ourEconomy: Opinion

How misleading economic analysis is corrupting our democracy

Devoid of original ideas, the right is using flawed economic analysis to discredit progressive policy proposals. Here's what to look out for.

Laurie Macfarlane
5 November 2019, 7.48pm
Image: Marco Verch, CC BY 2.0

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

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

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

Perhaps, but this is only part of the story.

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

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

So far so good, right? Not quite.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1) Calculate an inflated up front cost

2) Exclude a range of economic and social benefits

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

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

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

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