Why the Conservative stance on immigration made a Hard Brexit inevitable

 

In a recent post I discussed the UKIP insurgency, and argued that its main source was a contradiction within the strategy of the Conservative party that began soon after New Labour’s election victory. The Conservative opposition, together with their allies in the press, increasingly focused on the alleged dangers of high immigration. In part as a result, immigration increased in importance as an electoral issue from almost nowhere in 1997 to become one of the top three issues four years later.

The contradiction was that while it was easy to talk, as William Hague did in 2001, about the UK becoming a “foreign land”, the Conservative party never had any real plans to seriously reduce levels of immigration. Focusing on high levels of immigration was a tactic for defeating a Labour government rather than a policy for government. Despite appointing a minister to the Home Office, Theresa May, who was dedicated to fulfilling pre-election promises to significantly reduce immigration, Cameron’s government found it impossible to do so without inflicting damage to the economy, something they were not prepared to do.

One of the comments on that earlier post asked why I focused on immigration, rather than talking about social conservative values more generally. It is the interaction between the social and economic that is crucial here. Immigration was powerful as a campaigning issue because it could be related to economic as well as social issues (stealing our jobs or benefits etc), and likewise doing something about it had economic consequences. In this way it is very similar to national sovereignty and Brexit, but quite different from issues like gay marriage [1]

Perhaps a Prime Minister and Chancellor who were more strategic and less focused on short term political tactics [2] could have managed a transition from an opposition campaigning to bring immigration down to a government that ignored the issue without igniting support for a more socially conservative party (UKIP). However that became impossible when the government's core policy was austerity. In that sense, the rise in UKIP was inevitable. With the threat from UKIP firmly established, it became inevitable that Cameron would make the concession that UKIP and the right wing press most wanted, which was a referendum on EU membership.

Furthermore, while it was far from inevitable that Cameron would lose that referendum, victory would not have laid the issue to rest as he hoped it would, because UKIP, the right wing press and some of his MPs would have refused to let it do so. Perhaps a lucky chance decline in immigration coupled with an improving economy and ample public service provision after a Remain victory could have reduced the popular interest in the issue, but that was not going to happen when the Conservatives’ main economic policy was to shrink the state and reduce taxes. [3]

This rather long prelude tells us that ending free movement was bound to be part of any Brexit deal the Conservative party would negotiate. This is clear from reading Tim Bale’s invaluable book “The Conservative Party after Brexit: turmoil and transformation”, which is an invaluable source for anyone analysing Conservative party politics from 2016 until today. It was not just that the minister tasked with reducing immigration became Prime Minister, but also any Brexit deal that allowed free movement to continue would have allowed Farage and the right wing press to undermine the party in exactly the way they did anyway, except more so.

The first part of the book deals with May’s attempts to first formulate a Brexit plan, and then try and convince the Conservative party to back it. Her plan was essentially to stay in the EU’s Customs Union but leave the Single Market. She failed to get parliament to approve that plan, time and again, and that failure led to disaster in the European Elections. Her position had become untenable, and Johnson took her place.

What is remarkable about that period is how a minority of Conservative MPs, the ironically named European Research Group (ERG), seemed to be able to dictate the form that Brexit took. Why were the majority of parliament’s MPs not able to exert their voting power and achieve a softer Brexit? To see why that was never going to work, it is easiest to imagine the following counterfactual.

Suppose that someone other than May had been elected Conservative Party leader after Cameron resigned, and that they had concluded that such a close referendum result meant that national unity should be placed above party unity. They formulated a plan that amounted to the UK leaving the EU but staying in the EU Single Market and Customs Union: a soft Brexit. They sought and got the agreement of Labour  leadership and enough Labour MPs to support that plan, and parliament agreed to start the negotiation process with the EU on that basis.

During that process, the ERG, the right wing press, Farage and party members would have been in even greater uproar than we saw under May. Farage would have kept pointing out, correctly, that the Brexit vote was a vote against high immigration and this soft Brexit would do nothing to control immigration. Just as happened under May but more so, Brexit voters would have felt betrayed and deserted the Conservative party. Enough Conservative MPs, in fear of losing their jobs in 2020, would side with the ERG and threaten to depose their leader (as they have since done repeatedly). The PM, in an effort to save their job, would have been forced to revise their proposals to appease the ERG and voters.

If this counterfactual sounds pretty close to what happened under May anyway, that is because the fundamental reason why parliament could not exert its authority is the same. Too many Conservative MPs would have feared a substantial election defeat would follow any softer Brexit because of the power of Farage and the right wing press.

So just as Cameron had conceded a referendum in an effort to maintain party unity and power, the same forces ensured that we would have a hard Brexit. Anything else would have meant a strong third party on the (socially conservative) right, and therefore a Labour victory. This is one of the features of a FPTP system, which penalises having more than one party in any particular policy space.

A more favourable counterfactual to achieving her own, slightly softer Brexit was the one May herself chose, which was to get a larger majority in a General Election. If she had won that large majority, she might have been able to pass a Brexit deal that effectively stayed in the EU Customs Union. While Farage, the ERG and right wing press could attract votes away from the Conservatives because of free movement or not getting Brexit done, doing so over our ability to set tariffs would have been harder. Of course in reality she got the opposite of a larger majority.

The only other possible route I can see to a slightly softer Brexit (staying in the Customs Union but not the Single Market), other than a large May majority in 2017, is a variant of the previous counterfactual, where the new leader who put national unity above party unity and as a result had got agreement from the opposition at the beginning of the process for such a deal. Of course May did try to get agreement with Labour, but as a last resort by which time the momentum behind a second referendum was too strong. The reason why this counterfactual might have worked while something similar involving staying in the Single Market would not is that opponents of that deal might have found it hard to gain many votes on the issue of setting our own tariffs. Yet even if you believe this counterfactual was possible, you need to ask whether the Conservative party could have produced such a leader from their ranks, whether they would have been elected by their MPs and, most crucially, whether they could have disguised their intentions from the membership in the final leadership vote.

This is how under FPTP a minority can dictate to the majority. The minority need the following ingredients:

1. An issue that was a key reason why the party was elected, or a referendum result, but on which the party is failing to deliver (e.g. immigration,Brexit)

2. An insurgent party and a media that can highlight that failure and take a large number of votes from the governing party as a result

3. Enough MPs from the governing party who worry more about losing power (as a result of votes lost to the insurgent) than the policy issues involved, and are willing and able to side with the minority to reject their leader.

Under these conditions, the critical majority moves from MPs in parliament to MPs in the governing party, and the critical motivation moves from the issue involved to the need to retain power. Under a PR type system this possibility would be much less likely to arise, because if the governing party plus the insurgent party got the majority of votes they would have the majority of MPs, so power could be retained albeit shared. Under FPTP a majority of votes can lead to a minority of seats if the vote is split, so power is lost.

This is how the referendum result in 2016 led in just three years to the effective takeover of the Conservative party by Brexiters in 2019, and the election of a PM who anyone with any knowledge of him knew would be totally unsuited to that role. (And which was tragically demonstrated very quickly with the arrival of Covid.) The Conservative party appointed as the only person who could get them out of the Brexit hole they were in, the man who had been the person who put them in that hole in the first place. An electoral system that was supposed to marginalise the political extremes had put one in charge. [4] A group, as Tim Bale notes, that one rebel Tory described as “a narrow sect who wouldn’t be out of place in a Muppet version of The Handmaid’s Tale”, was allowed to take over the UK government.

[1] Cameron, unlike his predecessors, tried to soften his party’s socially conservative image in some of these areas.

[2] To quote Tim Bale from his book mentioned later in the main text: “I’m also increasingly persuaded that those individuals, and therefore parties as a whole, are as much tactical and reactive as they are strategic and proactive – actors, in other words, with incredibly short time horizons”

[3] As the party today looks forward to opposition, you can see the same contradictions playing out. Brexit has not led to lower immigration, because the economic costs of achieving that are too great. European migrants have been replaced by non-European migrants. While some Conservative politicians understand that there is a trade-off between getting lower taxes and lower immigration, others do not, or pretend not to for the sake of their next leadership election.

[4] Johnson, or those advising him, had the sense to realise that selling Brexit would require a limited and then only partial reversal of austerity. When it became clear that required large tax increases many Conservative MPs were deeply unhappy, which is one reason that Johnson was succeeded by Truss. The extent to which Johnson believed in a larger state is questionable. Tim Bale writes:

“Johnson and Sunak – the latter especially – were no different [to most Tory MPs], prepared to take action in order to prevent the economy falling of a cliff but damned if they were going to do more than the minimum required to keep so-called ‘Red Wall’ voters (and indeed voters in general) onside once the pressure was off.”

While the current leadership may be simply reaping the fruit sowed by Osborne in terms of the size of the state and the state of the public services, in terms of their attitude to civil liberties, asylum, deregulation, accountability, a pluralist democracy, privatisation, corruption, and Brexit itself, Johnson and his successors have led the most right wing administration since WWII.

New fiscal rules in the Eurozone, but unwarranted lack of national sovereignty persists

 

The EU Commission has put forward proposals for the next version of fiscal rules for the Eurozone, and these have now been agreed with some amendments (see below). (Here is a useful summary of the proposals.) That changes are needed in what existed before the pandemic is undeniable.

The original Stability and Growth Pact rules were a disaster. They were the clearest example of something I wrote recently about deficit targets:

“The cyclical nature of the government’s deficit (rising in bad times, falling in good) encourages politicians to do fiscal consolidation at the wrong time and discourage them from doing fiscal consolidation at the right time.”

These original rules encouraged periphery members of the Eurozone (EZ) to spend too much/tax too little in the early and mid-2000s (leading to inflation above the EZ average), and then encouraged the whole of the EZ to cut spending just when higher spending was needed (the austerity period), producing a second recession after the Global Financial Crisis.

The Commission attempted to rectify these problems by introducing cyclically adjusted deficit targets and other modifications to the SGP rules, but the resulting complexity suited no one, in effect giving considerable discretionary power to the Commission and EZ as a whole over elected national governments.

I wrote a lot about the perverse nature of EZ fiscal decisions during the austerity period, but much less since then. The reason is set out here. I have always thought that the focus of fiscal policy in individual EZ countries should be national stabilisation, not debt stabilisation. If individual countries focus on their own inflation rate relative to the EZ average, for example, then you avoid the dangers of pro-cyclical fiscal policy outlined above. This has always been the message of macroeconomic theory.

The academic rationale for the Eurozone imposing rules for the national deficit was that a common currency would increase the incentives for national deficit bias. What the Eurozone crisis showed was the exact opposite. When deficits rose after the GFC, it was countries with their own central bank that found interest rates on their debt falling. Because the ECB is not a buyer of last resort for national debt, it was EZ countries with excessive deficits that the markets worried about. Market discipline over excessive deficits was greater, not less, with a common currency. There are no good reasons, therefore, for the Commission or other EZ countries to be able to dictate the level of national deficits: instead they should focus on countries with persistently above or below average inflation.

Even if I’m right about this, political pressures will mean the EZ will persist with worrying about national deficits rather than national inflation differentials for some time. So when talking about changes to EZ fiscal rules, I‘m in a similar position to someone who doesn’t believe in dieting having to write about the wisdom of the latest dietary fad. Instead of asking whether the Commission’s new proposals will help reduce national deficits, I will instead ask four questions:

1. Do the proposals make it more or less difficult for national governments to stabilise output and inflation relative to the EZ average using fiscal policy, which is what they should be doing?

2. Do the proposals address the issue of the zero lower bound?

3. Is public investment excluded from the fiscal rules? Will fiscal rules stop contributing to a serious decline in public investment in the EZ?

4. Do the proposals reduce or increase the amount of interference by the Commission or other EZ countries in national fiscal policy
   
   

This last point needs some explanation. Those that wish less national sovereignty for EZ members, and more decision making at the EZ level, may have the opposite criteria. Fiscal rules imposed by the Commission may be a way of getting Fiscal Union by the back door. My own view is that fiscal union by the back door would be a potential political disaster at this point in time, so I want to increase rather than reduce national fiscal sovereignty within the EZ.

Returning to the new rules suggested by the Commission, one aspect might help national governments do countercyclical fiscal policy. The proposals emphasise medium term planning (4 years rather than year to year, and possibly extendable) and the concept of sustainability. However, countries that exceed the 3% deficit limit will not only be expected to reduce their deficit to this limit within the plan period, but will have to reduce the deficit by 0.5% a year at least. The issue of what happens at the zero lower bound, where fiscal policy at the EZ level should take over responsibility from the ECB in enhancing economic recovery, remains unaddressed.

What might seem striking about the proposals is the switch from a focus on cyclically adjusted deficits to adjusted net expenditure. As ‘net’ here means net of cyclically adjusted taxes, and ‘adjusted’ here means excluding cyclical changes in unemployment benefit, this switch is less important than the terminology might suggest. Nevertheless, Charles Wyplosz argues that the new measure is “convoluted and much less intuitive” than the cyclically adjusted balance, and also has a number of technical disadvantages. If the motivation was in part because of very real difficulties in doing the cyclical adjustment, then the new measure also involves doing very similar things. The advantage of true medium term plans and targets (5 years is better than 4) is that most forecasts assume the economy 5 years out is ‘at trend’, so there is no reason to cyclically adjust.

The new ‘adjusted net expenditure’ measure does have one advantage, however. It excludes “above trend” public investment, As a result, an EZ country that decides to increase levels of public investment beyond normal levels will not be penalised for doing so. This is better than nothing, but it doesn’t seem to stop governments from cutting public investment below normal levels to meet suggested net adjusted spending levels proposed by the Commission. This is always a temptation for governments, because cutting investment is less politically painful than cutting current spending or raising taxes. This is why low levels of public investment in the EZ are, in part at least, due to poorly specified fiscal rules.

The proposals nod towards giving “‘independent fiscal institutions’ (IFIs, or fiscal councils) a greater role in the process, but it is not clear to me how substantive that is. Blanchard, Sapir and Zettelmeyer are concerned about the “outsized role” the Commission has in the process. To quote

“The Commission would propose the reference scenario, assess the country’s counteroffer, and recommend a modified plan if it finds the counteroffer lacking. If the country does not accept the modified plan, the Council is expected to adopt the Commission’s reference scenario for surveillance and enforcement purposes.”

One option the Commission had was to transfer its own oversight role to an IFI for any country that appeared not to be ‘at risk’ and if the IFI was truly independent, but this opportunity was not taken. Hopefully the shift to a more medium term perspective will give national governments more freedom, although whether that is achieved in practice we will have to see.

This continuing lack of fiscal sovereignty within the Eurozone is not just (and not mostly) because it gives an unelected Commission power over elected governments. The more serious problem is that it gives other EZ countries, some of whom have a very hawkish and macroeconomically naive view, power over national fiscal policymaking, as this account of the negotiations over these proposals makes clear. (This was most evident, of course, in the case of Greece during the last decade.)

This in turn makes the current EZ stance that any new EU members must also join the EZ very punitive. It is a very good reason why a future UK might stop at joining the EU Single Market and Customs Union, and refrain from full membership, even though that gives it no say in rule making.

Why is there asymmetry in how insurgent political voices on the left and right are treated by the two main parties in the UK?

 

The attitude of the two main parties to those further to the right (for the Conservatives) or the left (for Labour) is very different. In the case of the Conservatives since Cameron, until very recently at least, the best word to use would be appeasement. We left the EU as a result. The attitude of Labour leaders (with the obvious exception of when Corbyn was leader) can be characterised as exclusion.

Is this asymmetry just the result of the choices of particular party leaders, or is there something more structural behind this. Another way of asking the same question is whether the success of UKIP (in terms of winning votes and influencing policy) could ever be duplicated on the left? Equally will Sunak suffer if he continues to marginalise the Brexit ultras, and would he have the political capital to replace his current home secretary, if he ever wished to do so (which he shows no sign of as yet) ?

The first point to note is that attitudes have changed over time. Prime Minister Heath famously sacked Enoch Powell, and Major was pretty intolerant of his Brexit “bastards”, which is very different from more recent Conservative leaders. The attitude of Kinnock, Smith, Blair, Brown, Miliband and Starmer is more consistent, and stems from the major internal battles of the 1980s.

A second point is that basic two party theory suggests it makes sense for leaders of either party to lean to the centre, rather than worry about those on the political flanks. A third party on one of the two political flanks breaks that model, but only if voters vote for it. Under a FPTP (First Past The Post) type electoral system, if they do in any numbers they are making it much more likely that the side whose vote is not split will win. If such a third party does emerge, and a political leader attempts to reduce its vote by appealing to potential voters of that third party, it runs the danger of alienating voters in the centre and losing to the other major party.

This basic model is too simple in many respects, and suggests an excessive advantage in playing to the centre ground. In reality new parties are relatively easy to set up, but they find it much harder getting serious political traction. It makes sense for governments in particular to try and stop that happening by appealing to their flanks as well as the centre. Political parties also need to keep their members happy to help win elections, and these members tend to be significantly more to the left/right than the marginal voter.

A final and crucial point in today’s UK environment is that the media is not symmetrical in two important respects. First, what I have in the past called the directed propaganda media (in the UK to varying extents the press and the new TV ‘news’ channels of the extreme right) is weighted towards the right because it follows the money. [1] Second, and just as important, is what is often called the non-partisan media, which we could equally call the ‘manufacturing consent media’, which in the UK comprises the major broadcasters and a few newspapers like the Financial Times. This second part of the media can be asymmetric for two reasons: it may be heavily influenced by an asymmetric press, and it can be intolerant of what it sees as political extremes. [2]

The most successful third party from the flanks of the political spectrum in recent years has to be Farage’s UKIP/ Brexit party. Evans and Mellon argue that the rise of UKIP can be largely explained by one issue, immigration, and the growing linkage of that with EU free movement following the UK government’s decision to allow immediate unlimited immigration from accession countries. While the Conservative opposition did use concern about immigration as a primary weapon against the Labour government, UKIP benefited as well because (a) Cameron was seen by some as too socially liberal on some issues (b) the Conservative leadership was in favour of staying in the EU, and (c) UKIP attracted some former Labour voters who were more left wing than the Conservatives on economic issues.

Yet throughout the Labour government of 1997-2010 UKIP never won more than 3.5% of the votes in General Elections in the seats it contested. UKIP’s power increased immeasurably under a Conservative led government. In many ways Cameron enacted the best possible combination of policies from a Brexit supporters point of view. He kept immigration in the public eye by creating targets for numbers that he didn’t have the means, or was unwilling to use the means, to come close to hitting. Yet he also used immigration as an excuse for the economic effects of his austerity policies. Immigration according to Conservatives was why voters found access to public services more difficult, and competition from immigrants was why your real wages were not increasing. All that UKIP and the the right wing press (and later the Leave campaign) needed to do was link a failure to meet immigration targets with Freedom of Movement, which they found very easy to do.

In this way the Conservative led government of 2010-15 precluded the option of exclusion towards UKIP, so appeasement (and in particular conceding a referendum) was the only option left. As both UKIP and the Conservatives stressed the importance of controlling immigration, and the right wing press did all it could to worry voters about this issue, it was not credible of Cameron to portray UKIP’s stance on this as extreme. Yet Cameron was not prepared to damage the economy in order to meet his immigration targets, and did not want to leave the EU. In addition he made many potential UKIP voters worse off through austerity, yet blamed that on immigration. Thus he handed UKIP all the ammunition they needed to attract socially conservative voters. [3]

If this interpretation is correct, then two things might seem to follow. First, after the referendum result a form of Brexit where we left the Single Market was inevitable under a Conservative government. Anything otherwise would enhance Farage’s threat to the Conservatives. Second, even if Remain had narrowly won rather than lost the referendum Cameron would not have been able park the Brexit issue for long. His only hope of doing so would have been to start declaring the virtues of immigration, but the right wing press would not have played ball.

Could something similar happen with a Labour government and a more left wing political party? The Green party is associated in voters’ minds with one clear objective (tackling climate change and improving the environment more generally) just as UKIP was, and it tends to be more left wing than Labour (just as UKIP was more socially Conservative than the Conservatives). Yet while Labour is in opposition, like UKIP it does much better in local elections than in general elections.

Under a Labour government could the Greens repeat the success of UKIP? A little piece of imagination might help answer this. One of the centrepieces of Labour policy is increased public investment in greening the economy, which they argue is critical to both tackling climate change and improving economic prospects. Most Labour voters and members share that view. Suppose in government Labour continued to talk this talk, but at the same time completely failed to raise public investment in greening the economy because of deficit targets, say. The Guardian runs an article on how Starmer told the cabinet that it needs to “cut the Green crap” to meet those targets, and the economy continues to languish. In those circumstances it is not impossible to imagine the Green party becoming a vehicle of protest for Labour voters. .

The point of this bit of (hopefully) make believe is that the success or otherwise of a UKIP of the left depends rather more on what a Labour government does than what any more left wing party does. Cameron reneged on his pledges to control immigration, while still blaming immigration for the country’s economic woes, many of which were of his own making. Under FPTP if, and perhaps only if, a future Labour or Conservative government makes a central part of their political campaigning an issue central to their voters but on which they have little intention to act, will a party from the political flanks threaten the big two. [4]

[1] Tim Bale calls the right wing press ‘the party in the media’. While this phrase nicely captures the extent of its partisanship, it could be misread as implying an excessive degree of control by the political party. This media is ultimately controlled by its owners, and while on some occasions they may be happy for their papers to follow the party’s lead, on others it may be the party that has to bend to the tunes played by the press.

[2] This may affect both major parties. The non-partisan media tends to be both younger and so more socially liberal and also from privileged backgrounds resistant to radical left wing policies. This may cause difficulties for mainstream parties that push socially conservative policies or left wing economic policies. The former, however, may be neutralised through the influence of the press, or when third parties that are socially conservative have large scale popular support. Finally the BBC, through financial pressure and via senior appointments, has become less independent of the government.

[3] What Cameron and Osborne knew was that achieving a socially conservative goal (much lower immigration) would seriously harm the economy, and that this was the last thing they could afford to do when hitting the economy with austerity. The same was true for another policy favoured by social conservatives, Brexit, as the current government is finding out. Many of the conflicts/contradictions in the current government can be traced to this source.

[4] What is also possible is that, if the leader changes, the party membership may elect a more radical leader, much as Corbyn’s election represented frustration within the membership that the mainstream candidates seem to be accepting austerity just at the point that public dissatisfaction with the policy was growing.

The Tyranny of Nostalgia

 

Russell Jones has written a history of the UK economy since the 1970s, and as narratives go this is very good. While I inevitably had minor points of disagreement, on most issues I think the author makes the right calls. The narrative is clear and not unnecessarily technical, so you don’t need to be an economist to read it. (The book is also chart free, which I think is a shame.) It is very comprehensive implying extensive research, which is quite an achievement when writing about 50 years of economic developments and policies.

These virtues have costs, of course, at least for an academic like me. Being comprehensive can mean that you give too many reasons why this or that happened, or particular policies failed, rather than focusing on the key drivers. That in turn can lead to ambiguities or inconsistencies. One rather interesting one is the conflict that emerged between PM Brown and Chancellor Darling over the relative priorities to be given to the recovery (requiring fiscal stimulus) and controlling the growing budget deficit (requiring fiscal consolidation). While I sense that the author favours Darling on this, his later discussion on austerity rather suggests that Brown was right.

As this blog has featured many of the episodes covered by this book, I will not try to go over this ground again here with a short narrative about a longer narrative. (For this, see William Keegan’s nice review). Instead let me try and do something different. I want to use the book as material to bust several widely held myths about the macroeconomic history of the UK over the last fifty years.

1. There is no relentless decline. This is a point I have made before but cannot be repeated too often, given the UK economic declinism temptation many fall into. This period might have started and ended in relative decline compared to the US, Germany and France, but from the 1980s until around the Global Financial Crisis the UK economy grew as fast or faster than these economies. This is a point the author notes at various places in the text, although the book’s title and conclusions do relapse somewhat. .

It is this relative performance that really matters. Those who say Thatcherism and New Labour disappointed because growth was no better or maybe even worse than in the golden age after WWII ignore that starting point! The reality is that much of Europe and Japan were rebuilding their economies after large scale destruction during the war, and the UK was bound to see some of the benefit of that. The UK economy may have never had it so good in the 1950s, but it was falling behind other major economies, which is one of the reasons we kept trying, and eventually succeeded, in joining the EU.

2. The relative unimportance of economic thought. The myth that it is otherwise is often promulgated by economists, suggesting that economic history is to a considerable extent determined by changing economic ideas within academia. So, for example, the story goes that In the UK Keynes ruled from WWII, but Keynesianism failed in the 1970s with high inflation, so Freidman and monetarism took over from the 1980s. While the author does describe changing academic fashions at various points in the book, reading his account confirmed my view that these changing academic winds were generally not the key driver of policy changes.

In my view the key policy failure of the 1960s and 1970s was that policymakers were determined to avoid using demand management as a means of moderating inflation. It is not, as James Forder has pointed out, that policy makers were using the wrong Phillips curve, but just that UK policymakers didn’t want to use the Phillips curve at all. To call this reluctance ‘Keynesian’ is really too far a stretch, as neither Keynes nor those who developed Keynesian theory were great proponents of prices and incomes policies.

Equally, in the narrow sense of the term, what came after the 1970s was not monetarism. As the book makes clear, money supply targets were briefly tried and failed miserably, with great harm done to UK manufacturing and many who worked in it. What changed in 1979 was the UK got a Prime Minister and Chancellor who were no longer committed to maintaining full employment, but were determined to get inflation down without resorting to prices and incomes policies. Today the reluctance of policymakers in the 1960s and 1970s to use the Phillips curve to control inflation looks like a temporary aberration reflecting a determination not to repeat the disaster of the Great Depression. [1]

Equally the idea that austerity was the result of work by Alesina or Reinhart and Rogoff is nonsense. The unfortunate truth is that there will always be some economists around to give even the craziest policies some respectability, as Brexit showed. The pandemic taught us that this is not a peculiarity of economics, but can happen with supposedly harder sciences as well. (Actually, as my own book argued, medicine is perhaps the closest discipline to economics.)

If there is an exception to this argument that economic ideas matter very little to recent UK economic history, I think you can find that too in this fifty year period. The idea that macroeconomic stabilisation should come from independent central banks pursuing inflation targets did come in large part from current academic economics, rather than politics or Keynes’s 30 year old academic scribblers.

3. Another favourite myth of mine that I have talked about before, but which is clearly shown to be a myth by this book, is that Conservative politicians are better at managing the economy than Labour politicians. Labour tends to get the blame for the IMF crisis in the mid-70s, but this had a lot to do with the earlier Barber boom, where the author reminds us that policy aimed for 5% growth. The Thatcher period may have seen relatively good growth on average, but it was a really bumpy ride because of what can best be described as destabilisation policy: monetarism, the 1981 budget (Jones describes this as “an admission of failure”) followed by the Lawson boom, then ERM membership at an overvalued rate leading to Black Wednesday. The author is right that Labour inherited a reasonably healthy economy, but the 1997-2007 period was incredibly stable compared to the 1980s and early 1990s, in part because macro policy was much better. Unfortunately 2010 to today has seen a return to destabilisation policy, first with austerity, then Brexit, then the government’s reaction to Covid and finally Liz Truss.
   
   

4. 2010 sea change. 1979 rightly represents an important shift in how UK economic policy was done, although I would argue this is not so much from Keynesian to monetarism (see 2 above) as the advent of neoliberalsm. However 2010 (to 2024?) may also come to be seen as a similar sea change.
   
   From reading this book it is clear that from WWII until 2010 policymakers were constantly looking forward, trying (and sometimes failing) to deal with real and serious economic problems. Policymakers constantly worried about the productivity gap (and therefore prosperity gap) between the UK and Germany, France or the US, and tried to do something about it. It is a major reason why UK policymakers wanted to be part of the EU, and then the Single Market.
   
   In contrast since 2010 Prime Ministers and Chancellors have based policy on largely imaginary problems, like austerity or sovereignty, to further either minority or individual goals. Since 2010 policymakers have stopped focusing on the UK’s relative productivity compared to Germany, France and the US, and instead have preferred to tell us that everything they do is ‘world beating’. It is the shift in focus that is perhaps the underlying story behind the UK’s relative decline since 2010.

If you want a comprehensive and well researched book on which to compose your own ideas (or bust myths) about UK economic policy over the last 50 years, this book is for you. Alternatively if the subject just interests you, and you want a well written account that avoids dogma, I can recommend this book. One thing you can say unequivocally about UK economic policy over the last half century is that it has been far from uneventful or boring.

[1] Just to preempt the inevitable responses, although basic MMT does hark back to post-war policies it does also use demand management and the Phillips curve to control inflation. With a job guarantee what changes is the number of people on the JG scheme, rather than unemployment.

Why deteriorating healthcare is a macroeconomic issue

 

“Healthy People, Prosperous Lives” is the first interim report of the IPPR’s Commission on Health and Prosperity. (I am a member.of the Commission, but not an author of this report.) This analysis could not have come at a more topical moment, as suspicion mounts that there may be a link between the worsening state of our health services and the dire state of our economy. This report uses research to quantify that link.

Let me start by looking at the contraction of labour supply since the pandemic that has persisted in the UK, while in other countries it has largely or completely disappeared. This chart is taken from an earlier FT article by John Burn-Murdoch.

There has been some debate about whether this deterioration in UK labour supply is a result of poor UK health outcomes, or whether it represents a post-pandemic increase in early retirement. As the report points out, early retirement may well be the result of poor health. The chart below looks at pre-pandemic exits from employment following the onset of chronic or mental ill health. Among those under 50, the most common outcome is unemployment, but for all ages the most common result is retirement. So retirement since the pandemic may in part reflect the consequences of ill-health.

UK relative economic decline did not start after the pandemic. As my comparison with the US showed, GDP per capita grew at similar rates in both countries from 1955 to 1990. In the 90s and 2000’s UK GDP per capita grew more rapidly in the UK than the US. Some of this may have been due to an expansion in the UK financial sector that came to an end with the Global Financial Crisis, but another important factor could have been service sector growth as a result of the EU’s Single Market. Towards the end of the 2010s, however, US growth catches up with the UK, and overtakes it during and after the pandemic. Between 2010 and 2021, US GDP per capita grew by 16%, but UK GDP per capita grew by only 8.3%.

There is no doubt that there are many reasons for this reversal of fortunes for the UK relative to other economies since 2010, with Brexit being the most obvious. However poor health caused by a deterioration in healthcare could also have been an important factor. The IPPR report looks at the impact of poor health from the bottom up, by calculating the earnings lost as a result of the onset of chronic illness or mental illness. The main reason for earnings loss is employment exit. In addition, the research suggests that the onset of either form of illness on a household member has a large impact on the earnings of other members of the household.

The report estimates that those that became chronically or mentally ill between 2015 and 2021 led to a reduction in GDP of about 2% in 2021. Of course how much of that could have been prevented as a result of better health provision is unknown, but it does suggest that a steady or sharp deterioration in health provision will have noticeable consequences on the performance of the aggregate economy. As these two charts shows, in the UK we have had both a steady (from 2010) and then a sharp deterioration (since the pandemic) in health provision, with over 7 million people currently waiting for treatment.

Not only will this deterioration in health provision have had a significant impact on the overall prosperity of those in the UK, it also increases regional inequalities. The report shows that because chronic and mental health problems are greater in regions other than the South East England, any improvement in health provision is likely to reduce regional economic inequalities.

One final chart on waiting lists, from John Burn-Murdoch at the FT, illustrates the clear correlation between how well the NHS is performing and the party in power.

Health provision gets worse under the Conservatives and better under Labour. Some see the squeeze in NHS and social care funding since 2010 as part of some grand plan to end the NHS, but I’m not convinced the Conservative party will ever have the political capital to do this. The dynamics work the wrong way. As long as the NHS improves under Labour, then a prolonged period of worsening services under the Conservatives is required to motivate NHS abolition, but by that time the Conservatives will be much less popular and will not want to risk losing further votes by ending the NHS.

Instead I think the clear empirical association between Conservative governments and an increase in waiting times is just a by-product of these government’s desire to reduce taxation. What this IPPR report shows is that this deterioration isn’t just bad for patients, but is bad for the economy as a whole.

There has since 2010 been a clear plan to increase the farming out of NHS services to the private sector (which started before 2010), and as this map from EveryDoctor shows that plan has been very successful. (See postscript below.) However because the NHS is relatively efficient, privatisation for profit is likely to either raise costs or reduce the quality of care, thereby intensifying the deterioration in healthcare that comes from a political obsession with tax cuts.

With Labour leading in the polls and a general election not too far away, thoughts are naturally turning to how Labour could turn the tide on NHS performance. The Commission report has plenty of ideas on that front (as have others), and I cannot do justice to these ideas here. Labour in opposition talk a lot about reform, but at best this is a political device to avoid saying the truth out loud before an election. The reality is that the most obvious and effective way to improve health outcomes in the UK is to spend more money on health and social care, and that in turn requires higher taxes. What this report shows is that doing this would improve the economy as well.

Postscript 03/05/23

EveryDoctor have now updated their map to show which MPs have links to private medical companies.

Which OECD country is the highest social spender?

 

Before answering this question, we need to define what the OECD counts as social expenditure. It is mainly a combination of what we call welfare spending (including pensions) and health spending, but it also includes incapacity-related benefits, active labour market programmes, as well as unemployment and housing benefits. What it is not is just public social spending. In all OECD countries individuals spend some of their own money (either directly or through their employer) on social expenditure. In the UK, for example, private social expenditure exceeded 6% of GDP in 2019 according to the OECD, mainly in the form of pension contributions.

The answer to the question posed by the title, using this data, comes from the diamonds in the chart below.

That France is top is probably not a huge surprise , but that the United States is second (just below France) might. The blue columns represent public (state) social spending, and the US is indeed fairly low here, but the US has the second highest private sector social spending among OECD countries. France is at the top partly because it has a very generous pension system (see this recent post), while the US is so high in part because it has a very expensive (and inefficient) health system.

Given how many hits of the keyboard are spent discussing public spending on health, pensions and other items, combining public and private spending in this way can be a useful corrective. What matters to most people is how big their pension is, or the quality and accessibility healthcare is, rather than the form in which they pay for it.

The OECD splits private social expenditure into two types: mandatory and voluntary.

In countries where private social spending is high, in both Switzerland and Iceland it is largely mandatory, in Canada and the UK it is almost all voluntary, while the Netherlands and the US it is mixed. The last two involve mandatory health payments (Obamacare in the US). Mandatory payments might give consumers some choice over providers, but otherwise mandatory payments are similar to a tax. In the UK the largest component of voluntary social expenditure involves private pensions. Again this gives consumers more choice than any state pension would, but for individuals the option of not buying is hardly advisable, which means they do not have additional money to spend on other things. The big advantage of a state pension over private pensions is that the latter exposes individuals to interest rate risk at the time their pensions need to be turned into an annuity.

So while the choice between public, mandatory private and voluntary private provision is important, the amount of social expenditure from whatever source is at least as important. Of the G7 countries, which spent the least on social expenditure in 2019? In the chart above it is the UK. This has not always been the case, as the following chart shows [1].

Key: In 2010 from top France,US,UK,Germany,Italy,Japan,Canada

In 2010 the UK had the third highest social spending in the G7, but the trend over the following decade has been consistently downwards. Because our Conservative government has been obsessed with cutting taxes and squeezing the state, without much attempt at reducing the scope of what the state provides in the UK, we end up having less spent in many areas (including social expenditure) than most people want. [2]

This is a crucial fact to bear in mind the next time someone moans about how much the state spends on health, pensions or some other item of welfare spending. It is a point I try to emphasise whenever I discuss public spending on health or pensions, or aggregate public spending figures. An emphasis on total social spending is also crucial when looking at data on tax.

According to OECD figures for 2020 for the G7, the country with the highest total tax as a share of GDP is France at 45%, followed by Italy at 43%. Germany is significantly lower at 38%, and then Canada and Japan lower still at 34% and 33% respectively. The UK is at 32%, while the US is lowest at 26%. The UK is a low tax country, with only the US lower among the G7. But as the figures above show, these differences reflect the form of financing of social spending at least as much as the total amount of social spending. Those who suggest that low taxes in the US mean that people there have more money to spend are being disingenuous, because US citizens need to pay, either directly or indirectly, for social goods that are provided free in other countries.

For this reason much of the public debate about the size of the state misses key issues. What should be central to this debate is how types of spending, including social spending, are financed rather than the amount that is spent. For example, is it better for the state to provide most pensions (as in France) or is it better for individuals to pay for their own pension schemes? Is a health service privately funded via insurance companies (either voluntarily or through mandated payments) less efficient than something like the NHS. How much tax people pay will follow from that discussion, yet tax is all too often how such discussions start.

[1] Data for 2019 in four of the G7 countries are not shown here, perhaps because data in the previous chart is partially estimated.

[2] Those who can afford it can try and make up the difference by, for example, buying private medical insurance, but the quality of private sector health care in terms of medical outcomes is highly dependent on the NHS.

Why fiscal consolidations (spending cuts or tax increases) don't reduce debt to GDP ratios, and why politicians continue to tighten at the wrong time

 

The claim often made for fiscal consolidations (cuts in public spending or increases in taxes) is that they are required to reduce the ratio of public sector debt to GDP. But while fiscal consolidations are likely to reduce public sector debt, they are also likely to reduce GDP, so the impact on the debt to GDP ratio is unclear. Research just published by the IMF suggests that, based on past evidence, the average effect of fiscal consolidations on the debt to GDP ratio is negligible (i.e. virtually zero).

Looking at the study in more detail, the results are even worse for proponents of austerity. By austerity I don’t mean fiscal consolidation in the form of spending cuts, but any fiscal consolidation undertaken when output is below trend. Here is a figure from the study.

On the left hand axis is the probability that a fiscal consolidation will reduce the debt to GDP ratio, where the average probability is 51%. The first column shows that a positive output gap (GDP is above trend i.e. a boom period) turns that probability into 57%. The second column shows that if the world economy is above trend that ratio goes from 51% to 60%. The final column shows that if private credit is high relative to GDP, the probability that a fiscal consolidation will reduce the debt to GDP ratio falls to 42%.

In 2010, all economies were recovering from recession (so the domestic and world output gaps were negative) and private credit was high relative to GDP (although falling rapidly following the financial crisis). So 2010 austerity was significantly more likely to increase the debt to GDP ratio than to reduce it. As many of us said at the time, 2010 was exactly the wrong time (indeed, probably the worst time) to embark on fiscal consolidation, because not only would austerity lower GDP, but it would raise debt to GDP because lower GDP would more than offset lower debt. Which is exactly what National Institute modelling, among others, said would happen back in 2011.

Some have suggested that while that lesson might have been relevant in an environment of low interest rates (where rates can easily hit their lower bound), that era has recently come to an end. This is where a second piece of IMF research, in the same WEO, becomes very relevant. It looks at historical trends in real interest rates, tries to explain them in terms of key drivers, and then assesses where they might go in the future.

The bottom line is that we have not entered a new era. Instead real interest rates are likely to go back to the same low levels that we saw before the pandemic. One reason for this, demographics, is relatively predictable. Another is the global slowdown in productivity growth. Productivity growth is less predictable, but with no pick up in sight continuing modest productivity growth seems like a good assumption. Unless there is something big that is missing from the analysis, the age of low real interest rates (what economists call secular stagnation) is still with us.

In practical terms this means that the trend level of nominal interest rates in the advanced economies, the level that would neither stimulate or depress activity in the medium term and where inflation is at target, is between 1% and 3%. That means that as inflation falls, so will current interest rates. We have not left the era when an economic downturn could easily put interest rates at their lower bound. As a result, it will remain the case that while monetary policy is the first choice for controlling (excess) inflation, it is fiscal policy that needs to be the

first choice for avoiding recessions and boosting recoveries.

The message of this evidence is familiar to anyone who understood macroeconomic theory well before 2010: leave fiscal consolidation for the good times. Yet this is a lesson politicians, and those that advise them, find it very difficult to learn.

So why are so many politicians, and much of the media, so resistant to accepting that fiscal consolidations - if necessary - should be reserved for good times and never undertaken in bad times. A large part of the answer is that, for most politicians on the right, fiscal consolidations are not primarily about reducing the debt to GDP ratio, but instead an excuse to cut public spending and reduce the size of the state. It is what I have called ‘deficit deceit’. No wonder that in the UK over the last 13 years the government’s fiscal rules seem to change very few years, because they are typically chosen to squeeze public spending rather than enhance macroeconomic management.

However I don’t think that is all. The cyclical nature of the government’s deficit (rising in bad times, falling in good) encourages politicians to do fiscal consolidation at the wrong time and discourage them from doing fiscal consolidation at the right time. [1] They do this because deficit targets treat governments like cash-constrained individuals, who if they are short of money have to spend less and if they are flush with money they have to spend more.

In theory this need not happen if credible governments ditch debt targets, and ensure deficit targets are medium term, like a 5 year rolling deficit target. It shouldn’t happen if credible governments ensure this medium term deficit target excludes public investment, allowing public investment to reflect social returns, government missions and the cost of borrowing. It shouldn’t happen if these medium term deficit targets are chosen intelligently, allowing debt/GDP to rise when it makes sense to do so. And finally it shouldn’t happen if these medium term deficit targets are ignored if fiscal policy is needed to avoid a recession, or to stimulate the recovery from one.

That is how sensible fiscal policy would work. If it did, fiscal consolidation would only occur in good times, and it would be effective in reducing debt/GDP. Fiscal consolidation would not happen in bad times, allowing fiscal stimulus to end bad times, and consolidation would only happen in good times if that made economic sense.

But small state politicians are not the only reason why this doesn’t happen. The other reason is the media. Not just the right wing media, that wants a small state, but also the media that likes to think of itself as non-partisan. As I explained here, in the world of mediamacro meeting deficit targets are indicators of ‘government responsibility’, and rolling targets that never arrive just don’t wash. We have a medium term rolling deficit target today, but the media still gives us monthly (!) commentary on the latest numbers for the deficit, with predictable and endless speculation of tax cuts or spending cuts.

This isn’t because most journalists in the media have the wrong model of how economic policy should work, but rather they have no model at all. As a recent BBC report implied, the main feature of much journalism about economic issues is economic ignorance. That is why, for example, ministers can keep asserting that giving doctors or nurses more money would raise inflation without such statements being challenged. (Higher pay for NHS staff or teachers does not put pressure on prices, so it is not surprising that the evidence shows no link to inflation.) If all journalists think they know is government deficits or debt are ‘a bad thing’, then this creates what I have called mediamacro.

Politicians work in a media environment, so many find it hard to combat mediamacro. If the media wildly inflate the importance of deficit targets, and fail to understand why these targets are much more long term than inflation targets, then politicians will be tempted to act as if the media’s view is correct. For this reason deficit targets encourage politicians to do exactly the wrong thing with fiscal policy, consolidating when the economy is weak and the deficit is rising, and undertaking fiscal expansion when the economy is strong and the deficit is falling (or in surplus). [2]

How do you counteract both deficit deceit from the right and mainstream media ignorance? The obvious answer, as Chris Dillow suggests, is to give knowledge an institutional voice, which in this case means enhancing an independent fiscal council. Our own, the OBR, was set up by George Osborne to play a much more limited role. The Treasury farmed out its fiscal forecasting, but none of its macroeconomic analysis. That split makes little economic sense, and it needs to change.

An OBR that was able to provide fiscal policy analysis alongside its forecasts could enhance public discussion of fiscal policy options, and give space for politicians who want to promote good policy to counter media ignorance. That advice could range from acting as a watchdog to stop the government fiddling the process to more general advice about the form of fiscal policy rules. As long as it took its lead from the academic literature and remained independent, this enhanced OBR would improve public debate about fiscal policy, which in turn should help improve policy itself.

[1] Basing targets on cyclically adjusted deficits does not work, because cyclical adjustment is too uncertain.

[2] The example that always springs to my mind here is Spain after the creation of the Euro. Spain should have been running a more restrictive fiscal policy because its inflation rate was above the Euro average, but because the budget was in surplus and because of the centrality of deficit targets in the EZ, the political/media just couldn’t cope with the idea of even larger surpluses.