Chris Dillow's Blog, page 177

Beecroft's lesson

The Beecroft report (pdf) is drivel. By this, I don't mean that I disagree with it; I also disagree with the TPA's single income tax report, but I can at least see that is a serious piece of work. What I mean is that Beecroft make no attempt to engage with the serious research on the subject. It is, says David Renton, "puff" with "no expertise". Rick says it contains "no data at all" but"quack remedies."

This poses the question: why ever did the government think that such sloppy stool-water is an adequate basis for policy-making?

It could partly be yet another example of the government's anti-intellectualism that has led to so many avoidable policy errors.

I suspect, though, that something else is happening. Beecroft continues a theme which was common under Blair and Brown - of believing that successful businessmen are somehow well-placed to review policy. Blair, for example, asked David Freud to review welfare to work policies even though, by his own admission, he "didn't know anything about welfare at all."

But why have such faith in businessmen? The answer, I fear, lies in the outcome bias. It's natural to see success and infer that some kind of skill lies behind it. So politicians see rich businessmen and think: "if you're so rich you must be smart."

But it ain't necessarily so, as this wonderful paper by Bjorn-Christopher Witte shows. He describes how, under some circumstances, competition will select not the most skilful, clever and hard-working, but rather the lucky chancer: 

Under competitive conditions that favor riskseeking behavior, the importance of skill decreases because actual outcomes are determined mostly by chance. In the extreme case, survivors are not the most skilled but simply the luckiest risk-seekers.

He discusses this in terms of fund managers, but I suspect his point generalizes.

In this sense, we should be grateful to Beecroft. The slovenliness of his report has served a useful function. It highlights how competition does not necessarily favour the smart and rational, and how politicians' deference to the wealthy is founded upon cognitive error.

The state & growth: what's the mechanism?

Whenever he was faced with a blustering student - which was often - my old economics tutor, the late Andrew Glyn, would ask: "What's the mechanism?" This is the question we should ask about the TPA's The Single Income Tax report. It says:

There is a long history of macroeconomic studies which have found that economies where public spending is a lower share of national income tend to see stronger economic growth.

Pages 130-42 of its report (pdf) provide empirical evidence.

It's in this context that mechanisms matter. There are (at least) four important, and often overlooked, features of mechanisms.

1. They vary across times and places. The TPA has in mind the idea that lower taxes stimulate entrepreneurship and investment. That's perfectly plausible. But isn't it possible that this mechanism would be weaker than usual now, given that the dearth of monetizable investment opportunities and the lack of supply of credit? The fact that lower public spending has often raised GDP growth does not suffice to show that it will do so here and now.

2. The precise type of spending matters. If by "public spending" you mean spending on airport "security", I'm with the TPA. But if you mean, say, instead spending on early years childcare, I'm not: this can raise growth both by freeing up women to enter the labour market and by raising human capital in the longer term.

3. Institutional quality matters. Public spending which is funnelled into the pockets of bureaucrats would depress growth. But spending which has positive outcomes, such as raising educational attainment (harder than it seems (pdf)) or cutting transport congestion wouldn't.

4. There's a distinction between the long-term and short-term.In the long-term one way in which spending can affect growth is by affecting social norms.But this effect can be amibguous.On the one hand, small government might boost entrepreneurial spirits and self-reliance because youngsters believe there are few state jobs available to them. But on the other hand, the same distrust of the state which breeds small government might be an obstacle to growth-enhancing public spending; look at the state of US roads or public education.

Thinking in terms of mechanisms, then, helps us reconcile (sort of) the TPA's evidence with Lane Kenworthy's observation that the Nordic nations have combined high spending with good economic performance; they - perhaps unusually, perhaps not - have had the right sort of spending; points 2 and 3 have worked in their favour.

I'd just make some other observations.

First, it's perfectly coherent to believe that the relationship between public spending and growth varies from nation to nation. The fact that the Nordic countries have achieved good growth with high public spending does not create a case for other nations to raise public spending, if bad institutions cause that spending to go on boondoogles and bureaucrats rather than upon measures to raise outcomes.

Secondly, your attitudes to 1-4 are, I suspect, hugely conditioned by your priors. If you have faith in entrepreneurial spirits and scepticism about governmental quality, you'll side with the TPA on points 1-4. If you have faith in government but not in entrepreneurial spirits you won't. Cross-country studies don't much help.

Thirdly, this is no place for "bigthink." What really matters are the microeconomic details such as the precise types of spending and the institutions through which it is channelled.

The liberal Keynesian dilemma

There's a dilemma in policy thinking which doesn't get the attention it deserves - the dilemma of liberal Keynesianism.

It goes like this. On the one hand, one of the better ways of stimulating the economy is to increase public spending. And yet on the other hand, many of us are uneasy about the social, political and cultural effects of big government.

Many people, of course, respond to this dilemma as we do to many problems, by pretending it doesn't exist. The right tie themselves in knots by pretending that shriking the state has quick and large beneficial economic effects, whilst many on the left ignore the costs of big government.

But how should those of us who take the dilemma seriously respond?

One solution is to increase not current spending, but capital spending. This has two virtues. One is that it's not subject to a ratchet effect; once a road is built, you stop spending. The other is that it is less likely to lead to many of the nasty effects of big government, which are the promotion of social norms which breed arrogant and complacent public sector workers, an acceptance of hierarchy and a decline in initiative and self-reliance.

Another solution was described by Keynes. Bigger government, he thought, would actually encourage entrepreneurship because it would improve the odds of it succeeding:

If effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

I'm not sure if either of these answers is wholly convincing. Very few people are arguing for a big shift from current to capital public spending. And few entrepreneurs or their lackeys are enthusiastic Keynesians, perhaps for reasons spotted by Michal Kalecki. This suggests either that very few share my unease at the Keynesian dilemma, or - more likely I suspect - that these answers are inadequate.

It is, perhaps, in this context that Labour's fiscal conservatives might be onto something. As Hopi and colleagues wrote:

 There are two major imperatives to a centre-left fiscal conservatism: to lock in fiscal sustainability in the long term; and to advance centre-left goals in the context of limited resources through clear priorities and bold reforms.

Unfortunately, it's not at all clear what those "bold reforms" should be, or whether they would work.

I suspect, then, that the liberal Keynesian dilemma is more acute that generally thought, especially at a time when the private sector seems unable to generate economic growth for itself.

Gender, science & stereotypes

Paradoxically, this post on gender stereotypes actually reinforced one perhaps unjust prejudiced stereotype I have - that female/feminist writers are apt to rely on unscientific anecdotes and focus upon trivial everyday irritations. This is unfortunate, because rigorous scientific thinking about stereotypes suggests that women have a genuine grievance.

This paper shows what I mean. Researchers got subjects to compete in a task in which it is thought that men do better - mentally rotating different shapes.

They found that women did indeed do worse than men in such tasks, but only when they knew their competitors' gender:

Information on rival’s gender affects women and men very differently. In the task that is perceived to favor men, it has a positive effect on men’s performance under competition, increasing their performance by almost 60%, but a negative effect on women’s performance when competing, reducing their performance in about 40%.

What's going on here is the stereotype threat, or the "give a dog a bad name" effect. When people are invited to believe that something is "man's work", men step up their effort whilst women become weedy girlies.

Stereotypes, then, are not just irritating generalizations. They have serious and large effects.

I find it plausible that this could have adverse effects upon women's life chances. If some jobs are perceived as "men's work" then women will be less inclined to do them, or might do them worse, even if there is no original rational basis for that perception; it's the perception that creates the reality, not vice versa.

What should be done about this? The answer might not be positive discrimination, such as having quotas for women directors. The authors say:

Affirmative action policies based on gender may in fact have counterproductive effects, since while creating advantageous conditions for women they also make gender information salient, affecting women’s performance negatively.

Instead, I suspect the solution is to challenge the original stereotypes - to show that gender differences either do not exist or, where they do, that they are the result of a social construct, rather than innate biological differences; the work of Alison Booth is relevant here.

Now, it should be obvious from that I say this not to criticize feminists. Quite the opposite. Underneath the trivial anecdotes lies a real and important issue.

A defence of austerity

Is there anything to be said in defence of the coalition's fiscal austerity? Martin Wolf and Jonathan Portes think not. And the Tories' usual defences of their policy seem inadequate. The idea of expansionary fiscal contraction has come as close to being refuted as any macroeconomic idea can be - at least in terms of its relevance here and now. The government's claim to be "fiscal conservatives and monetary activists" is undermined by Osborne's failure to change the inflation target. And the idea that austerity is necessary to retain the faith of bond markets is, at best, an unproveable counterfactual and at worst ("we could have been like Greece") mindless drivel.

So, what can be said for austerity? If I were a Tory, I'd try the following.

The focus of policy should be upon long-term prosperity, not the here and now.

One reason for saying this is that complaints about current high unemployment are mere crocodile tears. If Labour really were concerned about the costs of short-term downturns, it would have used its 13 years in power to improve risk-pooling - either by increasing out-of-work benefits or by encouraging the development of macro markets. It didn't do so, and voters didn't want them to. This tells us that the public behave like Lucasians (pdf), in thinking that the costs of downturns are small.

What's more, the very fact that real bond yields are low tells us that future income is very valuable, relative to present income. We should therefore try to maximize it. And austerity raises long-term growth.

This is partly because there can be a trade-off between stabilization policy and longer-term growth. One overlooked reason for this is that a counter-cyclical fiscal expansion would merely involve spending on unproductive boondoggles that burden future generations. As Britmouse says: "I doubt the Pembury road will ever get priority over the expensive white elephants."

More importantly, though, there's some evidence - not as much as Amity Shlaes pretends, but some - that lower government (pdf) spending can raise long-term growth. Granted, that evidence comes mainly from cross-country research of questionable validity. But two mechanisms make the link plausible.

One is Baumol's cost disease. Government, by its very nature, has low productivity growth. This means that having a big government condemns us to low growth by simple maths. Worse still, the rising relative cost of government over time will crowd out the private sector - and the bigger government is, the sooner it will do so.

The other is that, in the long-run, social norms matter. The persistence of big government threatens to create a norm in which young people to look for safe public sector jobs in sclerotic hierarchies, which would divert talent away from the private sector towards low-productivity-growth work. This could choke off future growth. Also, prolonged austerity now is creating low or negative real interest rates. This will encourage youngsters in future to take on more debt - because macroeconomic conditions in our formative years shape our behaviour (pdf) throughout our lifetime. In this sense, austerity today will encourage borrowing in future - maybe for consumption but maybe too to set up businesses. This too should raise future growth.

As for why we should cut now, there are two reasons. One is that it's what the public want: Labour's offer of (slightly) smaller and later spending restraint was rejected by the voters.The other is that the sooner we start cutting, the easier it will be in future - partly because the objections will be out of the way, and partly because once we get into habits, it's easier to stick to them.

Now, I suspect this sort of argument makes more sense than the standard Tory ones - though that's a low bar. As for how much sense it makes, I'm not sure.

Sexism, deunionization & inequality

Is sexism partly to blame for the decline of trades unions? A new paper suggests so. It finds "a negative and statistically significant link between workplace union density and gender diversity" and says:

The increase in the labour market participation of women in the face of gender discrimination may increase friction between female and male employees within the workplace. This may, in turn, pose challenges in the way of coalition building, which unions need to achieve in order to succeed.

In other words, it might be no accident that the increase in female employment since the 70s has coincided with declining unionization; the former might be one cause (not the only one, of course) of the latter.

Intuitively, we shouldn't be too surprised at this. There's sad evidence that ethnic diversity weakens social solidarity and the building of pro-redistribution coalitions. Mightn't the same be true for gender diversity?

You can read this in two different ways.

You could say that the decline of unions is (partly) due to men's sexism, a reluctance to unionize with women.

Alternatively, you could ascribe it to the increased gender mix of workplaces.

It is, of course, the interaction of the two that does the damage.

This raises an awkward point. The decline of unions since the 70s has contributed (pdf) to rising wage inequality. If increased gender equality (in the sense of more job opportunities for women) has contributed to the decline of unions, then it follows that greater gender equality has been a cause of reduced income equality. Rick recently noted, rightly, that "We are more economically unequal but less socially unequal than we were three decades ago." But he didn't add that the latter might be a cause of the former.In this sense, there are - at least for given (sexist) norms - potential trade-offs between different types of equality.

Unemployment: a river not a pool

The ONS released some important data today that deserve more attention - the unemployment flows numbers. These show several points of interest:

1. In Q1, 530,000 people moved from unemployment into work. That's over one-in-five of all the unemployed. Even in a depressed economy, folk have a fair chance of finding work.

2. In the same quarter, 342,000 moved from economic inactivity to work. These represent 15.1% of the economically inactive people who'd like a job. The chances of moving from inactivity to work are not much lower than the chances of moving from unemployment to work. This suggests that very many of the inactive are disguised unemployed. With 2.34 million of the inactive saying they'd like a job, this could mean that unemployment is much greater than official figures suggest.

3. Almost as many people moved from inactivity to unemployment (438,000) as moved from employment to unemployment (443,000).This also suggests that the distinction between inactivity and unemployment is fuzzy.

4. 902,000 moved from employment to unemployment or inactivity in Q1. This represents 3.3% of all in employment. This suggests that, over a three month period, the average worker has a one-in-30 chance of losing their job.(This underestimates job insecurity, as it excludes folk who lose their job buy find another within the quarter.)

5. Of those 902,000, 459,000 moved into inactivity and 443,000 moved into unemployment. This tells us that unemployment is a poor measure of people who have lost their jobs, as less than half of those doing so actually become unemployed.

The overall picture here is that we should not speak of a "pool" of unemployment. Rather, the unemployment number is a snapshot of a quite fast-flowing river.Such a snapshot fails to capture the fact that job insecurity is high, and that more people want to work than the headline unemployment figures suggest.

For more on UK unemployment flows, check out the work of Jennifer Smith.

The coming crisis of Conservatism

Tory ministers have told British business to stop whinging and work harder. These remarks are more significant than generally thought.I suspect they are the bewildered howls of frustration of men who realize that their god has failed them.

What I mean is that, for at least 40 years the central tenet of Conservative economic thinking has been that if only government could "get out of the way", entrepreneurial spirits would be unleashed and the economy would grow.

This belief has not always been wrong. But it is now. Record-low interest rates, a quiescent labour force and the (prospect of) a public spending squeeze has not boosted the private sector. British businesses' get up and go has got up and gone. Quite why this is so is a long story, but it involves:

- the dearth of investment opportunities, due to a lack of monetizable innovations and the migration of low-wage industry to Asia.

- the fact that geography is against the UK. It shackles us to the euro area, and men rarely swim strongly when they are tied to a drowning man.Today's figures show that export volumes grew just 0.3% in the last 12 months, quashing hopes that we can export our way out of austerity.

- the absence of credit growth.

These factors don't just mean that Osborne's hopes of expansionary fiscal contraction are misplaced. They bring into question a decades-old Tory ideology of faith in business and smaller government.

The question is: where does this leave Tory economic thinking? The right's answer is to double up, and demand more cuts in taxes and spending - apparently ignorant of balanced budget multipliers. Ministers' answer seems to be just exhortations to business to do better, accompanied, I suspect, by the hope that something will turn up.

But what if it doesn't? I suspect we'll then see a crisis of Conservatism of the sort that afflicted Labour for years after the collapse of social democracy in the 1970s.

An equality multiplier?

Why are some countries more equal than others? A new paper by Erling Barth and Karl Ove Moene has an explanation - the equality multiplier.

This consists of two mechanisms:

1. A wage equalizing effect. A generous welfare state - decent unemployment benefits - reduces the threat of the sack. It thus empowers the low paid to push for higher wages.

2. An equality magnifiying effect.Greater wage equality means higher incomes for those on below-average wages, and higher incomes increase people's willingness to pay the taxes that fund social insurance - especially to the extent that those on below-average incomes are more vulnerable to the shocks (such as unemployment) that the welfare state provides against.

These two mechanisms feed off each other, in such a way that equality multiplies. This helps explain an otherwise curious fact - that countries that have more pre-tax equality also have more generous welfare states; contrast Scandinavia with the UK or US.

If this is right, social democrats should rejoice, as it implies that quite a small move towards equality can generate moves to even more equality. For example, better unemployment benefits increase workers' bargaining power, which increases their wages, which in turn makes them more willing to fund a welfare state.

However, there are two dangers here. One is that the multiplier works both ways: it can magnify inequality too. Barth and Moene write: 

Higher inequality means lower incomes relative to the mean for a majority of voters. With a lower income each of them would like to allocate a larger share of it to immediate consumption rather than to tax-financed welfare programs with less direct benets. Thus, increasing wage inequality means a declining electoral support for a larger welfare state.

This passage, though, highlights a problem I have. Is it really true that, as the incomes of the relatively poor increase, they become more willing to pay tax and less desirous of higher personal consumption? Certainly, this can happen in some times and places. But isn't there instead the opposite danger? As the worse-off become better off, their support for a welfare state might decline, because they will have to pay for it themselves, rather than rely upon better-off others doing so. Similarly, if moderately well-off workers become better off, their willingness to support others might decline, as welfare benefits are seen to go to "scroungers" rather than neighbours. In cases like these, we moves towards equality actually backfire; as Nick says, a similar thing can be true for social equality too.

I only take one conclusion from this. It's that egalitarian policies, and the social basis of them, interact, perhaps in complex ways that are sensitive to initial conditions, (changing) social norms, cognitive biases and the precise distribution of income and perceptions thereof. In this sense, moves towards or away from egalitarianism have genuinely unforeseeable effects - which egalitarians might or might not like.

Private schools' advantage

Michael Gove's speech decrying the domination of the privately-educated has reignited an old debate. But there are two important distinctions to be made here.

One is: does private schooling confer advantages merely through the quality of its education, or does it confer them even beyond this?

If private schools merely offer better education, you'd expect their pupils to get more A levels and places at Oxbridge, but you wouldn't expect them to go on to succeed more than state school pupils with the same qualifications.

However, two pieces of evidence suggest they do better than this. One is that, as the Sutton Trust has shown, the top professions comprise more former private school children than one would expect from their roughly 50-50 share of Oxbridge students. The other is that men from independent schools earn almost 7% more (pdf) than men from social classes IV and V, even controlling for the type and quality of the degree they have.

This implies that you cannot eliminate the advantage that private schools have over state schools merely by eliminating their educational superiority - not that this is feasible, given how expensive it would be. Worrying about teacher quality and class sizes, as Gove does, is therefore not the whole story. Yes, it's a (big) part of the story. But not the whole of it.

The second question is: does private schooling actually cause these non-educational differences, or is it correlated with them?

What I mean is that they are likely to be due to things such as greater confidence, ambition, a sense of entitlement to top jobs and social networks.But it's quite possible that these would exist even if private schools did not, simply because they would be transmitted from rich parents to rich kids anyway.

What I'm saying here is that abolishing private education, as George Monbiot and Laurie Penny advocate, is not sufficient - whether it's desirable or not. The advantages of the rich would exist even if private schools were abolished. I agree with Shuggy: if you want to increase equality of opportunity and social mobility - and I'm not sure how many people do - you need to reduce economic and social inequality.

Another thing: I suspect that the disadvantage bright state-educated kids have against private school kids is smaller in the City than in the media - that Jim O'Neill is less atypical in finance than Paul Mason is at the BBC. Is this just me, or is there hard evidence for it?

Yet another thing: Given the prevalence of public school kids in acting, music and sport (other than football), I suspect an under-rated benefit of private schools is not so much their formal academic superiority, as the better extra-curricular education they offer.