Well, yes and no Professor Krugman, yes and no

The economics of this is of course correct For Paul Krugman is indeed an extremely fine economist:

We may live in a market sea, but most of us live on pretty big command-and-control islands, some of them very big indeed. Some of us may spend our workdays like yeoman farmers or self-employed artisans, but most of us are living in the world of Dilbert.

And there are reasons for this situation: in many areas bureaucracy works better than laissez-faire. That’s not a political judgment, it’s the implicit conclusion of the profit-maximizing private sector. And people who try to carry their Ayn Rand fantasies into the real world soon get a rude awakening.

The political implications of this are less so, given that Paul Krugman the columnist is somewhat partisan.

And of course that implication is that since that private sector (as Coase pointed out a long time ago) uses bureaucracy at times then we should all shut up and simply accept whatever it is that the government bureaucracy decides to shove our way.

Which is to slightly miss the point: yup there’s command and control islands in that sea. Bit it’s that sea that srots through those islands, sinking some and raising others up into mountains. Which is something that doesn’t happen with the monopoly of government bureaucracy: they don’t allow themselves to get wet in that salty ocean of competition.

That planning and bureaucracy can be the most efficient manner of doing something? Sure. That sometimes it’s not? Sure, that’s implicit, explicit even in the entire theory. How do we decide? Allow that competition. It’s the monopoly of the government bureaucracy that’s the problem, not that we somtimes require pencil pushers to push pencils.

RIP John Nash

In a Think Piece for the Adam Smith Institute, Vuk Vukovic pays tribute to the endlessly influential theorist John Nash:

It is with great sorrow we hear that one of the greatest minds in human history died this weekend in a car crash with his wife while they were returning home from an airport. John Forbes Nash Jr., was widely known as one of the founders of cooperative game theory whose life story was captured by the 2001 film “A Beautiful Mind”, is truly one of the greatest mathematicians of all time. His contributions in the field of game theory revolutionized the way we think about economics today, in addition to a whole number of fields – from evolutionary biology to mathematics, computer science to political science.

You can read the whole piece here

When a fossil fuel subsidy is not a subsidy

You may have seen an IMF report in the news last week claiming that fossil fuels are subsidised to the tune of over five trillion dollars every year. This made good headlines, but only because the IMF chose to describe untaxed externalities as ‘post-tax subsidies’. This is unusual and misleading. I wrote about why in The Daily Telegraph:

The IMF’s idea of “subsidies” to fossil fuels refers to something completely different. They have taken the indirect costs to society of using energy – air pollution, traffic congestion, climate change – and, if governments haven’t imposed special taxes on one, called it a “subsidy”. The problem is, we already have a word for these things: externalities. And there is something rather Orwellian about describing a failure to tax something as a subsidy. Here’s an example of what we’re talking about: when my neighbours play loud music at night, it makes me worse off. I’d pay, maybe, £20 for them to shut up, if it wasn’t so awkward to go to the flat downstairs, knock on their door and start negotiating prices. Economists would say that they are imposing a £20 externality on me, and that in a perfectly efficient world, my building would charge residents around that much to play music, and give it to sleep-deprived neighbours like me. But, in the absence of that charge, nobody would say that those neighbours are being subsidised by me. It’s just not what the word means. Except, apparently, to the IMF.

That isn’t to say that externalities should never be taxed, if a private solution can’t be found. But we already have high fuel taxes in most of the developed world, and in the developing world these taxes will hold back growth. Since economic development has positive externalities, it’s not obvious that the negative externalities of fossil fuels outweigh the positives. You can read the whole piece here. 

Spotting Worstall’s Fallacy in the wild

In a discussion of Joe Stiglitz’s new book in The Observer we see this:

Back in 2008 the top 20% of households in the country were estimated to be worth 92 times more than the bottom 20%. The latest estimate puts the gap at more than 100 times. And a further £12bn of welfare cuts are planned by the new Conservative government. The gap between rich and poor is unquestionably widening.

That conclusion may or may not be right but it’s most certainly not supported by the evidence which is given of the contention. That evidence coming from this ONS report:

Total net wealth is defined as the sum of four components: property wealth (net), physical wealth,
financial wealth (net) and private pension wealth
. It does not include business assets owned by household members, for instance if they run a business; nor does it include rights to state pensions, which people accrue during their working lives and draw on in retirement.

It’s known as Worstall’s Fallacy simply because our own Tim Worstall bangs on about it so often. We cannot measure inequality (or poverty, any number of other things) without taking into account the things we do to reduce said inequality (or poverty, or any other problem). It’s only when we look at the post-attempt to solve the problem situation that we can turn our minds to whether we should be doing more, or possibly less, to try to solve this problem.

So, note that our definition of wealth there does not include that state pension: something we do to reduce the wealth and income disparities between those who can save for a private pension and those that cannot. Note that it includes private housing equity but not the capital value of a below market rate tenancy for life (“social housing”). It does not include the capital value of health care, or education, free at the point of use, for all the citizenry. It does not include whatever capital value we might ascribe to the social insurance policies that will provide us with an income in the case of economic misfortune.

We do all of these things because they make people wealthier. Perhaps not as wealthy as other arrangements might make them, but the essential driving point is that we consider health care, education, social insurance and so on make people wealthier. Thus, in our discussion of wealth we must include them. We cannot look solely at the market distribution of purely market wealth and even attempt to decide whether more or less should be done to try to change that distribution. We must look at the post- all the redistribution we already do situation to be able to make a decision.

To switch from wealth to income to make this point. The TUC has done the calculation about income inequality. Between the top 10% and bottom 10% the market inequality is about 30:1. Maybe that’s too high, maybe that’s not high enough, your moral choice. When we take account of taxation and benefits that falls, and when we take account of government provided services, that health care and eduation and so on, it falls again. To 6:1. Again, you can say that this consumption inequality is still too much, or not enough, your moral choice. But 6:1 is very definitely different from 30:1.

And what is the relevant ratio to be looking at if we want to make a decision upon whether to do more redistribution or less? Quite, it’s obviously that 6:1 one, not the 30:1. And so it is with wealth or poverty or so many other problems. The number we need for our decision is the extent of the problem on the ground, not the extent of the problem before all of the things that we already do.

Assigning reasonable capital values to the effects of both the welfare state and government provided services brings the 10/90 wealth ratio down to anywhere between 20:1 and 5:1. We could and would defend anywhere in that range dependent upon assumptions. Is that too much? Not enough? Entirely up to your moral choices. But it’s very different from that 100:1, isn’t it, and it’s also the relevant number we need to use when thinking about what to do next.

A glorious example of political naivety

There’s any number of lessons that we might take from the past few years. Fragile banking systems aren’t a good idea perhaps. We seem to have shown that monetary policy is still effective at the zero lower bound, therefore fiscal policy isn’t the only thing we can turn to in recession. The eurozone is giving a useful empirical lesson in optimal currency areas. There’s all sorts of things we can and should learn from recent times. But then it’s also possibly to be hoplessly naive about all of this:

The biggest surprise for me, and perhaps it shouldn’t have been, is the degree to which politicians are willing to put political interests ahead of helping people in need. Watching the political/policy reaction to the Great Recession was both disappointing and eye opening.

Well, no, it shouldn’t have been. Ourselves we waver between thinking that public choice theory is the right way to think of this (politicans and bureaucrats are subject to the same incentives of self-interest as everyone else) and the pronouncements of Mancur Olson (all governments are bandits exploiting the population and about the best we can hope for is a stationary bandit, not a roving one) dependent upon the crust of our liver on any particular day. But either insists that we cannot look to the political class as being interested in either what we want or what we need: not unless it’s going to directly impact upon our propensity to vote for them so that they get to stay part of that political class.

The idea that a professional economist should believe that politicians would ever put helping people in need above political interests strikes us as simply hopelessy naive. However, this is still a good outcome: the next politician promising that we’re going to run the world off kisses and unicorn parps is less likely to be believed now, eh?