Why the State Pension needs to be much bigger than the Triple Lock is ever going to get it to

07. November 2023 · Write a comment · Categories: Cartoons, COVID-19, Pensions

An excellent report came out in August this year from Common Wealth entitled Undefined Benefit: Fixing the UK Pensions System on the problems and potential alternatives for the UK pension system. One of the most eye catching points made in the report was that, despite pension gains since 2010 in terms of average pensions, the overall coverage of pensions remains very patchy and uneven, particularly towards the bottom end. This graph in particular caught my eye:

The bottom half have very little total net wealth and virtually no private pension wealth at all. This makes them almost entirely dependant on the State Pension and any other income-related (in the absence of a full pension) or other benefits they may be entitled to.

Coincidentally, the IFS have also produced a paper on pensions recently, including this graph (note the cut off at age 74):

The new State Pension (nSP as the Government refer to it) came into effect in April 2016 and currently stands at £203.85 per week or £10,600 pa. This compares with the Pensions and Lifetime Savings Association’s (PLSA) moderate level of retirement living standards which require £23,300 for a single pensioner and £34,000 for a couple. The moderate level includes such things as:

  • Some help with maintenance and decorating each year.
  • £74 a week on food (including food away from the home).
  • 3-year old car replaced every 10 years.
  • 2 weeks in Europe and a long weekend in the UK every year.
  • Up to £791 for clothing and footwear each year.
  • £34 for each birthday present.

The plan for closing the gap between these two levels of income has historically relied on occupational pensions in the UK, to a much greater extent than in most countries. However there are problems with this approach. First of all, not everyone has an occupational pension:

This is the current situation with pensions in payment, which is supposed to be being addressed by automatically enrolling employees into workplace pensions. However, the TUC noted as recently as 2020 that, due to the way the rules operated around low-paid and young workers, 6.3 million employees were still without a workplace pension. A survey of 2,000 employees by Unbiased and Opinium, also in 2020, similarly concluded that 17% of over 55s were still without any pension savings.

Secondly, as defined benefit occupational pension membership has fallen, the amounts which will be provided by the defined contribution arrangements which have replaced them are comparatively uncertain. The Pensions Policy Institute’s (PPI) DC Future Book 2023 has looked at the average employee and employer contribution rates under auto-enrolment:

They then projected whether this combined minimum contribution of 8% (on top of the full new State Pension) would be sufficient to meet any of the PLSA’s retirement living standards:

The combination of pension freedoms and not enough in your pot does of course allow crash paths like these, and perhaps explains the slightly more positive pension position shown in the chart from the IFS report compared to the first chart. By cutting off at 74, the IFS could well be surveying people on the steep descents above while they are still depleting their pots to maintain a slightly higher income.

Of course many other models are available – these projections used the PPI economic scenario generator developed by King’s College with many of the economic assumptions taken from the OBR and there are further details at the end of the report – but that seems beside the key point to me here.

Irina Dunn famously daubed the phrase “a woman needs a man like a fish needs a bicycle” on the back of a toilet door in the University of Sydney in 1970. The pension industry has been very successful in attracting funds and innovative in developing products, and occupational pensions coverage overall at some level has clearly increased substantially as a result of auto-enrolment. But none of the bells, gear arrangements, lightweight alloys or any of the other innovations can change the fact that a state-of-the-art defined contribution investment bicycle can never guarantee to float a goldfish to the water level it needs to thrive. You need the state to fill the tank.

This means raising the State Pension, not by some arbitrary formula involving price inflation, earnings inflation and the number you first thought of, but to what we regard as a reasonable level to live on and which we want to be able to guarantee noone falls below. Comparing the UK with other comparable flat rate state pension pillars in Europe we find the following (from March 2022):

This would suggest an increase of somewhere between 40% and 100% to the current State Pension level to reset the balance between a guaranteed income and that based on the lottery of the markets to European levels.

Many people talked about the need to increase societal resilience as we emerged from the pandemic, instead we appear to be moving in the opposite direction, with no clear idea yet about how to deal with NHS waiting lists, even less idea of how to deal with rough sleepers. And on pensioner poverty we have this:

Source: DWP Households Below Average Income: an analysis of the UK income distribution: FYE 1995 to FYE 2022 Figure 25 – Percentage of pensioners in relative low income, FYE 2003 to FYE 2022 (ie below 60% of median income)

After a concerted attempt to reduce the percentage of pensioners in relative low income during the pandemic, the curve is upwards again, as it has been since at least 2012.

Things have got so bad that Olivier De Schutter, the UN’s special rapporteur on extreme poverty and human rights, has described the UK’s main welfare system as “a leaking bucket” and said that our poverty levels violate international law.

This cannot go on. We can certainly afford to have a welfare system which does not violate international law. And we can afford a much less leaky bucket when it comes to pensions too. I will provide some ideas on how in my next post.

The Imagination of our Ancestors

27. July 2023 · Write a comment · Categories: Climate Change, COVID-19, Economics, Science Fiction
Source: One of Henrique Alvim Corrêa’s 1906 illustrations of War of the Worlds. HG Wells himself approved of these incredible drawings, praising them before their publication and saying, “Alvim Corrêa did more for my work with his brush than I with my pen.”

“We are living inside the imagination of our ancestors” said Gaia Vince in an article earlier this year. I was reminded of this more recently when Sandy Trust said something very similar in his excellent presentation on climate scenarios ahead of the publication of the The Emperor’s New Climate Scenarios, which highlights how most climate-change scenario modelling in financial services excludes the possibility of tipping points and secondary impacts of climate change, thereby substantially underplaying the risk of us ending up with a hothouse earth scenario.

So I decided to remind myself of the imagination of one of our more imaginative ancestors and read The War of the Worlds. Despite having recently watched both the 2005 Spielberg/Tom Cruise film and the BBC adaptation, I found the content of the book quite surprising – much more focused on how the society of 1895 dealt with the Martians than the aliens themselves.

Wells delights in revealing the imagined human response at each stage. From concern about Martians trapped in their spacecraft in a pit near Woking, to sending a deputation to negotiate with it, to satisfying ourselves that they cannot escape their landing crater after their “Heat-Ray” has massacred 40 people surrounding it. As he puts it:

So some respectable dodo in the Mauritius might have lorded it in his nest, and discussed the arrival of that shipful of pitiless sailors in want of animal food. “We will peck them to death tomorrow, my dear.”

That was on the Friday. By Saturday night there was still more interest in the breakdown of a train between Byfleet and Woking junction than in whether this had anything to do with Martians. The lack of response continues:

I have read, in another account of these events, that on Sunday morning “all London was electrified by the news from Woking”. As a matter of fact, there was nothing to justify that very extravagant phrase. Plenty of Londoners did not hear of the Martians until the panic of Monday morning. Those who did took some time to realize all that the hastily worded telegrams in the Sunday papers conveyed. The majority of people in London do not read Sunday papers.

Wells has a theory:

The habit of personal security, moreover, is so deeply fixed in the Londoner’s mind, and startling intelligence so much a matter of course in the papers, that they could read without any personal tremors: “About seven o’clock last night the Martians came out of the cylinder, and, moving about under an armour of metallic shields, have completely wrecked Woking station with the adjacent houses, and massacred an entire battalion of the Cardigan Regiment. No details are known. Maxims have been absolutely useless against their armour; the field-guns have been disabled by them. Flying hussars have been galloping into Chertsey. The Martians appear to be moving slowly towards Chertsey or Windsor. Great anxiety prevails in West Surrey, and earthworks are being thrown up to check the advance London-ward.”

By Monday morning London is being evacuated in the wake of death and destruction. Wells could not sound more contemporary if he were to give his views about Lockdown or responses to the climate emergency. And we can look at these Londoners from nearly 130 years ago and see ourselves, busily discounting the far greater saturation of 24 hour television news, radio and social media and reading, watching and listening to the dire warnings of our own time “without any personal tremors”.

But if our children are going to be living inside our imagination, then what are we offering them? Ursula K Le Guin, in a talk originally called “Where Do You Get Your Ideas From?” and then changed to “The Question I Get Asked Most Often”, said this:

“The imagination can transfigure the dark matter of life. And in many personal essays and autobiographies, that’s what I begin to miss, to crave: transfiguration. To recognise our shared, familiar misery is not enough. I want to recognize something I never saw before. I want the vision to leap out at me, terrible and blazing – the fire of the transfiguring imagination. I want the true dragons.”

And that transfiguration of our experience, to embrace things we never saw before but can imagine, must happen in our stories initially. But if the stories are good enough they can then spread – to our homes, our workplaces, other places we meet our friends and people who aren’t our friends, to our politics, our economics, our society.

Roman Kznaric’s asks in his book, The Good Ancestor, whether there is an antidote to political myopia. His response is that there is and it lies in attempting to establish what he calls “deep democracy”.

In 2009, The Observer newspaper reported that a letter had been sent to the Queen after she demanded, during a visit to the London School of Economics in November 2008, to know why nobody had anticipated the credit crunch. There was one particularly telling sentence which was picked up widely at the time:

In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

To force our children to live inside our current imagination is to force them to live in a world stunted by the ever increasing influence and share of our head space which can be bought by the ever shrinking group of people we allocate our wealth to. But somewhere between the transfiguring imagination Le Guin talks about and the practical proposals of Kznaric and others, it seems to me that there is the first draft of an imagination which our children could live inside.

Day 6 of the UCU Strike: a historical perspective on strikes

16. February 2023 · Write a comment · Categories: COVID-19, Economics

From the column inches expended on the recent industrial unrest, you could be forgiven for thinking that we were in the middle of an unprecedented time of strikes. More working days were lost to strike action in 2022 than at any time since 1989. However, as the graph above shows, and the accompanying ONS release details, what is in fact unprecedented is the degree of industrial peace we have had in the UK since 1985 when the miners’ strike was violently suppressed. The number of strike days lost in 2022 was 2.4 million, which sounds a lot until you realise that there were almost 30 million lost in the so-called winter of discontent in 1979 and the highest year for strikes was 1926, the year of the general strike, when 162 million days were lost.

Between 1919 and 1921 the number was above 25 million for all three years (peaking at 86 million in 1921, the second highest strike year on record). In 1919, an average of 100,000 workers were on strike every day: coal miners, railway workers, transport workers, dockers, police officers, soldiers, ex-servicemen, journalists, painters, teachers, farm workers, cotton spinners and many others. Yes, that’s right – police officers and soldiers were striking! This led to the Police Act of 1919 which established the Police Federation. As David Allen Green has pointed out, this has led to the seeming paradox of a group with no right to strike appearing to have some of the strongest employment protections.

And the soldiers? As John Westmoreland has written in Counterfire, this is even more interesting.

On 3 January 1919 2,000 soldiers in Folkestone refused to board troop ships bound for France to be deployed against the Russian Bolsheviks on the side of the White Russians. They refused orders and led a march of 10,000 through the town. They then formed a Soldiers’ Union. Despite a media blackout, there were around 50 mutinies across the UK and one particularly shocking one of the 13th Battalion of the Yorkshire Light Infantry at Archangel in Northern Russia in February 1919.

A very successful Hands Off Russia campaign increased the pressure on the Government, who were eventually forced to demobilise the troops. The mutineers largely escaped punishment, when mutiny was normally punishable by death (and General Haig indeed advocated shooting the strikers). The Government was forced to meet many of their demands. Demobilisation, which had been slow up until then because of the Russian military campaign planned, sped up considerably. British forces shrank from about 3.8 million at the Armistice to around 900,000 in late 1919 and down to 230,000 by 1922. Demobilising so many men in such a short space of time increased unemployment markedly, from just 1% of the labour force in May 1920 to 23% by May 1921.

Meanwhile, the Spanish flu pandemic, which claimed its first victim in May 2018, swept across the globe, infecting around 500 million people and killing around 50 million of them in the absence of treatments for flu or antibiotics to treat complications like pneumonia. This compares with the 756 million cases of Covid-19 recorded by the WHO to date, from which there have been 6.8 million deaths.

The strikes of 2023 are not extreme by historical standards at all. However, attempts by the Government to further muzzle the rights of people to withdraw their labour certainly are.

Could climate change slash global GDP by 18%? It’s much worse than that

05. May 2021 · Write a comment · Categories: Actuarial, Climate Change, COVID-19, Economics, Prediction, Risk

Last week, the news from the Actuary magazine was that climate change could slash global GDP by 18%. This was based on a Swiss Re report, the economics of climate change, from which the analysis above is taken.

According to the report, “The current trajectory of temperature increases, assuming action with respect to climate change mitigation pledges, points to global warming of 2.0–2.6°C by mid-century.” It was unclear why they had decided to stop at 2050, when current commitments continue to push temperatures up until 2100. And the scenarios from the IPCC’s AR5 Synthesis Report (see below) show that the path we are currently on diverges far more considerably from the Paris agreements after 2050. Climate effects are very long-term and many of the impacts of a 2-3°C warming would be irreversible ones, ensuring continuing losses at similar or greater levels for decades to come, and that is before we even consider the much higher probabilities of feedback effects: from the melting of the permafrost, additional methane releases, loss of Amazonian carbon and the loss of the albedo reflectivity of Arctic ice. The Swiss Re report makes clear that is has not considered these.

You might notice that there is a separate column to the left, in a different colour, with the title “Well-below 2°C increases” and sub-title of “Paris target”. It is actually an agreement which 189 countries have signed up to, including the UK. As the Paris Agreement says (Article 2 Point 1):

This Agreement, in enhancing the implementation of the Convention, including its objective, aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by:
(a) Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature
increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

There has been some debate over whether the Agreement is aiming for 1.5°C warming with a 50% chance of staying below it, or for “well below” 1.5°C similar to the 2°C goal with a 66% chance of avoiding more than 1.5°C warming, but the modelling used for the next IPCC report has adopted the latter definition. Either way, I cannot see why Swiss Re has decided to put the Paris Agreement targets in a different column from what it calls the “likely range of temperature gains” as if those we have committed to are no longer feasible to aim at.

In saying this, I do not underestimate the massive challenge of keeping to the Paris target. As Mark Lynas says in Our Final Warning, at the end of 2018 over 1,000 GW of additional fossil-fuelled electrical power generation capacity was planned, permitted or already under construction around the world, equivalent to adding an additional 188 Gt CO2 into the atmosphere to the 658 Gt already baked in from existing infrastructure, which gives a total of 846 Gt of CO2 not including impacts from deforestation, agriculture and future land-use change. This compares to a future carbon budget as estimated at the end of 2018 by the IPCC (although estimates of this vary considerably) of 420 Gt of CO2 (or 1,170  Gt of CO2 for 2°C warming). So an extraordinary change of direction is required and we should be very cautious of getting anywhere near these limits when we do not know precisely where they are.

Which brings me onto the modelling of economic impacts. The first thing to say is that modelling in terms of impact on GDP, while guaranteed to get the attention of the financial community, is perhaps not the best way of communicating the devastation of runaway climate change.

In the summary of Mark Lynas’ excellent book Six Degrees: Our Future on A Hotter Planet , which summarised the scientific consensus already arrived at by 2007, the three degree increase for which damages are being estimated is expected to lead to Africa […] split between the north which will see a recovery of rainfall and the south which becomes drier […] beyond human adaptation. Indian monsoon rains will fail. The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers [will decrease] by up to 90%. The [IPCC] in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates.[and] food prices [will] soar. Population transfers will be bigger than anything ever seen in the history of mankind. [The feedback effects from the] Amazon rain forests dry[ing] out and wild fires develop[ing] [will lead] to those fires [releasing] more CO2, global warming [intensifying] as a result, vegetation and soil begin[ning] to release CO2 rather than absorb[ing] it, all of which could push the 3° scenario to a 4°-5.5° [one]. The recent update to this: Our Final Warning, describes “entering the three-degree world means we are now living in a hotter climate than any experienced on Earth throughout the entire history of our species”. These impacts, which are likely to pose existential risks for many, appear totally inconsistent with the economic loss modelling shown above.

In his 2020 paper, The appallingly bad neoclassical economics of climate change (apologies, Journal access required), Steve Keen says in the abstract:

Forecasts by economists of the economic damage from climate change have been notably sanguine, compared to warnings by scientists about damage to the biosphere. This is because economists made their own predictions of damages, using three spurious methods: assuming that about 90% of GDP
will be unaffected by climate change, because it happens indoors; using the relationship between temperature and GDP today as a proxy for the impact
of global warming over time; and using surveys that diluted extreme warnings from scientists with optimistic expectations from economists. Nordhaus has misrepresented the scientific literature to justify using a smooth function to describe the damage to GDP from climate change. Correcting for these errors makes it feasible that the economic damages from climate change are at least an order of magnitude worse than forecast by economists, and may be so great as to threaten the survival of human civilization.

There follows a demolition of the methodologies employed by Nordhaus and others in this field. To be fair to the Swiss Re report, some of the criticisms in Keen’s paper appear to have been borne in mind when constructing their model, eg:

A shortcoming of our model build so far is that some economic impacts are linearly estimated: non-linearities are not adequately captured. We use multiplicative factors of 5 and 10 to simulate the increasing severity of outcomes from nonlinearities… Importantly, the framework does not consider
tipping points, events such as the partial disintegration of ice sheets, biosphere collapses or permafrost loss, that pose a threat of abrupt and irreversible climate change. This is because it is thought that tipping points will materialise well after our model horizon of mid-century only.

And as the Swiss Re report also acknowledges:

It is likely that the estimated impacts of GDP damages from climate change will rise as existing modelling develops to incorporate economic linkages in trade, migration and other channels, and to generalise the results to multiple countries.

And they are getting criticisms from the usual suspects of climate denial, eg Bjorn Lomberg on Twitter here, that even their attempts to date to quantify the uncertainties caused by non-linearity are a step too far.

And yet there remains a problem with these analyses in that they fail to capture existential risk. One of the things Steve Keen points out in his paper is the different attitude Nordhaus found towards estimating damages from climate change in natural scientists as opposed to economists. Natural scientists typically estimated the damage at 20-30 times higher than economists and some refused to cooperate with the exercise at all:

I must tell you that I marvel that economists are willing to make quantitative estimates of economic consequences of climate change where the only measures available are estimates of global surface average increases in temperature. As [one] who has spent his career worrying about the vagaries of the dynamics of the atmosphere, I marvel that they can translate a single global number, an extremely poor surrogate for a description of the climatic conditions, into quantitative estimates of impacts of global economic conditions. 

But how do you calibrate what is clearly a complicated model that Swiss Re and Moody’s have constructed for this analysis? Obviously we all have a very recent GDP fall in our minds at the moment – here is a summary from the UK Commons Library of Economic Indicators as at 30 April 2021 (themselves sourced from OECDstat and Eurostat):

This shows an almost identical GDP fall of 10.5% year on year in Q2 2020 for the OECD as predicted in the event of a 3.2°C warming, although it has bounced back pretty quickly since. For a longer term view of the global data, Our World In Data have an Annual growth in GDP per capita graph which runs from 1961 to 2017 (see below).

One very large GDP fall which stands out in the data here is the 26.5% fall in China in 1961. This was towards the end of the China’s Great Famine, in which approximately 3 million people died of starvation over a 3 year period. This certainly qualifies as an existential event and Swiss Re’s modelling suggest something of similar proportions in Asia and Africa at 3.2°C warming.

The biggest danger in all of this is that rich countries will look at a 10.6% reduction in GDP (at 3.2°C warming) and think this liveable with and adaptable to for their populations. After all, Simon Wren Lewis calculates that the austerity policies between 2010 and 2018 in the UK reduced GDP by nearly half of this amount every year for at least the second half of this period, compared to where it would have been without these policies, with an estimated cumulative loss of 15.9% of GDP. An 18.1% overall world average loss, however, effectively means more than a 25% loss for the rest of the world outside the OECD, as the OECD accounts for around half of the world’s total GDP which, even if we did not allow for the acknowledged likelihood that these are underestimates, is still in the Chinese Famine category of disaster and neither liveable with nor adaptable to.

We are already seeing vaccine nationalism carve up the world between rich and poor countries, with up until last month only 0.3% of the vaccines administered around the world having gone to people in low-income countries. This is likely to reduce the ability of poorer countries to be represented properly at this year’s COP26 when it frames a global response to the climate change which will affect them so disproportionately. And the losses if we do not act will be measured in far more frequent floods and sea level rise, extreme storms and heatwaves, crop failures, water and food shortages and mass migration on a scale we have never seen before, not GDP.

Could climate change slash global GDP by 18%? It’s much worse than that.

 

Hope-over-Experience is a comfortable place to live in…for now

26. April 2021 · Write a comment · Categories: Climate Change, COVID-19, Economics, Prediction, Risk

There is a particular variety of We Know Zero graphs that look like this one – showing an experience of a steady increase in something (usually bad, but not always) up until now, followed by a projection of that thing falling in the future. My wife Marsha suggested I call them Hope-over-Experience graphs, which seems to suit them very well.

Such diagrams are often very comforting for those who want to maintain the status quo. Let’s look at three such curves in particular (the excellent Doughnut Economics by Kate Raworth has alerted me to the first two of these).

The Kuznets Curve

There is a considerable body of evidence, most notably from Kate Pickett and Richard Wilkinson, that inequality impacts most health and social problems adversely, to the detriment of all socio-economic groups, but what is to be done about it? Enter our first Hope-over-Experience graph. In this case the x-axis is actually income per capita, but to the extent that this is something expected to increase with time I don’t think this matters too much. The y-axis is inequality. It was originally proposed by Simon Kuznets (the inventor of GDP) in his 1955 paper Economic Growth and Income Inequality (my apologies, but you will need journal access to read this) based on data from England, Germany and the United States from 1875 onwards, and the belief that economic growth will automatically deal with inequality has been a powerful influence on economic policy at the World Bank and elsewhere since.

However, more recent data has shown the patterns suggested by this limited original data set are no longer correct, if indeed they ever were. Thomas Piketty and Emmanuel Saez, in their 2001 paper Income Inequality in the United States 1913-1998, state:

In particular, the evidence presented in this paper, together with the evidence on France by Piketty (2001a, 2001b) and the U.K. by Atkinson (2001),
strongly suggest that there was no such thing as a “spontaneous”, Kuznets-like decline of inequality in developed countries during the first half of the 20th
century. The inequality decline was to a large extent accidental (depression, inflation, wars) and amplified by political factors (progressive taxation). This does not mean that the current rise of inequality will not be followed by a mechanical downturn during the first few decades of the 21st century: this is simply saying that such a mechanical downturn apparently never occurred in the past.

Their data suggests a curve which looks like this instead:

The Environmental Kuznets Curve

This was first proposed by Gene Grossman and Alan Krueger in 1994 in their working paper Economic Growth and the Environment, which suggested that there was an eventual inverse relationship between pollution and income per capita, with a turning point mooted at around $8,000. Most of their graphs are not quite as U-shaped as the Kuznets Curve, but this nonetheless has come to be known as the Environmental Kuznets Curve.

However, in 2016, the international industrial ecology research community and United Nations Environment agreed on a comprehensive data set for global material extraction and trade covering 40 years of global economic activity and natural resource use, which led to several papers including the UNEP Global Material Flows and Resource Productivity: A Report of the International Resource Panel (again apologies but journal access needed). Their graph of material extraction instead looked like this:

The Human Development Index (HDI) is the geometric average of 3 indices: Gross National Income, Health and Education. An optimum score of 1 is achieved where life expectancy is 85 or more years, adult literacy is 100%, school enrolment is 100% and the Gross National Income is US$40 000 or more per person per year in purchasing power parity. So again, this is not very supportive of a reduction in material footprint with increased wealth.

Which brings us to the third graph, often cited as an argument for why one of the most obvious ways to reduce inequality rather than just focusing on average income per capita, ie make taxation more progressive, is pointless.

The Laffer Curve

The story of the Laffer Curve, dating from the 1970s, is recounted by Arthur Laffer himself here. It plots tax rates against tax revenues to indicate that there is a tax rate beyond which tax revenues actually reduce. As he says:

The Laffer Curve itself does not say whether a tax cut will raise or lower revenues. Revenue responses to a tax rate change will depend upon the tax system in place, the time period being considered, the ease of movement into underground activities, the level of tax rates already in place, the prevalence of legal and accounting-driven tax loopholes, and the proclivities of the productive factors. If the existing tax rate is too high…then a tax-rate cut would result in increased tax revenues. The economic effect of the tax cut would outweigh the arithmetic effect of the tax cut.

However, returning to Piketty, this time in the 2011 paper,  Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities by Piketty, Saez and Stefanie Stantcheva, the evidence underpinning this curve is again highly questionable. As they point out in the abstract (bold type added by me):

This paper presents a model of optimal labor income taxation where top incomes respond to marginal tax rates through three channels: (1) standard labor supply, (2) tax avoidance, (3) compensation bargaining…The macro-evidence from 18 OECD countries shows that there is a strong negative correlation between top tax rates and top 1% income shares since 1960, implying that the overall elasticity is large. However, top income share increases have not translated into higher economic growth. US CEO pay evidence shows that pay for luck is quantitatively more important when top tax rates are low. International CEO pay evidence shows that CEO pay is strongly negatively correlated with top tax rates even controlling for firm characteristics and performance, and this correlation is stronger in firms with poor governance. All those results suggest that bargaining effects play a role in the link between top incomes and top tax rates implying that optimal top tax rates could be higher than commonly assumed.

There are a number of charts which could be used from this paper, but I have chosen the plot of economic growth against changes in top marginal tax rate to illustrate most clearly the problems with the Laffer Curve idea:

This graph should show an inverse relationship if the Laffer Curve were true.

Why do I feel the need to debunk these simple so-called economic laws which are nothing of the sort? Because you will always prioritise economic growth over everything else if you believe that:

  • Growth will fix inequality;
  • Growth will fix pollution;
  • Trying to fix inequality through the tax system is counter-productive.

And these beliefs will then also have policy implications when faced with a different sort of curve.

This was an explainer from Grant Sanderson at 3Blue1Brown about COVID-19 from March 2020 setting out quite simply how it was likely to spread, and how different case numbers in different countries (eg between Italy and the UK) were as likely to be due to being at different time points since the start of the pandemic as reflecting the relative success of their containment policies. We now know the UK Government locked down too late, at least partly because they prioritised economic growth over containment policies in the first few weeks:

Those attitudes changed and we have had an incredibly successful vaccine rollout in the UK, but this has been at the expense of any idea of international cooperation in vaccine supply. Wealthy countries such as the UK have bought enough vaccinations to cover our populations almost three times over, while Covax, the global vaccine procurement scheme, only aims to vaccinate 20% of the populations of recipient countries this year.

This is very short-sighted if we think there might be an international issue even more threatening to life than COVID-19 which can only be combatted by unprecedented levels of international cooperation. And of course this is exactly what we have in the form of the climate emergency and our final graph (from the National Oceanic and Atmospheric Administration (NOAA) in the US showing the relentless rise in the level of carbon dioxide in the atmosphere as global emissions continue to increase:

 

Living in Hope-over-Experience may be very comfortable for some people for a limited time, but if it stops us engaging with the more implacable curves of the world we actually live in then none of us will be safe.

Fiscal space

05. January 2021 · Write a comment · Categories: COVID-19, Demographics, Economics, Risk

NASA, ESA, and the Hubble Heritage Team (STScI/AURA), Public domain, via Wikimedia Commons

Fiscal space is defined as the difference between a nation’s sovereign debt-to-GDP ratio and the limit beyond which the nation will default unless policymakers take fiscal steps that are outside of anything they have done historically. That limit is sometimes referred to as the fiscal cliff, just to ram home the imagery of fixed physical limits beyond which disaster beckons.

How much fiscal space does the UK have? Moody’s have an answer, which depends most heavily on when you ask the question. In September 2019 it was as follows:

This shows the UK with a fiscal space (the “dynamic” means they assume interest rates increase as borrowing does, due to “crowding out” arguments – ie government borrowing pushing up the price of borrowing for everyone – so beloved of most economists) of around 175% of GDP, with this then projected to fall over the following 5 years as rates “normalized”. While the cost of borrowing seems to be dynamic, the actual borrowing itself is not allowed to be in these calculations – it is assumed that they just add to debt without increasing the revenue components of the primary balance.

Well of course then we had 2020, at which point (June 2020) Moody’s appear to have stopped talking about fiscal space and instead are now focusing on something called “debt affordability”. What happened to dynamism and crowding out? Not explained:

However despite this triumph of debt affordability, they then produce another graph to indicate that governments still need to be bearing down on debt to GDP ratios:

As they say in the document “rating implications will depend on governments’ ability to reverse debt trajectories ahead of potential future shocks”. Remember this was in June 2020. Let’s also remind ourselves of another graph:

Requiring governments to reverse debt trajectories in this environment is insane and likely to result in more deaths if not ignored. However as recently as last month in their issuer comment for the UK they said:

However, compared to the government’s March budget (that was quickly overtaken by events), there are some initial signs that fiscal policy outside of investment is likely to be less expansive than previously announced. What remains unclear is whether this ambition will be able to withstand the political pressures that seem to be inevitable given the government’s previous commitments. Even before the Spending Review, longer-term spending commitments for health, education, and defence had already been announced. Together, these three areas account for around 60% of total expenditure.

I have been hard on Moody’s in this piece, they are most certainly not alone. But this attempt to divorce sovereign debt levels from what is actually going on in countries needs to stop as does the constant discounting of the value of any government spending at all. Political pressures to spend more on health and education are not always things that governments need to “withstand” in order to look good in a Moody’s graph. There are far more important things at stake.

 

Change and Innovation-Speak

03. January 2021 · Write a comment · Categories: COVID-19, Economics

Blaise Pascal, mathematician and philosopher, once said:

All of humanity’s problems stem from man’s inability to sit quietly in a room alone.

This seems to have a particular relevance at the moment, when many of us are being asked to do precisely that. I also agree that this is definitely a problem we have. However I prefer to think of it as just one consequence of our inability to think about change in any rational way. We fear change, which is why we yearn so much to go back to “normal” at the moment, even if normal life was pretty unsatisfactory for many of us before the pandemic struck. We fight against change if we think what we have is threatened from outside the room we might otherwise sit quietly in, whether that is the loss of our income or that of our influence in the world or our “sovereignty”.

The only way in which we can contemplate change is in the context of some utopian ideal of improved productivity making one aspect of our lives much better while not requiring us to change any other part of them. Hence so much resistance to any idea of redistributing what we already have in favour of “Pareto improvements” to the economy, ie those which benefit some people without making anyone else worse off, and the obsession amongst economists with the “productivity puzzle” in the UK in particular:

So we look for ways to achieve this miraculous productivity improvement while leaving everything else essentially unchanged and the magic word which promises this more than anything else is innovation. Innovation will enable us to do more with less (or, more usually, make us do a lot more much cheaper, therefore encouraging us to use even more in the process). Innovation will have spin offs in lots of other areas we have not even imagined yet, but they will all be good ones! Innovation will solve the productivity puzzle.

In The Innovation Delusion, Lee Vinsel and Andrew Russell challenge this. As we have become more and more desperate for all change to look like innovation, we have made actual innovation harder to achieve, while saddling ourselves with higher and higher maintenance costs of new “innovative” infrastructure which is increasingly unsustainable to finance, rather than maintaining what we already have better.

I therefore prefer the quote that they use, from Kurt Vonnegut:

Another flaw in the human character is that everybody wants to build and nobody wants to do maintenance.

Innovation-speak, as they call it, is not innovation at all, but presenting ideas as innovative when they are not. As they say:

It plays on our worry that we will be left behind: our nation will not be able to compete in the global economy; our businesses will be disrupted; our children will fail to find good jobs because they don’t know how to code…Innovation-speak is a dialect of perpetual worry.

No wonder we are unable to sit quietly in a room alone.

And in the coming years when we will need to make substantial changes that work well enough for all of us to be able to continue living on this planet together, this approach will not work. We need for our thinking not to be magical, but grounded in realism. We need to make new things that we can afford to maintain sustainably. Innovation-speak will not get us there.

NEW versus England and Wales – an update

02. January 2021 · Write a comment · Categories: COVID-19, Demographics

I previously wrote a blog in 2013 based around the Office for National Statistics (ONS) statistical bulletin entitled Estimates of the Very Old (including Centenarians), 2002-2011, England and Wales, which summarises how the proportions living to 90 years old and above have changed since 1981. It showed us a population living within a population: Nonagenarian (ie the over 90s) England and Wales (NEW) within the full population of England and Wales. I thought it might be time for an update, based on the latest ONS bulletin from September 2020, which now covers the period 2002-2019.

There have been quite a few changes. There are still more women than men in NEW, although the overall ratio has reduced from 2.7:1 in 2011 to around 2:1 in 2019 (see below). The NEW population, which was somewhere between the sizes of Malta’s and Cape Verde’s full population in 2011, has now just passed that of Western Sahara and has its sights firmly set on passing Luxembourg’s population next.

The population of NEW is still growing far more quickly than that of England and Wales, or indeed the UK, with a 25% increase between 2011 and 2019. However, with the NEW population you need to look beyond just improvements in public health and medical advances to the time at which they were being born. For instance, the number of people alive at almost every age from 90 years and above was higher in 2019 than in 2018, but with by far the largest increase at age 99 years (62.2%). This was caused by a big increase in births from the second half of 1919, compared to the previous year, as a result of the end of World War 1!

The bulletin ends with a sombre reminder that, although we would normally expect the large increase in those aged 99 years in 2019 to translate into a record number of centenarians in 2020, other factors, particularly the COVID-19 pandemic, are likely to have had a significant impact. COVID-19 deaths are highest for the 85 years and over age group. Public Health England have calculated excess deaths in the over 85 population at 11,656 between 21 March and 18 December 2020 (with 13,844 categorised as COVID deaths, suggesting a drop in excess deaths from other causes). This compares with the 2019 NEW population of 605,181, an increase of 21,157 on 2018.