I was a Miner, I was a Banker/I was a Quantitative Analyst/Between the Wars/I played at Glastonbury/In time of austerity

A bit of a follow up from last weeks look at the ways property wealth, property tax and pension wealth interact and how monetary policy can change how wealth is re-distributed.  

While I was writing it Andy Haldane (did I mention he was my favourite Central Banker?) invited Billy Bragg to give a lecture on Monetary Policy at Threadneedle Street. This is the video of it:  

https://www.bankofengland.co.uk/events/2018/april/one-bank-flagship-seminar-billy-bragg

Just to manage your expectations he doesn’t do “Levis Stubbs Tears”.    Billy Bragg at the Bank of England may sound odd, but it was meant to expose Central Bankers to a broader range of views outside of their own bubble.  There was a predictably mixed response, with people liking or disliking his speech based mostly on where they were politically before the speech rather than the actual content of it.

Billy’s big point, I think, is that the lack of accountability by Institutions is driving support for authoritarianism.  This is spot on. This lack of accountability is a huge problem for public institutions and faith in democratic politics – politicians are mired in scandal and yet no-one resigns.  Since Gordon Brown made the Bank of England independent in 1997 there has been an assumption that interest rates and monetary policy are politically neutral, but when decisions are taken that re-distribute wealth that can’t be apolitical.   It’s worth reflecting on this next time someone suggests taking the NHS out of political control in the same way as the BofE.

He also talks about the way that the money spent on things like QE could have been spent more usefully on building schools or hospitals.  I think that Billy is actually describing 2 similar but subtly different approaches.

The first is that the Government could borrow money very cheaply and spend it doing things that would help improve society and the economy.  This is spot on.  Over the last few years we could have borrowed cheaply, fixed every pot hole, every leaky classroom roof, bought a brand new set of state of the art NHS diagnostic kit.  Not only would this have saved money in the long run, but it would have helped grow the economy too.

We could also have bought out any PFI deals signed at high interest rates before the Credit Crunch with a long time left to run on them.   A couple of the NHS Trusts I worked for have done just that, using low interest rates and some of the financial flexibilities available to Foundation Trusts to buy out historic PFI:

https://www.ft.com/content/490d42ae-2f0c-11e0-88ec-00144feabdc0

https://www.theguardian.com/healthcare-network/2011/feb/03/pfi-nhs-trust-paid-off-tees-esk-wear

https://www.ft.com/content/cc4f10b2-4951-11e4-8d68-00144feab7de

https://www.independent.co.uk/life-style/health-and-families/health-news/northumbria-nhs-trust-saves-67m-by-freeing-itself-from-pfi-deal-9517844.html

I like the way that the FT describes both of them as the first.   Just goes to show that even the best newspapers struggle to follow the boring detail of public borrowing and PFI deals. 

The second approach is the possibility of using QE style asset purchases to do something more ambitious than buy Bank Bonds.   We could, for example, issue Local Government Bonds, which the Bank of England could buy, and use this money to build Council Houses.  This idea was promoted by John McDonnell under the heading of Peoples QE.

I’m a bit more sceptical of Peoples QE.  The most obvious reason is that we could just use conventional public sector borrowing to achieve this, particularly when interest rates are low.  It’s a solution to a problem which doesn’t need another solution.   The reluctance to use cheap borrowing is because politicians don’t want to be honest about how much they are borrowing, and that doesn’t help improve accountability.

Both plans – traditional Government borrowing and Peoples QE – share some similar problems.  When the Government spends capital it almost always needs a flow of revenue to go with it.  A new Hospital needs on-going spend on Doctors and Nurses, Schools need Teachers, Roads have pot holes.   The only areas of Government capital spend which don’t have this problem are things like Council House building where the capital spend brings in rent.    

Having run public services myself there are very few uses for capital which doesn’t come with revenue consequences if only to fund the interest payments.

There is also an even nerdier problem with using Government spending or Peoples QE rather than traditional QE.   The traditional QE model benefits from the magnifying effect of fractional reserve banking.    The size of the lending that Banks can release into the economy is much greater than the size of the asset purchase. 

But peoples QE has a more profound problem.  While the Global economy is dependent on QE no-one knows when or whether it has negative long term consequences.   It may be that it distorts capital markets, increases volatility, or decreases long term growth.  It might even be that Andy Haldane is wrong and it increases inequality.

With conventional QE it is easy to reverse the process.   The Bank can sell off the bonds it purchased and reduce the amount of QE.   With unconventional or Peoples QE it is much harder to reverse the process if you need to reduce the amount of QE in circulation.  If you have used the funds to build Council Houses the only way to reduce the QE is to start selling off the Council Houses.   If you have used the funds to build Hospitals then they will have to be sold too.

It’s easy to see how this produces an almost impossible dilemma for a future Government.   If QE is causing inflation, or making the poor into paupers but the only cure was selling off Council Houses or Hospitals how would a Government act?  How would a Corbyn led Government survive this kind of dilemma?

This is a more conventional clip of Billy:

https://www.youtube.com/watch?v=wWjO9BTJhPc\\

More to come tomorrow….

https://www.theguardian.com/music/2018/apr/08/billy-bragg-to-give-speech-on-how-to-build-a-better-society-at-boe

https://www.opendemocracy.net/neweconomics/alternative-qe-billy-bragg-right/

http://www.cityam.com/284358/bragging-rights-city-heavyweights-flummoxed-popstars-bank

Last month I wrote about attitudes to inequality specifically why I think that recent headlines about Rampant Inequality are way off the mark.  The belief that we live in an era of great inequality is so prevalent that a lot of people reacted with disbelief when I wrote that wealth inequality in the UK was at a historic low, despite recent small rises.  For me it is poverty that matters more than inequality. 

The Golden Age of Equality

I wanted to balance that by writing about the changes in the way that the distribution of different forms of wealth accumulation – property and pensions  – has changed over the last few decades. 

Since the Credit Crunch there has been an accumulation of property wealth in fewer and fewer hands.  In the immediate aftermath of the Crunch house prices fell sharply but the lack of liquidity in the financial system made it difficult for anyone without a big deposit to get a mortgage.  First time buyers who would normally have benefited from cheaper prices were squeezed out, while people who could access lots of capital found it easy to amass big property portfolios.  That’s why they call it capitalism.

I will admit that I was a beneficiary of this.  I took a job in Leeds just after the Crunch and rather than sleep in hotels I bought a flat, whose value had fallen significantly, and which was conveniently situated near the bars on Call Lane.  In the years up to the credit crunch large numbers of flats were built in and around Leeds City Centre, possibly as many as 20,000.  By 2009 when I was shopping for a flat 10% of them were empty, many for over a year.   

These flats saw very big falls in value, in developments like Aspect 24.  As I travelled around the City viewing flats whose occupiers had bought them new and which had lost over 20% of their value, wiping out all of the cash buyers had put in.  People like me who could access capital were able to buy choice properties cheaply, with mortgages at very low rates.   

A recent speech by Andy Haldane from the Bank of England sets out the economics behind these experiences.   Andy is my favourite Central Banker.  I realise that having a fave Central Banker is an unusual thing, and marks me out as a bit of a policy nerd.

The Bank of England, like most Central Banks, reacted to the Credit Crunch with the most expansionary monetary policy in history.   Interest rates were cut to their lowest ever levels, close to zero.  Additional stimulus was provided through asset purchases – so-called Quantitative Easing or QE. These asset purchases by Central Banks are currently running at around a cumulative 15% of annual global GDP.  

This pushed an awful lot of money through the Banking system and into the economy, to counteract the affects of the Credit Crunch.  Bit by bit monetary policy changes helped to reflate the economy, and restart the housing market.  By 2010 house prices were rising again, and continued to rise in areas like London all the way through to the Brexit vote.  Those who had acquired additional properties during the Credit Crunch accumulated wealth as monetary policy pushed up prices. 

It is a common assumption that the people who made money in the years following the credit crunch were the top 1% with gold hats, but a much broader group of people with plenty of capital, a property portfolio or stocks and shares benefitted too from expansionary monetary policy.

Despite this Andy Haldane argues that 10 years after the credit crunch Bank of England actions hadn’t made inequality worse – income distribution and the Gini coefficient today are the same as they were 10 years ago. 

I am sceptical about some of the claims made about inequality but even I am baffled by Haldane’s views.   He argues that the impacts on jobs and wages in lower incomes groups balances the increase in property wealth, and he has lots of graphs to prove it:

There are 8 pages of graphs to illustrate his point.  I do like a good graph.

No matter how good the Bank of England’s graphs department are they can’t touch this graph from the Resolution Foundation, which is by far and away my favourite graph at the moment.  Yes, I know that having a favourite graph is as odd as having a fave Central Banker.

You can find this graph and a great money other fine diagrams in this report:

http://www.resolutionfoundation.org/app/uploads/2018/03/Council-tax-IC.pdf

When Harold Wilson became Prime Minister total property wealth was worth 3 times annual GDP.   Total wealth taxes brought into the Government a sum equivalent to just over 2% of GDP.   

Today total property wealth is 7 times GDP, but the taxes on property still only bring in just over 2% of GDP for the Government.

Without being hyperbolic this has been the biggest stealth tax cut of all time.   The tax cuts is partly caused by Governments fiddling with property taxes for political gain, but mostly due to the failure to reform or even rebase Council tax.  This failure to update Council tax is a wholly regressive policy which gives an effective tax cut to those in the most expensive properties

If the Government take from property taxes had kept up with the increases in property wealth there would have been no need for the age of austerity.

I have long advocated using the accumulated property wealth of richer older cohorts to help fund the care costs of the baby boom generation.   This is very unpopular, particularly where the care costs are as a result of an illness like Dementia.  The Conservatives proposed some moderately progressive proposals to use property wealth to fund care at the last general election.  Labour made hay opposing the “Dementia Tax” even though it put them in the position of defending inherited wealth.

Both parties in their own way are committed to defending inherited property wealth, largely because both main political parties are largely made up of people with property wealth.   Looking at the graph above not only has the property market been a source of widening inequality since the Credit Crunch, but this as actually been going on for a very long time, Labour and Tory.   

Even an inequality sceptic like me can see that housing and other assets like stocks and shares have become concentrated in fewer hands since the credit crunch.   Rates of home ownership are back were they were before Margaret Thatcher started selling off Council Houses, and rates of share ownership are back where they were before the same Prime Minister sold off shares in public utilities.  Stealth tax cuts just make this worse.  

At this point I had convinced myself that there was something I was missing about the view of wealth and inequality.    I am a big fan of Andy Haldane, but the size of wealth accumulation from property since the Credit Crunch, facilitated by BofE policy, must have increased inequality.   I couldn’t see how he could be right.

I checked his findings against the latest data from the Office of National Statistics.  This shows that even the recent rises in inequality has come to an end, and the current gap between rich and poor is static.  The BofE were right:

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016

What the ONS data sets shows is that the rise in wealth inequality due to property wealth is being offset by changes in pension wealth – over the last few years nearly £1tn has been added to the value of private pensions. Given that the total GDP of the UK is just under £2tn this is a huge amount.   

For most people of my generation the most valuable things we own are our homes and our pensions, given that our collections of rare Morrissey solo records are plummeting in value.   We tend to track the value of our houses much more carefully than the value of our pensions, despite the fact that as we get older some of us will have pension funds worth a lot more than our houses.  Senior Doctors in NHS Super An can easily hit the £1m tax free limit.

Most people I know didn’t really notice the 2008 pensions act when it was passed, or when it was implemented a few years afterwards   I certainly didn’t spot it, and I was working for a Quango sponsored by DWP.   Frankly pensions are boring and complex, and even I struggle to keep track of it.   For those who missed it the 2008 Act requires all employers to set up an occupational pension scheme, which employees are automatically enrolled in unless they opt out.  The Act also established the National Employee Savings Trust, a public pension provider for those who do not have an occupational pensions, which functions as a low-fee pension scheme in competition with existing funds.

Part of the reason why the 2008 Act passed un-noticed is because most of the people who I know work in big companies or the public sector where access to good quality pensions is still widespread.   We have grown used to reading pension horror stories, many of which are true, about the closure of final salary schemes .  This has created the impression that whole pensions system is in crisis, but for most of my generation we are still in really good schemes.   The people who are benefiting the most from the 2008 Act are low paid workers in the private sector, who for the first time are benefiting from the kind of occupational pensions that white collar public sector and private sector employees take for granted.

The impact of the increase in pension wealth for people on lower incomes following the 2008 Act is as great as the increase in property wealth for people on higher incomes since the Credit Crunch.   This is a huge and progressive re-distribution of wealth, which will continue for years to come.

The generally accepted story of the New Labour years is that they did lots of stuff about tackling poverty but largely didn’t really do much on inequality, despite passing progressive legislation like the National Minimum Wage.    Peter Mandelson’s view that he was “intensely relaxed about people getting filthy rich as long as they pay their taxes” has come to define our view of the New Labour era as one where tackling inequality wasn’t a priority.  

In retrospect the  2008 Act may well turn out to be one of the most significant pieces of redistributive legislation of the last few decades, worth more in total than the NMW.   I honestly find it incredible that such a huge change in wealth distribution could have happened without my noticing, but I don’t think I am alone.  After all pensions are boring, and most people I know aren’t affected by the changes in the 2008 Act.

In the meantime I new set of developers have announced another round of flat building in Leeds.  9,000 more flats on the Quarry Hill site, with unrivalled views of Britains finest example of neo-Stalinist architecture.  

What could possibly go wrong?

https://www.ft.com/content/4c5ce3fc-0753-11e8-9650-9c0ad2d7c5b5

https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/how-monetary-policy-affects-your-gdp-speech-by-andy-haldane.pdf?la=en&hash=FCBD26BEE0C888B53856C099796780DED35190A4

https://www.bankofengland.co.uk/speech/2016/the-distributional-implications-of-low-structural-interest-rates-and-some-remarks-about-monetary

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691917/households-below-average-income-1994-1995-2016-2017.pdf

https://www.theguardian.com/commentisfree/2018/apr/09/dementia-sell-home-britain-health-lottery?CMP=twt_gu&__twitter_impression=true&__twitter_impression=true

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/methodologies/wealthandassetssurveywaswave5validationoffiguresagainstexternalsources

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/articles/earlyindicatorestimatesfromthewealthandassetssurvey/previousReleases

https://www.opendemocracy.net/neweconomics/time-call-housing-crisis-really-largest-transfer-wealth-living-memory/

https://www.theguardian.com/social-care-network/2018/mar/21/jeremy-hunt-social-care-reform

http://www.resolutionfoundation.org/publications/home-affairs-options-for-reforming-property-taxation/

The two headlines above, one from the Washington Post, and one from the Guardian are typical of recent press stories about the rise in inequality . Inequality is apparently the defining characteristic of our current age.  The Guardian has an excellent series of articles chronicling how inequality shapes the modern world, while Oxfam have published some hard hitting recent reports which take aim at rising Global inequality.   The World Economic Forum included income inequality on their Global Risk survey, while even the IMF, who usually are pretty conservative in their outlook argue that too much inequality is reducing levels of growth:

http://www.imf.org/en/Publications/FM/Issues/2017/10/05/fiscal-monitor-october-2017

The source of this inequality is apparently a group of people called the Global 1% who are amassing more and more wealth than ever before.  To be in the global top 1% you need to earn £23,500pa, which means that a large number of people reading this blog are 1%ers. 

You evil bastards.   

Globally us 1%ers control about half of the worlds wealth, and that share is increasing.  Given that UK median personal income is about £22,000 nearly half of the population of the UK are in the global 1%

To be in the UK top 1% you would need an income of over £650,000 a year, which is probably a bit more than most people reading this.   You can stop worrying about the Occupy movement camping outside your house for a while yet. Within the UK the top 1% control about 25% of the countries wealth according to Oxfam.  There are other slightly lower estimates, but a range of 23-25% looks about right.  

The UK has Gini co-efficient of 73.2% compared to an OECD average of 72.8%, which means that we are pretty average in terms of income inequality.   If you compare the UK to similar economic such as the Top 30 developed nations we are in the bottom half for equality, although the way inequality is distributed means that the UK is closer to counties like  Sweden than it is the the USA or Mexico:

What is true is that things are getting worse.  Since the credit crunch most of the wealth created has gone to the richest 1% in the UK and globally, while the incomes of the poorest have stagnated or even fallen.

This would seem to substantiate the argument that inequality is worse than it has ever been, and that Capitalism has an inbuilt tendency to become more and more unequal over time as Thomas Picketty claims:

I have 2 basic problems with this.   The first problem is historical, the second geographical.

From a historical perspective these claims are ludicrous.  

Sorry if that sounds harsh, but the idea that income inequality is worse now than it was 100 years when the British Empire was at it’s peak strikes me as absurd.  Back then the top1% in the UK controlled not just the majority of the countries wealth, but a huge proportion of other countries wealth too.   The incomes of the top 1% were actually greater than the entire GDP of the UK. 

If we go further back it is just as bad.  Inequality was worse in the age of the transatlantic slave trade, worse in the era of the Highland Clearances and the Enclosure of the Common Land.

In fact if we look at  the  EINITE – Economic Inequality across Italy and Europe, 1300-1800 we can see that wealth inequality has been increasing in the manner predicted by Picketty from the Black Death onwards – it looks as if the shortage of Labour caused by the Black Death redistributed wealth away from the aristocracy. 

From the end of the Edwardian era and WW1 Inequality starts to fall, and continue for most of the next 100 years.   There has been a small uptick in the last few years, but inequality across Europe and in the UK is the lowest that it has been since the late C16th.

The EINITE dataset covers all of Europe, in the UK the rise of the Empire magnifies the effects, such that the peak of inequality in the Edwardian era is much higher.    Britain was also more unequal than mainland Europe during the Tudor era as the Crown amassed huge amounts of wealth through trade with the colonies and seizing the riches of the Church. 

If we take the last 1000 years of British History as a whole there are 2 notable periods of equality.  The first lasted from the Black Death and the abolition of serfdom in 1380 to the dissolution of the monasteries.   The second period of equality is the one we live in now.  To put this in simple terms in the last thousand years all of the years since the introduction of the welfare state have lower levels of inequality than all of the years before the introduction of the welfare state. 

Putting this into a neat chart, the wealth of the top 1% in the UK over time looks like this:

This is a pretty rough approximation, based on the sources below.   It is hard to work out whether the long periods where inequality is static are correct, or whether they reflect that some eras of economic history are more widely studied than others.

This doesn’t quite prove Piketty right or wrong.   There are eras with high demand for capital and low levels of inequality, and eras with low demand for capital and high levels of inequality.    There is however a discernible increase in inequality during the capitalist era. 

The second problem I have with the claims that we are living through an unprecedented era of great inequality is geographical.   I have visited India a number of times over the last 20 years.  During that time the gap between the living standards of Indians and the living standards of people in Britain has shrunk visibly.   Countries like India are closing the gap between their living standards and Europe faster than at any time since before Columbus and Vasco de Gama set sail.  

This isn’t unique to India.  Globalisation, or global free trade, is a dirty word among lots of people in the West, but around the world living standards, life expectancy and literacy are being transformed.    Poverty is falling globally, as is malnutrition, and infant morality.   Some of this is driven by global free trade, some by technological advances, some by political or social changes.   30 years ago 40% of the worlds population lived on less than $2 a day, today that is only 8%. 

For people in country like India and China this is an age of equality.   Across the globe inequality between countries is falling, while inequality within countries is increasing, particularly in the West.   The increase in inequality within countries is offsetting a lot of the improvement in inequality between countries, but overall the global Gini co-efficient is falling, not rising.

The data could support a different interpretation of inequality between and within countries.  Inequality within the UK takes off with the rise of the British Empire, which peaks in the Edwardian era.   As the Empire goes into decline inequality shrinks within the UK, and between the UK and it’s former colonies.   Economic relations with India for example start to change during WW1 when the UK stops exporting goods to captive markets to concentrate on the war effort.  After the war the Great Depression makes the UK too weak to recapture it’s market share.  The rise of London as a no questions asked financial hub maybe off sets some of that in the last few decades maybe reverses some of that, but not enough to make big difference.   The driver of inequality isn’t capitalism maybe but imperialism?  This is an argument that would make free marketeers and hardline Leninists happy in equal measure.

Why then do we fell that there is a crisis of inequalityif this is one of the most equal and egalitarian eras of the last thousand years?

Partly this is relative, I was born in the late 60s, probably the most equal year since the Black Death. Everything looks unequal measured from that point.

Partly it is because the way the internet filters news.  The headlines we read are a jumble of global, national and American news, which mix up what is happening here, with what is going on in the US where inequality is very much worse.   The Spirit Level, while a great read, draws the bulk of it’s data from the US, rather than the UK, which gives a misleading picture to UK readers. 

But largely it is because income distribution has changed within our peer group.  People who own property and have inherited property wealth continue to amass wealth albeit maybe a bit more slowly than the did a generation ago.   The millennial generation in particular have less property wealth and less accumulated pension wealth than recent generations at the same age.   This affects people who are mostly in the top 1% globally but not in the top 1% nationally.  Things are a bit worse for white middle class people compared to rich white people, a bit better for people in Latin America and Sub-Saharan Africa and loads better for people in China and India.

Don’t get me wrong, the current growth in inequality isn’t a good thing for someone who believes in progressive politics.   But the reality doesn’t match the headlines.  The problem in the UK is poverty more than inequality.

If we had asked progressive liberals back in the 1980s if they would accept a world in which our standard of living grew a bit more slowly, but our consumption of raw materials fell and people in the 3rd world did much better we would have seen that as a big triumph.

That is exactly what the last 20 years have delivered.   But apparently we don’t like it as much as we thought we would.

https://www.equalitytrust.org.uk/scale-economic-inequality-uk

https://policy-practice.oxfam.org.uk/publications/an-economy-for-the-99-its-time-to-build-a-human-economy-that-benefits-everyone-620170

http://www.resolutionfoundation.org/app/uploads/2017/06/Wealth.pdf

http://src-home.slav.hokudai.ac.jp/rp/publications/no02/P1-C1_Saito.pdf

https://www.equalitytrust.org.uk/resources/the-spirit-level

https://www.equalitytrust.org.uk/how-has-inequality-changed

https://www.weforum.org/reports/the-global-risks-report-2017

http://piketty.pse.ens.fr/files/Lindert86.pdf .  

https://www.theguardian.com/inequality

http://blogs.lse.ac.uk/businessreview/2017/04/27/the-long-run-tendency-for-wealth-to-concentrate-in-a-few-hands/

https://www.gc.cuny.edu/CUNY_GC/media/CUNY-Graduate-Center/PDF/Centers/LIS/Milanovic/papers/2009/palgrave.pdf

http://documents.worldbank.org/curated/en/914431468162277879/pdf/WPS6719.pdf

http://economics.ucdavis.edu/people/fzlinder/peter-linderts-webpage/papers/three-centuries-of-inequality/Lindert%20Inequality%20chapter.pdf

https://inequality.stanford.edu/sites/default/files/media/_media/pdf/Reference%20Media/Hoffman,%20Jacks,%20Levin,%20and%20Lindert_2002_History%20of%20Inequality.pdf

Distribution of taxable population and wealth in England during the early Sixteenth Century, Sheail, 1971

ENGLISH GROSS DOMESTIC PRODUCT, 1300-1700: SOME PRELIMINARY ESTIMATES; Apostolides,Broadberry,Overton,van Leeuwen,2008

I write my blog in WordPress, and I can check out how many reads I get for every blog.   Sometimes you get surprising insights  –  there is someone in Canada who binge reads my blog every few months for eample. 

Breezy businessy blogs written from a vaguely leftish perspective are popular, some subjects less so.  The most unpopular blog I have ever written had a long section on female participation in the Indian Labour Market

https://jon-chadwick.com/2017/09/09/modi-thatcher-reagan-morrissey/

I won’t tell you how many people read this blog, but it’s not many.  I don’t know whether it was Modi, Thatcher, Reagan or Morrissey which put people off.

For those those who didn’t read it India is one of the few countries in the world where female participation in the workplace has fallen over recent years.  As India has become more prosperous woman have left the workforce and gone back to more traditional roles in the home. This is a pretty unusual phenomenon  – in most other developed or fast growing economies female participation in the workplace has increased greatly. 

This isn’t the case in big cities like Delhi or Mumbai, where economic growth has created job opportunities for large numbers of women.  It is largely a phenomena in rural areas where women were engaged in marginal roles often doing little more than carrying heavy loads, and where Conservative social attitudes still prevail in many households. 

In general I believe that measures that raise incomes encourage Labour Market participation and I am puzzled and a bit fascinated that India is going in the opposite direction.

There was plenty of debate a few weeks ago when I wrote  about Universal Basic Income.  UBI remains the pet project of lots of Liberal and left wing politicians.

One of the least popular politicians among Western Liberals is Nahendra Modi.  Most Western lefties who have an opinion regard him as an arch Conservative, and a reactionary.  I have written about Modi before, and it is worth reminding ourselves that as well as promoting some socially conservative ideas under his Premiership the Indian Supreme Court has passed 2 notable Liberal judgements, on divorce and gay rights:

https://timesofindia.indiatimes.com/india/muslim-women-hail-triple-talaq-bill-seek-ban-on-polygamy/articleshow/62298393.cms

http://www.independent.co.uk/news/world/asia/india-homosexuality-legalise-law-gay-lgbt-couples-supreme-court-ruling-a8148896.html

India is currently considering introducing UBI across the whole country -the proposals are contained in the Indian Finance Ministries last annual report – a cracking read for people who like really long books full of numbers and graphs.   

India also has a large number of anti-poverty programmes which are not well regarded, as well as a complex series of subsidies which distort prices.  India currently spends 2.07% of GDP on subsidies, mainly in food, fertiliser and petrol, and another 1.38% of GDP on social welfare and anti-poverty measures.   

The Indian Finance Ministry proposes replacing these subsidies and anti-poverty programmes with a single UBI payment to the 75% poorest of Indians, paid electronically into bank accounts. The Modi government last year embarked on a radical programme of demoneterisation – taking large amounts of paper currency out of circulation, ostensibly to tackle corruption, but also to increase the use of bank accounts, and electronic direct cash transfers.   

This would raise the incomes of all but the very poorest of Indians above the Tendulkar Poverty Line. 

This is a very different ambition to the plans for UBI in the West, which would cost a much greater percentage of GDP.  It is also worth noting that while the UK economy grows at 1.5%pa India is once again the Worlds fastest growing major economy – over 7.5%pa.   

One of the criticisms of UBI schemes like the one the FinMin are contemplating is that they encourage people to drop out of the Labour Market.  Given that the people leaving the Labour Market over recent years have been women in rural areas it is hard to see why a socially Conservative Government would object to this. 

There is a final element to Modi’s policy mix that is worth mentioning. The Indian Government is introducing the Aadhar system – the world largest biometrical ID scheme.  Over 1bn Indians are already registered with it, and it has widespread, but not universal support.   This goes way beyond the ID card proposals that were developed by the last Labour Government.  The controversy was such that David Cameron was able to scrap the project on what he claimed were civil liberties grounds., in particular the way the project brought together data from different Government Departments.  That most Government Departments went ahead with these databases anyway, but contracted them out to companies like Experian wasn’t made clear to the public. 

https://uk.reuters.com/article/uk-india-aadhaar-breach/critics-of-indias-id-card-project-say-they-have-been-harassed-put-under-surveillance-idUKKBN1FX0FQ

I really do hope that India goes ahead with a large scale UBI experiment before they think about national implementation.   This would potentially be a transformative programme for many Indians, and the economics of it would be very different to trying the same programme in the UK.   I just don’t think that people should assume that this is a Liberal or left wing project, it is the work of a socially Conservative and at times Authoritarian administration.

http://pib.nic.in/newsite/PrintRelease.aspx?relid=157804

http://mofapp.nic.in:8080/economicsurvey/

https://en.wikipedia.org/wiki/Suresh_Tendulkar

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:

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:

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:

https://www.youtube.com/watch?v=UZ4rL5_EkEk

(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.

http://www.resolutionfoundation.org/app/uploads/2017/05/The-deficit-the-election-forgot.pdf

http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/19111701.pdf

http://www.telegraph.co.uk/finance/2832095/Statisticians-wrangle-over-Network-Rail-accounting-treatment.html

 

In 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:

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. 

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. 

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).

http://www.resolutionfoundation.org/publications/the-minimum-required-minimum-wages-and-the-self-employed/

https://www.theguardian.com/uk-news/2017/dec/25/scotland-universal-basic-income-councils-pilot-scheme

https://visual.ons.gov.uk/uk-perspectives-2016-spending-on-public-services-in-the-uk/

https://www.theguardian.com/commentisfree/2017/sep/15/the-guardian-view-on-universal-basic-income-tax-data-giants-to-pay-for-it?CMP=share_btn_tw

http://www.independent.co.uk/news/uk/politics/labour-sets-up-working-group-to-investigate-radical-idea-of-basic-income-john-mcdonnell-reveals-a7563566.html

http://uk.businessinsider.com/elon-musk-universal-basic-income-2017-2

https://www.theguardian.com/commentisfree/2017/sep/15/the-guardian-view-on-universal-basic-income-tax-data-giants-to-pay-for-it?CMP=share_btn_tw

https://www.theguardian.com/society/2017/feb/19/basic-income-finland-low-wages-fewer-jobs