New Economist

Fantasy journalism

It must be tough being an economic journalist in Britain these days. Low unemployment, over a decade of robust growth, rising incomes and wealth... hardly the sort of news that might get your story on the front-page. What to do? Well, one can always manufacture a crisis. That's what Guardian economics editor Larry Elliott appears to have done in his forthcoming tome (co-written with Dan Atkinson), Fantasy Island. Here's the blurb:

We live in a country fantasising about its ability to run up debts seemingly without end, to enjoy high-paid employment for which it is not qualified, to project military power that it does not possess and in general to assume, in defiance of the evidence, a superior economic and political position in relation to most of the rest of the world. ...Welcome to Fantasy Island.

..Blair leaves behind him a seedy dreamworld mired in debt and bankruptcy, drifting into a crisis of employment and employability, hallucinating into existence a diplomatic and military role that it cannot possibly afford. It's time to take stock of the future he and Brown have mapped out for us while there's still time to do something about it.

Apparently Britain is going to hell in a hand basket. I doubt even the most curmudgeonly Spectator columnist could have come up with such a gloomy, alarmist prognosis. The dubious reasoning underpinning much of this 'analysis' is exemplfied in an article by Elliott in today's paper, entitled Blair's legacy: a fantasy island trying to live beyond its means at every level:

At the national level, the spend, spend, spend mentality has saddled Britain with a record trade deficit. Hardly noticed in last Thursday's excitement was the release of the latest set of trade figures from the Office for National Statistics. These showed that in March, the UK imported £7bn more goods than it exported - more than 6% of GDP. This figure alone gives the lie to the notion that Britain under Labour has cracked the age-old problem of inflation, since a trade deficit is merely disguised inflation, evidence of excess demand that can only be met through imports.

It's not difficult to see why the UK is running a trade level of this size: consumption has been rising fast while manufacturing output has flat-lined. Unlike Germany, Japan, Sweden - or even the US, which has a huge trade deficit itself - Britain is no longer an industrial nation. Is this worrying? Well, it scares the life out of me, but not it seems the government. The fantasy here is that we can cope with living beyond our means at a national level through the profits generated by the City and by building up Britain's "knowledge economy". A £7bn trade deficit suggests we have some way to go...

What's wrong with these claims? First, it is disingenous to focus solely on the trade in goods, particularly when the UK services balance regularly posts large surpluses (£2.5 billion in March alone). Second, as this ONS report shows, the goods and services trade deficit has been narrowing over the past year, not widening. Third, one should really look at the overall balance of payments - the current account deficit was 3.4% of GDP in 2006, a lot less scary than Elliott's 6%.

The days when the British economy ran largely on goods production are long gone. The services sector - including the City - generates far more employment and value added than manufacturing and primary industries do. Moreover, if financial markets agreed that the trade deficit is "merely disguised inflation" one would expect them to have pushed interest rates higher and the pound weaker.

The only "seedy dreamworld" in evidence here is that of a disenchanted left-of-centre hack trying to beat up a crisis where none exists. Try sticking to the facts in future, Larry.

P.S. I am not of course claiming Britain faces no economic problems - simply that there is little evidence of crisis, and that on most key measures the economy is in reasonably good shape.

Explaining market moves: the Bloomberg myth

Anyone who has regularly read Bloomberg market reports knows they always try to give a rational reason for daily market movements - however tenuous the connection. Take today's stories, for example. The first makes sense:

Asian Stocks Rise as Crude Oil Falls to Year-Low, by Stuart Kelly

Asian stocks rose after oil fell to its lowest this year and Sony Corp. said profit at a unit that makes mobile phones almost tripled. Matsushita Electric Industrial Co. and Hyundai Motor Co. paced advances.

But how about these two:

Pound Halts 5-Day Slide as King Signals He's Open to Rate Rise, by Aaron Pan

The U.K. pound halted a five-day slide against the dollar after Bank of England Governor Mervyn King said inflation remains a concern for policy makers in Europe's second-largest economy. Britain's central bank will need to continue monitoring price increases as inflation picks up after a dip last month, King said late yesterday in a speech in Winchester, southern England. The central bank on Oct. 5 held borrowing costs at 4.75 percent for a second month.

Gilts Advance on Speculation BOE to Lift Rates Once More Only, by Kabir Chibber

U.K. government bonds advanced on speculation the Bank of England will be done raising interest rates after one further increase this year. Yields on benchmark 10-year gilts are near their highest in three weeks as quickening U.K. house-price inflation reinforces expectations the central bank will lift borrowing costs next month, following a surprise increase in rates in August.

Hmmm. While it's not impossible for rate hike speculation to have such opposing effects, it does seem a bit of a stretch. Felix Salmon asks: Do markets always move for a reason?

When the Economonitor was a wire-service Econominitor, he used to get into arguments frank exchanges of view with his editors on the subject of reporting market movements. The driving conceit of market reporting is that everything moves for a reason – which means that a tiny move upwards in, say, the S&P 500 would be because investors were heartened by some economic data report, while an equally tiny move downwards would be because of "profit-taking" or somesuch. If in doubt, "there were more buyers than sellers," or its converse, would suffice as a "reason why" some given market moved in a certain direction.

Jack Shafer notes that at Bloomberg the word "uncertainty" is banned from news stories on precisely the grounds that "markets move for a reason". He doesn't note, maybe because he was never a markets reporter, that at least half of all market reports could be more simply and more accurately replaced with "markets moved and we don't know why". What we do know is that the "reasons" given in market reports are very unlikely, on some deep ontological level, to have a real causal relationship with market moves.

What is the most absurd or contradictory market-moving wire report you've read?

Sweden's major overhaul

Some readers have rebuked me for my comment in yesterday's post, Sweden moves to the right, that "the much vaunted 'Swedish model' is set for a major overhaul". Likewise, Andrew Leonard over at How the World Works, wrote in his post Nordic welfare woes:

The New Economist promptly declared that the "Swedish Model" is set for a "major overhaul," and the righty blogosphere is hooting with glee at the "socialist" defeat. But the New York Times' prediction that a "fine tuning" is in the offing seems more likely. Observers have been quick to point out that four years ago the Moderates campaigned on a platform of big tax cuts and were trounced. Their proposals for reform have since become considerably more, er, moderate.

...Salon contributor and U.K. journalist Andrew Brown is working on a book about "Sweden and the Future." Taking time off from writing a column for the Guardian on the election to exchange a quick e-mail, he noted that this shouldn't be interpreted "as a big swing to the right. The thing about Swedish politics is that there is always a pretty tight consensus among the ruling class about what ought to be done; just sometimes a disagreement about who ought to do it."

Well, let's clarify what I meant. I don't expect Sweden's uber-generous welfare state to be radically reformed (though the incoming government did pledge during the campaign to cut unemployment benefit). But let's not pretend that nothing has changed. This morning's Financial Times front page has a story by David Ibison in Stockholm: New Swedish government vows to cut role of state in economy

Sweden's new government plans to reduce the state's role in the economy substantially, and will sell off government stakes in some of the country's best known companies, including SAS, the airline, and Nordea, the Nordic region's largest bank. In a shift in economic direction, it has pledged to spin off holdings in unlisted state-controlled firms and to open large parts of the economy to private sector competition.

...The Alliance's plans clear the way for a period of significant corporate restructuring and rapid changes to the private and service sectors. The new government's policy was expected to involve a three-stage period of privatisation and deregulation over the next three to five years, bankers said.

The first stage involves the sale of stakes in listed companies, then the sale of unlisted state-owned groups and finally the possible sale of public service companies, such as utilities. It will see the sale of 20 per cent of Nordea; 45 per cent of Telia-Sonera, the telecommunications group; 7 per cent of OMX, the stock market operator; and 20 per cent of SAS.

Fredrik Reinfeldt, prime minister elect, has not committed himself to a timetable for the sales but said they would go ahead when the best price was obtained. They have a combined market value of about SKr150bn (£11bn).

Carl Bildt, a former prime minister and leader of Moderaterna, the main party in the Alliance, told the Financial Times: "We need to do with the service sector what we did with the private sector in the 1990s." He was referring to the deregulation of the banking, telecoms, retail and automotive sectors in the 1990s. That created some of the country's most powerful companies, such as Ericsson, the communications company, and Volvo, the world's second largest truck maker.

That may not seem like a 'major overhaul' to US readers, but if any European readers believe a rolling five year campaign of privatisation and deregulation won't shake up the Swedish model they're engaging in wishful thinking.

What should Labour do now?

As Gordon Brown prepares for the 'speech of his life' at next week's Labour Party conference, a panopoly of commentators have been offering their assessment of the Blair years and giving advice for the party. This weblog doesn't often stray into party politics, but as there is some interest amongst readers, here goes...

Peter Hain, candidate for Deputy PM and Secretary of State for Northern Ireland and Wales, thinks Being bold and progressive will win back disillusioned voters (The Observer, 17 September). He wants Labour to recapture the green vote, "narrow the gap between those at the top and those at the bottom" (without saying how), and "deepen democracy" through democratic reform of the House of Lords, and electoral reform (introducing the alternative vote). Hain concludes:

For Labour, the task of renewing after 10 years in government is onerous - and rarely, if ever, achieved by governments of either party.What happens ne But with a renewed and revitalised party, we can do it. What matters now, at this point of transition from Labour's most successful-ever Prime Minister, is to rediscover our passion for our values and so enable the decent, caring, moral and progressive majority in British politics not to be seduced by Cameron's trendy soft focus or feel driven into the arms of the Liberals in protest, but to come home to Labour.

Will Hutton writes in the Observer that if Gordon Brown becomes Prime Minister, his first duty should be to restore New Labour's core values: Blair is dead but Blairism must not die with him

The heart of Blair's problem was that he could no longer win the arguments. For all the strengths of his core creed, it had become intellectually incoherent. Parts worked and continue to work. But it did not add up to a progressive position at home, while abroad, its attachment to pre-emptive unilateralism meant that it became an apologist for American and Israeli might, the least progressive position of all. Intellectual incoherence is political death and last week Blair died.

But not, I submit, Blairism or at least a reconstituted version. ...Blair's successor must rescue Blairism from its blind alleys but, simultaneously, own and reinvigorate its core propositions. At home, the Labour party must drive on with the consensus achieved in the mid 1990s while making more explicit its aims to increase public value, legitimacy for public action, opportunity and social justice.

The Fabian Society's Sunder Katwala ponders What happens next? in the October issue of Prospect Magazine. British politics has moved to the centre-ground, so there is little point Labour turning right-ward.

New Labour’s political success, in beginning to convert its opponents, means that the 1990s politics of triangulation now delivers diminishing returns. Attempts to define “New New Labour” on the “think of something the Labour party will hate” principle (such as Stephen Byers’ call to abolish inheritance tax) now makes little strategic sense, because the dynamic of the cross-party battle has been reversed.

For a decade, New Labour claimed the centre-ground by pushing rhetorically into Tory territory, and the Tories consistently fell into the trap seeking “clear blue water” out to the right. Three defeats later, they have worked it out. Just as Labour had to show it had a response to crime, Cameron seeks attention by addressing issues which Tories used not to talk about—the environment, social justice and global poverty.

Bye to Blairism

As Britain's prime minister enters his final few months in office, the commentariat seem keen to enumerate his failings or offer gratuitous advice as to when best to leave.

We won't know for years how history judges Blair's legacy, of course. For now, involvement in the messy Iraq conflict overshadows a respectable economic and social record.

While 'Blairism' will never have quite the currency that 'Thatcherism' did, that is not to say the Prime Minister's approach to politics has no underlying philosophy. Nevertheless, Third Way politics is no longer in vogue, and the 'stakeholder society' but a fleeting memory.

For Chris Dillow at Stumbling and Mumbling, New Labour shows "a blind faith in technology over professionalism, for 'modernity' over tradition, for managerialism over true expertise, and for statism over liberty". In short, it's Blair's managerialism that's the problem:

Managerialism is distinct from management. The latter is a practice, the former an ideology. What's more, this ideology is distinct from technocracy, in several ways:
1. Managerialism is a faith. It says that a centralized organization, however complex or inept, can be well run with the right leadership. Hence the belief that Reid is the man to turn around the Home Office. Technocrats, however, ask: how, exactly, is it possible to run an organization?
2. Managerialists manipulate  symbols and image - hence the importance of spin. Technocrats believe they can and should manipulate reality...

Stefan Stern, writing in today's Financial Times, is even harsher. He recounts the seven habits of an ineffective prime minister:

Consider briefly these seven classic leadership mistakes (it is always seven, isn’t it?) that he has been guilty of:

Failure to adapt to changed circumstances. “New Labour” stormed to power on the back of a brilliant marketing and communications effort, allied to a ruthlessly efficient campaigning style. But governing is different from campaigning. Having established what seemed a winning strategy, Mr Blair never learnt the art of leading a collegiate administration.

Failure to manage expectations and follow through on ideas. Mr Blair has been addicted to making hyperbolic claims, which in turn have set unrealisable goals for himself. He has preferred “eye-catching initiatives” to the unglamorous hard grind of policymaking.

Adoption of the ‘heroic CEO’ leadership model. Mr Blair is much taken with dynamic business leaders. But he has fallen for the hype which suggests that chief executives achieve great things on their own. He has been unhealthily self-centred. When he announced the time-frame for his forced departure last week, he said: “I would have preferred to have done this in my own way.” That statement is not really compatible with parliamentary democracy.

Top-down, autocratic style. Mr Blair chose to ape the leadership style of a predecessor, Baroness Thatcher. Like the Iron Lady, Mr Blair said he had “no reverse gear”, that backbone was what counted, not backing down. This posturing was inauthentic. It also suppressed creativity and limited colleagues’ ability to show initiative. This was itself an overreaction to the John Major years (Mr Blair’s immediate predecessor, who had been perceived as a weak leader). Mr Blair’s fear of the power of the media encouraged this centralised rigidity.

Failure to listen to constructive, well-intentioned criticism. Mr Blair and his core leadership team closed itself off from the rest of the government and the wider Labour party. For over a decade his more critical friends have offered advice on changes to his style of government but have been ignored. Many tried to warn Mr Blair that his period in office would end in tears. Now it has.

Addiction to arbitrary targets and performance measures. Mr Blair has frequently imported the wrong private sector techniques into the public sector. His government’s crude use of targets has distorted employees’ behaviour and led to unintended negative consequences.

Failure to manage a stable and orderly succession and build a strong organisation. Après moi le déluge. Apart from Gordon Brown, chancellor of the exchequer – who seems to be feared and resented in equal measure by the current leadership – no other significant future leadership talent has been brought on. Great leaders leave talented successors and a healthy organisation in place behind them. Meanwhile, party membership is in steep decline and morale is low.

The first two points resonate. But a failure to listen, autocratic style, etc are criticisms that one could apply to almost any leader in office for a long period, and whose popularity is waning.

Meanwhile, those readers who think the current imbroglio has been unfair to Mr Blair might like to check the new pro-Blair website Keeping the Faith.

Worth reading

A few recent and varied pieces:

* Ronald Dworkin poses Three Questions for America at the NYRB

* Ben Waxman explains why students are forced to spend so much on textbooks

* Menzies Chinn discusses the US labor market and the incipient slowdown

* The FT's Martin Wolf says we should Share gains with globalisation’s losers (alternative version available via Economist's View, which also includes excerpts from the online debate)

* OECD Chief Economist Jean-Philippe Cotis provides an interim assessment (PDF) of the world economic outlook

15 websites that changed the world

This month the web is 15 years old and in that short time it has revolutionised the way we live, from shopping to booking flights, writing blogs to listening to music. John Naughton lists what he considers are the 15 most influential websites to date in today's Observer: Websites that changed the world

Top of his list is eBay.com, followed by online encyclopaedia wikipedia.com. Third comes napster.com, the music file sharing website, followed by the video-sharing network, youtube.com. Weblog publishing system blogger.com, comes in fifth. As Naughton puts it:

The strangest thing is how casually we have come to take it for granted. We buy books from Amazon, airline tickets from Easyjet and Ryanair, tickets for theatres and cinemas online, as if doing so were the most natural thing in the world. We check the opening times at the Louvre in Paris or the Museum of Modern Art in New York (or browse their collections) online. We check definitions (and spellings) in online dictionaries, look up stuff in Wikipedia, search for apartments to rent on Craigslist or a host of local lookalikes such as Daft.ie in Ireland.

You can buy and sell just about anything (excluding body parts) on eBay. Children seeking pictures for school projects search for them on Google Images (and download them without undue concern for intellectual property rights). Holiday snaps escape from their shoeboxes and are published to the world on Flickr. Home movies likewise on YouTube. And of course anyone with doubts about a prospective blind date can do an exploratory check on Google before committing to an evening out with a total stranger.

Note: Sites mentioned above without links are not in the top 15, while six that were listed are not mentioned: friendsreunited.com, drudgereport.com, myspace.com, slashdot.org, salon.com and yahoo.com

I recall surfing with Mosaic on my university terminal in the early 1990s. Back then it was mainly about email, finding information and fun sites. Web design was appalling, finding things was hit and miss (even with Yahoo), and surfing the net from home meant long waits. Sometimes if I'd opened up a few new pages I'd go and make a cup of tea while they loaded.

These days I research trips and book most of my travel and accommodation online. I order most of my books and some CDs online. I use the internet intermittently throughout my working day - looking up papers, academics, events, news releases... I listen to streaming radio and music on my laptop. I check newspaper and magazine sites. I email. And I blog, of course. i cannot imagine life without the internet.

In another 15 years time I expect there will be plenty more to interest, excite, entertain and shock us.

"Trust me, I'm an Economist"

Coming soom, to a station near you - Economics TV! Hamish McRae informs us in the Sunday Independent that Tim Harford's new book The undercover Economist is being turned into a television programme: The dismal science gets into our heads

"Trust me, I'm an economist." Really? Well, yes.

One of the great things that has been happening to the study of economics in recent years has been the focus on the micro rather than the macro. We used to worry mainly about the big issues: GDP growth, interest rates, inflation and so on. We still do, of course. But beside that has been a new interest in what economics can tell us about the small things. Why do people behave as they do? What makes people happy? How do we fix the NHS? Actually those do not sound small at all, but they are concerned with the detail of the behaviour of millions of people, rather than the mass of an economy.

The subject has been moving along steadily but two best-selling books have suddenly brought this sort of work to public notice. One is Freakonomics, written by two Americans, Steven Levitt and Stephen Dubner. The other is The Undercover Economist by a British author, Tim Harford. In rather different ways, the two books relate economics to how people behave - from drug dealers in Chicago (Freakonomics) to supermarket shoppers or coffee drinkers at Starbucks in London (The Undercover Economist).

And now there is a treat in store for British TV viewers interested in this area, for the latter book has been transformed into a TV series called Trust me, I'm an Economist, which starts on BBC2 on 18 August. And the first programme is about love.

No, it will not tell you how to capture the heart of the man or woman of your dreams (though it does show some things you clearly should not do). It will, though, help explain the extent to which we are rational economic beings and the extent to which we are not. And it will explain how the market can be harnessed to all sorts of socially beneficial aims.

With a bit of luck, it might also help economically illiterate policy makers to understand why their policies so often fail. We could do with a bit more of that.

Data fun for all the family

OK, I confess - I'm a  data junky. So I am very thankful to Jim Gibbon (via Eszter Hargittai of Crooked Timber) for posting about Gapminder. It provides the best visualisation of data I have ever seen. Here is Jim's post:

I’ve been blown away this morning by a new tool for displaying world development data called Gapminder.  If you want a spicy way to show off statistical data, it’s hard to imagine a more compelling software program.  There is a great video demonstration of Gapminder being used in what is possibly one of the best presentations I have ever seen (I laughed, I cried, my jaw dropped).  You can play around with the program online, but make sure to watch the video to get a sense of its capabilities.  (Note: No statistical knowledge required, appropriate for all audiences!)

The Gapminder Foundation was founded by Ola Rosling, Anna Rosling Rönnlund and Hans Rosling in Stockholm. It shows what a small non-profit can do.  You can checkout the Gapminder tool online - and there is also a related tool with even more options on the website: Trendalyzer. It's capabilities are awesome. The website also has plenty of downloads and presentations.

BIS' warning to the world

Earlier this week BIS, the Bank of International Settlements, held ita Annual General Meeting and published its Annual Report. In my opinion this is the best single source on inflation and monetary policy and is required reading for all central bank watchers. This year, there is also an illuminating analysis on how globalisation has affected wages and prices. Here is the report's contents:

76th Annual Report by chapter:
	Table of contents, letter of transmittal Read (PDF, 11 pages, 53 kb)
I.	Introduction: resilience to mounting strains Abstract | Full Text (PDF, 8 pages, 56 kb)
II.	The global economy Abstract | Full Text (PDF, 23 pages, 819 kb)
III.	Issues in emerging market economies Abstract | Full Text (PDF, 25 pages, 800 kb)
IV.	Monetary policy in the advanced industrial economies Abstract | Full Text (PDF, 20 pages, 1842 kb)
V.	Foreign exchange markets Abstract | Full Text (PDF, 19 pages, 1472 kb)
VI.	Financial markets Abstract | Full Text (PDF, 22 pages, 1487 kb)
VII.	The financial sector Abstract | Full Text (PDF, 20 pages, 593 kb)
VIII.	Conclusion: coping with risks, today and tomorrow Abstract | Full Text (PDF, 14 pages, 67 kb)
	Organisation, governance and activities of the Bank Abstract | Full Text (PDF, 74 pages, 326 kb)

Over the fold I have includede several press reports highlighting BIS' warnings about inflation, the need for higher rates, and the impact of globalisation. But you are much better off reading the report yourself.