The QS World University Rankings are a load of old baloney

The University of Cambridge is not the best university in the world.

The University of Cambridge is the best university in the world, according to the eighth annual QS World University Rankings for 2011/2012, out today. Oxford came fifth in the tables and there is a total of five UK universities in the top 20. What a load of old baloney.

Here are the rankings:

1. University of Cambridge
2. Harvard University
3. Massachusetts Institute of Technology
4. Yale University
5. University of Oxford
6. Imperial College London
7. UCL (University College London)
8. University of Chicago
9. University of Pennsylvania
10. Columbia University
11. Stanford University
12. California Institute of Technology
13. Princeton University
14. University of Michigan
15. Cornell University
16. Johns Hopkins University
17. McGill University
18. Swiss Federal Institute of Technology
19 Duke University
20 University of Edinburgh

This ranking is complete rubbish and nobody should place any credence in it. The results are based on an entirely flawed methodology that underweights the quality of research and overweights fluff:

40 per cent -- academic reputation from a global survey
10 per cent -- from employer reputation
20 per cent -- from citations by faculty
20 per cent -- from student faculty ratio
5 per cent -- proportion of foreign students
5 per cent -- proportion of foreign faculty

The methodology is designed to underweight the performance of US universities that tend not to have a high proportion of foreign students or foreign faculty members -- but who cares about that? It is unclear whether having more foreign students and faculty should even have a positive rank; less is probably better. So, the UK faculty all say they are wonderful, but that isn't a plausible measure of quality. Another way to improve the rankings of UK universities would be to replace the 20 per cent for citations with a 20 per cent weight to any university whose name started with the letters CAM or OXF; the ranking is that absurd. Or they could weight by the proportion of buildings on the campuses built before 1500.

A more realistic ranking is provided by the University of Shanghai, that ranks the quality and quantity of research output of its faculty as well as the receipt of Nobel Prizes and field medals by both its faculty and alumni heavily. The number of faculty members from Botswana and the number of students from Chile quite rightly have zero impact, which is as it should be. Here are the weights used in their much more believable methodology:

Criteria
Alumni of an institution winning Nobel Prizes and Fields Medals -- 10 per cent
Faculty of an institution winning Nobel Prizes and Fields Medals -- 20 per cent
Highly cited researchers in 21 broad subject categories -- 20 per cent
Research Output Papers published in Nature and Science -- 20 per cent
Papers indexed in Science Citation Index-expanded and Social Science Citation Index -- 20 per cent
Per Capita Performance Per capita academic performance of an institution -- 10 per cent
Total 100 per cent

Note that since 2000, the faculty of the University of Cambridge has been awarded one Nobel Prize, in 2010, which was its first since 1984, while UCL and Oxford have both had none. Indeed, the University of Oxford's faculty hasn't received one since 1973. By contrast, MIT and Columbia have both had five; UC Berkeley has had four while Stanford, Rockefeller, Johns Hopkins, Chicago and Princeton have each had two and Harvard one.

Here is Shanghai University's much more believable 2010 ranking that ranks Cambridge fifth and Oxford tenth, and these are the only two UK universities in the top 20:

1. Harvard University
2. University of California, Berkeley
3. Stanford University
4. Massachusetts Institute of Technology (MIT)
5. University of Cambridge
6. California Institute of Technology
7. Princeton University
8. Columbia University
9. University of Chicago
10. University of Oxford
11. Yale University
12. Cornell University
13. University of California, Los Angeles
14. University of California, San Diego
15. University of Pennsylvania
16. University of Washington
17. University of Wisconsin, Madison
18. The Johns Hopkins University
18. University of California, San Francisco
20. University of Tokyo

The QS is a flawed index and should be ignored. The University of Cambridge is not the best university in the world.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?