The Importance of Being Lucky

We have been taught that meritocratic institutions and societies are fair. Putting aside the reality that no system, including our own, is really entirely meritocratic, meritocracies may be fairer and more efficient than some alternatives. But fair in an absolute sense? Think about it. A meritocracy is a system in which the people who are the luckiest in their health and genetic endowment; luckiest in terms of family support, encouragement, and, probably, income; luckiest in their educational and career opportunities; and luckiest in so many other ways difficult to enumerate–these are the folks who reap the largest rewards.

Ben Bernanke, 02/06/2013

This is an excerpt from a speech that Ben Bernanke, the Chairman of the US Federal Reserve, gave earlier this month. How fantastically refreshing it is to hear someone, who holds such a senior position in global economic policy-making, expressing an opinion like this. As Bernanke notes, “We have been taught that meritocratic institutions and societies are fair.” We have and nowhere can this be the case more than in the UK in the past three years. Let’s recap on why the government thinks that the poor and vulnerable are where they are today:

Don’t get a job. Sign on. Don’t even need to produce a CV when you do sign on. Get housing benefit. Get a flat. And then don’t ever get a job or you’ll lose a load of housing benefit. David Cameron

…out of work for years, playing computer games all day, living out a fantasy because he hates real life… David Cameron

…it pays not to work. That you are owed something for nothing. David Cameron

…fairness is also about being fair to the person who leaves home every morning to go out to work and sees their neighbour still asleep, living a life on benefits. George Osborne

The Conservative position has long been that those who are doing well have earned it and those who are doing badly have not. The rich are strivers (well done, have a tax cut) and the poor are skivers (must try harder, have a benefits cut). The government perpetuates this myth in order to represent a complicated problem as a simple case of an unfairness in our society, which thankfully they are on hand to address.

Both I and the government agree that things as they stand are not “fair” and we both see unfairness in the way that wealth is distributed. We do though, have opposite views on the direction that this unfairness takes. The government believes that policy has been punishing the rich and rewarding the poor. I believe that policy has had the opposite effect and is a direct cause of the growing gap between rich and poor.

So why do we have such different views? The government’s view assumes that it is a simple problem of incentives. Make being poor less attractive by cutting benefits and being rich more attractive by cutting the top rate of income tax and the problem will resolve itself. The problem with this view is that it assumes that poor people have chosen to be poor. I would like to propose that another factor be included when trying to understand why some people are better off than others. I want to talk about luck.

Like it or not, we are not all born equal. From the moment the sperm fuses with the ovum, a person’s genetic make-up is determined forever. That genetic make-up will have a huge effect on that person’s intelligence, social skills and health. The genes that we are born with, I would argue are entirely down to luck. George Osborne might argue that the sperm that make rich people are striver-sperm. Hardworking sperm who want to “get on”. Not like those other sperm who sit around doing nothing in their teste all day. I don’t buy that though. Before a person is even born, a huge factor in how lucky they might be in life has already been set.

And when that person pops out into the world, the role of luck doesn’t diminish one bit. Those of my generation probably all read the Roald Dahl book, Matilda – a story of a loving, caring, genius child who was born to parents who were the opposite of all of those things. That was just a book though and the social environment in which a child is lucky or unlucky enough to be raised does undoubtedly have a huge bearing on the opportunities they will have in future life.

David Cameron and George Osborne are themselves good examples of being lucky. They were lucky enough to be born into families who were fantastically wealthy and well-educated and who were able to send them to the most prestigious educational institutions in the country. But in spite of this they seem utterly unable to appreciate how luck affects the citizens in the society over which they preside.

I was lucky too. I wasn’t born into a rich family and didn’t go to a posh school but I was lucky in that I was born healthy and with genes that made me want to learn things. Furthermore, I was lucky that my parents had an interest in appeasing my appetite for learning. As an infant I was fascinated by magnets. My mum bought number fridge magnets and every morning the front of our fridge would display new sums for me to do. Before I’d even got to school I’d picked up a lot of maths and being good at maths ultimately got me into university, got me a job out of university, allowed me to be good at the job and allowed me to continue doing something that I’ve (mostly) enjoyed ever since. It would be very convenient for me to believe that this happened purely through my striving. It wasn’t though. If I am honest, I was just lucky.

A government who does nothing to acknowledge the role that luck plays in society will only make things worse. After all, the luckiest are likely to be born into the already lucky families and the unluckiest into the already unlucky ones. If a government did nothing then social polarisation would surely continue. What we have now though is even worse. If you accept that luck plays a major part in this, our current government’s rhetoric around rewarding strivers and punishing skivers actually means further rewarding the lucky and further punishing the unlucky.

I’m not suggesting that the notion of striving is a futile one, I don’t believe it is at all. I do however suggest that if you reduce a complex social problem into a simple debate of “strivers vs skivers” without accepting that we are not all dealt the same cards, it will lead you to implement entirely the wrong policies. The reality is that if you introduce policies that disproportionately benefit the advantaged at the cost of the disadvantaged, the advantaged will become more advantaged and the disadvantaged will be come more disadvantaged.

It really is that stark and any government who actively pushes things in such a direction must be extraordinarily detached from reality.

Unless of course, it was exactly what they were aiming for.


Seat Belts, Cycle Helmets and Bank Regulation

A couple of years ago I saw a study that looked at whether wearing a helmet while cycling reduced a cyclist’s chances of being killed in an accident while on their bike.

As I recall it did but there were two competing factors. The obvious one was that helmetted cyclists who suffered an impact to their heads were less likely to experience a serious injury than their bare-crowned colleagues. The other was that cyclists who wore helmets seemed to be more likely to have an accident – the theory being that putting a helmet on made the cyclists less worried about potential injury and less likely to cycle as carefully.

Whether or not that is the case, it doesn’t sound implausible. If I were driving a big, modern 4×4 with modern seat belts, airbags, side impact bars, crumple zones etc. I might well drive differently than if I were driving a rickety, 1960s rust bucket with no seat belts, no airbags and a massive spike poking out of the steering wheel, ready to impale me in the event of the slightest impact.

While adding safety features is welcome we should not discard the flip-side of the coin that attitudes could become less risk-averse as a consequence. People might well believe that the problem is solved to a much higher degree than it really is and therefore discard a risk that previously they took very seriously.

At the moment the government is looking closely into proposals by the banking commission that would bring new regulative and punitive measures to our banks. These include things like spreading bankers’ bonuses over a period of up to 10 years, and putting them in prison if they are “reckless”.

While I welcome proposals that might help to ensure a safer banking system, I don’t think either of these achieves an awful lot to prevent a future financial crisis. The primary problem that we need to address is not whether we can put a banker in prison if they bring down a bank and not whether a banker receives £1m today or £100k per year for the next 10 years.

The primary problem is that almost five years after Lehman, we still have no way to let a major bank go bust without taking down the global economy. As I said, new ideas for how to better regulate banks are welcome but irrespective of what they are, we should be in no doubt that the banks of the future will always find new and more exciting ways to go bust. Faith in the idea that we can make regulations to avoid this scenario is misplaced. A much more useful area on which to focus our attention would be a reform of the banking system in such a way that a bank is never “too big to fail” and if the worst happens and a bank does go bust, the world economy is left intact afterwards.

That is not what these proposals are addressing though and my major concern is not just that they might well be far less effective than the government thinks; it’s that if we implement them, we’ll relax, and (with our cycle helmet and seat belt in place), pat ourselves on the back and think we have truly solved the problem. We won’t have though. A bank, irrespective of regulation, will always be able to go bust. If we are going to learn just one thing about the causes of the financial crisis it should surely be this and it would be really nice if we properly addressed that problem now.

The alternative is that we wait for the next financial crisis to convince us.


Losing the Argument

I read Phillip Inman’s piece in The Guardian last weekend entitled, “9 reasons Keynesians aren’t winning the argument”. I always feel a little bit uncomfortable with how the term “Keynesian” is used, as it makes it sound like a bit of a cult rather than a mainstream view but anyway, for now lets go along with it.

So, as someone who falls into the category about which Inman is talking, let’s see how his arguments apply to me.

1. They think policymakers refuse to change course because they don’t understand

I disagree. Inman’s first reason implies that there are two possibilities – either policymakers don’t understand or they do understand and are doing something else anyway. My position is far simpler – whether policymakers “understand” or not is entirely irrelevant. Policymakers’ refusal to change course has nothing to do with the theory or evidence because they are not interested in the theory or the evidence. Policymakers don’t ever consider changing course because changing course is considered political suicide. Their “understanding” has no bearing on this argument.

2. They think that everyone agrees austerity is wrongheaded

I disagree. If that were the case then policymakers would probably have no option but to change course. The fact is that plenty of people still believe (in large part due to policymakers’ propaganda) that the UK’s economy works like that of an indebted household who must pay down their debt immediately in order to recover. Wrong as that is, I don’t think Keynesians believe that that isn’t a commonly held belief.

3. They think Brussels and the IMF have changed their tune

I disagree. Brussels has clearly not changed its tune and I haven’t said otherwise. Mario Draghi (President of the ECB) may not be as bad as Jean-Claude Trichet (his predecessor) but there is still plenty to criticise and I don’t recall too many people holding back. The IMF’s position has clearly moved though. Although they are not now throwing themselves unequivocally behind fiscal stimulus, they have nonetheless, amongst other things, admitted that fiscal multipliers are much higher than they initially thought, that George Osborne is “playing with fire” and most recently their admission that they had hugely underestimated the damage that austerity would do to the Greek economy. It is not in any way a total reversal of their position but to refuse to acknowledge a noted change is a bit silly.

4. They make out that a spending boost with borrowed money is risk-free

Inman doesn’t really explain what the mysterious risks are that I’m ignoring. Austerians say that the risk is that markets would lose confidence and interest rates would soar. I do strongly dispute that but that’s not a risk that Inman mentions. Inman’s risk seems to be that we might be the next Japan and that is pretty lazy journalism to be honest. I haven’t, (and I don’t think any Keynesian has), been singing the praises of Japanese economic policy over the past 20 years. A Keynesian view on Japan would be something like they should pursue higher expected inflation in conjunction with a significant and temporary fiscal stimulus. I don’t recall them doing that at any point in the last 20 years (although it looks like Abe might be starting to do that now.)

5. They think central banks can carry on printing money with no risk

Hold on a moment, why are the argument-losing Keynesians getting the blame for central banks printing money? That’s being done at the moment anyway. My take on QE has always been that the benefits have been and will always be hard to measure and that it’s almost certainly far less effective than fiscal stimulus. Of course a central bank can’t print money forever without consequence – I’ve never said that. I think all I ever said on it was that while we’re in a liquidity trap it wouldn’t be inflationary (and it hasn’t been.)

6. They think quantitative easing can be switched off and normality will return

Hold on again. In point 5 I’m ignoring the risks of carrying on printing money and now I’m ignoring the risks of not carrying on printing money? Ok, I’ll address it anyway.

It would be a bad idea if tomorrow The Bank of England decided to dump all of the debt they have accumulated back into the bond market. I don’t think any Keynesian has ever suggested they should do that though. When things are good again should we drip it back in slowly or should we just let it mature? To be honest I don’t think there is a massive problem either way but irrespective of that I don’t really understand why this is a reason I’m losing the argument – austerians have exactly the same decision to make.

7. They argue that no one should fear inflation

This is just not true. Higher inflation is bad for lots of people. If I’m a wealthy pensioner with lots of savings and inflation is higher than the interest rate I get, then that’s clearly a worry for me. In that situation I would “fear inflation”. What I’m saying is that while higher inflation has problems, it also has benefits and the benefits of higher inflation are often ignored. When interest rates are at the zero lower-bound and the economy remains depressed then what we need is a negative real interest rate and that means higher inflation. No one is saying that it’s going to be better for everyone but we should all be sensible here and understand that a 2% inflation target is not going to be the perfect rate in all economic circumstances.

8. They argue that stock market and house price rises are benign

Really? I seem to recall that I wrote a fairly damning post about the latter’s role in the economic crisis. “The London stock market recently neared its all time high”, warns Inman. Not when you take inflation into account it didn’t, and let’s be clear here – the potentially catastrophic effect of bubbles are well known and well appreciated by Keynesians. Paul Krugman spent five years before the crisis warning that the dotcom bubble had been replaced with a housing bubble.

9. They believe politicians can be trusted to spend stimulus funds in the best way

This really is a load of poo. When have I, or any other proponent of fiscal stimulus ever said, “the government should borrow money and I don’t care what they spend it on because they’ll know best”? I think a more familiar argument is, “the government should borrow money and spend it on those infrastructure projects that will increase employment, boost growth and need to be done anyway”. Rebuilding old schools, investing in renewable energy, replacing old bridges and roads that are falling to bits – that’s money that we need to spend soon anyway – all the Keynesians are saying is let’s spend it now when the economy is suffering from a lack of demand and borrowing is really cheap rather than after a recovery when unemployment is low and borrowing is more expensive.


Inman’s article really isn’t very good. It contains a couple of validish arguments that are badly represented but mostly it’s a list of things that really aren’t important in understanding why the argument is where it is. We can of course faff around, quibbling about what happens when quantitative easing is switched off but do you really think that this is the reason that public opinion has not unanimously fallen behind Keynesian policies? No.

As I mentioned earlier, our politicians have rejected reasoned arguments, economic theory, and the damning evidence that followed because to them, these things just weren’t relevant. Our politicians wanted low public spending and so they cut public spending. They then misrepresented the situation in order to make it look like their policies were good and with their charming little analogy about how we were just like an indebted household, they did a very effective job of perpetuating this fallacy within the masses. That is the important point and it’s one that Inman completely misses. The Keynesians have been trying to fight an economic battle but they are doing so against politicians who, with their weapons of spin, misdirection and misrepresentation, are simply too strong.

Inman doesn’t just misunderstand what the argument is he also misunderstands where the argument is. Keynesians are not losing this argument – Keynesians lost this argument a long time ago.

For three years we have pursued austerity. For three years we have failed to deliver economic growth. We have created the longest depression since the 1800s. We have created a society in which people unnecessarily lost their jobs and their houses. We have created a society in which people who want to work are forced to sit at home because there are no jobs for them to go to. We have created a society in which our school-leavers and university graduates go forth into a job market that has no use for them.

That is what Keynesians predicted that austerity would give us and this is what austerity has given us but winning the argument wasn’t about being able to stand around afterwards saying, “I told you so.” Winning the argument was about preventing this disaster from ever happening and we didn’t and therefore we lost.

To those of you who think I’m being overly defeatist, I ask this – take a good look at the state of our country today and then tell me that austerity hasn’t already won.


Don’t Be Evil

Do you remember when we had that big scandal surrounding MP’s expenses? And we found out all the crazy things they had been claiming for? And then they said that it was ok because their claims had been within the letter of the law?

I can’t help but spot the irony when, in more recent weeks, companies such as Google, Amazon and eBay have been summoned in front of MP committees to explain why, in spite of lots of sales, they have managed to pay so little tax in the UK.

“We’ve paid every penny according to the letter of the law!” They claim.

“But it wasn’t in the spirit of the law!” Say the MPs (who have presumably found some kind of salvation in the intervening months).

Since their dodgy expense claims were exposed, MPs seem to have had developed a sudden fetish for these televised committees in which they, (the goodies) can heap their new-found morality on the baddies – G4 security, the BBC, the newspapers, tax savvy multinationals etc. But has the fastening of these people in the metaphorical stocks, while our MPs throw their metaphorical rotten vegetables really achieved anything?

I’ll be clear – I don’t think Google et al should get away with paying so little in tax but this mock outrage from MPs gets my goat. Should we really be that surprised that a company turns out to be a bit of a shit just because their motto says, “Don’t be evil”?

It’s a nice thought but in reality it is simply unreasonable to assume that when you have tax loopholes in your system, someone (most likely a big and powerful someone) won’t take advantage of them. Companies will look at what the negative publicity will cost their shareholders and will look at what the reduced taxes will give their shareholders and they will make their decision based on that. If they didn’t they would be being negligent to their shareholders.

There is, of course, one way for our MPs to address this and that is to close those loopholes. These companies sell a lot of stuff here and make an awful lot of profit here. If the laws of the land don’t turn any of these profits into tax revenues then it is time to change the laws of the land and guess who makes them?

It’s up to our government to make sure that the loopholes are closed and it is fairly daft to expect these companies to pay tax that they could legally avoid because of “morality”. Yes, I’m sure our MPs all feel like paragons of virtue when they sit on their committees but let’s all be sensible here – these companies are concerned with profits, not morality and to be honest why shouldn’t they be?

When the UK has exploitable tax laws then it is the duty of our MPs to make them non-exploitable, not to faff around trying to play the morality card. And while we’re on that subject let’s be brutally honest here – given their history, these guys have absolutely no right to play that card.