Chris Dillow's Blog, page 83

Over-estimating Osborne

Is there a grand plan behind Tory economic policy? Simon asks:

To what extent was austerity an inevitable political consequence of the financial crisis, or did it owe much more to opportunism by neoliberals on the right, using popular concern about the deficit as a means by which to achieve a smaller state?

Michael Burke thinks the answer���s clear:

A central tenet [of Osbornomics] is that the private sector is the key to prosperity and that therefore everything possible should be done to promote and encourage it. The state should shrink in order to release the inherent dynamism of the private sector. 

I���m not so sure. I suspect Michael is giving Osborne too much credit.

To see my point, remember that fiscal austerity is ambiguous for profit rates ��� which are what matter in a capitalist economy. On the one hand, austerity can boost profit margins by weakening workers��� bargaining power. On the other hand, though, austerity also depresses demand tends to depress profit rates.

Whether austerity is in capitalists��� interests depends upon how capital spending responds to it. If capitalists are afraid to invest because profit margins are squeezed, austerity might succeed in boosting growth and profit rates by removing the fear of wage militancy. Silvia Ardagna has shown (pdf) that this is one mechanism through which expansionary fiscal contractions are possible.

However, whilst this might have been true in the 1970s ��� thus justifying Thatcher���s attack upon workers ��� it is not the case now.  Whatever other problems capitalists have, a militant working class is not one of them. In these conditions, austerity is hostile to capitalists��� interests, insofar as weaker aggregate demand depresses profits.

To put this in the useful terms of Marglin and Bhaduri, in early 80s we were in an exhilarationist regime in which higher profit margins stimulated investment and so boosted profit rates. Today, however, we might be in a stagnationist regime in which the adverse effects of weaker aggregate demand offset the benefits of weaker worker power. 

Thatcher might have been a saviour of British capitalism, but Osborne is not.

Three other things also make me think this:

 - Osborne has retreated significantly from the spending cuts he planned a year ago. This is not the action of a man with a plan on cutting the state to encourage capitalist growth.

 - This government is not noticeably expanding the realm of markets and profit-making opportunities. Privatization of the NHS is slow. And whilst academisation will allow a few spivs to make money, I���m not sure it represents a significant expansion of the domain of capitalism.

 - Many other Tory policies are hostile to the interests of many capitalists: the uncertainty created by the Brexit referendum; immigration controls and the National Living Wage.

The left has often in the past under-estimated its enemies. But I���m not sure this is the case now. Sometimes, there is no great conspiracy or brilliant strategy. Sometimes, a twat is just a twat.

Incentives as ideology

���Incentives matter��� says Econ 101. Reality, however, says otherwise. Here���s a new study:

Agents do not provide high effort when prize spreads are larger. When we take into account agents��� risk aversion, we find that while the effect of large spreads is not significant for risk-prone individuals, it is strongly detrimental for the performance of risk-averse individuals.

This is based on the performance of Italian students in exams. It is yet more in a long line of evidence that high-powered incentives can and do backfire, for example:

 - They can encourage outright dishonesty such as fiddling performance figures or Libor rates.

 - They encourage workers to do jobs which are easily measured and incentivized rather than ones which are less observable but which have longer-term payoffs, such as preserving the company���s reputation or solvency. Incentives, for example, gave us PPI mis-selling and banks��� issuing ���liars��� loans.��� As Benabou and Tirole show (pdf), bonus cultures can cause ���significant efficiency losses, particularly in the long run.���

 - The urge to meet targets can crowd out innovation and creativity. As John Seddon has said:

���Best practice��� in the service of big ideas promulgated from the centre and inspected for compliance is, in fact, worst practice, a nail in the coffin of innovation. For innovation to flourish the locus of control must shift to the frontline where people deliver public services. Innovation requires freedom to learn and experiment.

 - Big incentives can signal that a job is very difficult. This might encourage some to simply and others to take big risks to meet their targets. Or they might have an adverse selection effect: only the irrationally overconfident would want to take on such jobs.

 - The Yerkes-Dodson law tells us that that big incentives can and do lead to choking ��� as we see when golfers miss easy putts and footballers important penalties. As Dan Ariely and colleagues say, ���high reward levels can have detrimental effects on performance.���

All this poses the question: if high-powered incentives can so often fail or backfire, why do they still exist in some places? I suspect the main reason is that whilst the idea that big rewards are necessary to elicit good performance might be often wrong, it serves as a useful justification for inequality. What we have here is ideology masquerading as economics.

Tories & Communists

Pointing to the latest episode of the Tories kowtowing to China, Phil notes the absurdity that:

A right wing Conservative government is letting a strategic industry collapse to curry favour with the world's leading communist power.

This is ironic only in Alanis Morissette���s sense of the word ��� which is to say, not ironic at all. In truth, we shouldn���t be surprised at all by Tories finding common cause with Communists.

This might seem odd to those who remember Conservatives��� attacking Communism for its appalling human right record. But those attacks were always hypocritical. Many right-wing cold warriors variously supported Macathyism; Pinochet���s murder of dissidents; the slavery that was the draft and National Service; the brutal repression of homosexuals; and the denial of the most basic rights of self-ownership to women ��� marital rape was not criminalized in England until 1991. And they were deplorably silent about apartheid���s denial of basic human rights.

What Tories objected to in Communism was not its denial of freedom generally, but rather the denial of a particular form of freedom ��� the freedom of a few bosses to make money at the expense of others. Because China grants this freedom, Tories have no gripe with its form of Communism.

From this perspective, Conservatism and Communism have much in common. Both support inequalities of power which deny autonomy and self-determination to workers. As Corey Robin has written (pdf):

Conservatism is the theoretical voice of this animus against the agency of the subordinate classes. It provides the most consistent and profound argument as to why the lower orders should not be allowed to exercise their independent will, why they should not be allowed to govern themselves or the polity. Submission is their first duty, agency, the prerogative of the elite.

Osborne and Hunt���s support for Chinese-style sweatshops, in which millions of drones slave away to enrich others, fits this pattern.

The main difference between Communists and Conservatives is not one of principle but of degree: Conservatives applaud centrally planned economies within companies, but Communists think it should be extended to the whole economy.

Even this difference is narrowing. Like Communists, the Tory government wants power to be centralized. For example, Roger Gough ��� a Tory member of Kent County Council ��� says of enforced academization:

Whitehall now clearly believes that it knows those schools��� best interests than they do themselves. School autonomy only counts when it comes up with the ���right��� answer. Nor are the wishes or choices of parents seen to count for anything, a paternalistic and technocratic approach reflected in the equally unjustified proposal to end the requirement for parent governors.

And Robin Hambleton says of ���devo-Manc���:

The Osborne proposals involve Whitehall taking three massive steps to centralise power.  
First, who is going to decide which areas of the country are to have these new governance arrangements? Answer: ministers. Second, who will decide the criteria for devolving power to these lucky localities? Answer: ministers. Third, who will be crawling over the detailed proposals individual cities have for urban development and socio-economic innovation? Answer: ministers.

The big divide in politics and economics isn���t so much left versus right as between those who believe in top-down control versus those who believe in decentralization and empowering all the people. On this divide, Tories and Communists are on the same side.

Austerity vs the free market

One of George Osborne���s great if inadvertent achievements ��� aided by a complicit media ��� has been to escape sufficient censure for the consequences of austerity. Few people blamed his cuts for the winter floods, just as savers aren���t blaming him for low interest rates. It���s as if austerity is a mere statistical artefact, rather than something which damages real lives.

So it is with the steel crisis. It is insufficiently remarked that if we had sensible macroeconomic policy ��� not just in the UK but across Europe ��� then steel demand would be higher and the crisis less acute.

This isn���t to say there���d be no problem. Even a 10% rise in EU demand for steel would represent (pdf) only 1% of total global output, and the industry of course faces long-term difficulties. But higher demand for steel would at least mitigate the crisis, buy time for the industry to effect a more orderly adjustment, and give displaced steelworkers a greater chance of finding alternative employment.

Yet again, though, macroeconomic policy isn���t getting sufficient blame.

This raises a paradox ��� that it is supporters of free markets who should be most opposed to irrationally restrictive macroeconomic policy. This is because ��� as we���re seeing with demands for steel tariffs and other forms of state aid - austerity increases hostility to the free market.

It���s not just in the steel crisis that this is the case. In worsening the wages and job prospects of the worst off ��� not just in the UK but across Europe ��� , austerity increases support for minimum wages and immigration controls. As Ben Friedman says ���economic growth brings about the advance of freedom���; stagnation and austerity tend to have the opposite effect.

Free marketeers should therefore be saying: ���austerity is a menace because it is increasing support for anti-market policies.��� I haven���t, however, been deafened by such calls.

Many readers will reply that higher aggregate demand is not a cure-all. I sympathize. But this is because I too am sceptical of the efficacy of the free market. Free marketeers, though, should be more optimistic. It is entirely possible to argue that the free market works in allocating jobs, but fails in determining the level of employment. In fact, this was Keynes��� position:

When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

Opposition to austerity combined with support for free markets is therefore not only a reasonable position, but also one with a decent intellectual pedigree. Which makes it all the more mysterious that it is so rarely heard. I suspect, though, that this mystery is best left unexamined.

The EU as Qwerty keyboard

Is the EU like the Qwerty keyboard?

I ask because back in 1985 Paul David wrote a paper (pdf) in which he claimed that the Qwerty keyboard was inferior to alternatives such as the Dvorak one. However, the Qwerty keyboard was adopted for reasons which aren���t relevant today ��� for example, in slowing typists down it reduced the frequency with which typewriter keys collided with each other. And it persists because the short-run costs of becoming accustomed to a new keyboard deter us from shifting despite the long-term advantages of doing so.

Although some people quibble with David���s example ��� it���s unclear whether Dvorak keyboards are actually better ��� the general story here is plausible. We can become locked into inferior (pdf) technologies which were first adopted by historical accident because the costs of switching to better alternatives are high. Robin Cowan claims (pdf) that this is the case with nuclear power plants in the US*. 

Now, here���s the thing. If Brexit���s intelligent advocates are right, the same thing is true for the EU. They argue that our relationship with the EU is sub-optimal and might become more so and that we���d be better off (pdf) with globally free trade. However, there are short-term costs to shifting: the uncertainty caused by Brexit could dampen investment both directly and, perhaps, by raising borrowing costs.

In this sense, the EU is like the Qwerty keyboard; it���s inefficient, but we���re locked in by historical accident and the short-term costs of changing.

Which poses the question: are those short-term costs worth incurring? My hunch is no (pdf). Even if we achieved good free trade agreements, it would take many years to reap the benefits of them simply because companies would have to invest in export sales efforts in unfamiliar parts of the world, thus overcoming the force of gravity. Dietz Vollrath���s general point ��� that it takes many years for improvements in potential GDP to feed into actual GDP ��� applies especially here.

I fear, therefore, that Brexit���s advocates are under-estimating the costs of adjustment.

They���ve got form for doing so. Back in 1984 Patrick Minford argued in favour of pit closures on the grounds that unemployed miners would find work elsewhere ��� that the adjustment process would be swift enough to more than offset the short-term hardship. He was wrong: ex-mining communities are still depressed.

And here���s my suspicion. Perhaps in supporting Brexit free marketeers are making a mistake they often make: they under-estimate how slow and costly the transitions can be from one equilibrium to another.

* My favourite example is Brian Arthur���s story of how steam-powered cars were hard hit by an outbreak of foot and mouth disease in 1914 which closed the water troughs from which they refuelled, thus locking us into petrol engines.

 

Barriers to equal respect

Noah Smith suggests some ways in which we could achieve a greater equality of respect. Whilst I agree with him that this is a worthwhile project, I fear he���s fighting an uphill battle.

Inequality of respect is probably at least as old as material inequality. As Adam Smith wrote:

We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent���The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness. (Theory of Moral Sentiments I.III.29)

Pretty much the entire media business vindicates Smith���s point.

There are at least two powerful reasons why material inequality breeds inequality of respect.

One is that if you regard poverty as due to a moral failure ��� laziness or fecklessness ��� then you will of course disrespect the poor as being morally inferior; Bryan Caplan is at least honest on this point.

The other is that managerialist capitalism is a form of totalitarianism. It recognizes and respects only one form of success ��� the accumulation of what Alasdair MacIntyre called the ���external goods��� of wealth, celebrity and power. If you regard life as a race in which the winner is the guy who dies with the most goods, you���ll regard the rest as ���losers���.

In this context, Noah is absolutely right. Words ���need to be backed up with beliefs���: otherwise, talk of respect is like the patronizing drivel of HRwankers. In particular, we need beliefs to change in two ways.

First, we must recognize that differences in wealth are due very largely to luck: to being born in the right place at the right time to a decent family; finding inspiring teachers or mentors; having a decent genetic inheritance; getting a lucky break at work; and so on. As the world���s greatest singer put it:

I traveled to a prison; I saw my share of shattered dreams.
Were the tables slightly tilted I could be bound, they could be free.

Once we recognise the importance of luck ��� and many people don���t even when it is glaringly obvious ��� we should no more defer to the rich than we should to lottery winners.

Secondly, we should recognise that there are many virtues ��� that getting up every day at 5am to clean an office requires as much, if different, merit as more remunerative work does.  Humble diligence is more admirable than the egomaniacal pursuit of wealth and power. This requires a greater acknowledgement of value pluralism than modern capitalism offers.

Now, you might think here that, as a Marxist, I���d stress that a belief system that generates equality of respect requires a material base, of greater material equality. I���m not sure. There are many arguments for greater equality of condition, but I���m not sure that the possibility that it would generate more equality of respect is among them. Material equality could lead to all sorts of status inequalities if narcissistic egomaniacs seek to differentiate themselves through ways other than cash incomes.  The campaign for greater equality is a battle that must be fought on several fronts.

Costs of daylight savings time

Putting the clocks forward tonight might be expensive in terms of health, wealth and happiness, according to three separate pieces of research.

First, Laurence Jin and Nicolas Ziebarth have found ���evidence of mild negative health effects when clocks are set forward one hour in spring���: in Germany, hospital admissions increase after the clocks go forward in the spring and fall when they go back in the autumn. This is consistent with the possibility that the extra hour���s sleep in the autumn improves our health whilst the loss thereof in the spring worsens it.

Secondly, there���s this (pdf):

Individuals in both the UK and Germany experience deteriorations in life satisfaction in the first week after the spring transition���We attribute the negative effect of the spring transition to the reduction in the time endowment and the process of adjusting to the disruption in circadian rhythms. The effects are particularly strong for individuals with young children in the household.

Thirdly, Mark Kamstra and colleagues have found that stock markets do badly around the time of daylight savings changes. In the UK, the spring DST weekend has seen the All-share index fall by an average of 0.4%, compared to a drop of less than 0.1% in ordinary weekends. This is consistent with the possibility that disruptions to our sleep patterns increase anxiety.

You might object that these findings suffer from p-value fetishism and publication bias. If you do, you might cite this as support: it finds no evidence that DST affects risk appetite or cognitive performance.

Personally, I have an open mind about these effects. I do suspect, however, that it might be more intelligent to change the hours we work than the clocks.

The death of politics

When I heard that Osborne was planning cuts in disability benefits I assumed that he had taken soundings among Tory MPs so that he had support for the measure. It seems I over-estimated him - which given my low opinion of him is quite a feat. Instead, he's given us a second omnishambles Budget. This, though, is only one of several examples of the government���s incompetence.

By this I don���t mean that I think its policies are wrong. I mean it is technically incompetent, in the sense of being unable to implement its intended policies. In Osborne���s case, this was because of a misreading of his party���s mood. This wasn���t an isolated failure. Even Cameron���s sympathizers have criticized the ���chumocracy��� which distances him from many MPs; as we saw in his (perhaps lucky) failure to win support for intervention in Syria, he lacks the darker skills of politics, the ability to cajole MPs to support him.

This is not the example of failure. Theresa May���s attempts to deport students has been found to be not just illegal but monstrously badly administered. And IDS���s unlamented resignation has reminded us of the serial cock-ups in introducing Universal Credit. In these cases ��� as in David Cameron���s letter to Oxfordshire Council a few weeks ago ��� we see a government incapable of grasping detail.

What���s more, the government doesn���t even understand what politics is. Politics is about what happens when individuals��� plans are mutually irreconcilable ��� when what���s rational for an individual is collectively self-defeating. It is, therefore, the art of solving problems of collective action. However, Cameron���s encouraging of panic-buying of petrol in 2012 and his mindless talk of the ���nation���s credit card��� show that he has consistently failed to grasp this point.

What we have, therefore, is a government which does doesn���t appreciate what politics is ��� and one which therefore fails in party management and in administration. This might be because of a form of deformation professionelle:  politics has become so dominated by spin that ministers fail to appreciate that it requires skills other than just PR.

All this poses the question: if the Tories are so technically incompetent, why did they win the election?

Partly, it���s because the game is biased in its favour.

 Also, though, it���s because the things I���m describing aren���t confined to the Tories; New Labour was also guilty of poor administration.

What���s more, the Left too has largely lost the art of politics. Inspired perhaps by the epigones of 1960s feminists misusing the slogan ���the personal is political���, a lot of what passes as ���political��� discourse is in fact the mere narcissistic revelation of personality. The possibility that there is or should be a difference between private and public selves ��� brilliantly described by Richard Sennett ��� has been forgotten. Also forgotten is the art of rhetoric; how many political writers start ��� as they should ��� with the question: how can I persuade sceptics or opponents to agree with me?

In this sense, politics is a dying, perhaps even dead, art. Most of those who claim to take an interest in it are not really interested in how to govern the public sphere: if they were there���d much more interest in the social sciences. Instead, they're mere spectators in a wrestling match who are booing baddies and cheering goodies.

The success of once-fringe characters such as Trump, Farage and even Corbyn are double symptoms of this death. On the one hand, their popularity is due in part to voters wanting people to speak for them, regardless of the question of whether their urges are implementable or practical. But on the other, it is due to the failure of the Establishment and centrists to make their case.

Sadly, though, all sides are so encased in their partisan narcissism that they can���t see this. Fish never know they���re wet.

No friend of the worst off

Danny Finkelstein���s defence of cuts to welfare and taxes has caused a row with Jolyon Maugham:

The government argues that the best thing for less well-off people is that the economy should thrive and jobs be created. Income from work is the most secure foundation for vulnerable families of all types. To ensure this, it is essential to control the costs of spending programmes and to ensure, with low corporate and (though this is slow work) low personal taxation, that Britain is one of the most attractive places to have a job and invest in businesses. And this works. It���s successful. Job creation has been extraordinary.

There���s some truth in this. Getting people into work is a wholly good thing; those in work are better off both financially and psychologically than the unemployed. The Tories have increased (pdf) incentives to work by increasing the gap between in-work and out-of-work incomes. And I���ll even concede that low and simple corporation tax might play a part in generating jobs. I have, however, some quibbles with it.

1. Insofar as welfare changes have increased work incentives, it���s by cutting out-of-work benefits ratherr than increasing in-work incomes. The IFS says (pdf) that changes to tax credits since 2010 have caused ���significant losses for low-income working households.���  This is not the action of a government that is deeply concerned for the low-paid.

2. For many, income from work is not as secure as Danny claims. ONS data show that in Q4 ��� a time of decent overall growth ��� 893,000 people left employment. Many of these were low-paid workers who lost their jobs. The Joseph Rowntree Foundation has estimated that ���more than a third of low-paid workers (38.4 per cent) experience a period of worklessness over a four-year period���. The unskilled suffer a cycle (pdf) of low pay and no pay. This isn���t solely because of bad macroeconomic policy. It���s simply because of normal job creation and destruction; around ten per cent of all businesses cease trading each year.

3. Low paid work is not often a stepping stone to better things. The Resolution Foundation says (pdf) there���s been a ���long-term decline in the rate of movement between jobs���. This, they say, implies that prospects for pay growth and career progression for younger workers have deteriorated.

4. The Tories ��� and in fact the last Labour government too ��� have not reduced the extent of relative low pay. The Resolution Foundation estimates that 21% of workers earn less than two-thirds of the median wage, a proportion than hasn���t changed over the past 20 years.

5. Although employment has certainly increased remarkably since 2010, it���s not clear how much this is due to benefit changes and sharpened work incentives. In fact, insofar as these have played a part it���s because the increased supply of labour has bid down wages ��� a mechanism the Tories are surprisingly coy about mentioning. I suspect that a much bigger reason for the growth in jobs is that the slump in productivity growth means that a given growth in aggregate demand now translates into much more jobs growth than it did in the past. As the government is probably not responsible for the productivity slowdown, it shouldn���t claim credit for the jobs growth.

6. There���s something Danny is silent about ��� macroeconomic policy. If we���d had a less tight fiscal policy since 2010, employment and wages for the low-paid (and everyone else) would very probably be higher now. Danny does not rebut this point.

Let���s take another perspective on this. Imagine that economic policy were governed by a Rawlsian difference principle ��� that it serves the greatest benefit of the least advantaged members of society. Would this principle really give us Tory welfare and macroeconomic policy? Or would it instead mandate fiscal expansion and a more generous welfare system? I suspect the answer is clear.

On Tory splits

How great are the divisions within the Tory party? There���s a split on this. Andrew Pierce says Iain Duncan Smith���s resignation is the culmination of a personal feud, but Rachel Sylvester in the Times says it embodies an old divide among Tories between free market liberals and patricians who want to protect traditions and the worst off.

I suspect, though, that this division reflects four other dividing lines in the party.

One is liberty vs authority.  Glen Newey points to the paradox that the Conservative state is ���ever lustier in its pursuit of a supposedly shrinking remit���. The desire to cut the share of state spending in GDP coexists with Theresa May���s extension of the surveillance state, and the party that gave us gay marriage also gives us a ban on legal highs.

This paradox reflects competing impulses. On the one hand, there���s a love of (negative) freedom. But on the other, as George Lakoff says, Conservatives have a mental model of a strict father ��� an idea that authority should be strong. At its worst, this conflict can yield pure hypocrisy: freedom for the right people but repression for the wrong ones.  

I suspect that one under-rated reason why Tories support austerity is that they instinctively feel that big borrowing undermines the state���s authority and capacity: just as a strict and disciplined father doesn���t get into debt, nor should the state.

Note too that the belief in authority isn���t confined to the state: it also explains conservatives��� love of traditional families, and their support for bosses: one of Thatcher���s principles was the assertion of management���s ���right to manage.���

The second split is between capitalism and populism. Big business, for example, favours EU membership and liberal immigration policy, but many voters don���t.

A third split is between one nationists, who profess a desire to help the poor, and those who stress the power of incentives. The introduction of a living wage, top tax cuts and harsher regime for benefit recipients might look incoherent to ideological purists. But it���s a rough compromise between competing tendencies.

Fourthly, there���s a split between optimists and pessimists. As David Willetts said in Modern Conservatism,   there has always been a melancholy tendency in conservatism. As Oakeshott wrote (pdf), change is regarded as loss. But on the other hand, there are those who are more optimistic.  Such optimism can arise either from faith in free markets, or in the power of that strict father.

In the 70s, this split manifested itself as between those who believed in ���managed decline��� and an accommodation to strong trades unions, and more optimistic Thatcherites who thought unions could be weakened and the country turned around. We see echoes of that today in the Brexit debate: optimists think Brexit will create a dynamic free trading nation; pessimists fear they���re wrong and that it better to try and cope with the Brussels bureaucracy. Turning schools into academies represents a triumph of the optimists ��� a belief that different management can transform schools for the better, and a rejection of traditional forms of control.

These splits can co-exist in the same person. For example, when he was Education Secretary Michael Gove was sometimes a libertarian optimist supporting free schools and sometimes the strict father wanting to dictate how to teach.

You might think that in saying all this, I���m sneering at the Tories as being a divided rabble. Not so. All reasonable people experience conflicts between values. Skilled politicians are capable of managing these well. The Tories��� problem is not that the divisions exist, but that they are being ill-managed.