Poland Spring and the perils of the regulatory state

Some things do indeed need regulating--others can be regulated but should not be. The difficulty of course is in deciding which must be and which should not be. A general rule of thumb coming from game theory.

We humans are pretty good at dealing with all those things like the prisoners' dilemma if they come in games of multiple iterations. The ultimatum game, for example, the explanation of why people will punish "unfair" distributions, comes from the manner in which life itself is indeed a series of multiple interactions. Perhaps these days with different people, but in the core of what created humans with the same small group over the years. That is, we train people to be fair through punishing them when they are not--a process that only works if we're with those multiple iterations.  

From this we can extract our rules about regulation. Where the decision to purchase, say, is something done multiple times with many choices we can leave regulation to the market. Flavours of toothpaste for example, we do not need to define what such may be made. Consumer pressure will regulate matters just fine. Something which is done once or twice in a lifetime, the purchase of a pension, or a mortgage, will probably require more oversight.

At which point the claims against Poland Spring water:

Eleven consumers filed a class action lawsuit this week against Nestlé Waters North America, Inc., alleging the company's Poland Spring Bottled Water is "a colossal fraud."

...

The group argues Poland Spring water has been "a colossal fraud perpetuated against American consumers" since it was first bottled in 1993. They claim that "not one drop" of the water complies with the Food and Drug Administration's definition of what constitutes spring water, and instead is ground water.

No, we don't know either. But we do have the regulation of what is spring water, the one that must be met:

The name of water derived from an underground formation from which water flows naturally to the surface of the earth may be “spring water.” Spring water shall be collected only at the spring or through a bore hole tapping the underground formation feeding the spring. There shall be a natural force causing the water to flow to the surface through a natural orifice. The location of the spring shall be identified. Spring water collected with the use of an external force shall be from the same underground stratum as the spring, as shown by a measurable hydraulic connection using a hydrogeologically valid method between the bore hole and the natural spring, and shall have all the physical properties, before treatment, and be of the same composition and quality, as the water that flows naturally to the surface of the earth. If spring water is collected with the use of an external force, water must continue to flow naturally to the surface of the earth through the spring's natural orifice. Plants shall demonstrate, on request, to appropriate regulatory officials, using a hydrogeologically valid method, that an appropriate hydraulic connection exists between the natural orifice of the spring and the bore hole.

We would assume that since these are the regulations then Nestle meets them although obviously, given the suit, perhaps not. Our point though would be that this isn't something that requires such regulation. Bottled water is a many times purchase, something that can thus be left to consumer pressure to regulate.

It's water. In a bottle. Want some?

That would seem to cover it for us.

No, we simply do not believe this scare story, sorry Polly

More normally Polly Toynbee tells us that we should just put up with the fact that the NHS won't treat everything, won't buy every possible medicine and cure. On the grounds that every health care system does ration and that yes, rationing by price is the sensible way to do this. Those treatments which gain more quality life years per pound should be funded over those which gain fewer, that's how we maximise the effect of the scarce resources available for health care.

Sadly, Polly seems not to have the courage of her convictions as she presents this scare story to us:

Little by little services vanish. Prof Azeem Majeed, head of primary care and public health at Imperial College and a Lambeth GP, has just blown the whistle in the British Medical Journal on the latest withdrawal of a service: many clinical commissioning groups (CCGs), including his own, are banning GPs from prescribing anything that can be bought over the counter. Bristol, Lincolnshire, Dudley, Telford and Essex are among many others issuing the same edict.

At first glance it makes sense not to prescribe what most people can get for themselves, until you consider poorer patients who can’t afford the 22 drugs now banned for prescribing.

Well, yes, it does make sense that the NHS not try to provide those things which are easily available elsewhere. As with that Scottish nonsense of a Government Tampon Distribution Service, it's a grossly expensive method of doing something which can be done very much more cheaply in another manner.

And now consider what is being complained about:

Majeed says “Low-income families often can’t afford ibuprofen, or gluten-free products for coeliac disease sufferers. A single mother on low pay with two children can’t afford the £10 it would cost for nit treatment.” 

We don't know about nit treatment but gluten free? As the BMJ itself has pointed out:

On the other hand, James Cave, a general practitioner, argues that “it’s ludicrous for the NHS to be treating a food product as a drug and to require GPs and pharmacists to behave as grocers.” He says the “complex rules” imposed by the NHS governing what can be prescribed and how often are stressful for people with coeliac disease and their GPs. “It’s a time-consuming rigmarole and, for the NHS, a very expensive one,” he argues. “The eight basic gluten-free staples advised for people with coeliac disease are all cheaper from a supermarket than the NHS price,” he explains. “This is a scandal.”

The NHS pays up to £6.73 for 500g of pasta, yet 500g of gluten free pasta will cost £1.20 at a supermarket. Additionally, there is a dispensing fee which is charged on top of all prescriptions. “If we stopped prescribing gluten-free products tomorrow GPs would shout for joy and the NHS would stop being ripped off,” he says.

NHS distribution of such things is a method of wasting scarce resources, nothing more. And as to the ibuprofen, Boots Online will sell you 16 200 mg tablets of the stuff for 35 p. Yes, 35 pennies, less than the cost of a packet of crisps these days. This is not something which needs the might of the state to distribute in an efficient manner.

Sorry, we just don't believe you Polly, just don't believe you.

A different way of thinking about Net Neutrality

"Net Neutrality" is the idea that internet service providers (ISPs) should not be able to prioritise some traffic over others even if they are willing to pay more. For example, Netflix cannot be charged more for its highly-demanded content than, say, BBC4. Or, looked at another way, people who watch a lot of Netflix cannot be charged more for the additional network congestion that creates than people who watch one programme a month.

ISPs can and do charge for total data downloaded – Net Neutrality refers to the bandwidth a particular provider and consumer use. With Net Neutrality, ISPs would not be allowed to create special 'fast lanes' for content like Netflix that users or Netflix itself could pay more for, with cheaper 'slow lanes' for content that is less bandwidth- and speed-sensitive (like this humble website).  

Many large internet content providers are pro-Net Neutrality, especially the ones that provide high-volume content. Many users are too, with websites like Save the Internet claiming that "The internet without Net Neutrality isn’t really the internet". 

I find this all quite odd – in my experience, absent the histrionics about 'saving the internet', most normal people are surprised that anyone objects to the idea of charging heavy users more.

Net Neutrality might best be understood as a redistribution from light users to heavy users. An enjoyable new paper from Keith N. Hylton attempts to explain the mechanics, and potential side-effects, of Net Neutrality by way of analogy – a toll bridge used by commuter traffic and heavy lorries. 

If the lorries add more congestion and do more damage, it would be efficient to charge them more so that they bear those costs. But what might happen if we banned that kind of discrimination?

Charging cars and trucks different prices would permit the bridge owner to internalize to truck owners the additional costs imposed by the trucks. This, in turn, would discourage the trucks from excessive use – for example, from imposing a marginal cost of $1 on the bridge owner and other users when the marginal benefit to the truck owner from the particular use is only $.50. A charge that varied with the intensity of the use would encourage truck owners to consider the congestion costs and the miles of wear and tear imposed in each relevant time period. The higher charge would also induce some truck owners to avoid the bridge in favor of another route. Over time, charges might encourage technological innovation toward trucks that carry the same freight while imposing lower congestion and depreciation costs.

Charging separate prices allows the bridge owner to reduce congestion and depreciation costs, and pass those cost savings on to consumers in the form of lower general prices (for an equivalent unit of service) for use of the bridge, which, in turn, would increase the total consumption of the services offered by the bridge.

Admittedly, in some cases the bridge owner might choose not to charge differential prices. Perhaps the differences in service costs are minor, and the administrative costs of differential pricing exceed the efficiency gains. Alternatively, perhaps trucks provide the greatest source of demand for new bridge capacity. Foresighted bridge owners would therefore be reluctant to tax a major source of industrial capacity growth. In these cases, the bridge owner may choose not to impose differential pricing even if completely free to do so.

The bridge analogy seems to apply straightforwardly to the net neutrality problem. Net neutrality is equivalent to prohibiting the bridge owner from using differential pricing, and generates similar costs. Some providers of internet content, such as Netflix, impose extraordinary congestion costs as a result of the internal subsidy from consumers of other internet services.

Hence, permitting the network owner to price differentially can and probably would enhance consumer welfare. To the extent that heavy use of the service has a depreciation effect (electrical components suffer wear and tear from use), similar costs are imposed.

The whole paper is very readable and enlightening, and you can read it here.

At some point we're going to stop this delusion - why not now?

As Charles Mackay famously pointed out we humans are prone to sweeps of delusions and madnesses among us, especially as a crowd. This is often taken merely as a warning about financial markets and investment schemes but that's to take too narrow a view. Society can be swept along on such currents in other directions too, the same human fallibility affects other fields.

Such as this:

Supermarkets, restaurants and takeaways will be asked to shrink thousands of products or find other ways to cut their calorie content as part of a Government crackdown on junk foods.

Pizzas, ready meals, crisps and burgers are being targeted by health officials in a national plan to combat obesity.

Manufacturers will be set sweeping targets in a bid to reduce the daily calorie intake of millions of consumers, and tackle Britain’s growing weight problem.

The specific recommendations on calories have yet to be drawn up, but are likely to be modelled on existing targets agreed by manufacturers to cut sugar in cakes, biscuits and chocolate by 20 per cent by 2020.

Health officials said they will now work with the food industry to agree plans to tackle “excess calorie consumption” in a host of savoury foods - especially those regularly consumed by children.

What started out as a complaint about sugar in soft drinks morphed into sugar more generally and now they're coming after savouries.

As Chris Snowdon at the IEA has conclusively proved, as just the general records show, we do not eat more calories now than our forefathers, quite the contrary, we eat fewer. We expend fewer again, that's what is the cause of the weight gains.

At which point we've people trying to violate Hayek's maxim, by micromanaging the food supply. Yea even unto the size and composition of a slice of pizza. This never will work as there can never be enough information at that centre to enable the planning. This is before we even dream of that other thing about humans, that they will change their behaviour in the face of changed incentives. You know, have two instead of one of those smaller slices.

This is all another of Mackay's extraordinary delusions and like all madness of crowds it will come to an end. Why don't we start that end right now? Put Public Health England back in their box and stop this nonsense of trying to plan the food supply of a nation?

The Soviets never managed it however hard they tried for 70 years, it's not going to work now, is it? 

So, what should we do in the absence of knowledge?

If we don't have the information, just not a scoobie of the knowledge required, to make a decision then what is it that we should do? Sensible folk would probably say we should go and find out before we make our decision:

The rise of the UK’s nascent shale industry is "overhyped" and 55 million years too late, according to new research of the UK’s geology.

A team of scientists has warned that the UK’s most promising shale gas reservoirs have been warped by tectonic shifts millions of years ago which could thwart efforts to tap the gas reserves trapped within layers of shale.

Professor John Underhill, a chief scientist at Heriot-Watt University, said the debate over whether or not to develop domestic gas sources could prove redundant because Britain’s shale layers are “unlikely” to be an economic source of gas.

OK, excellent. There's a scientific prediction. What is it that we do when using the scientific method? We attempt to design experiments to disprove the assertions being made. If they survive such attempts at disproof then we upgrade assertions and speculations into something quite possibly true. That is, we attempt to go and find out. 

So, what should be the reaction to this assertion? 

Quentin Fisher, a professor of petroleum geoengineering at the University of Leeds, said more work was needed as the disadvantages pointed out in the seismic imaging could be balanced by other factors with an advantage for shale extraction.

“Prof Underhill is quite correct to highlight the great uncertainties that exist regarding the likely productivity of shale in the UK and is correct that the geology in the UK tends to be structurally more complex than in the US. Many of us involved in this debate have regularly highlighted the large uncertainties that exist,” Fisher said.

“Although geological complexity and late tilting may be detrimental to shale gas prospects in the UK, there are other factors that may be more favourable, such as having thicker shale sequences.”

He said the only way to find out was through testing. “The bottom line is that the only way to truly assess the viability is to drill wells, and we need to get on with that.”

Well, yes, quite so. We've now got duelling theories and the only way we can decide between them is to go drill. So, go drill we should.

We all know how Professor Underhill's speculations are going to be used of course. The anti-frackers will be shouting that there just ain't any gas there so instead let's continue with the cucumber storage of moonlight scheme. When the correct response is as above. If there's gas there then we're copacetic (we,. not the anti-frackers), if there isn't then, well, so let's go find out.

There is a similarity here with a point made about climate change. The greater the uncertainty about how bad the effects will be the more careful we've got to be about it happening. Certainly true but the same logic applies here. The more the uncertainty about the shale gas contents of Britain the more the answer is drill baby, drill.

How much do refugees cost the taxpayer?

The supposed fiscal burden of refugees (how much they cost the state) is often touted as a reason to rein in refugee resettlement programs. This doesn’t seem to be the case for adult refugees in the United States, according to a new paper released in June by the National Bureau of Economic Research. It shows that adult refugees aged 18-45—the majority of the researchers’ sample—make a net fiscal contribution over their first 20 years in the U.S.

The authors argue that current literature examining social and economic outcomes for refugees “tends to concern very specific populations, uses very small samples, relies on data from a small number of countries with high refugee totals, or focuses on very short-term outcomes.” But this study was different. It tracked a group representative of refugees in general and was based on an extremely large, diverse sample. The NBER Digest explains:

They separated refugees from other immigrants using Department of State data, and created a sample of 20,000 refugees who entered the country in 1990-2014. Their sample represents a third of refugees who arrived during the period.

The initial fiscal impact of refugees was (unsurprisingly) negative due to resettlement costs, low human capital, and high welfare use. However, this was only the case for 8 years after arriving in the country:

Using the NBER’s TAXSIM model, the study estimates that “refugees pay $21,000 more in taxes than they receive in benefits over their first 20 years in the U.S.” This may well be a low estimate of refugees’ positive net fiscal impact:

...we assumed that refugees paid the same amount in sales taxes as they did in state income tax. Data from the Quarterly Summary of State and Local Tax Revenues, between quarter 1 of 2010 and quarter 4 of 2014, indicates that revenues from state income tax and sales tax have been essentially the same over this period, with only a 2% aggregate difference. This most likely understates the amount of sales tax paid by refugees, as it is a regressive tax.

The authors also found that many child refugees enjoy positive educational outcomes, although older teenage refugees tended to fare worse:

Among young adults, we show that refugees that enter the U.S. before age 14 graduate high school and enter college at the same rate as natives. Refugees that enter as older teenagers have lower attainment with much of the difference attributable to language barriers and because many in this group are not accompanied by a parent to the U.S.

What does this new evidence mean for the UK’s approach to refugee resettlement? Firstly, it shows the importance of conducting more research into the net fiscal impact of refugees arriving in the UK; data on this topic is remarkably hard to find. The closest thing we have is estimates of the net fiscal impact of general immigration flows, and these estimates tend to be static rather than employing the NBER study’s dynamic approach.

Some evidence from Australia does suggest a negative fiscal impact of refugee immigration; although refugees became net contributors after 10-15 years, they were net drains on public finances over the course of a full 20-year period. However, it’s vital to view refugees’ fiscal impact in comparison to that of natives; if a country is running a budget deficit, the average natives will also have a negative net fiscal impact that may be similar in magnitude to the average refugee.

Any discussion of fiscal impacts must also include potential for positive effects on natives not captured by narrow measures of fiscal impact. My colleague Sam Bowman has previously referenced an innovative paper on Denmark’s experience with refugees:

Mette Foged and Giovanni Peri looked at refugee influxes from Yugoslavia, Somalia, Iraq and Afghanistan to Denmark between 1985 and 1998.

These refugees were distributed evenly across the country’s municipalities without any regard to labour market conditions. This counts as an ‘exogenous shock’...like a new influx of refugees to the UK would.

Forty to fifty percent of these immigrants had only secondary school education or lower and “were in large part concentrated in manual-intensive occupations”. By allowing for a deeper division of labour, the “refugee-country immigrants spurred significant occupational mobility and increased specialisation into complex jobs, using more intensively analytical and communication skills and less intensively manual skills.” That meant that native workers who might otherwise have done low-skilled jobs were able to move into more specialised, productive, highly-paid work.

These considerations aside, there are various external factors that could hamper the ability of refugees to make a positive contribution to public finances. Compared to the United States, many European countries have notoriously inflexible markets and generous welfare states, posing a dilemma for progressive supporters of immigration. As IMF analysts have put it, negative fiscal impact could also partly reflect “the existence of legal obstacles preventing refugees from starting to work quickly upon arrival.” There are sensible ways to maximize the benefits of refugee influxes, such as ‘keyhole solutions’ and private refugee sponsorship schemes.

Another reason not to believe the Bank of England’s stress tests

This posting is the third in a series on the 2016 Bank of England stress tests. A fuller report, “No Stress III: the Flaws in the Bank of England’s 2016 Stress Tests”, will be published later in the year by the Adam Smith Institute. 

The previous posting is here.

The Bank of England repeatedly reassures us that its stress tests demonstrate the resilience of the UK banking system.

Well, let’s put the stress tests to a stress test.

We have the performance measure, the leverage ratio at the peak of the stress scenario[1] and we have the pass standard. A bank passes the stress test if its leverage ratio at the peak of the stress is at least as high as the pass standard, and it fails the test if the leverage ratio at the peak of the stress falls short of the pass standard.

Let’s consider the five biggest banks: Barclays, HSBC, Lloyds, RBS and Standard Chartered.

In its 2016 stress tests, the BoE used the ratio of Tier 1 capital to leverage exposure as its leverage ratio. The Bank refers to this leverage ratio as the ‘Tier 1 leverage ratio’. The leverage exposure is a measure of the amount at risk and will be of a similar order of magnitude to, and for UK banks will typically be a little smaller than, total assets.

Across the big five, the average Tier 1 leverage ratio at the peak of the stress was 3.95 percent.

The pass standard used in the test was based on Basel III rules and was 3 percent.

By this test, the UK banking system looks to be in reasonable shape and only RBS failed to meet the 3 percent pass standard.

It would, however, be premature to get the champagne out just yet.

On July 8th this year I wrote to Governor Carney about the stress tests and one question I put to him was “How does the Bank justify the 3% Tier 1 minimum required leverage ratio?”

On August 3rd the Bank’s Executive Director for Financial Stability Strategy and Risk, Alex Brazier, wrote back to me with the following answer:

Our minimum leverage requirement for the major UK banks is now 3.25% of assets excluding central bank reserves. … But this is a minimum. On top of that the systemic and countercyclical leverage ratio buffers will, once phased in, add around 0.75% to the average leverage requirement of the largest UK banks.[2] Furthermore, to pass stress tests, firms typically need to hold a buffer of around 1 percentage point on top of this. (My italics)

I am grateful to Mr. Brazier for the clarification, which I interpret as an authoritative statement that the largest UK banks will typically face a minimum required leverage ratio of around 5 percent once the new buffers are phased in.

I am however puzzled why the Bank did not use this higher minimum required leverage ratio as the pass standard in its stress tests. After all, what is the point of the Bank using a 3 percent pass standard in the stress tests whilst simultaneously arguing that the actual minimum required leverage ratio is, or will be, considerably higher than 3 percent? The reason this is a problem is that it opens up the incongruous possibility that a bank might be deemed to pass the stress test whilst simultaneously failing to meet the minimum required leverage ratio.

I am even more puzzled when Mr. Brazier writes that the banks need to meet these higher standards in order to pass the stress tests. Whatever is one to say when the Bank of England official in charge of the stress tests maintains that to pass the stress tests the banks must meet a higher pass standard than the pass standard used in the stress tests?

So the question then arises: how would UK banks have performed in the stress test had the BoE used a minimum required leverage ratio of around 5 percent as its pass standard, instead of the 3 percent pass standard that it did use?

Recall that across the five big banks, the average Tier 1 leverage ratio at the peak of the stress was 3.95 percent. Since 3.95 percent is nowhere near close to 5 percent, then it would appear that, taken as a group, the big five UK banks would have failed the stress test.[3]

The “incongruous possibility” mentioned earlier would appear to be a reality:  taken as a group, the big five banks passed the stress tests even though they did not meet minimum regulatory requirements during the projected stress.

In fact, it would appear that they passed the stress tests even though they did not meet the pass standard required to, er, pass the stress tests. 

End Notes

[1] The Bank’s headline capital ratio, the ratio of CET1 capital to Risk-Weighted Assets, is not considered here because the denominator is deeply flawed to the point of being discredited. See, e.g., K. Dowd, Math Gone Mad: Regulatory Risk Modeling by the Federal Reserve, Cato Policy Analysis No. 754, Cato Institute, Washington D.C., September 2015 or No Stress II: The Flaws in the Bank of England’s Stress Testing Programme, Adam Smith Institute, London, August 3rd 2016. 

[2] At this point. Mr. Brazier inserted a flag to the following footnote: “See the Governor’s letter to Andrew Tyrie of 5 April 2016 for a fuller explanation of the impact of buffers on leverage requirement available here: https://www.parliament.uk/documents/commons-committees/treasury/Correspondence/Mark-Carney-Governor-Bank-of-England-to-Rt-Hon-Andrew-Tyrie-MP-5-04-16.pdf”.

[3] When I replace the leverage exposure measure in the denominator of the leverage ratio with total assets, I estimate that the average leverage ratio across the big 5 banks at the peak of the stress would have been in the region of 3.7 percent, a comfortable fail.

We do rather love this debate over AI and regulation

We also rather love it when non-economists, but people expert in other fields, try to tell us about matters outside their own area of expertise and inside economics. And here we have Mark Buchanan, a physicist, and a good one to boot, who would tell us about the economic and regulatory impact of Artificial Intelligence. Stepping off one's area of expertise is a dangerous thing:

Humanity has a method for trying to prevent new technologies from getting out of hand: explore the possible negative consequences, involving all parties affected, and come to some agreement on ways to mitigate them.

Well, no, humanity doesn't do that and never has done. In that universe where things are planned, possibly, but that isn't the one we inhabit nor have we ever done. No one did say that the Spinning Jenny was going  to free up women from that household labour so they should be paying the inventor. Many were aware that being in charge of a half tonne of metal while intoxicated could be a problem but it was 1925 before the previous laws about steam engines were extended to cars. It was 1934 before even the most basic compotentcy tests were applied to those who could drive even sober.

We don't, and never have, sat down and argued out the costs and benefits of a new technology. What we have done instead is those technologies which have spread, seem useful, ponder on whether they need some regulation, after that popularity and general usage is established.

And of course there can be no other way in a market economy. We do not wish ethicists, philosophers, bootleggers or bandits, politicians or bureaucrats to tell us what we may try. Rather, we want to be able to try everything and only if actual harm to others is proven then perhaps ameliorate this.

People use laws, social norms and international agreements to reap the benefits of technology while minimizing undesirable things like environmental damage. In aiming to find such rules of behavior, we often take inspiration from what game theorists call a Nash equilibrium, named after the mathematician and economist John Nash. In game theory, a Nash equilibrium is a set of strategies that, once discovered by a set of players, provides a stable fixed point at which no one has an incentive to depart from their current strategy.

Sure, Nash is great, and far brighter than you or we, probably more so than us all collectively. But that's still not what we do:

But what if technology becomes so complex and starts evolving so rapidly that humans can’t imagine the consequences of some new action? This is the question that a pair of scientists -- Dimitri Kusnezov of the National Nuclear Security Administration and Wendell Jones, recently retired from Sandia National Labs -- explore in a recent paper. Their unsettling conclusion: The concept of strategic equilibrium as an organizing principle may be nearly obsolete.

But we never have done and hopefully never will do. That market is the process of exploration. So we never do say "What do we do if?" rather, we say "We've found that people like this!" and then consider if anyone has been hurt, are their public goods from it, externalities?

Or as we should put it, sure, many things need regulation, many things don't. Nash Equilibriums should be found, most certainly. But this is something we do after the deployment of a technology, not before. For if we have to have this discussion first then what new technology would ever be deployed?

This error is what people mean by the precautionary principle of course, and it's why it's wrong.

A better way

If you tax investment, you tend to get less of it. And because workers rely on invested capital to produce the goods and services we consume everyday, falls in investment inevitably lead to falls in wages. In fact, economic theory tells us that because investment is so responsive to changes in tax rates, workers would be better off if we abolished taxes on capital investment (like corporation tax) entirely and instead raised taxes on consumption to compensate for lost revenue. Top economists, such as Greg Mankiw, Bob Lucas, and Marty Feldstein believe that we could boost long-run wages by almost 10% if we made these changes.

Defenders of taxing capital (such as Thomas Piketty) typically argue that the models used to advocate for abolishing capital taxes are overly simple or make unrealistic assumptions. That can’t be said for a new paper by Kotlikoff, Benzell and LaGarda that simulates the effect of the US adopting Congressman Paul Ryan’s ‘Better Way’ tax plan.

Ryan’s tax reform proposal replaces the U.S. federal corporate income tax with a 20 percent business cashflow tax (BCFT), which allows firms to write-off all investments and wages against their bills, but at the same time ends the deductibility of net interest payments. It also includes a border-adjustment mechanism that exempts net exports (exports minus imports) from business tax receipts. Put simply, it transforms the corporate income tax into a VAT style tax on domestic consumption (levied on firms) with a payroll tax cut. As Kotlikoff et al points out, this would effectively lower the marginal tax rate on capital to zero.

Typically, models assessing the effect of switching from capital to consumption taxes make a number of restrictive simplifying assumptions, such as infinitely-lived agents, homogenous skill levels and zero trade. Kotlikoff, Benzell, and LaGarda take a different approach.

Their model assesses the effect on 17 different regions, taking into account realistic estimates of life expectancy; demographic change; migration flows; a separate energy sector; government transfer programs; and international corporate tax rates. It is the most comprehensive attempt to model the effect of fundamental tax reform I’ve ever seen.

They find that compared to the status quo, in the first ten years of the reform:

• The US Capital Stock would increase by 25 per cent
• Pre-tax wages would increase by 6 per cent
• US GDP would be nearly 8 per cent higher – an 0.8% boost to GDP growth for the first decade of the reform

They also model what would happen if other countries match the US’s tax rates. They find that:

• GDP would still be about 5% higher, but not as high as if other countries didn’t try to compete with the US with. lower tax rates
• Interestingly, because Americans own a significant proportion of overseas assets, lower overseas tax rates will lead to increased asset incomes in turn boosting income tax receipts and allowing for extra income tax cuts.

One of the more bizarre findings of the paper is that in the long-run (2100) GDP would be lower under the Ryan plan. But, this shouldn’t be seen as a negative. In fact, Kotlikoff, Benzell and LaGarda point out that the lower GDP result is driven by higher wage rates leading people to work slightly shorter hours and spend more time on leisure. In other words, people are still better off.

Kotlikoff, Benzell and LaGarda’s results are even more powerful when you consider they do not consider two of the biggest arguments for switching to business cashflow tax. First, they don’t consider the possibility that the reform will make overseas tax avoidance harder and make collecting taxes from IP intensive tech firms easier. Second, they don’t consider the effect of ending the debt-equity bias, which many top economists believe would make financial crises less frequent.

Paul Ryan’s been forced to drop major aspects of his tax reform plan in order to keep the Senate and Trump administration on side. Instead, Ryan will go for straightforward corporate tax rate cuts and shorter capital allowances, an improvement to the status quo, but sub-optimal when he could be take advantage of what Nobel Laureate Bob Lucas once called “the largest genuinely free lunch I have seen in 25 years in this business”.

In the UK our corporation tax set-up isn’t quite as bad as in the US, but it’s far from perfect. We may have a low statutory rate but the effective rate (i.e. the one people actually pay) is still high. That’s because we have some of the least generous capital allowances in the world. We should pick up the baton that Ryan dropped and fix our broken corporate tax system.  

So let us have that conversation about automation and gender

Suzanne Moore insists that we must discuss the gender implications of automation:

 Surely there can be no discussion of neoliberalism, austerity and automation that leaves out gender.

So let us consider the gender implications of automation - it has been the most women liberating, pro-feminist, process of the past few centuries. It is near entirely responsible for the economic equality of women that we all enjoy today. Compared to any time in the past whatever remains of gender inequality is a mere rump, a triviality - perhaps one we should still work on but by comparison it's tiny.

Brave and bold words, yes, but also true in two manners. The first is what Hans Roslin and Ha Joon Chang call the "washing machine," a grab all term for the automation of household tasks. As we've noted before we think these numbers might be a little overcooked but at least one estimate has the time taken to run a household, internally in unpaid labour, falling from 60 hours a week a century ago to 15 now. Roombas, vacuum cleaners instead of carpet beaters, washing machines, microwaves, gas stoves instead of wood or coal that must be blacked and on and on. The largest change in working hours over this past century has been the fall in female unpaid hours inside the household.

We automated much of that household work.

The second largest, and it is only the second largest as leisure time has risen for both sexes over this period of time, change in working hours has been the rise of women into the paid, market, world of work. 250 years back when the world was animal or human muscle powered there was a natural, even if unfair if you like, advantage that men enjoyed. Muscles were what was being hired, men had more of them, men got the work and the higher wages for having more of what was being hired. In more technical jargon men were more productive at the tasks of the day.

We've automated that now, there are very few of us indeed who make our living by sheer grunt, that thing where men have that advantage. Thus that discrimination has, pace whatever rump you'd like to complain about, disappeared.

Domestic automation has led to women having the time to be economically equal, automation of the world of market production has given them the means to be so.

So Huzzah! for the interaction of automation and gender then.

And that's before we even start talking about the Spinning Jenny. As Brad Delong has pointed out to one of us, any women you meet in literature before about 1600 are occupied with spinning thread near constantly, from Penelope (perhaps more weaving there) in the Odyssey onwards. By Jane Austen's time it simply isn't something mentioned, it has been automated. Homespun just isn't a thing any more.

Automation liberated women - let's have some more of it to liberate us all, eh?