Left Outside

What the hell is Boris talking about?


That graph atop this post doesn’t look like any bell curve I know. Intelligence is distributed normally. Income isn’t. Connecting the two is stupid, but looks clever. Superficially I can see the appeal, but when you dig down into the mechanisms it just doesn’t work. The superstar effect looks important, but isn’t. No matter which way I turn it in my head I can’t understand what Boris is on about. Boris says that those with IQs below 80 are inevitably poorer and those with IQs above 130 inevitably richer. The mechanisms that drive inequality don’t work like that and the data don’t back him up.

What drives inequality? It varies by time and place. In 1960s America over 94% of doctors were men, since then women have been allowed to enter the field and now only 62% of doctors are men. Since then, 20% of medical productivity improvement can be explained by the entry of more talented women. That study isn’t about IQ but it does show that power plays a huge role in keeping one group well off by harming another. 

Moving back to the issue at hand when we talk about inequality we’re generally talking about the 1%. Who are they? The 1% are Doctors, Lawyers, Financiers, Executives and Entrepreneurs, according to this Economist article. Doctors and Lawyers are clever and earn a lot of money, but aren’t generally super rich. Just appropriately rich, I’m going to leave them. People working in finance and entrepreneurs are the wealthiest but there’s no story about how high IQ could turn into super-high income that correlates with the data.

As The Epicurean Dealmaker points out, genius is not required to make lots of money in investment banking, tolerance for brutal working conditions is:

Investment banking neither seeks out nor requires the allegedly “best and brightest”—whoever the fuck they are supposed to be—for its employees. All we seek are aggressive, ambitious, smart enough young kids to process our ridiculous pitch books, update our standardized models, and generally take our shit while we senior bankers do whatever is necessary to bring in enough revenues to ensure our continued employment and the consequent support of our dependent wives, children, mistresses, and bartenders. [Emphasis in original]

That quote points to the other key reason financiers make so much money: organisational capital. This is the rules, connections and technology that turn a building of arrogant excel-jockeys into a multi-billion dollar wealth creation machine. While it lasts, organisational capital is responsible for a huge amount of value that an individual creates and it has nothing to do with how clever that individual is. The same logic applies to why senior managers make so much money, sure they’re smart, but being super smart won’t have much effect against the background of the rest of the firm.

So that’s a partial pass for Boris for Lawyers and Doctors, but a big fail for Financiers and Managers for Boris’s pet theory. Where Boris’s theory makes the most sense is for the fifth class of the super rich, the entrepreneur. But it only makes sense at a superficial level. Supercleverman has supergoodidea and makes loadsamoney. But no, that’s not how it works.

Having an higher IQ really doesn’t really make you more likely to succeed as an entrepreneur. Most companies fail, and while somebody with an IQ of 150 is smarter than more than 99% of the population, everyone is more or less as equally ignorant relative to the complexity of the economy. Being 50 IQ points cleverer than the next guy doesn’t mean your company will succeed, you’re taking as big a punt as anyone else.

So what was the data I was talking about? The longest longitudinal survey ever conducted was started in 1938 and still going recording the lives of 268 American men. There was no noticeable difference in maximum income earned by men with IQs in the 110-115 range vs. men with IQs above 150. This matches another paper (H/T Chris) which is much larger and also finds very little correlation between IQ and income.

The bottom 16% of people with IQs under 80 will find it very hard to join the 1%. But there’s no explanation in the data to explain why someone with an IQ of 130 or 150 is richer than someone with an IQ of 110. There is some justification for inequality in market income due to differences in inequality, but there is nothing in Boris’s speech that justifies the inequality we actually have. Using intelligence to justify inequality is classic Boris. It looks smart but when you look closely and ask how it works in vanishes into smoke.

Filed under: Economics, History, Politics

Everything you never knew you wanted to know about Islamic Central Banking


This is cool! [1] Hassan Rouhani talking about monetary policy? Could I be any more excited? No.

Despite inventing zero, arabs have no use for it, [2] at least not when it comes to central banking. Lending money at interest is haram in Islamic finance so the use of interest rates to control demand as is normal in the west doesn’t apply. So does this also means that unlike in the UK and the US there is no danger of interest rates going to zero and the economy entering the liquidity trap?

Most reporting on Iran focuses at its very high inflation but nobody is paying much attention to the tools used by the central bank. This is understandable, inflation has skyrocketed and the central bank has no independence and is controlled by the Iranian state. My rhetorical question is largely irrelevant at the moment, but if we look at the tools Iran’s central banks uses the question is likely “yes”. I think we should look a little at the tools of Islamic central banking anyway as they give us a window into a world of central banking with interest rates or a zero rate problem.

To begin, a little history. The first Islamic savings bank was established in Mit Ghamr in 1963 by Ahmad El Najjar, an economist. In the 1960s Nasser was trying to modernise egypt and so the bank kept secret its overtly Islamic nature. Riba – charging interest – is haram so the saving bank operated on a profit share basis. Today, the much larger Islamic finance industry – in 2011 $1.357 trillion of shariah-compliant assets existed globally – has a variety of alternatives to charging interest.

Islamic finance seeks to avoid unearned income, which is seen as exploitative. Instead of lending money and charging interest, which is seen as just transferring risk, risk is shared through a variety of mechanisms; as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar). This can be illustrated with an example: Unlike in western finance a mortgage transaction does not involve interest payments. Instead the bank would arrange to buy the house from the seller and sell it on to the buyer at a profit with payments arranged as installments.This arrangement is called Murabahah and is the most relevant for our discussion of central banking.

Sukuk is also an important concept too. This is similar to a bond in which interest is regularly paid on a principal. However, because riba is haram in Islam it cannot be structured like this. Instead sukuk imply a transfer of ownership and can look like a form of repurchase agreement. You agree to repurchase something at a certain price over a certain period of time. This echoes previous posts of mine of what saving really is. Interest rates are just symbolic, what is really happening is people buying durable things today with an expectation they will be able to sell them on for more in the future. Interest rates are our way of expressing that, Murabahah or Sukuk are another. The latter seems clearer and more honest on the mechanism actually.

(At this point, I do want to point out to all the snooty economists, engineers, mathematicians who mock post-modernism…who’s laughing now?)

So what does all this mean for Islamic central banking? The most prominent method of controlling monetary policy is the control of the profit rates allowed by banks when they lend, the Mudharabah discussed above. Anything from an 18% to 20% on non profit-and-loss sharing arrangements, and slightly lower on profit-and-loss sharing arrangements. In a country shrinking around 5% a year finding a 20% return implies a high rate of nominal GDP growth which is split between negative growth and even higher inflation.

We can see that the implied maximum profit rates require very high growth in nominal incomes and we also see very fast growth in the monetary base. Entering into a profit-and-loss agreement will guarantee you a high nominal return in a low growth environment and monetary growth is high to accommodate these contracts. There is no reason however that the profit share cannot be set to a lower number. This would amount, via the Kalecki equation, [3] to a monetary tightening and NGDP and inflation would both have to decrease to accommodate this lower allowable rate of profit. Weirdly a shrinking of the nominal profit rate could increase it in real terms. Money is weird.

This piece from Cato, caveat lector, says that Iran stopped publishing information on its money supply in March 2011, at the time they showed continued very rapid growth in the money supply. If Rouhani has changed this that’s great. The country’s monetary policy at the moment is chaotic but once the chaos fades it will be useful to bear in mind how Islamic monetary policy works. The details in this post are broad sketches only. I took lots from these documents [12345] and I’m not sure of their quality. This is an area where I don’t even know anyone who might know an expert, so any input in the comments or on twitter is welcome. Likewise please share this as this might get picked up by someone better informed than me.


[1] Yes. Cool. You’re here aren’t you?

[2] Yes. Persian or Iranian is more appropriate but I’ve been looking for a chance to use that line since I drafted this post months ago. UPDATE: As Lorenzo tells me, actually the Indians invented zero as a concept, the Arabs were miles behind. More here.

[3] I’m making the Kalecki equation  [1, 2, 3] do some heavy lifting here, but I think that’s right…

Filed under: Blogging, Economics, Foreign Affairs, Politics, , , , ,

An answer to secular stagnation, the socialisation of investment, is already happening

Last week Larry Summers brought the idea of secular stagnation right into the mainstream (of the little read econoblogosphere). In my eyes it was a big presentation in a “only Nixon can go to China” kind of way. Larry Summers is a creature of technocratic centrism in America, ex-President of Yale (whoops, thanks Tim/a>) Harvard and creature of Wall Street. When Unlearning Economics declares capitalism fundamentally flawed I meh, when Larry Summers does it, I’m more curious. Not because I like Larry more but because of the opposite, Larry’s an arsehole.

“Many people think monetary policy was too easy [before the crisis], everybody believes that there was a vast amount of imprudent lending going on and almost everybody believes that wealth as it was experienced by households was in excess of reality. Was there a great boom? Capacity utilisation wasn’t under any pressure, unemployment wasn`t at any remarkably low level and inflation was entirely quiescent. Somehow even a great boom was unable to produce any excess in aggregate demand…

Suppose then that the short term real interest rate that was consistent with full employment had fallen to negative two or negative three percent. Even with artificial stimulus to demand you wouldn’t see any excess demand. Even with a resumption in normal credit conditions you would have a lot of difficulty getting back to full employment.”

Larry Summers – November 8, 2013

Marco Nappolini at Pieria suggest that increased vulnerability to energy costs has reduced the incentive to increased fixed business costs by hiring permanent employees. Excess capacity and the end of scarcity have led to a situation where investment is only profitable at very negative interest rates. Only measured against very inhospitable risk-free returns does any sort of investment make sense. Even then it only makes sense inasmuch as you mitigate your losses, rather than capture the superprofits which once supposedly animated capitalist.

This situation has been characterised by Paul Krugman as “When prudence is folly.” Responsibly saving when interest rates are trapped at zero just reduces demand, and depresses your returns. In essence because capacity and savings are abundant further investment or saving only reduces current spending further and makes further investment and saving even less appealing. Interest rates stay at zero and we just stay far from full employment for a long time.

As Larry Summers says in his talk. This has been resoundingly rejected by the economics profession for a number of years. At least since the monetarist revolution in the 70s/80s economics have been comfortable arguing that aggressive monetary and fiscal stimulus can produce the necessary demand to restart spending, saving and investment at the necessary levels to return economies to full employment. The nature of investment and technologies may have changed and I want to discuss a little the nature of that change and the response already in train.

The extended (for blogs anyway) Skidelsky quote on Keynes explains that he thought eventually capitalism would lose its vigour and that some “socialisation of investment” would be required. You can only read the bolded bits, that’s why I do on other people’s long blockquotes.

The problem of maintaining full employment arises from ‘the association of a conventional and fairly stable long-term rate of interest with a fickle and highly unstable marginal efficiency of capital’ (Keynes, 1973A, p. 204). His solution to the problem is to use monetary policy to establish a permanently low long-term rate of interest. For ‘any level of interest which is accepted with sufficient conviction as likely to be durable will be durable…’ (Keynes, 1973A, p. 203). For this reason, he did not want to use interest rates to manage the business cycle: the exact opposite of present practice. Nevertheless, he believed that it ‘seems likely that the fluctuations in…the marginal efficiency of capital…will be too great to be offset by any practicable changes in the rate of interest’ (Keynes, 1973A, p. 164). Hence, apart from keeping interest rates permanently low, investment needed to be ‘socialised’. Keynes wrote: ‘I expect to see the State…taking an ever greater responsibility for directly organising investment’ and ‘I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment’ (Keynes, 1973A, pp. 164, 378).
By ‘socialisation of investment’ Keynes did not mean nationalisation. Socialisation of investment need not exclude ‘all manner of compromise and devices by which public authority will co-operate with private initiative’ (Keynes, 1973A, p. 378). This single throw-away line in the General Theory reflects Keynes’s thinking on ‘public-private partnerships’, which came out of his involvement in Liberal politics in the 1920s (Skidelsky, 1992, chs 7 and 8). In essence, he sought to expand the public-utility component of investment to give greater stability to the investment function. Today, he would have seen the big institutional investors like pension funds as a major support for stability. A guaranteed stream of investment would reduce fluctuations to modest dimensions, which could be readily controlled, if so wished, by speeding up or slowing down elements in the investment programme. Such investment would not necessarily be profit-maximising. But provided it yielded positive returns, there would be a gain. If markets had perfect information, public investment would be inefficient. But with uncertainty, there is a gain as against having no state investment at all, because of the losses due to uncertainty.

I am here to present evidence that this is already happening and is uncontroversial in the heart of government. Within both DECC and the Department of Transport the above is taken for granted. I think as we move towards an economy in which networks and the free flow of data become ever more important this trend will continue and because the benefits are hard to capture it will look a lot like secular stagnation. One such example is the smart meter roll-out:

Between now and 2020 energy suppliers will be responsible for replacing over 53 million gas and electricity meters. This will involve visits to 30 million homes and small businesses.

DECC estimate that the programme will cost £12 billion and produce £18 billion of benefits. The programme involves all energy suppliers and network operators working together with government to set up a new national communication grid to exchange real time data on energy usage. There are no comparable Key Public Infrastructure projects anywhere close to it in scale or scope in the world. All work is taking part because the government has demanded it under advice from industry and the public-utility component of investment has been extended to give greater stability to the investment function.

The costs are almost certainly an underestimate, they almost always are. The benefits are based on headline savings. Shifting of consumption, reducing energy consumption, making investment in the grid more efficient etc. They are almost certainly an underestimate. Smart gadgets, smart homes, and the potential to totally disintermediate electricity sale will be opened up by this investment.

Power is a commodity. It should be pretty unprofitable, but it is not. The data produced by its consumption is valuable though. The smart meter roll-out infrastructure will allow the entry of people good at data into a commodity business. Google selling electricity and using your data to make your life better is a business proposition that will totally destroy the incumbents. The benefits could be huge but the investment had to be socialised.

There’s a similar problem with rail smart ticketing in the UK. The benefits to smart ticketing vastly outweigh the costs, but rail operators are unable to capture the majority of them. Indeed as it becomes easier to track people on the railways it might be easier for the services rail companies offer to be replaced by new entrants. The data produced will enable passengers to track their own journeys and work out how valuable they are. Jeffrey Sachs (via Mark Thoma and Arnold Kling) pushes back against Summers and writes that investment is only sluggish because regulation and policy is holding it back. I think that is unrealistic. In lots of areas policy is already helping to address the problem of secular stagnation with the socialisation of investment. 

Technology is changing and reducing the return on investment which can be monetised by those making the investment. The benefits from networks, twitter or the internet of things will be broad, ubiquitous and difficult to monetise. Because this investment won’t produce a good return for those carrying it out it will look a lot like secular stagnation. The new world will be built on smart networks (and intuitive marketing much to Alex’s horror) and the private sector cannot trusted to carry this out. The need to socialise investment is driven by secular stagnation and the difficulties encountered in monetising investments reliant on network effects. 

Filed under: Politics

Why getting a Mickey Mouse degree or working for a benevolent monopsony are the only ways to guarantee a job

Via Alex I learn from the ONS that Media graduates have the second highest rate of employment of any graduate:

Employment rate by degree

…but they also have the lowest aggregate wages. Ouch.

Wages by Degree

This is a nice contrast to the graduates with the highest wages and the highest rate of employment of any graduates: Doctors.


Just my little joke…anyway, moving swiftly on. This seems pretty odd, no?

Medicine needs good A levels, constant hard work and the final years of the degree are spent on placements which normally lead to jobs in medicine. Media Studies requires significantly less good A levels, a lot less work and you don’t get nearly as much support finding a job. So what gives?

The 2010 economic Nobel prize went to Diamond, Mortensen and Pissarides for looking into exactly this sort of problem. Matching jobs to workers is not a costless or effortless process. Although economists have spoken about this since the 1930s this only really got formalised in the 1970s.

Several factors can make finding employment (or employees) difficult. Imperfect information about trading partners can lead you unaware of opportunities; heterogeneous supply and demand can mean that there are job openings for which nobody is suitable; slow mobility could prevent people from moving to where the work is or people may be poor judges of their own skills and demand too high a wage.

Medicine degrees are incredibly hard work and require incredibly bright students. The search process for students is totally different to “normal” job hunting because there is one employer, the NHS. After an online application, students rank their preferred cities, ranked and then selected into jobs by the hospitals they are matched with. The high skill and short supply of Medics explains their high wages and this search system explains their high employment. A similar system of search exists for nurses, which have similarly high employment rates.

Media degrees are easier to start and there are no specific search programmes set up to find graduates employment and yet they are still employed at far higher rates than Humanities graduates, even though their wages are similar and Humanities graduates are just as thick. [1] What’s the difference? Its the reservation wages stupid. And added flexibility. Being told you’re doing a Mickey Mouse degree reduces your reservation wage and makes the psychic cost of taking non-graduate jobs easier to bear. An Historian would never make lattes, a meeja grad might. Graduates become easier to match to jobs because they’re willing to cast the net wider and accept a worse wage.

For medics, in terms of search costs we can see they have higher reservations wages than Media studies students, but their sole employer is used to this. An efficient matching mechanism helps to match supply to demand. Supply and demand are kept close to one another because the number of new jobs and new graduates is predictable. Finally, new doctors list the cities they’re willing to move to reducing frictions associated with mobility.

Engineering is more curious, but thinking about search costs can help us explain their lower employment and high wages. They’re clever, hard working people and many engineering degrees require vocational work. But the multiplicity of firms involved means that search costs are higher. Plus, whereas hospitals tend not to move around much engineering work does. For example, over the next decade (or more) there will be work in Somerset, then it might be in Cumbria, or London. While it can be hard to find a job, there is a big shortage of engineers. 6000 people will be required at any one time at Hinkley Point C. Crossrail’s progress means that there are no qualified drillers left in the UK. Want to bore a tunnel? Bore off. All the tunneling experts are busy. 

It’s easy to tell a story looking at the above tables and say that of course lots of media students are in employment they’re cheap. That logic kinda breaks down when you apply it to expensive doctors. And a story about high skill people being super employable breaks down when you look at engineering. But thinking about search costs can help explain a lot and make slightly odd patterns easier to explain.


[1] I’m a History graduate. Calm down.

Filed under: Economics, Politics

For Gibraltar! We don’t want to fight but by Jingo if we do

We don’t want to fight but by Jingo if we do,
We’ve got the ships, we’ve got the men, we’ve got the money too,
We’ve fought the spic before, and while we’re Britons true,
The Spaniards shall not have Gibraltar.

Part something or other in an ongoing series:


Filed under: Politics

How evil are immigration restrictions?

Round and round we go. From Ben Southwold:

(a) restricting migration restricts extremely important rights, like the freedom to take a job you are offered and the freedom to offer a job to a desired applicant, (b) when we curtail these sorts of freedoms we need to have a preponderance of evidence that the costs are very high, (c) the economic evidence says immigration is pretty good for the recipient country, very good for the source country, and amazingly good for the migrant themselves, (d) the magnitude of the social/cultural impact (i.e. the effect of migrants on our institutions, customs, etc.) is unclear, (e) therefore, we ought to have open borders (or something very close to open borders).

Ben Six responds:

To my mind, the burden of proof lies with advocates of radical change. One requires a large body of evidence to justify a course of action that would significantly and permanently change a stable and somewhat civilised nation.

I disagree, of course. Similar arguments were made in the antebellum south. Slavery was a well established system. Destroying it, argued white slave owners, could perhaps be justified but a lot of evidence would be required to prove such a radical change was worthwhile.

This argument sounds evil and ridiculous now, but were they so wrong? Ex ante they had the weight of tradition on their side, ex post blacks in the south continued suffering intensely under sharecropping and Jim Crow, without much of a material improvement over their pre-emancipation condition.

How you feel about these arguments will depend on how you feel about slavery. Under what conditions does the burden of proof fall on the radical? When it comes to slavery I don’t think the burden falls on the revolutionary. I think a similar logic applies to immigration restrictions.

Filed under: Politics

Why people should just admit they want some foreigners to die

Ben Cobley makes a good point that far too much of the immigration debate focuses on facts when what really matters is how people feel. Earlier this week we had a report published that showed that European migrants paid more in tax than they claimed in benefits. As I said, perhaps uncharitably, on twitter:

Excuse my French, but as Ben says this is about feelings not facts. Precisely no people will change their mind due to this report and precisely no useful arguments were had on twitter as a result. The whole debate could be better framed. It would save Jonathan Portes his health at least if he could just admit that people don’t care about the facts. After all, there’s grist to everyone’s mill here.

Ben points out that between “1995 and 2011, immigrants from non-EEA countries claimed more in benefits than they paid in taxes.” Now this doesn’t surprise me after all a large number of these people will be asylum seekers who were banned from working or are children. We’re straying towards facts here. Which I concede isn’t that useful. But I’ll just conclude that children and those banned from working are likely to be a drain on  the public purse, but not terminally so.

Anyway, Ben is sympathetic to migration but still thinks that with Britain’s population possibly rising by 9.6 million to 73.3 million by 2037 we should be enforcing strict limits on further migrants to give time for existing migrants to integrate. I’m not going to discuss the merits of this plan, I want to talk about how I feel and how I think other people feel.

The status quo is that a small number of migrants are allowed to enter the UK but that most people in the world are kept poor or persecuted. “Most of us do not merely let people starve, but also participate in starving them” as Thomas Pogge says. Undoubtedly, more immigration would help solve this problem. And that’s where my emotional response begins. But most people are unmoved by this argument, in fact they pretend it doesn’t exist.

This apparent callousness is okay. People support policies that cause pain and suffering on a huge scale. That’s normal. All I want is for people to admit it openly. Yes, I think the immigration debate in this country is boring but not because my side call too many people racists (although that’s unhelpful). It is because restrictionists refuse to make the honest argument “this many million people must suffer on my behalf.” 

So I guess that’s how I feel. People support policies that will kill people. Lots of people. I don’t think they’re bad people for wanting that. They’re normal people. I don’t want to go through life thinking 99% of people are evil: why would I bother with politics if humanity was so unredeemably awful? But I’d like to see some admission that there’s a trade off. Some people must die or live in drudgery and cholera so that I can feel a certain way. 

You shouldn’t set policy so that people are expected to behave like superheroes. We can expect someone to pull a drowning girl out of a lake, but not to give up their day job to become a free range lifeguard. The same is true of immigration. Leaving people alone is a heroic act and people feel justifiably odd admitting that. That’s the real reason our debate around immigration involves people shooting facts back at one another. It’s a smoke screen because some things are too horrible to say.

Filed under: Blogging, Migration, Politics

Why the coalition won’t tear itself apart over evidence based policy

It continues. It intensifies! This time its interdepartmental rather than stroppy bloggers attacking IDS. The Foreign Office is getting stuck into Theresa May (alternative). There is a view within the Home Office that there is electoral gold in them thar hills of health tourism and immigrants squeezing local services, but they’re having difficulty turning up any evidence to support their policy. As one government official put it…

..Ms May is frustrated that the evidence she has received “doesn’t fit the Home Office view”, adding: “Theresa wants to go big on impact of immigration on local services and health tourism and the reality is there is very little evidence to demonstrate this. There is a political view from May’s people, but this report has to be evidence-based.”

The evidence she has received doesn’t fit the Home Office view. What a wonderful vignette of official thinking. Anyway, this is all around a report being prepared by the Home Office for the FCO on the negative impact of free movement in European on the UK. Problem is they can’t really find any…

Health tourism is really very small. Figures like from 2% to 0.06% of the NHS budget are bandied about, the official views of the right and left. The first figure is so ludicrous I remain a little convinced that much of the right is engaged in an elaborate performance piece and they’re on the verge of yelling “The Aristocrats!” The other figure might be a bit on the small side but it corresponds to 40,000 people or so, which is at least the right ballpark.

Anyway, the battles between different government departments are fun to watch. Hopefully the FCO will win in this one and the Home Office will have to tone down its rhetoric and adopt slightly less disastrous policies. Luckily we’re at the point where the coalition’s deficit fighting zeal might help poor people.

We’re well below the optimum level of immigration for debt reduction. This is the officialish position as set out by the Office of Budget Responsibility. More immigrants means more workers means more taxpayers means a bigger denominator on the debt to GDP ratio. There’s also the clusterfuck around preventing foreign students studying in the UK as discussed by Paul Sager (Yes! Really!) here. If the FCO can help wear down May’s position then both of these policies could be reversed in the name of fiscal rectitude.

I’m not arguing that there is any coherent pro-evidence based policy putsch in action, just that evidence based policy is a tool of actually existing politics not a new approach to politics.

Filed under: Economics, Foreign Affairs, Migration, Politics, ,

Freezing energy prices

Much to everyone’s amusement, after the gnashing of teeth and wailing of…mouths, I guess… following Killerband’s conference speech, people have been pointing out that energy suppliers allow you to freeze your prices yourself.

I think it’s important to have a laugh. And don’t we laugh here? But also to be po-faced and serious. So I thought I’d discuss this. So why are energy companies whining so much about Ed Miliband’s proposal when they offer something equivalent? Well, I’m glad you asked.

Companies can either lose customers, retain customers or acquire customers. Losing customers is usually bad, but not always. I’ve definitely dealt with customers who buy low margin products then eat up hours of my time. Fuck those guys. But generally speaking losing customers is a cost.

You might think that acquiring customers was awesome. But not necessarily. In a perfectly competitive market firms are pretty ambivalent about acquiring more customers or selling more. Their profits won’t change since, in a perfectly competitive market [1], it is all competed away.

However, the real world much more closely resembles one of monopolistic competition. There are limited firms, so they don’t compete as fiercely as we assume and products are not identical so people can’t switch firms so easily. In energy, effectively, the product is identical although the customer service might differ. However there aren’t many firms.

They want to win customers, but that means tempting someone away from another firm providing a near identical product. That’s expensive because you either have to offer something identical for less, or spend lots of money tricking people into switching supplier.

This is what makes keeping customers so awesome. You roughly know how much you can want to spend acquiring a customer and this gives you a ceiling for what you’ll spend to keep an existing customer (more or less).

This is where the price freezes come from. If E.ON [2] offer to freeze your prices for two years and you say yes, that’s great. Sure they might miss out on a couple hundred quid, but you’re theirs now. Trapped. Your loyalty is assured at a modest cost.

You can turn this to your advantage. Work out how much a firm spends to acquire a new customer and you’ve got your negotiating position. That’s why you can negotiate with telecoms operators or TV providers so easily. Their product is cheap to supply, but customers are expensive to acquire so they’re happy to negotiate. Worth bearing in mind when you’re next on hold.

This what makes David Cameron’s reaction to British Gas’s price increase so interesting. Nothing prevents you switching within the system, but there’s no leaving the energy grid (unless you’re Tom and Barbara). You can mitigate price increases, but these company’s are regulated utilities and that means their shareholders (your pension funds) need a return. If we all switched to cheaper tariffs prices would go up more. It’s a not-so-merry merry-go-round.


[1] Which don’t exist, no, before anyone points it out.

[2] Other energy suppliers are available.

Filed under: Politics

Free schools: the market as a discovery mechanism


Some things don’t need discovering:

  • This is a school which has been set up and run by representatives of the community with limited knowledge and experience. Leadership and management, including governance, are inadequate and have been unable to improve the school.
  • The school has not been adequately monitored or supported. Pupils’ achievement is inadequate because the staff’s expectations are too low and pupils do not make enough progress.
  • Teaching is inadequate. Many teachers are inexperienced and have not received the training and support they need.
  • etc.

So sayeth Ofsted about the Al-Madinah school. Unfortunately, because Gove was keen to have Free Schools up and running as soon as possible he’s let some rather unsavoury characters run full steam ahead.

Some of a libertarian bent have greeted this failure with fanfare. The market winnows out losers. No central planner can succeed. This is all part of the process of discovery.

Between me and you, I think this might be bullshit.

I’m all for discovery and failure. The Use of Knowledge in Society makes a lot of good points theoretically. Disney, Haskel and Heden make a solid empirical case for the importance of failure. But plur-leease. They don’t give you carte blanche to celebrate failure.

At Al-Madinah and Pimlico, obviously stupid ideas have failed and everyone involved is the worse for it. Having incompetent teachers is bad for pupils. Hiring a 27-year-old to be headteachers is a bad idea. These are not the market discovering something useful. This is idiots rediscovering things people of normal intelligence already knew.

Actually, blaming idiots is unfair. [1] Ideology blinded these people in utterly predictable ways. These are not evidence of the strengths of the Free School programme’s tolerance of experimentation. Nobody has done a double blind randomised trial to prove parachutes are effective. You’re a clever bunch, I’ll let you join the dots yourself.

Celebrating bad ideas failing is a bad idea. Celebrating good idea failing is great, we can chalk them off and move on. But generally, I wouldn’t recommend celebrating a bad idea succeeding either. Look at finance.

Investing in hedge funds, dot-coms and bank stocks has made a lot of fund managers very well off, but for the investors? Not so much. There’s an old joke about someone going to a marina and being shown all the hedge fund managers’ yachts and asking “where are the clients yachts?” Haha. How droll.

Anyway. If you were paying attention, the Nobel prize in economics was awarded a few days ago. It went to the guys who made the best empirical case that “you personally won’t beat the market, so don’t try any funny stuff.” It’s a pity it ended up being called the “efficient market hypothesis” because there’s a lot in the idea for the left. Those masters of the universe who justify their paycheques through their unique foresight and vision? Bullshitters.

Rather than all the financial jiggery-pokery, a diversified portfolio of stocks, fixed income and cash (regularly rebalanced) is a much better investment than almost anything else. [2] But the terrible idea that super-duper financial wizardry can make people loads of money persists. Bad ideas have legs. Don’t celebrate that.

So what do we see with free schools? Lots doing well and a few fucking up in entirely predictable ways. The market discovers, but there is some stuff we already know. Don’t segregate children, don’t hire people born in the 1980s to run schools, don’t trust hedge fund managers. A little oversight goes a long way. The market will discover your terrible idea is terrible over and over again, but we don’t need to. We’ve written some good ideas down.


[1] Some of my best friends are idiots.

[2] Okay. Dan is probably right, I defer to his superior knowledge. There are some ways to beat the market. If you’ve the diligence, calmness and discipline and can follow some simple rules then you can succeed. But most won’t and therefore don’t and in that sense Matt is more correct and I can continue with the same beliefs I always had.

Filed under: Economics, Politics, Society

Comparing discussion of immigration in the 1970s and mid-2000s: It isn’t pretty

A propos Ralph, I thought it would be timely to post this. I’ve blown the dust off my old, old university laptop and pulled this from the archive for you, Written about 6 years ago, but it holds up pretty well. Sadly.  Views are probably still my own, but I haven’t read the damn thing in years so considered criticism will be welcome. Enjoy:

Read the rest of this entry »

Filed under: Migration, Politics

The one chart that tells you everything you need to know about the UK economy

Change in Employment since 2008 Construction and Estate Agents

Hard to know where to start with this. Since 2008, construction has lost 277,000 jobs and estate agents have gained 77,000. The housing crisis is only going to get worse. The economy is not rebalancing towards sustainable growth. Employment is miles away from recovering. I’ll write more on this once I’m able to digest how terrible this is.

The data comes from the Labour Market Statistics September release, JWS2 versus JWS8 change against the 2008 Q1 figure. I’ll write more on this later. Hat tip to Laura Kuenssberg.

Filed under: Economics, Politics

Red lines for who? The countries we threaten when we threaten #Syria

Add the War for Deterrence to the War on Drugs and the War on Terror to our ever-growing list of abstract noun inspired wars. But deterrence for who?

We outlawed Chemical weapons at the 1899 Hague Convention, but that didn’t work, they were used by all sides during World War I. We tried again 1925 with the Geneva Protocol and that was more successful, probably because of the horrors of the trenches. We reinforced the Geneva convention with the Chemical Weapons Convention in the mid-1990s. A lot of institutional effort has gone into banning chemical weapons and it appears to have (mostly) worked. This is particularly impressive given the traditional uselessness of international law.

Something seems to be working to deter people from using chemical weapons. Until now it hasn’t been occasional cruise missile strikes enforcing it. So what has? Why have we not seen more chemical warfare?

During the second world war both Churchill and Hitler restrained from using chemical weapons in the battlefield. This is despite Churchill being a fan of chemical weapons and Hitler possessing stockpiles. During the war there were few opportunities when either side could make use of the weapon decisively so this red line was never crossed. This has echoes of cold war mutually assured destruction. Only in the most brutal and atrocious wars have we seen chemical weapons deployed, like Iran-Iraq.

So even when states do engage in war, there is usually enough restraint available to not use chemical weapons. They don’t confer a large battlefield advantage and they make war more awful so they are mutually avoided.

But, there has been a secular decline in interstate conflict to the point where we don’t really see states going to war with one another anymore. Using chemical weapons takes a more developed institutional capacity than using conventional weapons. A key question in Syria is whether the rebels have the capacity to use chemical weapons, it’s not clear they do, whereas the Alawite state does. The decline of interstate conflict explains part of the decline of chemical warfare post-war as many combatants just can’t deploy them.

In conflicts between states with the capacity to develop and distribute chemical weapons, chemical weapons use is mutually deterred. However, in civil wars the odds of reprisal are less and the mutual deterrent effect is weaker. This may be where the US’s cruise missiles have a role to play.

So far, so abstract. But assume I’m right and that we are entering an age of civil, not interstate, war and that we need to redouble our efforts to discourage chemical weapons use by non state actors.

Obama hasn’t been pushed enough on these concrete example. I’m not saying there is no case for enforcing with cruise missiles an international norm against chemical weapons. The world is changing and all sorts of terrible policies might become good policies. But when you look at the specifics it doesn’t add up: the intermittent and mild punishment of (some) states for their use of (some classes) of chemical weapons to deter (some) other states and nonstate actors from using chemical weapons. Hmm…

So who are we actually deterring?

Only seven states aren’t full signatories of the Chemical Weapons Convention: Angola, Egypt, North Korea, South Sudan, Syria, Israel, Myanmar. There are other states we should add to this list too. The cases of the US, China, Russia, Taiwan and Libya are all instructive too.

Firstly, the US, China and Russia will do as they can and the weak suffer what they must as a consequence.

North Korea isn’t going to be deterred from anything. They have real weapons of mass destruction and have been quietly genociding their own people for some time.

Myanmar has just graduated from international pariah to exciting emerging market investment opportunity. They don’t need additional incentive to not gas people.

Israel used white phosphorous in Gaza and faced some time on the international naughty step, but I don’t believe Obama is directing his cruise missile suasion towards Israel.

South Sudan has only existed a two years. So I think their absence is more prioritisation than worrying.

In Angola, chemical weapons were used in the 1970s by the Portuguese. Following decolonisation Angola slipped into civil war which lasted until 2002 and during which it is likely chemical weapons were used (I remember no cruise missiles then, incidentally). So Angola’s absence from the treaty isn’t an incipient sign of chemical weapons atrocities, but there is concern that chemical weapons could be used in the future.

Libya was an international pariah, but had been welcomed back in the late naughties and had been making significant inroads in putting their chemical weapons beyond use.

Taiwan probably has some chemical weapons just in case China ever attacks. Their probably not going to get attacked because 1) trade codependency 2) their ally the US would kick up a stink. Bombing Syria is probably a good way to signal that using chemical weapons is a good way for Taiwan to lose a powerful ally. Having an ambassador us the words “using chemical weapons is a good way for Taiwan to lose a powerful ally” is equally effective, cheaper and (my favourite part of this plan) involved no piles of corpses.

Egypt has massacred lots of its people and continues to receive military aid from the US. I presume a missile strike on Syria will convince the Egyptian junta to stick to conventional mass murder. Success!

Terrorist nonstate actors are a more mixed bag. It seems likely that Islamist terrorists would use chemical weapons regardless of what the west wants because we already want to annihilate them. Once you’ve made someone a persona non gratis it becomes difficult to incentivise them with sticks and carrots.  Effect ambiguous, at best.

Other states with chemical weapons capabilities and future civil wars are interesting. Obviously, despite the security state’s vast surveillance and intelligence gathering we don’t know where all the chemical weapons are and because of the laws of physics we don’t know who’ll have them in the future. The taboo against chemical weapons usage is already very strong, as John Holbo says, just discussing cruise missile strikes will have an affect. Bombing Syria will probably makes their use slightly less likely, but their use is already very, very unlikely. A partial success.

Given the tiny marginal effect blowing stuff up in Syria will have I’m more convinced than ever that military intervention in Syria is a terrible idea. Obama set up a stupid red line. If he plans on killing people to cover for his own stupid mistake then he’s a monster.


CLARIFICATION: Yes, I know it’s “supposed” to be whom in the title. I think whom needs to die as it adds nothing useful to understanding and is therefore solely used to enable well educated people to look down at less well educated people. Welcome to my war on pronouns. Altogether safer than wars on abstract nouns.

Filed under: Foreign Affairs, Politics

Sweden and the West is still closed to Syria’s refugees


To much fanfare yesterday Sweden announced it would offer permanent residency to refugees from Syria in Sweden. That covers 16,000 Syrians and their families. 2 million Syrians are currently displaced out of a population of 20 million ravaged by civil war. Great.

Due to the current situation in Syria, a decision has been made by the Swedish Migration Board. This decision means that as a Syrian citizen or stateless person who has a temporary Swedish residence permit, you may apply for a permanent residence permit.


If the Swedish Migration Board grants you a permanent residence permit, your family may also be given permission to move here.Primarily, your immediate family (husband, wife, partner and children under 18 years of age) may be given residence permits in Sweden. Read more in the links below. For your family member to receive a decision as quickly as possible, apply onlineopens in new window.

This is an beefing up of a policy launched last year which offered some Syrian’s only temporary residence. Given the situation in Syria I’m pleased that Sweden has decided it would be immoral to deport people there. Presumably it’s quite difficult to even find willing pilots now.

The policy impacts the tiny number of people who have managed to make it from Syria to Sweden. There are 2 million people who are not so lucky, the internally displaced or camp dwellers of Turkey, Jordan and other Syrian border states. This policy, and others like it to be announced imminently worldwide,  will only help the very luckiest Syrians in the world. It’s another example of progressive politics helping those who don’t really need it.

Don’t think that this applies to all Syrians. That would be an insane policy for Sweden to unilaterally announce, even an extremist like me can see that. This only applies to those already there. The embassies of Turkey and Jordan are open for the application of residency permits, but you can only apply for asylum in Sweden itself. Good luck to those who have lost anything stumping up the airfare. Good luck getting the visa!

On the other hand, substantial funding is being provided for refugee camps. Up to June this year the UK had spent £50m on supporting refugee camps in other more generous countries surrounding Syria. Sounds like a lot of money, but when you consider each cruise missile launched costs about £1.5m the figures rapidly pale.

There is a lot of money available for war. Penniless refugees who make it to the west will be begrudgingly supported. But there is still not nearly enough support being offered. Just giving money and logistical support to refugee camps would be incredible. The amount were planning to spend on missiles could feed and clothe millions.

Instead of gesture politics for the few Syrian here we need a proper resettlement plan. Instead of peanuts, refugee camps need proper investment in infrastructure, public health and education. The UK has, to its eternal shame, forced Syrians in the UK to return to a civil war. Only a few weeks ago I was being told by a friend about a surreal deportation going away party they were having for a Syrian friend.

There are so many small, important, humane things that could be done to support the Syrian people that aren’t being done. Some people complained that seeing Labour MPs celebrating the government’s defeat at last weeks vote showed that politics is broken. Politics isn’t broken because the Labour party acted ungraciously, it’s broken because “doing something to help foreigners” means bombing them, not supporting them.

Filed under: Foreign Affairs, Politics,

Political economy trumps economics: Boeing versus BA, Airbus vs Emirates

In aircraft manufacture you see two huge firms, Boeing and Airbus. You have some smaller firms like Comac and Bombardier, but really its a two horse show. The four firm industry concentration is about 70%. That means 70% of the worlds aircraft by value is produced by just four firms. The vast majority of that is Boeing and Airbus. Can you say oligopoly?

This contrasts sharply with Airlines. The four firm industry concentration is only 20%. Not perfect competition, but pretty good. So good, in fact, the average European airline’s margin for the past few decades has been 0%. Aviation is one of the few industries where profit actually is competed away as you see in your textbooks.

There are two points to take from this.

The first is that irrational policies can have positive effects. The reason we have the competitive air market we have is because governments won’t allow airlines to consolidate. A firm from Hong Kong can own the electrical infrastructure of London,  but woe forbid British Airways’ iconic livery disappear. Nothing naturally keeps aviation fragmented, as its manufacturers show. Irrational attachment to a paint job can do the lord’s work and keep an industry competitive and prices down.

The other thing to take away is that the industry that matches the austrian just so story of recession is aviation. In good times airlines order lots of aircraft, in bad times they go bust but those planes don’t stop flying. Once billions of pounds of hardware have been delivered you have to use it, even if it destroys your industry’s profit margins, because if you don’t someone else will.

A more consolidated industry could retire planes earlier, purchase fewer planes or increase prices, but the hyper-fragmented and competitive industry prevents these tactics being employed. Note however, that the unsustainable boom isn’t the result of easy money, it’s capitalist competition that drives this dynamic. And airline executives hate it. Just look at the US where consolidation is advancing as large firms attempt to merge to drive up prices.

Whereas Duncan and Krugman lament that political economy trumps economics, I think we should take solace. At least it’s a mechanism! It cuts both ways, so while the political can get in the way of good policy it can also support it. When making economic arguments it will probably be best to put the political to the fore, even if it’s not your “best” reason.


Filed under: Politics

How swift or certain justice in Syria?

In criminal justice it is well understood that swiftness and certainty of punishment is more important than severity. Our strategy in Syria is giving us the worst of all worlds: swift but unpredictable and severe but counterproductive we are making the world and Syria more dangerous.

While lots of people are scared of another Iraq, the prospect seems to be receding. Cameron is taking a resolution to the UN with wording similar to that in UNSC 1973, authorising all necessary means to protect civilians, but the will to war doesn’t seem so strong as in 2003. Famous last words, as they say.

Instead Cameron, Hollande and Obama are all emphasising that it is necessary, perhaps sufficient, to strike hard and decisively to punish Assad to prevent future chemical weapons attacks. Even if this has little effect on the Syrian civil war itself it will underline the red line around chemical weapons use in this, and other conflicts. The argument is weak and sounds as though it’s been cobbled together in a hope it sounds coherent to justify a policy their gut feels is right.

Hundreds of people were killed last week in Ghouta by chemical weapons. It is too hard to say whether they were deployed with Assad’s direct say so but it looks very likely they were deployed by the government. It could have been a rogue commander or something more cynical ordered by Assad himself. The public still don’t know for certain, the UN have not officially reported, but Obama, Hollande and Cameron seem convinced. They may be party to incontrovertible evidence, but we have not seen it. In fact, from what we’ve seen the case for extraordinary action doesn’t seem strong enough, given the potential downsides.

Ghouta is the most deadly gas attack of the Syrian civil war, but it’s probably not the only one. There have allegedly been ghastly gas attacks going back to at least 2012, some of which may have been perpetrated by rebel forces. If we have seen “just” another gas attack, the red line crossed  must be very wide. Beyond Syria and looking back a few years, we see other, presumably lesser, chemical weapons being deployed without warranting death from above. The argument that Assad requires punishment, hard, certain and now is not very strong as a deterrent. I want him punished too, but not at all costs. White Phosphorus has been deployed by Israel in Gaza and by the US in Iraq. It may be that White Phosphorus is a lesser chemical weapon.

But that just leads us to the question: what’s so special about chemical weapons? They are horrific, but so is war. If we’re drawing arbitrary red lines around weapons of mass destruction, one that surrounds Ghouta, Halabja and Hiroshima isn’t logically more coherent than one which includes Gaza, Faluja and Nagasaki. It’s killing that’s terrible, a red line that includes Tahrir Square and the Pearl Roundabout would be better than one targeting some states targeting some citizens with some classes of weapons.

This is a roundabout way of saying that a limited and punitive intervention won’t work on it’s own terms.

If it punishes Assad enough to tip the balance of power definitely away from him he will become more desperate and may become more brutal in his campaign. He may eschew chemical weapons, but it doesn’t mean civilian casualties won’t escalate.  If it punishes Assad enough other states may look at their chemical weapons stockpiles and think: “what are my chances?” A rational actor would certainly revise their strategy, but they wouldn’t necessarily presume they can never use chemical weapons. Simply that they need to keep the UN further away; or ensure a higher kill rate to minimise witnesses; or keep its usage to small doses to maintain deniability; or to use one class of chemicals but dispose of the sarin; or… and so on.

A rules based international realm is a safer one, predictability and boredom are excellent things for humanity to aspire to. The reaction to the Ghouta massacre shows that our leaders aren’t heartless, but it also shows they aren’t governed by rules. In criminal justice the certainty of punishment matters more than its severity, if the international community want to set a precedent it’s too late. Firing cruise missiles at the bad guy feels like a just, rules based strategy, but it is not.

In criminal justice ensuring that punishment follows swiftly and predictably after a crime is more effective than sporadic but severe punishments. Swift doesn’t necessarily have to mean immediate, just without unnecessary delay. We are getting all of this wrong. The middle of a civil war is not the best time to mete out “precision” justice or “surgical” slaps on the risk. The logic behind the imperative to punish war crimes is a sound one, but the execution has been abysmal and won’t have the desired consequences.

Finally: Chris makes the good point that there are people in a better position to make this call than me, I’ve references this above. I don’t have enough information on what’s happening in Syria, what happened in Ghouta, what might happen if we bomb this or that to come to a truly an informed opinion. Three things make me disbelieve our leaders. One, my anti-authoritarian streak. Two, the paucity and inconsistency of the arguments that have been made, as I’ve described above. Three, I just don’t trust them anymore. Fool me once, shame on you, fool me twice, I, uh, won’t get fooled again.

And another thing: I’m aware the Russians and Iranians and Hezbollah et al are intervening there even if the west is not. I see that as evidence we should not enter a quagmire as much as I see it as evidence we should.

One more thing: I haven’t spoken about mission creep or the temptation of committing ground troops or the potential civilian casualties of any western punishment of Assad, or my favoured alternative; supporting refugees, because this isn’t the place. I suppose I will get to each of those if and when necessary.


Filed under: Foreign Affairs, Politics, , , , , , , ,

Syrian Reading List Bleg

Hello readers, since we’re about to start bombing somewhere can I request you tell me the best IR/war/Syrian blogs and tweeters to follow please?

Filed under: Politics

Tony Blair on Egypt and Syria: efficacy more important that democracy

To the surprise of nobody at all peace envoy Tony Blair, thinks we need another war, sorry, intervention in Syria. What he’s just said about Egypt illustrates why it has always been a terrible idea to listen to him.

The former prime minister said the use of chemical weapons by the Syrian government and the involvement of Iran in the civil war meant intervention was necessary.

“You’ve got the intervention of Hezbollah, at the instigation of Iran. The other big change is the use of chemical weapons. Once you allow that to happen – and this will be the first time since Saddam used them in the 1980s – you run the risk of it then becoming an acceptable form of warfare, for both sides,” he told the Times.

I hate to go on about underpants gnomes when we are perhaps only hours away from war but…this is the normal schema for middle eastern adventures, at least as sold to us plebs.

  1. Western intervention
  2. ???
  3. Liberal Democracy

I’ve not had much to criticise on step one or three, comparably speaking. The US and its allies can definitely defeat pretty much any developing state on earth. Liberal Democracy ain’t all it’s cracked up to be, but at least its an ethos man. It’s the middle bit that’s caused the problem. For problem read “pile of corpses.”

The middle steps have always been hazy, but the plan has always been to step in when our “duty to protect” kicks in and to lead the intervened state towards liberal democracy with local characteristics. I think it’s a testament to how awful things in Syria are that nobody is honestly suggesting we know what we would do next. Like a dog chasing a car nobody knows what to do once we’ve got one.

I’ve always kinda thought that Blair, Bush and their fellow travellers didn’t have a plan but hoped things would kinda work out. I think a lot of them are genuinely bummed it didn’t work out. Not Blair though, he seems to have dropped the commitment to Liberal Democracy altogether. Behold:

Tony Blair: “The events that led to the Egyptian army’s removal of President Mohamed Morsi confronted the military with a simple choice: intervention or chaos. Seventeen million people on the streets are not the same as an election. But it as an awesome manifestation of power.”

“I am a strong supporter of democracy. But democratic government doesn’t on its own mean effective government. Today efficacy is the challenge.”

Support for “efficacy” now trumps “democracy.” On a basic level I agree with Tony, that many people protesting matters and should be listened to (ahem), but what matters more in the developing world is bedding in democratic institutions. If the ??? ever meant anything it was the difficult bargaining and institutional development that has now stalled or regressed in Egypt.

So what are we left with now that Liberal Democracy has been ditched as an end goal and that we will not support any “messiness” following the intervention? That plan for Syria in full:

  1. Western intervention

Filed under: Blogging, Foreign Affairs, Politics

Six links

  1. Media Matters: Daily Beast Publishes Piece Suggesting Prison Is Pretty Great For Transgender People
  2. Daily Mash: Russia just so gay < so gay.
  3. Wall STreet Journal: North Korea Grapples With Crystal Meth Epidemic
  4. Pieara: What’s Wrong With Economics? < How do I get a gig there?
  5. New Book: Big Gods: How Religion Transformed Cooperation and Conflict
  6. FT: Hit puberty? Time to get LinkedIn < Society sucks

Filed under: Politics

Mechanisms, not morality, are driving interest rates to zero

“For low rates” is a bit strong, this is more “how low rates.” Show me how to push against this mechanism and I’ll shut up. So, this is my argument, once more:

  1. Saving is buying something durable now to sell in the future [1]
  2. Interest rates are just a way of expressing year by year the difference between current price and future price (plus some financial frictions)
  3. Currently lots of people want to buy durable assets
  4. In the future we don’t expect those durable assets to be worth much more than today
  5. This is the mechanism that drives interest to zero
  6. Only the existence of physical cash prevents interest rates going even lower

Ros Altmann kindly responds to my previous posts on savings, but I’m not sure I fully understand the critique. Ros is in favour of “responsibility, prudence, living for tomorrow as well as today” which are all noble intentions. But they don’t address the fundamental problem described above.

Saving is owning assets and then the liquidation of this position. Sometimes these assets are abstract rights: a state pension is ownership of a stake in the tax collecting power of the state, the liquidation the drawing of regular payments until death. A house is another more concrete example (haha). Depositing money in a bank and expecting it to be safe seriously limits the class of assets which can be owned and sold by the bank. The more people think about mechanism and the less they think about morality and models the better.

Ros concludes “If savers are all doomed and they just start taking risks and lose their savings (as many of them will because they are not equipped to take such risks and actually need their savings to live on) then everyone else is doomed too.” To which I reply, “welcome to the party, my friends and I have been here a while, pass the smartprice crisps.”


[1] Insert:
a) Putting money in a nice safe bank account is just a way of disintermediating this process to someone else
b) This is a form of financial opacity on behalf of banks to convince you they’re safe custodians of your cash
c) Likewise, the fact savers are lending money to someone to buy something on their behalf to later sell on their behalf is willfully denied by savers
d) All of these subclauses are probably regrettable but necessary

Filed under: Economics, Politics

When NGDP is Depressed, Employment is Depressed

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