BusinessDay 25 Oct 2017

Wednesday 25 October 2017
FT FINANCIAL TIMES
C002D5556
BUSINESS DAY
A3
Prepare for Nafta, the
zombie edition
World Business Newspaper
Victory for Macron
as EU ministers
back curbs on
migrant labour
Tighter laws on ‘posting’ of foreign workers
risks east-west split across bloc
MEHREEN KHAN AND
ANNE-SYLVAINE CHASSANY
Emmanuel Macron, the French
president, has won a significant
victory in his efforts at European
reform after EU ministers
voted to back a Paris-led
campaign to tighten restrictions on the
so-called “posting” of foreign workers.
Following lengthy talks in Luxembourg,
EU ministers agreed the practice,
which allows employers to temporarily
“post” migrant workers to another
member state without the need to
abide by the local labour rules, would
be limited to 12 months with an option
to extend for a further six.
However, Mr Macron’s victory could
come at a price by further damaging
Europe’s already strained east-west relations.
Several eastern nations, including
Hungary and Poland, voted against
the reform, while the Czech Republic’s
labour minister warned limits on the
free movement of workers risks stoking
anti-EU sentiment in her country.
In his five months in office Mr
Macron has railed against posting as
encouraging “social dumping” from
low-wage to high-wage countries and
vowed to protect European workers
from the vagaries of unscrupulous employers.
“Europe is moving forward,” the
French president tweeted on Tuesday
as he welcomed the deal. “More protections,
fewer frauds. Perseverance,
dialogue and ambition enables Europe
to transform for the benefit of all.”
His campaign for employee protections
is in part designed to neuter
France’s Eurosceptic far-right and farleft,
which have made election gains
by portraying the EU as being against
workers’ rights.
But it has stoked significant resentment
in Europe’s eastern capitals where
it is viewed as an assault on the freedom
of their workers and companies to operate
in the single market.
Poland, the biggest exporter of
• Wang Qishan ineligible for another
five-year term on Central
Committee
Wang Qishan, the feared
head of Chinese president
Xi Jinping’s anti-corruption
campaign, was not named to
posted workers in the EU, has dubbed
Mr Macron’s obsession with posted
workers “arrogant” and “lacking political
experience”. Michaela Marksova, the
Czech labour minister, warned ahead
of the negotiations that the issue could
take the country “far closer to Czechxit”,
or exit from the EU.
The fraught negotiations in Luxembourg,
which ran late into Monday
evening, were complicated by France’s
insistence on a 12-month cap, say EU
diplomats. An original reform from the
European Commission set two-year
limits and had broad agreement from
the newer member states.
In an eventual compromise, some
eastern countries backed by Portugal
and Spain insisted that truck drivers
should be exempted from the tightened
rules. But the concessions were not
enough for Poland, Hungary, Latvia and
Lithuania to back the deal, which passed
with a qualified majority vote. The UK
and Ireland abstained.
Nicolai von Ondarza, deputy head
of Europe research at SWP, the German
think-tank, said this was a rare example
of larger EU governments choosing to
outvote smaller member states rather
than go back to the negotiating table.
Another instance was a controversial
EU deal in 2015 to relocate refugees —
a decision that sparked revolt in the
eastern bloc and which has been legally
challenged by Budapest and Prague at
the European Court of Justice.
Mr von Ondarza warned that abandoning
consensus in divisive areas such
as free movement would stoke the grievances
of central and eastern European
governments against Brussels. “There is
a danger the majority will overplay their
hand,” he said.
The posted workers agreement,
which will now be debated by the European
Parliament, also split the unity
of the four Visegrad nations: Poland,
Hungary, Slovakia and the Czech Republic.
The Slovaks backed a deal, as did
the Czechs eventually.
China anti-graft tsar cut from
top Communist party leadership
TOM MITCHELL
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the Communist party’s new Central
Committee on Tuesday, making
him ineligible for another five-year
term on the party’s most powerful
body.
Mr Wang’s possible re-appointment
to the Politburo Standing
Committee had been one of the
most hotly discussed outcomes at
Continues on page A4
Trump team’s tax cut defence is outlandish and incoherent
The corporate levy is not what stops companies from investing
MARTIN SANDBU
Free Lunch had already expressed
doubts about the
claim by Donald Trump’s
administration that its planned
corporate tax cuts will mostly benefit
US workers. But now Kevin Hassett,
chairman of Trump’s Council of
Economic Advisers, has doubled
down on the claim by presenting
calculations purporting to show
that cutting the corporate tax rate
to 20 per cent would boost average
household income by $4,000
to $9,000 and median household
income by $3,000 to $7,000. To be
clear, the claim is that much of that
extra income is to come from higher
wages, not higher dividends.
The argument is bizarre in so
many ways. The numbers are far
too large to pass any smell test.
Hassett confusingly (or confusedly)
attributes the decades-long divorce
of median wages from productivity
growth and profits to the US’s relatively
high corporate taxes — even
though that divergence is largely
driven by increasing inequality within
wages (which means the average
has grown faster than the median).
He partly relies on a simplistic
empirical argument that low-tax
OECD countries have seen faster
wage growth in recent years than
high-tax ones. But there are plenty
of other reasons for that, in particular,
these low-tax countries are
predominantly eastern European
ones that both got out of their crises
quickly and had much lower
wages to begin with so they should
be growing faster. Finally, in his remarks
introducing the study, Hassett
mixes up the respectable claim that
lower corporate taxes could encourage
investment in productive capital
with the fallacy that repatriating
Virgin Money boss
warns sexism is still rife
in the City of London
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Donald Trump speaks during a meeting with chief executives of manufatcturing companies at the White House in February © EPA
corporate income earned abroad
would do so. Yesterday we refuted
the idea that corporate profits are
trapped offshore.
The reactions from professional
economists have been intense.
Lawrence Summers has attacked
Hassett, wrapping his substantive
critique in unusually harsh personal
criticism. The CEA’s numbers, he
points out, imply that total wages
would riseby 300-450 per cent of
the size of the tax cuts. He has since
repeated the criticism, emphasising
in particular that when companies
can fully expense new capital investment,
the corporate tax rate has little
effect on the incentive to invest in
capital financed by equity.
Meanwhile Jason Furman, Hassett’s
immediate predecessor at the
CEA, identifies more gaps in the
“wild” reasoning. He points out
that “the White House methodology
yields the absurd conclusion
that eliminating the corporate tax
altogether would boost annual
household wages by up to $20,000”.
There have been interesting
responses from right-leaning economists.
Harvard’s Greg Mankiw, an
earlier CEA predecessor, has posted
the maths of a stylised example of
corporate tax cuts, which he shows
can in theory easily increase wages
by more than the size of the tax
cut. John Cochrane has elaborated
on the algebra and why it matters;
Steven Landsburg offers a very
useful graphical illustration of the
argument, and also explains it in
plain words.
It is important to be clear about
the main point here: that a corporate
tax cut can increase wages is a standard
result that most economists
across the political spectrum would
agree with. As Michael Strain puts
it: “That’s not just a political talk-
ing point; it’s the consensus view
of professional economists.” It is
equally important to understand the
mechanism underlying the model:
it is that companies will respond to
the lower tax rate by investing more
in productive capital, and it is this
increase in the capital stock that
raises wages.
But, Strain rightly adds, don’t
exaggerate. For anyone who thinks
Mankiw’s algebra lends credence to
the CEA’s quantitative claims, other
economists show why this is not so.
First, according to Brad DeLong, a
mistake in the algebra means the effect
is overstated. Second, the model
assumes that the US is a small open
economy when in reality it is neither
small nor very open (for its size),
which means there is not unlimited
investment that could come in from
abroad. Third, the model ignores the
funding of the tax cut — increased
borrowing, spending cuts or other
tax rises — which could diminish
the incentive to invest.
And finally Paul Krugman very
usefully takes on Landsburg’s geometry
to explain in easy terms what
the graphicalanalysis misses. Above
all, this is (to reinforce the point) that
the proposed mechanism by which
corporate tax cuts raise wages is by
increasing the capital stock. But that
takes time, Krugman points out, and
in the meantime asset prices will rise
first (benefiting the asset rich). And
if the increased investment does
happen, the model assumes it does
so by increasing capital imports — in
other words, through a larger trade
deficit; much larger given the assumed
investment response. If there
is anything the Trump administration
claims not to want, this is it.
So the administration’s defence
of corporate tax cuts is both outlandish
and incoherent.