Beware the nostrums of economists

 

T. T. RAM MOHAN

 

TOPICS

economy, business and finance

Politicians should not fall for the economic fad of the day. Policies should be subjected to democratic processes and be responsive to people’s aspirations

“The ideas of economists,” John Maynard Keynes famously wrote, “… are more powerful than is commonly understood. Indeed the world is ruled by little else.” He might have added that the ideas of economists can often be dangerous. Policies framed on the basis of the prevailing or dominant economic wisdom have often gone awry and the wisdom was later found to rest on shaky foundations.

A striking case in point is the debate on austerity in the Eurozone as an answer to rising public debt and faltering economic growth. One school has long argued that the way to reduce debt and raise the growth rate is through austerity, that is, steep cuts in public spending (and, in some cases, higher taxes). This school received a mighty boost from a paper published in 2010 by two economists, Carmen Reinhart and Kenneth Rogoff (RR). The paper is now at the centre of a roaring controversy amongst economists.

The RR paper showed that there is a correlation between an economy’s debt to GDP ratio. As the ratio rises from one range to another, growth falls. Once the debt to GDP ratio rises beyond 90 per cent, growth falls sharply to -0.1 per cent. For some economists and also for policymakers in the Eurozone, this last finding provided an ‘aha’ moment.

CUTS IN SPENDING

Since public debt was clearly identified as the culprit, it needed to be brought down through cuts in spending. The IMF pushed this line in the bail-out packages it worked out for Greece and Portugal among others. The U.K. chose to become an exemplar of austerity of its own accord.

It now turns out that there was a computational error in the RR paper. Three economists at the University of Massachusetts at Amherst have produced a paper that shows that the effect of rising public debt is nowhere as drastic as RR made it out to be. At a debt to GDP ratio of 90 per cent, growth declines from an average of 3.2 per cent to 2.2 per cent, not from 2.8 per cent to -0.1 per cent, as RR had contended.

You could say that even the revised estimates show that growth does fall with rising GDP. However, as many commentators have pointed out, correlation is not causation. We cannot conclude from the data that high debt to GDP ratios are the cause of low growth. It could well be the other way round, namely, that low growth results in a high debt to GDP ratio.

There is a broad range of experience that suggests that high debt to GDP ratios are often self-correcting. Both the U.S. and the U.K. emerged from the Second World War with high debt to GDP ratios. These ratios fell as growth accelerated in the post-war years. India’s own debt to GDP ratio kept rising through the second half of the 1990s and the early noughties. As growth accelerated on the back of a global boom, the ratio fell sharply. The decline in the ratio did not happen because of expenditure compression, which the international agencies and some of our own economists had long urged.

NEEDED, RETHINK

The controversy over the RR paper should prompt serious rethinking on austerity in the Eurozone. Many economists have long argued that the sort of austerity that has been imposed on some of the Eurozone economies or that the U.K. has chosen to practise cannot deliver higher growth in the near future. It only condemns the people of those economies to a long period of pain.

The IMF itself has undergone a major conversion on this issue and is now pressing the U.K. to change course on austerity. Its chief economist, Olivier Blanchard, went so far as to warn that the U.K. Chancellor, George Osborne, was “playing with fire.” The IMF’s conversion came about late last year when it acknowledged that its own estimates of a crucial variable, the fiscal multiplier, had been incorrect. In its World Economic Outlook report published last October, the IMF included a box on the fiscal multiplier, which is the impact on output of a cut or increase in public spending (or an increase or reduction in taxes). The smaller the multiplier, the less costly, in terms of lost output, is fiscal consolidation. The IMF had earlier assumed a multiplier for 28 advanced economies of around 0.5. This would mean that for any cut in public spending of X, the impact on output would be less than X, so the debt to GDP ratio would fall.

REVISED ESTIMATE

The IMF now disclosed that, since the sub-prime crisis, the fiscal multipliers had been higher — in the range of 0.9 to 1.7. The revised estimate for the multiplier meant that fiscal consolidation would cause the debt to GDP ratio to rise — exactly the opposite of what policymakers in the Eurozone had blithely assumed. The people of Eurozone economies that have seen GDP shrink and unemployment soar are unlikely to be amused by the belated dawning of wisdom at the IMF.

This is not the first time the IMF has made a volte face on an important matter of economic policy. Before the East Asian crisis and for several years thereafter, the IMF was a strong votary of free flows of capital. During the East Asian crisis, many economists had pointed out that the case for free flows of capital position lacked a strong economic foundation, unlike the case for free trade. This did not prevent the IMF from peddling its prescription to the developing world. India and China refused to go along.

In 2010, the IMF discarded its hostility to capital controls. It said that countries would be justified in responding to temporary surges in capital flows. A year later, it took the position that countries would be justified in responding to capital surges of a permanent nature as well. Last December, it came out with a paper that declared that there was “no presumption that full liberalisation is an appropriate goal for all countries at all times.” The IMF’s realisation was a little late in the day for the East Asian economies and others whose banking systems have been disrupted by volatile capital flows.

Capital account convertibility is one instance of a fad in policy catching on even when it lacked a strong economic foundation. Another is privatisation, for which Margaret Thatcher has been eulogised in recent weeks. Thatcher’s leap into privatisation in the U.K. was driven by her conviction that the state needed to be pushed back. After privatisation became something of a wave, economists sought to find theoretical and empirical grounds for it and initially came out overwhelmingly in favour.

GRADUATED APPROACH

It took major mishaps in privatisation in places such as Russia and Eastern Europe for the conclusions to become rather more nuanced. Privatisation works in some countries, in some industries, and under conditions in which law and order, financial markets and corporate governance are sound. Moreover, partial privatisation — or what is called disinvestment — can be as effective as full privatisation. As in the case of capital account convertibility, India’s graduated approach to liberalisation has been vindicated. It is, perhaps, no coincidence that the fastest growing economies in the world until recently, China and India, did not embrace the conventional wisdom on privatisation.

Other fads have fallen by the wayside or are seen as less than infallible since the sub-prime crisis, and these relate to the financial sector. ‘Principles-based’ regulation is superior to ‘rule-based’ regulation. The central bank must confine itself to monetary policy and regulatory powers must be vested in a separate authority. Monetary policy must focus on inflation alone and must not worry about asset bubbles and financial stability. One can add to this list.

What lessons for policymaking can we derive from the changes in fashion amongst economists? Certainly, one is that politicians and policymakers must beware the nostrums of economists, and they must not fall for the economic fad of the day. Economic policies must always be subject to democratic processes and be responsive to the aspirations of people. Broad acceptability in the electorate must be the touchstone of economic policies. Another important lesson is that gradualism is preferable to ‘big bang’ reforms.

India’s attempts at liberalisation, one would venture to suggest, have conformed to these principles better than many attempted elsewhere. Such an approach can mean frustrating delays in decision-making and the results may be slow in coming. However, social turbulence is avoided, as are nasty surprises, in economic outcomes. At the end of the day, economic performance turns out to be more enduring.

(The author is a professor at IIM Ahmedabad; ttr@iimahd.ernet.in)

Doctors' basic errors are killing 1,000 patients a month

The Independent 13 July 2012

Almost 12,000 patients are dying needlessly in NHS hospitals every year because of basic errors by medical staff, according to the largest and most detailed study into hospital deaths ever performed in the UK.

The researchers from the London School of Hygiene and Tropical Medicine and colleagues found something went wrong with the care of 13 per cent of the patients who died in hospitals. An error only caused death in 5.2 per cent of these – equivalent to 11,859 preventable deaths in hospitals in England.

Helen Hogan, who led the study, said: "We found medical staff were not doing the basics well enough – monitoring blood pressure and kidney function, for example. They were also not assessing patients holistically early enough in their admission so they didn't miss any underlying condition. And they were not checking side-effects... before prescribing drugs."

In one case a middle-aged man who had a cyst on his neck removed developed an infection. He was treated with antibiotics but medical staff did not realise he was not responding until it was too late and he died.

In another case, a 40-year-old obese woman was in hospital for three weeks while doctors investigated symptoms including vomiting and weight loss before discovering she had ovarian cancer. She was never given preventive treatment for blood clots – a risk of prolonged bed rest – and died of a clot on the lung.

The study was based on analysis of 1,000 deaths at 10 NHS trusts during 2009. Previous estimates have suggested up to 40,000 deaths a year are caused by errors in care but these have been based on international studies and have not directly linked the errors with the cause of death.

Dr Hogan added: "Hospitals must learn from careful analysis of preventable deaths and make every effort to avoid [them]."

Most of the patients who died were elderly and frail and suffering from multiple conditions. But some were in their 40s and 30s. More supervision by senior consultants was required to ensure junior doctors carried out proper assessment on admission and liaised with GPs and social services.

International evidence suggests one in 10 hospital patients suffers harm as a result of errors in their care, ranging from short-term effects from a wrong prescription to severe harm resulting from an operation on the wrong limb.

But the new study, published online in BMJ Quality and Safety, found errors of omission were more frequent than active mistakes.

Dr Hogan said: "The NHS in the future is going to have to look after very frail elderly patients as their numbers increase. Our systems are not robust enough to ensure we avoid harming them."

The authors say the quality of hospital care should be assessed on the basis of harm caused by errors, rather than on deaths. "If 95 per cent of deaths in hospital are not due to preventable poor care, the scope for hospitals to demonstrate reduction in their mortality rate is limited," they say.

A Department of Health spokesperson said it was an important study which revealed a picture of preventable deaths.

"Patients have a right to expect the very best care from the NHS. Any preventable death in hospital is unacceptable and we expect the NHS to ensure patients receive high-quality, safe and effective care. We know that data like this can help hospitals to improve services," said the spokesperson.

Man who died of dehydration was killed by hospital neglect

Neglect by medical staff led to a man dying of dehydration in a hospital bed, a coroner has ruled. Medical staff at St George's Hospital in Tooting, south London, did not give Kane Gorny vital medication to help him retain fluids. The 22-year-old, who was a keen sportsman, even phoned police from his hospital bed as he was so desperate for a glass of water, the inquest heard. Deputy Coroner Dr Shirley Radcliffe told the hearing: "A cascade of individual failures has led to an incredibly tragic outcome."

She recorded a narrative verdict at Westminster Coroner's Court and said Mr Gorny had died from dehydration contributed to by neglect. Dr Radcliffe said: "Kane was undoubtedly let down by incompetence of staff, poor communication [and] lack of leadership, both medical and nursing."

James Stevenson, the solicitor for Mr Gorny's family, said they were "devastated by the number of missed opportunities" to prevent his death.

When is poor form just randomness?

Ed Smith in Cricinfo

There is a nasty moment in the career of every coach or captain when he looks around the dressing room during one of his own team talks and asks himself the startling but pertinent question, "Who am I talking to? These words, these exhortation, these commands - who are they aimed at? Who do I want to be listening? Is anyone? And should anyone be listening, even to me?" 

And yet all captains were once themselves in the ranks, so they must still remember the days when they were among the non-listeners rather than the un-listened to. One colleague of mine kept a newspaper crossword (unobtrusively placed next to his left thigh) to look at during every team talk. As the coach yelled and blamed players, my team-mate would nod sagely, as if in agreement. But he wasn't nodding about the team talk at all; he was nodding in satisfaction at having cracked nine across.

And I don't blame him. In fact, the ability to tune out of team talks is a vital preliminary for preserving your sanity as a player. Why? Because cricket is a very difficult game to generalise about and because it is very rare that all the components of a team underperform simultaneously. Far more often - after any day's play - the dressing room contains a wide variety of individual performances. So why should a player who has prepared optimally and performed admirably allow his mood to be ruined by a team talk that is aimed entirely at someone else? Cricket is famously a team game played by individuals - a fact it is all too easy to forget when you are speaking to the whole team.

Look at England's performances in Test matches this winter and ask yourself what changed between the abject failures of Pakistan and the superb victory of the second Test in Colombo?

The bowling? No change - it was excellent throughout. The wicketkeeping? No change. The fielding? No change. The body language? A symptom rather than a cause. The team mentality? No change that I could discern. The effort and discipline? No change that I could pick up.

The difference was very simple: England succeeded in getting runs in Colombo where they failed to get runs in the UAE and in Galle. Only one element of their game had been problematic. And once England's batting was fixed - or fixed itself - the team returned to winning ways and preserved their status as the No. 1-ranked Test team in the world.

It is alarmingly simple. All that disappointment and suffering - the defeats, the soul searching, the media criticism, the frankly baffling idea that Andrew Strauss ought to be sacked as captain, and the barking mad suggestion that Kevin Pietersen was no longer good enough - it was all caused by something utterly straightforward: England's six frontline batsmen simply weren't scoring enough runs.

How can we explain the fact that so many good players were out of form simultaneously? The coach, Andy Flower, was typically self-critical in blaming the team's preparation for the batting failures earlier this winter. I have a different theory. England's collective batting woes did not necessarily have a direct "cause" of the sort that journalists and fans like to believe must always exist. It may not have been a question of effort or preparation or even collective mood.

Team batting failures are sometimes caused by the simple fact of randomness. What do I mean by randomness? Imagine the career scores of each batsman in the team printed in sequence on a piece on paper. It would look like a cardiogram - the upward spikes are the hundreds, the lowest points are the zeroes. Now imagine six of these cardiograms - one for each of the team's batsmen - laid one above the other on the same page.

	England's collective batting woes did not necessarily have a direct "cause" of the sort that journalists and fans like to believe must always exist. It may not have been a question of effort or preparation or even collective mood

If the same batting team stays together for a long enough period of time - and England's selection policy is very stable - there will inevitably be a time at which all six of the cardiograms are at a low point. Obviously this is a catastrophe for the team: no one is getting any runs! But it does not follow that the batsmen are slacking or the coaches are useless or the tactics are flawed. It really is just one of those things.

The question, and it is a hugely problematic one, is: how can we know if it really was random rather than "caused" by errors of approach and application? There is no complete answer to that. It is a question of judgement; and good judgement is what singles out the top coaches and captains.

The best coach I've ever worked with constantly used to ask if what everyone else was calling "form" was in fact randomness. When my team was bowled out for a low score, he'd say, "Did you actually bat badly? Or did you just nick everything?" He meant that sometimes the ratio of edges to plays-and-misses is unusually high. The underlying logic is important: it is a sign of wisdom not to draw too many conclusions from a small sample of outcomes.

If this coach sounds like a soft touch, don't be fooled. He sometimes asked the same question in reverse form when we won. He would shock me by saying, "You won, but for much of the game you were outplayed. I think you need to consider changes." The point - a point that most students of sport entirely miss - is that the foundations of lasting success are built on the correct assessment of a team's fundamentals: its ability, its cohesion, its discipline and preparation. Those fundamentals change slowly, and it is easy to misinterpret a random fluctuation as a fundamental crisis.

Look at other sports. Last autumn, after a string of defeats, Arsenal languished at the bottom of the Premier League. There was a clamour for Arsene Wenger, their superb manager, to be sacked - despite his stellar record of producing successful teams while also balancing the budget. Does anyone now believe that Arsenal would have recovered so brilliantly (they are third in the table and set for yet another year of qualification for Europe) under a different manager? No, what was required was for Arsenal's board and fans to hold their nerve instead of over-react to a small sample of poor results.

The same applies to this England team. They had a shock this winter. They are right to ask themselves tough questions about how such a good team lost four consecutive Test matches. But they would be wrong to think it is because they are picking the wrong players or have the wrong captain.

Medical Errors - Eighth Leading Cause of Death in the US

According to the Institute of Medicine, between 690,000 and 748,000 patients are affected by medical errors in the US every year and between 44,000 and 98,000 die from them. Even this low ball estimate makes medical mistakes the eighth leading cause of death worse than breast cancer, AIDS and motor vehicles accidents. It also makes medicine far more error prone than high-risk fields. For commercial aviation to take the same toll in the US as medical errors do, a full-up 747 would have to crash every three days, killing everyone on board.

More troubling is the medical profession's traditional response to these disturbing statistics, which has largely involved evasion, obfuscation, minimisation, defensiveness and denial....

"Observing more senior physicians, students learn that their mentors and supervisors believe in, practice and reward the concealment of errors. They learn to talk about unanticipated outcomes until a mistake morphs into a complication. Above all they learn not to tell the patient anything."  - Nancy Berlinger in After Harm.

Extracted from Being Wrong by Kathryn Schulz