If parliament continues like this it makes May’s deal inevitable

So yesterday most of the Conservative party found unity, by once again believing in a unicorn. The unicorn that the EU would allow the UK to unilaterally end the backstop. Of course a backstop that one side can end without that side being in the Customs Union and Single Market for goods is not a backstop at all. Alternative arrangements to avoid a hard border in Ireland did not exist when the UK was negotiating with the EU and they still do not exist. If you wanted an illustration of how stupid this country looks to those overseas here it is. If you want to see how implicated the right wing press is in this stupidity look at the headlines today: Mail - “Theresa’s Triumph”, Express - “She’s Done It”.

Why did the Prime Minister and her party indulge in this fantasy? Because it runs down the clock. May wants to run down the clock because she thinks, with good reason, that in the end parliament will vote for her deal. The ERG wants to run down the clock because it wants No Deal. What we saw yesterday was the willingness of the Prime Minister to look completely stupid over the next week or so banging her head against an EU brick wall just to avoid compromising on her red lines.

What was new and much more worrying about last night is that we learnt there was a new block in parliament. This block will vote to stop parliament doing anything to try and find an alternative to May’s deal. We already knew that the ERG and May’s block would do that, but they were short of a majority. They got a majority last night thanks to 14Labour MPs. If this continues, it will prevent parliament coming up with any alternative to May’s deal that can command a majority. That just leaves May’s deal and No Deal left as we approach 29th March.

But surely, you may be asking, how can May’s deal win when it was so decisively rejected last time? The ERG will continue to vote against it, because they want No Deal. But will Labour MPs and Tory rebels still vote against it if that inevitably means No Deal? I doubt it. Anyone voting against May’s Deal when it is the only alternative to No Deal would get blamed for the chaos of No Deal. Instead Labour will choose abstention, allowing May’s block to beat the ERG block and May’s deal to pass.

If this happens, no one comes out of this well. The ERG really do hate an all UK backstop. May will have her negotiating credibility torn to pieces before she has to do a trade deal with the EU, in a situation where the UK is once again fighting against the clock (the end of transition). Labour will have not voted against the deal they committed to voting against. But the institution that would lose most with this outcome is parliament itself. It had an opportunity to take control from a bankrupt government and it failed. While it is tempting to blame the 14 Labour MPs, the real problem is that the majority of Conservative MPs are prepared to seriously damage the economy, make the UK an international laughing stock and risk the chaos of No Deal just to preserve the unity of their deeply flawed party.  

Why the UK cannot see that Brexit is utterly, utterly stupid

If you talk to almost anyone overseas, except those at the right wing extreme (like Trump) or part of a tiny minority of the left, their reaction to Brexit is similar to the former Prime Minister of Finland. What the UK is doing is utterly, utterly stupid. An act of self harm with no point, no upside. Now sometimes outside opinion is based on incomplete or biased information and should be discounted, but on Brexit it is spot on. So why are so many people in the UK unable to see what outsiders can see quite clearly.

The days when Leavers were talking about the sunlit uplands are over. Liam Fox has not even managed to replicate the scores of trade deals the UK will lose when we leave the EU. As to independence, Leavers just cannot name any laws that the EU imposed on the UK they do not like. Since the referendum even public attitudes to immigration have become much more favourable.

Instead there has emerged one justification for reducing real wages, for allowing our economy to lose over 2% of its GDP, to allow firms to make plans and enact plans to leave the UK: the 2016 referendum. People voted for it so it has to be done. It is described as the will of the people. Yet few bother to note that almost half the people voted the other way, with those that would be most affected not even having a vote, and that this victory was won by illegal means. All that is brushed aside.

But what is really remarkable is the way what this vote was for has gradually mutated over time. Just before the vote, the Leave campaign talked of many ways of leaving, with Norway (which is in the EEA) as one option. They did this for a simple reason: every time Leavers came up with a feasible way of leaving other Leavers did not like it. Yet within little more than a year Leavers were declaring that the vote was obviously to leave both the Customs Union and Single Market. During the referendum campaign the Leave side talked about the great deal they would get from the EU, but within two years many of the same people were seriously pretending that voters really wanted No Deal. A vote for the ‘easiest’ deal in history has become a vote for no deal at all, apparently.

In much the same way, as Alex Andreou notes, what was once described as Project Fear transforms in time into ‘the people knew they were voting for that’. Claims there will be no short term hit to living standards made before the referendum has now become people knew there would be a short term cost. (Remember Rees-Mogg told us that short term means 50 years.)

Meanwhile warnings from important UK businesses become an excuse to talk about WWII, yet again. What people from outside the UK can see that too many inside cannot is how the case for Leaving has become little more than xenophobia and nationalism. What people overseas can also see but we seem unable to is that there is a world of difference between a vote to Leave the EU in an unspecified way and a real, practical plan. Which means that the first referendum, particularly as it was narrowly won, needs to be followed by a second referendum over an actual, realistic way of leaving. In other words a People’s Vote. When Jonathan Freedland says “the notion that a 52% vote for a hypothetical, pain-free Brexit translates into an unbreakable mandate for an actually existing Brexit is shaky at best” he is wrong: the notion is simply wrong.

Some of the arguments against this are so dumb, yet are allowed to pass as serious. ‘Why not the best of three’: there is no reason for a third referendum. ‘The first referendum was an unconditional vote to leave’: of course it could never be. [1] Suppose we found out that everyone would lose half their income under any specific way of leaving - would you still argue that in 2016 voters voted for that? Or that a second referendum means that ‘politicians have failed the people’. Most politicians voted to Remain because they knew that any realistic way of leaving would be bad for people. They have been proved right and a majority of the electorate might well agree.

But by far the worst excuse not to hold a People’s Vote is that a second referendum would be undemocratic. Orwell must be turning in his grave when he hears politicians say in all seriousness that a second referendum would undermine faith in democracy. This is the language of dictators and fascists, but few seem to mind. Given the difference between the final deal and the promises of the Leave campaign the case for a second referendum is overwhelming, but you would not know that from the UK public debate. There is only one way to make sense of the ‘People’s Vote = undemocratic’ equation, or the ‘will of the people’, and that is that the first referendum effectively disenfranchised Remain voters. [2]

That is exactly what happened after the 2016 vote. Those wanting to Remain to all intents and purposes ceased to exist. If we are just talking about Leave voters, then of course most will be disappointed by a second vote. Is this why Labour MPs just worry about Leave voters in their constituencies, because Remain voters no longer matter? It is why we get endless Vox pops from Leave constituencies, and no mention from EU citizens who have lived here for years who are worried sick because the computer might say you have to leave.

How did Remain voters get effectively disenfranchised? Why is the lunacy of what this country is doing only apparent to foreigners? Answering this question is not hard for anyone who has read my book ‘The Lies We Were Told’. What we have that foreigners do not is a public discourse shaped by a handful of newspaper proprietors who just happen [3] to be intensely hostile to the EU. Partly through intimidation by that same press and their political allies, the BBC follows this discourse. This is where the ‘will of the people’ came from. It was this press that puts rebel Conservative MPs on their front pages, and that uses language like saboteurs and traitors. It is intimidating MPs in order to influence the democratic process, but of course few in the media call it that. 

As I discuss in my book, I have seen this before in a milder form at least twice in recent times. In the first the UK convinced itself that austerity was the only way forward, despite most academic economists saying otherwise. It was the media that promoted claims that governments were just like households, even though first years economics students are taught why this is not true. And then it was the media that pushed (or left unchallenged) the idea that austerity was the result of Labour profligacy: it was a straight lie but it played a critical part in the 2015 election.

If people have doubts about my argument that the media played a central role is misdirecting the public then (and many do), well Brexit should be a test case. And so far Brexit has gone exactly as these newspaper proprietors would have wished. Three coincidences is a row? The reason why those overseas can see that Brexit is utterly, utterly stupid while the UK stockpiles food and medicine, and the Prime Minister tries to blackmail MPs into supporting her deal, is because those overseas are not influenced by the UK media.

[1] As this one seems very popular, it is worth spelling out why it is rubbish. The 2016 referendum was not some kind of contract, where all those voting to leave committed to support any vote to leave for all time. It is highly likely that some people voted for a particular kind of Brexit and would prefer Remain to other types of Brexit, which is crucial given the narrow victory. (Which is also why claims that Remain cannot be on any second referendum ballot are also nonsense.) Some may have voted Leave to give more money to the NHS and to stop Turkish immigrants, in which case they may have changed their minds. It does not say "we should leave whatever the form of leave at whatever cost" on the ballot or the small print, because there is no small print.  

[2] There is a serious and quite compelling argument that referendums in a representative democracy are a bad idea, but this equation is about a referendum that has been necessitated by an ambiguous first referendum.

[3] Well maybe not ‘just happen’: see here

The key arguments for high top rates of income tax are political as well as pecuniary

When people complain that neoliberalism is a meaningless concept, I should point them to what has happened to the top rate of income tax since around 1980, not just in the US and UK but elsewhere. (Source HT Marcel Fratzscher)

Here is a chart of the United States top tax rate over the last century (HT Martin Sandbu). Eisenhower had top earners paying a 91 percent marginal rate.

No doubt there are complex reasons for these reductions, but key among them has to be a neoliberal belief that cutting top rates would lead to more dynamic CEOs who would produce more dynamic companies, and the benefits of this would trickle down to the economy as a whole. Low top tax rates would encourage entrepreneurs to take more risks that were socially beneficial and so on. The argument is so familiar, trotted out routinely by right wing think tanks, it hardly needs elaborating. It is a classic example of neoliberals using a bit of simple economics to justify policy that is advantageous to themselves or their paymasters.

Yet the evidence for such an effect is weak, at best. The intuition for why it should be weak is straightforward. Above a certain level of income, other incentives beyond the purely pecuniary become important. Top CEOs, like top footballers, want to be successful at what they do, and more successful than others. They will want success whatever the overall financial rewards of being successful.

Another bit of basic economics that neoliberals hardly ever mention is the diminishing marginal utility of consumption. This implies quite the opposite of low tax rates at the top. It is socially much more beneficial to tax those to whom one dollar is not worth the effort of picking off the sidewalk and transfer it to those who are poorer. A well known paper by Diamond and Saez found that, after allowing for disincentive and avoidance effects, the optimal top rate of income tax in the US should be 73%. [1] [2]

There are two reasons why even 73% might be an underestimate. Piketty, Saez and Stantcheva have argued that giving CEOs lots of money can have negative incentive effects. The CEOs start putting effort into increasing their salary rather than improving their firm. Part of your status comes from what you can afford. When all CEOs are taxed a lot at the margin the size of your salary has little impact on that, but when your salary is not taxed so much you can increase your salary and theefore status by extracting more from your own firm. To use some economics jargon, a low marginal tax rate on top incomes can be a good example of an incentive for rent extraction rather than an incentive for increasing social output. .

But while an extra dollar for a CEO is not going to incentivise them in a positive way very much, you could argue that it incentivises those with talent to aspire to be CEOs. CEOs are always going to be among the richest in society, because a lot of their income will be taxed at lower rates. A paper by Lockwood, Nathanson and Weyl turns that argument on its head. High salaries are associated with activities, like finance and law, that have what economists would call negative externalities, which means that they do much less good for society than the size of the salaries they pay might suggest. A lot of finance, for example, is about trying to take money off other people rather than growing the size of the overall pie. If high post-tax salaries incentivise talented people into those professions, that is negative for society, which would benefit if they worked in different jobs. You can reduce this misallocation of talent by having higher tax rates on top incomes.

Neoliberals have one last line of defence against raising top tax rates in a single country, and that is migration. The argument is that talent, which could be quite mobile, will move to where talent is most rewarded. There is clear evidence that this is true, to an extent. This concern does not mean we leave top tax rates where they currently are or even reduce them, but simply that we might not put them up as high as they should otherwise go while some countries that are attractive to talent continue to have low tax rates on top incomes. Sweden seems to do pretty well with a 70% effective top tax rate.

This danger of a race to the bottom with top tax rates makes it all the more important that the United States raises it’s top marginal tax rate, along the lines recently suggested by Democrat Alexandria Ocasio-Cortez. For various fairly obvious reasons the US does not need to worry too much about a talent drain if it raised top tax rates.

In my view the arguments for higher top tax rates are at least as much non-pecuniary, by which I mean they do not depend on the points raised so far. The evidence that social welfare is higher in more equal societies seems compelling to me. In other words we should increase top tax rates just because that helps produce a more equal society. I have seen a few attempts to debunk the evidence for this in The Spirit Level, but they are not convincing as a collective, while there is even more evidence to support the idea that people are happier in more equal societies..

There is a final argument for high tax rates at the top which seems particularly relevant to the US and UK at the moment. If you have a political system like the US where money easily buys political influence, you will find some of those who earn very high salaries trying to do exactly that (some references here). You can create the kind of plutocracy I discuss here. Because money can also help to buy votes, that plutocracy may also be able to continue with democratic elections without in any way threatening the plutocracy. Even when you have laws limiting the amount that can be spent on elections, the UK shows there are ways for the rich to get around that, particularly if they control large sections of the press.

This is the argument made in this excellent NYT op-ed by Emmanuel Saez and Gabriel Zucman. They write

“An extreme concentration of wealth means an extreme concentration of economic and political power. Although many policies can help address it, progressive income taxation is the fairest and most potent of them all, because it restrains all exorbitant incomes equally, whether they derive from exploiting monopoly power, new financial products, sheer luck or anything else.”

The economist Greg Mankiw, in a short response to this op-ed, says

“most rich people I know would have been happy to spend vast sums of money to keep Mr Trump out of the White House. And many tried. The Trump phenomenon is not an argument that the moneyed elites have too much influence on politics. If anything, it is an argument that they have too little.”

But this misunderstands (as some on the left do) the nature of the plutocracy that super incomes and wealth create. It does not, as I make clear here, create a kind of committee of the very rich that between them decide who rules. It is much more erratic than this. Instead it allows small groups among the very wealthy, who may be quite unrepresentative, to hijack a democratic system. Trump and Brexit are clear examples. Mankiw is right that one way to avoid that would be to create a more representative kind of plutocracy, but a far better way of avoiding disasters of this kind is to deal with the problem at its source, by reinstating high rates of tax on top incomes.

[1] Some intuition on this number. If disincentive and avoidance effects were so large that an increase in tax rates led to no additional income, then there is no pecuniary advantage from doing so. If these effects did not exist, the optimal marginal rate at the top would be 100%. The paper estimates these effects are somewhere between these two extremes, so the optimum tax rate at the top will be between zero and 100%.

[2] For a discussion of these issues in a UK context, see https://www.ifs.org.uk/publications/9678. Note that HMRC calculations that the short-lived raising of the UK top tax rate to 50% did not raise any revenue involve debatable assumptions, and much of the avoidance only worked because the hike was temporary.    

No deal syndrome: why do people keep buying snake oil when it doesn’t work?

Using a very broad brush, the Leave vote represented the votes of two groups: social conservatives who felt threatened by immigration, and the group often referred to as the left behind. Both groups were sold snake-oil by the Brexiters. There would be more money for the NHS, we would avoid a flood of immigrants coming from ‘about to join’ Turkey, we would get the easiest deal in history with the EU (because we held all the cards), and we would get lots of advantageous trade deals that the EU were not able to make on our behalf. To mention just a few of the lies that were told to sell their snake oil.

Their lies were gradually exposed over the two years following the referendum vote. There would be less money for the NHS, and even with the money it has they cannot hire enough nurses or doctors because EU citizens no longer want those jobs. Turkey didn’t join, and the EU will not give us all the benefits we had as members. Mr. Fox has not even managed to replicate third party trade deals we have enjoyed as a result of being in the EU, for the simple reason that the EU have a lot to offer and great experience at doing trade deals and we have neither.

To say ‘but both sides lied’ misses the point. We knew what Remain was, while the Leavers sold a prospectus that was false in almost every detail. As a result, the Brexiters stopped talking about the easiest deal in history and started talking about No Deal. In fact they knew before 2016 that there was no plan they were happy with before the vote. But because they hate the EU (either because they want a neoliberal paradise or they are nostalgic Little Englanders who want to rule the waves again) they have just moved from one set of lies to another.

The only difference between the lies they told in 2016 and the lies they tell now is the scale of disaster they are pretending will not happen. Leaving in a controlled and partial way would hurt business but they would get time to adjust. Leaving suddenly and completely has business in an absolute panic, and consumers as well as workers would soon feel the impact. The snake-oil sellers are unmoved: just more ‘Project Fear’ they say. In addition our political influence in the world, already severely dented, would crash to zero under No Deal. No worries, say the snake oil sellers, we stood alone once before, as they endlessly churn out utterly misplaced WWII analogies. (This is only possible because none of them actually lived through WWII, but instead just remember santised histories and films.) As David Heniq says, that this is happening is political failure on a grand scale.

In US popular culture, snake oil sellers peddled their wares in Wild West medicine shows. In the UK they do so in much of the press, and relentlessly in the broadcast media. Even when BBC journalists know their claims are all garbage, most are too frightened to challenge them because they fear being picked out as another example of Remain bias by the right wing print media. Brexiters have all the time in the world to appear in the media because they do not need to analyse policies. They just pick up the latest sound bite and off they go.

No Deal is like someone who hates modernity but cannot work out why, and so retreats to living as a hermit in a cave. It will not last long. No country on earth wants no trade deals, which is why recent history is all about new trade deals being done rather than undone. Just as Lexiters talk of deals with Bolivia and other countries that have ‘true socialist’ governments, the Brexiters end state is for the UK to become an unincorporated territory of the US. Ask the people of Puerto Rico what that feels like.

Why do so many of the public still believe these lies, when it is obvious that these snake oil sellers lied, or to be too charitable got it so wrong, in 2016? Being fooled once is understandable, but twice in such quick succession? Well not all those who vote Leave are fooled. In particular, a few of the left behind group have switched to Remain, and others in that group can see that No Deal would hit them hard.

But a remarkable number of 2016 Leavers still back the snake oil sellers. One reason goes back to the media. The Brexiters pretend that Remain told as many lies as they did in 2016, and that 2016 Project Fear has been proved to be such, and unfortunately too many in the broadcast media believe this. In reality, most forecasters got the decline of GDP and real wages as a result of the referendum over the last 2+ years roughly right. As often happens, the media’s narrative and reality are very different, because the media does not talk to experts.

However a misleading media narrative is not the only cause of popular belief in the virtues of No Deal. We have, I fear, a UK example of Trump support syndrome. Many of Trump’s supporters accept that he lies all the time but still support him. They believe that Trump supports their identity and values. Social conservatives feel threatened by multiculturalism, by social liberalism, by feminism (no dealers tend to be men), by the green movement. They also tend to be nostalgic for an old order. What better figure to represent all that than Rees-Mogg. Of course the old order they remember involved an industrialised economy with strong unions and a strong welfare state, while a No Deal UK run by the Brexiters would be a completely service economy with few unions and little welfare state. This is an irony of No Deal: its supporters are nostalgic for a pre-neoliberal past while its leaders want to give them even more of neoliberal modernity. 

These Brexiter leaders are like the Republicans in the US they so admire: politicians armed with an ideology who know little about the policies they peddle and the reality these policies would change. What they do specialise in is selling policies. The rest of the Conservative party may be too attached to business to swallow No Deal, but they were happy to enact austerity and the widespread use of sanctions for benefits. There may be some obvious liars who lie about lying, but more generally there is a party that continues to pretend that stopping money to the poor has nothing to do with an explosion in food bank use. The One Nation Tories of old are almost gone, and have little future in a party whose members, as Tim Bale explains, are obsessed with Brexit and mostly want No Deal.

There will always be people who buy snake oil, particularly if it is linked by its sellers to medicines of old. If real snake oil sellers still existed today they would be banned from touting their wares. The mechanism we used to have to keep these people out of politics was a critical media, but most of that media today seems either to be advertising the benefits of the snake oil, or incapable of challenging the snake oil sellers’ claims. The consequence of letting these charlatans run loose with no checks on the lies they tell is a country stockpiling food and medicine, and preparing to put troops on the streets, for no other reason but that too many people bought snake oil.

Parliament’s Brexit game

Someone may have done this elsewhere and probably with more accuracy, but I hadn’t seen it so I thought I’d work through the numbers myself. Suppose parliament breaks down into five main factions, with a very approximate indication of their size.

Brexiters - No Deal         100

May loyalists - No FoM   200

People’s Vote                 150

Corbyn loyalists               30

Soft Brexit                      150

You can see how Tuesday’s vote worked out. May’s block alone voted for her deal, while all the other blocks voted against. Note also that the soft Brexit block have no quarrel with the Withdrawal Agreement as such. It is the political declaration about what the UK tries to do after Brexit that they want to change.

The unusual feature of this game is of course that if no other block can get a majority by the end of March, the Brexiters win because the UK leaves without a deal. So the race is now on to get a majority. As we have already seen, May’s deal which effectively ends Freedom of Movement cannot get a majority, because the Brexiters who she courted for two years have turned against her (as they always would).

If May really did try and get a deal for a softer Brexit she would probably get enough, although many Labour soft Brexiters might be reluctant to sign up to anything that came from her. In addition the DUP could end their support for her government, and she might lose a few from her block. A more subtle move is to release her block to vote for something organised by Labour and Tory MPs. That is probably the best chance for a winning coalition, but May has until now proved too stubborn and too partisan to try it. Alternatively she could agree to a second referendum between her deal and Remain, which the People’s Vote block would vote for even if the proposal came from her, but she might still lose the DUP’s support. Sam Lowe and John Springfield have a discussion of May’s options here.

Another possibility, raised in my last post, is that the soft Brexit group and the People’s Vote group unite by offering a Remain vs Soft Brexit referendum. This would have a chance, particularly if Corbyn supported it. It seems clear that the second referendum block cannot win on their own (despite my best efforts to suggest that is the right way forward) while the soft Brexit possibility is still around.

That will be one reason why Corbyn will not declare quickly for a second referendum. So if May remains stubborn and if soft Brexit and People’s Vote fail to combine, we get into a war of attrition. To see which blocks are most durable, we need to think about what happens on the week starting 25th March. [1]

At that point, if no majority is formed over that week, we get No Deal. That tells you that the Brexiter block is the most durable (something May seems unable to understand). In that week May will undoubtedly try to push her deal through as the ‘not a No Deal’ option, but equally MPs will counter with a revoke A50 amendment. The latter possibility tells you that the People’s Vote group and May are more durable blocks than those advocating soft Brexit, because they have something to hope for in a last minute panic. That in turn means that the Soft Brexit block need to get a winning coalition sooner rather than later.

All this assumes that No Deal remains on the table. The only way it could get taken off is for parliament, or May and parliament [2], to commit to revoking Article 50 at a date close to leaving. If that happens we get a new game, because most of the Brexiter block would revert to May's corner, but equally other blocks would become more stubborn. But if this analysis is correct, it suggests she has a better chance of getting a majority for a slightly softer version of her deal if she took No Deal off the table. 

This is almost certainly wrong and incomplete, and I’m more than happy for people to tell me why. 

[1] It would probably be before that date, because whoever wins and stops no deal will need an extension of A50, and the EU may need some time to agree to that. But the EU will probably not grant an extension unless the UK has made up its mind, if only because they believe the threat of No Deal is needed to get the UK to make up its mind.

[2] Thanks to @SpinningHugo for reminding me that May cannot revoke A50 alone. 

Is Norway+ the way forward?

A number of MPs seem to think so. Their argument goes as follows. Although the Withdrawal Agreement (WA) is not about trade (beyond the backstop), and trade is dealt with in the Political Declaration that is not legally binding, a vote for Theresa May’s deal will be taken by her as endorsing her wish for a hard Brexit. In that case parliament should instruct the government to pursue a much softer Brexit now, because it is better to do that now than later (especially if later never happens).

Indeed it is plausible to argue that the current impasse in parliament would not have happened if May had gone for a soft Brexit (something close to BINO: staying in the Customs Union (CU) and Single Market (SM)) from the start. That, it could be argued, was the appropriate thing to do when the vote was so close. Another way of putting the same point is that there may not have been a majority for Leave at all if it had been clear that this involved leaving the CU or SM.

The narrow vote for the Welsh Assembly in 1997 is an interesting example in this context. It was even more narrow (it was won by 50.3%). As a result, according to this thread from Richard Wyn Jones, the winners went out of their way to involve some of the losers in the discussions about how the Welsh Assembly would work. [1] So if May had thought about uniting the country after the 2016 referendum she would have proposed some form of soft Brexit. Instead she tried to unify her party rather than her country, and the rest is history.

Although trying to unite the country would have been the right thing for any good Prime Minister to do (as May will probably find out today), I think the implication that subsequently a soft Brexit would have passed a vote in parliament is less clear. We return again to the critical point that a soft Brexit is not a compromise between a hard Brexit and Remain. Something like BINO is, for Leave voters, worse than Remain, because it gives away sovereignty compared to Remain with nothing gained in return.

Soft Brexit is Brexit in name only, and assuming Article 50 would still have been triggered there would have been two years during which Brexiters would have kept telling us that a soft Brexit is pay and obey with no say. And for once they would have been largely right. For a country as large as the UK, having an external body choose your regulations and trade deals when you have no say in that external body is a big deal. It is the opposite of taking back control. I do not think soft Brexit could have survived public scrutiny over two years.

This has important implications for attempts in parliament to modify the Political Declaration to commit to a soft Brexit before passing the WA. I can see the attraction for many MPs: it would be the same attraction it would have had to a statesmanlike PM after the 2016 vote. But there is a distinct danger that the public will end up hating it. Remainers obviously, but also most Leavers who will feel that they have been cheated by parliament.

If you are one of the MP’s going for this option and think I am wrong, there is an obvious way forward that could get us out of our current impasse. (I first heard this idea from @SimeOnStylites.) Combine your forces with those going for a second referendum in the following way. Propose a referendum between some form of soft Brexit (softer than May’s deal) and Remain. That proposal could command a majority in the house, and would still give people the option of throwing out the idea if they preferred staying in the EU. [2]

[1] This all came to light in a rather amusing way. May included this vote as part of her speech yesterday on why parliament should support her deal. She ‘forgot’ that despite the referendum result the Conservative party - including herself - voted against the Assembly being adopted after the vote! This illustrates why all the talk of the democratic need to respect the 2016 referendum by May and the Brexiters is just an excuse to enact a policy they want. Full story here.

[2] Of course Brexiters will complain, but they will complain just as much if the soft Brexit option is passed in parliament anyway.

Should we worry about temporarily raising government debt? - Blanchard’s AEA Address

This post not about the main part of this address, although as its my area and interesting I may write about it later. Instead I’m going to talk in a non-technical way about its premise, because that alone has implications that may be well known among economists but not elsewhere. The following is based on his presentation.

Should governments worry about temporarily paying for things by borrowing? One standard answer is yes, because although nothing obliges government to pay off this extra debt (it can be rolled over), it has to pay interest on that debt which requires higher taxes. If the government didn’t raise taxes to pay the interest on the debt, but instead just borrowed more to pay the interest, you would enter what is sometimes called a debt interest spiral, where debt goes up and up and eventually explodes.

But does a slow explosion in debt matter if the economy is also growing? A government (like a firm of individual) should look at debt as a ratio to its ability to pay, and the easiest way to do that is to look at the debt to GDP ratio. A company would not worry about increasing debt if its profits were rising even faster. For a given stock of debt, its growth rate is given by the rate of interest on the debt. So GDP rises faster than debt if its nominal growth rate (real growth plus inflation) is greater than the rate of interest on that debt. In shorthand, g > r.

Typically economists like me tend to assume that this is not true, and instead r > g. But the starting point for Blanchard’s lecture is that currently, and on average in the past, g > r. There has been only one decade since the 1950s when this hasn’t been true, and that is the 1980s when governments were pushing up interest rates to bring inflation down. Most of the time g > r. So the fact that g > r today may be the rule and not an exception.

Why do economists typically assume r > g when the opposite has generally been true? One answer is called financial repression, which is a label given to attempts by governments in the past to keep interest rates ‘artificially low’ in conjunction with various credit controls. The idea was that in a financially liberalised world where interest rates are used by central banks to target inflation there will be no financial repression, and real interest rates will be higher. So it made sense, the argument went, to assume r > g from now on even though g > r in the past. However what economists call secular stagnation suggests that the average interest rate required to keep inflation constant has actually been steadily falling, so Blanchard’s findings become relevant again. There is plenty of scope here for more research and debate.

So if normally g > r, does this mean we do not need to worry about debt? Not quite. What it means is that one of the standard objections to raising debt, which is that taxes will have to rise to pay the interest, no longer holds if g > r. If g > r the government can borrow to pay the interest, and yet the debt to GDP ratio will still gradually decline, because the economy is growing faster than debt. The objection to raising debt that taxes will have to rise in the future to pay for it disappears. Indeed the whole ‘burden on future generations’ objection to raising debt falls away, because the debt to GDP ratio declines by itself: there is no future burden.

An important proviso, however, is that we are talking about one-off increases in debt. Such one off increases would include, for example, increases in debt to build new public infrastructure or increases in debt caused by fiscal expansions to fight a recession. g>r does not mean we do not need to worry about persistent primary deficits (by which I mean spending permanently higher than taxes). A persistent primary deficit will add to the growth in debt, so the debt to GDP ratio will rise despite g > r.

This is just the starting point for Blanchard’s lecture, and if you are an economist I recommend watching it as it is very easy to follow. In policy terms I think it is the last nail in the coffin of what Paul Krugman calls the deficit scolds. Those who argued for austerity because of the burden on future generation, although on weak ground even if r > g, find their argument collapses if g > r. [1]

[1] Blanchard shows this remains true even if there are periodic shocks where r > g, as long as on average g > r.

The 2016 referendum was a badly designed rigged vote corruptly and unfairly won. Why is there so much deference to it?

We are probably about to take the huge step of leaving the EU that a majority of the population no longer want. We will do so because certain political forces have elevated a rigged, corrupt and unfair vote into something all powerful, that demands to be obeyed. If you doubt this think of all those who claim a second referendum would be undemocratic: a statement which is a contradiction in terms unless 2016 has some unique, special status. The purpose of this post is to argue it does not deserve this status.

The UK is a representative democracy that very occasionally holds referendums. Although referendums have been reserved for constitutional issues, it is not the case that constitutional issues are always decided by referendums. Instead they often tend to be used by governments to put to rest major internal debates over constitutional issues. Cameron promised to hold a referendum on EU membership in order to (temporally as it turned out) silence internal debates within the Conservative party.

I discussed why the referendum was badly designed here. Leave were not required to settle on a particular alternative to being in the EU: EEA membership (Norway), being in the Customs Union or not, being in the Single Market or not etc. For that reason Boris Johnson can claim that leaving without a deal is closest to what Leavers voted for even though No Deal was never proposed by the Leave campaign. This lack of specifics also made it easier for the Leave campaign to spin fantasies like ‘the easiest deal in history’.

The result of the referendum would have its impact on two main groups above all others: UK citizens living in the EU and EU citizens living in the UK. The only people in that group allowed to vote were UK citizens living in the EU and registered in a UK constituency less than 15 years ago. However Commonwealth citizens resident in the UK were allowed to vote. In the 2014 referendum on Scottish Independence EU residents were allowed to vote. How do you describe excluding UK residents who would be most affected by a referendum as anything other than rigging that referendum.

Vote Leave broke election law in at least two ways, yet neither of the main political parties seem to care (one for obvious reasons, the other less so). We still do not know whether the Leave campaign was funded by Russian money or not. To dismiss this by saying the extra spending probably didn’t influence the result misses the point. If all that happens after one side breaks spending rules in an election is a fine then we are on the road to US style elections where money plays a very big role. That in turn leads to a plutocracy of the kind I describe here and which Jimmy Carter has recently talked about. The penalty for overspending has to be very large, and the obvious penalty is to cast doubt on the validity of the vote. Rather than speculate on whether law breaking influenced the result, we should just say the vote was corruptly won.

But there was a much deeper unfairness with 2016 than Leave campaign spending, and that is the behaviour of much of the media. Most of the right wing press effectively groomed their readers long before the referendum with constant stories, often simply false, of an interfering Brussels bureaucracy: so much so that the EU set up a website to correct untruths. During the campaign most of the right wing press (80% by daily readership) were effectively part of the Leave campaign, providing what is best described as propaganda. The influence of the press was particularly important because, unlike a General Election, most people before the campaign were uninformed about the EU. This propaganda might have been counteracted with information provided by broadcasters, but the BBC in particular decided to balance truth with lies. Elections where information is replaced by propaganda are not fair. 

For all these reasons 2016 was not a free and fair referendum. But the same political forces that had championed Leave in the campaign went about deifying the (narrow) victory. Brexit quickly became the ‘will of the people’, as if the 48% who voted to Remain - and especially EU residents whose future was put in doubt - had either ceased to exist, or have become traitors. This alliance between Brexiters and the right wing press is the main reason why support for Leave has stood up despite everything that has happened since: who wants to be a traitor? An indication of how successful this continuing campaign has been is that if you ask people about how the economy has been since the vote, they will probably mention first the pre-vote Treasury short term forecast that predicted a recession, rather than actual events like the fall in real wages caused by the Brexit depreciation.

Once it became clear that the Leave campaign’s claim that the EU would allow us to retain the benefits of being in the EU after we left was pure fantasy, it was natural for the Brexiters and most of their press allies to migrate to advocating No Deal. It is the only outcome that might give the UK some more sovereignty (or perhaps US regulations), albeit at a terrible economic and political cost. Project Fear easily transfers to what might happen with No Deal.

In a rational world, and dare I say in any real democracy, the possibility of No Deal would be eliminated with ease by MPs, who would simply mandate the executive to Revoke Article 50 on March 27th if no other way forward had been agreed. That this has not been done, and all sensible MPs dare propose (and narrowly win) is something weaker, is indicative to the hold that the 2016 referendum still has on MP’s attitudes.

When this is all history will people struggle with how a narrow victory in a rigged, corrupt and unfair referendum could lead MPs to vote for a Brexit that a far greater majority of people no longer want? Not really. It is pretty obvious how people with lots of money to spend combined with extreme neoliberals and little englanders to subvert the political process in the UK. Just add to this a tendency of too many on the centre-right to appease the far right, from Cameron who allowed a rigged referendum that was badly designed to May who constantly set policy to please the Brexiters in her party, and you get the subversion of democracy that is Brexit

Lexit misdirection

Just as Brexiters have heavily influenced the way the mainstream media understand Brexit, so Lexiters have heavily influenced the way those in the Labour party understand Labour’s policy towards Brexit. In both cases we have an argument based on ideology dressed up with spin designed to persuade others.

The main focus of this post is the argument that Labour has to support Brexit because otherwise it will lose lots of seats in any General Election. But I want to start with state aid. This idea that the EU’s state aid rules would hinder Labour policy has a structural similarity with the famous £350 million a week claim of the Brexiters. The debate then focuses on how much of the idea is true, just as the Brexit debate was about how much we paid to the EU. But in both cases we are being led to ask the wrong question.

In the Brexit campaign the debate should have been about whether the public finances would deteriorate as a result of Brexit, rather than by how much they would improve. In the case of Lexit the debate should be whether the state aid that a Labour wants to do that the EU would prevent would benefit the economy by enough to more than offset the loss due to lower trade and general chaos if we leave with no deal. Why no deal? Because being part of the EU Customs Union is sure to be accompanied by restrictions on the use of state aid. So, just as with Brexit, the Lexiters goals can only be accomplished by forsaking any kind of close economic relationship with the EU.

There is far less analysis of this more appropriate question, probably because any reasonable analysis would conclude that the costs of tearing up all our trade agreements with the EU far exceeds any benefit from a bit of extra state aid. Some Lexiters respond to this by trying to discredit the science of gravity equations: occasionally in a manner that is simply laughable.

Lexiters, and also many others, were on more solid ground when they argued immediately after the referendum that Labour had to support Brexit to win another General Election. Triangulation was suddenly fashionable on the left, and it worked perfectly in 2017. Because Labour were officially supporting Brexit, May was unable to make the debate all about Brexit. But because Labour talked about a Brexit that did no economic harm, they also captured the Remain vote.

The key fact from the referendum was that the Remain vote was concentrated in large cities rather than small cities and towns, so something like 60% of Labour constituencies voted Leave. But public opinion has changed since the 2016 referendum. That change may not be large, but it is enough to shift many previously Leave constituencies to Remain. Some analysis suggests Remain constituencies are now in a slight majority, and in addition that a majority of marginal seats also support Remain.

There is a second factor that weakens support for Leave. We are now talking about specific and realistic ways of leaving, rather than the fantasy of your choosing promoted by the Leave campaign in 2016. It is not at all clear that Leavers who want No Deal should prefer May’s deal to Remain and vice versa. Reality has taken the passion out of many Leavers. In contrast, a long campaign against the odds has helped increase the passion among many Remainers, and it is now Remainers rather than Leavers who are more determined to vote in any second referendum.

You can see this in a poll undertaken by YouGov [1]. It asked the following questions, with the total Conservative and Labour percentage vote in each case (don't knows included in total but not shown).

	Con	Lab
If there were a general election held tomorrow, which party would you vote for?	26	24
How would you vote if there was another general election before the UK leaves the EU and the Conservative Party support going ahead with Brexit, but the Labour Party and the Liberal Democrats are opposed to Brexit?	31	25
How would you vote if there was another general election before the UK leaves the EU and the Conservative and Labour Parties both support going ahead with Brexit, and the Liberal Democrats are opposed to Brexit?	28	16

Labour opposing Brexit does shift some votes from Labour to Conservative, but this is partially offset by some Remainers switching to Labour, meaning that the Conservative lead does increase from 2 to 6 if Labour declares against Brexit. However if Labour declares for Brexit, Labour’s vote collapses, giving a Conservative lead of 12.

These numbers should not be taken as a realistic projection of what would happen, because voters are primed to think about Brexit alone rather than other issues. (They are also primed to think about switching from Labour to the LibDems, rather than Greens for example.) But what this poll does indicate is that the number of Remainers Labour would lose by enabling Brexit is much greater than the number of Conservative voters they would attract, and the number of Leavers they would lose if they declared against Brexit.

The poll also shows (contrary to some claims by Remainers) that Labour’s current (as of mid-December) strategy of ambivalence is the optimal one in terms of maximising their vote. As in 2017, being formally for Brexit but also being either the best chance of stopping Brexit or of getting a softer Brexit, is a vote winning strategy, exactly as triangulation theory suggests it should be. But if Labour are forced to choose, as they may well be this month [2], this poll shows that the Lexiter argument that to maximise their vote the party has to choose supporting rather than opposing Brexit is not supported by the evidence we have.

[1] Should we discount this poll because it was paid for by a Remain organisation? This is what Brexiters often do to discredit evidence. The poll would only be suspect if it was carried out by a non-reputable company, or if the question asked was a leading one. This is why I have included the exact question in this post. On when who funds research matters see here. 

[2] Some Remainers also claim that Corbyn has already failed to stop Brexit. I can see no good evidence for this claim. However if the leadership recommended or even allowed abstaining on a crucial vote that allowed Brexit to happen, then Brexit would quite rightly be seen by Remainers as enabled by Labour, because by abstaining Labour were critical in allowing Brexit to go ahead. This is confirmed in a follow-up poll to the one discussed above released today.