Stumbling and Mumbling

Patriotism and taxes

It’s sometimes said that the only people who’ll leave the country as a result of the 50p tax rate are the unpatriotic ones. A couple of new papers suggest there’s something in this. They show that there’s a strong relationship between patriotism and willingness to pay taxes. This holds in two ways:
1. Countries whose citizens say they are proud of their country (as measured by the International Social Survey Programme) are likely to have smaller black economies than countries with less patriotism. The US, Australia, Ireland and Canada, for example, have high patriotism and small black economies. Korea and Russia have unpatriotic people and large black economies. The causality here, though, might run either way.
2. Within countries, patriotic individuals are more likely to say that it is very important not to evade taxes. Patriotism is as powerful an influence in increasing - expressed! - tax compliance as not being self-employed or being a Protestant (Catholics are less fastidious about paying tax).
There are three implications here.
First, Boris might be right to call the 50p tax “an assault on London.” Londoners are, I suspect, less patriotic than the rest of us: it’s hard to love your country if you live in such a dump. So they are more likely to run away from higher taxes.
Second, if a government wants to get people to pay tax, it should think about ways of making us love our country more. Edmund Burke pointed out the best way to do this; “to make us love our country, our country ought to be lovely” (par 130 here).
Thirdly, there’s a slight embarrassment here for the conventional Left. Parts of it have traditionally been uncomfortable with patriotism, partly for decent reasons. However, this might be one force for achieving a Leftist aim of getting the rich to pay more tax.

Price and quality

Price can determine quality - for women at least. That’s the message of a new paper (pdf) by researchers at the Stockholm School of Economics.
They got some Americans to taste two bottles of red wine, one costing $5 and one $40. Women who were told of the price of the expensive bottle before tasting it rated the wine much more favourably than did women who tasted it blind. For men, however, knowing the price made little difference to their rating.
And being told the price of the cheap bottle before tasting it made no difference to how the wine was rated.
This suggests that expensiveness can help to signal quality - at least to women - although cheapness is not necessarily a signal of inferiority.
This half-corroborates a finding of Dan Ariely, discussed in his great book Predictably Irrational - that expectations shape experiences. So if we expect something to taste nice, it will. This effect works even for products that have no material effect; Ariely has show that expensive placebos work better than cheap ones.
This laboratory evidence has real-world implications. It might explain why cosmetics companies can sell expensive products - mostly to women! - even though they are of dubious merit.
But might it also have a political application? Could it be that support for public spending increases has been based, in part, on the belief that expensive means better?

The "evil poor" problem

Laurie Penny has been criticised for her attack on this “evil poor” piece by Night Jack. But, in outline, she’s right.
Night Jack is promoting a cognitive bias - the fundamental attribution error, the tendency to attribute events to people‘s personalities rather than to the situation they find themselves in. He labels “Kappa clad, drugged up, workshy, wasters“ as evil without asking: might their behaviour not instead be due (in part) to situational or environmental factors?
In not raising this question, he’s perpetuating one of the great hypocrisies of the right. On the one hand, they exaggerate the extent to which people respond to incentives - hence the claim that the 50p tax rate will do huge damage. But on the other hand, when the poor respond to incentives by turning to crime, they demand not that incentives be changed - except, of course, to cut welfare benefits - but moralise about “evil.”
And when some of us try to point out that crime arises (in part) from incentives, we are told that “not having any money is not an excuse for being a violent criminal“, as if we don’t know the distinction between explanation and exculpation.
It is, though, a simple trivial fact that crime arises - in part - from social conditions; the same neoclassical economics that, in bastardized form, tells us that a 50p tax rate is a bad idea tells us, in its more proper form, that poverty causes crime. There’s abundant evidence that bad education, poverty, and inequality do this (pdf). And if your “parenting” or schooling” equips you for no better than mind-numbing minimum wage work, with no hope of advancement, wouldn’t you be a workshy waster too?
Articles like Night Jack’s however, ignore this, deflecting our attention away from social structures and onto the character of the poor.
In doing this, they play to another cognitive bias - the salience effect. It’s common for us to pay attention to what we can see easily, and in doing so under-rate the importance of less visible social forces. Drawing attention to criminal gangs wandering the streets distracts us from the factors that cause poverty and those criminal gangs - bad education, exploitative work, images of unachievable riches in the media, a dysfunctional welfare state.
Now, I’m not being utopian here. No social structures would eliminate crime. And it might even be that relative poverty (for others!) is a price worth paying for low taxes. All I’m saying is that the pretence that crime arises from “evil”, whilst ignoring the social conditions that contribute to it, is at best only part of the story. And at worst, it’s ignorant and reactionary, and just serves to flatter the ego of those who like to feel smugly superior to others.

New cultures & the post-bureaucratic age

I fear there might be a paradox within David Cameron’s thinking, highlighted by yesterday‘s speech.
On the one hand, he wants “a massive culture change at every level of government to make the state careful, not casual, with public money” - a “culture of thrift.”
He’s keen on cultural change. He’s called for an end to bonus culture and dependency culture, and he wants new cultures of responsibility and mutual respect.
But on the other hand, another theme of his is “the post-bureaucratic age” and decentralization.
Which raises the question. Is it possible to achieve such cultural change quickly at the same time as decentralizing?
In yesterday’s speech he described ways he hopes to achieve his culture of thrift. He told ministers: “If you do more for less you get promoted” (though this isn’t possible for all ministers.) And he said: “We’ll impose a new fiduciary responsibility on senior civil servants – a contractual obligation to save the taxpayer money.”
But these are mechanisms for a bureaucratic age, when top-down bureaucrats run things and so influence culture. They‘ll lose traction in a post-bureaucratic age, when government isn’t so “command and control.”
Which brings me to my paradox. “It's the boss who sets the culture” says Cameron. But if the boss has less power generally, how can he set the culture?
The obvious route here is through institutional change. Institutions shape culture, at least in the long-run. And Cameron has proposed such change:

We’ll invite social enterprises, private companies and community organisations to help run our public services not in a limited, half-hearted way, like Labour have, but with passion and enthusiasm, because we really believe in it.
And we will pay these new providers by the results they achieve, so there’s a real incentive to improve.

This, though, runs into four problems.
1. The evidence from Labour’s attempts to get private companies involved in welfare-to-work schemes suggests that this is no guarantee of getting “more for less.” We must guard against the silly prejudice that “state = inefficient, private = efficient”.
2. Doing this enlarges the constituencies that have a vested interest in increasing state spending. Companies that tender for public sector work aren’t interested in efficiency - just the size of the cheque.
3. It fails to harness the dispersed knowledge of where waste lies - that is, the know-how of public sector workers themselves. Cameron is spot-on to say that efficiency “can’t just be about top-down cuts imposed by ministers.” But the problem ministers have is the same as outsiders have - they don’t know as much as insiders about how to tackle waste at the microscopic level.
4. There is already a well of altruism in the public sector - people who do more for less.  Threatening the jobs of such people, especially if you replace them by a cheese-paring lowest bidder, risks destroying this resource.
Now, I say this not (for once!) in a spirit of hostility, or as a knock-down argument. Rather, I just want to pose the question: isn’t there a little tension between wanting big and quick controllable cultural change on the one hand, and a “post-bureaucratic age” on the other?

The economics of Susan Boyle

What does the fame of Susan Boyle tell us about economics? Here are some possibilities.
1. The power of the contrast effect. Ms Boyle’s singing talent is magnified by the contrast between it and her  ugliness and - yes - mild learning difficulties. Her rival Hollie Steel also exploited this effect; her bad dancing caused her singing to seem better by contrast.
This contrast effect is a powerful influence upon our perceptions. If you put your hand in a bucket of lukewarm water, it’ll feel cold if your hand had previously been in hot water, but warm if it had been in cold. And it has important implications. In Influence, Robert Cialdini cites research which shows that men shown pictures of average-looking women whilst watching Charlie’s Angels judged them to be uglier than they did if shown the same pictures during other TV shows; women suffered by comparison to Farrah. The damage done by the “beauty myth” is down to the contrast effect.
And retailers exploit this. We’re likely to buy ties just after an expensive suit, or lots of options for our car just after deciding what model to get because after a large purchase, a given sum of money seems smaller than it otherwise would.
2. The ubiquity of statistical discrimination. Ant (always the one on the left) hit the nail on the head: “you didn’t expect that, did you.” We were prejudiced against Ms Boyle because she was ugly.
This is a widespread prejudice. Ugly people, on average and controlling for other things, earn less than good-looking ones, with the penalty for ugliness being generally larger than the premium for beauty.  It’s for this reason that criminals are more likely to be ugly; munters have worse labour market prospects, and so are more likely to turn to crime.
However, this bias against the ugly is not pure spite. The audience’s low expectations of Ms Boyle were well-founded, because very few successful singers are ugly - even the ones who aren’t conventionally handsome have charisma; Celine Dion and Barbra Streisand come to mind precisely because they are rare exceptions.
Similarly, there’s evidence that good-looking people are genuinely more productive than ugly ones - perhaps because teachers give them more attention in school and so develop their talents.
3. Efficiency vs. justice. The correlation between looks and ability suggests that the rule, “don’t hire the munter” will, generally speaking, be a useful one. It’s a fast and frugal heuristic that saves the decision-maker time and often works. It is, therefore, an efficient rule.
But it can be an unjust one,  because it penalizes the small number of Susan Boyles. If it’s expensive for these to demonstrate their talents - and it will be in many cases where they can do so only over time, or by working with costly capital -  they will not get hired.
There’s therefore a trade-off between efficiency and justice.
4. The (limited) power of the web. Ms Boyle has become an overnight star in the US - something not achieved by many British singers even with huge record company backing. It’s tempting to say this shows the power of the web; that Youtube clip has gone viral.
But in another sense, it shows the impotence of the web. The web did sweet FA to bring Susan Boyle to initial public attention. Instead, she got her break through very old media - a TV talent show.
And this is still generally true. There are pitifully few big stars - yet - who have broke through thanks to the web alone: Sandi Thom (who she?) and Lily Allen don’t count.
Yes, the power of old media is waning. But it is still the only way for making a star.

Class war vs economic policy

Not for the first time, Shuggy has got it spot on. The rise in the top tax rate to 50% is, he says, “pure symbolism.”
I agree. It might or might not raise revenue (two pdfs). But in the best or worst case the sums involved are peanuts in the context of a £1000 billion public debt. As a way of shrinking the deficit, the move is, to a first approximation, irrelevant.
Nor is it likely to affect our general economic performance. Nigella’s dad’s cut in top-rate taxes had no discernable effect on aggregate labour productivity. So why should a tax change that affects far fewer people do so?
But it’s not just Darling who’s guilty of gesture politics. David Cameron is doing the same. He told the Today programme - admittedly as an afterthought - that it is “necessary” to reduce welfare dependency. But getting a few people off the dole and onto tax credits will do very little to improve the public finances. And dragooning the most idle people into work is not going to significantly improve overall economic growth.
In both cases, we see a similar thing. Both men are appealing to their supporters gut hatred of “the other” - welfare claimants in one case, the rich in the other. But such attacks are mere grunts.
Or at least, they are in the way Darling’s practicing it. A genuinely socialist policy would not so much tax the rich as aim at reducing demand for very highly paid people, for example by getting rid of exploiters and chancers who masquerade as managers. Who knows, such a policy might also be economically rational too?

Public finances: the left's problem

It’s insufficiently appreciated just how much of a problem the state of the public finances poses for the Left.
The difficulty is: how can public borrowing be reduced without sacrificing leftist objectives?
Even by 2012-13, the Treasury expects net borrowing to be £118bn, 7.2% of GDP, with most of this (5.5 percentage points) being “structural” - that is, not blameable on the state of the economy. And even this forecast is predicated upon what Polly Toynbee calls “savage cuts” in vital public spending.
The problem is, it’s not obvious how this gap can be greatly closed in ways the Left would like.
For example, abolishing the Department for Business, Enterprise and Regulatory Reform and halving spending on big military projects would save only £6.3bn. Pushing the tax rate on incomes over £150,000 to 70% would raise another £3.6bn, even if they don‘t emigrate or dodge it. Even if you could get the 10% of richest households - those earning over £41,000 - to pay an extra 10% in income tax, you'd only raise a little over £2bn.
Add in a few other favourites - scrapping ID cards and immigration controls - and we’d only bring in a little more.
The fact is, then, that obvious leftist ways of cutting spending and raising taxes would close only a fraction of Darling’s estimate of the structural Budget deficit.
So, what can be done? Here are three possibilities:
1. Hope that something comes up. It’s possible that the public finances will improve more than Darling expects. This would happen if the ending of the credit crunch causes firms and households to increase borrowing - and the counterpart to this would, as a matter of arithmetic, be lower government borrowing. Certainly, history shows that long-term forecasts for public borrowing are usually wildly wrong.
2. Campaign for higher inheritance taxes. In the latest year for which we have data, £58.3bn (pdf) was inherited. The tax rate on this was a mere 5.8%. Why should inheritances be taxed more lightly than work or savings?
3. Argue for greater workers’ control of public services. The fact is that it’s top-down command and control managerialism that got us into this mess, on two counts - by allowing the mismanagement of banks that caused the financial crisis, and by allowing waste (a lot of which is management) to proliferate in the public sector. As I said, it is only workers’ control that offers hope of genuinely useful cuts in public spending.
I dunno if these possibilities are adequate. But I do know that standard leftist slogans - “tax the rich”, “stop the cuts” - aren’t enough.

The most important Budget number

The most important number about today’s Budget is $12.5 trillion. That’s the amount of money the private sector is likely to save around the world this year*.
This means that the government can raise the £220bn it plans to borrow in the gilt market merely by attracting 2.5 pence for every pound saved**. This is smaller than the share of the UK in the global economy.
It should be quite feasible to achieve this. As Ricardo Caballero has pointed out, the world has a shortage of safe liquid assets. Issuing gilts therefore meets global savers’ needs. This is why the UK - and governments of developed countries generally - has enjoyed very low borrowing costs as debt has soared.
This raises a point which the architects of New Labour glossed over. Globalization makes social democracy more feasible, in one respect at least.
In globalized capital markets, it’s possible for governments to borrow massively without suffering rising interest rates; no Chancellor could have gotten away with today’s borrowing in the closed-economy world of the 1970s. This means counter-cyclical fiscal policy becomes more possible.
This doesn’t necessarily means it’s more effective; the Ricardian objection must still be addressed. Nor does it mean it’s a good thing to lumber future generations with higher debt.
Nor does it mean gilt yields will stay low. I suspect there’ll come a time when Asian savers discover better things to do with  their money than lend to highly-indebted governments. But this is more likely to happen when the global economic recovery reduces demand for safe assets, and would hit all government bonds.
All it means is that there’s a message for left and right.
For the right, it means you shouldn’t scare us with stories about a “sea of red ink”. Big borrowing is more feasible, at least in the short-term, than you pretend. I hate to break it to you, but the UK is not the only country in the world.
And for the old Guardian-reading left, it means you shouldn’t complain too much about globalization. If it weren’t for this, the government would be unable to borrow as much as it is, and would have to slash public services right now.
* Figure 1.15 in the latest IMF World Economic Outlook estimates the global savings ratio will be 22.8% of GDP in 2009, with GDP being $54.9 trillion.
** In fact, this is an over-estimate, as perhaps half of the gilts issued might be bought by the Bank of England under its quantitative easing policy.

Waste & decentralization

Reform, the rightish think-tank, and the TUC agree upon something - that you cannot achieve big cuts in public spending merely by cutting waste, as Alistair Darling hopes to do.
They’re right. It’s especially hard to cut waste if you try to do so by top-down management. I say this for two generic reasons, which are central to understanding any organization.
1. Bounded knowledge. Any sentient being who works in the public sector could identify some waste - an inefficient process, a malingering colleague. There is, therefore, vast knowledge of government waste. But this is fragmentary and dispersed. Top-down management doesn’t gather it. And workers have little incentive to offer it - for fear of rocking the boat, being identified as a trouble-maker by their boss, or simply not wishing to grass up a co-worker.
The upshot of this is that government doesn’t know what’s waste and what’s not. To them, public spending is like the old joke about advertising spending; half of it is wasted, but we haven’t a clue which half.
2. Bureaucratic capture. If government asks departmental managers to identify waste, guess what? They’ll never say that management is wasteful. The people who’ll lose their jobs under “efficiency savings” aren’t the ones who are useless, but the ones who are powerless.
There are, therefore, severe limits on how far top-down, command-and-control management can cut “waste.”
So what’s the alternative? One is to cut genuine functions: ID cards, Trident, big military or IT projects, corporate welfare. Another might be to apply (maybe Draconian) rough-and-ready rules; how about:  “sack anyone whose job title contains the word ‘strategy’”?
There is, though, another possibility - to abandon top-down managerialism. One alternative is “systems thinking“. Another, relatedly, would be a systematic decentralization of government functions. In giving power to workers rather than management, we would stand a chance of exploiting their dispersed knowledge of waste, whilst slashing back the costly box-tickers, supervisors and hangers-on that have so expensively disfigured the public sector.
As Nick rightly says,  this would require a revolution in government. And I confess to not being at all sure how, technically, it could be achieved; it’s the details that matter.
What does seem clear, though, is that cutting waste and empowering public sector workers are not substitutes. They go together.

The state and equality

What proportion of state spending goes upon increasing equality? This is one of many questions posed by comments on my post about the left and the state.
I suspect the answer is: not much.
Let’s start with some figures. The DWP estimates that spending on welfare benefits in 2008-09 was £134.2bn. That’s 22.2% of all public spending. However, more than half of this was on contributory benefits, such as the state pension and incapacity benefit. This is just (on average) people getting their money back. Non-contributory benefits, at £61.9bn, represent just 10.2% of total public spending and 4.2% of GDP.
For example, income support for the under-60s is just £8bn, or 1.3% of spending. A similar proportion goes on support for poorer pensioners. Housing Benefit is 2.8% of all spending, Jobseekers Allowance just 0.3%.
Cash transfers to the poor, then, are only a small fraction of public spending.
But of course, these are only a part of the link between the state and inequality.  Tawneyite socialists claim that spending on (say) health and education are forces for equality.
But are they? Julian Le Grand famously argued in a book in 1982 that the rich actually got more than the poor from these services - a claim supported more recently by the Joseph Rowntree Foundation.
In the case of healthcare, the claim is also supported by this paper (pdf). One reason for this is that the poor under-estimate their ill-health and so are less likely to make claims on the health system. Another reason is that the rich live longer (pdf) than the poor, and the bulk of health spending on most individuals comes late in life.
And it’s quite plausible that education spending is actually for force for inequality, for four reasons:
1. Kids from richer families are more likely to stay on (pdf) at school. This is because they get better schooling before the age of 16. Children of professional and managerial workers are almost four times (pdf) as likely to get 5 or more GCSEs as those of unskilled manual workers are only
2. Education is partly a positional good. This means those with less of it than others might be worse off as a result.
3. Schools can act (inadvertently) as a means of legitimating inequality and hierarchy.
4. Although romantics like to think of schools as a means whereby some kids from poor backgrounds (like me) can escape poverty, they often serve the opposite function. They might be ways of crushing the aspirations and abilities of poorer students, especially if they are black.
Now, I’ve deliberately overstated the arguments here, to pose the question of how egalitarian the state is.
I suspect that, in truth, the key to whether the state is a force for equality rests upon something we cannot see - the counterfactual.
Big government leftists suspect that the alternative to state provision would be little or bad healthcare or education for the worst off. But mightn’t the alternative be instead greater use of charity, scholarships or - better still - co-operative self-provision. (Remember, there‘s a big difference in principle between state financing of public services and state provision).
On this point, I have an open mind. But surely, all leftists should agree that the state doesn’t do as much as it should to reduce inequality. The question is: is this failing a bug, as big-state leftists believe, or - as I fear - a feature?