On June 20, the Review of the Government’s case for a High Speed Rail programme was published. This was commissioned by the Transport Select Committee from the independent consultancy, Oxera.
The programme is initially for a high-speed rail link form London to Birmingham and then subsequently for two additonal routes from Birmingham to Manchester and from Birmingham to Leeds. The whole thing is known as the ‘HS2 Y programme’
Oxera’s brief was to ‘provide an independent review of the economic case for the programme and to provide a set of questions that the Committee could use to probe the evidence base put forward by witnesses during its inquiry.’ In considering the economic case, Oxera focused on the economic, social and environment impacts, both monetary and non-monetary.
The summary to the report states that:
Overall, the case for the High Speed Rail programme seems to depend on whether and when the capacity is needed, the selection of the best VfM [value-for-money] approach to delivering that capacity, the degree of uncertainty around the monetised benefits and costs of the preferred options, and judgements on the balance of evidence relating to non-monetised items, such as environment and regeneration impacts (which are likely to be substantive in their own right but not fully set out in the Government’s assessment).
On July 19, the Institute for Economic Affairs, the pro-free-market think-tank, published a highly critical disussion paper, challenging the case for HS2. The paper, High Speed 2: the next government project disaster? arges that:
There is a significant risk that High Speed 2 (HS2) will become the latest in a long series of government big-project disasters with higher-than-forecast costs and lower-than-forecast benefits. HS2 is not commercially viable and will require substantial and increasing levels of subsidy. Taxpayers will therefore bear a very high proportion of the financial risks, which are wholly under-represented in the Economic Case presented by the Department for Transport.
The publication of the report and the IEA discussion paper has fueled the debate between supporters and opponents of HS2, as the articles below demonstrate.
Update
In November 2011, the House of Commons Transport Select Committee came out in favour of the government’s HS2 plans. According to the committee’s chair, Louise Ellman:
A high speed rail network, beginning with a line between London and the West Midlands, would provide a step change in the capacity, quality, reliability and frequency of rail services between our major cities.
A high speed line offers potential economic and strategic benefits which a conventional line does not, including a dramatic improvement in connectivity between our major cities, Heathrow and other airports, and the rest of Europe.
However, she did raise some issues that would need addressing concerning the overall level of investment in the rail network and the encironmental impact of HS2.
Investment in HS2 must not lead to reduced investment in the ‘classic’ rail network. We are concerned that the Government is developing separate strategies for rail and aviation, with HS2 separate from both. We call again for the publication of a comprehensive transport strategy.
Investment in high speed rail has potential to boost growth but may have a substantial negative impact on the countryside, communities and people along the route. This must be better reflected in the business case for HS2 and future phases of the project. We would encourage the Government to follow existing transport corridors wherever possible.
Further update
In January 2012, the government approved HS2. The Transport Secretary, Justine Greening, said:
I have decided Britain should embark upon the most significant transport infrastructure project since the building of the motorways by supporting the development and delivery of a new national high speed rail network.
The ‘articles for further update’ below give reactions to the announcement.
Articles
Is the UK’s high speed rail project a waste of money? BBC News, Rory Cellan-Jones (21/7/11)
On a collision path The Economist blogs, Blighty (21/7/11)
High speed rail dismissed as ‘vanity project’ by right-wing think tank The Telegraph, David Millward (19/7/11)
HS2 high-speed rail plans ‘a recipe for disaster’ Guardian, Dan Milmo (19/7/11)
High speed rail report shows ‘uncertainty’ over benefits Rail.co, A. Samuel (21/7/11)
Our high speed rail future BBC News, Rory Cellan-Jones (21/7/11)
Anger as high-speed rail link to London branded ‘vanity project’ Yorkshire Post (20/7/11)
Articles for update
MPs support plans for a high speed rail network BBC News, Richard Lister (8/11/11)
High-speed rail project will boost economy, say MPs Guardian, Dan Milmo (8/11/11)
High speed rail report ‘raises questions’ say opponents BBC News (8/11/11)
MPs back controversial high-speed rail link Yahoo News, Sebastien Bozon (8/11/11)
HS2 project: ‘Wrong to castigate locals’ BBC Today Programme (8/11/11)
Articles for further update
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
HS2 – What’s in it for you? Channel 4 News (10/1/12)
Ready to depart: But will the HS2 express be derailed before it arrives? Independent, Nigel Morris (11/1/12)
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
Reports and discussion paper
Review of the Government’s case for a High Speed Rail programme Oxera Publishing (20/6/11)
High Speed 2: the next government project disaster? IEA Discussion Paper No. 36 (19/7/11)
Good case for high speed rail to run to Birmingham and beyond, say MPs House of Commons Transport Select Committee News (8/11/11)
Transport Committee – Tenth Report: High Speed Rail House of Commons Transport Select Committee (8/11/11)
Questions
- Itemise (a) the monetary costs and benefits and (b) the non-monetary costs and benefits of HS2 that were identified by Oxera. Try to identify other costs and benefits that were not included by Oxera.
- Why are the costs and benefits subject to great uncertainty?
- How should this uncertainty be taken into account by decision-makers?
- Explain the process of discounting in cost–benefit analysis. How should the rate of discount be chosen?
- What are the main criticisms of the report made by the IEA discussion paper?
- Assess these criticisms.
Most people are risk-averse: we like certainty and are generally prepared to pay a premium for it. The reason is that certainty gives us positive marginal utility and so as long as the price of insurance (which gives us certainty) is less than the price we place on certainty, we will be willing to pay a positive premium. By having insurance, we know that should the unexpected happen, someone else will cover the risk. As long as there are some risk-averse people, there will always be a demand for insurance.
However, will private companies will be willing to supply it? For private market insurance to be efficient, 5 conditions must hold:
1. Probabilities must be independent
2. Probabilities must be less than one
3. Probabilities must be known or estimable
4. There must be no adverse selection
5. There must be no moral hazard
If these conditions hold or if there are simple solutions, then insurance companies will be willing and able to provide insurance at a price consumers are willing to pay.
There are many markets where we take out insurance – some of them where insurance is compulsory, including home and car insurance. However, one type of insurance that is not compulsory is that for cyclists. No insurance is needed to cycle on the road, but with cycle use increasing and with that the number of accidents involving cyclists also increasing, the calls for cyclists to have some type of insurance is growing. If they are hit by someone without insurance and perhaps suffer from a loss of income; or if they cause vehicle damage, they will receive no compensation. However, whilst the risk of accident is increasing for cyclists, they are still statistically less likely to cause an accident than motorists. Perhaps a mere £30 or £40 per year for a policy is a price worth paying to give cyclists certainty. At least, this is what the Association of British Insurers (ABI) is claiming – hardly surprising when their members made a combined loss of £1.2 billion!
Articles
Cyclists ‘urged to get insurance’ BBC News, Maleen Saeed (26/11/11)
Cyclists urged to get more insurance by … insurance companies Road.CC, Tony Farrelly (26/11/11)
The future of cycle insurance Environmental Transport Assocaition (24/11/11)
Questions
- With each of the above conditions required for private insurance to be possible, explain why each must hold.
- What do we mean by no moral hazard and no adverse selection? Why would their existence prevent a private company from providing insurance?
- Using the concept of marginal utility theory, explain why there is a positive demand insurance.
- What might explain why cyclists are less likely to take out insurance given your answer to the above question?
- Do you think cyclist insurance should be compulsory? If governments are trying to encourage more sustainable transport policy, do you think this is a viable policy?
The following podcast from the BBC Radio 4’s series, A Point of View is by John Gray, emeritus professor of European thought at the LSE and author of False Dawn: The Delusions of Global Capitalism. In the podcast, he considers whether Marx, the great 19th century thinker, was right to predict the demise of capitalism.
Marx’s picture of the end of capitalism and the stages of society that would succeed it have been dismissed by most academics and commentators as quite false. Marx predicted that as capitalist economies became increasingly unstable and unequal, so workers would rise up in revolution. What would follow would be a socialist state in which the means of production would be collectively owned and output and distribution would be planned. As socialist economies became wealthier and life was perceived to be fairer, so the need for state control would diminish. Eventually the state would wither away and the ultimate stage of communism would be reached, where there would sufficient resources to reward everyone according to their needs.
Two of the key criticisms of Marx’s analysis are: (a) capitalism was overthrown in only a few countries and (b) in the countries that did adopt central planning, such as the Soviet Union and Eastern European countries, the state did not wither away; instead, they reverted to capitalism.
But whilst Marx’s analysis of a post-capitalist world may have been flawed, his analysis of the weaknesses and tensions of capitalism have been prophetically correct in many regards. As John Gray says:
It’s not just capitalism’s endemic instability that he understood, though in this regard he was far more perceptive than most economists in his day and ours.
More profoundly, Marx understood how capitalism destroys its own social base – the middle-class way of life. The Marxist terminology of bourgeois and proletarian has an archaic ring.
But when he argued that capitalism would plunge the middle classes into something like the precarious existence of the hard-pressed workers of his time, Marx anticipated a change in the way we live that we’re only now struggling to cope with.
Listen to the podcast and try to assess whether we are witnessing a 21st century version of Marx’s 19th century vision.
A Point of View: The revolution of capitalism (article) BBC Radio 4, John Gray (4/9/11)
A Point of View: The revolution of capitalism (podcast) BBC Radio 4, John Gray (4/9/11) (see alternatively)
Has Western capitalism failed? BBC News (23/9/11)
Questions
- Why, according to Marx, do capitalist societies contain the seeds of their own destruction? What role would the middle classes play in this?
- Why does capitalism transform everything it touches?
- Explain what is meant by ‘creative destruction’.
- How would Marxists respond to the criticisms of their analysis that the middle classes have got proportionately bigger and that, with the advent of the minimum wage, even the poorest workers are protected?
- To what extent has the experience of the developed world since the banking crisis of 2007/8 lent weight to the Marxist analysis?
- John Gray says that “Today there is no haven of security.” What does he mean by this and is there an answer within capitalism?
- And here’s a hard question to finish with: if capitalism does contain the seeds of its own destruction, what will succeed it? Will it be something other than capitalism and, if so, what? Or will it be a new variety of capitalism and, if so, what will it look like?
Every quarter, the Bank of England publishes its Inflation Report. This analyses developments in the macroeconomy and gives forecasts for inflation and GDP growth over the following 12 quarters. It is on the forecast for inflation in 8 quarters’ time that the Bank of England’s Monetary Policy Committee primarily bases its interest rate decision.
According to the February 2011 Inflation Report forecast, CPI inflation is expected to be at or slightly below its 2% target in two year’s time, but there is considerable uncertainty about this, as shown in the fan diagram in Chart 3 of the Overview. What is more, inflation is likely to rise considerably before it falls back. As the Report states:
CPI inflation is likely to pick up to between 4% and 5% in the near term and to remain well above the 2% target over the next year or so, reflecting in part the recent increase in VAT. The near-term profile is markedly higher than in November, largely reflecting further rises in commodity and import prices since then. Further ahead, inflation is likely to fall back, as those effects diminish and downward pressure from spare capacity persists. But both the timing and extent of that decline in inflation are uncertain.
It is interesting to look back at the Inflation Reports of a year ago and two years ago to see what was being forecast then and to compare them with what has actually happened. It’s not too difficult to explain why the forecasts have turned out to be wrong. Hindsight is a wonderful thing. Unfortunately, foresight is less wonderful.
Articles
BoE forecasts pave way to rate rise, but King cautious Reuters, Matt Falloon and Fiona Shaikh (16/2/11)
Inflation report: what the economists say Guardian (16/2/11)
Inflation will rise sharply, says Mervyn King BBC News (16/2/11)
The unrepentant governor BBC News blogs: Stephanomics, Stephanie Flanders (16/2/11)
Inflation: Mervyn and me BBC News blogs: Idle Scrawl, Paul Mason (16/2/11)
What would Milton do? The Economist, Buttonwood (16/2/11)
Why inflation hawks are still grounded Fortune, Colin Barr (16/2/11)
Podcast and Webcast
Bank of England Press conference: Podcast (16/2/11)
Bank of England Press conference: Webcast (16/2/11)
Inflation Report
Inflation Report, portal page for latest report and sections, Bank of England
Inflation Report, February 2011: full report, Bank of England
Data
Forecasts for the UK economy: a comparison of independent forecasts, HM Treasury
Prospects for the UK economy, National Institute of Economic and Social Research press release (1/2/11)
Output, Prices and Jobs, The Economist (10/2/11)
Questions
- Examine the forecasts for UK inflation and GDP for 2010 made in the February 2009 and February 2010 Bank of England Inflation Reports. How accurate were they?
- Explain the difference between the forecasts and the outturn.
- Why is it particularly difficult to forecast inflation and GDP growth at the present time for two years hence?
- What are the advantages of the Bank of England using a forward-looking rule as opposed to basing interest rate decisions solely on current circumstances?
- Explain whether or not it is desirable for interest rates to be adjusted in response to external shocks, such as commodity price increases?
- What do you understand by the term ‘core’ inflation? Is this the same thing as demand-pull inflation?
- How is the Bank of England’s policy on interest rates likely to affect expectations? What expectations are particularly important here?
- Explain whether or not it is desirable for interest rates to be adjusted in response to external shocks, such as commodity price increases?
Business leaders and politicians pay a great deal of attention to economic forecasts. And yet these forecasts often turn out to be quite wrong. Very few economists predicted the banking crisis of 2008 and the subsequent credit crunch and recession. And the recently released 2010 Q4 growth figures for the UK economy, which showed a decline in real GDP of 0.5%, took most people by surprise.
What is more, forecasters often disagree. If, for example, you look at the forecasts made by various panel members for Consensus Forecasts, you can see the divergence between their various predictions.
So why is economic forecasting so unreliable? Is it the fault of economic models? Or are there too many unpredictable factors that can impact on economies – factors such as business and consumer confidence, or political events, or natural disasters, such as the recent floods in Australia, South Africa and Brazil? Will economic forecasting always be a very inexact science?
Articles
Davos 2011: Why do economists get it so wrong? BBC News, Tim Weber (27/1/11)
Popular Semi-Science Slate, Robert J. Shiller (24/1/11)
Fed Often Gets It Wrong In Its Forecasts on US Economy American Public Media, Justin Wolfers (26/1/11)
Don’t bet on economic forecasting CNBC, Jeff Cox (21/9/10)
Forecasts
Forecasts for the UK economy HM Treasury
Econ Stats: The Economic Statistics and Indicators Database Economy Watch (large database of worldwide annual statistics, including forecasts to 2015)
World Economic Outlook IMF (follow link in right-hand panel)
OECD Economic Outlook: Statistical Annex OECD
European Economic Forecasts European Commission, Economic and Financial Affairs DG
Questions
- For what reasons may economic forecasts turn out to be wrong?.
- To what extent is economic forecasting like weather forecasting? Which is harder and why?
- Wo what extent can the poor accuracy of economic forecasts be blamed on the application of the ‘wrong type of economics’?
- How much variation is there in the independent forecasts of the UK economy reported by the Treasury (see HM Treasury link above)?
- Using the HM Treasury link, compare the forecasts made of 2010 in January 2010 with those made of 2010 in January 2011. Attempt an explanation of the differences.
On June 20, the Review of the Government’s case for a High Speed Rail programme was published. This was commissioned by the Transport Select Committee from the independent consultancy, Oxera.