Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 15 June 2016

Defending George Osborne on Brexit once again

When a good part of the electorate are in cloud cuckoo land, you may have to leave planet earth to talk to them.

Economists are pretty certain - as certain as they ever are - that Brexit will reduce medium to long term growth relative to staying in the EU. A large section of the UK public either do not know that, or do not believe them. They have been told, in some cases by people that should know better, that these assessments by economists are ‘just another forecast’. They are told that economists cannot forecast one year ahead, so how can they possibly know what will happen in 10 years time. [1]

Against this they have the certainty that you cannot control EU migration from within the EU. They feel intuitively that austerity was the right thing to do, and the government confirms this, so the pressure they see on public services must be due to immigration. The papers they read say this day in and day out, and never mention that migration helps the public finances. And then there is the money - however much it is - that we would certainly save by not paying into the EU budget.

As a Chancellor you know this is fantasy. You know the OBR will take account of consensus opinion after Brexit and revise down their projection of UK trend growth over the next decade or two. You know that will inevitably mean lower tax receipts, so you will have to raise taxes or cut spending at some point. But you also know that if you try and add realism, by saying this might not have to happen immediately (and should not happen immediately if Brexit causes a short term recession), you just muddle the message. So to bring home to people this is not just ‘another forecast’, you talk about an emergency budget immediately after Brexit.

Is that scaremongering? Well it is not in the same league as pretending we will soon be ‘flooded’ with Turkish migrants because they are about to join the EU.

When Jeremy Corbyn was asked how he rated his enthusiasm for staying in the EU out of 10, he said 7 to 7.5. It was an honest answer. But the general consensus was that it was not a good answer in terms of the politics of the moment. He needed to send a ‘clear message’ that we needed to stay in the EU, and so should have avoided answering the question. All this makes me glad I’m not a politician. But as far as George Osborne is concerned, I think he just sent a ‘clear message’.

[1] Just in case it needs spelling out, assessments of the long term impact of Brexit are counterfactuals, or conditional forecasts. Of the ‘if the supply of apples falls, their price will go up’ kind. They are much less uncertain than the unconditional forecasts about what will happen to inflation and growth in a year or two.  

18 comments:

  1. You are wrong to associate the problems immigration causes with that due to austerity. Austerity exacerbates the problems, but it did not necessarily cause them. When Mrs Duffy asked why there were so many workers coming in from Eastern Europe when there was high unemployment she asked that question of Brown; that was before austerity. Immigration became a big concern in the mid 2000s; that was when the economy was booming along, before the financial crisis. An era of unimaginable hubris when people had a lot of faith in the ingenious models used by economists and financial engineers, especially in the derivatives sector of the financial markets - but which few people really understood but which most gave the benefit of the doubt. If you criticised light touch regulation you were deemed almost eccentric and reactionary.

    If austerity is lifted, the problem remains. In some ways actually if you inflate the economy - you could strain and exacerbate distortions in the public sector even more (and politically explosive immigration). It is going to have to be handled very carefully.

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  2. "so the pressure they see on public services must be due to immigration."

    Pressures on the public services - such as in schools that arose when immigration rose sharply started before austerity.

    " it is not in the same league as pretending we will soon be ‘flooded’ with Turkish migrants because they are about to join the EU."

    Most likely true, but nobody is going to listen to that after what was said when Poland joined.

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    1. To let people from Poland work in the UK was a decision of the British government, not the EU. Most other EU countries opted to delay this to reduce the shock on the labour market.

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    2. The point is that Turkey is decades away from entry. Frankly, the EU may fragment before then.

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    3. Victor you are absolutely right. And it was a decision made on the basis of a forecast using an econometric model. No wonder there is so much distrust towards the experts. If we get Brexit and if I was Dustman or anyone else involved in that forecast or decision I would lie low.

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    4. The pressures on the public services increased markedly when local government were deemed to be 'facilitators' for central government policy.

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    5. The more interesting thing is the comparative overreaction to Polish migration in Britain vs other EU countries. Ireland is now 2.7% Polish (vs. ~1% in Britain), and where is Irish UKIP? I am not sure whether or not the anti-EU immigration feeling is separable from the broader anti-immigration feeling - for instance, I see many complaining about EU migrants creating 'ethnic enclaves', which does not seem to be true (Ealing is the most Polish area in the country, I believe, at 7%), so I wonder whether or not anti-free movement is a more PC way of being anti-immigration in general (given the genuine concern over the creation of ethnic enclaves of non-EU migrants, such as Tower Hamlets being 1/3rd Bangladeshi).

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    6. Anon 8.11. It is isn't a worry of ethnic enclaves. That is clear by the point you make - Tower Hamlets is an ethnic enclave but it does not worry people.

      What worries people I think is pressure on public services, wage competition and basically overpopulation. Britain is seen as already overcrowded country by many people. Note it was the population forecast which saw the polls swing more heavily towards Brexit.

      Mind you I do not think Brexit has a chance. To win these referendums they need a clear majority that does not subtract undecideds. That is why the bookies odds are still clearly favouring remain. Undecideds in referendums and elections overwhelmingly eventually go with the status quo.

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    7. Anon,

      I'm talking about people who have explicitly told me that they are worried about Polish and Romanians living in ethnic enclaves or ghettos and not assimilating. Given the fact that these don't seem to really exist, I can only imagine that they are thinking of the ethnic enclaves of non-EU migrants.

      And I think people are somewhat worried about areas becoming majority-migrant, I remember when there was the controversy about election fraud in Tower Hamlets people noted that it was partly due to the Bangladeshi community being insulated from the rest of society. I saw articles about them when the government put forward proposals to make migrants learn English too.

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    8. "What worries people I think is pressure on public services, wage competition and basically overpopulation"

      I feel you are somewhat too generous. These people do not worry about the same things when it comes to white British babies.

      "And it was a decision made on the basis of a forecast using an econometric model. No wonder there is so much distrust towards the experts."

      Was it the opinion held by academic economists or just a number from a report by a government agency or a think tank paid by the elites? Was it maybe good for the economy or at least for the elites, just not for the working man?

      Did you know other EU countries made another decision? If something is important to you, you have to do your due diligence. Murdock will not give your the information you need if it conflicts with his interests and those of his billionaire buddies. Organize and find alternative media sources.

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  3. Short term shocks need not be a problem, however, if you consider this alternative response. Inspired by some MMT reading, consider that the government never issue debt and finance any deficit with new money. In time of growth taxes would need to raise for fear of inflation but when a short term negative demand side shock hits there is no need to cut your spending as inflation is not a fear. Consider it permanent helicopters with taxation focusing solely on inflation.

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  4. Once outside the EU and Article 123 we can run unlimited overdraft at the Ways and Means Account rather than the silly unlimited intraday overdrafts we have now.

    "You know that will inevitably mean lower tax receipts, so you will have to raise taxes or cut spending at some point."

    It is not true at all. Firstly government spending *always* works by creating money as the supplementary memorandum submitted by HM Treasury shows and so taxes and borrowing do not fund spending.

    There is no reason to raise tax rates or cut spending at all. It is a lie and likely counterproductive as people will get scared and save more. In fact if growth and output are lower you would want to raise spending and cut taxes.

    Government spending causes about 90% tax and creates 10% private savings as the money goes through the economy. So straight away if nobody saved any money the government spent it would get all its money back as tax. At the same time some people are spending savings or creating money via bank loans. These also generate tax revenue and all spending similarly will end up as tax if there is no saving in the spending chain as 'bits' of the money are siphoned off to the Treasury via various taxes (a large proportion being VAT.)

    What the Chancellor is saying is he will cut spending and raise taxes if we vote Brexit for no good reason. It is similar to him saying "vote Brexit and I will eat this kitten." I don't think he has the balls to actually go through with it, although I could be wrong.

    "Well it is not in the same league as pretending we will soon be ‘flooded’ with Turkish migrants because they are about to join the EU."

    Or they explain the practicalities. When you veto an EU decision, the question gets asked again. That's how the EU constitution became the Lisbon Treaty. Can you see Mr Corbyn using the veto - given his internationalist open borders credentials?

    So there is no practical veto over any time. Hence we have Bulgaria in the EU even though it has corruption on an unimaginable scale.

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  5. "Tory revolt grows as 65 MPs oppose Osborne's post-Brexit budget"

    http://www.theguardian.com/politics/live/2016/jun/15/eu-referendum-live-osborne-punishment-budget-farage-flotilla-thames

    Yay no additional stupid austerity if the UK votes Leave.

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  6. Surely the chancellor is losing credibility when he becomes too political. This isn't a game. There is a danger now that his doom-mongering and threats will bring about a self-fulfilling prophecy. Evans-Pritchard sums it up nicely:

    http://www.telegraph.co.uk/business/2016/06/15/osbornes-punishment-budget-is-economic-vandalism/

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  7. You're not defending George Osborne, you're defending the indefensible.

    http://www.telegraph.co.uk/business/2016/06/15/osbornes-punishment-budget-is-economic-vandalism/

    Glorious piece of writing from AEP.

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  8. But the message he ends up giving, that he will introduce fiscal tightening immediately, adding to the probable simultaneous deflationary impact of Brexit, is that he is happy to risk precipitatating a recession through pro-cyclical policy. Did you see Ed Vaizey trying to defend this on Daily Politics ?

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  9. Part of the electorate sees Brexit as a means of closing UK to immigration.
    Part of the electorate sees Brexit as a means of opening-up the UK to greater freedoms with the rest of the world.
    Part of the electorate wants things to stay the same.
    An interesting situation.
    If the number of people who want change (for opposite reasons) is greater than the number that want to stay the same, then we will get change. What that change will be is yet to be decided.

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  10. So, including the excellent interview with Daniel Kahneman by AEP, the story is this:

    The past, 2009-2015, or so:

    1) People vote for austerity - clearly an error.
    2) No one ever admits error, people seek scapegoats.
    3) Pressure on public services? It must be immigrants, it can't be austerity!

    Immigration is a strong motivator in the referendum.

    The present, Cameron falls on his sword:

    1) People vote for brexit - clearly an error.
    2) No one ever admits error, people seek scapegoats.
    3) Economic decline as a result of brexit: did I not tell you: immigrants!

    The future, Boris falls on his sword.

    More extreme, openly racist people come to power. How to stop this positive feed back loop?

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