Sunday, 30 August 2015

End August Links

# "Economically speaking, Britain is losing three or four cities a year. Blame longer commutes" shows a map of the ONS's Travel To Work Areas

# The Up and down, left and right post on Crooked Timber has a fascinating chart showing the relative influence of Thatcher compared to almost every other UK Prime Minister in recent history:
rawlschart
NB x-axis is mislabelled: should say 10th percentile disposable income rather than median.

# Chris Dillow speculates on London's productivity advantage over the the rest of the UK: "The fact is that London is far more productive than the rest of the country - 29.2 per cent more so ... How can this be? The obvious possibility is that ... cities do indeed benefit from agglomeration effects: people learn from living and working alongside each other. ... But there's a problem here. If this were the case, we'd expect that cities generally would have higher productivity than less densely populated areas. But in the UK, this is not so. ... our other major cities such as Birmingham and Manchester have below-average productivity. This is consistent with another theory - that London's wealth is due not to benevolent agglomeration effects but to parasitism. It might be that big legal and financial industries actually depress economic activity elsewhere, in part by sucking talent away from other uses. ... wealthy traders want to sit on top of each other - but this could be because doing allows them to benefit from insider dealing, front-running and rigging markets rather than because of genuine productivity improvements."

# The FT has a related article which anecdotally shows the impact of a region's status - talented people go high-status and help to build the status of the place that the go, but many of the other benefits that talented people bring to an area are zero-sum - if talented person A goes to region X, then benefits accrue to that region that therefore don't accrue to the other regions. Executives erode the north-south divide "the ... company has made several announcements supporting tech start-ups, and cultural and charitable initiatives near its home in north-east England. ... the global group, one of only six English FTSE 100 companies with headquarters north of Birmingham, remains rooted in Newcastle ... and is reinvesting there. The location of company headquarters matters greatly for regional economies but in the UK there is a north-south imbalance. The majority are in London and the south east. As well as conferring kudos, company headquarters support high-level, well-paid jobs internally and in a plethora of professional firms. They can underpin schools, charities, cultural and sporting venues and help maintain a balanced demographic. They can also play a vital role in fostering start-ups and promoting economic activity. These “agglomeration” effects then make it easier to attract skilled people to an area. ... Roger Whiteside ... has noticed a behavioural change among top managers. Instead of relocating their families when they clinch a top job, nowadays, he says, executives “don’t move the family, they move themselves”. Mr Whiteside lives in London but spends three days a week in Newcastle. He says Heathrow’s Terminal 5 is packed with senior executives at 6am on Mondays. ... “I think we are very close to London,” he says. But he adds; “I don’t think people in London think we are close to them.” Getting investors to visit Vertu’s Gateshead base is like pulling teeth, he says."

# Written before the Greek Referendum on 5th July, this piece from Interfluidity is great:
"Among creditors, a big catchphrase now is “moral hazard”. We cannot be too kind to Greece, we cannot forgive their debt with few string attached, because what kind of precedent would that set? If bad borrowers, other sovereigns, got the idea that they can overborrow without consequence, if Spanish and Portuguese populists perceive perhaps a better deal is on offer, they might demand that. They might continue to borrow and expect forgiveness, and where would it end except for the bankruptcy of the good Europeans who actually produce and save? ... the term moral hazard traditionally applies to creditors. It describes the hazard to the real economy that might result if investors fail to discriminate between valuable and not-so-valuable projects when they allocate society’s scarce resources as proxied by money claims. Lending to a corrupt, clientelist Greek state that squanders resources on activities unlikely to yield growth from which the debt could be serviced? That is precisely, exactly, what the term “moral hazard” exists to discourage. You did that. Yes, the Greek state was an unworthy and sometimes unscrupulous debtor. Newsflash: The world is full of unworthy and unscrupulous entities willing to take your money and call the transaction a “loan”. It always will be. That is why responsibility for, and the consequences of, extending credit badly must fall upon creditors, not debtors."
; and
"But don’t the Greeks want to borrow more? Isn’t that what all the fuss is about right now? No. The Greeks need to borrow money now only because old loans are coming due that they have to pay, and they have been trying to come to an agreement about that, rather than raise a middle finger and walk away. The Greek state itself is not trying to expand its borrowing."

# Chris Dillow's Something for nothing culture makes some similar points to my economic efficiency arguments for property tax reform. He makes the empirical point that I had not included that: "across countries, high home ownership is associated with poor macroeconomic performance; Greeks and Italians are far more likely to own houses than Swiss or Germans"

# The market economy’s stability by Beaudry, Galizia, & Portier is interesting. It "suggests that the market economy is inherently unstable and booms and busts arise endogenously as the results of market incentives. ... In the current dominant paradigm [Stable-with-shocks], there is a tendency to see monetary policy as the central tool for mitigating the business cycle. This view makes sense if excessive macroeconomic fluctuations reflect mainly the slow adjustment of wages and prices to outside disturbances within an otherwise stable system. However, if the system is inherently unstable and exhibits forces that favour recurrent booms and busts of about seven to ten years intervals, then it is much less likely that monetary policy is the right tool for addressing macroeconomic fluctuations. Instead, in such a case we are likely to need policies aimed at changing the incentives that lead households to bunch their purchasing behaviour in the first place." Although the article does not then go on to say it, one of the major mechanisms through which households' purchasing behaviour becomes bunched is through the correlating influence of the housing (and land) markets.

Wednesday, 19 August 2015

Benefits of Longannet Closure?

It was announced yesterday that Longannet is to close next year. `PM blamed as end of Longannet looms': ScottishPower have blamed high transmission costs, which Scottish Government Ministers have labelled "discriminatory".

I wrote about this issue prior to the General Election, and I received a response from National Grid. This response stated that "It is true that while there is an excess of generation in Scotland, compared to local demand, then generators in Scotland pay more in transmission charges than those in England and Wales. ... It is worth noting that as the generation portfolio changes, the transmission charges will automatically adjust to reflect the direction of flows on the system – e.g. if further existing generation in Scotland closed that would cause the transmission charges for generation in Scotland to reduce and ultimately reverse."

This is not a point that I've seen in any of the coverage of Longannet's closure. Hopefully someone will be able to find the answer: by how much will transmission charges in Scotland fall as a result of the closure of Longannet? By how much (perhaps in £s per MW of installed capacity) can a windfarm (in Fife maybe) expect to improve its revenues? Could the impact of this closure on transmission charges perhaps mitigate some of the wind subsidy cuts announced by the UK Government?


Monday, 6 July 2015

Land Tax Footnotes

I have a post up at Scottish Property Tax Reform - The economic efficiency arguments for property tax reformThis quick post is to provide some notes, links and qualifications on that longer piece.



The fixed supply of land

It's not 100% accurate to say that no land is withdrawn from supply with high land taxes - it would certainly disincentivise land-owners from funding resource and mineral prospecting on their land which could be considered a form of "land creation". It also disincentivises land-owners from seeking land use re-designations (from agricultural use to residential use say). And I suppose that if someone owned a shallow seabed at the coast that could be reclaimed from the sea given investment, then a land tax would make this investment less profitable. Bryan Caplan raises this issue in A Search-Theoretic Critique of Georgism.

It can be claimed that taxing land taxes positive spillovers created by other private investment (your land value depends positively upon how nice your neighbours land is and upon private amenities close by) and that this may reduce the supply of such investment: The Problem With 100% Land Value Taxes. The anecdotal example given to describe the issue is "Real estate developers who move into neighborhoods with high vacancies, low demand, and high crime are often hoping that positive spillovers from their investment will spur additional investments from others, which will in turn make their investment more valuable." Noah Smith disagrees that land taxes are an issue here: "the problem of neighborhood externalities is a thorny one, but the LVT does not make it worse (or better)".


Land as an asset class

In an OLG model, the introduction of land crowds out productive capital formation - see Deaton & Laroque (2001)


Sounds good – let’s go


Chris Dillow posts a depressing Venn Diagram in The Economic Policy Dilemma:

Finally, worth posting another link to Noah Smith's fantastic summary: This 100-year-old idea could end San Francisco’s class war


Tuesday, 30 June 2015

End June Links

Secular Stagnation As Wising Up

Government borrowing and long-term interest rates: a natural experiment

Bitcoin isn’t the future of money — it’s either a Ponzi scheme or a pyramid scheme

What Assumptions Matter for Growth Theory? is the best summary of the "Mathiness" discussion in econ blogs

# Glick & Rose The currency union effect on trade: Redux: it used to be estimated and presumed that currency union had a strong effect on trade, but recent empirical work has found much weaker effects. Basically the data hint that there are positive effects, but the size of any such effect is a strong function of the econometric technique used, and so we cannot say with any confidence that there is much of an effect on trade from CU.

# 2 pieces of great news from the Netherlands:
   - Dutch court’s climate ruling may force other states to cut emissions – or else
   - Dutch city of Utrecht to experiment in citizen’s income

# Not such good news on the effectiveness of energy efficiency when done in reality rather than under ideal conditions: A new study looks at federal energy-efficiency efforts — and the results are grim

Andrew ZP Smith asks, among other things, if wind energy is actually subsidised: "The chief assistance for onshore windfarm operators comes in the form of top-up payments from bill-payers, above what the operators receive from selling their electricity in the wholesale markets. ... An electricity grid tends to rank different generators in order of marginal cost, prioritising the cheapest forms of generation. ... Cheap electricity is brought online first, and the plants with the highest marginal generation cost are saved till last. ... Wind is never the most expensive fuel on the grid, because its fuel is free. The cost of wind power is almost entirely in construction; marginal generation cost is next to nothing. Therefore when the wind blows and power is generated, it knocks out the most expensive generator (and whether that’s coal or gas, depends on their relative prices, the carbon price, and the relative efficiency of the generators) and it lowers prices across the whole market. Previous research in Germany and Spain has found that these cost reductions outweigh the revenue support paid to wind. Wind is not subsidised in those two countries – indeed, quite the reverse, wind lowers total costs for consumers."

# Evidence on the costs of Brexit? Campos, Coricelli, & Moretti conduct econometric exercises on Norway (which was able to join the EU in 1994, but chose not to) and the other 1994 candidate countries (who did join) Sweden, Finland and Austria. They find that the decision not to join the EU has reduced Norway's productivity by 6%.

# It's not often Celtic and Scottish football get a mention on VoxEU! Dominance in football: An application of Sutton’s theory of endogenous sunk costs

# People often say that lefties support Keynesian demand management because they support big government. Nick Rowe makes a good point that this doesn't make sense: "My beliefs about the optimal size of government don't matter for my beliefs about fiscal policy. My belief that the size of government matters and that there is an (interior*) optimum does matter for my beliefs about fiscal policy. It's why I'm against it." i.e. belief in big government should bias you against Keynesian demand management (all else equal).

# This Diane Coyle post is a bit rambling, but the maps are cool, there are some links that I should go back to, and it ends with a point that I entirely agree with about CBA for transport projects: "standard cost-benefit analysis does not do a good job when it comes to big infrastructure projects ... because it is a tool for assessing marginal changes, not ones which might involve large non-linearities – behaviour changes or network effects. ... it isn’t about saving 20 minutes on your journey time to increase the amount of time you can spend in a meeting at the other end."

Friday, 26 June 2015

Is fiscal austerity contractionary under floating exchange rates?

Nick Rowe points to Scott Sumner pointing to research by Mark Sadowski: basically austerity is strongly associated with weaker economic activity in the Eurozone (so country implementing it does not have control over monetary policy with which to offset the fiscal austerity), but not associated with weaker economic activity in countries with their own currency.

Graphs pinched from Scott Sumner's blog:
# Eurozone/no independent monetary policy -
Screen Shot 2015-06-18 at 11.54.06 AM

# Independent monetary policy -
Screen Shot 2015-06-18 at 11.55.00 AM

Scott Sumner uses this result to claim support for the "Market Monetarist" position (that monetary offset is always possible and so there is no reason to use fiscal policy), over the Keynesian position (that monetary policy is exhausted when interest rates reach their ZLB and fiscal policy should be used). The application of this result to the UK might be that the combination of austerity (to eliminate the government's budget deficit) and expansionary monetary policy (to boost the economy) is a perfectly coherent and practical policy choice.

Is this a valid conclusion to draw? As Nick Rowe says "It's 6 days now, which is a long time in the blogosphere. I have seen posts about who said what about who said what. What I want to see are posts that interpret those correlations. And other interpretations/explanations are always possible (though econometricians bravely try to minimise the number of plausible interpretations). How would you explain them?"

I would guess that an important explanation here is relative devaluation: Using data from BIS, there is a strong negative correlation between the degree of austerity and the devaluation experienced for the floating rate countries. If devaluation is associated with economic expansion (which seems plausible), but under floating exchange rates devaluation occurs at the same time as fiscal austerity, then austerity could be ceteris paribus contractionary, but we would not see the actual contraction under floating rates - so e.g. in Iceland we see austerity (contractionary) and devaluation (expansionary) and overall not much impact. In Eurozone countries we see only the ceteris paribus contractionary effect of fiscal austerity.

The problem for the policy conclusions that you might draw if this is the explanation is that in times of depression, not everyone can devalue against everyone else - it is by definition a zero sum game. So devaluation worked well for Iceland which was small and could achieve lots of relative price movement against e.g. the US, but it cannot work in general. There's still a need for fiscal policy - especially in relatively large currency zones like UK (which is certainly large relative to the Icelandic Krona).

----------------------------------------------------------
Technical results:

# Regression for eurozone/fixed rate countries. Note negative and significant coefficient for degree of austerity (capb) upon economic performance (ngdp): point estimate = -2.12, p_value = 0.1%



# Regression for floating rate countries. Insignificant relationship (p_value = 88.4%) between degree of austerity and economic performance.



# Adding trade weighted exchange rate movement over the period (xrchg) changes the picture. The correlation between the capb and xrchg variables is -63%, and the observed variation in the combination of the two variables enhances the observed negative effect of austerity upon economic activity. The austerity variable is still not significant but its 95% confidence interval includes the point estimate for the fixed rate eurozone economies.


Friday, 19 June 2015

I think effort is required to be this technically illiterate!

BBC Scotland reports today on a new hydro scheme: "Plans lodged with Dumfries and Galloway Council said the scheme will generate about 700 megawatts a year." Now obviously a scheme that delivered energy output at a rate that was accelerating by 700 MW per year would be fantastic: if initial output was zero, within a decade it could be generating all the electricity used in Scotland (less than 6GW) - but I knew the BBC must have got this wrong and presumably the plans were either for a big 700MW scheme, or for a small scheme that generated 700MWhrs per year. They helpfully provided a link.

In a moment of prevarication, I clicked through and saw that the plans said neither! They actually said 100kW. So the journalist must have converted 100kW to 100kWhrs per hour, then multiplied by approximately 350 days per year, and by approximately 20hrs per day to get 700MWhrs per year, and then reported it as 700MW "a" year.

This is mind blowing semi-competent incompetence!

Monday, 1 June 2015

End May Links

# Richard Murphy highlights some interesting research which suggests that tax cuts only promote employment growth if they're directed at the lower end of the household income distribution, with no change on employment if directed towards the top of the income distribution. (Of course I'm only linking to this as confirmation bias - it's the sort of thing I'd like to be true!)

# In terms of SNP policy priorities for Westminster, I agree with Mike MacKenzie's True Grid on Bella: gaining a regulatory and subsidy regime that allows a full exploitation of Scotland's renewable energy resources should be the top priority. The news that the SNP has the chairmanship of the Energy and Climate Change select committee is therefore particularly welcome.

# Wow! No idea is this is feasible or not, but the scale of the idea from ScottishScientist is jaw-dropping: World’s biggest-ever pumped-storage hydro-scheme, for Scotland? Euan Mearns provides some criticism.

# Simon Wren-Lewis provides the best election post-mortem on the macro-economic arguments that played out in the media, and Labour's abject failure in this regard.