24 Hour Politics People P2. More on Laffer curves, and maybe I was too harsh on Jeremy Corbyn?


As a follow up to yesterday’s blog I wanted to say a tiny bit more about Laffer curves and whether or not they work in the real world.   I feel that I dismissed a huge idea in modern economics without giving it time of day, but I didn’t want the whole blog to be about the myth of self funding tax cuts.

The basic problem with applying Laffer curves in real life is that the financial relationship between the state and the citizens is incredibly complicated.   The state takes money from the citizen in many ways, direct and indirect taxation, fines, student loan repayments, licenses, child maintenance charges, excise duty, with a range of deductions and exceptions depending on whether you are employed or self employed, married or single. 

The state also gives people lots of money too.   Benefits, rebates, subsidies.   

Because of this each individual’s marginal tax rate – the amount the state will take of the next £1 you earn over your current income varies hugely.  Someone who is self employed with no student loan can pay a much lower marginal tax rate than someone on the same income who is employed and has student loan repayments or a child maintenance liability, or both.  I can be sat in the pub with someone who earns an almost identical income to myself, but who pays a marginal tax rate 5 or 6 times higher.

That’s why applying the simple notion of the Laffer curve doesn’t work with income tax.   

I also think that the elasticity of income in response to changes in the tax rate is more complex than the Laffer curve allows for.

If you are rich and you are faced with a short term increase in tax you can manipulate your income, moving funds around, to avoid the higher tax rate.   George Osborne announced in advance that he was cutting the higher rate of tax, which meant that lots of people deferred their income until after the tax cut came in.  This gave the appearance of a increased tax take, but was really just the same income moving from one time period to another.    Once that one off increase was over the tax take was lower because the tax rate was lower.   This is why he discovered that his extra cash evaporated quickly leaving him with a whole in his budget.    This is a familiar story – Reagan championed self funding tax cuts throughout his period in office, but doubled the US budget deficit in the process despite big cuts to welfare programmes.  This means that the short term elasticity of income in response to changes in the tax rate is greater than the long term elasticity.

Only the super rich who can move their money around using the kinds of tactics reveals in the Panama Papers have truly elastic income, and can shop around for tax havens.  The rest of us don’t have that option. 

That doesn’t mean that the Laffer curve doesn’t work at all. There are other ways in which the state takes money from individuals – student loans for example – where the higher the level of repayment the higher the default rate and the higher the cost of collection (as the rates get higher complaints, challenges and enforcement costs go up).   Eventually you reach the point where further increases in repayments don’t bring in any more money.   

This isn’t unique.  The Child Maintenance system has lots of debt where the cost of collection is greater than the value of the money to be collected.   The state doesn’t want to publicly write off this debt for moral and political reasons, but fiscally it is a dead loss.

It looks to me that the student loans book is in a similar state.  A sensible Government could reduce the repayment rates on student loans with little or no impact on the total sums collected.  This isn’t quite the same as proving that the Laffer curve is right – after all anyone who has worked with debt books knows that this phenomena isn’t unique to Government income, it is simply a function of the relationship between cost of collection and amount collected, and not a specific function of tax. 

Ramsey MacCorbyn?

In the main blog I was a bit underwhelmed by Corbyn’s plans on Government spending.   The size of the increases in spending were well below those implemented by Wilson, Callaghan, Blair and Brown, and the plans to expand the state were limited.   The last Labour manifesto talked a lot about ending austerity, but actually the difference between the Labour plan to eliminate the deficit and the Tories was pretty slim:

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This graph from the Resolution Foundation shows the Labour Manifesto as the red line with the different Tory plans as the blue lines.   Fiscal Objective was Osborne’s original plan, the dark blue line his revised plan after the tax cuts, and the purple line is Tory Manifesto.   Not a lot to choose between the 2 parties.

This minimal relaxation in austerity isn’t anything like enough to cover the commitments to more funds for the NHS and ending tuition fees.  There were tax increases planned, but this doesn’t explain how big increases in spending could be achieved without an equally big increase in public spending as a % of GDP.

There are 2 answers to this.

Firstly that Labour was quietly banking £7.5bn of Conservative party benefit cuts, which would have hit poor families hard, as this graph from the IFS shows:

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Labour’s tax hit on the rich was matched by a Tory style reduction in the incomes of the poorest.

But secondly because Labour is planning a big increase in the role of the state in running the Railways and key utilities, but claims that this can be done “off balance sheet”.   John McDonnell was questioned about this on the Marr show and the Robert Peston show over the last few months:


(the nationalisation stuff is from 5minutes in)

The proposals which Labour has are to issue bonds to the private sector to fund the nationalisation of utilities, which will then pay out to the bondholders. The purchase prices will be set by the Government, presumably at a discount.

This effectively means that it is a leveraged buyout, with the discount taking the place of a cash investment from the Government.   It also looks spookily similar to the kind of off balance sheet PFI transactions that got Ken Clarke, Gordon Brown and George Osborne into so much trouble.

I’m not as hostile to PFI as some people, but they only work when the Treasury Cost of Capital rate is high.  At the moment the Government can borrow at close to 0% interest, which makes any kind of PFI pointless.   Labour are planning to borrow more expensively than they need because they don’t want to show the true impact of the plans.

The privatised utilities, as McDonnell points out, also have substantial debts of their own, in addition to the debt which will be loaded onto them by the nationalisation process.  

These debts have to go onto someones books somewhere, and if they have been nationalised this can only be on the Governments books, including any pension liabilities.  Which means that they can’t be off balance sheet.   I honestly can’t work out how this impacts on Labours plans for deficit reduction, and I suspect that is because they haven’t worked it out either.   Nor am I convinced that the National Audit Office will allow the nationalisation costs to be treated as off balance sheet, given that they wouldn’t allow Network Rail’s liabilities to be treated as off balance sheet either. 

If the accounting of the liabilities is opaque then how the revenue activities of the newly nationalised utilities and railways will show in the National Accounts as even vaguer.  If they are counted as public sector spending then Labour will be increasing public spending as % of GDP by a much greater amount than their last manifesto indicated, in fact it would make public spending a great proportion of GDP than any previous Government Labour or Tory. 

All of which means that Labour under Corbyn might actually have a more radical plan than I gave them credit for.  They just haven’t worked out how to account for it, nor have they learnt any lessons from the last 3 waves of PFI deals.





24 Hr Politics People; Why Laffer Curves and Universal Basic Income have become 2 of the most influential daft ideas of the modern age.

fullsizeoutput_1f8aIn case anyone had missed it we live in a 24/7 media culture.  Politicians rise and fall based on their ability to shape or react to a continuous churn of news.

This has created a bias for action not ideas.  Tough new measures rather than well thought out policies. Clampdowns on pretty much everything.  An endless parade of action oriented political virility.   More tough new measures.  A raft of tough new measures. 

Sometimes it doesn’t even matter if the new measures mean anything.  When David Cameron was PM he would regularly announce radical new measures with no intention of actually implementing them.  Renting out surplus Government Offices to entrepreneurs was one such phantom policy, allowing start ups to trade share options for workers rights was another.  Both were announced with a fanfare and then totally forgotten.   Blair would announce the same policy multiple times to create the impression of action.

In such an environment complexity and compromise are treason and treachery.   In all the noise across traditional and social media simple ideas and slogans shouted loudly cut through more easily than thoughtfulness and nuance. Take back control! Build the Wall! For the Many, Not the Few!

All of this has created a bias in favour of the rapid implementation of rubbish ideas.

Some ideas in politics and economics are better if they are never implemented.  Sometimes ideas work best as concepts – something to help people think through complex problems, but which aren’t really meant to be acted on.   Maybe Cameron instinctively knew this, or maybe he was just shallow and lazy and couldn’t be bothered seeing things through. 

You can decide which for yourselves. 

If that seems a bit philosophical think about the Laffer curve.   This is one of the most influential ideas in modern economics – the idea that if tax rates rise too high it will disincentivise wealth creation and lead to a lower tax take.   

The concept was explained by Arthur Laffer to Donald Rumsfeld and Dick Cheney by drawing a simple graph on a napkin at a dinner party.   It was meant to be a simple way of understanding the concept of the elasticity of taxable income in response to changes in tax rates. It was soon taken up by right wing politicians to justify the idea of the self funding tax cut.  Most recently George Osborne claimed that his reduction in the top rate of tax had increased the tax take:

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It is worth noting that although Osborne was claiming in March to have brought in an extra £8bn in revenue thanks to the Laffer curve only 4 months later he abandoned his plan to eliminate the deficit by 2020 due an unexpected deterioration in public finances. 

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In fact every time a claim has been made for self-funding tax cuts based on the Laffer curve there was an unexpected deterioration in public finances shortly afterwards.

Laffer himself was surprised that politicians thought this was a policy to be implemented, and would have been baffled that anyone might think that it was possible to recalibrate the income tax rate of a major economy using this simplistic device.  The way the individual interacts with the state is too complicated for such crude policy measures to work. 

Often these simplistic concepts are the hardest to pin down and disprove precisely because of their simplicity.  They sounds truish, and because they were never meant to be taken that seriously there is little there to disprove.  The Laffer curve was popular among a particular group of politicians and economists because it gave an easy to understand and simplistic solution to a complex problem.  Laffer curves fit a right wing world view that believes in cutting taxes and shrinking the state, things that are popular with a core group of voters and political donors.   

One of the biggest ideas right now in political economy is the concept of the Universal Basic Income (UBI).  The basic principles of UBI are that it is an unconditional payment made to everyone, regardless of current income, to allow them to live at a basic level, whether they are in work or not.

UBI is an idea which has proponents on both sides of the political divide.   Left wingers like it because it looks like a simple solution to problems of poverty and inequality.  Right wingers like it because it provides a way of managing social welfare systems without intrusion into peoples lives – in fact it started off as an idea on the Libertarian Right.   It is also one of the pet projects of Tech billionaire Elon Musk, and has lots of support among the very rich.

Recently it has jumped from being a right wing idea to being a left wing idea.  It appeared in the 2015 Green Party Manifesto, is being trialled in Scandinavia, and has a planned trial in Scotland.  Bernie Sanders flirted with putting it in his manifesto, and it will be a key policy aim of Yanis Varoufakis’s new political party when he can decide what it is called. The Guardian even claimed that failure to embrace UBI cost Hilary Clinton the Presidential election.  Even the Labour Party, who are normally anxious of any policy ideas more modern than 1979 have started to think about it.

The attraction of UBI as a left wing policy isn’t hard to work out.  While the National Minimum Wage has revolutionised the wages of people at the lowest skills level in the Labour Market it has also led to a group of workers being pushed into unwilling self employment, where income is often well below NMW levels.   UBI would be as transformative for self employed workers as NMW would be to employed workers.

UBI is also being promoted as a solution to the potential labour market problems arising from new technology – what happens if large numbers of manual or even white collar jobs vanish over the next decade?  How could our current democratic system cope with lots of structurally unemployable people?

This fear of technological change is really a restatement of an age old fear that the middle classes have about angry unemployed working class people coming to get them, combined with the dreams of lots of burnt out middle aged middle class people who would like do something more rewarding like retrain as yoga instructors, grow organic parsnips, or become boutique Gin producers.    

I like UBI it because it offers the opportunity to reduce the costs of administering benefits, in particular it reduces the costs of administering conditionality.  It is the increasingly complex and irrational rules around conditionality that are at the heart of much of the cruelty in the modern benefit system. 

I also like that UBI might be a way to give economic value to caring for people, but this is such a huge issue that it needs is own blog.

There is however a massive reactionary problem at the heart of UBI, which explains why it started out as a right wing idea. 

To illustrate this lets start by looking at the proportion of GDP taken up by Government Expenditure:

When the Attlee Government came into power in 1945 Government Expenditure was over 60% of GDP. This isn’t surprising as the UK was a wartime siege economy.  While Attlee is famous for nationalising lots of things in reality most of the industries nationalised by the post-war Labour Government were already controlled by the state, and had been for some time; coal and steel for examples.   Rail had come under increasing state control from WW1 onwards.   

Attlee shrunk the size of the state from 65% to 35%, where it remained for about 20 years.   From Wilson onwards Government spending as a % of GDP starts rises due to the extension of the Welfare State, for example the introduction of universal child benefit, and the costs of the oil price crisis, hitting 45% by 1979.    

Thatcher had an ideological desire to bring down Government Spending, but struggled to achieve her target of 35% due to the high costs of unemployment.  Major achieves little of note.

Blair and Brown increased the size of the state to 47.5% – the highest ever peace time share of GDP. This increase was largely driven by spending on the NHS and a big expansion of the benefits system through the introduction of tax credits.  Oh, and they spend a fair bit nationalising the banks. 

Cameron and Osborne tried but failed to get spending back down to 40% of GDP, while the current Labour leadership are committed to push up Government spending very modestly to roughly 43% of GDP, a bit short of New Labour or Harold Wilson. 

Using 2016 data (we don’t have all of 2017 data in yet) state spending was £747bn or 41% of GDP.   Government income was slightly lower than this which is why we are still running a small budget deficit. 

Of this £258bn was social protection, the largest component of which was pensions at £108bn.   This means that the state spends about 15% of GDP on supporting the incomes, mostly of older people, and people on lower incomes.   

This is where  universal incomes, average incomes and Government spending start and collide.

If the UK scrapped all social protection spending, pensions, benefits, everything but set a UBI at 25% of average income Government Spending would increase to over 50% of GDP – it’s highest peacetime level, but this would give a UBI of less than £6k per year, which would do little for the poorest in society.   

To achieve a UBI of £10,000 a year Government Spending would have to increase to 60%+ GDP, which is roughly the kind of siege economy we ran in WW2, an era of food rationing. 

This looks like a massive burden to taxpayers, however this is a big mistake – the Universality bit of UBI means that is transfers wealth away from people who are currently in receipt of means tested benefits and gives the money to people currently too rich to access them.    UBI would in fact be hugely regressive, which is probably why it started off life on the right of politics, not the left.   

For anyone interested in progressive politics this should be a fatal flaw.

The same problem occurs with proposals to make tech companies to pay for it.  A recent proposal in the Guardian suggested levying Amazon, Google and Apple to pay for a UBI of £10,000.  The article rightly points out that at the moment high tech companies with substantial development costs who operate in multiple tax regimes find it too easy not to pay tax.  But same problem exists with this proposal.   

Google’s turnover in the UK is £1bn, Amazon is the same.   I tried to find out Apple turnover for the UK, but all I got was recipes for fruit based pastry treats. 

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Lets assume that we were able to squeeze £1bn extra tax pa from tech multinationals operating in the UK, this is several 100 times what they currently pay. 

That £1bn would be enough to pay £10,000pa to 100,000 people.    As there are 52m people in the UK aged over 16 this is nowhere near Universal.

Anyway you cut budget the Universality bit is unaffordable and helps the rich more than the poor, but his doesn’t mean that UBI is a bad idea.   It just means that it is a helpful way of thinking about whether the current benefits system needs means testing, or conditionality, and how we give an economic value to caring, particularly for people caring for other family members. 

I don’t have a particular problem with means testing benefits, believing that without means testing we can never achieve a welfare system that meets the criteria of:.

“from each according to their ability to each according to their need”

I do however have a massive problem with the huge industry which has grown up around conditionality, making people jump through daft hoops to access small sums of money.  The cost of running the massive bureaucracy of DWP is disproportionate to the work they do in managing public funds.    We could scrap all of Job Centre Plus, make basic payments unconditionally and use some of the savings to set up a government wide counter fraud service that would tackle the relatively small numbers of benefits fraudsters across Government.   The limited range of support to job seekers that DWP do offer could be delivered locally by charities, small businesses and Local Authorities. 

UBI is a brilliant though experiment, a way of thinking differently about how the state spends money and what it values.   If for example we took the £1bn levy and used it to pay 100,000 young people to set up new businesses how would this change the economy?   What if the state funded ecology activists to work on challenging new projects to tackle climate change? What if the state funded talented young writers and musicians from working class backgrounds to make the pop charts less awful and TV more interesting?  What if we recognised the economic value of caring and the state paid for it directly?

These are all the kinds of solutions which a limited form of non-universal basic income might unlock.   Just don’t actually try to implement UBI in it’s crude form because it doesn’t work!

I do have one final problem with UBI which I wanted to highlight.  I think it is popular because it avoids having to answer the really difficult question – how to create meaningful jobs for people.   

People writing policy on left and right are so far divorced from the actual world of work that they are unable to meaningfully conceive of what work looks like for most people.   Even the Trade Unions are really just white collar civil service staff associations ruled by a small clique of left wing bureaucrats. 

The problems in the UK Labour market are about the decline of the dignity and security of Labour.  It is easy to blame this on Government policies, cruel and heartless Neo-liberals. In fact individuals rights in the workplace have increased not decreased over the last 20 years, largely due to the legislation passed in the late 90s and early 2000s.  The increased Labour market flexibility that has led to low employment isn’t due to taking away peoples rights as a small group of right wing politicians and economists have claimed, but by enticing them into the workplace with greater protections, more support.

Blaming the awfulness of politicians is just as daft as blaming immigrants for the problem.

What we are experiencing is a huge fall in demand for manual labour, disguised by the National Minimum Wage, mass underemployment, bogus self employment and zero hours contracts.   All of this is taking place at a time when employment and business investment are both very low.   This would indicate that far from technology displacing low income employees we have an artificially high demand created by lack of investment in high tech.

If things are this bad now think how bad they will be if Business investment starts to increase?

It seems to me that people, particularly on the left, are talking about UBI because they don’t know how to create meaningful jobs for people in the future, nor have they thought about the extent to which people get a huge amount of their identity from work, a sense of purpose in life.   

UBI dodges these questions and instead dumps people with some money and tells them to make the best of it.  If you have built up enough capital in life to afford gym membership, or travel, or have a wide social network, and are engaged in clubs and hobbies having the time to persue them paid for by the state sounds great.   Being able to devote your energies to charity work, or helping to save the environment

But this isn’t the reality of life for lots of people on low incomes.  And for people who are already lonely UBI looks like a way of making life even more isolated.   I wrote a while ago about the way that obesity, prescription opiates and guns were killing white Americans in rural areas at a prodigious rate.   This growth in despair and the decline of jobs which support an American lifestyle go hand in hand, and we are starting to see the same decline in life expectancy in parts of the UK with high levels of manual employment.

So, at the end, why does this matter?

Because the way ideas in economics are portrayed in the media dumbs things down, and simplify things which means that good but subtle ideas don’t get airtime and simple but daft ideas thrive.   That’s why austerity, which was a deeply stupid idea, prevailed for years, even when it was palpably failing.   Good ideas and bad ideas get jumbled together in a way that discredits the good with the bad.

Ultimately Laffer curves and UBI share 2 qualities – the are both regressive fiscal measures that transfer funds from the poor to the rich, and they are both popular polices because they avoid the need to think about really difficult issues – how do you stop the erosion of the tax base while cutting taxes (Laffer curve), and how do you deal with a structural over supply of manual labour, and the decline in jobs which give a sense of meaning to peoples lives (UBI).









What if all Government Data is wrong?

fullsizeoutput_1efa.jpegThis is short update in advance of next weeks full blog.  I am trying to stick to one longer piece a month, with some shorter blogs in between

Last year I wrote about the way that Unemployment Statistics are collected:


In particular I highlighted problems with the way the Labour Force Survey captures data about the UK Labour Market.  In a world of zero hours contracts, part time working and high levels of self employment the LFS is no longer an accurate tool to measure unemployment, which could be a lot higher than we think it is.   This was based on my own experiences as part of the LFS survey cohort.

One of the big questions that troubles economists looking at the British economy has been the decline in productivity.  Despite apparently everyone working harder we are much less productive than neighbouring nations. The French have a shorter working week, longer holidays, longer lunches, and more wine and yet still manage to have higher productivity than us Brits.   

Partly this could be the function of changes in consumption.  Barrista coffee is more labour intensive than Mellow Birds, my Distillery makes less Gin per employee than Gordons – but that is the point – people want more human input into the products and services they buy, and the more human input the more they value it.  We want to spend time with our GP, and our hairdresser.


We are moving from an economy which is highly resource intensive to one that is more service oriented. This isn’t a bad thing – our resource consumption has fallen dramatically over the last few years, which is great for the environment.

This explains part of the output gap, but  I just don’t think we are drinking that much expensive coffee, artisanal cheese and craft gin. 

If the unemployment data is wrong then the productivity gap might be smaller than we think.  But what if the UK output data was rubbish too?

For the last few years we have been part of the Small Business Output cohort for the Manufacturing Output Survey.   While in theory all small businesses are registered with Central and Local Government in reality the state, locally and nationally knows less than it should about the small business manufacturing sector.  Lots of small businesses are reluctant to send their details to Government bodies, and the state doesn’t have the resources to track them down.   

When Durham County Council set up their Manufacturing and Engineering Taskforce one of the task forces first tasks was to find out what manufacturing businesses actually operated in County Durham.  One of the businesses they found built wind tunnels.  Hard to imagine how no-one had spotted that before.

I’m not great at filling in forms, and only actually filled the form in at all because it has lots of scary warnings on.   Eventually I got fed up and this week I rang the ONS and told them we weren’t filling their forms in any more.   

It turns out that a business should only be in the survey sample for 12-15months, after which they are meant to refresh the sample to make sure it is up to date and randomised.    We had been in the cohort for over 3 years, because they don’t have the resources to keep the sample up to date.  Instead of using a proper randomised sample they have just been collecting the same date from the same businesses.   LFS has the same problem – the sample size they use is much smaller than they really need to be statistically valid.  

Which means that all of the output data we have been looking at to measure productivity is as rubbish as the unemployment data.  It’s not hard to imagine a scenario where new, and highly productive manufacturing industries enter the market are under represented in the survey, while older established businesses with less productive technologies are over represented. 

Looking at LFS the Unemployment data has been wrong since 1997, although in the early years the mistake was small.   After the credit crunch the data got worse, and from 2010 onwards has become increasingly divorced from reality.   

It is harder to tell how long the Manufacturing Output Survey has been rubbish, or how far out it is.

But if Ministers no longer care whether what they say in Parliament is true or not then it no longer matters whether the data being collected is right either.  If the Minister doesn’t care about the truth then why should the Senior Civil Servants who brief them care if they are giving the right data?   If the SCS don’t care if the data is right why should the less well paid Civil Servants who manage performance care either?

It’s not just our news that’s fake.  Our facts are too.