The innocence principle

Like freedom of speech, the presumption of innocence before proof of guilt is something that almost everyone agrees is important in principle, but are occasionally reluctant to apply in practice. In recent weeks we have witnessed some examples of this reluctance that, to me, seem chilling.

Eric Garner was an obese African-American who was killed by police officers holding him in a chokehold while they arrested him for illegally selling individual cigarettes in New York City. His last words are here.

Virtually everyone who has seen the video agrees that they acted with an extreme amount of force against a man who was not fighting back although he was resisting arrest (passively – that is, in a way that would not harm the officers).

A Grand Jury found that the police officers who killed Eric Garner did not act unlawfully. I defer to the Grand Jury on this, but assuming they are correct this suggests that the scope for lawful killing by police officers is extremely broad. As law professor Glenn Reynolds (and others) has noted, killings by police are treated much more sympathetically by juries than killings by civilians.

Michael Brown was an African-American teenager who was shot and killed by a police officer during an arrest after he (seemingly) robbed a convenience store in Ferguson, Missouri. There is still some disagreement about what happened here. The initial reports suggested that the officer executed Brown as he fled or begged for his life, but the subsequent Grand Jury investigation seems quite conclusive that Brown assaulted the police officer. The Grand Jury’s conclusions prompted looting by people in Ferguson.

If Brown’s shooting was unjust, the Garner lesson applies. But if the narrative found by the Grand Jury is correct then the protests, lootings and slandering of the police officer involved are wrong. In that case, it is the media’s presumption of guilt on the part of the police officer involved (even after the Grand Jury verdict) that has led to significant destruction and violence. People suspended the innocence principle to advance a political point, and the results have been bleak.

Jackie is a student at the University of Virginia by a Rolling Stone article which alleged that she had been gang-raped by a group of fraternity men. Last week Rolling Stone retracted the story after a number of facts given by Jackie in her story proved to be false.

The aftermath of the Rolling Stone story has been extremely disturbing, with very prominent people proudly dispensing with the innocence principle. The Washington Post ran a piece titled “No matter what Jackie said, we should automatically believe rape claims” (this was later changed to “generally” believe them). The Guardian’s Jessica Valenti wrote that “I choose to believe Jackie. I lose nothing by doing so, even if I’m later proven wrong”, and that “the current frenzy to prove Jackie’s story false – whether because the horror of a violent gang rape is too much to face or because disbelief is the misogynist status quo – will do incredible damage to all rape victims.” [my emphasis]

Has Valenti considered that someone else may lose something if we chooses to believe an accusation that is untrue? Or that we may have other reasons than misogyny or incredulity to want to know if a criminal accusation is false?

Sexual assault is very common, but this does not mean that false accusations do not occur. An estimated 1.5% to 7.5% of accusations may be false. Staggeringly, a 2012 study that used DNA testing of old physical evidence and exonerated between 8% and 15% of convicted rapists.

I know why Valenti is eager to believe Jackie: because not believing a genuine story is horrendous for the victim and makes other rape victims less likely to come forward, and hence makes rape an easier crime to commit. But the inverse is also true: believing a false story is horrendous for the wrongly-accused and makes other false accusations more likely. (The Rolling Stone story did not name individuals, but guilt-by-implication can still be enormously harmful.)

In all of these cases, people who would normally say that the presumption of innocence before proof of guilt is a good thing have assumed the opposite. The rule might work in general, they may say, but this case is an exception. Police need to be able to subdue people resisting arrest. The death of an 18-year old must be unjust. Rape is too serious an allegation to question.

Like the principle of free speech, the innocence principle only produces good results if we apply it rigidly and in cases where doing so may feel deeply unsettling.

The innocence principle matters because people who seem guilty may in fact be innocent. This is why mechanisms like jury trials exist – like the ‘thick’ version of free speech that I argued for recently, they are a mechanism for sorting the truth from lies.

Hayek speculated that liberal institutions like these evolved over time, because the societies that lacked them eventually fell behind the ones that upheld them. Politically and culturally, we may be witnessing an erosion of these institutions now. That would be a catastrophe. But it is not too late to change course.

Why do people oppose immigration?

My Buzzfeed post on immigration generated a bit of traffic yesterday and a bit of disagreement, too. The most common objection to our approach to immigration is that it’s one-dimensional—OK, we might be right about the economics, but c’mon, who really cares? It’s culture that matters. This point was made to me a few times yesterday and there’s definitely something to it.

My first response is that I think people underestimate the public’s ignorance of the economics, and hence the public’s fears about immigration. This poll by Ipsos MORI (I love those guys) asked opponents of immigration what they were worried about—as you can see, their concerns are overwhelmingly about job losses and the like:

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The top five concerns are all basically to do with economics, with the highest-ranking cultural/social concern getting a measly 4%.

Obviously this isn’t the whole story. People might be lying to avoid seeming “racist”, for example. But in other polls people seem less reserved—last year 27% of young people surveyed said that they don’t trust MuslimsLess than 73% of the population say they’d be quite or totally comfortable with someone of another race becoming Prime Minister, and less than 71% say they’d be quite or totally comfortable with their child marrying someone of a different race. So the ’embarrassment effect’ of seeming a bit racist can’t be that strong, and clearly the ceiling is higher than 4%.

I reckon it’s more likely that people have a bunch of concerns, of which the economic ones seem more salient. Once they’ve mentioned them, they don’t need to add the cultural concerns to the pile. Either that, or we just believe people in the absence of evidence to the contrary.

That’s why I think it’s legitimate to focus on the economics of immigration, even if we concede that the cultural questions are important (and tougher for open borders advocates to answer). Persuading some people that their economic fears are misguided should move the average opinion in the direction of looser controls on the borders.

If we could put the economic arguments to bed we might be able to have a more productive discussion about immigration. If culture’s your problem, then let’s talk about that, but remember that the controls we put on immigrants to protect British culture come with a price tag. Maybe we’d decide that more immigration was culturally manageable if we ditched ideas like multiculturalism and fostered stronger social norms that pressurised immigrants into assimilating into their new country’s culture. I don’t know. (Let’s leave aside my libertarian dislike of using the state to try to shape national culture.)

The point, for me, is this: the economics of immigration does matter a lot to people. Immigration is not either/or—we can take steps towards more open borders without having totally open borders. At the margin, then, persuading people about the economics of immigration should move us in the direction of more open borders. And that, in my view, makes the world a better place.

Nominal GDP targeting for dummies

Nominal Gross Domestic Product (GDP) targeting is a type of monetary policy that people like me think would give us a more stable economy than we currently have. It would replace the Bank of England’s current monetary policy, inflation targeting.

Nominal GDP can be understood as sum of all spending in the economy. Total spending can increase either because of price rises (inflation) or because there’s more stuff to go around (economic growth). If this year inflation is 2% and we have 2% economic growth, nominal spending (nominal GDP) will have risen by 4%.

The current policy of inflation targeting means that the Bank of England tries to control the money supply so that prices rise, on average, by 2% every year. If prices rise by more or less than this, the Bank is judged to have failed in its job.

Nominal GDP targeting would mean that the Bank of England would stop trying to target price rises, and instead try to target the total amount of nominal spending that takes place in the economy. That means that if economic growth was lower than usual, the Bank would have to try to make inflation higher than usual. If economic growth was higher than usual, inflation would be lower than usual.

This system is appealing because it is often the total amount of spending in the economy that matters, rather than inflation per se. Wages are usually set in nominal terms, which means that they do not automatically adjust upwards and downwards according to inflation.

Because of this, a drop in the amount of spending going on can lead to a mismatch between all the wage demands in the economy and the amount of money available to pay them. In other words, there is not enough money in the economy to pay everyone. This has two possible outcomes: either wages can be cut to meet the new level of spending, or people will have to be fired.

Empirically, it seems as if firms prefer to fire some workers than to cut wages across the board. In fact, firms really hate cutting wages, for some reason, and unemployed people are often reluctant to take the same job that they once had for a lower wage. Economists refer to this phenomenon as “sticky wages”.

So the outcome of a fall in total spending is usually unemployment. This is an example of a nominal change having a real effect, and destroys wealth that need not be destroyed, because the previously-profitable relationship between the worker and the firm has now been undone.

When this happens across the economy it can affect economic growth. In fact, this seems to be a very important factor in recessions – when there is a steady level spending taking place, the market is pretty good at finding new ways of using unemployed workers fairly quickly. When there just isn’t enough spending going on, we have to wait for workers and firms to cut wages enough to hire them again, which can take a long time.

Under nominal GDP targeting, the Bank of England would commit to keep the spending level growing even if economic growth dipped. As I’ve said, that would mean more inflation in times of slow growth and less inflation in times of quick growth.

Because inflation is being used to offset the changes in economic growth, negative economic ‘shocks’ like oil crises will translate into higher prices, prompting the market to adjust to take account of new realities, but never creating the domino effect of mass unemployment that we sometimes currently experience. The real economy would still adjust to real shifts in supply and demand, but we’d avoid the chaos that unstable monetary environments can create.

The key is that almost all contracts in the modern economy are set in nominal terms. That means that money that is managed in the wrong way can create a lot of unnecessary destruction of wealth. Nominal GDP targeting would probably give us the most neutral monetary system possible with the government, with the monetary environment kept stable so the real economy can do its work in allocating resources.

Money matters. The 2008 crisis happened because expectations of inflation, and hence nominal spending levels, dropped sharply, causing the ‘musical chairs’ problem of too little money to fulfil all the existing contracts and wage demands, which led to widespread bankruptcies and job losses. Today, the UK and the US have begun to get their spending levels growing at a healthy rate again, and their real economies have begun to grow healthily again too.

The Eurozone is the saddest story. The European Central Bank has been obsessed with fighting inflation (possibly because Germany has not suffered much, and Germans have bad memories of hyperinflation during the 1920s), and as a result nominal spending has grown very slowly indeed. The consequences are easy to see: in the weaker European economies, like Greece, Spain and Italy, unemployment is at historically high levels. It seems likely to stay there for many years.

Many people, myself included, believe that a system where private banks could issue their own notes without a central bank at all would be the best system. This is known as ‘free banking’. One of the best arguments for free banking is that it would keep nominal spending levels steady, because banks would issue more notes during periods of slow growth and fewer notes during periods of high growth. This should sound familiar – nominal GDP targeting is probably the closest we can get to ‘stateless’ money while having a central bank.

Nominal GDP targeting would not prevent all recessions or guarantee growth. The real economy is what determines things like that. But badly-managed money can destroy growth, create recessions by itself, and turn small ‘real’ recessions into extremely bad depressions, as happened in the 1930s and 2000s. Nominal GDP targeting would give us stable, neutral money that avoids these things. We would have been better off with it in 2008, and we would be better off with it today.

Don’t kill off the only industry that provides loans for low-earners

Wonga’s decision to write off £220m worth of debt for 330,000 customers and “voluntarily” embrace new regulations will been seen by many as a form of social justice and an obvious defeat for the big, bad, payday-lending wolf.

Unfortunately, the Financial Conduct Authority’s attempt to further regulate the payday lending sector may end up harming low-income earners in need of a loan.

But first, we must distinguish between the payday lending industry and Wonga as a specific organization within that industry. Payday lenders offer customers quick and easy access to short-term cash flow. Though anyone with any income size could apply to Wonga for a loan, it is mostly used by people with low-incomes, as such earners struggle to get bank loans and credit cards, and payday loans are often cheaper than using an unauthorized overdraft.

Of course, there are risks associated with payday lending, as “companies are loaning to high-risk demographics, with usually low-income averages and bad credit scores.”* In order to stay profitable and protect themselves from bankruptcy, payday lending companies must factor defaults into their interest rates.

These interest rates –especially Wonga’s interest rates – tend to be the target of myths constructed by opponents of payday lending, who are either accidentally or intentionally analyzing the data badly. Most notably, critics attack Wonga for charging its customers close to an astronomical 6,000% interest rate.

That figure, however, comes from a legal quirk in British financial regulations that requires every business to express their interest rates as an annual rate. Wonga’s payday loan interest payments are capped at sixty days, so there is no scenario where anyone could come close to paying Wonga nearly 6,000% APR, as the company is forced to express as it’s annual rate.

Some of the criticisms leveled specifically at Wonga do have merit – indeed, their fake legal letter scandal from this past summer – which threatened customers with legal action if loans weren’t repaid – left everyone feeling uncomfortable with the industry.

Such behavior from any company is unethical, to say the least, and should be met with repercussions. But the FCA’s decision to crackdown on all payday lenders as a result of Wonga’s actions will drive almost all payday lenders out of business and leave Wonga to dominate the industry.

From today it has introduced new lending criteria to improve its decisions. That means it will be lending to fewer people and it is unlikely to be the only firm forced to do that, as the FCA said today: “This should put the rest of the industry on notice.

This new lending criteria, coupled with previous regulation tightening – bans on payday advertising in public spaces – and future proposed regulations – like a mandatory cap on costs for all short-term loans – reduces the entire industry’s profitability and forces smaller companies, that would otherwise compete with Wonga, out of the market.

Furthermore, other indirect financial regulations continue to ensure Wonga’s dominance in the loan market. Credit unions could become competitive payday lenders and compete with companies like Wonga, but their interest cap of 3% a month prevents them from properly competing in the market.

Yes, Wonga is facing a 53% fall in annual profits partly as a result of new controls set by the FCA, but other payday lender companies, that don’t have the ethically questionable history of Wonga, are looking to be cut out of the market all together.

Critics of payday loans will be overjoyed to hear that the payday lending industry is on the rocks, but those who actually use its services and benefit from the loans should be worried. Banks and credit card companies have priced these customers out of accessing loans, and with with less payday lenders offering their services to people with low incomes, a lot of people will find themselves with no options, no loan, and no way to pay rent.

While payday lenders are by no means the perfect system to deliver loans to low-income customers, they are currently the only realistic way for such people to get their hands on necessary loans.

*This gal.

Two cheers for technocracy

Who needs experts? The minimum wage was once an example of the triumph of technocracy, where decisions are delegated to experts to depoliticise them.

The Low Pay Commission was set up to balance competing priorities – increasing wages without creating too much unemployment. If you were a moderate who thought the minimum wage was a good way of boosting low wages, but recognised that it might also create unemployment, the LPC gave you a middle ground position. (For what it’s worth, I’m an extremist.)

That technocratic settlement also allowed politicians to, basically, safeguard against an ignorant public. By delegating decisions like this to experts, bad but politically popular policies could be avoided. Relatively well-informed politicians could avoid having to propose bad policies by depoliticising them.

Other examples of this include NICE’s responsibility for deciding which drugs the NHS should and shouldn’t provide, and the Browne Review that recommended student fees, which had cross-bench support. The old idea that “you can’t talk about immigration” comes from an informal version of this – everyone in power knew that people’s fears about the economics of immigration were bogus, so they were basically ignored.

But that technocratic settlement now looks dead. Labour has now made a specified increase to the minimum wage part of its electoral platform, following George Osborne’s lead earlier this year. That means that voters will have to choose not just between two rival theories about the minimum wage, but two competing sets of evidence about whether £7/hour or £8/hour is better, given a wage/unemployment trade-off.

Whether voters are self-interested or altruistic doesn’t really matter. A self-interested low wage worker would still need to know if a minimum wage increase would threaten her job; an altruistic voter would similarly need to know a lot about the economics of the minimum wage and the UK’s labour market to make a judgement about what level it should be.

And of course the minimum wage is just one of dozens, if not hundreds, of questions that political parties offer different answers to that voters have to make a judgement about.

In practice this does not happen. Voters are very uninformed about basic facts of politics, and are almost entirely ignorant about economics, which almost everyone would agree would be necessary to make the correct judgement about something like what the minimum wage level should be (even if they didn’t agree on which theories and evidence was relevant). Even the use of rules-of-thumb such as listening to a particular newspaper or think tank (ha) will suffer from the same problems.

Voters, then, face a nearly impossible task. Assuming they are bright, well-intentioned, and believed that it was important for them to cast their vote for the party that would have the best policies, they would have to amass an enormous amount of information to make the right decision on all the questions they, in voting, have to answer.

So voters are trapped. They cannot know what minimum wage rate is best any more than they can know what drugs the NHS should pay for. They are, empirically, very unaware of basic facts, but they would find it hard to overcome that even if they wanted to.

Does democracy make us free? Maybe, but it’s the freedom of a deaf-blind man – we can choose whatever policy we want, without any idea about what those policies will actually do. So, if the alternative is more direct democracy like this, maybe technocracy isn’t so bad.