Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 29 April 2016

The hypocrisy of British politics

The Labour party has a problem with antisemitism almost by definition. This is because many Labour party members are highly critical of the current democratically elected government of Israel, and Israel often identifies itself as a Jewish state. So difficult questions naturally arise, like are attacks on the existence of the state of Israel also antisemitic? But these problems can, and should, be addressed and dealt with. (For what it is worth, I personally would answer yes to my previous question.)

Does that mean that anyone who has made antisemitic remarks in the past must be excluded from the Labour party, even if they apologise and fully retract those remarks today? Here I would agree with John Rentoul that the answer has to be no. In particular, because this kind of antisemitism can be frequently found in Muslim communities, it is important to encourage those from these communities who now acknowledge their past mistakes the chance to atone for them by pointing out similar mistakes to others, rather than branding them for life.

Now for the hypocrisy. A week ago, our Prime Minister accused the Labour candidate for mayor of London, Sadiq Khan, with knowingly sharing a platform 9 times with Suliman Gani, a former imam in Tooting (Khan’s constituency) who the Prime Minister said was a supporter of IS. Now if Mr. Gani was a known supporter of IS, this would have been a serious charge against Khan. The only problem is that he is not.

It is not just that Mr. Gani denies being a supporter of IS, and those that know him or have met him think the accusation is obviously false. It is not just that he is a member of many interfaith groups. It is not just that the Prime Minister has produced no evidence that he is an IS supporter.  It is also that he has had many meetings with Conservative MPs including the Conservative candidate for London mayor. He has visited No.10 Downing Street and the Houses of Parliament.

Try to imagine how you would feel if the Prime Minister had announced in Parliament that you were an IS supporter. If you are thinking to yourself that would never happen, because you are not a Muslim imam, then I think you should now realise why what the Prime Minister did is so serious and damaging. It is also why any claim by the Prime Minister that his remarks had nothing to do with either Khan’s or Gani’s religion would be at best naive, and more likely a straight lie.

The Conservative candidate for mayor of London, Zac Goldsmith, has run a dog whistle campaign, where he has tried to associate Sadiq Khan with Muslim extremism. He is reported to has described Gani as “one of the most repellent figures in this country”. Does it worry him that Gani has been associated with a number of prominent Conservatives, including himself?! Probably not, because Goldsmith is not a Muslim, so any guilt by association charge would be ridiculous. His opponent and Labour candidate Sadiq Khan is a Muslim. That is the key difference.

Khan is a Muslim, but is clearly not an extremist in any shape or form. The Conservative attacks are based not on Khan’s political views or actions but his religion. How else can Goldsmith justify painting Khan as an extremist for sharing platforms with Gani, when Goldsmith and his colleagues have asked Gani to help recruit other Muslims to the Conservative party. 

If nothing is done about this, similar tactics could (and presumably would in any future election [1]) be applied to any Muslim standing in an election. It also means that if you are a Muslim who happens to know a Muslim candidate, then you may be called an IS supporter by the Prime Minister in the Houses of Parliament (where libel laws do not apply). Basically the Prime Minister and his party are playing to Islamophobia, and treating individuals with the same disregard as tabloid newspapers in order to do so.

It may be fair to criticise the Labour leadership for not being tough enough on antisemitism within Labour, although it is also perfectly fair to allow people time to get the facts and quite unreasonable to have trial by media. But no one could accuse the current Labour leadership of completely ignoring the problem. In contrast, the Prime Minister has made no apology to Mr. Gani over his accusation in parliament, and the Conservative candidate for London mayor continues to use his opponents religion as a weapon against him.

[1] The man who is currently the favourite to be our next Prime Minister is quite happy to link the views of the President of the United States on Brexit to his Kenyan ancestry. The defence minister Michael Fallon has even gone so far to suggest Khan is a security risk.

Thursday 28 April 2016

Politicians and statistics

We should all know never to take a statistic quoted by a politician on trust. But there is a huge difference between the ways in which politicians can (mis)use statistics.

Take, for example, when Labour before the 2015 election kept saying people were £1,600 worse off than they were 5 years earlier. As Tim Harford notes, there are a lot of issues in making any general claim based on earnings data. But as Geoff Tily points out, the £1,600 is hardly a wild exaggeration or gross distortion. It pointed to a key fact, which was an unprecedented decline in real earnings which no one seriously disputes. It would have been incredible if Labour had not kept talking about this.

Tim writes that it represents “a political use of statistics conducted with little interest in understanding or describing reality.” Of course it does not describe the complexity of reality, the differences between the median wage and the experience of the median worker, etc etc. Those complexities need to be set out and Tim does so brilliantly. But politicians in speeches will never do that, and it would be unrealistic to expect them to do so. There is also no evidence presented which justifies the claim that this statistic was used with little interest in understanding or describing reality.

Take another example from a recent post of mine. George Osborne had derived the cost of Brexit by taking the GDP loss and dividing it by the number of UK households. Fraser Nelson, and subsequently Anthony Reuben at the BBC, objected that this was dishonesty (Nelson) or confusion (Reuben) because only about two thirds of GDP was household income. Typical you might think for this Chancellor to misuse statistics to exaggerate. Yet as I explained in the post, what the Chancellor had done was standard practice by economists, because less government spending or investment are also in an important sense costs to households. In that case too, a politician was using a summary statistic in a reasonable way.

You might say that it is best for politicians to avoid quoting numbers, but numbers are often crucial. Take the claim, often made by opponents of immigration, that it reduces wages of low earning workers. There are studies that find that, but as this neat chart from the CER shows the magnitude is small relative to other influences on earnings. (See Jonathan Portes for more discussion on this.)

Magnitudes are often crucial. It is true, for example, that fiscal policy before the financial crisis was a little on the lax side. But the magnitudes involved could have been corrected by any new Chancellor in one budget with hardly anyone noticing. They are a world away from the magnitudes required to claim Labour were profligate before the crisis, and that austerity was required to clear up the mess that Labour had created. Given the importance (to the result) of that claim before the 2015 general election, it is odd indeed to focus instead on Labour’s claims about real earnings losses.  

The other examples Tim discusses in his article - Trump’s crime statistics and Jeremy Hunt’s figures for excess weekend deaths - are indeed totally or highly dubious, for reasons Tim makes very clear. Or an example that is close to my heart: the Prime Minister claiming that they had not cut spending on flood defences, which could be made to be true but hardly describes reality. These are all examples where the politician wants to mislead people. It is this misuse of statistics that we should focus on.

Tuesday 26 April 2016

Junior doctors: asking the right question

A government source (anonymous of course) has told the BBC that junior doctors, in their long running dispute, are really trying to topple the government. It appears some in this government really think that this dispute is their version of the 1984 miners’ strike. A compromise to trial the new contract, which would have almost certainly led to the strike being called off, was rejected by Jeremy Hunt as ‘political opportunism’.

It is natural when this kind of standoff happens to choose sides. The government is trying to introduce a 7 day week culture into the NHS: are they trying to do this ‘on the cheap’ by suppressing pay (and safeguards against excessive hours), or are the doctors being unreasonable and putting lives at risk?

I think that is the wrong question. A much better question is to ask how this dispute came about in the first place. The mine workers had a long history of strike action, but this strike by doctors is unprecedented. Unlike coal miners, doctors are not in a declining industry, and they are not led by the likes of Arthur Scargill. Instead they are a key part of a sector where demand continues to rise, and technology (for the moment at least) tends to add rather than reduce costs.

In this context, this government and its predecessor have tried to do something pretty radical, which is to reduce the share of NHS spending in GDP (for a chart from the Kings Fund, see here, and for details of the NHS squeeze see here). It is part of their attempts to reduce public spending, initially under the pretext of deficit reduction but in reality to allow tax cuts. In their typically Orwellian way, they call this ‘protecting the NHS’. Their hope is that this squeeze on resources will reveal and end inefficiencies which until now vested interests, lethargy and bad management have maintained.

An alternative way of achieving the same goal is to embark on a top down reorganisation that you believe will make the system more efficient.

The 2010 coalition government tried to do both at the same time. You do not need to be an expert on the health service to guess that trying both at once would be a disaster. Any kind of successful wholesale reorganisation of a large organisation costs resources in the short term, even if it brings benefits in the longer term. Predictably, according to the experts, this reorganisation was “distracting and damaging”.

Did the new (2015) government learn the lesson? Silly question. Introducing a 7 day week culture into the NHS may well be a good idea in principle, although the evidence is not nearly as clear as Hunt suggests (which is why trials are a good idea). Using dodgy statistics to suggest to the public that going into hospital at weekends rather than a weekday was dangerous was an extremely irresponsible thing to do. To the extent that there is a problem it is unclear whether doctors are critical to it. But even if the reform itself is justified, it is another reorganisation that requires resources in the short term.

Aneurin Bevan, who set up the NHS, said that to persuade reluctant doctors to accept the idea he had “stuffed their mouths with gold”. Reorganising doctors’ contracts was bound to create winners and losers, and in a profession with considerable solidarity that would not be agreed to without extra money to compensate the losers. To try and do it while starving the system of resources was just crazy, and allows doctors to tell themselves that they are striking to save the NHS rather than to protect their pay.

The only similarity with the miners strike is that the doctors also cannot force the government’s hand. The more they escalate the dispute, the more their solidarity and public support will fragment. Jeremy Hunt has already got away with putting party interest above public probity once in a previous job, with Cameron’s active assistance, and he may profit this time as well. If he does demoralised UK doctors will leave in increasing numbers for more congenial working conditions overseas, and gaps will be filled by doctors trained overseas (if the home secretary lets them in).

The question to ask is not which side is right, or whether the strike is justified. The critical question is how did we get to this situation, and what that tells you about this government’s competence. The NHS works on relatively meagre resources because of the goodwill of those that work within it. Do we really think that facing down UK doctors is the way to get a better NHS? If the government does not compromise, the only losers in this dispute will be you and me.

Postscript (29/4/16) This by Ben Dean in the Telegraph makes similar points, and even questions whether the new contracts are better than the old in achieving a true 7 day week goal. 

Friday 22 April 2016

Some thoughts on Paul Mason’s McDonnell road show talk

John McDonnell has got quite a collection of talent to give talks on economics around the country, and the latest is Paul Mason. His talk is wide ranging and certainly not academic in tone, as befits the occasion, and I agree with the broad thrust of it, although not all the details. Here are a few thoughts.

The impending second crisis.

There seems to be a general presumption in certain circles that we are heading for another crash. (Perhaps I could call it ‘the end of capitalism is nigh syndrome’.) This is always a possibility (of course), but I do not think it is a probability. In the UK, do not be fooled by the referendum blip (or pause). I think it is quite likely that Prime Minister Osborne will by 2020 be presiding over strong growth, as everything that was put on hold before the referendum comes on stream. I also think we may see rapid Eurozone growth before then.

On a related theme, there is also a widely held view that after the referendum the Conservative party will fall apart - it is the Corn Laws all over again. I would put that probability much smaller than the chance we might vote to Leave, or that Boris gets to be our next PM.

Fiscal rule

I’m glad he likes Labour's new fiscal rule. He writes: “There’s a school of thought among Labour supporters, and some academics, that the deficit is irrelevant, that “taxing the rich” solves all your problems. It does not.”

‘I did not know you could do that’

His reference to the Macdonald government coming off the gold standard is certainly apposite. Too often the centre left gets trapped by what it sees as unbreakable economic or political convention, only to see the other side break it (think minimum wage).

Monetary policy

What is said in this central section sounds radical, but I think it is meant to be read in the context of the impending next recession that I talked about earlier. What I think he is worried about is that, in that context, any fiscal action would need monetary support, and with the current regime it might not get it. In other words the economy tanks, the next Labour government wants to stimulate but inflation stays close to 2%, and the Bank of England does not cut rates to allow the fiscal rule's knock out to apply. For this reason he supports the proposal, which has a number of notable advocates, that the inflation target be raised to 4%.

I would agree this could be an issue: what economists called the ‘divine coincidence’ (that inflation would always provide the appropriate signals) just does not seem to work very well any more. Whether raising the inflation target to 4% is the best way of dealing with the problem, as opposed to for example an intermediate NGDP target, I’m less sure about but I’m open to persuasion. I agree with Paul that this is a problem involving the central bank's mandate, rather than its independence.

He also supports Corbyn’s original Peoples QE proposal. He cites me as opposing it, but in fact I did not oppose the idea as an alternative to the QE that the Bank would want to do otherwise. What I thought was wrong with Corbyn’s QE was that it appeared either to negate central bank independence, or make a National Investment Bank conditional on the Bank wanting to do QE. In the past I have talked (here, or via Tim Harford here) about how governments and the central bank could cooperate to do money financed fiscal stimulus. In other words Corbyn's QE is fine as an alternative to conventional QE in the context of recession fighting, but not as a general way to finance an investment bank.

I suspect he is also just a little bit worried that the bond vigilantes might finally arrive. I think there is no way that will happen, but we have some history of a central bank governor who worried that it might and gave the wrong advice as a result. If that happened again, we would want monetary policy makers to offer monetary finance of any fiscal stimulus (in exchange for a government commitment to always recapitalise the central bank on request), rather than urge fiscal constraint. Perhaps one way to do that would be to make the central bank’s ability to do unconventional monetary policy conditional on that money finance offer being made.    

Thursday 21 April 2016

Explaining the last ten years

The Great Recession was larger than any previous post WWII recession. But that is not what it will be mainly remembered for. Unlike previous recessions, it appears to have led to, or coincided with, a permanent reduction in the productive potential [1] of the economy relative to previous trends. As unemployment today in the US and UK is not very different from pre-recession levels, then another way of saying the same thing is that growth in labour productivity and real wages over the last seven years has been much lower than pre-recession trends. (As employment has not yet recovered in Europe, I will focus on the US and UK here.)

I have posted charts showing this for the UK many times, so here is something similar for the US. It plots the log of real GDP (green) against the CBO’s (Congressional Budget Office) estimate of potential output (yellow). Unlike the UK, potential growth in the US does not appear constant from 1955, but the CBO has potential output growth between 3 to 3.5% in most years between 1970 and the early 2000s. The break created by the Great Recession is clear: potential growth fell to as low as 1% immediately after the recession, is currently running at 1.5%, and the CBO hopes it will recover to 2% by 2020.

US Actual (green) and Potential (yellow, source CBO) Output, logged. Source: FRED.

There seem to be two ways of thinking about this decline in potential output growth. One is that the slowdown in productivity growth was happening anyway, and has nothing to do with the global financial crisis and recession. This seems unlikely to be the major story. For the UK we have to rewrite the immediate pre-recession years as boom periods (a large positive output gap), even though most indicators suggests they were not. A global synchronised slowdown in productivity growth seems improbable, as some countries are at the technological frontier and others are catching up. As Ball notes, “in the countries hit hardest by the recession, the growth rate of potential output is much lower today than it was before 2008.” However the coincidence story is the one that both the OECD and IMF assume when they calculate output gaps or cyclically adjusted budget deficits. The CBO numbers for the US shown above adopt the coincidence theory to some extent, reducing potential growth from 3.5% in 2002 to 2.0% by the end of 2007.

If we stick to the more plausible idea that this is all somehow the result of the financial crisis and recession, we can again split explanations into two types: those that focus on the financial crisis and argue that crises of this type (rather than other types of recession) impact on potential output, and those that look at the impact of the recession itself. The distinction is important in understanding the impact of austerity. If the length and depth of the recession has permanently hit potential output, as Fatas and Summers suggest, then the cost of austerity is much greater than we could have imagined.

Looking at previous financial crises in individual countries, as Nick Oulton has done for example, does suggest a permanent hit to potential, but I have noted before that this result leans heavily on experience in Latin American countries, and Sweden’s recovery from its 1990 crisis suggests a more optimistic story. Estimates based on OECD countries alone suggest more modest impacts on potential output, of around only 2%.

What about the impact of the recession itself? Here it is helpful to go through the textbook story of how a large negative demand shock should impact the global economy. Lower demand lowers output and employment. Workers cut wages, and firms follow with price cuts. The fall in inflation leads the central bank to cut real interest rates, which restores demand, employment and output to its pre-recession trend.

We know why this time was different: monetary policy hit the zero lower bound (ZLB) and fiscal policy in 2010 went in the wrong direction. Yet employment has recovered to a considerable extent (although less so in the US than the UK). A recovery in employment but not output (relative to pre-recession trends) means by definition a decline in labour productivity growth. How could this happen?

The table below shows the rate of growth of real and nominal wages in the UK and US in pre and post recession periods.

Annual wage growth (1)
Annual price growth (2)

Annual wage growth
Annual price growth
  1. Compensation per employee, source OECD Economic Outlook
  2. GDP deflator, source OECD Economic Outlook

Nominal wage growth followed the textbook story. But price inflation did not fall to match, implying steadily falling real wages, particularly in the UK. This could just reflect the decline in productivity, which occurred either coincidentally or as a result of the financial crisis and recession.

The financial crisis could have reduced productivity growth if a ‘broken’ financial sector had stopped financing high productivity investment projects, or kept inefficient firms going through ‘pretend and extend’ lending. The recession could have reduced productivity growth by reducing investment, and therefore embodied [2] technical progress. Perhaps this loss of embodied technical progress occurs in all recessions, but we do not notice it because recoveries are quick and complete.

However the causality could be the other way around. Falling real wages led firms to switch production techniques such that they employed more labour per unit of capital. Workers priced themselves into jobs. The big question then becomes why did firms let this happen? Why did firms not take advantage of lower wage increases to reduce their own prices, and choose instead to raise their profit margins?

One story involves a secular increase in firms’ profit margins (Paul Krugman’s robber barons idea), either because of a reduction in goods market competition (profit margins are sometimes called the degree of monopoly), or a rise in rent seeking as Bob Solow suggests (HT DeLong). [3] However it is not obvious why this should be connected to the recession. If it is not, it is like the coincident and exogenous productivity decline. We will not get back to the earlier productivity growth path without reversing whatever caused this secular rise in profit margins.

Another, in some ways more optimistic, story involves different degrees of nominal rigidity: nominal wages are less sticky than nominal prices. As a result nominal wages led prices in reacting to the recession, but now prices are ‘catching up’ and profit margins will fall back. That would fit nicely with inflation continuing below target for some time, and real wages and productivity recovering. It is an optimistic story, because an additional demand stimulus would increase wage but not price inflation, and we would see rapid growth in labour productivity as firms reversed their earlier labour for capital substitution.

Unfortunately recent data suggests this is not happening. Instead core inflation is now above target in the US and rising to target in the UK.    

So is there some other way that a large recession in itself can cause a large reduction in potential output? Macroeconomists group such explanations under a general heading called ‘hysteresis mechanisms’: mechanisms whereby recent history can have permanent effects. Ball summarises the three main types of mechanism that economists have identified: “it appears that recessions sharply reduce capital accumulation, have long-term effects on employment (largely through lower labour force participation), and may slow the growth of total factor productivity.” If technical progress is embodied, we can link the first and last. That will be the subject of a later post.  

[1] For those not familiar with the term, a traditional way of thinking about potential output is that it is what output and incomes could have been if we had avoided booms and recessions, or equivalently if we had avoided domestically induced variations in inflation. Potential output can increase either because the labour force increases, or because labour productivity increases due to either technical progress and investment.

[2] Embodied technical progress is greater labour productivity brought about through new machinery i.e. it needs investment for it to happen.

[3] Postscript (just): Here is Martin Sandbu on the same issue