Should Eurozone central bankers keep quiet about fiscal policy?

The Governor of the Irish Central Bank, Philip Lane, has called for higher taxes on savings and investment (property taxes). Frances Coppola, in a very clearly argued and well informed article, says this “attempt to dictate to the Government is a serious threat to Irish democracy.” Is it?

The conventional view is that there is an implicit quid pro quo between independent central banks (ICBs) and governments. Governments do not interfere with monetary policy and in exchange central banks do not suggest to governments what fiscal policy, or any other non-monetary policy, should be. It is important to note that this implicit quid pro quo has never seemed to extend to central bankers in the Eurozone, who have frequently pontificated on matters outside monetary policy, so in that context Lane’s comments are not out of the ordinary. But that does not make it right or wrong.

I have argued in the past that the situation where interest rates are at their lower bound requires ICBs to tell governments what to do, or at least say they can no longer do an effective job unless the government undertakes fiscal expansion. In that context I rather like the suggestion in a paper by Ed Balls and colleagues [1] that at the ‘Zero Lower Bound’ (ZLB) central banks should be mandated to write every three months to the government suggesting how much stimulus they think is required for the economy to get of the ZLB.

The situation for central banks in Eurozone countries is similar in the sense that cannot change interest rates (which are set by the ECB). They do, however, as Frances points out,  have responsibility for the health of the financial system in their own economies which requires macroeconomic expertise. So it seems reasonable to apply the quid pro quo to financial supervision by an ICB in a Eurozone country in much the same way it is applied to a ICB that is not in a currency union or fixed exchange rate regime.

But is the quid pro quo sensible in the first place? There is a real concern that an independent central bank might be intimidated by government politicians telling them what to do. That is understandable, as part of the whole rationale for ICBs in the first place is that their independence from politicians gives them additional credibility that they are not acting for political reasons.

The argument for a quid pro quo is that independent central banks should not abuse their authority to interfere with political decisions that have nothing to do with monetary or financial (macroprudential) policy. Let me put a counterargument that I sketched out in a different (UK) context here. While it is obvious no central banker should give advice on who should win the next General Election, that is not what we are talking about here. We are talking about issues were the central bank has some expertise.

Given that, it would be strange indeed if the central bank was prohibited from telling the government what its expertise suggested. You could see the outcry if the ICB guessed a recession was on its way, but kept that knowledge to itself and it subsequently turned out it was right. So in this case Lane would undoubtedly tell the government his views. What we are therefore talking about is secrecy. Is it best that this expertise is kept from the public so as not to embarass politicians when they ignore it? That does not sound so clever. More generally, the lesson of the last ten years is not one where governments would have made good macropolicy if only they hadn't been intimidated by central banks, but rather than in Europe central banks gave bad advice.  

I wanted to talk about this particular case because it perfectly illustrates this dilemma. Back in the early 2000s, while he was still a lowly academic, Philip Lane was one of the few public voices suggesting that the Irish Republic needed to use fiscal policy to cool down its economic boom. He was ignored, and the result was a financial and economic crash. He therefore not only has expertise but a reputation for being right on the very issue he is giving his advice about. Is it really better for Irish democracy that this advice is kept secret from the public?

[1] Balls, E, Howat, J and A Stansbury (2016) 'Central Bank Independence Revisited: After the financial crisis, what should a model central bank look like?' M-RCBG Associate Working Paper No. 67

Brexit Endgame: second stage (which is unlikely to end with no deal)

We have entered the stage where everyone seems to be worrying about a No Deal Brexit. It was inevitable that the EU would use this as a threat - that is the whole point of the A50 process. Rather less obvious is that the UK would do so as well: we have master tactician David Davis - this is going to hurt us more than you so you should be very afraid - to thank for that. But to be fair, appearing irrationally stupid enough to contemplate No Deal is about the only weapon the government has in its negotiations with the EU. So both sides talk up its chances, which naturally leads everyone to panic. If you want an antidote, this post is for you, although please bear in mind that what follows is about probabilities not certainties, and you can never rule out the possibility of this government doing something really stupid.

Stage one, recounted here, was the break with the Brexiter hardliners to re-engage with the EU after six months backtracking from the December agreement. I call the second stage as what Theresa May has to do to get over the March 2019 hurdle that sees the UK exit from the EU. [1] Unfortunately, given parliament’s failure to provide any guide to the executive, our only clue about what this entails is to think about what is in Theresa May’s interests. (For May, unlike the Brexiters, there is no Brexit ideology we need to worry about, so its interests rather than ideas that matter.)

May’s primary interest is to get a deal. She does not want to go down in history (and down is where she would go if there was no deal) as the Prime Minister who led us to a disastrous No Deal Brexit. Her secondary interest is in perpetual Brexit, by which I mean negotiations that continue to keep Brexit in the news so that a majority of Conservative MPs dare not allow an election for leader and so she stays as PM. These interests tell us what May will try to do.

Perpetual Brexit requires leaving most of the negotiation of what the final relationship will be with the EU until the transition period. That might seem odd, given that this final relationship is what the Chequers document is all about, but see below. I think the EU will probably be broadly OK with that (although I do not think they should be [2]), as long as May agrees to the Irish backstop. As I argued here, May will do all she can to convince the EU that it is politically impossible for her to agree to this backstop. But the likely outcome is that she will fail, and her interests therefore require that she does accept the backstop to get a deal.

The reason why accepting a backstop is politically difficult for her is that any deal that includes it is likely to be opposed by both the DUP and Brexiters. If Labour vote against the final deal then she does not have the votes in parliament for the deal. A potential way around DUP opposition is to convince them that the UK during transition will negotiate a deal that makes the backstop redundant. (For some speculation on all this, see Peter Foster here.)That is a key reason for the Chequers document. But the DUP are as unlikely to accept her word as the EU, so they would require some form of words in any EU agreement that could be held as a commitment.

In passing, if you have a sense of deja vu about all this, you are not imagining anything. This is what happened at the final stages of the December agreement.

The problem with this approach is that anything that would make the DUP happy is likely to worry Brexiters. The more that May says the UK will stay close to Europe so the backstop will never happen, the more the ERG will talk about becoming a vassal state to the EU. It looks, at the moment, like an impossible position. But many things can happen between now and parliament’s vote on any deal with the EU, so I think it will be foolish to discount the possibility that she might just succeed. If she does, we have what I’ve called perpetual Brexit, which in reality means transition=BINO for some time if not forever. (The final deal will probably be BINO with face saving: perhaps I should call this BINOFACE.)

What threats could May invoke to get any deal through parliament. In the negotiations leading up to the deal both the UK and EU will use the threat of No Deal. However once the deal is made threatening No Deal if parliament fails to vote for it is counterproductive if she is trying to convince Brexiters, because No Deal is exactly what these idiots want. A threat of no Brexit however might inspire her Remain rebels. The same would be true of a threat of a second referendum. Perhaps the best threat for her is a general election, because neither the Brexiter nor Remain rebels would want to be responsible for a Corbyn government. The problem with any threats however is that this is not a repeated game, so there is no incentive for her to go through with her threat if it also conflicts with her interests, and people know that.

If she fails to win a vote on the final deal, I still cannot see leaving without any deal as a likely option. It just isn’t in anyone’s interests to let that happen, apart from the Brexiters. But it would be hard for the EU to agree to an extension of A50 on the hope that something turns up. This is where a referendum might become a reality (combined with an extension), as a way out of an impasse. If that happens, it will be the ultimate irony that Brexiter intransigence gives the Remainers what they want. However there is a caveat, and that is that May will propose a referendum with a two way choice between her deal and No Deal. There would be a final fight in parliament to get Remain on the ballot paper in some way.

I doubt, however, that May would want to fight a referendum where Remain is a possibility, because it is quite likely that Remain would win, particularly if Labour leads the campaign for Remain. That would make her position very difficult. As a result, she may prefer the option of a general election. A lot will depend on the polls at the time. But the bottom line is that either an election or a referendum (accompanied by an A50 extension) are more likely than crashing out with No Deal if parliament rejects the final deal. But don’t expect either side to tell you that.

The possibility of parliament voting down any deal and even the possibility of no deal, with the government stockpiling medicines etc, should focus open minds on how ridiculous our position has become. Brexit may get voted down because no one is happy with the form of Brexit we will get. Yet neither the government or parliament is able to say this is ridiculous and we should stop in now. Ostensibly this is because they feel they have to implement the ‘will of the people’. But this is so short sighted, because even the people who voted Leave will be unhappy with the Brexit they get when they see what it is. They voted, it should always be noted, for the “easiest trade deal in history” (Fox) where “we hold all the cards” (Gove). We now know better, but it seems our representative democracy is paralyzed by a vote for a fantasy.    

[1] I’m not going to stick my neck out even further than I am in this post by saying how many stages there will be, beyond saying that it is at least three. The point about calling it an endgame is that the result is clear with best play from the winning side.

[2] Some Remainers do not like me saying so, but the willingness of the EU to keep the terms on which we leave vague when it is voted on in parliament is a bit of an insult to democracy. None of their business, you may say, but they are as much part of theis negotiation as the UK. The majority of UK voters, and probably MPs, would not vote for a BINO type deal where we pay, obey but have no say, and the EU side must know that is where we are heading if a border in the Irish Sea is ruled out.

Fake News UK style

So yesterday Jeremy Corbyn gave a speech which journalists had been given advance notice of. The Independent tweeted “Jeremy Corbyn to highlight economic 'benefit' of Brexit as he demands UK stop relying on 'cheap labour from abroad'” and referenced an article by their political correspondent Ben Kentish. As you might expect, the great and the good piled in to condemn the speech as anti-immigrant and pro-Brexit.

I was alerted to all being not what it seemed by this tweet from Financial Times Chief Political Correspondent Jim Pickard. He wrote: “Corbyn team is complaining that his words about "cheap labour" have been taken out of context and on this occasion they are absolutely right: he was talking about "imports" made abroad with cheap labour, not cheap labour coming here - here's the relevant passage. Please retweet.” My interest was aroused, but I could not find a copy of the speech online because it had not been given yet.

An example of the advantages of twitter follows. I asked in a tweet if anyone could provide me with the speech, and I received both the press briefing and the ‘check with delivery’ speech itself. You can now read the final speech in full yourself here, or watch an excerpt here. I then did something I do not think I have done before, and quickly composed a thread about the speech. The rest of the day saw lots of people using my own thread to correct others who had reacted to the original Independent tweet. If anyone wanted to notify me about anything else yesterday I’m afraid it has been lost in a mountain of what seems like thousands of notifications referencing my thread.

What we can say for certain is that the Independent’s tweet, which at the time of writing has not been withdrawn, is very misleading. Corbyn was not giving a speech about the benefit of Brexit, and the ‘cheap labour’ he referred to was that used to produce imported goods. Instead the speech was all about the active industrial policy that a Labour government would put in place to help manufacturing industry, which made sense as he was addressing a manufacturers organisation in Birmingham.

But surely he must of said something about the benefits of Brexit? The speech said this: “exporters should be able to take proper advantage of the one benefit to them that Brexit has already brought – a more competitive pound.” He suggested they had not because of the absence of any industrial policy. His statement about a benefit to exporters of the depreciation is innocuous.

To many Corbyn supporters this is just par for the course - it is happening all the time. I am no Corbynista, but I would agree. Much of the media, both Labour friends or foes, appears happy to distort things the Labour leadership says to an extent that I cannot remember happening to another Labour or Conservative leader in my lifetime. The macro evidence for this is the 2017 election, where Labour destroyed the accepted wisdom that election campaigns made little difference to the polls.

Labour’s extraordinary surge in the three weeks of the campaign is far too large to be due to just some mistakes by the Conservatives. The more plausible explanation is that both parties had direct access to the media, and for the first time voters were seeing the parties and their policies directly, rather than being filtered through media interpretation. This also helps explain why Labour’s position in the polls began to steadily deteriorate soon after their election bounce: the media filter came back on, with a constant stream of negative stories about Labour and its leadership. I have talked before about the contrast between coverage of Labour’s antisemitism problem and the Conservative’s islamophobia problem.

That is the context in which to see the events I described yesterday. A very small example of a much bigger and very serious problem. There is of course a lot you can say about the speech that is not misrepresentation. Is it right to be so focused on manufacturing when so much of our economy involves services, for example? Did it appear to promote an insular UK? For my own part I would be very critical to the reference to cheap labour. The reference occurs in the following sentence:

“We’ve been told that it’s good, even advanced, for our country to manufacture less and less and to rely instead on cheap labour abroad to produce imports while we focus on the City of London and the financial sector.”

This is a standard argument on the left against financialisation and City dominance, but the words ‘cheap labour abroad to produce’ are completely unnecessary, unless someone was trying their hand at dog whistling.

Can the misrepresentation of that tweet be forgiven in wanting to make this a story about Brexit? Well there is a Brexit story in the speech, and it is the opposite of the one suggested by the tweet. Corbyn is always accused of being a Lexiter: wanting to leave the Single Market so that he can use state aid to support domestic industry. Here is what he said on that:

“Too often, we have been told by Conservatives who are ideologically opposed to supporting our industries that EU rules prevent us from supporting our own economy. But if you go to Germany you’ll struggle to find a train that wasn’t built there, even though they’re currently governed by the same rules as us. When the steel crisis hit in 2016 Italy, Germany and France all intervened legally under existing state aid rules but our government sat back and did nothing. We have made clear we would seek exemptions or clarifications from EU state aid and procurement rules where necessary as part of the Brexit negotiations to take further steps to support cutting edge industries and local businesses.”

That, I would suggest, is not what a Lexiter would say.

Trump and Corporatism

For many years some have seen the US as a form of corporatism* - as a country run in the interests of the corporations and those who lead them. There is considerable evidence that in many senses they are correct. However to see Trump as the epitome of this ‘rule by corporations’ I think misses something important. Trump is different from what went before in important respects.

The way business influenced politicians in the past was straightforward. Campaigns cost a lot of money (unlike the UK there are no tight limits on how much can be spent), and business can provide that money, but of course corporate political donations are not pure altruism. The strings attached helped influence both Republican and Democratic politicians. It was influence that followed the money, and that meant to an extent it was representative of the corporate sector as a whole. The same point can be made about political lobbying. 

The government of Donald Trump is different. It is a selective plutocracy, and with one important exception that plutocracy is selected by Trump. In that way it can also be seen as a democratic dictatorship, where the complexity of government requires some delegation of power to other individuals. Like many dictatorships, some of those individuals are the dictator’s family members.

A dictatorship of this form would not be possible if Congress had strongly opposed it. That it has not is partly because the Republican party chooses not to oppose, but also because Trump wields a power over Congress that can override the influence of corporate money. That power comes from an alliance between Trump and the media that has a big influence on how Republican voters view the world: Fox News in particular but others as well. The irony is that under these conditions democracy in the form of primaries gives Trump and the media considerable power over Congress.

The distinction between traditional corporate power ‘from below’ and the current Trumpian plutocracy can be seen most clearly in Trump’s trade policy. It would be a mistake to see past US trade policy as an uninterrupted promotion of liberalisation, but I think it is fair to say that trade restrictions have never been imposed in such a haphazard way, based on such an obviously false pretext (US surpluses good, deficits bad). Trump’s policy is a threat to the international trading system that has in the past been lead by the US, and therefore it is a threat to most of corporate USA. Yet up till now Congress has done very little to stop Trump’s ruinous policy.

The photo above is taken from an extraordinary recent event (watch here) where Trump walks down a line of senior executives, who in turn stand up and say what they are doing for the US and pledge to do more. Each statement is applauded with a positive statement by Trump, as his daughter trails behind. These are top companies: IBM, Microsoft, General Motors etc. It is all a show, of course, but of a kind the US has never seen before. It seems indicative that this is not just a continuation of past corporatism but something quite different. These are corporate executives doing the President’s bidding for fear or favour.

All this matters because it creates a tension that could at some stage drive events. So far the Republican party has been prepared to allow Trump to do what he wishes as long as didn’t require their explicit approval (i.e their votes in Congress), but it has not as yet bent its collective agenda to his. (Arguments that it already has tend to look at past Republican rhetoric rather than actions.) This uneasy peace may no longer become tenable because of developments on trade, or Russia, or the mid-term election results. If enough Republicans think their future is safer by opposing Trump rather than indulging him, they still have the power to bring Trump to heel. But the longer the peace lasts, Trump’s influence on the Republican party will only grow.

* Readers outside the US may be confused by my use of the term corporatism: it is one of those terms with many meanings. I'm using it in the fourth and final sense described here.

Did a partial framing of Brexit encourage Labour’s acceptance of its inevitability?

After the Brexit vote, the left (unusually) managed to define the way many people saw that vote by talking about those ‘left behind’. It was a ‘cry of pain’ from communities who lost out because of globalisation. Theresa May was happy to pick up this theme in her desire to proclaim the Conservatives as the party of the working class and of those ‘just managing’, without actually doing anything for these groups (in fact making their lives worse).

There are two positive things to say about this framing. First, it was partly true. Second, it brought the eye of the normally London focused media to communities it had largely ignored. But as an explanation of the Brexit vote it was seriously incomplete. Although around two thirds of those living in council houses or social housing voted Leave, so did a majority of those who owned their house outright. In geographic terms the areas with a majority of Leave voters were the towns and rural areas of England and Wales. While 70% of Sun readers voted Leave, so did 66% of Mail readers and 55% of Telegraph readers. Scotland contains many areas left behind by globalisation, yet in all of Scotland a majority voted Remain.

In addition, describing the Leave vote as a vote of those left behind by globalisation omits the rather crucial point that leaving the EU will do nothing to help those communities, and almost certainly it will make their lives considerably worse. They were sold snake oil. We have polling evidence that most Leave voters still think they will be better off after Brexit, despite all the advice and evidence otherwise. Many Leavers would support us leaving without any deal, which would be disastrous for the UK.

In contrast in 2015, Labour ran a campaign that was all about the need to raise real wages (‘the cost of living crisis’) and spend more on public services. That was not snake oil, but voters responded by giving the Conservatives more power. So why no cry of pain then? If your answer is that these voters did not see Labour as on their side in 2015 whereas they saw Brexit as something for them in 2016, then there is a very simple reason why. 

The simple explanation for Brexit is to focus on the media. To say that 80% of weekday papers read were pro-Brexit is an understatement: readers faced relentless propaganda against the EU and Freedom of Movement. People, however alienated or desperate, do not choose snake oil by themselves. It requires a salesman with a large attentive audience. As Chris Dillow reports, snake oil sellers put great efforts into marketing.

Does it matter that many on the left focused on the left behind story rather than looking at the role of the Brexit press? Perhaps it can help explain Labour’s stance on Brexit. If you have convinced yourself that the leadership always wanted Brexit, think about the large number of Labour MPs who also think some form of Brexit should go ahead (and I am not talking about Kate Hoey or Frank Field).

If you see the Brexit voters in traditional Labour constituencies as being motivated by decades of deprivation, you know that cannot be changed overnight and therefore you may choose to shape your policy to the wishes of these groups, and instead try to limit the damage of Brexit itself. If you had instead seen Brexit as snake-oil promoted by the hard right who wanted to align regulations with the US rather than the UK in order to weaken environmental and worker protections, you might instead focus on highlighting the lies of the snake-oil sellers.

It could be argued that something very similar happened to Labour over immigration. If you convince yourself that anti-immigration views among Labour voters reflect xenophobia or even racism, then there is little to do but placate them. This will undoubtedly be true for some, but we have increasing evidence that attitudes have been shifting and can be shifted when people make the argument that immigration is beneficial. What is clear is that the right used immigration as a political weapon, and the right wing press obliged with a steady stream of negative coverage.

If Labour MPs had any doubt about how power concerted campaigning, the 2017 general election should have put those doubts to rest. If such a large change in public opinion about a set of policies and politicians can be achieved in three weeks, imagine what a party with considerable media access campaigning against Brexit and for the virtues of immigration could achieve over a year, particularly when events and preferences are going their way. The suggestion of this post is that the framing of Brexit as a protest by the left behind was partly why we can only imagine what impact that might have had.

Trump and Brexit

As Trump makes clear, the UK can choose US rules or EU rules. Brexit is about having no say in either.

Of course every Leave voter is an individual with their own motives. But if you had to broadly characterise the two big issues that gave the Leave side victory in 2016, it was fears about immigration and a wish for greater sovereignty. Both were based on lies.

Immigration

You would not know it from the media, but people in the UK have been developing a more favourable view of immigration over the last six years. Here is a table from the latest National Centre for Social Research Social Attitudes survey on Europe.

In 2017, for those who expressed an opinion one way or the other, nearly three quarters thought immigration had a positive impact on the economy, and 65% thought immigrants enriched our culture.

Given this trend in attitudes, how did we vote to Leave? I keep going back this poll on EU immigration published in June 2016 which I wrote about shortly after it came out.

You can see it is consistent with the numbers above: people on balance think EU immigration is good for the economy and for British culture, and even for themselves personally. So why would they want to reduce EU immigration? Because they overwhelmingly thought EU immigration was bad for the NHS (and by implication all public services).

This, after all, is the line that Conservative and even some Labour politicians have consistently pushed, as have parts of the media with no comeback from most broadcasters. Before the referendum there were few stories about EU doctors and nurses, but plenty about migrants using the NHS. This concern was emphasised by the Leave campaign with the combination of the £350 million more for NHS claim and the prospect of being ‘overrun’ by Turkish immigrants.

The only problem with these claims that immigration reduces access to public services is that we know, with almost certainty, that the opposite is true: immigration creates net additional resources for public services. This is not complicated: they pay more in taxes than they take out because they tend to be of working age. But the myth that politicians and the media promulgate is that immigrants are somehow the reason access to public services has become more difficult, and they do this in large party to cover up the impact of austerity.

There was a final issue during the referendum that may have encouraged people to vote Leave. Even if they were positive about the EU immigrants that were already here, it just seemed sensible that the government should control their number. After all the government had set a target for net migration, and were having great difficulty meeting it. Yet the media never talked about the positive aspect of freedom of movement - the ability of UK citizens to live and work anywhere in the EU - and how that would end if we left.

Sovereignty and trade

I still talk to Leavers on both right or left who are convinced that the EU has taken away major elements of the UK’s sovereignty. One talked about “accountable democracy, sovereignty, independence, autonomy and freedom”. Yet when I ask for specific instances of a law or somesuch where the EU has compromised all these things, answer comes there none. There is a simply reason for this, beyond the propaganda, and that is that the EU is about harmonising regulations, and this harmonisation has brought benefits rather than pain to UK citizens.

International trade involves a form of cooperation with other countries, and international trade is good for both sides because it allows more efficient production as well as consumption of a greater variety of goods. The more we cooperate on rules and regulations, the more trade will happen. This harmonisation of regulations is like marriage: each side loses a degree of individual autonomy but we gain much more in return.

The thing about regulations governing networks of trade is that there cannot be too many of them, just as there cannot be many operating systems for computers. The whole point about harmonising regulations is to reduce their number of regulations, so firms do not have to produce lots of different goods which differ only in the different national regulations they meet. Which means that, if the UK wants to really benefit from the gains to trade, it has to choose one standard to match UK regulations with. And given existing patterns of trade, the UK only really has a choice between two: the EU and North America (NAFTA). Neither is likely to abandon their regulations in favour of what the UK may happen to do. (Equally third countries will never choose to harmonise on UK regulations rather than EU or the US.)

Translate this into Brexit, taking back control is like divorce, except in this case divorce from a partner you are still happy to be with (we happily trade with). To be honest, however, I’m not sure many Leave voters needed convincing of all this. As this poll shows, only 22% of Leave voters thought we would lose full access to the single market. Instead they believed the propaganda they were fed, that somehow their lives were being influenced in a negative way by the EU, and that they would therefore be better off after Brexit

Brexiters and Trump

While most voters were not very interested in regulations, many Brexiters certainly were. Most Brexiters are not very interested in immigration, but are interested in removing us from EU regulations and adopting much looser US standards. Of course they talked about ‘global Britain’, but it never made sense for the UK to set its own regulations for trade independently of both the EU and US. What they wanted was to get rid of EU regulations on labour or the environment which did not fit into their ideological framework.

To say, as I did here, that the Brexiters hijacked the EU negotiations, to make them about their own concerns rather than the people who voted, is not quite right. I think it is another example of deceit: getting what they want indirectly because what they want is not in itself popular. EU labour and environmental regulations are popular with most people. So the Brexiters could only achieve their goals through deceiving Leavers, and once more through our partisan or pathetic media they succeeded. After all, the first significant deceit, which was reducing the size of the state by making a fuss about the deficit, had been a big political success.

Normal US politics would want none of this. The US traditionally values the UK as part of the EU, and a jumping off point for their own corporations. Trump is of course not a normal POTUS. He is part of a right wing plutocratic elite that has captured the Republican party, and a good part of the Conservative party. Their aim is to spread his kind of authoritarian right wing politics as far as they can. Trump’s retweeting of Britain First islamophobic materials was no accident. One of his ambassadors has lobbied on behalf of former English Defence League leader Tommy Robinson!

I remember writing sometime back that Trump’s election was a big blow to Brexit. I thought, perhaps naively, that at least some Brexiters would think twice before becoming cheerleaders for Trump. I thought some might be concerned that far from doing trade deals, they would be concerned that Trump seemed more interested in destroying trade by placing tariffs on imported goods. If any have showed any concern I have not noticed. It seems instead that the Brexiters, along with the right wing press, really are the Republican party in the UK.

Theresa May

Stage one of the Brexit endgame that we saw less than two weeks ago was Theresa May at last standing up to the Brexiters in her party. I think she could and should have done this from the very beginning. That she didn’t do so reflects naivety about Brexit rather than strategy on her part. There are many clues that this was so, some of which are spelt out by Jonathan Lis here: getting rid of Sir Ivan Rogers was a huge unforced error that conclusively shows that she and her immediate advisors did not understand the task they had taken on. But it would be suicide for her to turn back from her new path now..

Trump’s attacks on her are another sign of how important her Chequers document is. Of course it is not a plan the EU can accept, but it represents her choice to finally stop the Brexiters turning Brexit into their ideological, Republican orientated plaything. She must know that her new opponents will not be appeased, and do not do compromise. I hope that Trump’s humiliation of her will help her see that global Britain was always a myth, and that the UK has to choose the EU rather than the US. She will need resolve as she is forced to compromise further to get a deal, although she will try to push at least some of that into transition.

Perhaps I am wrong about the final situation being BINO plus face saving for the UK: perhaps the EU will offer serious concessions for the first time in these negotiations. But it is foolish to believe that these concessions will in any way be advantageous to the UK, and somehow make Brexit worthwhile. What gain is there to be outside the single market for services, when exports of products from financial and creative industries to the EU is one of the UK strengths? What gain in there in restricting EU immigration, when most people now agree that immigration enhances our economy and culture, and economists know also enhance our public services. Yes, we would have more sovereignty: the sovereignty to make our lives worse with no compensations.

Whatever deal May finally does with the EU, and at whatever time, it remains the case that Brexit will do for UK sovereignty the opposite of what it claimed. It is better to follow EU rules than US rules, but with Brexit we will be following, with no say in how these rules are changed. It is a huge indictment of our political system that our Prime Minister and a majority of our MPs feel incapable of saying to people you were lied to, and following this course gives you less sovereignty than you had before June 2016. All we can hope for is that the Brexiters, in their new found position of Brexit rebels, will vote against the deal and let parliament, directly or indirectly, kill the whole thing off. The Brexiters will have caused enormous damage, but it would be poetic justice if they helped bring an end to Brexit.

The micro incompetence of UK austerity

I have, for obvious reasons, talked a great deal about the macroeconomic incompetence of austerity, and how it probably cost each UK household around £10,000 in lost resources on average. I have also talked about how it was based, at least after 2012, on political deceit: a pretense that cuts were necessary to reduce government debt when in reality the aim was to reduce the size of the state. (If the priority really was the deficit, why all the tax cuts?) What I have talked less about is the microeconomic incompetence in the way this reduction in the size of the state was achieved.

To many that may seem an odd thing to discuss. After all, isn’t how government spending is allocated between health, education, defence etc inevitably a political decision. But that is not how an economist would think about it. People have preferences between spending on the various goods that are allocated by the state, and so it is perfectly reasonable to ask how good a job the state does in getting the right allocation i.e. in reflecting society’s needs and preferences. If it wasn’t doing this to the first approximation (and allowing for slightly different preferences depending on political orientation) you could legitimately question whether the state was doing a good job. One of the pieces of academic research that has always stuck in my mind is a 1984 paper by Ron Smith and colleagues, who found that allocation did reflect needs and costs once you allowed for bureaucratic inertia.

As a result, it is perfectly legitimate to ask whether an attempt to shrink the state has preserved broadly the correct allocation or distorted it. After all, if a Labour government substantially increased government spending in random ways with no coherent plan everyone would be quite right to complain. So exactly the same should be true in reverse: if you are going to shrink the state you should do so in a planned way.

There was of course no public plan set out in 2010 discussing what parts of the state should be smaller and why. Was there a secret plan that guided Osborne and the Treasury’s decisions? Perhaps he had to keep his plan secret because if it had ever been made public it would have been very unpopular. As I have noted many times, there has never been in the UK more than 10% of the population that wanted a smaller state. That is why state reduction had to be done by deceit, as a few journalists have been prepared to acknowledge in public. But if you are going to do something by deceit, and have kept your master plan of where the state should be shrunk secret, you probably deserve people like me making the assumption that there is no plan beyond political expediency. So I will assume that the only plan was to make the cuts in areas that they could get away with.

Under certain assumptions, that idea of cutting until the pips squeak is in itself not a bad method. In particular, if you think that there is a lot of waste and inefficiency in public spending (because of lack of competition etc), then this mechanism may be one way of getting rid of that waste and inefficiency. However some of the assumptions required for that method to work show clearly why it is in fact a very bad method. One assumption is that each part of public spending has an equal political voice, and will shout only as loud as the real pain of cuts. The real world is just not like that.

Take pensions and social care as two examples. The state pension has been austerity free, probably for the simple reason that pensioners tend to vote Conservative. So why has social care, which is used by the same people, been subject to savage cuts that are highly likely to have led to many premature deaths? The answer is in part that people do not have full information: the papers they read do not talk about cuts to social care very much. It is also because social care is the responsibility of local government, and so cuts can be blamed on local councillors rather than central government.

I started thinking about this again after reading an article by John Harris, who discusses the perilous state of UK local government. As he says, political “journalists who work themselves into a lather about this or that item of Westminster gossip hear the dread phrase “local government” and glaze over.” Do you know who the minister for local government is? I had to look it up. So the feedback mechanism that tells the Chancellor and the Treasury that cuts in local government have gone too far is largely absent and can be neutralised. As a result, that is one place where further cuts are still in the pipeline.

Groups that have been particularly badly hit by cuts, the disabled and poor, also happen to be those with little political voice. In some other areas the extent to which cuts took place depended on simple spin. Because of the spin that the NHS budget had been protected, it suffered sharp cuts because it normally grows substantially for various good reasons. Is this all part of a master plan, or just what was politically convenient?

Economists go on about the efficient allocation of resources, and that should apply just as much to public goods as private goods. The fact that this allocation is achieved through political decisions rather than responses to price signals makes it easier to get things wrong, but it should not mean allocations are random. So any departures from a reasonable allocation due to a programme of cuts which has been and is being allocated based on essentially arbitrary factors should be a major cause of concern. In simple english, not only was the Conservatives’ attempt to shrink the state done at the worst possible time for the economy as a whole, it has also been done in an incompetent way in terms of how spending is allocated.

Brexit Endgame: Stage 1

A characteristic of many endgames in chess where the result is clear is that pieces leave the board quickly to make the eventual win obvious. What we have seen with the resignations of some (Davis, Baker and Johnson at the time of writing) is but the first stage in that process. As I had anticipated, the Brexiters have split, probably for two reasons. The first may involve calculating what the best way of becoming May’s successor is (remember any calculation does not need to be correct). The second is about whether trying to bring May down is more dangerous to Brexit than accepting defeat and playing a very long game. Let me expand on this last point.

BINO (Brexit in name only, or something very close to it) is not a stable position in the long run for a large country like the UK. The very long game for Brexiters sees BINO as a first stage in a gradual distancing of the UK from the EU. The big problem with this strategy is demographic: Brexit was a vote of the old against the not so old. For that reason the instability of BINO is more likely to lead to rejoining, although when that happens depends in part on the EU. But bringing May down could simply backfire and halt or even end Brexit, as it can only be done by enough Brexiters joining Labour in voting against May’s Autumn deal with the EU. If the deal is voted down by parliament we are in ‘anything can happen’ territory, and that anything includes leaving with no deal, no Brexit at all, a new Prime Minister or even a new government. Remember also that it is easy for Brexiters to make threats now, but actually voting against a deal is something else. [1]

A vote of no confidence in May among Conservative MPs, although it will probably be talked about endlessly by the media, is also the least important event in all this. May will win, because Remainers do not want to risk a Brexiter Prime Minister. If Brexiters have any sense they will leave any vote until later anyway, for the reasons I will now explain. 

We have seen the first stage of the Brexit endgame, the first set of pieces to come off. The plan hammered out at Chequers, as Chris Grey explains, is the basis for negotiation that I said May needed to get on the table, but it also cannot be accepted by the EU for many reasons. In terms of pieces still to go, the elaborate attempt in the Chequers plan to give Fox the appearance of still having a job will not stand. But having to concede in effect staying in the Customs Union, and seeing Fox (and others) go? is the least of the three changes the EU will probably require compared to that plan. The EU is unlikely to accept a goods only Single Market deal for the whole of the UK, and is even more unlikely to accept the UK staying in the Single Market without also having freedom of movement.

How the endgame is played by the EU now becomes important, because it will determine when (not how) this all ends. The end result for Brexit if it happens - some form of BINO - is not in question unless something very surprising happens within the EU. But May will be desperate to avoid that becoming clear for as long as possible, and it is up to the EU the extent to which they let her play that game. To continue the chess analogy (my apologies for those who do not play), May wants an endgame that allows her to postpone the inevitable (i.e. to avoid agreeing to BINO) until the time control period of 40 moves comes to an end (we leave in March 2019, and enter transition). That requires a withdrawal/future framework deal that is vague enough that it is not obvious that freedom of movement will continue. Even that may not be enough for May to get any deal through parliament, but that is all she has to play for.

The calculation the EU now has to do involves working out what outcome is most likely in ‘anything can happen’ territory. If they think there is any risk of no deal they might play along with May’s attempts at fudge (although the Irish backstop cannot be fudged). But if they see as the most likely outcome that Brexit comes crashing to an end, then maybe they will play for that form of endgame. That calculation will have a strong influence on how this all ends. Which is not surprising. By triggering Article 50 the UK government gave up control and put our fate in the EU’s hands, like a novice playing a grandmaster.

[1] Actually ending a government is much harder than most imagine after the Fixed Term Parliaments Act. Would Brexiters really join the opposition parties in a vote of No Confidence in the government and become responsible for a possible/likely Corbyn led government? At the moment a vote against any deal with the EU would lead to a No Deal Brexit, but I suspect May has enough leeway to stop that (and the EU would always accept a request for more time to avoid that outcome). She could even threaten the Brexiters with ending Brexit if any deal falls: unlikely I know but it would put various cats among pigeons.

Islamophobia and Antisemitism: a case study in BBC bias

In March and April, there was constant BBC coverage of Labour’s problems with antisemitism. One piece, in March, talked about a ‘saga’. I have no general problem with this coverage. Labour does have a problem, so it should be covered by the BBC. However there has been far less coverage of the problems the Conservative party has with Islamophobia. Is there an objective reason to justify this?

The antisemitism story was notable for two important reasons. First religious organisations had publicly complained. Second these complaints had been supported by prominent Labour figures. However exactly the same applies to Islamophobia. The Muslim Council of Britain (MCB) have called for an inquiry, as have other leaders and groups. Sayeeda Warsi, former co-chairman of the Conservative party, has repeatedly called for more action (the latest here).

But to suggest equivalence between the two stories is misleading. The Conservatives’ Islamophobia problem is a much bigger issue for two reasons. First, the senior Conservative Sajid Javid has attacked the MCB for harbouring members with unacceptable views on extremism and not representing Muslims. In contrast Labour leaders have not attacked the Jewish organisations in the same way (by saying, for example, that their views come from a pro-Israel stance), and have met directly with them. Whatever the truth of Javid’s claim about extremism, the charge that they are unrepresentative is rather undermined by an organisation affiliated to the Conservative party, the Conservative Muslim Forum, also calling for an inquiry. (Letter to Theresa May here.)

Second, while Labour has never to my knowledge run an anti-Jewish campaign to win a general or mayoral election, the Conservatives did exactly that against Sadiq Khan who is now mayor of London. David Cameron even libeled an ex-Imam in his attempts to link Khan to Muslim terrorism.

Thus on any objective criteria, the Conservative Islamophobia problem has been a more serious story than Labour antisemistism. Yet the balance on the BBC has been the other way around, with far more coverage of the latter than the former.

What is the source of the bias? One may be that BBC News tends to ‘follow the story’, which invariably means following stories in the press. Corbyn has few friends in the major press titles, whereas the Conservatives are openly supported be much of the press. Another, I’m afraid to say, is that the BBC is very reluctant to criticise the government on its own account, something that goes back many years.

Case studies such as these are critical in establishing that the media has a clear bias against the current Labour leadership. (There are others: this is rather fun, and also academic research: here for example) The BBC itself, which is deluged with criticism from all quarters, seems to find it difficult to sort the wheat from the chaff. The classic line that because they get criticism from both sides they must be doing something right is nonsense. The political right in particular, because they know the BBC is sensitive to criticism, puts a lot of resources into criticising the BBC, and it will continue to do so whatever the BBC’s output.

All this presumes that Islamophobia and Antisemtism are viewed as equally bad. I personally think they should be, but unfortunately terrorism and Western wars in Islamic countries may have confused many people. Here is Sajid Javid again:

“All communities can do more to try and help deal with terrorists, try and help track them down. But I think it is absolutely fair to say that there is a special burden on Muslim communities because whether we like it or not these terrorists call themselves Muslims. It is no good for people to say they are not Muslims, that is what they call themselves. They do try to take what is a great peaceful religion and warp it for their own means.”

The idea that Muslims bear a ‘special burden’ has been the excuse used by the right wing press for consistent Islamophobia. When a member of the ‘non-Muslim community’ kills Muslims outside of a mosque, and says when arrested that he wanted to kill all Muslims, he is described by the Times as a mentally troubled lone-wolf, as if to emphasise that there is no special burden there. As in so many things, the irresponsibility of the right wing press has influenced sections of society for the worse. Perhaps it has also influenced the BBC.