Wednesday, December 04, 2013

The recent surge in output in the UK has been noted by many commentators. Indeed, it seems quite remarkable.

The latest forecasts produced by my neural network model, using the most recently available data (up to September) suggest that a spike in output growth is likely - though the magnitude of the spike is moot - with the rate of growth falling back quickly to (much) more modest levels as we move into 2015.

Clearly much will depend on policy. Even though the output gap is still substantial, growth of the kind being predicted above is unlikely to last long without a build up of infationary pressure as workers seek to recover the lost ground of recent years. This could provoke an interest rate hike sooner rather than later - and that could bring output growth down sharply.

Thursday, November 21, 2013

Jim Heckman and Tim Kautz have provided an intriguing analysis of ways in which individuals' characters influence their economic outcomes, and of how character can be changed by various interventions. They view character as something that can change over time, something that is shaped by the individual's environment, and something that can be developed by interventions.

Opportunities for such interventions exist at many points over the life cycle, but are particularly rich during the early stages of life. Non-cognitive skills are developed at this stage, but this does not mean that character is fixed thereafter - describing these soft skills as personality traits is therefore misleading, and they are better described as skills. Skills can be honed over time.

The importance of such skills in the labour market is clear. Conscientousness, extraversion, emotional stability, agreeableness and openness - in that order - are known to be positively correlated with job performance. The evidence on the ability of interventions to affect character, and thence subsequent attainment, comes from a variety of sources, but one of the most persuasive concerns the effects of the Perry preschool programme.

These are important findings. The way in which various options affect the characters of stakeholders needs to be addressed in the design and subsequent evluation of policies.

Monday, November 04, 2013

The Confederation of British Industry has estimated that the net benefit of the UK's membership of the European Union amounts to somewhere between £62 billion and £78 billion per year - that is between 4% and 5% of Gross Domestic Product. This benefit comes from access to European markets, the dismantling of tariffs and other barriers to trade, and the consequent realisation of economies of scale. Further benefits come from the improved access to sources of finance that arise from EU membership, and from increased investment from outside the EU from firms wishing to locate within the common economic area.

The figures cited by the CBI are almost completely meaningless. To evaluate the benefits of membership of the EU, it is necessary to have an idea of what non-membership would look like. Were the UK to leave the EU, for example, it would most likely do so on a basis that retained freedom of trade. So to include the impact of free trade in any calculation of the benefits of the EU seems strange.

There is, of course, a case for staying in the European Union. But exaggerating the numbers does not serve to strengthen that case.

Thursday, October 24, 2013

New work by Pablo Brañas-Garza, Antonio Espín and Shoshana Neuman examines the effect of religiosity on the extent to which people's behaviour is pro-social. Based on games frequently used in experimental economics, the results, based on quite large samples of individuals, are striking. Active participation in religious activities appears to be strongly associated with more altruistic behaviour. Looking into the future, as adherence to faith declines, so (in the absence of countervailing measures) might the extent of pro-social activity.

The mechanism underpinning this finding is complex – it is likely to be partly the direct result of religious teaching, but partly also the result of the development of a sense of community that is engendered by frequently meeting neighbours at a religious institution. The latter should be seen alongside other developments – such as the growth of home entertainment – that together may reduce social cohesion.

Altruism, it seems, needs institutions. If our society lets the old institutions go more quickly than it lets go of its need for altruism, then new institutions will need to develop to plug the gap. These new institutions may be virtual – social networking, for example. But it remains to be seen whether the connection between the virtual world and the real world is sufficiently strong to serve the need.

Tuesday, October 22, 2013

In a fascinating study of the impact of corporate culture on company performance, Luigi Guiso, Paola Sapienza and Luigi Zingales have found a strong positive effect of managerial integrity and ethics. This should not be surprising, but it is immensely reassuring. In competitive markets, bad behaviour should be competed out of existence.

Friday, October 18, 2013

Òscar Jordà, Moritz Schilarick and Alan Taylor have produced one of the more interesting analyses of recession following financial crisis. As is by now well known, the severity of such recessions greatly exceeds that of a typical recession. Figure 6 of their study demonstrates this vividly. Following a financial crisis, output falls further and takes longer to recover than in a normal recession; this follows from the fact that investment - which is barely affected in a normal recession - falls drastically and recovers very slowly; this is reflected also in lending data, which show very slow recovery in the credit market.

The recent recession was triggered by an increase in debt. As the international evidence reported in Figure 1 of the study shows, this debt increase was primarily a characteristic of the private sector – indeed public sector debt had been falling as a proportion of GDP in the decade leading up to the crisis. Notwithstanding that, the ability of governments to respond to financial crisis necessarily depends on their own debt position; clearly this has deteriorated in the wake of the crisis, and contributes to the overall level of indebtedness. An adjustment was necessary – and the low levels of bank lending that have served to prolong the recession represent a part of that adjustment.

Another part is fiscal retrenchment. Hopes that this would of itself be expansionary (owing to a ‘confidence fairy’ effect) always appeared fanciful. The trick to recovering the government’s financial position must to phase fiscal policy so that retrenchment is achieved over a reasonable time horizon, but without proceeding so quickly as to damage the recovery that now seems under way.

Wednesday, October 16, 2013

Gordon McCord and Jeff Sachs have provided a fascinating analysis of the determinants of economic growth. This is an area in which I too have dabbled in the past, and many of their results - concerning the effects of landlock, openness etc. - reassuringly resonate with mine.

Surprisingly, though, McCord and Sachs find that the number of years of schooling typically received by men serves to dampen growth - though the schooling of women increases it. There are many possible explanations why female education should have a stronger positive effect on growth than male education - for instance, women may be more effective in passing their knowledge onto younger generations. But the finding that male education actually reduces growth appears perverse. I would argue that it is one that should be treated with caution - there is surely a high degree of collinearity between the amounts of schooling that men and women receive, and this could be distorting the result. This is a case of a study where further detail would be welcome.

Wednesday, October 09, 2013

The latest industrial production data, released this morning, reveal a drop in (seasonally adjusted) output in August. Nevertheless, feeding these data into my neural network forecasting model reveals that there remain grounds for cautious optimism about the likely trajectory of the economy over the next couple of years. The forecasts appear below.

Thursday, September 26, 2013

Opposition leader Ed Miliband has rattled some cages in recent days with his criticism of energy companies. To be sure, where companies are behaving in an anti-competitive fashion there is scope for regulation. But the precise proposal here seems curious. The threat to freeze energy bills after the general election will surely encourage the energy companies to raise prices beforehand, having exactly the opposite effect to the one intended.

Wednesday, August 07, 2013

The Bank of England's inflation report contains (on p.38) a GDP forecast that confirms the general view that recovery is now under way. From the end of this year, the Bank expects growth of around 2.5% per year. This is welcome news.

Also welcome is the Bank's stated intention 'not to raise Bank Rate from its current level of 0.5% at least until the ... unemployemnt rate has fallen to a threshold of 7%' (subject to certain conditions on inflation and financial stability, p.7). This should provide sufficient certainty to ensure that market rates of interest are anchored, allowing, for example, lenders to offer longer term loans at fixed, low interest rates, and thus boosting the economy.

Under such conditions of stable and low interest rates, the Bank expects unemployment to fall gradually from its current level of 7.8%, reaching 7% around the middle of 2015. It should be noted, however, that 7% remains a couple of percentage points above the Bank's own estimate of the long run equilibrium (p.29). There remains a lot of slack in the economy.

A variety of recent statistical releases suggest that the economy is, at last, recovering. The latest run of my neural network forecasting model, based on industrial production data up to June of this year, is reported below.

This indicates a marked recovery, indeed so marked that it will quickly be followed by a downturn. This prediction should be treated with a great deal of caution (and even scepticism). The sharpness of the recovery is probably exaggerated, and so too, therefore is the likelihood of a quick reversal. I suspect that this - and the considerably less sanguine predictions that I reported on 17 July - reflect some inaccuracies in the published data for May. At that stage, the industrial production index had remained static for four months; the June figure, alongside various other indicators, renders the figure for May suspect.

Other positive statistics released recently include the second quarter estimate for GDP growth (0.6% over the quarter) and a rapid growth of retail sales noted by the British Retail Consortium.

Added note: If the industrial production figure for May is indeed downwardly biased, then that has implications for the forecast reported here. Supposing the value of the industrial production index in May should have been 95.5 (rather than 95.3), the forecaster would still lead us to expect recovery over the coming year, but it is much more modest and short lived. This serves to reinforce the point that, while several indicators give grounds for optimism, caution is still needed in interpreting the data.

Thursday, July 18, 2013

The Office for Budgetary Responsibility has produced a fascinating report on the impact of migration on the public finances. The report presents the government with something of a challenge.

Chart 3.14 on page 100 tells the story. The central projection shows that we can expect the net public sector debt as a proportion of GDP to rise towards 100% by the 2060s. Increasing immigration can reduce this burden quite substantially - since migrants tend to be younger than the population as a whole, and hence are more likely to be working, they generate substantial tax revenues. Reducing immigration has a severe impact on the national debt; indeed reducing net migration to zero is projected to cause the public sector net debt to rise to around 150% of GDP by the 2060s.

It is difficult to place too much credence on figures that look so far into the future. But the overall message from the Office for Budgetary Responsibility is clear: reducing the national debt without accepting an increase in immigration is likely to be an unrealistically tough ask.

Wednesday, July 17, 2013

The latest unemployment statistics, for the three month period to May of this year, present some good news. The unemployment rate appears to be falling, with the total number of unemployed workers some 57000 lower than in the previous period.

This appears to sit alongside other recent encouraging signs - including the upgrade to the forecast produced by the International Monetary Fund, which now predicts 0.9% growth in the current year.

Other data suggest that we should remain cautious, however. Industrial production has been flatlining in recent months, and remains stubbornly lower than it was a year ago. The forecasting model that I report here from time to time, based on these industrial production data, was, until recently, predicting a modest recovery, but is now pointing to a renewed bounce along the bottom.

For sure, some statistics are encouraging. Overall, however, the picture remains one of fragility.

The proposal to impose a minimum per unit price on alcohol sales in England and Wales appears to have been scrapped, apparently following an adverse public opinion survey.

This is not an altogether straightforward issue, as the statistical evidence on the effects of minimum pricing paints a rather confused picture. Estimates of the elasticities of health outcomes with respect to the minimum price of alcohol vary widely. Much of the best evidence comes from Canada - and Canadian researchers have studied also the UK situation. However, all the serious studies of which I am aware report significant (albeit widely divergent) beneficial outcomes from the imposition of a minimum price.

The proposal for a minimum price was a great example of a 'nudge' policy that offered the prospect of remarkable social benefits - it is regrettable that it has fallen victim to politics.

Friday, June 21, 2013

Cristina Cattaneo, Carlo Fiorio and Giovanni Peri have conducted an important study into the impact that immigrants have on the job prospects of native workers. This is, of course, a politically sensitive topic.

The findings of their analysis may provide some observers with a surprise: they find the 'native Europeans are more likely to upgrade their occupation to one associated with higher skills and better pay when a larger number of immigrants enter their labour market'. Their detailed empirical results suggest why this might not be the general perception. In their simplest model, it takes up to four years for the beneficial impact to become apparent. In more sophisticated models, which make allowance for issues arising from the direction of causality, the effect is immediate, but becomes more pronounced over time.

It is usually, though admittedly not always, the case that free markets serve us well. The labour market is no exception.

Wednesday, June 12, 2013

Ernst Fehr, Holger Herz and Tom Wilkening have produced a fascinating study, based on experimental work, of how bosses do (and do not) delegate. They find that bosses tend not to delegate enough - that both their own and their subordinates' interests would be served by more delegation. By retaining authority and failing to delegate, bosses support an under-supply of effort by their subordinates which is not in the organisation's interest - and hence not ultimately in the bosses' interests either. It seems that organisations stand to gain much if they can find incentive mechanisms that reward bosses in such a way that they delegate more appropriately. Such mechanisms would need to compensate bosses for their distaste for being overruled.

Fehr, E., Herz, H., & Wilkening, T. (2013). The Lure of Authority: Motivation and Incentive Effects of Power American Economic Review, 103 (4), 1325-1359 DOI: 10.1257/aer.103.4.1325

Evidence from the Institute of Fiscal Studies and the Trades Union Congress shows the extent to which wages have fallen over the course of the recession. The TUC reports that real wages have fallen by 7.5% overall, and by more than 10% in some parts of the country. This, according to the IFS, is a sharper fall than over any other five year period in recorded history.

The fall in wages has allowed unemployment to remain at much lower levels than might have been expected given the severity of the recession. The IFS attribute this flexibility of wages in part to a continued high level of labour supply - with many workers who would, in previous recessions, have quit the labour market as 'discouraged workers' opting instead to remain in the labour market this time - and in part to the effect of union legislation.

As the economy recovers, it would not be surprising to see wage pressure increase, as workers seek to recapture some of the losses they have made over the last few years. Unless such demands can be rigourously controlled, this could lead to an escalation of wages that feeds through into price inflation, and at the same time the braking force on unemployment could wither. While we now appear to be witnessing the beginnings of recovery, this could be frustrated by stagflation if discipline is not maintained.

Tuesday, May 07, 2013

The latest forecasts from my neural network model are shown below. The picture has changed relatively little over the last 3 months, though it does suggest that we should be a little more optimistic about the rate of growth that will be achieved in 2014.

Monday, March 18, 2013

The taxes due to be imposed on savings deposited in banks in Cyprus represent a response to the vulnerability of the banking system in that country. They have been defended on the grounds that depositors would ultimately bear the burden of any rebalancing. True though that might be, there are some serious problems with this type of solution.

The legitimacy of any tax rests on the idea that people understand that they will be liable to pay the tax if they do certain things. If I earn income, I expect to pay income tax; if I purchase goods and services, I expect to pay value added tax, excise duties and the like. It is not usual, or fair, to introduce new taxes where the payments are made by people who can reasonably be supposed to have behaved differently had they known the tax was on the way. One might describe the tax as legalised (but not legitimate) theft.

The proposed Cypriot tax is being imposed on all deposits - including those below €100K which are supposedly protected from bank collapses. It is not, therefore, a tax primarily aimed at big Russian depositors, as has been claimed (although many of the large deposits do of course come from Russia). One might describe it as theft from the poor.

The tax sends a signal to all savers in Europe that their savings are, quite simply, not safe. One hopes that the furore that this has attracted will prompt a rethink and that small depositors will be protected. Otherwise, the authorities may well have triggered bank runs throughout southern Europe. It is not a smart move.

Wednesday, February 13, 2013

The Bank of England has published its latest forecasts for the UK economy. These suggest that output is set to recover in the latter part of this year, rising quickly to a growth rate of around 2 per cent by the end of 2014. The Confederation of British Industry has made a similar forecast.

The latest results of my neural network forecaster (based on growth of industrial output) paint a similar picture of eventual recovery, although the prognosis for growth is more modest. The red line below shows the forecast to the end of next year - and suggests that growth during 2014 will be around 1.5%.

Friday, February 01, 2013

Sometimes it's nice, and reassuring, to see some unsurprising results emerge from statistical exercises. Brian Jacob, Brian McCall and Kevin Stange have recently produced a paper that analyses the determinants of college choice in the US. Amongst these determinants are college expenditures (per full-time equivalent student) on amenities (what the authors term 'country club' facilities) and on instruction. Unsurprisingly, spending on amentites attracts students. But it is a less strong attractor for the ablest students. Spending on instruction, meanwhile, positively attracts only the ablest students (and actually puts other students off). This means that different colleges' spending patterns can be rationalised by looking at the types of students that they are attracting (and are looking to attract in future).

Tuesday, January 22, 2013

Today marks the tenth anniversary of this blog. It's been an exciting ten years for observers of the economy. But listing some of the early topics covered in the blog provides a remarkable insight into how the world has changed over this time.

-student tuition fees raised to £3000 - and Conservative party plans to scrap tuition fees

-the congestion charge introduced in London (at a daily rate of £5) and the first motorway toll road opened

-the five economic tests for UK membership of the euro assessed

Inevitably, though, in looking back over the last decade, it is the Great Recession that stands out as an economic event of magnitude. The crisis, presaged in the UK by Northern Rock and reaching a climax with the collapse of Lehmans, has lasted over 5 years and output is still well below pre-crisis levels. The 6 September 2012 policy change by the European Central Bank has been instrumental in reducing interest rate spreads across the continent, and offers some hope that we may finally enter a period of sustained recovery. Nevertheless policymakers are still walking a tightrope - they must encourage growth while still attending to the fiscal deficit and guarding against inflation. The impact of deficit reduction policies, alongside the still fragile international economic environment, will mean that recovery is a slow process. So economics is, for better or worse, likely to remain interesting well into the next ten years.

Friday, January 04, 2013

In a recent paper, Robert Gilhooly, Martin Weale and Tomasz Wieladek have shown that the application of different estimation methods lead to widely varying conclusions about how output growth has been affected by (i) demand and (ii) productivity over the recent past. While traditional measures suggest that, for the UK, demand deficiency is almost uniquely responsible for slowdown, the application of a more refined method suggests that demand and productivity effects are equally responsible.

Essentially, the method proposed by Gilhooly, Weale and Wieladek is designed to compensate for biases that result from the fact that the fortunes of different sectors of the economy are intertwined at any point in time. Traditional methods that are used in this context do not work well when the time period under consideration is short, but these authors finesse this problem by adopting Bayesian methods. They argue that superior forecasting properties of their model suggest that its results should be taken more seriously than those of exercises based on other methodologies.

An important question then remains: if as much as half of the drop in output has been due to a fall-off in productivity, how can this fall-off have happened? If the findings imply that, over the course of the recession, we have unlearned the lessons of how to produce efficiently, then it is reasonable to question how such amnesia can occur.

To some extent, the decline in real wages may have allowed firms to retain labour while tolerating a fall in productivity - a fall that in itself reflects a drop in demand for the firms' output. Labour hoarding of this kind is readily explained in a context where firms expect a rapid return to growth and anticipate future labour shortages. It is not clear that this is the case now.

Another explanation may be that high productivity sectors have declined for secular reasons - for example, as natural resources have been depleted, the output of the extractive industries has fallen. This might suggest that there is a more permanent element to the decline in productivity, and that we should not output to grow rapidly to its previous high level.

It is possible, therefore, to put a rationale on the findings of Gilhooly et al. that productivity decline has been an important driver of recession. More work is probably needed before it is safe to conclude that this explains as much of the drop in output as the authors suggest. But their research certainly serves a purpose in reminding us that there is work to be done on the supply side of the economy as well as on the demand side as we seek to climb out of recession.