The political compass highlights left-vs-right and authoritarian-vs-libertarian. Much neglected is the idealistic-vs-pragmatic dimension.
This post reads as the pragmatist's manifesto.
While I can't disagree with any of these rules of thumb - I'm fairly pragmatic myself - I'm not sure they would actually help in a conversation with someone using a more idealistic framework.
Do you think there's a correlation between idealistic-pragmatic and either axis on the political compass?
(I think you're right that if idealistic people could spot reality when it's pointed out to them, then they'd probably already have noticed. But I think it's still a service to say to the pragmatic "No, you are sane. It's everyone else who's lost the plot.")
I think of myself as fairly idealistic, in that I'll openly take positions such as 'Brexit is good, because Britain being an independent country for future centuries is worth any potential short term economic hit', or 'I don't care if it produces results, giving designer trainers to delinquent kids to get them to stay in school when well-behaved poorer children can't afford them is fundamentally unjust, so we shouldn't do it.' I just also think the world works in a certain way and you have to be realistic about the trade-offs!
Number 7 is a particular annoyance to me and is a red flag in a conversation, indicating that the person I’m speaking with doesn’t really understand their fellow humans.
The only point I would add to your notes is to include a mention of David Friedman's "Hidden Order: The economics of everyday life". As a physicist, I found it really useful for understanding economics, perhaps because Friedman also has a background in Physics and so he explains it in a way that makes sense to me.
How true is 2. for labour - in particular for 9-5 type jobs? E.g. when the threshold for the 45% tax rate went down to 125k, did highly paid workers start working less? (I can't imagine an ambitious lawyer who aspires to be partner would work less. Although they may not be representative!)
Labour market elasticity is pretty well-established.
As with all these things, most people won't change (any more than most people will stop buying eggs if they go up by 10p) - but some will. It may manifest in a decision not to put in the extra hours to go for a promotion, or to not take on an extra responsibility. I personally know people who've made decisions not to take work that would take them into the higher rate tax threshold, or over the student loan repayment threshold.
A recent case where tax had a big impact was with doctors, when pension tax charges caused a significant number to drop their hours (one estimate was 1 in 4 GPs).
I liked that, and you got a new subscriber, but there's a few things I disagree with (or rather, they contradict my priors, so I'm less willing to agree to them).
I get the theory behind 'taxes damage the economy', but you're only showing half the equation, as taxes translate to increase public spending. I accept that individual transactions may be fewer, but it's not clear that the subsequent gov expenditure doesn't counter-balance it in the aggregate.
There's a similar time-blindness with the prisons point. I agree that people in prison commit fewer crimes when they're in prison. However, 99% of prisoners get released into society eventually. If being in prison makes then more likely to offend and more competent at it when they're out, then yes, the *nature* of the prison experience can lead to more crime in the aggregate and in the longer term.
Finally, I increasingly think that rent is a Giffen good. Given how mutch they constitute a person's expenditure, the higher rents are, the less money people have to save for a deposit, leading to needing to rent for longer, increasing demand for rents, which lead to higher rents.
Thank you for subscribing! Your 'rent is a Giffen good' theory excited me enough that I posted it on social media, but unfortunately two genuine economists who I trust to be right about things like this told me it was false. In the words of one:
"It assumes that houses for rent/sale are not substitutes, but renters/homeowners are, so that if I buy a house that affects rental demand but not supply. [It has a superficial similarity] but the actual mechanism by which a price increase leads to a demand increase for a Geffen good is very different (it operates just at the individual level - as the price of potatoes rises, I am forced to buy only potatoes since I can't afford any other food)."
On prisons: that's a fair point and I agree that this might be a factor if you're sending people who carry out petty crimes to prison for 3 months - they lose their jobs and meet other criminals. But for the majority of prolific/career criminals, who commit the vast majority of crimes, the guideline holds.
On taxes, I'm going to defend the position here. The deadweight loss is what gets you: the tax wedge means that the amount of money the Government collects is less than the economic activity that would have happened elsewhere (*how much less* is really key in designing effective taxes). It's basically like friction - yes, you're moving money around, but you're losing something in the process. So it's best to think of tax rises as trading some amount of economic activity for something else you value, such as a healthier population, or more equality, or nukes, or free education, or whatever.
I'm happy to be corrected about the Giffen point, but I don't think I fully understand it (yet?).
I get that houses for rent/ownerships are substitutes, especially in the case of landlords leaving the market, as they'll either sell to other landlords or new owners, soon to be non-renters, thereby reducing the demand for rent.
However, why doesn't the 'rent-Giffen' theory work on an individual level? Surely high rents *do* make it harder (or impossible) for an individual to save enough for adeposit for mortgage, therefore increasing the demand for rent - while making the rental market more attractive to landowners.
It might not be as immediate an economic decision as what you'll eat that evening (potatoes or meat & potatoes), but it still operates on an individual level - no?
Iain - would you view sin taxes (tobacco, alcohol) as also harming the economy, as presumably due to the first rule (supply and demand) they reduce demand for something that has a cost to economy (in health and productivity outcomes, if leave any moral points aside)? Or would this be the exception?
I think you're confusing 'activity you like' with 'economic activity'. Alcohol and tobacco use have a minimal impact on economic activity or productivity (most people die of something, smokers in particular tend to die at the end of a working life - in fact, the net impact on the Exchequer is likely positive (tragically) due to not paying pensions).
The big thing that sin taxes have going for them is that we actively want to discourage smoking so the deadweight loss matters less. If we swap (to make up numbers) 10 units of tobacco-related activity for 7 units of non-tobacco related activity that may well be a win!
With sin taxes I'd worry more about rules 4 and 5: how much can we tax tobacco before the black market starts undermining the legal market? Is a high level of stigmatisation and tax, but with a legal but inconvenient 'escape valve' better than an outright ban, with all the organised crime it might fuel?
The political compass highlights left-vs-right and authoritarian-vs-libertarian. Much neglected is the idealistic-vs-pragmatic dimension.
This post reads as the pragmatist's manifesto.
While I can't disagree with any of these rules of thumb - I'm fairly pragmatic myself - I'm not sure they would actually help in a conversation with someone using a more idealistic framework.
Do you think there's a correlation between idealistic-pragmatic and either axis on the political compass?
(I think you're right that if idealistic people could spot reality when it's pointed out to them, then they'd probably already have noticed. But I think it's still a service to say to the pragmatic "No, you are sane. It's everyone else who's lost the plot.")
That's an interesting perspective.
I think of myself as fairly idealistic, in that I'll openly take positions such as 'Brexit is good, because Britain being an independent country for future centuries is worth any potential short term economic hit', or 'I don't care if it produces results, giving designer trainers to delinquent kids to get them to stay in school when well-behaved poorer children can't afford them is fundamentally unjust, so we shouldn't do it.' I just also think the world works in a certain way and you have to be realistic about the trade-offs!
Brilliant, best substack i have read in months
Thank you!
"If supply is greater than demand, prices will fall, calling demand to increase."
"Hi demand, this is prices. Yeah, I'm calling you to tell you to rise. Yeah, I fell over again. Thanks buddy."
Hyper-prolifif criminals have stolen a 'c' and hidden their crime with an 'f'.
"none mean that criminals behind bars aren’t committing [fewer] crimes."
Also, "But none of these make the first statement first." - should "first" be "false"? And is "...or that it is humane" missing a "not"?
Thanks both, all now fixed!
Number 7 is a particular annoyance to me and is a red flag in a conversation, indicating that the person I’m speaking with doesn’t really understand their fellow humans.
These seem like good rules of thumb more people should bear in mind (including me, no doubt).
On private schools and heroic assumptions: what's your perception of the difference in outcomes between the state and independent sectors?
Is an independent school education not up there with universities as a Veblen good, particularly since there's no £9535 cap on fees?
Oh, and maybe women are just gilding the lily.
And the graphics, what application or software were they created with?
The only point I would add to your notes is to include a mention of David Friedman's "Hidden Order: The economics of everyday life". As a physicist, I found it really useful for understanding economics, perhaps because Friedman also has a background in Physics and so he explains it in a way that makes sense to me.
Good recommendation! I am always pro recommending physicists. :-)
How true is 2. for labour - in particular for 9-5 type jobs? E.g. when the threshold for the 45% tax rate went down to 125k, did highly paid workers start working less? (I can't imagine an ambitious lawyer who aspires to be partner would work less. Although they may not be representative!)
Labour market elasticity is pretty well-established.
As with all these things, most people won't change (any more than most people will stop buying eggs if they go up by 10p) - but some will. It may manifest in a decision not to put in the extra hours to go for a promotion, or to not take on an extra responsibility. I personally know people who've made decisions not to take work that would take them into the higher rate tax threshold, or over the student loan repayment threshold.
A recent case where tax had a big impact was with doctors, when pension tax charges caused a significant number to drop their hours (one estimate was 1 in 4 GPs).
https://commonslibrary.parliament.uk/research-briefings/cbp-8626/
I liked that, and you got a new subscriber, but there's a few things I disagree with (or rather, they contradict my priors, so I'm less willing to agree to them).
I get the theory behind 'taxes damage the economy', but you're only showing half the equation, as taxes translate to increase public spending. I accept that individual transactions may be fewer, but it's not clear that the subsequent gov expenditure doesn't counter-balance it in the aggregate.
There's a similar time-blindness with the prisons point. I agree that people in prison commit fewer crimes when they're in prison. However, 99% of prisoners get released into society eventually. If being in prison makes then more likely to offend and more competent at it when they're out, then yes, the *nature* of the prison experience can lead to more crime in the aggregate and in the longer term.
Finally, I increasingly think that rent is a Giffen good. Given how mutch they constitute a person's expenditure, the higher rents are, the less money people have to save for a deposit, leading to needing to rent for longer, increasing demand for rents, which lead to higher rents.
Thank you for subscribing! Your 'rent is a Giffen good' theory excited me enough that I posted it on social media, but unfortunately two genuine economists who I trust to be right about things like this told me it was false. In the words of one:
"It assumes that houses for rent/sale are not substitutes, but renters/homeowners are, so that if I buy a house that affects rental demand but not supply. [It has a superficial similarity] but the actual mechanism by which a price increase leads to a demand increase for a Geffen good is very different (it operates just at the individual level - as the price of potatoes rises, I am forced to buy only potatoes since I can't afford any other food)."
On prisons: that's a fair point and I agree that this might be a factor if you're sending people who carry out petty crimes to prison for 3 months - they lose their jobs and meet other criminals. But for the majority of prolific/career criminals, who commit the vast majority of crimes, the guideline holds.
On taxes, I'm going to defend the position here. The deadweight loss is what gets you: the tax wedge means that the amount of money the Government collects is less than the economic activity that would have happened elsewhere (*how much less* is really key in designing effective taxes). It's basically like friction - yes, you're moving money around, but you're losing something in the process. So it's best to think of tax rises as trading some amount of economic activity for something else you value, such as a healthier population, or more equality, or nukes, or free education, or whatever.
Thanks for the comment!
I'm happy to be corrected about the Giffen point, but I don't think I fully understand it (yet?).
I get that houses for rent/ownerships are substitutes, especially in the case of landlords leaving the market, as they'll either sell to other landlords or new owners, soon to be non-renters, thereby reducing the demand for rent.
However, why doesn't the 'rent-Giffen' theory work on an individual level? Surely high rents *do* make it harder (or impossible) for an individual to save enough for adeposit for mortgage, therefore increasing the demand for rent - while making the rental market more attractive to landowners.
It might not be as immediate an economic decision as what you'll eat that evening (potatoes or meat & potatoes), but it still operates on an individual level - no?
Iain - would you view sin taxes (tobacco, alcohol) as also harming the economy, as presumably due to the first rule (supply and demand) they reduce demand for something that has a cost to economy (in health and productivity outcomes, if leave any moral points aside)? Or would this be the exception?
I think you're confusing 'activity you like' with 'economic activity'. Alcohol and tobacco use have a minimal impact on economic activity or productivity (most people die of something, smokers in particular tend to die at the end of a working life - in fact, the net impact on the Exchequer is likely positive (tragically) due to not paying pensions).
The big thing that sin taxes have going for them is that we actively want to discourage smoking so the deadweight loss matters less. If we swap (to make up numbers) 10 units of tobacco-related activity for 7 units of non-tobacco related activity that may well be a win!
With sin taxes I'd worry more about rules 4 and 5: how much can we tax tobacco before the black market starts undermining the legal market? Is a high level of stigmatisation and tax, but with a legal but inconvenient 'escape valve' better than an outright ban, with all the organised crime it might fuel?