Nudge, nudge

On my train rides yesterday to the Royal Economic Society Conference at my new home institution (from September), the University of Manchester, I read Why Nudge? The politics of libertarian paternalism by Cass Sunstein. This is obviously a progression from Nudge, his bestseller with Richard Thaler, and a reply to the often-made criticism about the paternalism inherent in nudge policies.

The book is a very good short primer on the philosophy of this kind of intervention, drawing on behavioural psychology and economics. It does not cover either how to do ‘nudges’, or the cognitive biases the policies seek to compensate for – for that, you need the predecessor book. The aim here is to argue back against the view that for all the biases in decision-making that we are learning about, it is better for people to be free to make their own mistakes than to have government bureaucrats or politicians tell them what to do.

Sunstein makes two very strong points in his counter-blast. One is that there is no avoiding ‘choice architecture’. For example, if a government decides not to make pension contribution decisions opt-out, it is thereby choosing to make them opt in. If a cafeteria puts chocolate by the check-out, it is choosing not to put fruit there.

The other is that governments make lots of interventions in individual choice, constantly. These range from declaring some activities (taking drugs, say) a crime punishable by prison or fines to regulations (how you make alterations to your house) to tax incentives (a high tax on cigarettes) all the way through to educational campaigns (pictures of diseased lungs) and advertising (pay your tax on time to avoid the fine). Nudges are indeed at the soft end of this spectrum of government actions.

So why do I, like many others with a libertarian streak, feel uneasy about nudging in general? Not the specifics; the pension opt-out is clearly sensible, and using behavioural insights in designing competition remedies similarly a no-brainer. It’s the general idea of governmental Mad Men that’s disturbing, the sense of manipulation and infantilisation of individual voters that implies. Not that I’m naive about the capacity of individuals – including me – to take sensible decisions much the time. As Sunstein points out, the work of Gerd Gigerenzer on decision-making heuristics clearly suggests people would benefit from the short-cuts well-designed choice architecture can create.

The ‘yuk factor’ I felt grew all the stronger on reading: “Personalized paternalism is likely to become increasingly feasible over time. We can imagine highly personalized default rules, attempting to specify diverse rules for people in different circumstances.” Sunstein acknowledges the huge information advantage people have about their own interests compared to any bureaucrat, but evidently thinks that the information asymmetry will reduce – and anyway argues that the structures of public sector policy-making and impact assessment guard against bad nudges.

I’m not so sure, thinking about the growing pressure of increasingly polarised and populist politics on administrative decisions. We should consider the effect of ‘soft’ behaviour-manipulation policies on how the people feel about politics and government: is nudging going to increase or decrease further the low trust voters have in their governments? And one final question is whether behavioural responses will change the more people understand the cognitive biases and the nudges intended to work around them – will we learn? Is there a Goodhart’s Law for nudge policies?

Don Draper for prime minister?


Nigeria, GDP, and all that jazz

Mine is the kind of household where we spent Sunday afternoon eagerly waiting for the announcement about the rebasing of Nigeria’s GDP, or in other words the updating of the weights on the different components that add up to GDP to reflect their share in the economy. Like a number of other African economies, it had been more than 20 years since the construction of Nigeria’s GDP statistics was last updated in this way. It happens roughly every five years in most OECD countries – the US had a significant one last year.

The announcement was worth waiting for: taking due account of sectors like films, music and mobiles took the level of GDP up by 89%, and makes Nigeria’s economy bigger in absolute terms than South Africa’s. The rebased statistics also show a marked change in the structure of the economy, as this chart from the official presentation shows.

Nothing real has changed, the economic problems like poverty and inequality and a poorly-functioning state remain, but the confidence effects on investors and entrepreneurs could be significant. Expectations are crucially important for economic decisions.

As it happens, if you want to read more about this, my GDP: A Brief But Affectionate History has a section specifically on the subject. Razia Khan of Standard Chartered, @raziakkhan, kindly tweeted key bits of it yesterday, and is a key person to follow on the subject.


Hard Times, continued

Just arrived: Hard Times: The Divisive Toll of the Economic Slump, by Tom Clark with Anthony Heath. It’s the fruit of a research project that ran from 2007-2012 in the US and UK, documenting the social effects of unemployment, foreclosure, increasing inequality. The researchers asked people in certain communities to keep diaries, which are combined here with data, interviews, and more conventional academic description. It looks a good companion, albeit totally different in style, to The Unwinding (wonderful book – I reviewed it here) – although without having read this one, I wonder how the US/UK comparison will work, given how different the two countries are.

As an aside, Hard Times is one of the few Charles Dickens novels I enjoyed – aversion therapy in the form of school English lessons put me off the better known ones like Great Expectations. I did much better with the ones I read myself, A Tale of Two Cities being by far his best.

A lucky escape

It was a mistake to go into Daunt Books on Cheapside yesterday when I had 20 minutes spare before lunch. In a lucky escape, I got out with only three paperbacks: Altai by Wu Ming, The Golden Egg by Donna Leon, and Geek Sublime: Writing Fiction, Coding Software by Vikram Chandra. The blurb asks: Can code ever be called beautiful? It promises the book looks at the links between logic gates and modernism, geeks and machismo, and Indians and coding. Irresistible.



Capital in the 19th century

During the mid-late 1970s era of high inflation, I was a teenager growing up in a household with two parents who worked, but not in jobs with unions that could deliver inflation-beating wage increases, and whose small savings were held in a building society account. Rising food and energy prices made things tough. Marked as we all our by personal experience, I’ve ever since believed inflation to be harmful for people on relatively low incomes, tending to mean declining real earnings and negative returns on savings.

The early section of Piketty’s Capital in the 21st Century has given me pause for thought. He contrasts the Victorian and Edwardian era of stable prices and rentier wealth (in the form of land and then government bonds) with the post-1920s era of declining importance in inherited wealth. He writes:

“Capital is never quiet: it is always risk-oriented and entrepreneurial, at least at its inception, yet it always tends to transform itself into rents as it accumulates in large enough amounts.” (p115-116)

The point of accumulation is to build up enough to stop working, whether at the scale of a character in an Austen or Balzac novel, or at the scale of a colonial power like France or Britain.

What changed with the onset of the violent 20th century was inflation. In the 19th century, when governments built up war debts, rentier classes bought the government bonds and could live securely on the repayments. “In the 20th century, a totally different view of public debt emerged, based on the conviction that debt could serve as an instrument of policy aimed at raising public spending and redistributing wealth for the benefit of the least well-off members of society. The difference between these two views is fairly simple: in the 19th century, lenders were handsomely reimbursed, thereby increasing private wealth; in the 20th century, debt was drowned by inflation and repaid with money of decreasing value.” (p132)

France inflated far more dramatically than the UK in the period 1913-1950, and French public debt dropped from 80% to 30% of national income over that period. The UK had a colossal 200% of GDP debt in 1950, but made up for it with inflation in the 1950s and especially the 1970s. In both cases, though, inflation was the means of expropriating the rentier classes and, Piketty argues, one of the key reasons the 20th century bucked the tendency of capitalism to create and enhance entrenched wealth inequality. So this is obviously a different perspective on inflation from my teenage perception.

I was chatting about this to Professor Dieter Helm, who chairs the UK’s Natural Capital Committee and is writing a book about valuing natural capital (which will be a must-read when it’s out). He pointed out that the shift towards an inflationary regime coincided with a generational rebellion against the Victorian emphasis on thrift and investment for the future, in favour of consumption and the present. In Britain, the Bloomsbury Group – including Keynes – exemplified this; see for example Michael Holroyd’s tome on Lytton Strachey.

This all makes one wonder about the next few decades – I’d bet on a return to inflation and expropriation of the bond-holding classes (pensioners?), even though the pressing concern is deflation. But this is a bet, not a forecast. Besides, the future the Victorians built is the one we’re still living off, the infrastructure and institutions. Anybody who cares about sustainability (in its broadest sense) must surely be thinking in terms of tilting the balance away from consumption and towards investment. Towards capital, in fact, which makes its distribution all the more important.