The confidence trick

This is the heart of the narrative that holds the government’s economic policy together:

Towards the end of Labour’s time in office, government borrowing was threatening to spiral out of control. Questions were being raised about our national credit rating, and the bond markets were pushing up the cost of borrowing. The coalition’s determined programme of larger and faster spending cuts has rescued the UK, creating much-needed confidence in the prospects for deficit reduction and, as a result, economic growth.

So: what’s the evidence?

I’ve looked at the yield on 10-year government bonds – a standard measure of the interest rate the government pays to borrow – and worked out how it changed when a select half-dozen events happened. I’ve taken the average bond yield over five trading days before each event and over five days after, to smooth out the effect of momentary blips, and compared each pair:

1. On 29 March 2009, credit-rating agency Standard & Poor’s warned that without a stronger deficit-reduction strategy, the government’s AAA credit rating might be at risk. Between the five days before this and the five days after, 10-year bond yields rose by 0.06%, making borrowing a bit more expensive.
2. On 21 May 2009, Standard & Poor’s formally moved the UK government from a “stable” outlook for its credit rating to “negative”. Bond yields rose by 0.38%.
3. On 26 January 2010, the fund management firm Pimco (a major player in the global bond markets) said that UK national debt was a “must to avoid” as it was “resting on a bed of nitroglycerine”. Bond yields rose 0.002%.
4. Coalition negotiations meant that the change of government took longer than usual. But between the five days before the election (6 May 2010) and the five days after David Cameron became PM (11 May), bond yields fell by 0.21%, making it cheaper for the government to borrow.
5. On 22 June 2010, George Osborne produced his first Budget. Bond yields fell by 0.18%.
6. On 22 November 2010, the government published its full spending review. Bond yields fell by 0.04%.

Well, this all seems to support the government’s case. There’s only one small problem: all these numbers are for US government bonds, not UK ones.

Here, by contrast, is what happened to UK government bond yields:


So in all six cases, when there was supposedly bad news for UK bonds, US bonds took a bigger hit, and when there was supposedly good news for UK bonds, US bonds got a bigger boost.

[Update: For a longer perspective than five days, I’ve averaged over the six months before the election (November 2009–April 2010) and the following six months (May–October 2010). From the first period to the second, UK government bond yields fell by 0.64%, but this was beaten by US bonds, which fell 0.75%. This simply does not support the claim that the coalition and its policies have been key to keeping UK borrowing costs down.]

In fact, US and UK government borrowing costs are very strongly correlated these days (since 2008, a massive +0.9):


So, unless the US markets are hypersensitive to what happens in Britain, something much bigger has been going on.

Before I get into what that is, let’s see how the actual amount of government borrowing relates to the cost of borrowing. The government’s story says that these are positively correlated – as does common sense. Surely, the more you borrow, the bigger a credit risk you become and people will charge higher rates to lend to you. So, if the amount of money the government is expected to borrow rises or falls, bond yields should move in the same direction.

Let’s see.

Every month, the Treasury collates the latest set of independent economic forecasts. Sometimes these look only two years ahead and sometimes they look farther, so the data I’ve put together is a bit irregular.

First of all, in Labour’s final year, there were five sets of independent forecasts of government borrowing that covered 2010/11 and 2011/12. This chart shows these alongside monthly averages for government bond yields (yes, UK ones):


As Labour’s time in office drew to a close, independent expectations of government borrowing were falling, not rising. The correlation between the level and cost of borrowing (albeit from a tiny sample size) was strongly negative. This means that fears of higher deficits could not have been responsible for the rise in bond yields that happened during this time. (And bear in mind that US bond yields also rose over this period.)

Secondly, over the lifetime of the coalition, here’s a chart showing monthly bond yields alongside independent forecasts of government borrowing across 2011/12 and 2012/13:


Again, the correlation is negative. As borrowing expectations have risen over the last six months, the cost of borrowing has fallen. This means that increased confidence about lower deficits could not have been responsible for the fall in bond yields. (And bear in mind that US bond yields also fell over this period.)

I’ve shown one chart for before the election and one chart for after. Wouldn’t that miss the change between the two governments, when both borrowing forecasts and the cost of borrowing both fell? Yes. But this fall in UK bond yields was matched – in fact, exceeded – by the simultaneous fall in US bond yields, which really can’t be explained by changes to UK fiscal policy. Something bigger is going on. But what?

The answer has two parts. For the first part, we can turn to Nick Clegg.

After the election, the Lib Dems abandoned their more gradual manifesto proposals for reducing the deficit and signed up to the Tories’ plans for faster, bigger cuts. Clegg said that the situation in Greece, which exploded shortly before the election, had changed things. In that, at least, he was right. However, he meant that there was a danger of the sovereign debt crisis spreading to us, so we had to be extra cautious with our finances. But the real lesson is different.

Investors have to put their money somewhere. Bonds issued by developed-country governments are normally seen as ultra-safe, and the yields paid on these bonds are normally quite low, as the safety is their main selling point. For higher returns, you can make a higher-risk investment elsewhere, if you dare. But the crisis in the eurozone meant that the risk-averse large institutional investors lost their appetite for Greek (and later Portguese, Spanish and Italian) government bonds.

So they needed to invest somewhere else.

On 23 April 2010, the Greek government requested an IMF/EU bailout. Between the five trading days before this desperate act and the five after, UK government bond yields fell by 0.07% and US bond yields by 0.04%. Rather than a fear of contagion hitting all sovereign debt, those countries that the markets saw as nowhere near the danger zone – including the UK – found that they could borrow more cheaply. Increased demand from fleeing investors brought down our bond yields.

And this persisted: 23 April 2010 was the day that US and UK bond yields both began a largely uninterrupted four-month fall.

The second part of the answer – what bigger thing is going on to make non-eurozone government borrowing so cheap even while so much of the stuff piles? – is the condition of the economy more broadly. But it relies on the same principle: investors have to put their money somewhere.

Jonathan Portes of the National Institute of Economic and Social Research reasons that lower bond yields would be a sign of confidence and economic strength if they were associated with a better stock-market performance; but they’d be a sign of weakness if they went hand in hand with stock-market falls. He finds that, since the coalition was formed, there’s a “strong, significant and positive” correlation: bond yields fall when the stock market does as well.

He’s right. I’ve checked, and from June 2010, government bond yields and the FTSE have shown a correlation of +0.56. The persistent weakness of the economy as a whole (in Britain and elsewhere) means that private-sector investment prospects look poor. The result of this pessimism – as with the flight from Greek bonds, although at a less frantic rate – is that investors who might have put their money in the stock market are instead going for government bonds, further pulling yields down.

This can also explain the counterintuitive positive correlation I noted earlier between the cost and the predicted amount of government borrowing. As the economy falters, investors move from stocks and shares to the safety of government bonds, driving down the yield on them. But a weaker economy also means lower tax receipts and higher welfare spending, so borrowing forecasts go up.

And that’s exactly what’s happening. The government can borrow so much so cheaply not because its plans (which keep getting rewritten for the worse) inspire such stunning confidence but because the rest of the economy inspires so little. It’s a sign of failure, not success. The story the government’s trying to spin us is entirely the wrong way round.

A few closing remarks, because I’m not in this post advocating any particular fiscal policy over another:

• While the government’s deficit-reduction plan has had little discernible effect on the cost of its borrowing, that doesn’t mean there isn’t a difference between safe and risky borrowing. There is. Both this government and the last have clearly been seen as being on the right side of the line – by the markets if not by the commentators. Despite the political rows, the difference between the Osborne plan and the Darling plan wasn’t massive.
• While nobody knows exactly where the line is, it’s clear that a few extra tens of billions of borrowing wouldn’t spark a crisis; indeed, feeble growth and high inflation mean this is exactly what’s happening. But, conversely, it’s far from clear whether a few tens of billions of stimulus would really make much difference to growth.
• Crisis avoidance isn’t the only reason to reduce borrowing as quickly as we reasonably can. A 12-digit deficit, even on a low interest rate, still costs a lot, and servicing debt interest isn’t the most socially or economically useful thing to do with taxpayers’ money.
• Economics isn’t the only reason to be sceptical about the virtues of rapid public spending cuts. It’s not just faceless bureaucrats and feckless scroungers that will suffer as a result.

Update: Chris Dillow also ponders what low bond yields mean and what the stock market can tell us. but he looks at the FTSE small caps index rather than the more globalised FTSE 100. I think the lesson is that the economic slowdown that's pushing bond yields down is not confined to the UK - just as my chart of US and UK bond yields would suggest.

Poor school results

One of the biggest things affecting a school’s exam results is not what happens inside the classrooms: it’s the backgrounds and circumstances of the children the school lets through its gates in the first place. The more children from poorer families a school has, the worse its exam results tend to be.

The graph below shows almost every state secondary school in England [1]. It plots how many of each school’s pupils qualify to receive free school meals against how many of each school’s pupils get at least five A*-C grades at GCSE including English and maths. Roughly speaking, it plots poverty against results [2].


There’s a pretty good correlation, of -0.57, between how many pupils are on free school meals and how many get five A*-Cs including English and maths. As poverty rises, exam results fall (although this fall levels out after around the point where a fifth of a school’s pupils qualify for free meals).

The grammar schools skew the picture – but only a little. Among comprehensives, the correlation is -0.55 – only slightly lower.

Most grammar schools are clumped up in the top left corner of the graph. They get very good results, which is hardly surprising given their intake. But selecting for ability also tends to select for wealth. The average selective school has just 2.6% of its pupils on free meals, while comprehensives average 16.7%. In fact, there’s not a single grammar school in all the land with even three-quarters as many kids on free school meals as the average comprehensive.

The next graph tells a similar story to the first, but it just covers comps, and it gets rid of a lot of the noise by grouping together schools by how many children on free meals they have (0-0.9%, 1-1.9%, 2-2.9%, 3-3.9% etc.) and shows the average results score for each such group:


But the correlation figures above understate the strength of the relationship. There are wide regional variations in prosperity across England, and of course parents don’t navigate the education system on a national scale: school choice works locally.

So by breaking the figures down into individual local education authorities (LEAs), we can see how strong the relationship is between poverty and results on a scale more relevant to parents’ choices about which neighbourhood to live in and which schools to apply to.

I’ve checked every LEA with 20 or more secondary schools (the smaller they are, the less reliable the correlation stats become [3]). There are 45 such LEAs, out of a total of 150.

The correlations range from -0.57 (Cornwall) to -0.90 (Leeds) – with an average of -0.76. So if you look into an individual LEA, the local link between poverty and results is usually much stronger than across England as a whole [4].

(LEAs with selective schools appear to have only slightly stronger poverty-results correlations than all-comprehensive LEAs.)

All this just shows how strong the link between poverty and GCSE results is. The exact nature of the causation is more complex to untangle, but it’s going to involve the fact that struggling to make ends meet makes it harder to devote time and resources to one’s children’s development. It’ll also, conversely, involve the fact that schools with good results become oversubscribed, driving local house prices up so that these schools become fuller and fuller of children with well-to-do parents.

One way to stop the education system from segregating children is to prevent popular, higher-scoring schools from cherry-picking the most promising ones. Banding and lotteries are efforts to achieve this, but I’m not aware of any compelling evidence either way on their effects.

The government’s big plan is the pupil premium, Nick Clegg’s favourite boast but something that appeared in all three main party manifestos in 2010. It’s an interesting way to motivate higher-scoring schools to admit more poorer pupils. Whether it succeeds or fails will depend on whether the extra cash can overcome the fear of being dragged down by the chavs.


[1] 2009/10 data, from the ‘Secondary’ tab of the ‘School spending – all data’ spreadsheet produced by the Department for Education. I’ve had to take 23 schools out of the calculations as there aren’t exam results figures for them.

[2] Qualifying for free school meals is an imperfect measure of poverty, related as it is to receipt of certain benefits. But it’s a decent indicator. Also, there are many other ways to measure how good a school’s results are than the number of kids getting five A*-Cs including maths and English: you could raise or lower that bar as you liked. This, however, is the data I have.

[3] Out of curiosity, I also looked at each of the 26 LEAs with under 10 schools in the data set. All have similarly strong negative correlations, for whatever that’s worth – except for the odd (but tiny) outlier of the Isle of Wight, whose five schools form a decent line sloping the other way, for a correlation of +0.51. I don’t know what, if anything beyond random variation, is going on there.

[4] How can pretty much every LEA have a stronger correlation between poverty and results than the national figure? Simple. This chart shows the schools in Bradford and Northamptonshire:


The red dots are pretty clearly grouped around a line (Northants has a correlation of -0.81), and so are the blue dots (Bradford’s is -0.76). But they’re different lines: Bradford is, on the whole, poorer and has more schools getting lower results, but with increasing poverty making less of a difference among its schools than in Northants.

So putting all the dots together blurs the clarity of the lines a bit: the overall correlation across the two LEAs between poverty and results is -0.73 – still high, but lower then either alone. The same thing happens, on larger scale, when looking at all the schools across England together.

Grammaricks

Over on my other blog, I've got some limericks about language, grammar and editing.

Because silliness is better than politics.

(It'll help you with the first one if you know that 'stet' is a proofreading term meaning 'leave it the way it was'.)

Brown’s fiscal mistake

Labour’s time in power can be divided into three periods, as far as the public finances go. First, borrowing was reduced to zero and below, cutting the national debt from 42.5% of GDP in 1996/97 to 29.7% in 2001/02. Then, a period of borrowing 2.3-3.3% of GDP a year, raising the national debt to 36.5% of GDP in 2007/08. And finally, all hell broke loose.

It’s the middle six years that are now the most contentious, when the government ran deficits that weren’t huge but were still on the large side given that the economy was doing well.

That said, there was a world economic slowdown around 2001-03, and the fiscal stimulus that resulted from extra borrowing probably helped the UK come through in pretty good shape. Indeed, Chris Dillow goes further, arguing that the longer pre-crisis period was one where government spending was an important prop to the economy – tighter fiscal policy would have meant less growth and potentially a bigger housing boom if interest rates had been cut to compensate.

It’s also debatable how much less bad things would now be if we’d gone into the crisis with a balanced budget rather than a 2.4% deficit. We could have had a bigger stimulus (and, hopefully, a smaller recession), or had the same stimulus with less borrowing overall (so smaller interest payments and, hopefully, slower spending cuts now) – which would have been better. But the flipside of going into the crisis in better fiscal shape, as Chris argues, is that we might have been in worse shape in other ways.

But there is one sense in which Gordon Brown unarguably got it wrong.


This graph shows government revenues relative to GDP (thick black line) compared with a series of Brown’s Budget forecasts (dotted coloured lines):

Year after year, Brown predicted the Treasury’s income was about to rise to 40% of GDP and above; in reality, it never even reached 39%. Now, public borrowing is hard to predict, and so a couple of years of undershooting is acceptable margin-of-error stuff. But by, say, 2004, it must have been clear that something was wrong with the forecasting assumptions: the money consistently wasn’t appearing as expected.

Brown should have rethought his tax and spending plans or at the very least his predictions. After several good years, the Treasury had – like the financial sector – become optimistic to the point of complacency. And so, as they don’t like to mention, had the Conservatives, who in 2007 signed up to Labour’s spending plans for the following years.

Zeno’s paradox of fiscal policy and Osborne’s prophet motive

As Duncan reminds us, the central aim – the “fiscal mandate” – of the government’s fiscal policy is this, as set out by George Osborne in last June’s Budget:

the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget.

The thing about the fiscal mandate is that it’s a rolling target. In June 2010, the end of “the five-year forecast period” was 2015/16. Now it’s 2016/17. During the next election campaign, it’ll be 2020/21.

(Also note that it covers cyclically adjusted borrowing, excluding capital spending. These caveats take out a hefty chunk of the actual deficit. And yes, Brown was just as bad, with his ‘borrow only to invest over the course of the economic cycle’ Golden Rule.)

Which means that the notion of ‘hitting’ this particular target collapses – like the protagonists in Zeno’s paradoxes of motion, we’ll never reach the end of the rolling five-year period and see where it hits. But if Osborne can’t ever hit (or miss) the target, all we can do is judge whether he’s ‘on course’ to hit it.

This is why the Office for Budget Responsibility is so important to him: the official central objective of fiscal policy is for the announcement of that policy to induce the OBR to make a favourable forecast. That’s all.

It is, of course, ridiculous to think that government borrowing can be accurately predicted that far ahead. Osborne and the rest, whatever their faults, are (mostly) not mentally subnormal. And the OBR shows no signs of being any more accurate a coven of seers than the in-house Treasury forecasters used to be.

All of which means that the fiscal mandate in itself is a convenient fiction. Nobody cares about a few billion pounds here or there several years down the line. The real aim of this device is to persuade the king’s prophets to pull something out of the entrails that will give the troops confidence for the fight. And, given the sheer amount of ‘eliminate the deficit by the end of this parliament’ coverage that’s followed, it’s working. Politically, at least. Temporarily, at least.

Because Osborne has allowed an impression to take hold that the target is more rigorous than it really is. That suits him for the time being. But those simplified headlines, which he’s hardly rushed to correct, may end up as embarrassing for him as “Brits 45 mins from DOOM” became for Blair. In early 2015, when we’re still borrowing however much, it’ll look like a failure.

(And, as Duncan also points out, there’s also a ‘supplementary’ target that does have a fixed date: for government debt as a share of GDP to be falling by 2015/16.)

Updte: here's a chart showing what happens to the deficit when you adjust for the economic cycle and then take out capital spending (predictions as per Budget 2011):


Note that Osborne's taget measure (the green line) excludes roughly half of public borrowing at the moment. This cyclically adjusted current deficit was hardly out of control before the credit crunch hit; indeed, Labour had it lower going into their recession than the Tories had it going into theirs at the start of the 1990s. I raise this not to imply that everything was fine in 2007 but to point out that Osborne's choice of target doesn't necessarily do the political work he'd like it to.

Well, quite

I’ve just noticed that David Cameron began his speech about the riots and looting with this line:

It is time for our country to take stock.

The labour market

Just been listening to Peter Lilley on Radio 4 explaining why we need to force the workshy to get jobs.

Good luck with that.



Update: I should have included my data source. From the Office for National Statistics, select option 21.1 (Vacancies and unemployment). Then data series AP2Y is total UK vacancies, MGSC is seasonally adjusted LFS unemployment among those aged 16+, and JPC5 is the ratio (excluding agriculture, forestry and fishing for a reason that escapes me – perhaps there are a couple of million lumberjack vacancies that could save the day). Thanks to CH and friends for reminding me to add this.

How I tried to incite a riot using the mainstream media, and got away with it, by Tom Freeman (aged 18¼)

What with the recent rioting and looting – and the four-year sentences given to two morons who tried (and failed) to whip up a bit more trouble by posting on Facebook – I was reminded of my own murky past.

In 1995, when I should have been revising for my A levels but found everything else somehow more interesting, I noticed a letter in the Guardian from a man complaining about how unaccountable our rulers were. I don’t remember whether the idea came to me immediately or crept up on me over a few hours, but my reply was published on May 31:

In answer to Joe Phillips (Letters, May 30), I’m afraid there are very few ways in which we can vent our dissatisfaction at the monarchy, or the House of Lords, or even the Government between elections. We have opinion polls, where we can say what we like but get dismissed as unrepresentative, and we can write letter to politicians and newspapers but get dismissed as cranks.
However, there is a third way. At 2.30 tomorrow afternoon I will be conducting a violent and bloody revolution at the Palace of Westminster. All welcome. Refreshments will be served and crèche facilities will be available. Weather permitting.
Tom Freeman

Nobody could possibly take that seriously, just as nobody could possibly take seriously a jokey tweet pretending to threaten Robin Hood Airport with destruction if it didn’t clear the snow and reopen quickly.

Later that day, I received a phone call from a man from Stoke. (Back then, the Guardian printed its correspondents’ full addresses, so he’d clearly rung directory enquiries.) This polite and, from the sound it, ageing class warrior wanted to know about travel arrangements.

I let him down gently, and he had the decency to chuckle. But I realised that further explanation was needed, and so on June 2 the Guardian was good enough to print this:

My fellow anarchists and I apologise to readers for the failure of the planned “violent and bloody revolution” (Letters, May 31). The oppressed masses we had hired for the event were held up by traffic cones on the M4, and so the uprising was inquorate. The regulator Offcoup has recently revoked our Chartermark: with the loss of such government approval, we were unable to recruit enough passers-by to smash the state.
Tom Freeman

The police have yet to come a-knocking.

A quiet quinquennial

Five years ago today I started this blog. This, according to my powers of pretext detection, justifies cake.

But it’s obvious that my heart’s not been in it lately:


I don’t exactly know why the decline. Probably a whole bunch of things.

For most of these five years I’ve been expressing my opinions faster than I’ve been forming new ones, so eventually I was bound to feel I was running out of fresh things to say.

My work has been more demanding lately, leaving me less mental energy for other things. Oh, and I got a new widescreen TV with more channels than I could ever have dreamed of. My IQ drops 10 points when I’m even in the same room as it.

My main subject matter, politics, grabs me less than it used to. I’m still interested enough to read, but not usually enough to chew things over, to chase up some background info, and to write.

The biggest issue these days is how the government’s plans will affect the economy, but economic prediction is a mug’s game. And even once we’ve waited and seen what’s happened, it can damned tricky to untangle what caused what. So all most of us have are our broader views on different fiscal doctrines. And mine are not nearly as well-informed or lucid as plenty of other people’s.

More generally, the novelty of the coalition has faded and the novelty of Ed Miliband’s leadership never quite managed to arrive. I find it hard to care all that much about the supercilious progress of the Tory campaign to disguise power as necessity, or about Labour’s fitful drifting between trying to find a way to be noticed and trying to find a way to be. Balance requires that I also mention the Lib Dems here.

And then, of course, there’s the Blogger’s Ruin, luring so many of us away from the precious paragraphs we once took such earnest pride in researching and sculpting, Twitter. (That said, I’m taking this week off Twitter, so it’s possible that in a couple of days I’ll crack and post 3000 words here about Syria or something.) (I won’t.)

But I’m not quitting. I’ve noticed that bloggers who announce they’re quitting are often back, a few weeks later, as prolific as ever. Maybe I should try that? No, I can’t trick myself if I know what the trick is. So I’ll carry on, posting bits and pieces when the mood takes me. But I can’t promise my former regular readers – I’m no longer a regular writer, therefore I can’t have regular readers any more – the kind of output I once produced.

Either way, thanks for dropping by.

Demons at News International

Usually, when I rewrite a song, I’m trying to raise a chuckle or two. But the News of the World phone-hacking scandal doesn’t really deserve ridicule; it deserves contempt and disgust. So I hope the tone of this is right.

To the tune of ‘Angels’ by Robbie Williams.

Demons

I hear your pain
Do the fear and grief drive you insane?
And do you know
The lengths to which I’ll go
To get your tale told?
But my heart’s not cold
I’m just selling things that can be sold
So when I hear that you’re in dread
Your hope has all but fled
All those desperate things you’ve said
I’m feeding demons instead

[Chorus]
And through it all I offer a great story
All heartbreaking and gory
Whether I’m right or wrong
And down the mobile phone
Wherever it may take me
I know how much you’ll make me
When you try to call
You won’t escape me
I’m feeding demons instead

When you’re feeling grief
And you’re yearning for some dear relief
I’ll be right here
And you know I’ll always give you my ear
And as the story grows
I’ll rake over the bones
And when love is dead
I’ll see the demons are fed

[Chorus]
And through it all I offer a great story
All heartbreaking and gory
Whether I’m right or wrong
And down the mobile phone
Wherever it may take me
I know how much you’ll make me
When you try to call
You won’t escape me
I’m feeding demons instead

Brothers in arms

The origins of the First World War is a classic history exam question. One issue that comes into many answers is the web of allegiances and rivalries among the interrelated royal families of Europe.

The Independent’s picture editors have taken the occasion of this book review to reveal the real family dispute that explains the War:


Oops.

Banks, but no banks

I quite like the idea of giving everyone shares in Lloyds and RBS, because there is a nice neatness (almost a sense of closure) to the concept of us getting something back from the banks we saved. But at the same time I think it’s an unworkable stinker – quite apart from the issue of whether it wouldn’t be better for the government to sell the shares normally and use the proceeds to cut public borrowing.

Mr Clegg said that it was “psychologically immensely important” for people to be given a stake in the banks … to turn RBS and Lloyds Banking Group into “people’s banks”. … “The idea is that people could buy or sell shares over time.” … Mr Clegg said the proposal would create an army of private shareholders that could hold some of the big banks to account, replacing institutional investors who had done too little to curb boardroom excess.

I see his point. But I don’t think it’ll work. He’s reckoning that people will think:

Ooh, shares in a couple of banks that almost went catastrophically bust! That’ll definitely be a good investment, I’ll hang onto those for the long term and certainly not sell them immediately.
And I’m sure everyone else won’t be selling them immediately either, because that would (a) depress the price of the shares, limiting the benefit that people would get and hitting public confidence in the whole exercise, and (b) quickly concentrate ownership of the banks back in the hands of large institutions.
What’s more, now that I own 0.0000018% of RBS and 0.0000009% of Lloyds, I can use my spare time to become an active shareholder and contribute to how these banks are run. It’ll be like the Big Society meets the minutiae of financial corporate governance – I can’t wait!

I suppose it’s possible, but I wouldn’t bet on it.

Fraternité

Last year I thought David Miliband would be a more capable Labour leader than Ed; I still do. But I worry about the idea of (somehow) replacing the one with the other.

The main thing most people know about Ed is that he beat his brother to get the job – and they think that’s a bit odd, and maybe a bit suspicious. That’s a pity. But for Labour to go on to dump Ed and install David would magnify this ‘dysfunctional family’ thing a thousandfold. And it could make the party look very short of talent. Speaking of which...

If there were another credible leader in the wings, the dynamic might be different, but I don’t see who that would be. So, for the time being, we’re stuck with Ed.

The timelessness of news values

My colleague K, who is trawling through old newspapers for her dissertation, has just unearthed this report from the Daily Express in 1965:

Rhyme and reasoning

I know! I can fob them off with some stuff I wrote somewhere else a couple of months ago!

Ahem. A while back, Jams O Donnell asked his blog readers for philosophy poems. Among the responses were a few from me.

First, a pair of limericks advocating and rejecting Descartes’s ‘real distinction’ between mind and body:

A skeptical Frenchman did find
He couldn’t deny his own mind,
But his brain he could doubt
So he therefore ruled out
That the two things were of the same kind.

But Lois thought Clark was a clot
While Superman surely was not;
So they differ, she’d claim,
And yet they’re the same –
So distinctness from thought can’t be got.

First-year undergrad stuff, to be sure, but that’s about all I can remember these days. And they’re bloody limericks, how much sophistication do you expect?

And then I tried a haiku based on David Hume’s view about the standards of evidence needed to establish that a miracle had really happened:

Water into wine
Or wine into witnesses:
Which would you swallow?

Raise rates to cut inflation? It may not be so simple

Higher interest rates do, other things being equal, lead to lower inflation – but this effect takes time to work its way through the economy. What doesn’t take time is the rise in mortgage costs when rates go up. So, in the short term, a rate rise increases rather than lowers the cost of living as most people understand it.

The Bank of England’s target measure of inflation is the CPI. This differs from the previous target measure (up to 2003), the RPI-X, but both have in common that they don’t include mortgage interest payments. The RPI measure does include these (the X that RPI-X leaves out).

This table shows correlations between changes to the Bank’s base rate and changes in the three inflation measures:


(Data from the Bank and the ONS; going from January 1997, before which CPI figures are only estimates, to September 2008, after which we had the extraordinary bout of rate-slashing followed by two years and counting of no change.)

So rate rises are, in the short term, associated with barely lower CPI and RPI-X but substantially higher RPI. A 1 percentage point rise in the base rate over the course of up to a year is on average associated with a 0.7–0.9 point rise in RPI.

Of course, there are plenty of things that affect inflation on any measure – the pressures that might prompt a rate rise are likely to persist – so we have to be careful drawing conclusions about causation. But the difference between RPI and RPI-X is very telling. The two measures should be subject to the same pressures except for those to do with mortgage costs. So this comparison is a pretty good control, suggesting that the Bank’s rate rises cause a much bigger short-term rise in the RPI – and in mortgage-holders’ experienced cost of living – than they cause a reduction in the other components of overall inflation.

This means that if the current high inflation (on any measure) is only temporary, as is often suggested, then rate rises are not just an unnecessary response but a positively counterproductive one. If the inflationary pressures (from e.g. the VAT rise and higher energy costs) are going to drop out of the figures before too long, the only real danger is if these permanently raise people’s inflation expectations and fuel a wage-price spiral.

Given that, an extra jump in the RPI via higher mortgage costs would only add to the risk.

(On the other hand, if the inflationary pressures are likely to endure, then the longer-term disinflationary effects of higher rates may outweigh the short-term risk.)

VAT: the inflationary fiscal contraction

Plenty of us are worried about George Osborne’s doctrine of ‘expansionary fiscal contraction’ – that as he cuts public spending and raises taxes, the economy will not weaken but strengthen.

His theory is that the financial markets will ease as the government borrows less, so that businesses and households will be able to borrow more cheaply and thus spend more, because the now perfectly healthy banks have oodles of spare money to lend and the last few years have absolutely not made any of us debt-averse. This will boost growth and certainly not store up any kind of trouble because rising private debt never leads to economic problems. What’s more, by laying off hundreds of thousands of its own workforce, the government will free up productive capacity and stop ‘crowding out’ our frustrated private sector, which has been desperate to hire more people but just can’t find anyone who’s unemployed.

Well, maybe. But I’m thinking about yesterday’s inflation figures. CPI is up to 4.5%, well above the 2% target, and it’s expected to go higher. As Duncan notes, without the effects of the VAT rise and other indirect taxes, inflation would be a more manageable 3%. Three-fifths of the above-target inflation is the government’s fault.

Pretty much all tax rises slow the economy down. Mostly, they also reduce inflation, as producers and retailers adapt to lower demand by cutting prices. But the government has discovered the ingenious double whammy of a tax hike that raises prices as well as hitting growth: an inflationary fiscal contraction. Both of these things are bad in themselves, but there are two further bad consequences.

First, the combination of them makes life very hard for the Bank of England. Inflation is way above target, but interest-rate rises – the tool for reducing inflation – are risky given the weakness of the economy. The theory was that loose monetary policy could offset ever-tighter fiscal policy, but with fiscal policy creating higher inflation, the Bank will probably have to put rates up sooner rather than later.

Second, state pensions and a number of benefits are linked to inflation. Putting up VAT is supposed to reduce the deficit, but the resultant higher inflation means that a fair amount of the money raised will just end up being paid out again: as a revenue-raiser, it’s inefficient. This will mean the deficit stays higher for longer – unless Osborne, who takes pride in refusing to budge from his Plan A, tightens further still.

Lucky us.

The last gasp of the Labour government

From the IFS:

Crossing out and counting in

As the dullest farce in British history crawls to a close, those of us still in the audience grow gloomily aware that we need to write its ending. This flat, tetchy, flimsy spectacle of a referendum campaign is going to have to have a winner. And what rotten, wooden characters to choose from, reciting lines so outrageous they almost threaten to rouse us from the torpor they send us into.

But I don’t know how to abstain. So I have to try to focus: Alternative Vote or First-Past-The-Post?

Throw off the pious fantasies of the ‘yes’ campaign – as if reshaping the ballot paper would make politicians more decent and diligent, as if we could fashion saints using origami. Cast aside the paranoid fallacies of the ‘no’ campaign – as if some people would get more votes than others, as if a vote counts for more when it’s forced to move downmarket than when it can stay with its first true love. Focus.

As you’d expect from a man of his political acumen, David Cameron cuts to the heart of the matter. He says he will vote against a system that is “a confusing mess of preferences, probabilities and permutations”. And so will I.

Under FPTP, you pick which candidate you like the most. Then you try to estimate whether they have a chance of winning, based on your calculations of how other people are going to vote (all the harder given the big boundary changes for 2015). If you assess that they’re unlikely to win, you have to decide whether it’s more important for you to register your support for them or to pick one plausible winner that you prefer to another such. You mentally compile a list of the candidates that you judge to have a fair probability of winning and decide how much you like or dislike each of them. Then you compare how strongly you feel about your favourite candidate with how strongly you feel about the difference between your most and least preferred of the serious contenders.

And then you distil all this down to one cross in one box. One cross, whether you’re wildly keen or glumly tolerant, whether this is your first choice or just the lesser of two evils.

Yes, AV is more complex than FPTP. That’s something it has in common with us: we are more complex than FPTP, and AV lets us show it without having to second-guess whether our favourite is in with a chance. Because AV is more sophisticated, it allows us to be sophisticated too; it doesn’t force us to feign a single, all-or-nothing partisan identity.

And I’m not just talking about political anoraks like me. Most voters don’t have an overwhelming party allegiance. A poll for the Institute for Public Policy Research finds that just 18% of people are strongly attached to one party; 60% of us have some sympathy for a number of parties.

But is AV too complex to understand? Well, the Aussies seem to manage. Londoners seem to manage with the preferential voting system for the mayor. The Scots, Welsh and Northern Irish seem to manage with the assorted proportional systems for their devolved bodies. And the 2010 British Election Study (cited by the IPPR) gave 13,000 people a mock AV ballot: of those who voted in it, more than 90% picked a second preference, over 80% picked a third and over 70% picked a fourth. It seems that most of us have the nous, as well as the range of opinions, to do this.

It’s true, AV will need more explaining than FPTP. But it’s not nearly as hard as people are being led to believe. Alas, the Electoral Commission’s official explanation is dry and abstract; my own effort was also a bit abstract, as well as being handicapped by its own words-of-one-syllable gimmick.

But I have seen one very good showcase for AV – a three-minute video of people picking where to go for a drink. It ingeniously uses ‘voting to make a choice’ as a metaphor for ‘voting to make a choice’. It applies AV and FPTP in an easy-to-understand context, and shows how AV can stop a minority from beating a majority who are divided by less than what unites them.

So I like the process. What about the results?

The concrete effects AV would have are hard to guess. The safest prediction seems to be: (some) more seats for the Lib Dems, making hung parliaments and thus coalition governments (some degree) more common.

I don’t think coalitions are good or bad per se. I’m no fan of the current one, but I don’t imagine I’d like a Tory majority any more. There’s a view, though, that the process of coalition-making is undemocratic. As Janet Daley puts it, “no political leader can be held to account for his pre-election commitments because they must all be up for grabs in the post-election horse-trading”.

The Lib Dem poll ratings disprove this. There’s a world of difference between political leaders feeling able to say ‘don’t blame me, it’s a necessary coalition compromise’ and voters accepting that.

What’s more, with parties competing for lower preferences as well as first ones, campaigns – and our whole political culture – are likely to become less absolutist. Without the dogma of the immaculate election, as the sanctity of the unsullied party ebbs, so the idea of coalition will become less alien. I don’t say this is good or bad, just that if AV does produce coalitions, it’ll do so by a process that gets us thinking in that direction anyway.

So I’m voting ‘yes’. While AV does cost us some clarity, a lot of that clarity is phoney or forced. AV lets us say more. It allows us to think a little more broadly, to do a little more than dump all our reproachful hopes at one person’s door. People who truly do love one party and hate the rest can carry on putting a ‘1’ and nothing else; people who see shades of grey can be as discerning as they please.

There’s a lot more that could be said about either system; I’ve just focused here on the points that keep leaping out to me. And there are plenty of failings in British democracy, both constitutionally and culturally, that a change of voting system won’t solve. But AV or FPTP is the choice we’ve got to make this week. So, however this ends, after the curtain falls and we shuffle back into the daylight, let’s not conclude that ‘reform is done’ or ‘reform is dead’. Let’s try to do politics better.

Jack Bauer, copyeditor

If you share my sense of humour and fondness for grammar, you might like this what I wrote. (If you don’t, you probably won’t.)

Update 2/5: And here’s a topical second episode, revealing Jack’s role in bringing bin Laden to editorial justice.