back of a spreadsheet; back of the net

No housing benefit for the under-25’s.  There are quite a few reasons why that’s a poor policy.

I wonder if it is the start of an attempt to remove the minimum wage.

So, whilst pondering whether the leave Africans to die in their own cesspools or to bravely and selflessly take on the mantel of running their continent question for them I stumbled on the idea of Charter Cities proposed by Paul Romer.

The idea is that a developing country sings a treaty with one or more developed countries to create a city in (more or less) unoccupied land.  The developing nation gives the land for the city and the developed nation gives the rules, the enforcement of the rules and the guarantee that the rules won’t be changed after individuals and corporations have made difficult to back out of investments in the city.

The idea is based on the observation that rules matter. That one of the greatest barriers to developing countries developing is that they have bad and / or indifferently enforced rules that are subject to arbitrary change (1).

To give the city administration a long term stake in improving the lot of its citizens they own all the land and lease it to, well to whomever want to lease it. If they want to increase rents they have to increase the ability of people to pay rent by making them better educated, more productive, healthier, free-er. No gouging because anyone can leave at any time to either return home or move to one of the other Charter Cities.

People, either only from the host country or from all over the world can move in. They accept the rules of the charter city and get on with earning a living.  If the Charter City offers them a better life than they currently have, they will move there. If it doesn’t they won’t. This would be a third option alongside immigration, possibly illegal, to a place that doesn’t necessarily want me or stay in country that has a low standard of living and isn’t improving quickly enough for me.  A hoped for side effect is that with local competition for citizens local despots and kleptarchs, or local trying really hard but struggling to build consensus would pull their fingers out.

The benefits to the host country are that they end up with a well-run, prosperous city nearby which wants to buy its products and services and in turn wants to sell goods and services. The benefits to the administrative country are altruistic and a hoped for reduction in aid costs and security costs. The people who live in the city, well they benefit because they live prosperous lives in a well-run city. If they find they’re not living in a prosperous city, then they leave.

So, I’m wondering what could go wrong? That’s a serious question.(2)

(1) often as a result of the country being a kleptarchy but not necessarily.

(2) and I'd be obliged if your responses did not use the words Libertarianism or Colonialism.  I want to know what's wrong with Mr Romer's idea, not a straw man.

Some Links for those with a more than passing interest.

http://www.prospectmagazine.co.uk/magazine/for-richer-for-poorer/ 

Article by Paul Romer in Prospect

http://chartercities.org/concept 

The Web Page for Romer's foundation.

http://www.guardian.co.uk/science/2010/jul/27/paul-romers-charter-cities-idea 

A Critical - but in my view not very good article in the Guardian. The comments are more useful.

http://chartercities.org/blog/66/new-systems-versus-evolution

 Romer discussing systems.  (If widgetfox is reading this he may also mention hair and shoes)

http://www.freakonomics.com/2009/09/29/can-charter-cities-change-the-world-a-qa-with-paul-romer/

 A bit of a Q&A by Freakonomics

http://chrisblattman.com/2009/10/14/charter-cities-debate-round-2/

Part of a debate between a sceptic of the idea and Romer - the rest are findable.

Today’s foray into the Ten Pillars of Economic Wisdom is my response to the second of Henderson’s Pillars, Incentives Matter, Incentives  Affect Behaviour.

This post started out as a reply to a comment on this entry.  It got a bit long and became a post of its own.  Below I attempt to excuse the poor performance of macro-economics as a science and demonstrate the better peformance of micro-economics.

It is certainly the stated aim of the science economics to understand economic activity so that testable predictions can be made and be seen to be correct. In that sense it is a science.

It’s ability to do that in macro-economic situations is relatively poor. I offer the following explanations and excuses.

The range of possible outcomes is much greater than the range of interesting outcomes.  A prediction that, next year, people will buy and sell goods and services much like they did last year but perhaps a little more of them instead of the whole shebang descending into outright anarchy is of less use to the people who use economic predictions than whether GDP growth in the UK is 1.1% or 1.2%.

Newtonian physics ability to predict that the sun will rise tomorrow is much better, but less use, than its ability to predict whether you need to wear a sunhat or a rain hat.

Secondly, macro-economics is looking at very complex systems, made up of other complex systems. The interactions of these complex systems is difficult to understand because it’s quite difficult to isolate them experimentally. (1) Even it were possible to get whole economies in the lab there is so much data that it’s difficult to analyse. So, the macro-economists ability to do primary science is very limited.  They can use a whole slew of real data to try and understand what has happened in historical situations but there are problems with that. Firstly, there is lots of debate about which data are real, influential and complete, which confounding, which complementary. Some of the data is erroneous. Some is corrupt. There are lots of inputs and lots of outputs and the lines between them are not well understood. It’s also not exactly clear whether the inputs are actually inputs or really outputs or just noise.  The second…

 The second is the third big reason why macro-economics struggles.  All the situations it is using to create a model of how economies behave are unique.  The 1929 Crash and Depression has a lot of similarities with our own current situation but it’s different enough that it is unique (2). The next Great Crash and Depression will be different again. You can gain some insight by comparing sets of similar events and trying to isolate differences in input. This is, to use a technical term, bloody difficult. And again, there are the usual arguments about the quality of the data and it’s interpretation.  What you see when you see macro-economists arguing is two people with limited data arguing about whether a unique event was Type 1 or Type 2 with an occasional heckle suggesting it’s Type 3 and someone suggesting that the Types should really be Class A, Class B and Class Pyjama.

In historical terms we’ve had perhaps 6 big recessions or depressions in the UK and maybe 800 adjustments of the Bank of England base rate.  That’s not a lot of data to build a workable theory.  Not compared to the number of times balls have been dropped.

If you want a historical analogy for the science of macro-economics – picture yourself as a 17^th Century physician trying to explain the Great Plague of London. 

Micro-economics, which is where I play, has a much happier situation.  It’s trying to create theories and models that predict the behaviour of smaller systems with fewer participants.  We’re looking at the behaviour of individuals and firms. People are buying and selling things all day every day so there are lots and lots of unique data sets. You can isolate some interactions in a lab and replay them changing the variables one at a time. For those that you can’t there are sufficient volume of interactions that even if we can’t isolate them in the lab we can do meaningful statistical analysis. We can analyse the behaviours, the inputs and outputs, we can drill into the underlying psychology or the maths. And we can test lots of different, seemingly unique situations, again and again until we are able to discover universal rules.

Micro-economics predicts that if the price of a good rises then the volume of sales will fall. You might well say, well, no shit Sherlock, but up until Galileo conducted his experiments people thought that the large cannon ball would hit the ground before the smaller one.  So micro-economics predicts that if a price rises, volumes will fall. It offers an model for predicting by how much volumes will fall and what the consequent impact on total revenues will be. It offers a theory for explaining why some goods, Giffen goods, behave differently and sales volumes increase when the price increases (3) and you can use this to predict which goods are going to be Giffen goods. If you see a good behaving with a strange price elasticity of demand you can run experiments to see if the good is a Giffen good or a Veblen (high status goods).

The theory of transaction costs offers a predictive model for where the boundaries between different organisations will lie based on the comparative cost of performing specific operations in house or hiring out the work. It tells me that firms will be reluctant to hold rare and expensive specialist services on their books 365 days a year if they can hire in consultants when they are needed and only when they are needed. It tells me that small firms therefore won’t have internal consultancy departments but that very large firms might do for some specialist roles. And lo, MLW and f4f3 both land contract work doing specialist labouring.

Most excitingly for me, we can do economics experiments on non-humans and get decent results predicting the way they behave and how that behaviour will change over time if we change one of the input variables. The maths of economics appears to be coded into the genes of species.

So, macro-economics has problems with prediction because it’s ability to gather experimental data is poor. It’s a problem intrinsic to the nature of the beast it is studying. The theories are untested and a bit wild. This won’t really improve until we have much more data.  Check back in 2512. Micro-economics is much better at predicting outcomes using a theory. Theories can be built and quickly tested in the lab and in the wild.

One way of looking at stock and commodities markets is as a series of experiments where scientists pretending to be traders use a predictive model to work out if a price is going rise or fall.

(1) an example of an attempt to perform economics on an experimental basis is North Korea. A second, perhaps happier example, is Cuba.

(2) e.g. no China and India growing, or not, at 10% per annum.

(3) Giffen goods, fascinating and one of my first loves as an economist.

I was asked by widgetfox for my views on The Ten Pillars of Economic Wisdom by David Henderson.

I broadly agree with them. Not as the absolute Truth of Economics, but as a handy guide for students. More anon.

A conversation developed on twitter between widgetfox, andrewducker and myself which we all agreed would not suit twitters 140 character format. I offered to set up a conversation on LJ. Here is it. I’m starting by recapping the position so far. In the interests of cohesion I’ve expanded my own original points a little. If I’ve misrepresented any of the contributions from WidgetFox or Andrew Ducker, then I’d welcome their correction.

To my broad agreement with the Ten Pillars I offered my opinion that one should remember that macro-economics sits on a foundation of human psychology and that you should be able to build up to macro-economic principles from the psychology of individuals and you should be able to work down from macro-economic principles to the psychology of individuals.  I’d go further, if you can’t root your macro or micro-economics in human psychology then you’d better start work on the economics again.  I think my favourite example of this is Modigliani and Millers Nobel Prize winning statement of the bleeding obvious in relation to the Weighted Average Cost of Capital.

WidgetFox disagreed (1).  She suggested that 1) (a) humans are distinct from each other and (b) are inconsistent in their behaviours so are hard (impossible) to model. 2) people interact in complex systemic ways with each other and this makes their behaviour even harder to model.

Andrew Ducker said he disagreed with these statements from WidgetFox.

We touched on time preference and risk preference.

At this point we all decided that having this conversation on twitter wasn’t going to work.

I’m not sure whether I agree with WidgetFox or not.  I certainly agree that humans are inconsistent in their behaviour and that they interact in complex systemic ways.  I’m not so sure that, in macro-economic terms, they are distinct. In any event, this might make their individual behaviour difficult to model. I’m not sure, that it makes it impossible to model. I think I’m a gnostic on this point.

What I think we’re dealing with in economics is not the way individuals behave in a particular situation, but the way they behave on average and in aggregate and the way they make individual decisions. I think that macro-economics is the aggregation of micro-economic behaviour and that micro-economic behaviour rests on heuristics and bounded rationality (amongst other things, but heuristics and bounded rationality is most germane to this discussion.)

Whilst there is a difference between All People are X and On Average People are X I think in macro-economics the difference is cancelled out by the sheer volume of transactions and actors. For most, if not all, macro-economic situations I think it is unlikely that there is a significant difference between All People Being X or the Aggregate Position Being X (for an individual who is facing whatever curve macro-economics is offering.)  A large part of the practical business of macro-economics is about trading positions. If there are evenly balanced outliers in a set of economic actors then the curve takes the same shape as if all people agreed that it should have a certain shape. (2)

On a micro-economic scale it’s not necessary to understand how particular individuals will behave. What you need to understand is whether heuristics tells you that whatever black box the human mind is, either single minds or complex systemic groups, sufficient people will be nudged into your shop to make opening that shop worthwhile.  There might be sufficient people who will buy very low quality at a very high price to keep you in business (3) but on average economics and experience says not.

The fact remains that individuals and firms manage to anticipate the individual and group behaviour of others sufficiently well in order to engage in economic transactions with them.

(As a side note I wonder at the effect on macro-economics that many of the large volume actors are professionals.)

WidgetFox will undoubtedly have made and be about to make a more subtle and nuanced argument than I understood. I look forward to it, knowing that the fault for not understanding what she says lies with me. 

I’m looking forward to Mr Ducker expanding on why he disagrees with WidgetFox on the modelability of humans.

(1) She didn’t call me Lord Copper this time. I’m not sure this strengthens my position.

(2) I’m quite interested in the ability of betting markets to predict outcomes. So far it looks like they no worse than any other method.

(3) and they are called tourists

I’ve been looking at voting intentions by class recently and thinking about class generally a bit recently.

I’ve also been thinking about the Living Wage and the work of Rowntree on the Poverty Line

Class is a strange thing in Britain. In Australia where I have lived class is different.  I don’t think it’s correct to say there is no class distinction in Australia but it’s more closely tied to economics than social position.

For me class in Britain seems to be some synthesis of current and future economic position, education, social position, the type of job you do and some kind of nebulous cultural affinity.  Is Alan Sugar working class or an aristocrat?

I’ve been trying to winnow out the economic element. My classification below is work in progress. I’d welcome any constructive criticism. I’m trying to focus on the impact economic positions have on choice, security and expectation.

When looking at income I’m not currently drawing a distinction between income from earnings, from social transfers or from free at point of use access to socialised services such as health care or education.

I do draw a distinction between income that is earned and income that is derived from owning capital. The key distinctions being choice about working or nor and choice about when you consume you’re lifetime wealth.

The key caveat when considering my classification is that is isn’t just your current position that matters to my mind but what you expect your lifetime position to be. I think there is a considerable difference between being a poor student at Oxford trying to live on £12k a year until your job offer to work for a bank comes in, someone who has just bought a house and so is spending most of their income on mortgage payments and has £12k a year after paying for housing and being a cleaner in your 50’s with no savings trying to live on £12k a year.

Classes of Labour

 On the Poverty Line / On the Living Wage – or just below.

 Too little income to participate in society fully and with dignity. Significant risk of long term health issues do to persistent material shortage. Significant risk of serious discomfort due to short term financial shocks. 

 (I’m struck by how similar the Poverty Line and the Living Wage are in conception.)

 Much lower than this and I think you are in danger of imminent death.

 Subsistence Labouring

 Sufficient income to meet current needs but no capacity to build up meaningful reserves.  An income from labour that allows some “luxuries”. A significant one off financial shock would result in Poverty Living for some time (e.g. a car crash resulting in absence from work and the need to buy a new car). Every penny is counted and accounted for. One is living from paycheck to paycheck.

 Comfortable Labouring

 Sufficient income to meet current needs and to save against certain one off shocks but still not able to accumulate significant amounts of capital.  Will never have the deposit for a house so will never own their home so will be paying rent forever. Essentially working until death or retiring into Poverty.

(Not really happy with the name for this group – I’m trying for something that suggests that life is pretty okay at the moment but only so long as you keep working.)

 Prosperous Labouring

 As Comfortable Labouring but with the ability to save significant amounts of capital for the long term future. By significant I mean sufficient to live on. So enjoying the material well-being of Comfortable Living whilst also saving for a mortgage, saving for a pension or putting aside cash. Someone who was in the Prosperous Labouring group might expect to retire into the Comfortable Labouring Class type material well-being.

 For me this is a key break point. This is the place where someone working can look forward to not working, or having choices about the amount or type of work they do. They can also face the future without fear of a significant material drop in their current living standard.

 Affluent Labouring

 As Prosperous Labouring but with sufficient saving ability that they would retire into Prosperity i.e. even after reaching the point where they can give up paid labour they are still able to put surplus cash aside and this gives them the ability to significantly assist children or grandchildren.

 (I am wondering if the one of the most profound social, economic and political  phenomenon we see in the early part of the 21^st Century might be the division of the UK into those whose grandparents left them a house in their will and those whose grandparents didn’t – this might be seen as the completion of Thatcher’s revolution or not.)

 Affluent living just keeps going. I don’t see any significant difference in outcome for people who work – it’s just how quickly you decide to trade working for not working and how much you decide to assist your offspring from current earned income.

 Classes of Capital Holding

 People may hold sufficient capital that they don’t have to work. This may be as a result of inheritance or by working for a while in the Affluent Labouring class.

 I’m going to skip cases where a modest pension and home has been bought and go straight to where there is a difference in outlook.

 Insulated.

 Sufficient capital accumulated to have a secure and materially comfortable life without working.  Wealthy enough that you are not significantly affected by economic cycles.  You are free from economic fear. You are not able to significantly influence social, cultural or political aspects of your community unless you put in labour work.

 Rich

 As Insulated but with sufficient income that one can support several dependents into Insulated status.  Neither you, nor your children (or perhaps even your grandchildren) will ever have to work.

 Perpetually Rich.

 As Rich but with sufficient capital that you and your decedents can live well off the income and never touch the capital.

 The change in outlook here is that one of legacy.

 Locally Influential.

 Rich enough that you could significantly alter social, cultural or political aspects of your local community.  E.g. your financial contribution would be enough to endow a local theatre group, arts centre or sports club or church or university professorship or to assist the electoral chances at a local election of your favoured party. Things get done because you will them. Or not done because you disapprove.

 (There is a bit of a grey area between owning the capital and managing capital on behalf of other people. The leadership of RBS can decide to sponsor local Edinburgh activities with other people’s money.)

 Nationally Influential

 As Locally Influential but at a national level. You probably have your own security service.

 (Clearly there are trade-offs of scope of influence for time of influence.  If I have £10m I can financially back my favoured candidate in my constituency indefinitely or I can spend most of my “spare” fortune on supporting them in a wider sphere once.

 Internationally Influential

 As Nationally Influential but on an International scale. Your wealth is equivalent to the GDP of a small country. Or you are the Hereditary Head of State of a small country.

 Globally Influential

 As Internationally Influential but on a Global scale.  The income from your wealth is equivalent to the GDP of a small country. As a point of reference we are talking Bill Gates here. By careful targeting of your resources you have the ability to significantly alter the prospects for humanity or at least large chunks of it.

I am thinking about self-driving vehicles and the impact of them on day to day life. 

I am often on a bus from Chippenham to Calne so I’m using this bus route as the basis for some high-level* thinking about the impact on my life. 

I’m deliberately showing my workings in case** I have made a significant error in my assumptions. 

The service from Chippenham via Calne to Swindon that I use takes about 1 hour 5 minutes one way. It runs every 20 minutes from 6am until 10 pm. A 16 hour service. 

Labour Costs 

I think there will be 5 buses on the route at any one time, one way. Ten buses in total. 

Those buses will need drivers.  Ten drivers.  But they don’t work 16 hours. I reckon they work 8 hour shifts. So two shifts are needed for each day. That’s 15 drivers.   

The drivers will want holidays and will call in sick. I’m guessing about 15% additional headcount to cover absensce.  So that’s 17 and ¼  drivers working this route.  I estimate their salary including on-costs at £30k.  (I’m basing this on adverts I used to see in Swindon for bus drivers.) 

That’s a cost of £520k for direct labour driving the bus. 

Fuel Costs 

The journey is 22 miles one way. 

For three buses an hour each way for 16 hours I make that 96 trips of 22 miles or 2,112 miles per day.  The service doesn’t quite run every day but let’s assume it does.*** 365 days at 2,112 miles per day is 770,880 miles per year. 

Deisel fuel retails at £1.42.  Buses get a rebate of 43p on the fuel duty they pay so the real retail price of the fuel is closer to £0.99.**** 

Fuel costs therefore about £282k per annum. 

Total marginal direct cost for the service £800k  

So of the marginal direct costs 35% (ish) is fuel and 65% (ish) is labour. Shall we say a 3:2 ratio of labour to fuel. 

Sacking all the drivers saves £520k.  

If it helps let me point out that computer driven buses are going to be more fuel efficient than human driven buses.  I’m allowing for a 10% fuel saving, worth £28k. This takes the total cost of the service down to £254k or 32% of its original costs.  Pretty much the third of the cost. 

What conclusions do I draw from this? What is the impact? 

If you were to install a fleet of self-driving buses on the Chippenham to Swindon bus service and sacked all the drivers the savings from driver wages would be about the same the fuel costs for running the service, twice. Therefore you could either triple the frequency or run two equivalent service on a different route***** 

Self-driving buses half or better the cost, double or triple the frequency or double or triple the coverage of bus transport in the UK. 

There are some flaws with the analysis. The most significant is that in order to double the number of bus journeys you need to double or triple the number of buses.  Say £100k per bus. That would be £1.6 million for my Bath to Calne route. Or the savings made in drivers’ wage for 3 years. 

*EDITED*

*To update fuel cost figures for a fuel used per mile more reflective of rural driving conditions* Quite literally your mileage may vary for this post.

*Vague and almost certainly wrong but hopefully useful in a Fermi sense. Urban bus labour costs to fuel costs might be significantly different as urban buses are in stop start traffic and the density of buses per route is a bit higher (the routes are shorter and more frequent)

**In the expectation 

***The buses will have to be driven back and forwards to the depot and theirs driver training and so on. Let’s call it 365 days. 

**** There are other complexities to do with taxation, especialy VAT but unless you are the Tax manager at my last employer I won’t do VAT for you. 

***** A Bath to Calne route would be my favourite.

A few disorganised observation on the latest UK inflation report.

Annualised CPI fell from 5.2% to 4.2%. It is expected to fall further during the year.  CPI inflation is still more than twice the Bank of England’s target for inflation of 2%. It’s been above target since Q3 of 2007, except for the a couple of quarters when the world’s economy stopped. The Bank’s forecast is that it about even money if inflation will *still* be above target in two years’ time.

GDP not returning to pre-crash levels until the 2^nd half of 2013. The commentary implies persistently high unemployment until after the economy returns to its pre-crash levels. The UK economy appears to have lots of spare capacity, high unemployment, low demand and low wage growth which should indicate falling and low inflation.

Inflation is not only driven by domestic factors and wage inflation in China and oil and energy prices will be significant factors. There is not a lot the Bank of England can do to address these.

£50bn of additional quantative easing. Two points arise. I’m not sure of the long term impact on inflation of 300 hundred billion pounds of freshly minted cash. It might have very little effect. It should have a long term inflationary effect. My gut feel is that the effect of quantitative easing on growth and inflation will be felt later rather than sooner.

Secondly, at some point the money injected to the economy has to come out. I think there is a risk that we get a sudden spurt of QE assisted growth as everyone who has hoarded QE cash realises the economy is saved and spends it. This will cause an up tick in inflation and these effects will be reversed as the Bank of England removes the £325bn of additional cash from the economy. This will make the economy look and feel less certain than it is. This might add another year of wobbly uncertainty. Not so good if you are looking for a job.

Real incomes continued to fall in the face of lower wage settlements and rising energy and import prices and against a background of stubbonly high inflation. Households are also saving more money. 

Businesses are also hoarding cash.

A fairly standard Keynsian response to uncertainty but unhelpful if you want people to buy stuff. The Bank seems uncertain about why the savings rate has increased. They seem uncertain about a lot of things. I am uncertain about how uncertain they are.

Inflation has been running at 4% percent a year for the last few years.  Real wage growth since the crash has been 2%. Not 2% per year. 2%.

Every time I look at one of these reports they predict a slow improvement in the economy starting soon but not quite yet.  Jam tomorrow.

So, I continue to fret away about inflation and the causes of inflation. Not because it is high but because it is uncertain and it is surrounded by bad news.