Chart of the week: US household savings rate falls after deleveraging of recession

Summary: Latest GDP revisions also boost household savings

What the chart shows: The chart shows US household savings as % of disposable income

Why is the chart important: The US Bureau of Economic Analysis has just published its most recent major GDP revision. These take place every five years, but the 2013 was more through-going than most, in two ways. First, investment in intellectual property (films, books etc) is now counted as capital expenditure. Second, pension savings is now included in the household savings rate. The revision does not change the past, but it provides a better picture of it. In the case of household savings, it helps explain how US households have managed to deleverage in the aftermath of the Great Recession. However, the recent trend is still for the savings rate to fall. Short-term, that is good news for the economy. Somewhat further out, it is a concern. 

Postcode petrol prices

Transporting fuel to Scottish islands is an expensive business. This in turn makes motoring on the islands more expensive. The UK government's solution? It gives a 5p/litre reduction on fuel duty on the islands. Which means millionaires who've retired to Arran enjoy a subsidy from poor motorists on the mainland.

So now everyone else wants to get in on the act. There is an election coming up, of course, and now people on 'remote' parts of the mainland – Devon, Northumberland, North Yorkshire and Wales could be in line for the same cut. The Treasury is asking petrol retailers and customers in 25 Counties to provide details of their prices. Well, we know what they are going to say, don't we?

Don't get me wrong. I'm in favour of any tax reduction of any size on any thing at any time in any place. Taxes are far too high. But as well as being low, taxes should be simple. If you are going to tax fuel, or alcohol or incomes or anything else, tax them equally: don't try to use taxes for social engineering. The long-run results won't be happy.

Back in the 1970s, when the UK gave subsidies to 'assisted areas' that were thought to be in need of special support. Of course, everyone wanted the subsidy, and before long, the entire country was one vast 'assisted area' apart from a small pocket in the South East. That is where this kind of me-too politics takes us.

Politicians should not be empowered to favour any particular groups. They should treat us all equally – if we allow them to discriminate, the opportunities for corruption are huge. If people choose to live in remote places, they need to accept the costs of that – along with the benefits, which might include scenery, solitude, simplicity and much else. We should not tax them for the latter and should not subsidise them for the former.

By manipulating the tax system, politicians skew the decisions people make about where they live and what they do. Bit by bit, we end up gravitating to the subsidised places and working in the subsidised industries – instead of going to where we can be most productive in the most productive industries. And then we wonder why the country is broke.

An interesting question indeed

Mark Thoma asks an interesting question:

I have a question. Why should government spending as a percentage of GDP stay constant as GDP grows?

Sadly he rather spoils it by providing the wrong answer:

It seems that, as we grow wealthier as a society, we would want relatively more of the kinds of goods government provides, e.g. social insurance.

Nothing is a normal good in all income ranges, a normal good being one that we spend the same portion of our incomes on whatever those incomes might be. Everything is, at some point in the range of possible incomes, an inferior (we spend smaller portions of income as income rises) or superior good.

So, yes, it's entirely true, there is no good reason that government as a percentage of GDP stays static as GDP rises. The interesting follow on being whether we do indeed desire more of such social protection as incomes increase.

And I'd say that we've already gopne over the hump from government being a superior good to it being an inferior one.

Imagine life 200 years ago. Yes, indeed, there was charitable provision for medical care, the invalids and the old: but as it turned out, what the people actually wanted was more than just that charity. The voters voted that they wanted government to provide at least more than had previously been done. Yes, we might argue about this but these definitions of superior etc goods are not about what ought to happen but about what people actually do. And people most certainly have voted to have more social insurance than we had when GDP per capita, in current money, was £2,000 a year or whatever.

However, does this hold true today? For we already have social insurance: pensions for the old, food for those unable to afford it, money for the unemployed, top ups to wages for the unskilled, a national health service, care for the orphans and so on and on and on. If GDP doubled, for example, would we be insisting on having twice the social insurance we currently do? I think not actually, I think that given we do indeed have that desired safety net I think that people would generally regard more government as an inferior good. Something we have less of as a portion of our incomes as incomes rise.

The initial question is interesting and the answer is that there is no reason why government should be a static portion of GDP. But I do indeed think that at our current levels of government and GDP that it has become an inferior good, something we'll spend a lower portion on as we get ever richer.

Let's talk about cartels

We generally think that cartels are a bad idea: they're one of those conspiracies against the public that happen when businessmen meet together for pleasure and the like. There have been though those who insist that cartels are just absolutely great. They ensure decent profits for investors and unions can also claim a share of those profits in the form of "good jobs at good wages". Monopolies are just an extreme form of that cartel idea of course, where the cartel is within one firm. And the people who think that those cartels are a great idea really do scan the ideological spectrum. It's implicit in Fascist economics, such as there is an economics of fascism. It's what Roosevelt tried to do with the National Recovery Act (no, I am not trying to state that Roosevelt was a fascist, only that in his approval of cartels he had a similar policy to one followed by Mussolini et al) and it's implicit in all those calls for nationalised industry in Dear Old Blighty, where we can go back to the unions extracting some percentage of the monopoly profits for the labour force.

But we're just seeing a cartel breaking up, right before our very eyes. The potash cartel that is, a vital ingredient of fertilisers worldwide:

OAO Uralkali, the world’s largest potash producer, upended the $20 billion-a-year industry by ending limits on production that underpinned prices and halting cooperation with Belarus that controlled supplies from the former Soviet Union. The decision sent shares of potash producers plunging as much as 27 percent from Israel to Germany to Canada and the U.S. as investors speculated a flood of supplies will lead to prices will sink for potash, a soil nutrient that strengthens plant roots. Uralkali, part-owned by billionaire Suleiman Kerimov, said it exited the venture after Belarus undermined the sales agreements.

The shares of all of the producers plummeted. Clearly, the market was entirely sure that the cartel propped up profits. And the price looks set to fall substantially of the product itself:

“We see the potash price may fall below $300 a ton after the change in our trading policy,” Uralkali Chief Executive Officer Vladislav Baumgertner said. That’s at least 25 percent below the current contract price for China and the lowest since January 2010.

The global market is around 34 million tonnes. Assume that $100 price drop talked about there: that's $3.4 billion that's going to be transferred from the pockets of the producers to the pockets of the consumers. Now what was it Adam said, ah, yes, the sole purpose of all production is consumption and the interests of the producer must only be attended to so far as they are vital to the consumer, or something along those lines, wasn't it?

The breakdown of just one single cartel makes consumers $3.4 billion better off it seems. Which is really why we don't like cartels and monopolies, even if they do end up providing "good jobs at good wages".

You really cannot just plan economies you know

It's one of the standard conceits that the man with a plan can make society better for us all. The standard response to this conceit is Hayek's point, that no one can have enough information in sufficient time to be able to make or manage such a plan. That's why we have to use markets as they're the only information processing and calculation engine we've got that is capable of doing the job. There are, of course, people who prefer to shout that Hayek's all wet and that their plan would undoubtedly work. Fortunately we've already run the experiment, we generally call it the 20th century, and we now know that Hayek was indeed right.

All of which leads to this interesting little tale:

Migration statistics are "little better than a best guess" and probably understate immigration to the UK, a parliamentary report has revealed. With immigration again set to be a key battleground during the next election, a report released today by the Public Administration Select Committee warns that the statistics are not fit for purpose.

Because of the unreliability of the figures, the report adds, the Government should aim for a target of 50,000 if it wants to reduce immigration to under 100,000 by 2015. Estimates of immigration, emigration and net migration are primarily based on a sample of 800,000 people interviewed at ports and airports each year, known as the International Passenger Survey. But only about 5,000 of those tend to be migrants and, in addition, the report comments, these "may be reticent to give full and frank answers, to say the least".

This means that the Office for National Statistics and the Home Office are producing "blunt instruments for measuring, managing, and understanding migration to and from the UK", which do not, the report says, measure the impact of migration on local areas, the social and economic impacts of migration or the effects of immigration policy.

Or as we might put it, we cannot "manage" immigration or the effects of it because we've got no clue at all about how much of it there is. We don't, in fact, know how many people there are in the country, let alone how many of them are native born (it's actually Polly Toynbee who has been saying for years that sewage processing requirements show that there's more people in the country than there are on the books). In such circumstances we simply cannot go about trying to manage things like housing: given that we've no clue of the number of people we can't decide how many houses and or flats there should be. We can only start to look at what the markets are telling us: prices are rising, in fact are at Ungodly levels, and so we need to have more houses and or flats.

How many more? I don't know, you don't know and the government can't possibly know. Just more until we stop having house price inflation.

I should end here with a clarion call to something or other. But I'm not sure that this rises to that level: perhaps a clarinet call. We really have run that experiment about planning and markets. Given that we've received the results, can we please start paying attention to them? We simply do not have, cannot have, the information we need to plan things. That's why we have to use markets.

Simples really, isn't it?

Chart of the week: EU debt/GDP ratios rising

Summary: The UK’s debt/GDP ratio fell in Q1; in most of the Eurozone, it rose

What the chart shows: The chart shows consolidated general government debt/GDP ratios in the UK and the euro area as %

Why is the chart important: One of the main consequences of the Great Recession has been an explosion in public debt. For the time being, the burden of this debt has been eased by ultra-low interest rates. However, at some stage, interest rates will begin to normalise; at that stage, debt – which regularly needs to be rolled over – will become increasingly expensive for governments to service. It is therefore crucial to at least bring the rise in debt under control as soon as possible. Latest data from Eurostat show that UK government debt/GDP fell slightly in Q1 this year. Faster output growth in Q2 means that it almost certainly fell slightly more in Q2. By contrast, for the euro area as a whole – and for all of its members barring Germany and Estonia – debt continued to rise. While output growth is the acute problem, debt is becoming a chronic one which will ultimately have to be dealt with – through repayment or default.

If you'd like to know why economic growth is slow....

Then I shall tell you why economic growth is slow. We've become infested with an overweeningly bureaucratic state. I have examples from my own work but perhaps one from the public domain is better:

There was some bad news for York Potash project developer Sirius Minerals last week, after approval of its mine was delayed yet again, causing the shares to plunge.

I'm perfectly happy with the idea that a mine needs planning permission. Indeed, I've no problems at all with the idea that you need a permit to go dig a girt big hole in a national park. However, there's parts of this process that look absolutely absurd:

The second study essentially concluded that its authors did not see a market for the form of potash Sirius would produce. “In the conclusion, AMEC states that it does not believe there is a significant market for polyhalite and therefore stated economic benefits are unlikely to occur,” Sirius said. “This is followed with a view that, as polyhalite cannot be sold in sufficient volumes, the economic and employment benefits cannot be realised.”

What? One the one hand we've got Jeremy Grantham and vast numbers of enviros and organic nutters insisting that potash (and another fertiliser, phosphorous) is about to run out and therefore we're all gonna die and then we've these nutters employed by the government to say that no one will buy the stuff. A very quick Google indeed shows that there is a market for the stuff. Here. But much more than that, in order to get permission you've got to show the bureaucrats that there is indeed a market for your goods. What?

That's a planned economic system, not a market one. In a market system sure, you might need permission to go dynamiting the North Moors but whether you make money doing so is what you're there risking your capital to find out. It's absolutely damn all to do with functionaries in offices whether you do or not: that's your risk. And the only way anyone will ever find out is by going and doing it.

And this is indeed one reason why economic growth is slowing: because we've erected this system whereby the bureaucrats get to second guess everyone in their atempts at new economic activity. Yes, this is beter than a system in which only the bureaucrats ever initiate new activity: but it's still vastly worse than one in which people get on with what they want to do without having to spend several years waiting for a signed chitty. Economic growth has slowed over the past few decades simply because we've put more paperwork obstacles in the way of economic grwoth.

Chart of the week: Eurozone car sales flat for 10 months

Summary: Euro are car sales have moved sideways for ten months

What the chart shows: The chart shows sales of new cars in the euro area as well as in the four largest EA members, expressed as an index with the average for 2008=100

Why is the chart important: The biggest purchases of households, the ones for which they usually borrow money, tend to be cars and houses. For this reason, both purchases are excellent leading indicators of activity, in that they are usually only undertaken when they buyer is feeling optimistic. EA car sales data give rise to cautious optimism that economic activity in the single currency zone has bottomed out. However, there is still little or no sign of any sustained recovery.

The good news about world poverty and globalization

On my own website today I draw attention to the Economist story about the progress of world poverty between 1990 and 2010. I point out that:

"World poverty has halved in two decades. The measure used is the $1.25 a day of consumption that is the average poverty line for the 15 poorest nations. This figure shrank from 43 percent in 1990 to 21 percent in 2010. This was not achieved by redistributing wealth from richer countries, but by having wealth created in poorer ones by economic growth."

The ASI responded to the "Make Poverty History" wristbands that celebrities popularized in 2005 by pointing out that the slogan did not indicate how this might be done. It implied redistribution, with more aid to flow from rich countries to poorer ones.  We produced our own wristbands that read, "I buy goods from poorer countries," and sent them out free to anyone who asked for one.  We gave away many thousands. 

Our point was that poorer countries become richer if we open our markets and buy their goods.  It is this, rather than aid, that has made a difference to the lives of a billion people over those two decades, and can change the lives of the billion still to be lifted from poverty.

A letter to the Archbishop of York

The Most Reverend & Right Honourable Dr. John Sentamu, Archbishop of York

The Office of the Archbishop of York

Bishopthorpe Palace Bishopthorpe, York YO23 2GE

21 July 2013

Your Grace,

I note from today's Observer that you are concerned about the Living Wage. I write to make a point that I suspect the usual suspects will not make to you. The importance of understanding that the living wage is calculated as a pre-tax number.

We here at the Adam Smith Institute agree that the Joseph Rowntree Foundation is indeed measuring poverty in the correct manner. We derive this from Adam Smith's comments on a linen shirt: it is not a necessity. However, if one lives in a society where being unable to afford a linen shirt means that you are regarded as poor, then in that society, if you cannot afford a linen shirt you are indeed regarded as poor. The JRF numbers are gathered in a similar manner: what do focus groups think people should be able to do in order to be regarded as not poor in this time and place? Add up the costs of those things and we reach that living wage. This is a much better definition of poverty than the more usual reference to some percentage of median income.

However, it is absolutely vital to understand that those numbers are pre-tax. The importance of this is as follows: if it were not for the amount that government takes from such meagre wages then the minimum wage would indeed be, to an acceptable level of accuracy, that living wage.

An example to make this clear. Assume 37.5 hours a week of work for 52 weeks of the year. At that living wage of £7.45 an hour this is a gross weekly income of £279.40 (I round slightly) or £14,527.50 a year. We are all agreed that this is not a large sum.

From this sum the recipient will have to pay employees' national insurance. This starts at £109 per week and is charged at 12%. £20.50 per week in such charges, or £1,063.30 per year.

There is also income tax to pay. This starts at £9,440 this year and is charged at 20%. £1,017.5 in such taxation.

We can see therefore that the net income from the living wage is some £12,446.70 a year. This is not greatly different from the gross income on the minimum wage: £6.19 an hour for 37.5 hours for 52 weeks is £12,070.50. Or if we wish to bring that back to a rate per hour, the difference between the post-tax living wage and the pre-tax minimum wage is some 19 pence per hour.

Unfortunately it does not stop there. There is also employers' national insurance to pay. Some insist that it is actually the employer who carries the burden of this tax. Almost all economists disagree, insisting that it is the employee who does in the form of lower wages. Indeed, we have it on the word of an expert of great eminence, Richard Murphy of Tax Research (who is funded in part of the Joseph Rowntree organisations, just to show his impartiality on this point), that it is indeed the employees who carry the burden of this tax. The calculation is slightly complex, but it's reasonable enough to claim that it is a further 13.8 % of those wages (it isn't, it's 13.8% of the total wages including the employers' NI but let us keep the maths simple) meaning a further £20 to £23 a week deducted from those wages. Or a further £1,196 a year.

If we add all of this together we find that the living wage of £7.45 an hour actually provides a lower post-tax standard of living than the minimum wage of £6.19 an hour free of taxation would provide. That latter would provide £12,070.50 a year to live on. By no means a great sum but still larger than the £11,250.7 that is available from the living wage after the politicians have taken their very much more than tithe.

It is indeed possible to play with these calculations, to make them more accurate. But the same end result will always come out. The current minimum wage, free of income tax and national insurance, would provide a higher standard of living than the proposed living wage under the current taxation system.

It is for this reason that I have been proposing for some years now, in fact ever since the first JRF calculations on the living wage were published, that the personal allowance for both income tax and national insurance be raised to the full time full year minimum wage. This would, at a stroke, raise that minimum wage to a higher standard of living than the proposed living wage. With the advantage that we only have to convince the Chancellor of the Exchequer of the righteousness of this path, not millions of employers across the country.

I look forward to the results of your investigation into low wages and am convinced that you will come to the same conclusion that we have. The shockingly low disposable incomes of the working poor in this country are not the result of any meanness or avarice on the part of employers: it is simply that the government taxes the working poor too much. Given this, that we can convert the minimum wage into something better than the living wage simply by ceasing the political depredations upon the pockets of the populace, I assume that your conclusion will be that the personal allowance, including that for national insurance, should be substantially raised.

After all, it's not really a particularly complex point. If you want people to have more money then tax them less.

yours sincerely,

Tim Worstall

Senior Fellow

Adam Smith Institute

London SW1