Monday, 31 March 2014

End March Links

# This is the economic argument for independence: "If the most ambitious or creative people leave, then it becomes progressively more difficult to facilitate the recovery of an economy ... Scotland cannot remain as a reservoir of talent for other economies and societies without descending into decline ... This is also why we shall need to attract talent from abroad through intelligent immigration policies." Options for Scotland, Report highlights emigration fears

# Fantastic post from Simon Wren-Lewis about how the argument 'that if a Sterling Union is in rUK's economic interests then current ruling out of currency union must just be a bluff' is wrong: when has George Osborne ever let bad economics rule out a policy!!

# Piketty's new book:
   - Some slides with charts
   - Krugman: Notes on Piketty, Working for the ownersWealth over work & NYRB Review
   - Atkinson & Morelli: Chartbook of Economic Inequality (and Vox article)
   - Relinking to great Matt Yglesias post about land

# I love this video showing 1000 years of European border changes: Watch as 1000 years of European borders change

# As usual, Interfluidity's latest has some great ideas in it:
"Suppose, reasonably I think, that ceteris paribus humans prefer to “be good”. That is, we prefer to do work that is productive and engage in behavior that is ethical. Suppose, also reasonably, that a well ordered society depends upon people sometimes making choices opposed to their material interests on ethical or other grounds. Then it is obvious how inequality might be costly. Instead of talking about “incentives to” (produce, extract rents, whatever), we might describe outcome dispersion as a tax on refraining from mercenary behavior. If the difference between economic winners and losers is modest, people of ordinary virtue might refrain from participating in activities they consider corrupt, might even be willing to “blow the whistle”, because the cost of doing so is outweighed by their preference for behaving well. But as outcome dispersion grows, absenting oneself from or even opposing activities that would be personally remunerative but socially undesirable becomes too costly. The required sacrifice eventually overcomes a ceteris paribus preference for virtue. Preventing the misbehavior of large coalitions is a collective action problem. An isolated malcontent or whistleblower is likely to be evicted from the coalition without meaningfully improving behavior, if others choose to “circle the wagon”. Outcome dispersion both increases the costs to individuals of engaging in pro-social behavior, and diminishes the likelihood that bearing those costs will be fruitful, since others will have strong incentives not to follow. ... there really isn’t anything any one individual can do to remedy the bad practices. Making a big issue of them would lead to useless excommunication. Instead we shrug ironically. ... Ethical behavior is endogenous. “Inequality” renders it costly."

# Note to self: I need to remember (and then use sometime) the OECD Fiscal Decentralisation Database

# Will the ECB go negative?


Friday, 28 February 2014

End February Links

# Simon Wren- Lewis on the English floods, and the economic policy & climate skepticism of the Tories. It may come back to bite them. Austerity and flood damage & Are the UK floods Cameron’s Katrina?

# Is Liberal England starting to "get" Scottish Independence? Aditya Chakrabortty in the Guardian

# Fantastic point by Matt Yglesias about public policy incentives in Scotland: "A place like Scotland is a sufficiently small share of the United Kingdom that it makes sense for a Scottish political activist to be more focused on 'how much money does this program bring to Scotland?' than on 'how good is this program at generating social benefits in a cost-effective way?' An independent Scotland ... would have politics that I think would ultimately be more constructive." The whole thing is good though too, Should Scotland become independent?

# I love Robin McAlpine's new website C'monScotland (though he needs to get an RSS feed sorted or it's going to be too easy to ignore and miss new posts). It's focus is on the bargaining powers of Scotland in Post Yes vote negotiations, and I think he has it spot on. Some choice quotes:
   - A thousand years old and brand new: "If Scotland is a continuing state then both Scotland and the remainder of the UK inherit all aspects and elements of the preceding state in a proportionate manner. If the UK is party to a treaty, after independence both the remaining UK is a party and independent Scotland is a party. If the UK owns an asset beforehand, rUK and Scotland then own that asset proportionately. If the UK has any obligations (such as debts) then those obligations pass to both rUK and Scotland ... Or you are a successor state in which case there is not a single certainty ... If we're out of the EU and we have no access to Sterling, we have no obligation to UK government debt ... there are some downsides to that position. Yes we'll need to agree terms for EU entry ... But it's not all downside; with no obligation to accept debt (and no mechanism via which it can be imposed on us) we have a very strong bargaining position. In fact, if only we could start thinking about ditching Sterling we'd have all the cards."
   - On unicorns for tea: "let there be no more talk of default. Let there be no more talk of 'crippling rates of interest' which (a) recent precedent suggests is pure scaremongering not related to events and (b) refers to the crippling interest to be paid on debts we don't have. If the worst came to the worst and Scotland was left in a position where it had to play its most aggressive card, we would walk away with no debt, no default and no problem raising money."
   - The difference between having and using: "if we set up a deal [the shared constraints implicit in a Sterling Union] to maintain a sensible approach to running deficits in the early years of independence ... that means we're not independent?... Apparently, however, the loss of interest rate-setting and the need to hold to a reasonable pact on deficit are the red line that must not be crossed. Neither of these things are anything like as fundamental to the operation of the state as the loss of control over trade, state investment or domestic law, but for some reason we are supposed to hang our heads and give up. It's not real independence. ... There are only two constitutional positions; sovereign and not sovereign. Being a nation state puts you into the former of these categories. What you do with your sovereignty – and for how long you do it – is then up to you. Hence 'sovereignty'. Britain has given up much more sovereignty already than even the most cautious SNP position proposes we additionally give up post independence. Germany has given up even more. In fact, Germany will probably have given up more power than Scotland when all is finalised. Is Germany a sovereign state? How do the poor Germans get through the day when they realise that their 'independence-lite' constitutional status is barely worth having? ... A sovereign nation is in control, not just now but indefinitely. If Scotland joins a Sterling Zone-pact and if that pact is badly negotiated ... we can just change our mind. We can leave whenever we want, irrespective of what we've agreed. It's called realpolitik and it happens day and daily."
  - Born honest, born clever: "unless the UK accepts Scotland beginning its independent life as a continuing state (something the UK point blank refuses to even contemplate), we have no formal obligation to do, accept or agree anything. This is not Scotland's doing, it is the rules of the game as chosen by Whitehall. ... Still, the people of England were robbed by these bandits every bit as much as the people of Scotland. ... My position is clear on this; if this debt was to be repaid by the elite that created it I'd be off like a shot, leaving them to drown in the backwash of their corrupt financial system. But it isn't. The elite are never the ones that pay for their crimes; it's always the people. And it is the people of England, Wales and Northern Ireland who will be paying for the behaviours of the elite. I for one will have no part of leaving them on their own with no cash to invest in their society while Osborne and Darling enjoy their personal millions. But – and oh what a size of but this is – the terms on which we repay our debt to the English, Irish and Welsh people will be our terms. Every intransigent action take by Whitehall in negotiations which costs Scotland money will be subtracted from that debt. If they really did refuse access to Sterling then the cost of a foreign currency reserve (the cost of running a currency pegged to Sterling) would be taken off that debt. If they mess us around on our share of the assets, we'll make the unilateral decision on what we're deducting in kind. And so on. If the people of the rest of the British Isles want us to take our share then they have the responsibility to make their democratic government behave in good faith. "

# And this post by Prof Christine Bell, Currency Reflections: The Legal Issues, shows that Robin McAlpine is not out on a limb in his interpretation.

# Whilst claiming that 'we really really want a currency union and if we don't get one then our outside option looks pretty good' may be a masterstroke in the bargaining process, it remains the case that a currency union is fundamentally not a good idea: even Krugman agrees.

# This is great: Lasers blast a way forward for nuclear fusion power; but this is disastrous: Fire in the hole: After fracking comes coal

# I like Chris Dillow's examples in When good ideas turn bad

# "So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that “sound” economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant."

# Data visualisation:
   - Guardian Cities interactive map on life expectancy in cities based on LSE Cities’ data
   - James Trimble's maps: http://ukdataexplorer.com/

Tuesday, 11 February 2014

How could independence cost more to provide just the same?

Last week the FT reported that Owen Kelly, the chief executive of Scotland’s financial services industry trade body, Scottish Financial Enterprise, said: "A yes vote would require the creation of an additional financial regulator with hundreds of staff. The cost would run into millions and have to be paid for by the industry in Scotland".

Why would having a regulator in Edinburgh as well as London cause, or not cause, increased costs? Increased costs would arise if the work of the regulator involved a large percentage of fixed costs (say writing regulations) rather than variable costs (e.g. dealing with individual cases). I don't know much about the detail of financial service regulation, but I would have thought that checking the compliance of individual companies (i.e. variable costs) would account for much of the total costs and that any additional fixed costs could be covered by the savings made through reduced office rents and salaries for operation from Edinburgh rather than London.

Suppose there are no additional costs, but no savings, then would this be positive for or against independence? Clearly For. No additional costs so increased activity in Edinburgh must be at the expense of reduced activity in London (they have fewer cases to process because some firms now under jurisdiction of Scottish regulator). 2 minutes of speculation leads me to think that a Scottish regulator is likely to be a net positive for Scottish economy, and net neutral for Scottish financial service firms. But as usual the scream of 'there might be some changes' goes up and it's a massive blow for the independence campaign.

It does highlight a wider issue that many people possibly get wrong: there are public services provided for the UK as a whole that are not currently provided in Scotland - mainly central government services like HMT etc; surely it will cost Scottish taxpayers money to provide these services post independence? Well, no: unless there is evidence for fixed costs in public good provision, then reducing the amount of services required by UK by 8.4% and creating this level of service provision in Scotland, has no net cost to taxpayers. It may be a loss to the London economy and a boost to Scotland's economy to have the high status employment of providing these services located here.

But are there fixed costs in public service provision? You might have thought so, but perhaps surprisingly Deaner & Phillips (2013) (*) do not find any evidence of scale economies when looking across Europe at the costs of providing public services in countries of different sizes.

(*) Section 5.1 ‘Spending by service area – how might it change?’ on page 62 and 63

Wednesday, 5 February 2014

End January Links

# Interesting stats about (English I think) housing markets: 4 charts that prove you know nothing about the housing market

# Francis Coppola has Three posts on Basic Income

# Dude, where's my North Sea oil money & Was the UK government’s use of North Sea Oil a scandal?

# My interview with Michael Greenwell at Scot Independence Podcast

# Read some of the Papers prepared for the Sixth Urban Research and Knowledge Symposium

# Some more interesting material from Business for Scotland, dating from the pre-North Sea Oil period, that I should follow up on: Scotland's century of lost wealth

# The case for Land Value Tax by Noah Smith: This 100-year-old idea could end San Francisco’s class war

# On the Labour proposal to raise the additional rate of income tax back to 50p (related to the behavioural responses in my inequality paper):
   - The IFS: 50p tax – strolling across the summit of the Laffer curve?
   - Frances Coppola: Oh no, not again
   - Chris Dillow: Taxes and growth
   - Simon Wren-Lewis: Understanding ever increasing executive pay

# Absolutely brilliant post from Matthew Yglesias about forthcoming Piketty book on capital and inequality: The Return of Land Prices, featuring the following chart: we're back in the world of Henry George...

Tuesday, 28 January 2014

The state of UK cities

The Centre for Cities produced a very interesting report this week, the Cities Outlook 2014, which has been all over the media. The BBC led with stories about how "the economic gap between London and the rest of the UK is widening because other cities are punching below their weight" and the Guardian described the report as "The great migration south".

The report's headlines are that 80% of new private sector jobs over 2011-12 are in London, and that the migration of the young and skilled to London can indeed be broadly characterised as "London sucks in all of the talent".

The report is consistent with the case I've made previously that the UK apparently suffers, relative to the rest of Europe, from poor regional policy. It is also consistent with other studies of UK cities, e.g. LSE's Henry Overman says: "... an empirical regularity called Zipf’s law. Applied to cities, Zipf’s law suggests that the second largest city should be half the size of the largest, the third largest city should be a third the size of the largest, and so on. To a reasonable approximation, this law holds for the relative sizes of cities in most countries. But it does not hold in Britain where our second-tier cities appear to be too small." And it is important because economic theory (e.g Krugman: The new economic geography, now middle aged) suggests that "'Cities [are] evidence that increasing returns and positive external economies actually play [an] important economic role".

If economies of scale are important, and if most of our cities are too small, then the dominance of London and its hinterland is a big deal. Scale economies are the pre-eminent example of circular, but correct, reasoning: economic activity goes to London because that's where it's most efficient, and it's most efficient because economic activity goes to London. The impact on the rest of us is that economic activity here cannot be justified because it can be better done in London, and it can be better done in London only because not enough is economic activity is being done here. George Rosie describes the loss of company headquarters from Scotland which is an aspect of this process. John Kay speculates on the effectiveness of independence as a solution for this: "How much ... is due to Scotland’s membership of the United Kingdom and how much would have happened anyway in a world in which London is a major financial and business centre is an open question. But certainly, Scotland has not been able to adopt policies of retaining corporate headquarters within its boundaries in ways that it might have been able to do as an independent country."

I've had a quick go at looking at the growth rate of private sector employment and the share of total change in private sector employment of all the cities in the report (done both including and excluding London), and trying to explain these using log population size, dummy variable for parliamentary powers (i.e. 1 for London, Edinburgh or Cardiff, 0 otherwise), travel time to London (drive time from google maps), and the share of the population employed in the public sector. The results are far from conclusive but they suggest all the things that we might expect: negative dependence on travel time to London, positive dependence on parliamentary powers, positive dependence on population, negative dependence on public sector share of employment. The most significant explanatory variable, even if we exclude London, is the dummy for parliamentary powers.



The Centre for Cities finishes with it's 'Key Messages':
   - Cities are not islands
   - Talk of constraining London is misplaced
   - The next largest cities punch well below their weight.
   - The policy privileges afforded to London should be extended to other cities
These are fine: essentially more devolution of power and local autonomy - which is consistent with the results of the above table. But their message about not constraining London is weasel-ly worded. No-one is suggesting "constraining" London - but the implicit subsidies of London should certainly be ended.

Public investment is distorted in London's favour (see e.g. Left Foot Forward's article on the New national infrastructure plan, which featured the following chart). And even though overall public sector employment as a share of population is not especially high in London, its share of central government employment is massive, and this (especially given the talent, status and influence of senior civil servants) will have associated positive spillover effects for the London economy.



The rest of the country also subsidies London wages and housing costs through the London weighting on public sector salaries and housing benefit payments that are linked to local rather than national rental rates. If it is too expensive for the government to employ people and to operate out of London, then it should move its operations, not provide wage subsidies not available in poorer regions. If housing costs are too high and so real wages too low, then people would be discouraged from migrating to London. That would be the natural operation of the market.

As policy stands currently, the rest of the UK subsidises the operation of both the public and the private sectors in London through massive public investment, the placement of a stock (which provides for a "thick labour market") of talented and influential public employees(*), and through wage and cost of living subsidies. In return the rest of the UK sees the loss of its human capital and the elimination of possible economies of scale in other locations. A proposal to spread out central government employment and to eliminate central government funding of this level of public investment or these wage and cost of living subsidies is not a right wing proposal: a local government in London could continue to invest or pay very high levels of housing benefit if it chose to raise the money locally - incomes are high enough to support this. But it must be London that bears the cost of subsidising London, not the rest of the UK. This is not a policy of constraining London, merely a cessation of the policy of favouring London.

Other links:
   - Ron Martin, Ben Gardiner, Peter Sunley and Peter Tyler at the LSE Blog
   - Larry Elliot in the Guardian
   - My article on Concentrating economic activity in London
(*) Business for Scotland has more on relative numbers of civil servants in Scotland, London & UK as whole

Monday, 27 January 2014

What a week!

With the press release of our paper on 'Constitutional change and inequality in Scotland', last week was hectic. Apart from media appearances (e.g. GMS), which are a fairly new experience, the most stressful aspect was the concern that one side or other in the referendum campaign would claim the report as vindicating their position, and that we'd be seen as biased and partial in our analysis. For an example of how political our paper turned out to be, see the last 5 minutes of FMQs last week, which end with Baillie and Salmond arguing over who had read the report most closely!

I started to get worried when I saw the Scotsman article on the paper, which inserted the word "independent" every time our press release mentioned only "Scotland" which gave the impression that independence was somehow worse than the other constitutional options at tackling inequality. I then saw conversations on twitter accusing us of producing research to order for the No campaign. I joined one of these twitter conversations with a link to the press release accompanied by the words "needs a lot of spin to be anti-Indy". When this was repeatedly retweeted I thought maybe I'd gone too far the other way...


Anyway, what did our research say? And what comfort could it give to either campaign?

Our research quantified the impact on the level of inequality in Scotland of small changes in various tax and benefit levels. Our model included behavioural responses to policy changes, including a migration response. The conclusion of the research was that these small changes would have only a minute impact upon inequality levels - to achieve Scandinavian levels of inequality using on fiscal policy would require massive changes to current fiscal policy, which would likely be accompanied by adverse behavioural responses (read: decent proportion of tax base could flee the country).

If we assume that achieving Scandinavian levels of inequality is the aim, then the message of our research is that policy other than simply fiscal policy is likely required to achieve this aim. Changes in labour market policy, and in the levels of public service provision (such as improved childcare provision), that serve to bring down the level of wage inequality before the impact of taxes and benefits must be implemented - perhaps alongside small changes in fiscal policy. Over the course of a generation perhaps, the expectations of the population and the social norms that they operate under, will evolve to permit a more equal, Scandinavian style economy. All very consistent with the policy prospectus underlying the Common Weal project.

Conversely, Taxpayer Scotland also welcomed the report, especially its inclusion of behavioural responses, and they do have a certain logic: the report shows that reducing inequality to Scandinavian levels will be very difficult using only fiscal policy. If actually achieving Scandinavian levels of inequality will be slow and will require the commitment of the population over timescales of a generation or more, then Taxpayer Scotland suggest that the aim of reducing inequality should perhaps be reconsidered.

But what can the campaigns take from this? Well, The No side can claim that as an independent country, the UK already has all the levers that an independent Scotland would gain in order to tackle inequality. Indeed, the lower behavioural responses induced by the whole UK acting in concert, compared to a Scotland acting independently (with the rest of the UK functioning as an outside option for the fleeing Scottish tax base), means that, if the UK was serious about tackling inequality, then it would be easier to tackle as a 'whole of the UK' issue. The No side can also question the commitment of the Scottish population to actually implement policy over a generation to tackle inequality (especially given polling evidence like this).

The Yes side can point to the numbers in the report that show the UK being relatively unequal in OECD terms, markedly unequal in European terms, and extremely unequal when compared with the Nordics. They can point to the rationality of this situation from the point of view of what the UK has to lose in terms of the large contribution to this inequality from the City of London: the UK is not doing much to tackle inequality, and this may be its optimal policy; the UK is unlikely to ever do much to tackle inequality because it has to look after London. They can also point to the fact that fiscal policy is not nothing: power to do something here, even if relatively ineffectual, is perhaps better than the nothing that the UK is doing (in fact the UK may even be going backwards, given future planned welfare cuts). Finally, the Yes side can point to the potential of additional policy levers that do not come under the heading of fiscal policy, and which are unlikely to be included in any enhanced devolution settlement.

As one of the authors, I don’t think the report necessarily strengthens the case for or against independence, but it does highlight that there are real difficulties in using fiscal policy to tackle inequality in either case.

Saturday, 4 January 2014

New Year arguments for Yes

Whilst ranting/discussing on hogmanay about why a Yes vote isn't obviously a bad economic choice and quite possibly a good economic choice, I had the flow of my argument disrupted somewhat. It wasn't just the drink: my problem was that I was actually making two separate arguments, and the logic of one does not translate to the other.

The two arguments were:
  1. Small countries do as well as large countries, if not better
  2. The UK is run particularly badly as far as its peripheral regions are concerned
Obviously saying Germany's great and that the UK does badly and that this is because small countries function better is nonsensical. But I think the two points both stand - it's just that they stand independently (so to speak) of each other.

Consider those countries of Northern Europe which have never been part of the communist block, as the set of suitable comparators: Iceland, Norway, Sweden, Finland, Ireland, UK, Denmark, France, Belgium, Netherlands, Luxembourg, Germany, Switzerland and Austria. All data is 2010 GDP per capita at Purchasing Power Standard from Eurostat.


The trend (solid line) for income per capita against population size is decreasing, hence the first argument. The vertical dashed line shows Scotland's population and the horizontal dashed line shows average income per capita across these countries. The red data point is the UK - slightly below the average for this group of countries, but not by much.

This is not a very strong argument for independence: it is suggestive of small countries doing slightly better than large countries, but tells us nothing about the direction of causality. Small wealthy regions may choose independence rather than independence leading to wealth. It remains the case though that we have circumstantial evidence in favour of the first argument: the small countries of North West Europe appear to do a bit better than their larger neighbours, and this bodes well for the prospects of an independent Scotland.

The second argument is that the UK's regional policy is particularly poor and that the UK is a particularly bad place to choose to be a peripheral region. We have seen that per capita income in the UK is slightly below, but very close to, the average for this group of northern European countries - but how is this income distributed within the country? I rank the NUTS-2 Regions within this group of countries from lowest to highest. If the distribution within the UK was similar to that within the other countries of this group then we should see the regions of the UK (red columns) clustered around the middle of this ranking.



We see that rather than clustering around the middle, the red bars are disproportionately in the bottom half of the distribution, with very few in the upper half. But the UK is not a poor country: it's an average country within this group, so why are almost all its regions in the lower half of the income distribution? The answer is that it has the most skewed regional distribution and London is the richest NUTS-2 region in Europe. The following chart shows the same data as the previous but as deviation in income per capita from the NUTS-2 region with the national capital. The regions of the UK occupy ALL of the bottom spots.



So I think there is strong evidence in favour of argument 2: regional policy in the UK is terrible and if you are not the capital then independence is not a bad idea. Again this evidence is not overwhelming: it could be the case that the UK is fundamentally a very poor place compared with everywhere around it, and the wealth of London is pulling us all up. I don't believe that this is the case though. I think it is likely that policy is such that human and physical capital investment which in other countries is spread around, in the UK is instead directed towards London, and almost every single region of the UK is losing out as a result.

UPDATE: What I've done here repeats some reporting from last summer - http://www.scotsman.com/news/bill-jamieson-data-shows-why-uk-is-truly-divided-1-2944789
http://www.neweconomics.org/blog/entry/Breaking-free-of-London-focused-growth
http://www.heraldscotland.com/politics/referendum-news/london-calling-the-shots.21228380