Uncharted Territory

March 26, 2013

Forecasting and Philosophy

I noted yesterday that:

“Weather forecasting (and climate prediction) is not just about computer power. Deep philosophical ideas also come into play.”

I fear I may have under-delivered on the philosophy.

I intended to suggest that all forecasts, such as of weather, are necessarily and systematically inaccurate.

To recap, my main point yesterday was that running an inaccurate forecasting model numerous times doesn’t solve all the inherent problems:

“All ensemble forecasters know is that a certain proportion of computer model runs produce a given outcome. This might help identify possible weather events, but doesn’t tell you real-world probabilities. If there is some factor that the computer model doesn’t take account of then running the computer model 50 times is in effect to make the same mistake 50 times.”

Let me elaborate.

We can dismiss the normal explanation for forecasting difficulties.  Forecasters normally plead “chaos”.  Perfect forecasts are impossible, they say, because the flap of a butterfly’s wings can cause a hurricane.  Small changes in initial conditions can have dramatic consequences.

I don’t accept this excuse for minute.

It may well be the case that computer models suffer badly from the chaos problem.  In fact, the ensemble modelling approach relies on it.  I suspect the real world is much less susceptible.  Besides, given enough computer power I could model the butterfly down to the last molecule and predict its wing-flapping in precise detail.

No, the real-world is determined. That is, there is only one possible outcome.  Given enough information and processing power you could, in principle, predict the future with complete accuracy.

Of course, there are insurmountable practical problems that prevent perfect forecasting:

  • The most fundamental difficulty is that no computer can exceed the computing capabilities of the universe itself.  Although the future is written, it is in principle impossible to read it.
  • You might try to get round the computing capacity problem by taking part of the universe as a closed system and building a huge computer to model what is going on in that relatively small part.  The difficulty then is that the entire universe is interconnected.  Every part of it is open, not closed.  If the small part you were modelling were the Earth, say, then you’d have to also model all celestial events, not just those which might have a physical effect, but all those which might be detectable by humans and therefore able to affect thought-processes and decision-making.  And, since our telescopes can see galaxies billions of light-years away, there’s a lot to include in your model.  That’s not all, though.  You’d also need to model every cosmic ray that might disrupt a molecule, most dramatically of germ-line DNA – though a change to any molecule is of consequence – and even every photon that might warm a specific electron, contribute to photosynthesis or allow a creature to see just that bit better when hunting…
  • Then there are problems of what George Soros terms reflexivity.  That is, people’s behaviour is modified by knowing the predicted future.  They might act to deliberately avoid the modelled outcome, for example by deflecting an asteroid away from its path towards the Earth, which we might term strong reflexivity.  Or they might change their behaviour in a way that unintentionally affects the future, for example by cancelling travel plans in light of a weather forecast – weak reflexivity.  With enough computer power, some such problems could conceivably be overcome.  One might predict the response to an inbound asteroid, for example.  But it’s not immediately apparent how a model would handle the infinitely recursive nature of the general problem.

In practice, of course, these would be nice problems to have, because computer simulations of the weather system are grossly simplified.   They must therefore be systematically biased in their forecasting of any phenomena that rely on the complexity absent from the models.  As I noted yesterday, all runs in an ensemble forecast will suffer from any underlying bias in the model.

Two categories of simplification are problematic:

  • Models divide the real-world into chunks, for example layers of the atmosphere (or of the ocean).
  • And models necessarily represent closed systems – since the only truly closed system is the universe as a whole.  Anything not included in the model can affect the forecast.  For example, volcanic eruptions will invalidate any sufficiently long-term (and on occasion short-term) weather forecast.  Worse, weather models may be atmosphere only or include only a crude simplification of the oceans.  That is, they may represent the oceans in insufficient detail, and furthermore fail to include the effect of the forecast on the oceans, which in turn affects the forecast later on.

The good news, of course, is that it is possible to improve our weather forecasting almost indefinitely.

Perhaps those presenting weather forecasts should reflect on the fact that, as computer models improve, ensemble forecast ranges will narrow.  The 5-day forecast today is as good as the 3-day forecast was a decade or two ago. The probability of specific real-world conditions will not have changed.  That has always been and always will be precisely one: certainty.

It makes no sense to say “the probability of snow over Easter is x%”, when x depends merely on how big a computer you are using.

No, forecasters need to say instead that “x% of our forecasts predict snow over Easter”, which is not the same thing at all.

March 25, 2013

The UK’s Cold March 2013 and the Perils of Ensemble Forecasting

Weather forecasting (and climate prediction) is not just about computer power. Deep philosophical ideas also come into play. In particular, problems emanate from the use and communication of the concepts of probability and uncertainty. Often, the probability of a specific outcome is quoted, when what is meant is the level of its certainty in the opinion of the forecaster. Or more to the point in the opinion of the forecaster’s computer.

I’ll discuss communication problems more generally in a later post, but here I want to suggest the possibility that the outputs of forecasts – specifically ensemble forecasts – are being misinterpreted, and not just poorly communicated.

Anyone wanting an accessible introduction to the issues of forecasting, communicating forecasts and ensemble forecasting in particular, could do a lot worse than view the recent Royal Society debate, Storms, floods and droughts: predicting and reporting adverse weather. It’s entertaining too – there’s a great rant (with which I can’t help agreeing) from an audience member on the way the BBC reports London’s weather.

Ensemble forecasting is when a computer weather (or climate) model is run repeatedly – say 50 times – for the same forecast, but with very slightly different initial conditions (e.g. atmospheric pressure and temperature at particular locations). The idea is to produce a range of forecasts, representing the likelihood of possible outcomes. Tim Palmer suggests during the Royal Society debate that the most famous UK forecast ever – the dismissal in 1987 by Michael Fish of the possibility of a hurricane in Southern England the evening before one occurred – would instead have been presented probabilistically. Had he had an ensemble of forecasts, Fish might have said that there was a 30% probability of a hurricane.

I don’t agree with this.

If Fish had said there was a 30% probability of a hurricane he would have been guilty of confusing his computer model with reality.

All ensemble forecasters know is that a certain proportion of computer model runs produce a given outcome. This might help identify possible weather events, but doesn’t tell you real-world probabilities. If there is some factor that the computer model doesn’t take account of then running the computer model 50 times is in effect to make the same mistake 50 times.

March 2013 in the UK is the cold snap that just keeps on giving. The weather has defied forecasts. Specifically, it seemed just a few days ago that westerly air was going to break through before the end of March. Of course, this has a bearing on where March 2013 will rank among the all-time coldest, which I discussed in my previous post, but I’ll have to find time to revisit that subject in the next day or two.

The Weathercast site has made ensemble forecasts from the European Centre for Medium-range Weather Forecasts (ECMWF) available to the public. Here are some from over the last few days:

130323 Heathrow actual weather slide 4

I’ve lined them up, so that the day the forecast is for appears in a column for forecasts as of 00:00 hours on 22nd, 24th and 25th March.

An ensemble that’s behaving itself should provide less of a spread of forecasts as we get closer to the forecast date. For example, the spread of the maximum temperature on Easter Day, 31st March narrows in the forecast from 25th March compared to that on 24th.

But now look at the coldest possible temperatures on 31st March. On 22nd hardly any predicted temperatures below 0C, and none below about -2C. By 25th most of the forecasts were for a frost on the morning of 31st, and many for a severe frost (-3C or so). This shouldn’t happen.

It seems that on 22nd nearly all the model runs predicted Atlantic air to break through by 31st; by 25th virtually none of them did.

Instead of fanning out more the longer in the future the forecast is for, the ensemble model outcome seems to change systematically. Perhaps ensemble forecasts don’t solve all our problems. I suspect there are aspects of the climate system our computer models do not yet capture. There are things we do not yet know.

As we saw for the unexpected rainfall in 2012, ensemble forecasts can predict zero probability of extreme events, in this case the (most likely) second coldest March since the 19th century. And the whole point of ensemble forecasts is to predict extremes.

The forecast for 31st March is of more than passing interest, of course. It is no doubt of great importance to those who may be planning to take school kids on Duke of Edinburgh expeditions on Dartmoor or (since we’re talking about a London forecast) preparing for a traditional Boat Race on the Thames!

July 16, 2012

Saint Mervyn: King by Name, King by Nature

I’ve been following the Libor scandal with considerable interest. The former Chief Operating Officer of Barclays Jerry del Messier should be settling into his chair before the UK House of Commons Treasury Select Committee as I write these words – don’t worry, I’ve set the recorder for the BBC News Channel.

Perhaps we’ll find out the answer to why Jerry del Messier was cleared of rigging Libor on the grounds that, according to Barclays’ briefing note (pdf) issued ahead of Bob Diamond’s appearance before the Select Committee he:

“…concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high. He passed down an instruction to that effect to the submitters.”

on the basis of Diamond’s infamous note to file which suggested that Paul Tucker, Deputy Governer of the Bank of England had advised that:

“…while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.”

The mysteriousness of it all arises because Barclays was already lowering its Libor submissions. They admit that during the period Sept 2007 – April 2008:

“Less senior managers gave instructions to Barclays submitters to lower their LIBOR submissions. The origin of these instructions is not clear.”

You’d think that when Jerry del Messier told his rate-setters to “lowball”, someone might have mentioned that they were already doing it!

I really like the point in Barclays memo that:

“[del Messier’s] instruction became redundant after a few days as liquidity flowed back into the market.”

“Became” redundant? His instruction was already redundant!

It’s not del Messier’s behaviour that really bothers me about the whole affair. It seems all the banks were at it, and Barclays may not have been the worst culprit. Barclays is just the first to settle. And the only logical explanation I can think of for George Osborne’s strange claim that Libor lowballing was sanctioned by Balls, Brown and Vadera is that it was an open secret in the City.

After all, no-one would borrow at a rate inflated by concerns that the banks might fail, as opposed to one simply reflecting risk, the base rate and the balance between supply and demand for money. Libor simply doesn’t work in those circumstances. The authorities would be obliged to address the problem any way they could in order to save the economy.

I hate to see public bullying. It seems our politicians – and many in the media and, notably, Mervyn King – just don’t like Bob Diamond. What will they do when they run out of obvious scapegoats? The excuse for laying into Diamond seems to be some problem with the “culture” at Barclays. Is it any different to that at any other investment bank? Doesn’t the “culture” in any occupation go with the turf? Presumably they don’t want traders to behave like, say, Premier League footballers, or Hollywood actors. Something less flash perhaps: doctors, say or IT guys. But would they still be able to do the job? These occupations surely require quite different qualities and aptitudes. Maybe something a little more sales oriented, perhaps, then: used car dealers or estate agents. Or politicians! But are these professions more or less honest than investment banking? I’m stuck. Perhaps our politicians could spell out exactly how they want investment bankers to behave.

Or perhaps Mervyn King could tell us. After all, he’s the one who fired Bob Diamond – never mind that the regulatory investigation is far from complete. Is he going to fire the heads of a dozen other banks?

Never mind that the real reason seems to be some problem with Barclays “culture”, it’s not actually Mervyn King’s job to sack the Chief Executives of banks. Or anyone else employed by a bank for that reason. And even if it was King’s job, he would be obliged to follow due process.

Diamond could be forced to step down if the Financial Services Authority found he was not a “fit and proper” person. Which didn’t happen.

Or if he lost the confidence of Barclays’ shareholders. He might have done, I suppose, but that’s not why he went.

No, Marcus Agius (Barclays Chairman and ex-Chairman) explained what happened:

“Agius told MPs that the chief executive had quit ‘because it became clear that he lost the support of his regulators’ just 48 hours before the American-born Diamond was scheduled to appear before the committee.

Agius described how he had been summoned, along with Sir Michael Rake, the most senior non-executive director on the Barclays board, to see King shortly after Agius’s resignation had been announced a week ago on Monday.

‘We had a conversation in which he said that Bob Diamond no longer enjoyed the support of his regulators,’ said Agius, who then had to hold an emergency board meeting by telephone of non-executive directors to decide how to proceed. He admitted to being shocked as concerns had not been raised when the £290m fine for attempting to manipulate Libor rigging emerged five days earlier.

Agius said he and Rake went to Diamond’s home on the Monday evening. Diamond – who had insisted to MPs last week that he did not know about any regulatory pressures – ‘was not in a good place’, said Agius. He said that the conversation was ‘not long’ and that Diamond had asked for time to talk to his family.

‘I left his [Diamond’s] house confident he would resign, if he hadn’t done so already,’ Agius said.”

Staggering.

I’m surprised there’s not been more outcry at such authoritarian behaviour by the Governor of the Bank of England, who is, after all, just a public official.

One exception is Philip Inman who provides some background in a Guardian piece titled “How Mervyn King Finally Got Bob Diamond.”

“…from the moment the credit crunch began to wreck Northern Rock’s finances in the summer of 2007, the grammar-school boy from Wolverhampton, whose father was a railway worker and then a geography teacher, was ready with his analysis. King said most of the huge debts accumulated by banks could be tied to the huge bonuses executives received as reward for their lending.

In meetings with regulators and then chancellor Alistair Darling, Diamond, then head of Barclays Capital, and his investment banking peers were seen as a bunch of amoral, greedy traders. Darling relates in his diaries how King would counsel against providing rescue funds that perpetuated a risk-taking culture.

But it was Diamond, one of nine children and also the son of a teacher, who made it public and personal. At a time when most bankers were busy trying to prevent their institutions going bust, he broke cover to give an interview in a Sunday newspaper. In an analysis of central banks’ actions in combating the credit squeeze, Diamond notably excluded the Bank of England from praise.

He said providing short-term cash was the job of a central bank. ‘For the recovery to continue we need to find more ways to get liquidity into the short end of the curve,’ he said. ‘That’s down to confidence, and that’s down to the central banks. We’ve seen thoughtful moves by the [US Federal Reserve] and the [European Central Bank].’

The Bank of England saw the interview as a direct attack on its handling of the crisis. King’s response was to embark on a series of speeches and interviews in which he openly decried the emergence of a ‘small elite’ that agreed to pay itself bonuses in good times and bad.”

So petty. Maybe Mervyn is touchy – I think Diamond was right. Perhaps, if King had behaved more like other central bankers, we’d have a healthier banking industry today, and Ed Miliband wouldn’t be threatening to break up the survivors to create more competition. Don’t forget that Alliance & Leicester, Bradford & Bingley and Northern Rock have all disappeared from our high streets.

What’s more, blaming the financial crisis on bank bonuses is simplistic to say the least.

And perhaps central bankers should have seen the housing bubble warning signs a bit earlier.

Another commentator who hasn’t let the matter pass is Hugo Dixon who suggests at Reuter’s that the “BoE governor’s arm-twisting raises tricky issues”:

“…on whose behalf exactly was King speaking? The BoE, after all, is not responsible for supervising banks – and won’t be until next year. That’s still the job of the Financial Services Authority. If King wasn’t speaking for the FSA too, he was arguably stepping beyond his authority.

On the other hand, if the BoE governor was speaking on the FSA’s behalf, why didn’t the regulator itself deliver the message that Diamond should go? And why too did the FSA apparently change its position? After all, the regulator had only just agreed a settlement with Barclays over the Libor rate-fixing scandal. If it had wanted Diamond to go, that would have been the moment to say so.

A further question is how exactly the regulators managed to twist Barclays’ arm. If the FSA doesn’t support a bank director in his role, the current mechanism for removing the executive is to deem him no longer ‘fit and proper’. But it seems hard to argue that Diamond didn’t meet that test. After all, the lengthy investigation into the Libor scandal did not criticise him personally.

Some people will no doubt say it is good that Diamond has gone and it doesn’t really matter how that was engineered. But methods used in difficult situations can easily become precedents.

The BoE is about to become even more powerful next year when it takes over banking supervision. It is important that it operates in a transparent and accountable fashion.”

Quite.

July 12, 2012

The Pensioners’ Crusade

Filed under: Complex decisions, Economics, Inequality, Politics, Public spending, Reflections, UK — Tim Joslin @ 12:06 pm

I noted on Tuesday Nick Boles’ suggestion in a keynote speech at the Resolution Foundation (pdf) to limit certain pensioner benefits to the less well-off:

“Spending on universal benefits for the elderly (the Winter Fuel Allowance, free prescriptions, free bus travel and free TV licenses for the over 75s) reached roughly £4 billion in 2010/11.

I know that this help is vitally important for many older people – and a step away from universal provision of these benefits after the next election would need to be handled very carefully as many members of this generation are admirably reluctant to make a fuss, even when they really need help.

But, does anyone here think it would be responsible for a country in our financial position to go on giving a free TV license to Michael Winner, free prescriptions to Lord Sugar and a winter fuel allowance to Sir Paul McCartney after 2015?”

A point well made.  But, I strongly suspect, to no avail.

I diligently provided links to reaction at the BBC, Guardian, Independent and Mail which all headlined Boles’ hardly original elderly means-testing proposal, even though it would only save £1.5bn of the £8.5bn he says we need to save:

“If we are to achieve stability in our public finances AND make crucial investments in improving productivity and competitiveness, we must find a way to save at least £8.5 billion from the £145 billion we currently spend on benefits other than pensions.”

Popping into Tesco yesterday, though, I noticed that I’d jumped the gun in my headline search.  The Express is going to war on the issue.  Holy war.  Here’s their front page:

I love that capital C in Crusade.  “Upper-case there”, the editor must have ordered.  “We’re not being figurative here.  This is official.  It’ll be there in the history books alongside Richard the Lionheart vs Saladin and, of course, the Children.”

The headline’s a classic as well.  Whereas the Mail and the Independent implicitly accepted the government’s right to cut benefits, but signalled with the A-word (“axe”) that targeting elderly benefits might be a cut too far, the Express went several steps further.  “Secret Plot to Rob Pensioners”.  Hmm.  Not really “secret” is it?  Which means it doesn’t really qualify as a “plot”.  And I think most would agree that discontinuing the provision of a benefit hardly counts as “robbery” (which, strictly speaking, involves violence or the threat of violence, as opposed to theft, which doesn’t).  One might even quibble that it is “pensioners” being “robbed”.  The word “pensioners” has connotations of those struggling to get by on a meagre stipend, and the qualification for the benefits in question is on the basis of age, not – as Boles’ examples of Winner, Sugar and McCartney might suggest – dependency on an annuity.

Boles’ whole point was that benefits would only be withheld from the wealthier elderly, a subtlety somewhat glossed over in the scene-setting opening sentences of the story on the front page of yesterday’s Express:

“A THREAT to strip Britain’s pensioners of benefits such as free bus passes and prescriptions triggered outrage last night.

A key ally of David Cameron yesterday called for strict means testing of claims that also include winter fuel payments and TV licences.

But the move was immediately condemned by charities and OAP groups – and today the Daily Express adds its voice by launching a Fair Deal For Our Pensioners Crusade.

This newspaper urges readers and campaigners alike to support its demand that the Government honours its pledges to pensioners in full, and does nothing to chip away at their universal welfare entitlements. Tory MP Nick Boles caused ­fury after saying the Government could save £4billion a year by stopping better-off pensioners from getting the benefits.”

£4bn/yr is in fact the total cost of the benefits.  Boles hopes to save £1.5bn/yr.

But Cameron’s calculation will be whether £1.5bn is worth the potential electoral damage in 2015 (if the Coalition lasts that long).  He’ll be looking for media outrage at “giving a free TV license to Michael Winner, free prescriptions to Lord Sugar and a winter fuel allowance to Sir Paul McCartney”.  And not finding it.

On one side is most favourable headline to the proposal at the BBC, which reports that the “Rich elderly should lose benefits, says David Cameron ally”.

And on the other is a lot of axeing and the Express’s army of pensioners ready to march against the heathens in Downing Street.

You have to admire the Express.  They understand their constituency.  As, I’m sure, does Cameron.  This kite’s not going to fly.

July 10, 2012

Nick Boles’ Resolutions

Filed under: Complex decisions, Inequality, Media, Politics, Public spending, Reflections, UK — Tim Joslin @ 5:04 pm

Note (12:15 11/7/12): Corrected in 2nd paragraph following a communication from the Resolution Foundation – they are focussed on issues rather than party politics (like the E3 Foundation – I approve) and do not “describe themselves” as “centre-left in outlook”, as I said in the initial version of this post that they “might” do.

I wrote last time that I would try to report on events I attend. For once, I’m keeping my word.

This morning, the Resolution Foundation (RF) hosted the latest in a series of meetings making up its “Commission on Living Standards”, which constitutes a large part of the analysis and policy debate around what Ed Miliband loves to call the “squeezed middle”, that is, as RF put it, “the economic decline of low to middle income Britain”. Heck, the Commission even has its own website, full of bells and whistles. Whilst the RF seems centre-left in outlook, they are politically independent and engaged with all three mainstream political parties. Today was the turn of the Tory and Cameron loyalist Nick Boles, with Lord Adonis chipping in as responder.

Many Resolution Foundation events are heavily trailed and reported in the media, and Nick Boles’ pitch on Raising Living Standards this morning was no exception. Trouble is, the mainstream media inevitably focus on whatever aspect they believe will catch the attention of their readers, so we have “Tories plan to axe pensioners’ benefits” in the Independent, “Limit winter fuel allowance and Sure Start, says Cameron ally” in the Guardian, the more accurate headline “Rich elderly should lose benefits, says David Cameron ally” at the BBC, not to mention the A-word again at the Mail: “Axe free prescriptions and bus passes for the better-off elderly, says Cameron ally”.

Clearly the media would rather scare the horses (check out the comments – and the voting on them – on that BBC story) than present some reasoned argument. No wonder we end up with swathes of incoherent policies.

The Independent’s report gives the best summary of the politics of the situation. Cameron doesn’t want to “axe” benefits for the well-off elderly, because he promised not to in 2010. Will he be able to avoid repeating such a promise in 2015? The question was asked this morning. Although Boles made a good point about how none of the parties faced up to the impending fiscal crisis in 2010, I’m not convinced. I reckon Paul McCartney’s bus-pass is safe for some time yet.

But Boles’ talk was not titled “Pensioner’s perks”. It was much more wide-ranging than that. Indeed, there was much more discussion in the Q&A this morning of tax credits, youth unemployment and even the comparative advantages of the German education system (better for technical students) and that in the UK (better for the academically inclined).

If there was a takeaway policy message from Boles, it was not that the government might try to claw back around £1.5bn/yr from well-off pensioners, it was that they want to find £8.5bn of savings (at 2012 prices) from the welfare budget as a whole by 2016 (by which time that £8.5bn will have inflated to £10.5bn). And my impression was that if it was up to Boles most of the saving would come from child-related benefits, especially those paid to parents (i.e. Child Tax Credits and Child Benefit), as opposed to schools, and Sure Start, which Boles seems to have it in for.

Since the hard-working families demographic is up there in electoral importance with the pensioners-who’ve-earned-the-right, it’s hard to see where any of the £8.5bn is coming from.

The strength – and weakness – of Boles’ approach is that he aims to be ruthlessly analytical. So he laid down 4 principles:
(1) Only those areas of spending that measurably increase the competitiveness of the economy should be allowed to increase faster than GDP.
(2) As implied by (1), spending on other areas (police, defence, environment etc) must fall relative to GDP.
(3) Areas of recent public-spending growth must decline relative to GDP.
(4) There should be no new areas of spending.

This leads to some overly-rigid thinking, in my opinion. For example, principle (4) seems to preclude a resolution of the elderly care issue, which has revived this week (apparently all-party talks broke down some time ago – like Adonis, I despair at the Westminster political process). And principle (1) relies on measurements, which are not simple in practice – this seems to be why Boles doesn’t like Sure Start.

During the Q&A though, it became clear that Boles has another principle:
(5) Public spending must decline as a proportion of GDP.
Boles said he didn’t go as far as David Laws, who has apparently called for a reduction in public spending as a proportion of GDP to 35%, from 45% after the financial crisis, but implied 40% was a ceiling (Osborne is trying to get it back down to around 39%, similar to the level under New Labour).

Of course, as Adonis pointed out, growth is key, and could reduce the tax-take percentage simply by increasing the denominator (GDP).

But the real weakness in Boles’ thinking is that it ascribes a cost to money that is simply paid to the Exchequer and then paid back out again. This is illogical. A perk is still a perk whether it is a free bus pass (counts towards the public spending percentage) or preferable tax treatment (doesn’t count). You could save money by taking away free bus passes for well-off over 65s or by requiring over 65s to pay National Insurance (NI). Now you or I would weigh up the pros and cons of both these measures. But Nick Boles doesn’t look at it that way. He’s wrong – the public only care about the rate of tax they pay (and to be honest even that’s irrational – they should only care when it changes, as pay rates adjust to the tax regime over time). People certainly don’t give a monkey’s whether UK public-spending is 29% or 45% of GDP – or 25% or 50% for that matter.

So Boles would be wise to reflect on the last question asked this morning, by Gavin Kelly, the RF CEO and Chair of the meeting. Gavin reckoned that the £8.5bn could be saved by requiring over 65s to pay NI (which all agree should be consolidated with income tax – it would be a bit illogical to pay insurance for when you can’t work when you’re over retirement age!) and (probably the biggie) reduce tax relief on pension contributions to basic rate tax only.

I suspect there are other tax allowances that really apply only to the better off that could be looked at – some of those for buy-to-let landlords look rather generous to me, and do we really need to allow new savings to be added to ISA tax shelters every year? Are we really serious about reducing the deficit?

It would seem to be less painful to reduce tax allowances than cut public spending. Consideration should at least be given to tax measures that don’t commit the political cardinal sin of raising headline rates of tax. Come on guys, even Brown was bold enough to raise the NI rate!

Let’s hope ideology doesn’t trump pragmatism in the Coalition’s forthcoming Spending Review. Perhaps they should start by renaming it a Budget (or even Deficit Reduction) Review. Or simply reclassify tax allowances as “spending”!

June 20, 2012

Rio+20 Mañana

One of my New Year 2012 resolutions was to report here about events I attend. Trouble is I always seem to put it off – “mañana”, I think – and after a few days there’s another event to report on. In fact I’m already one event behind (thorium – mañana) but am nevertheless starting by reporting on the Alternative Rio+20 Summit organised in London by the Campaign against Climate Change (CCC).

My expectations were moderate to low – I was hoping for a briefing on what Rio+20 is all about and maybe some interesting talks and discussions. I can’t say these aims were met. The CCC is about climate change and that’s not the main topic at Rio, so the conference wasn’t focused as well as it might have been. And whereas a few years ago CCC conferences were excellent and informative, they now seem to be a gathering mainly of “activists” all keen to promote their cause. The Q&A sessions were therefore largely hijacked, most annoyingly by a social networking bedwetter carrying around a 3ft dragon soft toy as a way to attract attention, and a woman wearing Mickey Mouse ears with text proclaiming something about “McNulty”. She was campaigning against proposed cuts in rail services. The effectiveness of her interjections may be judged by the fact that I had to google “McNulty rail” to find out who the guy was. Both campaigners, using the term loosely in the case of Mr Twitter-will-save-the-world, not only spoke off-topic in the plenary, but in subsequent breakout groups too. Most people in the breakout meetings will have attended the plenary.

The likelihood is extremely low that any intelligent debate can be organised around topics so vaguely defined as “sustainability” and “development”. Compounding the problem, “sustainable development” is – if these words mean anything at all – an oxymoron. So what I found most interesting about the whole Alternative Rio+20 event were the reflections on the history of international negotiations made by a couple of academics from the host institution, the School of African and Oriental Studies (SOAS). Harald Heubaum spoke about how Copenhagen failed for procedural reasons and suggested that the G77 group of countries was less unified than at the original Rio (the “Earth Summit”) and the West less inclined to make concessions. My initial thoughts were that perhaps the Earth Summit was too successful and, as well as taking all the low-hanging fruit (so how could any subsequent conference possibly match its ambition?), locked in unhelpful features, such as the distinction between “developed” and “developing” countries, with no mechanism for movement between these groupings. Of course, dividing the world in this way is madness, but the very idea of countries negotiating in the way they do is flawed. The interests of states is not the same as the interests of their people, so we end up with bizarre assertions, such as that the “right to develop” is a human right. It’s not, “development” is collective, human rights refer to individuals.

As far as climate change is concerned, these international talks are becoming increasingly fruitless, at least in terms of action (as opposed to exchange of ideas). The whole exercise has become entirely dominated by demands from developing countries that the developed countries are unable to meet. “Development” is in any case not something that can simply be given, or prevented. What’s clearly needed is to establish technocratic institutions that are able to say these are the rules for burning coal, preserving forests & oceans, wherever they are in the world. That’s right – we need the same rules for everyone.

Reading about the Rio talks – such as the draft text – is profoundly depressing. There’s little clarity, but the question our leaders are apparently asking is something like: “How can the aim of preserving the environment be prevented from conflicting with ‘development’?” The “needs” of the economy rather than the need to preserve the environment are taken as a given. Common sense, such as the observation that there are indigenous peoples who just want things left as they are and who aren’t really bothered about “development”, would suggest turning the whole thing round. “How can we protect the planet from the Malthusian juggernaut of industrialisation?” Clearly there’s a process – economic growth or “development” – that may be a good thing or may be a bad thing, but has certainly been accelerating for a couple of centuries, a process that will, if left unchecked, consume the planet. This process simply needs to be constrained. Such an observation would suggest that we need to simply protect remaining biodiversity wherever it is, leave fossil fuels in the ground wherever they are and so on. The tools currently being employed by the global community are not achieving this, and are never likely to.

We don’t need Rio+20. We don’t need any more COPs (Conferences of the Parties), such as Copenhagen. What we need is an entirely different process that starts from the environmental problems we’re actually trying to solve. The interests of nation states (or those of any other institution) should not be represented, since these will obviously conflict with the goal. Sovereignty must be delegated, else solutions are impossible. The technocrats would simply need to decide what the best mechanism is for preserving each resource – outright bans on exploitation perhaps in some cases, but most likely some form of pricing – and how best to implement it.

I do have more to say, but the morning is over. I’ll try to find some time to finish. Mañana.

June 2, 2012

Grexit? Spout? No, better half-in, half-out!

I’m not a huge admirer of Margaret Thatcher, and still less of her Chancellor, Nigel Lawson. But, back in the day, they suggested the eminently sensible idea of “currency competition” as an alternative to European Monetary Union (or, rather aptly, EMU). The idea was that the euro would be introduced alongside the pound, franc, mark and so on, with markets deciding the extent to which the international currency displaced the national currencies. But did the eurocrats listen? No, like improbably large flightless birds, they simply buried their heads in the sand.

The time for currency competition has now arrived. The case is compelling. So compelling in fact that when I scour the web to check my (in fact accurate) recall of the origin of the idea of currency competition in the eurozone, I find that it’s already been suggested as a solution to the current crisis – an alternative to Greek exit from the euro (Grexit) and Spain out (Spout) – by Philip Booth at Conservative Home. The existence of Professor Booth’s contribution allows me to make this post a little shorter than it would otherwise be. He also points out something I hadn’t previously realised – that it would be necessary to enact “a simple constitutional change to remove the clause in the EU constitution that requires the euro to be the sole legal tender currency in eurozone countries.” Actually that seems to put a small spanner in the works – is there no limit to the stupidity and lack of foresight of the eurocracy?

What would happen is this. In the (extremely likely) event that the Greeks do not vote on June 17th for parties willing to stick to the country’s agreements with its creditors, the EU (and IMF) would say to Greece that no more euros are to be made available from, say, 1/1/13 (to allow for necessary preparations). Greece nevertheless wants to stay in the euro. The conditions would be these:

  • All euros in circulation in Greece remain as euros. New bank accounts in drachma are created alongside for those who need them. Euro debts remain euro debts. And the Greek governments euro debts remain payable (it’s too late, unfortunately, for those that have already been forgiven).
  • Drachma are issued by the Greek central bank, subsequently backed by drachma bonds made available to the domestic market (I say domestic as international lenders are likely to be somewhat sceptical). The drachma floats freely against the euro.
  • Greece starts paying public sector workers, domestic contractors and state beneficiaries (the unemployed, pensioners etc) in drachma. The private sector has a choice. But companies (say in tourism) with euro debts and euro income would have no need to change their main operating currency. Such Greek exporters are not part of the problem – they can and should remain part of the European single market. It’s the Greek government that is bankrupt. The problem is the Greek public sector, not the private sector.
  • All Greek shops (and domestic businesses) would be obliged to accept both euro and drachma at an official market rate, say the previous day’s closing mid-market price.
  • Greece continues to service its international euro debt and recapitalises its banks (in euros, though if drachma are provided, these would have to be immediately converted by the banks). The need for euros for this purpose would be a key factor in determining the value of the drachma and hence public sector wage and other costs. In return (and only if satisfied that the Greek banks are solvent) the ECB would continue to allow Greek banks to borrow from it.
  • In theory it doesn’t really matter what currency Greece collects taxes in (as they are convertible), but because of time-lags the tax currency should match the currency of the taxable event (i.e. if you’re paid in euro you pay taxes in euro). Note that the drachma is likely to inflate, so the public and companies are likely to want to convert to euro for savings purposes.
  • Greek import costs are similarly convertible, but since there may be few external holders of drachma, euro would effectively be required. Greece would be forced to balance its trade (and in fact achieve a surplus, given its debts) – and the drachma would fall until it did.

The goals of such a policy are of course to:

  • Stop the haemorrhaging of deposits from Greek, Spanish and Italian banks. This is taking place because of fear that such deposits will be forcibly converted to a weaker currency, such as the drachma.
  • Remove the need for further Greek and other bailouts.
  • Force Greece (and others) to take reponsibility for their own budget and trade deficits.
  • Allow wages and hence public-spending to adjust in Greece and any other countries that follow the same course.

My flavour of the idea is slightly different from Booth’s in that he doesn’t make such a clear distinction between the public and private sectors of Greece’s economy. What we have in common is the realisation that, as Booth puts it:

“There would be no doubt about the legal status of private debts and credits denominated in euro and little doubt about the legal status of Greek government debt (any doubts would revolve around whether it was denominated in euros or the ‘sovereign currency of the Greek government’ – most likely the former). There would be no capital flight – all euro deposits in Greek banks would remain euro deposits.”

I would say the policy exploits what George Soros terms “reflexivity”. That is, it creates the positive feedback that as soon as it becomes seriously discussed it becomes less worthwhile for Greeks (and Spaniards and Italians) to move their euro bank deposits to Germany, making the policy itself easier to implement.

Note that this desirable reflexivity is in marked contrast to the historically stupid decision to haircut private lenders to Greece, which had the fairly predictable consequence of raising the costs of borrowing by other euro countries perceived by the market to be weak.

I call this the “half-in, half-out” or “Hiho” plan for restoring some kind of normality to the economies of the eurozone’s ailing members and to get the overall European economy moving again. As the ditty goes: “Hiho, hiho, it’s off to work we go!”

May 13, 2012

Gifts to Greece

My first thought this morning was to write about the so-called UK drought again. Maybe I’ll post something on that later.

Then I had a strong urge to comment on the absurdly excessive punishment of Lewis Hamilton (a 5 place penalty or inadmission of his final run – moreorless equivalent punishments – would have been appropriate) after an error by his team in qualifying for today’s Spanish GP. I’d hardly call myself an expert on the sport, but a previous foray into F1 commentary attracted a good deal of attention.

Instead I’m going to channel my annoyance at the spoiling of what might have vaguely resembled a sporting event in Barcelona towards the Greeks.

All I want to convey is one simple point, that the Greek people have benefited hugely from the international loans on which they have already partially defaulted and look increasingly like failing to repay in their entirety.

We haven’t invented this thing we call money just for fun. Money allows resources to be allocated. If you borrow it, spend it and fail to repay the loan, you have acquired or consumed resources that could have been used by someone else. Take the Athens metro railway and all the other billions worth of infrastructure to support the 2004 Olympic Games. How was that funded? I’ll hazard a guess. Borrowed money, at least in part. And what will happen to all that capital investment when Greece defaults? It’ll still be there. These assets will remain in existence indefinitely for the benefit of the Greek people. To the extent they haven’t been paid for, they’ve effectively been stolen from the rest of the world.

Some loans may be riskier than others, because that’s how the world is, but, unlike equity investments, loans are designed to be repaid. Financial disruption – on a global scale over the last 5 years – arises when debts are not repaid. So, because of the knock-on effects, Greece’s default is worse than theft! The entire EU has been plunged into recession in large part because of the need for the financial system to prepare for possible Greek default. Instead of using capital to support new lending, banks have been writing down Greek (and other) debt and taking actual losses.

Obviously we’re just reaping what was sown when Greece and other European sovereigns borrowed unsustainably. The question is how to prevent repeats of this cycle of behaviour?

Let’s mull over that question for a minute. What is the popular conception of what’s going on?

I think it was Arthur Smith I heard on the radio yesterday saying the Greeks should be let off their debts because “it’s not the fault” of those protesting. In what sense is that, Arthur? Are you perhaps saying the average Greek took no executive decisions regarding the nation’s finances? Clearly true. But isn’t a large part of the problem that they haven’t paid and continue not to pay their taxes? What do you think is fairer, that every Greek homeowner should pay a special tax (they’re refusing) or that you and I should find the money?

And isn’t a large part of the problem the Greek public-sector? What do you think is fairer, that Greek workers should take whatever pay cuts it takes to balance the books (as has happened elsewhere in Europe, such as in Estonia – now growing again – Latvia and Lithuania) or that you and I should find the money?

Many non-wealthy Greeks must also be culpable of wilfully participating in a cash economy, benefiting from lower prices for services whilst complicit in tax avoidance. What do you think is fairer, that the Greeks start paying taxes commensurate with their public spending like people in most other countries, or that you and I should find the money?

But the really interesting point is that Greece is a democracy. They’ve chosen their own government since the ousting of the colonels in the 1970s. Collectively, then, they’ve repeatedly elected politicians, at least some of which have overspent, undertaxed and cooked the books, or appointed officials to do so on their behalf. Clearly, collectively, the Greeks have benefited from this behaviour. I’m intrigued, Arthur, whether you’re suggesting that, collectively, the Greek people are also not responsible for the situation they find themselves in.

That’s probably enough. After all, Arthur is a national treasure, practically the new Queen Mother, and perhaps a little fragile. Maybe he just didn’t think. Maybe, like the QM, he inhabits a world where decisions are made by waving a magic wand. Maybe, like the QM, he lives in a world where one need take no responsibility for one’s finances.

I also caught a snippet this morning of someone on the Andrew Marr Show invoking the precedent of Argentina. That great and honourable country, that upstanding, exemplary member of the international community most recently defaulted on their debts about a decade ago. And it’s been great for their economy! Who’d have thought it? It’d be great for my personal finances if I went out and bought a house, a car, new furnishings and white goods, new shoes, clothes and so on and then didn’t bother paying for them. I’m sure I’d feel pretty well off for a few years too.

Let’s pick on someone else. Arianna Huffington writes in the NYT:

“Yes, the Greeks acted irresponsibly before the economic collapse — the same way my father had acted irresponsibly in his private and professional life. But that is not reason to punish the children, to destroy their future as part of a remedy for a past for which they bear no responsibility.”

What Arianna is saying – for some reason “bleeding heart liberal” is the outmoded phrase that comes to mind – is a little more sophisticated than Arthur Smith’s indignant genialism. We have to draw a line, she says, to protect the innocent. Though, I can’t help pointing out yet again, these “innocent” are nevertheless beneficiaries of the misappropriated funds spent in Greece over the last decade or so. Perhaps they’ll remember that every time they hop on Athens’ shiny new metro trains.

The fear gripping financial markets – and contributing to the unnecessary economic hardship and suffering of innocent little children currently taking place in, say, the UK – is that other countries will follow Arianna’s line of reasoning too. Why shouldn’t Ireland, Spain, Portugal and even Italy say “don’t punish the children”? Having elected profligate, irresponsible governments that have given them what they wanted – low taxes, high spending – why won’t they now elect governments to satisfy their new desire for debt writeoff with some kind of moral justification (right wing nationalist or left wing anti-capitalist – take your pick, or, hey, what the hell, you can even pick both!).

If we want financial stability – quite possibly a good thing, I suggest, in light of the 1930s, just as a for example – then debts have to be repaid. And sovereign debts would be a good start.

So how can the international community protect itself against freeloaders? Against those countries who run up debts, fail to collect enough tax and then, in the words of the song about the girl next door and the bathroom floor, plead “It Wasn’t Me”?

Here’s my suggestion. Many of the countries that default are serial offenders. There’s something deeply ingrained, in their DNA if you like, that leads them to spend too much and collect too little tax. So cut them off from international finance for long enough for them to lose thir habits. This would be simple to implement. The financial services industry is highly regulated (all that effort’s been really effective, hasn’t it?). Regulators in responsible countries (say the UK, the US, the EU apart from Greece) could simply demand that no financial institution or its subsidiaries (maybe even no company) lends at all to a government that has defaulted on sovereign debt over the last 50 years – or maybe even more. Or, crucially, to any institution in that country dependent on its government, such as a bank or a company.

Since holding the currency of the defaulted country would constitute lending, all investment in defaulted countries would have to be funded locally in their own currency. Imports would require foreign currency that would have to be acquired beforehand by local institutions or individuals, i.e. by selling goods and services as exports (or small amounts of currency to tourists and other visitors). No publicly funded export credit guarantees would be available to UK companies, for example. In effect, such countries would be forbidden from running a trade deficit.

Such a measure would do two things. It would financially quarantine serial defaulters for a time longer than short-term market memory currently manages (defaulters tend to return to the international markets within a decade). And it would give non-defaulters pause for thought.

September 17, 2011

Don’t Backslide on Greece!

You know there’s serious trouble when the Economist runs a two-page editorial, in this case proposing “how to save the euro”.

The Economist agrees with most observers that the problem boils down to how to deal with Greece.

Let’s recap.  Greece, a serial defaulter, essentially fiddled the books to understate its debt in order to be admitted to the euro club, hoping for more economic stability.  Then the financial crisis came, and, as the saying goes, the tide went out and the Greeks were seen to be wearing no trunks.  Not only that, there was an Aegean tsunami on the horizon. Luckily, the Germans had grabbed the deck-chairs so the Greeks aren’t on their own.

What are the Greeks, the Germans and the eurocrats (not to mention the IMF) to do?

What baffles me is the current hysteria from all quarters. Decisive action is not required, as for example, George Osborne insists. The Greek debt is a long-term problem which requires a long-term solution. “Decisive action” implies some kind of quick fix. “Decisive action” is the last thing we need.

In fact, I can see things that can be done to mitigate the situation – economic stimulus measures in the less-indebted eurozone, other European (that includes the UK, Mr Osborne) and other global economies – but I simply can’t see how the central problem could be handled any better than it already is. If that’s not what the markets want to hear then the markets will just have to get over themselves. Some problems just have to be lived with.

Let’s consider the alternatives (I’ve previously written about this on Martin Wolf’s blog at the FT, but I can’t even access that right now, as I terminated my FT subscription in protest at them trying to jack up the price).

1. Greece exits the euro and devalues
This would be catastrophic, at least in the short-term. The Economist discusses the possibility and quotes an estimate that such a step would cost Greece 40-50% of its GDP in the first year (though this seems to assume they leave the EU as well). The trouble is, the “mother of all financial crises” that would result would not be confined to Greece. French and other eurozone banks would take a massive hit, with all kinds of knock-on effects. Even if the initial shock could be contained without seriously recessionary consequences for the remaining eurozone countries, it would simply be a case of “who’s next?” – Ireland, Portugal, Spain, Italy, Belgium, France…

2. Greece devalues within the euro
This is the straw that many are now clinging to, including the Economist, but in fact it’s almost as bad as option 1.

First, there’s the moral argument. Why should the beneficiaries of excessive Greek borrowing be forgiven their debts? Greek taxpayers (or non-payers, by all accounts) would escape paying taxes equivalent to the nation’s long-term spending; all Greeks would have benefited from public services that they haven’t fully paid for; Greek public sector workers would have been paid more than the nation could actually afford – the list is endless. The point is, although different Greek constituencies would no doubt blame each other, the entire nation is complicit, though pre-school children can legitimately claim not to have been in a position to influence matters overmuch.

Second, if Greece is let off a large chunk of its debt, why wouldn’t other countries demand the same? Why should the Portuguese, Spanish, Italians, Irish, French and Belgians suffer tax rises and cuts to their public services if Greek debt is simply written down?

Third, and critically, there’s the problem that a Greek default within the euro doesn’t actually solve the underlying problem. It does something about the debt, but not the deficit. If Greek debt is (say) halved from around 140% of GDP to around 70%, they will still not be credit-worthy, because they’d still be running a deficit. There would still be a need for the IMF, EU and ECB troika to help the Greek government somehow bring revenue and expenditure into line. There’d still be a need for wealthy Greeks to pay more taxes, the Greek public sector to spend less and its economy somehow to grow. In the meantime there’d still be a need for someone to lend euros to Greece.

A Greek default within the euro would simply not have the usual effect of sovereign defaults because it would not be accompanied by devaluation.

In fact, the main effect of Greek default within the euro would be for the Greeks to say “thank you very much”. There’d still be a big hit on eurozone banks (including the Greek ones which would need to be recapitalised from somewhere, and not to mention the ECB), although not the automatic loss from lending to the Greek private sector that would occur in the case of option 1 (when devaluation would make it more difficult, to say the least, for Greek companies to service euro-denominated debt).

Now, it seems to me the troika must recognise this. If I was them I’d demand the budget reforms before allowing any kind of Greek default. In particular, the possibility of Greece having to leave the euro needs to be still on the table. In fact, it wouldn’t surprise me if there hasn’t been a nod and a wink to the off-message officials and politicians (usually German) who regularly float this possibility.

It seems the next payment to Greece is being put off to the last possible moment, even though stumping up is much better for everyone than the alternatives. What puzzles me is that the markets don’t recognise that this brinkmanship is a necessary part of the strategy of forcing Greece to balance its budget in the long-term.

What the Greeks should really be worrying about is the possibility that they haven’t resolved their fiscal problems by the time the rest of the eurozone has recovered (and in particular the banking sector has rebuilt its capital) sufficiently to withstand a Greek default, euro exit and devaluation. Then the eurocrats might just decide to throw them to the wolves.

Still, I wouldn’t rule out a collective loss of nerve and a Greek default within the euro. We’d have to muddle through somehow. If there’s a double-dip, there’s a double-dip – maybe that’s now the least we can expect; if there are further sovereign defaults, the sun will still come up the next morning; if we do end up calling it the Second Great Depression or a Lost Decade, life will still go on. As I said, some problems just have to be lived with.

July 31, 2011

Uncertain about Risk and Uncertainty

Filed under: Complex decisions, Global warming, Philosophy of science, Reflections, Science — Tim Joslin @ 6:57 pm

Here’s an interesting – nay, potentially iconic – figure from a paper, Greenhouse-gas emission targets for limiting global warming to 2C, Meinshausen et al, Nature vol.458, p.1158, 30th April 2009:

It represents the results of a heroic assemblage of climate modelling data. The horizontal axis gives the emissions from 2000-49 (belying the paper’s title, incidentally) in GtCO2 for each set of data plotted and the vertical axis – careful wording alert – the probability of the given model output set predicting a global mean temperature increase of 2C or greater over pre-industrial levels before 2100. The dots and swathe of colour are the outputs of all this modelling; the solid black line some kind of best fit (I know not how determined) or “illustrative default”; the dotted line incidentally is the outcome based on a set of models including carbon cycle feedbacks, which implies less likelihood (carefully chosen word) of hitting 2C for given fossil fuel and land-use change emissions.

The good news is that if this modelling exercise represented a set of real world possibilities, we could, for example, emit around 1500GtC02 and still have a 50% chance of avoiding “dangerous climate change” defined as the 2C temperature increase. The bad news is that the grey area bottom left of the figure represents the 234GtC02 of actual emissions from 2000-06 (7 rather than 6 years, I believe, though the paper is scandalously ambiguous on this point) – basically we have to slow way down.

You could probably write a dissertation about the diagram – for example, why are we discussing scenarios for the future such as the IPCC’s A1F1 (top right) which apparently emit more carbon before 2050 than is stored in the world’s fossil fuel reserves (and even more in the second half of the century)? In fact, why are we discussing more than one of the IPCC scenarios, since even the best of them, B1, is unlikely to lead to less than 2C warming? There is surely no longer any need to nuance the basic point that unmitigated emissions will lead to dangerous climate change.

But all I want to cover just now is essentially one word. The word “probability” on the vertical axis.

What we have here are not probabilities in any real-world sense. There will only be one outcome. We will be at one position on the horizontal axis, depending on (in this case) our emissions before 2050 (though different pathways may give different outcomes for the same 2000-49 emissions). The distribution about the illustrative default (a vertical slice through the diagram) is an indication of our state of knowledge (as encapsulated by the models used) as to what will happen to the global mean temperature as a result. It is not, in a strict sense, a probability.

Using the term probability in this context is unfortunate. In fact, I might even go so far as to say it is symptomatic of a pathology: the same pathology evident when the idea of carrying out climate “experiments” is discussed. Guys, we are using models, not instances of the real world. If parallel universes do exist, we do not have access to them.

My personal issue with all this is that when I read the word “probability” I assume we’re talking about risk, when in fact the topic is uncertainty. I simply can’t help it.

It is extremely unfortunate that the climate modelling community (and perhaps a wider group) has chosen to use the word “probability” to refer to uncertainty as well as risk when they could simply have used “likelihood”. This has been extended to probability distribution functions (PDFs) which are often nothing of the sort (I say “often”, because, confusingly, the horizontal axis may be a probability function and the vertical axis what I would call a likelihood function). These figures should be renamed likelihood distribution functions, with the added advantage of a less overused TLA, LDF rather than PDF.

Apart from confusing models with the real world, the inappropriate use of the term “probability” has caused another problem: too much weight is being given to quantifiable knowledge (included in models) and too little to that which has not been quantified. The term “likelihood” would instead force people to focus on the right questions. What’s happened is that the climate science community is pretending it can somehow answer epistemological questions – those about the state of knowledge – in a scientific, quantifiable way. Presenting the information in precise terms – “my belief in the actual increase in the global mean temperature we can expect for 1500GtC02 emissions is represented by this graph” – doesn’t alter the fact that all we are discussing is the state of our knowledge. And when we let machines produce the graph we automatically lose anything not input to the calculation.

I thought I’d try to clarify the problem with a simple analogy.

If I toss a coin and call “heads” the probabilityrisk – of losing is approximately 50%. I can make decisions on this basis.

But I said “approximately”, because there is some uncertainty – the coin may have a bias.

Now, any estimate of uncertainty in this case depends entirely on my state of knowledge. For example, I might have tested the coin – suspecting it might be weighted – before the crucial coin toss and found that of hundreds of attempts 55% came up heads. This (and my knowledge of statistical confidence testing) may then lead me to believe the risk of losing to be not 50% but 45%. But this would be exceptional. For a randomly chosen coin I would normally be prepared to say it’s likely – an expression of certainty – that the risk of losing when calling heads is, for all practical purposes, 50%.

If asked to quantify how sure I am that the risk of losing is 50%, I might say 99.99%, because I believe the vast majority of the coins in circulation are equally likely to come down heads as tails. But this 99.99% is what I would term a likelihood – a judgement of the uncertainty – not a probability.

On the other hand I may be asked to pick a coin from a bag I’m told contains 50 normal coins and 50 weighted so as to come down heads only 25% of the time. Now it becomes a probability as to how likely it is that the coin is true. I can even calculate the overall probability of tossing a head (37.5%). There may still be uncertainty, though – whoever told me 50% of the coins are weighted might have been lying.

What I hope this analogy conveys is the importance of being clear about what we know and what we don’t know. We should only talk about risk and probabilities within a defined theoretical framework. When making judgements as to the state of our knowledge we should be discussing uncertainty and (I suggest) likelihood.

Let’s turn back to the iconic figure from Meinshausen et al and that vertical axis labelled “probability”.

Are we really talking about probability or likelihood?

Remember where the numbers come from – a series of computer model runs. Here’s a philosophical point: no scientific model is the same as the real world. A simple scientific law such as F=ma or E=mc2 may make very good predictions, but has different characteristics to the real world. And these simple models give the same answer every time (or rather, are not sensitive to small variations in the initial conditions). When we use complex computer-based models such as of climate, we find that quite different answers result from multiple runs with minimally perturbed initial conditions.

What we don’t know is how much of the variation in model runs depends on a lack of determinism of the real world and how much is a result of the characteristics of the models. Remember the real world is air, water, sunlight, clouds and so on. The model is numbers representing big chunks of real stuff in a computer. Maybe there is a “butterfly effect” and the magnitude of global warming in a century’s time will depend on minor unpredictable events that happen today. Somehow I doubt it – weather may be affected by small events, but not climate – though the issue could be discussed long into the night.

What is less disputable, though, is that we don’t know how much of the variation in model predictions of global warming is due to different real world possibilities and how much is due to the characteristics of the models.

By failing to distinguish probability from what I term likelihood, and labelling their vertical axis as “probability”, papers such as Meinshausen et al are perhaps implicitly asserting that what is represented is entirely due to real world variability.

It seems to me far wiser to do the opposite. We should assume that the variability of model outputs represents uncertainty. We are best off considering that if the models were perfect they’d give the same answer every time.

But Meinshausen et al might argue that all they’ve done is use the word “probability” loosely. They might agree with my argument. Now, though, we have another problem. We are giving much more weight to model variability than to other forms of uncertainty. The models only capture some of the known unknowns. There are known real-world phenomena that are not included in the models – poorly understood phenomena, for example, carbon-cycle feedbacks, such as methane release from tundra. And then there are unknown unknowns.

Here’s my biggest problem – if we are to present some forms of uncertainty in numeric form then surely we are obliged to present all forms of uncertainty in the same way. It is misleading to simply list the things we haven’t taken account of. We have to make judgements about the known unknowns and unknown unknowns and adjust the uncertainty distribution accordingly. It’s not all bad news: we might argue that the models overstate the uncertainty in outcome and narrow the distribution in figures such as that by Meinshausen et al.

Policymakers need a considered view of the state of climate knowledge, not diagrams that present dubious “probabilities” and a set of provisos.

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