Owen Jones and labour economics

It appears that the latest campaign from Owen Jones and all things left is about the shameful way in which the self-employed are treated. Given that this group includes both Jones and your humble writer this is of course something of great interest. Sadly however, Jones is, as usual, entirely at sea with any economic concept more complex that “it’s all so unfair, innit?”

If booming levels of self-employment are an indicator of a thriving economy, then Greece is the powerhouse of Europe. Just under a third of the population of this austerity-ravaged nation are self-employed, more than double the EU average. Spain is another go-getters’ paradise, it seems: with half an entire generation out of work, self-employment among the young has surged. And then there’s Britain, where around 40% of the rise in jobs since 2010 is down to self-employment. If our rulers are to be believed, here is entrepreneurial flair and British dynamism in action, a vindication of the government’s “long-term economic plan”. But the plight of the self-employed is being ignored. It is time that the left began championing their cause.

Well, strip this of the rhetoric and perhaps there is a point there. Spain and Greece do indeed have a paucity of jobs and a surplus of people who would like to do one. So, what’s the cause of this? The amount that people are willing to pay to get a job done is lower than the amount that people are willing to accept to do a job. As we know, prices adjust to balance the supply and demand for anything, this is the function of a market.

As we also know if, through government action, that market is not allowed to change prices so as to balance supply and demand then it will balance anyway.

But self-employment spells precariousness, insecurity and falling living standards for all too many. Last week George Osborne lauded figures indicating that wages were rising; but what is often neglected is that the 15% of British workers who are self-employed are stripped out of these figures. There is little up-to-date research on their income, but the Resolution Foundation suggests that between 2006-07 and 2011-12 their weekly earnings dipped by a staggering 20% – and there was a big rise in underemployment, or self-employed people doing far fewer hours than they would like.

Quite so. Given that formal employment costs more than employers are willing to pay (or, the same thing, that the government imposition of conditions and extra costs makes the residual wage lower than people will accept) then the price of employment is lowered by side stepping some of those costs of employment.

Self-employment is often a means for businesses to hire workers without offering the rights and responsibilities that normally come with employment: private pensions, paid holidays, sick pay or maternity leave, for example.

Again, quite so. We have imposed, through government, a series of costs that are part of compensation but not a part of wages. Thus, if a system exists where those compensation costs can be avoided, and the total compensation is more than the market clearing price, then some part of the labour force will end up with the wages only, and not that compensation part.

So, what is the solution here? Well, if it’s government action forcing the price of labour above the market clearing price then the answer would seem to be to stop that government action that does so. Jones, and all things left are of course arguing that such costs should be forced upon all so that even more people can be unemployed. Quite why this is a good idea we’re not sure.

But our larger point here is that we are once again seeing the entire blindness of a certain section of the commentariat to reality. If self-employment is rising, because it means that people can escape the costs of employment, which is indeed the analysis they are offering, then this is evidence that the costs of employment are too high. The solution is thus to lower those costs of employment.

The most obvious place to start doing that is to abolish employers’ national insurance. This is, after all, one of the major costs that this sort of employment arbitrage is designed to avoid.

We’re even, at this point, willing to agree that there might be something to the basic analysis on offer. As long as, of course, Jones and all things left are willing to agree with our solution: lower taxes on employment.

Time for a 40% top rate

Lord Lawson has called for George Osborne to lower the top rate of income tax to 40% in his July budget.  It is a timely call that echoes former times.  When Nigel Lawson, as he then was, was preparing his 1988 budget, the ASI published research showing that if he lowered the top rate from 60% to 40%, the Treasury would soon gain revenue, even though the government share would be smaller in relative terms, and the burden on business would be lighter.  

Chancellor Lawson did just that, lowering the top rate to 40% and the starting rate from 29% down to 25%.  This was his trademark tax simplification.  From a myriad of rates and thresholds he now had reduced income tax to only two rates.

Not only did Treasury revenue increase as predicted, but the richest 10% ended up paying a higher share of the total.  From just over a third, their share rose to just under half of the total.  Again, this was what research had forecast would happen.  By contrast, when Labour reneged on its election promise and raised to top rate to 50%, official figures show that it raised nothing like the £2.9bn glibly forecast by Alistair Darling.  And when the coalition lowered it back to 45%, the tax loss was estimated at only £100m.

To cover the political charge of lowering tax for top-rate payers while cutting the welfare bill, Mr Osborne might try a new tactic.  He should lower the top rate from 45% to 40% on a two-year trial basis.  If after that time two results had not been achieved, he should promise to revisit it.

The two results required would be:

1. That the revenue raised from income tax was now higher than it was from a top rate of 45%, or about to become so, and

2.  That the proportion of income tax paid by the top 1%, the top 5% and the top 10% of earners was now higher, or about to become so, than it had been under a top rate of 45%.

Lord Lawson is completely right.  Lowering the top rate to 40% would make Britain a more attractive place to do business.  It would attract talent and investment to boost our economy.  It would achieve growth at no cost to the Exchequer, and it would create jobs.  More to the point, it would send a signal to the world that the UK was once again achievement oriented.  Mr Osborne should be brave.

Inequality: some people know what they want to find

One wonders how many times Guardian economics columnists have revealed the shocking discovery that: ‘trickle-down economics’ doesn’t work, equality isn’t only desirable for fairness reasons but also for growth and stability; some important group with heretofore sound neoliberal credentials agrees; and that shadowy international organisations and selfish elites are to blame for this fairly clear truth not being tackled through policy.

Messrs Elliott, Chakrabortty and Inman, responsible for most of the august paper’s economics comment, and all apparently endowed with eternal reserves of surprise, regularly inform us of these groundbreaking findings, that shatter economists’ ideological complacent laissez faire free market neoclassical neoliberal capitalist consensus.

The latest has a title that might well have been automatically generated: “So much for trickle down: only bold reforms will tackle inequality” with an equally excellent standfirst, “Even the IMF recognises the vicious circle in which inequality breeds instability, which causes recession and spending cuts that make inequality worse”. Between them they really hit up all of the bases, and the piece is no different.

IMF research released last week (pdf) shows that there are economic downsides to inequality. Raising the income share of the poorest 20% of the population increases growth by as much as 0.38 percentage points over five years. By contrast, increasing the income share of the richest 20% by 1% decreases it by 0.08 percentage points. So much for trickle down.

She added that these disparities were becoming baked in, with social mobility on the decrease. To get on in life, you had to live on the right side of the tracks, and according to Lagarde, that “didn’t sound fair”.

At this point, readers might be wondering whether this IMF has anything to do with the other IMF, the one that tells countries seeking financial help that they need to liberalise labour markets by cutting minimum wages and reducing the scope of collective bargaining; the one that demands cuts in public spending and insists that state assets should be privatised at every opportunity.

They are indeed one and the same. The IMF that warns of the perils of inequality is the IMF that is demanding measures of Greece that will add to poverty and make inequality worse. One half of the fund – the economics team that comes up with the big-picture analysis – says one thing. It supports investment in education, an enhanced role for trade unions and higher taxes on the rich. The other half – the part that draws up the structural adjustment programmes – says something entirely different.

What’s weird is that while it would be nice to believe in a mendacious Larry Elliott, realistically it’s more reasonable to assume this is all in earnest. Indeed, does it really make any less sense than my worldview?

I can point to evidence suggesting that inequality doesn’t perpetuate through educational differences. I can point to evidence that people don’t actually care about real world inequality, which they wildly mis-estimate; they only care about their perceptions of inequality, which changing inequality doesn’t necessarily change. I can show that inequality doesn’t unduly affect politics, that it doesn’t undercut morality or community, and that the Spirit Level is nonsense.

But then you have people like the IMF, surely among the most credible bodies in the world, regularly releasing papers saying we should care. Who would you believe? As ever, it’s very hard to decide what to do when one’s meta-rationality goes awry.

I can say that the methodology of the IMF work is shoddy and that you should look at credible meta-analyses—but why should Elliott et al. trust me when I’m going against far more credible people. And surely we cannot expect everyone to dissect the details of every paper when they make a judgement on the area.

So while I might criticise the rather silly framing of this new ‘revelation’ I can hardly give full-throated criticism of the Guardian economics section line in general—interpreting evidence is just too hard.

A proposal to solve the housing crisis

The problem is not that people lack the resources to buy houses; it is that there are simply not enough houses.  People are living longer, more choose to live singly, and immigrants increase the population.  Schemes that help people to obtain mortgages direct extra funds into housing without increasing the supply, and put more upward pressure on house prices.

The Green Belt acts as a corset around our cities, forcing people to live beyond it and commute through it, with attendant pollution and congestion.  They need houses near the edge of cities, but the Green Belt stops them.

The first step is to classify Green Belt land into its three types.  There is verdant land, with fields, meadows and woods – what most people think of when they think about Green Belts.  There is ‘brown,’ or damaged land, including abandoned mines and quarries and former industrial buildings.  Thirdly there is agricultural land, much of it given to intensive cultivation on vast fields using fertilizers and pesticides.  It falls well short of being environmentally friendly.

Once the land is classified into its three types, the verdant land should be left untouched.  All of the ‘brown’ land should be made available for building.  In addition a one-mile deep strip of agricultural land at the inner edge of the Green Belt should be made available for house-building.  In compensation, at least a mile of agricultural land beyond the outer edge of the Green Belt should be added to it as verdant Green Belt.

The grant of planning permission within this extra land near cities would dramatically lower the cost of housing land, putting downward pressure on house prices.  The million extra homes that could be built on this land would have a similar effect.  A move such as this would increase the supply of housing and make it less expensive, bringing home-ownership within reach of many.  

Furthermore, there would be a net gain of properly ‘green’ land by the outer extension of the Belt with more verdant land.  The prospect of extra housing, a curb on the upward spiral of prices, and with no loss of green land, all suggest this might be a practical and popular help to the housing problem.

Beat combos are not quite our thing, however

There is something of interest to be gleaned from this little story about Taylor Swift and her interaction with Apple’s new music streaming service:

Apple has apparently changed its policy and pledged to pay musicians for the use of their work during a free trial of the Apple Music service following an open letter from US pop star Taylor Swift.

We’ll admit that which young lady warbles away at the front of the latest popular beat combo is not normally our thing. [Speak for yourself! – Sam] But it’s worth noting who has the economic power here. On the one hand, the most valuable publicly listed corporation on the planet, one that makes a Bill Gates sized fortune in profits each and every year, with cash reserves measured in the hundreds of billions. On the other one young lady in her 20s.

Yet when the two clash over the division of revenues it is that young lady who wins. The interesting economic lesson being that it is not size, or the corporations, or wealth, that wins. It is who controls the scarce resource that does.

Swift’s music is (oddly to us but there we go) extremely popular. It is a must have for any music streaming service. Thus she being the one hold out will make that giant corporation change the terms it offers to everyone.

It is not size, or who has the most lawyers, or the most money, which wins in a market economy. It is scarcity that rules. Which is, of course, just how we like it, for our task in an economy is to decide how scarce resources are allocated.