(Star)*ucking the Economy

A guest post from the Green Bean Counter aka Rebecca Boden, Professor of Critical Accounting at the University of Roehampton.

Starbucks insinuates itself into the fabric of our lives, branded as everyone’s friendly fellow citizen – a coffee shop with a convivial atmosphere where you can hang out on sofas, or have a business meeting. Starbucks’ image as our ever-present and commercially successful friend is somewhat tarnished by the recent news that it pays virtually no UK corporation tax (the tax on corporate profits) on its 700 or so stores. In the world of accounting that I inhabit this is correct because Starbucks makes virtually no profit. You might think that they're really bad business people after all - but you'd be wrong.

In fact, Starbucks are very good to their shareholders, as they would claim they are legally obliged to be. They also have very good (coffee) bean counters who use two primary tactics to move profits out of the UK and into countries where the tax charge is lower.

First, they buy the coffee they sell to us from themselves. The bit of Starbucks that sells the coffee to other bits is a separate legal entity based in Switzerland. Even though it's selling to itself, it doesn't sell cheaply: the coffee traders make a healthy 20% profit on their transactions with the rest of Starbucks. This increases the expenses of the UK coffee shops, reducing their UK profits. Whilst this makes a big profit appear in the Swiss company, the advantage is that there is a much lower rate of tax on corporate profits there.

All of this is just bookkeeping - the coffee never actually goes near Switzerland, although it is bought and sold through there. Such 'transfer pricing' manoeuvres move money (and, usually, profit) from one country to another by fixing a sale price that has little to do with open markets and everything to do with paying as little tax as possible.

The UK tax authority - Her Majesty's Revenues and Customs - does have powers to tackle transfer pricing by adjusting companies' taxable profits, substituting a fair market (arm's length) price for the selling-to-yourself price. But this is complex and the arguments fraught - companies like Starbucks might argue that they pay over the odds to guarantee security of supply or superior quality. These can be difficult arguments to dislodge because open market prices are inherently subjective.

Second, Starbucks asserts that it is its branding that lets it sell so much coffee. The brand is owned by another Starbucks company - this time based in the Netherlands. This collects profit-reducing royalty payments equivalent to 6% of turnover from the coffee shops and moves them to the Netherlands where, again, they seem to enjoy very favourable tax treatment. Again, this manoeuvre can, in principle, be attacked by HMRC. But you could also have endless, and irresolvable, arguments about the value of a brand in selling a cup of coffee.

Starbucks argues that they do pay over a lot of tax to HMRC. True – but the overwhelming majority of that is not tax on Starbucks but tax which falls on others that it collects on the government’s behalf. This includes the personal income taxes and national insurance contributions payable by employees (which are deducted at source in the UK). Starbucks does also pay national insurance contributions itself in respect of its employees. But it’s important to remember that these pay for workers’ benefits, like pensions or sick pay, and therefore relieve employers’ costs. Then there is Value Added Tax, the final incidence of which falls on the end consumer but which is collected by the seller - Starbucks. And Starbucks does pay fairly minor local property taxes - but this is to provide all of the services like street cleaning etc. that help make Starbucks profitable in the first place, so could really be seen as business costs. Local property taxes are property-related, not profit-related. This puts Starbucks, with its economies of scale, at a significant advantage over more local and smaller-scale businesses which would pay the same taxes for the same premises.

What Starbucks doesn’t pay much, if any, of is tax on is its underlying profit – the profit it would make it its transactions were all at arm’s length rather than to itself. The routing of coffee ownership through Switzerland and the paying of royalties to the Netherlands are mere strokes of the keyboard, yet they create an accounting reality which leads to the entire surplus value of the business being spirited abroad. And the opportunity cost is even greater than the tax loss – the decimation of locally-owned (and therefore locally responsible) business and the creation of clone-town Britain.
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Resilience Hierarchy

I was delighted to spend Wednesday morning this week at a conference on the subject of Peak Money organised by the Transition Network. Economics has been a key theme of Transition since the beginning. Useful outcomes have been the book on Local Money by Pete North and the economics content of the Transition Timeline book by Shaun Chamberlain. Both are available from Green Books.

I tried to fit into the 'transition culture', although that isn't always easy for me, since my motivation is for political action as much as local practice, and the discomfort some of the transitioners feel for this sort of critique is difficult for me at times. I seem to become cast in the role of angry politico, always taking a critical position. While I like to reframe myself as the grit in the oyster, it doesn't always make for an enjoyable exchange.

I used my time on Wednesday to share some of the political-economy background to the question of how Transition Towns should deal with the economic crisis, focusing on the question 'Why waste a good crisis?' I feel that we are wasting this crisis. The reality is that only the 2008 Recession managed to successfully reduce UK CO2 emissions, which makes our point that tackling the growth imperative of the capitalist economy is vital to ensuring an adequate response to climate change.

I also felt bound to question the idea of 'peak money', which I find unhelpful in spite of the slide in Tony Greenham's presentation which was fairly suggestive of a peak curve for net lending by UK banks. My concern about the concept is that it draws a parallel between a natural, non-renewable resource, whose exhaustion is inevitable, with a socially constructed tool that we can change at will. Since much of the business of economics is precisely about creating abstractions, imbuing them with power, and then using them to acquire resources, it seems to me vital that those of us building a sustainable economy should be very clear about what is real and what is subject to social or political control.

Instead of the idea of 'peak money' I suggested the idea of a resilience hierachy, moving from the least to the most abstract. In this way of framing the economy, money comes at the bottom of the hierarchy, because it is highly abstract and (as somebody once said) you cannot eat it. Fossil fuels might be somewhere in the middle: real but enhaustible. At the top of my hierarchy will always be land, the sole and eternal source of our support. To place land back at the heart of economics must be the most important task of a green economist.
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Celebrating Zero Growth

I spent yesterday evening at the launch of the second Zero Carbon Britain report, a second edition of the report again produced by the Centre for Alternative Technology, this one intended to frame our transition to a climate-friendly society by 2030. There is lots of good stuff here, with detailed plans for the obvious areas like built environment, transport and energy, and more on the less obvious areas such as agriculture, motivation and policy than the last time the report was put together.

I was invited to contribute to the economics chapter, which was an additional area, but I am sorry to say that none of my contributions seem to have made it into the report. One reason for this is that the cultural home of Zero Carbon Britain as a study - and even as a concept - is the rather tecchie world of modelling and gadgets, a world where my approach must seem rather girlie. The deeper reason is that the report was intended to influence government, and it was therefore self-consciously set within the existing paradigm.

My question to the report's writers is: can we have a Zero-Carbon Britain unless we have a Zero-Growth Britain. In spite of the fact that the job of writing the economics chapter was delegated to nef, and they have clearly stated elsewhere that a steady-state economy is a prerequisite of sustainability, this question caused some confusion at the launch and is not adequately addressed in the report. A decision had been made to frame the report in terms that parliamentarians would feel comfortable with, so the growth paradigm was left unchallenged.

Economics is an expert field, perhaps even a field whose jargon and mathematical symbols operate like a 'Trespassers will be prosecuted' sign, but it is desperately important that those who would propose sustainability policies in any area have a basic level of economic literacy. There is little point in talking about changes to housing, energy or transport without stating simultaneously that all these changes will be irrelevant if we continue to live in an economic system that requires growth in order to survive.

The report was launched at the first meeting in this parliament of the All-Party Parliamentary Climate Change Group, a group who include E.On and Royal Bank of Scotland amongst their membership. I am sure that both will find opportunities for making profits from the sort of move towards a zero-carbon Britain that the report proposes, whether as installers of massive new energy grids or the providers of the capital for the same. For my money, the Steady-State economy conference in Leeds on Saturday has more relevance to our species' survival on this planet. Tweet

Guild of Green Economists

The New Economics Foundation is advertising for a Chief Economist. This raises several questions for me. The job is directed at a number-cruncher, which is made clear by the requirement for skill in 'modelling', which to any economist reading the advert can rapidly be translated as 'regression analysis', the stock-in-trade of the academic and research economist.

This is a pity, since regression - and indeed most forms of high-level mathematical analysis - cannot deal with the complexity of the ecological system we are a part of. If we begin our analysis of the problem with maths we are bound to end up with the sort of simplified truth that is always wrong as far as the planet is concerned.

Most large corporations have a Chief Economist - Vince Cable, now the darling of the radical set, is a former Chief Economist with Shell - and now nef is to have one too. In the world of economics, there are a great many chief economists but very few indians. This has set me wondering about why large companies need an economists but small businesses and communities apparently do not.

When I moved to Stroud nearly four years ago now I was still quite insecure in my role as an economist. I did not want that label - which smacks of capitalist apologism - but was shy about claiming the title 'green economist'. When I dared to say that I was a green economist I was delighted by the response: 'Great! We need one of those!'. It seems to me that this was the right response: every community needs at least one economist.

Perhaps the reason we do not have local economies is that we do not have economists. The 'practicing economist' that nef explicitly ask for must have been practising either in academia or in a corporation since there is no paid role for an economist working in her or her local community. We could not imagine a local economy functioning without an accountant, yet economists are isolated in their ivory towers rather than working in their backyards. We must have people who count money, but have not seen the need for people who are expert in the wise use of local resources.

So in response to nef's call I would like to suggest a grass-roots alternative: the guild of green economists. This could be a network of those who, rather than the 'deep understanding of economic theory and practice and excellent quantitative and analytical skills' that nef is calling for, have a jobbing knowledge of how local economies work, a sensitivity to the idiosyncrasies of their own local economy, and a desire to rebuild an economy with a connection with the local environment at its heart.

If any readers of this blog would be able to commit some time to turning this vision into a reality - especially if you might be able to handle the internet end of things - I would be glad to hear from you. Tweet