Natalie Twisleton-Wykeham-Fiennes: don’t you just love her? One of the Black Lives Matter campaigners, our Nat caused chaos by occupying the runway at London City Airport, on the grounds that climate change is racist.
She and eight others, including a former member of the Oxford University Croquet Club, were sentenced by the courts last week. For many, their punishments were derisory: token fines and suspended prison sentences.
Would harsher treatment deter future protests like this and the one which disrupted Heathrow last month? Anecdotal evidence suggests it would.
In the town where I grew up, nestling in the foothills of the Pennines, the police would often drive miscreant youths late at night to remote hamlets up on the moors and make them walk home. It helped if it was raining, which it usually was. The more recalcitrant were likely to discover that the damp made the steps of the local police station unusually slippery. Compared to today, crime was low.
But this is mere causal empiricism, and there is a vast academic literature on whether or not harsher punishments deter crime. As a broad approximation, criminologists themselves tend to be sceptical about the impact of punishment as a deterrent.
A few years ago, I was at a seminar on the topic in which a criminology professor at Middlesex University asserted, without a trace of irony, that crime was caused by capitalism. In contrast, economists, who believe that agents respond to incentives, often claim that deterrence works.
Economists base their conclusions not just on theory, but on statistical analysis of detailed databases. Even so, the results might not be straightforward to interpret. For example, if prison sentences are increased and we see a fall in crime, is this because potential criminals are deterred, or because prolific criminals are in jail and can’t commit crimes?
Francesco Drago and colleagues published an influential paper in the Journal of Political Economy in 2009. They exploited the natural experiment provided by the Collective Clemency Bill passed by the Italian Parliament in July 2006. This provided for an immediate reduction of three years in the sentences of existing inmates, and as a result 22,000 of them were released. But if they re-offended, they had to serve all the suspended time, plus whatever extra they were given.
The study showed decisively that an additional month in expected sentence reduced the propensity to re-commit a crime by 1.24 per cent. Steve Levitt, in his bestseller Freakonomics, described similar results obtained by smart analysis of American data.
Perhaps the way forward is to experiment with another fundamental concept in economics, that of externalities. Twisleton-Wykeham-Fiennes believes that flying, while convenient for the individual, imposes costs on others through its negative impact on the climate. Other people bear these costs, which are external to the benefits to the person flying.
The airport protests inconvenienced many others. So the fines should be in proportion to the external costs created by the crime. The assets of the well-heeled protestors would vanish in a trice. Anyone for this natural experiment? Future Twisleton-Wykeham-Fienneses might prefer croquet instead.
As Published in CITY AM on Wednesday 21st September 2016
Who will win the US presidency?
Opinion polls have got a bad name in Britain, at least. During the 2010 general election campaign, many suggested that Gordon Brown could still continue in power in a minority government or coalition. The polling record in the 2015 campaign was even worse. Most polls showed the two main parties neck and neck, and even the exit poll on the day did not predict the overall majority achieved by David Cameron.
Conventional, survey-based polling is encountering fundamental problems, and they’re not confined to the narrow area of trying to discover political opinions. They are much more general. Household surveys are the source of a wide range of statistics which guide policy, such as official rates of poverty, inflation, and, in the United States, unemployment rates and health insurance coverage. They are also a primary source of data for a lot of economic research.
But an article on their accuracy by Bruce Meyer of the University of Chicago and his colleagues in the Fall 2015 issue of the prestigious Journal of Economic Perspectives concludes starkly that “the quality of data from household surveys is in decline”. The title of the paper says it all: “Household surveys in crisis”. Households have become less likely to answer surveys at all, those that do respond are less likely to answer all the questions, and their answers are becoming less accurate.
In the US government’s consumer expenditure survey, for example, non-response rates have risen from 15 per cent in the mid-1980s to 35 per cent now. In surveys designed to measure poverty, 25 years ago between 10 and 20 per cent of respondents failed to answer all the questions, but this “item non-response” rate is now as high as 40 per cent.
In a lengthy discussion, the authors point out that it is difficult to pinpoint exactly why these things have happened, precisely because any survey designed to answer the question would itself be unreliable! But they suspect that an important reason is because “talking with interviewers, once a rare chance to tell someone about your life, is now crowded out”. People have so many opportunities to give feedback via email and social media that they just cannot be bothered with conventional surveys.
These trends create formidable problems for polling organisations in trying to correct for any biases which might exist in any particular survey or sample. Adjustments to a sample which might have worked 20 years ago to give an accurate picture of the population as a whole no longer have the same validity. This is exactly the problem that the political pollsters in the UK have encountered.
Against this background, what are we to make of the opinion polls in the run up to the American presidential election?
On the face of it, Hillary Clinton does seem to have a small lead over Donald Trump, but her margin is narrowing. Perhaps the most scientific prediction would be to just toss a coin.
As published in CITY AM on wednesday 14th September 2016
Image: Hillary Clinton by Roger H. Goun is licensed under CC BY 2.0
Sports fans will all be familiar with the commentator who almost always gets things wrong. “Arsenal are very much on top here” he – it is invariably a “he” – will pronounce, or “Root is looking very settled”, only for the opposition to score a goal immediately and for the Yorkshireman to be clean bowled. In economics, a similar role is played by the International Monetary Fund (IMF).
In the middle of July, Remain fanatics had a field day. “The IMF has slashed its forecasts for the UK economy for next year after Brexit”, crowed the Financial Times. Maurice Obstfeld, the Fund’s chief economist, claimed that Brexit “has thrown a spanner in the works”. Global growth projections for 2017 were cut back, but most of all for the UK.
But on the first day of September, the IMF was forced to admit that growth in Britain had, in a splendidly bureaucratic phrase, “surprised on the upside”. On the same day came the news that manufacturing activity in August had posted its biggest monthly rise in 25 years. On Monday this week, the Markit purchasing managers’ index for the service sector registered the biggest monthly increase in its 20 year history.
The IMF has real form. In 1998, East Asia was experiencing a major economic crisis. Yet in May 1997, the IMF was predicting a continuation of very strong growth in most countries for the year ahead: 7 per cent for Thailand, 8 per cent for Indonesia and 8 per cent for Malaysia. They revised the projections down by December, but even these proved wildly optimistic, as the economies collapsed during 1998, registering a fall in output of over 15 per cent in Indonesia, for example, worse than America in the Great Depression of the 1930s.
Macroeconomics is the study of variables such as GDP which describe the economy at the aggregate level. Since the 1980s, it has been dominated by the concept of equilibrium. Highly mathematical models have been developed, resting on the premise that the economy can correct itself and absorb any shocks. Olivier Blanchard, the IMF’s previous chief economist, was a great enthusiast for this project. In August 2008, he published a paper which concluded with the claim “the state of macroeconomics is good”. Three weeks later, Lehman Brothers collapsed.
Apart from the European Commission itself, the IMF has been probably the biggest cheerleader for the euro. Since the inception of the single currency in 1999, a whole series of statements and technical articles from the IMF has eulogised its mystical benefits. At the end of July this year, the IMF’s own Independent Evaluation Office (IEO) was totally scathing of the Fund’s record on this. The top staff became impervious to other points of view and ignored warning signs of the financial crisis. In their view of the world, it simply could not happen.
The IMF exercises enormous influence and power. Yet its persistent ineptness makes England football managers look like world beaters. To add insult to injury, its staff enjoy tax free salaries. It’s time to close the Fund down and go back to the drawing board.
As published in CITY AM on Wednesday 7th September 2016
Following the Brexit vote, normal service seems to have resumed. A key question in economic policy since the General Election of 2010 has moved centre stage once again: should the government abandon austerity?
At one level, the question has an easy answer. Interest rates are now so low that the UK government can borrow for 30 years at a rate of not much more than 1 per cent, so some relaxation in terms of infrastructure spending does seem sensible. It is essential that the projects are not motivated by purely short-term political expediency, but in principle they are a good idea.
For Jeremy Corbyn, the answer is even easier. He would carry out no less than £500bn of extra public spending. How would this be paid for? Even easier, just grow the economy, stupid! Extra taxes generated by economic growth will fund whatever we like.
This is not a spoof, it is what Corbyn and his shadow chancellor John McDonnell actually believe. Taxes are currently about 40 per cent of the economy, so to pay for £500bn of extra spending, the economy needs to grow by something like £1.25 trillion. Its total size at the moment is just under £2 trillion. This stupendous growth will take place like something out of Harry Potter, once Jeremy waves his wand.
The real task of political economy facing the chancellor is a much more difficult one. At one level, there is no need to relax the policy of austerity and the simple reason is that the UK is at full employment. The unemployment rate from April to June, the latest data available, was just 4.9 per cent. This is well below the average of 7.3 per cent during the period since the major oil price shock in 1973. Record numbers of people are in work, no less than 31.75m of them, up by 600,000 on the same period a year ago. The labour market is essentially in equilibrium, and almost anyone who wants a job can get one.
But a key reason for full employment is that labour has priced itself back into work. Following the recession in 2008, earnings after allowing for inflation fell every single year until 2014. Only last year was this trend halted and a modest increase registered. Workers have become cheaper to employ.
The downside is that many people in work have experienced falling living standards. If real earnings rose by 5 to 10 per cent to make up the lost ground, on the one hand there would be less incentive for an individual employer to hire someone. But on the other hand, the “price” of labour is the wage, and higher wages mean more money to spend, and higher demand for goods and services. So more workers would be needed by firms to satisfy this demand.
In principle, full employment can exist with higher earnings. The risk, however, is that we become trapped in a relatively low wage full employment situation.
If the government were to relax austerity to do something about this, it would be a very difficult balancing act to pull off. But the political rewards could be huge.
As published in City AM on Wednesday 31st August 2016
The A-Level results released last week confirm the dominance of schools in London and the South East. Provisional league tables have only appeared so far for state schools, but these two regions have two-thirds of the top 100. South Yorkshire, Tyne and Wear, and Wales did not have a single school between them in the top 100.
State schools in London and the South have many of their potentially brightest pupils creamed off by high-powered public schools. Yet they consistently produce much better results than their counterparts elsewhere in the country.
An article in the latest issue of the American Economic Association’s top Journal of Economic Perspectives sheds light on this persistent regional discrepancy in school performance. The paper, by Ludger Woessmann of Munich University, is an in-depth, meticulous statistical analysis of differences in the average achievement levels of school students in different countries across the world. There are of course formidable conceptual issues in comparing performances in, say, Ghana and Germany. But building on the pioneering work of the OECD and its Programme for International Student Assessment, the International Association for the Evaluation of Educational Achievement has made great progress in dealing with them.
An advantage of using such a disparate data set is precisely that there are large variations in both inputs and outputs in different countries. This means that, somewhat paradoxically, provided that the right analytical framework is used, the variability makes it easier to identify exactly what factors are important in determining outcomes. Even within the developed world, substantial differences exist. So we can usefully learn some lessons for inside the UK from Woessmann’s work.
The analysis confirms that resource inputs such as expenditure per student or class size appear to have limited effects on student achievement. Spending more money in itself is a very inefficient way of improving outcomes. This has been clear in general across the public sector as a whole since Gordon Brown’s experiments with massive increases in public spending.
Interestingly, “competition from privately operated schools positively affects achievement levels”. This implies that the strength of state schools in the South is in part due to the fact that they have to compete to attract good pupils. It is no coincidence that there is a cluster of very good state schools in South Manchester/North Cheshire, because Manchester, unlike anywhere else in the North, has a number of excellent private schools.
Given current debates here about devolving power within the educational system, Woessmann reports that school autonomy has positive effects on performance.
Finally, the values and attitudes of teachers and management matter. King David, a state school in an insalubrious part of North Manchester, promotes “traditional Jewish values of respect, self-discipline and the pursuit of excellence”. It came forty-ninth in the national tables.
Michael Gove described the UK educational establishment as “the blob”. The opinions and values of the blob are contradicted almost in their entirety by the scientific evidence. Competition, both within and between schools, and autonomy are key determinants of success.
As published in City AM on Tuesday 23rd August
The total number of working days lost through labour disputes last year was, at just 170,000, the second lowest annual total since records began in 1891.
What a difference a year can make. Southern Rail commuters have endured months of misery due to the prolonged series of strikes called by the RMT. Union members on Eurostar walked out in the past week and have threatened to do so once again over the Bank Holiday weekend. Before it was suspended yesterday, Virgin East Coast staff were planning industrial action.
We are also experiencing the long-running dispute between the government and junior doctors, who in April carried out their first full walkout in the history of the NHS. They are now threatening the “trade union dispute of the century”, with rolling strikes from September onwards.
Traditionally, strike activity rose as the economy picked up. And labour market statistics for 2016 do show that the UK economy is very close to full employment. Pockets of unemployment may be scattered in some of the regions, but the latest economy-wide figures show a rate of just 4.9 per cent, the lowest for 11 years. There are a record 31.7m people in employment, and the proportion of people aged between 16 and 64 who are in work is also at a peace time high of 74.4 per cent.
Despite the buoyancy of the labour market, however, disputes remain very rare in most sectors of the economy. The current spate of strikes is essentially confined to the public sector, broadly defined. Private companies operate the rail franchises, but Network Rail is responsible for the maintenance of the network as a whole.
The connection between the strength of the economy and the number of strikes still holds in transport and health. The innovative polices of the rail operating companies mean that passenger numbers have boomed, doubling over the past decade. And the demand for health services continues to grow rapidly.
The unions shed crocodile tears and claim the disputes arise out of concerns for the safety of the public. In one sense, the strikes are nothing more than good, old fashioned examples of the workers putting their hands in taxpayers’ and consumers’ pockets when the opportunity arises.
But we might reasonably ask why the same things are not happening elsewhere in the economy. There does in fact appear to be a more sinister aspect to these disputes. Many of the strike activists are supporters of Jeremy Corbyn. The Labour leader and his acolytes scorn the possibility of reform through representative parliamentary democracy. Building a so-called social movement is far more important to these true believers than is winning elections.
The Black Lives Matter campaign, another social movement, earlier this month closed access to Heathrow from the M4 and disrupted transport across the UK. Just as with the junior doctors and the rail workers, the same sanctimonious regret was expressed at any inconvenience caused to the public.
Unfortunately, Corbyn’s position as Labour leader and his advocacy of “social movements” gives comfort to the growing number of strikes, sit downs and general disruptions which we are currently witnessing. And if he wins the party’s leadership contest, we can expect them to continue.
As published in CITY AM on Wednesday 16th August
Cricket fans will be delighted that Joe Root is establishing himself this summer as a truly great batsman. His Test match batting average of 55.49 is bettered by only 16 players from across the world since Test cricket began in 1877. Root currently sits seventh in the England career batting averages, and he clearly has the ability to improve. But who is the greatest English batsman of all time?
The question is interesting in its own right to cricket fans. But it also raises general issues around the need to understand the background to statistics, how they are produced, and in what context they appear.
That said, statistics alone are decisive in determining the greatest Test batsman. That laurel falls unequivocally to Don Bradman. In terms of players whose careers have ended, only four have an average exceeding 60. Three of these are between 60 and 61. Bradman averaged 99.94.
But judging the best English batsman ever is a bit more tricky. Geoff Boycott, who bore the brunt of ferocious West Indian attacks in the 1970s, can clearly be ruled out. His average of 47.72 falls too far short of those with averages in the high 50s to be explained away by circumstances.
One candidate is the Surrey opening batsman Jack Hobbs. In the course of a long career between 1905 and 1934, he not only averaged 56.94 in Tests, but accumulated the highest number of first class career runs of anyone in the world, a total of 61,760. It is hard to see this latter record being broken. Careers are shorter than they used to be, and Hobbs’s three decades were not then untypical. And there are a lot more Test matches, which reduces the opportunities for top batsmen to make big scores against the weaker sides in the county championship. Only two out of the top 20 run makers ended their career after 1990.
Hobbs’s opening partner for England during much of the interwar period was the Yorkshire man Herbert Sutcliffe. In a career lasting from 1919 to 1945, he registered the best Test average of all England players, 60.73, and notched up a grand total of 50,607 runs at a slightly better average than Hobbs. Not as well-known as the Surrey man, Sutcliffe seems to have the edge.
But delving under the stats, my own vote goes to Len Hutton. Only sixth on the all-time list of England averages at 56.67 and scorer of “only” 40,140 runs, as a 21 year old, he set a new individual world record, with 364 against Australia at the Oval in 1938. As important context, his best years were cut off by the war. Not only that, he received a serious war injury to his arm, forcing him to alter his batting style. When Test cricket resumed, he had to face the demon combination of Lindwall and Miller, part of the great Australian team of the late 1940s, the strongest side in history until that date.
Statistics on their own, whether in cricket or in economics, often do not tell the full story.
As published in CITY AM on Wednesday 10th August 2016.
One of the surprises of last week was the Office for National Statistics (ONS) estimate of economic growth in the second quarter of 2016, the period from April to the end of June. In the run up to Brexit, the economy expanded by 0.6 per cent on the first quarter of the year. This was an acceleration, with the first quarter of 2016 only being up 0.4 per cent on the previous one.
The situation in the third quarter is currently confused. The GFK consumer confidence survey for July showed the biggest monthly drop since 1990. But the weakness of the pound means that exports are due for a boost. Certainly, judging from the sheer numbers of foreign tourists crowding London in the last few weeks, we are raking in the euros and the dollars.
But the ONS view on what happened in the second quarter of 2016 is by no means the last word. Quite rightly, our national statisticians are keen to provide information on what has been happening in the economy as fast as they can. So they publish what is known as the “first estimate” of GDP growth for a quarter just a few weeks later. It is this estimate which grabbed the headlines.
Most economic data published by the ONS are estimates, produced with information gathered from a wide variety of sources. But as time goes by, more of it comes in for any particular quarter. Self-employment income, for example, is quite important these days. But an accurate picture is not available until after the end of the tax year, when all the returns are submitted. So the initial estimate might very well change over time.
Looking back over the past 20 years, the average of all the first estimates of growth made over this period is a bit lower than the average of the latest estimates. So, on balance, first estimates get revised upwards, showing that the economy has been more buoyant. But statistically speaking, we cannot say with real confidence that they are significantly different.
Certainly, the averages can conceal some large inaccuracies in the first estimate data. The ONS now thinks we entered the recession of the late 2000s in the second quarter of 2008, with the economy shrinking by 0.7 per cent compared to the first quarter. But the first estimate which was made showed modest growth of 0.2 per cent. The first estimates did indicate a recession in the second half of 2008, but underestimated how much the economy was contracting. In contrast, during 2009, the first estimates failed to register the speed of the economic recovery. In the winter of 2011-12, the first estimates notoriously suggested we had entered a new recession, which is not borne out by the latest data.
It is a hard life being a policy-maker. One of the problems is reading the runes about where the economy is now and where it has been in the recent past. The first estimates of GDP are better than nothing, but can on occasion be quite wrong.
As published in CITY AM on Wednesday 3rd August
The proposed takeover of the hugely successful ARM Holdings by the Japanese giant SoftBank is in the news. Cambridge-based ARM is well placed to exploit the white hot concept of the internet of things, highlighting the UK’s recent advances in this field.
The UK has also performed well in biotechnology. But the industry came under scrutiny last week at a Centre for the Study of Financial Innovation seminar. Geoffrey Owen, former editor of the Financial Times, and Sussex academic Michael Hopkins introduced their new book Science, the State and the City.
On a world scale, the UK is second only to the United States in biotech, outstripping everyone else in key performance indicators for the industry. Owen and Hopkins’s book, however, is prompted by the fact that we are a very long way behind the leader. For example, US scientists have 45 per cent of all the citations in life sciences in academic journals, while we have just 15 per cent. The UK government spends roughly double the amount on health research and development of our European neighbours, but America spends at least 10 times as much as we do.
Our distant second places, in these and other areas which determine the success of a high technology industry, feedback on each other and cumulate. As a result, the market capitalisation of US biotech firms is more than 20 times as big as those of the UK.
Why has this happened? After all, what is possibly the greatest scientific discovery of the twentieth century which made all this possible, that of the double helix structure of DNA, was by the British scientists Crick and Watson.
Owen and Hopkins carefully dismantle the myth that it is the short-term outlook of the City which is responsible. This is often compared unfavourably to the long-termist approach of Germany and Japan. But it is the allegedly short-term Anglo-Saxon economies which are by far the best performers in biotech, an industry in which the time period from scientific discovery to marketable product is at least 10 and often as much as 15 years.
They do note, however, that British academics appear more interested in publishing academic papers and securing yet more research grants than in the process of commercialisation. There is a steady flow of entrepreneurial scientists who found biotech companies, but it is very much a minority taste in the UK compared to America.
The US industry clusters, with firms concentrated in San Francisco and Boston. So does the British, mainly near Cambridge. But attempts by European governments to develop clusters in a top down, dirigiste way have not worked. Owen and Hopkins argue that American success is based on a bottom up, evolutionary process, in which a successful ecosystem emerges rather than being designed.
Entrepreneurial academics, teaching hospitals, and venture capital spontaneously collaborated for mutual benefit. The US government also helped, with its massive funding for research and regulatory changes which boosted the industry.
The lesson is a general one for development. The public sector can facilitate but not command success. That arises from the drive of individuals with proper incentives.
As published in CITY AM on wednesday 27th July 2016
A key platform of our new Prime Minister is to curb what she perceives to be boardroom excesses. “It is not anti-business to suggest that big business needs to change”, she said.
One of her proposals is to allow employee and worker representatives to sit on company boards, a suggestion which has not gone down well in the corporate world. The debacle at the Co-op, with its legion of elected directors, has been cited many times as an argument against Mrs May’s idea. First Group already has employees on the boards not just of its component companies, but of the group plc itself. However, given that one of the companies is Great Western trains, one of the most notoriously unreliable of all the rail operators, this has not proved to be a panacea.
May is keen on making shareholder votes on executive remuneration legally binding. True, in the spring, a clear majority, some 60 per cent, rejected BP boss Bob Dudley’s £14 million pay. But only 33 per cent of shareholders failed to back Martin Sorrell’s package at the WPP AGM last month, even though both Standard Life and Hermes, two of Britain’s most influential fund managers, voted against the pay report.
Board members receive emoluments. Shop floor workers get pay. Yet however we describe them, the gap between the two has opened up in dramatic fashion in recent decades, with no obvious economic justification. In the United States, for example, the average compensation of CEOs in the top 350 firms is some $15 million a year. This enormous sum is 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 latter figure would still hand the average CEO some $5 million today, not a bad sum to have. The American economy has done well, but it also did well in the decades immediately after the Second World War, when remuneration disparities were much narrower.
Legislation is the brutal option, but there is no guarantee it would work. The fundamental challenge is to alter the set of values which has become dominant. The social norm at the top of industry has become one in which it is perfectly acceptable to be paid very large amounts, virtually regardless of performance. This behaviour has influenced remuneration in non-market sectors of the economy, such as the pay of top management in universities, and in particular that of Vice-Chancellors. Their average salary in 2014/15 was £274,000. Incredibly, the Vice-Chancellor of Falmouth University – it does in fact exist – received £285,000.
There is a simple policy which could radically alter attitudes and behaviour. The Prime Minister should let it be known that no-one who behaves in an ostentatious way on this matter will either be knighted or elevated to the Lords. Indeed, such honours might be reserved for captains of industry who volunteer for substantial pay reductions. Miracles might then happen and social norms drastically changed.
As published in CITY AM on Wednesday 20th July
Image: Home Secretary, Theresa May, speaking at the Girl Summit, by DFID – UK Department for International Development licensed under CC BY 2.0