Stumbling and Mumbling

The myth of the irrational consumer

We’ve seen house prices and shares plummet, unemployment rise and, according to the MPC (if not the data), the worst banking crisis since World War I. And how have consumers reacted?
By increasing spending. Today’s figures show that, despite the troubles of (quoted) retailers, retail sales volumes have risen 2% in the last 12 months.
How can consumers have been so resilient in the face of so much terrible news?
My chart shows part of the answer. It shows that before the crisis struck last year, consumers were, in effect,  behaving as if bad news were on the way. The ratios of retail sales to house prices and share prices reached low points in 2007. This meant that consumers, in aggregate, did not much increase spending in response to rising wealth. They behaved as if the rises in house prices and shares in 2003-07 were largely temporary. In effect, they were bracing themselves for bad times. The result has been that, as house and share prices fell, spending has held up, causing the ratios of sales to wealth to rise.
In other words, consumers - on average - are rational and forward-looking. They see trouble coming.  A now-classic paper expressed it thus:

Consumers tend to smooth out anticipated, transitory movements in tomorrow’s returns by factoring them into consumption today. When wealth is temporarily higher than its long-term trend with consumption and labour income, investors must be expecting returns on the market portfolio to fall and are holding consumption temporarily below its trend relationship with assets and income in anticipation of lower returns.

Although that paper used US data, Bank of England research has found a similar thing true for the UK.
This raises a devastating problem for managerialist ideology. It suggests that consumers - on average and in terms of behaviour rather than words - are much more rational than “experts” or government. Whilst the banking system has been driven to the brink of collapse, and government finances are in a mess, consumers have weathered the storm quite well in part because they - more than government or “experts” - saw it coming.
Now, I am not saying here that spending will continue to hold up.  Maybe rising unemployment will hit it. But the data suffices to disprove one theory that was popular a few months ago - that reckless consumers would cause a recession. The truth is that consumers have not been a cause of our troubles - though some (many?) will be victims of it.
Instead, the fact is that the crowd of ordinary people has been much more resilient than top-down organizations such as banks or government.
There’s a lesson here that won’t be learnt.

Sergeant, Tocqueville & democracy

John Sergeant’s performance on Strictly Come Dancing has reminded me of Alexis de Tocqueville.
Despite having the elegance of a spastic in a magnet factory (c. Gene Hunt), viewers have voted in droves for him - so much so that he’s withdrawn from the contest rather than make a continued mockery of it.
This is where Tocqueville comes in. He would not have been at all surprised by Sergeant’s popularity, as he knew that democracy rarely elects the best men:

The natural instincts of democracy lead the people to keep men of distinction from power…When one enters the House of Representatives in Washington, one is struck by the vulgar demeanour of that great assembly…Its laws are almost always defective or untimely.

Nevertheless, Tocqueville thought democracy conferred great long-term advantages upon a nation, by improving the public’s character:

A man of the people, when asked to share the task of governing society, acquires a certain self-esteem…He may not be more virtuous or happier than his forebears, but he is more enlightened and active…Democracy does nor provide a people with the most skilful of governments, but it does that which the most skilful government often cannot do ; it spreads throughout the body social a restless activity, superabundant force, and energy never found elsewhere, which, however little favoured by circumstance, can do wonders. Those are its true advantages. 

Here, though, is my concern. Do our current managerialist-democratic institutions really have the benefits Tocqueville thought?
I fear not. For one thing, being asked merely to put a cross in a box every four years, or to ring a number, is not sufficient to engender a superabundant energy. Quite the opposite, it can merely breed apathetic sense that our rulers must bow to our prejudices, however ill-informed they are.
It can also lead to an exaggerated sense of entitlement. We saw this in the witch hunt against Brand and Ross, with the elderly right-wing middle class thinking that the BBC should cater only to their own particular tastes.
It can also, as Mill noted in his warning against the tyranny of the majority, prompt the belief that we should meddle everywhere. The complaints that led to the sacking of Jon Gaunt were a manifestation of this; the proper response to him should be merely to ignore the fat, bumptious, oleaginous, simple twat, not to demand his firing.
Now, whether I’m right or wrong in seeing and decrying these effects is perhaps a secondary issue. What matters is the fact that we overlook the extent to which institutions shape character.

Reg Varney's role in economic history

The death of Reg Varney has rightly led to many tributes. However, his largely pernicious - albeit inadvertent - contribution to economic and political history should not go unnoticed.
His portrayal of Stan  Butler did much to perpetuate the image of the 1970s worker as a bone-idle work-dodger; we forget today just how enormously popular On the Buses was. And this in turn might subconsciously have contributed to the popularity of Thatcherism. How many of those who, when asked by Tories in 1979 whether the working class had become too big for its boots, conjured up a picture of Stan Butler and so voted for Thatcher?
There’s more. As Andrew reminds us, Reg Varney was the first man in the world to use a cash point machine. In doing so, he might have kicked off two effects.
One is a tolerance of inflation. One of the drawbacks of inflation is that it forces us to economize on holding cash, as inflation erodes its value. We therefore make more trips to the bank, incurring what economists call shoe-leather costs - costs which are more significant than you might think. It was for this reason that Mr Varney’s less illustrious near-contemporary Milton Friedman thought that the optimum rate of inflation was negative.
However, the invention of the ATM helped make it much easier to get cash out of the bank. This fall in shoe leather costs for technological reasons offset part of the normal cost of inflation, which helped make people less intolerant of it.
Is it really a coincidence that inflation began to rise as the cash point machine, as popularized by Mr Varney, became more widely used? I think not.
There’s a second effect of its spread, however, which has only become appreciated in light of the rise in behavioural economics.
The easier availability of cash has reduced one constraint on our spending. Before Mr Varney used the cash point,  impulse buying of good or sessions down the pub were constrained by the fact that cash was hard to obtain. After that fateful day, however, the constraint came down. If you think of consumers as rational far-sighted maximizers the effect on spending should have been minimal. But if people lack self-control, the spread of the ATM would have raised spending.
Maybe, then, Mr Varney is partly to blame for the low savings ratio.
His impact upon the economy has, therefore, been arguably quite malevolent. But then, he is not the only great TV character of whom this can be said.

If I were George Osborne...

George Osborne says we are in danger “of having a proper sterling collapse, a run on the pound.”
If I were he, I would not have said this. If we get a genuine run on the pound, Osborne will win even if he had not made this remark, as the fall will reflect discredit upon Labour’s economic record. But now, if we don’t get such a run, Osborne will be accused of being an immature hysteric with no grasp of economics.
So his comment doesn’t make sense in cost-benefit terms.
Instead, if I were he, I’d make two different points.
1. The current weakness in the pound shows that the market doesn’t expect Brown’s fiscal stimulus to work.
Put it this way. There are loads of examples of increased government borrowing being associated with a stronger exchange rate. Most famously, the Reagan deficits of the early 80s saw the dollar boom. There’s a simple reason for this. If markets expect looser fiscal policy to boost economic growth, they’ll expect higher short-term interest rates and a stronger demand for money, which are good for currencies.
That sterling’s so weak - and the market expects low short-term rates even in late 2010 - suggests therefore that it doesn’t expect the economy to gain a boost from Brown’s fiscal policy.
It’s in this context that the Tory charge that Brown failed to fix the roof in sunny days makes sense. Public borrowing is so big that any tax cut or spending rise can only be temporary. And because everyone knows this, there’s a danger that they will respond to the fiscal stimulus by saving more in anticipation of future tax rises or spending cuts, in which case the stimulus will fail.
2. The days when governments could get away with borrowing heavily are coming to an end. In recent years, there has been heavy demand for gilts from overseas, as the Chinese have looked for places to invest their surplus savings, and oil exporters have invested their revenues.
But this buying is already slowing down. And it could continue to do so. As the Chinese government budget slips from surplus to deficit, it will absorb some domestic savings. And lower oil prices will give middle eastern countries less to invest.
So although we’ve been able to borrow cheaply recently, we might not be able to continue to do so - especially if/when investors risk appetite returns and they sell safer assets such as government bonds.
In this sense, Brown’s borrowing is indeed irresponsible, as it leaves future generations exposed to the risk of having to pay higher borrowing costs.
These allegations are arguable. But they make more sense than forecasts of a sterling crash.

Baby P: some questions

I wasn’t planning to write anything about the Baby P case, thinking it tasteless to pontificate about something so horrible. But since others have lowered the benchmark, here are four questions.
1. Aren’t there a lot of cognitive biases here? Camilla Cavendish says a mix of groupthink and Bayesian conservatism may have led social workers to under-estimating the danger Baby P was in. But aren’t we also at risk of committing the hindsight bias?  With hindsight, things look as if they were inevitable when they were in fact only vague possibilities?
And of course, there’s also the confirmation bias. Every pub bore who thought social workers were Guardian-reading bed-wetters thinks this shows their ineptitude.
2. Aren’t we holding social workers to impossibly high standards? I mean, we don’t expect the police to catch all or even most criminals, we don’t expect hospitals to avoid all unnecessary deaths, and we certainly don’t expect politicians to make perfectly rational judgments. So why expect perfection from social workers? The fact is that they have to take huge decisions under immense uncertainty. Errors are inevitable. The question is: what sort of errors should they make? Should they err on the side of intervening in which case they might prevent abuse but at the expense of breaking up some tolerable families? Or should they regard taking children into care as a last resort, and so risk children’s lives? In conditions of necessarily limited knowledge, one of these mistakes will be made?
3. Have we drawn the line in the right place here? The legitimate* reason for hating seeing children put into care is that they do so awfully badly there; four-fifths end up with no GCSEs.
But is this because state care is worse than even poor parenting? Or might it instead be due to selection effects? If kids from only the very worst parents go into care, you’d expect them to do badly at school simply because they have a poor genetic inheritance and/or a bad start (pdf) which perhaps even good care can do little to ameliorate (except at a huge price?) If this is the case, then our aversion to putting kids into care rests at least in part upon a simple fallacy - post hoc ergo propter hoc - and we are endangering lives unnecessarily.
4. The DCSF says “proper procedures” were followed after it got a complaint about Haringey social services in 2007. This has naturally caused outrage; how can “proper procedure” lead to the death of a child?
So how should we interpret it? One possibility is that this is mere procedural fetishism - the belief (not confined to the public sector) that as long as the boxes are ticked and the papers in order, then outcomes don’t matter.
But there’s a more benign possibility. Under uncertainty, errors will be made. In this case, we cannot judge processes by single outcomes, as even the most effective process will lead to bad outcomes sometimes. Instead, the best we can do is to have in place a process that, on average, minimizes error. And in this case, following “proper process” will be the right thing to do not because it will always achieve the right outcome - nothing can do that - but because it minimizes error. If so, the DCSF is right.
But how can we tell which process minimizes error? We can’t run market-style experiments in which many differing processes compete alongside each other.
Which leaves us vulnerable to the possibility that the claim that “proper procedures” are in place is no more than a mix of unscientific wishful thinking and special pleading. 
I don’t pretend to have any answers here. All I want to do is raise the possibility that perhaps a tiny bit of progress can be made by at least avoiding the most egregious intellectual errors.
* Is keeping families intact really an end in itself? I'm not sure.

Inequality, Veblen and the crisis

Is inequality to blame for the US financial crisis?  To see why it might be, start - as all American stories must - with Calleigh Duquesne. She drives a Chrysler Crossfire, which probably costs almost half her annual salary. It’s implausible that her British equivalent - would that one existed - would own something so flash.
Why the difference? Thorstein Veblen had one answer. In capitalist society, he said:

property now becomes the most easily recognised evidence of a reputable degree of success as distinguished from heroic or signal achievement. It therefore becomes the conventional basis of esteem. Its possession in some amount becomes necessary in order to any reputable standing in the community. It becomes indispensable to accumulate, to acquire property, in order to retain one's good name.

Americans, then, buy conspicuous consumption goods in order to signal to others, and themselves, that they are worthy of esteem.
And Americans are more prone to do this than others because Americans, much more than Europeans, believe wealth comes from hard work rather than luck; even the poor remain hopeful of moving up. It is a cliché that Americans see a flash car and think; “if I work hard I’ll get one of those” whereas the British think “tosser.” 
This naturally leads them to save little and spend much - to get into debt.
And this is where inequality comes in. As this rises, the less well-off feel the need to stretch further to appear to keep up with the wealthy. A 1000 square foot house might be adequate when others live in 1500 sq foot houses. But it’s not when they live in 3000 sq foot ones.
As inequality rises, then, so savings fall and debt rises as people scramble to keep up with the rich. The result is a greater vulnerability to financial crisis caused by people defaulting on loans.
This story is beautifully told by Jon Wisman in this new paper.
What’s the evidence for it? A few things:
1. The US has a much lower household savings ratio than most other developed countries. Is it really a coincidence that the US also has both a greater belief that wealth is due to hard work and greater inequality?
2. There have been three episodes in US history of rising inequality: the late 19th century, the roaring 20s and the post-1980 period. All were accompanied by general consumer booms.
3. Since 1980, the US savings ratio has fallen sharply.  What, other than rising inequality, might explain this, given that many other developed economies have not experienced such a fall?
It is, therefore, at least plausible that measures to prevent this crisis happening again would have to include policies to reduce inequality.
However, although nationalization and “Keynesianism” are back in fashion, equality isn’t. Funny that.

Cameron's tax con

The Tories’ call for tax breaks to employers is a scam. A fiddle. A con. A fraud.
They propose that firms who take on a worker who has been unemployed for over three months be given a credit against national  insurance contributions. This will be £2500 for a full-time worker, and less for a part-timer. They claim this will create 350,000 new jobs, and that the plan will pay for itself in savings on unemployment benefit.
Nonsense.
What this ignores is the enormous deadweight cost of the plan. Hundreds of thousands of jobs are created every year even in declining industries or in recessions (pdf). By the Tories own figures (pdf), 1.5 million people unemployed over three months left the unemployment  count in the 1991 recession. And in September this year - a month which saw the biggest rise in net unemployment since 1992 - 227,400 left the count*.
This huge job creation means the Tories’ plan merely gives taxpayers’ money to employers for doing what they would do anyway. That’s not revenue neutral.
Of course, if this plan were implemented the Tories could no doubt point to tens of thousands of claims for the tax credit. But these claims would consist main of jobs created anyway, not of jobs created by the plan.
Granted, the plan will genuinely create some jobs, insofar as it lowers the cost of hiring workers. The extent to which it will do so depends upon the price elasticity of demand for labour.
But we know this is low. This is because the national minimum wage has not priced many workers out of jobs. Some, yes. But not many.
And here the Tories have form for exaggerating the price elasticity of demand for labour. Back in 1991 Michael Howard claimed that a minimum wage would destroy two million jobs. He over-estimated the response of labour demand to prices. Cameron is doing the same thing.
This said, there is one way in which this idea might create jobs, maybe many.  Remember there are tens of thousands of firms which expand even in recession**.
Put yourself in the position of an employer in one of these. You can expand in one of two ways - by increasing the hours of existing workers, or by taking on new staff. At the margin, Cameron’s plan encourages you to do the latter.
This might create lots of jobs. But it does so by depriving existing employees of the chance to work longer hours and earn more.
Now, this might be a good thing in one sense. The unemployed are much less happy than the employed. So getting them into work, even at the expense of others being less able to work longer hours, is a net gain in well-being.
What it is not, however, is revenue-neutral. If someone finds work only because others work shorter hours than they otherwise would, the benefit to the tax-payer is nugatory - and maybe negative depending upon the individuals concerned***. This is because the Exchequer loses the tax revenues it would have got, had existing workers worked longer hours. Add the employers' NIC credit to this and the tax-payer loses. (This is not the only way in which the plan is costly: Hopi describes another.)
Cameron’s plan is, then, a con. It’s a hand-out to bosses at the expense of tax-payers and low-wage workers.
* Table 10 of this pdf. Not all these went into work by any means. But many do. 
** Table 3.1 of this book shows that in the 1989-91 recession half of all firms actually increased employment and that 85% of the job losses in the 1989-91 downturn occurred in just 10% of firms.
*** Cameron claims, following David Freud, that the tax-payer gains £8100 net if someone moves from JSA to work over 12 months. But this estimate depends a lot upon who it is that moves. For example, if someone from a married couple with two children moves into a 30-hour job on the minimum wage, the taxpayer gains only £100 a week - £5200 a year - as it pays child tax and working tax credits. The gains from a single person moving are greater, as he gets no tax credits. But the gains from a lone parent moving are smaller. And these estimates assume a job is created, rather than carved out from other workers working fewer hours.

Forget Bretton Woods

Will Hutton has a wonderfully silly idea:

Brown should also go back to Bretton Woods basics. He should propose the end of floating exchange rates and argue for a system of managed exchange rates between the euro, dollar and yen to bring back more predictability into the system.

Tim’s reaction to this is right. To see just how silly it is, let’s assume - heroically - that such a system could work and that the UK had been pegging sterling in recent months.
If this had happened, the Bank of England could not have cut interest rates, because it would instead have had to set them higher to stop sterling falling. Insofar as lower official rates have worked at all, this would have exacerbated our downturn.
How might this have been avoided?
One possibility would be for sterling to have been pegged at a low rate. But this would have exacerbated the earlier inflationary boom, as the Bank would have had to keep rates low to keep sterling down.
Another, contrary, possibility is that a sterling peg would have stopped the boom in the first place. This is because policy-makers would have feared that a current account deficit would have put pressure on sterling, and so set monetary and fiscal policy tighter a few years ago to stop it emerging. But this would have choked off not just the housing boom, but also investment in productive capital goods.
But would even this have been feasible at all? Maybe not. Imagine that a big country saves more than it invests, runs a current account surplus. It must then buy overseas assets. If it buys UK ones there’ll be incipient upward pressure on sterling. Under floating exchange rates, sterling merely drifts upwards. Depending upon how much this depresses inflation, domestic interest rates may or may not come down.
Under fixed exchange rates, however, interest rates must fall to stop sterling rising. And this threatens to cause an even bigger boom in house prices, and hence - eventually - a bigger bust.
Such a scenario is no mere theoretical possibility. It is, roughly, what happened to the Spanish property market after the country joined the euro, with results that are now being felt.
And the big country is, of course, China. The question of how the global economy could cope with its current account surplus would have been a much bigger headache under fixed exchange rates than it has been under floating ones. 
Trying to peg exchange rates would be like squeezing on a balloon. You’d reduce volatility in one place, but merely increase it in others.
This would be worse than pointless. The great thing about exchange rate volatility is that it’s relatively harmless. One of Paul Krugman’s smartest sayings (of many) is that “the exchange rate has so little effect in part because it fluctuates so much.”
So, why not leave volatility in the place where it does least damage?

The audacity of cynicism

Everyone’s gone over that speech from Hazel Blears. But there’s one point I want to pick up - her conclusion that our political culture can be “rescued from cynicism.” For me, though, the problem is the exact opposite - that there’s not enough of the right kind of cynicism.
By this, I don’t mean cynicism about politicians’ intelligence or motives. Instead, what I mean is that people aren’t cynical enough about the prospects for achieving leftist goals through conventional parliamentary routes.
Blears’ speech itself highlights the problem. She says:

The modern state must… be devolved, decentralised, and dedicated to giving people the power to take on an increasing share of the responsibility for their own lives, and authorship of their own destinies….
Increasingly, modern society, in all its variegation, granularity and complexity, is best served by a decentralised, democratic state, and public services best run from the bottom up.

But despite 11 years in office - the first few of them with a massive majority and impotent opposition - this government has made next to no progress at all in this direction. Or indeed in the direction of leftist goals by other definitions. Income equality, for example, is barely different now from 1996-97.
This suggests that ownership of constitutional powers is insufficient for a government to achieve leftist ends. There are many other obstacles to this.
One set are the cognitive biases that combine to lend support to state capitalism. The availability bias creates a bias against liberty, as the alleged benefits of restricting freedom are always clear whilst the benefits are dispersed. The salience heuristic means its easier to blame immigrants for our ills than bosses or structural forces. The status quo bias means current evils, however big, are preferred to unknown ones, however small. And a variety of attribution biases, such as the valence effect, combine to provide hostility to redistributive taxation even amongst those who aren’t rich themselves.
Blears’ speech gives another obstacle. “Groups and institutions with power are seldom pleased to relinquish it” she says, rightly. Bureaucrats will always think of ways of retaining power for themselves and denying it to the people.
It's not just bureaucrats who can thwart the left’s objectives. Attempts to improve social mobility run into the problem that rich parents will naturally do everything they can to transmit advantages to their children. The Ross-Brand affair shows the power of the right-wing press.
And of course, there is the power of capitalism itself. A successful capitalist economy requires that businesses retain “confidence.“ Policies that jeopardize “confidence” - be they regulation, sustained full employment or redistributive taxation - will therefore be ruled out.
But the interests of capital are fickle. Why are part-nationalization of banks and “Keynesianism” now fashionable? It’s not because they have triumphed in a lengthy intellectual debate. It’s because it is thought there is no alternative to them if capitalism is to survive.
Herein lies a lesson the left have not learned from the financial crisis. Whilst capitalists use the language of necessity to justify their favoured policies, the left remains in a Nietzschean fantasy world in which agency is sufficient, believing it can succeed if only it can find a superman with a strong enough will. Hence the mania surrounding Barack Obama.
Such faith in human agency, and oblivion to the enormity of the structural obstacles the left faces, is a massive manifestation of the fundamental attribution error. On this point, we need more cynicism, not less.

New Labour's class hatred

I don’t think anyone has grasped the full gob-smacking level of imbecility and venality within this:

Ed Balls, the children's secretary, and Yvette Cooper, the chief secretary to the Treasury, have launched an attack on the so-called London living wage – the £7.45 an hour recommended minimum for all workers in the capital. They claim it would be "artificial, inflationary" and not "necessary or appropriate."

Now, there is a reasonable objection to the living wage. But it's not the one Balls makes. To call it inflationary is just moronic.
For one thing, worrying about inflation today is like worrying about drowning when your house is on fire. And for another thing, higher wages are not inflationary. What’s inflationary is when higher wages lead to higher prices. And this can only happen if aggregate demand - as set by monetary and fiscal conditions - allows it.
So, if you must worry about inflation, you should therefore oppose the monetary expansion which is part of the bank bail-out, and cuts in interest rates.
Funnily, though, I’ve heard no squeak from Balls opposing the CBI’s call for a full point cut in Bank Rate.
What Balls seems to be saying - contrary to basic economics - is that it is only workers’ demands that are inflationary, never bosses'.
Now, on its own this would be a mere individual pathology. But it’s not alone. Let’s put it alongside these:
1. Mandelson comes straight from taking hospitality from an oligarch to opposing more flexible working conditions.
2. In that oooh so butch speech last month, Straw said we should be “crystal clear about what the public expect the justice system to do on their behalf - to punish those who have broken the law.” He omitted to add that this does not apply to arms dealers.
3. Under New Labour’s tax system a single person earning £250 a week pays more tax (table 1.1d of this pdf)  than someone inheriting £600,000.
There seems to be a pattern here. New Labour defends the interests of the rich - however they acquired their money - whilst attacking those of the poor, regardless of any principle of logic or justice.

The state vs bad parents

Tim opposes the Dutch proposal that “unfit mothers” be forced to take contraception. I fear he might be a little hasty. The idea addresses a legitimate question.
The fact is that bringing a little scrote into the world is imposing a burden onto all of us. And it’s quite legitimate for us to limit people’s right to do this.
Let’s draw a parallel with immigration policy. Most people in the UK favour immigration controls on the grounds that immigrants impose costs onto the rest of us - through, say, higher public spending, lower wages for the unskilled or just congestion.
But it’s highly arguable how great these costs are. What’s not at all arguable, though, is that a badly brought-up child will impose costs upon us, in the form of its criminal behaviour or benefit claims.
The case for the state to curtail bad parents is, therefore, stronger than the case for immigration controls. As the greatest Liberal of all said:

To bring a child into existence without a fair prospect of being able, not only to provide food for its body, but instruction and training for its mind, is a moral crime, both against the unfortunate offspring and against society; and that if the parent does not fulfil this obligation, the State ought to see it fulfilled, at the charge, as far as possible, of the parent.

Where I agree with Tim is that the Dutch proposal gets the enforcement mechanism totally wrong. The state just does not have the information to know who is or isn’t an “unfit mother”, and the attempt to do so just risks equating “unfit” with “poor.”
A far better mechanism would be that proposed by Mill - that parents be fined if their children do badly at school. This allows people to decide for themselves whether they are fit to be parents.
Put it this way. Being a bad parent imposes external costs upon others. So shouldn’t there be a Pigovian tax upon it?

Recession & social mobility

What impact does recession have upon social mobility? Polly Toynbee baldly asserts that the effect is adverse:

What happens to social mobility now depends on the depth of the recession…If there are no jobs for young people leaving school, university or apprenticeships, there could be another lost generation.

I’m not sure things are so clear. In theory, the impact of recession is ambiguous.
It is the case that recessions do have a long-term effect on earnings. As this paper (pdf) shows, people who enter the labour market in bad times experience lower subsequent earnings than those who enter it in a boom.
But the implication of this for social mobility is ambiguous. The authors estimate that the effect is more adverse for lower-ability people - as smarter graduates who find themselves in a bad job are more able to move upwards later. It is only if these smarter graduates are from a higher social class that social mobility suffers. And there’s no reason to suppose they are.
Instead, there are two other routes through which recessions might reduce social mobility.
1. Recessions are buyers’ markets for labour. This permits employers to discriminate in favour of people from poor backgrounds .
2. Recessions usually raise unemployment disproportionately among younger unskilled workers. This might lower social mobility insofar as it means these get less on-the-job experience and therefore get less chance to move onto better-paid work.
But it’s not obvious how powerful a barrier to mobility this is. Even in good times, it’s prodigiously rare for people to from postboy or cleaner to managing director. More likely, low-skilled work is just a stepping stone to other bad jobs or the dole.
What’s more, our class position is to a large extent (pdf) set before we enter the labour market. It is education, not the labour market, that is a force for social mobility. And there are three ways in which recessions might increase the scope for education to raise social mobility:
1. Insofar as recessions hurt the high paid - a claim usually exaggerated - they might reduce demand for private schooling.
2. Students from poor backgrounds might be more likely to stay on  in education if there are no jobs to get. Had there been work for 16-year-old school-leavers in Leicester in 1980, I might well have left school and perhaps not been as upwardly mobile as I have been.
3. In cutting jobs in the private sector, recessions might increase the supply of more able graduates into the teaching profession. And better teachers (pdf) in schools in poor areas help improve social mobility.
In theory then, it’s possible that recessions might improve social mobility. And because social mobility is so hard to measure, there’s no hard data to help us either way.
I suspect, then, that Polly is exaggerating the importance of recession. Instead, I side with Robert E. Lucas:

Policies that deal with the very real problems of society’s less fortunate….can be designed in total ignorance of the nature of business cycle dynamics. (Models of Business Cycles, p105)

Immigration & wages: more evidence

Does immigration cut wages? Here’s some new evidence.  Stephen Nickell and Jumana Saleheen estimate that a five percentage point rise in the proportion of immigrants working in a particular occupation  leads to a fall in wages in that occupation of 0.2%.
This is statistically significant, but hardly economically so. It means that 1.5 million new immigrants would cut average wages by less than 3p an hour.
However, all this effect is concentrated in low-skill service sector occupations, such as retailing, cleaning or bars. Here, a 10 percentage point rise in the immigrant workforce as a share of the total is associated with a 5.2% fall in wages.
Is this significant enough to justify restricting immigration? I’m not sure:
1. There are lots of others things which have depressed unskilled wages in recent years - globalization, technical change, the decline of unions and the fact that new technology allows efficiency wages to be replaced by direct control. It could be that failure to control for these leads to an over-estimate of the impact of immigration.
It's odd to focus so much upon immigration when considering causes of falling relative wages.
2. This paper (pdf) finds that the main effect of immigration is to reduce the wages not of natives but of previous immigrants; the Polish cleaner cuts the wages of the Nigerian cleaner.
3. Even if immigrants do reduce wages of unskilled natives, it doesn’t follow that immigration controls are the best policy response. These have a deadweight cost, and might not work, as restricting non-EU immigration might merely cause a rise in migration from the EU.
It might instead be that a better response would be tax or benefit changes to help those on low pay.
So, my Bayesian prior remains - if you want an argument for immigration controls, you can’t find it in the economic research.

Social mobility: an uphill battle

Talk about clutching at straws. The Cabinet Office claims that social mobility is improving, on the grounds that there has been “a statistically significant decline in the importance of family background on educational attainment."
The  evidence for this lies solely on page 36 of this pdf, which cites an as-yet unpublished paper estimating that the correlation between family income and GCSE scores fell between 1986 and 2006.
However, the correlation is still higher than it was in the mid-70s, and is astronomically high in absolute terms - around 0.8.
This is despite the huge efforts New Labour has made to improve schooling.
Which raises the question. Could it be that efforts to improve social mobility just don’t justify themselves in cost-benefit terms?
The fact is that if a government wants to increase equality of opportunity - to weaken the influence of family background upon people’s life chances - it must fight against one of nature’s most powerful impulses, parents’ desire to do the best for their children. Because rich parents are better able than poor ones to do this, the battle to improve social mobility is a viciously uphill one.
Just consider the policies, some of which are sketched in the Cabinet Office report, necessary to improve equality of opportunity:
- more equal pre-natal care, because low birth weight is associated with poor cognitive development:
- better pre-school child care:
- a school system that provides better education for poor kids than rich ones;
- a social structure that ensures that a poor kid, even if s/he gets good GCSEs, has aspirations as high as richer kids;
- a labour market which is not class biased, which does not confer advantages upon those with the right contacts, accent or “soft skills”;
-  career ladders within companies that allow people from poor backgrounds to progress as well as those from richer ones;
- a steeply progressive inheritance tax.
Many of these policies are just infeasible or enormously expensive.
And what would be the benefit of them - to give a handful of ambitious poor kids (I write as one who was once one of these) the chance to scramble up the greasy pole?
Here’s my question. Wouldn’t it be better, in cost-benefit terms - for egalitarians to focus more upon reducing inequalities of outcome?
More progressive taxation, allied to an attempt to dismantle organizational hierarchies, might be far easier ways of achieving equality than costly and vain efforts to improve social mobility.
The idea that greater equality of opportunity is somehow more feasible or more desireable than greater equality of outcome is, surely, a huge error.

The £45 trillion government "debt"

Guido asks why unfunded public sector pension liabilities are not counted as government debt.
There might be a simple reason for this - future pension payments are, in practice, no different from any other form of government spending.  We don’t think NHS spending in, say, 2020, should count as government debt today. So why should pension payments in 2020 count?
Two answers to this won’t do at all.
1. Government has a legal obligation to pay future pensions, in a way it doesn’t have to pay for the NHS in 2020.
Only a petty-minded lawyer would think this a meaningful distinction. If the government were to try and stop paying for the NHS it would run into at least as much trouble as if it tried to stop paying public sector pensions.
The government is obliged  - by political pressure, like it or not - to pay for a vast number of things in future.
2. Future spending on pensions is known today, whereas NHS “liabilities“ are not.
This is meaningless simply because it would be absurdly reckless to value an unknown liability at zero.
So, let’s do a back of the envelope calculation. Let’s assume the government is obliged, by political demands, to spend fourth-fifths of its current spending (£566bn this FY according to the Budget), the other fifth being waste or things it can cut without huge objection.
If we assume this grows 4% a year, and we discount future spending by 5%, then the government’s total liabilities are £45 trillion. That’s a debt GDP ratio of 3000%. And I've erred on the low side here.
Does this mean the government’s bust?
Of course not. It has offsetting assets - the net present value of future taxes.
Now, one might object that the government’s future spending will become very burdensome - due not only to future public sector pensions, but to the pressures an ageing population puts upon the NHS and state pensions. But all developed economies face this problem.
And Guido would of course argue that government should make much more effort to shrink its activities, to reduce that £45 trillion liability.
I have some sympathy for that view.
What I have no sympathy for is the pretence that a political choice is a mathematical necessity. It’s not.