Thanks, Otto!

October 30th, 2014

Considered the first, Iron Chancellor Otto von Bismarck’s public pension influenced many of today’s pension systems. In less than 2 minutes, this illustrated video delivers a clear and accurate message on Bismarck’s legacy.


On the 125th anniversary of Otto von Bismarck’s creation of the world’s first state pension, HelpAge hosted a conference assessing his legacy and the future of pensions. The event “Thanks, Otto! 125 years of pensions and new global perspectives” was held in Berlin, 28-29 October 2014.

For more, go to

the pain in Spain continues

October 30th, 2014

The Spanish economy is growing, and the recession is over, but living standards for many continue to fall.

[D]onations [to food banks] have risen sharply since the start of the Spanish crisis, but that demand has grown faster still. Over the past five years, the number of Spaniards who rely on the country’s 55 food banks has soared from 780,000 to 1.5m, and – despite growing signs of economic recovery – their numbers continue to rise.

“On the macroeconomic level you see that things are going better. But our people see no change,” says Nicolás Palacios, the president of Spain’s food bank federation. “There are more and more people whose unemployment benefits have run out, and who have used up all their financial reserves. And even if they have some income, a few hundred euros are just not enough to feed a family.” ….

The number of people receiving emergency aid from Caritas [the charity branch of the Roman Catholic Church] has leapt from 350,000 in 2007 to 1m today. Even one year after the end of the recession, the organisation says it sees no sign that the recovery is reaching the most vulnerable sectors of Spanish society: “We hear that economic growth is back, we hear that the banks are doing well. But people are desperate,” says Sebastián Mora, the secretary-general of Caritas España.

Tobias Buck, “Spanish recovery lays bare a social crisis“, Financial Times, 30 October 2014.

Hunger in Spain (people receiving food hand-outs)

Spanish unemployment rate (per cent)

‘high’ healthcare costs in the UK

October 29th, 2014

In an FT op-ed, a Conservative British MP writes that his government spends far too much on healthcare: “[I]t is an instance of the economic principle that people tend to consume too much of anything that is given away free”. He believes that people should “think twice before they make wasteful demands on the country’s health service” and “force the NHS to become more rigorous about cost assessment, attribution and control”.

He acknowledges that some are “calling for the abolition of taxpayer-funded healthcare”, but does not share this view because “there is intense public opposition to any proposal that involves charging for NHS services”. He proposes, instead, a plan to inform National Health Service (NHS) patients of the cost to government of services they consume:

Everyone who uses NHS services would receive a statement every year, showing which services they had received and how much they cost. Where cheaper treatment options were available that were just as good – say, visiting a family doctor rather than an emergency room – they would also be told how much this would have saved. …. [This] would encourage people to take greater responsibility for their own healthcare, without making them directly responsible for the financial costs.

Jesse Norman, “What dandruff can teach us about funding the NHS“, Financial Times, 29 October 2014.

Aside from a feeling that provision of cost information can have little or no effect on consumer behaviour so long as the service is provided free of charge, two things in this column strike me as odd. First, though Mr Norman is a Conservative MP, his defence of public provision of ‘free’ healthcare (without co-pays) would be regarded as socialist in the United States.

Second, he is concerned only with the high cost of healthcare. In contrast, US conservatives  pay little attention to cost, even though per capita expenditure on healthcare in the US is nearly twice as high as it is in the UK. The US political debate is primarily over how healthcare is funded and how citizens access it, not how much it costs. This reflects in part the fact that US conservatives tend to be market fundamentalists, so assume – despite evidence to the contrary – that removing government from provision of healthcare will drive costs down. Citizens too poor to purchase healthcare at market prices can turn to public or (preferably) private charity.

voluntary pension contributions in Mexico

October 28th, 2014

Mexico’s contributory Social Security pension scheme is modelled on the Chilean system of individual, privately managed accounts. Contributions are mandatory for all government employees and for workers in the formal sector of the economy. In 2005 workers in the self-employed/informal-sector were allowed to participate voluntarily, but only 260,000 of the country’s 30 million self-employed/informal workers opened retirement savings accounts. Nearly all these accounts have been inactive at least since 2008.

CONSAR, the Mexican pension regulator, recently announced the results of the first survey on the saving and consumption habits of self-employed/informal-sector workers. The government divides those workers into two groups: The first group comprises professionals who are licensed and work independently—such as doctors, dentists, and lawyers; the second group comprises own-account workers who are in business for themselves and provide products or other types of services. According to the government’s statistical agency, close to 60 percent of the economically active population (nearly 30 million individuals) belong to those categories of workers. The government conducted the survey because since 2005, when the self-employed were first permitted to participate in the individual account program, the take-up rate has been very low, only 260,000 accounts.

The survey covered men and women aged 18–55. Of all survey participants, 60 percent have never had an individual account and 40 percent have an account but have not contributed to that account for at least 6 years. About 30 percent of those surveyed are professional, and the remaining 70 percent are own-account workers; both groups of workers represent a variety of socioeconomic levels. About one-third of the own-account workers have completed secondary education, while nearly all of the professionals are licensed.

United States Social Security Administration (SSA), International Update, October 2014.

Informality explains why Mexico can achieve universal coverage only with non-contributory social pensions.

ISIS waterboards hostages

October 28th, 2014

[In a new video] journalist John Cantlie, who was seized [by ISIS] in late 2012 … reads an apparently scripted message that criticises the British and US’s stance on hostage negotiations. ….

Referring to the hostages’ treatment by the captors, Mr Cantlie says: “Some of us who tried to escape were waterboarded by our captors, as Muslim prisoners are waterboarded by their American captors.”

John Cantlie: IS hostages face waterboarding for escape attempts“, BBC News, 26 October 2014.

This should not cause alarm, as waterboarding is described by Americans as ‘enhanced interrogation’, not torture.

US healthcare reform

October 27th, 2014

FT Washington columnist Edward Luce writes that the Affordable Care Act (Obamacare), despite its flaws, will be difficult to repeal. Thanks to the ACA, there are ten million fewer uninsured Americans than there were last year, and Republican opposition has become more muted. Read the rest of this entry »

material comfort and happiness

October 26th, 2014

Three FT columnists – Undercover Economist Tim Harford, psychotherapist Antonia Macaro, and  philosopher Julian Baggini – discuss possible links between happiness and the consumption of material goods. Read the rest of this entry »

international monetary policy at the zero bound

October 25th, 2014

The latest news from the International Monetary Fund (IMF) is further evidence that the world economy is not on a sustainable path of recovery from the 2008/2009 Great Recession.

Late last night (Friday the IMF) set a floor on the interest rate it uses to compensate member countries for use of its funds. The decision was made in reaction to falling interest rates around the world, which threatened to turn its own rate negative. The floor – 0.05% – is just slightly above zero. With negative interest rates, no country would want to participate in IMF activities, as the Fund would be charging members for use of their money. Read the rest of this entry »

Reviewing Piketty’s Capital

October 23rd, 2014

[Thomas Piketty's] Capital in the Twenty-First Century is a very important book that is not really about capital, and is not really about the twenty-first century. It is predominantly a work of analytical economic history, focusing on the late nineteenth century to the present – with words of warning for the future, nestled among caveats regarding the pitfalls of economic predictions. And its subjects are the dynamics and distribution of incomes and wealth, where wealth is to capital what an hourly wage is to an hour of work: the market value, not the thing itself. ….

As inequality rises and wealth becomes increasingly unearned, how can a democratic capitalist society respond? Regarding income inequality, Piketty advocates taxing incomes above $500,000 or $1 million at a rate of 80 per cent. Importantly, the point is not to bring in revenue, because it would probably bring in very little – remuneration at the top end would probably fall dramatically, given the small return to higher salaries. But given that taxes at this rate did not slow down growth in the past, and that countries that still have high top income tax rates have not fallen behind the US and the UK, the evidence indicates that their loss would be everyone else’s gain.

How does this work? The knock-on effect of top incomes on everyone else’s incomes, or what economists call general equilibrium effects, are rarely acknowledged, and indeed Piketty does not spell them out. But next time you hear someone suggest that a concern with top incomes can only be driven by envy, recall that, one way or another, the rest of us have to pay for those incomes: as workers, higher pay at the top means our salaries have to be lower; or as consumers, it raises the prices we face; or as pension-holders, it lowers share prices and profits that fund our retirement. Again, since the evidence shows that excessive pay at the top does not increase the size of the pie, their ever-growing slice comes at everyone else’s expense, and trimming it would leave more for the rest of us. ….

In 1913, just before the outbreak of the First World War, the historian and socialist theorist R. H. Tawney observed that ‘what thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice a problem of riches’. Let us hope that this time around we find a solution to the problem of riches that does not require global catastrophe.

Paul Segal, “Review Essay: The problem of riches“, Renewal 22: 3/4 (2014).

HT: Mark Thoma

Paul Segal is Senior Lecturer in Economics at King’s International Development Institute, King’s College London. For more reviews, see the current issue (no. 69) of Real-World Economics Review (ungated, free access). This special issue on Piketty’s Capital contains essays by Robert Wade, James K. Galbraith, David Colander, Dean Baker and others.

Capital in the Twenty-First Century was translated from the French by Arthur Goldhammer and published by Belknap Press in 2014.

happiness, satisfaction, and GDP

October 22nd, 2014

I would like to call everyone’s attention to a superb article written by University of Southern California economist Richard Easterlin, a scholar who, years ago, touched off the booming field of “happiness studies”. I, for one, am not convinced that happiness – even life satisfaction or subjective well being – is something we can usefully measure, aggregate and use for policy purposes. Nonetheless, Easterlin makes a spirited, impassioned case for replacing GDP (Gross Domestic Product) with SWB (Subjective Well Being). He has succeeded in convincing me that SWB, with all its faults, is at least preferable to HDI (the UNDP’s Human Development Index) as a measure of welfare.

Here are two paragraphs from the introduction, and two from the conclusion of the essay. The entire essay (4 pages) can be downloaded, copied and printed without charge, so click on the link below. You will not be disappointed. Read the rest of this entry »