Is this a pleb I see before me? Reality and perception in the markets

Andrew Mitchell, the government’s chief whip, remains in some difficulty after his exchange with the police at the gates of Downing Street. At the heart of the incident there is an objective reality. Either he used the word pleb, or he didn’t. Either the police were officious jobsworths, or they were the epitome of politeness.

But, in many instances, perception matters much more than reality. It is perhaps unfortunate for Mitchell that he went to Rugby School, the home of the arrogant bully Flashman in the novel Tom Brown’s Schooldays. This fictional setting, and this fictional character, have played an important role in shaping how many regard the incident.

Perception often matters more than reality in economic policy, also. After allowing for one-offs, UK public borrowing was 22 per cent higher in the April-August period than in the same months last year. So the deficit-reducing Osborne is actually presiding over a sharp increase in government borrowing. Yet the markets continue to believe in him, to have faith that he is committed to deficit reduction.

Further, the objective difference between the policies of Osborne and Labour’s Ed Balls is minute. Osborne wants to achieve his target for deficit reduction in six years. Balls has the radical alternative of getting to the same number in seven years.

The margins of error involved in forecasting public spending and receipts, even one year ahead, are also huge. And the potential error in predicting the projected deficit, the difference between these two numbers, is even larger.

Given the size of this margin of error, to all intents and purposes there is no effective difference between the strategies of Balls and Osborne. Yet Balls struggles to gain credibility in financial markets, while Osborne currently has their confidence. Narrative and perception outweigh reality.

This Time is Different, the monumental study of government debt by Carmen Reinhart and Ken Rogoff, former chief economist at the International Monetary Fund, showed that, when public sector debt to GDP ratios rise above the 90 to 100 per cent mark, there is a sharply increased risk of lower growth and default. The data shows clearly that Germany is hovering very close to this critical value. Yet it is perceived as the epitome of financial stability.

A great deal of economic policy in Europe, at the moment, can be seen as an attempt by various players to get their narrative of events to “go viral.” They want to reassure financial markets, almost regardless of objective reality.

This is the future of macroeconomics. With a real basket case, like Greece, the facts are so glaring they will be hard to ignore. But, in general, as with the Mitchell incident, the truth is usually capable of more than one interpretation. Perception trumps reality.

by Paul Ormerod

As published in City AM on Wednesday 26th September 2012

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Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

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Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.