Stumbling and Mumbling

Don't tax the rich

The intelligent question posed by Saturday’s march is: what alternative is there to Osborne’s spending cuts? There’s one popular answer here that I’m not happy with - that we should tax the rich. UKUncut says:

Rich corporations and individuals collectively get away with dodging £95bn every single year…collecting the tax dodged by the super-rich would render the vast majority of the government’s spending cuts unnecessary.

I  have three problems with this.
1. Is there really £95bn lying untaxed? My chart suggests not. It shows the tax paid by non-financial corporations as a share of their total income; it comes from table K1 and K2 of today’s national accounts data. This does not tell us whether or by how much firms are dodging tax. But it does tell us something - that even if we could return this share to its peak of 15% - when the anti-capitalist Thatcher was PM - we’d only raise an extra £13bn. To get a lot more out of firms would, then, require an unprecedentedly high tax take.
2. Even if we could raise £95bn in tax, should we? £95bn is equivalent to 6.5% of GDP. How could firms and the rich pay this? One extreme possibility is that they would do so simply by running down their savings, with no impact on economic activity. At the other extreme, they would reduce employment and spending to pay the tax. Even if the truth is largely the former, such a tax rise would be significantly recessionary.
The best reason to oppose Osborne’s cuts is that the economy is too weak to take a fiscal tightening - but taxing the rich is a fiscal tightening too. And remember - the best evidence we have is that, as Stephen Gordon says, it is workers who end up paying corporate taxes.
3. Insofar as rich people dodge tax, this is only a symptom of the underlying disease - that the rich are too powerful. They have the political power to get tax breaks, and to dissuade HMRC from investigating them, and have the economic power to (credibly?) threaten to migrate or to employ lawyers to exploit loopholes. Whilst they have this power, they are unlikely to be heavily taxed. The state will not have better lawyers and accountants than the rich.
Now, I must be clear here. I am all in favour of hitting the rich - via land value tax, inheritance tax and nationalization of the banks rather than higher corporate taxes. But this should be part of income redistribution policy, not fiscal policy - or at least, not fiscal policy alone.
What’s more, it is not good enough merely to take the rich’s money. Efforts to do so will be only weakly effective without measures to reduce their power. Achieving this, however, requires radical social change - such as forms of worker ownership that make hugely-paid bosses redundant. Such change requires thought. Sadly, though, one lesson from Saturday is that some on the left are better at posturing than thinking. 

Quantifying luck egalitarianism

To what extent is income inequality the result of family background? This new paper looks at correlations between the earnings of siblings to adjudicate; the idea being that the higher such correlations are, the more important is the influence of the family. It finds:

In Denmark 20 percent of the inequality in permanent earnings can be attributed to family and community factors shared by brothers while the corresponding estimates are 43 percent in Germany and 45 percent in the US.

(The numbers are a little lower for women).
This is consistent with other research, which suggests that intergenerational mobility is lower in the US than it is in the Nordic countries.
This fact bears directly upon the notion of luck egalitarianism. This says that inequalities are acceptable insofar as they result from individuals’ free choices about, say, how hard to work, save and study but are impermissible insofar as they arise from luck.
Now, it is obviously a matter of luck what type of family we are born into. If you subscribe to luck egalitarianism, then, you should favour a tax and benefit system that removes the inequality arising from this source. Which requires that inequality fall by 45% among men (and 29% among women). But the US system seems to fall well short here. Taxes and benefits cut the Gini coefficient by less than one-fifth - perhaps because the benefits system is mean, rather than because the rich are lightly taxed.
I suspect  - given that intergenerational mobility is similar to the US’s and that taxes and benefits reduce the Gini coefficient by 27% - that the UK system also falls well short of luck egalitarianism. 
Anyone who wants to defend the existing low levels of redistribution in the US and (to a lesser extent UK) should therefore argue against luck egalitarianism. Whilst I’d expect right libertarians to do this, I’d be interested to see how Lib Dems do so.

Forecasting & power

“Where does this end?” asks the Economist of Libya. The answer, of course, is that nobody knows.
Which raises an important point. It’s well known that economic forecasts go horribly wrong, at least when they are needed. But could it be that this is not a failure of economics, but rather a reflection of the fact that human affairs are inherently unforecastable?
AFAIK, other social sciences - politics, sociology, anthropology are no better that forecasting than economics. Political science failed to predict the collapse (pdf) of centrally planned economies in 1989, the colour revolutions in the old Soviet bloc in the mid-00s and the Arab uprisings this year. All of which corroborates Philip Tetlock’s finding (pdf) that, in political forecasting “experts only occasionally exceeded chance predictive accuracy.”
There might be a reason why the social sciences don’t get forecasts right. It’s not to do with individual incompetence - though I don‘t deny there‘s that too - but rather with the nature of the disciplines. Quite simply, there are no - or very few - immutable laws of human behaviour. Instead, as Jon Elster has written:

[The social sciences] can isolate tendencies, propensities and mechanisms and show that they have implications for behaviour that are often surprising and counterintuitive. What they are more rarely able to do is state necessary and sufficient conditions under which the various mechanisms are switched on. (Nuts and Bolts for the Social Sciences, p9)

This means that forecasting is often impossible.
Why, then, do people think otherwise? One reason is that the urge to think we live in a predictable world is a powerful one. 
There is, though, another reason. As Elster says, knowing about mechanisms gives us understanding, whereas forecasting gives us control. And this is, of course, what our rulers - politicians, the media  or business “leaders” - want. Social scientists make forecasts not because they know the future, but simply because they are asked; they are simply meeting a demand.
But the thing is that our rulers’ claim to legitimacy is founded in large part upon the notion that they do have, or at least have access to, the ability to predict and control. For example, the government justifies its spending restraint by appealing to a forecast - that without such restraint, bond yields would rise sharply. As Alasdair MacIntyre wrote:

The realm of managerial expertise is one in which what purport to be objectively-grounded claims function in fact as expressions of arbitrary, but disguised, will and preference  (After Virtue, p107)

And herein lies the reason why it’s so convenient to mock economists for their forecasting failures. Doing this distracts us from the fact that human affairs are unforecastable - a fact which challenges our rulers’ claim to legitimacy.

The fairness of 50p

Over in the twitterverse, a Very British Dude has asked whether I think it reasonable to confiscate by force more than half of someone’s marginal earnings.
Note that this question is, in principle, wholly separate from the question of whether high taxes raise revenue. It is perfectly possible to argue that a 50p+ tax rate is fair and just but economically damaging or, alternatively, that it is unjust but an effective revenue-raiser. Which makes me wonder why so few argue for such positions.
Anyhoo, to a VBD’s question. I’d suggest three possible answers here, which vary in force depending upon the precise type of the rich:
1. A high tax is a dividend, paid to the state in return for its investment in the things that made you rich.
Even if the state did not educate you, the chances are that it educated your colleagues and customers, whose education benefits you. The state has provided the domestic peace that has enabled the economy to grow and thus give you the chance to get rich; very few of the UK’s top earners would be so rich had they been born in sub-Saharan Africa. It has provided laws - such as patents and copyright protection - that allow artists and entrepreneurs to profit from their efforts and talent. And in various ways the state helps to sustain  capitalism and hence profits and high earnings.
Why shouldn’t it demand payment for such benefits?
2. The state’s force is a form of countervailing power. Some (many?) of the rich owe their fortune to the fact that they are powerful. Most egregiously, this power consists of an ability to extract cash from the state. When the government taxes bankers or the bosses of BAe, Serco or Capita, it is merely getting its money back.
 In other cases, high earnings come from a power to extract rents from either shareholders or workers - if only because of an ideology which says that management is a rare talent that should be highly prised. In these cases, state power corrects for private power.
3. Inequality is a form of market failing. Imagine we were all behind a veil of ignorance, not knowing what talents we’d be born with. Isn’t it plausible that, behind such a veil, people would agree to enter into insurance contracts such that if they got lucky or talented they would pay out to the unlucky and untalented? People would, surely, agree to pay out a proportion of the £1m-plus a year they would earn as Premiership footballers in order to soften the misery of being born with no marketable skills.
You can therefore regard redistributive taxation as, in effect, the sort of insurance payments that would be made, if such contracts were  feasible. In this sense, the tax merely fills in for the missing market.
These arguments do not get us to a precise tax rate. But they do suggest a case for some degree of progressivity in the taxes.
And let’s be clear. A 50p tax is not massively progressive. Overall revenues are equal to just over 37% of GDP. Under a purely proportionate tax system, then, we would all pay 37% of our income. A 50p tax rate look burdensome not because it is highly progressive, but because the overall tax take is so large. Expecting a tiny proportion to pay 50% (yes, for some the marginal rate is 62%, but the average rate is lower than this) strikes me as not wholly unreasonable.

Productivity isn't everything

“Productivity isn’t everything, but in the long-run it’s almost everything.” Everyone knows, and agrees with, this sentiment of Paul Krugman’s.
Which is a shame, because it isn’t true. This new paper shows that for several developed economies - including the UK - there is no common long-run trend between GDP and productivity growth.
Even over long periods, GDP growth can be significantly affected by changes in labour utilization, not just by productivity.
Take, for example, France and the UK. The authors show that, between 1980 and 2005, the UK grew faster than France. But France had the better growth in hourly productivity. Instead, the UK’s superior growth came partly because hours per worker did not fall so far and partly because the employment rate rose.
Here, I can hear Tim Worstall: “jobs are a cost, not a benefit.” This is only half right. It’s right in the sense that if people choose not to work, or to work less, then there is nothing necessarily wrong with a slowly growing economy.
It is wrong, though, if people would like to work more, but cannot do so. In such circumstances, UK-style growth - through employment rather than a productivity surge - can be welfare-enhancing; unemployment, remember, is a massive source of unhappiness.
This has important policy implications. It suggests that measures to improve labour utilization, ie to achieve fuller employment, can significantly improve GDP growth not merely over cycles, but over the longer term - that is, insofar as anything can.
This is not to say there is a trade-off between productivity growth and employment growth. Quite the opposite. One way of raising labour demand is to increase productivity.
What it does mean is that, when there are six million people who are unemployed or under-employed, it is a little odd to think that long-run growth requires only productivity growth rather than increased employment.
Productivity is not everything - which, given the UK’s recent performance is just as well.

Big government & capitalism

In the Economist’s rather good survey of the growth of government, there’s one thing missing - something right libertarians tend to understate. I refer to the possibility that the increasing size of the state over time has often served the interests of capitalism.
I don’t just mean that individual capitalists are quick to use the law to suppress basic freedoms, or that they got massive state handouts when governments bailed out banks. I’m thinking of six general mechanisms:
1. A solution to stagnation. Back in the 1960s, Baran and Sweezy argued that because capitalism was better at generating profits than it was at investing them, it contained a tendency towards stagnation. State spending, they said, was one way of boosting aggregate demand and offsetting this tendency.
Although this theory fell out of favour in the inflationary 70s, I suspect it has regained relevance recently, as a key feature of western economies has been a dearth of investment opportunities.
2. Stabilization. In theory, a small state could stabilize economic fluctuations through orthodox deficit spending. In practice because recessions are unforeseeable and because fiscal policy works only with lags, this is not possible. Instead, stabilization requires the existence of a largish state, which creates a big non-cyclical component of aggregate demand.
And let’s be clear here. Capitalists value stabilization; very few chief executives are fans of Robert Lucas’s view (pdf) that the welfare costs of business cycles are small.
3. Legitimation. Insofar as capitalism tends to generate inequality, it also produces social unrest which, in turn, can deter investment and growth; it is no accident that traditionally very unequal south American countries have had poor long-run growth. A welfare state which buys off discontent is thus in the interests of capital. Remember, arguably the first modern welfare state was established by Otto von Bismarck, a man not commonly regarded as a loony lefty.
A welfare state also sustains capitalism in another way. For aggregate profits to be maximized, capitalists must get workers’ wages back, in the form of consumer spending. However, if workers must save for old age or against the risk of unemployment, this will not happen - which is potentially detrimental for profits.
4. A solution to the paradox of wages. For any individual capitalist, the best possible  outcome is for him to pay low wages and thus have low costs, whilst everyone else pays high wages, so he enjoys high demand. The existence of a big state helps resolve this paradox by increasing the demand for labour and hence wages. Of course, sometimes - in many countries in the 70s and 80s - the state can go too far in this regard, from the perspective of capital. But this doesn’t alter the fact that sometimes - in the 30s - it didn’t go far enough.
5. Regulation diminishes the principal-agent problem. Whether because of asymmetric information or the problem of collective action, shareholders have only imperfect control over bosses. In a free market, then, bosses might act in ways that maximize their own (short-term) advantage, to the detriment of shareholders and society - as, for example, when banks took too much risk. Sometimes, then, the state has to do what shareholders cannot, and regulate firms - though as we saw in the banking crisis, it does so only imperfectly.
6. Regulation and red tape are an overhead which bears more heavily upon smaller firms. As such, they can benefit larger firms, who enjoy less competition.
Now, I am not saying here that big government is always and everywhere in the interests of capitalism; in the 70s and 80s it often wasn’t. Nor am I saying it is the only cause of big government.
What I am saying is that the state grew in the 20th century in part because that is what capitalism required. It is no accident that heads of big business are rarely full-blooded libertarians - a fact which the latter should remember.

Intervention: an appeal for evidence

One reason why I rarely write about foreign affairs - aside from the fact that I know nothing about them - is that the debate about them looks like people lobbing stones at each other from intellectual ghettos, rather than trying to engage with people like me.
But what would it take to come up with an argument I could accept?
It’d start from the premise that the “whaddabout” question (Why intervene in Libya? Whaddabout Burma, Bahrain, Zimbabwe…?) is not a knockdown argument. But nor is it adequately answered by  Cameron’s reply, endorsed by Norm, that "just because we can't do the right thing everywhere, doesn't mean we shouldn't do the right thing somewhere".
What we need are clear criteria for deciding when to intervene. The obvious candidate here is cost-benefit analysis. Intervention, after all, is a form of investment - an upfront cost in the hope of future benefits - and should therefore be subject to the same appraisal as other investment projects.
The relevant inputs into this analysis would include: could military intervention make a decisive positive impact? (It’s in this context that international agreement matters, as this increases the odds of success*.) Is the dictator so brutal that it is worth the costs of “collateral damage” to remove him? What are the prospects for a transition to liberal democracy? These are the sort of issues that Sunder describes.
One complication here is that there might be a trade-off between the effectiveness of intervention and the evidence that justifies it. The most effective time to intervene will be immediately after a dictator takes power - because he’ll then be weak. But the evidence for his brutality be weak then. It will accumulate over years - but by then, he’ll have built up a client base of loyal supporters and have killed the people who might overthrow him and build democracy, and so the chances of intervention succeeding will be smaller.
Of course, it would be a rationalistic conceit to put precise numbers onto the costs and benefits. But I would at least hope for (perhaps wide) parameters. I’d also hope for an analysis of the risks. Could it be that intervention in Libya, for example, is less prone to the risk of expensive, long-term and unsuccessful military action than intervention elsewhere? I don’t know. But I’d like someone to provide good evidence.
What I’m appealing for, then, is that intervention be approached as an empirical issue amenable to economic analysis. Yes, the facts required for such analysis are elusive and surrounded by uncertainty. But this is an argument for trying harder to analyze them - not for retreating into ideological positions.
Oh, and one other thing. If you want to persuade me of the case for intervention, under no circumstances use the phrase “national interest”. This just marks you out as a pompous waffling oaf.
* Legality is not an issue; as David Allen Green says, a notion of legality that hinges on the opinion of Russia or China is a pretty feeble one.

On Jamie's Dream School

Watching Jamie’s Dream School last night prompted a thought: does any TV programme better embody so much of what I dislike about Britain today? (Don't get me started on Lily Allen: From Rags to Riches.)
First, there’s the rampant egocentricity; as Alvin Hall noted, a lot of the kids have massive egos. Which is a big obstacle to education; how can you learn anything if all you’re interested in is yourself? Is it an accident that a similar show which had some success in dealing with “failed” kids - Bad Lads’ Army - did so by breaking down egos?
It would, though, be wrong to decry this as merely a failing of young people. It’s also common in their elders, especially in the media. Many (most?) columns are motivated by ego - the belief that readers give a damn what you think - and are read in a similar mean spirit. They are judged good or bad not according to the ideas and information imparted, but according to how well they echo one’s prejudices - as in “an excellent column by Melanie Phillips/Polly Toynbee/Martin Wolf “.
And then there is the celebrity culture - the belief that celebrity is somehow a general purpose technology that can do anything. The counterpart to this is a disregard for professional expertise. As Brit says, the “big, stinking lie at the heart of this misconceived programme“ is that “a bunch of Jamie’s celebs can succeed where professional teachers have failed by simply turning up and ‘giving it a go’”.
But in elevating celebrity above proven professionalism, Jamie is not alone. It’s almost impossible to get a documentary on some TV channels unless it is fronted by a celeb. And anyone thinks they can set themselves up as a climate scientist, economist or journalist. I’m not sure which worries me most - that so many do so, or that they occasionally succeed.
And then there is the headmaster John D’Abbro. A giveaway here was when he criticised David Starkey for making an “inappropriate” comment to a kid. Not “wrong”, note, but “inappropriate.”
The use of this word is a hallmark of a particular character that thrived under New Labour. It’s someone who is enough of a moral relativist not to want to use the terms “right” and “wrong”, but not so much of a relativist that they are prepared to forego the power and wealth that comes from passing judgment upon others. Egalitarianism only goes so far.
Topping all this off is the complete absence of any scientific method. What is this programme trying to show?
Let’s say some kids do benefit from the experience? Will this show the inadequacy of conventional schooling? Hardly, because it’s possible that they would benefit from having a second shot at education with proper teachers too. And if the kids don’t benefit, is this because they are unredeemable, or because they cannot be taught by clueless egomaniacs. Either way, we learn nothing.
If you’ve read this far, though, a paradox might have struck you. In complaining about these aspects of our society, am I not guilty of exactly the same egomania I am decrying - namely, that I assume you give a toss about my opinion, and that it is a bad thing if people are not like me? Or could it be that these things do have a materially detrimental effect upon society?

Fixed growth

Ilan Noy points us to this paper by him and colleagues which estimates that even terrible natural disasters “do not display any significant effect on economic growth.” This reminds me of an old paper by John Landon Lane and Peter Robinson which found that, give or take noise, western economies grew at similar long-run rates. “There are few, if any, feasible policies available that have a significant effect on long run growth rate” they concluded.
Taken together, these papers raise an intriguing possibility. Could it be that trend economic growth is so deeply embedded in institutions that it is much less malleable by man or nature than we think?
The three obvious counterfactuals to this aren’t necessarily convincing:
1. The great slowdown in western economies after 1973. But was this really a reduction in trend growth or just a long cycle*? The late R.C.O Matthews claimed in 1968 that high post-war growth was “a gigantic cyclical boom”. And booms turn to bust.
2. Japan’s “lost decade(s)” after 1989. This might tell us that something does affect long-run growth - financial crisis. Or it might just tell us that growth always slows down once a nation has closed the income gap with rich countries.
3. China’s economic growth has soared after the reforms initiated by Deng Xiaoping in the late 70s. But if you release the handbrake your car will shoot forward, even if it has only a feeble engine.
On the other hand, we have pitifully few examples of a rich liberal democracy making a transition from ordinary to high long-term growth. You would struggle to identify a Thatcher revolution from looking at UK GDP numbers, for example. Isn’t this a clue that growth isn’t so amenable to policy?
This is not to say that nothing affects growth. Technical progress should do - though it's unclear whether this is as manipulable by policy as endogenous growth theory claims. So do revolutions - though the historical record suggests not necessarily for the better.
All of this suggests we should be sceptical about Tim’s ideas for increasing our trend growth rate. Whether this is because these ideas, reasonable as they seem, will not in fact work, or whether it is because there are institutional constraints that prevent governments from adopting them is another matter.
Which brings me to a thought. One conventional view on the right - which includes Blairism - has been that we should worry less about how we cut up the economic pie and more about ensuring that we increase its size. But what if we just cannot, reliably and in the long-term, do this? Doesn’t redistribution then become relatively more important?
* Don’t get me started on Kondratieff waves.

Religion, happiness & choice

What’s the link between religion and happiness? This paper (pdf) suggests that it is not a linear one, but rather U-shaped:

All else constant, people are happier in countries in which the level of religiosity is either high or low, but are less happy in countries with intermediate levels of religiosity.

One reason for this, the authors say, lies in network effects. A country with middling religiosity will be a heterogenous one with little social cohesion. Religious folk will worry about a loss of values whilst atheists will fret about the social restrictions imposed by the pious. No-one will be satisfied. Alternatively, nations with middling levels of religiosity are often moving from one thing to the other, which breeds uncertainty about the future.
However, I wonder if there might be something else going on too. Although this finding holds for societies, might the same be true for individuals? Atheists and fanatics can be happy, but the mildly religious struggle.
Take two examples. In Jolie Holland’s song Corrido por Buddy, she sings of the “bad religion” that “brings you down and can never lift you up”, leading to the suicide of its victim.
And in Corrie, Sophie Webster recently tried to kill herself, motivated in part by her struggle between her faith in God and her lesbianism. Her problem is one of being middlingly religious - sufficiently so to fear God, but not so much so as to have convinced herself He loves her.  Her more religious pastor seems convinced that God loves him, which only shows that God has lousy taste. 
If I’m right, it suggests there is a problem with the notion that people can maximize utility. It would have been pointless to suggest to Buddy or Sophie that they change their beliefs - even though doing so seems to us an obvious way out of despair. This is because we cannot always freely choose our beliefs. They are the result of socialization or upbringing or a perception that God does or does not exist.
This suggests that there is not only the obvious budget constraint upon utility maximization, but a belief constraint too. Which raises the question of how many other such constraints there are, and so what a well-defined and psychologically plausible “utility maximization” problem would really look like.