Stumbling and Mumbling

Public spending and equality

Sunder at Next Left points out that public spending cuts might well bear harder upon the poor than the rich. This raises a question: what exactly is the link between public spending and inequality?
To kick off the enquiry, my chart shows the cross-country relationship for the 23 wealthiest OECD nations in the mid-00s. The Gini coefficient measures inequality after taxes and transfers. Data come from the OECD.
Two things stand our here.
First, there is a negative relationship. between public spending and the Gini coefficient. Higher public spending is associated with greater equality. Across the 23 nations, the correlation is 0.5. Sweden and Denmark have low inequality and high public spending. The US has low public spending and high inequality.
Second, this correlation is not very tight; the R-squared is only 21%. Several countries have both higher public spending and greater inequality than Korea or Australia, for example. This could be because some public spending is indeed a bill for failure; if inequality arises from people being too badly educated to find work, spending on welfare and fighting crime might be large.
Also, big variations in public spending exist with similar levels of inequality: France and Switzerland have the same Gini coefficients, but the French government spends 18 percentage points more of GDP.
For me, this introduces a new perspective. For years, the debate slanging match between left and right has been: should the UK move north-west in my chart to Sweden, or south-east to the US?
But this misses something: why can’t we move south-west, to Korea or Australia? How do they achieve both greater equality than us and lower public spending? They show that smaller government and greater equality are feasible. What conditions must exist for this to be the case?*
If the coalition were sincere about wanting “progressive cuts” - which I doubt - it would answer this question before blindly slashing spending.
* It could well be ones that can’t be created except in the very long-term, such as a highly educated population or an ethos of justice.

Incapacity benefit vs the banking crisis

How much could we save by reforming incapacity benefit? George Osborne is hinting at big numbers. He claims that “Incapacity Benefit and Employment Support Allowance is a very large budget“: the media are talking of £12.5bn.
However, DWP figures show that, in 2009-10, incapacity benefit and ESA (which replaced IB for new claimants in 2008) put together cost just £6.7bn. That’s less than half a percent of GDP. That £12.5bn, I suspect, is obtained by adding in income support. But that exaggerates the potential saving to be made from changing IB and ESA, because moving someone off these and onto Jobseekers Allowance might not, in itself, reduce that income support.
Let’s do a simple sum. The long-term basic rate of IB is £91.40 a week. Moving someone off IB and onto Jobseekers Allowance, which pays £65.45 a week would therefore save the tax-payer just under £26 a week. This means that even if a million people were to make the move, we’d save just under £1.4bn a year.
You might object that they wouldn’t move onto JSA, but into work. There are two possibilities here.
First, the IB claimant might somehow find work at the expense of a JSA claimant. If so, my calculation stands.
Alternatively, the increased supply of labour as people come off IB might be met by an increased demand for labour, so overall employment expands.
But this can only happen if the greater supply bids wages down. In the presence of the NMW, there’s a limit to how far this is likely. Insofar as this limit bites, employment won’t rise. But what if it doesn’t bite? Even then, the economic gains are mitigated by two factors. First, low-wage workers face lower wages, which offsets the taxes they save from not having to subsidize “scroungers“. And second, these lower wages cause an increase in tax credit payments.
The gains from reforming IB, then, are small.
This is especially so compared to the cost of the banking crisis. Michael Dicks of Barclays Wealth, working with the IFS, says:

By 2015, we estimate that potential output will be 9% of GDP (£132 billion in today’s money) lower than it would have been in the absence of the crisis .

In other words, the banking crisis costs us 100 times as much as we could save by reforming IB.
More, in fact. This cost of the banking crisis - lower GDP (not, note the sums involved in bailing out the banks) - is a pure loss. But savings on IB spending are a mere transfer - they enrich tax-payers but impoverish benefit claimants.
This raises the question. How can people be reasonably relaxed (by now) about the massive cost of the banking crisis, and yet so concerned about the much smaller costs of the IB/ESA system?
The rational possibility is that the banking crisis is a sunk cost - we can do nothing about it - whereas the benefit system isn’t.
But is this really the whole story?

Class and football

Who’s to blame for the craptacularness of the England team? Fabio Capello? Matthew Upson? The Fifa official who appointed David Blunkett as a linesman? 
None of them. I blame Taylor. Not Graham Taylor, but Frederick Winslow Taylor.
He invented scientific management. The effect of this was to break down traditional craft work - where manual and physical labour combined - and give us workplaces in which management did the thinking and labourers did the grunt work. This created an iron curtain between intelligence and physical labour not just in the workplace, but in our culture.
The problem is, though, that football needs both brains and physical work.
It’s no accident that the European nation in which craft traditions declined most sharply is also the team that is weakest in those areas where intelligence is most needed.
I mean this is in two senses. First, we are tactically inflexible; Fabio Capello has been criticised for sticking rigidly with 4-4-2, but could this be because he didn’t trust his players to change things?
Secondly, we are under-supplied in positions where intelligence is needed: the holding midfielder who can read the game; the players capable of changing the tempo of the match; and the ones who can find space and pick out a pass - England has no-one who even vaguely resembles Cesc Fabregas or Mesut Ozil.
Don’t reply that Frank Lampard has an IQ of 150. You’d never have guessed from the last two weeks. And there’s a difference between IQ intelligence and footballing intelligence; Glenn Hoddle has devoted his life to demonstrating this.
What’s more, these failings are long-term. Yes, England has produced the odd intelligent player. But whether it be against Hungary back in 53 or when faced with total football in the 70s, tactical innovations have generally come as a surprise to England.
Even more revealingly, the public have little desire for intelligence. Just listen - if you can bear to - to callers to 6-0-6. How many ask for more "passion" and how many for more intelligence? Or watch the crowd at a Premier League game get restless on those rare occasions when a team actually succeeds in keeping possession.
However, it’s not just Taylorite management that left us a crap England team. The more modern fad for superstar bosses has also had this effect.
Just as British businesses think they can solve their problems by paying superstar chief executives huge money - thus giving us RBS and BP - so our football authorities preferred to pay Capello £6m a year than ask whether the structure of the game was right.
A similar thing happens with the team. Superstar players are considered undroppable. Yes, this might be because there is no depth of talent; who was there on the bench yesterday who might have reasonably been expected to change the game? But it also betokens an idea that individuals matter more than structures.
And yet (at least) two examples contradict this.
First, the most impressive footballing structure of recent years - Arsenal’s famous back four - contained only one player one would consider significantly talented. For the most part, they were players of intelligence and discipline. And the great AC Milan side of 1993-94 - managed by some chap called Capello - managed to thrash Barcelona with players who were, mostly, highly competent rather than superstars; surely, no team ever kept their shape - 4-4-2 - better than it did.
What I’m saying here is that football is a mirror onto society, and the England team reflects one scarred by the misrule of bosses.  Is it really a coincidence that the most class-divided society in Europe* also happens to have had for years - not just for one tournament as France and Italy have had - an under-performing team?
* Yes, I know south American nations are more unequal than the UK, but produce better football, but there are all sorts of cultural differences that might explain this.

Duncan Smith's daft idea

Iain Duncan Smith is doing a great job at the DWP - if DWP stands for Department of Witless Policies. His new wheeze is to offer “incentives” for people in social housing to move to where there are jobs. There are four issues here:
1. Lots of jobs are short-lived. Even in good times, one job in seven is destroyed every year. Over a quarter of low-paid jobs last less than a year. And one study found that 42% of new jobs last less than 12 months.  This means that many of those who do move will find themselves out of work shortly afterwards.
2. And they’ll be a long way from their friends as well. This matters, because large social networks help people back into work - as they learn of job openings from friends. In this sense, IDS’s proposal might not  reduce unemployment much overall, as it’ll increase the duration of unemployment for those who move house and then lose their jobs.
3. Moving away from one’s friends reduces happiness. Nattavudh Powdthavee has quantified this (pdf). He’s calculated that the difference in happiness between a person who sees their friends and relatives less than once a month and one who sees them most days is roughly as great as the difference in happiness between the unemployed and those in work.
This means that, for the average unemployed person, moving into work and losing close social networks is neutral for happiness. In this sense, IDS’s idea fails to promote the general well-being which David Cameron has advocated - and is certainly inferior to job creation in areas of high unemployment.
I’ll concede, though, that there’s a selection effect here. If IDS offers only genuine incentives for the unemployed to move, then those who take up the offer will be those who value working highly and friends (if they have them) lowly, so aggregate happiness will increase.
This, however, assumes that IDS is true to his word and offers only carrots rather than threats, and that people are good predictors of their own well-being. Both assumptions are doubtful.
4. If large numbers of people move into areas where there is work, there will be “pressure on public services” and a potential erosion of social capital. But these are  exactly the objections some people have to immigration. Quite how one can oppose immigration and favour IDS’s proposal is unclear - unless, that is, you‘re a racist.
There is, though, one effect of his idea. Insofar as people move from areas of high unemployment to low unemployment, rents and house prices will rise in the latter. I suspect, then, that IDS is pursuing pure Thatcherism - he wants to increase house prices in Tory-supporting areas.

What savings culture?

Iain Duncan Smith says:

We do not save enough in this country, it is shockingly bad when it comes to how much we save.
It has become unattractive to save. It is appalling, and changing the culture is critical.

But when did the UK ever have a savings culture? My chart shows ONS’s estimate of the savings ratio since 1946; savings are measured as disposable income minus consumer spending. Last year, households saved 7% of their disposable income. This was actually above the post-1946 average (of 5.6%).
Yes, we saved more in the 1970s. But those were uncertain times and our wealth was being eaten up by double-digit inflation. I doubt if IDS wants a return to that.
What’s more, even at the peak of our fecklessness, in 2008, we saved a higher proportion of our income than we did in any year between 1946 and 1955.
Looking at the savings ratio, it wasn’t the 1940s that was the era of austerity, but the noughties.
If you’re surprised by this, you shouldn’t be. Our perception of the past is coloured by a class-inflected salience bias. We think of people in the 40s and 50s as being well-off Laura Jessons repressing their emotions and living well within their means. What we forget, though, is that millions of workers were on or near the breadline and simply could not afford to save. Now, though, more of us can afford to do so, and so the savings ratio is higher.
IDS’s idea that even this high ratio is insufficient rests upon a supposition that he knows better how individuals should behave than do the individuals themselves. Not only is this deeply questionable, it represents an arrogant anti-Hayekian statism. It’s as if New Labour never lost the election.

The incidence of housing benefit

Gideon Osborne’s plan to cut housing benefit has prompted predictions of large-scale evictions and hardship. But are these really correct?
Put yourself in the shoes of a landlord facing a tenant who, because of the cuts, cannot pay his rent. Will he really evict him when other likely tenants won’t be able to afford the rent either, because their housing benefit has been cut as well?
Perhaps not. Perhaps instead the landlord will simply cut his rent. If so, the burden of the cut will fall on landlords, not tenants.
The question, then, concerns the incidence of the cut. There’s a direct parallel here with taxes. Just as the pain of a tax rise doesn’t necessarily fall upon the direct payer of the tax, so the pain of a benefit cut doesn’t necessarily fall upon the recipient.
 There is evidence here. Stephen Gibbons and Alan Manning looked at the effects of restrictions on HB in the mid-90s. They found that - depending on how the statistics are cut - between half and all of the cut in HB fell upon landlords, who had to cut their rent.
This is consistent with research in France (pdf):

We find that one additional euro of housing benefit leads to an increase of 78 cents in rents, leaving only 22 cents for low income households to reduce their net rent and increase their consumption.
This large impact of housing benefits on rents seems to be caused by a very low housing supply elasticity.

Now, I don’t say this to defend Osborne’s move. Gibbons and Machin find that it is only tenants who are in a position to negotiate lower rents - those who move - who did pass on the cut to landlords. In this sense, HB cuts do bear heavily upon the most vulnerable - those in a weak bargaining position. And you could argue that lower rents would be a bad thing, as they’d reduce the supply of property to let.
All I’m saying is that the belief that a £1 cut in HB is a £1 loss to poor tenants might well be wrong.  And I happen to think (sometimes, I fear, uniquely) that there’s no reason why the Left should subscribe to bad economics.

Necessity, choice & legitimation

For years, Marxists have been accused by their opponents of believing in a crude economic determinism. However, it is not so much Marxists who believe this as our rulers. George Osborne described his Budget yesterday as “unavoidable.”  His stooges have described the measures as “necessary.”
This is bull. The austerity is not necessary or unavoidable. It is the outcome of a choice, a judgment: should we risk damaging economic growth in order to placate the markets, or should we risk a sell-off in gilts to nurture the recovery?  By all means argue that the government has made the right choice. But don’t pretend there wasn’t one.
Samuel Brittan hit the nail on the head here:

The trick of the British establishment is to turn discussion from "whether to" into "how to" questions. The media debate is on which government services to cut or on the balance between spending cuts and tax increases. Once the discussion has been channelled into these trenches the establishment has won. The real argument, however, should be on whether we need unparalleled fiscal austerity or not.

But as Sir Samuel says, the coalition is playing an old game here. It was Thatcher who coined the phrase “there is no alternative.” And Alan Finlayson has described how Tony Blair used rhetoric about modernization to “render ‘natural’ and incontestable that which is not necessarily so.”
What’s going on here was described by Alasdair MacIntyre in After Virtue. Our managerialist rulers claim to possess scientific knowledge of society - of a sort which renders policies “necessary.” But such knowledge does not exist. It’s just a fig leaf with which to hide a lust for power:

What purport to be objectively-grounded claims function in fact as expressions of arbitrary, but disguised, will and preference.

The language of necessity is a means of legitimation - an attempt to justify what is in fact questionable. It’s also a means whereby rulers can set themselves above others. I mean, if Osborne were merely to try to show that he’d made the right choice, he’d have to debate with his opponents on equal terms. But by claiming is actions are “unavoidable” he is claiming an especial insight into fine-grained laws of movement of economics that mere mortals don’t have  (because such laws don’t exist).
But this raises the question: why do our rulers - not just the current coalition but their predecessors too - want any further legitimacy beyond that given to them by winning a plurality of the vote? Could it be that they instinctively feel that the mandate given by actually-existing democracy is insufficient?

Probabilities, biases and market efficiency

Bill Edgar in the paywalled Times draws our attention to a nice contrast - that the chances of New Zealand getting a draw against Italy were in fact higher than the chances, before the tournament began, of Brazil winning the Cup: 5-1 against 11-2. 
However, the Kiwis’ result is being described as a “shock” and “surprise” in a way that Brazil winning the Cup wouldn’t be. How can this be?
The answer, I think, lies in two cognitive biases.
One is the availability heuristic. When we’re challenged to think of the chance of something happening, we often respond by trying to imagine the event. And it’s easy to imagine Brazil winning the World Cup because they’ve done so five times, whereas New Zealand have never got a result against Italy (though they did run them close last year in their only previous meeting). 
The other bias is a version of the conjunction fallacy - the failure to see that the combination of even quite likely events is in itself an unlikely out-turn.
For Brazil to win the World Cup, they must succeed in their group and then win four games. This is five events. Even if success in each is a high chance, success in all is improbable. For example, a 70% chance in each amounts to a less than 17% chance overall.
What we have here, then, is an example of how markets can be wiser than individual intuition. Our intuition is that New Zealand’s result was a shock whereas Brazil winning the Cup would not be. But the market, which set the odds, was not so easily fooled.
Sometimes, then, it’s wiser to trust the market than our intuition.
You might object here, reasonably, that markets often go horribly awry. Which brings me to this paper (pdf) by Brock Mendel and Andrei Shleifer. Markets go wrong, they say, because sometimes rational but uninformed traders mistakenly believe that a price rise is driven by informed traders and not by noise traders.  However, this mistake is only possible because very often - as in our example - prices really are right and do embody genuine information.
In this sense, markets are occasionally inefficient precisely because they are so often efficient.

The end of growth?

Further to my previous post, is there another similarity between now and the 1970s - that the causes of rapid economic growth in previous years are fading away?
I mean, one reason why growth slowed in the 1970s was that a couple of the impetuses behind fast non-inflationary growth in the 50s and 60s - post-war rebuilding and the spread of some big technical advances - became weaker. Similarly, four possible forces behind economic growth since the mid-80s might also now be fading:
1. Credit liberalization in the 80s  led to a rise in the ratio of consumer debt to incomes. You can think of this as a long one-off adjustment, which is now most over.
2. In the 90s and early 00s, the risk premia on real capital assets declined, thanks to lower inflation, the absence of worker militancy and macroeconomic stability. This caused a rise in capitalists’ confidence and in capital spending, which was partly one-off. With the re-emergence of economic volatility, this process has stopped.
3. In the 90s and early 00s, technical change in IT and telephony created investment opportunities that have now been mostly exploited.
4. We’ve seen the best of the positive supply shock resulting from the supply of cheap goods from the far east. Even before the crisis began, the inflation rate for non-energy industrial goods was turning less negative; it was minus 0.8% in the 12 months to December 2007, against more than minus 2% for 1999-2005.
These weakening forces are consistent with one overlooked aspect of the OBR's recent forecasts - that it reduced the estimate of trend GDP growth from the 2.75% which the last government believed, though it seems to blame this upon the credit crunch rather than upon pre-existing trends. They also gel well with two broad facts.
First, the trade-off between unemployment and inflation (in the US) and between unemployment and the trade gap (in the UK) has worsened. This is consistent with a deterioration in the ability of economies to deliver non-inflationary growth.
Secondly, even before the crisis, consumer spending was falling relative to wealth, and capital spending was low relative to profits. Both are consistent with forward-looking agents taking a dim view of future growth prospects. Maybe they were right.

"I'm 'aving hoops"

What decade are we living in? I don’t mean do we call this the tens or the teens or whatever? What I mean is: are we reliving the 70s? There are at least seven parallels between then and now.
1. There’s been a banking crisis.
2. Immigration is a big issue. In the mid-70s, tens of thousands of Ugandan Asians came to Britain. We now know that this was great for the economy and society; the area of Leicester where many settled is now better off than when I lived there. As in the 70s, though, immigration is being discussed in ignorance of this fact.
3. Commodity prices have risen sharply.
4. Unemployment is rising, with a apparently little hope of it falling significantly.
5. A particular manifestation of social democracy has collapsed: post-war Keynesianism in the 70s, New Labour’s idea that tricksy statist policies can reconcile equality and efficiency today.
6. There’s been an adverse supply shock (pdf) not wholly due to higher commodity prices. Labour productivity growth slowed in the 70s, and has slowed recently.
7. There are worries about high government borrowing - though these were justified in the 70s, as bond yields approached 20 per cent.
Of course, there are tons of differences: inflation’s much less of a problem now, and Manyoo won’t get relegated. But I find the parallels odd.