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Less austerity will always mean more tax

Less austerity will always mean more tax

There is a great deal of discussion, following the election, of relaxing or even abandoning austerity.

There is an equal amount of confusion about this, because the same word is being used to describe two quite separate concepts.

The consequences of the government changing its policy on austerity are dramatically different, depending on which one it is.

One meaning of the word is what we might call “social austerity”. From any given pot of money available to a government, its supporters believe that, in general, tax cuts should be promoted rather than public spending increased. Opponents argue that public spending as a result has become underfunded. Local councils, education, and the NHS all need more money.

Social austerity can be relieved, as even the DUP and some Conservatives argue, by increasing spending appropriately, and funding it by increases in taxation. This was an important aspect of Labour’s manifesto, and the tragedy at Grenfell Tower has intensified the discussion around it.

The main risk is purely political. Are voters really and truly willing to pay more tax, rather than just wanting someone else to pay it?

There are some potential adverse economic consequences if the policy of higher taxation is pushed too far. Former French President Francois Hollande’s 75 per cent tax rate led to several hundred thousand skilled young people leaving France, mainly for the UK. If companies are taxed too heavily, they may choose to locate to another country. Both skilled labour and capital are geographically mobile.

But, within reason, social austerity could be relaxed without perhaps too many fears in this direction.

“Economic austerity” is quite a different matter. Opponents of this want to increase the gap between government spending and tax receipts – the so-called fiscal deficit. This is funded by issuing government bonds. So the deficit in any given year goes up, and the outstanding stock of government debt also rises.

Any relaxation of social austerity is paid for by higher taxes now. Any relaxation of economic austerity is paid for by borrowing more now.

But the debt has to be repaid at some point, and the interest payments on it must be met. So taxes in the future will be higher. Either way, less austerity means more tax.

John Maynard Keynes himself made it very clear that increasing public spending at a time of full employment would simply lead to more inflation. There are areas of the country where there probably are people registered as unemployed who genuinely do want to work – the Welsh Valleys, for example. But the rest of the UK is at full employment.

The number of people in employment is at an all-time high, at 32m. This has risen by 2.8m since 2010. Meanwhile the unemployment rate has fallen from 7.9 per cent in 2010 to just 4.6 per cent today.

Any major fiscal stimulus to the economy now would simply bid up wages, leading to higher costs and higher inflation.

The public mood on social austerity may have shifted. But the case for economic austerity is stronger than it has ever been.

As published in City AM Wednesday 21st June 2017

Image: People’s assembly by Peter Damian is licensed under CC by 2.0
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Don’t fear robots taking your job – worry about them cutting your wages

Don’t fear robots taking your job – worry about them cutting your wages

Robots and artificial intelligence (AI) seem to be in the news all the time, and breakthroughs are announced regularly.

Last year, it was an AI programme which beat the world champion at Go, a game immensely more complex than chess. Now, in the austere American journal the Proceedings of the National Academy of Sciences, comes news of a big step forward in the task of getting AI programmes to think like humans.

Once we have learned to ride a bike or swim, we can remember how to do it, even after a lapse of many years. In the meantime, we will have learned many other skills as well.

This is straightforward for humans. But it has proved to be extremely difficult for AI. When an algorithm such as a neural network learns a new task, the challenge is to prevent it from “forgetting” how it solved previous ones, how to stop its knowledge from being overridden. A big team from Google’s Deep Mind and Imperial College London claims to have solved the problem.

Scientific progress such as this is uplifting and inspiring to read about. Yet there always seems to be a downside. On almost the same day as the Deep Mind paper was publicised, the latest in a series of gloomy reports about the impact of robots and AI in general on jobs was released by PwC.

“Up to around” 30 per cent of existing UK jobs are susceptible to automation by the early 2030s, intones the firm’s blog on the report. Many others have come up with similar sorts of numbers.

For economists, the question of the impact of AI on the labour market is not so much about the eventual impact on jobs. It is about the level of real wages at which jobs will continue to exist.

We have seen massive technological progress for over 200 years. Huge numbers of jobs have been destroyed, but many others have been created. Professor Len Shackleton of Buckingham University points out that, in the census of 1841, domestic servants made up one quarter of all jobs. Lots more were in what he calls the “horse economy”, for railways had scarcely begun. Almost all of these disappeared long ago. Now, we have behavioural pet therapists instead.

Bob Rowthorn at Cambridge and Stephen DeCanio at the University of California have both separately extended the standard model of economic growth to include a robot (AI) sector. DeCanio’s summary is almost a popular caricature of economists: “an increase in robotic labour can have either a positive or a negative effect on wages”. But both of these highly technical papers are serious attempts to grapple with trying to understand the circumstances in which AI will either raise or depress real wages. The answer is not obvious.

Apart from a brief surge of interest in the 1990s, the mainstream model of economic growth has not really been worked on since its inception in the 1950s. But it offers a powerful framework for understanding the impact of AI. Economists should start to focus on it again.

As published in City AM Wednesday 29th March 2017

Image: TOSY Ping Pong Playing Robot by Humanrobo is licensed under CC by 2.0
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