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Economists have lost the public’s trust by meddling in politics

Economists have lost the public’s trust by meddling in politics

Michael Gove famously said during the Brexit campaign that people “have had enough of experts”. Certainly, the outcome suggests that many were sceptical of the doom-laden economic projections of Project Fear.

But what do the public think about economists themselves? An intriguing survey released last week by ING bank and the Bristol University Economics Network sheds light on how this particular group of experts is viewed. The findings were presented at a seminar held in the Treasury last week.

Some key results were reassuringly as expected. For example, an overwhelming majority of respondents, in the poll conducted by You Gov, think that economics is important.

There is a widespread misconception of what economists actually do. A great deal of media focus on economics is about macro economic forecasts, what will happen to GDP, inflation, interest rates and the like. In fact, very few academic economists work on forecasting problems, and even within the Treasury and the Bank of England, the teams directly involved with this are small.

Most economists work on micro problems, trying to figure out, for example, the impact of changing tax rates on incentives, or trying to assess the costs and benefits of an infrastructure problem.

In principle this is useful work. But, regrettably, the survey did not disclose to the respondents just how many economists are employed in the public sector. In 1964, the incoming Labour government of Harold Wilson doubled the number of economists in the civil service from six to twelve.

Now there are 1,400, not counting those working in the Bank of England and the numerous regulatory authorities. Much of the expansion took place under Gordon Brown. It is hard to believe that diminishing marginal returns, to use a jargon economics phrase, have not set in. In plain English, there are far too many of them.

An important feature of the survey is that there is a big problem of trust in the opinions of economists. This is particularly the case with older people and with Leave voters. Many believe that economists express views based on personal and apolitical opinion than on verifiable data and analysis.

A striking illustration of this is of course Brexit itself. It cannot be said too often that the Treasury forecasts of the consequences of a Leave vote predicted a massive rise in unemployment of 500,000 by the end of 2016. It has of course fallen.

At least 90 per cent of professional economists in the UK supported the Remain campaign. Some brave souls in university departments who favoured Leave found themselves virtually ostracised. The shameful attacks on Leave voters, accusing them of being dupes and incapable of understanding the arguments, are based on the misplaced intellectual certainty of the economics mainstream on this topic.

Economics is far from being an empty box, and it can usefully illuminate many practical problems. But the profession needs to be more honest with the public. Some parts of the discipline do have strong empirical backing. Others seem based more on groupthink than on objective science.

As published in City AM Wednesday 10th May 2017

Image: Big Ben from London Eye by Zen Whisk is licensed under CC by 2.0
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Economic Research Council talk: why are so many economists opposed to Brexit?

Economic Research Council talk: why are so many economists opposed to Brexit?

Economic Research Council talk on Monday 20th February 18.30 – 20.00: I will be discussing why so many economists are opposed to Brexit. 

Book your ticket here. A limited number of Early Bird tickets are available for £15 each.

Following a Financial Times survey in January that showed that nine times as many economists are opposed to Brexit as are in favour. I will explain why the thought processes of economists traps them in the past, and makes it difficult for them to appreciate the importance of change and innovation, expanding on how Brexit opposition has intensified over the past year, despite the strong post-Brexit performance of the UK economy.

The Economic Research Council, Britain’s oldest economics-based think tank, is dedicated to extending the reach of economic education, debate and leadership. In support of this, the ERC raises the profile of economic conversations; we host events to cultivate wider accessibility, inclusion and civic participation.

Image: Tread Upon Now What? by John Eisenschenk is licensed under CC by 2.0

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A radical idea to revive the North

A radical idea to revive the North

The Head of OFSTED, Sir Michael Wilshaw, warned last week that secondary schools in Liverpool and Manchester were ‘going into reverse’. Too many pupils in Northern towns and cities are simply not prepared for the next phase of their education, training or employment. In Liverpool, for example, four out of every ten schools are judged to be either inadequate or, in the bureaucratic jargon, ‘requiring improvement’, which basically means they are just not delivering the goods. The proportion of children securing five good GCSEs has fallen in many areas of the North.

All this is in sharp contrast to the dramatic turn around which has taken place in recent years in the performance of schools in London, whose results, particularly amongst poorer pupils, are now amongst the best in the country At the other end of the ability spectrum, the North falls short. The area from Cheshire and South Yorkshire up to the Scottish border has nearly 30 per cent of the total population of England and Wales. But in terms of A-level results, only 12 schools from this area make it into the national top 100 of state schools – leaving aside the massive domination of London and the South East in terms of private sector exam results.

This gloomy picture does not bode well for the future economic prospects of the region. Increasingly, growth is being determined not by physical investment but by the more intangible, but nevertheless real, concept of the stock of productive knowledge of an area. Not everyone can be a biochemist or work at the frontiers of artificial intelligence. But the ability to innovate and adapt to changed circumstances is required at all levels.

A visionary and challenging solution to the economic problems of the North is put forward in the unlikely setting of the academic journal ‘Environmental Planning: Planning and Design’. The author, Mike Batty, is an extremely distinguished professor in University College London’s Centre for Advanced Spatial Analysis. I work with Batty, so maybe this colours my view of his ideas. But despite many billions of pounds of public money having been spent in conventional ways in recent decades in trying to close the North-South divide, the situation has only got worse. A Liverpudlian himself, Batty is characteristically blunt about the prospects of new infrastructure projects making an impact: ‘None of this is going to work. If it does, it would have done so years ago’.

Instead, we need to break the vicious circle of cumulative causation, the forces which cause people from the North, especially the skilled and talented, to drift South. Not just in the UK, but across the West as a whole, many students in top universities stay on in the places where they studied. The dominance of the London-Cambridge-Oxford golden triangle needs to be challenged. Instead of spending on HS2, the monies should go to Northern universities to transform some of them into world class institutions. Mergers need to be forced through, and the poorly performing departments axed. It is a radical concept, but it might just work.

As Published in City AM on Wednesday 2nd March

Image: Angel of the North by Stuart Richards licensed under CC BY 2.0

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A Christmas competition with a difference…

A Christmas competition with a difference…

… and the chance to win a bottle of champagne.

For the prolonged holiday break, a quiz is appropriate. But one with a difference: not just questions, but comments to go with them. A prize of a bottle of champagne to the best answers – just email them to me.

The last couple of years have seen the rise of populist left-wing movements. Syriza in Greece is the most prominent example. Podemos in Spain polled well in the general election in that country on Sunday, securing just over 20 per cent of the vote. In neighbouring Portugal, the ruling conservatives were displaced this year after internal constitutional wrangles involving a motley alliance of leftists. Even in the United States, Bernie Sanders, the senator who openly proclaims himself a socialist, is attracting support in the Democratic primaries. Socialist incumbents were re-elected last month in Seattle, the home of Microsoft.

Many people have serious doubts about the practical viability of the programmes of these parties. But criticism is not limited to the right. The Labour Prime Minister James Callaghan notoriously pronounced at the height of the economic crisis of the 1970s that “we used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, in so far as it ever did exist”. But which famous socialist went even further and once said, and where: “certain comrades deny the objective validity of the laws of political economy under socialism. These comrades are profoundly mistaken”?

Thinking of workers’ rights, Sports Direct has come under intense criticism this month for the alleged way in which it treats its staff. The chairman of the Public Accounts Committee, Meg Hillier MP, has called for an HMRC investigation into low pay and the “humiliating and demeaning” working conditions at the company. Whatever the truth of the allegations (and Sports Direct has insisted that it is acting within the law), working in a warehouse on low pay isn’t much fun at the best of times. But things could be worse. Where and when could workers be sent to jail for being late for work twice within a single year and with what offence were they charged?

On a lighter note, England is in action in the first Test against South Africa in Durban beginning on Boxing Day. Brian Statham, the great England fast bowler (and great Lancastrian) wrote over 50 years ago that he expected all the batting records to end up eventually in Asia. It looks like a good prediction. The highest all-time partnerships for the first five wickets are now held by Indians, Pakistanis and Sri Lankans, including the highest of all, the 624 for Sri Lanka’s third wicket against South Africa in 2006.

But our boys still hold one truly outstanding record. Jim Laker’s match statistics of 19 wickets for 90 runs against Australia in 1956 is still by far the best bowling return, not just in Tests but in any first class match. As an approximation, what is the probability that this will be beaten in 2016? Extra marks for your reasons why. Happy Christmas.

Paul Ormerod

As published in City AM on Wednesday 23rd December

Image: Champagne by Sam Howzit licensed under CC BY 2.0

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Integration won’t save the struggling Eurozone

Integration won’t save the struggling Eurozone

Olivier Blanchard, the recently retired Head of Economics at the International Monetary Fund, has something of a track record with his predictions.  In 2013, he warned George Osborne that he was “playing with fire” with the UK’s recovery from the financial crisis.  Austerity had to be relaxed. We now know that we were actually nowhere near a drop in GDP.  Growth has been unequivocally positive in every year since 2009.  Compared to the year immediately before the crisis, 2007, GDP is now 6 per cent higher, a recovery of similar strength to that of America, with US GDP being 8 per cent up on its 2007 level.

In August 2008, only a few weeks before the collapse of Lehman Brothers, Blanchard published an MIT Discussion paper on the state of macro-economics.  This is the part of economic theory which tries to explain how the economy as a whole moves, why variables such as GDP or unemployment go up or down.  The state of macro-economics, Blanchard opined, as the most serious crisis since the 1930s was about to burst upon the world, was “good”.

But his pronouncements this week on the Eurozone deserve to be taken seriously, not merely because a stopped clock occasionally tells the correct time.  There is real substance to them.  Blanchard warned that the planned moves to closer integration within the Eurozone would not solve its fundamental problems.  Very powerful figures such as Mario Draghi, President of the European Central Bank, and Jean-Claude Juncker, head of the European Commission, are heading the drive to full fiscal integration of the Eurozone.

Under the plan, member countries of the Euro would pool funds to a Euro Treasury in Brussels.  This outfit would have the ability to transfer funds from strong to weak economies.  The UK Treasury has similar powers to move money around within the UK, which is a monetary union based on sterling.  Huge amounts have been taken from London and the South East and given to the rest of the UK over a period of decades.  But the gap in performance remains.

The relative performance of the Eurozone economies in recent years highlights the problems faced by the zone.  German GDP is now 6 per cent higher than it was in the year just before the crash, 2007.  Positive gains have been registered in countries like Austria, Belgium. France, too, is up, though here growth has more or less stalled since 2011.  Even Ireland, which was very badly hit, is now registering strong growth and the economy is larger than it was in 2007.

But there is another group where growth has been disastrously bad.  The Italian economy has shrunk by 9 per cent since 2007, Portugal by 7 per cent and Spain by 5 per cent.  These economies just do not seem to have the enterprise and the resilience to bounce back in the way in which Germany and its immediate economic satellites have done.   Closer integration may make sense for the successful countries in the Eurozone, but not for the rest.

As published in City AM on Wednesday 14th October 2015

Image: Euro Sign by Alex Guibord licensed under CC BY 2.0

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How do you deal with someone who thinks the Earth is flat?

How do you deal with someone who thinks the Earth is flat?

Imagine you are relaxing at a bar enjoying a drink after a hard day’s work.  The person next to you strikes up a conversation.  Initially he seems reasonable.  But soon he begins to go on at length about how the Earth is flat and how a misguided cabal of scientists hides this truth from us.  You could try and persuade him of the error of his ways.  But the most sensible course of action is to make your excuses and leave.

Economists face the same dilemma in commenting on the policies of John McDonnell, Jeremy Corbyn’s new Shadow Chancellor.  They are bonkers.  For example, McDonnell believes that the problem of the public sector deficit can be solved by extracting an additional £93 billion a year from companies.  He claimed in the Guardian this is the total amount of subsidies which the corporate sector receives from the taxpayer.  The source of the calculation is apparently a report published by the University of Sheffield, with the same newspaper bemoaning the fact that no-one bothers to read it.  Could there be a reason?

Suppose, purely for the sake of argument, that the £93 billion figure is correct.  What might be expected to happen if companies are suddenly deprived of this vast amount of money?  They might slash dividends, an action with which McDonnell would almost certainly approve.  This would of course harm pensions, but perhaps this is the price to be paid.  But firms might equally well make major savings by getting rid of workers, by reducing wages, or by drastic cuts in investment and research and development expenditure.  Ultimately, only individuals and not companies can bear the cost of taxation, a profound insight of economics which many, especially on the Left, find hard to grasp.

By comparison, the economic wish list set out by Corbyn himself during his leadership campaign gives the impression he retains some residual connection with reality.  But is a Flat Earther more or less balanced than someone who, say, believes that the dimensions of the Great Pyramid reveal the hidden secrets of the universe, a quite popular internet delusion?

Corbyn argues that there is no need to place limits on the amount of welfare benefits which an individual or family can receive.  Economic growth will revive the economy to such an extent that employment will boom, and many people will be removed from welfare as a result.  In turn, growth will be generated by the activities of a new National Investment Bank.  But this is pie in the sky.  The failure of planned economies such as the Soviet Union, the failure of the National Plan of the 1964 Labour government, the failure of the Regional Development Agencies, none of this evidence shakes Corbyn’s faith in the inherent superiority of economic planning and dirigisme.

No doubt these policies will have some popularity in the regions which are already heavily subsidised.  But it is hard to see them striking a chord in the wealth generating parts of London and the South East.

As published in City AM on Wednesday 23rd September

Image: An Epic View of Earth by NASA’s Earth Observatory licensed under CC BY 2.0

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