Is the OBR really independent?

June 20, 2010 7:00 pm by Chris Cook

The Office for Budget Responsibility is going to irritate lots of people this week. When it comes out with its assessment of the Budget, its multipliers and assumptions will come under attack. After years now (years!) of phoney arguments about the deficit, this will be A Good Thing. Indeed, all the Labour leadership candidates should embrace the new institution.

First, it should improve the credibility of the fiscal framework. No Briton can credibly claim that any fiscal rules could have any real disciplining effect: only an institution that can nip at the government can do that now. This framework offers the golden combination of clear red lines for governments and the flexibility to respond to as-yet-unforeseen economic circumstances.

Second, farming out forecasting should improve the quality of projections that inform fiscal decisions. As an excellent Social Market Foundation pamphlet puts it, an independent forecaster would help overcome some problems with internal forecasting:

Organisational bias in projection-making: promotion, reward and status may be linked - most likely implicitly – potentially excluding valuable contrarian opinions from influencing fiscal projections. This effect may be particularly strong if fiscal decision-makers have significant powers over the institution. Indeed, academic research has shown that in several European countries, official growth forecasts used for fiscal policymaking are biased toward being over-optimistic.

Policymakers risk being subject to group-think where all elements of fiscal policymaking are housed in the same institution with no institution charged with an “official challenge” role. For example a shared belief in what is actually unsustainable growth may be self-reinforcing and amplified if all the functions of a fiscal policymaking are combined in the same institution.

When combined with the credibility associated with longstanding institutions, such as that of HM Treasury, this can also lead to another behavioural economic phenomenon known as anchoring, whereby other, non-governmental organisations take the cue for their economic forecasts from HM Treasury. This is particularly likely to occur since no institution wishes to stand out against received wisdom: for any independent forecaster it is far less reputationally damaging to be wrong with everyone else than to be wrong on their own.

At the moment, being seen to have credible forecasts is particularly worthwhile: investors have, in recent months, fixated on suspect growth forecasts. But all of those benefits rely on the OBR actually becoming independent – something it currently is not.

The body – now established on an interim basis – is a Whitehall beast. Sir Alan Budd, OBR chief pro tem, leads a team of Treasury lifers, based in the Treasury, running Treasury models. This is all forgiveable: the apparatus was set up rapidly and has yet to find its feet. It is important, however, that it does not become a permanent feature of the OBR.

The most important aspect of the institution’s independence is staffing. OBR staff cannot be borrowed from the chancellor, going back to the Treasury at the end of a stint at the slide-rule. Otherwise they will still be creatures of their political masters. The OBR needs its own recruitment stream. (I’m sure George Osborne will be alive to this issue: he has long had an interest in the independence of Bank of England monetary policy committee members.)

As David Miliband has written, the OBR should, moreover, answer to parliament – not to the Treasury. Furthermore, MPs and peers should be allowed to submit written questions to the institution and it should be ultra-transparent.

Tags: David Miliband, George Osborne, Office for Budget Responsibility, SMF
Posted in Comment, Economics, Financial Crisis, Politics, UK | Permalink

Britain needs a proper head of state to bang heads together

March 25, 2010 2:00 pm by James Mackintosh

Here’s the problem: the public does not realise that truly enormous cuts to public service and/or massive tax rises are required. The politicians are too scared to tell them, for fear of losing the election. So after the election, whoever wins won’t have a mandate to push through the big cuts needed. Cue strikes, disappointment, attempts by new government to delay action, a sterling crisis, and possibly even an IMF rescue.

Politicians are being advised by some to keep schtum. But the solution should be for politicians of all the parties to set out NOW how bad things really are. The deficit is 11.8% of GDP, and has to be cut. Even on Labour’s planned cuts, if it sticks to its promise of protecting frontline services and overseas aid, other services need cuts of 18%-24% over four years. This is a profound change to the way the country operates; the public needs to be prepared, and needs to debate the issues before the election.

But no party is willing to set out the precise cuts, because the other side will attack them – as we’ve seen from the “Labour investment vs Tory cuts” lie, and from David Cameron’s backing away from the Conservative promise of an “age of austerity”. As a result, half of voters don’t believe action is needed, with almost half arguing that public spending should rise. They are going to get a shock when the cuts start to bite, and they are not going to be happy.

It is time to call on the Queen. Heads need to be banged together. Gordon Brown, Cameron and Nick Clegg should be forced to set out their policies in detail: all agree, after all, that big cuts are needed, they just don’t publicise it (much). There is very little difference between Cameron and Brown on the speed of the cuts, for all that both sides are trying to make that the issue. The political decision voters should face is whether they want Labour cuts or Tory cuts: and the only way to get that is if the politicians are honest.

The primary role of the head of state is surely to guarantee that democracy functions. At the moment the democratic debate is not working properly, which could have profound effects on the future of the country. A summons to the palace for the three leaders would probably do it, but if not, a simple public comment: the Queen continues to have the most powerful platform in the country. But if she’s too bound by constitutional convention to intervene, it just goes to show that it is time to move to a new constitutional set up, with a proper head of state able to defend democracy.

Posted in Comment, Politics, UK | Permalink

Hedge funds miss out on Greece

March 17, 2010 3:42 pm by James Mackintosh

While hedge funds are the focus of attacks on “speculators” from Greek, French, German, Spanish and Portuguese politicians for allegedly trashing the euro and Greek bonds, the funds don’t seem to have made money from it.

According to Hedge Fund Research, which tracks the industry, so-called “macro” hedge funds – those trading interest rates, currencies and government debt around the world – have lost money this year, suggesting they were betting the wrong way on Greece, lost big money elsewhere or had ignored the Greek trade altogether (although there are exceptions – at least one was coining it at the start of the crisis, while others deliberately closed their trades because they expected a political fracas).

But Bloomberg reports on a lovely irony: at least one of those betting against Greek bonds using the dreaded CDS was an American mutual fund. Fully regulated, respectable, and run by one of America’s oldest fund managers. The mission of Eaton Vance, according to founder Charles Eaton:

Professional investment management entails an obligation of responsibility of the highest order. It is a very serious matter to accept the obligation to be responsible for the investment of anybody’s money.

The eurocrats currently planning to ban the use of “naked” CDS to make such bets – a bad move with worse motivation – must be choking into their cappuccinos. They’ll be even more annoyed when they realise that a ban in Europe will have no impact at all if the US continues its opposition to such a move and allows CDS to be used not just to protect existing bond holdings, as Europe wants, but also to speculate.

Posted in Comment, Euro, Financial Crisis, Greece, Hedge funds, Politics | Permalink

Why is Chalabi still taken seriously?

March 5, 2010 12:54 pm by James Mackintosh

Ahmad Chalabi has written an op-ed in the WSJ calling on the US to stop meddling in Iraqi elections and leave the country to set up an alliance with Iran, Syria and Turkey.

We are proposing the creation of a regional alliance among Iraq, Turkey, Syria and Iran to bring together our geographic, economic, water and oil resources into a coherent framework. Our region has been plagued by secret wars, ethnic conflict and acts of terror sponsored by these states against each other during the past half century. It is time to put this behind us.

This alliance would be of benefit to the entire Middle East and a strong bastion against Islamic extremism. Such a treaty would also address the failure of the Arab security structure that has required the U.S. to deploy massive force to protect states in the region.

Quite apart from the fact that the US would go ape at the idea of Iraq joining sides with Iran and Syria, its two biggest regional enemies, the idea that such a move would be a strong bastion against Islamic extremism makes no sense. Iran is a semi-democratic (at least until recently) theocracy, Syria is staunchly secular, Turkey is constitutionally secular but run by a party with Islamic roots, and Iraq is still to decide, with the prime minister trying to hide his religious party behind secular rhetoric.

The only argument could be that such an alliance would fortify that part of the region against Sunni extremism: Shia Iran and the current Shia leadership in Iraq are natural enemies of al-Qaeda (although claims abound that Iran has quietly built some links). Chalabi, of course, is a Shia. Shia Islamism – or at least Shia-funded – is solidly entrenched in Gaza and southern Lebanon, much to the concern of the US. On top of that, it would encourage Sunni Arab states to band together in self-defence, led by Saudi Arabia. Hardly the way to encourage Middle East security.

But whatever the arguments, how can Chalabi be taken seriously? He is wanted in Jordan for bank fraud, and provided much of the now-discredited information that formed the “intelligence” basis for the claim that Saddam had weapons of mass destruction. True, he has been in and out of government in Iraq, in spite of falling out with the US over unsubstantiated claims that he leaked intelligence information to Iran. But his “de-Ba’athification” efforts are now worsening the religious divide within Iraq: he should be ignored. We can only hope Iraqi voters see through him.

Posted in Comment, Politics, US | Permalink

California’s Dems and the suede/denim secret police

March 3, 2010 4:44 pm by James Mackintosh

My first thought on hearing that Jerry Brown was likely to be the only Democratic candidate for the California governorship was to start humming California Uber Alles, the inspired Dead Kennedys punk anthem attacking him during his last stint as governor, in the late 1970s.

Anyway, turns out I wasn’t the only one. A Daily Beast reporter called up Jello Biafra, the Dead Kennedys lead singer, and found that he is rather less critical of Brown – a hardened liberal – than he used to be. He also neatly summed up what the song was supposed to be explaining:

The song and its variations were never as much about Brown or any individual politician as they were about liberal apathy, Biafra said. He traced the inspiration for the lyrics to his arrival in San Francisco in the 1970s, where he found that once-idealistic baby boomers had retreated into self-indulgence.

“I found myself surrounded by all these people who were activist rabble rousers in the Vietnam War era and now were stumbling around in the dark looking for some guru to tell them what to do,” he said. “I thought this kind of mellow-drone, hanging-plant cop-out approach was a one-way ticket to fascism—if people sleep too long, look what happens to them! The only politician with any power who had tapped into any of this or seemed to recognize it at the time was Jerry Brown.”

But who would want California’s problems? The state is the Greece of the US, with out-of-control spending, unemployment of 12.4 per cent and a form of direct democracy which makes it all but impossible to raise the new taxes it needs. Unless Brown can explain to voters that to get public services they have to pay taxes, he’ll face the same crisis as Arnold Schwarzenegger.

As an aside, some of the song’s lines could be adapted for today.
* “Your kids will meditate in school” – Recent tests suggest meditation could be a good idea for students
* “Zen fascists will control you” – Yoga sessions and chanting are now common at many of the biggest financial institutions and hedge funds which have at least as much power as many governments
* “You will jog for the master race” – Michelle Obama, no less, has launched a campaign against childhood obesity
* “Knock-knock at your front door / It’s the suede/denim secret police” – well, slightly forced but the secret police in the form of the CIA are doing rather a lot of spying, even if they aren’t looking for your “uncool niece”

Posted in Comment, Politics, US | Permalink

Britain’s political humour wars

March 1, 2010 12:39 pm by James Mackintosh

I’ve always taken the view that rightwingers are funnier than leftwingers. There are exceptions, of course – Armando Iannucci, Mark Thomas, Bird & Fortune – but leftwing attempts at humour are often stifled by political correctness and the desire not to offend. My view is changing thanks to the online poster wars. The Conservative attempts to counter the hugely funny send-ups of David Cameron’s posters by leftwing bloggers just haven’t worked. Compare and contrast My Labour Poster, a spin-off from the Conservativehome blog, and My David Cameron (also known as Airbrushed for Change), the far more amusing efforts by Labour activists to spoof the David Cameron posters, which were widely picked up by the mainstream press. Compare and contrast:

With the hopeless efforts posted to My Labour Poster. These are perhaps the worst, from a dismal selection:

The problem is that almost all the Tory efforts try to make serious political points – exactly the problem leftwing humour used to have. The fact that Gordon Brown sold off large chunks of Britain’s gold reserves when the price was low might be a (small) stick to beat him with, but just isn’t funny. And the 45 minutes claim (about the dodgy dossier) isn’t much of a political point from a party which also thought the invasion of Iraq was a good idea. There were two which caught my eye, though. This one isn’t really party political, but pokes fun at a Tory MP, Nicholas Winterton, who is moaning about the expenses reforms preventing him travelling first class:

And this one is reasonably amusing, too, even if what you learn from it is mainly about the prejudices of the creator. It also managed to annoy Labour, which is presumably the point (see Labour councillor Luke Akehurst’s attack – he objects to Labour voters being equated to “working class oiks who didn’t go to Eton or even whichever place Osborne went to = people on benefit = work-shy benefit-fraudsters”) The Tories need to bring back Saatchi’s creative genius. “Labour isn’t working” won’t cut it with unemployment still well below the Thatcher peaks, but surely they can do better than the weak posters they’re coming up with? As an aside, my colleague Caroline Daniel pointed me to a story she wrote about “nice” politicians back in 1998, which contained this comment:

Yet according to Ian Christie, deputy director of Demos: “One purpose of socialism ought to be to allow more people to sit around in cafes having fun with each other. Instead, the left often has a sense that they are doing more important things than the right, that they shouldn’t hang around being funny but need to be earnest and active. Yet social cohesion can be promoted by laughter and companionship.”

Perhaps now, after 13 years of Labour government, the Tories are finally worked up about the important things they want to be doing; dull and serious might work at policy conferences, but it is no fun. And the policies, such as they are, don’t seem to be winning over as many voters as Tories would wish.

Posted in Politics, UK | Permalink

Lollipops in a Westminster logjam

February 12, 2010 11:56 am by Ian Holdsworth

It is counterintuitive but sometimes a logjam is just what you need to get things done. On my way to Liverpool Street station last night, for example, I couldn’t cross a busy road for ages – until the traffic went into gridlock.

Might the same principle apply to the UK government’s ablity to cut the UK deficit in the not unlikely event of a hung parliament?

If, after the general election expected in May, no party has enough MPs to form a government, we could end up with a coalition of ministers forced to sit and reflect on each other in a cross-party traffic jam. Traditional opponents, under pressure to interact constructively, might just conceive the best of all possible plans to cut the deficit.

Well … we can all dream. But the City isn’t quite so upbeat.

Continue reading: “Lollipops in a Westminster logjam”

Tags: Hung parliament, minority government, UK election, Westminster
Posted in Comment, Politics, UK | Permalink

Why Massachusetts matters – and why it may not

January 20, 2010 11:02 am by James Mackintosh

Republican Scott Brown’s stunning victory in Massachusetts (I had a hunch it would happen after Martha Coakley’s stupid comments about Curt Schilling, the Red Sox pitcher supporting Brown, being a Yankees fan, not to mention spelling Massachusetts wrong in a campaign ad) has left most commentators taking the obvious line: healthcare reform is dead.

But the liberals have not given up. Ezra Klein at The Washington Post and Paul Waldman in American Prospect separately argue that the Democrats still have two ways to pass healthcare reform using quirks in the system (arch-liberal Paul Krugman supports the idea).

The first path would be for the House - where they have this strange tradition in which the majority rules - to simply pass, as is, the bill that already passed the Senate. Obama would sign it, and the infrastructure of reform would be in place. Then they could attempt to correct some of the Senate bill’s weaknesses in the reconciliation process, which only requires 51 votes (though it does limit which parts of the bill can be addressed).

The other path - and the preferable one, from a policy perspective - would be to get the bill done before Brown is sworn in.

Jim Webb, Democratic senator for Virginia, has already moved to spike this second route, saying last night that it would be fair to suspend healthcare reform until Brown takes his seat – in other words, forget trying anything funny. Without Webb, of course, the Dems still don’t have the 60 votes to override the Republican filibuster to get it done in the next two weeks or so before Brown moves to Capitol Hill.

The first “nuclear” option has already been floated by Senate majority whip Dick Durbin, the Illinois Dem, on the same principle as Waldman: once people wake up to the benefits of the healthcare reforms, they’ll like them, even if they were passed in an underhand unusual way. Nancy Pelosi, in the House, says there will be a healthcare bill – although she has not yet spelled out the tactics.

The idea, though, is dismissed by Daniel Indiviglio in the Atlantic as bad politics:

…is this wise? As mentioned, the most recent Rasmussen poll indicates that support for Congress’ healthcare bill is at its lowest level yet. Do Democrats really want to alienate 56 per cent of Americans and please just 38 per cent? The poll further finds that 44 per cent are strongly opposed to health care reform, while only 18 per cent strongly favor it. Even Ross Perot got more strong support than that - 19 per cent of the popular vote - in the 1992 presidential election.

Meanwhile, the debate over how Obama can save the mid-term elections in November is already under way. Ross Douthat in The New York Times concludes that Americans liked liberalism “more in theory than in practice” – bad news for Obama’s agenda, in spite of the resounding dismissal of the argument from the left (no surprise there). In the FT, meanwhile, Simon Schama calls on Obama to get down and dirty with the Republicans and start the fightback. In The Wall Street Journal, Iain Martin takes exactly the opposite line: Obama needs to be less divisive. Clive Crook shares Martin’s view: Obama is just not cut out for Chavez-style populism, and should respond to the anger of independent voters by stopping the partisan politics and fixing Washington – like he promised.

What will happen now? Given that exactly a year ago, when he took office, Obama’s agenda seemed pre-destined to make it into law, who can tell? But it is worth noting that the Republican party, in spite of Brown’s victory, remains pretty much leaderless, with a message made up purely of a return to Reaganite tax cuts and opposition to Obama. This is not much of a basis for popular support, especially with the tea party and wacky birther movement undermining their credibility with independents. Although perhaps, by offering to marry off his daughters, Brown is trying to widen his appeal to young unmarried men, at least.

Posted in Comment, Obama, Politics, US | Permalink

Will the boy George top the cabinet charts?

December 2, 2009 11:05 am by James Mackintosh

The questions just won’t go away. The City had a go at George Osborne, the Tory bloggers erupted in defence of the shadow chancellor and now he’s in doubt again. This time, it is Steve “shagger” Norris, twice Conservative candidate for London mayor, pointing out the obvious: David Cameron might prefer experience over friendship when it comes to filling number 11 Downing street after the election.

Osborne “hasn’t quite sealed the deal with the electorate in the way Ken Clarke [shadow minister for business and former chancellor] and William Hague [shadow foreign secretary] have”, he told a breakfast meeting this morning. “I think George has enormous value but I think David Cameron will speculate as to whether a switch of roles might be appropriate at this time.”

Appointing a more experienced hand – such as Clarke – would go down well with many in the City, who have been privately, and not so privately, worrying about Osborne’s combination of populism (on bonuses) and youth.

But many of those who have met Osborne, including several senior hedge fund managers regarded as City opinion formers, believe he is being underestimated. “He’s very impressive in person and he is advised by some of the smartest economists out there,” one told me.

Still, when it comes to winning the confidence of the public and the – vital – confidence of the bond markets, it is hard to disagree with Norris that Cameron is likely to keep this “an open issue right up to election day”.

Posted in Comment, Politics, UK | Permalink

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