Thursday, 29 April 2010

Behavioural politics, day 22 of 30

A bit of personal news first: CountMyVote was mentioned on Rory Cellan-Jones' blog and over 7,000 people arrived via that or the twitter links that followed it - an excellent combination of PR and viral marketing. Some very striking results emerged - the Lib Dems are way out in the lead on 62%, with Tories and Labour both in the mid-teens. This of course reflects a very specific demographic on twitter, but more importantly the emergence of a nascent movement, Obama-style.

Other campaign news today:

The Institute for Fiscal Studies has accused all three parties of hiding from voters the extent of public spending cuts required after the election. I would dispute their economics a little, but the behavioural point is that it creates an opportunity for one party to get some social proof by changing course and publishing a list of cuts which might win IFS approval. The IFS, incidentally, is universally described as a "respected" think tank whenever it's quoted on TV or radio - by which they mean "not in the pocket of any party". It's a nice reputation to have, but it's almost comical how consistent that adjective is.

Oddly, given that the Tories have run their campaign better overall, this issue has been a Labour victory. Labour has successfully intimidated the Tories into pretending that they won't cut anything - when in fact, I suspect the electorate would quite like to hear about some cuts. There are very few people who don't have a gut feeling that the government is wasting a ton of money - even if they couldn't identify a single penny of it. A party which promised a 5% cut across the board would win a lot of economic credibility, closing most of the structural fiscal gap in a single stroke. And by spreading the pain evenly across all government spending, it would immunise itself from a lot of negative reactions.

However, given that none of the parties are likely to take me up on this, let's look at what they have done.

David Cameron is trying yet again to get the Big Society - or is it Broken Society? - message out. Not much hope of that.

Gordon Brown claims that children's services will be cut by the Lib Dems and Tories. Negative campaigning does work but nobody's really listening.

Nick Clegg did something clever. He said something that could have come straight from Cameron's Big Society handbook, but without obscuring it with the name "Big Society". He offered to give nurses more power under a Lib Dem government. Who could object to that? Nurses, after all! We all love them. More to the point (of media coverage), he got a standing ovation from the Royal College of Nursing, and that was what got reported.

Events outside of party control are much more interesting, and today there was quite a haul:

  • Peppa Pig (no, neither had I) withdrew from a Labour campaign event to avoid being politicised. Mustn't bias those 3-year-old voters, after all they might be voting in the next election but three.
  • An Eastenders actress endorsed David Cameron - obviously not too worried about influencing the 19-year-olds who watch that.
  • Cancelling that out, a Tory candidate was suspended for saying that gay people are "not normal". In fact that's a more serious problem than it appears - because it confirms a narrative about the Tories that many people already suspected - the image of a residue of nastiness and intolerance behind the enlightened David Cameron.
  • Cameron was also confronted by a voter angry at his policy on special needs education. But there's just a bit of subtlety in this story, and I suspect few people would have listened long enough to the details to care.
  • Last week's totals of political donations were published. The Tories ahead, Labour surprisingly not too far behind (though with a big chunk from a trade union) and the Lib Dems, also surprisingly, nowhere near. I guess that, unlike in the US, it doesn't occur to British voters that a surge in the polls should be rewarded with money. Unless it's on the X-Factor.
  • The SNP is suing the BBC to stop Thursday's debate being shown in Scotland if Alex Salmond is not invited onto the show. Good publicity I guess, whatever the outcome.

I'm quite looking forward to writing up Wednesday. But I'll sleep on it and get events in perspective, as it's very easy to overreact to an event. As every broadcaster and newspaper has just demonstrated.

Ratings: Liberal Democrats 6/10, Labour 5/10, Conservatives 4/10.

Wednesday, 28 April 2010

Behavioural politics, day 21 of 30

End of week three of a campaign that has been very unpredictable. Yet despite the twists, I find myself frequently impatient for something else to happen. Am I spoiled by life at the speed of twitter? "Internet speed" doesn't quite describe it any more - I realise with amazement that I'm not far from my twentieth year on the Internet, and life certainly didn't feel like it was unfolding at this pace when I started.

I built a new website from scratch on Thursday, launched it on Sunday and it reached 7,000 visits on Tuesday. Yet I'm already impatient that it only had 3,000 on Wednesday and trying to work out how to promote it further tomorrow. Tonight I've been interviewed on the BBC and tomorrow I'm meeting a major industry figure to discuss the rise of behavioural economics. So why do I need extra political news to keep me even busier? Well, today we've definitely had some of that. However, I'm still a couple of days behind on these reports, so here is Monday's update.

It was all about game theory on Monday, and how players can signal, synchronise their strategies and find a local equilibrium.

The Conservatives have a little media win: they are expanding their list of targets to include more Labour seats - which they claim are now winnable due to the Lib Dems' increased vote share. This displays breathtaking cheek, given that the Lib Dems do far more harm to the Tories than to Labour. But they have persuaded respectable media outlets to report this with a straight face.

The dynamics of this finely-balanced contest are now such that creating an expectation that you can win is a necessary precondition to achieving a win. So the Tories have probably won themselves some tactical (anti-Labour) votes with this manoeuvre. They must do all they can to talk down the enthusiasm of the Lib Dem insurgents and restore their position as leading agents of change. It may be too late, but they're trying the right things.

In a related tactic, Labour and the Lib Dems are both talking about coalitions. The Lib Dems claiming they'd first talk to David Cameron if Labour came third in the vote - which makes sense, as it lets them go on to strike a deal with Labour when Cameron refuses a radical electoral reform bill. And Labour - at least Alan Johnson - is talking about being open to a coalition too. Having prepared the ground, both parties can claim to have a mandate to form a joint government if the situation arises.

There's a drop of policy, as Labour launch their "health manifesto". But I'll buy lunch for the first person to find a national newspaper writing about that after tomorrow. No matter how much Labour wants to bring the focus back onto policy, everyone has more interesting preoccupations. And that was before Wednesday's bombshell...but I'm getting ahead of myself there.

Ratings: Conservative 8/10, Liberal Democrat 6/10, Labour 5/10.

A new behavioural economics buzzword: Fudge

Martin Wolf has described the eurozone rescue package for Greece, correctly, as "a fudge".

However, he thinks this is a bad thing. Here's why it might not be.

One of the key goals in designing a rescue package is to avoid creating moral hazard - the risk that other countries look at the bailout, assume that they will be rescued too and therefore continue to borrow.

If the rules for the bailout are clearly stated, that creates an anchor which encourages people to trade up to it. The most obvious example is the Maastricht treaty rule which stated that countries in the EU must keep their fiscal deficit below 3% of GDP. Guess what size of deficit most countries ended up with? Around 2.9% was a pretty common figure.

So if the rules for the rescue were made explicit, it would give governments very clear guidance on exactly what risks they could take. Inevitably, some would be tempted to push it to the limit - and fall over that limit, in the knowledge that the rescue would come. Just as a person with theft insurance on their mobile phone is tempted to take a little less care with the handset than someone without.

Inviting the IMF to participate in the rescue is a superb way to make sure the rules can never become clear. Politically fickle as European countries might be, their interests are quite correlated. If it becomes obvious that it is in Germany's interest to bail out Greece, it will be equally obvious that they would bail out Portugal too. And if it's in Germany's interest, it's in France's, Holland's and (to a lesser extent) Italy's and Britain's as well.

But once the IMF gets involved, things become a whole lot trickier. The IMF is just political enough to be unpredictable. What's more, it's strongly influenced by Japan and especially by the US, whose Congress is a law unto itself. Literally.

Suddenly it becomes a much more dangerous game for Portugal or Spain to play - yes, they might have Germany over a barrel, but would the US endorse an IMF rescue which might end up including a third of the eurozone? Nearly inconceivable. And yet...not completely impossible either. If the prospect of rescue were completely removed, Spain and Portugal might be locked out of the bond markets utterly. This way, they can gradually reduce their deficits, knowing that they better not take too many risks.

The unpredictability makes it really tough for governments to play chicken with the bond markets. And makes it likely that sovereign bond investors will provide their own discipline on governments, by increasing the interest rates they expect on debt.

We all know the way to end a game of chicken: rip your steering wheel off. The problem is that the other person then drives off the road. By leaving the steering wheel in place, but taking their hands off it, the EU and IMF are frightening us into playing a bit safer than we otherwise would, without shutting down economic activity completely. Fudging might just be the way to keep the eurozone economy operating. And not for the first time.

Behavioural politics, day 20 of 30

If Labour's going to make a fightback, it better start today.

Nick Clegg may have made his first tactical mistake - allowing himself to be led, in a TV interview, into making an apparent commitment not to enter a coalition with Gordon Brown as prime minister if Labour comes third in share of the vote. This is a surprisingly concrete commitment, and provides more ammunition for opponents to use against him than it does for him to strengthen his position. By precommitting himself, he loses a lot of power in electoral game theory; he has to hope that it gains him enough to make up for it.

The other problem for the Lib Dems is that the News of the World has dug up a poll showing their support falling by about eight percent, putting them well back in third place. Together, these events offer the other parties the chance to create a narrative about Lib Dem hubris, overreach and collapse.

Some policy today. Labour with a believable, therefore clever, attack on Tory policy - suggesting that they'd introduce top-up fees for nurseries. David Cameron providing some welcome concrete detail on his Big Society strategy - it means a lot more to people to imagine taking control of their own school than to discuss citizen empowerment in general. And Clegg honourably defending his position on immigration - I wish that were a winning strategy but I suspect it's not, because of the greater salience of fear over hope.

On balance the Conservatives do better out of today, because any weakness for the Lib Dems is much more favourable to Tory than Labour prospects. But mostly it's by default - there were no strategic masterstrokes today.

Ratings: Conservative 7/10, Labour 6/10, Liberal Democrat 5/10.

Tuesday, 27 April 2010

Behavioural politics, day 19 of 30

Saturday is often a quiet day in the campaign, and both Nick Clegg (day off) and David Cameron (sister's wedding) were spending time with their families today.

Gordon Brown wasn't - instead, he spent it with an Elvis impersonator in a somewhat ill-judged campaign stunt.

Labour seems to be showing a bit of desperation in its strategy at the moment. I'm all in favour of lots of activity - the more you expose yourself to voters, the more chance one of your messages will resonate. It's the salami-slicing principle again. But there are two caveats to this:

  • The first is that the UK's balanced coverage laws mean that even if Labour holds five times more campaign events than the Tories, they have to get the same amount of TV and radio coverage. So it may be better to have a small number of events with a highly focused, controlled message than dozens of half-hearted low-quality promotions. This argument doesn't apply to newspaper coverage, and it could be a successful strategy to run literally thousands of small-scale campaign events with Cabinet ministers - if each can gather one or two hundred attendees, it might be possible to influence enough people to swing the election. Perhaps this is happening and the national media just aren't noticing. Hmm.
  • The other is that too much activity runs the risk of showing a lack of confidence. And confidence, for whatever reason, creates trust. It can only be good for Nick Clegg to show sufficient confidence in his prospects to take the day off, and David Cameron gets to put the election in perspective, showing that his family is more important.
Labour does have a chance of pressuring the papers and TV into covering policy a little more, and process and style a little less. But it's running out of time.

Ratings: Liberal Democrat 8/10, Conservative 7/10, Labour 5/10.

Monday, 26 April 2010

Behavioural politics, day 18 of 30

Note: blogging has been slightly delayed the last few days - I've been working on a new website, CountMyVote, where UK voters can state their voting intentions in order to gauge whether their chosen party has a chance or if it's worth voting tactically. If you're in the UK, please click through and cast your vote and help us build a picture of likely voting across the country.

Friday, of course, was all about debating the outcome of Thursday's debate.

The consensus that emerged (after a disputed Yougov poll put Cameron slightly ahead) was that everyone was about equal, but some were more equal than others. Gordon Brown got more negative than positive ratings, and Labour continues to trail in most polls.

Better news for Brown in the real world, as the economy grew by 0.2% in the first quarter. David Smith thinks this number is likely to be revised upwards, with good reason. Labour still have about twelve days to capitalise on this, but they'll have to start soon.

The Tories tried to create a mini-scandal out of some Labour leaflets which suggest that certain public services would be cut, or charged for, under Conservative policies. On Friday it looked like this might work, but since then the issue has disappeared.

Boris Johnson agrees that the rise of Nick Clegg is a phenomenon of behavioural politics:
"I feel some psychological thing has taken over the nation that I don't understand"
Some might say there are lots of things Boris doesn't understand - others think it's just an act. Both Conservative and Labour parties have a strong interest in portraying the rise of the Lib Dems as a psychological reaction, or a result of media obsession with process - anything but policy, basically. Labour benefit from a policy focus because that tends to equalise the three parties. The Tories benefit from marginalising the Lib Dems because it leaves them as the alternative to a disliked Labour Party. So expect Labour in particular to try to bring attention back to policy over the next few days, and the Conservatives to continue to attack the Lib Dems and Clegg.

Indeed, the only party which got any coverage today for a policy announcement was the BNP, who launched their manifesto. While I personally find it quite fascinating to continually analyse the behavioural game theory of the political contest, I can understand why others get a bit frustrated.

Ratings: Conservative 7/10, Liberal Democrat 6/10, Labour 5/10.

Sunday, 25 April 2010

The economics zeitgeist, 25 April 2010




This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.


I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Behavioural politics, day 17 of 30

The two stories of today are all about Nick Clegg:

  1. There's a debate tonight. Would Clegg perform as well as last week and maintain momentum, or would he be successfully neutralised by the other two (mainly, that is, by Cameron)?
  2. The Tory-supporting papers have decided now is the time to focus all their fire on Clegg. Will it work?
The debate itself was quite interesting - a much more even performance than last week's.

Brown is clearly hoping that people will focus on policy by now, but it's too early for that. The debate format is still a novelty - all the attention is therefore on presentation and on what the three leaders have learned or changed since last week.

This inevitably makes it another expectations game - Clegg was expected to be not quite so dominant, Cameron to be a bit better, Brown to be the same old Brown. And nobody did anything obvious to break out of expectations - so the debate will have mostly triggered the confirmation bias for voters' existing attitudes.

But there's one important game which played out immediately after the broadcast. Viewers who had no strong feelings about the debate, or who didn't see it, will have their judgement strongly influenced by social consensus. I've mentioned the Asch social conformity experiment before and it applies again here. This is why the Sun and YouGov were so keen to get their poll out immediately after the debate. If they declare Cameron the winner, people without a strong opinion would be more likely to say he won when asked afterwards. Thus, any poll taking place more than 15 minutes after the end of the debate is of little value as an objective comparison - it only measures how much people believe the earlier polls.

So the question to ask yourself about these polls is not: do you believe them? but: do you believe other people will believe them? If the answer's yes, then Cameron has the advantage. If not, probably Clegg. Either way, Brown is the definitive underdog now.

Which is also clear from the other story of the day, the Tory papers' vicious attacks on Nick Clegg. They appear to have decided by now that there's no need to bother with Brown any more - Clegg is the real threat. One paper has dug up an article he wrote years ago and printed a bunch of quotes out of context; another has found a "scandal" in which he received donations through his personal bank account to fund a researcher's salary. Whatever your political position, it seems clear that these stories are classic scaremongering.

That said, they may work. Nick Clegg has the huge advantage of being relatively unknown, and therefore having little negative baggage attached. It is probable that - due to the same mechanisms that explain loss aversion - we place more weight on negative than positive stories. Indeed, I'd argue that there is really no weighting process at all - more of a binary choice mechanism, where we simply ask ourselves whether there are bad things about a choice as well as good ones. If all three choices have both bad and good points, they will seem roughly equivalent at a casual inspection.

So if these papers can create the impression that Clegg has some skeletons in his closet, however minor, then he loses a big part of his edge over the other candidates. The hope for the Lib Dems is that the stories are so excessive that they can paint this as a Murdoch campaign to "overthrow British democracy". This message is starting to get some traction - ironically despite the fact that neither of the papers in question (the Mail and the Telegraph) are owned by Rupert Murdoch!

Mainly, the Lib Dems get stronger every day they survive without a major knock to their popularity. And they've hung on one more day today.

Ratings: Liberal Democrats 7/10, Conservatives 6/10, Labour 4/10.

Thursday, 22 April 2010

Behavioural politics, day 16 of 30

I'm writing this at the end of day 17, which has been much more exciting. But back to day 16 (Wednesday) first.

David Cameron has been hit by an egg, which seems to be a tradition of political campaigns nowadays. No real harm done except that eggs are only thrown at people with a chance of winning (and occasionally at people like Nick Griffin of the BNP, but that's a different motivation). So, paradoxically, the egg is probably good for Cameron - confirming that he's still the front-runner. This brief history of egg-throwing confirms that most politicians who've received an egg, a punch or an unexpected buttonholing have gone on to win the election - the exception being Harold Wilson in 1970.

The story of the day, insofar as there is one other than tomorrow's debate, is the IMF. Not the IMF's bank tax, which could trigger an interesting policy discussion. But whether, under a hung parliament, the IMF would have to bail out the UK's public finances. Ken Clarke, former Tory chancellor, has suggested that this might happen.

Briefly, my reaction as an economist: nonsense. The UK is nowhere near the fiscal position that would require this - and even if we were, the IMF couldn't hope to marshal enough resources to help. The UK's annual budget deficit is about equal to the IMF's total balance sheet of $250 billion or so. But more importantly, the fiscal position is improving - today's figures show a deficit of £163 billion, £3 billion less than was forecast just a month ago. If improvement continues at the same rate, next year's deficit is likely to be closer to £120 billion than the £160 billion officially projected.

But none of that is the point. The point is: can Ken Clarke scare people, and will it work?

Undoubtedly fear is a great tool to use in an election campaign. Usually incumbent governments get to use it, and Labour has played its "secure the recovery" card frequently. But the Tories have spotted that many people still have a discomfort over the idea of hung parliaments, because of vague folk memories from the 1970s (again, the factual basis for this discomfort is weak - but not the point).

There's a meta-fear question too: is it irresponsible for Clarke to raise this issue and will it "spook the markets"? Some predictions do have the power to become self-fulfilling, but I suspect not this one. So Labour's response that "Ken should know better" while true, probably won't make much impact.

Labour's focus today remains on the prospect of a coalition with the Lib Dems - which they regard as an appealing message, even as the Tories appear to think it will put people off. I wonder who'll be proven right?

The Liberal Democrats have had the confidence to firmly reject Labour's advances, which is exactly what they need to do to retain the 'hope and change' mantle. And while they're doing so, the Obama comparisons are starting to roll in. That can only be good for them - as is the simple fact that they've maintained their poll positions on equal terms with the other two parties for this long.

The Conservative-supporting newspapers are already hinting today at a vicious anti-Clegg strategy. But more on that tomorrow.

Ratings: Conservatives 7/10, Liberal Democrats 6/10, Labour 4/10.

Wednesday, 21 April 2010

Behavioural politics, day 15 of 30

Are we really only halfway through this election campaign? Things are no longer moving at the pace they started out. But there are still a few interesting nuggets each day from the behavioural point of view.

Gordon Brown is using a (by now standard) concession-and-request strategy, admitting that the liberalisation of drinking laws was a mistake and therefore gaining credibility on his defence of other policies.

Nick Clegg has made a populist suggestion that Goldman Sachs should be suspended as a government adviser while it's under investigation by the SEC for misrepresentation. A clever tactic, because it feels cost-free but satisfies voters' desire for fairness. Labour, as governing party, was forced to say that it would not be doing anything of the sort - of course, they probably have no choice (contract law, after all, being a rather fundamental part of our lives) but it makes look less tough on the banks.

David Cameron has ripped the head off a chicken (a human chicken that is, sent by the Daily Mirror). I'm not sure if this was a calculated attempt to show some personality - he seems to do best when out of his media-managed shell. We seek at least the illusion of affinity with people, even if we don't really want to see their flaws - so this would be a sensible policy.

The most interesting action remains tactical, though. Gordon Brown has made a surprising and strong effort to cosy up to the Liberal Democrats. This is understandable strategically, as Labour and the Lib Dems would have a strong interest in working together if the election does produce a hung parliament. As he suggests, it might marginalise the Tories semi-permanently. And no doubt he'd like to poach a few votes from them to strengthen his hand in a negotiation. But he causes a big problem by saying this out loud: at least half of the rise of the Lib Dems is an anti-Labour reaction. By suggesting that a Lib Dem vote is just like a Labour vote, he may be hoping to switch Liberal Democrats to Labour - but he runs as much risk of switching them to the Tories, which would be bad for both left parties.

Having said that, by making it clear that he wants to work with them, he legitimizes any prospective coalition. Nobody can complain now that they voted Lib Dem and didn't expect them to keep Labour in power. But to achieve that, he's risked gifting the Tories an advantage in the leadup to the second debate.

Ratings: Conservatives 6/10, Liberal Democrats 6/10, Labour 5/10.

Tuesday, 20 April 2010

Is the IMF taxing the wrong things?

I have no objection in principle to higher taxes on banks. But the IMF's surprising proposal (outlined by Robert Peston here) may not quite be taxing the right thing.

If the goal of the tax is to pay for the externality imposed on taxpayers by bank behaviour, that's fair enough. In line with the principles of Pigovian taxation, the tax should fall on the activities which impose those costs. That way, it's fair and also creates the right incentives, to shrink those activities if they do not benefit society enough to justify them.

The first part of the IMF's tax seems to fit this principle. Peston doesn't explain what this "flat rate" would be levied on - I assume it isn't literally a flat rate, otherwise Goldman Sachs or Citigroup would pay the same amount as the Cheltenham Building Society or the Third State Bank of Des Moines. Presumably therefore it will be in line with the recent Obama proposal: a percentage levy either on total assets or on risky, non-deposit (wholesale) liabilities.

The second part, however, is a tax on profits and compensation combined. This implies that, say, a national retail bank in India, which might make $500 million profit and spend $5 billion employing a million Indian clerks, would pay the same tax as an American investment bank making $2 billion profit and paying $3.5 billion in bonuses to a thousand wealthy residents of Manhattan and Staten Island. I am not sure that this would really make a lot of sense.

It's very hard to see how to make a general tax on either profits or salaries effective and fair as a financial regulation mechanism. Last year's one-off UK tax on bonuses is kind of workable, precisely because it is a one-off and therefore gives banks little reason to reorganise or change their practices to get around it. And straightforward taxation of profits and salaries is a fair way to raise general government revenues - but surely not to pay for an IMF rescue fund. Is it really fair that the Indian retail bank, who probably presents almost no risk to the international financial system and makes an important contribution to its local economy, pays the same as the hypothetical American bank, which is likely to be a highly leveraged, high-risk entity?

Now it is not guaranteed that the Indian bank is low-risk. Indeed, some apparently safe-looking state-backed German institutions caused huge problems in the last two years by overinvesting in property-backed financial instruments. But this was not a function of their profits or salaries - I suspect they weren't very profitable at all, compared to the American banks who sold them the assets. Instead, the problem was too much correlation of the financial system's assets - and that is where a tax should fall if we want to discourage risky behaviour.

It's time to write that post I've been putting off, on how to put a price on correlation. I'll update this one when it's published.

Update: I note that the IMF also suggests a limit on the tax deductibility of interest payments. This sounds attractive at first glance - but note that it is not actually an issue about financial distortion, because interest income is already subject to tax which balances out the deductions for interest costs. Instead, it's a way of preventing companies from shipping their profits offshore. At present it's easy to load up a profitable company in (say) Britain with debt, so that all its profits go to service a very expensive loan in the British Virgin Islands. The profits on the BVI loan are not taxed, and voila! No corporate taxation is due. This proposal may therefore be a way to wrap up a bit of tax-haven combat with a popular regulation that's hard to lobby against.

Behavioural politics, day 14 of 30

As the second week of the campaign draws to a close, it's becoming clear that (whatever the parties want to announce) the media's only interest is in the fights debates on Thursday evenings.

There's a small window for policy announcements today - about four days after the debates, the gossip has died down a little - but tomorrow it will pick up again in advance of Thursday's foreign policy debate.

So what are the parties doing to take advantage?

Not much - most of the discussions are meta-conversations about whether a vote for the Lib Dems will let David Cameron in, or let Gordon Brown in, or if a hung parliament will be good for the Ulster Unionists or bad for the bond market.

But if we can ignore that, there a few other issues showing through the fog:

  • A Labour candidate in Birmingham has created a leaflet claiming that the Liberal Democrats want to give paedophiles the vote. A risky tactic - it may well work emotionally, pushing a combination of buttons to do with fear, fairness and outrage, but it may also confirm the perception that Labour is doing old-style politics as usual.
  • Nick Clegg has announced £3 billion of spending on green jobs. Under normal circumstances this would be a good tactic, because those who are in favour of greenness will find it quite salient while those who don't care will not feel the pain. But in this campaign, focused as closely as it is on fiscal responsibility, any spending announcement is risky. This may be used against him in the remaining weeks.
  • Gordon Brown continues to look busy and prime ministerial, fighting the Icelandic ash cloud.
  • Criticism continues of David Cameron for his inconsistent campaign strategy - is it Big Society, attack Labour or attack the Liberal Democrats? It's hard to fight on three fronts: no matter what financial the resources the Conservatives have, the key resource of attention is limited and there isn't enough time left to successfully communicate three separate messages.

    The BBC's summary of the day proves this. It claims "David Cameron is concentrating on his Big Society idea" and then goes on to illustrate it with two quotes that have nothing to do with the Big Society - one attack on Labour and one tactical warning against the Lib Dems. There is a report of a Big Society speech but, to my mind, it's still much too abstract to sway many votes. He might manage to get the message across if he keeps at it for the next fortnight.
All parties suffer from a built-in disadvantage today: there's a much bigger story on the loose and only the most obvious bits of the political campaign will seep through to majority consciousness. This favours the Lib Dems because it reduces the rate of change: the longer they stay at the top of the polls, the more believable they become. If they can make it through the next debate without slipping back into third place, there should be enough momentum to see them through to May 6th. Therefore, despite their paedophile-voting, deficit-increasing policies, they get top ratings again today.

Ratings: Liberal Democrats 7/10, Labour 6/10, Conservatives 5/10.

The economics zeitgeist, 18 April 2010


This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.


I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Ten ways to (c)ash in

Profitable and not-at-all exploitative recommendations for transport and accommodation providers seeking to make the best of this week's Icelandic volcano:
  1. Create a steep demand curve for your tickets but start low. If you simply ramp up the prices of your train tickets, ferry berths or car rentals, you'll be accused of price gouging. Short-term gain but long-term hit to reputation. Instead, sell the first few tickets at the same price as you normally would, so that you can claim not to be exploiting anyone, but as your capacity fills, increase price steeply. I suspect this is what Eurostar is doing, but they're still being criticised for exploitation - so the next tip is:

  2. Make a big noise about how you're contributing to the rescue effort. We're all in this together you know, it's the Dunkirk spirit and all that. You're laying on extra buses, trains and ships - and while you need to ask a fair price to help cover your costs, you're saving people hundreds of pounds in hotel bills. Or you're opening up extra hotel rooms to save them thousands of pounds in travel costs.

  3. Provide a non-standard product at a premium price but sell your normal product at the standard price. For instance, make sure your standard class seats are sold at the usual price and you can charge what you like for first class. Of course, if you happen to run just one standard class carriage out of ten, you'll sell out of those instantly and everyone else will have to pay four times the price for first class.

  4. Unbrand yourself. If Joe & Co Bus Tours shows up in Barcelona charging €700 a ticket to get to London, people will grumble but buy the tickets anyway. The following week nobody remembers Joe & Co - or notices that they were a wholly-owned subsidiary of Thomas Cook Travel.

  5. Make your money on complementary products. If you feel obliged to keep the prices of train tickets or hotel rooms down, you can charge more for meals, booking fees or other associated services. A better alternative, however, is:

  6. Bundling. Provide people with lots of extra value for the high prices you're charging. Sure, the hotel costs £800 instead of £200, but you get free meals, tickets to the local musicals, spa treatments...never mind that you wouldn't have bought those normally and the hotel makes a huge profit margin. It's a package, you'll never get exactly what you ordered.

  7. Make your prices impenetrably complicated. Mobile phone companies are masters at this - their price plans are designed specifically to prevent comparison and ensure that they can hold profit margins up. Why don't you try it too? Maybe strike a cross-marketing deal - your trains, another company's buses and a ferry operator's ships. Add border-crossing fees, make sure the price changes between one train and the next, make your meals expensive in standard class but give them out free in first (but not including wine), offer a single through-ticket at a surcharge...soon enough your customers will give up and pay up.

  8. Swap customers. French train companies can gouge British tourists with impunity and vice versa - after all, who's going to go back and criticise once they're safely home? Eurostar would be well advised to sell all its tickets through local partners who can absorb the blame for the high prices.

  9. Co-opt a local associate to charge even more than you. Once they've seen the next-door hotel charging €2000 a night, your €800 doesn't look so bad. And once you've filled all the €800 rooms, your neighbour will make a couple of really profitable sales. If he doesn't, make sure to give him a fair share - next time it will be your turn.

    And above all...
  10. Don't feel guilty. One of the worst failings of most suppliers is to let customers guilt-trip them into cutting prices below the market rate. Ask yourself - if you had to choose between buying a Christmas present for your children or their children, who would you pick? Well then, why are you subsidising them? You aren't the one who's outstaying their welcome...

    Monday, 19 April 2010

    The axis of Asia

    David Cameron has been criticised for saying during the debate that China was a potential nuclear threat to the UK.

    However, Chris Huhne's slip of the tongue in the post-debate analysis went almost unnoticed. He claimed that the risk was not from China, but instead from rogue states like Iran...and South Korea.

    I now await the set to be completed with David Miliband's declaration of the imminent nuclear threat from Japan.

    Behavioural politics, day 13 of 30

    Finally on Sunday, there was a new political issue to talk about, other than whether Nick Clegg is as loveable as he seems.

    Unfortunately for the parties, it wasn't an issue of their choice. A group of Sunday newspapers have contrived to blame politicians for the eruption of an Icelandic volcano. Politicians are wasting time campaigning while a million British people are stuck abroad, seems to be the message. Nobody is sure quite what Brown or Cameron can do to get volcanic ash out of the atmosphere, but no doubt they should be doing something.

    So the Tories have released an eight-point plan for tackling the problem, and Brown has convened an emergency meeting or two to decide on the government's actions.

    It's not obvious what the political fallout (ahem) from this will be. The Tories have the advantage of being able to propose plans without having to implement them; while the government has the advantage that its statements will actually be listened to, because they will actually be implemented.

    It also raises a question for election law - the government presumably will have to be careful to limit its actions to those necessary for tackling the problem, but should not allow concerns about electioneering to restrict what it does to help resolve things.

    So how have the parties responded?

    • The Conservatives have raised the idea of a "Dunkirk style rescue effort" - clever imagery - but have oddly chosen this moment to warn that border controls might be too strict! Not quite in line with their typical policy position.
    • The government has indicated it will use Navy ships to help get people back home. A logical idea but raises the risk that they will be perceived to have reacted too slowly - surely ships will take a day or two to get anywhere and another day to get back. And how much capacity will really be available? This seems more like a symbolic action than a real solution.
    • The Tories have called for private transport operators to be prevented from raising prices. It's not clear how this could be done except through moral pressure. But it's likely to be a popular call, as it pushes those fairness buttons - people really are outraged by upward-sloping supply curves (another post on that subject is coming later).
    • From the Lib Dems - almost complete silence, though their transport spokesman Norman Baker has agreed that companies should not "cash in" on increased demand from returning travellers. Nick Clegg's children are stuck in Spain and he says that "like so many other people...we'll just have to wait". Maybe he just doesn't want to rock the boat - the longer he can stay ahead in the polls, the more people will believe in his chances of doing well in the election.
    Labour has the opportunity to come off best from this if the problem is resolved quickly - whether by them or by geology and weather. But it's too early to say whether anyone will benefit politically.

    Ratings: Labour 6/10, Conservatives 6/10, Liberal Democrats 5/10.

    Sunday, 18 April 2010

    Behavioural politics, day 12 of 30

    Is it just me, or has the whole election campaign shut down?

    What started out as quite a hyperactive campaign - understandably, because events get attention and attention attracts votes - has atrophied in the aftermath of Thursday's debate. The Liberal Democrats are being allowed to entirely control the agenda with an unqualified positive story - a suicidal strategic choice by their opponents.

    Labour and the Tories - I'm hesitant to call them "the two main parties" any more - are toying with attacks on the Lib Dems as a way of blunting their progress. The problem with this tactic is that it legitimises the Lib Dems as a serious competitor. And as we've mentioned before, one of the key barriers for the third party in winning votes is the perception that they can't win. If the other parties are running scared, that proves that they can.

    There is a more effective technique than warning of the risks of a hung parliament (Cameron's strategy) or trying to make a complex economic argument even more impenetrable by attacking the Liberal Democrats' tax proposals (Brown's). This is to avoid the meta-debate about "stepping up the attacks" and simply point out some of the Lib Dems' highly unpopulist, salient policies.

    Take Europe, for example. I'm personally a fan of the Lib Dems' highly pro-European policy, but you can bet that most UK voters are not. It only needs a few "European superstate" or "losing the pound" headlines - the kind that successfully killed Labour's pro-European ideas a few years ago - to seriously hurt the Lib Dems. It would be tricky for the Tories particularly to play that card, and Labour wouldn't be fully comfortable - but the Conservatives at least have plenty of pet newspapers who'd happily do it for them.

    Brown has tried to do this a little, pointing out that the Lib Dems would abolish child trust funds and tax credits. This may resonate with voters who benefit from those policies, but neither are emotive issues. The abolition of Trident, highlighted by Bob Ainsworth, may be a more effective attack for some voters.

    Ratings: Liberal Democrats 8/10, Labour 6/10, Conservatives 5/10.

    An online content business model: The pointless tweet chain

    A really rather odd phenomenon on twitter the other day.

    I saw a tweet looking something like this:

    This isn't an unusual format - it comes from someone who has set up an automated retweet command, and at the end of each message is a link back to the original tweet. Normally you can click straight through to the original link, but as you can see in this case, the link itself has been truncated, so I need to first click on the bit.ly link to see what it is.

    Often I can't be bothered going through this two-step process - Twitter is very much the Internet equivalent of the impulse buy, and two clicks is often not worth it. But this was a story I was interested in.

    So I click on the link:


    As expected, it's another shortened link - so I click on that too, in order to read the story.

    Or so I thought - for some reason, it takes me to yet another landing page:


    Maybe @myfxdeals is making his own landing pages for every story in order to generate more clicks? In any case this truncated story still doesn't show me the figures I want to see, so I need to click again to get the real article. Here goes, then...


    Getting stupid now. This isn't the real story either. I have been drip-fed one more piece of information - the expected growth rate in 2012 - but still I'm not on the real story with the background analysis.

    Another click and I'm on the Times site - now with four separate tabs open - to see a David Smith piece which I would probably have found anyway via his blog (which you'll see in my blogroll on the right):


    The only thing that will make this process more annoying is when the Sunday Times starts charging for access to its content, as Rupert Murdoch has promised it will.

    If anyone seriously thinks this is a good way to earn clickthroughs, they are being very short-sighted. The most likely outcome is that I unfollow the person I originally got this from (@TweetEcon), in which case they'll get no more traffic from me at all. More likely nobody has thought it through. Maybe one of them will notice this post and see if the whole thing can be streamlined.

    Of course if this is an attempt to generate more clicks, it may be an inept reaction to the very fact that the Sunday Times does not charge for content, and so someone is instead trying to make a business model out of generating more clicks and selling more ads. Felix Salmon has given some persuasive reasons why this probably won't work in the long term.

    Saturday, 17 April 2010

    Behavioural politics, day 11 of 30

    Nothing seemed to happen on Friday except for post-match analysis of the leaders' debate. But this highlighted an intriguing aspect of the deliberative process: social reinforcement of beliefs.

    There have been a number of recent research papers around the idea of deliberation, including John, Smith and Stoker's "Nudge Nudge Think Think" which compares the effects of choice architecture to the effects of open debate among citizens prior to decision-making. Although deliberation arguably gets better results than nudging (though it has a cost, which is the extra time it requires), one of the drawbacks is the risk that everyone converges on a common opinion.

    A famous experiment by Solomon Asch demonstrated the power of social conformity in shaping opinions. Even on questions with a clear, objective answer, subjects felt a huge pressure to agree with other observers against the evidence of their own eyes. And in the political world, full of subjectivity, self-fulfilling prophesies and theory of mind, this effect can surely only be greater.

    So the Liberal Democrats have won the next stage of the battle, which is to get everyone to agree that they won the previous stage. This may be discernible in the pattern of polls over Friday and Saturday: the Lib Dems first showed a catch-up towards Labour, then in the next set of polls overtook them into second. By Saturday evening they had even overtaken the Tories in one poll [warning - Daily Mail] - to lead the field for the first time in over a hundred years. As each poll showed some people's confidence in the Lib Dems' strength, other people became willing to believe in it.

    It feels unlikely that this strength will be maintained over the next week or two, but such is the disillusionment of many voters that it might just happen.

    The other parties did do something today - David Cameron launched what appears to be a kind of X-Factor style singing competition. Not bad politics perhaps, because if 20,000 schoolchildren enter it, their 35,000 parents will have a little more incentive to vote Conservative to make sure the contest doesn't end prematurely.

    Labour only needed to help the newspapers to sing the praises of the Lib Dems - because they will profit hugely from Nick Clegg's rise. The structure of the electoral system means that, if the Lib Dems lead narrowly, with the Tories in second and Labour just behind in third, the results, bizarrely, will be exactly reversed. Labour will be the largest party, followed by the Conservatives and then the Lib Dems.

    Ratings are only as close as they are because most of this was outside of the hands of the parties - their strategic choices were about as good as could be expected in the context of the debate's inevitable momentum. The main criticism is that the Tories needed to land some kind of killer blow to regain their lead, and they failed to find one. It would have been more far-fetched for Labour to do the same, but what a coup if they'd managed it. Missed opportunities for both.

    Ratings: Liberal Democrats 8/10, Labour 6/10, Conservatives 5/10.

    Friday, 16 April 2010

    Behavioural politics, day 10 of 30

    That was much more exciting than I expected.

    Following the leaders' debate on Twitter added a hilarious dimension - a peanut gallery for the oh-so-serious talk going on on screen. The side-effect was that I hardly noticed what they were saying, and could pay attention to the proper subject of a behavioural analysis: how they were saying it.

    On this basis, Clegg undoubtedly came out on top. There were lots of reasons for this:
    • Expectations. For some reason people thought Cameron would do best (even though he's not a very inspiring speaker at all), and so he was compared to the standard of expectations instead of reality. Brown was expected to be dull and earnest, and mostly was - though a few jokes at Cameron's expense will have delighted Labour partisans. And most people hadn't given much thought to Nick Clegg, so it was the easiest thing in the world for him to beat those non-existent expectations.
    • Mean reversion. In a comment a few days ago, Min pointed out that mean reversion (or regression to the mean) is not a law of nature, but often simply a statistical artefact. The point is, it applies when there is no reason to expect an underlying difference between the things being compared. In modern politics, which is based on appealing to the largest number of voters rather than fighting for heartfelt principles, there's every reason to expect that the parties will all be about equally appealing to voters. To the extent that there are differences (e.g. the Tories' huge lead over Labour last year) these mostly arise from temporary effects and cognitive biases, and the more new facts or impressions people are exposed to, the more the differences will disappear.

      This is why there are "iron rules" like the one David Cameron broke:


      ...he faced down critics in his party who warned that pressing for a television debate would break one of the iron rules of politics – that a frontrunner should never agree to hold an election debate with opponents.
    • Novelty. The main "real" effect hurting Labour is that people are tired of them. On the surface, this should favour their main opponents, the Tories, but there are plenty of voters who still remember them too, and without fondness. Therefore, if the Liberal Democrats appear as a viable alternative, and one without the handicap of having actually been in government within living memory, our desire for novelty will support them.
    • Clever positioning. Nick Clegg did exactly what he had to do, which was to stand outside of the fray. His physical positioning supported the brand positioning, and he allowed Brown and Cameron to argue across each other before stepping in and offering "the third way".
    Most importantly, Clegg has established the Lib Dems as having a real chance of doing well, which (as discussed yesterday) is a self-fulfilling prophesy. Yesterday I gave some speculative numbers:
    It would represent a genuine earthquake in British politics if we were to wake up the next day with 150 Lib Dem MPs, 250 Tories and 200 Labour. But it's not impossible.
    And what is the projected outcome from today's (spectacular) poll results?
    Latest ITV/Comres poll of Con36/LibDem35/Lab24 would give Con 289, Lab 186, LD 145 HOC seats try it skynews.com/howmanymps
    More soon on why a Lib Dem lead of 11 points over Labour translates into fewer MPs, and whether that's actually a likely outcome. But on today's showing, while Gordon Brown has missed an opportunity to establish himself as a "safe pair of hands", David Cameron is the top loser.

    If there is no immediate backlash against the Lib Dems, this could turn out to be the most important day in British politics for many years.

    Ratings: Lib Dems 9/10, Labour 5/10, Conservatives 3/10.

    Update: The Comres poll numbers above are not a representative sample - the numbers are only from people who watched the debate. The Lib Dems have made some progress in the polls today but not that much. I expect the picture to become clearer today and tomorrow.

    The Prime Ultimatum

    No, it's not a Matt Damon film...


    Richard Wiseman has an interesting experiment over at his blog this week. Have a look at it before you read on - or if you do read my post first, please don't participate in his experiment in case you bias the results.


    Back now?

    The experiment combines two really interesting cognitive principles. It's an example of the ultimatum game, a game theory experiment which measures our attitude to fairness. In a rational world, the person making the split should offer their partner just £1 (or even £0) and the partner would have no reason to refuse. In the real world, people do tend to refuse offers less than about £3, and knowing this, the offerer tends to offer an average of about £4.40, with a strong peak on the even split, £5.

    One thing that interests me is that many of the commenters - even though they are on the blog of a leading popular psychologist - have evidently never heard of the ultimatum game, which is one of the most famous experiments in the whole discipline. It's refreshing to see people enthusiastically discussing something about which professionals are so jaded.

    But what also surprises me is that not a single person comments on the other aspect of this experiment - it's a powerful test of priming.

    Richard specifically and visibly pre-selects participants into male and female groups before having them make their offer. This is very different from asking your sex after the offer is already made. Why? Because asking the question can influence the offer you make.

    An experiment by Steele and Ambady at  demonstrated that when students are asked to fill in a questionnaire about their sex before doing a test, they are more likely to conform to their perceived stereotype: women are better at the humanities, or worse at maths (there was a similar experiment by Shih, Pittinsky and Ambady (1999) with racial priming). The very action of classifying ourselves into a group which we believe has an effect on our performance, does have an effect on our performance. (This is my excuse for the picture of Danica McKellar, a mathematician who focuses on encouraging girls and young women to enjoy and become better at mathematics).

    Thus, I speculate that the results of Richard's experiment will show a greater difference between men and women than if the experiment were done without priming. Women, I suspect, will make fairer offers, and men will make more selfish offers, because that's what we think we're meant to do.

    Any thoughts, Richard? Is this what you're testing? Do you have non-primed statistics to compare to? Have I spoiled the whole experiment with this posting? I expect most of the results are probably in now, so I hope it's relatively safe.

    Thursday, 15 April 2010

    Behavioural politics, day 9 of 30

    Wednesday was the Liberal Democrats' chance to hog all the media attention - possibly the first time that sentence has ever been true.

    Just to make them wait a little longer, though...I'm first going to mention Gordon Brown's surprising admission that he was mistaken not to regulate the banking sector more tightly when he was Chancellor.

    This is an excellent example of concession and request, taking advantage of our bias towards reciprocity to try to create better feelings towards him. It's a dangerous game though, as it competes with a confidence bias which leads us to place more trust in people who are confident. You could argue that by admitting his mistakes he shows greater, not lesser, confidence - certainly when we say somebody's "defensive" it usually means we think they are unconfident. But doing it two years after the crisis started might not be a good tactic. On balance I think it's positive.

    So how about those Lib Dems, eh? Striking a balance between Labour and the Conservatives in several ways:
    • their manifesto was midway in length between the other two
    • instead of saying one main thing, like the Tories, or thirty different things, like Labour, they have chosen four themes - all quite salient: fair taxes, education, economic reform and cleaning up politics
    • their brand positioning is between Labour (big spenders) and the Tories (big cutters) with a "fiscally responsible" message
    Whether this last point is an accurate reflection of Lib Dem policies is another matter, but they are definitely perceived as the centre party, taking advantage of voters' aversion to extremes.

    Indeed this distinction between brand perception and issues is a theme throughout the campaign, as it always is:
    Danny Finkelstein, of the Times, tells the BBC's Daily Politics the public might say they want lots of policies, but actually what they do is "ascribe them backwards to the character they think the parties hold" - so really they judge policies through the prism of personality.
    The game theory of the campaign becomes really important for the Lib Dems. Many people are sympathetic to them - arguably most of the population - but won't vote for them because they have "no chance of winning". As soon as they are seen to have a chance - or, as in this election, to be likely power brokers - they will pick up a big chunk of the vote. And simply being taken seriously, as the Lib Dems now are, helps to give people that impression.

    It's plausible therefore that the Lib Dems will do much better on May 6th than was expected a few months ago. This would be assisted by the return of tactical voting, which in this election is being deployed both against Labour and the Tories. It would represent a genuine earthquake in British politics if we were to wake up the next day with 150 Lib Dem MPs, 250 Tories and 200 Labour. But it's not impossible. We need only think of the tipping point models of Thomas Schelling to see how quickly things can change if the right expectations build.

    Both of the other parties have been playing their social proof card, with Labour corralling 50 more economists to write a letter about the dangers of Tory cuts, and the chairman of WPP helping the Conservatives by suggesting he'd move their domicile back to the UK if the Tories win. But their job today was to somehow halt the momentum of the Liberal Democrats, or marginalise them, and neither have succeeded in doing so.

    The polls probably reflect yesterday's Conservative manifesto launch, with the Tory lead back up to 6, 9 or 12% depending which version you listen to. The Lib Dems are steady on between 18% and 21% - tomorrow's results will be very interesting. But tomorrow will be dominated entirely by the first ever leaders' TV debate. As I write, the BBC election news headline is the comically news-free "Historic leader clash gets closer".

    Ratings: Lib Dems 8/10, Labour 6/10, Conservatives 5/10.

    Wednesday, 14 April 2010

    Behavioural politics, day 8 of 30

    On day eight, it was the Conservatives' turn to get all the attention as they launched their manifesto.

    The most notable aspect of this was the 'big idea' of giving control of public services back to the public - the "Big Society". In fact, the biggest difference between the Tory and Labour manifestos is that the Tory one has a big idea. The Labour document does not have much of a unifying theme while the Conservatives are clearly aiming to define a long-term vision for the country.

    Will this work? I have my doubts. The Tories don't need to create a vision - their biggest advantage in this election is the visceral dislike many people feel for Gordon Brown. The more new ideas the Tories create, the more work they have to do to win people over to those ideas - people who could have been in their column by default.

    Tim Montgomerie of Conservative Home agrees - the manifesto should have been full of tactical, short-term, salient policies which would resonate with voters and draw a clear line between the two parties - or perhaps better, between Cameron and Brown. Instead it attempts to convey a quite abstract theme which won't instantly appeal to the majority of people. This power-to-the-people idea has been characterised as "Californian politics" - drawing mocking responses on Twitter from people in California who live with the consequences of referendum-style politics.

    However, we might be wrong. The journalists certainly prefer this manifesto - one of the BBC's commentators claimed that it was much better than Labour's because of its theme, and Janet Daly in the Telegraph praised its coherence. And themes do work - in the long term - because they give us a narrative to believe in and that can give a party a sense of inevitability. The "invitation to join the government" is a clever idea, if they can keep it alive long enough for anyone to notice.

    The question is whether the Conservatives have enough time remaining in this campaign to get the narrative embedded in the voters' heads. I suspect that the media will be looking for sharper, more instant stories than this.

    And are the actual ideas in the manifesto any good? Well, I wasn't really planning to get into such matters in these articles - that's hardly the point of behavioural politics. But I must admit - it does actually sound quite good. The classical economist's division of labour argument suggests that most people should focus on their jobs and families and let experts get on with running hospitals, schools, social services and the army. But behavioural economics - for instance, Dan Pink's argument about motivation - gives us reason to think that public services may well perform better with a bit more involvement from the public. If Labour does win, I hope they'll pinch a few good ideas from the Tories - it's worked quite well for them in the past.

    In other news:

    • UKIP and Plaid Cymru launched their manifestos too, distracting the BBC from the Tories a little
    • The Tory launch was in Battersea Power Station, apparently in yet another reference to Gene Hunt - a bit gimmicky for my liking but more interesting and less risky than the not-yet-open not-yet-officially-an-NHS hospital Labour picked
    • Labour's response to the Tory manifesto was predictable but competent - they claimed that there was a "hole" at its centre, of irresponsible, unfunded promises. They would have said exactly the same thing no matter what the manifesto actually contained. Quite rightly, since this is Labour's dominant theme of the whole election, and they need to take advantage of confirmation bias by hammering away on the same message.
    • Alan Sugar donated £400,000 to Labour, winning back a bit of social proof (see how quickly the national insurance topic has disappeared from the news?)
    • The Lib Dems have announced some tough policies on bank regulation, their credibility boosted by Vince Cable's untouchable economic reputation. But there have been a couple of wry comments about the joined-at-the-hip relationship between Clegg and Cable - can Clegg survive on his own?

    Finally, the Conservatives made an interesting claim after their manifesto launch:
    ...we shouldn't read anything into the absence of tax relief for the video games industry in the manifesto - they still support it
    Intriguing that it wasn't in the manifesto, then!

    In the short run, it makes perfect sense. By keeping it out of the manifesto it's harder for their opponents to claim that the Tories' sums don't add up. However, they want to keep the beneficiaries onside - hence this "side letter" to reassure them that the tax relief is still real.

    However, it does remind me of the infamous off-balance sheet liabilities that brought down companies from Enron through to the entire banking sector, and I am surprised they are leaving themselves open to this.

    Overall, the Tories have given up the short-term advantage of their manifesto launch and must hope that they can win it back with positive coverage over the next three weeks. Labour's rating is equally low only because they haven't done anything themselves to definitively retake the momentum today. But the polls may be narrowing, with a range of gaps from 3% to 10% in four opinion polls on Tuesday evening.

    We await eagerly the Liberal Democrat manifesto launch and, more importantly, Thursday's televised debate between the three party leaders. That will be when the campaign temperature jumps.

    Rating: Labour 6/10, Conservatives 6/10, Lib Dems 5/10.

    Wolf fixes the British economy

    Martin Wolf outlines what has to happen to get the UK's fiscal deficit under control while keeping the economy growing [note the similarity to Chris Dillow's argument a few days ago]:
    Policymakers must bear four points in mind: first, they must promote the essential strengthening of investment and net exports; second, they must realise that this big economic adjustment is a necessary condition for a durable fiscal improvement; third, they must also prevent the fiscal deficit from crowding out the needed rebalancing; and, finally, they cannot assume that today’s huge fiscal deficits can be comfortably financed indefinitely, should the rebalancing of the economy itself fail to occur.
    This is going to be a very tricky policy performance.
    I agree with the diagnosis. But it raises a different question which is not answered: why does not the market solve this problem?

    Some would argue that public sector borrowing itself causes the problem - if the government did not run a deficit, the private sector would have nowhere to put its money except into investment. Interest rates would fall until productive investment shows a net positive return.

    However, Wolf points out that:
    The Panglossian view is that...domestic private spending and the external balance would adjust automatically. But, with real interest rates on index-linked gilts at just 0.6 per cent, short-term interest rates at 0.5 per cent, yields on conventional 10-year gilts at about 4 per cent and weak growth of credit and broad money, this is a fairy story.
    This is the Keynesian view - that interest rates can't fall any further, so an increased saving rate would drive national income down (the paradox of thrift) until the economy reaches a new equilibrium at a much lower level of GDP.

    Scott Sumner would argue that a rising level target for NGDP or prices would combat this. Partly because inflation would make real interest rates negative (meaning capital investment is relatively more attractive than holding cash), and partly because a credible growth target for NGDP would make the expected returns on real investment higher.

    But even if this is the right policy, it is not yet accepted by a consensus of central bankers, and seems unlikely to be implemented. Thus, the answer to my question is: the market on its own is stuck in a low-return equilibrium and private actors can't solve the imbalances, or make investment profitable, without help or coordination. Is there a second-best policy which could achieve some of the same four objectives?

    The first of the four goals is the most important. Promoting investment is a clear objective of both main political parties. However, while Labour is indicating that it would pursue a strong industrial policy to directly boost private investment, the Conservatives (as far as I can tell) take the Panglossian view described by Wolf.

    Though I am tempted by Labour's approach on this issue, I am not convinced that industrial policy alone can create enough investment to make the difference. We are talking about £75 billion a year of new investment, over and above the £210 billion that's already taking place. Where else could it come from?

    Government can directly invest some of the money - if the deficit on revenue spending can be reduced, public investment in infrastructure could take up some of the slack. The obvious candidates - railways, roads - will be limited by the amount of skilled labour available, so we need some diversity of investment (this theme will come up again in a posting in the near future - look out for it). If government is going to invest directly, it must find ways to invest significant sums in other areas such as digital infrastructure, software, green energy - or perhaps technologies for long-term care. This should ideally be done with the intention of privatising the assets later, or else run at arms-length by creating a fund which will invest in private projects to build these technologies.

    More importantly though, the private sector needs to believe there are specific opportunities for long-term growth in the economy. Policy can have some influence on this.

    Some opportunities are demographically obvious - for instance, there will be millions of people retiring in the next few years and many of them will soon need long-term care. Why are more private investors not building care homes? Probably because the nature of the business opportunity is very unclear, due to uncertainty over future government policy. This can be resolved at low cost by simply making a clear policy announcement (neither party manifesto is clear on this, though Labour has a little more detail than the Conservatives - see also page 6:5 in Labour's full manifesto and page 48 of the Conservatives').

    Other opportunities are path-dependent - if someone invests in high-bandwidth digital infrastructure, then complementary software and media investment will also become profitable; otherwise, they won't. This is a valid argument for public investment in basic infrastructures, to move the economy into a better equilibrium.

    Wolf's other three objectives are all about how the public deficit is managed. In short, the deficit needs to be left intact for a year, brought down only as these imbalances can be resolved, but once they are resolved, reduced sharply. If the economy does not make a successful shift towards investment, significant devaluation of the pound, and lots more QE, may be the only option available. Let's hope the private sector has the sense to stop accumulating financial assets before that has to happen, and finds somewhere productive to put its resources.

    Tuesday, 13 April 2010

    Behavioural politics, day 7 of 30

    And on the seventh day...Gordon Brown launched the Labour manifesto.

    This was a good opportunity for Labour to deepen the public's engagement with their ideas. The more rational the conversation, the more the two main parties are likely to equalise. Both are skilled at targeting the median voter - democracy provides a strong competitive pressure to build a coalition of voters just big enough to win, without becoming so centrist that your base vote doesn't turn out.

    Therefore, if the choice is made purely on the issues in the manifesto, the parties should end up with a similar share of vote - which would certainly be a position Labour would be happy with, given where they are starting out. What's more, the media gave Labour most of its attention throughout the day, temporarily free of the obligation of balance (the Tories are launching tomorrow and will no doubt get the same favour).

    The manifesto reads well (at least the part on the economy, which I read in detail). It has few new spending commitments, which in this context is probably a good tactic due to the strong loss aversion currently in play (people who consider the manifesto as a whole may react much more strongly to the extra debt or taxes they expect to incur, than to the benefit they'll get from the spending). But it does have enough new policy announcements to suggest that Labour is not completely out of ideas.

    The Conservatives, partly through luck and partly through a skilful response, did manage to take the edge off the launch. First by an emotional interview with David Cameron on ITV, which won some headlines. Then by finding some negative comments made two years about Gordon Brown by Ellie Gellard (@BevaniteEllie), who introduced the manifesto launch. And finally by the fortuitous timing of the legal aid award to three Labour MPs who are fighting theft charges in the expenses scandal. It's hard to know whether all this outweighs the positive impact of the manifesto launch, but it certainly reduces it. Labour will be hard pressed to return the favour tomorrow.

    Nick Clegg of the Liberal Democrats showed his courage by allowing Jeremy Paxman to interview him - which neither of the other party leaders has yet been willing to schedule. Clegg performed well and this is a good step in establishing the Lib Dems as a serious competitor. They have definitely managed to win much more attention in this election than on previous occasions, probably because of the likelihood that they will form part of a coalition after the election.

    Jim Prior has written an article comparing negative political campaigning to the (mostly) positive marketing campaigns run by commercial brands. A fair point, but there is a big difference between the two. In the short-term, politics is much closer to being a zero-sum game than is brand-building. There's a prisoner's dilemma here - if one party remains positive and the other goes negative, the positive party loses woefully. Therefore it becomes rational for the parties to play as aggressively against each other as they can.

    Of course in the long term, trust is eroded and politicians as a group lose authority. Therefore it would serve them well to find a way to make a deal to limit negative messages - at least between elections, if not during a campaign.

    Ratings: Labour 7/10, Lib Dems 6/10, Conservatives 6/10.

    Gift voucher arbitrage

    I received the following emails today:


    What should I do? Are these two offers exactly equivalent?

    The John Lewis voucher somehow sounds better, because they sell better stuff. I could get (a fortieth of) a Macbook!

    Then again, I buy stuff in M&S more often, so the voucher is more likely to be used - and I could get a very nice dinner there for £25. If they'd offered to buy me dinner in return for my time, I'd probably be even better disposed towards them.

    And yet, if a client offered me £25 cash for 30 minutes work, I'd turn it down. Is it possible that I feel more positive towards B2B Marketing and Vocus than I do to my clients? Hardly.

    The only possible rational explanation is that I am less worried about establishing a reputation for cheap work in the eyes of a market research company than in the eyes of my customers. If this were happening, it would be a strange form of intuitive price discrimination. But this isn't really what is going on.

    It's simply that products and tangible rewards are more salient than cash - and in this case instead of thinking about the numerical difference £25 will make in my bank account, I think about what I could buy with the voucher. They're taking advantage of my lack of ability to make two different things (a nice meal versus 30 minutes of time) commensurable and compare them objectively.

    This is one of the reasons money is such a great invention, because it does allow us to convert different things into a common measure and compare them.It is a tool that helps us to maximise utility. The continuing task for marketers is to distract us from making that comparison and keep us just irrational enough for them to profit from it.

    Monday, 12 April 2010

    Behavioural politics, day 6 of 30

    An interesting challenge to Labour today - they have been accused of using personal medical data to send leaflets to cancer patients, claiming that care would be cut back under the Tories.

    We don't yet know the truth of this - Labour has denied this kind of targeting and I'm not sure how they would get access to such data anyway. But it's quite likely that the mailing is not targeted at all, and the suspicion arises from a horoscope effect or dog-whistle rhetoric.

    Imagine you open up the newspaper to read your horoscope. Today, it says, you're going to face the recurrence of a challenge from the past but your innate fortitude will help you overcome it. And a communication from a friend will remind you that you're well-loved. Well, it isn't too difficult for that prediction to come true - we can all map our lives into this kind of vague "prediction".

    Similarly, dog-whistle phrases are recognised and resonant with those to whom they're important, while others will pay less attention or not notice them at all. Surely "cancer patient" must be near the top of the dog-whistle list?

    The only problem for Labour here is that they have been too successful with their message. It has been so effective in scaring people that some of them think it must have been personally targeted. This has led to media attention they didn't want. Google has had similar problems with its advertising technology.

    The Lib Dems have been accused of "cosying up" to Labour, which I think is fair comment. Though they have thrown a few brickbats at Brown, their main criticism has been of the Conservatives. In fact, this makes perfect sense from a game-theoretic position. The only chance for the Lib Dems' to have any power is if there's a hung parliament. And the only chance of that is to hold the Tories back. The probability of Labour retaining an absolute majority is thought to be tiny (Betfair offers them only about one chance in 17), so the Lib Dems' best strategy is to hammer the Tories in the hope of blunting their votes - even if, in some places, Labour benefits rather than the Liberal Democrats themselves.

    The Tories haven't been much present in today's news - David Cameron has gone on a charity walk with cricketer Ian Botham, but no major new announcements. People are starting to notice that the rest of the shadow cabinet are nowhere to be seen - this is definitely Cameron's campaign. That might be a gifted strategy but it has the potential to backfire. We'll see. Monday is Labour's day too, as they are launching their manifesto - so the Conservatives will mostly be out of the news until their own launch on Tuesday. Something dramatic is called for.

    Finally, for contrast, here's a prime example of non-behavioural politics from Andrew Sullivan.

    Ratings: Labour 8/10, Lib Dems 7/10, Conservatives 6/10.

    Sunday, 11 April 2010

    Behavioural politics, day 5 of 30

    The "marriage tax" is the dominant discussion of Saturday, and illustrates an important point. The influence of an issue does not depend on its financial value.

    There's a relatively tiny amount of money at stake - £150 a year for about 3 million people - but the Tories intend it to send a clear signal that they are the party which supports marriage.

    The price elasticity of marriage is very low (though not zero) - there has been some actual research on this, though I think the paper reveals more about people's aversion to blood tests than it does about money. In any case, it seems unlikely that many people will actually get married (or stay married) because of this. But the Conservatives would like to be associated with the moral position that people should be married.

    This is a common tactic in the commercial world. Remember in the 1980s when you used to get free glasses for buying petrol? The value of the glasses was probably no more than 1% of the price of the petrol - but in the mind of the consumer, it takes on a significance out of line with its value. The mind is bad at making different goods commensurable, so it tends to assume that getting two goods is nearly twice as good as getting one.

    Similarly, getting two benefits (a tax cut for being married and a lower national insurance rate) for only one cost (a reduction in public spending) seems like a net positive. It is very hard to work out the real net effect on your personal situation.

    This implies that parties should salami-slice their announcements, presenting them as multiple separate benefits instead of one complete package.

    The two main parties have grasped this, with the Conservatives setting each day's agenda fairly successfully with their announcements so far and Labour publicising a new policy today on regulating takeovers of public companies. The Lib Dems seem to be focusing their fire on the Tories - which has as much chance of helping Labour as the Lib Dems themselves.

    Once again, Labour - and lots of other people from outside party politics - have fought the Tories' issue head on, asking why married people - and married people with one income, at that - should be subsidised at the expense of everyone else. It's not clear how this will play out. The Tories are favoured because the issue has much more salience for its beneficiaries than for everyone else. There is symbolism on both sides: the Tories exploiting the positive image of marriage, and Labour and the Lib Dems painting the Tories as old-fashioned and wedded (no pun intended) to a reactionary view of the world.

    On balance, today probably favours the Tories a little - but it's close.

    Ratings: Conservatives 8/10, Labour 7/10, Lib Dems 5/10.

    The economics zeitgeist, 11 April 2010




    This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.


    I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

    I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

    You can also see the Java version in the Wordle gallery.

    If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

    Saturday, 10 April 2010

    Behavioural politics, day 4 of 30

    Day four (Friday) and we're still hearing a bit about national insurance. The focus has moved firmly away from discussion of the tax itself, and onto whether the required spending cuts will endanger public services and/or the recovery; and onto the meta-debate about the political effects of talking about this policy. From the BBC:
    Could the tide be turning in the National Insurance row? Several newspapers lead with attacks on the businessmen who have backed the Conservative stance. Perhaps the Tories hope their married couple's tax break will move the debate on over the weekend before any sort of potential backlash can gather steam...
    Other than that, it's hard to discern much a theme in the day's events:
    • A bit more heuristic optimisation in the Lib Dems' game theory, trying to get the benefits of tactical voting without losing out on it to Labour, while simultaneously avoiding burning any potential bridges with either main party
    • The Tories are accumulating yet more social proof by adopting Peter Gershon, who wrote a report for the government a few years ago on spending cuts and is now advising the Tories; and Michael Caine, who is speaking about their "national service"-style volunteering scheme
    • Labour took a few hours to decide to fire Stuart MacLennan, who made some ill-advised (though hardly unusual) comments on Twitter about "slave-grown bananas" and his opponents. The acceleration of the political cycle is pretty clear - the news emerged at 9, he was fired at 12 and Labour is criticised for moving too slowly.
    • The Lib Dems announce a consumer manifesto which "includes ending "unfair water rates", making airline ticket prices easier to understand and bringing in new legislation to stop banks charging high overdraft fees". An interesting gambit here - I suspect that the idea of a consumer manifesto is too abstract, and they should instead have salami-sliced the policies and announced them one-by-one to maximise both news coverage and the impact of a series of salient individual issues.
    • Brown is trying to make Labour's policy on DNA salient by highlighting the story of Sally Anne Bowman and suggesting that her killer would not have been caught under Tory policies. It can be risky to use such emotive techniques if they become a meta-discussion point throughout the campaign, but if not, they can make a powerful difference to a segment of voters.
    • Brown also uses an effective cognitive technique of concession and request in his evening speech, admitting to being "too serious, impatient and focused on policy" in order to ask the audience's attention while he criticises the Tories.
    There are some hints in Friday's coverage about the discussion points for Saturday, but I'll leave those for the next post.

    Overall, a not very enlightening day, and if that helps anyone it is probably Labour, who benefit from mean reversion if the Tories' momentum and poll lead are not sustained. The Lib Dems did get more attention than usual, though.

    Ratings: Labour 6/10, Conservatives 6/10, Lib Dems 6/10.