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.