Thursday, 4 October 2012

More on whether US growth is over

So another big beast of the global economic commentariat has produced his assessment on Robert Gordon’s take on whether US growth is over. Martin Wolf at the FT joins Paul Krugman in finding Gordon’s hypothesis plausible. Some more sceptical reactions were John Cochrane’s and Bill Easterley, who tweeted it was nonsensical.

At a personal level I was already predisposed to find Gordon’s hypothesis persuasive, having been won over by Tyler Cowen’s Great Stagnation argument. Given that I enjoy a good historical read I am now also looking forward to Gordon’s Beyond the Rainbow: The American Standard of Living since the Civil War. However, I am a bit surprised at how little scrutiny Gordon’s handling of the data has received. The core chart he presents is this one:

Now, I have tried to replicate his nice steps using Maddison’s data.  It is difficult.  He certainly must have selected his year brackets very carefully to get such a neat downward step pattern.  Even after trying to smooth the data by taking the rolling 20-year average per capita growth rate I get the following much messier picture: 

A number of additional thoughts emerging from the data and my chart:

(1) Overall, despite the messiness of the data Gordon’s hypothesis of declining trend growth still seems plausible.

(2) The UK was certainly not the frontier economy from 1300. The charge was first led by the Italian city states and the baton is then taken by the Netherlands.

(3) Not shown in the chart is the fact that, according to Maddison’s data, growth between 1300 and 1750 was already a significant uptick from the previous 1000 years.

Wednesday, 3 October 2012

The top 20% DO account for 70% of net contributions to the state

So, a former boss (or boss of the boss of my boss!) from the early days of my career has been having a twitter to-and-fro with Allister Heath and Nelson Fraser over the progressivity of our (the UK's, not Spain's) tax system.  His final authoritative word on the issue goes beyond the initial assessment from Full Fact by quoting this very interesting factsheet on the impact of tax and benefits put together by the ONS earlier in the year.

But, whereas his exposition of the evidence is flawless I find his final conclusion wanting.  The point of his article appears to be two-fold: (1) to demonstrate that using income tax only gives a partial view of the progressivity of the tax system; and (2) that once a broader view is taken the system is not as progressive as would have been concluded.

Now, the ONS gives us the data not just for taxes paid but also for benefits (both direct and in-kind, e.g. the state schooling that my two children are currently receiving at an approximate cost of £7,000 each).  And Portes warns us to focus on non-retired households for a more accurate view.  So I have produced the following chart:

The story we get does not differ substantially from that which you would get by looking at the income tax story:

(1) For the lower 40% living in the UK with the current tax arrangements provides a substantial boost to their incomes.

(2) The middle quintile are indifferent - the tax they pay is broadly what they would otherwise have to pay for the public services they receive (incidentally, I would expect the small surplus shown in the chart for this quartile to turn into a deficit if we factored in the value of the promise of a future state pension).

(3) The 40% of households with the highest income are the only net contributors to the system, with the top quintile accounting for 70% of all net contributions (the difference between the dark and the lighter blue bars).