High taxes, low returns and putting Manchester in charge of Brexit

Afternoon all,

Yes we’ve got some thugs on the streets and constitutional uproar in the Commons. I can see how this feels a bit suboptimal. But you’re seeing this all wrong. Messy politics and scandals are really the foundation of our true national purpose – making surprisingly good TV.

You can’t get the Brexit you want, but without it you’d have missed out on 90 mins of decent viewing this week. And while it’s not ideal when political leaders try to murder ex-lovers, it’s a small price to pay for a GOLDEN GLOBE (congrats to Ben Whishaw and the Very English Scandal team).

So don’t lose sight of the big picture over the next few weeks – it’s not about the future direction of the country, but the future of our country’s directors.

But of course too much screen time is bad for you, so below are this week’s reads covering debates on high tax rates and low interest rates.

Have a good weekend.

Torsten Bell
Director, Resolution Foundation

Taxes up This week the new US congress was sworn in to office, and the youngest House member Alexandria Ocasio-Cortez lit up the headlines with her interview supporting 60 to 70 per cent marginal tax rates on the very highest-paid. It’s got everyone over the pond excited – because it’s an excuse to row about something other than Donald Trump and his wall fence. But what are the underpinning arguments for a higher top rate? A good explainer points to a key paper which concluded the US should have a 73 per cent top rate. The basic reasoning: if you’re really rich another dollar can’t possibly add much to your well-being, so you don’t have to be much of a utilitarian to think that a little extra redistribution might raise society’s overall well-being. Here’s the opposite view from the Cato Institute – the usual stuff about lower revenues and capital flight, the one word rebuttal to which is Sweden (or in fact Britain – see Chart of the Week).

Interest rates down. Low interest rates make it easier to borrow, and to maintain higher levels of debt. That’s why central banks cut interest rates to stimulate economic activity during a downturn. For the government itself, what matters for whether our national stock of debt is rising or falling is the relationship between the economy’s growth rate and the interest rate. If our GDP is growing faster than interest is racking up on our debt, things are a lot easier than the other way around. That is obviously the case today with growth having returned post-crisis, whileinterest rates remain incredibly low in most developed countries. In his Presidential Address (text here) to the American Economic Association, Olivier Blanchard puts that into historical perspective by arguing that historically growth rates have in fact generally been higher than interest rates, and so worries about government debt may have been overdone. It’s a techy read, but he helpfully provided a one tweet summary: ‘low interest rates imply that, not only public debt may have small fiscal costs, it may also have low welfare costs. You can use it, if you use it wisely.’

Testosterone up, returns down. A recently-updated study asks whether you should trust very masculine men with your money. It compares the stock-picking performance of men working in hedge funds according to their facial width-to-height ratio – which apparently is a proxy for testosterone… Its strong conclusion is that investment portfolios managed by men exposed to high levels of testosterone in puberty do quite a bit worse than those managed by men with low testosterone. Why so? Apparently higher-testosterone managers trade more often, choose riskier stocks, and they’re more prone to the ‘disposition effect’ (not selling assets that are doing badly because they hate losing). So get your tape measures out and start measuring the faces of anyone investing your cash…

Gig economy down. Newspaper headlines tell you that the gig economy is growing like wildfire. But our survey data generally doesn’t show that to be the case. So what’s going on? Well in an impressive feat of humility two very high profile researchers whose work underpinned much of the surging gigs argument have now admitted they were wrong. In a new paper (£) they take a deep dive into the data and conclude that there has in fact only been a modest rise in the number of people working in these ways, matching what we see in the UK data. The change of heart is summarised here.

Parliament up (to Manchester). Post-Brexit (and even before it) there have been people arguing that one way for our politics to address challenges of political disempowerment, and of regions feeling written out of our national story, is to move Parliament out of London. This week fellow think-tank director Polly Mackenzie published her case for moving Parliament north to Manchester permanently, freeing politics from its metropolitan tendencies and from a city that’s become ‘a byword for distance, disengagement and disconnection’. If this all sounds too radical for you, a few days earlier another think-tank director, Bronwen Maddox, put forward her view [£]: use the refurbishment of Parliament over the next few years to at least drop some of the ceremonials, and redesign the two debating chambers before the politicians come back. Personally I’d move the whole thing to Sheffield – but I have ulterior motives.

Chart of the week This week returns to the row above about top rates of tax. In the UK there’s a lot of excitement about Alexandria Ocasio-Cortez and the ‘radicalism’ of this idea. The first point is understandable (she’s a very impressive performer) but the second is a little bit odd because she’s proposing a top tax rate of 60-70% on those with an income over $10m. We already have an effective tax rate of over 60% for those on a bit over £100,000 as the personal allowance is reduced for each extra pound you earn. So, Britain = a US socialist’s nirvana. And before anyone starts feeling sorry for those high earners, don’t forget that the combined effect of our tax and benefits system is that the majority of lower income working families receiving benefits face effective marginal tax rates of over 70 per cent.