Stumbling and Mumbling

Idiosyncrasy in house prices

The Nationwide reports that house prices have fallen 4.4% in the last 12 months. What does this really tell us?
I don’t just mean the report is uninteresting because housing is not net wealth. What I mean is: what relevance does a national aggregate have for actual individuals?
Few people believe inflation is really as low as 3%, because their personal experience tells them it’s more than this. So why should we think another aggregate is relevant to individual experience?
Put it this way. When I had my flat valued, the highest valuation was more than 10% above the lowest. 4.4% is therefore only a fraction of the idiosyncratic uncertainty about a particular property’s price.
Or put it another way. What matters for your house price are local conditions: is a local employer expanding or not? Are transport links improving? Is crime rising? Have gypsies moved in nearby? Are they planning to put up a big new housing estate? These local factors can swamp national ones.
This study of the US found that city-wide price moves can explain only one-fifth of the variation in returns on housing at the zip-code level.
Phil and Kirstie are right: it’s all about location, location, location.
You might think this is just trivial. After all, the average is right, on average. There can be no doubt that average prices are falling.
True. But I think this does have two implications.
First, it’s another reason why a drop in house prices might not have disastrous effects on consumer spending. Local variations, when allied to the optimism bias, cause even those long of housing to think: “things aren’t that bad round here.” Although this attitude helps sustain consumer spending, it can cause housing transactions to fall badly, as sellers continue demanding excessively high prices as the market falls.
Second, it means individual house prices are more volatile than national data pretend. I suspect this is part of the reason why people own so much housing and so few shares. If  the national news reported the price change on 22 Acacia Avenue, Sidcup every day, as it does for the FTSE 100, I suspect a lot of people would regard housing as a riskier investment than they do.

The right and our electoral system

Mike Ion thinks the Labour leadership should do more to combat the rise of the BNP:

Gordon Brown would send out a powerful message to his party's core supporters if he were to personally throw his weight behind a call for a new "coalition of the willing" that will help to blunt the advance of the far-right in this country by addressing some of the genuine concerns of white working-class voters while at the same time openly challenging those concerns that have no factual or legitimate basis.

I fear Mike's plea will go unheeded. The fact is that our electoral system gives Labour little incentive to fight the far-right, or listen to its core supporters.
Labour will not lose the next election because of the rise of the BNP in places like Stoke (Mike's example). It makes no difference if Labour's 10,000 majorities in Stoke's constituencies are cut by thousands because of the BNP or abstainers. What will cost Labour the election is the loss of places like Worcester or Oxford East*. And although abstentions or BNP votes by white working class voters in those areas could be a problem, they are less a danger than middle-income floating voters swinging to the Tories. It was his grasp of this fact that helped Blair win three elections.
So, could it be that ignoring its core support - and the rise in the BNP this threatens - is one of the prices we must pay for our first-past-the-post system?
* corrected in light of comment.

Paying to meet people

I think this conversation between Tyler Cowen and Bryan Caplan took a wrong turning. Bryan asks:

What if we use the metric of your willingness-to-pay to spend an hour with a person? There are a few awesome people you would pay thousands of dollars to meet. But you'd pay hundreds of dollars to avoid an hour with most people.

For me, though, this question merely seems to vindicate Tyler's point, that people are much of a muchness. Because there's hardly anyone I'd pay a lot to meet. What if my heroes (Arsene, Dar, Jolie) turn out to be dullards? Or if Freema, Emily, Carol or Gillian are unimpressed by my charms - unlikely as it sounds? I can't see why I'd pay a lot to meet a great thinker simply because I suspect their best ideas are all in their books. And I suspect most famous people got to be famous by being self-obsessed egotists.
Surely, the people we get the biggest kick from meeting aren't the well-known ones we'd pay to meet, but rather those who pleasantly surprise us - for example, the young researcher with new ideas he's yet to publish, rather than the established thinker who's become a bumptious bore?
So, am I wrong? Who are these people it's worth paying so much to meet? And are there enough of them to disprove the notion that people are more similar, in important respects, than many of us believe?

MPs' falling pay

MPs' relative pay has been falling down the years. Inspired by this post by Raedwald, I looked at how their pay has changed relative to average earnings - and I was surprised.
A formal salary was introduced in 1911 at £400 a year. Had salaries risen in line with average earnings since then, MPs would now be paid over £140,000 a year. Had they risen in line with average earnings since 1964 (when the Lawrence Committee set pay at £3250 a year), they'd be paid £100,000.
In fact, their base salary is £61,820.
But here's a strange thing. When David Lloyd George introduced that £400 wage, he said it was "the minimum allowance to enable men to come here." Which suggests he had a fancy idea of the minimum.
Or did he? He thought such a sum was necessary to attract men "who would render incalculable service to the state."
I suspect we can agree that current MPs' salaries do not do this.

Kids need money, not dads

Do children need fathers to bring them up? David Cameron thinks they do. But MPs decided last week that children conceived by IVF don't. And this paper, which has just comes to my attention, suggests that the MPs are right and Cameron wrong.
Ian Walker and Yu Zhu confirm that there is "a large negative correlation" between living in a non-intact family and having low educational attainment.
But this is because there's a large negative correlation between being poor and having low education, and single parents tend to be poor. And Walker and Zhu found that, controlling for this removes almost all the link between single parenthood and bad educational attainment. They estimate that a child from a single parent home is 27 percentage points more likely to leave school at 16 than one from an intact family. But controlling for income reduces this probability to just 5.9 percentage points. And with the standard error of this estimate at 10.1 points, we can't rule out the possibility that the pure impact of single parenthood upon educational achievement is zero or even positive.
So, perhaps the problem isn't that dads leave home - but that their money does.
This corroborates my Bayesian prior - based on that most unreliable of evidence, personal experience - that if a violent or deadbeat dad walks out, kids gain from greater emotional security and the loss of a negative role model.
Those with different priors, however, might note that the coefficient on single parenthood and educational under-achievement is still positive, implying that it is probably bad for kids' schooling, but that the problem is rather that there's so much variation in the data that it's hard to be certain of anything. And you might also claim - ideally with other evidence - that educational attainment is not the only important metric of family success.
Or you might ask, as I did, why the evidence should matter. Maybe two-parent families are good for non-consequentialist reasons.

Talent-spotting, luck and equality

At a time when we’re seeing that Gordon Brown is not up to the job of being PM, Glenn Hoddle is setting up a scheme to revive the careers of young footballers rejected by their clubs.
There’s a link here. Hoddle is taking the view that even top football teams are bad at spotting talent. And Brown’s agony shows that Labour MPs are also terrible talent spotters; remember, just a few months ago, these were so confident Brown was up to the job that they didn’t even bother to have an election.
So, could it be that the old adage is right: “the one thing rarer than ability is the ability to spot ability”? Certainly, many managers believe that lots of hiring decisions were mistaken.
And could it be that what often look like successful hires are in fact sheepskin effects? If we treat someone as if they very able, they will act as if they are - and even if they don’t groupthink will stop doubters pointing out that the emperor has no clothes: this was the theme of the film Trading Places.
I ask all this not merely because it is relevant for political and business decision-making, but because it also matters for egalitarians.
If many hiring and rejection decisions are mistaken, then it’s hard to argue that inequalities in income are closely related to ability or “merit”*. Instead, they have a large arbitrary element; I, for example, can easily imagine that, with different luck, I would be ten times as rich or poor as I am now.
In which case, perhaps the moral (as distinct from economic) case for redistribution becomes stronger.
 * The objection to this is that it only takes one correct decision of many for ability and jobs to become aligned; it doesn’t matter if nine of ten employers fail to recognize your ability, if the tenth does. But is this objection decisive in the face of oligopsonistic hirers or path dependency? Narrowly failing or succeeding in getting into Oxbridge, or onto Goldman Sachs’ graduate trainee programme, can permanently affect your life prospects.

Economics vs marketing

Here’s something that puzzles me. On the one hand, neoclassical economics is more triumphant than ever. It aspires to explain all aspects of human behaviour from sex to umbrellas, inspires best-selling books and newspaper columns, and not a day passes without some Guardianista bewailing the hegemony of neo-liberalism. But on the other hand, government policy pays little attention to this approach.
Take its anti-alcohol strategy:

The Government will run a major campaign aimed at improving understanding of alcohol units and raising awareness of the health impacts of regularly drinking in excess of the NHS recommended lower-risk levels.

This flatly contradicts the presumptions of neoliberal economics in favour of a marketing mentality. The two are very different.
Economics says people are - at least in matters that are important to them - as rational and well-informed as they need to be. They know excess drinking has costs; you only have to see a Scotchman on a London bus to know it can ruin lives. They get bladdered because they believe the benefits of doing so outweigh these costs.  Even addicts make this trade-off. If you want people to drink less, therefore, you should either raise the costs of doing so or somehow reduce the benefits.
The marketing approach, by contrast, says people do some things because they are ill-informed, so their behaviour can be changed by informative advertising .
We have, then, two competing paradigms. And here’s my question. Why is it that the economic paradigm doesn’t inform public health policy? Can economists really claim that it’s because politicians are stupid, without conceding that their (our) mindset doesn’t have the widespread applicability we pretend?  Are there really incentives that cause politicians to eschew the economic paradigm in favour of the marketing one?* Or is the paradigm itself missing something?
* I’m not convinced that politicians prefer preaching to raising excise duties because the latter would be unpopular? Don’t they realize they also lose support by pretending we’re idiots?

Brown: immigrants to the rescue?

Might migrant workers help Gordon Brown out of his predicament?
My thinking - as usual - is simple.  Migrant workers have accounted for a disproportionate proportion - over half (pdf) - of the rise in employment since 1997. They have been the swing producer. And as the economy cools and jobs are destroyed, it's these jobs that'll go. This is partly because newly-created jobs tend to be more unstable and prone to destruction than older ones, and partly because migrants have filled jobs in cyclical sectors that are most vulnerable to a downturn; the Polish builder is a stereotype for a reason.
So, the coming downturn could look different from its predecessors. It'll take the form not so much of voters (and their friends and neighbours) losing their jobs - though this'll happen to some extent - but of Poles going home.
Voters might therefore be pleasantly surprised by how mildly the downturn hits them. And it's a common tendency for people to react more strongly to surprises, good or bad, than to anticipated events.
So, in the 2010 election, Brown might be able to say something like:

The economy has weathered the storms of the last two years far better than our critics claimed.  Not only has inflation fallen sharply, but unemployment is still half a million lower than when we took office in 1997. This shows that we are the party of stability and sound economic management. 

No case for joining the euro

The FT's Lex column claims that now might be a good time for the UK to join the euro. I'm not sure.
It says the weak pound - DM2.44 in old money - "is a competitive rate to lock in for exporters."
True. But the fact that it is a competitive rate shows precisely the virtue of floating exchange rates. They act as shock absorbers, helping - modestly - to support the economy when it's weak and cap inflation when it's strong.
Sterling is weak in part because the UK's economic outlook is worse than the euro zone's. Locking into the euro would deprive us forever of this shock absorber.
Lex continues:

The superiority of the UK’s financial framework and central bank are also suspect after the credit crunch.

True, the Bank has lost anti-inflation credibility in recent months, one gauge of this being the fact that breakeven inflation rates are so high.
But if the gilt market thinks  an official interest rate of 5% is inadequate to restrain inflation over the long-term, why lock into an official rate of 4%? Joining the  euro will only solve the Bank's credibility problem in the same sense that cutting your leg off will cure your gout.
The decision to join, or not, the euro is one that should be regarded as irrevocable. To take it on the basis of short-term advantage - a weak pound - or evidence that might be only short-lived would surely be folly.

Altruism in the public sector

Workers in at least parts of the public sector are significantly more likely to do unpaid overtime than their private sector counterparts.
This new paper finds that people in the not-for-profit caring sector (education, healthcare, childcare and care homes) are 12 percentage points (40%) more likely to do unpaid overtime than comparable workers in the profit-making caring sector.
This suggests that what Julian Le Grand called "knightly motives" are significantly more common in the public sector - because people with a strong sense of vocation are likely to avoid working for someone else's profit. The TV detective motivated by a desire to nick villains rather than get on with the top brass is a cliche because it contains some truth.  
This doesn't just mean that the neoliberal idea that everyone is motivated by narrow self-interest is wrong. It also means that there are dangers in "reforming" the public services. Reforms that introduce profit motives, or alienate workers by introducing heavier-handed management, might add to costs by reducing donated labour.