The glory that is Will Hutton

We're getting close to the point that we'll have to declare Will Hutton a national treasure, something that must be preserved in aspic for the glory of posterity. Read through this little point:

It is beginning to be obvious that performance has hardly anything to do with the sustained rise in executive pay. Why should British CEOs in charge of smaller, generally less complex companies be paid proportionally more than their counterparts in the US? Does it make sense that 60% of pay comes in options to buy shares, so that executive focus is wholly on doing those things – cutting investment, avoiding risky innovation, using cash to buy company shares etc – that keep up the share price.

Certainly it's possible to ponder the high salaries that executives get at large companies these days. We might even agree that there's perhaps a certain soupcon of conspicuous consumption in the numbers that are bandied about. We could equally point out that modern companies are vastly larger than our largest companies were even just one generation ago, meaning that the effect of a good CEO is more magnified. And, perhaps even more importantly, the effect of a terrible one (recall what happened to GEC for example) similarly magnified.

But imagine how confused you must be to insist that 60% of pay comes from your success in increasing the share price and then insisting that said pay has nothing to do with performance? Getting the share price up being the aim and desire of the shareholders of course, the very reason they've hired that CEO to run the company for them.

So, just how do you embalm a journalist?

HMRC is intending to sell anonymised tax data

It appears that HMRC is going to be selling anonymised tax data.

Government plans to share taxpayers' data with private firms were condemned as "borderline insane" by a senior Conservative MP. Under the proposals, HM Revenue and Customs would be allowed to release anonymised information to third parties including companies, researchers and public bodies where there is a public benefit.

That a senior Conservative thinks this is borderline insane predisposes us to rather liking the idea. And that Richard Murphy is against it makes it obvious that there's some sense to it.

However, we should oppose this on the Sir John Cowperthwaite principle. He, famously, would not allow GDP statistics to be collected in Hong Kong on the grounds that some fool would only try to use them to do something. So it is here.

For do recall that all of that famous Piketty and Saez research into the top 1% incomes, the top 0.1% and so on, came because they were able to get unprecedented access to anonymised tax data from the IRS. So it's not just that fools will use statistics to do something it's that the entire left political class is trying to use statistics to increase taxation. So, don't let them have the data in the first place.

Something of a blow to one of Polly's pet peeves

We're all aware of one of Polly Toynbee's little foibles: her insistence that because the people who own successful newspapers aren't left wing therefore the true left wing nature of our society gets overlooked and overruled.

Never forget what Labour is up against: 80% of newspaper readership for a hundred years has belonged not just to conservatives, but mainly to extreme maverick press barons, using their power to control politics.

We would have a far more left wing government and polity if only those capitalists hadn't been able to brainwash the people.

Interestingly, the John Bates Clark Medal as just been awarded by the American Economy Association. For research into exactly this idea:

A first set of Gentzkow’s papers studies political bias in the news media. In “What Drives Media Slant? Evidence from U.S. Daily Newspapers” (Econometrica, 2010), Gentzkow and co-author Jesse Shapiro use textual analysis of a large set of newspaper articles to classify content as more Republican or more Democrat (“media slant”). This is done using statistical analysis of phrases that differentially show up in Republican versus Democrat Senators’ speeches in the Senate. These constructed measures of media slant match well with conventional wisdom and with other, more ad-hoc and subjective newspaper political classification. Gentzkow and Shapiro then use these measures to estimate demand for newspapers, and to model the newspaper owner’s choice of media slant. They find that most of a newspaper’s media slant can be explained by the preferences of its readers rather than by the tastes of its owner. The second part of the paper tries to sort out whether the bias of individual papers is driven by “demand” – i.e. the political biases of their target audience – or “supply”, i.e. the idiosyncratic preferences of the owners. They find that it is mostly demand.

It's the other way around. Newspapers, editors, proprietors, do not determine the views of the readership, rather they try to divine what those views are and then pander to them. Meaning that if 80% of the UK newspapers are to the right of Polly Toynbee then 80% of the population is to the right of Polly Toynbee. And thus, obviously, in a democracy we should never go anywhere near the sort of policies that Toynbee favours.

Of course, we already know that last but it's nice to get another confirmation.

As I've been telling you for a couple years now

A new ONS report makes for us a point that I've been regularly presenting to you over the past couple of years. Yes, there most certainly is variation in age at death across the country. And yes, those in more deprived areas do indeed tend to die younger than those in more affluent ones. But this isn't, and isn't from somewhere between not very much and a lot, because living in a deprived area kills you. Rather, it's because people migrate in and out of deprived and affluent areas and those doing the migrating tend to have different health prospects:

One factor that has received less attention is the selective migration of healthy individuals from poorer health areas into better health areas or vice-versa. This type of migration has been shown to play a significant role in increasing or decreasing location-specific illness and mortality rates, which then consequently impact on life expectancy figures. Norman, Boyle and Rees (2005) demonstrated that the largest absolute flow within England and Wales between 1971 and 1991 was of relatively healthy people moving from more deprived into less deprived areas. The impact of this migration was to raise ill-health and mortality rates where these people originated from and lower them in the destination areas. The authors also noted that the benefit to less deprived areas was reinforced by a significant group of people in poor health who moved from less to more deprived locations.

This also speaks to the error that is made about health inequality in the UK. Marmot, and thus the system itself, seems to think that it is economic inequality that determines health inequality. Thus, reduce the economic and you'll reduce the health inequality. But as above, we can see that at least sometimes the causation is the other way. People with bad health have bad economic outcomes: that's why they're moving to more deprived, also known as cheaper, areas.

This is that old difference between correlation and causation again. There is undoubtedly a correlation between income in an area and health and lifespan. It's been politically convenient for campaigners to insist that the causation is that the income differences cause the health and lifespan differences. And I've no doubt whatsoever that that is a part of it: but we've also got that reverse causation as well. That the initial health, and thus lifespan, inequalities are part of the cause of the economics ones. Which means, of course, that equalising the economic outcomes will not equalise the health or lifespan ones. And thus we can and should shout at those campaigners who insist that it will.

Was there really a Cuban Missile Crisis?

Lars Christensen, aka the market monetarist, has a great post over at his blog on whether or not the Cuban Missile Crisis should really have been so worrying. A stupid question, you might think, but he shows that the equity markets did not crash anything like as much as they would have been expected to do if a true catastrophe was likely.

What really happened, however, was that S&P500 didn’t drop – it flatlined during the 13 days in October 1962 the stand-off between the US and the Soviet Union lasted. That to me is pretty remarkable given what could have happened.

Why didn't the markets think the world was going to be destroyed—and with it the value of big companies. Why didn't investors rush to put all their money in gold, underground bunkers, canned goods and guns?

There might be a number of reasons why we didn’t see a stock market collapse during the standard-off. Some have argued that the crisis was an example of what have been called Mutual Assured Destruction (MAD). Both the US and Soviet Union knew that there would be no winners in a nuclear conflict and therefore none of them would have an incentive to actual start a nuclear war. It might be that investors realised this and while the global media was reporting on the risk of the outbreak of the third World War they were not panicking (contrary to popular believe stock markets are a lot less prone to panic than policy makers).

Another possibility is of course that the markets knew better than the Kennedy administration about the geopolitical risks prior to the crisis. Hence, the stock market had already fallen more than 20% in the months prior to Kennedy administration’s announced that the Soviet Union was putting up a nuclear missiles in Cuba.

And it's worth reminding those who are sceptical what actually happened.

And the market was of course right – there was not third World War and after 13 days of tense stand-off the crisis ended.

For more commentary, read Pete Spence at City A.M. and the rest of Lars' post.

A little reminder of how far we've come

This is a little way off our usual beaten track here but there's an important point underneath it. An excellent piece in the NY Times about the impact of the deaths of the US Civil War upon that country. We look back now at the numbers, 750,000 or so killed, equate that to perhaps 7 million now in the much larger population, and think that these numbers must have terrorised the country, as that larger one would us today. But that's not quite how it was: people didn't brush off the casualties, but they didn't loom as large in the societal mind as we might think.  Partly because two thirds of those were due to disease and only one third to actual action. And while death from disease on campaign was at least partly caused by being on campaign death from disease while not on campaign was common enough so it wasn't looked at in quite the same way. But more than that:

If we work from an assumption that deaths from disease were not viewed at the time as war casualties, but rather as a continuation of prewar circumstances, instead of 750,000 casualties faced by Civil War-era Americans, we are left with 250,000. If we divide this figure by the four years of war, we have a crude estimate of 62,500 battlefield deaths per year. But even this figure requires context to understand its significance. It is important to keep in mind that death rates were tremendously variable in the period, even within relatively stable locales, because of the unpredictable nature of contagious disease. Some areas reported rates that varied from below 2 percent up to 6 percent. A conservative estimate of a 2 percent death rate for 1860 would have meant about 629,000 deaths that year for the nation as a whole, while a 3 percent rate would have resulted in 943,000 deaths (today’s rate is consistently below 0.8 percent). The additional battlefield deaths in the war would thus represent an increase of between 7 and 10 percent over the normal rates. Significant, but hardly catastrophic.

Yes, the deaths in that war (as in any) were horrendous, wasteful and we would most certainly hope to avoid any more in the future. But it's worth noting how far we've come since those days, our total death rate now is lower than just the variation in the total death rate at that time from year to year. This is basically the effect of sewage and vaccination (other medical treatments a little, but the real drivers are those first two). Two things that our now much richer society can afford as a matter of course.

Another way of putting this is rather hopeful. I tend to doubt that rich countries will ever be persuaded to get into an all out war ever again. Simply because there are so many fewer things that kill us now that we'll not, in terms of mass armies and mass battles, ever be prepared to take the risks.

Online illegal drugs markets show us the potential benefits of legalisation

Monday saw the worldwide release of the 2014 Global Drug Survey, with particular focus on the recent growth of online markets for illegal drugs. Despite its temporary shutdown in October 2013 - following the arrest of its alleged founder Ross Ulbricht - Silk Road (2.0) remains the most popular anonymous drugs marketplace on the internet. The online element of the survey therefore focused mainly on this site. Growing up in Essex has made me appreciate why purchasing illegal drugs online is a far more attractive option. I have experienced the catastrophic effects of drug prohibition first-hand, and it is part of the reason that the issue means a great deal to me. Friends and acquaintances have had terrible experiences due to contamination from unscrupulous dealers with little incentive to raise their drugs’ quality, and every reason to lace their products with harmful additives. The violence associated with buying and selling drugs in person has affected the lives of people close to me.

As a current university student, I now live in an environment populated by many people who use Silk Road regularly, and for a variety of purchases. From prescription-only ‘study drugs’ like modafinil to recreational marijuana and cocaine, fellow students’ experiences with drugs ordered from Silk Road have reinforced my beliefs in the benefits of legalisation. They have no need to worry about aggressive dealers and are more likely to receive safer drugs: meaning chances of an overdose and other health risks are substantially reduced.

Their motivations for using Silk Road rather than street dealers correlate with the Global Drug Survey’s findings. Over 60% of participants cited the quality of Silk Road’s drugs as being a reason for ordering, whilst a significant proportion also used the site as a way to avoid the potential violence of purchasing from the street. Given that payments are made in the highly volatile Bitcoin, it was also surprising to learn that lower prices were a motivation for more than a third of respondents.

Thus far, governments have unsurprisingly been reluctant to apply the insights that Silk Road provided us with. The political classes remain largely sceptical of attempts at reforming drug laws. However, the UK debate on legalisation is slowly progressing; earlier this month, Nigel Farage spoke in favour of drug law reform, echoing calls for a royal commission from Nick Clegg in February. Ipsos MORI polling last year found that more than half the country supports legalising (or decriminalising) cannabis.

Opponents of reform make the argument that legalisation helps to further normalise drug culture, resulting in increased usage. This is a reasonable claim, and one that seems to be supported by the available literature on marijuana legalisation. However, a marginal increase in the use of safer, regulated drugs seems a worthy price to pay. Legalisation will improve the lives of the poorest and minorities, who are disproportionately harmed by prohibition. It will reduce the violence associated with illegal drugs, ease the pressure on prison spaces and benefit public finances. Instead of criminalising drug users and addicts, it can provide the individuals who currently choose to use illegal drugs with products that are even safer than Silk Road.

Ross Ulbricht, or ‘Dread Pirate Roberts’, set out to explicitly show what it would be like to end the failed War on Drugs. He posted the following in his LinkedIn profile:

“I am creating an economic simulation to give people a first-hand experience of what it would be like to live in a world without the systemic use of force.”

Silk Road has given us a real-world demonstration of why removing state violence from the drug market is one of the best steps the UK government could take towards improving the lives of its citizens. Legalisation should be put back on the agenda.

It's not capitalism that Cuba should be worrying about but markets

Cuba is, however gradually, reforming its economy which is great. However, they do seem to be concentrating on the wrong bits still:

Less well known and less common are the cooperatives but they are part of a political balancing act for the government, which needs to move hundreds of thousands of workers off the state payroll but also wants to slow the rise of capitalism. In many ways it prefers cooperatives, where each worker has a stake in the business, to private businesses where owners make profits based on the work of their employees.

That concentration on who owns what is the wrong thing to be concentrating upon. Sure, capitalism is useful, it's also a great bugbear of those over on the left. But it's also not the important point in an economy. What is important is markets: competitive markets at that, with entry and exit. This is vastly more important than whether those entrants (and those being forced to exit) are cooperatives, owned by the government or top hatted pot bellied capitalists like myself.

The reason for this is that there is no possible method of planning a modern national economy. We could use Alchian's (and Hayek's) point that only a market economy produces enough experimentation for us to be able to work out what to do, or that Socialist Calculation problem that means we've still got another century of Moore's Law to go before we could possibly calculate what to do. There is simply no alternative to using the prices and incentives that a market provides for us and so therefore that's where Cuba should be concentrating their efforts. Simply scrap the rules about who may do what, those licencing regimes. Worrying about who owns it is trivial by contrast.

As an aside, to those who will insist that Cuba provides wonderful free health care and so the system mustn't change. Amazingly, I think you'll note that this country, the UK, also manages to provide free health care to all citizens. And we manage to do this without being a communist dictatorship, without being in Stone Age poverty and without shooting anyone who wants to leave. So quite why those three things are considered necessary to provide tax paid for healthcare I'm really not quite sure.

Politics makes us 'stupid' because the world is complex

Ezra Klein has launched his new site, Vox.com, with an essay on ‘how politics makes us stupid’.

The piece is provocative, and Klein uses some interesting examples. Most striking is the study that shows that people’s maths skills get worse when the problem they’re dealing with has a political element and goes against their political instincts. (Klein seems to have slightly misunderstood the study he’s written about, but his basic point stands.)

The basic claim is that people engage in ‘motivated reasoning’ when they think about politics – in other words, they think in order to justify what they already believe, not in order to discover the truth. This, he suggests, is because the politically-engaged people get more loyalty to their ‘tribe’ than they lose by being wrong.

This ‘identity-protective cognition’, as he calls it, makes sense – a pundit who decides that the other side is right about some particular political issue (Klein uses global warming as an example) has a lot to lose in terms of status within the group they’re part of, and little to gain by being right.

Klein says that this has become worse as political parties have become more ideologically uniform and ideological ecosystems, like think tanks, blogs, media, more expansive. Not only is there the external cost of being wrong, but admitting to yourself that you’ve been wrong for a long time is quite difficult too, especially if you’re politically engaged and some of your sense of self is tied up with your beliefs. You could call this ‘rational ignorance’.

Even though that might seem plausible, I think he is assuming too much and is wrong about some of the phenomena he identifies. I’d like to suggest an alternative understanding of political ignorance that, I think, explains more and assumes less.

I think Klein’s fundamental error is to assume that the truth – or, at least, his mode of truth-seeking – is obvious. Basically, he starts off from the position that most people could reasonably see the light if they wanted to. If that’s right, then it could follow that incentive to disbelieve the truth. And “identity-protective cognition” is an interesting way of understanding that.

But suppose truth is not obvious – that we’re ignorant not because we want to be but because, in Keynes’s words, “we simply do not know!”. In contrast to the rational ignorance Klein is discussing, this kind of ignorance comes about because life is complex. The existence of this kind of ignorance is what allows people to disagree without either being willfully ‘dumb’.

To demonstrate his case, Klein uses examples of ideological dogmatism that are based on rejection of the hard sciences. Here he is assuming that a reasonable default position must be to believe in the usefulness of science, so anyone who deviates from that by disbelieving some scientific point must have an incentive to do so. But if they are simply unaware of the fact that science is usually a good way of learning things, them ignoring scientific consensus is simply a mistake.

Klein may see it as being obvious that science is great. But he has probably spent a lot more time thinking about it than most people – for many, rightly or wrongly, the jury is still out on science, as a great man once said. Error, not group loyalty, may be a simpler explanation for people’s refusal to accept what seems to be a well-established truth.

If the truth is difficult to determine, people who have an interest in politics need some way of sorting the truth from the information they can access. Since there is a huge amount of conflicting data and theory in nearly every area of policy (whether garbage or not), people need some way of sorting the wheat from the chaff.

That’s where an ideology comes in. An ideology, I suggest, is a type of ‘web of belief’ that allows people to use what they already believe to be true to sort relevant and true new information from irrelevant and untrue information. As Jeffrey Friedman puts it, ideology “provides pegs on which to hang the political facts of which non-ideologues tend to be so shockingly ignorant”.

This fits with the fact that ideologues are usually a lot more informed than non-ideologues, an important fact that, so far as I can tell, Klein ignores.

Klein’s view is that political ideology ‘makes us stupid’, but ‘closed-minded’ is probably a more accurate term. The vast majority of the public is shockingly ignorant of basic political facts, with the informational 'elite' also happening to be the more closed-minded. The alternative to closed-mindedness may simply be to be extremely uninformed.

This matters because the things Klein blames for politics making us stupid – ‘gerrymandering, big money, and congressional dysfunction’ – are mostly irrelevant if the view I’ve outlined here is correct. In a complex world where the truth is hard to discover, even the purest politics would make us stupid.

This implies a much more fundamental problem with the democratic process than Klein suggests. The trade-off between ignorance and dogmatism may be unavoidable in politics, making a well-functioning deliberative democracy virtually impossible to achieve. This may imply that less cognitively-demanding ways of making decisions, like markets, may be even more valuable than we realise.

The importance of Tiebout effects

An excellent little piece of cheering news about what this coming century holds for us:

When I was done with In 100 Years, one prediction stuck in my mind more than any other. It was the mathematical economists Mas-Colell who, almost in passing, wrote, “I believe that Tiebout effects will be increasingly felt on a global scale.” He should know, having long been involved in government, in Brussels and his native Catalonia Spain. As the Wiki says, Charles Tiebout is the economist fundamentally associated with the concept of voting with one’s feet. His Tiebout model was designed to show how people choose their communities, within limits, simply by relocating and choosing to pay higher or lower taxes and prices (or immigrating, or simply fleeing, and choosing to bear greater risks). It’s the way suburbs emerge around cities – some with good schools and fancy houses, others with very low rents, and the rest at every stage in between. It covers refugee camps, too. That this ineluctable force of human nature will continue is the prediction I most confidently expect to pan out, in a century of global change.

For what this means is that free and liberal society will continue.

Think about what Tiebout really means: that people differ in their desires, differ in the trade offs they're willing to make. We all thus potter about looking for that set of circumstances that best suit us. It can be the trivial of making sure when young and dating that we live near the good booze and a decent supply of potentially willing sexual partners, moving out to calmer climes when we have chosen (or been chosen to) settle down, through to the ability of the self-appointed righteous to cluster together to congratulate themselves on their righteousness. Camden Council for example. This works on hte larger scale as well: we can and should be allowed to leave a political entity where those trade offs don't suit us.

As opposed to those (Camden again) who say that we all have to live by the same rules, make the same trade offs. And that's the cheering part of the above prediction. That if Tiebout is going to hold for this century then that means that we'll continue to have a free and liberal society this century.

Maybe.