As commentators continue to pick over the public spending review OU economist Alan Shipman writes for Society Matters on the blurred line between fact and fiction...
The Deputy Prime Minister’s attack on the Institute for Fiscal Studies (IFS) over its way of assessing the ‘fairness’ of the Comprehensive Spending Review, has brought the public into a debate that in good times only vexes academics. How much of what economists tell us comes anywhere near to being ‘fact’, supported by coherent theory and reliable evidence - and how much is ‘opinion’ based on data that’s inconsistent and open to other interpretations?
Governments fight the IFS at their peril. Its annual analyses of UK budgets have acquired almost unquestioned authority, among journalists and all political sides except those whose fiscal arithmetic it queries. Nick Clegg and David Cameron happily quoted its past analyses when they suggested that Labour Chancellors had run excessive deficits, or exaggerated real growth in public service provision. IFS director Robert Chote has now been headhunted to run the new Office for Budget Responsibility – but faces a tough challenge winning his new organisation (still housed within the Treasury) as strong a reputation for objectivity and accuracy as the one he has just left.
complainers
Coalition ministers – who include the former IFS economist Steve Webb (Pensions) as well as former Shell chief economist Vince Cable (Business) – know they can exploit at least four problems that can’t be resolved by those still practising their original craft. [Not even by economics Nobel laureates Paul Krugman (see Society Matters 13, page 2 )Christopher Pissarides and Joseph Stiglitz, who are among those casting doubt on the wisdom of present UK fiscal strategy].
First, they can question the quality of the data. Survey returns (from organisations like the Confederation of British Industry or Chartered Institute of Purchasing and Supply, which has highlighted a possible sagging of business confidence since mid-year) may be biased, if the complainers are more inclined to report than the contented. Even data from the Office for National Statistics (ONS) may be open to question, on the basis of its measurement method (there are various ways of calculation, even for regular headline-hitters like growth and inflation rates), its own use of surveys, and periodic revisions that can prevent comparisons of current and past data. These problems, and the scope for occasional calculation error, could get worse as the ONS absorbs its own share of public spending cuts.
sunny outlook
Second, they can question the processing of the data. IFS calculations of tax and spending impact, like macroeconomic forecasts and an increasing number of economists’ declarations on other issues, emerge from large computer models. These try to capture the many simultaneous interrelationships that connect the main economic variables (and firms’ and households’ expectations of those variables), and quantify its overall effect. Forecasts can differ because models differ, and because different assumptions are made about future values that aren’t generated within the model. So if enough forecasts are generated, there’s usually at least one that supports officialdom’s sunny outlook. Models’ tendencies may be shaped by the structure and parameters chosen for them. Critics have long observed how International Monetary Fund (IMF) models are often excessively optimistic on the prospects for countries that have followed its prescriptions. But there may be a tactical case for being so, since forecasts help to shape expectations that may become self-fulfilling if the optimism (or pessimism) spreads widely enough.
pre-flatscreen fuzz
Third, they can question the interpretation of the data. This is where, infuriatingly for economists’ public audience, all that is bad from one angle looks good from another, and any pretence of high definition quickly shades into pre-flatscreen fuzz. Social and economic problems lend themselves to opposite interpretations because effects feed back into causes, and trends set off reactions that may cause countervailing trends. Does the UK’s exceptionally strong first-half growth vindicate outgoing Chancellor Alistair Darling? Of course, because he helped generate the growth by reducing the deficit slowly. Does it vindicate incoming Chancellor George Osborne? Obviously, because the growth makes it safe to reduce the deficit more quickly.
Fourth, they can (as the deputy prime minister does) put forward additional data that change the story. Mr Clegg points out that the IFS has only assessed the (disproportionately harsh) impact on the poorest of cuts in benefits and public services and rises in indirect tax. It has ignored the possibly beneficial effects of other measures, such as new funds for schools and ‘Big Society’ initiatives. Research groups like the IFS can only report on the issues they have been commissioned and resourced to investigate. However objectively they do so, there’s always scope to suggest missing factors whose inclusion would change the conclusion.
big tunnels, small torches
That’s why politicians under fire always set up a commission of enquiry, with a remit either broader or narrower than the currently contested ground. The starkest of messages can always be smothered in an amplification of small print, or a deluge of new chapters. Political figures needing political figures will keep the think-tanks in business, however much universities’ research budget shrinks. Everyone plays a part in society. So until we’ve got exhaustive data on everyone - a prospect ruled out by limits on computing power, if not by civil liberties - social science will always be searching big tunnels with small torches, allowing those who shine a different light to give a very different view.
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