Monday, 1 November 2010

Do incentives matter? Evidence from the Rolling Stones.

For those who doubt the central economic assumption that agents react to incentives you need look no futher than this extract from an article about the Rolling Stones (as reported in Greg Mankiw's excellent blog)

The Stones are famously tax-averse. I broach the subject with Keith [Richards] in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out--it is, in other words, a perfect venue for such a discussion. "The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don't want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out." No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn.

More great insights into the economics of the Rolling Stones and the music industry are here.

The aircraft carrier scandal and the lessons for state spending

The current UK government decision to spend £5.4bn on aircraft carriers that will have no aircraft to fly from them is a major scandal.  But how did we get ourselves in this position?  The FT has been trying to trace this and the story seems to be this (see Sue Cameron FT 27th October 2010):

  1. the Ministry of Defence signed a contract such that it was more expensive to cancel the carriers than proceed with them.
  2. that contract was signed, (by the last government) against the advice of the civil servants.  Cameron reports further “To further silence Whitehall objections, the decision went to the cabinet committee on defence, chaired by the then Labour Prime Minister Gordon Brown, whose constituency is next to a shipyard. It was waved through and covered by collective responsibility”.
 Note that £5bn+ exceeds the entire science budget by some distance.  Those in the then Cabinet who waved this decision through should be ashamed of themselves.  Those who plea for more government spending to boost the economy should also be thinking twice if this is how it gets spent.  The only small consolation is that economists who point out that maket failure is oftern mirrored by goverment failure have a near-perfect case study.