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October 06, 2022



Rather than retelling the trite old economic story of "you can have tax cuts, or you can avoid cuts to welfare benefits and public services. But you cannot have both" in response to the recent gilt yield rise, can we tell instead a financial story of a couple traders bumping gilt yields up for arbitrary reasons probably more connected to their technical short hedging positions than any macroeconomic events; then momentum traders get on board; then pension funds are exposed through margin calls; then fire sales start occurring and isn't this how irrational panics start?

So rather than stale old stories of economic trade-offs between taxes and spending, aren't we really dealing here with market manipulation and irrational emotion, whose instigators opportunistically seize on weak old theoretical economic stories to spread rumors in chat rooms, the better to profit from their technical short hedges?

In short how does the proposal and subsequent withdrawal of a tiny $2 billion in tax receipts change yields so much, unless a lot of psychological noise is going on?


Chris Dillow:

Between 1948 and 1971 (when the top income tax rate averaged 90%) UK real GDP grew by an average of 3.3% a year: since 1988, when it was cut to 40%, it has grown only 1.9%.


September 23, 2022

Wonking Out: The tax-cut zombie attacks Britain
By Paul Krugman

[ Chris Dillow's analysis here, adding to that of Paul Krugman, strikes me as perfect. ]

Graham Jones

You wrote: "The social sciences, he wrote, are a box of mechanisms. But we often cannot foretell which mechanism will operate more strongly."

This is because the "social sciences" are not a science. In a science, an understanding of the mechanisms leads to an explanatory theory, and in turn the theory is confirmed by its ability to predict outcomes.


@Graham Jones

Is paleontology not a science because it cannot predict outcomes?

Is Svante Pääbo not a scientist because he does not predict outcomes?

Is meteorology not a science when it gets the weather wrong but becomes a science when its predictive success gets above 50%?

The demarcation debate is a fool's errand.


The level of debate over the mini budget has been awful.

'Unfunded tax cuts'. What on earth? Is there a more Orwellian phrase in economics? The underlying notion that all money belongs to the state and the state decides what is fair for you to keep is a highly dangerous one.

'Raise benefits by inflation'. well why stop there? Why not double them and give claimant a free car? Once you start spending on the basis of what people deserve rather than what we can afford we are finished.

The OBR will pronounce shortly and no doubt say that as the extra growth rom tax cuts is uncertain they will assume it is zero. Which is nonsense.

Everybody on here knows that people and organisations respond to incentives. In particular that people respond massively to financial incentives. But we are being asked to believe that is not true and we can move money around with no consequence.

We can face our bankrupt state now, or we can do it again in five years time when the crisis will be that much worse. But we cannot escape facing that reality.

Truss/KK are right.


The frustrating thing about the whole Remain/Blairite blob outlook is it is so limited. It just looks one step ahead all the time. It never asks the question "And what then?"

windfall tax. "And what then?" as if companies don't respond to incentives.

raise benefits by inflation not earnings. "And what then?" once you have reduced the incentive to get a job an increased the burden on those working.

P Chernanko

@Dipper. Your response is pretty awful tbf. Lots of strawmen:
The 'right' to tax...well start out at the other end of your ridiculous spectrum and levy no taxes and end all pretence of the 'State' right there. Happy now?

Windfall tax and incentives?
Ever heard of something called 'unearned income'? ...or monopolies (especially of natural resources) and rentiers?
...see Wealth of Nations.Adam Smith.

"Raise benefits by inflation"...so when its clear after 12yrs of Tory rule we all know on here that after tax and benefit changes there has been a rather large transfer from bottom decile to those on mid and upper deciles you think it appropriate to see how much slack remains in the bottom decile?

Everyone on here knows you dont need to earn 100 times the average wage in your firm in order to get out bed but some silly folks pretend otherwise.

'Incentive to get a job...'
But surely you know we already have the lowest regulatory 'burden' on hiring and firing in western europe and with wages so low (40% of universal credit recipients are 'working') the state has to subsidise business to employ.You like the idea of lower real wages though...

Truss/KK are clueless. Thats what spooked the markets and even half the Tory party know it!


@ P Chernanko

'levy no taxes and end all pretence of the 'State' right there.' Well yes, start at that end and ask what is it that we can spend better collectively than individually. Better that way round than start at the 'all money is the state's and we should judge what someone should be allowed to keep'. We all know where that ends. How many times do we have to go down that road before we find there is nothing but mass poverty and corruption down that road?

'tax and benefit changes ' etc just a reminder that the irresponsibility of the give away minibudget restored the overall tax levels of 2021

40% of universal credit recipients are 'working'. Exactly. Try find a low paid job that isn't 16 or 22 hours because it interferes with Universal Credit. We face a labour shortage but the benefits system effectively prevents that shortage being addressed. The last thing the benefits state wants, once it has people in its clutches, is to let them go.

I'm sure you have lots of stats but I keep a regular close eye on our local labour market and particularly our local working class town, and the Blairite state has nothing for those folks, only endless dependency.

I don;t like low wages. I don't like poverty. I voted Brexit so workers would not have their wages constantly undercut. But you don't end poverty by making people more dependent on handouts. That just increases it.

I know, as a Truss/KK supporter, that our enterprise is doomed. That Starmer/Reeves will be PM and Chancellor before long. And that after three years of heavy state high tax induced economic torpor and the thundering reality that with no growth that debt is never going away and will be forever round our necks, that a debt and currency crisis will appear, and then the Truss/KK folks will be back to say we told you so, we knew we would end up here, and that's why this mini-budget was right.


... and Ashworth going on about the large number of long-term sick people. As if that's a real thing. I understand that long-covid has been particularly hard on social workers and health workers in the public sector. I wonder why that would be?

People respond to incentives, and respond very strongly to financial incentives. One you make being long-term sick a paying job, you will get lots of people being long-term sick.

But that will be your problem soon. Reeves will be standing at the dispatch box saying that the unprecedented and completely unexpected surge in long-erm disability requires the top tax rate to be increased from 60% to 80%. And the OBR will pretend that incentives don't exist and they can just take that 20% without any consequences. And you will know it is a road to disaster but you will fear saying that out loud.

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