Category: economics

Faster, please.

Gavin Kelly argues that it doesn’t much matter, from a practical point of view, what the Eds decide about the coming spending review. It covers 2015 and 2016, and administratively speaking changing it wouldn’t have much impact before the end of the financial year in April, 2016. After all, the Tories and the Lib Dems only managed to implement a few billion in in-year cuts.

I think this is, in a word, nuts. First of all, the comprehensive spending review timetable is not controlled by the precession of the galaxy. It was invented by Gordon Brown. It’s an administrative construct, not a law of nature. If it was absolutely necessary, it could be changed. That said, administrative constructs have a life of their own. After all, there’s a reason why the end of the financial year is in April.

Much more importantly, though, we should think back to the summer of 2010. It is of course true that a lot of the cuts weren’t implemented until much later, and indeed some still haven’t been implemented. But there is surely a reason why the recovery stopped dead in Q3 2010, just then. The Government took considerable care, over the summer and autumn of 2010, to communicate that it intended to swing to austerity, to prepare the public with rhetoric, and also to make early announcements that would be hard to roll back, as costly signals of credibility.

Hence the decisions to kill the Building Schools for the Future program and to chop the Nimrod MRA4 planes up for razor blades. They knew it would take some time to implement the plan, and they took action ahead of it in order to commit themselves irrevocably.

If you think expectations, predictions of the future, plans for investment, and forward guidance on policy matter in economics, you should take this very seriously. It is utterly conventional to say that governments should hand monetary policy to the central bank, or import credibility from a fixed exchange rate, in order to commit themselves in advance. If you’re a Keynesian, you presumably think animal spirits – largely intuitive enterpreneurial judgments of future prospects – play a key role in the determination of investment.

For some reason, “expectations” have always been used as a punch at Keynes, as an argument that stimulus always and only achieves inflation. This only works with full-blown Ratex, but still, it is surely strange that nobody seems to think that the government credibly signalling an intention to achieve deflation might cause rational economic actors to expect just that but everyone thinks the same would work for inflation. They had the power, they had the intent, and it was what half the country feared they’d do.

If you want a slightly more formal statement of this, consider either an adaptive-expectations model where people adjust their expectations to what just happened, or else a slightly more sophisticated one where people follow the trend with gradually increasing confidence, but try to identify break-points where things change. (I’m indebted to Daniel Davies for this idea.)

Another issue is the composition of the cuts. So far, they have disproportionately fallen on capital investment and specifically on construction. The front-loaded element was even more so. There are good reasons to think that investment, and even more so construction, are the leading variables in the economy. (Kondratieff, Keynes, and Kalecki thought so, and that’s just the Ks.)

Now, consider François Hollande. The PS has pursued the idea of staying the course until some future development makes it possible to do otherwise – either a shift in European politics, or eventually winning back the confidence fairy via enough “sérieux budgétaire”. Surely, the expectation this creates is that it’s not getting any better, and is likely to get worse with the chance of some sort of horrible accident, and therefore it’s best to dig a hole. Of course, being in the eurozone creates constraints the UK doesn’t have.

I’m on the record as saying that the worst possible thing that could happen at the election would be Labour getting Zapped into Hollandaise sauce. So I think that whatever is planned for the spending review, the very first days of the Eds should include an immediate demand shock, if nothing else to show willing. The example of 2010 suggests that it might not need to be very big. Similarly, the example of 2008 suggests that a relatively small discretionary stimulus might be more effective than we think. And both suggest that targeting capital investment and construction would help.

The title is, of course, taken from “Crazy Mike” Ledeen. If he could influence politics with his blog…

From the economy (and asterisk-biz)

VoIP engineer, Linux developer ( Asterisk, 2+ years, Perl, MySQL)

ESSEX BASED – Small but growing hosted VoIP provider requiring experienced engineer to join our team. Looking for a team player who is keen to be involved in new ideas.

The successful candidate is required to have:

-2+ years of VoIP (Asterisk, SER/Kamailio), incl. experience of independently setting up VoIP systems.

-Familiarity with AGI and able to develop in Perl

-Working with large Servers and carrier grade hardware.

-Strong Linux background (RedHat/Centos/Debian)

-Thorough understanding of the principles of VoIP telephony (SIP)

-Working knowledge (experience) of SQL based DBMS, MySQL.

Desired skills:

-Web development experience, HTML/XML/SOAP programming.

Your duties (role) will include:

-Support the company and its client’s Hosted VOIP platform, help in developing new services.
-Looking after existing infrastructure, modifying and updating services.
-Deploy new VOIP platform to new customers.

-Provide hardware maintenance and general technical support for the platform.

-Liaise with other members of both, technical and sales teams, on service planning, capacity forecast, quality issues, etc…

-Report to manager, on all service outages and take proactive steps to minimize downtime.

Tent provided Salary £30,000+ based on experience.

Pigs

OK, so who spent a significant part of their evening reading about pigs and pork thanks to a Twitter row about CRESC? Yeah, me.

I think that paper is rather good, and you can see the applications to something like this. That said, I wonder how euro-compliant some of it is.

I’d really like something similar about call centres, and I was driving at it with the series. Mind you I’d also like to write it myself.

37.2 homogenous capital units and one for the barman

Just a quick hit, in comments at Steve Randy Waldman’s:

Economists who think finance is merely a veil over real production also think real production is basically just like the easy bits of finance, for example, British government bonds – negligible transaction costs, huge liquidity, instant and frictionless trading, authoritative pricing and well-defined pricing models, abundant and public information

Our economic future: Other.

So, reading the LSE Growth Commission report. There’s the usual stuff about infrastructure, and they want both an infrastructure bank and an infrastructure planning commission (I remember that!) and crappy provision for small and medium-sized firms’ financing needs, hence a KFW-analogue. So far, so radical consensus.

There’s also a weird fetish for academies; apparently we need them because British schools aren’t doing well enough by the most disadvantaged kids. Well, it wasn’t that long ago that academies/specialist schools/whatever were there to stretch the sharp-elbowed middle classes’ gifted and talented kids and therefore to keep them in the system. It’s like Paul Krugman’s joke – how many European finance ministers does it take to change a lightbulb? Austerity! – just with academies.

If the most disadvantaged kids’ problems are really so ingrained that we need to tear everyone else’s schools up, you might think it would be a better idea to stop disadvantaging quite so many of them.

I snark, but actually there is a good, new idea in the report – as well as GDP and inflation, median household income should be reported and treated as a policy target. I’d sign up for that, on condition that it is calculated in real terms, using RPI or something similar rather than CPI aka “inflation with all the important stuff like food, housing, and energy taken out”.

Meanwhile, IPPR Juncture (oooh, IPPR, look at him, probably buys rocket salad on the internets and has a beeper) has a really interesting piece about 1970s industrial policy from Alan Bailey, the head of industrial policy in the Treasury at the time.

Two points here. The first is that Bailey notes and regrets that the policy framework didn’t really care about the service sector.

The fact that the services sector was a large and growing part of the economy was briefly recognised, but the remainder of the white paper, and the sectoral analysis, concentrated on manufacturing industry; the needs of services were to be handled separately (if at all).

As I said in this post on the NESTA innovation report, why is there no Council on Industrial Service Design?

The second is this:

I recall that the best-performing sector under ‘General Engineering’ was ‘mechanical machinery not elsewhere specified’, the statisticians’ residual ragbag

Bailey recalls this as an example of the statistics, or possibly the assessment process, being flawed.

But I think there may have been something else going on – what if the statistics were right, and a lot of productivity was concentrated in firms whose outputs were purely intermediate, often very specialised, but not easily allocated to a sector defined by the end user?

This basically describes the idea of the “industrial commons” or “clustering”, and it strikes me that the British engineering firms that survived Tory Macroeconomics Experiments 1 and 2 are very much like that. There aren’t so many that have a well-known final product; there are a lot that make recondite intermediate products and do rather well.

Jakob Whitfield’s awesome blog has a case in point. When Frank Whittle was looking for technical partners to work on the jet engine, he found them all over the UK; Firth Vickers in Sheffield forged the main turbine, High Duty Alloys Ltd. of Slough the compressor, and although most of the people he asked thought it was impossible, a Scottish firm he found at the British Industries Fair took on making the combustion chamber.

Later, when the project became a national priority, all kinds of other firms were involved via the Gas Turbine Coordinating Committee. Ricardo, still going today, provided engineering consulting on control systems. My favourite, though, is the Leicester Shoe Machinery Company, which helped Power Jets invent several new machine tools to productionise various bits of the engine and lent them engineers to advise on the problems of mass-producing them.

This stuff is important. I guess it’s the charismatic megafauna vs. smelly jungle thing again; the West Midlands lost Triumph and Rover, but it kept Ricardo and a huge range of subcontractors. Depressingly, though, I suspect that it might be hard to operationalise this as policy in a way that wouldn’t tend to concentrate investment in the West Midlands and the South-East.

A brief inquiry into the nature and consequences of think-of-a-number pricing

Inspired by this weekend’s story that you now pay a transaction fee to fly Ryanair even if you use a Ryanair credit card, which is apparently a thing that exists even if it sounds like it shouldn’t, I have been thinking about their business model. It is not what you may think it is.

This is one of those stories where there’s a business school whiteboard version, and then there is reality. The whiteboard version goes like this: they disaggregated all the service elements formerly bundled into the airline ticket, and priced them. As a result, through the wonder of revealed-preference, we know that people value some of them enough to pay for them separately. You then repeat the words “Southwest Airlines” several times, and ponies!

The cynical version starts off like this: ok sunshine, you expect me to believe a single write operation on their OLTP system costs £6? Seriously. If FR’s IT was that dreadful, they wouldn’t be able to run an airline.

Now, here’s the clever bit. Fares are prices; people mostly pick their carrier on fares. This is of course the point of running a low-cost airline. In case you doubt that low headline fares are the attribute of selection here, look at their website or adverts or airport presence. It says “The LOW FARES airline” everywhere.

You can’t choose to fly FR and be handled by some other company, so once passengers pick them, there is no competitive pressure on the fees. By transferring things from the headline fare into non-fare fees, part of the business has been removed from the domain of competition and moved into the domain of monopoly.

Now, as a rule, if something is more monopoly-like, do we expect its price to contain more or less margin? I think we know the answer to that one.

This may also create an opportunity for tax-dodging. Imagine a company that puts the IT systems that do its check-ins and credit card processing into a subsidiary that lives in, say, Luxembourg. You could move income from the operating business into the subsidiary. I have no idea if FR does this, and finding out would involve reading their report and accounts. Reading financial filings is something I do if people pay me, like enduring carols, riding, making PowerPoint slides, and going to Dubai.

However, they’re the airline that charged all its flying training candidates £50 to read their CVs, and then charged everyone who paid it by credit card another £50 three months later to “reconsider”, so…

Upshot! Disaggregating bundled products does not necessarily increase competition. In fact, it can actually transfer economic activity from the competitive sector to the monopoly sector. This creates opportunities for think-of-a-number pricing.

Think-of-a-number pricing is pricing that has no necessary link to economic reality, and is only constrained by a vague sense of plausibility. It is what happens when your electricity company decides to “estimate” your usage between two actual readings and sends you a gigantic bill, in the hope you’ll just pay it rather than calculating how much power over how much time that means and explaining to their call centre that this would have required quite an impressive industrial-grade circuit, and that a standard residential supply would have burned out in a giant blue flash, and as you aren’t speaking from beyond the grave, repeatedly threatening to change provider…until the enemy cracks and settles for a modest increase in the monthly payment.

Unlike normal prices, think-of-a-number prices convey no information whatsoever, other than the fact you’re being ripped off, which is only of use if you have alternatives. The informational function of prices is kinda important for the whole edifice of economics, and is the entire basis for the notion that tax-funded spending is by definition inefficient, so this is a non-trivial point.

From a business, rather than economic, point of view, this of course means that disaggregation creates margin.

In the last analysis, though, something very interesting is happening here. Weirdly, if you bundle all the services and sell them for a single sticker price, like a proper airline, they have a real price! Because, after all, you still compete on fares, so you need to keep costs down. The IT department has to contribute to the competitive effort. But if you break them out, they don’t, and because of think-of-a-number pricing, economic information is destroyed! And, as no competitive pressure is involved once you’ve sold the ticket, it is inevitable in a profit-maximising firm that an element of think-of-a-number pricing will happen!

And we have an existence-proof that people do actually behave in the way this requires, buying on headline price and then submitting to think-of-a-number pricing: it’s called Ryanair. Now, we could also go on to discuss their user experience design and the notion of “cooling out the mark”, but this blog post is long enough.

Economic reality is yesterday’s political choice

Economics is an agenda-setting system. Here’s a working example – Noah Smith engaging Robert Gordon (who is in his turn drinking from the poisoned well of Tyler Cowan). Gordon’s big idea is that y’know how things aren’t so great? Well, they’re always going to be awful, so there’s nothing can be done about it! And therefore, we don’t need to discuss any action and shut up.

He argues this for the following reasons. One, he thinks technological progress is slowing down. Two, he thinks the US labour force won’t grow as fast as it did. Three, educational attainment has “plateaued”, based on the OECD PISA comparison. Four, high income inequality means structurally weak demand from the “consumer” (aka labour) sector. Five, globalisation. Six, the environment. Seven, “debt” of whatever sort.

Well, the first of these is an arguable proposition. Personally, I can think of plenty of people who are convinced that technical progress is accelerating, others who think it is slowing down, and still others who think (like David Harvey) that it is illusory or even undesirable. I would argue that both the declinist and Kurzweil-ist views are wrong for the same reason: they are both exercises in cherry-picking the data. Singularitarians love computing and sometimes genetics, because both fields give you an instant optimism hit. Declinists prefer to pick problems that remain unsolved and projects that failed, because that’s what their prior assumptions are set to. Both views are dependent on prior value judgments.

But I have a more subtle and useful critique. Economists tend to think technology is exogenous. Historians of technology couldn’t disagree more. In their view, technical progress happens through learning-by-doing. This has an important corollary – you learn nothing by being unemployed except that it sucks, and a set of survival strategies that aren’t much use except in the context of being on the dole. Technology is, in part, endogenous, and therefore it is influenced by macroeconomic policy.

Surely demographics is an independent, structural force? The answer to this is “bullshit”. There is a reason why the European countries with welfare states that are more generous to parents in particular (like the UK, Sweden, and France) have much higher TFRs than the Mediterranean ones that are getting told that they aren’t having enough kids and also that they need to slash their welfare provision. Further, people who are thinking of starting a family need to know that they are likely to have a job.

And the US is a country, despite everything, where people queue up to get in. Therefore, there is an even more direct way in which its population is a political choice. They can issue more green cards.

As for education, Gordon argues that the US is doing badly, and that it is doing badly compared to its competitors. The competitors, presumably, did something different. Perhaps they didn’t spend so much time teaching the controversy? It is a political choice.

It seems to me hardly worth saying that inequality is an expression of political power, but perhaps it should be banged home. The US could become more equal by changing the tax code, hiking the top rates and putting the money into the earned-income tax credit. If income inequality is the problem, the answer is surely to do something about it.

Globalisation, well, I thought it was meant to be good for growth? Snark aside, if the US wants to deglobalise, it can increase its tariffs, subsidise exports, and devalue the dollar. It is a political choice.

As for the debt, surely nothing is more subject to politics than the size of the government budget deficit, and the incidence of taxation? Further, if it’s the fact that consumers want to save/reduce their debts that’s the problem, the government ought to be running a deficit, because how else can the private sector save on aggregate?

As for the environment, well, where the fuck have you been all these years, smartarse?

But the interesting point here is how a succession of political choices, which were all originally sold as being economic requirements, are now recycled as being structural economic forces in themselves. As such, it turns out, they explain the problems of the day entirely, and get rid of the need for further political choices. A structural force is very often nothing else than an unrespectable political choice.

This is the spirit of what I call Sad Donkey economics, although sadly my prediction hasn’t yet delivered. Now, Chris Dillow argues in Gordon’s favour that equities are pricing-in low growth. But then, why would they do anything else if the politicians have chosen it?

What I did on my holidays: a stability pact photo

OK, here’s a photo from my summer.

IMAG0287.jpg

The car, in front of the modernist building, in the rather dilapidated car park, is an actual product of the DDR, a Wartburg, with Hungarian plates. Where are we, and why?

Obviously, we’re in Archway, N19, north London but not the cupcakey sort. The car park is next to the council gym where I work out – got that, assassins? – and the building is part of the Archway towers complex. By pure serendipity, it might also be the one that used to be Global Witness HQ, where I skulked in back in 2005 or thereabouts to borrow a copy of Alex Yearsley’s Dutch intelligence file on Viktor Bout, including the phone bills that went into this post and this one.

You’ll notice the lack of any jubilation around that Wartburg – if you look really closely you might also notice, like I did, signs that the driver might be living in the car. I’ve noticed, also, a few signs of a Hungarian community around there, like the Bulgarian one down the road where I live. But, eh, people living in Wartburgs. This wasn’t what we signed up for, was it?

At the same time, I was amazed just how often I met people rolling in 1980s kitsch in Berlin, which is about the last place where the 80s are worth romanticising. (There, and West Yorkshire.) You could stick a caricature together – 80s music and look, 60s architecture, with the politics of the 1990s. Everybody thinks it’s Ostalgie, but I suspect it’s really westalgie, and it’s pissing me off to have to look at the EU I spent so much time defending to people and (essentially) studying for a degree that was meant to make me an instant eurocrat, and see an institution more neoliberal than the US Democratic Party (and that’s saying something – but when did you last significantly expand the welfare state?).

There will be more of this. So you may wish to go and read the Viktor Bout posts.

The radical consensus

“Why the Olympic Games mean we should support my politics” is already a sizeable genre, as Chris Brooke pointed out, quoting Daniel Davies in plausibly deniable mode. However, one of the very few pieces in this line that is worth reading is this one by Will Hutton, using the British Olympic team as an exemplar for the institutions-first industrial policy today’s kids are going wild for…well, at least the TUC, the Labour Party, and for that matter the CBI.

Of course, a lot of people on the Left and even quite a few on the right and for that matter Vince Cable have been going on about this stuff for years, notably Hutton. Don’t get stuck next to him at a party. But the Olympics piece is one of the very few I’ve seen that actually gets it across, and as such I recommend it.

If Ed Miliband isn’t an idiot, he’ll play up the point that every interest group in town suddenly loves the Fraunhofer Gesellschaft. With few notable exceptions. The only politician, businessman, or trade unionist worth having who doesn’t agree with Will is of course the man best placed to stop anything like this happening, George Osborne.

So perhaps Bryan Gould was right about the 1987 Policy Review. And I should really read up about the Labour eurosceptics (this being a point of Tom Barry’s) – not so much for the euroscepticism as for their take on City/wider economy politics.

Whatever happens, there’s clearly a bit of work to do, via Tom Watson on Twitter.

The Portuguese Development Agency offered a 45 per cent subsidy on the total cost of investment in new weaving technology, developed by Brintons, while the best Britain could offer was 10 per cent through the Regional Growth Fund [and that only next June].

There is of course a criticism here that this is just the politics of productivity, and a lot of the stuff about “reforming British capitalism” tastes of filler (who wants to reform British socialism?) but then, it’s not like we’re swimming in good ideas.

when the invisible hand kills a million people, it leaves no fingerprints

Another request-for-book, borrowing the title from a favourite Daniel Davies-ism from the days he used to say rude things about the IMF.

It strikes me as interesting that the idea of inflation/devaluation/currency debasement has such long legs and is written so deep in the culture, when its opposite – deflation/recession/depression – is so much more effective as a way of creating misery. After all, for inflation in itself, rather than a change in prices relative to wages, to be a problem, you need to be rich and most people aren’t. That’s part of the answer in itself, of course. But still, the invisible hand kills millions without leaving fingerprints, but you shave the silver content of the coinage a bit and they’re still putting on plays about what a bastard you were 800 years later.