How misleading economic analysis corrupts our democracy


Today the cover page The Times reports that the Labor Party’s plans to introduce a four-day work week will cost taxpayers £ 17 billion.

The figure is based on a report from the Center for Policy Studies, which attempts to quantify the impact of reducing average full-time hours to 32 hours without loss of pay on public sector payrolls.

At first glance, this seems plausible. After all, if everyone works less, it will surely take more people to maintain the services, which will increase the payroll?

Maybe, but that’s only part of the story.

One of the main arguments in favor of a four-day week is that it will pay off by increasing productivity. Advocates cite studies showing that shorter work hours are associated with higher levels of productivity. Many European countries, such as the Netherlands, Germany and Denmark, work fewer hours than the United Kingdom and yet produce more.

In its analysis, the Center for Policy Studies acknowledges this by assuming that reducing the workweek will increase productivity by 6%, making up for half of the hours lost. He assumes that the remaining lost hours will be made up for by hiring additional staff, which will increase the payroll by £ 17bn per year.

So far everything is going well, right? Not enough.

First, the report’s assumption that productivity will increase by only 6% is controversial. Numerous studies and experiments around the world have shown that introducing a four-day week results in greater productivity increases than that. No later than yesterday it was reported that Microsoft Japan tested a four-day week and found that it increased productivity by 40%. Of course, this may not apply to the public sector in the UK, but it should be noted that if the study assumed productivity gains of 12% instead of 6%, there would be no ‘cost. Strictly speaking.

More importantly, the analysis does not take into account other potential benefits of the policy. For example: several studies found that a shorter work week results in improved physical and mental health for staff and fewer sick days. Public services – especially health and education – are among the most sensitive burnout and staff turnover. Deloitte estimates that poor mental health in the public sector costs £ 1,794 to £ 2,174 per year per employee, and that health sector staff take double the number sick leave than 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 does not seek to seize this potential.

The analysis also ignores evidence that working less is good for the environment. A study estimated that a 25% reduction in working hours could lead to a 36.6% reduction in our carbon footprint. Another found that the introduction of a four-day week in the UK could reduce car mileage by up to 9%. In the face of accelerating climate degradation, the silence of the report on the environmental benefits of the policy is revealing.

Finally, the analysis is based on a static model of the economy which does not actually exist. While any new staff will generate new salary costs, a significant proportion (up to 40%) of these will flow to the treasury in the form of income tax and national insurance, which is deducted from paychecks. Staff. Thus, the supposed “costs” of the policy are considerably overestimated.

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

Instead, it would appear that the study was designed to generate newspaper headlines for the sole purpose of discrediting progressive policy proposals.

Unfortunately, this is not a one-time event. Last year, the same think tank published a widely condemned report who claimed that the cost of Labor’s re-nationalization plans would be “at least £ 176 billion”.

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 one side and liabilities on the other. If the return on invested assets is greater than the cost of borrowing (or if the long-term value of a policy is greater than its original cost), this is not a “cost”, but a “cost”. ‘a credible investment.

While the Center for Policy Studies wants us to believe that there is only one side of the balance sheet, other economists are not so naive. Senior economist Jonathan Portes described the work as “not a serious analysis” and “Propaganda”.

But it’s not just the Center for Policy Studies. In the last general election, the Institute for Fiscal Studies published an influential table in its analysis of the electoral manifesto showing the distributive impact of all the tax and benefit proposals of the Conservative, Labor and Liberal Democrats manifestos.

This graph seemed to show that Labor plans were relatively regressive, even compared to the other two major parties. However, subsequent analysis found that the analysis did not reflect the entire Labor manifesto, but less than 8 percent of spending commitments and 16 percent of tax increases. Many of the excluded measures would probably have had a largely gradual impact.

Economist Simon Wren-Lewis describe IFS analysis as “shameless pre-Keynesian ignorance,” noting that:

“The IFS said that increasing corporate taxes would reduce investment, but did not note that increased demand would have the opposite effect. Because the IFS does not do macro , these points just weren’t raised. No one argued that increasing public investment when it is real interest rates were roughly zero, not only made good economic sense. , but it would also stimulate the economy, likely increase productivity and result in more taxes itself. In other words, the IFS implicitly assumed that this package would have no impact on production. “

As we enter an election campaign that could prove to be the most important in living memory, we can expect a wave of analysis from think tanks trying to discredit progressive politicians on issues. ranging from public investment and housing to climate policy and social protection.

If history is to be trusted, much of this “analysis” will follow a common formula:

1) Calculate an inflated initial cost

2) Exclude a range of economic and social benefits

3) Claiming that the policy is “unaffordable” or “regressive”

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

There are always two sides to an equation. In such an important election, it is essential that both parties are heard.

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