Stumbling and Mumbling

Laffer curves for footballers

High earners are internationally mobile, and so will emigrate if taxes are too high. Because of this, tax increases actually reduce revenue. So goes the standard rightist claim. However, a new paper (pdf) suggests it is plain wrong. Henrik Kleven, Emmanuel Saez and Camille Landais have studied the response of professional footballers in Europe to tax rates. And they’ve concluded that the revenue-maximizing tax rate upon them in England is over 80%.
Yes, there is a Laffer curve - it’s just that we are on the left of it.
This is not because top footballers don’t leg it when faced with higher taxes. They do. The authors estimate that a rise in the top tax rate of 10 percentage points reduces the probability of a foreign player joining that country’s league by four percentage points. As Arsene said, “With the new taxation system…the domination of the Premier League…will go. That is for sure.”
This mobility, though, is not sufficient to justify low taxes. The reason for this is simple. If a high-ability player leaves, he’ll be replaced by lower-ability one; when Cristiano Ronaldo flounced off to Spain, Manyoo did not field just 10 players. This displacement effect means the loss of tax revenue is far smaller than the loss of the top player would suggest. The upshot is that revenue-maximizing tax rates are high.
If this applies to high earners generally, it would imply that our 50p tax rate, far from threatening to reduce tax revenues, is in fact way too low . But does it apply?
Two things suggest yes. A footballer’s career is short. So he does not have the option, which other workers do, of postponing retirement in order to make up for a loss of post-tax income. For footballers, then, substitution effects dominate income effects in a way that is not true of other workers.
Secondly, footballers - especially from smaller countries - are accustomed to having to move country. So they are more mobile than other workers.
On the other hand, though, there’s a big difference arguing the other way. Football must be located in England. Fans expect Arsenal to be based in London, not in Basle. But the same is not true for the hedge fund industry. It could move overseas in its entirety. This argues for lower taxes.
However, as demand for £1 million houses has risen sharply in the last year, and prices of prime London property are rising, it’s not obvious that the new 50p tax rate is, so far, reducing the rich’s inclination to live in England.
What’s more - of course - revenue maximization is not the only criteria here. The authors find that higher taxes do reduce the quality of a country’s football league by driving out some of its top players. And there are, of course, also arguments that huge taxes reduce freedom.
Nevertheless, the fact is that complaints that higher taxes will backfire and produce less revenue are highly dubious. 

(Not) envying future persons

Tim Harford suggests that it's better to be an averagely wealthy person today than a colossally rich one in 1900, on the reasonable grounds that no amount of wealth in 1900 could have bought antibiotics or mobile phones.
It's a good point.
But let's turn it around. Let's assume that people in the future will be much richer than us, and have access to many more new technologies, perhaps even near-immortality. They might look back on us as we look upon 1900ers, with pity and relief. And yet we do not envy them, even though we might envy today's rich who are much worse off than future persons. Nor do we really wish we were born later. Why not?
A lot of potential answers seem inadequate.
It could be because some things - housing, education - will be more expensive in the future. But then, housing was very cheap in the past, and yet this doesn't make us prefer to have lived then. 
I don't think it's because we don't know what the future holds and are ambiguity-averse. I'm glad I'm not a student today, even though today's students have advantages I didn't: central heating, the internet, en suite showers and many more girls*.
Nor is it, I think, because our preferences adapt to our circumstances and so we don't want the impossible. Even if I try, I don't really want to be born in the future rather than not exist now.
Nor is it because if I were born in the future, I'd be a different person and so the very question "what era would you rather live in?" is illogical. This doesn't stop us trying (maybe badly) to imagine living in the past - even though we could only do this by being a different person too.
So what is the answer? It could be a variant on this last point. Most of us are happy being who we are, and don't want to be the different person we'd have to be if we lived in the future instead. Or, similarly, we value friends and family so much as to prefer them to the random draw of different ones that we'd have if we lived in the future.
Even so, I'm a little puzzled. Why don't we envy future persons? And could the reason we don't also explain the Easterlin paradox, which is that the atrocious poverty (by today's standards) of past generations didn't seem to have made them miserable?
* When I was at Oxford, women were in a minority and almost all were either scary feminists, Christians or ugly. Don't ask for a Venn diagram. 

Chasing Rainbows: A review

Tim Worstall has, with touching quaintness, written a book. Chasing Rainbows claims to be about how the “green agenda defeats its aims.” I’m not sure this is a good description; Tim never quite defines clearly what the “green agenda” is. Instead, I’d rather read it as a (partisan) economist’s take on environmental questions.
 In doing so, he demonstrates both the strengths and weaknesses we see in his blog.
One of these is a clarity of exposition. By economists’ standards - a low bar, admittedly - Tim writes very well, although some readers might find his snarkiness a little wearing. And there are some brilliant flourishes. His idiot cousin metaphor for comparative advantage verges on the genius.
There’s also the ability to show that basic economic concepts - opportunity cost, comparative advantage, Pigovian tax - have everyday practical applications. This skill is, I fear, under-rated; it’s very easy even for economists to understand these ideas in theory, but forget their usefulness. As a result, Tim scores some great successes; his discussion of carbon taxes; of the role of markets in promoting growth; and the link between prosperity and fertility are spot on.
However, I have three problems with it - which, I suspect, we often see in his blog.
First, there is - as Paul points out - a tendency to under-rate the intelligence of his opponents. This is most evident in his claim, in chapter one, that jobs are a cost, not a benefit.
This is certainly true in a world of full employment. In such a world, a “green job” means there’s one less worker to do something else. But we don’t live in such a world. The alternative to “green jobs” is not people being more productive elsewhere, but rather them lying around on the dole. And given that unemployment is a massive source of unhappiness, this is a bad thing. Yes, it’s true that, as individuals, we want to minimize effort. But in a world where risks are not pooled adequately, this is not true for society. In such a world, “green jobs” might be equivalent to Keynes’ paying men to dig holes and fill them in again - a way of pump-priming aggregate demand.
Of course, there are arguments against this, and Tim knows them. And it’s also true that greens - to their discredit - don’t often present their job creation in such Keynesian terms. But the point is that Tim doesn’t take the debate beyond the “jobs are a cost, not a benefit” line. This is excessively simple.
Secondly, there’s a failure to ask: is this a big problem or a little one? For me, this leaps out of his discussion of recycling. He’s entirely  correct to say that advocates of recycling ignore the effort involved in doing so. But is this really a significant issue? Here in Rutland, recycling consists merely of chucking rubbish into one of three bins - which is no effort at all. I fear that, in giving weight to trivial issues, Tim is guilty of a common error amongst free market economists, of over-estimating the importance of small deviations from full optimality.
Thirdly, there’s a tendency sometimes to attack a weak argument rather than a strong one. Thankfully, the dread name of Richard Murphy doesn’t appear in this book. But Tim’s Quixotic attack on irrelevant targets does.
He argues, convincingly, that “the physical world is not the defining limit upon economic growth; human ingenuity is”. This is true. But this doesn’t take us far. It’s quite possible that we’re heading for lower growth not because of pure resource constraints, but the race between diminishing returns and technical progress - which has always been the determinant of growth - is becoming tighter. You can interpret high commodity prices and firms’ reluctance to invest as evidence that the smart money believes that David Ricardo’s “stationary state” is, at least, a credible scenario. In tilting at the windmill of resource constraints, Tim doesn’t consider this more sensible possibility.
I don’t say all this to diminish the value of this book. If I were an economics teacher, I’d recommend it as holiday reading for my students, in the hope that they’d see how textbook concepts can be used - and that my greener students will be stimulated to think more clearly.

Busyness

“All human evil comes from a single cause, man's inability to sit still in a room“ said Blaise Pascal. “Don’t just do something. Stand there” said Clint Eastwood.
Both great men saw an important truth - that people have a huge urge to to things, regardless of reason or effect.  A lovely new paper (pdf) by Christopher Hsee discusses just this. 
He got some students to fill in a questionnaire and then drop it into a box, in return for which they’d get some chocolate. One box was right outside the door, the other was 15 minutes walk away: the students were also told they’d be needed to fill in another questionnaire 15 minutes later, so they weren’t free to just leave.
When told that the same chocolate was available in both locations, 32% chose the 15 minutes walk. They just fancied stretching their legs. However, when told that the chocolate was different in both places, 59% chose the walk. They said this was because they preferred the chocolate that was further away - even though a survey of them showed that the chocolate was equally attractive in both places.
What's more, those who walked said afterwards that they were much happier than those who sat still. This was also true in a separate experiment, when some students were told to walk, and others not to.
Hsee concludes: 

People choose to be idle if they do not have reason to be busy, but…even a specious justification can prompt them to seek busyness. In addition, people are happier when busy than when idle, even if busyness is forced upon them.

This, surely, explains a lot, for example:
1. Equity investors trade a lot, even though doing so loses money.
2. The unemployed are significantly unhappier than the employed, even controlling for incomes.
3. Bosses are forever finding themselves something to do, even though good organizations run themselves: this is one of the differences between managerialism and management.
4. Politicians - at least “progressive” ones - do more than they should, with limited success.
5. There’s widespread public hostility to the “workshy”, even though these are only a tiny minority of the unemployed, and even though it’s a good thing in utilitarian terms that some people don’t want to work.
These facts become explicable once we realize that people think that busyness is a good thing in itself, regardless of its effects.

Flight's right

For the second time in as many weeks, a Tory has had to apologize for saying something that contains a lot of truth. This time, it's Howard Flight, who said:

We're going to have a system where the middle classes are discouraged from breeding because it's jolly expensive.
But for those on benefits, there is every incentive. Well, that's not very sensible.

But the truth - of course - is that people do, at the margin, respond to incentives. If you raise the cost of having children, people will have fewer of them.
For example, this study of the introduction of working tax credits - which increased work incentives for single parents - found that the move "led to a significant reduction in single mothers’ subsequent fertility."
This paper finds that:

Financial incentives play a notable role in determining fertility decisions in France...Adding to the existing tax-benefit system a child subsidy of 150 euros per month...would raise total fertility by about 0.3 points.

And there's also evidence here (pdf) from Israel.
It is, therefore, clearly true that withdrawing child benefit from top earners - forget that "middle class" crap - will discourage them from "breeding."
In this sense, Mr Flight is quite right. Where we might disagree with him, naturally, is in the class hatred indicated by that last sentence. But then,who would expect anything else from a Tory?

Journalists' pay, and camels

I finally saw the first episode of Any Human Heart last night. And I was shocked, shocked I tell you.
By the level of journalists’ pay.
In the early 30s, Logan Mountstuart was offered five guineas per 1000 words for some features on Spanish cities. This is equivalent to over £1000 today, measured by the rise in average earnings. Most freelance journalists nowadays would be happy to get half this - though as a popular author Mountstuart could command a premium.
He’s later offered $50 per day, plus expenses, to report on the Spanish civil war - equivalent to £1900 in today’s money.  This is six times as much as a broadsheet columnist would earn today.
This is comparable to what the Daily Beast offered William Boot to report on the war in Ishmaelia. He got £50 a week (the exchange rate in the 30s was just under 5$/£1) plus expenses. And in those days, expenses were in their pomp:

“And think what you can make on your expenses” urged Mr Salter. “At least another twenty. I happened to see Hitchcock’s expense sheet when he was working for us in Shanghai. He charged three hundred pounds for camels alone.”*

This would take Boot’s weekly wage to £12,600 in today‘s money.
Of course, we shouldn’t regard this as corroboration of the accuracy of Mountstuart’s wage: it is almost certainly Boyd’s source.
I’ve two other data points here, though. One is that George Orwell hints that a book reviewer got two guineas per 800 words in 1946. This is equivalent to just over £200 in today’s money. This is not far shy of what many magazines pay today. Orwell’s description of the writer fearing “the heavy boots of his creditors clumping up and down the stairs” isn’t too far from Laurie’s “things I can't afford include meat to stop me getting anaemic, bedsheets without holes, a place to keep my clothes that isn't the floor, and any sort of holiday.”
At the other end of the spectrum, Kenneth Morgan tells us that Michael Foot was offered £450 a year in 1938, “soon to rise higher”, to be a features writer on the Evening Standard. This is over £81,000 in today’s money.
With this income, he rented a flat in Mayfair at 30 shillings a week. That’s £55 in today’s money deflated by the RPI and £190 deflated by average earnings. Today, the cheapest flat in the area goes for £295 per week.
The picture here seems to be that journalists’ pay has barely kept up with average earnings generally since the 1930s, and has almost certainly fallen relative to housing costs.
Which shouldn’t be surprising. Although demand for journalism probably hasn’t risen much since the 30s - newspaper sales then were huge - the supply of potential journalists has increased. Which could be one adverse but unintended effect of the expansion of universities.
* Hitchcock’s trick was repeated:

A nosy accountant writes to a well-known Daily Mail correspondent about a charge he made some months earlier, when confronted with a desert transportation  problem, which read: ’To purchase of camel - 25 pounds’.   The accountant asked: ‘I assume when you left North Africa you sold the camel.  What did it fetch?’   To which the newsman (I think it was Ralph Izzard)  replied: ‘Thanks for the reminder. To my last month's expenses please add: ‘Camel died... to burial of camel.. . Five pounds.’

Dissonance, ignorance & Lib Dems

Several of you have mocked Vince Cable’s claim that the Lib Dems have broken no promises in raising tuition fees. What you haven’t pointed out, though, is that this is a particular instance of a common behaviour - the things we do to reduce cognitive dissonance.
Dissonance happens when we hold two conflicting beliefs - such as “I’m an honest person” and “I’m acting in a way contrary to what I promised.” Such a conflict is uncomfortable. Cable’s solution is to use self-deception: “that promise wasn’t really a promise at all.”
Another solution in other contexts is simply to try to ignore the consequences of our actions. A new paper shows how widespread this is.
The authors got a bunch of students to play a dictator game, in which they were given some money and offered the choice to split it evenly or 7-1 in their favour.
36 of the 90 subjects chose the even division. This looks like pro-social fair-minded behaviour.
But what’s the motivation here? Do people really care about others? Or do they simply care about themselves, and wish to maintain a self-image of themselves as fair-minded?
Another experiment was used to adjudicate.  Subjects were asked to choose among random pairs of pay-offs to themselves and a random partner. They were shown their own pay-off, and given the option to see their partner’s pay-off as well. However, two-thirds of the people who chose the even split in the pure dictator game chose not to see their partner’s pay-off. This is despite the fact that someone who wanted to make a genuinely pro-social choice would have to do so. The authors say:

People do not show other-regarding behavior because they care for others, but because they want to maintain a certain self perception.

This corroborates this paper by Jason Dana and colleagues, and this one (pdf) by James Konow.
What’s going on here is a form of dissonance reduction. People have two conflicting beliefs: “I want to make money” and “I’m a fair person.” One way to reconcile these beliefs and reduce dissonance is simply to choose not to know the effects of one’s actions upon other people - which allows one to believe that a selfish choice was in fact “fair“.  People use strategic ignorance to reduce dissonance.
This doesn’t just happen in laboratories. The classic example was General Tommy Franks’ statement in the Iraq war: “We don’t do body counts.”  This was an attempt to save him from the dissonance that would have arisen from trying to reconcile the belief that the war was justified with the evidence that tens of thousands were dying.
Another example is this effort from Nick Clegg, in which he argues that, for “new progressives” what matters is not lifting people out of poverty but increasing social mobility. This too is a form of strategic ignorance. Poverty (in the sense he dismisses) is easily measurable, with only a short lag: how many have an income less than 60% of the median? But social mobility can only be measured decades after policies have been implemented: it’ll take 30 years for us to tell whether the pupil premium has increased mobility.
What Clegg is doing, therefore, is choosing ignorance: he’s asking for his actions to be judged by a measure that won’t be available until he’s long-forgotten.
Of course, I’m not arguing that the Lib Dems have a monopoly on egregious means of reducing cognitive dissonance. They don’t.
My point is simply that what appear to be moronic political statements are in fact the outcome of quite common psychological mechanisms.

Osborne takes default risk

Don and Sue both make the obvious leftist response to Osborne’s proposal to lend to Ireland: how can a government which claims that spending cuts are necessary suddenly find £7bn?
It’s a good, glib debating point, but maybe not much more. In truth, it could be that lending to Ireland will reduce UK government borrowing.
The reason for this is simple. The UK can raise £7bn very cheaply, and earn a high return by lending to Ireland. The terms of the loan are not yet known, but let’s assume for illustration that the interest rate is 7.7%, the current yield on five year Irish gilts. UK yields are now at 2%, so this implies that, over the course of the loan, the UK would earn just over £2.2bn.
We could add to this the taxes the Exchequer would receive from UK exporters, who find their ability to sell to Ireland enhanced. But this is a second-order gain. In 2009, Ireland spent 17% of its GDP (pdf) on UK goods and services. So, if our £7bn loan raises Irish GDP by £7bn, and assuming a tax rate of 40% on exporters‘ income, the Treasury will get another £640m: 0.4 x 0.23 x 7.
The Treasury’s £7bn loan could therefore earn it a total return of just under £3bn. This is almost certainly better than it would get from orthodox loose fiscal policy. To recoup £3bn from £7bn of borrowing to finance domestic spending at a 40% tax rate requires a multiplier of well over three. This is  larger than most plausible estimates.
All of which raises the question. If bailing out Ireland is such a good idea, why not do more of it? Why not lend to Portugal and Greece as well, and to all comers?
Simple - default risk. Lending to  Ireland brings with it the risk that Ireland won’t repay - a risk which Duncan thinks very high.
This changes the maths. If the Treasury gets back only half of its loan, then it’s touch and go whether lending to Ireland is better than ordinary Keynesian borrowing. (The politics, of course, is much worse, as Osborne would get much more flak for a bad overseas loan than he would for lacklustre domestic fiscal policy).
But let’s be clear. The question here is not: how can Osborne find £7bn? He’ll find it from the same place as the other £155bn he’ll borrow this year - from the gilt market. Instead, the issue is: what is the default risk and the interest rate on this loan? It is this, and this alone, that determines whether the loan is a good idea or not.

Monetary policy without the euro

Daniel Hannan is blaming the euro for Ireland’s woes. This raises a paradox.
Hannan’s argument seems reasonable. Had Ireland stayed out of the euro, the Central Bank of Ireland would have been free to run a tighter monetary policy, and this would have prevented the boom in credit and house prices, the ending of which destroyed the banks and crippled the economy.
There is, however, an obvious counter-argument to this. Central banks which have been free to set monetary policy without regard to external factors have not succeeded in avoiding bubbles in credit and asset prices - just look at the Fed. An independent national monetary policy - even assuming one is feasible for a small open economy such as Ireland - is no guarantee of avoiding financial crises.
Why? There are, roughly speaking, three possible reasons:
1. The Fed - under both Greenspan and Bernanke until at least 2008 - believed markets were rational and so underweighted the danger of asset prices bubbles. On this view, monetary policy failure was a temporary and corrigible error.
2. Central bankers’ reputations depend disproportionately upon what bankers think of them; in most times, the ordinary man in the street doesn’t give a thought to central banking. This gives central bankers an interest in erring on the side of low interest rates, because investment banks love cheap and easy money.  This is why Bob Woodward could get away with describing Greenspan as a “maestro.”
3. It’s just impossible for central bankers to spot bubbles, especially in the presence of the sort of supply-side changes Ireland experienced in the 00s, because centralized experts cannot know better than even imperfect markets.
Which brings me to my paradox. If I were a rightist, I’d have more sympathy with (2) or (3) than (1) - in fact, I do. But if this is the case, the value of monetary policy autonomy is low, in which case the argument for Ireland having stayed out of the euro becomes weaker. To believe that Ireland could have avoided a bubble by staying out of the euro requires one to believe that centralized policy can reliably out-perform markets and prevent bubbles. Which is an odd thing for a right-winger to believe.

Threats to freedom

Take three recent items.
1. Vince Cable claims that the Lib Dems “didn't break a promise” in raising tuition fees, even though their manifesto (pdf) said “We’ll make going to university affordable for all…We are the only party that is committed to scrapping tuition fees.”
2. Paul Chambers’ notorious tweet is deemed “obviously menacing” by some judge, even though everyone else saw it as just a bad joke.
3. Nick Cohen highlights the cases of Dalia Nield and Peter Wilmshurst who - like Simon Singh - are being sued for libel after giving honest scientific opinions.
There’s a common theme here. All three cases show that public speech is under threat, in two senses.
First, there are double standards being applied. When ordinary people enter the public sphere to either vent their anger or express an expert opinion, the worst possible construal is placed upon their words, and they are bullied by the legal system. However, the ruling class can tell bare-faced lies and suffer no penalty.
Secondly, there’s an attempt to drive out the truth whilst encouraging lies.  As I’ve said before, the logical consequence of this repression will be to deter honest businessmen  from coming to the UK. If people come to appreciate just how repressive our libel laws are, they will interpret the lack of criticism of individuals or new products not as a sign that these are honest people and good products, but rather merely as an indication that criticism has been silenced. Good, honest people will then find it impossible to differentiate themselves from criminals and charlatans. Equally, no-one will in future believe politicians’ promises*.  The result will be the death of any meaningful public discourse/
Now, one solution here is to support the campaign for libel reform. But I wonder if this is sufficient.
Instead, these cases, taken together, highlight two facts.
One is that robust, free, truthful speech  requires equality. You can’t have free speech when rich businessmen and corporations regard it as a threat to their wealth**, nor when ordinary folk are assumed by the authorities to have criminal intent. In this sense, freedom requires equality - not necessarily in material terms but rather democratic equality, in which people’s interests and intents are given equal weighting.
Secondly, the threat to freedom comes not from lefty statist politicians but from businesses and self-important security apparatchiks. And their willingness to use intimidation - Paul Chambers and Dalia Nield have suffered more on-going distress than those caught up in the student demonstrations - exceeds anything the left can manage.
* Of course, few ever did. The Lib Dems‘ lies have merely enlightened young and naïve first-time voters.
** It’s not good enough to claim that Dalia Nield will win eventually, just as Simon Singh did. The fact is that those accused of libel face months of hassle and fear, and the prospect of this cows other people into submission.