Stumbling and Mumbling

The recession is not taking place

The other day, I tried to do some Christmas shopping. I went into six shops looking for a Wii fit. All were out of stock. When I get home, I get a Barclaycard statement telling me my credit limit has been raised.
The evidence of my own eyes, therefore, tells me there is no credit crunch, and that insofar as retailers are struggling, it is because of a lack of inventory, not a lack of credit.
For me, then, the recession is not an empirical fact in the sense of something I experience directly.
Of course, I won’t deny that some people are “really” losing their jobs. But as I say, this happens on a huge scale even in “good” macroeconomic times. Which, again, shows that individuals’ lived experience tells us little about macroeconomic phenomena such as booms and slumps. These are aggregate economic data, not direct sense data to any individuals.
Instead, recession is a hyper-real phenomenon,  a construct of abstract aggregate data - and not even all aggregate data.  It exists a little like the Gulf war existed for Baudrillard, as a media spectacle.
And we should interpret efforts to dampen the recession in this sense, as a manipulation of signs and simulacra. They are not efforts to improve the security of actual, real individuals. After all, did anyone react to the Pre-Budget report by thinking “my job, which was vulnerable last week, is safer now?”
No.

Hierarchy, altruism and gender

Hierarchy can crowd out altruism. That’s the message of this new paper by Luigi Bosco.
He got groups of people to play series of dictator and ultimatum games, in which one person offers another a division of a pot of money.
In one set of groups, prize money from the games was split equally. In another set, the individual who accrued most money was allowed to decide how the prize money was to be distributed in other games.
Mr Bosco found that players in the second set made significantly less generous offers in the games. That suggests that competition for power - the ability to decide how others (not oneself) get paid - can make people more selfish and  less altruistic.
There are at least three implications here:
1. In some contexts, traditional motives - money and power - might be counterproductive; we should read this paper alongside research (pdf) by Kathleen Vohs which has found that merely thinking about money can make people more selfish. In organizations where there is a big pay-off to co-operation - such as from sharing information, kicking around ideas or mentoring others - hierarchy and financial motivation might reduce efficiency.
2. Institutions shape “character” - they have the power to make us more or less selfish. This suggests that the costs and benefits of institutional design are large. Could it be that business managers and politicians over-rate the importance of policy, relative to that of institutional design?
3. When offered the competition for power, men became more selfish than women. This corroborates other research, showing that there are gender differences in how people play tournaments. The “glass ceiling” might exist, in part, therefore because contests for status in a hierarchy favours masculine qualities.  This in turn suggests that feminists especially should be sceptical about the merits of hierarchy and competition for power.

Recession vs inflation targeting

Here’s a puzzle. Morally speaking, does it make sense to worry so much about recession whilst having supported the policy of inflation targeting for the last 16 years?
When the Bank of England raises interest rates in normal times to reduce inflation it is, in effect, imposing big costs upon a minority - loss of business and jobs - in order that the majority can gain from lower inflation. The Bank of England has argued that the benefits of this outweigh the costs, so inflation targeting is justified in utilitarian terms.
But a recession has very similar effects. A minority lose their jobs, but the majority will gain from lower inflation.
How, then, can a government which supported inflation targeting worry so much about recession?
Some obvious answers won’t do, for example.
1. This recession threatens to cause deflation, which might in turn lead to a severe depression.
I’m not convinced. For one thing, deflation needn’t cause depression and even if it does, the Bank of England can stop it simply by printing money.
What’s more, the welfare benefits of lower inflation - savings on shoe leather costs and on tax distortions - don’t stop at zero inflation. Friedman, remember, thought the optimal inflation rate was negative.
2. The cost of recession isn’t just unemployment hitting a few hundred thousand, but the fear of unemployment hitting millions.
But this fear exists even in normal times, because the job destruction rate is so high. The 25,000 jobs that’ll be lost when Woolies closes represents just half of one average week of job losses between 1997 and 2005.
No-one in government gave a damn about those losses. So why get so panicky when the rate of job destruction increases slightly?
I fear there’s an analogy here with transport deaths. If a plane crashes killing 250 people it’s headline news for days. But the same number die on the roads each month without anyone much noticing.
3. Recessions bear disproportionately upon the poor.
It is the case that workers who lack power (the "unskilled") are more likely to get the heave-ho. But this is true under inflation targeting as much as in recession.
And in one way, this recession might actually help the poor. The worst-off, remember, don’t have jobs at all. And if prices fall, they’ll gain because the real value of their benefits will rise.
4. The jobs lost in recession are permanent, whereas those lost under inflation targeting are only temporary.
To argue this, however, requires one to argue that recessions reduce long-run growth rates. But Alistair Darling rejected this. His estimate of trend growth is the same now as it was in March, before the recession.
So, the puzzle remains. How can you both support inflation targeting in normal times and worry much about recession? Am I missing something here? Is this another example of sloppy thinking about the ethics of economic policy? Or are there non-moral reasons to care so much about recession?

Darling's spending rise

In his Pre-Budget Report, Alistair Darling promised to cut borrowing after 2010 by finding £5bn a year of “efficiency savings.“ These account for all the fiscal tightening in 2010-11 and three-quarters of it in 2011-12.
But there’s a good chance that, at least in 2010, these spending cuts will be largely offset by a spending rise - on pensions and social security benefits.
The problem is that inflation is highly likely to turn negative later next year - thanks not only to the VAT cut, but to falls in oil prices and mortgage rates, and to this spring’s price rises dropping out of the annual data. I’ve seen a couple of forecasts that RPI inflation will be minus 2% next September.
This matters, because state pensions and social security benefits are usually changed in line with September’s inflation.
If the Chancellor were to do this next year, though, he’d have to cut benefits in  nominal terms. In a rational world, this might or might not be feasible, But in our world, it is almost certainly politically unacceptable.
So he’ll have to announce a real rise in benefits. Memories of the 75p pension rise disaster would mean this would have to be more than just a token.
Perhaps the least he could get away with would be a 2% rise in nominal terms - equivalent to £1.90 on the state pension.
But this would add £940m to spending on pensions alone, and £2.5bn to spending on all benefits.
Half of Darling’s “efficiency savings” are therefore offset.
Now, in one sense, this doesn’t much matter. £2.5bn is a tiny fraction of the margin of error in borrowing forecasts.
But it might matter in another sense. This rise would add to scepticism about whether Darling really has the stomach to cut spending. Which in turn might increase the pressure upon him to raise taxes.

Lansley on recession

Andrew Lansley is a prat. I say this not because he’s claimed that “recession can be good for us”, but because he has pathetically apologized for saying so, and withdrawn the post in which he said so.
However, his claim has some substance:
1. There’s some evidence that recessions do, as Lansley claims, cause people to live healthier. Smoking and obesity decline in recessions. And deaths from several (pdf) causes fall in recessions. 
2. Recessions are minority activities. In the 1989-91 downturn, the worst-affected 20% of firms accounted for 94% of gross job losses. The vast majority of us keep our jobs in a recession. Which means that we gain in several ways. It’s easier to book restaurants and theatre tickets, and to get cabs; I spent a large part of the last recession being driven around in a big Merc. And of course inflation comes down - which is a considerable improvement in welfare.
3. It is possible that recessions help improve  long-run growth by cleansing the economy of lame ducks.
4. People are not so risk-averse that fluctuations in average living standards over time cause them pain. In this sense, as Robert Lucas has demonstrated (pdf), the bad thing about recession is not that GDP falls 1-2%, but that the costs of the downturn fall disproportionately upon some people and we don’t have adequate institutions for spreading this risk.
These claims are of course arguable. But they are reasonable. They are certainly more so than the notion which I fear underpins some of the hysteria surrounding recession - the idea that all is well if the economy grows but catastrophic if it doesn’t.
Lansley’s cringing apology, then, represents a bad day for democracy. It shows us that our party system stops some quite reasonable  beliefs from being considered.

Acceptable vs effective

I’ve never seen the attraction of prostitution. If a man wants quick unfulfilling sex with a woman who despises him, he should get married. However, government proposals to criminalize paying for sex with someone “controlled for another person’s gain” are quite obviously imbecilic.
But this raises a wider question. Could it be that there’s a very sharp trade-off between effectiveness and political acceptability? Could it be that policies that could work are politically unacceptable, whilst policies are that are “acceptable” wouldn’t?
I’m thinking of four topical examples here. 
1. If you’re serious about wanting to protect vulnerable women from becoming prostitutes, why not have a citizens’ basic income? In improving their options outside prostitution, this would improve women's bargaining power and so reduce exploitation. Freer immigration would have the same effect, as traffickers of women would lose their power over them.
2. Proposals for a “presumed consent” rule for organ donation seem problematic. So why not have a market in organs? The allegation that this would hurt the poor might not be true, and could in any case be ameliorated by a citizens’ basic income.
3. Many forms of fiscal stimulus might fail as they’ll be offset by increased private saving. One that might work, however, would be a big increase in unemployment benefits. This would have the virtue of being targeted at people who’d like to borrow but can’t, so government, in effect, is borrowing on their behalf. It might also increase private savings, by diminishing one motive to save - the fear of losing a lot of income if one loses one’s job.
4. Recidivism rates are high and rising. We should therefore conduct experiments in prisons to see what policies might reduce re-offending. But when Whitemoor prison did this, Jack Straw ordered it to stop, without citing any hard evidence at all about the effectiveness (or not) of the comedy classes. In this respect, he is just repeating the idiocy of one of his predecessors, who  refused to fund research which might have shown that dietary changes could improve prisoners’ behaviour.
What we have in all four of these cases is a dichotomy. One the one hand, we have policies that New Labour (and in some cases Tories too) consider acceptable - laws against prostitution, “presumed consent”, tax cuts, and a tough prison regime - but which are unlikely to succeed. On the other hand we have policies which might work - CBI, markets in organs, higher unemployment benefit and experimental prison therapies - but which are so unacceptable as to not even be on the agenda.
What this shows, I think, is that New Labour’s claim to believe in technocratic, evidence-based policy is a sham. They are not technocrats at all, but either priggish moralists or cowardly panderers to mob prejudice.
I sympathize with Penny Red; if we really want rational policy-making, we might need a revolution.

Would tax cuts work?

Sir Samuel Brittan  repeats what for me is becoming a questionable but popular argument:

As for straight tax cuts, there are several ingenious arguments against using them as a stimulus. They boil down to saying that taxpayers will expect taxes to rise again and therefore save most of any windfall. This is the case for concentrating reliefs on poorer citizens who are cash-constrained. It is even more a case for temporary cuts in indirect taxes such as value added tax.

My problem is that focusing tax cuts upon the poor will not necessarily avoid the fact that taxpayers will save any windfall.
For one thing, the idea that the poor have a higher marginal propensity to consume than the rich is questionable. If you owe money to a loan shark, you’ll be more keen to pay down your debts than if you merely owe to Barclaycard. And the very fact that the savings ratio has fallen so much as inequality has risen suggests that the rich or near-rich have a high propensity to consume too.
But even if the poor would spend more of a tax cut than would the rich, it doesn’t follow that tax cuts to them would stimulate the economy. It’s possible that higher earners would react to those cuts by thinking “someone will have to pay for them. And it could be us.” So higher saving by the rich might offset increased spending by the poor*.
Much the same argument applies to cuts in VAT, except with the additional problem that insofar as this does increase spending, some of the benefit will leak out in higher imports.
Even in ordinary times there are loads of examples (pdf) of fiscal policy being counter-productive - of tightenings leading to expansions and easings leading to contractions. But these are not ordinary times. Every scabby dog knows that tax cuts now will mean taxes rises later.  So, if ever there was a time when Ricardian equivalence might hold, now is it.
The chances of an orthodox fiscal expansion working now are, surely, lower than usual.  It might work - though how could we tell? - but we can’t be confident it will. 
So why do it? I suspect because the government feels the need to be seen to be doing something, regardless of its probable effectiveness.
But then, this is true of so many policies.
* For fiscal policy to work, future tax rises will have to be expected to fall upon the poor, not the rich, as I've pointed out.

The myth of the irrational consumer

We’ve seen house prices and shares plummet, unemployment rise and, according to the MPC (if not the data), the worst banking crisis since World War I. And how have consumers reacted?
By increasing spending. Today’s figures show that, despite the troubles of (quoted) retailers, retail sales volumes have risen 2% in the last 12 months.
How can consumers have been so resilient in the face of so much terrible news?
My chart shows part of the answer. It shows that before the crisis struck last year, consumers were, in effect,  behaving as if bad news were on the way. The ratios of retail sales to house prices and share prices reached low points in 2007. This meant that consumers, in aggregate, did not much increase spending in response to rising wealth. They behaved as if the rises in house prices and shares in 2003-07 were largely temporary. In effect, they were bracing themselves for bad times. The result has been that, as house and share prices fell, spending has held up, causing the ratios of sales to wealth to rise.
In other words, consumers - on average - are rational and forward-looking. They see trouble coming.  A now-classic paper expressed it thus:

Consumers tend to smooth out anticipated, transitory movements in tomorrow’s returns by factoring them into consumption today. When wealth is temporarily higher than its long-term trend with consumption and labour income, investors must be expecting returns on the market portfolio to fall and are holding consumption temporarily below its trend relationship with assets and income in anticipation of lower returns.

Although that paper used US data, Bank of England research has found a similar thing true for the UK.
This raises a devastating problem for managerialist ideology. It suggests that consumers - on average and in terms of behaviour rather than words - are much more rational than “experts” or government. Whilst the banking system has been driven to the brink of collapse, and government finances are in a mess, consumers have weathered the storm quite well in part because they - more than government or “experts” - saw it coming.
Now, I am not saying here that spending will continue to hold up.  Maybe rising unemployment will hit it. But the data suffices to disprove one theory that was popular a few months ago - that reckless consumers would cause a recession. The truth is that consumers have not been a cause of our troubles - though some (many?) will be victims of it.
Instead, the fact is that the crowd of ordinary people has been much more resilient than top-down organizations such as banks or government.
There’s a lesson here that won’t be learnt.

Sergeant, Tocqueville & democracy

John Sergeant’s performance on Strictly Come Dancing has reminded me of Alexis de Tocqueville.
Despite having the elegance of a spastic in a magnet factory (c. Gene Hunt), viewers have voted in droves for him - so much so that he’s withdrawn from the contest rather than make a continued mockery of it.
This is where Tocqueville comes in. He would not have been at all surprised by Sergeant’s popularity, as he knew that democracy rarely elects the best men:

The natural instincts of democracy lead the people to keep men of distinction from power…When one enters the House of Representatives in Washington, one is struck by the vulgar demeanour of that great assembly…Its laws are almost always defective or untimely.

Nevertheless, Tocqueville thought democracy conferred great long-term advantages upon a nation, by improving the public’s character:

A man of the people, when asked to share the task of governing society, acquires a certain self-esteem…He may not be more virtuous or happier than his forebears, but he is more enlightened and active…Democracy does nor provide a people with the most skilful of governments, but it does that which the most skilful government often cannot do ; it spreads throughout the body social a restless activity, superabundant force, and energy never found elsewhere, which, however little favoured by circumstance, can do wonders. Those are its true advantages. 

Here, though, is my concern. Do our current managerialist-democratic institutions really have the benefits Tocqueville thought?
I fear not. For one thing, being asked merely to put a cross in a box every four years, or to ring a number, is not sufficient to engender a superabundant energy. Quite the opposite, it can merely breed apathetic sense that our rulers must bow to our prejudices, however ill-informed they are.
It can also lead to an exaggerated sense of entitlement. We saw this in the witch hunt against Brand and Ross, with the elderly right-wing middle class thinking that the BBC should cater only to their own particular tastes.
It can also, as Mill noted in his warning against the tyranny of the majority, prompt the belief that we should meddle everywhere. The complaints that led to the sacking of Jon Gaunt were a manifestation of this; the proper response to him should be merely to ignore the fat, bumptious, oleaginous, simple twat, not to demand his firing.
Now, whether I’m right or wrong in seeing and decrying these effects is perhaps a secondary issue. What matters is the fact that we overlook the extent to which institutions shape character.

Reg Varney's role in economic history

The death of Reg Varney has rightly led to many tributes. However, his largely pernicious - albeit inadvertent - contribution to economic and political history should not go unnoticed.
His portrayal of Stan  Butler did much to perpetuate the image of the 1970s worker as a bone-idle work-dodger; we forget today just how enormously popular On the Buses was. And this in turn might subconsciously have contributed to the popularity of Thatcherism. How many of those who, when asked by Tories in 1979 whether the working class had become too big for its boots, conjured up a picture of Stan Butler and so voted for Thatcher?
There’s more. As Andrew reminds us, Reg Varney was the first man in the world to use a cash point machine. In doing so, he might have kicked off two effects.
One is a tolerance of inflation. One of the drawbacks of inflation is that it forces us to economize on holding cash, as inflation erodes its value. We therefore make more trips to the bank, incurring what economists call shoe-leather costs - costs which are more significant than you might think. It was for this reason that Mr Varney’s less illustrious near-contemporary Milton Friedman thought that the optimum rate of inflation was negative.
However, the invention of the ATM helped make it much easier to get cash out of the bank. This fall in shoe leather costs for technological reasons offset part of the normal cost of inflation, which helped make people less intolerant of it.
Is it really a coincidence that inflation began to rise as the cash point machine, as popularized by Mr Varney, became more widely used? I think not.
There’s a second effect of its spread, however, which has only become appreciated in light of the rise in behavioural economics.
The easier availability of cash has reduced one constraint on our spending. Before Mr Varney used the cash point,  impulse buying of good or sessions down the pub were constrained by the fact that cash was hard to obtain. After that fateful day, however, the constraint came down. If you think of consumers as rational far-sighted maximizers the effect on spending should have been minimal. But if people lack self-control, the spread of the ATM would have raised spending.
Maybe, then, Mr Varney is partly to blame for the low savings ratio.
His impact upon the economy has, therefore, been arguably quite malevolent. But then, he is not the only great TV character of whom this can be said.