Stumbling and Mumbling

Why is Brown lying?

Why are Gordon Brown and Ed Balls denying that public spending will have to fall after the election?
Here’s a possibility. It’s because they don’t believe the Budget forecasts. They think public sector borrowing might fall more sharply than the Red Book projects (pdf), with the result that the spending cuts contained in the Red Book won’t be necessary*.
To see why they mightn’t believe those forecasts, start with my chart, which is taken from various parts of the economic accounts released today. This shows the financial balances - savings minus investment, or net lending - of the public and domestic private sector.
You can see that these two  are almost mirror images of each other: the correlation between the two since 1988 has been -0.94**.
Here’s the link between the two. The private sector is now running a surplus because of the credit crunch. Because of this, some people - in fact companies, as that’s where the surplus is - cannot borrow as much as they want. Because others are free to run surpluses, the result is that the private sector as a whole is running a big surplus - equivalent to 4.9 % of GDP over the last four quarters. 
The necessary counterpart of this is that the government must run a deficit. I say “necessary” because across all sectors the financial balances must sum to zero - saving must equal lending.
In other words, the public sector is in deficit because the credit crunch has forced the private sector to run a surplus.
The mechanism here is straightforward. As credit-constrained firms cut inventories, capital spending and jobs, economic activity falls. That cuts tax revenue but increases public spending on welfare. (It also causes the government to run a looser fiscal policy, but this is only a small part of the increased budget deficit.)
Now, here’s the reason for optimism. As the credit crunch recedes, the private sector’s financial surplus will shrink as firms become freer to borrow. And the counterpart to this is that the public sector’s deficit will come down - possibly more quickly than the Red Book forecasts, and sufficiently quickly to avoid the need for big spending cuts.
This raises the question. If this is what the government believes, why doesn’t it say so in its Budget forecasts?
In a sense, it does. It forecasts that GDP will grow 3.25 per cent after 2010. Such strong growth is, I suspect, only possible if banks are lending again and firms are borrowing to invest - that is, if the private sector‘s financial balance is falling.
Where the mystery comes is in why this optimism is not embodied in the borrowing forecasts.
It might be because it is politically awkward to do so. Forecasting a big fall in the deficit requires one to forecast either that taxes will rise relative to GDP, and/or that spending (on welfare benefits) will fall even more than is currently pencilled in.  Even the former would be politically embarrassing. Perhaps, they think, it’s better to forecast only small changes in spending and taxes and to project a pessimistic scenario for borrowing. 
Now, I’m not making forecasts here. I’m not saying that the credit crunch will end swiftly and that public borrowing will fall. 
What I am saying is that, insofar as there is an intelligent reason for Brown and Balls to deny the necessity for spending cuts, it’s because they believe a story like this.
Perhaps, then, the "lie" is not in the denial of the need for spending cuts, but in the Budget projections themselves.
* Perhaps what I mean is that they believe that there's a good chance that the deficit will come in below forecast. There is something utterly absurd about the Red Book projections in that these are point forecasts subject to humungous (but unacknowledged!) uncertainty. It would be better if Chancellors follwed the Bank of England's polciy of making forecasts as fan charts of probabilities, but I fear the meeja are too simple to accept such a device.
** It’s not minus one because of movements in the current account deficit - foreigners’ financial surplus. However, as these are small, I can ignore them for the sake of simplicity.

New Labour & capabilities

Paul Cotterill notes that New Labour is talking about Amartya Sen’s concept of capabilities, but warns that there is “a real danger of Sen being deliberately misinterpreted and misused.”
I fear this is not so much a danger as an inevitability. I say so for three reasons.
1. Sen’s capability approach is, in an important sense, hostile to real-world democracy. He’s pointed out that many of the people who lack capabilities can be quiet and content; this is because they cope with their deprivation by reducing their expectations:

The hopeless beggar, the precarious landless labourer, the dominated housewife, the hardened unemployed  or the over-exhausted coolie may all take pleasure in small mercies, and manage to suppress intense suffering for the necessity of continuing survival, but it would be ethically deeply mistaken to attach a correspondingly small value to the less of their well-being (On Ethics and Economics, p45).

But electoral politics requires that we do precisely this, because these people keep quiet whilst - by the same token - the rich make too much noise about their exaggerated entitlements.
The capabilities approach, however, requires us to do the exact opposite - to raise the capabilities of the worst off, even though they might be reconciled to poverty, and even though doing so might cost votes. Does New Labour really have the appetite for this? The fact that they cravenly caved into demands to cut inheritance tax suggests not.
2. The focus on capabilities is not a way of wriggling away from income equality. Quite the opposite. Sen has written:

Being poor in a rich society is itself a capability handicap…Relative deprivation in the space of incomes can yield absolute deprivation in the space of capabilities. In a country that it generally rich, more income may be needed to buy enough commodities to achieve the same social functioning. (Inequality Re-examined p115)

The list of capabilities required in a rich nation, Sen says, “can be very wide indeed.”
Capabilities, then, require a greater focus on relative poverty, not less.
3. Equality of capabilities requires a massive increase in education spending on the poor.
An important capability is education. This allows us to convert formal opportunities for jobs into actual attainment and hence well-being (pdf), and is associated with better health.  A serious concern for equality of capabilities would therefore focus on raising the education of the worst off, to the level of the rich (this is what equality means). But this would require huge rises in spending. We’d need to spend more per head on kids from poor backgrounds than parents do at the best private schools, simply to offset all the factors (poorer nutrition, lower expectations, maybe lower inherited cognitive skills etc) that would cause the poor to do badly even if they did attend the same school as the rich.
Such huge spending increases aren’t going to happen.
So, Paul’s fear is well-founded. 

The Atheist's songbook

Call the NSPCC:

Give Richard Dawkins a child for a week’s summer camp and he will try to give you an atheist for life.
The author of The God Delusion is helping to launch Britain’s first summer retreat for non-believers, where children will have lessons in evolution and sing along to John Lennon’s Imagine.

That'll have them flocking to the seminaries.
This raises the question: why are there so few atheistic (as distinct from Satanic) songs?
Dar Williams' After All, Josh Ritter's Thin Blue Flame and Jolie Holland's Periphery Waltz (from the greatest album ever made)  are great songs - infintely more so than Imagine -  but not exactly singalongs, though Mark Erelli's Kingdom Come, from the Darwin song project, is catchier.
But there aren't that many more, are there? The Atheist's Songbook is a thin thing compared to God's.
What am I missing?

The Guardian hoax

This piece by Murray Teitel is one of the most remarkable I’ve ever seen.
To the superficial reader, it looks like grade A garbage. Which it is, if we read it as narrow economics.
But it's not really that at all. In fact, it is a heartbreaking work of staggering genius, a brilliant illumination of class relations, post-modernism and the crisis of the left.
The clue is in the title, “the sardine economy.” This is, of course, a homage to Eric Cantona. It’s also a hint that Teitel is emulating Alan Sokal. Just as Sokal used copious references to French philosophers to con Social Text into accepting a nonsensical article - thus revealing the empty pretensions of post-modernism - so Teitel is using a greater French thinker to deceive the Guardian into publishing an article which illuminates its own vacuousness.
Teitel begins:

I am not an economist. Even as an undergraduate, I didn't take one class in economics or political science…With a mind uncluttered by all this expertise…

With these words, Teitel is showing clearly what we've long suspected - that ignorance is no bar to writing for the Guardian.
What matters is not knowing one’s subject matter, but ones’s readers. And Teitel knows them perfectly - he knows that they know that finance is a BAD thing done by BAD people. And he knows that the job of the writer is to echo his readers’ prejudices, not to make them think.
In getting this pastiche past the editors, Teitel is showing that they don’t value knowledge, truth or understanding of the external world. They don’t need intellectual stimulation, and certainly not tools for transforming the economy and society. Instead, all they need is confirmation that their prior beliefs were right. The purpose of writing is merely to massage their egos - because the ego of newspaper editors matters much more than what is quaintly and erroneously called the “real world.”
Teitel is also inviting us to ponder the class bias of the Guardian. What sort of person would have such an inflated sense of entitlement that he thought he could get money for writing about something he knew nothing about? Only the most pampered child of the upper class. Those of us from harder backgrounds think, foolishly, that we need some kind of skill to earn a living.
Better still, he’s highlighted the impotence of the Guardian-reading left. He claims that the sort of economy we need is “obvious”. Which poses the question: why is the economy we actually have so different then? Could it be because large chunks of the “left” are too busy admiring their own moral rectitude to engage with that pesky external world that just refuses to behave as we’d like?
Teitel has, therefore, brilliantly exposed the weaknesses of the middle-class soft-brained left. And the Guardian’s editors were too stupid to spot this, even though Mr Teitel left a massive clue. I mean, a call for a “real economy based on productive labour” coming from  someone claiming to be a lawyer can’t possibly be genuine, can it?

The left and cuts

The Guardian picks up a point leftie bloggers have been making for a while - that New Labour and the left should think properly about public spending.
First, we should acknowledge that such cuts are not urgent - which means we have time to think. The fact that real gilt yields are below 1% shows that the deficit is easily financed for now. Instead - as Mervyn King said - the problem comes when the economy has recovered. The sort of deficits the government envisions - 5.5% of GDP in 2013-14 after the recovery are uncomfortably high.
However, even this doesn't mean cuts will definitely be needed. Medium-term forecasts for the public finances aren’t worth the paper they’re written on. It’s quite possible that if the banking crisis does dissipate, government borrowing will fall faster than expected; this is because government borrowing is the counterpart of household and corporate lending, and this is high now because banks’ reluctance to lend is causing some people to be forced savers, so if the private sector does start borrowing again, government borrowing will fall.
But what if cuts are needed? Then we have a problem, because it’s insufficiently appreciated just how hard it is to cut spending intelligently, for three reasons:
1. Healthcare and education are inherently expensive. Why do the best private schools  charge £20,000-plus a year for tuition? It’s not because they are inefficient. It’s because the job of imparting knowledge to young brains is a slow one. Similarly, the expense of private healthcare, here and in the US, shows that good medicine doesn’t come cheap.
If you want quality education and healthcare then, you’ve got to spend. But these two departments alone account for over two-fifths of public spending. This puts a high floor under spending.
2. Public spending generally gets relatively expensive over time. This is Baumol’s cost disease; it happens because wages, a big part of public spending, tend to rise faster than prices. It’s technically and politically hard for the public sector to pay “China prices“ - even if services could be offshored to low-wage economies - there‘d be an outcry against doing so - and so it doesn‘t benefit as much as the rest of the economy from the major long-term deflationary force.
3. Ministers cannot identify waste, so efficiency savings can’t be made easily from the top-down. This is partly because top bosses rarely know what’s happening on the ground, and partly because the wasteful bureaucrats have the power to protect their departments.
Spending cuts, then, are hard to achieve. So what can be done? One possibility is to decentralize the provision of public services; workers on the ground know better than ministers where waste lies, so they should be empowered to cut it; it is to New Labour‘s shame that David Cameron seems to grasp this point better than them. Another possibility is to cut some government functions.  The Department for Business Innovation and Skills, to use this week’s name, is one candidate here, as are PFI and IT projects that are just transfers of cash from taxpayer to companies. More generally, governments will have to get used to using the phrase: “this isn’t government business.”
A third possibility is to think of cutting the middleman - asking how services can be delivered at minimal cost. It’s in this context that universal welfare benefits - which include a citizens basic income - are attractive: they are much cheaper to administer than means-tested ones.
Now, these proposals are deliberately vague. I suggest them as lines to think along. My key point is simple. If we need to cut spending, we can only do so intelligently by radical restructuring of the public sector. And this should include an attack upon managers and upon the corporate capture of the state.

Justice & public opinion

The report (pdf) from the Joseph Rowntree Foundation on public attitudes to inequality has attracted intelligent comment. But it poses the question I asked in another context: why should we care about public opinion? The question: what is just? is not the same as: what is popular?
I have three general concerns here.
1. Perceptions of fairness can be coloured by a “people like us” effect. We naturally think that folk like us are more deserving. This new paper (pdf) discovers a sinister manifestation of this:

We find significant racial bias in perceptions of worthiness: respondents rate recipients of their own racial group as more worthy.

Although that paper found that actual behaviour - charitable giving - wasn’t influenced by racism, other research has found that it is.
There seems to be a “people like us” effect in these findings. People are both resentful of those richer than them and hard upon those poorer.
2. There’s a lack of local experts. For example, 75% of people disagree with the statement “rich people at the top have a really tough time overall because they work hard, with more stress and responsibility than other groups.” But unless you’ve worked at high incomes, or known well those who have, how would you know this?
My own experience suggests the 7% who agree with it might be nearer the mark. When I downshifted ages ago from a job in (around) the top 2% of earners, I felt better for it, and many former colleagues  were envious of me; “If only I didn’t have kids…” was a common phrase. Of course, my experience might be wrong. But it is experience, not a view pulled out of my jacksy.
It’s not just in attitudes to the rich that such ignorance manifests itself. 69% agree that “there is enough opportunity for virtually everyone to get on in life if they really want to.” But, again, how would you know this, unless you’d grown up at the bottom of the pack - say in a children’s home going to a bad school?
3. Cognitive biases matter. One of these is the “just world” belief; as Tim Horton, who led the research says, people invent reasons for believing things are fair. Another is the fundamental attribution error; as the report says: “participants in our discussion groups tended to attribute success or failure overwhelmingly to individual rather than structural factors.” Funnily enough, though, this is more marked in theor attitudes to the poor than to the rich.
Now, I don’t mean to disrepect the JRF’s research here. All I’m saying is that there’s no reason to suppose that public opinion about justice should coincide with what is actually just. After all, if it did we could ditch 2500 years of political philosophy and use opinion polls instead. 

The economic consequences of Ms Anderson

The Guardian reports:

The U.S. dollar fell broadly on Tuesday as stabilizing equity markets in Europe and the United States eroded safe-haven flows into the greenback…The dollar has tended to fall when risk sentiment improves as investors move money away from safe-haven investments into riskier ones.

This is a common claim. But it raises the question: how can the dollar be regarded as a “safe haven currency” when the US has net overseas debt equivalent to almost a fifth of GDP, when the OECD said today that the country is likely to have big current account deficits despite the recession, and when there are still good reasons to fear that the dollar could fall a lot?
Here’s a partial answer - Pamela Anderson.
To see what I mean, we must distinguish between risk and uncertainty; risk is quantifiable, whereas uncertainty, or ambiguity, is not.
The dollar might not be a low-risk asset. But it is a low ambiguity one.  And when investors get nervous they flock towards things they “know” - the Ellsberg paradox shows us that people hate uncertainty even more than they hate quantifiable risk. Low-ambiguity assets therefore do well in jittery times, but fall back as “safe haven“ demand falls.
But how did the dollar acquire its low ambiguity status? Many reasons. Here’s one. Foreigners think they are familiar with American society in a way that they are not with, say, Japanese or German society. And a form of halo effect causes them to unconsciously think that because they “know” American society, they know its economy too - and by extension its assets.
This familiarity arises in part from the spread of the English language. But it‘s also the result of the US’s cultural hegemony.  The universal popularity of American film, TV and music has helped make the US seem well known to foreigners.
Which of course is where Ms Anderson comes in. Baywatch was seen by over a billion people in 148 countries, thus contributing to the US’s low-ambiguity status. 
In this sense, Ms Anderson has helped support the US dollar, and helps us understand the apparent paradox of how a risky asset can benefit from safe haven status. And because this status has enabled the US to borrow at lower cost than it would otherwise be able to, Ms Anderson has helped facilitate a huge transfer of wealth from non-Americans to Americans.
I’m surprised her importance for international economics has been overlooked for so long.

Heightism vs discrimination

The Times reports on heightism:

Short men get short shrift: repeated surveys have found that the taller the man, the higher his likely salary and promotion prospects.

It’s certainly true that taller men earn more - this paper (pdf) estimates that each inch of stature adds 1.7% to a man’s earnings.
However, this is not - or at least not entirely - because employers discriminate against stumpies. The same paper finds that half the premium comes because tall men are better educated. This is because height is associated with good childhood health and hence success at school. And, it says, another chunk of the height premium comes from tall men being more likely to work in well-paying occupations or industries. 
Controlling for education, industry and occupation, each inch of height brings in only 0.4 per cent better earnings.  Which suggests that pure discrimination against smurfs is, well, small.

Danish research based on Department of Health figures showed that shorter Britons reported worse physical and mental health than their “normal” sized counterparts.

However, a new paper (pdf) by Angus Deaton has found that shortarses’ worse mental health is largely due to their worse education and earnings.  He says:

There is good evidence that cognitive and physical function develop together, so that children who do not reach their potential heights also do not develop their full cognitive potential. It is this lack of full cognitive development that accounts for lower levels of education, and lower earnings in adulthood which, in turn, are almost entirely responsible for lower levels of life evaluation, and poorer emotional outcomes.

The Times continues:

Perhaps most woundingly of all, taller women tend not to countenance shorter men as potential romantic partners: the French National Institute for Statistics and Economic Studies found that men who are 6ft tall or above are 50 per cent more likely to be married or in a long-term relationship than men under 5ft 5in or below.

But this is only to be expected - and not just because high incomes increase the chances of a man beig married. Height is a powerful predictor of being good in bed - as is baldness, heterochromia and left-handedness.  But more research is needed on this subject.

Hester's pay: the underlying questions

I fear the hostility to the big pay package offered to RBS boss Stephen Hester  is confusing the symptom for the underlying problem.
This problem is that the government is missing an opportunity to rethink how banks should be organized. Its big stakes in RBS and Lloyds give it a chance to raise (at least) three questions:
1. How big should banks be? Should commercial and investment  banking be split, as Nigella‘s dad has suggested? Should banks become small enough to fail, and if so how?
2. What should be the internal organization of banks? The failure of Goodwin’s Stalinist management is, at least, consistent with the hypothesis that top-down running of huge organizations is a bad idea. What are the merits of the alternatives, such as forms of market-based management, mutualisation or worker-control?
3. If banks are to be the servants of the economy, how should they behave? A new paper estimates that it is  corporate lending, not household lending, that promotes long-term growth.  But banks have lent twice as much to households as to non-financial companies. How, if at all, should banks be encouraged to raise corporate lending?
Now, I can forgive the government for not having well-thought out views on these questions; after all, it never expected to own so many banks. What’s less forgivable, though, is that it is not taking this opportunity to start a debate.
There is, though, a reason for not having ones. Doing so might reduce the market value of banks. If Lloyds and RBS were to be split into smaller, competitive units they might not raise as much when they are privatized as they would if they remain large near-monopolies - and as the Treasury says, the objective of state ownership is to “create value for the taxpayer as shareholder.”
Which raises the question. Is this an example of the government being altruistic, and thinking about the future interests of tax-payers even though it’ll be out of office when any privatization happens? Or is it just that it has an ideological prejudice in favour of big hierarchical organizations and winner-take-all pay systems?

Binge drinking, genes, norms & taxes

Higher alcohol taxes could increase binge drinking, not reduce it. That’s the message of this paper (pdf).
The reasoning here is as follows.
First, shy people are more likely to drink heavily than others - because they need to reduce their inhibitions. As Tony Adams wrote:

I wanted to become a proper drinker because all the people I liked, the ones I wanted to be like, enjoyed a drink. They were confident and funny and outgoing, all the things I wanted to be…I was a shy, awkward character who needed a drink so he didn’t have to worry…I wanted to find a girlfriend but was frightened and needed drink for Dutch courage.

Secondly, shyness is partly genetic. In particular there’s a correlation between having blue eyes (pdf) and being shy.  Because of this, the authors found that people with blue eyes are significantly more likely to agree with the statement “I drink alcohol to feel more comfortable in social situations.”
Thirdly, there’s a spill-over from genes into social norms. In societies with more blue-eyed/shy people, drinking for Dutch courage, to loosen inhibitions - big binge drinking sessions - is more common. The very fact that an activity is common often means it’s more socially acceptable, which means that non-blue-eyed/non-shy people are also more likely to binge drink. For this reason, binge drinking is much more common in Scandinavian countries - where more people have blue eyes - than in southern European ones.  It’s also more common in those US states with biggish populations of Scandinavian ancestry: the Dakotas, Minnesota, Wisconsin.
Given all this, it’s possible for higher alcohol prices to increase binge drinking. This is because higher prices can reduce demand for drink among non-shy people. If the gregarious guy who only pops out for one or two doesn’t go down the pub at all, the counterweight to “binge drinking culture” diminishes. The power of the social norm that supports such drinking therefore rises.  In the long-run, therefore, higher alcohol prices might increase binge-drinking, even if they do reduce (pdf) overall alcohol consumption.