Not connecting

The BBC reports that interest rates on savings have fallen to a record low. It omits to say that this is to a large extent the direct result of Tory policy. This is simply because, for a given inflation target, more fiscal austerity means lower interest rates. What we’re seeing is just George Osborne delivering his promise to be a fiscal conservative and monetary activist.

However, nobody seems to be making this connection. Quite the opposite: the biggest losers from low interest rates – older richer people – are those most likely to support the Tories.

This is not the only way in which voters aren’t drawing the dots, however. Most people agree with Osborne that we face a high risk of a financial crisis this year. However, this is precisely the environment in which fiscal policy should be loose – to cushion us from the fall-out from such a crisis. And yet Tory austerity is more popular than Labour’s more sensible approach: in one poll, 41% of voters say the Tories are the best party to handle economy compared to only 18% of them saying Labour is.

What we have in these two cases is a failure to make connections. This is not an isolated problem. As David Leiser and Zeev Kril show, it’s a key feature of how laypeople misunderstand economics.  “People are remarkably poor at combining causal links into a system” they say. 

This inability to make connections is by no means confined to fiscal policy. We see it in other contexts too, for example:

 - People support nationalization and price and immigration controls in part because they fail to see that these can have unintended consequences and that free markets can sometimes produce benign outcomes without state direction. The invisible hand is well-named: people can't see it.

 - Employers favour overconfident but incompetent candidates – and investors fall for charlatanic fund managers - because they fail to ask: what’s the connection between competence cues and actual performance?

 - All the reporting about last week’s fall in stock markets paid very little attention to the question that really matters: is there any connection between this and future market returns?

Rather than think through causal chains, says Mr Leiser, people use what he calls the “good begets good heuristic (pdf)”. They believe that good things lead to good things and bad to bad.  This helps account for the popularity of minimum wage laws: higher wages are a good thing, so folk under-rate their adverse (pdf) effects. It also helps explain Osborne’s popularity: people think that a good thing (promising to reduce government debt) has good effects (reducing economic risk) and so underweight the importance of the paradox of thrift.

All this bears upon one of the week’s big issues: is the BBC biased? In part, it corroborates Owen Jones’ claim that the left over-rates the importance of the media: people form mistaken ideas because of cognitive biases unrelated to media propaganda.

Nevertheless, it might also suggest that political reporting is – at the moment – inherently biased. If you report only politicians’ words and actions and neglect connections between these and the real world, you will create a good impression of those who send out competence cues and who exploit the good begets good heuristic and a bad one of those who are poor at the presentation game but who understand better the connections between policy and the real world. Perhaps, therefore, the  BBC is biased even if it doesn’t intend to be.

Comments

[Spanish Bill]

Nah. Not one of your best posts. You neglect to mention at the outset the global context of low interest rates and deflation, wilfully I suspect, because it doesn't fit a certain narrative.
Your final paragraph is sinister, if it doesn't intend to be. There is a difference between spot news coverage and analysis. It is the job of the true journalist to show not tell, only by doing so can we hope to minimise subjectivity and strive for balance and freedom from bias. It is the job of commentators and politicians to make the most of the connections as they see them. Adding colour and context to a story is important but it is important for a journalist to avoid editorialising. Here's the journalist's bible: http://handbook.reuters.com/index.php?title=Standards_and_Values
The name and address below are fictional. As a result, you may decide not to publish my comment. Unfortunately, I have no desire to engage in any long-winded arguments. My experience of the hard-left is that they are incredibly boring people who will argue the toss about anything. That's not meant to be a slight on you; I enjoy your posts, usually, as they provide me with welcome food for thought and distinctive lines of enquiry. But who knows about your followers. There are a helluva lot of idiots out there right now. Sorry.

[Jonathan da Silva]

Far too nice on BBC.

BBC bias is mostly as you imply benign establishment [my words]. However take Snowden revelations the BBC would have Greenwald on but to discuss the legality of Edward Snowden's position not the matter at hand or one he would be an authority on either. Caroline Lucas is asked a load of stupid questions when bringing up opposition to fracking such as legality of some protests again not something she would be expert on. Take their former champion Paxman who would ram polls down people on the fringes throats [call to authority arguments back hardly unbiased investigation] or in Conrad Black's case his wife's alleged character!

(Yes I have not watched their news for a couple of years now but I still pay for it)

Regardless whether state media should be funded on a regressive tax is the question. At least now as I understand it they cannot jail 1000s of poor people anymore. It does seem ridiculous to tax people to fund commercial projects like Eastenders, Radio 1 & soporific [my view] drama.

[Bob]

If you read that paper (although the language in it is terrible, but not unusual) it does seem to beg the question a little. I wonder what the position of the authors is.

Ultimately it provides evidence that if you put the cost of employment up during a recession, the firms respond by increasing the load on higher level staff and letting the lower end go. Aka increasing productivity! Unsurprisingly that stops the low level staff from increasing their skills and getting better paid jobs (although you'll note they never mention who gets the better paid jobs instead, or whether they still exist).

However if you don't put up the minimum wage, then the firms won't increase productivity. They will continue employing more low level staff. Similarly if you subsidise the wage with Tax credits from government.

It's a bit daft to say "let's not bother with productivity increases because otherwise people won't get jobs in the private sector".

All the paper shows is that minimum wage increases are not enough if you want the productivity gains of cost pressure *and* the income improvement outcomes of employment.

What you need for that is more jobs that there are people that want them.

What you need is a Job Guarantee.

[Edward Harkins]

Good copy but I would differ from Stumbling and Mumbling where he says that 'the left'(?) over-rate the impact of the media on voters' opinions. IMO the insidious aspect is that the over-whelming bias of the London-centric UK media pre-sets the overall news agenda. Voters are then left to 'decided' their opinions on the basis of what is permitted space, and just as importantly not given space, in the mainstream news agenda.
An especially glaring example was the wholly disproportionate coverage and grandstanding given to UKIP before and during the 2015 General Election campaign. Very early on the BBC in particular, and the BBC Daily Politics programme in particular, decided that UKIP was prime time news material. There was a period of some weeks when it seemed that UKIP, mostly leader Farage, was on the Daily Politics as a matter of daily routine (meanwhile the Greens, for example, were much under-reported and only infrequently appeared on BBC).
BTW those discombobulations and conflations of fact and dubious preconceptions from 'fictional' and arrogant Spanish Bill were in themselves the 'sinister' thing.

[Churm Rincewind]

Well of course the BBC is "biased". It is, for example, biased against slavery as a business opportunity, burglary as a viable career option, murder as a way of resolving domestic conflict, and criminality in general (add your own examples here).

However, the charge that the BBC is "biased" along party political lines across its total output is hard to evidence, though many have tried.

The dramatic claim that "the BBC admits it co-ordinated in advance the on-air resignation of Stephen Doughty" has no bearing on the BBC's editorial policies. A similarly valid claim might be that the BBC "co-ordinated in advance Diane Abbott's Newsnight defence of Jeremy Corbyn's shadow cabinet reshuffle". Both Stephen Doughty and Diane Abbott knew perfectly well what they were doing, which was to inflict the maximum possible damage on their political opponents by the judicious exploitation of the media opportunities available to them.

[Luis Enrique]

I guess the fact that some people are good communicators biases things in their favour.

One of the supposed merits of using maths in economics is that it means you can be a rubbish writer and still convince people. Not sure how far that goes myself but something to it.

[Blissex]

«the biggest losers from low interest rates – older richer people – are those most likely to support the Tories.»

Ah someone is wrong on the web! :-)

Older richer people usually are far more invested in property than cash or short-term bonds, and they have been enjoying massive tax-free effort-free capital gains thanks to low interest rates, and also higher stock and long-term bond prices.

Admittedly they still complain: those I talked to wanted both property prices doubling or tripling every decade *and* high interest rates on their far smaller positions in cash and short-term bonds.

The difficulty is that this short blog piece fails to make the connection between Tory policies and the different interests they represent, and investors long mostly in cash seem a rather less important constituency than those long property and stocks.

«Perhaps, therefore, the BBC is biased even if it doesn’t intend to be.»

I have seen some of the shameless coverage of J Corbyn related events, and the BBC style seems to me to try hard to act as a big amplifier for every bit of news unfavourable to J Corbyn or just likely to alarm voters.

[David]

HeHe... what a mess! So people are not very clever, and rather bigoted. It's not really news unless a politician is still wearing his/her radio microphone.

[Alex]

Blissex is right. who are these people who have enough net wealth to feel their interest earnings, and keep it in government bonds or *cash* rather than equities, property, or something else?

You don't hold cash for the interest, you hold it for its unique and irreducible liquidity. Holdings of cash and cash-equivalents are determined by liquidity preference - this is (Keynesian) Econ 101.

[Sandwichman]

I third what Blissex and Alex said.

[Deviation From The Mean]

"is the BBC biased?"

Next weeks question, is the Pope Catholic?

I don't agree with what Blissex and Alex said but don't have the time to go into why!

[phayes]

“Perhaps, therefore, the BBC is biased even if it doesn’t intend to be.”

No perhaps about it. The BBC has a mission statement etc. and we can be certain that it doesn't intend to be biased. It intends to educate and inform us. Its officers/employees might have been failing it and us on primarily economics and other social science-informed issues, just as they have in the past e.g. on issues primarily medical science and climate science-informed, but they shouldn't have been.

[Bob]

"The BBC has a mission statement etc. and we can be certain that it doesn't intend to be biased."

Few people realise that the BBC gets its funding from HM Treasury. The other job it is tasked with doing is to collect the licence fee *which it then turns over to HM Treasury* – in other words an outsourced tax collector.

The licence fee collected and the amount the BBC gets in funding have actually nothing to do with each other in any causal way. The BBC is very fond of linking them of course to maintain the hypothecation lie. But HM Treasury has the final say as to how much the BBC gets – regardless of how much licence fee tax is collected.

Those who pay the piper call the tune. Inevitably if you have an organisation that depends for its money on the state, and the executive running the state doesn’t respect impartiality then the public broadcaster will end up being a mouthpiece for the state.

[Keith]

Equally is not economics full of ideology it self? Are you sure it is therefore not perfectly possible for all sorts to fail to make connections?

Also are you sure strictly speaking as an economist that the automatic adjustment mechanisms you refer to really work in the real economy? Lots of right wing economists in the USA swear blind a private insurance based health care system can work perfectly despite the constant proof of market failure, as they insist on applying simplistic concepts of supply and demand which may work for most goods but not for health insurance.

bob is right. The "licence fee" is a tax. it should be abolished and replaced by a revenue source that is not regressive if the BBC is to be kept at all. No organisation can be independent when its revenue is subject to the vote of supply in the commons.

[Guano]

Your overall hypothesis would appear to be that “People are remarkably poor at combining causal links into a system, especially with respect to economics, and that the media are a part of this problem”.

There are a couple of issues here. The first is that there are a lot of variables in an economic system, so how they are linked is complex and there are a lot of assumptions about how one affects another. The second is that A affects B in different ways according to the time-scale and the assumptions you make about the movement of other variables in the system. The economy is supposed to be full of feed-back loops, and these are supposed to keep the system in balance (in the long-term).

It does appear to me that political reporting (about the economy) is often misleading because it fails to explain what assumptions are being made. There is also an inherent contradiction between the assumption that there is a free-market economy (that will tend to remain in balance in the longer-term) and the belief in a Chancellor who can push button A and get effect B without setting off other changes in the system. Reporting often reports what that the Chancellor has done A because he wants B to happen (which would be what is in the Treasury press release) without any questioning of the limits of this mechanical thinking.