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Good morning, and in packed programme today, we will be hearing from a man who thinks Apple has demonstrated that it has a depression-era mentality. We will hear from a scowling US congressman, who – after slating Obama’s State of the Union speech yesterday – says the US needs tax cuts. We will be hearing from another man who wants to abolish inheritance tax, and we will be hearing from the closest the economic world has to a journalist God, who says it is time for central banks to start funding government expenditure. And to round things off, we will get the views of a Nobel Prize winner who thinks innovation is dying.

First, let’s go straight to Apple. The company has quite a lot of cash – some $137 billion in all. So what is it going to do with it? It appears the company has three options: sit on it, invest it, or pay it out as dividends. David Einhorn, hedge fund manager and shareholder in Apple, is suing the world’s most famous maker of smart phones. He wants to see most of the cash pile paid out as dividends, and accused the company of “Depression-era mentality.” The thing is that Mr Einhorn has a point. But dividends may not be the answer. Technology and innovation may indeed be creating higher corporate profits, but it is also creating a scenario in which less growth is trickling down into wage packets. The problem is not unique to Apple. You may recall that last year Ernst and Young issued a report saying there was around three quarters of a trillion pounds lying idle, sitting in UK corporate bank accounts, presumably being used by the banks to buy government debt. For as long as the money sits there doing nothing, the economy is the loser. Higher dividends would help, because at least that way profits would be distributed from companies to investors. But what would investors do with the money?

Meanwhile, as Tim Cook was busy defending Apple and pretty much scoffing at the Einhorn law suit, a man almost as important as Mr Cook – a certain Barack Obama – was using his most closely watched speech of the year to talk about efforts to simulate the economy. He wants to see a higher minimum wage, and government stimulus. You could say that John Boehner, the top Republican in Congress, is to Obama what Einhorn is to Cook. According to Reuters, while Obama talked the talk of the government leading the US economy to growth, Boehner was at times ‘scowling.’  He even tweeted criticisms of the State Union Address while Mr Obama was still talking. Boehner sees the solution to the economic woes facing the US as simple; he wants to see taxes cut.

But the danger with tax cuts is the same as the danger in seeing big rises in dividends. What will the recipients of the money do? Will they sit on it, spend it, or invest it in schemes that simulate the economy?

Meanwhile, in the ‘Telegraph’, Allister Heath made the case for abolishing inheritance tax (IHT) altogether. And because his article appeared in the ‘Telegraph’, there was no shortage of readers who agreed. The argument for abolishing IHT is simple enough. It is in our genes to want to leave something for our children. IHT goes against nature. But let’s forget about that, and look at economics. Inheritance is economically highly inefficient. By rewarding some people for the work done by their parents, it can kill the incentive to work hard. It can have the effect of crowding out people who may be blessed with more natural ability from a competitive marketplace, ceding the advantage to those with access to more funds via their inheritance. If you want a truly efficient tax system don’t tax the creation of wealth, but do tax the hoarding of it. So reduce income tax, CGT and corporate tax as much as possible, even reduce VAT. But impose a land tax, and increase, but don’t decrease IHT.

Then there is the man whose shadow I am not fit to cross. Martin Wolf stands above the economic world like a colossus. He penned a piece for the ‘FT’ today arguing that it is time central banks monetised debt.

His argument is essentially this. QE is used to bail out banks, so why not use it instead to simulate demand? He said: “Why is it good to support the leveraging of private property, but not the supply of public infrastructure? I fail to see any moral force to the idea that fiat money should only promote private, not public, spending.” As for those who say such actions will lead to hyperinflation, he reminded us that despite QE in the US “broad money (M4) was 17 per cent below its 1967-2008 trend in December 2012.”  See: The case for helicopter money
For more on the link between QE and inflation, see last week’s thought for the day: Why we will not see runaway inflation or soaring interest rates soon, but why we may do eventually 

Some critiques of the Wolf plan say why not instead use money created by central banks to fund tax cuts? Why should the government fund public projects that the private sector had already decided were not worthy of its support? Well, the reason is two-fold. Firstly, as was argued above, there is no guarantee that tax cuts will lead to more spending. The money given back as tax cuts may be saved. As for the second point, surely the lesson of 2008 was that the markets are not perfect and that sometimes they can wrongly allocate capital, can be far too short-termist, and are not happy to fund experiments in the innovation process. In fact, innovation often evolves from ideas that markets were unwilling to back– memory foam evolving from space flight, the Internet from US defence spending in the cold war, for example.

And finally, Andre Geim – one of the men who discovered graphene and joint winner of the Nobel Prize – recently warned in the ‘FT’ that lack of government funding for scientific research is in danger of killing innovation. He may only be partially right, but the point is that Geim’s argument on its own may be sufficient justification for a helicopter money drop for science and research and entrepreneurs,  and why markets don’t always act in the best interests of our collective needs.


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Showing 3 comments

  1. Michael,

    Martin Wolf?

    I recall mentioning some time ago in an answer to one of your blog, the possibility of using around during £200 billion QE for this very purpose.

    If I’m not mistaken, that would have bought the nine or ten nuclear power stations we need, HS2, increased airport capacity in the South East with a few new roads and an inflation allowance thrown in.

  2. Michael Baxter


    I don’t disagree, although I would like to see more emphasis on seeing QE used to support existing and budding entrepreneurs

  3. Michael,

    That’s absolutely fine – there’s no shortage of QE money floating around after all.

    And I’m pretty sure we’ve mentioned using the likes of 3i and other private equity/finance specialists to loan the funds out prudently.

    Prudence? Now there’s a word we haven’t heard politicians mention lately.

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