In support of dynamic scoring

Estimating the impact of tax cuts is a tricky business. You can fairly easily calculate how the revenue from current income and spending will change, but that’s just the beginning. The problem is that people don’t stand still: they change their earning and spending habits in response to your tax changes, which changes the revenues from the taxes. The UK government is pretty good at estimating that but economists have long known that there are a couple more stages before you have a full picture of what’s going on. That’s why HM Treasury has begun to use a dynamic, computable, general-equilibrium (CGE) model to estimate the effect of tax changes.

CGE models bring us closer to reality…

The CGE model accounts for the long-term effect on the economy of changing behaviour. In the case of cuts in the fuel duty it accounts for the growth in production caused by a reduction in transport costs. Increasing production generates more road traffic, which yields more fuel duty revenues and partially offsets the cost of the cut. Using the CGE model to ‘dynamically score’ (as the jargon goes) the cost of the tax cut incorporates effects these effects that are not a part of the traditional approach. Read more

Book review: Capital

Here is my book review of Capital in the Twenty-First Century [Review of Capital].  I have tried to avoid other reviews, so that I can give a perspective based on my own reading of the book – the only bits I’ve noted before now are these discussions, this twitter post, these “reviews”, and this interview.  As a result, I have probably covered a lot of ground that has already been covered, just in a less informed fashion – my apologies!

My review is very long (20 pages).  Although it is still written as a blog post there are no hyperlinks or links to other blog posts, I’ve tried to go directly to literature instead.  Here is a pdf version of the review [Review of Capital].  So if, instead of reading this online, you’d prefer to make yourself a coffee, grab some dark chocolate, lie down on a bearskin rug in front of a roaring fire, and fall asleep to something, then this review should do the trick.

I will put down a cut down (and more accessible) version at some point well in the future – it already exists but is promised to other people.  In this post I will just put the “summary” section, if you want to read the full review you will have to click on the pdf version of the review.  My review is not very accessible, and I’m sorry about that.  However, I didn’t feel that I could discuss Piketty’s argument as “one thing” when it is very multifaceted – I hope this is clear from the summary at the start.  Going through the argument in the way I have, and then discussing assumptions involved individually, helped me to understand what is going on – so I may as well still share it 🙂

Note:  In the review there were two things I directly said, but I’m not sure if my language was clear enough – but as I can’t access the file prior to posting I’ll just stay here.  1) In the example, the higher MPL from higher K drives up w and drives down r, that is why I state w/r is higher – my language isn’t quite clear enough in it.  2) when discussing the average as the minimum wage worker, the point is that in reality individuals/households “move between” income deciles a lot, making this an awful benchmark – again my language may not be clear enough.

If you catch logical mistakes in the review, I’d love to hear from you – the reason I wrote this without reading anything else was to ensure that I gave the book an honest appraisal, on the basis of my actual understanding.  I’m more than happy to learn where my understanding is wrong.  Here is the introduction and summary:

Read more

Discussion Tuesday (on Monday)

Continuing on with value judgements:

Social groups can evolve to changing social structure surprisingly rapidly.  As a result, basing policy on inherent “social values” (such as for housing) is at best an exaggeration, and at worst nonsensical.

Once again, remember that these are points for discussion – I am not saying I agree or disagree with them.

Note:  The early timing on our discussion Tuesday is to make space for three Piketty Capital related posts this week – the first of which is a book review tomorrow.

What do Easter trading laws and bus timetables have in common?

Today is Good Friday, I have just moved house, and have no food – so I’m trying to work out how to source some.  As a result, you may think I’d be supportive of ACT saying that the Easter trading laws are archaic and need to be overhauled.  But even in my hungry stupor, I realise that there is a potential defence of Easter trading laws – the co-ordination of bus routes.

Now that might seem entirely random, but hear me out.  Making firms close on Good Friday is a way to ensure that no-one is working, and that everyone is on holiday at the same time.  As a result, having the day off today isn’t just having the day off – it is having the day off while everyone else is having the day off.  It is an enforced holiday for all.  This may be a good thing, if there is a “co-ordination failure” in terms of when people take time off.

How does this work?  Say that you value having the day off more when all your friends, family, and arbitrary other people are also having the day off than having the day off with everyone else still busily working – or at least you like that to occur a few times a year.  However, it is costly and difficult to organise a situation where that happens with people.  If individuals take days off on the basis of specific personal plans, or at random, then we will end up in a situation where people take holidays at different times – and as a result, we end up in a pareto inferior equilibrium.  But if the government, or some overarching institution (the Church) organises a day we can all have off together, then we can do that and all be a bit happier for it.

How is this like bus timetables?  Well, the co-ordination of bus routes is another type of co-ordination game – if you have to catch two buses, you would like the times to line up.  If the first bus is too early, your trip takes longer.  If your first bus is too late, you can’t take trip!  As a result, having bus routes planned help out.

Anyway, I’m done with this.  I’m going to go find a service station so I can buy something to eat!  Happy Easter and all that!

General Equilibrium and factor shares

Note:   I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂

I was surprised that there was a chapter focused solely in general equilibrium – and not GE in general, but competitive, neo-classical, GE.  I was especially surprised as such a model isn’t really “built” for distributional analysis – economists often say we need a different framework to do distributional work!

It is a neat chapter though, so let’s pop it in here 🙂 Read more

Neo-Ricardian factor shares

Note:   I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂

Last time I said I thought Neo-Ricardian was Post-Keynesian – it seems like they have similar authors, but the essays focus on different “important elements”.  Furthermore, the direct issues with “neo-classical factor models” are indeed clearer here!  However, the focus seems much more on short-term, and in some ways monetary policy, issues rather than long-term trends in factor shares.  That is ok, but it is important to note that some of the Post-Keynesian models in these chapters are discussing different questions than the questions the earlier part of the book was based on. Read more