Stumbling and Mumbling

Remember the economy?

The political-media establishment’s obsession with News International is distracting us from a worrying fact - that our economic prospects are deteriorating. Take these developments:
-  The IMF has warned (pdf) that the euro area’s debt crisis has “potentially large spillovers” to the rest of the world economy.
- Germany’s ZEW indicator has fallen sharply, signalling that the country’s economic growth will slow markedly.
- Governments in developed economies next year will engage in the largest concerted fiscal tightening for 30 years. There’s not much chance of this being expansionary.
- Yesterday’s results show that in the last nine months, Apple spent more on building up cash and bond holdings than it did on R&D. This is a microcosm of a widespread fact in western economies - that a dearth of investment opportunities is causing firms to prefer to hoard cash, even at nugatory interest rates, than to invest in real activity.
Yes, these are facts about the world economy, not mere local ones. But they matter for us in two ways. The obvious one is that they threaten to depress our exports. The less obvious is that these global clouds are adding to UK firms’ reasons not to invest. All this matters because, with public and consumer spending going nowhere, exports and investment are our only hopes for growth. And these hopes are dimming.
It’s no wonder, then, that today’s minutes (pdf) show that the MPC thought:

It was likely that the current weakness in activity would persist for longer than previously thought…recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term.

Markets share this view. One reason why real government borrowing costs are at a record low is that pessimism about growth has caused investors to pile into government bonds.
Now, granted, there are reasons for optimism; the adverse effect of the parts shortages created by Japan’s earthquake should wane, boosting output in coming months; the recent fall in oil prices has raised real incomes (of firms, not just households); and emerging markets should grow well. However, the UK is badly placed to benefit from the latter; last year, we exported more to Spain and Italy than we did to the BRIC countries.
The real problem for George Osborne is not that he’s being sucked into the “hackgate” scandal. It’s that it looks increasingly as though now is a bad time to be tightening fiscal policy.

Brittleness, & the public sector

Institutions are brittle. This is one of the big lessons of 2011. The News of the World and the presidencies of Hosni Mubarak and Zine al-Abidine Ben Ali have in common the fact that they looked strong, but suddenly collapsed when they came under strain.
This brittleness has implications for public sector reform.
Take as the starting point Tim’s questions:

How do we get rid of management that fucks up? How do we incentivise those who own the system to hire good managers?
Only when you’ve managed to create a system within the public sector that manages those two tasks do you have an idea that is worth considering.

Now, it is the case that cash incentives tend to be weaker in the public sector  - though penalties for failure are not a ubiquitous feature of the private sector. But there’s something else that can replace these: gift exchange. (Some) public sector workers do huge amounts of unpaid overtime, partly out of what Julian Le Grand calls “knightly motives” such as a sense of vocation. In exchange for this, (some) public sector users put less pressure upon the system by not bothering doctors too much and by not suing them for malpractice.
But here’s the problem. Gift exchange is brittle. It might collapse disastrously if heavy-handed management causes a withdrawal of goodwill, if excess regulation displaces a sense of professional discretion, or if peer pressure leads one or two bad employees to infect others.
 The question, then, is: how can we design a system that’s flexible in the face of such brittleness?
The obvious - and not wholly incorrect - answer is to use market forces. As Tim says, the collapse of Southern Cross (another example of institutional brittleness) has not had disastrous effects, simply because another provider has taken over. And the very diversity and plurality of a well-functioning market protects us from the collapse of particular institutions within it. No-one, other than its staff, suffered much when Woolworths went bust because we just bought our sweets from elsewhere*.
There are, though, two problems here.
One is that market forces require space capacity - so that users of a collapsed or inadequate school or hospital can quickly move elsewhere. But provision of such capacity is expensive. There is an inherent trade-off between flexibility and efficiency.
The other is that the very introduction of such markets threatens to displace that gift exchange - as I say, it’s brittle; people might work for nothing for the NHS, but not for a private firm**.
I don’t say this to offer simple answers. The point is instead that there are none - because, surely, another lesson of this year’s events is that human affairs are unpredictable, and so we cannot foresee the consequences of political change.
* The banking crisis actually vindicates my point here. The massive losses resulting from the collapse of the tech stock bubble in 2000-03 led to milder economic effects than the smaller losses incurred by banks in 2008-09. This is because the former were spread over more people, whilst the latter were concentrated in a few oligopolies. We were too reliant upon a few brittle organizations. 
** Surely, HuffPoUK cannot recruit decent bloggers who are prepared to work for nothing for long?

Immigration & the media

Lord Glasman’s call for an end to immigration shows that there is a nasty populist streak to Blue Labour.
The counter-arguments to it are:
- Immigration has, on average, raised UK wages and insofar as it has had an adverse effect on unskilled workers, this is small.
- Many other developments have done more damage than immigration to the working class: the decline of trades unions; deindustrialization; the emergence of an army of cheap labour in Asia; the way technical change has empowered bosses relative to unskilled workers; and so on.  It’s perverse to focus on immigration whilst ignoring these.
- “Controlling” immigration has a deadweight cost - the taxes necessary to pay for border guards, and the loss of liberty for ethnic minorities who’ll be harassed to prove they have a right to be here.
- There is, y'know, such a thing as freedom.
- Just because people don’t migrate to the UK does not mean they have no effect on UK wages. Factor price equalization tells us that foreign workers can depress UK wages, whether they move here or not.
Strong as these arguments might seem, public opinion is with Glasman and against me. One  Ipsos-Mori poll (pdf) found that 64% agree with the statement “there are too many immigrants in Britain” and only 18% disagree.
This raises the question. Why, given the paucity of its economic impact, is there so much hostility to immigration?
Some of it is unrelated to labour economics; the same poll found (pdf) more concern about “pressure on public services” than upon wages. But this seems nonsensical; how long would the NHS last if it sacked its immigrant staff?
All this raises a possibility - that opposition to immigration is stoked up by the power of the press. But is it? The evidence seems mixed.
The strongest argument for it is that, when people use their own direct experience, they don’t find immigration a problem. When asked “how much of a problem, if at all, do you think
immigration is in Britain at the moment?” people split 74-21 in favour of saying it was. But when asked how much of a problem it is in their local area, they split 71-24 against the notion.
But there’s other evidence to lead us to doubt the influence of the press:
- According to the same poll, only 19% of people get their information about immigration from the tabloids, compared to 55% who get it from the TV and radio.
- Even young people, who are less likely to read newspapers at all, believe immigration is a problem. Yes, they are less likely to think so than older folk, but then young people are normally more liberal anyway.
- UK attitudes to immigration are only around the average level for Europe (pdf) generally, so our nasty right-wing press hasn‘t led to atypical levels of hostility.
- Even a majority of readers of “quality” newspapers think immigration is a problem. Yes, more Daily Mail readers think it is, but this just raises the old cause-vs.-effect question: are people bigots because they read the Mail, or do they read the Mail because they are bigots?
What’s more, there is an alternative hypothesis to explain hostility to immigration that leaves out the press altogether.
One element of this is the salience effect. Immigrants are more noticeable than other longer-term structural forces that have weakened the position of unskilled workers, and so they get a disproportionate amount of blame.
Another element  is an instinctive hostility to out-groups. Whether it be lefties hating the right, locals’ suspicion of grockles or the middle class hating chavs or - yes - my hatred of public schoolboys, we just don’t like people unlike ourselves. There was colossal inter-tribal violence even before the invention of writing, and we were killing Jews and Muslims decades before the invention of the printing press. Antipathy to immigrants just continues the story.
Which brings me to a thought. Could it be that the left is predisposed to exaggerate the power of the press because doing so provides a comfortable explanation for what is an otherwise unpleasant fact - that the British people don’t share our beliefs for some deep-seated reasons? The media are just a scapegoat. And we all love a scapegoat.

Murdoch as Wizard of Oz

Rupert Murdoch reminds me of a figure from a 1930s film. I don’t mean Charles Foster Kane, but the Wizard of Oz. He is now revealed not as a fearsome, powerful magician, but rather as an ordinary man pulling meaningless levers and wheels, a “very bad wizard” indeed.
And like the Wizard, his power was always a myth, something imputed to him. The reason he was so desperate to buy all of BSkyB, remember, is that he was impotent against the market forces that are making newspapers unprofitable, and so was desperate to move more into broadcasting. And as Nick says, the power of the press has long been over-rated. The robust evidence we have suggests that newspapers have only small influence upon behaviour. The belief in the power of the press owes a lot to the post hoc ergo propter hoc fallacy. Papers act as a (sometimes unreliable) barometer of public opinion, and follow this mood as much as lead it. The claim that it “woz the Sun wot won” the 1992 election is only slightly more (pdf) sensible than blaming Liam Dutton for our wet weekend.
But why was Murdoch attributed near-mythical powers by most politicians?
There is one legitimate possibility - they were playing the odds. Perhaps the few thousand people who were influenced by the Murdoch press happened to be the few thousand living in the marginal seats that decide elections. And cosying up to Murdoch was - it was thought until very recently - a free hit: it might get a (small) payoff, but there was little downside.
There are, though, two less pleasant reasons. One lies in the mythology of journalism. Journalists love to invest individuals with power, because this reduces social affairs to simple questions amenable to journalists’ tools: bad things happen because bad men do bad things, and good things happen because good men do good things. This distracts them from the awkward fact that power arises from structural impersonal forces rather than solely from intentional human agency.
My third reason brings us back to the Wizard of Oz. Just as the Tin Man, Scarecrow and Cowardly Lion  thought the Wizard could give them something they thought they lacked, so politicians thought Murdoch could grant them something they lacked - popular support. But neither the Wizard nor Murdoch could do so. Virtues are not something to be conferred upon us by a powerful individual, but instead are to be sought by our own efforts.
Here, though, is where my metaphor breaks down. The thing is that the Tin Man had a heart all along, the Scarecrow had a brain and the Lion had courage. But our politicians do not have that which they sought from Murdoch. Nor is it likely they will discover it.

Institutions, revolutions and growth

“Institutions have a first-order effect whereas policies only have a second-order effect” says Peter Boettke in reply to Ha-Joon Chang (pdf) and in defence of Douglass North.
One piece of evidence for this is that, give or take a standard error or two, economic growth has been pretty much the same across many liberal democracies  - consistent with the theory that policy variation within similarish institutions has little effect on long-run growth.
Another piece of evidence - albeit not perhaps one that Boettke or North will like - is a new paper (pdf) by Steven Pincus and James Robinson, who argue that the Glorious Revolution of 1688 laid the foundations for the industrial revolution.
However, this was not because it created secure property rights; these pre-dated the revolution. Instead, they say:

The Glorious Revolution was not significant because it was a change in the de jure rules, but it was important in helping to cement a change in the distribution of de facto power in the country.

That change was from landed property towards finance and manufacturing. This led to several policy changes that promoted economic growth. Turnpike Acts helped build new roads which facilitated trade; the abolition of the hearth tax enriched the middle classes; and the establishment of the Bank of England boosted the availability of credit for manufacturing.
But, say Pincus and Robinson, there was another effect. In empowering parliament, the revolution allowed the Whigs to tax land in order to pay for the expensive Nine Years’ War - a war which boosted demand for English manufactures. In this way, the revolution helped accelerate a shift in economic power from land to commerce and manufacturing.
There are, I suspect, three broad lessons here:
1. Institutional change is not exogenous. It is the product of incentives and interests - the growing power of commerce, in this case. It is for this reason that, as Boettke says, attempts to impose institutions from outside often fail.
2. Institutions are not neutral. They favour some interests over others. As luck would have it, the interests favoured by the Glorious Revolution happened to be interests that promoted economic growth generally.
3. Institutional change has long-run, unforeseeable effects. Neither William III nor his supporters thought they were laying the foundations for one of the greatest transformations in human history.

Tyranny of the majority

Here are two opinions with more in common than one might think:

Murdoch’s withdrawal of his bid for BSkyB is a bad thing for both liberty and efficiency. The question of who owns what should be decided by market forces and the rule of law, not by majority opinion.

Secondly:

One obvious solution to the euro crisis is for there to be significant fiscal transfers within the euro area - from Germany to Greece, Portugal and perhaps Italy. This is both economically logical - it’s been a commonplace for years that monetary union requires some kind of fiscal union - and consistent with the aims of the EU, which, remember, are for “ever closer union.”

What these ideas have in common is that, with the odd honourable exception, they are not being expressed very widely or strongly. Yes, the Times’ leader said something like the former, but it is hardly unbiased; I looked in vain for a similar sentiment in the FT and Telegraph. 
What’s going on here, I fear, is a form of what Mill called the tyranny of the majority. Because these opinions oppose the view lots of vocal people, “men of judgment” are scared to express them for fear of seeming out of step with the public mood. Regardless of the intellectual merits of these arguments, they look eccentric.  
I think this is to be regretted on two grounds.
First, it stifles debate and narrows the terms of public discourse. Even if the above opinions are wrong, we need them expressed in order to get a livelier impression of the truth by investigating why they are wrong.
There are, of course, other examples here. The fear of the tyranny of the majority also limits public debate about the case for legalizing drugs or for open borders.
Secondly, it prevents radical change. If public opinion is regarded as a datum to be accommodated rather than as something to be changed by persuasion - as I fear is Ed Miliband‘s view - we are more likely to get cowardly populism than genuine libertarian socialism. It’s easy to forget that the “free market revolution” of the 80s was founded upon ideas which were canvassed by “cranks” and “eccentrics” in the 1970s, when such ideas were very unfashionable.
The point here is that the issue of plurality and diversity in public discourse is not merely about who owns the press. It is also about whether people have the courage to express unpopular views. The problem is that both politicians and the media lack that courage - and, indeed, have good incentives to lack it.  

Can jobs continue growing?

As David Smith says, today’s jobs numbers (pdf) suggest the labour market is doing quite well. However, I very much doubt whether this can continue. Here’s why:
1. The number of unfilled vacancies fell by 5.5% year-on-year. In the past, vacancies have been a lead indicator of employment, with a lag of a few months, as my chart shows.
2. Labour demand isn’t as strong as the employment numbers suggest. Although the number of employees is 1.1% up on a year ago, aggregate hours worked have fallen by 0.8%. This reflects the fact that the average hours worked by full-timers has fallen.
Now, I suspect this isn’t because firms are engaging in job-sharing, with workers working fewer hours so the firm can take more on. Instead, I suspect it reflects two different experiences. Some firms are expanding whilst others have trimmed back hours and overtime. But this latter is a form of labour hoarding, which might lead to actual job cuts unless things turn around, or at least to firms not replacing workers who leave.
3.  There might still be a lot of labour hoarding going on. If so, then firms might shed labour unless the upturn in demand proves stronger than expected.
One sign of this is that labour productivity has been so weak. Since GDP troughed in 2009Q3, GDP per hour worked has risen by only 2.4%. This compares to rises of 6.2% and 8.5% in the equivalent periods of the 1991-92 and 1981-82 recoveries. This weaker upturn has come despite the fact that productivity fell further during the last recession than it did in the 80s and 90s recession.
Now, some of this difference might reflect the fact that there’s been a fall in trend productivity growth. But some, perhaps, is evidence that firms are clinging onto staff. At best, this points to a low rate of hiring even if GDP grows nicely. At worst, it means they’ll shed workers.
4. We know that there are more job losses to come; the OBR expects public employment to fall by 310,000 between 2011Q1 and 2015Q1, and there are likely to be losses in retailing too. Even if we get successful rebalancing, this mightn’t absorb all these losses. This is because manufacturing tends to be much less labour-intensive than the public sector or retailing.
Now, I hate economic forecasts, so I‘ll not make one. All I‘m saying is that I‘ll be surprised if employment continues to grow so well, unless something very unexpected happens to GDP growth.

Inequality & healthcare reform

“People with money can get friendly with their local GP at a dinner party, maybe see them out of hours if there’s an emergency” says Cameron.
Paul is critical of this, and rightly so; GPs don’t want to socialize with people whose piles they saw that morning.
This, though, misses the point - that there are other channels through which the middle class can get a better deal from the NHS than the poor:
1. The middle class tend to be better at moaning - God knows, they get enough practice. As Julian Le Grand has written:

Insofar as complaining works at all, it favours the self-confident and articulate middle classes, thus tending to steer services in their direction. (The Other Invisible Hand, p98)

We might add to this that it’s human nature to more or less subtly sympathize more with like-minded folk, and so some doctors might give the middle class a longer hearing than poorer patients.
2. Public information campaigns tend to reach the rich more than the poor, and so exacerbate health inequality.
3. Doctors tend to prefer to work in “nice” areas, and so poor areas are under-provided with GPs. Back in 1971, this led Julian Tudor Hart to propose the inverse care law: “The availability of good medical care tends to vary inversely with the need for it.”
Now, inequality in access to healthcare is not the main cause of health inequalities (pdf). But nevertheless it does seem to exist. One survey (pdf) in 2003 found:

There is strong evidence that lower socio-economic groups use services less in relation to need than higher ones from many studies of specific NHS services.

Equally, though, there is some evidence that this inequality has narrowed in recent years. One study found that waiting times for some non-urgent operations in 1997 were longer for poorer patients than richer ones and yet by 2007 this difference had disappeared. What’s more, this increased equality coincided with the introduction of more patient choice.
Now, this is not decisive. But it is suggestive of a possibility - that competition and choice in public services, regardless of its impact on overall standards, might be egalitarian. Introducing “exit” might redress the inequality caused by “voice” alone.
Which brings me to a sad fact. Debate about public service reform has crystallized along boring left-right lines. Rightists who don‘t give a toss about equality, be they Blairites or Tories, have promoted reform whilst the conservative statist left has opposed it. This, though, has led to neglect of a more interesting idea - that perhaps public services might be reformed in genuinely egalitarian directions.

Against press regulation

If you wanted evidence that Cameron is the “heir to Blair”, his demand for tougher press regulation, with its typically New Labour knee-jerk statism, provides it.
There are (at least) six reasons to be sceptical about whether tougher regulation will work:
1. Regulation is not a magic bullet. The financial services industry has been quite tightly regulated for years, but it is not famous for having served its customers well.
2. The NotW’s misdeeds are not just a failure of the PCC but - much more seriously - a failure of the police to uphold the law. Intercepting communications and bribing policemen are criminal offences. But the investigation into these was “pretty crap.” It is, surely, a vastly higher priority to ensure that the police do their job properly than to reform press regulation.
3. There is a trade-off between two (supposedly) desirable features of the press - that they print the truth and that they respect privacy. If you impose tougher sanctions on the papers for printing untruths, they will respond by making more effort to back up their stories, which will lead to more intrusion into private lives. Conversely, tough restrictions on the press’s ability to investigate stories will lead to more false ones being published. And a clampdown on both will just accelerate the demise of investigative journalism.
4. In practice, it is difficult to distinguish clearly between matters of legitimate public interest and salacious tittle-tattle. And it's even more difficult to do so when those who want to regulate the press - politicians and the powerful - have no interest in making such a distinction. Tougher regulation, then, won’t just mean fewer stories about Kerry Katona’s cha-cha, but also  even fewer attempts to “humiliate the powerful.”
5. The NotW’s motive in phone-hacking and bribing coppers was to give its customers what they want - which is often, as Orwell pointed out in 1946, a good murder. And it was pretty successful in this: its sales, remember, outnumbered those of the Observer by nine-to-one.  In this respect, regulating the press is very different from regulating financial services, medicines or food. In the latter cases, regulation tries to protect customers from products that don’t  satisfy their wishes. In the case of the press, regulation tries to stop customers getting what they want.
6. The issue here is not, as Ben Chu claims, the power of the press to “bully politicians who have the nerve to challenge their reactionary world view.” No amount of regulation short of drastic infringements of free speech will prevent this. In fact, regulation might actually increase such bullying. If papers can’t attract readers by running exclusive stories, they might try to do so by devoting more space to rentagob columnists. If anything, regulation might actually work in the interests of Richard Littlecock. And no right-thinking person, surely, wants that.

Class & corporate crime

Andy Coulson and Rebekah Brooks are two of the very few senior media figures not to have been to either private school or Oxbridge. Is this a coincidence?
Maybe not. Here’s a theory. To rise to a top job without the benefit of a private or Oxbridge education requires a disproportionate amount of ambition and competitiveness. And this is likely to dispose one to at least tolerate sharp practice; even if Coulson and Brooks didn‘t know of their journalists‘ sharp practice, their competitive personalities are likely to have promoted a cut-throat culture which encouraged such behaviour. As Adam Smith said:

The candidates for fortune too frequently abandon the paths of virtue; for unhappily, the road which leads to the one, and that which leads to the other, lie sometimes in very opposite directions. But the ambitious man flatters himself that, in the splendid situation to which he advances, he will have so many means of commanding the respect and admiration of mankind, and will be enabled to act with such superior propriety and grace, that the lustre of his future conduct will entirely cover, or efface, the foulness of the steps by which he arrived at that elevation.

Of course, Coulson and Brooks are only two data points. But there are several other examples of how people from “outside” backgrounds have been guilty of misdeeds in highish corporate positions:
- of the Guinness four, three were from working class or northern backgrounds who left school at 16, and the other was an immigrant.
- Asil Nadir and Robert Maxwell, two of the biggest corporate fraudsters, were both immigrants.
- Peter Clowes of Barlow Clowes notoriety was from a working class family in Moss Side.
- Nick Leeson went to state school and not university.
- Malcolm Calvert, one of the few people to have been convicted for insider dealing in recent years,  “was far from a typical recruit” at Cazenove.
Of course, these don’t represent a statistically significant sample, and nor could they given that it’s rare for people from poor backgrounds to get very rich, and rare for corporate fraud to be prosecuted successfully. Nor is it the case that public schools and Oxbridge don’t produce criminals - though these tend to pursue crime as a substitute for conventional careers rather than as a complement.
All I’m suggesting is that there might be a correlation between corporate crime and social background. But (even) if I’m right about the fact, might I be wrong about the mechanism? Could it be instead that the propensity towards misconduct is equally spread across the classes, but it just happens to be that successful people from outsider backgrounds are more likely to come under close scrutiny and so be caught out?