Tuesday, September 23, 2014

The West Yorkshire Question

Despite my years of frothing outrage at the cynicism and cruelty of the UK Conservative Party, even I was genuinely shocked at David Cameron's reaction to the Scottish referendum result. No sooner had the dust settled on the PM's desperate bid to keep the UK together he was there again, putting the boot in on his political opponents. Labour had wheeled out the big guns to save his Premiership, and his instinctive response was to promise a constitutional reform that could conceivably prevent Labour ever governing the UK with a majority again. Of course, Labour had no choice but to do all it could to win the vote for No, for obvious reasons of parliamentary arithmetic. But now they find themselves skewered on the so-called West Lothian question as the Tories promise 'English votes for English laws'.

There is a superficial appeal to the WLQ just as there is often an instinctive rejection of 'postcode lotteries' in healthcare. Britons are quite relaxed about inequality of incomes and opportunities, but the formal equality of process is something they are quite attached to. Why should Scots get to vote on English health and education when the English can't vote on theirs? It's not fair. Of course, the reason we are in this situation to begin with is that for years - specifically between 1979-1997, and on 'reserved matters' from 2010 to now - the English were deciding for Scotland despite having no real mandate from Scotland to do so. But the English are the English. We didn't get where we are today by sharing power around.

The problem with 'English votes for English laws' is that it is so transparently a power-grab by the Conservative party. Aware that without Scotland, they would have every chance of a majority in the next parliament, the Tories are seizing the moment, with the cover of resolving the Scottish mess. They could manage to keep the Union together, but cement the dominance of England, and their own - victory from the jaws of defeat. The problem is, the logic of EVEL is actually an insidious one from their point of view. Why stop at England? Why not extend the logic of the West Lothian question to Northern Ireland, whose unionist majority in Westminster has regularly delivered parliamentary support to the Conservatives? Still better, why not consider all the representative iniquities of the UK constitution, such as the unaccountable institutions of the City of London, or the voting rights of the Church of England hierarchy in the House of Lords?

In fact what the West Lothian question does is turn the spotlight on the UK's wildly undemocratic constitution. Until now, English voters in the North of England or in major cities have not tended to see their plight in terms of territorial difference. But if with EVEL non-Tory areas felt that they were effectively condemned to permanent opposition this would be unlikely to hold. After 1979, Conservative support collapsed in Scotland, but also became increasingly territorially differentiated in England, both between North and South, and between cities and the suburbs and countryside. Will working class voters in Northern England accept a centralised state with a locked-in Tory majority? The hope of an eventual Labour victory kept England together through the 1980s and 1990s, but do we really think Liverpool, Bradford and Sheffield, or even inner London for that matter, will allow themselves to be ruled by the Tory shires forever?

The WLQ reminds us that we have an improvised, cobbled-together constitution. Devolution creates imbalances, largely because we lack any state-wide decentralised institutions of the kind that have allowed France, Spain and Italy to recognise territorial distinctiveness whilst maintaining a functioning central state. Resolving the WLQ does nothing but highlight how our constitution entrenches power amongst a metropolitan, Oxbridge-trained elite backed by the Southern English middle class. The rest of England - galvanised perhaps by the sight of an even more ridiculous old Etonian in Number 10? - could start to ask the West Yorkshire question: why should a region that has always voted Labour always get a Tory government?

Wednesday, September 10, 2014

Don't Leave Me This Way: Thoughts on the Scottish Referendum

All of a sudden, the Scottish referendum looks like it could cause an earthquake in the British political system, and indeed in Europe as a whole. At the very least, it is shaking the foundations of the UK establishment in a way we haven't seen at least since the MPs expenses scandal in 2009. The sight of the English leaders of the three main British-wide parties hurrying up to Scotland to appeal for a No vote reveals a lot about how this country works.

First, it shows the remarkable complacency that characterised the 'No' 'campaign' until last week - no real attempt was made to cast the Union in a positive and forward-looking light - if anything the message was: we know the UK is lousy, but independence would be even worse. Don't get ideas above your station.

Second, if they seriously think that these three products of the English elite class can convince wavering Scots to stay in the Union, they surely are making a big mistake. Clegg, Cameron and Miliband in their different ways are as out of touch as they could be with the British population in general, never mind Scotland.

Third, we can see how rarely our politicians actually ever make the attempt to understand what people want and why. Most of the time political campaigning here is about negative messages about opponents, threats of the terrible things that might happen if some popular policies were ever enacted, and manoeuvring to get the largely foreign press barons to offer their support (which thankfully is less and less important is newspaper circulation declines). The UK is held together by fear and apathy and it takes a moment like this - produced by David Cameron's unique mix of short-term opportunism and total detachment from popular sentiment - to show that most of us really don't like the way the country is governed.

The referendum has given the Scots the chance to do what many of us in the rest of the Union would love to do: defect from this elitist, unrepresentative and often incompetent political system. Fortunately for the Scots, a distinct national identity and a separate territory make this possible. For the English, anti-Europeanism seems to do the same job - after all, apart from immigration, there is no real policy issue determined at the European level that registers in the popular consciousness. When politics falls short, national identity can provide a focus for discontent and desire for change.

Very often though, nationalism offers largely delusional answers to our problems. In the case of the UK and Europe, Brexit would effectively mean that we would get roughly the same EU policies we get now, but not be allowed to vote on them (a 'fax democracy', as the Norwegian Prime Minister once put it). For Scotland, independence would have similar consequences. Scotland is so obviously interdependent with the rest of the UK that exit is a fantasy: as an independent state, Scotland would have the pound, the Queen, an open border with England and probably still a large UK military presence as part of its NATO contribution. Whatever independence it would gain would be pretty similar to what it already has: the right to spend its allocation of UK government spending as it wants and legislate over most areas of domestic social and economic policy (within the framework of EU law).

The big difference would probably be fiscal, in that rather than cashing in the Barnett Formula bonus in Westminster's allocation of public funds, Scotland would take oil revenues in directly. Whether or not Scotland would be better off under this arrangement is very hard to tell: it depends on very uncertain estimates of future UK public spending and future oil production and prices. Whichever way it plays out, managing what would become in many ways an oil-producing economy (especially since banking, Scotland's other big productive sector, would be pretty likely to move South) is a complicated business when you lack your own currency. The advantages of the oil money being recycled through Westminster is that it smoothes out the very volatile behaviour of oil revenues. Provided a beneficial settlement with the rest of the UK could be reached, Scotland would probably be better off in a fiscal and monetary union with the rest of the existing state.

Rationally, a very narrow No vote could end up being best for Scotland. It would suddenly have significantly increased bargaining power, and could use it to secure a more substantial form of fiscal independence which could involve some kind of guarantee that it gains most of the benefits of North Sea oil whilst maintaining complete control over how the money is spent. A Yes vote would present Scotland with the tricky business of creating a new state with, almost certainly, a rather less benign attitude from the rUK, which essentially holds all of the chips. It could very quickly get quite nasty and the financial turbulence we're starting to see would be an awful lot worse. With a strong but not victorious Yes vote, UK politics suddenly has to sit up and take notice, and this has already happened, with Cameron and Miliband eschewing the pointless debating society antics of PMQ in order to actually leave the Westminster bubble and make the case for belonging to this country.

There is a broader message in all this for the rest of us. Sitting moaning on our sofas about how much we hate our politicians will make no difference at all. Threatening major political upheaval will. UK politics as become a kind of elite game which can only survive with current levels of disengagement and apathy. Unfortunately it seems to be easier to mobilise around divisive and visceral national identities, than around concepts like social justice, environmental protection and democratic participation. But in a democracy, organised political action will always make a difference, and the powerful expression of popular demands can't be ignored.

Saturday, May 24, 2014

Piketty Debunked? Not So Fast

Obviously, it couldn't last. Piketty's book was so universally lauded by such a chorus of great minds (Solow, Wolf, Krugman, even Summers with some reservations), and an even greater chorus of lesser minds (the journalists seduced by his 'rockstar' persona and Gallic charms), that is was only a matter of time before someone pushed back. And just as the book's original reception was probably overdone - it's a great book, but there are plenty of possible criticisms and counter-arguments - so the counter-offensive is similarly overcooked.

Chris Giles in the FT takes issue with Piketty's data on rising wealth inequality, raising some interesting questions about how he fits together different data sources to create a two-century long series, and how this series compares to other available data. Not surprisingly, different sources give different numbers - indeed vastly different numbers. In particular, Giles was struck by the marked difference between the wealth figures used by Piketty for the UK, and those published recently by the UK Office for National Statistics, which suggest much lower levels of inequality. Intrigued, he dug further using Piketty's data, which is posted online (although I couldn't get it this afternoon - maybe he's checking the files?).

Giles comes up with this chart:

By adding the raw data from the UK Inland Revenue figures, used by Piketty and colleagues to extend the series, and the ONS data, which they did not use, Giles is able to throw doubt on the uptick in wealth inequality Piketty claims for the period since the 1970s. This, alongside other errors and questionable decisions, means that the books 'central findings... no longer seem to hold'.

That's quite a big claim. Is it true? Well, here I'll just look at the data for the UK. There is a problem with the chart posted just above - it takes Piketty et al's series from 1810, and then, for the final few decades of the series, throws in other data sources which show a lower level of inequality. The picture that leaps out of the page is that instead of a U-shaped trend over the 20th century, claimed by Piketty, the FT's alternative data suggests a flatlining distribution since the 1970s, thus invalidating the claim of rising inequality.

But this is misleading, because by throwing in new data that gives a lower figure in the same chart, the visual impact is of a different trend that is not really supported by the data. The IRS numbers that Giles throws in raw were used by Tony Atkinson and Piketty to construct the longer series, with adjustments to attempt to make them consistent with different sources for earlier periods. The fair test of whether Piketty's trend exists or not is to compare the IRS numbers with data for the earlier period. In fact those numbers track the trend of the Piketty series fairly closely, but with lower absolute values. As for the ONS numbers, they give us only 3 data points over a 6 year period, which happens to include the biggest shock to asset prices since the Great Depression and the Second World War. You can argue that the ONS's lower estimate of wealth inequality is better than Piketty's, but you can't say anything about the trend.

However, the IRS numbers do still suggest rising wealth inequality. If we place these numbers in their own chart, with no tricky juxtaposition against the longer data series, this is what we get:

A clear, though unspectacular upward trend in wealth inequality as measured by the Inland Revenue data, on which the Atkinson series used by Piketty is based. It's also worth pointing out that the HMRC numbers, although not much help with the long-term picture, do attribute 70% of wealth in the UK to the top 10%. As far as I can see, the main difference between Piketty and Giles's alternative data is that the latter suggests that inequality started to rise in the late 1980s rather than the 1970s.

I'll leave the rest to the specialists in constructing historical series of income and wealth distributions, a complicated field in which Piketty has a long track record. If he's made mistakes in the data work used in the book, boo to him. But if he hasn't, it would probably be the first 700 page academic book not to make any.

The problem is that, having been anointed the 'rockstar' economist, Piketty is set up to fail, and the normal business of argument and questioning which any successful research project spawns will inevitably become politicised and dramatised. The FT is, for once, guilty of a kind of tabloid simplification that is quite out of character: the headline 'Piketty findings undercut by errors', 'Rockstar economist's wrong sums on rising inequality' reminds me of the debate around climate change and the 'hockey stick' graph. And not in a good way.

Doubtless one percenters will be happy to find that they are not doing as well compared to the rest of us as we thought. Economic liberals that have sweated to produce justifications for rising inequality in terms of productivity and innovation will maybe revise down their estimations of the contribution of the one per cent. OK, I'm being sarcastic. The direction of policy and the phenomena we observe all around us, never mind the data, suggest that wealth and income are increasingly concentrated. But of course documenting long-term trends with multiple kinds of data is difficult, as the climate scientists could attest. Maybe Bill Gates, Steve Jobs, or indeed Yaya Toure and Tony Blair, are exceptional and unrepresentative anecdotes from a world characterized by fairly evenly distributed wealth. But I really doubt it.

Tuesday, April 29, 2014

Capital, Politics, and Piketty

So, along with everyone else, here's my tuppence worth about Piketty. This is probably reckless on my part as I've actually not read the book yet (thanks Amazon), as indeed I suspect many other people sounding off about it haven't. But I've already spent hours thinking about his arguments so I may as well get my thoughts down somewhere. So here is what I think about what I think Piketty says in the book, based on what a bunch of other people think he says in the book (amongst the many reviews, I recommend Solow, Krugman and Milanovic). I get to hear him speak on Wednesday, so I'll post again if I've got him wrong.

And the point is this: it's all about the politics. Piketty actually pays a fair bit of attention to politics, and like Hacker and Pierson he is concerned that the concentration of income and wealth at the top is affecting the distribution of power in the political system. But, as an economist, in the end it appears that Piketty believes that market economies have a kind of underlying dynamic that leads to the concentration of capital independently of whatever political forces may be dominant. Politics can only come along to disturb this dynamic through thing like wars, revolutions, organised labour.

This is not surprising, as the economists' ontology, even for someone as critically minded as Piketty, still posits markets as a kind of state of nature. But the problem is that there is no such thing as a pre-political market, a point powerfully made in a recent book by Murphy and Nagel: The Myth of Ownership. Markets are sustained by institutions, and these institutions are political artefacts, albeit influenced by raw economic forces. Nowhere is this more obviously the case than in the definition of returns on capital, especially in our financialized age. Almost nothing about Piketty's r is meaningful unless we consider the various rules and regulations governing property rights, credit, taxation, and permitted behaviours in formalised markets.

All of which implies that there is a social and political foundation to the kind of capitalism in which r tends to > g. That social and political foundation has to be explained, and even where economic forces powerfully influence policy and institutions, we still need to understand the political sources of the property rights which allow economic forces to do what they do.

In other words, we need a political theory of how the conditions under which  r > g can come about. The rise and fall of the labour movement, and indeed the rise of fall of 'populist' democracy more generally, is the historical backdrop to this, and Piketty indeed may be right that the mid-twentieth century was a blip and that patrimonial capitalism is the norm over the past three centuries. But to explain this we need to know how people act politically to tame capital (including unintentionally, given that the Second World War probably wasn't on anyone's wish list), and economics, in the end, can't answer this question on its own.

The irony of ironies is that Piketty's work itself seems to be having a major political impact, at least for now - how sustained it will be is anyone's guess. The ink spilled over this 'rockstar economist' may be a sign of the fickleness of the media, but there is no getting around the fact that inequality is emerging as a political issue, finally. What happens next depends on a lot of variables, but those variables are social, cultural and political, rather than economic. Piketty's work is important for economics, but it should also alert political scientists that there is a big political story to be told about how capitalism got to where it is today.

Saturday, April 19, 2014

On the Hypocrisy of the One Per Cent

Well, actually, that should read the hypocrisy of the one per cent's cheerleaders, such as the Wall Street Journal's James Taranto, who has penned a crass article criticising Paul Krugman's new salary as a Research Professor at CUNY ($225,000). Apparently Krugman is a hypocrite: on the one hand he proclaims the injustice of the top one per cent enjoying huge and rising incomes, and on the other he himself has... a huge and rising income. Hypocrite!

This is familiar territory - the right has always enjoyed pointing out the contradiction between egalitarianism in principle and higher-than-equal incomes in practice. There is a superficial appeal to the notion that concern for inequality should translate, in practice, to being poor rather than rich. This has been present in the political rhetoric of the Anglo-Saxon right for some time: Labour's Roy Jenkins was famously condemned as a 'champagne socialist' back in the 1970s, whilst the Daily Telegraph joyfully pointed out that current leader Ed Miliband, the son of a Marxist academic, lives in a massive house in one of London's more exclusive neighbourhoods. If they really cared about inequality, wouldn't they give everything they have to the poor?

Hypocrisy, Wikipedia tells us, is the practice of engaging in the same behaviour one criticises in others. What exactly do people like Krugman or Miliband criticise? Do they really condemn everybody in the top one per cent of earners? I don't think so. What they are criticising is a social phenomenon - the unequal and unfair nature of the distribution of rewards and assets in a capitalist society. Their political position is to do something about this, something you might disagree with, or believe to be futile, but which would probably make them personally worse off (both advocate higher taxes for people in the top income brackets, which includes them). So what's hypocritical about that?

The misunderstanding arises from confusing personal conduct with political commitments. The idea is that you would like to change society so that it produces more equal outcomes. This is a political project, in other words, a set of actions that a society has to pursue collectively, because to do so individually is largely pointless. If Ed Miliband chose to hand over half of his house to a couple of homeless families, that would be laudable, but would make no real difference to the problem of poverty in the UK. What would make a difference is if all people as rich as him were to give up some of their wealth to the benefit of the poor. The way to achieve this is to win election and change policy. How big Ed's house is doesn't really matter (although frankly a more humble dwelling probably would look less incongruous). J.K. Rowling gives very large chunks of her own money away and publicly espouses left-wing causes, but is still nearly a billionaire. Is she a hypocrite?

So what is Paul Krugman's sin? He is a Nobel-prize winner, not loved by everybody but undeniably one of the top economists of his generation. He is giving up a position at Princeton University which, I would bet my pokey London flat, pays him quite a bit more than $225,000. Probably double that, to be conservative. He almost certainly makes a handy pile from his more popular writings. So is he a hypocrite? Well for a start, he is leaving the gilded elite of US private schools to work in the public university system, way down the 'academic food chain'. But more important, Krugman spends a lot of his time advocating giving up a chunk of his wealth in favour of the poorer, as long as others do too (I have no idea how much he gives away privately, that's not the point). It's a political commitment. What would be hypocritical, would be to advocate tax rises for the rich, then avoid or evade those tax rises himself.

The irony of all this is that Paul Krugman has never been an egalitarian as such. No economist is - if you believe markets have any role to play in our society, then you believe in inequality by definition. The question is: how much? Krugman actually adopts a pretty standard Rawslian approach to inequality, typical of progressive-minded economists, and in fact of anyone who is not a raving libertarian. Markets are about talent and productivity being rewarded, and that means Krugman earns more from academic writing than I do. A lot more. But probably nowhere near as much more as he would do in a pure market system. He probably could afford to work for CUNY for free, but why should he? Those criticising him certainly wouldn't, so aren't they the real hypocrites?

Wednesday, April 16, 2014

George Osborne's report card

So I've just been reading George Osborne's 2010 Mais lecture. It's one of those that have been deleted from the Conservative Home website. He think I know why.

In this lecture, delivered just before the 2010 election, Osborne laid out the eight benchmarks under which he said his economic policy should be judged:

We will maintain Britain's AAA credit rating. 

We will increase saving, business investment and exports as a share of GDP. 

We will sell in due course the government's stakes in RBS and Lloyds . 

We will improve Britain's international rankings for tax competitiveness and business regulation with specific measures on corporation tax and regulatory budgets. 

We will reduce youth unemployment and reduce the number of children in workless households as part of our strategy for tackling poverty and inequality. 

We will raise the private sector's share of the economy in all regions of the country, especially outside London and the South East. 

And we will reduce UK greenhouse gas emissions and increase our share of global markets for low carbon technologies. 

We will raise productivity growth in the public sector to match the best of the private sector. 

On my count they've managed one of these eight - raise private sector share of the economy. I think. Given the reduction in the size of the public sector, it kind of follows. There may be similar productivity growth across public and private too - it's been awful economy-wide, so I guess it's not hard for a shrunken public sector to match whatever paltry gains there are in the private sector.

Anyway, it's easy to see why the speech has been buried by the Conservative party, although of course it can still be found, here.

Thursday, March 6, 2014

Can equality beat xenophobia?

So now it's the turn of the IPPR to say its thing about immigration. A few thoughts.

There is something I've always found curious about the reaction to immigration in the UK, above and beyond the fact that there is little evidence that it has had any deleterious economic effects (see on this Jonathan Portes and Simon Wren-Lewis, the latter increasingly puzzled at people's inability to look at the data objectively). Hostility to immigration is a pretty constant feature of modern societies, even those founded on mass migration themselves (the US being the prime example). This hostility is particularly strong when migrants have very different ethnic and religious identities to the host nation.

What is quite striking about the UK's current preoccupation with immigration is that, unlike previous waves, the incoming population is pretty similar to the indigenous one. Eastern Europeans do not look obviously different to the white majority of Britons, they have similar religious backgrounds (usually Catholic or Orthodox Christians), and it is a stretch to claim that they have markedly different cultures. So racism, which it is usually pretty easy to associate with hostility to immigration, isn't an obvious part of the current anti-immigrant climate.

Instead, most of the concern seems to be directed at the objective, material consequences of the arrival of a large number of working-age adults in a country with a stretched infrastructure and a very open labour market. There may be little evidence that immigration itself is driving down wages, but it is certainly the case that there has been large scale immigration in a period in which wage growth has been first stagnant, then negative, for most employees, and pressure on the available housing has begun to be unsustainable.

Although I reject the scapegoating which accompanies nearly all discussion of immigration in the public sphere these days, I think the IPPR report's appeal for a 'fair deal', does actually capture part of what is going on here. Immigration has become the acceptable way for people with no particular attachment to progressive politics to talk about issues of poverty, inequality and fairness. So, instead of complaining that Britain's fabled 'flexible labour market' - with its emasculated unions, minimalist legislative protections, and unencumbered managerialism - makes people's working lives miserable, we complain that migrants are taking all the jobs and driving down wages. In fact what drives down wages is workers' weak bargaining position, which is best addressed not by punitive and impractical restrictions on freedom of movement, but by legislating and organising for employees to get a better deal. Similarly, instead of addressing housing shortages by taxing property and buy-to-let landlords properly, intervening to increase supply and generating a genuine market driven by consumer demand, we blame immigrants just for being here.

So the answer is not to try and change people's minds about immigration: that's a hopeless task. Instead we must focus on making people's lives better so they have less to complain about. Immigration is here to stay for all kinds of reasons, and the best way to protect freedom of movement and take the political pressure off migrants themselves is to improve working conditions and quality of life for everyone who lives in the UK. And thankfully, there are policies that can do this. There is no evidence that a brutal labour market is better for productivity and growth, nor does the current organisation of the housing market make any sense. There are tried and tested policy responses to inequalities of pay, working conditions and housing which are perfectly compatible with good economic performance: indeed all the evidence is that inequality is bad for growth. So Labour should bite the bullet and do something for the workers. It won't make them like immigrants, but it should stop them being tempted by the reactionary and frankly racist message we're hearing from the right.

Friday, February 7, 2014

On the marginal productivity of the 1%

The debate rumbles on. The rise in top incomes, particularly striking in the English-speaking democracies, is starting to become a central theme in debates about equality and fairness, shifting attention away from the perennial redistributive conflict between the middle and poor (ably fuelled by the right here in Britain) towards the spectacular gains made by a tiny group of the superwealthy.

As well as hitting mainstream politics - even Obama gave top billing to inequality in his State of the Union address - this debate has penetrated into academic economics. The reaction is interesting to behold. Whilst liberal (in the American sense) economists such as Krugman and Stiglitz argue that the growth in top incomes is in large part the fruit of rent-seeking and overbearing political influence, most economists are reluctant to go so far, invoking instead the role of exogenous forces such as globalization and technological change.

There is a certain irony to this, as economists are usually instinctively awake to the possibility of capture of political institutions for the purpose of subverting markets and winning excessive returns through regulatory manipulation, fiscal tricks and straightforward bribery. Indeed, the traditional skepticism of many economists towards the benefits of government interventionism owes a great deal to their suspicion that government interventions are very likely to favour politically powerful producer groups rather than consumers, a suspicion formalized with great success by the public choice school. So it is puzzling that the doubling of the income share of the richest one hundredth of society over little more than quarter of a century is seen as such a natural development by much of the economics profession.

To the extent that top incomes shares are not seen as a sign of something malfunctioning in our economy, they are generally viewed as broadly reflecting the relative productivity of different groups in the income distribution. Typical of this view is the recent article by Greg Mankiw in the Journal of Economic Perspectives, gamely entitled 'Defending the One Per Cent', which illustrates the risks of meddling with big gains for top earners by positing an imaginary world in which everyone is equally productive and paid the same, until someone like Steve Jobs comes along to shake up the distribution by producing something innovative that everybody wants. Mankiw suggests that 'this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades'. Mankiw therefore concludes that not only would redistribution be bad for incentives, stopping the next Steve Jobs in his tracks, but it would be morally unfair. The earnings of 'superstars' are 'just desserts'.

Mankiw's article provoked an irritated response from Robert Solow, amongst others. There are a large number of ways in which the argument can be challenged theoretically and empirically, and I'll probably deal with them in future posts. But just for now, here's one: the just desserts arguments suggest that earnings have a strong correlation with marginal productivity, and that marginal productivity reflects a combination of innate ability and talent, and hard work. Luck and structural privilege are not supposed to come into the equation very much, or otherwise 'just desserts' start to look hard to justify, and the gains from privilege could probably be taxed without any real loss to the economy, since they don't reflect any real productivity advantage. Except we know that luck and structural privilege are important. For a start, in unequal societies social mobility is lower, suggesting that inequality feeds on itself and prevents talent rising to the top. But to my mind the most striking forms of structural privilege here are gender and ethnic discrimination. Although some diehards still cling to the notion that women or particular ethnic groups are innately inferior, and therefore deserving of lower rewards in the workplace, these ideas are no longer taken seriously by researchers. Yet the one per cent is disproportionately occupied by men, and white men at that. I took a fairly unscientific sample by scrolling down the top 100 in the Forbes rich list of billionaires here. Only ten of them were women.

If women are less likely to be superstars, then either women are inherently less deserving, or there is something other than talent and hard work at play in determining who gets to the top (and no, it is apparently not the choice to spend more time raising a family). And if the latter is the case, then the outsized gains reflect, at least in part, something other than marginal productivity. The typical example would be the CEO of a large company, whose material impact on the company's earnings is generally hard to establish with any reliability. If the CEO were to leave, another would take their place, capturing similar earnings, but it is next to impossible to establish the differences in marginal contribution (and after all, company performance is typically uncorrelated with CEO returns).

Ironically, the debate about desserts seems to stand or fall on how optimistic we are about the power of the market. Conservative economists, strangely, tend to suspend their keen eye for rent-seeking, privilege and market subverting power when it comes to the top one per cent, preferring instead to imagine that the returns to skills over the recent period have just happened to be concentrated in the very top of the income distribution. Yet the obvious riposte is that if the state is so permeable to special pleading, corruption and political manipulation, a wealthy elite should surely be the first to take advantage of this permeability, particularly since the mass organizations - such as political parties and trade unions - that secured redistribution downwards are in terminal decline.

Maybe we are supposed to believe that the one per cent are not only smarter, but so morally unimpeachable that they will restrain from interfering with the market system that has served them so well? I think we should ask Carlos Slim about that one.

Friday, January 31, 2014

Inequality and Taxation: Bleed the Rich?

Labour has taken an uncharacteristic turn this week and embraced a policy which would have made Tony Blair choke on his morning coffee, were he the remotest bit interested in contemporary party politics. Ed Balls has revived the 50% tax rate on earnings above £150K, slaughtering several New Labour sacred cows in one go. Redistribution: check. Upset business leaders: check. Unrealistic fiscal ambitions: check.

What is different now, of course, is that the couple of decades since New Labour was born have seen a spectacular rise in the GDP share of top earners, a devastating economic collapse caused by the reckless behaviour of some of those top earners, and lately a prolonged stagnation in average living standards. The notion that helping the rich enrich themselves would benefit all is no longer widely believed, and the 50% tax rate appears to be polling well, even though the Institute for Fiscal Studies suggests it won't actually raise any money (they estimate £100 million a year).

January - the month of the UK self-assessment tax deadline -  is always a good time to think about tax and incentives. Certainly the prospect of losing half of any extra pound earned has a disincentive effect, but then again, so does the prospect of losing 40%, which is the situation currently facing anyone earning between about £42,000-149,999 (not to mention the disincentive effects of reducing/eliminating child benefit for 40% taxpayers) . Moreover, the current coalition government did not simply abolish the 50% tax rate introduced by Gordon Brown in 2010; it lowered it to 45% instead. If 45% doesn't have disincentive effects, why should 50%? In short, a 5% increase in tax on earnings above the £150K barrier may encourage a bit of inventiveness in reporting incomes, but I don't envisage Wayne Rooney hanging up his boots in protest any time soon.

Labour's proposal is a handy piece of populism, but it is also a good opportunity to think a little more about why top earners earn what they do, and what effects taxing the rich might have for the economy as a whole. As Simon Wren-Lewis reports, recent research suggests that lower taxes for the rich may not encourage productivity as much as it provides top executives with even greater incentives to plunder the coffers of their companies, redistributing rents to themselves. The classic Laffer curve argument may be true, but in a way which has no real economic costs - if taxes are higher, executives will expend less wasteful energy in extracting greater rewards for themselves out of an existing pool of resources. In some cases, higher taxes could disincentivize rent-seeking behaviour that has dramatic negative externalities, such as reckless risk-taking in the financial sector.

Estimates of the effects of these tax changes are very approximate, since the 50% tax rate only survived a couple of years (current projections are based on only one year of data), and these were years in which the economy remained more or less stationary, so any fiscal consequences of the tax hikes need to control for the depressed state of the economy (which no-one to my knowledge has attempted to pin on the 50% tax rate). All taxes are distortionary, but at the same time all income is conditional on the complex infrastructure of a market economy, which is inconceivable without the state raising a large share of GDP in tax revenue.

The 1% enjoy their property thanks to the public goods our taxes provide, and society's willingness to tolerate and cooperate with an economic system which rewards the rich so handsomely. As the 1%'s share of income grows, the 99%'s tolerance of inequality is bound to be stretched. Countries where the rich don't pay tax tend not to be very safe places to live. It is a cliché, but taxes are the price we pay to live in a civilised society, and advanced economies need to be civilised, resting as they do on the complex and dynamic interactions of highly educated citizens. There is no such thing as a free lunch, even for the rich.