Mark Thoma: W. Arthur Lewis and the Tradeoffs of Economics and Economists [feedly]

W. Arthur Lewis and the Tradeoffs of Economics and Economists
http://economistsview.typepad.com/economistsview/2017/06/w-arthur-lewis-and-the-tradeoffs-of-economics-and-economists.html

From Vox EU:

W. Arthur Lewis and the tradeoffs of economics and economists, by Ravi Kanbur, VoxEU: There is nothing new under the sun. The passionate political economy discourses of today consume us entirely. But they are in fact perennials, broaching the fundamental questions of economic policy that have ruled supreme since economics gained an independence of sorts from moral philosophy 250 years ago.¹ The nature of market failure, the case for government intervention on grounds of efficiency and equity, and the interplay between economic and political forces are some of the tracks on which discourses have run for generations. The life and work of W. Arthur Lewis, winner of the 1979 Nobel Prize in economics, is a testament to the tradeoffs of economics, and of economists.

Arthur Lewis was born in the British West Indies in 1915. He won a scholarship to study at the London School of Economics, graduating with first class honours in 1937.² And yet Lewis's path was not entirely smooth. Even at the LSE, an institution founded by Fabian socialists, he faced the racism that he also met in the streets of London. When he was considered for a temporary one year appointment at the LSE in 1938, the Director of the LSE wrote to the Board of Governors that: "The appointments committee is, as I said, quite unanimous but recognise that the appointment of a coloured man may possibly be open to some criticism. Normally, such appointments do not require confirmation of the Governors but on this occasion I said that I should before taking action submit the matter to you" (Tignor 2006: 21).³

Lewis became involved with the burgeoning decolonisation movement in Britain, and consorted with the likes of C L R James, George Padmore, Eric Williams, and Paul Robeson. The 1930s and 1940s were a period of ferment not just on the decolonisation front. Economic policy in general was under discussion and dispute. From Cambridge, John Maynard Keynes had excited a generation of students with his critiques of 'the Treasury View' in the face of massive and persistent unemployment. Arthur Lewis was Keynesian in macroeconomic matters, but also more interventionist in microeconomic and structural policy. This set him against Sydney Caine, an influential official in the Colonial Office, in the work of the Colonial Economic Advisory Committee, on which Lewis served. Lewis described Caine as "a religious devotee of laissez-faire, and his headship of the Economic Department at this juncture is fatal" (Mine 2006).

In 1951, Kwame Nkrumah won a sweeping victory in the elections in the British colony of the Gold Coast (soon to become the independent country of Ghana) and in 1952 Lewis was invited by Nkrumah to write a report on industrialisation (Lewis 1953).⁴ At this very time, Lewis was fashioning his Nobel Prize winning argument on 'surplus labour', which he argued was the state of affairs in the West Indies, in Egypt, and in India (Lewis 1954). In these situations, the main brake on development was inadequate investment in manufacturing, and to the extent that this investment was held back by market failures in the manufacturing sector, the government should intervene to address them.

However, Lewis's thrust in his report was that the Gold Coast, unlike India, did not present a situation of surplus labour. Rather, it was one of labour shortages given the large amount of land available in agriculture. In this situation the way of releasing labour for manufacturing, without pushing up wages so much that investment would be choked off, was to increase agricultural productivity. In labour shortage economies, that would have been priority number one. The Gold Coast industrialisation report revealed the evolving balance of Arthur Lewis as the economist. Identify the nature of the market failure first, then design the intervention.

Arthur Lewis was present in Accra for the celebrations when the Gold Coast became Ghana on 6 March 1957.⁵ But he was to return in October of 1957 for a fateful stint as the government's chief economic adviser, at the invitation of Kwame Nkrumah. His 15 months as resident adviser in Ghana were tumultuous. There were some policy areas in which he sided with the government and Nkrumah. Perhaps the most famous of these is his general agreement that the surpluses from the cocoa price boom should be collected by the government and used for development purposes rather than passed through to cocoa farmers, a view very different from positions being advanced by Bauer (1954) at that time. However, in the main Lewis clashed with Nkrumah, especially on various 'white elephant' projects that were being considered and approved, many of them in the name of industrialisation.

The letters of this time provide a real insight into the clash between the economist and the politician. After a series of attempts by Lewis to intervene in the drafting on the Five Year Plan, his verdict on the plan was that it made "inadequate provision for some essential services while according the highest priority to a number of second importance….Alas, the main reason for this lack of balance is that the plan contains too many schemes on which the Prime Minister is insisting for 'political reasons'" (Tignore 2006: 167). Nkrumah's responses to Lewis were to be expected from a man who had famously said "seek ye the political kingdom first". In an exchange that brought to a head Lewis's decision to leave his post as economic adviser, Nkrumah emphasised "political decisions which I consider I must take. The advice you have given me, sound though it may be, is essentially from the economic point of view, and I have told you, on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future" (Tignor 2006: 173).

How can one explain the seeming contradictions in Lewis? On the one hand was the critic of laissez-faire economic policies, whom the radical anti-colonialists expected to be on their side. On the other was the economist who acted as a check on the extreme statist interventions proposed by this same tendency in economic policy discourse, arguing against heavy state subsidy to industry on purely economic grounds, even leaving aside its propensity for corruption and use as political patronage.

As a student, Lewis must have read John Maynard Keynes's clarion call in his essay "The End of Laissez Faire" (Keynes 1926).⁶ This was, seemingly, a call to abandon the tenets of 19th century economic liberalism in favour of a more interventionist credo – "let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded" (Keynes 1926: 287-8). This is Keynes presaging the Lewis of the 1930s and 1940s railing against Sydney Caine and his laissez-fair policies for the colonies. And yet in the same essay Keynes hints at a different world view, a more nuanced perspective on state intervention:

"We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ʹone of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion'" (p. 288-91).

How like Lewis, or rather how like the economist Lewis became in Ghana.⁷ I have argued elsewhere that Edmund Burke's question is the eternal question of political economy and accounts for the cycles of thought in economics (Kanbur 2016). This is what allowed Lewis to support some industrial intervention in his first report on the Gold Coast, while at the same time asserting the primacy of agricultural development. It is what allowed him to support substantial taxation of cocoa while at the same time railing at the (economic and political) misuse of the funds so raised. That was Arthur Lewis in Ghana, but it was Arthur Lewis all along. It has also been political economy all along, and will continue to be so.

References

Aryeetey, E, and R Kanbur (eds.), The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.

Bauer, P (1954), West African Trade: A Study of Competition, Oligarchy, and Monopoly in a Changing Economy, Cambridge University Press.

Kanbur, R (2016), "The End of Laissez Faire, The End of History and The Structure of Scientific Revolutions", Challenge, 59 (1), 35-46.

Kanbur, R (2017), "W. Arthur Lewis and the Roots of Ghanaian Economic Policy", In E Aryeetey and R Kanbur (eds.) The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.

Keynes, J M (1926), "The End of Laissez-Faire", in The Collected Writings of John Maynard Keynes, Volume IX, Essays in Persuasion, Royal Economic Society, Palgrave MacMillan, 1972.

Lewis, W A (1953), Report on Industrialization of the Gold Coast, Accra.

Lewis, W A (1954), "Economic Development with Unlimited Supplies of Labour", Manchester School, 22 (2), 139-191.

Mine, Y (2006), "The Political Element in the Works of W. Arthur Lewis: The 1954 Lewis Model and African Development", The Developing Economies, XLVI-3, 329-355.

Tignor, R L (2006), W. Arthur Lewis and the Birth of Development Economics, Princeton University Press.

Endnotes

[1] The conventional dating for this is of course the publication of Adam Smith's Wealth of Nations in 1776.

[2] I draw liberally on the comprehensive and excellent biography by Tignor (2006).

[3] Tignor (2006: 37) also recounts the story of how, despite his by then brilliant academic qualifications, his appointment to a Chair at Liverpool was blocked for reasons of "other considerations than high academic standing." Finally, however, he did get his Chair, the Stanley Jevons Chair at the University of Manchester in 1948.

[4] Lewis's transmittal letter on the report, written to Minister of Commerce and Industry K A Gbedemah and dated 5th June, 1953, notes the details of the assignment: "I have the honour to transmit herewith my Report on industrialization and economic policy, which I was commissioned to write by letter No. MCI/C,16/SF.3/18 from your Ministry, dated November 29, 1952. I visited the Gold Coast from December 15th, 1952, to January 4th, 1953, and travelled extensively in the country, covering about 1,800 miles by road and by air. I had the opportunity of visiting many industrial establishments, and I discussed the subject with as many persons as possible in the time available." (Lewis, 1953, p. i).

[5] For an assessment of Ghana's economy in the sixty years since independence, see Aryeetey and Kanbur (2017).

[6] For an assessment of this essay in the broader context of the evolution of economic thought, see Kanbur (2016).

[7] Tignor (2006) and Kanbur (2017) further discuss Lewis's post-Ghana life and work.

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Cleveland FED: New Data on Wealth Mobility and Their Impact on Models of Inequality [feedly]

New Data on Wealth Mobility and Their Impact on Models of Inequality
http://economistsview.typepad.com/economistsview/2017/06/new-data-on-wealth-mobility-and-their-impact-on-models-of-inequality.html

Daniel Carroll and Nick Hoffman of the Cleveland Fed:

New Data on Wealth Mobility and Their Impact on Models of Inequality: Wealth inequality, the unequal distribution of assets across households, has been rising for decades. However, this statistic alone gives an incomplete picture of the inequality of households' economic experiences and opportunities. A fuller understanding comes from also knowing how much movement within the distribution households experience over time. For instance, is it likely that someone with low wealth today will be a wealthy person at some point in the future, or are they rigidly stuck at the bottom? In other words, a fuller understanding of households' economic opportunity comes from a combination of data on both wealth inequality and wealth mobility.

This Commentary explores the topic of wealth mobility in the United States during the past three decades (see Carroll and Chen 2016 for similar work on income inequality and mobility). Examining supplemental data from the Panel Study of Income Dynamics (PSID), which track families' wealth over time, we calculate changes in relative wealth mobility; that is, how likely families are to move up or down the wealth distribution, relative to one another. We find that wealth mobility has declined since the 1980s, a trend that is robust to a wide range of measures. Finally, we identify savings behaviors that are associated with more mobile families. Such behaviors may explain the disparity between observed levels of mobility and the levels predicted by the standard model used to study inequality. ...

Jumping ahead:

Conclusion Wealth mobility depends on luck and household choices. It is a reflection of households' opportunities as well as their responses to those opportunities. Panel data from the past 30 years show a decline in wealth mobility across several measures. It appears that families are less likely to change wealth quintiles over time, while those that do move are less likely to move very far. The reasons for these trends are not fully known, but increasing wealth inequality has contributed to the decline. Families that do make large movements through the wealth distribution appear to be more likely to own some form of a risky asset, as compared to families that do not make large movements.

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Piketty: Will Macron’s Marchers take power? [feedly]

Will Macron's Marchers take power?
http://economistsview.typepad.com/economistsview/2017/06/will-macrons-marchers-take-power.html

With over 350 seats, the MPs elected on the « La république en marche » (LREM) ticket will have an overwhelming majority in the Assemblée Nationale (Parliament). Will they use it to be in the forefront of reform and renewal of French politics? Or will they simply play a passive role, rubber stamping and obediently voting the texts that the government sends them?

It happens that they will shortly be faced with their first real-life test with the question of deduction of income tax at source. The government wishes to postpone the implementation until 2019, perhaps forever, for reasons which are totally opportunist and unjustified. This big step backwards is bad news for the alleged intention to reform and modernise the French fiscal and social system proclaimed by the new government (a general intention that is unfortunately rather vague once we enter into the details: see What reforms for France), and leads us to fear the worst for what is to come. Now, contrary to what has been stated, the government cannot take this sort of decision without a vote in Parliament which should therefore take place in the coming days or weeks.

There are two possibilities. Either the LREM MP's force the government to maintain this crucial reform and its application as from January 2018, as was already voted by the outgoing Parliament in the autumn of 2016 in the context of the 2017 Finance Act. It will then be clear that the new MP's are ready to play their role fully in future reforms and oppose the executive when necessary. The other option is to follow in the steps of the conservatism of the government, which, unfortunately, seems to be the most likely outcome. This would alert us to the fact that with this new majority and this new authority we are dealing with reformers who are mere paper tigers.

Tax deduction at source and the social contract

What are we talking about? The deduction of income tax at source was implemented in 1920 in Germany and Sweden, during World War Two in the United States, the United Kingdom and the Netherlands, and in the 1960s-1970s in Italy and Spain. France is the only developed country which has not introduced this. This is one of the most archaic aspects of our tax system and our administration. In this respect, we are between 50 and 100 years behind all other countries.

This is all the more regrettable as tax deduction at source would enable a considerable gain in efficiency for all the parties concerned. In the first instance, for taxpayers, who in the present system find themselves paying their taxes one year after receiving the income, when their professional and financial system may well have completely changed. On the contrary, the new system would enable tax payment to be adjusted in real time to the situation of each individual.

In matters of tax administration, this would enable tax officials to focus on more important tasks, in particular on tax inspection and combating tax evasion.

Finally, for businesses: some business leaders, noted for their conservatism, claim that this reform will mean more work for them (the same line of argument has always been used in all the countries in which this reform has been implemented over the past century). The truth is that deduction at source has already been established in France since 1945 for social contributions. In total, income deducted at source amounts to more than 20% of GDP, if one includes all social contributions (including CSG), whereas income tax represents less than 4% of GDP. The extension to deduction at source of income tax will be a source of simplification for our tax system which will ultimately be to the advantage of businesses and all social and economic stakeholders.

In fact, the constant postponement of this reform has led to bureaucratic nonsense of an incredible complexity. A blatant example is the employment allowance (PPE), recently renamed activity bonus (PRIME D'ACTIVITE). At the moment, after deduction at source of social contributions, the wages of a full-time worker earning the statutory minimum wage (SMIC) are reduced by approximately 300 euros per month (1,450 Euros before tax to 1,150 Euro net). Then, if he or she applies for it, several months later the employee will receive the equivalent of 130 euros per month as an activity bonus from the family allowance benefits fund (caisses d'allocations familiales). It would obviously be preferable to deduct less at source, to ensure that each worker receives a higher net wage on his or her monthly payslip and thus be able to organise their lives in function of resources of which he or she is assured, instead of wasting time in uncertain procedures which are random and stigmatizing. Why have we ended up with such an absurd system? Because income tax is not deducted at source. The result is that it has never been possible to pay the PPE (the employment allowance) – which was part of income tax when it was introduced – automatically on the pay slip. This is one of the many concrete situations which could be cleared up if the reform was implemented.

Over and above these practical aspects, which are essential, there is a much broader democratic, political and philosophical dimension at stake in the establishment of tax deduction at source. It is one of the key elements in the clarification of the relation between the State and the tax-paying citizen. It enables the question of taxes and that of transfer payments, the issue of fiscal justice and of social justice, the question of a fair income and that of a fair wage to be considered at one and the same time.

Generally speaking, it would be a grave error to deal with these questions of taxation and mode of deduction as purely technical questions. In the absence of a fair and accepted system of deduction, without consent to taxation there can be no collective capacity to act. Fiscal revolutions are central to all the major political revolutions. Without deduction at source, the social security system could not have been established. Just imagine each wage-earner writing a cheque to the social security fund one year late, for sums amounting to over 20% of GNP? The fact that deduction at source has never been extended to the State taxes conveys a distinct limit to our collective capacity to construct a relationship of trust between the tax-payer citizen and the central State in France. This is an issue which involves our social contract in its totality.

François Hollande's last five-pin billiards shot –

Unfortunately, the issue of generalising deduction at source has been a subject for discussion for decades now in France. On each occasion this reform has been rejected. In 1999, confronted with the protests of part of the tax officials and businesses, the Jospin government finally decided to sacrifice M. Sautter, the Minister who introduced the reform. At the time, it was postponed for one year. That was 18 years ago.

After considerable hesitation, the socialist governments in power between 2012 and 2017 finally decided to introduce a very well thought out project which was voted by Parliament in the autumn of 2016, enabling the reform to be introduced in January 2018. It is of course regrettable that this new system was not implemented earlier, before the elections and not after, to ensure that the reform could no longer be challenged. Doubtless it can be considered a desperate attempt by François Hollande in support of his campaign for re-election and we all know how that ended.

The fact remains that it is a good reform, undoubtedly the most important for decades in the field of taxation. The system formally adopted by the MPs in Autumn 2016 in the context of the Finance Act for 2017 is a good system. In particular, it is based on modern, information technologies (which the German, Swedish, American and British reformers did not have in the inter-war years or World War Two) which enable the transmission in real time and anonymously of all the information required for businesses to apply the correct rate of deduction. All the relevant consultations with tax officials and businesses had taken place, there were no further challenges to the reform, everything was ready for its implementation in January 2018.

Following the productive discussion in Parliament in Autumn 2016, it had even been suggested that taxpayers who so desired could easily choose the application of a neutral rate (which would not take into account any other income they might have, or their family situation) or a customized rate (enabling the spouse who earns less, often the woman, to be deducted at a lower rate than that applied to the other). No other country in history has been able to provide as many guarantees and choices for the implementation of tax deduction at source (this is the advantage of later reforms: we have better technical supports).

When the head reformer buries the reform

In May 2017, along comes a new president, Emmanuel Macron, self-proclaimed 'head reformer' of the country. What did he announce in a press release dated 7thJune, a few days before the first round of the parliamentary elections?- that the implementation of deduction at source had been postponed indefinitely. True; an implementation in 2019 is mentioned. But given that the last postponement for one year dates back to 1999, concern is legitimate. The historical experience of these issues suggests that this type of reform must be implemented at the beginning of the five-year term (quinquennat) especially when they are already fully operational, otherwise there is a high risk of permanent postponement.

All this is particularly worrisome in that the official excuse – that it would place too great a burden on businesses and that the reform was not yet ready – is quite simply not credible.

The German, Swedish, American, British, Dutch, Spanish, Italian etc. businesses have been ready for a century, or half a century (depending on the country) to apply tax deduction at source at a time when information technology did not even exist, and we are being made to believe that French businesses would not be ready to implement this system in 2018? None of these countries has ever reversed this reform and we are still wondering whether France is ready to meet the challenge? The whole thing makes no sense.

The truth is that everyone knows that the real reasons for postponement are elsewhere. It is a question of pleasing the most conservative fringe of business leaders on one hand; but primarily it guarantees maximum visibility for the micro fiscal reform that Macron wishes to implement in January 2018. This is the rise of 1.7% in the CSG (generalized social contributions) enabling the financing of a reduction of 3% in regular social contributions for employees (at the expense of pensioners, in particular). This reform should result in a rise in net salary. Macron wishes this message to come over loud and clear. The implementation of tax deduction at source at the same time might confuse the issue, something which Macron wishes to avoid.

I want to be very clear: this is a particularly lame excuse. Firstly, because taxpayers are perfectly capable of understanding that these two reforms are separate, provided that an effort is made to explain this to them.

Then, because 'fiddling' with the CSG rate and social contributions is particularly untenable in substance. The fact is that retirement pensions of over 1,400 Euros per month are to be cut to raise the monthly salaries of 5,000 Euros, 10,000 Euros or 20,000 Euros. Good luck to the LREM MP's who have to explain the logic of this type of redistribution to their electors. I only hope that when the time comes they will have more common sense than the lead 'reformer'. In this situation, the correct solution would obviously be a reform based on progressive rates, that is lower for the low-income groups and higher for the higher ones, whether it be salaries or retirement pensions.

In any case, it is extremely alarming to see a President take the risk of permanently compromising a reform as structural as the implementation of tax deduction at source, simply to ensure more visibility to a very small tax reform (which, no matter what one might think about the content, is only a minor parametric reform: the rate of an existing tax is being raised, to lower that of another).

 

Lies and bad faith

The last totally dishonest excuse sometimes relayed by complacent or poorly informed media is that deduction at source would be impossible to implement in France due to the 'familialisation or family-based' aspect of income tax, that is the fact that income tax depends on the family situation (dependent children and spouse). In reality, the same applies in all countries. Throughout the world, in one way or another, income tax depends on the number of dependent children with different systems of taxable income or tax reductions. These systems are indeed different from the family quotient used in France, but the rate of deduction to be applied, in consequence, is also a function of the number of dependent children (sometimes in an even more specific way than in France, given that the family quotient is capped in France), and this in no way prevents tax deduction at source from being applied. It should also be borne in mind that in Germany and in the United States, the calculation of income tax depends also on the income of the spouse, in accordance with a system which is close to the marital quotient in France and, there again, this has in no way prevented the deduction at source from being applied for almost a century now. On all these questions, the French reform offers in reality much more flexibility and confidentiality than all similar reforms applied in other countries.

In conclusion: the government communiqué dated 7 June 2017 announced the postponement of the reform, as if everything had already been decided, discreetly specifying that 'appropriate legislative and regulatory measures would soon be taken to organise the postponement'. In fact, even if the new executive power would very much like to do without the checks and balances of parliamentary oversight, this is happily impossible under our current laws. The reform of tax deduction at source with a clear timetable for implementation was formally adopted by parliament (the Assemblée) in the autumn of 2016. This timetable can only be changed and the reform postponed by a new vote in the Assemblée. It is to be hoped that the LREM MPs will know how to seize this golden opportunity to assert their faith in the democratic renewal, the reform and the modernisation of our country.

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Enlighten Radio:Labor Beat on Winners and Losers: Railroad Earth, Richard Wolff, Union Edge

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Post: Labor Beat on Winners and Losers: Railroad Earth, Richard Wolff, Union Edge
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Enlighten Radio:The Are You Crazy Day -- Starting with the Fabulous Lou Rawls

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Enlighten Radio:Best of the Left Tuesday on Enlighten Radio

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Enlighten Radio Podcasts:Winners and Losers Podcasts: Coalition on Human Needs, plus Hound dog and Abel Eakin

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