Corruption and Growth?

Last week we considered economic growth, and noted the role that institutions play in fostering, or at least being correlated with, economic growth. We considered corruption when thinking about rent seeking: whether economic agents create value themselves, or seek to apportion the value created by others – for example, via piracy or theft.

We saw a version of the Corruption Perceptions Index, a measure of corruption amongst countries, noting which countries were deemed less corrupt, and which others were more corrupt. Today Bloomberg reports on the 2015 Corruption Perceptions Index, in which apparently Brazil and Turkey show the biggest falls. Related or otherwise, Reuters reports that recently the IMF downgraded its GDP growth forecast for Brazil to -2.5% from 1.1% in 2016, and the World Bank cut its growth forecasts for Turkey recently.

Measuring ourselves

We take measuring ourselves incredibly importantly. This is true at the individual level (we want to know whether we fit in), but also at the national level – how well are we doing relative to, say, the Eurozone countries?

In order to be able to say anything at all about the latter, we have to have some measurements. The standard measurement we use when it comes to entire economies like the UK, or like France or Germany or the USA, is Gross Domestic Product, or GDP. It’s the value at market prices of all the goods and services produced in an economy over some period of time. It’s everything we make as a country, at the value we place upon it – very broadly speaking.

That it’s not a good measure of welfare is almost universally well known. This article from a very interesting blog (well worth a read if you’re feeling like procrastinating but want to feel like you’ve been at least a little bit productive) notes that by and large innovation doesn’t appear in the statistics either. Relative to even our parents, but certainly our grandparents’ eras, ours is one of mass variety, it’s argued, and this is the result of innovation – loads more great products for us to buy and enjoy.

The very basic economics says this should be good – we can find the products that most suit us in all areas of our lives, and be happier than if we were more restricted in the choices we could make. However, choices have opportunity costs, and opportunity costs may lead to regrets – if one makes one choice, one cannot have done the other similarly enticing thing. If innovations are sufficiently small (the difference between, say, the latest Android phone made by Samsung and the latest one may by LG), we as consumers cannot realistically be expected to be well informed about these kinds of differences and what they mean.

Anyhow, the bottom line is that we use GDP, and we use it in all sorts of ways (not least to determine how much the government should spend). It’s a vitally important statistic, and a huge amount of effort goes into producing it (effort that shows up in GDP) – and we should be aware of its shortcomings, without necessarily advocating its replacement. It’s not clear how any other measure of well-being could appropriately factor in the amount of choice we have, and how differently it affects each of us.

Macroeconomic Uncertainty

Today’s BBC headline is the Chancellor warning about a “‘dangerous cocktail’ of economic risks” facing the UK economy in 2016, suggesting this year will be the toughest since the financial crisis. It’s more politics than economics as one reads what the Chancellor actually said in a BBC Radio 4 interview this morning, representing expectations management: after all the positive talk about the economy by the Conservatives before the election and since, things have changed somewhat in recent months to challenge that outlook.

One of those things was that GDP growth for 2015Q3 was revised down – not by a huge amount, from 0.5% to 0.4% – but a downward revision nonetheless, and along with other downward revisions has meant that the UK grew significantly less in 2015 than was previously thought.

Another is the continued low oil price which, while great at the petrol pump for the paying customer, has mixed impacts on the UK economy which does export oil.

Perhaps most interest, however, is to also consider the Independent’s take on the Chancellor’s recent actions (as well as rhetoric): it talks about the role that economic forecasts played in the Chancellor’s budget giveaway in the Autumn Statement in November, noting that they might have been “potentially unreliable”. We noted here at the time that the budget giveaway did rely heavily on forecasts for GDP growth: governments need forecasts of economic growth in order to project the tax receipts they will get, and the amounts of benefits they’ll have to pay out, which heavily influences the level of the budget deficit/surplus. If growth now comes in lower than was forecast, this will almost certainly mean that the budget deficit will be worse than expected, casting doubt on the ability of the UK economy to meet the Chancellor’s new Fiscal Charter: to balance the budget in normal economic times.

As well as lecturing Introductory Macroeconomics this term and hence covering issues mentioned here in greater depth, I’ll also be lecturing a third year course on forecasting, where we will discuss the kinds of methods that are used to produce the kinds of forecasts that underly government budget decisions like these. Many of our undergraduate students take placements and graduate roles with the Government Economic Service, which could see them being placed in the Treasury, hence right in the centre of the process of generating those forecasts. What you are doing here as a student could play a crucial role in shaping the future of our country!

Tis the season?

overseas-aid

You may have seen this graphic, or some similar sentiment, doing the rounds at the moment.

As you may be aware, successive governments have committed to spending 0.7% of GDP on aid to some of the poorest and most needy people around the world. It’s also a tiny amount of money. The plot below makes this clear: it’s a small amount even of the interest the government pays on its national debt, and (not plotted) about a twentieth of what we spend on pensions each year.

Foreign Economic Aid and Interest on National Debt since 1993

So, practically, firstly, stopping this money would make little difference to the government’s overall budget. Bear in mind that the deficit is still much larger than 0.7% of GDP.

Secondly, there are many, many things that the government spends lots of money on that might be better reconsidered if there is a need to cut other things before we spend more money on flood defences (and helping those affected by the floods).

Third, as we’ll learn about this coming term, governments have budget constraints, and if they spend more than they get in tax receipts they run a deficit (as the UK government has done for a long time now), and need to borrow. As such, if something is important (hence has a good rate of return, however measured), and can be financed at a low interest rate (as is the case at the moment), then a better argument is that it should be funded by more borrowing.

Finally:

Hate quants? But it’s awesome!

If you’re the average first year undergraduate student (yes, I know, nobody’s really the average, but anyhow) you’ll either really hate quants (econometrics), or you’ll feign dislike in order to avoid seeming to be a geek.

My hope is that as you learn more about economics, you’ll learn to enjoy and even love the subject more, but also realise that data, and hence econometrics, is utterly central to all of it. All of the theories we teach you in micro and macro need to be verified out there in the real world, and the only way to do that properly is to collect data about the real world. Testing theories properly also requires that we learn appropriately what the data can, and is, telling us. This bit is econometrics. It’s absolutely essential if we’re going to determine which economic theories are worth taking seriously, and which we can safely discard.

Data can be pretty awesome at times, too. For example, in this day and age betting is ubiquitous on all kinds of events – see www.oddschecker.com/ if you want to get some sense of this. Data on the bets multiple bookmakers offer for events as diverse as the Premiership (Leicester City, really?!), and the next elimination on Strictly Come Dancing. These are predictions, or forecasts, about unknown as yet future events. Economic activity relies entirely on predictions about future events – how many sales will my company get with that new product, will that job be just right for me, should I take out insurance on my new phone, and so on…

If you’re concerned about more conventional data though, and the important messages we can learn from a proper and detailed look, here’s an example from yesterday on earnings. Hopefully it makes the point really clear: it’s vital for our good as a nation, and as a society, that we know about our statistics. Stagnant earnings growth that spawned the whole “cost of living crisis” (however real it felt for your dear lecturer over that period ;-)) may well have been bad statistics caused by a misleading calculation of the average that treats new entrants to the labour market, on low wages, equally to existing members of the workforce who are receiving more “normal” pay rises. Worth a read.

It makes the bigger point though: there’s an issue with how our statistics are calculated, and that needs to be investigated. Thankfully that is happening; I’m no fan of the Chancellor of the Exchequer, but this is one of his better moved by some distance: he has set up a review into how statistics like GDP are being calculated, particularly in this day and age of masses of data (think about how much data Tescos and Sainsburys must have on you). Dry stuff I’ll grant you, but this section is particularly relevant for the first week of term after Christmas:

The Review was prompted by the increasing difficulty of measuring output and productivity accurately in a modern, dynamic and increasingly technological economy. In addition, there was a perception that ONS were not making full use of the increasingly large volume of information that was becoming available about the evolution of the economy, often as a by-product of the activities of other agents in the public and private sectors. Finally, frequent revisions to past data, together with several recent instances where series have turned out to be deficient or misleading, have led to a perception by some users that official data are not as accurate and reliable as they could be.

Space and Economic Value

From wired.com, http://www.wired.co.uk/news/archive/2009-08/11/why-didnt-britain-win-the-race-to-the-moon

This morning at 11:03am, GMT, a British astronaut will be launched into space for the first time.

The Treasury, the part of the UK government that is all about spending and revenues, has taken the opportunity to laud the UK space industry and its support for it on Twitter. Indeed there’s a new National Space Policy, the first such thing to exist here in the UK.

The Tweet, and the policy blurb emphasise that the space industry is “worth £11.8 billion” to the UK economy. Where has this number come from?

One of the first things we’ll be doing next term is thinking about is numbers like these – where do they come from? With an industry like the car industry it’s much easier to work these things out, since people buy cars at a particular price, and we then assume that that price reflects the value we as a society place on that good (a debatable assumption, but an assumption nonetheless).

But with space? Who buys the produce of the space industry? Hence, if there is no end consumer in the same way as most industry, what do we do? The answer is we value by the value of the inputs that went into the process. What was the value of the labour, capital and land inputs that went into production in the industry?

If you’re starting to raise objections about this, that’s fair enough; it’s far from a satisfactory approach.  For example, given this the government could simply give all employees a pay rise to get a GDP increase. However, it’s hard to know what else could be done instead, if we wish to measure things like national economic activity. Some defence can be mounted; the amount paid to the factors of production employed in the space industry must be market rates – if the UK space industry paid too low, then their experts would seek employment elsewhere – space agencies overseas, or other areas of manufacturing, say, in the private sector. As such there is some basis in what we value as a society in these calculations, even if it’s not as direct as in, say, private sector manufacturing.

In addition, the methods employed by the UK when calculating national income are the same as other countries around the world use. Hence at least if our measure is bad, it’s only as bad as what everyone else is doing, and still affords us a basis for comparing between countries.

Measuring social welfare

Social decline? Photograph: Jim Dyson/Getty Images

In a City.A.M. opinion piece, Tim Montgomerie writes about the need to better measure social welfare, primarily to counter the social decline we’re apparently seeing.

One thing that a good measure of social welfare would reveal is the extent to which we are in a decline. It is very common for commentators to lament about how things aren’t like they used to be, harking back to some golden age. It’s less clear what Montgomerie’s golden age is from reading his article which perhaps absolves him a little of this criticism. Nonetheless I’m sure there is an inbuilt tendency in us all to view the age of our youth as that golden age. I’ve come to realise, in my own personal experience, that the 1980s couldn’t have been a social golden age given all the upheavals taking place in that tumultuous decade.

Anyhow, the point remains a good one: we do need to measure social wellbeing in the same way we measure economic wellbeing (i.e., GDP). It’s not a novel point, it gets made year after year; back in 2010 David Cameron was talking about measuring “gross wellbeing” as well as “gross domestic product”, and before the general election Ed Miliband made a request to the Office for National Statistics that they start measuring wellbeing, or “living standards” in a single measure. None of this is to diminish the message, just to point out that it’s nothing new, and that like many public projects, project completion appears to be always somewhere on the distant horizon.

Early next term we’ll be talking about measuring GDP, and measuring economic wellbeing more generally, as well as social wellbeing.

UK growth slows

The BBC’s “UK GDP growth” picture

Hidden beneath the ongoing furore over tax credits, the Office for National Statistics (ONS) this morning released the last UK growth figures: growth of 0.5%.

What does this mean? This is a number for how much more was produced in the UK economy in the months between July and September 2015 compared to the same months in 2014, in real terms (controlling for changes in price levels).

Overall, more was produced (and although 0.5% may seem small, UK GDP was US$2.7tr (trillion) in 2013 hence 0.5% of that is still a healthy US$135bn), but the number is slightly lower than was to be expected (apparently 0.6% was expected).

Additionally, growth wasn’t evenly spread over different parts of the economy: the manufacturing sector produced less, as did the construction sector (which had a large fall), although the service sector produced more.

Here’s plenty more “LIVE” commentary from the Guardian: http://www.theguardian.com/business/live/2015/oct/27/uk-gdp-growth-figures-george-osborne-live-updates

Here’s the actual data release from the ONS: http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product–preliminary-estimate/q3-2015/index.html

We’ll spend time thinking about GDP growth and what it means early in the Spring Term, after Christmas.

Making Money on Macro?

Twitter is great for leaning more about macroeconomics, believe it or not. I happened across this tweet just now:

I’d highly recommend following the link; you’ll find a detailed account of a bet two macroeconomists agreed two years ago about inflation given GDP growth.

What is there to learn there?

1) Macroeconomics is very hard! Andrew Lilico readily admits he doesn’t understand how quantitative easing (QE) has affected inflation, and admits he’s unsure about how the labour market is currently working. The thing about QE is that is was “unconventional monetary policy”, which meant it wasn’t normal, hence there isn’t lots of examples of it previously being used elsewhere to get some sense of how it might work (you can count the uses on one hand, pretty much: Japan, UK, US, now Eurozone). This is problematic for us as macroeconomists: how then can we hope to understand how policy will work? The answer is we try and develop our theoretical understanding of how the economy works; but this has risks too…

2) Forecasting is not economics! Forecasting is predicting the future, and the future need not be the same as the present – things change all the time that have dramatic impacts on how events will turn out. Portes suggests that only an oil shock would have led to him losing the bet, and in fact one did occur, but a negative shock – something essentially nobody expected. More dramatic examples of forecast failure would be those in and around natural (and unnatural) disasters: e.g. forecasting output in Japan for the year ahead, just before the earthquake and tsunami struck in 2013. We can understand the economy perfectly well, but if things change tomorrow, our forecast will be wrong. Forecasting is different from economics. If you’re interested in forecasting, do think about taking my third year course on forecasting! 🙂

3) Knowledge is money! If you do know the economy well, and study macroeconomics hard, there’s no reason why you can’t hope to make financial gains using that information. This need not be betting related, either; better knowledge about the economy can lead to better ideas about how to store your wealth, about what line of work to go into, about when (and where) to buy a house. Much of this is common sense of course, but there’s no doubt a bit of economic nous can help you augment that common sense. All the more reason to study economics :-)))