Saturday, 15 December 2012

Delegation and accountability

Ian Mulheirn of the UK's Social Market Foundation uses lots of evocative phrases in a recent post on the OBR’s role in the Autumn statement: he talks about the wizard of OZ, economic high priests handing down prognostications on tablets of stone, Robert Chote (director of the OBR) as a kind of Pope, and more. But behind all this is a crucial point about the delegation of key economic judgements to experts. Ian expresses a feeling that is shared by many, but which I think is mistaken.

First a brief recap. As I explained here, given the Chancellors fiscal mandate, the extent of UK austerity depends crucially on the judgement of the UK’s independent fiscal council about what the output gap is. Now, its the Chancellor’s choice to pursue this path, and as I argue here, it is not a good path in the current circumstances. But having set these parameters, the OBR’s judgement is critical in determining the medium term  fiscal stance. Unfortunately, given the recent behaviour of UK productivity, no one has much of a clue what the current output gap is. Until the Autumn statement the OBR had been following a consistent approach, based on survey evidence, but this time it found that approach produced results it found unbelievable. So it is now, like everyone else, making it up as it goes along.

Ian does not disagree with this move, and as he notes others have gone further than the OBR in discounting the survey evidence. But nevertheless he says of this change: “ The loss of consistency and the sudden wholesale re-evaluation of its approach makes the OBR’s processes opaque and unpredictable for outsiders.” This is true, but would he rather the OBR stuck to an approach to measuring the output gap that it, and most others, no longer believe - just for the sake of consistency?

I think his real complaint is about accountability. To quote again: “Back in 2010, the case for the OBR was that independent economic experts would yield better judgments about crucial things such as the structural deficit than politicians. What that argument overlooked was that politicians are at least accountable for their judgments at the ballot box.” Now I think many feel the same way, so lets explore just what is meant by accountability here.

A political party is accountable at the ballot box for everything it does, all at once. And I can safely say that you will find it very hard to discover a voter who will say in 2015: I’m not voting for the Conservatives because the Chancellor got his calculations about the output gap wrong. By contrast, Robert Chote's reputation will depend in large part on the judgements he makes on this issue. Partly for that reason, I know who I’d prefer making these judgements, even though I cannot vote for or against him.

There is also a certain naivety in the way even some macroeconomists talk about evaluating these judgements. If we are talking about a forecast, they suggest the judgement is simply based on whether the forecast is right or wrong. Yet anyone who knows anything about macro forecasts knows this is silly. To test the ability of a macro forecaster by results, you need a large number of forecasts to separate luck from judgement, by which time the forecaster is safely drawing their pension. The only short term criteria we really have to make a judgement is the quality of their analysis, as judged by other experts.

This is why it is very important that an institution like the OBR or a central bank is accountable in a clear public manner to those with expertise in the area. If that institution starts taking judgements that clearly deviate from what outside experts regard as reasonable, there should be mechanisms by which the leadership of that institution can be changed. The way the Treasury Select Committee works in the UK, while far from perfect, provides accountability along these lines. The absence of similar mechanisms in the Eurozone is a real concern. Where such accountability exists, I think it is superior to any appeal to the ‘judgement of the ballot box’.

As I have argued before, there are structural flaws in getting politicians to make judgements that involve technical expertise, which the ballot box does not resolve. Delegation to independent institutions can avoid these flaws. However these institutions will invariably have to tread a careful path, because their advice has political implications. Here I do have a little sympathy for Ian’s point of view. There is no doubt that the current government has taken every opportunity it can to use the OBR as cover. In his Autumn Statement speech the Chancellor again used analysis the OBR has done about its forecast errors to suggest that the UK’s second recession had nothing to do with austerity. This is a simple case of economic deceit.[1] If my judgement had been misused in this way, I would want to make that misuse as clear as possible in a very public manner, because I had a reputation to protect. Whether the OBR has done that in this case I leave as an exercise for the reader.



[1] Austerity in itself will depress the economy, but a forecast that included it could still be optimistic because of other factors. If these other factors do not materialise, the forecast will be wrong for that reason, but austerity has still depressed the economy. Now whether some of the OBR’s forecast error is due to underestimating the impact of austerity is another matter, so I will not comment on it here, as others have already done so.

4 comments:

  1. Interesting post, although, I respectfully disagree. This post, and the earlier political economy one you link to, only adress one side of the argument. A false dichotomy is created, because the issue is presented as independent institutes vs. central government. What about keeping the OBR or central bank independent, but putting the decision to nominate governors in the hand of the public rather than the government?
    In this case it is ensured that a democratic process centres around the issues adressed by these institutions - thus accountability is created and preserved.
    And through the maintenance of independence, it creates a check and balance on gov't policy.
    And ultimately the greatest benefit is that it at least provides a structure where those facing the trade-offs macro opines about (be it deficits vs stimulus or inflation vs unemployment) actually also can decide about them. They may be wrong on these issues sometimes (or mislead), but ultimately, it should be those that are actually affected by unemployment and inflation that know best about its effects and relative importance to their well-being (and thats what we are trying to maximise, no?). And I think it would actually present an incentive to economists as well to really explain their ideas to the public.

    ReplyDelete
  2. "... you will find it very hard to discover a voter who will say in 2015: I’m not voting for the Conservatives because the Chancellor got his calculations about the output gap wrong."

    No, but you may very well find voters who say "I"m not voting for the Conservatives because they left me unemployed/without retirement savings/with my home loan underwater/with falling wages in the face of rising living costs/any or all of the above". Same thing, different language.

    And Mr Osborne will, rightly, be unable to persuade them that the faulty calculations were not his but those of some unelected technocrat. The buck stops with him.

    ReplyDelete
  3. You never get this completely right imho.

    Let politcs do it. And you have all sorts of other issues involved. Probably Osborne knows he needs a bit of pressure to be able to make some changes in the too expensive and most likely long term unaffordable welfarestate. Likely like a proper politician rather short term focussed (kicking the can to after the next election when somebody else is at the job is ok); allocations are likely inefficient because of political choices; in general politicians always like reasons why they can spend more; stimulus in the form of extended social spending is incredibly difficult to reverse lateron when the stimulus is not longer needed. Missing the expertise (in the UK less of an issue, but especially in smaller countries a real problem).

    Economists (or any specialist forum). Especially with not exact sciences like economy there is not 'one truth', plus it clearly looks like points of view are heavily biased by political alliance.
    Anyway it is not only good or bad for the economy in general. It is also making effectively political choices. Say somebody who gets nearly all his income from abroad and his nearly all his wealth there as well could not care less for a stimulus, while furtheron up the road he will be asked to pay for it by higher taxes.
    Allocation of stimulus will have effect at a personal level as it is partly a choice as well.
    Another issue is that economist in the widest sense have a credibility problem. Some very simple points have been completely missed before the crisis. RE bubble, partly caused by the with economists very popular low interestrates. Banks simply regulation/supervision within the possibilites overseeers had were way below standard.
    Another issue economist in general havenot got a clue how to sell things to the general public. What you see on economic blogs is that they simply donot understand that a) the general public is doubtful about their expertise and b) that creating money from nothing (as that how it is seen by many) triggers a sort of natural allergic reaction by many.

    I donot believe in ad hoc decisionmaking. Sometimes it will be necessary, but in general it should be clear beforehand who has the power to make a certain decision. The EuroZone is a good example of this powers not clear so everybody is trying to do things for which there is no political and social platform. If you want to mess with the basics of the state that is the way to do it.

    In a nutshell. Politicians are not really to be trusted to make the right decision but decisions have such a political dimension (next to the economical one) that in a democracy there should be democratic legitimacy. Now the most important question how?


    ReplyDelete
  4. I got clearly not the answer. But some things might help.

    -Get the structure in place (and made it clear) beforehand. Fed is less of a credibility problem than the ECB because of that. Not the only thing but it helps.
    -Difficult one (not really a good idea howe to do it) split technical and political issues.
    -2 layer system. Decison by say politics but has to be approved or requires heavy and in public advice.
    -No politics in the expert forum as much as possible. If appointments become Supreme-Courtish you have a problem. Also especially in Europe you see a lot of so called independent bodies basically via selfappointment being effectively 'consensus left of centre'. In the US likely to see more lobby influence.


    Another point is have a plan ready and adjust it every year or twice a year. Combined with a stimulus (if that is the issue) priority list. Looking at Obama he did spend a lot but effectively it is all social transfers. Cash for clunkers. It simply looks crap (uncredible as stimulus) to a lot of people and they were probably right. There might have been good social reasons for doing it, but apparently Obama was pretty sure that that was not the way to sell them.

    Which brings us to the subject that politics also has a huge credibility issue at hand in the Western world and they are doing very little to cure that.

    Post WW2 continental Europe had strong advisory bodies with a lot of power. Partly coming from the fact that a substantial part of their members came from unions resp employers. But it looks like it didnot really work well the importance of these bodies have become less over time. An issue to be looked at why.

    Overseen everything.
    Probably still mainly political decisonmaking for democratic legitimacy. But with something close to approval by a truly independent body. I would also like to see that body having done a lot odf homework. So especially stimuli are used effectively. And it becomes clear which decisions are taken for political reasons.
    But at the end of the day it is not the best of times to set such a thing up. Credibility of all sorts of authorities is probably at a historic low. Combined that a lot of people think that think/expect/demand that things will go back to the pre-crisis normal, which is imho very doubtful. Nevertheless politicians and advising economists in the widest sense of the word are likely to be judged on this at the ned of the day. It simply looks like another dip in credibility is built in the system whatever it will be. Either for mainly Western politicians or the combination of an independent body and politics, the outcome is a nasty hit for the credibility of authorities in general.

    ReplyDelete