Wednesday, 10 November 2021

The economics of whether we should pay MPs more?

Should we pay MP’s more? They are already on £80k a year which puts them in the top percentages of pay in the UK. For many, how much someone should get paid is a question of morals. Why should bankers get paid more than a nurse, for example? And politicians are perhaps at the bottom of the pile in terms of what the public deems worthy remuneration.

Most people generally want a politician to mow their own lawn and travel in standard class. In some ways, this doesn’t make sense, as you would probably prefer them to work on, you know, political stuff. And maybe that means getting someone to cut the grass now and again. But the idea is the more a politician moves away from peoples ordinary lives, the less they are able to understand them (at least this is what I observe, way up high, in my tower made of elephant tusks).

This does raise the question though, should we pay them nothing? Surely the honour of serving as MP is reward enough? The problem with this argument is not only who would want to become an MP, but who could. You would have to be from an incredibly wealthy background to even consider it and you would end up with a parliament looking like one from the 1800s.

One of my research interests is occupational choice: why do people choose one career over another? So let’s say you were personally thinking of becoming an MP, what would you do? Well, you might write a big list of pros and cons of becoming an MP over what you are currently doing. Although there are lots of factors that make up the decision, let’s start with wages.

For most people, £80k a year is going to be a big wage increase so it seems like a no brainer that being an MP would be better. But there will be some people, some doctors and lawyers for example, that would have to take a wage cut. So if we paid MPs more would we get more applicants from these types of people? And if you think that these types of people would make better MPs, then it might be a price worth paying (whether this is true or not is up for debate, but let’s just go with it for now).

But just looking at current wages doesn’t take into account the long term. Becoming an MP is not necessarily a job for life. Lisa Forbes who was elected in June 2019 lost her seat in December of that year. There is an element of risk involved. This might not necessarily be a problem if you can slip back into your old career or move on to a new one (more on this later).

For many very high-paying careers (over 80k), however, taking time out can really hurt your pay. This is something women know only too well. So the amount you would have to increase MP’s pay by, in order to attract those who earn over 80k, would need to compensate not only for their current wage, but the job insecurity and future earnings hit they may receive. In other words, you would have to pay a lot more than simply matching someone’s earnings.

Now of course there are other important considerations when becoming an MP. Not least the fact that everyone will think you are an arsehole. How much you would have to remunerate someone for this is going to vary from person to person. Personally, I wouldn’t become an MP for anything less than the entirety of UK GDP. If you are the type of person who doesn’t care that everyone thinks you are an arsehole, then you are most likely an arsehole. It is a vicious circle.

But on the other side, if you make the job of being an MP too attractive by paying them lots and fawning over them all the time, then people might do anything to cling on to their job. When voting on a particular issue do we really want MPs to be thinking “this is going to costs me £X if I vote the way I think I should?

Joking aside, we have seen two MPs lose their lives in a very short space of time. To me, pay is probably the last thing on many peoples minds when deciding whether to become an MP or not.

OK, so would paying MPs more help with the whole second jobs scandal at least? Well, first we need to understand why second jobs are a problem to begin with. You could argue that MPs should focus all their time doing MP stuff, which is a fair point.

Another concern is that by taking a second job there is a potential for lobbying. Now the line as to what is legal and illegal here is a little blurred. It doesn’t have to be brown envelopes under the table kind of thing. It could be that I play within the rules but it still offers some advantage to whoever is paying me. Now it might be that the MP actually agrees with what the company they are lobbying for are doing, but the incentives here for them to be influenced are just extremely high and will inevitably lead to problems.

So if we pay MPs more, does this reduce the incentive to take on these 2nd jobs? Well to a certain extent, yes. But remember, what we really care about here is MPs doing corrupt things by accepting these 2nd jobs. This is where it gets a little complicated.

Is everyone corruptible, by that I mean is there a figure that you would be willing to do a corrupt thing? If yes, then by paying MPs more would push this value higher which may reduce overall corruption. But what if we just think there are some corrupt people and some uncorrupt people. If that is the case, paying MPs more just allows those corrupt MPs to bargain for higher payments without reducing overall corruption.

There is quite a big literature on this in economics and is an important question but I think we need to look at the issue of second jobs more closely. It seems that a lot of these second job scandals seem to be taken by former ministers who have lost the extra pay they get from performing ministerial duties.

To me this makes a lot of sense why these individuals would go looking for extra income. There is a huge finding in economics that people don’t like having their wages cut. OK, this may seem obvious, but hear me out. Let’s say your boss says you either work longer hours or get a pay cut, which one would you choose? Most people will choose to work longer hours.

You can kind of see why. You may have rent or mortgage repayments based on that level of earnings and all sorts of lifestyle choices that make a drop in income more undesirable than working extra hours. Economists call this downward wage rigidity to sound fancy.

So one way around this 2nd job problem would be to equalise ministers pay with MPs, so that being fired or resigning from being a minister doesn’t involve losing out on extra pay (this may cause other issues but I am not paid enough to solve all of the government’s problems for goodness sake).

The other thing to consider is what happens once an MP leaves parliament. Banning second jobs doesn’t preclude MPs from lobbying from outside once they leave office, like the recent scandal with David Cameron. Going back to the decision as to whether you want to become an MP or not, those who are inherently corrupt may actually be attracted to the future income streams that being a politician can provide. So I think any discussion about second jobs needs to also involve people who have served as an MP too.

So to sum up, will paying MPs more result in better “quality” MPs or less corrupt ones. Even if it were politically possible, I think probably not. Although I am not totally wedded to this view and am open to changing my mind, as I do need some new wallpaper...

Tuesday, 9 November 2021

Infinite growth on a finite planet: an explainer

Anyone who thinks that you can have infinite growth on a planet with finite resources is either a madman or an economist - Sir David Attenborough

Do you think we can get infinite growth on a finite planet? Personally, I would not say “yes” to this question. I think economists answer this question badly as there is just so much room for misinterpretation. So here is how I would answer it…

I do not believe you can continue to use finite resources forever. They are, by definition, of limited quantity. Ultimately, we need to shift away from fossil fuels and reduce CO2 emissions to help fight climate change.

We often think about economic growth as using up materials. We take some of these finite resources and use them to create something else, something new. In my mind, I picture industrialisation, huge factories being built out of solid concrete puffing out huge plumes of smoke.

And throughout most of recent history, resources have been a key input in driving economic growth. Economists call this extensive growth - when you use more physical inputs to get more output.

If you were a farmer back in the Middle Ages and wanted to grow more vegetables, you could just plant some more in a neighbouring field. More resources, more output. At some point though all the neighbouring fields become occupied by other farmers.

Farmers found out by simply rotating where crops were planted each season, they were able to get more output with the same amount of inputs. This is what economists call intensive growth and what we often refer to as productivity.

At this point you may say, this is all very well, but we still need to use some physical inputs to get more outputs. Even if we make a coal plant more efficient, we still need to put at least some coal in it.

So this is where we get to the crux of what growth actually is. The way we often measure it, GDP (Gross domestic product), is based on summing up the value of everything that is sold in the economy. If I buy a beer and a pack of crisps in a pub, I am adding to GDP (I like to do my bit for the economy) and using up physical recourses.

But I also like to go to concerts. When I pay to see someone play music, is that using any physical inputs? You could say, of course it does because I travelled there by train, and they needed electricity to plug in their Yamaha CS-80 synthesiser.

But what I am really paying for here is listening to the musician play. Even if we lived in a society that banned travel and the use of electricity, I may still want to pay to see someone sing even if I had to walk there. So if we were somehow able to create sustainable resource use (and that’s a big if), then in the future we could get “infinite” growth: as long as people want things, you will get “growth”.

This is what economists are thinking of when they say “yes” to the question posed by Sir David Attenborough. But to me, it is sort of feels like a technicality – a quirk of how we calculate growth.

The more pressing question is climate change. If we continue at the same levels of C02 emission there will be negative consequence for the climate. This is why we should care about the amount of physical inputs we are using, even if we are getting more intensive growth out of them.

This is why to some, the Degrowth movement is appealing: in order to decreases carbon emissions, we need to decrease growth. However, I would prefer to rephrase this a different way: we need to decrease carbon emissions, even if this costs economic growth.

Economic growth is not the root cause of climate change, it is carbon emissions. Focusing our attention on growth - with all its weird idiosyncrasies – leads you down a blind alley.

Let’s say that in order to decreases growth we ban the use of air travel overnight. Do I think this will causes a recession - yes. Do I think it will have a long-term decrease on growth – I don’t know. The reason I do not know, is once you have banned the use of air travel, the incentive to innovate new ways to travel is huge. Banning air travel does not stop people wanting to see the world. And let’s say, that some miraculous way to travel quickly to other countries is invented without producing carbon – would we want to ban that as well?

Even in my example society where electricity and transport were banned – it may take you to the level of what growth was at in the Middle Ages but it is highly unlikely to stop growth from that particular level. People will try and innovate around those constraints and invent new ways of finding out what people want.

Now you could try and shift those wants and preferences like the Degrowth movement by arguing we can be happier if we buy less stuff. And I agree with this argument in many ways: often we focus on the material as opposed to the things that really make us happy like spending time with family. But stuff can also help me spend more time with family, like helping me wash the dishes via a dishwasher. And if we are able to find ways for people to buy as much stuff as they want without harming the environment, then who I am to tell others what will make them happy?

The crucial thing here is that we should be willing to sacrifice some economic growth to help fight climate change - if that’s what it comes to. Economic growth is not an end to itself. We care about other things than incomes, as the pandemic made clear.

This is why most economists are in favour of carbon taxes. Personally, I am in favour of carbon taxes to the extent that it may decrease future growth. And it may be that proponents of Degrowth would go further than me in terms of how high these taxes should be. But the focus needs to move away from hypothetical arguments about growth (ironically one of the objectives of Degrowth is to stop our obsession with growth) and to one on actual policies to help fight climate change. Because at the moment, I think a lot of people are talking past each other and it's not very productive.