Stumbling and Mumbling

The micro-macro error

Housebuilder Persimmon reports today that sales of its houses are up strongly so far this year. Does this mean the housing market slowdown is over?

No. It is a howling error to infer anything about macroeconomic conditions from the experience of one particular company. No sensible person would infer from the bankruptcies of Courts and Allders that retail sales collapsed last year. Why then infer from Persimmon’s success that the housing market is strong? The fact is that many companies thrive in downturns and many fail in booms; even in the 1990-91 recession, huge numbers of firms did very well, as this book shows.

Maybe Persimmon’s results merely demonstrate this fact.

Indeed, aggregate numbers suggest housing turnover is has fallen sharply. Figures from the Bank of England show that the number of mortgage approvals in December were 37.1 per cent down on last December (page 3 of this pdf – more figures are out tomorrow). And this pdf from the Inland Revenue shows that property transactions in January were 28.7 per cent down on last January.

This matters, because falls in housing turnover can be a leading indicator of falling prices. The house price falls of 1989-90, 1992 and the slowdown in 2000 were all preceded by downturns in turnover.

There’s a simple reason for this. Sellers’ asking prices tend to be stickier than buyers’ offer prices. This is because asking prices depend partly upon private valuations of one’s own house as well as upon market conditions, whereas offer prices are a purer reflection of market conditions. The upshot is that if the outlook for the housing market deteriorates, offer prices will fall relative to asking prices. The result will be fewer transactions as buyers and sellers fail to agree a price. It is only after a few months, when sellers’ asking prices adjust, that house prices will fall.

This stickiness of asking prices can also mean that house price indices overstate the true strength of the housing market when turnover falls – because the houses that change hands are a biased sample of all the houses on the market. This pdf by Will Goetzmann estimates that this bias can cause measured price indices to overstate true prices by around 5 per cent in a downturn.

Of course, it’s still a matter of debate whether house prices will fall sharply or not.

What we can say though Persimmon’s results don’t add much to the picture.

They do, though, look like perpetuating one of the stock market’s more curious anomalies – the seasonal pattern in house-building stocks.

Since 1986, Datastream’s index of house-builders has out-performed the market 17 times out of 19 in the first quarter of the year. In the other three quarters it has out-performed only 21 out of 57 times.

More on minimum wages

What are the arguments in favour of a minimum wage? Thanks to commenters on my earlier post, I think we can get a clearer view of this. I think there are five good (if not wholly convincing) cases to be made in its favour.

Before turning to the five, let me just dismiss some bad arguments.

The economics of MI5

Why are the police and government continually warning us of the threat of terrorism? MI5 claim the threat is “serious and sustained.”

The obvious possibility is that they might be right. But as I’ve said, there’s a sharp trade-off between truth and utility. There are two other possible reasons.

Minimum wage effects

Tony Blair today announced plans to cut the jobs and hours of low-paid workers.

He’s going to raise the minimum wage, from £4.85 an hour to £5.05 in October. This as the Low Pay Commission recommends in its report today; it also recommends a rise to £5.35 in 2006.

The first rule of economics, of course, says that if you raise the price of something, you’ll reduce demand. And this means shorter hours and job losses for some of the low paid.

The Low Pay Commission pretends this won’t happen. Its chairman Adair Turner says: “Our analysis suggests that previous upratings [to the minimum wage] have largely been absorbed without adverse effects.”

Can I give Mr Turner some advice? Try reading your own report matey.

Defending liberty

Here, Tony Blair defends the Prevention of Terrorism Bill, which will allow the Home Secretary to put terrorist suspects under house arrest. And here are some extracts from Hansard:

[The bill] involves serious and fundamental departures from the normal processes of British law. It grants powers of detention…in respect of subjects of the United Kingdom which would otherwise be condemned without hesitation as contrary to the principles of British justice….

Either someone is a terrorist, in which case he should be in detention, or he is not, in which case he should be able to move freely. If such a person is under suspicion, he should be under surveillance…

The [bill] allows an extension of detention not by the judiciary but by the Executive… prima facie the power is offensive to the basic principle of the rule of law, which is that deprivation of liberty should be through the courts and not through politicians…

The purpose of judicial intervention--which the Home Secretary appears, with all due respect, not even to understand--is to make sure that the powers of detention, extraordinary as they are, are exercised in a proper way. It is not good enough to say that the Home Secretary will exercise them in a proper way, because the very principle of the rule of law is that that decision should be made by a court, not by a politician…

The notion that one should be detained by Executive power rather than by order of the court is contrary to the provisions of the convention on human rights. If [a man] cannot understand that, he cannot understand the basis of British law…

We passed the Police and Criminal Evidence Act 1984 so that, after 36 hours, a person should be brought before a judge. We did not say that he should be brought before a civil servant or a politician but a judge. Let me educate…Members. It is important that the power is vested in a court because in this country we believe that powers of detention should be exercised by courts, not by politicians, civil servants or parts of the Executive….

To claim that the suggestion that someone who is detained should have the right to go before a judge rather than a politician is an outrageous breach of what we need to fight terrorism stands sense, reason and decency on its head. To describe that position as soft on terrorism and to decry it as giving succour to terrorists says far more about the desperation of the [government] than about the fight against terrorism.

All hon. Members abhor terrorism. Everyone believes that we must act against it with all the powers we have. Of course that might involve measures which restrict civil liberty in a way which may otherwise be repugnant. However, if we go beyond what is necessary to combat terrorism effectively, if we cravenly accept that any Act introduced by the Government and entitled "Prevention of Terrorism Act" must be supported in its entirety without question, and if we adopt the attitude that anyone who dares to question it is a closet supporter of terrorism, we do not strengthen the fight against terrorism : we weaken it.

Which brave and noble guardian of our freedoms spoke such words?

Tony Blair himself, opposing the extension of the Prevention of Terrorism Act in 1993.

Truth versus utility

One of the problems I have in my day job is that I’m sometimes accused of being useless. Some people think I’m supposed to give investment advice. I prefer to tell the truth*. And the truth is, of course, that most investment advice is utter rubbish; this pdf represents the largest part of the exception.

This isn’t mere navel-gazing. It raises an important issue – the trade-off between truth and utility.

This is, of course, an everyday problem. Can you even imagine what sort of life a perfectly truthful man would lead? Could he ever keep a job or a relationship? A little falsehood might be necessary for us to continue living. Donald Davidson (“Deception and Division” in Jon Elster (ed) The Multiple Self) has written of the benefits of abandoning truth and rational enquiry occasionally:

Both self-deception and wishful thinking are often benign. It is neither surprising nor on the whole bad that people think better of their friends and families than a clear-eyed survey of the evidence would justify. Learning is probably more often encouraged than not by parents and teachers who over-rate the intelligence of their wards. Spouses often keep things on an even keel by ignoring or overlooking the lipstick on the collar.

The problem is, though, that the trade-off between truth and utility isn’t confined to our private lives. It spills into public life.

John Rawls opened his A Theory of Justice with the claim that “truth is the first virtue of systems of thought.” But in many systems, it seems secondary to utility.

In investing, people don’t want the truth - that it’s hard to beat the markets and that one should trade stocks very rarely. Brokers want people to trade. And many investors want to feel they are doing something, or to believe that there are experts who know what the future holds.

In football, Jose Mourinho and Arsene Wenger rarely tell the truth. They are more concerned to build team morale or trick opponents.

In politics, truth would require us to acknowledge that there are trade-offs between most desireable ideals; that the median voter is not a legitimate recipient of redistribution; and that people like Iqbal Sacranie are just pompous idiots. Utility requires otherwise.

Indeed, Charles Taylor has argued that the very progress of science and technology has come at a price. To learn about the universe and the world, he’s said, requires us to abandon the ancient notion that the heavens and earth were a meaningful order with man at their centre. Our understanding of the world has come at the price of an alienation from it. From “Rationality” (In Hollis and Lukes (eds), Rationality and Relativism):

The dissociation of understanding of nature and attunement to the world has been very good for the former. Arguably, it has been disastrous for the latter.

Now, here’s my question. There are a great many constituencies pressing for prioritizing utility over truth; politicians, investment advisors, pseudo-scientists, religious figures, “community leaders” and so on. Who, then, stands for truth?

Not (all) academics, who are too busy grubbing around for money. The University of Newcastle’s Faculty of Medical Sciences reveals a lot about the state of academia. Nor journalists, who are more concerned to sell dead trees and strengthen the prejudices of their readers.

So, could it be that this is one of the merits and purposes of the blogosphere? It’s an arena in which the pursuit of truth – or to be less pretentious honesty – has a higher priority over utility?

* My preference for truth (or honesty) over utility is partly a reflection of my working class background. A good indicator of the difference between the working and the middle-classes is: what happens if you are dishonest? If you’re working class you get the sack; if you’re middle class, you get a pay rise. (Another indicator is the wearing of scarves. No working class man would ever drape his scarf over his shoulder. One of my most difficult tasks in life, when I see someone doing so, is to resist the temptation to pull it hard.)

Kicking grandad

The Stupid Party’s plans to cut council tax for pensioners have been well dissected by Blimpish.

For me, though, they raise another question: why should we redistribute income to pensioners at all? I’m not sure we should.

Now, let me be clear here. I’m not arguing against the state pension, which is a form of forced saving rather than redistribution. What I’m interested in is special help to pensioners, be it lower council tax, winter fuel payments or the minimum income guarantee.

I don’t think there’s a case for these.

The world's worst business idea?

I think I might have spotted one of the world’s worst business ideas. A new shop has opened near me called flogit4u. It offers to sell your stuff on eBay for you.

How can this possibly work? For one thing, many people think selling stuff on eBay is an enjoyable hobby. You might as well offer to play Civ III for people.

Sure, these people are offering some superior skill, are taking on the risk of fraud, and should be able to earn a higher reputation by dispatching lots of goods quickly.

But surely these gains are dissipated by consumers’ awareness of the principal-agent problem - you can’t trust a hireling to get the best price for you.

Flogit4u seem to think they have solved this by charging enormous commissions; if they sell an item for £100, you’ll see only £62. But this, of course, just raises other obstacles to success.

Is there a business with less chance of success? Or am I missing something?

A racist welfare state?

This story suggests that Friedrich Hayek understated the case against the welfare state when he accused it of being racist. In the Road to Serfdom, he said: “What socialists proclaim as a duty to the fellow members of existing states, they are not prepared to grant to a foreigner.”

However, Save the Children show that the NHS is not only not granting help to foreigners, but is actively hurting them, by poaching African nurses.

This is doubly inegalitarian. First, an African nation makes a bigger sacrifice in training a nurse than does the UK, simply because it is poorer.

Second, in Africa, a little nursing can make the difference between life and death. In the UK, it often doesn’t – it merely makes that treatment for piles a little less uncomfortable.

So, my questions are: should genuine egalitarians – those of us who think Africans are entitled to the same respect as Englishmen – really support the welfare state in its current form? And doesn't this highlight one of the best (and overlooked) arguments against free immigration - that it can hurt countries who lose skilled workers?

Two words

In the last 24 hours, I’ve heard two words from New Labour figures that seem to vindicate Blimpish’s excellent post.

The first came from Nicky Gavron on the Politics Show (which I only caught because I thought the Burnley-Blackburn game was kicking off earlier). Ken Livingstone’s infamous remark, she said, was “inappropriate.”

Not wrong, notice. Inappropriate. This is one of the buzz-words of the sincere.

Sincere woman cannot use the word “wrong” because she’s a moral relativist. As Blimpish put it: 

Sincerity is the Existentialist virtue because it denies any role for objective, transhistorical truth-claims (i.e., that there is any fixed human nature).

However, sincere woman cannot give up her claim to power, or her duty to pass judgement. So she needs an alternative. And this is where “(in)appropriate” comes in. Making the “appropriate” remark or action signals that one is, in Blimpish’s words, “in touch” with others’ feelings. Sincere people aren’t right or wrong, but “appropriate.”

The second word came from Peter Mandelson on the Today Programme. The arms embargo against China was, he said, “anachronistic.” Not morally wrong mark you (he’d struggle to justify that claim), nor economically inefficient, but “anachronistic.” That is, out-of-date. Mandelson’s condemnation, then, is based on a claim that he has superior insight into the forces of history – a pure Marxist claim. As Blimpish said:

Credibility is the Marxist virtue because it claims that there is a materialist dynamic to History by which we rationalise the world around us. The Credible Man stands for reason - but that is already understood as History, and so discussion is wasteful, unnecessary.

It’s no coincidence that Mandelson, like so many other New Labour luminaries – such as John Reid and Alan Milburn – used to be a Marxist*. They have all retained the arrogant notion that they have a privileged insight into the forces of history – which just happen to be on their side.

Sadly, though, they have lost their faith in the possibility of radical social change. Which only shows that just because you’ve lost your faith doesn’t mean you’ve found your reason.

* Unshocking disclosure – I too had a Marxist youth. In the 1980s I was a supporter/member of the Militant Tendency, which if nothing else must be the best-named political group ever. Although opponents called us Militant, we always called ourselves the Tendency. I’ve had exactly the opposite journey from New Labour types. I’ve lost the belief in centralism and managerialism, but retained a hatred of inequalities of power (and, to a lesser extent, wealth). Why has my journey from Marxism been the minority one?