I don’t trust it because, although the theory might be OK that there is a point beyond which raising tax rates reduces revenue, nobody can agree where that point is.

It is all very topical, what with the budget and the debate about the top rate of income tax and everything. One of the reasons why people who don’t like higher tax rates don’t like higher tax rates is that they reckon that having a higher rate of tax encourages people to avoid or evade those taxes by giving them more incentive. I’m sure that is right, though less sure why governments, and especially the current one, only apply that logic at the top end.

There is a famous aphorism about how the rich can only be encouraged to work harder by paying them more and the poor can only be encouraged by paying them less, which we all enjoy and maybe there is a bit of that. The same logic used to lower the top rate of tax could be used to increase benefits: if benefits are so low you can’t live on them, and can’t find work then there is a huge incentive to fiddle them.

Or how about this one? A story in our local paper says that Crawley is the No 3 place for illegal tobacco, with nearly a third of the cigarettes in town being smuggled or counterfeit. With 37p being added to a packet, that figure isn’t likely to decrease. Of course tobacco duty is seen to have a public health purpose by discouraging smoking, but at what point does it just discourage legal smoking? Maybe somebody should plot a Laffer curve for it?

First, an article in the Times, written in 2006 by George Osborne. It starts:

A generation ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn.

And from the BBC News website this month:

The demise of Ireland’s Celtic Tiger economy has been spectacular. The IMF described it as the deepest recession of any advanced country. Ireland’s boom was built on the success of the construction industry, fuelled by cheap loans.

The total cost of rescuing Ireland’s banking sector is expected to be 50bn euros.

Ireland are about to embark on a new four-year budgetary plan, while the UK government is going ahead with implementing Ireland’s last four-year plan, since that seems to have worked so well.   There is a fair chance that Ireland’s economic troubles will bring down the government within six months, unless all the voters have emigrated to Australia and New Zealand by then, which they are planning to do in their thousands.

So much for “the art of the possible in long-term economic policymaking”.

Four years ago George Osborne asked:

What has caused this Irish miracle, and how can we in Britain emulate it?

The scary thing is that, having seen where a policy of austerity has got Ireland, it hasn’t stopped Osborne pursuing the same policies here.

Hat-tip to @Paul Burgin

To be fair, this might be partly due to my lack of sympathy for extraordinarily wealthy bankers who jeopardise the whole economy to make even more profit, though the book is not especially sympathetic to the main character.  It seems quite neutral towards him really.

The story concerns a veteran of the first Gulf War, who is now a senior executive at a Boston-based bank.   He finally decides to spend some of his money by building a huge house he doesn’t really seem to want or need.  His new house comes with a neighbour, a retired history teacher, who doesn;t like either the house or what it represents.  She starts a legal battle to have the house removed.

At the same time, things are not all going according to plan at the bank.  The best part of the book is where it explains a bit about how banks can get into trouble through aggressive/over-confident/reckless trading, a lack of regulation, and the by-passing of what regulation there is.

Here is what I wrote about it:

This debut novel is interesting enough and readable, but nowhere near as good as the hyped up comments on the dustsheet make it out to be. From the comments by people like Jonathan Franzen and Malcolm Gladwell I was expecting something like Tom Wolfe, but in a more manageable size.

The writing is good, but the story contains too many coincidences, to the extent that they are a distraction. The main character, bank executive Doug Fanning, has a neighbour who objects to his hosue being built next to her. Her brother happens to be high up in the Federal Reserve Bank of New York, so he is involved in regulating Fanning’s work. Nate, a teenager who is going to the neighbour for extra tuition, just happens to be the son of Fanning’s boss at the bank. It is a small world, but surely not that small?

Or maybe life really is like that in the high-status New England environment?

The main body of the story gives a plausible account of the operations of a rogue trader and does a reasonable job of putting a human face to such activities, which are way outside the experience of most of us. As for the impact of such activities on ‘normal’ folk, the regulator character helps by dwelling on the way the stability of the banking system affects them.

This is not a bad book. I quite enjoyed it, and would recommend it as well worth reading for the perspective on bank collapses, but it is not the great American novel that its publicity makes it out to be.

While I might be happy that the second letter supports my party, and is signed by more ‘leading’ economists than the first one, I don’t think it means anything.  I would not be greatly surprised to find a letter to the Daily Star next week, signed by 300 more from the apparently limitless supply of experts who have yet another opinion.

Surely the only real impact any of this can have is on the credibility of economics as a science.

Unfortunately I was disappointed, partly through having expectations raised so high they would have been difficult to satisfy, but also through real shortcomings in the book itself.There is a lot of media attention on the book, mostly a result of an iconoclastic chapter on climate change.  It is hard to summarise a lengthy chapter in a few lines so, shorn of any subtleties, it will be presented as either a declaration that climate change can be fixed so there is no need to think green, or twisted to support claims that climate change is a myth.

I’ll happily admit that the science involved is beyond me, but I’ll also hazard a guess that it is beyond the authors too.  They are two people much smarter than me who visited a group of people even smarter than them.  I don’t think they were significantly better equipped than me to query what they were told and so I reckon they mostly just repeated what they were told, but putting it in a more narrative form.

That is not to say it is not interesting, but just that it doesn’t belong in this book: it would be better in a book by Nathan Myhrvold and his associates themselves, making their own case.  In any case, it involves theories and assertions that are going to cause a lot of friction with environmentalists, whether true or not.

For what it is worth, regardless of the soundness of the theories, there are reasons other than climate change to think about limiting certain types of energy use,  like direct health impacts of exhaust fumes or over-reliance of economies on diminishing and un-renewable energy sources.

The IV proposals smack of a Deus ex Machina solution to climate change, falling into the too-good-to-be-true category, but I would really like it if they are right.  It would offer some hope for the future, albeit with the danger of appearing to offer encouragement for habits which can be bad in themselves.

Anyway, that is an argument that is likely to rumble on for a long time. For now, here is what I said about the actual book:

While I found this book to be every bit as readable as Freakonomics, I didn’t find it nearly as satisfying.

In the first book it felt like Levitt was taking lots of data and results from other researchers and then making his own synthesis of them, usually finding some counter-intuitive conclusion out of it all. In large chunkc of this book it just felt like the other work was being re-hashed, especially in the increasingly notorious and attention-grabbing chapter on climate change.

Really it is just a description of theories coming out of Nathan Myhrvold’s labs.  While they might be interesting, and I am in no way qualified to say whether they are plausible or not, this whole chapter was a piece of straightforward journalism which could have been done by Dubner on his own – and maybe it was.  The only sort of economic twist to it was the tacking-on of the idea of externalities.

I know that chapter is the one that will attract most headlines and controversy, but it was more about physical science than economics and any ‘freakiness’ was in the original work rather than being applied by Levitt & Dubner.

The other headline-courting chapter (the one about the economics of prostitution) is more in the spirit of the first book, and is fascinating in its way, although again there doesn’t appear to be as much processing of the information by Levitt.

The parts of the book touching on drunk driving (and walking), car safety and child seats is truer to the spirit of Freakonomics with some juggling of data and statistics to come up with unexpected consequences, and original research by the authors.

Before the end I was getting a suspicion that topics were chosen to be deliberately provocative and controversial with conclusions guaranteed to get the maximum shock value: prostitutes are better off with pimps, child safety seats don’t save lives, and climate change can be fixed without the need to reduce polluting behaviour.

This is not a bad book, but it just doesn’t compare well to the first one. It is as if the authors were trying too hard with this one.  There is less emphasis on behaviour and incentives, but still something on nearly every page to make you realise how you shouldn’t just take everything at face value, and some fascinating material about knowledge management in hospitals – really: it is more interesting than it sounds.

In conclusion, a thought-provoking read, but fans of the original Freakonomics should be prepared to be underwhelmed.

Looking back, that all sounds very negative, but really there are some of the wacky conclusions you want from this pair – the unexpected negative impact on education of greater freedom of opportunity for women for example.  Also some things you odd bits of information like how blowjobs have gone from being top of prostitutes’ tarriffs in the past to being an entry-level activity now, with some explanation of why that might be.

I’ll give it 3/5 but still recommend it.

The financial services industry generally thought that the various controls and regulations that turned out to be too light and ineffectual were in fact too strict, and the Tories agreed with them.  You might have thought that everybody had learnt their lesson, but not according to Dale Jannels of AToM Ltd.  He starts by saying:

Nationwide launched a 125% mortgage this week!  Sadly, most reports failed to spot that this scheme is for existing borrowers, in negative equity, looking to move house!  Positive news, but the hype will have teased first time buyers who will have to wait a while longer yet!  In the middle of 2007 there were some 28,000 first time buyer products.  Today there are roughly 1,200.

Is it just me who feels a bit depressed at the suggestion that there is a pent-up demand for people to get their foot on the first rung of the property ladder by borrowing more than their house is worth?   Why is it “positive news” that banks are ready to start getting back into the bad habits that landed us in our current mess – even before the current mess is cleared up?    If these prospective buyers have such short memories, shouldn’t somebody be doing something to save them from themselves before they borrow more they can afford – when interest rates are so low that the only way they can do is up?

Later on there is this scientific-sounding statement on lending:

However, it is borrowers moving from lender to lender which helps to stimulate money movement in the financial markets.  Borrowers leaving a lender release funds for someone else, and so on.

Not sure I follow that.  If an existing borrower moves from one lender to another they will free up funds with their old lender – but use up funds with the new one.  There is no new business; just a bit of a merry-go-round that ultimately just benefits those on a commission to help keep it going round. (Like AToM Ltd?)

But the real  scene-stealer was at the end:

Finally, re-mortgage applications have increased recently.  Borrowers looking to secure long-term fixed rates are applying at the right time.  Some, who are in increasing financial difficulties, are looking for sensible ways to remortgage (not always our recommendation).  Others are releasing equity to acquire Buy to Let properties in the current cheaper climate.

Wasn’t it only a few months ago that the papers were full of stories of buy-to-let landlords coming undone, when they discovered that there really is no such thing as a free lunch?   If you have a house with some equity in it you are secure.  Use that equity as a deposit on a second house, then borrow the rest and you are not secure.  When your fixed rate deal ends and you are suddenly faced with mortgage payments doubling what are you going to do?  Double the rents so that nobody can afford them?

And then what will you do? Blame the government? Blame the banks? Or blame yourself for being greedy?

Suddenly it becomes clear how the whole housing and mortgage market got into their spirals in the first place – it appears that we are all rushing, lemming-like, to make sure we are as close to the edge as possible.

Let’s get some proper regulation in this business while we still can.  If the Tories get into government then, for some reason, I can’t see them putting in any sort of regulation – they thought there was too much to start with – so we should be doing something nw while we still can.  Prospective first-time buyers will be better served by a drop in house prices than by an increased willingness or ability to lend them what they can’t afford.   Preventing irresponsible lending should go hand-in-hand with building more affordable homes suitable for first-time buyers rather than more four-bedroomed houses.

Only on the first chapter so far, but its already gripping stuff, and I am already feeling even more manipulated by marketing types than I was before.   I did take the time to read the author’s biography at the back of the book and notice that he is a founder of the Center for Advanced Hindsight.

How cool is that?  It really does sound like the sort of thing that Douglas Adams would invent in one of his books, and I’m still not 100% sure it is not an imaginary entity.

It is sort of about maths and economics but also about philosophy and science generally.  I think that somebody recommended it to me in a comment on this site, but I can’t remember who that was.  The recommendation was probably based on my enjoyment of books like Freakonomics, Blink and The Wisdom of Crowds.  While it is similar to books like those and The Long Tail, it is a whole lot more idiosyncratic and uncompromising in some respects.Unfortunately it is not one of those books where you can easily absorb the ideas and incorporate them into your own world view: the author really wants his readers to totally accept his ideas and totally change their world view to revolve around them.  That is not something many people are prepared to do.

The tone of the book is interesting to say the least.  Taleb is not keen on most mathematicians. Or philosophers.  Or statisticians, businessmen, politicians, economists (especially Nobel winners), traders, and experts in general.  Large sections of the book reminded me of two things: one that will be familiar to quite a few people and the second will ring a bell for a much smaller population.

Remember the Christmas special of Father Ted, where Ted was awarded the Golden Cleric award for rescuing a group of priests from Ireland;s largest lingerie department?   His acceptance speech was not the traditional litany of thanks but instead was a multi-hour diatribe against people, subdivided into sections like “liars”, “frauds” and “people who have really fecked me over down the years”.    Well this book reads a bit like that in large parts. And don’t get him started on the Gaussian bell curve!

The other thing it reminds me of is the writings of Hugo Rune, when they are referred to or quoted in Robert Rankin’s books when he takes every opportunity to slag off the ‘greybeards’ and ‘charlatans’ in the scientific establishment.

At times I found that the general tone of score-settling distracted from the ideas, but at other times I found it amusing.   Above all it is thought-provoking as well as just provocative and iconoclastic.  I am going to have to take some time to think about the ideas in there.

For example, Taleb makes a very good case for not bothering to read a newspaper, how all the information you pick up actually impairs rather than improves your decision-making.  I particuarly like that as I find very little time to read the papers now and it helps me to stop feeling bad about that.

The concept of how hard it is to predict the past is especially mind-blowing as it casts doubt on the accuracy of most history books.  I also liked the whole notion of the futility of looking for causes and what he calls the narrative fallacy.

So plenty to enjoy in there, despite my dislike of several aspects – not least the author’s technique of using invented examples to ‘prove’ points.

I have another of  Taleb’s books in the waiting-to-be-read pile, but I think I will give my brain a rest by reading Necrophenia (the new Robert Rankin) and The Time Traveller’s Wife first.  I’m not sure I can take two non-fiction books in a row.

I am rarely in a position to say “told you so” but someone who is in a great position to utter those words is Naseem Nicholas Taleb.  I am nearing the end of his book The Black Swan (published in 2007) and on page 225 he says:

We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks (often Guassianized in their risk measurement) – when one falls they all fall.  The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard.  We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogenous framework of firms that all resemble one another.  True we now have fewer failures, but when they occur… I shiver at the thought.

The Tories, of course, paraphrase that by saying it is all Gordon Brown’s fault…  In a footnote to that paragraph Taleb is even more specific when he says:

Likewise, the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.

As the book was published in April 2007 those words would have been written in 2006 or early 2007 at the latest.  In September 2008 Fanny Mae was rescued/nationalised/taken into conservatorship when the fuse got lit to that barrel of dynamite.

The timing of the programme was spot on, as one of the areas where chaos theory is particularly applicable is economics, and the current world economic situation is a great case study in the futility of trying to predict what markets will do, or to control them in the first place.  One of the talking heads, himself a well-respected figure in finance, said that just about anybody can make predictions about the economy when it is all going smoothly, but nobody can ever predict when it is going to change, which would be a much more valuable ability.

The trouble with chaos theory is that it is not simple and it is not intuitive. The Newtonian model of everything makes sense, is easy to understand and is very comforting: the idea is that, like Hari Seldon in Asimov’s Foundation books, you can accurately predict everything if you can record the current postition of everything accurately enough, and that makes us feel in control.   It is no surprise that a theory which states we are not in control and are unlikely to ever be in control and which cannot be easily understood or explained is not going to get accepted easily.

For our decision makers to base policy on chaos theory they would either have to really get it on a much deeper level than just knowing what ‘the butterfly effect’ means, or they would have to make a great leap of faith and place themselves in the hands of mathematicians.  The trouble with that is that you can always find another mathematician with an alternative theory.  I have to admit that even though I did pretty well in maths at school and have read the standard popular science and popular maths books on chaos I don’t really get it.  I think it is beautiful and mysterious, but I can’t claim to have absorbed it completely.

I still hold out a little hope that chaotic does not mean impossible to predict or calculate; just very, very difficult.  Difficult to the level of being practically impossible, but still theoretically possible.  OK, I know that stochastic systems can be so sensitive to initial conditions that to measure those initial conditions accurately enough you will run into Heisenberg’s uncertainty principle…  but somehow I can make myself turn a blind eye to that.

In a way I wish I had been born a lot earlier.  Life was so much simpler when Foundation was published in the 1950s and the idea of psychohistory could be thought plausible.

Still… good to see programmes about maths getting made, even if they are a bit superficial.  Makes a change from reality TV, talent shows and celebrity dancing.  It almost makes up for missing Tim Marlow’s return to TV tonight: he has defected from Five and is now on the Sky Arts channel, which I don’t get.