Stumbling and Mumbling

Globalization and social mobility

In that speech yesterday, David Cameron claimed that "social mobility has fallen - to a lower level than in the 1950s." I guess he was referring to this paper.
Here's my theory. Social mobility in the UK (and US) could decline further - because of globalization. It rests on three premises.
1. There's a distinction between "hard" skills and "soft" ones. Hard skills are technical ones, like engineering, software programming, and data analysis. Soft skills are things like negotiating skills, salesmanship, communication skills, the ability to  get on in "teams".
2. Globalization means demand in the west for hard skills will weaken, relative to demand for soft skills, because the hard skills will be more easily offshored. There are countless Indians or Chinese who can write software as well as an Englishman, and cheaper. But there are much fewer who can write good English or sell a house.
3. Bright working class youngsters, relative to middle-class ones, have relatively more hard skills than soft ones (There are of course countless exceptions.) Think of the dweeb, geek, Northern chemist stereotype - people like us. Or alternatively, consider Ewart Keep's theory, that soft skills are often just a proxy for being middle-class.
These three premises imply that the prospects for upward mobility by bright but poor youngsters will decline, because the well-paid jobs (requiring hard skills) they have climbed up into in the past will be done in India and China. Middle-class youngsters, with their softer skills, are less vulnerable. 
Now, I'm not offering this as an explanation for the recent decline social mobility - globalization probably hasn't gone so far yet. But it could be a factor in years to come. 

Mortgage approvals and the stock market

These figures show that mortgage approvals for house-buying have hit a 19-month high. Cue talk of a stronger housing market.
What the experts won't tell you  is that rising mortgage approvals are also a leading indicator of share prices. Since 1990, the correlation between the level of mortgage approvals and annual returns on the All-share in the following 12 months has been a statistically significant -0.34; the R-squared is 11.4%. This link holds even controlling for the predictive power of the dividend yield. And it points to zero returns in the next 12 months.
There's a simple reason for this.  High mortgage approvals mean people are sufficiently risk-tolerant to want more debt. There's a correlation between this appetite for  risk and appetite for equity risk. And low risk aversion means low returns.
This doesn't mean you should rush out to sell. The relationship, though statistically significant is economically weak. And another leading indicators of returns - financial institutions' cash holdings - are booming, which points to good returns.
Instead, there are two messages here.
1. Mortgage approvals don't matter merely for house prices. It's a plain cognitive error - the representativeness heuristic - to think otherwise.
2. There is (limited) predictability in share prices. For me, the interest in financial markets lies in uncovering this predictability, rather than listening to the prattle that passes for the judgment of experts.

Violence against women: some econometrics

Women in the North East, Wales and in poor areas are more likely to be victims of violence than other women. That's the finding of this paper (pdf) by Kent Matthews and colleagues. They estimate that, in the North East, 519 women per 100,000 are admitted to A&E as a result of violent injuries. In Wales, the figure is 460 per 100,000. But it's only 134 in East Anglia and 222 in London.
They also found that violence-related injuries among men and women are significantly higher in summer than winter. Violence is also negatively related to incomes and house prices.
More intriguingly, higher beer prices are associated with less violence, because they mean less drunkenness. They say:

A rise in the real price of alcoholic drink would have a significant downward effect on the rate of violence-related injury.

However, male injuries are three times as sensitive to beer prices as female injuries.

John Lewis and school reform

New Labour could learn something from Mrs Norm and Janice Turner. They both endorse the survey of Verdict research – that John Lewis is the nation’s favourite shop.

Now, the important thing here is that John Lewis is a worker co-op. And it’s no coincidence that this form of ownership should be good for customers – because workers who have a stake in a firm regard customers not as an interruption to their indolence, but as the source of their livelihood. Economic research confirms commonsense – that workers who own part of a firm are more productive than workers who don’t.

What could New Labour learn from this?

Simple, it could encourage the spread of worker co-ops. One place to start might be school reform.

Put it this way. In many businesses where professional standards and skilled employees are the key to success, employee ownership is the norm; law firms, accountants, hedge funds, vet and medical practices are routinely partnerships of professionals.

Why shouldn’t this model be extended to teachers? Why shouldn’t schools be co-operatives/partnerships of teachers who compete against each other?

This would have several merits:

1. The combination of co-operative ownership and competition would raise standards.

2. It would give teachers more genuine professional autonomy.

3. Groups of like-minded teachers (say, according to their views on different educational theories) would bind together. The resulting difference in teaching methods would let us see what works and what doesn’t.

4. It accords with the economic theory of property rights – that employees should own organizations where human capital is the key asset.

Now, I want to be vague about the precise blueprint here; there are loads of possibilities. All I’m saying is that teacher-controlled schools should appeal to both “left” – because it puts workers/teachers in charge – and “right”, because it introduces competition. It’s also consistent with economic theory. So why not at least think about it?

Against the minimum wage

Polly Toynbee rehashes the arguments for a higher minimum wage. So I'll repeat the arguments against.
1. A higher minimum wage does not materially reduce poverty. The low-paid face enormous marginal tax rates, so most of the higher wages end up in the state's pockets, not workers'.
2. The fact that the Stupid party was wrong to say that the minimum wage would destroy a million jobs proves nothing. No-one would mistake the slaverings of imbeciles for economic analysis.
3. The fact that jobs have been created since the introduction of the minimum wage is also irrelevant. The test of the effect of the minimum wage is not: how many jobs have been created since it began? It's: how many jobs would have been created, had we not had a minimum wage?
4. The effect of the minimum wage on employment is not the true test of its impact. Economic theory tells us that a higher price reduces the demand for labour. This could mean a drop in hours worked, rather than in employment.
5. Even if all the impact of the minimum wage is upon jobs rather than hours, the jobs lost are just too few to show up in macroeconomic data. Put it this way. New Labour has promised to raise the minimum wage by 30p - 5.9% - in October. This implies a rise in the aggregate wage bill of barely 0.1%. Assuming a price-elasticity of demand for labour of 0.7, this implies that just 17,500 jobs will be destroyed; there are just under 25 million employees. This is half a week's inflow into unemployment. It's undetectable in aggregate figures. To find the impact of the minimum wage, we need detailed microeconomic studies. Like this one (pdf). It found "some evidence of employment and hours reductions" - just what theory predicts. 
6. The claim that the minimum wage doesn't reduce hours or jobs is a radical one. It implies that the first rule of economics - that if you raise the price of something, people will buy less -  is wrong. How can this be? The least implausible explanation is that there's monopsony in the market for low-paid workers. But even this implies that higher minimum wages reduce profits (pdf). Lower profits might reduce business start-ups, or cause  firms to close.  If you think profits have no such effects, why not call for the abolition of capitalism?
7. Even if a higher minimum wage doesn't reduce employment and hours, it might change the composition of the workforce. A higher minimum wage might attract the semi-retired, housewives or students into work. As employers would find these more employable that the semi-literate unskilled, the latter would see their prospects worsen. Why should egalitarians welcome this?
8. The real way to help the poor is not to raise the minimum wage but to introduce an unconditional basic income. This would give people the choice of whether to accept low-paid jobs or not, and so genuinely empower them. But then, New Labour's mission is to harrass and manage the poor, not to liberate them, isn't it?

In defence of prostitution

From different political perspectives, both Blimpish and Neil Harding think it should be a crime to visit prostitutes. I disagree.

Take Blimpish’s first argument first:

Some things should be beyond the reach of the market, partly to stop capitalism eating itself and partly because (horrors) society isn't just a place to do business.

The problem with this Walzerian argument is that conventional sexual relationships are inherently tainted by business-like dealings. All men pay for sex, often with ear-ache, or with dinner, dresses, jewelry or just jobs around the house. The distinction between explicit prostitution and these transactions is one of fine degree only. It’s absurd to draw a sharp distinction between market and non-market sex transactions where none exists.

The second argument, made by Neil and Blimpish, is that “it's a libertarian fantasy that most prostitutes are there out of considered and free choice.”

There’s a big element of truth here. Most prostitutes are not elegant Chelsea horizantales, but desperate drug addicts or simgle mums*. But even these have a choice, albeit a constrained one. It denies their humanity to pretend otherwise. They could stay at home on benefits or take a minimum wage job.

The real scandal is not that these women are "forced" into prostitution, but that their choices are so limited that prostitution seems the best option. But this scandal is one of the state’s making, in four senses:

1. The criminalization of drugs is a de facto conspiracy with drug-dealers to raise drug prices, and thus induce drug addicts to do more tricks to buy the drugs. If drugs were legalized, prices would fall and addicts would feel less need to turn to prostitution.

2. Bad education means many women cannot get good mainstream jobs, and so prefer £10 hand-jobs.

3. An inflexible and mean-spirited welfare system limits women's career choices. A citizens’ basic income, by contrast, would give women money whatever they did, and so give them more freedom to choose options other than prostitution.

4. Immigration controls give criminal gangs power to force illegal immigrant women into prostitution.

In these ways, it’s the state that increases the worst forms of prostitution. Neil should object to this, not to men using prostitutes.

Indeed, there’s a very strong reason not to stigmatize such men.

Put it this way. I find it quite easy to earn decent money. If I were to say that people earning less than £25,000 a year were inadequates and defectives, you’d regard me as an unfeeling monster.

Why, then, should you regard men who are unlucky enough not to be able to get sex through conventional means in this way, as inadequates, who should be criminalized?

The fact is that, for many men, for various reasons, prostitutes are the only hope of sex we can get. Such hope should not be criminalized. Recognizing this is entirely consistent with policies to improve the lot of women who enter prostitution.

* I’m excluding here cases where women are forced into the trade by immigration gang-masters or violent pimps. Unlike Squit the Younger, I find forced labour abhorrent.

Happiness and economic growth

Will Wilkinson lays into Andrew Oswald’s argument that governments should pursue happiness rather than economic growth. There’s one passage I want to dispute. He asks economists:

Tell me, is your faith in the value of growth diminishing? Do you think the world would be a more happy or a less happy place if world GDP growth slowed, such that the incomes of all the billions of people living in abject poverty (for whom the effect of income on happiness appears to be profound) grew at slower rate?

I think this elides two important distinctions.

1. Between rich and poor nations. No-one doubts that higher incomes will be a great thing in sub-Saharan Africa, where they can make the difference between life and death. Andrew’s argument against pursuing growth applies only to richer nations, where the correlation between incomes and well-being is weaker. This paper (pdf) makes the point well for Scotland, where health and well-being are low despite reasonable incomes.

2. There’s a big difference between opposing targeting economic growth and actively welcoming lower growth. One reason why I want politicians to stop promising to increase growth is not that lower growth would do us good but simply that governments have not been able to deliver this promise. This paper (pdf) concludes:

The many policy packages used across…countries did not have significant long-run effects on relative growth rates. We conclude therefore that long-run growth rates are determined by international factors, and are insensitive to national policies, especially for small countries. This implies severe restrictions on the ability of most governments to increase national long-run growth rates.

Of course, this tells us only that the policies governments have tried have not increased growth. Maybe policies they haven’t tried will raise growth.

And here’s a paradox. Maybe policies aimed at increasing happiness will be more successful at increasing growth than have been policies aimed directly at increasing growth.

The idea here is simple. Any happiness-oriented policy will want to build social capital; it’s networks of friends that make us happy.

And guess what? There’s reason to believe that social capital promotes growth (pdf).

Maybe faster growth is one of those things that we can only get if we aim at something else. If so, those who want faster growth should welcome happiness-oriented policies.

Seven sevens

Tim tags me, and I am his bondsman and must obey.
Seven things to do before I die:
1. Live outside London
2. Meet a nice girl
3. Get a cat
4. Get a garden (a prerequisite for 3)
5. Give up work
6. Get a car
7. Play the guitar adequately
Seven things I cannot do:
1. Play the guitar adequately
2. Speak a foreign language
3. Ice skate
4. Speak to strangers (though I'm good at public speaking)
5. Overcome my prejudice against public schoolboys
6. Mix grain and grape
7. Respect anyone in authority
Seven things that attract me to...country music:
1. It gives bald men an excuse to wear hats indoors
2. The beautiful women: Shania. Martina, Sara, Alison...
3. Male harmony duets, especially the Blue Sky Boys
4. The sound of the pedal steel
5. "San Quentin you've been living hell to me."
6. The virtuoso musicianship of Bill Monroe and his many band members, among many others.
7. "The wisdom and ignorance of a crushed, undying race."
Seven things I say:
1. One reason why I started blogging...
2. Or is it?
3. Sorry about that (with 100% sincerity)
4. No.
5. Should we care?
6. What goes around comes around
7. Couldn't hit a cow's arse with a banjo.
Seven books I love:
1. Code of the Woosters.
2. Brothers Karamazov
3. Free to Lose (not Choose)
4. After Virtue
5. On Liberty
6. Decline and Fall
7. Judgment under Uncertainty
Seven films I've loved at various times:
1. True Stories.
2. Brief Encounter
3. Eraserhead
4. Rear Window
5. Casablanca
6. Life of Brian
7. Maltese Falcon
Seven reasons not to tag seven others:
1. I don't want to impose
2. This particular meme's starting to get stale
3. The ones I tag won't thank me
4. The ones I don't tag will be offended that I haven't thought of them
5. Thinking of seven things is really hard
6. Everyone's answers will be smarter than mine, so I'll look stupid
7. I 'd rather just invite anyone to pick the tag up: the blogosphere's about openness.

Placebo effects

In last night's Alternative Medicine on BBC2, the Perfect One talked about the power of placebo effects. Some apparently nonsensical treatments work, she said, if we expect them to. She says:

NHS doctors are not taught the positive power of placebo. They’re told to reduce its effect for scientific research.

This raises a question. If placebo effects are powerful in medicine, aren't they also likely to be powerful in the social sciences? Could it be that the power of some institutions derives not from their genuine mechanical ability to control things, but merely from our belief that they have power? In other words, the notion that institutions have power is  a self-fulfilling illusion.
Here are three areas  where I reckon power might be due partly to a placebo effect:
1. The media. The editorial lines and news content of the dead trees is determined by the profit motive , not by intellectual considerations. Why, then, do we believe newspapers have power? Could it be that their influence exists largely because we merely think it does?
2. Company bosses. Sure, entrepreneurship matters. But most bosses of large firms aren't entrepreneurs - they're just bureaucrats. If I were to say that such bureaucrats don't, generally speaking, improve firm performance, what could you do - other than cite a handful of exceptions - to prove me wrong?Put it this way. Since the early-60s, the number of managers in the UK have exploded, as have the numbers of MBAs.  And yet non-oil profit rates are not significantly higher now than then (pdf). More and more inputs of management have not yielded better results.
Maybe, then, a lot of company management is unnecessary bureaucracy. The notion that bosses can control firms for the better is an illusion.
3. Politicians. How many individual politicians have actually genuinely changed your life - more so than, say, a teacher or even a good song? In how many of these cases was the influence deliberate? (I might actually be an exception here.) Maybe much of the power that politicians wield exists only in our heads. Sure, the political class as a whole taxes us. But do individual politicians really make as much difference as you'd imagine from the attention they get?
I reckon we can, to a fair degree, just ignore these people. Their power and influence is largely illusory. They are like the Queen of Hearts in Alice in Wonderland:

Turning to Alice, she went on, "What's your name, child?"
"My name is Alice, so please your Majesty," said Alice very politely; but she added, to herself, "Why, they're only a pack of cards, after all. I needn't be afraid of them!"

Alan Pardew and the winner's curse

West Ham boss Alan Pardew reminds me of something I've said before: if you want to understand stock markets, it’s better to read the sports pages than the financial pages.
He says he paid "slightly over the odds" for Dean Ashton. This is a good example of the winner's curse. When an asset of uncertain value is put up for auction, it's likely to be sold for more than it's worth, because there's a good chance that the highest bidder will over-estimate it's value.
This might explain a well-known fact about stock markets - that newly floated companies, on average, under-perform over the long-run; Jay Ritter summarizes the data in this pdf.
For some other applications of the winner's curse, check out the papers collected at this great site.
Another thing: it's not often West Ham are associated with winners. The standard view of them was expressed by Ronnie Biggs. When he was on the run in Brazil the 1980s, he was visited by a journalist. Whilst they were chatting over drinks, Biggs said: "I see West Ham have lost." "How do you know?" asked the journo.  "Well" said Biggs: "It's Saturday, ain't it?"