Evidentiary standards are slipping

Over the past month, there have been a number of instances in which a politician or journalist has made a bold claim, and then ignored or been unable to provide any evidence to support those claims.

For example, Fraser Nelson claimed that being in the EU had been a net detriment to the UK’s trade, and that the evidence he had seen supports that view. However, when provided with evidence that contradicted his claim, and when challenged to provide the evidence to which he referred, Nelson did not provide any sort of response. Likewise, Michael Gove claimed that there was evidence to indicate that leaving the EU would provide the UK with a “net dividend”. However, when pressed to provide the evidence that he claimed existed, Gove did not do so; nor did he respond to the provision of evidence that contradicted his view.

This is not just a problem for right-leaning opinion makers either; it affects left-leaning ones just as much. For example, despite copious evidence (from the Low Pay Commission) that increasing the minimum wage too high would be detrimental to the employment rate of low-income earners, Jeremy Corbyn claimed that increasing the minimum wage to £10 per hour would raise their living standards.  Again, Corbyn provided no evidence to support his claim.

This seems to be part of a wider, and long-running, malaise, in which policymakers can make a bold claim without any evidence to support it, yet said claim is taken at face value and isn’t challenged by the media nearly as often as it should be. Even worse (and a point made by Jonathan Portes in his recent discussion with Michael Gove), when challenged to provide evidence to support their views many in the media and political sphere tend to rely on a single statistic or anecdote even if copious evidence exists that contradicts their claim.

That’s assuming that the personalities concerned respond at all. Much of the time, they remain meekly silent, failing to respond, yet letting their original claim stand as though it hadn’t been challenged at all.

This isn’t just a point of pedantry – quite clearly, claims made by those covering and participating in campaign trails have real implications. For example, Vote Leave’s claim that Turkey would join the EU (despite all evidence to the contrary) likely played on some voters’ desires to reduce immigration (according to Ashcroft immigration was a major concern for roughly one third of voters), despite the fact that immigration has continually been proven to benefit the UK and everyone in it.  Similar points can be levied against various claims that the current level of trade between the EU and the UK could easily be replaced by trade with Commonwealth countries (despite the fact that the well-proven gravity model of trade directly contradicts this). And it seems likely that the upcoming election will be rife with claims and counter-claims that are (un)supported with evidence to varying degrees.

In essence, it is at least plausible that false claims made by opinion formers were taken to be true by some members of the voting public who based their decisions accordingly, and might have voted differently had they been informed of the actual evidence.

Now, what can be done to ensure that voters (and the general public as a whole) have actual evidence available rather than simply the claims of journalists and politicians?

Well, for a start, the press regulators (IPSO and Impress), the Electoral Commission, and the likes of the Office for National Statistics need to take on a much more proactive role. They should not wait for complaints to be submitted to them by the general public, but should take it upon themselves to investigate and penalise those in the public eye that make misleading or unsupported claims, with those punishments being far more severe than those currently used (for example, newspapers cannot continue to be allowed to get away with publishing retractions in the bottom corner of some page in the middle of their publication).

Second, political programmes like Newsnight, Question Time, and the Daily Politics should do far more to challenge politicians and journalists to support any claims they might make with sufficient evidence (i.e. more than just a single anecdote or statistic).  In other words, any journalist or politician appearing on such shows must be able to demonstrate that their claims are valid. The presenters on such shows should spend far more effort researching the actual evidence as well as questioning their guests on the basis of any claims that they might make.

Third, the Parliamentary Standards Committee needs to realise that their role in holding MPs accountable extends to claims made by MPs that are not supported by any evidence. Such claims are in violation of the MPs’ Code of Conduct and should be treated as such, with the necessary punishments for these violations being far more than the usual slap on the wrist.

Finally, and a much more long-term remedy, the general public should be provided with far greater training in the use and abuse of statistics. This should start from an early age and not only train people in how to calculate various (simple) statistics, but also provide information concerning how to spot when a commenter is using misleading figures or is relying solely on anecdotes to try to substantiate their points.

Once these suggestions have been implemented, the ability of journalists and politicians to deliberately obfuscate and mislead would be markedly reduced. That can only be a good thing.

Corbyn and the railways: the costs of having a life-size trainset

A major part of Corbyn’s campaign to become leader of the Labour Party was the promise to re-nationalise the operation of the UK railways. Indeed, that promise became Corbyn’s very first official policy, with part of the supposed rationale being that “the public have paid £10 billions in subsidies and the operators have posted aggregate profits of £1 billion” since the railways were privatised.

Although there have been a few articles in the mainstream media that purport to examine the feasibility of re-nationalisation in terms of the costs of doing so (see, for example, here and here), these articles have, at best, been cursory and only scratched the surface.

In particular, these articles fail to examine 1) the initial costs of regaining control of the railways from private operators; and 2) the annual costs of running the railways once they have been re-nationalised. These are discussed in turn below.

The first issue of the government regaining control of the railways could be solved costlessly (in terms of government money) if a Corbyn government were willing to wait until the franchises running the railways came to a natural end. However, this approach does not seem likely for two reasons. First, the current schedule of rail franchises indicates that all will run out prior to 2020 (the first year of an hypothetical Corbyn government), such that the current Conservative government likely would re-new the franchises at lengths of around 7-10 years (as suggested by the Brown Review) means that the earliest date at which a franchise will expire under an hypothetical Corbyn government would be 2022. Second, given that the policy of re-nationalisation was the first of Corbyn’s official policies, it seems that Corbyn would be unwilling to wait particularly long to enact this policy.

Hence, Corbyn’s re-nationalisation most likely would require buying out all franchise owners. Although there do not appear to be any publicly available figures regarding how much it would cost to buy out all rail franchises, we can construct a back-of-the-envelope estimate. Using the fact that Stagecoach and Virgin paid £3.3bn for one franchise (implying that the franchisees consider a franchise to be worth at least that much), and assuming that this value is directly related to the number of passenger kilometres (i.e. the value of a passenger kilometre is the same across all franchises, then using the information provided in the Office for Rail Regulation Report here (excluding London Overground),  the total value of all rail franchises in the UK is about £38bn. This amounts to a one-off cost of roughly 3% of GDP in the year in which the Corbyn government would re-gain control of the railways.

Although that doesn’t sound too bad, there is also the second item involved in running the railways – namely, the ongoing costs (or profits) from operating them. Indeed, currently the franchises together have a profit margin of about 3% – in other words the railway operators make roughly £250 million per year as profit.

While it might be tempting to conclude that re-nationalising the railways would therefore actually make it profitable on an annual basis to do so, this would imply that it would take almost 150 years for the initial £38bn cost to be recouped by the government. That probably does not make much business sense.

Moreover, that £250 million per year figure assumes that the current prices, price increases, and levels of investment apply in future. However, isn’t the entire rationale for Corbyn wanting to re-nationalise the railways so that prices are kept lower and investment higher than they would be if the railways were not re-nationalised? Although it is difficult to put an exact figure on how much it would cost per year to achieve Corbyn’s aims of lower prices and/or higher investment levels, it is plausible that they would pretty much wipe out any current profit. In other words, the initial outlay of £38bn is unlikely to ever be recouped.

Now, whether you think that this outlay of public funds that are unlikely to ever be recouped (and that could be used for other things such as new hospitals, new schools etc. if they were not used to re-nationalise the railways) is worth having possibly (but not guaranteed) lower prices and higher investment levels, then that’s your choice. But I know where I’d rather have £38bn spent, and it’s not on taking back control of the railways.

Why would the UK move away from inflation-targeting?

Today’s announcement that the Corbyn Labour party is planning to examine to what extent the Bank of England’s inflation target might be modified to take into account factors other than inflation provides a good opportunity to reflect on what inflation-targeting itself has achieved and why the UK might move to a different monetary regime.

(By way of background, although the Bank of England is “instrument independent” – that is, the BoE gets to choose how it achieves its target – the target itself is set by the government – i.e. the BoE is “goal dependent”. Hence, in the event that a Corbyn government is elected, they would have the power to change the measure that the BoE targeted.)

Although one of the main reasons for Corbyn’s decision to re-examine inflation targeting appears to have been due to actual inflation having missed the BoE’s target on a consistent basis in recent years (CPI has been below the 2% +/- 1% band much more often that not recently), it can be argued that this “accuracy metric” is not the most important criterion by which to measure the success of inflation targeting.

Indeed, the main purpose of inflation targeting is to anchor people’s expectations regarding what level of inflation will prevail. As such, the most important metric by which inflation targeting should be measured is the extent to which people’s expectations regarding what the prevailing rate of inflation will be have converged to the level of inflation that has been set as the target.  To that end, both Capistran & Ramos-Francia and Gurkaynak et al. demonstrate that targeting inflation leads to a decrease in the range of people’s inflation expectations.

In other words, the fact that a target might have been missed does not matter in-and-of-itself. Instead, missing an inflation target only matters insofar as consistently missing the target would affect people’s expectations of inflation. Thus far, there have not been any signs that people’s expectations regarding future inflation have been affected by the Bank of England missing its target.

Hence, at least one of the motivations regarding a potential move away from inflation-targeting is likely to be flawed. However, that is not to say that the other targets that have been proposed – such as targeting nominal GDP growth, or increasing the level of inflation targeted to, say, 4% per year – would lead to run-away inflation. Indeed, there are some economists that advocate moving entirely to a nominal GDP target would have the benefit of promoting growth (particularly when interest rates are close to the zero lower bound) as well as still preventing anchoring inflation expectations (see, for example, here).

The one word of caution that needs noting is that a nominal GDP target is less transparent than inflation – how will the general public be able to translate a target for nominal GDP into a target for inflation? How will they be able to know what inflation is likely to be when all they have is a nominal GDP target? Hence, it seems likely that a nominal GDP target won’t be sufficient on its own, but instead needs to be accompanied by an explicit inflation target (i.e. a dual target). That seems a much more transparent and easily-accessible policy, particularly given that the main aim in all of this is to anchor people’s expectations.

Corbynomics and the expropriation of private assets

With Jeremy Corbyn’s victory in the Labour leadership elections, there likely will be a renewed focus on Corbyn’s economic policies.  Indeed, there has already been some interesting analysis of Corbyn’s proposal for “people’s QE” and the ramifications that would have for the (instrument) independence of the Bank of England (see Simon Wren-Lewis’ mainlymacro blog).

However, one area of Corbyn’s stated economic policy that has received less attention is his desire to (re-)nationalise the energy, rail, and banking industries. It is conceivable that there might be a re-hashing of the age-old debate regarding the relative advantages and disadvantages of privatisation vs nationalisation, with the same age-old conclusions.

Much more interesting, on the other hand, is the mechanism (and the implications of said mechanism) by which Corbyn proposes to carry out his re-nationalisation policies. Specifically, Corbyn has stated that he “reserves the right to” nationalise a firm “”with either no compensation or with any undervaluation deducted from any compensation for renationalisation.” (as reported by The Independent)

In other words, Corbyn has stated a potential desire to expropriate a privately-owned firm (or multiple firms) while providing a less-than-market return on the assets that a Corbyn government would acquire.This is likely to have a dramatic impact on private incentives to 1) acquire any of the assets that the current Conservative government would privatise over the next five years; 2) invest in the energy and rail industries that Corbyn has said he already wants to re-nationalise; and 3) invest in other industries in the UK.

First, Corbyn thus far seems to have restricted the target of this policy to firms that are privatised by the current Conservative government over the next five years.  Therefore, the heaviest impact is likely to fall on those assets that the current Conservative government was planning to sell off over the next five years. In particular, Corbyn’s expropriation policy is likely to reduce the amount of money any selling-off of assets by the current government is able to raise.

To see this, note that should a Corbyn Labour government win the 2020 election, any asset sold off by the current government between now and then would be taken back by the Corbyn Labour government. This means that any private entity thinking of purchasing any asset the current government sells off would need to factor in the possibility that they lose control of (and, hence, also lose any profits resulting from) that asset in 2020.  As such, a private entity would reduce the amount it was willing to pay for the asset being sold-off – the obvious result of this is that it reduces the amount of money the current government would be able to raise from selling-off any assets (with the associated implications concerning any reduction of the national debt).

It is possible that this makes selling-of the asset not to be worthwhile such that the current government decides to retain control of it after all (perhaps this is Corbyn’s plan all along?). If so, then it would mean that assets that might be put to more efficient use in the private sector instead continue to be run by the public sector (with the resulting potential impact on GDP).

Second, although Corbyn does seem to have restricted his expropriation policy to government assets that are sold off between now and 2020, there remains the possiblity that he extends that policy to his entire re-nationalisation aims.  In other words, Corbyn could conceivably expropriate the assets of energy and rail companies.  This introduces substantial uncertainty regarding the rate-of-return energy and rail companies can expect to obtain on any investments they might make between now and then. As increased uncertainty regarding the rate of return of an investment results in fewer investments being made (see here and here), the impact of Corbyn’s policy (even if Corbyn is not elected in 2020) is to reduce the current levels of investment made by firms in these industries. This comes at a time when both the energy and rail industries are in need of substantial investment in new infrastructure – anything that reduces the incentives of these firms to make these necessary investments cannot be a good thing.

Third (and this is somewhat speculative on my part), to the extent that Corbyn might wish to expand his nationalistion policy to other industries, the same impact would be felt in those industries.  However, the impact in these as-yet-unnamed industries may well be negligible, particularly in comparison to all the other areas of uncertainty that affect firms’ investment decisions (at least until any further nationalisation policies are stated).

It remains to be seen if Corbyn gets a chance to implement his policies, but, regardless those stated policies are already having an effect. Corbyn needs to clarify exactly what his plans regarding nationalisation are very soon lest those effects grow substantially.