Stumbling and Mumbling

Sincerity, ego & liberalism

A recent post of mine set people wondering: does he really believe that? The question reveals something curious about our culture.
I say this because it shouldn’t matter what I believe. Ideas are good or bad or - more importantly, interesting or not - whether I believe them or not. What matters is reasoning and evidence, not what I believe.
This issue is not, of course, about me. Those protestors outside the Chilcot enquiry on Friday make a similar mistake. They accuse Blair of lying, as if this is a bad thing.  Surely, what matters is the allegation that the war was a bad idea badly executed. This stands or falls independently of the question of Blair’s honesty.
Instead, there seems to be a huge premium upon sincerity; Blair himself exploited this when he famously claimed that he was “a pretty straight kind of guy.”
What we’re seeing here is more than a mere vindication of Richard Sennett’s claim that public life has become a mutual revelation of “personality.” It’s that people seem unable to conceive of any alternative to this.
This is what lies behind  the “culture wars.” Intellectually, the debate between religion and secularism is an arid one; there’s barely a single point made by Ditchkins or their interlocuters that wasn’t made 80 years ago by Bertrand Russell and his opponents. So why is the mass debate - the mots juste - so lively? It’s because what’s at stake isn’t an empirical proposition, but egos. When someone says “I am a Christian” or “I am an atheist”, the emphasis is entirely upon the “I”.
In this sense, we are living in an era of narcissism - albeit in perhaps a different sense from Christopher Lasch’s - in which the self is all-important.
Which raises a paradox. We think of the modern, post-Enlightenment era as being defined by liberalism and the scientific method. But these have in common the belief that propositions are separate from the individual - that the individual is a disembodied subject distinct from his beliefs. However, our public life effaces this distinction, whereas - as Sennett pointed out - people in the 17th and 18th century had a strong sense of a distinction between the public and private person.
I’m not sure why this is - though I suspect we can regard it as an outgrowth of modern capitalism. Still less am I sure it’s a healthy development.

Osborne: arrogant prat

In its early days, one feature of the research into cognitive biases was the emphasis it placed upon the fact that “experts” were as prone to error as laymen. In Kahneman and Tversky’s classic Judgment Under Uncertainty, for example, David M. Eddy showed that doctors commonly misinterpreted diagnostic probabilities, whilst Stuart Oskamp wrote that “professional psychologists are no better interpersonal judges, and sometimes are worse ones, than are untrained individuals.“ And in Human Inference, Richard Nisbett and Lee Ross said:

There is no inferential error that can be demonstrated with untrained undergraduates that cannot also be demonstrated in somewhat more subtle form in the highly trained scientist.

This has not been forgotten. More recently, Philip Tetlock and Gerd Gigerenzer have shown that experts in politics and medicine still get things wrong.
Sadly, though, the point seems to have disappeared in the debased form in which George Osborne understands - I use the word loosely - behavioural economics. He seems to think that irrationality is something to which only the little people are prone, and that it can be corrected by politicians and experts who are above such imperfection.
This mistaken premise leads him to some silly ideas. He writes:

The crisis has finally put to rest the assumption, which underpinned Labour's entire system of financial regulation, that individual behaviour is always entirely rational and that market prices always reflect intrinsic values.

Now, even if we leave aside the straw man, there are three problems with this claim:
1. The case for government not intervening heavily in financial markets does not rest upon the view that individuals are “always entirely rational.” Instead, it rests on the problem that policy-makers are no more able to spot irrationality and bubbles than are market participants. As Alan Greenspan famously asked: "how do we know when irrational exuberance has unduly escalated asset values"? And, indeed, he spent much of the next 10 years showing just how tricky the question is.
2. It omits a crucial distinction. Markets can go wrong not (just) because people are irrational, but  because they have limited knowledge. In particular, knowledge of the future - which is the key to pricing any asset - is, as Keynes said, “usually very slight and often negligible.” But it is slight and negligible for governments too. To believe otherwise is to commit the howling cognitive error of the optimism bias.
3. There’s a category error here. Prices of financial assets are better regarded not as the discounted present value of future cash flows but as state-contingent securities. But from this perspective, there’s no such thing as “intrinsic value.” Yes, with hindsight, it might look as if markets got it wrong. But this is no proof of irrationality. For example, were share prices low a year ago because markets had irrationally over-reacted? Or were they low because they were pricing in a (small?) probability of a disaster which might, but didn’t, occur?
Sadly, Osborne’s piece does not improve. As DK and Tim point out, the examples  he gives of individuals’ irrationality are pathetically weak.
All we have is an ill-founded assertion - that government, somehow, knows better than us.
Still, I’ll say one thing in Osborne’s defence. His piece is not quite as arrogant and imbecilic as this.

Manufacturing and the recession

Tim Worstall sets us a task:

Work out the share of each OECD…economy that is a) manufacturing and b) finance.
Look at the decline in GDP and the length of time of negative growth.
Compare and contrast the four sets of data.

My chart should set him on the way. It compares the share of manufacturing in GDP in around 2007 to the fall in GDP from its peak (which varied from country to country) up to Q3, the last period for which the OECD has data.
The correlation is positive - 0.18 - but very weak. Yes, Iceland with its small manufacturing sector suffered the most, whilst manufacturing-heavy Norway and Korea suffered little: indeed, Korean GDP is back above its pre-recession peak. But generally speaking, there isn’t much link.
For example, Japan and Finland are more manufacturing-based than the UK, but suffered deeper recessions. And France, which has less manufacturing than the UK, suffered a milder recession.
If we look at the share of GDP devoted to finance - defined broadly by the OECD to include business services (lawyers, accountants etc) and real estate - the picture is similar. There is a negative but weak correlation - minus 0.11. This shouldn’t be surprising, as manufacturing-light economies tend to be finance-heavy ones.
Truth is, we shouldn’t be hugely surprised by this. Manufacturing and finance are related. Because the credit crunch caused a collapse in trade credit, it led to a slump in world trade and in inventories, and so hit some manufacturers hard. 
These figures, do not, of course, shed any light upon an alternative hypothesis - that finance-heavy economies will grow more slowly in coming years as banks recapitalize themselves and come under heavier regulation.
Frankly, I couldn’t give a damn here. The idea that our economy should be more reliant on manufacturing (or finance) seems to me an absurd notion, combining both central planning and a fetishism of national borders. If people just did what they are best at doing, a healthy economy should emerge - shouldn't it?

What apathy?

Back in the 1970s, the boss of a large firm was bemoaning the decline of British manufacturing. “I don’t know why we’ve lost so much market share in the last 20 years” he said. “I mean, we’re making exactly the same things we were back then.”
I was reminded of this by Tom Harris’ post on increasing voter apathy. Aside from a passing reference to distrust of politicians, he seems oblivious to the possibility that apathy is increasing because of the inadequacy of the product on offer. For example, he says:

The “instant gratification society” is partly to blame: the internet has instilled in us an expectation that if you want something, you should get it instantly...A growing number of people can’t quite get their heads around the idea of a political party promising to fix the economy, the health service, the schools system, in a timescale of years.

But the problem isn’t merely that voters want more instant solutions. Many of us doubt whether the economy, health service and schools system can be “fixed” at all - especially by unqualified people with policies formed with more attention on the trash media than the empirical evidence.
And let’s be clear here. Apathy is rational. Like most voters, I live in a safe seat. It’ll make no difference to the result whether I vote Tory, Labour or not at all. The only reason to vote lies in what Nozick called symbolic utility: to get a warm glow from identifying with particular people or values.
Now, there was a time when, for many, this justified voting - because they were working (or middle) class and Labour (Tories) were the party of the working (middle) class.
But this is no longer true.
Which poses the question: what are the values or personal qualities that politicians are asking us to identify with?
Many of us just can’t see an acceptable answer to this; it seems our choice is between a party that regards us as dogs and one run by the children of the rich for the children of the rich. Which is why we don’t vote. But it‘s not “apathy” we feel, but contempt. 
Mr Harris, of course, doesn’t see this. But then, as Upton Sinclair said, “it is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Obesity, widowhood & happiness

Which is worse for happiness - being fat or suffering the death of a spouse?
Two recent papers suggest the answer is - being fat.
First, Marina-Selini Katsaiti finds that “obesity has a negative and statistically significant effect on individual well being”. She estimates that, in Germany, a three-point rise in BMI (from, say 24 to 27 - equivalent to gaining around 20 pounds for someone who’s 5’8”) reduces happiness on average by so much that it would require a 67% pay rise to compensate. In Australia it would require a doubling of income to offset the adverse effect of such a weight gain. Of course, these figures tell us how little income raises happiness, as well as how much chubbiness reduces it.
In the UK, the effect is smaller, but even here a 10-point rise in BMI reduces happiness by 0.1 units on a seven-point scale.
These findings control for obvious influences upon happiness such as age and income, and also attempt to control for reverse causality - the possibility that people eat because they are unhappy.
Now, contrast this to a new paper (pdf) by Andrew Clark and Yannis Georgellis. They show that, in the UK, men and women who have been widowed are happier in the 3-4 years after their loss than they were the year before it. Yes, their well-being slumps in the 12 months after bereavement, but it recovers thereafter. Adaptation is, they say, “rapid and complete.” The same is true for divorce.
Juxtaposing these findings yield a remarkable implication - that, judged by happiness, it is worse over, say, a four-year period, to put on weight than it is to lose your partner (though, in the case of divorce, the two might be correlated).
How can this be?
One possibility is that there are some bad things we adapt to, and so we don’t. Widowhood falls into the former camp. After several months, the bereaved are comforted by happy memories. Obesity, however, falls into the latter - as does unemployment. Maybe (some) fat people hate themselves for their lack of self-control. Such a possibility is, of course, inconsistent with the notion that people are rational maximizers and so is a flat denial of the premise of conventional neoclassical economics.
Personally, I find this counter-intuitive. Does this show that my intuitions are wrong? Or does it instead show that there’s something odd about happiness research, and if so, what? 
* I’m a single man with a BMI of 26.

Osborne & the deficit: 4 questions

George Osborne makes a curious remark here:

The overriding objective of fiscal policy must be to provide the credible deficit reduction plan that allows the Bank of England to keep mortgage rates as low as possible for as long as possible. That will do more to sustain a recovery than anything else.

This raises 4 questions:
1. What’s the mechanism through which deficit reductions would allow mortgage rates to stay low? One possibility is the Keynesian one - they would depress demand, and the Bank would keep rates low in response. Another possibility is some form of the fiscal theory of the price level, which says that expectations of future government deficits affect inflation now.
If Osborne believes the former, he should concede that his Labour critics have a point - spending cuts would tend to hurt the economy. If he believes the latter, he should distance himself from those who have claimed that quantitative easing is inflationary - because you can’t (pdf) believe in both (pdf) monetarism and the FTPL.
2. Would low mortgage rates really “do more to sustain a recovery than anything else”? Yes, personal debt exceeds households’ bank deposits by £454.9bn, which suggests that households would get an extra disposable income of £4.5bn a year for each percentage point fall in interest rates, relative to what they would otherwise be. But this is only 0.3 per cent of GDP. And there’s a danger that this would be saved rather than spent if highly indebted households use their windfall to pay off debt; I suspect this is a big reason why the savings ratio rose last year.
Of course, it’s possible that low mortgage rates would eventually lead to increased borrowing. But how is this consistent with the claim that “Britain’s new economic model must be built on saving”?
If Osborne means that a low Bank rate would stimulate corporate borrowing, then he might have a point - though I fear the interest elasticity of capital spending is low - but then, why talk about mortgage rates?
3. Doesn’t Osborne’s claim put a limit onto the size of the fiscal squeeze? Bank rate is already as low as it can go - which means mortgage rates are near their lowest feasible level. This means that if the economy turns out weaker than expected this year - sufficiently so that the Bank keeps Bank rate at 0.5% - there’s simply no room for lower government borrowing.
Granted, Osborne might mean that deficit cuts will reduce shorter-term gilt yields and hence fixed rate mortgages. But the effect here is small; short-dated yields depend far more upon interest rate expectations and overseas yields than they do upon government borrowing.
4. Is it wise to pre-announce this intention? Imagine it’s the day after a Tory election victory.  FX markets figure: “the Chancellor wants interest rates to be as low as possible, so let’s dump sterling.” The pound then falls - possibly a long way, if rising interest rates in the US and euro zone cause carry traders to short sterling. This in turn would limit the Bank of England’s ability to hold rates low.
In this sense, Osborne’s policy would be self-defeating. 

A modest proposal

Let’s say, for the sake of argument, that you believe the following:
1. Britain’s population is growing too quickly. We should prevent it reaching 70 million.
2. We need to cut public spending aggressively.
3. Society is broken. “100,000s of children are growing up in disorder and neglect”, many of whom will go on to become criminals themselves.
If you believe these propositions, why don’t you support the compulsory sterilization of people who are likely to bring up “feral” children? Such a policy addresses all three of these concerns. It limits population growth. It heals “broken Britain” by preventing the perpetuation of a criminal underclass. And it saves the tax-payer the cost of child benefit, social services, schools and prisons.
What’s more, the objections to it seem misplaced:
1. “It’s an illiberal infringement of a basic human right.” But no-one has the right to impose burdens onto the rest of us. Quite the opposite. To have a child that you are not going to raise properly is, as Mill said, “a moral crime, both against the unfortunate offspring and against society.” Surely, the right to live and work where one wants is a stronger right than that to have children - so anyone who supports immigration controls should countenance limits upon the right to have children. 
2. “People have a natural desire to have kids.” Even if this is true - which I doubt - it’s irrelevant. Civilization depends upon us curbing our natural desires - otherwise we’d be killing each other all the time.
3. “It’s expensive and unworkable.” Is it? A policy of sterilizing illiterates or persistent criminals is not obviously more expensive than: spending over £1bn a year on immigration controls that don’t work; or proposals to raise school standards; or a marriage tax break that is mostly a deadweight cost.
With these objections weak, why don’t people propose a sterilization programme?
There are some cognitive biases here. There’s the simple “ugh factor.” There’s guilt by association; sterilization is associated with you-know-who. And there’s an optimism bias; we like to believe that social engineering - better schools and social services - can eliminate the underclass and bad parenting, even though it hasn’t.
However, there might also be vested interests at work. I don’t just mean that social workers’ jobs depend upon there being an underclass to manage, but also that politicians need an underclass to stir up fear and make credible the offer of protection.
There’s also the point made by Foucault in Discipline and Punish. Governments, he said, have moved away from intrusive interventions upon the human body in favour of a “carceral network” which operates a huge range of disciplining procedures. This, he says, “succeeds in making the power to punish natural and legitimate”, and thus helps to make power more acceptable.
I say all this not to support compulsory sterilization; I'm sceptical of all three premises. I do so for another reason. This is that politics is described not merely by what is discussed, but also by what is not. The fact that sterilization is not on the agenda tells us something about our managerialist  society.
* I write as someone who’s never wanted kids and has spent much of the last two years wondering if I’m responsible enough to look after a cat.

Markets blurt it out

Why have bank stocks reacted badly to President Obama’s proposals for a Glass-Steagall II? In principle, these plans are intended to make banks less risky - which should be good for share prices, not bad.
It’s not because the plans introduce uncertainty into the future of the industry. The uncertainty was there all along, and not least of the uncertainties is whether the plans will come to anything at all: EoC says “there's zero chance" of  the proposals becmong law. This should have mitigated equities’ response. So too should the fact that equity analysts’ reaction has been quite mixed.
So why have they fallen? One reason is that the plans limit banks’ potential growth; they envisage no institution having more than 10% of all insured deposits.
There might, however, be two other reasons:
1. A loss of “synergies.” Let’s say banks were forced to sell off their proprietary trading or hedge fund divisions. If these were pure stand-alone units, this would, in an efficient market, be equity-neutral. Shareholders would merely exchange the discounted present value of their profits in the form of bank stock for the discounted value of profits in the form of cash.
If, however, there are asset complementarities between prop trading and the “vanilla” bank, then the prop trading division will be worth less as a stand-alone unit. So shareholders will lose.
What could these complementarities be? Some are innocuous - if, say, prop trading helps hedge banks’ loan book. But there are a couple of other cases.
First, prop trading profits might arise from using information the bank gleans from its ordinary dealings with customers. The most egregious example of this occurs with takeovers; there’s a long-established tendency for share prices in a target company to rise just before a takeover is formally announced.
Secondly, prop traders enjoy a low cost of capital because they are backed by a large bank, and this would disappear if they had to stand alone. A lot of marginally profitable trades - such as betting on tiny falls in yield spreads - would cease to be profitable if the cost of capital rose.
If you doubt the importance of these two factors, just ask why traders work for banks at all? Why don’t they move out of dirty, over-crowded New York or London, buy a country mansion and trade on their own account - or failing that, buy out the bank and set up on their own as many hedge fund managers did? The answer is that they need the bank’s backing, and cannot make much money from their own skills.
2. The end of the “taxpayers put.” Banking shares comprise not one, but two assets. One is the bank stock itself. The other is a free put option - the prospect that, if things go badly wrong, the tax-payer will limit your loss. However, Mr Obama’s statement, “Never again will the American taxpayer be held hostage by a bank that is ‘too big to fail‘”, threatens to devalue this option.
Banks have had it because, as Jack McHugh says, they have “successfully gamed the legislative and regulatory systems so well” for years. It looks as if it might now be game over.
So, here’s my theory. Stock markets have acted as if the leftist critique of banks is correct. In marking down bank stocks, they seem to believe that traders don’t possess great stand-alone skills but make money only thanks to the good fortune of having a big bank behind them. They also seem to think that banks have for years captured the state and used it for their own purposes.

Is inflation rising?

Is inflation really taking off? Yesterday’s figures, showing a rise in CPI inflation from 1.9% to 2.9% has prompted different reactions. David Blackburn at the Speccie says this shows the impact of printing money. But Giles says this view is dimwitted, and Tom attributes the rise to base effects.
These figures might help here. They show the percentage change in the consumer price index between June and December - the semi-annual inflation rate:
2003 = 1.0
2004 = 1.0
2005 = 1.0
2006 = 1.5
2007 = 1.1
2008 = 0.5
2009 = 1.4
These are wonderfully ambiguous. On the one hand, they clearly show that the second half of 2008 was an outlier. Inflation then was unusually low - thanks to VAT and oil prices falling. In this sense, the rise in annual inflation in the last few months is due to unusually good news in late 2008 dropping out of the annual measure - as Tom says.
However, the figures also show that the rise in prices in the last six months has been slightly greater than the average rise in recent second halves of the year. In this sense, there has been bad news about prices in the last few months. The rise in inflation mightn’t all be due to base effects.
This does not establish that inflation is being pushed up by quantitative easing; I side with MPC member Adam Posen in regarding such a claim as “idle chatter“ (pdf). I suspect instead that what we’re seeing is a combination of the pass-through of last autumn’s fall in sterling, and the reluctance (pdf) of firms to cut prices in recession; there‘s no point trying to win more customers if they are not out there. These factors should be temporary.
Equally, though, these numbers do cast a little doubt upon the conventional view that abundant spare capacity will reduce inflation. It hasn’t done so very much recently.
Personally, I’m a little less sanguine about inflation than I was a few months ago. Which makes me all the happier that I’m not still in the mug’s game of forecasting it.

Happiness & productivity

The old cliché is true - a happy worker is indeed a productive worker. This paper by Andrew Oswald and colleagues finds that “happiness has powerful causal effects on labor productivity.”
They established this through a couple of experiments, in which subjects were asked to add up series of 2-digit numbers, with small payment by results.
In one experiment, subjects were split into two groups, with one being shown a short comedy film and the other not. Subjects shown the film were 10% more productive than those who weren’t. This productivity boost was confined to those who actually enjoyed the film.
What’s more, subjects did not realize that this effect was happening; only 31% felt that watching the clip had improved their skill on the test. 
In another experiment, subjects were asked before the test  whether they had suffered a family bereavement or parental divorce in the last two years. Those who said they had were about 10% less productive than those who said they hadn’t.
All this suggests that happiness can actually cause greater productivity. This is not a trivial fact. It’s quite possible in theory that happier workers are less productive - if, say, Gooners spend their time at work dreaming of Cesc or if women think about their new boyfriend.
It is, however, unclear from these experiments how long-lasting the effect is; for example, were the bereaved less productive because bereavement has lengthy adverse effects, or were they temporarily unhappy because the questionnaire had reminded them of their loss?
This raises two issues.
First, it suggests that the link between happiness and incomes runs both ways. The question: does income raise happiness? has had tons of attention. But it might be that the link also runs the other way. Maybe happiness raises incomes by raising productivity. Happiness is an input into the economy as well as an output.
Secondly, it raises the question: what, if anything, can employers do to make workers happier? It might not be helpful to follow Andrew’s experiment literally, and show them a comedy film before the working day begins - as people will quickly resent being manipulated. So, what policies are possible?
As you’d expect, I’d point out that greater autonomy at work is one possibility - because people are happier when they have more democratic control. You might add that policies that improve the work-life balance - such as flexible hours - would do the trick. What wouldn't work, though, is continuous innovation; other new research finds that this reduces workers' well-being.
But another possibility is that employers simply discriminate in favour of happier people when they hire.