Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 17 September 2019

On the supposed gap in the centre of UK politics, or the alleged powerlessness of the UK median voter

A remarkable feature of the UK political landscape is how powerless what could be called the political centre currently feels it is. By the centre I don’t just mean individuals that call themselves moderates, but also UK business: capital if you like. How did this happen? It is a long story I’m afraid.

The first and most obvious factor is the UK’s first past the post (FPTP) voting system for MPs. In earlier decades this was thought to empower the centre. If any party drifted towards a less central position in the political spectrum (left/right, or in two dimensions with open/closed), the other would quickly capture that centre ground and would be triumphant in elections. The wishes of the median voter were very powerful. But this assumed that the desire for power would always triumph over a left or right political ideology in at least one party.

The theory seemed to work well in the decades before the turn of the century. When Labour drifted to the left in the early 80s, it ensured its defeat at the polls. Although the Conservatives under Thatcher were also moving to the political right by adopting neoliberalism, that was put down to the median voter wanting the power of the unions to be destroyed, wanting privatisation etc. Labour regained power by adopting many of the elements of neoliberalism, but moved back to the median voter by adding a human face to that neoliberalism.

The Conservatives regained power in 2010 by choosing Cameron as Prime Minister, someone who moved the Conservative party in a more liberal direction in one or two areas, and also was more receptive to the growing concern about immigration. So far you could just about believe in the power of the median voter, and the need for parties to capture the centre ground. I am sure anyone reading those last two paragraphs would have already realised that things were a lot more complicated. But this basic model has had a strong influence on how many interpreted and did politics over this period.

Following this theory Labour moved to the right under Miliband by, for example, gradually giving in to the rhetoric of austerity and immigration control. Given how close the result was in 2010 (the Conservatives could only govern as part of a coalition with the LibDems), you might expect Labour to at least do better than they did in 2010. It did not work. The Conservatives won having pursued in coalition a more right wing policy than under Thatcher. The unemployed, the poor and the disabled were denigrated to a far greater extent than under Thatcher, and so called debt crisis had been used to shrink the state in ways that the median voter did not want. Privatisation continued despite its unpopularity. The hostile environment started.

It is 2015, rather than 2010 or 2016, that is in many ways the critical point in the UK political timeline. Why did the median voter theory not work in 2015?

There is a line that Ed Miliband lost because he was not a ‘natural leader’, by which people generally mean he was unpopular in polls. Strangely enough, Kinnock and Brown also had the same problem, as does Corbyn today. The one exception is Blair. Now it is true that Blair did have qualities that these others did not, but he also had these qualities compared to Major or May or even Thatcher. The other key point about Blair is that he did a deal with the press that helped him win in 1997. One study suggests that this deal was not critical for the 1997 victory, but it was big enough to speculate that the withdrawal of support for Labour by Murdoch in 2010 may have been critical to Brown’s loss.

Labour’s response to the 2015 loss was to stick to the theory and reason that the median voter must have moved to the right. It is a good example of a theory influencing the behaviour it seeks to explain. There was talk by senior MPs of adopting Osborn’s position on austerity. Labour members were understandably having none of it, and elected the only credible anti-austerity candidate. Does the Corbyn election mean the median voter now has nowhere to go? Are we stuck in a new equilibrium, where both major parties were pursuing their ideology? This is the line promoted by many. If true under FPTP the best hope for the median voter is the very risky one of hoping the LibDems can gain enough MPs to hold the balance of power.

Most people in the media do not talk about the influence of the media, for obvious reasons. But the blind spot goes well beyond this. I once asked a political scientist why no regression studies have looked at the role of the media in influencing the 2016 Brexit vote, and their response was because it probably would work too well. This is not quite as bad as it sounds, because there is a real problem in distinguishing between a symptom (Brexit type voters like reading the type of papers that support Brexit) and a cause (Brexit readers are influenced by the paper they read). But just because that problem is difficult to solve should not mean the issue is swept under the carpet.

As I have noted many times, the studies that do try to solve that symptom/cause problem typically find a large causal influence. The most recent was a study discussed here which shows how the Sun boycott in Liverpool (because of its coverage of the Hillsborough disaster) increased the Remain vote there in 2016. Obviously the more united the media is on an issue, the more powerful its influence.

That is what happened in 2015. With few exceptions the broadcast and print media decided that the goal of economic policy was no longer economic growth (the slowest recovery for centuries) or personal prosperity (the biggest decline in real wages since WWII) but reducing the deficit. This created the view that Osborne had been more competent in handling the economy than Labour (whereas he had been the most incompetent Chancellor for decades), and this was the only strong card of the Coalition government. The other factor that may have swung it to Cameron in the last few days was the Conservative line that Miliband would be in the SNP’s pocket, and the broadcast media decided to lead on this rather than Labour’s favoured topic of the NHS. (The English nationalism that is such a strong part of Brexit was evident then, and earlier in Cameron announcing English votes for English issues immediately after Labour had prevented Scottish independence.)

The media persuaded the median voter to elect in 2015 the most right wing government since 1945. Critical to the victory (and to some extent the 2010 victory as well) was the adoption of deficit phobia (a key part of what I call mediamacro) by the broadcast media, and particularly the BBC. After 2010 the BBC began to look more like state media, promoting the interests of the Conservative party, because of relentless pressure and threats from the right. The BBC had managed to remain roughly balanced towards the end of the Labour government (deficit phobia aside), but from 2010 onwards things began to change. What made the difference, or why did Labour’s attempts to intimidate the BBC not end their balance? Again the right wing press plays a crucial role, and in addition the Conservatives have a trump card of threatening to abolish the BBC.

Does this leave the centre nowhere to go? Remember the median voter's power in a two party system comes not from voting for a centre party, but in voting either Labour and Conservative, depending on whichever is nearer the centre. The theory only breaks down if both parties are miles from the centre in different directions but roughly equal distances, and that is not the case at present. Opposite a right wing party adopting authoritarian and undemocratic actions we have a Labour party pursuing fairly solid social democratic policies, as their 2017 manifesto made clear. To put it another way, while Labour are mainstream Europe, the Conservatives are now Trump’s USA.

The leaderships’ left wing baggage has had some effect. It made its leadership an easier target for the media, particularly as a result of Corbyn’s strong support for the Palestinian cause. It also created a group within Labour and beyond whose primary aim seems to be to bring Corbyn down. More importantly the leaderships’ historic Lexit position meant it failed to follow its membership on Brexit quickly enough, which in turn allowed the LibDems to return from obscurity. But in substantive terms such as monetary, fiscal and taxation policy Labour would be considered too right wing in the 1970s. Elsewhere, like a National Investment Bank, and support for public transport as part of a Green New Deal, few except the most ideological neoliberal would think this wasn’t essential. Their Brexit policy of unconditional support for a referendum means Brexit would end under a Labour government.

In contrast, the Conservative party has morphed into a Republican party led by our version of Trump. It was heading that way before Brexit, and Brexit has pushed it over the edge. It is as imperative to remove the Conservative party from power as it is to remove Trump, and ensure that it does not return in its current form. Just as the need to remove Trump is not conditional on whether they are opposed by Biden or Sanders or Warren, so the same is true for Johnson. That cannot be done by the Liberal Democrats in 2019 anymore than it could in 2010, and it cannot be done by forcing the Tories to be a minority government. Only a prolonged period in opposition will convince Tory members and MPs that Brexit, extreme neoliberalism and Trumpian authoritarianism have all become toxic. The median voter still has a natural place to go, and that is to Labour’s European social democracy rather than the Conservatives as Republicans and Johnson as Trump..


Saturday, 14 September 2019

Why the Supreme Court must protect our constitution

This is a very short post about a critical matter. It will not be a 'on the one hand, on the other' type of discussion because there is one overwhelming argument. It is about protecting our parliamentary democracy, a democracy that in one area in particular relied on norms of behaviour that have now been broken. The Prime Minister has shut down parliament for his own political reasons, and the only institution that can stop both that and a Prime Minister doing it in the future is the UK’s legal system.

According to David Allen Green, Scottish judges are less disinclined to get involved in political matters than English judges. If this is correct, then the decision of three senior Scottish judges that Johnson had lied to the Queen in asking to suspend (prorogue) parliament may be overturned. That, to put it plainly, would be a disaster for the UK constitution.

Why am I sure parliament was suspended for political reasons? Because shutting down parliament for 5 weeks is not necessary before a Queen’s Speech. The excuse that parliament normally suspends itself for the party conference season will not wash because (a) Johnson knew full well parliament was thinking of not doing so because of the gravity of the current situation, and (b) it was suspended well before that season. The three top Scottish judges also thought the motivation was clear. 

Why is this so important? The reason is obvious. If the executive can suspend parliament whenever it likes, for purely political reasons (it doesn’t like what parliament is doing), then the executive have the power to end our parliamentary democracy. First it is for a few weeks, and then it is for a few years. It is simply nonsense to say that this is a political matter, because politics has been shut down. Parliament cannot even vote no confidence in the Executive because parliament has been suspended. The argument that the law should not get incolved in political matters does not wash on this occasion.

The first best solution to this loophole in our constitution is to do what other countries do, and let parliament vote on its suspension, much as it does if it wants a recess. But until that happens, our courts are the only line of defence against a Prime Minister who suspends parliament against its will for his own political reasons. If the Supreme Court cannot defend our constitution when parliamentary politics is shut down, who can?

Tuesday, 10 September 2019

Some observations on tactical voting in the forthcoming General Election

The first and most obvious is this. If you say you are a Remainer, or if you understand the nightmare that No Deal will create, or want to end the threat to democracy this government is, you have to vote tactically. The converse is also true. If you don’t vote tactically, you by your actions are supporting a No Deal Brexit. You will be partly responsible for a No Deal Brexit.

If you want a Brexit that does not involve crashing out, you might tell yourself that the only way of getting a good deal is to keep No Deal on the table. But it is obvious by now that Johnson has no intention of even trying to get a deal, because he knows the EU will not budge on the need to prevent a hard border in Ireland. Amber Rudd in her resignation letter made that clear, as have many other Conservatives. If Johnson wins an election you can be sure we will leave with No Deal.

Tactical voting is second best. The first best thing to do is for Labour and the Liberal Democrat/Green alliance to cooperate, much as Farage will almost certainly do with the Conservatives. There are tons of seats where Labour have no chance to win, and plenty where the Liberal Democrats cannot win. In the current poll of polls, Labour are static on 25% and the LibDems are static on below 20%. The idea that during an election the LibDems and Labour could swap places is fantasy, and in contrast there are good reasons for thinking Labour may make some gains during the campaign. It makes no sense for the LibDes not to cooperate, and then end up with a government that will crash us out of the EU because people voted LibDem in lots of Lab/Con marginals.

Equally the potential gains to Labour in cooperating are huge, as this FT article shows. Under current polling Labour would get about 220 seats and the Tories just under 350. If the LibDems stood down in Lab/Con marginals Labour could get nearly 300 seats, beating the Conservatives. A belief that Labour will make similar gains during the election campaign as they did in 2017 is almost certainly false. May ran a terrible campaign, Cummings will not. He will employ all the social media tricks he used to win the EU referendum vote and more. In contrast to 2017, many will not vote Labour because of the antisemitism issue. Why risk the certainty of gains under cooperation for more risky options?

Unfortunately I see no signs that this kind of cooperation will happen. The Conservatives can cooperate with the Brexit party because the Brexit party is under the complete control of Farage and the Conservative party is now under the complete control of Cummings/Johnson. Both Labour and the LibDems are more democratic, and resistance to cooperation remains high. 

In addition the LibDem leadership fears that because Tory voters believe the 'Corbyn as devil' meme, they will not switch to the LibDems if they cooperate with Labour. It does not matter that non-cooperation means far more Labour seats will be lost than LibDem seats gained, increasing greatly the chances of a Johnson victory: party advantage is more important than stopping No Deal. So we have to presume that cooperation between the LibDems and Labour over seats will not happen. (In contrast, LibDem cooperation with expelled Tories seems acceptable.)

Which is why voters are going to have to do what politicians will fail to do, and vote tactically. The People’s Vote and other Remain campaigns understand that, and will be campaigning and helping with tactical voting. In most cases what to do is obvious: vote LibDem where the LibDems can realistically beat the Conservatives and vote Labour where Labour are more likely to beat the Conservatives.

The key point that I want to make is that the goal has to be to elect a Labour government, which realistically will be a minority Labour government. If that victory is more than marginal, Brexit will end one way or another. Those who say they cannot trust Corbyn on Brexit, or that Corbyn is really a Brexiter, are falling for media propaganda. There is no way Corbyn, even if he wanted to which I doubt, could go back on his commitment to hold a referendum. The trick is to hold a referendum in such a way that Remain are sure to win, and that means not having No Deal as the other option.

In contrast a minority Conservative government would do everything it can to avoid that outcome, and with Labour Leave MPs they will probably have the votes to do so. In that case Remainers would be relying on the patience of parliament and the EU which will be severely tested over five years.A more probable outcome if Labour do badly is a majority Johnson/Cummings administration. Every LibDem attacking Labour are encouraging this outcome. 

This point is important when deciding who to tactically vote for in difficult cases. If the contest is between a Labour Remainer and an independent, where the former can realistically win, then it makes sense to vote Labour because it increases the chances of a Labour government. However if that Labour MPs supports Leave, the decision is reversed, because we need a majority of MPs supporting a referendum whoever is in power. In a contest between a Leave Labour MP and a Conservative Leaver, then it is obviously important to vote for the Labour MP, because they increase the chance of a Labour led government.

Whether enough voters vote tactically in this way will determine the future of Brexit. We have, at last, a sure way of ending this nightmare of the last three years, and I fear if we don’t take it all those campaigns and every march will have been for nothing. I also fear for democracy under this government, which has shut down parliament to stifle accountability and will no doubt do so again. This could be the last chance to end Brexit and save the United Kingdom as we know it. We have to take that chance.

Friday, 6 September 2019

Different kinds of fiscal stimulus

Newspaper day. In the Guardian I have a piece that looks at how we should regard any tax cuts that Boris Johnson may announce as part of the forthcoming election. And make no mistake tax cuts are coming (we already know they intend to cut the tax on petrol), because the spending review signalled that the governments rule will change, as Chris Giles discusses in a good article in today’s FT in which I among other economists are quoted. .

In the Guardian piece I argue that tax cuts are a bad idea because in the context of us leaving the EU they will almost certainly produce unsustainable increases in the deficit without much of a compensation in higher output. As I say in the Giles FT article, policies that if unchanged would lead to steady and permanent increases in debt to GDP are not a good idea. That in turn will mean that at some stage either taxes will have to rise or we will be back to austerity.

But why did I also imply that Wednesday’s spending review was to be welcomed? Are not spending increases and tax cuts not two sides of the same fiscal stimulus coin? There is the obvious point that in many areas public spending cuts have gone way too far. But there is a macroeconomic point as well. Spending increases directly raise aggregate demand by the same amount. Things like income tax cuts, particularly if they go to the better off, are largely saved. (A number of around a third is commonly found in empirically studies for the amount actually spent.) So you get less demand stimulus for your money.

According to calculations done in a separate article by the Financial Times, Labour’s likely plans will also raise the ratio of debt to GDP. But if you look beyond the ‘scare’ headline, the reasons are quite different. Labour will still meet its fiscal rule for current spending, but the amount of investment planned could lead to the ‘falling debt to trend GDP’ part of the rule being breached. These calculations need to be taken with a pinch of salt, because they assume the additional investment produces no increase in GDP, and therefore no higher tax take. Even the IFS when they evaluated Labour’s election plans in 2017 allowed additional public investment to boost GDP. Which is just one reason why the FT’s analysis annoyed the large number of economists, including me, who signed this letter published in the FT today.

I didn’t like the FT write up for another reason. It seemed to be designed simply to be one more fiscal scare story. If I had been writing this I would have asked whether, if the policy did in fact break the debt to trend GDP part of the rule because of more public investment, that part of the rule made sense. A company increasing investment would happily increase its debt to sales ratio if it did a lot of investment, as would an individual increase their debt to income ratio when buying a house. Perhaps that part of Labour’s fiscal rule is a hangover from the days when mediamacro thought government borrowing was a bad thing, even when it was additional investment?

That is the key difference between Labour and the Conservative policies. If the debt to GDP ratio rises because of supposedly permanent tax cuts, that leads to steadily increasing debt to GDP and so cannot be sustained. Running public investment at high levels because you are restoring the public capital stock and as part of a Green New Deal may be prolonged but it is not permanent, and temporary increases in debt to GDP to finance investment make sense.

Monday, 2 September 2019

Do Conservative MPs really think they can cope with the consequences of No Deal?

Dear Conservative MP

You are no doubt bracing yourself for the short term consequences of crashing out of the EU. But you still feel that once we get over the shortages of food, fuel and medicines, things can get back to normal again after three mad, Brexit obsessed years. But have you thought about what the new normal will be? It will be anything but normal, and it will not be a nice time to be a government MP.

The first and most obvious departure from recent normality is the breakdown of peace in Northern Ireland. A hard border is an inevitable result of crashing out. That border is the end of the Good Friday Agreement (GFA), and anyone who tells you otherwise knows nothing about Northern Ireland or hates the GFA. Stormont government, already broken for two years, has almost no chance of being put back together. We will have permanent direct rule, and a gradual escalation of violence that will first require mainland police, and then the army, to quell. Will you be comfortable as being one of those that made this happen?

You may think that is a small political cost because the mainland and its voters have never cared too much about what happens in Ireland. That is why terrorism will eventually spread to the mainland. Will the Conservative party then be forgiven for throwing away a peace that was won with so much difficulty and had endured for decades? Do you fancy being a minister for Northern Ireland?

That is not the only part of the UK that will be giving the government grief. A No Deal Brexit will make a majority of Scottish voters favour independence. Ignoring the SNP’s calls for a new referendum cannot be sustained without civil unrest, and attempts to do so will only harden opposition to the Union. It is quite likely that the government will fight and lose a referendum at some stage, and then it will be bogged down in the negotiations that this loss will require. Do you want to be a Conservative and Unionist Party MP in a government that broke the Union? Do you fancy being a minister for Scottish affairs?

You might think that at least Brexit is done and over as an issue. You would be wrong. It will be replaced with desperate attempts by the UK government to get a trade agreement with the EU. What were Brexit negotiations will become trade negotiations. In these negotiations the EU will insist on something like the backstop. The UK government will initially refuse. With no agreement in sight, yet more firms will leave the UK and many will collapse or shed jobs. Will you be comfortable with knowing that was a consequence of your actions? Do you fancy being a Business department minister trying to decide which firms to bail out and which to go under?

Did you really believe that a trade deal with other countries, and particularly the United States, would provide any sort of compensation for a reduction in EU trade and the UK economy after a No Deal exit? Trying to get these trade deals will take a lot of political time and energy. In reality the UK will be lucky to replicate the trade deals that we already had through the EU. As long as Trump is in power a trade deal with the US will either involve serious damage to the UK or it will not happen, and even a Trump deal might be blocked in Congress without the backstop. How will you explain either to your constituents after all the talk of Global Britain?

A lot of these costs of a No Deal Brexit can be covered up in the short term by money from the government that it does not have. According to the Resolution Foundation the old fiscal rules have already been broken, and after crashing out of the EU it is going to get much worse. UK borrowing will grow and grow as a share of GDP, as the impact of a No Deal Brexit on the public finances become clear. Are you happy that you will be helping to trash the Tories reputation among many for economic competence? Fancy a job at the Treasury during this period?

Farmers in particular will need large subsidies after they find they cannot sell their goods to the EU. New trade deals with other countries will be unable to compensate. At some stage lots of farmers will go out of business. Some may be your constituents. How do you think they will regard you as someone who helped this happen? Perhaps you will be a minister at DEFRA talking directly to even more of them.

The post-No Deal government will also have to suffer a series of international humiliations as the UK’s importance in international affairs gradually diminishes. One of the things that we could be forced to relinquish in the absence of EU support is the UK’s permanent seat at the UN. Our ability to look after our overseas interests will be steadily compromised as the money runs out. It is difficult to predict what these humiliations will be but don’t expect any other country to come to our aid. We are in the era of international regional groupings and we will not be part of one. Is that what you became an MP to achieve? A job in the Foreign Office perhaps trying to talk to people who don’t want to talk to you?

That is a most likely case scenario. Worst case is that No Deal shortages mean Johnson fails to win the forthcoming General Election, and you become an opposition MP, for perhaps a very long time. Or these shortages lead to civil disorder, and the government takes upon itself emergency powers that reflect its authoritarian streak. Objections from parliament, or even laws passed, are ignored as the government has already threatened to do. Are you comfotable working in the Home Office in such circumstances, dealing with this but also hundreds of EU citizens wrongly denied permanent residence?

You say that if I vote against the government to stop a No Deal Brexit I will lose my job at the next election. But is a government MP a job you really want, if that government is going to spend all its time fighting fires in Northern Ireland and Scotland, pleading with other countries for disadvantageous trade deals, borrowing more just to keep trying to avoid raising taxes, fending off angry farmers whose lives you have helped ruin, and watching the UK’s standing in the world gradually decline? Not to mention trying to talk to angry constituents who cannot get their medication in what doctors call the biggest crisis the NHS has ever faced.

Perhaps it is better to do what you know is right, so that during the subsequent chaos you can hold your head high and say you tried to stop it happening.

Yours sincerely

Simon Wren-Lewis

Friday, 30 August 2019

Johnson suspends parliament to force a crash out Brexit

On Brexit at least (and who knows what may be next) UK democracy has been suspended. Yesterday the Prime Minister drastically reduced the number of days parliament will sit until we automatically crash out of the EU. On the critical issue of Brexit, the Prime Minister has become an unelected dictator. He intends to use his dictatorial power to restrict the supply of medicines and food to the British people.

The device he has used is a quaint part of the UK constitution where the Queen decides when parliament sits or does not sit. Nowadays the Queen has no power so she takes advice from the executive. The Prime Minister instructed his lackeys to ask the Queen to prorogue (the technical name for suspend) parliament for 5 weeks and the queen approved. It is as if the President could shut down Congress whenever he liked, and in particular whenever they were about to do something he disliked.

It was cleverly done, in that it allowed parliament to sit for effectively four days in early September and probably about a week just before we crash out of the EU, so the PM could claim parliament still had “plenty of time” to discuss Brexit. Johnson, like Trump, is a serial liar. As the former head of the civil service Lord Kerslake said, to believe this is anything other than an attempt to critically curtail the chances that parliament can stop us crashing out is an insult to the intelligence.

Johnson knows that only the most foolish will believe the 'plenty of time' lie. But Johnson's big idea that he wants wavering Tory MPs to believe is that the EU will only change the backstop if they truly believe the UK will crash out. This is one more Leave misjudgment about the EU, in a long list of them. The EU do not want the UK to crash out, but they are not going to sacrifice peace in Northern Ireland to avoid it. Any UK government not made up of anti-EU fanatics would want to avoid that to.

Like so much in the UK’s unwritten constitution, the Queens right to decide when parliament sits is a hangover from our history that has been allowed to remain because it was understood that the Queen would follow the advice of the Prime Minister (the last monarch that didn’t had his head cut off) and the Prime Minister would respect the will of the parliament. In the UK parliament is sovereign, but only because there were unwritten norms that assumed no government would be undemocratic enough to disobey.

Article 50, the process by which the UK is negotiating to leave, also makes an assumption that governments reflect the interests of its citizens. It says that after two years, unless the EU extends that deadline, the leaving country crashes out with no trade deal, and indeed no deal on anything else. It was assumed that no rational government would ever want to crash out and so this deadline was a great incentive to agree to a deal of the EU’s liking. The UK now has a government that relishes the opportunity to leave without a deal, which the government’s own advice suggests will lead to shortages of food, fuel and medicines.

Does this affront to democracy matter if it is restricted to the issue of Brexit, where a referendum voted to leave? It matters because in that referendum the Leave side only talked about leaving with a deal. That is the mandate that this advisory referendum provided - to leave with a deal. So leaving with no deal does not even respect the referendum.result.

Here are some comments by MPs about the idea of a Prime Minister proroguing (i.e. suspending) parliament to get their way on Brexit.
I think it would be a terrible thing that having said we should have more power in this country and trust our institutions more ... and shut the door on parliament”
[Proroguing parliament] goes against everything that those men who waded onto those beaches, fought and died for and I will not have it.”
It is a ridiculous suggestion”
Delivery on democracy while trashing democracy. We are not selecting a dictator.”

Not any old MPs, but now ministers in the Prime Minister’s cabinet. Yet none has expressed any regret at it actually happening, now that they have some power. How far the Conservative party has fallen.

Let’s think about what this actually means if we crash out of the EU. A measure that will have profound implications for most UK residents will come into effect without approval from the House of Commons and with hardly any scrutiny. The official document that sets out the likely impact on food and fuel supplies, medicines and much else remains secret, and no House of Commons committee has had a chance to examine claims that the government has somehow avoided the shortages this document predicts.

You may say that parliament overwhelmingly gave the approval for the government to start the Article 50 process, but on this occasion - and time and again subsequently - MPs have not anticipated how fanatical those advocating No Deal are. They will certainly not have anticipated a No Dealer becoming Prime Minister and suspending parliament to crash out via Article 50. If you had said that more than two years ago you would have been laughed at. UK democracy has fallen a long way in two years.

For those tempted to say this is just one issue and just five weeks (the total length of parliament’s suspension), I would say two things. First, this is hardly a minor issue, but one of the biggest issues that the UK has had to deal with in decades. On this vital issue, Johnson is trying to force an outcome that most people do not want. Second, pluralist democracy normally does not end with a bang but in stages of plurality. No doubt when the Hungarian government in 2011 abolished its fiscal council plenty of Hungarians thought little of it. That has been followed by the end of judicial independence and and independent media. It is clear this government also has little respect for parliamentary democracy.

Will the majority of MPs in the little time they have left do enough to stop us crashing out of the EU? I honestly do not know, but I am pessimistic because only Johnson can extend Article 50 and I now think it is quite likely he will try to frustrate parliament in other ways and that he will ignore parliament if it did succeed. A vote of no confidence may be the only option MPs have. Will Johnson’s suspension of parliamentary democracy unite enough MPs to do this? Again I have no idea, but I can say this.

If Jeremy Corbyn in government did anything similar to this in order to get one of his policies through, I would argue he was no longer fit for office. But perhaps putting power above principle, as the MPs whose quotes I show above clearly do, is today a characteristic of almost the entire right of UK politics? The principle at stake right now is parliamentary democracy itself.


Wednesday, 28 August 2019

A New Macropolicy Assignment

With central bankers rightly pessimistic about fighting recessions, maybe it is time to give that responsibility to politicians, while keeping central banks in charge of keeping inflation at target.

At the recent Jackson Hole conference of central bankers there seemed to be a general acceptance that central bankers just do not have the tools to effectively fight a new recession. I discussed some of the reasons here. The most familiar is the lower bound for nominal interest rates, but Anna Stansbury and Larry Summers argue that even before we get to the lower bound interest rates may be an ineffective stabilisation tool when they are very low. [1]

This is not a problem specific to this period of time. Most people agree that the natural real interest rate (the real rate at which inflation is stable) has fallen with little sign that this fall will be reversed. That means nominal interest rates are likely to remain low for decades. So its not just this recession where monetary policy is impotent, but every recession in the foreseeable future.

One response is that, as I argued in my earlier piece, central bankers should aim to develop new tools that are effective in recessions. This includes differential interest rates for borrowers and savers, and helicopter money. But for whatever reason central bankers are in no hurry to do this. Instead their current view is that fiscal policy needs to take some of the burden of fighting recessions.

Unfortunately for a variety of reasons many politicians in government have not got the message. In the Eurozone they are stuck with primitive fiscal rules that assume monetary policy can always control demand. In the US and perhaps the UK they think a fiscal stimulus is giving the rich tax breaks, which is perhaps the most ineffective way of stimulating demand.

More generally we have had decades were central banks were responsible for controlling inflation and avoiding downturns, and both politicians and the media (and to some extent economists) will require something more than one Jackson hole conference to shift this expectation. Maybe another recession might do it, but the largest recession since WWII failed to do the job. Part of the problem is that central bankers will try to fight the next recession with ineffective measures like Quantitative Easing, and this appearance of activity will fool too many into thinking they have the problem in hand.

As we saw in the last recession, the danger is not just that politicians will fail to fight a recession, but they may actually do the wrong thing. In their minds and also the minds of most media commentators, the central bank is responsible for controlling demand (and therefore fighting a recession) but politicians are responsible for controlling the deficit. This leads to a perverse response in an economic downturn if monetary policy is ineffective.

Macroeconomists call a simple division of labour between monetary and fiscal policy an assignment. What I call the conventional assignment is that interest rates control demand (and therefore inflation) and politicians control the deficit. I called this assignment conventional because it had become ingrained in the minds of economists, the media and politicians. Right now the conventional assignment is not working in terms of fighting recessions.

If central banks remain conservative in developing new tools, what we need to do is give back to politicians the responsibility for fighting economic downturns. One way of doing that is to take monetary policy away from independent central banks, and give it back to politicians. This would make politicians responsible for avoiding recessions as well as controlling inflation, and they will realise that a fiscal stimulus is a more effective means of doing this than any kind of monetary policy stimulus.

I do not want to rehearse the arguments for or against central bank independence (CBI), but simply note that the popularity of CBI comes from a suspicion that politicians are unreliable when it comes to fighting inflation. And unlike supporters of MMT I see no reason to believe that interest rates chosen by independent central bankers are not effective at moderating periods of excessive inflation.

My suggestion is instead a modified assignment. Central bankers remain responsible for controlling inflation, but politicians become responsible for fighting recessions. That is two different bodies managing the same variable - aggregate demand - but at different parts of the business cycle. Think of it like a car, with independent central bankers as the brake and politicians as the accelerator.

Cars are designed so it is difficult to push the accelerator and brake at the same time. We need something similar for this assignment: some way of coordinating between politicians and central banks so they don’t try to manage demand at the same time. The obvious coordination device is the adoption of a common belief about what the NAIRU is (or something similar to the NAIRU) and a common forecast (as actions will depend on expectations of future states of the economy).

The advantage of this asymmetric assignment is that it makes politicians responsible for tackling recessions, which in turn avoids a mistaken view that in a recession they should be controlling the deficit. In other words it is an assignment that rules out austerity. Any assignment that prevents austerity has to be worth considering.

[1] I will wait to see the paper before commenting on this idea, but there is no theoretical reason why the IS curve should be linear. What we need is some empirical evidence, but unfortunately the microfoundations hegemony means that is thin on the ground.

Saturday, 24 August 2019

Why a November General Election looks most likely, and why a government of national unity will not happen.

When I wrote this based on Johnson winning a November general election, someone asked me whether it was a prediction or a warning. It was both. I still think it is the most likely outcome..Here are my thoughts that led me to that conclusion, which of course may be completely wrong.  

Putting Brexit to one side, Johnson needs a larger majority to govern. So an election sometime in 2019 seems very likely. It is also clear he wants this to be a ‘people versus parliament’ election, where of course Johnson represents the people and parliament ‘is colluding with the EU’ to block No Deal. He has hit the ground running with various popular measures. So the key question is when in 2019 the election will be.

There seem to be three possibilities.

  1. An election before 31st October
  2. An election announced before 31st October that takes place after that date
  3. An election in November or December

An important factor governing this choice is that Johnson will avoid an election after we crash out with no deal, unless he is completely deluded about what crashing out means. Even if he blames the EU for everything that goes wrong, voters will not take kindly to a government that played down the consequences of crashing out when crashing out turns out to have severe consequences.

This means that if he intends to leave with no deal, his only choice is (1). But he needs a pretext, and that pretext would have to be MPs instructing the PM to get an extension if he fails to agree a deal. He could ask parliament on 19th September to call an election to be held on 24th October, for example, but that would rely on parliament acting very quickly to rule out crashing out. Johnson also misses out on a crowd pleasing budget. It would be odd to base a complete strategy on parliament moving quickly, but nevertheless I think it has to be the second most likely outcome, particularly if he thinks leaving by 31st October is critical in suppressing the Brexit Party vote. .

Leaving this possibility to one side, we can rule out Johnson ignoring an instruction from parliament to extend the A50 deadline, because it involves holding an election during the chaos of crashing out. Which suggests all the talk of governments of national unity is a red herring, but for rather different reasons than Stephen Bush gives here. Labour may still call for a vote of no confidence (VONC), but Tory rebels are likely to vote it down while they pursue other avenues to stop no deal. Corbyn's choice about whether to call a VONC is lose/lose: if he doesn't he gets blamed and if he does and fails it will be spun as Tory MPs not wanting to support a Corbyn led government.  

If we rule out the improbable early election option (1), and we also assume Johnson will not want to hold an election after we crash out, then this means Johnson will accept an instruction from parliament to obtain an extension before 31st October. That would be obtained on the assurance of an imminent general election, and the EU would almost certainly accept this. Johnson gets his people versus parliament election.

This has the disadvantage, of course, that Johnson will have failed to keep his promise of leaving by 31st October, which risks a revival of the Brexit Party. He could respond that he has been forced to do so by an instruction from parliament which it would be irresponsible of him to ignore. His election campaign would be that the EU would have offered an alternative to the backstop, but this was undermined by MPs ruling No Deal out. 

As calling a general election before 31st October to be held after that date (option 2) mixes the task of campaigning with having to ask the EU for an extension, a November election seems the most likely outcome, although far from certain. 

There are another set of possibilities where Johnson really wants a deal, which is based - as Aleks Eror suggests - on something like a backstop for Northern Ireland alone. This is what the EU originally suggested of course, but no doubt Johnson could dress it up as a result of his tough talking, and much of the press would back him up. This leads to the same place. Parliament would reject the deal with the ERG and DUP in the lead, but he could fight an election on this basis and use a victory as a mandate.

If there is a November election, a Johnson victory seems the most likely option, although again far from certain. While Johnson taking over as PM has squeezed the Brexit Party’s support, Labour has so far only received a small recovery in its vote since the European Elections and the Liberal Democrats remain strong. Of course that may change before any election, but I would say the balance of probability is that this will fail to stop many Remainers in key Lab/Con marginals from voting LibDem or Green rather than Labour.

The irony of all this, if I'm correct, is that Johnson is looking to his rebel MPs to stop a no deal Brexit. A failure to do so, if this was accompanied by a failure to negotiate a new deal with the EU, would require either fighting an election after the chaos of crashing out, or Johnson choosing rather than being instructed to get an extension, as May did in March. If that happened then Johnson would suffer the same fate as May, and the Brexit Party would revive. Only in those circumstances might we not see an election in 2019.

Tuesday, 20 August 2019

Why did the UK become a failed state?

‘I should be the leader of a government of national unity’. ‘No you shouldn’t, someone else should’. I’m afraid if you were hoping I would write about this nonsense you will be disappointed. It seems to me right now nothing more than just another way for those who really dislike Corbyn to attack him and those who support Labour to attack everyone else. Rebel Tories will be hoping a crash out Brexit can be stopped another way, and if that fails or in the unlikely event that Johnson ignores parliament, who has the relatively unimportant job of leading a caretaker government will be decided days before it needs to be decided, and not before.

The discussion is one illustration that the UK has become a failed state, where a government about to do great harm to those it governs draws comfort from opposition parties arguing with each other. This post is about how a policy (crashing out of the EU) that will do nearly everyone harm and some great harm seems to have considerable, albeit still minority, support. I wrote in January about how the rest of the world thinks Brexit is utterly stupid, and leaving without any deal looks beyond stupid. When a country does something as idiotic as this, and it has popular support, there is something deeply wrong with that country.

Arguments that people really believe they will gain something worth the cost of the pain and suffering of crashing out merely shifts the question, because we will gain nothing that comes near compensating for the costs. Most supporters of Brexit cannot name an EU based law that has a significant negative impact on their lives, let alone a law that the UK opposed at the time, let alone compare that to the many EU laws that have brought benefits. Nationalism alone is not an answer: few think football fans would be better off if our teams stopped playing in the Champions League, or if our national teams could no longer buy overseas players.

What we have is an information failure, where warnings of the dire consequences of crashing out are not believed but fanciful stories that being outside the EU will allow us to improve ourselves are believed. It is no surprise that the government is furious about the leak of the Operation Yellowhammer (predicting immediate shortages of medicines, food and fuel after we crash out), but what is more surprising is that a third of the population believes politicians that say these worries, documented by the government's own civil service, are unfounded. Politicians that are normally quick to assert that the machinery of government is incapable of organising anything well on this occasion are pretending that same machinery can work wonders.

One of the lessons I learnt from working on the economic impact of a different kind of disaster is that consumer reaction can seriously magnify its impact. In this case as soon as stories of shortages occur people start ‘panic buying’ and those shortages are magnified tenfold or more. It is this reason that the leaked documents talk of dealing with law and order problems, including riots.

That no government minister will guarantee that no one will die as a result of crashing out is revealing. That the NHS is prevented from voicing its fears tells you even more. Yet many of those who believe it is right for us to crash out of the EU are also older and depend the most on the NHS. Again this makes no sense unless you see this as an information failure where these connections are just not being made.

The broadcast media is obsessed by recessions (and in particular the technical definition of a recession), but those freely predicting one should learn from what happened after the 2016 referendum. On that occasion many consumers responded to higher inflation cutting their real wages by saving less, and the same could happen again. We also saw in 2016 that predicting a recession that does not happen can distract from the real cost of Brexit. What we have seen instead since 2016 has been a steady gap emerging between UK growth and growth elsewhere, together with a collapse in investment. 

Too often short term shortages are presented in war like terms: we will get through it and it will be worth it once it is over. The truth is that by making trade with our biggest trading partner much more difficult will ensure that the UK grows more slowly. We will be permanently and substantially worse off as a result of crashing out. The bumpy road is going downhill. Those who tell you this is just another forecast do not know what they are talking about. One of the basic ideas in economics is that trade makes people better off, because if it didn’t why would people trade? Making it harder to trade with the EU means less trade with the EU. There are no sunlit uplands when it comes to crashing out of the EU, which is why of course other countries think we are utterly stupid to try. With less income comes less public services: a worse health service, higher taxes or both of these. There will be thousands of firms like this one, strangled not just by tariffs but the greater bureaucracy that comes with Brexit.

Leave politicians understand this, which is why they talk about all the marvelous trade deals we will get now that we are free from the EU. The reality is once again the opposite of this. The EU is in fact very good, and very experienced, at doing trade deals with other countries, and we will lose nearly all those when we crash out. Once that happens politicians will be desperate to do two things: sign a trade deal with the EU and with the US. Negotiations about a trade deal with the EU will not even start for some time, because the EU will insist on the backstop staying in place along with a level playing field in terms of competition, neither of which a Tory government will accept until they have to. The compromises that our current government thinks it can avoid by crashing out will be made at some point, and so all the pain of crashing out will be completely pointless.

Donald Trump supports Brexit because he knows the UK will be desperate to do a trade deal with the US when it leaves, and he knows people desperate to do a deal are vulnerable to exploitation. In this case no deal may well be better than a bad deal, but the government will sign it anyway because it will look good at the time, and the harm it does can be delayed or fudged. [1] This illustrates a basic political point. Countries are much stronger as part of a group than they are on their own. We have already seen how the EU has backed the Irish government in trying to keep to the Good Friday Agreement alive, and when the UK crashes out just watch the EU’s efforts to diminish the economic costs on the Irish economy.

What the EU cannot prevent is the creation of a hard border on mainland Ireland when we crash out. Pretending otherwise is another Brexit fantasy. That will see the end of the peace process that was so painstakingly won decades ago. Along with the kinds of terrorism we are already used to, we can add a revival of Irish terrorism. A belief that crashing out represents political gains at the expense of economic pain is nonsense, because the political costs of a No Deal Brexit are just as serious as the economic costs.

Are people really aware of this when the say they are in favour of crashing out? You either have to assume that a third of the population has gone mad, or instead see this as a fundamental failure of information. The UK is a failed state because the producers of information have made it fail. 

All the information on No Deal outlined above is readily available for anyone who wants to find it . But so is ‘information’ suggesting exactly the opposite: that all these warnings are Project Fear and our lives have been made much worse because of the EU. Only people like those who are reading this are likely to be able to sort out which are the more reliable sources. Many more people will not have the time or inclination to even look. They will rely on the mainstream media: newspapers and broadcasters.

Over half of newspapers read (hard copy or online) are pro-Brexit, and their combined print and online reach is huge, with a monthly reach of 29 million for the Sun. (Figures for daily newspapers based on circulation only are much smaller and more pro-Brexit.) But there is a key difference between the coverage of the pro and anti Brexit press. Just compare the coverage of the Sun or Mail on the Operation Yellowhammer leak with those in most other newspapers. Their headlines talks of the document being scaremongering, rather than focusing on the content of the leak itself. On Brexit at least half the press are acting at the moment as if under the control of the state, or you could equally say that the state is following a policy pushed by that section of the press.

This could be offset if the broadcast media was fact based, but normally it is not. Their model is not to tell the truth and expose lies, but instead to present balance, which in the case of Brexit involves balancing lies with truth. So those consuming Brexit propaganda from their newspapers will not find this corrected by the broadcast media.

Once you combine this with how important the media is in influencing opinion, then the key role of the media in explaining the information problem revealed by widespread support for crashing out is obvious. A large part of the consumers of information are reading propaganda which is not contradicted by broadcasters.

But there is another route where media coverage is important, and that is the media’s influence on party membership. Party membership is by definition partisan, and so will look at sources of information that are also partisan. The overlap of the Brexit press and the right wing press is very large. As a result, Conservative party members are likely to be even more influenced by the Brexit press. If I am right about the pivotal role played by the media, then we should expect the proportion of party members to be more in favour of crashing out than the population at large, as indeed they are.

The relationship between the press and politicians is not straightforward. Both are influenced by each other. The ring wing press was much more pro-Brexit than Conservative MPs as a whole, and through both routes (the population as a whole and through party members) this has influenced MPs. The 2016 referendum accelerated this process, as did the 2019 Tory leadership contest, because in both cases it strengthened the role of the Brexit media.

Ideas and policies normally come from politicians, and the partisan press will normally go with that. But occasionally ideas are initiated by the press, and politicians find it difficult not to run with them, as we have seen with Brexit. As the line newspapers take on major issues is normally decided by their owner, this is obviously undemocratic. But more generally it does not seem right that any major player involved in the means of information should turn their information provider into a propaganda vehicle. When that happens, you can end up with policies that suit the newspaper owner but for nearly everyone else are utterly stupid.

Stopping Brexit is only half the story, if we want the UK to stop being a failed state. We also need to tackle the causes of Brexit. Normally politicians dare not talk about reform of the media, because they fear the consequences. (Since Thatcher every leader of the Labour party except one has been unpopular with the public, and that one did a deal with Rupert Murdoch!) Corbyn’s Labour party has reform of the media as a key part of its manifesto. The proposals are modest, but by making the BBC more independent they may represent a start at ending the power of a large section of the press to misinform.

[1] The deal may not be signed by the US anyway, because Congress will require a backstop