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In The Guardian, 2018-12-13, historian Timothy Garton Ash asks the EU27:

“(…) all we need from you, my friends, is a clear, simple, positive message, without ifs or buts: “We want you to stay!””

The EU27 already said this, before this plea actually. Yet, let me offer my fellow citizen apologies to the British people for the misconduct by the EU27 leadership. The EU27 has not been clear enough. It has allowed itself to get infected by the irresponsibility by the UK leadership.

An issue between Member States

The EU is a union of Member States and an arrangement between governments. The EU is no usual democracy with a direct relationship between EU citizens and their collective EU government. The EU27 regard Brexit as an internal affair of the UK. EU President Donald Tusk chairs meetings of government leaders, and would see himself entirely out of place when he would tour the UK and have Town Hall sessions trying to resolve misunderstandings and pleading the common cause. Brexiteers would accuse him of meddling in internal affairs, and Tusk could only confirm this. Many Britons would see him as another Pole who should depart as soon as possible, even when he would be excellent at taking care at hospital beds or fixing the plumbing.

Clear and convincing evidence that the UK is under the spell of populism

The 2016 Referendum is clear and convincing evidence, acceptable in a decent criminal court, that the UK is under the spell of populism. In proper democracy it is Parliament that decides such issues. Who studies the mathematics of democracy can better appreciate the history that it are mostly demagogues and incompetents who resort to referenda to create the illusion as if the “will of the people” has been called upon. The 2016 Referendum was an exercise in populist lunacy and the UK government has been irresponsible concerning it. Prime Minister Theresa May clearly doesn’t have the background to understand this. In this particular respect she is no better than Silvio Berlusconi though with a feeling for understatement and a stiff upper lip, and she rather follows populism in the UK instead of steering her country out of it.

Stab-in-the-Back Myth

In this political setting, anything that the EU27 says can and basically will be used against it. The EU27 has been cautious about the risk of a Stab-in-the-Back Myth that the EU27 would be at fault for the mess that the UK is in and could be in for coming decades. When the EU27 would state with more emphasis that it would rather have the UK remain, like Garton Ash suggests, then this would likely be misrepresented as a ploy to lure the virgin UK into a place of darkness and unspeakable horror.

Take the bull by the horns

In real politik the EU27 accepted that a Member State succombed to populism. They should have been wiser. Alongside the unavoidable negotiations, the EU27 should also have discussed How to Deal with Populism in a Member State. EU scientists with basic impartiality in Town Hall meetings could have invited Britons to see this true diagnosis and monster eye to eye. It is still not too late. I myself have looked into the deeper causes of Brexit. My finding is that Britons think that they have democracy while the UK has only proto-democracy. The UK has district representation instead of equal proportionality. The UK system has been causing problems in the UK for a good part of last century, and Brexit is only a culmination.

A second referendum is populism all-over again

Garton Ash’s second referendum is populist irresponsibility all-over again. He neglects the evidence of the 2016 disaster and believes in a heaven of well designed referenda that disclose the “will of the people” like an Oracle of Delphi. His world view is locked in proto-democracy, and he doesn’t even notice the prison walls.

The advice is a moratorium

My suggestion is a Moratorium on Brexit of two years, so that the UK can discuss and improve its democracy. See the former weblog entry.

 

Wikimedia commons May and Berlusconi

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A Brexit moratorium of two years is the best advice today that econometrics can offer the UK and EU. Two years are only a short period with respect to the long future ahead. After two years of misinformation the UK and EU better make room for two years of proper information.

The difference between a flat Earth and a sphere

My background is in econometrics, Political Economy and Public Choice, and the latter is “the use of economic tools to deal with traditional problems of political science” (Gordon Tullock 1987). The Brexit referendum outcome in 2016 caused me to look deeper into its causes. In August 2017 I discovered that “political science on electoral systems” (including referenda) still is locked in the humanities and thus pseudo-science. For its claims on reality this branch is comparable to astrology, alchemy and homeopathy. This branch has been misinforming the world for a good part of last century.

The Great Depression in the 1930s came about because economists had confusions about the gold standard and such. Now we have a similar situation with respect to this branch of political science. This discovery on “political science on electoral systems” compares to the distinction between a flat Earth and a sphere. It means that all evidence must be re-evaluated.

If you wonder where failing government in the USA, UK or France comes from, then include this misinformation and miseducation as a fundamental factor. Brexit is an example of a democracy running astray because of this misinformation. The deeper cause of Brexit is that the House of Commons and the electorate are misinformed by the academia. There is a grand scale of misinformation by famous UK scholars like Iain McLean, John Curtice, Simon Hix, younger Alan Renwick, and (other) members of the UK Political Studies Association and lack of critique by the UK Royal Statistical Society.

For the National Academia of Sciences and Humanities of the world I propose that they set up their own national buddy systems, consisting of both scientists and scholars on democracy and electoral systems. Scientists tend to be less interested in democracy and scholars are at a distance from empirics, so that buddies can support each other in commitment to study and in bridging gaps of understanding.

The evidence is in my paper “One woman, one vote. Though not in the USA, UK and France” (MPRA 84482, 2018). The buddies perhaps better start with the novel statistics on the USA midterm 2018 and the SDID measure on disproportionality.

Cold Civil War in the UK

Many Britons are dead-tired of the Brexit discussion and want a clean break of it. The term Cold Civil War has been used. Rather than force a decision down each other’s throat on the three available options, it is better to kick the can down the road, and have a time-out to reconsider how the UK got where it is now. The UK better changes the discussion to another topic, away from Brexit, on which the three options are rather clear, and instead onto the foundations, structure and workings of UK democracy itself. The UK appears to be horribly confused on both democracy and statistics, and the people in the UK will gain new energy when they finally would get proper information.

All three options have the risk of a Stab-in-the-Back Myth

Both the EU and prime minister Theresa May have emphasized that there will be no more negotiation. There are three options on the table. Firstly the EU-May deal, secondly the Crash out of the EU, and thirdly a Bregret and return to the Status Quo Ex Ante. All three options come with the risk of a Stab-in-the-Back Myth.

Many UK voters have been dreaming and have been misinformed by all sides. It will be easy for many Britons to blame the EU as the villain who abused virgin Britannia. It will be hard for them to admit that they themselves have been dreaming.

  • A stagnation or even a drop in income can be portrayed as punishment by the EU.
  • The May-EU deal would fail on the sovereignty a promised by many Brexiteers.
  • Bregret would be seen as a betrayal of the referendum outcome.

Cognitive dissonance can be resolved by finding scapegoats, and butchering them in cleansing rituals. The Stab-in-the-Back Myth would not only affect the UK and future EU-UK relations, but Pied Pipers of Hamelin within the EU would also use UK resentment as ‘proof’ that the EU is devious indeed.

This lose-lose outcome exposes the weak spots of international governance. Basically, though, the irresponsibility in the UK has infected the EU. EU policy makers should have known better. They treated Brexit as an issue between Member States but they rather should have cared for EU citizens too, also in the UK, even when this notion of EU citizenship has little legal status. This present discussion provides a solution approach.

Two past years of misinformation, two new years for information

The last two years were burdened by misinformation around the 2016 Brexit Referendum and then there were both secrecy and some open chaos in the subsequent UK-EU negotiations. Voters in the UK are only dimly aware about the logic of the Irish border and the Good Friday Agreement of 1998 in this balancing act on national sovereignty and international treaties. Yet the greatest problem lies at a more fundamental level on democracy itself.

Another two years of uncertainty might play into economic stagnation, yet there are many no-regret investments waiting to be done. It really is wisest to take a time-out. This armistice of two more years gives breathing space and appears crucial to clear the fog of war and prevent a Stab-in-the-Back Myth that would play into rancuous backlash in both UK and EU and that could wreak havoc in the future.

How this moratorium can be achieved

The current House of Commons was elected in 2017 and thus after the referendum of 2016, and it would have a mandate to reconsider the situation, even if it would mean breaking promises to voters, which promises clearly cannot be kept with only the present three options on the table. Potentially the EU27 would allow the UK time for such a reconsideration of it is democratic foundations. The recent advice by the ECJ Advocate General provides scope to unilaterally revoke the withdrawal notification (ECJ press release 187/18). However, the EU27 would tend to regard this correct unilateral act with suspicion, and fear for instability in the UK. If the UK would revoke and clarify that it would use a moratorium of two years for a reconsiderations of its democratic foundations, then fears in the EU27 about UK instability and risk about a Stab-in-the-Back Myth against the EU would be assuaged.

After this moratorium of two years, the UK may still leave the EU perhaps in 2021 but at least then this decision would be based upon a clearer understanding in the UK about democracy and statistics.

Not “populism” but kindergarten politics

The 2016 Brexit Referendum Question itself was simplistic and doesn’t fit the requirements for a decent statistical questionnaire. It was political manipulation pure and simple. The Leave vs Remain outcome was 52-48%, but some 17% of voters had Remain between different options of Leave, and thus had to gamble what would be the likely outcome. (RES Newsletter 2018-10) Referenda are mostly dumb and risky, and an instrument of populism instead of deliberative democracy. With this lesson learned, the UK better avoids a second referendum.

Let me quote Cas Mudde who “defined populism as an ideology that considers society to be separated into two homogeneous and antagonistic groups, “the pure people” versus “the corrupt elite”, and which argues that politics should be an expression of the volonté générale (general will) of the people.” (Guardian 2018-11-22) The term “populism” is distractive though, as if there would be a core of truth in going back to the people, as “ideal democracy”. Cas Mudde struggles with the dictionary and is less observant of what is really happening here, namely kindergarten politics. A division between Us and Them is what kids in kindergarten understand, with a saviour prince on a shiny horse, and it is a core element in blockbuster Hollywood movies. This is what Donald Trump is comfortable with and what his analysts are feeding him with.

The proper answer to this kind of politics is to explain that issues are more complex, and Cas Mudde suggests this too. Complexity however requires time. Both UK and EU can use a moratorium of two years to come to terms with the complexity that we now see on Brexit. The key point is to use this time in an educational manner beyond kindergarten, and thus in a fundamentally different manner than we have seen in the last two years. The misinformation about Brexit not only concerns mere mundane points like on the NHS but also concerns some fundamental aspects by professors from the academia as well.

Weimar and equal proportional representation

This discussion now meets with Godwin’s law. In 1941, Ferdinand Hermens (1906-1998) fled from nazi Germany, found refuge at Notre Dame, Indiana, and published his “Democracy or Anarchy” that argued that the Weimar Republic collapsed because of (equal) proportional representation (EPR). After winning WW2, the USA and UK assumed that their electoral system of district representation (DR) would be superior too. Later research by political scientists has essentially repeated the bias, introducing ever more fallacies.

Historians have debunked Hermens’s analysis. Hitler seized power by using the fire in the Reichstag to arrest communists, eleminating such parliamentarians from voting committees. (Lorraine Boissoneault, Smithsonian 2017) EPR was hindering the nazis, not helping them. Anyway, the choice of electoral system must be made for its own optimality, and other rules would be relevant for such stress tests. Above, I have mentioned the evidence.

A solution for the UK is to switch from DR to EPR

The two year moratorium then could have two phases. When the proposed buddy-system of the Royal Society and the British Science Association (science) and the British Academy (humanities) has generated results and has started informing the general public about their findings, in a first phase, then in a second phase the UK can consider switching from DR to EPR, and have proper elections so that all voices in the UK are duly represented, finally for the first time in history. Parties can split along their Brexit views in order to offer voters the full spectrum. The Stab-in-the-Back Myth has less risk of developing when all people can see the true proportions of the different views on Brexit. With new elections, the House of Commons can finally start from proper proportions to negotiate between parties for a compromise. Compromises would focus on internal UK affairs, since there are no more negotiations with the EU on Brexit.

With this advised solution approach provided by econometrics, it may still be, as said, that the UK leaves the EU perhaps in 2021 but at least then all UK voters have been treated properly, with prudence, justice, dignity and compassion, in equal proportion.

Disclaimer: I did not read “Democracy or Anarchy” and the EU-May Deal, but looked at abstracts. Parts of this text have been used earlier.

UK Parliament on the Boston Tea Party

Salah el Serafy (1927-2016) stated the following about GDP and NDP (Gross and Net Domestic Product):

  • “Selling natural assets and including the proceeds in the gross domestic product, GDP, is wrong on both economic and accounting grounds.”
  • Even though NDP is rarely estimated, depreciation of produced assets is fairly small and predictable. Declines in natural assets, on the other hand, may be large and volatile, and are not reflected at all in the estimates of GDP commonly used for macroeconomic analysis.”
  • “For economic purposes, a better approach would be to calculate the user cost component of resource declines, and either subtract this from GDP as capital consumption or (much better) exclude it from the gross product altogether.”

The term “user cost” merely indicates the investments that are required to maintain the resource level and quality.

Two flows

In the RES Newsletter El Serafy (2014) recalled:

“Exploiting finite natural resources without replenishment is akin to mining and Marshall had taken pains to explain that the surplus realized in mining, often miscalled rent, should be split into proper ‘rent’ which is income and ‘royalty’ which is capital.”

George Santopietro (1998) summarized El Serafy’s position as:

“El-Serafy (1989) argued that the surplus for a depletable resource represents two values: (1) a true income component which can be consumed; and (2) a separate depletion cost. The depletion cost is the amount that needs to be reinvested in order to sustain the economy’s ability to provide future generations with the ability to enjoy a non-declining level of consumption. In this line of thinking, the net price method overstates the true depletion cost. Von Amsberg took El-Serafy’s method and applied the strong sustainability criterion to it by calling for a depletion cost sufficiently large that when invested in the production of a substitute, future generations will be able to enjoy a non-declining flow of similar services.”

It was actually John Hicks who distinguished fundist and materialist capital in accounting. In both cases there is Hicks’s accounting principle of keeping capital intact for income estimation purposes. El Serafy puts emphasis on fundist capital, thus with monetary value. A depletion of a natural asset can be compensated by a gain in other capital. The alternative is to look at the physical stock of goods. El Serafy: “damaged or depleted natural capital cannot easily be replaced with manufactured capital.”

A small model

Wondering what to make of this, I came upon the following small model. When you sell your house then the proceeds are not your income, so much is obvious. You might rent out a room to pay for the maintenance costs. Farmers sell the proceeds from their crop but keep some seeds for next year.

Since Keynes, macro-economics has tended to link consumption to income but let us now relate it to the capital stock that might be depleted.

Assume that the price of a depletable resource is p = 1, and that the resource stock K is capital too: K ~ p K. The first is in physical units and the second would be in money, but let us take the resource as the numeraire, so that K = p K.

  • For investment: Let physical investment J = b K. Let g be the physical return factor on physical investment. Then economic (gross) investment I = r K = (dK with d depreciation and i a rate of interest. We also have I = g J = g b K so that r = g b.
  • For consumption: Let w L be services without use of capital. For consumption of the depletable resource we distinguish a fraction s that is sustainable and a fraction u that is unsustainable. Total consumption is C = (s + u) K + w L, and we have sustainability when u = 0. Below relations allow us to deduce that s = (g – 1) b, so that sustainable consumption is determined by the physical return factor of physical investments.
  • From these two: u K are the user costs or investment that are required to keep the resource intact. When consumption is sustainable = 0 then such costs are not incurred.

In accounting of expenditure flows, it may happen that u currently is not even included in D, so that also NDP is off-track.

If u is in D then we find: NDP gives substainable consumption s K + w L, while the figure of GDP will be polluted by unsustainable depletion u.

Physical, sustainable if u = 0 Nominal, with p = 1
C = (s + u) K + w L C = (s + u) K + w L
J = b K I = r K = (i + d) K       (gross investment)
K[t+1] = (1 – sub) K + g J K[t+1] = (1 + r) KD
K[t+1] = (1 – u) K D = d K = (s + u + b) K = (r + u) K
s = (g – 1) b r = s + b = g b,     1 – u = 1 + i
d = s + u + b GDP = Y = C + S = C + I = (s + u + r) K + w L
0 ≤ s + u + b ≤ 1 NDP = YD = s K + w L = (g – 1) b K + w L

El Serafy rather wants to see that also GDP is income, which can be achieved by a separate deduction from the stock:

Physical, sustainable if u = 0 Nominal, with p = 1
C = (s + u) K + w L C = (s + u) K + w L
J = b K I = r K                                  (gross investment)
K[t+1] = (1 – sub) K + g J K[t+1] = (1 + r) KD* – Δ   with Δ = u K  as user cost
K[t+1] = (1 – u) K D* = d* K = (sb) K = r K     (without user cost)
s = (g – 1) b r = s + b = g b,   and r = i* + d* means i* = 0
d = s + u + b GDP* = Y* = C + S = C + I – Δ = (s + r) K + w L
0 ≤ s + u + b ≤ 1 NDP = Y*D* = s K + w L = (g – 1) b K + w L

An example is selling the natural resource, putting the proceeds into a bank, and live from the perpetuity. With i the money rate of interest, then sustainable income is s K = i K, so that s = i. Then b = 1 because all money is in the bank, and g = 1 + i = r. It follows that GDP = (1 + 2 iK + w L and NDP = i K + w L. Normally we do not regard the whole capital as the investment but for money it makes sense. In practice money in the bank is only a financial arrangement and the true return must still come from productive investments.

Environmental sustainability

Above model can be extended with environmental sustainability by replacing s + u with es + eu, with es ≤ s and eu ≥ u. For example, the home owner must put aside additional investments for an extension to the house to make room for solar panels or heat pumps, or to relocate it because of flooding. Sustainability and environmental sustainability have the same model here, and only different data. However, practical modeling can be different. Mere sustainability might rely on actually observed values of the going rate of depleting, while environmental sustainability with es and eu would require more involved modeling to come to grips with the current (conservative) expectations on future development.

Intermediate conclusion based upon this small model

I tended to favour GDP as based upon expenditure flows, since depreciation of produced capital tends to use accounting schemes that seem rather arbitrary. Now, however, it is clearer to me that depletion of natural resources may pollute these GDP data. Now I am starting to think that NDP would tend to be a better yardstick, provided that statisticians find adequate estimates of depletion of course. If those estimates are deficient then the use of NDP provides only the illusion of improvement though.

PM. This simple model seems quite tricky. A one time deviation from sustainability causes a one time GDP growth, but also forces to continue to deviate from sustainability for ever more, with K[t] = (1 – u)^t K[0] merely to maintain the income level without any growth. It is only a simple model to clarify a basic idea. Salah el Serafy has more sophistication with the user cost.

Salah el Serafy again

El Serafy (2014) however advises that resource depletion is removed from income altogether (with my comments):

“Any presumption that removing ‘royalty’ (the capital element) from GDP entries relating to natural resources might be taken care of at the level of estimating NDP cannot be accepted for more than one reason.
First, NDP is not often reckoned at all, and if reckoned there is no unanimity over the amount to be used for the capital consumption involved. (TC: But would there be unanimity for correction at the level of GDP ?)
Second, natural resource deterioration due to commercial exploitation is not ‘depreciation’ in the accepted sense; it does not conform to standard wear-and-tear allowances applied at year-end to asset categories, and may in fact amount to as much as 100 per cent of the asset. In the latter case proceeds of the asset sale will all be a User Cost and must be exiled altogether from GDP. (TC: This is a matter of definitions. If Gross is taken as expenditure flows, then Net can be taken as depletion and standard depreciation. However, expenditure flows are not income indeed.)
Third, if stock erosion is viewed correctly as Marshall advised as emanating from ‘Nature’s store’, accounting conventions dictate that using-up stocks must be dealt with at the gross income estimation stage. Clearly natural resources are not ‘fixed capital’ but inventories, and the User Cost implicit in using them up should be recognized for correct accounting. (TC: But the situation becomes blurred, when the stocks can be used for investments to maintain the stocks, see above small model. In that case it makes some sense to define Gross as the expenditure flows, and deduct depletion with depreciation. However, expenditure flows are not income indeed.)
Such economic reasoning appears to escape the concerns of the estimators who have taken charge of the accounts resisting the economic logic behind the ‘greening’ quest.”

Conclusion

El Serafy did his doctorate in economics at Oxford in 1957, supervised by John Hicks, one of the giants in economics, and also famous for his insistence on proper accounting. El Serafy laments that this heritage has gotten lost:

“However, as the economists’ interest in studying social accounting faded the accountants and statisticians have taken over, often disregarding the concerns of economics, and disclaiming any hint that the national accounts should be estimating income.”

“Their message in brief is that no adjustment for environmental losses can be expected within the mainframe of the national accounts. This in effect is a death sentence on ‘green accounting’.”

Salah el Serafy has a point. The point has also been made by Tinbergen & Hueting.