My letter to William Sutherland

Dear Professor Sutherland,

I would first like to complement you on an excellent article. I would next like to identify an important omission: "Just because a scientific finding happens to be ideologically inconvenient, this does not mean it is false." Note that this is a separate category from both "Bias is rife" and "Scientists are human", because it applies to the policy maker's interpretation of a finding, rather than to the methodology that was used to unearth the finding.

Very many thanks,

Noah Carl,

Nuffield College, Oxford

Unemployment in Western countries since 2000

The most widely cited measure of unemployment is the unemployment rate. This is defined as the number of people who are not employed but are actively searching for work relative to the total labour force. The labour force, in turn, is defined as the total number of people who are either employed or unemployed. During the financial crisis that began in 2008, unemployment rates in most Western countries rose considerably. In many countries, they are still high. One major exception is Germany, where the unemployment rate today is lower than it was in 2007. The graph below plots the unemployment rate for selected Western countries between 2000 and 2011. (All data are from the World Bank.)

The unemployment rate went up everywhere except Germany. Most countries experienced a moderate increase. Greece, on the other hand, experienced a substantial increase. Although the unemployment rate rose in France and Italy, it was not unusually high in these countries by 2011.

Another measure of unemployment is the employment-to-population ratio. This is defined as the number of people who are employed relative to the total population older than 15 (or 16). Alternatively, it is sometimes defined as the number of people who are employed relative to the total population aged between 15 and 64. The graph below plots the employment-to-population ratio (defined the first way) for selected Western countries between 2000 and 2011.

Here a very different picture emerges. The employment-to-population ratio has long been much higher in the United States, the United Kingdom and Sweden than in the other European countries. This is due to a number of factors: demographic, cultural and regulatory. (Part of the difference may also be due to discrepancies in exactly how 'employment' is defined in each country.) One caveat is that many of the people not working in a country like Italy (namely women) are engaged in home production, which is an economically useful activity. Nevertheless, it is quite remarkable that in the early 2000s, for example, about 20 percentage-points more people were employed in the United States than were employed in Italy.

How much has the Coalition government cut public spending?

Here I present two charts showing how much public spending has changed over the last few years. Data are from HM Treasury; they can be downloaded here. (I also used data on population size from Trading Economics). I consider three measures of public spending: total real spending, total spending as a percentage of GDP, and total real spending per capita. Figures do not include money spent on the bank bailouts.

The first graph shows how public spending has changed since the Coalition government came to power. In 2010, the first year of the Coalition government, spending rose. (This may have been due to spending increases already planned by the previous Labour government.) In 2011, spending remained flat. In 2012, it began to fall. And in 2013, it continued to fall. Total real spending is now 2.8% lower than it was in 2009. Total spending as a percentage of GDP is now 2% lower. And total real spending per capita is now 5.9% lower.

Another way to examine how spending has changed is to compare current spending to pre-crisis spending. After all, spending increased considerably during the economic crisis. As the graph below shows, two of the three measures of spending are still above their pre-crisis levels. Total real spending is 2.3% higher than it was in 2008. Total spending as a percentage of GDP is 6.4% higher. And total real spending per capita is 1.7% lower.

A correction to my post about Rawls

A couple of days ago, I wrote a post about Rawls' difference principle. My main conclusion was that Rawls' argument for the difference principle relies on the mistaken assumption that there is such a thing as a rational preference; it assumes that minimaxing behind a veil of ignorance is more rational than following any other strategy, such as maximising expected utility. (As a friend of mine points out, someone who believes there is such thing as a rational preference will not necessarily accept my conclusion.)

However, I made one mistake in my analysis. This mistake does not affect my conclusion, but I think it is worth discussing anyway. In particular, I stated that Premise 2 of Rawls' argument for the difference principle is tantamount to the claim that it is rational to play a minimax strategy when faced with a veil of ignorance. This is wrong. What I should have said is that Premise 2 is tantamount to the claim that it is rational to play a minimax strategy and to be inequity-averse when faced with a veil of ignorance.

Premise 2 (again, please correct me if I've got it wrong) is as follows. An individual faced with a veil of ignorance would only want to deviate from perfect equality if doing so would improve the position of the least well-off people in society. More generally, an individual faced with a veil of ignorance would only want some amount of inequality, rather than no inequality, if introducing that inequality would improve the position of the least well-off people in society. In other words, she would want to maximise the position of the least well-off, whilst keeping inequality as low as possible.

By way of illustration, consider the diagram below. An individual who simply had a preference for minimaxing would be indifferent betweeen Scenarios 2 and 3. Conditional on maximising the position of the least well-off people in society, she would be indifferent to the amount of inequality in the rest of the distribution. However, an individual who not only had a preference for minimaxing, but was also inequity-averse, would prefer Scenario 2 to Scenario 3. The least well-off do just as well in Scenario 2 as they do in Scenario 3, but there is less inequality overall in Scenario 2.

If my interpretation of Premise 2 is correct (please tell me if it isn't), Rawls is arguing that a rational individual behind a veil of ignorance would have a preference against scenarios where she could be--on average--better off, and--at worst--no worse off. He is arguing that, conditional on maximising her minimum utility, she would prefer to have lower expected utility. Even if (unlike me) you believe that preferences can be rational, it seems rather irrational to want less expected utility rather than more.

One response I can think of (which is not totally unreasonable) is as follows. The different scenarios behind a veil of ignorance do not correspond to different distributions of utility, but to different distributions of the social and economic determinants of utility (i.e., status, income etc.). And although it might be irrational to want less expected utility, it is not irrational to want less expected income. This is because if you happened to be one of the least well-off people in society, you would want the most well-off people to have as little income as possible.

A counter to this argument is as follows. Even if it is not irrational to be concerned about your relative income, and accepting that there are diminishing marginal returns to income, it is not true that, for all combinations of degree of concern over relative income and rate of decrease of marginal utility, you would strictly prefer less inequality to more inequality. In other words, holding minimum income constant, it is possible to imagine some increase in inequality that you would prefer. At this point, the debate would presumably come down to what degrees of concern over relative income and rates of decrease of marginal utility were reasonable to postulate.

Problems with Rawls' difference principle

(I cannot rule out that all of what I'm about to say has already been said, and already been refuted, somewhere in the literature.)

Rawls' difference principle states (someone correct me if I've got it wrong) that a deviation from perfect equality is just if, and only, if it would improve the position of the least well-off people in society.

Rawls' argument for the difference principle is as follows (again, please correct me if I've got it wrong). A deviation from perfect equality is just if, and only if, it would be chosen by a rational individual faced with a veil of ignorance about her own qualities (Premise 1). Such an individual would only want to deviate from perfect equality if doing so would improve the position of the least well-off people in society (Premise 2). Therefore, she would only choose to deviate from perfect equality if doing so would improve the position of the least well-off people in society (Conclusion).

The argument is clearly valid, so any criticisms must be directed toward its premises. Premise 1 says that a social institution is just if and only if it would be chosen by a rational individual behind a veil of ignorance. And Premise 2 says that a rational individual behind a veil of ignorance would maximise the position of the least well-off people in society. Conditional on accepting that justice is the right criterion for deciding what sort of institutions we should have, Premise 1 is fairly unobjectionable. Premise 2, on the other hand, is problematic.

Premise 2 is tantamount to the claim that it is rational to play a minimax strategy when faced with a veil of ignorance. It therefore implies that there is such a thing as a rational preference. Rationality is defined as doing whatever best satisfies one's preferences, conditional on one's preferences; it is a property of decision-making or behaviour, not a property of preferences. Arguably then, the difference principle is predictated on a category error.

The difficulty of maintaining that it is rational to minimax behind a veil of ignorance becomes clearer when we consider other possible strategies. Indeed, an obvious alternative strategy is to maximise expected utility. (I explain the difference between minimaxing and maximising expected utility at the end of the post.) Now, I am not arguing that maximising expected utility is more rational than minimaxing. Rather, I am pointing out that the difference principle rests on the claim that minimaxing is somehow more rational than maximising expected utility (or playing any other conceivable strategy).

A different interpretation of Rawls' difference principle is as follows. In referring to what a rational individual would do, Rawls did not mean to claim that there is such a thing as a rational preference. Rather, he was simply describing what a typical person would do. In other words, he was making a testable claim about what we should expect people to do when faced faced with a veil of ignorance.

Again, this interpretation is problematic. First, the population is almost certainly heterogeneous with respect to preference for equality. There are probably some people who would minimax; some who would maximise expected utility; and some who would play a different strategy altogether. Second, the difference principle no longer necessarily implies that deviations from perfect equality are only just if they improve the position of the least well-off people in society. Rather, it implies that deviations from perfect equality are just so long as the typical person tends to choose them. Indeed, if empirical enquiry reveals that people tend to maximise expected utility, say, then very large deviations from perfect equality may turn out to be just.

The difference between minimaxing and maximising expected utility

The diagram above depicts a veil of ignorance thought experiment (the numbers are completely hypothetical, and were chosen purely for the sake of exposition). Scenario 1 corresponds to perfect equality; the least well-off experience just as much utility as the most well-off. Scenario 2 corresponds to a situation where the least well-off experience 2 units of utility, the middle experience 3 units of utility, and the most well-off experience 4 units of utility. And scenario 3 corresponds to a situation where the least well-off experience 1 unit of utility, the middle experience 4 units of utility, and the most well-off experience 7 units of utility.

According to Rawls' difference principle, a rational individual behind a veil of ignorance should play the minimax strategy: she should maximise her minimum gain. The minimum gain from Scenario 1 is 1; the minimum gain from Scenario 2 is 2; and the minimum gain from Scenario 3 is 1. Therfore, she should choose Scenario 2.

However, an alternative strategy would be for an individual to maximise expected utility: he could maximise his average gain. The average gain from Scenario 1 is 1; the average gain from Scenario 2 is 3; and the average gain from Scenario 3 is 4. Therefore, if an individual were maximising his expected utility, he should choose Scenario 3.