Bad Projection!

We’ve had a little spate of good, (or at least, not bad) news on the economic front – lower than expected unemployment, lower than expected December deficit and so on.

As a result of this I have been struck by the contrast between these optimistic inklings and the language used by the Chair of the Audit Commission about the deficit. The chair, Mr Bundred attacked both main parties for being insufficiently clear about where cuts need to be made in what he was sure would be a terrible few years.

It wasn’t so much what he said that concerned me, but his certainty about the future. It occurs to me that the certainty of Mr Bundred (and others like him) about the future is at least as dangerous as our leaders political cowardice in dealing with the deficit.

It may well be that the deficit turns out to be substantially higher or lower than Mr Bundred expects. So retaining maximum flexibility until the moment you need to take your decision may well be not only convienient politics for both Osborne and Darling, but strategically correct too.

I once had an idea for a book calledBad Projection – how mistaken forecasts and false predictions have started wars, caused recessions and destroyed economies”. It would have been a pop history book, setting out all the times when poor forecasting led political leaders to make disastrous economic and political decisions.

Obviously, there’s a lot of mid-bubble hype to laugh at (Dow 36,000, anyone?) but I was thinking more of occassions when official or quasi official presumptions about the economic future have turned out to be badly wrong and led people who otherwise would have made sensible decisions to take terribly mistaken ones. The purpose of the book would be to examine the damage that unwarranted certainty of social scientists can cause.

Examples would include the exagerrated fear of increased spending the Labour government faced in 1951, which led to a split in the Labour party that reverberated for a generation.  Or, more seriously, you could examine the “Treasury view” of the 1930’s, which led the British government to do little the ameliorate the great depression. If you were to include warfare, you would have so many examples from Normandy to Iraq, you’d need an entire library to hold the first volume.

So if certainty kills, what should we do instead? I rather like the advice of Samuel Brittan:

“The real art of policy analysis is to work out the appropriate response to an extremely wide range of contingencies that are liable to occur.

This could take two forms. One is the formal analysis of a great many contingencies with the aid of decision trees and other tools. I suspect… these would turn out to be largely parade ground exercises, at least for major problems…

Second, and more promising, would be to work out broad rules which would as far as possible put the economy on an automatic pilot and minimise discretionary intervention.”

It strikes me that rather than announcing what they would cut at a deficit of £178 billion, which is widely discussed but very unlikely to ever come about,  we are better served if politicans were clearer what their priorities would be in different likely futures. What would the Conservatives do if the deficit was only £140 billion – what would Labour do if the cost of debt began to rise sharply?

In such a context, a pledge to prioritise particular areas of spending makes sense.  (Though I agree that absenting a whole department from spending pressure seems silly).

One final note of optimism. I wonder if, in the past, politicians were more reliant on projections to guide them, well after their decisions had caused real harm or good. It’s possible that policymakers are now able to be guided by real responses to decisions much more quickly.

If that’s true then the key is for politicians to work to retain freedom of movement – flexibility to change course and tack as the data changes. That in other words politicians shouldn’t commit themselves too far in advance to specific policies. This is, of course, a lot easier if the data comes in quicker and can be adjusted faster.

The other thing to do is for politicians to remember not to predict never-ending doom and misery on the one hand, or the imminent arrival of utopia on the other.  This is one trap we all seem incapable of avoiding.

13 Responses to “Bad Projection!”

  1. IanVisits

    I wonder if part of the problem with government finances, specifically debt, is that most people only ever see a final lump sum figure. I am sure most people look at their personal debt not so much as a lump sum but as a collection of debts from various sources (loans, mortgage, credit cards, shop cards etc).

    I ponder if we would be better off if each time a debt is spent, that the debt it put into a package marked “debt exhibit X” and a repayment schedule agreed for that package.

    I am not suggesting that each and every expenditure is so packaged, but if, for example, the NHS has income of Y and running costs expenditure of Y+X, then that year’s debt is put into a package and marketed a “NHS running costs – debt for Year 2010”

    That debt then demands an annual payment from the tax until it is repaid, and it has priority over existing spending commitments.

    This creates openness as people can look up on a simple website what specific parts of government spending are incurring debt, and what timeframe has been agreed for its repayment.

    At the moment, what seems to be missing is the visibility as to why debt exists, and what is being done to repay that debt. If people understood why debt rocketted up recently, and what plans exist to repay it, then we might be more comfortable (or less?) with the debt levels.

    Obviously, if a debt has a repayment schedule of X years, then “in emergency” that can be set aside, so that politicians have the necessary flexibility to deal with short-term issues, such as war or recession. However, having to formally declare a fiscal emergency would help to temper the hotheads who want to behave in a populist manner in the run up to an election.

    Reply
  2. newmania

    We are still printing money and spending hugely more than we have coming in , this is because there is an election coming as any fule do know Good news now is just a sugar coated turd , Do not eat .
    Mr. Bundred (like Mr. Cable ) is only saying what everyone knows already we are about to go off an cliff and it may be 170ft down of 140 ft down it may be 200ft down. It is not a Hopi and a skippy and it is a direct consequence of the structural deficit built up by New Labour. When you think of the misery about to engulf millions of ordinary people is it even appropriate to continue this sniggering parlour game ?
    Polly Toynbee berates New Labour for not raising taxes to pay for “Improvements “ ,I see it my way . We all agree that ( No more bust) New Labour has been a lie its achievements illusory and the consequences dire .

    That ‘all’ clearly includes many in the cabinet

    Reply
    • leftoutside

      Quantitative Easing: move to 1990s Japan if you hate printing money so much.

      Alternatively, the rest of us are more concerned with avoiding a depression than with a vague terror of printing money.

      We will never be like Weimar Germany, but we could have become something like stagnating Japan.

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  3. Chris

    That’s just a meaningless jumble of words thrown together, looks ok but no foundation or real meaning. Probably sounds good when spoken, you should sell it to your leader.

    I assume that you’re in training to become a spad or a business consultant.

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  4. leftoutside

    Newmania aside, I have a real world example for you. Featuring the nasty Tories no less!

    Tory run Nottingham Council have proposed a sweep of cuts to balance their budget rather than any tax increases or a reduction in the accrued surplus.

    Well it looks like they were working with figures which were unduly negative about future tax revenues.

    Bad predictions leading to bad results. Well, bad results for most, for the Tory council it probably just offers an opportunity for a further reduction in obligations. But in my book, its from bad prediction to bad result.

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  5. newmania

    Alternatively, the rest of us are more concerned with avoiding a depression than with a vague terror of printing money.

    Like Australia you mean who did it by not building up a structural debt and thereby not having to print money to buy their own gilts and able to afford a larger fiscal stimulus without running the horrendous risks that even Hopi seems to be faintly aware of . As for Japan it seems top me that New Labour are doing their best to mimic the disastrous polices of the failed decade and avoid the successful ones of Sweden

    http://www.forbes.com/2009/02/10/recession-tarp-japan-opinions-columnists_0211_thomas_cooley.html

    http://www.spectator.co.uk/coffeehouse/5710918/osborne-looks-to-sweden-but-lets-not-turn-japanese.thtml

    The only thing New Labour want to avoid is being wiped put at the Election which is the only reason we are continuing make things worse every week
    and as for projections is the New Labopur acrtually collect the rvenuie they are claimign it will be thre firdst time they have not overestimated tax receipts whilst in office . Off course when you ha ve cured boom and bust why would you worry ?

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  6. Praguetory

    A little problem with the lower unemployment figure is that it appears to have been caused by unemployed people stopping looking for work rather than getting jobs.

    If over the last decade you had bet on the deficit being worse than the government had forecast you wouldn’t be out of pocket.

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  7. Alan Ji

    Ah yes, Steve Bundred.

    Once an elected member of the GLC.

    Once the National Union of Mineworkers delegate to IslingtonNorth (I kid you not) .

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  8. Al

    Surprised that you missed out the chronically bad economic advice doled out to the Callaghan government (which resulted in the needless IMF loan and all the damage that followed).

    Reply
  9. CS Clark

    If that’s true then the key is for politicians to work to retain freedom of movement – flexibility to change course and tack as the data changes. That in other words politicians shouldn’t commit themselves too far in advance to specific policies.

    This could also be: politicians can point to projections that, despite being seen as good and true by almost all at the time*, turned out to be bad, and use that as an excuse to do bugger all, to take their grand manifesto promises and quietly turn them into limited trial programmes, and then expect to be praised for it if they’re exceptionally brazen. You know. Just in case. (It probably also means that politicans, like generals, have to be lucky.)

    So in its ability to provide cover for inertia, I’m sure it would be as popular as Nudge. As long as you can also think of a snappier title.

    *As opposed to projections that everyone knew were only 50/50 at best but treated as true for ideological purposes, or projections where the attempts of others to deliberately falsify data were underestimated (now there’s your Normandy right there), which probably lead to different lessons.

    Reply
  10. Bernardine World

    I continually loved your style of explaining the how and why of doing things and that is beyond of grasp of people who desire the “do this and do that” sort of infos.

    Reply

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