The impact bias against Labour

This week’s prize for an epic lack of self-awareness goes to Philip Hammond, who told us that a Labour government would lead to “a collapse in business investment and a crash in the value of the pound, causing a shockwave of inflation”.

Even if he has a point – which he hasn’t – this provokes the reply: how will we tell the difference from a Tory government?

The Tories have given us not one, not two but three of the worst economic policy errors of modern times: austerity; the vote to leave the EU (which was due in part to austerity); and then the pursuit of a hard Brexit. They have set the bar for economic competence lower than a snake’s belly. Even if you think Labour’s policies leave much to be desired*, they clear this low hurdle.

How, then, can anyone believe otherwise?

One answer, of course, is motivated reasoning: it’s easy to believe what you want to believe.

Another is ambiguity aversion. To people accustomed to 30 years of neoliberalism, Labour looks like an uncertain prospect even if it is offering what is really only mildish social democracy – and people hate uncertainty.

A third answer is that Tory policies favour the 1% whereas Labour’s don’t, and these have massively disproportionate political influence. They also – unlike the poor – have an over-inflated sense of entitlement and take umbrage at Labour’s challenge to those entitlements.

But there’s a fourth thing I’d like to emphasize. It’s adaptation. Many people have adapted to Tory mismanagement but not (arguendo) to Labour mismanagement. And the old adage – and Steps song – is right: better the devil you know.

Some economic research is relevant here. Reto Odermatt and Alois Stutzer show that people adapt to even devastating events such as widowhood and disability; this confirms research by Andrew Clark. And – what is relevant – they fail to see that they will adapt. They expect that changes will hurt more than they in fact do. Psychologists call this the impact bias.

Some work by Christoph Merkle corroborates this. He surveyed UK stock market investors just before the crisis and found that they said that big losses would make them miserable. After incurring those losses, however, investors were much more content than they expected to be. We’re prone, he says, to loss aversion illusion.

All this is of course another way of saying there’s a status quo bias: we prefer current bads to prospective ones, even if the latter are milder. This is because we fail to see that we've adapted to our current situation and fail to anticipate future adaptation.

In this sense, when Labour policies are compared to Tory ones, we don't compare like with like and so judge Labour more harshly. We give the Tories an easy ride because we fail to see that we've adapted to their incompetence without anticipating we'll also adapt to Labour's. This bias is exacerbated by a tendency to attribute feared policies as well as real ones to a future Labour government; a failure to appreciate that Labour's worst policies will be abandoned or watered down; and by an under-estimation of the resilience of the economy to bad policy. 

I fear, however, that this isn’t just a cognitive bias but also a media one. Listen, for example, to this (14’55” in) hilarious exchange between posh people who know nothing. Which brings me to a point I’ve made before: the BBC is biased not so much because it’s chock full of right-wing gits, but because of more insidious subtle biases to which it is insufficiently alert.

* I’d describe them as macro good, micro bad (with the exception of McDonnell’s wholly admirable support for coops), but it takes a lot of Harberger triangles to fill an Okun gap.

Comments

[e]

Our news media's lack of imagination, and our centrists' pride will shackle our near future to current Conservative party decline. Conditional, authoritarian, miserableness (at best) is what increasing numbers can look forward to; because lets be honest, anything left of Nick Clegg sets warning lights flashing, and truncheons twitching. We're in a ridiculous state.

[E Hart]

Quite right. There is also a sado-masochistic element at play. "We are not worthy..." The British in macro are like Larkin's Mr Bleaney gazing up at an unadorned 60 watt bulb wondering whether they warrant any better. However, unlike Mr B, they aren't going to so sanguine about their circumstances once the penny drops. After the last of the scapegoats (foreigners, the EU, assorted other straw men) have been exonerated, there will be nowhere else to put the blame for out long-standing economic malaise other than at its source - this and previous governments.

[Dipper]

"Reto Odermatt and Alois Stutzer show that people adapt to even devastating events such as widowhood and disability; this confirms research by Andrew Clark. And – what is relevant – they fail to see that they will adapt. They expect that changes will hurt more than they in fact do. Psychologists call this the impact bias."

and so to Brexit ...

[marku52]

I was listening to the public radio here in the states shortly after the Brexit referendum, and the posh twits were complaining that-horror of horrors, London real estate prices were falling.

Oh, the horror.

[Mark Evens]

I don't think that is epic lack of self-awareness by Hammond at all. Rather, a thinly veiled statement that Brexit is as bad (in his mind) as Socialism. Give the man some credit - he may be a Tory politician, but he's more aware than most of them.

[Blissex]

«he may be a Tory politician, but he's more aware than most of them»

His supposed nickname of "spreadsheet Phil" to me sounds like praise more than mockery, but then I think good accounting is very important, unlike the Greats ("literae humaniores") trained "leaders" like B Johnson, who seem to behave as if they thought that pandering to and fooling the mob is the main way to power and fame.

[mike berry]

I think this analysis misses the point.

I'd emphasise two issues.

Firstly, public understanding of the economy is very limited. Most people have no conception of the size or composition of the public spending pie. Most also hugely overestimate the quantity of public spending that goes to areas with high media visibility and underestimate in other areas. They also see the economy as very much like a household and are wary of debt.

Secondly, what people know (or think they know) is heavily dependent on what they read or see in the media. Here, the Conservatives and their allies in the Press have been incredibly successful in creating easily understood narratives that resonate with people. In the 2000s there was a massive and very successful campaign by much of the press and the Conservatives to portray Labour as the party of welfare which was creating a client state of wasters bleeding the public dry. Here's some examples from a brief period in 2009:

If Mr Cameron wants to be remembered as a genuinely courageous public figure rather than merely as a camera-friendly celebrity, then he should devote his attention to slashing our gigantic public sector, with its vast swathes of pen-pushers, time-servers, quangos and leeches (Daily Mail, 28 July 2009)

Every encounter with the bloated monster of Brownian big government - not to mention John Prescott's grotesque legacy at regional and local level - tells us that it is riddled with waste, inefficiency and executive perks (Telegraph, 17 June 2009)

The gravy train is out of control across all tiers of government - national, local and European. Town halls waste millions. The public sector is crying out for reform. Pointless pseudo- government quangos mop up £70BILLION a year and employ 50,000 people hand-picked by the party in power. (Sun, 18 May 2009)

They have also been very successful at using historical events for propaganda purposes. So the complexity of the 1970s is distilled to the three day week, the Winter of Discontent and most importantly the 1976 IMF bailout.

These 'truths' are deployed regularly - see QT last week and Philip Hammond's speech today. They are also staples of press coverage.

[Andrew Mangles]

Blissex thinks accounting to be a better training than the Greats but B Johnson may be a clown but he's not a fool. Pandering to the masses has worked well for demagogues down the ages as he well knows. Julius Caesar springs to mind as a particularly successful example of the type. Johnson is gambling on the popules behaving the same way as they did 2000 years ago in Rome