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April 04, 2010

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Ralph Musgrave

Congratulations on a vastly more thoughtful analysis than we get from politicians (not that the latter are difficult to outwit).

However, I’m not sure about this passage: “It all depends upon where the burden of NI actually falls.....”. I suggest it makes no difference where the incidence falls.

Suppose the incidence is entirely on profits. That means employers spend less, and demand declines by exactly the same amount as if the incidence is all on wages.

Or suppose employers pass on the entire cost to customers, in this case the incidence is on customers, thus demand declines by exactly the same amount again.

Tom Freeman

On teenagers' overoptimism: yes, that might stop them voting for redistributive measures, but turnout among young voters is pretty low. By the time they're 30 and doing less well than expected, they may be likelier to explain this fact in terms of bad luck and systemic unfairness than in terms of their having become less deserving of good pay. Which could increase their support for more egalitarian policies.

Laban

"It is, of course, perfectly reasonable for the average teenager to expect to earn over £50,000 in their 30s, simply because inflation will ensure this"

... while simultaneously impoverishing those on non-indexed pensions, of course.

Re student overconfidence, did you read this by Don Peck ?

http://www.theatlantic.com/doc/201003/jobless-america-future/2

"In her 2006 book, Generation Me, Twenge notes that self-esteem in children began rising sharply around 1980, and hasn’t stopped since. By 1999, according to one survey, 91 percent of teens described themselves as responsible, 74 percent as physically attractive, and 79 percent as very intelligent. (More than 40 percent of teens also expected that they would be earning $75,000 a year or more by age 30; the median salary made by a 30-year-old was $27,000 that year.) Twenge attributes the shift to broad changes in parenting styles and teaching methods, in response to the growing belief that children should always feel good about themselves, no matter what. As the years have passed, efforts to boost self-esteem—and to decouple it from performance—have become widespread.

These efforts have succeeded in making today’s youth more confident and individualistic. But that may not benefit them in adulthood, particularly in this economic environment. Twenge writes that "self-esteem without basis encourages laziness rather than hard work," and that "the ability to persevere and keep going" is "a much better predictor of life outcomes than self-esteem." She worries that many young people might be inclined to simply give up in this job market. "You’d think if people are more individualistic, they’d be more independent," she told me. "But it’s not really true. There’s an element of entitlement—they expect people to figure things out for them. "

Grumpy Optimist - Andrew Richardson

This is angels on a pin economics. Who said that recovery was about aggregate demand at the margin over the next quarter or so. It is about getting us out of an enormous hole - that will require that somehow or other we can the public proportion of GNP down from it's current level of over 50% and to try to generate and release productive resources in the private sector. That means lower taxes and even greater cuts in spending. It's not difficult and it is what the Tories are inching towards.

cookie

'What worries me is that this overconfidence might have regressive political effects. If people over-estimate their future earnings, their demand for redistributive policies will be low because they‘ll under-estimate their chances of benefiting from such policies and over-estimate their chances of suffering from them. More generally, they will overly identify with the interests of the well-off.'

I am less worried about students' estimates of their future earnings and more about their estimates of 'progressive' politicians' success at delivering on their promises. After all, the typical student is within an order of magnitude when it comes to their own future earnings :)

Neil

Speaking of cognitive biases, you seem to have fallen into one yourself: The old "broken windows" fallacy.

There is no way, simply no way that cutting waste could EVER endanger economic growth. Waste is, by definition, of negative economic value. Cutting it increases the aggregate value in the system.

Do you really imagine that if we sack a bunch of useless back office civil servants, the money they previously had in their budgets will simply sit idle? The resources will be re-allocated to places where they can be better used.

Flipping your logic around, could we really BOOST economic output by hiring more pointless middle managers? (Or by smashing windows to keep the glassmakers busy?)

Ted

The employer pays an employer's NI contribution that the employee doesn't see on their payslip. If NI goes up and employment costs are to stay the same the employer has to cut the gross pay that the employee sees on their payslip. To the employee it looks like the employer has reduced their pay when really they have suffered a tax rise from the government. I think that this is the root of the objection to NI rises from the CBI. Raise income tax instead, much more transparent.

Falco

"If, as Tim claims, it falls upon workers - because higher NI cause firms to reduce wages relative to what would otherwise be the case - then NI doesn’t raise the cost of employing people and so doesn’t reduce employment."

This is likely to be true for future hires but for current employees the situation is more difficult. If the employer simply cuts wages, (in passing on the tax), then there will be adverse effects on the business, (lower motivation of staff, possible strikes, etc). From the employer's point of view it is simpler to combine the loss in one event and fire someone, thereby reducing employment.

Bruce

One of the easiest (seemingly least painful) ways of cutting public sector "waste" will be cutting outsourced work and squeezing external contractors. That will hurt many businesses, including some of those rich businessmen who have done very well out of this government's largesse. If, as Tim suggests, NI actually falls on workers rather than employers, big business might do better to take the NI rise and see less public sector cuts.

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