Nudging people to do what they want to do
Not all of us in the Adam Smith Institute agree on everything all the time. Life would be duller if we did. One topic that divides some of us is the notion of 'nudge.' Thaler and Sunstein wrote a book under that name in 2008, describing ways of "changing the choice architecture" so that people find it easier to do what they want to do, but fail, perhaps because of inertia, to follow through upon.
Two thirds approve in polls of organ donation after death, but less than 30% were completing the form. The US driver's licence application gave applicants the choice, and they had to choose yes or no. The number volunteering as organ donors shot up to the two-thirds who approved of it. The choice to volunteer had been made easier. Other countries have followed suit with similar results. Some add a third option: "I do not wish to make a choice at this time."
The BBC news magazine's Home Editor, Mark Easton, has described some successes by the No. 10 Behavioural Insights team, colloquially known as the Nudge Unit. They boosted job applications by unemployed people by personalizing the invitation. A simple request to turn up for potential jobs at a supermarket saw 11% come forward. When the person's name was added to the request ("Hi, Sam…"), it rose to 15%. When the JobCentre adviser signed it at the bottom ("Good luck, Michael.") the proportion turning up rose to 27%.
The team managed to boost black and ethnic minority (BME) applications to become police officers by adding the words "Congratulations! " and telling applicants they had been "selected to participate in the next stage of the assessment process." It added "What is it about being a police officer that means the most to you and your community?"
Whereas previously the situational judgement test had been successfully completed by 60% of white applicants but only 40% of BME candidates, the revised wording saw the BME percentage rise to more than match the success rate of white applicants.
Some in the ASI are suspicious of this approach, partly because it involves a decision about what should be nudged, meaning about behaviour that should be encouraged, and partly from a fear that the technique could easily be abused to promote behaviour that people don't want to do. These should certainly be watched, but if the technique uses polling to ascertain what people would like to do but find difficult, then it can be helpful.
The technique has been used to help people pay their tax arrears more promptly, and to encourage people to put more aside into their pension funds. Many countries are now adopting these techniques, and the Nudge Unit sells its services to other governments. Whatever else can be said, to libertarians 'nudge' is better than compulsion.
To put minds at rest: Australia is not going to be the new Greece
Sadly, some seem not to have grasped the specific problem that is powering the Greek nightmare. Given this failure to understand the underlying cause, we get predictions like this:
Commodities crash could turn Australia into a new Greece
In more detail:
The respected Australian economist Stephen Koukoulas recently wrote of the dangers that escalating levels of foreign debt could present for future generations. Could a prolonged period of depressed commodity prices even turn Australia into Asia’s version of Greece, with China being its banker of last resort instead of the European Union.
No, simply no.
It's true that the Lucky Country has been very lucky, being the major commodity supplier into China as that nation actually built a nation. And that growth is slowing, the prices of those commodities are falling and so the terms of trade that Oz faces are deteriorating. But this will not, cannot, turn that country into another basket case like Greece.
For Australia has its own currency: the one thing that Greece does not have an which is causing that economic grief.
So, imagine that commodities, the major exports, do decline in price, and stay down in price. Yes, Australia as a whole is thus somewhat poorer. And it's likely that Australian wages relative to the rest of the world will therefore need to decline. Greece had to do this by making sure that 50% of young people, 25% of all people, were thrown out of work so that wages would indeed decline. Both Keynes and Friedman were adamant on this point, that nominal wages are sticky downwards and when those two agree you'd better pay attention. Australia, of course, does not need to do that. They can, as Friedman pointed out was the sensible way to do this, depreciate the currency instead. Relative wages change but no one has to be thrown on the scrapheap to achieve it. Indeed, as the value of those export commodities declines the currency will fall quite naturally, causing our price change without any action at all.
That is, Australia simply will not be the new Greece because Australia has its own currency. As Greece, obviously, does not.
The "Helpless" Poor
In 1985, Bob Geldof, struck by the poverty in Africa, produced ‘Live Aid’, an artistic extravaganza designed to invoke compassion, charity and pity for African people living in dire conditions. It branded an entire continent with a single image of pervasive and inescapable poverty created by poor geographical factors, that could be addressed if only the rich Western world wrote a large enough cheque. It may have started with Live Aid but as we saw with Band Aid 30 last year, there is no tragedy that people on the African continent can suffer with dignity.
Some musicians dropped out of the Band Aid 30 Ebola single. Fuse ODG wrote that the Africa which Bono invoked in his lyrics “did not reflect what Africa is truly about”.
These philanthropic efforts have shaped how we perceive the Global South today. In 2001, 16 years after Live Aid, a survey by VSO demonstrated that 80% of British people “strongly associate[d] the developing world with doom-laden images of famine, disaster and Western aid”. 74% of people believed that the developing world depended on the Western world to progress. Live Aid was for Ethiopia, and Band Aid 30 for fighting Ebola, and yet the brand that these efforts used was ‘Africa’ and to consumers, this became ‘the developing countries’.
What impact has this had on the attitude people harbour towards the developing world? According to Shah, Hall and Carr (2014):
“A side effect of this effort, however, is the perpetuation of long-held views of “the developing” as helpless and trapped, awaiting rescue that justify more and better interventions on their behalf.”
This ‘helpless’ poor narrative is wrong, and it’s harmful.
In ‘The Beautiful Tree’, James Tooley writes of his experiences in researching private (fee-paying) schools used by the poor in India and some African countries. Tooley finds that the poor in many nations rebuff the government-run, free, public schools, where teachers often did not turn up to class. International organisations either ignore or dismiss these schools (they are not ‘pro-poor’ and ‘exploit’ the poor, say some). He writes:
“It appeared that these private schools, while operating as businesses, also provided philanthropy to their communities. The owners were explicit about this. They were business people, true, but they also wanted to be viewed as “social workers”, giving something back to their communities. They wanted to be respected as well as successful. A major motivation - many of the owners had a similar story - was their status in society. Khurrum told me: “I have an ambition of running a school, of giving good knowledge, and of building good character, good citizens, good people. We have status, as leaders of schools, people respect us, and we respect ourselves.”
This is aspiration and self-respect - both attributes sorely missing in the current narrative. He gives the example of these private schools offering scholarships as examples of the ‘poor subsidising the poorest’. These are not people waiting for rescue. These are people who work to ensure their children do better - living proof that the ‘helpless’ rhetoric is misguided, at best.
The problem isn’t just the misrepresentation of large swathes of the global population. It’s that this mischaracterisation of the countries is harmful to the countries affected. As Fuse OBG points out, many people who are willing to pay £2 to raise funds for a killer disease will, nevertheless, not visit Africa on holiday. Why? Because we have internalised this image of Africa as dirty, poor, dangerous. It means Africa, as a continent, doesn’t receive as much investment, which is one of the tools by which countries can improve their lot.
In the case of Live Aid, the consequences were more pernicious. By framing the Ethiopian famine as one of geography and lack of Western political will, the real perpetrators of the continued famine went unchecked. According to de Waal (2008):
“The fact that the famine was a crime perpetrated by the Ethiopian government under President Mengistu Haile Mariam, and that relief agencies could become accomplices to that crime, were swept aside in a simplistic rush. The Ethiopian rebels, who ultimately won the civil war in 1991, estimate that the indiscriminate supply of humanitarian aid to the Mengistu government prolonged the war by at least a year.”
Yesterday, the third Financing for Development summit started. I wrote about some of the recent literature that supports moving away from development aid. But the other problem plaguing our discussion of development is, simply, the language we use. Sensationalist chat might get the dollars rolling in, but it does nothing for the long-term growth and dignity of the countries we’re talking about.
Moving away from aid in development
Today, world leaders are meeting in the Ethiopian capital of Addis Ababa for the third Financing for Development summit. This builds upon the work of previous summits to produce a framework for the funding of development programmes and all that entails. It's an important discussion, not least of all because after decades of hurling cash at nations, growth in recipient nations has been sub par. Clemens et al. indicate that a 1% increase in aid in one year results in a 0.1-0.2% growth in real GDP per capita on average, which emerges in the following 5-10 years from the aid increase. Previous studies have conflicted in their findings of the impact of aid on growth - this paper reconciles the various views by controlling for confounding factors and considering just those factors that tend to have a short-term impact. Such a modest increase (combined with the fact that this is an average figure - many countries would not have benefited from aid at all) indicates that the effectiveness of aid is, from a charitable perspective, suspect. In subsequent posts on this subject, I’ll write on alternatives to aid.
Development aid is often confused with humanitarian aid - and this makes it look much more appealing than it really is. Few people would advocate not donating to emergency causes in other nations to help in the aftermath of a crisis; long-term development aid doesn't have this morally glossy hue. The main reason is simply just that the evidence doesn't show it to be very effective.
The economist Dambisa Moyo has written extensively on this subject in her book, Dead Aid (2010). She puts forward the argument that aid in Africa has served only to entrench aid dependency, and result in market-distorting inefficiencies. The consequence of this approach is one in which donor nations are off the hook but none of the promised benefits have accrued to the recipients. Moyo also indicates some evidence to show that nations that didn't receive aid have done better than those that have. Her research and argument goes further than many mainstream development economists (i.e. Paul Collier, who maintains that the right kind of aid can be helpful) - for Moyo, it's not just that aid has been ineffective, but that aid has entrenched the poverty it sought to cure Africa of.
This provides great context for Lucy Martin's paper on the impact of tax compared with aid. Martin finds from experiments in Uganda that citizens are 13% more willing to punish leaders for misusing tax revenue on average - but those with most experience of taxation are 30% more likely to punish government. The theory is simple: the loss of utility is higher when, not only do you lose earned income, but that income is not put to good use to produce social goods. The fact that in many countries, poor citizens do not pay tax results in less anger and frustration at poor governance. Aid as a substitute for tax revenue hence enables this process to continue and results in less frustration - and less clamour for better governance, without which the institutions that result in development cannot develop.
In 2006, William Easterly wrote:
The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. Yet, unchastened by this experience, we still have such absurdities as the grandiose plans by Jeffrey Sachs and the United Nations to do 449 separate interventions to reach 54 separate goals by the year 2015 (the Millennium Development Goals), accompanied by urgent pleas to double aid money.
Nothing much has changed since his time of writing, except we have committed yet more resource to an aid programme which is at best ineffective and at worst harming the prospects of the world’s poorest. The insights of extensive research and leading economists should inform us to proceed carefully and to give more weight to those areas of development that might be more fruitful. Most importantly, when the evidence suggests we might be doing enormous harm to those least able to bear it, our governments should be proceeding with humility and caution rather than hiding behind their cheque books.
Some people just don't understand what capitalism is
Another one of those delightful whingefests over at The Guardian. The mobile phone means that, what with texts and emails and the like, we are all on call all the time. This is not though, the fault of the tech, but of capitalism:
The problem is not tech: it’s capitalism. Admitting the real source of the problem creates an opportunity to address it. Capitalism has adroitly managed to evade responsibility and neatly slip its leash, but we should be able to exercise greater critical thinking than that and bring it to heel. Capitalism and tech are deeply intertwined, of course, but let’s not confuse the two.
Yes indeed, let's not confuse the two. So, what actually is capitalism? No, it's not just a compendium of all that Guardianistas hate. It's not even a solid description of our own current society. What it actually is is a description of who owns the productive assets in a society: the capitalists or some other group of people? And do the capitalists own all said productive assets? Nope: so we're not even in a fully capitalist society.
It’s capitalism that took advantage of this opportunity to work it, turning it into something that could be used to control employees and keep them constantly within arm’s reach. The person who refuses to be constantly available or who exercises discretion in terms of the kind of work performed after hours won’t last long at a company and certainly won’t advance in terms of salary and rank.
There are decidedly non-capitalist organisations in our society. All of government for example. The NHS, John Lewis, the Co Op, the remaining Building Societies and so on. All lawyers (they're partnerships, not capitalist organisations) and on and on. It wouldn't be out of order top insist that some 50% of our society is not currently capitalist.
At which point we need to ask: well, are those non-capitalist parts of the society subject to the same texts and out of hours emails? It would seem that they are: therefore it's not capitalism causing all of this, is it?
Unless, of course, one is writing for The Guardian where capitalism is simply the moniker for everything and anything one wants to whinge about.
There might even be real problems with capitalism, could well be real problems with tech: but let's not confuse the two, eh?
The Treasury has lost on RBS whether or not it sells up
One bizarre argument that has come up on Twitter and amongst the media recently is that George Osborne, in his ruthless free market zeal, is determined to privatise RBS, selling off some of the government's stock now, despite this meaning the government will have lost money by rescuing the bank. According to these critics Osborne fails to see the obvious correctness of their arguments and the obvious stupidity of this move because he is blinded by an ideological obsession with privatisation.
This line of attack is nuts. Firstly, you do not make a loss when you realise it; simply turning the equity into cash does not suddenly mean the government has lost out. By analogy: imagine I buy a house for £400,000, but I accidentally drive a bulldozer into half of it, meaning that it is now worth only a quarter of what I paid. When did I get worse off: when I drove the bulldozer into it, or when I sold it? Am I still worth £400,000 until I sell the house for its new value of £100,000?
Secondly, even if you did, there's little to no reason to expect RBS shares to rise above any other asset in the future; the government could easily lose more than the notional £12bn less its 79% stake is worth than when it was bought. There may well be some market inefficiencies (or perhaps not) but even if there are, no one is seriously going to argue that the government is playing one of the super-sophisticated strategies to exploit those inefficiencies by holding onto a FTSE100 bank that it picked up as part of a bailout.
Thirdly, simply comparing price now to price then is ridiculous: the FTSE as a whole has something like doubled since 2008 and 2009 when RBS was bailed out. If the relevant counterfactual is 'risky equities investment' then the government could have made tens of billions of pounds; if the relevant counterfactual is 'pay down debt' it could have saved billions of pounds on debt interest. On a more relevant comparison, the state has lost a lot more than £12bn. But it lost that when it invested and when the price fell.
If it's bad to sell off RBS, that's because there's some special reason why RBS will do better for itself and society if owned by the government. This is quite implausible; actually it seems more likely that owning RBS could twist governmental and RBS incentives, distorting the banking market and harming society overall. It is complete nonsense to say that by selling now Osborne is losing money for the Treasury—it's already gone.
Owen Jones and labour economics
It appears that the latest campaign from Owen Jones and all things left is about the shameful way in which the self-employed are treated. Given that this group includes both Jones and your humble writer this is of course something of great interest. Sadly however, Jones is, as usual, entirely at sea with any economic concept more complex that "it's all so unfair, innit?"
If booming levels of self-employment are an indicator of a thriving economy, then Greece is the powerhouse of Europe. Just under a third of the population of this austerity-ravaged nation are self-employed, more than double the EU average. Spain is another go-getters’ paradise, it seems: with half an entire generation out of work, self-employment among the young has surged. And then there’s Britain, where around 40% of the rise in jobs since 2010 is down to self-employment. If our rulers are to be believed, here is entrepreneurial flair and British dynamism in action, a vindication of the government’s “long-term economic plan”. But the plight of the self-employed is being ignored. It is time that the left began championing their cause.
Well, strip this of the rhetoric and perhaps there is a point there. Spain and Greece do indeed have a paucity of jobs and a surplus of people who would like to do one. So, what's the cause of this? The amount that people are willing to pay to get a job done is lower than the amount that people are willing to accept to do a job. As we know, prices adjust to balance the supply and demand for anything, this is the function of a market.
As we also know if, through government action, that market is not allowed to change prices so as to balance supply and demand then it will balance anyway.
But self-employment spells precariousness, insecurity and falling living standards for all too many. Last week George Osborne lauded figures indicating that wages were rising; but what is often neglected is that the 15% of British workers who are self-employed are stripped out of these figures. There is little up-to-date research on their income, but the Resolution Foundation suggests that between 2006-07 and 2011-12 their weekly earnings dipped by a staggering 20% – and there was a big rise in underemployment, or self-employed people doing far fewer hours than they would like.
Quite so. Given that formal employment costs more than employers are willing to pay (or, the same thing, that the government imposition of conditions and extra costs makes the residual wage lower than people will accept) then the price of employment is lowered by side stepping some of those costs of employment.
Self-employment is often a means for businesses to hire workers without offering the rights and responsibilities that normally come with employment: private pensions, paid holidays, sick pay or maternity leave, for example.
Again, quite so. We have imposed, through government, a series of costs that are part of compensation but not a part of wages. Thus, if a system exists where those compensation costs can be avoided, and the total compensation is more than the market clearing price, then some part of the labour force will end up with the wages only, and not that compensation part.
So, what is the solution here? Well, if it's government action forcing the price of labour above the market clearing price then the answer would seem to be to stop that government action that does so. Jones, and all things left are of course arguing that such costs should be forced upon all so that even more people can be unemployed. Quite why this is a good idea we're not sure.
But our larger point here is that we are once again seeing the entire blindness of a certain section of the commentariat to reality. If self-employment is rising, because it means that people can escape the costs of employment, which is indeed the analysis they are offering, then this is evidence that the costs of employment are too high. The solution is thus to lower those costs of employment.
The most obvious place to start doing that is to abolish employers' national insurance. This is, after all, one of the major costs that this sort of employment arbitrage is designed to avoid.
We're even, at this point, willing to agree that there might be something to the basic analysis on offer. As long as, of course, Jones and all things left are willing to agree with our solution: lower taxes on employment.
Time for a 40% top rate
Lord Lawson has called for George Osborne to lower the top rate of income tax to 40% in his July budget. It is a timely call that echoes former times. When Nigel Lawson, as he then was, was preparing his 1988 budget, the ASI published research showing that if he lowered the top rate from 60% to 40%, the Treasury would soon gain revenue, even though the government share would be smaller in relative terms, and the burden on business would be lighter.
Chancellor Lawson did just that, lowering the top rate to 40% and the starting rate from 29% down to 25%. This was his trademark tax simplification. From a myriad of rates and thresholds he now had reduced income tax to only two rates.
Not only did Treasury revenue increase as predicted, but the richest 10% ended up paying a higher share of the total. From just over a third, their share rose to just under half of the total. Again, this was what research had forecast would happen. By contrast, when Labour reneged on its election promise and raised to top rate to 50%, official figures show that it raised nothing like the £2.9bn glibly forecast by Alistair Darling. And when the coalition lowered it back to 45%, the tax loss was estimated at only £100m.
To cover the political charge of lowering tax for top-rate payers while cutting the welfare bill, Mr Osborne might try a new tactic. He should lower the top rate from 45% to 40% on a two-year trial basis. If after that time two results had not been achieved, he should promise to revisit it.
The two results required would be:
1. That the revenue raised from income tax was now higher than it was from a top rate of 45%, or about to become so, and
2. That the proportion of income tax paid by the top 1%, the top 5% and the top 10% of earners was now higher, or about to become so, than it had been under a top rate of 45%.
Lord Lawson is completely right. Lowering the top rate to 40% would make Britain a more attractive place to do business. It would attract talent and investment to boost our economy. It would achieve growth at no cost to the Exchequer, and it would create jobs. More to the point, it would send a signal to the world that the UK was once again achievement oriented. Mr Osborne should be brave.
Inequality: some people know what they want to find
One wonders how many times Guardian economics columnists have revealed the shocking discovery that: 'trickle-down economics' doesn't work, equality isn't only desirable for fairness reasons but also for growth and stability; some important group with heretofore sound neoliberal credentials agrees; and that shadowy international organisations and selfish elites are to blame for this fairly clear truth not being tackled through policy. Messrs Elliott, Chakrabortty and Inman, responsible for most of the august paper's economics comment, and all apparently endowed with eternal reserves of surprise, regularly inform us of these groundbreaking findings, that shatter economists' ideological complacent laissez faire free market neoclassical neoliberal capitalist consensus.
The latest has a title that might well have been automatically generated: "So much for trickle down: only bold reforms will tackle inequality" with an equally excellent standfirst, "Even the IMF recognises the vicious circle in which inequality breeds instability, which causes recession and spending cuts that make inequality worse". Between them they really hit up all of the bases, and the piece is no different.
IMF research released last week (pdf) shows that there are economic downsides to inequality. Raising the income share of the poorest 20% of the population increases growth by as much as 0.38 percentage points over five years. By contrast, increasing the income share of the richest 20% by 1% decreases it by 0.08 percentage points. So much for trickle down.
She added that these disparities were becoming baked in, with social mobility on the decrease. To get on in life, you had to live on the right side of the tracks, and according to Lagarde, that “didn’t sound fair”.
At this point, readers might be wondering whether this IMF has anything to do with the other IMF, the one that tells countries seeking financial help that they need to liberalise labour markets by cutting minimum wages and reducing the scope of collective bargaining; the one that demands cuts in public spending and insists that state assets should be privatised at every opportunity.
They are indeed one and the same. The IMF that warns of the perils of inequality is the IMF that is demanding measures of Greece that will add to poverty and make inequality worse. One half of the fund – the economics team that comes up with the big-picture analysis – says one thing. It supports investment in education, an enhanced role for trade unions and higher taxes on the rich. The other half – the part that draws up the structural adjustment programmes – says something entirely different.
What's weird is that while it would be nice to believe in a mendacious Larry Elliott, realistically it's more reasonable to assume this is all in earnest. Indeed, does it really make any less sense than my worldview?
I can point to evidence suggesting that inequality doesn't perpetuate through educational differences. I can point to evidence that people don't actually care about real world inequality, which they wildly mis-estimate; they only care about their perceptions of inequality, which changing inequality doesn't necessarily change. I can show that inequality doesn't unduly affect politics, that it doesn't undercut morality or community, and that the Spirit Level is nonsense.
But then you have people like the IMF, surely among the most credible bodies in the world, regularly releasing papers saying we should care. Who would you believe? As ever, it's very hard to decide what to do when one's meta-rationality goes awry.
I can say that the methodology of the IMF work is shoddy and that you should look at credible meta-analyses—but why should Elliott et al. trust me when I'm going against far more credible people. And surely we cannot expect everyone to dissect the details of every paper when they make a judgement on the area.
So while I might criticise the rather silly framing of this new 'revelation' I can hardly give full-throated criticism of the Guardian economics section line in general—interpreting evidence is just too hard.
A proposal to solve the housing crisis
The problem is not that people lack the resources to buy houses; it is that there are simply not enough houses. People are living longer, more choose to live singly, and immigrants increase the population. Schemes that help people to obtain mortgages direct extra funds into housing without increasing the supply, and put more upward pressure on house prices.
The Green Belt acts as a corset around our cities, forcing people to live beyond it and commute through it, with attendant pollution and congestion. They need houses near the edge of cities, but the Green Belt stops them.
The first step is to classify Green Belt land into its three types. There is verdant land, with fields, meadows and woods - what most people think of when they think about Green Belts. There is 'brown,' or damaged land, including abandoned mines and quarries and former industrial buildings. Thirdly there is agricultural land, much of it given to intensive cultivation on vast fields using fertilizers and pesticides. It falls well short of being environmentally friendly.
Once the land is classified into its three types, the verdant land should be left untouched. All of the 'brown' land should be made available for building. In addition a one-mile deep strip of agricultural land at the inner edge of the Green Belt should be made available for house-building. In compensation, at least a mile of agricultural land beyond the outer edge of the Green Belt should be added to it as verdant Green Belt.
The grant of planning permission within this extra land near cities would dramatically lower the cost of housing land, putting downward pressure on house prices. The million extra homes that could be built on this land would have a similar effect. A move such as this would increase the supply of housing and make it less expensive, bringing home-ownership within reach of many.
Furthermore, there would be a net gain of properly 'green' land by the outer extension of the Belt with more verdant land. The prospect of extra housing, a curb on the upward spiral of prices, and with no loss of green land, all suggest this might be a practical and popular help to the housing problem.