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Britain is more optimistic about Brexit than gloomy forecasts suggest

Britain is more optimistic about Brexit than gloomy forecasts suggest

The International Monetary Fund (IMF) is up to its usual tricks. Last week, it predicted a two-year recession in the UK in the event of a no-deal Brexit.

Even in the main forecast, involving a mild Brexit, GDP was projected to grow by only 1.2 per cent this year and 1.4 per cent in 2020.

These are very gloomy numbers. If they were correct, it would be the weakest period of growth since the financial crisis itself in 2008 and 2009.

The IMF has form on this matter. Six years ago, in the spring of 2013, mainstream economists were full of doubt that the government’s policy of austerity would work. In January that year, the IMF projected only one per cent growth, which in April it slashed to just 0.6 per cent.

In fact, economic growth accelerated from 1.4 per cent in 2012 to 2.0 per cent in 2013 and 3.0 per cent in 2014.   In line with the thinking of Project Fear, in the middle of June 2016 the IMF predicted an immediate recession if the UK voted to leave.

Exactly the opposite happened. The economy continued to grow, and unemployment to decline.   To be fair, this time around there does seem to be evidence of a slow-down. The Office for National Statistics (ONS) suggests only modest growth at an annual rate of around one per cent in the last three months of last year.

A recent Deloitte’s survey of chief financial officers found only 13 per cent of them more optimistic about prospects than they were three months ago. Does the online world tell us anything different?

The ONS is making progress here. The agency is starting to use so-called big data to try to get faster and more accurate fixes on what is happening to economic activity. Online information such as value added tax returns and road traffic is being analysed.

Given that this is the first time it has ventured into this field, the ONS is understandably cautious about its initial estimates. It says, rather cryptically, that the indicators they are using are broadly in line with their long-term averages and paint a mixed picture.

Since 2016, with my UCL colleague Rickard Nyman, I have been monitoring on a daily basis how people in London are feeling.

The conventional measurement of wellbeing is based on responses to surveys. In contrast, the Feel Good Factor (FGF) extracts the sentiments which people reveal, knowingly or unknowingly, in their online posts, using advanced machine learning algorithms.

There were big drops immediately after Brexit and after Donald Trump’s election. But the FGF recovered in a matter of days.

Averaging the data over each quarter, optimism peaked at the start of 2017. By early 2018, a sharp drop took place, but sentiment was still around its 2016-19 average. During early 2019, the FGF is down again, but only slightly, and the past few weeks show no change compared to the same period last year.

Uncertainty over Brexit does seem to be having a negative impact on sentiment in the short term. But the overall trend offers some sunny perspective on the IMF’s dismal economic forecasts.

As published in City AM Wednesday 17th April 2019

Image: British Weather by Wikimedia is licensed under CC BY 2.0
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Modern Monetary Theory? More like Magic Money Tree

Modern Monetary Theory? More like Magic Money Tree

As the Brexit process unfolds, the possibility of a Corbyn government has become much more tangible. Last month, John McDonnell, the shadow chancellor, wrote to the Treasury to say that in power he would require them to “widen the range of economic theories and approaches in which its officials and those in the rest of the government are trained”.

In principle, this would be a good thing. Machine learning algorithms, for example, have been shown beyond doubt to be more powerful than the traditional economists’ tool of econometrics for analysing data. Standard economic theory is not as good as cultural evolution theory at understanding how search engines, reputation systems, and social media affect the decisions we make and the news we read.

Somehow, however, one feels that this is not the retraining which McDonnell has in mind.

The fashionable idea among left-wing economists is something called “Modern Monetary Theory” (MMT). In the US, the rising Democrat star Alexandria Ocasio-Cortez appears to be keen on it, believing that it could finance her Green New Deal as well as an immense raft of social programmes and welfare benefits.

A key part of MMT asserts that governments who control their own currency can finance any level of spending simply by printing more money. Countries in the Eurozone, for example, cannot do this, because the European Central Bank controls how much money can be created – but the UK can.

A sharp increase in public largesse almost always creates an increase in the public sector deficit, which is the difference between spending and the income that the government gets from taxes.

The conventional way of financing the deficit is by issuing bonds. This both creates a stream of interest payments to the lenders, and at some point – depending on the date of maturity – have to be repaid.

MMT asserts that printing money instead removes these constraints. Money created by the government never needs to be repaid. For example, £10 notes carry the phrase “I promise to pay the bearer on demand the sum of 10 pounds”. If you take it to the cashier’s desk in the Bank of England, they will do just that – they will give you another £10 note instead.

Also, money carries no interest. In technical terms, we might think of money as a “zero coupon perpetual bond”, although I have never seen MMT theorists refer to it in this way. In one way, MMT is completely true. Countries like the US and the UK can finance government deficits by printing money rather than issuing bonds. Indeed, there are genuine arguments to be had about the appropriate mix of the two.

Where the theory falls down, however, is not recognising the adverse consequences of creating too much money. The economic history of the world is replete with examples of how this just creates inflation, from Roman emperors to the latest example, Venezuela.

MMT ought to be renamed the Magic Money Tree. The Bank of England is running a competition for whose face should be on the £50 note. For MMT theorists, the answer is obvious: old magic grandad himself, Jeremy Corbyn.

As published in City AM Wednesday 10th April 2019

Image: Jeremy Corbyn by Chris McAndrew via Wikimedia is licensed under CC BY 3.0
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If there is something fishy about influencers, why do we take the bait?

If there is something fishy about influencers, why do we take the bait?

Social media influencer, Yovana Mendoza, provided an amusing diversion from Brexit last week.

The 20-something vlogger built a very lucrative personal brand around veganism. She amassed over 3m followers on YouTube and Instagram by advocating a raw vegan diet and 25-day water fasts.

All seemed to be going well until a competitor observed and filmed Mendoza eating seafood. The vlogger’s embarrassment was compounded by the fact that she tried to hide the fish.

Unsurprisingly, the ensuing video went viral.

Mendoza performed what has become the ritual apology on online media: “It was the worst day of my life. I felt like someone had died,” she posted. “Someone did”, was one of the less abusive responses, “the fish”.

The final act in the saga was her own video in which she confessed to eating fish “for health reasons”.

The episode illustrates some fundamental features of the online world. It shows how the popularity of products or ideas need not necessarily be connected to the inherent merits of the offer.

There has always been a strong tendency in popular culture for success to breed success. Things become desirable, not necessarily on account of their inherent qualities, but simply because they are already popular.

The internet compounds these tendencies. The inherent attributes of products become outweighed by the effect of social influence on the choices that people make.

In more conventional markets, where social influence is weak, economic theory has a good understanding of how consumers behave. In this type of market, consumers gather information on the attributes of the alternatives, such as price and quality, choosing products based on their individual preferences and affordability.

In recent decades, the theory has been expanded to incorporate situations in which consumers don’t have all the information to hand.

But it is still essentially based on the idea that people compare what a product offers with what they want.

This differs in the online world, because what people want is altered by observing what other people want.

For example, Mendoza sought to convince her 3m followers that raw veganism and extreme water fasts were part of a healthy lifestyle, despite not following her own advice.

There is no suggestion that Mendoza’s work is fake. But the high emotional content that she regularly published gave it a better chance of being noticed and spread by social influence.

People are learning this fast, and the use of “clickbait” is spreading rapidly.

The largest ever study on fake news was published just over a year ago in the Science journal, and it concluded that fake news and rumours tended to spread much faster and reach more people than accurate stories.

A key reason is that fake news typically shows a much higher level of emotion in their overall content. The question is whether we will all learn to see through this and start behaving rationally again.

But the furore around Brexit suggests that we have some way to go.

Paul Ormerod 

As published in City AM Wednesday 3rd April 2019

Image: Clickbait by Pete Unseth via Wikimedia is licensed under CC BY-SA 3.0

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This Nobel-winning economist can tell you why there’s no Brexit consensus

This Nobel-winning economist can tell you why there’s no Brexit consensus

Should pure blue sky research be funded?

Certainly, the answer from government-backed research councils seems to be “no”. The emphasis is increasingly on research which has immediate practical applications.

Yet seemingly esoteric research can shed light in quite unexpected areas. For example, a PhD thesis written by a then obscure research student 70 years ago helps us understand the difficulties encountered today in resolving the current Brexit problem with a series of votes.

The number of alternatives suggested as the outcome of the Brexit process has been bewildering.

During the past week alone there has been: Theresa May’s deal; her deal plus a customs union; her deal plus a customs union and the Single Market; a Canada-style free trade agreement; another referendum; revoking Article 50 and cancelling Brexit; and leaving without a deal at all.

Little wonder that MPs have struggled to produce an overall majority in favour of any particular option.

So now we come to the idea of so-called “indicative votes”. MPs are due to vote on each of a large range of options to see which, if any, command a majority.

A variant would be to get MPs – or the electorate as a whole if there were another referendum – to rank explicitly the alternatives in order of preference. When we elect the London mayor, we have to express our preferences rather than just cast one vote, as we do in a General Election.

All of these approaches seem plausible. They share the same basic idea: test the options with a voting system based in some way on preferences among the alternatives, and see which comes out top.

It seems common sense. But unfortunately, as is often the case, common sense is not a very good thing to rely on.

The PhD thesis mentioned above was written by Kenneth Arrow, who went on to win the Nobel Prize in economics. He demonstrated the inherent problems of preference-based voting systems.

Arrow, who died in early 2017 at the age of 95, is virtually unknown to the general public. He spent his life in the sheltered groves of American Ivy League universities. But he made some of the most profound contributions to economic theory in the whole of the second half of the 20th century.

One of these was his so-called Impossibility Theorem. He proved that, whenever voters have three or more alternatives, no system of ranked voting can convert the ranked preferences of individuals into a set of preferences at the aggregate level which is guaranteed to be consistent.

Arrow’s result applies not just to a given practical example, but to all systems of this kind. Paradoxes abound. For example, even if all voters prefer X to Y, it is entirely possible that at the group level the result may not reflect this.

When once asked about the practical implications, Arrow himself said: “Most systems are not going to work badly all of the time. All I proved is that all can work badly at times.”

Brexit is an excellent example not just of this, but of the value of high quality, blue sky research.

As published in City AM Wednesday 27th March 2019

Image: Brexit via Pixabay

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Emojis are a better metric for wellbeing than traditional data methods

Emojis are a better metric for wellbeing than traditional data methods

HMRC’s programme to make tax digital continues to roll out.

Anyone with a small business will know about the imminent deadline of 1 April, when VAT returns become digital.

Quick to seize an opportunity, several companies have developed software to ease the task.

The digitisation of tax raises the wider issue of whether technology will help the Office for National Statistics (ONS) put together faster and more reliable measures of the state of the economy. The VAT returns potentially give the ONS real-time information.

The current methods of constructing the national accounts – the picture of how the economy is doing – remain rooted in the twentieth century. Ron Jarmin, the deputy director of the US Census Bureau, writes in the latest issue of the top ranked Journal of Economic Perspectives that: “current measurement programs are not keeping pace with the changing economy, and current methods for collecting and disseminating statistical information are not sustainable”.

For example, national accounting bodies such as the ONS and the Bureau of Economic Affairs in America still rely heavily on sample surveys for their information.

Jarmin points out that surveys are encountering increasing problems. Response rates by both households and companies have declined substantially, increasing costs and threatening quality.

The intellectual conservatism of outfits such as the ONS is illustrated by measurements of well-being, or happiness. Hailed as an innovation when David Cameron instructed the ONS to produce this in 2014, it is based purely on old-fashioned survey questionnaires.

Economists in general are traditionally sceptical of survey-based approaches. The respondents, in the jargon of economic theory, simply state their preferences when answering a series of questions.

Economists place much greater weight on preferences which are revealed by the actions which people take. In the 1980s in Britain, survey after survey showed a stated preference for higher taxes and more public spending. Yet in their actions at the ballot box, people kept electing Margaret Thatcher. They revealed a preference for the exact opposite.

The online world is replete with revealed emotions. Indeed, the entirely new language of emojis has evolved to allow people to do this.

Modern machine learning techniques can readily translate the text of tweets and blogs into a scientifically-based measure of wellbeing. And they can do so much faster and more reliably than the survey methods used by the ONS.

Jarmin urges governmental statistical agencies to rely much more on digital information in general. He argues that material “generated from transactions, online interactions, sensors, the internet of things, and many other sources can be used to capture various aspects of economic activity”.

He notes the massive increase recently in the number of economists working for tech companies in the US. Here, innovative methods of data collection and analysis are the norm.

Statistical agencies such as the ONS need to show the same energy and move much more rapidly into the twenty-first century.

As published in City AM Wednesday 20th March 2019

Image: Berlin Wall by Jed Record via Flickr is licensed under CC BY-2.0

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