The UK credit rating was reduced by Moody’s amongst great media interest. But just how significant is it?
It should come as a surprise to few that the opinion of the Credit Rating Agencies is not beginning and end of economic analysis. The failures of risk calculation in the run-up to the 2007/8 crash are well documented. The Financial Crisis Inquiry Commission, a US government investigation into the recession, found them to be “essential cogs in the wheel of financial destruction.” Moody’s are amongst those singled out in the report for having made a particularly large contribution to the crisis.
The ultimate flaw in calculating the riskiness of securitized sub-prime debt was that nobody understood the risk. In the absence of certainty in risk calculation the industry relied upon assumptions about the profitability of the housing market and the likely rates of default. As has happened repeatedly, the market over-estimated the strength of a financial innovation. The history of risk miscalculation is long, and well documented in a book by Reinhart and Rogoff called This Time is Different. The pattern is common- the “conventional wisdom” of the time was that something is a good idea- whether its a particular economic policy, a financial innovation or a school of thought. The assumptions of that conventional wisdom cease to be seen as assumptions and become economic truths, which are often disproved painfully and spectacularly. Galbraith wrote convincingly on the conventional wisdom in The Affluent Society.
The conventional wisdom of 2010 was that austerity was an unfortunate necessity. The IMF supported it, the OECD favoured it, and various governments and prospective governments were hedging their bets and speaking solemnly about the necessary sacrifice. Even the private sector overwhelmingly supported it, despite their known inability to step into the gap left by government investment and expenditure.
The entrenchment of the necessity of austerity as the conventional wisdom was the justification for implementation in the eyes of the Coalition government. Without austerity there would be a collapse of confidence in the private sector, a rise in the cost of borrowing for the UK and disaster would shortly follow. Although many speculate about the small-state philosophy that may be behind the enthusiasm for budget cutting in the Conservative Party the official justification has always rested heavily on necessity driven by expectations of those subscribing to the conventional wisdom- everybody “knew” that without deficit reduction the UK would suffer the consequences of a displeased private sector.
Perhaps the most significant aspect of the credit rating downgrade isn’t in its consequences for the future, but in what it indicates about the present. If a credit rating agency is in some ways an aggregator of the conventional wisdom, downgrading the UK whilst it continues to implement austerity and shows no sign of abating might be evidence of a shift in the conventional wisdom. The IMF has become more hesitant in supporting the severity of the UK Government’s fiscal consolidation, elements of the private sector have begun to call for greater state investment and high profile failures continue to give food for thought.
Crucially, the conventional pro-austerity wisdom has been undermined by its lack of success in the UK. Growth is non-existent, interest rates remain as low as possible with little impact, the deficit remains stubborn and banks still refuse to lend. As Galbraith said,
“The enemy of conventional wisdom is not ideas but the march of events.”
Despite the fanfare, the downgrading of the UK credit rating is likely to have little impact, precisely because it tells us what we already know- the UK economy is very weak and current economic policy is not working. It does, however, give the impression that a change of “conventional wisdom” may be coming.
Getting on the Tube today I saw an advert for a film due to be released in the cinema soon. I’ve reposted the image beneath, see if you can spot the well-placed and subtle advertising.
I’m not claiming this is the worst example of product placement I’ve ever seen, and I’m not suggesting that this is likely to make us Apple Zombies. Two points to this. The first is that this isn’t very subtle. The product may be in the background, and slightly out of focus, but the entire picture is setup to draw your eye to it.
Secondly, this is only the tip of the iceberg. Once you notice product placement in films its difficult not to see it. Skyfall was the beneficiary of bad press for it (no publicity is bad publicity) but few people seem to realise how widespread it is. Sometimes its reasonably subtle, as in Five Year Engagement, and sometimes it makes the film unwatchable, as in Talladega Nights. I haven’t seen This is 40, but I really hope its better than the poster suggests…
Recently I watched Total Recall. I didn’t enjoy it, for reasons I will briefly elaborate in a minute, and it got me thinking about the large budget action/sci-fi/thriller films that are made and quickly fade into the mists of mediocrity.
There is a concept in an advanced stats approach to sports called replacement level. Its the standard of performance at which freely obtainable talent will perform- the average ability of somebody a team can sign without much difficulty. Its quite a useful tool in sports- it evades the hype, narrative and preconceptions about players and gives a better indication of whether somebody is actually any good, or whether they are just average with a positive/negative narrative distorting their performance. Football hasn’t enthusiastically embraced the statistical element of athletic performance, but its in full swing in North America.
What does this have to do with Total Recall? As a film, its replacement level cinema.
Reading the papers, magazines and blogs that cover events in New York, a recent arrival like myself could be forgiven for thinking that your average guy on the street would regard the NYPD as little more than thugs who have the decency to occasionally torment criminals, in addition to arresting people for 36 hours for lacking ID. I was somewhat surprised then to see the superb approval ratings for the NYPD and its Commissioner, Ray Kelly, the man with a mandatory sentence of being described as ‘pugnacious’. A poll by Quinnipiac University shows that residents of New York City give the NYPD a 70% favourable rating, with 23% unfavourable.
Predictably enough there is a significant difference when the figures are broken down by race. What caught my attention was not so much the massive approval rating among whites, but the fact that 56% of blacks approved of the NYPD while only 37% disapprove. Minorities, above all young black men, are incontrovertibly subject to disproportionate attention from and harassment by the NYPD. The stop and frisk tactics, which a small majority of New Yorkers disapprove of, humiliate thousands upon thousands of largely non-white citizens every year. Add to this profiling, the burden of harsh and unjust drug laws, and simple discrimination at the hands of police officers and it would not be surprising to see non-white citizens turn their backs on the NYPD. Instead, they offer their half-hearted backing to the NYPD.
The dramatic and continuous drop in crime rates must (surely?) lie at the heart of this. In the past twenty years New York has gone from being a, perhaps undeserved, by-word for urban decay and crime to one of the safest cities in the world:
|Crime – incidents per 100,000|
The bulk of these crimes, particularly murder, occurred in the poorest and most dangerous parts of the city. In all likelihood the greatest improvement in the quality of life as a result of falling crime has been felt in the areas where crime and the fear of being a victim of crime has become increasingly rare. As more and more areas of the city enjoy a crime rate which is not particularly threatening, more and more people – particularly black and hispanic citizens – benefit from the drop. This plummeting crime rate and the nightmare-ish memories of what demons used to stalk the streets and avenues has become part of the popular folklore of the city. Even if the real New York of 1990 wasn’t quite the hellhole it is remembered to have been (for example, 2011 London’s crime rate is notably worse than 1990 New York’s) the idea of the bad old days has become one of the touchstone facts of public life in the city.
Quite clearly the NYPD do not deserve the credit for this transformation, as anyone reading one of the multitude of revisionist articles to appear in recent years knows well. To list a few of the points that have been flogged to death, crime began it’s rapid descent before Giuliani was Mayor and zero-tolerance was always more slogan than strategy. The wave of crime which accompanied the crack epidemic began to recede as the number of new addicts dried up and existing addicts were imprisoned, burned out or recovered. Economic recovery saw marginally better prospects for young urban men. Gentrification expelled poor, minority families and replaced them with upper-middle class urbanites. Dozens of other factors have played their role, from mandatory minimums to lead pollution. The uncomfortable truth for cheerleaders of the NYPD, though, is that crime has dropped dramatically all across the United States, even in cities such as Washington D.C. where policing has remained largely unreformed.
The NYPD has worked no miracles and has, in the largest part, had the good fortune to get the credit for a turnaround which they have helped along but not driven. The old New York, which was decayed and dying, has been turned around and the clearest indication of that is the incredibly low crime rate. The NYPD undoubtedly act in discriminatory and frankly thuggish ways but they also represent a social stability that now seems firmly within our grasp. Fifteen years ago the drop in crime could have appeared to been merely a pause before trends continued. Even eight years ago that may have lurked at the back of people’s minds, but today, on the back end of an economic crisis which has wreaked economic havoc the crime levels have stayed low or even continued to drop.
So I find it easy, for once, to suppress my patronising inner-leftie and resist the urge to let loose an accusation of false consciousness. I don’t seriously doubt for a minute that many among these approving respondents could reel off a list of transgressions by the NYPD, but I also don’t doubt that the NYPD represents the values of order which mean so much in a city casting an eye back on its criminal past. A hard-won order which has done so much to change the lives of poorer, often non-white citizens of the city for the better.
The long-discussed, oft-delayed Second Avenue Line is currently being constructed in Manhattan. The new ‘T’ line will be partially opened in 2016, after the MTA has blown through much of its expected $22 billion price tag. It will come as a surprise to no-one that building a new subway line in Manhattan is an expensive and complicated proposition, but exactly how expensive it is boggles the mind. Part of the line already exists while a larger proportion of the line is being built using the relatively cheap cut and cover method, meaning that Second Avenue will be dug up, the track laid and then the hole filled in. All this means that just under 70% of the line is being constructed using tunnel boring machines. With a total length of 8.5 miles, the subway line is by far the most expensive public infrastructure project on earth, mile for mile, costing $2.59 billion per mile – or $40,877 per inch.
In a world where budget crises see figures running into the hundreds of billions bandied around with little sense of awe, these rather more modest amounts can seem, if not reasonable, then at the very least plausible. Exactly how ridiculous it is for a subway to cost $2 billion per mile becomes obvious, though, once international comparisons are made. Crossrail, the British government’s plan to build a 73 mile long high-speed railway underneath London is set to cost just under $23.4 billion – or $320 million per mile. These exorbitant costs are not just the preserve of the MTA, however. Amtrak’s plan to build a 438-mile long high-speed line linking Boston, New York, Philadelphia and Washington D.C is expected to cost $151 billion, or $344.7 million per mile. A similar effort in Spain to link Madrid and Levante with a 580 mile high-speed line is set to cost $16.8 billion. That is, a mere $28.9 million per mile.
In a country whose infrastructure is increasingly neglected to an extent obvious to travellers, the question of reining in costs should be a major concern of policymakers. Yet, as with many issues of public spending in American political discourse, the costs of a project are treated as something invariable. That a subway line should cost $22 billion is accepted with all the fatalism of a Scottish trawlerman watching his ship toss about in the harbour during a storm. It would be too easy, though perhaps not totally unfair, to blame this all on cosy relations between politicians, bureaucrats and profiteering contractors. Awarding contracts to the lowest bidder as the MTA almost always does has obviously failed to deliver value for money and has not stopped the main construction manager Parsons Brinckerhoff (or at least some of their very recently employed executives) having fingers in many of the other contractor’s pies. This explanation only plausibly explains fractional differences, not the exponential cost differences. After all, the British government has to deal with a construction industry which itself is hardly above the temptation of colluding to rig bids for public sector construction contracts. The same goes for almost every country on earth. So what, exactly, is wrong with cost control for public infrastructure in the United States?
First of all, and perhaps most egregiously, is the habit of bodies such as Amtrak and the MTA to spend significant sums of money on utterly frivolous aspects of the project. Earlier this year Matt Yglesias rightly mocked Amtrak’s “insane” plan to spend $7 billion renovating Union Station in DC. That, alone, makes up 4.6% of the total cost of the Northeast Corridor’s planned cost. The changes at Paddington Station, to accommodate Crossrail, will be minimal and proportionately cheap. For the MTA’s sins, a blogger who tracks the ins and out of the projects has gone through procurement announcements and identified consulting and design costs as needlessly high. Separate from the Second Avenue Line, the MTA is spending $3.8 billion on a single subway station at the World Trade Center site. If the Second Avenue line could be built with the same per-mile costs of Crossrail, then the budget for that single station could pay for the entire line.
Secondly, the nature of the procurement process and the inevitable legal wrangling drives costs up significantly. This is one area where the good intentions of decades past have returned to haunt today’s bureaucrats. Many of the procurement rules, such as those requiring detailed costing, tight monitoring and the award of contracts to the lowest bidder have effectively denied government agencies leverage over contractors. These rules made sense in an era where predecessors to the MTA dealt with significant corruption, but today they are a recipe for wasteful spending and poor decision-making. Once the MTA, or any other agency, are locked into these contracts it becomes very difficult to cancel them or otherwise penalise poor performance. Any attempt to do so, or even to force contractors to shoulder the burden for problems, is faced with legal challenges and judicial review, further driving up costs. The idea that the MTA could unilaterally alter plans – and contracts – as drastically as Transport for London (TfL) did when it delayed Crossrail’s completion for a year to save £1 billion is fantasy.
Above all, however, the problem is that there is no single actor at either the federal, state or local level whose job is to write the cheques and count the pennies. What immediately becomes obvious when discussing infrastructure projects in the US compared to elsewhere is that the men in grey suits from the Treasury or the Finance Ministry are nowhere to be seen. At each step of the way in the Crossrail project the Treasury has been looking over the shoulders of the Department of Transport and TfL, with the Treasury’s approval being mandatory for the project to proceed. In the US there is no equivalent to these professional exponents of cost-effectiveness, with their probing questions and control over expenditure. Those who monitor costs in the US invariably have little power to alter spending whilst those who do have the power are, rightly, concerned with a broader range of issues. What exists is a situation where everyone is trying to deliver the project but where the decision to undertake the project is essentially done in the tacit knowledge that approval for the project, almost always, involves writing a blank cheque.
This is a problem which plagues much of American public life. The refusal to give adequate weight to how money is spent and not just what it is spent on sees the United States wrestling with imagined dilemmas. Mere mortals can control costs and a sensible government can save money and do more without raising taxes. Even if we take for granted the fact that costs in the US will always be ludicrous, there is little reason why the Second Avenue Line cannot be shockingly expensive instead of eye-wateringly so. If the per-mile cost were halved to $1 billion, it would still manage to be the most expensive on earth, but over $11 billion could be saved. $11 billion which, even with current costs, could be used to rapidly upgrade signalling systems across the entire subway system and increase capacity and service for every New Yorker. $11 billion in investment which would not require new taxes, new borrowing or spending cuts elsewhere.
In case you missed it, the autumn statement confirmed something that many have noticed already- the UK economy is in serious trouble, and there isn’t a plan to do anything about it.
The sliding GDP growth forecasts are cause for concern. The 0.1% contraction expected for 2012 is almost 1% below what was forecast back in March. Back in November 2010 the OBR expected 2012 growth to be 2.6%. Every time the outlook is refreshed it is revised downwards, and the unbounded joys of 2%+ growth stay just out of reach- not next year but certainly the year after that… Its now possible that five years after the beginning of the first recession we could be about to enter a triple-dip recession.
This week the Government announced a fall in net immigration to the UK, from 242,000 to 183,000. The Conservatives pledged in their manifesto to reduce net migration to tens of thousands by 2015, an ambitious target that on the face of it seems attainable given the 24% fall. However, recent trends in EU migration demonstrate that the target was never viable.
The EU has an entrenched policy of free movement of workers, the level of which is out of the hands of government. In 2004 the EU expanded to include Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania Malta, Poland, Slovakia and Slovenia. Since then, net annual migration into the UK from Europe has never fallen beneath 58,000. That may make 100,000 sound reasonable, but the number has tended to be much higher. The graph below is a history of post-2004 expansion net EU migration into the UK.