Stumbling and Mumbling

Is full employment possible?

Peter Hain is promising "full employment in our generation." If we're lucky, everyone will ignore him. Full employment - if it is attainable at all - is like falling asleep. It's achievable - if at all - only if you don't aim for it.
Back in the 60s, governments were committed to full employment. And this commitment ultimately proved self-defeating. The belief that governments would guarantee full employment led to wage militancy, shirking - vindicating Kalecki's forecast that the threat of the sack would lose its power - and over-investment as firms anticipated continued high demand.
The upshot was a profit squeeze, accelerating inflation, the crises of the 1970s and rising unemployment.
By contrast, we've recently been nearer (relatively) to full employment than we have been for years, and yet subjective insecurity - the fear of losing jobs to immigrants, offshoring or imports - is high. This is no accident. It's insecurity that makes fuller employment possible, by restraining wage demands, and so lowering the Nairu: it's not as if every boss can use this tactic to combat wage militancy.
In this context, Hain's hubristic aim for full employment is counter-productive. If people become confident that full employment is possible, job security will rise and with it wage militancy or shirking, making full employment even more unlikely.

Trust and economic growth

Economies in which people trust each other grow at lot faster than ones in which there's lots of mutual suspicion. That's the message of this new paper.
This finding is not new, and it accords with common sense. People who trust each other are more likely to invest in physical or human capital, more likely to engage in market for lemons transactions, more likely to exchange know-how, and more likely to invest in productive activity rather than rent-protection or extraction.
But until now, the link between trust and growth has been difficult to unravel. This is partly because of problems of reverse causality - wealth can cause greater trustworthiness as well as vice versa - and partly because of omitted variables: if political institutions encourage rent-seeking, trust and growth will be low because of bad institutions, rather than because of a direct role for trust.
The paper tries to solve these problems by using inherited trust - the attitude of the children of migrants to the US to other people - as an instrumental variable. The authors find:

African countries, taken as a whole, would have been able to double their output per capita between the 1950s and 2000s if they had had the same level of inherited trust as the Swedish people...A country like Germany would have an income per capita 15% higher in the 2000s if the level of inherited trust of the German people had been identical to that of the Swedish people.

This raises the question. Given that trust matters, what can be done to increase it? Breaking down hierarchies, improving sociability and cutting crime are some possibilities.
Others, however, might point out another - increase ethnic homogeneity. After all, is it a coincidence that traditionally ethnically homogenous Sweden has such high levels of trust? I'd rather not believe so, but is there a nasty trade-off here between an open society on the one hand and trust and prosperity on the other?

The Fed, and rationality

Should the Fed respond to fears of a "credit crunch" by cutting rates (or hinting at a cut) next month? This is not merely a question of narrow mechnical economics, but about the nature of rationality.
Imagine the Fed were to (surprisingly) cut rates. Equity investors could respond to the move in one of two ways:
1. "Easier money is good for shares and the economy, so I'll buy."
2. "Yikes. Things must be even worse than I thought if Bernanke's so scared of a credit crunch that he's been panicked into cutting rates. I'll sell."
Reaction (1) is plain causal expected utility. Reaction (2) is what Robert Nozick called evidential expected utility.
And the thing is, both are plausible principles of rationality. That's why Newcomb's problem is so vexing.
Becuase we can't use logic to tell which principle will dominate investors' thinking, we can't tell whether  a rate cut really would calm their nerves. Traders make their money not by anticipating economic news, but by anticipating reactions to it, which is a different thing altogether.
But things aren't so simple as this. Lets' suppose investors know that the Fed knows all this. Then they could react to a rate cut by thinking: "If the Fed's easing despite fears that we'll react by principle  (2), things must be catastrophically bad. I'll sell."
I suspect it's the fear of this meta-reaction that will (or should) stop the Fed moving next month; we're into the higher moments of reflexivity.
But the implications are wider than a single rate move. This paper (pdf) discusses how it complicates monetary policy. More generally, the fact that rationality is ambiguous means that predicting human behaviour is just far trickier than the so-called experts would have us believe.

Meaningless, and demeaning

Via James, I see that some Toryblogger is inviting us to rank our favourite blogs.
Include me out. To do this is to pervert everything that's best about the "blogosphere." The great thing about blogging is that it's diverse, egalitarian and gives a voice to those marginalized by conventional politics and the media. To pretend that bloggers can be ranked hierarchically according to a clear set of criteria by the sort of people who read dull mainstream blogs is to undermine these virtues.
Is Norm better than Wat Tyler? Is Matt Sinclair better than Shuggy? The questions are meaningless, because there's no obvious single objective standard by which to judge them.
Indeed, to assess them at all is to demean them - who the hell do I think I am to judge such evidently good people?
In practice, I guess most of the people daft enough to take part in this survey will use the standard: how far do they agree with me? Excellence in any writer is, after all, merely a matter of how far he flatters the reader's ego. But this merely reduces the survey to a question of the tastes of a biased sample - which is utterly uninteresting.
So, if you must take part in this survey - and I'd rather you didn't - could you please not mention me? I neither want nor need the acclaim of the multitude. As Adam Smith said:

To a real wise man the judicious and well-weighed approbation of a single wise man, gives more heartfelt satisfaction than all the noisy applauses of ten thousand ignorant though enthusiastic admirers. (Theory of Moral Sentiments, Book VI.III.31)

Liquidity: still loose

Whilst the world's stock markets worry about a credit crunch, the Bank of England this morning released figures showing that, in one important respect, money is still loose. Their figures show that non-bank financial institutions' bank deposits have risen 22.3% in the last 12 months, and by 5.6% in the last three months, although growth in June alone was lower.
This chart shows why this matters. There's a reasonableish tendency for a high ratio of institutions' cash holdings to All-share market capitalization to lead to high returns in the following 12 months.
There are two possible reasons for this:
1. High institutional cash holdings lead to rising share prices, as some of the money is used to buy stocks. (I say some, because non-bank financial institutions include not just pension funds and insurance companies but also things like leasing companies and doorstep lenders).
2. A high ratio of money to share prices means share prices are low. And this can lead to prices rising, either because  markets over-react, or because  low prices mean high risk-aversion and therefore high expected returns; the latter is quite consistent with markets being efficient.
Of course, you can quibble endlessly here. But I'm not making a dogmatic forecast. I'm just saying that not all measures say the sky is falling in for stock markets.

Kidults' wisdom

Richard Herring's piece on kidulthood omits an important point - that the kidult on his skateboard and the "mature" adult in his suit and tie are equally stupid.
The folly and pathos of the kidult lies in the fact that he wants something - youth, hipness - that is both unattainable and of dubious value. Do you really want to be young again, with your naivete, gaucheness with girls, unformed tastes and insecurities?
But in this, the kidult is little different from the besuited 40-something professional. To be still chasing money, power and authority two decades after leaving university is pathetic, in the proper sense of the word. To have failed to see in 20 years that these are mere trinkets of frivolous utility suggests that one is incapable of learning anything about society or human nature.
In this sense, there's wisdom in kidults. At least they see that conventional professional success means nothing of substance.

CiF mentality

Matthew Sinclair and the Devil's Kitchen want to set up another CiFWatch blog. They're stronger men than I, because my usual reaction to CiF is just despair.
Take this from Khaled Diab.

Together, the world's 946 billionaires are worth a staggering $3.5 trillion - which sits between the annual GDP of Japan and Germany.

This confuses income with wealth. A more relevant - and just as staggering - benchmark is that it's around two-fifths of the UK's housing stock (pdf).

One reason why this kind of gap appears is that while most of us depend on our labour to earn our daily bread, the superrich have the magnifying effects of capital - and other people - bolstering their fortunes.

This is just crass. Most of the super-rich he mentions - J.K. Rowling, Oprah, David Beckham - owe their fortune to superstar economics, a field Mr Diab seems ignorant of.

There is a strong case to be made for the introduction of a cap on earning, or a "maximum wage". This would complement the minimum wage to ensure a fairer distribution of wealth in society...Some will immediately raise objections and say that markets should not be meddled with or else we risk stifling creativity and growth. But what this neoliberal capitalist dogma overlooks is that markets always have been and always will be controlled.

I've just the four objections here.
1. The presumption that "fairness" consists only in the pattern of wealth. But what matters is the origin of inequalities. Some wealth - that arising from theft (such as that of Russian oligarchs), exploitation, rent-seeking or (I'd add) inheritance is more unjust than Oprah Winfrey's fortune.
2. The smearing of one's opponents as having "dogma."
3. The failure to even address the problem of incentives. It might be that winner-take-all markets are a cheap way of incentivizing people. How many people work in TV, writing, or software programming for low wages in the hope of becoming the next Oprah, J.K. Rowling or Bill Gates? I dunno. And nor does Mr Diab.
4. The failure to see that the fact that "markets have always been controlled" might be correlated with the fact that mankind has almost always been poor.
What grieves me most here, though, are not the flaws in this particular piece. They're not important enough to merit attention.
Instead, the piece reveals a mindset to which the chuntering class - especially but not exclusively Groan-readers - is prone. It's the presumption that society is not be be studied carefully, but is merely the object onto which we should impose our own ill-thought-out ideas. 

It pays to be gay

It pays to be gay. This new paper estimates that American lesbians in cohabiting relationships earn 18% more than straight married women, and 27.5% more than straight cohabiting women. Gay men earn 25% more than straight cohabiting men, but slightly less than married men, at least outside the top quartile of earners.
This difference reflects the fact that gays and lesbians are better educated than straights, so it's consistent with discrimination against gays. For lesbians - though not gay men - the return to education seems lower than for straights.
The same seems true in the UK.
Curiously, lesbians do better than straight women if they work in more male-dominated occupations, and do worse in female-dominated occupations.

After the market falls

What happens after a big fall in share prices? There are two possibilities. One is that the market bounces back, because a big fall increases risk, and higher risk means higher expected returns. The other is that "contagion" occurs - nervousness feeds on itself.
I looked at the 30 worst weeks for the All-share in the last nine years - weeks when the market fell 3.3% or more, and asked: what happened the following week?
On average, the market actually fell in those weeks, by 0.24%. That's worse - though not statistically significantly so - than the average 0.06% rise for all weeks since July 1998.
This suggests the contagion effect offsets the lower prices = higher expected returns  mechanism.
Big falls do, however, raise the volatility of subsequent returns, and cause them to become slightly positively skewed. So, recent history suggests the odds are (slightly) against the market bouncing back next week.

Women, catholicism and the welfare state

In the last 150 years, all developed economies have enlarged their welfare states and given women more political power. Is there a link between these developments?
Yes, says this new paper - but only in non-Catholic countries.
To see the thinking, consider a man in a country where women are disenfranchised. Should he support female suffrage? He’ll weigh two competing considerations:
1. If the wage gap between men and women is low, he’ll support female suffrage. This is because fewer women will vote for higher taxes, and some richer women might vote for lower taxes. So enfranchising women won’t raise his tax bill.
2. If he’s got traditional attitudes to women, he’ll oppose their enfranchisement.
Where attitudes to women are relatively egalitarian, point 2 has less force. So women will be enfranchised even if they earn a lot less than men. There’ll then be more voters supporting higher taxes and a bigger state. But in traditional societies, point 2 has force. So women will only be enfranchised later, when their incomes are higher. Their support for big government will therefore be smaller.
Roughly speaking, attitudes to women are more conservative in traditionally Catholic countries; women got the vote in Spain and Italy much later than they did in  Scandinavia. So you’d expect the link between women’s enfranchisement and the growth of the welfare state to be smaller in Catholic countries.
And this, finds Graziella Bertocchi, is exactly what happened. In non-Catholic nations, women’s suffrage expanded the state. But in Catholic nations, it didn’t.