Last week’s Spring Statement by chancellor Philip Hammond has led to predictable calls to “abandon austerity”.
With massive hyperbole, Labour accused him of “astounding complacency” in the face of what they claimed to be the worst ever public funding crisis.
The facts are rather different. Far from being squeezed, after allowing for inflation, current spending by the public sector has risen almost eight per cent since the depths of the recession in the middle of 2009.
True, the economy as a whole has grown faster, with GDP now almost 18 per cent up from its low point almost eight years ago. But public spending is up, not down.
The recovery has been driven by the private sector. Companies are investing 33 per cent more on new capital equipment now than in 2009.
Personal consumer spending, the single biggest component of GDP, is up by 15 per cent. So living standards have risen more or less in line with the economy as a whole. The growth rate is slightly less, but this is good news. Resources are moving, albeit slowly, into investment, the foundation of growth in the future.
The myth that austerity prevails in the UK is potentially a dangerous one. The simple fact is that Britain is at full employment. Over three million net new jobs have been created, and the total number of people in work stands at a record 32.1m.
The numbers claiming unemployment benefit amount to just two per cent of the total population aged between 16 and 64.
Of the 650 parliamentary constituencies, there are only 33 where the rate is four per cent or more, and in almost all of these it is between four and five per cent. Of the 84 constituencies in the south east, there are only nine where it is even above the national average of two per cent.
A basic premise of economics is that, at full employment, an increase in government spending financed by extra borrowing will create inflation. The economy will not expand, because existing resources are fully utilised. The stimulus will create excess demand for them, which will bid up prices.
We need not rely on conventional economics for this argument. Those who invoke John Maynard Keynes’ name to support “abandoning austerity” ought to familiarise themselves with the words of the great man himself.
Keynes’ magnum opus, the General Theory of Employment, Interest and Money, was published in 1936, shortly after the deepest recession the western economies have ever seen.
Keynes did indeed recommend extra government spending to boost the economy when unemployment is high. Economists have argued ever since as to what extent, if at all, he was correct. But in a key section of his book – chapter 10, for all you fellow trainspotters out there – Keynes writes: “When full employment is reached, any attempt to increase expenditure further will set up a tendency for prices to rise without limit.”
The chancellor should follow the sound advice of Keynes, and stick with his current plans.
As published in City AM Wednesday 21th March 2018
Did Donald Tusk, the former Prime Minister of Poland and now president of the European Council, conspire with Vladimir Putin to murder the President of Poland, Lech Kaczynski?
Many Poles believe this preposterous story, I learned last week at a fascinating conference on social influence at the University of Warsaw.
In 2010, a Polish Air Force plane carrying Kaczynski was blown up in Russia. An investigation by both Polish and Russian experts concluded that it was a pure accident. But on social media, where people are influenced by others, Tusk is widely thought to be complicit.
Coincidentally, the largest ever study on fake news was published last week in “Science”, probably the world’s leading scientific journal. Over 100,000 stories tweeted by some three million users were analysed over a 10-year period by a team led by Soroush Vosoughi, a data scientist at MIT.
There are two key ways to measure the spread of a tweet. The first is, quite simply, the number of users who retweet it. The second is the length of the link the tweet passes through. Most tweets are never retweeted at all. But if your tweet is retweeted by a friend, and in turn someone retweets your friend’s retweet, its “length” is two.
The conclusion of Vosoughi’s research is rather depressing. Fake news and rumours spread much faster and reach more people than accurate stories, using both measures of the spread of a tweet.
The academics offer two explanations for their findings. Fake news seems to have more novelty for users than real news. And fake news tweets typically show a much higher level of emotion in their overall content.
The impact of emotion on influence is supported by the work of Serge Moscovici, a French social psychologist who was mentioned a lot at the social influence conference in Warsaw.
Moscovici, who died in 2014, is famous in psychology circles for his research on how minorities can exert influence on the opinions of the majority.
His best known experiment was based on what we now call false news. Participants sat down in a group and were shown a series of slides coloured different shades of blue. They were asked to say out loud the colour. When the game was played straight, everyone answered correctly.
But when Moscovici planted a few people to say very firmly and confidently that a slide was green, they were not only able to change opinions, the majority of the group sometimes ignored the rational evidence and believed the false statement.
The MIT false news study may help lay the foundations for algorithms which could flag up fake news. For example, stories with a high emotion level which also spread rapidly and deeply could be highlighted as being potentially false.
In its early days, email encountered the problem of identifying spam. The spammers and the “defenders” play a complex game with their different algorithms, but it is one which the spammers now usually lose.
So there is hope that, eventually, fake news can be overcome.
As published in City AM Wednesday 14th March 2018
While weather may not seem like a typical economics topic, there are always interesting aspects to behaviour in any context.
Quite a number of drivers, for example, appear to have ignored notices of road closure. They drove on regardless, until becoming stuck in the snow.
In Greater Manchester, which seems to have been the vortex of the storm, the police had to put out a special appeal on this.
Part of this apparently irrational behaviour was undoubtedly due to sheer stupidity, or even to a lack of basic literacy. But for others, the response may have been more rational.
Almost all motorists will have encountered flashing lights on a motorway to slow down for an “incident” or “debris in road” or some such thing. But a good proportion of the time, the problem has been solved already. The authorities have simply been slow to switch the warnings off.
In short, the experience of motorists leads some at least to doubt the validity of the information provided by the authorities.
How do they know whether they can trust the accuracy of the information when they have been misled in the past? Alternatively, they can choose to believe it, but if it is actually false, they will suffer substantial inconvenience.
So, in the humble context of a “road closed” sign, we see some of the key issues which surround fake news on social media.
On a more cheery note, there have been numerous accounts of stranded drivers being helped by the local community.
A prominent example was in Rochdale, where vehicles were trapped on the M62, in winds over 90mph. One man was offering hot tea to motorists for £1 a cup. He was hardly profiteering. But even so, the volunteers were scandalised – they were providing tea for free.
This altruistic behaviour may seem to challenge the very basis of economic theory. In the popular view, economics sees people acting purely in their own self-interest.
Giving blood is a classic case often used to attack economics. Surely, it is argued, this is pure altruism. Certainly, all the adverts urging you to be a blood donor focus on this motive. Admittedly, you get a free drink and biscuit as part of the process. But the benefits from this can hardly be said to be worth the time and effort involved.
A fascinating paper published by the prestigious US National Institutes of Health in 2014 challenges the view that blood donors are motivated by pure altruism.
The Nottingham University psychologist Eamonn Ferguson did some neat analysis with a survey of blood donors. He examined a range of motivations, but the most important was what he described as “warm glow” altruism.
People who gave blood derived personal benefit from the positive emotional gains associated with donating.
We do not, of course, know whether the motorway helpers were motivated by “pure” or “warm glow” altruism. But economics can find things of interest even in the gloomiest situations.
As published in City AM Wednesday 7th March 2018
Image: London Snow by David Merrigan via Wikimedia is licensed under CC by 2.0
University lecturers began a strike over their pensions last week. The dispute may even run on and jeopardise the summer exams.
The main issue is that the universities’ pension scheme seems to be in substantial deficit. To solve the problem, a move from defined benefits to defined contributions is proposed.
With the former, the pension is a guaranteed amount each year. With the latter, the pension depends upon how well the assets which back it are performing.
Matt’s cartoon in the Telegraph brilliantly captured the reactions of many, as he so often does. Two dons are walking through a quadrangle, with one saying “if a philosophy lecturer went on strike and all his students slept through it, did the strike ever happen?”.
The more liberal elements of the media have been much more sympathetic. Lengthy interviews with the strikers and their grievances have been published.
These are illuminating.
A woman in her 30s, for example, complained bitterly that the uncertainty that the changes would bring to her future pension were creating so much stress she was barely capable of doing any work.
The life cycle theory of savings and consumption, favoured by many economists, would be helpful to her. Put simply, she should save more while young to draw more benefits when she is old. She, and others like her, could simply take out a personal pension scheme to boost their existing one. But this rational choice appears to have escaped her.
A lawyer in his early 40s conformed more closely to the paradigm of rational behaviour. He was very clear. It was the responsibility of his employer – the university – to provide him with a guaranteed income when he retired, so someone else could pay for his benefits.
The motives of many students are more difficult to discern. Many seem to be fervent supporters of high pensions for their teachers. This could be pure altruism, or it could just be stupidity – because they are the ones who will be paying for these pensions. They will be working when the lecturers have retired.
Pensions can only be paid out of the efforts of those currently in work. Even intelligent people, which for all their faults is a category which embraces many lecturers and students, often fail to grasp this basic fact.
Pensions provided by the state are funded out of taxation. Parts of many private pensions will be paid for by interest on government bonds, but taxes are needed to pay for this.
Pension assets invested in the stock market give rise to a stream of dividend payments. But these in turn depend upon the productivity and efforts of the labour force at the time.
An exception might seem to be a country such as Norway, which has used its oil assets to reap investments abroad. This just means the Norwegians have been smart enough to get foreign workers to pay their pensions rather than their own citizens.
A demand for a guaranteed benefit is nothing more than trying to hold a future generation to ransom. Only they can pay it.
As published in City AM Wednesday 28th February 2018
Image: The Graduates by Sakeeb Sabakka is licensed under CC by 2.0
Tomorrow, the Office for National Statistics (ONS) will publish its latest estimates on how much the UK economy grew between October and December 2017, compared to July to September.
Last month, the ONS thought that there was an increase of 0.5 per cent.
The economy cannot be put in a set of scales and measured. Total output, GDP, has to be estimated by the ONS. As more information comes in, the estimates change.
The numbers will be pored over, particularly in the context of Brexit. A revision down to 0.4, for example, would bring joy to Remainers.
A depressing feature of much of this kind of commentary is the lack of understanding it shows about the uncertainties which surround even the revised numbers. A revision of just 0.1 per cent tells us virtually nothing.
The United States is probably the world leader in economic data estimates. But the Bureau of Economic Affairs’ (BEA) view of growth rate of the economy in any given period can alter quite dramatically over time.
The financial crisis burst on the world in the autumn of 2008. Earlier that year in April, the initial estimate of the BEA was that the American economy had grown just 0.15 per cent in the January-March period over the previous three months. Pretty slow, equating to only 0.6 per cent if sustained over a whole year. But at least it was a positive number.
Now, the BEA believes that US GDP fell by nearly 0.7 per cent in that quarter, an annual rate of 2.7 per cent in fact.
In other words, America was already in a full-blown recession. If only policymakers had known.
This misplaced fetishisation of numbers is the subject of an intriguing article by Paul Johnson in the latest edition of the monthly magazine Prospect.
Johnson is the director of the highly respected Institute of Fiscal Studies (IFS), an outfit which lives and breathes economic and social statistics. But he has become concerned not only about how numbers have come to dominate policy debate, but about the illusion of knowledge which addiction to numbers has created.
His Prospect piece opens with the statement: “I trade in numbers and am passionate about them. But I have also learned to be very cautious in their company.” He offers guidelines to navigate the thicket of data which bombards us on a daily basis.
The first is to be aware of the limitations of statistics. An increase in crimes, for example, might be genuine, or it might just reflect an increase in the propensity to report a crime.
His second point is to take into account the broad picture, and not be seduced by the apparent precision and certainty conveyed by decimal places. GDP growth of around 0.5 per cent a quarter, for example, means that growth is sufficient to keep employment numbers up. It does not really matter whether it is 0.4, 0.5 or 0.6.
The limits to knowledge about economic and social systems is a constant theme of this column. The IFS is a very welcome convert to the cause.
As published in City AM Wednesday 21st February 2018
Michel Barnier invokes a wide range of emotions this side of the Channel.
To his credit, the EU’s chief Brexit negotiator appears to have a stronger grasp of the insights of game theory than his UK counterparts.
Thomas Schelling, the polymath winner of the Nobel Prize in economics, advanced the science of game theory in many ways. Funded by the US security forces at the height of the Cold War, Schelling formalised the concept of credible threats.
How could America convince the Soviet Union that, if necessary, it would launch a nuclear strike? This would have been a highly irrational act, and game theory is meant to be played by entirely rational people.
One way to do this is by brinkmanship, defined by Schelling as “the tactic of deliberately letting the situation get somewhat out of hand, just because it being out of hand may be intolerable to the other party and force his accommodation”.
This seems to be exactly what Barnier is doing. His draft document published last week includes a so-called punishment clause that would allow Brussels to ground aircraft and block trade if the UK failed to obey EU rules during the transition period.
The counter ploy to such an irrational move – which would harm the EU as well as the UK – is not to cower and capitulate. It is to play brinkmanship yourself.
A threat to, say, drop a tactical nuclear device on Hamburg would not work. This would be unbelievable.
But we could threaten to walk out of the talks all together. Several European countries such as Poland appear to be seriously concerned about this prospect.
But we need back-up material for this to seem like a real threat; Barnier has to think that we would really do this.
Much of the doom and gloom from the Remain camp is all about short-term economic prospects if we leave. Our negotiating team should make it clear that in the longer run the UK would be better off outside the grip of the central planning mentality of the European Commission, even if there were transitional costs.
The Markets in Financial Instruments Directive II (Mifid II), designed to offer greater protection to investors, is a perfect illustration.
Introduced at the start of this year, and at least seven years in the making, Mifid already runs to several thousand pages of regulatory requirements. In this mindset, both bureaucracy and rules can eliminate risk.
But it is so complicated that it is virtually beyond the powers of a human to grasp. Certainly, experts like Phil Treleaven at University College London believe that it is riddled with contradictions.
We do not need the madness of Mifid II. The EU is frightened of an innovative, lightly taxed UK, which embraces, rather than resists, the rapid pace of change in the world economy.
If the government really believed this itself, we could play brinkmanship to our heart’s content and run rings round Barnier and his cronies.
As published in City AM Wednesday 14th February 2018
“Pork barrel” has been a theme in American politics for almost as long as the United States has existed.
Many members of Congress work hard to secure public works projects, agricultural subsidies and the like for their own districts, almost regardless of the economic arguments for and against.
Surely the European commissioners would rise above such petty behaviour? After all, the European Union claims that they “represent the interests of the EU as a whole”.
It turns out that many of them have had their noses in the trough, both literally and metaphorically. A new scientific study shows that the agricultural commissioners have systematically over the years ensured that their own country receives more than its fair share of funding.
This cannot be dismissed as the product of some swivel-eyed Brexiteer. The findings are published in a paper in the latest issue of the American Economic Review (AER), probably the most prestigious academic economics journal in the world.
Kai Gehring of Zurich University and Stefan Schneider of Heidelberg find that “there is a significant positive relationship between the commissioners’ country of origin and the agricultural fund spending these countries receive during their terms in office”. Their highly sophisticated statistical analysis concludes that “this translates on average into about €850m per year for the country of origin of the respective commissioner”.
There are many anecdotes along the same lines. One which is very relevant in the light of the current Volkswagen emissions scandal is how, in 2007 and 2008, the German commissioner for enterprise and industry, Gunter Verheugen, repeatedly opposed a planned commission proposal to reduce new cars’ carbon dioxide emissions.
As Gehring and Schneider state, “his success in weakening the initial proposal was widely perceived as support for the German car industry”.
The current study is the first in-depth scientific analysis of the allocation of funds by the commissioners.
In economic terms, the Commission structure is a principal-agent one. The national government which makes the nomination is the principal, and the commissioner is the agent of the government. It would be surprising if their interests were not aligned to some extent, particularly since many commissioners want to return to political life in their own countries.
Tellingly, the authors note that they had to restrict their investigation to agriculture because “a lack of data and transparency” did not allow them to quantify the effects for the other directorates general. But it does not seem unreasonable to believe that they operate in a similar way to agriculture. The overall effect is to divert some €1.5bn a year to a few select countries, those which hold the big-spending portfolios.
The AER paper analyses almost three decades’ worth of data. So we might plausibly conclude that this has been going on ever since we joined the EU in 1973.
If we add back in the interest on the extra monies we have had to hand over as a result, even though the cost to us may be difficult to estimate, the study gives plenty of scope to come up with a big number.
As published in City AM Wednesday 7th February 2018
The Transport for London (TfL) bus experiment has proved to be overwhelmingly unpopular.
Supposedly at every bus stop (but more usually once the bus has pulled away) a disembodied voice informs the passengers that the bus is about to move.
The hated announcement is being run as a trial for four weeks. TfL will then evaluate its effect on the number of accidents on the buses themselves.
A conflict between individual and collective welfare is exposed by the reactions to the experiment.
Collectively, we do not want it to continue, but individuals have little incentive to stop it in an effective way.
For example, public spirited individuals could fall down and claim that this was due to the motion of the bus. The statistics would then show an increase in accidents. Even the most obdurate bureaucracy would find it hard to persist with the experiment
The “victims” would bear costs as individuals, such as the time spent reporting it, plus the risk they might actually injure themselves. But they would create a benefit for everyone else. The voice on the buses would be switched off.
The concept of the winners compensating the losers has been a fundamental principle of economic theory for at least 100 years. It is important in public policy making, in the cost-benefit analysis which is carried out to decide whether a public infrastructure project should go ahead.
This is the rationale for the soon-to-be-abolished tolls on the Severn crossings, for example. The users benefit from a much-reduced travel time, but the non-users lose by having to pay taxes to build the bridge in the first place.
In general, the problem with implementing this in full is that the gainers are small in number relative to the losers. They tend to object vociferously to the charges levied on them, so that they rarely pay the full amount of their benefit to compensate everyone else.
With the bus scheme, the reverse is the case. Large numbers benefit from the ending of the scheme, and only the small number simulating an accident would lose.
But a public body such as TfL could hardly be expected to set up a scheme which would undermine its own experiment.
We might then ask why a market has not emerged to compensate those willing to simulate a fall. In a market, individuals could be paid the full costs they incur.
With social media, setting up such a market would be easy. But there would be two main problems.
The first is that of trust. How would participants be reassured that the relevant monies would be paid? The issue of institutional trust is a fundamental reason why markets are difficult to set up in many contexts.
There is also what economists call the free-rider problem. How many of those who dislike the voice would simply leave it to others to make the payment? There would be no coordination mechanism for ensuring that everyone paid.
Annoying though it may be, the bus experiment shows that even everyday issues often raise fundamental aspects of economic theory.
As published in City AM Wednesday 31th January 2018
A strong thread in the acres of print about the Carillion debacle is that the private sector should not really be involved in infrastructure projects. The public sector would, apparently, do it better.
Readers who experienced life under the nationalised rail and telephone systems might be forgiven their scepticism.
One idea which is taking hold is that the government can borrow more cheaply than any private company, so it must be more effective for the state to carry out major infrastructure projects.
The interest rates at which different outfits can borrow are plain for all to see. But they are just the tip of the iceberg. We need to look below the surface to see the real economic argument.
Philip Booth of the Institute of Economic Affairs set it out clearly at the weekend. People will lend money to the UK government more cheaply than to a company mainly because the risk of default is much lower. Indeed, the British state has not defaulted on its debts for well over 300 years.
But the risk of an individual project failing may be considerably higher. The huge overrun of costs on the Aberdeen bypass, for example, was one of the reasons for the demise of Carillion.
If this happens to a company, it can go under. The government simply passes the unforeseen costs onto the taxpayer.
The general rate at which the government can borrow does not reflect the true level of risk on a specific project. Ideally, the voters who ultimately pick up the tab would understand this, but in practice it is not spelt out to them. There is an information failure.
All this said, there is a strong argument for bringing some key aspects of economic life back under public sector control.
Central banks are by far the most important example. In the 1990s, mainstream macroeconomists pushed the idea of independence for these banks, and it took hold. One of Gordon Brown’s first acts as chancellor in 1997 was to make the Bank of England independent.
All sorts of benefits were meant to flow from this. But it is hard to discern any of them in practice. The Bank conspicuously failed to head off the financial crisis of the late 2000s. And once the crisis had hit, its initial response was to worry about the esoteric theoretical concept of “moral hazard” rather than saving capitalism.
If the chancellor gets things wrong, the government can be booted out. The Monetary Policy Committee can’t be.
If MPs wanted to change this and take back control, a precedent has been set. The Highways Agency was set up as an executive agency in 1994. But in 2015, the coalition re-constituted it as a company owned by the government.
In practice, transport ministers do not seem to have exercised much control over it. There is an ongoing shambles, for example, with road works both on the M6 north of Birmingham and on the M60, Manchester’s equivalent of the M25.
But in principle they could. It is time to restore control to elected politicians. To, in a word, renationalise the policymaking bodies.
As published in City AM Wednesday 24th January 2018
Image: Carillion by Terry Robinson is licensed under CC by 2.0
Companies and service providers are no longer allowed to charge customers for using a credit or debit card. The new law came into effect last Saturday.
The economic secretary to the Treasury, Stephen Barclay, trumpeted: “rip-off charges have no place in a modern Britain and that’s why card charging in Britain is about to come to an end.”
It all sounds good. But far from reflecting well on the government, it calls into question just how much a so-called Conservative administration understands the workings of market economies.
One immediate effect of the new law is that it is no longer possible to pay your tax bill online direct to HMRC. The relevant part of their website proclaims “you won’t be able to pay with a personal credit card from 13 January 2018”.
Exactly at the time when people are coughing up, a new regulation designed to benefit the consumer has made it harder for them to pay. In economist-speak, this reduces consumer welfare.
Many retailers, especially the large ones, will of course simply find other ways of passing the costs on. Just Eat, for example, has introduced a 50p service charge on all orders. Previously, the company added a 50p charge to card transactions. But now all customers will have to pay it. Other retailers will just add the odd bit here and there so that no-one will really notice.
The fundamental point is that, ultimately, only individuals can pay taxes and charges.
Even if a retailer chooses to absorb the fee and not pass it on, this leaves less money for its other commitments. Such as money for wages, dividends to shareholders, and payments to suppliers.
Credit and debit charges seem to attract bad legislation. A change introduced in 2015 has probably made consumers worse off overall. In this case, the blame can safely be laid at the door of the EU. It was their regulatory requirement.
The card schemes such as Visa and Mastercard charge card companies such as Barclaycard and Capital One a fee. This “interchange” fee is a sort of royalty. It is just a fee for being part of the big scheme, not for any sort of processing.
There is a genuine market in operation here, because the card companies can switch schemes. There was a wide variety of fees, such as a fixed percentage of the transaction being financed, with and without a maximum cap, and fixed amounts.
But through competition, high value transactions such as car purchase or tax payments had tiny percentage fees.
The EU in its wisdom capped the interchange fee at 0.2 per cent of the transaction value. But just as universities have all charged the maximum student fee set by the government, the interchange fee is now very frequently set at the maximum 0.2 per cent.
So car buyers, for example, lost out by having a much bigger fee passed on to them.
The urge to meddle unthinkingly in micro detail, without grasping that this will change behaviour, is a besetting sin of modern politicians.