Stumbling and Mumbling

Where does UK FDI go?

Today's figures (pdf) on UK foreign direct investment cast doubt upon both the simplistic pro- and anti-globalization views.
They show that, of the £318.6bn invested overseas by UK firms between 2000 and 2004, only £14bn (4.4%) went to Africa - and most of that to South Africa. UK firms invested more in France (£20.5bn) than in the whole of Africa.
This shows that one crude anti-globalization view is wrong. Globalization is not a "race to the bottom". Companies don't invest merely where wages are low and labour protection weak. They prefer to invest in France  than in Africa.
Equally, though, it casts doubt upon the greatest hopes for globalization. With companies investing so little in Africa, it suggests the region will be slow to grow on the basis on inward direct investment alone.
There are, though, signs that things might be changing. In 2004 alone, FDI in Africa accounted for 11.2% of the total (£5.8bn of £51.8bn). That's easily the highest proportion of the last 10 years.
One reason for this change might be that returns on African FDI are high. The ONS estimates that FDI in Africa earned a return of 23.3% last year, compared to just 9.6% on UK FDI generally, and 6.6% in FDI in Europe; I wouldn't set store by these precise figures - they are subject to hefty errors.
Before Guardianistas moan about the UK ripping off Africa, just remember that returns on capital should be highest in those places where capital is scarcest. (Though this doesn't rule out rip-offs).

A sociologist complains

Here's one sociologist's complaint about how the dead trees have misrepresented her work:

It seems some journalists - or their editors - have no patience with finer detail; when they report research findings, they are only interested in numbers or broad sweeping statements..."My personal view is more authentic than anything any study can come up with" seems to pass for journalism...sloppy...ill-founded, mistaken...

That's Liz Spencer, writing in the latest newsletter from the Institite for Social and Economic Research. Read the rest here.

A cost of inequality

One of the costs of inequality is that it causes people to work too much. That's the claim of this paper (pdf) by Samuel Bowles and Yong-Jin Park in the latest Economic Journal.
They show that there's a strong correlation between working hours and inequality. Countries where inequality is high - such as the UK and US - have longer working hours than more egalitarian countries such as Norway or the Netherlands.
This, say Bowles and Park, shows that Thorsten Veblen was right. He said that a desire to keep up with the Jones motivated people to work harder:

The propensity for achievement -- the instinct of workmanship -- tends more and more to shape itself into a straining to excel others in pecuniary achievement. Relative success, tested by an invidious pecuniary comparison with other men, becomes the conventional end of action. The currently accepted legitimate end of effort becomes the achievement of a favourable comparison with other men... Among the motives which lead men to accumulate wealth, the primacy, both in scope and intensity, therefore, continues to belong to this motive of pecuniary emulation.

The higher is inequality, the stronger will be this motive.
You might think there are obvious alternative reasons for the link between inequality and hours:
1. Inequality means there are bigger incentives for success, so people work harder. This predicts that working hours will be longer where there are greater inequalities within firms.  However, Bowles and Park estimate that aggregate working hours are sensitive to wage differences across industries. It's  difficult to see how wages in another industry can give someone an incentive to work longer.
2. IT has caused a rise in both inequality  and working hours. However, Bowles and Park show that there was a link between the two before 1983, well before the IT revolution.
If this is right, consumption externalities are more important than previously thought. The big spending of the rich doesn't just make others feel inadequate, but causes them to work too hard. This, say Bowles and Park,  strengthens the case for a progressive consumption tax.
There is, though, another view. Will Wilkinson has said that it might be cheaper for the poor to simply change their preferences, and stop envying the rich.
I think this is good advice generally. But there is a problem with it. Bowles and Park suggest that the link between inequality and working hours operates through social norms, rather than conscious individual choices. It might be easy to ignore Paris Hilton when deciding  how long to work - but it's a lot harder to walk out the office when everyone else is working.
A personal note: I suspect my own history, perversely, supports Will's and Veblen's point. One reason why I was able to move from a high to lower-paying job was that, as a relatively solitary person, I was less exposed to invidious comparisons between my spending and others, and so felt less need to keep up with richer people.
More stuff. Two more technical papers on the links between consumption externalities and labour supply are here and here (pdfs).

John Lennon and the decline of the left

Since Thursday’s emote-fest – a supplement in the Times for Chrisssakes – I’ve been trying to articulate why exactly I dislike John Lennon. It’s not that his acclaim is out of proportion to his merit – this is true of most famous people. It’s that he's a pivotal figure in the decline of the Left, the decline from empiricism to emotivism.

Think of the iconic pre-60s liberal-left personalities: Marx, Lenin, the Webbs, Russell, Beveridge, Orwell, or most of the 1945-51 government.

What these otherwise disparate figures had in common was a commitment to rational inquiry and empiricism. Be it Marx toiling away in the British Museum, Orwell’s dossing down in Paris and Wigan, the Webb’s poring over blue books or Stafford Cripps working himself to death, all thought the task of the left – be it reformist or revolutionary - was founded upon thorough hard work and intellectual endeavour.

Contrast this with the left of the late 60s, the excrescence of which we’ve seen this year at Live8 and in anti-war demos. To them, a few slogans and a display of self-righteousness seem sufficient. Rather than try to understand the world, they think it sufficient that the rest of us understand their pain, their sincerity.

In this decline, John Lennon was a pivotal figure, because he offered the illusion that slogans could change the world: “power to the people”, “all we are saying is give peace a chance” and – most contemptibly fatuous of all – “all you need is love.”

Revolution, then, ceased to be a matter of hard work and asceticism, and became an opportunity for easy self-expression, for empty gestures like the bed-in, to demonstrate the clarity and superiority of one’s moral vision.

The English middle-class need little enough prompting as it is to demonstrate their smugness. John Lennon gave them even more. And it's the empty-headed emoting Lennonists who are too dominant in the meeja and politics today.

Of course, this picture’s a simplification. The pre-60s left had a big helping of self-righteousness; Churchill said of Cripps: “there, but for the grace of God, goes God.” And they had way too much faith in rationality and empiricism. But none of them thought self-righteousness was sufficient, in the way that much of the post-60s left did, and still does. And in this decline, John Lennon, maybe partly inadvertently, played a role.

Another thing: don’t try telling me that songs must be simplistic. Just listen to Dar Williams.

Property rights and environmentalism

Tim rightly attacks the economic illiteracy of Squit the Younger; why the heck does he want to "find ways to increase...the quantity of money"? He's also right to point out that  market mechanisms are the way to protect the environment.
I suspect, though, that it would be unwise for the Stupid Party to explore this idea, good as it is.
If market forces are to protect the environment, clear property rights must exist. In the classic problem of the tragedy of the commons, common land gets over-grazed and destroyed precisely because no-one owns it, and so no-one has an incentive to protect it. If someone owned the commons, they could charge people for using it, thus protecting the land.
Free-market environmentalism, then, requires the assignment and definition of property rights: to preotect the environment, someone must own it.
But to whom do we give ownership? The Coase theorem says it doesn't matter, from the point of view of efficiency. As long as there are no transactions costs and free capital markets, the same economic activity will occur. So, for example, if environmentalists owned the Arctic National Wildlife Refuge, oil companies could pay them for the right to extract oil. Or if oil companies owned it, environmentalists could pay them not to drill.
Sadly, though, this is too simple. Even when the Coase theorem is right, the allocation of proerty rights affects the distribution of wealth. And the assumptions underpinning the Coase theorem rarely apply. In particular, there's the problem of the endowment effect; once people own something, they value it more highly than if they don't. That means ownership matters for efficiency, as well as equality.
So, when we ask: how can we use markets to protect the environment?, we must ask: how should property rights be assigned?
And herein lies the danger for the Stupid Party.  If we start asking about how we can use property rights to protect the environment, we might start asking some really embarrassing questions, like: are there other ways in which a  (re-)assignment of property rights might be good for us? How do property rights emerge anyway? Is the current distribution of them consistent with philosophic accounts of what legitimate ownership means?
This opens a really nasty can of worms for the Stupid party. If I were them, I'd heed the advice of William Blackstone, to keep quiet about the subject:

There are very few that will give themselves the trouble to consider the origin and foundation of this right [to property.] Pleased as we are with the possession, we seem afraid to look back to the means by which it was acquired, as if fearful of some defect in our title; or at best we are satisfied with the decision of the laws in our favour, without examining the reason or authority upon which these laws have been built.

More stuff: Here's Garret Hardin's original essay, The tragedy of the commons. And here's a great analysis (pdf) of the issues involved in assigning property rights over the environment.
Another thing: Tim says: "Zac Goldsmith...wouldn’t know a decent economic argument if you slapped him in the face with it." I'd like to see this hypothesis tested, frequently.

Public schoolboys and political success

Everyone knows that both main party leaders went to expensive public schools – Blair to Fettes (fees £20,169 per year) and Cameron to Eton (fees £23,688). But the paradox here has not been sufficiently explored.

Blair’s success, and Cameron’s supposed appeal to the Tories, lie in their parties’ belief that these men appeal, more than anyone else, to “middle England.” But why is it that the two people with supposedly the widest appeal in both parties have such exclusive backgrounds?

I know we shouldn’t infer much from two data points, but here’s a tentative theory. It’s public schoolboys who are more likely to have the combination of confidence and intellectual shallowness* required to express the vacuities of managerialist politics.

By managerialism, I mean the ideology, shared by Blair and Cameron, which says: that there are no deep trade-offs between values or interests in politics; that “modernity” is both self-evident and self-evidently good; and that government can solve social problems.

Public schoolboys are best at expressing this ideology. The confidence they get from thinking from an early age that they are an elite, and can achieve anything, spills over into a confidence they can achieve anything if they are in government. And only they have the confidence to make statements that so often seem bland and meaningless; it takes an expensive education to appear stupid.

By contrast, snotty-nosed state schoolboys like me can’t do this, for at least three reasons:

1. Our success, from the 11-plus on, has consisted in working out what things mean. We couldn’t use phrases like “compassionate Conservatism”, “full-blooded economic policy”, “decent, reasonable, sensible, commonsense.” We’d stop and ask: what the bleeding hell am I on about here?

2. Success in politics requires repetition. How many times did/does Blair use the same rhetorical devices: “tough on crime, tough on the causes of crime”, “education, education, education”, “passionate”? Such repetition, stasis, comes naturally to a public schoolboy who is brought up to believe that his first instinct must be the preservation of privilege and the existing order, and thus no change, only repetition. But it’s alien to state-educated meritocrats, who are brought up to believe success must lie in changing themselves, and moving on. Our instinct is: “say something once, why say it again?”

3. Public schoolboys find it easy to believe there are no trade-offs, because they themselves really can have it all. Scum like us know we cannot. We know the price we pay for passing the 11-plus is to be surrounded by people we despise. We know that economic success comes at the price of isolation – expressed wonderfully a few years ago by Chris Evans, who once said that he bought a dining table that sat eight people, only to realize that he didn’t have seven friends. From this perspective, we see deep trade-offs.

As a I say, this is tentative. The hypothesis is merely that managerialism – as distinct from technocracy – comes easier to public schoolboys than to others; this is, of course, just a tendency, with many exceptions.

It’s a cliché that social mobility has fallen in recent years, probably mainly because of the collapse of state schooling and expansion of the universities. But could a contributory factor be that a vacuous managerialism has conquered both government and companies?

* The counter-argument that Cameron got a first doesn't wash with me. I suspect he got it the dullard's way, by revising.

Free the City Slickers

The “City Slickers” Anil Bhoyrul and James Hipwell face jail for share ramping, tipping stocks they already owned. Apart from working for the Mirror, I don’t see what they’ve done that merits imprisonment.

Put it this way. Share-ramping is only possible when the market is inefficient. In a truly efficient market, traders would have reacted to the City Slickers’ columns with a yawn: “we know that, it’s already in the price.”

So, Hipwell and Bhoyrul can only have done one of two things. Either they helped make the market more efficient, by putting information into prices. Or they exploited other investors’ irrationality – their tendency to over-react to news, or their limited attention spans, which cause them to overlook facts that were already in the public domain. Making the market more efficient is positively good. And if we’re going to make it illegal to exploit others’ irrationality, pretty much anything becomes a crime - including, perhaps, most political campaigning.

Nor am I worried that some of the reasons they gave for tipping stocks were (knowingly) wrong. In an efficient market, shares wouldn’t react to wrong information. Hipwell and Bhoyrul would then only lose credibility. They shouldn’t go to prison because others are stupid. Nor should the law protect people who are daft enough to believe what they read in dead trees.

Still less am I worried that they owned the shares they were tipping. If a stock’s good enough for a tipster’s readers, it should be good enough for him. The only circumstances in which this is not the case is if the tipster’s idiosyncratic risks differ from his readers – in which case he should explain why. It’s tipping a stock you don’t own that I find suspicious.

There are, I’ll grant you, more deserving recipients of our sympathy than Hipwell and Bhoyrul. But I don’t think their conduct is any morally worse than most share tipsters. They merely exploited others’ gullibility and stupidity. And countless financial advisors and fund managers do that every day – for example, on many (most?) of the occasions when they recommend an actively managed fund rather than an index tracker.

I’m with the City’s old school on this. On hearing that insider dealing was to be made illegal, more than one old broker said: “Insider dealing? That’s the only sort you should do, dear boy.”

Another thing. Philip Katz, the DTI’s brief, described Hipwell and Bhoyrul as “pretty low-grade financial journalists.” Isn’t this a tautology?

Apocalypse, and the demand for money

Here's the solution to the so-called pensions crisis:

Scientists are monitoring the progress of a 390-metre wide asteroid discovered last year that is potentially on a collision course with the planet, and are imploring governments to decide on a strategy for dealing with it. It's called Apophis. It's 390m wide. And it could hit Earth in 31 years time...Nasa has estimated that an impact from Apophis, which has an outside chance of hitting the Earth in 2036, would release more than 100,000 times the energy released in the nuclear blast over Hiroshima.

Although this solves the pensions "crisis", it raises another problem.
To see it, imagine we knew for sure that Apophis would hit earth on, say, July 20 2036. This means that on July 19 no-one would want to hold money - coz you can't take it with you. Money would be worthless. The converse of this is that (some) goods and services would be infinitely valuable.
Now, if money will be worthless on July 19, no-one will accept it on July 18. So it will be worthless then. And on July 17.
Simple backward iteration means money should be worthless now.
The prospect of the end of the world should therefore cause hyper-inflation today.
So why doesn't it? It's because there is a transactions demand for money which exists even if money loses its function as a store of value.
But is this motive really strong enough to entirely repress now the hyper-inflation that's inevitable in 2036?
One of the interesting aspects of the end of the world is the light it sheds upon demand for money functions.

Don't bet on a slowdown

Can I offer the Stupid Party some advice? Well, I will anyway. It's this - don't pin your hopes on an economic slowdown cutting support for Labour. I'm prompted to say this by Jonathan at Samizdata:

With the economy showing signs of cracking under the increasingly oppressive Chancellorship of Gordon Brown...the time is ripe [for a Tory breakthrough].

The problem for the Tories, if not for anyone else, is that the economy could well strengthen next year, if not as much as the Chancellor forecasts. Three things point to this:
1. Companies have lots of cash. In the last 12 months, their retained profits have exceeded capital spending by £21.7bn, or 2.3% of GDP - the highest proportion since 1983 (table I of this pdf). In theory, this could be a sign of realistic pessimism about the future. But history shows otherwise. Such surpluses have been a great predictor of stronger growth, as firms eventually spend the money on jobs and equipment.
2. Retail sales could bounce back. In my day job, I've estimated that spending now is lower than it should be, based on the long-term relationship between sales and income and wealth. Traditionally, such shortfalls have led to rising spending; it's an error correction mechanism (pdf). Rising mortgage approvals (pdf) and bank deposits also point to stronger retail sales. Indeed, sales might be already picking up; the British Retail Consortium has reported that total sales growth in November was the strongest since March.
3. Business confidence in Europe has been rising this year, though it did dip last month. With some reputable forecasters expecting the US to grow OK next year, this means UK exports should grow all right.
Now, I'm not saying the economy will definitely strengthen. I'm with Ambrose Bierce on forecasting:

Predict, v.t: to relate events which have not occurred, are not occurring, and will not occur.

I'm just saying that Tories shouldn't hope that an economic downturn will reveal Gordon Brown's mismanagement of the economy.
This isn't to deny that there is such mismanagement. It's just that economic growth and allocative efficiency are two different things; you can get the former even with a lot of the latter. This is especially true in the short-run (by which I mean several years). It can take a very long time for the full effect upon the economy of increased disincentives to be felt.

The £150 billion tax rise

Taxes will rise by £150 billion over the next five years. That's what the Treasury forecast in yesterday's Pre-Budget report.
Table B15 of the report shows that the government foresees net taxes and national insurance contributions rising from 37.4% of GDP this year to 38.6% in 2010-11; only 0.1 percentage point of that is due to higher North Sea revenues. With GDP forecast to rise from £1225bn this year to £1577bn in 2010-11 (table B3), this implies a rise in taxes from £458bn to £608.7bn. That's £150.7bn.
This is equivalent to twice this year's VAT receipts, or to this year's income tax and duties on tobacco and alcohol combined (table B14).
Granted, most of this rise represents the effect of growth; the Treasury reckons on getting 42.8% of the £352bn rise in GDP it foresees.
However, the rise in the share of taxes in GDP is equivalent to a £14.7bn tax rise - equivalent to 4p on the basic rate of income tax.
Did you read this in the dead trees?