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Guided by an invisible hand

The bank meltdown marks a turning point in our thinking about how the world works writes the Nobel L

Make no mistake: we are witnessing the biggest crisis since the Great Depression. In some ways it is worse than the Great Depression, because the latter did not involve these very complicated instruments - the derivatives that Warren Buffett has referred to as financial weapons of mass destruction; and we did not have anything close to the magnitude of today's cross-border finance.

The events of these weeks will be to market fundamentalism what the fall of the Berlin Wall was to communism. Last month in the United States almost 160,000 jobs were shed - making more than three-quarters of a million this year. My guess is that things will get considerably worse. I have been predicting this for some time, and so far, unfortunately, I have been right.

There are several reasons for my pessimism. The extreme credit crunch is a result of the banks having lost a lot of capital. And there is still uncertainty about the value of the toxic mortgages and other complex products on their balance sheets. The US economy has been fuelled by a consumption binge. With average savings at zero, many people borrowed to live beyond their means. When you cut off that credit you reduce consumption. This, in turn, will dampen the US economy, which helps keep the global economy growing. The American consumer has not only sustained the US economy, he has sustained the global economy. The richest country in the world has been living beyond its means and telling the rest of the world it should be thankful because America fuelled global economic growth.

There are further reasons for my pessimism about short-term economic prospects, in America and Europe. In the second quarter of this year, growth in the US would have been negative were it not for the growth in exports. But with the slowdown in Europe and problems in Asia it is difficult to see how we can maintain net export growth. The strengthening of the dollar - due not to greater confidence in the US but to reduced confidence in Europe - will make matters worse. The fall of energy prices will help a little, but not enough.

Treasury Secretary Hank Paulson has now come up with a new bailout scheme. The original plan - buying up the thousands of "troubled assets" (read: bad loans and complex products based on them that Wall Street created) - was badly designed and rife with problems. How would they have been priced? Call in the same Wall Street experts who got us into the mess and mispriced risk before? It is a heads I win, tails you lose situation.

The worry is that the taxpayer will be left holding the short end of the stick.

The British approach, which Paulson seems to be following, is far better, involving capital injections into banks, with preferred shares to protect against losses and warrants to share in some of the upside potential. This is the approach that I - along with most US economists and people with good street sense, like George Soros - had been saying America should adopt.

Ironically, though Paulson wouldn't listen to us, he seems to have listened to Gordon Brown.

Many of the problems our economy faces today are the result of the use of misguided models. Unfortunately, too many took the overly simplistic models of courses in the principles of economics (which typically assume perfect information) and assumed they could use them as a basis for economic policy. Many central banks use the notion of inflation targeting - that they should focus exclusively on inflation, raising interest rates when inflation increases. But I would argue that central banks have a broader responsibility; they are supposed to ensure the stability of a country's economy. While monetary authorities in the US and elsewhere focused on price stability, they allowed the financial system to undertake risks that put the whole economy in jeopardy.

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith's conclusions do not hold when there is imperfect information - and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership - the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

Professor Joseph E Stiglitz is chair of the Brooks World Poverty Institute at the University of Manchester and a 2001 Nobel prizewinner

This article first appeared in the 20 October 2008 issue of the New Statesman, My year with Obama

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The age of lies: how politicians hide behind statistics

Perhaps it is time to combine our Trump-era, heightened sensitivity to untruths with a new broadcasting technique or two.

The small slabs of crude election soundbites, with extra ornamentation in the form of half-true and meaningless headline statistics, clunk across the airwaves, and we grimace. The dead prose reaches us umpteen times a day – “an economy that works for all”, “the many and not the few”, “work is the way out of poverty”, “more being spent on our schools than ever before”, “the NHS is treating more patients than ever ­before”, “fastest growth rate in Europe”, “the national interest”, “the most ­important election in my lifetime” – and yes, let’s hear it for “strong and stable leadership”.

On 30 April, Andrew Marr tried a little witty and civilised pre-emptive mocking to stop Theresa May using soundbites in his interview with her, but it did not work because it could not work. Embarrassment about clichés and almost idiotic numbers is not what democratic politicians worry about at election time. Many of us may pine for the old American game-show device – where, for failing to amuse and divert the audience, contestants are removed from the fray by a man hammering a gong – but that is not on offer and, in election mode, the politicians will do as they have long learned to do. They will listen to the Lynton Crosbys and Seumas Milnes of this world and plough on – and on.

The soundbites are largely vacuous and we are more noisily sardonic about them than three decades ago (hooray for media literacy) but they aren’t worse than normal. There is no point expecting the debate to run on the lines of Gladstone’s Midlothian campaign 140 years ago, when he charged around Britain giving five-hour speeches – richly informed by Liberal philosophy – which did the trick for him and his party.

The clichés are, naturally, often interchangeable. Everybody running for high political office could quite contentedly utter any or all of the above phrases, though I concede it doesn’t require an inspired analyst of modern British politics to know what Theresa May is trying to do with her leadership riff – nor Jeremy Corbyn with his “rule for the many and not the few”, a phrase that has been used religiously since the adoption of universal suffrage. Only Jacob Rees-Mogg would put it to one side.

I spent almost 30 years at the BBC – working with a cadre of (mostly) hugely talented and impartial presenters and editors trying to find ways of injecting a bit more surprise or rigour into political interviews. (Surprise and rigour are often not the same thing.) I recall David Dimbleby reducing Alastair Campbell to semi-public fury in 1997 by excavating Tony Blair’s early political career and finding, neither surprisingly nor, in my view, particularly reprehensibly, that he had said Michael Foot-like things in a Michael Foot-like era. Oddly, nobody had thought to do this after he had been elected leader three years earlier, so Dimbleby’s approach to Blair had an element of ­surprise. And then there was John Humphrys’s relentless needling of Gordon Brown for his comic refusal after the 2008 financial crash to use the word “cuts” to describe what might have to happen to reduce the budget deficit, or even to agree with his own chancellor, Alistair Darling, that the global economic outlook was very bad. Brown had an on-air mega-curdle.

We know the score – the politicians find the rhetorical and statistical position that provides the best short-term defensive crouch, while the interviewer at least wants to make sure that the audience knows the question posed is relevant, fair and, if need be, that it has been dodged. Time presses on both participants – but the impact of the compression is unequal. The interviewee usually has the upper hand. In her early period Margaret Thatcher, who was a good deal more nervous than her subsequent reputation for clarity and authority would suggest, might well have been the all-time queen of interview delay tactics. However, most interviewees know that once they have found an answer to a question the first thing to do is to pad it out in case the next question is a little more difficult.

I am not outraged by any of this; nor do I believe these encounters should be dismissed as sterile, or that we should be contemptuous of the skills involved on either side of the exchange. The sort of one-sided triumph enjoyed by LBC’s Nick Ferrari with Diane Abbott is rare, and her numerical amnesia over policing made a whole argument go kerplunk – but even in more orthodox interviews you can often detect at the very least a broad weakness in a broad argument.

To my ear Corbyn sounds perpetually unsteady on defence policy (see his Marr interview in the first week of the campaign) and public finances, and neither May nor David Cameron before her manages much fluency on the impact of cuts on the working poor once they have uttered that threadbare soundbite about work being the route out of poverty. Would that it were so simple.

Our willingness to dismiss as boring these interviews, the staple of daily current affairs programmes, is overdone. And we have been a little graceless about the extent to which senior UK politicians do – or did – engage in at least some forms of public debate. Anyone who follows the US media will know how rare it has always been for senior members of the administration and White House staff to expose themselves to the sort of scrutiny still supplied by the Sunday political shows, Radio 4 current affairs programmes, Newsnight or Channel 4 News.

For decades, senior politicians in the UK turned up in the studios – often with scarcely concealed irritation – but they went through with it. In part because it was expected and in part out of self-interest. Good interview performances could lead to rapid promotion. Iain Duncan Smith was (you may be surprised by this) particularly effective in his early years at advocating his causes, and his party’s, in front of a microphone. But the studios did for him when he became Tory leader. As it turned out, his failings were more obvious when confronted by a skilled interviewer than in the House of Commons. His nervous coughing finally caught up with him one morning on the Today programme, and that was that.

Duncan Smith and Abbott are far from alone in seeing their currency plummet as a result of losing the plot in an interview. Harriet Harman, normally a highly fluent and agile politician, was sacked as social security secretary in 1998 after a grim outing, at least for her, with John Humphrys – caused not by his abrasiveness nor by any Abbott-like forgetfulness, but by her almost tangible unhappiness with a New Labour policy she was defending.

Even now, on BBC Question Time, some heavyweights will turn up only to be mauled by the voters on topics a long way away from the heart of their portfolio. Yes, they get copious notes from party researchers and have endless rehearsals to minimise the chance of saying anything too intellectually lively: but they should nevertheless get credit for risking it in the first place.

However, outside election time this tradition of broadcasting interrogation and debate, not much more than 50 years old, is under stealthy attack. The presenting team on Today is seriously good, but it is hard not to notice that the heavy hitters turn up less often for their ten minutes of duelling; similarly with Newsnight and Channel 4 News.

The Prime Minister’s Olympian approach to this sort of public engagement aggravates what was already a problem. The broadcasters may be losing ground. In this election there will be no head-to-head leaders’ debates featuring Labour and the Conservatives, and there is no great uproar about it. As it happens, I don’t believe that their absence is a disaster – not least because the format of individual leaders confronting an engaged Question Time audience one at a time (a “tradition” that began in 1997) provides far more substance and revelation than the 2010 or 2015 leaders’ debates did.

In the meantime, what can be done to the interview to improve the quality of public debate? Forcing out the clichés is not a realistic goal. Yet perhaps it is time to combine our Trump-era, heightened sensitivity to untruths with a new broadcasting technique or two. The BBC Trust (which I was part of for two years until it ceased to exist in April) commissioned its final independent editorial report on the BBC’s use of statistics from a panel of experts chaired by the former UK chief statistician Jil Matheson.

It is a superb piece of work. Above all it pleads with the BBC to do more to put statistics in context. The work was largely complete before the EU referendum so it did not pass judgement about either the veracity of the Brexiteers’ “extra £350m for the NHS” claim or the BBC’s coverage of that claim. I listened and watched a lot and, contrary to the views of many leading members of the Remain campaign, the BBC seemed to me to have consistently signalled to the audience the risible nature of the figure, if not as rudely as many would have liked.

Yet there is a different perspective on that cause célèbre. Only very rarely did the BBC on air (or anyone else, for that matter) compare the sums involved with total UK public expenditure: a net annual payment to the EU of about £8.5bn, compared to public expenditure of about £785bn. This £8.5bn is not a trivial sum – and it is likely to sound gargantuan to an unskilled worker on low wages in Hartlepool – but it hardly threatens the nation’s existence. We will have to think about that number all over again when the EU divorce bill gets paid.

In the past few years there has been a welcome growth online of fact-checking websites that get to grips with some of the half-sense or nonsense uttered – sometimes deliberately – in public debate. Among the broadcasters, Channel 4 News got in first with “FactCheck” and deserves great credit for having done so. The BBC has Reality Check; there are also the non-aligned Full Fact and others. And the Institute for Fiscal Studies (IFS) sits as a mega-authority when it pronounces on individual economic statistics. (It was a particularly dispiriting episode when the IFS took a pounding during the EU campaign.)

The good newspapers and the broadcasters have correspondents who can – and do – understand the context in which statistical argument takes place. They know the difference between a big number and a not-so-big number, the difference between an aggregate spending figure and spending per head of population, the difference in importance between a one-month figure and a trend – and a trend that does not change much over time.

This is all good, and better than it used to be. But perhaps more of this rigour can be woven into what is still the dominant form of political accountability in broadcasting: the interview.

So let us try a thought experiment. Imagine (though we don’t really have to imagine) that the Health Secretary, Jeremy Hunt, comes into a studio to say, surprise, surprise, that more is being spent in real terms on the NHS than ever before. Imagine that he is told there will be no questions on anything else until he can answer, let’s say, two obvious supplementary questions: in the course of the past 60 years how often has his assertion not been true? (Answer, says the IFS: four times, one of which was 2011/12.) And what has been the growth in per capita NHS spend, in real terms, since 2009/10, compared to the previous 15 years or so? (Answer: 0.6 per cent, as opposed to 5.4 per cent.) Answering these would show that his boast is one that almost all of his predecessors could have made, and also that the Conservative-led coalition was less generous to the health service than the preceding Labour government. It would be absolutely fair for Jeremy Hunt to respond vigorously about the need to cut the deficit or even to make points about who was in government when the crash happened – but he could not be allowed to get away with statistical near-rubbish.

Similarly, the mantra on English education (“Our schools are getting more money than ever before”) is a waste of air. It’s not that the cuts are “vicious” – just that the assertion when put in context is gibberish. The economy is growing and the school population is growing, fast. So if we were not spending more in total, and in real terms, then the cuts would be vicious. And yet, per head, there will be less in real terms for pupils. Period.

The front-line interviewers I know best are very skilled journalists and they often do try to get a jab in when the numerical nonsense gets going – but they have to move on, whether to other urgent matters or to seek a news headline from the interview, and there is not enough jeopardy for the press officer or spin doctor who wrote the politician’s brief to desist from writing the same stuff next time around.

There may be other ways of levelling up matters. The interview could proceed as normal; but at the end of it up could pop, say, Tim Harford (of the brilliant statistics programme More or Less on Radio 4) to put in the necessary corrections. It would have to be done within a few minutes or else the impact would dissipate. From time to time, Harford or his equivalent does appear after a political interviewee has spouted statistically illiterate twaddle – but not often enough, and usually this happens long after the attempted mugging of intelligent debate. Too little, too late.

It would be obligatory to ensure that this type of treatment, particularly at election time, was meted out to all the parties – but outside the election it is the government of the day and its news departments that are going to have to face most of the music. Fair enough.

My suggestion is not put forward because I am advocating a particular party’s reading of the state of the nation (or nations). There is no monopoly on vice. We should not forget Labour’s “triple counting” of health service spending after 1997 even if Blair/Brown subsequently, in benign economic circumstances, did indeed put their foot on the health-spending accelerator.

Rather, when the election dust settles and the media seminar post-mortems crank up yet again – about the level of turnout, political ennui, the particular disengagement of the young, the coverage of the leaders, the role of opinion polls and other staples – we need to keep working on how to improve the quality of public debate. It is not all awful, and a stylised contempt for what is good is itself corrupting of democracy. But the numbers nonsense needs fixing. 

Mark Damazer is Master of St Peter’s College, Oxford, and was the controller of BBC Radio 4 from 2004 to 2010

This article first appeared in the 18 May 2017 issue of the New Statesman, Age of Lies

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