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Companies that bow to the social media mob are operating in the wrong century

Companies that bow to the social media mob are operating in the wrong century

Pizza Hut is the latest addition to the list of companies grovelling to criticism on social media.

The restaurant chain tweeted an apology for running a promotion in the Sun newspaper.

A few weeks ago, Paperchase said that it would not place any more marketing campaigns with the Daily Mail after receiving “hundreds” of complaints.

In the public sphere, last year Greater Manchester Police staged a simulated terror attack in the massive Trafford Park retail complex. The carnage began, realistically, with the cry “Allahu Akbar”. Following a Twitter storm, the police felt forced to apologise.

Boris Johnson, in his inimitable style, has condemned Pizza Hut and Paperchase for being “cowardly”. The campaign against them was run a by a small group of hard-left activists calling themselves Stop Funding Hate.

But examples such as these raise a more important question. Which century is British management living in?

After being attacked by critics on social media, many outfits respond with blind panic. A famous Monty Python sketch depicts the novel Wuthering Heights, not in words but in semaphore, a nineteenth century technology. Many senior managers seem to remain stuck at this level of communications technology.

Scientific knowledge of how things spread on social media such as Twitter has grown enormously in the last few years. Yet swathes of top management appear to be completely unaware of this work.

A high-powered study published last year by the physicists Guido Caldarelli and Gene Stanley, editor of the top statistical physics journal Physica A, confirmed that social media users typically form communities of interest which foster confirmation bias, segregation, and polarisation.

In other words, in general people on social media are preaching to the already converted.

With Rickard Nyman, a computer science colleague at UCL, I conducted a real-time analysis of the tweets during the Brexit campaign. Modern algorithms reveal as clear as day that there were two communities, with little connection to each other. One group was talking about what they would see as the “grown-up” themes of employment, the economy, trade and such like. The other, in essence, just didn’t like foreigners all that much.

The key moment was when, with just over two weeks to go, immigration began to get traction as a theme amongst the “Remain” Twitter community. Otherwise, the two groups were just reinforcing existing opinions and prejudices.

More is known. A significant proportion of tweets do not get retweeted at all. And it is the act of retweeting which shows that the recipient is paying attention.

Simply being a follower and reading a tweet involves effectively zero effort. The number of followers is a very weak indicator of a person’s influence.

Most tweets which express strong emotions essentially just fade away. It is the more balanced ones which have a greater chance of getting traction across the network.

The most depressing thing about the reactions of companies and public bodies to social media attacks is not, as Boris would have it, their cowardice. It is that they seem to show very little understanding of modern technology.

As published in City AM Wednesday 13th December 2017

Image: Pizza Hut via Stephen McKay is licensed under CC by 2.0
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It is the private sector, not the state, that has enabled America’s economic recovery

It is the private sector, not the state, that has enabled America’s economic recovery

The American economy continues to power ahead. The widely respected and independent Congressional Budget Office (CBO) reckons that the actual level of GDP in the US in 2017 is finally back at the level of potential output.

The potential level of GDP is the amount of output which would be produced if there were no spare capacity in the economy. In a service and internet-oriented economy, any estimates of it are fraught with difficulties.

The maximum output of a car plant or steel mill is reasonably straightforward to work out, at least in the short term. But it is less obvious what the constraints are on any web-related business.

Still, the concept of potential output is taken seriously by policy-makers. And the CBO does a better job than most at guessing what it is.

On their figures, the last time actual and potential GDP were in balance was in the year immediately prior to the crisis, 2007, which at least makes sense.

In 2009, the depth of the recession, the CBO calculates the gap between the two to be six per cent. That may not sound a lot, but in money terms that represents more than one trillion dollars.

American GDP is now almost 15 per cent more than it was in 2007, and 20 per cent more than in 2009.

Along with this, employment has surged, with 17.2m net new jobs being created from the low point of December 2009. As in the UK, employment is at record highs.

The increase in employment is entirely due to the private sector, where it has grown by 17.3m.

In contrast, the numbers employed by the government, whether federal or state, have been cut by 100,000.

The same applies on the output side. Again, it is the private sector which is driving the recovery.

Compared to the bottom of the recession in 2009, and after stripping out inflation, public sector spending is down by $200bn.

In contrast, private sector investment has risen more than 10 times this amount – an increase of $2.1 trillion.

So, despite strict restraints on the public sector, the American economy has recovered well from the crisis – indeed, better than the best performing main European economies, Germany and the UK.

The evidence has been there all along, as soon as the US began to pull out of the recession in the early part of this decade. It is evidence which seems to be studiously ignored by the strident voices in British academic circles calling for an end to “austerity”.

Of course, there have been tax cuts, and these stimulate the private sector. But the risk over the longer term is that growth will not be rapid enough to bring in enough revenue to curb the growth in public sector debt.

Indeed, the CBO sees the potential rise in this debt as an important threat to the long-term growth of America. Higher public borrowing, in its view, reduces the private sector investment which is needed for growth.

As published in City AM Wednesday 6th December 2017

Image: New York via Pixabay is licensed under CC by 0.0
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The OBR’s forecasts should be taken not just with a pinch of salt, but with the contents of an entire mine

The OBR’s forecasts should be taken not just with a pinch of salt, but with the contents of an entire mine

There has been a great deal of crowing in metropolitan liberal circles over the report of the Office for Budget Responsibility (OBR), published with the Budget last week.

The OBR revised downwards its projections for GDP growth for each of the next five years. Annual average growth to 2022 is predicted to be just 1.4 per cent a year.

The OBR believes that the UK is experiencing a “negative supply shock”.

But forecasts are merely forecasts. They do not constitute scientific evidence at all. This is especially true of economic predictions.

One section of the OBR’s report which relates to facts rather than views about the future has been seized on. This is that growth in the euro area during 2017 has been both stronger than it was in 2016, and stronger than in the UK. This is represented as showing that the EU is dynamic, and the UK is fading away.

But the experience of just a few months data – we only have official data to, at the very latest, the end of September – needs to be put into context.

Since 2007, the year immediately before the financial crisis, GDP in the UK has grown by just over 10 per cent.

This does indeed represent a decade of growth which, by historical standards, is low.

But the figure is very similar in Germany. In France, output is only around six per cent higher than it was 10 years ago. In Spain, GDP has risen by five per cent.

In Italy, however, the economy has shrunk by some five per cent since 2007. The Italians have had a decade not just of low growth, but of negative growth. They have gone backwards.

Despite over 40 years of EU membership, the UK economy remains far more synchronised with the US in terms of the year-on-year fluctuations of the business cycle.

So over this period, we see some years when economies in the EU have grown faster than in the UK, and some years when they have grown more slowly. This is precisely what to expect when the cycles are not coordinated.

The OBR itself is fully aware of the huge potential for error in economic forecasts.

Indeed, the report illustrates the uncertainty around its five-year projection of 1.4 per cent annual GDP growth in a so-called “fan chart”. This shows the potential range around the prediction, based on past errors made in official forecasts.

At worst, growth could be negative, with an annual average fall of one per cent. But at best, we could have a sustained boom with growth of over four per cent a year.

Based on how wrong past forecasts have been, the next five years could see a cumulative fall in GDP of over five per cent, or a cumulative rise of over 20 per cent.

The OBR’s forecasts should be taken not just with a pinch of salt, but with the contents of an entire mine.

As published in City AM Wednesday 29th November 2017

Image: Philip Hammond via Wikimedia is licensed under CC by 2.0
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Doublethinking or dim? Why the Labour party can’t be trusted with the economy

Doublethinking or dim? Why the Labour party can’t be trusted with the economy

Are members of the Labour Party frontbench experts in doublethink? The concept was invented by George Orwell for his novel 1984, written in the 1940s as a critique of the Soviet Union.

Masters of doublethink can hold, for purposes of political expediency, two opposing opinions at the same time, one of which might be complete nonsense.

The Leader himself set a good example during the general election campaign when he promised to abolish all outstanding student debt. Jeremy Corbyn rather backtracked on this after the votes had been cast, when it was pointed out to him that this would cost around £100 billion – over £1,500 for every man, woman and child in the UK.

His close ally, the Shadow Chancellor, followed this up on Sunday. Asked about the cost of Labour’s re-nationalisation plans, John McDonnell said that “you don’t need a number because you swap shares for government bonds”.

Independent experts put a provisional costing of around £500 billion on McDonnell’s plans. This amounts to over 20 per cent of GDP.

Imagine you want to buy a house for £10 million but have no savings. And imagine that you somehow persuade someone to lend you the money. True, you have acquired an asset worth £10 million and have a debt of the same size. Your net wealth position is unchanged.

But you face the problem of paying the interest on the loan, the terms of which may be very onerous, reflecting your credit risk.

McDonnell argues that nationalised industries will make a profit, which will take care of the interest payments.  Stretching credibility even further, Labour argues that because the interest on government bonds is currently only just over 1 per cent, the payments would not amount to much.

Yet it is obvious that the markets might want a much higher rate of interest to finance the plans of a Chancellor who wanted to add £500 billion to public debt.

Emily Thornberry, the Shadow Foreign Secretary, has also got in on the doublethink act. Challenged on TV to name any country where Labour’s policies of financing spending by issuing debt had worked, she finally came up with Germany and Sweden.

The Bank of International Settlements complies data on the ratio of government debt to GDP. There are several ways to do this, but on their preferred approach in Germany it is currently 73 per cent and in Sweden 44 per cent. In the UK it is already 116 per cent.

Much more plausible comparators are Italy and Greece, where the ratios are 150 and 173 per cent, figures which McDonnell would reach easily. In Italy, GDP is still 5 per cent below its peak level in 2007, a whole decade ago. And in Greece it is 26 per cent lower.

Are the top Corbynites cynical exponents of doublethink? Less charitable people might say they are just plain dim. As so often in economics, the evidence so far does not enable us to decide between the two hypotheses. But, either way, they are bad news.

As published in City AM Wednesday 22nd November 2017

Image: Corbyn and McDonnell by By Rwendland is licensed under CC by 4.0
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Mind the gap: Economics is catching up to the fact that we’re not always rational

Mind the gap: Economics is catching up to the fact that we’re not always rational

Do Tube strikes make Londoners better off?

At first sight, the question is simply absurd. The answer is surely “no”.

But a paper in the Quarterly Journal of Economics comes to the opposite conclusion. Cambridge economist Shaun Larcom and his colleagues analysed the two-day strike of February 2014.

They obtained detailed travel information on nearly 100,000 commuters for days before, during, and after the strike.

A key feature of the strike is that nearly half the stations remained open. So most commuters could experiment with routes different to the ones they normally use.

The project may seem barking mad. But it investigates an important issue in economic theory.

Richard Thaler’s recent Nobel Prize for behavioural economics received a lot of publicity. Behavioural economics looks for examples of people making decisions in ways which deviate from those predicted by the rational choice model of economics.

A criticism from the mainstream is that deviations might indeed be observed at a point in time. But over time, they will disappear as people learn to be rational and make the best decision.

The Tube network remains the same for long periods of time. Commuters have many opportunities to learn about it. So almost all of them should use the quickest possible route to work. If someone has just moved jobs or homes, there may be a short period of adjustment. But everyone else ought to have learned the best way to travel.

Yet Larcom and his colleagues find that a significant fraction of London commuters fail to find their optimal routes. They come to this conclusion by comparing the journeys of the people in their data set before and after the strike.

Of course, for many journeys the best route is trivially easy to discover. If you live in Richmond and work in Hammersmith, there is only the District Line. Other journeys have more options. Larcom notes that there are 13 potential ways to travel between Waterloo and King’s Cross.

The authors point out that many decisions faced by consumers are more complex and less repetitive than the commuter problem they analyse. So, in an excellent example of jargon, they state that “our estimate of suboptimal habits may be a lower bound to the problem in other contexts”.

In other words, systematic and persistent deviations from rational choice are an important feature of the real world.

Economists of course like to value everything, and there is a standard way of valuing time. The academics estimate that the time gains subsequently achieved by those who switched routes outweighed the time losses incurred by everyone else during the strike. So Londoners were better off as a result of the strike.

Bizarre though it may seem, the article is a good example of how economics is becoming much more empirical when thinking about individuals’ behaviour and less reliant on pure theory.

As published in City AM Wednesday 15th November 2017

Image: Underground by By Elliott Brown is licensed under CC by 2.0
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There’s a difference between priceless and worthless, but economics can’t measure it

There’s a difference between priceless and worthless, but economics can’t measure it

The so-called “productivity puzzle” just does not go away.

The October, employment figures released by the Office for National Statistics (ONS) brings it into focus.

The number of people in work rose to a new record high of 32.1m, with an increase of around one per cent compared to a year ago.

Total output, measured by GDP, continues to rise, but modestly. We do not yet have official estimates for the year to October, but GDP seems to be up by some 1.5 per cent.

Productivity is defined as output per worker, so it is only around 0.5 per cent higher than a year ago. No scientific consensus has yet emerged to explain why productivity growth continues to be so low.

But there is increasing evidence that the rate of growth of output is being systematically underestimated.

The economy cannot be put in a set of scales and measured. Its size has to be estimated, and the ONS uses a wide variety of methods to do this.

The fundamental problem is that the foundations for estimating GDP were built in the 1930s and 1940s, when the economy was dominated far more by manufacturing. Measuring how many things have been produced is inherently easier than measuring services.

The ONS does not stand still, and tries to take account of the massive changes in the economy which have taken place. But the rise of the internet economy brings entirely new problems to solve.

A key one is what the futurologist Alvin Toffler many years ago called the “prosumer” sector.

Traditionally, products are developed and sold by companies, and consumed by, well, consumers.

In the prosumer sector, consumers themselves participate in the production and development of products and services.

A good example is the statistical package R. This is open source, and freely and readily downloadable by anyone.

In recent years, R has become the package of choice for young scientists in a wide range of disciplines around the world. They both use it, and contribute to its development by uploading their own algorithms.

A huge range of routines can be downloaded. Its graphics features are amazing. Software is appearing on it that has the potential to take on commercial giants such as Word and Powerpoint.

It has become a very valuable tool for scientific research, using the word “valuable” in its every day sense of the word. But it is run by a small not-for-profit foundation, so in ONS terms its value is close to zero.

The problem is that R is what economic theory describes as a “public good”.

This jargon phrase applies to anything where anyone can consume it, and where the supply never runs out. No matter how many people use R, it is always available for the next person.

For most goods and services, this is just not true. When I put my swimming towel on the pool lounger, it is no longer available to you.

The prosumer sector creates a lot of output. But economics has not yet solved the question of how to value public goods.

As published in City AM Wednesday 8th November 2017

Image: Vintage Scales by Public Domain Pictures is licensed under CC by 0.0
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