As published in City AM Wednesday 27th March 2019
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HMRC’s programme to make tax digital continues to roll out.Anyone with a small business will know about the imminent deadline of 1 April, when VAT returns become digital. Quick to seize an opportunity, several companies have developed software to ease the task. The digitisation of tax raises the wider issue of whether technology will help the Office for National Statistics (ONS) put together faster and more reliable measures of the state of the economy. The VAT returns potentially give the ONS real-time information. The current methods of constructing the national accounts – the picture of how the economy is doing – remain rooted in the twentieth century. Ron Jarmin, the deputy director of the US Census Bureau, writes in the latest issue of the top ranked Journal of Economic Perspectives that: “current measurement programs are not keeping pace with the changing economy, and current methods for collecting and disseminating statistical information are not sustainable”. For example, national accounting bodies such as the ONS and the Bureau of Economic Affairs in America still rely heavily on sample surveys for their information. Jarmin points out that surveys are encountering increasing problems. Response rates by both households and companies have declined substantially, increasing costs and threatening quality. The intellectual conservatism of outfits such as the ONS is illustrated by measurements of well-being, or happiness. Hailed as an innovation when David Cameron instructed the ONS to produce this in 2014, it is based purely on old-fashioned survey questionnaires. Economists in general are traditionally sceptical of survey-based approaches. The respondents, in the jargon of economic theory, simply state their preferences when answering a series of questions. Economists place much greater weight on preferences which are revealed by the actions which people take. In the 1980s in Britain, survey after survey showed a stated preference for higher taxes and more public spending. Yet in their actions at the ballot box, people kept electing Margaret Thatcher. They revealed a preference for the exact opposite. The online world is replete with revealed emotions. Indeed, the entirely new language of emojis has evolved to allow people to do this. Modern machine learning techniques can readily translate the text of tweets and blogs into a scientifically-based measure of wellbeing. And they can do so much faster and more reliably than the survey methods used by the ONS. Jarmin urges governmental statistical agencies to rely much more on digital information in general. He argues that material “generated from transactions, online interactions, sensors, the internet of things, and many other sources can be used to capture various aspects of economic activity”. He notes the massive increase recently in the number of economists working for tech companies in the US. Here, innovative methods of data collection and analysis are the norm. Statistical agencies such as the ONS need to show the same energy and move much more rapidly into the twenty-first century.
As published in City AM Wednesday 20th March 2019
Image: Berlin Wall by Jed Record via Flickr is licensed under CC BY-2.0Read More
As published in City AM Wednesday 13th March 2019
Image: Police via Wikipedia is licensed under CC BY-SA 3.0Read More
The idea that the Earth is flat is a rapidly growing trend on social media. The Flat Earth Society’s Twitter feed has the best part of 100,000 followers.
The evidence of major natural experiments, which contrast the performances of economies based upon market-oriented principles with those based upon the planned economy ideology of socialism, is decisive in just the same way.
Compare the US and the Soviet Union, East and West Germany, North and South Korea, India and China under different forms of socialism versus under different forms of capitalism. In each example, the capitalist country performed far better than the socialist one.
This is discussed in an interesting new book by Kristian Niemietz, head of political economy at the Institute of Economic Affairs (IEA), entitled “Socialism: the failed idea that never dies”. (As a disclaimer, I am a member of the IEA’s academic panel but was not involved with this book).
The main theme describes the attitudes of western left-wing intellectuals towards socialist societies. The author covers the Soviet Union, China under Mao Zedong, Cuba, North Korea, Cambodia, Albania, East Germany, and Venezuela.
Niemietz identifies common trends in how western believers in socialism have reacted to each of these regimes.
There is an initial honeymoon period, where the experiment generates some evidence that it might be working. The Soviet Union in the 1930s, for example, was industrialising rapidly. Western admirers such as George Bernard Shaw conveniently ignored the mass famines in Ukraine and the millions of people in the labour camps. They eulogised the new type of society.
Eventually, the negative evidence becomes too strong to sweep under the carpet. Supporters then become angry and defensive. They question the motives of their critics and there is a frantic search for excuses.
The third and final stage sees western socialists deny adamantly that this particular example ever constituted real socialism. Socialism did not fail, because the country was never actually socialist to begin with.
These points are not just of abstract interest. Niemietz sets out in detail how the current Labour leaders, Jeremy Corbyn and John McDonnell, have gone through exactly these three phases in their attitudes towards Venezuela.
The final part of the book considers why such an obviously wrong idea continues to attract support.
Niemietz recognises that this is probably a job for psychologists, but being an economist, he looks to see what economic theory can say.
A key point is simple cost benefit analysis. Western intellectuals can acquire prestige and admiration for defending socialism, but never have to incur the costs involved of actually living under that system.
But if Corbyn and McDonnell have their way, the bien pensants of North London would learn for themselves what socialism actually means. Unfortunately, the rest of us would as well.
As published in City AM Wednesday 6th March 2019
Image: Berlin Wall by Flickr is licensed under CC BY-SA 2.0Read More
Sydney University’s Centre for Complex Systems does innovative work on a broad range of topics.
Climate change is, quite literally, a hot topic in Australian politics. The country melted in 45-degree record temperatures in January, and upcoming federal and state elections are concentrating minds.
Both the main political parties have ambitious targets for emissions reduction. The centre-right coalition government wants to cut emissions by 26 to 28 per cent by 2030. The opposition Labor party, which until very recently was the firm favourite to win the General Election this year, aspires to slash emissions by no less than 45 per cent.
A major report was released last week describing the results of an economic modelling analysis of these plans.
Of course, any such exercise has to be surrounded by many caveats and cautions. But the author, Brian Fisher, has a good pedigree. For many years he headed the Australian Bureau of Resource Economics, and has been involved with the UN’s Intergovernmental Panel on Climate Change.
Under Australian Labor’s plans, for example, Fisher’s report suggests that GDP in 2030 would be nearly 10 per cent lower than it would otherwise be.
A key point is that, in the jargon, the marginal abatement cost curve is non-linear.
Essentially, at the start of any plan to cut emissions there is some low-hanging fruit.
The first steps in reduction can be carried out fairly easily. Cars, for example, have already become far cleaner in recent years without consumers feeling any noticeable pain through higher prices.
But these easy gains soon become exhausted. Further reductions have larger and larger negative consequences for the economy.
With each extra bit of abatement, the costs rise more and more. At some point, they start to explode.
The results come as no surprise to economists. Cutting carbon dioxide emissions is a costly business.
William Nordhaus received the Nobel Prize in economics last year for his work over the past four decades on the economy and climate change. His analysis shows very clearly that targets set by the UN, for example, to control global temperature rises are enormously expensive.
The current climate change strikes by schoolchildren in the UK are a direct copy of those which happened last November in Australia.
These children are owed a fair and detailed conversation about the costs of the policies which they are calling for and how that would impact their lives, from making their smartphones and other gadgets more expensive, to putting up the costs of any holiday plans they might have.
Many liberals seemed to encourage the strikes. They appear to hold the opinion that good intentions are all that count. The Duchess of Sussex, for example, feels able to both campaign on climate change and take a private jet from New York back to the UK.
But if serious action is going to be taken on the climate, both politicians and scientists have to be more explicit about the costs. A proper, mature dialogue with the electorate is needed.