Economic Issues

One Size Does Not Fit All: Micro-Policy Making in Practice – Using Data to Speed-Up Growth and Slow-Down Decline: the possibilities of Data Linkage and Sharing Strategies in the Public Sector

Almost two decades ago Professor Richard Rose in his eponymous book of the same name talked about the problem of Big Government – the increasing inability of politicians to pull the levers of power to turn the drive-shaft of change. There has been a subdivision and increased specialization of agencies responsible for the delivery of policy. This has resulted in inter-agency conflict & boundary disputes reducing the effectiveness of policy delivery. Government has increasingly resorted to changing the structure of organizations (setting up another QUANGO) to deliver policy rather than understanding the reasons for policy failure.  The result has been an exponential increase in the number of policy programmes and an increase in the overlap and contradiction between them. This has lead to internal conflict within Government about economic development priorities and goals. The end result has been political Inertia and potentially stalemate at worst.

Political inertia has been compounded by failures in Intelligence Systems. On a Monthly Basis we are subjected to the ritualized farce of the production of Statistical Data on GDP by ONS which is not only at least 6 weeks old but is subject to such wide-ranging revision, both upward and downward, that both its veracity and accuracy is being called into question. You certainly would not try and run a Manufacturing Business on the basis of such unreliable Data – the Business would go bust.

The lack of availability of up-to-date Management Information is why we continue to see a creep in Government Spending despite a commitment to Reducing Spending. Measuring changes in the funding demands of Policy Programmes is easier than justifying or understanding the need for scaling back, cutting or measuring the impact of existing programmes. There is insufficient knowledge of the impact of existing Business Support programmes. Policy Evaluation is retrospective. Information is backward facing with too much information being provided too late identifying failings that cannot be undone. The result is decision-making that is after the fact with problems often being discovered by well meaning and committed committees of investigation many years after they occurred.

Consequently, Decision-makers have been forced trust to their own intuition. There has been a tendency to rely on the infallibility of their own “judgemental opinion” because it is simple and convenient. This has resulted in a “Traditionally it has always been done that way mentality”. No one is able to prove conclusively otherwise or show policymakers they are wrong. The result has been badly formulated and more poorly applied policy. This works fine in a benign economic environment. In a harsher climate when assumptions are being fundamentally challenged it is much more difficult to defend the indefensible and to find a solution when you are sometimes forced to justify not only your very existence but the funding rationale. There is thus a need for hard evidence: high quality validated quantitative data. This ensures a move from Opinion Based Decision making, where choices are made despite significant unknowns and knowledge gaps, to true Evidence Based Decision making.

The irony is that we have more Data available in more issue-areas than at any point in history. Data is now far easier & cheaper to gather, store, analyze and disseminate than ever before. The problem is that Data in the Public Sector is too inaccessible. Not only is critical Business Economy Data not collected together in one place but it is not linked with sources which will enrich decision makers understanding of key policy agendas. This was particularly evident during the Dip 1 Recession under the previous Labour Government, particularly so in the North West of England. The quantity and quality of up-to-date accurate business data was insufficient to offer a detailed and granular overview of the North West Regional Economy. Business Link North West (hereafter BLNW) focussed on the lack of real data in the region building a Business Intelligence System that delivered detailed business diagnostics and risk assessment tools to assess the performance of Businesses, especially in the SME Community, during Dip 1. 

The Business Performance Index (hereafter BPI) as it became known was an Evidence-Based Decision Support Tool providing the ability to drill down into Key Data Segments and identify and locate Businesses exhibiting specific characteristics.  The BPI was the first (B2B) business profiling system in the public sector.

BPI was used to analyse key segments using a wide array of data attributes or characteristics (circa 250).  This offered the opportunity to conduct, thematic analytics for policy formulation, decision making, implementation and measurement including geographical analysis highlighting key economic drivers and constraints within sub regions and sectors.

It was soon discovered that Labour’s Super Regionalism and ultimately the failure of Tony Blair’s vision of sub national “big ticket” regionalism was due to the One Size Fits All prescriptive approach pursued by the Regional Development Agencies which ignored not just subtle but the major fundamental differences that existed in the economic performance of individual Sub-Regions across the UK. In the North West the problem was exacerbated by the structure of economies of place at a sub-regional level and the historic identities that are coterminous with this.

Robust data and analysis allows for more effective policy-making. Data is critical to the delivery of evidence-based policy formulation. With BPI the NWDA was able to track the performance of companies over time and highlighted areas of improvement or decline. This capability provided both the context and the measurement capability required to test Business Support Interventions over time. Data available on such a scale by the BPI enabled a process of quantitative analysis to help predict the impact of policy options to stakeholders in a “winners and losers” format. Robust data analysis illuminated problems by revealing severity, geographic concentration, trends and causation.

Part of the explanation behind the failure of a number of LEPs in the North West and the UK to make more effective progress is the lack of access to the kind of in-depth Business Economy Data that BPI would have been able to provide.

You will notice that throughout this Paper I have been speaking about the BPI in the Past Tense. That is because the NWDA took the decision to decommission this incredibly valuable and analytically powerful strategic data asset. Retaining such Data Assets that existed within the RDAs and Business Links would have been extremely beneficial for LEPs, especially when it comes to the bidding process and Green Book predictive analytics which underpins Regional Growth Fund bids. Sadly Key Decision-makers, several of whom now sit on LEP Boards chose not to make the retention of Strategic Assets a priority and make such assets available to LEPs across the UK.

In situations like this a more strategic approach planning the transfer of data assets and data bases to the LEPs to aid them in their very difficult task of addressing the one size does not fit all failure of the RDAs would have been invaluable. The scorched earth appearance of the decommissioning of strategic data assets does not reveal Public Sector Agencies in their best operational light. Perhaps, however, a more measured assessment of a Government in a hurry to dismantle what it saw as examples of systematic failure rather than a consideration of retaining the operationally more efficient bits at a sub-regional county level would have helped.

Ged Mirfin

Conservative Councillor: Ribble Valley Borough Council &

Former Chief Data Officer Business Link North West – a Wholly Owned Subsidiary of the North West Development Agency

My Reply to Professor John Ashcroft:

The Saturday Economist : UK Economics news and market updates 18th August

http://www.johnashcroft.co.uk/2012/08/the-saturday-economist-uk-economics-news-and-market-updates-18th-august/#comment-18941

Martin Weale: Does he really know what Stagnation is?

Martin Weale, Bank of England MPC Member, has achieved notoriety this week by arguing that the UK economy is in a period of extended Stagnation rather than recession. Slow Growth in certain areas of the Economy however is not No Growth especially if it is offsetting Slow Decline in other areas. Far be it from me to accuse Martin Weale of lacking a sense of historical perspective but I genuinely wonder how far Monetary Economists genuinely understand Underlying Growth within the Economy. As a Business Information Economist I am incredibly sensitive to emerging nascent data trends and how what happens in one area of Economic Activity can have potentially profound effects upon what happens in another area. The key to modelling what is happening in in the UK Economy at Present is understanding better how Economic Growth is offsetting Economic Decline and how the two trends are inter-related. More important is the need to question whether the Economic Evidence Base and Available Data is adequate to create a detailed understanding for MPC Members to be effectively well informed to take critical decisions about both Interest Rates and Quantitative Easing. Recent Seminars I have sat through where Bank of England Staffers have bemoaned the lack of sufficient insightful data, particularly at a Regional level, suggests not. I am increasingly worried therefore about whether the Bank of England has access to a sufficient and up-to-date volume of detailed micro-level data to take critical decisions about Economic Management of the Monetary Economy?

I also have deeper concerns relating to deep understanding of the Economic Business Cycle or as it has become known in academic circles: the “Real Business Cycle”. If Benoit Mandelbrot’s influential work “The (Mis)Behviour of Markets” tells us anything it is that Economic Cycles are Predictably Unpredictable. The gap between theoretical models and empirical evidence is a recognition that Economic Cycles are an admixture of long periods of predictable smooth growth interspersed with sudden fluctuating periods of unpredictable decline when the Economy enters into negative Growth. Where you sit is where you stand. The safe bet is to characterise the Economy, particuarly following a sudden period of decline, as entering into an extended phase of stagnation. The danger is to fail to recognise those elements of growth within a declining economy – the seeds of future potential growth.

The problem, as Charles Kindleberger, continues to remind us, is that the academic tools and knowledge that we require to understand post-Crash Economies are fundamentally different from what went before. Not least because we lack the historical benchmarks to assess Economic Performance in an Economy in which there was a total collapse of the Banking System and a Structural Existential Crisis in the Eurozone.

In understanding the Real Business Cycles policymakers need to recognise that the Economy is vulnerable to a series of both internal and external random shocks, both large and small, which can influence the direction of travel of inflation in particular, especially when the Economy slows. These shocks were visible this week. They were however no less predictable causing a small upward fluctuation in inflation. The cause was profiteering on behalf of School Uniform Retailers and Airlines and Holiday Companies as Millions of Parents shopped for Shoes and Clothing for Children Returning to School at the End of the Summer Holiday and Parents Seeking Holiday Bargains Abroad during a Busy Olympic Period.

Policymakers need to be prepared for and to expect such fluctuations. What Economists need to do do is to be prescient enough to recognise the potential of positive shocks. It is important to acknowledge that behaviour at an aggregate level in the field of macro-economics should be explained by reference to behaviour of what is happening in the micro economy.

Sitting down with my good friend Malcolm Evans from NW Super Angels this week, we both recognised the potential of Digital & Creative Start-Up Businesses to drive Economic Activity and Deliver Competitive Advantage and Growth to Business and Professional Service Firms in spite of the down turn that is affecting the Sector. If that is, such Businesses recognise the potential and are willing to take a risk in and invest in new technology, software and web-enabled tools to improve Service Delivery and Interactions with Customers. It is less a Big If than one might imagine as Forward Facing Firms are willing to Invest in New Technologies as a way of Achieving Key Differentiation. The Potentiality of Such Technology is Rarely apparent except to the eye of the IT Futurologist but its impact can be extremely profound. Such an impact is badly understood by PolicyMakers. I saw a great exanple of such a software product this week invented by a Business located in Salford, in the heart of the NorthWest, called AdInsight – an Analytical Tool which links Call Response Tracking to KeyWord Ad Response on the Internet which will ultimately revolutionise both the Direct Response Advertising Industry, PPC and SEO. Those Companies that Invest in it will have the Potential to Steal a Huge March on their Competitors.

My Reply to Professor John Ashcroft:

The Saturday Economist : UK Economics news and market updates 11th August 2012.

 http://www.johnashcroft.co.uk/2012/08/the-saturday-economist-uk-economics-news-and-market-updates-11th-august-2012/

The Need for a National Enterprise Council?

Why was it that the Soviet Union succeeded in putting the first astronaut into Space? And yet, at the time, the United States was the most powerful economy on the Globe! An economy which was larger than that of all the other economies across the Globe put together. More important the vast majority of the largest Corporations in the World had their main manufacturing facilities located in and were headquartered in the United States. With the creation of NASA however, within a 5 year period, not only had the United States put a man on the moon but had also developed an unassailable lead in both the Space Race as well as the Strategic Arms Race. The lesson was that in the most dergulated and liberal market economy in the world it took action on behalf of the Federal Government to establish a coordinative institutional machinary for Private Sector Corporations to co-operate and achieve progress on a strategic agenda at a National level. 

I offer this thought in response to the tongue-in-cheek aside that John has offered in his Milton Keynes column on undercapacity in the UK economy. The problem with even the most insightful of Macro-Economists is that the apparent convergence in thinking about the performance of the UK economy is based on a conceit: the theoretical narrative which is used to explain the fluctuations which have been observed in first world industrial market economies.

There are two strands of argument which underpin this narrative. The first is a slow but steady growth in output over time, averaging anywhere between 1.5 and 3.5% per annum depending on your Base Year. As the vast number of revisions by the Treasury to substantiate the legend of continuous uninterrupted growth during the Chancellorhsip of Gordon Brown demonstrates there is neither an accepted view of the precise date of Year Zero nor the precise length of Long Economic Cycles. Indeed the narrative doffs its hat at a theory of Long Economic Cycles at the expense of its revisionist younger brother which focuses on the Political Economy of Persistent and Continued Fluctuations in Outut which underpin Analyses of Slower Growth retarded by Structural Impediments within the Make-Up of the Economy. Such Fluctuations, it is argued, can be severe with output fall for sometimes significant periods of time, especially during Financial Crashes which conform to repititious historical logic. In this latter, more pessimistic Economic Narrative we should be less concerned in looking for the structural causes of undercapacity and instead accept that these are natural functions of an Economy which is contracting.

The esoteric analysis that some Macro-Economists are engaging in shows how much our WorldView has become conditioned by an Optimistic View of the Economy which is based on both an expansionist internal logic and a view of Continued Progress. As Economic History demonstrates  this is an inherently flawed and misconceived view of the world.

This is why I particularly value re-reading Charles Kindleberger’s influential text “Manias, Panics And Crashes: A History of Financial Crises” in which he exhorts the reader of the necessity to continuously re-invent the institutional machinary of Economic Government in order to address the unique set of circumstances raised by Financial Crises which have demonstrated increasing levels of severity over the course of history.

In previous posts I have eulogised the work of rofessor Richard Rose who almost two decades ago talked of the problems of Big Government. What he meant was the increasing inability of Politicians to Pull the Levers of Power to Turn the Drive-Shaft of Change. Bigger Government has led to increasing organizational complexity. There has been a Subdivision and increased specialization of Agencies responsible for the delivery of Policy. This has resulted in inter-agency conflict & boundary disputes reducing the effectiveness of policy delivery. Government has increasingly resorted to changing the structure of organizations (setting up another QUANGO or Programme each with its own favoured or designated delivery partner) to deliver policy rather than understanding the reasons for policy failure.  The tendency has been to Change the Structure rather than Amend the Programme. The Result has been an Exponential Increase in the No. of Policy Programmes and an Increase in the Overlap and Contradiction between them. This has lead to Internal Conflict within Government about Economic Development Priorities and Goals. The greater the number of Stakeholders and Organizations and the greater the overlap between them, then the greater the conflict. The End Result has been Political Inertia & potentially Stalemate at worst. At best the reult has been massively extended Project Delivery Time Horizons Effectively what we are saying here is that Government lacks the effective machinery to solve the crisis.

Part of the reason for the current undercapacaity in the economy or should that be economic performance may have as much to do with lacking the requiste institutional machinary in order, like NASA in the United States, all those years ago the problem of institutionally managing Big National Infrastructure Projects.

Is it time, I ask, to create a National Enterprise Council made up wholly of Representatives from the Private Sector, Big Business especially in order to drive forward the kind of Big Infrastructure Projects that will revitalise the Economy and bridge the performance gap. NEDC failed during the 1970s because it was a Corporatist Tripartite decisionmaking body desigened to manage Industrial Relations and Wage Negotiations between Employers and the Trade Unions. In no uncertain terms am I proposing a return to anything approaching such a failed State-led version of Corporatism. Instead what I am proposing is a Business Led Model of Corporatism. This will entail very high levels of close knit co-operation cooperation between manufacturers, suppliers, distributors, banks and local government with active acquiescence of  trade unions  and employer engagement and participation. Education and Training will become much more Business Focussed. There will be a much greater focus on identifying and backing winners and Business Led National Infrastructure Projects with the Public Sector encouraged to Get Out of the Way as far as is possible.  This will be the Ultimate process of Creative Destruction – Continuous Change Management of a High Growth Enterprise Strategy on the scale envisaged has not been attempted since the Victorian era.

Such a Business Led Infrastructure Based Growth Strategy will ultimately force a rethink on Local Enterprise Partnerships and their current unhealthy level of dependence on the Public Sector especially as far as Bid Management for access to Regional Growth Funding is concerned.

Such an approach will also force much greater responsiveness from Civil Servants. The Regulations concerning Accessing Funding are too Complex, the Process is Too Convoluted and it is Taking Too Long for Proposals to Be Evaluated and Decisions To Be Announced. Competitive Bidding It May Be but the Competitiion Element is Now Getting In the Way of Infrastructure Led Growth.

Having Senior Representatives of Big Business firmly Embedded in the Treasury, BIS and CLG will be a salutory experience for Government showing what makes sense from a Business Perspective and What Doesn’t, especially for those Ministers with Little or No Business Experience.

Am I Confident such a Business Led Corporatist Model of Growth will Transpire. Perhaps, not as much as I once was but if we are to address the problems of undercapacity caused as a consequence of the current structural issues which have resulted from the Financial Crash then we need as a Nation to be aware of the potentialities of Purely Business Led Solutions.

My Reply to Professor John Ashcroft:

The Saturday Economist : UK Economics news and updates 4th August 2012

http://www.johnashcroft.co.uk/2012/08/the-saturday-economist-uk-economics-news-and-updates-4th-august-2012/#comment-18764

I wonder whether we are all becoming Keynesians now? Indeed, I detect a worrying consensus amongst what Charles Kindleberger called “system economists”: lets use large scale infrastructure projects in order to kick-start the economy into life.

There is nothing particularly Keynesian about any of this. Large scale road, rail (including HS2: High Speed Rail ), airport (in both London & the Regions), Inner City Supertram and London Underground infrastructure projects should have been taking place as a matter of course over the last two decades in order to address the gaps in Britain’s creaking transport system, nor least to increase the competitiveness of the British Economy.

Be careful what you wish for however. And also be prepared to wait for a very long time indeed for some of them to happen. Such is the level of what I have dubbed “Institutional Interblocking”, particularly at a local level in the UK, that economic growth in the UK is being retarded by institutional turf wars.

More important, “systems economists” would be reminded that the situation which confronts us today would have been wholly unfamiliar to Keynes. It no longer makes sense to talk of Public Works. Indeed the cross pollination between the Public and Private Sector Economy renders the distinction almost meaningless. LEPs are the ultimate embodiment of this confusion – a Public Sector led initiative designed to Empower Private Sector led Economic Development in a Back to the Future led vision of Municipal Corporatism. The concept is based on the Public Sector & Big Business working together in a good & true partnership to “park, pave, assize, market…and improve”. Unfortunately LEPs have become increasingly reliant on the Public Sector to resource the bidding process for Growth Funding to the extent that in some cases they have become little more than extensions of the Public Sector. They are not the powerful Civic Associations that has been hoped for.  http://slidesha.re/L1Lxfd The problem has been compounded as Local Government is not playing a sufficiently active role in the process of economic development. As long as the centre continues to set & restribute Business Rates there is insufficient incentive for Local Government to become more actively involved in the process of economic development. More radical solutions are required to genuinely empower Local Authorities.

The problem is that momentum is being lost because of the impact of inefficient institutional competition and overlap between competing providers of Economic Development at a local level.

Richard Rose almost two decades ago talked of the problems of Big Government. What he meant was the increasing inability of Politicians to Pull the Levers of Power to Turn the Drive-Shaft of Change. Bigger Government has led to increasing organizational complexity. There has been a Subdivision and increased specialization of Agencies responsible for the delivery of Policy. This has resulted in inter-agency conflict & boundary disputes reducing the effectiveness of policy delivery. Government has increasingly resorted to changing the structure of organizations (setting up another QUANGO or Programme each with its own favoured or designated delivery partner) to deliver policy rather than understanding the reasons for policy failure.  The tendency has been to Change the Structure rather than Amend the Programme. The Result has been an Exponential Increase in the No. of Policy Programmes and an Increase in the Overlap and Contradiction between them. This has lead to Internal Conflict within Government about Economic Development Priorities and Goals. The greater the number of Stakeholders and Organizations and the greater the overlap between them, then the greater the conflict. The End Result has been Political Inertia & potentially Stalemate at worst. At best the reult has been massively extended Project Delivery Time Horizons Effectively what we are saying here is that Government lacks the effective machinery to solve the crisis. The Bunker Mentality is as much an institutional reality as it is a state of Mind.

So how do we address this issue?

At a National Level we need to employ a Cabinet Fixer. We quickly need to Appoint a Cabinet Heavyweight with sufficient gravitas to play an unblocking role as Infrastucture Secretary but on a much larger scale to that played by Michael Heseltine. I am open to suggestion on who this should be – there are a number of excellent candidates. My current favourite: the most out and about Minister of State – Chris Grayling.

Second, infrastucture projects are not necessarily National in scale. There is much that could be achieved at a City Regional level provided the necessary powers, funding and effective institutional machinary is established. Why this is taking so long under the present circumstances is a source of concern. Regional Political Turf Wars and diversion of political effort to low priority agenda items like Lords Reform are part of the explanation.

Lastly, there is much that can be achieved at a Local Level in terms of Local Economic Development by freeing up Capital spending. Local Authorities are best positioned to know where the shoe pinches or when new shoes are required, particularly when the Private Sector are unable to provide adequate levels of Social Housing to meet local need because they do not effectively understand either the level or the best location for the sighting of Social Housing.

Localism has wrought a change in the competency powers of Local Authorities. Localism however should go further in the form of permissive virement such that the efficiency savings in current expendture which result in the unfortunate underspend which occurs in the Public Sector can be utilised for additional or new expenditure on capital projects.

Systems Economists however should beware of what they wish for. The all pervasive impact of the Audit State and its intrusive accounting for the spending of Public Monies acts as a further regulator on the pace of delivery of infrastructure projects and not just in terms of ensuring that bidding regulations are adhered to. There is a cost overhead on large infastructure projects which is currently running at an unhelpfully high level.

A more insidious effect which NIESR will clearly be aware of is the shadow of the European Union and the OJEU effect. As in the case of Bombardier and Rail Infrastructure Projects and the Building of Wembley Stadium there is no guarantee that contracts will be awarded to British firms or indeed that they will benefit as first level sub contractors or that British Workers will not be undercut by cheap foreign labour from the EU. How to resolve this particular dilemma is the subject for another post but economists have a responsibility to think hrd about what a Britain First Industrial Policy will look like.

Dr. Ged Mirfin
Contributing Political Economist at the Peel Policy Forum

http://www.peelpolicyforum.co.uk/

 The Economic Insecurity Dilemma: Constructive Radicalist Thinking on the Economy

The term Economic Insecurity Dilemma stems from the fact that under free market conditions competition during periods of economic decline businesses will seek to ensure their survival during the period in which the economy enters into and moves towards the bottom of an economic cycle. This is because there is no overriding authority to regulate competition and act as an automatic lender of last resort and bail out businesses in danger of folding in all cases without discrimination. The dominant feature of businesses during the prevailing recession has been to attempt to protect their balance sheets. This has two features which are mutually inclusive.

The first is to build-up the cash reserves on their balance sheet. There has been a tendency for businesses to finance capital projects without recourse to lending from Banks thus leading directly to a lowering a demand for finance.

The second is to tighten their own credit collection terms whilst reducing the speed at which they pay others lengthening their payment terms and the days beyond this. This has the greatest impact on Small Businesses at the Bottom of Supply Chain hierarchies the Most because they can least afford to Credit Charges and to be Paid Late and Large Businesses at the Top of the Supply Chain hierarchy who are effectively squeezing the Supply Chain and using it as a source of additional or replacement credit to mitigate the impact of short-term liabilities: repayment of loans to banks and credit lines to suppliers. Large Retailers are the prime culprits in some cases extending their days beyond terms out past 100 days for some suppliers because they are the biggest prime retail outlets for their product. The direct consequence has been to artificially enhance the ability of Large Businesses to Land Bank & Asset Purchase by Reducing the Impact of Loan Repayments on Cash Flow.

Business Defensive Positionality

These two features are part of a phenomenon called Businesses Defensive Positionality – the ultimate form of Risk Aversion. It was a phenomenon which had its roots in the profiteering days of the Labour Years and has reached its ultimate epitomy in the behaviour of the High Street Banks with capital adequacy rules forcing an even more extreme form of Defensive Positional Behaviour. Each New Quarter’s contraction in GDP has encouraged an even more defensive Business Mindset as Businesses adopt a Safety First approach redolent of short-termism and a reluctance to expend valuable funds on the kind of speculative Market Research and Customer & Competitor Intelligence Projects that delivered thought leadership and cutting edge marketing differentiation and business development strategies. In a highly uncertain business world however it is difficult for Directors and Proprietors to think beyond their own business survival. Consequently, Risk Aversion has become metamorphosed from an Attitude of Mind to a Business Posture.

The Insecurity – the threat that the economic recession poses to the very survival prospects of Businesses – has been compounded by the economic uncertainty facing the Business not just as a consequence of a Downturn in Trade, Restrictive Credit, Reduction in Public Sector Spending, Scaling Back in Capital Spending, Reductions in the Value & Yield of Commercial Property, an Increase in the Rate of Business Insolvency & Bad Debt, Rising Global Commodity Prices, Shrinking Consumer Disposable and Discretionary Income, Cancelled and Scaled Back Capital Projects but also by a much more insidious feature an existential crisis in the functioning of the Global Economy – a crisis which it is extremely difficult to measure the impact of.

The Global Economic Existential Crisis

At its most basic what we are talking about here is the Crisis in the Eurozone and the possible collapse of the Euro as a Currency. At its most advanced what back to the future doom sayers are pessimistically predicting is a return to far less co-operative and more protectionist and illiberal form of international trade. At its bleakest a fatalistic view of international relations paints a picture of escalating trade disputes over increasingly scarce or overpriced global commodities descending into armed conflict. From an intermediate perspective what we are talking about is a crisis in the very Institutions of Government. Faith in Politicians has already sunk to an all time low. There is a perception amongst certain sections of the General Public, the most economically disenfranchised and the squeezed Middle Classes especially that part constituted of former Public Sector Employees as well as some Politicians on the sceptical fringes of mainstream politics now fear that the problems are so intractable as to be resistant to even the strongest fiscal medicine. This sense of powerlessness with an increasingly traumatised population watching from the sidelines as the crisis plays out has parallels in the darkest ages of history with cathartic events like wars, climatic events, natural disasters, fire, revolution effectively resetting the political-economic operating system inaugurating a new era in history. It is one of the ironies of British History that foundational Political Change does not occur until it is forced upon us.

Policy Initiatives and the Problem of Big Government

Richard Rose almost two decades ago talked of the problems of Big Government. What he meant was the increasing inability of Politicians to Pull the Levers of Power to Turn the Drive-Shaft of Change. Bigger Government has led to increasing organizational complexity. There has been a Subdivision and increased specialization of Agencies responsible for delivery Policy. This has resulted in inter-agency conflict & boundary disputes reducing the effectiveness of policy delivery. Government has increasingly resorted to changing the structure of organizations (setting up another QUANGO) to deliver policy rather than understanding reasons for policy failure.  The tendency has been to Change the Structure rather than Amend the Programme. The Result has been an Exponential Increase in the No. of Policy Programmes and an Increase in the Overlap and Contradiction between them. This has lead to Internal Conflict within Government about Social Priorities and Goals. The greater the number of Stakeholders and Organizations and the greater the overlap between them, then the greater the conflict. The End Result has been Political Inertia & potentially Stalemate. Effectively what we are saying here is that Government lacks the effective machinery to solve the crisis. The Bunker Mentality is as much an institutional reality as it is a state of Mind.

What do the Voters think?

Voters have become increasingly convinced in their own minds that the money has run out. They fear that if there was another Banking Collapse this time there would be no money left to rescue them. Nor can they understand how it is possible to bail out Greece, Portugal, Spain, Italy et al when most of the major economies in Europe are still in crisis themselves and continuing to expend eye watering sums on propping up their own domestic banking infrastructure. The whole situation has an air of complete unreality about it, particularly so when commentators tell us that the money isn’t real and the credit made available by the ECB is artificial. It is hardly surprising therefore, that consumers are proving so unwilling to part with the money in their pockets. They simply do not understand how bad things are and more important, how long they will take before they get better.

Post Traumatic Debt Stress

Equally Powerful psychological determinants underpin the behaviour of Economic Decision-Makers. What we are talking about here is the inability of decision-makers to change the behaviour of Business, to create the level of confidence necessary to provide the motivation to inculcate New Business Activity. Economic Confidence comes with Rising GDP. Economic Confidence encourages further Economic Growth and so it goes on. It is a self fulfilling cycle. In a situation of limited Growth and Consumer Pessimism it is proving difficult to allay the fears of Business. The Government needs to be confident that it is going to deliver growth and demonstrate very clearly where this is going to come from. The existential external crisis makes this difficult to do so. It is the hidden elephant in the room of the Business Growth Coaching Session.

Economic Credibility & Testing Political Accountability

Economic decision-takers have not only to demonstrate that the economic climate is improving  but also when things do get worse their plan for improving economic performance has credibility. Credibility, unfortunately, is not simply a black letter exercise in demonstrating clearly that a range of indicators are heading in the right direction, it is also an exercise in political popularity. Popularity, however is time delimited. As a population we have been conditioned to believe that things are going to get better and that Governments will be able to deliver during the period of an electoral cycle. The current recession has elongated the political business cycle. Governments for the foreseeable future will be faced with managing expectations over a much longer economic horizon. For that to occur they have to be able to date precisely when the economy will enter a sustained phase of growth to deliver a political feel good factor and with it electoral success. The polls already suggest that debt fatigue has already set in. The problem is that the electorate is struggling to see the light at the end of the tunnel. After an artificially overextended credit fuelled period of growth the electorate are struggling to come to terms with the prospect of an equally long period of economic rebalancing. It is akin to some form of post-traumatic economic stress.

The consequence is that there is a danger for the foreseeable future of single parliament governments or a willingness to turn to political alternatives offering simple reflationary solutions or more extreme political solutions like withdrawal from the EU. Neither are they likely to deliver a permanent feel good factor or one sufficiently long lasting to sustain a government in office for the long-term. This is the enduring paradox that the current economic recession has bequeathed to Britain.

What may be required is a change in the political business cycle that prepares the electorate for economic therapy. Like invasive medical treatments it may be necessary to combine periods of extreme economic surgery and radical restructuring with periods of economic recovery and intensive economic care. Ten years is a long period for any radical treatment. It may that a New bargain is required, one in which the electoral cycle is foreshortened to perhaps 4 years rather than the current 5 in order to assess more precisely the impact of economic policy, economic competency and not least political accountability, especially if that accountability resides within the rapidly negotiated clauses of a post-election coalition agreement.

In the coming days I will be outlining a series of Economic Confidence-and Stability Building Measures to mitigate the worst effects of the Economic Insecurity Dilemma.

This is my Reply to Professor John Ashcroft’s latest;

The Saturday Economist : UK Economics News and Updates 28th July

http://www.johnashcroft.co.uk/2012/07/the-saturday-economist-uk-economics-news-and-updates-28th-july/#comment-18551

The problem with classically trained economists is that they have been trained to view the world to behave as they expect it to. When it doesn’t the first assumption is that their figures must be somehow wrong or inaccurate. That is the problem with relying on orthodox measures of economic performance. The problem that so called behaviourial economists have meanwhile their view of how the economy performs has yet to be accepted. Their frustration is that classically trained economists have yet to catch up – there is a methodological time-lag as they adjust their thinking of how the economy actually performs.

In his classic text on Finacial Crises, “Manias, Panics and Crashes: A History of Financial Crises” Charles Kindleberger makes the point that it takes time for economic thinking to develop the necessary sophistication to build a sufficiently detailed understanding of what happened. It is an idea he explores further in “Comparative Political Economy: A Retrospective” when he looks at the skills that analysts should be required to develop when it comes to writing Political Economy narratives.

It is perhaps why I like Paul Ormerod’s lastet work, “Positive Linking: How Networks Can Revolutionise the World” in which he explores the notion that conventional economics is drastically limited by its failure to comprehend the linkages between interactions and their impact in different or the same areas of the economy. Perhsps what we are witnessing therefore is not perhaps so much “The Death of Economics” but rather its rebirth on a more sophisticated basis as today’s poorly understood linkages become tomorrows more erudite wisdom.

So on what basis does the current data fall down and why? Firstly, it has become increasingly difficult to read and read the effects of unemployment data. All Governments adjust how they calculate unemployment data. It is a function of a modern post-industrial economy in which self-employment is an increasingly prominent feature that it is difficult, if not impossible, to accurately calculate who and who is not working – especially those highly skilled and highly remunerated consultants who only need work part of the year. Even during the depths of a recession they can still make the life style choice of when and when not to work. During deep and long-lasting financial crashes the trend of salaried employees, especially those in the Public Sector, to seek alternative self-employment as consultants increases exponentially. The trend has been recognised but its impact on the wider economy is poorly understood. An exodus has become a veritable stampede as the approximately 1/3rd of the reduction in unemployment is accounted for by the creation of new self-employed start-ups. The figure if anything is probably actually under rather than over stated.

Secondly, the relationship between observable trends in one data set and another: in this case between employment and GDP is even more poorly understood. The reality is that there are huge number of former Public Sector Employees who received very large redundancy settlements which they have used either as substitute wages or as capital to invest in a new start-up business. There is little or no understanding however of the time-lags between exiting Public Sector Employment, Starting a Business, Commencing Trading and Generating an Income Stream that is Reported in the GDP Figures. I found in a previous incarnation that it can take up to 3 years to generate and for significant levels of turnover to be recognised in a New Start-Up Business. In some caes this can take up to 5 years. http://slidesha.re/L1KWKi Rebalancing of the economy therefore will be no short-term phenomenon. In that sense GDP is probably under-reported but it will take more than the sound-bite of a Television Economics Editor or Hack Corresponent on a Weekly Economics Magazine to take the time to explain this in a way that the public will understand or belief.

Thirdly, there is an adverse side to this phenomenon and that is the impact of the loss of Middle Managers on the Performance of Businesses. I call this phenomenon the Death of the Intermediary Economy. It has two aspects. The first is the loss of collective memory and tactical decision making input from Middle & Senior Managers who would have been responsible for the Management of Purchasing and the Direction of Projects in Large and Medium Sized Enterprises. A lot of this is based on personal business relationships and know-how which has evaporated as jobs have been shed and cost control and tighter de-stocking regimes deployed. The second is the disappearance of a layer of Intermediary Businesses which sit between Suppliers and Purchasers of Services. The Direct Line Model holds sway not just in the Consumer Insurance Market. During an Economic Recession Businesses have moved away from working with Agents, Brokers and Consultants and going to direct to supplier who themselves have become much more e-commerce platform savvy. Businesses have also become less prepared to invest in speculative long-term projects with an expensive consultancy price tag attached to it. Even established City Centre Business & Professional & Service Community Businesses have recently seen a slowing in revenue growth and/or a contraction in staffing requirements. The impact of the shrinkage in the intermediary economy is a key trend which is also insufficiently understood. The shrinkage in the intermediary economy however maybe to the ultimate benefit of large outsourcing businesses which are beginning to absorb and sub-contract work to an army of consultants whilst squeezing their revenue base.

The fourth is cash hoarding in the economy as Funds held in Banks has noticeably increased. Larger Businesses in particular have more Funds on their Balance Sheets but are hanging on to it What I call the Economic Insecurity Dilemma whereby Businesses react to the tightening in Credit Conditions in the wider economy and insecurity in the Eurozone by more jealously not only guarding their own cash but also lengthening their own credit and payment terms. The dilemma is made more existential because reported falls in GDP will make the situation even worse. The danger is that this will become a self-perpetuating phenomenon. It is a phenomenon underpinned by pyschological dynamics. Downturns in Trade will appear much worse because Business Executives take a more negative view of Trading Performance than is actually the reality. It is a cycle which is difficult to break. It will utimately be broken through improved intelligence (which business are sometimes reluctant to invest in) clarly demonstrating that economic performance is improving. And therein lies the rub. How will we know if we don’t know whether the figures are accurate or not.

The fifth trend or disjuncture was starkly revealed in the press last week. The size of the unreported or black economy. A highly respected figure in the Manchester Political Hierarchy told me a couple of weeks ago that for every 0.5% fall in GDP the black ot grey economy grew by twice the amount. Of more concern was the estimate that in certain inner city areas the black economy could now reprsent anywhere between 20 and 25% of GDP! It is probably no less true in non inner city areas.

My thoughts are designed to provoke debate as they are to encourage discussion but the difference between the felt pulse of the economy and the reported figures lies the true economic performance.

We just need to get more sophisticated in explaining it. The black numerals of the figures themselves do not necessarily tell the full story and are as indicated in John’s piece nowhere near it.