The Volterra Approach

The Folly of Wellbeing in Public Policy

2012-01-30T06:31:00.001-08:00

The idea that Government policy should focus more on promoting wellbeing has been gaining support. Proponents of this view argue that happiness indicators have stagnated over decades because, they argue, governments have paid too much attention to maximizing a materially-based measure of economic welfare, Gross Domestic Product, rather than a more holistic indicator based on happiness. This premise is clearly false. Economics has undoubtedly been important in post-war political life, but it has not always been a decisive factor in determining the outcome of elections. Clinton’s Party lost the election in 2000 despite years of prosperity, Margaret Thatcher led the tories to re-election in 1983 despite the 1980-82 recession, and Tony Blair overwhelmingly defeated the Conservatives in 1997 after several years of strong economic growth. The fact is politicians do exhibit concerns over a wide range of issues where GDP is not the immediate focus. For instance immigration and crime are two very live issues that no serious politician can afford to ignore. Yes, economics and economic policy matters to voters, but so do other issues, and it is wholly misleading to suggest that policy is focused solely on the maximization of GDP. GDP as a concept has been criticized as it does not capture wider social and environmental costs and benefits within a society. But the simple fact is that GDP was never intended to include them in the first place. The purpose was to measure the value of the output of an economy, as far as possible using market based prices to do so. The question of measuring non-market output is conceptually different to that of happiness and well-being, but it is often confused with them in practice. Namely: Should we, and if so how, extend the concept of GDP to include more ‘non-market’ factors? A wide range of adjustments to the basic measure of GDP have been suggested, such as weighting income by the degree of inequality, deducting the value of ‘bads’ such as time spent commuting, valuing work in the house, and so on. However, the wellbeing movement goes far beyond tinkering with what is and what is not included in GDP. It suggests replacing it altogether with a measure which purports to describe not the material prosperity of a population, but its happiness. Surveys on the levels of happiness reported by individuals have been carried out over a few decades in most Western countries. In general there is no apparent trend to be found, either up or down. Over the same period, average material standards of living (GDP per head) have shown a clear upward trend. This seems to support the old maxim ‘money does not buy you happiness’! The fact that measured happiness has not increased over decades is viewed by some commentators as indicating a flaw in our society which must be corrected through government intervention. Indeed the lack of correlation between happiness and GDP is indicative of a similar non-trend across many other variables: expenditure, life expectancy, racial and gender inequality. This suggests that attempting to improve the human lot through any policy – not just through pursuing economic growth - is entirely futile. Alternatively, we could conclude that happiness data over time shows little movement because it does not have much meaning. When happiness is measured, people are asked to register their level of happiness on a scale of n categories (e.g. 1 = ‘not happy’, 2 = ‘fairly happy’ or 3 = ‘very happy’). Discrete categories mean that people have to undergo large discrete change in their happiness in order for this to be registered by the indicator so noticeable changes in average happiness can only come about through substantial numbers of people moving category. Furthermore the happiness data can exhibit no indefinite trend; in answering a survey in which levels of happiness are measured on an n-point scale, the data is therefore bounded between one and n. In contrast, at least as it is presently defined, real GNP can exhibit no upper bound. More subtle recent work is in fact suggesting that there is a clear and positive connection between life satisfaction and income, and that there appears to be no cut-off point to this. In a paper published in 2010 in the Proceedings of the National Academy of Science Daniel Kahneman and Angus Deaton distinguished two aspects of well-being. First, life satisfaction, defined as the thoughts which people have about their life when they think about it. Second, emotional well-being, which refers to the emotional quality of an individual’s everyday experience, the frequency and intensity of emotions such as joy, anger, sadness. The results of Khaneman and Deaton are striking. Life satisfaction is unequivocally related in a positive way to income, but emotional well-being is not. In these recent studies, GDP does therefore appear to continue to have wider value as an indicator of a successful society, over and above its direct purpose of measuring material prosperity. Despite such recent developments happiness advocates continue to insist that a single measure of happiness should be the only way of evaluating policy and progress. The problem is not merely that this lobby wants to replace GDP with a happiness index, it is the belief that by measuring happiness, it then becomes subject to prediction and control by policy makers. Of course, the fact that economics has made little or no progress in its ability to predict and control the macro economy might be seen to suggest that same fate awaits the happiness index and its devotees. It is simply not possible to obtain systematically reliable predictions of aggregate happiness indices, any more than it is for GDP. We cannot predict with accuracy the next shake of a true dice, and neither can we do so for happiness. Indeed, government attempts to increase measured happiness, rather than making life better for us, may well actually do the opposite: create arbitrary objectives which divert civil service. energies from core responsibilities; give many people the message that happiness emanates from national policy rather than our own efforts; and create pressure for Government to appear to increase an indicator which has never before shifted systematically in response to any policy or socio-economic change. These are exactly the mistakes of the target-driven mentality which has come to pervade the British public sector. We should learn from these rather than replicate them. By Paul Ormerod.Read Paul’s full chapter on the subject in the recent IEA publication …and the Pursuit of Happiness available here.

Recessions as Collective Action Problems

2012-01-19T03:41:00.000-08:00

In a blog on Keynes and Hayek I mentioned that I viewed recessions as collective action problems. In this blog I want to expand on what I mean by this because it makes all the difference for economic policy. It also contextualises our conventional demand management approaches, namely fiscal and monetary policy.

To build up the hypothesis, it is necessary to dip our toes in to a number of fields of study. But let us start with some empirical evidence and build the conceptual framework from there.
In his study of decision-making in the financial system, set out in his book Minding the Markets, Prof. David Tuckett from UCL interviewed 50 investment managers and analysed how they made decisions under conditions of uncertainty. Here I will take Prof. Tuckett’s conclusions and apply them to the phenomenon of recessions.

Prof. Tuckett explained how investment managers used narratives to help them make sense of the past, present and future. The amount and complexity of the information and the high degree of uncertainty they have to deal with can be staggering. So they develop narratives – mostly sub-consciously – to form what seems to be a cohesive pattern of understanding. This is also true of people in everyday life.
This is very different to conventional economics where “rational expectations” dominate. In this conventional approach, people are typically fully informed, have a particular (unchanging) model of how the economy works, and use these to determine their expectation of some variable in some fully predictable future.
By contrast, in reality people use narratives – again, subconsciously most of the time – in complex environments and these narratives can include some expectation of the future. People also typically have a sub-set of the information required to make decisions in their daily lives and, in complex social systems, the future is inherently uncertain.

Narratives form an important part of our framing of some situation or object but that is not to say they displace conscious analyses of the economy. The two are not mutually exclusive: narrative formation can involve a complex interplay of the conscious and sub-conscious aspects of the brain.
Narratives are also formed in part through social interaction. We listen to what others have to say: they influence us and we influence them, both at the same time. This important point means we are compelled to think of social systems as “Complex” (meant in the formal, Complexity theory sense), with people continuously interacting and co-evolving. The concepts of emergence and global cascades are useful for understanding how narratives are “exchanged”, how they spread, and how a particular narrative might become a “consensus” view among a group of people.

With these micro and system-wide points in mind, my argument is that recessions come about when a dominant narrative emerges within society, leading to behaviour that is consistent with a recession subsequently arising. If people believe a recession is likely, or imminent, they tend to behave “prudently” with respect to both consumption and investment. An important point is that the narrative of a recession and how people respond to that narrative make a recession both inevitable and self-fulfilling. In more technical language, there is “time-consistency” between the narrative-expectation and people’s behaviour.
An important difference between a recession narrative, which leads to a recession, and traditional theory is that in the latter, an economy is typically expected to gravitate toward some future full-employment equilibrium. For example, the models used by central banks (the terribly-named Dynamic Stochastic General Equilibrium models) normally show economies necessarily recovering following a recession. But if the consensus narrative is one of recession, and remains there, it is plausible that an economy can remain in that state, i.e. a “depression” narrative could emerge, reinforcing the slump. Alternatively put, a depression could be viewed as a sub-optimal equilibrium in a complex system.

I refer to recessions and depressions as collective action problems because they arise out of the collective action of agents in the system, operating in a way that is consistent with self-interest but which result in outcomes that are detrimental to all. An analogy is the Prisoner’s Dilemma game in game theory. As is famously known, the outcome in the Prisoner’s Dilemma is sub-optimal for both prisoners. If they could collude (a form of collective action), they could achieve a different outcome that is preferable for both. But this outcome is contingent upon the collusion being viewed as credible by both prisoners: some mechanism is required.

Now let’s turn to the policy implications of treating a recession as a collective action problem. In traditional macroeconomics, the mechanisms used to mitigate recessions (fiscal and monetary policy) are viewed as managing the overall level of demand in the economy. But if the narrative approach above is accurate, are these traditional tools of demand management sufficient for bringing about a recovery? Not necessarily.
What is crucial is the impact these policies will have on people’s narratives about the economy, not only their impact on “aggregate demand”. How these changed narratives influence individuals’ behaviour is another important question. A key point is that the overall impact of people’s changing narratives concerning an economy can dwarf demand management policies. A second key point is that narratives seem to be formed through an emergent process, which means prediction and control are highly problematic.
It is for this reason that I am sceptical of orthodox Keynesian approaches that imply a mechanistic view of the economy, whereby people adjust – deterministically – to macro management policies. Narrative formation is much more complex than that. Indeed, my colleague Paul Ormerod noted in November that the US appeared to be enjoying an expansionary fiscal contraction. This is possible if narratives change in favour of a recovery, leading to recovery-consistent behaviour by individuals, despite a fiscal contraction.
However – and this is a big however – demand management policies can and do influence narratives. But they should be viewed as one of a complex set of influences on how people view the economy, including its future.

UK GDP Growth (Source: ONS)

Before concluding, it is worth noting that these points relate to the fiscal policy debates of 2008-2010. During those debates the conventional Keynesian and Conservative perspectives were wheeled out. Keynesians said the fiscal deficit had to be expanded to counter a contraction in private demand; and Conservatives emphasised prudence to inspire “confidence”. A narrative-based framing shows that the Conservative perspective was not as unreasonable as Keynesians argued: we can re-state “confidence” through a narrative framing in stating that a prudent approach might inspire a shift away from a recession narrative to something more optimistic. But there is also a reasonable argument that a fiscal expansion might have inspired a recovery narrative. We will never know. What is clear is that we need to understand better how narratives emerge and perpetuate and how they can be influenced, including (if at all) by governments.
To conclude, I suspect that to those people not trained in conventional economics, this all sounds blindingly obvious. I would like to think that is because I started with a look at research based on empirical evidence, albeit based on the world of finance; and because I mixed this evidence with appropriate and cutting edge concepts from the new field of Complexity theory. But a lot more work needs to be done to deepen this framework, including by the academic community.

By Greg Fisher, Managing Director of Synthesis - associates of Volterra

HS2 gets Traction

2012-01-12T06:22:00.000-08:00

Justine Greening has announced this week that HS2 will go ahead – which is enormously welcome. It is still surprising how many people have fallen for the proposition that is will be an expensive white elephant. Even the leader writers of the Financial Times have been captured by the Nimbys and the naysayers.
The fact remains that the long distance rail system is creaking at the seams. The West Coast Main Line is one of the busiest railways in Europe and managing its maintenance, even after its refurbishment, is a nightmare. The southern end, with massive commuter use, already needs more capacity. So we don’t just need HS2 to meet projected growth – we need it here and now.
Running infrastructure too close to capacity is risky, just as we see at Heathrow. This has to operate at 98% capacity, so that the slightest thing that goes wrong means lengthy trouble and hours to get the system back into normal running.
But the extra capacity will generate additional benefits. Accessibility is crucial to modern economies. With globalisation and the fact that cities are the focus of growth, intercity connectivity will be a key element in maintaining the UK’s economic performance. Our work for the Core Cities has shown that city centre growth will both generate and be generated by extra trips.

Bridget Rosewell

Minsky Mania: a Raincheck

2012-01-09T02:57:00.000-08:00

The American economist Hyman Minsky is currently very fashionable, especially amongst those who are sympathetic to the idea of more government intervention in the economy.
Minsky argued that financial crises were an inevitable feature of capitalism, unless governments stepped in through regulation and central bank action.
He hypothesised that in prosperous times, when the corporate cash position became strong, exuberance developed which translated into a speculative bubble in asset and property markets. Private sector debt rose as borrowing increased to fuel the speculation, and at the ‘Minsky moment’ a crisis would occur. Following this, banks tighten credit, and even companies which are fundamentally sound may be driven out of business because of an unwillingness to roll over debt.
His theory is very seductive in the light of the experience since 2007.
But the theory does not explain why, over the past 80 years, we have only had two major financial crises, the early 1930s and the recent one from 2007. It is the dog which has not barked which causes fundamental problems for the hypothesis as it stands.
For example, in the United States, private sector debt relative to the size of the economy reached a peak of 2.1 in 1932. From a low point of only 0.4 in 1945, it rose almost without interruption to a new peak of nearly 2.2 in 2001. But there was no crisis. It reached 2.6 in 2006, much higher than its peak in the 1930s Great Depression. But again, no crisis.
The Minsky story is good at telling us after the event what happened in a crisis. It does not tell us why crises do not happen, even when the objective facts suggest they should.

Paul Ormerod

Health Spend At the Blair Benchmark

2011-12-09T10:01:00.000-08:00

The Blair milestone has been reached. In a celebrated TV interview in the autumn of 2000 the then Premier Blair committed the government to raise NHS spending up to internationally comparable levels with our European partners or more widely with the OECD. Now our spending is over the OECD average –9.8 per cent of GDP compared to an average of 9.6 per cent. This is more than among others Finland, Australia and Italy. Spending on health per person is also now slightly above the OECD average at $3847 per person compared to the average of $3233.
For decades the problems of the NHS have been blamed on underfunding. It was said that the NHS may not have been the envy of the world but it was the envy of Finance Ministers. Now there are no more alibis. For the future there seems little chance of any large bail out where funds rise faster than inflation. The OBR Report paints a picture of falling tax revenues and might have said more about the forward commitments on public spending especially for an increased number of retired who expect improved public sector benefits and may not get them The NHS has its own forward commitments for PFI schemes and technical improvements.
The NHS and the private health sector are now much more important for the productivity of the whole economy than they were when the health service accounted for 3 per cent of GDP as was the case in 1950. There is also the potential for further drag on the economy as demand expands. Health services have a hidden economic and human opportunity cost in that they employ a large proportion of the most highly qualified personpower. How can we create conditions which would ensure that these abilities are fully used?
The key lies in a new drive for redesign of services. We have to improve quality and patient access for a level of funding which will be at best static in real terms. Yet we have a high cost, high tech model where spending has been growing by 4.8 per cent p.a. in real terms. Volterra is committed to working with health partners to make a creative and effective response to this rather large and threatening challenge.
There is an emerging model of healthcare which can deliver better services for patients. The model has four stages in prevention, early diagnosis, ambulatory treatment and care programmes. There is clear evidence from Scandinavia and from HMOs in the US that such a model can deliver better health for populations while containing costs.
Premier Blair in fact came to realize that his commitment to Euro level of spending was not enough for a good health service—for this were needed incentives and competition and patient choice. The agenda is still there and now inescapable.

(1)OECD Health at a Glance 2011. Key Findings United Kingdom.

By Nick Bosanquet, Director Volterra Health

Infrastructure Rules

2011-12-06T01:52:00.000-08:00

It is fascinating how our attitudes have changed. Ten years ago, I was arguing the case for Crossrail – the London rail link which will increase capacity into central London by around 80,000 people in the peak – to an audience which was entirely cynical about our ability to deliver this.
An attempt to get the project off the ground in the early 1990s had failed and many experts were sure that the case could not be won. Indeed winning this case took a huge coalition of parties from business to local communities and the pressure of the new Mayor of London. I lost count of the meetings, conferences, campaigns and reports. Crucial to the case was the argument that this railway was about more than time savings. Instead it was about the economy. It was about delivering more people into the most highly productive part of the UK economy, thus enabling more jobs and more productivity.
I produced an entirely different kind of business case – one resting on output and jobs and the constraints imposed by a lack of capacity. This was crucial.
Now it seems that the argument about the importance of infrastructure is won. The Chancellor announced a long list of projects that were now going forward especially in road and rail, to be paid for by savings elsewhere. The justification is how this will support economic growth, which shows how the highest level of government has grasped that if the UK is to stay ahead, we will need an infrastructure which supports a 21st century economy – very different from the 20th century one.
London got lucky in the last thirty years. It was able to restructure away from manufacturing which was located around the ring roads and radial routes and towards services which were more productive in the central area because it had an overground and underground transport system with sufficient capacity to take up this shift in economic geography. That capacity had run out, but hopefully the re-investment will happen in time to prevent a sliding away of productivity.
However, new investment in still needed. The Chancellor has rightly supported the extension of the Northern Line to Battersea – a project which opens up regeneration on a major scale but can never be justified on standard transport grounds.
And he has recognised that London (and indeed the UK) needs to maintain its international status in aviation. A world class city needs a world class airport. Heathrow is too constrained to achieve this as air transport grows. The ideas for an estuary airport can give us the aviation capacity we need and also be linked to state of the art access for freight and passengers which will improve enormously the prospects for the rest of the country which will be able to access Europe by rail and the rest of the world by air while bypassing London.
What we now need to do is to sort out properly the funding for these projects, which should pay back. Whether in fares, development, or taxes we need to be clear that we expect these investments to pay their way, so that further investments can also be made. This will require a very different approach to project appraisal, risk and finance than those we have made so far.

By Bridget Rosewell

The August Riots: A Network Perspective

2011-11-29T06:49:00.000-08:00

What can complex systems and network theory tell us about the summer riots?

There was clearly a great deal of copying going on, of imitating other people’s behaviour. This was both within a given community and across communities. Social network media did not cause this, they facilitated it. The incidents received much wider coverage in the traditional media.

But ex ante, it is extremely difficult to predict which events will give rise to ‘cascades’ across networks in this sort of way. Which events will lead to general riots, which will lead to local disturbances, and which will experience no problem at all.

This is a key insight of network theory. Networks are ‘robust yet fragile’. They are robust in the sense that most shocks, most bits of new information, most events are contained by the network, and their influence does not spread. But they are at the same time fragile, in the sense that an incident similar to others which have not spread, suddenly gets traction and spreads.

There are lots of examples of perceived police insensitivity towards minority communities, real or imagined. But in general these do not lead to widespread looting in British cities. There was nothing unique about the shooting of Mark Duggan, and his immediate family called for calm. But in this instance, the network was fragile. Rioting and looting spread.

Once an event happens, however, whenever copying or imitating the behaviour of others across networks is important, it becomes easier to predict whether it will really take off. The complex network structure which makes ex ante prediction very hard, paradoxically makes it easier to assess the eventual scale of the outcome than it would be if networks were not present. So, for example, early diffusion of activity across different communities is a much more powerful predictor than the initial scale of activity. Sometimes, locally large disturbances remain confined and do not spread.

Finally, although a key insight of network analysis is to break the common sense link between the size of an event and its eventual outcome, it is only broken in part. We now know that in networks, small events can have large consequences. This is where ‘common sense’ breaks down.

But a large event still has large consequences. So when riots and looting spread, you have two strategy options. First, to try lots of different small scale interventions and see if one of them takes off, if it is able to exploit the fragile property of networks. Second, to do something on a dramatic scale. For example, call in the Army and shoot 20 looters dead. But what you do not do is what it appears the police did, which was to be reactive only, not proactive. And if you want to follow the first option, time is of the essence. You want to experiment, so you had better do your experiments very quickly before the looting spreads out of control.

By Paul Ormerod

Healing the Finances of the NHS

2011-11-23T04:17:00.000-08:00

The financial problems of the NHS are extremely serious—but more like anaemia than haemorrhage. It is the financial equivalent of a long-term medical condition.
The NHS Commissioning Board has just appointed Professor Malcolm Grant as chair and must now determine the likely funding, costs and demand over the next five years. Not just the cost commitments that are already there for example from PFI schemes, but also from increasing numbers of medical graduates, and rising energy and food prices.
Trusts' financial problems have probably been under-estimated. The Department of Health names 20 trusts it is concerned about, but 18 others with PFI schemes and at least three in the London area with known financial problems can be added to that list. Most of the 40+ trusts with problems are in or near London.
The NHS has to redesign services while facing deep uncertainty about budgets. By 2013 the 250 new clinical consortia will have allocated budgets but it will be 2014 at the earliest before they can be confident these are realistic.
There is a danger of funding for new programmes being blocked. Managers are preoccupied with short term survival and consultation activities when the service is faced with urgent funding and design problems, with great uncertainty about responsibilities, funding and service development. There are also problems looming regarding quality of care, especially for elderly patients.
PCTs have data on activity and cost which will not exist for new boundaries, and PCT clusters can work as development agencies for the consortia during their brief remaining life. A three way partnership between clinical consortia, PCT clusters and local government, in its new and positive public health role, is needed, with close co-ordination due to the four different funding streams: the clinical consortia, the National Commissioning Board, the health and wellbeing boards, and social care funding.

Local strategy must be defined first. As the old and wise maxim says, strategy has got to come before structure. New services are going to have to be paid for by savings on the old ones, but the incentives to make them would be much greater if people had some idea of what the money would be spent on.
The new consortia must make a start in developing these strategies well before 2013. Service redesign can use the new four-staged model of healthcare - prevention, early diagnosis, ambulatory treatment and care programmes.
Many current services are obsolete, provider dominated and the wrong side of the digital divide. We need a process of change that will take years but has to start with a clear statement from the new commissioners of what they want. They should signal their intent to use patient choice and willing providers as key resources in getting change. International evidence supports a new approach to hospital admissions. From 1999/2000 to 2009/10 hospital admissions rose 38 per cent in England, compared to 1.6 per cent in Sweden. Both nations have ageing populations yet admissions for the over 75s increased 66 per cent in England compared to 0.6 per cent in Sweden. Reduction in growth of admissions is essential to the improvements in quality of hospital care and should be a major priority for the new consortia.
The Nicholson challenge needs to be redefined in terms of 10 a per cent reduction in costs – and not just for hospitals. The immediate goal is for £15-20bn of savings but all of this cannot come from acute hospitals when they account for only 39% of PCT purchasing of services and the rest goes on primary care, community and mental health services.
Some savings need to be re-invested in better care for elderly patients and new drug therapies, where spending has been rising 10% a year. Such cost cutting is important as per patient costs will rise in response to reduced admissions.
Finally a bonfire of controls must be lit. The general aim of moving commissioning closer to patients is a good one but it will be tough to kick the central planning habit. Local commissioners and providers must regain their initiative and flexibility. The NHS has attracted many talented staff in the last ten years. Let's use them to get back to solvency.
by Nick Bosanquet, Director Volterra Health as featured in the Health Service Journal 10/11/2011

Demand for high quality residential properties in prime London remains strong despite the uncertainty surrounding the wider economy …

2011-11-17T09:20:00.000-08:00

The riots in London set a sombre mood in the capital earlier this year. Alongside this America was downgraded amid concerns that the government is not doing enough to balance the books. The biggest issue at the moment however is the Eurozone crisis which continues to cause significant concern in the markets and dominate the news. The recovery from the recession was being bolstered by growth in the emerging economies but even this has begun to slow.
Forecasts for growth in the UK economy have been steadily falling over the past six months and the consensus is now for growth of just 1% in 2011, in contrast to the 2% being forecast at the start of the year. Forecasts for just 1% over the whole of 2011 would require only slight growth in the final quarter. The preliminary estimate for GDP growth in the third quarter of 2011 was 0.5% which was higher than some expectations.
Forecasts for growth in 2012 have been dramatically downgraded in recent months. In August commentators were still forecasting growth of 2% for 2012 but this has been revised down and now the consensus is for growth of just 1% next year as well. However this median position hides a wide range of opinions, with some forecasters expecting less than 1% growth and others forecasting closer to 2% growth. In reality all this really tells us is that considerable uncertainty exists at the moment.
However, despite this very uncertain outlook for the UK economy with economic performance being, at best, mediocre in 2011, prime residential property has still seen incredibly strong returns up until the end of the third quarter.
Despite national house prices remaining stagnant in 2011, London prices are 3.9% up so far in 2011 and as much as 8.4% in prime parts of the capital such as Westminster. House prices nationally remain 11% below their pre-recession peak levels, prices across London have returned to their previous peak but prices in Westminster and Kensington & Chelsea are now up to 13% higher.
Indeed transactions of prime properties in London priced £2m-£5m have hit record levels every quarter this year and Volterra now expect that prices will finish the year at least 6-8% above 2010 levels with growth exceeding this in the really prime central parts of London.
It is clear that the prime central London housing market is very different from the rest of the UK. While in most regions of the UK prices are mainly driven by the performance of the regional economy and the availability of mortgages, this is less true in central London. The prime central London market sees considerable numbers of cash purchases, largely because it attracts international investors. Therefore it depends more on the global economy than that in the UK and, despite the UK economy not being the strongest, it is still perceived as a safe haven for property investment especially with the current concerns over the health of the Euro. Buyers from emerging economies are growing in importance and this has been particularly evident in prime locations such as Knightsbridge where international demand and cash purchasers are much more prevalent.
There remains a shortage of good quality stock in prime locations. Demand is being driven by predominantly overseas, equity rich purchasers, particularly for higher value properties.

The uncertainty around troubles in Europe and wider economic concerns are now resulting in a more nervous sentiment which suggests that we may see a relatively stagnant final quarter; however, this does not take away from the fact that the market has still been one of the best performing sectors in an otherwise difficult economy.

By Ellie Evans

Paul Ormerod: Why Are Markets So Volatile?

2011-11-17T04:51:00.000-08:00

Mainstream economic thinking has considerable difficulty in explaining the massive degree of volatility of financial markets over the past few months. Both shares and bonds exhibit large fluctuations on an almost daily basis.
The problem is particularly acute for the concept which is fundamental to a great deal of modern macroeconomics, based on the so-called ‘representative agent’. This would not matter if it were purely a piece of esoteric reasoning, but models which embody this concept proliferate in central banks and international financial regulatory bodies.
The simplifying assumption is made that the workings of the economy can be explained in a model in which there is just a single decision maker, deemed to ‘represent’ the behaviour of everyone.
The ‘representative agent’ is certainly a curious assumption to make in the light of the financial crisis, when much of the focus is on the differing behaviours of creditors and debtors. In the Euro area crisis), for example, it makes no sense at all to speak of the ’representative agent’, the German government has quite different behavioural rules and constraints from that of, say, the Greek and Italian administrations.

Kenneth Arrow, a Nobel Laureate, wrote in 2004 that the representative agent assumption cannot explain the fundamental existence of markets at all! ‘if we did not have [agent] heterogeneity, we would have no trade’. In other words, if people did not have different opinions about the value of a share or a bond, why would trade take place at all?

Keynes put it a different way. If all traders think identically, market prices will fluctuate between zero and infinity!

And here we have the explanation for market volatility. The more that traders follow the herd, the more the market as a whole begins to think as a single agent. And so prices fluctuate more.

Traders form their views on a mixture of their private opinions and on market sentiment. You may think the Italian government’s finances are sound, but if most other people disagree, it takes a very brave soul to stick to his or her private opinion.

In the current circumstances, when there is considerable uncertainty, traders are giving much more weight to market sentiment than to their private opinions. The more the world looks like the world of mainstream economic theory, the more volatile it becomes!

By Paul Ormerod

Paul Ormerod: Expansionary Fiscal Contraction

2011-11-10T02:44:00.000-08:00

To many people, this phrase is an oxymoron. How can fiscal contraction be expansionary?
But the evidence suggests that this is exactly what has been happening in the United States.
In terms of national output, GDP, the trough of the recession was reached in the second quarter of 2009 (2009Q2). We have now had nine successive quarters of positive growth, and in 2011Q3 the level of output is above that of its peak level before the recession started. Growth has not been as strong as would be desirable, but there has been consistent growth. On any measure, the recession is over.
Where has the growth come from? Not from public spending! Between 2009Q2 and 2011Q3, current public expenditure in real terms fell by $38 billion, or by some 1.5 per cent.
The private sector grew, the public sector contracted. Private consumption rose by $450 billion, nearly 6 per cent, and capital spending by firms rose by $200 billion, or nearly 13 per cent. There was a slight deterioration in the net export position, but overall the private sector delivered growth.
The employment figures tell the same story. Employment changes tend to lag what happens to output, and the lowest level of total employment was not reached until February 2010, when 129,200,000 people were employed.
Between then and September 2011, public sector employment fell by nearly 500,000. But private sector employment rose by over 2.5 million, to give a net increase of almost 2.1 million.
The lessons for Europe are to have a co-ordinated fiscal contraction.

By Paul Ormerod

Wasting Lives - a statistical analysis of NHS performance since 1981

2011-10-27T04:31:00.000-07:00

The last few months have seen regression in the public debate about health options in the UK with a disregard of key evidence. A new report published this month authored by John O’Connell,the Research Director of the TaxPayers‘ Alliance, analyses the performance of the NHS over the past thirty years (read the full report here). The TaxPayers‘ Alliance is to be congratulated on its restatement of what should be one of these key pieces of evidence—how far is the NHS delivering an adequate performance in terms of preventing mortality.
There is now an accepted methodology developed by McKee and Nolte at the London School of Hygiene for estimating numbers of premature deaths and a number of studies have shown that the NHS is performing poorly on this indicator. In this latest review the UK rate of mortality amenable to healthcare in 2008 was 33 per cent higher than the average rate of the Netherlands, France and Spain leading to 11,749 more deaths. Such evidence does not affect deep emotional loyalty but it should surely prevent the kind of uncritical endorsement of the current system which we have heard so much of from the BMA, Baroness Williams with greatest eloquence. They are uncritically endorsing a system which is not delivering rather than showing any sense of urgency in seeking explanations.
But why? It used to be quite possible to argue that the main problem was underfunding that England was spending less than the Euro average. The last ten years have seen an actual test of this hypothesis with a growth of spending that has brought the NHS close to the Euro average and above low spenders such as Scandinavia and Spain. Yet there has been no change in the rate of improvement in mortality. The ―UK has caught up with it European peers at a nearly constant rate between 1981 and 2008.‖ There has not been a surge of improvement related to the surge of spending. Of course the argument is already being made that the NHS needs more spending as a result of demand factors: but even if this were feasible there is little reason to expect any better results than in the previous period.
The Report reviews other health systems and presents a strong case that the real problem with the NHS is responsibility. People at the local level are deprived of capability for key decisions on performance. Where not frozen by politicisation, decisions are parked by bureaucracy. Any attempt at local initiative such as the recent strategy for London tends to be blocked for political reasons. Most key decision such as on pay and service are dictated from the centre. The TaxPayers‘ Alliance has made a worthy contribution which challenges the health establishment to act on evidence.
It is clear that triple nationalization – funding, resource allocation and provision delivers results which are deeply damaging to many patients. A single payer system linked to pluralism in supply – in effect the model in comparator countries – will produce better results for patients. Research by Cooper has shown that competition saves lives for patients with cardiac problems. Hospital competition lowered death rates from heart attacks 2002-8 by approximately 7 per cent. But will we ever shake the Groupthink of the health establishment and persuade them to put patients first?

Nick Bosanquet: Director Volterra Health

Why is economic growth stalling? May be it is Ricardian equivalence!

2011-08-02T07:52:00.000-07:00

The British and American recoveries do seem to be stalling. The recovery profile is by no means as strong as is usually the case after recessions, even after pretty major financial crises like that of 2008/09.

One of the insights of complex systems is that the impact of any particular factor may differ dramatically according to circumstances. So think, say, of a network of firms or consumers and ask how optimism or pessimism might spread across the network. Each decision maker will for his or her view in part upon the views of others to whom he or she is connected i.e. pays attention. And each agent (decision maker) will have its own level of persuadability. In other words, how easy is it for other agents to get the agent to change its mind?

A well established result is that changes in the opinions of a small number of agents can have dramatically different outcomes in terms of how far they spread across the system as a whole. Most of the time, changes of mind by a few agents won’t get very far. But occasionally, they can infect, as it were, almost the whole network.

Ricardian equivalence is an esoteric concept which much of the time has little or no impact. But it might be doing now.

David Ricardo was a great English economist who wrote in the early 19th century. He made millions in the City and was also an MP. During the Napoleonic wars, government expenditure grew phenomenally. Ricardo asked: does it matter how this is paid for?

One way is to put taxes up now. The other is to run a deficit and issue government debt (bonds) to pay for it. Ricardo said it didn’t matter how it was done. The latter way implied a future stream of interest payments on the debt, and rational agents would anticipate that taxes would go up in future to meet these payments. So they would cut back their spending now to save for the increases in future taxes. Their spending would fall by just as much as if they were taxed now. The two methods are equivalent.

The current massive emphasis on government debts and deficits certainly alerts consumers to the idea that taxes might have to rise to pay for them. So they are cautious about spending. Companies, sitting on piles of cash, observe this caution and postpone investment decisions which they can easily afford to pay for.
So the economy stalls. In more normal times, Ricardian equivalence is a pretty odd idea. But it might be why the recovery is weak now. Paradoxically, cutting the deficit more sharply might lead to a much stronger rebound.

By Paul Ormerod

Paul Ormerod: Recovery is not always smooth

2011-08-02T02:36:00.000-07:00

Paul Ormerod: Recovery is not always smooth: "There has been huge media attention about the 2011 Q2 UK GDP growth figures released today. The estimate of 0.2 per cent shows only very we..."

Is the UK third sector ready for the new social contract between the Big Society and the Small(er) State?

2011-07-29T09:14:00.000-07:00

©alexhughescartoons.co.uk

On 11th July 2011, the coalition government put forward the Open Public Services White Paper, setting out the principles for reforming public services by reducing the Big State and empowering the Big Society. The Paper sketches the new contours for public service modernisation along five defining principles: choice, decentralisation, diversity, fairness and accountability. In the PM’s own words, this is the much needed reform to an “old fashioned, top-down, take-what-you’re-given” approach to public service delivery that was adopted “with all the right intentions” but “is just not working for a lot of people” any longer.

And the Big Society was not short of a response. Leading figures from civil society put forward Civil Dialogue: Ideas for Better Working between Government and Civil Society, a collection of think pieces that go beyond praise of the ‘co-production model’ and identify some of the barriers to change in new public service delivery. For decades, government and voluntary organisations have operated largely dissimilar organisational and capitalisation models. Payment-by-outcome commissioning is having its fair share of critics, who point at overstretched third sector organisations struggling to access multiple sources of capital whilst keeping their commitment to high quality social services. Besides, the long-term nature of the third sector’s commitment to diverse yet increasingly interlinked social causes could run the risk of slowdown under frequent policy and regulatory changes.

But, is this painting too gloomy a picture for the future success of the new social contract between the the Big Society and the Small(er) State? It probably does! The UK third sector has a long tradition of creating economic value for social causes by blending private enterprise with the public interest. And it has been able to do so by adapting to competitive market pressures from the private sector and managerial pressures from central government.

Prior to the introduction of the centralised welfare system after the 1942 Beveridge Report, social services in the UK were provided locally, mostly by voluntary associations or mutually beneficial cooperatives and societies. With the gradual privatisation and liberalisation of large utilities (e.g. transport, energy, telecoms) in the 1980s and 1990s, the prospect of a more diversified supply market for public services began to emerge. And although the Blair government’s New Public Management introduced a heavily managerial system of performance measurements set by the central authority for procured public services, the third sector was able to diversify its organisational structure in order to create economic wealth for social purposes (largely under the 2004 Companies (Audit, Investigation and Community Enterprise) Act, in conjunction with the 2005 Community Interest Companies Regulations and the 2006 Charities Act).

Under this regulatory regime – not without critics pointing at ex ante regulatory burdens – charities, social enterprises and voluntary associations in the UK have been able to adapt their organisational models to competitive pressures from the private and public sector, in order to reduce costs and create innovative social services. These emerging organisational models rely on five pillars, adopting the best of both worlds (commercial enterprise and standardised performance management in service delivery):

Brand Legitimacy/Credibility: third sector organisations use their long tradition in social service delivery to consolidate a unique brand image, providing a credible platform for operating in clearly defined market segments (e.g. Cancer Research UK, Oxfam, BUPA, Nuffield Health, Places for People)
Service Diversification: third sector organisations show great ability to use multiple sources of knowledge and capital (voluntary labour, financial resources) in order to adapt traditional services to interrelated social needs and create new services to respond more efficiently to the root of social problems (e.g. The Social Investment Business identified the need to couple traditional funding services with commercially viable business support; The Big Issue designed a commercially attractive product to tackle the problem of homelessness).
Measuring Quality/Efficiency: most third sector organisations in the UK use or have developed internal standards for measuring efficiency of their services and ensuring a standardised high quality of delivery (e.g. Places for People uses the London Benchmarking Group Framework to assess the community impact of its business)
Working in Partnership: most third sector organisations in the UK have experienced growth by setting up partnerships for particular social causes to enhance the overall social benefit of their services (e.g. Divine Chocolate promotes fair trade and is owned by two networks of farmers’ cooperatives)
Dynamic (Corporate) Governance: most third sector organisations rely upon a dynamic governance structure, which allows them to grow sustainably by using multiple funding streams: public tenders, donations, operating activity, partnerships in key business segments (e.g. Comic Relief, the National Trust, Women Like Us).

Overall, this model allows third sector organisations to fulfil their social mission and enhance their social impact whilst preserving commercially viable models to generate surpluses for service development and innovation. Instead of diluting their social mission, these organisations use their community interest or charitable status for competitive advantage in service development, drawing on wider social resources through diversification of their revenue streams and collaborations with private and public entities, as well as local communities in order to deliver higher quality services at lower costs.

Moreover, the five pillars described above are not applicable solely to large-scale service deliverers in the third sector, who benefit from established revenue streams and strong brands. Rather, this organisational model originates from small-scale third sector service deliverers, whose strategy has been to provide innovative social services from multiple funding streams whilst developing new means to use knowledge and technology more efficiently in order to do more with a set level of resources.

However, these new organisational models might be exposed to new types of risks, other than those associated with regulatory burdens or undercapitalisation. Most of these risks cannot be limited by ex ante or ex post regulatory measures, but by careful internal management that looks beyond traditional aspects of economic analysis such as capital investments, performance or market conditions.

In order for the third sector to be ready for the new social contract between the Big Society and the Small(er) State, it needs to turn its attention to the microdynamics of sector specific services and the dispersed interactions of private and public agents tied in complex networks of partnerships, multiple revenue streams and contracted services. In order to succeed in the long term, the new organisational models put forward by the diverse members of the third sector need to be assessed as part of the complex system they operate in, rather than modelled on traditional economic forecasting that treat them in isolation. The UK third sector is capable to operate innovative business models because, not in spite of, the complex network of service providers. Understanding this complexity will unlock the unique position of third sector organisations in achieving the necessary balance between the Big Society and the Small(er) State.

By Irina Iordachescu

The NHS Funding Future is Greek

2011-07-19T08:22:00.000-07:00

The NHS funding crisis is going Greek— insolvency not just liquidity. In the short term the obvious threat is from cash flow and there is the long term problem of whether the old service model can deliver quality and solvency.

The NHS from 2000-2010 did not just get large injections of cash—it got addicted to them and built its whole service model around them. It is a high cost model based on big capital projects and highly paid staff. The NHS used to run on limited staffing and obsolete capital. Now that option is no longer possible. The aims of quality, access and innovation are widely shared but they cannot be met simply by reducing costs on the old system. The Nicholson challenge is the wrong way round --- a strategy for redesign has to drive savings. Without redesign, the smaller system will simply deliver lower productivity, lower quality and longer waiting times.

There is a strong consensus that admissions can be reduced –for example in cancer services there are 100,000 unnecessary admissions of late stage cancer patients. There could be more options for end of life care at home and we do not have the staff to give quality of care to elderly patients with medical admissions. Reducing or at least containing admissions is essential to quality: it is also a condition for solvency in the local health economy as consortia cannot afford to pay for an ever increasing number of admissions.

There is an alternative model out there for the making. Key stages are prevention, early detection, ambulatory treatment and care programmes. This is what the much abused term integration is really about. Where this has been tried, as in the NSF for Coronary Heart Disease, the model has produced results which have both raised outcome and lowered total costs. The model depends on improved communication with patients the right side of the digital divide and on the willingness of GPs and clinicians to take responsibility for care programmes not just for care fragments.

The Nicholson challenge has to be seen as the start of a five year strategy for making sure that patients can get improved service from the new model. It can contain costs but only if we offer a better service to the Pareto group --the 20 per cent of patients which generate 80 per cent of the costs. We also have to raise quality by concentrating high cost services on fewer hubs.

There is already some progress to the new model but this tends to be in areas like Cumbria and Nene where there are few large hospitals. It is going to be very tough to get any forward movement in the cities especially after the loss of the London strategy. The next eighteen months are the time for a new sense of direction.

The final clue on solvency comes from the long term outlook for public spending. The UK is running out of younger tax payers and there are expensive commitments to improving pensions. Indexation of pensions to earnings is likely to double the cost of price indexation. The Treasury has made very definite commitments to the IMF to reduce the debt. There is no room for any special treatment for the NHS within these IMF commitments. The NHS now has political priority far beyond its fiscal priority.

Service redesign is the key to a service that can live within its means. The NHS now has vast guaranteed funding—can it use it better?

By Nick Bosanquet

The full version of this article was published in the Health Service Journal, 14 July 2011.

Paul Ormerod on Hard Problems in Economics

2011-07-12T02:21:00.000-07:00

This is a summary of a presentation I gave in Zurich in June to FuturICT, which is one of the candidate flagship European Union research projects, each worth 1 billion Euros.

1.    Financial markets is a very hard problem, issues of agent heterogeneity, networks, learning, financial innovation, regulation – all these and more are important. Mainstream economics has largely avoided the topic, content to believe in the efficient markets hypothesis. A great deal of distinguished work has already been done by econophysicists.

2.    Inequality: where does it come from? This is not just a matter of the distributions of income and wealth. A major concern of policy makers on say, outcomes in health care or education across hospitals and schools, is that such outcomes are ‘unequal’ in the key sense that they differ at any point in time. This seems inevitable in any complex system of interacting agents, but it is often a major concern to voters and hence to politicians.

3.    Shortages: food/water/energy – how do we avoid/mitigate these key social, economic and security-related problems.

Both these very hard problems require trans-disciplinary teams. For example, Elinor Olstrom showed how societies evolve ways of dealing with the ‘problem of the commons’ to give outcomes which are quite different to those predicted by economic theory.

4.    What does it mean for an agent to be rational in the world of the 21st century? We face a stupendous number of choices, many of which are complex and difficult to evaluate and distinguish between them, and we are increasingly both aware of and influenced directly by the behaviour and decisions of others across networks. A sub-theme of this is: how do agents cope with the massive explosion in information and turn it into useful knowledge.

The old concept of rationality is no longer in general valid.

This has very deep and widespread policy implications. Almost all existing policy is based on a view of the world in which autonomous agents maximise subject to constraints. In a world of interconnected agents where maximisation does not make much sense, what becomes the basis of policy? How will agents react? What are better ways to get them to react in ways which policy makers want?

This involves matters such as, individual learning, social learning, the evolution of self-image, networks (the relevant topology; how they evolve; who/where/when agents might copy).

So a very hard task is: what is the new paradigm for agent behaviour, one which in principle is general across the social sciences.

By Paul Ormerod

Nick Bosanquet: face up to NHS budget foes

2011-07-11T02:48:00.000-07:00

First Published 26 November 2009 | By Nick Bosanquet

As rising costs and a tidal wave of public expectations push the NHS towards a new funding crisis, managers would do well to study the lessons history offers

This is the fifth NHS funding crisis with the same drivers - rising costs and increasing public expectations - since 1948. In managing this crisis, it may help to review the previous ones, which occurred in 1951, 1968, 1976 and 1987. After all, those who forget history are condemned to repeat it.

A crisis in NHS funding occurs approximately every 10 years, so the current one was due in 1999-2000, but was postponed by the promised rise in spending. Increased spending bought time but left the deep problems to be faced.

In the first crisis, spending increased 70 per cent, from £253m in 1948-49 to £400m in 1951-52, helped along by public expectations at the start of the NHS. But rising costs and public expectations soon collided with budget constraints. The NHS faced strong competition from the Korean War re-armament programme. The response of the Labour government was to freeze NHS spending at £400m and introduce prescription charges. In this case, however, the cost and activity pressures were weak and the crisis was not repeated for a long time.

The next crisis, in 1968, followed the 1967 devaluation of the pound. Chancellor Roy Jenkins was committed to making room for exports by cutting back public spending. The main casualty here was capital spending, through the postponement of the hospital building programme, and higher prescription charges. Later, the 1976 crisis, with Denis Healey as chancellor, saw a new round of reductions in capital spending.

The 1987-88 crisis was brought about more by rising expectations than rising costs. A tragedy caused by long waiting times for heart surgery at Birmingham Children’s Hospital triggered a review that led to the introduction of the internal market and to a period of much faster growth in NHS funding.

Debate in previous years had brought to the fore the issue of the minimum funding required to keep pace with changing technology and an ageing population.

Today’s crisis:

The 2010 crisis follows a period in which both costs and patient expectations have risen strongly. These forces have increased spending, which is about to collide with the budget constraint. This is bound to happen eventually, given the infinite nature of medical demand and the limits to public resources that would emerge even without a recession.

An early move, as in the 1988 crisis, is to seek more activity from the supply side - a productivity miracle. However, at present, this productivity miracle has mainly an extracorporeal existence in the various quangos floating like barrage balloons above the NHS. The reality for the NHS is service scheduling, professional demarcations and now rising risk to staff reputations from quality standards, which are as laudable as they are uncosted.

All this makes any change in the traditional pattern a very difficult task indeed and one unlikely to have results in the short term.

All these funding crises have had the same causes, but the consequences for staff and patients have increased over time. The 1950 and 1968 crises were mainly at the political level. There was little sign of strong pressure for more spending and services at the local level. NHS staffing was less than half what it is today and there was much less media interest. The 1987 crisis showed a rise in tempo, with much wider involvement from patient groups and much more far reaching effort to change the supply side through the internal market.

The crisis of 2010 will be more far reaching still because there are higher public expectations, more programmes and the NHS is much larger. Our political leaders will have a natural inclination to ignore the unpleasant realities to come, but if we are to reduce the human and social cost it is essential to face up to them. The funding crisis is likely to lead to a covert rise in waiting times - rationing by stealth. In a service with rather rigid production systems and fixed funding, a 20 per cent increase in demand over five years is going to mean that queues return. The information revolution and more explicit quality standards will raise this crisis near the top of the political Richter scale.

The remedies lie in explicit priority for patients with serious illness, giving more power and responsibility to local managers and professionals for getting more value out of the immense health budget, and more choice and competition.

The economic recession: where are we now, and how bad has it been?

2011-07-04T02:52:00.000-07:00

The world economy as a whole is roaring away. The 5 per cent real GDP growth on 2010 is almost the highest annual growth rate seen over the past 20 years. And even in 2009, world output fell by only 0.5 per cent.

The problems have been almost exclusively in the developed world. Looking at annual growth rates in 17 countries since 1871, the current recession can be placed in the context of 140 years of data.

Quarterly data is now routinely available, but for most of this period, this was not the case. It only started in a few countries in the late 1940s, and gradually spread. But for long term comparisons, we have to rely on annual data.

We can define a recession in two ways. First, the successive periods in which (annual) real growth is less than zero. Second, the periods in which the level of GDP is below that of its pre-recession peak.

I published statistical analysis of recessions 1871-2010 in Risk Management in 2010, which is on the papers section of the website, and I have extended it for a conference in Kiev in honour of Simon Kuznets in the ‘new’ section of the site.

Looking at the economies of Western Europe, Canada, the US, Japan, Australia and New Zealand, the falls in output started to happen in the period from the third quarter of 2007 (2007Q3) to the second quarter of 2008 (2008Q2). In almost all the 20 economies, growth had resumed by 2009Q4, and often earlier in 2009. In Portugal and Spain growth resumed, albeit very haltingly, in 2010Q1, leaving Ireland as the only exception.

So on this conventional definition, the recession was short, entirely in line with historical experience: over 90 per cent of all recessions last no more than 2 years. The size of the recession across the sample of 20 countries varied substantially, but overall it was a pretty big one, with the average fall in output being arouind the third quartile of all recesssions.

Despite the size of the recession and the financial nature of the crisis, in 9 of the 20 countries, by 2011Q1 (the latest data), the level of output had exceeded its previous peak value. This group includes America and Germany.

This perspective indicates that the recession was a serious one. Even on this measure, very few recessions last for longer than 3 years, yet it has already lasted this long. Some economies, such as France and the Netherlands, are close to their previous peak output levels. There is a group (Denmark, Finland, Italy, Japan, Portugal, Spain, UK) where the level of GD remains 3 to 6 per cent below its previous peak – Ireland again is the exception.

But overall, even the economies of the developed world have demonstrated great resilience in the face of a financial shock which had the potential to turn into a repeat of the 1930s.

By Paul Ormerod

Hybrid for happiness (because wellbeing matters, too)

2011-06-28T01:26:00.000-07:00

Charlotte Alldritt, Senior Consultant and Hybrid Organisation Expert Panellist guest blogs on the importance of happiness and wellbeing in the workplace for Microsoft's The Hybrid Organisation.

Hybrid for happiness (because wellbeing matters, too)

Volterra supports HSR in the UK

2011-06-27T05:32:00.000-07:00

The Transport Select Committee is currently taking evidence at the inquiry into High Speed Rail (HSR) in the UK. Volterra supports the development of an HSR network in the UK. With only 70 miles of high speed track, the UK lags behind countries such as Morocco with 422 miles and Saudi Arabia with 342. By 2025 Network Rail predicts that Japan, the first country to introduce HSR and with a similar geography to the UK, will have over 3,750 miles of track. International examples show us that HSR typically pays for itself through fares, quickly exceeds demand forecasts, delivers significant economic and regeneration benefits and reduces the demand for car and aviation trips.

The UK has historically underinvested in infrastructure – specifically transport – and it is vital that this is rectified if we are to continue to be globally competitive and to grow our way out of the recession. Volterra has long argued that cities are crucial to the UK’s economy, they are places where innovation and knowledge transfer can take place. We argued the concept of agglomeration in the context of Crossrail, this resulted in changes to the way transport investment is evaluated in the UK. Yet the evaluation methods still don’t capture everything, effectively assuming that the economy is a zero sum game – benefits in one place must be at the expense of somewhere else. The government’s case for HSR, even using the existing guidance along with conservative demand forecasts, still result in a strong case with a good return on the proposed investment. Investing in transport which can relieve capacity constraints on routes that are already creaking is crucial to maintaining the future competitiveness of the UK and its cities.

By Ellie Evans

A Hybrid approach to flexible working

2011-06-21T03:43:00.000-07:00

A Hybrid approach to flexible working
'Hybrid Organisation is a business approach driven by an understanding of the people within a company. A focus on people – and an understanding of the tools and resources they need to be productive and engaged – is central to any Hybrid strategy'...

Value Added and Plan B

2011-06-20T01:51:00.000-07:00

The proponents of the need for a Plan B have got one thing right – rebalancing the economy is a painful process and anything that could reduce the pain would be jolly nice. However, it is not clear that they understand the disease and thus the remedy.

In a way we need to go back to the definition of what an economy is about. The fundamental measure of economic activity is based on value added. This is what work adds to inputs to make outputs that people want. In a state-run economy this can be subverted by the government deciding what we ought to want, a proposition whose failure is now pretty well established. Indeed the failure is even worse, since governments are particularly bad at establishing what is wanted by non-citizens and it is especially clear that it is trade that drives economic performance.

For example, ‘China’s share of world trade in goods has soared, rising from an insignificant 1% of the total in 1980 to 9% today. And China and India are enjoying increases in living standards every decade which took the US between 30 and 50 years to achieve in the 19th and early 20th centuries’.* It is growth and trade which are intimately connected.

So value added is also connected to trade – to creating specialism, and to meeting the needs of not only your own citizens but also the citizens of other countries. Over recent decades, indeed most of the second half of the twentieth century, Germany did this with machinery and the UK with professional services, including banking. Nonetheless, the UK also has some niches in high performing textiles, chemicals, medicine and computing. At least these are the ones I know about, there may be others. Building on these, allowing them to be successful, will reduce the trade deficit and equally the government deficit.

Creating real value added then also allows spending on services which make life more comfortable. Plan B would only work if it helps create that value added. It does not do so if it binds up wounds which are still festering under the bandages.

Bridget Rosewell

*The Southern Silk Road, HSBC Global Research, June 2011

Paul Ormerod: What a good job Keynes didn’t believe in forecasti...

2011-06-06T09:26:00.000-07:00

Paul Ormerod: What a good job Keynes didn’t believe in forecasti...: "Keynes is in many people’s minds at the moment, as uncertainty about the course of the economic recovery is high. In May 1933, at roughly t..."

Some Comments from the Third European Public Relations and Communications Summit

2011-06-06T07:41:00.000-07:00

I recently attended the third European Public Relations and Communications Summit organized by the New York-based company Exl Pharma. This year there was a change in mood and direction compared with the first, the mood was urgent and the direction was towards building new kinds of partnerships with clinicians and patient groups. Corporate communicators are now much more than flag wavers in front of the juggernaut. They are managing a function vital to the survival of the company. Chief Executives know who they are.

So why this transformation? Pharma companies are in the process of changing their business models. The days of blockbusters are over, for them the phase of greater urgency was with the regulator in gaining initial market access. Instead the companies are having to relate much more directly to their funders: the patients. A new kind of pharma care pathway is now on the way to involving diagnostics, targeted personal therapies and outcome measurement. Companies have to take more responsibility for getting therapeutic results. Especially notable were the contributions at the Conference from Fiona Olivier, Strategic Business Communications Director at Abbott. And from James Read, Director of Public Affairs International at Gilead. Abbott are working to develop a new team approach to the culture change. Gilead has shown what can be achieved in getting improved results for patients from the new range of anti-viral therapies. The new model is being supported by key voices in the European Federation of the Pharmaceutical Industries and Associations led by Colin Mackay.

The new model gives the opportunity for a wider range of companies to develop special expertise. It’s more favourable to new entrants than the blockbuster model, those winner take all models that led to increased concentration in the industry. The new model gives smaller and medium sized companies the chance to build a new kind of relationship with patients.

Nick Bosanquet

Happiness Sceptic

2011-06-03T02:31:00.000-07:00

Happiness Sceptic

I finally got something positive about the project to measure wellbeing. Much of this has so far rather left me cold. Clearly, there is more to life than the economy, and equally there are many measures of such things as life expectancy, quality of life, educational outcomes and so forth.

And some of the happiness gurus I find distinctly scary. When they tell me they know what makes me happy, I turn up my copy of 1984 (well worn it is too). When they say that all we need to know is a left hand variable (happiness) and the right hand variables which determine it (how often you go to the pub) I want to get away from regression analysis and reach for a gun so that I can shoot before I am shot as an undesirable who doesn’t know what is good for her.

But actually there is something in this. The something is the word ‘subjective’. A lot of subjective feelings are of course ephemeral, emotional and variable with the weather. But some of the ‘subjective’ analysis – how do you generally feel about life – has the capacity to enhance some of our objective analysis. We know that unemployment is a loss of output. We can measure the association with health problems. An association with views on life and its value adds a dimension to this understanding.

But I have not abandoned scepticism. First, I want to know how plausible I might find an allocation of public spending based on such judgements rather than the more normal ones. Moreover, if I discovered that unemployment was a greater scourge than previously thought, does this mean that we should pay people to continue to do jobs for which there is no economic justification?

Bridget Rosewell

Engaging Citizens

2011-06-02T03:29:00.000-07:00

Engaging Citizens

I have just participated in a workshop organised by a EU Research Programme called ASSYST, which was focused on the role of ICT in developing policy for a green knowledge based society. I am often sceptical of titles such as this which seem to have every policy buzzword and which can become a substitute for thought. This was, however, an exception.

The most interesting phenomenon was how participants from two Italian regions, from Ile-de-Paris and from London (me) were all stressing the need for more open data access and for creating a more informed and participative dialogue with citizens.

Moreover, we were all positive about the potential for enhanced ICT access to revitalise democracy and help develop better, more focused and more effective public services.

Of course, our histories are not entirely shared and so the balance of views was not universal. Both Britain and France are more centralised than Italy, and in Britain the scope for deciding on local spending is decidedly limited. As ever, participants were shocked to discover that local authorities in the UK only dispose of 5% of budgets independently. This included some of the other Britons present, it should be said.

The group present included both regional policy makers and the academics from the research programme, who want to establish how to develop scientific descriptions of these interactions between citizen, policy and politics. How to model networks and their dynamics, as well as how connections might differ under wider use of internet communication were discussed.

The digital divide and the risk of disempowering those who cannot afford or do not want to try new methods of engagement were key risks, particularly if the sort of knowledge that begins to matter excludes the elderly whose value in some societies is precisely their broader knowledge. If it is the old who vote while the young engage differently, some of us were concerned about society tension.

Nonetheless, in spite of worries about these sorts of tensions, I came away more enthused about the fight to increase access to data, and more convinced that it is an important battle.

Bridget Rosewell

2011-05-26T02:53:00.000-07:00

The New Economics of Cancer Care

The last four decades have seen a reduction of many diseases—but not of long term medical conditions—or of cancer. Between 1971 and 2008, the age standardized incidence of cancer has increased by around 24 per cent in males and 49 per cent in females. Cancer is rapidly becoming the leading UK cause of premature death under
70. Demand will be driven by population aging---75 per cent of new cancer cases are diagnosed in people over 60.
In The Economics of Cancer Care*, now available in paperback for the first time, Prof Nick Bosanquet of Imperial College, an economist and Chairman of Volterra Health and Dr Karol Sikora a leading clinician and former Director of the WHO Cancer Centre in Lyon set out how we could have a more effective cancer care through stages of a New Model :

Prevention
Screening and early diagnosis
Ambulatory care
Care programmes
Palliative and end of life care

This model is international and requires co-ordinated action. Prevention is cost effective but does not reduce incidence in the short term: early detection can raise incidence as well as carrying a risk of false positives which will lead to treatment delays. Most cancer treatments can be organized on a day basis. And there is an urgent need for programmes to improve the quality of life of survivors. Lastly there is an international deficit in low cost effective end of life care.
The new model developed from research done by the authors on improving cancer services in The Czech Republic and Poland: and also for Hospital Trusts in the UK. The new UCLH cancer centre in London, where Nick contributed to the design, will have no in-patient beds and will aim at 10 days from referral to treatment. The new model offers a very positive and fundable way forward for cancer services for the future decade, where there will be a 100 per cent rise in demand and a 10 per cent rise in funding.

*N.Bosanquet and K.Sikora. The Economics of Cancer Care. Cambridge University Press paperback 2011.

Triumph of the City – Ed Glaeser

2011-03-21T08:35:00.000-07:00

This new book celebrates how cities have made civilisation and fostered human endeavour. It is a readable and exciting book and I agree with many of its propositions. But what it has made me reflect on is the concepts of necessary and sufficient. In his book, Glaeser concentrates on the need for skilled citizens and education. He argues convincingly that this is essential for growth and city success. He is surely right.

But there are other necessities too. Not all of these come over clearly enough in my view, although they are certainly present. He writes about the rise of consumer cities, places where the ability to consume a desirable variety of goods and services makes them good places to be and thus generate the contacts which produce innovation and ideas.

In fact, cities started as consumer cities, places where the elite created the opportunity to make and consume luxury goods. What is fascinating is how long they took to create production cities, where this contact made it possible to have ideas and get them to function. The Roman Empire had very successful cities but couldn’t create the Industrial Revolution. This took considerable historical contingency – accidents perhaps in one reading – which came together to create the explosive growth which has reduced infant mortality, raised living standards and lengthened our lives.

Two elements are key to this contingency, communications and harnessing energy. Both are as essential as skills and education. Communications are both short and long range. Short range communication is about creating ideas and how to use them. Long range is about the ability to exploit these ideas and make them work. Small groups can get together and have all kinds of insight. Without longer range communication, nothing will happen. The internet and the world wide web have harnessed ideas in a wider and wider way, and follow on in the long road from printing, from the telegraph and telephone as well as physical communication as ways of communicating and expressing our ideas.

Glaeser tells how New York grew rich on pirating British novels – and indeed Rudyard Kipling complains about such piracy – this is precisely about harnessing ideas effectively.
Energy is the other pre-requisite. Tractors replaces horses in agriculture and transformed agricultural productivity, as indeed horses had done in medieval times. Electricity made elevators possible and the density of occupation in city centres which Glaeser extols. Fossil fuels have a productivity which nothing else has so far matched. All the education in the world will not help us when the lights go out.

The education and communication might help us create the new technologies which could replace such fuel, although we are still a distance from doing so. So we need three things – skills, communication and energy.

Ed Glaeser has focussed on the first of these. I suspect that this is partly because in the US they are still very rich in communications and energy infrastructures. However, in other countries the balance might be different. In the UK, the physical and energy infrastructure needs as much attention as the skills.

Do we want to throw money at reforms without results?

2011-01-05T08:59:00.000-08:00

Volterra Consulting's new sister firm, Volterra Health, launched its first report today 'The Medical Arms Race, A New Global Perspective'. It sets out our main critique of common health policy reforms over the last thirty years and warns of the dual costs of running the 'Old Model' in parallel with attempts at the 'New'.

Volterra Health take a global view and show that while behavioural demand drivers of increasing health costs are important - and will become more so - there are basic structural problems preventing cost containment. Most developed countries suffer from an imperative to use the latest technologies and therapies - the so called 'medical arms race'. But some developing countries have shown that they can get better or comparable results for much, much less (see also McKinsey, 2010).

Professor Nick Bosanquet, Bridget Rosewell and Charlotte Alldritt argue that unless we halt this medical arms race and address underlying supply side issues, we'll continue to throw money at 'reforms' which only fail payors and patients. As Charlotte also argues in the Guardian today, healthcare is going to be the issue for 2011. Watch this space!

Gender Pay Gap Widest Amongst the Top Jobs in London

2010-12-28T13:39:00.000-08:00

Just before the Christmas festivities got into full swing GLA Economics published its analysis of women in London’s labour market. The GLA’s findings include:

1. Women with children are least likely to be in employment in the capital (53%) compared to the rest of the UK (65%);
2. Women in full time work earn 87p for every £1 earned by men (at the median); and
3. The gender pay gap rises to "a staggering 31%" between men and women at the top of the income spectrum (the ninetieth percentile).

I have argued elsewhere (see, for example, ‘2020 Welfare: Life, Work, Locality’) for a local Living Wage – a principle advocated by the Major of London. While a floor level wage not only creates an effective minimum, it also helps to establish a culture in which work is made to pay. Given that children in families where adults are working are more likely to be in poverty in London than elsewhere, the Living Wage policy is particularly pertinent for the capital.

But what about women at the top end of the income distribution, for whom regulation by a Living Wage doesn’t apply? In London, females employed in the private sector receive just two thirds of their male counterparts. Astonishingly, the pay gap rises with the level of qualification achieved. This is not just poorly educated women failing to assert their right to equal pay. If they get there (only 5.5 per cent of all executive directors in the FTSE 100, for example, are female) the most articulate and highly qualified women in London’s top jobs are earning significantly less. The GLA show that the picture is worse in London than the rest of the UK and hasn’t changed in the last decade.

Does this mean that we should sit back and wait for norms and behaviours to change? What policy levers might accelerate the current crawl towards greater gender pay equality across the whole of the income spectrum? Two approaches are frequently proposed:

1. Legislation has proved to be only marginally successfully, having slightly narrowed inequalities between male and female pay in the public sector (subject to certain duties by the Equalities Act 2006). Nevertheless, the gender pay gap persists (averaging 16% compared to 21% in the private sector) and the ways in which public sector regulation can influence norms and cultures of the private sector are not clear. Legislative policy levers also take time to change the culture in which they are applied.

2. Greater transparency of comparative salaries between and within organisations might help to speed this process up. Sweden has shown that a policy of open tax returns can work. But the traditional British sense of squeamishness over ‘vulgar’ of talk of money could bolster the privacy lobby.

Set within a wider debate ranging from positive discrimination to Open Government, solving the gender pay gap seems doesn’t seem within our grasp in the short term. Some argue that the recession has delayed progress further. The Equality and Human Rights Commission recently concluded that efforts against the gender pay gap are ‘grinding to a halt’. To kick-start progress, we need a new source of insight. Work by Volterra on the spread of social norms, values and network effects (see N Squared, RSA 2010) offers an alternative approach which could help to combat gender based inequalities that cost our economy much, and our society more.

Posted by Charlotte Alldritt, Senior Consultant Volterra Consulting

Bucket Economics

2010-07-19T06:22:00.001-07:00

We would all like to see permanent full employment – a productive job for everyone. When I learnt my economics we thought that the way to achieve this was demand management: if demand in one part of the economy fell, the answer was to raise it in another. As resources drain out of the bucket in one place, then fill it up elsewhere.

This bucket model may look simple but it has been hugely influential (perhaps largely on that account) and has been hailed as the encapsulation of the ideas of John Maynard Keynes. The tidy reformulation of his ideas popularised by John Hicks, himself a Nobel prizewinner, gave weight to the proposition that we could understand equilibrium in the macro-economy and hence manage levels of demand to ensure that it was achieved, balancing monetary demand and unemployment using interest rates and fiscal spending.

Unfortunately, the model left out two crucial aspects, even though both had been noticed by Keynes. One is that public sector activity is not a substitute for the private sector. Keynes saw that it was possible to break out of an underemployment equilibrium with public works, but did not see this as a permanent phenomenon. Yet over time, an increasing role for the public sector has ratcheted up as a result, and each time that cuts are proposed, an immediate defence of ‘our jobs’, understandably, springs up. And the public sector is seen to provide ‘good jobs’ – secure, well pensioned and with good holidays. Much less is made of whether they produce anything at all, certainly whether there are increases in productivity as wages rise. Ratcheting up public sector activity as a proportion in downturns and never reducing it as the economy recovers will never produce any pressure for good economic performance.

The other missing element was any consideration of debt. In rereading Keynes, it essentially comes over that borrowing does not really matter because it reflects a real asset. Recent experience has shown not to be true. Debt has to reflect the ability and willingness both to pay it back and to service the interest due. The failure to do this triggered the debt crisis of 2008 when holders of debt realised they the assets against which the debt was held were essentially worthless. And this crisis morphed into a crisis of sovereign debt when the responsibility for managing this debt passed to governments. It is true that governments can force their citizens to pay – it is called taxation – but if this is difficult then they need to find other governments’ citizens from whom to borrow.

In any of these cases, there are real burdens of interest payments to be carried. The only alternative is to default. This is not that unusual, but it plays merry hell with credit ratings later, as you would expect. It can only be achieved by countries where underlying opportunities are very strong. It is unlikely to work for highly developed nations.

These missing features from the bucket model are dynamic, changing the shape of the bucket as we proceed; they are underweighted by the proponents of continued borrowing to prevent a double dip recession.

Abusing the Future

2010-04-22T03:15:00.000-07:00

We all know that we don’t know what the future will hold but we all plan for it anyway. We plan our holidays, our retirement, the sales of a new product and the state of the economy. We pull wool over the eyes of our ignorance because someone, somewhere needs a view.

Just occasionally, there is the potential to have more than one view. Most of us find this quite hard. We are not programmed to believe several impossible things before breakfast. We are happy to talk about risks, but these are merely up and down (usually down) divergences from that ‘view’. It is often described as a central view but this is not often really the case; it is very unusual when a commentator has as many risks on the upside as on the down.

These views are stories. Stories have coherence and rationality. They tell why this will happen as a result of that. They give comfort of an evening that we can make sense of the world we live in. Scenarios both increase and decrease this comfort. Once, long ago, when I still engaged with large macroeconomic models we set up a scenarios club. With our clients, we proposed to develop scenarios of alternative futures of the world economy. (My macro model was so large that it covered the whole world!) The club sat down to envisage the scenario. We talked of oil shocks and market shocks – it was 1987 – and the future of international agreements. Every scenario that we imagined was run through the model and presented to the club. And then the reactions would set in.

Each participant imagined the policy reaction to the shocks. And when we ran these through the models, we got swiftly back to the business as usual which was our baseline forecast. A world in which things go on pretty much as they have done before. Our scenario club, perhaps not surprisingly, did not last long. I didn’t last long either. I quickly came to the conclusion that these models were a waste of time and money and told me nothing I could not write on the back of an envelope or fag packet (I was still smoking in those days).

Moreover of course we utterly missed the real scenario of the rise of new economies and the spread of globalised markets. Nor could our model have handled this, since it had no data on China and India and very little on Brazil or Russia.

This shows how hard it is to imagine alternative futures, in which the world is really different. And even if we can imagine the causes of these, the outcomes are utterly unpredictable. Not so much stories as fairy stories. So why bother?

One reason to bother is that it might help to be ready when things change. The story of Shell’s success in reacting to rising oil prices in 1973 is supposed to reflect how it had considered this scenario in advance. And this is certainly why the military play war games: when things move fast it helps to have figured out your reaction in advance rather than trying to do the analysis in real time.

On the other hand, playing war games convinced some highly intelligent analysts during the Cold War that pre-emptive strike was the best solution. Fortunately more cautious counsel prevailed. So scenarios are not an unmixed blessing. In this case, they were being used to counsel extreme reaction. A similar use, potentially similarly by vested interests, has been provided by some climate scientists. A scenario based on the risk of greenhouse gas increases, subsequent temperature rises, sea level increases and tipping points of various physical relationships has been used to create a scare which at one level induces the desire to play hard because it is all too late to save the planet.

At other levels, the scenario is simply a story. Facts are uncertain, their implications still more so. Our reactions can stabilise or destabilise and to be frank in the current state of knowledge either could be the case. One reaction to this is to look for probabilities. With enough history we can estimate the probability distribution of any variable in which we are interested. In this case, upside and downside risks are much more likely to be balanced and human tendencies to be either gloomy or optimistic might be minimised. But probabilities are not stories. They carry no freight of rationality or causation, nor of policy reaction implications. The Bank of England has carried probability ranges of inflation and output outcomes for some years now. They are not very wide (not nearly as wide as the data suggests) and in any case have not succeeded in getting much traction. People prefer stories.

An important reason for this is a sense that we face uncertainty. Uncertainty means we cannot attach probabilities to any given outcome. We simply do not know what is most likely. So it is not irrational to prefer the story. Choosing stories to tell and writing stories helps us learn about possibilities. It may help us react to events as they unfold. But it does not help us know what will actually happen. That is much more about defining a probability distribution and considering whether it is possible to do this.

Bridget Rosewell

Making Climate Change win-win

2010-04-12T02:15:00.000-07:00

This is the theme of the conference of the European Climate Forum www.european-climate-forum.net this year. Listening to the speeches I am struck by the parallels in analysis between thinking about the impact of climate change and that of infrastructure.

First, we have the scientists. Climate modellers talked about the difficulty of building models that properly incorporated short term natural cycles in order to identify the longer term effects as well as the challenge of separating out local climate effects which are also distinct from large scale impacts. This debate is entirely similar to that about the effectiveness of models of the economy. Most macroeconomic models are concentrated on identifying the prospects for the next five years, and are based on data only since the Second World War. Yet at the same time they are based on equilibrium behaviour which is highly unlikely to be observed in the short term (possibly also the long term but that is the next paragraph). Like climate models, they are imperfect, and like climate models, the pressure to provide the policy outputs militates against model development and strongly against admitting imperfection, data problems or errors.

Second, we have the impact analysts. Many speakers focussed on the distinction between mitigation and adaptation. This raises a debate about economic dynamics which is pretty much absent from the models. A reliance on equilibrium focussed models lies behind the kind of analysis provided by Stern, which shows a long term steady state growth of the world economy which happens anyway and thus gives a small cost to investment in climate change mitigation. In other words, the economy grows and investment happens regardless. The same approach lies behind the difficulty in showing that infrastructure projects generate real additional growth – since the models also show that growth happens anyway. In both infrastructure and climate change models there are too few linkages between investment choices, technologies and growth rates. Thus the baselines have too many assumptions built into them which mean that the real impacts of either cannot be properly evaluated.

Third, this leads to the question of project and investment finance. Finance is the elephant in the room in both topics. In climate change, investments either to mitigate or adapt are seen as a cost. Yet analysis of, for example, the coastal cities, shows that creating flood defences has a significant payback in protecting growth prospects, when the dynamics are separately considered. A dynamic analysis of renewable power projects in Germany shows that it creates added value and added jobs – and thus an ability to raise the funds to create the investment. Finance for investment has to be raised from somewhere. It can come from the taxpayer, whose ability to insist on a payback is rather limited, but whose ability to pay is also in the end limited. Or it can come from savers through the investment funds and pension funds where this money is put. Savers need to get something back for what they put in and they need to be sure that the money will be there. In large regulated investments, which is what infrastructure and climate change projects generally are, this means that government must allocate the returns from these investments to the projects, rather than seeing the returns as coming from the general activity of the economy.

In the UK, it is government practice to ask whether an activity creates additionality or not. The stronger the belief in the underlying equilibrium growth or the economy, the harder it is to show that anything will be additional. This applies both to an infrastructure project and to climate change mitigation projects. Both require spending – transport systems, power systems for example – and both have payback in fares, fees and economic growth. That economic growth needs to be better recognised if we are to raise the funds to make these investments.

Large projects have implications which change the terms on which the economy operates. Such projects are those which drive economic growth and those which are largely exogenous to models – even those which purport to make technical change endogenous. They change the structure of relative prices, and work through the networks of connections by which innovation can occur. Understanding this is key to deciding on investments and needs to be better appreciated by those who are still captured by a now out of date of economic model.

Bridget Rosewell

To Borrow or not to Borrow?

2010-03-04T08:26:00.000-08:00

The ICAEW (the accountants) had a conference on securing public finances on Tuesday. They published a document including my contribution in Securing the Public Finances. It is comforting that a consensus is emerging that we need to develop a new approach to public services with much better transparency and accountability that we presently have. Whether within government or for citizens, there is inadequate accounting and financial management and too few ways in which citizens can understand or contribute to what is going on.

Jonty Oliff-Cooper from Demos was particularly interesting in talking about new ways in which we need to open up to new ideas and citizens’ input. Clare Tickell also described the work that we have been doing at PST2020.

The consensus of the professionals engaged in delivery and of those actually managing the money contrasts with the approach taken by some economists. I hear there is a petition out there arguing that it is essential to keep borrowing ‘until the economy recovers’. They call upon the ghost of Keynes in supporting additional borrowing in a crisis.

I think this is misguided. Firstly, we have absolutely followed the Keynesian advice to borrow in a crisis to keep the economy going. That is why borrowing is now reaching 12 per cent of GDP. This does not mean that even more borrowing is thus justified.

Now that the economy has turned the corner we need to give the private sector space to recover. This will not be achieved by continuing to fill the bucket with more public borrowing which will crowd out other investment, raise interest rates, and damage our international standing.

It is very unfortunate that economists live in a static world in which the ideas that recovery takes time and needs confidence fails to fit the models. The confidence of investors appears often in Keynes’ writing but in the subsequent models has been lost in favour of a simplistic view that somehow government and private spending can just be switched on and off.

The crisis has created the best chance we have in a generation to get some focus on the size and deliverability of public services. On the previous path, there was a lack of control and trends in demand for health and on aging which cannot be met. I think it is essential that we debate this and decide what a new model of public services might look like.

Bridget Rosewell

Inequality or Poverty

2010-03-01T08:57:00.000-08:00

I am exercised by the distinction between caring about poverty and caring about inequality. We might characterise this as the distinction between 'look after the weak' and 'soak the rich'! There is now a literature about how getting richer only helps people feel better off up to a certain point, while for rich countries, being better off does not make a difference.

It is then argued, in books such as the Spirit Level, by Wilkinson and Picket, that it is reducing inequality which is the key to making us better off in rich countries. But I am not convinced by their argument.

Partly, this is because the statistical relationships that they derive are not very powerful. In particular there is a very weak discussion on the direction of causation between, for example, trust levels and inequality. If these links cannot be made strongly then a policy of reducing inequality will be expensive and completely ineffectual.

What is especially frustrating is that instinctively it seems reasonable that inqualities of various kinds would become more important as societies become richer. What is important is to understand how much more important and what it means for the functioning of a stable society and its ability to provide satisfactory lives for its citizens. It does not help to be told that successful societies can be forged in the community of war - this does not seem to be a good policy option!

By contrast, I do not think we pay enough attention to the causes and consequences of poverty, which at the same time has become a mainstream industry for policy makers, public sector staff and think tanks. From the foundations of social democracy, reducing poverty has been a central aim. What is so extraordinary is that so little appears to have been achieved. The Public Services Trust 2020, of whose investigation into the future of public services I am a Commissioner, has detailed the failures of our services on a number of levels.

It seems to me that one root of this is a failure to distinguish between services that are essentially for all, (and for which all bear a responsibility to use wisely and to understand their costs and benefits) and those for which those who pay and those who benefit are never the same. It is in the interest of the producers of these services to confuse these differences - even if they do not mean to.

Until we debate these distinctions more clearly, we risk continuing to go round in circles in these debates.

Bridget Rosewell