Stumbling and Mumbling

The investment slump

Capital spending has fallen to a record low as a share of GDP. Today’s figures (pdf) show that in Q1 business investment in current prices accounted for 7.9% of GDP - its lowest proportion since records began.
OK, in part this is good news - it reflects the fact that the relative price of capital goods has fallen.
But this is only part of the story. The volume of capital spending, as a share of GDP, is now close to its lowest since the mid-90s.
This matters because capital spending is not only a cause of future GDP growth, but a symptom of it; one reason why firms don’t invest is that they don’t anticipate much future demand growth.
But why are firms not investing? Three reasons strike me as only a fraction of the story.
“The recession created spare capacity, and this means firms don’t need to invest.” No doubt, this is true for some firms. But if there were general spare capacity, inflation should be lower than it is, at least if you believe conventional output gap stories.
“Banks are starving firms of funds.” However, in recent years firms, in aggregate, have not even been investing their retained profits. If firms aren’t even spending internal funds, a lack of access to external ones is not the whole problem.
“Osborne’s fiscal squeeze is having conventional Keynesian effects.” Again, partly true, but investment was weak, especially in current prices, even before the recession.
I’d suggest two other possibilities.
One is that rebalancing is - so far at least - is having asymmetric effects. Companies serving consumers and government know that demand will shift away from them and so are cutting capital spending. But firms in export and investment sectors aren’t yet confident enough to invest. As a result, we’re seeing investment in service sectors fall by more than investment in manufacturing is rising.
Secondly, there is still - as Ben Bernanke said back in 2005 - a “death of domestic investment opportunities” in western economies. Quite why this should be so is not clear. Possible explanations include: a slowdown in the rate of technical progress; an inability to profit from what technical progress there is; and the migration of low wage-dependent business to the far east. 
Two things, though, are clear. First, we know now that demand for investment good is price-inelastic. Lows prices of goods themselves, and low risk-free interest rates, are not enough to get firms spending.
Secondly, neither investors nor government nor the general public seem to be prepared for a world of few investment opportunities and weak growth.
* That spike in the chart is a statistical blip caused by a change in the way investment in the nuclear industry was measured.

Dylan, Giggs & reputations

It’s fitting that Ryan Giggs should finally be outed at the same time as everyone is celebrating Bob Dylan’s 70th birthday, as the juxatposition of the two reveals the curious nature of public reputations.
Giggs’ reputation should be sky-high. He should - I write as a Gooner - be celebrated as the premier  British footballer of his generation, and yet today he looks like a prat.
Bob Dylan, however, was at best an average guitarist and worse singer and someone whose best-known songs at least say nothing to those of us of a younger generation*, yet he has become a massive cultural icon.
We have a paradox. In both cases, public standing seems disproportionate to actual ability and achievement. In Giggs’ case, it is less, in Dylan’s more. What’s going on?
One thing is that, sometimes, we project what we want to see onto public figures. In his early career, Dylan was  seen as a folk/protest singer, with the result that many felt deeply betrayed when he went electric. But that “voice of a generation” tag was something pinned onto him. And ever since, people have projected a genius onto him which he - whether by skill or accident - has managed not to shake off.
It’s not just Dylan who has benefited from such projection. Think of all those England cricketers of the 80s and 90s who were the new Ian Botham. And remember Gordon Brown’s reputation as the Viking warrior? What’s remarkable about Dylan is that the projection has gone on for years.
A further aspect of reputation is that they are often subject to Bayesian conservatism - as in the old saying, “give a man a reputation as an early riser and he can sleep til noon.” Having gotten a reputation for brilliance, Dylan could issue duff, bland, silly or gnomic songs and statements and everyone believed they must mean something. His career is regarded as greatness punctuated by mediocrity (Self-portrait, Christmas in the Heart) rather than vice versa.
This is what Ryan Giggs failed to see. Had he not bothered to get an injunction, the story of him and Imogen Thomas would have been read in the morning and forgotten in the afternoon. Our prior belief that Giggs was a great footballer and generally decent bloke was so strong that a minor marital infidelity would have made little difference to the regard in which we held him. But in fighting the story, he’s made himself look like an uptight humourless, self-important prig, and his image has suffered much more. Another victim of the Streisand effect.
Which brings me to another paradox. Ryan Giggs has, I presume, been surrounded by lawyers, agents and advisors who have huge experience of managing reputations, celebrity culture and the media. Who got it massively wrong. And yet 50 years ago, a university drop-out from Nowhere USA managed to build a colossal reputation with no such guidance.
Expertise in PR seems to be even less useful than ability in singing.
* I’ll concede that parts of John Wesley Harding are very good indeed. But, for me, songs such as Blowin’ in the wind, The times they are a-changing, and Subterranean Homesick Blues just mean nothing. This is not a genre or generational thing; I regard Dylan's near-contemporaries Leonard Cohen and Townes van Zandt as minor gods.
** In the Times, Ed Smith says that his generation “hasn’t produced anyone fit to carry Dylan’s Gibson guitar” - which means he’s never heard Jolie Holland or Sam Baker or Dar Williams.

Pippa, compartmentalizing & the left

For me, this piece at Lib Con - What does the objectification of Pippa Middleton say about our culture? - says more about the state of the left than one might think.
The author - a man - complains at women being regarded as a “composite of various body-parts.”
One problem I have with this is that it seems to amount to no more than a complaint that people aren’t like the author. It’s a mere raging against the state of the world.
Put it this way. When we complain about things like inequality, we have in mind some kind of institutional changes that would reduce it: tax changes, worker ownership etc. But what kind of institutional change would stop men admiring Pippa’s arse? I can’t think of any - and Matt suggests none. In the absence of a demonstration that things can be different, Matt’s complaint is a mere expression of taste, not a political statement. It’s on a par with my distaste for heavy rock. I might bemoan its fans, but I don’t pretend they’ll go away, nor pretend this is a political matter.
This problem is exacerbated by another. Matt says:

Women’s body-parts are seen as ‘parts-for-male-use’ and women as possessors of these parts become nothing more than ‘objects-for-male-use’.

But this is a massive leap. Men can - and do - notice female features and at the same time acknowledge that women are equals*. We combine “low” pleasures with high thoughts. We can watch Mad Men both for high aesthetic reasons and to admire Christina Hendricks’ norks. We can note Pippa’s arse and support slutwalk.
And herein lies the difference between people like Matt and people like me. I compartmentalize. Matt seems not to.
What I mean is that I have various mental boxes: my politics; my sexuality; my work; my musical tastes and so on. Matt, though, seems not to recognize this.
The difference here, though - which is the point of the post - is not merely between Matt and me. It’s between two different conceptions of the role of politics - conceptions which are correlated with old vs. new leftism. We old lefties see politics as one activity among others. We see no connection between Marxist politics and Marx’s, ahem, colourful sex life. And I, for one, have combined leftist politics with jobs in the City and non-political journalism.
The newer left, though, is less compartmentalized - hence the slogan, “the personal is political” and the desire to politicize everyday life.
On this point, though, I’m conflicted. On the one hand, I’m tempted to defend my conception of politics on the grounds that it is more liberal: seeing everything as political is the road to fanaticism and totalitarianism.
But on the other hand, I have a sneaking regard for those non-compartmentalizers. The thing is, compartmentalization is another word - in some contexts - for alienation. And shouldn’t Marxists be resisting alienation?
* I might be wrong. Maybe a culture in which women’s body parts are objectified does lead to a devaluation of women and to greater gender inequality and to more crime against women. But this is an empirical matter, and one where Matt presents no evidence.

Inequality & power

The Times today provides one answer to Sam Bowman's question: does inequality matter? It reports how Glencore's profits arise, in part from "exposing thousands of Zambians to dangerous levels of sulphur dioxide emissions." The firms is also accused of profiting from inside information obtained from an EU bureaucrat and using stolen land in Colombia. 
These are all examples of how income and wealth inequality - Glemcore CEO Ivan Glasenberg is a multi-billionaire* - arises in part from inequalities of power: Zambian and Bolivian villagers have no power to insist that the costs of pollution are internalized; Colombian peasants had no power to protect their property rights, and so on.
These, of course, are not isolated examples. As Rick says, "All pay is, ultimately, a function of power."
Some of this power is innocuous: Wayne Rooney earns a fortune because his rare skills give him the power to demand a high wage. But other forms of power are more questionable. For example:
- top bankers are rich because they hav the power to privatize gains but socialize losses.
- technical change has weakened the power of unskilled workers whilst raising that of bosses.
- profits and profit-related incomes have risen at the expense of wages because capitalists have power conferred on them by mass unemployment and declining militancy.
- workers have low pay because they lack bargaining power whilst capitalists can extract favours from government because they do have such power, as they can threaten to relocate.
And herein lies one of the blindspots of the free market right. It seems unable to see that in actually-existing markets, there is power and unfreedom; some of the more tedious passages of Hayek's Constitution of Liberty are where he tries to redefine coercion as something that hardly happens in a market economy.
If the Left is sometimes guilty of caricaturing the rich as evil exploiters, the right has its own caricature of them as heroic Howard Roark types. They are not.
However, it's not just the right that is at fault here. So is the non-Marxist left.
It sometimes gives the impression that more progressive taxes are a sufficient response to inequality. They are not. Such taxes fall as heavily upon the minority of the rich who are genuine public benefactors - entrepreneurs and talented sportsmen and artists - as it does upon exploiters and rent-seekers.They do not address inequalities of power.
Worse still, it's not clear that the soft left even has much idea here. It's not obvious whether the state is part of the solution or part of the problem. Those allegations against Glencore, for example, could all be seen as examples not (just) of corporate malfeasance but of state failure.
* It's a minor point, but it peeves me when the media reports that Glencore's flotation will make Glasenberg a billionaire.This is not true. It's owning a big part of a valuable business that makes him a billionaire, whether the firm is publicly or privately owned.

Ken Clarke & two politics

I’ve never understood why many people had a high regard for Ken Clarke. Even so, I fear the fuss about his remarks on rape reflect discredit not just upon him, but upon our political culture too.
What I mean is that there is a genuine and tricky political question here that is being overlooked.
Imagine we were to implement one implication of the “rape is rape” view and give all rapists long sentences. Because people are risk-seeking in the domain of losses, this would discourage guilty men from pleading guilty as they‘d prefer to take their chances with a trial. This would have two effects. It would inflict upon victims the trauma of giving evidence and reliving their ordeal. And - juries being juries and reasonable doubt being reasonable doubt - it would mean that some guilty men might get off.
Clarke’s proposal to discount sentences for guilty pleas is intended to diminish these costs.
What we have here are a set of trade-offs. There’s a trade-off between giving rapists long sentences on the one hand and ensuring all the guilty are convicted on the other. And there’s a trade-off between justice - insofar as harsh punishments are just - and minimizing costs, both to the victims in terms of giving evidence and to tax-payers in terms of banging people up for long spells.
These trade-offs are ubiquitous in sentencing policy. In some cases, the sentences that are best from the point of view of deterring crime might be too harsh for the requirements of justice. In other cases the sentence necessary to ensure adequate punishment might actually lead to more recidivism.
The various things we want from sentencing policy - justice, deterrence, rehabilitation and cost minimization - will in many cases conflict with each other.
And herein lies the essence of what proper politics should be; a debate about what to do when values collide. Of course, judges must have discretion in individual cases, but their decisions must be taken within parameters set by informed public opinion about such values.
But this is not the debate we’re having. Instead, we’re seeing three ugly aspects of our political culture.
One is a tendency to view all political utterances through the prism of whether or not they are “gaffes” - the effect of which will be to discourage plain speaking, or indeed speaking at all.
A second is an atavistic tribalism, which leads both Ed Miliband and The Sun to demand Clarke’s resignation, both on the grounds that he is not “one of us.”
And this leads to a third aspect - the tendency for politics to be reported in terms of who's up/down/in/out - terms which are to a large extent uninteresting tittle-tattle.
Meanwhile, the real substance of proper politics is forgotten. 

Class matters

Today’s figures confirm that real wages are falling. They show that average earnings rose by 1.7% in the year to March, a period during which consumer prices rose 4%.
It’s easy to ascribe this to weak productivity growth, the sclerotic post-crisis economy and to rising commodity prices.
Such an explanation, however, misses something. It raises the question: why are these factors hitting wages more than profits? In the 1970s, for example, very similar forces caused a severe profit squeeze more than a wage squeeze.
The answer to this question, of course, lies in one word - class, understood in its proper,  Marxian, sense. Capitalists today have the power to pass on economic pain to workers in a way they did not have in the mid-70s.
In this context, we should welcome a new paper (pdf) by Juan Carlos Cuestas and Bruce Philp. They show that the rate of surplus value in the UK - defined as the ratio of profits to wages, excluding the public sector and self-employed -  is a reasonable empirical function of three factors: the unemployment rate, which shifts the balance of power in favour of capitalists; working class militancy; and  - perhaps surprisingly - whether we have a Labour or Tory government.
Now, we can quibble with this. I’m not sure whether the phrase “surplus value” has any analytical force distinct from talk of the balance of class power or the profit-wage ratio. And it’s quite possible that this analysis omits some other variables, such as the way in which technological change in recent years has been biased in favour of capital.
Nevertheless, the important fact remains. This shows that a central feature of the economy - the growth of wages relative to profits - can, and should, be analyzed in Marxian terms. To omit this is to ignore some key elements of the economy.
It is rather unsatisfactory for Ed Miliband to talk about the “squeezed middle” without a Marxist perspective.

On elasticity optimism

In the Times (£) Simon Wolfson advocates road pricing, claiming:

Behaviour would quickly adapt and this, in itself, would reduce congestion at the busiest times of the day.

Although I’m sympathetic to his argument, I’m not sure about this. A big reason why roads are congested is not that everyone freely chooses to drive in the same place at the same time, but rather that they have to do so in order to get to work. Would a worker at Next really get a sympathetic response if she told her boss: “I’ll in an hour later tomorrow to save money on congestion pricing”? This limits the extent to which behaviour can adapt to road pricing*.
I suspect Wolfson is exemplifying here a particular type of thought common on the right - a form of elasticity optimism, which says that price signals have large and quick behavioural effects. It’s the same idea we see in the claim that abolishing the minimum wage will significantly reduce unemployment, or that higher taxes will lead to large reductions in labour supply.
All these are examples of what I’ve called the “small truths, big errors”; a germ of truth is blown out of proportion.
What puzzles me, though, is why the right does this. It‘s not as if there is overwhelming empirical evidence to support such optimism.
In the case of taxes, I suspect the motive is simple self-interest - the desire to wish that our own interest, low tax, happens to coincide with the public interest. The right is, of course, not alone in doing this; public sector workers who believe in the virtues of big government do the same thing.
I suspect, though, that something else is going on.
One thing is that if price signals do have large effects, then behaviour can be regulated by the market alone and so there’s less need for state intervention.  Efficiency and liberty then go hand-in-hand, so a potentially nasty trade-off is averted.
Also, and relatedly, there’s a blindness to failures in the private sector. Wolfson fails to see that bosses’ power to demand that workers be in a particular place at a particular time will prevent workers responding to congestion pricing. Likewise, opponents of the minimum wage fail to see that there can still be mass unemployment even in a free labour market.
In both respects, the right seems to be guilty of the sort of utopian thinking that the left used to be accused of**. 
* I’m ignoring the issue of incidence here. If workers demand wage rises to compensate them for congestion prices, employers might become more flexible in an effort to reduce their costs. How likely is this?
** I say "used to be" because the left has to a large extent stopped having ideas for social or economic improvement, and become a mere oppositional force.

Looks & earnings

Here’s yet more evidence that appearances matter in the labour market. Christian Pfeifer estimates that, among Germans, a one point higher rating for physical attractiveness on a 1-11 scale is associated with 3% higher wages, controlling for other obvious influences. The effect is slightly larger for men than for women.
This implies that, among men the earnings difference between being very ugly and very attractive is greater than the return to a university degree.
What’s more, in contrast to some research, this is not due merely to there being a penalty for being ugly. Although the ugliest men do suffer low wages, very handsome ones do better than middlingly attractive ones. Among women the looks premium is more linear.
Why should this be? There are many possibilities, but several of them are flawed, for example:
 - Customers prefer to deal with attractive people. This runs into the problem that, even in occupations where you’d think there would be a big customer premium on attractiveness, such as prostitution, the returns to looks aren’t much different from those in the labour market generally.
- Looks are correlated with other productive traits, such as intelligence (pdf) - the Vorderman effect. However, this might not be the case, and anyway most studies on the beauty  premium control for the big and obvious measures of ability, such as academic qualifications.
- Looks are associated with self-confidence, which enables its owners to push for better jobs. However, Pfeifer shows that there is no correlation between men’s assessment of their looks and earnings; it is only the interviewers’ opinion of their looks that are correlated with earnings*.
With these theories flawed, here’s another theory. The beauty premium exists because the labour contract is typically incomplete and workers’ performance cannot always be easily monitored. In such cases, employers will want people they can trust - and, for reasons which might not be rationally grounded, good-looking people are considered to be more trustworthy (pdf).
Perhaps, therefore, the beauty premium isn’t just a funny quirk, but is instead an artefact which arises from the very structure of the labour market - the same structure which gives us both efficiency wages (and thus persistent unemployment) and rising inequality generally.
* This raises the possibility of reverse causality; maybe interviewers get the impression that a man is well-off and subconsciously rate him as more attractive because of this.

Against the rally against debt

Today’s “rally against debt” should be called the campaign against the UK’s pension fund industry.
What I mean is that government debt is not just a liability. It is also an asset, and a tremendously useful one.
Imagine that the rally’s aim were to be pushed to its logical conclusion and that government debt did not exist - which, given that that rally thinks such debt is “immoral” is not a wholly unreasonable imputation.
Pension funds and insurance companies - who hold £294.1bn of the £994.9bn stock of gilts (pdf)   - would then face an acute shortage of long-term sterling safe assets.  They could not transfer into corporate bonds, as this market is just not big enough.  Nor would cash be a good alternative, as this carries reinvestment risk - the fact that you can’t be sure of its future returns. And of course equities and commodities are just far too volatile. (Anyone who thinks gold is a safe store of value is just a prat.)
Worse still, fund would face a terrible shortage of inflation-proofed assets - as hardly any private sector companies issue index-linked debt.
Institutions which have long-term liabilities - such as pension and insurance companies - would then be in a terrible mess. They would not have the assets which offer a safe match for their huge future liabilities.
Government debt, then, is pretty much necessary for the existence of the pension industry.
Now, one might have two objections to this.
One is that as government debt falls, pension funds will switch into corporate bonds and this will encourage firms to issue more of them, with the result that private sector supply of safe assets  will replace government supply.
This is unlikely. I’m not sure that top-quality borrowers want to expand their balance sheets by £294bn; there just aren’t that many profitable investment opportunities for them. And if they issue debt to buy back equities, the increase in gearing means they won’t remain safe firms.
And it’s extremely unlikely that firms will issue index-linked bonds to replace government ones.
Another objection is that the rally doesn’t really want to abolish debt, but merely moderate its increase. You can, after all, have too much of a good thing.
But is there too much of this long-term safe asset? There’s one obvious test - to look at its price. If the price of government debt were low and falling the rally would have a point.
But it’s not. Yields on the debt are close to multi-year lows: 3.4% for nominal 10 year debt and 0.2% for its index-linked counterpart. The market, then, is telling us that this asset is still in short supply - that there’s not enough of it.
Which brings me to a paradox. Most of those who are marching today are, I suspect, supporters of the free market. They believe the market, in general, knows better than governments.
When it comes to government debt, though, they abandon this faith in the market, and expect the government to over-ride its wishes.
It’s enough to make me suspect today’s march might be just a silly stunt.

Marriage, wages & exploitation

When Tom Waits sang “better off without a wife”, he showed that his genius did not encompass labour market economics. It‘s widely established that men are better off with a wife in the sense that they earn more. Andrew Oswald has written (pdf):

In virtually every country ever studied, [male] workers who are married earn between 10% and 20% more than those who are single.

Why? This new paper sheds some interesting light. It studies the effect of marriage upon the earnings of top baseball players. It found that married players earn 16% more than singletons.
But marriage had no effect upon players’ productivity, as measured by things such as batters’ on-base plus slugging percentages.
This is a new finding, as previous studies of the effect of marriage have been unable to measure productivity independently of earnings. And it is inconsistent with many common explanations for the marriage premium, such as:
1. Marriage raises men’s productivity, by freeing them from having to do housework and so allowing them to focus more on work.
2. There’s a selection effect in marriage; men who have good prospects are more likely to get a wife. This theory fails because all top baseball players have high wages and are marriageable prospects.
3. There’s a selection effect in jobs - married men are more likely to choose jobs that are well-paid in order to support their families; for example, if I’d been married I would probably have spent longer working in the City and not gone into journalism. This explanation fails because we’re looking at the same occupation.
So, what does explain the marriage premium? One possibility is that married men are less exploited than single ones:

High ability married men are able to negotiate a higher salary for a given marginal revenue product. There are a number of intuitive explanations. Perhaps wives push their husbands’ to harder negotiate or perhaps marriage increases the self-worth of the player.

This point, of course, might generalize to the wider labour market.
There is, though, a curious other possibility:

At the team level, ballpark attendance and wins are positively correlated with the fraction of married players. Employers may discriminate in favor of married players because they lead to overall greater team success that is not necessarily captured by the standard productivity measures.

In other words, married men, to a (slightly) greater extent than single ones, have a “winning mentality” - though their overall performance is no greater, they deliver when it matters.
I’m not sure whether this has implications for the general labour market. But it might generalize to other sports. It might not be a coincidence that there are relatively few married men in the Arsenal team.