Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 4 September 2015

Letter wars, and how policy is made

This one is UK focused, although similar points may apply elsewhere

First there was the letter in the Guardian written by economists providing support for Corbyn’s macroeconomic stance, and then there was a letter in the FT written by other economists suggesting Corbyn’s policies are potentially damaging. I was asked to sign both, but declined, so I can be completely impartial and objective! There are two ways to read this letters war, but it also tells us something about how economic policy can actually be made.

The first way to read the letters war is that this is all about which side you are on in the Labour leadership contest. That is the interpretation newspaper headlines give, and it is the case that there are committed Corbynites who signed the first letter and committed ABCs (Anyone But Corbyn) who signed the second. However the first letter explicitly states that not all its signatories support Corbyn, and some of the signatories of the second letter are clearly not Labour supporters.

The second reading is that the letters are about different things. The first letter focuses on austerity: “His opposition to austerity is actually mainstream economics”. The second talks about nationalisation and what should be called Corbyn’s QE. So another possible interpretation is there is no disagreement between the two letters. This reading is supported by the fact that the second letter says “public investment — in many areas much needed — can be financed conventionally”, which appears to be in tune with the first letter which attacks current austerity. As I have noted before, every academic economist I have read thinks now is a good time for higher public investment. (As far as I am aware, there was no letter to counter this attack by economists on Osborne’s new fiscal rules.) Finally the first letter does not explicitly endorse nationalisation or Corbyn’s QE.

So in terms of their texts the two letters could be quite consistent with each other. I am certainly against current and past austerity. I have also been publicly critical of Corbyn’s QE because of the (perhaps unintended) implications for Bank of England independence, and the (perhaps unintended) implicit acceptance of deficit constraints. Which is why I did not sign either letter, but perhaps I could also have signed both! [1]

As many economists signed each letter, I think both readings are correct. It is tempting at this point to lapse into a negative discourse about how hopeless letters are, or how hopeless economists are at writing letters and commenting on policy. In fact the opposite reading is correct. What the letters illustrate is how hopeless actual policy making on macroeconomic issues can be.

I think most people imagine politicians outside government as having at their disposal a huge network of assistants, each of which is plugged into a huge network of advice coming from individuals and think tanks. There is certainly a huge amount of advice out there, but you need some knowledge to filter good from bad, research based ideas from ideological ones etc. And that is the problem: there is no army of experienced assistants doing that job. Politicians instead often have to rely on a few (generally political) contacts and perhaps one or two inexperienced assistants.

It is therefore just inevitable that in something like a party leadership election you might see some poorly thought out policies. Politicians, or those that advise them, will not have the time or resources to filter and consult. That letters may follow should be no surprise. It is what happens next that matters. The danger is that politicians get committed. That is why those who have expertise need to shout loud and soon, by letter or any other means at their disposal.

So before you are tempted to make fun of poorly written letters and fall back on clich├ęs about economists never agreeing, you need to suggest how else policy proposals could be criticised and debated. And before you criticise a politician for changing their minds, recognise the advice they initially get is often imperfect and changing their mind is often the wise thing to do. A culture that penalises ‘flip flopping’ leads to politicians who just follow convention and mouth platitudes, and in this Labour leadership election at least it is clear that is not what a good part of the electorate wants.

[1] Not really. I didn’t sign the first because I had clear misgivings about Corbyn’s QE. The second says things about nationalisation I either do not know about (efficiency), or that appear to accept a false view about the impact of privatisation/nationalisation on the public finances. If the state buys a profitable business at a fair price and keeps it profitable, there is no issue of fiscal space or ‘affordability’, just as privatisation per se does not improve the public finances. Economists of all people should see through this aspect of short term deficit fetishism. The only issue with privatisation/nationalisation should be which method of ownership/control is more efficient.   


  1. "It is therefore just inevitable that in something like a party leadership election you might see some poorly thought out policies."

    This won't do at all. They are a test of the candidates judgement: the best we have. So from Corbyn we have had

    1. Renationalisation - particularly of rail the very worst candidate.

    2. People's QE. The big problem with this was not (as you claimed) that the Bank of England was a bad vehicle for it (though it is) but because he saw it as a way of replacing ordinary funding, not as a demand shortfall measure at the ZLB.

    3. The completely bonkers £120 bn tax gap and £93bn 'corporate welfare' stuff. This is the worst of the bunch. It is naked pandering to the belief that there are easy and painless ways of paying for all the lovely stuff we want.

    That is just the economics side of things. His views on the EU, Nato and the west in general are appalling.

    The Grauniad letter from the 41 "economists" said

    "His opposition to austerity is actually mainstream economics, even backed by the conservative IMF. He aims to boost growth and prosperity."

    This implies that Corbyn's *means* of ending austerity and boosting growth and prosperity are approved of. After all, everyone is in favour of boosting growth and prosperity in general.

    It was a disgraceful thing for Blanchflower and Mazzucato to have signed. They know as well as me that the specifics of what Corbyn is proposing make no sense, but they have given him a shield to protect himself from the attacks by the mainstream social democratic candidates. (Cooper has done a fine job in calling Corbyn out. He has now retreated to the usual stance he takes when called out on saying stupid things: he just wants to "debate" them.) They have created that there are two sides to the 'debate' and that Corbyn is on one side of that.

    Corbyn will win, and the cause of social democracy in the UK, and the end to Tory government which you favour, seriously set back. Certainly for 2020, probably for longer. They have contributed to that and need to be called out on it strongly. Good for Tony Yates and Paul Levine for at least trying.

    Your sin is less grave, but sin it is. It is a sin of omission.

    I agree that the letters are terribly drafted though (particularly the FT one). Economists can't write.

    1. Social democracy and slightly more compassionate Osbornism are not the same thing. Whatever his faults Corbyn seems to the only one making that clear.

    2. If you cannot spot the difference between

      1. the government that just cut £13bn in tax credits for the poorest


      2. the government that raised tax credits to that level

      and think they are the same and just 'Tories', you are lost to reason.

    3. You are not the first to think that if only people like me came out against Corbyn, his popularity might be diminished (although others have put it more politely). I'm afraid that indicates that you do not understand what I have called ( the Corbyn phenomenon. Your comments on Blanchflower and Mazzucato clearly indicate you do not understand them.

      I try not to do partisan economics. I write about issues that I know about or have time to research, and I'm happy to give that advice (critical or otherwise) to those that advise Corbyn, ABC, Osborne or the LibDems.

      On that basis I have been critical of Corbyn's QE, just as I have been critical of Labour's handling of austerity, and the pro-austerity views of some Labour MPs. All could be capable of helping lose Labour the next election. That is about all I know to write about. In writing about my 'sin of omission', what you seem to imply is that I really know that Corbyn will be a disaster compared to ABC, but for some reason I prefer not to say so. Which indicates that you do not understand me.

    4. I think that is an abnegation of responsibility.

      I am not naive enough to think that your intervention (or indeed the intervention of every competent macro-economist in Britain) would stop Corbyn's election. or even influence the voting much.

      Nor do I claim that your responsibility comes, as you seem to think, from the fact that Corbyn will lose the 2020 election. That is unprovable (although I am personally certain he will).

      The responsibility comes from the fact that there is a mainstream consensus about what a 'progressive' alternative to current government policy looks like, and it isn't what Corbyn is proposing. I would be very surprised if you actually thought that it was ok to use 'People's QE', even if not carried out by the Bank of England, save at the zlb when looser fiscal policy was not available. that is not Corbyn's position and you should say so.

      What has blinded people like Blanchflower and Mazzucato is that they are so passionately opposed to Osborne and all his works that they have confused their enemy's enemy for their friend. I think you are guilty of the same. So relieved are you to find someone, anyone, strongly denouncing austerity that you are prepared to give their views credence.

      There is a difference between politics and economics. People like Kendall and Cooper (and Balls before them) are not the fools you take them for. They know full well that it is a precondition of Labour winning that it establishes a reputation for fiscal rectitude. If that doesn't fit with textbook maroeconomics, tough luck. Indeed, so what?

    5. I do not take Kendall, Cooper or Balls as fools. However they, like you, seem to have come to accept that "a precondition of Labour winning that it establishes a reputation for fiscal rectitude", and therefore means they cannot oppose Osborne's austerity. This equates fiscal rectitude with economic competence, and if you do that you are lost.

      The evidence of the past does not show that austerity always wins elections. Before 2008, economists were seriously concerned about what they called deficit bias, which was that governments allowed debt to increase for no good reason and they were not punished for it.

      This misconception about austerity led a Labour opposition to abstain on measures to cut the very tax credits you talked about in response to Diarmid Weir, at a time when foodbank use has exploded! Is that your mainstream consensus about a social democratic alternative?

    6. Simon makes what would be part of my response above. I would also point out that the very fact that Osborne has managed to so easily reverse what Labour did is itself evidence that such amelioration, while welcome in itself, is not enough.

    7. "This misconception about austerity led a Labour opposition to abstain on measures to cut the very tax credits you talked about in response to Diarmid Weir, at a time when foodbank use has exploded! Is that your mainstream consensus about a social democratic alternative"

      The reason Labour abstained on second reading was that there are things in the Bill that it approves of. So Labour is in favour of the proposed reporting obligations on full employment, apprenticeships and troubled families. If it just opposes tout court the Tories could then say 'Labour opposes all these nice things, aren't they evil.' So, the Parliamentary tactic was to abstain on second reading, propose amendments, and oppose on final reading. Labour opposes the tax credits cuts.

      The problem was that this kind of subtle Parliamentary maneuvering proved badly counter-productive, especially in the middle of the leadership election.

      The electorate equate fiscal rectitude with economic competence. Unless we introduce boot camps for re-education in the General Theory, that is just the way things are. Fortunately there is a large contrast between the primary colours you need to paint in to win elections, and the subtle shades of what you can then do once in office.

      As the most brilliant current politician, George Osborne, has been showing us.

    8. I think your first three paragraphs illustrate the problem. Labour abstained because they were worried about what the Tories would then say. Defensive, defensive, steadily retreating to the right. And Labour party supporters rightly say we want no more of this.

      You say "The electorate equate fiscal rectitude with economic competence" as if this is an immutable fact, ignoring my point that before 2008 it clearly was not! A few days ago many would have said with equal confidence that most people would always equate Syrian refugees with economic migrants and there was just nothing that you could do about that in opposition.

      There seems to be a pervasive pessimism about voters within the Labour establishment. Voters think most on welfare are scroungers, so we have to accept that and talk about cracking down on fraud. Voters think migrants just come for our benefits, so we must crack down on this as well. Voters think that economic competence is about balancing the books, so we have to appear to support austerity. That was the strategy before 2015, and it failed.

    9. Well, it looks like we are going to have a serious test of your preferred strategy, and so we'll find out if you are right about that.

    10. You say "The electorate equate fiscal rectitude with economic competence" as if this is an immutable fact, ignoring my point that before 2008 it clearly was not!

      I don't think this is anywhere near as clear as you think. Before 2008 fiscal rectitude wasn't really an issue. The 'economy as a household' analogy wasn't any easier to explain away, but the household was doing quite well and the credit card bill wasn't too large, so it wasn't something that people worried about.

      Since then we have seen the credit card bill explode, the household is still spending more than it is bringing in, and other households in the vicinity have gone bust.

      The attitude to fiscal rectitude and economic competence hasn't changed, it has just become relevant.

    11. I talked about these issues here:

      2010 really was an unusual period: many individuals were saving more/borrowing less, and the Eurozone crisis was a constant news item. Contra what you are suggesting, you might say that as people get more used to borrowing their outlook becomes more nuanced.

    12. Yes, I read that, but I don't see any basis for the link you draw between people's personal behaviour and what they think about the economy as a whole. I think people will keep worrying about the national credit card bill for as long as it is very high, irrespective of their personal circumstances.

      This doesn't mean by the way that Labour has to accept entirely the austerity narrative: to an extent I agree with you that this strategy has failed. My point is just that it is very hard, and I think it is going to remain hard. Yvette Cooper sometimes makes a decent fist of it, when she's not doing her impression of an obfuscation robot.

    13. When/if it becomes clear that the current debate is about how quickly you pay the debt down, rather than stopping debt rising, I think it will be not nearly as difficult as some imagine. It is a much easier sell that 2009/10, when debt was still rising pretty fast.

    14. It is undoubtedly easier than 2009/10, but:
      1) as long as there is a deficit the argument that the debt is still going up will be hard to counter, and
      2) the credit card bill can still easily be presented as much too large
      So I think the argument is still pretty difficult to make, and particularly difficult for Labour because of existing prejudices. I think the chance of Jeremy Corbyn making it successfully is precisely nil.

    15. It seems a little bizarre that Hugo can just claim that Rail is the worst candidate for nationalisation, with no evidence/rationale...

    16. Water is the best candidate.

      Rail was largely nationalised in 2002 by Prescott. The franchise system works well.

      A lengthy post on the idiocy of rail nationalisation isn't really appropriate here, but it is a good example of Corbyn pandering to the prejudices of those who haven't examined the issue.

    17. "The franchise system works well."

      LOL. Ask the customers.

    18. Who pay below cost.

      The desire for nationalisation is just people wanting a free lunch.

    19. Hugo, you don't appear to know much about the details of the rail system or indeed transport policy. Many of those who do, have supported further moves to nationalisation. They may be wrong, but your conceit that the idea is beyond the pale suggests that you've fallen into the "generalist" trap where you believe your abstract principles apply no matter what the situation. Indeed, above all, it suggest you have not examined the issue.

    20. He also ignores the idea of public transport as a public good. If commuters did not get a "free lunch", i.e. paid the full rate - well they wouldn't, would they, they'd take the car instead - with all the associated costs that that would imply.

    21. Metatone


      Give me the details of who you are claiming says this, and I will review it.

      I can see the case for re-nationalising water. But why rail? The usual reasons given are just daft.


      And the bidder for the franchise had to match or beat the return to the government from network rail running the franchise. Which is how competition works, Maximises returns for all of us.

      Happy days.

    22. George,

      East Coast's return to the Treasury was much smaller than what the new franchisee has committed to pay to the Treasury.

      It's a fairly effective system at earning money for the government to reinvest in rail, with the government off the hook for the fare increases that pay for it.

      It could doubtless be better, but equally it could be worse. For instance the government took over some procurement (from rolling stock companies) and made an utter pig's ear of it.

  2. It seems a bit strange to suppose that a leadership election held with four months notice from election defeat to closing of the ballot should require fully worked out policies that will not be applied until 2020.

    What the election is surely about is what kind of Party Labour members (and supporters, but that's a whole other debate) want to belong to for the duration of this period of opposition. Do they want to remain in the mainstream consensus, being - hopefully - a bit nicer and a bit more reasonable than the Conservatives, or do they want to find a different voice and give it a try over a longer period than the run-up to an election.

    Putting the question does not determine the answer, but there is a real debate to be had here. What is fascinating to the outsider (I'm sympathetic but have never been a Labour voter) is the desperate attempt by so many people inside and outside the party to take the question off the table as soon as the voters look like giving the wrong answer.

    The 'technical' economics questions are interesting as markers of this debate: while details of Corbyn's proposals can, and should, be criticised he seems to be alone in escaping the Austerity world view which claims that ALL government expenditure that is not directly protective of private property should be held to an absolute minimum. This (deeply mistaken in my view) principle has been elevated beyond a political position to an axiom thanks in part to certain developments in economic theory which pretty much pre-suppose the position.

    1. I think these are very valid points. (A quibble - there have been plenty of developments in economics going the other way, so there is cherry picking going on.) It is also nonsense to think that Corbyn would be able to simply impose unpopular or clearly unwise policies on the parliamentary party.

      What a lot of anti-Corbyn people fear is a return to the kind of manipulation of the party that happened in the early 1980s. But a lot of that relied on apathy from most party members. What you are seeing now is not apathy. So what is crucial is that Labour, whoever wins, takes the current enthusiasm that Corbyn's candidature has created and uses it to good effect.

  3. Simon,

    It's refreshing to to read posts that are critical of 'Corbynomics' without just assuming the worst possible interpretation. In some cases even when it's since been clarified that's not what's meant (ahem, L&V).

    I find it difficult to see the second letter as anything but nakedly political though. To the lay reader, who of course, it is aimed at, it very much doesn't say, "yes, opposing austerity is well within the bounds of main stream economics but the specific policies are not".

    (FWIW I think the first letter's political too but slightly more defensible. As a response to people dismissing Corbyn plans to spend more because the economy is 'like a household' (CBI boss), then it's reasonable. But if that was the case they could have made it clearer.)

  4. Quick question. If the western world economies are struggling to achieve much economic growth with interest rates at nearly 0% does that mean the end of the world is nigh? Presumably the next economic/stock market crash will be the last as interest rates cant be cut any further. Am i being too simplistic?

    1. Over dramatic maybe. This is the secular stagnation debate. My own contribution to that debate has essentially been - start reversing fiscal austerity (more public investment) and see if you still have a problem.

    2. Just use fiscal policy. Cuts to NI and VAT.

    3. Just cut VAT and see if we still have a problem.

  5. Excellent post Simon. I think the prickly & charmless comments from spinning hugo are unnecessarily harsh. Maybe if he/she didn't hide behind a cloak of anonymity the tone might be a little more pleasant. But then again, maybe not.

    1. "Prickly & charmless"... You're being far too polite. More appropriate descriptors would be "misguided" or "clueless", such is the frequency with which he misunderstands, misinterprets and unfortunately misrepresents SWL's insights.
      The self-assured, overconfident judgemental style of his comments is strongly suggestive of a deep-seated intellectual inferiority complex - hence the tone of his narrative towards our host.

  6. It is hardly like there has been no academic research into the costs of 1980s and 1990s privatisation. I have a copy of 'Privatisation and Economic Performance' eds Bishop, Kay, Mayer published in 1994 which is less than complementary in most areas of this Tory jiggery-pokery.

    I see that analysis of the last election had the Tories picking up an extra 1.4% of the vote, but this was UKIP voters switching to the Tories in marginal seats.

    There is plenty of scope for the sort of effective debate the Labour and Liberal Parties should have had in 2008 to happen now, given that their respective political strategies since that time have been so woeful.

  7. As a Labour member and supporter of Jeremy Corbyn, I'd like to make some comments on partisanship and economic expertise.

    I support Jeremy for many reasons and his opposition to austerity is one of those. We have a huge range of problems (housing, skills, productivity, unemployment, insecurity, inequality, living standards, etc.) which the Conservative / New Labour consensus has failed to tackle.

    To challenge that consensus, we need to be able to show that we have workable policies and that our numbers add up. That's where the expertise comes in, not just in developing such policies but also through public scrutiny and challenge. Success of a future Labour government will be measured by delivery of real benefits, not by adoption of specific macro or monetary policies and still less by adherence to theory. But informed debate on proposals will help us make those rigorous and credible.

    I'm not wedded to PQE or any other specific measure and I don't believe Jeremy is either. If it works we'll do it, it it doesn't we won't and we'll need to judge that by the conditions of 2020.

    We're still at the early stages of policy development. Nobody thought we might actually have to implement a progressive agenda in the not very distant future. A Corbyn victory in 2020 is perfectly possible and if he wins he will face intense resitance from the wealthy and vested interests. So what we do has to work.

    Blogs have brought economics out of the academy and stimulate the debate we need. Letters just scratch the surface.

    1. But Corbyn's already overestimating tax revenue for specific plans (raising top rate of tax) and dangling prospects of big sums of free money from uncollected tax and business tax allowances.

      I think that's a very bad sign.

      If he were to be running on middle class tax rises, I'd respect him as principled and telling it how it is. Some tax rises starting fairly low down would pay for stuff like the costs of the much older population.

      We've had nothing like that. It's money rustled up by going after other people. I think that goes nowhere, and his spending plans go nowhere.

      Ed Miliband, btw, was not very austere. Too much, sure. But there's no more a huge gulf with Corbyn than there was with Sturgeon.

  8. The key question is where Corbyn will get his economic advice once elected. Will he continue to rely on Richard Murphy and other trade union consultants? If so, the results could be bad. Will he do what Owen Jones suggests and give Paul Krugman a call? If so, would Krugman really have the time or inclination or UK-specific knowledge?

    Perhaps the best of all worlds would be for him to get in touch with Professor Wren-Lewis...

    1. Or Bill Mitachell? Randall Wray? Steve Keen? There's a whole host of economists (SWL too) to choose from...But in reality they all agree...end austerity, spend some money, see what happens.

  9. Simon, as a Corbyn supporter I very much welcome your thoughtful and constructive contributions to the economic debate. I see the merits of them, and also some counterarguments. In any case, I perceive relatively little disagreement about what needs to be done, but some about the mechanism thereof.

    I doubt whether there's much which could affect the election result now: perhaps you could write privately to Corbyn assuming he wins, when the dust has settled. He needs a diverse group who are broadly sympathetic to his aims, in order to put flesh on the bones of a workable policy.

  10. Letters are good, if discussion in detail extends to blogs.

    Blogs are perfect forum to hone policy proposals, if the authors of the proposals are open-minded. In the end politicians have to decide.

    Policies also have to be election winners. The option of austerity light, based on higher deficits has now been rejected twice by the voters, yet that is what seems economists still want to sell.

    Until Corbyn comes along and picks out something more sensible. Traditional economists might say it is populism, but MMT has never been seriously questioned, and proposals like PQE base much of their underpinning on MMT. Corbynomics is successful and will win Corbyn the election.

    So radical ideas win the leadership election, and might even win in 2020. As long as traditional economists do not undermine the radicalism (it wins elections, remember), they should be welcome for their advice.

  11. Could I also include you in my Mosler Challenge, Simon? I know you did not sign the letter, but on their "risk to financial credibility" point you seem to be in agreement.

  12. The whole thing is very depressing.It's bad enough that the mechanics of 'policy making' are as you imply but more depressing is the apparent inabiility of the letter writers to make clear exactly what they want to say, Would their efforts pass muster in an undergraduate tutorial?

  13. In a tweet that was retweeted by Peter Doyle (for some reason I can't find it any more), Mr Yates sent a link to the letter and called corbynomics "reckless rubbish". I think whatever the reservations one may have about "corbynomics" this kind of language betrays the real way of thinking of the authors. Quite different from the language used in the FT "Sir, ...", "not thought through" ...


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