Economics – We Know Zero

We may be missing where the action is likely to be in the so-called Fourth Industrial Revolution

08. September 2025 · 4 comments · Categories: Actuarial, Demographics, Economics, Media & Politics, Professions

*Title page vignette of Hard Times by Charles Dickens. Thomas Gradgrind Apprehends His Children Louisa and Tom at the Circus, 1870*

It was Fredric Jameson (according to Owen Hatherley in the New Statesman) who first said:

“It seems to be easier for us today to imagine the thoroughgoing deterioration of the earth and of nature than the breakdown of late capitalism”. I was reminded of this by my reading this week.

It all started when I began watching Shifty, Adam Curtis’ latest set of films on iPlayer aiming to convey a sense of shifting power structures and where they might lead. Alongside the startling revelation that The Land of Make Believe by Bucks Fizz was written as an anti-Thatcher protest song, there was a short clip of Eric Hobsbawm talking about all of the words which needed to be invented in the late 18th century and early 19th to allow people to discuss the rise of capitalism and its implications. So I picked up a copy of his The Age of Revolution 1789-1848 to look into this a little further.

The first chapter of Hobsbawm’s introduction from 1962, the year of my birth, expanded on the list:

Words are witnesses which often speak louder than documents. Let us consider a few English words which were invented, or gained their modern meanings, substantially in the period of sixty years with
which this volume deals. They are such words as ‘industry’, ‘industrialist’, ‘factory’, ‘middle class’, ‘working class’, ‘capitalism’ and ‘socialism’. They include ‘aristocracy’ as well as ‘railway’, ‘liberal’ and
‘conservative’ as political terms, ‘nationality’, ‘scientist’ and ‘engineer’, ‘proletariat’ and (economic) ‘crisis’. ‘Utilitarian’ and ‘statistics’, ‘sociology’ and several other names of modern sciences, ‘journalism’ and ‘ideology’, are all coinages or adaptations of this period. So is ‘strike’ and ‘pauperism’.

What is striking about these words is how they frame most of our economic and political discussions still. The term “middle class” originated in 1812. Noone referred to an “industrial revolution” until English and French socialists did in the 1820s, despite what it described having been in progress since at least the 1780s.

Today the founder of the World Economic Forum has coined the phrase “Fourth Industrial Revolution” or 4IR or Industry 4.0 for those who prefer something snappier. Its blurb is positively messianic:

The Fourth Industrial Revolution represents a fundamental change in the way we live, work and relate to one another. It is a new chapter in human development, enabled by extraordinary technology advances commensurate with those of the first, second and third industrial revolutions. These advances are merging the physical, digital and biological worlds in ways that create both huge promise and potential peril. The speed, breadth and depth of this revolution is forcing us to rethink how countries develop, how organisations create value and even what it means to be human. The Fourth Industrial Revolution is about more than just technology-driven change; it is an opportunity to help everyone, including leaders, policy-makers and people from all income groups and nations, to harness converging technologies in order to create an inclusive, human-centred future. The real opportunity is to look beyond technology, and find ways to give the greatest number of people the ability to positively impact their families, organisations and communities.

Note that, despite the slight concession in the last couple of sentences that an industrial revolution is about more then technology-driven change, they are clear that the technology is the main thing. It is also confused: is the future they see one in which “technology advances merge the physical, digital and biological worlds” to such an extent that we have “to rethink” what it “means to be human”? Or are we creating an “inclusive, human-centred future”?

Hobsbawm describes why utilitarianism (” the greatest happiness of the greatest number”) never really took off amongst the newly created middle class, who rejected Hobbes in favour of Locke because “he at least put private property beyond the range of interference and attack as the most basic of ‘natural rights'”, whereas Hobbes would have seen it as just another form of utility. This then led to this natural order of property ownership being woven into the reassuring (for property owners) political economy of Adam Smith and the natural social order arising from “sovereign individuals of a certain psychological constitution pursuing their self-interest in competition with one another”. This was of course the underpinning theory of capitalism.

Hobsbawm then describes the society of Britain in the 1840s in the following terms:

A pietistic protestantism, rigid, self-righteous, unintellectual, obsessed with puritan morality to the point where hypocrisy was its automatic companion, dominated this desolate epoch.

In 1851 access to the professions in Britain was extremely limited, requiring long years of education to support oneself through and opportunities to do so which were rare. There were 16,000 lawyers (not counting judges) but only 1,700 law students. There were 17,000 physicians and surgeons and 3,500 medical students and assistants. The UK population in 1851 was around 27 million. Compare these numbers to the relatively tiny actuarial profession in the UK today, with around 19,000 members overall in the UK.

The only real opening to the professions for many was therefore teaching. In Britain “76,000 men and women in 1851 described themselves as schoolmasters/mistresses or general teachers, not to mention the 20,000 or so governesses, the well-known last resource of penniless educated girls unable or unwilling to earn their living in less respectable ways”.

Admittedly most professions were only just establishing themselves in the 1840s. My own, despite actuarial activity getting off the ground in earnest with Edmund Halley’s demonstration of how the terms of the English Government’s life annuities issue of 1692 were more generous than it realised, did not form the Institute of Actuaries (now part of the Institute and Faculty of Actuaries) until 1848. The Pharmaceutical Society of Great Britain (now the Royal Pharmaceutical Society) was formed in 1841. The Royal College of Veterinary Surgeons was established by royal charter in 1844. The Royal Institute of British Architects (RIBA) was founded in 1834. The Society of Telegraph Engineers, later the Institute of Electrical Engineers (now part of the Institute of Engineering and Technology), was formed in 1871. The Edinburgh Society of Accountants and the Glasgow Institute of Accountants and Actuaries were granted royal charters in the mid 1850s, before England’s various accounting institutes merged into the Institute of Chartered Accountants in England and Wales in 1880.

However “for every man who moved up into the business classes, a greater number necessarily moved down. In the second place economic independence required technical qualifications, attitudes of mind, or financial resources (however modest) which were simply not in the possession of most men and women.” As Hobsbawm goes on to say, it was a system which:

…trod the unvirtuous, the weak, the sinful (i.e. those who neither made money nor controlled their emotional or financial expenditures) into the mud where they so plainly belonged, deserving at best only of their betters’ charity. There was some capitalist economic sense in this. Small entrepreneurs had to plough back much of their profits into the business if they were to become big entrepreneurs. The masses of new proletarians had to be broken into the industrial rhythm of labour by the most draconic labour discipline, or left to rot if they would not accept it. And yet even today the heart contracts at the sight of the landscape constructed by that generation.

This was the landscape upon which the professions alongside much else of our modern world were constructed. The industrial revolution is often presented in a way that suggests that technical innovations were its main driver, but Hobsbawm shows us that this was not so. As he says:

Fortunately few intellectual refinements were necessary to make the Industrial Revolution. Its technical inventions were exceedingly modest, and in no way beyond the scope of intelligent artisans experimenting in their workshops, or of the constructive capacities of carpenters, millwrights and locksmiths: the flying shuttle, the spinning jenny, the mule. Even its scientifically most sophisticated machine, James Watt’s rotary steam-engine (1784), required no more physics than had been available for the best part of a century—the proper theory of steam engines was only developed ex post facto by the Frenchman Carnot in the 1820s—and could build on several generations of practical employment for steam engines, mostly in mines.

What it did require though was the obliteration of alternatives for the vast majority of people to “the industrial rhythm of labour” and a radical reinvention of the language.

These are not easy things to accomplish which is why we cannot easily imagine the breakdown of late capitalism. However if we focus on AI etc as the drivers of the next industrial revolution, we will probably be missing where the action really is.

If we don’t have a goal, the means take over

03. September 2025 · Write a comment · Categories: Economics, Media & Politics, Professions, Science Fiction

I have just been reading Adrian Tchaikovsky’s Service Model. I am sure I will think about it often for years to come.

Imagine a world where “Everything was piles. Piles of bricks and shattered lumps of concrete and twisted rods of rebar. Enough fine-ground fragments of glass to make a whole razory beach. Shards of fragmented plastic like tiny blunted knives. A pall of ashen dust. And, to this very throne of entropy, someone had brought more junk.”

This is Earth outside a few remaining enclaves. And all served by robots, millions of robots.

Robots: like our protagonist (although he would firmly resist such a designation) Uncharles, who has been programmed to be a valet, or gentleman’s gentlerobot; or librarians tasked with preserving as much data from destruction or unauthorised editing as possible; or robots preventing truancy from the Conservation Farm Project where some of the few remaining humans are conscripted to reenact human life before robots; or the fix-it robots; or the warrior robots prosecuting endless wars.

Uncharles, after slitting the throat of his human master for no reason that he can discern, travels this landscape with his hard-to-define-and-impossible to-shut-up companion The Wonk, who is very good at getting into places but often not so good at extracting herself. Until they finally arrive in God’s waiting room and take a number.

Along the way The Wonk attempts to get Uncharles to accept that he has been infected with a Protagonist Virus, which has given Uncharles free will. And Uncharles finds his prognosis routines increasingly unhelpful to him as he struggles to square the world he is perambulating with the internal model of it he carries inside him.

The questions that bounce back between our two unauthorised heroes are many and various, but revolve around:

Is there meaning beyond completing your task list or fulfilling the function for which you were programmed?
What is the purpose of a gentleman’s gentlerobot when there are no gentlemen left?
Is the appearance of emotion in some of Uncharles’ actions and communications really just an increasingly desperate attempt to reduce inefficient levels of processing time? Or is the Protagonist Virus an actual thing?

Ultimately the question is: what is it all for? And when they finally arrive in front of God, the question is thrown back at us, the pile of dead humans rotting across the landscape of all our trash.

This got me thinking about a few things in a different way. One of these was AI.

Suppose AI is half as useful as OpenAI and others are telling us it will be. Suppose that we can do all of these tasks in less than half the time. How is all of that extra time going to be distributed? In 1930 Keynes speculated that his grandchildren would only need to work a 15 hour week. And all of the productivity improvements he assumed in doing so have happened. Yes still full-time work remains the aspiration.

There certainly seems to have been a change of attitude from around 1980 onwards, with those who could choose choosing to work longer, for various reasons which economists are still arguing about, and therefore the hours lost were from those who couldn’t choose, as The Resolution Foundation have pointed out. Unfortunately neither their pay, nor their quality of work, have increased sufficiently for those hours to meet their needs.

So, rather than asking where the hours have gone, it probably makes more sense to ask where the money has gone. And I think we all know the answer to that one.

When Uncharles and The Wonk finally get in to see God, God gives an example of a seat designed to stop vagrants sleeping on it as the indication it needed of the kind of society humans wanted. One where the rich wanted not to have to see or think about the poor. Replacing all human contact with eternally indefatigable and keen-to-serve robots was the world that resulted.

Look at us clever humans, constantly dreaming of ways to increase our efficiency, remove inefficient human interaction, or indeed any interaction which cannot be predicted in advance. Uncharles’ seemingly emotional responses, when he rises above the sea of task-queue-clutching robots all around him, are to what he sees as inefficiency. But what should be the goal? Increasing GDP can’t be it, that is just another means. We are currently working extremely hard and using a huge proportion of news and political affairs airtime and focus on turning the English Channel into the seaborne equivalent of the seat where vagrants and/or migrants cannot rest.

So what should be the goal? Because the reason Service Model will stay with me for some time to come is that it shows us what happens if we don’t have one. The means take over. It seems appropriate to leave the last word to a robot.

“Justice is a human-made thing that means what humans wish it to mean and does not exist at all if humans do not make it,” Uncharles says at one point. “I suggest that ‘kind and ordered’ is a better goal.”

The Monty Brewster Predicament

16. July 2025 · Write a comment · Categories: Economics, Professions

Last week I read The Million Pound Bank Note by Mark Twain and Brewster’s Millions by George Barr McCutcheon, from 1893 and 1902 respectively. Both have been made into films several times: the Mark Twain short story was first made into a silent movie by the great Alexander Korda in 1916, although the best known adaptations were the one starring Gregory Peck in 1954 and Trading Places (starring Eddie Murphy) in 1983 (which included elements of both The Million Pound Bank Note and Mark Twain’s novel The Prince and the Pauper); Cecil B DeMille was the first to attempt a film adaptation of Brewster’s Millions (from the earlier play) in 1914, with the best known adaptation being Walter Hill’s 1985 movie starring Richard Pryor (movie poster shown above).

Both stories were written before the First World War and it is interesting to see when each has been revived with new adaptations. In particular, although an early attempt was made to film Twain’s story, noone attempted it again until after the second world war, whereas there was a new adaptation of Brewster during the very interesting period between 1920 and 1922 when the first international financial conferences were being held in Brussels and Genoa to establish an international consensus for policies where “individuals had to work harder, consume less, expect less from the government as a social actor, and renounce any form of labour action that would impede the flow of production.” The aim was to return to a pre World War I economic orthodoxy and therefore remove what would be very painful economic measures for most people from the political sphere and into the sphere of “economic science”. In other words, it was a time when the political elite were trying to change the rules of the game.

This may be because Twain’s story, about a man who is given a million pound note and is feted by everyone he meets as a consequence and never has to spend it, winning a bet between the two men who gave him it as a consequence, was seen as a rather slight tale. Interestingly an American TV adaptation and the Gregory Peck film a few years later came out around the time when the Bank of England actually first issued such notes (called Giants) in 1948, which also relied on the power of people knowing they were there rather than ever having to use them.

The rules of the game certainly vary considerably across the Brewster adaptations: DeMille in 1914 was very respectful of the original but by 1921 the $7 million dollars had shrunk to $4 million. By 1926 in Miss Brewster’s Millions, Polly Brewster must spend $1 million dollars in 30 days to inherit $5 million. This was the point where Twenty20 fortune dissipation appears to have supplanted the Test Match variety. In 1935 a British version had Brewster needing to spend £500,000 in 6 months to inherit £6 million. In 1945 Brewster must spend $1 million dollars within 60 days to inherit $7 million. By 1954 the first Telugu adaptation has him spending ₹1 lakh in 30 days which, by 1985, has inflated to ₹25 lakh.

Later in 1985, the Richard Pryor film requires Brewster to spend $30 million within 30 days to inherit $300 million, with the tweak that he is given the option to take $1 million upfront, which for the sake of the movie he doesn’t. There have since been five further adaptations reflecting the globalisation of the ideas in the story (three from India, one from Brazil and one from China) before the sequel to the Richard Pryor film last year.

What is striking about both stories is how, although supposedly about financial transactions, albeit of a rather unusual kind, they are in fact all about how people behave around the display of money. In Twain’s tale, Henry Adams is transformed from being perceived as a beggar to being assumed to be an eccentric millionaire as a result of producing the note.

In the Brewster story, Monty Brewster has to spend the million dollars he has been left by his grandfather within a year so that he has no assets left in order to claim the seven million dollars left to him by an uncle on this condition. The original story explains the strange condition (something the Richard Pryor film doesn’t do as far as I can recall) as being due to his uncle hating his grandfather so much (due to his grandfather’s refusal to accept his uncle’s sister’s marriage). The uncle therefore wanted “to preclude any possible chance of the mingling of his fortune with the smallest portion of Edwin P Brewster’s”.

The problem for Monty is that he is not allowed to tell anyone of the condition, and therefore it is the difficulties the behaviour he then has to adopt causes him with New York high society that is the subject of the story. There are dinners and cruises and carnivals and holiday homes all bankrolled by Brewster for himself and whoever will journey with him, during which he falls in love and then out of love with one woman and then falls in love with the woman he had grown up alongside. Things normally regarded as good luck, like winning a bet or making a profitable investment, become bad luck for Monty.

By the end of the year, and very close to spending the whole million with nothing to show for it, he returns from a transatlantic cruise where he had been kidnapped by his friends at one stage to prevent him sailing to South Africa, to find himself spurned by the very society he had tried so hard to cultivate:

With the condemnation of his friends ringing in his troubled brain, with the sneers of acquaintances to distress his pride, with the jibes of the comic papers to torture him remorselessly, Brewster was fast becoming the most miserable man in New York. Friends of former days gave him the cut direct, clubmen ignored him or scorned him openly, women chilled him with the iciness of unspoken reproof, and all the world was hung with shadows. The doggedness of despair kept him up, but the strain that pulled down on him was so relentless that the struggle was losing its equality. He had not expected such a home-coming.

After a bit of a scare that the mysterious telegram correspondent Swearengen Jones, who held the 7 million and was assessing his performance, had disappeared, everything comes right for Monty in the end and he marries Peggy who had agreed to do so even when she thought him penniless.

And we are left to assume that everything in the previous paragraph is reversed in the same way as in The Million Pound Bank Note on being able to display wealth once more.

There is a lot of plot in the Brewster story in particular, a lot of which does not amount to much but keeps Monty Brewster feverishly busy throughout.

These two in many ways ridiculous stories, written as they are just as economics is trying to establish itself as a science and ultimately the discipline that shapes our current societies, I think reveal quite a lot about the nature of money amongst people who have a lot of it. Neither Henry nor Monty (apart from an opening twenty four hours for Henry and a scene revolving around a pear in the gutter after a night sleeping rough) experience hunger or the absence of anywhere to sleep at any point. Their concern for money seems to be entirely about social position, the respect of who they regard as their peers and being able to marry the women they have set their hearts on. In other words, money is not about money for these protagonists, it is about status.

It seems to me that almost the entire edifice that we call economics now has possibly been constructed by people in this position. Is this why money creation is represented in so many economic models via constructions clearly at odds with the actual activities of banks (one of many pieces by Steve Keen demonstrating this problem here), and why ideas such as loanable funds and the money multiplier, persist in economics education? Perhaps the original architects of these economic theories did not need money to live, as much as they needed the respect of who they saw as their peers.

David Graeber often used to point out how much more time people at the bottom of society spent thinking about people at the top than the people at the top spent thinking about them. Is this at the heart of the problem?

Of course we do still have some social mobility. A relatively small number of people from poor backgrounds can still enter influential professions. Some of them have even become economists! Of course the very process of becoming a professional is designed to distance you from your origins: years of immersion in a very academic discipline, requiring total concentration and dedication to internalising enough of the professional “truths” learnt so as to be assessed as qualified to practise, normally while engaged in highly intensive work alongside more senior people for who these truths have already been securely internalised.

And then once there you are in the Monty Brewster situation, so insecure about your position within this new society you have joined that you will do whatever it takes to maintain it. You are “upwardly mobile”. Your families are proud that you are “getting on” and doing better, certainly in terms of income and professional respect, than they did. There is no serious challenge to this path other than its difficulty, which again creates a massive sunk cost in your mind when considering alternatives. And it is a path which is invariably described as upward.

Meanwhile the societies we have constructed around these economic edifices also have a lot of plot, a lot of which does not amount to very much but it keeps us all feverishly busy most of the time.

Financial consequences

03. July 2025 · Write a comment · Categories: Economics, Media & Politics

According to Pat McFadden, a Government minister, there will be “financial consequences” to the decision to modify the planned cuts to disability and health-related benefits in order to win the vote on the welfare bill. There certainly will be for people receiving these benefits.

The changes to the bill in order to get it voted through will still:

reduce the health element of the Universal Credit for new claims from £97 to £50 per week from April 2026 and restrict payment to claimants over the age of 22, although now the benefit will continue to increase at least in line with inflation;
possibly re-introduce some of the restrictions to eligibility for personal independence payments following a review.

But that does not appear to be what McFadden was talking about, as he went on to list a number of taxes the Government would not raise. Instead the financial consequences comment sounded more like the empty threat of the playground bully when his victim has unexpectedly given him a bloody nose and he is trying not to lose face. Because nearly all of the newspaper coverage of this event appears to have been focused on this reputational aspect rather than on the fiscal significance of the changes:

In my last post, I referred to Harvey Whitehouse’s excellent Inheritance – the Evolutionary Origins of the Modern World, which included this definition of gossip:

When we lived in small communities, in which everybody knew everybody else, news consisted mainly of socially strategic information about who was hoarding wealth, who was telling lies, who was sleeping with whom, who was stealing, who was free-riding, and so on. In most of these newsworthy stories, there would be transgressors and victims, and news purveyors and consumers would be very sensitive to the reputational consequences of this information. The common term for this is gossip.

So by focusing on the reputational consequences of a welfare bill in the House of Commons, these newspapers are preferring to present a story which affects the livelihoods of up to a million people as if it were gossip. This approach is justified by the media as something the public are interested in and therefore something we will buy. Our bias towards stories about reputational consequences, even of people we do not know or are ever likely to meet, is therefore used against us and the world gets a little less understandable with every gossipy take of a more complex story. This has other implications (or perhaps what McFadden would call “consequences”): the rest of the day’s news seemed to revolve around whether someone had been mean to the Chancellor of the Exchequer and made her cry.

And the actual financial consequences? Well, the BBC made much about the impact of the Chancellor’s tears on the bond and currency markets. Morningstar went further and claimed that investors had saved the Chancellor’s job by forcing the Prime Minister to support her very publicly after failing to do so initially. The unspoken assumption is that the markets control the economy and all we can do is have gossipy conversations in our impotence about whether Rachel, Ed, Wes, Liz or Angela are up or down this week.

This is self-fulfilling: we can be as powerless as we decide to be. Or we can realise that the way we run our country and society is up to us. The £5 billion all of this is supposedly all about could be raised in any number of ways: slowing down the quantitative tightening programme the Bank of England is set on, a policy of selling bonds before maturity not adopted by the European Central Bank or the Federal Reserve in the United States, or any of a number of suggestions made by Richard Murphy which would have been focused on the top 10% of earners. Instead we went after the disabled first. Noone forced us to. We did it to ourselves.

Perhaps we should all be a little tearful about that.

The Economics of Laughter and Forgetting

27. March 2025 · Write a comment · Categories: Actuarial, COVID-19, Economics, Media & Politics, Prediction, Risk

https://parliament.assetbank-server.com/assetbank-parliament/images/assetbox/b26cd8f5-538e-4409-b033-f1f02aea6821/assetbox.html

Milan Kundera wrote his The Book of Laughter and Forgetting in 1979, a few years after moving to France and the same year he had his Czech citizenship revoked. His books had all been banned in Czechoslovakia in 1968, as most of them poked fun at the regime in one way or the other. The Book of Laughter and Forgetting was no exception, focusing, via seven stories, on what we choose to forget in history, politics and our own lives. One of the themes is a word which is difficult to translate into English: litost.

Litost seems to mean an emotional state of feeling of being on your own suddenly brought face to face with how obvious your own hopelessness is. Or something to that effect. Kundera explored several aspects of litost at length in the novel. However, for all the difficulties of describing it exactly, litost feels like a useful word for our times, our politics and our economics.

I want to focus on two specific examples of forgetting and the sudden incidents of litost which have brought them back into focus.

The first, although not chronologically, would be the pandemic. There are several articles around suddenly about the lessons we have not learnt from the pandemic, to mark the fifth anniversary of the first lockdown. Christina Pagel, backed up by module 1 of the Covid-19 Inquiry, reckons:

Preventing future lockdowns requires planning, preparation, investment in public health infrastructure, and investment in testing, virology and medical research…

She takes issue with some of the commentary as follows:

But the tenor of reporting and public opinion seems to be that “lockdowns were terrible and so we must not have lockdowns again”. This is the wrong lesson. Lockdowns are terrible but so are unchecked deadly pandemics. The question should be “lockdowns were terrible, so how can we prevent the spread of a new pandemic so we never need one again?”.

However the stampede to get back to “normal” has mitigated against investing in infrastructure and led to a massive reduction in testing and reporting, and the Covid-19 Inquiry has given the government cover (all questions can just be responded to by saying that the Covid Inquiry is still looking at what happened) to actively forget it as quickly as possible. Meanwhile the final module of the Covid-19 Inquiry is not due to conclude until early 2026, which one must hope is before the next pandemic hits. For which, as the former Chief Scientific Adviser and other leading experts have said, we are not remotely prepared, and certainly no better prepared than we were in 2020.

It is tempting to think that this is the first major recent instance involving the forgetting of a crisis to the extent that its repetition would be just as devastating the second time. Which is perhaps a sign of how complete our collective amnesia about 2008 has become.

Make no mistake, 2008 was a complete meltdown of the core of our financial system. People I know who were working in banks at the time described how even the most experienced people around them had no idea what to do. Alistair Darling, Chancellor of the Exchequer at the time, claimed we were hours away from a “breakdown in law and order”.

According to the Commons Library briefing note from October 2018, the Office for Budget Responsibility (OBR) estimates that, as at the end of January 2018, the interventions had cost the public £23 billion overall. The net balance is the result of a £27 billion loss on the RBS rescue, offset by some net gains on other schemes. Total support in cash and guarantees added up to almost £1.2 trillion, including the nationalisation of Northern Rock (purchased by Virgin Money, which has since been acquired by the Nationwide Building Society) and the Bradford & Bingley (sold to Santander) and major stakes in RBS (now NatWest) and Lloyds. Peak government ownership in these banks is shown below:

If you read the Bank of England wacky timeline 10 years on from 2018, you will see a lot about how prepared they are to fight the last war again. As a result of this, cover has been given to actively forget 2008 as quickly as possible.

Except now various people are arguing that the risks of the next financial crisis are increasing again. The FT reported in January on the IMF’s warnings (from their Global Financial Stability Report from April 2024) about the rise in private credit bringing systemic risks.

Meanwhile Steve Keen (one of the very few who actually predicted the 2008 crisis) in his latest work Money and Macroeconomics from First Principles, for Elon Musk and Other Engineers has a whole chapter devoted to triggering crises by reducing government debt, which makes the following point:

A serious crisis, triggered by a private debt bubble and crash, has followed every sustained attempt to reduce government debt. This can be seen by comparing data on government and private debt back to 1834.

(By the way, Steve Keen is running a webinar for the Institute and Faculty of Actuaries entitled Why actuaries need a new economics on Friday 4 April which I thoroughly recommend if you are interested)

Which brings us to the Spring Statement, which was about (yes, you’ve guessed it!) reducing government debt (or the new formulation of this “increasing OBR headroom”) and boosting GDP growth. Watching the Chief Secretary to the Treasury, Darren Jones, and Paul Johnson from the IFS nodding along together in the BBC interviews immediately afterwards, you realised how the idea of allowing the OBR to set policy has taken hold. Johnson’s only complaint seemed to be that they appeared to be targeting headroom to the decimal point over other considerations.

I have already written about the insanity of making OBR forecasts the source of your hard spending limits in government. The backdrop to this Statement was already bad enough. As Citizens Advice have said, people’s financial resilience has never been lower.

But aside from the callousness of it all, it does not even make sense economically. The OBR have rewarded the government for sticking to them so closely by halving their GDP growth projections and, in the absence of any new taxes, it seems as if disabled people are being expected to do a lot of the heavy lifting by 2029-30:

Part of this is predicated on throwing 400,000 people off Personal Independence Payments (PIPs) by 2029-30. According to the FT:

About 250,000 people, including 50,000 children, will be pushed into relative poverty by the cuts, according to a government impact assessment.

As Roy Lilley says:

We are left standing. Abandoned, to watch the idiocy of what’s lost… the security, human dignity and wellbeing of our fellow man, woman and their family… everything that matters.

As an exercise in fighting the last war, or, according to Steve Keen, the wars successive governments have been fighting since 1834, it takes some beating. It was litost on steroids for millions of people.

So what does the government think these people are going to fill the income gap with? It will be private debt of course. And for those in poverty, the terms are not good (eg New Horizons has a representative APR of 49% with rates between 9.3% APR and maximum 1,721% APR).

And for those who can currently afford a mortgage (from page 47 of the OBR report):

Average interest rates on the stock of mortgages are expected to rise from around 3.7 per cent in 2024 to a peak of 4.7 per cent in 2028, then stay around that level until the end of the forecast. The high proportion of fixed-rate mortgages (around 85 per cent) means increases in Bank Rate feed through slowly to the stock of mortgages. The Bank of England estimates around one-third of those on fixed rate mortgages have not refixed since rates started to rise in mid-2021, so the full impact of higher interest rates has not yet been passed on.

So, even before considering the future tax increases the FT appears to be expecting, the levels of private debt look like they will shoot up very quickly. And we all know (excluding the government it seems) where that leads…

The Government Knows Zero

13. March 2025 · Write a comment · Categories: COVID-19, Demographics, Economics, Media & Politics

*Successive OBR forecasts of % changes in GDP year on year since the pandemic https://obr.uk/publications/*

This blog has a long history with the OBR, which I won’t go into here, although you can get a sense of it from this. It was the reason the blog is called We Know Zero. However I find myself returning to talk about them once again in the light of some of the Government’s latest spending (or removal of spending) plans.

Daniel Susskind had this to say about the role they are currently playing for the Government, to determine whether it is going the right way to achieve economic growth:

This was never meant to be the OBR’s purpose. Set up in 2010 by George Osborne, then chancellor, it was designed to solve a different problem: that the official UK public finance forecasts were not credible. The Treasury had a strong incentive to massage these numbers into better shape, whatever the political make-up of the government. And the belief was that an independent statistical authority would be free of that temptation. To that extent, the OBR is a success story: its forecasts do appear to be less biased.

At this point I need to stifle a snigger: less biased than what? I think it may not have a political reason for bias, but their methodology is like train tracks as I have maintained since this blog started in 2013: if you lay them out in a particular way then, even if you don’t want to call it bias, that is the way the train will run (to misquote Yes Minister). It may be statistically unbiased, in the same way that someone who misses a penalty past each post (I am sure that this analogy has nothing to do with my team going out of the Champions League this week) has, on average, hit the target.

However I agree with Susskind that the OBR was certainly never set up to advise on policy. As he goes on to say:

With that in mind, the idea that the OBR somehow knows enough to take each UK government policy and state its impact on growth to a single decimal point is fanciful. Yet that is what it will attempt to do at the end of the month, with immense practical consequence. A reduction of 0.1 percentage point in the OBR’s potential productivity growth forecast, for instance, is estimated to create a hole of £7bn-£8bn in the public finances — that is the equivalent of the entire budget of Defra.

Or the foreign aid budget or disability benefits or…the list looks likely to go on.

In an open letter this week, 17 major charities including Scope, Trussell Trust, Citizens Advice, Mencap, Sense, the Joseph Rowntree Foundation and the RNIB urged the Government not to cut the Personal Independence Payments (PIP) and the Limited Capability for Work payment, saying:

Scope’s analysis of government figures shows that without PIP, a further 700,000 more disabled households could be pushed into poverty. Life costs more for disabled people. Huge numbers already live in poverty as a result of these extra costs. The impact of any cuts to disability benefits would be devastating.

Meanwhile Roy Lilley looks at those cuts from the NHS end of the lens. I don’t agree with his assessment of the IFS, but there is nothing else here to argue with:

Currently, 2.9 million working-age adults are claiming disability benefits, an increase of 900,000 from pre-pandemic levels, with 500,000 attributing their main condition to mental health issues.

Lilley asks why this is, comparing the mental stress attributed to the pandemic with that of the Blitz. He then cites a study by the Tavistock Institute:

While, in the post war years, mental health issues were still stigmatised, post-war policies focused on social security and housing aimed to reduce economic stress that so often is the contributing factor to poor mental health.

We have done a lot to reduce the stigma of mental health issues, but:

I question the policies. Social and economic factors. Job insecurity and financial stress must be the key factors that have a negative impact on mental health well being.

Back to the Trussell Trust, who have been running a campaign for a while now to guarantee everyone the essentials to live on. As they say:

More than three quarters of people on Universal Credit and disability payments have already gone without essentials in the last six months.

Back to Lilley, who as I said, is primarily concerned with the NHS:

Since 2019 the NHS has experienced a 36% increase in patients seeking mental health services.

As he goes on to say:

Labour’s plan to cut benefits won’t solve the problem. It’ll very likely make it worse.

Policies cutting the root causes of people needing benefits, like safe homes and decent jobs would seem much more sensible.

Unfortunately Lilley’s “if there is one organisation worth paying attention to” IFS believe that OBR forecasts should continue to underpin the Chancellor’s spending decisions. I couldn’t disagree more.

That means constraining the Government to act as if all it knows is what the OBR knows. Which is precisely zero.

Madame, si c’est possible, c’est fait; si cela ne l’est pas, cela se fera

05. March 2025 · Write a comment · Categories: Actuarial, Economics, Regulation, Risk

*Trump mentions in BBC News US & Canada top feed around 4.30pm today. Out of 12 stories, 8 mention Trump by name in the headline* https://www.bbc.co.uk/news/world/us_and_canada

You will have all seen the work mug staple: “The Difficult We Do Immediately. The Impossible Takes a Little Longer”. The original quotation in the title, originally attributed to Charles Alexandre de Calonne, the Finance Minister for Louis XVI, in response to a request for money from his Queen, Marie Antoinette, appeared in a collection from 1794, this was a year after Louis and Marie Antoinette (but not Charles, who survived another nine years) died on the guillotine and five since George Washington had been inaugurated as the first President of the United States. It seems as if the seemingly impossible may need to be attempted once again.

So let’s start by expanding on the problem which I brought up in my last post. The problem goes much wider than Donald Trump. He is assembling a court of loyalists around him, in the style of a mob boss, which as has been observed by others, has been the prelude to fascism in the past. As Jason Stanley, Professor of Philosophy at Yale and author of Erasing History: how fascists rewrite the past to control the future, puts it: “the United States is your enemy”. There is also considerable circumstantial evidence to suggest that Trump is considered an agent of influence by Putin’s regime in Russia.

The difficulty of what I am about to suggest is also the reason why it is so urgent: our relationship with the United States (the one we keep needing reassurance by successive US Presidents of its special nature) is positively symbiotic. George Monbiot lists some of our vulnerabilities here:

Through the “Five Eyes” partnership, the UK automatically shares signals intelligence, human intelligence and defence intelligence with the US government. The two governments, with other western nations, run a wide range of joint intelligence programmes, such as Prism, Echelon, Tempora and XKeyscore. The US National Security Agency (NSA) uses the UK agency GCHQ as a subcontractor.
Depending on whose definitions you accept, the US has either 11 or 13 military bases and listening stations in the UK. They include RAF Lakenheath in Suffolk, from which it deploys F-35 jets; RAF Menwith Hill in North Yorkshire, which carries out military espionage and operational support for the NSA in the US; RAF Croughton, part-operated by the CIA, which allegedly used the base to spy on Angela Merkel among many others; and RAF Fylingdales, part of the US Space Surveillance Network. If the US now sides with Russia against the UK and Europe, these could just as well be Russian bases and listening stations.
Then we come to our weapon systems… among the crucial components of our defence are F-35 stealth jets, designed and patented in the US.
Many of our weapons systems might be dependent on US CPUs and other digital technologies, or on US systems such as Starlink, owned by Musk, or GPS, owned by the US Space Force. Which of our weapons systems could achieve battle-readiness without US involvement and consent? Which could be remotely disabled by the US military?
Then there is our independent nuclear deterrent, which is “neither British nor independent” according to Professor Norman Dombey, Emeritus Professor of Physics and Astronomy at the University of Sussex.

Then there is the sheer cost of rearming with Europe to the extent necessary in the absence of the United States’ support, suggesting 3.5% rather than 2.5% of GDP is what will be required, suggesting the UK Government, with its WCAIWCDI approach described here, will need to find something in addition to the foreign aid budget to ransack. I will be talking more about defence spending in a future post.

It is small wonder that some commentators, such as Arthur Snell, former Assistant Director for Counter-Terrorism at the Foreign and Commonwealth Office, conclude that disentangling ourselves from the United States may be impossible. And that is just considering defence and security considerations.

On the economy the symbiosis is just as evident. First of all there is the sizeable proportion of our imports and exports of both goods and services which are with the United States. Only in June 2023, we were trying hard to develop these further with something called the Atlantic Declaration. Although, as a recent speech by Megan Greene of the Bank of England’s Monetary Policy Committee shows, our trade with the US as a proportion has remained remarkably stable since 2000 at least.

Source: ONS and Bank calculations. Trade weights for each trading partner are calculated as the sum of bilateral exports and imports as a share of total UK trade. Data is annual and in current prices. EU refers to the EU27. Latest data point is 2023

Culturally, the United States is embedded in our laptops and mobile phones, our television programmes and movies, and our social media. Its concerns have permeated our language and our politics. A reasonable proportion of our political and financial elite have been to their universities and theirs to ours. Many of our employers have US parents: just in the actuarial world, two of the three biggest consultancies (Aon and Willis Towers Watson) are described as British-American firms, with the other one (Mercer) headquartered in New York. It has Apple. It has Amazon. It has Google. It has Meta and, of course, X.

And perhaps the greatest entanglement of our two countries is political, to the extent that we routinely send our politicians to each other countries to support election campaigns and our media breathlessly report every in and out of the US Presidential elections. We are lucky if a French or German one is mentioned more than a couple of weeks before it takes place. Whether it is the language thing (we are still VERY resistant to learning other languages) or the post imperial thing (feeling like we have a special understanding of the problems the United States face as a self-appointed global police force) or the degree of financialisation of our economy or for some other reason, it is very hard to avoid a sense of being conjoined with the United States of America.

But it is precisely because our relationship is so close in so many important areas that we are particularly vulnerable to US pressure – the harder it will be to disentangle ourselves, the more urgent it is that we do.

As David Allen Green puts it this week, the US is currently undergoing a diplomatic revolution. Originally applied to France’s realignment of all of its alliances away from Prussia and towards Austria, which ultimately led to the work mug motto at the start of this piece, the US appears to be realigning itself towards Russia and away from the UK and the EU. As Green goes on to say:

Other countries would now be prudent to regulate their affairs so as to minimise or eliminate their dependency on the United States – it is no longer a question of waiting out until the next United States elections.

And other political systems would be wise to limit what can be done within their own constitutions by executive order, and to strengthen the roles of the legislature and the judiciary (and also of internal independent legal advice within government).

The last seems key to me. We cannot, particularly now we are outside the EU, afford for our main ally to be capable of being so capricious. This applies whether the US are allowed to and do elect a President in 2028 who is respectful of its institutions and constitution. We always felt Americans were very respectful of their constitution because they never stopped talking about it, but it turns out to have been a thin veneer with little meaning. Much like our discussion of sovereignty in the UK.

The first thing we need to do is to stop obsessing about what John Mulaney memorably referred to as a “horse in a hospital” in 2019. Despite the fact that was five years ago and we have now seen a horse in the hospital before, many have been turned off news coverage altogether by the anxiety caused as a result of the constant media narration of what Trump and Musk have done next each day. The dangers of treating the Trump and Musk chaos as a TV show are potentially existential in the US but grave for us in the UK too.

While we may have deep sympathy for the people in the US and other countries caught up in the chaos, our priority has to be to get our own house in order. Otherwise we won’t be any help to anyone.

My priorities would be the ones I set out in October 2022, only now with much greater urgency.

We can’t have parties with only 20% of the popular vote (34% of a 60% turnout) having an absolute majority of 174 seats. We need proportional representation, so that every vote counts equally and perhaps we might get somewhere near the turnout of Germany’s last election of 82.5%.
Reform media ownership and promote plurality in support of a more democratic and accountable media system. The Media Reform Coalition has produced a manifesto for a people’s media which I support: it includes proposals for an Independent Media Commons – with participatory newsrooms, community radio stations, digital innovators and cultural producers, supported by democratically-controlled public resources to tell the stories of all the UK’s communities. As we know, our social media is controlled by Meta (with Facebook, WhatsApp and Instagram), all of which have more than 2 billion active users and Google with YouTube, also with more than 2 billion active users. X still has over half a billion, despite what Musk has done with it. In newspapers, 90% of daily circulation is controlled by three firms: News UK, Daily Mail Group and Reach plc (which has most of the local titles you’ve ever heard of, including the Birmingham Mail and Birmingham Live, as well as The Daily Express and the Daily Star).
Reform election finance. Recommendations for doing this were provided in the July 2021 report by the Committee on Standards in Public Life. There was an eye-watering amount of money spent in the US Presidential Election this time: The Democrats spent $1.8 billion and the Republicans $1.4 billion, with $2.6 billion and $1.7 billion respectively being spent by the two parties on the Senate and House races. In the UK, paradoxically, the relatively small amount of money donated to parties mean that they are potentially more vulnerable to well organised lobbying operations. This is why the offer of $100 million by Musk to Reform led for calls to restrict foreign political donations to profits generated within the UK.

This way we would be more resilient to the many ways that the current chaotic United States establishment can reach into our own politics and governance, and start to develop policies with broad support which can reduce our dependency on the United States.

Is we can’t afford it the new we don’t want to?

20. February 2025 · Write a comment · Categories: Economics

It started as soon as they came into government in July.

“If we cannot afford it, we cannot do it.”

This was obviously a rebuttal to the Keynes statement from the 1940s:

“Anything we can actually do, we can afford.”

The list of things “we can’t afford” started to grow, including:

Winter fuel payments for pensioners not on Pensions Credit. This cut the number of pensioners receiving the winter fuel payment from 11.4 million to 1.5 million and will save £1.5bn in the next financial year.
Stopping reforms to social care proposed by Sir Andrew Dilnot. These would have meant making the means test for local authority support more generous and raising the capital limit from £23,500 to £100,000. Estimated saving: £1 billion.
In April, the employer national insurance rates will increase (from a previous decrease we now “cannot afford”). These are forecast to raise between £23.8 billion and £25.7 billion a year, for the five years 2025/26 to 2029/30.

So far, so predictable, based on the we-cannot-afford-it-we-cannot-do-it (WCAIWCDI) philosophy. But then we had a tweak.

In response to criticisms of the decision to approve the construction of a third runway at Heathrow, the UK’s Business Secretary Jonathan Reynolds came up with a new formulation:

“We simply cannot afford to say we don’t build reservoirs any more, we don’t build railways, we don’t build runways. That’s not good enough, we will be left behind.”

Burrowing through the double negative we have a complete reversal of WCAIWCDI. Instead we now have we-cannot-afford-to-say-we-don’t-build-X, where X is something they desire to build. WCATSWDBX if someone wanted to reduce it to an acronym. Obviously you would have to be fairly determined to do so.

So we-can’t-afford-it can be used both positively and negatively it seems. We can’t do it if it is bad spending, we can’t afford to say we don’t do it if it’s good spending.

And now we come to defence spending as the US support for Ukraine starts to look highly conditional. We are still not sure whether this is in the WCAIWCDI or the WCATSWDBX camp. On the one hand, the PM has said that we are prepared to send troups to Ukraine, which sounds like WCATSWDBX. On the other hand, recent statements by the defence secretary and the PM also suggest that they are not considering anything beyond an increase in defence spending from 2.3% of GDP to 2.5%. Which sounds more like WCAWCDI.

Elsewhere there has been optimism amongst some (eg here and here) that the need to increase defence spending will topple the WCAIWCDI regime and allow other spending priorities in too. Others fear that any increases will just lead to further cuts to other public spending.

It’s no way to run a railroad. The government needs to be more Phoebe Buffay and just tell us what they do and don’t want to spend money on instead of telling us that we can’t afford things to avoid the discussion like an overbearing parent. Then we could have a proper family argument about them.

Going nowhere faster

29. January 2025 · Write a comment · Categories: Actuarial, Climate Change, Economics, Prediction, Risk

*Risk trajectory (black circle) shows the anticipated future state for the risk in 2050. Current risk position in grey. Source:* https://actuaries.org.uk/planetary-solvency

The excellent report from the Institute and Faculty of Actuaries and the University of Exeter Planetary Solvency – finding our balance with nature splits the risk trajectories into four sections: Climate, Nature, Society and Economy. I have focused on the Society one above as, in my view, this is the reason we are interested in all of the other ones. According to the Planetary Solvency report, we are on track for a society in 2050 described as follows:

Nature and climate risk trajectories will drive further biophysical constraints including stresses on water supply, further food supply impacts, heat stress, increased disease vectors, likely to drive migration and conflict. Possible to Likely risk of Severe to Decimation level societal impacts, with increasingly severe direct and indirect consequences of climate and nature risks driving socio-political fragmentation in exposed and vulnerable regions.

So what are we doing about it? Well the United States has just voted in Donald Trump as President. There was a flurry of executive orders issued in his first week (with the appropriate caveats about how many of these might actually be implemented), the climate-related ones of which are neatly summarised here by Bill McKibben:

The attacks on sensible energy policy have been swift and savage. We exited the Paris climate accords, paused IRA spending, halted wind and solar projects, gutted the effort to help us transition to electric vehicles, lifted the pause on new LNG export projects, canceled the Climate Corps just as it was getting off the ground, and closed the various government agencies dedicated to environmental justice. Oh, and we declared an “energy emergency” to make it easier to do all of the above.

Timothy Snyder has written about how to respond to tyranny in your own country. What is happening currently in the United States is threatening tyranny for many (as Robert Reich lists here):

The government now recognizes only two “immutable” genders, male and female. Migrants (now referred to as “aliens”) are being turned away at the border. Immigration agents are freed to target hospitals, schools, and churches in search of people to deport. Diversity efforts in the federal government have been dismantled and employees turned into snitches. Federal money will be barred from paying for many abortions.

The first thing you should do, according to Timothy Snyder, is to not obey in advance.

Most of the power of authoritarianism is freely given. In times like these, individuals think ahead about what a more repressive government will want, and then offer themselves without being asked. A citizen who adapts in this way is teaching power what it can do.

And how did we respond to all of this in the UK? Well Keir Starmer was keen to tell The Donald that we were deregulating to boost growth in their first phone call. His reward for this was the story that Trump thought he was doing a good job. Supposedly an endorsement from the “Drill Baby Drill” guy is the proper corrective from being told he should be locked up by the Nazi salute guy.

And then there were the actions on the environment. From the talking out of the Climate and Nature Bill which sought to meet new legally binding targets on climate change and protect nature. To a housing policy which will be both hugely environmentally destructive and fail to make houses more affordable. To announcing the intention to overhaul the planning rules, in the upcoming Planning and Infrastructure Bill, to reduce the power of people to object (and, as the Conservatives’ restrictions on protest have not been lifted, subsequently bang them up for years on end if we subsequently demonstrate about it) so that global firms would think that the UK was a “great place to invest” .

And then today we had Rachel Reeves’ big speech. Approval for developing the third runway at Heathrow, as had been extensively trailed, and the creation of “Europe’s Silicon Valley” between Oxford and Cambridge were the main announcements. There was quite a lot of talk about investment in sustainable aviation fuel (which means biofuels, the benefits of which have already been shown to be wiped out by rising demand).

And as for the Silicon Valley idea, I am not sure we want one. First there is the lack of real innovation despite the excellent game they talk. And second, is it going to be the authoritarian nightmare that the Californian one is turning into? The early signs are not good. Just last week Marcus Bokkerink, the Chair of the Competition and Markets Authority (CMA), was replaced by Doug Gurr, until recently Jeff Bezos’ head of Amazon UK. So not exactly standing up to Technofeudalism then.

According to Cory Doctorow:

Marcus Bokkerink, the outgoing head of the CMA, was amazing, and he had charge over the CMA’s Digital Markets Unit, the largest, best-staffed technical body of any competition regulator, anywhere in the world. The DMU uses its investigatory powers to dig deep into complex monopolistic businesses like Amazon, and just last year, the DMU was given new enforcement powers that would let it custom-craft regulations to address tech monopolization (again, like Amazon’s).

But it’s even worse. The CMA and DMU are the headwaters of a global system of super-effective Big Tech regulation. The CMA’s deeply investigated reports on tech monopolists are used as the basis for EU regulations and enforcement actions, and these actions are then re-run by other world governments, like South Korea and Japan.

When you see Trump flanked by Bezos and the other Tech Bros at his inauguration, it certainly feels like we are obeying in advance. Rachel Reeves’ speech had an enormous increase in energy demand implicit in pretty much every measure announced, which is expected because, GDP (the thing she is looking to boost) and energy consumption have been in lockstep forever. This is the implication of prioritising GDP growth over everything else.

What were missing were both a compensatory increase in renewable energy capacity and/or a reorganisation of our economy away from energy intensity. The problem for the government is that the latter would not increase GDP, so instead we get into the absurd position of the Business Secretary saying we “cannot afford to not build runways”.

However it seems that when the motivation is big enough (in this case to dispute the assertion that the Russian economy is doing well in wartime despite the official statistics, which the EU really needs to do in order to continue to make the case for sanctions) alternative ways to measure the economy can be found. In section 3.2 we find this:

The general assumption of connecting GDP growth to making people better off is not relevant in this situation, which should be included in any discussion of how the Russian economy is doing.

What is interesting about this analysis is that:

a. It is carried out by the kind of orthodox economists (the Stockholm Institute of Transition Economics) who believe GDP would be a good index to use in normal circumstances; and

b. They are saying this even if the GDP figures published by Russia are technically accurate. As they go on to say:

What this analysis suggests is that if we believe in official Russian statistics, then Russia has economic capacity to sustain current policies in the short run, a conclusion shared with many other observers. We also find, though, that beyond the GDP numbers, the redirection into a war economy is already putting pressure on all sectors not directly involved in the war, causing internal macroeconomic imbalances, increasing risks in the financial sector, and eroding export revenues and existing reserves. Short term growth is kept up by a massive fiscal stimulus, but the impact is mitigated by necessary monetary contraction to deal with inflationary pressures, and structural factors (demographics, weak property rights) limiting the possible economic response to the stimulus.

Some of which sound familiar closer to home – “necessary monetary contraction” (things we cannot afford) and “increasing risks in the financial sector” anyone?

We are currently facilitating a world where the only capacity we are increasing is to fly over the climate-ravaged areas of the globe and their fleeing populations. Fly Baby Fly is not going to get us anywhere we want to go.

Getting serious about politics

16. January 2025 · Write a comment · Categories: Actuarial, Climate Change, Economics, Regulation, Risk

When I started writing this blog in April 2013, one of its main purposes was to highlight how poor we are at forecasting things, and suggest that our decision-making would improve if we acknowledged this fact. The best example I could find at the time to illustrate this point were the Office of Budget Responsibility (OBR) Gross Domestic Product (GDP) growth forecasts over the previous 3 years. They do not appear to have improved much since then.

Fast forward to 2025 and apparently we have a crisis. Rachel Reeves has been forced to defend her budget following rises in 10 year gilt yields to levels not seen since the financial crisis and the Prime Minister has been forced to say that she will stay in post for the rest of Parliament. Everyone has piled in, from the former Deputy Governor of the Bank of England to the Institute for Fiscal Studies. So is there in fact a crisis? Well no, not really. As an opinion piece in the FT has pointed out, the drivers of the latest rate rise are not really UK-specific at all. Another piece in the FT puts the gilt yield “crisis” into yet further perspective. Finally, there is the comparison with the US gilt market, which moved above its 2008 level in 2022.

The reason for all of the hype of course is the totally self-constructed cul-de-sac that the Government has built around its economic policy options. Tiny movements in government debt or CPI or GDP or indeed gilt yields have been given heightened significance by being explicitly tied to how much the Government will allow itself to spend on its various programmes. As stated in the FT:

Only the OBR can accurately predict how much headroom the Treasury has against its fiscal rules, the Treasury insisted on Wednesday. “Anything else is pure speculation,” it added.

I refer back to the aforementioned forecast history of the OBR and ask how we ever got in a situation where their forecasts would determine how the UK government behaved. As the recent essay by Stefan Eich (on Adam Tooze’s Chartbook) points out, Keynes said:

“Our power of prediction is so slight, our knowledge of remote consequences so uncertain that it is seldom wise to sacrifice a present benefit for a doubtful advantage in the future.” It was consequently rarely right to sacrifice the well-being of the present generation for the sake of a supposed millennium in the remote future.

Meanwhile we are now doing precisely this on the basis of OBR forecasts. As Rachel Reeves set out at the start of her chancellorship in July, in a precise inversion of Keynes:

Because if we cannot afford it, we cannot do it.

Unfortunately for the government, while they spend all of their time trying to solve this imaginary problem they have created for themselves, there are actual real problems that do need to be addressed, and which are currently being drowned out by the noise of political commentators with too little of substance to talk about apparently.

So Sir Michael Marmot, author of the landmark Institute of Health Equity reports on health inequalities in 2010 and 2020 and the recent report on the role of the property sector in improving health, referred to the maintenance of the two child benefit cap as “almost a form of eugenics”.

The Trussell Trust reports that:

A record 9.3 million people face hunger and hardship across the UK. This includes 6.3 million adults and 3 million children. This represents one in seven (14.0%) people across the UK, and one in five (20.9%) children. Current levels are more than a third higher than they were 20 years ago, when 6.7 million people faced hunger and hardship.

And a group from the Institute and Faculty of Actuaries, in partnership with Prof Tim Lenton and his team from the University of Exeter, set out in a report today (Guardian summary here, Planet Critical discussion here) the dangers of the current massive underestimation of climate change risk. As Tim Lenton says:

The choice is simple: continue to be surprised by rapidly escalating and unexpected climate and nature-driven risks, or implement realistic Planetary Solvency risk assessments to build resilience and support ongoing prosperity. We urge policymakers to work with scientists and risk professionals to take this forward before we run the ship of human progress aground on the rocks of poor risk management.

The part which really stood out for me (in such contrast to the equally massively exaggerated risks ascribed to movements in bond markets this week) was on the inadequacy of global risk management practices:

Policymakers often prioritise the economy, with their information flows focused on this. But our dominant economic model doesn’t recognise a dependence on the Earth system, viewing climate and nature risks as externalities.
Climate change risk assessment methodologies understate economic impact, as they often exclude many of the most severe risks that are expected and do not recognise there is a risk of ruin. They are precisely wrong, rather than being roughly right.
The degradation of natural assets such as forests and soils, or the acidification and pollution of the ocean, act as a risk multiplier on the impacts of climate change and vice versa. Traditional risk management techniques typically focus on single risks in isolation, missing network effects and interconnections, underestimating cascading, compounding risks.
Current risk management approaches fall short of the RESILIENCE principles detailed in this report for realistic and effective risk management. Consequently, policymaker risk information is likely to significantly understate the potential impact of climate and nature risks, weakening the argument for urgent action.
These limitations mean that policymakers are likely to have accepted much higher levels of risk than is commonly realised.

If policymakers judged these risks on the same calibration scale as they current view the knockabout on financial markets I doubt we would ever hear about the intricacies of the 10 year gilt yield or the decimal places of CPI ever again. Similarly, if the societal impact of prolonged policies targeting the poor was included (perhaps in the form of meaningful measures of poverty based on the work of the Social Metrics Commission), rather than the level of the FTSE 100, we might start to make inroads into the current dire statistics.

We have hard problems to solve which require a serious government prepared to be bold, do big things and take the political risk of doing so (because the political risks are so tiny compared to the actual risks the population face), not one so focused and constrained by minutiae that it defeats itself.

We Know Zero