Identity crisis (repost from 2014)

John Quiggin17 Comments

When I posted the following piece two years ago, I didn’t suppose it would be enough to kill the absurd idea that “most Australians pay no net tax”. But, given its obvious kinship with Mitt Romney’s disastrous “47 per cent” catchphrase, I felt sure that hardheads on the political right would kill it off before it lined them up on the losing side of a class war.[1] Not for the first time, I was wrong. So, here’s a reprint.

In the latest issue of Gerard Henderson’s Sydney Institute Quarterly, Adam Creighton, economics correspondent at the Oz, “explains why most Australians pay no net tax”. That’s a striking conclusion, so I checked it out. Creighton has discovered that most Australians get about as much back in transfer payments and public services as they pay in taxation. The poor get a bit more, and the rich a bit less.

To save Creighton some work in future, can I suggest he consider the budget identity constraint “Expenditure = Income”. Since the government spends on services and transfer payments roughly the same amount as it raises in tax revenue[2], it’s obvious that, for the average Australian the same identity must hold, with income renamed as “tax paid” and expenditure as “transfer payments and public services”.

Next up: Why there is no net travel into the CBD

fn1. Romney wasn’t silly enough to push this line in public. He got caught using it at a donors meeting, when someone secretly filmed him.

fn2. Taking account of the seignorage from inflation, returns on assets, intertemporal transfers through debt etc, this rough equality becomes an identity. Please, no arguments about deficits, and especially about MMT. The point of this post is a really simple, and doesn’t need this kind of complication.

Why is global finance so profitable (crosspost from CT)

John Quiggin21 Comments

In a recent post, I asserted that

activities like tax avoidance/evasion and regulatory arbitrage aren’t peripheral flaws in a financial system primarily concerned with the efficient global allocation of capital. They are the core business, without which the profits of the global financial sector would be a tiny fraction of the $1 trillion or so now reaped annually

As I’m working on income distribution issues my long-running book project, this seems like a good time to see if this claim can be backed up by hard numbers.

First up, here’s my source for the $1 trillion number (actually $920 billion). As a plausibility check, I’ve tried to estimate the total size of the global financial sector. Various sources, including Wikipedia estimate that the banking and insurance sector accounts for 7-8 per cent of US gross product. Extrapolating to world gross product of about $80 trillion that would give around $6 trillion for the total size of the sector. The US is almost certainly more financialised than the world as a whole. Still, the profit number looks about right. A trickier question is whether the rents accruing to managers and top professional in the sector should be counted as part of profits. I’d guess that these rents account for at least another $1 trillion, but I have no real idea how to test this – suggestions welcome.

Is tax avoidance/evasion and regulatory arbitrage a big enough activity to account for a substantial share of a trillion dollars a year? Gabriel Zucman estimates that there’s $7.5 trillion stashed in tax havens, of which around $6 trillion is untaxed. He estimates the tax avoided at $200 billion . I’ll estimate that half of that ($100 billion) is creamed off in financial sector, mostly as profits or rents. That implies a profit margin of a bit under 2 per cent, which seems reasonable.

Tax evasion by wealthy individuals is only a small part of the story. Legal tax avoidance is almost certainly more important. Most of that involves companies, but it’s important to distinguish between “close” corporations, which hide the activities of an individual or family and large global corporations. I don’t have any idea how to measure the cost of avoidance through close corporations. As regards global corporations, Zucman estimates that “a third of U.S. corporate profits, or $650 billion, are purportedly earned outside the country, with a cost to the US of $130 billion a year . Extrapolating to the world as a whole, that would be at least $500 billion. Again, assuming the financial sector creams off half of the sum, we get $250 billion (the fact that the finance sector itself accounts for around 40 per cent of all corporate profits means there’s a problem of recursion that I haven’t worked through)

Then there’s manipulation of exchange rate and bond markets. I have no idea how to measure this, but given that the notional volume of trade in some of the markets concerned is measured in the hundreds of trillions, it seems plausible that the profits and rents from market-rigging must be at least in the tens of billions.

These are probably the biggest scams, but there’s also regulatory arbitrage, privatization (a huge source of rent over recent decades), domestic tax avoidance and more.

Adding them up, I’d suggest that $500 billion a year is a low-end estimate for the profits and rents associated with various forms of anti-social financial sector activity.

There’s lots of potential error around these numbers, but the order of magnitude seems reasonable to me. As against the claim that the explosion in financial sector activity and profits over the past 40 years has been driven by the benefits of a more efficient allocation of capital by rational markets, the claim that it’s all about tax-dodging and socially unproductive arbitrage seems pretty plausible.

Obviously, the social cost of a financial system devoted to undermining tax and regulatory systems far exceeds the profits earned from the activity. That’s true of any kind of socially destructive, but privately profitable, activity. But the problem is greater in the case of financial sector activity because of the disastrous effects of financial crises.

Rubin gets it right (crosspost from Crooked Timber)

John Quiggin11 Comments

Crises upend all kinds of assumptions, and the crisis in the Republican Party is no exception. Who would have thought, for example, that the National Review crowd might end up voting for the Libertarian candidate while lots of self-described libertarians are backing Trump.

At least as surprising to me is that, among all the attempts from establishment Repubs to understand the disaster that has befallen them, the most insightful and accurate (that is, the closest to my own analysis) has come from Jennifer Rubin at the Washington Post, someone I’ve never before taken seriously. Unlike nearly all the NeverTrumpers she accepts the obvious implication of the fact that around half the Republican electorate has gone for Trump’s tribalism

The GOP discovered (in part, through Sen. Ted Cruz’s collapse despite perfect mechanical execution) that there is no majority supporting the Reagan agenda. Certainly, Cruz was a politician of limited talent and imagination, but if he could not sell the “three-legged stool” to the masses, perhaps there are no masses receptive to that sort of stuff. Even in a GOP primary, there is no majority looking to roll back gay rights or give huge tax breaks to upper-income Americans.

Second, she nails the role of climate change denialism in the intellectual collapse of the political right

Along with all of this, conservatives have to end their intellectual isolation and self-delusions. They need to stop pretending that climate change is not occurring (the extent and the proposed solutions can be rationally discussed) or imagining that there is a market for pre-New-Deal-size government. Conservatives must end their infatuation with phony news, crank conspiracy theories, demonization of well-meaning leaders and mean rhetoric

Contrast that with, say, Will and Krauthammer, who denounce Trump in extreme terms, but peddle lunatic conspiracy theories themselves.

In this context, I was struck by this piece headlined The outlandish conspiracy theories many of Donald Trump’s supporters believe. Despite the headline and the spin in the text, the data reported in the article shows that Trump supporters are only marginally more likely than Cruz and Kasich voters to accept the standard set of Republican conspiracy theories. To give a fairly typical example,

Fifty-two percent of his supporters said [the claim that vaccines cause autism] was possibly or definitely true, compared to 49 percent of those who supported Cruz and 45 percent of those who supported Kasich

These differences are barely outside the likely margin of error in a poll of this kind. The differences between groups of Repub voters on any given issue are far smaller than the differences arising from more or less extreme conspiracy theories (for example, only about 20 per cent of each group think that the Sandy Hook shootings were faked).

If there is one prediction that can safely be made it is that the Republican party of 2017 will be very different from that of 2015, before the Trump eruption. Whether it moves in the direction of sanity remains to be seen.

Polls vs punters: an explanation?

John Quiggin35 Comments

Nearly a month ago, I noticed that betting markets were giving long odds (3.5 to 1) against a Labor win in the (presumably) forthcoming election. That would be a good bet if you thought Labor had a better than 22 per cent (1/(1+3.5)) chance of winning. Given that the polls were pretty much tied, I thought those were good odds.

Since then, the polls have moved steadily in Labor’s favor to the point where their lead is just about statistically significant in a meta-analysis (add lots of independent samples and the margin of error declines). At the same time, the government has barely had a good news day. Their one big hit, the kerfuffle about 10-year projections of tobacco tax revenue (a bipartisan policy) blew up in their faces a few days later when Turnbull and Morrison couldn’t/wouldn’t state the cost of their company tax plan. It seems that they had the $50 billion number ready, but had hit on the clever plan of having the Treasury announce it today, just before Parliament is dissolved so that Labor couldn’t … I’m not sure what (cue underpants gnomes). As a result of all this, the pundits, who dismissed the idea of a Labor win as implausible until very recently, are now coming around to the idea

Yet despite all this, the odds are barely unchanged at 3.3 to 1. That’s good for anyone who gives Labor a 23 per cent chance. There are a few possible explanations of this

(a) The idea that betting markets are highly rational aggregators of information is wrong
(b) Those betting in these markets have inside information or else insights unavailable to the rest of us.
(c) The markets don’t really exist in any substantial form and are just a publicity stunt for the bookmakers. That’s the argument of this 2013 article by Michael West, whom I’ve usually found to be sensible and reliable.

Pirates ! (Militarism Whack-a-Mole #173)

John Quiggin17 Comments

Making the case against militarism is very reminiscent of climate denial whack-a-mole. Demolish one spurious argument, and you’re immediately presented with another. For example, my post showing that the economic benefits of “keeping sea lanes open” could not justify more than a trivial proportion of current naval expenditure, got hardly any substantive responses (apart from tiger-repelling rocks), but a great many saying “what about the pirates?”.

I’ve done the numbers on this one, and they look pretty clear-cut. There are a bunch of estimates on the web of the annual cost of piracy ranging from $1 billion to $16 billion a year.

This seems implausibly high. The amount actually stolen by pirates or paid as ransoms is far smaller, less than a billion a year at its peak, AFAICT. Looking in detail, there’s a fair bit of double counting here (both actual losses and the insurance premiums which offset them are counted, for example), and the high-end numbers typically include some estimate of the cost of naval deployments on anti-piracy patrols. In particular. Still, in the spirit of fair play, I’ll go with $15 billion a year as an upper bound.

Turning to the US Navy* budget, it’s currently just shy of $400 billion a year. That supports a fleet of 272 “deployable battle force” ships, implying an annual cost of $1.5 billion per ship. So, the annual cost of piracy is the same as the cost of about 10 ships. To put it another way, reducing the fleet by one ship, and scaling down anti-piracy operations accordingly would have to increase global piracy by 10 per cent to yield a loss to the global shipping industry greater than the savings to the US (I leave aside the question of why the global shipping industry is such an important recipient of US foreign aid).

Having played military whack-a-mole many times before I can anticipate the responses in my sleep. So, I’ll open the comments threads, resist the temptation to take part, and whack the inevitable moles in a later post.

* The US spends more than other developed countries, but I don’t think the others get any more ship for their shilling, capability-adjusted.

Budget bubble

John Quiggin5 Comments

The stream of leaks about Tuesday’s budget suggest that the process was still in turmoil until the last minute. If the last round of leaks are broadly accurate, it looks like a budget that will fit fairly neatly into a class war frame. On the tax side, the government has long been floating a cut in company tax rates and the removal of the budget emergency levy on incomes above $180k. At the last minute, they have apparently decided on an increase in the threshold (currently $80 000) for the 37 per cent marginal tax rate.

Presumably, Morrison and Turnbull think that this will be a vote-winner for people concerned about being pushed into higher tax brackets, or already in the higher brackets. How may such people are there, and who are they? Let’s suppose that the budget measures compensate for the bracket creep since Labor left office. The income tax statistics for 2012-13 showed that, at that time, 18.6 per cent of tax returns reported income of $80 000 per year.

Assuming a 10 per cent increase in nominal incomes since then, I estimate that around 5 per cent of taxpayers would have entered the 37 per cent bracket since then. Of course, most of these would be paying 37 per cent on only a tiny fraction of their income, but people don’t always judge these things sensibly. Still, a budget measure targeted at 5 per cent of taxpayers (a good deal less than 5 per cent of the electorate, even taking account of the fact that many are in couple families) doesn’t seem like an election winner.

The real punch of the measure is that everyone on incomes currently over $80 000 will benefit. Assuming a 10 per cent increase, the full benefit of $360 per year (the 4.5 cent difference in marginal rates, applied to $8000) would go to everyone with a taxable income above $88000. That’s about 25 per cent of the 12 million who file income tax returns or 3 million people.

Those above $180 000 will also benefit from the removal of the 2 per cent emergency levy, which is a much bigger deal for the beneficiaries. Anyone earning over $200k will gain at least $400 from this measure, more than from the tax cut

The threshold change I’ve calculated would cost around $1 billion a year to benefit a relatively small group of voters, most of whom are already Liberals and the rest of whom (including me, for example) are unlikely to be all that responsive to tax cuts.

As a political strategy, this doesn’t make obvious sense. I suspect, however, that most politicians and political commentators (particularly, though not only, on the conservative side) make their political estimates on the basis of people they know, many of whom are exercised about bracket creep, and very few of whom make less than $80 000 a year. I recall studies where members of the political class were asked to estimate the median Australian income, and got the number drastically wrong. The social bubble is reinforced by the intellectual bubble created by an increasingly fact-free rightwing world view.

Bubble thinking isn’t exclusively a problem of the political right. But it’s more prevalent there than at any time in the recent past. It may well prove the Turnbull government’s undoing.

* Peter Martin makes the same point about median incomes. After seeing a lower number in his article, I’ve corrected my original estimate of the budget cost, which was too high.

A data point on minimum wages

John Quiggin23 Comments

I’m currently working on a section of my Economics in Two Lessons book dealing with minimum wages in the context of predistribution policies, so I thought I would compare Australia with the US, where the idea of a $15/hour minimum wage is currently a hot topic. In Australia there are two kinds of minimum wage. The PPP exchange rate is estimated at $A$1.30 = $US, which is fairly close to the market exchange rate at present, so I’ll give both $A and estimated $US equivalents

The standard minimum wage for workers aged 21 and over is $A17.29 hour ($US13.30) applying to employees under standard award conditions. These include four weeks annual leave, sick leave, employer contributions to pension plans and so on.

More comparable to the situation of US minimum wage workers are “casual” workers, employed on an hourly basis. Casual workers get a loading of at least 25 per cent, bringing the wage up to at least $A21.60 an hour ($US16.60), to compensate for the absence of leave entitlements. In addition, they have entitlements including:

* “Penalty” rates for weekend and night work (usually a 50 per cent loading, 100 per cent on Sundays)
* For workers employed on a regular basis, protection against unfair dismissal.

The policy question is: what impact have these high minimum wages had on employment and unemployment. That’s too big a question to answer comprehensively, but we can look at the obvious data points: the official unemployment rates (5.7 for Oz, 5.5 per cent US) and the 15-64 employment population ratios (72 per cent for Oz, 67 per cent US). So, it certainly doesn’t look as if the Australian labor market has been crippled by minimum wages.

Note: I’ll respond in advance to the widespread misconception that Australia is a special case due to mineral resources. Mining accounts for about 2 per cent of employment in Australia, and (because most mines are owned by multinationals) its contribution to Australian national income is also so, probably around 5 per cent.

* Workers aged 18 get about 70 per cent of the adult minimum, equivalent to around $US11.50 for casuals. But the great majority of US minimum wage workers (about 80 per cent) are 20+.