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If done right, Rishi Sunak’s towns fund will reap huge rewards and end decades of top-down strategies

If done right, Rishi Sunak’s towns fund will reap huge rewards and end decades of top-down strategies

Nurses’ pay has been one of the biggest flash points of last week’s budget. But, the Chancellor also stirred up lesser, but no less important, furores.

One of these was the list of places which are set to receive money from a whole string of new initiatives for the regions.

For example, under the Towns Fund, 45 towns will receive cash. And 40 of these have at least one Conservative MP (for transparency, since last May I have been pro bono Chair of the Rochdale Development Agency.  Rochdale borough has one Labour and one Tory MP).

Perhaps the cynics are right, this is politics. Governments are more inclined to reward their own supporters. Labour Prime Minister Harold Wilson, for example, agreed to build the notorious white elephant Humber Bridge simply to secure a Labour victory in a by-election in Hull.

But there is sound reasoning behind the government’s strategy – endowing towns with the resources to build themselves up will reap more rewards than throwing money at the problem, across the board.

The real meat of this blueprint was buried deep in the catalogue of accompanying documents to the budget, rather than the speech of itself.

One of these in the current batch sounds as dull as dishwater.  The National Infrastructure Commission has received terms of reference for a study on “Infrastructure, Towns and Regeneration”.

But, they mark an important intellectual shift in policy towards the regions.

Over the decades, since Harold Wilson was Prime Minister in the 1960s, many billions of pounds have been spent under the umbrella of regional policy by both Conservative and Labour governments.

But despite this, the gap between London and the South East and most of the rest of the UK has grown rather than narrowed.

Much of the spending has lacked focus, being top-down and driven by Whitehall. The projects have been huge, but have achieved little.

In more recent decades, an emphasis on cities in particular rather than “the regions” in general has paid dividends.

In the mid-1990s, for example, there were still bomb sites undeveloped since the Second World War within half a mile of the centre of Manchester. It was not possible to buy a house in the city centre because there were virtually none. Now there are 80,000 mainly young professionals living there, and the city has boomed.

The regeneration of cities like Manchester, Leeds and Liverpool provides examples of successful partnerships between the public and private sectors.

It is the satellite towns which surround these cities where problems have become further entrenched. The drain of talent to London has been around for a long time. But the recent success of their nearby cities have put the towns under even more pressure.

The government wants to focus attention now specifically on towns.

Crucially, the emphasis is on projects which are locally-owned. In the jargon of economics, growth in these towns has to be endogenous. It cannot be imposed from above. That particular approach has been tried and it has largely failed.

Towns need to innovate in how to do innovation. Beyond the politics, the government is carrying out an exciting intellectual and practical experiment.  The economics ministers deserve plaudits not brickbats.

As published in City AM Wednesday 10th March 2021
Image: Darlington by Robert Graham via Geograph
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There are economic lessons to learn from TfL’s hated bus announcement experiment

There are economic lessons to learn from TfL’s hated bus announcement experiment

The Transport for London (TfL) bus experiment has proved to be overwhelmingly unpopular.

Supposedly at every bus stop (but more usually once the bus has pulled away) a disembodied voice informs the passengers that the bus is about to move.

The hated announcement is being run as a trial for four weeks. TfL will then evaluate its effect on the number of accidents on the buses themselves.

A conflict between individual and collective welfare is exposed by the reactions to the experiment.

Collectively, we do not want it to continue, but individuals have little incentive to stop it in an effective way.

For example, public spirited individuals could fall down and claim that this was due to the motion of the bus. The statistics would then show an increase in accidents. Even the most obdurate bureaucracy would find it hard to persist with the experiment

The “victims” would bear costs as individuals, such as the time spent reporting it, plus the risk they might actually injure themselves. But they would create a benefit for everyone else. The voice on the buses would be switched off.

The concept of the winners compensating the losers has been a fundamental principle of economic theory for at least 100 years. It is important in public policy making, in the cost-benefit analysis which is carried out to decide whether a public infrastructure project should go ahead.

This is the rationale for the soon-to-be-abolished tolls on the Severn crossings, for example. The users benefit from a much-reduced travel time, but the non-users lose by having to pay taxes to build the bridge in the first place.

In general, the problem with implementing this in full is that the gainers are small in number relative to the losers. They tend to object vociferously to the charges levied on them, so that they rarely pay the full amount of their benefit to compensate everyone else.

With the bus scheme, the reverse is the case. Large numbers benefit from the ending of the scheme, and only the small number simulating an accident would lose.

But a public body such as TfL could hardly be expected to set up a scheme which would undermine its own experiment.

We might then ask why a market has not emerged to compensate those willing to simulate a fall. In a market, individuals could be paid the full costs they incur.

With social media, setting up such a market would be easy. But there would be two main problems.

The first is that of trust. How would participants be reassured that the relevant monies would be paid? The issue of institutional trust is a fundamental reason why markets are difficult to set up in many contexts.

There is also what economists call the free-rider problem. How many of those who dislike the voice would simply leave it to others to make the payment? There would be no coordination mechanism for ensuring that everyone paid.

Annoying though it may be, the bus experiment shows that even everyday issues often raise fundamental aspects of economic theory.

As published in City AM Wednesday 31th January 2018

Image: London Bus via Pixaby is licensed under CC by 0.0
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Science does not always make sense

Science does not always make sense

The story of the week for many people was the new alcohol guidelines issued by the UK’s chief medical officers.  In 1995, the recommended weekly upper limit for men was set at 21 units, or around eight pints.  This has now been slashed to only 14 units.

We might imagine that this drastic reduction is based upon some important advance in medical knowledge.  But our cultural cousins in Ireland, Australia and New Zealand do not seem to have noticed it.  They still have recommended limits very close to our 1995 one.  Large swathes of America retain a puritanical mistrust of alcohol, and even pensioners are required to certify their age in many states before they can order a drink.  But the “health limit” for men in the United States is 25 units.  In Spain it is 35.

The methodology of science may seem an abstract subject, but it has important practical implications.  The point in question is: can your conclusions be replicated by other scientists? Medical officers in the UK have used scientific evidence to pronounce about “safe” alcohol limits.  Their Spanish counterparts have done the same, and have come up with a number two and a half times as large.  The conclusions are completely different in the two cases.

Replicability is currently a hot topic in science.  For example, there is a serious crisis in psychology.  It seems that most of the conclusions they draw from their experiments cannot be reproduced when the tests are repeated.  We have all read media features under the headline “six steps to happiness”, or some such compelling title, based on academic psychology.  But we need to take them even less seriously in future.

Science and Nature are the top two scientific journals in the world.  Last August, Science had an article which attempted to reproduce the results of 100 experiments published in leading psychology journals.  The original teams collaborated with the replicators, a fact which should enhance the rate of replicability.  In fact, only 36 per cent of the attempted replications led to results which were statistically significant.  Further, the average size of the effects found in the new studies was only half that reported in the original studies.  The lead author, Brian Nosek, commenting on the paper in Nature, said that there is no way of knowing whether any individual paper is true or false from this work!

Economics has made progress in facing up to this crucial issue.  Can your result be repeated by someone else?  Many leading journals now insist that the data sets and even the code used to generate findings are posted on line.  But there is still a long way to go to get economists to take replication as seriously as do physicists.  A few years ago, my own company created a competition, with a decent prize, for the best paper on replicating an article already published.  In the first year we got five entrants, the second just two, and in the third only one.  Economics must avoid the current pitfalls in medicine and psychology.

As Published in CITY AM on Wednesday 13th January 2015

Image: Pour by jenny downing 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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The national accounts are the new JK Rowling

The national accounts are the new JK Rowling

A potential candidate for the world’s most boring book is the Office for National Statistics’ National Accounts: Sources and Methods.  This book, all 502 pages of it, is currently available in hardback on Amazon for just 1p.  It does exactly what it says in the title.  It gives a detailed description of how the data in the national accounts – variables such as GDP, inflation, earnings – are estimated.

These data series are the building blocks on which economic policy is based.  The Bank of England has a mandate to keep inflation around 2 per cent.  The Chancellor frets if the latest GDP growth figures are weak.  All these indicators depend upon the detailed processes described in the book of gathering information, sifting it, and deciding what it means.

To an economist at least, the tedium of the book is interrupted by occasional pearls of wisdom.  There is huge uncertainty around any particular number which is produced.  Sources and Methods suggest that the potential margin of error around an estimate of GDP is plus or minus 1 per cent.  To put this in context, average annual GDP growth in the UK over the past 30 years is just 2.3 per cent.  For some of the more obscure statistics, the error margin was believed to be as large as plus or minus 15 per cent.

But national accounts have suddenly become sexy.  Sir Charles Bean, former Deputy Governor of the Bank of England, has been tasked by George Osborne to carry out an independent review of the quality and delivery of UK economic statistics.  There is a particular focus on the challenges of measuring the modern economy, with a rapidly rising proportion of all economic activity taking place via the Internet.  Measuring value in cyber society, with its completely innovative range of products and services, is a major intellectual problem.

The latest issue of one of the American Economic Association’s flagship journals, the Journal of Economic Perspectives, carries an article on communicating uncertainty in official economic statistics.  The initial estimates for any statistic are invariably revised over time.  These revisions are often large, so that the early estimates offer a misleading view of the economy to policymakers.  In the first quarter of 2014, for example, there was an unexpected fall in American GDP on the previous quarter.  Initially believed to be just 1 per cent at an annual rate, the number was revised to a much larger drop of 2.9 per cent.

The problem goes much wider. For example, national accounts statisticians rely quite a lot on surveys.  But ‘non-response’ can be serious.  In poverty statistics for the US, for example, over the 2002-12 period between 7 and 9 per cent of households in the sample yielded no data at all by not responding.  A massive 41 to 47 per cent gave incomplete data by not filling in all of the survey.

Statistics in general is suddenly fashionable. High starting salaries go to graduates who can analyse Big Data.  And the boring old national accounts find exciting new challenges.

As published in City AM on Wednesday 15th September

Image: Harry Potter by Halle Stoutzenberger licensed under CC BY 2.0

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Why economics can prevent Europe’s refugee crisis from becoming even worse

Why economics can prevent Europe’s refugee crisis from becoming even worse

Emotions are running high over the refugee crisis, with heart-breaking images arousing waves of compassion across Europe. As ever, however, economics lurks in the background. The tragic stories of refugees coming to Europe rightly elicit a call to help those in need, but we must understand the underlying realities to truly do something about this crisis.

We can contrast the general composition of the refugees fleeing Syria and those already encamped at Calais, for example. The Syrians are mainly family groups, whereas in Calais young men predominate. Incentives help explain their choices of destination. As they trail across Eastern Europe, the Syrians chant “Germany!” At Calais, however, everyone wants to get into the UK. The political situation is highly fluid, but Germany has had a policy of open borders for such refugees. Other European countries are less easy to get into.

Many of those in Calais speak fluent English and have high skill levels. They would make a much more positive contribution to this country than, say, relatives imported from the poorest parts of Pakistan and Bangladesh. Their families have invested large amounts of money in their journeys, made with the specific purpose of getting into the UK. The lighter regulatory burden imposed on the British labour market than in much of the rest of the EU is in many ways a great strength. But it does mean that it is much easier to work illegally here. In theory, employers can be prosecuted for employing illegal immigrants, but in practice this doesn’t always happen. Skilled young people can thrive, which is why they want to come – not to sponge off our benefits, but to work.

Incentives feature strongly in the highly emotive issue of the boat crossings too. Since the EU took the decision to rescue the boats, the numbers crossing have soared. The demand has increased after an important component of the price of the voyage, that of the chances of being turned back, has fallen sharply. But the consequences of this misguided liberalism have been to place more lives at risk. Indeed, there is increasing evidence that the so-called boat captains are now not even bothering to get on board themselves. They simply take their large fees and let the refugees steer as best they can. After all, why put your own time and effort into a task when the EU will, or least purport to, do it for you? So the crossings have become even more dangerous.

The role of incentives is misunderstood and so, too, is the most fundamental feature of economics – the allocation of scarce resources. “Saint” Bob Geldof may be able to accommodate refugees in his large underutilised homes, but for local authorities there is a real trade-off. Every refugee housed is a person already on the waiting list who has to stay on it. Not just that, but they tend to be allocated to the poorer parts of the country where property is cheap. Simon Danczuk, the leading Labour moderate, points out that his Rochdale constituency has already been made to accept more asylum seekers than the whole of the South East of England.

Economics may often seem harsh, but keeping its principles in mind can avoid outcomes being even worse.

As published in City AM on Wednesday 8th September 2015

Image: Un jove de Kobane (Síria) refugiat a la frontera turca. by Jordi Bernabeu Farrús is licensed under CC BY 2.0. 

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