Economics

So here\’s the announcement:

This year\’s Nobel Prize in economics goes to Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson.

Greg Mankiw then asks:

Eric is used to teach economic theory at Harvard and was a great teacher and colleague. If my recollection is correct, when he moved from Harvard to the Institute for Advanced Study in Princeton, he bought the house Albert Einstein used to live in. I wonder if there are any other houses that can claim two Nobel laureates.

Err, any house that Linus Pauling lived in between 1962 and 1994?

OK, so we want to talk about inequality and possible responses to it. Sure, OK:

I might add that serious egalitarian-oriented health care reform — if indeed it succeeded — would significantly lower the case for greater progressivity of taxation.

Aha! So, if we\’re really interested in equality of outcome (which is what at least part of the argument about redistributive or progressive taxation is about) and we move 10% of the economy into an egalitarian form (bear with me, 10% is roughly right for that part of the economy in the UK which is the health sector) then we have to worry less about the equality of the other 90%. If we move another 5 or 10% (whatever it is for education, say) into such a state funded egalitarian form then we need to worry less about the inequity in what remains.

In fact, as we move anything from a grossly inegalitarian distribution into a more egalitarian one, we need to worry less about the inequitable distribution of those parts of life which are left distributed so.

So, over the past couple of hundred of years, we have seen a huge decrease in the inequality of many things. Of caloric intake, of height, of protein intake, of leisure time, of length of life, of the survival of children, of housing, of clothing, literacy, numeracy: in fact, in just about everything that is actually important to a human life well lived.

We may well have Victorian levels of inequality in income distribution (we don\’t, but people like to say so) or of wealth (ditto) but we absolutely and most certainly do not have such inequalities in all of the things which actually matter.

Which really rather leads me to the conclusion that we shouldn\’t worry about income inequality as much as we do. Because it\’s simply a trivial vestige of the much greater inequalities of the past.

At last Friday\’s Cato luncheon featuring Gregory Clark, Clark emphasized that settled agriculture is a much more arduous lifestyle than hunter-gathering (he said if he had to be tossed back in time prior to 1800 he would rather be placed in a hunter-gatherer society than in an agricultural one). To get the same amount of food, the civilized farmer has to work a much longer day.

When a modern factory becomes available, it\’s not such a great stretch for a farmer to adapt. But for a hunter-gatherer, the long work day and monotonous nature of labor are really alien. Thus, it was much easier for Japan or China to eventually industrialize than it has been for Australian aboriginals or for Africans.

As long as we restrict that to Africans with a hunter gatherer lifestyle (and thus not the Bantu tribes and many others who are indeed farmers) then yes, that might be part of it.

On Sunday I visited the only biosphere reserve in Wales: the Dyfi estuary. As is usual at weekends, several hundred people had come to enjoy its beauty and tranquillity and, as is usual, two or three people on jet skis were spoiling it for everyone else. Most economists will tell us that human welfare is best served by multiplying the number of jet skis. If there are two in the estuary today, there should be four there by this time next year and eight the year after. Because the estuary\’s beauty and tranquillity don\’t figure in the national accounts (no one pays to watch the sunset) and because the sale and use of jet skis does, this is deemed an improvement in human welfare.

Err, no. Most economists would say that the sale of jet skis indicates a rise in GDP and would then, if you\’d just sit still for long enough to understand what they\’re trying to tell you, point out that the noise is what is known as a negative externality. That this is one reason why GDP isn\’t actually the be all and end all of the system and certainly, that a rise in GDP can accompany a decline in human welfare due to those very same externalities.

This sort of stuff is covered in A Level economics, even the new simple version for today\’s state educated. Might be worth buying one of the textbooks perhaps.

For he more advanced, a huge chunk of economics over the past few decades has been devoted to exactly this matter: the difference between economic growth and growth in human welfare. The two are not synonymous and the interesting questions are about when they diverge and what we do about it when they do.

Where economists do divide on such matters is what to do about the situation. Some would advocate taxing the jet skiers (Pigou taxation). Another idea (one I would support myself) is that the reserve should be private property and the owner charge people for watching the sunset, and for riding jet skis. A profit maximising owner would then balance the higher fees willing to be paid by the small number of skiers against the larger number of people and their smaller fee for going "Ahhh!" at the setting sun. We would thus find out who vaued the resource more, by what people are willing to pay, and in that process of discovery we would also find our solution: that scarce resource would be being used for its most highly valued use.

The massive improvements in human welfare – better housing, better nutrition, better sanitation and better medicine – over the past 200 years are the result of economic growth and the learning, spending, innovation and political empowerment it has permitted. But at what point should it stop? In other words, at what point do governments decide that the marginal costs of further growth exceed the marginal benefits? Most of them have no answer to this question.

Because it\’s not actually a question that governments should be asking. We don\’t hire our governors to decide such things for us., We hire them to do only those things that must be done collectively and with the monopoly of violence and impulsion that the State possesses. Whether there should be economic growth or not (which at heart is the question of whether there should be technological advance or not) is not one of those things for the State to decide.

Is it not time to recognise that we have reached the promised land, and should seek to stay there? Why would we want to leave this place in order to explore the blackened wastes of consumer frenzy followed by ecological collapse? Surely the rational policy for the governments of the rich world is now to keep growth rates as close to zero as possible?

It would appear that George hasn\’t actually read his own beloved IPCC reports. Specifically, the SRES.

In the A1 scenario family, demographic and economic trends are closely linked, as affluence is correlated with long life and small families (low mortality and low fertility). Global population grows to some nine billion by 2050 and declines to about seven billion by 2100. Average age increases, with the needs of retired people met mainly through their accumulated savings in private pension systems.

The global economy expands at an average annual rate of about 3% to 2100, reaching around US$550 trillion (all dollar amounts herein are expressed in 1990 dollars, unless stated otherwise). This is approximately the same as average global growth since 1850, although the conditions that lead to this global growth in productivity and per capita incomes in the scenario are unparalleled in history. Global average income per capita reaches about US$21,000 by 2050. While the high average level of income per capita contributes to a great improvement in the overall health and social conditions of the majority of people, this world is not necessarily devoid of problems. In particular, many communities could face some of the problems of social exclusion encountered in the wealthiest countries during the 20 th century, and in many places income growth could produce increased pressure on the global commons.

Energy and mineral resources are abundant in this scenario family because of rapid technical progress, which both reduces the resources needed to produce a given level of output and increases the economically recoverable reserves. Final energy intensity (energy use per unit of GDP) decreases at an average annual rate of 1.3%. Environmental amenities are valued and rapid technological progress "frees" natural resources currently devoted to provision of human needs for other purposes. The concept of environmental quality changes in this storyline from the current emphasis on "conservation" of nature to active "management" of natural and environmental services, which increases ecologic resilience.

So, to achieve lower population, we need higher growth. To get lower carbon intensity, we need high growth. To pay for the tranistion to a low carbon economy we need high growth (it\’s one ofthose things they discuss, that to get rapid technological turnover you need high growth).

Of course, George says that to get these things we should have no growth. Lucky he\’s so well read, isn\’t it?

Following on from this morning\’s wonders about houshold income, I\’ve had a response. For those who didn\’t see it, I was wondering about this:

While the average household gross income has climbed over the past decade from £34,796 to £53,835, people have far less of that money to spend each month after they have paid essential bills.

That gross income looks very high indeed for the average household.

I\’ve had a response from the people who did the original report:

Average household income in 2005 was £49,335. This was calculated using ONS figures for the total gross income for the UK as a whole in 2005 and dividing this by the number of households in the UK in 2005. The ONS data for 1997 to 2005 was used to calculate a compound annual growth rate of 4.461%. This was used to calculate the 2007 estimation.

 The estimation part looks fine. But running these numbers backwards (24 million households times £50 k a year gives £1.2 trillion, roughly GDP) makes me think that they\’ve used GDP for "total gross income". Now technically you can do that to give an approximation. I\’ve forgotten the technical descriptions of GDP and trying to look them up doesn\’t give me what I want: the adjustments needed to give a more accurate figure. Aren\’t total household incomes equal to consumption equal to value added? Or do we need to adjust for retained profits, savings, etc? The perils of only knowing a little perhaps.

Anyway, that\’s how we get that very high figure, GDP divided by the number of households. It\’s high because it\’s the mean, not the median, and because, well, we don\’t normally define household income that way anyway.

So says a report from uSwitch:

In 1997, when Labour came to power, people were left with 34.5 per cent of their gross income once they had paid taxes, national insurance, mortgage or rent. Now they are left with 32.6 per cent, says a report by uSwitch, a price comparison website.

It is the latest survey to highlight how millions of households have failed to benefit from the strong economy because of rising taxes and escalating bills. Ernst & Young, the accountants, calculated this year that the average family had £838 left to spend each month, compared to £899 four years ago.

There\’s three things to say about this.

While the average household gross income has climbed over the past decade from £34,796 to £53,835, people have far less of that money to spend each month after they have paid essential bills.

That gross income looks very high indeed for the average household. Might they be talking about the mean rather than the median? Rolling around the back of my mind I have the idea that the median US household income is somewhere in the $40-$50k a year range and I really don\’t think that the UK is richer than the US, nor that (as an alternative explanation) the average UK household is more than twice the size of the average American one.

The second is that they\’re rather confusing two things:

Increases have hit four key areas in the past 10 years. Petrol — often the biggest cost for a family after their housing — has increased by 55 per cent and phone and internet bills have risen 77 per cent as millions more use broadband and mobile phones.

So there\’s a change in the composition of "essential spending" as well as a change in the prices.

Finally, the Treasury is probably correct here:

He said: "As a result of tax and benefit measures introduced by the Government, this year all households will be on average £1,000 a year better off in real terms and families with children will be on average £1,550 a year better off in real terms, compared to 1997."

For the original calculations don\’t seem to (although as I can\’t find the report I can\’t check) include benefits, only tax. But this is untrue:

A Treasury spokesman denied that Government tax policies had eaten into incomes.

Of course the tax policies have eaten into incomes. It\’s the benefit policies that might have amended this, but tax per se must eat into incomes.

But I think the biggest fault is in their headline figure for average household incomes. I really don\’t believe that that is the median. Median individual earnings are £26 k a year aren\’t they? And it is most certainly not true that the average household has two incomes at that median now, is it?

Worth remembering that:

We should not be surprised by such profligacy. In 2001 Brown stated that the UK would borrow a total of £28bn between 2001 and 2006. He ended up borrowing £129bn during that period. So his "prediction" was more than £100bn astray.

It\’s not just the tax rises, it\’s also the rise in borrowings: and, even more than that, the rise in promises of future spending (on pensions and the like) which are not being accrued.

Future taxes have gone up by vastly more than current ones have.

I see in Wikipedia the following:

Ricardo became interested in economics after reading Adam Smith\’s The Wealth of Nations in 1799 on a vacation to the English resort of Bath. This was Ricardo\’s first contact with economics. He wrote his first economics article at age 37 and within another ten years he reached the height of his fame.

Ricardo\’s work with the stock exchange made him quite wealthy, which allowed him to retire from business in 1814 at the age of 42. He then purchased and moved to Gatcombe Park, an estate in Gloucestershire.

Gatcombe Park is of course where the Princess Royal lives now. But other than that, does anyone know the address in Bath where Ricardo first read Smith?

Being a Bathonian and, as is well, known, something of an economics geek, I\’d love to find out. Any ideas? Any ideas about how to even find out?

Interesting little thought:

The paper, published today in the Proceedings of the National Academy of Sciences, looked at the ultimatum game, in which a proposer makes an offer to another person on how to divide a sum of money.

The researchers found that twins were more likely to behave in the same way as each other when deciding whether to accept an offer.

"This raises the intriguing possibility that many of our preferences and personal economic choices are subject to substantial genetic influence," said the study\’s lead author, Bjorn Wallace of the Stockholm School of Economics.

See, I can\’t help being a greedy capitalist bastard: I was born this way!

Yes, he\’s as confused on this subject as he is on all the others.

Instead of the profits being spread to the roots of the game and the communities in which the clubs are embedded, the Premier League has become the vehicle for financial engineering that makes private equity look honourable. In essence, clubs are being bought at astronomic prices, then the revenue they generate is used to pay back the debt their new owners incurred. The winners are the selling shareholders, the loser is football.

So the winners are the selling shareholders. That\’s the Brits who currently own the clubs, eh? You\’d think that a bunch of Brits doing well from hte way they hav developed an industry over some decades would be regarded as a good thing but no, in Hutton World, this is a bad thing.

Last week, Russian billionaire Alisher Usmanov took his stake in Arsenal closer to the 30 per cent that would trigger a full bid. Despite the club\’s robust talk of staying British, the eye-watering price he can afford to pay for the shares, to be financed by the club\’s own revenues post takeover, surely means it is only a matter of time before even this citadel falls.

But Will. If it\’s all being financed out of the club\’s own revenues then it doesn\’t have to be a billionaire that buys it, does it?

Chelsea and England captain John Terry\’s recent £135,000-a-week contract, a catch-up with the pay of Chelsea imports Michael Ballack and Andrei Shevchenko, is a classic example of the inflationary dynamic.

Indeed, this is absolutely a classic example. Of the way in which in talent based industries, all the money flows to those with the talent. They might only be 1% better than the other hundreds of thousands of soccer players in the country but that 1% means that they are in great demand. The same is true of merchant bankers, film stars, actors and so on. The owners (whether individuals or more widely spread shareholders in listed companies) get the short end of the stick here as that competition to hire that rare talent means that the workers\’ wages spiral ever upwards.

But then I thought that as a man of the left, Hutton was in favour of the workers getting the money, rather than the capitalist overlords?

What to do? Ten days ago, Michael Platini, incoming president of the Union of European Football Associations (Uefa) wrote to Gordon Brown arguing passionately that \’the values championed by football are a powerful source of social integration and civic education\’. Now the values are money. He wants pan-European action: wage caps on players; quotas for home-grown players; regulations on agents; financial checks on owners; revenue sharing between clubs; and redistribution of revenue into lower leagues. Platini even wants a reference to sport\’s special nature in the EU Reform Treaty.

Does Hutton want this? Salary caps for God\’s sake? That the workers should not get the full value of their contribution?

Football values must be reasserted and some limits have to be negotiated and it will have to be an initiative on a pan-European scale. The way things are, it cannot and will not include free-market, Eurosceptic, every- asset-can-bought-by-anyone England.

Apparently so. What a liberal man Will Hutton is, to be sure.

An interesting little detail in this story about the Greek fires this summer:

In the absence of a land registry and forest maps, Greeks invariably have been able to build with impunity in areas that would normally be protected.

So at least part of the cause of the fires was the absence of clearly delineated property rights. Tsk, it is something that people do try to point out a lot, that when they are not clearly marked out and registered, then you will get problems.

As with what used to happen in Portugal: if the forest burned down you would get planning permission for it. Now, as a result of a change in the law, you have to replant it. Amazingly, the number of fires has fallen.

So this summer\’s fires: not necessarily climate change, but a dereliction of duty by the Government….not necessarily the current one either. A systemic failure to allocate and then defend property rights.

This is interesting news don\’t you think?

The bull runs of the 1980s and 1990s, and the first half of this decade, with their epoch-making transfer of wealth to the richest 1% of the population, have distracted attention from the actual long-term weakening of advanced capitalist economies. Economic performance in the US, western Europe and Japan has, by virtually every standard indicator – output, investment, employment and wages – deteriorated, decade by decade, business cycle by business cycle, since the early 70s.

1) There\’s been no transfer of wealth. There\’s been a differential allocation of the new wealth created, yes, but not an actual transfer.

2) Err, output, investment and wages are all lower than they were in the early 1970s? It is to laugh.

The years since the current cycle began in early 2001 have been the worst of all – in the US, growth of GDP and jobs has been the slowest since the end of the 1940s, and real hourly wages for about 80% of the workforce have languished at about their 1979 level.

I would love to see where that wages number comes from, really, I would. I have a sneaking suspicion that he\’s looking at "real hourly wages of all employees". Which, given that there\’s been a huge structural change in the workfoce since thn, with part-timers and women flooding into it, is really not a very enlightening number.

The rest of it reads rather like the coming of the Marxist Gotterdamerung. Falling profitability…corporations oppressing the workers….wouldn\’t be surprised to see the reserve army of the unemployed turn up along with the progessive immiseration of the working classes.

Sigh, I thought we\’d rather given up on that failed analysis?

The Great Compression is the extreme fall in income inequality that happened in the late 1930s, early 1940s in the US. The one that has largely reversed in recent decades (although I would prefer it if the people complaining about said reversal were willing to note that the earlier inequality was driven by returns to financial capital and the current by returns to human capital). Various explanations for all of this are put forward but I have to admit that I like Tyler Cowen\’s:

Crush the incomes at the top and then make the fat cats pay much higher wages to protect the world and become a superpower.  Impose wage and price controls as well.  See how long it takes before these distributional effects — which don\’t exactly match the distribution of economic talent– reverse themselves in the aggregate.

Really, he is:

In the long history of Labour as a governing party, nothing – but nothing – has been as politically destructive as financial crisis. The slump of 1931, the devaluations of 1949 and 1967 and the IMF bail-out of 1976 inflicted mortal wounds that destroyed four Labour prime ministers and sent four Labour governments to their electoral graves. Collectively these events had an even more devastating effect, cumulatively undermining the plausibility of the entire 20th century Labour governmental project and barring the way to a sustained British social democratic settlement on European lines.

Whether the run on Northern Rock of 2007 has triggered another episode to rank with those past traumas it is still too early to say.

…

But there is a radical option too. This says that Northern Rock proves that the right sort of government regulation and intervention will support, not destroy, strong markets and good businesses.

Quite. The right sort of government intervention and regulation will indeed support strong markets and good businesses. There\’s no one (at least no one rational) who would dispute this. All we need now is to work out what is the right sort of government intervention. On the evidence that Martin himself offers, the Labour Party has failed to get the right answer to this question four times and the result at the fifth time of asking is as yet unknown.

There is a very good argument for the right type of intervention but I\’m not sure that the above is a very strong argument for Labour knowing what the right type is.