economic growth, war and inequality

April 16th, 2014

A book by French economist, recently published in English translation, is attracting considerable attention. Here are portions of one review of the book, which I have added to my ‘must read’ list.

French economist Thomas Piketty has written an extraordinarily important book. Open-minded readers will surely find themselves unable to ignore the evidence and arguments he has brought to bear. ….

Among the lessons is that there is no general tendency towards greater economic equality. Another is that the relatively high degree of equality seen after the second world war was partly a result of deliberate policy, especially progressive taxation, but even more a result of the destruction of inherited wealth, particularly within Europe, between 1914 and 1945. A further lesson is that we are slowly recreating the “patrimonial capitalism” – the world dominated by inherited wealth – of the late 19th century. ….

Yet the book also has clear weaknesses. The most important is that it does not deal with why soaring inequality – while more than adequately demonstrated – matters. Essentially, Piketty simply assumes that it does. ….

For me the most convincing argument against the ongoing rise in economic inequality is that it is incompatible with true equality as citizens. If, as the ancient Athenians believed, participation in public life is a fundamental aspect of human self-realisation, huge inequalities cannot but destroy it. In a society dominated by wealth, money will buy power. Inequality cannot be eliminated. It is inevitable and to a degree even desirable. But, as the Greeks argued, there needs to be moderation in all things. We are not seeing moderate rises in inequality. We should take notice.

Martin Wolf, “‘Capital in the Twenty-First Century’”, by Thomas Piketty“, Financial Times, 16 April 2014.

Martin overlooks the fact that Athenian society was very unequal. Only about 20% of Athenian residents were citizens. The vast majority – slaves, freed slaves, women and others – were excluded from voting and from participation in public affairs.

Martin is reviewing Capital in the Twenty-First Century, by Thomas Piketty, translated by Arthur Goldhammer (Harvard University Press, 2014). Read his complete review at the link above (free registration required).

GDP is a flawed measure of output

April 16th, 2014

Gross Domestic Product (GDP) has many flaws, some of which are well-known. It ignores unpaid work, for instance, including work done, mainly by women, caring for young children, the elderly, the infirm – even a spouse and adult children. The famous example from first-year economics is that GDP would go up if everyone took in their neighbour’s wash, charging each other for laundry services. With few exceptions (imputed rent for owner-occupied housing is an important one), GDP is a measure of market transactions.

FT columnist John Kay thinks that the problem is more serious than many realize. GDP, he explains, measures poorly even what it is supposed to measure.

At Oxford university, many students regard attendance at lectures as optional. So teachers who fail to enlighten or entertain end up talking to empty rooms. A malicious fellow student measured lecturing performance by computing the ratio of attendance at the start of a course to attendance at the end. The highest score was earned by the hapless teacher of a first-year course on national income accounting.

Few universities now offer such a course. They have responded, or pandered, to student preferences, and the economics curriculum has moved on. Not necessarily in a good way; national income accounting … is no longer well understood. ….

And national income accounting cannot handle the financial services sector. Reported output of financial services rose dramatically during the 2008 financial crisis. This nonsensical result arises because the measurement of financial services output is strongly influenced by the margin between average bank lending and borrowing rates, which increased sharply. When someone confidently quotes the contribution of financial services to national income, you can be sure they have no understanding of the esoteric concept of “financial services indirectly measured” (don’t ask). Only a few people in the depths of national statistics offices do. This problem casts doubt on the validity of reported growth rates both before and after the crisis.

It once puzzled me that many economists in the financial sector forecast and discussed GDP without knowing what it was. I have since realised the job of market pundits is not to forecast GDP but to forecast what the statistics office will announce is GDP, and that is not at all the same.

John Kay, “GDP is flawed – just not the way most people think“, Financial Times, 16 April 2014.

There is much more in the full column, which can be downloaded at the link or, in a few days, at

US cable barons

April 14th, 2014

Comcast’s proposed takeover of Time Warner Cable without doubt will be approved, paving the way for further monopolisation of US broadband. Why? According to FT columnist Edward Luce, it is a result of crony capitalism. It also helps that Comcast’s former chief lobbyist currently heads the Federal Communications Commission (FCC).

The FCC is dominated by senior former cable industry officials. And there is barely a US elected official – from President Barack Obama down – who has not benefited from Comcast’s extensive campaign financing. As with the railway barons of the late 19th century, he who pays the piper picks the tune.

The company is brilliantly effective. Last week, David Cohen, Comcast’s genial but razor-sharp executive vice-president, batted off a US Senate hearing with the ease of a longstanding Washington insider. …. One or two senators, notably Al Franken, the Democrat from Minnesota, offered sceptical cross-examination about the proposed merger. But, for the most part, Mr Cohen received softballs. ….

The public’s indifference to the rise of the internet barons is also assisted by lack of knowledge. Americans are rightly proud of the fact that the US invented the internet. Few know that it was developed largely with public money by the Pentagon – or that Google’s algorithmic search engine began with a grant from the National Science Foundation. It is a classic case of the public sector taking the risk while private operators reap the gains. Few Americans have experienced the fast internet services in places such as Stockholm and Seoul, where prices are a fraction of those in the US. When South Koreans visit the US, they joke about taking an “internet holiday”.

US average speeds are as little as a tenth as fast as those in Tokyo and Singapore. Among developed economies, only Mexico and Chile are slower. Even Greeks get faster downloads.

Edward Luce, “The power of the US cable barons must be challenged“, Financial Times, 14 April 2014.

Mexico and Chile joined the OECD club of wealthy nations, but does this mean that they are now “developed economies”?

what is ‘universal pension’ – UK 1908 edition

April 13th, 2014

I recently came across the following description of a 1908 act of parliament. It called my attention, because I was not aware that the UK had ever had a universal pension, certainly not one dating from 1908.

The Old Age Pensions Act of 1908 established for the UK a universal non-contributory pension for those over the age of 70.  You had to be a UK resident for at least 20 years and pass a ‘character’ test.  The pension was means tested with the maximum 5 shillings per week for a single person and 7 shillings and sixpence for a married couple going to those with incomes below £21 a year and reduced on a sliding scale for those with incomes between £21 and £31 10 shillings a year. [emphasis added]

You could be disqualified if you’d made yourself deliberately poor, been imprisoned or convicted for drunkenness under the Inebriates Act.

Frances Simmons, “OLD AGE PENSION – a crown from the Crown“, Simmons Gallery, 9 April 2014.

The blogger writes  that the 1908 pension was “a universal non-contributory pension for those over the age of 70″, provided the beneficiary had resided in the country for at least 20 years. She then adds that there was an income test, and also a test of good character. If these tests are consistent with universality,  then no non-contributory pension could possibly qualify as ‘non-universal’, and the ‘universal’ adjective is redundant.

I often see ‘universal’ used as a synonym for ‘non-contributory’ in reference to old-age pensions. Sometimes, it is even used as a synonym for ‘contributory’. Many describe US Social Security, for example, as a ‘universal scheme’. It is, but only in the sense that the same rules apply to everyone: the more you contribute, the larger your pension. With fewer than ten years (40 quarters) of contributions, you receive no pension  – unless you happen to be the current, widowed or divorced spouse of a Social Security beneficiary.

‘Universal pension’ then can be anything. Perhaps we should replace the term with something else. Actuaries use the term ‘demogrant’ which is short for ‘demographic grant’. This is accurate, but ugly. Does anyone have a better suggestion?

Alternatively, we could ask writers to restrict the term “universal pension’ to schemes that require nothing more than proof of  age and citizenship/residence, . The Wikipedia entry “Old-Age Pensions Act 1908″ does not describe the pension as universal. Nor does the history of editorial changes for that article record any previous use of the word ‘universal’. This is a hopeful sign.

Here is a full description of the act, from Wikipedia:

The Act provided for a non-contributory old age pension for persons over the age of 70. It was enacted in January 1909 and paid a weekly pension of 5s a week (7s 6d for married couples) to half a million who were eligible. The level of benefit was deliberately set low to encourage workers to also make their own provision for retirement. In order to be eligible, they had to be earning less than £31. 10s. per year, and had to pass a ‘character test’; only those with a ‘good character’ could receive the pensions. You also had to have been a UK resident for at least 20 years to be eligible and people who hadn’t worked their whole life were also not eligible.

Also excluded were those in receipt of poor relief, ‘lunatics’ in asylums, persons sentenced to prison for ten years after their release, persons convicted of drunkenness (at the discretion of the court), and any person who was guilty of ‘habitual failure to work’ according to one’s ability.

“Old-Age Pensions Act 1908″ Wikipedia, accessed 13 April 2014.

Additional information on the functioning of this social pension can be accessed by clicking on the link above. These two sentences are particularly revealing:

Initially, most of the recipients of the pension benefit were women. In order to remove any stigma in receiving the benefit, the scheme was administered by the Post Office rather than the existing social welfare agencies such as the parish or Poor Law.

One reason for females to outnumber males at age 70 and older is that women live longer than men. Also, I suspect that men are less likely to pass a test of good character.

universal pensions for India

April 11th, 2014

IIM Bangalore professor Charan Singh interviews University of Maryland professor Kenneth Apfel.

Charan Singh: What are your thoughts on pension security in India given the fact that we do have a significant divide – 90% of India’s population is in the informal sector and does not have any structured mechanism even as the remaining 10% enjoys the benefits of pension security that ensures a reasonable quality of life even after retirement?


Kenneth Apfel: Some countries, which are in the same economical circumstances as India, are moving closer to universal pension systems. China is formulating policies in providing basic economic security to its elderly. Nepal provides social pensions for a large and growing proportion of its ageing population. The question really is: what are the best mechanisms for India to consider moving forward to a universal system of basic economic security? Not just for the 10% of the formal workforce but for the rickshaw drivers, factory workers, shopkeepers? This is the group that has no secure retirement system and to develop that in the next few years we need to think on a long-term basis and start planning right away.

The government should commit and earmark a certain amount towards economic security of the elderly – in terms of 20 years from now, 40 years or 50 years from now. Because planning now is necessary. It is necessary to think about the fiscal rules that are imperative to build these programs. Universal social pension needs to be established.  I recommend a core basic social pension for all, perhaps with a relatively high retirement age. India should start small and build the structure at this stage so that India is ready, as its economy changes, to make the necessary changes in the basic social pensions.


Charan Singh: With your experience, who should be responsible for providing pension? Should it be the central government, state government or the local bodies or municipal corporation? The objective is that we can achieve maximum coverage of the elderly with minimal leakages in the system?

Kenneth Apfel: I believe the core basic security for the elderly should be from the Union government. If we think about India 30 or 40 years in the future, pension systems that are designed locally will become problematic.  This is a national challenge that needs a universal national solution.

Elder care in India: US pension expert sees crying need for universal pension & healthcare“, Indian Institute of Management Bangalore, accessed 11 April 2004.

Charan Singh is Reserve Bank of India Chair Professor of Economics and Social Sciences at IIM Bangalore. Kenneth S. Apfel (born 1948) is professor of public policy at the University of Maryland. From 1997 to 2001 he was Commissioner of the US Social Security Administration. Professor Apfel is spending the Spring 2014 semester as a Fulbright scholar in Delhi at the National Council of Applied Economic Research, studying India’s health insurance and public pension policies.






everything you always wanted to know about money (but were afraid to ask)

April 11th, 2014

Martin Wolf offers a clear, concise explanation.

Some years ago I moderated a panel at which a US politician insisted that the Federal Reserve’s money printing would soon cause hyperinflation. Yet today the Fed’s main concern is rather how to get inflation up to its target. Like many others, he failed to understand how the monetary system works.

Unfortunately ignorance is not bliss. It has made it more difficult for central banks to act effectively. ….

Understanding the monetary system is essential. One reason is that it would eliminate unjustified fears of hyperinflation. That might occur if the central bank created too much money. But in recent years the growth of money held by the public has been too slow not too fast. In the absence of a money multiplier, there is no reason for this to change.

A still stronger reason is that subcontracting the job of creating money to private profit-seeking businesses [banks] is not the only possible monetary system. It may not be even the best one. Indeed, there is a case for letting the state create money directly. I plan to address such possibilities in a future column.

Martin Wolf, “Only the ignorant live in fear of hyperinflation“, Financial Times, 11 April 2014.

For more, read the full column at the link above. Even better, download and read the following article, which inspired Martin Wolf to write his column:

This article provides an introduction to the role of money in the modern economy. It does not assume any prior knowledge of economics before reading.  The article begins by explaining the concept of money and what makes it special. It then sets out what counts as money in a modern economy such as the United Kingdom, where 97% of the money held by the public is in the form of deposits with banks, rather than currency. It describes the different types of money, where they get their value from and how they are created. …. A short video explains some of the key topics covered in this article.

Michael McLeay, Amar Radia and Ryland Thomas, “Money in the modern economy: an introduction“, Bank of England Quarterly Bulletin (2014 Q1), pp. 1-10.

a new subprime crisis?

April 11th, 2014

In 2007-8 the subprime mortgage crisis launched a financial crisis. FT columnist Gillian Tett warns that subprime lending is back, this time for cars rather than for real estate.

A few short years ago, “subprime” was almost an expletive. During the financial crisis, mortgages linked to subprime borrowers – or those with poor credit history – caused devastating losses ….

But the financial world has a short memory …. In recent months subprime lending has quietly staged a surprisingly powerful return, not in relation to real estate, but another American passion – cars. ….

The historical echoes are uncanny. During most of the past decade the amount of car-related debt grew only modestly. Yet outstanding car loans, which totalled $700bn in 2010, have jumped by a quarter in the past three years. ….

Even more notable is that this has occurred amid a sharp deterioration in loan quality. Five years ago, subprime loans represented barely a 10th of the total; today they account for a third. A particularly high proportion of GM cars sales are financed by subprime loans. Meanwhile, a 10th of new loans are now going to so-called “deep subprime”, or consumers who would previously have had little chance of getting funding – particularly given that incomes for poorer households have stayed flat or declined, even as car prices jumped. ….

[T]his little saga is a stark reminder that parts of America’s current recovery are built on wobbly foundations. And it is another timely illustration – if any were needed – that cheap money has a nasty habit of creating distortions in unexpected places; even if they do not usually occur in exactly the same place as before.

Gillian Tett, “American subprime lending is back on the road“, Finanical Times, 11 April 2014.

the investment costs of pension funds

April 10th, 2014

It is well-known that most employees haven’t a clue about fees they are paying for management of their personal retirement (defined contribution) accounts. Less-known is the fact that employers who invest to pre-fund employee pensions often have no idea of these costs either. Anyone ignorant of the fees they are paying will not think of searching for a lower-cost provider of financial services. Surprisingly, even in the United Kingdom, nearly a quarter of employers with final salary (defined benefit) schemes are unaware of the investment costs they incur.

Final salary pension schemes are corporate dinosaurs. Other ways for employers to provide for retirement are evolving around them, but for now they still loom large.

That is why the Pension Regulator’s survey on the annual charges paid by these schemes matters. In the context of costs of £2.53bn [US$4.24bn], it makes a difference that poorly managed schemes can end up paying about 10 times per member more than their efficient peers. And it is positively unnerving that, in among other clouds of unknowing, almost one in four are unaware what they are paying in investment costs – the second biggest expense for most schemes.

Alison Smith, “Pension schemes should be better at counting their costs“, Financial Times, 10 April 2014.

cows and global warming

April 9th, 2014

Carbon dioxide from fossil fuels is the primary man-made gas warming the planet, but methane is far more potent and the US’s biggest source of it is its 88m cattle, which produce more than landfill sites, natural gas leaks or hydraulic fracturing.

The Obama administration’s launch last month of a plan to curb methane emissions has given fresh relevance to climate-friendly technologies for cattle that range from dietary supplements and DNA gut tests to strap-on gas tanks.

Juan Tricarico, director of the Cow of the Future project at the Innovation Center for US Dairy, an Illinois research institute … said there were common misconceptions about where cattle methane comes from. “Ninety-seven per cent of all the methane gas is released by the front end through burps, not from the back end,” he said. ….

Methane accounts for 9 per cent of US greenhouse gas emissions and does not linger in the air as long as CO2, but it has a global warming effect more than 20 times greater than CO2, the White House says. ….

At Argentina’s National Institute of Agricultural Technology, scientists have created backpacks that collect gas via tubes plugged into cows’ stomachs. A typical animal emits 250-300 litres of methane a day and researchers say this could be used to power a car or a refrigerator for a day, but Jorge Antonio Hilbert of the institute says the tanks’ use on a large scale is “totally improbable”. ….

Ilmi Granoff of the Overseas Development Institute said … “Forget coal, Forget cars. The fastest way to address climate change would be to dramatically reduce the amount of meat people eat,” he said. “But that involves cultural preferences and they are difficult to touch.”

Barney Jopson, “Scientists seek climate-friendly cow of the future“, Financial Times, 9 April 2014.

Another reason to feel guilty when eating steak … or even while drinking milk!


towards universal Medicare in the USA

April 9th, 2014

A number of years ago, while living and working for a short period in the US, I had occasion to visit a private doctor’s surgery. While I was waiting in reception a retired couple who had recently moved to the area inquired about the availability of treatment under Medicare, only to be informed that the doctor’s Medicare list was full.

I, on the other hand, received excellent treatment but, as the couple presumably had worked for most of their lives, this seemed out of kilter by comparison.

The US and its people embody a model of freedom and choice in the world and we must remain optimistic that this basic right to access care as “universal coverage” can eventually become more than “only a dream”, and not just in the richest nation on earth.

David Moore (Helensburgh, Argyll & Bute, Scotland), “Making universal coverage a reality“, letter to the editor, Financial Times, 9 April 2014.