Stumbling and Mumbling

Leftist Tories?

Have the Tories gone soft? At the weekend, George Osborne spoke about taking steps to reduce corporate tax dodging. And today (in the Times £) Tim Montgomerie supports a mansion tax. 

What's going on here might be more than just an effort to "detoxify the brand." It's what we saw in Disraeli's "one nation" Toryism, Bismarck's creation of the welfare state and in the Tories' acceptance in the 1950s of most of the welfare state built by the 1945-51 government - an attempt to buy off discontent.

Yes, the Tories are the party of the rich. But it is not always in the collective interests of the rich to get immediately even richer.This aim must be balanced against the aim of ensuring the social stability which allows the rich to stay rich in future. As James O'Connor wrote:

The capitalistic state must try to fulfill two basic and often contradictory functions - accumulation and legitimization...This means that the state must try to create or maintain the conditions in which profitable capital accumulation is possible. However, the state also must try to maintain or create the conditions for social harmony. (The Fiscal Crisis of the State, p6)

Osborne and Montgomerie fear that a backlash against inequality might lead to support for harsher redistributive policies which hinder capitalist accumulation. So they want to enact such policies on their own, milder terms. It's a form of vaccination: introducing a small amount of the disease of redistribution can protect the capitalist organism against the bigger disease of even greater equality.

Insofar as the Tories have been successful down the decades, it's because they've been able to balance accumulation and legitimization; Thatcher stressed the former, Disraeli the latter, but they are two legs of the same beast.

This raises two questions. First, how strong are the material pressures on the Tories to adopt a more egalitarian stance? I'm in two minds here. On the one hand, working class power is sufficiently weak that it can be ignored, which means there's little need to "bribe the working classes", in Bismarck's phrase. But on the other hand, the social norm against corporate tax-dodging is strong, and the hope that enriching companies would encourage investment and growth seems to have been dashed - both of which point to the need for more legitimization policies.

Secondly, if redistributive policies can be adopted by the "right" (eg Disraeli, Bismarck), and if they can be shunned by the "left" under pressure from capital (eg New Labour), could it be that we over-rate the importance of the colour of the government, and under-rate that of the social norms and class power which constrain governments? At least some economic research (pdf) suggests the answer might be: yes.

Power, skill & wealth

Does wealth flow to skill, invention and service to others - as neoclassical economists maintain - or is it instead a rent extracted by the powerful (pdf), as various heterodox economists claim?

In many cases, it's hard to say because the two are very similar. Skill is scarce and scarcity is a source of power, so returns to skill and returns to power are often the same thing. For example, if you want an iPod as distinct from other MP3 players, Apple has power to charge a premium price. But this power lies in an ability to design a desireable product.So, are Apple's profits a return to invention, or to power?

Luckily, we have a case to adjudicate between the two hypotheses.Trevor Baylis, inventor of the wind-up radio and undoubtedly a great contributor to human well-being, is potless:

Due to the quirks of patent law, the company he went into business with to manufacture his radios were able to tweak his original design, which used a spring to generate power, so that it charged a battery instead. This caused him to lose control over the product.

This vindicates the heterodox economists against the neoclassicals.

You might object that Baylis was naive. Maybe. But an economy in which people distrust each other will be a poorer one, and one in which everyone bones up on the details of the law is one in which they have less time to devote to their true specialism, with the result that we have less division of labour and lower productivity.

Of course, drawing strong inferences from Mr Baylis's case alone would be committing the journalist's fallacy. But his case is not wholly atypical.William Nordhaus has estimated that "only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers". This suggests Trevor Baylis is more typical than Bill Gates.

And this is not the only way in which wealth flows to power rather than ability, at least as widely understood:

 - Why did bankers get a bail-out when HMV staff didn't? It's because bankers had the power to persuade the state that hand-outs were necessary to stave off disaster, whereas HMV workers didn't.

 - Moshe Adler has shown (pdf) that relatively ordinary people can get superstar-style incomes if they go viral and get widely talked about: think of Dan Brown, Kim Kardashian, and linkbait journalists. The power (or luck) to get yourself talked about matters more than talent.

 - CEOs' high pay is the result of power - an ideological structure which presumes that the ability to manage companies is a scare talent requiring huge "compensation", and a power to extract rents.

 - Where skill can only be revealed by working with expensive resources - such as film actors or CEOs - employers will often prefer the known mediocrity to able people who lack the power to prove their talent.

 - in crony capitalism (the only capitalism we have), profits go to firms that can use their connections to win juicy state contracts or protection, not necesarily to the most efficient. 

We have enough cases here to show that power matters more than neoclassical economics would have us believe. In many cases, the idea that financial success is a reward for ability and service to others is just a fairy tale.

Narcissism & power-blindness

Alex Massie's attack on the narcissistic left has been quite widely praised. But I'm in two minds about it.

To some extent, he has a point. As Phil says, there is an element in the left of "individuated identity politics...that can justify petty, spiteful, bellicose, moralising behaviour toward groups one doesn't like": he cites some atheists, but we could add that recent row about transsexuals.

My gripe with this type of politics is that the focus on individuals distracts us from power relations; it's an application of the fundamental attribution error. For example, capitalists dodge taxes and exploit workers not so much because they are greedy and immoral people but because doing so is the logic of capital; capitalists are "capital personified."

Similarly, the rich are rich not (just) because they work hard or are talented, but because they have the power to extract money from others*. And the unemployed are unemployed not (just) because they are lazy but because "unemployment is an integral part of the 'normal' capitalist system."

This point also applies to the matter in hand. The complaint from Laurie and Owen, among others, that the two million antiwar protestors were ignored or "betrayed" under-emphasizes the fact that those two million lacked power. This might have been legitimate - they were in fact out-numbered at the time. Or it might be more questionable; support for the war might have been based in part upon a lie and as Phil acutely notes, MPs' attitude to public opinion varies peculiarly.

Let's concede, for the sake of argument, that the protestors had morality and reason on their side. So what? Morality and reason matter only to the extent that they are sources of power.

In this way, the narcissism of degraded leftist identity politics serves an anti-leftist function, of blinding us to pervasive inequality. The non-Marxist left is as much a product of capitalist ideology as anyone else.

So far, I sympathize with Alex - albeit for reasons he might not like. I part with him for three reasons:

1.Laurie is groping towards a recognition that it is power structures that matter more than individuals' qualities: "We have to make sure that we are listened to – and we’re still working out how to do that."

2. It's not just the left that's narcissistic. We live in a narcissistic age, and the narcissism of the powerful has much nastier effects than that of the left.

3.Complaining that MSM columnists such as Owen or Laurie are narcissists is rather like noting that basketball players are tall. A degree of narcissism is necessary for success in their career, as it is in many others. As someone said, "It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness."

* The distinction isn't so sharp, as "talent" can be a way of achieving power.

Freedom: a matter of life & death

Stephen Dorrell, chairman of the Health Select Committee, wants to stop the NHS enforcing "gagging clauses" on former employees. He's more correct than he knows. The issue here is not just one of freedom, but of life and death.

I say this because of something Joseph Hallinan says in Why We Make Mistakes. He points out that whilst the accident rate for aiplanes has fallen sharply since the 1930s, the rate of medical misdiagnosis has declined more slowly (pdf), so that - in the US - well over 30,000 people a year die as a result. A big reason for this difference, says Mr Hallinan, is that:

ORs are typically hierarchical places, with the surgeon on top; cockpits are not...When it comes to pointing out potential errors, everyone [in a flight crew] is considered equal (p194).

Hierarchy inhibits feedback: nurses don't challenge doctors; junior doctors don't challenge senior ones, nobody challenges managers, and so on.

But feedback is essential for improvement.If a musician couldn't hear what he was playing, or a golfer couldn't see where his shots went, do you think either would get better? This point is emphasized by Matthew Syed in Bounce. Feedback, he says, is "the rocket fuel that propels the acquisition of knowledge". Good feedback "is the reason why mankind has progressed." Geoff Colvin agrees:

We've examined at length the importance of frequent, rapid, accurate feedback for improving performance. Most organizations are terrible at providing honest feedback...Tet nothing stands in the way of frequent, candid feedback except habit and corporate culture. (Talent is Over-rated, p131-2)

It's in this context that "gagging orders" are - literally - fatal. They limit feedback. Sure, the feedback might be noisy - an outgoing employee might have questionable motives, but a noisy signal is (probably) better than none. Whistleblowers are essential to progress.

Of course, nobody thinks that removing gagging orders is sufficient. Matthew Green says: "To implement any kind of change in the NHS means challenging a whole mass of entrenched hierarchies". And Paul advocates weekly meetings between management and staff. They are right. Improvements come from feedback, which requires openness and a sufficiently egalitarian atmosphere that encourages junior staff to speak honestly.

Why, then, could anyone possibly oppose this? Simple. Feedback challenges the self-image of the powerful; it tells doctors that they are not godlike experts, and managers that they are not running immaculate organizations. Alex Massie decries the narcissism of the left. But that is merely irritating. The narcissism of the powerful can be fatal.  

The helicopter paradox

I recently suggested that there's a paradox about inheritance tax - that the sort of people who instinctively support it should in fact oppose it, and vice versa. I suspect there's a similar paradox with the debate about helicopter money - those who advocate it should in fact think it'll be little better than other policies, whilst those who should most favour it seem not to do so.

To see what I mean, let's define helicopter money. It does not mean that Sir Mervyn throws £20 notes from a heliopter. Instead, it means that the government hands money to the private sector - by, say, a tax cut or increased investment.It finances this by issuing gilts which are immediately bought by the Bank of England with newly-created base money. Those gilts are then cancelled. A helicopter drop, then, as Simon says, is just a money-financed fiscal expansion. But how does this differ from a bond-financed expansion, in which the government sells gilts to the private sector?

The standard answer* is that the extra supply of gilts reduces their prices and hence raises their yields; in the textbook model, we move up the LM curve. This increases borrowing costs for companies, thus  reducing capital spending and so - to some degree - offsetting the fiscal stimulus.

The case for a money- rather than bond-financed fiscal stimulus thus rests upon the response of gilt yields to extra supply. The more gilt yields rise if their supply increases, the better - in terms of macro stimulus - is a money-financed expansion.

Who, then, would we expect to support a money-financed stimulus? Obviously, the sort who think that extra gilt issuance would frighten the markets.

By contrast, the sort of people who think there's huge demand for safe assets - so the government can sell gilts without depressing their prices much - won't see much advantage in a money-financed fiscal expansion over a bond-financed one.

Which brings me to my paradox. This exactly not the division we're seeing. For example, Martin Wolf endorses a helicopter drop, but he has written that "the massive fiscal deficits being run by the UK and US are not...crowding anybody out of the market." But if you believe the latter - as I suspect you should - then a bond-financed expansion is fine and we don't need a helicopter drop.

On the other hand, we'd expect Tories - who want government debt to come down - to favour a helicopter drop. But AFAIK, few do so.

There is, I think, an explanation here. A money-financed fiscal expansion, as Simon and Sir Mervyn agree, tends to raise future inflation. To some this is no problem and might even be a good thing. To others, it is. Perhaps, then, the old division between rightist inflation hawks and leftish/Keynesian inflation doves lingers on**.

* I'm ignoring Ricardian equivalence, as this doesn't seem a live issue now.

** Sir Mervyn and Mark Carney both oppose helicopter drops. This isn't necessarily because they are inflation hawks. It might be because they see the inconsistency between raising future inflation and retaining an inflation target.

Beyond hydraulic policy

One of the more significant things Sir Mervyn King said today is this:

There are limits to what can be achieved via general monetary stimulus – in any form – on its own...As time passes, larger and larger doses of stimulus are required.

This won't be a surprise to those who doubt the efficacy of monetary policy when interest rates are around zero - though it might to those advocates of NGDP targets who sometimes give the impression that there's little difference between announcing a target and achieving it.

There's a more general point here. King is rejecting "hydraulic macroeconomics" - eombodied in Bill Phillips' Moniac - which believes that pulling policy levers has stable, predictable effects.

Of course, it's not just monetary policy which has variable effects. Fiscal multipliers also vary from time to time and place to place, depending upon whether we are at the zero bound, the extent of credit controls, the exchange rate regime and so on.

Economics is not physics or engineering: there are few if any stable, reliable parameters.

Though all this should be well known, it has implications which I don't think are properly appreciated.

For one thing, it suggests that macroeconomic stabilization is harder to achieve than supposed.If the precise efficacy of monetary policy is unknown, could we rely upon it to atabilize output if an adverse shock were to hit us this year? I doubt it.

If this is the case, it suggests economic policy should have other priorities.

The obvious one is that it should aim at boosting long-run growth through supply-side reforms. Personally, I'm sceptical of this too; long-run growth may be less malleable than supposed.

Instead, there's another alternative. If macroeconomic policy cannot be relied upon to stabilize growth, threre's a case for other means of reducing economic risk - such as a stronger welfare state or macro markets. But there's no popular taste for this. If anything, the opposite. The coalition's desire for smaller government spending and larger exports would - if it is achieved which I suspect it will only half be - tend to increase economic volatility.

However, the issue here goes beyond macroeconomics. If macroeconomic policy is not hydraulic but instead has varying efficacy, mightn't the same be true of other areas of policy, such as health and education where the effectiveness of policy levers could vary with (eg) social norms?

I fear that politicians, being selected for having an optimism about what policy can achieve, under-estimate this problem - until, of course, they have been in office for a while.

Rationality vs friendship

Norm returns to a theme of his - of wondering why the anti-war left couldn't and still cannot see that there was a case for overthrowing the fascist Saddam Hussein. I suspect that what's going on here is a common combination of two cognitive biases - groupthink and sampling bias.

The sampling bias is our tendency to forget that the people we associate with are more like us than the general population. Groupthink is the tendency to become overconfident about our beliefs simply because they are echoed by people we like.The combination of these two biases leads us both to over-estimate the prevalence of opinions like our own, and to be overconfident about their validity.

It's not just - or even mainly - the anti-war left that's prone to these biases. Republican pundits who expected Romney to win the presidential election made the same mistakes  - though wishful thinking might also have been involved; being surrounded by Republicans led them to under-estimate Obama's support. It's a cliche that Hampstead liberals live in their own bubble. And one reason why chief executives often come across appallingly when interviewed on the radio is that, surrounded by like-minded people, they are unused to having their ideas challenged.

Luckily, there are ways we can counteract these twin biases.

First, for any strong belief you have, ask: what is the strongest case I can make against it?

It's important to do this because the most popular arguments for a particular policy are often mindless. But it doesn't follow that all arguments for them are. For example, the fact that the claim that Saddam had WMD was a lie should not discredit the claim that he was a tyrant we are better off without*. Similarly, just because talk of a structural deficit is drivel, it does not follow that there is no case to be made for fiscal austerity.

Secondly, we should open ourselves up more to opposing views. If you're a rightie, read the Guardian, and if you're a lefty, read the Torygraph. I subscribe to the Spectator but not the New Statesman.

Herein, however, lies a problem. There is a trade-off between inculcating rationality and building friendships. Rationality requires that we seek out people to challenge our worldview, but friendship and community requires that we move among like-minded people. This is another way of corroborating Jon Elster's observation that "the only persons who are capable of taking an unbiased view of the world are the depressed" (Alchemies of the Mind, p299).

Which only goes to show, yet again, the truth of Isaiah Berlin's view that the great goods are mutually incompatible.

* I don't say this to take sides in this debate; the case for or against the Iraq war is a matter of accounting, on which I have insufficient data.

The Tamara Ecclestone paradox

The government's otherwise inadequate proposals on funding social care have set me thinking about Tamara Ecclestone.

Their plans involve a proposal, to increase inheritance taxes by freezing the threshold above which tax is paid. The raises the under-explored question of the desirability of such taxes.

The case for them has traditionally rested upon questions of practicality and ethics: how many loopholes does the tax have? Should the state interfere in family life? Is is desireable that a privileged few should get something for nothing?

There is, however, an economic argument for such taxes, highlighted by Wojciech Kopczuk.

He points out (pdf) that if people expect to get a big inheritance, they have less incentive to work, and so an inheritance tax can be optimal to the extent that it raises work incentives. Emmanuel Saez and Thomas Piketty have shown (pdf) that this, along with other factors, can generate high optimal inheritance taxes.

This raises a paradox. To see it, ask: who are the sort of people who expect to get big inheritances and so are deterred from working? There are two (extreme) possibilities:

1. The rich have high skills, and such skills are passed onto their children by genes or environment. If this is the case, the economy will lose a lot if the children of the rich are disincentivized from working. We should therefore favour high inheritance taxes as a way of reincentivizing them to work.

2. The children of the rich are airheads, wastrels and no-marks, so it's little loss to the economy if they are out of the labour market. If this is so, the case for high inheritance taxes to motivate them to work is weak.

Which generates my paradox. The sort of people who instinctively oppose inheritance taxes tend, I suspect, to believe the rich pass on skills to their children. But if you believe this, you should favour higher inheritance taxes on economic grounds. On the other hand, those - like me - who viscerally support inheritance taxes tend to think the children of the rich are abominations who can safely be kept out of the labour market. To us, the country would be a better place if George Osborne had been disincentivized from working. But if you believe this, you shouldn't want an inheritance tax that forces the little bastards into work.

The point of this is two-fold. First, there can sometimes (often) be a conflict between rationality and instinct. Secondly, one's beliefs in the fairness of taxes can sometimes sit uncomfortably with one's views about their efficiency.

Another thing: you might object that inheritance taxes are inefficient insofar as they deter parents from working. Maybe, maybe not. But this doesn't, I think, weaken my paradox.

Some benefits of religion

Francis Sedgemore says:

Atheists will never “call off the faith wars”. We are in this battle to the end of religion, which poisons everything.

I fear this overstates things. There's lots of research - much of it summarized here (pdf) and here (pdf) to suggest that religion has some positive effects. For example, it is associated with increased trust and lower crime (pdf), and - at least amongst protestants and jews - with higher education and labour supply. For these reasons, it's quite possible that religious beliefs - if not (pdf) actual church attendance - are conducive to prosperity.

What's more, there's pretty good evidence that religious belief is associated  - on average and with exceptions naturally - with higher subjective well-being, not least because it cushions us against adverse events.

Of course, you don't have to look far for evidence that religion also has horrible effects. But it is surely absurdly unscientific to think that Boko Haram or the Taleban are typical of religious observers.

You might object to this that religious belief is just irrational. But it doesn't follow that the defeat of religion would mean the triumph of reason. You only have to look at Comment is Free to see that people have an infinite number of ways of being silly without believing in sky fairies. As G.K. Chesterton said, when people stop believing in God they don't believe in nothing but in anything.

I cannot, therefore, side with some of my fellow atheists in regarding religion as wholly bad. Indeed, I suspect it's unscientific to do so. Maybe, all things considered, it is a net bad, but the Hayekian in me thinks it impossible for anyone to construct a fully accurate balance sheet of all its costs and benefits.

Which brings me to a paradox. My personal attitude to the content of religion was formed by reading Bertrand Russell's Why I am not a Christian as a teenager; I don't think Dawkins or Hitchins add much to this. But this is moderated by the research suggesting that - at least here in the west - religion has some favourable social effects. I'm puzzled, then, that the "culture wars" should be more intense now than at any time in my life. I suspect there are two reasons for this.

One is a version of the halo effect. People tend to think that if religion is bad in one respect - "it's irrational" - it must be bad in many others. But it ain't necessarily so. (Believers, of course, are also prone to this error.)

Secondly, we live in an age of ego, and of fragile ego at that. The demand that religion die out, or that it spread, amounts to little more than the demand that people be more like me, me, me.

How the wage squeeze helps the Tories

Is the stagnation in productivity and squeeze in real wages good for the Tories? I ask because of a fact pointed out by Andrew Pickering and colleages in a new paper - that there's a strong positive correlation in developed economies between the share of wages in GDP and the size of government. Both increased in most OECD economies between the 1960s and 1980s, and both have fallen since in most.

You might think this is because both are counter-cyclical; in recessions, the wage share and size of government both increase. However, Pickering and colleages point out that the correlation holds even controlling for the size of the output gap, which suggests there's more than mere cyclicality going on.

There are two things here.

One, which they stress, is that the wage share is a measure of the relative cost of government. Because many government services are labour-intensive, falling wages reduce the relative cost of government, thus allowing the state to shrink.

In this context, falling productivity in the private sector actually helps the Tories because it puts Baumol's cost disease into reverse. When productivity grows faster in the private sector than public, the relative cost of public services rises, tending to increase the size of government. But private sector productivity is now falling whilst that in the public sector is rising; the data (if you believe them) shows that government output has risen 3.7% in the last two years whilst public sector jobs have fallen. This is reducing the relative cost of government, thus making it easier to shrink the state.

You might think this is a relatively benign thing. If it's cheaper to provide education and health services, a fall in government spending as a share of GDP is no problem.

True. But I fear there might be another factor at play, to the detriment of social democrats.

It's that the demand for government might be income-elastic. If you're struggling to pay the gas bill or to buy petrol to get to work, you'll be more opposed to paying tax (and be less pro-social) than if you're more comfortable.

In this regard, the "squeezed middle" might be no friend to social democratic objectives.

Perhaps, then, falling real wages are more helpful for the Tories' cause than generally supposed.

Another thing: the share of wages in UK GDP has been quite stable lately. But I don't think this affects my point - not least because, if we do get a recovery in GDP whilst high unemployment holds down wages, the wage share will fall.