In pursuit of the greatest happiness

With many calling ‘happiness economics’ the future of economic thought, ASI Fellow Tim Worstall responds to Lord Layard’s latest proposal on National Happiness.

GDP is not the be-all and end-all of our existence; it talks of value added to economies but has little to say about anything else.

Richard Layard and Joseph Stiglitz (one a Nobel Laureate, the other one of those who tried to jam some economic understanding into my brain) rightly tell us that gross domestic product isn’t in fact the be-all and end-all of how we should be measuring life, the economy and everything. They also, again correctly, point to various alternative ways in which we might measure, thus set as our target, things which are more important than merely the value added in an economy.

What is always interesting is to take such suggestions and follow them to see where they lead: so let’s do exactly that with the proposal from the professor at the old alma mater, my Lord Layard.

So I propose a campaign for the Principle of the Greatest Happiness. This says I should aim to produce the most happiness I can in the world and, above all, the least misery. And my rulers should do the same.

Sounds like a plan, so, using only the professor’s own work, where will this lead? Specifically, where will this lead us if we try to design a tax system which accords with this principle (that’s the “rulers should do the same” bit)?

Vital clues can be found in his book Happiness, something which if you haven’t read you probably ought to. There are two major points made about the taxation of incomes in it and we’ll add just one commonplace observation from the world around us to reach what we must assume will be the taxation system that will produce the maximal amount of happiness: the top fluffy kitten count, if you will.

The first point is that happiness does indeed rise with income – but only to a certain point. That point varies a little, dependent on where you are and with exchange rates and so on, but a reasonable estimate is about £15,000 a year. Less than that and earning more money makes you happier simply because you’re earning more money. More than that and you might be happier or not, but it’s not the extra money that’s making you so.

Excellent. So the first and most obvious principle of our high kitten-cuteness tax system is going to be that we’re not going to tax incomes below £15,000. This would clearly make people less happy, as it would take them below that number where higher incomes make them happier.

The second point is a little more complex. The contention is that when we earn more than £15,000 we create a kind of pollution. It’s never quite really nailed down: one way of describing it would be jealousy, the green-eyed god, over the fact that others have more than we do. Layard’s description is more gentle, in that others having more impels us to emulate them; we try to keep up with the Joneses. In doing so we strive for higher incomes, despite the way that these will make us no happier, at the expense of the many other things that will make us happier – time with family, with friends and so on.

Thus those earning more than £15,000 are imposing an externality of unhappiness on those around them: and we all know what happens to such negative externalities in welfare economics. We tax them! This is exactly the same economic argument behind carbon taxes, the congestion charge and air passenger duty. The polluter must pay the social cost of their pollution. Turning the argument around the other way, that positive externalities should be subsidised is exactly the economic argument used for tax contributions to basic science and such things as universal primary schooling. There’s nothing odd or strange about the economics here, only the aspect of life to which it is being applied.

Layard’s estimate is that the unhappiness caused by those on higher than £15,000 incomes is some 30% of the amount of those higher incomes. Someone on £1,015,000 a year is causing £300,000 of unhappiness elsewhere while someone on £45,000 is causing £10,000s’ worth (umm, OK, I’m using one third not 30%, but you get the picture). We should thus tax the two, respectively, £300,000 and £10,000 for the externality of the non-fluffy kitten time they are imposing on those around them.

Our third point is simply the commonplace that people do not like to pay taxes. Yes, yes, I know, there are endless screeds here at Comment is free insisting that no, really, offering up the sweat of our brow to the state is such a pleasurable experience that we’d all do it willingly, without the compulsion of law. Actually, this seems not to be the case. Last time I got the figures from the Treasury (for the tax year 2005), it turned out that only five people across the entire nation had voluntarily paid more than was their legally demanded due – and four of those were dead. So if we adopt the entirely uncontroversial economic idea of revealed preferences (don’t look at what people say but what they do) we can be sure that for the vast majority of the population taxes are not something paid for the joy of them. They are, in fact, something which make us unhappy.

This now gives us the details which we need to build our tax structure for optimal happiness. We can and should tax those who cause unhappiness in others by the value of the unhappiness they create through their higher incomes. We should not tax more than this for we will be creating unhappiness by doing so. Finally, we should not be taxing incomes below £15,000 a year because taking money below that sum will again increase unhappiness.

So our tax system with the highest fluffy-kitten count, the one that will “produce the most happiness” as our rulers should strive to do, just as we ourselves should, is a flat-tax system of 30% with a high personal allowance of £15,000 a year.

While this is, of course, very different from our current tax system, it is still progressive (yes, it is: work out the maths for yourselves – as incomes rise so do the portions of those incomes paid in tax) and it ticks all the boxes that will lead to maximal happiness.

In the UK, the US and Germany, happiness has been stagnating for decades. A civilisation based on the Greatest Happiness Principle would be a great improvement. Yes, indeed it will, as long as we actually accept the implications of that Great Happiness Principle as laid out for us by one of the great researchers into that principle, Richard Layard himself.

The only conundrum left is that there are only two organisations that I know of (that I am a member of both of them is entirely coincidence) which actually have as suggested policy anything close to this top cute-kitten system: Ukip and the Adam Smith Institute. But then the reason that I am a member of both is because they are both well ahead of the progressive crowd, in so many important ways.

Published on guardian.co.uk here.

Ending child labour

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Despite our reputation around here as market crazed fanatics whc would do and argue anything to further the interests of international capital there is indeed a method to our perceived extremism: no, not that we are in fact market crazed fanatics.

I certainly am driven to recommend markets as the solution to most problems most of the time simply because markets are indeed the solution to most problems most of the time.

Take for example the problem of child labour. Most certainly we would all prefer a better world in which the young go to school and prepare themselves for making the future world even better. But as Paul Krugman points out, this isn't actually one of the options available to those who currently labour in carpet factories, brickworks or upon garbage dumps. The options are work or starve.

So what might we do to try and reduce these pressures upon the young innocents? How about globalisation?

We examine the effects of trade liberalization on child work and schooling in Indonesia. (...) Our main findings show that increased exposure to trade liberalization is associated with a decrease in child work and an increase in enrolment among 10 to 15 year olds. The effects of tariff reductions are strongest for children from low skill backgrounds and in rural areas. However, a dynamic analysis suggests that these effects reflect the long term benefits of trade liberalization, through economic growth and subsequent income effects, while frictions and negative adjustment effects may occur in the short term.

Please note, this is not a result of us in the rich countries reducing our tariff barriers to Indonesian products. This is the result of the Indonesian government reducing tariff barriers to imports. Just another proof that imports are what make us all rich and that it is wealth that reduces child labour.

The policy prescription seems obvious as well. All those campaigning for the end of child labour (a worthy and noble goal) should in fact be campaigning for the poor countries where child labour exists to reduce their import tariffs. Sadly, of course, this is not what happens: all too many seem to be arguing for both the end of child labour and also that those nasty western products must be kept out of the poor countries so as to protect infant industries. A depressingly counter-productive course of action.

Out of control spending

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As reported by the BBC, this government has finally decided that spending cuts are going to be necessary after Gordon Brown lead many to believe cuts would not be needed. Were we really expected to believe that a government that has put us nearly £900 billion in debt may not have needed spending cuts? With government spending reaching over 44% of the entire national income did the government truly expect to sit there and tell the British people that spending cuts might not be obligatory?

Government spending has simply reached astronomical proportions. We can no longer claim to live in a free market society. We live within the bounds the government has set for us, instead of the government living within the limits we have given to it. The invisible hand has been cut off, and the free market is caged. I am insulted that the government would dare to look at the people who elected them – the very people who they have laden with over £14,000 of debt each – and say that they believe spending cuts ‘might’ be necessary. What ‘might’ be necessary is a change of command from government to the people, and from the treasury department to the free market.

Government spending is nothing more than a facade to cover up increased debt and limited economic growth through open and fair trade in the free market. How much more government control of the economy do people need to see before they realize that government is painting them into a corner, or would they rather begin to climb the walls rather than stand up for change?

Baroness Scotland: hoist her by her own legislation

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I find Baroness Scotland odious and wish that she would be hoisted by her own legislation and extradited to the United States to face Racketeering charges for employing an illegal immigrant as a cleaner, with the same prospect of spending 30 years in a Texas slammer as the NatWest Three.

But I would be despondent if she lost her job as Britain's Attorney General simply because she didn't ask for the passport, work permit, or citizenship papers of her 'daily'. Who on earth does? At least she paid tax and national insurance on her cleaner's wages, which is far more than most other people would do. In politics, it's best to watch your back.

Equally, there would be a poetic irony. It's the government's job to make sure that people are not here illegally – not the job of innocent householders who haven't got the energy to clean their own homes because they have to work round the clock to meet Gordon Brown's tax demands. They pay handsomely for the government's much-vaunted promise to keep the streets of Britain free of illegal immigrants. As Attorney General, Baroness Scotland is a part of that, and if she is falling down on the job, then yes, she should go.

Not that the policy makes sense anyway. Many supposed asylum-seekers flood here because of our cushy welfare system. Maybe we should start there if we want to stem the tide. But many other immigrants come and are willing to work hard, in dirty jobs, in order to better the condition of themselves and their families. If anything, we should be congratulating businesses and householders – and even ministers – for giving a job and a home to such deserving folk.

You're a what?

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I love Jeremy. I love fast cars. I love progress. But I learnt some things and those things terrify me. I learnt that climate change will make my future unrecognisable. I know that I’ll not have the same choices that Jeremy has now. If we keep on loving the fossil-fuelled lifestyle then by the time I hit 49 the world will be too busy coping with the impact of climate change to bother about how big an engine is possible. I’m the biggest libertarian of them all – I’m dumping dung at Clarkson’s gates so he might understand that his attitude will land us all in [it].

So said Tamsin Omond after dumping a load of manure on Jeremy Clarkson's lawn. Oh dear. This graduate seems to be using words she doesn't understand. Perhaps she should go back to university and find out what it means to be a libertarian.

Libertarians certainly wouldn't dump manure on the gardens of those who held views that were opposed to their own. They adapt to their surroundings and/or compensate others who they impose upon. What they don't do is run amok based upon some perceived future that may or may not actually occur. They found their beliefs in fact based upon a thirst for knowledge. Libertarians change their own lives so that they can live happily with themselves. They refrain from imposing their views on those around them recognising, maturely and respectfully, that they have no ownership over others. This is undertaken so that they themselves do not have their way of life infringed.

Sorry Tamsin, but you are not a libertarian. You're an enviromental-fascist. Please leave us alone so that we can avoid having our progress hindered and our futures' ruined via inhibitive enviromental legislation aimed at saving mother Earth.

The leaked 'cuts'

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Westminster is very excited about the recent leak from HM Treasury, which apparently revealed that – despite its repeated statements to the contrary – the government is planning to cut public spending by a cumulative 9.3 percent from 2011 to 2014. But is that really what the leaked documents suggest?

Well, up to a point. It is true that total departmental expenditure limits (DEL) will fall by 9.3 percent in real terms over that period. Look at this in cash terms though, and it just means departmental spending is going to fall from £390.5bn in 2010-11 to £386.3bn in 2013-14. And that's difficult to get excited about.

Moreover, departmental expenditure limits only represent part of public spending – about 58 percent of it in 2009-10. The real story in the Treasury's leaked figures is what's happening to the other parts of public spending. As the Institute of Fiscal Studies' Robert Chote wrote in The Times:

...the Treasury expects debt interest payments to rise by 11.1 per cent a year, social security costs by 1.4 per cent a year and other “annually managed expenditure" (such as public sector pension payments and contributions to the EU) by 3.1 per cent a year.

The result of this is that total public spending – surely the figure we should be most concerned with – is set to rise from £620bn this year to £760bn in 2013-14, when we will still be running an annual deficit of almost £100bn.

Of course I'm happy that politicians are finally talking about cutting public spending, but if they imagine that these so-called 'cuts' will be enough then they've got another think coming. Vince Cable seems to realize this – his recent paper for Reform suggested up to £112bn of cuts over the course of the next parliament. George Osborne and Alistair Darling have some catching up to do.

Public expenditure – identifying the mechanism

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In recent weeks, much political debate has focussed on public expenditure, which – given the unprecedented levels of government borrowing – needs to be cut sharply. However, most solutions being put forward focus on scrapping or cutting spending on individual programmes. Whilst there are compelling financial cases for abandoning the Crossrail project, for substantially reducing the costs of the replacement Trident programme and for means-testing child benefit, this pick n’ mix approach is not analytical.

Instead, the next Government should implement a top-down approach by focussing on the 2009/10 public expenditure projection – before interest – of £671 billion: any Government forecasts beyond the current year carry little credibility. To regain control of public expenditure, ongoing real cuts of c3% per year should be applied to this figure. Hence, for 2010/11, the next Government should aim for a £650 billion out-turn. Subsequently, departmental budgets should be specified by the Treasury to enable such a figure - before any unforeseen contingency items - to be reached. Consequently, major spending departments, such as Social Security, Health, Education and Defence, should be required to operate within these figures.

It should also be made perfectly clear that - like the Chief Executive of any major plc - the Secretary of State is primarily responsible, with his ministerial team, for deciding how the allocated departmental budget is met. Top civil servants, including the departmental Permanent Secretary, should be obliged to play a leading role in ensuring that the best possible services are provided within the budgeted amount.

Any unreasonable failure to deliver should be punished in the same way as applicable to FTSE-100 Chief Executives, whose turnover ratio is high – though still well below that of Premier League football managers.

Of course, there would be political flak but is anything more important at present than regaining control of the UK’s parlous public finances?