Stumbling and Mumbling

Trades union stupidity

The prize for fool of the day goes to Paul Kenny, general secretary of the GMB. He's responded to James Dyson's knighthood by asking:"Do people now get a knighthood for services to exporting jobs?"
This is drivel in both economics and ethics.
In economics, it's wrong because "exporting jobs" doesn't - except in the very short-run - destroy UK jobs. Put it this way. Had production of Dysons stayed in the UK, they would have been more expensive to make. Housewives* buying Dysons would therefore have less money to spend on other things, like getting their hair done. So there would be fewer jobs for hairdressers. "Exporting" Dyson's jobs to China and Malaysia is therefore a way of creating jobs in hairdressing.
If "exporting jobs" were a bad thing, we'd all be better off doing everything at home - growing our own food, making our own clothes and so on. But this is obviously absurd. As Adam Smith pointed out, we get richer through the division of labour. And this requires that jobs be exported.
The moral problem is: why should Mr Kenny object to Chinese and Malays getting jobs, even if they are (which they are not) at the expense of British workers? Why should their interests count for less than ours?
Now, unlike many people who'd agree with all I've said, I'm a supporter of trades unions; I'm a member of the NUJ. I think they're a good way of protecting workers from stupid and aggressive bosses.
However, Mr Kenny's sentiments make it clear that, whilst unions might be good at giving services to their members, they are not necessarily a good political force.
* The sexism here is Dyson's own. I bought a Dyson a couple of years ago - and very good it is - and I've since been getting junk mail from them addressed to "Mrs Dillow."

City bonuses and entrepreneurship

Tim's done a good fisk of David Bolchover's attack on City bonuses. But there's one point he omits - that David is wrong to claim that:

City bonuses, an overt symbol of capitalist success, are an impediment to capitalist success. They represent the cushy alternative to entrepreneurship, diverting the attention of lively young minds away from risk and towards the dream of cosseted wealth.

But the City doesn't divert young people away from entrepreneurship, because this option is not available to them. Unless they've inherited wealth, young people straight from university have little chance of becoming entrepreneurs, because they have little chance of raising cash. What bank or venture capitalist will lend to someone with no track record and no security?
Instead, the City can be a great place for potential entrepreneurs to work, because it teaches them valuable skills about how businesses and markets work. To name but three, Ocado, Bloomberg and Amazon were founded by former investment bankers.
I'd guess that the City creates more entrepreneurs than it co-opts. Put it this way. Is there really less entrepreneurship in the UK or US - homes of the great financial centres - than in countries with smaller financial sectors? It's not obvious.

People's panels: some issues

Blair wants to introduce people's panels into policy-making. The timing of the announcement - on a day when few noticed - suggests the government itself is unsure of the reception the idea will get. But I think there's something to be said for it.
One  advantage of such panels, in principle, is their openness. People's panels will be less susceptible to lobbying by special interest groups, and will not be swayed by partisan political advantage.  Also - in theory - such panels will be able to consider proper evidence carefully, rather than be pressured by the mass media.
And, of course, people's panel's will be more egalitarian than the closed hiearchies that take decisions today. I'd rather trust the people than authority.
All this said, there are some doubts:
1. The panels' decisions have no constitutional standing, so they are non-binding. Governments can therefore cherry-pick the panels' proposals.
2. They could ignore the interests of minorities. As Philip Hensher points out, in the context of healthcare priorities, this could lead to under-spending on HIV or bowel cancer.
3. There are no incentives for panellists to get decisions right. Of course, we shouldn't under-rate the importance of pure public spiritedness; in my (naturally limited) experience, this works well in criminal juries. But there is a potential problem of accountability.
4. There's a danger of agenda manipulation. Who decides what evidence is put before the panel?  Who decides what issues are decided by panels?
5. People's panels are not genuine empowerment. Individuals have no right to sit on them. Along with point 4, this means there's a danger that they'll only be used when it's in the government's interests to do so.
6. Are the panels a way of taking careful decisions on the basis of evidence, or just a way of bringing even more mob prejudices into policy-making?
On balance, I support the idea of people's panels not as an institution in themselves, but as the first - shaky and small - step towards a fuller democracy. They invite us to ask the right questions: are there alternatives to closed hierarchical decision-making? How can we use the wisdom of crowds whilst sloughing off the prejudices of the mob? Can we free policy-making from special interest groups? Is direct democracy feasible, and if not, why not? A good starting place to think about these questions would be Buchanan and Tullock's Calculus of Consent, available in full online.

Divorce laws and inequality

Are easy divorce laws to blame for rising income inequality? This question occurred whilst I was reading this paper (pdf).
The theory here is straightforward. If it’s easy to get divorces, rich men will be reluctant to marry poorer women, for fear that these are just gold-diggers out to get a big divorce settlement. They will therefore prefer (ceteris paribus) to marry richer women whom they perceive as less likely to want them just for the money. If divorce is impossible, by contrast, this fear will be absent, as the poorer woman would be unable to get a big settlement.
A relaxation in the divorce laws, therefore, will lead to a rise in assortative mating. At the margin, bosses will be more reluctant to marry their secretaries. They’ll prefer higher-earning women who are less likely to regard them as a meal ticket*.
But, if high earners marry high earners, their children are more likely to inherit skills which make them high earners. By the same token, with low earners marrying low earners, their children are more likely to inherit a lack of earning skills.
In this way, easier divorce laws will, after a generation, lead to greater inequality in skills, and hence to income inequality.
Now, of course, there are other reasons for the rise in assortative mating – not least the fact that there are more high-earning women than there were years ago.
But there is some mixed evidence that assortative mating is a factor in rising inequality and declining social mobility. Insofar as easier divorce laws have contributed to this, they are perhaps therefore a partial cause of increasing inequality.
I reckon there are two lessons here, both awkward for liberal leftists. One is that there are trade-offs between their values: economic equality versus freeing women from bad marriages. Second, there can be adverse long-term consequences of legal change which are genuinely unforeseeable.
* There’s a caveat here. What’s really disastrous for a man is if his wife stops her high-earning career after marriage and then claims compensation for this in a divorce.

Experts, instinct and bloggers

Marcel Berlins criticizes Time magazine's decision to make web users "Person of the Year." And he misses the point by a thousand miles. He says:

The philosophy I object to, which the internet's information explosion has fostered, is that the "ordinary" person is as - no, even more - important to the dissemination of knowledge, information and opinion as the expert or the professional....Time's assertion that those working for nothing are "beating the pros at their own game" is nonsense. They are providing a different service, an opinion based not on expertise and experience, but on their less tutored feelings.

What this misses is that the "less tutored feelings" already dominate public life; has Berlins never seen the Sun or Daily Mail?
Worse still, " less tutored feelings" dominate expertise in Downing Street. Here's Blair earlier this year:

Political leaders have to back their instinct and lead (my emphasis).

This is no isolated example. Here he is in 1997:

There are times when to calculate the risks too greatly is to do nothing; there are times too when a political leader must follow his instinct.

And in a speech in Sedgefield in 2001 (no longer webbed), he said that in the 1980s:

I stopped thinking about politics on the basis of what I had read or learnt, and started to think on the basis of what I felt.

And, of course, there are Blair's many claims to be "passionate" about things.
We are, then, ruled by "untuored feelings" and emotivism. To blame the web for the rise of these and decline of expertise is not just wrong, but indicative of a bullying mentality - a sneering at the powerless accompanied by a reluctance to chastise the powerful.
Indeed, far from embodying raw emotion, the web can give a greater voice to the expert: there's more economic expertise in my sidebar than you'll find in Downing Street or the mainstream media.
What's more - and Berlins misses this too - in the diverse blogosphere there's a chance that individual errors will cancel out, thus giving us the wisdom of crowds. In the narrow hierarchical villages of Whitehall and the dead trees, there's no such hope.
So, Time was right. The web is a (small?) hope for escape from the barbarians who rule us.

The elusive cost of Christmas

Is Christmas efficient? Jonathan Chait says it's not. Norm says he's missing the point. I'm with Norm.
The notion that Christmas is inefficient seems like common sense. I know my preferences better than anyone else. So I can spend money on myself more efficiently than anyone else can. So, if others buy stuff for me, it's likely to be on some things I don't value particularly highly. It would therefore be more efficient if we all spent money on ourselves, rather than each other.
In these papers (both pdf), Joel Waldfogel quantified this. He estimated that "gift-giving destroys between 10% and a third of the value of gifts."
End of, you might think.
Nope. In another paper (Jstor only) Sara Solnick and David Hemenway estimated that gift-giving actually creates enormous value. Recipients valued gifts at more than twice their price.
Why the difference? It lies in the question they asked.
Waldfogel asked: what is the "amount of cash such that you are indifferent between the gift and the cash, not counting the sentimental value of the gift?"
Solnick and Hemenway asked: "Aside from any sentimental value, if, without the giver ever knowing you could receive an amount of money instead of the gift, what is the minimum amount of money that would make you equally happy?"
There are two big differences here. Waldfogel uses the word "indifferent" whereas Solnick and Hemenway use "equally happy." The latter puts people in a better mood than the downbeat word "indifferent". This subliminally encourages people to value things more highly.
Also, Waldfogel asks people to disregard the sentimental value of the gift at the end of the question, whereas Solnick and Hemenway do so at the start. Waldfogel's question therefore emphasizes the disregard more, giving people a greater focus upon the mere material features of the gift.
I take two lessons from this. First, as Bradley Tuffle and Orit Tykocinski say here (pdf), "subtle changes in wording can drastically affect subject response." Surveys are therefore a tricky way of elicting reliable information. Survey design is a great skill.
Second, it's sometimes harder to prove that common sense is right than you might think. This might be one reason why so many people prefer armchair theorizing to hard empirical work.
Above all, though, we should remember that there's something odd about ignoring the sentimental value of gifts because, as Norm says, this is precisely the point of them.
There's more to life than instrumental rationality. And if you forget this, you misunderstand the nature of rationality.

The coming public spending freeze

Government spending will have to fall in real terms for the rest of this financial year if the Chancellor's forecasts are to be met.
Today's figures (pdf) show that central government current spending on items other than interest and welfare benefits has risen by 15.1% so far this financial year.
However, in his Pre-Budget statement (B29 of this pdf) Brown forecast that it would rise only 5.3% in this financial year.
To meet this forecast, spending in December-March will have to rise just 1.1% comapred to the same period last year.
As annual inflation in the public sector is running at almost 5% (based on the general government consumption deflator in Q2), this requires a hefty cut in real terms.
Which raises the question: to what extent is Brown really in control of public spending?

Lib Dems and Basic Income

Are the Lib Dems moving towards advocating a citizens' basic income? Though this speech by Ming Campbell doesn't explicitly say so, the move is implicit, in two senses.
One is in the wholly admirable desire to simplify both welfare benefits and tax credits.
The second sense is that three of his objectives seem compatible only with something like a CBI. These are:
1. To raise out-of-work benefits; he complains that "the safety net is not only riddled with holes, but is also set too close to the ground."
2. "Halving the number of people facing effective tax rates of more than 60%."
3. "To make work pay."
The thing is, under orthodox welfare systems, there's a tension between these three. If you want to make work pay and raise the safety net for non-workers at the same time, you've got to pay more generous in-work benefits or tax credits. Which means you've got to withdraw such benefits as people's incomes rise. That naturally implies high effective tax rates. I guess you could keep most effective rates below 60%, but that means paying in-work benefits even at quite high incomes. This would be expensive.
This is where a CBI fits in. In paying this to everyone unconditionally,  no-one loses benefits when they move into work.  So work pays, and poorer workers will face lower effective tax rates. Objectives 2 and 3 can therefore be reconciled.
Can this be done whilst also achieving objective 1? I guess it would be expensive. But there's room for spending cuts as well as tax rises...

City bonuses: a defence

Big City bonuses have come under (via) attack. It's time for a defence of them. Here goes:
1. They are (partly) a return for taking risk. I'd guess that many of the older recipients of big bonuses have been made redundant in the past, and would be again - at no notice - come the next downturn.
2. They're a return to what is unsatisfying work in many other ways.  If you want to see the nearest that rich countries can  get to legalized slavery, work for Goldman Sachs. Put it this way. I left the City over 10 years ago, and I don't regret it.
3. It's a competitive market. The profits made by, say, Goldmans could be competed away by other investment banks. And hedge funds and private equity firms are highly competitive businesses, with few barriers to entry.
4. The City does perform a useful function. Efficient risk-sharing and the allocation of capital cuts the cost of finance and so allows  firms to grow - hence creating jobs - that would not otherwise do so.  It's not necessarily the case that the caring professions really help people the most.
5. As professions go, the City is probably more open and meritocratic than most. I'd bet (a small sum) that the proportion of recipients of "obscene" bonuses who were privately educated is lower than the proportion of top journalists who were (pdf).
I suspect opponents of big bonuses are guilty of (deliberately?) conflating two very different things - the big money paid to chief executives, and bonuses earned by people working in the City. To me, the latter are acceptable, the former not.
Indeed, in one respect, the two are wholly opposed. Chief executives' big pay is (often) just a return to power and rent-seeking.  City pay is (often) set by a genuinely competitive market.
Now, it's easy to exaggerate here. I wouldn't argue that people in the City are more talented than those earning much less;  some are, but othodox fund managers are pretty stupid.  And in my experience there's a big element of arbitrariness (and office politicking) in bonus payments. Nevertheless, there are many worse things that the "left" should be complaining about.

The Ashes, inequality and explanation

Why did England lose the Ashes? There's a parallel between this question and the question: why are some people richer than others? This is because both are subject to three levels of explanation.
1. Micro, or proximate. In the case of the Ashes, this level focuses on the precise, individual factors that caused England to lose: the Aussies were good, England were only lucky in 2005; Simon Jones and Michael Vaughan were injured; the selectors wrongly omitted Read and Panesar; the team were under-prepared for the first test, and so on.
In the case of inequality, this level focuses on differences in human capital, or in the compensating advantages or market failures that cause some jobs to be better paid than others.
2. Meso, or middling-level explanations. With the Ashes, this set asks questions about the structure of English cricket.  Should the side be selected by the coach, or  by a committee of experts in the county game? Are central contracts the best way of creating a team, or should England players play more county cricket?
With inequality, this level asks why there should be differences in human capital. Much of New Labour's (stated) policy has been addressed to this question - Blair's emphasis upon Sure Start, for example, or the aim of raising educational standards and increasing university graduates.
3. Macro explanations. In the case of cricket, these ask: what features of English society cause us to produce so few good cricketers? Is it the sale of playing fields, the under-payment and demotivation of teachers, the decline of social capital that means youngsters don't join cricket clubs, a bias against competitive sport, or what?
In the case of inequality, this level looks at the underlying power relations that generate inequality - the ability of firms to exploit workers; the inbuilt opportunities for rent-seeking at the top of hierarchies; the ideologies that underpin hierarchical employment structures and create a big demand for "talented" managers, and so on.
People who are relaxed about inequality seem to prefer to stick to micro level explanations, whilst radicals prefer level 3-type explanations.
Which raises my question. Does this "left" vs "right" preference between levels of explanations for economic inequality map into a similar preference for explanations of England's cricketing failure? If not, why not? And if so, what causes the difference in preferences?
And what counts as a proper explanation anyway?