Stumbling and Mumbling

Drink, pregnancy and earnings

Last week, Nice advised women to avoid alcohol whilst they were pregnant. New economic research supports this, as it suggests that drinking during pregancy has long-term effects upon the child's educational attainments and earnings.
To establish this, J. Peter Nilsson looked (pdf) at the effect of a liberalization of Sweden's  tough alcohol laws back in the 60s. In November 1967, two Swedish counties,  Varmland and Gothenburg & Bohus, allowed ordinary grocery stores to sell strong beer. As a result, beer consumption in these counties leapt 10-fold, until the ban was re-imposed in July 1968.
And Mr Nilsson found that children in these two counties who were conceived just before the liberalization - and hence were likely to be exposed to more alcohol in the womb - did far worse in life than children in counties where alcohol was liberalized, or who were conceived in the two counties after the ban was re-imposed.
He found that men exposed to the extra drinking, on average, completed half a year less schooling than those who weren't exposed. And, at age 30, both men and women who were exposed earned one-fifth lower wages than those who weren't exposed - a massive effect.
If this sounds like the puritans are right, cheer up - exposure to alcohol after you've been born seems to raise wages.

Terminal 5: a Coasean problem

The shambles at Terminal 5 shows what happens when bosses are ignorant of economics. Here's the Times:

BAA claimed that the baggage system was working properly but had become clogged with bags because BA had too few staff to unload them from conveyor belts. BA said that BAA had provided too few security staff to process its baggage handlers as they arrived for work.

And the Telegraph:

British Airways said the system was provided by the airport, while BAA said it was the airline which was responsible for getting bags from the aircraft to the belts.

Now, this is cretinous. Baggage handlers are obviously complements to a baggage handling system - one's useless without the other. And it's a basic principle of economics that complementary assets should be run by the same boss, to ensure that they work together. And yet BAA and BA have contrived to ignore this; BAA runs the system whilst BA provides the staff.
This is not a sophisticated principle. It's grasped perfectly well by the Archers, for example.
Which, I guess, shows just how low management has fallen. Rather than apply basic organizational principles, BA managers prefer to live in a purely imaginary world of visions. As I say, management is not a technical function aimed at making things work, but an ideological process used to justify bosses' status and salaries.

Hillary the Nietzschean

Everyone's mocked Hillary for her "mis-speaking." Only Bryan Appleyard, however, has come close to diagnosing the underlying illness. Her narcissism, he says, has caused her to elevate the survival and propagation of her self-image above all other values, such as a respect for reality.
In this sense, Hillary is a good Nietzschean. So-called "truth", he said, is just "a mobile army of metaphors, metonyms, and anthropomorphisms -- in short, a sum of human relations, which have been enhanced, transposed, and embellished poetically and rhetorically" in the service of the pursuit of power.
To him, the founding fact about the world is not external reality but rather our own wills: 

Nothing is “given” as real other than our world of desires and passions and...we cannot access from above or below any “reality” other than the direct reality of our drives...Seen from inside, the world defined and described according to its “intelligible character” would be simply “will to power” and nothing else. (Beyond Good and Evil.)

The important thing here, though, is that Hillary is not unique. Prioritizing the will to power over the truth is a defining feature of managerialism. Managers presume that the world can be bent according to their will. And, time being a tricky thing, it's a small step from thinking the future is wholly malleable to thinking the past and present are as well - as Stalin knew in his notorious doctoring of Russian history. Hillary's "mis-speaking" is in the same category as New Labour's smearing of David Kelly and bosses' presentation of company accounts not as objective measures of corporate performance but as vindications of their own success. All subordinate "truth" to ego.
Now, I'm not suggesting Hillary, or bosses generally, do this consciously. I suspect instead that Hillary has lived so long within the purely imaginary world of the decision-maker that she has long forgotten the distinction between her own will and reality.
But the distinction does exist, if only because "reality" is the product of others' wills as well as her own. So perhaps Hillary's tragedy is not merely her Nietzschean narcissism, but also her solipsism.

Privileging religion

What is a conscience? This is the question Brown opened when he said that "exercising your conscience will mean for Labour Party members a free vote" on parts of the embryology bill.
But, as Janine asks, why should conscience only permit a free vote  here? To take just one example, many Labour MPs consciences might - or should - stop them wanting to put people in jail for 42 days without charge. But there's little hope of a free vote on the Counter Terrorism bill.
What Brown means by "conscience", then, is "religious belief." Which raises the question: why should religious beliefs have a special status in politics that allows MPs free votes when they don't get them on other grounds?
Now, I'm by no means as hostile to religion as some, but I have three problems with this:
1. It treats the consciences of religious believers with a respect not given to those of agnostics. 
2. It gives too much respect to religious loyalties over others. It takes for granted what should be questioned - that one's loyalty to one's church should over-ride one's loyalty to one's party. But why should this be the case when - to take our 42 days example - loyalty to liberal principles is not  given similar status?
3. It privileges some forms of moral thinking over others.  Why should a belief founded  (perhaps loosely) in religious doctrine entitle an MP to a free vote when beliefs - which might be much more rigorously considered - founded in secular moral philosophy do not?

The curse of CSI

This line from the latest Case-Shiller house price report caught my eye:

Las Vegas and Miami share the dubious title of the weakest markets in January, reporting double-digit annual declines of 19.3%.

Now, what do Las Vegas and Miami have in common? Yup, they are locations for two of the three CSI franchises.
Even if we allow for the fact that prices in the third CSI area - New York - are holding up relatively well, the CSI effect seems big. Prices in the three CSI cities have fallen by an average of 14.8% in the last 12 months, compared to an average fall of 8.7% in the other 17 metropolitan areas covered by the Case-Shiller indices.
Coincidence? No. There's an obvious reason for this - the salience effect. CSI causes people to exaggerate the extent of violent crime in its cities, causing people, at the margin, to avoid them.
Granted,  the CSI effect doesn't seem significant in conventional statistical terms. Regressing annual price changes upon a CSI dummy (1 for Las Vegas, Miami and New York and zero for the other 17 cities) yields a p-value of 15.1%, against the null hypothesis of a zero effect. But remember:
1. Why should we be classical statisticians about this? If your Bayesian prior is that there is a CSI effect - as theory predicts - the evidence provides some corroboration.
2. Don't confuse statistical and economic (in)significance. As we've seen, the effect is economically significant - worth over $15,000 for a house priced at $250,000 this time last year.
3. CSI is not the only show affecting perceptions of crime and therefore prices. If we add a Numb3rs effect (giving LA a dummy value of 1 as well), then the p-value for a combined CSI+Numb3rs effect drops to 5.9% - significant at the 10% level, as they say. Papers have been published with less.
Pedants will moan that this is just a nonsensical excuse to carry a picture of Emily Procter. But what do they know?

Much ado about little

Depending on which report you read, the CBI's latest economic forecast is "gloomier than the Chancellor's", "sharply below the level Chancellor Alistair Darling forecast" or a "challenge" to the Chancellor.
The truth, though is more mundane. This table shows the quarterly GDP growth forecast by the CBI and Chancellor, based upon my interpolation of the mid-point of the Treasury's range (pdf) and the CBI's profile of annual growth.
You can see that both agree upon  two things - that growth will be weak in the first half of this year, and that it'll return to around trend by late 2009.
The disagreement is simply about when the up-turn will come.
And even this is small. The 0.2 percentage point difference between the  forecasts for Q3 and Q4 is less than the average revision in official estimates of quarterly GDP growth between the initial release and the latest numbers. This means it's quite possible that reports this time next year will vindicate the CBI and yet later revisions will vindicate the Chancellor (or vice versa). It'll be years before we know who's right.
What's more, of course, forecasts are subject to a big margin of error; the Treasury estimates its average error to be 0.5 percentage points for its 2009 forecast of 2.5% growth; the CBI's average error will be about the same. 
Both forecasts, then, are consistent with GDP growing around 2% for a while.
How dull is that?

Taxes & labour supply

What effect do taxes have upon labour supply and tax revenues? Everyone's got a prejudice here. But if instead you want some facts, you could try this big new paper which surveys the evidence, and the difficulties involved in getting those estimates. Some highlights:
1. "Male hours of work are almost completely irresponsive to changes in work incentives." For reasonable changes in tax rates, we work full-time whatever.
2. But "for high skill men higher rates of taxation are likely to discourage effort and creativity quite substantially." We might go into the office as much as ever if taxes go up, but we spend less time working and more time arguing about our favourite member of Girls Aloud. However, most estimates here suggest elasticities of tax revenue to rates (around reasonable levels) are less than one, so higher tax rates do just about bring in more revenue.
3.   The self-employed are more responsive to taxes. It's here - if anywhere - that we might find big adverse Laffer curve effects upon taxable income and hence revenues.
4. Women's hours are more responsive to taxes than men's, but not much.  On average, a woman working 25 hours a week needs a 20% rise in post-tax income to work one extra hour.
5. Participation in the labour market, rather than hours worked, is sensitive to incentives, especially for low-skilled men. This suggests the benefit system and tax credits can have big effects upon whether men work or not. And this, combined with points 1 and 4, suggests there's something to be said for big in-work benefits at the expense of high marginal withdrawal rates.
One big caveat here, however, is that the very long-term effect of higher marginal taxes might be larger than the shorter-run effects. Higher taxes might reduce incentives to get education and training (as they reduce the pay-offs to having high skills) or might even change social norms to create a "why work?" culture.
These effects, however, are almost impossible to quantify. 

Mismemory & demand

In Corrie, Gail can't remember falling down the stairs. This is a common response to trauma; a colleague of mine recently fell off his bike and broke his nose (it didn't spoil his looks - he's a scouser), and he can't remember the accident either.
The mind blocks out distressing events; it's easy to imagine an evolutionary reason for this.
But it's not just in extreme cases that our memory of bad things is distorted. Daniel Kahneman has shown (pdf) that our memories of less dramatic things can also be systematically distorted in two particular ways.
First, our memories are insensitive to the duration of a bad event; we remember long uncomfortable experiences as being no worse than shorter ones despite the fact that we'd all prefer discomfort to be as short as possible.
Second, our memory conforms to a "peak-end rule". If the end of an episode is less painful than its worst moment, we look back on the incident less unfavourably than we do if the pain suddenly stops.
Here's my question. Might this have economic consequences?
Take holidays. At first, these are deeply unpleasant - the hassle of checking in and waiting hours for a plane - but they end adequately. Or take moving house. This too is horribly stressful at first (dealing with lawyers) but it ends nicely (I hope).
These episodes are those which the peak-end rule says we are are likely to remember  too favourably - because the end of the event is less distressing than the peak.
So, could it be that demand for air travel, or moving house, is higher than it would be if our memories were correct, because we forget how unpleasant they are? If so, some part of demand for them is irrational.

Meanwhile, in the real world...

Do consumers know something financial markets don't? That's the question raised by today's figures, showing that high street spending is much stronger than economists expected.
The value of sales grew 6.6% in the 12 months to February, the biggest annual increase for six years. Seasonally adjusted, the  volume of sales has risen 2% since December. And before seasonal adjustment, sales rose by 1.7% in February, the third best February since records began in 1970.
This isn't just because of higher spending in food shops;  sales volumes by non-food stores have risen 1.2% in the last two months and 5.2% in the last 12.
Now, if you believe in the wisdom of crowds or in the permanent income hypothesis, this indicates that consumers are confident about their economic future. It seems they aren't spooked by higher food prices and utility bills - perhaps because they had reined in spending in anticipation; sales volumes stagnated between September and December.
Perhaps, instead, consumers are looking at the fact that their bank deposits are equivalent to over a years' after-tax income; low unemployment; and high profits, which are usually a portent of employment and real wage growth. They're spending because things aren't nearly so bad as the City's panic would have us believe.
What other explanations could there be? City economists are scrabbling around for excuses.  February's unusually bright weather got people into the shops. And the early Mothers' Day also inflated sales, as folk bought harps for their mams.
There's something in these. But they don't fully disguise the important fact - that the real economy is in far better shape than the financial one - something which many "experts", funnily enough, aren't keen to point out.

Complements in production

A colleague of mine is doing jury service; the case has dragged on for ages, because a jury member has fallen ill. The west coast main line will be closed over Easter because of engineering works in Rugby. The sale of my flat is taking forever, because my solicitor is so slow.  And despite the Bank of England's efforts, interbank markets are illiquid.
These four things are related.  They all show the troubles that happen when inputs into a production process are complements rather than substitutes. If a jury member falls ill or idle, you can't easily replace him halfway through a case; the 12 jury members are complements. If the line in Rugby is closed, trains can't easily be diverted through Coventry, and the track around Rugby is a complement to the track through to Manchester. I can't now substitute to a quicker solicitor. And the production of market liquidity is a complementary process. It's no use one bank being healthy and able to lend if others aren't perceived to be creditworthy. Market liquidity is like making a dream so real - it takes two baby.
In cases like these, single failures can badly hold up production - a chain is only as good as its weakest link - and substitution away from that link is difficult. We have Leontief production functions.
Now, Charles Jones has showed in this fantastic paper (pdf)  that such  complements in production processes help explain why poor countries stay poor.  But my examples suggest that they matter in richer countries too.
Could it be that  sectors have low productivity partly because they are riddled with complementarities in production, and so suffer from weakest link problems; think of transport, construction and the law, where Jarndyce vs Jarndyce is still an accurate description?
One of the tricks of good management is to try and overcome problems like these; remember, the assumption of conventional economics, that the production function is given, is false; such functions have to be discovered. A good manager asks: how can I avoid being dependent upon a weak link? Sometimes, the answer to this is to bring the complements under the same ownership. Other times, it's to increase potential to substitute between inputs, for example by replacing highly paid stars with cheap formats or by offshoring.
But what happens if managers lack incentives to find such substitution possibilities? Could it be that one reason for inefficiencies in the public sector - and even perhaps for  the collapse of the Soviet Union - is that managers lack incentives to minimize costs and hold-ups by finding technologies that permit substitution?