Stumbling and Mumbling

Education or redistribution?

What's the best way to improve the lives of children from poor backgrounds? Polly Toynbee raises the issue when she says:

Under Labour so far, despite rising general achievement there has been no narrowing of the [educational] gap between those on free school meals and the rest. As Estelle Morris said sadly as she left government, every year a poor child is in school, he or she falls further behind. All that school does after the age of five is to widen the gap between the social classes.

Here's a theory. Education might be a prohibitively expensive way of equalizing the life-chances of people from poor backgrounds. Cash transfers would be cheaper.
This rests on three premises:
1. Higher spending on education generally has little effect on outcomes (pdf). Huge rises in spending might therefore be necessary to achieve even small rises in educational attainment.
2. People with low cognitive skills (say because of low birth-weight) find it difficult to convert education into qualifications or other qualities attractive to empoyers.
3.  Education  explains only a fraction of the dispersion in earnings. This paper (pdf) shows that, although there is a decent average return even to GCSEs, differences in men's qualifications and other observable characteristics account for only one-third of the variation in  wages.
Education spending, then, might not be a cost-effective way of improving equality of opportunity; for US evidence on this, see this great paper (pdf) by John Roemer and Julian Betts or this by James Heckman.
Perhaps, therefore, egalitarians should think less about improving the lot of the worst-off through education, and focus instead upon higher cash transfers to such people in later life. Equalizing incomes (to a point) might be more cost-effective than equalizing opportunities.
You might object that equalizing incomes is expensive because it creates disincentive effects. But these could be reduced if cash grants were paid unconditionally to adults who had low birthweight or free school meals - factors associated with poor educational outcomes.
Now, I'm not denying the possibility that some interventions, such as Sure Start, might be a cost-effective way of improving equality of opportunity.
I'm just challenging a common prejudice.  Most people think equal opportunity is more desirable or attainable than "fuller" conceptions of equality. But it ain't necessarily so.

Connections IV

This week’s connections are inspired by Sharon Stone or, as I prefer to think of her, the future Mrs Dillow*, whose director in Basic Instinct 2 is Michael Caton-Jones…

1…who was the tenant in Connaught Square of Tony Blair…

2…who was “educated” at Fettes, which is the middle name of the greatest batsman never to play test cricket…

3…who won the Walter Lawrence trophy (in 1971), as did Les Ames (1939)…

4…who was an RAF Squadron Leader in WWII, as was Roald Dahl…

5…who attended Repton School, as did Jeremy Clarkson…

6…who once drove a Rolls-Royce into a swimming pool, thus (arguably) emulating Keith Moon…

7…who was due to play the lead role in The Odd Job, the first solo film made by Monty Python’s Graham Chapman…

8…who has an asteroid named after him…

9… as does John Locke, who was asthmatic (pdf)…

10…as is Sharon Stone.

*unless Kathy, Shania or Gillian object.

Noel Edmonds and the equity premium

Here’s another charge we can add to the list of complaints against Noel Edmonds – he’s deepening the equity premium puzzle.

His show, Deal or No Deal – you might have caught it if you forgot to switch off the TV after lusting over Carol Vorderman – is a pure test of people’s attitudes to risk. This paper uses it to ask how risk-averse people are.

And the answer is: not very. They estimate that the average coefficient of relative risk aversion is 1.61. This implies (I reckon) that a man with £25,000 will pay £3300 a 50-50 chance of winning or losing £10,000.

This in turn implies that people should invest heavily in equities. If we use the Merton equation (postscript) to allocating wealth between risky and safe assets, it implies that – for an equity premium of 3 percentage points a year and annualized volatility of 20% - people should have almost half their financial wealth in equities.

But they don’t.

Put another way, such low risk-aversion implies that equities should not out-perform safe assets by as much as they have done. This is because if people aren’t averse to risk, they don’t need large returns on risky assets to compensate them for holding them; this paper (pdf) by John Cochrane remains the best description I’ve read of this issue.

This raises the question: why are people only slightly risk-averse when they are gameshow contestants, but more risk-averse when they are investors? Possible answers are:

1. Myopic loss aversion. People overweight the importance of the large probability of small short-term losses on equities.

2. An endowment effect. We’re more risk-averse about the money we’ve earned and saved than the money Noel Edmonds has put in a box for us.

3. Ambiguity aversion The pay-offs in Deal or No Deal are transparent, if hard to calculate precisely in the studio. The pay-offs to equities look like an uncertain prospect. And people are averse to uncertainty, more than to risk; this is the lesson of the Ellsberg paradox.

4. Mystification. Thieves the financial services industry deliberately complicate the stock market to preserve their mystique of (illusory) expertise. This deters people from investing in stocks. Tracker funds aren’t widely advertised – I can’t think why.

Another thing: here’s a great paper on risk aversion (pdf).

"Enlightenment rationality" and freedom

Many of you have laid into Maddy for this. But most of you have failed to address the strong point she raised, albeit cack-handedly – that rationality is a tricky concept.

Maddy asks:

whether a new understanding about rationality emerged in the eighteenth century and if so, how was it then positioned vis a vis religious belief?...Why do people think an understanding of rationality which is over 200 years old is useful now?

She’s got a point. As Alasdair MacIntyre showed in Whose Justice? Which Rationality? the “Enlightenment” produced several new conceptions of rationality – conceptions that would have seemed odd to, say, Aristotle or Aquinas.

To we economists, the dominant of these is Hume’s notion of instrumental rationality. To him, “reason is, and ought only to be the slave of the passions. “Our aims are given non-rationally, and we reason only about the means of achieving them.

However, as Maddy points out, hardly anyone acts like this; the best evidence comes from the work inspired by Daniel Kahneman and Amos Tversky. Nor even can we so act. Newcomb’s problem shows that rationality is deeply ambiguous. And this assumes that we are isolated individuals, cut off from deep commitments to community or tradition – a view critiqued not only by MacIntyre but also Michael Sandel. Still less is instrumental rationality an obvious normative ideal; when Nye Bevan described Hugh Gaitskell as a “desiccated calculating machine” he described Humean rationality well, but it wasn’t a compliment.

So, (at least) one notion of Enlightenment rationality is awkward. This raises the point made by MacIntyre:

Disputes about the nature of rationality in general and about practical rationality in particular are apparently as manifold and intractable as disputes about justice.

But it also raises a question about the foundation of liberty. Humean rationality gives us an obvious justification for spreading freedom. If I’m the best judge of my chosen goals, it’s best for me that I be free to pursue these. If I’m rational, I’m open to persuasion, and so freedom of discussion and thought will lead me towards truth, not error. Throw in invisible hand mechanisms – the rational self-interest of each is the self-interest of all – and you’ve got a convincing case for freedom.

But if Humean rationality is a fiction, this justification weakens, maybe collapses.

Which raises questions: what, then, is the justification for freedom? How deep a justification do we need? Can we do better than the utilitarian claim that Enlightenment rationality delivers the goods? Is our preference (and mine's as strong as anyone's) for Enlightenment institutions just a “passion” without rational foundation? How much does it matter if it is? How can we engage in a battle of ideas with Islamism if our conceptions of rationality differ so much?

Another thing: For me, one of the worst features of Maddy’s piece was its complete ignorance of contemporary thinkers about rationality – the likes of MacIntyre, Nozick and Kahneman. Someone should tell her that there’s more to the debate than dusty old corpses and the rantings of live lunatics.

Britain's economic boom

The UK economy is booming. Today's figures show that real GDP grew by an annualized 15.9% in Q4. Consumer spending grew 21.6%, capital spending by 20%, and exports by 10.2%.
Yeah, I know the official figures (pdf) show that GDP grew just 0.6%, 2.4% annualized. But those are after seasonal adjustment.  I've quoted the unadjusted figures*.
Unadjusted figures show that GDP always rises strongly in Q4 (though Q4 2005 was the strongest since 1999) and slumps in Q1.
I think this matters:
1. It corroborates Robert Lucas's view that the welfare costs of economic fluctuations - at least to the average person - are tiny (pdf). For each of the last 31 years, the economy has boomed in Q3 and Q4, and slumped in Q1. The meeja and policy-makers don't much notice. let alone care. If seasonally unadjusted recessions - the ones real people actually experience - don't matter, how can seasonally adjusted  ones be so important?
2. Seasonal fluctations can cause longer-term fluctuations. This paper (pdf) reckons they can explain half of US post-war business cycles.
3. Economic volatility around the turn of the year might explain the stock market does so well in winter - investors need good returns to compensate them for economic risks.
* Table A2 in the UK Economic Accounts, available here for the brave.

Allah's fishy coincidence

From the Liverpool Echo:

Hundreds of Muslims are descending on a Liverpool house to witness what many are calling a miracle. Two fish are causing huge excitement among the faithful, who say they are each inscribed with holy names. Worshippers are convinced two Oscar fish bear the names of Allah and Mohammed in their scales....The fish were bought last week from a pet store in Speke by Ali AlWaqedi, 23.

Now, what else do we know about shops selling tropical fish in Liverpool? Truly, Allah moves in mysterious ways.

Three surprises in German business confidence

Germany's Ifo Institute reports today that its index of the business climate has risen to its highest level since 1991 - so much for what used to be the sick man of Europe.
If that's one surprise, this chart is another. The Dax index - which supposedly contains Germany's most globalized businesses - has recently been hugely well correlated with changes in the Ifo index. This, I suspect, shows that German investors' appetite for risk is sensitive to domestic business conditions, and the home bias (pdf) causes this to raise domestic share prices.
And here's a third surprise - changes in business conditions affect the Dax with a lag. A regression of the three month change in the Dax since 1997 upon the three month change in the Ifo index, lagged three months, gives us:
3M ch. Dax = 2.646 + 1.55 x ch.Ifo.
The R-squared is 6.2% - not bad for volatile data - and the t-stat is 2.69. Results since 1992 or 1995 are similar.
This suggests the Dax is an inefficient market, in that relevant information is not discounted immediately.
Given the Ifo's huge rise in the last few months, this augurs well for the Dax. Sadly, though, the predicted rise in the next 3 months - 11.6% - is smaller than the standard error in the regression (12.9%). Which goes to show that there's a big difference between spotting apparent inefficiencies and being able to profit easily from them.

Frank Ellis's dishonesty

I was minded to support Frank Ellis. Everyone has a right to free speech, even if it's offensive.
However, having read the piece he wrote for Leeds Student (thanks DK), I've changed my mind.
The problem is that his views aren't merely offensive, but downright dishonest, in (at least) four ways:
1.  If he's going to talk about racial differences in educational attainment, why not refer to these UK figures published just five days before the date on his article? They show that black Caribbean boys do indeed do worse at GCSEs than white British boys; 33.3% of them get 5 or more GCSEs at A*-C, against 50.2% of white British boys.
However, black African girls out-perform white British boys (53.3% get 5 or more GCSEs), as do  Indians, Chinese, Pakistani girls and mixed-race girls.
There may be racial differences - but none to support the implicit claim that whites' educational attainments are superior.
2.  There's no reference to this paper (pdf), which shows no difference in intelligence between black and white babies. This suggests that differences in educational attainment later in life are not innate, but mighe indeed be the "social and political construct" he complains about.
3. There's no mention of the positive economic benefits of immigration. Of course, it might be reasonable (though I doubt it) to argue that these benefits are offset by losses of cultural cohesion. But it's just dishonest to ignore this and claim that "the BNP is the only party in this country that articulates the thoroughly justified hopes and fears of the white indigenous population regarding the legal/illegal immigrant invasion."
4. There's no mention of an alternative explanation for the link between Africans' low IQ and poor economic performance. Maybe the latter causes the former, because malnutrition and low birth weights are important influences upon intelligence.
There are many other ways one can challenge Ellis's piece. For me, though, these points show that he's not merely voicing unpopular opinions, but being simply dishonest.
Of course, private citizens have a right to wilfully ignore evidence, even to put their stupidity and mendacity into the public arena. But Ellis is not speaking as a private citizen, but as a public employee; as Brownie says, he's not billed as some bloke from Yorkshire.
This, of course, doesn't mean he should be sacked. There is a case for the university retaining him: to demonstrate its commitment to extreme toleration; to show students that lecturers have fallible opinions whioch should be challenged; and because Millian arguments for the value of even obnoxious and untrue opinions are valid.
But these are utilitarian considerations. Ellis has no right to expect the tax-payers to pay his wages.

Ethnic composition and school performance

What impact does a school's ethnic composition have upon pupil performance? This paper addresses the knotty problem.
it finds that, in Bradford, students of Pakistani origin do best in white-dominated schools, and worst in Pakistani-dominated schools. Whites also do better in white-dominated schools.
However, in Leicester, whites do better in Indian-dominated schools, whilst people of Indian origin (who do better than whites and Pakistanis generally) do best of all in schools with a small white majority.
The authors stress that it's difficult to extract causality from this. Maybe white Bradfordians do worst in Pakistani-dominated schools because only low-ability white students attend such schools, rather than because such schools educate whites badly.
The key lesson here is that it's impossible to generalize; those who talk as if there's a single "BME" are mistaken:

No general conclusions should be drawn regarding the posited link between educational outcomes, ethnic background, and school composition; the situation regarding Pakistanis in Bradford is not the same as that of Indians in Leicester.

The paper throws up lots of fascinating facts which show just how hard it is to generalize about education. My favourite is that school performance influences GCSE results more in Bradford than it does in Leicester, whilst individual student characteristics matter more in Leicester than in Bradford.
Serious inference: if the impact of schools upon exam results varies from city to city, what does this tell us about the link between school funding and performance?
Non-serious inference: there's more variation in the character of people in Leicester than Bradford: Leicester schools have produced Alastair Campbell, David Icke, me, Oliver Kamm and David Attenborough - how much variation do you want? 

Beyond left and right

Bryan Caplan and Lenin both applaud Los Angeles' pro-immigration demo. And yet most people regard Bryan and Lenin as coming from extreme opposite sides of the left-right spectrum.
But doesn't this show that "left" and "right" are (increasingly?) meaningless terms?
A more interesting division would be pro- and anti-statists.
Bryan and Lenin (and me) are all on the same side of this. Big government conservatives, Polly Toynbee and Gordon Brown are usually all on the opposite side.
Of course, there are divisions within each camp. Anti-statists will argue between themselves about whether markets or popular collective action are better co-ordination mechanisms.
I'm just making two points:
1. The left-right division dominates our thinking about politics too much. It's often less a way of organizing ideas, than a way of splitting us into tribes. Shouldn't we think of other axes for dividing political views?
2. Those who support markets (as distinct from business, obviously) are on the side of the people against those in power. As Thomas Sowell says, the idea of a free market was/is deeply revolutionary.