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 economic development has positive externalities, and taxing energy reduces those. It’s not clear to me 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?

Don’t fear the trade bill

We do admit we find this all rather amusing. We’ve all been shouted at for months now that the transatlantic trade deal (and various others under discussion) will allow such evils as tobacco companies suing if they are deprived of their intellectual property as a result of plain packaging. Thus we must reject said trade deals. And then this happens:

One such measure is the introduction of plain cigarette packaging – a policy that David Cameron’s successful spinmeister and tobacco lobbyist, Lynton Crosby, thankfully failed to block. But now the tobacco companies are fighting back, suing the government for up to £11bn on the basis that it would constitute “deprivation of a highly valuable intellectual property”.

This is an absurd example of how the law values property over people. Our government is democratically elected. Yes, that rightly means there have to be checks and balances, and policies must abide by the existing framework of the law. But if the law enables tobacco companies to extort £11bn from the government – money, ironically enough, that could be used to treat people suffering from tobacco-related illnesses – then the law is wrong. If the law does not value people’s lives and wellbeing over the rights of tobacco companies to make profit from cancer sticks, then the law is morally bankrupt.

This privileging of corporate interests over democracy is only going to get worse. The Transatlantic Trade and Investment Partnership – a treaty being hammered out between the EU and the US with woefully little scrutiny – could grant companies the same legal rights as nation states, enabling them to sue elected governments in secret courts to block policies that dent future profits. And sure enough – using a similar treaty – Philip Morris sued the Australian government for the same policy. It used the same tactic against Uruguay’s government for enlarging health warnings on cigarette packages.

How it is going to get worse if these provisions are already in domestic law?

At which point we can point out the two important points here.

The first is that the law, rightly, contains provisions on such things as eminent domain, just as it contains provisions of rights to property. The government can indeed confiscate property on the grounds of greater national need. It can force you to proffer up your house for the building of a railway line. It can force you to give up your business to the government. That is, nationalisation is entirely legal under both domestic and international law. However, that right to property part also means that the government must pay full market value for that property that it is taking (and the Americans have it even more anchored in their law as “a taking”).

This is of course as it should be. If the value of that railway line, that nationalisation, even that imposition of plain packaging, is sufficiently large in the national interest then there must be, from the value added by the scheme to make it sufficiently large in the national interest, enough to compensate the original values of the properties. Moving an asset from a lower to a higher valued use is the very defintion of wealth creation after all: so, if we are indeed adding that value then some can be used to compensate.

This argument also works in reverse: if there is not the value being added to compensate those original owners at that original price then the scheme is not in fact value adding. If that plot of land as a place for a house is worth £200,000, but it’s only worth £20,000 as part of a railway line then that railway line is not value adding: it is value subtracting, thus something that makes us poorer.

So too with plain packaging. We’ve no idea whether the £11 billion is a realistic number or not: but we do insist that if plain packaging is in fact value adding then it must be possible to compensate those having their property confiscated to reach that goal. Otherwise, if the value isn’t there, then the scheme itself is not value adding. If that’s true, then why are we doing it?

Which is one of the values, over and above the civil liberty of secure property rights, why such a legal position is so useful. It insists that those who talk up the value of a scheme actually have to prove, by providing the cold hard cash, the value of that scheme.

The second point is about those tribunals and so on. Given that these rights already appear in UK domestic law there’s nothing to fear from our signing a treaty that also includes them. It would be like our signing a treaty that insists that murder is a crime. Yes, we agree, so why not sign?

However, there are places out there not so blessed with a largely honest and largely reasonable legal system. And treaties are always reciprocal: what we agree to domestically the other side is also agreeing to in their domestic arena. So, the real value of the treaty (ies) is that it extends those rights which we have, as Britons, to those who have the unfortunate circumstance of not being Britons. And quite why this is a bad idea escapes us.

What excellent news about British social mobility

This isn’t the way that anyone intends we should read this ONS report of course but it is also a true and valid way of reading it.

Almost a third of the UK population experienced income poverty in at least one year between 2010 and 2013, official data shows.

The figures, published by the Office for National Statistics (ONS) on Wednesday, show that approximately 19.3 million people had a disposable income of below 60% of the national median at some point during the four-year period.

Word. And the actual ONS figures:

In 2013, the UK persistent poverty rate was less than half the overall poverty rate of 15.9%. By comparison, in many other EU countries, the persistently poor make up a higher proportion of those in poverty.

Since 2008 (the first year for which comparable EU longitudinal data are available), the UK has consistently had a persistent poverty rate lower than the EU average.

Almost a third (33%) of the UK population experienced poverty in at least one year between 2010 and 2013, equivalent to approximately 19.3 million people. In contrast, across the EU as a whole, a quarter (25%) of people were in poverty at least once during that period, with a larger proportion of people in the UK experiencing poverty at least once over those 4 years than in many other EU countries.

Worth noting one point: this is relative poverty. So, it’s against median income. Further, it’s against median income in each country. So we are not, not at all, stating that people in Britain have a lower living standard than those in, say, Romania.

Note first that that persistent poverty is half the average rate. That’s pretty good, don’t we think? And note also something else. Britain has greater variability in poverty. Variability in income is also known as economic mobility (or as the phrase has become these days, social mobility). For us to have more people who slip into poverty for a time, but not have more people in poverty overall, means also that more Britons must rise up out of poverty. That is, we really do have greater social mobility.

We doubt very much that anyone else will make this point.