Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 26 March 2019

Left behind movements do not just reflect deindustrialisation, but also geography, inequality and lack of representation.


There was extensive analysis after the UK EU referendum of the characteristics of those who voted for Brexit and those who didn’t. A robust finding was that those who voted for Brexit tended to be older and had less years of education. But some noted a link between a tendency to vote Leave and areas of deindustrialisation. The idea of the ‘left behind’ was born. It gained force when rest-belt states in the US swung to Trump in the same year.

This characterisation of the left behind was attractive to many on the left, who have been critical of the globalisation they saw as the cause. Yet as Martin Sandbu points out, the period of what is often called hyper-globalisation is the 1990s, and much deindustrialisation occurred before then. Some of that was a result of automation rather than globalisation, and in the UK 1980s deindustrialisation was hastened by a large appreciation of sterling caused by a combination of discovering North Sea Oil and monetarism. Why the 30 year delay for the left behind to finally find its political voice?

If we look at the geography of the Brexit vote, areas of deindustrialisation is not the only thing that strikes you. Much more obvious is that people in large cities voted against Brexit, and those in smaller cities or towns or the countryside voted for Brexit. The same was true for Trump, and Trumps core support comes from rural areas. Is this simply a consequence of differences in age and education already discussed?

It could well be. As the Centre for Towns showed, UK villages and towns have been getting older and cities have been getting younger. Jobs that attract the university educated tend to be in cities rather than in towns and villages.The old tend to be more socially conservative, and so are attracted to the anti-immigration message that was a key part of the Leave and Trump campaigns.

There is no doubt these factors are important, but do they explain all the the geographical nature of the support for Brexit and Trump, or is there more to it? I think the gilet jaunes from France can shed some light on this question. As John Lichfield outlines, the gilet jaunes come from peripheral France: the outer suburbs and countryside. That may include some areas of deindustrialisation but it goes well beyond that. Their protests are self-organised and remarkably persistent. They do not fit any clear left/right categorisation. Immigration, or race, are not high up among their concerns, which is why they do not feel represented by the far right party of Marine Le Pen.

What do the gilet jaunes want? Specific demands are varied and often contradictory. But a dominant theme is that they want to be valued and represented. They feel that the centres of power in France, the government but also other organisations, do not speak for or even respect them. They think the major cities are getting all the benefits of growth while they are falling behind.

The gilet jaunes tend to be working or lower middle class, sometimes self-employed, sometimes retired. Initially their protests were sympathetically viewed by most French voters, which was one reason why Macron responded with tax breaks for pensioners and low income workers. As time goes on and the violence has continued their popularity among French voters has waned. Whether they have a future as a coherent force may depend on whether they can transform themselves into a conventional political group that wins seats in the forthcoming European elections, a process which has already led to some fragmentation along traditional left/right lines.

Macron’s election as President of France had led many to think that the wave of populism influencing democracies around the world could be held back or even beaten. What the gilet jaunes show is that this cannot be done just by electing a charismatic President. Indeed the character of Macron, clearly part of an affluent city elite, may even have been a provocation.

Can the gilet jaunes tell us anything about those who voted for Brexit or Trump? All three movements come from outside of the main cities, so perhaps geography is more than just an incidental factor. What is unique about the gilet jaunes has been self-organisation, made possible through social media, and the variety of their political demands. In contrast Trump is a Republican, and Brexit is a very specific cause. But perhaps this difference just reflects the ability of some politicians and parts of the media to capture the discontent of the geographical areas that feel left behind?

The EU was not considered an important issue among most voters until the referendum. Immigration was, but a good part of that was because the government and press had managed to deflect anger at declining public services and wages on to immigrants rather than their own policies. Whereas the gilet jaunes had to organise themselves using social media, Brexit and to some extent Trump had sections of the conventional media to do that job. While many gilet jaunes want to overturn the government, Brexit supporters succeeded because they had the help of politicians and the media.

Underlying causes in all three cases include geographical and financial inequality, and a feeling of being ignored by conventional politics. In the UK, looking mainly at the first decade of the century, a NEF report found that nearly all of the 20 fastest growing constituencies were in cities. Often the prosperity of towns depends on the success or otherwise of a nearby city. Those in the periphery see money going to projects like crossrail or HS2 while local bus services are cut.

People look at others to measure their own prosperity but they also look at their own past. In the UK real wages are still below levels before the financial crisis, and in the last year the disparity between the incomes of most people and those at the top of the income distribution has started to increase again. (It is one reason why the Chancellor is getting more tax receipts than he expected.) In the US most of the proceeds of growth have for some time been going to the top of the income distribution.

We can see the same thing, although to a lesser degree, in France. Here is a revealing graph from a study by Thomas Piketty and colleagues. It shows how average annual growth rates of pre-tax income has varied by where people are in the income distribution over three time periods. To the right we have the richer income deciles, including at the end the top 1%, 0.1% and 0.01% respectively. In the two periods before the 1980s incomes at the top grew less rapidly than all other groups. From 1983 to 2014 the opposite has been true: growth rates of top incomes have been up to three times those of everyone else. In addition the growth rate of incomes of the non-rich have been historically low.




Low average growth in most incomes together with much faster growth in incomes at the top is provocative, particularly if you are in parts of the country that are stagnating with few prospects. I do not think it is any coincidence that a week ago we saw the gilet jaunes targeting the exclusive shops and restaurants of the Champs-Élysées.

Inequality based on incomes or geography is not enough to get the gilet jaunes on to the streets, to get UK voters to want to take back control, or Trump voters to vote for the worst President in a century. This also requires a feeling that your voice is not heard in the political process. In the UK a feeling of powerlessness was hijacked by politicians and the press who pretended it was a result of the EU, or in the US by Trump who pretended to speak for ‘real America’.

Speaking up for those left behind should naturally be something parties on the left do. Yet in the UK, as the NEF report shows, Labour have been increasing their vote share in dynamic cities and the Conservatives from areas in decline. This may be part of a longer term trend in both the UK, US and France, where the left party that once represented the less educated now is the party of the educated. The chart below taken from another study by Piketty shows this trend, which he calls it the emergence of the “Brahmin Left”.


Yet I think this alone is an incomplete explanation. To explain recent developments we should add the adoption by traditional left parties of a neoliberal framework which discouraged regional, industrial and redisributive policies that might have transferred more of the benefits of city dynamism to the periphery. That created a left behind that went beyond areas of deindustrialisation, that felt unrepresented and deprived, and which in the UK and US was open to capture by a populist right.


Friday, 22 March 2019

Labour’s Brexit stance is a tragedy for Labour but the current Brexit mess is an entirely Tory failure.


Before deciding that I’m writing about Labour when I should be writing about the disaster that is Theresa May, please read to the end.

As it becomes obvious (sort of) that there is no majority among MPs for a People’s Vote (something that has actually been clear for some time), the argument has been made that this justifies Labour’s failure to support a People’s vote and instead to seek a compromise, a softer Brexit. I have talked about the wisdom of compromise over Brexit before, but I want to make a different point here, about the stance that Labour has taken over Brexit.

In 2015 Labour lost a General Election where the strong card, perhaps the only strong card, of the Conservatives was their handling of the economy: in other words austerity. It would therefore not be ridiculous to claim that the vote was a verdict on austerity. Some Labour MPs did just that, and argued that if Labour were to win the next election it had to match George Osborne’s policy.

Thankfully on that occasion a new Labour leadership did not take their advice. There were three compelling reasons to continue to argue against austerity - indeed to argue against it much more strongly than Balls and Miliband had done. First and most importantly, it was a policy that made pretty well everyone worse off, and almost certainly led to premature deaths. Second, austerity was a policy that was very unpopular among party members. Third, there were good reasons to believe that the popularity of austerity among the public at large would fade away over time.

I think all these points apply to Brexit as well. Does the fact that 2016 was a referendum while 2015 was a General Election make a difference? Here we have to talk about the nature of the 2016 referendum result. It was not, and could never be, an unconditional instruction to leave under any circumstances. As the form of leaving was unspecified, and the conditions under which we would leave were strongly disputed (with the winning side proving to be completely wrong), it should only have been a request for the government to investigate how we might leave.

It was also won narrowly, with the winning side spending significantly more than was legal. That alone casts a question of legitimacy over the result. I find it extremely odd that some on the left say otherwise, and suggest Remainers have to prove that the additional spending made the difference, something that it is almost impossible to do. Do they realise the precedent they are setting? The right always has more money for obvious reasons, and if the only consequence of overspending by the right is a fine then that is an open invitation to try and buy elections.

Labour’s early approach to Brexit was successful in avoiding the 2017 election being a rerun of the referendum, but there were other ways of doing that. A reasonable strategy that would have achieved the same end was to accept the vote (obviously), but to reserve judgement while the government was negotiating. It would make sense to put down markers about being extremely skeptical that Brexit promises could be met and, crucially, whether a deal that was beneficial could be found.

As the outlines of the government’s deal became clear, Labour should have done what was right and what its members wanted, and campaigned for a second referendum. Once Labour had to put its cards on the table, triangulation ran out of road. The case for a vote on the final deal became unassailable once it was clear Leave promises about what the EU would do were worthless, that there were alternative ways of leaving each of which had some public support, and the public were not getting behind Brexit but were still deeply divided about whether to Leave and how to Leave. 

The Labour leadership’s arguments against doing that were of exactly the same form of those who wanted to adopt Osborne austerity after 2015: the policy that members wanted was seen as a vote loser. Even if they are right about backing a second referendum being a vote loser (and I strongly suspect they are wrong), the only argument I can see for treating austerity and Brexit differently is a belief that one matters much more than the other, and such a belief is very misguided.

What about the argument that there are not enough MPs in parliament to support a second referendum? In my view that is an entirely separate point. In general opposition parties cannot get their way, but that does not mean they stop campaigning for what they think is right. It may well be that parliament will never vote for a second referendum, and some compromise - a softer Brexit - is all that can be achieved. I hope that is not the case, but it could well be. But that does not mean a party should start off campaigning for the compromise you may be forced to reach, rather than campaigning for what is right.

Some people argue that we have to support Brexit to show solidarity with those left behind who support it. That ignores those left behind who voted against it, but even so it is not a good way to proceed. You could say exactly the same about immigration, which many of those left behind blame for their situation. It would be quite wrong for Labour to adopt an anti-immigration policy they did not believe in just to show solidarity with those who wanted it. The same is true of Brexit.

But I have to make one final, and critical, point. I think Labour’s Brexit policy is tragic because it has, directly or indirectly, diminished support for Labour and its leadership among many people who might vote Labour. By triggering Article 50 Labour bear some responsibility for Brexit, and I have suggested before that the successors to the current leadership should come from those who voted otherwise. However I cannot say with any certainty at all that Labour’s policy has had any effect on the Brexit process as such. It is not at all clear that if Labour had adopted the stance I suggest above it could have stopped Brexit, This Brexit mess is entirely Tory affair. To quote Alison McGovern, “This is a Tory problem, a Tory solution and a Tory obsession.” It is Tory disunity and madness that has delayed Brexit. It is a terrible Tory Prime Minister that has made democracy in the UK become a laughing stock among the rest of the world. Those who claim the Tories and Labour are equally to blame or equally responsible for Brexit are wrong. 

May's speech to the public on Wednesday night was Trumpesque, and extremely dangerous. She blamed MPs for delaying Brexit when she had delayed one vote for no good reason, and then basically said its my deal or no deal. She pretended she was acting for the people while parliament was frustrating the people’s will, when in reality less than 40% of voters support her deal and parliament is reflecting that. She seems on the point of taking us over the cliff edge and it is only Tory MPs that can stop her. To make such an authoritarian, populist speech without realising what she was doing tells you all you need to know about her character and political ability.

Her proposal to the EU only made sense if she was prepared to leave with No Deal, which in turn signals to the ERG that they should not vote for her deal. The EU is much too sensible to agree with that, and has in effect given parliament three weeks to work out an alternative to May’s deal. That requires Tory MPs to cooperate with the Labour leadership, something they have not yet been prepared to do [1]. To the many who suggest that somehow the Labour leadership could have prevented the mess we are in I say show me how you can be sure of that, because to me this looks like all the Tories own work from David Cameron to today.

[1] If Tory MPs do finally have serious discussions with the Labour leadership, the Single Market is critical. If all the leadership does is demand to stay in a Customs Union (something inevitable with May's deal given the backstop), it will be equally responsible for the damage caused by leaving the Single Market. Phrases about 'access to' or 'staying close to' the Single Market bind the government to nothing. 

Tuesday, 19 March 2019

Brexiters are stopping Brexit because they need to believe in the fantasy of Global Britain


It now looks like May will not get a chance to put her deal to parliament for a third time today, thanks to a ruling from Speaker Bercow. Yet while some compare Theresa May’s relentless and humiliating quest to get her deal passed by parliament to the Black Knight from Monty Python’s the Holy Grail, and Bercow believes the deal has to change for it to be voted on again, there would have been a critical difference this time.

Previously rejection has meant nothing except that we get closer to leaving without a deal. No deal is what economists might call the ‘bliss point’ of many Brexiters. The outcome most Brexiters want is what they call a ‘clean break’ with the EU. Before parliament agreed to delay rather than crash out, it was obvious the Brexiters would vote against May’s Withdrawal Agreement.

If the Withdrawal Agreement had been voted on today (and May could well have pulled it herself anyway because she believed she would lose again), rejecting it would have almost certainly meant a long delay to Brexit rather than crashing out. That may be a crucial difference for many Brexiters, including the DUP. A few have already said that they would have supported May’s deal this time, and others appear to be looking for ways to change their minds. So the vote would have been closer than last time it it had been held.

Given this, I have never understood why May kept No Deal on the table for so long. It was obvious that most Brexiters preferred No Deal and would therefore inflict embarrassing defeats on the Prime Minister. In contrast the threat of No Deal does not seem to have kept the few MPs on the opposite wing on board. All I can assume is that she really believed the David Davis mantra that the EU would cave at the last minute for fear of the impact of no deal. If so that was a huge misjudgement, to be added to the already long list of huge misjudgements she has made over Brexit.

Now she has finally said a long delay is the alternative to her deal passing, the Brexiters would have a real dilemma if the deal was voted on again. A long Brexit delay does not take No Deal completely off the table, but it makes it much less likely than before. It also increases the possibility of a second referendum. To understand the dilemma the Brexiters would have if May were allowed to and had put her deal to parliament for a third time, we have to enter the make-believe world of ‘Global Britain’. Of course Global Britain appeals to the English nostalgia for empire that runs deep within Brexit, but to most Brexiters it is much more than that.

Conventional economic analysis tells us that leaving the EU’s Customs Union and Single Market will reduce the amount of trade the UK does with the rest of the world. The reasons are obvious, and I think are privately accepted by most Brexiters. Their main line of defence during the referendum was that the EU would give us all the benefits without the costs, which we now know conclusively is not true. While some Lexiters might be attracted by the idea of a less global UK (because they blame globalisation for deindustrialisation), Brexiters do not want less trade. Their idea of Global Britain was to do more trade with non-EU countries to offset, in the longer term at least, the loss of trade with the EU.

The Irish backstop in the Withdrawal Agreement (WA) effectively rules out Global Britain. Most trade deals involve tariff reductions, and if the UK is in the EU’s Customs Union it cannot unilaterally reduce its tariffs to make new trade deals. Theresa May and Liam Fox may pretend otherwise, but most Brexiters know this to be the case. The more May moves to appease the DUP by promising that EU rules in Northern Ireland will also be adopted by the rest of the UK, she restricts yet further the scope of independent (from the EU) UK trade deals. Without tariff reducing trade deals with emerging countries and the US, Brexiters believe there will be a decline in the amount of trade the UK does with the rest of the world, and that will be harmful to the UK economy.

That is why some Brexiters insist that May’s deal is worse than staying in the EU. But others will point out that the WA does allow the UK to move away from many of the rules of the Single Market, which in their eyes is an important part of Brexit. A few may pretend to themselves that the backstop can still somehow be subverted once we have left, or even that No Deal can still be achieved after approving the Withdrawal Agreement by rejecting enabling legislation. They may say that it would be extremely ironic and embarrassing if Brexiters by their own actions stopped Brexit happening. Those still opposed to May’s deal will respond that those who vote for it own it, and if trade and the economy subsequently decline voters will blame those who voted for May’s deal.

Behind all this is the influence of Conservative members. The departure of Nick Boles, who left his Conservative Association before he was pushed, reflects a new mood of militancy among the Tory grass roots. Boles had voted for May’s deal, and his crime in the eyes of party members was that he also campaigned against no deal. With some of the Brexiters hoping to succeed May, their decision is all about pandering to this electorate.

In truth this debate is upside down compared to the real world. I describe Global Britain as make-believe because all reputable studies suggest new trade deals cannot come close to offsetting lost EU trade. A key reason is what economists call gravity. Gravity is the observation that countries trade more with their neighbours than those far away, a robust finding that appears to hold despite falling transportation costs. That means that even if the UK after Brexit could get lots of tariff reduction deals with countries outside the EU (a big if), this would not come close to making up for the lost trade with the EU. The government’s own analysis comes to the same conclusion. By keeping us in the Customs Union, May’s deal actually helps the economy, although as I outlined last week leaving the Single Market is still very costly.

Brexiters always refer to how much faster countries outside the EU are growing. But this is like giving up your solid 40 hour a week day job to work just one hour a week for a rapidly expanding firm for the same hourly pay. Because the firm is rapidly expanding you could be working 2 hours a week within 10 years! This is something few in their right minds would do in real life, so why should we do the equivalent as a country?

Brexiters prefer to ignore the analysis of the overwhelming majority of economists, and instead look to the tiny group of Economist for Free Trade (EFFT). But as Chris Giles has recently shown, if you look at how the GDP forecasts of various groups just after the referendum have been doing recently, those of EFFT have been wildly optimistic compared to others. As the chart shows, EFFT (then Economists for Brexit) did well in the first few quarters after the referendum because many consumers dipped into their savings, but by the end of 2018 EFFT were doing much worse than the OBR, Bank of England and the consensus of private sector forecasters. Giles sums this up by saying “The lesson is simple: listen to economists, but not to those peddling a political line.”


So the only economists who really believe in Global Britain have already been shown to be far too optimistic about the impact of Brexit. No doubt they would say that is because May’s deal prevents Global Britain, but it is clear from movements in sterling that the foreign exchange markets fear No Deal most of all because of the impact this would have on trade. The Brexiters have a wonderful way of avoiding these facts. As the consensus among economists is that trade will suffer if we leave the EU, economists overwhelmingly favour staying in the EU. The Brexiters then conclude that if they favour Remain they therefore must be biased. Ergo only the predictions of economists who believe in Global Britain can be trusted!

There would be a certain horrible symmetry if May’s Brexit deal had passed this week. It would have been a narrow victory, just as the EU referendum result was narrow. It would be a victory tainted with public money used to bribe Labour MPs and the DUP, while the referendum vote was won by the Leave side spending much more private money than the rules allowed. Both victories would have been won against a weak and divided opposition: Cameron unable to talk about the virtues of immigration and Corbyn unable to campaign against Brexit. Both May’s deal and the referendum victory are based on lies designed only to get them across the line. Both are blind, with no clear idea of the kind of Brexit that will follow. Both therefore fail basic notions of legitimacy.

If Bercow prevents May putting her deal before parliament again in the near future, or if she decides herself she would not win anyway, then her failure to pass her deal on 12th March involves a delicious irony. Brexit failed to happen because of the actions of Brexiters themselves, because they actually believed one of their own lies: the make-believe of Global Britain.


Friday, 15 March 2019

Triangulation or bipartisanship does not work when one side goes off the scale


Brad DeLong describes himself as a Rubin Democrat, which he defines as “largely neoliberal, market-oriented, and market-regulation and tuning aimed at social democratic ends.” It is a natural position for an economist to be: it is generally more efficient to tweek markets than destroy them. But he thinks the time has come for this kind of Democrat to pass the baton over to the left. “We are still here, but it is not our time to lead.”

That is an unusual thing to say, on either side of the Atlantic. In the UK the left under Corbyn is in the lead, but you see few of the people who used to run the Labour party saying anything similar. Instead some have conducted a relentless campaign to undermine him. Not only is DeLong unusual, I also think he is probably right, so I want to examine the reasons he gives.

The key point he makes is that the political right has torn up the normal rules of the game, by both moving further to the right and becoming totally partisan. This was very clear in the Obama years. Obama pursued Romney’s health care policy and John McCain’s climate policy and George H.W. Bush’s foreign policy. “And did George H.W. Bush, did Mitt Romney, did John McCain say a single good word about anything Barack Obama ever did over the course of eight solid years? No, they fucking did not.”

There is much less bipartisan cooperation in the UK compared to the US, but I think there is a clear analogy with triangulation. The lesson Brown and Blair drew from the defeats of the 1980s was that Labour needed to win the middle class, and that meant moving policy to the centre ground. There was little attempt to reverse the neoliberalism of Thatcher, but instead to mitigate its social effects.

But the problem is that the political right in both countries were not playing by the same rules. They had a quite different strategy, which was to shift policy on issues like taxation and the size of the state to the right, and instead try and win elections by pushing a socially conservative agenda. (Here is a formalisation.) There is no triangulation here, but instead an attempt to hide a right wing agenda by starting a culture war. [1] As the right has control over a section of the media, they can also misrepresent their own and their opponents position. That control, together with ineffective scrutiny by the non-partisan media, allows politicians to lie to an extent that would have been thought inconceivable a couple of decades earlier.

When the right adopts this strategy (what I have called elsewhere neoliberal overreach), attempts by the left to get bipartisan agreement or triangulate policies moves what most political commentators call the centre ground of policy to the right. This has two effects. The first is that policies that would be popular among a majority of the population don’t happen. It is often noted that Corbyn’s policies are popular, and the same seems to be true in the US. Second, those supporting the left wing party become dissatisfied with it, and try and move it back to where it once was.

A vivid illustration from the UK of how triangulation fails is immigration. The Conservatives, together with their allies in the media, decided to use immigration as a major weapon against the Labour government. Gradually the increase in the number of stories about immigrants living on welfare and ‘taking our jobs’ began to move immigration up the list of issues voters were concerned about. Immigration numbers were increasing because the government knew this was good for both the economy and public services, but newspapers used words like “mass”, “vast”, “large scale”, “floods”,“waves”“army”, or “hordes”. With a few exceptions it was not voters in areas where migration was increasing that were reacting, and the best predictor of voter concern was which newspapers voters read.

Eventually Labour decided they had to try and triangulate, by talking tough on immigration. The case for immigration was no longer made. The false belief that immigrants made access to public services worse became ingrained. This allowed the Conservative government to deflect a lot of anger over austerity on to immigrants, and it eventually led to Brexit. The strategy of triangulation was a disaster. It is interesting that since the negative impact of reduced immigration on the economy has become clear with Brexit, views on immigration in the UK have shifted to become positive rather than negative.

Another consequence of the right not playing by the old rules is a lack of proportionality. I remember reading Paul Krugman during the Clinton vs Sanders primaries. I think Paul mainly favoured Clinton because Sanders was too populist, which naturally grates for someone who knows and cares about the detail and the difficulties involved in populist policies. But I also remember him writing that the Republicans might be hard on Clinton but that would be nothing compared to what the right would do if Sanders was the Democratic candidate. I’m not sure that was correct, because the right were not playing by the old rules where you had to stick to facts.

As a result, Clinton was accused of all kinds of imagined crimes by Trump, and the non-partisan media played along by obsessing about her email server. Much the same happened in the UK if we look at the 2015 and 2017 elections. The right wing press relentlessly attacked Corbyn in 2017 with wild charges about what he would do as PM, but what they did to centre-left Ed Miliband (‘red Ed’) in 2015 was not that different. Their attacks were not proportionate to how left wing their opponent was.

I think you need to add in one additional point here, and that is a public that is looking for radical solutions, by which I means solutions that move away from the status quo. The reason for this is not hard to understand: the worst recession since WWII following the financial crisis, stagnant and declining real wages, and geographical areas (rural, towns) that seem to be falling behind more dynamic cities.

The lesson of Brexit and Trump is if you fight a culture war and lies with just well researched and targeted policy proposals, you lose. It is better to fight a culture war with an alternative vision and popular policy proposals, and a bit of class war too. I am not suggesting that you don’t have well researched and targeted policy proposals behind that: as DeLong says “we are still here”. But this is the time for radicals on both sides. I suspect Sanders would have been more effective than Clinton at taking on Trump, just as Corbyn was very effective at taking on Theresa May.

You might have noticed that I have said very little about policy divisions between the left and centre-left, and that is because in practice I don’t think they are very important. In both countries the left cannot implement much that the centre-left disagrees with, and much of what the left want to do the centre-left are prepared to accept. [2] (Maybe not rich Democrat or Labour donors, but crowdfunding means that is unfortunate rather than fatal.) The key question is whether the centre-left allows the left to lead when it needs to lead, or instead fights against the left and keeps the right in power.

Let me end with Brad again.
“Our current bunch of leftists are wonderful people, as far as leftists in the past are concerned. They’re social democrats, they’re very strong believers in democracy. They’re very strong believers in fair distribution of wealth. They could use a little more education about what is likely to work and what is not. But they’re people who we’re very, very lucky to have on our side.”

Some in the UK may feel that statement just does not apply here, but they need to ask whether DeLong is right and it is the left’s time to lead, because what he says about the political right in the US applies equally to the UK.


[1] Cameron talked the talk of centre triangulation, but that did not happen in practice (with the exception of one or two issues like Gay marriage and the aid budget). With austerity he pursued an attempt to shrink the state that Thatcher could only dream of, and the degree to which the Tories wanted to shift policy to the right was masked by the Coalition’s other partner.

[2] One of the problems we have in the UK is supporters of the left who do not understand this, and act as if the centre-left is the enemy and it can win without them. But the centre-left also needs to recognise that on some big issues like financialisation they have been wrong and the left has been right. Some discussion on US issues here from Paul Krugman.

Tuesday, 12 March 2019

If you enjoyed the last two years and want more of the same, vote for May’s deal


Trade negotiations happen after the Withdrawal Agreement (WA) is signed, so why don’t those wanting a softer Brexit just vote for the WA and argue about trade later? The Political Declaration which does talk about trade is vague and non-binding. The reason is straightforward. Parliament will get very little say on the framework for those trade talks. The only real chance most MPs will get to influence the type of trade relationship the UK has with the EU is by directing the government now, as the price of passing the WA.

However so far parliament has largely failed to do that, largely because Conservative MPs have put party unity above the future health of the country. So what will happen to politics and the economy if parliament votes to pass May’s deal, either today or in a few months time? The first and well known point to make is that nothing would immediately change as far as UK firms and citizens are concerned, because we would start a transition period where we remain inside the Customs Union (CU) and Single Market (but no longer have any say on the rules of either). There will be little economic bounce from ending No Deal uncertainty, for reasons outlined below. So the immediate action will be about the politics of negotiating what happens after the transition period ends.

If you want to know what that would be like, just look at the last year or two. Most of the arguments within the Conservative party over the last year or so have been about trade, and not the content of the WA. So signing the WA settles very little. It does mean that we have signed up to the backstop, but May still pretends that this backstop means we can still stay outside the CU. I cannot see Brexiters meekly accepting that the UK should join the CU either. We will continue to have endless discussion of unicorn ‘alternative arrangements’ for the Irish border designed only to avoid us being up to a CU. The inevitable truth of course is that the backstop implies some part of the UK has to be in the CU, but as the last two years have shown large parts of the Conservative Party refuse to accept reality when they don’t like it.

At some point during the transition period Theresa May could be replaced as Prime Minister. It seems very likely, given the views of Conservative Party members on Brexit, that a Brexiter will be elected in her place. The likely outcome of that, as far as Brexit is concerned, is either that nothing changes, or that the government attempts to persuade the EU to do the impossible.

For example Theresa May is determined that we should leave the Single Market (SM) because her primary aim is to end Freedom of Movement (FM). Any successor is likely to want to leave the SM because they do not want to be bound by EU regulations on minimum workers rights or the environment. Because of the economic damage that will cause (see below) the government will attempt to get a trade agreement with the EU that mitigates that harm. They will find out, yet again, that it is impossible to get anything close to the benefits of the SM without being in the SM. And because the UK will not want to accept that, the negotiations will go on and on.

But at least No Deal will be off the table? Unfortunately just as you think you have avoided one cliff edge, another appears. If no trade deal is done during the transition period, we crash out much like we would with No Deal now. And the Brexiters in government will be saying not to worry the EU always cave at the last minute. They will fight extending the transition period from 21 months, even though it is impossible to negotiate a trade agreement in that time, because the ERG wants to fall off a cliff.

In short, if May’s deal is approved we can look forward to a politics dominated by internal squabbles within the Conservative Party, and the absence of constructive negotiations with Brussels, for perhaps the next four or more years. Much as we have seen for the past two years. This is because the WA does nothing to resolve internal Conservative conflicts, and more fundamentally conflicts inherent with Brexit itself.

If, despite it all, the government manages to negotiate a trade agreement with the EU, what will be the economic and political consequences for the UK? Will it all be worthwhile in the end? A good guide to the economics is the study involving a collaboration between the Centre of Economic Performance and The UK in a Changing Europe, which is both authoritative and representative of similar work. They believe that from 2030 onwards UK GDP per capita will be lower by between 1.9% and 5.5% as a consequence of leaving the Single Market. The midpoint of that range represents lost resources for each household of about £3,000 each year. There will of course be a large hit to the public finances, implying higher taxes or less public spending, even after allowing for an end to contributions to the EU.

Why such a large range? The 1.9% mostly comes from the direct effects of lower and more costly trade, using standard trade modelling techniques together with reasonable estimates of the barriers created by leaving the SM. The government using a similar model get similar numbers. The higher figure in the study’s range is based on empirical evidence for the impact of trade on productivity, which captures other effects such as lower foreign direct investment or reduced competition. Because the empirical evidence captures many more effects than the model, we would expect it to be larger. Those who dispute numbers of this scale in this range have to explain not only why the models, including those used by the government, are wrong but also why the simple correlations between trade and prosperity more than back the models up.

Our best guess is that we have already lost over 2% of GDP as a result of stagnant investment and sterling’s depreciation. As a result, most people will probably not notice the economic impact of ending the transition period, because most of the firms that were going to leave will have already left as a result of cliff edge uncertainty. Instead Brexit will be a gradual decline in the UK relative to the remaining EU.

What about Global Britain? Most trade agreements involve tariff reduction, so being in the CU largely limits the scope for Mr. Fox to do new trade deals. In addition, who would want to harmonise their regulations with the UK, when the gains from doing the same for the EU are much greater. A more likely outcome is that we harmonise our regulations with the US.

The government will be desperate to sign a trade deal with the US to show that ‘global Britain’ is more than a slogan, and that means the US will largely get their way in terms of regulations (including food standards) and participation in the NHS. Thus the longer term political consequence of parliament agreeing to May’s deal is the gradual transition of the UK into a US style economy.

In an age where the regulations governing trade in goods and services are increasingly decided by large regional blocks, the only rationalisation of Brexit that makes any kind of sense is that we move from the EU block to the US block. That is what a lot of the Brexiters want, which is why they resist the backstop so much, because that ties our tariffs to the EU. But the political consequences of tariffs are less important in shaping an economy than regulations on things like working conditions and the environment. That is why, even with the backstop, Brexit will mean we will become more like the US economy. Whatever the merits or otherwise of that, a big difference is that we had a say in how the EU is run but we will have none in what the US does. A 51st state without representation if you like. Taking back control it is not.


Friday, 8 March 2019

Is the German Debt Brake the worst fiscal rule ever?


The answer is probably not: a simple balance budget is worse. The German Schuldenbremse fixes the total cyclically adjusted deficit at 0.35% of GDP, which implies a gradually falling debt to GDP ratio. If actual outturns exceed this figure, there is a control mechanism which reduces the permitted deficit to get the path of debt back on target. So this debt brake improves on a simple balance budget by allowing a very modest deficit and cyclically adjusting. On the other hand it is worse than a simple balanced budget because it error corrects.

The fundamental mistake the rule makes is to make control of debt its central aim. Doing this only makes sense if you ignore macroeconomic common sense. The deficit and debt are macroeconomic shock absorbers. Running a variable deficit allows taxes and spending to be reasonably stable, which is beneficial for obvious and not so obvious reasons. Trying to tightly control the deficit and debt does the opposite. It makes sense to smooth taxes and government spending, but no sense whatsoever to smooth the deficit and debt.

The aim of a good fiscal rule is to eliminate deficit bias, which is the tendency of government debt to rise over time because, for example, politicians always want to spend more and tax less. The timescale for deficit bias is decades rather than years, so there is no need in principle to tightly constrain year to year deficits, or worse still to try and stay on some path for debt, and as I have already noted it is actually harmful from a macroeconomic point of view to do so.

Doesn’t the debt brake make some concession towards the macroeconomic stabilising role of the deficit by cyclical correction? There are two problems here. First, cyclical correction is a very imprecise art, and there is evidence the method used in the German debt brake and elsewhere does not work very well. Second, cyclical shocks are not the only thing that disturbs the government’s deficit. In practice all kinds of things can lead to erratic movements in the deficit, and it makes no sense to have to adjust tax rates or spending to exactly offset this erratic behaviour.

As Jonathan Portes and I explain in our paper on fiscal rules, a better way of keeping the stabilising role of deficits while still ensuring they do not steadily increase over time is to have a rolling target for the future deficit. Five years is the typical length of an economic cycle, so looking ahead five years makes sense, and also avoids the need for imperfect cyclical adjustment.

This kind of rolling future target is open to cheating, because the government can always promise but never intend to deliver on meeting the target. The problem here is that governments can cheat in so many ways when it comes to fiscal planning. No rule, even a draconian one like the debt brake, will stop all forms of cheating. The best way to avoid cheating is to establish a fiscal council with political weight that can distinguish between a government that fails to meet its targets through bad luck and one that fails because of cheating.

Do we need the debt error correction in the debt brake? A consistent result in academic research is that debt correction should be very slow, if it happens at all. That happens automatically with a deficit target, while the debt brake corrects too quickly. So the answer is no.

Another problem with the debt brake, alongside many other fiscal rules, is that it has a target for the overall deficit which includes public investment. Public investment should not be included in any deficit target, because there is no reason the current generation should pay for something that will benefit future generations. As investment is less painful to cut than current spending (or raising taxes), rules for the total deficit often lead to under investment, and we can see this in Germany. That only hurts future generations.

This is not about Anglo-Saxon economists telling Germany what to do. There are plenty of German economists who also see that the German debt brake makes no sense, and anyway economics is universal. The debt brake is a bad fiscal rule. It is doing the German people harm. It needs to change.


Tuesday, 5 March 2019

Is increasing workers' bargaining power a way of raising real wages?


There is no doubt that the last decade has been a terrible period for average real wages in the UK, with levels still below where they were before the Global Financial Crisis. It is very tempting to related this to the weak baragining power of workers. After all, we were being told before Brexit that the economy was strong, so if the benefits were not going to wages they must have been going somewhere else. Some people go further and say that one of the reasons that the bargaining power of UK workers is weak is because of high levels of immigration, and that therefore immigration must be responsible for lower real wages.

What people often forget is that real wages depend as much on prices as nominal wages. If nominal wages in the economy as a whole rise, firms can just pass additional costs on by raising their prices, leaving real wages unchanged. Equally if nominal wages are depressed because of weak bargaining power or immigration, firms are able to cut prices to become more competitive, rather than keep prices unchanged and raise their profits.

To see what firms have done on average we can look at the chart below, which shows the percentage shares of profits and wages in national income over the last thirty years. (They do not sum to 100 because of factors like self employment income and sales taxes.) The share of wages and profits in national income have been remarkably stable over the last two decades. It is simply not the case that bosses have been expropriating the gains from growth over the last decade.


So what does explain why real wages are still lower than before the Global Financial Crisis (GC), when the size of the economy a whole surpassed its pre-GFC level in 2013?

The first explanation is that GDP is not the right measure to use if you want to know about standards of living, because it can increase just because there are more people producing things in the economy. A much better measure is GDP per capita (GDP divided by the total population), and that only surpassed pre-GFC peaks at the end of 2015. It is one of the great ironies of UK politics (and a big media failure) that the growth the Conservatives like to boast about is in good part due to immigration they want to stop.

Yet GDP per capita is still higher than it was pre-GFC and real wages are not. The main reason for that is the exchange rate. We have had two very large depreciations since the GFC: one that happened as the crisis was unfolding and one as a result of the Brexit vote. This raises the price of imported consumer goods, which reduces real wages relative to GDP per capita. Another way of making the same point is that although each worker is producing a bit more stuff than pre-GFC, that stuff buys less overseas goods than it used to, which means workers are worse off.

The first depreciation probably reflected in part our dependence on a financial sector that was hit by the GFC, but the Brexit depreciation was a completely self-inflicted wound. But that aside, the overall message is that the main reasons for lower UK real wages are stagnant productivity and a decline in sterling.

Does this mean that weak bargaining power has nothing to do with weak UK wages? There are two potential reasons why there could still be some connection. First, there is some evidence that individual firms that have some monopoly power now share less of their surplus profits with workers than they used to, and that might well reflect weaker bargaining power. Perhaps the UK aggregate profit share might have fallen over the last decade if it hadn’t been for these firms passing on less of their surplus to workers.

Second, it might be the case that one reason why productivity is so poor is that nominal wages have remained low. If nominal wages rose because workers had more bargaining power, that might induce some firms to investment in labour saving machinery. This is an argument I examine in a new article in a special edition of Political Quarterly on post-Brext policy.

We have one clear recent piece of evidence on what happens if you raise nominal wages, and that is when minimum wages are increased. If George Osborne’s hike in minimum wages raised labour saving investment and productivity then no one has noticed. More seriously, the near consensus of the empirical literature on minimum wages is that increases generally do not reduce employment, and that appears inconsistent with those increases promoting labour saving investment. Now an increase in the minimum wages is not exactly the same as an increase in the bargaining power of workers, so this piece of evidence is not definitive, but as yet we have no strong evidence that greater bargaining power would spur innovation.

All this suggests that the declining bargaining power of workers is at best only a minor factor behind the decline in average real wages. To increase UK real wages we need to improve productivity, and that means not hitting investment on the head with first austerity and then Brexit. Evidence suggests that the best way to increase productivity is by raising demand so firms need to invest to meet that demand. Raining public investment would be the best way to stimulate aggregate demand.

But that does not mean that we should not increase the bargaining power of workers. There seems little doubt that working conditions in some occupations are pretty bad, and a strong union presence would be an effective way of improving the working conditions of workers. But I also think a strong union presence in a worksplace can have a positive influence on the distribution of real wages.

The average wage measure in the national statistics include some some very high wages at the top of the income distribution. Over the last thirty years the typical or median real wage has fallen by much more than the average, and that is because of rising inequality, a good part of which is due to high pay rises for the top few percent of earners. While some of that is just down to the rise of the financial sector, some is also within a firm. Andy Haldane at the Bank of England has also noted (page 8) that since the 1990s the wage share of older workers has risen, but the wage share of younger workers (below 35) has fallen. Furthermore, as Martin Sandbu points out, it is often inequality in the wage distribution that allows firms to continue to employ workers on low wages to do things a machine could do. Some of this growing inequality may have been a consequence of weaker trade unions.

There are therefore plenty of good reasons to want to increase the bargaining power of UK workers. Just don't expect that to have much impact on the living standards of workers. To raise real wages we need higher UK productivity, and that will only come from stronger private and public sector investment.