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Political Labels, Bayesian Priors and Centrism

tl;dr

The public policy idea space is too large for most individuals to reach an informed view on all issues. Individuals therefore use some high level model (belief in the market, state control, libertarianism etc.) to define a prior or starting point. We identify models associated with political and economic schools, parties and finally define centrism as the political prior associated with trust in institutions and the status quo.

Homo Economicus

In economics, there is the concept of homo economicus – a purely rational actor which weighs all available information to make an informed and optimal decision. Behavioural economics has largely shown this to not exist in the real world where individuals regularly fall into logical heffalump traps and behave irrationally.

In politics, we have an analogous view that people should weigh the evidence on both sides of a debate and come to a rational decision. However, the complexity of many issues, the number of issues and the lack of complete information make this impossible to do.

Bayesian Thinking

In mathematics, Bayes Theorem describes how we should integrate a new observation into our view of the world. Interestingly, it requires a prior view of the state of the system to do so.

One analogy for this is the Warmer/Colder modification to a treasure hunt. With something hidden from a child, you periodically tell them as they move around whether they are getting warmer (closer to the target) or colder (further away). With repeated nudges they slowly zero in on the treasure.

After many observations we should arrive at the ‘correct’ result. But in real life, in the public policy space, observations are rare and uncertain so it matters a lot where we get our starting point from. After only three warmer/colder hints, we will probably be closer to the target than where we started, but we may still be a long way away.

Anchors and Generalisation

Given how important that starting point is, how we arrive at it is an interesting question.

A logical approach would be to train a more generalised model on all the observations available and use that to generate your prior for any particular policy. For example, you might look the history of rent controls and food price controls to build a prior on the suggested policy of energy price caps (from where you can begin the process of updating based on data). Or you might use a yet more general model, something along the lines of ‘generally markets work better than government intervention’ as your starting point (thus requiring a higher level of evidence for a policy that increases government involvement).

But we don’t always have to build our own model. Other people spend a lot of time thinking about this stuff, so a perfectly valid way of generating priors may be to use the views of people or institutions that we trust, for example political parties or influential thinkers. We can then diverge from these views using our own observations, but it gives a good starting point.

Below we detail some possible mental models that may generate priors for some people.

General Policy Models

  • Ideologies – Communism, Anarchism, Libertarianism etc.
  • Political Parties – Conservatives, Labour, Greens etc.
  • Party Factions – Momentum, ERG
  • Media Outlets – The Times, The Guardian, The Daily Mail, The Mirror etc.
  • Individuals – The popular Twitter account, blogger, vlogger etc.
  • Religions or Religious Leaders

Each of these models can change in importance over time as people evaluate whether they generate useful priors.

Centrism

How then does a centrist think about generating priors. There are some options for how we should think of centrism:

  1. Centrism is the limit of incorporating all available observations – it is the point where those with left wing and right wing priors will eventually end up if they accurately account for all the real world data out there
  2. Centrism is a high level of pragmatism, realising that generally what is achievable will be somewhere between the views of the major political parties
  3. Centrism is defined by a high degree of trust in institutions. It therefore assumes that the set of policies created by those institutions (and existing today) is a good prior for evaluating the correct policy

Option 1 (Optimal Centrism) seems to be disproved by the fact that centrist policies are highly localised. For example the U.K. centrist views on Gun Control (no guns please) and Healthcare (more NHS funding) are very different from the US centrist view on Gun Control (background checks) and Healthcare (more help for people who can’t afford insurance). Even if I have mischaracterised the views slightly, it is clear that the gulf is wide and therefore it seems unlikely that both these positions were achieved by correctly integrating all available information.

Option 2 (Pragmatic Centrism) seems somewhat unsatisfactory as an explanation for how centrists locate a policy position through priors and observations. It describes the reduction of the idea space to a set of achievable policies rather than telling us anything about how the optimal policy might be selected.

Option 3 (Institutional Centrism) seems the most persuasive option. ‘Many intelligent people have spent a good deal of time creating and refining the current system’ appears a perfectly defensible position and it predicts that a reasonable prior for most policies is the current position. From there we can tinker, adjusting policies slightly, adding or removing small sections of regulation, reallocating spending and taxation to a certain extent and creating new institutions and bodies to help further optimise the machine.

We may want to think of centrism therefore as not only existing on the left-right spectrum between the two main parties, but also as existing on a separate spectrum of institutional trust, with centrism standing opposite radicalism.

Brexit and Campaigning

The Brexit vote was one for which there were very few reliable observations to update your position with. This framework would therefore suggest that priors will have a high relative importance in the final vote.

As it happened, Centrists were generally in favour of remain as the status-quo and pro-institution option. Both sides made lots of (with hindsight) incorrect predictions about what Brexit might entail, predictions that were generally ignored. Vote Leave ended up winning the vote by persuading the public that not surrendering sovereignty should be the correct starting point for the debate (Take Back Control).

Tax System Bugs Part 1 – Plumbers and Plasterers

tl;dr

Income Tax is a friction that prevents many beneficial but marginal transactions from taking place, particularly in labour heavy industries. A re-designed tax system would avoid income tax.

Benefits of Specialisation

A plumber and a plasterer are doing up their homes. Both houses have a similar amount of work to do, a week of plumbing and a week of plastering – a specialist however, could get each job done in three days. They could do all of their own work in eight days (three days doing the job they excel at and five doing the job they are less skilled at) or, if they are good friends they could swap houses – one do all the plumbing and the other all the plastering and they’d be done in six. Economic specialisation in action, saving each 25% of their time.

This example is a bit like a barter system. It relied on the plumber and the plasterer having something the other wanted at the same time – an unlikely event. In modern society we have solved the barter issue using money – now the plasterer and plumber don’t have to be doing home improvements at the same time. Say they charge a day rate of £200 – the plumber could pay the plasterer £600 to do work in his house in May and the plasterer could pay the plumber £600 in July. They result is cash neutral and allows both to get the job done in six days.

This also means that the two are no longer tightly coupled, the plumber could employ and be employed by two different plasterers and still the maths would work out. 6 days of work, economic benefits for all!

Except, we interfere with this nicely functioning market with taxes.

The Tradesman’s Swap Bug

In reality our tradesmen pay tax and charge VAT. Of the £600 for three days work, £190 is taken in Tax and NI and £410 goes to the individual. VAT is additionally charged at 20%, so instead of invoicing £600, you invoice £720.

Looking back at the sums our plasterer now:

  • Spends £720 on plumbing work
  • Gets £410 from plastering work
  • Gets two days back in productivity for spending £310 in cash
  • By putting those days to work plastering will only make £270 (post tax)
  • Is £40 worse off

Therefore this trade doesn’t happen. Both workmen do the whole job themselves, taking 8 days and not reaping the benefit of specialisation.

By taxing labour too heavily we have made the economy less productive in a very real sense.

Childcare

This may seem like a niche example. But the implication is that this is happening all over the economy. One particularly clear example is that of childcare.

A household can look after it’s own children or employ childcare to do so (in the form of a nursery or childminder). To make this decision economically viable, it stands to reason that the person returning to work should make more than the cost of the childcare. However, similar to the above example, tax enters the equation and the amount that must be earned increases by the earners marginal tax rate. This means that many parents who (absent tax) could return to work are unable to do so.

Childcare Vouchers

A poor solution to this issue (from the perspective of the market, it may be desirable from the perspective of the child) would be the issuing of childcare vouchers that entitle everyone to a set number of hours of free childcare a week.

  • For high earners already willing to pay for childcare it acts a pure windfall
  • For middle earners it may in some cases compensate for the tax issue and allow some parents who want to to go back to work
  • For low earners it encourages irrational transactions (where the parent may make less than the childcare costs absent of the voucher)

In all it is an expensive policy that doesn’t help a huge amount from the perspective of ‘getting parents back to work’.

Repeal Income Tax

The solution to this problem? Move the tax burden away from income. Reduce, or ideally repeal, taxes on earned income such as Income Tax and National Insurance.