The BBC Economics Editor (Robert Peston) has stated that: “the economy is absolutely at the heart of this election campaign”. And several other BBC Correspondents have made similar observations. But despite these assertions BBC reporting of the election campaign has failed to challenge the consensus amongst the main parliamentary parties in relation to economic policy.
According to this consensus, decisions about the appropriateness or otherwise of fiscal policy measures should be subject to the assessment of the country’s economic prospects determined by the Office for Budget Responsibility.
There are two unsatisfactory aspects to this.
Firstly, the technical analysis upon which the OBR relies for its assessment is demonstrably flawed. For as long as sterling remains a sovereign currency the exchange rate will be a significant factor affecting the country’s economic circumstances. Robert Chote (Chairman of the OBR) states categorically that:
“The depreciation of sterling which began in 2007 has led to a change in the relative prices of domestic and foreign goods which will have had two effects:
(i) It will provide a boost (to) export growth as the relative price of exports of UK goods and services in foreign markets has fallen; and
(ii) It will reduce import growth as the relative price of imports to the UK from foreign markets has increased (often termed import-substitution)”
(source: email from Robert Chote received 4th April 2012)
But not only are these expectations without justification in
terms of economic theory, they are also directly contradicted by the evidence
provided by the Office for National Statistics.
The ONS figures indicate that the OBR’s expectations are completely refuted. The devaluation of sterling in the aftermath of the Great Financial Crisis has raised the prices of goods imported and goods exported alike: there has been no “change in the relative prices of domestic and foreign goods”.
And this ought to come as no surprise since you only need seven types of product to account for more than half of UK exports and you only need the same seven to account for more than half of the UK’s imports as well. The categories are: Mechanical machinery; Electrical machinery; Cars; Medicinal & pharmaceutical products; Refined oil; Crude oil; and Other miscellaneous manufactures. So no wonder prices of imports and exports move together: their prices come from the same world markets.
In fact, the ONS data is entirely consistent with the proper economic theory. In this, the crucial price-relativity affected by the exchange rate is that between tradables and non-tradables. Tradables being those things that are internationally portable (e.g. motor-vehicles; feed wheat; consultancy services etc.,). Non-tradables being those things irrevocably confined to our shores (e.g. residential property; domestic care services; the infrastructure of the public realm etc.,).
The impact of sterling’s devaluation has been to raise the sterling prices of tradables across the board (i.e. both the things we buy from overseas and the things we sell abroad) because their prices are set in international markets (and not in sterling terms) and apply equally to ‘imports’ and ‘exports’ (translated into sterling terms by the same exchange rate), so there is no relative price change such as the OBR expects. And consider the significant difference that this makes: the OBR believes devaluation is expansionary (increasing domestic output) whilst the correct theory says it isn’t (rather the opposite, when you take’ income effects’ into account).
A more detailed consideration of the ONS data confirms that import and export prices within the same (tradable) product categories habitually move together (being basically the same international price of course), showing that the UK is well integrated into global market determination of producer prices for tradables. The pivotal role of the exchange rate is to alter the balance of activity in the UK economy between the tradables and the non-tradables sectors: this comes about because whilst prices in the latter (non-tradables) are inherently set in sterling, prices in the former (tradables) are translated into sterling from abroad by the exchange rate (thus changing when it changes).
The second unsatisfactory aspect of this situation is more constitutional: the role of elected MPs is to challenge (i.e. hold to account) the operation of unelected authority; but by agreeing to abide by the pronouncements/judgements/forecasts of the OBR the political parties are effectively giving immunity from challenge to the unelected authority represented by the OBR. This is inappropriate. And since there is no professional body responsible for standards of practice by economists, the public is excluded from any possibility that errors (such as that relating to the exchange rate) can be exposed and eliminated.
To summarise then: all the main political parties are explicitly committed to accepting the authority of the OBR in determining the official assessment of the country’s economic situation and hence the scope for adoption of varying fiscal policy measures. This is a clear political consensus. It is equally clear that the OBR’s assessment is systematically flawed.
The BBC Editorial Guidelines are commendably clear about what should happen in circumstances such as this: “In such cases...... ...our reporting should resist the temptation to use language and tone which appear to accept consensus or received wisdom as fact or self-evident. ... BBC output should avoid reinforcing generalisations which lack relevant evidence, especially when applying them to specific circumstances. .... Care should be taken to treat areas of apparent consensus with proper rigour.”Unfortunately, in the case which I have identified, the BBC has completely failed to live up to these valiant expressions of intent. By failing to challenge the political consensus about the operation of economic policy, an issue which the BBC claims “is absolutely at the heart of this election campaign”, the BBC is betraying its audience, the general public and the electorate. It's contributing to electoral fraud.