Proof of this supply side thing

Recall, the original contention was that if you lifted the incredible tax burden on the higher paid then they\’d all work harder and earn more money.

Pay has risen at a faster rate for Britain’s biggest earners than for anyone else over the past 25 years, according to research published yesterday.

The top 1 per cent of full-time workers have enjoyed a 117 per cent surge in between 1986 and 2011, according to the Office for National Statistics. The top 10 per cent and bottom 10 per cent received increases of 81 per cent and 47 per cent, respectively.

Seems to have worked, eh?

9 comments on “Proof of this supply side thing

  1. You can also take it as evidence that producer capture is entirely possible without government intervention. It’s those networks, clubs, gentlemen’s agreements. That’s why the workers see their jobs going to India while no one thinks to move the top management there.

  2. Tim

    Naughty Tim. Not evidence at all. Off hand, I can see several other reasons this might be the case:

    1) Highest paid employees previously received untaxed emoluments (expense accounts) that were abolished as a result of lower marginal tax rates. No change

    2) The tax net has become tougher (eg for company cars) and thus has reduced the relative benefit of tax dodges and brought the money into taxable pay. No change.

    3) JamesV’s producer capture – standard principal agent problem, managers keep their own jobs, but outsource production to India, even though outsourcing management to India is more efficient.

    4) High level workers have come here from abroad, changing the composition of the top 1% as UK tax rates have become more attractive. This doesnt mean the old 1% are more productive, we’ve changed the composition. Some change, but not evidence of harder work – trading off leisure for wages. (Evidence that lower tax rates are good for other reasons).

    It is possible that your explanation is correct. But the hypothesis is unproven.

  3. Well this is the problem with statistics. It’s not clear what this does prove, support or anything else. Who are these people? Are they public, private, third or “state connected” sector (the latter being nominally private businesses that only exist because of the State, e.g. wind farmers).

    You see, we ought to expect no consistent shifting of the proportions of the national income in a free market, just oscillations- sometimes lawyers will be doing a bit better than average, and ordinary shopgirls doing a little worse, then later on vice versa. But if there is, as it seems is being claimed here, a consistent shift of income, in a heavily statist economy, from the bottom to the top, that is rather suspect.

    So like I said, who are these people? Are they producers of economic value? Are they producing 117% more output in goods and services, or just being paid 117% more due to other factors? The statistic doesn’t say.

  4. Ian, I disagree, slightly. I would expect inequality to increase in a free market over time, because of technology. As Paul Graham says (http://www.paulgraham.com/gap.html), “I’ve seen the lever of technology grow visibly in my own time. In high school I made money by mowing lawns and scooping ice cream at Baskin-Robbins. This was the only kind of work available at the time. Now high school kids could write software or design web sites. But only some of them will; the rest will still be scooping ice cream.”

    However, he also says “Technology should increase the gap in income, but it seems to decrease other gaps. A hundred years ago, the rich led a different kind of life from ordinary people…

    [C]onsider watches. Fifty years ago, by spending a lot of money on a watch you could get better performance. When watches had mechanical movements, expensive watches kept better time. Not any more. Since the invention of the quartz movement, an ordinary Timex is more accurate than a Patek Philippe costing hundreds of thousands of dollars.”

  5. Milton Friedman made much the same point: “Industrial progress, mechanical improvement, all of the great wonders of the modern era have meant little to the wealthy. The rich in ancient Greece would have benefited hardly at all from modern plumbing — running servants replaced running water. Television and radio — the patricians of Rome could enjoy the leading musicians and actors in their home, could have the leading artists as domestic retainers. Ready-to-wear clothing, supermarkets — all these and many other modern developments would have added little to their life. They would have welcomed the improvements in transportation and in medicine, but for the rest, the great achievements of western capitalism have rebounded primarily to the benefit of the ordinary person. These achievements have made available to the masses conveniences and amenities that were previously the exclusive prerogative of the rich and powerful.”
    Reduced equality of income does not imply reduced equality of standard of living.

  6. James James,

    I’m not at all convinced by that argument; it would seem to me that we ought to expect a pretty stable normal distribution of incomes in a free market.

    It’s also worth bearing in mind that if your argument is correct (and it may be, I concede) then we free marketeers lose pretty much any utilitarian justification for promoting free markets. They really will be bad for the common man, and Marx was right, etc.

    One is then left with a “matter of principle” argument, that tells the poor man to accept his poverty as an articulation of a principle for which he does not give a damn, and which is to his disadvantage. I don’t believe I can sell free markets to my fellows on that basis, and I’m not entirely convinced that I want to sell such an ideology anyway. We are all utilitarians at heart, perhaps.

    But anyway, I don’t see why a free market won’t induce a flood of new entrants into a field like web design and bring the price down; that’s how it’s supposed to work, after all.

  7. we free marketeers lose pretty much any utilitarian justification for promoting free markets. They really will be bad for the common man, and Marx was right, etc.

    No, he’ll be better off. Both in simple financial terms and in ppp. What he won’t be is as much better off as the top end. Unless you are now subscribing in full to the relative poverty argument.

    It doesn’t matter that some people drive Rolls-Royces and live in mansions. It does matter whether you can afford the rent on a 3-bed semi (or 2-bed flat or whatever) and either, if you are condemned to live in the earthly purgatory that is London, your Oyster card or, in more civilised climes, a reliable 2nd-hand motor.

    Add your linen shirts (I’ll admit to owning 2) and whatever else you feel to the mix. It’s function, not bling, that’s actually important (we’ll ignore potlatch cultures.)

  8. JamesV – “That’s why the workers see their jobs going to India while no one thinks to move the top management there.”

    The former management of what is now ArcelorMittal may well disagree with you.

    Britain has been out sourcing management for decades now. Most of Britain’s car industry has had the management out sourced to Japan. Most of Britain’s chemical industry to the Netherlands. And then there is Mr Mittal. Wherever he currently resides. London I believe.

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