Jeremy, you can't pay for anything out of a tax rate rise which doesn't increase revenue

It always comes as a shock to a certain type of person to find out that the Laffer Curve is actually true. No, we do not mean the caricature of it, that all tax cuts pay for themselves, but the actual contention itself. That there are tax rates above which revenue collected falls, not rises. What that rate is depends upon the economy which is being taxed, the tax being discussed and so on. That Laffer Curve peak for, say, cigarette taxation is going to be different than that for income taxes for example.

But that basic contention really is true. And thus the mistake being made by Jeremy Corbyn:

Jeremy Corbyn would fund pay rises for public sector workers partly through a 1% rise in corporation tax and bringing back the 50p top rate of tax, the party has said.

We don't approve of the basic idea here but we do understand it. This is merely politics - I'll take money off those nasty people over there to give to you, my dear voters. That is mere politics - the bribery of sufficient people to get elected.

However, we do still have that Laffer point. The best evidence we have is that the peak of the Curve, for the UK and for income taxes, is lower than that 50 pence or 50% rate. Yes, there's all sorts of exciting shouting matches over income shifting and so on as to what really happened when we had and then did not have said rate but our reading of it is that 50% is too high. 

We've also that Diamond and Saez paper in the US which said that, where there are allowances,  the peak rate is 54%. One such allowance which the UK has is the ability to become non-resident, an option not available in the US. Further, that 54% is "taxes upon income", not "income tax", meaning that we must add employers NI to our income tax rate to reach that 54%.

Both theory and empirical evidence seem to indicate that 50% in income tax is above our Curve peak. Meaning, of course, that raising the tax rate to that level will not increase revenue with which to bribe Corbynista voters.

At which point there's no reason to do it, is there?

People are still getting this climate change thing wrong

The latest screeches about how we're all going to boil in the remains of the last ice floe:

Leading climate scientists have warned that the Earth is perilously close to breaking through a 1.5C upper limit for global warming, only eight months after the target was set.

The decision to try to limit warming to 1.5C, measured in relation to pre-industrial temperatures, was the headline outcome of the Paris climate negotiations last December. The talks were hailed as a major success by scientists and campaigners, who claimed that, by setting the target, desertification, heatwaves, widespread flooding and other global warming impacts could be avoided.

All the way through the entire discussion the economists have been pointing out that we do not want to set a temperature target. We want a cost benefit target. What will be the costs of whatever action we take as against the benefits our actions will create? And we should only be incurring such costs up to the point that they equal the benefits gained. The 1.5 oC target does not achieve this therefore it is the wrong target:

Keeping within the 1.5C limit will be extremely difficult, say scientists, given these rises.

These alarming figures will form the backdrop to the Intergovernmental Panel on Climate Change talks in Geneva this month, when scientists will start to outline ways to implement the climate goals set in Paris. Dates for abandoning all coal-burning power stations and halting the use of combustion engines across the globe – possibly within 15 years – are likely to be set.

Just not going to happen, is it? And more than that, getting rid, entirely, of the internal combustion engine within 15 years is going to cost vastly more than any benefit it might bring.

The problem was made particularly severe because moving too quickly to cut emissions could be also be harmful, added Field. “If we shut down fossil fuel plants tomorrow – before we have established renewable alternatives – we can limit emissions and global warming, but people would suffer. There would be insufficient power for the planet. There is an upper limit to the rate at which we can move to a carbon-free future.”

Yes, rather the point we've been making all these years. Also a point made, quite vehemently, in the Stern Review itself. We should only do as much as costs less than the benefits the actions bring.

Our own opinion here is that people aren't in fact being serious about this in the slightest:

“Some negative emission technology will inevitably have to be part of the picture if you are going to keep 1.5C as your limit,” said Professor Jim Skea, a member of the UK government’s committee on climate change. “There will always be some human activities that put carbon into the atmosphere and they will have to be compensated for by negative emission technology.”

But what form that technology takes is unclear. Several techniques have been proposed. One includes spreading crushed silicate rocks, which absorb carbon dioxide, over vast tracts of land. Another involves seeding oceans with iron to increase their uptake of carbon dioxide. Most are considered unworkable at present – with the exception of bioenergy with carbon capture and storage.

No, really, we insist that people are not taking this whole thing seriously at all. For we have spoken directly with the people who investigated seeding the oceans with iron. It works, there's no doubt at all that it works. It's also startlingly cheap. It's not a complete solution but it's an entirely viable one. It's also one that it's illegal to carry out, even illegal to do further testing upon it.

On the day that first ship laden with ferrous sulphate sails for the Southern Ocean we'll agree that people are taking this all seriously. And that is about the level of effort required. Fleets are not, a couple of ships might be. The raw material is a waste from other processes and is thus free. Distribution is no more than a burly bloke shoveling it over the side. Our best information so far is that this will sequester up to 1 billion tonnes CO2 a year. About the current output of two Britains.

We do actually know how to sequester CO2. But we're not doing it and not even planning to do so. People just aren't taking this seriously, are they?

This is nuts

That there are iniquities and inequities in our society seems to us to be a statement of the obvious. Further, that we might well like to sort through them, consider them and decide which we might like to try to solve. If a solution is possible at all of course.

This does not mean that every iniquity does in fact have a solution:

People suffering from mental health problems such as depression and panic attacks earn up to 42% less than their peers, prompting the government’s equalities watchdog to brand the pay gap “a disgrace”.

Quite why is is a disgrace is something left unsaid. Ill health of any form can and often does lead to a reduced income. It is not true, as some like to try and insist, that all health inequality is caused by economic such, it is true that at least some economic inequality is caused by the random chances of health inequality.

That this applies to mental health as well as physical is hardly a surprise.

“We must do more to tackle the injustice in our society of this mental health pay gap,” said David Isaac, EHRC chair. The figures revealed “the hidden disgrace of British society’s pay gap for men and women living with depression and panic attacks”, he added. 

We're not even sure that anything can be done about this. But worryingly the analysis is worse than this, much worse:

Commission analysis of men who suffer from mental impairment, including learning difficulties and mental health problems, has concluded that they are more likely to earn less as a result of working part-time, being in low-paid jobs or having few educational qualifications. Notwithstanding that, however, “there is still a large and unexplained gap and the impact of discrimination and stigmatisation as underlying factors should not be underestimated”.

To be crude about this the complaint is that some stupid people don't get much education and thus don't get nice jobs. This is not, we think, a savage injustice calling out to the very heavens for restitution.

We do think it might be a bored bureaucracy looking around for something to do with its time and budget.

But for an expression of true madness try this:

Emma Mamo, head of workplace wellbeing at the mental health charity Mind, said: “Fortunately, employer attitudes towards recruiting and supporting people with mental health problems are improving, with many employers now putting in place measures to support staff wellbeing.

“It’s unacceptable that people with mental health problems earn less than those without mental health problems.“Staff who have a mental health problem can and do make a valuable contribution to the workplace,”

It is most certainly true that certain mental health problems reduce the ability of the worker to produce value for their employer. Thus they get paid less.

We're about to get a campaign calling for equal pay for the ill. And that's just nuts.

Piketty is interesting, yes, but is he right?

That Thomas Piketty's book about wealth and capital is interesting is entirely true. And the world that it describes is perhaps one that we might not like all that much. But we do recall Paul Krugman saying how great a work it is but that it doesn't quite seem to describe this particular world that we inhabit. Certainly, the American economy does not run on inherited capital. Further, the large rise in capital and wealth in both the US and UK economies in recent decades is based upon pensions and housing - not great concentrations of capital at all.

So, interesting, possibly even shocking, but is it true?

Thomas Piketty's Capital in the Twenty-First Century puts forth a logically consistent explanation for changes in income and wealth inequality patterns. However, while rich in data, the book provides no formal empirical testing for its theoretical causal chain. In this paper, I build a set of Panel SVAR models to check if inequality and capital share in the national income move up as the r-g gap grows. Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g.

That's from the IMF. It appears that, whichever world Piketty is describing it's not this one.


This really is idiocy, yes, we're afraid it is

We feel a little let down here. Not quite sure why we did but we expected better than this from The Times. We also expected better than this from a science correspondent. So, a double disappointment from Oliver Moody:

If those arguments sound in some way sentimental, consider food security. At present the UK produces 62 per cent of what it consumes. Agricultural tariffs tend to be among the more punitive terms levied in trade deals and the EU is not likely to be forgiving if we lose access to the single market. Prices will rise and if we lose the capacity to grow a wide range of our own food we will be horribly vulnerable to the whims of the international markets.

The assumption being made there is that if the EU imposes agricultural tariffs upon Britain then this will make food more expensive in Britain. This is nonsense, that upon stilts kind of nonsense too.

Once we Brexit the EU will be in charge of whatever tariffs they decide to impose upon British exports to that fair continent. They might well set them at the same levels that they charge to other countries. That then makes British food more expensive on that fair continent. The effect on the price of British food in Britain is to lower it a little. For, presumably, facing high tariff barriers less will be exported and thus more will be available for domestic consumption.

The error underlying Moody's confusion is the assumption that the EU will determine what the tariffs will be on fair food from the continent arriving in Britain. That's nonsense - whatever our import tariffs will be will be something that we decide. And given that we like food from the continent why would we add, add ourselves that is, to the price we must pay for it? Quite, we won't.

Finally, being free of the EU's farm tariff barriers will mean that we can import lovely food from other parts of the globe. New Zealand is known to offer butter and lamb at reasonable prices for example.....

The argument that leaving the European Union will make food more expensive is nonsense, nonsense upon such stilts that it is idiocy we're afraid.

Polly's car crash of an argument

Polly Toynbee decides to take on the iniquities of the HGV industry:

The economic orthodoxy says a labour shortage should lead to a pay rise until people are enticed into vacant jobs – but that doesn’t happen as industries conspire to keep pay low, despite the shortages.

That's actually a significant charge - cartels in hiring are highly illegal. Under current rules a company found to be taking part in such can be fined 10% of turnover if found guilty. We also have a system whereby the whistleblower doesn't get fined and everyone else does - an adaptation of the insights of the Prisoner's Dilemma to the real world.

Given the seriousness of the charge we do really rather hope that Polly has the evidence to back up the allegation. 

However, that's not the car crash aspect to her argument. This is:

The story of road haulage is mirrored time and again in British industry, with employers failing to work collaboratively, unions too weak to force good pay and conditions, and no government intervention.

Companies collaborating is bad but companies must collaborate. 

We do rather wonder whether Polly reads her own work.

Julian Baggini's really not understanding Tax Freedom Day

Over at The Guardian Julian Baggini has an attempt at denouncing our favoured little concept of Tax Freedom Day. As ever with economic logic in The Guardian the wheels rather come off his argument. For he makes the incorrect conceptual leap from insisting that the things government provides are just great to the insistence that therefore tax is great. Nope, no, and really, just no. 

It is impossible to get either accounting or economics correct if you fail to distinguish between a cost and a benefit. Thus we must indeed distinguish between costs and benefits:

No one is celebrating such a social solidarity day yet. However, for several years the Adam Smith Institute and the Taxpayers Alliance have been advocating something they call tax freedom day, which fell this year on 3 June. They tout this as “the first day of the year that you start earning money for yourself”, since on average all we earn for 154 days of the year we pay in taxes.

Social solidarity day and tax freedom day are of course two ways of looking at exactly the same objective phenomenon: that on average, 154 calender days earnings are taxed. The meaning of this fact, however, is changed by how we frame it. For economic libertarians, taxation is a deprivation of what is ours by natural right. For those who favour a welfare state, taxation is (or at least should be) a fair payment towards a well-functioning, just society that protects the weak as well as the strong.

Tax freedom day has been an effective rhetorical tool for advancing the tax-as-theft worldview. It is now as politically difficult to speak positively of tax as it is easy to praise the things we spend these taxes on, as though we can be in favour of the NHS while being against what funds it.

We're sure that there will be disagreements between Mr. Baggini and ourselves on what are the lovely parts of government and what aren't the lovely parts of government. Even on how we might gain more of the lovely parts without having to put up with the rest of the dross.

But it is still absolutely essential to insist upon that distinction. The benefits of government are indeed a benefit. Tax is the cost we must pay to gain those benefits. Tax is not, in and of itself, a benefit - it's on the other side of our calculation, the other page in the ledger.

We could, of course, just dismiss this as a matter of emphasis, possibly as each side deploying the appropriate rhetoric to support their favoured argument. But sadly this is very much more important than that. We do in fact want the maximum of those good things from collective spending while doing the minimum of that tax raising to fund collective endeavours. Thus we want to minimise the tax bill for whatever it is that we are getting.

Yes, this includes everything - whether you favour military spending, the NHS, education, whatever, we still want to get the maximum bang for our buck, the most people cured for the least money, the most snotnoses taught to reed n'rite for the least picked from our wallets. That is, it is only by viewing tax as a cost that we can possibly hope to gain any efficiency in the manner in which it is spent.

Rather than Baggini's view, which seems to be that the more money we burn as votive offerings to the State the more we will be demonstrating our reverence for said state. At which point we do have to point out that we are Enlightenment liberals, who do believe in the separation of Church and State - whether that means organised God type religion or the religion of the State itself. 


The joy of Paul Mason's economics

We've pointed to the glee with which we welcome Paul Mason's contributions to economic understanding before. Not, as you know, considering him as a guide to reality, but rather as if he were the poster child in one of those "before and after" ads. Mason's views forming the before picture, before any study of any real actual economics has taken place.

A glorious example is this piece of his. Where he's wondering whether the current events are a re-run of the 1930s. Well, where people use the bad policies of the 1930s, say Venezuela, then yes, perhaps it is. Where people use policies that worked from the 1930's then again, it's a replay, but not in a bad manner.

We are, for example, reminded by the consistent cries for more infrastructure spending of Hitler's reaction to the problems of the early 1930s. Which was to splash out on that infrastructure like the autobahns. Which most certainly boosted employment and so on, but it's also true that the Nazi state would have been bankrupt by 1941 (Goetz Aly's "Hitler's Beneficiarie" is very clear on this) and thus war and plunder as a solution.

But that is only an example of 30s policy, Mason mentions another one:

On the face of it, the similarities are real. Britain’s vote to leave the EU parallels its panicked decision to quit the gold standard in September 1931 – the first major country to quit the global economic system.

The joy there is that quitting the gold standard worked. Worked very well in fact. For it led to a 25% decline in the exchange rate, a very large stimulus to the domestic economy. This was combined with a cut in government spending - that is, with fiscal contraction. The combination of the two (the exchange rate stimulus being larger than the fiscal contraction for those keeping Keynesian score at home) was overall expansionary and Britain's Depression troubles were largely over in 18 months. To be followed by rather a boom as an unconstrained housing industry, untrammeled by limitations on planning permissions, went onto produce 300,000 houses a year in places that people actually wanted to live - and which they could also afford.

We're really not sure about everyone else but we think that's a pretty good outcome. Why, we might even recommend it today. The pounds was indeed allowed to crop by that 25%, we've had loose monetary policy and Osborne was promising fiscal austerity. That is, Britain's 1930s experience was that fiscally expansionary austerity was not only possible it actually worked. And if we blow up the Town and Country Planning Act 1947 and successors would work even better.

But that's rather more about out ideas than Mason's. The point we want to make about his ideas is that he seems unaware that the actions he is worrying about actually worked. And it would be useful if, as an economic prognosticator, one knew which ideas did actually work and which didn't. Expansionary fiscal austerity does, socialism does not perhaps? 

Matt Ridley is wrong: progress is all about predicting the future

I’m a huge fan of Matt Ridley’s work, but his most recent column on experts struck me as being a little off-base. 

You’re better off ignoring ‘expert’ predictions about the future, he says, pointing to so-called experts’ failed predictions about the FTSE dropping after the Brexit vote, and bad (sometimes terrible) forecasts by the Met Office.

In contrast, there are the plumbers, doctors and mechanics we rely on regularly:

There are no experts on the future. Explaining the present and the past requires expertise: ‘it’s your carburettor/prostate’. In forecasting the future, experts are generally no better than everybody else. They might be worse.

But a plumber or a doctor is an expert on the future. I don’t hire plumbers to tell me why I got a leak, I hire the ones who can correctly predict which pipe they need to replace to stop it from leaking in the future. 

Doctors who blamed miasma for plagues were explaining the present and past. The ones who figured out how to stop plagues in the future were the ones we actually needed. 

You can fit any number of theories on past experiences. The useful theory is the one that can predict new experiences.

Consider Feynman on the scientific method:

First we guess a new law. (“Don’t laugh, that’s really true!”) Then we compute the consequences of the guess to see what that guess would imply. Then we compare those results to nature, experiments or experience. If it disagrees with our experiments, it’s wrong. If it cannot predict what we observe, it’s false.

Without predictions, in other words, we’re not doing science at all. 

In Trial & Error, Madsen points out that theories that successfully predict events in this way cannot be said to be true, but they are useful. They allow us to shape the universe in a way that is more to our liking. 

Matt is a little unfair to the Met Office. It’s not confusing to say that weather forecasts are “based on probabilities”, nor is it untestable. If they predict an 80% chance of rain and four times out of five it rains, that looks like a useful method. If it only rains two times out of five, it looks like a useless method – one that is systematically wrong. 

If I say that you have a five-in-six chance of rolling between 1 and 5 on a single roll of a die, rolling a six does not make me a bad forecaster. The examples he gives of bad forecasts are a little like that. Overall, the Met Office does well at short-term forecasts. Our inability to rigorously test its climate models are cause to be sceptical about those models, as Rupert Darwall points out. They don’t mean we should throw our hands up and accept that all predictions, everywhere, are worthless.

Matt mentions the fascinating “superforecasters” project, made up of people who consistently beat the odds in predicting geopolitical events. They are more foxes than hedgehogs, willing to adapt their models to new information rather than sticking to the same one come what may. But their existence rather blows a hole in his basic claim, which is that complexity renders predictions useless. People seem to just need to change their methods.

Similarly, if consistently accurate predictions are impossible, then stock markets and bookies should be easy to consistently beat. Since it is actually very difficult to beat the market or the betting odds repeatedly, it seems as if these are quite good at predicting things.

And while it’s true that there’s an awful lot we can never know in economics, we can and do make accurate predictions about it quite a lot too. Impose a tax on something and with some exceptions you’ll usually get less of it. Put price floors on something and you’ll get too much of it; put price ceilings in and you’ll get too little. 

It’s impossible to make a policy argument without a prediction like this. If we didn’t have good, reliable predictions that communism ruins everything, the case against communism would be weaker. How could we possibly say that one policy or another is bad without implicitly predicting that, if implemented, it would be likely to go badly?

I think what Matt is really against is bad predictions based on false ideas. And there is no shortage of these, nor of experts willing to peddle them to an unsuspecting public. But they are often easy to spot precisely because their predictions are so bad. Put Seumas Milne in charge of the Treasury and I wager that I can make a good prediction about the state of the economy in a few years’ time.

Identifying these bad predictions and their advocates is what we should be doing, not denying that anyone can make predictions at all. That’s why we should ask people to write clearly, to be precise about their claims, and to admit it when they’re wrong. (They’ll definitely tell us when they’re right.)

I’m biased, of course. We at the ASI love to make predictions: we think the world is getting better, that technology is advancing (we even have a few ideas about how), and that making people freer makes their lives better. We’re just as frustrated as Matt is about phoney “experts” and their predictions. But without useful predictions, tested against reality, we wouldn’t have a leg to stand on.

How free trade helps the UK's poorest

Much has been made of a trend of low income voters, the so-called "left behind", turning their backs on free trade, and instead supporting anti-trade politicians like Trump and Le Pen. 

One solution, typically advocated by the left (but also by those with more centrist tendencies) is to simply redistribute some of the gains of trade to those who've lost out (i.e. workers in Port Talbot). But the problem is that the gains of trade already go to those least well-off. 

A paper in the most recent Quarterly Journal of Economics by Fajgelbaum and Khandelwal shows why. The least-well off typically spend a much greater share of their income in traded sectors than rich folk. Think cheaper imported food in ASDA and cheaper imported clothes in Primark. The rich on the other hand, will typically spend more on services that are much more difficult to trade internationally. 

So what is causing the backlash against free trade? Everyone's favourite textbook writer Greg Mankiw has a piece in the New York Times arguing that it's not economic self-interest but culture that's driving opposition to globalisation.

Referring to a study by Mansfield and Mutz, he writes:

For an economist, one natural hypothesis to entertain is that people’s attitudes toward globalization are based on their self-interest. That is because textbook economic theory says that openness to international trade increases a nation’s overall prosperity, but it also says that some people gain and others lose. Even if the gains exceed the losses over all, those who get the short end of the stick may still object.

Yet Mr. Mansfield and Ms. Mutz reject this theory of voter attitude. If people were just looking out for themselves, their view of globalization would be determined by the industry in which they worked. Those in industries with a high concentration of exports should be favorable to an open economy, while those in industries that have to compete with imports should be opposed. In actuality, however, people’s attitudes about free trade and offshore outsourcing are unrelated to the characteristics of the industry in which they are employed.

Mankiw lists three belief that Mansfield and Mutz suggest are more predictive of opposition to free trade; isolationism, nationalism and ethnocentrism. It's not increased redistribution, but addressing these cultural concerns that'll ultimately matter, if sense is to prevail on free trade.