How to fix the Eurozone

It's rare that an economic question is clear cut. Nearly all issues are two sided, with substantial costs and benefits to all approaches. But the reason the Eurozone crisis has resumed is pretty obvious—'bad' disinflation and deflation almost universally across the bloc, and a failure of the European Central Bank to provide even the most basic monetary stability. The solution is equally obvious: meet the inflation target and commit to a level target to prevent future cock-ups. Household, firms and sovereigns take out (nearly all of) their debts in nominal terms, i.e. not adjusted for inflation. They are likely to build in expected inflation. However, if inflation is higher than expected, debtors incomes should rise faster than they expected, while their debt is still fixed, making the burden lighter. Of course, this means creditors receive less than they expected. It's the same on the other side.

If the central bank promises 2% inflation per year over the next ten years, and the markets believe it, then the yield of a gilt that matures in 10 years will take this into account. This goes (approximately) for all other assets in the economy, like mortgages, consumer credit, business loans and so on. If inflation departs from target it enriches one side at the expense of the other, contrary to what they all could have reasonably expected when they signed these contracts.

There is a complication: there is a difference between the inflation and deflation caused by supply shocks and that caused by demand shocks. When prices rise because everything really has become more costly to produce (a supply shock like an OPEC oil price hike) then this makes debts harder to pay, but worth no more. When prices fall because everything has become cheaper to produce (a supply shock like Chinese labour coming onto the world market) this makes debts easier to pay, but worth no less. But central bank expansions and contractions are demand shocks, not supply shocks.

This means that the national debt will be harder to pay if inflation comes in lower than target for monetary reasons. Inflation has been below the European Central Bank's target for nearly two years, and is falling further below it. Twelve countries have either zero inflation or deflation. Unless there were massive supply-side improvements across the Eurozone—which we would see in the form of impressive real GDP growth or productivity improvements—this would usually mean that firms will find it hard to make good on their investments, and governments will find their national debts increasingly hard to manage. This is exactly what we are seeing.

As I said above the weird thing about this situation is we actually have an easy-ish solution. Commit to meeting the inflation target, making up the deficit of the past few years and targeting a level path of inflation (or total income) in the future. That means that if the ECB makes a mistake and 'undershoots' its target, it doesn't allow this to distort the economy but does a little extra inflation in the next few months; if the ECB 'overshoots' it does a little less. This is not baleful central bank 'intervention' or 'disortion'—the distortion was letting the rules of the game depart so far from those they signed all of their contracts expecting.

The alternative is a 'lost quarter century' of stagnation while everyone slowly adjusts to the new monetary arrangements they have been hit with.

George Monbiot doesn't quite get this competition thing

We've George Monbiot telling us all that this market thing, this rampant individualism, means that we all no longer cooperate with each other. Sadly, this shows a terrible misunderstanding of what markets actually are. They are, of course, a method by which humans cooperate with other humans. Competition is simply the method by which we decide who to cooperate with:

Yes, factories have closed, people travel by car instead of buses, use YouTube rather than the cinema. But these shifts alone fail to explain the speed of our social collapse. These structural changes have been accompanied by a life-denying ideology, which enforces and celebrates our social isolation. The war of every man against every man – competition and individualism, in other words – is the religion of our time, justified by a mythology of lone rangers, sole traders, self-starters, self-made men and women, going it alone. For the most social of creatures, who cannot prosper without love, there is no such thing as society, only heroic individualism. What counts is to win. The rest is collateral damage.

If I grow the pears, you grow the apples, then Bob and Jim make the cider and perry from them, then we sell some and drink the rest, are we competing against each other here? Or are we cooperating over the specialisation and division of labour and then trading in the resultant production? It is the latter of course: competition only comes in when we're deciding whether it's you growing the apples for this enterprise or Charlie in the next orchard over. The same with Bob and Jim: there might be competition to see whether it should be Bill and Johnny making that alcoholic nectar, but the end result is still that competition is how we decide who to cooperate with, the actual activities in the market, in the production cycle, being cooperation.

This same is true if it's Danny in Taiwan making the chips, Yue in China assembling them and Rupert in Cambridge writing the operating system that makes the smartphone work. The market is still the method by which we coordinate cooperation among human beings.

Over and above that misunderstanding there is also this from George:

This is the Age of Loneliness.

Well, yes, intellectual who lives in the depths of rural Wales thinks loneliness is an important phenomenon. There is a reason why the intelligentsia of every society tends to cluster in the cities. We might even identify a little bit of excessive projection from the personal to the general in this screed.

Seumas Milne's dodgy statistics on African poverty

Seumas Milne's column last week blamed globalisation for migrant deaths in the Mediterranean. The column isn't that important, but this bit jumped out at me:

As the catechism of “free market” deregulation has been imposed across the world under “free trade” and “partnership” agreements and the destructive discipline of the IMF, World Bank and WTO, capital and resources have been sucked out of the developing world and tens of millions of people have been driven into urban poverty by corporate land grabs.

That is why the number living on less than $2 a day in sub-Saharan Africa has doubled since 1981 under the sway of rich world globalisation. Africa’s boom has been in resource exploitation, not in most people’s living standards. So it is hardly surprising that migration from the global south to high and middle-income countries has more or less tripled over the past half century.

Actually, the percentage of people living on less than $2 a day in sub-Saharan African has fallen from 72.2 percent to 69.2 percent since 1981. The total number of people on $2 a day has doubled because sub-Saharan Africa’s population has doubled (p. 96). "Free market deregulation" has nothing to do with it, except for the fact that infant mortality has fallen substantially.

I know this because it is in the same paper that Mr Milne's figure comes from, on the same page, in the same table. It's a pity that he did not think to mention the data that directly disproves his claim.

I wrote a letter to the Guardian pointing this out but they didn't print it. It's also worth pointing out that African poverty fell by 38% between 1990 and 2011. (h/t Anonymous Mugwump.)

Silicon Ovaries

It's only apt that Silicon Valley's new plan to tackle gender imbalance involves cutting-edge technology, a dose of futurism and flash-freezing things in sub-zero temperatures:

Apple and Facebook are offering to freeze eggs for female employees in an effort to attract more women on to their staff, according to US media reports.

Apple, the world’s most valuable brand, said it would offer the perk to US-based staff from January. “We want to empower women at Apple to do the best work of their lives as they care for loved ones and raise their families,” the company said in a statement to ABC News. “We continue to expand our benefits for women, with a new extended maternity leave policy, along with cryopreservation and egg storage as part of our extensive support for infertility treatments.”

Facebook offers up to $20,000 (£13,000) for egg freezing for female employees. The company also offers adoption and surrogacy assistance and “a host of other fertility services for male and female employees”, the company said. (The Guardian)

Even though the schemes are unlikely to have huge take up, it's an idea with a commendable sentiment behind it. The tech world is notorious for its lack of female representation and lingering sexism, and women make up only 30% of Apple and Facebook's workforce. Their support of 'cryopreservation' will benefit both the firms and their employees.

It's damn inconvenient that the years in which women are able to best forge a career are often also those of peak fertility. This not only creates huge opportunity costs when selecting a career/family/income combination, but restricts the pool of talent available to employees. Being able to keep young eggs on ice (and being aided financially to do so) expands the range of work/child  options women have, and makes some of the tradeoffs a little less binary and severe.

 There are a number of ways we try to reduce the 'costs' of raising a child, from statutory maternity pay and free childcare to paternity leave and work crèche schemes. All of these actions shift part of the cost of child-rearing from one figure (usually the mother) to another actor, such as the state, an employer or a partner. It's usually a good thing that these costs are shared out amongst others, but it would be even better if the costs were simply reduced. Something like fertility preservation does that— it uses technology to augment the options available to women and reduces the opportunity cost of pursuing a career— without the need for state intervention, relying on a partner, or for social behaviours and cultural shifts to occur. If a woman voluntarily choses to use her 29-year old self's eggs at the age of 39, everybody wins.

Of course, Apple and Facebook have chosen to foot the bill here, and no firm should be forced to provide such procedures for their employees. But these leading companies clearly think that $20k is a small price to pay to attract and retain top female talent. Certainly, a firm which signals that it is prepared to help employees overcome obstacles to their life choices (amongst many other generous perks) will be a draw for many, and can help women to achieve the success they've always been capable of.

Naturally, there will be those who recoil in horror at the idea of Facebook laying a frosty, calculating hand on their employees' ovaries. Some consider it a neanderthalic and clumsy way of improving women's standing in the workplace, whilst others worry that supporting such technology gives a strong and unpleasant message to women that forging a career whilst raising a family is a faux pas.

Cryopreservation's hardly going to become a mainstream phenomenon any time soon, and for now is only really an option for a small number of women. Were employers to start actively encouraging the treatment or making employment decisions based upon it, then we would need to have a serious conversation about the way in which it was used. Egg freezing's also in no way a panacea. If Silicon Valley really wants to boost the women in its ranks, there's plenty of other things which they can do, like offer more schemes for current parents, and foster a more female-friendly everyday culture.

Ultimately, egg storage is another medical innovation which — like the pill— affords women a greater range of life choices. And far from establishing expectations of what a female employee should do with her womb, Facebook and Apple's support of the proceedure indicates a commitment to heterogeneity and flexibility. It is smart of them to support such a range of lifestyle and career choices, and with luck initiatives like these will help to enrich the lives and bolster the careers of the women who've chosen to work there.

In praise of subprime auto loans

We've another one of those laments, over at the Guardian, for the way in which the financial markets deliver financing to people who are poor. Apparently this is very bad, allowing poor people to finance capital expenditures in the same manner that we richer people are able to. You know, how nefarious Wall Street must be if it lets the poor, we mean really, poor people!, buy a car.

Many people are buying those cars with they help of Wall Street banks, which are lending money to people with bad credit again – just as they did prior to the financial crisis of 2007. In the last crisis, it was houses.

The $26bn worth of subprime car loans is far short of the $500bn of subprime real estate securitization in 2006, at the top of the housing bubble, partly because cars are a lot cheaper than houses.

This time, like last time, Wall Street isn’t directly lending poor people money. That part is done by an array of smaller financial companies in strip malls and office parks.

The smaller financial companies sell the loans to Wall Street. Wall Street puts them into big piles, sorts them from weakest to strongest credit scores, and then sells the pieces and parts of them to their customers. The customers can be hedge funds in Greenwich, Connecticut, or other banks. No part of the loan goes unsold: from the highest rates to the lowest-rated, buyers are always there.

This process is called subprime securitization, and about $26bn of it will be done this year in auto loans to poor people.

This is, according to the author, just terrible. And of course the reality is that it's just wonderful.People who would not be able to afford a car can now do so: this enables them to get to work, to the shops, and thus makes them less poor. And the miracle here is that securitisation, the securitisation that distributes the risk.

Now it is possible, of course, to associate this subprime securitisation with what happened with subprime mortgage securitisation and thus wonder whether there's going to be a replay of 2008. But there won't be for two reasons. The first being that there's just not enough of these auto loans to cause anything like a systemic crisis.

The second is that it wasn't securitisation, nor subprime, that caused the problem last time around. It was fractional reserve banking: more specifically, that the slices and dices of these loans were on the books of banks who were leveraged in their holdings of them. So, when the value of the loans slid the banks became illiquid and possibly insolvent. If those same slices and dices had been in non-leveraged hands, pension and or insurance funds for example, then there wouldn't actually have been those runs on those banks.

So, all we're left with here with these subprime auto loans and their securitisation is that poor people get to buy cars more cheaply than they would without that spreading of the risk. And maybe The Guardian thinks that's terrible but the rest of us should regard it as a pretty good idea. We are, after all, the people who are pro-poor, aren't we?

Being economically worth less does not mean you are worthless

I’ve just been on Channel 4 News discussing Lord Freud’s comments about letting people with disabilities choose to work for below the minimum wage. I haven’t watched it back but I gather from Twitter that I fluffed it a bit – unfortunately the producers put me up against two people without telling me, so I got flustered. 

The thing I said that upset people the most was that some people with severe disabilities or learning difficulties may be economically worth less than people without. (One of the people I was debating apparently thought I said ‘economically worthless’.) 

Lots of people have taken this to be a comment on the moral value of people with severe disabilities or learning difficulties. This is an error. The value of a person’s labour is equivalent to what others will pay them for a given amount of time, also known as their productivity. When Lord Freud talked about people not being ‘worth’ the minimum wage, this is what he meant.

It has absolutely nothing to do with how important they are as a person. Some very good people are unproductive because they are inexperienced, they don’t have economically-valuable talents, or they are disabled. Some very bad people are very productive because they did well in the lottery of life. Indeed this is something I care about very strongly, and it has led me to abandon beliefs I once held quite strongly in favour of mechanisms that would redress some of this imbalance.

Perhaps it was a bad choice of words to say ‘economic worth’ because many people are unaware of the above. I can understand that if you heard me say someone was ‘economically worth less’ (let alone ‘economically worthless’!) that you might think I was making some comment about that person’s value as a human being. I’m pleased, at least, that many people who disagree with me nonetheless give me the benefit of the doubt, and I hope I’d do the same.

I think Freud’s comments were motivated by a sincere desire to make disabled people’s lives better off by allowing those that want to work to do so, with their wages topped up by the taxpayer. Whether or not you agree that this is a wise move it does nobody any favours to suggest that anybody in this debate thinks people with disabilities are not valuable as human beings.

It ain't what you don't know that gets you into trouble

It's what you know for sure than ain't so that does. And Mark Twain's observation has a great deal to tell us about how and why economic policy is so often so bad. For it's not just the politicians who are deeply misguided as to what the facts of the situation are: we the citizenry can be alarmingly inaccurate in the things we believe about the economy. As Tim Taylor points out:

There's an old saying often attributed to Daniel Patrick Moynihan that "Everyone is entitled to their own opinions, but not to their own facts." In public opinion surveys, of course, people are offered a chance to assert facts that reflect their own frame of mind. For example, Social Security is popular, while foreign aid is not, and therefore people (wishfully) hold the opinion that we must not be spending too much on Social Security, but are spending a lot on foreign aid that could cut with little domestic pain. But it's obviously tricky to have a productive social discussion about economic issues when there is little agreement on central facts.

Very much the same holds true in the UK: people overestimate the unemployment rate, how much is spent on overseas aid, underestimate how much pensions cost and so on. And then of course there's the very slightly more tricky things that we should be able to agree upon but generally don't: a higher minimum wage reduces the number of jobs, rent control is the best way of destroying urban housing short of aerial bombardment and so on. We even have our own version of that Moynihan quote, comment is free but facts are sacred.

Would that public discourse, the setting of public policy, took place within the boundaries of those facts rather than being misinformed by what people are sure is true but just ain't so.

Tired of London?

Samuel Johnson famously pronounced: “when a man is tired of London, he is tired of life”. This isn’t the end of his statement though, he added: “for there is in London all that life can afford.” But what if you can’t afford life in London? Surely then it is time to up sticks and move to a cheaper city.

According to a poll from the Supper Club, the network for entrepreneurs turning over £1m or more, 40pc of London-based business owners have considered moving their operations.

More than a third claimed that the cost and inefficiency of London’s public transport system is holding back businesses, while 40pc said that the cost of housing is driving away the best talent. With house prices in London reaching an all-time peak, business owners have warned of a “brain drain”.

The Supper Club, which represents 330 entrepreneurs from a range of sectors, found that 79pc of respondents fear a skills crisis within five years.

Of course, for as long as London remains a leading world city – at the cutting edge of finance, business and culture – it will remain a pricey place to live. After all, there is a flipside of the economies of amalgamation – some stuff, like housing becomes more expensive. And yet, there can be no doubting that house prices are hitting crisis point. For Generation Y, many can’t foresee how they will ever be able to own property in the capital. London’s big divide is between the owners and the renters and successive governments’ failure in allowing more houses to be built is squarely to blame.

To give you a sense of the crisis, Shelter’s model predicts that fewer than 1 in 5 of London families will be able to become owners by the age of 65 if prices inflate as they have done in the past.

As the LSE’s Paul Cheshire points out, politicians haven’t stepped up to the plate. The coalitions’ Help to Buy policies are doing little (except pushing up prices), while Labour’s suggestion for partial controls on rents, increased security of tenure, and elimination of agent’s fees for finding housing for renters, will probably just decrease rental supply as fewer people want to become landlords.

Cheshire believes “nothing short of radical reform will improve housing affordability. But radical reform, like intelligently loosening restrictions on Greenbelt building, is frightening.” Affordable, more stable house prices should be the policy goals of all political parties. This requires a more liberalised system, whereby the demand for housing would impact its supply.

This generation of successful entrepreneurs may be able to live in London but their employees increasingly can’t. And crucially, for the wealth of this nation, the next generation of entrepreneurs may have already moved to a city where the cost of living isn’t prohibitively expensive – and my first pick wouldn’t be the UK.

What's at stake in the social justice debate

The most interesting cultural debate of modern times is about the free expression of ideas. The main instigators of this debate are the social justice movement. It champions people who lack or are seen as lacking social power, like women, racial minorities and transgendered people. It does this by criticizing people who say and do things that hurt or reinforce the powerlessness of these groups. An example may be the ‘misgendering’ of a transgendered person – that is, referring to someone as a man when they identify as a woman.

Opponents of the social justice movement are numerous but intellectually disorganized. In this post I hope to draw the lines of battle as fairly as possible in order to make the fundamental argument clearer to both sides. I will try to make a case for the side I prefer in a future post.

The social justice movement sometimes tries to “show the door” to people who say what it sees as bad things. One example was the campaign against Brendan Eich after he was made CEO of the Mozilla Corporation, which makes the Firefox web browser. Eich, who invented the Javascript coding language, had donated $1,000 to the anti-gay marriage campaign in California six years previously. This led to a campaign for a boycott of Mozilla products and calls by Mozilla employees for Eich to resign. Ultimately, Eich resigned.

Another recent example is the (comparatively muted) reaction to TV presenter Judy Finnegan’s discussion of a rapist footballer on Loose Women earlier this week. Finnegan argued that because the rape was not violent and the victim was drunk at the time, the footballer should be able to return to playing football after he had served his time. This has prompted calls for apologies and so on.

The Eich case is significant, the Finnegan case is not. But both are essentially skirmishes in the debate over what we can say in public and what we can't. Note that I disagree with both Eich and Finnegan – I support gay marriage and I don’t think ‘non-violent’ rape is any less bad than violent rape (except the obvious additional injuries and trauma associated with any violence).

But the crucial issue is not whether these beliefs are good or bad, it’s whether they’re acceptable to say in public. This is what distinguishes the social justice movement and makes it interesting: its aims are to discourage the expression of certain bad beliefs, not to correct or rebut them. It’s not about whether Eich or Finnegan’s beliefs are right or wrong, it’s about whether society should tolerate their expression at all.

This is very important. Much of the content of the social justice movement’s beliefs is either right or trivial – gay rights are good, acceptance of transgendered people is good, etc. The idea that makes the social justice movement special is the idea that some ‘words matter’ so much that we need to stop them from being said through social and consumer pressure.

For the most part, the debate is not about legislation on either side. Most social justice advocates want to boycott firms that employ people with bad beliefs and socially shun people with bad beliefs. Some have sudden conversions to ‘thin libertarianism’ when opponents say they are undermining free speech, claiming that the only kind of freedom of speech worth caring about is that affected by the state.

But this is silly. Private actions can impose costs on others to an enormous extent. If being a Muslim in Britain meant losing your job and losing your friends, it would be a significant and meaningful limit to your freedom to be a Muslim. To the extent that this happens, it is a meaningful limit on Muslims’ freedom. The consequences are what matter.

Members of the social justice movement might point out that words do indeed have consequences. Eich’s donation helped the platform of people who want to restrict gay rights; Finnegan’s beliefs may lead to greater tolerance for rapists and hence, at the margin, more rapes. And almost everyone thinks that some words should be restricted: harassment and threats can ruin people’s lives and it is for the best that certain kinds are illegal.

What’s more, lots of people who think it’s bad to boycott a firm for employing a transphobe think it’s right to boycott a firm for employing, say, a racist. And virtually everyone thinks it’s OK for a firm to fire an employee for being rude, obnoxious or dishonest.

But this may go too far. Even if words can have bad consequences, they can have good consequences too. A utilitarian justification for free speech is that we need it to discover what’s true. Many beliefs that once seemed untrue to almost everyone later became very convincing to almost everyone, like heliocentrism and equality for non-whites. We can never be sure of practically any of our beliefs, but we do seem to have the ability to gradually sort bad ones from good ones. A competitive ‘marketplace of ideas’ may be a good way of helping that to happen.

I suggest that opponents of the social justice movement should organize around this kind of principle. The onus may be on us to prove that losing the 'marketplace of ideas' is worse than the hurt and/or powerlessness that its existence exacerbates.

The question is about the costs of freely discussing ideas that may indirectly lead to bad things. In a future post I will try to argue for a very extensive form of free speech that would require us to tolerate the expression of virtually any concept or idea, if it’s done so politely and honestly. But to understand why we should value a 'thick' definition of free speech we must first understand why people want to curb it.

Something a little odd in Russell Brand's Revolution

We clearly weren't going to get a deep and complex understanding of economics in Russell Brand's little manifesto for a better world, Revolution. Nor, given that his amanuensis appears to be Johan Hari, should we have expected one. But to get the result of one of the more famous psychological/economic experiments the wrong way around is still pretty impressive:

Slingerland explained, between great frothing gobfuls of munched hazelnut, that this inherent sense of fairness is found in humans everywhere, but that studies show that it’s less pronounced in environments where people are exposed to a lot of marketing. “Capitalist, consumer culture inures us to unfairness,” he said. That made me angry.

The anger there is justified. For all of the experimental evidence points entirely the other way, that capitalist, consumer (the two being linked because only this capitalist free marketry has ever produced a society where consumerism is even possible) cultures show vastly increased senses of fairness. It's actually one of the things that makes them work.

In the closely related ultimatum game one player is given some sum of money to split (say, $100). Player one can decide how that split is to work, 50/50 or 99/1 and anything inbetween or the other way, their choice. Player two the decides whether to accept that split at which point both participants get their cut of the cash. If player two rejects the split as being "unfair" then no one gets anything.

The standard results (usually those results come from rather rich Ivy league students playing each other as that's the group that professors tend to have access to) indicate that there is an inherent "fairness" bug built into human behaviour. If player one moves to something like a 70/30 split (and it's worth noting that no one ever offers better than 50/50, there's just no 40/60 splits out there) then the odds of the deal being rejected soar.

People really are willing to punish themselves to enforce some idea of fairness.

And that's where the usual analysis stops: people are fair so capitalism Yah! Boo! Sucks!

However, some researchers have started to play this very same game with people who are not rather rich Ivy League students. And the results in non-capitalist, non-market and non-consumer societies are very different. Here people act more like the conventional game theory would expect: when offered a 98/2 split player two will take it. Heck, it's 2 free dollars, why not? People in non-capitalist and non-consumer cultures do not seem willing to pay a price themselves to punish perceived unfairness.

All of which shows us that capitalist consumerism brings with it (or, as certain researchers posit, the behavioural change is what makes capitalist and free market societies work, that understanding about the quid pro quo) a heightened sense of fairness and equity, not a lowered one.

As I say, we'd not expect Brand (or Hari) to get their economics correct but to get it 180 degrees the wrong way around is still pretty impressive.