Happy to do my bit

This week marked another of those set piece UK fiscal events that are so beloved of politicians, journalists and a large number of economists with the publication of the government’s Spending Review. The media focus was on the OBR’s forecasts which highlighted that the UK is set to experience its worst drop in annual output since the Great Frost of 1709 (around 11%) and the biggest fiscal deficit since 1944-45. Neither of these come as a surprise to those who have been following the UK economy in 2020 and the macro picture painted by the OBR for 2020 and 2021 largely accords with my own, so I found it rather difficult to get excited about the big picture.

That did not stop TV news editors and newspaper journalists from focusing on lurid headlines demonstrating the impact of Covid-19 on UK economic prospects. But in my view, the narrative around the outlook was more interesting. In this context I was particularly intrigued by comments from the BBC’s chief political correspondent suggesting that public borrowing is at “absolutely eye-wateringly enormous” levels and that with regard to the 60-year high in public debt: “This is the credit card, the national mortgage, everything absolutely maxxed out.”

This was yet another example of the failure to grasp some of the basic issues of fiscal policy – an issue I touched on here. It was particularly interesting to hear these comments on a day when the Economic Statistics Centre of Excellence (ESCoE) issued a report highlighting the general public’s lack of understanding of economic issues. The report, which was based on direct surveys of the public, found that they “could give broad definitions and speak in broad terms about economic concepts. However, when they were asked to provide more detailed explanations, they were generally unable to do so, and had typically never considered factors beyond their ‘personal economy’.”

When it comes to issues of dealing with public debt, this distinction is crucial. A household has a finite life and has to repay its debt over its lifetime but a government has a much longer lifespan (if not infinite, then certainly over many generations). Accordingly there is no rush to repay debt so long as there are institutional borrowers willing to hold it in the form of government bonds. Indeed for all the talk of “paying down debt”, UK debt levels have fallen in only 22 of the last 100 years and the incremental declines have been small relative to those years in which it increased. But between 1945 and 2000 it fell sharply relative to GDP, from 250% to 30%, implying that the costs of carrying the debt fell relative to income. As I noted in this post, the economic conditions for debt solvency imply that so long as the rate of GDP growth exceeds the interest rate paid on debt, the ratio of debt-to-GDP will decline (other things being equal). This means that governments should worry less about paying down the debt than ensuring that the amount of debt relative to GDP can be reduced.

The non-specialist media made great play of the “eye-wateringly enormous” £2.3 trillion debt level. But what does this mean? As it happens, the UK national debt has risen to just over 100% of GDP, which is a 60-year high. However the last time the debt ratio was at similar levels, the outstanding debt was a mere £29.6 billion and when it was at an all-time high of 259% of GDP in 1946 it amounted to £25 billion. To put that into context, the UK recorded a fiscal deficit of £47.9 bn in April 2020 alone: in absolute terms, the April deficit figure was almost twice the annual debt which the UK racked up after the most expensive conflict in its history. Of course such comparisons are meaningless for they take no account of inflation but they illustrate the futility of trying to grasp what a £2.3 trillion figure means. It is perhaps not surprising that voters struggle to understand basic fiscal concepts.

On the basis that the survey indicates they can relate economics to their own experience, consider this thought experiment. Imagine that a household has a gross income of £50,000 and borrows £200,000 to fund a mortgage. To be sure, £200,000 is a tiny fraction of £2.3 trillion but it represents four times the household’s annual income compared to one times the economy’s total income (or three times the government’s annual tax receipts). Who is more indebted? Moreover, the household has to pay back its borrowing over a horizon of 25 years but the government can simply issue more interest-bearing IOUs in order that it can roll over its debt. Who has the more onerous debt repayment schedule? And it is not just the UK consumer who struggles. The German government has convinced its electorate that it also should pay down debt, with the consequence that many German economists bemoan the lack of investment in infrastructure in recent years. 

I have made the point previously that the media has a big role to play in educating the public in the use of economic statistics and holding those politicians who misuse them to account. The most egregious misrepresentation of recent years was the claim by the Leave campaign that the UK could save £350 million per week by leaving the EU. When Boris Johnson repeated this claim in 2017 the head of the UK Statistics Authority called him out. However it was known to be a lie in 2016 before the referendum, and the popular press did nowhere near enough to call it for what it was. The comments by the BBC’s political correspondent, referred to above, were not (I assume) motivated by a deliberate intention to mislead but they nonetheless painted a false picture of an economic problem that affects all taxpayers. In that sense, the media can be said to be acting irresponsibly.

However the economics profession does not get off scot free either. Economists are often not good at explaining economic concepts in ways which relate to the everyday lives of most people. As the ESCoE report points out, “people are deeply interested in the economy and economic issues … However, at the same time, … they felt economics was difficult to engage with properly for the average person, and felt it was communicated it an inaccessible way, describing the economy as ‘confusing’, ‘complicated’ and ‘difficult to understand’”. In a speech given a couple of years ago, BoE chief economist Andy Haldane recounted an anecdote in which an academic tried to explain to an audience why leaving the EU would be bad for UK GDP. To quote Haldane: “A woman rose from the audience and, with finger pointed, uttered the memorable line: ‘That’s your bloody GDP, not ours!’” Indeed the ESCoE report suggested that “GDP was seen as economic jargon, contributing to the feeling that economics was largely inaccessible to them.”

This does suggest that there is a growing divergence between policymakers and the small group who understand the message they are trying to convey, and a sizeable majority of voters who do not. It certainly goes a long way towards explaining why the rational economic arguments against Brexit found such little resonance. The key lesson from all this is that the public needs to be more engaged with those economic issues which affect them in order that they can make more informed decisions. This in turn requires more effort across the spectrum in order to get the message across, and my first wish would be for the media to tone down the hyperbole when discussing matters such as fiscal issues. Economists have a duty to make some of the concepts more accessible as well, otherwise much of what we say will simply go over the heads of those who should be taking notice. On that front, I am more than happy to do my bit.

Factbombing

The old joke has it that you can prove anything with statistics but the evidence from the political debate over recent years is that the opposite is true. There is indeed such a thing as too much information. Full Fact, the charity that tries to assess the claims and counterclaims made in the course of the UK public debate, has called the weapons grade use of statistics ‘Factbombing’ which is a highly evocative and entirely accurate description of the phenomenon.

I first became aware of the extent to which politicians throw out huge quantities of statistics during George Osborne’s budget speeches without being able to put my finger on what was happening. But it has been taken to new levels in the course of day-to-day parliamentary business, particularly in the wake of the Brexit referendum. Full Fact quote a case from prime ministers’ questions in January when Jeremy Corbyn made 13 separate factual claims in the course of one question, which then did not relate to the question he subsequently asked. Of course, this makes it impossible to give a sensible answer, which is precisely the intention: Much of the pointless trading of facts is designed to gain political advantage and not to enhance the quality of the debate. The flip side is that data overload makes it very difficult for the average voter to follow the twists and turns of the debate.

As for accuracy, fact bombers do tend to quote accurate statistics, although they are often cherry-picked and therefore quoted out of context which reduces their usefulness when the subject matter is put under further scrutiny. But by the time we get to that point, the debate has moved on and nobody cares whether “a Labour government properly funded the police force” or that the Conservatives are responsible for “rising crime, less safe streets.” Perhaps an even bigger problem is that politicians are generally not trusted, so it is questionable whether the electorate believes or cares what “facts” politicians quote in the course of debate which further undermines the case for evidence-based policy.

Of course, one of the reasons why politicians are not trusted is that when they do lie, they lie big. Think about the claim made in 2016 that the UK could save £350 million per week by leaving the EU. This is based on the gross contribution to the EU budget before rebates and the amount returned in the form of EU funding. It is true that over the period 2013 to 2016 the UK’s gross contribution does correspond to this figure, but the net figure is 45% lower (£190 million per week). To the extent that UK fiscal finances never work off the gross figure but off the net number, which means that such a large figure never enters the budget calculations, it is simply untrue to quote the £350 million figure, as the UK Statistics Authority Chairman pointed out to Boris Johnson in 2017. Not that British politicians have a monopoly on untruth: One of the masters of the dark arts is Donald Trump (see here for a rebuttal of some his more egregious comments) and let’s not get started on Watergate.

One of the great problems in the use and misuse of economic statistics is the lack of context. I have made the point previously (here)  that spending “millions” on government outlays is to miss the point that overall revenues are measured in billions and the size of the economy is in the trillions. For example, an outlay of £100 million is worth 4.7% of annual GDP today compared with 9.7% 20 years ago. “Record spending” on the NHS is misleading if it has not kept pace with the overall size of the economy, particularly when the population is growing older and demands on healthcare resources are rising.

It is not just politicians who are guilty of overegging it. The Department for International Trade made a similar howler recently by sending out a tweet pointing out that “exports in the 12 months to April 2019 grew by 4.0% to a record high of £645.8bn.” Exports at a record high in money terms, yes. But as a share of GDP they are still below the high recorded in Q1 2012. Indeed, it is pretty likely that the latest release of economic time series such as exports or GDP will always post record highs so long as they continue to show positive growth. In statistical terms, such series are non-stationary, meaning that their mean and variance are not constant over time. I would be much more impressed if growth (which is statistically stationary) reaches a record high. But in a world where we need to reach for the superlative, it is much easier to go with the lazy headline regarding all-time high levels of exports.

Perhaps the real problem with Factbombing is that it diminishes the quality of debate. We need to know which facts we can trust and which we can discount; which are germane to the debate at hand and which are irrelevant? In a world where we are bombarded with information on a daily basis, it is more important than ever to remember that the singular of data is not anecdote.

The law of large numbers

The news that the government is to inject £1.6bn into the economies of some of the UK’s less well-off regions after Brexit is not unwelcome, but it is a piffling sum in the grand scheme of things. The government’s press release stated that the Stronger Towns Fund “will be used to create new jobs, help train local people and boost economic activity – with communities having a say on how the money is spent.” The press release did not say how long it would take to disburse the fund, but in a radio interview this morning the Communities Secretary said it would be available until 2026.

To put this into context, the UK’s GDP last year was £2.1 trillion which means that the total amount of the fund is equivalent to less than 0.1% of annual output. Spread over seven years the package is invisible in macro terms – £228 million per annum, or 0.01% of GDP. For reference, the troubled retailer Debenhams PLC is the smallest company in the FTSE All Shares index by market cap – the 646th largest firm in Britain – yet it still made a gross profit last year of £232 million. In other words, the government is distributing an amount equal to Debenhams’ annual profits to “create new jobs, help train local people and boost economic activity.”

We can slice the numbers up another way. The £1.6bn fund is split into an amount of £1bn to be allocated on a needs-based basis to eight English regions, with the government setting out the specific amounts, whilst the remaining £600 million goes into a fund that communities in any part of the UK can bid for. The population of the eight regions in question is around 46.5 million, implying that the fixed £1 billion element of the fund will allocate just £21.50 per person. Over a seven year period that is just over £3 per person per annum, with people in the south east being allocated 59 pence per annum whilst those in the north east receive the princely sum of £5.69 (chart). I must have missed the bus which carried the slogan “Vote Leave and get a fiver.” 

Clearly this is not enough to provide any sort of fiscal boost, which would lead us nicely into a discussion of how ineffectually the government has used fiscal policy since 2010 (and one day we will revisit this particular topic). But there is another issue here which goes to the heart of how economic issues are reported. Far too often, headline figures are reported in absolute terms without giving any context, particularly when it comes to government outlays. Take, for example, the UK’s defence budget. In FY 2009-10 outlays totalled £45.9bn measured in 2016-17 prices, and the government can argue that for the last three years spending has risen in real terms. What they don’t say is that savage cuts between 2010 and 2015 mean that defence outlays are currently 20% below 2010 levels in real terms.

Another particular favourite are the migration statistics. Remember how the government promised to cut net immigration to the “tens of thousands”? Latest data show that as of September 2018, annual net immigration was still running at 283k – admittedly down from a record 336k prior to the EU referendum but still a long way from target. And here is the real kicker. Net migration from the EU has indeed fallen to the tens of thousands (57k in the year to September, down from 189k in mid-2016). But non-EU migration hit record levels of 261k. This, you will recall, is the component over which the UK has control but it would appear not to have taken back the control the electorate believed it voted for (never mind the fact that the data are barely fit for purpose).

There does seem to have been a growing tendency in recent years to misrepresent economic data for policy purposes. The claim that the UK would save £350 million per week by leaving the EU was a misrepresentation based on the UK’s gross budget contribution, not the net figure. It was based on a grain of truth but was distorted beyond credibility. More generally, data are taken out of context and represented as fact when they are only a partial representation of the truth. It is a growing problem and social media exacerbate the issue by allowing misconceptions to become established before they can be refuted.

The press has a duty to hold a lot of this stuff to account but often politicians get away with it. There are some journalists who do a great job in calling out the nonsense but all too frequently the focus is on the personalities behind the story rather than the substance. For that reason, I can heartily endorse Full Fact, a charitable organisation that spends its time checking the numbers behind the spin. Of course, the misuse of economic statistics is not a new phenomenon. Back in 1935, Roy Glenday told the Royal Statistical Society, one of the commonest pitfalls awaiting the economic statistician “is to draw general inferences from partial and limited experience.” More than 80 years later, it is the politicians who increasingly try to pull the wool over our eyes.