Memo to Guardian Journalists

And other assorted economic illiterates:

Now Martin knows as well as any economist that dividing a stock (wealth) by a flow (GDP) is a no-no, and immediately classifies you as economically illiterate, along with those others who divide, say, stock-market valuations of multinational enterprises with country GDPs to say things like "these companies are bigger than whole economies…"


Just Say No!

Errm, Dean, Well…

I see your point but….

The regulatory policy that states had in place was deliberately to designed to have a cross subsidy, with industrial users paying more so that residential and commercial users could pay less. One expected result of deregulation would be that this cross-subsidy would be eliminating, which would mean that electricity prices for residential and commercial users would rise relative to prices for industrial users. It would be quite striking, if it turns out that even industrial users did not benefit from deregulation.

I\’m perfectly willing to agree that such a cross subsidy was in fact what was planned, what was desired. However, I would argue that there is at least the possibility of an alternative explanation of the results of deregulation. That such a cross subsidy was not in fact achieved. That, despite the desires of the planners, it was actually industrial large users who were subsidised by residential and commercial users.

That does at least explain the observed facts, that industrial users are facing higher (I assume relative to commercial and residential…for if everyone is paying higher prices then that might just be changes in raw materials or fuel costs) prices under the deregulated system.

It also fits with my own prejudices Bayesian Priors, that when a system of such cross subsidy, of regulation, is set up, whatever the intended outcome, those with the biggest incentives are going to be those who strive most to make sure that the system benefits them. Thus the industrial users, given that they had vastly higher and more concentrated benefits from gaming the system than residential users did, worked harder to make sure that they system benefitted them, not the residential users.

In short, such planned systems might have an intended outcome, and we often see when they unravel that the actual outcome was the opposite of what was planned.

A good reason not to have such planned systems, of course.


I\’m Very Confused

And please stop laughing at the back there, yes, I kow, not an unusual situation.

Richard Murphy:

But what is clear is that in this case the banks, despite having a useful role for which they have been given the right to claim for themselves about 97% of all seignorage, worth about £45 billion a year for their profits, have declined to support Northern Rock even though it is, according to the Bark of England solvent and able to pay its way.

Hunh? Are bank profits in the UK actually £45 billion at all? I\’d be astonished if they were (note, profits from banking in the UK, not of global banks that happen to have their HQ here). The links gives me this:

That technical factor also points the way to monetary reform at the national level. Dematerialised non-cash money (i.e. electronic bank-created money held in bank accounts and transmitted between them by modern information and telecommunication technology) is now overwhelmingly important. About 97% of this country\’s money supply is created in that form by commercial banks, and only 3% as banknotes and coins issued by the Bank of England and the Royal Mint.

The commercial banks create the non-cash money out of thin air, calling it credit and writing it into their customers\’ current accounts as profit-making loans. That gives them over £20 billion a year in interest, while the taxpayer gets less than £3 billion a year from the issue of banknotes and coins. Stopping
commercial banks creating non-cash money, and transferring to the central bank responsibility for creating it and issuing it debt free to the government to spend into circulation, will result in extra public revenue of about £45 billion a year. This is the reform with which this book is specifically concerned.

Errm, is this just fractional reserve banking all over again? I think it is you know. Didn\’t know that Murphy hung out with the LaRouchies.

Paul Krugman: Wobbled By Wealth


The public wants change. … Nor is the demand for change solely about Iraq: there has been a strong revival of economic populism. Democracy Corps asked those who believe America is on the wrong track to choose phrases that best described … what’s gone wrong. The most commonly chosen were “Big businesses get whatever they want in Washington” and “Leaders have forgotten the middle class.”

So much, by the way, for pundits who claim that Americans don’t care about economic inequality…

Paul laddie. That first answer isn\’t a condemnation of economic inequality. It\’s a condemnation of the way in which the State pokes its nose into economic life. If Congress weren\’t so hell bent on detailing what we all may do then business wouldn\’t be in there buying the right to do as they wish. The way to stop business buying such influence is to stop Congress attempting to have such influence capable of being bought.

Quote of the Day

In the comments to some anti-market eco-wibble at CiF:


Comment No. 906068

November 4 19:50


The article poses a simple question: do we want Government to decide how to allocate this valuable, scarce resource or leave it to the market?

Easy one. The scarcer oil becomes, the more important it is to leave its allocation to the market. That\’s what markets are good at.

Quite. Some things are simply too important to be left to governments.

\”Town Faces Defeat To Tesco\”

This is an interesting little example of the different conceptions of freedom that are out there. On the one side we have democracy, the will of the majority as expressed through the political system (and for the moment we\’ll accept that the local council is indeed reflecting that). On the other we have the market conception of freedom, that people themselves should decide what they want to do. That is, that people should not be subject to the tyrrany of the majority:

An 11-year planning battle pitting Tesco against townspeople and featuring secret agreements, allegations of corruption and dramatic U-turns could end in victory today for the supermarket giant.

Twelve councillors will vote on whether to allow Tesco into the Norfolk town of Sheringham after the district council\’s planners urged them to accept Tesco\’s proposal for a 1,500sq metre store.

While anti-supermarket campaigners will make a final plea to councillors, the mood in the seaside town of 7,000 residents and more than 100 independent businesses – the only settlement of its size in Norfolk still without one of the big four supermarkets – was pessimistic yesterday.

On the democracy side we have people insisting that the choices of their fellow residents must be limited. In order to keep those 100 independent businesses, as they the vocal majority desire, others are not to be allowed to shop at a local Tesco\’s.

On the other side we have people moreorientated to an individual, or market, conception of freedom (like myself for example) who would look at it the other way around. Why should the desires of that majority stop the minority from expressing their own preferences? The only possible answer that I can see is that by expressing such desires, by shopping at Tesco\’s, they will be reducing th choices of the others by making those 100 independent businesses unviable.

Fine, so we have two groups each arguing for the thing that they desire and they are mutually conflicting. So a decision has to be made between the two, yes?

Well, not quite, and this is where the market vision of freedom comes into play. Instead of looking at what people say they want, or at the number of people willing to write to the council on the matter (about 8% or so of the population it seems) look at what people think that people will actually do in the future.

Will that democratic majority not shop at Tesco\’s? Tesco obviously doesn\’t think that will happen, otherwise why all this effort to build a store? But the thing is, nor do the opponents of the store. If they thought that people wouldn\’t shop there then they wouldn\’t give two figs whether Tesco wasted its money or not.

The very fact that they oppose the plan shows that they think people will shop there: they are thus using politics to deliberately limit the desires and freedoms of others. Which is why the store should be built, of course, so that individuals may make their own decisions, not be subject to such a tyranny of the majority.

One other matter: you know all these stories of the supermarket\’s land banks? If it takes 11 years just to get planning permission, don\’t you think it\’s actually entirely rational of them to have such?


Thomas Palley really does come up with some beauties.

The current global exchange rate system is a sub-optimal arrangement. There are many theoretical reasons explaining why foreign exchange markets are prone to mis-pricing, and the empirical evidence shows exchange rates persistently depart from their warranted fundamental levels. Moreover, the system permits strategic manipulation so that some countries (particularly in East Asia) actively intervene to undervalue their currencies. That has made for a lop-sided world in which half play by free market rules and half are neo-mercantilist, creating threatening tensions.

OK, right, agreed even. Current exchange rates are influenced by governments and this leads to imbalances. Sure.

Beyond such realignment, there is need for systemic reform to avoid recurring misalignments. That suggests a system of managed exchange rates for major currencies in which countries cooperatively set exchange rates.

So we should give more power to governments to influence exchange rates and this won\’t lead to imbalances.


Property Rights, Property Rights.

We hear a lot about what we should be doing for the poor of the world. But what is it that the poor themselves seem to be demanding?

Demonstrators will present their demands to parliament today, including a call for a national land commission to grant patta — legal title — to those who have occupied land for generations but have been ousted with little compensation.

Property rights d\’ye say? My, have they all been reading Hernando de Soto or something?


The Register.

As Matt says, a spectacular missing of the point.


It\’s always possible that the man is merely being comical in some leaden economist fashion.

Err, yes, that is a possibility.

Regulation and Incentives


The number of childminders has fallen by almost a third over the past decade. In 1997, there were 98,500 registered childminders in England. Today, according to the National Childminding Association, there are 69,925.

So, do we want more or fewer child minders?

Childminders are quitting in their thousands because of the bureaucratic "lunacy" governing their work.

Should the regulation be as it is or be relaxed? For it would appear that we can\’t have both the strict regulation and more child minders. Clearly, we\’d like to have both perfect regulation and the exactly right number of child minders but then we\’d all like a pony as well.

So which is it? Oh, and why is it that the bureaucrats seem incapable of realising that there is in fact a choice that has to be made, that regulations are not costless?

Gordon Brown\’s Economy

Not really a great validation of the way he\’s acted over the past decade:

"Judging by the fiscal deficit trend, the UK is now in worse fiscal shape than almost any other major Western country. In the event of an economic downturn, the UK now has little leeway for stimulus," it said.

If we were to have followed Keynesian type management of the economy then, at the end of 15 years of uninterrupted growth, the public sector finances should be hugely in surplus, we should be payin back the debt, as Lawson was back in the late 80s. Clearly we haven\’t been doing that, we still have huge public sector deficits and if there is indeed a recession coming then we don\’t any longer, have the option of borrowing and spending our way out of it.

Quite simply Brown left the spending taps too open too long.

If that recession does indeed come in the next year or two (for there will be one sometime, no one really thinks we\’ve abolished the business cycle) then it really ain\’t gonna be pretty. Could even be that the next election is one that you want to lose, not win.

Carol Sarler and Economics

Well, quite:

Nevertheless, a radical review of the standard we expect, not from most but from all nurses, and of how we properly reimburse it, is his business. The laws of economics might not be his area of expertise. But even he must know the one about peanuts and monkeys.

Very good, incentives and selection.

What, then, is the difference between a regular ward nurse and one working in an ICU? About six grand.

An ICU nurse, who has chosen to specialise, can earn up to £31,000; one who has not so chosen has a ceiling of about £25,000. And so what, you say: in every trade the more studied and trained gain seniority and higher salaries. But if it is a matter of life or death, and if it is the case that better-paid nurses are better nurses – “vocation” notwithstanding – we might revisit the thorny question of nurses’ pay in general, which is, as ever, less than is earned by teachers or police.

Ah, thus if we raise all nurses\’ pay, all will perform to the higher standard?

Not quite. It\’s the very fact of the wage differential that provides the extra incentives. Raising the general level of pay doesn\’t raise the incentive to be a better nurse at all: it might raise the incentive to be a nurse in the first place, but not to perform better once there.

Water Trading

I have no doubt that this will have various greenies up in arms:

Global shortages of water could lead to the precious liquid being exchanged in a similar way to permission schemes used by countries for carbon dioxide, the head of one of the world’s leading exchanges said yesterday.

Craig Donohue, chief executive of the Chicago Mercantile Exchange (CME), said that water could become a commodity as droughts and demand place huge pressures on river systems and water tables.

Trading water as a commodity would, it is argued, put financial pressure on users to keep consumption down, in the same way that carbon emission trading schemes penalise the biggest polluters.

You can hear it now, can\’t you? Water is a right, it shouldn\’t be commodified….and what about the Children!

A pity that none of them will actually look at the details: it\’s a form of insurance. Farmers (and we are talking about farmers, they use most of the world\’s fresh water) can buy insurance from speculators that there won\’t be enough water to grow their crops. That\’s how it will work: no one is actually suggesting a physical trading scheme, where water is taken from British Columbia to Australia, say.

Not a Surprising Finding

Immigrant workers are both higher paid and more reliable than their British counterparts and contributed £6 billion to economic growth last year, a Government study said yesterday.

Wow! Isn\’t that a shock children? People who move thousands of miles to work tend to be more reliable. And, amazing, the more reliable workers get paid more!

The study, the first official attempt to establish the economic and fiscal impact of the record levels of immigration seen in recent years, states that \’\’in the long run, it is likely that the net fiscal contribution of an immigrant will be greater than that of a non-immigrant".

Another stunner! The immigrant arrives already adult: so some other place has paid for their upbringing and education. So we\’re not paying those costs of the first 20 years of their life, unlike the manner we do for the native born. It would be tough for them to cost us more than a native, wouldn\’t it?

The Nobel in 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?

Now Here\’s an Interesting Argument

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.

Interesting Thought

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.

Oh Dear George

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?

Household Income

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.