The National Trust

Well, yes:

The report says land and its natural resources were undervalued, underfunded and needed better care……The trust, which manages 250,000 hectares of open countryside and 700 miles of coastline, says it had drawn on its experience as Britain\’s biggest landowner after the Government in writing its Nature\’s Capital report.

When the largest landowner in hte country is a charitable trust, one which does not manage land for its economic value, then, yes, it\’s pretty clear that here will be a misvaluation of land by the market.

Erm, Guys, Macro, Macro

Drinkers and drivers were hit in the pocket yesterday as Alistair Darling used them and a borrowing surge to try to steer Britain away from recession and through global financial storms.

I bloody well hope that\’s not what Darling is trying to do. The borrowing makes sense in Keynsian terms. If there\’s a recession coming along then deficit spending is a reasonable thing to do (although there\’s a lot to be said fo the idea that we\’ve already got enouh natural such spending  built into the system).

But raising taxes is, under the same rubric, entirely the wrong thing to do. Because, er, the aim of deficit spending is to boost spending, see, not just move it from the drinker\’s pocket to the public sector\’s.

Tax Incidence Again

I\’ve had a response to an earlier post from John Christensen of the Tax Justice Network. Essentially, he takes issue with my contentions about tax incidence: the idea that just because a company is handing over a cheque for corporation tax, it doesn\’t mean that it\’s the corporation bearing the burden of that tax. Here\’s what he says:

I am an economist.  The idea that the tax incidence might be shifted, in some circumstances, from shareholders to workers or consumers, is based on very specific assumptions relating to the nature of the economy in question (i.e. it is a closed economy), the structure of the labour force (full employment is assumed) and the capital market (assumed to be perfectly competitive).  Back here on planet Earth, we recognise that these assumptions don\’t apply, and the model is merely an exercise in academic guesswork.  In real life very economies (other than North Korea) operate as closed economies, and companies do pay tax on behalf of their shareholders: hence the huge effort made by the corporate sector to avoid paying taxes and lobby for tax breaks.   Greetings from planet Earth.   John

Note please that he insists that such shifting of the burden depends upon it being a closed economy.

Here is the Congressional Budget Office on the subject:

This study applies a simple two-country, five-sector, general equilibrium model based on Harberger (1995, 2006) to examine the long-run incidence of a corporate income tax in an open economy. In equilibrium, capital is assumed to be perfectly mobile internationally in the sense that the country in which a real investment is located does not matter to the marginal investor. In addition, each country is assumed to produce at least some tradable corporate goods for which the country cannot affect world output prices. Like the original Harberger (1962) model, the worldwide stock of capital and the supply of labor in each country are fixed. Under those assumptions, the model provides closed form solutions and easily understood predictions about its comparative static equilibria. As with any simplified model, the analysis is silent about some potentially important issues – such as the effect of the corporate tax on savings, growth and other dynamics – that may also have important effects on corporate tax incidence.

We are, of course, still using a model, but we\’re certainly not assuming a closed economy. Their finding?

Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden. Domestic landowners receive a small benefit. At the same time, the foreign owners of capital bear slightly more than 70 percent of the burden, but their burden is exactly offset by the benefits received by foreign workers and landowners.

John, given that the assumptions you make about the model are wrong, might you want to address this issue of tax incidence again?

As to the rest of you, well, make up your own minds. You want to believe a buddy of Richard ("tax is not a cost") Murphy or the Congressional Budget Office?

Crazed Economic Thought of the Day

A trade deficit increases the workers\’ wages.

No, no, hold on. We know that an increase in the capital stock raises wages…more machines are bought, productivity rises, capitalists compete for the labour to man those machines, wages rise.

A trade deficit means a capital account surplus: it must do, it\’s an accounting identity.

So a trade deficit means an increase in the capital stock, which thus drives up wages.

What have I missed?

Good Grief!

He\’s going to get shot for saying this, isn\’t he?

In a speech to the Labour organisation Progress, he will say: "Aspiration and ambition were natural human emotions – not the perverted side effect of primitive capitalism.

"Rather than questioning whether huge salaries are morally justified, we should celebrate the fact that people can be enormously successful in this country. Rather than placing a cap on that success, we should be questioning why it is not available to more people. Our overarching goal that no one should get left behind must not become translated into a stultifying sense that no one should be allowed to get ahead.

"I believe a key challenge for New Labour over the coming years is to recognise that, far from strengthening social justice, a version of equality that only gives you the opportunity to climb so far, actually subverts the values we should be representing.

"Instead, any progressive party worth its name must enthusiastically advocate empowering people to climb without limits, free from any barrier holding them back."

Which brings us to this excellent image.


So, we have adjusted everything so that we can compare like with like. Instead of using market exchange rates, we use PPP, as we should do when comparing internationally. We\’re measuring the standard of living that is.

Further, this is after all of the tax and benefits: so it\’s the actual standard of living that people have. In the paper itself, Smeeding discusses things like health care and food prices (more expensive in the US for the former, in the EU for the latter) and so on. He calls those differences pretty much a wash.

Finally, we\’re comparing these living standards to one simple standard: median US income. So, the way to read this chart is that the poorest 10% in Sweden enjoy 38% of the US median income. The richest 10% of Swedes have 113% of the US median income. Finland it\’s 38% and 111%.


Now, look at the US system. 39% of US median income. So, the living standard of the poorest in the US is actually higher than the living standard of the poorest in either Sweden or Finland. All that horribly oppressive taxation, that huge redistribution of resources, leads to an improvement in the lives of the poor of precisely….umm,… nothing.

But look at the richest 10% in the US: 210% of median income. Climbing without limits, eh, free from barriers.

Clearly the US system, the provision of a minimal welfare state, a safety net, in Bill Clinton\’s phrase, a hand up not a hand out, creates greater freedom and liberty for said climbing that the Nordic system of insisting upon confiscating the majority of the economic product of the successful. And it does so while giving the poor exactly the same standard of living as that crushing of freedom.

So, anyone who believes in said freedom should be looking to move from the Nordic style confiscatory tax regime to the US lighter touch, yes? After all, the poor do just as well, while the others do better: it\’s a Pareto improvement, making some better off while making no one worse off.

This is otherwise known as a free lunch, something that we are always at pains to insist does not exist within economics….until we meet politicians that is, for their actions can indeed be so counter-productive as to leave us with said free lunch if we can only get them to stop committing the lunacies that they currently are.

An Excellent Argument

Henry at CT.

If he’s being quoted accurately, Mankiw seems unduly defensive. If I were him, I’d take a much more pro-active stance. I’d claim that I was teaching my students a valuable practical lesson in economics, by illustrating how regulatory power (the power to assign mandatory textbooks for a required credit class, and to smother secondary markets by frequently printing and requiring new editions) can lead to rent-seeking and the creation of effective monopolies. Indeed, I would use graphs and basic math in both book and classroom to illustrate this, so that students would be left in no doubt whatsoever about what was happening. This would really bring the arguments of public choice home to them in a forceful and direct way, teaching them a lesson that they would remember for a very long time.

Yup, that would do it.


Spotting the Laffer Curve in the Wild

Now, we all know that the Laffer Curve exists, that\’s a simple piece of maths. Where all the argument comes in is at what tax rates do we start to see Laffer Curve effects?

Such effects can go either way: a fall in tax rates leading to higher tax collections, or a rise in tax rates leading to lower such revenues. The Guardian tells us that we\’ve actually spotted one such Laffer effect in the wild:

The last time a windfall tax was imposed on North Sea operators in 2005, it brought short-term gains to the Treasury but led to a slump in drilling activity that ultimately cut tax revenues.

Interesting, no?

Fair Pay Network

Yes, we\’ve got another bunch of do-gooders around, the Fair Pay Network.

Evidence suggests that fair pay policies increase worker efficiency within organisations that adopt them. This is primarily felt through the contribution which fair pay levels have in combating the recruitment and retention problems which plague employers of low-paid workers.

This is, of course, true. But they\’ve missed the important part of it. It is only true for the companies that adopt it if most other companies do not adopt it.

Companies are in competition with each other for the best workers: workers are in competition with all other workers for the best available jobs. If you raise the pay then as the employer you\’ll be beating your competition for those best workers: if as a worker you\’re getting better pay than others then you\’ll work harder and better to keep that better pay. Plus, of course, you\’re less likely to switch jobs (staff recruitment is a very high part of the total costs in some sectors).

All excellent stuff of course. But if everyone now starts paying "Fair Wages" (what they mean is the Living Wage) then these benefits for the company disappear, for neither of the two driving forces remain extant.

So, err, by campaigning for all businesses to pay "Fair Wages", the organisation is campaigning to eradicate the very reason that fair wages are beneficial to those businesses which pay them.


Interesting Stuff on the Part Time Pay Gap

From the upcoming Economic Journal,

Women in Britain who work part-time have, on average, hourly earnings about 25% less than that of women working full-time. This gap has widened greatly over the past 30 years. This article tries to explain this part-time pay penalty. It shows that a sizeable part of the penalty can be explained by the differing characteristics of FT and PT women. Inclusion of standard demographics halves the esti- mate of the pay penalty. But inclusion of occupation makes the pay penalty very small, suggesting that almost the entire unexplained gap is due to occupational segregation. The rise in the pay penalty over time is partly a result of a rise in occupational segregation and partly the general rise in wage inequality. Policies to reduce the pay penalty have had little effect and it is likely that it will not change much unless better jobs can be made available on a part-time basis.

So, the part time pay gap is something like 12.5% when you account for the differences between the people doing the full and part time work (note, not the 36% that the Fawcett Society blather on about) and just about zero when you account for the fact that people are doing different jobs.

As pay is, in the end, determined by how many people there are willing and able to do a job as against how many people wish that job to be done (ie, our old friends, supply and demand)  it\’s difficult to reject the conclusion that there is in fact no part time pay gap.

And thus no problem to solve.

Polly on Gambling

My, how things do change. A couple of years ago Polly wrote a book in which she denounced the £50 billion gambling industry.

the £9.7bn a year that the Office for National Statistics shows households lose

Somebody\’s obviously had a word, as that is indeed the correct sum to be using: losses, not turnover. Another way of framing that number is (this is a dimly recalled number, apologies) that it\’s somewhere between one and two percent of consumer expenditure.

However, there has never been any sign of popular demand: in national polls 93% saw no need for more casinos. They are opposed by majorities locally, by women even more strongly than men.

So if there\’s no sign of any popular demand then people won\’t build the casinos, will they? No one deliberately sets out to lose money on a new business after all. It may well be true that a majority of the population see no need for more casinos, that they won\’t in fact go to them if built: but in a liberal democracy that\’s no reason to stop those who do wish to go to them. As long as peoples\’ activities do not harm others there is no moral case for us to stop them doing as they wish: it\’s what the very concept of being a liberal means.

The US, on the other hand, has gone the other way, banning online gambling by forbidding credit card companies to pay out to online sites. There are elaborate ways round this, but it stops impulse online gambling by anyone with an ordinary credit card. Why don\’t we do that?

Because it\’s a grossly illiberal restriction upon freedom and liberty perhaps?

The Australian government now draws over 10% of its income from gambling:

No. This is deliberately misleading. "The Australian Government" is the Federal one. That\’s the one that levies corporation tax and income tax, as examples. See here. The Federal Government raises a little over 20% of GDP through taxation: none of it from gambling. The State Governments are the people who tax gambling. Total State tax revenues are a little under 9% of GDP and the average of that 9% which is raised from gambling is the 10% Polly uses. Translating that back into UK figures, some 0.9% of GDP, we get a tax take of £10-£11 billion. A useful chunk of change, certainly, but really rather different from her implied number, 10% of total tax revenue, or £55-£60 billion, isn\’t it?

The UK Treasury gets only £1.4bn from gambling: on household losses of £9.7bn, that sounds as if the industry is escaping its fair UK dues.

It is to snigger. Household losses are of course not the profits of the gambling companies. They are the revenues of them. Out of those revenues they rent their buildings, pay their staff, run the advertising campaigns and so on, plus of course they have profits upon which they pay tax. But for the government to be screwing 14% of total turnover out of an industry is really quite impressive: outside sectors like domestically pumped oil (with the royalties upon it) I\’m not sure that there is any other sector so heavily taxed. Be very interested to know if there is of course.

One thing that might further amuse: those total losses are the total revenues: out of which are also paid such things as the good causes fund from the lottery.

No-one is suggesting banning gambling or casinos, any more than I would ban pornography, or drugs or all manner of things that might do people harm.

Well, you did just suggest banning internet gambling, as in the US.

What is it about gambling that makes Polly so confused?

Hillary Clinton

I think it’s imperative that we approach this mortgage crisis with the seriousness that it is presenting. There are 95,000 homes in foreclosure in California right now. I want a moratorium on foreclosures for 90 days so we can try to work out keeping people in their homes instead of having them lose their homes, and I want to freeze interest rates for five years.

She is going to lose, isn\’t she? Please God? Please?

Communism Don\’t Work

This is something I\’ve said a lot. Nice to see a real economist making the same points:

What does this have to do with the world of 1997? Well, nowadays we take the triumph of capitalism as something preordained by the superiority of our economic system. After all, it now seems obvious to everyone except North Korea and Cuba that a market economy is vastly more productive than one controlled from the center – and the Cuban economy is imploding, while the North Koreans are quite literally starving to death. Moreover, every time a Communist regime collapses, it turns out that the actual state of the economy it governed was far worse than anyone had imagined. For example, typical estimates of the GDP of East Germany before the old regime collapsed put its real GDP per capita at 70 or 80 percent of the West German level – meaning that East Germany was actually richer than some regions in the West. Yet after the fall of the Berlin Wall, visiting Westerners found something that looked like a Third World economy, with antiquated factories (and disastrous environmental problems) producing consumer goods of ludicrously low quality (like the notorious East German Trabant, an automobile that makes a Honda or Ford seem like a Mercedes). We used to think that the Soviet Union had an economy about half as large as America\’s, that is, bigger than Japan\’s; nowadays Russia seems to have less economic power than, say, Italy.

What a Surprise!

Britain\’s biggest supermarket is urging the Government o introduce new laws to ban the sale of cut-price alcohol amid growing concern over the level of drink-fuelled crime and disorder.

Bollocks. Alcohol is used as a loss-leader. Stop people from competing on the price of alcohol and supermarket profits will go up: and consumerbenefits go down. This is a markedly pro-capitalist and anti-consumer measure.

Ashley Seager: Moron

Please, please, can we get this right?

A properly designed FIT rewards early adaptors, helps kick-start a new industry and creates jobs. The German PV industry added 10,000 jobs last year.

"Creating jobs" is a cost of such schemes, not a benefit. Jebus, why are all the writers on this subject such morons? Have they not learned the very basics yet?


Err, Anatole?

Thursday\’s quarter-point rate cut, to 5.25 per cent, left British interest rates more than a full percentage point above the level prevailing in every leading economy apart from Australia.

Come along now, that\’s an irrelevance. We don\’t care what nominal interest rates are, only real. What\’s the number after we adjust for inflation? From memory (and using RPI not CPI) UK rates are now something like 0.5%, maybe 0.75%.

Explaining a Little More of the Gender Pay Gap

As you all know, I\’m pretty certain that we don\’t really have a gender pay gap in the UK. That is, we don\’t have one cause by direct discrimination against women, or what is known as taste discrimination.

I\’m also absolutely certain that there is indeed a difference between the average wages earned by women and those earned by men (or if you want to be picky, those paid to each). The difference is explained by a mixture of things: choices in jobs, choices in hours put in, there\’s most certainly a huge effect from childbirth and rearing and so on.

One more to add to the list:

When it comes to short periods of sick leave, women take almost 50% more time than men. This was found in a study conducted in Finland, published in Occupational and Environmental Medicine on February 5, 2008. However, when long term sick leave is evaluated, neither women nor men are dominant.

Researchers Laaksonen, Martikainen, Rahkonen, and Lahelma assessed periods of sick leave in a population of 7000 municipal workers in Helsinki, Finland between 2002 and 2005. Aged between 40 and 60 years, they were surveyed regarding their working lives and general health.

For short periods of self-certified sick leave, women were 46% more likely than men to call in. When certified by a doctor, they were also a third more likely to take a short term sick leave. However, diagnosed illnesses explained only about one third of the differences in self certified and one half of doctor certified sick leave.

But diagnosed illness explained only about a third of the difference in spells of self certified sick leave and about half of that certified by a doctor. The authors suggest in explanation that women may be better at recognizing problems and going to the doctor for treatment.

For periods longer than two weeks, the gender differences in sick leave weakened. By the time a leave is at a period of 60 days or more, men and women show few differences. This indicates that the divide between males and female sick leave is largely in short term periods of leave rather than long term.

Women commonly reported physical health problems, physical work demands, and work fatigue as reasons for leave. The psychological conditions of working and family related factors appeared to affect both genders equally, as did physical problems.