Gary Stevenson is wrong about the real world

Offering a critique, or at least an economic critique, of lefty darling Gary Stevenson is difficult. His book (which is largely a memoir) and his YouTube videos don’t offer much economics to get one’s teeth into. There are a lot of assertions that it’s the rich wot dun it — and then ran away — but of an economic model to explain this, or even the facts and figures to try and puzzle through the idea, there isn’t a lot. Yet of course it’s a stunning hit because Britain’s never been short of those who would like to tax the rich ‘till the dripping snot ran red, etc. Citizen Smith was a documentary, not fiction.

Fortunately, help is at hand. Stevenson’s master’s thesis is both online and about this very point. The essential economics of his claims are contained here. He really does say that this is his core idea. This is the bones of it all, and everything else is the selling of the point:

This thesis explores whether wealth inequality could be the cause of recent unpredicted rises in asset prices and sustained falls in interest rates, by using fixed-factor, heterogeneous agent models with asset ownership appearing explicitly in the utility functions of agents. When inequality is very high, increasing inequality is shown to push asset prices up and interest rates down.

The correlation we know about. Low interest rates push up asset prices. This was the very reason to have quantitative easing in the first place — to push up asset prices and thereby get people interested in borrowing cheap money to create new tranches of those now high priced assets. The longer this goes on, the more we think it will happen. More investment would be good and our way out of our problems. The correlation we know about, and the causation is entirely standard economics.

Stevenson’s thesis is that the causation runs the other way. Perhaps in part, perhaps wholly. The very fact of high wealth inequality — and he means wealth, not income here — causes asset price rises and pushes interest rates down. This is the novel claim: causes, not is caused by.

It’s an interesting theory. He models it, and, in his model, it works. Obviously, that’s rather how a thesis works, but even so it’s viable. The question is whether it’s true?

A light detour. There are many things that are true in economics, including many things which are true and important in their own small ways, but which aren’t true at the level of the whole system. They interact with other equally true and important things stemming from elsewhere and so do not dominate said system.

As an example, some people work to make their nut and then go fishing. So, if we raise taxes upon their work income, they will work more hours to earn that nut so as to be able to go fishing. This is called the income effect. Others look at what they earn from working and only go fishing when that is less than the value to them of fishing. If we raise taxes upon these people, then they’ll reduce their working hours — pay is now less than fishing is valued at — and go fishing. This is the substitution effect.

Both are wholly true. As it happens, the income effect seems to apply to pieceworkers on lowish incomes — say, taxi drivers (or freelance writers). This is why we can never find a cab in the rain (or a quick article when you really need one). More people wanting a cab means the nut is earned earlier, and off canalside it is. An increase in demand can — no, really — lead to a reduction in supply. Grasping this point is what gave Uber the idea for surge pricing which increases supply at that time of increased demand, for we’ve got to raise wages substantially to keep the cabbie on the road once nut met, etc.

So this really is true — true enough to build a centi-billion dollar business on (by value at least).

Also, as it happens, the substitution effect seems to apply more to higher income earners. If the b’stards are going to take 60 per cent of my earnings, then I’ll not bother. I’ve got my own canal to fish in anyway.

Neither of these really applies to any one of us all the time, but each applies to enough people enough of the time that we get that Laffer Curve thing. Yes, tax rises can make some people work more, some less — now what’s the balance over the society at which tax rate?

We can reduce asset prices and raise interest rates without significant wealth taxation

So, we can have things which are true, accurate descriptions of human behaviour but which do not, in fact, explain observable reality by themselves. The income effect alone would have us all working 90 hours a week at a 90 per cent tax rate — which isn’t what happens.

The Stevenson Thesis leads to the policy claim. We’ve got to tax the wealth off ‘em because if we don’t, then the self-reinforcing circle just carries on. High wealth inequality causes asset prices to climb further, interest rates to fall or perhaps stay too low.

I’m perfectly willing to accept the thesis as something that happens. Maybe a bit, maybe a lot. This is partly just due to me being me — I’m usually willing to accept someone else’s arguments and then see where that takes us.

A second detour — as it happens, Stevenson and I did the same degree (economics “with”) at the same university (LSE) some two decades apart. The big difference is that he got a first, I a third. I am therefore incapable of having grand ideas that spring Athena-like. I have to go and look things up. Ho hum — well, every econ student is told about comparative advantage and all that.

So, the claim is that this is all self-reinforcing and unless we tax ‘till the snot, etc, then we’ll never escape. The thesis is dated 2019. Since then we’ve had Covid and QE II. We’ve also had, since then, the resurgence of inflation and rising interest rates. If we are to take the Stevenson Effect seriously, then we have to assume that rising interest rates were caused by a fall in wealth inequality, and therefore snot, etc, isn’t necessarily called for (or not for this reason, even if it’s very popular amongst the Wolfie Smiths).

Well, that could be. Many effects in a whole economy recall. Or, to continue looking up, FTSE all share (the results are much the same for FTSE100, 250 and 350) was at 4,200 immediately pre-Covid. Today, it’s at 4,700 (we’ll leave Trump and tariffs out of it, just to be fair). FTSE is not inflation adjusted so we need to add that in. The BoE says that inflation has been 25 per cent since then so the stock market has actually gone down in real terms. The nominal rise is 12 per cent, inflation 25 per cent — that’s a real fall. House prices, adjusted for general inflation, are down since 2020. If we run with median house price to median wage and do again that inflation adjustment thing they’ve fallen by more than that. Because real wages have risen.

So, we’ve not disproven the Stevenson hypothesis. It could well be that given the model constraints used, wealth inequality in and of itself pushes interest rates down and so increases asset prices. But we have shown that the political demand that flows from this is not true. We have raised interest rates without taxing the wealth off the rich, and asset prices are moderating compared to wages — or, in reality, they’re falling in real terms.

The thesis isn’t strong enough, in other words, to actually provide us with useful policy at this economy wide level. We can reduce asset prices — and to the extent that this reduces wealth inequality, that too — and raise interest rates without significant wealth taxation. Therefore significant wealth taxation is not necessary to reduce wealth inequality by moderating asset prices and increasing interest rates.

Now it is true that we face real economic problems. Maybe wealth inequality is one of them (although I’ve always been fascinated by the fact that in Britain, it is lower than it is in Sweden). House prices are a dreadful problem. We really should do something about those. Me, well — I suggest executing the Town and Country Planning Act 1947 and its successors, and then digging up the corpse and hanging it again just to be sure. But then I did only get that Third, not First, so simple solutions for a simple mind.