The idea that speculative markets can be used to forecast political events hit the headlines a while ago with the furore over terrorism futures. This idea is still around and the general claim that political events can be forecast by futures or betting markets is still being pushed hard. The main source of data is at the Iowa Electronic Markets, but there’s plenty more. Reader Jack Strocchi sent me this report on a study of Australian betting markets and elections.

As it happens, I’d already looked at this and come fairly rapidly to the conclusion that the betting markets weren’t much good, so I was struck by the money quote from author Justin Wolfers

The data suggests the Australian betting market is extraordinarily efficient. And why not? There’s a huge incentive for participants to do their homework, collect reliable information and make sure the price is right.”

Looking at the report and also the Iowa studies, the evidence in support of this claim still seems very weak to me. In 2001, for example,

The night before the election, Howard was ahead in two of three major polls ….[on Centrebet] Howard was the favorite with odds of $1.55, suggesting a 64 percent probability of his winning the election,”

That is, on the crudest possible use of the polls, two out of three suggested a Howard win, giving odds almost identical to Centrebet. In fact, I doubt that any serious analyst would have given Labor even a 25 per cent chance by election night.

To be fair, Wolfers doesn’t put much weight on the election-night market. He says

data from Centrebet, Australia’s largest bookmaker, demonstrated the impact of current events on the betting odds throughout the nine months leading up to the election, reflecting immediately the electorate’s seesawing response to such events as leaders’ televised debates and the Sept. 11 attacks in America.

In fact, however, the betting markets reacted more slowly than the polls. In this piece written in September 2001, Wolfers and his co-author Andrew Leigh rated Labor a 55 per cent chancebased on the Centrebet data.

But enough of this ad hoc discussion. What test should we be applying here? It’s not appropriate, as nearly everyone in this field has done to treat polls and betting markets as separate predictions. Punters in the betting markets have access to the polls. So they should always do at least as well as any mechanical rule based on poll data. The test “have the markets done better than the polls” implicitly compares the actual betting strategies to the rule “at even money, bet on whichever candidate is ahead in the polls”. Even compared to this simple-minded rule, the improvement shown by the markets is marginal at best.

The real issue we should consider, before rushing to embrace terrorism futures and the like, is how betting markets would perform in the absence of information from polls. You’d have to go back before World War II for this, but it’s my impression that predictions of election outcomes in this period were often way off the mark.

Once there were three bubbles. The one that attracted everyone’s attention was the dotcom bubble, of which no more needs to be said. The second bubble, noted by plenty of economists was the glaring overvaluation of the bubble. Given chronic deficits in both the budget and current account, and the fact that the US dollar was trading at a value well above purchasing power parity, anyone who gave any credence to the view that markets eventually reach equilibrium could conclude that the US dollar was bound to fall, and it has duly done so. (this only leaves the question of why putatively rational investors did not sell earlier)

The third bubble seemed, until this year, like part of the second. Rates of interest on 10-year US government bonds are amazingly low, currently around 4.25 per cent (the price is inversely proportional to the interest rate, so low interest rates mean a bubble in bond prices). Most economists would, I think have assumed that, as the US dollar declined in value, long-term interest rates would go up. But, apart from a brief panic a few months ago, this hasn’t happened.
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I usually agree with my blogtwin Tim Dunlop, and one of us often beats the other in posting a given idea by a matter of hours. But this time I’m well ahead. Tim endorses Mark Latham’s criticisms of overgenerous Parliamentary superannuation, making the point that

Now that the sort of neo-liberal policies that Latham favours, and that successive governments have championed, have improved the job market so that nearly everybody’s job is as precarious as that of an elected federal politican, it does seem that some adjustment is in order

I had my say on this in 1998.

Back in the 1960s and 1970s, talk of a four-day working week was commonplace. But with the growth in working hours and work intensity during the 1980s and 1990s, even a five-day week was viewed more as a nostalgic memory than as a realistic proposition.

I’ve been arguing for some time that the tide has been turning on this issue, and the news that ETU secretary Dean Mighell http://www.theage.com.au/articles/2003/12/17/1071337017313.html has launched a new push for a four-day working week fits neatly into this story. Of course, Mighell is very much on the left of the union movement, and this is a personal view rather than an official ETU claim. Still, the fact that the idea is being discussed at all is significant in the same way that the kind of discussion of the “24/7 economy” popular a few years ago mattered more than the fact that the idea itself was chimerical.

Talking of the Scientific American, the November issue has a very interesting article on the discovery of some early human fossils in (the former Soviet Republic of) Georgia, generally assigned to Homo erectus but having a lot of characteristics in common with the earlier Homo habilis. One scientist quoted in the story even uses the phrase “missing link”.

This should be a big problem for scientific creationists, who generally argue that fossils classified as Homo erectus are just Homo sapiens and that Homo habilis is an extinct ape.

But, as we’ve seen from the debate over global warming, it’s unlikely that the accumulation of evidence will change the minds of those whose commitment to a particular viewpoint wasn’t based on empirical evidence in the first place.

Update Bargarz has more.

My column in today’s Fin (subscription required) continues my efforts to debunk the generation game. (So far these efforts appear to be pretty much as futile as a campaign against astrology, but I persist anyway). I’ve extended my range of targets from the general pop sociology on this topic to the Treasury and its analysis of intergenerational equity.

This reminds me that I really ought to say something about the Auerbach-Kotlikoff idea of generational accounting, which had something of a vogue in the early 90s and is still helping to justify generational chatter. Auerbach and Kotlikoff tried to systematically assess the impacts of government fiscal policy on members of different generations. In my opinion, what they produced was a complicated way of answering the question “Are the present settings of tax and expenditure policy sustainable in the long run”. If there’s interest, I might try a more detailed post on this some time.

In the meantime, here’s my article:
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While I read more online than anywhere else, I still like magazines, and subscribe to quite a few of them. Most are fairly well-known, like Prospect, Scientific American and the London Review of Books; you can find a lot of the content of these online also.

I wanted to mention a few less prominent Australian magazines which I subscribe to and find worthwhile. There’s Australian Options, published in Adelaide, Eureka Street from Melbourne and Dissent from Canberra. If you’re looking for a Christmas present for a leftish friend/relation, you could do worse than a subscription to one of these.

Among the many comments lost (temporarily I hope) in the great database disaster was a discussion of the old distinction between equality of outcomes (like life expectancy) and equality of opportunity. This distinction has long been a staple of debates between market liberals and social democrats, and now defines a central point of distinction between supporters of a Third Way (such as Blair) and modernising social democrats (such as Gordon Brown), who may be indistinguishable on issues like privatisation that formerly acted as litmus tests.

A look at the evidence suggests that a position supporting equality of opportunity while accepting highly unequal outcomes is not sustainable. The most important observation is that, contrary to popular belief, there is less mobility between income classes in the United States than in European social democracies. A good, and fairly recent study in this is The Real Worlds of Welfare Capitalism by Goodin, Headey Muffels and Dirven, which I reviewed here, along with Barbara Ehrenreich’s Nickel and Dimed.
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Following the great database disaster, I’m thinking about alternatives to the current setup, kindly provided for me by Robert Corr and mentalspace. The problem is that there are too many levels, and a disaster like this puts an unfair burden on Robert. So I’m thinking about moving to another hosting service.

But, if I’m going to move and make everyone to change their bookmarks, update blogrolls or just forget about me, I need to think about more radical changes. One would be to use TypePad, the easy version of MT. If anyone has tried this, I’d be very keen to hear about it.

Then, on the providential theory, the fact that my invitation to guestblog on Crooked Timber came at the same time as the database disaster must be telling me something. Maybe I should get with the Zeitgeist and join a group blog.

Anyway, here’s a nonbinding poll where you can express your views. Please leave comments also, especially if you choose “Other” (I thought about “stop altogether” as an option, but decided that would be tempting fate and spam).

<script language="javascript" src="http://www.pulsepoll.com/scripts/mgwms32.dll?MGWLPN=LOCAL&wlapp=PollServe&SiteID=9953&Profile=1&Width=110&LanguageID=35 You must turn on JavaScript to view the PulsePoll. For tech support: co-laboratory

Saddam’s capture has all sorts of implications.

The biggest is that it will greatly accelerate the withdrawal of US troops from Iraq. This is obvious enough if the resistance fades away and large numbers of troops aren’t needed. But suppose this doesn’t happen. It’s hard to see the US public putting up with a continued stream of casualties when the main objectives on which they were sold the war have either been achieved (get Saddam) or proved illusory (WMDs). The instant reaction Good. Can we go home now, is going to be fairly widely shared as time goes on.

On the Iraqi side, as Juan Cole points out, this will only strengthen the Shia demand for proper elections and a US withdrawal. Now that the fear of Saddam’s return is gone, the dependence of a future Iraqi government on the US is significantly reduced. Shias might well judge that they could do a better (because more ruthless) job of suppressing the insurgency on their own.
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