Posts Tagged ‘National Institute of Economic and Social Research’


We have all heard the gripe; most of us have uttered it too. The author of this article certainly has. Why this obsession today with kids having to go to university. It seems you need a degree for anything. Some graduates are leaving university and taking on apprenticeships. It is absurd, of course it is. Yet, maybe it is not as absurd as we have been led to believe. New research suggests that graduates are good for us.

There has been a change in common sense. There was a time when having a good education was prima facia a good idea. But now, the queues outside the Job Centre made up of graduates, or the number of graduates working for minimum wage suggests that degrees are not what they used to be. We tell our kids to go to university. They run up massive debts. And they enter the job market with skills that are no more relevant than a handful of CSEs (That’s assuming you are old enough to remember what a CSE is). Is it an example of madness Britain, a country that has fallen in love with debt, or alternatively is it that the government (and to be fair, the last government was just as guilty – maybe even more so) has found a new wheeze to keep the unemployment data down; to keep young people off the jobs market for as long as possible by getting them to go to university?

It is just that the second of those arguments does rather fly in the face of economic theory. If it really is the case that degrees are meaningless these days, then UK plc, and indeed its government courting popularity, would encourage more potential graduates to get jobs instead because this would stimulate demand, which in turn would create more demand and the need for more jobs.

Now the National Institute of Economic and Social Research has produced a report on behalf of the Department for Business Innovation and Skills which suggests graduates are good for UK plc.

Looking across much of the developed world, the report found a strong correlation between rising productivity and the increase in number of graduates.

Between 1994 and 2005 UK labour productivity per hour rose by 34 per cent. Over the same period the share of the work force with a university degree rose from 12 to 18.9 per cent. The report suggests that at least one third of this growth can be attributed to the growing number of workers with degrees. However, even in 2005 the share of the workforce holding a university degree in the UK was below that of Finland, the US, Japan and Canada. The report said: “If the Higher Education sector in the UK were to expand towards the size of the US, this could be expected to raise the level of productivity in the UK by 15-30 per cent in the long-run.”

The report also found that graduates, on average, are paid 70-180 per cent more than workers without formal educational qualifications. It said: “Within the UK, the wage premium for graduates is higher than average, at about 160 per cent relative to workers without formal educational qualifications. Wage differentials should be closely correlated with productivity differentials, since firms face a hard budget constraint and relative wages are determined to a large extent by employer demand.”

If you want to read the report in full, see: Graduates and economic growth across countries

Here are three observations.

Some university degrees are better than others.  It may be true to say that some graduates benefit enormously from their qualification. But that does not mean all do.

The report referred to here was looking at data up to 2005. A lot has happened since then. But it is important that we take a long-term view. Right now, graduate unemployment is too high. But that does not mean it will always be that way. Let’s not make a judgement about the worth of education from the very narrow perspective of a country recovering from its longest ever economic downturn.

Technology is making the future even harder to predict than normal. Who knows what skills will be in demand in a decade’s time? Maybe in an environment of such rapid change, a good education is a good basis upon which individuals can build.

© Investment & Business News 2013


In the UK there is something confusing going on. They call it the productivity puzzle. Why is it that during the worst downturn ever suffered by the UK – at least it’s the worst since the beginning of the last century which is how far back the data goes – employment has kept growing to the extent that this year it passed an all-time high? Data provides a hard answer: productivity has been falling. But what the data does not do is provide the reason why.

Maybe the reason can be provided by the existence of Zombie companies. Once again, hard data comes to our aid – they really do appear to exist.

So interest rates were slashed to record lows, and then just to be sure they were slashed some more. That was the story of the great downturn: record low rates. If things had been different, if central banks have been more circumspect, had fretted about inflation, and moral hazard, then the great recession of 2008/09, and the downturn that began in 2008 would have been far far worse.

Company liquidations and indeed individual insolvency levels would have soared. House prices might have crashed. Unemployment would have risen to horrendous levels, and youth unemployment would have topped 50 per cent in some regions. In fact if the Bank of England and the Fed had adopted that policy, the UK and the US would have ended up looking a lot like the Eurozone.

Fortunately, in the democratic countries of the UK and the US the electorate would have never have tolerated such a state of affairs. It appears that the electorate in certain Eurozone countries was powerless to act; their cross on the electoral ballot had as much meaning as an Egyptian voting for the Muslim Brotherhood.

But just because record low rates stopped the UK from suffering an even worse downturn, it does not mean that the policy hasn’t come with disadvantages.

A year or so ago, the then FSA issued data showing that between 5 and 8 per cent of mortgages could be subject to forbearance. At that time, Dr Angus Armstrong at the National Institute of Economic and Social Research said: “This has a familiar ring of the zombie firms in Japan which were insolvent but the banks would not close to avoid crystallising a loss.”

But what about the corporate world? We keep hearing about zombie companies, but are they for real?

So here is the data:

First off here is the chart that shows something is wrong:

And now here is the chart that shows why zombie companies may provide a partial explanation.

The Bank of England put it this way: “Liquidations have risen only modestly since the financial crisis, even though data from companies’ accounts suggest that the proportion of companies making a loss is higher than in the early 1990s. Insolvency professionals suggest that more businesses have been able to survive the 2008/09 recession because of the low level of Bank Rate, coupled with increased forbearance. That includes forbearance by banks on existing loans, by HMRC on outstanding tax payments, and by other companies on late payments.

Forbearance and low interest rates will allow some viable businesses to remain in operation through a temporary period of weak demand. But in other cases, where businesses will find it hard to compete in their markets when demand recovers, forbearance acts as an impediment to the efficient reallocation of capital and labour, reducing underlying productivity growth. Similarly, it may have dampened the incentives to carry out the restructuring needed by some companies in order to grow strongly.”

But in the US, where the central bank has been just as proactive as the Bank of England in promoting low interest rates, things have been different.

As far as households are concerned, there is a key difference in the way in which the mortgage market operates. In the UK if you find yourself with negative equity, having your home repossessed does not help because it is still your responsibility to pay the shortfall. In the US, it is the bank’s responsibility. This has led to a more ruthless approach to mortgage repossessions in the US, but at least this is kinder on those with negative equity and who cannot meet commitments, and it is has led to fewer so-called zombie households.

As for companies and entrepreneurs, in the US the same stigma does not apply to bankruptcy as there is in the UK. Indeed for US entrepreneurs, it sometimes feels as if facing bankruptcy is a sort of rite of passage. Chapter 11 is often applied very effectively in the US – consider GM for example.

In the US, we have seen record low interest rates, but creative destruction too.

In the UK where –to a large extent – we have only had record low rates, it may become a problem as the economy recovers, and rates finally rise.

© Investment & Business News 2013

Every quarter, we hear the excuses. Inflation was higher than predicted in than previous inflation report because… Growth in GDP was less than expected because…

If there is one thing we have come to expect from inflation reports, it is that the forecasts will be changed – and for the worse.

But, and lean in close – this will be whispered so as not to jinx it – the next inflation report is due out this week, and talk is that the Bank of England may revise its estimates of growth – upwards. It may revise its estimates of inflation – downwards.

On the growth front, the last week or so has seen a fair dollop of good news. The latest Purchasing Managers’ Indices were up, with the sub index tracking new export orders in the manufacturing sector up to its highest level for a couple of years.

The latest news on industrial production, especially manufacturing, was encouraging, and now the National Institute of Economic and Social Research (NIESR) has estimated that in the three months to April the UK economy expanded by 0.8 per cent.

Okay, 0.8 per cent expansion is not exactly a scintillating pace, but compared to what we have become used to, it really is rather good.

As for inflation, according to the British Retail Consortium, shop price inflation was just 0.4 per cent in April, the lowest level since 2009.

It is just that NIESR said underlying growth was not so good, and don’t forget that UK households will only feel better off once wages rise faster than inflation. In the three months to the end of February, wages rose by just 0.8 per cent compared to a year ago. Inflation must fall much, much further, or wages rise much faster before households feel better off.

Incidentally, the latest Bank of England inflation report will have an interim feel about it. The new governor, Mark Carney, will have taken over by the time of the next one. And the August report will look at ideas for loosening the bank’s targets for inflation too.

© Investment & Business News 2013


Ken Rogoff and Carman Reinhart – the two academics who wrote that rather controversial paper suggesting that when public debt to GDP rises over 90 per cent, growth falls sharply – have come out fighting. And you know what, their observations not only make a lot of sense, they are pretty much smack on in agreement with what has long been argued here.

Let’s be fair to Rogoff and Reinhart, they are not arch Austerians. It is just that their work is often quoted by arch Austerians. And when serious loopholes were found in it, the likes of Krugman practically danced on what some say was Rogoff and Reinhart’s grave. The Austerians responded by saying that the errors found in the Rogoff Reinhart model were trivial, and did not unduly affect the conclusion.

Sometimes, however, you need to stop listening to the interpreters and listen to the original instead.

Take as an example this extract from the Rogoff and Reinhart paper: The Aftermath of Financial Crises published in 2009.    “The main cause of debt explosions,” states the paper, “is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis.” In short, the paper states the case of the anti-Austerians; government debt does not cause GDP to slow, rather slowing GDP causes government debt to rise.

Rogoff himself has gone on record as saying that the conclusions of the paper he co-wrote are often exaggerated.

In today’s FT, Rogoff and Reinhart produced an article that says it, clearly in black and white.

“To be clear,” they said, “no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched.”

“Nevertheless,” they continue, “given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.” See: Austerity is not the only answer to a debt problem 

Hear, hear to that. We need both. We need austerity and stimulus. This is no contradiction.

We need investment into infrastructure, energy, education, and (this is the one that ‘Investment and Business News’ has spoken up for more than anything else) into entrepreneurs.

But actually, move away from Rogoff and Reinhart and look instead at the National Institute of Economic and Social Research (NIESR), which under its director Jonathan Portes has looked very Keynesian in its attitude towards government debt and stimulus.

In NIESR’s latest paper on the growth prospects of the UK economy it recommended: “Investment in education, innovation and infrastructure is essential for future economic growth.” The paper stated: “With 10-year government bonds attracting yields of less than 2 per cent, the government can finance additional investment in much needed infrastructure at little cost. With an economy in such a depressed state the fiscal multipliers are likely to be far higher than in normal times.”

In short, the darling boy and girl of the Austerians, and NIESR, headed by one of the UK’s most articulate and apparently switched on Keynesians, are saying much the same thing.

Of course we need to see austerity, not just in Britain, but across much of Europe. In Greece, the public sector has been a drain on the economy for decades.

Of course we need stimulus, no stimulus at a time when households and companies are saving more will automatically mean less GDP.

So we need austerity in areas of the public sector that are bloated. We need stimulus in areas that will create not only more jobs in the short term, but also improved productivity in the long term.

What we don’t need are stimuli that just hand money to households and companies via tax cuts. Much of this money will be saved. There is no point in the government borrowing money to fund tax cuts that help the private sector to save more.

© Investment & Business News 2013


Actually, it doesn’t matter. It really doesn’t, not in the scheme of things. Did the UK have a double dip recession or not, who cares? What we know is that the UK economy has performed poorly. To focus on whether we had a double dip is to focus on sound bites over reason.

But…just to set the record straight, here is the story so far, told briefly – because it is not that important – but hopefully accurately, because it is perceived as important and myths are circulating about this issue.

In January 2012, the ONS released its first estimate of GDP for Q1 2011. It estimated a contraction of 0.2 per cent. Its first estimate of GDP for Q1 2012 was for the economy to have also contracted by 0.2 per cent. As for Q2, it first estimated a contraction of 0.5 per cent.

So remember that, based on first estimates, the UK saw growth of minus 0.2, minus 0.2 and minus 0.5 per cent in Q4 2011, Q1 2012 and Q2 2012.

There then followed a period of revisions. By August of last year, ONS data was telling an even more alarming story with minus 0.4, minus 0.3 and minus 0.5 per cent growth.

Now look at the latest data, out a few days ago, and the story is as follows: minus 0.1 per cent, minus 0.1 per cent and minus 0.4 per cent.

In short, things don’t look anywhere near as bad.

The ONS itself tried to put the record straight: “The falls in output from 2011 Q4 to 2012 Q2 are all modest, “ it stated, adding: “In total the economy contracted by 0.5 per cent. The decline in output in the first two of these quarters is particularly small. When growth is very weak, the difference between, say, estimated growth of 0.1 per cent and -0.1 per cent in a quarter is actually within the statistical margin of error.

The contraction in the economy in the following quarter, the April-June period of 2012, is explained by the additional bank holiday which was called in June as part of the Queen’s diamond jubilee celebrations. The impact of such special factors should not perhaps contribute towards a recession.”

The National Institute of Economic and Social Research (NIESR) looked at much the same issue. Simon Kirby from NIESR in a report published today said: “Much of the attention focused on the avoidance of a ‘triple-dip’, rather than another quarter of relatively weak economic growth. Revisions to data mean that it is increasingly unclear whether there was even a ‘double-dip’.

As we have noted many times before, obsessing about a couple of quarters of minute falls in output distracts us from the clear trend: that of a stagnating economy.”

To ask whether the UK had a double or treble dip is, in fact, to ask the wrong thing. What we can say is that the UK’s output is some 2.5 per cent below the peak recorded in early 2008. It is the longest downturn ever recorded, and that is surely what matters.

© Investment & Business News 2013