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The people of Burnley and Bradford have a point about the impact of immigration

The people of Burnley and Bradford have a point about the impact of immigration

The scenes as the migrant camp was cleared in Calais once again provoked bitter divisions in British society. Metropolitan luvvies and liberals tweeted their virtue and called for no restrictions on immigration. In more traditional areas, there is active resentment at the possibility of even further inflows of foreigners.

When New Labour decided in the early 2000s to allow large-scale immigration from new EU member states, we were seriously invited to believe that an influx of immigrants on a scale unprecedented in our history would only have positive economic effects and would boost economic growth.

Economics certainly suggests that an increase in labour supply can increase growth in output. But in the so-called neoclassical growth theory of economics, even in the post-endogenous variety made notorious by Ed Balls in his previous incarnation, by far the most important source of sustained growth is innovation.

A truly modern economy does not rely on more and more capital and labour being fuelled into the machinery of production. That was the old Soviet model.

A modern economy relies instead on innovation. So there are at best limited benefits from importing more and more labour. True, immigrants can bring new skills, found innovative new businesses and, as they tend to be younger, they can slow down the ageing of society. But they, too, get older eventually, so this is not a long-term solution.

The anxieties about immigration are not couched in the arcane language of economic theory. But a fuller appreciation of the theory does enable us to understand why people worry so much. Underlying the theory are the assumptions that supply and demand balance in labour markets, and that the prices of the various kinds of labour – in other words, wages – are set at appropriate levels.

A recent paper in the Journal of Economic Perspectives by Christian Dustmann and Uta Schönberg of University College London shows that large-scale migration in fact creates serious imbalances and mismatches in labour markets.

They provide extensive evidence of what economists call “downgrading”. “Downgrading” occurs when the position of immigrants in the labour market is systematically lower than the position of natives with similar education and experience levels. The authors calculate that, in Germany, recent immigrants have wages which are on average 17.9 per cent below those received by natives with similar age and skill profiles. In the US, the figure is 15.5 per cent and in the UK 12.9 per cent.

Dustmann and Schönberg illustrate the disruption which mass migration can cause even more starkly. They calculate that while 69.7 per cent of immigrants in their samples can be classed as high skilled in terms of their education, only 24.6 per cent are in high skilled jobs. In their dry terminology, this means that “immigrant arrivals to the United Kingdom were a supply shock in the market for low-skilled workers”.

Mass migration has not simply meant more people competing for jobs. It has meant that people with higher skill levels are competing for your job. In other words, the people of Burnley and Bradford have been right all along, and the metropolitan liberal elite completely wrong.

 

As published in CITY AM on Tuesday 1st November

Image: Calais Jungle by malachybrowne is licensed under CC by 2.0

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America is embracing the opportunities of AI while the rest of the world frets

America is embracing the opportunities of AI while the rest of the world frets

The rise of artificial intelligence (AI) continues to generate concerns. The latest furore emerged at the start of this week. Researchers in the top ranked University College London computer science department claimed that an AI algorithm correctly predicts the outcome of 79 per cent of cases heard at the European Court of Human Rights.

The current fear of AI, certainly among the arts graduates who write the editorials in the national quality press, is such that the study was firmly denounced. Computers can never replace human knowledge and experience in these matters.

But in real life, algorithms are increasingly being used by law firms. The law is essentially a series of rules which have been developed over time. Many areas of civil law are enormously complex. Computers can sift through huge amounts of material and save a great deal of expensive human time.

The use of AI is proliferating rapidly in many diverse areas, from the early identification of diseases and the reduction of energy costs for data centres, to the decision on whether or not to grant a loan. An article in the latest issue of the august scientific journal Nature by Kate Crawford and Ryan Calo shows that investment in technologies that use AI in the United States has soared from some $400m in 2011 to well over $2bn last year. They quote IBM’s chief executive, Ginni Rometty, saying that she sees a $2 trillion opportunity in AI systems over the next decade.

Earlier this month, the White House published its report on the future of AI, based on four workshops with leading specialists held across America on how AI will change the way we live.

The US government recognises that this highly disruptive new technology creates new risks in many ways. But so, too, did the railways.

During the opening ceremony of the Liverpool to Manchester line in 1830, the engine Rocket hit and killed a cabinet minister, William Huskisson. Serious suggestions were made that men with red flags should walk in front of trains, which would have defeated the whole point of the technology. But these risks did not stop railways from spreading across the world. In the same way, the White House report concludes that “AI holds the potential to be a major driver of economic growth and social progress”.

The report is packed full with both interesting information and perspectives on AI. But it is also a case study in why the United States continues to be by far the most innovative economy in the world. By and large, the Americans leave innovation to commercial companies. But where the national interest is concerned, the public sector works in symbiosis with the private. They plan a huge programme of basic research in AI, but with a firm eye to its practical application. Just as the US did with biotech, the aim is to develop a critical mass of money, skills and ideas funded by the government, which companies then build on. America is once again embracing the future.

As published in CITY AM on Wednesday 27th October

Image: Artificial Intelligence by A Health Blog is licensed under CC BY 2.0

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Thank competition – not magical central bankers – for years of low inflation

Thank competition – not magical central bankers – for years of low inflation

Tempers are fraying at the highest levels of economic policy-making in the UK.

Theresa May, at the Conservative Party conference, emphasised the “bad side effects” for savers of the Bank of England’s policy of near-zero interest rates, a position reinforced by former Tory leader William Hague in the Telegraph this week. A few days ago, Mark Carney, the governor of the Bank, hit back by saying he would not take instructions from politicians.

He went on to discuss inflation. The fall in sterling puts up the price of imports, and some economists predict that inflation will hit 3 per cent next year, up from its current (still low) level of 1 per cent. The Bank’s Monetary Policy Committee (MPC) has an official remit of maintaining inflation at 2 per cent. Carney stated that he would allow inflation to run “a bit” above this to protect growth and employment.

Just how much power does the MPC have to control inflation in such a precise way? At first glance, the work of the MPC has been brilliant. Some years the inflation rate has been higher than the 2 per cent target, like in 2011 when it was above 4 per cent, and some years lower, as last year when it was zero. But over the past 15 years, inflation in the UK has averaged 2 per cent a year, almost exactly in line with the target.

But the average inflation rate has been very close to 2 per cent averaged across the 28 member states of the European Union. And the United States also registered the same average of around 2 per cent over the past 15 years.

The fact that inflation has averaged more or less the same rate across the major economies for well over a decade – only in Japan has it been substantially different – strongly suggests that there is a common factor at work. It could be the collective skills of central bankers, or it could be the effect of plain, old fashioned competition.

Competition in markets for goods and services means that it is hard to make price rises stick, and competition for labour means it is difficult to secure substantial wage increases. Competition in the global economy is the main reason inflation has both been low and very similar across the developed world.

The MPC controls the short-term rate of interest, and the theory is that a rate increase, say, reduces demand in the economy as a whole. This in turn has a stable and predictable impact on inflation, with lower demand leading to lower inflation. The trouble is that the facts do not fit the theory. Inflation dropped to zero after peaking in 2011, but unemployment has effectively halved and the economy has grown at a decent rate.

We do owe central bankers in the UK and the US a massive vote of thanks for preventing the crisis of the late 2000s from becoming a repeat of the Great Depression of the 1930s. But even they do not have magic powers. Inflation is low because of competition, not central bankers.

Paul Ormerod 

As published in CITY AM on Wednesday 18th October 2016

Image: FSB Chair Mark Carney at pre-Brisbane press briefing in Basel by Finance Stability Board is licensed under  CC BY 2.0

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Look to Twitter for why Britain’s economy proved Project Fear wrong

Look to Twitter for why Britain’s economy proved Project Fear wrong

The economic data on post-Brexit Britain is beginning to emerge.  We discovered last month that employment in May to July grew by 174,000 compared to the previous three months.  Last week, the Office for National Statistics published its estimate for the output of the service sector of the economy in July.  This shows a 0.4 per cent rise on June, and a growth of 2.9 per cent since July last year.  Both are very good figures.

Official data, even for employment, is notoriously prone to subsequent revisions.  Is there any harder evidence that the economy is prospering and that Project Fear, so prominent in the referendum campaign, was wrong?

The key to a growing economy is of course confidence.  This was the great insight of Keynes.  The economy is driven much more by psychological factors – by his memorable phrase “animal spirits” – than by objective economic ones.  If confidence becomes depressed, no amount of stimulus will persuade businesses to spend on their investment plans or hire more people.

My colleague Rickard Nyman has been analysing tweets in the London area every day from the beginning of June.  Now, there is an awful lot of rubbish on Twitter, but the latest machine learning algorithms enable you to dive into the mud and come up with pretty polished estimates of overall sentiment.    The day after the vote, 24 June, stands out as one huge hangover.  The balance of London sentiment went very sharply negative.  Yet by the end of June, it was back to where it stood at the start of the month.  Sentiment wobbles along for the rest of the summer, but since the start of September a strong positive upward trend has set in.

Most tweets of course are about the fortunes of Arsenal, going on holiday, what was on TV, and not directly about the economy.  But the overall mood of Londoners has become much more positive over the last few weeks.

More evidence of positive feelings was provided at a seminar organised last week by the law firm Linklaters and the property outfit Strutt and Parker.  The focus was on commercial property, which is notoriously sensitive to the state of the economy.  There is no doubt that the sector took a hit immediately after the Brexit vote.  But every speaker, from quite different backgrounds, struck a decidedly optimistic note about both commercial property in particular and the UK in general.

Andy Martin of Strutts noted that the value of deals in 2016 is on track to be close to the levels of 2007, the pre-recession peak year for the economy, despite the sharp pause in the summer.  Both Zach Vaughan from Brookfield, one of the largest investors in global real estate, and Chris Morrish, recently retired as head of European real estate for Singapore’s sovereign wealth fund GIC, confirmed the continued strong attraction of the UK for overseas investors.

A coherent picture emerges from this diverse mix of official statistics, social media conversations and global commercial property perspectives.  The UK economy is thriving.

As Published in City AM on Wednesday 5th October 2016

Image: Twitter by Christopher is licensed under CC by 2.0

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Brexit was the final straw: it’s time to scrap the IMF

Brexit was the final straw: it’s time to scrap the IMF

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

Image: Valsts kanceleja/ State Chancellery is licensed under CC BY 2.0

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Why the economic picture tends to be rosier than initial estimates suggest

Why the economic picture tends to be rosier than initial estimates suggest

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 

Image: Scale by Thomas Leuthard licensed under CC BY 2.0

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