Stumbling and Mumbling

Overconfidence & tuition fees

Traditionally, universities have selected the smartest applicants. But could this change, so that they select the stupidest, in one sense at least?
This is the thought raised by a new paper by Arnaud Chevalier. He points out that there is enormous variation amongst graduate earnings. For example, among those who graduated in economics in 2003, the 10% of highest earners three years later earned almost 80% more than the lowest 10 per cent of earners. The differences were even bigger for law, IT, maths or accounting graduates. And in almost all subjects, the differences exceeded 60%.
You might think these differences are the inevitable result of differences in graduates’ ability. But these control for A level results, university attended, parents’ social class and class of degree, and so control for a lot of ability.
I suspect - based upon no more rigorous evidence than the experience of my contemporaries - that a chunk of these differences reflect Smith’s compensating advantages: some graduates trade off a high salary for more rewarding work.
Nevertheless, the likelihood is that such differences also reflect an element of luck.
Which raises the question: faced with such a large variation in the returns to a degree, who is going to be willing to pay £9000pa in tuition fees?
Not the average graduate; Dr Chevalier estimates that a fee of less than £5000 is the maximum he or she would pay.
Instead, it is the most overconfident - those who overestimate their chances of becoming a top earner.
Now, in one sense this is not catastrophic because overconfidence about one’s ability is to some extent a self-fulfilling belief; people who are overconfident are believed by others to be more able than they really are.
In another sense, though, it threatens (or promises) a radical change. Traditionally, being a university graduate has been a signal of ability. But it might become the opposite - a signal not of ability but of a particular form of irrationality. Having a degree might become like owning a Porsche - others think: “look at the prat who’s paid for fortune for that.”
This is, of course, consistent with the view - expressed more in the US than the UK for now - that education is in a speculative bubble.

In praise of Monarchy

Timothy Garton Ash gives some guarded support for the UK having a monarchy. I’d go further, and suggest it is a good idea, for three reasons.
First, the existence of a monarchy is irrational, out-of-date and absurd, with all its pomp, invented tradition and flummery. But this is an argument for it, not against it. The monarchy is much like the NHS: idiotic in theory but surprisingly successful in practice. It therefore reminds us that rationality is a very weak tool for judging the efficacy of institutions.  Only “progressives”, with their unthinking and self-regarding faith in their limited stock of reason, believe rationality should be the sole arbiter of how we should organize ourselves.
Secondly, John Band makes a superb point:

I suspect it’s not a coincidence that the countries which are best at equality overall (e.g. Sweden, Denmark, Norway, the Netherlands) [he might have added Japan - CD] also tend to be monarchies

This, he says, is because monarchies remind us that our fate in life is due not solely to merit but to luck, and thus increases public support for redistribution. Is it really an accident that monarchical Spain is more equal than presidential Portugal, or Canada more egalitarian than the US, or Denmark more than Finland?
The Observer says that “meritocracy and monarchy is one marriage that just doesn't work.” True. But a true meritocracy would, as Michael Young famously pointed out, be even more horribly inegalitarian than the fake one we have now. So given the choice, give me monarchy.
Thirdly, there’s a question. If we had an elected presidency, what sort of preening, self-loving narcissistic egomaniac would think they were capable of representing and symbolizing the nation? (Tony Blair, you all answer.)
An elected presidency would thus symbolize - and so help entrench - our culture of ego, the belief that people are to be valued for who they are as individuals rather than for their roles. By contrast, a monarchy embodies the opposite principle - that people matter for what they do, not for who they are. In this sense, of course, a republic would be “modern”. But this is precisely a reason for opposing one.
Now, I can imagine two objections to all this. One is that a monarchy is a symbol of a society that is disfigured by class division. True. But we should worry about the bird, not the plumage.
Secondly, my objections to a republic could be overcome by having not an elected president but one chosen by lot. This would replace the lottery of birth with the lottery of, well, a lottery. There is, though, a very high chance that this would throw up as our head of state someone far more obnoxious than our present Royals. And given that there is a little to be said for impressing the outside world, we might as well stick with what we have.  

Talk, trust & inequality

Talk is cheap. Actions speak louder than words. These are cliches. But they are not necessarily true, as an experiment by Maros Servatka and colleagues shows.
They got  subjects to play a simple game. In this, player A has $10 and can choose to give some, none or all to player B. However much he gives, the experimenter triples it. Player B then chooses to return some, none or all of the money to A.
This game hinges upon trust. The more A trusts B to return cash, the more he’ll give. So, how can A be made to trust B? The experimenters tried three things before the game was played. One was simply to do nothing. A second was to get B to write a message to A. The third was to have B give money to A.
And here’s the thing. The message worked much better at winning A’s trust and elicting his contribution. On average, A gave $8.92 when B sent a message, compared to $7.31 when B sent a gift and just $5.55 when there was nothing.
Words, then, are better than actions. This, says Dr Servatka, is because “a key to building a trusting relationship is in conveying the idea that both players are entering a mutually beneficial transaction that will result in both of them being better off.” And it seems that a message does more to build such a relationship and to convey that idea than does a gift. It seems that people are keen to trust those who send them a message.
This is consistent with the finding (pdf) from dictator games that “communication dramatically influences  altruistic behavior, and appears to largely work by heightening empathy.”
All this helps explain why firms spend so much on advertising: communication elicits giving.
But it raises a thought. Lots of communication is asymmetric; it tends to run more from the rich to the poor, from rulers to ruled and from bosses to workers rather than vice versa. This suggests that the rich and powerful are more likely to elicit trust and gifts from the poor and weak than vice versa.
In this sense, the very existence of the media serves to entrench inequality, even aside from their explicit ideological content.

The politics of trivia

There’s one point that’s been missed in the argument following David Cameron’s remarks about there being over 80,000 addicts and the obese on incapacity benefit. It’s that this is a trivial issue.
Let’s - heroically - take at face value the Daily Mail’s claim that “there are 81,670 drug addicts, alcoholics and obese people claiming incapacity benefit instead of working.” 81,670 people getting £94.25 a week adds up to a cost of £400m a year*. This is one-twelfth of the error in the OBR’s forecast for public sector borrowing. It’s an inconsequential sum - or at least not one worth making a fool of oneself for.
But this is by no means the only example of the government making summat of nowt. Its plan last year to privatize forests squandered goodwill on what was, at best, a low-priority problem. The referendum on AV is making an issue of what even its supporters regard as a “baby step.“ Immigration controls also fall into this category, as even on the kindest reading of the data, the benefits of them are teeny.
In this sense, Cameron is truly the heir to Blair, as he’s continuing New Labour’s tendency - evident in its introduction of thousands of piddling little laws - to conduct the politics of trivia.
But why do this? Here are three possibilities:
1. Statistical illiteracy. Most people aren’t interested in politics, and so just don’t realize how small the numbers are for the costs of incapacity benefit or immigration. Politicians and the media, of course, do not enlighten them.
2. Managerialism. The belief that society is perfectible and fully controllable causes our rulers to fail to accept that there will always be plenty of ruin in a nation, and causes them to think they can eliminate even small costs.
3. Politics has become about the revelation of character, and trivial issues serve as dividing lines here. In attacking addicts, Cameron is trying to revive the distinction between the deserving (us) and the undeserving (them)** - just as immigration is about creating a divide between us and them.
The same thing is at work with the AV referendum. You could replace this with the question “are you in favour of change?” and pretty much the same people would be on the same sides.
In this sense, though, the politics of trivia serves a conservative function. I don’t mean merely, or even mainly, that it helps to “divide and rule” the workers. Instead, as Richard Sennett said:

The obsession with persons at the expense of more impersonal social relations is like a filter which discolours our rational understanding of society; it obscures the continuing importance of class in industrial society; it leads us to believe community is an act of mutual self-disclosure and to undervalue the community relations of strangers (The Fall of Public Man, p4)

* You might object that this under-estimates the cost, because if these people were working, they’d be paying tax. More likely, though, they’d be getting in-work benefits and tax credits.
** If we’re concerned about people claiming incapacity benefit because of their “own fault”, wouldn’t we put people suffering from smoking-related illnesses or sports injuries into this category? And yet Cameron omitted to mention these - perhaps because such people are “one of us” - to use Thatcher’s illuminating phrase - whereas drug addicts are “them”.

The poor rich

Norm wonders why so many well-off people don’t realize they are rich.
I’m not convinced by his answer - that folk don’t want the stigma of being thought rich.
Another possible explanation lies in the salience effect. The very rich get a disproportionate amount of attention. There are far more newspaper reports about, say, Wayne Rooney’s salary than there are about the reality of (relative?) poverty. This leads people to think the rich are more numerous than they are, and the poor less numerous. This effect is magnified by conspicuous consumption: when we see fancy cars and big houses, we infer that their owners are rich, when in fact they might only be saddled with humungous debt. It’s also magnified by occupational segregation. Very many middlingly rich people don’t associate with those significantly poorer than themselves*.
It’s also possible that the lower rich are burdened with high expectations. If you think a “middle class” lifestyle means taking two holidays a year or sending your kids to private school, then your outgoings will be as high as your income, and you’ll not feel rich. This process might be compounded by a lack of self-control and bad budgeting.
There is, though, another possibility - that the middlingly rich are not that rich. Take a man on £100,000 a year - an income which, with a non-working wife and two kids puts him in the top 6% of incomes. In one sense, he’s in a similar position to those far further down the income scale. He faces much the same fear of losing its job as those on much lower incomes; the probability of job loss might be lower, but the cost, should it materialize, is higher.
He’s poor, in the important sense that he cannot afford freedom**. Objectively, he is working class.
This vindicates one of Marx’s predictions - that the relative numbers of the working class would increase over time, as the middlingly bourgeois became proletarianized.
 And herein lies a paradox. Although the “poor rich” don’t feel rich, they don’t feel truly working class either, in the sense that they don’t much identify with people on, say, £15,000 a year and don’t have the (organized?) hostility towards the capitalist class  which Marx thought they would eventually get.
Instead, we have the worst of both worlds - people with a sense of resentment and entitlement without class solidarity. And this has some unpleasant effects.
* I’ve long suspected that London Underground is partly responsible for this. If we take the tube, it’s possible to travel from wealthy areas of London to the City without ever seeing poverty.
** He's also poor in the sense that he can't afford a decent house in London.

Don't forecast recession

Duncan Weldon is forecasting a “double dip” recession. I’m not sure this is wise.
I don’t mean he’s wrong - he might not be. What I mean is that an economic forecast should not be a description of the future. It should instead be based upon an assessment of the costs of being wrong versus the benefits of being right. This, for example, is why well-established forecasters - such as those working the major investment banks - so often produce near-consensus forecasts whilst less well-known ones produce extreme ones. The former lose a lot from being wrong, relative to others, and so don‘t risk it. The latter, however, need to attract attention, and so the benefit of producing an eye-catching forecast outweigh the cost of being wrong.
By this criterion, Duncan’s forecast doesn’t stack up - or at least, it certainly wouldn’t if all of Osborne’s critics were to adopt it.
To see my point, consider two scenarios:
1. Osborne’s critics forecast a recession, but we get sluggish growth of, say, 1%.
2. They forecast growth of 1%, but we get a recession.
In both cases, the forecasts are equally wrong. But the pay-offs differ.
In (1) Osborne will say: “My critics forecast recession. Their warnings about the effect of my cuts were wrong. This shows you shouldn’t believe them.”
In (2), however, he can’t say this. But his critics can say: “We thought the cuts would have bad effects, but they turn out to have been worse than we thought.”
It’s better for Osborne’s critics to forecast mild trouble, therefore, than to predict doom.
You might object here that I’ve set up the problem wrongly, and a recession is, as Duncan says, the most likely outcome.
This isn’t really the point. There is a big risk to Duncan’s view. It is that bosses now are even more overconfident than usual - because surviving the recession has further boosted their inflated self-belief - and overconfident bosses are more likely to invest. If so, we might get sufficient growth in capital spending to offset weak public and personal consumption.
If this happens, it would in no way vindicate Osborne’s position: such investments will prove to be unprofitable in coming years. But it would appear to discredit those who forecast recession. The cost of this risk materializing, I suspect, outweighs the expected benefit from taking the risk.
This is not to say Duncan, as an individual, is wrong to take the risk. Maybe he reckons the uplift to his own reputation in the event of being right outweighs the risk of being wrong.
What I’m saying is that Osborne’s critics, in aggregate, should not forecast recession.

Crime & immigration

What’s the link between immigrants and crime? Liberals are loath to raise this question. But perhaps they shouldn’t be, as a paper presented to the RES annual conference yesterday by Franscesco Fasani (earlier version in this pdf)  shows.
It looked at the effects of two different waves of immigration; asylum-seekers in the early 00s, and workers from the A8 countries after 2004.
They estimate that asylum-seekers did add to property crime, though not to violent crime. The average local authority area getting an average number of asylum-seekers (roughly 0.1% of its population) saw its crime rise by about 2.5% as a result.
However, immigration from the A8 countries has been associated with lower property crime, though whether this is statistically significant depends upon what you control for. It had no effect upon violent crime.
There’s an obvious reason for the difference. Asylum-seekers were prevented from working and so took to crime to make a living, whereas A8 immigrants come here to work, and people in jobs are less likely to rob and steal. The solution here might be to get asylum-seekers working rather than to prevent them arriving.
Herein, though, lies a quirk. Consider this quite reasonable hypothesis:

Immigrants might raise crime even if migrants are no more likely to commit crime than natives. This is because of its effects upon social capital. An area with a lot of migrants, especially recent ones, is likely to be an area where neighbours are less likely to know each other. They are therefore less likely to join neighbourhood watch schemes or watch out for their neighbours’ property whilst they are out. This might attract criminals into the area. This process might be reinforced by a “broken windows” mechanism, if anonymity leads people to take less care in maintaining the front of their homes or in keeping the streets free of litter.

However, the experience of A8 migration suggests that this hypothesis is unproven. And this, in turn, weakens the claim that immigration reduces social cohesion, at least in ways which have measurable consequences. This might, of course, be because such cohesion was low to begin with.
Which leaves me wondering. Maybe the cost of immigration is not something that‘s measurable, but rather lies simply in people‘s “gut feeling.” But then, gut feeling is all that matters, isn‘t it?

Gut feelings

David Cameron says something curious:

For me, politics shouldn't be some mind-bending exercise. It's about what you feel in your gut – about the values you hold dear and the beliefs you instinctively have. And I just feel it, in my gut, that AV is wrong

As a member of the Meh to AV camp, I have mixed feelings about this attitude.
I want to applaud Cameron’s honesty. Most of us, normally, use apparently rational arguments as a cloak of respectability for what are really instincts and prejudice. It’s refreshing to see someone breaking with this hypocritical and self-serving tosh.
Also, there’s much to be said for gut instinct. As Malcolm Gladwell showed in Blink!, there are many cases when snap judgments work.
Such cases are common when there is huge Knightian uncertainty, as in such cases rationality does us little good simply because we can foresee only a tiny subset of all possible events. I’ve long suspected - albeit based upon my personal experience - that many of the best investment decisions are founded more upon gut instinct than upon explicit reasoning, as this can at least warn us when something fishy is going on.
I suspect this is what Cameron’s doing here; he’s got a feeling he can’t articulate that AV is a slippery slope to something nasty.
This is a perfectly respectable small-c conservative attitude. As Michael Oakeshott wrote (pdf), there is much to be said for a cautious disposition to prefer the familiar and the known rather than the rationalist promises of improvement.
On the other hand, though, I have misgivings.
For one thing, such an attitude is very close to idle cultural relativism. If politics is all about gut feel, it’s not obvious what difference there is between liberal democrats and Islamists. Their gut feeling is to oppress women and kill infidels. Our gut feeling is otherwise. How can we distinguish the two, without some “mind-bending exercise” which puts values onto some rational foundation?
Also, such an attitude brings the legitimacy of government into (further) question. Why should I obey Cameron’s gut feelings? The obvious answer, of course, is that he has the power of the state to back them.
Equally, if gut feel is all there is, then there’s little place for rational debate. The clash between your gut instincts and mine can be resolved only by force of ballots or bullets.
But this reduces politics to mere power (which it is, of course - but it would be nice to retain some illusions to the contrary.)
In this sense, Cameron’s elevation of gut instinct serves big-C conservative interests. It is the rich and powerful, by definition, who have power on their side whilst the poor have, at best, truth and reason. Anything that downplays the latter, therefore, supports the interests of the ruling class.
It does this in another sense too. Put it this way. How did I, and a few like me, manage to “rise” - God, I hate that metaphor - out of our poor childhoods? It’s because we succeeded at education - because of our knowledge and reasoning ability. But now, we are told that such ability is not what really matters. When I passed all those exams, I was not demonstrating that I had the skills to join the elite: it‘s gut instinct that matters, after all, not knowledge and logic. Instead, I was like a dog jumping through hoops - performing a few mildly distracting tricks in exchange for a patronizing pat on the head.

Was the Bank to blame?

Fraser Nelson blames the financial crisis on the Bank of England for, he says, “pump[ing] the British economy with the steroid of cheap debt”:

The Queen’s famous question — why did no one see it coming? — has a clear answer. Because everyone was looking in the wrong place. They were fixated with keeping consumer inflation in check, and didn’t notice the signs of a debt bubble. Savings had collapsed, the prices of assets — from fine wine to penthouses — were soaring. Yet all this was described as stability and prosperity because inflation stayed around the 2 per cent level.

I’m not sure about this. The thing is, it wasn’t just low inflation that gave the Bank a reason not to jack up interest rates much in the mid-00s. There were other facts suggesting the economy was not strong:
1. Unemployment was high and rising. The rate troughed at 4.7% in 2004, and rose in 2005-06. On a wider measure (including the inactive who’d like to work and part-timers wanting full-time work) there were 4.4 million - over 11% of the working age population - unemployed in 2006-07. Fraser repeats Cameron’s line that this was because the welfare state dampened incentives to work, but this is at best only part of the story.
2. GDP growth was modest. In the three years to 2007Q2 it grew only 2.5% a year - around its trend rate.
3. Not all asset prices were booming. In 2006-07, the PE ratio on non-financial shares was only 13-14 - half its level of 1998-99. The stock market was taking a downbeat view of the economy’s prospects.
4. Companies were not investing. Non-financial firms’ financial balance (the excess of retained profits over capital spending) was in a surplus equivalent to over 2% of GDP in 2006-07.
All these were good reasons for the Bank not to raise interest rates very much from 2005 to 2007; note that they did raise rates, from 4.5% to 5.75% during this time.
There is, though, another story we can tell which reconciles the “debt bubble“ and these facts. It’s this.
A combination of the Asian savings glut - which depressed AAA rated bond yields in the west - and the low risk aversion caused by the appearance of economic stability made banks want to lend. However, firms were reluctant to borrow to invest in new assets. The result was that lending flowed into the housing market and funny money. Such loans were not matched by genuinely higher incomes, which is what would have happened had we had investment in capital assets. They were speculative or Ponzi loans rather than hedge loans, in Minsky‘s terms. They were therefore risky. However, shareholders were unable or unwilling to get banks to restrain this lending.
There’s a big difference between this kind of story and Fraser’s. Fraser seems to agree with many social democrats, in believing that capitalist economies could be stable if only policy-makers did the right thing. But my story suggests it is far harder to do this than supposed. Perhaps capitalism always contains the potential for instability, and policy-makers cannot eliminate this.

Cameron: wrong on welfare & immigration

There’s one element of Cameron’s speech on immigration I want to quibble with. (Actually, there are loads, but I'll keep it brief.) It’s this:

Migrants are filling gaps in the labour market left wide open by a welfare system that for years has paid British people not to work. That's where the blame lies - at the door of our woeful welfare system

I have four problems with this.
1. It misdescribes the welfare system. In April 2005, for example, the typical worker had a replacement ratio of 48.5% - implying that he was twice as well of in work as out. (table 2.4 of this pdf) Work incentives were higher for single people, but less for lone parents or second workers. The notion that people are better off not working is - except in extreme cases - just a fiction.
2. It deflects attention from the fact that people aren’t working because of a lack of demand. Since December 2007 the number of unemployed on a wide measure (measured unemployment, part-timers who want a full-time job and the economically inactive who’d like to work) has increased by 1.5 million to 6 million. Isn’t it a funny coincidence how people’s “incentives” not to work just happen to have increased during a financial crisis?
I fear Cameron is committing the “small truth, big error” fallacy here - picking on a little fact (a few people have disincentives to work) and omitting a bigger one - the unemployed are out of work for other reasons.
3. It ignores the fact that labour isn’t fungible. An unemployed council worker in Swansea cannot easily become a plumber in London or fruit-picker in Lincolnshire. It is these mismatches between the pattern of labour supply and the pattern of demand that immigration fills.
4. It ignores a bigger problem - that even if people had even sharper incentives to work, many would not be able to not just because there is weak aggregate demand for labour, but because they have low skills (and the “wrong” personalities?) and demand for unskilled labour has collapsed since the 1980s. This might be an issue about the education system. But it is not one for the welfare system.
Cameron’s claim that “we will never control immigration properly unless we tackle welfare dependency” shows that the right can be as woolly minded idealists as the left.