Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 30 May 2017

Growth will be lower if the Conservatives win

The Conservatives want Brexit to be the central issue in this election. Partly as a result, the relative macroeconomic outlook under the different parties has not been discussed as much as it should, or as much as it was in 2015. The other reason it has not been discussed very much is that the economic record of the last seven years has been dire, but prospects under either Labour or the LibDems would be distinctly better. [1]

The last seven years have seen an extraordinary decline in real wages. To quote Rui Costa and Stephen Machin:
“Since the global financial crisis of 2007/08, workers’ real wages and family living standards in the UK have suffered to an extent unprecedented in modern history. Real wages of the typical (median) worker have fallen by almost 5% since 2008, while real family incomes for families of working age have just about recovered to pre-crisis levels.”

This stagnation in real wages is greater than any other advanced economy bar Greece. [2] In addition, as Laura Gardiner from the Resolution Foundation points out, current government policies imply the “biggest increase in inequality since Thatcher”. The less you earn, the more this government plans to take income away from you.

The Conservative response is to point to record levels of employment, and to keep saying ‘strong economy’. But these two apparently diverse developments, high employment and falling real wages, may be related in a very simple way: workers may have been forced to price themselves into jobs by keeping real wages low, or workers who might otherwise have retired are continuing to work to earn enough for their old age. When high employment is a symptom of no growth in living standards, it is nothing to cheer about. They both reflect a weak rather than a strong economy.

The different party manifestos have been discussed at length, but one aspect that has been almost totally ignored by the media has been their different macroeconomic implications. A lot of the responsibility for this lies with the IFS. As I wrote in a recent tweet, the “problem with IFS analysis of manifestos is not just the absence of macro dimension, but their failure to acknowledge it even exists.” **

Both the Labour and LibDem manifestos amount to an increase in public investment, and an increase in public spending financed by higher taxes, compared to current government plans. Standard macroeconomics implies that both higher investment and spending will lead to an increase in GDP, unless the Bank of England raises interest rates to exactly offset this effect. With interest rates currently stuck at their lower bound, and with public investment helping aggregate supply, that last possibility is extremely unlikely. The conclusion therefore has to be that GDP over the next few years would be higher under a Labour or LibDem government than under the Conservatives.

This is why, according to Larry Elliott, Oxford Economics estimate that “the economy would be 1.9% bigger under the Lib Dem plans and 1% bigger under Labour’s plans than under Conservative plans.” The argument that this cannot be done because it would involve some more borrowing is rightly dismissed as pre-Keynesian nonsense. It is for this reason that the IFS approach of ignoring macro is so helpful for the Conservatives. I understand that the IFS does not do macro, but its failure to even mention this gap in their analysis not only encourages mediamacro, but in the current situation represents a clear bias towards the Conservatives.

This is not the only reason why living standards would be significantly higher under a Labour/Lib Dem government. Just as the IFS ignores macro, I fear Theresa May ignores economics. In this post I noted her obstinate refusal to take foreign students out of their net migration target (causing considerable damage to one of our leading export industries), but more generally her obsession with reducing immigration is likely to do further damage not just to the public finances, but output and living standards too. It is increasingly clear that while the the coalition government (and in particular George Osborne) had no intention of meeting their immigration target, May regards it as an unfulfilled commitment despite the economic damage this would do. This marks a big difference between the Conservatives and Labour.

Finally, in comparing the economic outlook under a Conservative or alternative government, we should not ignore Brexit. After my previous post outlining why May is in many ways unsuited to the forthcoming EU negotiations, some comments were along the lines that surely Corbyn would be worse. I think not, for two reasons. You have to put out of your mind the government’s and media’s framing of these negotiations as some kind of poker game or battle of wills. They are much more like a cooperative exercise involving give and take. I see clear reasons for thinking that May/Davis will be worse at this than Corbyn/Starmer. Last but not least, I think there is no chance of a No Deal outcome under Labour, but a significant chance that the Conservatives would walk away. As Ben Chu points out, what is best for the UK economy might well be rather different from what Theresa May sees as best for Theresa May.

If the last 10 days of the campaign seem to ignore the outlook for the economy, there will be a very simple reason why. As a result of the manifestos, attitudes to immigration and Brexit, the UK economy will be better off and subject to less risk if Theresa May is no longer the Prime Minister after 8th June.

[1] Implicit in these two sentences is that the Conservatives tend to dictate the issues discussed by the media during an election, as was clearly the case in 2015.

[2] See also this New York Times piece from Simon Tilford, which presents a rounded picture of our performance relative to other European countries, rather than the carefully chosen snippets beloved by the government's spin machine.

** In the original version of this post I said that the IFS analysis assumes GDP would be fixed. This is incorrect: what I had missed is that they do allow a short term impact from additional public investment on GDP (see slide headed 'Impact on the Economy' here). However this slide illustrates exactly the concern I have.
(1) It makes no sense to allow a short term impact from public investment, but no short term impact from a balanced budget increase in public spending.
(2) The slide says that the long term positive impact of this public investment on GDP will be exactly offset by the macro impact of a higher minimum wage and additional public holidays. Is this a result of detailed macro analysis, or just a convenient assumption?
(3) The slide also says that the Conservative commitment to reduce immigration would weaken growth and public finances, but despite this they assume no impact of lower immigration on growth. This makes no sense whatsoever, unless we are working backwards from the fixed long run GDP assumption. 


  1. Does the IFS really completely ignore the macro dimension? Haven't had time to go through their election briefings in detail yet (don't judge me, I don't have a vote!), but this tweet: seems to imply in the footnote that they do take into account effects on aggregate output of different paths for government spending.

  2. I seem to remember your chief anti-Corbyn point being that coming towards the GE pundits would always be asking "if your own party MPs have no confidence in you, why should the country?". I just want to point out that it actually hasn't come up yet in any major way, and that so far, Labour's 100%-Corbyn-led manifesto and his honest approach to campaigning are what upgraded Labour's chances from "infinitesimal" to "small but non-negligible". So armed with this hindsight and your own non-negligible analytical power, I wonder if you still think Labour's (and hence the UK economy's) chances would have been better under Owen Smith [1,2]?



    1. The Tory campaign is appallingly incompetent, but I think they're probably going to play that card at some point.

      100% Corbyn-led manifesto? He's in the ludicrous position of explaining that he doesn't agree with chunks of it. Nia Griffiths, for one, has had to waste her time because Corbyn's too vain to back the Labour position properly.

      I'm afraid that with the defeat of Smith went the chance of fighting Brexit in a meaningful way.

    2. Simon, I agree with the Macro point, of course, but equally Labour isn't really putting its investment plan where it should be, at front and centre. They've chosen to emphasize daft stuff like scrapping tuition fees, free school meals, pensioner benefits and renationalizing "rail". And they've also been incompetent at selling them. If you're dealing with what you call mediamacro, you do what Sturgeon did in 2015. You talk in terms of percentages, and don't scare the electorate with huge numbers.

      Obviously, Labour's better than the Tories on spending plans, but I can see the business tax rises post Brexit bringing in not all that much at all, and us being borrowing for lots of this current spending. We don't neeed to be too dogmatic about that, but it's unnecessary.

    3. I heartily disagree that throwing support behind Corbyn now requires any kind of cognitive dissonance.

      My anecdata tells me that a majority of labour members agree (and always have) with much of the policy and position Corbyn takes.

      The principle complaint is and was that he lacks efficacy in opposition leadership. If he can't swing a decent left hook then he might not be the right person to put into the boxing ring.

      Does this analysis mean that I can't hold my nose during what is now signed and sealed as a GE with him at the helm? Of course not. Do I even think he is particularly inadequate as a potential PM? Not particularly. Am I even vaguely troubled by the choice between him and May? No!

      Ok, re. Smith- you have a point. He was a poor alternative, and the 'anyone but Corbyn' vibe looks to have been a bit silly.

    4. It's true pundits on broadcast media haven't done so, but Conservatives do spam that talking point everywhere.

    5. I have seen Conservatives make this point, but nevertheless you ask a good question. I will try to address them after we know the result.

  3. In general I agree with your sentiments here.

    However, the quote of the article in the NYT is rather apposite in my view because it attempts to put our overall economic performance in some sort of perspective; in fact in my view it is rather optimistic in its tone. The secular trends of demographics; cost of energy; robotics; globalization and, last but by no means least, climate change, are curiously absent in the debate. I am not so much concerned with the relative merits of May versus Corbyn; what I am concerned about is a political system which ignores major issues like the ones above.

  4. Together, the BBC and the IFS really are a neoliberal shambles.

    1. Hi from Australia. So sad to see Al Jazeera having to fill in the gap in quality journalism that the Beeb used to supply.

      The conservatives in Australia (the Liberals - yes it's crazy) want to do the same to our ABC.

      Even just for the sake of independent media and journalism, let's all hope that the UK conservatives lose.

  5. Simon, interested novice question please: could it be that the wage stagnation we are currently experiencing will have the same effect as Germany's internal devaluation you've previously written about, and would therefore result in a more competitive economy in the longer term?

    1. Novice response: No, because the UK has not managed to force its trading partners in a currency union that prevents them from currency devaluations. We are also about to lose tarif-free access to said trading partners so it's even worse than that.

  6. Professor, I don't understand why real wages don't include house price inflation. Surely as a measure of how well off the average worker is this information is essential. It seems to create a false picture to state that someone is 5% poorer than in 2007 if their rent rose 10%. I feel I must be missing something.

  7. Of course, everything was wonderful before 2008 and the ensuing stagnation (some might say 'correction') has nothing to do with what happened in the previous 15 years.
    BTW, do you discuss the theories (some might say 'insights') of the 'Black Swan' author with your students, or do you enforce a Taleb-ban?

  8. Simon, could you reply on Nils point?

  9. 2 things about Labour's campaign and manifesto to date have confused me.
    1) no discussion that I have heard (other than you here) of the neo-Keynesian multiplier effects of increased public spending. As Keynes himself said, digging holes and burying money in them would have a positive effect. So it sounds as if Labour are just doing the usual tax and spend on public services.
    2) no discussion of a wealth tax. I met John McDonnell at a May Day rally and asked him about this and he just smiled and said wait for the manifesto, but there was no reference there that I could see. They may not wish to frighten the horses, but it seems to me a vital move (cf Picketty), to tackle the real sources of inequality and tax avoidance.

  10. Simon, do you think NIESR are best-placed to do independent macro scenarios for others (inc IFS) to use? Or is there someone else (Oxford? Independent OBR?).


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