Stumbling and Mumbling

EU and non-EU immigration

In last night’s debate, Nick Clegg asked David Cameron:

Can you now tell me - am I right or wrong that 80% of people who come here come from the European Union, and your cap would make no difference to that? Is that right?

No, Nick, it’s not. According to the International Passenger Survey, 431,000 non-British immigrants came to the UK in the 12 months to June 2009, the latest period for which we have figures. 166,000 of these came from the EU. That’s 38.5%. In the previous 12 months, EU immigrants were 177,000 of 454,000. And in the year before that, 174,000 of 473,000.
Alternatively, we could look at the nationality of people employed here. Table 8 of this pdf shows that, in Q4, there were 2.288 million non-UK nationals working in the UK, of which just over one million came from the EU.
Strictly speaking, it seems Clegg’s wrong, by a factor of around two.
There is, however, some force behind his general sentiment.
Let’s say that we could impose a binding cap upon non-EU immigration, so that an employer who would like to hire a non-EU worker can‘t. What does he do? If he hires a British national, then immigration does indeed fall one-for-one with the cap, and employment of native workers rises one-for-one; this assumes that, at the margin, a British worker is as productive as a non-EU one.
But if he hires an EU national instead, aggregate immigration won’t change. There’ll just be more EU immigrants and fewer non-EU ones: we’ll have more Greeks and fewer Turks, more Poles and fewer Russians. It’s not clear what is gained by this, from the perspective of someone worried about “flocking east Europeans.“
So, which is it? There’s one piece of evidence here. This paper finds that new immigrants are a closer substitute for earlier immigrants than they are for native workers; for this reason, immigration reduces the wages of earlier immigrants relative to migrants. This suggests that a cap on non-EU immigration might indeed lead to increased EU migration more than to increased native employment.
Which leads me to a question. Let’s say we get a Tory government that imposes a cap on non-EU immigration. Immigration then rises from the EU, with the result that overall immigration stays high. What happens then?
Ideally, people would realize that we can’t control immigration, and so shouldn’t try. But there might instead be another reaction. Some will say, as UKIP does: “we can only control immigration by leaving the EU.“ Pressure to do so will therefore increase.  So, is Cameron’s cap on non-EU migration a stepping stone towards leaving the EU? 

Should never have put me with that woman-gate

Most people, I fear, are missing the point about “Bigotgate”. What’s truly appalling about Brown’s words is not that he called Ms Duffy a bigot: as Paul and Matthew point out, all candidates have badmouthed voters behind their backs at sometime, maybe with less justification than Brown had. Instead, Brown’s most outrageous remark was:

Should never have put me with that woman.

But Ms Duffy was, sadly, a fairly typical voter. If you don’t want to meet voters, you shouldn’t become a politician - unless, of course, your lust for power overcomes your aversion to genuine politics.
What’s more, anyone with half a brain could have said a lot to placate her incoherent concern about east European immigrants. Such immigrants are contributing to the public finances and have helped the economy grow whilst keeping inflation down. And east European migration is not new; Poles have lived in England for decades with no ill-effects. Far from it; they made a significant contribution in the Battle of Britain.
That Brown did not say any of this merely highlights the cretinism of his immigration policy. On the one hand he’s pandered to bigotry and failed to make a case for immigration, but on the other hand he’s just given grist to the mill of every moron who bleats that “you can’t talk about immigration.“
What we saw yesterday, then, were two features of Brown’s Labour. There was the lofty managerialist aversion to arguing with real people; as Fraser says, the sight of someone in a Jag slagging off ordinary folk will resonate. And there was the inability to make a coherent argument for a just and proper cause.
But there’s another thing - Brown’s felt need to apologize. There are many reasons not to have done this. He should have debated properly with her instead. But having failed to do so, he should either have stuck to his guns, or figured that prolonging the story would merely do more damage. Instead, he rushed off to grovel.
This, I suspect, reveals much about his “moral compass.” He figured: “I sinned so I must repent.” This suggests that, to him, morality is a matter of external rules, any breach of which is to be punished. We can, however, contrast this to conceptions of virtue ethics. A virtuous politician might have argued on the spot, or decided he was right to call her a bigot, or made the tactical calculation that the apology would lose more votes.
Herein, however, lies perhaps one root of Labour’s illiberalism. Brown fails to see the possibility that people might, in the right circumstances, behave virtuously - as citizens or as public servants. Instead, he believes their behaviour, like his, must be constrained by rules. 

On limited attention

As far as I know, no-one has pointed out the link between the surge in support for the Lib Dems, Congress’s grilling of Goldman’s executives, the Graham Nortification of Doctor Who and the Go Compare advert. Let me rectify this omission. The common link is that all are manifestations of the fact that people have limited attention; they just don‘t notice a lot of things.
On that first leaders’ debate Nick Clegg was not astoundingly brilliant. For this reason, the instant reaction of some commentators was quite downbeat: “It’s still about blues versus reds” said the FT’s Jim Pickard; “unlikely to be a game changer”, said Tim Montgomerie; and Jackie Ashley called Brown the winner.
So, why did Clegg win so much support? It’s because many voters don’t normally pay much attention to politics. They simply hadn’t given the Lib Dems much thought. The leaders’ debate changed this, by bringing Mr Clegg to their notice. He only had to turn up sober to be a winner.
Because the political classes are obsessed with political minutiae, they don’t appreciate this and so some missed the significance of that debate.
A similar thing explains Congress’s interest in Goldman Sachs. Any rival investment banker could for years have given you allegations of - ahem - sharp business acumen at Goldman’s. So why should such allegations be more noticed now than years ago? It’s because the financial crisis brought Goldman’s to greater public attention. Hence Congress’s grandstanding.
Goldman’s is much the same company as it was a few years ago, just as Clegg is the much the same guy. The obloquy of one and the acclaim of the other arise from how attention has shifted, not from how they’ve changed.
However, advertisers and TV bosses do know that attention matters. This is why adverts get repeated so much. If they tell us about a price comparison site only once or twice, we’ll forget. We need the message rammed home every 15 minutes. It’s also why the BBC ran that trailer during Doctor Who. BBC bosses knew that it wasn’t enough to trail Over the Rainbow days before or to publicize it in TV listings. It needed more attention.
The underlying theme here is that people don’t - can’t - know everything, so we limit our attention to what we need to know. The result is that it can take some effort to change our information set.
This has effects in financial markets. It might help explain the profitability of momentum strategies - the fact that stocks that have recently risen carry on rising. When a share rises a low, it attracts attention which attracts more buying; in the presence of even informal short sales constraints, prices are set by optimists.
It can also mean that share prices move because of prior information - in clear violation of the efficient market hypothesis. For example, we know that beer consumption is heavy among 20-somethings. If, therefore, a lot of people are born in a given year, you’d expect strong beer consumption 20 years later, which would benefit brewing stocks. The EMH says this should cause such stocks to rise in the year when many people are born. However, Stefano Dellavigna has shown (pdf) that in fact the stocks rise in the year of the consumption, 20 years later.  This, he suggests, is because of limited attention; investors don’t pay heed to the importance of demographics.
Which brings me to my point, insofar as I have one. Gilt yields have fallen in the last couple of days as the Greek crisis has intensified. This suggests markets regard gilts as one of the good guys that benefit from a flight to quality, rather than PIIGs-type bonds that suffer contagion effects.
If you believe in the EMH, this just shows that the UK is not like Greece. But what if investors don’t have full information but limited attention? What if these cognitive limits cause them to overweight information such as our relatively low debt-GDP ratio (yes - PDF) and long debt maturity, but underweight other information which might become relevant?
I’m not saying this is happening - I suspect it isn’t. But if I were a Tory desperately trying to cling onto the idea that the UK is like Greece, I’d be using the notion of limited attention as part of my argument.

Defending FPTP

Paul defends the FPTP system by citing this paper (pdf) which argues that Labour’s success in converting votes to seats was the result of it winning votes efficiently - in marginal seats. Paul gives us a football analogy:

If Manchester United win the Premier League title, but have a lower goal difference than Chelsea as it looks as though they may, we won’t say that United cheated; we’ll say they ground out the results when it mattered.

I’m not sure about this. Of the 356 seats Labour won in 2005, only 37 - barely 10% - were won with a majority of under 2000, the equivalent of grinding out results where it matters. On the other hand, Labour won more seats with majorities of 12000 or more than the Lib Dems won in total.
One could equally well argue - consistently with the paper cited by Paul - that Labour’s success is due to geography. Its support is concentrated in urban and working class areas, which gives it lots of seats with a huge majority. With these in its pocket, it can divert resources to fighting marginals. 
Put it this way. It’s theoretically possible to get 30% of the votes in each constituency but end up with no MPs; Lib Dems suffer under FPTP because they are closer to this than Labour or the Tories.
But is this due to inefficient campaigning, as Paul implies? Or is it instead because of a geographic misfortune which FPTP penalizes?
If I were to defend FPTP, I’d argue differently from Paul - along the following lines:

We know from welfare economics that, in a world of inefficiencies, it’s possible to increase overall welfare by introducing a new inefficiency. A similar thing might be true of justice. The injustice done by FPTP to Lib Dems actually increases overall justice.
FPTP gives more weight than would a “fair” voting system to the votes of the worst-off, as these are geographically concentrated. But this extra weighting merely offsets the injustices the worst-off suffer in other ways. It introduces a little Rawlsianism into an unjust world.
Yes, in a fully just world we wouldn’t have FPTP. But such a world would also see the biases against the worst-off removed as well. Whilst the latter remain, FPTP gives a little counter-weight to those biases. 

This argument seems to me theoretically acceptable. The objections to it are that the Labour party has been a poor defender of the interests of the worst off, and that FPTP doesn’t just give a bias towards working class votes, but also towards Tory ones which are also geographically concentrated. The argument that FPTP gives us "strong government" is, of course, gibber.

Keynesian, or inefficient?

Hamish McRae says “the Government has not been a net contributor to growth for the past 18 months.” He’s referring to Friday’s GDP figures, which show that the output of government services was lower in Q1 2010 than it was when GDP peaked in Q1 2008. This is the first two-yearly fall since records began in 1983.
Giles says: “this recession has not seen a Keynesian spending splurge.”
You might wonder what the hell is going on. 
There are three “headline” measures of government activity, which my chart shows.
One is the output of government services - health, defence, education etc - which shows up within the output measure of GDP.
Another is government consumption, which comes in the expenditure measure of GDP.
And a third is overall central government current spending, which is reported in table PSF3 of the public finances; in my chart, I’ve deflated this by the GDP deflator.
And here’s the queer thing. The correlation between annual changes in these three measures is low; no higher than 0.26 since 1984Q1.
How come? One reason is that central government spending includes debt interest and welfare payments, which the other two don’t.
Another reason is that government consumption includes spending on procurement which is excluded from output. If Whitehall were to buy a ton of paperclips and leave them in Horse Guards Parade, consumption and current spending would rise, but output of government services would not.
Similarly, if public sector productivity were to fall for any reason output of government services would drop whilst consumption didn’t.
And this is what seems to have happened. Between 1983 and 2008, government consumption and output rose at much the same rate in real terms. Since 2008, however, consumption growth has outstripped output growth. This is consistent with what the ONS tells us - that public sector productivity has fallen,
Does this mean Giles is right to say the government hasn’t been Keynesian? In one sense, no. Between Q1 2008 and Q4 2009 (the latest available) real government consumption rose 4.7% and real central government current spending rose 13.5%. This is Keynesian. To him, remember, even wasteful spending - paying men to dig holes and fill them in again - was counter-cyclical.
In another sense, though, Giles is right. Whether you look at consumption alone or real current spending generally, growth in the last two years has been no higher than in the early 00s. In this sense, the government has not been Keynesian. 

"Skill", disposition and circumstance

Could it be that experience doesn’t just produce skill, but also a perceived lack of skill - even in highly successful people? This is the question posed by this piece by Patrick Barclay.
He says that  Manyoo might not want Jose Mourinho to be their next manager because he does not produce teams that play attractive football with home-grown talent.
But Mourinho can plausibly claim that these shortcomings are the product not of a lack of skill or disposition on his part, but are instead due simply to the opportunities he’s had. At Porto, he was an unproven manager and so needed to prove himself quickly. At Chelsea, his plutocratic owner demanded instant success. And at Inter, well, no manager lasts long enough these days to build from the ground up.
It’s possible then, that “Mourinho’s weaknesses” are no such thing. In adapting (very well) to his circumstances, some of his potential skills have if not atrophied then simply not been displayed.
This point, I think, generalizes. Maybe we often attribute to a person strengths and weaknesses that are in fact simply adaptation to circumstances.  It’s the fundamental attribution error.
Take, for example, my game of economics writing. I suspect the differences between my writing and, say that of Larry Elliott, Martin Wolf or even Fraser Nelson are due not so much to differences in  our personalities but to differences in who we write for. If I were writing for the FT, I’d write a bit like Martin and if I were writing for the Speccie, I’d write like Fraser - and vice versa. People often say “Wolf has written a good piece” or “Nelson has written a stinker”. But it might be more accurate to say “that space in the FT (Speccie) has produced a good (awful) piece.”
You might object here that we choose jobs that we find congenial.  Mourinho chose jobs that require instant, pragmatic success, I chose to work for the IC rather than Guardian or Speccie, and so on.
I’m not sure. It’s equally possible that the opposite is the case. We fall into things, or get what we can, and then our preferences - maybe our characters generally - adapt to our circumstances. Our jobs create us, not (just) vice versa. Our talents, and weaknesses, aren’t the result of innate dispositions but rather are path-dependent.
Now, I personally have no great cause for complaint here. But I suspect that the millions of people trapped in drudge work might, and would sympathize with Ian Dury‘s sentiments. Maybe the meritocratic idea that people should go as far as their talents will take them is an impossible ideal - because even success requires that talents not be manifested. 

Why not the Lib Dems?

Why shouldn’t I vote Lib Dem? I mean, among the things I want from a government are: a fiscal policy that’s not based on imbecilic hysteria; a little respect for civil liberties; the scrapping of Trident; and a desire for a more egalitarian tax and benefit system. The Lib Dems are the only main party offering these.
And yet I don’t feel any inclination to vote for them. Why not?
Of course, there’s a lot about their policies I don’t like. They are insufficiently liberal on immigration and drugs. Their plan to raise the income tax threshold to £10,000 a year isn’t as egalitarian as they sometimes pretend.  And there is not enough in their manifesto about shifting power from bosses to workers. (Sure, they’re not a socialist party - but nor is Labour.)
But then, I have many more arguments with Labour policy, and yet I feel an instinctive fondness for the party that I don’t towards the Lib Dems.
One reason for this is that I’ve never been sure what their core principles are. At best, this reflects the tension between Orange Bookers and tofu-munching eccentrics. At worst, it’s manifested itself in a mere search for a gap in the market between the two main parties, and the tendency to tell voters on the doorstep whatever they want to hear.
There are, however, two other reasons.
One is that whilst several of my friends have been Labour supporters or members - I was a member of the party myself in the 80s - very few have been Lib Dems. 
Also, I associate the Lib Dems with their nasty homophobic campaign against Peter Tatchell in the 1983 Bermondsey by-election. I could never vote for a party that behaved like that. For some reason, this bears more heavily than the fact that I know many Lib Dems to be decent people.
Which leads me to my point. This is not a post about the LibDems at all, but about the formation of political beliefs. My views are shaped by tribalism and historic events - to the typical first-time voter the events of the early 80s are as distant as the Suez crisis is to me - more than what is happening now. But if this is true for someone like me who can often pass as highly rational, how true is it of others?

Prostitution, choice & markets

Paul argues that, for many women, talk of them choosing to be prostitutes is too simplistic, as the choice is one made out of desperation. This raises the question: what policy implications does this have?
The no-brainer is to improve their outside options - a citizens‘ basic income, anyone? What’s more interesting though is that Paul’s argument might be consistent with decriminalizing prostitution.
To see what I mean, imagine all the laws - and, if you like, social pressures - surrounding prostitution were removed. What would happen?
There’d be an increased demand for prostitutes. Some men who were deterred from visiting them by the threat of being arrested for kerb-crawling, or fear of being ripped off and unable to report that to the police would now visit prostitutes.
What would be the response to this?
One possibility is that the greater demand for prostitutes would be matched by women becoming prostitutes. But Paul’s argument is that this won’t happen on any great scale. Despite what the videos show, whoring and doctoring are not close substitutes.
Another possibility is that existing prostitutes would work harder, servicing more clients. This too is ruled out by Paul’s argument. If sex with strangers is unpleasant, the supply of prostitutes’ labour might not rise much.
This leaves us with just one possibility - that the increased demand for prostitutes simply bids up their prices, leaving them better off. This could allow them to spend less time on the game. I suspect their labour supply is like that of New York cabbies (pdf): it would fall as wages rise, and for the same reason - that the work is intrinsically unpleasant and so people want to minimize it.
You might object here that I’m ignoring the role of pimps. But this doesn’t overturn the argument. Paul’s perspective suggests that the supply of pimps is more elastic than that of prostitutes. But as new pimps try to enter the market, they would bid down the profit margins of existing pimps. Prostitutes would therefore benefit. Pimps would offer them better terms to retain their labour.
What I’m saying here is that Paul’s argument implies that prostitutes would benefit from a free market. It says, in effect, that the supply of prostitutes is inelastic. But this inelasticity means they benefit from legalization.
There’s an analogy here with the theory of tax incidence. This says that the burden of a tax falls upon the inelastic side of the market. And you can think of criminalization as being a form of tax. Penalties for soliciting, kerb-crawling or poncing are forms of tax. And if the supply of prostitutes is inelastic, it is they who would gain from the tax represented by decriminalization.
You might object here that maybe the supply of prostitutes isn’t inelastic. Higher demand might instead lead to immigration by foreign prostitutes. I’ll grant that this is a problem if these are trafficked - but we all agree there should be strong penalties against this, and if the police didn’t waste their time enforcing laws which benefit pimps (and drug-dealers - but that’s another tale) they would be better able to pursue such criminals. If, however, they are free women, what’s the problem? The welfare of foreign prostitutes matters too.
My point here is that it is easy to tell a story in which free markets are welfare-enhancing for the badly off, even if the idealized conditions for such a market - fully free choices - are not in place. Free markets aren’t always a utopian fantasy, but can be answers to dirty real world problems.

Benefits of piracy

I know it comes too late to add to parliament’s lengthy and rigorous discussion of the Digital Economy Bill, but this recent paper by Francisco Alcala provides a nice argument for the economic advantages of piracy.
These arise from two features of the conventional music market  - that it is expensive and time-consuming to spot the next superstar; and that superstars (or their record labels) spend a fortune on promoting their albums.
In a world without piracy, these features mean that record companies under-invest in promoting new artists  for fear of not getting their money back.  The result is an under-supply of new bands - or at least an under-marketing of them - and excessively high payments to known quantities who aren’t especially great, as Marko Tervio has shown.
Piracy, however, changes this, argues Mr Alacala. If record companies fear that people will copy, say, U2’s new album, they will invest less in promoting it as such expenditure won’t be so profitable. At the margin this means that some people who would have bought the U2 album instead buy an one by a smaller band. And this increases the chances of that smaller band getting sufficient attention and acclaim to become superstars themselves.
The effect of this is that piracy increases the diversity of music in the short run, and increases the supply of superstars in the longer run. In this sense, piracy is efficient, as it corrects a market imperfection.
What’s striking about this result is that it comes even though Mr Alcala has biased his argument against it in two ways.
First, he’s not using the point that piracy is a form of promotion for lesser-known artists. File-sharing allows people to more easily introduce obscure bands to their friends. 
Secondly, he’s assumed that best selling artists owe their success to being (marginally) more talented than others - that they are Rosen (pdf) superstars. In the real world, however, this is not the case; does anyone really think (say) Sting is more talented than Tom Russell? Instead, better-selling artists are in fact Adler superstars. They owe their success not to their talent but to their fame. Their sales could therefore fall quite sharply without the benefit of promotion spending and its correlates such as TV appearances. If so, then piracy - insofar as it does reduce such spending - does even more to increase market diversity.
This raises the possibility that opposition to file-sharing is strongest amongst those performers whose success depends upon their fame more than their ability.

Arrogance, ignorance and greed

…is how Show of Hands describe bankers. But doesn’t the description fit the electorate as well?
Take ignorance first. A recent survey found that voters attributed many manifesto promises to the wrong parties. And there’s other evidence that a candidate’s position on the ballot paper affects voting - which violates any rational principle.
Which leads me to arrogance. I doubt if many people will decline to vote on the grounds that they just don’t understand the issues. And yet this is, surely, an entirely reasonable position: one reason I’ll not vote is precisely that there are huge numbers of policy areas - foreign affairs, health policy, climate change - that I know nothing about.
I fear there are two forms of arrogance at work here. One is ordinary over-confidence; people commonly feel they know more than they do. Another, though, is the same sort of bull-headed sense of entitlement that leads people to ring Alan Green (the ideal type of egomaniacal arrogant ignorance) on 6-0-6 or to speak their branes - a determination to inflict their views upon others*.
And then there’s greed. It’s universally accepted that it’s reasonable to vote in one’s (perceived) self-interest, as if the interests of the (approximately) 0.6% most fortunate people who ever lived have much ethical weight. Only a minority of people will support the Give Your Vote campaign, or try to see beyond self-interest and vote from the point of view of some kind of Rawlsian worst-off person.
Worse still, greed and self-interest don’t cancel out across all voters. The young and poor are less likely to vote than the old and rich, with the result that elections can increase intergenerational and interpersonal injustices.
I say this not (I think) to oppose democracy. I’d rather have the arrogance, ignorance and greed of the many than the arrogance, ignorance and greed of the few - which are the only options available.
Instead, I do so to question a strand of (vulgar) libertarianism. Some libertarians seem to think that only the state infringes freedom - hence the claims that women in the 19th century or peasants in medieval Europe were “free” in some meaningful sense. But surely Mill was right when he wrote that public opinion can exercise “a social tyranny more formidable than many kinds of political oppression.”
* Yes, I know folk have a legal right to vote. Strangely, though, whereas politicians are often fond of saying that rights come with responsibilities, they are loath to claim that this is also true of voting.