Tuesday, November 30, 2010

'Nudge' is the title of an influential book written a couple of years ago by Richard Thaler and Cass Sunstein. The thesis of the book is that small actions by government can be used to trigger large changes in behaviour amongst the population at large - government can 'nudge' people in a particular direction. The idea comes from the insights of behavioural economists who have combined research results from the disciplines of psychology and economics.

Nudge is now influential in policy circles. Indeed the new white paper on health policy, 'Healthy Lives, Healthy People', contains many ideas based on nudge. It talks of the need to harness 'the latest insights from behavioural science, and emphasises that 'top down inititiatives and lectures from central government about the risks are not the answer' to health issues.

Good. But let us hope that the solutions will be based on research, and that nudge is not used as an excuse for doing (and spending) too little when more needs to be done.

Monday, November 29, 2010

The Office for Budget Responsibility (OBR) has raised its forecast for growth in 2010 to 1.8%. This is in response to the higher than expected figure for third quarter growth. At the same time, the OBR's forecast for growth in 2011 has been cut - from 2.3% to 2.1% - following the VAT hike (from 17.5% to 20% in January of next year) and the planned cuts in government expenditure.

The outlook for the world economy remains very uncertain, with recent events surrounding the Irish economy merely serving to highlight the continued fragility of the financial sector. Weakness in the UK's main export markets continues to suggest that the risks remain on the downside. If the economy fares as well as the OBR expects in 2011, I would be pleasantly surprised; given the severity of the government's austerity measures, and the imposition of similar measures elsewhere, a growth rate of one point something seems to me to be more likely.

Thursday, November 25, 2010

The government has launched an initiative to create an index of happiness. Prime Minister David Cameron has argued that purely economic measures of prosperity, such as Gross Domestic Product, provide too narrow a metric of our wellbeing. No doubt he is right.

Composite measures of wellbeing are not a new thing. The United Nations has calculated a Human Development Index which, since 1990, has evaluated wellbeing in terms of people's educational attainment, life expectancy and income. The UK comes 26th in this ranking.

But what about happiness? A lot of recent work on happiness uses standard survey questions such as this: 'All things considered, how satisfied are you with life as a whole these days?' Respondents give a response, usually on a 5 point scale. The results correlate strongly with more objective measures of average happiness across countries - like suicide rates, addiction rates and so on. So perhaps there is something in this idea of a happiness index.

We know that stable familes, good health, active leisure time, high levels of employment, a relatively equal distribution of income, freedom and democracy all positively influence happiness. If these insights lead to the adoption of policies that are family friendly, that are health enhancing, that encourage active leisure and so on, then that is all to the good.

So far, so good. But there is an inconvenient paradox lying in wait. Much of the work that has been done on happiness indicates that happiness has not risen over time - even though we are now much richer than we were in the past. However, we also know that our happiness is determined largely by a comparison of our own income with that of other people. So if we see other countries getting richer while our own does not, we become less happy.

Like it or not, the question of economic prosperity will always come to the surface.

Tuesday, November 02, 2010

There is the deficit, and there is the debt. The deficit is a flow (like water flowing into a bath) - and it only make sense to talk of a flow as a measure of volume per period. The deficit tells us how much is being added to the debt per year. The debt, on the other hand, is a stock (like the amount of water that is actually in the bath). We pay interest on the national debt, and if the national debt rises too high we squander too much of our resource on these interest payments.

Clearly the flow and the stock are related. Keep the tap on too long and the tub overflows. The deficit does need to be reduced. But this chart, published by the Financial Times, is useful in putting things in context.

Relative to many other countries, the UK started out from a good place. Its policy response to the recession was aggressive (and, given the economy's reliance on financial services, it needed to be). We are left with a high deficit that needs to be cut. But the national debt remains in a place which gives the government some discretion (not much, but some) about how fast it should go in making the cuts.