Baker's Dozen -

‘Conservative-led’? Or just Conservative?

Written by Alex December 29, 2011

It’s been a year since Ed Miliband’s shadow cabinet diktat to stop using the word ‘coalition’ to describe the current government. The preferred term is ‘conservative-led’, chosen – apparently – to highlight the rightwing agenda of the government and the impotence of the Liberal Democrats in the coalition.

A year on and it’s still bloody irritating, for three reasons:

First, it is clumsy and rather meaningless (if I were crueller, I’d make a barbed comment about Ed Miliband’s leadership here). The “-led” sits at the end of the phrase awkwardly; the sort of language which is rich in sub-text to policy wonks but rather vacuous to the rest of us. Orwell counselled against using a long word where a short one will do. “Conservative-led” is a syllable too long.

Second, I’m not convinced of the reasons for its use. If Labour wanted to highlight the rightwing agenda of the government and the impotence of the Liberal Democrats in the coalition, why not just call it a Conservative government? Airbrushing the Liberal Democrats from Labour’s attacks would make the point in a far more compelling way.

Yet I think there’s a serious flaw with Labour trying to woo disaffected Liberal Democrat voters by downplaying attacks on the party. Winning the next general election outright will require voters to switch from the Conservatives, Lib Dems, Others and apathy (possibly the hardest task faced by politicians). The sorts of Lib Dem supporters which are likely to be uncomfortable with the coalition are unlikely to switch to the Conservatives or other parties on the right. Labour needs to gamble that it is the natural home of such support. The important thing is make these voters disaffected. I don’t see why direct attacks on the party shouldn’t be a part of Labour’s tactics.

Finally, the phrase irritates me because it is fully consistent with the dog-eared strategy Labour has employed for the best part of thirty years: ‘Tories evil, Labour good’ / ‘Same old Tories’ etc. There are many within the party that are still fighting battles of yore. The fact that David Cameron became Prime Minister by remoulding the Conservatives is one that eludes most on the left. There is something deeply unattractive about such bitter and shrill ideological attacks.* And such simplistic narrative is not without its own downside risks.

*This is true of zealots in all parties, not just Labour.

12.29.2011 // Leave a comment // Continue Reading »

Thoughts on the public sector strike

Written by Alex November 30, 2011

I’ll declare my interest up-front: a few weeks ago I became a civil servant and have already started contributing towards my public sector pension. However, I’m not a member of a union so can’t take part in the strikes today.

The defined benefit pension available to me is a career average scheme (long gone are the days when public sector final salary schemes were open to new members). Switching members of final salary schemes to career average schemes was one of the main proposals of the Hutton Report, so I’m not really affected by that change.

Equally, I’m of a generation that probably has a different expectation about (a) retirement age and (b) retirement income options. I’m relatively pragmatic about the need to raise the age at which social security payments kick in – for example, I’m quite attracted to the idea of linking the state pension age to life expectancy. And I’m expecting fully to be impoverished when I’m older (and trying hard to do what I can now to avoid that). So I struggle to get too worked up about Hutton’s proposals to tinker with the terms of public sector pensions to increase the retirement age and increase contributions (that may also have something to do with the fact that retirement is some forty years away).

As my first experience of pensions was the defined contribution scheme I joined with my first employer, I’m fully aware of the paucity of such schemes in comparison to defined benefit schemes. I’m aware also of the lousy returns on equities in recent years (I think my total return over the last three years is about 3%).

Finally, I appreciate the need to ensure sound public finances. The OBR report published yesterday forecasts unfunded public sector pension liabilities to rise from £4.0bn this year to £12.0bn by 2016/17. That implies higher taxes for me in future, so I’m not disinterested.

And yet there are several reasons why, even though I’m not personally concerned about the pension changes, I’m supportive of those who have decided to strike.

Firstly, pensions are promises. The government is proposing to significantly alter the terms originally offered to scores of public sector workers – i.e. they are reneging on aspects of the original promise. That’s a real issue for those nearing retirement (less so for those who are relatively new to the schemes).

Secondly, while in absolute terms the value of the unfunded public pension liability is rising, it will decline relative to the size of UK GDP. That’s important because, in the long run, it makes the liability more affordable.

Thirdly, I think some public sector professions are right to be concerned about the prospect of having to work until they are nearly 70 to be able to claim their pension entitlement. My sister is training to be a teacher and views the prospect of teaching until she is 68 as potentially damaging to both her and to the students she will teach.

Fourthly, public sector pensions are an important part of public sector remuneration. I know from my own experience that my pay is around 30-40% lower than I could obtain in the private sector currently. My public sector pension does not fully close that gap. And yet I’m much better off, relatively speaking, than many frontline workers, with whom I have great sympathy.

Fifthly, social security entitlement (i.e. state pensions) is the elephant in the room. It is the unfunded liability of those that will become truly unaffordable without significant changes. Politicians of all colours have persistently failed to address that issue.

Finally, I tend to agree with the argument put forward by the unions that comparison with private sector pensions schemes are unhelpful and will result in a race-to-the-bottom.

PS One of the most irritating aspects of this whole dispute is that the rhetoric from politicians and sympathetic commentators seems to imply that public sector workers are a different group from taxpayers. Public sector workers are taxpayers too. That should have important implications for political parties’ tactics in relation to this strike.

11.30.2011 // 1 Comment // Continue Reading »

Student loans: is debt aversion really that important?

Written by Alex November 24, 2011

There are several research papers which suggest that debt aversion is a material factor for young people when deciding whether or not to go to university (some even advocate calling student loans something else to increase take-up). Debt aversion is regularly cited in opposition of changes to higher education funding which shift the balance of funding towards the student from the state (e.g. the Browne review).

But new research from Canada suggests that debt aversion isn’t actually significant in higher education decisions.

Using more sophisticated survey techniques than previous studies (which appear to ask students bluntly whether they would prefer grants or loans), Cathleen Johnson and Claude Montmarquette found the price of higher education subsidy to be the most significant factor in determining whether or not students opt for higher education. The type of student support was not a material factor in the decision making, even when controlling for other factors – such as socio-economic background.

In the study, students were offered the option of a cash amount up-front, or a higher education subsidy. This broadly reflects the choice available to students – the cash amount could reflect the opportunity cost of spending three years in higher education (forgone wage income less the net present value of the increase in career earnings). As you would expect, demand for the subsidy was highest when the cash amount was relatively low, and vice versa.

Respondents who were already actively engaged in the labour market were found more likely to refuse the subsidy given any cash offer. And those with high grades and a family history of university education were more likely to accept the subsidy given any cash offer. Interestingly, the researchers found that the level of family debt influences the take up of financial aid positively.

However, price (the cost of higher education subsidy) was found to be the largest determinant of whether higher education was chosen.

So how should we interpret this in the context of the government’s higher education reforms?

The government has reduced the higher education subsidy to zero on a lot of courses, which is in effect an increase in price. So we would expect lower demand for these courses (other things equal).

However, lower demand for courses should increase the potential returns to higher education over an individual’s lifetime, which would have the effect of reducing the opportunity cost (the cash equivalent). This would boost demand (other things equal).

Equally, some students might opt for courses with higher subsidies (sciences, medicine).

So the effects of the reform would appear slightly ambiguous.

Perhaps most importantly, the research supports the view that the level of tuition fees matters. But perhaps not for one of the reasons commonly cited.

And it calls into question the decision to cap tuition fees at £9,000 whilst simultaneously removing the government subsidy. This has limited the extent to which higher education institutions can compete on price (although, admittedly institutions can still compete on “quality”). Standard economic theory implies this is likely to lead to an inefficient allocation of higher education resources.

11.24.2011 // Leave a comment // Continue Reading »

An alternative housing plan: stop caring so much about home-ownership

Written by Alex November 21, 2011

Like a boil that can’t be lanced, the housing market is once again the focus of political activity. Personally, I find the focus on housing as frustrating it is bizarre.

The financial crisis began by encouraging a lot of people who couldn’t afford to buy housing assets to over-leverage themselves, by financial institutions who then couldn’t manage the risk.
Sluggish growth since is in part due to painful deleveraging by households which over-leveraged themselves in the boom years.
House prices are being sustained artificially by loose monetary policy and lender forbearance. Without that, repossessions are likely to increase, reflecting the weak fundamentals of mortgage lending.
Mortgage supply has contracted because of rules designed to prevent the sort of risky behaviour by banks which led to the financial crisis in the first place. Wholesale funding has become more costly for them due to wider economic uncertainty.
Mortgage demand is weak due to economic uncertainty, more onerous lending terms and high house prices (higher deposit requirements are unaffordable given historically high house prices).
Housing supply is constrained due to lack of available credit finance, weak demand and economic uncertainty.
Some of that economic uncertainty is in part caused because of over-reliance by governments on frothy housing markets for tax receipts and growth in boom years (i.e.Ireland,Spain, theUK).
Right-to-buy has not resulted in an increase in housing supply because councils are not replacing their stock, and are unlikely to do so when capital budgets are being slashed due to deficit reduction plans.
The deficit reduction plans are only necessary because of a collapse in tax receipts due to a recession that started in the housing market and was exacerbated by deleveraging.
And so on.

Spot a problem here?

The economy is in a mess because of how we fetishise home-ownership. And yet seemingly the only thing all politicians appear to agree on is the importance of boosting home ownership (if not exactly how).

We’d be better off if we cared less, and stopped encouraging people to take bets with debt which are unlikely to pay off in the long term (for example, encouraging people to over-leverage themselves when interest rates are at historically low levels is storing up trouble for when they start rising again, no?).

While there are some serious issues with the substance of today’s proposals, my bigger problem is that they are fêted as means of stimulating an economy brought to its knees by housing.

The housing problem is actually that we care too much about home-ownership.

11.21.2011 // Leave a comment // Continue Reading »

Should technocrats run Italy and Greece?

Written by Alex November 16, 2011

The answer to any newspaper headline crafted as a question is invariably “no”, according to Andrew Marr. So it is with this post.

Both Greece and Italy have, in recent days, appointed technocrats to run their countries. Apparently, received wisdom, in the midst of an economic crisis, is that economists are best placed to stave off bankruptcy and to bolster investor confidence. Received wisdom is wrong.

My problem isn’t with the fact that the men in question aren’t ideologically neutral, as some have complained. Rather, it’s because economics does not provide an objective framework for getting out of this crisis; depending on your priors, either further fiscal expansion or fiscal contraction is what is required to stave off another Depression.

The legitimate differences in economic opinion amongst practitioners matters because the real question facing politicians in Europe right now is ‘who pays?’, as Aditya Chakrabortty has suggested. That isn’t an economic issue, but a political one.

Politicians, taking into account the views of their electorate as well as counsel from advisors, such as economists, should rightly decide on these issues. Their job is to weigh competing claims and take decisions in the best interests of the electorate given their mandate.

Appointing technocrats to run countries circumvents democratic processes. Papendreou left office in part because he felt he’d stretched his mandate as far as it could go. Governments run by technocrats lack democractic accountability – their main loyalty will be to their egos, not to the people. It also sets the dangerous precedent in Western democracies that suspending democracy in a crisis is acceptable.

That seems like a high price to pay for decisions that are not necessarily any better informed than those made by politicians.

11.16.2011 // Leave a comment // Continue Reading »

Politicians and sex

Written by Alex June 09, 2011

What can behavioural economics tell us about political sex scandals? More than you might think.

I’m currently reading Dan Ariely’s excellent book Predictably Irrational: The Hidden Forces that Shape Our Decisions. In one chapter, Ariely describes a study he undertook in 2006 which tested whether periods of sexual arousal altered responses to some questions about sex.

In short, they did.

For the study, Ariely got a number of young college men to answer a series of questions relating to sex. He then repeated the task but asked the students to ‘stimulate’ themselves while answering the questions. There were statistically significant differences in the way most questions were answered between the two states. For example: “Is a woman sexy when she is sweating?” saw an increase in positive responses; so did “Can you imagine getting sexually excited by contact with an animal?”, “Would you slip a woman a drug to increase the chance she would have sex with you?” and “Would it be fun to get tied up by your sexual partner?” ; “Would you use a condom even if you were afraid that a woman might change her mind while you went to get it?” saw a decrease.

Ariely concludes:

Our results on attractiveness of activities suggest that sexual arousal acts as an ampliﬁer of sorts. Activities that are not perceived as arousing when young males are not sexually aroused become sexually charged and attractive when they are, and those activities that are attractive even when not aroused, become more attractive under the inﬂuence of arousal. By showing that, when aroused, the same individual will ﬁnd a much wider range of activities sexually appealing than when not aroused, these ﬁndings weigh in against the view of sexual preferences as being purely an individual difference variable—i.e., as dispositionally rather than situationally determined. Certainly, there are robust individual differences in sexual preferences and in the likelihood of engaging in various behaviors…

So what’s the link to political sex scandals?

The research seems to provide a rebuttal to the oft-used argument that exposing political sex scandals is most justified where hypocrisy has been committed (for example, the ‘family’ politician engaging in extra-marital affairs).

The research implies politicians are actually incapable of providing honest answers about sexual predilections when not aroused, compared to a state of arousal. So maybe we should be more forgiving of differences between publicly stated beliefs (when not aroused) and actual behaviour (when aroused)?

Equally, the research provides a strong argument for politicians to try and avoid making statements which might lead to hypocrisy. If they cannot accurately describe their beliefs when not aroused, they should simply avoid doing so.

06.09.2011 // Leave a comment // Continue Reading »

Household debt and inflation

Written by Alex April 06, 2011

There’s a spat going on between Duncan Weldon and the Taxpayer’s Alliance over Osborne’s Budget last month and in particular, the causes of substantial forecast increases in household debt by the Office for Budget Responsibility.

I think they’re both right and both wrong.

Let me explain.

I agree with the Taxpayer’s Alliance that Duncan is guilty of a ‘post hoc ergo propter hoc‘ type of fallacy. Duncan assigns all of the changes in OBR’s household borrowing forecasts to Osborne’s tax and benefit policies. I think it’s plausible that at least part of the increase is for factors entirely unrelated to the Budget decisions.

But to what extent has inflationary pressure resulted in the change in forecasts?

Well here I agree with Duncan that relatively modest increases in inflation forecasts between Budgets is unlikely to have resulted directly in significant fluctuations in household debt forecasts (by which I mean increases in borrowing to fund current consumption).

However, the issue neither Duncan nor the Taxpayer’s Alliance has raised is the fact that the vast majority of the household debt figure they’re arguing about is mortgage debt (see table A64 in the latest economic accounts) – it appears to me they are both working on the assumption that the household debt figures referred to relate to unsecured personal debt.

Inflation is therefore significant in an indirect sense as the primary lever available to the Bank of England’s Monetary Policy Committee to meet its inflation target is the base interest rate. In general, the cost of mortgages is in some way linked to this interest rate. So it seems plausible to suggest that inflation – or more precisely, inflation expectations – can have tangible effects on mortgage debt – and thus household debt – via this mechanism.

If so, then the tonic suggested by the Taxpayer’s Alliance – tighter monetary policy – would make the problem worse, not better.

04.06.2011 // 1 Comment // Continue Reading »

Out of credit

Written by Alex February 07, 2011

Are lending institutions solely responsible for individuals getting into debt they struggle to, or cannot, repay?

I ask because the campaign to ‘End Legal Loan Sharking‘ – organised by Compass and supported in Parliament by, amongst others, Stella Creasy MP – seems to lay the blame primarily, if not wholly, at their door; borrowers themselves appear largely blameless. The language (‘spin’?) used by campaigners reinforces this view – borrowers are ‘exploited’ by ‘unscrupulous’ ‘sharks’.

The availability of easy credit does not mean borrowers have to use it, just as the availability of all manner of artery-clogging junk at the supermarket does not mean people have to eat it (and we rarely give sympathy to people who get fat because of their own greed).

It’s of course a legitimate concern that some low-income households finds themselves in spirals of debt, and right that elected officials should seek to remedy this.

But there are other households who have simply made bad decisions. And so ignoring the role of the individual in the equation is a major omission.

In the personal debt toolkit, caps on charges levied on payday loans might have their place (although I’m not personally convinced they would be effective). But where are the calls for better financial education?

Why are people, who for no obvious rational reason take on more debt than they can realistically afford, seen as victims? Do we really believe that they are forced, against their will, to sign up to legally binding credit agreements?* Why are those that lend solely to blame?**

The Left can’t and shouldn’t ignore the role of the individual and their decisions when it comes to personal debt – demand is just as important as supply. And no amount of regulation on lenders will stop some people making stupid decisions.

Maybe the End Legal Loansharking campaign is just symptomatic of a broader problem of debt in Britain – that none of us, really, likes to take personal responsibility for bad money management.

That is a rather ominous thought as we work out how to avoid another financial crisis.

*Some might suggest that consumers are confused by the true cost of credit agreements they enter into, but one of the interesting aspects of payday credit is that the charges levied are arguably more transparent than for other forms of loan/credit agreement.

**As an example of the potential weaknesses of the arguments advanced by the End Legal Loan Sharking campaign, it is not particularly apparent why lenders would want the majority of people it lends to to be unable to repay – this is obviously an unsustainable and unprofitable business model. The question of fees levied on these charges then becomes trivial, as it is unlikely to be paid.

02.07.2011 // Leave a comment // Continue Reading »

Fuel’s gold

Written by Alex February 01, 2011

Of all western nations, Britain has amongst the highest tax rate on petrol – around 4/5 of the price consumers face for a litre of petrol is tax.

Fuel is probably one of the few products that households buy in regular quantities at regular intervals, so price fluctuations are likely to be immediately obvious on household finances (except those who don’t have cars, for whom the problem doesn’t arise). And there tend to be quite effective lobbying organisations for consumers and businesses reliant on petrol.

So it is understandable, politically, that the government want to address the issue. And yet, and yet…

Applying varying rates of duty depending on geography appears, prima facie, unworkable and/or administratively burdensome – for example, if fuel is cheaper to buy in rural petrol stations, then some city drivers may think an excursion to fill up worth it. This probably explains why the language used by the Coalition is so soft – ‘under consideration‘, ‘seeking to address‘ etc. Don’t be surprised if this turns out to be empty rhetoric.
The literature suggests there are differences in the short- and long-run effects on petrol demand given a change in price, with the long term effect estimated as being larger than the short term effect – i.e. consumers of fuel adjust consumption in response to fuel price rises, but there is a lag. So cuts in fuel duty may have a smaller effect today than over the longer-term*. This could undermine arguments to cut duty based on current financial difficulties.
Whether or not you feel sympathy with drivers depends on what you think fuel duty is for. If you think it is primarily a tool to reduce emissions of harmful substances and encourage people to use greener forms of transport, then there is no apparent need to reduce the level of fuel duty. Indeed, you could plausibly argue that it needed to be increased further. If you think duty is merely a form of revenue raising, then you might be more sympathetic to the need to cut. BUT! as the deficit will need to be paid down in the long-run, cutting fuel duty will either place a burden on other tax-payers (which may include car drivers via other forms of taxation), or on future generations (who get hit with a double whammy of deficit and environmental impact of greenhouse gas emissions).
In general, a stabiliser might lead to greater volatility in fiscal policy.

Of course, a better question might be why we’re focusing on fuel price stabilisers at all, when food price fluctuations – arguably – have a greater impact on lower-income households.

*This assumes that the effect of price changes on demand are symmetric which I’m instinctively uncomfortable about.

02.01.2011 // Leave a comment // Continue Reading »

Osborne’s apparent lack of understanding of the National Accounts

Written by Alex July 23, 2010

Perversely, today’s surprise GDP figures have provided meat to all sides. Labour claims it was their action while in government that helped grow the economy 1.1% in the second quarter compared to the first. The Coalition claim the figures validate their approach of expedited deficit reduction, pointing to the fact that the majority of the 1.1% growth (around 1 percentage point of it) came from the private sector.

AFP reports Osborne as saying:

“Today’s figures show the private sector contributing all but 0.1 percent of the growth in the second quarter, and put beyond doubt that it was right to begin acting on the deficit now.

“While I am cautiously optimistic about the path for the economy, the job is not yet done.

“The priority now is to implement the budget policies which support rebalancing and help ensure … sustained growth.”

This is, of course, a bit misleading. GDP is calculated on a value-add basis – the difference between the value of a produced good or service, and the value of the materials used to create it.

What this means in practice is that the stated government contribution to GDP doesn’t accurately reflect government expenditure. For example, the government could buy £1bn of baked beans and fill the House of Parliament with them, and it would add very little to the government share of GDP. The value add would end up elsewhere – in consumer expenditure or exports/imports, for example.

So quite a lot of Government expenditure doesn’t show up in the government consumption share of GDP – this is the difference between what the Government produces on a value-add basis, and the total income it derives from taxation and borrowing (a lot of government expenditure is just a transfer from one group to another).

This is quite an important point in the context of savage cuts to government department budgets. When the government scales back expenditure, the feed-back effects are more broadly felt – we can expect wider consumption and capital investment to fall because some business and consumers rely on government transferring tax revenues to them (for which they may or may not provide services).

And if you scale back government expenditure by enough, you can start having material effects on non-Government components of GDP because of the way the national accounts are assembled. This may mean lower or negative GDP growth.

Osborne’s analysis of these results therefore seems a little naïve, or deliberately misleading.

07.23.2010 // Leave a comment // Continue Reading »