Stumbling and Mumbling

Labour's crisis: Cameron's fault

It’s widely agreed, and also true, that the Labour party is in crisis in part because of bad leadership. What’s not sufficiently appreciated, however, is that the bad leadership is not just Corbyn’s. It’s also Cameron’s. Labour is paying the price of his failed policies.

I mean this in two related ways. One is that fiscal austerity contributed to stagnant living standards. And stagnation, as Ben Freidman has shown, breeds intolerance. This has contributed not only to harsher anti-immigration sentiment, but also to immigration becoming a more salient issue. And Labour is regarded as weak on this.

Secondly, it was Cameron who gave us Brexit, not least because his austerity policies increased support for the Leave cause. This has hurt Labour in three ways:

 - It has created a perceived division within the party between its young, metropolitan outward-looking supporters on the one hand and more socially conservative working class Leavers on the other. Granted, this division is exaggerated: as John Curtice points out, most Labour supporters even in the party’s “heartland” voted Remain. But the sense of a divide is real.

 - It has allowed May and the Tory right to claim to embody the “will of the people”. This has left Labour looking out of touch. And it’s created a dilemma of how the party can claim to be on the side of the people when it opposed a policy they favour.

 - Brexit has diverted attention from policy areas where Labour might be stronger. Imagine it hadn’t happened. What would today’s big issues be? Chances are, they’d be the NHS and social care – issues on which voters better trust Labour.

Now, I don’t say all this to complain about an injustice. Westminster politics has little to do with fairness or meritocracy.

Nor do I say so to exculpate Corbyn: the fact that he's been dealt a bad hand doesn't justify him playing it badly.

Instead, I do so to point out that social affairs are complex and unpredictable. Even those of us who have long opposed austerity did not foresee that it would be Labour, more than the Tories, are paying the price of its ill-effects.

We tend to think that bad government policies will boost support for the opposition. It ain’t necessarily so.

Which brings me to my worry. Nick Cohen says that when voters realize that Brexit is a “godawful mess” they’ll turn against the “superliars” who are imposing it upon us.  This might be too optimistic. Instead, I fear there’s a danger of a backfire effect which will see even greater hostility to immigrants and experts.

It’s not just truth that does not prevail in politics. Nor, often, does justice.

On manufacturing productivity

Some people criticized my last post on the grounds that we’d expect productivity growth to have slowed down in recent years because the economy has shifted from manufacturing – where productivity gains are easier to achieve or measure – to services, where they are less easy to achieve or measure.

My chart helps to speak to this objection. It shows productivity growth for manufacturing only. I’m taking Bank of England data since 1948, updated for last year from the ONS.

This shows that productivity growth did accelerate in the 80s: ten-year growth peaked in 1981-91. You might read that as evidence that the Thatcher reforms did raise productivity. However, in recent years productivity has slowed. In the last 20 years, it’s grown by 2.4% per year, which is almost a percentage point less than it grew in the 1953-73 peak.

If neoliberalism did raise productivity growth, it did so only briefly.

I’ll not accept the objection that productivity growth slowed recently because of the financial crisis. True, it did, through several channels. But the crisis was not an accident. Crises are an inherent feature of capitalism. Claiming that productivity would have done well but for the crisis is like a football manager claiming that his side played well except for the six goals they conceded.

What’s more, the productivity slowdown recently is surprising because two things should have raised it.

One is offshoring – both outsourcing and the displacement of low-wage manufacturing in the UK by cheaper imports. This should have raised productivity in the same way that dropping a team’s worst batsmen would raise the side’s batting average. You might detect this effect in the 00s, but not more recently.

The other is robots. There’s not much evidence in these data that robots and digitization are raising productivity.

These data, I think, leave the debate open. They are consistent with my claim that neoliberalism is now depressing productivity. But they’re also consistent with the notion that perhaps neoliberal reforms did temporarily raise productivity, but that effect has now been outweighed by secular stagnation effects: less innovation, diminishing returns and suchlike.

I’m surprised and disappointed that we don’t hear more free market pessimism – the idea that free markets are a good thing but their effect on growth is offset by the dead hand of diminishing returns. This was David Ricardo’s view, and it seems to me a reasonable one now.

Neoliberalism & productivity

Chris Edwards says the privatizations started by Thatcher “transformed the British economy” and boosted productivity. This raises an under-appreciated paradox.

The thing is that privatization isn’t the only thing to have happened since the 1980s which should have raised productivity, according to (what I’ll loosely call) neoliberal ideology. Trades unions have weakened, which should have reduced “restrictive practices”. Managers have become better paid, which should have attracted more skilful ones, and better incentivized them to increase productivity. And the workforce has more human capital: since the mid-80s, the proportion of workers with a degree has quadrupled from 8% to one-third.

Neoliberal ideology, then, predicts that productivity growth should have accelerated. But it hasn’t. In fact, Bank of England data show that productivity growth, averaged over 20 years, has trended down since the 1970s.

Why?

It could be that neoliberal reforms did give a short-lived boost to productivity. I’m not sure. As Dietz Vollrath says, economies are usually slow to respond to a rise in potential output. If there had been a big rise in potential output, therefore, it should show up in the data on 20-year growth. It hasn’t.

Another possibility is that the productivity-enhancing effects of neoliberalism have been outweighed by the forces of secular stagnation – the dearth of innovations and profitable investment projects.

But there’s another possibility – that neoliberalism has in fact contributed to the productivity slowdown.

I’m thinking of three different ways in which this is possible.

One works through macroeconomic policy. In tight labour markets of the sort we had in the post-war years, employers had an incentive to raise productivity because they couldn’t so easily reply upon suppressing wages to raise profits. Also, confidence that aggregate demand would remain high encouraged firms to invest and so raise capital-labour ratios. In the post-social democracy years, these spurs to productivity have been weaker.

Another mechanism is that inequality can reduce productivity. For example, it generates (pdf) distrust which depresses growth by worsening the quality of policy; exacerbating “markets for lemons” problems; and by diverting resources towards low-productivity guard labour.

A third mechanism is that neoliberal management itself can reduce productivity. There are several pathways here:

 - Good management can be bad for investment and innovation. William Nordhaus has shown that the profits from innovation are small. And Charles Lee and Salman Arif have shown that capital spending is often motivated by sentiment rather than by cold-minded appraisal with the result that it often leads to falling profits. We can interpret the slowdowns in innovation and investment as evidence that bosses have wised up to these facts. Also, an emphasis upon cost-effectiveness, routine and best practice can deny employees the space and time to experiment and innovate. Either way, Joseph Schumpeter’s point seems valid: capitalist growth requires a buccaneering spirit which is killed off by rational bureaucracy.

 - As Jeffrey Nielsen has argued, “rank-based” organizations can demotivate more junior staff, who expect to be told what to do rather than use their initiative.

 - The high-powered incentives offered to bosses can backfire. They can incentivize rent-seeking, office politics and jockeying for the top job rather than getting on with one’s work. They can crowd out intrinsic motivations such as professional pride. And they can divert (pdf) managers towards doing tasks that are easily monitored rather than ones which are important to an organization but harder to measure: for example, cost-cutting can be monitored and incentivized but maintaining a healthy corporate culture is less easily measured and so can be neglected by crude incentive schemes.

 - Empowering management can increase opposition to change. As McAfee and Brynjolfsson have shown, reaping the benefits of technical change often requires organizational change. But well-paid bosses have little reason to want to rock the boat by undertaking such change. The upshot is that we are stuck in what van Ark calls (pdf) the “installation phase” of the digital economy rather than the deployment phase. As Joel Mokyr has said, the forces of conservatism eventually suppress technical creativity.

All this is consistent with the Big Fact – that aggregate productivity growth has been lower in the neoliberal era than it was in the 1945-73 heyday of social democracy.

I’ll concede that this is only suggestive and that there might be another possibility – that the strong growth in productivity in the post-war period was an aberration caused by firms catching up and taking advantage of pre-war innovations. This, though, still leaves us with the possibility that slow growth is a feature of normal capitalism.

Ignoring people

Are economists - even when they are right - guilty of ignoring people’s real experiences?

I ask because of the row over business rates. Some businesses face a big increase in these. To this, it’s tempting for economists to point out the incidence of rates. This often falls not upon businesses themselves but upon landlords: higher rates lead to lower rents, which means that rates are in effect a cack-handed form of land tax. The IFS has said (pdf):

Much of the burden of business rates is passed on from the occupiers of non-domestic properties to the properties’ owners (if different), via reductions in the properties’ market rental values.

I believe this. But I sympathize with business owners who aren’t convinced. The question is: how is the burden passed on? One way is through rents being renegotiated – a process which favours bigger businesses against smaller landlords. Another way is by firms moving to cheaper premises, or threatening to do so. Even the latter entails costs – of researching rents on plausible premises and being distracted from the tough day-to-day job of running your business.

Even in cases where the burden of rates is passed onto landlords, business owners suffer hassle. Talk about tax incidence – even if it is true – underplays this hassle. Economists’ analysis of comparative statics overlooks the human difficulties of moving from one outcome to the other. Real life is lived in time lags and in disequilibria.

Rates are not the only example of this. I suspect immigration might provide another. Here’s one study of how immigration affects natives:

Native Europeans are more likely to upgrade their occupation to one associated with higher skills and better pay, when a larger number of immigrants enter their labour market. They are also more likely to start a self-employment activity. As a consequence of this upward mobility their income increases or stays the same in response to immigration.

Again, I find this plausible. And again, it neglects the lived experience of those affected. Even those who make the upgrade well face a period of uncertainty: what job can I do? Will I get it? Will my business succeed? And so on.

Now, I stress here that I’m looking at cases where I believe economists to be more or less right. In other cases, some economists are guilty of a bigger error – of over-estimating the likelihood of a benign adjustment. Those who think that jobs lost because of the UK leaving the single market can be offset by ones created by more exports to Australia are making the same mistake Patrick Minford made in the 1980s when he supported pit closures on the grounds that redundant miners would find jobs as supermodels and astronauts*; they are over-stating people’s flexibility.

Instead, I’m making a point with a heavy heart – that even good, empirical economics can overlook real lived experience. Perhaps economists need more ethnography. This might be one reason (of several) why there is a big and regrettable chasm between economists and lay people.

* He didn’t use these examples, but he might as well have done.

Missing markets

Why is there such a long lag between good economic ideas and their implementation? I’m prompted to ask by the death of the great Kenneth Arrow.

He showed (pdf) that, under certain conditions, it was possible for competitive markets to achieve an optimal allocation of risk. One of these conditions is that there exist securities which pay out in all possible states of the world, so that we have in effect complete insurance markets. But, he concluded:

Many of the economic institutions which would be needed to carry out the competitive allocation in the case of uncertainty are in fact lacking.

He wrote that in 1952. Not much has changed since then. Yes, we now have index-linked gilts which pay out for all different possible rates of inflation. But we don’t have GDP-linked bonds that pay out in different rates of GDP growth, nor securities that pay out at different levels of house prices, or which pay out at different levels of occupational employment and so would offer insurance against our jobs being taken by robots. As Robert Shiller wrote in 1993 – 24 years ago! - we just don’t have markets that insure us against big economic risks: his book, Macro Markets can be seen as an attempt to operationalize Arrow’s high theory.

Why, then, has so little changed since Arrow wrote those words?

It’s not because his ideas are flawed: many far worse ideas have been adopted. Nor is it because the welfare cost of business cycles is small as Robert Lucas argued (pdf): recessions hit real people, not representative agents. Nor is it because the state does such a good job of insuring against economic risks that there’s no role for markets. Nor is it because there’s anything very unusual about this particular case; there was a gap of over 30 years, for example, between Ricardo arguing against the Corn Laws and their abolition.

Instead, I’d suggest other reasons.

One is simply a status quo bias. This isn’t wholly a bad thing. Things often exist or not for good reasons. The status quo might embody the wisdom of the ages. But a healthy scepticism can spill over into antipathy for change – as in the “not invented here” syndrome.

Another is that it’s easier for the financial “services” industry to make money by rigging markets or flogging over-priced products than it is for them to undertake genuinely worthwhile financial innovation. As William Nordhaus has famously shown, the private rewards to innovation are often small.

This might be especially true in finance. The worth of financial assets often lies in their liquidity, the ease with which they can be traded. Liquid markets, however, don’t fall from heaven. They need to be created which requires hard work. Donald MacKenzie discusses how Leo Melamed, then chairman of the CBOE, cajoled traders into trading index futures thus creating a market:

A market, says Melamed, “is more than a bright idea. It takes planning, calculation, arm-twisting and tenacity to get a market up and going. Even when it’s chugging along, it has to be cranked and pushed.” (An Engine, not a Camera, p173)

Perhaps Arrovian securities are lacking because there’s been no Melamed figure to chivvy them into existence. Markets don't exist because of a market failure. 

In this context, markets and government are complements not substitutes. If we want macro markets the government might need to create them and give them away; if it can create money out of nothing it can create other claims on wealth too.

One point that critics and supporters of markets are both apt to forget is that, when viewed from the perspective of Arrow-Debreu theory, the astonishing thing about markets is how under-developed they are.

The left's Brexit dilemma

Jeremy Corbyn’s decision to accept the “will of the people” on Brexit has been forcefully attacked, for example by Ed Vulliamy – with some justification. I fear, however, that we are perhaps under-estimating the extent to which the left faces a genuine dilemma here.

This dilemma isn’t so much electoral as ideological. For me, the big, great idea of the left is the desire to empower working people. But this runs into the problem: how can we claim to want to empower people and yet say that the people were flat wrong on an issue where they were empowered?

In accepting the “will of the people” Corbyn has at least ducked this dilemma. And for Blair, it doesn’t even arise. He’s always believed in managerialism and leadershipitis and so can consistently argue that he knows better than the people. It’s in this context (and perhaps this alone) that it makes sense for his critics to raise the subject of Iraq; his decision to go to war highlighted the limitations of top-down central planning.

Some of us, however, do face the dilemma. Can we solve it? I think so, in four ways.

First, the plebiscite was the wrong form of empowerment. It did not fulfil the conditions under which there is wisdom in crowds – for example, that there be meaningful private information or that beliefs be uncorrelated. This doesn’t necessarily mean we should reject its result outright. But it does mean we should use it as a platform for arguing for meaningful empowerment.  As I’ve said, if you think the plebiscite was a good idea you must, logically, think worker democracy an even better one.

Secondly, we should recognise (or pretend?!) that not everybody voted Brexit for consequentialist reasons. Some regard it instead as an intrinsic good: to them, being free of the “yoke of Brussels” is a good thing in itself. Once we do this, we can argue that Brexit, especially in the form pursued by Ms May, is costly. Goods have a price. That shouldn’t be surprising.

Thirdly, we should argue for ways of minimizing this price. That means arguing for the softest possible Brexit. But it also means pushing the case for supply-side policies that will give a boost to growth to offset the likely adverse effect of leaving the single market.

Finally, we should (re)claim ownership of the phrase “take back control. As Will Davies has said:

The slogan ‘take back control’ was a piece of political genius. It worked on every level between the macroeconomic and the psychoanalytic…What was so clever about the language of the Leave campaign was that it spoke directly to [a] feeling of inadequacy and embarrassment, then promised to eradicate it. The promise had nothing to do with economics or policy, but everything to do with the psychological allure of autonomy and self-respect. Farage’s political strategy was to take seriously communities who’d otherwise been taken for granted for much of the past 50 years.

We should be arguing that we should empower people not just to vote upon the obsession of a few rich cranks but to take control of their own lives. This means giving them a greater say in local public services; freeing them from the oppressive and demeaning aspects of the welfare state; and giving them more say in the workplace. It is to his great credit than John McDonnell is thinking along these lines – and to the great discredit of many others that his efforts aren’t getting more attention.

Replacing Wenger

Should Arsene Wenger go? If so who should replace him? In considering these questions we must remember three important economic principles.

One is that in hiring someone what matters is putting round pegs into round holes. Productivity often results not from the intrinsic quality of a worker, but from the match between his skills and the job. What matters is getting the right man for the job, not necessarily the best.

Boris Groysberg has shown this (pdf). He looked at 20 former managers of General Electric – a company with a reputation for producing good bosses – who moved to senior positions in other firms. He found that their performance varied enormously even though all 20 had similarly impressive CVs.

This variance occurred because the matches differed. Hiring a cost-cutter, for example, is a good idea for a firm facing stiff price competition in a mature industry. But it’s a bad idea if yours is a fast-growing newer firm. And conversely, a man whose good at managing growth won’t fit into a mature firm.

What Arsenal must ask, therefore, is two questions. First, what precisely is the problem we want to solve? And second, who has the skill-set to do so?

The problem seems to be one of mentality: how to ensure that good players don’t collectively under-perform in big games. Also, we’d like someone who’s good at managing up – who can get money and competence in the transfer market out of an “absentee owner with no knowledge or interest in football” and a board which has been occasionally clueless.

So, who fits this bill? There are few stand-out candidates. There’s nothing in the CVs of Eddie Howe, Thomas Tuchel or Ronald Koeman to suggest they are capable of taking a team from the top four to the top one. Yes, Diego Simeone or Max Allegri have a proven record to suggest they could do so – but the former at least would entail a massive and therefore risky cultural change at the club.

But here’s a problem. A CV tells us what a man has done – which might of course be just “got lucky”. It doesn’t necessarily tell us what he can do.

Which brings me to the second principle: nobody knows anything. Success is to a large extent unpredictable. This is as true in football management as business.  For example, Sir Alex Ferguson was on the brink of the sack in 1990, and Bill Shankly failed to get Liverpool promoted in his first two seasons on charge – something which would get a boss the boot in our more demanding times.  Nobody then foresaw their great achievements – just as nobody’s reaction to Claudio Ranieri’s appointment at Leicester was “this guy will take them to a league title”.

The converse, of course, is also true. Countless managers have failed to live up to fans’ or board’s hopes, even at the minority of clubs that aren’t run by egomaniacs or idiots: David Moyes and Louis van Gaal were both the right man for Manyoo once.

So, what can we expect of a new Arsenal boss?

Here’s my third principle: perhaps not much. We’ve got reasonable evidence (pdf) from top European leagues that changing manager does not in fact make much difference on average. This is perhaps consistent with the fact that any organization’s success often depends more upon organizational capital than upon single individuals. For example, some teams will always be near the top, and others won’t: last season was an outlier in this respect.

Maybe Great Men can make a difference. But the thing about Great Men is that they are very rare.

I guess the only point I’m making here for Arsenal fans is: don’t get your hopes up.

Healing Labour's class divide

There’s an emerging consensus that the Labour party’s longstanding coalition between workers and middle class intellectuals is breaking down. Bo Rothstein says the “alliance between the industrial working class and what one might call the intellectual-cultural Left is over.” Julian Coman laments the division “between Labour and its own traditional supporters in the heartland towns of the Midlands and the north.” And Peter Ryley says the left “has lost its ability to speak for and to working class people.”

We need a historical perspective here. There has always been a tension on the left between workers and the middle class. This was forcefully expressed by George Orwell. Describing an ILP meeting in London, he wrote:

Every person there, male and female, bore the worst stigmata of sniffish middle-class superiority. If a real working man, a miner dirty from the pit, for instance, had suddenly walked into their midst, they would have been embarrassed, angry, and disgusted; some, I should think, would have fled holding their noses.

Just a few years later, however, a Labour government laden with superior middle class types created the modern welfare state: the Wykehamist Stafford Cripps was even one of the vegetarians that Orwell so despised. And all subsequent Labour governments were well stocked with poshos.

Why then should the alliance be breaking down now?   

One reason is that the issues that have long divided workers and the well-meaning middle class are more salient now – most obviously Brexit. This perceived split might be exaggerated by a cartoonish stereotyping of the “white working class” as insular xenophobes fleeing into the arms of Ukip – an image which ignores the fact that Ukip is the party of multi-millionaires such as Farage, Banks and Nuttall*.

A second reason is perhaps that the social distance between the classes – especially at the top of the Labour party - has increased because of the decline of unions and autodidacts. The posh members of the 1945-51 government were daily reminded of their links to workers by their colleagues such as Bevin and Bevan. In recent years, the link has been weaker: yes, Blair had Prescott – but whereas Bevin and Bevan were respected and feared, there was always an element of patronization in the treatment of Prescott.

Perhaps linked to this is something else. Since the 1990s the middle-class superiority of which Orwell complained – which had been restrained by trades union power – has been unleashed. New Labour’s managerialism and embrace of bosses helped to alienate working people. And this continues to this day. Julian Coman describes how Wigan residents are angry at the “top-down high-handed way” a Labour council wants to destroy part of the green belt, and how working people feel “a sense of powerlessness.”

What we’re seeing in the UK might therefore be the same thing Joan Williams describes in the US – workers’ resentment at professionals who “order them around every day.”

There is, however, a solution to this. Let’s go back to Orwell:

To the ordinary working man, the sort you would meet in any pub on Saturday night, Socialism does not mean much more than better wages and shorter' hours and nobody bossing you about.

This is just what socialism should mean. Having “nobody boss you about” is desireable in itself, as Marc Stears argues. It is also economically efficient: worker democracy raises productivity.

And better wages is not a narrowly economistic demand. As Ben Friedman has shown, it’s a necessary basis for greater tolerance and liberalism and hence many of the things the middle class left (rightly) want.

What Labour needs, then, is a focus upon issues of control (not just in the workplace but more widely) and incomes. Whether it can do this is another matter.

* I assume Nuttall must be wealthy, given that he invented the internet and played for Real Madrid.

Low job mobility

It’s sometimes said that we live in times of unusual economic uncertainty, with new businesses disrupting old ones and robots threatening to take our jobs. Today’s labour market data seem to undermine such claims, as they show unusual stability in jobs.

My first chart shows one measure of this: inflows and outflows into and out of employment, as a percentage of total jobs. If we were seeing high rates of disruption, we’d expect to see lots of people lose their jobs either to robots or as their employers shrink under competition from new rivals, and lots of job creation as new businesses take on staff.

Which is what we’re not seeing. Outflows from employment in particular are lower than they were before the crisis.

My second chart shows moves from job to job: because the data aren’t adjusted for seasonal swings, the orange line shows a four-quarter moving average. This shows that whilst such moves have risen sharply since the recession, they too are below the levels we saw in the early 00s.

What we have here is evidence that the pace of creative destruction is lower now than it was pre-crisis. I suspect this is closely linked to the fact that productivity growth has been sluggish for years. This is partly because labour mobility should improve productivity by ensuring that round pegs go into round holes – that workers are well-matched to jobs. But it’s also because a lot of productivity growth comes not from existing firms upping their game but from (pdf) entry and exit. Low rates of labour mobility are a sign that entry and exit is low.

All this is a two-edged sword. The good news is that it suggests that job security has risen. This is consistent with the fact that we’ve seen strong consumer borrowing and spending in recent years.

The bad news isn’t simply that it is also a sign of weak productivity. As the Resolution Foundation has said (pdf), low mobility “may have concerning implications for young people’s career prospects.” This is because:

Job mobility is generally a key enabler of pay progression and career advancement, and this is particularly the case for young people as they build careers, find roles in which their productivity will rise, and make progress up the earnings curve may have concerning implications for young people’s career prospects.

This might have nasty political implications. Saliha Metinsoy says declining job mobility in the US contributed to Trump’s victory because it increased people’s frustration with their lack of job prospects.

All this poses big and serious questions: what, if anything, can be done to foster greater creative destruction? How can we achieve the upsides of a fluid labour market – productivity growth and better prospects for younger workers – whilst avoiding the downside of insecurity? (Hint: citizens income). I don’t, however, expect politicians to have good answers to these.

House prices as leaky bucket

The Resolution Foundation says (pdf) that the typical pensioner now has a higher income, after housing costs, than the typical worker. Which poses the question: do younger people have a legitimate complaint here? I think the answer’s yes.

First, though, let’s see what their grievances are not.

They can have no complaint about rising pension incomes because of the triple lock. Quite the opposite. The power of compounding means this will benefit tomorrow’s pensioners – ie today’s youngsters – more than it helps today’s old folk. (Those who complain that the lock won’t last ignore the fact that it is as sustainable as we want it to be.)

Nor can they complain about high pensioner incomes to the extent that these are due to more pensioners having jobs; the number of over-65s in work has doubled since 2005.  There isn’t a lump of labour, so pensioners don’t displace young workers, any more than immigrants do*.

And whilst they do have a legitimate complaint about low pay, this is not a generational issue but rather one about macroeconomics and class.

Instead, youngsters’ legitimate beef is about house prices. A big reason why pensioners are better off than them is that many pensioners live mortgage-free in houses they bought cheaply years ago, whilst young folk must pay a fortune in rent or (for a lucky few) mortgage payments. As David Willetts wrote in The Pinch, this is in effect a transfer of wealth from young to old.

The issue here is not merely that the old did nothing to deserve this wealth: no, stoking up bubbles and restricting supply doesn’t count. It’s that this transfer is inefficient.

Arthur Okun said (pdf) that transferring income from rich to poor was like carrying it in a leaky bucket. Because of administrative costs and adverse effects upon incentives, he claimed, transfers reduce aggregate incomes.

But there’s also a leaky bucket when the young transfer their wealth to the old. This is because there are good reasons to think that high house prices are bad for growth. For example, they impede labour mobility or force people to take long commutes which reduces their productivity. They encourage nimbyism and so delay infrastructure spending. They divert resources towards sectors with low productivity growth and so reduce overall growth: if youngsters didn’t spend so much on rent, they’d have more to spend on other things, which would help promote innovation and entrepreneurship. In encouraging high debt, they increase the risk of financial crises which have long-lasting adverse effects on growth. And then there’s the longer-term cultural effect: if people can get rich by sitting on their arses and seeing their house price increase, they’ve less incentive to work, save or set up new businesses.

Granted, there’s a potential offsetting effect: rising house prices create collateral which allows some people to borrow to set up new businesses. But I think it plausible that, net, high house prices are bad for growth.

Which means that the transfer from young to old is a negative-sum one. Okun was happy to use a leaky bucket to transfer cash from rich to poor. The case for using one to transfer from young to old is, however, far more questionable.  

To this extent, youngsters do have a real grievance, as they are on the wrong end of a redistribution which is bad for the aggregate economy.

* This poses the question: why do people complain about immigrants taking their jobs but not pensioners?