Saturday, December 19, 2009

"A man's respect for law and order exists in precise relationship to the size of his paycheck." - Adam Clayton Powell Jr.

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Cleaners 'worth more to society' than bankers - study

"The research, carried out by think tank the New Economics Foundation, says hospital cleaners create £10 of value for every £1 they are paid.

It claims bankers are a drain on the country because of the damage they caused to the global economy.

They reportedly destroy £7 of value for every £1 they earn. Meanwhile, senior advertising executives are said to "create stress".

The study says they are responsible for campaigns which create dissatisfaction and misery, and encourage over-consumption.

And tax accountants damage the country by devising schemes to cut the amount of money available to the government, the research suggests."


A: It seems believable that cleaners might make a far larger contribution to society than their pay suggests, and bankers far lesser compared to their own pay, but from what I understand the article to be saying, the real claim underlying the conclusions of the study is rather more dubious than that.

According to the study as reported, bankers destroy £7 of value for every pound they earn; advertising executives, £11; and tax accountants, £47 (as opposed to other occupations which generate value for every pound earned). This means that regardless of their pay, bankers, etc. make a negative net contribution to society. If this conclusion were to be believed, then bankers' compensation would not merely represent a misallocation of resources or the omission of externalities; it would mean that the very fact bankers exist, or that they are paid for their work, is a failure of the market.

Now, the report only calls for "a variety of policy recommendations to align pay more closely with the value of work", whereas no amount of pay adjustment could possibly align compensation with the value of work if the value is negative, as suggested by the phrase "destroy £7 of value for every £1 they earn". I'm thinking that the authors of the report (or perhaps the journalist authoring the article) found it reasonable enough to suggest (especially in the current economic climate) that such industries as banking, advertising and tax accounting had a net adverse effect on the economy, but did not wish to confront its logical conclusion that therefore these industries shouldn't exist in an efficient economy.

(Is it not possible to also deduce that if childcare workers are hired to look after tax accountants' children, thus enabling them to go to work, then the £9.50 of value they generate to society per pound of pay is neutralised by the £47 per pound of negative value the tax accountants generate as a result of being able to work, and therefore that childcare workers are only valuable to society when they work for certain kinds of people, such as cleaners?)

I think the reason why this sounds ludicrous might be because of the flaws inherent in presenting the value a person generates or removes from society in relation to his pay. In the first place, there can be no valid comparison of value if the report doesn't specify, "value generated/lost as compared to what alternative scenario?" If the advertising executive is absent from the economy, perhaps millions of dollars might be lost from company revenues, revenues which go to growing the economy and enhancing social welfare through wages and taxes. Conversely, why does a hospital cleaner create value if his employment is dependent on the existence of a healthcare system the size of which indicates the poor state of health, and thus the lack of welfare, of society? Besides, a dollar earned by a banker may well have a multiplier effect of more than a dollar in value created once the banker spends this dollar.

In any case, the questionable metric of "value generated to society per amount of pay" (what does it mean when a banker generates x amount of value?) seems to be the key problem here, and I think it clouds any analysis of the report's conclusions. I'm not very sure if I've gotten myself confused in the analysis as well, what does everyone think?


Me: Here is the original report for those who wish to read it: http://www.neweconomics.org/publications/bit-rich

It is an atrocious paper, full of rhetoric, low on solid evidence and packed with questionable (to use a charitable word) assumptions. Most of the report is just invective against the rich.

I didn't look at all of the 44 page report, but that was no serious loss.

Here are some of the many problems with the obviously populist study:

Bankers

- They assume bankers are *totally* responsible for the financial crisis, the recession (and loss in output) and the increase in UK public debt. The role of central banks, governments, developing countries' buying up US government securities and home buyers is ignored. They assume that the business cycle does not exist (i.e. that there would be no recession without bankers).

- They assume that a few thousand UK bankers (naturally, the most highly paid) were responsible for the financial crisis and that the rest of the industry was innocent. Yet, at the same time, only half of value added to the economy and tax payments is attributed to these few thousand bankers. In other words, the "costs" of these bankers are magnified and their "benefits" deflated. The only word to describe these assumptions is "fradulent".

- The main "value" of the bankers is their "Average annual contribution of the City to UK economic activity, as measured by gross value added". Presumably this doesn't include the benefits of a well-lubricated financial system (if the failure of the world financial system screwed up the world economy, the corollary is that a well-functioning financial system leads to a well-functioning world economy).

- The time of measurement for the "social loss" due to bankers. If they had made measurements before late 2007, they would have come up with very different results for the value to society of bankers. If you had used their analysis to measure, after World War II, the "cost" of militaries, you'd have come up with a figure at least equally as shocking.

Advertising

- They claim that advertising is responsible for "the costs to UK society of obesity, anxiety-related mental health problems and indebtedness" as well as "the substantial environmental costs from climate change and resource depletion", which is grossly unfair. Industry estimates of the impact of advertising are used, but obviously these are inflated by the industry (and probably half-plucked from thin air, like the methodology of this report)

- An even more fundamental issue - the baseline for "excess consumption" is the "Minimum Income Standard" (the level of income people think is needed to afford a socially acceptable standard of living in the UK today, and to participate in society). While this is not the poverty line by any means, there is a reason the word MINIMUM is used. Furthermore, some of the assumptions are questionable - it assumes a Single working adult "needs" to spend 4.49 pounds a week on alcohol and 30.95 pounds on "Social and cultural participation" (presumably, going to the cinema with your chums is a 'need' and not a 'want'). You can learn more about this MINIMUM standard at: http://www.minimumincomestandard.org/

Hospital cleaners

- They assume that hospital cleaners' value is due to a "reduction in Hospital Acquired Infections" (which is totally attributed to hospital cleaners, ignoring the roles of people like doctors, government policy, the advertising executives who came up with awareness campaigns and the bankers whose efforts have helped finance the expansion of the NHS ever since Labour came to power) and "the contribution of cleaners to the wider social value created by the hospital" (they don't even reveal what percentage they attribute, so I cannot judge if it is reasonable)

More fundamental issues

- The study looks as the average "cost" and the average "benefit" of the various professions to determine if we pay them "fairly". However, as economists we know that a more sensible way of paying people is to look at marginal benefit and marginal cost. We should pay people where the Marginal Benefit of employing them equals their Marginal Cost - NOT where the Average Benefit equals the Average Cost (which would lead to either over- or under-employment, not to mention a loss in Consumer and Producer surplus). This is related to the diamonds and water paradox.

- They assume that tax revenue is automatically good for society. Is tax money used to pay for MP expenses necessarily better for the UK economy than a tycoon spending his avoided tax money on High Street? How about taxes which are used for military spending (a liberal bugbear)? In which case avoiding tax would presumably be considered a good thing by the authors of this report.

- They claim tax avoidance is the same as tax fraud. Does this mean that if you can pay more in taxes you should? Are we morally obliged to find ways to increase our tax burden? This is nonsense.

The report is filled with lots more simplistic logic. Like saying GDP per person in Sweden is higher than in the UK although taxes there are higher. Ipso facto, "economic performance or prosperity is not adversely affected simply because of higher taxes". This is an epic FAIL in economic (or even normal) logic.

Although it is more economic than the so-called "Humanitarian Organisation for Migration Economics" (HOME), it still has many serious problems.


B: I'm not going to defend the study as precise - it's obviously intended to be provocative and full of "big ideas" rather than exact calculations. I certainly agree with A that the alternative scenarios for comparing value are (at best) imprecisely defined.

However:

1. I think Gabriel's first few criticisms of the study on bankers amount to the same thing, that it's not fair to attribute the financial crisis to the richest bankers without attributing more value created to them.

It's not clear that the most well-paid bankers necessarily did much to contribute to a "well-lubricated financial system" which helped a "well-functioning world economy". One could assume 1) that those bankers which carried out the most financially innovative, high-risk-high-return transactions which produced all that illusory value which vanished off the balance sheets (to the tune of the GDP of several nations, I might add) were the most highly paid, while those who contributed to the prosaic purposes of administering savings and conventional loans and overdrafts and ATM machines were not, and 2) that it is those innovative, risky transactions that are responsible for much of the magnitude of the financial crisis.

These assumptions also address A's point that the conclusion of the report seems to imply that bankers shouldn't exist, or shouldn't be paid for what they do. It might well imply this for parts of the banking industry as it exists at present. I'm not sure this implication is so outrageous.

2. Gabriel is simultaneously criticising the use of a minimum standard of living for measuring excessive consumption (implying one should use a higher standard) and criticising that minimum standard itself for being too generous by including a modest amount of socialising.

This confuses me, if no one else. Obviously if one objects to the very concept of identifying a minimum amount necessary for basic comfort and ordinary social participation, the whole exercise may seem strange, but having embarked upon it then we must needs come up with a notional idea of what's ordinary social participation, not what's the bare bones for survival. As someone who lives in the exotic land that is England, I can confirm from direct ethnographic observation that a pint in the pub on a Friday night and going for a curry and the cinema are typically regarded as fairly ordinary entertainments round these parts.

3. I don't think using advertisers' own inflated, self-promoting figures to produce a case against them is unfair. Actually, I positively relish it. No, relish is not objective. (Tasty though, especially with some mustard and a hotdog.)


Me: 1. The financial crisis was due to many people, from the people who came up with faulty models to the people in banks' risk management who failed to assess the risk of their banks' portfolios correctly to bank officers who approved housing loans to NINJAs (No Income, No Jobs/Assets) to Chinese officials who bought US securities to government regulators to people who took out housing loans they couldn't afford to pressure to allow more minorities to qualify for housing (i.e. giving minorities loans when they would otherwise not qualify).

To lay it all on the laps of the bankers is unfair.

2. My point with regard to this was that the "Minimum Income Standard" is drawn up with questionable methodology and/or assumptions, not that it is deflated or inflated.

Obviously we can argue over what is a "need" vs a "want", and a mendicant Buddhist monk's answer would differ from an Upper Middle Class organic food-eating, fairtrade coffee-drinking, pub-hopping, Ryanair-holidaying chap, but the point is that the idea of "overconsumption" is contestable (and perhaps not even intelligible).

3. I would not convict a man based on idle boasting of his exploits in a pub. Though I might rib him about it.

Here are some studies that show advertising has no effect on consumption.


B: On a footnote, I didn't recall seeing any parts where the report was "just invective against the rich", let alone this material amounting to "most of the report". Where is this "invective"? I would like to borrow some for future use.

Do you refer perhaps to the slightly mocking tone of the faked-up job adverts (all three paragraphs of them amongst 44 pages of text)? I have trouble finding anything else that could even vaguely qualify.

Or is it simply that having the temerity to argue robustly against myths about 'the deserving rich' constitutes the use of 'invective'?

On which note perhaps Pastor Martin Niemöller is turning in his grave:

http://www.hurryupharry.org/2009/12/17/first-they-came-the-rightwing-remix/


Me: Invective does not necessarily involve abuse - it can also be denunciation. And the report is certainly full of it.

A few specific examples:

i) "these City bankers are being handsomely rewarded for bringing the global financial system to the brink of collapse"

-> Many of the so-loathed bankers responsible for this debacle have left, and other bemused bankers have been working overtime to clean up the mess. Blaming all bankers for what some of them did [and not entirely knowingly] is like blaming your favourite minority for the crimes [and we all know the brickbats THAT will get you]

ii) "The wealthiest do not pay their fair share of tax and the very wealthy may pay none at all"

-> The "fair" level of tax is not defined (or even discussed) Presumably what is "fair" is paying the maximum that one can under the tax regime, and tax avoidance/optimisation is trying to escape your "fair" tax burden. But this begs the question of what level is "fair", and what forms of tax avoidance/optimisation are "fair" and which are "unfair".

For example, if I go to the trouble of filling up forms for VAT refunds when I leave a foreign land, this is a form of tax avoidance - am I paying my "fair" level of taxes? Are all forms of accountant-based tax avoidance necessarily "unfair"?

I would also be very interested in finding the very wealthy people who pay no tax at all. Obviously I need to change my tax accountant soon.

> Or is it simply that having the temerity to argue robustly against myths
> about 'the deserving rich' constitutes the use of 'invective'?
>
> On which note perhaps Pastor Martin Niemöller is turning in his grave:
>
> http://www.hurryupharry.org/2009/12/17/first-they-came-the-rightwing-remix/

I fail to see the relevance of this.

Lumping together those who are against rich-bashing with the most puzzling members of the right-wing is like condemning all those who work for social justice as Marxist Conspirators.
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