So where has all of Keynes' leisure gone?

In Economic Possibilities for our Grandchildren Keynes famously proposed that by about now we'd all be working 15 hours a week. As a result we've had endless little reports from the likes of the not economics frankly people suggesting that we should all indeed work only 15 hours a week and spend the rest of our time being poor. But there is another answer, the correct answer, to where all of Keynes' predicted leisure time has gone:

Women devote well over the equivalent of a working day each week to household chores – double the amount undertaken by men.

They spend an average of 11-and-a-half hours doing housework, while men complete just six.

A survey, commissioned by BBC Radio 4's Woman's Hour, found cooking was the most popular job.

Women said their chief responsibilities included changing sheets (86 per cent) and cleaning the toilet (83 per cent).

Whereas men were in charge of bins (80 per cent) and DIY (78 per cent).

The least popular tasks for both sexes were loo cleaning and ironing.

Keynes was proposing that as we got richer then we'd take more of our increased wealth as leisure. Which we have, in terms of our market working hours, to some extent at least. In the 1930s Saturday was still, for many, at least a half-working day. The standard 37.5 hour week of today would have been regarded as being near a part-time rather than full-time work load. But the real reduction in working hours has come as a result of the mechanisation of household production. Those microwaves, vacuum cleaners, gas ovens, central heating and so on, what Ha Joon Chang and Hans Rosling refer to collectively as the "washing machine", have led to a massive drop in the hours spent on running a home.

It would be stretching it a bit to say that a housewife in 1930 was working 11.5 hours a day on housework but not much: it was certainly 8-10 hours a day, very much a full time job. And it's that labour that just isn't being done any more: leading to the explosion of leisure time that we all currently enjoy. Keynes was right in that we've taken more of our increased wealth in the form of leisure. It's just that we've taken it from the non-market, household, part of our labours rather than the market and paid side.

Nominal GDP targeting for dummies

Nominal Gross Domestic Product (GDP) targeting is a type of monetary policy that people like me think would give us a more stable economy than we currently have. It would replace the Bank of England’s current monetary policy, inflation targeting. Nominal GDP can be understood as sum of all spending in the economy. Total spending can increase either because of price rises (inflation) or because there’s more stuff to go around (economic growth). If this year inflation is 2% and we have 2% economic growth, nominal spending (nominal GDP) will have risen by 4%.

The current policy of inflation targeting means that the Bank of England tries to control the money supply so that prices rise, on average, by 2% every year. If prices rise by more or less than this, the Bank is judged to have failed in its job.

Nominal GDP targeting would mean that the Bank of England would stop trying to target price rises, and instead try to target the total amount of nominal spending that takes place in the economy. That means that if economic growth was lower than usual, the Bank would have to try to make inflation higher than usual. If economic growth was higher than usual, inflation would be lower than usual.

This system is appealing because it is often the total amount of spending in the economy that matters, rather than inflation per se. Wages are usually set in nominal terms, which means that they do not automatically adjust upwards and downwards according to inflation.

Because of this, a drop in the amount of spending going on can lead to a mismatch between all the wage demands in the economy and the amount of money available to pay them. In other words, there is not enough money in the economy to pay everyone. This has two possible outcomes: either wages can be cut to meet the new level of spending, or people will have to be fired.

Empirically, it seems as if firms prefer to fire some workers than to cut wages across the board. In fact, firms really hate cutting wages, for some reason, and unemployed people are often reluctant to take the same job that they once had for a lower wage. Economists refer to this phenomenon as “sticky wages”.

So the outcome of a fall in total spending is usually unemployment. This is an example of a nominal change having a real effect, and destroys wealth that need not be destroyed, because the previously-profitable relationship between the worker and the firm has now been undone.

When this happens across the economy it can affect economic growth. In fact, this seems to be a very important factor in recessions – when there is a steady level spending taking place, the market is pretty good at finding new ways of using unemployed workers fairly quickly. When there just isn’t enough spending going on, we have to wait for workers and firms to cut wages enough to hire them again, which can take a long time.

Under nominal GDP targeting, the Bank of England would commit to keep the spending level growing even if economic growth dipped. As I've said, that would mean more inflation in times of slow growth and less inflation in times of quick growth.

Because inflation is being used to offset the changes in economic growth, negative economic ‘shocks’ like oil crises will translate into higher prices, prompting the market to adjust to take account of new realities, but never creating the domino effect of mass unemployment that we sometimes currently experience. The real economy would still adjust to real shifts in supply and demand, but we’d avoid the chaos that unstable monetary environments can create.

The key is that almost all contracts in the modern economy are set in nominal terms. That means that money that is managed in the wrong way can create a lot of unnecessary destruction of wealth. Nominal GDP targeting would probably give us the most neutral monetary system possible with the government, with the monetary environment kept stable so the real economy can do its work in allocating resources.

Money matters. The 2008 crisis happened because expectations of inflation, and hence nominal spending levels, dropped sharply, causing the ‘musical chairs’ problem of too little money to fulfil all the existing contracts and wage demands, which led to widespread bankruptcies and job losses. Today, the UK and the US have begun to get their spending levels growing at a healthy rate again, and their real economies have begun to grow healthily again too.

The Eurozone is the saddest story. The European Central Bank has been obsessed with fighting inflation (possibly because Germany has not suffered much, and Germans have bad memories of hyperinflation during the 1920s), and as a result nominal spending has grown very slowly indeed. The consequences are easy to see: in the weaker European economies, like Greece, Spain and Italy, unemployment is at historically high levels. It seems likely to stay there for many years.

Many people, myself included, believe that a system where private banks could issue their own notes without a central bank at all would be the best system. This is known as ‘free banking’. One of the best arguments for free banking is that it would keep nominal spending levels steady, because banks would issue more notes during periods of slow growth and fewer notes during periods of high growth. This should sound familiar – nominal GDP targeting is probably the closest we can get to ‘stateless’ money while having a central bank.

Nominal GDP targeting would not prevent all recessions or guarantee growth. The real economy is what determines things like that. But badly-managed money can destroy growth, create recessions by itself, and turn small ‘real’ recessions into extremely bad depressions, as happened in the 1930s and 2000s. Nominal GDP targeting would give us stable, neutral money that avoids these things. We would have been better off with it in 2008, and we would be better off with it today.

Where does Will Hutton get these ideas from?

This is just fascinating from Will Hutton:

The fall in real wages is blamed on EU immigrants, when the real culprit is more old-fashioned: workers in general, and young workers in particular, have not been organised enough to offer countervailing labour market power. It is not technology, globalisation or immigration that have triggered such a generalised collapse in real wages – it is the weakness of trade unions.

Where does this confident assertion come from? He provides us with no actual evidence to support it. Just the flat statement that it is so because Will Hutton has declared it to be so.

This is a statement that rather needs to be tested, don't you think? For example, unions are rather stronger in Germany than they are in the UK. Real wages have been declining in Germany:

After a decade of falling real wages, Germans’ purchasing power has started to increase over the past few years. In 2013, wage hikes are clearly outpacing inflation on the back of rising employment and a robust economy.

Unions are rather weaker in the US private sector than they are in the UK. And we all know the complaints about the stagnation and possibly fall in real wages over there.

We even have a report about this. The effects of globalisation upon incomes around the world. By a real economist using actual real data. The finding of which is that the people who haven't seen much gain from globalisation, the people who have had those stagnant real incomes as a result of it, are largely those below median incomes in the already rich countries. We can argue about whether that makes it all worth it or not (the 80% rises in income for almost all of the poor of the world make it so for us) but it's very definitely evidence that it's not the absence of unions that has led to the current situation: it's globalisation.

So where does Willy get his confident assertion from?

You can have cheap pensions and you can have interventionist pensions

But you cannot have cheap and interventionist pensions investment. That combination being what The Guardian is demanding:

Indexation keeps charges low – Nest is fantastically cheap. There are lots of good reasons to spread your investments over a diversified range of international companies, which Nest is doing. What’s more, in achieving returns of 10%-plus a year since launch, it hasn’t had to face too many awkward questions.

Nest is cheap, that's the way it has been designed. And the only way to have it that cheap is to be sticking the money into low and no load index funds. Any other system would mean having to cream off substantial parts of any likely return for those who do the managing to make the return. In fact, that's rather why Nest was first designed: to make it quite clear that there was a way of gaining pensions savings without having to pay over all of the gains to the Men In The City.

All of which is fine but it's entirely incompatible with this next demand:

Conventional City of London ideology is informing its investment decisions. Yet in Singapore, the country’s compulsory pension fund has been mobilised to held build local housing. Ottawa’s pension fund is extraordinarily interventionist. Given that we will be throwing hundreds of billions of pounds into a pension scheme for British workers, could we at least have a wider debate before sending half of it to Wall Street?

We've had that debate. And the answer was that we'd rather not send 2 and 20% to hedge fund operators, one or two percent to more traditional fund operators, for we've noticed that those fees almost inevitably eat up, and more, any extra performance they produce. And that's why all of these schemes for different methods of pension savings crash into a brick wall set up by reality. Yes, even these ideas that pensions should be in bonds to pay for infrastructure. The extra costs of managing the money, the extra costs of the requirement to have the people managing the money, are greater than the increased returns from having done so.

That's why indexation. For you can have pensions with cheap charges and you can have pensions with interventionist, active, management strategies, but you can't both pay for the activity and also have a cheap pension.

Fighting Daʻish, the un-Islamic State, with Mercenaries: an effective, feasible alternative?

We might be forced to deploy boots on the ground because air strikes are not sufficient to subdue the repugnant Daʻish (ISIS/ISIL/IS); instead, allowing Private Military Companies (PMCs) to lend direct support to suffering peoples via Mercenaries might be a more effective alternative. Many locals want to fight back (Kurdish Syrians, for example); let PMCs hire them and let them liberate themselves from Daʻish! It is not foreign support that people dislike but the feeling of indignity that arises from others having to fight your battles for you. The mask Daish wears is ideological in order to recruit more extremists and maintain an image; however, many rank-and-file members fight because of the relatively high wages paid (like the Taliban). Attracting individuals to PMCs instead of Daʻish and inducing defections would dwindle their numbers, slow their recruitment drive and show people that it would be increasingly risky to join them. Furthermore, as people defect, those inclined toward violent extremism for ideological reasons would realize that Daʻish is not what they thought it was and, therefore, Daʻish would lose some vital, core supporters. This would encourage a natural death for Daʻish through depletion of native support instead of a long and ineffective war against guerilla fighters.

Whereas our own armed forces would be reluctant to employ natives in the rank-and-file for security purposes, PMCs are more flexible with their recruitment policies. Furthermore, they would be legitimized, have more funds available and pay more than Daʻish; thereby giving young fighters a visible alternative (which isn’t their Govenrment, Foreign Governments or Militias they may have learned to despise) to Daʻish at a time when peaceful employment is scarce and they are pressured into joining for economic reasons (in Daʻish strongholds, for example). The PMCs’ recruitment efforts would also be counter-propaganda to Daʻish’s brainwashing.

Private entities could pay the PMCs to fight Daʻish. This would avoid impositions on those who do not want to see their servicemen on the ground in Iraq whilst enabling those who despise Daʻish to act. Funding would primarily be from sympathisers including, but not limited to; the Iraqi, Syrian and Kurdish diaspora, masses of moderate Muslims, humanitarian and charitable organisations, concerned global citizens, businesses that have vested interests in a stable Middle East, Philanthropists etc. PMCs would also have no incentive to continue fighting once sponsors cut funding.

What about the potential for immoral activities perpetrated by the PMCs? Where is their accountability? Sponsors of such PMCs would naturally distance themselves from those who exploit the chaos of war rather than alleviate suffering; it would be in the PMCs’ best interest to behave relatively decently in war though still ruthlessly toward Daʻish.

If Governments are wavering to offer even inadequate support, why should we be forced to lobby them to do so? Why should innocent people suffer as a result? This alternative can avoid compulsory deployment of servicemen, imposition of taxes and, most importantly, enable us to express ourselves and fight injustice in any way possible.

Beware the people promoting infrastructure spending

The IMF has told us that building infrastructure can pay for itself. This is, of course, true. However, we do need to be rather careful about the implications of that fact. for while it's entirely possible for something to pay for itself that doesn't mean that everything will do so:

The study finds that increased public infrastructure investment raises output in the short term by boosting demand and in the long term by raising the economy’s productive capacity. In a sample of advanced economies, an increase of 1 percentage point of GDP in investment spending raises the level of output by about 0.4 percent in the same year and by 1.5 percent four years after the increase (see chart, upper panel). In addition, the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise (see chart, lower panel). In other words, public infrastructure investment could pay for itself if done correctly.

The words to concentrate upon are those last three "if done correctly". For no, this does not mean that bunging £40 billion at a train set will pay for itself. Nor that damming the Severn Estuary will nor any other of the various plans people are floating. As Greg Mankiw says:

Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts). The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking.

It still depends upon what you're building and where you're building it and how you're building it.

Don't kill off the only industry that provides loans for low-earners

Wonga’s decision to write off £220m worth of debt for 330,000 customers and “voluntarily” embrace new regulations will been seen by many as a form of social justice and an obvious defeat for the big, bad, payday-lending wolf. Unfortunately, the Financial Conduct Authority’s attempt to further regulate the payday lending sector may end up harming low-income earners in need of a loan.

But first, we must distinguish between the payday lending industry and Wonga as a specific organization within that industry. Payday lenders offer customers quick and easy access to short-term cash flow. Though anyone with any income size could apply to Wonga for a loan, it is mostly used by people with low-incomes, as such earners struggle to get bank loans and credit cards, and payday loans are often cheaper than using an unauthorized overdraft.

Of course, there are risks associated with payday lending, as “companies are loaning to high-risk demographics, with usually low-income averages and bad credit scores."* In order to stay profitable and protect themselves from bankruptcy, payday lending companies must factor defaults into their interest rates.

These interest rates –especially Wonga’s interest rates – tend to be the target of myths constructed by opponents of payday lending, who are either accidentally or intentionally analyzing the data badly. Most notably, critics attack Wonga for charging its customers close to an astronomical 6,000% interest rate.

That figure, however, comes from a legal quirk in British financial regulations that requires every business to express their interest rates as an annual rate. Wonga’s payday loan interest payments are capped at sixty days, so there is no scenario where anyone could come close to paying Wonga nearly 6,000% APR, as the company is forced to express as it’s annual rate.

Some of the criticisms leveled specifically at Wonga do have merit – indeed, their fake legal letter scandal from this past summer - which threatened customers with legal action if loans weren’t repaid - left everyone feeling uncomfortable with the industry.

Such behavior from any company is unethical, to say the least, and should be met with repercussions. But the FCA’s decision to crackdown on all payday lenders as a result of Wonga's actions will drive almost all payday lenders out of business and leave Wonga to dominate the industry.

From today it has introduced new lending criteria to improve its decisions. That means it will be lending to fewer people and it is unlikely to be the only firm forced to do that, as the FCA said today: "This should put the rest of the industry on notice.

This new lending criteria, coupled with previous regulation tightening – bans on payday advertising in public spaces – and future proposed regulations – like a mandatory cap on costs for all short-term loans – reduces the entire industry’s profitability and forces smaller companies, that would otherwise compete with Wonga, out of the market.

Furthermore, other indirect financial regulations continue to ensure Wonga’s dominance in the loan market. Credit unions could become competitive payday lenders and compete with companies like Wonga, but their interest cap of 3% a month prevents them from properly competing in the market.

Yes, Wonga is facing a 53% fall in annual profits partly as a result of new controls set by the FCA, but other payday lender companies, that don’t have the ethically questionable history of Wonga, are looking to be cut out of the market all together.

Critics of payday loans will be overjoyed to hear that the payday lending industry is on the rocks, but those who actually use its services and benefit from the loans should be worried. Banks and credit card companies have priced these customers out of accessing loans, and with with less payday lenders offering their services to people with low incomes, a lot of people will find themselves with no options, no loan, and no way to pay rent.

While payday lenders are by no means the perfect system to deliver loans to low-income customers, they are currently the only realistic way for such people to get their hands on necessary loans.

*This gal.

Markets don't like racism

It is a commonplace to the point of boringness among advocates of free markets that they make people pay to discriminate based on their tastes. A factory owner who restricts employment to whites only will face a narrower talent pool—likely paying higher wages for lower skills in total or on average. Southern US states had to pass laws to try and stop employers competing with each other over black labour and bidding up their wages. 

Even owners of basketball clubs believed to be personally racist have disproportionately black teams, paying them huge sports star wages. However, not all ethnic groups have similarly prestigious or high-flying careers, and they do not all take home equal market incomes. It would be easy to jump to the conclusion that taste-based discrimination is driving this and the market isn't doing its job fully. But there is an alternative.

Employers cannot observe an employee's productivity directly, at least before they employ them. But they can observe some things about them that signal productivity—using statistics. For example, if on average south Asians or Polish migrants tend to work harder than white Brits, they can use this fact about them to help make their employment decision. This isn't racist—they don't prefer employing south Asians, and they would be equally happy to pay a white Brit £6.50 an hour to produce £7 of stuff—it's just that on average south Asians produce £7 of stuff an hour (say), whereas white Brits produce £6.40.

Which one is actually in place? We can test this. The answer is a resounding 'statistical discrimination'. For example, minorities in France did worse when a large randomised study made them anonymous in job applications—so firms couldn't see their names and thus ethnicities—implying that the reason they were called back and employed less was because their resumes/CVs were less attractive.

In Germany, job applicants with Turkish-sounding names got less callbacks than those with German-sounding names—unless both applicants had a favourable employment history reference. Then, for a given quality of reference, employers didn't care whether they were Turkish or German. On eBay, white sellers receive lower prices selling stereotypically black products and black sellers receive lower prices selling stereotypically white products, but these differences go away when sellers build up credible reputations.

US "landlord response rates across neighborhood racial compositions conform to the statistical discrimination model where agents use past experience to predict applicant quality by race." In the Israeli used car market there is "robust evidence of discrimination against Arab buyers and sellers which, the analysis suggests, is motivated by ‘statistical’ rather than ‘taste’ considerations." In an experiment selling iPod Nanos online, its being held by a black hand made buyers warier, to a similar degree as its being held by a tattooed white hand.

People do no racial discrimination whatsoever, and choose entirely based on expected points return, when picking their fantasy football team. Finally, even most of shared renting decisions in London are based on statistical concerns (some ethnic groups commit more crimes per capita), rather than personal preferences over races and ethnicities.

It is perfectly well and good to lament the fact that for whatever reason, some ethnic groups are less qualified, systematically less hard-working, achieve worse educational results, commit more crimes or whatever. This might be the result of discrimination on some other margin. But we can be pretty sure that markets are picking only on the criteria we want them to use.

Well of course the 2 degrees climate change target should be ditched

The reason that 2 degree climate change target should be ditched being that it was always an entirely economically illiterate target to set in the first place. Sadly, that's not the point being made in Nature on it. As The Guardian reports:

But two academics in the prestigious journal Nature now argue that the 2C target has outlived its usefulness. They say it should be abandoned and replaced with a series of measures – “vital signs” of the planet’s health.

Under the headline, “Ditch the 2C warming goal”, they argue the 2C limit is “politically and scientifically ... wrong-headed”, it is “effectively unachievable” and it has let politicians off the hook, allowing them to “pretend that they are organising for action when, in fact, most have done little.”

The reason it should be ditched is that it should never have been a target in the first place. For we should not be trying to target a particular change in temperature: we should be trying to target a certain cost of action.

Think back to what every economic report on this issue has said. That there will be costs associated with allowing climate change to happen. Also that there will be costs with preventing climate change from happening. And in such circumstances the correct answer is that we should spend up to the price of those costs on trying to prevent it happening. But we should not spend more than those costs: nor, obviously, should we spend less.

Thus whatever climate change target is set (for those who want to set one at all) it always has to be set in terms of the costs of the actions we are going to take. And this does have very important effects. For example, if we attack the problem in the most efficient manner possible (say, a carbon tax) then we can avert more climate change by doing so than if we try to avert it in less efficient manners (say, regulation or legislation). And that's why we really do want to always keep the costs in mind. Because if we set a temperature target, as we have, then people will say that we should do anything at all to meet that temperature target. But that's the very thing that we've already proven is not true: we should not do anything at all to avert warming. We should only do however much is economically rational: which brings us back to the costs of action as against the benefits of it.

So ditch the two degrees by all means. Then concentrate on what actually matters: the costs of whatever actions are taken.

Why does the son rise?

John Cochrane recently gave a speech where one of the main threads involved talking down the importance of income and wealth inequality. Poverty, and generally not having as much as we would like are bad, he says, but is there anything bad about inequality per se? That is: is there at least one respect in which things would be better if some people who are very well off were made worse off? He argues that there isn't, or if there is, it is of only trivial importance, and outweighed by all of the costs of actually 'doing something' about inequality.

In a response on Bloomberg View, Noah Smith argued that economists should respect people's actual preferences, and since people show strong preferences against wealth and income inequality, we should respect them. He uses the example of how people prefer to take nothing over free money when they are made offers they perceive as 'unfair' in the Ultimatum Game. On top of that, he says, inequality leads to socio-political unrest, which we can all agree is very bad and costly, citing a 1993 paper.

Finally, Tony Yates adds some extra arguments on his blog. He says luck has a big role to play in success, but success can also buy some of the non-luck factors in success (e.g. education), meaning that it can 'set off path dependence'—according to Yates this can lead to inefficient outcomes by distorting the allocation of talent. He says inequality reduces public good provision (e.g. education—although I'm not sure that is really a public good). And he says that inequality might make 'crony capitalism' more likely.

I've written twice about equality before: once saying that Rawlsian-style justice demands inequality of wealth/income in certain very relevant circumstances; another time arguing that Hayekian-style information economics militates towards equality of wealth. There are lots more things to say in this debate, but here I intend to take issue only with one of Yates' claims: the idea that luck + path-dependence means inequality is passed down through the generations (I can't see why exactly he thinks this distorts the allocation of talent, but here I'm only questioning the mechanism).

Luck is certainly a huge factor in success. And people do pay big money for better education to try and make sure their kids are more likely to succeed. But does this work? Let's look at some studies. Random selection into a better school in Beijing has no effect, random selection into a better school in Chicago has close to no effect, random selection into a better Kenyan school has no effect, nor does it in Missouri, nor in New York City. Once you control for student characteristics, Australian private schools didn't outperform state schools on the 2009 PISA. Conscription into extra education didn't much affect life outcomes in late 1970s France. In 1950s England, going to an elite school made no difference to a youth's job market outcomes. The literature is huge and there are many many more examples.

And other literatures point to the same conclusion. For example, we now know that the heritability of intelligence increases through life (to hit around 50-90% in adulthood), while 'shared environment'—upbringinging, parental inputs and schooling—falls to around zero. This is supported by traditional twin studies, twins reared apart studies, adoption studies, and now whole-genome analysis.

So it should not be surprising that it's actually really really really really hard to make sure your descendants stay rich with the proceeds of luck. In fact, we know that that's not why the descendants of the rich often are rich because we have a couple of pretty good experiments showing it! For example:

We track descendants of those eligible to win in Georgia’s Cherokee Land Lottery of 1832, which had nearly universal participation among adult white males. Winners received close to the median level of wealth – a large financial windfall orthogonal to parents’ underlying characteristics that might have also affected their children’s human capital. Although winners had slightly more children than non-winners, they did not send them to school more. Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren. This suggests only a limited role for family financial resources in the formation of human capital in the next generations in this environment and a potentially more important role for other factors that persist through family lines.

The same is true for modern lottery winners—the truest example of pure luck in success. And it took only two generations for the descendants of slaves to catch up with the much more advantaged & wealthy free blacks. Whether rich parents split an inheritance between eighteen kids or one, their grandkids are equally rich. Basically luck mixed with path dependance explains almost nothing.