personal investment blog

FALSE CORRELATIONS

FALSE CORRELATIONS

26 Jan 2018

POVERTY AND INEQUALITY

Listening to Radio 4’s Today (aka NHS Daily) I heard a professional lobbyist from Oxfam explaining that poverty and inequality are inextricably linked. Most of us are against poverty and inequality and, if we suffer from neither, probably feel slightly guilty about both. The counter argument, which is fairly obvious, is that economic growth is the only practical way to relieve poverty; that economic growth is best served by liberal democracy or free market capitalism, (if you think that term is more honest); and that inequality is always promoted by such growth.

Reading its latest polemic about the “inequality crisis” I learn that Oxfam broadly agrees with the argument that economic growth is the answer to poverty.

Between 1990 and 2010, the number of people living in extreme poverty (i.e. on less than $1.90 a day) halved, and has continued to decline since then. This tremendous achievement is something of which the world should be proud.  

Reward work not wealth: Oxfam January 2018

It goes on to say that we would have done even better if we had eradicated inequality. This is the big contentious and unknowable point and is therefore the object of lobbying rather than reasoned argument.

Oxfam’s lobbying might be more convincing coming from an organisation that rewards its executives less lavishly. The president of its US operation was paid a package of $504,000 last year; its CFO $258,000. Oxfam UK’s eight directors averaged £113,000 having received an inflation beating 3.7% rise.

What first struck me about the Today item was that I heard the Oxfam lobbyist say that “we (Oxfam) know more than anybody else the power of enterprise to help overcome poverty” – this is bragging worthy of Donald Trump and is perhaps evidence of how his influence is becoming pervasive, even among those who presumably despise him.

On reflection I was more taken with the casual way that poverty and inequality were conflated. Dodgy correlation is everywhere. Take two facts or convincing assertions and smoothly merge them into one conclusion that appears plausible because the two original statements can be presented as truthful.

PRIVATE EDUCATION AND UNIVERSITY PLACES

7% of UK pupils are privately educated. 17% of successful applicants to Russell Group universities are privately educated. There are two facts. Now let’s do what most people do and conflate them into a false conclusion: that Russell group universities favour privately educated applicants.

The reason that this is a false correlation is that the universities do not select from all UK pupils. Their choice is limited to those children who are taking ‘A’ levels in academic subjects, of whom 16% go to non-maintained (private) schools. In other words, Russell Group offers to privately educated applicants show practically no sign of special favour.

While the false correlation may be a propaganda weapon for the left in its long-standing war against private education it is worth reflecting on the possibility that the schools that charge so richly for places are happy to implicitly endorse the idea that it is possible to buy a leg up for one’s offspring. Read more about this here.

OUTSOURCING AND PRIVATISATION

Following the collapse of Carillion, Polly Toynbee wrote an article in The Guradian headed “The whole privatisation myth has been exposed”. See what she did there? Sometimes governments sell public assets to the private sector. Sometimes governments hire private companies to execute tasks. Both of those statements are true but are they both privatisation?

The argument for privatisation in the UK dates from the Thatcher years. It was never a policy that was without controversy but there seemed little reason for e.g. the company that held the monopoly on telephone lines to be owned by the government and never to face competition. No one knew then how the world of communication would be blown apart by first mobile networks and then the internet but only the most fanatical statist would now wish that everything was controlled by a government-run British Telecom.

Some privatisations made more sense than others. What was the competition-based argument for selling the rails on which trains run? It was pretty obvious that part of the attraction of privatisation was to raise cash to shore up the exchequer budget of that year – not a very far-sighted or admirable motivation. Harold Macmillan, a Tory patrician, was said, in 1985, to have accused the government of selling off the family silver. He clarified his view rather well, as follows:

As a Conservative, I am naturally in favour of returning into private ownership and private management all those means of production and distribution which are now controlled by state capitalism. I am sure they will be more efficient. What I ventured to question was the using of these huge sums as if they were income. I know now, I have learnt now from the letters that I have received, that I am quite out of date. Modern economists have decided there is no difference between capital and income. I am not so sure.

Earl of Stockton (Harold Macmillan), House of Lords, 14 November 1985

Rather than heeding Macmillan’s wise words, politicians of the 1990s and 2000s went further yet to flog off every public asset they could find. In 2001 HMRC sold 600 buildings for £220 million and agreed to lease them back for twenty years. In this way £220 million went to the Treasury and the liability headed off into the future. (See my recent post  on the implications of sale and leaseback for the private sector)

Flogging off public assets is one thing: outsourcing work for which the government is responsible is something else.

Public infrastructure projects do not require the government to hire thousands of construction workers and to start negotiating bulk deliveries of cement. For this we should all be grateful. It make sense to use specialist contractors. The problem arguably lies with the incompetence of the government decision makers who either award the contract to the cheapest bidder, who may well be desperate and offering suicidal terms, or get taken for a ride by agreeing to leave risks with the taxpayer and fat margins with the private company.

Outsourcing and privatisation both have good and bad points but this fact in common does not make them the same thing.

FREEDOM OF MOVEMENT AND IMMIGRATION

These are the tax avoidance and evasion of the Brexit debate in that they are routinely linked together as if they were the same thing. In fact they are closer to being opposites.

Tax avoidance is legal, tax evasion is illegal. They have not paying tax in common but all sorts of things involve not paying tax – walking your dog and inciting hatred using social media are also non-tax paying activities and again one is legal and one is not. I eagerly anticipate the day when a politician denounces them both.

Freedom of movement for EU citizens means that many European countries are very jumpy about accepting immigrants (or even visitors) from the rest of the world where the other 93% of the human race lives. I am strongly in favour of immigration, especially when educated and productive people want to come and live and work in my country. In this respect, I would like to offer equality of opportunity to 100% of the world’s population rather than just 7% of it. Selective freedom of movement, however liberal and friendly it may seem, is the problem and not the answer.

TRADE AGREEMENTS AND TRADE

This is a topical subject. People who have never traded anything are all over it. The trouble is it’s not a subject. International trade is something that takes place whenever and wherever trade agreements fail to prevent it.

Politicians, most of whom are currently melting glaciers with hot air in Davos, are threatened by the idea of free trade and promote protectionism through trade agreements. If you want something, someone somewhere in the world will sell it to you. This fact appears to terrify our leaders. Read all about it here.

Whenever you hear someone say that we need to be part of a trade agreement to trade please join me in shouting at the radio.  

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