Stumbling and Mumbling

Politics & the crisis: two narratives

Paul raises a significant and surprisingly under-appreciated point - that there’s a worryingly wide gap between economic explanations of the crisis and political responses.

My preferred explanation for the crisis draws heavily upon Ravi Jagannathan’s (pdf). Put simply, the combination of China’s export-driven growth and the desire to build up FX reserves to prevent a repeat of the 1998 currency crises generated a glut of savings which was invested in western bonds, causing a fall in their yields.

In principle, this drop in interest rates might have triggered a boom in real capital spending. But it didn’t, perhaps because the “great stagnation” meant there was a dearth of investment opportunities. Instead, lower rates unleashed a bubble in house prices, the bursting of which brought down banks.

There are five features of this account which politicians ignore:

1. This is a global story, not a parochial one.

2. The squeeze on workers’ living standards is  not merely due to high inflation (which is temporary) or to the legacy of the crash. It is also the result of the increased supply of labour created by China’s entry into the world economy.

3. Banks are not the prime mover here, but rather a conduit for these global forces. I mean this is in two senses. First, their creation of mortgage-backed securities was a response to demand; falling yields on proper AAA securities led to a “hunt for yield” which bankers thought they could satisfy by bundling up mortgages. Secondly, the counterpart of current account surpluses in Asia is current account deficits in the west. And a current account deficit, by definition, is an excess of investment over savings; investment here means house purchase, not just capital spending. But if a nation has an excess of investment over saving then it is likely that its banks will have to rely upon wholesale funding, because deposits (savings) will fall short of loans (investment). It is no accident that the “UK” domiciled banks that weathered the crisis were those that were properly globalized such as HSBC and Standard Chartered, and so able to call upon a large Asian deposit base. And it’s no accident that the banks that failed - Northern Rock, Bradford and Bingley - were dependent upon retail deposits, which were lacking.

4. The fact that the government was running a fiscal deficit before the crisis was not its fault. It was instead a simple accounting identity. If foreigners and companies are net savers, then other sectors must be net borrowers. This was partly the household sector, but also the government.

5. Policy can do little to raise growth. This is not merely because the effect of financial crises is to depress growth rates. It is because the crisis has its origin in large part in a decline in potential growth, which is what the dearth of investment opportunities represents. Deregulation or a “plan B” might ameliorate this problem, but they are unlikely to solve it.

What we have here, then, are two narratives between which there is an almighty gulf. There’s the economic narrative of the crisis. And there’s the party political narrative, which blames bankers’ greed, neoliberal economics, regulatory failure or Labour’s profligacy - all of which are only incidental features.

This, I suspect, helps explain or justify why there is so much apathy towards party politics, even amongst the most intelligent.

As for what could be done to change this, I would recommend that politicians stop pretending to have ways of getting us out of the mess, and focus instead upon how to more equitably distribute the hardship. A first step here would be to stop stigmatizing the unemployed.

GMT, ideology and power

The ideology that supports the power of the ruling class does not consist merely of explicit propositions. It also comprises silences and blind spots - things that are not seen or said.  The debate about whether to turn the clocks back or not illustrates this.

Rick thinks our existing arrangement is “bonkers”:

Shifting the middle of our daylight hours to 12 noon means that for almost everyone, there will be light in the morning when they don’t need it and darkness in the evening when they do.

The argument against this is that if we don’t put the clocks back, it would stay dark in Scotland until mid-morning, causing more accidents as people travel to work in the dark.

This debate is daft. Whatever we do to the clocks, we’ll only get eight hours of daylight in the winter. The only way to increase hours of daylight is to winch the country southwards.

Which raises the question. Instead of changing the clocks, why don’t we adjust our hours of work and schooling instead? If it’s dangerous or unpleasant to go to school or work in the dark mornings, just start the school or working day later. In the lighter south, the school day could start at eight and finish at three. In the darker north, it could start at ten and finish at five.

Businesses could do a similar thing. A northern one could weigh the convenience to its employees of starting later against the desire to keep the same hours as southern customers, and choose the optimum hours accordingly.

Granted, it would be a little inconvenient for schools and businesses to change hours  twice a year. But this would be mitigated by the convenience of having the same clocks as our European trading partners.

This seems obvious. So why isn’t it being considered, and why are we faffing around with talking about changing the clocks instead?

Enter the ideological blindspot. Working hours are not chosen for the convenience and safety of employees. They are instead a means whereby the capitalist asserts his power over workers, and whereby workers are dehumanized and turned into mere means of production. As Andre Gorz wrote:

The scientific organization of industrial labour consisted in a constant effort to separate labour, as a quantifiable economic category, from the workers themselves. This effort initially took the form of the mechanization, not of labour, but of the actual workers…
Time for working and time for living became disjointed; labour, its tools, its products, acquired a reality distinct from that of the worker and were governed by decisions taken by someone else. (Critique of Economic Reason, p 21-22)

And the school day is imposed upon children in order to inculcate into them the discipline of capitalist work.

So successful has capitalism become in normalizing this discipline that we do not even see it. The strongest powers are those we take for granted. And this blindness leads to the madness of changing the clocks when we could instead change our behaviour.

The bosses' pay con-trick

The bosses’ pay con-trick is getting worse. The pay of average FTSE 100 directors rose 49% last year, with the average CEO getting £3.86m.

I say this is a con for several reasons.

1. The link between pay and firm performance is asymmetric (pdf). In good times, bosses’ pay rises a lot, but in bad times, it doesn’t fall so far. In fact, the biggest influence on bosses’ pay is not so much company performance as simply the size of the firm. 

2. Big bonuses and performance-related pay are not technically necessary to elicit performance. There’s plenty of evidence that bonuses are sometimes ineffective at improving effort, sometimes actually counter-productive, and sometimes inferior to fines .

3. The claim that bosses must be paid a lot because their pay is set in a global market is silly.  CEOs are paid more in the US than UK, and yet few Brits have become CEOs of US firms; one of the very few exceptions was Martin Sullivan who was CEO of, ahem, AIG. Holding down UK bosses’ pay is unlikely to lead to a mass emigration.

4. It’s not even clear that the average boss has much effect upon corporate performance. Take three facts:

- We know from football that changing coaches has no effect upon team performance. If bosses of organizations as small as 11 men can’t turn around performance, what hope do they have for larger organizations? As Warren Buffett said, when a boss with a good reputation takes over a business with a bad one, it is the business that keeps its reputation.

- Jonathan Haskel  and colleagues have found that 80-90% of total factor productivity growth (pdf) comes from plants exiting and entering the industry, rather than from internal productivity growth. This suggests that bosses do less than widely thought to improve organizations’ efficiency.

- The death rate of companies is not only high, but statistically distributed (pdf) in a similar way to that of the extinction of species. This suggests that bosses can no more foresee (pdf) or prevent the demise of their firms than species can foresee or prevent their own extinction. Which suggests that bosses know less than we suppose.

In saying all this, I’m not taking a Marxist view. It was, remember, Hayek who told us that central management was flawed because of the impossibility of aggregating dispersed data.

5. The idea that bosses matter, and must be paid accordingly, plays upon our cognitive biases, such as:

- Fundamental attribution error. We assume that individual must be responsible for outcomes, and downplay the role of environmental or situational factors. So if a firm does well, we attribute its success to management rather than a lack of competition or macroeeconomic forces or just luck.

- Outcome bias. We believe that if something happened, it was inevitable. When a company succeeds, therefore, we look for causes - and the fundamental attribution error directs us to management. We forget that success might be due to luck, or to factors outside management’s control.

- Salience effects. I’ll concede that a handful of managers - Steve Jobs, Jack Welch, Arsene Wenger - can achieve great things. But these are exceptions. Looking at them and inferring that the average manager has great powers is like looking at Kate Moss and inferring that obesity doesn’t exist.

Given all this, you might wonder what the real reason is for bosses’ high pay. Simple. Power. Bosses , generally, might not have the power to create super-efficient high-performing firms, but they do have the power to extract rents from shareholders and workers. Like some City traders, they must, in effect, be bribed not to plunder the firm’s assets. From the point of view of shareholders, the small theft that is a multi-million  pay-packet is better than the large theft of wilful mismanagement.

Employment protection & jobs

Tim welcomes the proposal to scrap workers’ protection against unfair dismissal:

It will increase job creation…The harder it is to fire people the less likely people are to take someone on in the first place.

This is common sense.

And common sense is often wrong. Empirical work has struggled to find a link between employment protection laws and unemployment. For example, the OECD has found (pdf) that:

There appears to be little or no association between employment protection legislation strictness and overall unemployment

although it did find that such laws raise long-term unemployment.

And Stephen Nickell found (pdf) that employment protection laws were "negligible and completely insignificant” as a cause of cross-country differences in unemployment in 1980s and early 90s.

So, why is Tim’s intuition at odds with the facts?

It’s because there are a couple of mechanisms operating in the other direction.

If there were no employment protection at all, workers would gain less from staying with the same firm for a long time. Ceteris paribus, they would therefore have more incentive to leave. This would have two effects:

1. To retain staff, employers might have to pay more. This would tend to reduce employment. To put this in a way Tim would prefer, the incidence of employment protection laws falls upon workers in the form of lower wages.

2. Workers would have less incentive to invest in firm-specific skills. This would tend to reduce the firm’s efficiency and hence prevent it growing.

You might think these are small effects. Maybe. But so is Tim’s; firms - being over-optimistic about their ability to spot talent - don’t hire workers thinking there’s a chance they’ll be skivers or no-marks.

Because of these offsetting mechanisms, some research (pdf) has found “an inverse U relationship between employment protection and economic growth”:

From the point of view of per capita growth of GDP…employment protection in the early 1990s was too low in countries like Australia, Canada, Denmark, Ireland, Switzerland, the UK and the US

It is, therefore, unlikely that making it easier for firms to sack workers will reduce unemployment - and very unlikely that it will reduce it much. If scrapping employment protection is your best idea for creating jobs, you don’t really have any ideas.

Nice doesn't pay

Walter Isaccson’s biography of Steve Jobs reveals him to be, among other things, a nasty bully. This raises the question: does it pay to be a git?

A priori, it’s not obvious. Being unpleasant might hold you back, because it means you’ll lose networking opportunities and the chance to call in favours when you need them. But on the other hand, it gives you the ruthlessness needed to climb the greasy pole.

Luckily, research (pdf) by Guido Heineck tackles just this question. Unluckily, his findings are depressing.

He looked at the correlations between UK individuals’ earnings and “big five” personality traits, controlling for other things such as age, education, marital status and region.

And he found that being nice carries a wage penalty. Women in the top 25% of agreeableness earn an average of 11.1% less than averagely agreeable women, and the 25% of most agreeable men earn 7.8% less than average.

Note that it’s niceness that is penalized, rather than nastiness that’s rewarded; people in the bottom 25% of agreeableness earn no more than average. Heineck says this could be because “agreeable persons are possibly too passive for example in conflict situations or are poorer wage negotiators.”

The meek might inherit the earth in the next world, but they don’t get much in this.

It’s not just niceness that’s punished. So too, rather surprisingly, is conscientiousness.

As you might expect, the least conscientious quartile of people earn less than average. Being sloppy in your work costs you money. But there’s a penalty for being too conscientious. The most conscientious quartile of men earn 7.1% less than average, and the most conscientious 25% of women earn 8.7% less.

This is not because conscientious people go into routine jobs that are less well paid; these numbers control for industry and occupation. Instead, says Heineck:

A ‘too high’ standard in getting things done slows down decision processes and/or job performance which might eventually result in lower job productivity.

As the mighty Terry Allen put it: “Don’t ever do the best you can do. It’s better to be mediocre.”

Virtue, then, is not always rewarded. Whether this is a merit of capitalism or a demerit is, however, an open question.

Cameron's lesson from Man Utd

Man Utd’s defeat on Sunday contains a warning for David Cameron - one he will almost certainly ignore.

I’m thinking of path dependency - the tendency for a small events to amplify into big ones.

For example, having gone a goal and man down on Sunday, Manyoo chased the game and so left space for Citeh to exploit, thus conceding more. This boosted Citeh’s confidence and demoralized United, leading to more goals. A small edge thus ballooned into a large one. United suffered from this on Sunday, just as they benefited from it against Arsenal.

Citeh are not five goals better than United, any more than United are six better than Arsenal. In both cases, what we saw was that a small difference became a large one. Success breeds success.

We see similar things in the history of technology.  The qwerty keyboard, for example, was not, initially, technically superior to others. But once it became widely used, it became even more widely used because it was what people had (arbitrarily) become used to. Bill Gates’ detractors say a similar thing is true of Windows operating systems.

It might even be that the ubiquity of petrol-powered cars arose because an initially small advantage over steam cars led to greater investment in petrol engines and thus, eventually, to a massive superiority.

It’s not just success that breeds success, though. So does failure. Rogue traders become rogues because they suffer early losses and then, in their desperation to break even, take on reckless gambles which sometimes fail.

What’s this got to do with Cameron? Simple. There’s another example of path dependency.  Robert Cialdini describes how during the Korean War, American PoWs were asked by their captors to make mildly anti-American remarks. Having made such mild statements, some PoWs would then be easily induced to go further, with the result that they became collaborators. This happened, says Cialdini, because:

Once we have made a choice or taken a stand, we will encounter personal and interpersonal pressures to behave consistently with that commitment…many times a man would change his image of himself to be consistent with the deed and with the new “collaborator” label, often resulting in even more extensive acts of collaboration (Influence, p57, 71)

Good salesmen understand this. They are keen to get small business from customers, because they know that these often lead to bigger orders.

Herein lies the danger for Cameron. The 81 MPs who defied the Tory whip yesterday have become “rebels” or “independent minds“. They might therefore behave like this in future. Having gone onto the rebel path, they might stay on it. Tory backbenchers will thus become harder to control.

So, why do I say that Cameron won’t learn this lesson.?

It’s because of another feature of path dependency. The event that puts us onto a path might be just luck. The mediocre product that is lucky enough to sell well might gain further custom. The team that is unlucky to concede a first goal might chase the game and be caught on the break. And if we are lucky to get a good first job, the training and opportunities it gives us will enable us to have a successful career.

This, of course, is just what happened to Cameron. He was lucky to have the family connections that got him his first job, and this put him onto a good path.

Which is why he’ll not learn the lesson. To acknowledge the power of path dependency, Cameron will have to recognise that he owes his success to luck. But this he cannot do, as the privileged are no more capable of seeing their privilege than fish are able to see that water is wet.

Robbie Savage & the EU referendum

Saturday night’s Strictly Come Dancing demonstrates the case for having a referendum on EU membership.

What I mean is that any man watching SCD has a dilemma. On the one hand, we want Robbie Savage out, for serial crimes against football and taste. On the other hand, though, we want to keep Ola Jordan in the competition for obvious reasons.

When we are asked to vote, then, we’re being asked to express an opinion about a bundle of things: Ola’s merits and Robbie’s demerits. And this means that it’s hard to interpret the public’s preferences; are the couple still in the competition because we approve of Robbie’s dancing, or because we love Ola?

This, of course, is exactly the problem with conventional party politics. When invited to vote for a party, we’re asked to vote on a bundle of policies and personalities, some unpleasant, like Savage, and some not. And just as in SCD, this means preferences can’t be clearly expressed.

This applies to the EU. David Nuttall’s claim that 84% of us have never had the chance to vote in EU membership isn’t quite right. Anyone over the age of 46 could have voted Labour in the 1983 election, as they wanted to withdraw from the EU. But I suspect Mr Nuttall and other Tories didn’t do this, because the Olaesque attractiveness of leaving the EU was bundled up with the Robbie Savage of the rest of Labour’s manifesto*.

The case for a referendum is simply that, in unbundling options, public preferences can be more clearly expressed.

So what are the counter-arguments? There are two.

One is transactions costs. Sometimes, it’s just too costly to unbundle options.  If we were to vote for or against either Ola or Robbie, SCD would get very complicated. Ola might end up having to dance with Alex (my blog, my fantasy).  The parallel with the EU referendum is not so much the financial cost of organizing it, as the distraction of politicians’ time and effort from other tasks.

The second is pressed by Paul. If we give people the option of expressing a clear preference, we also give them the chance to express an irrational one. If we were to vote solely upon Robbie, our views might be affected by irrational hatred (as well as rational hatred). Bundling him up with Ola cools the passions, and allows for a more clear-headed assessment. Analogously, not holding a referendum might allow for a more rational debate, partly by prolonging the length of time over which it is held.

Now, I don’t have a view here one way or the other. My point is simply the one that has hitherto gone unnoticed - that there are striking similarities between Robbie Savage and the debate about an EU referendum.

* Actually, the Tory right wasn’t opposed to EU membership in the 80s; they were rather late to discover the merits of national sovereignty, but let that pass.

Tribalism vs freedom

“Closing St Paul’s? It’s elf n’ safety gone mad.”

We’re not being deafened by this opinion. Nor were some traditional defenders of the rights of property owners much outraged by the Dale Farm evictions: compare the Mail’s coverage with the generally sympathetic reporting it has given to other people who broke planning laws.

Such double standards are, of course, not unique. Many on the right think that the unemployed should travel to look for work, but want immigration laws to stop them crossing national borders when they do. And in 2008 many of those who had spent the last thirty years telling us to stand on our own two feet and singing the virtues of free markets suddenly discovered the virtues of state aid. As Ross Clark says, “our free market system tends to become rather less free when powerful people are in danger losing money.”

Now, you might think I’m going to say that this shows that many Tories are just hypocrites.

I’m not. Hypocrisy is ubiquitous. You can find it on the left as well as the right.

Instead, there’s another point here - that there’s a conflict between tribalism and self-interest on the one hand and freedom on the other.

The problem with freedom is that it doesn’t just promote our own interests. It can harm these interests;  laisser-faire required that banks collapse, with unpleasant externalities. And it can promote the interests of people who aren’t in our tribe. Freer planning laws help pikeys as well as Daily Mail readers. And the freedom to work where you want is good for foreigners as well as Brits.

This means that the cause of freedom is ill-served by tribalism and self-interest. And because the latter are significant forces in politics, we cannot hope that freedom will thrive.

Occupy, & democracies

Liberty, said John Stuart Mill, “is often granted where it should be withheld, as well as withheld where it should be granted.” I’ve often thought that the same could be said for democracy. And this is how we should interpret the Occupy movements.

What I mean is that if we think of democracy as an information-gathering device, it is used where it shouldn’t be and not used where it should. Most of us are either uninformed or actively misinformed about national policies, but democracy operates at this level. And yet we often do have knowledge about our locality or workplace, but local democracy and workplace democracy are weak or absent.

In this context, I’m not convinced by Anthony’s complaint that lefties such as the OccupyLSXers “know what people really want even if they don't yet themselves.” Such a stance is perfectly reasonable, given that cognitive biases research supports Marx’s view that there might well be such a thing as false consciousness and that - partly because of this - actually-existing democracy fails to advance justice or liberty.

 By contrast, I suspect the Occupy movements might be starting to build new foundations for "fourth generation" democracy; as Sunny says, there‘s more to democracy than voting once every five years. I mean this in four ways:

- Advancing economic democracy. A theme of the Occupiers seems to be a desire for more popular control over the economy. This might take dangerous forms - the market, remember, is a good information-aggregating device - or it might not.

- Egalitarian democracy. A virtue of democracy is not that it leads to good outcomes - it often doesn’t - but rather that the “one person, one vote” principle embodies an important aspect of equality. Occupy seems to be taking this further, not just by demanding greater economic equality, but also by demonstrating an egalitarian form of political activity - one undistorted by lobbyists or media prejudice.

- Micro deliberative democracy. The Occupiers are creating an arena in which political questions about economic organization can be asked, and get the attention of the media and Westminster. Such arenas are rare.

- Macro deliberative democracy. In calling hierarchical capitalism into question, the Occupyers are helping to open the Overton window, to influence mainstream politicians into considering issues which have hitherto been little discussed. In this sense the Occupyers are complements for the parliamentary left, not substitutes.

Now, I’m almost certainly taking a rosy view of the Occupyers here. As James says, there’s a large element of narcissistic activism among them. But it might grow into something better.

My main point, though, is that the Occupyers are, potentially at least, a force for democracy in the best sense. And insofar as there is a tension between them and parliamentary democracy, so much the worse for the latter. 

Crime, unemployment & peer effects

Crime seems to be rising. The British Crime Survey reports a 2% rise in all crime in the 12 months to June 2011. Although statisticians say this is not statistically significant, the rise in theft from households is significant.

This is just what you’d expect when unemployment is rising. I say this not because  I’m a liberal lefty, but because I’m an economist. The first rule of economics is that people respond to incentives. And when you’re unemployed you have more incentive to commit crime. This is partly because you have less to lose - you’ll not lose your job if you go to prison - and partly because, being poor you have a higher marginal utility of consumption and thus a stronger desire for money.

This paper estimates that a one percentage point rise in the UK unemployment rate leads to a rise in robberies, burglaries and thefts of around 45,000. And this paper finds that long-term unemployment is strongly associated with violent crime, perhaps because it leads to a feeling of alienation.

All this raises a question. If unemployment raises crime, why has the increase in crime been so small?

It’s because something else is going on. The decision to commit crime (or not) is not merely one taken by a rational maximizing isolated individual. It has a social dimension. People are more likely to commit crime if others in their social networks do, and less likely to do so if their peers are law-abiding. If your friends are robbers, there’s a high chance you will be too.

These peer effects mean that trends in crime can feed on themselves. If crime falls for several years - as it did in the 90s and 00s - it might continue to do so, because there are fewer “bad apples” to influence others to commit crime.

What we’re seeing now is the interplay of these two forces: higher unemployment is tending to raise crime, but the favourable peer pressures caused by a lack of crime recently is tending to reduce it.

And herein lies a danger. If further rises in unemployment lead to more crime, then we could get a further rise in crime, as the peer effects arising from there being more criminals magnify the initial  increase in crime.