Monthly Archives: June 2011

Cognitive dissonance

Blue GoldfishLet’s say you think of yourself as a good person (bear with me for a moment if you don’t). Now you do something nasty to somebody. This leaves you with two contradictory thoughts in your mind: “I am good” and “I am nasty”. In George Orwell’s Nineteen Eighty-Four, “doublethink” is quite routine, but in practice conflicting thoughts are a source of discomfort. This discomfort is known as “cognitive dissonance”.

Even if you don’t think you are a good person, you are not immune from cognitive dissonance. It can arise in all kinds of situations: perhaps you hear a reasonable argument against one of your firmly-held beliefs, perhaps a decision you take turns out badly, perhaps someone you consider a friend lets you down or someone you dislike does something to help you.

Whatever the cause, our brains tend to work hard to “resolve” the dissonance and explain away the contradiction (that person really deserved the nasty thing you did). This tendency is the source of a wide range of irrational behaviour, many of which are explored in the book I am reading at the moment: Mistakes Were Made (But Not By Me) by Carol Tavris and Elliot Aronson. The title itself gives just one example, the fact that we tend to explain away our mistakes: there were, of course, mitigating circumstances and were really all the fault of others.

One interesting theory in the book relates to prejudice. Stereotypes, particularly racial or religious ones, are often considered a contributing cause of prejudice. The authors suggest that the causality in fact runs the other way. People have a strong tendency to form groups and then feel not only a bond with others in the group but an antipathy to those outside the group. Obvious examples are nation, race, religion or football team, but group identification can be made in all kinds of ways. The book relates an experiment in which subjects were asked to estimate the number of dots shown on a flash card. After a preliminary round, each person was told whether they were an “under-estimator” or an “over-estimator”. As further tests were conducted, the results were announced to the group and in no time at all, under-estimators were cheering the successes of other under-estimators and boo-ing the successes of over-estimators, and vice versa. While under and over-estimators would never go to war, it is sobering to see how rapidly people can divide themselves into the in-crowd and the out-crowd. With this in mind, Tavris and Aronson argue that prejudice comes first, the result of disliking those outside your own group, and the stereotype comes later to explain this dislike:

By understanding prejudice as our self-justifying servant, we can better see why some prejudices are so hard to eradicate: They allow people to justify and defend their most important social identities‚ their race, their religion, their sexuality‚ while reducing the dissonance between, “I am a good person”‚ and “I really don’t like those people”.

So perhaps prejudice causes stereotyping not the other way around.

Like so many cognitive biases, the tendency to resolve cognitive dissonance is something you can take advantage of. Although Benjamin Franklin was around well before cognitive dissonance was given a name, he clearly understood the phenomenon. He relates the following story in his autobiography:

Having heard that he had in his library a certain very scarce and curious book, I wrote a note to him, expressing my desire of perusing that book, and requesting he would do me the favour of lending it to me for a few days. He sent it immediately, and I return’d it in about a week with another note, expressing strongly my sense of the favour. When we next met in the House, he spoke to me (which he had never done before), and with great civility; and he ever after manifested a readiness to serve me on all occasions, so that we became great friends, and our friendship continued to his death. This is another instance of the truth of an old maxim I had learned, which says, “He that has once done you a kindness will be more ready to do you another than he who you yourself have obliged.”

I am keen to try this trick myself, so if you don’t like me and want to keep it that way, think twice about doing me any favours.

Cognitive dissonance is a fascinating phenomenon, but simply studying does not make you immune from its grasp. Still, Tavris and Aronson suggest that there are ways to try to inoculate yourself:

We need a few trusted naysayers in our lives, critics who are willing to puncture our protective bubble of self-justifications and yank us back to reality if we veer too far off. This is especially important for people in positions of power.

That is advice I try to heed here on this blog. Whether I am arguing about property prices, government debt and deficits, climate change or any other topic, I welcome comments that argue against my position. I do not want to live in a bubble.

Looking beyond the financial crisis

The IMF has been busy of late, what with their attempts to stave off European sovereign defaults and shenanigans of its erstwhile managing director, Dominic Strauss-Kahn. I have been busy too (for rather different reasons I hasten to add) and so it has taken me a while to get to looking at the IMF’s most recent World Economic Outlook (WEO) report, which was released back in April.

The WEO is prepared twice a year and, whatever one’s views of the merits of the economic ideas of the IMF and their role on the world stage, the report provides a rich source of data and includes both historical data and five-year forecasts.

I was interested to compare the effect of the global financial crisis on the most challenged euro nations, the so-called “PIIGS”, Portugal, Ireland, Italy, Greece and Spain, to a few other countries. To account for differences in population and currencies, I chose Gross Domestic Product per capita expressed in US dollars as the measure for this comparison*. Even so, care needs to be taken in interpreting the results. Exchange rates do introduce a fair degree of volatility as is evident in the chart below: the trajectory of US GDP per capita is quite steady, although the downward dip over recent years is clearly evident, while the paths for every other country wiggle up and down with the vagaries of currency markets. Nevertheless, it is striking to see the IMF projecting that Australia will dramatically outpace the other countries in this group, thanks to the combination of a resources boom and escaping relatively unscathed from the financial crisis of the last few years. I should point out that, while taking the gold medal in this group, Australia is not the overall winner in the IMF 2016 forecast stakes. That honor goes to the small nation of Luxembourg, and Qatar is not far behind.

GDP per capita (II)

History and IMF forecasts of GDP per capita (in US$)

An alternative approach that seeks to eliminate exchange rate effects is to work in local currencies and make these comparable by scaling to a common base at some point in the past. Somewhat arbitrarily, I have chosen to base this comparison on 1996, which gives a 20 year span including the forecasts out to 2016. This time I have used inflation adjusted figures**. Interestingly, this approach sees Ireland coming out on top, which reflects the strength of their economic boom over the period immediately up to the start of the crisis.

Real GDP per capita Indices

History and IMF forecasts of GDP per capita (local currency index)

This chart shows even more clearly how unaffected Australia was by the financial crisis compared to other countries. Once again, these results should be treated with caution. Any comparison like this will be very dependent on the year chosen to base the indices. If only I had chosen the year 2000, Australia would be in the lead again!

* This is the IMF series NGDPDPC.
** This is the IMF series NGDPRPC, rebased to 100 in 1996.

Gibbons and welfare

Regular contributor James Glover, aka Zebra, returns in a post that manages to combine gibbons, tax and a beer coaster.

A question I often ask myself is how could gibbons possibly develop a civilisation comparable to our own? Gibbons are solitary creatures so do not form troops, groups or tribes. Developing and passing on knowledge in a gibbon society is therefore a long and chancey game. I imagine the gibbon equivalent of an Einstein stumbling upon a rock scratched by a long-dead gibbon Newton and after much pondering leaving his own scratchings to be found by some future generation’s gibbon Hawking. Actually, they are more likely to be the gibbon equivalent of Marie and Pierre Curie since gibbons pair-bond for life. They live in large open ranges well away from other gibbons. That loud “woop-woop-woop” you hear in zoos is the gibbon call for “get ‘orf my land”. It seems though that, bar an unlikely series of genius offspring, gibbons will never develop the tools and technology that could one day put a gibbon on the moon. And it seems equally unlikely that gibbons will ever develop a system of mutually supportative taxation either.

My point here is that income tax, and indeed all tax, is inextricably tied to the social nature of our species. To even conceptualise that there are many to take from and some to give back to requires more than two fruit/income-sharing individuals. Many people argue that taxes represent a crushing of the individualistic spirit of our species. I would rather say that it’s a celebration of our social nature.

There is a vocal minority which claims that there is nothing which taxes provide that could not be more efficiently provided by private enterprise, including the sine qua non of socialist governments, welfare. And they appear to have been proved to be right in the last few decades, which saw the privatisation of parts of government that were once thought to be unprivatisable, including national banks, utilities and prisons.

Yet we live in a society in which many people, while opposed to the specific taxing of the underprivileged (i.e. “me”), are happy to receive the benefits of taxation. There are, in my opinion, two types of taxation benefits. Firstly those which we are all equally able, at least in theory, to enjoy such as roads, schools and defence. And then those which are “targeted towards the needy”, as the phrase goes. As the genuinely needy diminish in numbers, the number receiving what is now called “middle class welfare” increases.

CoingsIn the recent furore over middle-class welfare it is frequently (but wrongly) stated that there is no point in child care payments to the middle classes. It is argued that since it is they who pay the majority of income tax (their greater numbers mean their tax payments are more in aggregate than those of the highest income earners) then the money just goes around in circles pointlessly. In fact there are very good reasons for making these child care payments. Even if everyone in society paid precisely the same amount in income tax and had exactly 2 children, to tax all and pay some is effectively taxing our younger and older years when we don’t have children to support. This tax is then reallocated to our middle years to subsidise the increased costs of raising children before they leave home. That doesn’t seem like such an outrageous idea and presumably is the basis behind the reasoning of those allegedly loony socialists, the Scandinavians, who pay generous child care support to all but the very wealthy.

This does not mean that in our society, where income inequalities do exist, that everyone should receive child benefit. There are clearly people who are very well off and do not need to be subsidised by their younger or older selves so it is inefficient to do so. It just means that the income cutoff is higher for child benefit than for other forms of welfare.

In Australia in the debate about middle-class welfare, which has been spurred on by the recent budget, the battle line has been drawn at a household income of $150,000 a year. An editorial in The Sunday Age (May 1 2011) made the claim that welfare in Australia was well-targeted because the top 40% of households only received 4.6% of the welfare budget. So I decided to run the beer coaster over some numbers. With the help of Google, I estimate a total welfare budget of $110 billion. This is made up of $60 billion in unemployment benefits (600,000 unemployed at about $10,000 per year on Jobstart) and $20 billion on the Disability Support Pension which pays about double the dole but requires more stringent eligibility tests. On top of this, about $30 billion is paid on child care and family benefits. Taking 4.6% of this $110 billion gives about $5 billion per year. Enough to build a couple of new hospitals and several schools and staff them with 5,000 teachers and nurses. Or indeed enough to invade a medium sized Middle-Eastern country. If you use my usual back-of-the-beer-coaster figure of 8 million households in Australia, then that is about $1,600 for the top 40% or highest income 3 million households. I can’t think what they need to spend it on. Although, as I noted in a letter to The Sunday Age in response to their editorial, this figure is coincidentally about the cost of a premium family subscription to Foxtel.

Gibbons also have children and the way they get them to leave the home patch of jungle is to ignore them more and more and then eventually treat them like strangers and shout at them to go away. This is the reverse of the process followed by humans, whereby the maturing children ignore their parents and then shout at them to go away before abruptly leaving home. I believe it is in our solitary versus social natures that an explanation lies for why the approaches of gibbons and humans to both child-rearing and taxation differ so much.

Why deficits are bad

There have been many posts here on the blog arguing that government debt and deficits should not be feared, at least not in countries with their own free-floating currency and without foreign currency public debt*. In doing so, I have never discussed the reasons people may have for holding a contrary view. But I have now come across a rather disturbing theory on the news site

It may be that there are some who would like to see an end to government deficits because they adhere to the Chicago school of economics and scoff that Keynes was thoroughly discredited by the stagflation of the 1970s. There may be others who challenge supporters of government spending with a simple question: if too much debt was the cause of the financial crisis, how could more debt be the answer? (Of course, regular readers of the blog will know the answer to this one: the debt build-up before the crisis was private sector debt and for the private sector to reduce debt by saving again, the government must run a deficit**). Still others may think that deficits cause recessions (rather than recessions causing deficits).

But the theory offered by is simpler still. Perhaps people think national debt is bad because it actually means a bad economy. Literally. They just do not understand the meaning of the words.

The evidence offered goes back to a US presidential debate from 1992. In the debate, an audience member asks the candidates the following question:

How has the national debt personally affected each of your lives. And if it hasn’t, how can you honestly find a cure for the economic problems of the common people if you have no experience in what’s ailing them?

If you watch the resulting exchange here, it quickly becomes clear that, in the questioner’s mind, “national debt” is in fact synonymous with “recession”. National debt doesn’t cause unemployment, it is unemployment!

Of course that clip is almost 20 years old and it is America, not Australia. But it still worries me. Could it be that part of the reason that it is so hard to have a rational debate about debt and deficits is that some (or even many) of the voting public do not understand what the debate is about? I hope not!

* So the eurozone is a different matter altogether!

** Either that or run a current account surplus…which is still something we have not achieved in Australia.