Category / Political Metrics

Economic failures and political equilibria March 21, 2013 at 5:59 am

An interesting idea, this, from Acemoglu and Robinson. They say

Our basic argument is simple: the extant political equilibrium may not be independent of the market failure; indeed it may critically rest upon it. Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances*. But unions do not just influence the way the labor market functions; they also have important implications for the political system… Because the higher wages that unions generate for their members are one of the main reasons why people join unions, reducing
their market power is likely to foster de-unionization. But this may, by further strengthening groups and interests that were already dominant in society, also change the political equilibrium in a direction involving greater effciency losses. This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its impact on future political equilibria.

*Where by ‘some’, I hope the authors mean ‘very few’.

In praise of Richard Wolff May 29, 2011 at 9:20 am

I shall be away for a few days, so let me leave you with an excellent article by Richard Wolff in the Guardian. There’s a lot in this piece, and I will only quote a few parts of it. Let me pick up with his discussion of the history of tax in the US:

The tax burdens of US corporations and the richest citizens (what they actually pay) are significantly lower than in most other advanced industrial economies. Indeed, they are far lower than they were inside the US a few years ago. In the mid 1940s, the corporate income tax brought Washington 50% more than the individual income tax. Today, the corporate income tax brings the federal government 25% of what is taken from individuals. In the 1950s and 1960s, the top individual income tax rate in the United States (the rate paid by the richest citizens on all their income over about $100,000) was 91%. Today, that rate is 35%, a staggering cut in the taxes on the richest Americans, far larger than the cuts in anyone else’s tax rates. Half or more of today’s federal deficits would be gone if we simply taxed the richest US citizens at the rates in effect in the 1950s and 1960s. If we also taxed corporations in relation to individuals as we did in the 1940s, the entire deficit would vanish.

Why has the US got itself into the lamentable situation of being easily able to solve its deficit problem but politically unable to admit that?

The largest corporations and richest citizens long ago learned that if you want to sustain an extremely unequal distribution of wealth and income, you need an equally unequal distribution of political power. Those corporations use their profits to pay huge salaries and bonuses to their executives, to pay big dividends to their major shareholders, and to “contribute” to politics. The corporations, their top executives and the major shareholders whom they enrich all regularly finance the political campaigns and politicians that perform that sustaining function. An increasingly unequal capitalist economy pays for the increasingly undemocratic politics it needs.

Any serious effort to change the basic situation, functions and direction of government policy must change the answer our society now gives to this basic question: who gets and disposes of the profits of producing goods and services in the US economy? So long as the answer remains corporations’ boards of directors and major shareholders (the status quo), current trends will continue until bigger economic collapses bring the system to self-destruction. Then we will have graduated from a crisis with banks “too big to fail” to a crisis that is itself “too big to overcome.”

Paradigm hunting December 3, 2009 at 3:12 pm

Like most things which create careers and make money, science isn’t what it claims to be.

It claims to be objective; validated by experiment; unbiased. Of course it isn’t because that takes far too much time. Usually the cranks are exactly that. So it would be an awful waste to test their claims or otherwise take them seriously. Similarly the promotions are in the hot topics, the topics that are getting published in the big journals. Stick with those, stick with the orthodoxy, and you have a career. This is entirely rational: paradigm changing science comes along infrequently, and it is a very good working assumption that any given anomalous result is a screw up rather than a harbinger of a dramatic new theory. Moreover, scientists are people: they have rivalries, jealousies, and such like too.

Scientists, then, for entirely practical and understandable reasons, don’t do science very objectively. And mostly that does not matter. A really good idea will win out eventually, albeit possibly after its creator has died. Some middling good ideas never make it, but the loss is not huge given the increase in efficiency that seeming-crank-avoidance brings. It’s OK, really, most of the time.

(Much of the landscape here has been surveyed by sociologists of science, such as Pierre Bourdieu. Donald MacKenzie has a nice take in the LRB here.)

Unfortunately, as Daniel Henninger points out in the WSJ, when politics enters the picture, things become rather less OK. I don’t agree with much of the Henninger article. However, his basic point – that the failure of scientists at the East Anglia Climate Research Unit to act the way scientists are supposed to act has caused great damage to the image of science – is sound. And it is a great pity.

First, it is worth saying that most people’s emails, if widely published, would cause some embarrassment. It is no surprise that things are no different for scientists.

Second, as we have seen in several cases recently, politics asks too much from science. Or at least politicians do. The real answer to many, perhaps most scientific questions is we don’t know. Experts give advice based on best guesses. This is particularly the case with climate models: like models in many other areas, they are approximations. We think that they work. There is good evidence that the work in some domains. But we are using them well beyond the area that we are really comfortable with. That means that there is model risk. So yes, climate change might not be as bad as our best guess – and it might be worse. It might happen sooner or later than we think. The balance of risk versus cost strongly suggests doing something now, and something pretty drastic. But we can no more know for sure that this is the right thing to do than we can know for sure that the sun won’t explode tomorrow.

What we need desperately is more evidence based politics. This requires three things:

  • Carefully gathering evidence, and using the best available theory to analyse it;
  • Forming policy on the basis of that analysis;
  • Ongoing review, including changing your mind if the evidence and/or the theory changes.

Politicians find that last part particularly hard as it can involve loss of face. But what would you rather have, someone trying to do the right thing, while acknowledging that they might be wrong about what that thing is, or someone who has blind faith in their decisions whatever the evidence?

Professional Liars January 7, 2009 at 8:28 am

What group of people’s whole job is lying – hiding their own activities, figuring out other’s lies, keeping things concealed? There are a lot of plausible answers – you get a credit for `politicians’ – but certainly one reasonable response is `intelligence staff’. Is it really credible to believe that people whose professional lives required them to dissemble and flex the truth will always be honest when dealing with their bosses or overseers? I doubt it, which is why I think that strong, independent oversight of the intelligence agencies is vital. It’s too easy for them to play the national security trump card when faced with a difficult question. You need people who can cut through that kind of obfuscation and impose a reasonable level of accountability.

I therefore particularly welcome Barrack Obama’s decision to nominate an intelligence outsider, Leon Panetta, to head the CIA. (NYT story here.) We tried that kind of idea once in the UK with Robin Cook: remember `ethical foreign policy’? He was a sad loss to British politics: I hope Mr. Panetta lasts longer.

What works September 7, 2008 at 7:09 am

WorkingSometimes, just sometimes, you read something so good that it makes every other piece of journalism you’ve read recently seem thin, dull, and without insight. Ross McKibbin’s article in the current LRB is that good.

McKibbin cut through the rhetoric admirably. He points out the hollowness of Blair’s promise to go with ‘what works’, indeed to the very antithesis of it:

The culture of the focus group does not, however, lead to an apolitical politics. On the contrary, it reinforces the political status quo and encourages a hard-nosed, ‘realistic’ view of the electorate that denies the voter any political loyalty, except to ‘what works’. ‘What works’, though, is anything but an objective criterion: these days it is what the right-wing press says ‘works’. The war on drugs doesn’t work; nor does building more prisons; nor, one suspects, will many of the anti-terror laws. But that doesn’t stop ministers from pursuing all of them vigorously. New Labour in practice is much more wedded to what-works politics than the Conservatives were under Thatcher, who was openly and self-consciously ideological.

Much of the present malaise in British politics flows from this. Among other things, what-works gives the wrong answers.

He also points out, amusingly, that we do in fact have three parties in parliament. They are just not the three parties whose names appear on the ballot paper. A more accurate arrangement based on ideology rather history would have:

A party of the moderate left, undoubtedly led by Vince Cable, which would include some Labour backbenchers (but no member of the present government), some Lib Dems (but probably not their leader), and perhaps Tories like Kenneth Clarke and Ed Vaizey. There would be a centreish party which would include Brown, some members of the cabinet, most Lib Dems, a large part of the Parliamentary Labour Party, probably William Hague, Theresa May, Alan Duncan and a few other Tories; Cameron and Osborne might be honorary or temporary members. The party of the right would include everyone else (including many members of the government).

There is much else of value in the full article and I would encourage you to read it. But even if you don’t, at least rejoice that there is still journalism of this quality going on in this country.

Risk and climate change policy August 13, 2008 at 11:48 am

Just before I went away Paul Krugman posted on the economics of catastrophe, and I have been meaning to follow up for a while. Krugman picks up on some research by Marty Weitzman looking at the distribution of outcomes of climate change. The basic idea is to look at the uncertainties and hence come up not just with a single prediction of the path of global average temperatures, but a path of distributions. There is a lot of model risk in this analysis – it is bad enough predicting financial distributions were we do at least have a lot of high frequency data – however the results are interesting. Krugman says:

Marty surveys the existing climate models, and suggests that they give about a 1% probability to truly catastrophic change, say a 20-degree centigrade rise in average temperature.

Twenty degrees would be game over. Even if it is only 0.01% chance, this is an outcome worth hedging. Clearly then it is not just the expected temperature change that we should be concerned with, it is the variance of that change, or more accurately the upside tail of the distribution. As Krugman says, mobilizing people to protect against low probability but catastrophic outcomes is crucial. Hedging far from the money is cheap, but you do actually have to buy those options.

Run rat run July 27, 2008 at 8:58 pm

Labour MPs are, of course, far more concerned for themselves than either the governance of the country or their party. Here’s just some of the utter nonsense, the self-serving anti democratic idiocy they and their leaders have been up to recently.

Now, I admit it, I cheered for Tony in 1997. I drank a lot of wine and ate pasta and stayed up until Portillo was gone. But now, please, can I have a Labour party back that is actually socialist, or at least has some vague aspirations other than leaving the rich alone, lining their own pockets, and trying to find some tiny chink of public life that has not yet been infected by Thatcherite free market dogma.

Why I like $140 oil July 8, 2008 at 12:10 pm

A surprisingly not ill-informed and annoying article by George Monbiot (isn’t it nice when someone who is usually foolish says something sensible?) considers the good things about $140 oil. One of them is that it is stopping a lot of unsustainable fishing:

No east Asian government was prepared to conserve the stocks of tuna; now one-third of the tuna boats in Japan, China, Taiwan and South Korea will stay in dock for the next few months because they can’t afford to sail. The unsustainable quotas set on the US Pacific seaboard won’t be met this year, because the price of oil is rising faster than the price of fish. The indefinite strike called by Spanish fishermen is the best news European fisheries have had for years. Beam trawlermen – who trash the seafloor and scoop up a massive bycatch of unwanted species – warn that their industry could collapse within a year. Hurray to that too.

Let me add to that. Hurray if the oil price ruins the road transport industry. We should be sending much more cargo by rail and river anyway. Hurray if it causes people to drive less and to buy smaller and less polluting cars. Not only should Gordon go ahead with higher vehicle duty on the most polluting cars, he should extend that idea to lorries, planes, and indeed every other source of pollution. The only way to realign the economy to the post carbon age is to get the incentives right. $140 oil helps, but $200 or $250 oil would be even better.

Update. The high oil price appears to be working in Washington. According to a Washington Metro press release:

Twenty of Metrorail’s top 25 highest weekday ridership days have occurred since April of this year.

Plunging rating May 11, 2008 at 6:36 pm

What should you do when confidence is being lost, when people are starting not to believe you? Gordon has this problem, and for him it is hard to see a way out. He looks inept after the would-he wouldn’t-he election, the climbdown on 10p, and so on. And he hasn’t closed down the obvious vulnerabilities: ID cards, 42 day detention, the war.

At times like this it is important to be clear what you stand for, what people can expect, and what they can’t. Trying to be all things to everyone is a recipe for disaster. So is failing to understand why people are upset. Stand back, admit to what you think are mistakes and apologise for them, present a clear vision for the future, be clear on where you think the ethical lines are, and wait.

Happy Birthday Blog March 5, 2008 at 2:10 pm

Danger, Fragile

On the second birthday of this blog, it is perhaps worth spending a moment on the name. Deus ex Macchiato* is so named for two reasons: the God in the machine is one, as I’m interested in how the rules of a particular situation determine the behaviour. Sometimes simple constraints can have unexpected consequences – a great example is how the Market Abuse Directive prevented the Bank of England from intervening early in the Northern Rock crisis. The ‘Macchiato’ comes from a system that works really well: coffee in Italy. It’s cheap, it’s good, and everyone expects it to work. No Italian would expect a local bar to serve anything other than a great coffee, and few would pay more than a euro for it.

As I contemplate the brownish steamed milk that the average British coffee shop provides, it interests me how a small change in the rules can provide a big difference in outcomes. Whether you are a finance professional, an engineer, an IT specialist, a regulator or a politician, you might perhaps have reason to be interested in systems engineering seen that way. Your scheduled programme from the frontier resumes shortly.

*απὸ μηχανῆς θεός is a literal translation – a calque – from the Greek. Originally it referred to the actors playing Gods being lowered by a crane onto the stage. That might have spoilt the illusion, but it was the only way to achieve what was needed.

Vegas FrontierUpdate. There is an article by Jenni Russell today in the Guardian which gives another good example of how badly written rules and ill-chosen performance metrics can lead to undesirable outcomes.

Just imagine you are part of the government. Among your principal concerns are how to hold society together at a time of rapid change. You worry about social and community cohesion and the practical, psychological and economic isolation of the elderly, the disabled, rural-dwellers and the poor. You set up a Department of Communities and spend billions on initiatives to create thriving, sustainable communities that will offer a sense of community, identity and belonging. Sustainability is another key concern. You care about the planet and exhort people to make fewer car journeys and walk or cycle more.

You inherit, all around the country, a network of local offices which happen to provide many of the functions you seek. They give people access to cash, benefits and government services, as well as connecting them through the post. The majority are combined with a shop, which makes them a social hub and meeting point. The postmasters who run them are an informal source of support and advice on everything from benefit claims to what to do in the event of a death. In cities almost everyone lives within half a mile’s walk of one, and frequently their presence is what sustains a small shopping parade. In rural areas they allow people to lead local lives, and are often the last service left in places that have been steadily stripped of buses, shops and schools. So what do you do? In the name of economic efficiency, you take government business out of their hands, and then start closing them down, in their thousands. […]

The Post Office is not an independent actor. Its strategy is decided by the government which, as its sole shareholder, defines its purpose and the level of financial support. Labour has already shut 4,500 offices and made many more unprofitable by moving key business, such as the payment of pensions or TV licences, to banks or the net. Now it is demanding that the network must close 2,500 of the remaining 14,000 offices because they are making “unsustainable” losses of £200m a year. The government announces that it will carry on subsidising the network, at £3m a week, but only for the next three years. I asked the Post Office press officer what the company’s mission was. “To go into profit by 2011,” she said. What about community needs? “You’ll have to ask the government about that.”

What is so outrageous about this strategy is that the government is acting within completely artificial constraints. Separating the Post Office from Royal Mail 20 years ago, removing key functions five years ago, and defining the network as a business, are all political decisions, not a matter of economic fact.

Certainly fair vs. possibly damaged February 17, 2008 at 3:54 pm

Alistair Darling almost did a sensible thing, then he lost his nerve. The UK’s current treatment of non-dom taxation is embarrassingly regressive and can hardly assist the fight against money laundering. More than that, though, it is simply unjust. People living and working in England should pay for the facilities and services they enjoy. For them to be essentially exempt from tax is certainly unfair. The other side of the argument is that if they were taxed, some of them might leave. But so far all we have is threats and the usual partisan lobbying from the likes of the CBI. Neither Alistair Darling no anyone else knows who would leave or what the impact of their departure would be (although Willem Buiter has a guess). Yet in the face of nothing more than some predictable finger wagging, Darling has given in. Where can I vote for a politician with some guts please? Or at least one who gets some stronger evidence than hearsay before making a decision.

What works replaced by what we believe December 28, 2007 at 8:46 am

The following quote comes from a post on the Guardian website:

What I find most striking about this, as about other items in this government’s moralistic agenda, is how opposing arguments simply are not heard. It isn’t just closed mindedness, the government and its supporters are in the grip of a kind of exclusivist belief system akin to a fundamentalist religion. Arguments based on individual choice, or the notion of adults making rational decisions, simply “do not compute”; they are here to protect us, like spoilt children, from the bad world out there, and they have our interests at heart, and if you don’t agree then clearly you favour exploitation and slavery and oppression.

The two things that strike me about this quote are firstly how accurate it is, and secondly how many things it might be referring to: Europe; Iraq; PFI; Pensions; Trident; Nuclear Power; 42 day detention; the DNA database; ID cards. Pretty much any part of politics that is in any way controversial in fact. Even if you agree with a particular policy, the monological belief system which nourished it is deeply troubling. No government which scorns alternative views and abuses legislative privilege with deeply partisan, ill-thought out and costly nonsense as Brown’s does deserves to survive, let alone win re-election.

A grand to come in December 18, 2007 at 10:12 am

From the Guardian:

Families who sponsor visits by overseas relatives to Britain will first have to pay a bond, expected to be £1,000, under new immigration proposals out this week.

This is a bad idea in so many ways. Firstly I bet the cost of deporting an illegal immigrant is a lot more than £1K: the Guardian says it is £11K. So the scheme won’t pay for the downside. It will however cost a fortune to administer. And it will leave the impression that the cost of breaking your visa terms is £1,000, so people will be encouraged to do that if it is worth a grand to them to stay. My guess is that it will increase rather than decrease the number of overstays.

The economic value of a leader November 19, 2007 at 9:35 am

Some tedious blogger who I won’t glorify with a link challenged Paul Krugman to admit that Mrs. Thatcher was ‘good for the UK economy’. That made me wonder how you would tell. At first it doesn’t seem difficult: there are a number of indicators of which perhaps GDP is the most obvious, and Thatcher the Milk Snatcher did indeed have policies which seem to have resulted in faster GDP growth.

However thinking about it for a moment it is obvious how to produce higher GDP growth: don’t spend on infrastructure and instead use the money to stimulate the economy. In the long term you reduce growth as the education system, transport and utility infrastructure can’t support the needs of the economy and you have to raise taxes high to fix them. But in the short term you get an upswing.

My gut instinct is that that is what happened under Thatcher: her government chronically underspent on the NHS, universities, schools, railways and so on. This allowed her to cut taxes which stimulated the economy for a few years. But because the workforce is undereducated, you can’t get around quickly and conveniently, and so on, eventually these constraints start to bite and growth is slower than it would have been if essential services had been maintained and improved. The present value of future earnings is lower without proper investment as any good private equity person knows. Of course measuring this long term decrease in potential GDP is enormously difficult to measure, but the phenomenon is certainly there. So perhaps even on economic grounds history will judge that Thatcher does not score that well.

The rules of trade September 24, 2007 at 7:39 pm

Stolen more or less wholesale from Naked Capitalism:

Dani Rodrik has […] set forth the conditions that have to be in place for trade liberalization to enhance economic performance (short answer, a lot); in another [post], he reviewed the analyses that claimed that our current trading system produced large economic gains and found the logic to be badly flawed.

Rodrik in turn refers to Deconstructing the Argument for Free Trade, an excellent paper by Robert Driskill. In particular Driskill begins by asking what the metric is:

What does it mean for a change in economic circumstances to be “good for the nation as a whole”?

He then goes on to review various possible metrics, and discuss their advantages and disadvantages. Encouragingly, he ends not with a conclusion but a methodological recommendation:

Trade economists should […] be forthright about the epistemological basis of their policy advocacy of free trade.

In other words, be clear about why you claim something is a good idea, not just that it is one.

Losing my religion September 23, 2007 at 12:26 pm

Two comment articles from recent days focus on faith schools. First on Thursday Zoe Williams argued against the state funding of faith schools:

We all […] have the odd qualm here and there about Islamic schools, and whether they invest proper rigour in the propagation of gender equality, but Christians, we think … now they’re different. They provide a sound education, they don’t discriminate on the basis of class, they’re not exclusive, they’ve been doing this for years. They can have as much taxpayer money as they want.

It’s balderdash. For a start, they are cherrypicking middle-class children (the Institute of Education at London University just produced this finding, after the most extensive research yet undertaken) and, much more important, in many cases they are prosecuting an agenda that is repugnant. Are we really happy to sit back and pay for this?

Her point is reasonable. If the state gives any organisation money, it is implicitly affirming its values and efficacy. Do faith schools really do what we want? In particular, is it good for children to be exposed to the diet of difference that is faith? Believers think they are somehow privileged, after all (ignoring for a moment a few Buddhists and perhaps the Quakers). In its currently fragmented state, do we really need yet another thing dividing people and encouraging prejudice being taught in schools?

Moreover, all faiths are not equal: atheists and agnostics are not allowed to play at the same table, as this story indicates:

A headteacher who tried to reduce the influence of religion inside the classroom by creating the country’s first secular state school had his plans blocked by senior government officials who called it a ‘political impossibility’.

Personally I would be perfectly happy to let my taxes go towards faith schools if there was good evidence they lead to better outcomes for children and society. But as they seem to be just another piece of Mr. Tony dogma unsupported by the facts, I tend to view them with some suspicion.

TechnoDemo September 18, 2007 at 7:40 pm

A few things have made me think about democracy recently.

  • First the Olympic Delivery Authority are sticking to the idea that the new Olympic stadium should only be used for athletics – despite a bid from West Ham to use it as a football stadium and athletics use requiring a downsizing of the building from 88,000 to 25,000. This is my money you are spending, people. I am sure most Londoners would prefer a new full size football stadium and a billion quid to spending more money on an athletics venue. So why is the ODA allowed to flaut the wishes of the people who are paying for their project and their salaries?
  • The West Lothian Question is in the news again. Most politicians seem to think differently from most voters on this one.
  • Finally I came across a really good article in the LRB (behind a firewall I’m afraid) that points out that political arrangements evolve and that democracy in its current form might be dating fast.

The problem is that democracy has little to do with the exercise of political power by the people. The people vote for a party, then the winner does what they want regardless of the people’s wishes. In extreme cases (Blair, for instance) the party leader even rides roughshod over the wishes of his own party. The only decision the people get is who to vote for once every five years or so.

Proportional representation makes the problem a little better in that coalitions are likely so governments have to be more moderate, mostly. But there is still the problem that it is politicians making most of the decisions, not the people. The model of having professional government might have made sense in the 18th century when figuring out what the people wanted was difficult and time-consuming but it is not clearly appropriate today. And professional politics encourages decisions that look good or send the right political message rather than reflect the people’s wishes – like replacing Trident.

There are alternatives. We could use referendums much more. We could elect different parties for different things – a Lib Dem could be responsible for law and order, for instance; a Green, the environment; a Tory, Defence; and Labour, the economy. There would be coordination issues of course but it isn’t obviously necessary to have the same party running every ministry. Or we could have a pre-emption mechanism so that any policy enough people disagreed with was put to a popular vote. If something is not done then respect for the political process will continue to decline. People are sick of their vote not counting. The good news is that it is fixable, especially given the potential to use technology for fast, easy voting. The bad news is that fixing it requires the turkeys to vote for Christmas.

What works? You wish… December 5, 2006 at 8:22 pm

‘What matters is what works’ Tony Blair once declared. I really believe that is true: sadly Tony doesn’t, and I suspect never did. As Ann Clwyd is ejected from her position as Chairperson of the parlimentary labour party thanks to her support for Blair, it is worth highlighting five of the worse examples of Labour’s doctrine pursuit of policies despite them obviously not working:

  • Iraq. No more need be said than that one word.
  • PFI. Wow, wouldn’t it be really great to pay more for the same public services and lock the NHS, Transport for London and many other bodies into inflexible, long term contracts? Anyone who claims Gordon Brown is an economic genius should be forced to have ‘PFI’ branded on their forehead so they never forget the disasterous waste caused by this terrible idea.
  • Faith Schools. We want a more tolerant society with higher standards of education. So let’s set up schools which exclude some faiths, enhance the sense of being special of others, suck up education resources that could be spent on improving ordinary schools, and give their governance to those verging on monomania.
  • Replacing Trident. We do not need to spend £25B on nuclear weapons now, honestly we don’t. This is all about Labour appearing tough on defense: it has nothing to with what the country actually needs.
  • The Internal Market in the NHS. No one who had actually spent any time trading the financial markets would ever suggest they are efficient allocators of resources so why on earth does the government think the market will magically solve the problems of the NHS?

None of these policies was obviously unworkable at the beginning: foolish or misguided perhaps, but not obviously unworkable. They all subsequently have been proved not to work. Yet still the government sticks with them, demonstrating the dominance of ideology over efficacy in their thinking.