Chris Dillow's Blog, page 76

Uber vs coops

A nice letter in the FT recently described Uber as a form of cyber serfdom. It���s a good analogy not just for Uber but for similar firms in the ���sharing economy��� such as Deliveroo. Whereas farmers once paid socage to their feudal lords, drivers now pay it to the owners of an app.

This poses the question: why do such feudal arrangements exist? Uber���s drivers are supplying capital ��� the cars ��� and are bearing a lot of risk. Common sense says that people with more skin in the game should own the company, because they have the sharpest incentives to make it work. As Oliver Hart put it, "a party with an important investment or important human capital should have ownership rights."

So, why have we got Uber and Deliveroo rather than cooperatives of drivers or cyclists who simply hire an IT guy to write an app? I suspect there are three reasons.

One is a lack of entrepreneurship. If you���re a cabbie or new migrant, you���re struggling just to get by. You don���t have the cognitive bandwidth to see a new profit opportunity or start a company.

Secondly, there���s a standard collective action problem. Getting dozens of cabbies together to agree upon something is tricky. It���s easier for the app developer to find cabbies and co-ordinate them than it is for cabbies to co-ordinate themselves. To use Oliver Williamson���s analogy, a wheel-type network in which the central hub communicates with others can be easier than an all-channel network in which everybody tries to coordinate with everybody else*:

To the extent that the requisite information-processing and decision-making talents are not widely distributed, efficiency will be served by reserving the central information collection and decision-making position to the one or few individuals who have superior information processing capacities. (Markets and Hierarchies, p 52)

Thirdly, there are credit constraints. Uber began with $200,000 of seed funding. That���s a lot for a team of cabbies to raise. And it���s easier to raise the money when you can show backers a natty app than when you���re merely hoping to buy the app ��� and, of course, much easier when you have a track record of a successful business behind you, as Uber���s founder Garrett Camp had.

But here���s the thing. Although these points explain why a coop didn���t come up with Uber in the first place, they are consistent with the possibility that coops will displace it eventually. Uber has demonstrated proof of concept, and energized its contractors to try to cut out the middle man. As a result, it is facing some nascent competition. In the US People���s Ride has begun as a challenger to Uber. And the Guardian reports that Yorkshire cabbies are starting their own coop. Such initiatives could spread.

In a classic paper, William Nordhaus pointed out that the profits from innovative activity usually got competed away. The question for Uber, therefore, is: does it have what Warren Buffett called an economic moat ��� protection against competition**? Is first mover advantage really sufficient? I���m not sure. And I���m certainly not $62.5bn sure.

Coops have started slowly in the race against cyber-feudalism, but they might win in the end.  

* The collective action problem might be especially severe for larger groups, such as home-owners who use Airbnb or ��� eventually ��� owners of self-driving cars wanting to hire them out. Cyber-feudalism might have a bigger edge here.

** Apple���s great designs and brand loyalty give it a big moat ��� which is why it has been an exception to Nordhaus���s finding.  

A welfare state: good for savers

A strong welfare state helps far more people than you might think. That���s my reaction to Shaun���s description of how low interest rates are hurting savers and pension funds.

To see what I mean, let���s start from Andy Haldane���s justification for low rates ��� that he would rather err on the side of looseness than tightness:

I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.

From one perspective, this preference seems odd. Robert Lucas famously argued that the welfare cost of economic fluctuations (pdf) were tiny. Why, then, is the Bank so keen to hurt savers by trying to reduce them?

The answer, of course, is that the costs of recession are not borne by some mythical representative agent. If a 1% fall in GDP (say) meant that everyone���s income fell 1% it would indeed be no big deal. But this isn���t what happens. Recessions impose massive costs upon the minority of people who suffer job loss ��� and we know that unemployment has massive human costs in terms of health (pdf) and mental well-being.

These costs fall especially heavily upon the young (pdf) and worse-off (pdf), who have no savings to cushion them through hard times. The coming downturn might be no different: as Brian Bell and Stephen Machin warn, it could hit low wages areas hard.

The justification for a rate cut is that it is an attempt to mitigate these high costs.

But why should it be monetary policy that does this? In principle, the job could be better done by a more generous welfare state (or macro markets!) ��� including a job guarantee.

If we had these better risk-pooling institutions, there���d be less need for counter-cyclical monetary policy. Older savers would therefore benefit from higher real interest rates, and younger ones would be better able to save for their old age. The risk of a financial crash ��� caused by investors piling into over-priced assets in an attempt to ���reach for yield��� ��� would also be less.

In this sense, those who are suffering from low interest rates ��� and I���m among them! ��� are the victims of an inadequate welfare state.  However, because people are terrible at making connections between economic phenomena they fail to see this ��� and our imbecile media doesn���t help them.

A good welfare state, therefore, shouldn���t be a sectarian demand of Trotskyites. It���s of far wider benefit than that.

On randomization

Burton Malkiel claimed that ���a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts". He was too harsh ��� on the monkeys. Subsequent research has shown that they often beat experts*. For this reason, I recently suggested that stock-pickers should employ some randomization.

Two things I���ve seen since then have broadened the case for random choice. David Van Reybrouck revives the argument for sortition. And Steve Levitt shows that people who decide upon a difficult choice (such as whether to leave a job or partner) by tossing a coin are significantly happier six months later.

This poses the question: when should we use randomization?

One circumstance is where there is significant indeterminacy - when we simply don���t have good reasons for preferring one option over another. This is the case (subject to caveats) for stock-picking: in many cases, we just can���t predict which stock will out-perform. It might also be true when picking candidates for a job. if we can���t be sure who is the best, we might pick one at random from those who meet the desired criteria.

Such cases might be common in economics. Keynes thought that investment decisions depended upon animal spirits not because businessmen were irrational but because rational deliberation was in fact impossible:

The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.

Another circumstance is where reason might go wrong. Levitt thinks this is the case in his study. He believes that the status quo bias leads people to stick with unsatisfactory jobs and relationships, so that choosing at random can avoid that error, thus forcing people into decisions that make them happier.

I���d add another example. If our judgment proves correct in one or two instances, it can lead us astray. This is because correct calls can embolden us to become reckless in later decisions. This is what happens to investors. It might also have afflicted Tony Blair: his successful military interventions in and Sierra Leone led him to believe he could repeat those successes in Iraq.

All this poses the question: if there���s a case for randomization, why is it so rarely used? You might think it absurd to decide matters such as whether to go to war by lottery**. And the excessive use of lotteries could lead to the sort of unpredictable world described (pdf) by Borges.

I suspect, though, that there are two bigger reasons why randomness is so rarely used. One lies in a version of the narrative fallacy; we need explanations, which randomness doesn���t give us. As Jon Elster put it:

Human beings are���reason-seeking animals. They want to have reasons for what they do, and they create reasons where none exist. (Solomonic Judgements, p56)

A second reason lies in overconfidence***. This causes us to over-estimate the scope and power of our reason, and thus to apply it where it is in fact useless or even counter-productive. In this sense, the same overconfidence that leads us into error also causes us to fail to see that we sometimes need protection from that overconfidence.

* This is because most stock market indices are weighted by companies��� market capitalization and because small stocks often beat larger ones. This means that that most stocks often beat the market, implying that a random selection will beat a closet tracker fund, which is what many funds actually are.

** Or is it? The lotteries needn���t contain equal chances: they could be weighted to give particular low probabilities.

*** One virtue of Channel 4���s Naked Attraction is that it reminds us of Kahneman���s claim that overconfidence is ubiquitous: if you looked like those guys, would you really want to appear naked on TV?

Piers Morgan, neoliberal

I���ve long been sceptical of the term ���neoliberalism���, thinking it a boo-word to describe justifications for theft and fraud. However, the unlikely source of Piers Morgan has made me think I might be wrong. He tweeted:

Just can't get excited by Silver & Bronze medals. You win or you lose. Gold is all that matters.

This echoes Donald Trump: ���I don���t like losers���.

Both statements have much in common. One thing is the ignorance of luck; people can fall short of winning for reasons beyond their control. But there���s another thing I want to focus on. To see it, recall Alasdair MacIntyre���s distinction between the goods of excellence and the goods of effectiveness. The goods of excellence consist in mastery of particular practices, which tend to be positive-sum: one man���s excellence can be celebrated by all. The goods of effectiveness, however, are things like wealth, fame, power and winning, and these are often zero-sum: for a winner there must be a loser.

What Morgan is doing is devaluing excellence and asserting that only the goods of effectiveness matter. In doing so, he is speaking as he has lived: his career is a testament to the acquisition of wealth and fame without merit. In this sense, he is the exact opposite of ���losing��� Olympians. To be the third best gymnast or cyclist in the world requires almost unimaginable levels of dedication and skill which most of us applaud. Chris Froome might have ���only��� won a bronze yesterday, but he has something Morgan will never have ��� the respect of reasonable people.

It���s here that neoliberalism enters the picture. As Will says, this is not merely free market ideology, but also about the expansion of managerialism and of government - for example, bailing out banks.

And it���s in this context that I might have been wrong. Perhaps there is a unifying theme behind what looks like a ragbag of disparate developments: it���s the elevation of the goods of effectiveness over those of excellence.

For example, the ���neoliberal university��� - in which hugely-paid vice-chancellors preside over degree factories ��� represents the rise of the goods of effectiveness and devaluation of excellence, scholarship for its own sake. When banks mis-sold PPI insurance and ���shitty��� mortgage derivatives they were pursuing effectiveness, not excellence. Similarly, target-driven new public management displaces the ���knightly (pdf) motives��� of public servants, again, prioritizing effectiveness (managerial power) over excellence.

It would, of course, be wrong to see this as a wholly new development. The conflict between managerial power and craft excellence is decades old: you can find it in the Ragged Trousered Philanthropists and in Taylor���s scientific management, as described (pdf) by the great Harry Braverman. What is perhaps new about neoliberalism is that it is a war against excellence (in MacIntyre���s sense) on so many fronts.

What���s so heartening about the backlash against Morgan ��� other than the fact that abuse of him is always welcome ��� is that it shows that neoliberalism���s victory is far from complete.  

Now, you might object here that Morgan has for years been a Labour party supporter. And therein lies the problem.

My socialism

Geoffrey Hodgson poses an old question: what is socialism?

I share his dissatisfaction with Corbyn���s definition as a way of living in which ���everybody cares for everyone else.��� For me, socialism is not about being well-meaning busybodies. Rather, the care must be expressed via institutions which meet people���s needs whilst treating them with dignity. On this score alone, our welfare state and immigration system fail.

So, can I come up with a better answer to Geoffrey���s question? Here���s my personal and idiosyncratic take.

First, a caveat. Like Marx, I���m not keen on detailed blueprints. Capitalism did not spring fully-formed from a single great mind, but rather evolved over centuries. The same will be true for socialism. Yes, there���s a place for utopian thinking insofar as it reminds us that there are alternatives to the present system, and insofar as they ask us how we might better embed values into institutions. But they can be a menace if they encourage sectarianism ��� ���my utopia is better than yours��� ��� and make the best the enemy of the good.

Instead, for me, socialism is a set of institutions which reconciles three principles.

First, real freedom. For me, socialism means giving people control to live their lives as they want. A basic income (pdf) and worker democracy are key features here.

Secondly, substantive equality. Rightist clich��-mongers will sneer here that full equality is impossible. But few leftists mean that everyone must have identical incomes, any more than that they must all wear Mao suits. Instead, two possible guidelines are envy-freeness and Rawls��� difference principle ��� that inequalities be acceptable only if they are to the greatest benefit of the least advantaged members of society.

For me, what matters here isn���t just inequalities of income, but of power and respect too. For this reason, whilst redistributive taxes are necessary they are far from sufficient. What���s also needed (among other things) is an end to the ���messiah complex��� - our moronic faith in bosses and leaders. One reason why I doubt that Labour party is an adequate means of achieving socialism is its obsession with leaders��� personalities to the detriment of sensible institutional reform.

Thirdly, we must recognise that knowledge and rationality are tightly bounded. For this reason, Geoffrey���s right to say that ���relatively little can be planned from the top.��� Markets, therefore, have a big place in socialism ��� not least because, as Adam Smith said, they are a means whereby people provide for others without caring. (The best counter-argument to this I���ve seen comes from Matthijs Krul).

This principle has another implication. Socialism should be achieved by evolution, by creating stepping stones ��� small institutional tweaks that create the potential for bigger ones. For example, small acts of empowering people ��� such as worker directors or patients��� groups ��� might create a demand for greater power.

In this context, expansionary macro policy and job guarantees are important in two different ways.

First, economic growth makes people more liberal and tolerant and hence supportive of beneficial change; the notion of some ultra-leftists that recessions create demand for socialism has surely been refuted by history.

Secondly, full employment would greatly undermine capitalist power. In my socialism, awful working conditions such as those at Sports Direct wouldn���t exist not because they have been outlawed but because workers have the real freedom ��� via a basic income and good jobs elsewhere ��� to reject such conditions. One step to socialism consists in enabling people to follow Johnny Paycheck���s example.

Yes, full employment would squeeze profits. But this would, I���d hope, create conditions for more worker ownership. Capitalism might thus wither away.

Now, you might object that all this isn���t too far away from Sam Bowman���s ���neoliberal��� manifesto. I couldn���t give a toss*. If we are to move towards socialism, we must take as many people with us as a far a possible ��� although of course there���ll come a time when Sam and I prefer different paths.

For me, socialism requires building support for institutional change. It���s not about narcissistic sectarianism. As I said, this is an idiosyncratic view.

* It���s a lovely paradox that it is now the right rather than the left that wants to abolish (one form of) money.

Bosses pay: the right's problem

The High Pay Centre said yesterday that FTSE 100 CEOs��� pay rose 10% last year to an average of almost ��5.5m. It���s obvious that the left should find this a problem. I want to suggest that it should also be a problem for the right too, for four reasons.

First, high CEO pay is due in at least part to a market failure. Milton Friedman famously said: ���If I spend somebody else���s money on somebody else, I���m not concerned about how much it is, and I���m not concerned about what I get.��� This is what happens when CEO pay is set by remuneration committees. Brian Bell and John Van Reenen point out (pdf), CEOs are paid for luck and not just skill, and their pay ���rises much more when the firm does well, than it falls when the firm does badly.��� As Simon says, CEO pay isn���t determined by market forces but by bargaining power.

There���s also an agency problem. CEOs can and do behave in a manner that enriches themselves rather than shareholders. For example, high leverage is good for banks��� CEOs but not so much for shareholders.

There���s another form of market failure: an arms race. Firms wanting to hire a good CEO want to pay an above-average salary. But if everyone tries to pay above-average, all that happens is that the average rises.

Of course, ��5.5m is tiny in the context of companies worth ��30bn+. But then, so is employee pilfering. Does that thereby become acceptable?

Secondly, rising CEO pay, especially when accompanied by a degradation of ���middle-class��� jobs means we���re shifting from a bourgeois society to a ���winner-take-all��� one. This has potentially nasty cultural effects. Whereas a bourgeois society fosters virtues of trustworthiness and prudence, as Deirdre McCloskey has shown, a winner-take-all society might reward vices such as ruthlessness, narcissism and deceitfulness.

Thirdly, it���s possible ��� I put it no stronger than that ��� that high CEO pay is bad for overall productivity. ���Wage inequality has a negative effect on a country's labour productivity���  one study. One mechanism here (of several) is the messiah complex. If superstars are paid fortunes relative to other employees, those employees will tend to look to the star rather than take initiative themselves. As Jeffrey Butler���s experiments have shown, pay affects beliefs about ability: the low-paid come to believe they have little skill whilst the high-paid become overconfident ��� and of course, overconfidence itself can lead to disastrous decisions.

It���s a simple fact that rising CEO pay in recent years has been accompanied by stagnant productivity. Of course, there are countless possible reasons for the latter, and correlation isn���t causality. But can we really be sure the two are unrelated?

Finally, there���s a danger that rising inequality will produce a nasty backlash. We know with some confidence that inequality tends to create distrust. And combined with stagnant incomes, it also breeds intolerance and small-mindedness. These might easily create hostility towards a market economy. We���re seeing this with support for Trump���s hostility to free trade. But who knows where else it might lead? Political instability is no friend of business or free markets.

Now, against these mechanisms you might try some defences of high pay ��� though Paul Marsland and Tom Powdrill have shed doubt upon those.

My point here is a simple one. There are good reasons why Theresa May has spoken of the ���irrational, unhealthy and growing gap��� between bosses��� and workers��� pay. It���s because such a gap threatens the values and interests of many conservatives.

Many Marxists are relaxed about this; it just confirms our view that capitalism is a device through which the rich exploit others. Should rightists really also be relaxed? I mean, they can���t all be just hypocritical shills of the rich, can they?

Grammar schools: the new Brexit

I went to a grammar school. Had I not done so, I doubt I would have gone to Oxford; I���m not one of those arrogant twats who thinks he would have ���succeeded��� in any environment. You might imagine, therefore, that I���d support new grammar schools as a means of increasing social mobility.

You���d be wrong.

One big reason for this is that I was atypical in getting into a grammar from a poor background. Chris Cook points out that in Kent, where grammars still exist, poorer kids are far less likely to attend them than richer ones. This corroborates work by Adele Atkinson, Paul Gregg and Brendon McConnell who have found (pdf) ���substantive under representation��� of poor children in grammars ��� a finding consistent with international evidence which shows that selective education increases inequality of opportunity.

My experience fits this. My school was two bus rides from home in a richer part of Leicester, and it played rugby rather than football ��� two powerful ways of signalling that boys like me were not welcome.  (There were also astonishingly few boys from ethnic minorities; my school was the whitest place in Leicester in the 70s outside of a National Front meeting.) It was only when I encountered a great teacher in the sixth form that I even began to feel as if I belonged. And he wasn���t an Establishment man: think of Mr Hector without the sexual peccadilloes.

Of course, equality of opportunity isn���t everything (or even anything!) But there���s no evidence that grammar schools improve overall educational outcomes either. Chris and Atkinson and colleagues show that those who attend grammars do a little better than they otherwise would whilst those who don���t do worse, leaving overall effects more or less unchanged. This too is consistent with the international evidence.

All this poses the question: given that there���s no good evidence that grammar schools improve either social mobility or overall educational outcomes ��� facts recognized by intelligent Conservatives - why is there still support for them?

One reason, I suspect, lies in the fact that private schools are so damned expensive. Some parents want to bring back grammar schools as a cheap way of ensuring that Tarquin and Jocasta don���t have to mingle with the riff-raff. There is, of course, an element of wishful thinking here: people over-estimate the abilities of their offspring and the chances they���ll pass the 11+. There���s also, as Angela Rayner says, an element of ���harking back to a mythical ���golden age������.

This mix of ignorance, atavism and wishful thinking is very much the same sort of thing that lay behind support for Brexit.

On causes of Brexit

There���s something about the post-Brexit autopsies that I���m not entirely happy with. It���s the failure to distinguish between the margin and the infra-margin.

Take a now-standard narrative ��� that older, authoritarian, less educated and lower-earning people tended to vote Brexit.

As Gary Bennett reminds us, we must avoid a common logical error here. Just because the uneducated disproportionately voted Leave does not mean that Leave voters were mostly uneducated.

Also, as Ben Chu points out, mono-causal explanations raise questions:

If the issue is a post-crash squeeze on incomes, why did young people, who have suffered disproportionately since the 2008 financial crash, apparently vote heavily in favour of continued EU membership while a majority of the over-50s, whose incomes have held up relatively well, vote against?

However, I want to focus on another problem. It���s that we knew months ago that older, poorer and less educated people were anti-EU. And yet Brexit came as a surprise ��� to betting markets, financial markets and not least to David Cameron.

This paradox warns us that whilst the conditions for a big anti-EU vote were in place ��� we knew for months that some 40% of voters supported Brexit ��� what remains unexplained is the surprise.

To put this another way, longstanding anti-EU sentiment was infra-marginal. The question is: what happened at the margin to tip the balance in favour of Brexit?  

The answer here, I suspect, lies in the Vote Leave campaign itself. It succeeded in mobilizing latent discontent in a way that neither Labour not UKIP managed in the 2015 general election: only 3.9m voted UKIP but 17.4m voted Leave. It did so in four ways:

 - ���Take control��� was, as Will Davies says, ���a piece of political genius. It worked on every level between the macroeconomic and the psychoanalytic.��� It spoke to communities which had long left neglected by mainstream politicians.

 - In not providing any sort of precise plan for Brexit, Vote Leave exploited wishful thinking and the tendency of people to take risks when they feel they have lost, by allowing voters to read into Brexit what they wanted: free marketeers saw it as a road to an open economy; Lexiters as a way of snubbing neoliberalism and anti-immigrationists as a way of closing borders. Thus was an incompatible coalition created.

 - It played upon hostility to immigration ��� a hostility the conditions of which were laid in part by austerity.

 - It exploited the distrust of experts, and so neutralized economists��� warnings that Brexit would make us poorer. It was helped in this regard by inequality. Not only did this create a distance between experts and lay-people, but we also know that inequality causes distrust.

What I���m trying to do here is reconcile two different perspectives. On the one hand, Eric says ���culture and personality, not material circumstances, separate Leave and Remain voters. This is not a class conflict so much as a values divide.��� And Rick says ���the left-behind who voted for Brexit last week were left behind a long time ago.��� These are statements about the infra-margin. But when I say that austerity and inequality ��� as cleverly exploited by Vote Leave - contributed to the Brexit vote, I���m claiming these things mattered at the margin.

There���s something else. Vote Leave was surely one of the most successful political campaigns in history. It was also dishonest and anti-intellectual. That both these claims are true is one of the most troubling features of modern politics.

The Tories' intellectual decline

We on the left use the word ���Thatcherite��� as an insult. Perhaps we shouldn���t, because Thatcherism was vastly more intellectually coherent than the childish gibberish that passes for Conservatism today.

I���m prompted to say this by an astonishing lead article in the Telegraph, which tries to blame ���Project Fear��� for the economic slowdown that triggered yesterday���s cut in Bank rate. It says:

If Britain is indeed experiencing a dent in consumer confidence then it is not down to Brexit ��� for that hasn���t actually happened yet.

The flaw here is so horrifically obvious that I���m embarrassed to point it out. Quite simply, the future affects the present because people act upon expectations. If they expect prices to rise, businessmen will raise prices now. If they expect good times, they���ll spend and if they don���t, they won���t. Yes Milton Friedman ��� one of the intellectual fathers of Thatcherism - was wrong to say the future is all that matters, but he was right to say that it matters to some extent.

Thatcherites, of course, knew this. In fact, it was the centrepiece of their economic policy. As 1980���s Medium Term Financial Strategy said (pdf):

The speed with which inflation falls will depend crucially on expectations both within the United Kingdom and overseas. It is to provide a firm basis for those expectations that the Government has announced its firm commitment to a progressive reduction in money supply growth.

Of course, inflation expectations didn���t fall as much as they hoped, which caused a bigger recession than they expected. But no Thatcherite would have been so stupid as to dismiss the role of expectations altogether.

This is not the only way in which the Telegraph has lost touch with Thatcher. She said:

An economy will work best when it is built on a framework of clear and predictable rules on which individuals and companies can depend when making their own plans���Government's primary economic task is to frame and enforce such rules.

This, of course, is 100% opposed to the policy advocated by the Telegraph.

What we have here, then, is a massive gulf between Thatcherism and today���s Tories. You might think that, as a lifelong anti-Thatcherite, I���d welcome this. I would, if Thatcherism were replaced in the Telegraph���s mind (I use the word in its most elastic sense) with some superior alternative. But this is not the case. I think Thatcherism was wrong. But it was at least tolerably coherent. Her epigones today instead offer just a ragbag of cognitive biases such as wishful thinking, overconfidence and the confirmation bias. The intellectual standard of Conservatives has, it seems, slumped since the 80s.

In defence of Labour's fiscal rule

Richard Murphy and James Meadway have been debating Labour���s fiscal credibility rule. Richard says it commits Labour to austerity; James says it doesn���t. I agree with James.

Let���s take Richard���s strong point. As I understand it, this is that public borrowing is the counterpart of private sector saving. The fact that a government deficit today co-exists with record-low bond yields tells us that the deficit is due to a global savings glut (or investment deficiency): accounting identities tell us that the counterpart to government borrowing is the UK���s current account deficit, which is another phrase for the rest of the world���s excess of saving over investment.

Given that post-Brexit uncertainty is causing firms to delay spending, it���s possible that the global savings glut will soon be also accompanied by the return of a significant corporate sector financial surplus, which would increase government borrowing.

Richard���s right that a fiscal rule which commits the government to fiscal balance in a world where the private sector wants to save would depress the economy and be self-defeating ��� just as Osborne���s austerity was.

However, there are three safeguards against this. The biggest is the knockout clause ��� that the rule will not apply when interest rates are at the zero bound. As John McDonnell said:

We will reserve the right, for as long as monetary policy is unable to undertake its usual role due to the lower bound, to suspend our targets.

A world in which the private sector is saving massively will be one in which rates are near zero, so the rule won���t apply.

Secondly, the same savings glut which gives us big public borrowing also gives us ultra-low bond yields. These mean that McDonnell���s promise to reduce the ratio of government debt to (trend) GDP is compatible with big borrowing. The maths of debt sustainability tells us that with index-linked yields at minus 1.4% and assuming trend growth of 2% any primary deficit of less than 3% of GDP would reduce the debt-GDP ratio. As the government is currently running a deficit of 1.1% of GDP, this implies that a significant fiscal easing is compatible with the fiscal rule.

Thirdly, policy-makers have another tool to support the economy: helicopter money. As Martin and Eric have argued, central banks can simply write people cheques.

I suspect, therefore, that Richard is wrong to say that Labour���s fiscal rule commits it to austerity. It doesn���t. Right now, it would be entirely consistent with reflationary policies.

All this said, he raises a good question. The fact that yields on top-quality government bonds around the world are at record lows tells us that there is an acute shortage of safe assets ��� a shortage which is doing terrible damage to people���s ability to save for retirement, among other things. The obvious solution to this is for governments to simply create more such assets by borrowing. So, why does Labour need a fiscal rule?

One big reason, I think, is political. Labour must establish economic ���credibility���. In the eyes of our asinine media, this credibility requires a plan not for jobs but for the public finances. John McDonnell���s rule does just this without damaging the economy. When you���re faced with a rabid dog, you should throw it a bone.