Click to get your own widget

Saturday, February 12, 2011


   Joseph Friedlander pointed me to this article on why life is not improving for ordinary people as fast as it used to. The article comes to similar conclusions as I have previously - state parasitism - and indeed to a not greatly different figure for it:

People on average are more educated, enjoying vastly better health, are living vastly longer, suffering (physically) vastly less and are, in absolute terms, vastly wealthier than at any time in human history. In London, they are seemingly happier, or at least more visibly joyful, than most urban populations ...

two prominent economists, Michael Mandel and Tyler Cowen have been writing about what they term is an ‘innovation interruption’ or an ‘innovation slowdown.’ Mandel puts his best case forward in his 2010 article, “Why the Jobs Crisis is Actually an Innovation Crisis”. In his ebook, The Great Stagnation Cowen, argues for this being an era of technological stagnation in considerably greater detail, and invokes a different primary causal mechanism, namely the idea that the US economy has been driven by a binge supper on the “low hanging technological and natural resource fruit” that was available until the early 1970s in the US.

I first noted, and wrote about this slowdown in everyday technological transformation, and working and middle class wealth, in the late 1980s, and I christened it the “Family Affair” paradox. Family Affair was a television sitcom that ran from 1966-71. The program was bland and unremarkable, but one thing I noticed watching a rerun, whilst confined to a doctor’s waiting room, was that nothing in the living spaces that the program played out in would have been out of place in 1989. The only noticeable changes were automobile styling and womens’ couture. Since I am a ‘classic movie buff’ with an insatiable appetite for films from the 1930s through the early 1960s, I noticed that it would be impossible to mistake an interior from 1940, for one from 1950 – let alone 1960. This phenomenon was brought home to me again some years ago when I toured “A kitchens of the 20th Century” exhibit at the Smithsonian, in Washington, D.C. The slowing of apparent technological change and growth in wealth (spaciousness and quality of finishes), mirrored what I had seen in film and television – and what Mandel and Cowen assert their economic analyses also show...

Mandel and Cowen have a number of arguments to explain this slowdown, and far more importantly, they have the solid economic data to back it up. Their arguments are that at least these factors in play:

The US was still largely virgin territory at the beginning of 20th century. It still had vast fossil fuel reserves, a huge reserve of unexploited and agriculturally rich land, and a largely rural population of intelligent and ambitious young people who were uneducated – and thus could be turned into a valuable asset not previously available. That’s all gone now.
The most transformative basic technologies that have created widely distributed wealth and jobs were largely products of the 19th century scientists and entrepreneurs. Edison, Tesla, Ford, Dow, and DuPont did the ‘easy’ and highly profitable science that really produced widespread improvement in the standard of living, such as artificial lighting and widespread electrification. These ‘easy’ technologies have now been harvested, much as is the case, say, in physics. Newton could integrate physics and invent the calculus whilst sitting under an apple tree in Woolsthorpe. All he needed was his mind, and a considerable body of observation that required little technology, but a great deal of time and patience (both of which were at premium before the Industrial Revolution). Still, he did not require a large hadron supercollider, nor any other multimillion, let alone multibillion dollar infrastructure. Those days have largely vanished from physics; and from many other branches of science , where the ‘oil oozing out of the ground’ has been scooped up and sold. Science, like oil exploration, has had its easy pickings, after which point, discoveries get more difficult and costly to tease out of the natural world.

This civilization treats scientists like garbage. I have written letters to the London Times and to The Guardian expressing my sadness and frustration that while there are countless statues to soldiers and generals – there are none to Darwin, Newton, Telford, Turing, or the countless other British minds that essentially enabled scientific-technological civilization. My suggestion to put a statue of Newton or Darwin on the Fourth plinth in Trafalgar Square (which is empty of sculpture or statuary) was rebuffed in a snide email from an editor at The Guardian who suggested that I “return to the US, and erect such statues in my hometown.”
All of these observations are, of course valid, and no doubt contribute significantly to the technological slowdown. However, as attractive as I find these ideas, they do not begin to adequately explain the current economic situation, nor do they really explain why we are all not a lot richer than we are. I say this because by any measure of actual increase in the efficiency of production, we should be much, much richer than we are...

more importantly... the fraction of that wealth that is retained by the people who really create it...

Determining how much wealth has been diverted is a tricky thing to determine, because you have to subtract out various kinds of parasitism, which is very difficult to do on an objective basis. For instance, governments do provide real benefits and services for their citizens; clean water, transportation infrastructure, law enforcement, the justice system, sanitation and public health, and so on. These things are costly and necessary. But how costly are they in both absolute and relative terms, and what is essential, and what is simply waste, theft, or bad decision making?

When I first got interested in this issue my perspective was very simplistic: historically nation-states (and empires) collapse when the taxation burden on their populace exceeds ~30% of the GDP, or its equivalent. So, it would seem simple enough to look at the taxation rate and come up with a number as to how close to that historical margin we are at any given time, assuming, of course, that this number still applies, because in the past, peoples’ incomes were just barely enough, or a little more, than was required to keep them alive, or in a modest (very modest by today’s standards) zone of comfort...

The huge absolute growth in wealth has thus destroyed the utility of this at least 2,000-year-old indicator for predicting how much theft is intolerable to the continued functioning of the socioeconomic system...

[a long list of taxes, licence, regulations and additional costs] often represents theft, or the shifting of taxes from productive creation or maintenance of civil infrastructure to wasteful, or actually destructive (actively destructive) spending. By the mid-1990s, I reckoned that actual taxation on productivity was in the range of 60% to 70%. It simply was not obvious, because so much of it was hidden, and it was not felt, because the wealth being generated by increased manufacturing and data handling efficiency was so vast, that it was now possible for people to be very comfortable on what amounted to the leavings from their real productivity.


I commented
On government parasitism it is the case that the government share of spending has grown from about 6% in the mid 19th C (a historic low) to officially just over 50% in Britain today. A further point is that the economists’ rule of thumb is that regulation costs the regulated 20 times what it costs government to run it. Thus 200,000 “health & safety” inspectors destroy the wealth produced by 4 million workers. We may be very glad that most government employees have no economic effect either way. I have done my calculations here of how government regulation destroys the equivalent of 100% of our actual economy & thus 50% of the potential economy we could have & subsequent research suggests this is not an underestimate. Combined that is government robbing us of 75% of our potential wealth, a figure close to the one in this article but calculated from a different direction.

One interesting counter example is Japan where, after spectacular growth, we have had 2 decades of zero growth. This is probably partly because government reorganised the economy to make keeping the banks solvent the prime objective so partly government parasitism; partly because they have an aging population; but I suspect partly because they had reached the top of the world technological tree at the time and had nowhere to go.

On that basis I would suggest that space development is the obvious “place to go”. I also think that the way to stimulate innovation, both in that field and others, is X-Prizes. Probably simplifying & enforcing patents laws so that inventors get more money than patent lawyers & the regulators who regulate new products out of existence would also help. I have proposed putting 2% of GNP into assorted X-prizes as something that would provide real technological progress & grow everybody’s economy by at least 2% annually (let alone 2% overall). This is something positive government could actually do which would improve on the free market which normally is the default best route.
  With further thought his assessment of state parasitism at 60-70% is even more closely comparable with mine at 75% since his calculation is based on American experience where the government sector is still lower than the 50%+ here (though 1/4 of that is done by borrowing rather than taxing, which is a way of taxing the next generation who don't yet vote). When independent calculations come up with the same result they multiply their credibility.

   Note that in Scotland the state sector is about 60% of the economy and regulations notoriously make building and some other things about 10% more effective. This brings the parasitic sector up to at least 80% of national income. This fits well with the observed fact that we are about 10% poorer than England  despite getting a "union bonus" from the Exchequer roughly equal to the oil taxes from Scottish waters.

    Obviously if this parasitism were removed we would be anything up to 4 times better off. All we have to do, as Frank Castle said to a lady who was scared living in New York but afraid to move out "Just do it".

UPDATE In comments Mark Wadsworth has a 3rd calculation which assumes less of the potential economy is destroyed  & includes some of the money government takes being returned to us but still comes out in the same ballpark:
"taking actual GDP as £100, normal people get to keep:

minus £50 publicly collected taxes
minus £17 privately collected taxes
plus £5 cost of core functions
plus £15 welfare and pensions
plus £8 value of NHS and education
= actual net income £61

But compare this with what GDP would be in the absence of taxes on income* (£133, let's say), "

Labels: , ,

75% seems "about right"

There's an unknown figure for the deadweight cost of taxes and regulations (i.e. goods and services which are never created and traded) which might add a third to actual GDP, so by reverse maths, 25% of GDP disappears.

Then of actual GDP, 50% goes in publicly collected taxes (income tax, VAT and the like).

Of the 50% that we can keep, another third goes in 'privately collected taxes', being primarily land rents/inflated mortgage payments but also the higher prices that cartel and monopoly suppliers can charge (see also, wild overpayments for public infrastructure).

But, to be fair, the government pays about 5% of GDP for 'core functions' (law and order, road maintenance, refuse collection), so that money isn't wasted, and it dishes out 15% of GDP as welfare and pensions, and the 'free' NHS and state education are worth half what the government pays for them (15% of GDP) but they are still worth something (say 8% of GDP) to the recipients.

So taking actual GDP as £100, normal people get to keep:
minus £50 publicly collected taxes
minus £17 privately collected taxes
plus £5 cost of core functions
plus £15 welfare and pensions
plus £8 value of NHS and education
= actual net income £61

But compare this with what GDP would be in the absence of taxes on income* (£133, let's say), and we are looking at normal people's income being slightly less than half of what they would be with smaller government/no taxes on income*

This is a bit more optimistic that your estimate of a quarter (but I'm sure we could iron out the differences).

* Note: I don't say 'in the absence of taxes, full stop' because there's no harm in taxing land rents - if the government doesn't collect them then private rent collectors (i.e. landowners and banks) will do so.
My estimate in the previous linked article was that deadweight of regulation eliminates the equivalent of 100% of remaining GNP. This consists of the assumption that regulation costs 20 times as much to the regulated as to the state; that the EU have acknowledged their regulations alone destroy 5.5% of GNP; that certain industries, that 75% of housing (& I now believe 93% of electricity) and some other targeted industries represent state parasitism.

On the other hand I wouldn't count "privately collected taxes" (ie rent) in the total, though I would count the BBC licence and carbon levy which I suspect don't count in the official 50% tax rate.

So that gets us to £61 + £17 = £88 out of £200 or 44% but that assumes £28 of the £50 spent by government is competently spent which, looking at things like the new Forth crossing, I suspect optimistic.
NC: "My estimate in the previous linked article was that deadweight of regulation eliminates the equivalent of 100% of remaining GNP."

I agree, this is an unknown. I am absolutely certain that deadweight cost of taxes is about 25% of potential GDP (i.e. one-third of actual GDP). It may be that deadweight cost of regulations is another 25% of potential GDP, but surely not half?

The 5% cost of regulations seems a fair estimate of actual cost (i.e. at least 1 million people waste their time complying with it) but to scale that up by twenty seems a tad pessimistic even by my hyper pessimistic views.

But like you say, the gap is huge.
The 5.5% was the estimate of Gunter Verheuggen the EU "Enterprise" Commissioner and was limited only to the extra regulations the EU impose. I think my estimate of housing costs and of electricity costs, each of which forms not only a large industry but one whose costs feed through to everything are well justified. Indeed at the time of the initial calculation linked I assumed electricity to be 75% parasitism but, following the Centrica quote in another post this week, think it should be 93%.

Admitedly this does not mean that the day after useless bits of government are abolished we will all get that much richer - it would need years for structural change to work through.

On the third hand I have made no allowance for the increased growth rate we could have had if allowed. Assume 9% growth rather than 2% over the last 20 years and we would all be 4 times better off from that alone - though I think that would have tombe both a cause and effect of significant investment in space. That is perhaps developing the argument to far for this point.
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?

British Blogs.