Relying on accurate weather forecasts & Fumbling the Statistics

Tim Harford has an interesting blog on weather and the accuracy of forecasts. However, he does not look at two aspects.

1. The Consequence of Reliance

Harford comments

“A recent case in point: Bournemouth’s woes during the bank holiday at the end of May. The Met Office predicted storms, but the beach resort in fact enjoyed the sunniest day of the year. Bournemouth’s tourist office reckons the town missed out on at least 25,000 visitors and more than £1m of revenue as a result. Subtler losses and gains were registered by the would-be tourists, and the lucky ones who enjoyed both a sunny day and a quieter beach.”

Imagine if this had been the USA. Would the BBC have received class-action suits unless every 2 minute weather forecast had the sub-titled with long sentances about only being an opinion, and no responsibility held for the accuracy. Would they also become increasingly like prophesies from the Delphic Oracle?

2. The Statistical Interpretation.

Harford says

MIT economist Michael Greenstone has studied the impact of local temperature surges on deaths in both India and the US. He calculates that a year with one extra “heatwave” day – temperatures above 32°C instead of 12°C-15°C – would raise the annual death rate by eight per million in the US. In India, the temperature vulnerability is more than five times higher, notably in rural areas where agriculture suffers and wages drop.

The population of the USA is around 320 million. So an extra day of heatwave will cause 2.5% of the population to drop dead.

In India the 5 times higher vulnerability means that one-eighth of the population could be wiped out. Or is could mean that the death rate is only one third higher, allowing for the population is 4 nearly times that of the US.

Maybe the USA figure should be 8,000 and not 8,000,000. It is a shame someone cannot sense check these figures, as Harford has some interesting insights on his blog at the FT.

Socialist Economics

 

Tim Worstall has a blog today on the socialist calculation problem. Here he concentrates on the impossibility of collating the data necessary for inputting into computers. This is the only a part of the problem.

 

1. The Relevancy Problem

Mises said (in Human Action). “Knowledge is about the past, decision is about the future” Past information can only be a guide to future decisions. But if any actor acts differently then past information becomes imperfect, unless the changes follow regular patterns – move along known demand and supply curves in economics language. If there is a structural change, then that past information becomes outdated.

 Example – the credit crunch

A major feature concerning the credit crunch is that we have “entered uncharted territory”. That is, the previous macroeconomic models approximations of the economy are incorrect. The relationships that economists have spent years refining are now irrelevant. This is why the government is going to get things wrong in tackling the credit crunch. There is no past data to model, so they are just guessing. Even if they chose the best policies (unencumbered by ideology or political spin), choosing the optimal combination of quantity, time and place is impossible. However, solving for the macroeconomy is much simpler that the millions of products making up the microeconomy.

 

2. The Disequilibrium Problem

To solve the price problem mathematically is to find the solution to the simultaneous equations.

 P = -x1D+a1

P = x2S+a2

 Where P = Price, D = Demand quantity, S = Supply Quantity, x1 = Elasticity of demand, x2 = Elasticity of supply.

 In the real world, the market is rarely in equilibrium. There are so many things changing that a best you can only characterize the “solutions” as transitory and approximate. At worst, they may be a long out. These equations are for each of many millions of products available, and have to be all solved to produce a general equilibrium. If individual calculations are out, then the relative quantities will be out, having a knock-on effect to all other products. If the relative prices are out in one period, then the information for the next recalculation will be out.

 3. The Philosophy of Socialism

 But even with these problems sorted out, socialism is about equality and “fairness”. In other words, the price of labour is not market determined, nor the price of many items – e.g. healthcare, education, food etc. No Socialist Government is going to suppress the democratic will of the masses, to that a dictatorship of a computer. The “socialist solution” means suppressing the very values in which socialists believe.

 Example – Social housing

A socialist system might hold that people should be allocated housing on the basis of need, rather than ability to pay. So a single person would get much smaller accommodation than a large family. If the rent was controlled or housing was free at the point of consumption, people would want to trade housing. A retired couple, whose children had left home may want to trade for a smaller property in a more desirable area. Someone may be willing to pay more rent for a property near to friends, or to their work, or for a something more desirable (with a garden, near to the country, near to the train station etc.). A socialist may want to override these signals with other aims.

 

History teaching fails on the basic facts – and Daily Mail on statistics

The Daily Mail reports a survey of first year unversity students, which found that as a result of “trendy” teaching, most could not answer basic factual questions on British History. Just 16.5% could name who was was the general in charge of the army at Waterloo, and just 11.5% could name a 19th century Prime Minister. (What of the ignorance of the 5% or more who couldn’t recognise the answer to the first is also a possible answer to the second)

I was of the first to get away from the traditional way of starting with the Romans in First Year and finishing with the Post war events in the fifth form. But I could have answered these questions reasonably well by eleven.

A summary comment on this may reveal a lack of fluency with statistics at the Dail Mail offices

“In total the students answered just 26.7% of the questions correctly – just over one in five”

Hat tip to Conservative Home for directing me to this article.

Does the Prime Minister Tell Porkie Pies?

Douglas Carswell today accused the Prime Minister of telling lies. Here is the comment just posted.

 

 Interviewed by Nick Robinson today, the Prime Minister categorically said that “I have always told the truth”. On that point I think we should believe him.

Why? you might ask. What he says is clearly at odds with the facts.

The problem is that Gordon Brown (along with Peter Mandleson) have moulded New Labour around projecting a message and image. That message is not objective reality, but the image necessarty to win power and retain it. Couple this with Brown’s decade-long building of his own power base to become Prime Minister through scheming against every opponent. What results is someone like a communist who saw the imminent revolution in every newspaper paragraph, or an alcoholic in denial. They can only see what fits their reality. To see objective reality would cause his own self-destruction with a comment like

“We are in the worst economic mess since the second world war, and many of my actions as Chancellor have made this worse for Britain. As Prime Minister, despite trying to do my best, I have made mistakes that our children will be still paying for in their retirement. I have run out of ideas and energy on how to improve the situation, shall therefore be tendering my resignation with immediate effect.”

The Adjunct to Cutting Government Expenditure

I have already posted about the need to cut government expenditure is a more rounded way through focusing on 7 major areas. There is an important adjunct to this. The ability of the economy to climb out of the recession will be hampered by

 1)      High Taxation

2)      Onerous Regulation

 The burden of these twin factors was able to be borne in the boom. They may have reduced profitability, but other factors such as low interest rates and the ever-increasing public expenditure more than offset these factors. In addition, the house-price bubble was helped by the planning constraints on new-build. This shortage of supply increased the house price inflation. Coupled with easy money and low interest rates it also helped the consumer boom.

The opposite will apply in the recovery. This is through,

 1)      The high costs of the regulation will limit the ability of firms to lower prices, whilst still remaining profitable – break even is higher.

2)      More importantly, the time taken in meeting regulatory requirements, whether in house building or in putting in place new investments, means that the payback period is lengthened.

3)      Regulations to protect workers rights means that taking on new employees is similarly discouraged (Protecting the employed in the good times means protecting the unemployed from gaining employment after the bad times – see much of Western Europe during the 1990s).

 Sustained recovery with real jobs will therefore be impaired.

 

Reducing the deficit requires not only cuts in government expenditure. It means removing the impairments of the private sector to adapt and grow.

 

John Redwood seems to be grasping this point when he recognizes that the car scrappage scheme just offsets some of the high taxes on the car industry. Here is my comment posted earlier.

 

Mr Redwood,

 You make a very valid points here about trying to undo the harm of  high taxes on the car with a subsidy for new car purchases. However, I would take issue with you on the government having encouraged new housebuilding. You have said before that house buying was encouraged house buying in the past with low interest rates from 2000 to 2005 (only then to raise them too high). However, tough planning laws have meant that during the boom the numbers of new homes being built were at record lows, with much of the new build being in apartments and not the more desirable houses. This shortage of new build when demand was (artificially) strong, further exacerbated the house price inflation.

 However, you do point to a general principle for a quick, sustainable and affordable recovery – Undo the harm done by higher taxes and more regulation.

In the boom, these extra costs were largely absorbed. They have encouraged a steeper downturn and the increased costs will slow down and diminish the recovery.