Saturday, 31 December 2011

The Spirits of Rational Fear

The art of politics as we all know, is not confined solely to the domain of excellent policy. As vulgar, as utterly despised by the public as it usually is, the capacity to effectively translate policy into platform is completely contingent on message, on narrative. We might call it the art of persuasion but this sounds far too eulogistic.

Most people are not economists or researchers, they are busy, hard pressed and hard at work trying to survive and succeed in their own lives and those of their children. They rely on the information they receive from the media, and as is by now well known, the media, not altogether the faithful servants of their political masters, have a tendency to highlight, amplify and transmit rather selectively according to their bias.

And this bias is not merely political, it is also one of commercial expedience. The desire is to deliver the 'essence' of what is said, and what it means to the public in a way that sells papers or attracts advertising revenue. In a sense, it is ineradicable. The voting public have high information costs when they engage in politics; it takes a lot of time and effort to learn party positions, absorb arguments and decide on the merits. Even if papers published meticulously and faithfully every word of every speech, this would not solve the problem.

As such, we run into a lot of recurring difficulties. Complex or paradoxical arguments, while often valid and important, are easily dismissed by someone with confidence and a more simplistic and readily understood argument. Simple, short and punchy ‘messages’ are far more easily absorbed, understood and transmitted than lengthy and detailed ones. And it is easier to pander to emotional response, than to engage intellectual enquiry.

We are not so much the slaves of long dead economists, as the thralls of warring tribal chieftains of economics, with private citizens picking favoured economists to read and follow, who in turn side politically with one party or another. Economics, almost invariably is too important to remain strictly scientific, and in any case the voices we hear are those with an agenda, doubtless with the most sincere of motives.

Right now I think it is emotions chiefly which render the economic argument in the UK difficult. It is not merely the packaging of austerity as somehow brimming with moral rectitude, but the fear and uncertainty which surround us. Even at the best of times voters tend to prefer the devil they know to the devil they don’t. Standout catastrophes such as Black Wednesday and the Winter of Discontent may dislodge a government, but poor economic governance alone is not necessarily sufficient.

With disaster potentially looming over the Eurozone, it should come as no surprise that citizens of the United Kingdom are fearful about the prospects for the future. I suspect that even those economists who are confident about the right path forward domestically shudder from the base of their spines to calculate the repercussions if the Euro were not to be stabilised. This is no errant fear, but a wise one. The complexity and dangers which such an event would herald are staggering.

This may be one of the reasons Labour has felt very nervous about distancing itself too much from the Government’s austerity plans. Even if you could make the case normally that Keynesian solutions are the right way forward-- a challenge in itself, as it is not nearly as easy to neatly package into sound bites as austerity-- it is doubly difficult to encourage the public to change course while the European crisis hangs over the near future.

After all, as bad as things may be, the country hasn’t collapsed. That may sound absurd, but when things are this fearful, that is the phantom which haunts our discourse, and one Cameron has conjured willfully by evoking Greece like a cudgel at every opportunity (with remarkably little said of Ireland, a country his Chancellor wanted to emulate not so long ago).

The main narrative we hear from the Tories is that they have credible plans, that they are firm, that they have made the UK a safe harbour in the storm. This has made it very difficult for Labour to be bold and distinctive. It has evoked at every turn a potential disaster from bond market vigilantes and higher interest rates. Many in this country are only barely surviving because of low mortgage rates, and default might be a twitch of the market away for them.

The British people will not want to risk an alternative until the storm clouds pass, I think. And when they do, if they do, it will also be harder for the Prime Minister to blame our domestic failures on the Eurozone. That will be a critical moment. If Labour does not differentiate itself then, it will be ignored, it will be mocked, and it will gather no praise from anyone. Neither its supporters nor its critics.

At that point a powerful alternative narrative will be needed to present an opposition with a vision. Another way of seeing the future which lifts the shadow from our current path and provides a believable and distinctive way forward. It is hard enough in opposition normally, doubly so when you only recently lost power. Add to this the internal opposition of the coalition and it is not enough to simply tinker at the edges. The public must not see Labour as dithering or indecisive, as unwilling to commit. There must be absolute clarity.

Friday, 30 December 2011

Growth, Choice and Optimism

Back during my first degree course I was studying for a unit on South Africa, and I remember reading for the first time an article on ‘good growth’. What the author meant of course was green growth, sustainable growth, which is undeniably an excellent and important topic. What I want to talk about today however is a different kind of good / bad growth.

Opponents to Keynesian economics often mock the example of a man being paid to dig a hole, only to fill it up again. The idea that you should pay someone to do something unproductive, simply to get money into the economy. This sets up the possibility that there are some types of economic activity which are productive, and some which are unproductive (whether unproductive is the same as bad is another argument).

In which case, I think a case study should prove enlightening. Let’s take a few areas of policy and economic activity for which there are ready international benchmarks and comparisons, using the US as an example. I only intend to do this superficially so as to make a point, but it isn’t difficult to go further.

The US health care system spends around three times as much, per capita, as the UK system, and produces somewhat inferior outcomes, taken as a whole. Now, of course there is no single reason for this, be it lack of preventative care, poorly structured care, over-prescription of expensive diagnostic methods, or the way money flows in the system. Certainly lifestyle is a factor and cannot be blamed squarely on ‘the system’ (save in its preventative and information role). Even so, we might conclude that somewhere in there is a lot of ‘bad’ economic activity.

The US justice system, in the meantime, imprisons something like five times as many people as the UK system, taken as a percentage of population. The costs of keeping these people in this state is great enough, as is the cost of the wardens, administrators and the operation of the criminal law. The US is very different to the UK of course, but if you look at the statistics on black male youths in prison, and how their economic and parental absence affects their children and wives, you’ll see a cross-sectional slice of how justice policy can perpetuate intergenerational problems just as easily as poverty and discrimination can. This is not an attack on prisons, but most people will I think agree that prison is not the answer to everything. In the American example, it must surely be a drain on society.

The financial services sector, which had swollen from 4 to 12% of GDP before the crisis, is perhaps more debatable. How much of what is done in Wall Street, or the city of London is economically virtuous, and how much is destructive? That is nearly impossible to tease out, and at best we can make estimates and assumptions to the effect that a great part of it has proven to be speculative and unproductive. That is my assumption, that is my estimate. You may agree or disagree.

Finally there is inequality. If we assume-- as I do, and will go into in far more detail soon in a separate post-- that the poor are not uniformly less talented from the outset than the well off, then we must assume that there is great economic inefficiency in allowing them, because of their environment and history, to squander their gifts. Yet it is clear that if they find it harder to get loans, harder to study and do well, harder to feel confident and to aspire, harder to imagine themselves succeeding and commanding respect, then their gifts are likely being squandered in some degree. Of course many gifted young people succeed in spite of the statistics, the odds and the deterministic framework they face, but exceptions too often prove the rule, even as they shed new light on the real complexities which underlie it.

If we take the huge percentage difference in GDP that the US spends on these things, for comparable or worse results in many cases, we can calculate a roughshod aproximation of the slice of this wealthy nation’s GDP that it can afford to sacrifice on what we may deem wasteful activities. The arguments over defence spending are in this sense illusory. At least defence is a legitimate policy consideration.

Now, to return to the beginning of this post, this is not an argument that we can survive with less economic activity, with fewer people working, with less money being spent. This is an argument that GDP growth, while important, is very much something government has to consider not just as a number, but as a targeted set of priorities for the gradual reconfiguration of overall economic activity. This is true no matter how you plan to get there or where you want to go. Not very contentious, I know.

A lot of Austrian economists would tend to argue that market distortions caused by government actions lead to malinvestment. Others would argue that we must direct investment into the industries ‘of the future’, though opponents would say governments don't do well at picking winners. Still others would say our first duty is to invest in infrastructure, to allow the rest to happen. Things like railways and roads and terminals for Heathrow. Or of course, we might feel inclined to invest in ourselves, in our human capital, especially given our prowess at things like chemistry in this country.

These are a lot of competing claims for a government to balance, and are made harder by the realities of path-dependency in fiscal policy. For example, we might decide we want more manufacturing and less finance, but we're already reliant on tax from the city, so we can't exactly axe it. Once you strip away one sector, or become reliant on another, it isn't easily remedied without some pain.

There is however, potentially, one surprising piece of good news for the idea of social choice. In the present crisis money has poured into treasuries, collapsing yields to historic lows and simultaneously making it hard for SMEs to get loans. Cash-rich companies are hoarding and those who are Keynesian in character would say that this is a time when government can and must invest. If so, the optimism that Ed Balls speaks of is best translated into a confidence and boldness in our thinking and how we envision the state of our economy in the future.

And there’s no harm in considering the cold hard economic logic of progressive policies.

Thursday, 29 December 2011

On Europe, Economics and a Panoply of Policy. An end of year round-up of recent events.

A brief personal note: I know I haven't written much recently, I've been seriously ill for most of the past year or so. I had hoped to start writing more sooner but the death of a close friend and assorted other far less important obstacles have held me back from it. That said I'm hoping to write more soon, and to be more involved and productive in general, particularly after the Fabian Society's New Year Conference. So to borrow from the closing paragraphs of Hitchhiker's Guide to the Galaxy: "We apologise for the inconvenience."

In recent days there have been some positive signs from Italy, the putative repercussions of monetary activism, long denied and decried and finally-- to some limited extent-- implemented by the ECB. This apparent policy of 'say what the Germans want, do what the French want' has, for the moment, set back the metaphorical doomsday clock that seems to hover over Europe from our vantage point here in Albion, perhaps to the consternation of some. Even so, noone can be resting easy just now.

I confess I always assumed that they'd see the seriousness of the thing and act in the end, but the months have passed, and the pronouncements of days, weeks and months to save the euro--all hollow, all futile-- have come and gone. My assumption that this didn't have to happen has given way, in part, to the fear that the Germans are playing at brinksmanship without knowing where the brink is, how fast the wind is going or when it might change.

In light of the suspended catastrophe on our border the argument over whether Cameron did the right thing when he walked away some weeks ago-- which was somehow domestic, but domestic everywhere-- has  at last silently slotted into its proper place, concluding that his decision was probably incompetent but basically irrelevant. Irrelevant to the unfolding crisis, that is, the fears of future irrelevance remain as Cameron struggles to keep his own backbenchers from overt schadenfreude-- a nasty but helpful German word-- and to avoid completely  detaching the UK from the EU.

After all, whatever else he's done the Prime Minister can't be blamed for the inadequacy of the European response. Tighter fiscal controls without transfers and ECB action would be counterproductive, if anything. A complete package is both necessary and highly unlikely. Meanwhile Labour found itself trying to criticise the PM while (validly) not saying it would have signed up, a doomed fudge brought about by the conspicuous popularity of the sort-of-veto, and which followed what seems to be the usual pattern for the opposition at the moment: Try to be in two places at once while claiming to be standing firm.

This unfortunate stance comes as the culmination of a general malaise around Labour as the polls-- which had stubbornly refused to come to their aid over the Autumn Statement-- seemed to dip lower and lower, despite everything imaginable going wrong for the Conservatives. And the less said about the Liberal Democrats, the better. Nick Clegg was apparently heard saying what most of us already believed, that the liberal democrats no longer have any choice but to sleep in the bed they've made for themselves until 2015. Their only hope is that the economic policy will succeed and they'll get the credit and be able to stand on an economic platform closely aligned to their mortal adversaries, and bedfellows.

The problem for Labour, and for the country as a whole, is the lack of a clear, consistent and coherent alternative to the government narrative. The lengthy leadership contest and the vacuous months which preceded it allowed the Tories to establish profligacy as prelude, such that anything they did no matter how harsh was now the only morally responsible act, conjuring an almost Victorian shade of prudent pecuniary policy and moral rectitude. The rather facile talking points for this position take the form of analogies to ordinary but upright family life, invocations of morality through economics: You cannot solve a debt crisis with more debt, or "we have to pay down the nation's credit card".

The alternative is not so easy, reality is not so neat. Whole economies do not operate in the same way as individual families, and the evidence is that this slump is demand-based. We cannot rely on easily expanding our export trade while demand is slumping globally and our trading partners are inclined to devalue at the same time as us. In the meantime the private sector is not likely to hire or invest if they expect future demand for their goods and services to decline, both through government orders and indirectly through the decreased spending of the unemployed. Similarly, decreasing the deficit is not done in absolute terms, it is relative. If the government's tax take is diminished and GDP falls, debt to GDP as a ratio will be far harder to reduce. If welfare payments have to be made in increasing amounts at the same time the problem is compounded.

Interest rates have been tied by the government to the anonymous shadowy powerbrokers we know better as 'the markets', and in large part this is true enough. The problem is that there is no surety whatsoever that our interest rates would rise as the government suggests if we abandoned their plan. Rates in Japan, the US etc provide some evidence here, but even in the UK rates have gotten lower despite the government failing to achieve its own plans. This is difficult to explain, unless you assume it reflects perceptions of risk in other places, and the value of our control over our own currency.

Meanwhile the NHS reforms have over the course of the past year come in for repeated criticism. Of special note for me personally, however, has been the repeated use of empirically false claims concerning the performance of the NHS. Noone is going to defend the status quo-- that places you immediately at the straw man position of thinking the NHS is perfect and should never be changed--, but I think that changes should at least not be pushed on the back of lies about how well the service currently performs. This not only undersells a national institution and the hard work of many simply for the sake of political expedience, it also panders to the tendency of the public to assume things are worse than they actually are. Last but not least, it ignores the very good case that while things could be improved, they could also be improved by smaller, cheaper and better trialled changes. Huge, transformative non-iterative changes are necessary sometimes in policy, and are often difficult to achieve, but that doesn't mean we should bypass that debate altogether.

Speaking of debate, the media reform issue, which has long-- always-- been one of my biggest pet causes, has finally kicked off this year. It seems like virtually everyone has already given up on the prospects for reform, but I'm holding out some hope, I sincerely think it is worth fighting for. We hear a lot about the freedom of the press, but very little about their obligations. A free press, like a free market is an abstract concept. It exists only in theory. In reality, monopolies and power structures inevitably grow and re-enforce themselves, rules, both emergent and externally imposed, come to govern behaviour within certain bounds, and feedbacks and constraints lead to relatively stable systems.

When I used to talk about regulation I'd sometimes hear the complaint that: "people should be free to choose to watch fox news if they want", and this is emblematic of the difficulty in explaining this issue. Noone is free absolutely, we are free within a framework, we are free to choose the options which exist. If Fox's . . habits, were unacceptable in a given framework-- or even a given culture of journalistic integrity--, then some other Fox, different in all but name would exist, and people would want the right to choose that as well.

There is a false argument that simply because something exists now, that represents a sacred choice which must be preserved forever. Somehow I doubt the demise of the News of the World will do much to change that particular problem. Even so, regulation, properly designed and independent of both government and press would simply create a new framework, in which newspapers would adapt and operate differently. If newspapers could not survive while operating ethically-- and this assumes that they lack the creativity to appeal to the public without resorting to deceit, subterfuge and sensationalism-- then we must question their role, and their value, and how we can restore social goods, such as investigative journalism, and through what mechanisms we might do that. There are options, even subsidising investigative journalism is not impossible. A thought for another time perhaps.

Anyway, these are a few of my thoughts and reflections as the year draws to a close, not my finest contribution to the science of brevity, I know. I'll work on that, at length. In the meantime I wish everyone a very happy new year.


P.S. Though I may have lamented so-called "deceit, subterfuge and sensationalism", that was not intended as a wish list of things I'd ban. I've written more extensively on this topic elsewhere on this blog, but in short I'm most concerned with malicious and deliberate falsehoods, the balance between privacy and free speech, and other specific issues. Sensationalism is not on my ban-list. I probably don't even have a ban-list.