Sunday, 31 October 2010

The economics zeitgeist, 31 October 2010


This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the 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.

Friday, 29 October 2010

Nick Rowe, communicator extraordinaire

As often happens, Nick Rowe has communicated something tricky and difficult to understand in a limpid and revelatory way:
...the main proximate effect of monetary policy on AD is via Tobin's q -- when the price of existing assets rises relative to the marginal cost of producing new assets, firms will move along their MC curves and produce more new assets. Investment increases, in other words, and investment is a component of AD. And when the price of existing assets rises relative to the price of newly-produced consumption goods, both the income (wealth) and substitution effects lead households to increase their demand for newly produced consumption goods, and consumption is also a component of AD.
This is such a good explanation of the fundamental mechanism of monetary policy that I virtually had to sit at my computer and applaud.

Greg Random responds in the comments:
Altering the flow and size of money streams changes the relative valuations of different asset classes, throwing the economy into discoordination, creating recalculation problems.
Think of housing assets and housing related financial assets.
While I don't necessarily agree with him, it made me think about a couple of questions:
  • Presumably the relative valuations of different assets change naturally anyway, no matter what the central bank does. Is this also discoordination? It's an ugly word for a natural and unavoidable process (indeed even if we could stop the relative price changes happening, it would be a terrible idea to do so).
  • Is it part of the central bank's (or the fiscal authorities') job to smooth these changes so that employees have time to transfer out of one investment industry into another, reducing disutility from unemployment? Welfare can certainly be increased if people have more warning of future changes which are going to happen anyway. But in this case the way to get that warning is by deliberately delaying the change...and the negative welfare effect of the delay might outweigh the positive effect of the warning signal.
  • How does this work with consumption goods? Their relative price changes too. Should authorities intervene in that (either to delay, or to help it along)? What is the difference between consumption goods and assets anyway? One can be converted into the other, in some cases by physical transformation, or alternatively by trading your expectations of the future benefits of an asset for the present benefits of a consumption good.
  • Is the difference between assets (or investment) and consumption analogous to the difference between individual, one-off exchanges and ongoing economic relationships? Does this tell us anything about whether there should be any protection or "property rights" in an ongoing economic relationship, as there is for an investment asset? Models of markets are generally based on simple exchanges, but many (most?) trades are part of a long-term series: an employment contract, or a rental payment, or the purchase of a sandwich from the same cafe I have been visiting for the last three years. Perhaps these are qualitatively different from a single, one-off trade of oil for gold on a commodities exchange.

Any of these questions would be easier to answer if illuminated by a Nickrovian thought experiment.

Related but not the same: this Marginal Revolution post asking about the composition of the economy and where declines in demand are happening.

Thursday, 28 October 2010

F1 versus G20

Loved this headline: Bernanke Beats Schumacher in Korea as Brains Finish First.

I don't really know what else to say about it. I'll post something more intelligent tomorrow.

Sunday, 24 October 2010

The economics zeitgeist, 24 October 2010


This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the 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.

Friday, 22 October 2010

Are the British natural Austerians?

Reader Bill Spight writes from the US, pointing to today's Brad Delong article and asking if I think the British psyche has a special tendency towards austerity.

I hadn't read Delong's piece (I find his blog a little too predictable usually, and while I agree with much of what he says, I don't need to re-read the same opinions every day). He is quite right, though, about the Tories' lack of a real economic theory behind their actions.

Osborne obviously has some acquaintance with economic theory - though it may be selective. He understands the idea of crowding-out, the impact of long-term interest rates on private investment, and the idea that monetary policy can sometimes compensate for fiscal policy. But the current cuts are more driven by political ideology than economics. Notably, they fail to understand the difference between public borrowing in an economy with high unemployment and output gaps, and in an economy running at full capacity. This of course is the basic Keynesian insight, and as Bill says, the Treasury View seems to have come back into fashion with this government.

A caveat here: the Bank of England and our newly constituted Office of Budget Responsibility (our version of the CBO) seem to think that the output gap in the UK is much smaller than common sense would suggest. Despite a 5-6% decline in output, the OBR has said that the output gap is only 2%. I can't understand why they would think this, although the relatively small rise in unemployment (it has only reached 8% here) and relatively high inflation (well over 3%) does perhaps explain why they may have come to that view. If the output gap really is only 2%, then perhaps there really is a crowding out effect. But I can't believe that the real figure would be so low. I think that low unemployment is more due to a recognition that skills in the UK are slow to adjust and therefore employers are hanging onto labour; and high inflation is due to the fall in the pound and to uncompetitive markets and high pricing power in certain sectors. Simple observation in UK businesses suggests that they could easily raise production by 5-10% without running into serious capacity constraints.

I do support some of the Tories' ideas: our public sector should be more flexible and entrepreneurial, and the idea of the private sector supplying some public services is a good one. I hope that one of the positive side-effects of these cuts will be to stimulate more private provision of those services - both because it should lead to more efficient supply, and because services will be more accurately targeted to what consumers really want. However, the impact of the cuts on short-term aggregate demand will be serious, and will probably outweigh whatever short-term benefits arise from a transfer of activity to the private sector.

So why has this happened? I think Bill's psychological explanation points in the right direction. British culture, as well as that in Germany and some segments of the US population, does tend towards masochism and the idea that "debt is sin, savings are virtue". Maybe it's no accident that "savings" and "salvation" are from the same root in English.

Looking at another recent post from Delong, we can get a clue: "...the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom..." This is a common view in Britain. Indeed, there is a sense of natural justice to it which speaks to the cognitive desire to make dramatic sense out of a sequence of events: punishment must be a consequence of earlier sin, and immorality must lead to downfall. Thus, a recession must be due to overindulgence. Certainly there is a sense in Britain that excessive consumption (and economic growth) is rather untoward, perhaps even American. A boom must lead to a bust.

Maybe it shouldn't be surprising that this attitude in the US is most closely associated with the party that's also the most culturally Christian. Sin leads to punishment, and too much partying leads to a hangover. The Democrats on the other hand, having sympathy with people who ended up poor through no fault of their own, are more willing to believe that bad things (depressions, recessions) sometimes just happen, and are not a righteous punishment on people who clearly deserve it. If you believe that, it's much easier to think that the technocratic solution of increased public borrowing might be the right one.

Public discourse in the UK in the 1960s and 70s was strongly Keynesian (and to some extent even Marxist). I don't know if that was true in the US too, but I suspect not. This could have been why Keynes was so discredited in the UK by the financial problems of the 70s - not just among neoclassical academic economists, but in the public mind too. Not that everyone in the UK knows Keynesian theory, but "the chattering classes" certainly have an idea of it, and so there's an influential intellectual class who are uncomfortable with the idea of high public debts, maybe more so than in the US. It was quite easy for the Tories to turn those people towards Austerian ideas.

Probably the political timetable helped: Labour was unpopular for lots of reasons (the general disillusion started with Iraq, was amplified by the row over MPs' expenses and in the end was mostly a function of the inevitable ineffectiveness of a government that had been in power for 13 years). The Keynesian policies followed by the Labour government in 2008-09 were not even particularly deliberate, but simply a result of the automatic stabilisers built into the UK tax system. A fall in profits and high incomes led to a 15-20% fall in UK tax revenues, resulting in an automatic stimulus and a big rise in the deficit. That deficit was implicitly blamed on a tired, unpopular Labour government, and the Tories stepped in, making themselves look responsible and giving them the political cover to make cuts that they wanted to make for other reasons. Almost the opposite happened in 1997, when in the mid-90s the Tories had been the ones to run up record deficits (as a result of a recession) and Labour managed to look responsible, giving them the ability from 1999 onwards to increase taxes (a bit) and public spending (a lot) which was a political, not an economic, choice.

So, there probably is a basic British cultural tendency to dislike both private and public debt, partly due to an innate conservatism and partly resulting from the perceived failure of Keynesian ideas in the 1970s. But the current political environment is as much due to an accident of the electoral cycle than to this basic psychology.

Finally I note that Osborne has done at least two useful things:
  1. deferred some of the planned cuts in public spending, so that over half of the cuts will not kick in for 2-4 years
  2. shifted some of the burden of the cuts onto transfers (welfare benefits) rather than cuts in actual government consumption
These two moderations should reduce the impact of the cuts on aggregate demand. After all, Osborne has no political need to be austere as long as he appears to be.

Update: Paul Krugman (and here) and Steve Randy Waldmann also write on the topic of morality in economics. It's an interesting subject, and may provide an evolutionary hint as to why markets work at all.

Also: More from Karl Smith, Niklas Blanchard and David McRaney.

Tuesday, 19 October 2010

Misunderstanding nudge

This article from Suzy Dean of the Institute of Ideas utterly misunderstands - or maybe understands, but thoroughly misrepresents - the ideas, application, scope and definition of behavioural economics.

Some choice quotes:
If we consider at the growing influence of ‘nudge theory’ within political circles, the tendency to explain social ills through the individual and widespread hostility towards lower class drinking, we can see that price fixing is symptomatic of the contempt politicians and other elites have for the public and their behaviour.
...Thaler and Sunstein argue the state can prompt people to behave a certain way by creating a ‘choice architecture’ which enables people to make the right decisions. The government’s ‘Nudge Unit’ has been tasked with public health issues including obesity and alcohol intake.
Yet the problem with nudge is evident in the decision to place a minimum cost per unit on alcohol. It skips the debate about whether it is the government’s business in the first place to prevent the public from adopting what are considered bad habits. Nudge assumes we are drinking too much and that a reduction in alcohol consumption is desirable. Based on the idea that government knows best, policy focuses on modifying the behaviour of the citizens without them knowing.
Where do I start?
  1. "Nudge theory" is not an attempt to explain social ills by blaming lower class drinking. It is a set of experimental results showing certain specific, statistically predictable, patterns of human behaviour and proposing some simple ways to respond to those patterns. IoI writers do, however, often enjoy projecting their own concerns onto other people's motives.
  2. Nudge does not skip the debate about the government's business. Nudge is a tool - just like making laws, raising taxes or imposing price regulations - which can be used after the government (or the people, democratically) decide what the government's business is. We've just had an election which was largely won by parties promising to reduce alcohol use. The winners are surely entitled to use what they see as the best policy tools to achieve that goal.
  3. Nudge policy might indeed modify the behaviour of citizens without them knowing. But minimum alcohol prices are the exact opposite of that. How can anyone's behaviour be modified by higher prices if they don't know about the higher prices?
But the most important mistake is this: a minimum alcohol price is not remotely related to behavioural economics. Not even close. This policy comes from a completely different field of economics. Called "economics".

Price changes are the most fundamental tool of conventional economics. They are nothing to do with the behavioural field at all. In fact, this is possibly the least behavioural government policy proposed in recent years. All of the reasons why minimum alcohol prices are bad (and there are many) arise directly from conventional economics. Behavioural has simply nothing to do with this policy and Dean's article is one of the weirdest bits of analysis I have seen in a long time.

The logic of the argument appears to be something like this:

  • Government meddling is bad
  • Governments sometimes use nudge policies
  • Therefore, nudge is also bad
  • Therefore, all government meddling is nudging
Fortunately the IoI is a big fan of classical education, so no doubt they will be sending Suzy on a course in basic formal logic soon.

Sunday, 17 October 2010

The economics zeitgeist, 17 October 2010


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

The words moving up and down the chart are listed here. "Nobel" curiously is lower this week than last! Evidently speculation about the result was more interesting than the reality of the actual award.

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.

Thursday, 14 October 2010

Nearly right is all wrong - Austrians again

Another example of how Austrian economics is nearly right but, at the last minute, gets it all wrong.

This article from Peter Boettke on Coordination Problem makes an insightful distinction between order and complexity in two different dimensions. He says:
I often use a 2 x 2 matrix to communicate to students the different schools of thought in economics. The rows reflect the problem situation we are find ourselves in (simple or complex), the columns reflect the outcome of our interactions (order or disorder). Neoclassical economics is found in the simple/order cell; Keynesian and market failure theory is found in the complex/disorder cell; Marxism and critics of economics are found in the simple/disorder cell. What does that leave? The complex/order cell and that is the intellectual home of the Classical economists such as Smith-Say, the Austrian school from Menger to Mises to Kirzner, and the New Institutional school of Alchian, Buchanan, Coase, Demsetz, North, Olson, Ostrom, Smith, Tullock and Williamson, etc.
A very interesting insight, with which I agree. As I've mentioned before, Mises was very thoughtful on the limits of human cognition; markets and the price mechanism do have the power to transcend some of those limits. Of course it is a bit simplistic - Keynesians don't really think that the world is in complete disorder because of the complex problems it faces. But still, a useful thought and helps to make a good case for the Austrian philosophy.

Another good thought:
The traditional perfect market versus market failure debate is stale --- the perfect market folks don't tell us how the story of the market unfolds, and the imperfect market folks stop the story short right when it is getting interesting.
Yes! The interesting theoretical action is understanding why and when markets might fail, and then working through the consequences. Economics is all about trade-offs. Using economic tools to analyse the trade-offs between markets and no markets, is a powerful application for them.

Then he spoils it all by saying:
If money is neutral, then the cost of inflation on society are widely different than if we understand the non-neutral aspect of money...if money is non-neutral, inflation is extremely damaging to the economy through the distortions in the pattern of resource use it engenders.
This assertion is completely unproven. Money, most modern economists agree, is non-neutral (in the short run at least), but this certainly does not automatically make inflation extremely damaging.

Inflation helps to break nominal anchors (a process with economic benefits) and safeguards against deflation (also a benefit); while on the cost side, it makes the allocation of resources harder due to less predictable returns. Are the costs greater than the benefits? That is a tough question, perhaps answerable with empirical data or perhaps with a sophisticated application of theory. But Boettke skips over the question altogether and just assumes the answer that suits the Austrian point of view.

He links to a paper by Steve Horwitz, which is more detailed but not much better; treating the cost side of the equation without mentioning the benefits.

I still think this is because Austrians are in love with rhetoric and philosophical insight, and hate the hard work of following the insights through with maths and empirical data. Occasionally I suspect my view on this is too harsh, but when I've said it before, commenters have turned up on this blog and instead of saying "no, Austrians can do maths" they've said "the reason Austrians don't do math is because..." followed by whatever spurious reason supposedly justifies it. See the comments on Boettke's article for several more examples of this.

The best economists - from Samuelson, Krugman and Diamond to the less famous but very useful Nick Rowe and Rajiv Sethi - all recognise the need for both intelligent economic insight and the mathematical rigour to test and develop your insights.

But to be fair to Pete Boettke, I'll leave you with another one of those insights from the end of his article, in the hope that some heretical Austrian mathematician might take up the challenge of modelling it:
...good economics is to be found in the unfolding story of economic life --- in those economic forces at work, in a world full of imperfections, in how the dynamic adjustments made by men result in a variety of coping mechanism for our ignorance and for the complexity of the world within which we find ourselves interacting with one another.

Tuesday, 12 October 2010

Should we pay for performance?

Tom Powdrill has a question: why do companies think that higher pay leads to better performance?

He's right to point out that there are lots of studies now showing the opposite: higher pay can lead to worse performance. But these are mostly lab studies which don't replicate all the conditions of real life.

To explain why companies might think this, notice that the implicit basis of pay-for-performance is that there is a cost to the worker of doing good work. Otherwise, why would we need to pay them more to do it? So, is it true that workers bear a cost if they do well?

In traditional work, where the quantity of labour largely controls the value of the output, this is certainly true. Digging more coal takes effort and time, hence we might want to compensate the worker for doing so. One can make a similar argument for writing more lines of Java code, though that's more controversial - mainly because more is not necessarily better.

But Tom is talking about management decision making, where it's not the quantity of work done but the quality of decisions made that matters. So is there a cost to managers of making better decisions? Yes, actually.

If they need to do more research, try more alternatives and learn more things in order to make a better decision, that's a cost. All of those things take time, and a lazy manager could just do the first thing that comes to mind and go home.

If they need to simply spend time thinking things through - especially if they have lots and lots of decisions to make - that's also a cost. Think of the classic naive junior health minister, sitting up till 2am going through the red box and taking shortcuts. Then think of the more cynical, less junior health minister who just signs what the civil servants put in front of her and goes to the pub.

In a few cases, the cost of making a decision that's good for the company is the option to make an alternative choice that's good for you. Especially in finance, where there are lots of opportunities to trade on your own account or siphon off money - high, performance-related pay is meant to incentivise you to act in your employer's interest and not your own.

And there's a more subtle cost to making good decisions on behalf of one company: the opportunity cost of making good decisions at the other company you could have worked for. If company B is willing to pay you well to make good decisions - simply because you're naturally talented at making them - then company A had better pay you good money too.

This last point explains why pay might be high, not why it might be performance related. But that's quite easily explained by a related argument. Companies offer performance-related pay because that lets the good employees select themselves for the job. If you're not willing to be paid per (goal scored/extra penny on the share price/lawsuit won) then maybe you're not so confident in your abilities after all. And who'd know your own abilities better than you?

These are all good rational explanations for performance related pay. And most of them are not reflected in the lab experiments which argue against it. So what of the cognitive and behavioural aspects?

Well, managers may not always know whether their decisions are good. If this is the case, then all of the above arguments are weakened.

And, as those experiments show, high stakes sometimes lead to counterproductive behaviour, probably due to the distraction of the potential rewards.

Tom mentions Deci and Ryan: undoubtedly intrinsic motivation is important to most people, and money can displace some of that, potentially diminishing the desire (and ability?) to do a good job.

So while the rationale for performance-related pay is clear, the counterarguments are evident too. Deci has attempted to measure the comparative effects (for example in "Experiment II" on this page) but the main result shows that when extrinsic motivation is added then removed, intrinsic motivation can fall. I don't know of any good attempt to measure or estimate the strength of the countervailing effects during the time that the monetary reward is provided.

Unfortunately this doesn't give us a clear conclusion (though I should probably obey blogging protocol by manufacturing one). There are good arguments for and against performance pay; some situations will call for it and others won't.

Monday, 11 October 2010

2010 Nobel Prize: Diamond, Mortensen, Pissarides

The 2010 Nobel Prize in Economics has been awarded to Peter Diamond (MIT), Dale Mortensen (NWU) and Christopher Pissarides (LSE).

Tyler Cowen has written a good concise summary of each prizewinner's work and contribution (linked above). I promised on twitter earlier today to write a post about the application of their research to the 2008-2010 recession.

First I'll mention Diamond's book on behavioural economics, which is one of the respected texts in the field and which I've been meaning to order for a while. Today I finally got around to it. The introduction, available here, gives a very clear and perceptive abstraction of the key contributions of behavioural economics as currently practised. It can be summarised in three departures from the standard model: bounded rationality, bounded willpower and bounded self-interest.

He (and co-author Hannu Vartainen) also reference the psychological process of decision-making as an important part of behavioural analysis, and identify the problem of welfare criteria in a model without rational choice. The book's main contribution is to apply the behavioural model - previously applied mainly in finance - to other areas of economics: public policy, development, law, health, wages and organisations.

The wages chapter of the book attempts to explain wage rigidity behaviourally. But the work of Diamond, Mortensen and Pissarides on search and matching models - for which the Nobel was awarded - is of a different character.

The three of them have not worked directly together (Mortensen and Pissarides have) but their work shares common features. And there seems to be at least one consistent message from the three.

Diamond's work shows that there are multiple equilibria in a market where the agents have a cost of finding opportunities to trade (in fact, he explores this in one paper by replacing the very idea of a "market" with a collection of agents each carrying out a search process). This clearly applies to labour markets, where employers need to advertise jobs, and workers need to spend time finding and applying for them. One consequence of this work: labour markets, even with flexible wages, can suffer persistent unemployment.

Mortensen - sorry, no link to paper - models the diversity of the skills of workers, showing that this (normally considered a cause of structural unemployment) can contribute to cyclical unemployment in a recession.

Pissarides co-authored the key paper of Mortensen above. And has done important empirical work to measure whether these models are actually right. He summarises the common thread of all three: wage stickiness is not the only explanation of unemployment.

This, however, highlights a common phenomenon in equilibrium systems: failures usually have multiple causes. If something in the system does not work properly, prices, supply or demand will usually adjust to correct it - and the system will return to equilibrium. Only if the price mechanism, or some other aspect of the system, is also not working, will the system remain out of balance.

The insights of these three economists' work help illuminate not just the general causes of unemployment, but the specific causes of the current slowdown. At first glance an explanation might be that search costs are especially high right now - but one would have thought that Internet job searching and mobile phones would have reduced those since the last recession. Could wage stickiness be greater than normal? Yes, probably - because of the near-deflationary environment in the US (Roger Farmer here suggests an effect which may partly counter this, that high inflation is more likely to lead to layoffs. Farmer's recent book explores a specific search/matching model and I will be posting an overdue review of it soon).

But remember, we need more than one cause. And the Mortensen/Pissarides paper suggests the answer: work is now more specialised, and skills less transferable, than in the past. Jobs with easily exchangeable skills are, by their nature, those that can most easily be outsourced to low-wage countries or automated away. So, the evolving nature of rich-country employment towards heterogeneous, IT-reliant, knowledge-rich jobs may have led to higher unemployment levels in and after recessions.

We can look deeper, beyond these two causes, and find that they originate from a common source: the cognitive abilities of agents. Recall Diamond's classification above. Because people do not receive and process information perfectly (bounded rationality), they invest in specialisation and cannot adjust immediately to new jobs. And because they do not know and/or obey their own interests (bounded self-interest), wages do not adjust to compensate.

And this, combined with the evolution of employment in the Western countries - arguably also a cognitive phenomenon - explains the increasingly jobless nature of modern recoveries.

Sunday, 10 October 2010

The economics zeitgeist, 10 October 2010


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

I think the aesthetics this week look somehow quite populist. Maybe a New Constructivist art movement is arising based on the desktop publishing style of Eighties environmentalists and Noughties organic farm shops. Any takers?


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.

Friday, 8 October 2010

Do Alan Johnson's economic views matter?

Much speculation today about the signal sent by Alan Johnson's appointment as shadow chancellor. Does this mean Miliband has decided to stick with Alastair Darling's policy of halving the deficit in four years? Is it a snub to Ed Balls, designed to avoid a new Blair-Brown style conflict between Labour's leader and (shadow) chancellor?

A search for '"Alan Johnson" economics' mainly shows today's news - neither Google nor Bing seems to allow me to exclude articles from the last 24 hours. Fortunately Bing simply isn't up to date yet, so I can find a few old articles - this speech from last October is typical, being a recital of Labour's standard policy message. The nearest thing to an economic policy statement is his speech saying there's no reason to worry about UK population growth to 70 million; and this item suggesting that the government should nationalise a dock in his constituency to stop it falling into disrepair.

But actually, Alan Johnson's economic views are irrelevant. For two reasons:

  1. Labour does not want to debate the Tories over economic theory. It won't change anything, and it will just take the debate onto a theoretical level in which the public is not interested. Labour's job is to wait for the Tories to make a mistake, or try to blame them for events that happen regardless.
  2. Alan Johnson will probably never be Chancellor, so there's no point creating a hostage to fortune. Whoever is shadowing Osborne by the next election will want the chance to lay out their own economic philosophy and that - if anything - will be the one that matters if Labour is elected in 2015.
Alan Johnson's real job, in fact, is simply to make George Osborne look young, inexperienced and flustered. Johnson's relaxed attitude, wit and apparent lack of giving-a-shit will do that very well.

Tuesday, 5 October 2010

Strategies for government departments

I've recently been developing the strategy for my own company, so I was interested to see this article by Paul  Mason about the strategy for the UK armed forces.
...three potential military strategies under consideration by the Coalition government...The "Adaptible Britain" scenario sees the UK retain the ability to respond to "generic threats" - retaining an army, airforce and deepwater navy, through conventional warfare. "Vigilant Britain" was code for retaining the big stick of nuclear weapons and a large Navy but with an army capable of only an "occasional foray". "Committed Britain" was code for a focus on power-projection, Afghanistan style.
Interesting. But what I found particularly thought-provoking was the following line:
To be able to ask yourself "what kind of country do we want to be in the world" is a nice choice to have: many countries don't have that choice.
And notably, neither do many government departments.

Imagine that the Department for Work and Pensions - or the Department of Health - or the Department for Environment, Food and Rural Affairs - were to ask itself: What kind of department do we want to be? What is the vision for work and pensions in Britain that we are trying to bring about, and what resources do we need to do that?

It's quite a clever tactic for the Ministry of Defence to say "we simply can't execute the Adaptible Britain strategy while making 20% cuts". But what if DEFRA could say the same?

It would make the choices posed by planned spending cuts a lot more visible. And it would create the space for a really interesting debate between proponents of different public service strategies.

Monday, 4 October 2010

When regressions go wrong...or too right

Via the excellent Simoleon Sense weekly roundup, I find this link which claims to discover "the single most important question in your life".

The research behind it claims to have found that the answers on a single kindergarten test can predict future income, college attendance, quality of college, college graduation (and while they're at it, a close link between college ranking and future wages).

I don't have the knowledge to challenge their results and I would not want to suggest that there's anything untoward about this research. But one thing makes me really, really puzzled: the results are too good.

Specifically, the regressions show an incredibly close linear fit between rank (or percentile) in the kindergarten test, and absolute salary. And a similarly close fit between rank in the test, and percentage chance of going to college.

The following image not only shows that unrealistically close linear fit, but they also imply an almost constant distribution of wages from $10k to $23k - which cannot possibly be correct. There should be a bulge in the middle, which would show up in this graph as a much flatter region in the middle of the graph instead of a straight linear gradient.

Your success on the test is a HUGE predictor of wages


And the next graph shows an even more constant spread of college admissions from 20% to 75%. Shouldn't there be bell curves in here somewhere?

And your likelihood of attending college


Incidentally, when you look closer at the college ranking versus wages figures, something else suspicious appears: the college rankings are described as an "earnings-based college quality index" and are measured in dollars. No surprise then that this measure would be correlated with earnings!

Now this may all be perfectly correct (the full presentation of the results is here). No doubt the results have been peer reviewed, and I don't have as much time or statistical expertise as the reviewers or indeed the researchers themselves. But whenever statistical analysis shows such perfect results, I'm cautious to say the least.

Sunday, 3 October 2010

The economics zeitgeist, 3 October 2010

This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the 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.