Is Trump about race and Brexit about culture?

The initial reaction to the Trump victory was to look at the Rust Belt states that swung the result to Trump, and as a result to talk about the economically left behind (as a result of automation or globalisation). Since then there has been a number of pieces of analysis that have appeared to show the opposite, which is that the Trump victory was all about race. This piece in The Nation by Sean McElwee and Jason McDaniel is a good example.

This debate has its exact counterpart with Brexit. While a lot of focus has been on how those voting in areas left behind by automation or globalisation tended to vote Leave, others have argued that the vote is really about cultural values. For example Eric Kaufmann notes how attitudes to the death penalty are a very good predictor for voting Leave.

The evidence from studies of Brexit for a ‘left behind’ effect is essentially geographical, as I discuss here. This corresponds with Rust Belt swing states for Trump. However McElwee and McDaniel use a different measure in their analysis, designed to pick up economic anxiety (worries about job security, mortgage payments etc). They show that while measures of racial resentment or animosity (among whites) are clearly correlated with Trump’s vote, measures of economic anxiety are not, as the RHS of the figure below shows.

They conclude on the basis of this that it was race, not economics, that won the vote for Trump.

However I think the chart above suggests a rather more nuanced conclusion. As the authors note and as shown on the LHS of this figure, high economic anxiety decreased the probability of voting for the Republican Romney in 2012. That is what you should expect. For those in economic difficulty the Democrats are more likely to bring in helpful measures (like more universal health care) than the Republicans. What Trump managed to do was negate a relationship between economic anxiety and voting Democratic that we would otherwise expect to see.

You can see exactly the same phenomenon with Brexit. Brexit is essentially about economics, because at heart it is about leaving a free trade area. To achieve that free trade requires some joint decision making, but I have yet to find a Brexiter who could tell me anything of significance that had been ‘imposed by Brussels’ that they were unhappy with. In that sense, the problems highlighted by Dani Rodrik’s famous trilemma were not critical: the UK was not giving up any sovereignty that really mattered to achieve free trade.

Except, of course, for freedom of movement. Attitudes to immigration, like the death penalty, is a pretty good way of sorting social conservatives from social liberals. But immigration as an issue can do more than that. If you can convince voters that they will also be economically better off by restricting immigration, then you satisfy their economic concerns as well. This is why immigration is such an attractive issue for the political right, particularly if you can shut out all those annoying experts who keep saying immigration has economic benefits rather than costs. That is how the Leave campaign could convince half the population that they will be better of leaving the EU, when almost every economist thinks the opposite.

What the Leave campaign managed to do was make a vote about an economic issue into one about a social issue, and as a result the vote split along the social conservative/liberal axis. McElwee and McDaniel, among others, show that Trump achieved much the same. Because he promised various measures, from immigration controls to restrictions on trade, that were designed to appeal to the economically anxious and the left behind, he negated the natural tendency of those groups to vote Democrat. And as with Brexit, no economist thinks these measures will actually help anyone. 

This helps explain an apparent paradox that might already have occurred to you. How can Trump’s victory be all about race, when before Trump we had the first ever black President who was re-elected for a second term? The answer was that a traditional Republican campaign was not prepared to deflect economic anxieties with building walls and erecting barriers to trade, so many in the rust belt put aside any racial animosity and voted for Obama. In contrast Trump was prepared to do this, so the racial issue dominated. 

That the economic promises made by Trump and Leavers are just a sham can lead to a regressive dynamic that I examined here. How can more progressive parties actively try and stop that happening and win back control, rather than simply hoping the right are rejected by the electorate? I suspect just explaining why immigration control or trade restrictions will not work will not be enough when we have a media that avoids providing expertise. It has not worked with Brexit. 

The answer may be to fight fire with fire, if the UK 2017 general election is any guide. Labour did not win that election, but in a three week period it staged an unprecedented advance to take away May’s majority. It did that by offering clear economic benefits for various groups, paid for by reversing previous corporation tax cuts and increasing taxes on the wealthy, as well as promising a substantial increase in public investment financed by borrowing. A lesson, perhaps, in how to deal with right wing parties that use populist policies to deflect economic concerns.

Postscript (01/04/2018) Here is a link to a tweet thread from Jason McDaniel commenting on this post.

Jeremy Corbyn cannot end Brexit

There is a cheap jibe that responds to the title of this piece by saying that Corbyn does not want to end Brexit. It is cheap because what Corbyn wants above all else is power. It is difficult to imagine this government surviving the collapse of Brexit, so ending Brexit is a means to that power. 

Another idea that some Remainers have is that if only Corbyn had campaigned against Brexit from the moment the vote to stay in the EU was lost, the Labour party could have somehow swung enough public opinion such that support for Brexit would by now be collapsing, and the resultant pressure on Remain-at-heart Tories would be so great that they would have been prepared to bring down their government just to stop Brexit.

To see why this makes little sense start with the 2017 election. May wanted this campaign to be about Brexit. She would have wanted nothing more than Corbyn to oblige by supporting Remain. The reason is straightforward. The Brexit vote divided the electorate on social conservative/liberal lines, with social conservative (anti-immigration) Labour voters supporting Leave. May knew that in a general election right wing social liberals would return to the Conservative fold, but left wing social conservatives could have been persuaded to vote Conservative, or at least not vote for an anti-Brexit Labour party. As a result of all this, the only choice Corbyn had before the election was to triangulate over Brexit, and it is only because of this that May did not get her landslide.

The only possibility is therefore if Corbyn had campaigned for Remain from the moment Remain lost the vote, and that as a result he had been sufficiently stronger in the polls by the following spring to dissuade May from holding an election. This seems very improbable for two reasons. First, immediately after the poll many who voted Remain believed the referendum result should be respected. Second, the Brexit vote has stayed pretty firm despite a fall in real wages. Once you recognise that, Corbyn had no choice but to triangulate over Brexit. That may have been an easy choice for him to make, but it was also the wise political choice. Had he not done so, May would have got her landslide in 2017. If Owen Smith had become Labour leader he might have made an anti-Brexit campaign work, but that is now irrelevant speculation.

That is why wishing Corbyn had not triangulated is in effect wishing May had got her landslide. Triangulation is why Corbyn has endorsed staying part of a customs union (although he could have done so sooner). As one of the reasons Labour gave for doing that is to avoid any infrastructure on the Irish border they have effectively endorsed staying within the EU’s Single Market for goods: the so-called Jersey option.

But triangulation is a dangerous game, particularly if your core support is not clear that is what you are doing. You have to convince socially conservative Leave voting Labour supporters that you will respect the vote, but at the same time convince your Remain voting core supporters that you will always push for a softer Brexit and take any realistic chance you are given to stop Brexit.

That was why sacking Owen Smith was foolish. The general belief of most Remainers is that they only way Brexit can be stopped is a referendum on the final deal. Sacking Smith because he advocates this just weakens Labour’s support among Remainers for the forthcoming local elections. Maintaining shadow cabinet discipline gains him nothing, while appearing to cast aside the hopes of many loyal Labour party members is a big deal. You do not win votes by shattering dreams.

However Remainers also need to realise another important political fact. The remaining slim chance that Brexit can be stopped requires Corbyn to remain passive. The only people who can stop Brexit happening will be the handful of Conservative MPs that have in the past voted against May’s wishes. They need to support moves that initiate the circumstances that lead to a popular vote on the final deal. Those Conservative MPs will only support such moves if they come ‘from parliament’, and not if they come from Jeremy Corbyn directly. Anything that comes from Corbyn is too toxic, as George Eaton notes here. All that Corbyn can do is leave it to others to do what they can to facilitate that moment, and then go with it if it comes. And he will go with it, because it increases the chances that the government will fall.

Whether that moment will come depends not so much on Corbyn or Labour, but more on the EU. So far the EU have allowed May to pretend that there is another solution to the Irish border question than the Jersey option. They have even gone as far as to set out what any free trade agreement (FTA) between the UK and EU would look like. They must know that the only way that FTA could ever happen is if there was a border in the Irish Sea, and they must also know by now that this is politically impossible for May. To go down the FTA route when May will have to concede something like the Jersey option for the whole of the UK is a waste of their time.

The EU therefore has two options. It could force the issue, and make May choose between the DUP and Liam Fox, or it could allow her to continue to fudge the issue until after we leave in 2019. Remainers should stop using Corbyn as a punchbag for their frustrations as time runs out to stop Brexit, and focus that frustration where it may belong, which is in the EU’s apparent willingness to indulge May’s desire to keep her party together.

Here is why the EU should not allow this charade to continue. Brexit is and will always be a right wing fantasy project. It is an attempt by a small group of newspaper owners and politicians with Little Englander fantasies to persuade the country that by leaving the EU the UK could become more wealthy in economic terms and more powerful in political terms. In reality precisely the opposite is true. In order to keep the fantasy in tact the Brexiters have tried to vilify experts, take power from parliament and intimidate judges, and have called any dissent they face unpatriotic. In other words the attempt to make this fantasy work has required its opponents to threaten almost every aspect of our parliamentary democracy.

If such tactics are seen to be successful they will only be repeated elsewhere. It is therefore not in the EU’s interest to allow May to keep her party in one piece. Brexit has to be seen as a failure, just as it is essential that Trump is seen as a failure. That has to mean that the Brexiters lose what matters to them most: political power. [1] It is not in the EU’s interests to allow May to appease her Brexiters. The possibility that by not indulging May the EU risks a No Deal outcome is now non-existent.

One thing above all else Remainers need to see. Even if Brexit cannot be prevented in 2019, it is essential that those who masterminded it suffer for the harm they will inflict on the UK. The only way they will suffer is if they lose power, and Conservative party members come to see the Brexiters as the source of their subsequent misfortune. To imagine, as some Remainers seem to do, that this can come about in first past the post UK by some kind of centrist revolution is as mad a fantasy as Brexit itself. [2] Whether they like it or not, the Brexit project will only be seen as a political failure if it leaves its leaders hollow, and the Conservatives out of power for a decade, and that can only happen one way.

[1] The idea that Brexit needs to be seen to fail in economic terms with the Conservatives in power is misguided. Economic failure will be gradual, and as with Brexit itself the government will deflect economic problems by finding scapegoats that play well with social conservatives, and by ramping up nationalism. As Simon Tilford argues, Brexit poses a real threat to pluralistic democracy. This is the strategy that Republicans have followed in the US, and right wing governments in Hungary and Poland are also following with some success.

[2] If centrists are uncomfortable with what Labour has become, think instead about what the Conservatives will become once May finally goes. The top three favourites to succeed may are all Brexiters, and for a good reason.

The Output Gap is no longer a sufficient statistic for inflationary pressure

One of the features of the latest OBR forecast is that they believe the economy is operating slightly above its sustainable level (a positive output gap), where the sustainable level is the level that would keep inflation constant. To see how startling that hypothesis is, here is the latest version of a chart I have probably posted more than any other since I started writing this blog.

It is UK GDP per head (source), which is a pretty good measure of average prosperity, and a trend line in red for 2.23% growth p.a. So from 1955 to 2007 prosperity grew at an average rate of almost two and a quarter percent each year. Since then it has increased at an annual rate of around 0.35%. And if the OBR are right, none of this is due to unutilised resources and lack of demand.

The shift in trend is just as clear if we look at output per worker. Some people try and rationalise this by saying that 2007 was a boom year, and so trend growth had really been falling long before the Global Financial Crisis (GFC). But the evidence does not support more than a slight downward shift in the growth trend before the GFC: the OBR estimate an output gap of 0.7% in 2006/7 and 1.8% in 2007/8.

I find it extraordinary that most economists still talk about the output gap after the GFC in the same way that it was talked about before the crisis: as a limit to how far and fast the economy can expand. To do that is in my view quite wrong. It ignores what I call the innovations gap: the difference between actual output and the level of output that firms could achieve if they started using the best technology available to them. Because there is currently a large innovations gap, firms are likely to meet additional demand not be raising prices but by investing in these more efficient techniques.

Before the GFC, we could ignore the innovation gap because it was relatively small. But since the crisis that gap for the UK and many other countries must have increased, because it is simply not plausible to assume that since the GFC technical progress has come to a virtual halt. Innovations may not have been increasing at the pre-GFC rate, but they cannot have almost stopped, which is the implicit assumption in the OBR’s analysis. Hence we have in the UK, and I suspect in many other countries, a subsrantial innovations gap which will prevent any excess demand leading to significant inflationary pressure. Some supporting evidence for this comes from the growing productivity divergence between leading firms and the rest.

Why have most firms not been investing in the most productive equipment and techniques since the GFC? I think the simple answer is fixed costs and demand. Investment projects almost always involve a large fixed cost element (disruption, retraining), and with static demand those fixed costs may exceed any efficiency gain. But in a normal recovery from a recession, where demand is growing rapidly, firms are happy to incur that fixed cost because they need to expand capacity anyway to meet growing demand. In a weak recovery, on the other hand, many firms may not need to expand capacity, with any modest increases in demand going to leading firms, firms that do invest in the latest technology. Hence the divergence noted above.

Exactly the same argument applies to the NAIRU: the level of unemployment at which inflation is constant. The NAIRU is almost certainly lower than most central banks think for a variety of reasons, but when it is approached I expected to see a pick up in investment and innovation more than a pick up in wage inflation. Investment and productivity growth go together, as a nice chart in the OBR’s latest forecast report shows (page 43).

A large innovation gap in the UK is being enhanced by Brexit. The more uncertain future demand is the more firms are likely to postpone productivity enhancing investment. It may be politically useful to delay creating a new customs union/SM for goods with the EU to try and keep the Conservative party together (as regular readers will know, I think this is inevitable because of the Irish border), but the uncertainty that delay creates just holds back UK growth. Just one more way in which both Brexit and more generally a Conservative government is an economically destructive project.

The existence of a large innovations gap, both in the UK and elsewhere, means that we need two things. First, we need a monetary policy that is very relaxed about raising interest rates. Second we need, in the UK and pretty well everywhere, a large increase in public sector investment. The first needs independent central banks to be less inflation averse and to stop treating the sustainable level of output as something which is independent of what they do. The second requires governments to stop being obsessed about deficits and instead to start investing in the future of all the people they govern.

Beliefs about Brexit

I have nothing to say on yesterday’s agreement that cannot be found in what Chris Grey or Ian Dunt writes. The difference in tone between the two seems to me to depend on different assessments of how far down the road the Irish border issue can be kicked. What I want to do instead is ask why public opinion seems oblivious to the failures of all those claims before the negotiations that ‘we hold all the cards’ compared to the reality that the UK has largely agreed to the terms set out by the EU.

I think as good a place to start as any is this poll result from ORB.

The view of the overwhelming majority of economists, and all the analysis from serious academics, the OBR, IMF, OECD, and now even the government, is that leaving the EU will involve significant economic costs. Yet despite all this the poll above shows as many people think we will be better off leaving as think we will be worse off. This is the kind of polling that should stop everyone in their tracks, much like the polls before the US election that said more people trusted Donald Trump than Hillary Clinton.

The result in this poll is all the more incredible because so far people are worse off as a result of Brexit. They are worse off because a depreciation immediately after the vote led to higher import prices that have not been matched by rising nominal wages. We have moved from the top to the bottom of the OECD growth league table. A belief that we will be better off has to involve Brexit in some way reversing what has already happened.

I can think of two classes of explanation for this apparent paradox. The first is that people are fully aware of what experts and the government thinks, but ignores this because they simply do not trust experts. Instead they fall back on simple ideas like there will be less immigrants after Brexit so they will be better off. Ideas that experts also say are wrong, but where experts are again ignored.

If that is the line you want to take, then it has a clear implication. The implication is never hold a referendum on anything. It is not normally a good idea to take decisions where you ignore all expertise.

There is however a second and much simpler explanation for the poll result shown above. I know about the view of the overwhelming majority of economists, the analysis from serious academics, the OBR, IMF, OECD and now even the government, and so do most people reading this blog or who read the Financial Times and a few other newspapers. But do people who pay far less attention to economics and politics know this? How would they know this?

They will know very little about it from reading the papers that campaigned so hard for Brexit in the first place. At best the information will be reported in a dismissive way with some reference to how economists always get things wrong. (Hence, by the way, a distrust of economists, because most of the media is either unable or unwilling to make the distinction between conditional and unconditional forecasts.) Against such reports will be a constant stream of comment and reporting extolling the imagined benefits of Brexit.

This propaganda could be countered by informed and informing reporting by broadcasters. Unfortunately, with the exception of Sky News, the standard of reporting by broadcasters on Brexit has been very poor. In particular the BBC treats Brexit like any other Westminster based issue, with an additional touch of nationalism. We hear a great deal from May, Fox, Johnson etc, with virtually no expert analysis of what the true state of negotiations are.

I’m not an expert on international trade, but because I read some of the now numerous people who write stuff on Brexit who are experts, or who have made themselves experts, I feel I am reasonably well informed. I have never seen the same level of expertise from the broadcast media. If I just listened to the BBC or read any newspapers bar two or three, I would know almost nothing about what was really going on in the negotiations.

Let me give a personal example. I missed the importance of the Irish border until September last year. I do not think I was unusual in this respect. I suspect I did so because I was influenced by the UK line that this issue was really a phase 2 problem, a line we heard over and over again on the MSM. What the MSM rarely did was ask what people in Irish Republic felt about the border, and hence why it got to be a first stage issue in the first place.

Once I realised its importance, I could see that the Irish border issue would have a fundamental influence on any final deal, and so could many other experts. But the BBC in particular seems unable to incorporate expert opinion, either directly or indirectly, into its coverage of the negotiations, in much the same way as they failed to do so before the referendum. As a result, most voters are left with bland and uninformative coverage. I see the same Brexiter MPs over and over again being interviewed by the broadcast media, but I cannot recall any occasion in which they have been reminded of the false claims they made before the vote.

The idea that the media can heavily influence popular opinion is not new. It has been widely acknowledged that people think crime is always rising, and overestimate the number of immigrants in the UK, the extent of benefit fraud and so on. These mistakes are almost always in the direction you would expect if people were far too influenced by newspaper headlines. We also now have published papers that demonstrate that the media influences rather than just reflects voters views. (See here for Fox News, and here for the UK press. Here is another study that also finds the Murdoch switch to Labour had large effects. Here is a study about how the media influenced attitudes to welfare after the 2011 riots.)

I also think this is not the first time in recent memory that the media has failed to accurately report what was going on and what experts thought. Before the 2015 election the media accepted the idea that getting the budget deficit down was the most important goal of macroeconomic policy, and that the economic fundamentals were strong. Few experts would agree with the former, and the latter was simply false. What I call mediamacro swung the election for the Conservatives.

The UK government wants a Brexit that will involve the UK not just ending free movement, but leaving the Single Market for goods and services and leaving any customs union with the EU. It is a form of Brexit not dictated by the referendum result but by the wishes of the Brexiters in the Conservative party. The only people who can stop this happening are other Conservative MPs, but many have said that these MPs will only be able to defy their government if public opinion swings against Brexit.

But that is not going to happen. So far the shift in the public’s view of Brexit has been small, and is largely down to previous don’t knows making up their mind. This is not surprising if as many people think they will be better off after Brexit as think the opposite. The most obvious explanation for this is that people remain unaware of the overwhelming expert opinion that they will continue to become worse off after Brexit. That in turn represents another victory for right wing press propaganda, and another critical failure from most of our broadcast media.