Wednesday, April 16, 2014

George Osborne's report card

So I've just been reading George Osborne's 2010 Mais lecture. It's one of those that have been deleted from the Conservative Home website. He think I know why.

In this lecture, delivered just before the 2010 election, Osborne laid out the eight benchmarks under which he said his economic policy should be judged:

We will maintain Britain's AAA credit rating. 

We will increase saving, business investment and exports as a share of GDP. 


We will sell in due course the government's stakes in RBS and Lloyds . 


We will improve Britain's international rankings for tax competitiveness and business regulation with specific measures on corporation tax and regulatory budgets. 

We will reduce youth unemployment and reduce the number of children in workless households as part of our strategy for tackling poverty and inequality. 


We will raise the private sector's share of the economy in all regions of the country, especially outside London and the South East. 


And we will reduce UK greenhouse gas emissions and increase our share of global markets for low carbon technologies. 


We will raise productivity growth in the public sector to match the best of the private sector. 



On my count they've managed one of these eight - raise private sector share of the economy. I think. Given the reduction in the size of the public sector, it kind of follows. There may be similar productivity growth across public and private too - it's been awful economy-wide, so I guess it's not hard for a shrunken public sector to match whatever paltry gains there are in the private sector.


Anyway, it's easy to see why the speech has been buried by the Conservative party, although of course it can still be found, here.

Thursday, March 6, 2014

Can equality beat xenophobia?

So now it's the turn of the IPPR to say its thing about immigration. A few thoughts.

There is something I've always found curious about the reaction to immigration in the UK, above and beyond the fact that there is little evidence that it has had any deleterious economic effects (see on this Jonathan Portes and Simon Wren-Lewis, the latter increasingly puzzled at people's inability to look at the data objectively). Hostility to immigration is a pretty constant feature of modern societies, even those founded on mass migration themselves (the US being the prime example). This hostility is particularly strong when migrants have very different ethnic and religious identities to the host nation.

What is quite striking about the UK's current preoccupation with immigration is that, unlike previous waves, the incoming population is pretty similar to the indigenous one. Eastern Europeans do not look obviously different to the white majority of Britons, they have similar religious backgrounds (usually Catholic or Orthodox Christians), and it is a stretch to claim that they have markedly different cultures. So racism, which it is usually pretty easy to associate with hostility to immigration, isn't an obvious part of the current anti-immigrant climate.

Instead, most of the concern seems to be directed at the objective, material consequences of the arrival of a large number of working-age adults in a country with a stretched infrastructure and a very open labour market. There may be little evidence that immigration itself is driving down wages, but it is certainly the case that there has been large scale immigration in a period in which wage growth has been first stagnant, then negative, for most employees, and pressure on the available housing has begun to be unsustainable.

Although I reject the scapegoating which accompanies nearly all discussion of immigration in the public sphere these days, I think the IPPR report's appeal for a 'fair deal', does actually capture part of what is going on here. Immigration has become the acceptable way for people with no particular attachment to progressive politics to talk about issues of poverty, inequality and fairness. So, instead of complaining that Britain's fabled 'flexible labour market' - with its emasculated unions, minimalist legislative protections, and unencumbered managerialism - makes people's working lives miserable, we complain that migrants are taking all the jobs and driving down wages. In fact what drives down wages is workers' weak bargaining position, which is best addressed not by punitive and impractical restrictions on freedom of movement, but by legislating and organising for employees to get a better deal. Similarly, instead of addressing housing shortages by taxing property and buy-to-let landlords properly, intervening to increase supply and generating a genuine market driven by consumer demand, we blame immigrants just for being here.

So the answer is not to try and change people's minds about immigration: that's a hopeless task. Instead we must focus on making people's lives better so they have less to complain about. Immigration is here to stay for all kinds of reasons, and the best way to protect freedom of movement and take the political pressure off migrants themselves is to improve working conditions and quality of life for everyone who lives in the UK. And thankfully, there are policies that can do this. There is no evidence that a brutal labour market is better for productivity and growth, nor does the current organisation of the housing market make any sense. There are tried and tested policy responses to inequalities of pay, working conditions and housing which are perfectly compatible with good economic performance: indeed all the evidence is that inequality is bad for growth. So Labour should bite the bullet and do something for the workers. It won't make them like immigrants, but it should stop them being tempted by the Tories' rancid, reactionary and frankly racist message.

Friday, February 7, 2014

On the marginal productivity of the 1%

The debate rumbles on. The rise in top incomes, particularly striking in the English-speaking democracies, is starting to become a central theme in debates about equality and fairness, shifting attention away from the perennial redistributive conflict between the middle and poor (ably fuelled by the right here in Britain) towards the spectacular gains made by a tiny group of the superwealthy.

As well as hitting mainstream politics - even Obama gave top billing to inequality in his State of the Union address - this debate has penetrated into academic economics. The reaction is interesting to behold. Whilst liberal (in the American sense) economists such as Krugman and Stiglitz argue that the growth in top incomes is in large part the fruit of rent-seeking and overbearing political influence, most economists are reluctant to go so far, invoking instead the role of exogenous forces such as globalization and technological change.

There is a certain irony to this, as economists are usually instinctively awake to the possibility of capture of political institutions for the purpose of subverting markets and winning excessive returns through regulatory manipulation, fiscal tricks and straightforward bribery. Indeed, the traditional skepticism of many economists towards the benefits of government interventionism owes a great deal to their suspicion that government interventions are very likely to favour politically powerful producer groups rather than consumers, a suspicion formalized with great success by the public choice school. So it is puzzling that the doubling of the income share of the richest one hundredth of society over little more than quarter of a century is seen as such a natural development by much of the economics profession.

To the extent that top incomes shares are not seen as a sign of something malfunctioning in our economy, they are generally viewed as broadly reflecting the relative productivity of different groups in the income distribution. Typical of this view is the recent article by Greg Mankiw in the Journal of Economic Perspectives, gamely entitled 'Defending the One Per Cent', which illustrates the risks of meddling with big gains for top earners by positing an imaginary world in which everyone is equally productive and paid the same, until someone like Steve Jobs comes along to shake up the distribution by producing something innovative that everybody wants. Mankiw suggests that 'this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades'. Mankiw therefore concludes that not only would redistribution be bad for incentives, stopping the next Steve Jobs in his tracks, but it would be morally unfair. The earnings of 'superstars' are 'just desserts'.

Mankiw's article provoked an irritated response from Robert Solow, amongst others. There are a large number of ways in which the argument can be challenged theoretically and empirically, and I'll probably deal with them in future posts. But just for now, here's one: the just desserts arguments suggest that earnings have a strong correlation with marginal productivity, and that marginal productivity reflects a combination of innate ability and talent, and hard work. Luck and structural privilege are not supposed to come into the equation very much, or otherwise 'just desserts' start to look hard to justify, and the gains from privilege could probably be taxed without any real loss to the economy, since they don't reflect any real productivity advantage. Except we know that luck and structural privilege are important. For a start, in unequal societies social mobility is lower, suggesting that inequality feeds on itself and prevents talent rising to the top. But to my mind the most striking forms of structural privilege here are gender and ethnic discrimination. Although some diehards still cling to the notion that women or particular ethnic groups are innately inferior, and therefore deserving of lower rewards in the workplace, these ideas are no longer taken seriously by researchers. Yet the one per cent is disproportionately occupied by men, and white men at that. I took a fairly unscientific sample by scrolling down the top 100 in the Forbes rich list of billionaires here. Only ten of them were women.

If women are less likely to be superstars, then either women are inherently less deserving, or there is something other than talent and hard work at play in determining who gets to the top (and no, it is apparently not the choice to spend more time raising a family). And if the latter is the case, then the outsized gains reflect, at least in part, something other than marginal productivity. The typical example would be the CEO of a large company, whose material impact on the company's earnings is generally hard to establish with any reliability. If the CEO were to leave, another would take their place, capturing similar earnings, but it is next to impossible to establish the differences in marginal contribution (and after all, company performance is typically uncorrelated with CEO returns).

Ironically, the debate about desserts seems to stand or fall on how optimistic we are about the power of the market. Conservative economists, strangely, tend to suspend their keen eye for rent-seeking, privilege and market subverting power when it comes to the top one per cent, preferring instead to imagine that the returns to skills over the recent period have just happened to be concentrated in the very top of the income distribution. Yet the obvious riposte is that if the state is so permeable to special pleading, corruption and political manipulation, a wealthy elite should surely be the first to take advantage of this permeability, particularly since the mass organizations - such as political parties and trade unions - that secured redistribution downwards are in terminal decline.

Maybe we are supposed to believe that the one per cent are not only smarter, but so morally unimpeachable that they will restrain from interfering with the market system that has served them so well? I think we should ask Carlos Slim about that one.

Friday, January 31, 2014

Inequality and Taxation: Bleed the Rich?

Labour has taken an uncharacteristic turn this week and embraced a policy which would have made Tony Blair choke on his morning coffee, were he the remotest bit interested in contemporary party politics. Ed Balls has revived the 50% tax rate on earnings above £150K, slaughtering several New Labour sacred cows in one go. Redistribution: check. Upset business leaders: check. Unrealistic fiscal ambitions: check.

What is different now, of course, is that the couple of decades since New Labour was born have seen a spectacular rise in the GDP share of top earners, a devastating economic collapse caused by the reckless behaviour of some of those top earners, and lately a prolonged stagnation in average living standards. The notion that helping the rich enrich themselves would benefit all is no longer widely believed, and the 50% tax rate appears to be polling well, even though the Institute for Fiscal Studies suggests it won't actually raise any money (they estimate £100 million a year).

January - the month of the UK self-assessment tax deadline -  is always a good time to think about tax and incentives. Certainly the prospect of losing half of any extra pound earned has a disincentive effect, but then again, so does the prospect of losing 40%, which is the situation currently facing anyone earning between about £42,000-149,999 (not to mention the disincentive effects of reducing/eliminating child benefit for 40% taxpayers) . Moreover, the current coalition government did not simply abolish the 50% tax rate introduced by Gordon Brown in 2010; it lowered it to 45% instead. If 45% doesn't have disincentive effects, why should 50%? In short, a 5% increase in tax on earnings above the £150K barrier may encourage a bit of inventiveness in reporting incomes, but I don't envisage Wayne Rooney hanging up his boots in protest any time soon.

Labour's proposal is a handy piece of populism, but it is also a good opportunity to think a little more about why top earners earn what they do, and what effects taxing the rich might have for the economy as a whole. As Simon Wren-Lewis reports, recent research suggests that lower taxes for the rich may not encourage productivity as much as it provides top executives with even greater incentives to plunder the coffers of their companies, redistributing rents to themselves. The classic Laffer curve argument may be true, but in a way which has no real economic costs - if taxes are higher, executives will expend less wasteful energy in extracting greater rewards for themselves out of an existing pool of resources. In some cases, higher taxes could disincentivize rent-seeking behaviour that has dramatic negative externalities, such as reckless risk-taking in the financial sector.

Estimates of the effects of these tax changes are very approximate, since the 50% tax rate only survived a couple of years (current projections are based on only one year of data), and these were years in which the economy remained more or less stationary, so any fiscal consequences of the tax hikes need to control for the depressed state of the economy (which no-one to my knowledge has attempted to pin on the 50% tax rate). All taxes are distortionary, but at the same time all income is conditional on the complex infrastructure of a market economy, which is inconceivable without the state raising a large share of GDP in tax revenue.

The 1% enjoy their property thanks to the public goods our taxes provide, and society's willingness to tolerate and cooperate with an economic system which rewards the rich so handsomely. As the 1%'s share of income grows, the 99%'s tolerance of inequality is bound to be stretched. Countries where the rich don't pay tax tend not to be very safe places to live. It is a cliché, but taxes are the price we pay to live in a civilised society, and advanced economies need to be civilised, resting as they do on the complex and dynamic interactions of highly educated citizens. There is no such thing as a free lunch, even for the rich.


Thursday, December 26, 2013

The Art of Political Bullshit

I've been trying for a while to put my finger on what is distinctive and new about the Cameron coalition government, and I think it requires conceptual innovation. How much of this is down to the novelty of coalition for the UK, and how much to Cameron's mob being genuine political path breakers is a question for another day. But for now I'll settle for coining a new term for this way of making, or pretending to make, policy. And that term is: bullshit.

OK, it's not that new a term. I've taken inspiration from Harry Frankfurt's well known essay On Bullshit, that didn't claim to address political life in particular, and whose arguments are not perfectly applicable to my concern here. The bits that I do think are relevant to the Cameron government are the wilful misrepresentation of reality, and of themselves. Of course, there is nothing new about politicians being economical with the truth, but what is distinctive about this form of political bullshit is that there is nothing very concrete underneath the deception and half-truths.

The key feature of the Cameron government is that there is no real aim to change anything very much, or at least anything that matters to the plutocrats that are this government's main audience. Things are rolling along just fine for this group, and the policy changes needed to keep them happy generally don't require much innovation. Backdoor privatisation of the NHS and blocking re-regulation of finance are tried and tested policies, and the Labour party is showing no real signs of attacking the government on these staples. It's business as usual.

What is new is the fodder served up for the rest of us. I've experienced two periods of government before this one - Thatcher-Major and Blair-Brown - both of which had an identifiable set of policy goals. The first probably made much more in the way of lasting transformations than the latter, but whichever way you look at it, there was a plan and there is a legacy. But this coalition's legacy will for the most part consist of the consequences of inaction on the one hand, and damaging policy confusion on the other.

Just a couple of examples will suffice to make the point. First, welfare reform. Iain Duncan Smith's Universal Credit has turned out to be an unworkable and expensive disaster, more or less as anybody who knows about social policy in this country predicted from the start. Other policies, such as the bedroom tax, are spiteful and nasty, but will not achieve their stated aim of cutting waste and avoiding overspending on welfare. In essence, what we have here is policy which isn't designed to achieve what it claims. Instead, it is designed to play well in tabloid newspapers, and fit in with a broad narrative about Labour profligacy.

The other obvious one is immigration. Immigration has made a big contribution to economic growth in the UK, it's unlikely that it has genuinely had much of an impact on wages or job opportunities for the British-born, and in the long run will help pay for pensions and rebalance the government accounts. Moreover, the policy levers available are ineffective, since the UK is bound by law to allow asylum seekers and EU citizens into the country. Immigrants are not a drain on the welfare state, and on average increase the skills base and educational resources available to the economy. Immigration will continue despite whatever the government does to make foreigners' lives difficult. Current government policy, based on the ludicrous objective of trying to hit a target which is a function of two barely controllable phenomena - immigration and emigration - is pure political bullshit.

There is a logic to this government being particularly prone to bullshit, because it was elected on a premise which was entirely at odds with the facts: that the financial crisis was caused by Labour increasing public spending by too much, and that the Conservatives could reduce government debt by targeting spending cuts on recipients of means-tested benefits. Given this starting point, there were two options: admit it was all nonsense, and change to a more sensible policy, or stay with the bullshit. The latter, of course, implies a further descent into the sticky mess, much in the same way classic situation comedies take small lies and magnify them into a chaotic and unmanageable web of whoppers.

The big question is, does bullshit work? A Conservative victory in 2015 would send a clear signal to the political class that bullshit is a winner, and make reality-based politics increasingly hard to sustain. The polls are not pointing to such an outcome, but the economic recovery - which deserves a book-length study of policy bullshit in its own right (for now, see Simon Wren-Lewis) - opens up some space for Tory optimism. We can expect an election campaign based on fantastical notions of 'making work pay', 'clamping down on migrants' and 'standing up for Britain in Europe'. After seven years of declining living standards, British voters will have the chance to call bullshit, or sink deeper into it. We'll see.



Tuesday, December 17, 2013

Bringing the State Back In. Really.


As we near the end of the fifth year of this economic crisis, there isn't much reason for optimism, despite the UK economy apparently reemerging from its austerity-driven slumber, and entering the usual housing-led recovery. The stuff I've been reading around the blogs in the last few weeks all points in the same direction: the postwar period of growth, shared prosperity and strong democracy has well and truly hit the buffers. And there is one conclusion that just about everybody is trying their best to avoid drawing, but that I think we'll probably get to in the end: the government needs to get a grip of the economy once again. Why?

First, after 1945 we, here in the advanced world of Europe and the Anglosphere, got used to economic growth as a kind of law of nature. There could be recessions, but the economy always recovered. Productivity gains could reliably be expected, giving us a trend rate of growth which allowed us to predict rising living standards into the future. Since 2007 that seems to have stopped. Many have argued that this is down to the wrong policy reaction to the financial crisis, but a recent debate has raised the possibility of an emerging 'secular stagnation', a permanent landscape of low growth because the natural rate of interest is below the zero lower bound. In this scenario, the capitalist economy can only generate growth and jobs through unsustainable bubbles.

Second, inequality has become a fact of life in the advanced economies. Increasingly, any income growth the economy generates is concentrated in the hands of investors and the managerial class, with the bottom 90%, or even the bottom 99%, largely losing out. Policy responses, such as tax credits for low earners and targeted investment in early years education to encourage social mobility, barely scratch the surface. Todays' economy, when it manages to create any income growth at all, simply directs it to an elite of super-rich individuals and those who think they have some chance of joining them.

Third, in these circumstances the social compact that allows democracy to work - a sense of shared fate and a sense that others can be expected to play by society's basic rules - starts to break down. Social classes and generations become intolerant and hostile to each other's demands, and increasingly the poor and ethnically distinctive are blamed for the broader problems of the economy and society. Extremist parties emerge and grab frightening shares of the vote, but even the mainstream parties adopt an increasingly intransigent approach.

Why on earth should anyone believe the government can provide any answer to these problems? After all, 2/3 of British voters believe political parties are corrupt, and satisfaction with the political system and its representatives is at all time lows in many countries. Government already spends around half of GDP in advanced democracies, and has little room to grow further.

This may be true, but I'm increasingly convinced we have no option. All the above problems require coordinated, collective action, and the state remains the only viable vehicle for achieving this. If the capitalist class cannot be induced to invest by market conditions, then government is the only one who can act, either by extending its fiscal role by taxing the wealthy, or even by simply exploiting the high demand for safe assets to borrow and invest. The Keynesian arguments for addressing the output gap through increased government borrowing are looking pretty healthy after the predictable failure of austerity to produce recovery. The 'secular stagnation' argument suggests we need to go further.

Current arrangements are also doing a lousy job of distributing income in a remotely balanced way, and here again government is the only answer. Redistribution through the tax and welfare system has a long and largely successful history, effectively banishing real poverty in the West after the Second World War. 'Predistribution' through a more interventionist approach to regulating the economy can also do a lot here. And even if you are skeptical this kind of intervention can achieve much, what is the alternative? Declining living standards into the foreseeable future for the bottom 90%, or more, of the working age population? Can democracy survive this in the long run?

By acting as the guarantor of coordinated action for the public good, government can revive democracy. The current trend towards technocracy and non-partisan expertise has not worked. Allowing government to act on behalf of the electorate, rather than committing it to abstract policy  rules designed by economists,  is probably the only way to revitalise the democratic process and overcome increasing hostility towards parties and politicians.

'Government' and the 'state' have become dirty words in the last few decades, but the alternative has failed. The evidence that state action never worked was always weak - the heyday of interventionism produced not only fairer shares, but also higher growth. Increasingly influential figures are arguing for a greater role for the state in the economy and society. There has never been a better time to make the argument.

Tuesday, November 12, 2013

A message from Germany: not my problem

Paul Krugman complains (again) that Germany's tough line towards the South fails to appreciate how much its own relative economic success in recent years is the flip side of the Mediterranean countries' failure. By refusing to allow a higher eurozone inflation rate, Germany is effectively denying the South the chance to realign its relative costs in the same way Germany was able to do in the first years of the Eurozone. As Krugman shows in his post, Germany's success in holding down its labour costs was spectacularly successful precisely because the South did not manage to achieve zero real wage growth, and therefore provided a ready market for German products (not to mention an outlet for German financial surpluses). Resolving the crisis requires Germany to return the favour.

I'm always puzzled, looking at things from the perspective of the UK and Southern Europe, how it can be domestically politically impossible to persuade Germans to spend money. After all, the easiest solution to the crisis has always been that Germans dipped into some of their trade surplus to enjoy the South's warm beaches and hospitality, or maybe even buy a few second homes on the shores of the Mediterranean. It looks like a win-win solution. Yet, the hair-shirted Prussians prefer to stick it all under the mattress, and invite Southern Europeans to do the same, even if this does actually shrink the economy and put German savings at risk.

This can be seen as a cultural or ideological problem. In many ways, the discourse of belt-tightening on the European level has a quasi-religious quality. We need to suffer, and those who have least should suffer particularly, since being poor they probably deserve it. The poor, Weber would say, lack a beruf (calling), whilst the parsimonious rich are blessed and will be rewarded in the afterlife. The crisis becomes a morality play. Easy answers, like inflation or fiscal stimulus, must be wrong, because the crisis is a clear sign we have sinned and must atone.

I can't help thinking that it would be easier to convince Germans to adopt a more constructive attitude if Southern Europeans didn't enjoy such an enviously pleasant climate and physical environment. Whilst Germans have to endure long cold winters, the South basks in sunshine  - no wonder they don't work so hard. Of course, as has been well documented by now, the average Southern European worker has a much longer working week than the average German, and savings rates are also actually quite high in the South:


The truly profligate are the Anglo countries, with clearly lower savings rates than continental and Southern Europe.

The morality tale of Southern Europe's decline doesn't really fit with the facts, but my guess is that it is simply easier to digest for Germans than the harsh truth, which is that European Monetary Union was designed and is being governed in line with German interests. In other words, the moralistic tone of the Eurozone policy discourse is a cultural problem founded on a very real set of material advantages.

EMU was an extension of the process of market integration in Europe, removing one of the last remaining barriers to trade - national currencies. By creating a single currency, competitive devaluations became impossible. The usual beneficiaries of such devaluations - the weaker currency nations of Southern Europe - were prepared to sacrifice this competitive advantage in exchange for the inflationary anchor provided by Germany's dominance of the new currency union. What they didn't perhaps anticipate was quite how exposed they would become to Germany's extraordinary capacity to control price and wage rises, and how little help they would get from the ECB, which shaped monetary policy around the needs of slow-growing Germany, leaving the fast-growing periphery to inflate itself into an uncompetitive real exchange rate. And now, the only way back for the South is a brutal internal devaluation which, as well as closing off the labour market to anyone below the age of 35, will make debt servicing next to impossible.

Despite recent optimism about financial flows returning to Spain, this process of internal devaluation is far from complete, and there are incipient signs of deflation across the South, hence the ECB's increasingly desperate attempts to use monetary stimulus to get the economy moving. Still Germany protests that all of this has nothing to do with them, and refuses to play any part in raising internal demand in the Eurozone. But politics has an awkward habit of raising its ugly head in these situations. There will be elections in Spain within 2 years, and almost certainly in Italy and Greece even sooner. The problem will not go away, and Catalan nationalists and left populists in Spain, the Five Stars movement in Italy, Golden Dawn and Syriza in Greece, are all waiting in the wings. Barry Eichengreen established that you can't run a gold standard in a democracy. Is Europe trying to test this theory to destruction?