Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 11 December 2018

Are the Labour leadership attitudes to Brexit just the austerity story all over again?


with a short coda on yesterday's events

Labour party voters overwhelmingly want Labour to come out in support of remaining in the EU, because it is the right thing to do. But apparently allies of Corbyn say that private polling and focus groups conducted by the party suggest that doing so risks preventing Labour from winning the next general election. Does this debate ring any bells? It certainly does for me. The debate over austerity took exactly this form within Labour from 2010 to 2015.

Austerity, like Brexit, was clearly a bad policy in the sense of making pretty well everyone worse off. But austerity, like Brexit, was popular among many voters, because they believed what they were told about its desirability. Just as the EU was about to open the floodgates of Turkish immigration to the UK, so austerity was required to prevent the bond vigilantes causing financial havok.

Labour began 2009 by ignoring the deficit and embracing an expansionary fiscal policy to end the recession. But later, while still in government, they began to talk about the need to support the recovery and reduce the deficit. In opposition this became a message of moderation: Osborne’s cuts were too far too fast. Before the 2015 election they were pledging to be “tough on the deficit”, even though their actual policy involved substantially less austerity than Osborne’s plans. After that election defeat some senior Labour figures suggested Osborne’s fiscal policy had merits.

This gradual change in message had very little to do with a changing view about the economics. [1] Instead it seems pretty clear it was about one thing only: austerity was popular. In good part this was because the media overwhelmingly adopted the austerity narrative, and so Labour found it almost impossible to argue for an alternative (standard macroeconomic) narrative. In the end some Labour politicians decided that if you couldn’t beat them you had to join them. This helped lead to Corbyn’s victory.

Labour’s policy on austerity during the 2015 election was a classic example of triangulation. Talk the talk on austerity but through detailed policy signal to your base that there would be much less austerity under Labour. Under the leadership of Corbyn, Labour’s policy on Brexit has followed a similar triangulation path. Indeed the parallels are even closer. If we equate the referendum with the 2010 election, before both we had some compromise towards austerity/Brexit (with Brexit Corbyn campaigning separately and did not endorse Remain’s economic case), and after both Labour triangulated, conceded the austerity/Brexit case but promising to reduce the economic cost.

The lesson from austerity is that Labour made two clear mistakes. The first, before 2010, was to muddle the message by arguing to both encourage the recovery and reduce the deficit at the same time. Will history view the leaderships acceptance of the 2016 result, and its consequent failure to point out the contradictions within Brexit, in the same light, or will they see it as essential to avoiding a 2017 general election that was all about Brexit? [2] The second mistake was to triangulate for too long, and miss the point where voters began to turn against austerity. With the gap in favour of Remain in the polls widening, have we already passed that point [3]?

Brexit, like austerity, is based on a huge lie. It reduces any politician who is persuaded that to keep votes, they too have to peddle the lie. It is pathetic watching senior Labour figures pretend that they, rather than the other side, can produce a Brexit unicorn: leaving the EU and increasing sovereignty without any economic cost. If you argue that these politicians have to demean themselves in this way to avoid losing votes, then you have also to accept that Labour before 2015 were right to accept some degree of austerity.

But whatever the rights and wrongs of this argument, we have now reached a critical point with Brexit. A clear majority of the country no longer believe in the Brexit unicorn. Labour’s membership overwhelmingly do not. Until now the decisions over Brexit have been made elsewhere, so Labour could just about get away with triangulation. But very soon Labour will have to make up its mind. [4] Is the Labour party of Corbyn and McDonnell strong enough to survive betraying its supporters over by far the biggest issue of the day? The parallel with austerity suggests not.

Update

I wrote this before May decided to delay (cancel?) what is now laughably called the meaningful vote, but also before the confirmation that the UK could revoke A50 unilaterally. One of the many unfortunate consequences of her actions is that Labour will continue to delay the day they finally accept they have to campaign to end Brexit. Waiting for the right moment to table a no confidence motion may be like waiting for Godot (just before May finally allows a vote in late March, anyone?). This in turn will make that eventual move to supporting a peoples vote look even more opportunistic.

But Labour’s dithering over Brexit is the least of our current problems. On the 26th November 2016 I wrote a post called “A Little English coup”. I argued that Brexit represented a coup against our pluralistic parliamentary democracy. I was attacked for using emotive language, and I wondered whether I had let emotion get the better of me. But consider what just happened. Parliament was on the point of overwhelmingly rejecting May’s deal, which could have led to a process whereby parliament debated over the best way forward. That is what should happen in a parliamentary democracy. Instead, May intends to waste time so she can present the same choice when there is no time for such a debate, all the while saying with a straight face that a second referendum would damage UK democracy. It is uncertain whether she needs to come back to the house on 21st January. Maybe not quite a coup, but a serious attack on parliamentary democracy nonetheless.


[1] A caveat might be that in office the Treasury had been able to persuade Darling about the need to quickly cut back on the deficit more than they might have been able to persuade Brown or Balls.

[2] While the 2017 election argument is compelling, a counter argument is that with a Labour leadership firmly committed to arguing the case for staying in the EU, Labour’s popularity would have been higher and there would therefore have been no 2017 election.

[3] A comparison many people make is with the Iraq war: popular at the time but when it all went wrong everyone decided they had been against it from the start. There is another structural similarity: with both cases we have had large popular movements against a policy that is backed by both major parties. Will the Labour party leadership be on the wrong side of both these popular movements?

[4] Labour’s policy of aiming to get a general election and if they won to then negotiate their own version of Brexit would be disastrous in practice. They would in all probability agree something pretty close to BINO. That would be a disaster for Labour. Any thoughts that at least the minority of Labour Leaver voters who are left would be grateful will be short lived. The Tories would become united in their opposition to the deal. Together with the right wing press they would attack Labour for reducing UK sovereignty with no gain. Many Labour Leavers would be able to see the evident truth in that claim. Fairly soon Labour Leavers would be condemning Labour for having given away UK sovereignty. This is the curse of Brexit - it destroys anyone who tries to implement it because all forms of Brexit are worse than staying in the EU, and are certainly worse than the fantasy promises that were made in 2016. Implementing Brexit, in short, is a vote loser.








Saturday, 8 December 2018

MPs need to get real about Brexit


If, as is widely expected, MPs reject the deal that Theresa May has done with the EU, they will have put this country in a very dangerous position. I say this not to encourage acceptance of the deal, but to emphasise that this negative act needs to be accompanied by a collective positive one. If it isn’t then we either leave without any deal (an outcome that only the ill informed, the mad and the Brexiter wish for) or MPs will just end up accepting May’s deal.

Like annoying noise on a railway train, the best thing to do with complaints from Brexiters is to ignore them. Once May’s deal falls, they are no longer part of the equation. They will never get rid of the backstop unless there is No Deal. May extended the backstop to cover the whole UK and so now the UK is in the backstop until the EU says we can leave. The best way to look at what the Brexiters are doing is that they want to sabotage any solution so we leave with No Deal. Luckily we can ignore them if MPs, rather than May, is in control.

There seems to be a lot of talk about Norway plus a Customs Union as a potential way out once May’s deal is rejected. It is, after all, what any Prime Minister worthy of that title would have had in mind from the start, because it superficially appears something that could unite the 52% and 48%. But as I have argued before, thinking about compromises of this kind does not work with Brexit. Here is a not very pretty diagram that illustrates what I mean. It plots various options on two axes, economic welfare and sovereignty, in relation to where we are within the EU. (Staying in the EU is where the two axes cross i.e. zero on both axes.)


Leave voters wanted more control over events and a better life. That is what they were promised. That combination is just not possible by leaving the EU.

A compromise of sorts for Leavers would be to give them greater sovereignty at a very large economic cost to themselves and others. This is No Deal. It is not an option that most MPs can accept for very good reasons. Even if you believe the reports that some leavers would sacrifice everything for more control (I don’t), you cannot justify imposing that kind of cost on the other (more than) half of the country. It will only happen if MPs really screw things up.

May’s Deal is a large yellow square because it leaves many issues unresolved, partly in an attempt to keep Brexiters on board. Any deal May does will end Freedom of Movement (FoM), so you have a little more control if you never intend to work abroad, but a lot less control if you wanted this as an option. But any positive on this account is negated by making the backstop UK wide. By leaving the Single Market for services, it has a significant economic cost (details here, summary here).

The position of Norway plus a Customs Union, which is very similar to staying in transition or what I call Brexit in Name Only (BINO), is that it reduces as far as possible the economic cost of Brexit. However it quite clearly loses a lot of control compared to staying in the EU. In the EU we have a say and a veto over key issues, while with BINO there is no UK veto. I prefer to call this BINO rather than EEA+ or whatever because this name describes what it is.

To be clear, BINO is better than May’s deal (as the forward to this should perhaps have made clearer). They both give up sovereignty, but because BINO keeps us in the Single Market and Customs Union it is clearly better in economic terms. But once May’s deal falls at the first attempt, MPs need to come up with an alternative that commands a majority in the house if they are really going to take back control from ruinous May. Going back to renegotiate the deal, even if it were possible which seems unlikely, is not going to produce anything that is fundamentally different from the deal MPs reject.

If MPs want to take back control they will have to choose between a second referendum (or just revoking A50) and BINO. Which you prefer I suspect depends entirely on how you see the politics of Brexit. If you think the first referendum requires Leavers to have something to take away as a victory, then BINO is a price worth paying to avoid alienating voters. The problem with that argument is that the Brexiters and more importantly the press will be quick to point out that they now have even less control over their lives (they have been ‘cheated’), and for once they would be right. BINO can be seen as the ultimate insult to Leave voters: you asked to leave the EU, so we have technically done so, and we hope you do not notice that you now have even less of what you wanted Brexit to give you.

Wednesday, 5 December 2018

Helping the left behind: its (economic) geography, stupid


In our national conversation we are familiar with talking about regional divides (most famously north/south), and nowadays that tends to amount to London versus the rest. This conversation has in the past talked about the countryside and the towns (remember the countryside alliance and their march on London). But the political divide that has become clear since the Brexit vote (and which is also clear in US support for Trump) is between towns and cities (see Will Jennings here (pdf), for example).

This political divide has economic roots. Martin Sandbu points us to a report from the Brookings Institution which looks at similar trends in the US. The report says
“For much of the 20th century, market forces had reduced job, wage, investment, and business formation disparities between more- and less-developed regions. By closing the divides between regions, the economy ensured a welcome convergence among the nation’s communities.”

But from the 1980s onwards, they argue that digital technologies increased the reward to talent-laden clusters of skills and firms. The big cities started growing faster than the small cities, and the small cities grew faster than the large towns etc. This trend has continued following the GFC, as this chart clearly illustrates. (For some UK evidence on regional disparities, see here.)


This reminded me of a passage in Paul Krugman’s account in 2010 of 20 years of what has been called the New Economic Geography.
“... a fairly eminent economist challenged some of us, in belligerent tones, for any evidence that increasing returns and positive external economies actually play any important economic role. I think I replied “Cities” – to be greeted with a stare of incomprehension.”

What the New Economic Geography that Krugman helped found shows is that increasing returns and positive external economies make cities a great place to set up a new business, and rural backwaters a place where businesses stagnate. To relate back to the Brookings report, digital technologies have greatly increased the importance of increasing returns and positive external economies. This is why most big cities thrive, and many small cities and most towns fall behind.  

If that all seems terribly fatalistic, it is important to remember that something else happened around 1980. Some of us can remember before the advent of neoliberalism the effort the UK government put into industrial and regional policy. No doubt some of that effort was misdirected, but it probably had some effect at leveling out economic development. One of the key assumptions of neoliberalism is that state activity of that kind is just unhelpful messing with the market mechanism, and that messing just holds back growth.

However one of the lessons of the new economic geography is that initial conditions matter: trees from acorns grow, and the state can have a huge role in nurturing acorns. A well thought out industrial and regional economic policy, that works with rather than fights against dynamic economic forces, can make a big difference. As the Brookings report suggests (see a second article from Martin) we have successful examples to show us how it can be done.

To see how much our current economic environment in the UK is going in the wrong direction, think about post-school education. Universities are essential, and can play a key part in helping innovation, but they produce students most of whom have already become detached from their home and can easily migrate to the dynamic cities. The further education sector, by contrast, tends to provide essential skills to a local workforce. Yet this sector has lost a third of its income since 2010 thanks to austerity. What better way to turn small cities or large towns into places where the workforce is only equipped to host another distribution centre?

One final point. Brexit contributes nothing to helping small cities and towns. If you make the UK a less attractive place to set up a business by making exporting harder, and skilled labour more difficult to find, that business will move from a UK city to a city in another EU country, rather than some declining town in the UK. That is already happening, and the process will continue if Brexit is not stopped. Brexit is not only a damaging exercise which will make the lives of people in the UK harder, it distracts us from doing something positive for those left behind. 








Sunday, 2 December 2018

Experts and Elites


It’s like 2016 all over again. Lots of forecasts of how much poorer we will be under different Brexit scenarios, which if the last time this happened is anything to go by will be ignored or dismissed by around half the UK population. Perhaps I should call for a total and complete shutdown of pronouncements by experts until our country's representatives can figure out what the hell is going on.

More seriously, what has led to this apparent distrust in the words of experts? I want to focus on experts in particular, rather than the more general concept of elites, and even more specifically experts from academic institutions or places directly tied to them. Will Davies has a nice account of the many reasons why distrust in politicians in the UK has increased, but a lot of what he has to say does not really apply to academia.

I have to admit to being completely partial in believing that once society starts ignoring what the evidence says it is on a road to ruin, and academics in the sciences (including the social sciences) have as their raison d'etre trying to understand evidence. And to be fair, much of society understands that. As an IPSOS MORI survey consistently shows for the UK, academics (‘professors’) regularly come close to the top of groups that people trust most.


Furthermore, if anything public trust in professors or scientists has been growing rather than falling over time. The same is also true of social trust in the UK, contrary to many popular accounts.

These results suggest that there has not been any recent decline in how much academics are trusted. But if you replace ‘professors’ by ‘economists’, levels of trust decline sharply. [1] And for good reason. I would have fairly low levels of trust in probably what most economists I see in the mainstream media say, and this is because I most frequently see economists in the media who are not academics. They are typically doing one of two things. The first is making up stories (sometimes plausible stories, but still based on zero evidence) about market movements. The second is describing macro forecasts: a necessary but highly unreliable activity.

Many journalists do not understand the difference between these kind of forecasts (‘unconditional’) and the kind of analysis presented on the economic effects of Brexit (‘conditional’). The analogy I tend to use is between a doctor telling you that you are more likely to die of a heart attack if you eat too much fat (‘conditional’), and a doctor trying to predict your exact time of getting a heart attack (‘unconditional’). This failure to understand the difference between the two activities is the first major reason why academics who say Brexit will reduce living standards are not trusted as much as they should be. It is predominantly a failure of the media rather than economists themselves.

I sometimes wonder, however, if certain journalists and politicians deliberately choose not to understand the difference between the two because it suits them to remain ignorant. This brings me to the second reason that academic economists may be ignored or dismissed over Brexit, and that is because certain elites have an interest in doing so. Here is Stewart Wood reacting to Jacob Rees-Mogg’s comments on Mark Carney after the Bank released some of its Brexit analysis.

The Bank’s analysis is of course not beyond criticism. [2] But the attacks of the Brexiter elite are quite deliberately not economic in character but political: Rees Mogg claimed Carney is a second rate politician (a second rate foreign politician!) and his forecast is designed to produce a political outcome (‘Project Hysteria’). The idea is to suggest that these projections should not be taken as a warning by experts but instead as a political act. Once again, I’m not suggesting we should never think about what an experts own interests might be, but if you carry this line of thought to the Rees Mogg extreme you undermine all expertise that is not ideologically based, which is exactly what Rees Mogg wants to do.

This I think is the second reason why the view of the overwhelming majority academic economists that Brexit will be harmful is going to be ignored by many. Since Mrs Thatcher and the 364 economists, the neoliberal right has had an interest in discrediting economic expertise, and replacing academic economists with City economists in positions of influence. (Despite what most journalists will tell you, the 364 were correct that tightening fiscal policy delayed the recovery.) Right wing think tanks like the IEA are particularly useful in this respect, partly because the media often makes no distinction between independent academics and think tank employees. Just look at how the media began to treat climate change as controversial.

But isn’t there a paradox here? Why would members of the public, who have little trust in politicians compared to academics, believe politicians and their backers when they attack academics? In the case of Brexit, and I think other issues like austerity, these elites have two advantages. The first is access. Through a dominance of the printed media, a right wing elite can get a message across despite it being misleading or simply untrue. Remember how Labour’s fiscal profligacy caused record deficits? Half the country believe this to be a fact despite it being an obvious lie. What will most journalists tell you about Brexit and forecasts? My guess is that forecasters got the immediate impact of Brexit very wrong, rather than the reality that what they expected to happen immediately happened more gradually. Why will journalists get these things wrong? Because they read repeated messages about failed forecasts in the right wing press, but very little about how GDP is currently around 2.5% lower as a result of Brexit, and real wages are lower still.

The second is that the elite often plays on a simple understanding of how things work, and dismisses anything more complex, when it suits them. Immigrants ‘obviously’ increase competition for scarce public resources, because people typically fail to allow for immigrants adding to public services either directly or through their taxes. The government should ‘obviously’ tighten its belt when consumers are having to do the same, and so on. In the case of the economic effects of Brexit, it is obvious that we will save money by not paying in to the EU, whereas everything else is uncertain and who believes forecasts etc.

As the earlier reference to Mrs Thatcher suggests, there is a common pattern to these attacks by elites on experts: they come from the neoliberal right. If you want to call the Blair/Brown years neoliberal as well, you have to make a distinction between right and left. The Blair/Brown period was a high point for the influence of academics in general and academic economists in particular on government. As I note here, Iraq was the exception not the rule, for clear reasons. Attacks by elites on experts tend to come from the political right and not the left, and the neoliberal right in particular because they have an ideology to sell.

[1] See this YouGov poll. Thanks to John Appleby for finding this for me. 

[2] For example, including a ‘worst case’ No Deal scenario designed for stress testing banks in a graph alongside more standard projections of the impact of the Withdrawal agreement is just asking for misinterpretation of the former.