Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 20 August 2019

Why did the UK become a failed state?

‘I should be the leader of a government of national unity’. ‘No you shouldn’t, someone else should’. I’m afraid if you were hoping I would write about this nonsense you will be disappointed. It seems to me right now nothing more than just another way for those who really dislike Corbyn to attack him and those who support Labour to attack everyone else. Rebel Tories will be hoping a crash out Brexit can be stopped another way, and if that fails or in the unlikely event that Johnson ignores parliament, who has the relatively unimportant job of leading a caretaker government will be decided days before it needs to be decided, and not before.

The discussion is one illustration that the UK has become a failed state, where a government about to do great harm to those it governs draws comfort from opposition parties arguing with each other. This post is about how a policy (crashing out of the EU) that will do nearly everyone harm and some great harm seems to have considerable, albeit still minority, support. I wrote in January about how the rest of the world thinks Brexit is utterly stupid, and leaving without any deal looks beyond stupid. When a country does something as idiotic as this, and it has popular support, there is something deeply wrong with that country.

Arguments that people really believe they will gain something worth the cost of the pain and suffering of crashing out merely shifts the question, because we will gain nothing that comes near compensating for the costs. Most supporters of Brexit cannot name an EU based law that has a significant negative impact on their lives, let alone a law that the UK opposed at the time, let alone compare that to the many EU laws that have brought benefits. Nationalism alone is not an answer: few think football fans would be better off if our teams stopped playing in the Champions League, or if our national teams could no longer buy overseas players.

What we have is an information failure, where warnings of the dire consequences of crashing out are not believed but fanciful stories that being outside the EU will allow us to improve ourselves are believed. It is no surprise that the government is furious about the leak of the Operation Yellowhammer (predicting immediate shortages of medicines, food and fuel after we crash out), but what is more surprising is that a third of the population believes politicians that say these worries, documented by the government's own civil service, are unfounded. Politicians that are normally quick to assert that the machinery of government is incapable of organising anything well on this occasion are pretending that same machinery can work wonders.

One of the lessons I learnt from working on the economic impact of a different kind of disaster is that consumer reaction can seriously magnify its impact. In this case as soon as stories of shortages occur people start ‘panic buying’ and those shortages are magnified tenfold or more. It is this reason that the leaked documents talk of dealing with law and order problems, including riots.

That no government minister will guarantee that no one will die as a result of crashing out is revealing. That the NHS is prevented from voicing its fears tells you even more. Yet many of those who believe it is right for us to crash out of the EU are also older and depend the most on the NHS. Again this makes no sense unless you see this as an information failure where these connections are just not being made.

The broadcast media is obsessed by recessions (and in particular the technical definition of a recession), but those freely predicting one should learn from what happened after the 2016 referendum. On that occasion many consumers responded to higher inflation cutting their real wages by saving less, and the same could happen again. We also saw in 2016 that predicting a recession that does not happen can distract from the real cost of Brexit. What we have seen instead since 2016 has been a steady gap emerging between UK growth and growth elsewhere, together with a collapse in investment. 

Too often short term shortages are presented in war like terms: we will get through it and it will be worth it once it is over. The truth is that by making trade with our biggest trading partner much more difficult will ensure that the UK grows more slowly. We will be permanently and substantially worse off as a result of crashing out. The bumpy road is going downhill. Those who tell you this is just another forecast do not know what they are talking about. One of the basic ideas in economics is that trade makes people better off, because if it didn’t why would people trade? Making it harder to trade with the EU means less trade with the EU. There are no sunlit uplands when it comes to crashing out of the EU, which is why of course other countries think we are utterly stupid to try. With less income comes less public services: a worse health service, higher taxes or both of these. There will be thousands of firms like this one, strangled not just by tariffs but the greater bureaucracy that comes with Brexit.

Leave politicians understand this, which is why they talk about all the marvelous trade deals we will get now that we are free from the EU. The reality is once again the opposite of this. The EU is in fact very good, and very experienced, at doing trade deals with other countries, and we will lose nearly all those when we crash out. Once that happens politicians will be desperate to do two things: sign a trade deal with the EU and with the US. Negotiations about a trade deal with the EU will not even start for some time, because the EU will insist on the backstop staying in place along with a level playing field in terms of competition, neither of which a Tory government will accept until they have to. The compromises that our current government thinks it can avoid by crashing out will be made at some point, and so all the pain of crashing out will be completely pointless.

Donald Trump supports Brexit because he knows the UK will be desperate to do a trade deal with the US when it leaves, and he knows people desperate to do a deal are vulnerable to exploitation. In this case no deal may well be better than a bad deal, but the government will sign it anyway because it will look good at the time, and the harm it does can be delayed or fudged. [1] This illustrates a basic political point. Countries are much stronger as part of a group than they are on their own. We have already seen how the EU has backed the Irish government in trying to keep to the Good Friday Agreement alive, and when the UK crashes out just watch the EU’s efforts to diminish the economic costs on the Irish economy.

What the EU cannot prevent is the creation of a hard border on mainland Ireland when we crash out. Pretending otherwise is another Brexit fantasy. That will see the end of the peace process that was so painstakingly won decades ago. Along with the kinds of terrorism we are already used to, we can add a revival of Irish terrorism. A belief that crashing out represents political gains at the expense of economic pain is nonsense, because the political costs of a No Deal Brexit are just as serious as the economic costs.

Are people really aware of this when the say they are in favour of crashing out? You either have to assume that a third of the population has gone mad, or instead see this as a fundamental failure of information. The UK is a failed state because the producers of information have made it fail. 

All the information on No Deal outlined above is readily available for anyone who wants to find it . But so is ‘information’ suggesting exactly the opposite: that all these warnings are Project Fear and our lives have been made much worse because of the EU. Only people like those who are reading this are likely to be able to sort out which are the more reliable sources. Many more people will not have the time or inclination to even look. They will rely on the mainstream media: newspapers and broadcasters.

Over half of newspapers read (hard copy or online) are pro-Brexit, and their combined print and online reach is huge, with a monthly reach of 29 million for the Sun. (Figures for daily newspapers based on circulation only are much smaller and more pro-Brexit.) But there is a key difference between the coverage of the pro and anti Brexit press. Just compare the coverage of the Sun or Mail on the Operation Yellowhammer leak with those in most other newspapers. Their headlines talks of the document being scaremongering, rather than focusing on the content of the leak itself. On Brexit at least half the press are acting at the moment as if under the control of the state, or you could equally say that the state is following a policy pushed by that section of the press.

This could be offset if the broadcast media was fact based, but normally it is not. Their model is not to tell the truth and expose lies, but instead to present balance, which in the case of Brexit involves balancing lies with truth. So those consuming Brexit propaganda from their newspapers will not find this corrected by the broadcast media.

Once you combine this with how important the media is in influencing opinion, then the key role of the media in explaining the information problem revealed by widespread support for crashing out is obvious. A large part of the consumers of information are reading propaganda which is not contradicted by broadcasters.

But there is another route where media coverage is important, and that is the media’s influence on party membership. Party membership is by definition partisan, and so will look at sources of information that are also partisan. The overlap of the Brexit press and the right wing press is very large. As a result, Conservative party members are likely to be even more influenced by the Brexit press. If I am right about the pivotal role played by the media, then we should expect the proportion of party members to be more in favour of crashing out than the population at large, as indeed they are.

The relationship between the press and politicians is not straightforward. Both are influenced by each other. The ring wing press was much more pro-Brexit than Conservative MPs as a whole, and through both routes (the population as a whole and through party members) this has influenced MPs. The 2016 referendum accelerated this process, as did the 2019 Tory leadership contest, because in both cases it strengthened the role of the Brexit media.

Ideas and policies normally come from politicians, and the partisan press will normally go with that. But occasionally ideas are initiated by the press, and politicians find it difficult not to run with them, as we have seen with Brexit. As the line newspapers take on major issues is normally decided by their owner, this is obviously undemocratic. But more generally it does not seem right that any major player involved in the means of information should turn their information provider into a propaganda vehicle. When that happens, you can end up with policies that suit the newspaper owner but for nearly everyone else are utterly stupid.

Stopping Brexit is only half the story, if we want the UK to stop being a failed state. We also need to tackle the causes of Brexit. Normally politicians dare not talk about reform of the media, because they fear the consequences. (Since Thatcher every leader of the Labour party except one has been unpopular with the public, and that one did a deal with Rupert Murdoch!) Corbyn’s Labour party has reform of the media as a key part of its manifesto. The proposals are modest, but by making the BBC more independent they may represent a start at ending the power of a large section of the press to misinform.

[1] The deal may not be signed by the US anyway, because Congress will require a backstop

Friday, 16 August 2019

How should academic economics cope with ideological bias

This question was prompted by this study by Mohsen Javdani and Ha-Joon Chang, which tries to show two things: mainstream economists are biased against heterodox economists, and also tend to favour statements by those close to their own political viewpoint, particularly on the right. I don’t want to talk here about the first bias, or about the merits or otherwise of this particular study. Instead I will take it as given that ideological bias exists within mainstream academic economists (and hereafter when I just say ‘academic economics’ I’m only talking about the mainstream), as it does with many social sciences. I take this as given simply because of my own experience as an economist.

I also, from my own experience, want to suggest that in their formal discourse (seminars, refereeing etc) academic economists normally pretend that this ideological bias does not exist. I cannot recall anyone in any seminar saying something like ‘you only assume that because of your ideology/politics’. This has one huge advantage. It means that academic analysis is judged (on the surface at least) on its merits, and not on the basis of the ideology of those involved.

The danger of doing the opposite should be obvious. Your view on the theoretical and empirical validity of an academic paper or study may become dependent on the ideology or politics of the author or the political implications of the results rather than its scientific merits. Having said that, there are many people who argue that economics is just a form of politics and economists should stop pretending otherwise. I disagree. Economics can only be called a science because it embraces the scientific method. The moment evidence is routinely ignored by academics because it does not help some political project economics stops being the science it undoubtedly is.

Take, for example, the idea - almost an article of faith in the Republican party - that we are on the part of the Laffer curve where tax cuts raise revenue. The overwhelming majority, perhaps all, of academic economic studies find this to be false. If economics was merely politics in disguise, this would not be the case. This is also what distinguishes academic economics and some of the economics undertaken by certain think tanks, where results always seem to match the political or ideological orientation of the think tank.

There is a danger, however, in pretense going too far. This can be particularly true in subjects where empirical criticism of assumptions or parameterisation is weak. I think this was the basis of Paul Romer’s criticism of growth theory and microfoundations macro for what he calls mathiness, and by Paul Pfleiderer for what he calls ‘chameleon models’ in finance and economics. If authors choose assumptions simply to derive a particular politically convenient result, or stick to simplifications simply because it produces results that conform to some ideological viewpoint, it seems absurd to ignore this.

Romer’s discussion suggests that it is at least possible for ideological bias to send a branch of economics off in the wrong direction for some time. I would argue, for example, that Real Business Cycle theory in business cycle macro, which was briefly dominant around 40 years ago, was in part influenced by a desire among those who championed it to look for models where policy had little role. In addition, it showed up economists tendency to ignore other social sciences, or even common sense, at its worse. [1] It didn’t last because explaining cycles is so much easier when you assume sticky prices, as most macroeconomists now do, but it may be possible that other aspects of mainstream economics may be ideologically driven and persist for a much longer time (Pareto optimality?), and mainstream economists should always be aware of that possibility. One of my first posts was about the influence of ideology on the reaction of some economists to Keynesian fiscal stimulus.

The basic problem arises in part because empirical results are never clear cut and conclusive. For example the debate about whether increases in the minimum wage reduce employment continues, despite plenty of empirical work that suggests it does not, because there is some evidence that points the other way. This opens the way for ideology to have an influence. But the political implications of academic economics will always mean that ideology plays a role, whatever the evidence. Even when evidence is clear, as it is for the continuing importance of gravity (how close two countries are to each other) for trade for example, it is possible for an academic economist to claim gravity no longer matters and gain a huge amount of publicity for their work that assumes this. This is an implication of academic freedom, although in the case of economics, I still think there is a role for an organisation like (in the UK) the Royal Economic Society to point out what the academic consensus is.

Does this mean economics is not a true science? No, because ideological influence does not trump data when the data is very clear, as in the case of the Laffer curve or gravity equations, although ideology and academic freedom may allow the occasional maverick to go against the consensus. That in turn means that it is important for any user of economics to be aware of possible ideological bias, and always establish what the consensus is, if it exists, on an issue. Could ideology influence the direction particular areas of economics take for some time? The evidence cited above suggests yes. So while I have no quarrel with the pretense that ideology is absent from academic economics in formal discourse, academics should always be aware of its existence. In this respect, some of the points that the authors of this study mention in the discussion section of their paper are relevant. 

[1] This reflected the introduction of a microfoundations methodology which soon began to dominate the discipline, and which I have talked about elsewhere (e.g. here and here).

Tuesday, 13 August 2019

Will we get No Deal because Brexiters want it more?

“The reason we might have a no-deal Brexit in Britain is because its advocates want it more than their enemies want to stop it. They are making it happen whilst their opponents spend their time only wishing it would stop.”

When I first read this in an article by Sky journalist Lewis Goodall I thought it was nonsense, and stopped reading. It obviously does not apply, for example, to EU citizens living in the UK or all those who march against No Deal. But then I watched this, a talk by Dominic Cummings on his referendum victory (HT @ericlonners), and I realised what Goodall was talking about.. I went back to the article, read it in full and mostly agreed with it.

The trigger was a point that Cummings makes in his talk about most of the media covering politics. They are essentially interested in the government, parliament and its MPs, and so everything they say has to be taken in this context. It is a point I have made myself before, but it is easy to forget. Goodall is not talking about those who march for Remain, or the trivial numbers that march for Leave, but instead he is talking about MPs in parliament. And I think on this he is right.

Take the discussion of a possible coalition of national unity that MPs could vote for if the only way of stopping Johnson allowing No Deal is to vote him out. The job of the coalition would be to get an extension of Article 50 and then call a General Election. The idea is that rebel Tory MPs could only do this if Corbyn does not lead that coalition, because Corbyn “has become toxic”. So avoiding No Deal is less important than allowing a Corbyn government, even if that government would last no more than a month! That supports Goodall’s thesis.

The LibDems seem to be saying the same thing. They would not vote for a Corbyn led coalition government even, it seems, if the alternative was No Deal. Again avoiding No Deal is less important than allowing a very temporary Corbyn government. That supports Goodall’s thesis too, and it comes from the so called ‘party of Remain’.

Finally the Labour leadership has ruled out any kind of coalition of national unity if it was not led by Corbyn. I can see why - it is hard to admit so publicly that your leader is toxic to other Mps just before a General Election - but nevertheless it means they are also putting party before preventing No Deal. Goodall is right again.

But what does all this actually mean? Simply that all these MPs or party leaders are prepared to put party interests ahead of national interests. We can but hope that at least some of this is posturing ahead of negotiations, but such posturing can in itself be harmful to the cause of preventing No Deal.

Of course the corollary is not that Brexiters are putting country ahead of party. A No Deal Brexit is only something that a fanatic would do. A better formulation of Goodall’s idea is that No Deal will happen because No Dealers are fanatics and opponents of No Deal are putting party before country.

What about the nonsense that No Deal is required to respect democracy in the form of the 2016 vote? This is preposterous because 2016 cannot be a mandate for a No Deal Brexit when No Deal was ruled out by the Leave campaign. Bexiters implicitly acknowledge this is true by pretending that they had talked about No Deal in that referendum. But if you want to see what kind of mandate 2016 does represent, it is well worth watching the talk by Cummings noted above.

As well as showing an acute understanding of how the UK broadcast media works, his comments on what won the referendum for Leave are interesting. He notes that before the referendum most people knew little about the EU, and in addition were not particularly exercised by it as an issue. (Polling confirms this.) So, quite simply, to win the referendum the Leave campaign had to associate the EU in a negative way with things people were exercised about. Cummings talks about keeping the original Brexiters, who did want to talk about the EU, well away from the campaign.

Cummings notes three things people did care about. The first and most obvious was immigration. He says this issue had become 'associated with the EU', and there were two reasons for this in my view. The first was the Conservative targets for total net immigration which had not been met, together with the rhetoric that blamed reduced access to public services on immigrants rather than austerity. The second was the idea put forward by the pro-Brexit press that these targets had not been met because of Freedom of Movement. In this respect the following ONS chart is revealing:

Before the referendum non-EU immigration was equal to EU immigration, so it is not at all obvious that Freedom of Movement was the only reason targets were not met. Immigration has been broadly stable since the referendum, because the fall in EU migration has been offset by a rise in non-EU immigration.

The second factor Leave had going for it, according to Cummings, was the outcome of the Global Financial Crisis, and I would add austerity. The reason is obvious, but again little to do with the EU. The third was the problems with the Eurozone, but again the Eurozone’s problems all stemmed from a single currency, and not the trade and other arrangements of the EU. Therefore what all three have in common is that they have little to do with the EU.

Which brings us back to whether the people saying they want No Deal care more about it than those who want to stop No Deal. Cummings’ analysis suggests that they don’t, because by his own admission they were voting for issues that had little to do with the EU. They evidently don’t because we have not seen hundreds of thousands march on Westminster in support of any kind of Brexit. The best they could manage were ‘thousands’ when the March deadline was missed. We have seen six million sign a petition to revoke Article 50, but a tenth of that number signing a petition for No Deal.

The fact that Remainers want to stay in the EU more than No Dealers want us to crash out should come as no surprise. Leaving the EU takes away basic rights from EU citizens in the UK and UK citizens in the EU, and confers no new rights in return It takes away the right of young people to work visa free in the EU. It takes away many people’s European identity. Crashing out will make almost everyone poorer and few better off. It will cost lives. All for the notion that we will become ‘independent’, when few Leavers can name a law imposed on them by the EU that they disagree with, and even fewer an EU law that the UK voted against. Brexit is one part of the population imposing considerable costs on the rest, for reasons that have little to do with the EU.

Friday, 9 August 2019

The Remainers urging people to vote for a No Deal Brexit

You might think the title above is nonsense: how can a Remainers vote for No Deal? I would have agreed with you a month ago. But since then I have noticed many so called Remainers saying that people cannot possibly vote for Labour in the forthcoming General Election because Labour, or Corbyn and his advisors, are pro-Brexit. These are the Remainers who are trying to persuade you to vote for No Deal.

Anyone who gives the matter a seconds thought will realise that Brexit is impossible under a Labour government. I may have understood this sooner than most but it is not hard. As soon as you see that the Conservative party is (because of Farage and their Brexiter MPs) bound to No Deal, you can also see that Corbyn could never get any kind of Brexit through parliament, unless it was a form of Brexit designed to be lost in a referendum to end the Brexit process.

The key point is that the Tories will vote against any kind of soft Brexit. The only MPs who might vote for a soft Brexit are the minority of Labour MPs that want it and maybe a few Tory MPs that don’t want No Deal and are prepared to defy their leader. Even if it went to a referendum, the combination of No Deal Brexiters and Remainers will easily triumph over a soft Brexit. Under a Labour government Brexit is dead, whatever Labour’s leader might think.

In many ways, a Labour government is the best way to end Brexit. If it goes to a referendum, it will be Remain against a soft form of Brexit, which is what should have happened after the 2016 referendum. That is a much safer referendum than Remain versus No Deal. In fact a Labour government is probably the only way Brexit can be sure to end, as Johnson even as the leader of a minority government will never agree to end Brexit, and may still try to force us to crash out.

As a result, those who say (like the leader of the LibDems) that people cannot vote for Labour because Labour are not led by a Remainer are either dishonest or haven't understood that Labour cannot achieve Brexit. But either way it is an extremely dangerous thing to say, because it is a likely to end up allowing No Deal. If parliament does vote against No Deal every Remainer in the subsequent General Election has to vote tactically.

It means in England voting for LibDem candidates in LibDem/Tory marginals, but it also means voting for Labour candidates in Lab/Con marginals. That is the only clear way a Johnson victory can be stopped. It doesn’t even matter if the Labour MP is pro-Brexit, because every Labour MP deprives the Conservatives of government.

So every Remainer telling you that you cannot vote Labour is telling you to vote for a No Deal outcome. Everyone who says you cannot vote for Labour because “Corbyn is evil” in various ways is telling you to vote for a No Deal outcome. Everyone telling you that you cannot vote Labour because Labour “is an antisemitic party” is telling you to vote for No Deal. And when it comes to a General Election, there will be some who will say you cannot vote Labour because they want Boris Johnson and No Deal to win.

Tuesday, 6 August 2019

Does Brexit represent an alliance of Rentiers?

One of the striking features of Brexit is that it is harmful to most productive capital and those who work with it: the capital embodied in firms that trade for sure, but also the capital that produces stuff for firms that trade and so on. In so far as Brexit will impoverish the UK as a whole, it is also harmful to any firms that produce for the UK market. Yet the party that has traditionally been thought of as supporting UK productive capital, the Conservative party, is the one promoting Brexit.

There are of course moneyed interests who provide active or financial support, and even bankroll, Brexit. Among owners of UK firms they tend to be individuals who have a particular beef against the EU. You will also find a few hedge fund managers. The most notorious financial backer of Brexit, Arron Banks, made his money through insurance.

Among those who voted for Brexit, there is a large group who are well off and retired. Your typical Daily Telegraph reader if you like. Being retired, their main source of income is their pension and their savings. At this point I can hand over the William Davies in a fascinating recent article in the New Statesman:
“What this group shares with the Johnson-Farage backers is a lack of any immediate interest in labour markets or productive capitalism. What’s the worst that could happen from the perspective of these interests? Inflation or a stock market slump would certainly harm them, but they may have forgotten that these things are even possible. Jeremy Corbyn terrifies them even more than the prospect of Remain, as they believe he will tax capital, gifts and inheritance into oblivion (they are less concerned with income tax as they don’t pay it). Where productivity gains are no longer sought, the goal becomes defending private wealth and keeping it in the family. This is a logic that unites the international oligarch and the comfortable Telegraph-reading retiree in Hampshire.”

He goes on:
“This suggests that support for Johnson and Farage is a symptom of prolonged financialisation, in which capital pulls increasingly towards unproductive investments, relying on balance sheet manipulation, negative interest rates and liquidity for its returns (aided substantially by quantitative easing over the past decade). To put that more starkly, these are seriously morbid symptoms, in which all productive opportunities have already been seized, no new ideas or technologies are likely, and no new spheres of social or environmental life are left to exploit and commodify.”

This is very neat. The ‘puzzle’ that Brexit is detrimental to productive capital is in some sense solved. It is the ‘unproductive’ elements of capitalism that is bringing productive capitalism down. Like all ideas, and particularly neat ones, this needs some healthy skepticism. The rest of this post is a contribution to that critique.

Let me start with the well off Telegraph reader, living off their savings and pensions. It is true that a good chunk of that pension and savings may represent financial assets in a different currency, and so when fears of a no deal Brexit leads to a fall in sterling this part of their wealth increases its sterling value. But I suspect for most the majority of their wealth will be UK based: either shares in UK based companies or UK government debt. Very few will have the wealth to invest in hedge funds. As many savers will tell you, it is low interest rates that are the immediate threat to their financial wellbeing, and the fundamental cause of low UK interest rates is austerity.

The well off Telegraph reader is certainly better protected against the impact of a No Deal Brexit compared to someone who works for a UK car maker, but they are not immune to the impact of a No Deal Brexit either. If their pension comes from a UK company, they could be quite vulnerable. I think Davies is right that they probably worry more about the financial threat from a Labour government, but that alone does not make them a supporter of a No Deal Brexit.

What is probably true for many is that the financial threat to them of a No Deal Brexit is more opaque, mediated through stock markets or investment funds, than it is to a worker on universal credit or a worker who might lose their job. But this is also true to the poorer pensioner who depends on their state pension, given the current rules for uprating these pensions (and the political power of those with a high propensity to vote). For both groups it makes sense to try and insulate them from domestic shocks, but a political consequence may be an impression of invulnerability to these shocks.

If we move from voters to financial supporters of No Deal, it is not the case that No Deal benefits the UK financial sector as a whole - far from it. Like much of the UK service sector, it benefited considerably by being in the Single Market, and will be hard hit by any hard Brexit. Of course most of the large firms involved can move, and in many cases have already moved, some of their operations to EU capitals, but this is something they have been forced to do and so it does not make the sector a champion of Brexit. The Association of British Insurers has warned that a No Deal Brexit could cause lasting damage to the industry.

The article talks about “maverick entrepreneurs (bosses of JCB and Wetherspoons)” but perhaps the same should apply to all those who have encouraged Brexit. There is no reason why neoliberal ideology that suggests regulations just get in the way of business should just influence politicians, and it is capital that often has to meet these regulations. In addition you will always find hedge fund managers wanting to make serious money out of any large change, and perhaps foreign powers able to find vehicles of influence.

It is difficult to think of any sector that will be better off after a no deal Brexit, except perhaps funeral directors and debt collectors. No organisation or institution, beyond the think tanks of the right, is championing this cause. Instead we just see mavericks from various sectors speaking on behalf of a no deal Brexit or providing financial backing. The key question then becomes how a few maverick wealthy individuals and a minority of politicians can hijack the political process so that it works against the interests of nearly everyone else in the country?

The first answer is a society where individuals are allowed to make huge sums of money such that they can, by their own spending, have a huge impact on politics. Finance is partly why 1% inequality has grown, but the reason taxes on the rich were cut is political: the rise of neoliberal governments. The way this political influence is typically put is that 1% inequality gives the few an incentive to distort the political process so they preserve their wealth, but equally it can also allow a minority of the same individuals to bend politics to fit their own, sometimes maverick, ideas. Wealth also allows those who bend politics to walk away if it all goes wrong, as Farage said he would. Perhaps globalisation has increased the chances that those who meddle in the political process of one country can escape when things go wrong.

Money alone is not enough to persuade a large section of society to vote for acts of self-harm. The second answer is that you must have considerable control over the means of information. Brexit is the product of the obsession of a handful of men who over a long period of time have used their newspapers to denigrate the EU, and in recent years have turned these same newspapers into propaganda weapons for leaving the EU. Too many, on the left and centre, fail to acknowledge that without our right wing press, Brexit would not have had a chance of happening. Of course this partisan media also needs something to persuade people with, but the age old tools of nationalism and the demonisation of some ‘other’ seems to suffice.

In a developed democracy even all this may not initially give our mavericks a majority of the voting population. They will, at first, only have partial control of the media and the institutions that represent capital, along with many others, will be against them. The third answer to how a few individuals can gain great influence and enact huge harm is to capture a political party in a two party system. Once this is achieved they can use a badly designed voting system and their partial control of the media to push themselves or their policies through. Trump did this in the US (he lost the popular vote) and a no deal Brexit will happen if the anti-Brexit forces split by more than the pro-Brexit forces in a General Election.

For those that like their history to be about grand forces rather than maverick individuals this kind of explanation is hard to take. But there is an underlying force involved here, a force of ideas rather than interests. It is neoliberalism, and in particular the idea that the state and regulations just get in the way of prosperity for all, that is powering many of these mavericks to inflict great harm on their fellow citizens.

Saturday, 3 August 2019

Fiscal tightening in UK recessions: 1981 and 2010 compared

I have decided to abstain from twitter conversations to protect my own wellbeing, but I made an exception for Andrew Sentance recently. The issue was the extent to which the 1981 fiscal tightening was equivalent to 2010 austerity. It was clear this needs a post to clarify things. In the charts below, I compare how various fiscal magnitudes compared to the year before financial year 1981/2 (blue) and financial year 2010/11 (red) in terms of percentages of GDP. (To be precise, the blue line subtracts X in 1980/1 from all subsequent years, where X is the share of some fiscal magnitude in GDP, and the red line subtracts X in 2009/10 from all subsequent years. Source OBR public finances databank) 

First consider public sector receipts.

The 1981 budget was a tax hike, that prompted the famous letter from 364 economists denouncing the budget. However notice that the tax hike was mostly reversed within two years. In contrast the tax hike in 2010 (higher VAT) was smaller as a percentage of GDP but it was not reversed.

With total spending we get a different picture

Under Thatcher the share of total spending in GDP stayed pretty constant. That does not mean there was no tightening, because with a large increase in unemployment we might have expected a rise in spending as a share of GDP (a point Andrew makes). But nevertheless the contrast with 2010 is stark. Public spending was the main component of fiscal tightening under Osborne.

It is worth looking at one component of spending: public investment.

Here we can see some tightening under Thatcher, but once again it was quickly reversed. Under Osborne the cuts grew over time, and by the end were twice as big as anything attempted under Thatcher.

These components can be combined by looking at net borrowing.

The Thatcher fiscal contraction was largely reversed within 2 or 3 years (almost completely reversed if we looked at cyclically adjusted figures). Osborne’s contraction grew steadily over time. It would also be a mistake to conclude that in the first two years Thatcher’s 1981 contraction was as equally severe as Osborne’s. Tax increases have a much lower impact on demand than cuts in public investment or government spending more generally.

So 2010 was not the first time a government had chosen to cut public spending in a recession, which is the reason I added the word ‘sharply’ in my tweet. It was also not the first time a UK government had attempted fiscal tightening in a recession, as 1981 shows, which is why I specifically talked about public spending in my original tweet. But perhaps the most important difference between 1981 and 2010 is longevity. Thatchers fiscal tightening in 1981 was largely reversed by1983: tightening did not just stop but it was followed by fiscal expansion. In 2010 tightening continued year after year. It is no surprise that the recovery was so weak.

Indeed, if you define an economic recovery as growth above past trends, which there is a strong case for doing, there was no recovery from 2010 onwards. Using the same definition there was a recovery after 1981, but it began in calendar year 1983. The temporary fiscal consolidation of the 1981 budget did delay the recovery for nearly two years, but partly because that consolidation was reversed the recovery eventually came. Of course monetary policy played an important role in both periods (the size of the interest rate cut was similar), but the cuts were slower under Thatcher and there was no Quantitative Easing either.

While 1981 was nothing like as bad as the austerity of 2010, it was a serious macroeconomic mistake which undoubtedly caused considerable hardship for many. It also played an important role in creating the conditions, in the mind of many Conservatives, for 2010. Conservative politicians and particularly the Institute of Economic Affairs told a false story, a story where the economists who wrote the 1981 letter were wrong and Thatcher was right. Because they kept on telling their story as if it was true some media commentators began to believe it was true. I’m sure this played some part in sustaining austerity in 2010.

Wednesday, 31 July 2019

There is no mandate for No Deal

We are told constantly that the 2016 referendum gives our government a mandate for a No Deal Brexit, and that we would not respect democracy if we failed to leave. Both arguments are obviously false, yet they so often go unchallenged in the media.

The 2016 referendum was narrowly won by the Leave side. It does not matter how many people voted in that referendum, the margin of victory was narrow. What many Leavers would like you to believe is that this referendum requires the UK to leave the EU in some way or another. This is false. The referendum did not say that we must Leave the EU whatever the circumstances and whatever the cost or whatever leaving meant. None of those words were on the ballot paper, and they were not implicit either.

Just suppose the 2016 vote had led to the recession predicted by the Treasury. No recovery from this recession was on the horizon. Suppose too that Trump had not become POTUS, and Clinton said she had no interest in doing a trade deal with the UK anytime soon. Polls overwhelmingly suggest that Scotland would seek independence if we left the EU. Polls showed support for leaving the EU had dropped to less than 30%, and so on and so on. Are we really saying that despite all this, we still had to leave the EU because of a 52% majority in an advisory referendum. The realism of this example is irrelevant if you want to defend the idea that the referendum was like some kind of contract that had to be followed come what may. You certainly have no right to call it democratic, or the will of the people

The question was whether to Leave or Remain. As a result, not surprisingly people voted on the basis of what they thought Leave or Remain meant. So to see what people voted for, you need to look at what was discussed. In particular, the Leave vote will have been influenced by what the Leave side said. And almost without exception, no one on the Leave side mentioned Leaving without any deal at all. (Of course some Brexiters are now pretending they talked about it all the time - lying is second nature for these people.)

Normally when someone says that a government has a mandate for a policy, it is because that policy was in the manifesto presented at the election. The Leave side did not have a manifesto, and that was a fatal flaw in Cameron’s referendum. In the absence of a manifesto we have to base any assessment of what any mandate was on what the Leave side said Brexit would entail. And almost without exception the Leave side said it would involve a trade deal with the EU of some sort.

It is true that the Remain side talked about No Deal as an extreme case in the list of possible forms of leaving the EU. But when looking at mandates, we look at what the winning side said, not the losing side. The Leave side spent a great deal of time ridiculing Remain predictions as Project Fear, and that included ridiculing the idea that we would not get a deal with the EU. Some on the Leave side said it would be the easiest deal in history.

The reason why No Deal is the only Brexit option left standing is that militant Brexiters have done everything they can to get us there. They voted down alternative options their government proposed. It is militant Brexiters, not a majority of the public, that think No Deal is the only true form of Brexit. When Brexiters claim that voters were really voting for No Deal they should be laughed at, but instead our supine media lets it pass.

What about the idea that we have to leave with No Deal because otherwise democracy (the 2016 vote) will be betrayed. This is a favourite claim by Farage. The people who have in fact betrayed Brexit are Farage himself and fellow Brexiters. They have turned a vote for a Brexit involving a deal with the EU into something quite different.

Such a claim only gets mileage because, thanks to the Brexiters, parliament failed to agree on a deal. But such an outcome was implicit in the 2016 result. Because the referendum did not specify what type of Brexit should be attempted, we have no a priori reason to believe that any particular option would command a majority. Indeed with such a close victory the presumption must be otherwise, and the polls show this to be the case. Parliament’s failure to agree a deal simply reflects the fact that there is no majority for any particular deal.

The idea that we must go through with Brexit even though there is no majority for any form of Brexit is nonsensical. It is an illusion created by a flawed advisory referendum narrowly won which politicians foolishly said at the time that they would implement. Luckily no politicians is bound by the foolish promises that other politicians made.

Again a hypothetical example shows this point. Suppose a similar referendum had been held on the proposition to increase spending on the NHS by raising taxes, and it had been narrowly won. However polls also suggested that when you asked about specific taxes (should we increase NHS spending by raising income taxes etc) there was no majority to raise any specific tax. Should the country nevertheless go ahead and raise spending and choose some arbitrary tax just because of the original referendum result? It makes no sense to enact something that a majority object to on the basis of a flawed referendum.

So why do Brexiters get away with still talking about the will of the people when a majority clearly favours Remaining to any form of Brexit? Not because we cannot rely on opinion polls - Leavers will not allow any further vote to confirm the opinion polls! That in itself is a crystal clear indication that Brexit is undemocratic. Some even say that a further vote on a specific Brexit deal is undemocratic. In what topsy turvy world is a public vote to confirm a previous public vote undemocratic.

It is a world where Brexiters have control of most of the media, and where Brexiters and some of the people who voted for Brexit are desperate for some democratic justification for what has become an assault on pluralist democracy and evidence based policy. If you repeat something often enough you are in danger of believing it yourself. Once Tory politicians said at every opportunity that the previous Labour government was profligate, and because it went unchallenged people believed it even though it was obviously false. (Just look at the numbers.) Equally if no one contradicts you when you say we must leave with no deal because of a narrow referendum win where no one on the winning side talked about leaving with no deal, you can convince yourself to enact the biggest act of self-harm in modern UK history on an unwilling majority.