Monday, 11 January 2016

The Procrustean Economy

In the Greek Myths Procrustes offered a unique proposition to the weary traveller. He guaranteed that whoever you were he had a bed that would fit you precisely.

Of course once the deal had been made, the reality emerged. There was just one size of bed. If you were too short you were put on the rack and stretched to fit. Too long and your legs were shortened with an axe.

So it has been with the economies across the world for decades now. They have been promised riches by the snake oil salesmen who try to pass themselves off as scientists and then rammed into a 'one size fits all' ideology, based around the false idea of equilibrium.

All the world economies have been forced to fit this peculiar bed, and have had their policies tailored to the idealised model, with the actual underlying people rammed into the structure regardless.

The consequence of this should be obvious, but seems to pass people by. The data collected from such economies will resemble the data you would expect from the model.

It really can't do much else - since the policies are there to prevent deviation from the norm. Therefore when you do empirical studies what you are actually using as data is the output from a system rammed into an inappropriate model. The data is tainted and what the taint means has to be understood.

It becomes part of the Orwellian self-referential structure that reinforces the norm - academic journals  where the peers doing the reviewing 'believe in the concept' and therefore reject anything novel out of hand, awards created by people who 'believe in the concept' and awarded to other people based on how hard they also 'believe in the concept', and data used to try and validate policies that are derived from structures that are already moulded into the form of the policies.

If you observe the movement data from a man in a straitjacket then you will form a particular view of the movement capabilities of a man. The problem is that you are neglecting to notice the straitjacket or the possibility that it could be removed.

Moreover even if you do notice the straitjacket, it is impossible to find an instance of a man without one, or to get into a position where you could remove it and see what happens.

To move forward we really need a world where the restrictions can be removed. The mainstream may have locked out the physical world with their politics and policies, but these days people have alternatives to the physical world that they can immerse themselves in.

We have virtual worlds.

Sunday, 3 January 2016

UK: Vacancy Ratio and People Wanting Work - QE Oct 2015

It seems I haven't posted this set of graphs for a while. Here are the overall 'wanting work' statistics:
The ratio of people wanting work to vacancies is now back to its pre-crash levels. And this means we're running up against the matching problem which is the essence of unemployment.
The UK participation rate. This is the ratio of those 'in the labour force' (ie unemployed and employed) to the household population. It differs from the ONS's 'employment rate' in that it doesn't exclude those over 65 (although over 65s who want a job are still classed as 'retired').

One of the features of the UK economy is that there is very little change in the participation rate (note the scale!). It's always about 63%. This is the case even if you use an extended participation rate including those who are 'inactive - want a job' (which raises the rate to about 68%).
Source: Office of National Statistics, tables MGSC (ILO Unemployment Level Ages 16-64 - Quarterly seasonally adjusted), LFM2 (Inactive - wants a job - Quarterly seasonally adjusted), YCCX (Part time workers - reason for working part time, could not find full time job - Quarterly seasonally adjusted), AP2Y (All vacancies - Quarterly seasonally adjusted), MGSL (LFS Household Population - all aged 16 and over - Quarterly seasonally adjusted) and MGRZ (Employment Level - all aged 16 and over - Quarterly seasonally adjusted).

Saturday, 2 January 2016

How Not to Model Human Behaviour

... humans are not random. They (we) are strange and wonderful. Their behavior may be unexpected or inconsistent (i.e., noisy), but it is not random. As an example, here is a simple demonstration. An easy question will be presented below and you may take hundreds of milliseconds to answer, but do answer. The question is: “Pick a number between one and four.” Have an answer?

The most common response is “three” and there is a secondary effect of this task: people feel a need to explain why they chose whatever answer they did. The second most common answer is “two”. Very few people decide to respond with either “one” or “four”. Sadly, there is not a serious study of this behaviour but undocumented sources suggest that the response statistics are close to 50 percent for “three”, 30 percent for “two” and about 10 percent for the other two answers.

The common explanation for the selection of “three” is that it was the most “interesting” number in the range. There is also a small number of people who are compelled to answer outside of the range, with fractions, or irrational numbers. These are rare occurrences. Similar results are obtained when the task is to pick a number between one and twenty. The similarity is that people pick their most interesting number. For this range, the most common response is 17, occurring about 40 percent of the time, well above a “rationally”, “logically” expected 5 percent. Other primes are also favored as answers because they too are interesting.

This behaviour is interesting. The decision-­‐making process should be simple, but it certainly does not appear to be a simple random selection among equally likely options. What this shows us is that people cannot even be random when they want to be. Further, if this task had been modeled as a uniform random distribution among equally likely choices, it would have been very different from actual behaviour.

Modeling human choices as uniform random distributions is making a very serious claim about human behavior. It is saying that all choices are equally likely even when we know nothing about how people actually decide. It also assumes people have no preferences, do not consider the consequences of their actions, have no memory of previous choices, and can be more consistent than the data shows. Modeling human behavior requires some data or some experience. Luckily, modelers are human and should know better.
Kennedy, William G. "Modelling human behaviour in agent-based models." Agent-based models of geographical systems (2012): 167-179.

UK Private Debt Levels - Q3 2015

The relative debt level for the UK look like this:
Relative deleveraging across all sectors has stopped this quarter. Everybody has put on more debt than GDP growth. In particular the household sector continues to grow its debt more than GDP - albeit slowly.

Source: Office of National Statistics. Private sector debt based on tables NLBC, NKZA, NNQC, NNRE, NNXM, NNWK, NLSY, NLUA, NJCS and NJBQ (Lending and securities per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted). Data and calculations are available online

UK Sectoral Balances - Q3 2015

Here's the latest UK Sectoral Statistics. The Household sector continues to net borrow and the corporate sector continues to net save. The RoW is now saving less in Sterling per quarter than they were earlier in 2015. The five sector chart shows the household/corporate distinction much more clearly. The household sector is now into its third year of borrowing more than it is saving in aggregate, and the level of borrowing from other sectors continues to increase. The household sector is now 28% of the overall 'deficit' from the deficit sectors. The pattern continues as the corporate sector prefers to hoard rather than invest and the government tries to push debt onto the backs of the household sector.

Next quarter we get the Q4 stats, which includes Christmas. So we'll see how much of Christmas was on credit cards.

Source: Office of National Statistics, tables RPYH, RQAJ, RQBN, RQBV, RPYN, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Data and calculations are available online

Friday, 1 January 2016

The Left's Love of Higher Law

One thing I've noticed during debates over the past year or so, is that those on the Left are particularly keen on the concept of Rule According to Higher Law. When they lose elections they always want to appeal to some higher body to stop any changes being made by the winners. (This seems Kantish in origin - perhaps the philosophers can shed more light?)

So at the moment there is a storm of protest about the Polish parliament's decision to make changes to the Constitutional Tribunal and require a two third's majority rather than a simple majority. This is the new parliament's response to the old parliament's decision to try and spike the tribunal with their own place men. The new government has, in the tradition of the right, simply turned around and played the same game with considerably more skill - spiking the committee with its own people.

Of course for somebody from the UK this is mildly amusing, since the UK has no real concept of the notion of a Higher Law. The Polish situation would be rather like the Privy Council or the Lords Spiritual being able to veto legislation passed by the House of Commons. In fact we have the Parliament Act that allows the House of Commons will to prevail even if the upper house - the unelected House of Lords - objects.

Here in the UK, parliament is 100% sovereign and if somebody wins an election, they can change direction at whatever speed they want whenever they want to - if they can get parliament to agree. The judiciary merely interprets the laws and is only able to hold the government (as the executive branch) to account. It has no power to bind parliament. In particular parliament has no power to bind subsequent parliaments.

As I've noted previously, the more I spend time in this area the more respect I have for the UK institutions and the way we get around the awkward self-referential binds there are once you get to the source of power. There is an advantage to a system with over a thousand years of trial and error behind it.

The problem occurs when you try and change aspirational law (like the UN charter on human rights, or indeed the US written constitution) into enforceable law. The question always arises of who does the enforcing and where does their power come from.

This is the pickle that the Polish have got themselves into, and you also see it in the USA where constitutionality is determined by an unelected Supreme Court. Laws are ultimately enforced by people. So how do you ensure those people have the will of the general population in mind when they decide? If they are unelected, then you can't even suggest they have a mandate. And very often they don't understand the will of the people - particularly considering the strata of society they usually come from. Essentially there is a supply side shortage of Solomons in this area.

What the new Polish government has decided to do is to is to take the 'rule by Higher Law' concept and replace it with a 'rule by Law' concept. No doubt the changes will bounce back and forward until somebody realises the whole idea of judicial override of primary legislation is fundamentally flawed in a democracy. Essentially, there are no rights other than those granted by your peers in society, to whom you then owe an obligation if you want to keep them. That then goes right back to the basic philosophy of the system.

As ever I rather like the neat solution the UK has come up with. We have a Human Rights Act which encodes the European Charter on Human Rights (ECHR) into UK law. However it doesn't give the judges the right to override legislation. It just gives them the right to mark legislation 'incompatible'. It is then up to parliament to fix the legislation to make it compatible. But importantly they don't have to.

The people then decide at the next election whether 'incompatible' legislation is a problem, and if they do they will elect a new parliament (and possibly a new government) that will change it.

So when prisoners in the UK successfully argued that their lack of a vote is in violation of the ECHR and judges marked the law 'incompatible', parliament decided not to do anything about it. The law remains enforceable, prisoners still have no vote. At the election the people of the UK didn't change the government to change the law and remove the 'incompatible' marker. So the law stands.

The society has decided that the written document of 'rights' is out of date and that people who violate society's norms have no right to take part in its elections until they have served their sentences.

In this way the law evolves organically along with the society and the ossification and reinterpretation problem of written documents is avoided.

Thursday, 31 December 2015

The Helicopters already exist. If you know where to look

Once again we are getting a lot of nodding heads banging on about central bank independence. I always find this argument amusing - particularly when it comes to the central bank issuing 'helicopter money'.

Helicopter money is a form of fiscal benefit that is paid to all on an irregular basis. A sort of Universal Pension or 'winter fuel' like payment. Therefore, from a simple efficiency point of view, it should be paid, in the UK, by the Department of Work and Pensions (DWP). The DWP already has the database in place and the Universal credit structure to administer the payment. They can deal with people who are abroad, powers of attorney, and all the other nuances of paying benefits to real people.

The DWP already operate the spend side auto-stabilisers and collect the data necessary to decide whether the spend-side auto stabilisers are doing their job and therefore they could very easily decide to pay out larger benefits to all. (Alongside the child benefit, which no longer goes to all - because it became politically untenable to do so. But let's not that little fact stop the fantasy.).

So there is absolutely no need for the central bank to be involved at all in the decision as to who gets fiscal support. The structure to make the decision already exists in other parts of government. The job of a bank is as it always should be - to accept instructions for payment and process them promptly, ensuring that the entire system clears efficiently and that target interest rates are met.

At the moment the DWP pays out benefits at a rate set by parliament based upon rules set by parliament. If you qualify you get the benefit. In other words the quantity of spend floats, with HM Treasury funding the spending as required via the central bank and debt management office.

The question then moves on to whether the DWP should make these decision 'independently' of parliament. If parliament decides to cut the level of tax credits, should the DWP be able to turn around and say no you can't because that damages effective demand? If not, why not? They are the experts - apparently. If parliament can't be trusted with money, why should it be trusted with providing social security?

And then you move onto the question of war. If parliament can't be trusted with money, or social security, why should it be trusted in sending people to their deaths. Surely the nuclear button should be handed over to the Defence Council and the generals should decide what to do 'independently' of parliament. They are the experts - apparently.

Of course if the generals are in charge and are able to deploy troops independently of parliament, then we would rightly call that a military dictatorship.

Therefore the notion of an independent central bank should be called out for what it is - an economic dictatorship ruled over by a class of individuals who look after the interests of the bankers and creditors and want to prevent government having first access to the resources of the country. Those supporting the idea are excuse makers for that destructive regime.

It is time that the Bank of England was rolled into the Debt Management Office and took its proper place as an operational subsidiary of HM Treasury tasked with clearing payments, maintaining order in the banks and managing the yield curve.

Then it would be absolutely clear to those economists who favour the 'social planner' dictatorship concept that such ideas will not be tolerated in a UK democracy. There will be no room for them to dictate to parliament how much it can spend, or even what rate it can spend at. (And they do see themselves in that position. They are that arrogant).

Parliament is, and should remain, supreme.  Advisors advise and parliament decides.  The ministries then implement what they have been asked to do. The chain of command is very clear - parliament outwards - with strict limits on the terms of references of the ministries.

That way the ultimate sanction - chuck out the politicians when they inevitably screw up - remains in the hands of the people that elect them.