Winner of the New Statesman SPERI Prize in Political Economy 2016


Tuesday, 23 July 2019

How the lessons from austerity have not been learned


The UK and the Eurozone are both vulnerable to the next recession, but both politicians and central bankers think each other should deal with it.


I don’t want to talk about the likelihood of a recession in the UK, US or Eurozone. Forecasting is a (necessary) mug’s game, where there are just too many variables to make anything like an accurate prediction. It is worth outlining the risk factors, and Grace Blakeley does an excellent job here. Instead my concern is the vulnerability in both the UK and the Eurozone to the impact of a recession if it happens. This vulnerability was clearly illustrated by the mistakes made after the Global Financial Crisis, yet in many ways the lessons of that failure have not been learnt.

Most people know the story of austerity after the Global Financial Crisis (GFC). In the UK the negative impact of the GFC was so severe that even cutting interest rates from around 5% to 0.5% was not sufficient to counteract its impact. As a result the Labour government in 2009 undertook various fiscal stimulus measures. They, together with lower interest rates, succeeded in stopping the fall in output, but by 2010 the signs of a recovery were still fragile. The new Coalition (Conservative and Liberal Democrat) government decided to focus on the rising budget deficit rather than the recovery, and undertook a large fiscal contraction in what became known as austerity.

The consequence of UK austerity was the slowest recovery from a recession in centuries. Here is a nice chart from a recent report by James Smith of the Resolution Foundation, which clearly illustrates the extent of the weak recovery.


Employment eventually recovered, but at the cost of an unprecedented fall in real wages. James Smith gives some evidence to suggest that the reason employment got off comparatively lightly but wages suffered by much more than we might expect was the 2008 sharp depreciation in sterling. This allowed firms to respond to the recession by keeping wages low, whereas in recessions in which sterling did not fall firms resisted nominal wage cuts and so had to resort to cutting jobs.

The idea that austerity was essential to reduce the deficit is simply wrong. It undoubtedly was a large factor in the weakness of the UK recovery. The tightening of fiscal policy has continued until today, with the consequence that interest rates have had to stay low to offset this fiscal tightening. The net result is that instead of rates being near 5% as they were before the GFC, they are below 1%. As James Smith points out, interest rate cuts in previous recessions have ranged from three to ten percent. This means that conventional monetary policy has almost no room to counteract a new economic downturn if one came.

The Eurozone is in an even worse position. Their history is of two recessions since the GFC, the second of which was largely caused by fiscal tightening as a result of the Eurozone crisis of 2010-12. The last time core inflation in the Eurozone touched 2% was in 2008, and it is currently around 1%. (More details from Frances Coppola here.) Interest rates set by the European Central Bank (ECB) remain at their lower bound. If a new recession happened, caused for example by a disruption in trade due to Donald Trump, conventional monetary policy would be unable to do anything about it.

Of course central banks in the UK and Eurozone still have various unconventional monetary policy tools. But the clue to their reliability at ending a recession is in their name. They are unconventional because they have only been used since the GFC, so we have limited evidence on their impact. It is like having an accelerator on a car where how far you have to push your foot down varies from second to second. You will end up driving slowly, which in economic terms means a prolonged recession.

All this is now largely understood by central bankers. All have said in one place or another that they will be relying on fiscal stimulus to help counteract the next recession. The ECB needs fiscal stimulus right now to get out of the last one. Yet fiscal stimulus is in the hands of politicians and not central bankers, and many of the politicians and political parties that were crucial in implementing the austerity that hit the post-GFC recovery are still in power.

There is therefore a danger that the policy of fighting the next recession will fall between two stools. Central bankers will say, in their own quiet and politically sensitive way, that they are not equipped for the task, but politicians may be deaf to these messages and will once again start worrying about deficits that inevitably rise in an economic downturn. To say more, we need to differentiate between the UK and the Eurozone.

In the UK some may think that with a new Prime Minister the problem of austerity has disappeared. In order to get elected both candidates have promised all kinds of tax cuts or spending increases. But as I have argued recently, what we are seeing here is what economists call deficit bias: the tendency to borrow just for political gain. Worse still, if the borrowing is mainly for tax cuts (including tax cuts for the rich), there is a danger that it is part of a strategy called ‘starve the beast’, which involves increasing the deficit with tax cuts and then demanding spending cuts to bring the deficit under control.

The upshot is that a Tory leader wanting to spend and cut taxes to please party members provides no guarantee that they will undertake effective fiscal expansion in any future recession. Neither of the Coalition partners has apologised for the mistake of austerity, and we have no reason to believe that they wouldn’t do it again in any future recession. The only major party that has a fiscal framework that would automatically move to fiscal expansion when interest rates hit their lower bound is Labour.

In the Eurozone there is also too little recognition among senior politicians that fiscal stimulus is required when ECB interest rates are at the lower bound. This is why Eurozone inflation is still below target. The OECD point to a crying need for more fiscal stimulus. Germany in particular has a great need for additional public investment, but is restrained by a fiscal rule that is worthy of an economic stone age. Efforts to create a Eurozone budget that could act in a countercyclical way have also been blocked by politicians, despite support from the ECB.

We can hope for a change of political attitudes in both the UK and Eurozone, but central bankers should not be content with hope. They have been delegated the task of stabilising the economy, and if they fail to complete this task in economic downturn after downturn many will come to believe that delegating monetary policy to central banks was a huge mistake. In addition, it is not the case that all central banks can do when interest rates hit their floor is unreliable types of unconventional monetary policy.

A fail safe way for a central bank to bring a recession to an end when interest rates are at the lower bound is to create money and give it directly to citizens. It could also create money and give it to borrowers by subsidising borrowing rates. The former is called helicopter money, a term due to Milton Friedman, and would require cooperation from government. The latter has been undertaken by the ECB in the past (see Eric Lonergan here), and so could be done to a greater extent without involving government. In essence it involves cutting interest rates on borrowing to well below the lower bound, but keeping rates for savers at the lower bound, and funding the difference by creating money.

Central banks in most of the major economies have been happy to create money during a recession, but nearly always this money has been used by central banks to buy assets. The impact on the economy is then difficult to predict, because no one's income has increased and the interest rate for borrowing has not fallen significantly. Giving the money directy to people rather than buying assets would have a direct and more predictable impact in stimulating the economy, as Frances Coppola argues in her new book.

So why do central banks not do this? There are two major reasons. First, they worry that increasing people's income is the job of elected governments, although I would argue that it is central bank's job to stabilise the economy if the government does not. (See my article with Mark Blyth and Eric Lonergan for more on helicopter money.) Second, if they create money to buy assets, when the economy recovers they can if necessary take money out of the economy by selling those assets. If they give that money away they wil not have those assets to sell. However this problem could be dealt with by governments guaranteeing the supply of assets a central bank needs.

Besides these arguments, I think there is a third argument why most central banks have not proposed doing these types of measures in a major way, and that is conservatism with a small c. The problem is that, if politicians unprepared to undertake fiscal expansion in a recession remain in power, that conservatism may be very costly both to us and to central banks themselves.

Friday, 19 July 2019

Reaction to “There is only one alternative to Prime Minister Boris Johnson”


I anticipated that my last post would not be popular in many circles. I want to respond to some of the common themes from the responses in this post, but there was one reaction I was not expecting. First some background. Since the beginning of the year I have had an arrangement with the online edition of the New Statesman (NS) that my Tuesday post should be simultaneously published on my blog and in the NS. The arrangement was working well.

My last post was published by the New Statesman as usual. And then sometime later it was unpublished. The line my post took was not one the NS wanted to carry. I do not know the details of what happened but I can guess. The post was hardly extolling the virtues of Corbyn as Labour leader, but it suggested any attempt to get rid of him was both futile and would increase the chances of Johnson winning the next election. I don’t think that message was welcome.

Of course any publication has a right to chose what it publishes, and I have no quarrel with that. What was unfortunate was the implicit confirmation of the main concern in the post, which was that the non-partisan and even left leaning media with the support of the Labour centre really believes they can depose Corbyn using the issue of antisemitism. I gave in the post the reasons why I think Corbyn is unlikely to depart as a result of this pressure and any challenge is unlikely to succeed, and none of the responses to my post questioned this logic.

Among comments on twitter, the most offensive was to suggest my post was itself a product of antisemitism, along the lines that I didn’t care about Jews. By implication anyone voting Labour in the future is also antisemetic. The most moderate remark I can make about this kind of comment is that it gives the drive to remove antisemitism a bad name. The implication that you are antisemitic if you support a party accused of badly handling internal cases of antisemitism is an extension of a far more frequent argument: the idea that it was not virtuous to vote for Labour.

A common response was that it was morally wrong to support a racist party or party leadership. Of course Labour is not a racist party and I doubt very much that its leadership are antisemitic, but lets put that to one side until later. The problem with this argument is that you can make lots of other similar arguments. Is it morally right for someone to support a party that was part of a government that caused untold misery through austerity, and where neither of the possible future leaders have apologised for supporting austerity? Is it morally right to support politicians that voted for the hostile environment policy?

Voting should be about weighing the pros and cons of each party’s stance on different issues, and in a FPTP system it means also thinking about whether voting for some parties in your constituency is a wasted vote. It is very hard to rationalise voting or not voting on the basis of I couldn't possibly vote for a party that showed any sign of racism. Would you really not vote if a party that failed to deal with antisemitism adequately even if it meant that another party whose leader actually uses racist speech and has voted for racist policies would stay in power? This is not a trolley problem: it is part of being a good citizen to make this choice.

Another comment I received is that there are no degrees of racism. I think this is nonsense. Once again it is useful to compare the two main parties. Both leaders are accused of being racist. With Corbyn the evidence amounts to things like not recognising antisemitic tropes in a painting, not mentioning someones antisemitism in an introduction to a book, or being associated with antisemitic people as part of his support for statehood for Palestine. With Johnson we have someone who has compared Muslim women in a certain dress to letterboxes (and those are not his only racist slurs), and who has supported a racist policy: a hostile environment that saw the deportation of members of the Windrush generation. Are these really equivalent?

Or let us look at the two parties. The Labour party has been accused at operating an inefficient disciplinary process for antisemitism or worse, of leadership interference in this process. The Conservative party routinely lets those exposed of making racist comments back in after a few months of ‘re-education’, and has just voted for a leader who makes racist remarks because most members show racist tendencies (to put it too mildly). Are these really equivalent?

Going beyond the UK, is telling non-white Congresswomen born in America to go back home to the crime infested countries they came from the same as anything Corbyn has done? The thing about the antisemitism in the Labour party is it involves no policy against Jewish people and it involves no language by members of the Labour leadership team against Jewish people. Some Labour party members are antisemitic, but there is no evidence that this number is unusually high compared to the population at large. When people try to equate antisemitism within the Labour party to racism in the Tory party they ignore these points.

The most depressing aspect in comments on my post was the number of people who just talked about antisemitism within Labour as if it was the same as racism within the Conservative party. This lacks the key ingredient that is also lacking in the media’s response, and that is a sense of perspective. One of the cheap remarks made in comments was that I was equating antisemitism within Labour to Clinton's email server. This was obvious nonsense, as I was clearly using the Clinton case to show how the media as a whole can lack a sense of perspective, and when it does that it can have terrible consequences.

Perhaps the most common response in comments was that a choice between Labour and the Tories could be avoided by voting Liberal Democratic. Despite the arguments in my post, I was told that the era of two party politics was over. Let me make one final point. The disastrous events that we have recently seen in the UK started in 2010, with in particular an austerity government during the worst recession since WWII. For more than half of the 9 years since 2010 the Liberal Democrats were in power, and the two candidates for leader were both ministers in the Coalition government. Their actions and voting records speak for themselves. As I have said in the past, I think the UK needs radical change to ensure nothing like the disaster of the last 9 years happens again. Only Labour at present provides that. Simply returning things to how they were before 2010 allows what happened from 2010 to happen all over again.











Tuesday, 16 July 2019

There is only one alternative to Prime Minister Boris Johnson


Corbyn may not be a great or even a particularly good leader, but it seems few in the media recognise he is the only viable opposition to the far right we have.

While I have been critical of the Labour leadership’s Brexit stance for some time, and still do not think Corbyn has gone far enough to maximise Labour's chances of General Election victory, he has done enough to ensure one thing: his survival. While his Brexit stance, together with continuing problems with antisemitism, will have lost some members and made others luke warm, there is little appetite to replace him amongst most members. This view will only strengthen as the likelihood of a General Election increases. It is Labour party members who choose the party’s leader.

But what about antisemitism? Could this issue be the downfall of the Labour leadership? The answer is almost certainly no. As the poll discussed here shows, while 66% of Labour members think antisemtism within the party is a genuine problem, 77% think the problem is deliberately exaggerated to damage Labour and Corbyn himself. On the basis of current evidence, and that includes any rebuke from the EHRC investigation, Corbyn’s position among members on this issue is secure.

The only other factor that might raise questions among the membership about their leader is very bad poll ratings. But two factors mean this is not a risk factor for Corbyn’s leadership. First, the new Brexit policy will win some voters back. As Rob Ford notes here, there are signs that the electorate’s flirtation with four party politics is coming to an end, as both Labour and the Conservatives move their own Brexit position. Second, Labour under Corbyn have been there and done that in 2017, such that there will always be the hope of a pre-election surge for Labour.

Could Labour’s continuing antisemitism crisis create another serious split between MPs and the leadership, along the lines of the vote of no confidence in 2016 after the Brexit vote? A split of this kind would only make sense if Labour MPs believed that they had a chance of defeating Corbyn in a ballot of members, and as I have already suggested they would be delusional. MPs may demand this and that in terms of how disciplinary procedures are handled within Labour, but any attempt to unseat Corbyn, or mass defections by Labour Mps, seems unlikely.

The security of the Labour leadership’s position within the party is one of two key factors in which to evaluate the impact of continuing criticism of Labour within the mainstream media and elsewhere. The second is the threat we face from what has become the most far right and dangerous government the UK has experienced for decades if not centuries.

The Conservative party is looking increasingly like the US Republican party, and its likely leader increasingly looks like a UK version of Donald Trump. However the Conservative party has got itself into a far more dangerous position than the Republican’s have ever faced. The Tories have Nigel Farage and a right wing press pushing them to implement a No Deal Brexit that goes way beyond anything Trump might be contemplating with tariffs. Furthermore opposition within the Tory party towards Johnson’s leadership ideas and No Deal looks vanishingly small.

Two recent events have underlined how far the UK government has descended into far right territory. The first was of course Johnson’s failure to stand up for one of our own ambassadors in the Darroch affair. A corrolorary of No Deal is that a trade deal with the US becomes politically essential, and that in turn means that Trump’s not so polite requests become the UK’s actions. This is a President who tells non-white Congresswomen born in the USA to go back to “the crime infested places from which they came”. In practice a US trade deal that UK politicians desperately want will be disastrous for UK agriculture, UK consumers and many more, people already hit hard by the UK leaving the EU with no deal.

The second recent event was Amber Rudd preferring a job in any future Johnson government to her previous opposition to No Deal. It has been an object lesson to those who thought Conservative MPs would always stand up for business and the Union to see how quickly all but a few have chosen political expediency instead. Again parallels with the Republican party in the US are instructive. Just as the right wing media in the US was able to use the Tea Party movement to shift the Republicans to the right, so the right wing press have used Farage to shift the Conservative party in a similar way.

The net result will be the normalisation of a No Deal Brexit over the next few months. Leaving without a deal was not what all of the 52% of Leave voters in 2016 voted for, but virtually no one in the broadcast media will be brave enough to push this point. The lie that the 2016 vote provides a mandate for No Deal will go unchallenged. Broadcasters will balance the nonsense that the impact of No Deal on the UK will be, to quote Johnson, “infinitesimally small” against the truth that it is the biggest act of political and economic self-harm ever inflicted on the UK.

Allowing Johnson to become leader shows that the Conservative party has completely lost its moral compass. All of Johnson’s misdeeds in his past mean nothing, just as Trump’s behaviour means nothing to his supporters and the Republican party. Both individuals lie all the time, but it doesn’t matter to his own side. Johnson encourages a friend to beat up a journalist, but it doesn’t matter. Johnson uses racist language on many occasions, most recently comparing Muslim women wearing the niqab and burqa to letterboxes, but this was deemed acceptable by his party. Johnson gets advice from Steve (“Let them call you racist. Wear it as a badge of honour”) Bannon, and even the BBC does not think Johnson lying about these contacts matters.

And so, as the Conservative party loses its moral compass, the chances are that large sections of the country’s elite will do so as well, and our standing overseas will plummet even further. Although Tory party members may find Johnson’s insults acceptable, don’t expect other countries to take a UK run by Johnson as more than a bad joke. Don’t expect other countries to do business with a UK that proposes to destroy its trade relationship with the EU and many other countries at a stroke. An elite that treats threats to prorogue parliament as acceptable will not be respected by countries that value democracy, although some others will welcome the development.

Yet those who say not in my name need to ask themselves whether they are prepared to make the choice required to stop this happening. There is only one realistic opposition to a Johnson led government. Believing the Liberal Democrats could ever play that role was unrealistic, because Labour has enough loyal voters to ensure that the anti-government vote would be split. Farage along with the LibDems might also take away votes from the government, but it would be foolish to rely on an English vote split four ways just happening to go against a Conservative government.

The awkward truth for those who for whatever reason dislike Corbyn’s Labour party is that Labour is the only party that can defeat this government, and its leader in the next election will be Corbyn. Voting is always a choice between the lesser of two evils. Supporting smaller parties when that lets the Conservatives win, or supporting none, may make those who dislike Corbyn’s Labour feel better, but it is in effect a statement that Corbyn’s Labour party would be just as bad for the country as a whole as out current government, and that is simply not a credible belief. Corbyn is not going to leave the EU with no deal, and in practice will be unable to leave the EU in any way. Corbyn is not threatening to prorogue parliament, is not desperate to do a trade deal with Donald Trump, does not lie all the time, does not get friends to beat up opponents, and does not have a history of using racist language. Whereas Johnson promises tax cuts for the rich, a Corbyn led government would help the many, not the few.

Yet there are few in the mainstream media who seem prepared to recognise the choice we face for what it is. Even wise and perceptive commentators like Martin Wolf, who lament the situation the Conservative government has led us to, often feel it necessary to balance their piece with a derogatory remark about the Labour leadership. Those remarks may or may not be accurate, but a plague on all your houses just allows this Tory government to stay in place.

Worse still are those in the centre or centre-left who refuse to give up hope of getting ‘their party’ back and will do anything that in their view helps that cause. In the first year after Corbyn was elected many MPs and journalists waged a constant war against the left in the media. I said at the time it was utterly futile and self-destructive, and I was right. It led to an attempt to unseat Corbyn that everyone on the left calls a coup, and a clear majority of members saw it the same way. Polls suggest the same is true today. Those in the centre and centre-left need to realise that for all Corbyn’s faults and mistakes he will be Labour’s leader going into the next election, and if they repeatedly attack him they are helping Boris Johnson do terrible damage to our country.

Of course the right wing press will do anything to discredit Labour: that is what their owners pay them to do. But often their task is made easier by the non-partisan media who think they are making choices using simple journalistic criteria, such as going with the story. What we are in danger of seeing with 24/7 criticism of Corbyn is a repetition of what happened to Hilary Clinton in the US elections. As I showed here, the mainstream media spent much more time talking about her email server than any of the sins of Donald Trump, or indeed all those sins combined. In that sense the US media chose Trump over Clinton. It was of course not a thought-through or considered choice, but just the outcome of lots of individual decisions that seemed to make sense in journalistic terms, but were disastrous in political terms.

Of course the constant tunes the media play matter. One of the incredible poll findings of that US election was that more people trusted the serial liar Donald Trump more than Hillary Clinton. That makes no sense unless you note the constant stream of media stories suggesting Clinton had something to hide. No one is suggesting Labour’s failures over antisemitism should not be exposed, just as no one was suggesting that Clinton should not have been criticised for using her own email for government business. What is missing in both cases is a sense of perspective, as here for example, or here. Without that perspective constant attacks on Corbyn will have an impact. The impact will be to keep a destructive far right government in power.

Saturday, 13 July 2019

Will Labour’s new Brexit policy win back voters?


Labour has finally agreed to back a People’s Vote unequivocally on any Brexit deal. That includes any deal it might itself negotiate after winning a General Election. It will campaign for Remain against No Deal or any Tory deal. Whether it will try and negotiate its own deal after it wins a snap General Election will be decided quickly as soon as that General Election is called.

This differs slightly from the proposal put forward by five biggest affiliated trade unions, which proposed that Labour would negotiate its own Brexit deal after winning a General Election, but leaving open whether Labour would campaign for this new deal or instead campaign for Remain against the deal it had negotiated. That part of the proposal has yet to be agreed, and may not be agreed, depending on decisions still to be taken.

Will this change in policy be enough to win back 2017 Labour voters who now say they will vote LibDem or Green because they want to remain in the EU? The policy still looks ambiguous compared to the LibDem's policy of calling for a People’s vote whether they are in power or not. Any interview of a Labour politician will now take a predictable form, with “what would you do if you win a General Election” being the first question. Labour have not left ambiguity behind completely.

Postponing the decision on what to do before any General Election makes procedural sense and also some political sense. If the polls start moving back towards Labour from now on then Labour can think job done. If they don’t then it becomes clear Labour need to commit to Remain as part of its General Election manifesto. Of course this is a game with voters and not a game against nature, and voters may realise this and could keep saying they will vote LibDem or Green in order to keep the pressure on Labour.

Another important factor will be if this new policy allows senior figures to start aggressively campaigning for Remain, rather than simply explaining Labour’s Brexit policy. They need, at a minimum, to start appearing at People’s Vote events. The official opposition has a huge (and some would consider unfair) advantage over other opposition parties in getting more airtime, and if they can use that to make the case for a People’s Vote that may win some votes back.

The post-election policy put forward by the 5 unions does have one advantage over the LibDem policy. The question for those supporting a People’s Vote is what deal do you put up against Remain? No Deal is not an actual deal, and would also fail to learn the lesson of 2016: don’t give voters an option that parliament thinks is disastrous. However May’s deal now has few backers, and if it won against Remain it is a pretty hard form of Brexit. The Union’s proposal would, if negotiations were successful, put a softer form of Brexit up against Remain, so it would be less of a disaster if Remain lost a People’s Vote.

Whether voters will see it that way depends crucially on Labour’s position on their negotiated deal. Leaving it open is not a vote winning strategy, because the natural presumption is that a Labour government that spends a lot of time negotiating a deal will want to support it in any referendum. Remain supporters may also reason that Remain would easily beat May’s deal, but might find beating a softer Brexit with Labour support a more difficult task. There is no point arguing that this strategy reduces risk in case Remain loses if it also increases the chance of Remain losing.

If the party wants to retain the proposal of the 5 unions and also win votes, it has to commit to support Remain whatever the results of those negotiations. Only then will Labour’s policy on Remain be seen to be comparable to that of the LibDems. This proposal, together with a commitment to support Remain, has the disadvantage of prolonging Brexit but the advantage of reducing the risk if the referendum is lost.

If this is all beginning to sound a bit convoluted, it is and it doesn’t need to be. If Labour’s only concern was to increase the chances of winning the next General Election it would have adopted a Remain strategy full stop. In other words Remain in all circumstances including a Labour government. Labour could have even gone one better than the LibDems and agreed to put revoking A50 on the table if it won a General Election. The fact that it didn’t simply reflects the minority within the party who either prefer Lexit or are MPs in Leave areas who fear losing their seats.

This minority within Labour have already done enough damage to the Labour cause. They have revived the fortunes of the Liberal Democrats and Greens as an alternative to Labour. By keeping Labour’s policy after a General Election unclear, they further risk the solidification of the support for both these parties among former Labour voters..

None of this matters for the Remain cause, because as I have argued for some time there is very little chance of a Labour government ever achieving Brexit even if it wanted to. But voters, including Remain voters, have yet to be convinced of that. Why should they, when the pro-Brexit minority within Labour have not been convinced either and continue to resist Labour adopting a Remain strategy. Indulging this minority for too long could cost Labour crucial votes, and Labour does not have votes to spare.