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Stephen Says...

This is my blog

sharing occasional thoughts about things that interest me

Before the General Election

the state of the country Posted on Tue, May 05, 2015 15:14:44

Political commentators used to look at living standards,
measured in financial terms, to try and explain the results of elections. This
association of political fortunes with economic circumstances has now become
conventional wisdom. And political parties have reinforced this presumption by
claiming credit for improvements in living standards (if the governing party)
or laying blame for deterioration (if the opposition). Government
responsibility for determination of the country’s economic situation is allowed
to go without saying. And yet, by allowing this, we, the electorate, are
insulting our own intelligence.

Any British government is powerless when it comes to
determination of international market prices for important necessities such as
energy or food. Nor can it affect decisions about interest rates in the
Eurozone or the United States. Or anything to do with China.

This is not to deny that government is a significant
economic actor. Not only is the state responsible for providing the
infrastructure within which both businesses and households carry on their
everyday existence but it also arranges for delivery of health and educational
services as well as disbursing alms to those whose ability to work for a living
is compromised by mental or physical frailty (mainly the elderly). Altogether
government accounts for about 40% of national income.

But for as long as sterling is maintained as a sovereign
currency the context for government economic policy is determined by the
exchange rate. Unfortunately, scandalously even (by defiance of the Nolan
Principles), official economic analysis is developed in denial of this fact.
See here for a summary of this situation.

Presenting the General Election as a choice in terms of
economic policy is fraudulent. As regards economic policy there is nothing to
choose between the main parliamentary political parties: the Government
(Conservatives and Libdems) and the Opposition (Labour) are agreed that the
analysis and judgements offered by the Office for Budget Responsibility should
dictate the scope for public expenditure and taxation. To vote for any of these
parties is to guarantee that the official assessment of the country’s economic
situation goes unchallenged. Since the OBR’s assessments are based on a tragic
misperception of the country’s economic situation it is not possible for a
truly coherent and effective policy to be developed and implemented by any of
these parties (whether alone or in combination). In these circumstances, to
vote for any of these parties is to connive with a public act of collective
self-deception.

Of course it’s possible to believe that economic policy is
unimportant, or that other government policies deserve to be developed along
certain lines rather than certain others, irrespective of the economic context,
and that expressing a preference for one political party over another is
justifiable in these terms. But I expect the economic context will be given priority by the parties. And expecting party place-persons to put citizens’
interests before the interests of their own party places seems to me a misplaced act
of faith.

And in the context of a ‘hung parliament’ it also seems
optimistic to expect that what any Coalition Government actually does will
reflect proposals put to the public in any manifesto. For example: a
Labour-Libdem Coalition Government would be likely to legislate for
constitutional changes introducing state funding of political parties along the
lines previously suggested by the Electoral Commission. Ed Miliband’s only
significant reform of the Labour Party has been to base trade union funding on
members’ decisions to opt in to political funding rather than allowing a system
of default consent to operate: this reform was a pre-requisite specified by the
Electoral Commission, and by adopting it the Labour Party removed the only
major obstacle to the scheme previously officially recommended. Since these
proposals would align state funding with electoral results (votes) all the
minor parties likely to be represented in the House of Commons would assist in
carrying the proposition. Also likely to be smuggled in with this change would
be an introduction of proportional representation (probably in the guise of
House of Lords reform). It is doubtful whether the introduction of these
changes would involve a referendum: more especially so if it’s a
Labour-Conservative Coalition. That’s not to say these are not sensible
reforms, for which a credible case could be made: it’s just an example of the
sort of thing the electorate should get used to being given by government (i.e. no choice), as
coalition is more overtly established as the permanent political context.



BBC Economics and Election Coverage

the state of the country Posted on Tue, May 05, 2015 15:03:04

The BBC Economics Editor (Robert Peston) has stated that:
“the economy is absolutely at the heart of this election campaign”. And several
other BBC Correspondents have made similar observations. But despite these
assertions BBC reporting of the election campaign has failed to challenge the
consensus amongst the main parliamentary parties in relation to economic
policy.

According to this consensus, decisions about the
appropriateness or otherwise of fiscal policy measures should be subject to the
assessment of the country’s economic prospects determined by the Office for
Budget Responsibility.

There are two unsatisfactory aspects to this.

Firstly, the technical analysis upon which the OBR relies
for its assessment is demonstrably flawed. For as long as sterling remains a
sovereign currency the exchange rate will be a significant factor affecting the
country’s economic circumstances. Robert Chote (Chairman of the OBR) states
categorically that:

“The depreciation of sterling
which began in 2007 has led to a change in the relative prices of domestic and
foreign goods which will have had two effects:

(i)
It will
provide a boost (to) export growth as the relative price of exports of UK goods
and services in foreign markets has fallen; and

(ii)
It will
reduce import growth as the relative price of imports to the UK from foreign
markets has increased (often termed import-substitution)”

(source: email from
Robert Chote received 4th April 2012)

But not only are these expectations without justification in
terms of economic theory, they are also directly contradicted by the evidence
provided by the Office for National Statistics.

The ONS figures indicate that the OBR’s expectations are
completely refuted. The devaluation of sterling in the aftermath of the Great
Financial Crisis has raised the prices of goods imported and goods exported
alike: there has been no “change in the
relative prices of domestic and foreign goods”.

And this ought to come as no surprise since you only need
seven types of product to account for more than half of UK exports and you only
need the
same seven
to account for more than half of the UK’s imports as well.
The categories are: Mechanical machinery; Electrical machinery; Cars; Medicinal
& pharmaceutical products; Refined oil; Crude oil; and Other miscellaneous
manufactures. So no wonder prices of imports and exports move together: their
prices come from the same world markets.

In fact, the ONS data is entirely consistent with the proper
economic theory. In this, the crucial price-relativity affected by the exchange
rate is that between tradables and non-tradables. Tradables being those things
that are internationally portable (e.g. motor-vehicles; feed wheat; consultancy
services etc.,). Non-tradables being those things irrevocably confined to our
shores (e.g. residential property; domestic care services; the infrastructure
of the public realm etc.,).

The impact of sterling’s devaluation has been to raise the
sterling prices of tradables across the board (i.e. both the things we buy from
overseas and the things we sell abroad) because their prices are set in
international markets (and not in sterling terms) and apply equally to
‘imports’ and ‘exports’ (translated into sterling terms by the same exchange
rate), so there is no relative price change such as the OBR expects. And
consider the significant difference that this makes: the OBR believes
devaluation is expansionary (increasing domestic output) whilst the correct
theory says it isn’t (rather the opposite, when you take’ income effects’ into
account).

A more detailed consideration of the ONS data confirms that
import and export prices within the same (tradable) product categories
habitually move together (being basically the same international price of
course), showing that the UK is well integrated into global market
determination of producer prices for tradables. The pivotal role of the exchange rate is to alter the balance of
activity in the UK economy between the tradables and the non-tradables sectors
:
this comes about because whilst prices in the latter (non-tradables) are
inherently set in sterling, prices in the former (tradables) are translated
into sterling from abroad by the exchange rate (thus changing when it changes).

The second unsatisfactory aspect of this situation is more
constitutional: the role of elected MPs is to challenge (i.e. hold to account)
the operation of unelected authority; but by agreeing to abide by the pronouncements/judgements/forecasts
of the OBR the political parties are effectively giving immunity from challenge
to the unelected authority represented by the OBR. This is inappropriate. And
since there is no professional body responsible for standards of practice by
economists, the public is excluded from any possibility that errors (such as
that relating to the exchange rate) can be exposed and eliminated.

To summarise then: all the main political parties are
explicitly committed to accepting the authority of the OBR in determining the
official assessment of the country’s economic situation and hence the scope for
adoption of varying fiscal policy measures. This is a clear political
consensus. It is equally clear that the OBR’s assessment is systematically flawed.

The BBC Editorial Guidelines are commendably clear about
what should happen in circumstances such as this: “In such cases…… …our reporting should
resist the temptation to use language and tone which appear to accept consensus
or received wisdom as fact or self-evident. … BBC output should avoid
reinforcing generalisations which lack relevant evidence, especially when
applying them to specific circumstances. …. Care should be taken to
treat areas of apparent consensus with proper rigour.”

Unfortunately, in the case which I have
identified, the BBC has completely failed to live up to these valiant
expressions of intent. By failing to challenge the political consensus about
the operation of economic policy, an issue which the BBC claims “is absolutely
at the heart of this election campaign”, the BBC is betraying its audience, the
general public and the electorate. It’s contributing to electoral fraud.