Playing with fire

If this isn’t a mess, it will certainly do until the mess gets here. An unnecessary, self-inflicted catastrophe on a truly astonishing scale. How did we allow things to get this far?

My initial thoughts when the results were announced was that I live in a country made up mostly of racists and half-wits but after some time to reflect I realise of course it isn’t as simple as that. Though the truth is hardly a lesser cause for despair.

From the start, I knew this was a terrible subject to put to a referendum. There is little benefit in asking a huge number of people to vote about something when a majority of them will have no chance of making an informed decision. But that is exactly what we did.

It is inconceivable that the result we saw would have happened if the voters had been making informed decisions. While the EU is far from perfect, the benefits of membership clearly outweigh any benefit we might get from leaving, but they are clear only if you understand the true consequences of what you are voting for.

In January 2010,when David Cameron was campaigning to be Prime Minister, he said that net immigration would be capped to limit it to tens of thousands. Otherwise, he told us, public services would be overwhelmed. This was when David started the fire. The fact that immigrants were actually boosting both the economy and public services was surely known to David, so why did he campaign on this point?

David is one of the world’s foremost pioneers in the creating and spreading of what I named the “Phantom Problem“. That is, you tell people there is a problem (knowing that most won’t check), scare them about it and then tell them how you are going to solve it.

David knew that immigration was a prime candidate for a phantom problem and he knew that he would be able to sound tougher about it than the incumbent Labour Party on whose watch immigration had increased.

After becoming PM, David could probably have forgotten about the small fire that he had started and it would surely have burnt itself out but it had served him well so far, so he continued to throw more sticks on it. This from a Cameron speech in 2011…

…for too long, immigration has been too high.

Between 1997 and 2009, 2.2 million more people came to live in this country than left to live abroad.

That’s the largest influx of people Britain as ever had…

…and it has placed real pressures on communities up and down the country.

Not just pressures on schools, housing and healthcare – though those have been serious…

…but social pressures too.

Because real communities aren’t just collections of public service users living in the same space.

Real communities are bound by common experiences…

…forged by friendship and conversation…

…knitted together by all the rituals of the neighbourhood, from the school run to the chat down the pub.

And these bonds can take time.

So real integration takes time.

That’s why, when there have been significant numbers of new people arriving in neighbourhoods…

…perhaps not able to speak the same language as those living there…

…on occasions not really wanting or even willing to integrate…

…that has created a kind of discomfort and disjointedness in some neighbourhoods.

This has been the experience for many people in our country – and I believe it is untruthful and unfair not to speak about it and address it.

Of course, all the while, immigrants were continuing to play a major part in propping up the economy that had been severely weakened, initially by the financial crisis and subsequently by David’s policy of austerity. David found that by stoking the fire he was able to successfully divert attention away from the true reason that the economy was performing so badly.

But then along came UKIP.

David’s plan had been to start a small fire and then show a lot of bravado about how he was taking tough decisions to tackle it. UKIP turned up to the fire David had started with a can of petrol. Unable to douse the flames, David decided to kick the problem into the long grass by announcing an in/out referendum on the EU. He positioned it by saying that the EU was broken in its current form but he would negotiate a much better deal for us to vote on. All David really cared about was winning the 2015 general election and with this he had bought himself a clear ride to victory.

When David returned to the fire after the election the problem he had single-handledly created was not in a good way and so off he went to Europe in search of some fire engines. Shortly afterwards he came back sporting a miniature water pistol, a moist handkerchief and a can-do attitude. Worse still, while he had been focusing on the 2015 election, UKIP, the right-wing press and his most ambitious Tory colleagues had spent their time loading their planes with napalm. 

David’s sudden switch, a few months ago, to fighting the fire rather than fanning it was far too little, far too late. Having spent five years telling the electorate that immigration was too high and that immigrants were benefit tourists who were the reason for a stretched NHS, he had made a fire bigger than he could put out.

In hindsight you might wonder how he could have been so arrogant to assume he would be able to control the fire but you must appreciate that phantom problems had been the entire backbone of David’s political success. Labour spending caused the global financial crisis (phantom problem) therefore we need austerity. People on benefits are lazy scroungers (phantom problem) therefore we need to cut benefits. Phantom problems had worked so well for David, he could never have conceived that one of them could ultimately lead to his downfall.

And all the time that David talked up those phantom problems, he told us not to listen to the voices of the economists who were trying to tell the public what was really going on. 

Logic, facts and evidence were lost in the Brexit debate because the voices of the people trying to responsibly inform the public were drowned out by those who were not. The political environment that David created since coming to power has been mislead the public, tell them to listen to the right-wing press and tell them to ignore experts and that was the political environment in which the EU referendum took place.

In such a scenario, how can we possibly expect the public to make an informed decision?

So what happens next? I don’t think anyone knows, there doesn’t seem to be any plan whatsoever. Scotland will surely push for independence again and well they should. After the EU referendum result I feel nothing but guilt that I asked them to stay last time. Even if they do go, the rest of us have a very uncertain time ahead and all we really know is that we will be worse off than we would have been otherwise.

Economics aside, we have sent a very sad message out about our country. A message that the UK is not an inclusive country, a message that we have reverted back to the that horrible attitude of many on the right, that there is something inherently special and superior about British people and “British values”, whatever those are.

The 51.9% are not all stupid racists. The vast majority are good people who have been misled because David created a political environment in which logic, facts and common sense are no longer relevant. When you watch the interviews with people on the news who voted leave and hear the reasons they did it, it is easy to tell yourself that they are either racist or stupid. In most cases they will be neither. These are good people who have more often than not been victims of Cameron’s austerity experiment and who have been let down badly by our politicians and our media.

And while this whole sorry episode in our history should finish when David threw himself on the fire he created the metaphor breaks down heavily there. David is a multimillionaire who will never experience one drop of the pain that he has created for the country he professes to love.

But, David, I do have a message for you because from all of this mess you have created there is something you can still learn:

Divisive rhetoric, no matter how much it helps the short-term ambitions of an individual, can have a truly devastating effect on society. George Osborne should have told you this earlier – after all, he has a degree in history. And despite your vast wealth, like Tony before you, your terrible legacy will haunt you forever. Whenever and wherever you pop up you will be forced to defend the indefensible, we won’t buy it and you will be remembered solely for creating this calamity.

That, David is your legacy.

And now it is time for you to go off and enjoy it. You pudding-faced, society-dividing, poverty-fuelling, hate-mongering piece of toss.

Here endeth the lesson.

RedEaredRabbit
 

 

 

 

Crazy Brexiters

It seems that in yesterday’s post, I failed to mention the main argument of the brexiters for why we should ignore the overwhelming economic evidence and vote Leave instead.

It seems to go like this (please correct me if I am wrong):

There are examples in history of an economist, or more than one economist, being wrong on something. Therefore we should ignore all economists now when they say that leaving the EU would be bad for the UK economy.

I’m not altogether sure this works as an economic argument, or indeed an argument of any kind. I think also, I have been quite generous to the brexiters with that summary. They aren’t actually asking you to ignore economists on the economic argument, they are actually asking you to look closely at the view of economists and then go out and vote for precisely the opposite of what they say.

Are economists alway right? Of course not and they often disagree with one another. Economic consensus on the scale that we see on brexit is actually fairly rare. This is in part because of the lack of any cohesive economic argument for brexit – there basically isn’t one, but also it’s a much simpler task we are asking economists to model here than we often give them. We aren’t asking economists to give an exact number on the size of the economy in five or 10 years time, just asking how it would be if we stayed in the EU relative to leaving. The majority of the variables and unknowns that you would need to get to a precise number cancel out when you are only comparing one aspect, (even if it is in this case a big one).

Of course, the argument from the brexiters against economists doesn’t stop there. Today Michael Gove, helpfully informed the public, that the economists’ motives are actually akin to those of Nazi sympathisers. 

I’ll tell you something – they really aren’t at all. I’m pretty sure the IMF, the OECD, NIESR, the LSE, the Bank of England etc are not heavily staffed by that kind of person and given how stupid a thing it was to say, we should perhaps leave it there.

Even if we do though, we are still looking at an economic argument with economists on one side and Michael Gove and Boris Johnson on the other. Like I say, the economic community’s economic forecasts aren’t always right, but I doubt they are less accurate than those of Aunt Sponge and Aunt Spiker.

8f11c695112aeec4917c90b7293bdc16

Look familiar?

I did say yesterday that I thought the whole referendum was a massive waste of time and while it is, it won’t for one second stop me taking the time out of my day to go to the polling station and voting to stay in. I did like Ben Goldacre’s conclusion on the same subject:

Just vote remain. It’s boring, there’s nothing awesome about it, but sometimes you have to take a break from useful productive work to stop idiots breaking things.

RedEaredRabbit

Should I stay or should I go?

In recent weeks I’ve had quite a few people asking me my opinion about the upcoming EU referendum.

My opinion is quite simple – it is a massive waste of time and money. As I wrote when the referendum was first announced, the advent of a referendum would simply result in politicians and the media spamming the public with misinformation, making informed decisions impossible.

And that has of course happened, exactly as I said it would. Not that I want to take much credit for that prediction – we have been here before recently with referenda:

  • Changing the voting system to AV (2011)
  • Scottish independence (2014)

Politicians didn’t exactly come out of those looking like their mission was to responsibly inform the public.

But, I guess, “massive waste of time”, wasn’t exactly the answer that the people asking me were looking for. After all, like it or not, the vote is going ahead, so I’m sure they were asking my opinion on voting in or out.

It’s a fairly clear case for me – I will vote to stay in the EU.

THE END

…..

 

What, you want more? Dammit.

It’s a complicated decision, so I shan’t try to cover every possible aspect of EU membership, but I will try to cover a few that seem to be getting the most airtime and seem to be most important to people.

So let’s start with the economy. Would the UK be better off or worse off if we left the EU? You wouldn’t think so by listening to politicians and the media but this one is actually fairly clear cut. Leaving the EU would make the UK significantly worse off compared with staying in the EU and that is in the short-term, the medium-term and the long-term.

If you want to read about the analysis then have a look here:

As Chris Giles wrote in the FT, there is a huge consensus among economists that leaving the EU would be significantly worse for the UK economy than staying in and if you don’t fancy following the maths in all of those papers, you probably don’t need to anyway. We know that trade makes us all richer. Making trade harder makes us all relatively poorer. Leaving the single market makes trade harder. It shouldn’t surprise us that the maths check out, when the basic logic is so straight forward.

According to the Cameron and Osborne analysis the UK is in for a recession if we leave. That is certainly not certain, as you can see from the papers. What is certain is that we would be worse off when compared with staying, both in the short-term and the long-term.

 

Yes, the leave campaign can always find an ‘economist’ to tell people the opposite but this is right in the leagues of Sarah Palin finding a ‘scientist’ who says global warming is fiction, or the Earth is only a few thousand years old.

On this issue the evidence is overwhelming.

Ok, so let’s have a look at immigration, which I guess is the next most discussed topic. Does immigration make us poorer? Are we at breaking point? Again, the good news is that we don’t need to listen to politicians or tabloids because we have some good analysis on this.

What we know is that EU immigrants, on average, contribute more to the UK economy than their native born colleagues. We also know that, on average, they take out less in benefits that their native born colleagues. In short, immigration from the EU makes the UK better off and the numbers here are, again, not in dispute.

There are poor people in the UK and there are some significant factors that cause their poverty. As much as the leave folks would have you think it, immigration isn’t one of them.

Of course, there are also the nonsense stories that lots of people believe – 70% of our laws were made in the EU, we pay the EU £350m a week etc. I could spend five minutes linking to why those are nonsense but if you still believe them, then you are probably beyond help and you probably didn’t get this far into my blogpost.

The EU is far from perfect – the Common Agricultural Policy, for example, is a big pile of cow poo. It doesn’t mean that we should turn our backs on the EU, make trading with our closest neighbours harder, lose the benefits of free movement and free trade etc.

Those who tell you that we will be economically better off outside the EU, or that the UK is at breaking point due to immigration fall into two categories:

  • People wilfully misleading you for their own reasons (politicians, tabloids)
  • People who have listened to politicians and tabloids

The people in the first camp are no better than climate change deniers or the flat Earth society.

Do yourself a favour and don’t be in the second camp.

RedEaredRabbit

 

 

 

Pre-Election Reading

Hello there! I hope you are all well.

I haven’t had much time for blogging of late, for which I apologise. The good news is that there are plenty of better people than me still doing it. With the election almost upon us, I thought I would direct you to some things you should read before casting your vote. If you are thinking of voting for the current government based on their economic record then I urge you to read these posts before doing so. If you know someone who is thinking of doing that then point them in the direction of these posts before they get near a polling station.

Paul Krugman is a winner of the Nobel Prize in Economics* and his recent essay published in the Guardian says everything I’ve been trying to say for five years – but much better:

The Austerity Delusion

Simon Wren-Lewis is a Professor of Economics at Oxford University but also writes economic blogposts that everyone can understand. He recently wrote a whole series debunking what he calls the “Macromedia Myths” – the stories we receive every day from the right wing press and the government, stated as facts but, as he shows, clearly not based upon them:

Media Macro: Introduction

Media Macro Myth 1: Britain faced a financial crisis

Media Macro Myth 2: Labour profligacy

Media Macro Myth 3: The 2007 Boom

Media Macro Myth 4: The immediate necessity of belt tightening

Media Macro Myth 5: The long term plan

Media Macro Myth 6: 2013 recovery vindication

Media Macro Myth 7: The strong recovery

Media Macro Myth 8: Employment growth

Oh, and on the subject of Labour’s “overspending” you might want to look at what George Osborne’s spending policy was in the year before the financial crisis:

http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm

Use your vote well on Thursday.

RedEaredRabbit

*Yes pedants, I know it is really called the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”

Royal Fail

Jonathan Portes, via Twitter, drew my attention to this article in The Telegraph by Tory MP, Douglas Carswell:

20140401-215636.jpg

The article is a fantastic example of how, no matter how bad the situation, politicians are able to rise above the usual constraints of fact, logic and evidence and carve out their own reality.

It is, of course, an article in response to the report that found that the government, when selling off Royal Mail, had substantially undervalued it.

In case you missed it, on the morning of 11th October last year, the government sold off Royal Mail. By the end of that day its value was £750m higher than that for which the government had sold it. It’s a bit like selling your car to your next door neighbour, only to find that, later on the same day, they’d sold it on to your other next door neighbour for much more.

While we won’t get the £750m back from Royal Mail’s new shareholders, at least with this government, we can easily get it back through cutting benefits for poor people. Hoorah.

Anyway, back to that Telegraph article:

Far from undermining the case against Royal Mail privatisation, today’s National Audit Office (NAO) report that suggests Royal Mail’s sell off was bungled actually convinces me that it the right thing to do.

That’s some logic that only a politician could come up with – if the government hadn’t bungled it, he would have remained unconvinced on the whole affair. But because they did bungle it, he is now convinced it was a good idea.

The basis for this “logic” is that because it was sold too cheaply, it proves that that government weren’t competent in knowing what to do with it, so it’s ok to sell it for much less than it is worth. That’s like saying, “I am rubbish at driving my Ferrari, so I should sell it for the price of a Nissan Micra.”

The article moves on, apparently now forgetting that it had previously said the sale was “bungled”:

Predictably, the NAO report is being interpreted as evidence that Royal Mail was sold off “too cheap”

In fairness, it is being “interpreted” this way because that’s exactly what it says.

The article then loses itself in a very muddle-headed analysis of what determines the value of a company. Essentially we are told, as the headline suggests, that the reason for the sudden and substantial increase in valuation was because the company was privatised.

This just makes no sense whatsoever.

A share price is essentially a measure of the market’s view on the future profits of a company. Occasionally a share price will increase substantially within a day but it happens when a piece of information becomes known that dramatically changes the market’s view of the future of the company. For example, if a pharmaceutical company announces that it has developed and patented a new drug that cures a common condition for which there was previously no treatment, then their share price might suddenly go up a lot. That’s understandable because the market expects their future profits to reflect this new piece of information.

On the day that Royal Mail was sold off, their new private status did not cause them to develop, patent and announce a new, substantially more efficient, way of delivering letters. The increase in share price was simply because the government undervalued the company when it sold it off.

So where did the money go? As we found out, a small number of investors in the City bought up a huge amount of shares and sold them on shortly afterwards, making hundreds of millions of pounds of profit. It really does take a politician to come up with the bizarre kind of argument given in this article to justify why it that money should have been profit for a few people in the City rather than money for the public purse.

If the government were now holding their hands up and admitting their mistake, while simultaneously apologising to the poor people, whose benefits are now being cut, we could at least give them credit for being honest.

Predictably (hey I can use that too), it’s smoke and mirrors time and if this is anything to go on, the government’s smoke and mirrors are looking thinner than ever.

RedEaredRabbit

 

Time for Plan B

It’s probably not controversial to say that politicians change their minds a lot. Nick Clegg, for example, found little difficulty in voting to increase tuition fees shortly after he’d happily been photographed doing this:

A pre-election Nick Clegg

It’s easy to pick out Nick Clegg over such inconsistencies (in fact it’s fish, barrel, howitzer time) but this is undoubtedly a common trait amongst politicians. Let’s look at another.

SNP Leader and Baron Greenback doppelgänger, Alex Salmond once described the pound as “a millstone round Scotland’s neck”. These days though he’s desperate to keep it. These days, we are told, that Scotland losing Sterling would cost British businesses hundreds of millions of pounds.

It’s a pretty big change in his position, so it’s worth asking why that change occurred.

Before that though, I feel I obliged to back up claim that he looks like Baron Greenback from Dangermouse:

Alex Salmond

Alex Salmond

Baron Greenback from Dangermouse

Baron Greenback from Dangermouse

Uncanny, no?

Back to the question. Why has his position changed so much? Economically this is hard to answer. While different currency options have different pros and cons, those pros and cons don’t really change a huge amount over the long term*. When Alex was strongly in favour of Scotland scrapping the Pound in favour of the Euro, he didn’t mention those lost hundreds of millions of pounds that are now such a problem.

Unsurprisingly this has nothing to do with economics and everything to do with politics. The past six years have not been kind to the public’s perception of the Euro and while such a policy might once have been a vote winner, today it would be a huge vote loser. The experience of close neighbours, Ireland, (amongst many other Eurozone economies) has been hard for Scottish voters to miss. Here are unemployment rates as one example:

UK & Ireland Unemployement (Source: IMF)

UK & Ireland Unemployement (Source: IMF)

Alex wanted the Euro when he thought it would gain him more popularity for independence and today wants Sterling for the same reasons. Not that that makes him any different to any other politician but it is important to understand that all of this has a lot to do with politics and not a lot to do with economics.

In any case though Alex’s new found love for The Pound is fairly immaterial because, as we’ve seen, there seems to be very little motivation from the rest of the UK to enter into a formal currency union with an independent Scotland. While this has generated much ire from Alex, it’s worth putting this position into perspective.

An independent country cannot demand than another country enter into a formal currency union with it  Unless both countries want to do it, it won’t happen and, to be fair, it shouldn’t happen.

Alex, as an expert on independence, should probably realise he can’t just pick and choose which aspects of independence he wants and which he does not. He might want The Bank of England to continue to act as Scotland’s central bank but, in the case of Scottish independence, that’s simply not a demand he can make.

Given this, it’s surprising is that he doesn’t seem to have any “Plan B” on the matter of what currency an independent Scotland would actually use. With six months to go until the vote, this looks more than a little disorganised. So what are the options for “Plan B”?

Essentially there are three:

Option 1: Dollarisation

Scotland could continue to use the pound as their currency without any formal monetary union. Several countries already do this with the Dollar (hence the term Dollarisation for using a foreign currency), such as Panama and El Salvador. Several also do this with the Euro, such as Monaco, Andorra and the Vatican City. Scotland would be, comparatively, a very big economy to try this out but it is definitely an option. There are some serious disadvantages of it, one of the big ones being that if, as a country, you have no control over your currency, you can go bust.

As an independent country, Scotland would start out with debt of around 80% of their GDP and with no control over their currency, markets would be unlikely to want to give them more very cheaply. Additionally, given recent history, the Scottish financial sector, dominated by RBS and HBOS, is unlikely to want to remain based in a country where they have no lender of last resort. NIESR go into the whole dollarisation thing in more detail here but it’s probably fair to say that:

a) To go down this route there would be an awful lot of details to sort out before September

b) Although workable, there are additional risks in dollarisation over the current system, some of which are material

Option 2: Adopt the Euro

LOL

Option 3: Create a new Scottish Currency

In this scenario, Scotland would set up its own central bank, print its own currency and have full control over both its fiscal and monetary policy. Unlike the other options, it would be economically independent. The down sides would be that the new currency was likely to be more volatile than the pound and there would be costs involved in cross-border transactions between Scotland and the UK when converting from one currency to another. There’s no reason to think that either of those would be an insurmountable problem though – neighbouring countries throughout the globe have used different currencies successfully for a very long time. Additionally markets wouldn’t panic about an independent Scotland using a foreign currency as they’d control their own, so Scotland would be able to borrow at reasonable (albeit higher) rates without being seen as a default risk. I really can’t see any reason why Scotland couldn’t do this successfully and it seems to me by far the cleanest and most workable (not to mention the only “independent”) of the three options.

As I mentioned earlier though – the economics of the debate aren’t taking centre stage (on either side) and, to be honest, it is worth asking whether they should anyway. If Alex Salmond could just communicate a sensible currency policy to the Scottish people we could then just move on to what the debate is really about…

Is it about other economic things?

No it’s not. An independent Scotland would certainly have the ability to operate successfully. Would they be on average better off or worse off? Despite what George or Alex tells you, I doubt there would be a big difference – there’s little evidence to suggest that things would vary much either way.

Is it about political things?

No it’s not. A “Yes” vote would mean Alex Salmond being in charge (and he is clearly a bampot), but a “No” vote would mean David Cameron being in charge and, if anything, he is an even bigger bampot than Alex Salmond. But that is politics for you – no matter how you vote, you’ll probably get a bampot.

So if it isn’t about economics and it isn’t about politics, what is it about?

Let me give you a hypothetical example to explain. Supposing there were clear economic benefits to the UK scrapping sovereignty and becoming the 51st state of the United States, would we all want to do it? I suspect that we would vote “No” and I doubt it would be a close run thing.

Alex Salmond, if he has any sense, should move straight past the currency discussion with a credible alternative to formal currency-union and focus on what is actually important in this debate. I suspect it is the reason he has spent his life campaigning on the subject and it isn’t about economics:

As a Scottish person, would you feel happier if Scotland were part of the United Kingdom or happier if it were not?

We can argue the economic and political details as much as we want. A question such as this goes way past economics and politics and it is essentially the question that will determine the way the Scottish people vote.

I can’t help but add that I hope you decide to stay.

RedEaredRabbit

* I say long term because in the short term pros and cons will change. Perhaps today being in the Euro would make people better off. Perhaps in six month’s time dollarisation would be slightly ahead. A currency choice is a long term option though and not something you can just keep switching every few months. Therefore the long term is where you should focus.

Greed Is Not Good

As we enter another year under Conservative-LibDem coalition, there are many stories I could highlight as my story of 2013. I could talk about the UK’s credit-rating downgrade and how it underlines the government’s (willing or unwilling) misunderstanding of what determines their borrowing rate. I could talk about how the government should take no credit whatsoever for the signs of economic recovery we have started to see. I could talk about how the government’s policy on immigration is, at best, completely ignorant of the widely available evidence on the subject. I could even forget politics and economics and talk about taking photographs of herons if you want to give me a moment.

However, in my current state of reflecting on 2013 whilst simultaneously looking to our future, there is one story that I feel needs to take precedence and that story is the story of inequality.

In November, Boris Johnson gave the annual Margaret Thatcher Lecture. You can read the full transcript if you can bear it but here’s a snippet:

Like it or not, the free market economy is the only show in town. Britain is competing in an increasingly impatient and globalised economy, in which the competition is getting ever stiffer.

No one can ignore the harshness of that competition, or the inequality that it inevitably accentuates; and I am afraid that violent economic centrifuge is operating on human beings who are already very far from equal in raw ability, if not spiritual worth.

Whatever you may think of the value of IQ tests, it is surely relevant to a conversation about equality that as many as 16 per cent of our species have an IQ below 85, while about 2 per cent have an IQ above 130. The harder you shake the pack, the easier it will be for some cornflakes to get to the top.

…the income gap between the top cornflakes and the bottom cornflakes is getting wider than ever. I stress: I don’t believe that economic equality is possible; indeed, some measure of inequality is essential for the spirit of envy and keeping up with the Joneses that is, like greed, a valuable spur to economic activity….

When Margaret Thatcher came to power in 1979 they faced a top marginal tax rate of 98 per cent, and the top one per cent of earners contributed 11 per cent of the government’s total revenues from income tax. Today, when taxes have been cut substantially, the top one per cent contributes almost 30 per cent of income tax; and indeed the top 0.1 per cent – just 29,000 people – contribute fully 14 per cent of all taxation….

I proposed that we should fete them and decorate them and inaugurate a new class of tax hero, with automatic knighthoods for the top ten per cent. Well, my friends, I am proud to say I have often been accused of being out of touch, but hardly ever have I produced so frenzied and hate-filled a response. People aren’t remotely interested in how much tax these characters pay. That does nothing to palliate their primary offence, which is to be so stonkingly and in their view emetically rich.

When George Osborne gave his speech about welfare cuts in April, I labelled it the worst speech ever made. I didn’t expect it to hold that record for such a short period of time. Let me take Boris’s points one by one.

The high and ever-increasing level of inequality is inevitable in a competitive economy

In a free and competitive economy, the laws of economics say that workers’ wages are set by supply and demand. That is we would expect workers with skills for which demand is high compared with supply, to receive higher wages than their counterparts. If there is a demand for apples and I am better at growing apples than the average apple grower such that I grow on average 10% more apples each year, then I would expect my wages to reflect this. In fact, if my wages didn’t reflect this, I probably wouldn’t bother growing the extra 10% and instead work fewer hours. Therefore it is fair to say some level of inequality of inevitable in a competitive economy.

However, that level of inequality is very far removed from the wage disparity that we see today. The wages received and the wealth held by the richest 1% dwarf that of the average worker by such a degree that it cannot be explained simply by the supply and demand of their skills. In 1998 the average remuneration of FTSE100 CEOs was 40 times that of their average employee. Just 13 years later it had ballooned to 140 times that of their average employee. This is the scale of inequality we are talking about and it is simply not explainable by supply and demand for skills – it’s not as if the number of people with the skills to be a CEO massively declined between 1998 and 2011. Something else is going on here.

The high and ever-increasing level of inequality is a natural result of varying intelligence

Firstly, it’s worth noting that the intelligence explanation of inequality is completely at odds with the explanation of our current government. David Cameron and George Osborne have for the past couple of years been pushing the explanation that people who do well, “go out and work hard” and being poor or unemployed is a lifestyle choice.

That’s clearly nonsense but Boris’s explanation doesn’t work either. The gap between the super rich and everyone else has increased at such a pace that it simply cannot be linked to intelligence in any significant way. How can the dramatic rise of CEO wages in such a short period of time be explained by “different people have different IQs”? It can’t.

Additionally it is worth asking why, if you accept that there is naturally a variation in ability, you should use that as a reason not to tackle inequality. Surely if you understand that some people are born with a natural advantage it is all the more reason to form policy to support those less lucky.

Let’s look at a couple of other examples of inequality from the US and see if these seem to be linked to a variation in IQs among workers.

In the US, the Walton family (I’m referring to the 6 heirs to the Wal-Mart empire not John Boy etc.) command a wealth of $67.9bn – equivalent to the combined wealth of the entire bottom 30% of US society. That must be one smart family!

In case you think by using the example of one family I am cherry-picking, let’s go macro. This recent paper from UC Berkely showed that between 2009 and 2012, the earnings of the top 1% of Americans grew by 31.4% compared with just 0.4% for the other 99%. Or to put it another way, 95% of the increase in US earnings between 2009 and 2012 went to the top 1%.

Can that possibly be explained by intelligence? No. Something else is going on.

Inequality is necessary to motivate people to work harder

To a point. Going back to my original example, it’s a fair possibility that my apple growing neighbour will see my apple haul is larger than her’s and work hard to increase her output next year.

As I have already stated though, this is just not the scale of inequality we are talking about and the idea that such a motivational effect exists when inequality is high is purely wrong. A small level of inequality might make me see an opportunity for increased wages by working harder but a high level of inequality will have the opposite effect. When a worker in a FTSE100 company sees the pay of their CEO increasing astronomically year on year, while their own pay stagnates, are they more and more motivated? Of course not, it is throughly demotivating.

Worse still, those at the very bottom living in poverty see the gulf they must cross to get out of poverty becoming greater and greater and the chance of crossing it becoming less and less. In South Africa the rich live in luxurious, gated communities surrounded by razor-wire and armed security guards. The poor live around them in shanty towns. If extreme inequality is an extreme motivator then we should expect to see high numbers of South Africans that were born in extreme poverty moving out of it. But we don’t.

The higher inequality becomes, the harder it is to solve.

Margaret Thatcher looked out for the rich and in doing so made things fairer

This one is half right in that Maggie did look out for the rich but the idea that she made things more fair or more equal is (in Boris terms) balderdash and piffle.

The Gini Coefficient is a standard measure of inequality in a country. A Gini Coefficient of 0 means everyone is equally well off. A Gini Coefficient of 1 means one person holds all of the wealth and the rest of the population have nothing. The lower the Gini Coefficient the more equal the society.

This graph shows (in blue) how the Gini Coefficient changed during the period of government over which Maggie was in charge. I’ve included the years back to 1961 (in green) to show that this wasn’t just an existing trend.

UK Gini Coefficient (1961 - 1990) Source: IFS

UK Gini Coefficient (1961 – 1990) Source: IFS

And this graph shows how real income changed during her time in charge for each fifth percentile:

Real Weekly Incomes 1979 & 1990 Source: IFS

Real Weekly Incomes 1979 & 1990 Source: IFS

As you can see the income of the poorest went down, while the richer you were, the more your income went up!

As Boris says, it is in large part due to Maggie that today the richest are paying a higher proportion of the total income tax than ever before. While that’s true he has failed to mention RedEaredRabbit’s Law of Income Inequality:

If you give the rich all of the income, the rich pay all of the income tax.

That doesn’t make it fair.

The rich should be lauded for the amount of income tax they pay

This one might be the worst of the lot.

A rich person who pays income tax (without trying any dodgy tricks to avoid it) is obeying the laws of the land. They are obeying them every bit as much as a poor person is who is paying their taxes. No one is paying income tax to be philanthropic – they are simply obeying the laws of the land as set by the politicians.

More than that though, are we seriously trying to say that someone in severe poverty would rather be where they are now, watching every penny just to put food in front of their children but paying a small amount of tax, rather than being a millionaire who pays much more? I leave you to choose your own heroes here.

Income tax is a government policy. It is they who decide who pays how much income tax. To say that heroism and knighthoods should come with the 45% bracket is worse than ridiculous.

The 99% hate the 1% for being rich

This is the always the last refuge of the right in this discussion. If you are concerned about rising inequality you’re just a nasty jealous person. This is not the case. The 99% do hate something but it isn’t the 1%.

The 99% hate the system that sees the wealth of the 1% accelerating away from everyone else. They hate the fact that the same system that caused the 1% to go from rich to super rich simultaneously caused their own pay to stagnate. And they hate the fact that this system caused a global economic crisis for which they are paying the price.

People don’t hate the individuals, they hate the system that causes the inequality. Why is it hugely convenient for right-wing politicians to push the case for the former? Because the responsibility of the latter lies solely with politicians and it is a system that those on the right seem to rather like the way it is.

Summary

It’s easy to say that inequality is inevitable in free market economics but that is simply not the case. Inequality did not suddenly balloon under Margaret Thatcher because the laws of economics were different in the 1980s – inequality ballooned directly because of the policies of her government.

Boris would like us to believe that the laws of economics exist in a vacuum but they don’t. They exist in a world dominated by politics. While the laws of economics help us to understand what the outcomes of different government policies might be they do not decide the policy that a government chooses to go with. Economics doesn’t define economic policy any more than economics decides the laws of the land. These are determined by politicians and those politicians absolutely have the power to reduce inequality if they choose to implement measures to do so.

CEOs of FTSE100 companies are allowed to give themselves large increases in remuneration not because of economics but because the politicians have set laws on corporate governance that allow them to do so. Companies operate monopolies not because of economics but because the laws of the land set by politicians allow them to do so. Banks were allowed to lend irresponsibly in the run up to the financial crisis, not because of economics but because politicians relaxed banking regulations to allow them to do so.

The problem with allowing inequality to increase forever might seem fine to Boris, (who we should remember, described his second salary of £250,000 for his Daily Telegraph column as “Chicken Feed”) but it has really serious implications.

Today we live in a country in which a child born into a rich family has a significantly greater chance of receiving a high income later in life than a child of equal intelligence born into a poor or average family. That is not the sign of a well functioning society.

We live in a country in which a child born into a family at one end of the income spectrum has a significantly higher life expectancy than a child born into a family at the other end. That is not the sign of a well functioning society.

As I have said, the laws of economics do not exist in a vacuum. Our politicians have every opportunity to reverse this trend, not just by implementing controls at the top but also by investing seriously in state education in the poorest areas and reducing poverty, especially child poverty.

We do not employ our politicians simply to tell us that it is “inevitable” that the profits from everything we produce should go the richest few. We employ them to look after every one of us, rich or poor, and don’t ever let them tell you that doing so is not feasible because of economics or free markets.

Boris has his sights set on being Prime Minister. You have seen the rise in inequality that occurred under the leader he idolises and you have heard his abdication of political responsibility for inequality.

One day he will run for PM.

When he does, you know what to do.

RedEaredRabbit

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