They say that the pen is mightier than the sword.
Consequently, it is incumbent upon us all to use our words judiciously. But it
is also important that those consuming any given message are careful to interpret
the information given to them without extrapolating beyond what is in
front of them. This is particularly important in a world riddled with fake news
in which messages can be subtly tweaked to say something that was not in the
original communication, which is then passed on down the chain like the old game
of Chinese whispers. It is also an issue for policymakers, particularly central
bankers who are trying to communicate with markets and the wider public.
This issue was thrown into sharp relief by the recent TV interview by British Foreign Secretary Boris Johnson, who in response to the question of
whether Russia was the source of the poison used in the Salisbury incident
replied: “When I look at the evidence,
the people from Porton Down, the laboratory… they were absolutely categorical,
I mean, I asked the guy myself, I said, 'are you sure?' and he said 'there's no
doubt.'” Only this week, Gary Aitkenhead, the chief executive of the
government’s Defence Science and Technology Laboratory stated that whilst the
government combined the laboratory’s scientific findings with information from
other sources to conclude that Russia was responsible for the Salisbury attack,
“we have not verified the precise source.”
It would appear that Johnson jumped to a conclusion that may
not (yet) be supported by the evidence – statistically known as a Type I error.
Meanwhile, the more cautious Aitkenhead refused to deal in speculation – as
befitting someone leading a team of scientists. But whilst there is a
discrepancy between these two versions of events, which has raised question
marks against Johnson’s judgement, it is important to note that Aitkenhead did
not say that the source was not Russian, as some of the more excitable media commentators
have suggested.
I was similarly struck by a Twitter exchange involving the
physicist Brian Cox who noted that “we
have a generation of senior politicians who were not taught how to think
properly - more science in their education would have helped. They use
imprecise, woolly language, which is symptomatic of woolly thinking.” Cox
was careful not to dismiss the arts and social sciences but was nonetheless inundated
with comments accusing him of doing just that, thereby rather proving his
point. People may disagree, but what I interpreted Cox as saying was that science
demands very high levels of certainty and many people could benefit from
understanding what constitutes a reasonable degree of proof before making
pronouncements in public.
But perhaps the problem is as much to do with the medium
through which many of our news stories are filtered. Take, for example, the way
in which the actions of central banks are reported. In August 2013 the Bank of
England unveiled a forward guidance strategy based on the unemployment rate. It
announced that Bank Rate would not rise from its then-current level of 0.5%
until the unemployment rate fell to 7%. This strategy was conditional upon
‘knockouts’ designed to allow for rate hikes if certain threats to inflation
became evident.
Although in fact unemployment fell well below 7% over the next
twelve months, the Bank did not raise rates for a variety of reasons – domestic
inflation was falling whilst the international environment was plagued by euro
zone uncertainty and concerns over Chinese events. Nonetheless, many people
fell into the trap of arguing that the Bank’s intentions did not match with its
actions which rather destroyed its credibility. But it is important to look at
exactly what the BoE said: “the MPC
intends not to raise Bank Rate from its current level of 0.5% at least until
the … headline measure of the unemployment rate has fallen to a threshold of 7%.”
This was not a commitment to raise rates once unemployment hit 7% – only a
commitment not to do so as long as it remained above the threshold,
which is a very different matter.
Despite the best efforts of the BoE to explain the
conditional nature of economic forecasts and the risks surrounding the central
case projection, the subtleties of this message are often lost in media
translation. Thus the mechanistic nature of the initial forward guidance rule
was always given more prominence than it deserved. Perhaps the BoE should have
been more aware that the issue would be construed in this way, and framing a
rule based on the unemployment rate laid it open to more criticism than was
necessary. I am not convinced that the BoE did a great job of communicating its
message at the time, but it certainly was not helped by some of the reporting
surrounding its commentary.
In his latest speech, MPC member Gertjan Vlieghe suggested that in his view it is “useful
to provide a snapshot of how today’s central growth and inflation forecast map
into my view of the likely central path of interest rates.” This is exactly
the approach adopted by the Swedish Riksbank which sets out an illustrative
path for the policy rate conditioned upon its economic forecast. Vlieghe
pointed out that “if growth and inflation
turn out differently from this central forecast, the path of interest rates
will be different too. That should not be seen as a mistake, or a breaking of
an earlier promise. It should be seen for what it is, namely an appropriate
response to a changed economic outlook.“
Whilst this is totally correct, past UK experience suggests that if the BoE were to
adopt such a strategy, a large number of people will misunderstand the nature
of conditional versus unconditional forecasts and use this as a stick with
which to beat the central bank when it is unable to deliver on its forecast. We
all have to choose our words carefully, but it seems that central banks have to
do so almost us much as foreign secretaries
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