A very important point about climate change

As you all know I'm boringly mainstream in my views over climate change. The scientists tell us that we've got to do something, the economists that that something is a carbon tax so I say, great, let's have a carbon tax. And then we get information that rather changes this so far sterile debate:

It puts the overall cost at less than 2% of GDP for a 2.5 degrees Centigrade (or 4.5 degrees Fahrenheit) temperature increase during this century. This is vastly less than the much heralded prediction of Lord Stern, who said climate change would cost 5%-20% of world GDP in his influential 2006 report for the British government.

Here's what Stern did to reach his figure, the one that leads to that $80 a tonne carbon tax. He took the worst possible economic forecast of the next century, the one leading to the highest emissions path. Then he made that worse with a couple of other assumptions. Then he invented (on this, possibly rightly) a new method of calculating net present values. And he assumed thatt here was high sensitivity of temperature to emissions.

However, the essential heart of his argument was correct. We don't want to undertake actions that are more costly now that the damage they save in the future. The limit to our attempts to prevent climate change, and yes he does lay this out, must be the scale of that future damage. To spend more now than that damage then would be nonsensical.

Which is where the new numbers coming from the IPCC come in. We now think that climate senstivity is lower than Stern assumed. Thus the actions that we should take to deter future costs must cost less now. That is, we should rationally be doing less now than we were before.

And the thing about this finding is that it is the boringly mainstream finding too. Which is interesting really, because there seem to be only a handful of people (Matt Ridley and myself being among them, he shouting it from a much taller soapbox of ourse) who even grasp this point, let alone actively promote it.

Can politicians act in an actively stupid manner?

An interesting question can politicians act, at times, in an actively stupid manner? No, not just be misinformed, a bit dim even, but can they end up enacting policies that are so far from their intended consequences that we can only describe them as having been actively stupid?

The answer, you won't be surprised to find out, is yes. As David Henderson points out here.

To recap the story: under Obamacare there are subsidies to the poor who cannot afford to purchase these new insurance plans. However, the law states that only those who buy their insurance through a State exchange can gain those subsidies. Those who buy through a Federally run exchange cannot get them. One can imagine why the law might have been written this way: let's make sure all the States set up exchanges. As we also know, things didn't turn out that way. Most States did not set up exchanges and most are now Federally run. Which means that most customers signing up at most exchanges are not eligible for those all important subsidies. At which point the IRS says this is absurd and allows customers of the Federally run exchanges to have the subsidies.

This is our first admission that yes, politicians collectively can be actively stupid. If even the people running the tax system tell us all that we've got to ignore what they've actually written into the law this is a difficult judgement to escape.

At which point enter a lawsuit. Various characters trying to insist that the IRS must obey the law as it is actually written and deny those subsidies to people on the Federal exchanges. The response to which is but that's insane: it will completely gut the law! Yes, it would: but this defence is our second admission that the politicians acted in a manner which is collectively stupid. The defence being that even Congress couldn't have been that stupid. But, obviously, they were: for the defence is that to obey the law as written would be stupid but it was Congress that wrote the law.

So, I take it that we've now conclusively proved that politiains, as a group, can act in a manner that is actively stupid. At which point we're back to our standard contention. That there are things that must be done, there are also things that can only be done by government. But we should limit the activities of government only to those things that both must be done and can only be done by government for, as we can prove, government is at times actively stupid.

A small linguistic note

One of the worrywart tribe has taken to the pages of The Guardian to tell us all that we have to talk about indeterminate masculine pronouns.

When I set about revising Plain Words, the guide to English usage by my great-grandfather, Ernest Gowers, I soon realised that applying the book's own principles to the job would require me to eliminate from its pages all uses of the indeterminate masculine pronoun. I was under orders to preserve the vintage charm of the original; but a writing guide must demonstrate what it is attempting to explain, and the most famous maxim in Plain Words is "be short, be simple, be human". In the 21st century, "he" used to mean "he or she" is annoying to so many people that it no longer qualifies as "human"– or charming.

I can't say that the use of "he" to mean "he or she" causes me any great anguish. But then as an ageing and privileged white guy I would say that, wouldn't I? However, I would point out that while people are whining about this the very same people are whining that we must move from gender speific job descriptions to indeterminate mascluine job descriptions. I have, for example, been seeing Scarlett Johansson being described as an actor. Which, to an ageing white guy like me seems a little unlikely given the curves she possesses. Similarly, we are urged to use police officer, or police something or other, rather than policeman or woman. The old distinction between chef and cook has gone, to be replaced with the indeterminately masculine chef as the description of one who knows how to season and cook remains as the verb.

Which leads me to my first observation, that some parts of society are schizophrenic (apologies, challenged in their mental stability) on certain matters. How can the same people be arguing that we must not use the indeterminate masculine at the same time as all job descriptions must become said indeterminate masculine?

As it happens I found out something about the Czech language last night (in the pub of course, one of the similarities with the English, and joys, of the Czech culture is that all of the interesting things happen in pubs). Which is that they have the same group of worrywarts over the use of the indeterminate masculine as we do. Except that their answer is entirely the other way around. In order to reduce, fight against, gender discrimination in language it is necessary to use fully masculine or fully feminine job descriptions. Thus Doktor and Doktorka, (leaving aside diacriticals etc), Ingenier and Igenierka, Economist and Economistka*, all the way through all job descriptions. Many of these distinctions are not in common use but the argument is that they ought to be. On the grounds that we can only fight gender discrimination by pointing out that women can indeed do any job in the economy and we should deliberately identify those who do so.

Which leads me to my second observation. This political correctness over gender in language is as with the methods of eating asparagus. It doesn't matter, in any real sense, how one eats asparagus, with knife and fork, with fingers, with catapults vaulting them into open mouths, it matters only that you understand the social class denoted by each method and approvingly sneer at all who do not use the method appropriate to your own. So it is with these worrywarts over the indeterminate masculine. Not only are they schizophrenic in our own language but that the same groups doing the worrying in other languages come to the diametrically opposed solution means that it's all just a method of identifying your tribe and doing so by what you express concern over.

In short we can continue to pay them no mind as I've been doing these past 50 years (umm, 51 by the time you read this).

*I don't claim that my Czech is good enough to have got those job descriptions correct, only that the "ka" denotes a women doing that job.

But football clubs are already effectively owned by the players

Football does, as we know, come in a number of different forms and codes. It also comes in a number of differrent organisational forms. The way that leagues are formed, franchises handed out, how teams are promoted and or relegated. And the effect, at least as I see it, is that large numbers of clubs that are supposedly capitalist in their form are in fact workers' cooperatives. Which makes an argument about why there aren't such workers' cooperatives a touch difficult: for I'm asserting that there are. The argument comes from Paul Walker:

For me, yes. Right now I should be working on a revise and resubmit on a paper in which, in its conclusion, I argue why there are no worker cooperatives in football and in fact in professional sport more generally. So for me its "Football as a workers cooperative - or lack thereof". As Chris highlights football is a great subject for the application of economics, even the theory of the firm. When considering a football team we have a situation where human capital, talent at playing football, is the basis for the "firm" which we may think would favour ownership by the workers. When human capital is the major input into production ownership by, at least some of the workers, is common, e.g. partnerships in law and accounting etc. This was also true of pirates! The interesting thing for professional sports is that ownership by the human capital, i.e. the players, is extremely rare. This is, I would argue, because a worker-owned team would be at a disadvantage relative to a player-as-employee based team.

So far I agree except for the one point: that I think most clubs, European ones at least, are, in effect, workers' cooperatives. I agree entirely that in legal form they are not. There's a few fan cooperatives but no workers' ones. But pure legal form isn't quite, to my mind, the total definition. Of importance is to look at the flows of money. If the money flows as if an organisation were indeed a workers' cooperative then I'd be inclined to call it one even if the legal form wasn't so. And even a brief look at football club accounts shows that almost all of them make a loss almost all of the time. That's certainly not what we would imagine to be a defining feature of a seris of capitalist organisations. Further, the money all ends up in the pockets of the players.

I explain this in more detail here comparing US leagues with English. Put simply, US sports teams tend to make profits for they are organised as cartels. This restricts entry of new teams and there is no promotion or relegation. Thus, to be able to play the sport you've got to be accepted by one of those teams: this gives the team power over the player. UK soccer is not so organised. Here the competition is to stay (or get into) the top flight and movement by a team is possible. This gives much greater powers to the players for the supply of those capable of shining at the top level is now smaller than the demand for them. Thus any extra money coming into the sport (as we have seen with successive TV contracts etc) ends up flowing into the pockets of said players.

At which point I would be very tempted indeed to say that while soccer clubs do not have the legal form of a workers' cooperative the fact that all of the money, all of the profits and more leaving the "capitalist" owners with nothing but losses and pride, flows to the workers means that they are workers' cooperatives in fact.

An extremely strange argument from Nick Cohen

I both know and like Nick Cohen but it's also necessary to call out this extremely strange argument he made in The Observer. He seems to think that "climate change deniers" have won the war and that therefore all is doomed. When, actually, here in the UK at least, the government has already put in place the mainstream scientific remedy for the perils of climate change. We've actually already solved the problem:

If global warming is not new, it is urgent: a subject that should never be far from our thoughts. Yet within 24 hours of the American association's warning the British government's budget confirmed that it no longer wanted to fight it. David Cameron, who once promised that if you voted blue you would go green, now appoints Owen Paterson, a man who is not just ignorant of environmental science but proud of his ignorance, as his environment secretary. George Osborne, who once promised that his Treasury would be "at the heart of this historic fight against climate change", now gives billions in tax concessions to the oil and gas industry, cuts the funds for onshore wind farms and strips the Green Investment Bank of the ability to borrow and lend All of which is a long way of saying that the global warming deniers have won. And please, can I have no emails from bed-wetting kidults blubbing that you can't call us "global warming deniers " because "denier" makes us sound like "Holocaust deniers", and that means you are comparing us to Nazis? The evidence for man-made global warming is as final as the evidence of Auschwitz. No other word will do.

To take my standard position here: let's assume that the IPCC is correct and see where that assumption takes us. That assumption takes us to the standard economics of how to deal with an externality. Some version of either cap and trade or a Pigou Tax will solve the entire problem for us. And we even have things like the Stern Review (or, giving us slightly different numbers for a variety of reasons, the work of Richard Tol and William Nordhaus) telling us how much that carbon tax should be: $80 per tonne CO2-e.

So, if the climate change deniers, whoever they are, have won we should see that there's no cap and trade program and no carbon tax. But if we look up at the world that we actually inhabit, what is it that we do see? We see that the EU has a cap and trade programme. Emissions are limited, exactly as the standard economics of the problem tell us they should be. Here in the UK we also have a carbon tax: in power generation it's been done in the rather silly manner of a floor to the price for a carbon emissions permit but while this is inefficient it does do the job. We have raised taxes on petrol (the fuel duty escalator) by twice what that Stern calculation would tell us we ought to. We have Air Passenger Duty which is again above that Stern calculation. In fact, when you add up all of the various green taxes we already pay on emissions we find that we're considerably over the amount that Stern said would be the optimal Pigou Tax to solve the problem.

No, really: I get some very odd looks when I try to explain this to people but it is actually true. If we accept the IPCC, then again accept the Stern Review, we have already put in place all of the policies necessary to solve climate change as a problem according to both the IPCC and the Stern Review findings.

And I simply cannot work out at all how this is supposed to be a victory for climate change deniers.

Some 2014 budget nasties

The ASI has already given its response to the budget. We should also remember that the UK's fiscal position is basically unsustainable even if economic growth is sustainable - and I find that extremely hard to believe. The UK economy needs massive fiscal consolidation, supply side reform and sweeping tax cuts if it is going to prosper.

Moving away from those macro-type issues, there are some very troubling aspects to the 2014 budget that it seems worthwhile highlighting, if only to remind us of the madness that is UK public policy. You won't read much about these in the popular press, which is more concerned with bingo and beer.

Changes to annuities regulations will increase tax take in the short to medium-term

As this article points out, pensioners taking a lump-sum payment will still face very large tax charges which will make a tidy sum for HM Treasury

In the longer term, changes to pensions are being funded by higher taxes on contributions

The Chancellor has reduced the relief on higher rate income tax for pensions contributions. Osborne has reduced the cap on tax-free life-time savings from £1.5m to £1.25m. Sounds like a lot of savings, but given the current rate of inflation, this will probably be about average by the time a lot of current workers retire. Anyone breaching this cap will face a 55% tax charge, which promises to raise about £5bn for the Treasury. I won't spell out the long-term economic effects these sorts of raids on saving have on the UK's economic growth prospects, but people need to start recognising that we cannot have sustainable, real economic growth without savings.

HMRC has been giving sweeping new powers

As if the (much-ignored, but hugely significant) General Anti-Abuse Rule (GAAR) of 2013 hasn't given HMRC enough. Essentially, the GAAR grants HMRC the discretion to determine, retrospectively, what is 'reasonable' practice, which, as Jamie Whyte points out strikes at the Rule of Law. Less seriously, but dangerous from an investment perspective, is that it creates huge uncertainty in the UK's tax position.
HMRC has received a £1bn increase to its budget and powers to confiscate funds directly from individual's bank accounts. This is hugely worrying from a civil liberty perspective, but we should also bear in mind that reducing the level of tax avoidance (which is, or ought to be, legal behaviour) simply represents tacit increases in taxation, which already stands at very high levels.

Changes to the rules on LLPs have been pushed through

The changes, outlined here, threaten to have potentially serious tax consequences for LLPs. This is in spite of a request by the House of Lords that they be delayed because of the uncertain impact of the new measures.

New rules on SDLT are very problematic

The Chancellor has signally failed to change SDLT despite the huge 'fiscal drag' and distortions to the property market it creates. As property prices rise, this will increase - no wonder the Government is extending its 'Right to Buy' scheme! As this article points out: "In the 2012 Budget, Osborne announced that homes worth more than £2m would face a stamp duty rate of 7 per cent.

Osborne said: “We are expanding the new tax we introduced to stop people avoiding stamp duty by owning homes through a company. We will expand the tax on residential properties worth over £2m to those worth more than £500,000."

This is a smoke-screen, however, as individuals were using this to avoid IHT on properties, and not SDLT. The reliefs available for landlords are very difficult to obtain, and essentially these changes will result in higher tax charges on landlords, thereby increasing rents and reducing availability, in a rental market which is already unaffordable to many and is plunging those on middling incomes into 'housing poverty'. 

How much does Will Hutton actually know about pensions?

Yes, it's a Monday morning so we've the weekend's Will Hutton column to pick through if we so with. And I have to say that it's a real doozy. We might hope for just a little better than this from someone who wants to tell us all how we should live our own lives, how the country should be run. He wants to talk about the new pension rules:

Meanwhile, insurance companies will lose a great part of the £11bn inflow they have been using to support long-term investment. To date, that has been invested in company and government bonds. But with more energy, imagination and drive, it could have been a rich source of long-term capital for British infrastructure projects – had the instruments been developed in which the insurance companies could have invested. Even as it was, the government has managed to coax the companies into coming up with £5bn a year on infrastructure over the next five years. But now an important source of the funding – annuity inflows – will evaporate.

The annuity inflows were not a large part of the financing of this market. For in one of his acts of financial repression (yes, that is the technical term for it) Gordon Brown insisted that annuioties should be largely funded by gilts. The pension funds which built up over the years, yes, these could be and are invested in some micture of bonds and equities and infrastucture projects and so on. But it's the very switch from those funds into hte annuities that reduces the amount available for such investments. But that pales beside this ludicrous misunderstanding:

But it is not "their money" and we all live in a society whose members' decisions profoundly affect each other. Mr Webb, I assume, would not make this remark about individuals being free, as neighbours, to play offensively loud music, or free not to bin their household rubbish or free to refuse to school their children. Being free to binge your lifetime savings, which taxpayers have helped create, falls into the same category. Every citizen in these island pays higher taxes than they otherwise would to compensate for the lack of tax coming from tax-sheltered pensions. The contributions to build up personal pension funds are allowable against tax and the funds, once acquired, pay no capital gains tax and no income tax on dividends. Up to 40% of the value of any pension fund is thus created through the construction of a watertight tax-free zone. We should care if the resulting money is spent on a Lamborghini: a chunk of the car belongs by right to taxpayers.

Sigh. The tax benefits that pensions savings get is not actually a waiving of tax. It is only tax deferral. It is true that you do not pay tax on the money you put into your pension fund. But it is also true that you do pay tax on any pension that results from that saving. And it's absolutely true that if you cash out your pension to the extent that you can afford a Lamborghini then you'll be paying at least the higher rate on most of that cash. Quite possibly the 45 p rate on some of it too.

That I pay tax upon my money in 2015 rather than in 1985 gives the taxpayers no claim over my car now, does it?

It's not just that assumption he's making there, that if you don't get taxed then taxpayers own part of you and your possessions. It's that he simply doesn't seem to be aware that pensions taxation is all about deferral, not the simple non-taxation of the income at all. And as I say, these are the people we're supposed to get our ideas from about how to run the country?

This is rather the point of student loans though

Hugh Muir gets all upset about what is happening over student loans. The repayment numbers are sinking through the floor so what's the point of the new system. And furthermore:

There is simple economics here; too many graduates chasing too few jobs in a labour market slimmed down by government austerity measures. Many who have taken out the loans can't find jobs, so they don't pay; but those who do find employment are paid so little in an over-supplied market that they don't reach the threshold at which they have to pay.

All of which is rather missing that this is part of the point of having people paying directly for their university educations.

We want them to think about whether spending three years of their life and also £27,000 is a good thing for them to be doing, And the more people realise that perhaps it isn't then the happier all should be.

Don't forget that the total cost of the system as a whole hasn't changed very much. All that is different is who is getting the sticker shock. And that's actually what we want to be happening: is a university education a good deal for those who go and get one? It's is now those who are thinking about getting one who face the prices: they can thus work out for themselves whether it's a good idea.

The answer is that sciences at a good place definitely are (assuming you finish) and arts and ologies at bad places almost certainly aren't. And the only way that anyone's ever going to be able to make a decision like this is by seeing the costs which they can compare to the benefits.

Which is, of course, why the system was changed in the first place.

As Ms. May is finding out overbearing law can be expensive

It's a fairly standard observation that most things and actions have both costs and benefits. Paying unemployment pay for a longer period alleviates poverty but also raises long term unemployment.  Dealing with climate change might make the future better but at the cost of making the present worse. In terms of laws about secrecy, privacy and so on we normally look at the costs as being the curtailment of civil liberty and the benefit as being greater security from the terrorists and the like. But as Theresa May has just found out the costs can also be economic:

Theresa May summoned the internet giant Yahoo for an urgent meeting on Thursday to raise security concerns after the company announced plans to move to Dublin where it is beyond the reach of Britain's surveillance laws. By making the Irish capital rather than London the centre of its European, Middle East and Africa operations, Yahoo cannot be forced to hand over information demanded by Scotland Yard and the intelligence agencies through "warrants" issued under Britain's controversial anti-terror laws. Yahoo has had longstanding concerns about securing the privacy of its hundreds of millions of users – anxieties that have been heightened in recent months by revelations from the whistleblower Edward Snowden.

Perhaps rather than Ms. May summoning Yahoo (and excuse me, but is that actually the correct word there? Does a British Minister really have the power to command the arrival of a private citizen in the Ministerial offices? Rather than politely request?) the rest of the government should be summoning Ms. May to ask why she's pushing legislation so repressive that firms are fleeing the country. Becausetheterrorists is a reasonable enough answer to why we have spies at all but keeping them corralled enough that people still wish to do business in our fair land seems a reasonable enough thought, doesn't it?

Osborne's Surprise

The most exciting part of George Osborne's fifth budget came as a total surprise.  This was the complete overhaul of the pensions system, and it achieved two of the Adam Smith Institute's long-term objectives: simplification combined with tax reduction. 

The previous rules, complicated and cumbersome, arose from the Treasury's lack of trust in people's ability to manage their own affairs competently.  The Treasury tried to micro-manage how pension pots should be drawn upon.  They limited the amount that could be taken in cash, and capped the amount that could be drawn in annual income to a small amount, with a punitive 55% tax on anything in excess. 

The Treasury's concerns were twofold.  They didn't want high earners to use pension pots to circumvent income tax, and they didn't want people drawing so much that they had insufficient left to support them and might become a burden on the state.  People were compelled at one stage to buy an annuity, despite the poor value these have represented.

Osborne's bold budget has introduced the revolutionary idea that people are better at judging their own interests than Treasury officials are.  At a stroke he has given them the choice of how much to draw and when to draw it, and abolished the 55% rate.  Anything they do withdraw will be taxed at their marginal rate.  Significantly, the Chancellor pointed out that those on his side of the House know that lower tax rates can sometimes bring increased revenue, and he expects it will happen in this case.

Saving for retirement has suddenly been made more attractive, and since much of this saving is in equities, it means more investment will be available to create and sustain jobs and to boost growth.  It also means that fewer people will choose to be dependent on the state in their old age.

The Chancellor has expressed his confidence that people will behave responsibly and with due regard for their own interest.  Bravo.  It is an admirable sentiment and one that should be adopted in other Departments.  The ASI will be encouraging them to do so in the months ahead.