Nothing new under the sun

The British Conservative party has torn itself apart over the issue of the UK's EU membership throughout the last 40 years. Indeed, Guy Verhofstadt, the former Belgian prime minister and current MEP who is now lead Brexit negotiator for the European Parliament, remarked recently that the whole Brexit issue was an internal Conservative Party spat that got out of hand. What is less well known is that in the early years of the twentieth century, the Conservatives were similarly split over another economic issue – that of tariffs – which ultimately had disastrous political consequences.

Our story starts at the beginning of the twentieth century in the wake of the Boer War (1899 to 1902) when the limits of British imperial power began to be exposed. The most powerful empire on the planet was forced to use its full military might to defeat an army comprised of farmers, which came as a big blow to national pride and caused a lot of soul-searching at a time when the USA and Germany were beginning to become established as major economic powers.

It was against this backdrop that the Tariff Reform League (TRL) was formed in 1903. The idea was to protect British industry from perceived unfair foreign competition by advocating a policy of Imperial preference in which the British Empire would be transformed into a single trading bloc to compete with Germany and the US. Imports from outside the bloc would be subject to duties which would be channelled towards social reforms, such as the establishment of a universal old age pension scheme. The TRL also claimed that high import duties would allow taxes to be cut in other areas. However, this was a controversial proposition and opponents claimed that such a protectionist policy would raise the cost of goods such as food (especially bread).

Like the Brexit campaign, the TRL was well funded and supported by a range of politicians, intellectuals and businessmen. Moreover, it was popular with the grassroots of the Conservative Party. But politicians were split, and the issue fractured relationships between Conservative MPs and their government coalition allies in the Liberal Unionist Party. As a result, this coalition suffered a landslide defeat in 1906 to the Liberals (not to be confused with the LUP) which advocated Free Trade. Thereafter, the tariff issue appeared to lose momentum. The so-called People's Budget of 1909 was instrumental in introducing a universal pension scheme, undercutting one of the arguments used by the TRL, and by 1914 the league had all but ceased to exist. The Conservative Party also downplayed tariff reform and abandoned a pledge to put the issue to the public in a referendum.

But the coda to this particular piece of history came after WW1 following the official dissolution of the TRL. After comfortably winning the 1922 election with a majority of 78 seats the Conservative prime minister, Andrew Bonar Law, resigned due to ill health. His place was taken by Stanley Baldwin who announced that tariff reform was to become official Conservative policy in order to tackle rising unemployment. Just as Theresa May did this week, Baldwin announced a snap election early in the new term to secure a popular mandate for the new policy. But in the December 1923 election, just 13 months after the previous one, the Conservatives lost 86 seats and although it was still the single biggest party in Westminster, it was unable to overturn a coalition of Labour and the Liberals.

Ironically, the Lib-Lab government failed to hold together and a third election was held in 1924 when the Conservatives won a landslide, helped in part by the infamous forged Zinoviev letter, which was published in the Daily Mail four days before the election. Things got worse for Labour before they got better. The party was blamed for the economic collapse of the early 1930s and polled its worst results at the 1931 election, to which it responded by electing George Lansbury, a left-wing pacifist, as leader.

Whilst history never repeats exactly, the parallels with the British political scene then and now are striking. The Conservatives are split on issues of national economic significance, with Brexit playing the role today of tariff reforms almost a century ago. In addition, the experience of 1923 illustrates that this week's decision to call a snap election is fraught with risks. We should also not overlook the role of the Daily Mail in publishing material whose veracity is open to question. Meanwhile, Labour is repeating its post-1929 convulsions all over again.

As it happens, nobody expects anything other than a thumping Conservative majority following the election on 8 June, so the 1923 experience is unlikely to be repeated. This is partly because, like Lansbury, Jeremy Corbyn is – rightly or wrongly – deemed unelectable. Ironically, Lansbury never actually faced the electorate – he resigned as Labour leader just over a month before the election and the party improved its performance compared to the previous election in 1931 under his successor, Clement Attlee. A Corbyn resignation in the next two weeks is unlikely, but he still has a chance to repeat the rhymes of history.

Perhaps what all this tells us is that there is nothing new under the sun when it comes to politics. The smart leader writers who tell us that the Labour Party is condemned to oblivion really ought to look more closely at history. But it is unfortunate that it is currently unable to mount an effective opposition to a government apparently bent on enacting a ruinous economic policy in the form of a hard Brexit. If there is anything to be learned from the economic and political debates of the interwar period, it is that economic nationalism – for that is what Brexit is about at heart – is a thoroughly bad idea.

Out of the blue

Today’s announcement by Theresa May that she intends to call an election in the UK for 8 June was an Easter surprise that nobody anticipated. From a political perspective, there are many good reasons why the PM would wish to hold an election now. First, the timing is propitious: The economy has withstood the Brexit shock better than most people expected, and although consumers are now being squeezed by the sterling-induced rise in inflation, with the result that real wage growth is now at its slowest since 2014, it has not yet gone on long enough to be really noticeable. It thus makes sense for her to hold an election before the bad news starts to kick in. Although the election was not originally scheduled to take place before 2020, there is a risk that in three years’ time, the economic fallout from Brexit would start to make its presence felt, which could be politically damaging.

Second, although the PM has previously said that the current government would serve its full term until 2020 it is pretty obvious that the manifesto commitments made in 2015 are constraining her room for manoeuvre. As I have pointed out previously (here) the election promise not to “raise VAT, National Insurance contributions or Income Tax" was a howler, which backfired in March when Philip Hammond was forced to rescind his planned increase in National Insurance Contributions for the self-employed following a backbench revolt. Oddly, the same backbenchers did not show any discontent when the commitment to remain in the EU single market was reneged upon (“We say: yes to the Single Market”). It is thus clear that the government realises the manifesto commitments are no longer appropriate in a post-Brexit Britain (so look out for a rise in self-employed NICs in the November Budget).

Third, the Labour Party is down and out. Jeremy Corbyn’s approval ratings are subterranean with three big pollsters giving him a net rating of between -36 and -41 (here). The Conservatives are ahead by 20 points in the polls, but prior to last year’s EU referendum the lead was only 5 points. I would conclude that Corbyn’s failure to speak out in favour of the near half of voters who rejected Brexit, and his decision to go along with the Conservatives’ Brexit timetable, has cost his party dearly. The bottom line appears to be that the Conservatives will win by a landslide with pollsters pointing to a parliamentary majority in excess of 100 seats, compared to 17 today.

As for UKIP, who cares? They appear to be a busted flush with their sole MP having quit the party last month and the party foundering in the absence of the charismatic Nigel Farage. Indeed, a party which existed only to force the UK out of the EU no longer has a raison d’etre. However, they could still damage Labour efforts to win seats in the English north and midlands by siphoning votes away, which can only help the Conservatives. Meanwhile, the Lib Dems are not expected to improve on their poor 2015 showing and the Scottish Nationalists will retain their lockout north of the border.

All this leaves me rather uneasy. The Fixed-Term Parliaments Act 2011 was designed to force governments to serve their full five year term and prevent them from choosing the timing of an election to suit their own purposes. Only twice since 1951 has a government called an election so early in its parliamentary term (1966 and 1974), and on those occasions the majority was either unworkably small (1966, when it was down to 4 seats) or the government was in a minority (1974). We have to go back to 1923 for the last time a government with a workable majority called an election so early. Following the 1922 election which gave the Conservatives a comfortable majority, the prime minister wanted to secure a mandate for tariff reform, which his government supported. In the event its 74 seat majority was wiped out in 1923 allowing Labour to form its first ever government (with support from the Liberals). So beware the lessons of history.

As it happens, sterling ended higher today as (in the FT’s words) “investors bet the prime minister would use the vote to neutralise Tory Eurosceptics and deliver a soft Brexit.” I am not sure it will necessarily turn out like this. Janan Ganesh, also writing in today’s FT, pointed out that the prime minister is not so much bending with the wind to appease the right-wing backbench Conservative MPs as much as she is a conviction politician on a mission. If you buy that version of events, then if the PM is able to secure a much wider parliamentary majority (as is pretty likely), she will then have a mandate to do pretty much whatever she wishes. And as the blog at Another Angry Voice points out (albeit in fairly intemperate language, here and here)  Theresa May has a lot in common with the right-wing of her party. This concerns me because it suggests that far from facing down the Eurosceptics, there is a risk she will be happy to deliver the Brexit-at-any-cost policy which so many of them want.

One thing is for sure: We should never underestimate the prime minister and she certainly does not come across as the type to be pushed around by anyone – especially by those within her own party. As Ganesh pointed out, we should not be fooled by the fact that “on Easter Sunday, one of the least pious societies in the world heard an explicitly Christian message from its prime minister.” As the old joke goes, she may be the clergyman’s daughter, but you couldn’t put anything pastor.

Getting the message across

They say you should never believe everything you read in the newspapers, although in today’s post-truth world I wonder whether you can believe anything. We all suffer from various cognitive biases and tend to believe those elements of the media which affirm our own prejudices. Bearing this in mind, I was gratified to read the headline in today’s Irish Times, pointing out that the “British government realises Brexit is a mistake”. It goes on to quote John Callinan, the second secretary-general at the Department of the Taoiseach, who pointed out that the UK government is now “slowly” beginning to understand that Brexit is “an act of great self-harm.”

Whilst I did point this out last weekend (here) it is gratifying to hear others say what I – and most of the economics profession – have been saying for the past four (and more) years. The worrying thing, of course, is that the article uses the adjective “slowly” to describe the UK government’s dawning realisation of the scale of the challenge. If that is indeed true, it is not the cognitive biases of our elected representatives we should be worried about, but their cognitive processing power. Indeed, there was a total absence of leadership during the referendum campaign with no politician daring to make a coherent statement about the benefits of EU membership which was able to tug at the heartstrings in the way that the Leave campaign managed. There was very much a sense that politicians faced an onslaught from a press which seemed only to be interested in making the case for Brexit. To put it simply, it was as if we lived through a period when rationality broke down.

It is not the first time we have been through this. I was reminded of the article by Chris Dunkley, the Financial Times TV critic in 1997, who described the TV coverage of the funeral of Diana, Princess of Wales by highlighting that the British public had engaged in some kind of collective breakdown. He pointed out that although 60% of the British population tuned in to watch it on TV, that still meant a sizeable minority of 40% did not, but given the way in which it was reported one would have thought that everyone was glued to their TV. Unfortunately I no longer have a copy of the article to hand, so I am quoting from memory, but it got to the heart of the way in which events are distorted by the popular press so that it becomes part of the accepted narrative.

In a similar vein I was struck by a paper I came across recently which looked at the way in which Jeremy Corbyn has been portrayed by the British press. The study, produced last July by Bart Cammaerts, Brooks DeCillia, João Magalhães and César"Jimenez-Martínez of the LSE’s Department of Media and Communications (here), pointed out that “Corbyn was represented unfairly by the British press through a process of vilification that went well beyond the normal limits of fair debate and disagreement in a democracy … He was also systematically treated with scorn and ridicule in both the broadsheet and tabloid press in a way that no other political leader is or has been … The result has been a failure to give the newspaper reading public a fair opportunity to form their own judgements about the leader of the country’s main opposition.”

As one who does not have much time for Corbyn’s policies on the whole, this is a very astute observation. The paper goes on to point out that “UK journalism played an attack dog, rather than a watchdog, role. This is unhealthy from a democratic point of view and poses serious ethical questions as to the role of the media in a democracy, especially when it concerns the legitimate contestation of the Government of the day.” Such behaviour was also evident in the run-up to the 2015 general election, when Labour leader Ed Miliband was portrayed as “Red Ed”, a dangerous socialist who would damage the national interest (not, of course, like the current government whose Brexit policy should in no way be seen as damaging to the national interest).

I have no wish go further into the debate about the role of the media where the likes of Simon Wren-Lewis have discussed it in much detail (here). But we should be very aware of uncritical acceptance of policies such as Brexit (or indeed Trumpism) which make seductive promises which cannot be met. It is incumbent on all of us (politicians included) to act responsibly in the face of some of the wilder policy claims in the press (or indeed social media). Otherwise, it will not just be politicians who have a slow dawning realisation that their positions are untenable. Once voters realise it, they may become even angrier than they are now, and that would definitely not be good for our democracy.

The economics of flight overbooking (or how to avoid a beating)

The recent news that a passenger was unceremoniously hauled off a United Airlines flight because the airline was unable to persuade enough passengers to voluntarily disembark strikes me as an extreme case of market failure. It is well known that airlines routinely overbook flights in order to maximise the chances of a full aircraft, given that a certain number of passengers will not travel for one reason or another. In the event that there are more passengers than seats, the airline must offer some form of compensation to persuade passengers to voluntarily make way. At the same time, the passenger must weigh up whether the price offered is sufficient to compensate them for the inconvenience. It is a classic bargaining situation worthy of further investigation.

Obviously, the aircraft cannot take off until all passengers are seated and it must wait at the departure gate until the supply and demand for seats is in equilibrium. The airline is charged in proportion to the time elapsed over and above the scheduled departure time. According to industry estimates (here), the cost of such delay is around £70 ($87.50) per minute. The airline will know before boarding begins that they are overbooked so it is in their interests to offer compensation before passengers take their seat, although in the recent United case the airline appears to have waited until they were on board, which is a major strategic error.

We can devise a simple model to analyse the choices facing the airline, based on some arbitrary assumptions but it makes the point. If we assume that it takes 10 minutes to remove luggage and repack the hold, then the airline has an incentive to offer compensation of less than $87.50 up to 10 minutes before the scheduled departure time. Between 9 and 10 minutes prior to departure, the strike price rises to $87.50 which is the price of saving another minute of delay. With less than 10 minutes until the scheduled departure time, and no takers for the offer of compensation, the fine will continue to rise in a linear fashion because the airline cannot unload the luggage and still make the slot. The airline will thus have to raise its offer to passengers on the basis that $87.50 has not proved sufficient incentive so far. On the assumption that one of the passengers does not suddenly “crack” during this standoff, the airline will have to engage in a price discovery process in order to tempt one of them to drop their claim for a seat because otherwise the delay will continue indefinitely.

Suppose that for every minute that elapses, the airline raises its offer by $10. Thus, with 9 minutes to go, the airline will face a fine of $87.50 and offers passengers a similar amount. With eight minutes to go, the fine rises to $175 and the passenger payout to $97.50 and so on (see chart for the representation of the cost structure in this case). The total cost to the airline is the fine levied by the airport for missing the departure slot plus the customer payout (we ignore the costs of any overnight accommodation for inconvenienced passengers). If there are still no takers at the scheduled takeoff time, the airline faces costs of $1052 (a fine of $875 and compensation of $177.50). Obviously, this process could go on for a while – in theory up the point at which it becomes cheaper to refund all passengers and cancel the flight (less the cost of unused fuel and any sundry items).

As it happens, one limit to the process is the legal maximum compensation which US airlines are required to pay ($1350). In our simple model formulation, the airline would have to wait two hours before reaching this limit but by that point the airport fines would exceed $11,000. Indeed, as the chart shows, the airline has an incentive to avoid the steeply rising departure fines. A simpler option would be for the airline to decide in advance how much to offer the passenger before it has to pay any departure fines. Thus, more than 10 minutes prior to departure the airline will not be subject to fines but knows that if it waits until the scheduled departure time before finding an agreement, it will have to pay $1052. The sensible option is thus for the airline to offer the passenger an amount up to $1052 which allows it to take off on time without incurring any departure fines; gains goodwill from the affected passenger and still pay an amount which is less than the legal maximum. Note, by the way, that European airlines are less generous. Payouts per passenger depend on the distance travelled and range from a minimum of €250 for short-haul flights to €650 for longer journeys.

The simple model suffers from a number of shortcomings, none of which change the broad picture. It does not deal with multiple equilibria (i.e. if more than one passenger were to accept the offer). A workaround to this problem is to pick a passenger at random and make the offer rather than hold an auction. More problematic would be the case where the airline needs to bump more than one passenger which changes the airline payoff because different people have different preferences, thus making it harder to find a series of market clearing prices.

This raises a question of what would tempt a passenger to accept the airline’s offer of compensation? It all depends on their time preference, or the rate at which they discount the need to be at their destination on time. This will depend on factors such as income and the value they place on their time. If you are a US worker with just two weeks holiday per year and you lose one day due to flight problems, you may set a high value on the cost of delays. If, however, you earn $50,000 per year, you can earn an extra day’s pay ($200) simply by holding out for two minutes beyond the scheduled departure time.

If the model outlined above does not provide a solution, the process can be short-circuited by the drawing of lots to choose who leaves the aircraft – as apparently United did. Unfortunately, the gentleman removed from the United flight was a doctor, who presumably applied a very high discount rate to his time, so it is hardly surprising that he was not best pleased at being asked to leave the flight – let alone the manner of his departure. There are many issues involved here, but perhaps the key takeaway is that airlines are desperate to avoid departure fines so if you have the time to negotiate, chances are you can drive a hard bargain. There again, you might just be hauled off the aircraft …

Beware the economics of populism

Venezuela is probably the worst managed economy in the world today. It has the largest oil reserves of any country, accounting for around 18% of the world total and twice as much as the whole of Europe put together, yet its citizens suffer food shortages and a lack of access to basic medicine. In short, they live in a country whose economy is – to put it bluntly – a basket case. It should not be like this. The fact that it is can be attributed entirely to a policy of economic mismanagement, driven by a government which for the last 17 years has pursued a brand of socialism known as Chavismo, named after its initiator, former president Hugo Chávez. 

When asked in a recent TV interview what Venezuela must do in order to get its economy back on track, my first answer was “get rid of the government.” Chavismo is a ruinous policy which sought to build a mass movement of popular democracy in order to establish economic independence, equitable distribution of revenues and an end to political corruption. It has failed on every count. It is not popular; has failed to break the dependency on oil and has resulted in an even less equitable distribution of incomes than when the policy started. Meanwhile, Transparency International today ranks Venezuela 166^th out of 176 countries in its Corruption Perceptions Index, compared to 71^st in 2000. In short, Venezuela is a classic example of how not to run a populist policy.

But, I hear you say, this sort of populist nonsense only happens in third world dictatorships such as Venezuela or Zimbabwe – it would never happen here. And you would probably be right. But it is interesting to note that the share of electorates voting for populist parties in the so-called developed world is at its highest since the 1930s (see chart below). The chart was taken from a recent excellent study by Bridgewater Associates which is well worth a read (here) and which takes a look at how populism emerges, how it runs its course and what are the wider implications. As the report states, “populism is a political and social phenomenon that arises from the common man being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them.”

This all sounds very familiar after the events of the last year, and although neither Brexit nor the election of Donald Trump are expected to lead to the extreme outcomes associated with past periods of populist government, they do share certain similarities. Both were motivated by a certain degree of xenophobia and both to varying degrees involve elements of anti-free trade, as well as being highly nationalist campaigns. We have also seen some elements of this in the French and Dutch election campaigns in recent weeks.

The real concern is that populist agendas tend to do more economic harm than good in the long-run. One of the unsung economic populists identified by Bridgewater is Robert Muldoon, the New Zealand prime minister from 1975 to 1984. His policies promised a continuation of New Zealand’s generous social welfare programs and protections, which resonated with elderly and rural voters, who helped bring him to power. His policies, which included setting up a pension system described as “the most generous universal pension scheme ever introduced in any country in any era,” came against a worsening domestic and global economic backdrop. The upshot was that New Zealand was subsequently forced to backtrack and introduced a major restructuring programme in the mid-1980s (the Rogernomics programme) which caused a lot of pain in order to reverse the excesses of Muldoon's policies.

Donald Trump’s threats to impose barriers to countries wishing to trade with the US threaten to do more harm than good. Brexit, if not handled correctly, will cause much greater long-term damage than many of its current proponents believe. Whilst we may not be about to go along the same path as Venezuela, the historical evidence makes it clear that politicians who make promises their economies cannot keep do us all a disservice.

Compromise on so many levels

In her January speech which set out what the UK seeks for its post-Brexit future, Theresa May stated that the UK does not seek “partial membership of the European Union, associate membership of the European Union, or anything that leaves us half-in, half-out. We do not seek to adopt a model already enjoyed by other countries. We do not seek to hold on to bits of membership as we leave.” But if politics is about anything it is the about the art of compromise, and over the past week, signs have emerged that the government is indeed prepared to “hold onto bits of membership” in order to avoid the cliff-edge that the prime minister has warned about.

The Financial Times reported in midweek that the UK may accept ”the possible extension of free movement, as the European Parliament agreed to open the way to a potential association agreement.” This sounds very much like the sort of policy guaranteed to get hard-Brexiteers foaming at the mouth but it is a rational and sensible response to something that could otherwise become a major problem. The UK is an open economy which has taken international specialisation to extremes. To simplify hugely, the UK has become a service-based economy and sources large chunks of its manufactured goods offshore. Precisely because the services sector is highly labour intensive, the UK needs to import large quantities of labour in order to meet demand. This model means that the UK is highly integrated into the global economy meaning that it makes little sense to suddenly throw up obstacles to the supply of labour which the UK needs to continue generating output.

The UK has also suggested that it may be prepared to take the rulings of the European Court of Justice into account in the interpretation of laws which derive from the EU – at least until there is time and appetite to change them. To the extent that the ECJ is a symbol to many Brexiteers of all that is wrong with the EU – overbearing, overreaching and undemocratic – this sounds like a significant concession. It is also recognition that taking back control of your own laws, after 44 years during which a large proportion have been designed with the EU in mind, is not an easy task. It is also yet another indication that the domestic civil service will be overwhelmed with the task of dealing with post-Brexit Britain and that large parts of the policy agenda will be given secondary consideration (see this article in today’s Observer).

All this suggests that there is a dawning realisation in government that the process of exiting the EU will be a lot more complex than people were led to believe twelve months ago (don’t say I didn’t warn you). It will also cause friction within the group of Leave supporters who seem to be split between the desire to “take back control” (whatever that means) and the slightly less-unhinged who (wrongly) see Brexit as an opportunity to remap Britain’s international trading relationships. Anyone advocating a clean break after two years of Article 50 negotiations is simply intent on marching the UK towards the cliff-edge that the prime minister is intent on avoiding. I am thus more optimistic after this week than I have been for a long time that if we cannot avoid Brexit, we may at least be able to secure an exit which minimises the damage.

It also raises the question of post-Brexit UK-EU relations? Extrapolating from this week’s (admittedly very small) sample of events, there is a possibility that the UK could indeed become the half-in half-out member that Theresa May appeared to rule out in January. On the one hand, this is a very bad compromise for it will not give the Leavers what they want and will fail to satisfy the Remainers who argue that we can obtain the same benefits by remaining in the EU. Yet it is the least worst outcome for a country which appears intent on leaving the EU.

But it also raises another question of what the EU wants to be in future. Twenty years ago, many economists argued that the EU was not ready to pursue a policy of full integration and that a variable speed Europe was the better option. The rationale was that since many countries were coming from different starting points, attempts to impose common standards would raise the degree of strain as they were forced to arrive at the same point at the same time. The experience of EMU, in which Italian output has not expanded since it joined the single currency, is an indication of the damage that can be caused if countries do not put in place the requisite reforms to ensure they comply with common standards (in Italy’s case, this means labour market reform). Brexit may thus be a precursor of a regime in which different countries integrate at different speeds. It may be no bad thing, and I will come back to it in a future post.

But as the British may well prove over the coming years, EU membership may not be a binary choice. After all, in this day and age, consumers are increasingly unwilling to accept take-it-or-leave-it choices. Why should the EU be any different?

Keep talking

Last week, Bank of England chief economist, Andy Haldane, gave one of his excellent speeches which on this occasion provided a tour-de-force on the topic of central bank communications (here). He pointed out that just over twenty years ago, central banks were still concerned to maintain their mystique. Indeed, I well remember from my student days that much of the contemporary economic literature was focused on the extent to which central banks could influence policy by withholding their reaction functions from public view. Today, however, central banks are much more open institutions. According to Haldane, the BoE’s communications last year amounted to 4.5 million words, which is pretty impressive even by the standards of the Twitter age.

But what is the point of all this communication? Central banks in democratic societies believe that they have a duty to get their message across to as many citizens as possible. There is a certain logic to this: After all, even though most central banks are independent – albeit to varying degrees – they still have a duty to explain their actions to the people in whose name they are acting. One of the pioneers of such communications was the Bank of Canada in the 1950s whose governor, James Coyne, viewed BoC speeches and other reports as devices to explain monetary policy to the public but also as a tool to underpin the central bank’s credibility and reputation. Karl Blessing, President of the Bundesbank from 1958 to 1969, similarly argued that: “A central bank which never fights, which at times of economic tension never raises its voice ... will be viewed with mistrust.”

Of course, much of this effort is wasted if those at whom the information is aimed do not understand the message being conveyed. The BoE is acutely aware of this problem and it was highlighted in a post by Jon Fullwood on the Bank Underground blog last October (here) which demonstrated that BoE texts generally have a Grade 14 reading level, which is equivalent to that required by a second year university student. In any case, even if the message is understood, it may not be accepted – particularly at a time when trust in institutions is low. This raises an important question of whether trust and understanding are inextricably linked. It is likely, as Haldane points out, that  “change in the nature of public language – shorter, simpler, shriller – puts an even greater premium on institutions making themselves understood … That means speaking in words and sentences that land rather than levitate with the public, that connect rather than divide public opinion, that illuminate rather than darken public debate.”

Some might say that this is akin to dumbing down the message. But there is nothing wrong with a little dumbing down if it gets the message across – after all, those with more interest in the subject matter can always engage at a higher level if they have the desire to do so. In any case, the actions of managing the economy do not have to change at all – merely the way in which they are communicated. Central bank communication can, of course, be taken to extremes as Richmond Fed President Jeff Lacker found out this week following the discovery that he had communicated sensitive market information to an analyst (prompting his immediate resignation). Sometimes the phrase “too much information” takes on a new meaning.

But despite central bank efforts to ensure that they communicate as effectively as possible, sometimes I wonder whether they overdo it. Should central banks worry overly much about whether their every last utterance is understood by the ordinary citizen? A certain degree of financial literacy amongst the general public is desirable but many citizens manage just fine without much knowledge about what central banks are up to.

As for a market perspective, it sometimes feels like Say’s Law is in operation, with supply creating its own demand. In other words, the more information central banks give out, the more markets seem to want. I would not be at all surprised if at some point in the near future there are calls for live broadcasts of central bank discussions, or at the least a live Twitter feed. That said markets are much more trusting of central banks today. Gone are the days when markets used to interpret central bank actions as being motivated by any informational advantage which they enjoyed. This is partly the result of greater central bank openness – after all, the Fed has gone out of its way to avoid a repeat of the actions which prompted the bond crash of 1994. But it is also to do with the communications revolution which means that markets and central banks operate with similar information sets.

Ironically, economists were originally employed in financial markets to interpret the actions of opaque central banks. I well remember a TV interview around 1990 in which Gavyn Davies was asked what the 1990s would hold for the City. His answer was something to the effect that he did not know but he ventured that by the end of the decade there would be fewer economists employed than there were at that time. He was wrong about that: But with central banks providing much more information and comment than they used to, it is possible that he will only be wrong about the timing.