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Articles by chris

Limits of evidence-based policy

2 days ago

There is something paradoxical about Michael Gove’s recent speech calling for government to be "rigorous and fearless in its evaluation of policy and projects." It’s that his praise for evidence-based policy has come in a year when we’ve seen that policy should sometimes not be based on rigorous evidence.
The best time to have imposed the lockdown was as soon as possible after a few cases had been discovered. But this would have been a hard sell. Not just the grifter media but the public would have asked: why are we losing our freedoms to forestall so small a threat? But of course, by the time there was strong evidence that a lockdown was necessary, it was too late.
Tens of thousands of us face the problem of having to act on insufficient evidence. The equity investor who waits for

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What football teaches us

4 days ago

I was a little perplexed by Tom Chivers’ nice defence of his love of football. For me, any defence can only be a rationalization: my love of the game long preceded the acquisition of whatever feeble reason I possess.
Nevertheless, there is a lot that Tom has left out. Albert Camus famously said that "what I know most surely about morality and the duty of man I owe to sport and learned it in the Racing Universitaire Algerios." He might have added, though, that it teaches us so much about society too.
One thing it teaches us is the importance of emergence and complexity. Danny Murphy exaggerates when he says that Man City’s guard of honour for Liverpool will leave Kevin De Bruyne "clapping for some players who can’t even lace his boots." But there’s a point there. A great team does not

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The economic base of realignment

8 days ago

One finding of Labour’s review of its election defeat is that politics is "organised more around cultural values than an economic ‘left-right’ divide."
This is the theme of Stephen Davies new book, The Economics and Politics of Brexit, in which he argues that we’ve seen a realignment of politics: "the main division in society has switched from being primarily about economics to being about culture and identity" – between cosmopolitans and nationalists. The Tories won December’s general election, he says, because they were quicker than Labour to see this division, and succeeded in uniting the nationalists whilst the cosmopolitans were divided. We can read Sir Keir’s "friends of the forces" plan as an attempt to appeal to the nationalists*.
Which in turn echoes a point made by Matthew

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Ideology vs the triple lock

15 days ago

Centrists want to scrap the pensions triple lock. Matthew Parris says it is now "impossible to defend" and that the old should pay the costs of the lockdown. Also in the Times, Oliver Kamm writes:

People of working age in their 30s, 40s and even 50s are disadvantaged by the way our economy favours pensioners. The cause of intergenerational equity demands some redress for this imbalance.

And Polly Toynbee says it is "rational and inevitable" that the triple lock should go.
I disagree. As I’ve said before, the triple lock is a thoroughly good idea.
For one thing, its main beneficiaries are NOT today’s pensioners but today’s young people. An 80-something will get only a few years of real-terms pension increases. But younger people can look forward to decades of such rises. Because

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Lockdown threats to capital

18 days ago

Many economists agree that a premature lifting of the lockdown will not necessarily boost the economy greatly. As both Simon and Jo say, if people fear catching the virus they’ll avoid shops and restaurants even if they are open.
Which poses the question. Why, then, are so many on the right so keen to lift the lockdown? In part, the answer might lie in a useful concept of Michal Kalecki’s (pdf) – their "class instinct." This tells them that a prolonged lockdown – especially combined with inadequate protection for workers and businesses – threatens the longer-term health of capital. The sooner it is lifted the smaller these threats are.
I’m thinking here of several mechanisms, each of which might well be stronger the longer the lockdown goes on.
First, the experience of huge economic

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Why so little anger?

24 days ago

Richard Murphy asks why there is not more anger at the government’s mishandling of the pandemic and predicts increased anger as unemployment rises.
I agree that people should be angry: the UK’s excess deaths per million exceed those of comparable countries and the government has not done enough to protect workers. But as recent history teaches us, the fact that something should happen doesn’t mean it will. There are reasons for the lack of anger.
One, I suspect, is that in crises people tend to want to pull together and not to rock the boat.
There are two other things that come from my day job that might be relevant here, however.
The first is suggested by research by Christoph Merkle. He found that UK shareholders just after the 2008 financial crisis were much less upset by their

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Origins of a disaster

27 days ago

The FT reports that Johnson " is now convinced that the economy is facing a cliff-edge unless it starts to reopen." But as Simon says:

[This] is a tragic error, not just because it will lead to yet more deaths but also because it will delay any economic recovery…The idea that there is a trade-off between protecting the economy and protecting people’s health is not only wrong, it is also dangerous.

But why do so many ministers and their supporters believe otherwise? I suspect it’s because of several errors.
One is the failure to sufficiently protect jobs and incomes. Yes, the furlough scheme is good. But it doesn’t go far enough. As Eric says, the government could have returned last year’s tax payments to companies and households – which would have done a lot to support the

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Tail risk in policing

June 6, 2020

One of the key things you learn in finance – often the hard way – is that averages and majorities are not sufficient statistics. What also matters – and matters a lot – is the distribution and in particular the extreme of the distribution. Making a profit in 99 days out of 100 is little use if the hundredth day wipes you out.
This tail risk comes in many forms: bonds can default; liquid assets can suddenly become illiquid; uncorrelated assets can fall together; and the rare event such as a crash that you’ve sold insurance against can materialize. And we’ve known since October 19 1987 that the risk is higher than a normal distribution predicts.
Intelligent risk managers and retail investor should know all this and guard against it – although many do not. 
Which is why I was

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Racism as emergence

June 5, 2020

Instinctively, I have solidarity with those taking a knee to protest at racism. But I have a problem here. We cannot eliminate racism merely by being nice to each other, any more than we can prevent recessions by wanting to be richer.
I say this because racial disparities aren’t just the product of racist attitudes – important though these are. They can also arise from human action but not human design: they are also an emergent process.
Such a possibility shouldn’t surprise anybody. When Adam Smith said that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest" he expressed an important point. Aggregate outcomes are not merely individual intentions writ large. Sometimes, selfish people do nice

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Hoist by his own petard

May 26, 2020

There is genuine anger at the behaviour of Dominic Cummings not just among the usual suspects but among some Tory MPs such as Roger Gale and Douglas Ross. It’s worth exploring why this should be the case.
It’s because of cultural evolution. Early humans worked out (or stumbled upon) an important fact, that we often thrive best when we cooperate. As Axelrod and Hamilton showed in a classic paper (pdf):

Cooperation based on reciprocity can get started in a predominantly noncooperative world, can thrive in a variegated environment, and can defend itself once fully established.

Or as Ken Binmore put it in Natural Justice:

We don’t need to pretend that we are all Dr Jekylls in order to explain how we manage to get on with each other fairly well most of the time. Even a society of Mr

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Austerity, power & BBC bias

May 23, 2020

George Osborne gave a revealing interview (1’52" in) to Radio 4 yesterday – revealing, not untypically for the BBC, for what it did not say.
Osborne said that sometime in the "next two or three years":

Markets, and indeed the country, will look to governments to set out plans for how they are going to eventually bring balance back to the public finances.

The first thing that was not said here – and certainly not by his fawning interviewer – is that the more educated parts of the country will be looking for no such thing. Intelligent economists (as well as me) agree that fiscal austerity will be counterproductive. With demand for gilts strong – even at negative yields – government borrowing is sustainable for now. And the best way to get it down is simply to ensure a strong economy.

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What we don’t see

May 19, 2020

Daniel Hannan recently tweeted:

Around 80% of us say we support the lockdown. But, looking around me, I’d say that no more than 20% are still observing it rigorously. Is this a case of what economists call “revealed preference” – or do people want everyone else to apply stricter rules than they do themselves?

It might well be neither. Instead, it’s an example of the sampling bias. The people we see are, by definition, those who are outdoors and thus who are disproportionately likely to be breaching the lockdown. What Mr Hannan isn’t seeing are the countless thousands of us staying indoors and observing the lockdown. He’s failing to appreciate that what he sees is a biased sample of what there is.
In fairness to him, this is a common error, as experiments by Benjamin Enke have

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How to be wrong

May 14, 2020

“The tradition of all dead generations weighs like a nightmare on the brains of the living.” I was reminded of these words of Marx by the Telegraph’s report that some Treasury officials are pushing for tax rises and spending cuts in part because there is a “plausible” risk of a sovereign debt crisis.
Of course, Simon is right: there is no such risk as the Bank of England can, in extremis, buy up gilts. Certainly, financial markets aren’t worried; the latest gilt auction saw record demand. And it would be foolish to begin austerity before the recovery is well-established.
Which only poses the question: why do intelligent people believe such silly things?
Part of the answer lies in selection effects. The interests of capital constrain policy options, and the rise of financial/rentier

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Technocrats & class

May 6, 2020

Are centrists even more utopian than socialists? I’m prompted to ask by a passage at the end of Anne Case and Angus Deaton’s Deaths of Despair. They write:

We believe that capitalism is an immensely powerful force for progress and for good, but it needs to serve people and not have people serve it. Capitalism needs to be better monitored and regulated, not to be replaced by some fantastical socialist utopia.

This comes after 260 pages in which they document how American capitalism has recently been a force not for progress and for good, but for mass social murder. They describe how the collapse of demand for unskilled labour has caused “the loss of meaning, of dignity, of pride, and of self-respect” and so led to tens of thousands of needless deaths of despair among the white

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Avoidable unemployment

April 29, 2020

We Marxists are often accused of being ideologues. This is silly. Everybody has an ideology, in the sense of a set of preconceptions about how the world works. The difference between we Marxists and others is that we are sufficiently self-aware to know this. By contrast, some of the most dangerous ideologies are those which their believers take for granted despite being wrong. This, I suspect, helps explain what is otherwise a paradox.
The paradox is that most voters approve of the government’s handling of the coronavirus crisis despite the fact that Universal Credit claims show that unemployment is soaring, especially perhaps among freelancers: the ONS expects (pdf) it to rise by two million, to over 10 per cent of the workforce.
This rise, though, is largely preventable. In

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Risk in capitalism

April 24, 2020

One thing this crisis is demonstrating is that in modern capitalism it is workers and small businesses that bear risk to a greater extent that does larger capital.
As Paul Evans points out, some of the biggest losers are freelance workers who are ineligible for furlough schemes. And Charles Gascon at the St Louis Fed adds that it is low-paid workers who are most at risk of losing their jobs:

The occupations at the highest risk of unemployment also tend to be lower-paid occupations. The average annual earnings of the low-risk occupations is $64,600, about 75% higher than earnings in the high-risk occupations, at $36,600. This indicates the economic burden from this health crisis will most directly affect those workers who are likely in the most vulnerable financial situation.

The UK

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When rules don’t apply

April 16, 2020

It’s a cliché that this is a crisis. But what exactly is a crisis? I like Richard Bookstaber’s idea – that it is a time when normal economic rules don’t apply.
For example, in normal times investors can reasonably think about valuations and corporate earnings. But in crises what matters instead is risk and liquidity. In normal times, negative feedback loops dominate: cheap assets will rise in price. But in crises, there’s a heightened danger of positive feedback whereby selling begets more selling.
In the 2008 crisis, for example, some opposed bank bailouts fearing a moral hazard problem. But they were applying normal times thinking. What mattered much more was keeping the financial system alive.
We’re seeing the same thing now. This crisis means that some normal ideas don’t apply.

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What centre?

April 12, 2020

The election of Keir Starmer as Labour leader has caused some leftists to fear that the party will move to the centre. Such fears, though, miss the point – that there is no centre.
By this I don’t just mean that there are no votes there, as the LibDems and CUK (or whatever they called themselves) discovered in December. I also mean that there are no ideas there either. One feature of CUK was its utter lack of economic thinking and obliviousness to the fact that the economy has changed a lot since the 90s and so requires new policies. Almost the only substantive thought in its launch document was the notion that government has a “responsibility to ensure the sound stewardship of taxpayer’s money” – an idea that has aged as well as Rachel Reeves desire to be tough on the unemployed.

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“We’ve established that, madam”

April 7, 2020

George Bernard Shaw, it is said, once met an actress and asked her: “would you sleep with me for a million pounds?” “I would think about it” she replied. “Would you sleep with me for a pound?” he then asked. “No” she replied. “What sort of woman do you think I am?” He replied: “We’ve established that, madam. Now we are haggling about the price.”
We should thing about policies the same way. Sometimes, it is worth establishing the principle, and then haggle about magnitudes and timing.
For example, New Labour introduced the minimum wage at a derisorily low rate in 1999. But having established the principle of a minimum it was easy to raise it, and so the UK’s minimum is now comparable to those of many other nations. Similarly, Thatcher’s privatizations began as a small-scale attempt to

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Inequality, morals & Marxism

April 2, 2020

One thing this crisis is demonstrating is that there are plenty of bad employers: the Guardian and Labour List both have lists of them. Another is that, as Sarah O’Connor says, “the people we need the most are often the ones we value the least.” As Paulo dos Santos says, society “grossly undervalues” care work and other jobs essential to fighting the pandemic.
Both these facts show the need for a Marxian perspective.
First, we must ask: why are care workers and others so underpaid? It is certainly not because they lack moral desert. Nor is it because they lack skills: caring demands immense “soft skills” such as patience, discipline and an ability to get on with people as well as physical ones. From a purely technical point of view – that is, one divorced from socio-economic factors –

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The Tories’ dilemma

March 29, 2020

Matthew Parris in the Times raises a challenge for Tories – but not, perhaps, the one he thinks he does.
The government’s willingness to borrow to get through the crisis, he says, undermines the traditional “Conservative case for prudence in public spending.” And if there are not the limits the Tories thought on public spending, then:

The Tories had better brace themselves serious questions about how we can do it for a virus but not to save a shipyard, or the planet from climate change. Or double the future capacity of our hospitals, or legal aid limits, or nurses and carers’ wages.

I think Tories have – and always have had – two answers here. But they contradict each other.
First, let’s dispose of bad reasons for “prudence.”
In part, it is a legacy from different times. In the

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Another wasted crisis?

March 27, 2020

In the immediate aftermath of 9/11 there was much talk that the real heroes were firemen rather than hedge fund managers. That talk soon disappeared, and Americans’ indulgence of plutocrats continued as normal. This warns us about clapping for carers: it might prove to be a brief emotional spasm with no lasting social effect.
Yes, crises can be turning points. But those of the 1970s and 2008 tell us that, for the left, they can also be wasted opportunities.
Here are five uncertainties about how the legacy of this one.
Will the crisis shift politics in a more technocratic direction?
It has taught us that we need more spare capacity in the NHS and that the government has prioritized static “efficiency” too much at the expense of resilience. It’s also taught us that the we need to build a

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Against “aggregate demand”

March 20, 2020

One legacy of the 2008 crisis has been that firms have built up big cash piles. Bank of England data show that non-financial firms now have over £425bn of sterling deposits. That’s equivalent to over two months of GDP and over 12 months of profits. You might think this is a great comfort, as it suggests that companies can respond to their loss of revenues not just by borrowing but by simply running down these cash piles: isn’t that what they are for?
But, but, but. There’s a huge problem here. The firms suffering the biggest drops in cashflow might well not be those with the cash mountains. To the extent that the two groups differ, there will be genuine distress.
Which alerts us to a fact overlooked by basic macroeconomics. The economy does not comprise a “representative agent” firm

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Against one-trick ponies

March 18, 2020

Those of you who believe that bourgeois economics is mere ideology have had two data points of corroboration recently.
First, Stephen Moore, Art Laffer and Steve Forbes said: "don’t expand welfare and other income redistribution benefits like paid leave and unemployment benefits that will inhibit growth and discourage work."
This contain layers of nonsense. For one thing, during the current public health crisis we want to discourage people from working so they don’t infect others. But even in normal times. Their statement would be wrong. In one survey of the evidence Abhijit Banerjee and Esther Duflo conclude that “there is no evidence that cash transfers make people work less.” (Good Economics for Hard Times, p289). One reason for this is suggested by the fact that the unemployed are

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Winning the argument?

March 12, 2020

The reaction of many on the left to the big spending rises in yesterday’s Budget is that they show that Labour has “won the argument” for higher public spending. This is partly true.
On current plans (pdf), total public spending will rise to 40.8% of GDP by 2024-25*. That’s a bigger share than Labour spent between 1997 and 2008. The Tories’ justification for this is correct: low borrowing costs make it sensible to borrow to support economic growth and improve our infrastructure. But this is exactly what most on the left – as well as mainstream macroeconomists – were saying years ago. In this sense, the left has won.
In another sense, though, this is awkward for the left. It tells us that the Tories can increase spending at least as much as Labour can. One reason for this is the old

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On (un)predictability

March 10, 2020

It’s a cliché that stock markets have been in panic mode recently. But why? The answer is not as obvious as you might think. And the issue matters not just for equity investors but for everybody interested in social science.
My chart shows the point. It shows that the All-share index has been largely predictable simply by the dividend yield. Since 1985 the correlation between the yield and subsequent five-year changes in the index has been a humungous 0.8. With the yield now over 5%, history suggests we have the best buying opportunity since 2009.
But, but, but. If investors had believed that the dividend predicts returns, we would never have seen any significant sell-offs of the sort we’ve seen lately. Any incipient rise in the yield would have triggered buying with the result that

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On centrist decline

March 7, 2020

One of the BBC’s most successful comedy shows of recent years is Radio 5’s 6-0-6, wherein actors pretending to be football fans phone in to spout gibberish about the game. A recurring trope is the need for “passion”: managers are expected to be passionate, and teams lose because they “didn’t want it enough.”
I was reminded of this by a tweet from Andrew Adonis, that Labour must “get real about winning” – as if the party would win elections if only they wanted it more.
This is yet another example of one of the great political changes of my lifetime – the utter intellectual collapse of the Labour right.
Think back to the mid-90s. Blairism – lest we forget – was at the time a genuine intellectual project, an attempt to accommodate (mild) social democracy to the economic realities of the

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On capitalist stagnation

March 4, 2020

One of the problems with even the best journalism is that it reports day-to-day events without putting them into context, thereby telling us about the weather but not the climate. So it is with the news that ten-year Treasury yields have hit a record low.
Although the latest move is due to increased risk aversion triggered by the coronavirus this merely continues a long-term trend. Nominal yields have been trending down since the 80s, and real yields probably since it 90s.
Why? Standard explanations talk of the shortage of safe assets and global savings glut. Useful as they are, such explanations miss something important. This is that basic theory (and common sense) tells us that there should be a link between yields on financial assets and those on real ones, so low yields on bonds

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Incentivized stupidity

February 26, 2020

Two good things I’ve read this morning raise an under-appreciated point – that people can be incentivized to behave in ways that seem stupid.
First, there’s Tom Chivers’ review of Mervyn King’s and John Kay’s Radical Uncertainty. He says it is “completely terrifying” that they thought their book needed to be written, because economists and finance types shouldn’t need to be told that “models are not 100% precise representations of reality.”
Of course, he’s right. Models are unreliable and the historic data that goes into them might not be a guide to the future – points well made by Richard Bookstaber in The End of Theory and by Nicola Gennaioli and Andrei Shleifer in A Crisis of Beliefs. But investment bankers have indeed made precisely this error, most famously when Goldman Sachs’

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Immigrants as scapegoats

February 21, 2020

Several observers believe that insofar as the government’s points-based immigration system reduces immigration (which as Jonathan says is “far from certain”), it will do real economic harm. Ian Dunt says it “is a bitterly stupid and small-hearted thing to do.” And Anthony Painter writes:

The scale of the change and its suddenness risk very significant negative impacts. Businesses and public services could struggle to fill vacancies, seasonal businesses could especially suffer, and costs could escalate impacting business and public service viability.

These harms arise because, to the extent that the new policy is based upon economics at all, it rests upon a fallacy – the idea that, as Iain Duncan Smith told The World at One (20’58” in), immigration has a “very negative effect on

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