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The Budget's political trap

In my column this morning I argue that Gordon Brown is highly likely to want to fight a "Many versus the Few" election campaign. And that he will try and start with this Budget.

In other words, the Budget will feature at least one tax rise on higher earners. I think this could come in one (or more than one) of three forms:

First, he could increase the rate on those with £150k incomes from the proposed 45p to 50p.

Second, he could reduce the threshold for the new 45p rate down to anything as low as £100k incomes.

Or third, (and my front-runner), he could reduce tax relief on the pensions of those earning, say, £100k or above.

How should the Tories respond?

The political trap is obvious and it would be idiotic to fall into it.

The correct approach would be to oppose all these tax rises (and any others for that matter) but to argue that when it comes to avoiding them (since Darling will probably project the increases forward) or reversing them (since he might try and force a vote on them now), the priority will be those tax increases that fall on the many.

So f(x) walks into a bar...

From my Saturday Review column:

Following my story about economists, people have been sending me jokes with an intellectual bent.

These are always welcome. My favourite this week?

f(x) goes into a bar and asks for a drink. "I'm sorry," the barman says. "We don't cater for functions."

What did Madoff tell himself?

I don't think it was the money. That may seem an odd thing to say, given the amounts involved. But I really don't think Bernie Madoff did it for the money. I think he did it for the same reason that we stay married, for the same reason we keep losing weight while we keep going to WeightWatchers, and for the same reason Gordon Brown can never admit error.

Back in the 1950s two psychologists, Morton Deutsch and Harold Gerrard, set their students a test — could they estimate the length of some lines they were shown? Some of the students were asked to make their estimates publicly, writing them down and showing the paper around; others made them privately, their writing quickly erased it was seen.

Then Deutsch and Gerrard gave the participants new evidence, strongly suggesting that their old estimates had been wrong. Those who had made a private estimate were reasonably flexible and willing to take the new information on board. But those who had made their estimate public stubbornly stuck to their original judgment. There was no moving them.

This psychological principle — our desire to be consistent to public commitments — is what helps married couples to stick together, helps diet clubs to work and makes it so hard for politicians to do U-turns.

Now think about Bernard Madoff. He had become the go-to guy at the golf club, the man with the Midas touch. His ability to deliver extraordinary results was publicly known; it was part of his identity and gave him his status. And it was this — much more than the money — that he didn't want to give up.

One more thing. It won't just have been his victims he was defrauding. He will also have been defrauding himself.

A central feature of human psychology is our desire to overcome what the profession calls cognitive dissonance. If deeply held ideas and clear facts conflict, we twist the facts around until they no longer challenge the deeply held ideas. A cult group that proclaims the end of the world, for instance, will not give up when the world stubbornly refuses to end. They will explain to themselves, for instance, that the world was saved by their adherence to the cult.

Madoff will have persuaded himself that his status was merited, and he will have suppressed in his own mind the idea that he was a fraud.

A fascinating piece of work in 1959 by Elliot Aronson and Judson Mills looked at the commitment that students show to their fraternity. They demonstrated that the more painful the initiation ceremony, the more likely the student was to value their fraternity membership. They were trying to make sense in their own mind of having endured such a ritual.

The most interesting part of the Madoff trial will not be learning the story he told others. It will be learning the story he told himself.

Why men prefer heavier playmates in a recession

How much do we need in order to weather the recession? About two pounds, on average, it turns out.

The Daily Beast reports today on the research work of Dr Leif Nelson of NYU's Stern Business School. Dr Nelson designed a series of experiments:

to investigate the question of whether men’s preferences in female bodily dimensions change during times of “resource scarcity".

Two experiments induced a feeling of financial insecurity before asking about their preferences in women, and two others involved polling before and after a meal. The results?

Nelson’s findings were stubbornly consistent. The male subjects who were made to feel insecure about their finances reported a preference for women who were, on average, roughly two pounds heavier than their financially confident counterparts.

Similarly, Nelson’s hungry subjects reported an affinity for a heavier (by roughly three pounds) female partner than those subjects who were tested when they were full.

Nelson explains that the average of two pounds was small because for some, hunger and poverty doesn't make a difference, while for others the difference it made was substantial.

Alert Comment Central readers will realise that this study mirrors the findings of another to which I have linked - Terry Pettijohn and Brian Jungeberg's study of the characteristics of Playboy Playmates from 1960 to 2000.

Pettijohn has advanced what he calls the Environmental Security Hypothesis, which he explained in an earlier study of film stars. The hypothesis is:

During social and economic hard times people prefer mature qualities in others to a relatively greater extent than during social and economic good times. These mature features may have communicated attributes such as strength, control and indepedence.

Let me remind you what they found in the Playboy study:

Consistent with Environmental Security Hypothesis predictions, when social and economic conditions were difficult, older, heavier, taller Playboy Playmates of the Year with larger waists, smaller eyes, larger waist-to-hip ratios, smaller bust-to-waist ratios, and smaller body mass index values were selected.

These results suggest that environmental security may influence perceptions and preferences for women with certain body and facial features.

According to The Beast, a study among women showed no consistent variation.

Goodwin pulls it off...

Professor Robert Cialdini is in London this week. Having read about the furore over Sir Fred Goodwin's huge pension, he pointed out that having secured a result like that, Goodwin was another one for my nominative determinism list.

How could I have missed this?

Betting on the American economy

One was the Chairman of Bush's Council of Economic Advisors. The other just won a Nobel Prize in Economics.

So should we be reassured that Mankiw and Krugman are now placing bets on the American economy?

(Hat Tip: Coffee House)

Why Sir Fred must stay strong

The most interesting three words in Sir Fred Goodwin's letter yesterday were these:

Dear Lord Myners

This was a man Sir Fred has known for years. His decision to use his title rather than his first name spoke volumes about the relationship between them. In a funny way, the use of this impersonal salutation gives a hint that their personal relationship - famously frosty - may be playing an unhelpful role in the sorry saga of Sir Fred's pension.

And that's just one problem with picking a man from the finance industry to help sort things.

I concluded two things from yesterday's undignified mess.

First it is now a public policy requirement of the utmost importance that Sir Fred does not surrender any of his pension.

It no longer matters whether the pension was unreasonable to begin with. What matters is that mob justice should not rule. The Government, having signed off on the arrangement, is now attempting to make itself look good by vilifying Sir Fred and trying to claw back his money.

It is (and this is not a reaction I often have in politics) a truly nauseating sight.

Second the flailing Lord Myners is yet another iteration of the John Davies rule.

John Davies, the accountant who served in Ted Heath's Cabinet to give it breadth was a respected businessman. But he was, it is generally agreed, a failure as a politician.

And repeatedly since then, injecting outsiders into political roles has come to grief.

Someone with political skill might have avoided agreeing the compensation package of which the pension was part. And they would certainly have ensured - when embarking on an assault on Sir Fred -that everyone was in full posession of the facts. Instead he allowed his colleagues to be ambushed by Sir Fred's letter.

The economics rap

The folks at Freakonomics certainly like to shake things up.

Their latest experiment: economic rap.

Here's a taster from 65-year-old contributor Dan Hamermesh:

It’s all about the Law of Supply and Demand,
Prices are set by the Invisible Hand.

Hamermesh gets bonus points for rhyming elastic with ballistic.

Trivia of the day: Guess which country....

The ever observant Marbury picks up on this nugget from Fareed Zakaria:

Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors?

You can find the answer here.