Scotland should have got tax powers years ago

The UK's Conservative Prime Minister David Cameron is expected to offer Scots the power to raise all income tax in Scotland, if they reject independence at the referendum planned for September. This would make the Scottish Parliament responsible for raising 40% of the revenue it spends, and would be offset by and equivalent cut in the block grant that Scotland receives from the Treasury.

This is a change that should have happened years ago. Critics call the present arrangement a 'pocket-money parliament'. Its only debate is how to spend the money gratuitously handed down to it by its English parent.

If Scotland had to raise much of its own revenue, however, the debate would change. The discussion would go beyond how to spend money, and embrace the question of how to raise it. There would, for the first time, be a national discussion about how much Scotland should be spending on its government. Taxpayers, both individuals and businesses, would start raising questions about value for money.

That should be good news for Mr Cameron. At last his Conservative Party, presently sidelined and bereft in Scotland and down to just one Conservative MP in Scotland – would have a real role once again. It would become a home for all those who believe that spending is too high, and who resent paying to fund a profligate government.

Why income inequality is really very good for us indeed

It's much the thing to be talking about these days. How income inequality is rising, wealth inequality is going ballistic and it's all a jolly bad thing. However, let us ponder this point of wisdom from Don Boudreaux:

Would you prefer to live in a society in which people compete for high status by earning lots of money through the creation, production, and sale of better mousetraps, or in a society in which people compete for high status by being indifferent to money but focused intently on conquering foreign territories or accumulating terrifying amounts of political power?

Assume, as we must, that human beings are status seeking animals. Most certainly for the male of the species this has always been true: higher status males have more children which is the point and aim of the entire game. And in various different societies status has been gained in many different ways.

As best we know, from the study of the remnant hunter gatherer groups, for most of our existence status has been gained by being a good hunter: both of prey and of other adult males. Yes, as far as we can tell, in socieities like that of the Yamomani murderers have more children than non-murderers. And in some such societies we've recorded murder as cause of death for as much as 40% of the male population.

We've also assigned status to people in other ways over the millenia of recorded history. Who was your Mum (and presumably there being a connection between that and who was your father) has often been popular. We've never quite done it but plenty of other places (the Fascists and communists come to mind) assigned status according to ideological purity: the Soviets even to the second or third generations. We in Britain have seen religious fanaticism used as a mark of status: difficult to understand the Commonwealth without that. The feudal period nominally ran on bloodlines but in reality on the male skill at crushing the skulls of the enemy.

And class and status have never, in Britian, been entirely about money. Even today they're not. But given the alternative sets of status markers that have been used over the centuries, aristocracy, theocracy, race (useful in discussing the Saxons, Danes and Celts) wouldn't we all start to prefer that they were? That one can gain status by having proven that you are producing something that a lot of others would like to have? For that's what this capitalism lark is at root about. You can only accumulate if you're performing a community service. Which sounds like a pretty good method of assigning social status to us.

Of course, we might always hope that humans will stop seeking status. But then at that point we'd not be describing the actions of the same species that we're currently studying, would we?

If only we could get the public health people to be doing public health...

This is all rather disturbing:

Last week I saw a young woman get off a bus in Lewisham in a singlet that exposed the back of arms completely covered in angry red bed-bug bite marks, like a cartoon version of measles. It's not only Cimex lectularius that has gained new life in England; body and head lice, scabies and other parasites are thriving. More dangerously, London has equivalent multi-drug resistant TB infection rates to those in Asian, South American and Russian Federation areas. In Sheffield Hallam, as the Mail reports today, Roma overcrowding has allowed threadworm, hepatitis and rickets to thrive alongside TB, with children exhibiting signs of malnutrition. Those immigrants - several a day - making it through Calais are also walking infection dumps, infested with scabies and other parasites and diseases.

...

The critical thing is that poor public health affects us all; a solicitor taking the bus because her car is in for a service can pick up head lice, the guy ahead of you on the central line escalator can cough or spit and infect you with TB, and a brush with the M&S fitting room can leave you with scabies. If you live in a big town or city you can't insulate yourself against poor public health - like bees in a hive, there's just too much cross-contact. The only way is draconian public health measures - modern workhouses, disinfestation of public transport, delousing stations, breaking up the slums, compulsory TB testing, school hygiene, fumigation of slum houses and bedding.

What's particularly disturbing about it is that we Brits pretty much invented the entire concept of modern public health. And we have a large number of people who are employed on our behalf to both study it and do something about it. And yet, as Chris Snowden continually reports, they seem to worry more about whether e-cigarettes should be legal, or whether sugar should have a health label on it, than the actual problems of communicable diseases of poverty that are the point and purpose of their trade.

Oh, and there's always the senior professors like this one:

No, really, the man knows not whereof he speaks. Iridium is a brand name for GPS systems, yes it is. But this is because the original design was to have 77 satellites and iridium, the metal, is element 77. There’s no actual iridium, the metal, used in Iridium, the GPS system. We’re getting into real loons on the loose territory here if people are building their desired world governance systems out of such misunderstandings of reality. And don’t forget, this campaign from The Lancet, this Manifesto for Public Health, really is a call for us to change the entire system of planetary government. And it really is based upon the musings of people like Professor Martin McKee. And his elementary misunderstandings of the world in which we live.

I'm well aware of the idea of the long march through the institutions. That the true socialist goals will only be achived when all of the apparatchiki are committed to them even if the electorate is not. But here's the real question: how do we get them to do the job we're paying them to do in the meanwhile as we wait for that nirvana?

Another point that occurs: if these geniuses in the public health movement can't get scabies out of a rich population like that of the UK then why should we take their ideas on planetary governance seriously? It's not like they're showing any great competence in their core task, is it?

The latest barkingly mad idea about house prices

David Boyle is, as we know, associated with the new economics foundation. It is therefore obvious that his ideas about matters economic are going to be less than sensible. He's approaching a real problem here of course:

David Boyle, who is also a fellow of the New Economics Foundation think-tank, said home ownership will be beyond the means of many of today’s children, leaving them at the mercy of rising rents. He predicted that by 2045, the average house price will reach £1.2million, meaning only the very rich will be able to afford a property.

I suppose that it's possible that that could happen, yes. So, what's his solution?

Instead, he said a radical solution is needed whereby new homes are sold at their initial price for 100 years.

And so is the nef's reputation for economic lunacy left entirely unsullied.

For prices are information. Rising house prices are the information that it would be a good idea to go build some more houses. And if we freeze house prices then we don't get that information about whether we might or should go build more. And if we don't have the information about possible shortages then such shortages, if they occur, will just get worse, won't they?

A rather more sensible response to rising house prices might be to issue more of those little chittys that allow you to build on a particular p[iece of land. Housing permits they are sometimes called. For we have no shortage of land that could be built upon, only a shortage of those chittys allowing the housing to be built. In fact, we're not even seeing rising house prices. We're really seeing a rise in the scarcity value of the chittys. Which, since they're created at the stroke of a bureaucrat's pen would seem to be a fairly easy thing to make more of.

And yes, nef still stands for not economics frankly.

The eurozone is in dire need of nominal income targeting

It may well be that, in the US and UK, nominal GDP is growing in line with long-term market expectations.* It may well be that, though we will not bring aggregate demand back to its pre-recession trend, most of the big costs of this policy have been paid. And so it may be that my pet policy: nominal income/GDP targeting, is only a small improvement over the current framework here in the UK or in the US. But there is one place that direly needs my medicine. As a whole, the Eurozone is currently seeing very low inflation, but plenty of periphery countries are already suffering from deflation. And this is not the Good Deflation of productivity improvements (can be identified because it comes at the same time as real output growth) but the Bad Deflation of demand dislocation. The European Central Bank could deal with a lot of these problems simply by adopting a nominal GDP target.

When it comes to macroeconomics, the best analysis we really have is complicated econometric models on the one side, and highly stylised theoretical models on the other. Both are useful, and both can tell us something, but they rely on suspending quite a substantial amount of disbelief and making a lot of simplifying assumptions. You lose a lot of people on the way to a detailed theoretical argument, while the empirical evidence we have is really insufficient to conclusively answer the sort of questions I'm posing.

In general, I think that very complex models help us make sense of detailed specifics, but that "workhorse" basic theoretical models can essentially tell us what's going on here. Unemployment is a real variable, not one directly controlled by a central bank, and a bad thing for the central bank to target. But in the absence of major changes in exogenous productivity, labour regulation, cultural norms around labour, migration and so on, there is a pretty strong relationship between aggregate demand and unemployment. Demand dislocation is almost always the reason for short-run employment fluctuations.

Unemployment rose everywhere in 2008-9. But it nudged down only marginally post-crisis in the Eurozone, whereas in the UK and US it soon began to steadily fall toward its pre-crisis rate (the red line, though not on this graph, has tracked the green one very closely). In the meantime the Eurozone rate has risen up to 12%. This is not at all surprising, given the almost complete flattening off of aggregate demand in the Eurozone—this means a constantly-widening gap with the pre-recession trend (something like 20% below it now).

Although intuitively we'd expect expectations to steadily adjust to the new likely schedule, three factors mean this takes a while: firstly the ECB is very unclear about what it is going to do (and perhaps unsure itself), secondly some plans are set over long horizons, and thirdly the lacklustre central-bank response to the 2007-8 financial crisis is unprecedented in the post-war period.

1. We have a huge literature on the costs of policy uncertainty—the variance of expected outcomes has an effect on firms' willingness to hire, invest, produce, independent of the mean expected outcome.

2. Many firms invest over long horizons. It may have become clear at some point in 2011, when the ECB raised interest rates despite the ongoing stagnation and weak recovery, that the macro planners, in their wisdom, were aiming for a lower overall growth path and perhaps a lower overall growth rate in nominal variables. And so, after 2011 firm plans started to adjust to this new reality. But many plans will have been predicated on an entirely different 2009, 2010, 2011, 2012, 2013, 2014, and so on. And as mentioned before, the gulf between what was expected for the mid-2010s back in 2007 and what actually happened is actually widening.

3. Thirdly, and finally, the period 2008-2010 is unprecedented and will have slowed down firm adjustment substantially. As mentioned above, even if firms set plans with a fairly short-term horizon (a few years) they wouldn't have been able to adjust to the new normal in 2008, 2009 and 2010 unless they really expected the ECB's policy of not only not returning to trend level, but not even return to trend rate!

All of these three issues are convincingly resolved by nominal income targeting. It's very certain—indeed the best version would have some sort of very-hard-to-stop computer doing it. It promises to keep up to trend. And it is very stable over long horizons.

Recent evidence reinforces the view, implicit in our models, that (unconventional) monetary policy is highly effective at the zero lower bound, even through the real interest rate channel (!) All the ECB needs to do is announce a nominal income target.

*This reminds me: isn't it about time we had an NGDP futures market so we could make claims here with any kind of confidence?

Something Michelle Obama really ought to know

Michelle Obama is on a campaign to reduce obesity in the US. And given her background in the health care insurance industry there's something that she really ought to know which she apparently does not:

And this isn’t just about our children’s health; it’s about the health of our economy as well. We already spend an estimated $190 billion a year treating obesity-related conditions. Just think about what those numbers will look like in a decade or two if we don’t start solving this problem now.

The thing she ought to know being that the more grossly flaccid lardbuckets there are the lower the total health care bill will be. For we discussed back here the point that lifetime health care costs for smokers, boozers and those with rolls of sweaty flesh dripping from them are lower than those for the supposedly healthy who live longer lives.

The researchers found that from age 20 to 56, obese people racked up the most expensive health costs. But because both the smokers and the obese people died sooner than the healthy group, it cost less to treat them in the long run.......Ultimately, the thin and healthy group cost the most, about $417,000, from age 20 on. The cost of care for obese people was $371,000, and for smokers, about $326,000.

There are all sorts of reasons why we might be happy for government to encourage this healthy eating. People might really be too dim to understand the private costs of it all. It might give an unelected busybody something to do with her life. But given that obesity does not increase health care costs we cannot justify fighting obesity by claiming that doing so will bring health care costs down. For it simply ain't true.

The business of business is business

It used to be that Governors of the Bank of England expressed their views rarely and elliptically, in an effort not to disturb the markets, which hung on their every word and every nuance. The new Governor, Mark Carney, seems to be trying to achieve the same results by the opposite methods. He speaks so often, and so bluntly in his direct Canadian style, on so many different issues that the markets haven't the faintest idea which direction they ought to be going in.

The latest is particularly unusual for a Governor. Carney has entered the political debate on equality, citing "disturbing evidence" of declining social mobility in advanced economies, and urging "a basic social contract comprised of relative equality of outcomes; equality of opportunity' and fairness". Nowhere is the need to be fair and trusted more acute than in the financial markets, he said.

This is worrying. It is a fair point that if people do not regard their bankers – and other suppliers – as trustworthy, that is bad for business all round. The market system relies on fair dealing and trust. But quite what social outcome the market system does or should produce is a matter for politicians rather than central bankers. (Well actually, as Hayek shows us, the outcome should not really be a matter for politicians either, but it sure as eggs is not the right subject for central bankers to opine on.)

It is worrying to in that the Bank of England regulates the commercial banks, what message is it sending to them? The suggestion that banks and bankers have some kind of obligation to promote "relative equality of outcomes" seems at odds with the Bank's other instructions that they should strengthen their balance sheets and be prudent and businesslike in their operations. Banks, after all, cannot escape risks. So yes, they should lend wisely. Yes, they should borrow prudently. Yes, certainly, they should comply with the law. And they should adhere to ethical standards – keeping their word, not lying to customers or misleading them, being sensitive to the interests of clients and making sure that those interests prevail.

But is it the proper role of any business to promote any particular social objective? Professor Norman Barry, in his Adam Smith Institute paper of many years ago, Respectable Trade, pointed out that in a properly competitive market, firms would have no cash spare to spend on such agendas, if they had no direct effect on their business. In banking, though, the situation is even trickier, because of the world of risk in which they live. Should banks promote particular social object, regardless of the extra risk that involves? The risk of not borrowing quite so prudently nor lending quite so wisely? That, after all, is what got us into the mess of 2007-08. Coerced by their regulators, American banks started lending to homeowners who could not afford the loans. While in the UK the former building societies, spurred on by politicians for reasons of 'regional policy', got quickly out of their depth with some very bad borrowing.

The business of business is business, not civics. Civics is the business of politicians. And something that central bankers should probably steer well clear of.

This is a terrible idea for local authority pensions

It was Ben Bernanke who pointed out that the major use of eonomics is to shoot down 90% of the proposals that are made for public policy. This is one of those 90% times with this remarkably silly proposal for how local authority pension funds should be invested:

This makes no sense, according to Birmingham city councillor, John Clancy. He has just published a book, The Secret Wealth Garden, in which he calls for three major reforms of the current system. Firstly, he calls for management fees to be capped at an initial 0.02% of the fund's value. This, he says, would still give fund managers a tidy £43m in fees annually. Secondly, he says funds should be de-risked through an amendment to the Local Government Investment Regulations to require a shift away from equities (particularly overseas equiuties) together with a minimum holding in regional and local investment bonds. This, he says, could provide up to £20bn a year for investment in infrastructure and house building.

Capping fees, well, meh. However, the other two proposals are entirely nonsense.

The point and purpose of pensions savings is to diversify away from the risks that are inherent in having your income coming from only one or two places. Therefore you absolutely do not want to invest your pensions savings in the same economy that you inhabit. For example, unless you're getting a very good matching scheme from your employer investing your pensions savings in the shares of said employer is very much a thing not to do. The same will be true of the local authority pensions savings in the economy of that local area. Imagine that the area enters some horrible near terminal decline? There are, after all, areas of every country that are simply losing population, closing down as an economy. You simply don't want to have the pensions of those in that area reliant upon investments in said area.

So the local investment portion of this idea goes against the very grain of what we're trying to achieve with a pension, a diversification of risk. And who, no seriously, who, would advocate investment in bonds for the long term? When the price of money, the coupons on bonds, have been below the inflation rate for half a decade already? It's nonsense.

Tax Freedom Day has finally come!

Yippee! Wednesday 28 May is Tax Freedom Day. Groan! The average person in Britain has to work 147 days of the year solely to pay taxes. Only then do we start earning for ourselves.

This year Tax Freedom Day falls three days earlier than in 2013. But we still labour nearly five months solid just to meet the Treasury’s demands. Even then, the government borrows another £1 for every £5 it collects in tax – borrowing which future taxpayers will have to repay. Add that in and the total Cost of Government Day does not arrive until 26 June!

The deductions on your payslip show only a small part of your total tax burden. Your employer pays the bulk of your national insurance, and when you start spending your pay you will find yourself paying value added tax and various other levies on alcohol, tobacco, cars, fuel and much else.

A billion here, a billion there all adds up. The Treasury hates Tax Freedom Day precisely because it shows the bottom line so clearly. They try to conceal the take by cooking up stealth taxes or by making the tax rules so complex that nobody can work out what they are really paying. And that has made the UK’s tax code one of the longest and clumsiest in the world.

But we should be told what we are paying. Only then can we see whether we are getting good value for money from our government apparatus. (Do you have to ask, though? That apparatus has grown in size by about a half since Gordon Brown became Chancellor in 1997. Are we really getting half as much benefit again?)

High spending and high taxes stifle economic growth. There is even a graph which economists use to illustrate that point, called the Rahn Curve. A bit of public expenditure seems to help growth – basic infrastructure, policing, defencd and justice have a cost. But when government spending tips over 40% of GDP, growth tends to slow. And we are well past that tipping point.

The message of Tax Freedom Day is simple. We are paying much more tax than we imagine. The lesson for politicians and tax authorities is to accept that, and to reduce and simplify Britain’s taxes.

The history of tax freedom day

Fifty years ago, Tax Freedom Day fell over a month earlier (23 April) than it does now. When England won the World Cup in 1966, it was still only 2 May. Then in the late 1960s, under Harold Wilson's Labour administration, the date moved much later, ending up at 26 May in 1970. The incoming Conservative government of Edward Heath government managed to bring it a little earlier, but before long it moved later again, hitting 2 June in 1975.

Over the next decade, Tax Freedom Day generally moved later, reaching a peak of 12 June in 1983 – reflecting Margaret Thatcher's desperate efforts to balance the government's books, even during a recession. During the rest of her term of office, she brought Tax Freedom Day earlier and earlier in May.

In the late 1990s, when Gordon Brown's expansionary agenda started to bite, Tax Freedom Day moved back into June again. It could have been a lot later, but Brown's massive borrowing enabled him to continue spending without raising the apparent tax burden still further.

Despite the financial crisis and a change of government, the date has remained stuck at the end of May for most of the last twelve years.

The big changes

1973-1974: The massive jump of 16 days was due to the sudden and very high inflation that resulted from the 'Barber Boom'. This pushed many earners into higher tax brackets (fiscal drag), and National Insurance receipts rose as nominal incomes rose too.

1979-81: The even bigger 20-day jump reflects the 1979 'austerity' budget which increased VAT (to 15%) and other taxes. Recession also reduced earnings, leaving the tax burden a higher proportion of the national income. A rising pound slowed export earnings, while another tough Budget increased tax revenues from income and wealth.

1997-2001: Most of this 9-day jump is down to Gordon Brown's first Budget in 1997, which introduced a windfall tax on utilities, changes in advance corporation tax, fuel duty rises, and the end of mortgage interest relief, producing a massive rise in tax revenues.