How Misleading Economic Analysis Is Corrupting Our Democracy

Yves here. This post provides some live examples from campaigning in the UK elections to show how think tanks cook their findings to push their political agenda. One way these economic studies fall short of the low standard of business analysis is the use of single point estimates. The public is treated as too stupid to understand uncertainty and is therefore shielded from ranges and sensitivity analyses.

Another way the political discourse gets warped is by clever positioning. A well-demonstrated cognitive bias is that the same economic proposition will elicit very different responses depending on how it is framed. Whoever decided to give universal government-backed medical care the colorless and uninformative name “single payer” was an evil genius. The right wing for decades has invested small fortunes in clever packaging, like denigrating social programs as “entitlements” and depicting the unnecessary and costly privatization as “public-private partnerships”

By Laurie Macfarlane. Originally published at openDemocracy

Today the front page of The Times reports that the Labour Party’s plans to introduce a four day working week will cost taxpayers £17 billion.

The figure is based on a report from the Centre for Policy Studies, which attempts to quantify the impact of reducing average full time hours to 32 hours with no loss of pay on the public sector wage bill.

On the face of it, this sounds plausible. After all, if everyone works less, surely more people will need to be employed to maintain services, which will push the wage bill up?

Perhaps, but this is only part of the story.

One of the key arguments in favour of a four-day week is that it will pay for itself by increasing productivity. Advocates point to studies showing that lower working hours are associated with higher levels of productivity. Many European countries, such as the Netherlands, Germany and Denmark, work less hours than the UK and yet produce more.

In its analysis the Centre for Policy Studies acknowledges this by assuming that shortening the working week will increase productivity by 6%, making up for half the hours lost. It assumes that the remaining lost hours will be made up for by hiring additional staff, which will increase the wage bill by £17 billion a year.

So far so good, right? Not quite.

Firstly, the report’s assumption that productivity will only increase by 6% is contentious. Many studies and experiments from around the world have found that introducing a four-day week leads to productivity increases greater than this. Just yesterday it was reported that Microsoft Japan tested out a four-day week and found that it boosted productivity by 40%. Of course, this may not apply to the public sector in the UK, but it’s worth noting that if the study assumed productivity gains of 12% rather than 6%, there would be no “cost” to speak of.

More importantly however, the analysis fails to consider other potential benefits of the policy. For example: multiple studies have found that a shorter working week leads to an uplift in staff physical and mental health and fewer sick days. Public services – particularly health and education – are some of the most susceptible to burn out and staff turnover. Deloitte estimates that poor mental health in the public sector costs £1,794 – £2,174 a year per employee, and staff in the healthcare sector take twice the number of sick days as those in the private sector.

If achieved, reducing the number of sick days and improving mental and physical health could save billions and reduce cost pressures in the NHS. But the analysis makes no attempt to capture this potential.

The analysis also ignores evidence that working less is good for the environment. One study estimated that reducing work hours by 25% could lead to a 36.6% reduction in our carbon footprint. Another found that introducing a four-day week in the UK could reduce car mileage by as much as 9%. In the face of accelerating climate breakdown, the report’s silence on the policy’s environmental benefits is telling.

Finally, the analysis is based on a static model of the economy which doesn’t actually exist. While any new staff will generate new wage costs, a significant proportion (up to 40%) of this will return to the exchequer in the form of income tax and national insurance, which is deducted from staff paycheques. Thus, the supposed “costs” of the policy are drastically overstated.

By ignoring so many of the potential benefits of the policy, and overstating the costs, the analysis sheds little light on the relative merits of the policy.

Instead, it would appear that the study has been designed to generate newspaper headlines with the sole aim of discrediting progressive policy proposals.

Unfortunately, this is not a one-off occurrence. Last year, the same think tank published a widely condemned report which claimed that the cost of Labour’s renationalisation plans would be “at least £176billion.”

The “cost” represented the amount of borrowing that would be required to finance the purchase of the utilities, but the analysis ignored the fact that an asset of equivalent value would be acquired, which would generate returns in the form of profits.

As any City analyst will tell you, a balance sheet has two sides: assets on the one side, and liabilities on the other. If the return on the asset being invested in is greater than the cost of borrowing (or the long-term value of a policy is greater than its up-front cost) then it is not a “cost”, but a credible investment.

While the Centre for Policy Studies wants us to believe that only one side of the balance sheet exists, other economists are not so naive. The leading economist Jonathan Portes described the work as “not a serious analysis” and “propaganda”.

But it’s not just the Centre for Policy Studies. At the last general election the Institute for Fiscal Studies published an influential chart in its election manifesto analysis showing the distributional impact of all tax and benefit proposals from the Conservative, Labour and Liberal Democrat manifestos.

This chart appeared to show that Labour’s plans were relatively regressive, even when compared to the other two major parties. However, subsequent analysis found that the analysis was not a reflection of the whole Labour manifesto, but of less than 8 per cent of spending commitments and 16 per cent of tax rises. Many of the measures excluded would likely have had a broadly progressive impact.

The economist Simon Wren-Lewis described the IFS analysis as “unabashed pre-Keynesian ignorance”, noting that:

The IFS said raising corporation tax would cut investment, but did not note that raising demand would have the opposite effect. Because the IFS does not do macro, these points were simply not made. No one made the point that increasing public investment when real interest rates were about zero not only made good economic sense, but would also boost the economy, probably raise productivity, and itself bring in more taxes. In other words the IFS were implicitly assuming that this package would have no impact on output.

As we enter an election campaign that may prove to be the most consequential in living memory, we can expect a wave of analysis from think tanks attempting to try discredit progressive policies on issues ranging from public investment and housing, to climate policy and social care.

If history is anything to go by, much of this “analysis” will follow a common formula:

1) Calculate an inflated up front cost

2) Exclude a range of economic and social benefits

3) Claim the policy is “unaffordable” or “regressive”

Don’t be fooled: next time you hear how much a policy “costs”, ask whether an attempt has been made to fully quantify the benefits. If the answer is “no”, then the analysis can safely be discounted.

There are always two sides to an equation. During an election this important, it’s essential that both sides are heard.

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17 comments

  1. The Rev Kev

    I thought about a long comment for this article but I will instead leave the link here for the Wikipedia article on the Centre for Policy Studies which came up with the report trying to debunk shorter working hours as being less productive-

    https://en.wikipedia.org/wiki/Centre_for_Policy_Studies

    When you read though it, you understand exactly who they are and what they are all about. Some minor highlights – Maggie Thatcher was a co-founder who used this as a platform to attack Keynesian economics. Its work was used to usher in neoliberalism into the UK and it has historical links to the Conservative Party. But you get the idea.

    Reply
  2. monday1929

    Sometimes one can’t be sure if it is innumeracy or a political agenda behind some errors. The Examiner News (Westchester County NY) was alerted that a sales tax increase from approx. 7 3/4% to 8 3/4% was not a ” one per cent increase” but rather an approx. 14% increase. The editor declined to respond to my second letter reporting that error and they have repeated the erroneous reporting.
    I have seen the same error on Bloomberg when discussing Fed Fund rates etc.

    Reply
    1. MICHAEL J GRAMIG

      True enough. What should have been said is that it was a taxation rate increase of 7 3/4% to 8 3/4%. The angle here is to represent the actual taxation rate to evaluate the increase’s actual status as a tax. Is 8 3/4% out of line with reasonable, or more properly, with NEEDED revenue increases? Is there a better way to raise the needed revenue or reduce expenses? Does the representation of the tax increase as a “14%” increase accurately describe the rate? There are different ways of considering issues such as taxation. If you’re a libertarian, any taxation is theft. If you are a liberal (progressive), you see taxation as the dues for a modern civilized society and not necessarily a drag on its economy.

      …of course there lies, damned lies, and economic statistics.

      Reply
    2. Dirk77

      A class in critical thinking needs to be made mandatory in college. I’m thinking of one in which students get skilled in creating the most misleading reasoning, analysis, possible. It would be lots of fun for everyone. If everyone could do it, it would make it all that much harder for them to fall for biased analysis. Perhaps it’s taught as rhetoric.

      Reply
  3. Chauncey Gardiner

    Thanks for this post, and particularly Macfarlane’s summary of their formula to discredit progressive policies. Also appreciated a few of the innumerable examples of use of language and nomenclature to frame and influence the public conversation, perceptions, legislation and policy. Use of particular terminology has become so pervasive that we generally don’t even think about it when we ourselves contribute to the framing. An example is the use of the term “the right” in the intro here today. That word is also commonly used to describe an argument, answer or solution as being accurate or correct. … are they really?

    Or consider the label on the U.S. Supreme Court’s “Citizens United” decision that further opened the door to political corruption by corporations and the wealthy, rather than reflecting the political will of ordinary citizens.

    Control of media is pivotal to specific language gaining traction. An example earlier this week was a lead story in the Washington Post when a terse two-word response by a 25-year old New Zealand Green Party legislator to a heckler in the NZ parliament, “OK. boomer”, was used to divert and reframe the public conversation in the U.S. away from legislative proposals to address climate change and toward one of many issues that are resulting from this unfolding catastrophe: social divisions… in this case framed as a generational split. Over 2800 comments by readers as of this writing.

    https://www.washingtonpost.com/climate-environment/2019/11/05/ok-boomer-year-old-lawmaker-shuts-down-heckler-during-climate-change-speech/

    “When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
    “The question is,” said Alice, “whether you can make words mean so many different things.”
    “The question is,” said Humpty Dumpty, “which is to be master – – that’s all.”

    Through The Looking Glass and What Alice Found There, by Lewis Carroll (1871)

    Reply
  4. Crockhamtown

    Re Jonathan Portes’s comments above, reverse the situation. Could someone do a balance sheet appraisal of the utilities before Maggie privatised them.

    Reply
  5. Grebo

    Almost all “think-tanks” are Neoliberal propaganda mills. If in doubt you can check this handy list.

    The article should also have mentioned that Jonathan Portes and Simon Wren-Lewis are or have been advisers to the Labour Party, not that I think they are wrong in this case.

    Reply
  6. Susan the Other

    Manufacturing fake analysis. Please, someone, send this post to Warren’s campaign headquarters. So she can finally stop harping on a budget plan to pay for the right to healthcare. God just think of all the separate budgets she could fuss over – the right to health care, the right to a clean environment; the right to a guaranteed job; the right to pursue happiness; the right to a minimum of leisure; the right to decent housing; the right to access public toilets; the right to equal justice under the law (that one will really require some tight budgeting); the right to privacy (ha). The right to truth in advertising, politics and economics? Liz will busy for a long time because the Equality Budget has so many little special interests to appease. Special Rights.

    Reply
  7. john buell

    When and why did the Secretary of War–presiding over military spending– become the Secretary of Defense–presiding over defense spending?

    Reply

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