Posted on 3 April 2024 in climate change, economic theory, economics

The Art of Knowledge Failure

In this monthly Director’s Note, Christopher Newfield reflects on the knowledge crisis gripping our culture. 

Christopher Newfield

ISRF Director of Research

Image by Filip Mishevski
(via Unsplash).

The vital role knowledge plays in society is rarely out of my thoughts, not least because the ISRF sponsors a wide range of original research beyond STEM (science, technology, engineering, and mathematics).

But while OECD countries are said to have knowledge economies, the creation and dissemination of knowledge is in crisis. For decades, STEM funding has been migrating away from basic research that lacks a clear commercialisation—or “strategic”—pathway. Meanwhile, social and cultural research often has profound, indirect public benefits, but receives only a tiny fraction of overall national funding, in large part because of a lack of direct financial returns.

The knowledge creation crisis was a theme of my research in the US. And unfortunately, it applies to the UK, too. In my three plus years at the ISRF, I’ve seen more UK universities struggling harder to support their academic staff’s research. I’ve now commissioned a study of research funding in the UK, which will highlight the troubling conditions of academic scholarship in the social, economic and cultural disciplines.

It also seems to be ever harder for society to put knowledge to use. This has always been a problem for state actors, where power easily overwhelms knowledge. History, international relations and anthropology, for example, have shown that a stronger state may defeat, suppress and immiserate its opposition without winning the war, much less achieving anything positive. Vietnam taught one generation of Americans this and Afghanistan another. And yet this established knowledge failed to deter invasions by Russia of Ukraine and Israel of Gaza.

We can see the same knowledge failure in economics. A perennial example is the Laffer curve. In 1974, U.S. economist Arthur Laffer drew a curve on a napkin at a Washington, D.C. restaurant in front of three key Republicans: the journalist Jude Wanniski and the party power brokers Dick Cheney and Donald Rumsfeld. His sketch “proved” that when governments cut tax rates on businesses and individuals they produce more, so that overall tax revenues increase.

This theory has been rolled out to legitimise tax cuts over the past 50 years, on the grounds that cuts return money to business while miraculously boosting tax revenue for government. Donald Trump used it to justify his 2017 tax cuts for high earners and corporations (and in 2019 gave Laffer the Presidential Medal of Freedom), while UK Chancellor Jeremy Hunt wheeled it out to support his cut to national insurance contributions in the March 2024 Budget.

Shortly after Hunt announced his Budget, Financial Times columnist Chris Giles tried, in classic expert style, to puncture the Laffer curve myth with tax arithmetic. And the article and what followed its publication offer some vivid insights into the wider knowledge crisis.

In the piece, headlined “Searching in vain for the Laffer curve boost,” Giles noted models showing that Hunt’s national insurance cut would increase wages and working hours enough to “generate a decent £1.7bn in extra revenues in 2028-29.” But, he added, this gain “was far offset by the total exchequer cost of the move of £10.7bn”.

“Hunt’s rhetoric did not match reality,” he said.

Knowing the stamina of this zombie economics, Giles also went after the Laffer theory behind lobbying against the “tourist tax.” After Brexit, the Conservative government ended its conformity to EU standards of Value Added Tax (VAT) reductions for certain purchases made by non-residents and, in 2021, started charging regular VAT on tourist shopping.

Giles writes, “In work funded by the Association of International Retail (AIR), the consultancy Oxford Economics [OE] has estimated that the Laffer curve is fully operational. If VAT-free shopping was extended to all tourists, it estimated ‘the total tax contribution is more than 60 per cent larger’” than the tourist VAT tax would generate.

Put otherwise, OE claimed that if the government surrendered £462 million in VAT receipts (the Office of Budget Responsibility’s initial estimate), it would get £153 million in unrefunded VAT while gaining ‘a further £940 million’ in taxes in four other domains  (production, employee income, “products purchased by UK businesses and consumer” and corporation taxes) that allegedly would not happen without the extra tourist shopping (OE, p. 15).

This is a classic Laffer claim.

Giles digs deeper to debunk it. He cites the updated OBR analysis showing that the numbers of visitors to the UK recovered at a similar rate to those EU countries that had not “scrapped VAT-free shopping.” As for taxes on spending, Giles discovers AIR/OE claims that the other taxable activities would not have happened without the extra shopping—for example, they posited “that anyone working in retail would be unable to find any work at all without the shopping subsidy”.

“Using more plausible behavioural assumptions,” Giles continues, “the OBR estimated that the ending of VAT-free shopping for tourists saved UK taxpayers £539mn [OBR’s updated estimate]. Again, Laffer’s curve is noticeable by its absence.” Giles says this because £539 million is clearly larger than the £153 million in taxes that AIR’s plan would retain.

So did Giles manage to kill off the Laffer myth? Giles’ gutting produced an instant written retort from Paul Barnes, the head of AIR. Barnes claimed that what matters is what tourists spend. “Spending in mainland Europe rose to 198 per cent of 2019 levels, but in Britain it fell by 28 per cent. This cost British businesses an estimated £1.5bn in lost sales as international visitors diverted spending to EU states where they can shop tax-free.”

No VAT cut, no tourist spending boost, Barnes infers. Ergo, “Laffer lives”.

The FT has permanently attached Barnes’s riposte to the bottom of the online version of Giles’s column. The right to reply is commonplace in the media and often correctly gives a voice to those facing criticism. Similarly, many media outlets seek to maintain “balance” by giving an equal platform to parties with opposing views.

But this quest for impartiality and balance can help fuel the knowledge crisis—by enforcing a false equivalence between rigorous evidence and cherry-picked opinion. Just ask the BBC, which has admitted, and worked to address, failings of this nature in its climate coverage.

By adding Barnes’s rebuttal to Giles’ article, the FT has arguably fallen into the same trap. It implies that a debate has occurred, tempting us to conclude there’s truth on both sides. This might lead readers to infer that Giles is right about tourist numbers, while Barnes is right about tourist spending, that the Laffer curve is false for A but true for B, and that lower taxes probably increase tourist spending, so why not give it a go?

Barnes would no doubt like this reader response, as it makes his letter the analytical equal of the OBR report and Giles’s column. But his letter is not equal. It throws out two decontextualized numbers, including a figure for sales allegedly suppressed by VAT (£1.5 billion) that doesn’t appear in his own report, and an alleged causality (VAT refunds doubled EU tourist spending) that lacks any support.

In my irritation with this phony debate, I spent a couple of hours reading the OBR and OE reports. I identified seven problems that I’ll cut down to the core Laffer issue. The OBR, to repeat, finds a £539 million VAT tax gain, while even OE’s actual number for “tax free” receipts is £153 million, a figure that is is 3.5 times smaller. Barnes ignores this reality. The alleged Laffer benefits come from that bunch of other taxes on activities (production, employee income, etc.) that Giles rightly insists would happen anyway and that therefore shouldn’t be assigned to shopping stimulated by lowered VAT.

The “debate” is between apples and oranges.

I concluded that Barnes is wrong, and Giles is right. But Barnes doesn’t lose just because he’s wrong. He has engineered a knowledge stalemate that spreads confusion, doubt, and therefore ignorance about the state of things.

We live in an age of nonstop marketing and spin, of manufacturing consent that depends on manufactured uncertainty, of bullshit in the philosophical sense. The point isn’t to convince the audience that your view is true but to get them to go along with it—in this case, to not object confidently to a future cut in tourist VAT on Laffer grounds.

This is the structure of propaganda, in a subtler form than that of censorship, suppression, denial or brainwashing. It sows an uncertainty that paralyses criticism, leading to a state where, in Peter Pomerantsev’s formulation about Putin’s communication effect, Nothing is True but Everything is Possible.

Possible, that is, for the powerful.

In this world, the Laffer curve isn’t true, but doesn’t need to be, for it has media visibility and self-interested backers that keep it permanently in play.This kind of bullshit knowledge was dubbed agnotology, or the making of ignorance by people who had spent years studying the campaigns of auto companies to deflect concern about lead poisoning, of tobacco companies to deflect concern about lung cancer, oil companies to deflect concern about global heating, or opponents of affirmative action to deflect concern about racial inequality.

In this context, what can knowledge producers like Chris Giles do? The stakes are extremely high. The ISRF, for example, is supporting research on a transition from green finance to green national and international government action, and the Laffer curve continues to disorganise support for higher tax receipts and the strong, competent states that could manage meaningful climate policy.

Among other things, knowledge industries and their knowledge workers should be much prouder, more confident and more militant about academic research that is not steered by the agenda of its funders. This means avoiding the false equivalence of a seriously researched column and a letter from the head of a lobby—particularly when you are an FT editor and both are appearing in your own newspaper.

There are knowledge workers in politics, social movements, journalism, NGOs, think tanks, consultancies like Oxford Economics, and schools—not just in universities. And what the good ones have in common is a stubborn academic passion for hard-core rigour, and a willingness to say what that is. Academic standards in knowledge creation, in their argumentative and sometimes obnoxious relentlessness, are there whenever our societies manage to undo a bit of knowledge failure.

Pending new, actual evidence, Laffer is dead.

Christopher Newfield

Christopher Newfield is the Director of Research at the Independent Social Research Foundation in London. He is a Distinguished Professor Emeritus of English at the University of California, Santa Barbara. Newfield has recently published two books on the metrics of higher education: Metrics That Matter: Counting What’s Really Important to College Students (Baltimore: Johns Hopkins University Press, 2023) and The Limits of the Numerical: The Abuses and Uses of Quantification (Chicago: University of Chicago Press, 2022). He is currently conducting research on the nature and effects of literary knowledge.