Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 18 January 2015

Mediamacro and responsibility

The Chancellor gives a huge pre-election bribe to the moderately wealthy over 65s, and describes the fact that everyone who can is trying to get hold of the bribe (and completely overwhelming the NS&I as a result) as a great success. [1] Chris Dillow describes this as corruption. To their credit, right wing think tanks have also condemned it for what it is. But the Chancellor says this is all part of his economic plan.

I suspect the penny is beginning to drop in mediamacro. This was supposed to be a government where deficit reduction was the overriding priority. It was of such importance that it was worth the risk (which materialised) of delaying the recovery until 2013 to achieve. Hard, sometimes painful choices had to be made to achieve the goal of reducing the deficit. A Chancellor who was prepared to do unpopular things for the greater good. The essence of responsibility.

Unless you were a top rate tax payer, of course. Or, following the Prime Minister’s conference speech last year, a moderately well off taxpayer. And now if you are moderately well off and over 65. Penny dropped? But this last example also tells mediamacro a difficult truth. Its modus operandi is that it can rely on the opposition to expose such things, but Labour appears to have been silent on this. Obviously, because these kind of bribes work because those that receive it are thankful and the much larger number who pay for it are not so fussed. [2] So it needs to seek out those who will call a spade a spade. It has a responsibility to do so. This time it could use right wing think tanks. Next time it may have to resort to economists who write blogs.

Chris Giles, economics editor of the FT, wrote an interesting opinion piece a few days ago. It appears at first sight to be an attack on Labour’s record in opposition. But it ends with “the intriguing thing about Mr Miliband’s Labour party is that its broad economic prospectus for the 2015 general election is perfectly sensible.” In contrast “the Tories’ plans appear ideological and border on calamitous for many public services.” If you want more detail on this, see my debate with Oliver Kamm in Prospect magazine. So his article is a form of puzzle: how did responsible Tories and reckless Labour change places?

One possibility, of course, is that there never was a puzzle. Chris lists many alleged failings by Labour, but a lot look superficial and presentational to me. Furthermore (and I know Chris will not want to admit this) when Ed Balls said Osborne was cutting too far too fast, he was right. In particular, public investment (school repairs, flood prevention) was cut immediately when there was no need to do so to meet the coalition's fiscal rules. Those who think it had to be done to appease the market should reflect on the fact that Britain lost its AAA rating because of weak growth, and pretty well everyone thinks that public investment has the largest GDP multiplier.

It is the media’s responsibility, which Chris for his part has grudgingly fulfilled, to point out - one way or another - who has the more responsible macroeconomic plan post 2015. The opposition will not make that case, because it has become terrified of being labelled spendthrift. Yet it is hard to find a macroeconomist who does not think Labour has the better macro policy from 2015, whatever their views about 2010 austerity. A responsible media needs to get this point across, just as it needs to point out pre-election bribes.

[1] Once upon a time NS&I was just a way that the government could sell its debt to ordinary people at slightly below market rates because it was safer than banks. However after the financial crisis, when it became clear how risky banks were, the government seems to have contracted the range of products that NS&I sell, I guess because of lobbying by these same banks. Once you could buy indexed linked assets from NS&I - no longer. Now it has become a vehicle for giving bribes to selected groups of savers.

[2] This is the ‘common pool problem’, one of the reasons economists give to explain deficit bias, which is of course being irresponsible about the deficit. 


27 comments:

  1. "So his article is a form of puzzle: how did responsible Tories and reckless Labour change places?"

    Because it is politics, and almost wholly unrelated to anything that might happen after 2015.

    So, from 2010 onwards Labour opposed the cuts and called for them to be 'slower and shallower'. When growth returned in early 2013 that left them without an economic message, 'cost of living crisis' being a whinge not a policy.

    Now life is terribly unfair, but Labour had made a terrible mistake. Political and economic arguments don't line up in the way you think they should.

    Instead of trying to create a reputation for fiscal prudence, which is a sine qua non of a Labour party majority (see electoral history since 1979), they had allowed the Tories to paint them as the same old spendthrift Labour party who had got us into this mess. This impression of shallowness is reinforced by the pattern of having opposed every cut up until the moment it is made, but with no subsequent pledge to reverse it.

    This is the Tories best card (other than Miliband himself) and so Osborne, ever the politician, put forward proposals for the post 2015 world of such eye watering implausibility that Labour could not match them. This was clearly a deliberate attempt to prevent Labour making the same pledge to keep within the Tory's spending plans that they had made with such success in 1997. (see also the idiotic in economic terms 'fiscal charter').

    None of this has very much of significance for anything that might actually happen after the 2015 GE. The prospects of a Tory majority are extremely remote, as Osborne knows. Economic and political gravity will assert itself and we won't see anything like the cuts Osborne is proposing if the Tories are still in office. Labour will be left with the same lame line that they have had since Osborne ended fiscal tightening 3 years ago "You are breaking your promise, by, errrrrr, doing exactly what we said you should do."

    If, as still just about seems more likely, Labour are in government Osborne (or more probably his successor, Osborne will move to the FO brief) has a ready made line of attack "you abandoned our long term economic plan by your reckless fiscal policy".

    I don't think the world is populated by fools in quite the way you do (although teaching undergraduates for years may I suppose create that impression.) See also your description of Giles making perfectly sensible points "grudgingly".

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    1. Alternatively: Osborne knew that an outright Tory majority is very unlikely, and so his drastic planned spending cuts are his starting point in negotiations with the Lib Dems/DUP after the election.

      Moreover, Labour has cried "cuts" at every opportunity, but satisfaction with public services has in general held up. So Osborne could go ahead and plan really serious cuts, knowing that Labour had cried wolf many many times already and so the effect of their further protestations on the public would be fairly mute.

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    2. The cry of 'wolf' is of course a problem. The hue and cry over the Health and Social Care Act (which did very little that was not already possible under earlier - Labour- legislation) is a classic example.

      The problem is, of course, that in the story the wolf did eventually turn up. Maybe this time, but I still doubt it.

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    3. I hate to quibble but aren't:

      "... having opposed every cut up until the moment it is made ..."

      ... and:

      "... doing exactly what we said you should do ..."

      ... mutually exclusive?

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    4. No, because the latter refers to the ending of fiscal tightening 3 years ago, not individual cuts.

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    5. So there have been no cuts by the Tories that Labour have opposed in the last 3 years?

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    6. Gastro you are wasting your time with SpinningH, no one understands politics like him, oh no. He once read Machiavelli and has never looked back.

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  2. The Tories desperately want the next election to be fought on the economy. What they do not want is the word immigration mentioned (witness the latest manoeuvring to keep Farage out of the debate). Labour have a hard battle here. Without Farage posing a menace Cameron and Osborne can then keep hammering - "who was in power in 2008, and who had to fix the mess - do we have to have a repeat of that". Labour have to distance themselves from Blair. They will try and blame the world economy rather than their monetary and financial deregulation policy.

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  3. I'm on the right, and couldn't agree more about the "bribe" to over-65s. You might also think about the fact that things like the winter fuel allowance have (unexplicably) failed to be cut or at least means-tested when other services used by younger voters have been.

    An aside - do you have any references to support

    "pretty well everyone thinks that public investment has the largest GDP multiplier."

    I was speaking to a leading academic economist who has papers in this area a couple of weeks back and he insisted that this was a common myth, and that the evidence suggests no meaningful difference between the multiplier on government consumption and public investment.

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    1. I could be pedantic and say that my statement is not inconsistent with your comment, because government consumption also has a large multiplier relative to most other fiscal changes (i.e. taxes and transfers). But more seriously, I have seen studies that have investment having a larger multiplier than consumption if you add in positive supply side effects from investment. So I would be interested to know why he thought it was a myth.

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    2. Here's one example: https://ideas.repec.org/p/igi/igierp/277.html

      From the abstract

      "Contrary to a common opinion, there is no evidence that government investment shocks are more effective than government consumption shocks in boosting GDP: this is true both in the short and, perhaps more surprisingly, in the long run."

      Also section 4.8 here: https://ideas.repec.org/a/eee/moneco/v60y2013i2p239-254.html

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  4. In the last week I made reference to Osborne's degree being, like mine, in history.

    Now, one of the useful words historians use - we don't do jargon (yeh, right) - is 'interests', those sometimes unspoken actions that connect individuals and/or groups together.

    I suggest that Mr Osborne is an interests-monger, which is the sort of person you would probably expect to come out of the idea of conservatism when its electoral position is so shaky and the private sector trade unions quiescent.

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  5. I'd forgotten Oliver Kamm still existed. Presumably this self-confessed left-winger (ha!) is trying to perform the same role for neo-liberalism as his oh-so-successful support for neo-conservative foreign policy.

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  6. Does Britain have a responsible media? Last time I looked it was more of an ideological media pushing the opinions of billionaire proprietors and their neoliberal policies so as to control politicians and ultimately Government policy.

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    1. ??? What? Does this mean what's written in the Daily Mail about Ed Miliband and Labour in general might not all be true???
      Noooooooo! He is Mr Bean. His party did crash the economy in 2008. They did know the crash was imminent (and chose to do nothing). Their policies would definitely lead to the economy crashing again. And he cannot eat a bacon sandwich...and he's 'Red Ed'...and, and...
      I hope that's clarified things for you Fifthdecade!

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    2. I don't normally respond to racist comments such as this but you ignore the fact it was the Banking failure that caused the crash; all that dross dressed up as AAA rated packages sold by some unscrupulous US bankers to those looking for higher 'low-risk' returns made a lot of money for those who traded the toxic parcels as fast as they could turn a quick buck. I don't necessarily blame British bankers, although they should have looked more closely at what they were buying and had more qualms about what they were selling, but recent scandals involving LIBOR rates and other messes show there has been a lack of care in some parts of the industry for too long now. It wasn't Labour at all, in fact the economy was recovering until Osborne got his Mitts on it...

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    3. My apologies for the misunderstanding I've caused - I totally agree(d) with your original comment and was trying to be sarcastic by writing about the lies the Mail churns out daily, to illustrate how ridiculous they are, and also confirming the validity of your points.
      I also totally agree with your second point, and for those who blame Labour for the economic crisis, there's a few clues in the term 'Global' 'Financial' Crisis which indicate the true origins of the crisis. And for those who say Labour are completely at fault due to regulatory oversight...whilst this cannot be ignored as a contributory factor (though originally initiated in the 1980s by you know who, and Osborne/Cameron in 2007 criticising Brown for over-regulation!!), making it the focal point of blame is rather like saying the local cafe owner is entirely responsible and "caused" the raids on his/her cafe by not having a security guard - which is to ignore those who actually chose to do the wrong-doing. Sure, contrary to what the financial sector and the then Opposition were calling for, Labour could have (tried to) implement tighter regulation, but as you rightly point out, even post-crisis, after all of the scandal and damage caused by the financial sector, with new rules/regulations introduced and with the spot-light firmly on them, parts of the banking sector still brazenly commit their wrong-doings. Which for me strongly suggests that even if there had been tighter regulation prior to 2008, they still would have done it, and if there's big money to be made with little/no chance of being held responsible (thanks George/Dave), I've no doubt they would do it again.
      Your very last sentence about Osborne: Reading his 2010 Mais lecture where he talks about the crisis, no mention is made at all of any banking/financial misdemeanours!! - just 'failure or regulation' and then Reinhart/Rogoffs 'build up of private/pulic debt as the cause. You know even then who he will protect at all costs.
      Strangely he says: "Britain has emerged - just - from the longest and deepest recession in living memory, but growth is proving painfully slow to return. "
      The "growth is proving painfully slow to return" is written at the time when under Labour quarterly growth in the year up to Q1 2010 was 0.4%, 0.5%, 1% and 0.6%. (annualised is 2.5%)
      My point is not that this is a fantastic growth rate, but rather the growth seen since 2013 is scarcely better (2.6% annualised), yet this growth rate is hailed as fantastic and a triumph by Osborne/Cameron etc.
      Hope this clarifies my position and apologies again for the sarcasm!
      (Which part of my sarcastic comment was 'racist'?)

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  7. Bribe? I would have thought that providing a limited amount of subsidised saving is more of a social measure, given how much many elderly have suffered from low interest rates (which are effectively government policy given that the Tories have shamelessly captured the BoE, who raised no objection to the government's claim to "monetary activism"). There must be thousands of elderly in relatively modest circumstances who rely on simple nominal savings vehicles to sustain them, who have been impoverished and distressed by recent monetary policy, like one of my neighbours who sold their shop when they retired and invested the proceeds in various bank bonds and deposits.

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    1. “Subsidised saving” is not a very good “social measure”. Hand-outs for those in dire straits makes social sense. But subsidising all or large portion of the savings industry will benefit rich as well as poor savers: bit of a blunt instrument, I think.

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    2. Low interest rates are not the result of government policy, when the Swedish central bank attempted to tighten it crashed the economy and that's not good for anybody. Loose monetary policy is borne out of necessity rather than any choice to favour any client group

      I find it hard to believe that a government that introduced policies like the pensions triple lock would deliberately pursue a monetary policy that harmed pensioners.

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  8. Chris Giles piece in the FT was in fact a perfect example of the 'mediamacro' problem. In spite of acknowledging the value of Labour's proposals, Giles could not resist referring to Labour's 'flawed analysis' and 'hubris', then claiming that Labour need to 'change their economic team'.
    You characterise the FT article as an 'Opinion Piece' but it was published as 'Comment' from the Economics Editor of the FT - 'Opinion' usually appears as such. If we cannot rely on the Economics Editor of our main financial newspaper to write objectively (whether in economic or political vein) we really do have a problem.

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    1. You're right, as economic analysis goes Giles is generally pretty good, he's certainly a good deal better than most but that piece really does read like a classic bit of goalpost moving in pursuit of an anti Labour stance (why does he not mention George Osborne's austerity U-Turn, the failure of OBR predictions, why does the UK's terrible growth record not vindicate complaints about austerity).

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  10. > Simon

    This post is unfounded to write it off out of hand as a bribe. Low interest rates have a macro economic role but also have a different effect on different sectors. Adjusting them at the sector level could be valid where it is warranted and you have not addressed whether the policy has merits or not. Low interest rates means low returns to private savers. Well who else generally relies on income from savings but the +65. Its very small compared to the interest paid to the bond market. So the government gets an income to retirees and does not disrupt the bond market in doing so.

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    1. If you want to give money to the over 65s, why not just give them a direct transfer (i.e. pay them 1000 pounds each)? Obviously to replicate this policy you would need to give more money to rich pensioners than poor pensioners, but that shouldn't be difficult.

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  11. In difficult time of deficit of budget and the other signs of recession the government needs to make unpopular laws and steps, because just such sometimes cruel actions will lead to further development and stable economy. However according to my experience such changes and difficulties were always directed on the people with not so high level of income. Unfortunately almost all the time such people have to cover all deficit and pay growing taxes and bills for utilities. I guess this site is helpful for them in any situation, but the government needs to change the approach and start to gain money from someone who has it.

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  12. In those days, there is a genuine sense our own banking system might have been engulfed with a second economic crisis, which this could have extended our sovereign’s capability to pay.
    I suppose payday loans in surrey bc is useful for individuals in almost any situation, however the government must alter the approach and begin to achieve money from somebody who has it.

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