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Why I (probably) oppose the RMT’s strikes at London Underground

Here is a quick, dirty and poorly-written explanation why I (probably) oppose the RMT’s strike action at London Underground:

The Tube, like most public services, is a monopoly.  As such, Transport for London (TfL) has pricing power and the ability to extract economic rents from consumers.  To whom would those rents flow?  There are three possible groups:  Capital owners (bonds), Capital owners (equity) and Labour (the suppliers of the stuff, not the political party).

The owners of capital in the form of bonds have no ability to insist on being paid economic rents because they cannot credibly threaten to walk away.  There are plenty of other (institutional) investors that are perfectly happy to step in and receive the low interest rates paid by TfL because TfL has the backing (implicit or otherwise) of the UK government and investors value that security.

The sole owner of capital in the form of equity is the UK government.  They have no desire to extract economic rents.  Indeed, they have an incentive to keep economic rents to a minimum because their existence is, on net, welfare-destroying for Britain as a whole.

That leaves the suppliers of labour.  If no TfL worker was unionised, then individual employees would be unlikely to be able to insist on receiving economic rent (i.e. a wage in excess of the value of their marginal product).  By being unionised, however, the employees have collective bargaining power and are therefore able to insist on economic rents.  They can do this because they can credibly threaten to stop the tube from working.  The current strikes are a demonstration of the credibility of any future threat.

There are two further issues to consider, however.  First:  what if without the union, workers would be unfairly exploited — paid less than the value of their marginal product?  If this were the case, the increased bargaining power of unionisation would be justified as it would offset the exploitation.  This is not a problem, however, because the owner of the Tube — the UK government — is not a a profit maximiser.  It is a (zero-profit seeking) service maximiser.  They have literally no incentive to pay less than the employees are genuinely worth.

Second:  what if, when paid the value of their marginal product, TfL employees end up with incomes that are less than the cost of living?  Once again, this fails as an argument for unionisation of TfL workers.  It is the job of the government to guarantee a living wage to all workers across the country, regardless of their job.  If TfL employees are concerned about this, they should be canvassing for an increase in the national minimum wage, not insisting on a higher wage just for themselves.

Therefore, to a first approximation, there is no justification for the unionisation of (and hence, no justification for the strike action by) London Underground employees.

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Don’t put a nappy on me just because you’re mollycoddling idiot #8,749

I hereby present the latest iteration of my telling the world how it ought to be run, damn it.  The topic today is:

With (very low) probability, p, event X might occur at location Y, causing offence, harm or even death to a person of type Z.

There are many examples of this sort of scenario.  Here are a few:

  • X:  Fall off a swing
  • Y: A public park
  • Z: A small child
  • X: Trip and fall
  • Y: Footpaths (sidewalks) with cracks in the concrete
  • Z: Old, clumsy or spatially unaware people
  • X: Bringing your dog
  • Y: The outside seating area of a cafe
  • Z: People that are allergic to, or just have an aversion to, dogs

Here is another, eloquently opposed by M.S. at one of The Economist‘s blogs:

  • X: Drown
  • Y: Lakes in Massachusetts state parks
  • Z: A weak swimmer

I’m sure that you, my eager and most imaginative audience, can describe any number of other examples.

What should we do when confronted with these scenarios?  Most people think that the world positions itself along a line separating, at one end, complete government regulation and at the other, zero government regulation and, instead, the use of tort law and civil suits to restrict the “bad” behaviour.  This is poor logic, however, because it is overly simplistic; it presupposes that we need to do anything at all!

I favour a midway point between regulation and tort law, but more importantly, to my mind, we usually don’t need to do anything when confronted with these possibilities. Life inherently has risks and, while we should act to avoid exacerbating those risks, we should not necessarily seek to remove them altogether.  There are three reasons for this:  First, because removing all risk is simply impossible and it is usually the case that reducing risk in one area causes it to rise in another; second, because exposure to some risk is crucial in the development of well-adjusted people and a properly-functioning society; and third, because to restrict people’s choices in order to lower the risk they face is to deprive them of their basic liberty to choose whether to accept that risk for themselves.

Let me summarise my view in this not-even-remotely-to-scale little plot. Think of the horizontal axis as a measure of how easy it is to demonstrate harm to a point of warranting action by “the authorities.”

There are 10 dots of each colour.  Broadly speaking, Australia and the UK have chosen the government regulation approach.  In Australia, every major political party seems to agree that the “solution” is always more (they would say better) regulation.  In the UK, the Lib Dems and Tories make occasional mutterings suggesting that they might agree with me, but for the most part they’re in lock step with Labour (UK), which likes the status quo.

America is a bit more varied.  By and large, they have adopted the approach of letting tort law and the fear of civil suits induce the effect of (remarkably strict) regulation, but when America does use explicit government regulation, it tends to be something of a light touch.  Democrats seem to want to move closer to the British/Australian model, while Republicans seem to either like their status quo or wish to move to the Libertarian ideal.

Small government / Libertarian idealists typically want no government regulation and, to the extent that things need to be dealt with at all, they want everything to happen through the courts.  Although they want small government, what government they do want, they want to be strong (e.g. in the enforcement of the law).

Speaking about America, M.S. in the above-linked-to Economist entry writes:

I would gladly join any movement that promised to do away with this sort of nonsense. For example, Philip K. Howard’s organisation “Common Good” (TED talk here) works on precisely this agenda. Common Good’s very bugaboo is useless, wasteful legal interference in schools, health care, recreation, and so on. But what you quickly note with many of these issues is that they’re driven by legal liability concerns. You have a snowblader in Colorado suing a resort because she crashed into someone. You have states declining to put up road-hazard signs because the signs prove they knew the hazard was there, which could render them liable for damages. You have the war on children’s playgrounds. The Massachusetts swimming ban, too, is driven by liability concerns. The park officials in Massachusetts aren’t really trying to minimise the risk that you might drown. They’re trying to minimise the risk that you might sue. The problem here, as Mr Howard says, isn’t simply over-regulation as such. It’s a culture of litigiousness and a refusal to accept personal responsibility. When some of the public behave like children, we all get a nanny state.

Which is exactly what I’m saying about America in my summary, but I think (at least, from my reading) that M.S. is assuming that the opposite of a litigious society is personal responsibility.  That’s not true, I’m afraid.  The level of personal responsibility is orthogonal to whether your society chooses litigiousness or state regulation.

Nevertheless, I suspect that M.S. (and Matt Yglesis) and I are on the same side in this debate.  Let people decide for themselves; they’re adults, or should be.  Don’t put a nappy (diaper) on me just because you’re mollycoddling idiot number 8,749 over there.

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The new UK bank levy is fantastic

Go read Robert Peston’s summary.  Here’s a summary of his summary:

  • It does not apply to:
    • retail deposits;
    • tier-1 capital; or
    • repurchase agreements (repos) with sovereign debt posted as collateral,

    so only the “risky” wholesale funding is targeted;

  • There will be nothing to pay for banks with eligible liabilities totalling less than £20 billion, so only the too-big-to-fail banks are targeted;
  • There’s a lower rate for eligible liabilities whose repayment date is at least 12-months away, so there is a link to liquidity and an incentive to move away from short-term funding;
  • It will be implemented over time, so there will not be any sudden shake-up to the British financial industry which might hurt the broader economy;
  • France and Germany have announced similar schemes, so there can be fewer complaints about a loss of competitiveness; and
  • When other countries implement similar schemes, the amount due will be adjusted to avoid double-taxation, so, again, there can be fewer complaints about a loss of competitiveness.

Fantastic.

Estimates are for £2 billion per year in revenue to the government.  I do wonder if that is assuming that the banks retain their current funding structure (which they won’t) or if allows for a gradual move away from short-term wholesale funding.

In any event, this is good for retail bank customers … the banks will now have an extra incentive to woo us for our deposits.

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Reporting reactions to the news, not the news

XKCD: Public OpinionI know I’m not alone in getting frustrated by the tendency, in all forms of mass media, to report on reactions to an event or debate rather than provide substantial detail on the event or debate.  I do realise that it’s because the drama of people’s reactions keeps the audience’s attention for longer, that most people aren’t actually interested in the finer points, that it bores them.

Jon Stewart lambasts America’s television news providers for providing anything but news, but for me the sharpest sense of frustration comes when I read a newspaper.  I don’t really blame the providers of news for being consumed by the desire to entertain when they have sound, colour and moving pictures at their command.  Well, okay, I do.  But the defence of the newspaper editor is far weaker.  Sure, there are technicolour tits on page three, but other than that and an over-sized font for the headlines, there’s not much the newspaper can do to distract you from the article itself.

Most people don’t read more than the first few paragraphs of an article.  That’s why papers like the NY Times put those delicious, tantalising nuggets on the front page for the vrapid browsers among us and then send the hungrier reader off to page Q13, or whatever, to finish the piece.  It’s not a practice we see in Britain, but I quite like it.  It gives a visual honesty to our collective consumption of news.  It lets me imagine, as I hunt through the paper for section Q, that the real meat of the article, the guts, the nitty gritty, the actual news, is available in there somewhere.  Sadly, it almost never is.

I don’t want to single out The Grey Lady.  There is no paper anywhere on earth that consistently lists out the facts in each article.  I don’t even need quality writing.  Just chop off the final paragraph and replace it with the facts in bullet point form.  Nobody reads that paragraph anyway, even if it is the one the journalist fought most with the editor to keep.  Leave the rest of the article peppered with Mr. and Mrs. Jones’s sob story and some politician’s outrage, but give me the facts quietly at the end, where it’s not hurting anyone.

Anyway, via Matt Yglesis, I see that a report has been written by Pew Research on the coverage of the health care debate in America.  You can see the full report here or a summary here.  I quite agree with Matt that the most telling aspect of the report is summarised in the following graph (although I disagree with his conclusion that this is not such a bad result):

Pew: Top Health Care StorylinesIt’s a terrible diagram, because 3D graphs make it near-impossible to read the actual numbers (I wonder if Pew Research sees any irony in trying to present these data in a snazzy format), so let me give them to you:

  • 41% : Politics and strategy
  • 23% : Descriptions of [proposed] plans
  • 9% : [Current] State of health care
  • 8% : Legislative process
  • 6% : Obama’s health care plan
  • 4% : Town hall protests

This is for all forms of media, though.  The then current state of health care featured more prominantly in newspapers, which gave it 18% of their coverage.  That’s better, but I suspect it’s deceptive.  That 18% will have included innumerable emotion-dripping sob stories about some old lady and her dodgy hip.  Disappointingly, online news sites, which have essentially zero marginal cost for an additional paragraph on the end of a story, gave only 8% of their coverage to describing the then current system.

Ah, well.  Go read the report.

Update:  Ezra Klein makes an excellent point:

It’s trite to say it, but the news business is biased toward, well, news. There are plenty of outlets that tell you what happened yesterday, but virtually no organizations that simply tell you what’s going on. Keeping up on the news is easy, but getting a handle on an ongoing situation that you’ve not really been following is hard. In recent years, we’ve seen the rise of outlets like FactCheck.org, which try and police lies that are relevant to the debate. But there’s really no one out there who is trying to give you the background to everything going in the debate. News organizations will write occasional pieces trying to sum up the legislation, but if you miss them, it’s hard to find them again, and they’re not comprehensive anyway. The fact that I still can’t direct people to one really good, really clear, really comprehensive online summary of the bill is an enduring frustration for me, and a real problem given the importance of the legislation and the number of questions there are about it.

If I edited a major publication — or even a medium-size one — I would begin each major legislative battle by detailing a few of my smartest, clearest writers to create a hyperlinked, fairly comprehensive, summary of the basic legislation. That summary would be updated throughout the process, and it would be linked in every single story written on the topic. As reader questions came in, and points of confusion arose, it would be expanded, so by the end, you’d have a document that was current, comprehensive, navigable and responsive to the questions people actually had about the legislation. Telling people what just happened is undeniably important, but given that most people aren’t following that closely, we in the media need to do a better job of telling people what’s been happening.

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An astonishing victory for the Liberal Democrats

Well, I am impressed.  The Lib Dems have obtained everything and more that I predicted yesterday.  I couldn’t be happier.  I’m astounded that the Lib Dems have achieved so much or that the Conservatives were prepared to concede so much.  Congratulations are due to both Cameron and Clegg.  This is a sensible, grown-up result.  Full details of the coalition agreement are yet to be released (they will at 2pm London time), but it looks like:

The Cabinet

  • Lib Dems to have five (!) seats in the cabinet, including deputy PM for Clegg.

Electoral Reform

  • Fixed term (five year) parliament, with the next election to be held on the first Thursday of May, 2015 [Lib Dems].
  • Adjustments to electoral boundaries to equalise the constituency sizes [Tories].
  • A referendum on Alternative Vote — a.k.a. Preferential Voting — for the House of Commons [Lib Dems].
  • Proportional Representation for the House of Lords! [Lib Dems]

Fiscal Policy

  • An emergency budget within 50 days [Tories].
  • A reduction in spending of six billion pounds for the 2010/2011 year [Tories].
  • A gradual raising of the tax-free threshold to £10,000 [Lib Dems].
  • Capital Gains Tax increased to match income tax, [Lib Dems] with lower rates for entrepeneurial business investments [Tories].
  • Inheritance tax to remain unchanged [Lib Dems].
  • The rise in employers’ National Insurance will be scrapped [Tories].
  • The rise in employees’ National Insurance will remain to partially fund the increase in the tax-free threshold [Lib Dems].
  • Tax cut for married couples will go ahead [Tories].

Europe

  • No adoption of the Euro [Tories].
  • Referendum on any future treaties that would cede any power to Brussels [Tories].

Immigration

  • A limit on non-EU immigrants to the UK [Tories].

Security

  • Trident gets replaced [Tories].

Financial Regulation

  • Macroprudential regulation to be at the Bank of England [Tories].
  • Microprudential regulation to be decided later (i.e. the FSA may not be dismantled) [Lib Dems].
  • An independent commission to consider breaking up the biggest banks [Lib Dems].

Energy

  • No agreement on nuclear power, but a Lib Dem will be secretary of state for the environment [Lib Dems].
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15:17 I predict a Conservative-LibDem coalition

The Labour and Liberal Democrat negotiating teams finished a session around 13:30.  The Conservative negotiation team then sat down with the Lib Dems at 14:00.  Ever since then, there has been a steady stream of increasingly-senior Labour figures arguing against a Lab-Lib coalition, which suggests to me that they’re softening up the ground for a Tory-led government.

From the BBC Live stream:

14:26 Labour MP and former minister Michael Meacher says his party should go into opposition and “renew itself”.

14:30 The first Labour minister has openly expressed the feeling that a Lab-Lib coalition is not viable.

14:36 “We must NOT enter a deal with Labour,” writes Keith Nevols, former Lib Dem parliamentary candidate, on his blog.

14:43 The London Evening Standard’s Paul Waugh claims that in last night’s cabinet meeting Health Secretary Andy Burnham “broke ranks to give an ominous warning of the dangers of trying to concoct such an unstable alliance” between Labour and the Lib Dems.

15:12 Labour MP for Batley and Spen Mike Wood says “David Cameron should be PM”.

My prediction:

A Conservative-Liberal Democrat coalition, with major points along the lines of:

  • Strong support for Tory spending (cut) plans;
  • Freedom for the Lib Dems to oppose the Tory line on Europe and Trident, at the least;
  • Some mechanism to equalise the size of constituencies (which would help the Tories);
  • A referendum on Alternative Vote — a.k.a. Preferential Voting — for the House of Commons (which would help the Lib Dems);
  • No agreement on reform of the House of Lords;
  • The Lib Dems getting one mid-to-high level cabinet position (something like Home Secretary); and
  • An intention to keep the new parliament for at least two years.

The Lib Dems will desperately want two things:

  1. to have electoral reform enacted (presuming that they succeed in the referendum) before the next election; and
  2. to have an opportunity to be seen to be actively influencing policy in their favour.

Of course, the Liberal Democrats have their Southport resolution.  Any coalition must obtain 75% support amoung Lib Dem MPs, members of the House of Lords and executives of the party.  Nevertheless, I think that they’ll pull it through.  If nothing else, the prospect of the first Lib Dem cabinet position in a century will awaken the real politik in their MPs.

Previously on the UK electoral system:

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British vs. Australian electoral systems

How the Australian electoral system is better than the British

  • Mandatory voting
  • A democratically elected upper house
  • Preferential voting in the lower house, proportional in the upper (no first-past-the-post)
  • The electoral commission adjusts the electoral boundaries every cycle
  • Elections are always on a Saturday so that everyone has time to get to the polling stations
  • Elections in all seats are administratively run by the Electoral commission

How the British electoral system is better than the Australian

  • The electoral cycle is longer.  Australia’s 2-to-3 years is too short.

How they both suck

  • Variable term limits.  There should be fixed term limits.  4 years in the lower house, 8 years in the upper (half re-elected each time).
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Why electoral boundaries favour Labour and why electoral reform would favour the Liberal Democrats

Brief answers to three questions about elections in the United Kingdom:

  • Why do electoral boundaries favour Labour?
  • Why would moving to Proportional Representation favour the Liberal Democrats?
  • Why would moving to Alternative Vote/Instant Runoff/Preferential Voting favour the Liberal Democrats?

Why the current seat allocation is biased towards Labour
Two reasons:

Firstly, it’s because of demographics, migration and the timing of boundary changes.  There’s a long-term trend across most of the country (excluding London) for people to be moving away from inner city areas and towards suburban, semi-rural and rural areas.  On average, that represents a movement of Labour-party supporters into Conservative seats.  As a result, the inner city areas remain staunchly pro-Labour, but the suburban and semi-rural areas become contested.  Under British law, electoral boundaries are only updated very rarely.  Quoting ukpollingreport.co.uk:

Because the effect of boundary changes is one way, any delay in keeping the boundaries up to date with population movements tends to be to the advantage of the Labour party and the disadvantage of the Conservatives.Currently, Parliamentary boundary reviews are based on the electorates at the time the boundary review commences (unlike local authorities boundaries, which are based on projections of the future electorate). In the case of the boundaries which will be used for the next election, the review began in 2000, so by the time the boundaries are first used in 2009/10 they will already be a decade out of date. By the time they are replaced by the next boundary review, due to report between 2014 and 2018, they will be close to 20 years out of date.

Secondly, there are different rates of turnout across different seats.  The poor and poorly educated correlate positively with Labour support and negatively with turning out to vote.

To appreciate what this means, suppose that you had two seats with equal numbers of people living in them (contrary to the demographics mentioned above); one generally pro-Labour and the other generally pro-Tory.  Let’s say that they each win 60-40.  On election day only 25% of eligible voters turn up in the pro-Labour seat, but 75% of eligible voters turn up in the pro-Conservative seat.  That will produce one Labour MP and one Tory MP (50% each), but when combined, the Conservatives will have received 60%*75% + 40%*25% = 55% of all the votes cast.

When combined with the demographic changes, this adds up to a significant advantage for Labour.  Obviously the second distortion (but not the demographic one) vanishes if you introduce compulsory voting like we have in Australia.

How Proportional Representation would help the Lib Dems

This one is easy to explain:

  • In 1992, the Lib Dems received 17.8% of the total vote, but only 3.1% of the seats in parliament.
  • In 1997, the Lib Dems received 16.8% of the total vote, but only 7.0% of the seats in parliament.
  • In 2001, the Lib Dems received 18.3% of the total vote, but only 7.9% of the seats in parliament.
  • In 2005, the Lib Dems received 22.6% of the total vote, but only 9.5% of the seats in parliament.
  • According to the fivethirtyeight.com forecast, this week the Lib Dems will receive 28.7% of the total vote, but only 18.4% of the seats in parliament

How Alternative Vote/Instant Runoff/Preferential Voting would help the Lib Dems
Two reasons:

Firstly, with first-past-the-post, Lib Dem supporters have an incentive to vote for someone else so that their vote “counts”.  This effect is particularly strong in contests that are perceived to be close (so it’s less of a concern this time).

Secondly, the Lib Dems do well when you ask people to rank their preferences – they’re rarely 1st, but they’re frequently 2nd.  To really understand how this would affect things, have a look at the transition matrix fivethirtyeight.com uses in their prediction.  This is their matrix for how they believe people have changed relative to 2005 (e.g. of previous Labour voters, 62% remain with Labour, 9% have switched to the Tories, 13% to the Lib Dems, etc):

It is therefore not really a matrix of average preferences, but it gives an idea of what it might be.

When Labour supporters switch, they favour the Lib Dems over the Tories 13/9 = 1.44
When Tory supporters switch, they favour the Lib Dems over Labour 6.5/3 = 2.17
When Lib Dem supporters switch, they narrowly favour the Tories over Labour 5/4 = 1.25

So, with preferential voting and pretending that there are only the three parties contesting each seat:

If a Lib Dem candidate is in the top two after the first round of voting, they can be confident of receiving the majority of the preferences of the supporters of the 3rd ranked candidate, no matter who they were.

But that can’t be said for the other two parties.  If a Labour or Tory candidate is in the twop two after the first round, whether they get a majority of the 3rd-place candidate’s preferences crucially depends on the identity of that 3rd-place candidate.  If it was Lib Dem in 3rd place, it’s a flip of the dice.  If it was the other big party in 3rd place, they’ll typically get only a minority of the preferences.

On average — over many seats and over several elections — that skewing of preference ranking will act in the Lib Dems’ favour with preferential voting.

Alternative Vote/Instant Runoff/Preferential Voting would help the Lib Dems
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I am Britralian

… being both British and Australian.  It only took seven and a half years of living in Ol’ Blighty to do it.  The ceremony took place in the chambers of the Camden Council Hall — all dark timber and green leather.  There were about 30 of us in the ceremony.  Roughly half chose to swear their allegence by God, and half to affirm it without any religious reference.  Now I get to wait six weeks before getting my British passport.

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People are not rational maximisers of von Neumann-Morgenstern utility

Here are two examples:

  • At every sandwich shop in Britain (Pret A Manger, Eat, etc), when you attempt to pay for your sandwich you will be asked if you will be eating in or taking the food out of the shop.  The reason is that, thanks to the complexities of the UK tax system, the shop is meant to pay VAT if you dine in, but they don’t have to if you take it out.

    The shop doesn’t care in the slightest whether you actually eat in or out. So long as they’ve asked you about your intentions, they’re legally covered.  The upshot is that for anybody actually intending to eat their sandwich in the shop, the rational thing to do is to say that you’re taking it out and then eat in the shop anyway.  If anybody asks why you chose to do so, simply explain that you changed your mind. Since the sandwich shop doesn’t care, the probability of being caught is zero; and since you can always say that you changed your mind even if you were, the cost of being caught is precisely none.  Hence, the rational von Neumann-Morgenstern expected utility maximiser should never pay more than the take-out price. But people do …

  • When you book cinema tickets online, you have the option of selecting a student discount.  Cinemas love online bookings because you then collect your ticket from a machine instead of a person.  That means that they’re free to either hire one less person, or put the person saved onto the candy counter.  It also means that they can have ticket collection take up less space and expand the candy counter (where all the fat profit margins are located).You do not need to show a student card when collecting your ticket from the machine at the cinema.

    You do not need to show a student card when entering the cinema with your ticket.  You can, in fact, claim a student discount without any risk of being asked to prove that you are actually a student.  But people don’t …

Both of these examples are of price discrimination by a monopolist.  In the second example, the Cinema is the discriminator, charging less to students because students, in general, have a lower willingness to spend than non-students.  In the first example, the UK government is the discriminator.  The people with the lower willingness to pay are those that are prepared to take their food out rather than dine in.

In standard economic theory, both examples should succeed only if a) people are risk averse — which, in general, they are — and b) there is a non-zero chance that a “cheater” will get caught and suffer some loss as a result.  Even then, the probability-weighted loss from being caught would need to exceed the probability-weighted gain from successfully “cheating”.

But since the probability of being caught in these examples is zero and, with the sandwich shop, at least, the loss from being caught is also zero, the theory breaks down here.

I suspect that even Loss Aversion, a consequence of Prospect Theory, would fail to explain people’s behaviour here because we are talking about zero-probability events.

I don’t think we can avoid including social norms and ethics to explain them.  People have a socially-conditioned aversion to lying (saying that you will take the food out when you really intend to eat in; saying that you’re a student when you’re not) and this is what offsets the gain from the deception.  It also pretty clearly depends on the size of the gain relative to some internal scale.  A non-student with a low income is more likely to pretend to be a student than someone with a high income.