Stumbling and Mumbling

Wages & corruption in cricket

Dileep Premachandran quotes a recommendation from Mohammed Malik Qayyum in 2000:

Pakistani players for all their talent are not as well-paid as their counterparts abroad. As long as they are underpaid the tendency to be bribed remains.

For me, this rings true. There are four aspects to the problem.
1. Comparisons. Mohammad Amir gets a monthly retainer of £1300 from the PCB, and a test match fee of less than £2000. Of course, this is a fantastic fortune by Pakistani standards, and even many high-earning Englishman would be delighted to get such money for doing something they love. However, these sums look paltry compared to the fortunes on offer in the IPL. And it‘s this comparison, rather than the wages of non-cricketers, that probably loom larger in the Pakistan players minds.
In Predictably Irrational, Dan Ariely gives the reason for this. People, he says, make comparisons that are easiest. And the easiest comparator for a Pakistani international cricketer is an Indian international cricketer. Ariely tells the story of an investment bank employee complaining to his boss about his salary:

“How long have you been with the firm?” the executive asked.
“Three years. I came straight from college” was the answer.
“And when you joined us, how much didi you expect to be making in three years?”
“About a hundred thousand.”
“And now you are making almost three hundred thousand, so how can you possibly complain?”
“Well” the young man stammered, “It’s just that a couple of the guys at the desks next to me, they’re not any better than I am, and they are making three hundred ten.”

We might call this the Ashley Cole effect. When Arsenal offered him £55,000 a week, he felt so insulted that he almost crashed his car. This is because he was comparing himself to better-paid peers.
2. A drawback to superstar economics. Put yourself in the shoes of a Pakistani player. He might ask: why should I earn only a fraction of MS Dhoni’s millions? We might cite Sherwin Rosen (pdf) in reply: MS Dhoni might be only slightly better than you, but small differences in ability can translate into colossal differences in wages. I doubt if the Pakistani players would accept this - would you? Insofar as they don’t - whether they should or not - superstar economics is another source of resentment.
3. Injustice hurts. One message of ultimatum game experiments is that people reject offers they perceive as unfair, even if such offers would make them better off. This suggests that when a sense of unfairness arises, people can behave spitefully in ways which seem irrational from a narrow utility-maximizing perspective.
4. Efficiency wages matter. It’s long been known that, in many firms, wages are higher than can be explained by simple supply and demand. Conventional explanations for this are that bosses want to deter workers from shirking, and so pay over the odds as a way of ensuring that there‘s a big cost of losing one‘s job if one is caught slacking.
Pakistani experience, however, reminds us that there’s another reason to pay over the odds: high wages are necessary to buy goodwill.
This is where points 1 and 3 interact nastily. Workers on even huge pay will feel badly treated if their comparators are even better paid. And if they feel unjustly treated, they might be tempted to behave badly, perhaps even at a cost to themselves. In such cases, huge pay will be needed to buy off such bad behaviour. This - rather than any crap about having to attract talent - is why bankers have been so well paid.
The PCB did not learn this lesson.

Welfare benefits & unemployment

Don Paskini claims that higher welfare benefits help people find work, pointing out that between 1996 and 2009, the numbers of lone parents in work increased, at the same time as benefits did.
His commenters are right to say the evidence doesn’t prove his claim, because perhaps even more people would have found jobs if benefits had been lower. But the evidence does prove something - that higher benefits can be consistent with lower benefit claims.
The problem here is that the anti-welfare lobby misrepresents its case. For example, when Neil O’Brien claims that higher benefits encourage people to stay on benefits rather than find work, what he should say is: “other things being equal, higher benefits will, at the margin, discourage people from seeking work.”
Put like this, four questions arise.
1. Is even this true? Yes, higher benefits encourage people to substitute work for leisure. But as Don says, there might also be an offsetting income effect; higher benefits allow people to afford bus fares to Job Centres, or a local newspaper, or child care whilst they are at interviews,  or a pleasant-smelling clunge that’ll impress an interviewer. They might, therefore price people into work.
2. How extensive is the margin? One of my big gripes against the right is their tendency to assume that margins are more extensive than they are. And this might be the case here. Some cross-country evidence has found that the link between job search and the ratio of unemployment benefits to wages is statistically insignificant.
3. Isn’t there an aggregation problem here? Let’s concede that lower unemployment benefits do encourage people to look for work. For any individual unemployed person, this increases their chances of getting a job. However, unless aggregate employment increases, their increased chances come at the expense of lower chances of finding work for someone else. The question, then, is: does increased job search lead to increased aggregate employment?
In theory, the answer is yes: an increased supply of labour means lower wages, which encourages employers to hire more - though this raises issues about elasticities. However, the presence of the minimum wage blocks this channel. Unless you call for the abolition of the minimum wage, the expectation that benefit cuts will increase employment is simply the fallacy of composition*.
4. Are other things equal? Don is surely right to say that unemployment depends more upon the state of the economy than the level of benefits.
And this brings me to the key issue. There is always a trade-off between risk and incentives; the low unemployment benefits that give people a high incentive to find work also mean that there is a large risk of losing lots of income if you lose your job.
The question is: what should be our preferences on this risk-incentives spectrum?
In good macroeconomic times, when work is plentiful (not that it ever is, but let that pass) it might be reasonable to prefer a welfare state that provides sharper incentives and greater risk. But this is not the world we live in today, and it might not be for many years.
My fear is that a nasty combination of wishful thinking about the labour market, a desire to stigmatize the unemployed, and unwarranted optimism about the supply-side effects of restricting unemployment benefits is leading the right to overweight the desirability of sharp incentives, and underweight the merits of better risk-pooling.
* I suppose there are other mechanisms through which benefit cuts might increase aggregate employment. But all require considerable levels of elasticity optimism.

The Spirit Level mechanism

During my holiday, I finally got round to reading The Spirit Level. And I have a problem with it.
It’s not the data. This is convincing if you’re prepared to be convinced, and not if you are not. Facts are rarely decisive in political disputes.
Instead, it’s the mechanism: how, exactly, does inequality lead to ill-health, crime and the other ills Wilkinson and Pickett describe?
They say that “greater inequality seems to heighten people’s social evaluation anxieties by increasing the importance of social status.” The result is a “threatened egotism”. If the anxieties this creates are directed inwards, they lead to ill-health, and if they are focussed outwards, the result is distrust and violence.
My problem here is that status competition exists within small groups, rather than within whole societies. Drug-dealers and academics, for example, compete against each other, not against the super-rich. If we were to kill all bankers - a policy not wholly without merit - this competition would continue. It’s the narcissism of small differences that gets us.
Now, the right might say this just shows that status competition is an ineradicable feature of all societies, and it won‘t necessarily disappear if inequality declines.
However, it could also be that two other mechanisms are at work.
One is that it is inequalities of power that matter, not (just) income - though the two are of course correlated. In unequal societies, bosses create  stress and anxiety for workers. And societies with unequal incomes are generally societies with stronger bosses and weaker unions, and hence more stress and uncertainty for workers.
Secondly, there’s an interaction between inequality and ideology. Let’s say that big inequality exists for some reason. The just world effect and status quo biases then lead to a subconscious desire to legitimate this inequality - a process aided, if you like, by the capitalist media. Part of this legitimation consists in promoting a narcissistic-individualist ideology, in which success and failure are attributed to individuals’ merits or failings, rather than to luck, social structures or power differentials.
In this sense, inequality breeds “social evaluation anxieties” by promoting an ideology in which personal qualities have undue salience.
Now, I’m not sure how strong these mechanisms are. All I’m saying is that if the left is to invest its hopes in The Spirit Level, it should think more about the precise causal mechanism - if there is one! - between inequality and social problems.
Another thing: Wilkinson and Pickett do not discuss the possibility that inequality also reduces economic growth - an omission which allows some to claim that they are part of the anti-wealth egalitarianism. I’m not sure this is wise.

Limits of social mobility

Whilst I was away, Nick Clegg appointed Alan Milburn to ask the ickle wickle money fairy to be nicer to poor people.
He might as well have done, for all the use his “social mobility” strategy will be.
There are - at least - four massive obstacles to increasing social mobility.
1. Social mobility requires downward mobility. If you measure mobility by the chances of someone getting into the top quintile of income, this is a necessary truth; only one-fifth of people can be in the top-fifth, so any improvement in the chances of people from poor families entering the top quintile must imply a reduction in the prospects of doing so for those born into rich families. Part of Alan Milburn’s job should therefore be to ask: how can I worsen the life-chances of David Cameron’s new daughter? Will he do this? I ain’t holding my breath.
2. Some of the routes that have traditionally allowed poor kids to get rich are now blocked. A large and growing public sector allowed poor kids to become doctors, teachers or criminal lawyers. And easy credit allowed others to become entrepreneurs. Neither channel is likely to be as helpful in the near future as they were a few years ago.
3. There are diminishing returns to policies that improve social mobility. Imagine a world without social mobility. In this world, some of the offspring of the rich are chinless inbreds, whilst many of the offspring of the poor are bright and hard-working. Then, some weakly meritocratic institutions are introduced - death duties, educational opportunities for the poor, whatever. Our chinless inbreds then fall down the income distribution, whilst bright hard-workers rise up it.  This, though, will change the character of the children of the rich and poor. Rich kids will - to a greater extent - have inherited (through nature or nurture) intelligence and a work ethic that will tend to keep them rich. Poor kids, meanwhile, will consist less of bright kids and more of stupid or badly brought up ones. It will then be hard for social mobility to increase further.
This, in rough form, is the story of the last 50 years - with assortative mating adding to the problem,
To increase social mobility from now on therefore requires more radical policies than we’ve had before.
4. These policies will have to include measures to help children before they arrive at school, and perhaps before they are born. Such policies, though, might entail larger interventions in family life than are considered consistent with liberty.
For these reasons, I fear that increasing social mobility is too ambitious a goal.

Welfare states & public debt

Low public debt requires a generous welfare state. This sounds paradoxical. But it’s not.
In Fault Lines, Raghuram Rajan says that one reason why the US engages in big Keynesian counter-cyclical policy is precisely that it has a weak welfare state. The absence of significant protection against unemployment means that there’s greater demand upon governments to do something about recessions:

The absence of a strong safety net…has made every one of the recent recessions “truly severe” from a political perspective. This has created tremendous pressure on governments to stimulate, both through fiscal means - tax cuts and spending increases - and through easy money policy (p98).

Although Rajan’s story focuses on the US, there is cross-country support for it. My chart shows that, across 21 major OECD nations, there has been a strong negative correlation (-0.41) between the size of the welfare state in the 90s and 00s and in the rise in the government debt-GDP ratio between 2007 and 2010. Countries with small welfare states - Ireland, Iceland, the US and UK - saw bigger rises in public debt than countries with more generous welfare states, such as Sweden.
Big welfare states, then, are not only not a cause of high public debt, but are in fact a counterweight to them. In this sample of OECD nations, there is also a negative correlation (-0.27) between social spending and the level of the debt-GDP ratio in 2010.   
There are two mechanisms here:
1. As Rajan says, a weak welfare state increases demand to “do something” about recessions, so there’s more counter-cyclical fiscal policy. Discretionary Keynesianism and a big welfare state are substitutes, not complements. And because fiscal policy tends to be looser in recessions than it is tight in booms, so there is a tendency for more discretionary fiscal policy to lead to higher levels of public debt over time.
2. A weak welfare state encourages central banks to err on the side of laxity, to pre-empt possible  recession; really tough anti-inflationary policy is facilitated by a strong welfare state - just look at Germany. This creates a bias towards easy money, which encourages bubbles and lax lending - and these cause severe recessions and increases in public debt when they burst.
Of course, you might reply that starting from where we are, rather than where we’d like to be, reductions in public debt must require some cuts in the welfare state. And it would be very difficult, starting from where we are, to both increase the welfare state and reduce public debt - though the 1945-51 Labour government managed it.
However, this does not detract from two points.
First, insofar as there is a link between the welfare state and the present state of public debt around the world, it is a negative one: generous welfare states can prevent public debt crises, and small welfare states can cause them.
Secondly, shrinking the welfare state could actually increase public debt over the long-term, as it would increase demand for counter-cyclical fiscal policies to combat unemployment, and encourage the slack monetary policies that lead to booms and busts.
* I’m using the OECD’s data on social expenditure as a share of GDP, averaged over the years 1990, 1995, 2000 and 2005 to smooth cyclical variations. Note that my data excludes Korea. Including Korea in the sample would weaken the correlation, from -0.41 to -0.2.

What do universities do?

Do universities increase their students’ earnings by raising their human capital, or merely by signaling to employers that the individual has high ability? This old question might gain force if universities are able to freely choose tuition fees.
Imagine Oxford were to charge £10,000 a year whilst a less prestigious establishment charges £3,000. A student is then offered a place at Oxford. He might figure: “I'll reject this, and go to Cheap University instead. This way, I’ll save £21,000 over three years, but I’ll have the offer of an Oxford place to signal my high ability to employers. And hey, if I'm bright enough to get into Oxford, I'm bright enough to earn decent money anyway.” If the signaling hypothesis is correct, or nearly so, this would be quite rational. And US evidence suggests it is roughly correct; students who turn down places at elite universities and attend less esteemed establishments subsequently earn about the same as those who accepted the places.
So, why might this be a wrong choice? Three obvious possibilities are:
1. University is a consumption good, not just an investment good. Maybe Oxford offers a better consumer experience than Cheap University.
2. Getting through Oxford doesn’t just signal one’s intellectual ability. It also signals an ability to get on with other Oxford students - a soft skill which employers value. Conversely, going to Cheap University rather than Oxford signals that one has a chip on one’s shoulder, and employers’ wouldn’t want that.
3. Oxford does actually impart skills to students. The strongest possibility here is that the weekly tutorial teaches one to bluff well.
My hunch is that 2 and 3 at least are strong arguments - not that I trust my hunches, though. But if Oxford were competing in a free marketplace for students, I doubt it would really market itself on these grounds. So perhaps a free market in universities would be a dishonest one.

A place for choice

This piece by Catherine Bennett, and the rather vitriolic reaction to it, shows the mess we can get when social science crashes into entrenched prejudice.
The thing is, there is by now abundant evidence that people choose badly. This is not just in trivial areas such as the choice of jam, but in really important matters; Richard Thaler and Shlomo Benartzi have shown (pdf) that even very intelligent people can be bamboozled by choices into getting their pension selections wrong.
However, Ms Bennett’s interlocutors overlook this. There seems to be a reluctance to face the fact that the evidence is mounting against the crude “max U” rational maximizer of Econ 101 myth.
But Ms Bennett is also wrong to infer from this that choice in public services is a bad thing. There’s good evidence that choice can, in the right circumstances, drive up standards. But how can this be, if people are bad at choosing? There are (at least) two possible mechanisms:
1. The mere threat that consumers might choose if not efficiently then at least adequately can prevent organizations getting too sloppy. Bosses who display a contempt for their customers - think of Gerald “crap” Ratner - tend not to succeed.
2. People don’t have to make the best possible choice. They only have to satisfice - pick a tolerable option. This could be sufficient to drive people away from really bad schools and hospitals. In this sense, choice and competition can improve standards not because the best get better or bigger, but because the worst disappear. This seems to be the case in the private sector generally. In this superlative paper, Alex Coad writes:

Selection only operates via elimination of the least productive firms or establishments, while the mechanism of selection via differential growth does not appear to be functioning well.

This suggests there is a middling position. Yes, Ms Bennett and her like wrongly under-rate the importance of choice in public services. But equally, I fear that some on the right might be over-estimating its efficacy.* Which leaves me puzzled, as to why an extremist like myself is left occupying the centre ground.
* I’m thinking here of choice as an instrumental value. One might reply that choice is a good thing in itself, even if it makes us unhappy, and aside from its effect upon standards. I’m not sure how to ajudge such a claim.

Structurally high unemployment?

The CIPD reports that firms are planning to make more redundancies. This raises a concern: could we be facing years of structurally high unemployment?
Note the word “structural” here. I do not mean merely the sort of unemployment that exists because demand is weak, say because the government is slashing spending - though I don't deny that this too could be a problem. I mean the sort of unemployment that can co-exist with inflation staying around or above target.
Five things make me worry:
1. Hysteresis. Short-term unemployment can lead to longer-term unemployment, as the jobless lose skills and experience. This is a particular problem for younger workers.
2. Labour hoarding. One feature of the recession is that firms didn’t shed as many workers as you’d have expected, given the severity of the downturn in output. This suggests firms have hoarded labour, which suggests that the upturn in output - if it does continue - will lead to increased utilization of existing workers, rather than new hires.
3. Oil prices are still high. Some recent research confirms that these matter for US unemployment. They also matter for the UK, as my chart shows. Note that the oil price rises of 1973-74, 1979-80 and the late 00s all led to rising unemployment. Note too - more worryingly - that the most significant falls in unemployment, in the late 80s and late 90s, both occurred at a time of low or falling oil prices. This condition does not exist now.
4. Bank credit is still tight. This will constrain new firms from creating jobs and existing ones from expanding. There’s a widespread consensus that the recession has reduced (pdf) long-term economic growth - which means slower employment growth.
5. The trade-off between unemployment and the trade deficit has worsened, by more than can be explained merely by weak overseas demand. This is a clue that rising unemployment might be more than structural.
The big question - which should get more attention than it will - is: what can be done about this? Mere macroeconomic management is not enough. Insofar as structural unemployment is high, plain macroeconomic policies can only reduce it at the price of raising inflation. This requires the inflation target to be raised or abandoned.
Nor is it clear that cutting payroll taxes will get us far, as these might merely lead to higher wages. And anyone who thinks cutting the minimum wage will lead to large job creation has supped too much Econ 101 moron juice.
Davids Bell and Blanchflower have some ideas here. Whether these can work is, though, doubtful. As Michal Kalecki said: “Unemployment is an integral part of the normal capitalist system."

Framing & ideology

Arsene Wenger is wise to cognitive biases:

During a week when England's most important footballer was plastered over the front pages of the tabloids for being, well, plastered in the early hours and in possession of a cigarette, Wenger argues the story is negative in the context of England's poor World Cup. "Imagine he does exactly the same but they won the World Cup," the Frenchman suggests. He proposes the story would then be an upbeat one. Good old Rooney. What a Jack the Lad. Look how he can be a winner and then go out and enjoy it. "That means you do not judge the guy, you judge first the result he has produced and then according to your disappointment, you judge the guy," Wenger muses.

The bias here is the framing effect: Rooney’s behaviour is views through the frame of his and England’s poor performance. (Note here that many great players smoked, as did Teddy Sheringham).
There’s one context, though, in which the framing effect can be pernicious. Successful people are often described through the frame of their success. This helps legitimize inequalities in two ways: it paints an overly complimentary picture of them, and encourages the perception that they owe their position to merit rather than luck.
I’ll take one example, but I’m confident you can find others - this interview with Mark Thompson, BBC director-general:

He often speaks like a man whose brain is racing many moves ahead – regularly halting mid-idea, to emit an “err ... err ... err ... ” as he reels in his thought processes to return to the place that his voice has reached. He seldom finishes a sentence, often leaves what could have been a brilliant thought hanging in the air.

This could be evidence that the man is an inarticulate bufffoon. Instead, viewed from the frame of his position, the interviewer imputes - without evidence - “brilliant” thoughts to him, and commends his  “cerebral manner“.
The framing effect, then, helps give authority figures an easy ride.
But here’s the thing. The framing effect is not necessarily wrong. A frame can contain valuable information which stops us over-reacting to the evidence of our own eyes. For example, seeing Mark Thompson umm and err make lead us to think him inarticulate. But the fact that he’s DG of the BBC gives us reason to pause: if he really were a bumbling oaf, would he really have been appointed to such a senior position?
And this is where ideology - which in the Marxian conception is much the same as cognitive biases - is such a tricky thing. Many ideological tropes are not simple untruths, but have a base - and occasionally a large one - in fact.

Public debt & the left

Jonathan Calder asks a good question: why has political radicalism become synonymous with wanting to see a permanent and massive public debt?
Let me deepen the puzzle. In three ways, the left should be more concerned about government debt than many on the right:
1. The left tends to be more sceptical about the rationality of financial markets. They should therefore take less comfort in the fact that bond yields are low, for fear that market opinion might turn quickly. This argues for cutting public spending in a considered, orderly way, for fear of having to make emergency cuts if sentiment does change. (Of course, governments could monetise borrowing rather than tap bond markets, but the costs and benefits of doing this shouldn’t be a left-right issue).
2. Government debt is analogous to climate change - both are burdens we impose upon future generations. If you’re concerned about climate change - and the left tends to be more so than many on the right - then you should also be concerned about government debt*.
3. Big government is no friend of the working class. What’s wrong with cutting public debt if it means ending the subsidy to arms companies that is military procurement? Why not slash spending on an organization that seems to have degenerated into a gang of thugs? Why not nationalize the banks and use some of their profits to reduce government debt?
On these grounds, we’d expect the many on the left to want to reduce government debt. So why aren’t they?
I think it’s because these factors are outweighed by another. What distinguishes left from right is that the left is more sceptical of the right about the self-righting capacity of capitalism. The left therefore thinks that cuts in public spending will not crowd in exports or business investment, but instead depress the economy, which will hurt workers disproportionately.
But this raises a question. What if we had more adequate insurance mechanisms - either more generous unemployment benefits or Shiller-style macro markets - which better cushioned workers from recession? Would some on the left then be less supportive of public debt, because the weight of factors 1-3 would increase relative to the costs of jeopardising economic growth?
* Of course, it could be that climate change is a left-right issue because the left believes capitalism must have all sorts of bad effects, whilst the right believes this is impossible.  But leave this aside.