Tuesday, 23 August 2016

Why economic punditry leaves you worrying about the wrong big numbers

Ben Chu in The Independent

Big numbers are all around us, shaping our political debates, influencing the way we think about things. For instance we hear a great deal about the prodigious size of the national debt: £1,603bn in July according to the latest official statistics.

There has been a proliferation of stories about the aggregate deficit of pension schemes, which has jumped to an estimated £1trn in the wake of the Brexit vote. And how could we forget that record net migration figure of 333,000, which figured so prominently in the recent European Union referendum campaign?

Yet there are other massive numbers we seldom hear about. The Office for National Statistics published some estimates for the “national balance sheet” last week. This is the place to look if you want really big numbers. They showed that the aggregate value of the UK’s residential housing stock in 2015 was £5.2 trillion – that’s up £350bn in just 12 months. A lot of people are a lot wealthier than they were a year ago.

That’s property wealth. What about the total value of households’ financial assets? According to the ONS, that stands at £6.2 trillion – up £113bn over the year. It will be even higher since the Brexit vote. Why? Because those ballooning pension scheme deficits we hear about represent a part of the financial assets of households.

Incidentally, a majority of the national debt, indirectly, represents a financial asset of UK households too. We often forget that for every financial liability there has to be a financial asset.

There’s still a good deal of handwringing in some quarters about the supposedly excessive borrowing of the state. But we don’t tend to hear anything about the debt of the corporate sector these days. The ONS reports that the total debt (loans and bonds combined) of British-based companies in 2015 was £1.35 trilion, pretty much where it was back in 2010.

If debt is something to get excited about, shouldn’t company borrowing be a cause for concern? Not, of course, if companies are borrowing to increase their productive capacities.

Actually, the major problem with corporate balance sheets lies in a different area. The ONS data shows that the corporate sector’s overall stocks of cash rose to £581bn in 2015, up £41bn on last year and a sum representing an astonishing 31 per cent of our GDP. It should be seriously worrying that firms are still choosing to keep so much cash on their balance sheets at a time when we badly need them to invest.

We tend to fret about the wrong big numbers. Consider the data on the liabilities of UK-based financial institutions. If you want a large number try this: £20.5 trillion. And around a quarter of these are financial derivative contracts. Many of those companies are foreign firms with UK operations. But UK banks – which we taxpayers still effectively underwrite because they are “too big to fail” – have aggregate liabilities worth £7.5 trillion.

That’s around four times larger than our GDP, yet Mark Carney, the Governor of the Bank of England, has rather strangely suggested he would be comfortable with that figure eventually rising to nine times national income.

Sometimes we fail to appreciate what lies behind the big numbers that shape our debates. The headlines this week said total UK employment grew by 172,000 in the three months to June. But this only tells one part of the story. Other data from the ONS showed that 478,000 people without jobs got them in the quarter, while 317,000 people entered the ranks of the unemployed. That headline figure is a net change in employment figure. And this wasn’t an unusually busy quarter for the jobs market.

This churn goes on constantly, with hundreds of thousands of us leaving jobs and hundreds of thousands taking new ones. The economic threat from the Brexit vote aftermath isn’t just people being made redundant – it’s a slowdown in hiring and that mighty labour market churn.

There’s a similar issue with those ubiquitous net migration figures. Newspapers talk of immigration creating “a new city the size of Newcastle each year” (or some variation on that line). That is rhetoric designed to stir public anxiety.

Yet that’s in context of an estimate of 36 million tourist visits to the UK each year, flows equal to half of the British population. And there are double the number of tourists visits going the other way each year.

What these big numbers emphasise is that we live in a mind-bendingly busy, complex and internationally connected economy. The figures we hear about, and which pundits fixate upon, are often the differences between two, or sometimes more, very large numbers. That bigger context should not be ignored.

The economic risks and fragilities of our economy are not always where we’re invited to believe they are.

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