Opinion

Edward Hadas

Taxes and human nature

Edward Hadas
Jan 30, 2013 14:54 UTC

The tax system could well be the most idiotic, hypocritical and unnecessarily complicated part of modern industrial economies. The system needs to be rebuilt.

In developed economies, as governments have expanded, taxes have increasingly been used as a tool of economic and social policy. The rich are taxed more than the poor for the sake of a vision of social justice: from each according his ability. Depending on the jurisdiction, some good cause or another is favoured: house ownership, marriage, children, charitable contributions, savings. For companies, an almost endless series of exemptions, deductions and definitions are supposed to encourage investment, employment or some other desirable end.

Each tax wrinkle produces its own complex set of rules. Taxpayers’ continuous efforts to minimise payments lead to yet more rules. Each tax jurisdiction has its own system, a diversity which both increases the intricacies of international business and creates opportunities for individuals and companies to place income where it is less highly taxed.

The complexity has created a lucrative business in tax advice, but it is hard to see how the overall system promotes either economic efficiency or social justice. The complexity does have one clear effect; it alienates people from their governments. The tax law evokes frustration and a righteous indignation which is often undercut by the fervent desire to hold onto particular tax advantages.

The recent moves against tax havens and some corporate tax shifting are a welcome exception – a few parts of the tax system are actually becoming less unjust. Foreign governments used mostly to ignore the practices of banks in Switzerland and other havens, but an international campaign against some of their practices has been effective. A more recent campaign against egregious corporate income-shifting seems to be gathering momentum.

The demographic effect

Edward Hadas
Jan 23, 2013 15:26 UTC

The populations of many countries are declining in a time of peace and prosperity. That unprecedented and basic change in society must indicate something, but what? The experience of Japan, where the trend is most advanced, provides some hints.

Until about 1950, Japan followed the once universal pattern of population increasing along with incomes. Then the birth rate began to decline. By around 1970, the birth dearth began; from then on there have been too few babies to keep the population constant. For the past two decades, roughly 140 children have been born to every 100 women. At that rate, each generation is about a third smaller than the last, although lengthening life expectancies kept the total Japanese population from falling until 2011.

One effect of this demographic transition is undeniable. It has sharply reduced the size of the dynamic core of the economy: the people who are starting their adult life. They bring ambition, flexibility and a strong desire for new housing and amenities. In Japan, this group, the people between 20 and 25 years old, is a quarter smaller now than in 2000, and is set to decline by another 15 percent over the next two decades. Demographic factors are not the only reason Japan’s GDP growth has been slow – 0.6 percent annual rate over the last decade – but they have played a major role.

The then and now of pensions

Edward Hadas
Jan 16, 2013 14:50 UTC

What is the right size for pensions? That question can be approached in two ways: “then” and “now”. Pensions, and other economic arrangements to support elderly people, may be considered repayments for what they did back then, when they were young. Alternatively, these payments may be considered as a share of output right now. In rich countries, the two approaches are in conflict. The “then” logic, which is based on promises made long ago, supports higher pension payments than the “now” logic, which is mindful of rapidly ageing populations. Politicians struggle to find acceptable compromises between the two approaches.

Until 60 or 70 years ago, politicians did not have to worry much because governments played a minimal role in supporting the few people who lived long enough to be unable to earn their keep. The elderly mostly relied on their own families for support. Moralists provided a “then” justification for this obligation: children had a duty to the parents who gave life, the young owed the old more than could ever be repaid for the provision of nurture and wisdom.

Philosophers and religious teachers often claimed that the duty of children to parents was as natural as that of parents to their children. However, many people must have remained unpersuaded. Otherwise, the injunction would not have been repeated so often in such solemn tones.

What Islamic finance can offer

Edward Hadas
Jan 9, 2013 13:53 UTC

The Islamic approach to finance was once the most advanced in the world. The period of pre-eminence ended six or seven centuries ago, but the religion’s fundamental insights into the field could help form a financial system suitable for the 21st century.

From the beginning, Muslim teaching took a religious view of commercial relations and responsibilities. There are a few injunctions in the Koran and far more in the teachings traditionally attributed to Mohammad. I am not an expert, but the basic ideas seem clear enough: merchants should be fair, risks should be moderate and understood, and God condemns all rapacious financial practices.

During the first centuries of Islam, Muslims became great traders, providing an economic bridge between Asia and Europe. Europeans adopted and then further developed the Islamic techniques of providing credit and of sharing responsibilities, risks and rewards. Christian thinkers continued the Islamic debate over what was fair and just, and church authorities copied the Islamic teachers’ practices, ruling on the legitimacy of transactions, and exhorting merchants and investors to restrain their greed.

Greed, justice and deception

Edward Hadas
Dec 19, 2012 12:15 UTC

Greed contributes to all the economic and financial woes of prosperous societies. The United States and other rich countries produce much more than is needed to support all of their people in comfort, so if desires were all truly modest, there would be few problems. Greed encourages people to decide that their own share is too small. Greed influences the popular desire for GDP growth (more, faster), financial gains (higher house prices as a human right) and total economic security (guaranteed pension, come what may). Voters’ greed encourages governments to spend more and tax less.

During the boom years, politicians and economists consistently underestimated greed’s disruptive power. While few endorsed the extremist view that greed is actually good, even fewer acted as if it were dangerous. The rhetoric changed during the crisis. It has become fashionable to add “greedy” to the description of any unpopular group – bankers, highly paid executives, rich people in general, welfare cheats.

In theory, the entry of greed into the public discourse ought to be helpful. If those subject to immoderate desire could be identified with certainty, then society might take up arms against them. While we might never win the battle, we could at least hope to shame and restrain the malefactors.

Economics for Christmas

Edward Hadas
Dec 5, 2012 12:51 UTC

The Christmas season is a particularly good time to think about the fundamental weaknesses of conventional economic theory. Frenzied shopping for gifts cannot easily be reconciled with the standard model’s dour “economic man”, a creature who “who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial”, in the classic definition of John Stuart Mill. The joyful Christmas season is also a good period to offer praise for a line of economic thinking which draws on a much more flattering view of human nature.

Historically, this approach has been closely associated with the Catholic Church, but “Catholic Economics” is a misleading title, since the thinking is not denominational – for example, Justin Welby, the incoming leader of the Church of England, is a fan. It is not really religious; many atheists would reject the conventional assumption that people always and everywhere calculate their selfish advantage. In honour of the season, I will use “Christmas economics” to describe this anti-Scrooge analysis, which is based on what might be called the Christmas economic person. Unlike the simple and narrowly rational economic man, this is a complicated creature, largely motivated by the desire to be and to do good, but also prone to greed and foolishness. That combination is illogical, but it is realistic; people always show a frustrating mix of virtue and vice.

A comparison shows the advantages of Christmas economics over the standard approach. Consider the difference between the conventional idea of a market and “giving in order to acquire”, a phrase used by Pope Benedict XVI in his Caritas in Veritate. Note that the economists’ market is not a physical place to shop, like a supermarket. It is a conceptual place where purely self-interested economic men trade with one another until they are all as satisfied as they possibly can be, a state known as equilibrium.

Candidates as consumer products

Edward Hadas
Nov 21, 2012 15:06 UTC

Barack Obama did not win the election because more Americans thought he would be a better president than Mitt Romney. More Americans voted for the incumbent than for the challenger, but it is Obama’s superior campaign organisation, and not his personal appeal, that deserves most of the credit. In particular, his product managers were better than Romney’s at using the technique of “data mining”.

The technique, pioneered by supermarkets, is conceptually simple: measure everything and tweak as necessary. In practice, it is a delicate affair. Suppose a popular soft drink has 4 percent higher sales when it is stocked next to a salty snack than when healthier raisins are its shelf-neighbour. Should shelf locations be swapped? There are many variables: the effect on sales of salty snacks and raisins, the profit margins of the different products, and customers’ sensitivity to any price changes. Most of the effects are tiny, but the study of millions of data, including a large number of computer simulations, can increase a retailer’s revenue and profit by a few percent.

In elections, data mining can bring votes to candidates and can increase the supply of contributions which pay for vote-gaining advertising. The work is detailed. Time magazine reports that the Obama campaign carefully tested how much more likely undecided voters in each close state were to yield to the blandishments of local rather than to out-of-state volunteers. The superiority in detailed computer work – “We ran the election 66,000 times every night”, as one expert explained to Time – probably gave Obama a few more percentage points of votes than Romney. It was the margin of victory.

The angel is in the detail

Edward Hadas
Nov 14, 2012 15:47 UTC

Barack Obama will not solve America’s most profound economic problems. That is not a partisan political statement about the newly re-elected president. Had Mitt Romney won last week’s contest, he also would not have been able to reduce unemployment, improve the trade balance, rebuild U.S. manufacturing excellence and strengthen the middle class. The fixing of the American economy is just not a one-man or one-woman job.

The Federal Reserve is trying to help with one of those problems, unemployment, but the central bank does not possess the refined tools needed to address this complex issue. Indeed, bold decisions made by the highest authorities cannot resolve any of the developed world’s greatest economic problems. The devil – and the angel – is in the innumerable details.

Of course, there are times when big policy decisions change the course of economic history, as when the new governments of formerly communist countries abandoned central planning, or when the U.S. government rescued its banking system during the last financial crisis. Less dramatically, changes in government deficits and central bank policies on interest rates can moderate fluctuations in the economy by compensating, to some extent, for hyperactivity or sluggishness.

EU for the 2018 economics Nobel

Edward Hadas
Nov 7, 2012 14:44 UTC

It may be a little early, but I want to make a conditional nomination for the 2018 Nobel Prize for economics. If all goes well, the European Union, which has just won the 2012 Peace Prize, will by then have met the criteria for the economics award: a “work on economic sciences of eminent significance”. The EU writes in deeds rather than essays or equations, but the unconventional form only adds to the accomplishment. Here is a preliminary draft of the citation.

The European Union is awarded this prize for its advances in the theory of economic organisation in modern industrial economies. The EU has added to our knowledge of the relationships between the economic good and political goals, between bureaucracy and entrepreneurial initiative and between private and state ownership. It has also contributed to the study of managing economic change. The EU’s “European theory” is supported by the most persuasive evidence: a unified, prosperous and fairly just economy.

The European arrangement is sometimes called the Social Market Economy. That title captures two key tenets: that the economy should always be considered as part of the broader society, and that competitive markets should play a major role in modern economies. However, “Social Market” misses several important European ideas: that regulation and enterprise should be mutually reinforcing; that supranational and national governments can perform complementary economic tasks; that many economic activities, including health care and education, are best offered by enterprises which are neither under direct government control nor purely private and profit-seeking; and that meritocratic bureaucracies can make valuable contributions in all parts of the economy.

Unrealistic Nobel economics

Edward Hadas
Oct 24, 2012 12:34 UTC

Stable pairwise matching won Lloyd Shapley and Alvin Roth the Nobel prize for economics. It is an idea that is simple, slightly illuminating for economists, occasionally useful for everyone – and profoundly misleading.

The matches in question are between members of two groups, for example potential husbands and potential wives, or medical school graduates and hospitals that might employ them. The “stable” is defined narrowly: the pairing off is stable as long as no individual can find a way to improve his or her situation by trading partners. What counts as “improvement”? The game theory of Shapley and Roth does not really address that question.

The simple idea, demonstrated by Shapley a half century ago, is that under certain conditions a methodical process of elimination – many rounds of tentative pairings – leads to stability. Take a pool of equal numbers of would-be brides and grooms. The men keep on proposing to their favoured women. At first, only the irresistible men garner acceptances from the most appealing women. Gradually, though, each less attractive man will win the favour of some less attractive woman, who accepts the sad reality that she cannot do any better. At the end, while many people may wish they had a different spouse, no one will be able to arrange a trade. Any alternative pairing will be less desirable than the current one to one side or the other. That is exactly game theory stability.

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