When to be optimistic on growth

I’m afraid I did not respond to requests to talk directly about the debate over Gerald Friedman’s numbers. I think I can only cope with that kind of thing one country at a time, and there were better people on the case. But I suspect a key to seeing your way through the wider debate is to know when to be optimistic about economic growth, and when not to be.

Martin Sandbu, channeling Narayana Kocherlakota, is quite right that we should not discount the possibility that economic growth could be unusually strong over the next decade or two. There is a significant chance that some of the slowdown that has appeared to have occurred to trend growth since the Great Recession might be reversible, partly because many hysteresis effects are also reversible. Inflation may not respond positively to strong growth as it has done in the past.

That possibility is high enough that it should have a big influence on monetary policy, for reasons I and others have outlined many times. The cost of needlessly throwing away potential resources is much higher than the cost of small overshoots of an inflation target. For that and other reasons the Fed’s decision to raise rates - and the MPC's decision not to cut them - was a mistake, as is continuing austerity.

Does that mean we should hard wire this optimistic view into budget projections? Essentially no, because budget projections should be based on your central guess of what is going to happen rather than any best case scenario. Almost every politician thinks they have the magic ingredient that will lead to strong growth. There is nothing wrong in that, but they should hope for the best and plan for the ordinary.

Doing this imposes a discipline on the electoral process that is essential to stop some politicians pulling the wool over voters eyes. If a politician or party wants to go with optimistic numbers, then the debate should be about how reasonable those numbers are, so voters can see what is going on. A world where these things are not debated is a world where everyone promises the moon and no one is any the wiser.

Where the discussion can get confused is if we put these two things together, and note also that fiscal stimulus involving additional investment would be good for the world right now. But that should and is argued for without pretending that it can all be paid for with the taxes that will come rolling in as it happens. There is a rock solid case for paying for extra investment - investment in its widest sense including human capital - by borrowing, because future generations benefit from that investment. When real interest rates are as low as they currently are, you have to be ignorant, duplicitous or slightly mad to say otherwise.

Labour's new militant tendency

I thought I would write a bit more about the strategy of undermining your own political party’s leadership, and why I think it is daft even on its own terms

One of the characteristics of a few on the far left of politics is a total belief in the ends they strive for, and very little concern about the means used to achieve it. Anything that brings on the revolution is OK. We now seem to have some near the centre of the political spectrum behaving in exactly the same way. Their revolution is deposing Corbyn from the leadership of the Labour party, and undermining that leadership is their means. For the sake of clarity, let me call this group the anti-Corbynistas.

When someone loses a leadership election, they generally retire gracefully. Sometimes they are offered a senior role under the new leader (Clinton and Obama) and become an active supporter. On other occasions (David and Ed) they would prefer, for whatever reason, to withdraw from the scene. And normally their supporters do the same. The goal of getting the party re-elected overrides any thoughts about who might have been a better leader. Other parties and the media will do their best to exploit these past divisions, but nearly everyone in the party avoids this bait.

As far as the contestants for the 2015 Labour party leadership are concerned, they have played by these rules. One chose to be in the Shadow Cabinet, and the two that declined have not spent their free time writing critical articles in the media. The majority of Labour MPs have made a similar choice: work with the new leadership or stay quiet. But an important minority, accompanied by a large group of political commentators, have not. They are the anti-Corbynistas.

Their mantra is the impossibility of Labour led by Corbyn winning. [1] This has the same status as a belief in the inevitability of revolution: just as the latter is fed by every injustice, so the former is supported by every opinion poll. For that reason I do not want to try and contest the certainty of their belief - there is no point. Instead I want to question the logic of what then follows.

Their reasoning goes like this. Because Corbyn is a barrier to Labour winning, the prime goal must be to hasten his departure by any means. As these individuals have easy access to the media, their main means is to criticise, or even mock, the Labour leadership at every turn. By doing this they ensure that Corbyn’s defeat at the polls will be sooner or greater, and thereby they believe hasten his removal from power.

What I want to argue that this tactic is counterproductive. Just as the behaviour of the revolutionary makes most sensible people doubt the attraction of any revolution, so the constant sniping at the leadership extends rather than shortens its life.

The reason is straightforward. Corbyn was elected by the membership, and if anything support for him has grown since then. (This and subsequent statements are based on this poll.) On key issues like Trident this membership share Corbyn’s own views, although it is worth noting that most expect their MP to represent their constituents views rather than their own. [2] So the question you have to ask is what will persuade Labour members to vote for someone else.

The obvious answer is a gradual realisation that Corbyn cannot win a general election, together with the emergence of someone else who looks like a better bet. [3] The mistake the anti-Corbynistas make is to then think that their tactics of open criticism will hasten this process. [4]

In fact the tactic will have the opposite effect. If they kept quiet and Corbyn loses in elections badly, as they are sure he will, then Labour members will see quite clearly the need for change and look elsewhere. By constantly generating bad publicity for the party, they muddy these waters. Corbyn supporters will claim that the bad results are the result of anti-Corbynista activity, and it will not be obvious they are wrong. So if anything the tactic of the anti-Corbynistas will delay, rather than hasten, the day that the membership elects someone else. That is why people like Tony Blair should tell them to stop. 

If their strategy is so obviously misguided, why do the anti-Corbynistas persist? One reason may be human nature: they hate Corbyn, and find it difficult to bite their tongue. Another is that they are constantly cheered on or goaded by the right, although you might imagine that would worry some people. But there is an alternative and more rational reason. Their real goal may not be the overthrow of Corbyn, but the creation of a new party. That strategy within the UK system is also flawed, but that would have to be the subject of another post.

Why am I, a macroeconomist, writing about such a political issue? I get annoyed by their constant references to me as a Corbyn supporter because I consort with the enemy, but I can live with that. (The same would come from the right anyway.) What annoys me more is that they are playing a large role in depriving the UK of an effective opposition party. Every time the new leadership launches a justified criticism of the current government, there is a fair chance this will turn into a discussion of divisions within Labour.

This is in danger of influencing macro policy. Osborne’s fiscal charter - which involves going for surplus - is so isolated in terms of informed opinion and out of tune with current concerns that it deserves to be ridiculed at every turn, so that if nothing else it is not tried again. I think that could happen with concerted pressure, but that pressure needs to include a united opposition. This did not happen before the election because Labour seemed to want to avoid the subject. We then had McDonnell for a moment flirting with the idea of supporting the charter. Now that Labour appear to have decided on a more sensible strategy, it would be tragic if this opposition to Osborne was diluted by some within Labour seeming to support the charter and dishing their own side.

[1] Some argue that these people are really a fifth column that should not be in the Labour party at all. I think this is wrong. Their belief that Corbyn is a barrier to Labour winning seems perfectly genuine to me, and I think Labour needs to be a broad church.

[2] Another part of the anti-Corbynista’s mantra is that Corbyn’s goal is to take control of the party by deselecting MPs, and there are examples of individuals who do indeed want that, but this poll suggests it is not what most party members want.

[3] Sometimes anti-Corbynistas complain that Labour party members would prefer to lose than compromise with the electorate: that does not seem true, but it also rather obviously contradicts their own strategy.

[4] In comments to this blog I have had some anti-Corbynistas deny this disloyalty has any effect on the electorate: again this seems very dubious but also contradicts the strategy.

A letter to Tony Blair

Dear Mr. Blair

We have not met, but I have talked to your former colleague Gordon a few times and I did some academic work on his 5 tests for Euro entry. I saw a report that you were mystified by the popularity of Jeremy Corbyn and Bernie Sanders. I have an article today in The Independent that might help you understand your puzzle.

I know you find it strange that people that appear to you like those your predecessor Neil Kinnock did battle with over the future of the Labour Party in the 1980s are now running the party. It must also seem strange that in the US where socialism once seemed to be regarded as a perversion, large numbers should be supporting a socialist candidate. You suggest some explanations, but you do not mention the power of finance, inequality and the senselessness of austerity. You say that these new leaders will not be electable. But if the alternative is to try and elect leaders from the centre who will do nothing to confront these great issues, and will instead cut spending, accept stagnation and wait for the next financial crisis, is it any wonder that many people would rather take their chance with someone different?

Please do not take this the wrong way. I generally look favourably on the achievements of your government when you were Prime Minister (that war apart). I hope, by reading my piece, or articles others have written, you will understand that the situation today is not the same as the early 1980s. At that time the expansion of the financial sector had only just begun, and the income share of the 1% was only beginning to turn upwards. If you can see this, I would ask that you do one final thing for Labour party members and for those, like me, who try and challenge the damaging policies of the current government.

There are many Labour MPs and left leaning journalists who seem to share your puzzlement, and have decided that they have to fight again the battles of the 1980s by doing everything to undermine their new Labour leadership. For example your friend Peter has recently reaffirmed that Labour is a broad church, but it seems for him it is like a church where those once in charge cannot countenance others being in the priesthood. Rather than celebrating the enthusiasm and interest of the many young people that have recently joined (even if they regard some of their aspirations as naive), and who will be vital in future election campaigns, this overtly anti-Corbyn group seem to regard them as a threat.

You know the electorate above all else hates divided political parties. You might note that the strategy of this group, by creating division at every turn as a means of achieving what they see as their ultimate goal, is not so different from that of some of the left wing militants that you and your predecessors had to deal with. Please tell them to stop. I fear they need someone they respect like you to point out the foolishness of their actions.

Yours

Simon Wren-Lewis

Our money

The UK government is currently trying to stop researchers who receive government grants from using their results to lobby for changes to laws or regulations. Nothing surprising there: this government has shown no hesitation in trying to rig the system to make its own re-election more likely. (Wonder where they got this idea from? Is this kind of thing now regarded as normal in the UK and therefore permissible behaviour?)

What I thought was interesting was the reported motivation for introducing the new rules.

“According to the Cabinet Office, it is intended to broaden government action aimed at stopping NGOs from lobbying politicians and Whitehall departments using the government’s own funds.”

The government’s own funds. You can imagine an irate cabinet minister saying “we gave them our money to do research, and now they are using this research which we paid for to question our policies”. The problem with this logic is that it is not the minister’s money. It is public money disbursed to departments, which departments use to fund research. The research should then be public research, which should be available to all the public (including the researchers) to make any points they wish. The real scandal here is government commissioned research which is not published when it is completed.

This reminds me of a much more common misuse of language, which is to talk about public money as taxpayers money. I had a go at this here. This widespread misuse of language is no accident: the political right is way better at this kind of framing than the left. It legitimises a (natural) desire not to pay taxes, but also encourages a sense of entitlement, which leads to an us (income tax payers) and them (only indirect tax payers) mentality which is so socially destructive. It is this same sense of entitlement that leads government ministers to think they own the research that was funded with public money.  

Sanders versus Clinton: lessons from the UK

The Sanders campaign, and reactions to it, continue to remind me of our similar experience in the UK. As I have already suggested, the common root of the support for Corbyn and Sanders comes from the anachronism of how a crisis created by the financial sector became transformed into the need to reduce the role of the state. Once you see this, and note the reluctance of many on the centre left to recognise or talk about it, the popularity of neither candidate is surprising. There are big differences between the two politicians and countries of course, but enough similarities to make what happened during the Corbyn campaign of some interest to those in the US.

Both the Corbyn and Sanders campaigns seem more receptive to certain types of heterodox economics rather than mainstream economics. It pains me as much as the next mainstream economist to hear those on the left claim that our present situation is due to the adoption of conventional economic theory, particularly given how the economics of austerity is so unconventional, but we cannot be surprised that many have drawn that (incorrect) conclusion.

The particular example from the Corbyn campaign that I wrote about was the idea that Quantitative Easing should be used to finance a new National Investment Bank. It was a bad idea, because it implied that the independence of the Bank of England would end. But it was not a stupid notion. The idea of a National Investment Bank and the idea that central banks can do better with the money they create than invest it in government debt are both sensible: it was their combination in the current situation that was problematic.

The good news was that once this idea was subjected to reasoned critique, it was quietly dropped. The lesson for mainstream economists who dislike aspects of the Sanders economic programme is that they should argue the case, rather than pull rank or experience.

The Corbyn campaign also had its ‘surprising’ fiscal numbers. I am the last person to endorse heroic fiscal projections: I believe strongly that any political candidate should plan for the ordinary even if they hope for the extraordinary. Of course this should be pointed out, as they were during the Corbyn campaign, but again it is important to argue that case rather than assume it, or impugn the motives of those behind the numbers. I also doubt doing this will change many minds: Corbyn still won. The attraction of Corbyn and Sanders is not in the coherence of their policy plans, but in the appeal they make to basic values unencumbered by conventions about what can be changed and what cannot.

I think the primary reason those standing against Corbyn lost is that they seemed trapped in a conventional discourse which was designed to appease a Westminster bubble, and of course they had the misfortune to be associated with a strategy where that appeasement had failed. When Labour lost the 2010 election they seemed to take a deliberate decision not to talk up their past achievements or dispute falsehoods about their failures, and that hurt Corbyn’s opponents both individually and collectively. Clinton does not suffer these disadvantages. Her fate may depend on whether she is seen as part of the establishment (which critically includes the power of the banks), or is the right person to take on this establishment.

There is one final warning that Corbyn’s victory may have for US Democrats. Many members and supporters of the Labour Party convinced themselves so strongly that he would be a calamity if elected that they have continued the campaign long after the result was announced. Some of them have convinced themselves that Corbyn is such a disaster that it is best to sabotage Labour at every turn so that his electoral defeat is emphatic and certain. That is tragic for the UK, but it would be even more tragic if the same thing happened in the US, given what the consequences of division of the anti-Republican vote might be. The lesson for those supporting Clinton and Sanders is do not burn bridges.

The austerity winds have changed

OK, back to the usual business. When a recent note to Labour's shadow cabinet on fiscal policy was leaked, the biggest negative reaction appeared to come from critics within Labour’s ranks. As a result I posted this, directly attacking what I called the left’s apologists for austerity. [1]

In that post I said the “rational case for imposing yet more austerity on the UK has all but disappeared”. Let me expand on that here. First, let’s look at other countries. The following table is from the IMF’s WEO database [2] and shows the projected deficit (as a percentage of GDP) for each of the G7.

	2014	2015	2016	2017	2018	2019	2020
Canada	-1.640	-1.664	-1.340	-0.960	-0.733	-0.615	-0.285
France	-3.975	-3.776	-3.370	-2.818	-2.129	-1.398	-0.747
Germany	0.306	0.511	0.301	0.354	0.561	1.036	1.036
Italy	-3.035	-2.686	-2.012	-1.249	-0.808	-0.447	-0.204
Japan	-7.295	-5.934	-4.549	-4.050	-3.751	-3.831	-4.143
UK	-5.672	-4.249	-2.830	-1.649	-0.755	-0.021	0.125
US	-4.108	-3.836	-3.590	-3.288	-3.373	-3.889	-4.165

We can see that the amount of projected fiscal tightening (the change in the deficit) is far greater in the UK than elsewhere. Only one country currently in deficit is aiming for a surplus, and that is the UK. If the UK followed a more sensible rule of aiming for current balance (which could avoid the welfare and additional spending cuts Osborne specified after the election), the 2020 figure would be minus the level of public investment, which under Osborne’s plans would be -1.8%.

It is very hard to find any respected institution or economist that will back going for overall surplus and keeping public investment low. The Economist is even talking about helicopter money (and quite right too), which is effectively a fiscal stimulus. It is just a matter of time before political commentators in the UK pick this up.

I suspect those who fear the electoral consequences of an anti-austerity line have in part begun to believe in Osborne’s political invincibility. In truth Osborne was always gambling by taking an austerity stance. He was out of tune with international opinion in 2009. He got lucky when the Greek crisis broke, but is now in great danger of overplaying his hand.

The Conservative response to McDonnell’s proposed plans tell us a lot. The spin is that Labour is planning to borrow forever. That spin is indeed consistent with Osborne aiming for surplus, but it is also incredibly weak and can be knocked down by a feather. Every company knows it makes sense to borrow to invest when interest rates are virtually zero. [3] If Osborne applied the same rule to companies as he proposes for the government, innovation and growth would grind to a halt. The 79-97 Conservative government borrowed on average over 3% of GDP each year. I could go on and on.

The austerity winds are changing once again, and Osborne has become isolated. In truth, any shadow chancellor worth his salt would exploit this by arguing against his new round of austerity. My only fear is that Labour will step back from doing so because the issue of austerity has become caught up in Labour’s civil war. This would be truly ironic, as no Labour MP who challenges Corbyn in an election on the grounds that Corbyn is anti-austerity has any hope of succeeding. Let us hope sense prevails, and Labour can at least unite in opposing Osborne's unnecessary cuts.

[1] Following this post, Hopi Sen noted that I had argued elsewhere that - in hindsight - it might have been better if Labour before the financial crisis had kept government debt close to the 30% of GDP they achieved around the turn of the century (rather than following their fiscal rule number of 40%) and asked if that would have been so different from current (or past) cuts? It is a helpful question, because it illustrates that I do not have a problem with fiscal consolidations per se, but just with the consolidations in 2010/11 and planned over the next five years.

The answer is that the two situations are very different. For a start we have a difference in scale. Keeping debt to GDP at 30% would have required reducing the annual deficit by 1-2%. The planned cuts in the deficit out to 2020 are much larger (see main text). In addition

1. from 2000 to 2007 we were not recovering from a recession, and interest rates were nowhere near their lower bound. So the overall macro risk of a tighter fiscal policy to keep the debt ratio at 30% was zero.
   
   
2. There is currently a strong macro case for additional public investment: very low borrowing costs, poor productivity performance, low real wages etc. Paying for that investment through higher taxes hits a generation ‘enjoying’ these low wages, so fails on intergenerational equity grounds. As the chart in the main text makes clear, the more reasonable aim of achieving current balance would still result in a sizeable consolidation if it was not offset by a large increase in public investment.
   
   
3. Stabilising the debt to GDP ratio at a new lower level after a windfall of unexpectedly high tax receipts in the early 2000s made sense from a tax/expenditure smoothing perspective. Trying to reduce debt rapidly, as current plans would do, does not.

[2] The database was compiled in October 2015, but despite what you may have read in the press, the Autumn statement did not fundamentally change this picture (see chart here).

[3] The UK recently sold a large amount of debt at a fixed nominal interest rate of only 2.5% for 50 years, and the sale was oversubscribed. With a 2% inflation target, that is a real interest rate of 0.5% guaranteed for half a century!

In praise of footpaths

After a short break (see end of this post), more normal service will now be resumed. While I was away in the US I did manage to post four times. Two of these were prompted by the publication of articles by me. Another was about UK policy stuff I am directly involved in, of which much more to come. The fourth post was about the basic commonality between support for Sanders and Corbyn which I felt many were missing.

I thought I would resume by talking about one big difference between the States and Europe that occurred to me over the last month, which has nothing to do with macro, and that is footpaths. By a footpath I mean a public rights of way over countryside that is not a highway (no cars allowed). In the UK in particular, if you think it would be nice to walk in the countryside for an hour or so without having to share the way with cars and lorries, you can usually do so by finding a footpath and walking on that. It is something that you take for granted until it is no longer there.

In the US as far as I know (and I think much the same is true in Australia and New Zealand) such footpaths just do not exist. There are many areas of public land which have excellent trail networks, but it may take some time to drive to these. The reason for this difference I suppose reflects history. Most of the footpaths in England and Wales were rights of way established in Anglo-Saxon, Roman or pre-Roman times, and these rights of passage are protected by english common law. (The position in Scotland is different.) Many of these became highways, but many did not, and those that did not become highways remain rights of way.

As a result, those who own land in the UK (perhaps just a few acres) may have a right of way over their land, and therefore have to accept that the public has a right to walk over this part of their land. It may be their property, but that ownership right comes with an obligation to protect the right of way. This system allows the public extensive access to the countryside, even if that countryside is privately owned. Of course these public rights of way are no longer used for their original purpose but are there instead for hiking (or walking the dog), and are extensively used for such. As this incurs very little loss in utility for the landowner, and a significant gain in utility for the public that use the land, then this seems like an excellent combination of private and public rights.

Of course the owners of private land sometimes do not see it this way, and the current system has seen its fair share of struggle between public and private. That struggle continues over the right to roam other unused private land that does not contain rights of way.

Is the absence of footpaths in the US an inevitable consequence of its history? One other thing I noticed travelling around California was how often public land (state parks etc) was the result of a private donation to the state. So perhaps enlightened landowners in the US could themselves create public rights of way over their land? Of course state or federal law could be changed to obligate large land owners to do so, but somehow in today’s America I do not see that happening any time soon.

Austerity's apologists on the left

The rational case for imposing yet more austerity on the UK has all but disappeared.  Economists are almost united in saying that now is the time for substantial increases in public investment, with government borrowing costs almost negative in real terms and low real wages. Even city economists have given up trying to pretend that the market is on the point of giving up buying UK government debt: the serious market analysis talks about a continuing shortage of safe assets.

In the political world, and mediamacro, things are very different. The right pushes continued austerity for the obvious reason that it shrinks the state: some are honest about this and some are not. My concern in this post is with those on the left who insist that Labour must play the austerity tune. Their argument is straightforward: the public has become convinced that Labour was irresponsible with the public finances, so the way to win back trust is to match Osborne on austerity.

This is a strange argument. The idea that it was Labour profligacy that required austerity is false. That many people believe it is undeniable, but to argue that this requires Labour to also pretend it is true, and promise to be less profligate next time, is bizarre. Myths like this are not set in stone, and can be challenged. To fail to do so concedes defeat.

Large numbers of the public believe many myths that have been encouraged by the right. They believe that a large proportion of those on welfare are scroungers: should Labour therefore pretend this is true? The public believe that large numbers of immigrants are just here to claim benefits, whereas in reality immigration improves the public finances. Should Labour base it's policy on this misperception?

What the left should be doing is uniting behind a clear narrative that challenges these myths head on. The strategy of trying to change the subject was tried in 2015 and failed. The strategy of pretending to believe the myths both fails to convince the public who believe them (Labour politicians tend not to be good actors), and alienates those who know they are untrue.

One thing Labour can learn from it opponents is consistency and simplicity of narrative. The alternative narrative should be that now is the time to invest in the future, and the public sector must take the lead in this. The failure of the Conservatives to invest over the last 10 years, in everything from housing to flood defences, needs to be reiterated at every opportunity, together with the statistics that reveal this failure. A fiscal rule that ensures that in the medium term the government only borrows to invest, with the key proviso that if monetary policy runs out of effective ammunition fiscal policy will support the economy, not only makes economic sense but also matches this narrative.

The days that UK macroeconomic policy was run by second rate accountants need to come to an end.  

How the Eurozone can be reformed

The 50th anniversary issue of Intereconomics is out, and I have a contribution which summarises how I think the Eurozone could succeed without deeply problematic attempts at fiscal and political union. I look at three areas where change is required, and then rerun history to show how the Eurozone crisis could have been transformed into no more than a Greek public debt crisis.

Of the three areas of reform, I have written about the necessity of national countercyclical policy many times. Perhaps the only novelty in the paper is that I make it clear that this could be conceived and run locally or directed centrally: I prefer the former, and I discuss some advantages of subsidiarity, but the issues are separable.  On reform of the ECB I think it's fair to say my discussion is weak: I just think this issue has to be discussed more.

The final area of reform involves OMT and a genuine no bailout rule, the combination of which in 2010 would have prevented the government funding crisis spreading beyond Greece. (This might have creating a banking crisis in some core countries, but problems with banks are best confronted directly.) It is revealing just how many people still think 2010 was all about trying to help those countries with profligate governments. If this is your view, I strongly suggest reading this paper by Orphanides, who slowly unpicks the ‘official’ version of the crisis with the IMF’s help.  

A good paper to write is why the Eurozone has been such a failure at trying to play the role of the IMF (and to some extent corrupted the IMF at the same time). Judging by the number of useful roads built in Spain, Ireland and elsewhere, the EU has had some success at playing the World Bank role, although I’m sure there are also mistakes. However I do not think a political scientist would find the failure to play the IMF’s role any great puzzle. It has taken the IMF many years and errors to learn to at least try to refrain from simply bailing out western creditors. Judging from the failure to even admit the mistakes of 2010, I doubt that the Eurozone would even try. It would be much better if the Eurozone just abandoned trying to play this role, and left the IMF (with reduced European influence) alone to do its job of helping Eurozone governments that get into difficulties.