David Cameron’s visit to Jamaica last week led to vociferous demands for the UK to pay the Caribbean island billions of pounds in reparations for slavery. Most people here reacted with predictable eye-rolls and sighs. Slavery was abolished throughout the British Empire in 1833, nearly two centuries ago. Jamaica has been independent since 1962, over fifty years ago. Surely they have had time to sort themselves out and get a decent economy?
There is much to be said for these arguments. In the early 1960s, for example, South Korea was essentially a poor, agricultural society, only one step up the ladder from subsistence level incomes. Now, it has a dynamic, modern economy with living standards similar to those of the West. Countries such as Singapore have followed similar trajectories.
The demands for payment are a classic example of what economists call “rent seeking” activity. The word “rent” here does not mean what you pay on your apartment to live in it. The concept goes all the way back to Adam Smith himself, though the phrase was only coined in the late 20th century. Rent seeking means trying to increase your share of existing wealth without creating any new wealth.
But we should not feel too much moral superiority over the Jamaicans. Rent seeking has proliferated in Western society in the last couple of decades. The US economy has performed well over this period. Its success is reflected in the amounts paid to CEOs, with the average compensation in the top 350 firms being around $15 million a year. This enormous sum is some 300 times higher than the amount the companies pay to the typical worker. In the mid-1970s, the ratio was not 300:1 but only 30:1. Even in the mid 1990s it was around 100:1. This later figure would still hand the average CEO some $5 million today, not a bad sum to have. It is hard to justify these payments in terms of the contribution the individuals are making to creating new wealth. Some of it, yes, but essentially these pillars of our society have been rent seeking on a grand scale.
Rent seeking by the public sector characterised Gordon Brown’s long period as Chancellor. Public spending rose dramatically. But much of the increase did not go to provide better public services. Instead, it paid for the private consumption of those employed in the public sector. Some graduates in Hollande’s France flee abroad. Most of the rest aspire to become a fonctionnaire. Good pay, virtually unsackable, and with a gold plated pension at the end, it is a much sought after position. Little wonder that France has essentially registered no economic growth since 2011. Jeremy Corbyn eulogised the Italians for subsidising a steel plant rather than letting it go under like Redcar. But rent seeking proliferates in Italy, and their living standards are now back to those of the late 1990s.
Economists disagree about many things, but they are united in their opposition to rent seeking, an unequivocally Bad Thing.
As published in City AM on Wednesday 7th October 2015
Image: “Street in Montigo Bay Jamaica Photo D Ramey Logan” by WPPilot – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.
Readers who either had young children or were children themselves in the 1980s will recall the Um Bongo jingle. The advert assured us it was drunk in the Congo. A survey published last week to mark the 60th anniversary of British television advertising showed that no fewer than 32 per cent of the total sample of 2,000 people remembered the tune. This compared to only 20 per cent who identified Mozart’s Eine Kleine Nachtmusik.
We might attribute this to the failures of our educational system to promote grand culture. But despite Justin Bieber selling more than 15 million albums and having almost 70 million Twitter followers, only 19 per cent of those polled could name his recent number one hit. In contrast to both high and low music culture, Um Bongo has seared itself into the brain cells. The failure of four out of five people to remember even the name of the Bieber song could perhaps be due to the age profile of his target audience. But their parents can hardly fail to be aware of him, in the same way that they knew of a drink which few of them actually consumed.
A potential reason for the differences is that the turnover in popular cultural markets has speeded up decisively in recent years. Attention spans have shortened. The changes in technology have made it very hard to make direct comparisons over the history of popular music charts since the early 1950s. But the trend was already apparent when the New Musical Express charts, introduced in 1952, were discontinued in 2006. The early and mid 1960s were a highly innovative period, with the emergence of for example the Beatles and the Rolling Stones. There were also many one-hit wonders seeking to emulate their success. At this time, in terms of the Top 75 in the NME charts, around 300 songs featured during the course of each year. By the mid-1980s, this figure has doubled to some 600, and in the mid-2000s it was around 1,000. So the turnover had risen sharply even a decade ago. Songs were getting less and less time to imprint themselves on memories. And there were many more of them which did become popular, even for a short time, so the competition to capture memory intensified.
A dramatic rise in ‘churn’, the speed at which relative popularity changes, can also been seen since 2000 in the choice of baby names, both here and in the United States. Baby names may seem frivolous, but the polymath American psychologist Stephen Pinker emphasises their cultural importance. The choice of name “encapsulates the great contradiction in human life: between the desire to fit in and the desire to be unique”. In the last decade or so, the latter has strengthened dramatically. The Houston anthropologist Alex Bentley and I have published papers showing that turnover in popularity was steady for most of the 20th century, but has since risen fivefold.
Attention spans have shortened, with important consequences for our society and economy. But, for some at least, Um Bongo lives forever.
As published in City AM on Wednesday 30th September
Imagine you are relaxing at a bar enjoying a drink after a hard day’s work. The person next to you strikes up a conversation. Initially he seems reasonable. But soon he begins to go on at length about how the Earth is flat and how a misguided cabal of scientists hides this truth from us. You could try and persuade him of the error of his ways. But the most sensible course of action is to make your excuses and leave.
Economists face the same dilemma in commenting on the policies of John McDonnell, Jeremy Corbyn’s new Shadow Chancellor. They are bonkers. For example, McDonnell believes that the problem of the public sector deficit can be solved by extracting an additional £93 billion a year from companies. He claimed in the Guardian this is the total amount of subsidies which the corporate sector receives from the taxpayer. The source of the calculation is apparently a report published by the University of Sheffield, with the same newspaper bemoaning the fact that no-one bothers to read it. Could there be a reason?
Suppose, purely for the sake of argument, that the £93 billion figure is correct. What might be expected to happen if companies are suddenly deprived of this vast amount of money? They might slash dividends, an action with which McDonnell would almost certainly approve. This would of course harm pensions, but perhaps this is the price to be paid. But firms might equally well make major savings by getting rid of workers, by reducing wages, or by drastic cuts in investment and research and development expenditure. Ultimately, only individuals and not companies can bear the cost of taxation, a profound insight of economics which many, especially on the Left, find hard to grasp.
By comparison, the economic wish list set out by Corbyn himself during his leadership campaign gives the impression he retains some residual connection with reality. But is a Flat Earther more or less balanced than someone who, say, believes that the dimensions of the Great Pyramid reveal the hidden secrets of the universe, a quite popular internet delusion?
Corbyn argues that there is no need to place limits on the amount of welfare benefits which an individual or family can receive. Economic growth will revive the economy to such an extent that employment will boom, and many people will be removed from welfare as a result. In turn, growth will be generated by the activities of a new National Investment Bank. But this is pie in the sky. The failure of planned economies such as the Soviet Union, the failure of the National Plan of the 1964 Labour government, the failure of the Regional Development Agencies, none of this evidence shakes Corbyn’s faith in the inherent superiority of economic planning and dirigisme.
No doubt these policies will have some popularity in the regions which are already heavily subsidised. But it is hard to see them striking a chord in the wealth generating parts of London and the South East.
As published in City AM on Wednesday 23rd September
A potential candidate for the world’s most boring book is the Office for National Statistics’ National Accounts: Sources and Methods. This book, all 502 pages of it, is currently available in hardback on Amazon for just 1p. It does exactly what it says in the title. It gives a detailed description of how the data in the national accounts – variables such as GDP, inflation, earnings – are estimated.
These data series are the building blocks on which economic policy is based. The Bank of England has a mandate to keep inflation around 2 per cent. The Chancellor frets if the latest GDP growth figures are weak. All these indicators depend upon the detailed processes described in the book of gathering information, sifting it, and deciding what it means.
To an economist at least, the tedium of the book is interrupted by occasional pearls of wisdom. There is huge uncertainty around any particular number which is produced. Sources and Methods suggest that the potential margin of error around an estimate of GDP is plus or minus 1 per cent. To put this in context, average annual GDP growth in the UK over the past 30 years is just 2.3 per cent. For some of the more obscure statistics, the error margin was believed to be as large as plus or minus 15 per cent.
But national accounts have suddenly become sexy. Sir Charles Bean, former Deputy Governor of the Bank of England, has been tasked by George Osborne to carry out an independent review of the quality and delivery of UK economic statistics. There is a particular focus on the challenges of measuring the modern economy, with a rapidly rising proportion of all economic activity taking place via the Internet. Measuring value in cyber society, with its completely innovative range of products and services, is a major intellectual problem.
The latest issue of one of the American Economic Association’s flagship journals, the Journal of Economic Perspectives, carries an article on communicating uncertainty in official economic statistics. The initial estimates for any statistic are invariably revised over time. These revisions are often large, so that the early estimates offer a misleading view of the economy to policymakers. In the first quarter of 2014, for example, there was an unexpected fall in American GDP on the previous quarter. Initially believed to be just 1 per cent at an annual rate, the number was revised to a much larger drop of 2.9 per cent.
The problem goes much wider. For example, national accounts statisticians rely quite a lot on surveys. But ‘non-response’ can be serious. In poverty statistics for the US, for example, over the 2002-12 period between 7 and 9 per cent of households in the sample yielded no data at all by not responding. A massive 41 to 47 per cent gave incomplete data by not filling in all of the survey.
Statistics in general is suddenly fashionable. High starting salaries go to graduates who can analyse Big Data. And the boring old national accounts find exciting new challenges.
As published in City AM on Wednesday 15th September
Emotions are running high over the refugee crisis, with heart-breaking images arousing waves of compassion across Europe. As ever, however, economics lurks in the background. The tragic stories of refugees coming to Europe rightly elicit a call to help those in need, but we must understand the underlying realities to truly do something about this crisis.
We can contrast the general composition of the refugees fleeing Syria and those already encamped at Calais, for example. The Syrians are mainly family groups, whereas in Calais young men predominate. Incentives help explain their choices of destination. As they trail across Eastern Europe, the Syrians chant “Germany!” At Calais, however, everyone wants to get into the UK. The political situation is highly fluid, but Germany has had a policy of open borders for such refugees. Other European countries are less easy to get into.
Many of those in Calais speak fluent English and have high skill levels. They would make a much more positive contribution to this country than, say, relatives imported from the poorest parts of Pakistan and Bangladesh. Their families have invested large amounts of money in their journeys, made with the specific purpose of getting into the UK. The lighter regulatory burden imposed on the British labour market than in much of the rest of the EU is in many ways a great strength. But it does mean that it is much easier to work illegally here. In theory, employers can be prosecuted for employing illegal immigrants, but in practice this doesn’t always happen. Skilled young people can thrive, which is why they want to come – not to sponge off our benefits, but to work.
Incentives feature strongly in the highly emotive issue of the boat crossings too. Since the EU took the decision to rescue the boats, the numbers crossing have soared. The demand has increased after an important component of the price of the voyage, that of the chances of being turned back, has fallen sharply. But the consequences of this misguided liberalism have been to place more lives at risk. Indeed, there is increasing evidence that the so-called boat captains are now not even bothering to get on board themselves. They simply take their large fees and let the refugees steer as best they can. After all, why put your own time and effort into a task when the EU will, or least purport to, do it for you? So the crossings have become even more dangerous.
The role of incentives is misunderstood and so, too, is the most fundamental feature of economics – the allocation of scarce resources. “Saint” Bob Geldof may be able to accommodate refugees in his large underutilised homes, but for local authorities there is a real trade-off. Every refugee housed is a person already on the waiting list who has to stay on it. Not just that, but they tend to be allocated to the poorer parts of the country where property is cheap. Simon Danczuk, the leading Labour moderate, points out that his Rochdale constituency has already been made to accept more asylum seekers than the whole of the South East of England.
Economics may often seem harsh, but keeping its principles in mind can avoid outcomes being even worse.
As published in City AM on Wednesday 8th September 2015
Image: Un jove de Kobane (Síria) refugiat a la frontera turca. by Jordi Bernabeu Farrús is licensed under CC BY 2.0.
A group of economists hit the headlines last week with their claim that Jeremy Corbyn’s policies are supported by mainstream economics. Perhaps the best known of them is David Blanchflower, a Monetary Policy Committee member when Gordon Brown was Chancellor. He predicted before the 2010 General Election that under the Conservatives, unemployment would rise from 2.5 million to 4 million, even 5 million was ‘not inconceivable’. The actual number now is 1.85 million. Still, economic forecasting is a notoriously difficult exercise.
The claim that Corbyn represents orthodox economic thinking is not easy to sustain. It is not possible to find a single article in a leading academic journal which recommends nationalising large swathes of the economy, particularly without compensation. Indeed, completely opposite themes are stressed, such as the importance of competition and markets, and respect for the principle of contracts and the rule of law.
To be fair, the Corbynistas only endorse his tax and spend policies. They claim that support for fiscal and monetary expansion is now the economic mainstream. But they fail to take into account one of the most fundamental concepts in mainstream macroeconomics, the so-called Lucas critique. This esoteric idea, quite unknown to the general public, has profound practical implications.
Many Keynesian economists try and assess the impact of policy changes in the following way. They take the key aggregate variables in an economy, such as personal consumer spending, exports, unemployment and the like, and use advanced statistical techniques to correlate them to other variables. Data is used over the past twenty or thirty years, to get enough observations. What emerges is the average impact over this period of changes in one variable on another. To take a simple purely illustrative example, we might find that if sterling fell by 10 per cent, on average over the past the value of exports increased by 5 per cent.
All these statistical relationships are bundled together in a computer, and questions can then be asked. What might happen if public spending were increased? The complex interrelationships in the programme are calculated, and the answer pops out. Forty years ago, Chicago based Nobel Laureate Robert Lucas made his critique. Changes in policy may very well change the average relationships which previously existed. The past is not necessarily a guide to the impact of a policy change. President Hollande discovered the practical power of this point when he put tax rates up to 75 per cent. He was presumably advised, on the basis of evidence from the past, that this would raise revenue. But hundreds of thousands of the most enterprising French citizens did not pay the tax at all. They simply left the country.
The idea that Corbyn’s policies on state control of enterprise can be separated from his fiscal and monetary proposals is not one which bears more than a moment’s scrutiny. The Lucas critique applies in spades. Any analysis which pontificates on the effects of the latter without taking into effect the whole gamut of his polices can hardly be taken seriously.
As published in City AM on Wednesday 2nd September 2015
Economics is often described as the dismal science, but it often contains cheerful material. A paper by the leading American economic historian Joel Mokyr made for exuberant holiday reading. Written for the top Journal of Economic Perspectives, it is entirely in English and contains not a single mathematical symbol. Mokyr examines the history of anxieties about the economic impact of technology since the late 18th century.
We are living through precisely such a phase of worry at present, as fears abound that robots will destroy our jobs and take over the world. There is nothing new under the sun. The same concern was widespread two centuries ago. The machinery installed in new-fangled factories would create mass unemployment. Mokyr points out neatly that people get anxious at the same time about a problem which has completely opposite implications. Namely, that we are running out of ideas, and the progress of technology will grind to a halt. The great English economist David Ricardo addressed exactly this question in the early 19th century in his Principles of Political Economy. Many leading economists in the United States share the concern today.
The most famous group objecting to machinery two hundred years ago were the Luddites, who went round smashing it up, along with any unfortunate mill owner they could get their hands on. But the slightly later Captain Swing riots were also widespread, particularly in rural areas, and were often even more dangerous. Mokyr notes that the modern equivalent is the Occupy Wall Street movement, an altogether tamer creature. It turns out that the Swing riots were mainly directed not against the new threshing machines used by farmers, but against the use of cheap immigrant labour from Ireland. Hello? And in any event, the main complaint made by the working class in the first half of the 19th century was about the exceptionally long hours they were required to work, an observation difficult to square with claims that jobs were being eliminated on a large scale.
In the end, the fears of the Luddites that machinery would impoverish workers were not realized, and the main reasons are well understood. Technological change increased the demand for other types of labour that were complementary to the new technologies. So, for example, large numbers of supervisors and managers were needed for the vast new factories and companies. Product innovation created completely new markets which demanded completely new types of job. And the process has continued. As Mokyr says ‘Nineteenth-century political economists lacked an ability to predict new job categories like the personal fashion consultants, cyber security experts, and online-reputation managers of the twenty-first century’.
In fact, the demand for labour has held up far more than was expected. Between 1900 and 1930, for example, weekly hours in American manufacturing fell from 59.6 to 50.6. A simple extrapolation, beloved of doom merchants, would imply only 25.4 hours would be worked by 2015. Of course, innovation is disruptive. But over the 250 years history of capitalism, its positive effects have greatly outweighed the negatives ones of job destruction.
Last week saw the ritual tears and joy of the announcement of the A level results. An encouraging aspect was the increase, albeit small, in the percentage of entries in traditional academic subjects, now standing at 51.2 per cent. This is yet another example of incentives at work. The universities have been signalling that non-academic passes, no matter how distinguished, will not count for much, and the message is getting through.
More dispiriting is the huge regional imbalance in the schools which perform strongly. The league tables for the private schools have yet to appear. But we know that the best results in these schools are concentrated overwhelmingly in London and the South East. Only a mere handful of Northern schools, such as Manchester Grammar, challenge the dominance of the likes of St Paul’s, Eton and Westminster.
The league tables for state schools confirm the splits in regional performances. Different criteria produce slightly different rankings, but the overall picture is robust to these variations. The list in the Telegraph is as good as any, based on the percentage of grades A*, A and B at a school. Only one school outside London and the South East makes the top ten, the Girls Grammar in the prosperous Cheshire enclave of Altrincham. In the top 100, the West Midlands has 12 schools, the same number as the whole of the North, from Cheshire up to Cumbria and across to Yorkshire and Tyne and Wear. The best performing state school in Wales comes in at number 168, and what used to be known as the People’s Republic of South Yorkshire manages an entry at 184.
True, London and the South East are wealthier, but the rest of the country moved on from flat caps, whippets and coal in the bath many decades ago. Besides, a greater proportion of able pupils are creamed off by the private schools in London and its surrounding region. This stiff competition for students does mean that the state sector here has a stronger incentive to perform well. But otherwise, it is very hard to rationalise such disparities in success on the basis of purely economic variables.
Cultural factors drive these discrepancies in the state sector. Crumpsall, for example, is a not particularly salubrious area of Manchester. But the King David comprehensive makes it at 55 in the Telegraph rankings, stating on its website that the school is ‘founded on traditional Jewish values with a belief in respect, courtesy, self-discipline, diligence and the pursuit of excellence’. In contrast, the Welsh Labour Party used to be proud that their schools sent young people to elite universities. But under devolution, this ethos has gone into decline, with the politicians being more interested in shoring up their votes amongst politically correct time servers. No wonder that Wales actually registered a positive swing to the Conservatives in the recent election.
Culture can be an elusive concept, but it is important and economists face the challenge of incorporating it into their analysis.
As published in City AM on Wednesday 19th August 2015
The key aim of George Osborne’s economic policy has been to eliminate the financial deficit of the public sector. The main way of trying to achieve has been to squeeze public spending. The orthodox economic textbooks maintain that this withdraws demand from the economy, and so leads to the growth rate being slower than it would otherwise be.
But can contractionary fiscal policy of this kind actually expand the economy? At first sight, it seems something of a contradiction, the concept that spending less might cause higher growth. An oxymoron, one might say – where I am using the word in its regular sense and not referring to those Greeks who voted ‘no’ in the referendum. The very idea provokes howls of derision and outrage, from leading Keynesians such as Stiglitz and Krugman downwards.
Yet we have been here before. In early 1981, the UK economy had moved into a deep recession, comparable in size to that which we experienced during the financial crisis. In the budget of March of that year, the then Chancellor, Geoffrey Howe, cut the financial deficit by 1.5 per cent of GDP, or some £20 billion in today’s prices. This prompted no fewer than 364 university economists to write to the Times in protest, explaining that the policy was completely misguided and would only serve to prolong the recession. In fact, the economy began to recover during 1981, and posted a healthy growth rate of 2.2 per cent in 1982, followed by a boom rate of 3.9 per cent in 1983.
One swallow does not make a summer. Is there any other evidence? Tim Congdon, in a recent article in the journal Economic Affairs, claims that since the 1980s, ‘expansionary fiscal contractions’ have been the norm rather than the exception both in the UK and the US. Keynesian support for fiscal activism is, he argues, unsupported by a large body of recent evidence. To cite just one example, Congdon points to the substantial fiscal tightening under the Conservatives from 1994 and initially continued by Gordon Brown until 2000. Over this period, the UK economy grew rapidly.
There are good theoretical reasons for thinking that cutting the government deficit could stimulate rather than contract the economy. The classic paper was written by Robert Barro of Harvard as long ago as 1974. Its rather mysterious title, ‘Are government bonds net wealth?’, has not prevented it from becoming one of the most cited papers in the whole of economics. Barro, who was subsequently awarded the Nobel Prize for work such as this in macroeconomics, essentially argued that a nation cannot make itself better off by increasing its public debt. More recently, the work of the Italian economist Alberto Alesina, now also based at Harvard, has been influential in policy making circles in the European Commission and European Central Bank.
The simple view that more government spending boosts the economy appears to make common sense. The opposing views are more subtle and complex. But it is the latter which at present have the upper hand.
As published in City AM on Wednesday 12th August 2015
Alas poor Cecil! Close personal friend of mine, sadly dead now.
The catchphrases of the Scottish comedian Bob Doolally capture the outpourings of grief among the Twitterati at the death of the now famous lion. The mourning is mixed with incoherent rage, as long-standing opponents of torture and capital punishment demand that the American dentist who killed the animal have his teeth pulled out without anaesthetic and then be sent to Zimbabwe to be hanged.
Yet the story illustrates two deep features of the current world. We can usefully reflect on the truly appalling outrages which have been inflicted on Zimbabwe by President Robert Mugabe. At the start of his regime, he used Cuban and North Korean troops to murder 20,000 political opponents. One of the most fertile countries in Africa has been reduced to destitution and starvation by racially motivated land grabs. Economic mismanagement, which far surpassed that of the Greeks, led to an inflation rate of one million per cent. But these outcomes scarcely rate a mention, in contrast to the global swamping of social media occasioned by the shooting of a lion.
In cyber society, there is in general only a tenuous connection between the objective content of an incident and the amount of popular attention which it receives. It is not a matter of people gathering all available information and then making a considered, rational choice, as standard economic theory assumes they do. Popularity is self-reinforcing, and in a dramatic way. Network theory is beginning to illuminate why some stories or products spread like wildfire while most receive virtually no attention. But this is due to the subtle mathematical properties of the connections rather than the content or the competing merits of the product.
Economics does much better at understanding the second aspect of the Cecil story. There is a big demand across the world to hunt exotic and dangerous species. The markets for trophies and other by-products of hunting, such as the alleged aphrodisiac of powdered rhinoceros horn, are probably even larger. Unrestricted entry into such markets would lead to the so-called problem of the commons. This arises when the actions of individuals, each making decisions independently and in a rational way, generate an outcome which is bad for the group as a whole. Resources become depleted to the point of extinction.
The <a href=”http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2009/ostrom-facts.html” target=”_blank”>Nobel Laureate Elinor Ostrom</a> spent much of her career researching how this problem is managed in contexts such as fisheries and farmlands. The existence of a well-defined community, whose members influence each other through their shared values and cultural norms, is a good indicator of success. But the urge to hunt is global, and so we face a market failure.
The regulation of hunting is one of the very few functioning aspects of the Zimbabwean state. It is a way of limiting access to rare species, and the permit fees received from legal hunters provide the resources required to combat poaching. Calls to ban hunting are ill-informed, for this would simply magnify the problem of the commons and lead to a world in which Cecils were extinct.
As published in City AM on Wednesday 5th August 2015