Stumbling and Mumbling

Job insecurity: what's the problem?

Via Harpymarx comes this:

More than 3.3 million workers (13 per cent of the workforce) are not confident they will still be in their job in a year's time.

This encapsulates two aspects of our economic problem. Neither are what you might think.
The first aspect is that job destruction - and therefore job insecurity - is an inherent feature of capitalism, because creative destruction is an engine of growth, and because workers are vulnerable to the whims of bosses. This is true in normal times as well as downturns, so for this reason, this survey is no evidence whatsoever of an impending economic downturn. (We‘ll probably get one, but this survey ain't evidence). 
This paper shows that even in years of steady aggregate growth, around one-in-seven private sector jobs are destroyed - 51,000 a week. The destruction rate is slightly higher in services than manufacturing. Although this destruction is more than matched in normal times by job creation, we do get a trace of this turnover in the macroeconomic data. Table 10 of this pdf shows that, in the last 12 months more than 200,000 have joined the claimant count every month. Over a year, this is equivalent to one in 11 workers - though of course, not all people who join the count do so because they lose their jobs, nor do all those who lose their jobs join the count.
Job insecurity, then, is a separate issue from the issue of macroeconomic fluctuations. The solution to it, therefore, is not macroeconomic stabilization but better insurance mechanisms. On this point, Robert E. Lucas was explicit in this classic little book:

Policies that deal with the very real problems of society’s less fortunate - wealth redistribution and social insurance - can be designed in total ignorance of the nature of business-cycle dynamics…and the discovery of better business cycle theories will contribute little or nothing to improved design.

The second economic problem is that this survey implies that 87% of workers are confident they keep their job. This suggests they are over-confident; yes, six in seven workers probably will keep their jobs, but I find it hard to believe they all know who they are.
Instead, I suspect a number of cognitive biases stop people realising how vulnerable their individual jobs are: the optimism bias (“bad things don’t happen to me”); the illusion of control (“if I work hard, they won’t sack me); and the just world illusion (“they can’t sack me; I’m good at my job“).
These biases have pernicious effects. In causing people to under-estimate their vulnerability to the  vicissitudes of capitalism, they cause them to support the system more than they should and to neglect potential ways of improving it - for example, better insurance methods or means of reducing bosses’ control over the workplace.
It’s insufficiently appreciated that the research into cognitive biases puts Marxist theories of ideology onto a stronger foundation. And this ideology can obstruct support for improving our economic institutions. This is a bigger problem than a merely temporary recession.

Darling: the worst for 60 years?

What on earth is Alistair Darling on about? He tells the Guardian that:

The economic times faced by Britain and the rest of the world "are arguably the worst they've been in 60 years".

I just don’t get this - and not just because, as John points out, we’re four times richer than we were 60 years ago. Let’s run through some possibilities.
1. GDP. This fell 1.3 per cent in the worst four quarters of the 1991 recession. The Bank of England reckons the chances of a repeat in the next four quarters are a roughly two standard deviation event - less than a one-in-20 chance.
2. Unemployment. The consensus among independent forecasters (pdf) is that the claimant count will rise by around a quarter million - to 1.1 million - by Q4 2009. In the 1981 and 1991 recessions, it rose three times as fast. It rose twice as fast in 1975.
3. Household incomes. Yes, these have been squeezed recently. But independent forecasters expect the squeeze to abate next year, and for real disposable incomes to rise 1.1%. In the worst point of the 1981 downturn, they fell 2%, and in 1977 - when incomes policy bit - they fell 4%.
4. House prices. OK, so these’ll fall. But this means diddly squat. House prices are not net wealth. Many people gain from falling prices.
5.Financial conditions. The stock market has risen in the last few weeks. The All-share’s dividend yield is 4% - slap in the middle of the range (3-5%) generally considered to be a long-run normal rate. People who are staking money on the UK economy, then, don’t think we face a crisis. Contrast this with 1974, when some people genuinely thought capitalism would collapse.
Yes, sterling has been weak. But this is as much a help to the economy as a problem.
So, what’s going on here? One possibility is that Mr Darling is much more pessimistic than reputable forecasters - which is an odd turnaround, given that he was more optimistic than them just four months ago. Or maybe he knows nothing about economic history.
There’s a third. The monetary policy committee meets next week. Darling is, in effect, pleading for them to cut rates. But why should they believe such hysteria?

The Friday questions

In what might become a regular feature, here are some unrelated questions arising this week. Feel free to help me out:
1. The government wants children to learn about the slave trade. But in 18th century England, how much different were the living conditions of the average slave from those of the average unskilled worker? I mean, both got a bare subsistence living and neither had political rights. But slaves had more job security. So how bad was slavery compared to free labour?
I know the passage from Africa was horrific, and there are examples of terrible mistreatment of both slaves and workers. But I’m asking about averages. Anecdotes aren't enough. And don't give me any nonsensical effort to empathise from today's perspective.
2. The National Gallery of Scotland wants the tax-payer to buy some paintings from the Duke of Sutherland. Why don’t we apply Nice-style cost-benefit analysis here? Would £100m spent on art really produce £100m worth of increases in quality-adjusted life years (by improving the quality of life, not length of course)? And if we don’t apply such reasoning, why not? Why is the restrictive CBA of Nice only applied to drugs, rather than to all public spending?
3. How can academics be so quick to close down free speech? Surely, any proper teacher must know that the solution to mistaken beliefs is to correct them through discussion - that’s what teaching means. Academics must therefore support free speech, by definition. Does this episode merely corroborate my prejudice, that a close interest in the Israel-Palestine question is dangerous for one’s mental health?
4. Companies are moving their head offices to Ireland or Luxembourg to save tax. So, is there something to be said for a cut in corporation tax, financed by higher top income tax rates? The idea here is that companies’ head offices are more mobile than individual high-earners, and it doesn’t matter much anyway if a few of these leave or retire anyway. So we protect tax revenues without increasing inequality. What's wrong with this?
5. Merrill Lynch has lost a quarter of the profits it made in 36 years in just 18 months. Does this show that the profits to investment banking are a reward for taking black swan risk? You make decent profits, on average, in exchange for massive losses on rare occasions? Were Merrill’s profits (and those of other investment bankers) in good times merely a reward for taking this obscure risk? Did they - and their rivals - really fully understand what they were doing, or were they just lucky punters? What would count as persuasive evidence here?
Are there interesting, non-trivial answers here that are well-founded in evidence? Or is it that there’s a lot we don’t know?

Brown: not "bonkers" enough

I gather that some fat bloke who always refers to himself in the third person has suggested that Gordon Brown might be “bonkers.” Right-thinking people have condemned this.  My complaint is different. It’s that,  to paraphrase Niels Bohr, Brown is not “bonkers” enough.
Take first the jibe that Brown is “faintly autistic”. The National Autism Society says that one symptom of Aspergers is a love of routine. But this is just what politics should be: the routine application of simple rules of law, and the routine delivery of public services. As Alfred North Whitehead said, “Civilization advances by extending the number of important operations which we can perform without thinking about them" - that is, by the application of routines. By contrast, one complaint I have about Brown is that he is insufficiently concerned with routine, but flits from headline to headline and from one ad hoc intervention to another.
Also, there’s some evidence that people who are slightly depressed have better cognitive functioning than what are absurdly called “normal” people. In particular, they are less prone to the illusion of control  and to the optimism bias. And extremely depressed people are too (pdf) pessimistic (pdf).
And these are good things in politicians. A policy-maker who recognized that he couldn’t always (or often) be on top of events,  and who knew that grand projects often end in failure would favour much more limited government than we have. Regrettably, however, Brown does not display these useful symptoms of depression.
So, perhaps, everyone - except Tom in this superb post - has got it wrong. The problem isn’t that Brown is bonkers. It’s that our political system not only expects its politicians to be always in control, but thinks it normal when they appear to be. If we define mental illness in Szaszian terms - as merely a deviation from the consensus - then there should be a little more of it.

Millions of models of socialism

Norm attributes to Martin Kettle the claim that “there are no credible models for a viable socialism.” This claim, though common, is both true and absurdly false.
It’s true in the sense that no country has what we might regard as an acceptable form of socialist government.
But it’s false in another sense. Let’s define socialism as Norm does:

At the core of the socialist idea is the principle of a self-organizing populace, not subject to the dictates or interests of any exploitative, oppressor class, but freely associated and pursuing, each person, his or her own course.

One might note that this is a description of a market economy. But leave this massively important point aside.
Even if we consider organizations, there are literally millions of models of socialism in Norm’s sense. Marriages between equals, friends agreeing to meet in a pub, village cricket leagues, folk clubs, neighbourhood watch schemes - to name but a few - are all examples of equal people organizing themselves without exploitation or oppression. Of course, these groups sometimes have organizers and chairmen, but insofar as these wield power at all, they do so with the free consent of others.
And even in the “economic sphere” there are countless examples of successful socialism in action. Hundreds of thousands of companies are run as partnerships which - in their smaller forms at least - are reasonably egalitarian and non-exploitative.
We have, therefore millions of viable models of socialism. Socialism is all around us. The question is: can we extend these models to larger organizations (and I include the state here)? Can we supplant hierarchical exploitative oppressive capitalist modes of production with more egalitarian ones?
In this sense, the question for socialism - at least at its current immature stage of development - is the one posed (pdf) by Ronald Coase and Oliver Williamson, among others: what are the most efficient forms of organizing economic activity? Under what conditions are oppressive capitalist firms efficient? My take is on page 28 of this pdf.
On this point I am, I fear, in a minority of one among the left. I regard socialism as merely a question in transactions cost economics. Almost everyone else thinks it’s a matter of striking moralistic poses.

Windfall tax: a conservative measure

Tim and Ross both do a good job of opposing calls for a windfall tax on energy companies. What they don’t do, however, is acknowledge the general problem that’s given rise to support for a measure.
This is that our mechanisms for pooling risks are inadequate. There‘s little the poor can do to avoid the costs of soaring fuel bills, whilst they cannot share in the benefits of these. Risks, then, aren’t pooled.
But there are several ways they could be, without a windfall tax, for example:
1. Renationalization of utilities companies, turning them into consumer-owned co-ops, along the lines of (say) the Co-op or mutual building societies.
2. A more redistributive tax and benefit system. This has the virtue of partly pooling all risks; someone who does well - through rising fuel prices, getting a good job or whatever - shares his luck with others, whilst a high basic income means folk worry less about losing their job or rising fuel prices.
3. Give the poor grants to buy air-source heat pumps.
4. Encourage the development of retail futures markets in electricity and gas, perhaps by giving such futures away to the poor, and allowing them to either sell them or buy more, say through the post office. This would allow people to choose the extent to which they could protect themselves from fluctuating fuel prices.
These measures differ  from a windfall tax in one important regard. They all empower the poor (literally in the case of 3) by increasing their control over their own lives or over energy companies.
By contrast, a windfall tax doesn’t do this. It leaves unchallenged the basic structure of capitalism and perpetuates the illusion that only ad hoc state action can protect the poor, who are to remain passive recipients of whatever crumbs Leviathan throws at them.
This is not only wrong. It’s conservative in the worst sense.

Tastes for tournaments

The wonderful Miss Snuffleupagus describes the difference between village children and her inner city students:

One boy, about 10-years-old, excitedly explains to me that he won 2 lollipops from the 'lollipop dip'. My kids would have laughed in his face...
What advantage these children have, to have been schooled in such a way so that they want to win a lollipop.

Here's my theory - unburdened by empirical evidence! - about the difference. Poorer inner city kids, more than their richer or suburban or rural counterparts, prefer tournaments - that is, winner-take-all contests in which a handful of superstars get massive prizes and others nothing. Hence their relative preference for careers in music, sport or drug-dealing (pdf) over careers where average pay-offs are higher and more evenly distributed - such as most graduate-style occupations.
Why is this? Some possibilities include:
1. They're victims of "bling culture".
2. Their schooling fosters expectations that they won't go to university, thus leaving tournament careers as their alternatives.
3. They have a taste for the small probability of a big gain. Perhaps the utility gain from driving a Merc in their 20s is huge - so much so that they prefer the small chance of doing so  to the larger chance of a smaller, but decent, income.
4. They have higher time discount rates, so the possibility of earning a good living in their 40s (say) holds no appeal to them - perhaps, in part, because they don't anticipate living so long.
Now, I'm guilty of fact-free theorizing here. Am I roughly right in seeing things this way?  If so, is there really a problem, or just a reasonable difference in tastes? And if so, is there anything to be done?

What do shareholders do?

What use are external shareholders? Two recent papers prompt the question. First, is this from Richard Freeman and Alex Bryson:

Firms with shared capitalist pay, particularly with share ownership schemes, have higher labor productivity than firms without such forms of pay.

This corroborates some earlier research (pdf) commissioned by HMRC.
This implies that if external shareowners shrink relative to internal ones - employees - productivity improves. Within a particular range at least, external shareholders are bad for productivity.
But mightn’t external shareholders improve efficiency through the market for corporate control, as the threat of takeover forces firms to become more efficient, whilst actual takeovers cause firms to pass from the control of bad managers to better ones?
No. This paper  shows that there’s very little evidence to suggest that low-profit firms are more vulnerable to takeover than more profitable ones. Instead, the statistics suggest that a manager wishing to avoid being taken over should just expand his firm, rather than improve profitability - which hardly improves aggregate efficiency. And, it says:

Both the short-run and long-run share price impacts suggest that takeovers, on average, substantially worsen acquiring company shareholders’ wealth…
The takeover process as a whole seems to be characterized more easily in terms of either the pursuit of managerial self-interest or in terms of the hubris hypothesis proposed (pdf) by Roll.

Now, of course, these findings are not sufficient to suggest that “expropriate the expropriators” is a wholly economically sensible strategy. What they do mean, though, is that the notion that outside shareholders fulfil an economically valuable function is not one that leaps out of the data.
My hunch is that the main benefits of the stock market are to: give incentives to entrepreneurs to start businesses, in the hope these can be sold at inflated (pdf) prices; to give long-term savers something that offers good returns; and to act as a laboratory for studying people’s behaviour under uncertainty. It’s not - at least not obviously - a device for making firms more efficient.

Do recessions raise productivity?

In the Telegraph, Roger Bootle writes:

It actually needs a downturn to flush out the inefficient companies and thereby to release resources - people, machines, property and management - to permit the creation of new companies.
Accordingly, far from fluctuations being necessarily bad, they have some characteristics that improve the allocation of resources and act to increase the sustainable growth rate of the economy.

This is certainly theoretically possible. But is it true? Here’s some scraps of contrary evidence:
1. The proportion of plants that close in any given year doesn’t change much in recession or booms. This suggests recession doesn’t winnow out inefficient firms. Instead, recessions might raise productivity by stopping unproductive firms from entering an industry or growing.
2. Geroski and Gregg’s study of the 1990s recession found that it was very difficult to predict which firms would suffer badly in recession. This suggests that measurably (perhaps an important qualifier) inefficient firms don’t necessarily shrink in recession. And they found only weak evidence that firms effectively restructured in recessions.
3. This paper by Alex Coad suggests that, on average, there’s very little correlation between firm efficiency and firm growth. Which suggests that resources don’t flow from inefficient, shrinking firms to efficient growing ones.
4. This paper (pdf) by Antonio Fatas concludes that “Countries with more volatile fluctuations display lower long-term growth rates.”
Now, I’m being deliberately selective here; in my book, I give a more balanced picture. And some research (pdf) by Keith Blackburn shows that economic volatility can raise average growth. Suffice only to say that the evidence is mixed. There’s a long gap between theoretical possibility and established empirical fact.
FWIW, I suspect the effect of recession on productivity growth depends upon what causes recession. If recession is the result of a simple exogenous drop in demand, productivity might improve, as the firms that suffer most could be those that are worst at attracting customers.
However, if recession is due to a credit squeeze, it could hurt productivity, as potentially efficient but temporarily cash-constrained firms suffer, whilst inefficient but cash-generative monopolies are less affected.

Chrissy elsewhere

In the Times, I name the real Olympic winners. The GDP numbers I used are here (I used raw GDP, rather than the PPP estimates). Taiwan isn’t in the World Bank list. The CIA’s estimate of its GDP would put it 17th.
The Lui and Suen paper is here (pdf).
When I said success was arguably related to talent I had in mind Anders Ericsson’s scepticism (and this pdf, via Freakonomics).
I wrote:

Big groups - nations, firms, government departments - have history, traditions and culture that heavily influence their chances of success or failure. These cannot easily be overridden by the mere will of a leader.

For an example of the halfwittery I had in mind, here’s Garry Cook, executive chairman of Man City: 

We’ll be as big as Manchester United…I’ve got to change the culture here…Today you can grow faster than it took United. We just need a superstar.

I’d love him to be right - but then, I’d be happy for a team of Gary Glitters to be as big as Manyoo. But does anyone seriously imagine he possibly could be?