As Charlie Bean says, we're richer than we thought

Or as Sir Charles Bean points out in his new report, we're richer than we thought and getting ever richer faster too:

Improving analysis of the digital economy could show that Britain’s economy is growing faster and consumers are better off, according to former Bank of England deputy governor Charlie Bean. Bean, who published his government-commissioned review of official economic statistics on Friday, said the U.K.’s growth rate could be between one-third and two-thirds of a percent higher with improvements to data collection.

“Measuring the economy has never been harder than it is today,” Bean told reporters at the Data Science Institute at Imperial College London. While digital activity is clearly adding to the economy, it’s not necessarily being picked up by the current methodologies, he said.

This is something that one of us has been banging on about for some time now. We know, absolutely, that we're not measuring the economy properly. This is also more than just a small statistical quirk too. For there's plenty who keep telling us that the economy is growing more slowly than it did in the past and thus the government must do something. However, if it's simply that we're not measuring growth properly then there is no need to that larger state. And as we say, we know we are measuring it wrongly, we're just not sure how wrongly.

A favourite example is WhatsApp. We have three methods of measuring GDP, production, incomes and consumption and all of them are measured at market prices. WhatsApp is currently free and carries no advertising. Thus it appears not at all in either the production or consumption variants of GDP. The engineers who make it are indeed paid so there's some, what, $50 million? $100 million? appearing in US GDP by the income method. But there's a billion users of the app and people are getting some to all of their telecoms needs from it. And we really cannot say that those billion are all getting only 10 cents of value from their use at most. Ten cents a year that is.

We really do know that we're measuring this digital economy wrongly: our question is how wrongly, not whether. That in turn means we're richer than we think we are and also that we're getting richer faster too.

Strangely, bequests don't seem to increase wealth inequality

An interesting finding from Denmark, that bequests and inheritances don't appear to increase wealth inequality:

Our work suggests – contrary to the popular belief – that bequests need not increase inequality even if rich parents have rich kids. In fact, in Denmark, the post-bequest distribution is more equal (if measured in relative terms) than the pre-bequest distribution.

And as we have been assured for years concerning income inequality it is that relative measure which matters. It's also worth pointing out that Denmark is significantly (by 10 percentage points or so) more unequal in its wealth distribution than the UK.

This has an interesting effect on taxation policy of course: the prime objective of inheritance taxation is to try to stop fortunes elf-replicating down the generations. It's also an interesting comment on Thomas Piketty's insistence that inheritance will become all in the near future. It just doesn't seem to work out that way.

We can see that there could be a demographic structure which was more problematic. Say, something like China, where there's a whole generation which is likely to be the only descendant of four grandparents. That's likely to concentrate wealth. But a population that is roughly stable is going to have just as much splitting of wealth between children thus bringing down the amount that any one of them gains. But it is interesting, isn't it? If inheritance doesn't increase wealth concentration then why do we tax it with such moral fervour?

Is Ted Cruz a policy wonk's dream come true?

Now that Ted Cruz seems to have a slim chance of winning the Republican Party presidential nomination, a couple of British commentators have said that he seems even worse than Trump. I do not care for his positions on gay marriage or abortion, and his immigration policy is absolutely terrible, but on many other issues he is actually rather good. It’s often the case that there is a bigger difference between policy wonks and politicians than there is within within those professions, even across ideological divides. On a surprising number of issues, Ted Cruz appears to have sided with the wonks:

• He opposes ethanol subsidies, and still won Iowa, where corn is king.  In doing so he may have broken a path for future presidential candidates to drop their support for this piece of corporate welfare.
• He (correctly) blames tight money for the Great Recession, not greedy bankers or loans to poor people. He once flirted with a gold standard, but it looks like he's gotten over that, fortunately. (Update: Perhaps not. Darn.)
• He wants a broad-based VAT to replace payroll and capital taxes, which according to the Tax Foundation would lead to a 13.9 percent higher GDP over the long term, a 43.9 percent larger capital stock, 12.2 percent higher wages, and 4.8 million more full-time equivalent jobs. VATs are relatively efficient taxes, and shifting taxation to them from capital taxes is agreed by most economists to be a good idea.
• He wants to expand the Earned Income Tax Credit, a cash transfer to the working poor, by 20 percent.
• He has introduced a bill in the US Senate that would allow for drugs and medical instruments approved by other developed countries to be used in the US, bypassing the expensive and time-consuming FDA approvals process.
• He supports states’ rights to legalise marijuana.
• He attacked other Republicans who demanded more mass surveillance of American citizens after the San Bernardinho massacre.

Like all politicians he is a mixed bag, but many of these are truly smart policies that most politicians wouldn't touch with a ten-foot bargepole. My opinion is of course irrelevant, but if he would soften his crazy immigration restrictionism I think he would be the outstanding candidate to policy wonks.

It's not possible to say what will happen after Brexit

We're rather encouraged by this little report into the effects of Britain leaving (or not) the European Union:

British companies could be forced to put up prices to the consumer or even be forced out of business by a ‘Brexit’ from the European Union, according to a report by Oxford academics.

No, not that bit, this bit:

It added that the overall economic impact of Brexit through changes to the country’s immigration policies were “not possible” to predict with certainty ahead of the referendum. The report said “confident predictions about the economic effects of migration after Brexit should be treated with caution”.

Some of us here have very strong views indeed about this Brexit process but we'll not inflict them upon you here. However, that point strikes us as being exactly correct. For it is impossible to state with any certainty what the economic effects of Brexit would be.

For what those effects would be, will be, depend upon the economic policies that are adopted once free of the shackles of Brussels*. If Britain adopts unilateral free trade then, as Patrick Minford has pointed out, the economy will grow. If immigration of low wage workers is curtailed then businesses which employ low wage workers will have a hard time of it, indigenous workers will start to see higher wages. What happens after Brexit depends upon the policies adopted after it, not on the leaving itself.

Thus all reports predicting either disaster or nirvana from the leaving itself should be regarded with the utmost suspicion.

*It could be that you could divine the views of one of us on this subject.

Five questions for scaremongers

Let’s be real. No-one knows what the economic effect of Brexit will be. Anyone who says they do is either kidding themselves or trying to kid you. But we do owe it to ourselves to make intelligent estimates and to set out our assumptions for scrutiny. So here goes. To start with, we break down the UK economy into sectors, using government definitions. No controversy there. Next, we make a couple of estimates.

First, an estimate of the shock for each sector of leaving the EU. This is a big part of what no one knows. This leads us to capture the vulnerability of each sector with the most punishing figures from the record: the collapse in output after the global financial meltdown of 2008 which was worse than any since WW2.

Second, an estimate of the recovery for each sector after five years. Once again we start with the post 2008 recovery after the financial meltdown. This provides a sense of the inherent resilience of each sector. And here is a good place to argue with us: we also include a small factor to reflect the policy response of government and the benefits which experts in international trade have observed from less restrictive trading arrangements. In fact we take only half of the benefit the experts have observed, erring on the side of caution.

Goods

The pie chart shows that the UK’s output of goods is made up of five more-or-less similar-sized elements: the most important ones are finished manufactures, oil and food. Basic materials are not as much in international trade as once they were; and “other” consists of the small sectors of semi-manufactures together with spares & repairs. Our figures are for 2013, but little has changed since.

Chart 1. UK goods

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Source: ONS (2013)

Charts two to five below show the position, sector-by-sector, starting with trend growth from over the ten years from 2002 to 2011, that is including the financial crisis. Our estimates for these sectors, together with our estimates for the goods sector as a whole, show an hit from Brexit after one year (save for food etc, whose complement of entrepreneurs make it particularly resilient), with all recovering by the end of five years.

Charts 2 to 5. Outlook for selected UK goods sectors after Brexit

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Sources: Authors, ONS (2013), Andriamendjara et al (2013), Berden et al (2007), Erixon and Bauer (2010), Helble et al (2007) and Petri, Plummer and Zhai (2011).

Services

Our pie chart for UK services is simplified by drawing like sectors together. We’ve followed Douglas McWilliams’ recent coinage, the “flat white economy”, bringing together professional services, culture/recreation, communications and technology services. Finance, insurance and real estate are self-explanatory. T&T is transportation and travel. The sectors not involved in international trade are utilities, distribution, healthcare, education and public administration.

Chart 6. UK services

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Source: ONS (2013)

Our estimates for the traded sectors - together with our estimates for the services sector as a whole - show smaller initial hits from Brexit (in the case of finance etc, none at all), with all making excellent progress after five years.

Charts 7 to 10. Outlook for selected UK services sectors after Brexit

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Sources: As charts 2 to 5.

Boris Johnson spoke of charts like these as “Nike ticks” and putting this all together we get the “Nike tick” for the economy as a whole.

Growth stays positive throughout, despite falling in the first year. The premium after five years should be seen as a spike on the benefits of deregulation and new markets.

Chart 11. Outlook for UK GDP after Brexit

Screen Shot 2016-03-10 at 16.05.05

Sources: As charts 2 to 5

Conclusion

Is it wrong to find these estimates encouraging? We make no apology for doing so, while fully admitting that ultimately all such estimates can only be a quantitative and graphical expression of assumptions. So are they dead right? Of course not. Are they a misleading basis for discussion? We don’t think so. Scaremongers who wish to dismiss them from consideration need to answer five questions:

• Why would the shock of Brexit be worse than the shock of the financial crisis?
• Why would UK firms be less resilient in bouncing back after Brexit than they have been since the 2008 turmoil?
• Take a look at our companion paper “Five questions for stayers”; why wouldn’t the UK and its trading partners benefit from relief from what the WTO shows as the world’s most complicated tariff regime, what the World Bank reports as a system of nontariff barriers second only to Russia, and priorities which put trade with the rest of the world at the back of the queue?
• Why would the UK government sit on its hands for five years after Brexit rather than develop new trading relations?
• Why would the benefit of those relations be less than the figures we are using, one half of the benefits from less restrictive trading environments attested by experts in the field?

To our way of thinking, our figures illustrate that the scare stories about Brexit are just that - scare stories. Do they prove it? No more and no less than the scare stories themselves!

The ASI's 2016 Budget Wishlist

Ahead of the Budget next week, here are the key reforms and tax cuts we hope to see the Chancellor announce: Scrap stamp duty on shares to boost investment

Stamp duty on shares may be one of the most harmful taxes we have despite raising relatively little money (£2.9bn in 2014-15). By making it costly for people to sell their shares, stamp duty interferes with price signals and raises the costs of investing overall. That hurts both savers and businesses’ access to investment financing. Scrapping it would be a cheap way of making stock markets direct money where it will be used best, give a boost to businesses in need of investment – and cement the City’s status as the world’s financial capital.

Pensions tax relief should be left alone

Abolishing the upper rate of pensions tax relief sounds like an easy way to save money, but it would be a huge mistake. Upper rate relief exists to help people smooth their incomes if they will only be in the upper tax bracket for a small part of their lives. Because people are taxed on pension withdrawals, abolishing upper rate relief would introduce double taxation to the system: people in the upper tax rate would be taxed for putting money in to a pension and again when they take money out of it. This would discourage some people from saving for their retirement and unfairly penalize the ones that do.

Alcohol duties should be merged into a simple alcohol tax

The alcohol duty system is amazingly complicated and confused, with entirely different rates per unit of alcohol for wine, beer, spirits, cider and sparkling wine, and strange kinks in the system that, for example, favour strong wines and ciders over weaker ones. This whole system should be replaced with a simple, flat per-unit tax on alcohol (as currently applies to spirits). That would stop the preferential treatment for selected drinks, like cider, and end the preferential treatment for stronger drinks. It might also make life a bit easier for Britain’s growing craft alcohol industry.

Phase out Housing Benefit altogether

Housing benefit should be phased out and eventually scrapped. In a property market where supply is tightly constrained, increases in housing benefit go mainly into higher rents. The empirical evidence suggests that about 70p of every £1 of the £26bn system goes into the pockets of landlords in the form of higher rents. Much of this benefit comes from renters who don’t even get the benefit, who are competed out. What’s more, the system encourages people with less means to move to the most expensive areas, since the level of payment is tied to prevailing rents, which means that the bill is artificially inflated. The government should use the money to supplement low incomes, by raising the employee NIC threshold and making the Universal Credit withdrawal rate less steep, so work pays more for UC recipients.

Stop business rates from taxing capital

Because business rates tax property values, they effectively tax both the land a property is built on, and the value of the bricks, mortar and some machinery on top of that land. Taxing land values is a relatively good way of raising revenue, because it does not discourage production. But taxing property discourages construction, improvements and investments in new machinery. The government should not exempt new machinery from business rates, as it is rumoured to be considering. This would add even more complexity to the system and increase compliance costs. And why should machinery, but not other improvements such as redecoration or refitting, be exempt? Instead, it should reform business rates so that they are based only on the unimproved value of the land the property sits on – and there is no reason not to improve the property itself.

As we've been telling you about house prices

As we've been telling you for some time now a goodly portion of the house price problem in Britain is because of the insanities of our housing planning system. As the Royal Economic Society is now pointing out:

House prices in the South East of England would have been roughly 25% lower in 2008 and perhaps 30% lower in 2015 if the region had planning regulations of similar restrictiveness as the North East of England.

This really is what we have been telling you:

Today housing space in England – particularly in London and the South East but also in other urban centres and large pockets of rural England – is among the most expensive and unaffordable in the world. Hilber and Vermeulen’s study shows that this is in large part due to supply constraints imposed by the planning system.

According to the research, the problem is clearly that there is too little supply given the strong demand for housing in parts of the country. But why? The study explores three possible types of supply constraints:

• The first type is regulatory and dates back to the Town and Country Planning Act of 1947. The UK planning system since 1947 is extraordinarily rigid by world standards. Urban containment through ‘green belts’, strict controls on height, lack of fiscal incentives at the local level to develop and ‘not in my backyard’ (NIMBY) behaviour facilitated by the planning regime all make it very difficult to build new homes.

• The second type is physical. Local scarcity of brownfield or greenfield land makes residential development in desirable locations very costly.

• The third type is uneven topography. It is very difficult to build new homes in places with steep slopes.

So which of the three types is most important in the case of England? The researchers use data from over 350 local authorities from 1974 to 2008 to explore this question. Their findings strongly suggest that regulatory constraints are the main culprit.

As we have indeed been saying.

So, abolish the Town and Country Planning acts and return us to the 1930s, the last time the private sector kept up with housing demand. The point being that markets really do work and regulation of them often does not.

The Wealth of Nations, 240 years on

On this day in 1776, exactly 240 years ago, the Scottish philosopher Adam Smith finally published his best-known work, An Inquiry Into The Nature And Causes Of The Wealth Of Nations – the book which Smith himself called his Inquiry but which is known to us today as The Wealth of Nations. It was fifteen years in the making. So long, indeed, that Smith’s friends eventually ganged up on him and urged him to finish it before someone else did the job for him. The final chapters (gleefully cited by Owen Jones in his talk to the Adam Smith Institute’s Next Generation Group last night) in which Smith talks about the need for governments to subsidise education and other services, show every sign of being rushed and given less of the lengthy consideration that he gave to earlier chapters.

Perhaps too much consideration, in fact. “It is a clumsy, sprawling, elephantine book,” wrote Leo Rosten; and he is not wrong. One “digression” alone, on the price of silver, takes up 70 pages, fully a tenth of the whole work. Smith seems to have found a place in it for every stray fact that came into his capacious mind – from the diamond mines of Golconda through the fisheries of Holland to the market for Irish prostitutes in London. As if that were not exhausting enough, even native English speakers have difficulty with the studiously elegant, but now very dated language; to others, it is unreadable, or nearly so.

It is for these reasons that I wrote The Condensed Wealth Of Nations. But that is not to downplay Smith's magnum opus. It is in every sense a great book. Some modern critics say that much of The Wealth of Nations was not original. But Smith’s achievement was to take the disparate ideas and facts in circulation at the time and weave them into a coherent intellectual system – indeed a new science, of economics. Overcrowded with facts it may be, and yet (as Joseph Schumeter remarked) it “lights up the mosaic of detail, heating the facts until they glow,” making it (says Rosten) "one of the towering achievements of the human mind: a masterwork of observation and analysis, or ingenious correlations, inspired theorising, and the most persistent and powerful cerebration.”

Yet Smith did not see his Inquiry as a mere textbook. It was a polemic against the suffocating regulations on trade and commerce in his time. Monarchs granted their friends monopolies, even in essential goods. The guilds restricted entry to every profession – and kept up prices. Exports were subsidised and imports were restricted because it was thought that the wealth of a nation was the amount of gold and silver it could get into, and keep, in its vaults. But Smith, audaciously, pointed out that both sides benefit from a voluntary exchange: they would not bother if they didn’t. Buyers may end up with less money, but they get, in return, goods or services they value more. Any restriction on trade necessarily reduces the value that such free exchange generates for both sides.

The Wealth Of Nations was hugely influential; the leading politicians on both sides of the Atlantic all read it, and took its advice. Taxes and tariffs were cut, monopolies and restrictions abolished, and the world enjoyed a century of free trade, enterprise, innovation, growth, and improvement. Too often today, we forget Smith’s advice; but it remains there to guide us. It is a book that has profoundly shaped our world.

Finally, even the TUC gets with the program

We've been arguing for a near a decade around here that the UK does not in fact have a gender pay gap. Rather, we've a motherhood, or perhaps a parent, pay gap. In line with Madsen's idea of our function when we started saying it people were shocked at our stupidity. It's now becoming the conventional wisdom, so much so that even the TUC appears to be getting up to speed on it:

Women who become mothers before the age of 33 earn 15% less than similar women who haven’t had children, according to new analysis published by the TUC on International Women’s Day today (Tuesday). The pay penalty for younger mums comes about as they are more likely to have had a significant period out of work or working part-time, before returning to full-time work when their children are older.

Yes, very much what we've been saying. And there's other research which shows that earnings decline for women (on average of course) by 9% or so per child they bear. Other research published for this special day:

A separate study by The Fawcett Society said the motherhood penalty still existed in the UK because mothers were judged to be less committed to their work. Its survey of 8,000 people found almost half believed women were less committed to jobs after having a baby, compared to just 11 per cent for men. Chief executive Sam Smethers said: 'It is clear that when a woman has a baby she is overwhelmingly perceived as becoming less committed to her job, while a dad is much more likely to be seen as more committed. 'This drives inequality and forces women and men into traditional male breadwinner, female carer roles.'

We agree with the evidence there but not with the logic. We're absolutely fine with the idea that anyone can adopt any gender role they desire. But it does remain that most parents do choose to adopt what we might call traditional gender roles concerning their children. Mothers as the primary carer, fathers as the primary provider. If it is people being forced into this then of course we're against it. If people are choosing this then we're just as happy as Larry: liberalism is about people being able to enact their own choices.

And the truth does seem to be that it is those choices made as parents which drive what some call the gender pay gap. After we account for age, education, time in the workforce and all that, mothers make, on average, less than non-mothers and fathers make more than non-fathers. It's in the 8-10% or so range either way. And given that the majority do become mothers, the majority fathers, that's around and about enough to explain that 10% or so gender pay gap that ONS and others report.

Again, if this is imposed upon people then we're agin' it. If it's emergent from peoples' free choices about how to live their lives then not only why would we object but why would anyone want to do anything about it?

Five questions for the “stay” campaign

The “stay” campaign is making much of the purported risks of leaving the EU. They seem reluctant to defend the EU on its merits, apparently taking the view that it’s a disagreeable necessity. Let’s explore this with five questions about risk. 1. Political risk

As a defender of the EU, do you deny that

• the EU is an inherently political project?
• its political capital and administrative energies have been focussed on continental unification?
• despite this, everyone acknowledges the EU’s longstanding “democratic deficit”, with multiple and confusing executive and judicial bodies which are not held to account?
• one, the ECB, has been at liberty to inflict a classic “bankers ramp”, penalising Greece as a creditor, without regard to the political reasons for its default, in which the EU itself is as much an offender as Greece itself?
• another, the ECJ, conceives of itself as an instrument of unification, leading to judgements which are arbitrary, intrusive and unpredictable.

In consequence, how happy are you about the risks which the EU poses to basic stability for itself and the UK?

2. Administrative or performance risk

How do you look away from the evidence that

• twenty one years of failed audits attest to the EU’s administrative dysfunction at the most basic level?
• the EU’s trade policy is hampered by its focus on the problems of the past, specifically tariffs on goods, rather than the future, that is services and nontariff barriers?
• the EU’s nontariff barriers give rise to harmonisation which is unnecessary and intrusive, with the World Bank describing its restrictions as second only to Russia?
• trade policy is also hampered by the EU’s emphasis on deepening its own internal market - in particular its headline currency policy - rather than opening it up to global commerce?
• this has diverted political capital and administrative resource from less dramatic but more effective measures, stalling its FTA programme, slowing growth in output and external trade, and adding nothing to the UK’s exports?
• the EU’s treatment of the free market in labour gives rise to uncontrolled migration and prevents national control over entitlement to welfare?
• the EU’s internal decision-making is so opaque as to give rise to the newly invented word of “comitology”?

How comfortable does this leave you when you think about the risks which the EU’s way of doing business poses to meeting its own objectives?

3. Economic risk

How can you shrug off concerns that

• the EU’s inherent corporatism has led to its “regulatory capture” by continental producer interests, especially manufacturing and agricultural interests, giving rise to intrusive harmonisation to the detriment of the UK?
• the EU has de facto given up on free markets in the matters most important to UK, capital and services?
• the EU’s passporting arrangements for banks risk contagion?
• the EU’s treatment of the free market in labour has given rise to intrusive regulation on employment conditions?
• the CAP has led to higher food prices and has restricted supply?
• the EU’s Internal decision-making (comitology) is barrier to the conduct of business?
• the UK has suffered from its loss of independent representation in international trade bodies?

How does this leave you as to the risks which the EU’s policies pose to economic welfare for itself and the UK?

4. Reputational risk

How easy do you find it to look away from the spectacle of

• a prolonged currency crisis threatening disruption among our neighbours?
• the EU’s treatment of migrants adding to chaos on its borders and doing nothing to ease turbulence in the Middle East?
• the EU’s tariff walls restricting supply of entry-level manufactures (eg, clothing) from emerging market suppliers?
• the CAP raising restricting agricultural supply from emerging market suppliers?
• the EU presiding over the highest level of nontariff measures among major traders but for Russia?
• the EU admitting to the world’s most complicated tariff regime?

What do your answers suggest as to the risks which the EU’s policies pose to its reputation in the global community, as well as the collateral damage to the UK’s reputation as a member?

5. Finally

Tell the truth, now: are you proud of the EU? do you admire what it’s made of itself? what it has achieved for this country? does its pattern of conduct and outcome sit well with your own standards and values? Or to revert to the formula to which stayers seem to be committed, what necessity justifies the nation’s continued commitment to a body showing such dysfunction?

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We should apologise for the “and another thing” character of these relentless questions. But the rhetoric does enable us to go beyond the commonplace that the “stayers” have given up defending the EU on the basis of its good intentions. We can now see that they are challenged to do so on the pragmatic basis that remaining makes for risk-avoidance.