Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 21 August 2018

The biggest economic policy mistake of the last decade, and it had nothing to do with academic economists


"The biggest policy mistake of the last decade" is the title of an article by Ryan Cooper, and the mistake is of course austerity. (It is a very US focused piece, so Brexit is not on the map.) Cooper goes through all the academics who gave reasons why austerity was necessary and how their analysis later fell to bits. (How much they fell to bits is still a matter of dispute as far as these authors are concerned.)

Here is his concluding paragraph:
“As we have seen, the evidence for the Keynesian position is overwhelming. And that means the decade of pointless austerity has severely harmed the American economy — leaving us perhaps $3 trillion below the previous growth trend. Through a combination of bad faith, motivated reasoning, and sheer incompetence, austerians have directly created the problem their entire program was supposed to avoid. Good riddance.”

There is a lot I could say about the details of the article, but this conclusion is essentially correct, and it applies at least as much to the UK and to the Eurozone countries. With Trump’s large tax cuts for the rich paid for in large part by borrowing, the Republicans can no longer credibly tell everyone austerity is essential. In contrast the political right’s enthusiasm for austerity in Europe remains strong.

Reading the article brought back memories of my first year or two writing this blog, where I became part of a mainly US blog scene of mainstream academics opposed to austerity, lead by Paul Krugman and Brad DeLong. We were trying to take down the academic arguments for austerity, and we succeeded. As Cooper’s article suggests it was not a very difficult task. Sometimes very senior economists who should have known better made simple mistakes of the kind I discussed here. On other occasions, like the predictions of massive inflation from Quantitative Easing that Cooper discussed, events quickly proved the Keynesians correct. Only in the case of the studies from the two pairs of Alesina and Ardagna and Reinhart and Rogoff was additional research required to challenge their conclusions.

As far as us Keynesians were concerned, the intellectual battles were won by the end of 2012 if not before. In particular Paul De Grauwe’s influential analysis of why Eurozone countries were experiencing a debt crisis, pointing to the lack of a sovereign lender of last resort, put an end to the academic credibility of ‘we are going to become like Greece’ stories. When the ECB introduced OMT in September 2012 and the Eurozone debt crisis came to an end De Grauwe was proved right. In 2013 Krugman wrote of austerity:
“Its predictions have proved utterly wrong; its founding academic documents haven’t just lost their canonized status, they’ve become the objects of much ridicule.”

What we didn’t know for sure then was the lasting damage that austerity would bring, and which Cooper notes.

I want to add two important points that Cooper’s article does not cover. The first is that although by 2013 most academics had become convinced about the austerity mistake (it was always a minority view anyway), economic journalists in the non-partisan media could not recognise that because the politicians were continuing to implement the policy. Here is Robert Peston in 2015:
“And before I am savaged (as I always am) by the Krugman crew of Keynesian economists for even allowing George Osborne’s argument an airing, I am not saying that the net negative impact on our national income and living standards of cutting the deficit faster is less than their alternative route of slower so called fiscal consolidation. I am simply pointing out that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly persuaded they’ve won this match – and take the somewhat patronising view that voters who think differently are ignorant sheep led astray by a malign or blinkered media).”

We now know that voters were indeed being led astray by a malign or blinkered media, or at least a media that did not have the courage to call the result of the academic debate.

The second point is that this academic debate had zero impact on politicians. In that sense Cooper’s article is of purely academic concern. Austerity was not begun because politicians chose the wrong academic macroeconomists to take advice from, and the fact that the Keynesians won the debate therefore had no impact on what they did. The academic debate was in this sense a complete sideshow. I think many Keynesian academics understood that: it was a fight we had to win but we were under no illusions it would change anything. I wrote in 2012 that if all academics were united we might have an impact on public opinion, but that illusion did not last very long and Brexit showed it was indeed an illusion.

I think this lack of influence that academic economics can have is not understood by many. It often suits some heterodox economists to pretend otherwise. Economists can be influential, but only when politicians want to listen, or the media is prepared to confront them with academic knowledge. For example politicians have not done nearly enough to ensure another financial crisis does not happen, but that isn’t because economists have told them not to or have not shown them how to do so. It is because politics prevents it happening.

The reason why economists like Alesina or Rogoff featured so much in the early discussion of austerity is not because they were influential, but because they were useful to provide some intellectual credibility to the policy that politicians of the right wanted to pursue. The influence of their work did not last long among academics, who now largely accept that there is no such thing as expansionary austerity or some danger point for debt. In contrast, the damage done by austerity does not seem to have done the politicians who promoted it much harm, in part because most of the media will keep insisting that maybe these politicians were right, but mainly because they are still in power.  

Saturday, 18 August 2018

Why an anti-Corbyn party is a terrible idea


Within a few months of Corbyn’s election, I wrote about what I called the anti-Corbynistas: a smallish group of Labour MPs and many in the media who were happy to attack Corbyn for the sole purpose of bringing him down. I wanted to make the simple point that their efforts were counterproductive. If, as they kept insisting, Corbyn’s chances of winning any election were zero, it was better that members find that out without their efforts. If they carried on, most members would put down any negative performance to the activities of the anti-Corbynistas.

In fact I understated my case. When Labour MPs voted no confidence in Corbyn after the 2016 referendum, most members read it as part of a plot not only to defeat Corbyn but also to take power away from themselves. And they didn’t want power for powers sake, but just to stop the steady drift to the right among their party leaders with no apparent electoral benefit. I tried as hard as I could to suggest that many MPs had voted no confidence out of frustration at Corbyn’s administrative incompetence and the failure of his pro-Remain campaign, but I have no doubt that that the activities of the anti-Corbynistas meant many members just didn’t get beyond the idea of a power grab by MPs. To put it bluntly, the anti-Corbynistas helped ensure Corbyn’s victory against Owen Smith.

After that the anti-Corbynistas went quiet. Labour fought a campaign where divisions within Labour were not the number one topic, and they produced a spectacular swing to Labour in the three weeks before the election. The argument that Corbyn would always be hopeless at the polls died in those three weeks.

A year later, and it seems that Labour’s real difficulties with antisemitic members has led to the return of the anti-Corbynistas. Here is Chuka Umunna in The Independent. The aim it seems is no longer to persuade Labour party members to give up on Corbyn because he cannot win. Instead the anti-Corbynistas have given up on Labour party members. In the short term that is surely right. Most of the membership do not care that much who he has been ‘linked to’ in the past: the MSM has cried wolf too many times. They know that Corbyn has always stood up for Palestinians and they respect him for it. The more he is attacked in the MSM the more it seems he provides a genuine challenge to the establishment, and that is exactly what members want.

However the leap the anti-Corbynistas then make is far more tenuous. Because they give up on Labour party members now, they may give up on the Labour party forever, and form a new political party. The best time to do that is now, so the argument might go, because Corbyn is under pressure over his Brexit stance and because of the antisemitism row. That logic is no better, and is probably far worse, than their logic after Corbyn was elected. It only makes sense if you think a Corbyn led government of centre left MPs is worse than a government that gave us austerity and Brexit.

Of course it is possible that a new centre party could sweep all before it. But our FPTP system makes it very difficult for new parties to break through in terms of winning seats. UKIP is an obvious example. The most successful new party of recent times is the SDP, and it ultimately failed. If a new party is to succeed, it has to win between 30% and 40% of the popular vote. Yet in our most recent general election in 2017 the third party vote was squeezed, and the two main parties won over 82% of the popular vote between them. Everyone points to Macron, but he won 24% of votes in the first round. That is not enough.

Where will the votes for a new centre party come from? Thinking in simple left right terms, the steady move to the right in the Conservative party, particularly over Brexit, has left a gap which a more right wing version of Miliband’s Labour could fill, although policies like a Mansion tax or higher corporation tax would probably have to go. Equally those voting for Miliband’s Labour who thought it was a tad left wing could be attracted to a new centre party, as could those Remainers who will not forgive Corbyn for accepting the referendum vote.

However if we think in two dimensional terms, with a social conservative/liberal axis, the position looks less favourable. Right wing social conservatives will stick to the Conservatives. Left wing liberals will mostly stick with Labour. So the new party needs to be in the centre on the second social conservative/liberal axis as well as the left/right axis. There are some basic problems with trying to capture both these groups. Most importantly, it is not very clear how being tough on immigration squares with arguing for the softest of Brexits.

So a new party will almost surely fail in breaking through, but I’m not sure that is the only objective. The other objective is to stop Labour winning the next election. There is a strange irony here. A group of people who were arguing with absolute conviction that Corbyn could not possibly win are now arguing that there is a real danger that he will win and therefore must be stopped, which means more Tory government Even if that is not an objective it could well be the effect.

This fills we with anger and dread. Anger that people can convince themselves that what would be in legislative terms a centre-left government can be worse that a party that had inflicted more damage on the UK in the last eight years than any since WWII. And dread at a Conservative victory in 2022 because a new party takes away crucial Labour votes. Nothing suggests the Conservative party has stopped moving in a rightward direction. Alleged Brexit betrayal and a resurgence of UKIP will help ensure that it continues in that direction. If current betting is right, the next Tory party leaders will either be someone whose inspiration is Ayn Rand, or someone who wants to take us back to the 18th century, or a clown who is happy to encourage Islamophobia..

I understand why some within Labour dislike Corbyn, and why they write lists of all the inexcusable (in their mind) things he had done in the past. I know some imagine that he alone is keeping Brexit going. I can see why, because of the rhetoric of some on the left, they can imagine that most of the 500,000 members have become cult followers who will never listen to reason. But is there evidence for that last assumption? Many Corbyn supporters and Momentum members are trying to get the party to change its policy in favour of a referendum on the final deal. This is not a party that will support Corbyn whatever he does: Labour has never been like that and never will be.

To me the anti-Corbynistas look much like those on the left in US general elections who didn’t vote, or voted for a third party, because they thought both candidates were equally bad. They focus so much on why the Democratic candidate is not ideal, they fail to see that they are much closer to their own position that the Republican. Corbyn may well do some things as PM that you do not like, but he will not stoke immigrant antagonism which fuels racism of all kinds. He will not talk about looking up at the closed blinds of their next-door neighbour sleeping off a life on benefits. He will not be content to see foodbank use explode after people get sanctioned because, for example, they have a heart attack. If you are content for those things to continue to happen, then creating a new party is a good way of ensuring they do.



Wednesday, 15 August 2018

Interest rate vs fiscal policy stabilisation


One divide between mainstream and many heterodox economists is on whether monetary or fiscal policy should be used for macroeconomic stabilisation (controlling demand to influence inflation and output). What makes a good instrument in this context? As I have argued before, a key difference between the mainstream and MMT involves different answers to this question. I think the following issues are critical.

  1. How quickly do changes in the instrument (e.g. increases in interest rates) influence demand?

  2. How quickly can the instrument be changed? Are there limits to how far it can be changed?

  3. How reliable is the impact of the instrument on demand? In other words how uncertain is the impact of a change in the instrument on demand?

  4. How certain can we be that whoever has power over the instrument will use it in the necessary way?

  5. Does changing the instrument have ‘side effects’ which are undesirable?

If we apply these questions to whether to use interest rates or some element of fiscal policy, what answer do we get?

Before doing that, it is worth noting this is all about the quickest and most reliable way to influence demand. It is quite separate to how demand influences inflation (as long as we are talking about underlying inflation).

The first question is important because long lags between changing the instrument and it influencing demand mess up good policymaking. Imagine how good your central heating would be if there was a day’s delay between it getting cold and the heating coming on. It is also perhaps the most interesting question for a macroeconomist. A full discussion would take a textbook, so to avoid that I’m going to suggest that the answer is not critical to why the mainstream prefers monetary to fiscal stabilisation.   

The second question is as important for obvious reasons. If an instrument can only be changed every year, that is like having very long lags before the instrument has an effect. On this question monetary policy seems to have a clear advantage given current institutional arrangements. Some of this difference is difficult to change: it takes time for a bureaucracy to move. As I noted with the fiscal expansion implemented by China after the crisis, about half of the projects were underway within a year. Others delays are in principle easier to change: there is no reason why tax changes need only happen during Budgets in the UK, for example.

The second part of the second question is a clear negative for interest rates, because they have a lower bound. This is not the case for fiscal instruments: you can always cut taxes further for example. Because this is a critical failure for interest rate policy, effectively the discussion in this post is just about what happens when interest rates are not at the lower bound. Even so, potentially having two different instruments for different situations is a count against monetary policy.

The third question is often not asked, but it is absolutely critical. Imagine raising the temperature on a room thermostat which not only had no calibration, but which acted in different ways each day or even each hour. OMT is a clear example of a poor instrument because central banks have far less idea of how effective it is than interest rate changes, partly because of less data but also because of likely non-linearities.

Are interest rate changes more or less reliable than fiscal changes? The big advantage of government spending changes is that their direct impact on demand is known, but as we have already noted such measures are slow to implement. Tax changes are quicker to makes, but many mainstream economists would argue that their impact is no more reliable than the impact of interest rate changes. In contrast some heterodox economists (especially MMTers) would argue interest rate changes are so unreliable even the sign of the impact is unclear.

The fourth question is only relevant if the power to change interest rates is delegated to central banks. Let me assume we have a UK type situation, where the central bank has control over interest rates but it has to follow a mandate set by the government. A strong argument is that, by delegating the task of achieving that mandate to an independent institution, policy is less likely to be influenced extraneous factors (e.g. there is no way interest rates rise until after the party conference/election) and therefore policy becomes more credible. (There is a whole literature involving similar ideas.)

This advantage for monetary policy simply follows from the fact that it can be easily delegated. However even if it is not delegated, fiscal policy has the disadvantage that changes are either popular (e,g, tax cuts) or unpopular (tax rises). In contrast interest rate changes involve gains for some and losses for others. That makes politicians reluctant to take deflationary fiscal action, and too keen to take inflationary fiscal action. So even without delegation, it seems likely that interest rate changes are more likely to be used appropriately to manage demand than fiscal changes.

The fifth and final issue could involve many things. In basic New Keynesian models the real interest rate is the price that ensures demand is at the constant inflation level. Therefore nominal interest rates are the obvious instrument to use. Changing fiscal policy, on the other hand, creates distortions to the optimal public/private goods mix or to tax smoothing.

So the case against fiscal policy as the main stabilisation tool outwith the lower bound might go as follows: it is slower to change and it cannot be delegated. Even if monetary policy is not delegated politicians may allow popularity issues to get in the way of effective fiscal stabilisation. While government spending changes have a certain direct effect, they are also the most difficult to implement quickly.

A potentially strong argument against monetary policy is the lower bound problem. You could argue that having monetary policy as the designated stabilisation instrument gets government out of the habit of doing fiscal stabilisation, so that when you do hit the lower bound and fiscal stabilisation is essential it does not happen. Recent experience only confirms that concern. I personally do not think mainstream macroeconomists talk enough about this problem.

The fiscal rule that Jonathan Portes and I developed, a version of which is Labour's fiscal credibility rule, does attempt to address this very issue. Switching from monetary to fiscal at the lower bound is a key part of the rule. It is also worth stressing that this rule does not prevent temporary changes in fiscal policy to counteract a downturn outwith the lower bound. (Anyone who says otherwise does not understand the rule.) For example if interest rates are already low, a fiscal expansion that is planned to last less than five years is consistent with the rule, and might be a sensible precautionary measure. (Public investment, which is outside the rule, could also be used in this way.) So Labour’s fiscal rule allows monetary policy to do its job, but fiscal policy is always there as a back up if needed.



Sunday, 12 August 2018

What becomes news and why


One of the unfortunate things that some Remain supporters can do is treat anyone who voted Leave as stupid. How could you vote for such an idiotic idea is a good question, but to assume the answer is stupidity is wrong. I personally know non-political people who voted Leave and they are anything but stupid.

So why did they vote for a stupid policy. To answer that you should ask how do you know it is a stupid policy. My guess is that you have read a lot about it from experts in trade and law and so on, and you have then come to that conclusion. That puts you in a small minority of the population. Most people are pretty uninterested in politics, and do not go out of their way to inform themselves about it day in and day out. They read a newspaper for the sport or the celebrity gossip or the crossword, and take a quick look at the main bit, often reading just a headline. They probably also look at/listen to a single news programme from the broadcasters because they know their newspaper has an agenda.

You could say that indifference to politics is itself stupid. People should be more interested in things that can have a profound influence on their lives. But it is also true that one individual normally has no influence on politics, so it is rational for them not to bother. Furthermore we have a representative democracy which allows most people not to have to think about politics too much except during elections. They delegate the job of worrying about politics to their MPs or councillors.

We are where we are with Brexit not because people were stupid in 2016, but because Brexiters controlled key parts of the means of information. We had Brexit because we had large parts of the press who turned their newspapers into propaganda vehicles for Leave. To believe that almost no one who read these papers were influenced by all this is equivalent to saying advertising does not work at all. What Brexit shows is not that people are stupid but that it is vital who controls the means of information, and the restraints they face from government agencies (which in the UK’s case for the press is pretty much zero).

I am often told that the circulation of newspapers is falling (true) and therefore they no longer have any influence (false). A factor of 2.5 is often used to translate circulation into readership. So even if the combined circulation of the Brexit dailies is 4 million, that means a readership of 10 million (the Leave vote was 17 million). But if you ask people whether they have read a particular newspaper in the past month you get much higher figures: 10 million for the Sun alone, 9 million for the Mail. Electronic readership then multiplies that by a factor of around 3 for those two newspapers.

What about the non-partisan media that do not have a view they want to push. Someone said to me the other day that their job is to report the news, and not to make the world a better place. Unfortunately it is not that simple! What counts as news and what doesn’t? Media outlets will talk about covering things that are important, but who decides what is important?

Very occasionally, some in the media question whether the rules the media currently use to select what is newsworthy are working. Here is a piece by Ezra Klein, who asks whether US media should be paying so much attention to what Donald Trump says, and instead spending more time on what he does. The (unwritten?) rule book for what the media thinks is important includes, at close to the top of the list, what the nation’s leader says. So Trump can with his tweets or speeches send the media where ever he wants them to go, often distracting the media from what he does.

But there is another reason that the media focuses on what Trump says, and that (as Klein suggests) is that importance is only one of the selection criteria the media uses. If it is entertaining or shocking that helps too. Trump knows that as well: it is an important part of why he became POTUS (see here). That is why Boris Johnson’s remarks about letterboxes is straight out of the Trump playbook: media coverage for a week, with maybe a slap over the wrists in a few months time. If your target audience is the Conservative party membership it is a no-brainer for someone like Johnson.

Both Trump and Brexit have created other serious problems for non-partisan media. Balance just does not work when one side is telling obvious lies. As Gavin Esler writes:
“The “crisis in our democracy” comes because maintaining quaint ideas of ‘balance’ in a world filled with ‘systematic disinformation’ is now an existential threat to the country we love, the Britain of the Enlightenment, a place of facts, science and reasoned argument.”

But it would be foolish to think this just started happening two years ago. I knew in March how the Brexit campaign would go because I had seen how the media had treated austerity and the state of the economy before the 2015 election. And similar things were happening on other issues, such as the complete failure to provide good information about the Coalition’s disastrous 2011 health service reforms. An obsession with Westminster gossip meant a failure to educate and inform.

No media organisation ‘just reports the news’. What is news, and how it is talked about, is always a choice, and often a very controversial choice. It is partly about perceived importance, but other values also matter. Partly for that reason, there is far too much coverage of what people say and Westminster gossip, and far too little about what people (invariably governments) are actually doing. Partly because news coverage is so Westminster focused, the insistence of balance has created an incentive for politicians to lie their heads off and not be held to account. The media is neither a neutral purveyor of news nor an institution simply designed to support ‘the system’. The media runs according to rules, rules that can have a profound influence on how people think and how they vote.

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Thursday, 9 August 2018

Labour’s fiscal rule is progressive


I have seen a lot of things said about Labour’s fiscal credibility rule in the last few days which are simply wrong. I think the heart of the problem is that many heterodox economists do not believe in what I call the conventional or consensus assignment outwith the lower bound for interest rates. That conventional or consensus assignment [1] is that interest rates should be used to stabilise the economy rather than fiscal policy. The whole idea of independent central banks setting interest rates is predicated on this assignment.

The assignment will not work when interest rates hit a lower bound where central banks feel they cannot cut rates any further (obviously!), so fiscal policy has to become the stabilisation instrument in that situation. The innovative feature of Labour’s rule is the knockout that allows exactly that. I do not think there is any controversy here, so I will confine myself to situations where interest rates are not at their lower bound and set at a level central banks believe will stabilise the economy.

Just as independent central banks are a (not necessary) consequence of the conventional assignment, so are fiscal rules. Without them history suggests you are likely to get deficit bias: a gradual increase in the government debt to GDP ratio over time. For a country with its own currency a rising debt to GDP ratio is never catastrophic, because the markets cannot force such a country to default. There is no magic number for the debt to GDP ratio over which disaster happens. All that stuff is austerity propaganda.

However deficit bias is not good for a variety of reasons. The most straightforward is that more taxes need to be raised to pay the interest on that debt, and taxes discourage labour supply (as well as being politically unpopular). You get deficit bias because it is too tempting for politicians to cut taxes or increase spending by increased borrowing, because to the electorate it looks like you are getting something for nothing. (Trump’s tax cuts for the rich would have been even more unpopular if he had cut spending or raised other taxes to avoid increasing the deficit). A fiscal rule is a device to discourage deficit bias.

It is not the case that fiscal rules are inherently neoliberal. A fiscal rule does not limit the size of the state in any way, as long as you are prepared to pay for higher government spending by raising taxes. Labour’s fiscal rule does not ‘enforce austerity’. Austerity in my book is cutting government spending in a way that is bound to reduce demand and therefore hurt the economy as a whole. In a fiscal credibility rule world monetary policy stabilises the economy, and if rates hit the lower bound the rule’s knock-out applies. That is the crucial difference between Labour’s fiscal rule and the one used by the Coalition government in 2010. Labour’s fiscal rule makes austerity impossible. Let me repeat that: you cannot have austerity with Labour’s fiscal credibility rule.

One false charge is that Labour’s rule would prevent a Job Guarantee scheme being introduced. The idea seems to be that, if a negative shock hit the economy, JG spending would rise and the fiscal rule would stop that happening. Note this is conceptually no different to unemployment benefits. This is not true because Labour’s rule targets the current deficit in 5 years time. In five years time monetary policy will have dealt with the negative shock, so there is no reason to adjust fiscal policy as a result of the negative shock. If by chance monetary policy fails once the 5 years are up, it gets another 5 years to try because the fiscal rule has a rolling target - it always looks five years ahead. That means government spending is never cut because there is a temporary economic downturn.

What this means is that fiscal planning under Labour will in effect always assume output is at the level that keeps inflation constant. Who decides what that long run sustainable level of output is? The OBR, much as they do now. Not the central bank, but the independent OBR. The OBR’s main job is to work out what the medium term steady inflation level of output is, and they put a lot of effort into getting it right.

At the heart of many of the objections to Labour’s fiscal rule is a wish not to follow the conventional assignment, but instead have fiscal policy rather than interest rates stabilise the economy. That alternative assignment means that fiscal policy would be whatever is required to stabilise inflation, and no rule for the deficit is required. That happened in the UK when we had fixed exchange rates and capital controls, so it is not a stupid idea. But to suggest, as so many seem prepared to do, that this choice over assignments is something more than a rather technical debate about transmission mechanisms, institutional constraints and delegation [2] is deceitful..

Which brings me to Richard Murphy’s post. Richard says so many false things about this rule it is difficult to know where to start. It is not ‘neoclassical’, it does not ‘have its roots in microeconomics’. It does not assume ‘markets allocate resources efficiently’. It does not make any assumptions about how money is created. To say that Labour’s rule is based on a microeconomics perspective but MMT has a macro perspective is complete and utter nonsense. You can justify Labour’s rule on the basis of pretty well any macroeconomics you like, as long as you accept that interest rates are stabilising the economy rather than fiscal policy.

The bottom line is that Richard tries to suggest that you could have more public spending under an MMT type assignment compared to Labour’s fiscal rule. That is also completely wrong, and if anything the opposite would be true. Suppose Labour comes to power in 2022, and nominal interest rates by then are at 2%, and inflation is steady at target. Labour are pledged to substantially increase public investment spending (which is outside the rule), which will put upward pressure on demand, at least initially. That would mean under a conventional assignment interest rates would rise to prevent inflation. But in an MMT world that wouldn’t happen. So in an MMT world how do you stop inflation rising? Either current spending would have to be cut, or taxes increased.

There is only one way that public spending for given taxes could be higher in an MMT world compared to Labour’s fiscal rule, and that is if inflation was not controlled at all. That is not what serious MMT economists would recommend. So when Richard says Labour’s rule means a Labour government would be committed to austerity policies, by which I think he means low public spending, while his MMT alternative would allow more public spending without raising taxes, he is, once again, just wrong.

[1] The term assignment comes from the idea that you have two instruments that can control inflation, fiscal policy or interest rates, and an assignment is where only one instrument is used to do the job. You could use both, of course, but if each instrument is controlled by different people with different views about the economy obvious problems could arise. Also in simple New Keynesian models it is optimal just to use monetary policy. I use the term conventional or consensus because it is the assignment that pretty well all advanced countries use, and the one most mainstream academic macroeconomists would recommend.

[2] transmission mechanism: how quickly and reliably each instrument impacts demand. institutional constraints: how quickly you can change the instrument (here monetary policy easily wins without significant institutional change). Delegation: again without major institutional change, you cannot delegate fiscal policy, so if you think delegating stabilisation policy is a good idea this favours monetary policy. As I argue here, delegation is as much about making advice public as it is about devolving power.

Monday, 6 August 2018

A decade of political deceit


It is tempting sometimes to portray the Brexiters (the politicians and the media leading the Brexit campaign, not those who voted Leave) as bumbling fools who just are not very good with reality in all its detail. Boris Johnson encourages that idea, particularly when you know his true reason for supporting Brexit is personal ambition.

I considered writing up a little fantasy shortly after water was discovered on Mars, Johnson had resigned as Foreign Secretary and May had won a vote by breaking pairing. I imagined the PM had convinced Johnson to captain a spaceship put together by the New UK Space Agency so he and David Davis could sign a trade agreement with whatever lived on Mars. It had to be hush hush so the EU did not try and get there first. When Johnson expressed concern that he might miss the vote on the final deal May assured him his vote would be paired, and when he returned in triumph the leadership would be his. After days when the press asked where is Boris, NASA reported receiving distress calls from what seemed like a spaceship heading in the direction of the sun.

But while Boris is in it for himself, the motives of many members of the ERG are rather different. As Time Bale describes, they need Brexit to be able to fulfill their vision for the UK, ably described in Britannia Unchained, written in 2012 by Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore and Elizabeth Truss. He calls them hyperglobalists. It is a UK of less welfare provision and even more ‘flexible’ labour markets, so that UK firms can compete ‘unhindered’ with the rest of the world like some kind of imagined Asian dynamo. Sort of Thatcher on steroids.

I’m not too interested on this occasion in the idiocy of such a plan, but the fact that this was never on the side of any red bus. It is another example of political deceit of the highest order. Their plan is not why most people voted Leave: quite the opposite in the case of many. As Tim writes:
“Does this disjunction between what “the people” currently say they want and what they supposedly need actually bother Tory hyperglobalists, except insofar as it prevents them, at least for the moment, from revealing all?
No – the reason being that they are Leninists, in the same way that Margaret Thatcher, their inspiration and icon, was a Leninist. Just like her, in 1979, they believe they know what we want better than we do ourselves right now. And just like her, they have a crusading vision whose details, inasmuch as they’ve been fully worked out, are best kept under wraps until the time is right and we can be made to realise – they hope gratefully rather than grudgingly – that there truly is no alternative.”

We have been seeing rather a lot of this Leninist deceit lately, similar to what Naomi Klein called the shock doctrine, or what John Harris describes as "the odorous whiff of the hypocrisies and deceptions that tend to come with privilege". Austerity as a very costly device to shrink the state, for example. And immigration targets which Cameron and Osborne knew would hurt the economy if they were seriously pursued, but made them nevertheless to help attract social conservatives to vote Conservative. Pretending immigration was a problem for the NHS or welfare payments was also a useful way to deflect criticism over the impact of austerity.

I know some people will respond that all politicians deceive, and of course they do in minor ways to sell policies that help ‘their side’. But politicians who deceive at such a high level because they are Leninists at heart are something less common. It is hard to argue that any of the Prime Ministers before Thatcher were so willing to hide their true intent. Occasionally perhaps for certain foreign ventures: Eden, and then Blair. But not Brown or Miliband. The SNP over the cost of Independence, certainly. But austerity, lying about immigration and Brexit still seem an order greater in terms of the extent of the deception: promising X to really get an undisclosed Y.

There may be a reason for why this total deceit is relatively new, and it has to do with how the political process is perceived as part of neoliberalism. If you see politics like a market place, policies have to be sold like products, and politicians are the salesmen as Chris Dillow describes here. [1] So if you can sell a car by creating an image of what that car embodies, so you can sell a policy by pretending it is something else. The fact that you do not have the equivalent of the Advertising Standards Authority for political advertising just makes doing that more attractive.

Just look at the lack of shame in pretending that austerity was all about clearing up the mess Labour made (a claim easily refuted by looking at the data), or that the economy was strong when it was actually very weak in 2015. But that was dwarfed by what was to come with Brexit. Nothing was sacred in doing whatever it took to win that vote. And when it was shown that this included overspending during the campaign, they had no shame in spinning this as a mere allegation by Remainers. Anything goes, including disrespecting our pluralist democracy, just so they get what they want. 

This is all related to what I called neoliberal overreach, and whether it was something we could have easily avoided or something that was bound to happen. For many neoliberal politicians and advocates their ideal economy and society is not achievable through honest campaigning, because it is not what the great majority of people want. In 2016 48% of people wanted higher spending and taxes, while less than 5% wanted lower spending and taxes. Rather than patient persuasion they prefer complete deception, and crucially the ideology can be seen as endorsing that. For this reason, I am happy to add Brexit to austerity and anti-immigration rhetoric as examples of probably inevitable neoliberal overreach.

[1] Chris Dillow suggests that one of the first great neoliberals, Margaret Thatcher, did not share this view. Perhaps her ideas were sufficiently popular - at least for a time - that she didn’t need to pretend they were something else. It would be interesting to know if Tim Bale agrees.

Friday, 3 August 2018

How China beat the Global Financial Crisis


If you were hoping for something on yesterday’s interest rate rise, I can only direct you to the leader in the FT today which says: “There is no compelling reason to increase the cost of borrowing in the UK, but there is definitely good cause to wait.” On why nine intelligent people could all make the same mistake, you have to question their mandate, and move to something that focuses on having the right environment for growth, as I do here.

I recently finished reading the latest book by Adam Tooze (of which much more in a subsequent post), and it reminded me of a story that was not told enough in the early days of austerity. Everyone knows about how quickly the Chinese economy has grown over the last few decades, and how strong exports have been an important part of that. In dollar terms the value of Chinese exports more than quadrupled between 2000 and 2007. By 2007 Chinese exports represented 35% of GDP.

An important characteristic of the Global Financial Crisis (GFC) was how quickly world trade collapsed. If we compare the beginnings of Great Recession after the GFC with the start of the Great Depression, while world industrial production moved in a similar fashion, world trade collapsed by much more in the Great Recession than the Great Depression. Here is a chart from Barry Eichengreen and Kevin O'Rourke’s ‘A Tale of Two Depressions Redux’ VoxEU article.



Trade collapsed in the winter of 2008 around the globe, without exception. This was very bad news for China. Whereas exports had been around 35% of GDP in 2007, they fell to around 25% of GDP in 2009. That is a big hole to fill, and if it wasn’t filled, there was a chance that Chinese growth would collapse completely with damaging knock on (multiplier) effects to the rest of the economy. Above all else, China feared the political consequences of the unrest widespread unemployment would bring.

As Tooze recounts, China’s reaction was swift and bold. In November 2008 it announced a stimulus package of public spending worth 12.5% of GDP. (The Obama stimulus package, by comparison, was around 5% of GDP.) “Over the days that followed [the announcement], across China, provincial party meetings were hurriedly convened …” Within a year 50% of the stimulus projects were underway. Some of this stimulus paid for what Tooze describes as “perhaps the most spectacular infrastructure project of the last generation anywhere in the world”, the Chinese high speed rail network. Monetary policy was also relaxed.

In 2008 as a whole, before the stimulus and hardly touched by the collapse in world trade, Chinese GDP grew by 9.6%. In 2009, when GDP in the advanced countries fell by 3.4%, Chinese growth was 9.1%. The stimulus package had filled the whole left by collapsing Chinese exports. (Source)

Basic macroeconomic theory says that a negative shock to GDP, caused for example by falling exports, can be completely offset by a monetary and fiscal stimulus. China is a good example of that idea in action. What about all the naysayers who predicted financial disaster if this was done? Well there was a mini-crisis in China half a dozen years later, but it is hard to connect it back to stimulus spending and it had little impact on Chinese growth. What about the huge burden on future generations that such stimulus spending would create? Thanks to that programme, China now has a high speed rail network and is a global leader in railway construction.

Now of course people will say that China is not like an advanced democracy, and it was not part of the global banking network that caused the GFC. But the US and UK stimulus programmes could and should have been larger. Those close to the action tell me that the UK was running out of things to spend more money on in 2008/9, but I cannot help think this amounts to a failure of imagination: it is not as if UK infrastructure is great, there are no flood defence projects left to do etc. Above all else China’s example tells you what a huge mistake 2010 austerity was.