Brexit insurance that is worth having

The Irish "backstop", the legal clause that offends the sensibilities of hardline Tory Brexiteers - to the point where they would be prepared not only to immolate their own government but even possibly lose Brexit altogether to be rid of it - is often described as "insurance".

It's insurance, of course, for the people on both sides of the Irish border in that it means - if there's no trade deal between the UK and the EU by 2021 - a hard border on the island will not descend. But it's also insurance for people in the rest of the UK too, given it's not in their interests, either, to jeopardise the Good Friday Agreement. That latter benefit should really be more emphasised in the UK debate.

Yet why do we need insurance in life? The truth is that we often don't. Buying a warranty on a new microwave or vacuum cleaner is a waste of money given the cost of the insurance and the statistical likelihood of the product failing. These are immensely profitable contracts for retailers, which is why they push them so hard at the tills.

And insurance companies are so profitable, in part, because people have a tendency to over-insure against the wrong things. We like the peace of mind that comes from the possibility of relatively small claims, even if we would usually be better off foregoing them.

The better reason to buy insurance is to cover losses we wouldn't be able to cope with. "Insure only those things you cannot afford to lose," is the advice of the economist John Kay. "You need insurance against your house burning down, but not for replacing the bedroom carpet. You need insurance against being hospitalised in the US, but not for an extra night's accommodation because your plane is delayed."

Some Brexiteers don't actually care very much about the Irish border. A clean break with the EU matters more. Some, apparently, privately think the Irish are impudent for using the leverage with the EU to demand a backstop at all and should "know their place".

But let's assume those who have voiced such opinions are outliers rather than representative. Let's assume mainstream Brexiteers genuinely want to avoid a hard border in Ireland but believe that the backstop is unnecessary, that it's overkill.

They place a low probability on it being needed because they are confident we'll conclude a free trade deal by December 2021 and that this will include an unproven technological fix to the problem of Ireland being in the customs union and single market and Northern Ireland being outside both, something that would ordinarily require border checks on goods and agricultural produce passing between the two.

But consider who is calculating those probabilities. And consider their record. When he was Brexit secretary, David Davis predicted that the UK would establish a free trade deal with the EU, and a host of other countries, the "very next day" after we formally depart on 29 March 2019. We know now that's not going to happen.

Liam Fox, still the trade secretary, predicted that a post-Brexit free trade deal with the EU would be the "easiest in human history". It's certainly not looking that way now.

Yet, in fact, this isn't the right way to weight up the value of insurance. For insurance is not to cover eventualities we expect to happen with a high probability, but those that we fear. Even if one put a low probability on a trade deal not being ready in time, that does not imply a backstop would be a mistake.

A good insurance policy protects us against worst case outcomes. That's what the Bank of England was thinking about when it put together its no-deal Brexit scenario modelling. It wanted to test whether the UK banking system could cope in the face of an even an extreme economic and financial shock.

That's why, even if one is sceptical of the assumptions used in climate warming models showing rising temperatures as carbon dioxide levels in the atmosphere rise, one can still be in favour of radical decarbonisation efforts. The risk of a super-heated planet is too great to take (and the cost of shifting away from fossil fuels is eminently bearable).

"Skin in the game," is the solution favoured by Nassim Nicholas Taleb for powerful people who propose to run risks affecting others. He gives the example of monarchs who personally led their armies into battle, and sea captains who go down with their ships. "Skin in the game means consequences when you are wrong as much as when you are right," he says.

Creating a political system with such clear symmetric incentives is difficult. But it's nevertheless a useful way to think about those loudly insisting we don't need the Brexit insurance of an Irish backstop.

#Brexit, #insurance, #Ireland, #Nassim #NicholasTaleb, #skin-in-the-game

Is Emmanuel Macron’s France in the vanguard of a new economic revolution?

As he delivered his televised address to the French public on Monday night, following a month of street protests and intensifying mob violence, Emmanuel Macron sat behind a gilt-framed antique desk, flanked by a pair of golden lampshades. Behind him loomed one of the imposing golden doors of the Elysee Palace's Salon Dore. Yes, "dore" means golden.

President of the rich? Whatever gave people that idea? Yet appearances can deceive. Despite the Marie Antoinette-style furnishings of the Elysee and the complaints of the gilets jaunes protestors, the statistics suggest the French Fifth Republic is actually a more egalitarian nation than its major peer economies.

According to the World Inequality Database, the share of total pre-tax income flowing to the pockets of the top 1 per cent of people in France is around 11 per cent. That compares with 13 per cent in Germany, 14 per cent here in the UK and 20 per cent in the US.

Post-tax income inequality, as measured by the Gini index, is also lower in France (29 per cent) than the UK (35 per cent) and the US (39 per cent) and roughly the same as in Germany.

The wealth share of the top 1 per cent in France is also well below that of the US. Comparisons with the UK and Germany when it comes to the distribution of wealth are more difficult due to a lack of comparable data but they are likely to be broadly similar.

What about economic performance? The French unemployment rate (9 per cent) is higher than the US (4 per cent), the UK (4 per cent) and Germany (3.3 per cent). Yet average real wages seem to have grown much more in France than in the UK and the US since the financial crisis a decade ago. Here in Britain they are still lower than they were in 2008.

The policies Macron announced on Monday - an increase in the minimum wage, a reduction in the overtime tax, an encouragement for employers to pay workers a Christmas bonus, scrapping an increase in the tax on pensioners - were mainly about putting money in ordinary people's pockets.

According to France's public accounts minister, this package will cost around €10bn (£9bn), or around half of one per cent of GDP. That's not negligible, especially considering the government was hoping to see its budget deficit decline from 2.8 per cent of GDP next year to 2.2 per cent in 2020 and the eurozone's rules define a 3 per cent deficit ceiling.

While Macron's package has been interpreted in some quarters as a "turn to the left", his refusal to reinstate the wealth tax on those with total assets of more than €1.3m, which he scrapped last year, shows there are limits to how far he is prepared to redistribute. He may, ultimately, need to capitulate on that too, just as he has on the new diesel tax, which sparked the recent protests.

The president suggested the unrest has stemmed from "40 years of malaise". That could be interpreted as an attempt to spread the blame after 19 months in office characterised by unforced errors, but there is something in this diagnosis.

While there are those like Marine Le Pen who ascribe the sense of dissatisfaction in France primarily to immigration, a glance at the demands of the (admittedly diverse) gilets jaunes suggests a dominant economic element.

In the wake of the destruction left by the Second World War, France basked in the "trente glorieuses" - thirty years of rapid economic growth and rising living standards for most.

Since the 1980s the rate of both overall GDP per capita growth and productivity growth in France has slowed. It seems to have shifted down again in the wake of the financial crisis a decade ago.

What's ominous for Macron is that this seems to be part of a global trend of slowing economic growth, suggesting it will not easily be turned around by policies in one country.

Defeatism is usually poor counsel and so it remains today. There surely remains potential not just for France, but for all nations, to increase national productivity growth through investments in infrastructure, research and skills. Living standards can be improved not just through redistribution but through a new generation of low-carbon technologies, through institutions that foster a greater sense of economic security, and through governance innovations that enable people and communities to take more control of their lives.

Yet the transition out of malaise is unlikely to be smooth. And if the economic pie is not growing as fast as it was, arguments and tensions about its division are likely to become more intense. Perhaps in this respect, as it was in 1789, France is in the revolutionary vanguard of nations once again.

#EmmanuelMacron, #France, #inequality

The unreliable Oxbridge signal

Oxbridge seems to recruit extraordinarily heavily from a small group of southern private schools (presumed to include Eton and Westminster) according to a new analysis by the estimable Sutton Trust.

So what? Why do we care? The answers probably seem obvious. An Oxbridge education appears to unlock the upper echelons of the British establishment.

As work by the Sutton Trust has previously shown, a startlingly high proportion of judges, senior civil servants, business executives, cabinet members and journalists (disclosure: I went to Oxford) were educated at those two quadrangle-festooned institutions of higher education.

If Oxbridge is drawing disproportionately from fee-paying private schools, these are likely to be children from relatively wealthy (if not super wealthy) families. Those children of the rich thus appear get a sizeable additional advantage in their adult life (at least if one considers entering parliament, law, the civil service or the higher reaches of the media to be a desirable destination).

This is poisonous for British social mobility, a monstrous affront to any reasonable conception of fairness.

That’s why we should care. But let’s take a step back. Imagine we were designing a system for selecting capable and ambitious graduates for advancement in those kinds of professions.

What would that system look like? Once you ask this question, the central importance of Oxbridge as a recruiting pool starts to looks absurd, no matter who goes there. The numbers studying at Oxbridge have risen since higher education steadily opened up to the masses after the Second World War. But the growth in new places has not kept pace with the explosion of total student numbers over the past half century.

Perhaps they should double the number of Oxbridge colleges and build on the green belt around the two picturesque cities to accommodate the secular rise in demand. But, in the real world, the annual Oxbridge undergraduate intake is destined to remain tightly limited by geographical constraints.

The two universities currently accept around 7,000 new undergraduates each year. That’s now less than 1.5 per cent of national total undergraduate acceptances in 2017 (533,890). Since Oxbridge receive around six applications for every acceptance, admission is a zero sum game: one person’s place is a place not won by five others.

Why are Oxbridge students so dominant in the upper reaches of certain professions? Many will say it’s because so many smart children tend to go there. And that may well be true to a certain extent. But it’s not the whole story. And it misses a vital economic mechanism: signalling.

Oxbridge transmits a “signal” to employers and gatekeepers of a capacity on the part of a candidate for exceptional perseverance and capability. (For some it will be signal of social class too but let’s park that for the purposes of this argument.) Many employers faced with a hiring choice between two equally strong candidates for fast-track training or some other opportunity will opt for the Oxbridge one because of that signal.

Yet the signal may not be accurate. Indeed, it may be becoming less accurate over time given the rise in the numbers attending higher education. To put it another way, what reason is there to believe that those five ambitious children who didn’t get in to Oxbridge have less potential to be a top lawyer, accountant, journalist, business executive or an MP than the one who did? But note the incentives the signal creates. It gives smart and ambitious children an added reason to apply to Oxbridge because they correctly discern that their chances of future advancement are higher there. This battle for places among bright kids reinforces the signal of quality, creating a vicious circle.

None of this is to argue that efforts to reform Oxbridge admissions are irrelevant or unimportant. They certainly aren’t. But perhaps the bigger challenge is to, somehow, erode the prestige of these two institutions in employers’ eyes, to interfere with the signal.

We need to encourage a culture where employers and gatekeepers, whether in the public or private sector, do not look at these two midsized universities as some kind of gold standard. We need recruiters to wake up (more fully – many, in fairness, have) to the reality that there are also vast numbers of extremely able and talented people elsewhere too.

In other words, do not simply concentrate on making access to the elite recruitment pool fairer but try to make that pool much bigger too. Bear in mind too that, in such a transformed environment, bright students would not have such an overwhelming incentive to apply to Oxbridge and to engage in that zero-sum competition for places. The vicious circle could become a virtuous one.

The problem with “elitism” is not so much that it privileges ability (leaving aside concerns about the social implications of a true meritocracy) but that it is so arbitrarily exclusive.

It’s a sad irony that the intense media focus on Oxbridge admissions may serve to emphasise the institutions’ signalling power. If everyone thinks it’s terribly important how these universities select students, doesn’t that underline that they are also terribly important institutions, that “the best” are to be found there? University-blind admission processes, like the one introduced by Deloitte a few years ago, are welcome experiments and we should hope for more of them. If we paid less attention to where others went to university the world would be a less tedious place. It could also be more just.

#oxbridge #SuttonTrust #socialmobility #university #signalling