Thomas Piketty ignores government capital

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Thomas Piketty’s core argument in Capital in the Twenty-First Century is that the return on capital is (likely to be) greater than GDP growth and therefore those with capital will gain an ever greater share of wealth increasing inequality. This is not true in an individual sense or societally. Gilts returning 4% over an 80 year lifetime, paying 45% income tax, assuming RPI of ~3% and inheritance tax on two transfers would reduce a £100m fortune by 92% in real terms. There are almost no historic fortunes. Crassus was supposedly the wealthiest man to ever live. The de Medici fortune, assuming a zero real return, would be worth about $23bn today. But in practice individual great fortunes have struggled to earn even a zero real return, even without destruction, let alone Piketty's assumed 5% real return, which would have seen them dwarf Bill Gates' paltry billions.

Piketty argues income is increasingly taken by the productive: As he shows on page 200 of his book capital’s share of national income has fallen about 40% from 1850 to 2010 despite a substantial real savings ratio. Piketty argues the productive avoid taxes making inequality greater. According to the ONS the top 10% of income earners pay 39 times more income tax than the average of the other 90%.

Redistribution is materially greater than increased taxes and capital’s falling share of income would suggest. Capital and the entrepreneur have created almost all of the growth in income. The hairdresser has not changed his productivity but has seen his real income grow. The farm workers who produce vastly more than 200 years ago, only do so because of the inventions and innovations of capitalists and entrepreneurs. While he drives a combine harvester he has not improved his skills, capitalists and entrepreneurs taught him how to use their inventions and better processes. Workers work ever fewer less strenuous hours, retiring earlier and nevertheless receive an ever increasing real income.

Piketty argues that the private capital to income ratio has grown materially to about 6, that its distribution is very skewed and government’s capital is zero, all as evidence of the inexorability of ever greater inequality. However, government has vast wealth in the form of the net present value of the tax flows they receive (and expect to receive in the future) to which he ascribes no value. But these flows are worth about 40x national income.

Even if he is correct about private wealth, the overall wealth of society is quite evenly distributed—the government’s 40 is increasingly devoted to welfare (and might usefully be imagined as de facto belonging to those who expect to receive it in the form of welfare and state provision of goods), redistributing from those who earned it to the rest of society. The capital value of transfers to a hypothetical individual who chooses to never work and relies entirely on the state is likely to be in the region of £1.5m.

The most bizarre complaint yet about rising train fares

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We've all, at some time or another, stood aghast when listening to one or another outbreak of lefty intemperance. The stamping of the foot as they insist upon absurdities like all people are born equal in every possible skill and talent, it's only society that makes us turn out different. Or to move from one of Danny Dorling's misconceptions of the world, how about Thomas Piketty's insistence on an 80% income tax plus an annual wealth tax in order to avoid the fate of France which is a country with a 75% income tax and an annual wealth tax. Or today's example, that it really is outrageous that rail fares should rise as subsidies to railways fall:

In reality, fare increases aren't really paying for infrastructure but are instead covering the gradual withdrawal of government subsidies, which have fallen by 9% in real terms since 2010-11.

Well, yes, and?

Agreed, we here think that privately run railroads are a wonderful idea, that's why we campaigned for that privatisation. We're aware that there's some people who don't agree with us on that too. But look at that specific reason that's being given. That it's right and proper that people be taxed in order to make middle class commuting cheaper. That the dustman must pay to subsidise the stockbrokers' travel in from Surrey. It's an absurdity when put that way but that is the argument being made. That it is somehow wrong that those who wish to live a long way from their work should pay their own costs of doing so.

How about that for an absurd insistence?

Why Roger contradicts himself

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Most of us know someone like Roger.  His speciality is that he opposes policies that would achieve his objectives, and supports policies that achieve their opposite.  Roger supports what he calls 'clean' energy, yet is adamantly opposed to nuclear power which is among the energy sources with lowest environmental impact.  He is also among those who protest against fracking, even though the gas it produces enable us to phase out the coal-fired power stations that are more than twice as dirty as gas-powered ones.  He argues that fracked gas is a non-renewable fossil fuel, which it is, and is therefore fast running out, which it isn't. Roger feels passionately about the plight of the world's poor, and is concerned that they should not go hungry.  Yet he campaigns to ban the genetically modified crops that can aid their farmers with crops that are more resistant to pesticides, drought and salt water, and can produce increased yields with less chemical fertilizers.  He expresses his sympathy with children in poorer countries, yet opposes the 'golden' rice modified with vitamin A that can save hundreds of thousands of third world children from death or blindness every year.  He supports using food crops to make ethanol, a renewable fuel.

He supports buying locally and campaigns against the 'food miles' that use energy to transport, even though it is by having us buy their products and crops that poorer countries can lift their populations out of poverty.

Roger is worried that greenhouse gases might be heating up the Earth, yet opposes all proposals that might offer technical solutions to this.  He is against even an experiment to seed areas of ocean with iron to generate algae blooms, increase fish stocks and sequester carbon.  He opposes all proposed ways to sequester carbon, saying it is more important not to emit it in the first place.  He wants experiments banned that would spray fine salt water mist into the lower cloud layers to increase their reflectiveness to incident solar radiation.

Roger's argument in the above examples is that they act against 'behavioural change,' which he says is the only solution to our problems.  Ways that enable us to solve those problems and carry on as we have, growing richer, miss the point in his eyes because he does not want us to be doing that.

If we were to take the objectives at face value, it would be illogical systematically to oppose the means of achieving them.  In the case of Roger, and maybe some others like him, however, I think I detect signs of a deeper, more fundamental motive.  At heart Roger is conservative.  He dislikes the pace and complexity of modern life, and yearns for the measured rhythm of a simpler life.  He has constructed a somewhat fanciful picture of the past which overlooks some of the disease and squalor that accompanied it.  Roger wants us all to live more simply because at heart he dislikes change and the unsettling effect it has on people like himself.  Those of us who are comfortable with change and the benefits it brings will beg to differ…

How to raise wages: cut corporation tax

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We'd all like to see wages rise: that is the point of this economy thing, after all, that the average life of the average bloke just keeps getting better and better. So, how might we go about doing this lovely thing? Well, some interesting research from the US as to the effects of eliminating (or, if not, at least lowering) the corporation tax rate:

We adopt a dynamic stochastic occupational choice model with heterogeneous agents and evaluate the impact of a potential reduction in the corporate income tax on employment. We show that a reduction in corporate income tax leads to moderate job creation. In the extreme case, the elimination of the corporate income tax would reduce the non-employed population by 5.4 percent. In the model, a reduction in the corporate income tax creates jobs through two channels, one from new entry firms and one from existing firms changing their form of legal organization. In particular, the latter accounts for 85.7 percent of the new jobs created.

This is not, we should note, about patent boxes, about freeing foreign income from UK taxation or any of that sort of stuff. This is the effect simply of lowering the rate upon profits made inside the UK. Jobs created would go up and, given that the closer we get to full employment the higher wages rise, wages will indeed then go up.

This finding is simply the mirror image of the standard point that capital and corporate taxes have higher deadweight costs than most other forms of taxation. Any tax means that some economic activity doesn't take place but different taxes destroy, for the same revenue raised, different amounts of economic activity. We would therefore, for whatever amount of revenue we want to raise, prefer to destroy the least amount of economic activity. Which means lowering corporation tax, as above, even if that means higher taxes on consumption or property to still collect the same revenue.

The remarkable logic of the minimum booze price people

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This is an interesting example of the logic of the anti-booze prodnoses. They tell us that a minimum price for alcohol will affect really heavy drinkers almost exclusively because really heavy drinkers drink cheap alcohol:

A new study of liver patients shows that a Minimum Unit Price policy for alcohol is exquisitely targeted towards the heaviest drinkers with cirrhosis. Researchers studied the amount and type of alcohol drunk by 404 liver patients, and also asked patients how much they paid for alcohol. They found that patients with alcohol related cirrhosis were drinking on average the equivalent of four bottles of vodka each week, and were buying the cheapest booze they could find.

No, really, that's it, that's their argument.

Published today in Clinical Medicine, the peer review journal for the Royal College of Physicians, the researchers studied the amount and type of alcohol drunk by 404 liver patients, and also asked patients how much they paid for alcohol. They found that patients with alcohol related cirrhosis were drinking on average the equivalent of four bottles of vodka each week, and were buying the cheapest booze they could find, paying around 33p per unit, irrespective of their income. In contrast, low risk moderate drinkers were paying on average £1.10 per unit.

If the government set a MUP at 50p, it wouldn't affect pubs or bars and would have no impact on moderate drinkers; the average cost would be £4 per year and 90 per cent would not be affected at all, the research shows. The impact on heavy drinking liver patients would be at least 200 times higher.

They've not even attempted to work out what the actual effect of an MUP would be. No discussion at all of whether people would in fact drink less. Or even whether people are in fact budget constrained and if they are whether it would be other things (oooh, I dunno, food maybe?) that would get dropped from their budget in the face of such price increases. They've just said that alcoholics drink cheap booze so we're right!

And they're still not attempting to answer the point we've been making here for so long. Which is that an MUP is still a ludicrous way of dealing with this. Even if it's true that higher booze prices would reduce the amount alcoholics glug, even if they're correct on that point, it's still a ludicrous solution. If you want more expensive booze then raise the alcohol tax: at least that way there'll be a bit of revenue and we can cut other taxes to boot. Why on earth you would try to raise prices and then insist that the extra margin stays with the manufacturer or retailer is very hard to fathom.

The problem with price fixing NHS drugs

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Markets have a funny way of getting around behind the rational planner and biting him in the buttocks. And so it is with price controls on NHS drugs. Sure, it sounds great that we use the power and majesty of the law to keep taxpayers' money out of the hands of those rapacious Big Pharma companies. But the problem is that this is leading to there being no drugs for people to take:

Patients are being harmed and put at risk because of national shortages of some prescription drugs, doctors have warned.

Medicines currently subject to shortages include Tamoxifen for breast cancer, Naproxen for arthritis and Amiloride, used to treat heart failure and high blood pressure.

A poll of GPs has revealed that more than nine in 10 family doctors have been forced to write prescriptions for “second choice” medicines because the drug they wished to provide was out of stock.

In recent years, scores of medicines, including those for breast cancer, arthritis and schizophrenia have run low because drugs intended for British use are being diverted abroad for profit, while others have been subject to production problems.

The survey of more than 600 family doctors by GP magazine found that one in three said their patients had suffered harm as a result, or faced a longer recovery.

The background to this is that there is an absolute freedom of trade across the EU. This is what the Single Market means. And we also have the NHS insisting that it will only pay certain prices for certain drugs. Fine, volume discounts aren't a problem and, if we're to be honest about it, nor is the use of countervailing economic power as a near monopsonist argues with the monopolies that pharma companies have over their still in patent drugs. But we do get to the standard problem with price fixing. Set the price too low and you'll get a shortage of whatever it is you've set the price of. Too high and you get a glut, fix prices at what the market price would be anyway and what's the point?

Here what's happening is that the freedom of trade is bringing that iron law of one price into play. Different EU countries fix (or don't even try to fix) drug prices at different levels. So there are arbitrage opportunities to buy pharmaceuticals in one country, at that country's controlled price, and move them to another EU country where the price is higher. It is this that is causing the shortages here in the UK.

Of course, people are trying to deal with this:

Because of the shortages, the Department of Health has introduced a system of rationing, which is supposed to mean the right number of drugs are held in stock. However, the system often means particular parts of the country run low on stocks, because they are not allowed to have more than their quota of medicines.

Facepalm. If the problem is initially caused by having fixed prices too low then the solution is to raise prices, isn't it? Remove the arbitrage opportunity and there won't be any arbitrage.

Will fracking lead to a UK energy renaissance?

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Jared Meyer, policy analyst for Economics21 at the Manhattan Institute, wrote an op-ed for City AM detailing the barriers that still prevent the UK from taking full advantage of fracking:

For the first time in six years companies are able to bid for natural gas exploration licenses in the United Kingdom. The UK became a net importer of petroleum and natural gas last year and domestically-produced natural gas now accounts for only a third of consumption. Prime Minister Cameron’s decision to go “all out for shale” is a welcome sign and will aid in reversing the trend away from energy independence. If done correctly, increased energy exploration will also help the economic recovery gain strength.

Three problems still inhibit the UK from taking full advantage of potential gains from fracking. First, the energy exploration permitting process is far too time-consuming. Second, private landowners do not own the mineral rights beneath their lands, leaving them with little incentive to support energy exploration in their backyards. Addressing both these issues will help overcome strong environmentalist opposition, the third obstacle.

This article was originally published in City AM. Read the full article here

Climate change is three times worse than we thought, apparently

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A new paper tells us that climate change is actually three times worse than we thought. For there may be tipping points, catastrophic changes, that cannot be worked back from and this shows that the carbon price should actually be three times higher than it is:

Climate policy aims to internalise the social cost of carbon by means of a carbon tax or a system of tradable permits such as the Emissions Trading System set up in the EU. But how do we determine the social cost of carbon? Do we take everything into account that should be taken into account? Most integrated assessment models (Nordhaus 2008, Stern 2007) calculate the net present value of estimated marginal damages to economic production from emitting one extra ton of carbon caused by burning fossil fuel.

However, global warming has many non-marginal effects on both the economy and on the carbon cycle. Climate catastrophes can occur that lead to sudden flooding, hurricanes, desertification, water shortages, etc. Many of such changes may be irreversible. Other catastrophes such as reversal of the Gulf Stream or sudden release of greenhouse gases from the permafrost lead to a sudden and long-lasting change in the system dynamics of the carbon cycle. Such changes in the system dynamics of the economy and/or the carbon cycle are called regime shifts. When such a shift takes place, this is called a tipping point. Scientists predict that at some point, structural changes will occur with effects that are very difficult or even impossible to reverse. The usual marginal cost-benefit analysis of existing integrated assessment models then puts us on the wrong track. The problem is much more serious than we think.

This argument seems, superficially, to have some legs. However, it doesn't really hold up for their conclusion is:

If the potential tipping point is ignored, our calibration yields, in steady state, a social cost of carbon of $15 per ton of CO2, which is about the same as in well-known integrated assessment models. If the potential tipping point is not ignored, the social cost of carbon increases to $55 or $71 per ton of CO2, depending on whether we take a constant or an increasing marginal hazard rate as a function of the stock of atmospheric carbon. These are big potatoes, we would say. The precautionary returns are 0.6% per year and 0.5% per year, respectively. The need for precaution indeed decreases when emissions are reduced more with a higher tax on carbon.

Splitting the social cost of carbon into the three components provides additional insights. For example, the $71 per ton of CO2 is split into $6 for the marginal damages, $52 for the risk-averting component, and $14 for the raising-the-stakes component. The risk-averting component is by far the largest, and it is clear that ignoring potential tipping points is putting us on the wrong track when discussing climate policy to curb greenhouse gas emissions.

The problem here is that public policy is not based upon a carbon cost of $15. Rather, it's based on the Stern Review result of $80. Which means that we're already doing enough to cover the new findings of this paper.

In fact, we're actually doing too much. The fuel duty escalator has led to us taxing petrol as if the correct carbon price is $160 a tonne CO2-e. The truth is we're doing too much to avert or mitigate climate change even if (or perhaps especially if) we take all of the scientific consensus about the subject entirely seriously.

Criminalizing consumption: Alcohol tags are a step too far

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At 2:30pm, I’ll be going on Sky News to argue against the implementation of alcohol tags the Mayor of London has announced will be piloted in four major London boroughs: Croydon, Lambeth, Southwark and Sutton. For 12 months, courts will be able to instruct "alcohol abstinence and monitoring requirements” on 150 offenders for a determined period of time. Any consumption of alcohol could lead to stricter punishment, including imprisonment. As custodial sentences go, alcohol tags are highly intrusive; the 24-7 monitoring over one’s consumption undermines their entire sense of autonomy. If such a policy were to be adopted, we must ask when – if ever – this kind of policing should be enforced.

The primary problem with the Mayor’s pilot plan is that is does not distinguish between violent offenders and more minor, drunken offenses. These tags are supposed to be part of an effort to create tougher community sentencing, which one could receive for committing assault, fraud, or playing music too loudly at night; policing one’s lifestyle choices for owning a speaker system seems nothing short of absurd.

There are also more principled problems, including the assumption of a second offense, which arguably undermines the notion of innocent until proven guilty. There is also a question of misplaced priorities; why does the government always jump to scale back the liberties of offenders, rather than addressing the deep, underling problems that lead to the offense in the first place?

Some former offenders have argued that alcohol tags have helped them to overcome their issues with substance abuse that have led them to commit crimes. Such testimonies, however, suggest that alcohol tags could prove useful in a voluntary, op-in system, when the offender has decided to tackle alcohol abuse and can use the tag as part of their support system.

But apart from that voluntary aspect, this new pilot sets a dangerous precedent that the best way to create order in society is for politicians and law makers to monitor and ban consumption and behavior until everyone fits neatly into line. Autonomy is sacred; even those criminals with their iPod docks don’t deserve to lose it.

The solution to climate change killing all the little fishies

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News today that climate change is going to kill off all the little fishies off Alaska. The rise in atmospheric CO2 leads to a similar rise in the ocean where it forms carbonic acid and thus reduces the alkalinity of the water making it hard for various species to operate. This ending up with a reduction in fish as the lower parts of the food chain suffer. The part of all of this that we might have difficulty getting our heads around is that there's a known technique to deal with this problem: it's just that the UN insists that we don't use it. Odd that we're not actually allowed to do something that will mitigate both climate change itself and also alleviate one of the effects of it. The story about the fishies is here:

Alaska’s fishing industry could soon be threatened by increasing ocean acidity, says an NOAA-led study to be published in the journal Progress in Oceanography. The acidification is due to increasing carbon dioxide release, which is absorbed by the ocean

Molluscs, such as the aforementioned Red King crab may struggle in acidic water, and find it difficult to maintain their shells and skeletons. As well as this, it has previously been shown in studies that Red King crabs die in highly acidic water, and both it and the Tanner crab grow more slowly in acidic water.

Alaska is particularly threatened by ocean acidification for a number of reasons: cold water will absorb more carbon dioxide than warm water, communities in certain parts of Alaska, namely the South-East and the South-West are reliant on fishing, and there are fewer other job opportunities in these areas than other parts of the state.

OK, is there anything we can do to deal with this?

When a chartered fishing boat strewed 100 tonnes of iron sulphate into the ocean off western Canada last July, the goal was to supercharge the marine ecosystem. The iron was meant to fertilize plankton, boost salmon populations and sequester carbon. Whether the ocean responded as hoped is not clear, but the project has touched off an explosion on land, angering scientists, embarrassing a village of indigenous people and enraging opponents of geoengineering.

The iron did fertilise plankton, there was an algal bloom, fish numbers increased and at least some of that carbonic acid was removed from the local waters, all at the same time. There was even some amount of the CO2 being deposited as nascent rock on the ocean floor and thus it being sequestrated for geologic periods of time. All in all it sounds like a most wonderful technology really, doesn't it?

The project was also on uncertain legal grounds. Ocean fertilization is restricted by a voluntary international moratorium on geo­engineering, as well as a treaty on ocean pollution. Both agreements include exemptions for research, and the treaty calls on national environment agencies to regulate experiments. Officials from Environment Canada say that the agency warned project leaders in May that ocean fertilization would require a permit.

Other than this, probably illegal, experiment the last official one was done 10 years ago. It's just great that everyone's working so hard to find even a partial solution to what we're generally told is the greatest problem of our times, isn't it?

We've spoken to one of those who studied, in detail, that last official experiment and there's no doubt that it works, would be extremely cheap and is capable of not only increasing fish numbers but also of sequestering some 1 gigatonne a year of CO2 into rock. But the powers that be won't let anyone actually do it and there are no further officially approved experiments in the pipeline either. It's almost as if people don't want solutions to climate change, isn't it?