Knowing and Making

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 ye...

Paul Krugman (via Niklas Blanchard ) is among many people asserting that: ...when the music stopped, Greece found itself with costs and prices way out of line with Europe’s big economies. (Niklas says this violates the law of one price - but the law of one price applies only when there is one good. In fact, hardly any goods are the same between Germany and Greece - labour is not as productive in Greece, the local tastes are for different products, and many services are non-tradable and not subject to the law of one price. An important example of this is that retailing is a service. Both the cost of retailing and the demand for it (which in Greece is strongly derived from tourism) affect the price of goods sold in shops. So the existence of the euro doesn't by itself imply that wages and prices should equalise quickly.) But that is an aside. In fact, I am unconvinced that Krugman's statement is true at all. According to  this report , Greek unit labour costs last year...

Intriguing to see how often the behavioural approach predicts the real behaviour of politicians. As recommended in yesterday's item , Labour indeed chose on Thursday to fight the National Insurance battle head on. Interestingly, so did the Tories. Mostly we think that political debates are zero-sum. If something's good for Labour, it's bad for the Tories and vice versa. So why would both parties want to do the same thing? There are a few possible reasons: Both parties may think it boosts them at the expense of the Lib Dems. That's certainly possible - because it focuses attention on them and entrenches the idea that it's a straight choice between the two main parties. One party may be mistaken. Perhaps they both think it's in their interest to have this out, but one of them is wrong. That's possible too, though we will never know for sure. Most intriguingly, it may not be about the interests of the parties  but of the campaigners . At the start of an...

Boris is, as always, the most entertaining man on the political circuit. This morning he contradicted official Tory policy by saying that the "citizen service" scheme for 16-year-olds should be compulsory and not voluntary. Presumably he's been slapped down by Conservative Central Office, so he has now clarified the position : London Mayor Boris Johnson has clarified his earlier comment, in which he said the National Citizen Service for teenagers should be compulsory - at odds with his party's plan for a voluntary scheme. He told me he believes the National Citizen Service should be as compulsory as you can possibly make it without "cheesing people off", the BBC's Carole Walker says. I hope the Conservatives are going to take this approach with all their new laws. If they do raise VAT, freeze public sector pay or restrict welfare benefits, I look forward to being able to exempt myself from the rules by getting "cheesed off".

Yesterday, the Tories won the first behavioural battle of the election campaign. Policy of the day is national insurance. Labour has committed to a rise of 1% in the employers' national insurance rate from April 2011 and the Conservatives have said they'll cancel this increase (for readers outside the UK, national insurance is our payroll tax, and the employers' component is the part paid by the company, as opposed to the part which is deducted from the employee's salary like income tax. Currently the rate is 12.8% and will rise to 13.8% under this policy). When the Tories announced this policy, around twenty chief executives of large companies wrote to the FT in their support. This was followed by another three on Tuesday and, yesterday, thirty more. So how does this play out behaviourally? I mentioned a couple of things yesterday which remain true: the Tories gain social proof  from the support of senior businesspeople, and the recency bias  means that the iss...

Today Gordon Brown announced that there will be a general election in the UK on Thursday 6 May. Over the next 30 days, I'll be analysing at least one policy each day from a cognitive/behavioural point of view. Voting decisions are, in many ways, like purchasing decisions - and many of the same cognitive biases apply to both interactions. In each case there's a seller and a buyer, and the seller's job is to present a package to the buyer that maximises the likelihood of "purchase". I'll be showing how the parties can do that. So please feel free to treat this as a critique of the UK's party manifestos, or as a 30-part tutorial in how to apply cognitive insights to politics. Perhaps a new discipline will emerge: let's call it behavioural politics. Today, as no real policies have been announced yet, the focus is on the overall campaign messages. Key events of the day  (note that the linked page may update in real time - I will try to find a permalin...

Chris Dillow says that there may be: ...a structural dearth of investment opportunities; even in the boom of 2007, firms had a large surplus. If this is the case, then a permanent large corporate surplus means permanent large government borrowing...government borrowing is - to a large extent - out of the government’s hands. But this is an odd argument. It starts from the premise that: government borrowing + corporate borrowing + household borrowing - net foreign lending = 0 Which is true, because by definition these things must add up. From this, Chris infers that the government has no control over its borrowing, because after corporates, households and foreign investors have made their choices, the government will be stuck with whatever's left over. This is untrue, however. It implies that all other actors have free choice and the government has none. In fact, the levels of borrowing are a negotiation between all the four parties in the above equation. Imagine a simpler e...