In the days of the old Soviet Union, so-called Kremlinologists would pore over every utterance of the Politburo, every sentence in Pravda, to try to work out what was really going on.
Sajid Javid’s defenestration from the Treasury has led to an upsurge in similar types of intellectual effort here. What was it really all about?
The Treasury, as the guardian of the public finances, has had a conservative line on spending since time immemorial. Keynes railed against it way back in the 1930s.
But the more orthodox thinkers within the Treasury suffered a substantial defeat last September, when Javid himself introduced the autumn Spending Review. The increase planned in 2020/21 for what the Treasury calls “day-to-day departmental spending” (which covers the running costs of public services) was the highest for 15 years, at 4.1 per cent in real terms.
True, by keeping the squeeze on benefits, the planned increase in total public spending was only 2.0 per cent after inflation. But even this meant that public spending was envisaged to grow faster than the economy as a whole.
If that was a win for the government, the Treasury then won a big victory by slipping its chosen man in as governor of the Bank of England.
Despite the smokescreen of alternative names put out during the long process of selection, it is unlikely that the Treasury ever had any intention of allowing anyone other than Andrew Bailey, a career public servant, into the Threadneedle Street job. More innovative thinkers such as Andy Haldane, chief economist at the Bank, and Gerard Lyons, a distinguished Brexiteer economist, lost out.
But this particular game seems to be the best of three — and it looks like the Treasury will lose.
Political economy demands that spending in the newly blue north of England not only be increased, but be seen to increase. Javid subsequently proved somewhat reluctant to open the spending taps too far, and has now been replaced by Rishi Sunak, a close ally of the Prime Minister, with his team expected to work more closely with Number 10.
In principle, a substantial relaxation of the controls on infrastructure spending seems justified. Interest rates are now so low that the British government can borrow for 20 or 30 years at a one per cent rate.
Even taking a reasonably pessimistic view, this is lower than the sustainable annual growth rate of the real economy in the longer term. So extra spending can indeed be paid for by the proceeds of growth.
Moreover, after sharp rises during the financial crisis of the late 2000s, the ratio of public sector debt relative to GDP was stabilised and has now been flat at some 85 per cent for the past six years. True, there must be some risk that the markets will eventually lose confidence and interest rates rise as a result. But here, it is perception and narrative which matters at least as much as objective economic statistics.
Boris Johnson’s election victory not only moved the nation on from Brexit wrangling, but inflicted a punishing defeat on the forces of socialism personified by Jeremy Corbyn. In image terms in the markets, the government is riding high.
A big increase in spending will be greeted with equanimity. The Treasury has lost this one.
As published in City AM Wednesday 19th February 2020
Image: HM Treasury via Wikimedia licensed for use CC BY-SA 2.0
Last week, the entire world witnessed the shambles of the vote counting in the Iowa Democratic caucus.
It should have been straightforward — but adding all the votes up in a consistent way took a whole week.
The list of errors is as long as your arm. In some precincts, for example, the total number of votes reported exceeded the number of eligible voters. But the main source of the problem seems to have been a mobile phone app that the Iowa Democratic Party used to collect results from caucus sites.
A system was in place which had stood the test of time through many election campaigns. But it was old-fashioned. It needed to be “modernised”. Hence the app.
Many layers of modern management share this obsession with technology for technology’s sake.
Financial institutions, for example, are fixated on apps: apps to manage day-to-day expenses, apps to help manage investments, apps to boost savings for your old age.
No doubt some of these have their uses. But the idea that apps can make major changes to the behaviour of individuals, and therefore drive productivity and prosperity, is something of a pipe dream.
As a further example of technology’s counter-productive impact, consider an elderly relative of mine who is in a care home. On entry, you used to sign the visitors book and enter the time of arrival; on exit, you put the time you were leaving — with a pen. A new computer system has been installed. It takes several times longer to enter these details. As far as I can judge, virtually no visitors use it.
Nobel laureate Bob Solow famously pronounced 30 years ago that “you can see the computer age everywhere but in the productivity statistics”.
In the 1980s, the decade to which Solow was basically referring, personal computers and fax machines were the cutting-edge of new technology. It seems like the Stone Age compared to the technology available to us now. Yet Solow’s problem remains.
Productivity growth was very low during the most recent decade, despite the massive advances made in technology. There are clearly many reasons for this. But one of them is, quite simply, that technology is often being introduced in situations where it is quite unnecessary. As a result, people become less rather than more productive.
More generally, new technology is proliferating in areas where the potential productivity gains are not that high. For example, it is convenient when buying a round of drinks to be able to tap your card rather than delve into your pockets for loose change, but it is unlikely that this innovation enables more drinks to be sold in any given pub or bar.
Similarly, self-service checkouts in supermarkets help avoid standing in long queues, but these rely on customers being willing to supply their own labour for free, rather than requiring paid staff to scan the goods for them.
The Iowa app incident is a source of amusement, but it may be telling us something more profound about why productivity growth remains low. New technology is being applied when it is simply not needed.
As published in City AM Wednesday 12th February 2020
Image: Iowa State Line via Flickr by Tony Webster licensed for use CC BY 2.0
Universities and their students are seldom out of the news. Ever since Tony Blair pledged to send 50 per cent of 18–21 year olds to university, they have been a persistent topic in political economy.
University towns now notoriously favour Labour at the ballot box, often an island of red in a surrounding sea of blue. One of the few rational policies of Jeremy Corbyn in the last election was the commitment to write off student debt. It was an excellent way for him to gather votes.
A key argument put forward for increasing student numbers was the existence of the “graduate premium”. Over their working lives, graduates earned more than non-graduates, so the expansion of universities would be positive for both individuals and the economy.
Quite a few commentators at the time argued that this rise in graduate supply was unlikely to be met by a corresponding surge in demand. The graduate premium would therefore not persist, certainly not for the lower ranked universities. Why pay extra for something which is in excess supply?
This is exactly how it has turned out. Many graduates end up in mundane, low-paying jobs. The Office for National Statistics shows that 31 per cent of graduates have more education than is required for the work they are doing.
And what about the 50 per cent of the age group who do not go to university? It is ironic that the left-wing parties shed tears for indebted university students, who in general have more privileged backgrounds. They have little to say about the rest.
All school leavers at 16 must now stay in some form of education until 18. Most attend a further education (FE) college, often combining this with a part-time job.
A lot is heard not just about universities but about the impact of “austerity” on schools. But within the education sector, it is the FE colleges which have experienced the greatest cutbacks since 2010.
Here is a great opportunity for the government to both increase the level of human capital in the economy and be seen to be delivering for the “left behind”. There are already rumours that the chancellor is planning a big increase in spending on FE in the March Budget.
Investment in university students has gone well past the point of diminishing returns. In contrast, the neglect of the FE sector offers the chance of getting a real return on increased spending.
The obvious beneficiaries will be the young people who do not go to university. With extra skills, they can earn an “FE premium”. It may be modest, but being able to earn even £10 an hour instead of the minimum wage makes a big difference to the individual concerned.
There could also be major benefits to the economy as a whole. The UK is notorious for the so-called “long tail” of productivity. Many SMEs have low productivity levels, so increasing the quality of the labour available gives them the chance to address this problem.
Big spending increases on FE colleges, and less attention to universities, are win-win for the government.
As published in City AM Wednesday 5th February 2020
Image: Graduates via Flickr by Sakeeb Sabakka licensed for use CC BY 2.0
It is a truth which has rapidly become universally acknowledged (to borrow Jane Austen’s famous phrase) that the government must deliver for its new supporters in the regions.
This is a massive challenge. The gap in income per head, for example, between London and other areas of the country is obviously large. But the firm trend has been for this difference to widen, rather than narrow.
Between 1997 and 2017, income per head, after allowing for inflation, rose by around 17 per cent in both the north east and the north west — just under one per cent a year. In Wales, another area where the Conservatives made big gains, the overall increase was a mere 11 per cent. In contrast, in London it rose by 42 per cent over these two decades. In inner London, the increase was no less than 56 per cent.
But that’s only half the picture. To fully understand what is going on, we need to look within the regions themselves. Manchester provides a perfect illustration.
In the mid-1990s, within half a mile of the city’s main rail stations was a bomb site. Not a site created by a contemporary IRA outrage, but by the Germans in the Second World War. In the subsequent 50 years, no one had thought it worthwhile to develop a piece of land in the centre of a major English city.
How times have changed. The total resident population of the city centre is now 80,000. Manchester has been totally transformed. The skyline has altered just as dramatically as that of central London.
The economic structure of central Manchester has come to resemble those of the inner London boroughs.
The Office for National Statistics provides detailed data on the numbers employed in each industry for every UK local authority. Turning these into percentages, I used some fairly straightforward maths to work out which local authorities have an industrial structure most similar to that of Manchester.
The answer is urban areas like Camden and Islington in London, and other major regional cities such as Bristol and Leeds. None of the nine other boroughs which make up the Greater Manchester region look remotely like the city centre itself.
The same is true of other English cities such as Newcastle and Leeds. The types of jobs on offer are quite different from those in the surrounding hinterlands.
The cities voted for Labour with massive majorities. It was in their satellite areas where the Conservatives triumphed.
The story looks the same from whichever level of geographic aggregation we look. Comparing the regions of the UK, London is much richer than the rest. Within individual regions, the main city is much richer than the rest.
It is easy to see why this happens. Once an area starts to become more attractive for business, other firms increasingly see it as a place to locate. Skilled people want to both work and live there. A virtuous circle is created, and the area pulls away from its surroundings.
If the government really wants to level up the country, it will need to be really imaginative to avoid falling into this trap.
As published in City AM Wednesday 29th January 2020
Image: Manchester vis Flickr by Zuzanna Neziri licensed for use CC BY 2.0
Last week, health secretary Matt Hancock signalled an important change of strategy.
Accident and Emergency Departments have a target that 95 per cent of patients should be admitted, transferred or discharged within four hours. Hancock suggested that the target will be scrapped. Instead, wait times will be determined by clinical need.
Cue predictable hyperbolic outrage. The president of the Royal College of Emergency Medicine, for example, claimed that this change would have a “near-catastrophic impact on patient safety”.
The NHS is not meeting the target by a long chalk. In December, the actual figure assessed within four hours slipped to under 70 per cent.
A key reason seems to be increased demand for A&E services. Since the Conservatives came to power in 2010, admissions have increased by almost 25 per cent.
It is inherently implausible to imagine that cases of genuine emergencies have risen by this amount. Road casualties, for example, far from increasing, have actually fallen by 24 per cent since 2010.
There is much anecdotal evidence to suggest that people are bypassing GP surgeries and turning up at A&E with trivial complaints. Perhaps GPs are so oversubscribed that people who cannot get appointments go to hospital instead, or maybe limited out-of-hours care means that patients feel they have little choice if they fall ill at weekends.
But regardless, the lengthening waits indicate excess demand for A&E care. Some form of rationing is necessary to allocate resources and to decide who gets treated.
There are two ways to ration. One is by price — whoever is willing to pay the most gets dealt with first. The other is by queue.
Even the most hardline free marketeer would surely balk at the idea of making people involved in genuine accidents wave their credit cards. So queue it has to be. And in such circumstances, it is entirely appropriate that decisions on who to treat first should be made on clinical grounds rather than a purely arbitrary target on the length of wait.
This controversy demonstrates the wider problem with setting targets: sooner or later (and usually sooner), people work out how to game them.
In A&E departments, once a patient has waited more than four hours, they have zero priority. The hospital incurs no more downsides if the wait is 14 hours rather than four hours plus a single minute.
We see this in other sectors too. Schools can, for example, meet exam targets by getting rid of weaker students — hardly what the target was designed to achieve.
And the Windrush scandal had its origins in the Home Office targets for the numbers to be deported. Officials could have tried to track down members of eastern European criminal gangs. Instead, they focused on the seemingly easier task of deporting elderly people who had lived in Britain for decades. They worked out how to meet the targets by minimising their effort.
Examples of gaming the system proliferate. Hancock is to be applauded for taking the first step to dismantle the culture of bureaucratic, counter-productive targets.
As published in City AM Wednesday 22th January 2020
Image: Ambulances outside A&E Department by D-G-Seamon via Wikimedia licensed for use CC BY-SA 2.0
The job advert issued by Dominic Cummings for people to work in government has attracted a wide range of comments. One particular focus has been on the sorts of skills he is looking for.
Computer science, forecasting, artificial intelligence, causality theory — all these topics excite his interest. Cummings advocates a small selection of scientific papers with which applicants should be familiar. He believes that humanities graduates are unlikely to be aware of them.
The papers are indeed quite challenging mathematically. Even the smartest arts graduate might struggle to cope with their content simply because of the language — maths — in which they are written.
The implication is that those with expertise in the humanities need not apply. Indeed, economics is conspicuous by its absence from the now notorious reading list.
I can empathise with his focus on the hard sciences. But economics does have one very powerful, general insight into behaviour that Cummings should heed. In fact, everyone — whether working in the civil service, think tanks or university social science departments — should be familiar with it.
It is, quite simply, that agents respond to incentives. When the set of incentives faced by an individual, a company, or a government changes, behaviour changes too. Different decisions are made as a result.
Two snippets of recent news, chosen almost at random, can illustrate the power of the concept.
Beggars have started to travel from Glasgow to Carlisle to ply their trade. In Scotland, the penalty for aggressive begging is up to a year in jail and a £5,000 fine. In England, it is only a £1,000 fine. These facts are sufficient to explain why Carlisle has become more attractive.
On a note that will be more relevant to most people, more than a million people a month now fail to turn up for GP appointments. From June to November last year, a record 7.8m patients did not attend.
This bad behaviour imposes extra costs on the NHS and makes it more difficult for people who really need to see a GP to get appointments.
A simple solution is to charge for visits to the GP surgery. It would not eliminate the problem, but it would make a big difference. Once having paid, people would be much more likely to turn up.
Any proposal to introduce charges in the NHS causes the left to froth at the mouth. The standard argument is that charges would deter poor people from accessing healthcare.
It does not seem to do so in countries such as Ireland and Sweden. Both charge people to see their doctors. The impact is mitigated in the former by an annual cap on charges, and in the latter low-income people can visit for free. Other EU countries have similar schemes — in France, the principle of health services is pay upfront, get reimbursed later.
It is not necessary to believe that people act in a completely rational way all the time. They obviously don’t. But incentives work. Empirical examples of the principle can be found every day, in every situation.
A simple, sensibly designed set of incentives is worth a tonne of regulation. A clear understanding of this principle should be the key thing Cummings considers when hiring a new set of government “weirdos” to shake up the civil service.
As published in City AM Wednesday 15th January 2020
Calling all employers: what was in your Christmas stocking? Did you find the latest gadget designed to enhance productivity?
The innovative device, featured in the media during the festive season, is a toilet with a downward sloping seat. The company which makes it, StandardToilet, has conducted extensive tests. A slope of 13 degrees is exactly the right tilt to make workers feel miserable without causing any lasting pain.
This way, it is alleged, staff will spend less time on the lavatory and more on their work. Output per worker will rise.
The very slow growth in productivity, the shorthand word for “output per worker”, was a defining feature of the past decade. Typically, productivity in the UK grows by around two per cent a year. During the latest decade, annual growth was barely above zero, at 0.3 per cent a year.
Higher productivity growth means that real wages can increase faster. Bigger pay packets mean more tax receipts for the government, so spending on public services can also rise.
Clearly, productivity growth needs to be boosted. But contrary to the claims, devices such as the sloping toilet may be one of the problems rather than the solution.
Recent years have seen a surge in technical innovations designed to control in ever more detail the tasks which workers perform. This is particularly the case at the lower end of the pay scale — think of warehouse jobs, delivery services and the like.
This ultra-micromanagement of time is intended to increase productivity. Its side effects include high employee turnover, resentment, and sheer bloody mindedness.
Why bother to make even the slightest bit more effort than your contract specifies under such conditions? Especially when, with the UK at full employment, you can walk into an equally crap job just down the road the very next day.
Nobel laureate George Akerlof addressed these issues in a famous paper 40 years ago entitled “Labor Contracts as Partial Gift Exchange”.
It was stimulated by a study which found that a group of women in a low-level, routine job exceeded the minimum work standards of the firm by an average of 15 per cent. This could not be explained by the standard economic theory of rational behaviour.
A key point for Akerlof was that the women did not work in isolation from each other. They interacted. He argued that, through these interactions, the workers acquired sentiment both for each other and for the firm. As a result, a situation developed which depended on the “norms” of gift exchange.
On the workers’ side, the “gift” given was work in excess of the minimum work standard. On the company’s side, the “gift” was wages in excess of what these women could receive if they left their current jobs.
The new tools of time and task micromanagement do the opposite. They are counter-productive, ensuring that virtually no employee will do more than the absolute minimum required by the contract. Why not try fur-lined, heated lavatory seats instead?
As published in City AM Wednesday 8th January 2020
Behavioural economics — which extends the ability of economics to explain the world — has become very fashionable.
Richard Thaler, Nobel Prize winner for his work in this area, observed that most of the time, the rational choice model of standard economics works well. People gather information on the various alternatives open to them, and choose the one which fits their preferences most closely.
Behavioural economics comes into play when people are observed to deviate from the predictions of this model. To explain this, Thaler points out that economists borrow bits from psychology and add them on to their basic rational choice theory. He has shown how various psychological concepts, such the so-called “endowment effect” and the “sunk cost fallacy”, can be used to explain why people make irrational choices.
Yet one important piece of psychology which economists have not used so far is the concept of cognitive dissonance.
The US psychologist Leon Festinger encountered a classic example when he infiltrated a group which believed that a catastrophic flood would end the world on 21 December 1954. The appointed day came and went, and the world was still there. Rather than processing this information rationally and abandoning their discredited beliefs, group members adhered to them even more strongly. The fervour of their proselytising increased.
Another important instance is seen in the Ukrainian famine of the early 1930s. On Stalin’s instructions, the Soviet military and armed members of the Communist Party seized the grain in the Ukraine. Millions died as a result.
The ardent young Communists turned on the Ukrainians and accused them of terrorism. The peasants were, despite all the evidence to the contrary, deliberately starving themselves to death in order to discredit socialism. Any Party member who disagreed was shot.
A much less harrowing example is given by Jeremy Corbyn and his cult during the General Election here.
The Friday before polling day, I was in my home town of Rochdale, having a drink with a couple of long-standing friends, both very experienced local Labour members. They were certain that Labour would lose. Brexit was certainly being mentioned on the doorsteps as a reason why voters weren’t supporting Labour, but the main reason was Corbyn.
My friends made specific predictions on the basis of rational analysis of the evidence. The neighbouring seat of Heywood and Middleton (majority 8,000 in 2017) would be lost. It was. Elsewhere in Greater Manchester, the Tories would win Leigh, Labour since 1922. They did.
Information of this kind, gathered on the ground by experienced agents, was fed back to the Labour leadership throughout the campaign from all over the country. It was pointedly ignored, possibly on the grounds that the informants were right-wingers trying to discredit the Dear Leader.
The electorate took some time to discover the reality of Corbyn. But once they had done so, far from displaying cognitive dissonance, they made a rational choice.
Now Labour, if it is ever to recover from defeat, should learn the same lesson.
As published in City AM Wednesday 18th December 2019
It would take a heart of stone not to be amused by Emmanuel Macron’s current predicament.
The French President is trying to position himself as the leader of Europe. But at the same time, the streets of the major cities in France are, quite literally, ablaze. France’s public services are crippled by the biggest strike in decades.
The reason is the massive unpopularity of Macron’s proposed reforms to public sector pensions.
The retirement age in France is still only 62, compared to 66 in the UK. In general, the proposal is not to increase the age, but to pay slightly reduced benefits before the age of 64. However, the most contentious part is to modify or even scrap completely the scams under which many public sector workers get to retire much earlier on full pension.
France faces a serious pension funding problem. Spending on pensions costs no less than 14 per cent of the country’s GDP. Only Greece and Italy are higher in the entire developed world.
That is probably why opinion polls put support for these reforms among the population as a whole at around 70 per cent, with even greater support among the young, even if many from the minority directly impacted have taken angrily to the streets.
Still, pension reform is known to be potential political dynamite — and not just in France. Raising the pension age for women has become an issue in the current General Election here.
The Women Against State Pension Inequality (WASPI) campaign argues that when the retirement age was raised for UK women in a series of reforms, the 3.8m affected women, born in the 1950s, did not have enough time to adjust.
Despite that fact that this is not mentioned in Labour’s manifesto, John McDonnell has pledged to compensate these women. The cost is a mere £58bn — around three per cent of GDP — almost all of which would need to be borrowed.
As it happens, considered purely in isolation, a reasonable case can be made for increasing the general level of the basic state pension in the UK. Pension costs here are below the OECD average as a percentage of GDP, at only half the level of France. But this would not be a free lunch. Other aspects of public spending would have to be correspondingly reduced.
The myth persists that people are investing in a funded scheme with their taxes. They pay the money in when they are working, the investments grow, and there is a pot earmarked for them at their retirement. In reality, the cost of paying an individual’s pension falls entirely on those who are working during his or her retirement.
For anyone in work, the government’s promise of a pension in the future is rather like a slightly dodgy IOU. The amount you will end up getting depends upon how fast the economy grows over the coming decades, how long people live, and ultimately on the generosity of those in employment when you retire.
Political debates on pensions are usually rather depressing for economists because of either the inability or the reluctance to understand this point.
Much as it sticks in the throat to say so, President Macron is to be admired for the stance he is taking.
As published in City AM Wednesday 11th December 2019
Image: President Macron protests by Jeanne Menjoulet via Wikimedia licensed for use CC BY-2.0
An important piece of social news emerged last week. According to the Office for National Statistics, the divorce rate in 2018 fell to its lowest level for nearly 50 years.
The overall trend is clear and well-established. The divorce rate rose steadily from the late 1950s, with sharp rises immediately following the Divorce Act of 1969, to the early 1990s.
Since then, with minor blips, the rate has fallen. It now stands at just over half the level of its 1993 peak.
Economic theory has a lot to say about marriage and divorce.
This may be surprising to many. But economists believe that the theory’s basic model, that of someone making a rational choice from the alternatives on offer in any given situation, is universal in its application. The institution of marriage is a key social phenomenon, and so the rational choice model ought to be able to give an explanation as to why it exists.
The Chicago economist Gary Becker received the Nobel prize in 1992 for his pioneering work in this area. Essentially, the participants in a marriage reap what economists see as the gains from trade. One partner goes to work and earns money, and the other raises children and does housework. By each concentrating on the activity which he or she does better than the other, both parties benefit.
Implicitly, Becker took as the social background to his theory the institutional structure of marriage and the family as it existed in the Midwest of the USA in the 1950s. Gender roles have certainly evolved since then, but his basic insights remain valid.
A much more general theory of marriage is linked with the work of economists such as Bob Rowthorn, former head of the Cambridge economics department.
In this approach, marriage is seen as an institution for providing couples with the confidence to make long-term investments in their relationship. The basic theme is that marriage should be seen as an institution for creating trust between individuals in the sphere of family life.
Given this emphasis on both trust and the long term, it is curious that many metropolitan liberals, not least Supreme Court justice Lady Hale when she headed the family courts, appear to see marriage as no better than any other form of family structure.
The empirical evidence overwhelmingly supports the special value of marriage for the individuals concerned, for their children, and for society. Indeed, there are few hypotheses in the social sciences which receive such clear confirmation from serious research.
For example, most children grow up to be useful and well-adjusted members of society regardless of family structure. But the incidence of crime and mental illness among children whose parents have divorced, while low as a proportion of all such children, is much higher than it is among those whose parents remain married.
The falls in the divorce rate can be seen as rational learning by the generation who were children themselves when divorce was at its peak. They see the costs imposed on them. And society as a whole will reap the benefits in years to come.