A Labour run on Sterling?

The news that John McDonnell was looking at a scenario where the election of a Labour government was met with a run on Sterling was all over the news yesterday. The Conservatives, who of course know all about runs on Sterling having created one just a year ago with the Brexit vote, immediately grasped the political gift they had been given.

Paranoia on the left meets prejudice on the right. But what would really happen to Sterling if Labour were to win the next election? Given announced policies, the answer is quite clear: Sterling would appreciate. The main reason is that under Labour there would be a large fiscal expansion: for certain in term of public investment and to a lesser extent with current spending. (I assume by then interest rates will be above their ZLB: if they are not, the fiscal expansion could be even larger.) There would also be a balanced budget fiscal expansion: even if government spending increases are financed by tax increases, this is likely to be expansionary to some extent because some of the tax will come out of savings.

This fiscal expansion, together perhaps with other labour market measures, would put upward pressure on inflation, prompting higher interest rates from the Monetary Policy Committee of the Bank of England. It is the prospect of those higher interest rates that would make Sterling appreciate. How much inflation rather than output would rise depends on how pessimistic you are about the supply side. If the MPC were doing their job properly, that increase in interest rates plus the appreciation would stop inflation rising very much. We will finally get the rebalancing between monetary and fiscal policy that we should have had for the last decade.

If we are also in a transition period for Brexit, with the final destination unclear, then Labour being elected would also lead to an appreciation because Labour are softer on Brexit than the Conservatives.

So where does the run on Sterling idea come from? The idea that all those traders in currency will get together and engineer one because they do not like a Labour government is nonsense. They may not like a Labour government, but they dislike losing money even more. Capital flight? You might see the share price of power or rail companies fall, but that is not going to be enough to move a currency like sterling. Any depreciation in sterling would be the equivalent of pound notes waiting to be picked up in the City and Wall Street: with higher expected interest rates and a likely future appreciation, who wouldn’t buy sterling?

The only way I can see that you could get a run on Sterling is if enough traders in the markets came to believe that Labour was going to abolish BoE independence because it wanted to keep interest rates low. In that case you could get significantly higher inflation under Labour, which would justify a nominal Sterling depreciation.

Which, of course, is why McDonnell committed to keeping Bank of England independence as one of the first things he did. And which is also why he was very foolish to say what he said, because it might lead some to speculate that he might renege on that commitment. Something tells me he is missing his Economic Advisory Council.

Uber and the anti-regulations bandwagon

The news that Tfl, the regulatory body for transport in London, had banned Uber because of regulatory failures brought out the usual suspects to support or condemn the move. In addition, the company organised an online petition to reverse the decision, which half a million people have signed. Tyler Cowen declared: “The new Britain appears to be a nationalistic, job-protecting, quasi-mercantilist entity, as evidenced by the desire to preserve the work and pay of London’s traditional cabbies”, and plenty of others took a similar line.

What always strikes me on these occasions is how people can jump to conclusions without any evidence. Now it is certainly true that licensing authorities can be captured by, and therefore favour, incumbents and therefore stifle innovation. They can artificially restrict numbers to drive up prices, although Tfl do not do this. But the fact that this happens sometimes does not mean it is happening every time. Equally companies like Uber can believe that they are so big and popular that they can ignore regulations, regulations which are designed to make the market work. [1]

It is important to note on this occasion that Uber have not complained about the regulations. Instead they initially said they had complied with them. Surely the time to write articles condemning Tfl’s decision is after Tfl lose the appeal brought by Uber in the courts.

However there is public evidence in this case. We do know the that as recently as August, a Metropolitan Police Inspector wrote to TfL about his concern that the company was failing to properly investigate allegations against its drivers. Between May 2015 and May 2016 the police investigated 32 drivers for rape or sexual assault of a passenger. It appears there has been at least one case where the police allege UBER allowed a driver that had been accused of sexual assault to stay on their books, leading to another ‘more serious’ attack on a woman in his car. Here is part of the inspector’s letter:

“My concern is twofold, firstly it seems they are deciding what to report (less serious matters / less damaging to reputation over serious offences) and secondly by not reporting to police promptly they are allowing situations to develop that clearly affect the safety and security of the public.”

Uber’s boss yesterday apologised for the mistakes they had made. Whether these mistakes are serious enough to warrant revoking Uber’s license the appeals process will decide, or most likely Uber will be allowed a new license on condition that they start taking regulations seriously.

What worries me in this case is the lack of any self-awareness of those who piled in to condemn the regulator without any evidence. Ten years ago the world experienced a devastating financial crisis that was due, at least in part, to a failure of regulations and regulators to do their job that was in turn due to political pressure from those who took a similar attitude to regulations as those championing Uber. And just three months ago around 80 people lost their lives in London from a fire that almost certainly was the result of a failure to comply with regulations.

Regulation bashing has since the financial crisis become one more example of neoliberal overreach. When the two political parties that brought us neoliberalism have today brought us Brexit and a President who seems to want to start a nuclear war, it is time for neoliberals to be thinking about reform rather than just playing the same old tune. Thinking about all that and the 500,000 who signed the pro-Uber petition brought to mind a song of a well known nobel laureate called Talking WWIII Blues, the last verse of which is

Well, now time passed and now it seems

Everybody’s having them dreams

Everybody sees themselves

Walking around with no one else

Half of the people can be part right all of the time

Some of the people can be all right part of the time

But all of the people can’t be all right all of the time

I think Abraham Lincoln said that

“I’ll let you be in my dreams if I can be in yours”

I said that

[1] There is also the question of why Uber rides are cheap, and whether it is making losses simply to drive out the competition, but that is a different issue. 

The real obstacle for the Brexit negotiations

I’m not going to say anything about the content of yesterday’s speech: I talked about the likelihood of a transition arrangement that involved us staying in the Customs Union and Single Market back in March. My only uncertainty then was whether May could be pushed to a No Deal outcome, but as the government has done absolutely nothing to prepare for that outcome it now seems an empty threat. As for a two year transition period, its an insider joke. You have to have no idea about trade negotiations to imagine it could be done in that time, but as that includes most Brexiteers it serves its purpose.

Instead I want to talk about is what could be the real obstacle to the negotiations moving on to the next stage, and that is the Irish border issue. Many have noted that putting it as a first stage issue seems illogical, because what happens to the Irish border will depend on future trade arrangements between the UK and the EU. There obvious answer to why the Irish border question got put in the first stage is that the EU want to force the UK into staying in the EU’s Customs Union precisely to avoid recreating a border between the two parts of Ireland.*

The UK’s paper on this question makes it clear that there is no realistic compromise on this issue, as Ian Dunt’s discussion makes clear. There is a third way, which is for Northern Ireland to remain part of the Customs Union while the rest of the UK is not, but the DUP will have none of that. This was a major implication of the election result and May’s bribes to obtain a confidence and supply arrangement with the DUP.

A key political question will therefore be whether the Irish government and the EU will play this card that they have dealt themselves. The Irish government would like to, but I suspect (from past experience) that if they came under pressure from the rest of the EU they would back down. But the EU would also like the UK to remain in the Customs Union to resolve the border issue. Indeed everyone would be better off if the UK committed to staying in the Customs Union on a permanent basis. The only obstacle to this are the fantasies of Brexiteers, personified in the department led by Liam Fox.

I said I was not going to talk about it, but perhaps this was one reason why May gave her speech yesterday. By confirming that there could be a transitional deal (which Richard Baldwin might call a pay, obey but no say period), she hopes to dampen the resolve of the Irish government and the EU to make this a sticking point in the negotiations. Will either party think to itself 2 years will become 5, by which time we will have a different government that is likely to make the transitional permanent, or will they use their dominant position in the negotiations to try and force the UK to stay in the Customs Union to avoid creating a border (and perhaps also force the resignation of Fox and others)? At the moment we do not know, but I suspect once again Mrs. May and her cabinet have misjudged the EU side.

*I've added to this sentence and elsewhere compared to the first version of this post, which might have been construed as implying the border was being used as an instrument to achieving an economic goal. I do not think that is the case.     

Productivity and monetary policy

The Bank are warning of imminent rises in interest rates. As Chris Giles points out, we have been here before, and before that, but that shouldn’t mean we should dismiss this talk, because one day it will happen. [1] They (the MPC) certainly sound serious. But why when current growth is so slow are they even contemplating it? Here is a clue from Mark Carney’s latest speech (my italics).

“On the supply side, the process of leaving the EU is beginning to be felt. Brexit-related uncertainties are causing some companies to delay decisions about building capacity and entering new markets. Prolonged low investment will restrain growth in the capital stock and increases in productivity. Indeed, if the MPC’s current forecast comes to pass, the level of investment in 2020 is expected to be 20% below the level which the MPC had projected just before the referendum. Net migration has also fallen by 25% since the Referendum.

As a result of these factors and the general weakness in UK productivity growth since the global financial crisis, the supply capacity of the UK economy is likely to expand at only modest rates in coming years.”

When people, like me, say how can the Bank be thinking of raising rates when demand is so weak, the response from the Bank would be that supply has been at least as weak.

This pessimism about the supply side comes straight from the data. If I hear people talking about the UK being a ‘strong economy’, I know they either have not seen this chart or are just lying.

UK Output per hour, whole economy (ONS)

The red line is a trend that pretty well matches the trend in the data until the end of 2007, with the amount you can produce with an hours worth of labour increasing by 2.2% a year. Since the global financial crisis (GFC) there has been almost no growth at all. If you want to know the main reason real wages have stopped increasing, this is it. [2]

I hear some people say this is just oil and financial services. It is not, as this table from a recent Andy Haldane speech shows.

Start at the bottom: total average growth has been non-existent since the crisis. The rest of the table looks at the contribution of each sector to that total. To see what productivity growth would be excluding financial services, just add that figure to the total: 1.8% 1998-2008, 0.4% 2009-2016. That table makes it clear that the productivity crisis is economy wide.

It is worth looking at aggregate productivity since the GFC period in more detail (same data). I often hear people say the productivity slowdown started before the GFC. From the chart below, it clearly did not. (We have just seen the tenth anniversary of Northern Rock going bust, and the UK productivity slowdown started shortly after that event.)

We could describe this data as five phases. 1) Productivity in the recession fell, as it often does in a recession for various reasons. 2) As the economy begins to grow again, so did productivity growth. 3) As it becomes clear, in 2011, that the ‘recovery’ is going to be very weak because of austerity, productivity growth stops growing. 4) By the end of 2013, with stronger growth under way (although still no catch up to previous trends, so not a true recovery) productivity starts growing again, although rather slowly. 5) Since the 2015 election, with the prospect and then the reality of Brexit, even that modest growth disappears. (My data does not include 2017Q2, which saw a very slight fall.) I could shorten the description as follows: recession, modest optimism, pessimism, even more modest optimism, uncertainty.

That is my gloss on the numbers, but I’ve done it to make a point. Productivity growth invariably requires an investment of some kind. It may not be physical investment, but just training someone up to be able to use some new software. Whether a firm incurs that cost will depend, in part, on their expectations about the future. There is a regrettable tendency in macro (I blame RBC theory) to treat productivity growth as manna from heaven. But the idea that potential improvements in technology stopped after the GFC, and just in the UK, is simply ridiculous. The problem is that firms are not investing in new technology. What I call the ‘innovations gap’ has emerged in the UK because of weak growth and the consequent pessimistic expectations of most firms. [3]

The idea that the economy could get itself in a low growth expectations trap is increasingly being put forward by economists: here is George Evans, for example. The UK has got itself into that trap because on the two occasions that a recovery of sorts appeared to be under way, the economy has been hit with terrible policy errors (austerity and Brexit). But the idea that UK firms are incapable of upgrading their production techniques is nonsense. They will do so initially if they can be confident that the demand for their products will increase, or subsequently when the innovation pays for itself even though demand is flat.

Which is why an increase in interest rates right now would be very bad news. It would confirm the pessimistic expectations of most firms that demand is not going to grow fast enough to make innovation worthwhile. Formally, the job of the MPC is not to worry about productivity but to control inflation. But elsewhere, where the same process may be happening to a lesser extent (the productivity slowdown is worldwide, just most acute in the UK), central banks are puzzled at why inflation just refuses to rise. 

The concept of an innovations gap is one solution to that puzzle. Expanding demand allows firms to invest in more productive techniques, and so there is less incentive to choke of demand by raising prices. I suspect in an alternative world where Brexit had not happened the Bank of England would also be puzzling over why prices were not rising. As a result, if the MPC do finally raise interest rates this year, it would be one more mistake to add to the growing list under the heading Brexit.

[1] On each occasion I also wrote a post saying that they should not raise rates, starting I think at the beginning of 2014.

[2] I discussed in earlier posts why real wages are falling by even more than output per head.

[3] Or perhaps the pessimism of the bank manager lending money to those firms. The Haldane speech shows that productivity growth has remained strong among the top, frontier companies. Why? Because these companies, given their position, will be seeing growth relative to the average, and have got to the frontier through a culture of innovation.

Undergraduate economics teaching moves into 21st century

The CORE economics curriculum, designed to provide an introduction to economics that reflects economics as it is today rather than as it was decades ago, has won justified praise from John Cassidy. I also think it is brilliant, not just for first year undergraduates but also for interested non-economists. To wet your appetite, read this short account by two of the leading lights behind the project.

Rather than spend the rest of this post singing its praises, I want to ask why first year undergraduate textbooks represent a clear example of market failure. The failure I have in mind is the inability to teach economics as it currently is, rather than as it was decades ago. If you look at the standard first year, Econ 101 textbook, it does contain more modern stuff, but normally in later chapters after presenting the basic models/frameworks which have not changed for 30 years or more. As a result, textbooks tend to be both dull, seemingly irrelevant and much too large. (This is a blanket generalisation and I’m sure there some exceptions.)

Here is my theory, which I will try and explain in plain english rather than with economics jargon. Although the ultimate consumers of textbooks are students, they are chosen by teachers who set the course textbook. So why are Econ 101 teachers not demanding textbooks that are less dull and more up to date?

Suppose someone had written something like the Core material, and a publisher (as publishers do) had sent it out to people currently teaching Econ 101 for comments. The reaction they will have got from a good proportion of Econ 101 teachers would have been ‘that is interesting, but can we include at the start some of the stuff I have taught for the last five years’. They, naturally, do not want to completely rewrite their courses, and I fear in a few cases learn material that is new to them.

The publisher reports back to the author: ‘we cannot publish this as it stands, but if you start with the traditional material then maybe’. It is a market failure because publishers are looking at the current set of Econ 101 teachers, and not those who will one day teach it and would love to have something more up to date. Another force for conservatism is that the big names who dominate the market find it much easier to add new stuff on at the end as extra chapters than rewrite their textbook from scratch.

I could add more, but I have been rude to enough of my colleagues already. Let we add two other specific points about CORE. The first is that it is clearly mainstream: this is not the pluralist text that many heterodox economists would like. That I fear is inevitable: economics is mainly a vocational subject, not a liberal arts subject. (Thats upset a few more.) But I was surprised to see MMT people describe this textbook as not for them. I have, after all, argued that MMT is just standard macro without what I have called the Consensus Assignment. [1] So I had a look.

In the section on government finances (14.8) we get

“When there is a budget deficit, this means the government must borrow to cover the gap between its revenue and its expenditure. The government borrows by selling bonds.”

This is not correct, and nor does it follow modern macro. [2] There we write the government budget constraint to include a term in the change in the stock of high powered money. (If money does not appear, it is because the paper explicitly chooses to work in a moneyless world for simplicity.) In short, the government can finance the gap between revenue and expenditure by creating money. Ignoring money in this section is obviously an oversight, as the discussion in section 10 clearly shows. But it is an oversight that should be corrected. [3]

That apart, I was already a fan of the macro approach adopted in CORE, because it is a simplified version of the Carlin and Soskice textbook. I like the consistent claims approach as a way of talking about inflation. It emphasises the elementary point that you need both wage and price inflation to get sustained increases in inflation, something monetary policy makers seem to keep forgetting right now.

I like, as some may remember, abandoning the LM curve and explicitly talking about central bank policy. I also like the way that banks are now incorporated as part of the monetary transmission mechanism. If there was a clear manifestation of how outdated (at best, we could also say just plain misleading) most textbooks are, it is their continued use of LM curves and the money multiplier.

I really hope that CORE continues to be successful. It is time we stopped boring and confusing first year undergraduates, and started inspiring them with an understanding of the economic ideas that allow them to address the countless real world economic issues that they will have to face.

[1] The Consensus Assignment gives monetary policy the goal of macroeconomic stabilisation and fiscal policy the goal of stabilising government debt.

[2] We can go back to the work inspired by Carl Christ together with Blinder and Solow. I should add that CORE is not alone among textbooks in failing to properly set out the government’s budget constraint.

[3] Now we all know (and as MMT also clearly states) that there are limits to money financing: too much of it is inflationary. But this should not be internalised by teachers to the extent that money financing is ignored. In particular it gives the impression that to finance a deficit a government has to find someone to lend them money, an incorrect belief that can have very misleading consequences if the government controls its own currency. It is more complicated with independent central banks, but again they are not an excuse to ignore money financing.  

Problems with triangulating over immigration

I have talked before about why triangulation over austerity did not work for Labour, but why triangulation over Brexit seems to be more successful. Tony Blair’s latest intervention suggests it is worth asking the same question about immigration. (The report that he launched is well worth reading.) It is a question that lies at the heart of many Labour MPs views on the politics of Brexit.

One of the lessons from austerity is that it is very dangerous to triangulate on an issue where you appear, as a result, to admit fault or blame. If the deficit is a problem (in 2011, say), why did you let it get so large on your watch? This was why ‘too far, too fast’ failed: you acknowledge a problem, and therefore implicitly admit guilt. Getting over the idea that there is a delicate balancing act between reducing the deficit and protecting the recovery is difficult, particularly as it is also an incorrect idea.

It is an obvious point, but exactly the same was true for immigration. Just look at the headlines. The parallels with immigration and the deficit are clear. In office, Labour did the right thing in ignoring the deficit in 2009, and they also did the right thing in allowing substantial EU immigration before then. In both cases the instincts of many voters is to do the opposite: the government should tighten its belt in a recession just like the rest of us, and the country should be able to control and limit who comes in. In both cases, the moment a government that in the past appeared to ignore these voter instincts starts to appear to suggest the instincts are valid, they trash their own record.

You could argue that while this is clearly right for Miliband and 2015, it has less salience for Corbyn rather than Blair today. You could go further and say that what works for Brexit will work with immigration. Just as triangulation gets you the votes of those who sort of want Brexit but worry about the economic consequences, so too could triangulation over immigration get you the votes of those who want to control immigration but are worried about the economic consequences of May’s obsession with hitting targets.

Here I think we need to look at a second problem with triangulation, which is that the nature of the political debate is influenced by it (is endogenous to it). With Brexit it means that neither of the two main political parties is making the case against Brexit, so the (non-partisan) mainstream political debate tends to ignore the anti-Brexit case. One of the unfortunate consequences of the way the BBC and others interpret impartiality is to see it in terms of the two main political parties, rather than (in this case) the population as a whole, so the views of half the population get largely ignored.

You could argue that this may be of secondary importance for an issue like Brexit, because the anti-Brexit case is still fresh in the mind from the referendum campaign. But that is much less true of immigration. Immigration is now well and truly defined in the media as a ‘problem’, and it is very rare to hear a politician (or anyone else) sing its praises. (Jonathan Portes does his best, but when a well known BBC commentator says his views will not win many votes, you get a clear idea of what is going on. [1]) May is quite safe from the media when she says immigration reduces wages and access to public services. The implication of all this together with a large partisan print media is politicians fear talking about the benefits of immigration because that may ruin a carefully triangulated position.

The reality is of course very different. Study after study after study (from academics, not partisan think tanks) shows how much we benefit from EU migration, and how it has virtually no impact on wages. Immigration increases the resources available to provide public services by more than it uses those services. Yet this knowledge is not reflected in the media discourse. The reason is straightforward: the political right wants to use immigration as both an excuse (for the impact of austerity) and a weapon (to achieve Brexit, for example), and the left by and large keeps quiet because it is triangulating.

People in the media may object by quoting polls that suggest the public overwhelming wants to control immigration: they are just reflecting that opinion. (But see footnote [1].) But polls also say people want less taxes. If you dig deeper public attitudes are far more nuanced than the public debate suggests. Here is some data, from an international study, by IPSOS-MORI:

“British people have become more positive about the impact of immigration over recent years. Forty-five per cent say immigration has been good the economy, up from 38% a year ago and from 27% in 2011, and 38% say immigration has made it harder for native Britons to get a job, down from 48% a year ago and 62% in 2011. However, Britain is one of the countries most worried about the pressure placed on public services by immigration, with 59% concerned – although this too is down from 68% a year ago and from 76% in 2011, when Britain was the most worried of all the countries surveyed.”

In other words, as I have emphasised before, the thing that most worries people in the UK about immigration is a myth. Yet triangulation, together with the way the media creates what I call ‘politicised truths’, means that voters are unlikely to find out what the facts are. [2]

The way this ambivalence is often articulated is through the issue of skill. 75% of people want skilled migration to stay the same or increase, while the consensus is that we should have less low or semi-skilled migrants. Yet if you name some categories of semi-skilled migrants, it turns out a majority want the same or more care worker, waiters, construction workers [3] and fruit pickers. As Rick says “apart from the care workers, construction workers, waiters and fruit pickers, what have low skilled* EU migrants ever done for us?” Skill has just become a way of people reconciling their wish for lower immigration in abstract with a recognition that immigration is good for the economy. It is like wanting lower taxes achieved through improving the efficiency of public services.

So how can something that people are ambivalent about become a major political issue that helped push us out of the EU? One answer is the sheer weight of numbers, and for some particular regions not previously experiencing inward migration that seems to be true. (It also reflects the inertia in public service provision.) But the rise of anti-immigration sentiment elsewhere in Europe where recent flows are not exceptional suggests other forces are at work. In part it is far-right parties exploiting fears about terrorism. But much more importantly in the UK, it reflects the deliberate exploitation of immigration as an issue by the Conservative party.

This predates the increase in immigration from Eastern Europe. In 2001 William Hague talked about Tony Blair wanting to turn the UK into a ‘foreign land’. The political temptation on the right to play the immigration card is strong, but until Brexit it has always been duplicitous. The wiser heads in the Cameron/Osborne government never wanted to hit their own targets because of the economic damage it would cause, and as a result they did not even bother to use all the controls that were available with free movement. As Chris Dillow says, immigration was the only scapegoat left to deflect concern about austerity and stagnant productivity. Immigration scapegoating became part of what I have called neoliberal overreach. [4]

This is I think the main reason why triangulation over immigration is not an effective strategy. By trying to appeal to those who are moderately concerned about immigration, Labour falls into a right wing trap, which is to implicitly validate their scapegoating. You can only convincingly argue that scarce public services are due to austerity rather than immigration if you can argue at the same time that immigration brings more resources to the public sector than it uses. You can only argue that economic policy is responsible for stagnant wages if you also say that it is not the fault of immigrants. Labour should go with its members and argue for the benefits of immigration, and in particular free movement with the EU. [5]

[1] This simple exchange illustrated so clearly to me why the BBC’s so called mission to inform and explain is often no more than a joke. Rather than regard popular beliefs that are incorrect as something the BBC has a duty to try and reverse, they are instead used to dismiss expertise.

[2] This is not just a UK phenomenon: around the world politicians use immigrants as scapegoats.

[3] I’m often told that economic studies of the benefits of immigration ignore ‘existing capital like housing’. Yet we need migrants to help build more houses for natives as well as migrants. The only thing that migrants cannot bring to the UK is more land, but with an effective regional policy which we desperately need anyway we have plenty of land.

[4] Some have asked why I called it overreach, when most just talk about the collapse of neoliberalism? For a start, using immigration as a political weapon is not a natural consequence of neoliberalism, and instead comes more from the social conservative part of right wing parties. Also while I think neoliberalism encouraged austerity, I can quite imagine those with neoliberal views forsaking it.

[5] There is an argument that free movement should be opposed because it is unfair to non-EU migrants. Yet you could make the same point about any trade agreement between two countries: it is unfair on all other countries. Arguments about equity that make some people worse off and no one better off give equity a bad name.

Economists show how Fox news changes votes

As I have noted before, economists are getting into media studies (we are natural imperialists) and beginning to provide empirical evidence on an age old, and critical, debate. Are some media outlets biased simply because their viewers or readers are partisan, or do these media outlets play a causal role in changing political views? And do readers/viewers discount the bias in media outlets, or does this influence how they vote?

We now have clear evidence on this in the case of US News Channels, and the answer is that Fox News changes votes in a big way: by magnitudes easily enough to swing elections. Those who argue that partisan right wing media does not matter very much now need to bring some counter-evidence to the table if they want to sustain that position.

The latest piece of evidence has just been published in the American Economic Review. Why is the study in a top-rank economics journal? One thing empirical economists are used to doing is looking for good ‘instrumental variables’, which in this particular case, means finding something that influences whether people watch Fox News that has nothing to do with their politics. If you then look at what these ‘accidental’ viewers do, that gives you a handle on the causal role of watching Fox News.

Dylan Matthews at Vox has an excellent explainer piece on the research, so I will not repeat the details here. Let me instead just list four key points.

1. Fox News is the dominant (by primetime viewers) US news channel. A sizeable minority of Fox News viewers are not Republicans.
   
   
2. The study’s data does not go beyond 2008, but in that year they estimate that if Fox News had not existed, the Republican vote share would have been over 6% points lower.
   
   
3. In contrast the more left wing MSNBC was far less effective at gaining votes for Democrats.
   
   
4. Fox News is not just setting its ideology to maximise viewers - it is much more Conservative than that. Instead it choice of ideology maximises its persuasive power.

The ‘headline figure’ of over 6% points in point (2) is an overestimate because other networks do shift their ideology to gain viewers. So if Fox News disappeared, other networks might have shifted right to capture ex-Fox viewers. But the key point is that Fox is acting in a way to maximise the propaganda power of its extremely right wing message, and it is successful in changing a significant number of voters minds. The apologist line that the media is ‘just reflecting the views of our readers/viewers’ does not hold for Fox News. In short, it is a propaganda organisation, not a ‘for profit’ news organisation. During one sample period, an analysis of the content of Fox suggested that over half the facts it reported were untrue.

One of the nice things about the study is that its results are reasonably consistent with earlier work based on the initial roll out of Fox News in 1996 to 2000 (which I referenced here). That earlier analysis used a different method to identify the causal impact of Fox on voters choices, so it is good that two different methods come to similar conclusions.

To some this will be no surprise (except perhaps that the research is in an economics journal). To paraphrase Obama, if he watched Fox News even he wouldn’t vote for himself. It fits my own account of how US politics has shifted so far to the right, and has become so partisan. To UK readers the obvious question is whether we can just substitute Mail/Sun/Express for Fox. In my view you can, and Brexit goes a long way to proving that. But explicitly or implicitly, the consensus view appears otherwise. Whether from left, right or centre, analysis of voter behaviour typically ignores or marginalises the role of the press. This and earlier studies suggest that is no longer good science.

Fox and their UK equivalents in the press have an importance way beyond academic studies of popular opinion. The story of Fox News and Trump are inextricably linked, as is Brexit and the right wing press. When you can serve large sections of the population real fake news - news that denigrates particular minorities or ‘outsiders’ and pushes the political views of their owners - then tyranny becomes quite compatible with democracy. Governments wield the ‘will of the people’ against pluralism and the rule of law, all enabled and even dictated by media as propaganda. We have examples within the EU and on its doorsteps. We are not there yet in the UK and US, but we are getting very close.

Revolutions in Economic Policy

The Commission on Economic Justice hosted by the Institute for Public Policy Research (IPPR) has just published a substantial and comprehensive report on the UK economy called ‘Time for Change’. I hope to write about aspects of that report later, but its basic premise is that we need a revolution in economic policy making, akin to the revolutions enacted by the post-war Attlee government and Mrs. Thatcher. The thinking behind the idea of economic policy revolutions is outlined by Alfie Stirling and Laurie Laybourne-Langton in a paper in The Political Quarterly.

The authors adapt the ideas of Thomas Kuhn’s The Structure of Scientific Revolutions to economic policy. I do not want to get hung up on the legitimacy or details of this. The basic idea that some periods involve profound changes in economic policy is not really contentious. Also the idea that the ‘failing paradigm’ will first try to adapt itself before being replaced by the revolutionary idea is straightforward. You only need to look at the state of current politics in the UK and US to take seriously the idea that what could be called the neoliberal era - the set of policies and world view associated with Thatcher and Reagan - is coming to an end.

There is a lot in the paper that I agree with, at least until the conclusions. [1] But I think my main critical comment would be that the paper focuses too much on macroeconomics, and as a result goes a little astray. It is if, having borrowed Kuhn’s idea and applied it to economic policy, the authors feel obliged to keep going back to an actual academic discipline, macroeconomic theory, rather than staying with economic policy as a whole. Let me set out first how I see the macroeconomic transformation that took place around the time of Thatcher and Reagan.

A key mistake that many people make is to say that conventional Keynesian macroeconomic theory was unable to explain stagflation, and that policymakers adopted monetarism or new classical ideas as a result. The basis for understanding stagflation and reducing inflation was known since at least Friedman’s famous address in 1968 giving his account of the expectations augmented Phillips curve. This Phillips curve was not used to guide monetary or fiscal policy before the end of the 1970s because most policy makers and some economists were reluctant to raise unemployment as a way of reducing inflation. [2]

In the UK this use of demand management to control inflation (or its counterpart, which was to abandon attempts at direct control like incomes policies) coincided with the election of Thatcher, but in the US it was initiated by Paul Volcker under Jimmy Carter. In both the UK and US it was associated with attempts to control monetary aggregates, but this lasted only a few years. You could argue that abandoning incomes policies was neoliberal, but to me it looks like the inevitable result of double digit inflation.

There was a revolution in macroeconomic theory, but I have argued elsewhere that it does not fit into the Kuhnian framework. The New Classical Counter Revolution (NCCR) did not come up with an alternative analysis of inflation: instead their concerns were more methodological. It is true that that many who promoted the NCCR also favoured neoliberalism, and you could relate reductionism to individualism (and hence neoliberalism), but I think the appeal of the NCCR owed much more to a collection of good ideas that the then mainstream resisted, like rational expectations.

Inflation targeting by central banks involves an attempt to manage the economy in much the same way as Keynesian fiscal activism had done before. The central bank is a part of the state. Central bank independence didn’t come to the UK until 1997, and existed in the US well before Reagan. What I call the Consensus Assignment (monetary to demand management, fiscal to debt control) was dealt a fatal blow by the GFC, but the popularity of this assignment owes little to neoliberalism. Attempts to link inflation targeting to neoliberalism, which are frequent, are in my view a mistake.

Trying to fit macroeconomics into an account of the rise of neoliberalism is therefore problematic, and more importantly it detracts from the real economic policy revolution that neoliberalism represented, which was a change in the attitude of policymakers to state intervention of almost any kind. Out went government partnership with industry (described as ‘picking winners’), together with a regional and industrial policy serious enough to counteract the effects of globalisation and technical change. There was a corresponding shift from the collective (including attacking trade unions) to the individual, together with the idea that ‘wealth creators’ (aka high earners) had to be incentivised by cutting ‘punitive’ taxation. Public money became ‘taxpayers money’ and so on.

All this was a successful neoliberal revolution, where by success I mean it took hold for decades. It, together with subsequent overreach, has caused serious problems and is therefore ripe for review. But ironically the attempt at a truly neoliberal macro policy - hands-off monetary targeting with no demand management - failed within a few years of being tried.

[1] I should say why I think the conclusions do not follow from the rest of the paper. There are some simple mistakes, such as “the failure of these same models to predict accurately the effects of the UK vote to leave the EU threatens to renew the crisis of confidence in economic theory.” But there is also an implicit very misleading equation pair: neoliberal policy=mainstream economics, revolution=heterodoxy.

First, the two previous revolutions in macro theory came from within the mainstream, not from outside. Second, neither austerity or Brexit have anything to do with mainstream economics. More generally, mainstream economics is as much a critique of neoliberalism as a support. As a result, a revolution in economic policy making could quite easily originate from within mainstream economics (see here, for example).

[2] Today, that view has been revived by members of the MMT school, who call using the Phillips curve to control inflation amoral.

Cherry picking economic statistics and Project Fear

It is often said that the left-right description of politics is not a straight line but a circle, with left and right becoming more similar as they get more extreme. It is mostly nonsense, but one thing that can make it appear so is ideology. If you start to let your view of the world be dominated too much by a particular ideology or conviction (whether of the left or right), you tend to exhibit the same characteristic denial of both reality and the wisdom of expertise.

One of the symptoms of this denial is the cherry picking of statistics. The example that quickly comes to mind is output, employment and productivity. Since the GFC, UK output growth has been insipid but employment growth has been strong. The counterargument to the claim that the UK’s recovery from recession was the weakest for more than a century has been to applaud employment growth. But of course the combination of weak output growth and strong employment growth is awful labour productivity growth, which is a major factor behind slow wage growth. Those that applaud strong employment growth as a counter to [1] weak output growth are in effect saying what a great thing the productivity standstill is. (I made fun of this in one of my better posts.)

One of the little homilies I used to trot out when I taught first year undergraduates was that economics is not about making lists. In any economic situation you can make a list of what is good and bad about the economy, and then make some kind of judgement based on comparing the lists. For example you might observe that output is strong, unemployment is low but inflation is rising, and judge that the first two outweigh the third. But to do this avoids any understanding of what is going on. Once you try to relate the data to some kind of framework or model (e.g. of the business cycle) you realise you are describing a boom which needs to be moderated.

We have seen this in spades with Brexit. When the economy initially appeared unaffected by the Brexit vote, those promoting Leave said this was the ultimate proof of Project Fear. They did not bother to look at the composition of growth: consumption led, supported by falling savings and higher debt. This was not sustainable, and sure enough growth in output per head in the first half of 2017 has been minuscule. Consumers, by borrowing, had simply delayed the short term Brexit slowdown. But I have been told that this means nothing: growth has been low in the odd quarter since the recession, so this is just two of those quarters together and to suggest otherwise is Project Fear.

I’ve been told exports are booming, unemployment is still falling (and low by EU standards), falls in real wages are nothing new and much else. Yet ask almost any economist what they think is currently going on, and they will tell you it is a downturn caused by a decline in incomes (and flat investment) following the Brexit depreciation that has - as yet - not been offset by strong growth in net exports. I looked at why Brexit could be the reason for the absence of a net trade boost here. I may not be right, in so far as any commentary of this kind based on limited data as things are happening could prove wrong. This of course gives ample scope to those who want to see a particular result to poke holes and stress uncertainties.

In the grand scheme of things, the short term effect of the Brexit vote are minor compared to the potential long term impact of Brexit, and of course a great deal depends on the form of Brexit when it happens. The short term matters because of what it shows. Those who promoted Brexit used the Project Fear label to discount economic expertise: the overwhelming view of academic economists that Brexit would reduce long term GDP, and cause a short term slowdown before it was implemented. They did this not because they came to a different view based on the economic evidence, but because they wanted to believe Brexit would be painless (or, more cynically, because the pain would be felt by others). Brexit is a classic example of an ideology driven project that discounted evidence.

Going on to deny that Brexit has caused an economic slowdown is simply the next step in denial: denial of past evidence extends to denial of current evidence. It is just like Trump and climate change (or Trump and much else), which is why I and others have related Brexit and Trump. But the reality of Brexit is now being felt by the UK negotiators. Back in March I said that the obvious outcome for the immediate negotiations was to stay in the Single Market and Customs Union for a transition period, but the UK team would try and dress this up as something else to save face. What the UK negotiators are doing only makes sense once you understand that Brexit can cause huge economic damage, but those that said otherwise must cling on to the pretense of Project Fear.

The use of the term Project Fear was an attempt to shut out expertise and evidence from the Brexit debate, just as it was used in the same way during the Scottish Referendum. [2] Hopefully we will never know what the costs of a Hard Brexit will be, because we will get a Labour government which will keep us in the Single Market and Customs Union (or better still, Brexit somehow collapses before then). But the concept of Project Fear deserves to be exposed and degraded nevertheless. So, following on from the spirit of my last post, here is a definition:

Project Fear: a term once used by those who wish to discredit economic evidence and expertise as just the exaggerations of one side in a debate.

Background. Initially used by Scottish Nationalists in an attempt to hide the short term fiscal costs of independence, and then in the European referendum to hide the economic costs of leaving the EU. Fell out of use after Sterling’s depreciation following the Brexit vote, and the subsequent decline in real incomes and economic slowdown.

[1] Given weak output growth, strong employment growth and a decline in real wages may be preferable to stronger productivity growth and high unemployment. But that is to talk about the characteristic of a weak economy. I am talking here about employment growth being used to counter the claim that the recovery is weak.

[2] Please, no more comments about how the SNP did not invent the term. The desperation to show (correctly) that ‘they used it first’ indicates a recognition that the term was used in that referendum to hide reality from the voters.