Stumbling and Mumbling

What can macroeconomic policy do?

I can’t get enthused one way or the other about Ed Balls’ call for a temporary cut in VAT. This is because of a more general point - I’m not sure just how much good or bad any feasible macroeconomic policy can do.
I say so for four reasons:
1. Balls’ proposal is, as Duncan says, “modest”. But modest policies generally have modest effects. Although a temporary VAT cut might raise demand, would employers really take on more workers in response to this, or undertake expensive expansion?
A similar thing is true for monetary policy. It’s insufficiently appreciated that the sort of interest rate moves considered by the MPC would have very small effects.
2. From the mid-90s to mid-00s, a mix of macroeconomic policy and good luck gave us low inflation and stable growth - the best outcomes that macro policy can feasibly achieve. But even at its low point unemployment, on its wide measure, barely fell below four million. And business investment, at least in current prices, was weak. This all vindicated a point made (pdf) by Ed Balls himself back in 1997:

Macroeconomic stability may not be sufficient to deliver the government’s growth and employment objectives.

3. “Successful” macro policy might be inherently self-defeating, as Hyman Minsky pointed out. This is because stable growth and low inflation might lead to speculative financial bubbles before they generate full employment. This in turn might cause a financial crisis or - depending on the policy response - tighter policy even at a time of quite high unemployment.
4. Even if macro policy could technically generate full employment, governments might not be able to follow such policies. This is because as Kalecki said back in 1943, these would not be in the interests of a capitalist class which needs unemployment in order to depress workers’ militancy.
5. There are lots of very important things that monetary and fiscal policy cannot do: up-skill the workforce, create a sustainable entrepreneurial spirit, or reliably increase the rate of (profitable) technical change.
Now, I don’t say all this to mean that monetary and fiscal policy are completely irrelevant. It’s just that they are - within reasonable parameters - second-order issues. For example, I am sceptical about Osborne’s deficit reduction plans not because I think fiscal policy can make the difference between triumph and disaster, but rather because I don’t think the economy here and now is sufficiently healthy to take such medicine.
For me, the really important issues concern that underlying health - the reluctance of capitalists to invest and hire - rather than small tweaks to macro policy. 

Personality, politics & debate

People who were verbally, physically or sexually abused as children, or who were bullied at school, are more likely to be left-wing, according to this new paper by Jan-Emmanuel de Neve, which uses a survey of US citizens. This, he says, could be because such trauma instils in people a heightened sense of vulnerability, which inclines them to support the underdog and state intervention to support the vulnerable. It might also prejudice them against traditional forms of authority.
There is, though, a further correlation here. Childhood trauma and leftist ideology are both correlated with openness to experience, as defined in standard “big 5” personality tests. It could be that openness to experience both causes people to be abused as a child - if, say, parents chastise their children for having their head in the clouds - and to embrace leftist ideology later.
This, though, is not the only strong correlation between personality and political beliefs. It’s also the case that conscientious people are more likely to be conservative.
I should stress, for the hard of thinking, that the correlations here fall short of one. It is not the case that all lefties were abused and bullied, nor that all conscientious folk are right wing.
But there is an important point here. This raises the question: what’s the point of political debate? We all like to think that we arrived at our political ideas rationally and that if only others weren’t so stupid and would only listen to us, they would be converted to our way of thinking.
But what if this is not the case? If our political views are formed by childhood experience or by some relatively immutable aspect of our personalities - and I think they are for me - then we are less amenable to persuasion.
To the extent that this is the case - and we‘re talking matters of degree here - then debate about politics has nothing to do with rational persuasion, and is mere self-expression. 

Miliband & the Graeme-Xin syndrome

There’s a delightful symmetry in the fact that Corrie’s Graeme and Xin storyline climaxed on the same day that Ed Miliband complained about “those on benefits who were abusing the system.”
That speech produced what Sue calls a “gasp of horror” from the disabled and the Left generally.
You shouldn’t need me to point out that complaints about benefit abuse is an example of the right’s “small truth, big error” rhetorical trick. But I will:
- According to the last DWP accounts, benefit fraud cost £1bn in 2008-09. That’s less than the cost of the DWP’s own administrative errors, and much less than the amount of benefits that people are entitled to but do not claim.
- From a Keynesian perspective, benefits serve a useful counter-cyclical function in stimulating demand. They are a roundabout way of boosting the profits of Lidl and Primark.
- Insofar as people don’t want to work, it could be that this what Jon Elster called an adaptive preference. Having tried and failed to get work, people reduce their cognitive dissonance by coming not to want work. People aren’t unemployed because they don’t want to work, but instead don’t want to work because they are unemployed.
So, why did Miliband ignore all this and instead take cheap shots at the worst off?
The defence of him is that this is the sort of political posturing a Labour leader must undertake in a world in which floating voters and the gutter press have irrational prejudices. As Septicisle says, “I suspect, and hope, that Miliband doesn't really believe this.”
Which brings me to Graeme and Xin. As you know, they pretended to get married in order to get Xin a visa, but ended up falling in love.
The message here is that people can - and do - end up becoming the roles they play; this is why arranged marriages often become loving ones, and why economists are more selfish than others.
I fear that this problem might also affect leftist politicians. Yes, they might start out by merely pretending to bash the poor. But as with Graeme and Xin, the pretence ends up becoming reality. Similarly, they might start out by trying merely to play a role by climbing up a hierarchy, but they end up supporting that hierarchy. As I’ve said, office determines character more than character determines office. The result is that leftist politicians so often disappoint their more radical supporters.
It’s in this sense that we should worry about Miliband’s attack upon benefit claimants. Such attacks might start out as mere noble lies intended to pacify the mob - but they don‘t end there.
All of which leads me to endorse a point made by Phil:

The Labour party is and always has been a party within the capitalist system and…trying to change it - rather than bypassing it in an attempt to change society - [is] a waste of effort.

Miliband's power blindness

It is a cliché that the Labour party owes more to Methodism than to Marxism. Today’s speech by Ed Miliband highlights the witless vacuity that this can lead to. He says “we have to tackle the new inequality in this country between the top and everyone else.” And he complains that “over the last twelve years Chief Executive pay in Britain’s top companies has quadrupled while share prices have remained flat.”
So far, so good.
But why has inequality increased?
Here, Miliband fails atrociously. Although the word “responsibility” appears 27 times in his speech, there’s one word he never uses - power. Rising top pay is attributed not to bosses’ power to extract rent from shareholders and workers, but instead to a lack of “values of responsibility“. Windy moralizing thus displaces any recognition of a key fact about capitalism - that it generates inequalities of power.
Given this, it is no wonder that Miliband’s policy proposals are feeble. He says that “we also need to recognise – as many great companies do---that firms are accountable to their workers as well as their shareholders”. But the nearest he gets to a concrete measure to achieve this is to propose that an employee sits on remuneration committees. Otherwise, his main idea is for firms to publish the ratios of top to average pay - as if a day of bad headlines will be sufficient to curb bosses’ excesses.
In the same spirit, his complaint about New Labour is about messages and morality: “we did not do enough to change the ethic we inherited from the 1980s” and “we sent out the wrong message to those at the top of society”. There’s no acknowledgement that New Labour failed to challenge the power of bosses - and, indeed, helped to entrench and legitimate that power insofar as it bought into the ideological fiction of the magic of leadership.
The fact is, though, that bosses pay themselves a fortune not because they are especially bad people, but because they can.
Miliband’s failure to see this represents a blindness about the nature of power in capitalist society. And his belief that all will be well if only people behave nicely contrives to be both hopelessly utopian and deeply conservative. Utopian, because significant moral change rarely happens simply because people ask nicely for it. And conservative, because it leaves unchallenged the basic hierarchical structure of capitalism.

Class, power & ideology

“Nothing makes sense without class” says Owen Jones.
He’s right, if we understand “class“ in its Marxist sense.
To Marx - though the idea was implicit in other classical economists such as Ricardo - class was not about lifestyle, but about one’s relationship to the economy. If your income comes from wages, you’re working class. If it comes from capital, you’re a capitalist.
You might reply that, by this criterion, we are almost all working class now. True. Even people who think of themselves as “middle class” are in many cases only a P45 away from poverty. They are objectively working class even if they are not subjectively so.
In this sense, Marx was right to predict that capitalism would produce an increase in the numbers of the working class. Remember, 200 years ago the yeoman farmer, the master craftsman, or the comfortably off idle wife were all significant social roles. They are, I suspect, less significant now.
What’s more, class in this sense is correlated with power: capitalists have it, workers don‘t*. This is because economic power flows to scarce resources and capital is scarcer than labour.
This perspective yields answers to three key questions which cannot be answered without the concepts of class and power:
- why has inequality increased since the 1980s? It’s because a mix of technical change and the emergence of a mass supply of cheap labour from China and India have increased the power of capital relative to labour.
- why is the pain of deficit reduction falling upon public sector workers and benefit claimants rather than the “rich”? It’s because the “rich” have power and workers and benefit claimants don’t.
- why did the state bail out bankers but not ordinary workers who lost their jobs? It’s because bankers have power - though the precise source of this is another question.
This raises the question. If class is so central to an understanding of the economy, why is it so little discussed?
The answer lies in another of Marx’s insights - that false consciousness prevents people from seeing how capitalist power operates. In this sense, the cognitive biases research programme throws up some new theories that vindicate Marx. For example:
- the illusion of control causes people to over-estimate the chances of them escaping the working class through their own efforts, and so under-estimate the importance of collective class action .
- the in-group heterogeneity bias (which is the flipside of the out-group homogeneity bias) causes people in similar economic positions to exaggerate the differences between themselves and so fail to see their common class position.
- the just world effect causes people to think that victims are to blame for their fate - so, for example, the poor are thought to be stupid and feckless even if the cause of their poverty lies elsewhere.
- the optimism bias leads people to think they will succeed if only they work hard enough, and so blinds them to the possibility that their class position will prevent them getting the full fruits of their labour.
And here, I part company with Owen. We cannot have a reasonable debate about class, because cognitive biases such as these are ubiquitous. Successful power structures persist in large part because the way in which power is exercised is hidden from us. The importance of class and the lack of discussion of it are two sides of the same fact.
* I’m simplifying horribly here. Many workers - most obviously the bosses who control firms owned by external shareholders - do have power. I’ll leave this for another time, as I don‘t think it much affects the main thrust of my point.

Yes, inequality kills

In The Spirit Level, Richard Wilkinson and Kate Pickett claim that “unequal societies are almost always unhealthy societies.” Some new research provides laboratory evidence for this.
Armin Falk and colleagues conducted a simple experiment. They split people into pairs. One person had to do a tedious job, of counting the number of zeros on sheets of numbers, with the pair being paid according to the number of correct answers. The other was given the role of boss, who did nothing except decide how to allocate the revenue thus generated between himself and the worker.
They found that “workers” who felt they were unfairly paid had significantly lower heart rate variability than those with less sense of unfairness.
This matters, because it’s thought that low HRV can predict heart failure.
Falk and colleagues corroborate this by showing that survey evidence links perceptions of being unfairly paid with subjective assessments of personal health.
What we have here, then, is clean micro-level evidence for a link between a sense of unfairness and physiological symptoms.
This is significant. Wilkinson and Pickett’s evidence - which is based mainly upon cross-country correlations between inequality and life expectancy - has been strongly criticized for relying upon a selective sample of data. This evidence, though, seems more robust - it's less vulnerable to the omitted variables bias if nothing else; it‘s reasonable to suppose that if something as trivial as a lab experiment can provoke changes in HRV, then the real world of longer-lasting senses of grievance might also do so, and probably to a greater extent.
There is, though, a slight caveat here. Falk and colleagues are measuring subjective senses of fairness. This means that a man who gets a £1m bonus but who thinks he deserves a £2m one will - ceteris paribus - have lower HRV than a minimum wage worker who feels fairly treated. I‘m not sure, though, that this undermines the basic point, which is that inequality really is bad for health.

What's wrong with private universities?

A.C. Grayling’s plan for a New College of the Humanities has provoked some stupid protests. But it raises a question: what exactly is wrong with private universities?
Many critics of the NCH have focused on the fact that the £18,000pa fees will exclude all but the very wealthy. But if the NCH is to succeed, this cannot remain the case.
I say so for a simple reason. When you buy a university education you are, to a very large extent, buying a signal. But the signal sent by an NCH degree is that you weren’t good enough to get into Oxford. No-one will pay £18,000 for this when they could buy the same signal for £9000 at the LSE or Exeter - especially as the quality of teaching at the NCH might be dubious. To overcome this problem, NCH will have to try to attract students away from Oxbridge by offering the brightest ones better subsidies than Oxbridge would.
It’s unlikely, therefore, that the NCH will greatly increase our already terrible inequalities of educational opportunities.
Hence my question. If we leave equality aside, what’s wrong with private universities?
Two objections at least seem misplaced.
“The profit motive will drive out the vocational dedication to learning that characterizes true universities - just as it has driven the care motive out of care homes.”
This objection fails in two ways.
First, state control does not guarantee the protection of high vocational standards either: for every Winterbourne View there is a mid-Staffordshire NHS Trust. And our state-controlled universities have failed to observe basic equality and has warped educational priorities through the RAE.
Secondly, it ignores the fact that, as Terence Kealey says in the Times, there are countless successful privately-owned universities around the world - many run for profit, many not.
I suspect the Left's instinctive hostility to private universities reflects an excessively rosy view of state ownership and an excessively pessimistic one of private ownership.
“For-profit organizations tend to die quickly” - a point correctly made by Kealey.
But so what? The death of organizations is a necessary part of any healthy ecosystem - not just because we learn from failure, but also because such deaths release resources which can be better employed elsewhere.
Which brings me to a paradox. To see it, consider the objections to privately-owned banks:
- they have high capital requirements, and government can raise capital more cheaply than the private sector.
- they expose society to the risk of a massive negative externality, namely the danger of financial crisis leading to recession.
- private ownership has failed to exercise proper discipline over banks’ bosses and senior employees.
- problems of asymmetric information and regulatory capture mean it is not obvious that regulation alone can successfully mitigate these problems.
However, it’s not at all clear whether analogous problems would apply to private universities. Hence the paradox - it could be that our traditional thinking is 100% wrong. State ownership of banks is a much better idea that state ownership of universities.
Whether you agree with this or not, there is an issue here. Shouldn’t we - and especially the left - think more clearly about the criteria that determine whether an organization should be owned by the state or private sector?