Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 13 October 2018

Implications of German export success


I have finally got around to reading this excellent CEPR ebook on Germany’s exceptional recovery. That German GDP growth since the Global Financial Crisis (GFC) is higher than average Eurozone growth or French growth can be seen below.

GDP growth (source OECD Economic Outlook)

However the relative performance in terms of unemployment is remarkable.

Unemployment (national definitions, source OECD Economic Outlook)

The tremendous success in reducing unemployment is discussed in two papers in the book, and both suggest that it had more to do with changes in the nature of firm-union bargaining than the Hartz reforms. (John Springford has a nice chart showing how the German Phillips curve has shifted.) I have for some time noted how wage increases in Germany after 2000 were too low in the context of a 2% inflation target, and this helped drive an export boom and is a factor behind a huge current account surplus of 8% of GDP.

Other chapters in the ebook argue that there were other, perhaps as or more important,  factors behind this export boom, and I’m convinced that other factors did play a role. However the point I want to make in this post is that, as long as these factors are permanent, they imply that the real exchange rate in Germany has to rise at some point. This is exactly the same point as saying that not all of the German current account surplus of 8% is structural. Some of that surplus is because the German real exchange rate is undervalued.

There are two ways the German real exchange rate can appreciate. The first is via an appreciation in the Euro, and the second is for German inflation to be higher than average Euro area inflation. Below is a chart of one measure of competitiveness for both Germany and the Euro area.

The level is arbitrary: it is how the two series move over time and relative to each other that matters. You can see how Germany gained competitiveness.over other Eurozone countries from 2000 to the GFC. You can also see how that gain has been partially but not fully unwound over the last 7 or 8 years. Looking at Euro area competitiveness, it is a little below its average level over the past and also its level in 2010 when I calculated it was close to its equilibrium rate to the dollar. (This work was unpublished, but uses a similar model to the one I used to calculate the optimal entry rate of Sterling into the Euro as part of the 5 tests.)

So there is perhaps some scope for a further appreciation in the Euro, but it seems unlikely that will be enough on its own to achieve the required German real appreciation. German nominal wages have increased by more than the Euro average in recent years, but the differences have been small. That difference needs to increase to get Germany's real exchange rate to sustainable levels. Germany should not think of that as a problem, but rather the way their export success has to be translated into higher incomes for German workers..


Wednesday, 10 October 2018

Talk on where macroeconomics went wrong


I gave a short talk yesterday with this title, which takes some of the main points from my paper in the  OXREP 'Rebuilding Macro' volume  It is mainly of interest to economists, or those interested in economic methodology or the history of macroeconomic thought. When I talk about macroeconomics and macroeconomists below I mean mainstream academic economists.  

I want to talk today about where macroeconomics went wrong. Now it seems that this is a topic where everyone has a view. But most of those views have a common theme, and that is a dislike of DSGE models. Yet DSGE models are firmly entrenched in academic macroeconomics, and in pretty well every economist that has done a PhD, which is why the Bank of England’s core model is DSGE. To understand why DSGE is so entrenched, I need to tell the story of the New Classical Counter Revolution (NCCR).

If you had to pick a paper that epitomised the NCCR it would be “After Keynesian Macroeconomics” by Lucas and Sargent. Now from the title you would think this was an attack on Keynesian Economics, and in part it was. But we know that revolution failed. Very soon after the NCCR we had the birth of New Keynesian economics that recast key aspects of Keynesian economics within a microfoundations [1] framework, and is now the way nearly all central banks think about stabilisation policy. But if you read the text of Lucas and Sargent it is mainly a manifesto about how to do macroeconomics, or what I think we can reasonably call the methodology of macroeconomics.And on that their revolution was successful, and it is why nearly all academic macro is DSGE.

Before Lucas and Sargent complete macroeconomic models, of both a theoretical and empirical kind, had justified their aggregate equation using an eclectic mix of theory and econometrics. Microfoundations were used as a guide to aggregate equation specification, but if this equation fell apart in statistical terms when confronted with data in would not become part of an empirical model, and would be shunned for inclusion in theoretical models. Off course ‘falling apart ‘ is a very subjective criteria, and every effort would be made to try and make an equation consistent with microfoundations, but typically a lot of the dynamics in these models were what we would now call ad hoc, which in this case meant data based. .

Lucas famously showed that models of this kind were subject to what we call the Lucas critique [2], and that forms an important part of Lucas and Sargent paper. They argue that the only certain way to get round that critique is to build the model from internally consistent microfoundations. But they also ask why wouldn’t you want to build any macroeconomic model that way? Why wouldn’t you want a model where you could be sure that aggregate outcomes were the result of agents behaving in a consistent manner

If you want to crystallise why this was a methodological revolution, think about what we might call admissibility criteria for macro models. In pre-NCCR models equations were selected through an eclectic mixture of theory-fit and evidence-fit. In the RBC and later DSGE models internal theoretical consistency is an admissibility criteria. Or to put it another way, a DSGE model never got rejected because one of its equations didn’t fit the data, but if one equation had a theoretical foundation that was inconsistent with the others it would certainly not be published in the better journals.

Have a look at almost any macro paper in a top journal today, and compare it to a similar paper before the NCCR, and you can see we have been through a methodological revolution. Unfortunately many economists who have only been taught and who only known DSGE just think of this as progress. But it is not just progress, because DSGE models involve a shift away from the data. This is inevitable if you change the admissibility criteria away from the data. It inevitably means macroeconomists start focusing on models where it is easy to ensure internal theoretical consistency, and away from macroeconomic phenomenon that are clear in the data but more difficult to microfound.

If you are expecting me at this point to say that DSGE models where were macroeconomics went wrong, you will be disappointed. I spent the last 15 years of my research career building and analysing DSGE models, and I learnt a lot as a result. The mistake was the revolution part. In the US, DSGE models replaced traditional modelling within almost a decade [3]. In my view DSGE models should have coexisted with more traditional modelling, each tolerating the other.

To get a glimpse of how that can happen look at the UK, where a traditional macromodelling scene remained active until the end of the millenium. Traditional models didn’t stand sill, but changed by adopting many of the ideas from DSGE such as rational expectations. Here the account gets a little personal, because before I did DSGE I built one of those models, called COMPACT. There are not many macroeconomists who have built and operated both traditional and DSGE models, which I think gives me some insight of the merits of both.

COMPACT was a rational expectations New Keynesian model with explicit credit constraints in a Blanchard-Yaari type consumption function, a vintage production model, and variety effects on trade. So in terms of theoretical ideas it was far richer than any DSGE model I subsequently worked with. Most of COMPACT’s behavioural equations were econometrically estimated, but it was not an internally consistent model like DSGE.

COMPACT had an explicit but exogenous credit constraint variable in the model because in our view it was impossible to model consumption behaviour over time without it. Our work was based heavily on work in the UK by John Muellbauer, and Chris Carroll was coming to similar conclusions for the US. But DSGE models never faced that issue because they worked with de-trended data. Let me spell out why that was important. Empirical work was establishing that you could not begin to understand consumption behaviour over a 20/30 year time horizon without seeing how the financial sector had changed over time, and at least one traditional macroeconomic model was incorporating that finding before the end of the last millennium.. Extensive work on exactly that issue did not begin using DSGE models until after the financial crisis, where changes in the financial sector had a critical impact on the real economy. DSGE was behind the curve, but more traditional macroeconomics was not. .

Now I don’t think it is fanciful to think that if at least some macroeconomists had continued working with more traditional data-based models alongside those doing DSGE, at least one of those models would have thought to endogenise the financial sector which was determining those varying credit constraints.

So the claim I want to make is rather a big one. If DSGE models had continued alongside more traditional, data-based modelling, economists would have been much better prepared for the financial crisis when it came. If these two methodologies had learnt from each other, DSGE models might have started focusing on the financial sector before the crisis. Of course I would never suggest that macroeconomics could have predicted that crisis, but macroeconomists would have certainly had much more useful things to say about the impact on the economy when it happened.

Just being able to imagine this being true illustrates that moving to DSGE involved losses as well as gains. It inevitably made models less rich and moved them further away from the data in areas that were difficult but not impossible to model in a theoretically consistent way. The DSGE methodological revolution set out so clearly in Lucas and Sargent's paper changed the focus of macroeconomics away from things we now know were of critical importance.

I’ve been talking about this since I started writing a blog at the end of 2011, but recently we have seen similar messages from Paul Romer and Olivier Blanchard in this OxREP volume. What I have called here traditional models, and in the paper I call Structural Econometric Models, Blanchard calls provocatively policy models. It was provocative because most academic macroeconomists think DSGE models are the only models that can do policy analysis ‘properly’, but Blanchard suggests policymakers want models that are closer to the data more than they want a guarantee of internal consistency, and they want models that are quick and easy to adapt to unfolding problems. The US Fed, although it has a DSGE model, also has a more traditional model that has similarities to a traditional model like COMPACT, and guess which model plays the major role in the policy process?

[1] Microfoundations means deriving aggregate equations from microeconomic optimisation behaviour

[2] The Lucas critique argued that many equations of traditional macroeconomic models embodied beliefs about macro policy, and so if policy changed the equations would no longer be valid.

[3] The difficulty of identification in single equation estimation highlighted by Sims in 1980 probably also contributed.  . 

Saturday, 6 October 2018

How the left stopped being a party of the working class


I’ve been meaning for some time to write about a recent paper by Thomas Piketty, which looks at what characteristics influenced voters to vote for the left or right in France, the UK and US since WWII. (Simon Kuper has a nice little summary with a great title.) Here is a chart that shows how after WWII educated voters tended to vote right, but now tend to vote left (even after controlling for income, age etc - see box)


In all three countries, the number of educated voters increased in all three countries, reflecting in part the need for higher skilled workers.

In contrast (and if we exclude the most recent elections in France and the US) the income profile for voting has not changed very much over time: poorer voters are more likely to vote left than richer voters, particularly if we control for education, although poorer voters are increasingly unlikely to vote. So the shift in voting patterns among educated voters demands an explanation and has fascinating implications.

Unfortunately the paper does not focus on this question, but it does suggest that part of any explanation may reflect the fact that more educated voters tend to have more liberal attitudes in general, and more liberal attitudes to migration in particular (see here for example). The positive correlation between social liberalisation and education is well documented (see [1] for example), as was evident in the Brexit vote.

I suspect there are other factors as well. There are possible reasons why the interest of human capital (as economists would call it) are different from the interests of business or financial capital, or no capital at all. For example a more meritocratic education system suits them better than one where income buys education, so they are likely to be stronger supporters of a state based education system (or indeed they may be part of it). They will also be more likely to consume state subsidised culture. More generally there may be a wish to break down traditional class based networks and replace them with more meritocratic structures. On the other hand because human capital generates an income, they will be less keen on tax based redistribution than workers. All this may create what some might call an education ‘cleavage’.

The implication for parties on the left are that party members were increasingly from the educated middle class rather than working class, and this has gradually changed the structure, platforms and leaders of left parties. Together with the decline in trade unions, the counterpart to this will be a less visible representation of the working class. Piketty describes this as the emergence of the “Brahmin Left” elite, which can be compared to the “Merchant” elite on the right.

A consequence may be that the political elite as a whole becomes less interested in redistributive policies that used to favour the working classes, and helped continue the decline in wealth inequality before the 1980s that Piketty has famously documented elsewhere. That in turn makes it easier for the right to capture parts of the working class vote, particularly when these voters have socially conservative views. A recent book by Mark Bovens and Anchrit Wille takes a very dim view of these changes.

There is a less pessimistic take on all this. As right wing parties have increasingly relied on pushing socially conservative/authoritarian/anti-minority policies to gain votes, left wing parties find that this combined with wealth/income protection is an unbeatable coalition for their opponents. (Perhaps this helps explain the decline in so many centre-left European parties.) The only way to beat that coalition is to rediscover economic policies that help the working class.

This long paper has other interesting results. In France, like the UK, public attitudes have seen a decreasing hostility to immigration over time. He also notes that the right’s socially conservative turn has helped to sustain an almost complete loyalty to the left from Muslims in the UK and France, and from blacks in the US. Finally a parochial point of interest, which is also a point that Torsten Bell has stressed recently.


Piketty notes that the dominance of the left among the young in the UK in 2017, as well as being unprecedented in the UK, was higher than in any of the two other countries at any point in time. It may be that this is part of a trend since 1997, but it could be exceptional because of Brexit, which amounts to the old taking opportunities away from the young.

[1] Education-based group identity and consciousness in the authoritarian-libertarian value conflict. / Stubager, Rune. In: European Journal of Political Research, Vol. 48, No. 2, 2009. .










Wednesday, 3 October 2018

How the media helped turn the worst recovery in 100 years into a strong economy in stable hands before the 2015 election


Are you exhausted and exasperated by Brexit? Do you despair when our foreign secretary compares the EU to the Soviet Union just because the EU will not change their rules to give us what we want? Do you wish that we could go back to how it was before Brexit? If so, I wrote my forthcoming book “The lies we were told” just for you. (It can be ordered at a 20% discount here, rising to 35% if you join the publisher’s mailing list.)

One of the posts in the book, written at the beginning of March 2016, anticipated a lot about the forthcoming campaign and how it would play out. I wrote
“The EU referendum is therefore another test of how much economic expertise can influence public opinion. As regular readers will know, we have been here before, and not just on austerity.”

One of those examples was the 2015 general election, which forms one of the nine chapters in the book.

As background, here is I think the best illustration of how poor the UK recovery from the 2009 recession was (from The Resolution Foundation).


As we can clearly see, the post-2009 recovery was slower than anything we have seen in the last 100 years. Now sometimes governments can be unlucky, as the economy follows events that they cannot control, but the recovery after the Global Financial Crisis was not like that.

In this chart, using OBR data, I compare the cyclically adjusted primary balance during the last three recessions.


Take the ‘ERM recession’ first. Fiscal policy did very little until 1992, when both fiscal and monetary policy became expansionary, leading to a strong subsequent recovery. (Fiscal policy moving in a downward direction is expansionary and vice versa.) This is a classic expansion, with both fiscal and monetary policy providing a stimulus together.

The ‘monetarist recession’ is more complex. During 1982 interest rates were reduced steadily from nearly 15% to 10%, but famously the April 1981 budget led to a sharp fiscal tightening (leading to the famous 364 economists’ letter). Contrary to right wing and media myth, the economy’s response to this contradictory mix was to grow at around the trend growth rate, so not a true recovery (by which I mean growth above trend, so we catch up with that trend). We only got a true recovery from 1983, when fiscal policy relaxed alongside monetary policy.

This is textbook stuff (hence the 364 letter). In early 2009 UK interest rates hit their lower bound, so fiscal expansion was needed more than ever, and that is what happened under Labour. But the Conservatives bought the myth about 1981, carefully cultivated by the Institute of Economic Affairs and swallowed by the media, that the 364 economists had been wrong, so in opposition they opposed the 2008/9 and 2009/10 expansion and in government started a fiscal contraction, a contraction that only came to an end in 2017.

The inevitable consequence was the weakest recovery for a 100 years. Combining a weak recovery with a large 2008 depreciation of sterling meant incomes literally stagnated for 7 years, as another chart from the Resolution Foundation shows. The Conservatives did not admit their mistake and pledge not to do it again, but preferred to create a false narrative instead.


The lie was the story of a profligate Labour government and how the Coalition government had been forced to clear up the mess. Voters bought it. Coming into the 2015 general election, polls suggested the economy was the Conservatives' strong point. They did so in part because the media never challenged the story, which was obviously false from just a brief inspection of the data. Rather than look at the data they preferred to talk to City economists (and not academics), and most City economists have an interest in backing a Conservative line and talking up the power and threat from the market. In that sense the media played a key role in winning the 2015 election for Cameron, which of course was the only way a referendum could happen. Evidence to back up all this is in the book. 

The Conservative party has never acknowledged their austerity error, and so we have every reason to think they would do the same again if another recession came along. Much of the media still prefer to let politicians make any nonsense economic claim they wish, and they rely on other politicians to challenge them rather than confront them with the facts or expert consensus.  

Having leading politicians spin a disastrous economic policy with lies and without challenge from the media did not start in 2016, but in 2010. Elsewhere in the book I try and explain why politicians on the right went off the rails in 2010, and also why the media facilitated a majority of the country going with them

Monday, 1 October 2018

The post-Brexit vote trade boost that never was

There is still a huge disconnect between the reality of the state of the UK economy since the Brexit vote and media perceptions. I heard one presenter on BBC News say the economy is doing pretty well following the Brexit vote. The reality is very different. According to the latest CER study the economy is 2.5% smaller than it would have been without that vote, which is nearly £2000 per household. We are back in the situation we were in before the 2015 election, where the reality for most households was pretty bad but the media kept on talking about a strong economy.  


But why has the Brexit vote had such a large negative impact on the economy, when Brexit has not happened yet. When I talked about what to expect immediately after the vote, when Brexiters were arguing that the collapse in sterling would be a big boost for the economy, I tried to point out that any boost would be temporary, because sterling had fallen for a reason: trade could become more difficult. That was a major reason for the depreciation, to compensate for future trade barriers. (I elaborated here, and talked about why real wages were falling here.)


It looks like I was being too optimistic. Here, from the ONS, is the breakdown of what contributed to GDP growth in each quarter since the vote. The contribution of net trade (the yellow bars) is always erratic, but there is no clear positive contribution emerging.



This aggregate data is backed up by the survey evidence from the manufacturing sector  reported here. Many firms have already lost export orders as they were cut out of EU based supply chains because of Brexit. A recent study from INET and Cambridge found that firms were either not entering into new agreements to export products because of Brexit or were more likely to exit from such agreements. Most recently another study used statistical methods to estimate what trade would have been without Brexit, and this suggested that exports to both the EU and non-EU were not increasing as you might hope as a result of the depreciation.


That exports to non-EU countries are lower as a result of the Brexit depreciation might seem puzzling, but it is important to remember the number of trade agreements that the EU has with other countries, which we will probably lose under some types of Brexit.


What is going on here? Why are exporting firms not increasing their volume of exports in the short term to benefit from the competitive advantage they have gained at least before barriers to trade are erected? No doubt some are, but they are being offset by others that are decreasing exports because contracts are getting cancelled or it is just not worth continuing to export or enter new markets.


The reason is something that trade economists have known about for decades. Trade involves important fixed costs. Supply chains have to be established, or the infrastructure to trade in overseas markets has to be set up. That means that those setting up supply chains do not want to be changing them every year, and as a result find it too risky to include UK firms when various barriers might arise as soon as March 2019. Equally firms selling direct to overseas consumers find that the investment required to set them up is greater than any profits they might only make for a few years.


All this would not matter so much in terms of GDP if similar things were happening to imports, but the most recent study I surveyed suggested this was not happening so much to imports. An important reason why exports are hit more than imports is specialisation. Increasingly there are products which the UK does not produce, so it is more difficult to substitute from overseas to domestic production. In contrast exports are generally competing with producers from many countries, so substituting from a version of the product coming from the UK is much easier. That I believe is an important reason why sterling fell so much after the Brexit vote.


Although all this is painful for people in the UK, it is also interesting for a macroeconomist. We have a ‘natural experiment’ involving a future event, but with the complication that what the future event exactly is remains uncertain. The negative impact on investment is exactly what we would expect: it is always safer to wait and see. The negative impact on exports is rather different from what standard models would imply, but can be explained by well known trade theory. The impact on consumption has perhaps been less than many expected, but that could be explained by many having incorrect expectations of what Brexit means for their future incomes. All this shows how important expectations are and how misleading naive expectations processes would be, but also why it is often important to allow for how distorted information sets can generate errors from rational expectations.  

Friday, 28 September 2018

Would a Corbyn Brexit heal the nation or wound Labour?


Just suppose May fails to get a deal, or her proposed Withdrawal Agreement (WA) fails to be passed by a majority of MPs. Suppose for some reason this results in an election that Labour wins. Labour have not pledged to have a referendum in those circumstances, and I think this is more than triangulation. It is increasingly clear that the Labour leadership want to do a Brexit deal with the EU.

I think it is also becoming clear that this deal will be essentially Brexit in Name Only (BINO): we stay in the Customs Union and Single Market. The Labour leadership will want assurances on nationalisation as well as other elements in their manifesto, and the EU will give the (substantial) assurances it can without changing EU policy in any way. Labour will I suspect also come back with a package on Freedom of Movement that involves enforcing the existing rules (EU nationals have to find work within 3 months) and any other sweeteners the EU care to throw them. That all adds up to BINO.

The key characteristic of BINO (which is what gives it its name) is that everything it does can be achieved by staying in the EU. As far as any sweetners are concerned, it is plausible that the UK is more likely to get those being part of the EU than being outside it. All that BINO achieves is to give up a direct say in how the EU evolves, and giving that up without any compensation cannot be in the national interest.

So why would Labour bother to do this? The answer I think is that they want to keep the minority of Labour voters who still favour Leave voting Labour. When the leadership says that they must respect the referendum result they do not really mean that it is undemocratic to hold another referendum: they are not that stupid. What they mean is that they do not want to antagonise Labour Leavers. In addition they believe that BINO with sweeteners would convince enough Labour Leavers that Labour had got the job done, and these voters would not worry too much about the details.

Before getting on to whether they are right, it is worthwhile noting that this has nothing to do with the Labour leadership being Leavers at heart. In a smart tactical move, Corbyn in his closing conference speech said he would back a WA that came from May if she delivered “a deal that includes a customs union and no hard border in Ireland, if you protect jobs, people’s rights at work and environmental and consumer standards - then we will support that sensible deal.” The inclusion of Ireland and protecting jobs means in practice staying in the Single Market. You just wouldn’t make that pledge if you wanted Lexit.

Of course exactly the same question arises for Theresa May and the Conservatives, if as I suspect the EU is not prepared to extend the backstop to the UK and so BINO is the only deal that avoids an Irish border anywhere.

So would BINO heal the wounds opened up by the original referendum or would it satisfy no one? A positive argument would start by suggesting that most Remainers will not mind losing any say in the EU, because they would be so relieved that we had avoided a hard Brexit. The people who should be worried about this loss of sovereignty are Leavers, but they will be more concerned with actually leaving. And both groups will be relieved it is all over.

The argument against is that BINO is clearly inferior with being a member of the EU, so Remainers will know we have done something that is clearly nonsensical. Leavers on the other hand will be convinced (by the Brexit press in particular) that this result is a sham Brexit, and therefore a betrayal of the original referendum, which is roughly how May herself has described it. As time goes on both sides will forget that the government was fulfilling a democratic mandate, and instead blame it for agreeing a Brexit that nobody likes.

I don’t see how it is possible to know which of these outcomes will come to pass, which in turn means a government that enacts Brexit is risking a lot. Of course politicians are used to taking risks, but these risks normally involve trying to achieve something they think will do the country, or part of it, some good. It is somewhat novel to take risks to achieve something that in itself does nothing but reduce the country’s influence and sovereignty.

Tuesday, 25 September 2018

The Next Referendum Question


I wrote in January about the “unanswerable case” for a referendum on the Withdrawal Agreement (it is not a second referendum but nor is it a referendum on the final deal), and I have not changed my mind in the slightest. To say such a referendum would not be democratic is self-contradictory. I personally would be happy for parliament alone to call a halt to Brexit, but if MPs believe that to do so would be seen as undemocratic then we have to have a referendum on the Withdrawal Agreement (WA).

Does it bother me that this will not be a referendum on the final deal, because the WA is likely to be vague on the final trade arrangement? No, for two reasons. First a referendum on the final deal will be meaningless because we will have already left (something which I do think is undemocratic). Second, we now have a huge amount of information compared to 2016.

We now know that there are essentially two types of deal with the EU we can do. The first is some kind of FTA (free trade agreement), where Northern Ireland would stay in the Single Market for goods and Customs Union (the Irish backstop). Theresa May says that is something no Prime Minister could agree to, but more worrying from my point of view is that we would be a lot poorer as a result because we would do less trade with the EU and many of the third countries that currently have trade agreements with the EU. Those who tell you that getting our own trade deals with those third countries would be a piece of cake are the same people who told you that we held all the cards with the EU.

The second option is that we stay in the Single Market and Customs Union, but have little say in how those emerge. That avoids the need to implement the Irish backstop, which is why it will be the most likely option that May will agree to in the end. The economic hit from that would be much smaller than the first option, but we end up with substantially less sovereignty than if we stayed in. May would like to persuade the EU to leave open the idea of extending the backstop to the whole of the UK, meaning we stay in the CU and SM for goods only, but I think the chances of the EU agreeing to this at the end of the day are slim, and as geography is as important to services as goods we would be worse off as a result.

This choice was not clear to even experts at the time of the referendum, and it was certainly not clear to voters. The campaign hardly mentioned Ireland (and when it did, it did not imagine a backstop), and voters were told there would be more money for the NHS (there will be less), Turkey was about to join (it is not), EU immigration hurt the public finances (it does the opposite), we held all the cards in any negotiation etc. The Remain side may have exaggerated the immediate economic hit, but two years later GDP is around 2% lower as a result of the uncertainty created by Brexit and the fall in Sterling has in addition cost each household an average of £400 per year. That is fact not Project Fear.

So the case for a referendum on the WA is overwhelming, given all the extra information we have. That nearly all this information has been negative for Brexit is reflected in the polls. So what should the referendum question be? I do not think No Deal should be an option. No one seriously campaigned for No Deal in the first referendum, and only a minority of Conservative MPs (60?) support it. The obvious question to ask is do you want to accept the WA negotiated or do you want to Remain in the EU. This does not disrespect the original referendum vote any more than the 2017 general election disrespected the 2015 one.

John McDonnell on the Today programme yesterday (here, 2:10 hours in) seemed to suggest a question like do you accept the WA, yes or no? Some took the 'no' as implying No Deal, but I doubt that as Labour would be campaigning for no and have already said No Deal is not an option. Instead it would be a suggestion to reopen negotiations. But if Labour cannot force a General Election, and with May saying this is the best deal she can get, what is the point? If you think a no result would put pressure on the EU, see what happened after the Greek referendum in 2015. I think many voters would realise this, and just vote for the WA to speed the end of the paralysis in government that Brexit had created.

Not only does his suggestion make little sense, but it was politically disastrous, given the overwhelming support for a referendum that included the Remain option among Labour voters and members. Just after a composite motion had been agreed which is itself a compromise between Remain members and the leadership, he appears to undercut it at a stroke. The words he should have said came from Starmer later in the day.

So the referendum on the WA should be a simple choice between accepting the WA as negotiated or cancelling Article 50 and remaining in the EU. What about all those working class Labour voters in the towns of England and Wales who will feel betrayed if we stay in the EU? Those people were sold snake-oil, and you do not expose snake-oil by prescribing it on the NHS. Instead you make sure you enact policies that reduce the demand for snake-oil, and hopefully that is what a future Labour government will do.