Chris Dillow's Blog, page 146

My depressing sexism

Commenters on a previous post have deprecated my perviness and the depressing air of sexism on my blog. I owe them an explanation.

First, note the paradox here. This blog's name is taken from one of the great feminist artists of our time, and it has occasionally supported quite radically feminist positions. Why, then, the lapses into apparent sexism?

One reason is that I am (sometimes subconsciously) making a point, that intellectual activity is very often a thin veneer, behind which lies a lust - for sex, power, wealth, tribalism or ego gratification. And, indeed, such activity is sometimes a means of achieving or legitimating those drives. A few years ago, Paul Johnson wrote an indifferently-received book pointing out that many great intellectuals had murky morals and private lives. The only surprise was that he looked so far afield for examples. The bitchiness of academic politics, and the long history of "respectable" intellectuals and technocrats touching up younger, less powerful women tells us that the high-minded and the low-minded co-exist.

This point was precisely what I was driving at in the post in question - and, indeed, in my many day-job writings on behavioural finance; the way we think about financial markets is much the same as the way we've thought about Kylie's arse. The well-paid apparently serious men who are managing your pension fund are prone to the same cognitive biases and deficient attention as ordinary people. They are not much different from the typical Nuts reader. 

And nor am I. One of the nastiest habits amongst those have have taken an interest in the cognitive biases research is the tendency to ascribe irrationality to others but not to themselves. The government's behaviour insights team, for example, seems to underweight the possibility that cognitive biases afflict the decisions of voters and ministers and not just consumers. Those "sexist" pictures are a reminder - to myself - that I'm not just a dessicated calculating machine.

There is, though, a more personal, idiosyncratic reason for doing so. I don't care about impressing people (I'd be out of luck if if did), so I try to eschew the non-rational tricks writers have of impressing their readers. I don't try to claim any moral high ground. I don't try to be boring in the hope of convincing people I'm serious. I try not to seem like a nice guy. And I don't write long-winded pieces with the intention of appearing thorough or analytical. Although I sometimes cross-post at Liberal Conspiracy, I don't write for idiots. I assume my readers are too clever to be fooled by the rhetorical ruses that writers use in an attempt to be taken seriously. I'd rather take the risk of looking like a perv than looking like a technocrat. I ain't never gonna be respectable.

A case for lower top taxes

I recently claimed that it's difficult to argue that lower top marginal tax rates will raise economic growth. However, it doesn't follow from this at all that there's no argument for them. If I were a rightist, here's how I would argue for them.

The case for lower marginal rates is primarily one of justice. As Hayek and Nozick argued, state that takes a large chunk of your income is an oppressive one. Sure, in theory a high marginal tax rate can coexist with a low average rate, but in practice the two often do go together, especially for the very rich - and in a civilized society we should worry about injustices done to small minorities.

What's more, there's no obvious evidence that avoiding this injustice carries economic costs. Sure, Piketty and Saez claim (pdf) that an optimal top tax rate might be high. But optimality is a very high standard, and the costs of falling short of it are low; there's a great deal of ruin in a nation. And in fact, two things suggest lower top tax rates might be consistent with a healthy economy:

- In the very long-run, taxes affect social norms. A very high top tax rate might therefore eventually erode the sense of individualist self-reliance and work ethic and so - perhaps after a generation or two - depress growth; Assar Lindbeck has explored this

- A low top tax rate goes together will a smaller state. This is because the best way to tax the rich less is to tax everyone less. And there's some evidence that under some circumstances smaller government is good for growth.

Granted, there are reasons to think that lower top tax rates can depress growth. But these are less convincing arguments against them than you might think. For example:

"Lower top taxes incentivize rent-seeking and the creation of risk pollution." But they do so only because they interact with bad policies. Better corporate governance and an end to crony capitalism should be used to reduce rent-seeking. And better banking regulation or the end of the implicit state subsidy would reduce risk pollution.

" Lower taxes have an income effect which encourages wealth creators to retire or downshift." But this is a good thing. It shows that lower taxes increase people's real freedom to choose work or leisure. The left wants a basic income because it increases real freedom for the poor. Isn't it hypocritical to deny real freedom to the rich?

Now, I write all this to speak to left and right. To rightists, I'm saying that you don't need to argue that tax cuts for the rich will boost near-term growth. In fact, doing so only makes you look like a fanatical shill who doesn't much care about the data. To the left, I'm asking: what's so good about higher top tax rates? They might be a tolerable second-best policy in a world where inequality arises in "bad" ways, such as from risk pollution and exploitation. But I would rather live in a society with low pre-tax inequality and low tax rates. But I guess this is why I'm a Marxist rather than a social democrat.

On shifting attention

So far, nobody has pointed out the connection between the fuss about the selection of Labour's candidate for Falkirk and last month's stock market sell off. Let me remedy this omission.

Both pose the same puzzle: why should there be so much bother about something that's been known for ages?

Everyone's known for years that the processes of selecting parliamentary candidates sees some sharp practice; it's not clear that Unite's behaviour in Falkirk was especially underhand by these low standards. Why then should Falkirk arouse such interest when so many other Machiavellian selections did not? Similarly, everyone's known for ages that the Fed would have to scale back quantitative easing at some time. Why, then, should the markets suddenly take fright at the prospect of it doing so?

The answer to both questions lies in the same fact about human psychology - that our attention is limited. We can't pay attention to everything, so we often ignore lots of things, only to suddenly worry about them when some otherwise perhaps innocuous piece of information strikes us. Such shifts might be motivated by people with agendas, but often they are not but rather arise as emergent processes.

We can call this the Kylie's arse syndrome. Back in 2000, Ms Minogue famously appeared in gold hotpants, prompting everyone to admire her arse. But her arse was much the same as it had been in the previous 13 years. What changed was that the hotpants drew attention to it. The facts didn't change, but people's attention did.

This concept of limited and changeable attention helps explain two things.

One is the waxing and waning of media frenzies and moral panics. These often focus not upon new menaces, but ones that have been around for years, but which suddenly get noticed - perhaps because of a random bunching of events (such as with attacks by dangerous dogs or flesh-eating bugs), or because of an especially egregious example - as when Mick Philpott's murders drew attention to long-term benefit claimants. And they often die down without much change in the underlying prevalence of the phenomena being panicked about.

The other is the apparently excessive volatility of asset prices. Sushil Wadhwani, a former member of the MPC once quipped (pdf) of current account deficits, that they "appear not to matter until, well, they suddenly do!" This hints at the more general fact that the markets' attention towards the "fundamentals" can come and go violently and unpredictably. We can shift from a position in which QE tapering, banks balance sheets, external deficits or whatever don't matter to one in which they do. In this sense, as Mordecai Kurz has shown (pdf), asset price volatility arises not (just) from the external economy but from apparently small shifts in belief equilibria.

You might claim that this is evidence that markets are irrational. whether they are or not is, though, in onme sense irrelevant. Such changes in attention are unpredictable - in part because they can be triggered by tiny signals which are amplified by everyone anticipating everyone else's beliefs - and so you can't make risk-free money from trying to anticipate them.

My bigger point, though, is that the same fact about the limits of human cognition links apparently different behaviour in markets and politics.

Why study classical economic thought?

Simon says economists should study the history of economic thought. I'm with him: my masters' dissertation was on Malthus's theory of unemployment. But this poses the question: why bother with the wrong ideas of dead men?

One answer is that they weren't always wrong. Marx was right about quite a lot. Mill can be read profitably by anyone worrying about the consequences of a low-growth economy; Ricardo anticipated today's debates about automation; and you can read the rise in commodity prices and fall in equity valuations of the last 10 years as being consistent with his theory of rent and profits.

And sometimes, the difference between the classics and modern economists is not that the latter are right and the former wrong, but rather that they address different questions. Ricardo didn't much care about year-to-year fluctuations in GDP but did worry a lot about the determinants of the distribution of income. Many economists today have the opposite priorities. This, though, means their abilities to address Ricardian and Marxian issues have ossified. If you read Greg Mankiw's defence (pdf) of the 1%, you'll not get the impression that today's economists have a much better of the distribution of income than Ricardo or Marx did.

In fact, in one sense economists are only now rediscovering what the classics knew. All of them, from Smith with his invisible hand through to Marx, were concerned with the question of how some kind of order emerged from what looked like a chaotic process of millions of people exchanging millions of goods. To Smith, this order was benign, to Marx less so. But both agreed on rthe importance of the question: how does order emerge from millions of individual decisions? Neither thought that a "Robinson Crusoe economy" made sense. It is only quite recently, with the growth of interest in markets as emergent evolutionary (pdf) ecosystems (pdf) that this issue has returned to the forefront of economics.

This raises the question: in what ways has economics progressed? One answer is that we've gathered more hard data than the classics had; Smith, for example, relied almost solely on anecdote. Another, obvious, answer is that we have vastly more mathematical formalism than they did. But what is the value of such formalism. Could it be that there are some questions which can't be answered solely by reliance on mathematical technique? Studying the classics reminds us that there are potentially more tools in the economists' shed than maths alone.

What's more, even when the classics are wrong, knowing why can sharpen our understanding. For example, everyone from Malthus to Marx expected the economy to converge to a state of zero growth. This view has been wrong (so far!) because technical progress has won the race against diminishing returns. But this should force us to ask about the determinants of such technical progress; why is this more powerful than the classics thought? It is only quite recently - with the emergence of endogenous growth theories - that economists have progressed from Malthus; the old neoclassical growth models merely assumed technical progress which is no explanation at all of the classics' failure.

And herein lines another reason why the classics matter. They were the smartest people of their day. If they were wrong or confused, isn't it also likely that the best minds our our day might also be mistaken and inadequate? The idea that we are clever and our forebears stupid is surely just arrogant gibberish. The mere passage of time does not ensure that progress happens. If this were the case, we'd have to believe Rihanna is a better singer than Bessie Smith was. And nobody believes that.

Taxes & growth

Ryan Bourne accuses lefties (via) of ignoring Karel Mertens paper (pdf) which claims that lower top marginal tax rates in the US have led to faster GDP growth.

However, this result is achieved by torturing the data. Martens estimates, Simple univariate regresssions show, says Mertens, that "tax rate increases are associated with higher income growth." It is only by imposing various controls that he finds that tax rate cuts lead to faster growth. And this opens up a potentially interminable argument about what we should control for and what not.

To see my point, consider the UK data. In 1988, Nigella's dad cut the top marginal tax rate from 60% to 40%. In the following 22 years - until the rate rose to 50% - real GDP grew by 2.4% per year. But in the previous 22 years, it had grown by 2.6% a year*. A cut in the top tax rate, then, led to slower growth. There are three possible reactions to this:

1. The tax cut actually made no difference to growth: 0.2 percentage points is well within the sort of difference we'd expect from random fluctations. Indeed, it's possible that there are almost no feasible policies which noticeably affect trend growth.

2. The tax cut actually reduced GDP growth. This might be because the income effect encouraged wealth creators to retire early, or because it incentivized rent-seeking or the growth of a banking sector which thrived only by creating risk pollution.

3. The tax cut on its own would have raised GDP growth, but other factors offset this benefit.

People like Ryan must argue for point (3). But this is tricky. Many rightists - in fact, not (pdf) just rightists -  would argue that other Thatcherite reforms of the 1980s and 90s should have raised trend growth: the reduction in trades union power; privatization; the abandonment of wage and price controls; lower corporate tax rates; and perhaps (pdf) inflation targeting.

To claim that Lawson's tax cuts boosted GDP growth thus requires one to argue either that the many pro-market reforms of the 80s and 90s had no great beneficial effect or even a negative effect, or that some other factor greatly depressed growth and offset all these benefits**. This requires some arguing.

For me, the message of all this is simply that aggregate GDP data just don't permit us to draw robust inferences about policy effects. Not only is theory ambiguous, but so is the data. For this reason, among others, Merten's paper is certainly not (pdf) the consensus view.

I suspect the argument about what the top tax rate should be is not one that can be settled by the data.

* I think it's important to take as long a period as possible here, firstly because doing so reduces the standard error around growth estimates, and secondly to allow for the (very plausible) possibility that tax rates have long-run effects by shaping social norms.

** We can leave public spending out of this. It averaged 37% of GDP from 1988 to 2010, compared to 37.5% in 1966-88.

Democracy in question

I have long argued that voters' preferences are systematically warped by cognitive biases or ideology. It turns out that things are even worse than I thought. A new survey by the Royal Statistical Society shows that people vastly over-estimate spending on unemployment benefits, welfare fraud and the number of migrants, among other things. This corroborates the TUC's finding that hostility to welfare spending is based upon ignorance.

This, though, brings into question the nature of our democracy. If voters are massively wrong about basic facts, what hope can there be for good policy-making?

Now, we shouldn't be too gloomy here. Alex points out that, for all their faults, British voters don't much support demagogues or the worst extremists. And Sue notes that, in at least one respect, public attitudes to welfare spending are quite humane.

What's more, we should remember that the virtue of democracy is not that it leads to better government. Instead, it is an intrinsic value; democracy recognizes the inherent equality of all people, by acknowledging that none is entitled to govern without others' consent. Bad government is the price we must pay for this principle. If moral values didn't have a cost, they wouldn't be values at all, but mere expedients.

Nevertheless, we should ask: is it possible to improve our democracy? The problem here is that bad ideas based on big errors do not get filtered out of the public debate. In fact, the opposite happens. Politics is a marketing exercise in which the media and politicians pander to public prejudice, with the result that bad ideas are actually selected for. Could things change?

In theory, yes. More associative or deliberative democratic institutions would give us a hope of filtering out bad ideas. Another possibility - which is consistent with Sam's call for more markets and less politics - is to use demand-revealing referenda. If people have to pay their own money to enforce a policy preference (say, immigration controls) they have an incentive to gather information. Making people pay is a way of making them think.

There is, of course, zero chance of such an institutional change.

There is, though, a paradox here. To see it, just ask: in which areas of public life are people most likely to be well-informed? The answer is not political affairs, where rational ignorance rules. Instead, people are more likely to have useful knowledge about their workplaces: they know, from the ground up, where there is inefficiency and waste. If we wanted to harness individuals' dispersed knowledge and expertise, wouldn't we therefore think that workplace democracy is (at worst) a reasonable idea, whilst political democracy is rather odd?

John Stuart Mill famously said that "liberty is often granted where it should be withheld, as well as withheld where it should be granted." Viewed from the perspective of efficiency - which I concede is just a partial view - you could say the same about democracy.

The wrong time

Doug Engelbart, who invented the computer mouse, did not make much money from his invention because its patent expired in 1987, before the surge in demand for home comupters. This fact poses a problem for people daft enough to think that markets reward merit - because it's quite common for very meritorious people to fail simply by being ahead of their time. Let's take a few examples from different fields:

-  Kane Kramer invented the digital audio player in 1979, far too soon for it to become sufficiently useful that he could profit from it. George Gray's patent on LCD screens expired in 1993, well before the explosion in demand for flat screen TVs and smartphones. Nicholas-Joseph Cugnot invented the car in 1769, and lost his reward for doing so in the French Revolution.

- Many writers died in obscure poverty before they reaped the rewards to their greatness: Melville, Poe and Fitzgerald to name but three.

- At the peak of his prowess with Blackpool in the 1950s, Sir Stanley Matthews earned £25 per week. A player of his ability today could get 10,000 times that.

- Many musicians died before their talent was recognized. Nick Drake, Jeff Buckley, Eva Cassidy and many great bluesmen sold about six records between them during their lifetime.

To put this another way, to achieve success it is not sufficient (nor necessary either - but that's another story) to be brilliant. You have to be brilliant at the right time. So, for example, if you'd forecast the financial crash in 2005 or 2006 and traded accordingly, you'd probably have lost money and been a failure.

I suspect that, in many walks of life - the arts, business and finance - financial success requires a one standard deviation intelligence. Writers must be sufficiently smarter than their readers that readers feel their intelligence to be flattered, but not so much smarter that they appear weird. Investors must buy or sell ahead of the pack, but only slightly so, else they'll lose money waiting for others to catch up. Businessmen must anticipate what customers will want tomorrow, not 10 years hence.

The point I'm making here is simply the obverse of that made by Malcolm Gladwell, who's pointed out that most of the richest men in US history were born into two periods: the 1830s and 40s, and the mid-1950s. They were born at the right time. Others, however, brilliant, were born at the wrong time. Which is one more reason, among many, why markets don't reward merit.

Why are unions unpopular?

Talk that Miliband is considering breaking Labour's link with the unions poses the question: why should reasonable people think distancing itself from the unions can win the party votes?

Let me first deepen the puzzle. Nobody under the age of 40 can remember when unions were (plausibly or not) accused of wrecking the economy. Indeed, these days, the wreckers are not unions but managers. From bankers causing recession through bosses plundering their companies to BBC executives stealing licence-payers money, the economic vandals today are bosses, not unions.

What's more, it would be easy to argue that stronger unions would be in everyone's interest, and not just because they help restrain managerial parasitism. They represent the "little platoons" that Tories should admire, and could be part of the "big society" that allows state regulation to be scaled back. And it's quite possible that the higher wages unions want would help the economic recovery by increasing aggregate demand.

Why, then, are unions still seen as the big bogey man that Labour feels it must distance itself from?

Obviously, Tories and capitalists and their lackeys in the media want to divide and rule their opponents. But why does Labour give credence to their demands?  I suggest four reasons.

1. Path dependency. Because we are all slow to change our minds, beliefs can persist after they've lost their truth and utility. The idea that unions are greedy wreckers thus persists long after it was possibly true - just as the idea that Tories are racist persists.

2. Modernity. Unions are seen as relics, dinosaurs. But a big part of Labour's managerialist ideology is the desire to present itself as "modern." Miliband is thus wary of associating with the unions for the same reason he doesn't wear kipper ties and Noddy Holder sideburns.

3. Individualism. The spirit of our age is the antithesis of the spirit of '45. People think they can advance themselves by individual, not collective effort. The ideology that gave us the 1945 government was created by the War. Today's ideology is created by the X Factor and Apprentice, and the pursuit of "winner take all"  prizes rather than ensuring an adequate reward for a decent job.

4. Presentation. Unions are lousy at hegemonic strategies. The rhetoric of "fighting" and "demands" makes them seem a tiresome sectional interest rather than a group whose interests are the national interest. And of course the media - including the ever-neutral BBC - reinforces this. Whereas bosses are often invited to give a "neutral" and "expert" opinion on the economy, working people rarely are. "What's good for GM is good for America" was long a plausible slogan. The slogan "What's good for Unite is good for Britain" has never even been tried. Perhaps, therefore, unions themselves are partly to blame for their political marginalization. 

Carney, Gross & the culture war

What does Mark Carney have in common with Christian Gross, erstwhile manager of Spurs?

The answer is not that they are foreigners charged with the impossible task of introducing adequacy into fifth-rate organizations. It's that both used the tube on their first day at work.

Here, though, the comparison ends. Whereas Gross was ridiculed for doing so, Carney was not.The difference highlights one of the big dilemmas facing public figures - be they football managers, politicians or central bankers.

What I mean is that they must try and send two very different - indeed, contradictory - signals. On the one hand, they must show that they are competent men in charge of events. On the other, they must show that they are in touch with people.

This is why Carney succeeded where Gross failed. Carney's technocratic credentials are secure (but give it time) whereas Gross's were not, at least in the eyes of a parochial media. So, whilst Carney's use of the tube humanized him, Gross's made him look like a buffoon.

Gross was of course not the last man to make this mistake. When Osborne tweeted that picture of him eating a burger, he was trying to look like a normal bloke. This would have worked if, like Carney, he previously built a reputation for competence. But because he hadn't he just looked silly.

These legitimation signals account for a large part of public affairs. Summit meetings, for example, are not about doing business - that can be done by conference calls and the "sherpas" - but about sending signals. They allow politicians to show that they are not trivial petty-minded nobodies being buffetted by events, but are instead statesmen bestriding the global stage. They are, as Walter Bagehot would have said, a dignified rather than efficient part of the constitution.

It's in this context that we should interpret the dilemma facing the Labour party. On the one hand, it wants to signal that it's in touch with the people. But on the other hand, some of us are hoping for signals of economic competence. The problem is that the two are mutually exclusive. Being in touch with the people requires a tough line on benefit claimants and immigrants, and the pretence that public borrowing is a big problem. Economic competence, however, requires the opposite.

For some of us, the Labour party is too much like Christian Gross and not enough like Mark Carney.

People on the populist end of this debate, such as David Goodhart and Simon Danczuk, at least have the wit to realize this mutual exclusivity between competence cues and populism. When Goodhart says "it is also not enough to sit in central London looking at databases, you also have to talk to real people" he's recognizing that scientific evidence collides with populism. And when Danczuk sneers at Owen for being "privileged", he's inviting viewers to think that anyone intelligent enough to get into Oxford (a low bar) must be out of touch. The same sneer, of course, is used when people aware of the economics of immigration are called a "metropolitian elite."

I say all this for two reasons. First, to repeat my point that populism (or perhaps even democracy) is incompatible with good policy-making. Second, I suggest that what we're starting to see here is the revival of a culture war between "eggheads" and populists. The fact that the populists are often themselves posh - David Goodhart went to Eton and Nigel Farage to Dulwich - merely vindicates Marx's point that when history repeats itself, the second time is farce.

"Economically illiterate"

In the Times (£) Simon Danczuk says lefties such as Owen Jones are "economically illiterate." He misses the point that, in many respects now, it is not the left that's economically illiterate but rather centrists like him.

 - It is economically illiterate to ignore the massive evidence that unemployment is a huge source of misery, and to talk instead of the minority of scroungers.

 - It is economically illiterate to complain about crony capitalism, as Danczuk does, without recognizing that basic economics tells us that crony capitalism is the only likely form of capitalism.

 - It is economically illiterate to think the unemployed can be incentivized into work when there are 4.9 officially unemployed people for every vacancy, and 12.1 unemployed if we use a wider definition of joblessness.

- It's economically illiterate to believe that the macroeconomic cost of scrounging is anything other than very small.

 - It is economically illiterate to speak of the "benefits of getting people into work" as Danczuk does, but then accept the Tories' tight fiscal plans for after 2015 - especially if you don't raise the inflation target.

 - It is economically illiterate to think the government is in control of its finances, and that fiscal policy alone is sufficient to reduce the deficit, without recognizing that deficit reduction requires a decline in the private sector's net financial surplus.

 - It is economically illiterate to think a jobs guarantee for those who have been out of work for more than two years is anything close to an acceptable employment policy, when these account for less than one-fifth of unemployment, and when helping them into work might well displace the shorter-term unemployed.

 - It is economically illiterate to ignore the evidence that there's very little that governments can do to much improve the economy's medium-term growth rate.

 - It is economically illiterate to ignore the fact that, throughout the west, there has been a long-term collapse in demand for unskilled work.

 - It is economically illiterate to ignore the possibility that preferences are endogenous. Insofar as some unemployed are lazy, their laziness might not (just) be a cause but rather an effect of their unemployment: why make yourself unhappy wanting something you can't have?

I don't say all this to attack Mr Danczuk, but rather to make a broader point. The phrase "economically illiterate" has long been used to smear leftists as unrealistic utopian dreamers. And I'll concede that the description fits many of the soft left. But this tactic ignores a nastier fact. At the current juncture of capitalism, what is  really economically illiterate is the belief that capitalism is compatible with decent employment prospects and living standards for all workers - especially if you limit your policy options to those that are acceptable to Paul Dacre.