Denmark may not be all that socially mobile

It's commonly thought that Denmark—and Scandinavian countries in general—are especially socially mobile. In these paradises, the theory goes, birth is not destiny. Because of high quality egalitarian education, healthcare, and progressive social attitudes, one's birth has less connection with one's life outcomes than anywhere else, especially the cut-throat conservative USA.

There's something to this view, but a new working paper from famed Nobelist economist, and education expert James Heckman (pdf), throws it into question. Heckman finds that Denmark does indeed have a more mobile society than elsewhere in terms of income, but that this does not mainly come from a generally more fluid and equal society in general.

In fact, the higher measured income mobility is "largely a consequence of redistributional tax, transfer, and wage compression policies". When it comes to educational mobility, the countries are more or less the same. To state that another way: those growing up with less advantage in Denmark don't do better than those in the US because they have high-flying careers and great labour market success, but because Denmark has higher taxes and benefits.

This adds to a large literature finding that there is little we can do to strike at the causes of inequality. Intelligence and the abilities that the labour market rewards come mostly from things we can't do much about. But we certainly can blunt the income effects of unfair endowments of skills through handouts from the state.

And it adds to another body of evidence finding that Scandinavian countries are not as magical—in policy terms—as we think. For example, the descendants of Norwegians, Finns, Danes and Swedes actually do better in the USA (pdf), under their relatively laissez faire hands-off policies, than they do under the relatively interventionist Nordic models. It just looks like Scandinavia is doing better because such a high proportion of its populace are Scandinavian, who tend to have good outcomes whichever system they're under.

There are some things that are just really hard to change!

Osborne won't be having an emergency budget then

Our word, a week really is a long time in politics isn't it? For George Osborne comes out of his post-referendum funk induced purdah to tell us all that he was just kidding. No, really, you didn't actually take the Chancellor of the Exchequer seriously did you? Ha, ha, gotcha! 

Mr Osborne will not publish an emergency Budget and says that while the outcome of the EU referendum will have an effect on public finances, it is sensible to wait until the autumn for the Office for Budget Responsibility (OBR) to assess the economy and for the new prime minister to be in place. 

Some 12 days ago we were being told:

George Osborne will warn that he would have to fill the £30bn black hole in public finances triggered by a vote to leave the European Union by hiking income tax, alcohol and petrol duties and making massive cuts to the NHS, schools and defence.

In a sign of the panic gripping the remain campaign, the chancellor plans to say that the hit to the economy will be so large that he will have little choice but to tear apart Conservative manifesto promises in an emergency budget delivered within weeks of an out vote.

Yes, of course, we know, the original threat and today's backtracking are both politics rather than economics and politicians do that. And that's why having politicians with power over the economy is such a bad idea - they will, inevitably, do politics not economics with the economy.

However, Chancellor is one of those jobs where the reality bit rather than the phantasms of politics is rather more important than it is in much of the rest of the Westminster circus. There will always be a blend between the buying of votes and doing what is actually correct but that blend has been, these past few years, far too populist and not enough reality.

Still, not to worry too much, only a couple of months to go now. For we rather do believe that the next Prime Minister will have a Chancellor, a different one, one who will eye up the balance rather differently. 

All political careers end in failure of course

But this is something of a new one on us, a move that is doomed to failure before it even starts. It appears that George Osborne is considering trying to replace Cameron as PM:

George Osborne’s allies are taking soundings this weekend among Tory MPs on whether the chancellor should stand against Boris Johnson to be the new Tory leader.

We're really pretty sure that's not one of those things that is going to work. And rightly so too.

Allow us to leave the politics out of this, as we should do, and consider only the performance as Chancellor. Most recently people will recall the outrageous slanting of the Treasury and other official reports about the effects of Brexit. The basic problem, as we all pointed out again and again, was that the inbuilt assumption of all those reports was that Britain would follow stupid policies on trade once we leave. And yes, following stupid policies leads to a bad outcome. But no consideration at all was given to what would happen if we followed sensible policies. Like Patrick Minford's insistence that we should simply move to unilateral free trade, the only sensible trade stance to have anyway, which would grow the economy, not shrink it.

Nominally independent, nominally expert, reports deliberately slanted for partisan political gain.

But sadly it's been worse than that Osborne has been a lousy Chancellor more generally. Two points particularly stick with us.  A higher minimum wage will cost jobs. Even the Low Pay Commission has been telling us this ever since they first started to set the level. Something called the Living Wage campaign starts to make political headway so Osborne decides to trump them, beat them. By bringing in a living wage higher than they were ever asking for. This is a Tory? A Conservative? 

Then there's one more subtle. The Bank Levy. When this came in we cheered it as being obviously correct. Too big to fail is indeed an externality of having large banks. The correct answer is a Pigou Tax on said externality. You can also view it as an insurance premium said large banks must pay for that implicit insurance they get. The original implementation was excellent. The tax was on the right thing, liabilities, and it considered risk. Overnight deposits paid more than long term bond issues, both more than equity. This was a right and good answer to the problem. And the banks were indeed both shrinking and changing their funding models as a result, changing them in the right and desired manner.

That in turn meant that the revenue from the levy was falling so Osborne changed the calculation to maintain the revenue but not the pressure for the banks to change in the desired manner. That is, he entirely screwed up one of the few important things he had got right first time. And all for entirely political, not economic, reasons.

The basic problem with having politicians trying to run the economy is that of course they will do so as politicians, not economists. But Osborne is worse than most. Don't just listen to us of course. Keep looking to see how that campaign works out to be party leader.

Short and sharp we predict, short and sharp and not in a good way. 

We're really looking forward to George Osborne's emergency budget

We're now 24 hours in or so from the markets having to digest the implications of the Brexit vote. The pound is down, less so against the euro than the dollar. That is a nice  stimulatory effect for the British economy, as devaluations are. The stock market, using a number of different measures like the FTSE 100 or the FTSE 250 is all the way down at the depths of Thursday last week.

And so in the face of this catastrophe we have something else to look forward to. George Osborne has promised us an emergency budget:

George Osborne will warn that he would have to fill the £30bn black hole in public finances triggered by a vote to leave the European Union by hiking income tax, alcohol and petrol duties and making massive cuts to the NHS, schools and defence.

In a sign of the panic gripping the remain campaign, the chancellor plans to say that the hit to the economy will be so large that he will have little choice but to tear apart Conservative manifesto promises in an emergency budget delivered within weeks of an out vote.

No one's really seen hide nor hair of him since the vote so we must assume that he's off working on exactly what he's going to cut and which taxes he's going to raise. All slightly odd given that stimulatory effect of the currency movements but there we have it. He did promise us he would punish us if we were naughty little boys and girls and so given that we have been we must expect to suffer.

Yes, that must be it. For it couldn't possibly be that he's simply hiding among the rubble of a once promising political career. Nor that the threat was just that, a threat, a piece of politics. For of course no Chancellor would just play politics with something as important as the economy, would they?

Who would prefer to offer an over and an under on that resignation speech being difficult to write?

Time for the EEA Option

So it’s a Leave. Now that we’re getting out the challenge will be to get the best deal possible. I think that is, by a longshot, the EEA Option – membership of the Single Market without membership of the European Union. Our full case for the EEA Option is here, but here are some quick points worth mentioning:

1. Markets are tanking in large part because of the uncertainty about what comes next. A quick and explicit commitment to the EEA Option would calm them and probably undo a lot of the damage that’s been done. It would tell them that (a) there is a plan, (b) that plan is probably politically acceptable to the EU and (c) there is no immediate short-term economic shock to worry about. 
2. The EEA Option takes much of the risk out of leaving. Brexit means a huge change to the way Britain will be governed, including the prospect of rebooting the country’s political culture altogether, as well as forging better links with the rest of the world in the form of free trade agreements and perhaps even setting up a common travel area with the other Anglosphere countries like Australia and Canada. But a lot of that opportunity could be lost if economic fears dominate the first few years of independence. EEA gives us breathing room to make Brexit a slow, safe process — not a risky, sudden event. We need a strong economy to get the other changes we want.
3. The referendum was about one question only: whether we stay or leave the EU. It’s tempting to treat Vote Leave like a political party whose pre-referendum promises must now be implemented like a party manifesto after a general election. No: Parliament is still supreme, and as long we Leave the EU, Parliament is what should and will decide what course we take in the years ahead.
4. Nevertheless, cutting immigration was not voters’ only concern. A Lord Ashcroft poll of 12,369 voters found that only one third (33%) of Leave voters ranked controlling immigration as their top reason for leaving – that is, 17% of all voters – compared to 49% who said it was “the principle that decisions about the UK should be taken in the UK”. 
5. For many Leave voters it was about having control over immigration, not necessarily reducing numbers. Article 112 of the EEA Agreement allows EEA states to take unilateral action to restrict freedom of movement in the event of “serious economic, societal or environmental difficulties”. This may be enough control to satisfy a majority of the British public, if it was the trade-off for economic stability in other respects. Those people who believe that voters will feel betrayed if immigration does not sharply fall should consider how betrayed those same voters will feel if we have a recession after being promised repeatedly that this was not a risk.
6. Voters may be surprisingly open to the EEA Option. We commissioned a YouGov poll recently that asked voters whether they would support the EEA Option even if it meant adopting some EU law and keeping freedom of movement, as Norway does. By a two-to-one margin (54% to 25%) they said that they would either strongly support or tend to support this choice. And yes, a single poll needs to be taken with a giant pinch of salt, but it is still indicative that the public wants economic security above all else.

For the EEA Option to be viable we’ll need support from across the political spectrum, and from both Remainers and Leavers alike. In particular, liberals of every stripe should embrace this route’s pragmatism and commitment to maintaining deep trading links between Britain and the EU. 

The EEA Option can unite Britain. To avoid the same kind of polarisation that followed the Scottish referendum, the next government will have to try and find a deal that satisfies more than just the 52% of leave voters. We need a deal that will calm the people who are anxious about the future today and feel as if half the country is against what they believe in. That should be the one that keeps Britain open, trading, prosperous, and free.

Today is Cost of Government Day, but the bill's on you

Hooray! It's Cost of Government Day. Or maybe there isn't cause for cheer. Because unlike its flashier, happier sister Tax Freedom Day, Cost of Government Day isn't the first day of anything, but the last day of something. It's the day when government spending gives way to private spending. Let me explain.

Imagine that we spent an equal amount of our net national income each day: one three-hundred-and-sixty-fifth of the total every 24 hours. Imagine further that instead of splitting spending among all its different targets as and when you need the goods and services you're buying, the government did all of the spending until it had finished. Then, afterward, all spending is private spending. Friday June 24th—today—is the last day where spending is done by the government and from tomorrow—Saturday June 25th—all spending is private.

Let me caveat that claim a bit. Firstly, just to be clear, it's obvious that government spending does not proceed in this way, it's spread across the year according to programme needs and so on. Secondly, we're looking at projected numbers, and we've used financial year figures to calculate calendar years. Thirdly, we've compared government spending to net national income, not gross domestic product, and GDP is much closer to a measure of total spending (indeed, it is partly calculated from a measure of expenditures).

But all of these caveats come with good reasons. Presenting government spending as a single chunk gives people a clearer and much more tangible grasp on its size. Most people don't think in financial or tax years, and when we revise our figures in future years, the changes are mostly small, indicating that our estimates usually aren't far off.

We even think there's a good reason for using net national income. One reason we track Cost of Government Day is to give an indication of the sheer scale of the UK government. But another is to give an indication of where future Tax Freedom Days could end up—and net national income is more close to a measure of the incomes we'll use to bear that burden.

When there is sufficient demand in the economy, government borrowing, just as much as taxation, comes at the expense of private economic activity. Money that is lent to the government cannot be invested in other projects.

What's more, presuming we don't want to throw away centuries of governmental financial probity, or create very high and unexpected inflation, debts must eventually be paid. Yes, we can grow the debt away: if the economy expands at a higher rate than the interest on our debt, the burden will get ever smaller relative to the amount we are producing each year. But £10bn of extra debt is still £10bn more (plus interest) in taxes to raise at some point.

Tax Freedom Day is more immediately appreciable, but arguably, Cost of Government Day is even more important. Government projects are often nice, but they inevitably come with a cost down the line. This year there was around a month between TFD & COGD—a month of pure borrowing—and one day that will be your loan to pay back.

Jobs are a cost, not a benefit

We don't quite share the general love of birdchoppers found in certain sections of today's society but we're entirely aware of the various cases for more renewable energy and so on. We can even come up with some interestingly true justifications for such renewables ourselves - certain hydropower projects are rather cheaper and better than spewing coal dust all over the countryside for example. And yet we would still insist that jobs are a cost of doing something, not a benefit, as not everyone in this debate seems to have realised:

A SUBSEA cable to export Scottish wind power to Norway will cost the country jobs and investment, the head of a renewables firm has claimed.

Regulator Ofgem has approved a licence for the construction of a 400-mile underwater power cable linking Scotland and Norway.

The £1.3 billion project will see wind power generated in Scotland sent to Eidfjord in Norway, with hydro energy from that country received in Boddam, Aberdeenshire.

Developers hope the link will be operational by 2022 with connections eventually developed to Iceland.

However, Rod Wood, managing director of Community Windpower, claims Westminster policy means “Scotland will lose out” on jobs and income because of the project – by buying in renewables from overseas instead of supporting the growth of the homegrown sector.

The basic plan seems sensible enough. Send the excess variable windpower from Scotland off to Norway where they will use it to pump water up behind dams. When there's a dearth of windpower in Scotland then the water can be let out again and the electricity delivered to Scotland. Sounds entirely reasonable to us, it's largely the way that the Danes are making their grid work.

But our environmental hero here is insisting that this is not good enough. Rather than using the most efficient method of gaining renewable power he is insisting that instead a more expensive method should be chosen. We know that it will be more expensive - because jobs are an expense, we've actually got to pay people to do these things.

This is a direct argument that the people of Scotland should be poorer. As such of course it's a very bad argument.

That line between public health and Puritanism

We're not quite sure whether we should be saying there's only a fine line between public health pronouncements and Puritanism or no line at all. Can't quite weigh up the linguistic distinctions:

E-cigarettes should be banned from public places like bars and restaurants because of the risks of "passive vaping," medics say.

Senior doctors said that allowing people to vape openly normalises the habit, and could encourage children to take it up.

But public health officials immediately rejected the idea – saying it could be damaging as it might deter smokers from switching to e-cigarettes.

Speaking at the British Medical Association’s annual meeting in Belfast, Dr Iain Kennedy, a consultant in public health from Glasgow, called for a ban, warning that there is no evidence of the long-term safety of the habit.

Dr Iain Kennedy, a consultant in public health, from Glasgow, said: “It is a myth that there is no such thing as passive vaping.”

He said there was clear evidence that non-vapers living in households with vapers had higher levels of exposure to nicotine.

“There are new potential risks, and we don’t yet know the level of those risks,” he said.

Well, actually, we do know rather a lot about such risks. Nicotine, as per nicotine itself, isn't all that much of a danger to human beings. This is why such things a nicotine patches are widely available. Because there's not much danger to anyone from them. Smoking on the other hand we know is dangerous. It being the lighting of the stuff and sucking in the smoke which makes it so.

Absolutely any evaluation of the two practices is thus going to come down one the side of not just allowing but encouraging, possibly even subsidising, people to vape not smoke. That is, if we are to judge on public health grounds rather than those of Puritanism.

You know, that worry that someone, somewhere, might be enjoying themselves?

Actually Angus, Millions of Americans aren't living on $2 a day

Nobel Prize Winners seem to have a habit of making bizarre claims that make you question whether they were really brilliant in the first place. Take Nobel Prize Winning Chemist Kary Mullis: after picking up a big cheque in Sweden, he went on to claim that HIV and AIDS weren't linked and that OJ Simpson was innocent. Or Nobel Prize Winning Physicist Brain Josephson who believes that psychokinesis is real and that water has 'memory'.

In a similar vein (although somewhat less severe), Nobel Prize Winning Economist Angus Deaton has written an essay attacking a view he dubs "Cosmopolitan Prioritarianism". Described by him as "an ethical rule that says we should think of everyone in the world in the same way, no matter where they live, and then focus help where it helps the most."

Most Cosmopolitan Prioritarians (of which I'd class myself, as well as my colleagues Sam Bowman and Ben Southwood), tend to be big fans of globalisation and free trade. While free trade benefits both developed and developing countries, it also reduces wages in places like Port Talbot, that are wealthy compared to India or Ghana but not by UK standards. But this is worth it for the truly breathtaking declines in extreme poverty in poor countries.

Now it's not unusual for an economist to bash globalisation, indeed since David Autor's paper on the effect of Chinese Imports on US labour markets, it's become the 'trendy' thing to do.

But, Angus Deaton goes further a makes a truly bizarre claim.

But several million Americans – black, white, and Hispanic – now live in households with per capita income of less than $2 a day, essentially the same standard that the World Bank uses to define destitution-level poverty in India or Africa. Finding shelter in the United States on that income is so difficult that $2-a-day poverty is almost certainly much worse in the US than $2-a-day poverty in India or Africa.

Citing research by Edin and Shaefer, here Deaton implies that there several million Americans who have substantially worse lives than Sub-Saharan Africans living in extreme poverty. This just doesn't pass the smell test.

Indeed, the ASI's own Tim Worstall already dealt with this rather misleading statistic back in September 2015.

They use an odd definition of income. One that doesn’t include all income in fact. They look only at cash income. But the US spends $500 billion a year on things like Medicaid and other health care services for poor people. That’s obviously got to be part of poor peoples’ incomes as well then. And then there’s Section 8 housing vouchers which pay for habitation for many poor people. This is also excluded. In their most restrictive version of income they don’t even include Food Stamps.

So what they’re really measuring is the cash incomes of the poorest people without accounting for pretty much all the things that are done to increase the total incomes (such total income being equal to consumption possibilities of course) of those poor people.

And that’s where their large rise in this form of poverty comes from. They are, as above, measuring only the cash income of poor people, including cash from welfare. But this system was deliberately changed in the 1990s to reduce the amount of cash welfare people got and increase the amount of in kind welfare (ie, Section 8, EITC, SNAP and so on) that people got.

But that's not all, there's even more reasons to doubt this zombie stat. First, the survey Edin and Shaefer use to compile their data systematically underestimates the benefits received by poor Americans.

Second, a whole bunch of people list their income as $0 in the survey, which given that it's nigh-on impossible to live on $0 worth of resources, suggests that there are serious measurement errors.

Indeed, when the Brookings Institute put the numbers under scrutiny, they found that virtually no Americans were living on under $2 a day.

It's certainly true that many Americans are struggling so far, and we probably do more to compensate those who've gained less from globalisation (perhaps with a Negative Income Tax). But when Deaton says "perhaps it is not so clear that the greatest needs are on the other side of the world." He's simply wrong.

A reminder of the circularity of most politics

The political compass is, as we all know, circular, not a left right spectrum. Go too far out into the craziness of the so called "far right" and one ends up spouting the same nonsenses that the "far left" promulgate. One of us once had rather some fun comparing and contrasting the economic suggestions of Colin Hines ("progressive protectionism"), formerly economic adviser to Greenpeace, with the economic proposals of the BNP. The point being that there was a lot of comparing to do, both wanted an autarkic economy without much interaction with those beastly foreigners and trade, and not all that much to contrast.

This morning gives us another lovely example of this:

Swedish far-right go bananas with call for foreign food ban

Yes, of course, it's a ludicrous idea.

The Smålandsposten newspaper reported that the draft budget included the demand that “organically produced products are desirable but the most important thing is that food is locally produced, that is to say, Swedish”.

This is indeed bananas as it comes from the far right. When it comes from the left and far left it is called being a locavore. Something that local councils are already urged to write into their contracts, there's charities pushing the idea and no doubt there's a government grant or two pushing it too.

Go too far right and you end up spouting the same nonsense as the left. All of which is amusing of course but when Natalie Bennett says we should all eat local she gets on the radio and TV. Odd how the policy is sanctified by who spouts it really.