Were the Victorians cleverer than us?

The Victorian era was marked by an explosion of innovation and genius, per capita rates of which appear to have declined subsequently. The presence of dysgenic fertility for IQ amongst Western nations, starting in the 19th century, suggests that these trends might be related to declining IQ. This is because high-IQ people are more productive and more creative. We tested the hypothesis that the Victorians were cleverer than modern populations, using high-quality instruments, namely measures of simple visual reaction time in a meta-analytic study. Simple reaction time measures correlate substantially with measures of general intelligence (g) and are considered elementary measures of cognition. In this study we used the data on the secular slowing of simple reaction time described in a meta-analysis of 14 age-matched studies from Western countries conducted between 1884 and 2004 to estimate the decline in g that may have resulted from the presence of dysgenic fertility. Using psychometric meta-analysis we computed the true correlation between simple reaction time and g, yielding a decline of − 1.23 IQ points per decade or fourteen IQ points since Victorian times. These findings strongly indicate that with respect to g the Victorians were substantially cleverer than modern Western populations.

Offered without comment because I’m seriously under-qualified to comment. But I don’t think they were. (Via Martin Robbins)

Filed under: Economics, History

Is it time to nationalise the railways?

You can tell that the one state-owned train operator was never meant to be permanent by the goddamned awful name they gave it. They were probably right, directly operating railways isn’t a recipe for success, more competition is, as I’ll show below.

For this post I’ll refer to them as DOR. Directly Operated Railways seemed to catch the left’s imagination last month. A profitable, popular state-owned railway was going to be privatised! [1] Labour’s Maria Eagle attempted to seize the zeitgeist:

With the Government’s rail franchising programme in chaos, it is a bizarre and dogmatic decision to prioritise the privatisation of a service that is actually on track. Since running services on a not for private profit basis, the East Coast operator has returned £640million to the taxpayer and invested more than £40million in improvements to the service, achieving some of the best results for passengers since records began.

The company only exists because in 2009 National Express defaulted on the line in the face of recession and hubris induced gigantic losses. Are there convincing arguments for keeping DOR running the East Coast Mainline? Ed Miliband thinks so and has argued it should be kept in public ownership as a benchmark for private operators. I’m not convinced. Lets look at the arguments.

Maybe railways will just be better run by the state because at a state-owned rail company employees  are motivated by “knightly motives“, as Julian le Grand describes. I doubt this for two reason. Firstly, these were people recruited from the rest of the rail sector to run a franchise. They don’t have a public sector “mission” like in the NHS, nobody does overtime etc. to set a benchmark. Secondly, I’ve met the people who run train companies, and they love running trains. They’re like children with toy sets. It’s sweet really. The problem isn’t passion for the industry, its service and profitability.

Perhaps DOR are run differently and more efficiently to other train companies? Nope. That’s not true. Nor is it really possible. Whereas, for example, Stagecoach have a couple of buses companies and rail franchises to run, gain experience, share best practice and variously enjoy economies of scale and scope DOR have one franchise and, of course, aren’t in a position to innovate if they’re meant to act as a benchmark.

So how can we make our minds up?

Luckily we have a comparator. There is also a West Coast Mainline run by a private sector company. They’re both much better than they used to be, that’s clear. You could probably argue that the East Coast Mainline offers as good a service at a lower cost, but you’d be relying as much on faith as on evidence. The data here is on overall service satisfaction and is taken from Passenger Focus’s National Passenger Survey and it illustrates gradual but real improvements in service on both.

The data I could find only went back to 2008 which isn’t far enough for my liking, but that’s what I’m working with. You can’t spot the National Express’s default in mid-2009 or the takeover by DOR. That is probably because National Express East Coast had been in trouble for some time and DOR had a mess on their hands to begin with and the data doesn’t go back to 2006 as I’d prefer.

What you can see is an accelerating improvement in service on the East Coast from mid-2011 onwards. Some people have argued that this is because it is a state-owned railway and therefore better. I’ve two words for you people: “British Rail.” That’s not good enough an explanation.

A good argument runs like this: DOR aren’t improving in a cost-effective because they’re state-owned, it’s because they face direct competition from better operators: First Hull Trains and Grand Central. Those two firms are Open Access Operators and run services in between those scheduled by DOR and they have always been better but smaller than the East Coast operator.

You could counterargue “well why is Virgin Trains so good.” But you’d only be falling into my trap.  During quality spurt visible 2008-2010 they were facing competition from an Open Access Operator call Wrexham and Shropshire. In 2011 the company, stymied by regulation which favoured its larger regulators, folded and improvements in Virgin’s services somewhat plateaued.

What we learn looking at the East Coast and West Coast Mainlines is that improvements in rail service are not correlated with state ownership. If you look at Passenger Focus’s surveys, service has improved across the board (as have prices, but that’s another story), but service quality has really accelerated where competition was most intense.

So, should I answer my linkbait title? No, we shouldn’t nationalise the railways, what they need is the opposite: less direct state involvement, more private train operators and more competition. Rail is almost a natural monopoly but not quite. As I’ve shown competition is possible and where it can work it works really, really well. It should be encouraged.

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[1] Actually, we’ve had profitable, popular state-owned railways in this country for a while, they’re just French, German and Dutch state-owned railways: Keolis, Arriva and Abellio.

Full disclosure: I occasionally help organise events in the rail sector.

Filed under: Economics, History, Politics

War is a very particular accounting issue

For me, like Chris, [going to war] is an accounting issue.

Thus sprach Paul. But I think that’s an ugly, confusing way of phrasing it. In retrospect perhaps you can decide whether a war was a good idea with a quick tally ex-ante and ex-post death tolls with some role for economic performance, but a forward looking evaluation is very different.

My priors suggest strongly that killing people is very wrong. My priors are very strongly biased in that direction. Call it a personality flaw! I think you’d have a tough job convincing me that killing one person was worth probably saving a hundred.

Thinking about war as something likely to be fucking terrible and which definitely has incredibly high costs and definitely has incredibly uncertain benefits is useful. It sets the bar for war incredibly high. No particular policy position needs be behind the war or your opposition, I am just talking about stacking the deck.

Stacking the deck gets a bad name, but stacking the deck against killing people is a self-evidently pretty good idea. War is one subject where I think the principle “first, do no harm” is a good one.

Why? Because history. The historical record says that some truly awful actions can lead to prosperity but that truly awful wars normally just lead to death and suffering. So, for example, my priors tell me to somewhat support what’s happening in coastal China, but not what happened in Iraq. I’ll do the same in the future too.

Filed under: Foreign Affairs, History, Society

Do no harm? You have no choice

The principle “first, do no harm” is a good one in most situations. But one situation where I find it hard to apply is in development: getting poor countries rich. Harm is inevitable and unavoidable and to some degree unmitigatable. Owen Barder lays it out thus:

We should pursue policies which do (much) more good than harm, which take account of the broader consequences, which take proportionate steps to limit the harm and risks, and which are careful and responsible about looking after those who are likely to lose from change.

I think is an eminently sensible position to take. I’m going to make a more fundamental argument that Owen though. Sometimes, merely moving policy in the right direction will have directly harmful side effects which you won’t be able to mitigate and this is okay. It’s okay because we don’t really have another option.

Norm takes umbrage with Owen’s defence of a utilitarian approach to the harm caused during development (and will likely dislike mine), laying out two key reasons. First, there are some things which are so wrong that no amount of mitigation can offset, Norm offers the example of torture. The other is that far-off, uncertain, broadly shared benefits should not be won at the cost of concentrated, short-lived, acute, concentrated costs.

Neither of these are good arguments for adopting “first, do no harm” in the field of development.

Take something as innocuous sounding as quinoa (no, really, take it!). According to the Guardian the trendy vegan boom in quinoa consumption has meant that the poor Bolivia and Peru can no longer afford their staple food and must seek alternatives. Although the guardian gives the impression that harm is occurring here, it is important to remember that we are talking about a mitigatable harm. Redistribution within Bolivia could split the gains from trade between winners and losers, with everyone better off.

But think more deeply about what’s going on here. Neither Bolivia nor Peru has reached the technological frontier for quinoa growing. I’m only working on the photos of those growing it supplied in the Guardian, but it looks pretty low productivity to me. Prices have increased because it is difficult to increase production to keep up with demand. Development is the process of ensuring that production eventually does.

However, this poses a paradox. Actually existing institutions that have seen this happen have also created incentives to do great harm.

Meeting demand (for export markets and domestically) will require investment. Those doing the investment need a degree of certainty that those investments will get a return and this means securing property rights for investors so they can spend big now and reap the rewards long term.

But, if the institutions protecting the property of the wealthy are stronger than those protecting the property of the poor then those peasant cultivators of quinoa are going to be kicked off their land. Given the institutional strength of the wealthy in any polities and the compromises unavoidable in politics the decks are likely stacked against those farmers. This is a harm that could be, but will not be mitigated.

I don’t just refer to simply exploiting workers, but to the expropriation of land and the intimidation of communities. These things are typical of development success stories because effective institutions make the stakes so high. They make honest hard work pay, but they often make the criminal exploitation pay too. Think Chinese land grabs, or America’s westward crawl – the historical record is full of successful developmental cases where incentives to profit coincide with incentives to pillage.

The job of development is to apply pressure and create institutions that cause economic growth, but brutality and suffering has coincided with all stories of development. “Do no harm” doesn’t work where successful policies cause suffering incidentally but inevitably.

Do I like it? Not exactly. Do I have a choice? Again, not really. Is “first, do no harm” a good principle for guiding development policy? Nope. I wish it were, but all the maps I have from getting from rural idiocy to modern society have these satanic mills halfway. [1]

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[1] Actually, there is a detour called “migration”, but that’s another blogpost for another time. In brief, if the institutions won’t come to Mohammed, Mohammed should go to the institutions.

[2] I find the this excerpt (below) at odds with Norm’s support for certain Mesopotamiam adventures as they featured a likely high ex-ante and a realised high ex-post death toll, but that is a subject for yet another blog post.

There are doubtless more qualifications necessary than just these two, but the point is that the ‘Do no harm principle’ can’t be adequately replaced by a purely quantitative measure of goods against harms. Some harms should not be done in any circumstances  Some benefits are too uncertain to justify definite harms.

Postscript: I have missed blogging. Ah. Feels like I’m stretching after a long lie down.

Filed under: Economics, Foreign Affairs, History, Norm Geras, Owen Barder

So. Much. Stupid. Conservative blind spots edition

Alex Tabarrok

Hey, black dudes! Its great having a big willy! Why you get so mad?! Us white guys are complimenting you!

Okay, that’s not what he said. But he did say this of Asians:

Alex Tabarrok

Hive mind is not even an insult it’s a compliment – like wisdom of the crowds. The hive mind diffuses knowledge and cooperates–it’s not all thinking alike it’s all using the best of each.

Perhaps I better back up a little and give all this a little context.

Noah Smith wrote a post saying that an academic paper  on A Garett Jones paper called “National IQ and National Productivity: The Hive Mind Across Asia“. When I hear about IQ and economic development I reach for my pistol. Noah Smith is just as sceptical. Personally, I don’t see the mechanism. As Chris Dillow says, there are models and mechanisms. You can come up with a pretty model and then become angry when the world deviates from it or you can think about how your pet theory would work its way through the real world.

I can understand a mechanism that uses slight changes in IQ to predict which “nation” will develop first. I’ll describe the one I have in my mind. There are thousands of institutional forms –  ”rules of the game” – and only a few of them are compatible with economic growth and prosperity. A higher IQ gives a group 1) a wider the selection of institutional forms to choose between 2) those institutional forms will on average be more complicated 3) better institutions are more likely to be chosen 4) once successful institutions are identified a more intelligent group will be more likely to keep them.

That is an interesting model, but it doesn’t seem to bare any resemblance to the history of the world. The more accurate picture is that various interest groups fought it out in various different places until, in north western Europe a powerful merchant group came into the ascendency and won political concessions that secured their property rights. This happened to have happened after the political revolution following black death in which western European peasants won a degree of autonomy and near some coal. That combination of secure private property, freeish though expensive labour and cheap energy happened to produce sustained economic growth. Nobody planned it because they were smart. It wasn’t sustained because it was smart by the best of my knowledge either. Because Europe was the most violent place in the world, everyone had to strive towards economic growth or face political annihilation. So greed, luck and violence seem far more important to the first sustained initiation of economic growth than IQ.

Similarly, why are some nations wealthy now and some not? Well there is again a similar model where clever nations adopt good institutions and stupid ones don’t, merely out of ignorance, but that doesn’t seem to be the mechanism we observe. Very poor places had their institutions fucked up by white people – psst, that’s Africa, Latin America, China, India etc. – and it takes a long time to get it together after an occupation and negative structural shock. National IQ sounds racist, and while I concede it might have some predictive power with regard to who’s developed, it doesn’t accord with most of the other mechanisms we have for where economic growth comes from – so I’m fairly happy to dismiss it.

So it is into this milieu we jump.

Noah argues that the paper discussed, by Garett Jones, uses lots of racist tropes and should handled with care. He provides some evidence contrary to the predictions of the paper of varying degrees of convincingness. Scott Sumner, whom I respect greatly, hits back that there is a great deal of explanatory power in culture and that Noah shouldn’t throw around the word racist because it is a bad thing. The only problem is that nobody was talking about culture, they were talking about racially innate IQs, and their explanatory power with regards to economic growth. And that brings us to Alex Tabarrok’s comment, at the top of this post and left underneath Scott’s saying how a “hive mind” is a good thing.

This gets to the heart of the real problem.

For some reason, those on the left can see the context in which things happen in a way those on the right cannot. Noah isn’t too left wing, but he seems to have this special power (and attribute of the left wing hive mind, no doubt).

Because for conservatives it often seems context means nothing. I mean seriously; when, in any cultural artefact ever created, any film, novel, piece of art, daydream or utopian novel has a “hive mind” been presented in a positive light? From Zamyatin’s We, to Huxley’s Brave New World a hive mind is not presented as something good. The hive mind does not refer to the wisdom of crowds.

Lets go back to black people, because its easier to talk about racism against blacks. What has been one of the most persistent racist tropes about black people? That they are sexually promiscuous, even sexually aggressive. This is why white people going on about black guys large cocks is usually racist in content, and often racist in its implications. For a female example, the Hottentot Venus wasn’t exhibited for Londoners to gawp at just because white people were/are racist, but because they were/are racist in particular ways. The ways in which people are racist must colour the way in which we view statements.

Context matters. Asians have been stereotyped as sneaky, corrupt, uniform, “hive mind” automatons for over a  century. You still see it in most western reports of strikes and social unrest in China – shocked, shocked reporters that Chinese people are rebelling against their bosses or bureaucrats. Jamie covers Mass Gathering Incidents frequently and there is a good article length treatment of labour unrest here. Hive mind? Tell that to Foxconn. Considering a racist slur in context is not hard, it takes effort in fact to abstract away from the negative connotations of most racist slurs, yet conservatives do so all too often.

This is sometime around the 1970s conservatives realised they were losing the fight for intolerance, so they changed tactics and tried to reframe the debate. They were no longer arguing in favour of racism, oh no, they were arguing against over earnest antiracism. This was politically convenient for two main reasons.  One, lots of the ground work of antiracism was carried out by those on the left. Two, it gave racists someone to vote for. Now in the UK Labour had an at best mixed record on race, especially with regard to housing policy, but during the 1980s they were much more focussed on antiracism. During the same period conservatives began to create a victim mentality where attacking antiracism became more important than attacking racism.

Alex Tabbarrok might like the idea of being part of a hive mind. And some white men might like the idea of being sexually promiscuous with a mighty, large penis. But to completely ignore over a century of casual and institutional racism is plain stupid. But it is a pattern conservatives find themselves slipping into too often: attacking antiracism more virulently than racism. This post is less than completely satisfactory, but I’ll leave it there, and pick up in the comments if necessary.

Filed under: Economics, History, Politics, Society, Alex Tabarrok, Chris Dillow, Garett Jones, Hottentot Venus, IQ, NIE, Noah Smith, Racism, Scott Sumner

Seventeenth century globalisation story time

Gather round children. Do you know where black pepper comes from? Where it used to come from?

Black pepper is native to South East-Asia and Europeans needed it, because without it the rotten food we ate tasted awful. But Europeans produced nothing much that Asians wanted other than silver and gold, and we didn’t produce much of that. So do you know how we bought pepper?

We sent guns to Africa to buy slaves. We sent slaves to Latin America to dig up shiny metals. We sent the shiny metals via Europe to South East-Asia to buy pepper and they told us to bugger off.

“Bugger off?” Asked Jenkins.

“Yeah,” said Obduluwangay “we’re naked, why do we need these round pieces of metal?”

So we changed tactics. We sent guns to Africa to buy slaves. We sent slaves to Latin America to dig up shiny metals. We sent the shiny metals via Europe to India. In India we hired brokers to hire weavers. The weavers sold us cloths and we took them to South East-Asia and they told us to bugger off.

“Bugger off?” Asked Jenkins, now he was really annoyed.

“Yeah,” said Obduluwangay “I’m not wearing that! Is that chintz?”

“Yes” said Jenkins, “don’t you like chintz?”

Obduluwangay looked offended, “that’s the sort of thing they wear in Bantam, not round here.”

So we changed tactics again. We sent guns to Africa to buy slaves. We sent slaves to Latin America to dig up shiny metals. We sent the shiny metals via Europe to India. In India we hired brokers to hire weavers. The weavers sold us cloths and our brokers told us where to go and we took these specific cloths to specific cities in South East-Asia where specific styles were worn.

“Oh lovely,” Obduluwangay said “have some pepper.”

“Hooray!” declared Jenkins, who promptly died of scurvy.

Thus concludes our story. The world has been a globalised place for a very long time, but it is a significantly better one now than it ever has been before.

Filed under: History, Bantam, India, Indonesia, Jenkins, Obduluwangay, pepper, South East-Asia

The 1636 Surat Earthquake

President Methwold’s Diary, August 29. Whilst I sat writing, Chout our broker and our Persian scribe being both near to me, the floor of the chamber under me and the wall against which I leaned contrived to move so long as to give me occasion to seek what might be the cause; but finding none visible, I demaunded of those with me what they felt; which were not yet recovered from their woonder; who answered that they felt the like motion; and so did divers others that sat so near as to answer the said question, and so many more in the house and town besides as to confirm that it was the first earthquake that ever I was sensible of. It contrived whilst a man might deliberatly tell sixty, with a gentle equal motion, and therefore I hear of no hurt that happened by it. [Spelling and Grammar cleaned up by LO]

It is fun being an historian. How many people alive now know there was a weak Earthquake in Surat, India, in 1636? How many have read a first hand account of it? Probably only a few hundred and now you are one of them.

Filed under: History, 1636, East India Company, Methwold, Surat

Trichet, Draghi, King, Bernanke versus Mellon, Norman, Moreau, Schacht

So here we are, with many of the world’s larger economies facing difficulty, with high unemployment common across the rich world, with financial conditions deteriorating, and with political systems paralysed. Markets are fleeing into the few assets that look safe, commodity prices, equities, and currency movements are all indicating a large and sustained drop in demand expectations. And the world’s most important central bankers are confused over whether or not to act out of concern over inflation and seeming terror that inflation might ever rise to and stay for a while at, oh, 3%. They seem horrified by the idea that central banks might—might—need, at some future point, to bring inflation expectations back into line, as they did in the early 1980s. Never mind, of course, that the experience of the early 1980s was a sunny day in the park compared to what the rich world has gone through since 2008, and heaven compared to what might loom ahead.

We’re making the same mistakes again. And by we, I mean them. And by making mistakes I mean causing catastrophic suffering. Our Central Bankers have failed us just as badly as those of the 1930s failed. Worse even, when you consider that our Lords of the Universe had the mistakes of the Lords of the Universe of the 1930s to learn from.

So remember, buy bunting, your spending is someone else’s income, its all you can do. Have a nice weekend.

Filed under: Economics, History, Bernanke, Draghi, King, Mellon, Moreau, Norman, Schacht, Trichet

Its a Central Banking Crisis Too

Much like Frances Coppola, I like charts. I think in pictures and words not numbers; I find it significantly easier to translate graphs into reality. But, unlike Frances, I hold the ECB peculiarly responsible for the Eurozone crisis, where she places more blame on the banking sector in general. I hope to present some graphs to convince Frances that the ECB is the real bad guy in Europe.

I have repeatedly called the European Central Bank insane for failing to save the Euro. That might be a little unfair, lots of banks acted insane during the 2000s, but the ECB’s monomaniacal and slavish adherence to inflation targeting led the bank to make two specific policy errors which have had grave consequences.

These policy errors exaggerated the errors of Europe’s banks and turned a balance of payments problem into a triple currency, banking and sovereign debt crisis. It wasn’t debt or deficits that sent the Eurozone periphery into crisis it was consistently importing more than they exported.

Such a lopsided Eurozone demanded flexible demand management, the right amount of demand for Germany had clearly been to inflationary for Ireland et al. However, when the crunch came the ECB was found wanting. Four times the ECB focussed too heavily on short term inflation and raised rates, or failed to cut rates, in error. Below is a graph of Eurozone interest rates as set by the ECB.

In 2008, rapid growth in the developing world pushed up commodity prices and headline inflation around the world. Simultaneous with this the world financial system had begun to blow up. In July 2008 the ECB hiked rates despite it being well aware it was operating in a period of acute financial stress (see chart 2). That is the first error, an over reaction to headline inflation. This error was felt across the world, as described by Lars here.

A few months later, in September, Lehman Brothers collapsed. In September the ECB did not alter its headline interest rate, it waited until October to cut rates. As a consequence of this passive tightening expected inflation in the Eurozone fell well below the ECB’s target rate (see chart 5) and the financial crisis began proper. That was the second error, it was quickly regretted and over the next eight months interest rates were cut to 1%, but no lower.

In April 2011, the ECB once again began to increase interest rates in April 2011 to fight higher inflation. This proved to be a mistake which was reversed between October and December 2011. The consquences of this mistake are plain to see. The below graph was cribbed from Tim Duy and shows the subsequent increase in unemployment.

The cause of this increase in human misery was  decrease in aggregate demand and expected future aggregate demand. Caused by the same demand shock, the borrowing costs of the Eurozone periphery spiked compared with the borrowing costs of Germany. Greece’s ten year borrowing costs spiked from being 9.49% higher than Germany’s to 12.64% higher. Similar movements can also be seen for Ireland, Portugal and Spain by comparing this data from late March 2011, with this data from May 2011.

The ECB’s fourth and enduring mistake is keeping interest rates at 1%, rather than cutting all the way to zero, and in failing to communicate that they will continue to be as accommodative as is necessary to boost growth. The ECB has failed to use the conventional tools and has actively sabotaged itself by failing to convince anyone it is willing to be as accommodative as is necessary to rescue the Eurozone from crisis.

This isn’t entirely the ECB’s fault, they’ve been given a very narrow mandate to maintain price stability. But mandates can be reinterpreted as necessary and blowing up the world financial system and throwing millions out of work to keep a lid on poorly recorded, probably inaccurate, inflation rate is an insane way to interpret a mandate for price stability. So I’ll probably keep calling the ECB insane.

Filed under: Economics, Foreign Affairs, History, Coppola, Draghi, ECB, Europe, Frances, Interest Rates, NGDP, Trichet

The City: Not that Important

Finance and Professional services are not synonymous with The City, something Rob Marchant (via Chris Dillow) needs to grasp when discussing Hollande’s lessons for Ed Miliband.

And, regarding his policy programme, it is difficult to see Hollande being a pragmatist in government. For example, take this declaration from a January speech:

“My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

All very well, I suppose, down with capitalism: hurrah. But, whatever additional regulation the financial sector may need, is it a good idea, on any level, to emote about it being the “enemy”? In any event, this is an approach that Miliband would be wise not to try to emulate; in a country like ours, where one-fifth of GDP derives from the City, it would have very deep implications for government credibility, for borrowing and for investment. It is easy for France to talk about a financial transaction tax when it has a tiny financial sector compared with the mighty City; everyone wants higher taxes for the other guy.

The City probably adds about 4% to UK GDP not a fifth, that number is from 2003 and The City probably added a little more than that between 2003 and  2007 and a lot less (perhaps negative?) since then. [1] It’s contribution to GDP is still about half that of UK manufacturing (!) and about a fifth of the total 20% added by all finance, insurance and professional services combined. Data from the ONS. This is where I presume Rob Marchant got his one fifth figure from by adding K48, K57 of page 19.4 and deriving a percentage from cell K77.

Discussion of high and low finance should be separated, something which I suppose Hollande needs to take on board as well. I should perhaps tentatively suggest three things: that most finance is dull, should be dull and most of it takes place outside The City. It consists either of taking short term deposits and lending that money out at a rate slightly higher rates or taking payments from large numbers of people and paying a small subsection of them large sums when something bad happens. It is very dull, very worthwhile and  it adds a lot of value but it is a world apart from what occurs in The City.

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[1] Remember that many firms in The City receive a huge hidden subsidy each year too.

For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

Not small sums at all, and I recommend you read Haldane’s speech in full. The City’s contribution to GDP is modest, although its contribution to exports is larger.

Filed under: Economics, History, Haldane, High Finance, Low Finance, Rob Marchant, Subsidy, The City

How to End this Depression!

Targeting the path of Nominal Gross Domestic Product (NGDP) is probably the most “fashionable” solution proposed for dragging the developed world’s economies out of depression. This post will refer to the UK, but lots more work has been done on the US from this perspective, particularly by Scott Sumner and David Beckworth. Britmouse has blogged about NGDP from a UK perspective.

Real GDP is a proxy for our incomes adjusted for inflation, how well off we are. Nominal GDP is the same but refers to our incomes in cash terms. This nominal measure deviating from trend has been what has driven the wild swings in employment and production the developed world has seen since 2007.

NGDP matters because wages and debt are sticky.

Wages: NGDP can decrease if all other prices decrease with it, the relative prices between them will not change and apart from updating some menus nothing will have really changed. But it is incredibly hard to cut wages, look at the clustering of wage changes around zero in the below graph (via Paul Krugman). This means a decrease in NGDP relative to wages will throw people out of work as employers become unwilling to employ them at the prevailing nominal wage.

Debt: We care about what real resources we can consume but all our contracts are written in nominal terms. If I owe someone £10,000 then at some point I have to hand over some bits of paper, or packages of electrons, to someone for that amount. But, if NGDP grows below trend the total nominal size of the economy will be smaller than expected when I took out the debt, but the size of my debt will not. The real cost of my debt will have increased and this will work to depress the economy because this dynamic will affect a number of people.

If NGDP sinks below trend there are then at least two mechanisms which can act to depress an economy. [1] Has it sunk below trend? Yes it has.

Is off trend NGDP growth associated with weak real GDP growth? Yes it is.

Are changes from trend NGDP correlated with changes in employment? Yes they are.

That might be a little difficult to make out for some. So I zoomed in and inverted the unemployment figures. Are they correlated? Yes, and closely.

Let me tell you a story with a different ending to the one you know. The year 2007 began with NGDP growing to trend, and employment decreasing against the backdrop of international inflationary pressures and financial distress. NGDP reversed course and began to decline during the second quarter of 2007 as did employment, crucially this was before the Lehmann Brother’s bankruptcy and the ohmygodwereallgoingtodie stage of the financial crisis. Unemployment had already increased by nearly 200,000 after NGDP began declining but before the financial crisis began in earnest.

This doesn’t exhonerate any bankers, they put the Bank and Treasury in this position after all. But it does imply different priority for actions. Occupy Threadneedle Street, my friends, not the London Stock Exchange.

Scott Sumner and Ben Bernanke

Looking at the third graph you can see NGDP decline, recovery and stagnation correlating closely with decline, (mild) recovery and stagnation in UK employment. The Bank of England controls the country’s printing presses and hence the nominal economy and responsibility for this depression lies with the Monetary Policy Committee for doing too little to avert it and with the Treasury for doing so little to force them to do more.

In the UK and US the last couple of decades have seen NGDP grow at about 5% a year, and this nominal growth has been split between price increases and economic growth. In 2008 NGDP collapsed and we saw deflation, disinflation, and recession. To date NGDP has not yet recovered to trend, in fact it remains over 10% below trend – and this is our main problem.

Increase NGDP and employment, incomes and taxes would increase, many intractable problems would vanish (though many would not). There are risks and there are methodological problems, but there huge gains for everyone if they right policy is adopted and I want to do my part to try and make sure the right policy is adopted.

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[1] Data from here, I’ve used basic prices to strip out the effect of VAT jumping up and down

Filed under: Economics, Foreign Affairs, History, Politics, Society, Adam Posen, Britmouse, Market Monetarism, Mervyn King, NGDPLT, Scott Sumner, Unemploy, Unemployment

Don’t let idiots run things

Is the Argentine government good at running things? Not really. Then it is probably a bad for them to run things.

Filed under: History, Politics, Argentina, Baring Bank, Corralito, YPF

The Eurozone as a Country

I think this data from WolframAlpha is worth thinking about with reference to thinking about the Eurozone as a country.

1 | Luxembourg | $107000 per person per year
2 | Netherlands | $48300 per person per year
3 | Ireland | $47600 per person per year
4 | Austria | $45900 per person per year
5 | Belgium | $43800 per person per year
6 | Finland | $43700 per person per year
7 | Germany | $41500 per person per year
8 | France | $41200 per person per year
9 | Italy | $35100 per person per year
10 | Spain | $32400 per person per year
11 | Greece | $29400 per person per year
12 | Cyprus | $28300 per person per year
13 | Slovenia | $24300 per person per year
14 | Portugal | $21700 per person per year
15 | Malta | $20300 per person per year
16 | Slovakia | $18200 per person per year
17 | Estonia | $14400 per person per year

Some thoughts. The most successful currency union I can think of is the United States. The Eurozone is very different from the US is some very important ways normally the negative are emphasised, but some of these differences are positive.

Potted History: The South and the North had different institutions up to the 1960s, what with the South being very, very racist. Unsurprisingly this left the South much poorer. After much brouhaha, the North won, finally completed the South’s reconstruction and the South began to converge on the living standards of the North. The South went from about half as wealthy, they were even still picking about half their cotton by hand, to about as wealthy. There is about a three to one difference between the poorest parts of Europe and the richest (ignore Luxembourg). That convergence took basically the whole history of the United States until very recently, this does not bode well for Europe, disparities can exist for a very long time.

But, despite larger inequality with respect to income, nowhere in the Eurozone is as much of a basket case as was the US South in terms of institutions. This means that it should see faster convergence on wealthy living standards which is one thing which makes the current crisis such a tragedy. There are no fiscal transfers within the Eurozone analogous to those within the US but neither does Europe have the terrible legacy the poorer parts of the US had. So there are (limited) reasons to be cheerful.

UPDATE: As Innocent Bystander points out in the topics, I’ve just provided a list of numbers without context. As you’re all not psychic let me say they refer to Gross Domestic Product Per Capita.

Filed under: Economics, Foreign Affairs, History, Convergence, Estonia, Eurozone, Institutions, Jim Crow, Luxembourg, Racism, Slavery, US North, US South

The Tories at least used to be competent

Why couldn’t it have been this lot to have taken on the miners? Scargill would have eaten them for breakfast. Mind you, the Argies would have as well.

Theresa May, the Home Secretary, ordered the rearrest and deportation of the extremist cleric on Tuesday morning, believing a time limit in which his lawyers could appeal against his removal had elapsed.

But yesterday, to the surprise of the Government, officials at the European Court of Human Rights said the deadline was 24 hours later and that it had received an appeal application from Mr Qatada’s legal team with an hour to spare.

As the situation descended into chaos on the eve of a government-hosted conference in Brighton to reform European human rights laws, the Home Office was accused by Labour of potentially acting illegally by starting the deportation process apparently before the deadline had passed.

Filed under: History, Politics, Idiots, Theresa May, Tories

Tom Bursnall, today’s new Worst Person in the World

Via @ByrneToff, we have an ex-Chairman of Conservative Future, ex-Conservative Party Councillor and future UKIP apparatchik who thinks people on unemployment benefits shouldn’t be able to vote.

He’s being so intensely shitty that I think I’ll do him the honour of promoting him above the entire cadre of the heartless US prison service and make him April 17th’s worst person in the world.

Tim, he’s one of yours, a UKIPer, and you really should do the honours, but I can’t help it. Mr Pro-Capitalist, pay attention this is important:

The primary goal of British political evolution has been resistance to arbitrary rule. Starting with Magna Carta the Baron’s received protection from the King, but this protection had roots going back in theory to the Norman Conquest. Many of these privileges were extended and universalised through the Glorious Revolution and the Bill of Rights in the seventeenth century. Later, when elites tried to use the courts to enrich themselves by seizing land these rights were reinforced by popular resistance to the Black Act by protest and in the courts. These rights were hard won, and hard fought for.

Once again, through the nineteenth century these rights and protections, chief among them the right to vote, were reinforced again  and again by Great Reform Acts, perhaps finally the Suffragettes completed this process in 1928, by getting political rights extended to all, so that everyone could protect themselves from arbitrary rule…Jesus, about a thousand years of history on one theme you seemed to have missed… politics is there to keep people safe from arbitrary rule.

To you Tom, Government may be all about redistribution, but hating poor people has completely blinded you to the main purpose of politics, protecting people from autocrats like you. What is more arbitrary than taking the vote away from people at their most vulnerable? I’m not sure I can think of one, it certainly goes against a thousand years of British history.

I’ll tell you something funny. How you’ll laugh Tom.

You are a member of UKIP, a party whose raison d’etre, if you’ll excuse my filthy French, is to maintain the hard won freedoms of one thousand years of British history from preening, authoritarians…that is…to protect this country from…

…you.

UPDATE: I’m not the only one to notice it seems.

Filed under: History, Glorious Revolution, Magna Carta, Tom Bursnall, UKIP, Worst Person in the World

You can be a well cultured despot you know

Noah and Scott‘s argument about China’s culture is going nowhere. They’ve got bogged down talking about whether culture affects economic potential or not. Long story short, of course it does! Consider these two examples:

Chinese expats around south-east Asia seem more entrepreneurial and they sure as hell are richer than the locals in places like the Malay Peninsula and Thailand. Less fortunately, Black Africans are less trusting than other people and this is just one reason economic growth is more difficult there. Without being able to trust that someone will take your money, disappear into another room and come back with what you want there can be no Argos. And where would you be without Argos? A lot poorer. [1]

The reasons for these cultural traits are complex. I don’t know the Chinese, but Africa’s level of trust appears to still be badly effected by the long defunct institution of slavery; kidnapping was very common for 200 years or so in a way which the rest of the world hasn’t had to deal with. You can be culturally more entrepreneurial. Likewise, you can culturally more or less prone to trust strangers. Both of these have real effects for lots of things, including economics. There, cleared that one up for you.

But whether culture affects wealth given a certain set of economic institutions is irrelevant. What is important is whether culture can influence China’s institutions. China is still deep in the throws of catch up growth, entrepreneurship is of course very important, but not nearly as important as having institutions which allow for the full execution of whatever entrepreneurship occurs. As I said earlier:

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients…

Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right.

The only way China’s culture will significantly influence its long run - at least until it reaches say half of rich world income per capita) – growth prospects is by influencing its institutions. An entrepreneurial culture, or pragmatic culture, is completely unrelated to whether China adopts a growth friendly political framework over the next five to ten years. What matters is whether the politically powerful can be convinced/forced to become economic losers. Look at those guys at the top. Do you think they’re culturally inclined to agree to that?

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[1] Not sure if that translates to my non-British readers. Argos is a shop with a tiny shop front full of catalogues and a big warehouse full of stuff. You order at the front and stuff appears a few minutes later from the back. The flippancy of my reference is of course a little ruined by this extensive footnote.

Filed under: Economics, Foreign Affairs, History, Politics, China, Elites, Entrepreneurship, Noah Smith, Scott Sumner, Why Nations Fail

The Occupy Handbook

Via. Coming out in May: Amazon.

Krugman, Graeber, Taibbi, Wolf, Saez, Rajan, Roubini…its kind of a who’s who of whose opinion I want to read on Occupy. I didn’t even read the blurb before ordering it.

Filed under: Blogging, Economics, History, The Occupy Handbook

Why China Might Fail

I found Scott‘s post very confusing, for many of the same reasons discussed here by Noah. [1] Scott says:

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore(or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

First of all, what I agree with in the post. China is poor and has for the last 40 years not been run by bloodthirsty foreigners or a psychotic madman. Growth from the abject poverty that was 1970s China is inevitable under those conditions. What is clear from Scott’s post is that China’s growth has very little to teach the wealthy West other than “don’t let genocidal maniacs into government” something we learned the hard way a little while ago.

Scott seems to think that China has got its act together and that it isn’t in anybody’s interest to derail its development. Things will be better for everyone when China is like Singapore and therefore we shouldn’t worry that China’s growth will decline disastrously or go into reverse. Technocrats are good! Just like the technocrats in the Fed…oh never mind.

Although I kinda agree that China looks like it has a good culture, strong infrastructure and abundant human resources, so did Argentina 100 years ago, and look what happened to them. What matters are institutions, Argentina’s stank and so do China’s. I am curious that Scott seems so keen to give a clean bill of health to China’s crony-capitalist economy and dictatorial, judicially-repressed polity.

I think he is being naive. Elites rarely do the right thing because they are oh so wise, they do the right thing if they are forced to.

Think about China this way: Whether its Township and Village Enterprises or Foreign Direct Investment into Free Economic Zones, a significant proportion of the growth which China has enjoyed has been controlled by the Chinese Communist Party. Not control as centrally planning, but control as the ability to cut of freedom of action of each. This ability to cut off these developments has kept party chiefs on the same side as China’s bourgeoisie.

It becomes difficult to keep control of growth when you hit middle-income – the low hanging fruit has been picked. One reason Michael Pettis is so worried about Chinese is that consumption repression has always been at the heart of the Chinese growth model. This has been fine for capitalists operating export orientated firms or contractors building infrastructure or real estate, but again places great power in the hands of China’s elites. To reverse this would require a massive transfer of wealth and power from political control to private control. I think Scott underestimates how much the Chinese Communist Party fears the consequences of this.

You can see this in the security apparatus of the Chinese State and its repression of free speech and its tight grip on the internet. they know that as their population gets wealthier they are going to demand more freedoms and more political representation; likewise they are going to demand more economic freedom and more social mobility, something which by definition must damage the interests of the current ruling elite. Powerful magnates will arise to  challenge the power, wealth and status of the current Chinese elite.

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients.

Scott says that he cannot see a stable China with a middle-income coast and a poor interior. You can be rich and surrounded by poverty, look at North America! Just look at it! Its been rich and surrounded by poverty for centuries. China still operates a hukuo system of local registration which until very recently prevented anyone from moving anywhere without official say so. You think the Chinese can’t stymie growth by reintroducing the hukuo system of internal border control? Urban Chinese still seem pretty dismissive of “farmers” judging even by the international lot I meet at LSE.

We’re back to my new favourite book to think with: Why Nations Fail. Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right. The point isn’t to describe how China will fail, I’m not sure it will, but only to highlight that there are powerful pragmatic reasons for those in power to want China to fail.

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[1] I will not that Noah has still not commented on my rebuttal of his bullish post on the potential for Chinese industrial espionage. Noah should note that I argue Scott is wrong for the same reasons I argue he is wrong. They both slightly misidentify how the drivers of long run growth operate.

Filed under: Economics, History, China, Elites, Hong Kong, Noah Smith, Scott Sumner, Singapore, Why Nations Fail

Shit Historical Practical Jokes

They [the British Officers in 18th century India] had a clever way of enjoying practical jokes, and at the same time indulging their mercenary propensities. One of them would enter the premises of a Banya and pretend that he was shooting doves or sparrows. The horrified believer in metempsychosis would then come out, earnestly implore him to desist, and even offer him “ ready money.” He “drops in his hand a roupie or two to be gone,” says the narrator. There, reader, is a picture of the representatives of a high-minded nation drawn by one of themselves. Poor Civilians ! At least in your case necessity was the mother of invention.

So reading around the history of the British in early modern India I come across this.

In case you can’t parse it: As a funny joke and also a way to earn money British Officers would visit the houses of rich Indians and pretend to shoot birds outside and because Indians tend to believe in reincarnation they would pay the British to stop shooting their dead parents.

Hooray for imperialism!

Filed under: History

My word!

The biggest-ever experiment in rolling back the state is now known as the Dark Ages.

Hmm… via.

Filed under: Blogging, History