Friday, May 27, 2011

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?

Thursday, May 26, 2011

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.)

Wednesday, May 18, 2011

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.

Tuesday, May 03, 2011

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.