Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday 29 June 2019

The UK right wing press: news or propaganda? The Boris domestic story.

Some background for non-UK readers. The contest for the next leader of the Conservative party, and therefore our next Prime Minister, is now between two: Boris Johnson and someone else. Johnson is the clear favourite to win. Johnson has a pretty colourful love life, such that uncertainty about how many children he has produced is a talking point.

Last week neighbours of Johnson’s current girlfriend heard screaming, crashing and shouting coming from her home very late at night. One particular neighbour, Mr. Penn, knocked on the door but there was no response. He then rang the police, who quickly came to the property. The police were satisfied that all occupants were OK, they had no concerns and left. One other neighbour described the earlier noise as so bad they thought someone had been murdered.

That would have been that, except that one of those neighbours, a Mr. Penn, contacted the Guardian about the story, and had also switched on his phone inside the flat when the noises started. The reason he gave for contacting the Guardian was simply that the story was of public interest. The Guardian rang the police and they initially said there was no incident that night. When the Guardian rang back with further details the police corroborated the story.

The story was of course of public interest. It was on the front page of every newspaper the next day, including the right wing press. So far, the right wing press were acting as proper newspapers. It is what happened next that tells a more interesting tale. Mr. Penn decided to go public (the Guardian had kept his identity secret) because
“The unpleasant things being said about myself and my partner, and some quite frankly bizarre and fictitious allegations, have been upsetting for not only us, but also for family, friends and fellow Camberwell neighbours, who are currently being harangued by the media. I would ask that you leave private citizens alone and focus instead on those who have chosen to run for power within the public eye.The attempts from some areas of the press to instead focus their stories on us, and in particular my wife, have been eye-opening, and very alarming.”

Here is a headline from the Mail the day after the incident hit the front pages that gives you a flavour of what he meant.

'Leftist' millionaire's daughter whose playwright husband called police on Boris after recording screaming bust-up 'gave the finger' to PM-hopeful in the street - as it's revealed Johnson's girlfriend Carrie no longer feels safe at home.”

Here is some more from the text:
“Most curious of all is what the couple did – and why they did it – after they were assured by police that there was nothing to worry about, that no one was hurt, no crime had been committed and that there was no cause for further action. At this point many in their position might have slunk away, faintly embarrassed they had dropped their neighbours (with whom they share a tiny communal landing) in it with police.”

Other right wing newspapers joined in. The Times searched through Mr.Penn and his wife’s twitter accounts to find ‘incriminating evidence’ that they were Remainers, left wing, disliked Johnson and so on. The Telegraph gave two pages over to comment of a similar kind.

The hypocrisy of the follow up reporting had two aims. The first was to distract attention away from the fact, which no one denies, that Johnson had had a blazing row with his girlfriend that frightened many neighbours and to instead focus attention on the messengers. The implication of rather a lot of the reporting is that if you hear a woman screaming next door best keep it to yourself. The hypocrisy is that every newspaper had run the story as a front page lead the day before, so Mr. Penn had been absolutely correct that the story was of public interest.

The second aim is to ensure that any other member of the public that might have potentially important information about a Tory politician that was in the public interest keeps it to themselves. They will keep it to themselves because they know that if they reveal it they will have the full might of the Tory press trying to destroy their character in the days after the information was revealed.

Adam Ramsey describes this as anti-journalism, but I think that does not fully describe what is going on. If it had been a Labour politician of any rank these same journalists would have gone to any length to find the dirt on the politician, and not reward their sources by investigating them as well. What these newspapers are doing is propaganda: providing information, especially of a biased or misleading nature, designed to promote a political cause or point of view.

Why have these papers not yet descended to the level of Fox News in pretending bad things (for Trump) did not happen? These papers know that most of their readers will get their news from one of the broadcasters as well. If they are not reporting what is a top story for these broadcasters their bias is all too obvious. They cannot hide the story that is embarrassing to one of their own, but they can do their best to prevent similar stories in the future never seeing the light of day.

Mr. Penn and his partner have left their flat after receiving a large number of death threats as a result of this newspaper coverage. Our right wing propaganda machines has achieved its goal. 

Tuesday 25 June 2019

Once the Nasty party, now the Brexit party

Brexit could be a gift to Labour that will keep on giving, if the Labour leader is able to grasp it

One of the sentences you are sure to hear nowadays is: “Brexit is not going to go away anytime soon”. It is true because Conservative party members will not let it go away. A recent poll showed a majority of those who will elect our next Prime Minister would prefer achieving Brexit to Scotland saying in the UK, Northern Ireland staying in the UK, or even the survival of their own party. They want Brexit even if it causes severe damage to the economy. The only thing that the poll suggested might make a majority forsake Brexit is the prospect of Jeremy Corbyn becoming Prime Minister.Therein lies the cure for our current Brexit blight and the opportunity for more than one period of Labour government.

In the short term Brexit fanaticism is extremely scary. The wish to see Brexit happen even if it leads to the destruction of the Tory party is utterly extraordinary coming from Conservative party members. Of course Conservative MPs do not want to see that, but their survival in government now seems tied to getting Brexit done, and so most seem prepared to contemplate a No Deal Brexit if that is what it takes. Our only hope to prevent this are a small band of Tory MPs who might put country before party, who could then combine with most opposition MPs to stop this happening.

Even if the attempt to leave with No Deal in October fails or does not happen, the Tory party is not going to give up. This radicalised membership will do its work by selecting Brexiters when MPs retire or leave for other reasons, and they may well deselect some of those who oppose No Deal. At some point those willing to stand up in parliament against a No Deal Brexit on the Tory benches will shrink to become insignificant. At that point Conservative party members will get their prize, if they are still in government.

How did the Conservative party descend to this level of fanaticism about just one issue? Robert Saunders’s New Statesman article about the closing of the Conservative mind is well worth reading. It is particularly useful for those young enough to think that Conservatives were always neoliberals. He writes:
“For most of its history, the Conservative Party has embraced ideas, while disclaiming ideology. Yet today, a party enslaved by ideology is almost barren of thought, just as it faces a historic set of challenges.”

Sauders has some ideas about why this happened but I think it remains a puzzle. One possibility is simply the scale of their intellectual victory under Thatcher, such that their Labour opponents showed they could operate in the UK that Thatcher bequeathed but with a more human face (including more NHS spending). The Conservatives became, to use Theresa May’s words, the nasty party in voters minds. The only way forward was to double down on reactionary xenophobia (Hague’s “foreign land”) or ramp up the neoliberalism (Osborne's austerity).

How did the Tory party membership get so radicalised about Brexit, when all the talk was about radicalism and entryism in the Labour party? The reason is that the Tory press that spent so much ink on talking about an imagined hard left Labour membership was also busy radicalising the Conservatives. Brexit embodies a mixture of nationalism, xenophobia, nostalgia and neoliberal zeal that Conservative party members cannot resist.

In all this scary stuff there is a potential light at the end of the tunnel, a way out of all this mess. And despite all the talk, it isn’t a Remain victory in a People's Vote. Even if we have another referendum, which seems only likely in a last minute panic created by an EU ultimatum, it will not de-radicalise the Tory membership. If, as seems prudent, the referendum is about the withdrawal agreement, then Brexiters will say that the right question was not asked. If it involves No Deal, then any loss by a few percentage points (and the press will ensure at least that) will just become unfinished business.

The best way for Brexit to end is not in the drama of another referendum, but instead with a whimper. The only way that can happen, with a radicalised Tory membership, is by electing a Labour government. As I have argued with little challenge, the Tories would oppose any sort of softer Brexit a Labour government might propose, so together with Remainers they would have a blocking majority in parliament or the country. How far a Corbyn led government would go down this road to nowhere we do not know. But he would never be allowed to put a Labour government at risk by pursuing a lost cause, so Brexit will not happen as long as a Labour government remained in power..

What we know a future Labour government would do is undertake a lot of measures designed to help one section of the Brexit electorate, the so called left behind. Very soon those and other voters would lose interest in Brexit, as politics became all about what the Labour government was actually doing. People would increasingly look back at the years following the 2016 referendum as wasted years, and an example of something never to be repeated.

At first Conservatives would try and keep the flame of Brexit alive. Doing so would only ensure their unelectability, as Labour would only have to remind people of the chaos of the Brexit years. Conservative voters and MPs would gradually realise that being the Brexit party was like being the nasty party, a sure way not to be re-elected. It may take one or two more elections, but as that poll of Conservative party members suggested, the only thing that could make them give up Brexit is a Corbyn government. That is in essence why a Labour government is the best, and I suspect only, way of disposing of the Brexit blight that has infected the Conservative party and therefore the UK.

This is the light at the end of the tunnel, such that Brexit ends with a whimper. However you have perhaps already wondered why, if this is all true, so many Labour voters and Remain supporters chose not to vote Labour in the European elections? Why have the Liberal Democrats suddenly managed to break free of the shackles of being in the 2010 Coalition government to be among the four contender parties in opinion polls?

I think there are two answers, one that acted as a trigger and one underlying force. The trigger was the Brexit talks between Corbyn and May. Although political commentators rightly gave these talks little hope of success, their length would certainly have provoked a fear among Remainers who had voted Labour in 2017 that Brexit could happen in this way. In addition the European poll seemed like an appropriate time to protest.

The underlying factor is that many voters are now identifying themselves in political terms along a Remain/Leave divide instead of a political divide. Remainers were getting fed up with the absence of a strong political voice making the case for Remain, and instead hearing endless discussion of impossible Brexit plans from the ERG. All they hear from Labour (because most voters do not read political speeches) is the latest version of Labour’s position on a second referendum. Labour seems to be muffling its own voice on the issue of the moment. The Liberal Democrat campaign slogan of ‘Bollocks to Brexit’ was just want Remainers had been waiting to hear.

Which brings us to the current shadow cabinet meetings. Corbyn has moved another iota, agreeing that an option on the ballot would be “a real choice” for Remainers, but not moving nearly as far as many want. There is a certain symmetry in the two main parties position on Brexit, but also major differences. The symmetry is that, during May’s period, both parties wanted some form of compromise compared to what most of their party members wanted. Both parties eventually encouraged an insurgent party, the Brexit party for the Tories and the Liberal Democrats for Labour, that was able to take a large number of their votes by offering policies that forsaked compromise. But there the similarity ends.

The Conservative party will decide, in one way or another, to come to some kind of accommodation with the insurgent party. That will happen by changing their Brexit policy to mirror the policy of the insurgent, or to cooperate with the insurgent party in any general election, or both. The Conservatives, as they always do, will adapt to the threat they face in order to stay in power. .

The Labour leadership, in contrast, is in denial. All the evidence points to their failure to campaign for Remain as being a critical threat to an election victory, an election that could come very soon. Even before the European elections there were as many Remain and Leave maginals, because many working class Labour voters had changed their mind since 2016. In addition, it turns out Labour leavers do not feel that strongly about Labour taking a Remain position, but Labour Remainers care about it a lot. I have not come across a single reputable pollster that suggests Labour are increasing their General Election chances by keeping its pro-Brexit position, and plenty arguing that to win they have to back Remain.

The argument that Labour needs to support Brexit to win the election is no longer credible. Instead the leadership’s support for Brexit puts at serious risk a Labour government that could rule for more than a decade. When you add in the impossibility of a Labour government enacting Brexit, and I just do not see why Lexiters remain in denial.

Incremental moves until conference also makes no sense as a strategy. The longer Remain voters get used to thinking they are going to vote Green or Liberal Democrat, and as long as the Labour leadership resists what appears to be overwhelming force, there is a strong risk that many will carry that habit into a General Election, if only because Labour’s eventual change will lack credibility.

If the shadow cabinet are interested in maximising Labour’s chance of being in power, it has to change Labour’s official position to one of supporting Remain now. No one is asking Corbyn himself to campaign for Remain, and it would probably be better if he didn’t, because there are plenty on his front bench who can do so more credibly. But their campaigning has to reflect Labour’s official position, which is to become the only party that can make Brexit go away.

Friday 21 June 2019

Why austerity is not Labour’s Legacy

On the relationship between finance and fiscal policy

When Momentum put out this tweet following the latest spat between Corbyn and Blair
“Blair favoured deregulation of the banking industry - leading to one of the worst crashes in modern history. While spending on public services was higher, his legacy will ultimately be the austerity that followed his failure to stand up to big finance.”

I responded with this
This is parroting the Tory line that austerity was Labour's fault. As wrong coming from the left as it was from the right. Austerity wan't inevitable after the Global Financial Crisis. It was Osborne choosing to shrink the state, because Labour hadn't. Know your true enemy.”

Big mistake. I had criticised momentum and, in some eyes, supported Blair and twitter did its stuff. Among those supporting the momentum tweet was Clive Lewis and (maybe) Grace Blakeley, and among those agreeing with me where Tom Kibasi and Chris Dillow.

A lot of these tweets were totally irrelevant to the original tweet and my response. The original tweet is pretty clear. Blair’s failure to regulate the banking industry led to austerity. So the gradual appeasement of austerity we saw from Labour from 2010 to 2015, which I have strongly criticised elsewhere, is not relevant. Nor are Darling’s plans for cutting the deficit before the 2010 election. As I have said before, it is unfortunate that Darling won his battle against Brown and Balls and allowed reducing the deficit to be part of Labour’s short term objectives. But that has nothing to do with the momentum tweet, which involved the financial sector. [1]

Did Labour’s failure to regulate finance lead to austerity? In a very basic sense the answer is clearly no. Osborne didn’t need to embark on cutting public spending in a recession for the simple reason that no Chancellor since Keynes has done so. It was his choice. Perhaps if Labour had been tougher on banks the UK might have been less vulnerable to the Global Financial Crisis. UK banks collapsed largely because of overseas assets they had on their books (little to do with domestic debt), so the regulation would have had to stop them buying those assets, or forced them to substantially reduced their leverage. But I find it hard to believe that we would have avoided a recession of some kind.

A recession - even a mild one - was all Osborne needed. He was looking for ways to reduce public spending, and he saw a rising deficit as his opportunity. He committed to his policy in 2008, which was well before the extent of the recession was known. So it seems almost certain that the deficit would have risen sufficiently to allow Osborne to undertake austerity.

But why did he undertake austerity. I think it is because he wanted to shrink the state, something he had failed to convince voters to do on its merits [2]. What I call deficit deceit is using the supposed need to reduce the deficit to cut spending. But Grace Blakeley and Clive Lewis suggest something more complex. Here is Grace:
“I suppose it depends on how you view the emergence of neoliberalism - I see it as an ideology that both emerges from and reinforces a change in the balance of class forces under which finance capital becomes hegemonic. ‘Shrinking the state’ is generally political cover for empowering or enriching a particular group and disempowering another - eg PFI used to allow investors to profit from state spending, and austerity used to disempower small l labour at a time when it otherwise might have organised to challenge the status quo.”

Suppose Labour had regulated finance to a much greater degree, and that would include not giving it a central role in Treasury decision making, much as Brown had in 1997 with the Bank and financial sector regulation. If that had reduced the size of the UK recession that would be a good thing. But would it have prevented austerity. I cannot see how. Would it have changed Osborne’s mind about wanting austerity? I cannot see how.

Did finance assist in some ways with the austerity bandwagon. Of course it did, from City folk who said the market for UK bonds was about to collapse to pressure brought through the Treasury. But much of that would have happened even if there had been greater financial regulation. Again there was nothing a Labour government could do to prevent all that, short of nationalising the entire sector. So calling austerity Labour’s legacy makes no sense on these grounds.

Another way to link finance with austerity, pointed out to me by Clive Lewis, was in this paper by Obstfeld. The idea is fairly simple. Too big to fail is all about the state bailing out the banking system. The state has to have the ‘fiscal capacity’ to do that. Ergo we need to moderate government debt levels to preserve that capacity. To look at this argument we need to examine the concept of fiscal capacity and fiscal limit.

Can a government run up a stock of debt relative to GDP that is unbounded? MMTers are quite right to say that, in a country that prints its own currency, a government can never be forced to default. But debt to GDP might get so high that the political burden of paying taxes or curtailing spending to pay the interest on that debt becomes more than the political cost of defaulting. Defaulting can take two forms: a literal default (failure to pay interest) or excess inflation devaluing the value of nominal bonds.

That limit is clearly way above the level of current UK debt. When some say we do not know where that limit is that may be a prelude to saying ‘and it might be near the current level’ which is just designed to scare governments. Governments know their own fiscal limits and the strength of their inflation targets. But Obstfeld’s point is that a financial crisis might push a government beyond its fiscal limit.

I do not think this argument held much weight with Osborne. As I noted above, he chose his policy in 2008, and I think it would have taken him a little longer to work this one out. (Obstfeld’s paper is 2013.) It might have influenced King and some Treasury officials in 2010. But you can see how weak the argument is in a recession by looking at what the Labour government did. In 2008 it bailed out the banks and in 2009 it undertook fiscal stimulus. The reason is straightforward: a recession is as bad for the financial sector as the real economy. The financial sector is hurt by loans going bad in the real economy, something that is made more likely in a recession. The priority in a recession should always be to get out of recession. Indeed I suspect Obstfeld would agree, as his paper is not an argument for austerity.

Even though I do not think there is much credence to the argument that Labour’s failure to regulate the financial sector caused UK austerity, that does not mean that the influence of the financial sector was not crucial elsewhere. Fear about the health of the financial sector in core Eurozone countries lead directly to the imposition of first austerity, and then to a second recession. Greece was hit hardest. In 2010 Eurozone leaders were happy to let Greek leaders pile on extra debt rather than default on debt their banks partly owned. That finance ministers in the Eurogroup were then prepared to tell a subsequent Greek government that they had to pay every penny back or Greece would be out of the Eurozone. (This episode tells you a lot about the Eurozone and those finance ministers and nothing about the EU.)

Banks, and politicians failure to be honest about the need to bail them out, were central to austerity in the Eurozone. Mark Blyth’s phrase “what starts with the banks ends with the banks” remains very apt there. In addition the desire to cut taxes on the rich, many of whom work in finance, is clearly a key motivation behind austerity in the US. But if austerity in the UK is anyone’s legacy, it is George Osborne and not Brown/Blair. He, and he alone, chose to cut spending in the middle of a recession, something no Chancellor has done since Keynes wrote the General Theory in 1936.

[1] For what it is worth, a different economic policy might have changed the 2010 election outcome: Labour might have got more or less seats. But it is absurd to call something a government’s legacy just because the other side were able to do it because they won an election. Under this logic Brexit is Corbyn’s legacy etc etc.

[2] Chris Dillow and others have suggested that his main motive was just to have something to attack Labour with. Some have suggested he just got the macroeconomics wrong (or more accurately it was at least 10 years out of date). It is difficult to bring evidence to bear on this debate, but all three explanations suggest Labour’s financial regulations policy had little to do with it.

Tuesday 18 June 2019

For too many Conservatives there is no spoon

The Tory party has lost its battle with reality. But there remains one hope, a man with a joke and a smile that can set the UK free from the EU. Unfortunately to do that he may set the UK free from democracy as we know it.

For those not familiar with the film Matrix, there is a scene where the hero Neo encounters a boy bending a spoon with his mind. The boy hands the spoon to Neo. The dialog goes on:

Spoon boy: Do not try and bend the spoon. That's impossible. Instead... only try to realize the truth.
Neo: What truth?
Spoon boy: There is no spoon.
Neo: There is no spoon?
Spoon boy: Then you'll see that it is not the spoon that bends, it is only yourself.

Neo then appears to bend the spoon with his mind. In the film the spoon isn’t real, but a digital simulation fed to unconscious humans to keep them alive. But what would happen in the real world if you really, really wanted to bend that spoon, and there was another world where you could make that happen? You could get to that world by talking a blue pill offered to you by a kind of anti-Neo.

Welcome to the contest for our next Prime Minister, where the electorate is just a small group of party members and Conservative MPs. The current contest is all about Brexit. Brexit is stuck. The goal of Brexiters, taken up by many (but definitely not all) who voted for it, is to gain complete independence from the EU and all its rules and regulations. They hoped to do this by leaving the Single Market and Customs Union, and replacing them with a free trade agreement (FTA) with the EU. Unfortunately they brushed aside two obstacles: the Irish border and the Good Friday Agreement.

Together they are a spoon that so many Conservatives want to bend by wishing it so. The Irish government and the EU live in the real world, so they know that an FTA with the EU would require a hard border on the island of Ireland. A hard border is incompatible with the Good Friday Agreement. As a result, either Northern Ireland or the UK has to keep their trading rules such that there cannot be a hard border in Ireland. The backstop ensures this will happen. Complete independence for the UK from the EU is therefore impossible, just like bending a spoon by thought alone.

Most Conservative candidates for Prime Minister pretend they can really bend the spoon. Many suggest it can be bent using soon to be invented technology. Technology that would make a hard border anywhere near the actual border unnecessary. But these candidates have a problem. If such technology could be found, the EU have said they would be happy to apply it. And if such technology is just around the corner, why would the Brexiters object to the backstop that will soon be removed? The fact that the same Brexiters who say the technology is almost apon us also refuse to accept the backstop suggests they do not really believe in bending spoons.

One or two candidates say that, if only they are given a chance to stare into the whites of the EU negotiators eyes, they can make the EU bend. This is also impossible. Others suggest that we can leave in October with No Deal and then we can do the FTA we want, because the EU will want the £39 billion that we have already agreed we owe them. In reality if we break our existing agreements with the EU after a No Deal Brexit the EU can do things like fail to let our airplanes fly.

Many of those voting for our next Prime Minister may understand all this deep down. They agree with the spoon boy that you cannot bend a spoon by thought alone. Instead they want to take the blue pill, and go to a world where almost anything is possible if you want it enough. A world where you can wish away the Irish border problem. The same world where we once stood alone and won WWII all by ourselves.

These Conservative party members are not hanging on every detail of alternative arrangements for the Irish border to check that they will actually work. They don’t mind too much how we leave and what is done to parliament to make that happen. They just want their blue pill and their anti-Neo to make all their difficulties disappear. They want someone to get Brexit done and banish Farage and then diminish Corbyn so they might actually win another election. They want there to be no spoon, because life would be too difficult if today’s reality turned out to be all there is. In particular, and to mix imaginary tales horribly, if they recognised reality they would have to give up their precious, Brexit.

Just after the 2017 general election I wrote about the Zugzwang that the Conservative party found itself in. Zugzwang is a term in chess where a player finds themselves in a position where every move that it is possible to make ends up making them worse off. In that situation the chess player would like to skip their move, but the rules say they cannot. What I had in mind then was that most Tory MPs wanted to be rid of May because she was clearly a hopeless leader who had called an unnecessary election with a commanding lead in the polls and lost it all. Yet these same MPs could not get rid of May because they would get a Brexiter instead.

I underestimated the Zugzwang the Conservatives were in. I hadn’t realised the depth of the rabbit hole that Brexiters were prepared to take the Conservative party and its members. Brexit could have happened if the Brexiters had not voted against May’s deal. Instead they have taken a referendum that promised the easiest trade deal with the EU in history and pretended it is mandate for No Deal at all. Their supporters in the press egg them on and most in the broadcast media let this pass.

At the bottom of the rabbit hole of Brexit, where only complete independence for the EU is acceptable, you can only survive by taking the blue pill. The blue pill takes you to another place where most Conservative members and MPs want to live. And Boris Johnson, who can seemingly make any bullets fired at him stop dead in mid air with a joke and a smile, is the person who can make this happen. Boris Johnson will offer you a red pill and a blue pill. The red pill that is reality and the blue pill where thought can bend spoons. Pills like the two articles he wrote before he decided to champion Brexit.

Unfortunately that other place where you go if you take the blue pill is not fictitious. They have seen it across the Atlantic. Johnson is in reality their Trump. Trump can get away with so many things that once were considered outrageous, and he only gets away with it because he has a party machine and media behind him that is prepared to tolerate and justify anything Trump does so they can stay in power, as long as the party serves its backers’ interests. A UK version of Trump is the only way of delivering an outrageous thing like No Deal Brexit.

Johnson, like Trump, is criticised for his lies and personal behaviour but he just laughs it off and nothing seems to matter. There are much more worrying similarities between the two. Johnson, like Trump, cannot concentrate for long, says or does the wrong thing at critical moments, has no vision except his own advancement, and makes serious mistakes that go beyond his words and his personal life. His genius is to turn his own incompetence into a joke, so he appears so refreshing compared to most politicians. Although the jokes may be well rehearsed, the incompetence is real. When you are worse off because of his incompetence it isn’t funny anymore, but you just need enough people who are yet to experience his incompetence first hand and who appreciate a funny politician and the job is done.

Which leads to a critical realisation. If Johnson is the UK’s Trump, then the spoon is not just the Irish border, or the consequences of a No Deal Brexit. The spoon has to be politics as we once knew it, democracy as we once knew it.

The first spoon that will be bent is an independent media that asks critical questions based on facts. As William Davies and others have observed, Johnson’s first leadership press conference was positively Trumpian. Journalists who ask tough questions were booed. Later pressure will be brought through the Tory media or elsewhere such that journalists quickly learn that asking such questions is more trouble than it is worth. Small outposts of critical thought may remain, because you only need to control what most people see and read to bend the spoon to your will. Whereas Trump plays the media through his tweets, Johnson can shrug off using racist imagery about Muslim women by offering the MSM cups of tea.

The spoon may become the judiciary, that has already raised the wrath of parts of the governing party, its press and its members by daring to allow parliament the final say in enacting Article 50. The already unprecedented number of attacks by politicians on the civil service will morph into a politicisation of the civil service that Thatcher would never have dreamed of. And very soon the spoon may be parliament itself. Johnson is committed to imposing the most devastating kind of Brexit on the UK if he cannot get a deal by October, and parliament may well try to stop him. Johnson has not ruled out ignoring or suspending parliament and going ahead anyway. If his poll numbers are not as favourable as some hope, or the deal he offers Farage is rejected, he may be tempted to bypass parliament rather than call an election.

The spoon that Johnson and his party want to bend or to pretend doesn’t exist is pluralist democracy itself. It will happen slowly, each stage seemingly not so bad because each happens with a joke and a smile. We can only hope that just because most Conservative members want to live in a world where there is no spoon, enough voters prefer changing the real world in ways that enhance rather than diminish our democracy.

Friday 14 June 2019

Bill Mitchell's fantasy about Labour's fiscal rule

My last post about outlandish attacks from some MMTers on Labour’s Fiscal Credibility Rule (FCR) was designed to be read by non-economists, and I didn’t want to bore them or waste space with all the fantasies Bill Mitchell has spread about the rule. But as I’ve had one of those fantasies tweeted back to me many times in response, I want to lay it to rest here.

That fantasy is that the Bank of England somehow has control of when the knockout happens. The knockout is when the rule is suspended and instead you have as much fiscal stimulus as is necessary to get the economy out of recession. It is triggered when interest rates hit their lower bound. At that point all monetary policy has left are unconventional policies, which are less reliable than fiscal policy, so it makes sense to go for a full fiscal stimulus. 

The way this simple rule has been spun by some is that it gives the Bank of England control over when the knockout is triggered. In reality the rule does no such thing. The Bank will have announced beforehand where the lower bound for rates is, and when a recession happens such that the Bank cuts rates to this lower bound the knockout is triggered. This is simple, unless of course you hate the rule because it is not MMT.

To see how MMters spin this as the Bank being in control of the knockout, you have to construct a fairy tale where the Bank is evil. Although they are supposed to do everything to end a recession, in this fantasy they have a higher calling, which is to impose austerity. So what the evil Bank does is announce that the lower bound is X, but when a severe recession hits they cut rates to X+0.25% and no further. They undertake all kinds of unconventional monetary stimulus but insist that rates are not at their lower bound, just because they do not want any fiscal stimulus.

What the fairy tale requires is that all 9 members of the Monetary Policy Committee (MPC), who actually set interest rates, collude to deceive the Chancellor and the public. In reality the M in MPC does not stand for Masonic - 4 of their members are external members. They would have to swear in public that the real lower bound is X and have to explain to parliamentary committees why rates have not been cut to X despite being in a major recession with rapidly rising unemployment and falling output.

I know many more past and current MPC members - both from the Bank and from outside - than I suspect Bill Mitchell does. What always impresses me is how seriously they respect the mandate they are given. They might have their individual views on fiscal policy, as Mervyn King did, but there is just no way they would collude to harm the economy because of those views. Most of those I have met are quite positive about the contribution fiscal policy can make in a severe recession, so they wouldn’t even want to deceive the public on this score even if they felt able to.

But let’s put all that to one side. After all I am sure MMTers would just say this shows I’m too much part of the elite, or I am incredibly naive, or whatever. Let’s just suppose this conspiracy happened. Each member of the MPC swore blind that rates were still not at their lower bound, and had concocted some kind of story about why rates should be kept above their lower bound despite rapidly rising unemployment and falling output etc etc.If all that happened, what would a Labour Chancellor do?

The Chancellor, together with much of the non-partisan press, would see what was going on. They would observe that in the middle of a recession the MPC were deliberately not cutting rates to the stated lower bound for no good reason other than a nefarious motive. The Chancellor would first embark on a temporary (less than 5 years) fiscal stimulus, which he is free to do under the FCR rule even without the backstop. If rates stayed at the same level for months as the recession continued, and the Bank embarked on all kinds of unconventional stimulus measures, the Chancellor would conclude, as any reasonable observer would, that the lower bound had been reached. The Chancellor would then invoke the FCR backstop, allowing him to expand on their original fiscal stimulus. Once the recession was over, I doubt very much that the current monetary framework would survive, which is yet another reason why no MPC would never embark on this fairytale.

MMters sometimes retort that the Chancellor would get political flack for triggering the backstop in this situation. In the middle of a recession with unemployment rising I doubt there would be much flack at all, besides the usual nonsense from the Tory press. But I find it supremely ironic that MMTers are prepared to use media reaction as an argument, as if the media reaction to any Chancellor adopting MMT would be all sweetness and light. Just imagine how abolishing the MPC, and saying taxes do not help finance spending, would go down with most journalists. People in glass houses shouldn’t throw stones.

Mike Norman Economics, commenting on my earlier post, says compared to Bill Mitchell I’m out of my league. That would be the league for telling fairy tales I assume. While one part of the left indulges in polemic and spinning fantasies against Labour policy, thankfully we have another part that is getting on with the serious business of preparing for a transforming government that will finally reverse what neoliberalism really is.

Tuesday 11 June 2019

Is Labour’s fiscal policy rule neoliberal?

That is the charge some on the left, particularly followers a movement called MMT, have laid against Labour's Fiscal Credibility Rule (FCR). MMT stands for nothing very informative, but it is a non-mainstream left-wing macroeconomic school of thought. Bill Mitchell, one of the leading lights of MMT, has run a relentless campaign against the FCR through his blog. As my own work with Jonathan Portes helped provide the intellectual foundation for the FCR, I will try and explain why I find the neoliberal charge nonsensical.

Although MMT has had its biggest impact in the US, it is increasingly discussed by those on Labour’s left (e.g. pro and con). Here I will give a lay person’s guide to only the aspects of MMT that lead to its dislike of Labour’s rule. MMT’s key idea is that fiscal policy (changing taxes and government spending) is better suited to stabilise the macroeconomy than a central bank setting interest rates.

Almost without exception, advanced economies use interest rates set by an independent central bank to control output and inflation. In the UK the Bank of England’s mandate (the inflation target and how quickly it has to be reached) is determined by the Chancellor. If the Chancellor wants to raise the inflation target or scrap it altogether they can do so. But the month to month task of actually choosing what interest rate is most likely to meet the Chancellors mandate is left to the Monetary Policy Committee (MPC), who are either Bank insiders or outsiders appointed by the Treasury.

Why is the choice of setting interest rates delegated to the MPC? Getting this choice right is a highly technical task, requiring detailed discussions of different forecasts and macroeconomic models. If the MPC is working well, they bring strong expertise to the table to help make a decision.

These experts could just give their advice in secret to the Chancellor, leaving the Chancellor to accept or reject their advice. The danger in doing that is the Chancellor will allow party political motives to influence what they do, to the detriment of the economy. As one Treasury insider once told me in the years before the Bank of England (BoE) became independent, the Chancellor recognised that rates had to rise but there is no way it was happening before the party conference.

A fundamental problem with today’s way of doing things occurred during the Global Financial Crisis. Interest rates fell to a level that became their lower bound. Central banks thought that cutting rates any further was ineffective and risky. When that happens, something else needs to step in to stimulate the economy. The BoE tried various measures (like Quantitative Easing), but they were all rather hit and miss because they had not been used much before.

Under the Labour government in 2009 fiscal policy was used to provide the stimulus that monetary policy could no longer reliably give. But in 2010 the Coalition government was elected and decided fiscal stimulus had to become austerity, with disastrous results in the UK and other countries that adopted it. Most macroeconomists rejected austerity in 2010, and their number increased steadily as the impact of austerity became clear.

It is now received wisdom among academic economists that when interest rates hit their lower bound, fiscal policy needs to provide a large stimulus to the economy. Labour’s fiscal credibility rule is the first in the world to formalise this. If interest rates hit their lower bound, the normal rule is suspended and a fiscal stimulus occurs that is sufficient to end the recession. Labour’s rule is therefore designed to prevent austerity happening again.

MMT wants to go one step further. It wants to use fiscal policy to stabilise the economy at all times, and not just when monetary policy is out of action. This is not a ridiculous proposal. The question is whether it would work as well as the current regime. Most macroeconomists prefer using interest rates when possible because rates can be moved quickly. It also allows this decision to be easily delegated to experts, which avoids party political influence getting in the way of macro stabilisation. However an obvious drawback of the current regime is that it cannot work when rates hit their lower bound, so in a bad recession you have to switch to fiscal policy. Labour’s fiscal rule hardwires that switch into policy.

If you are still reading you have probably decided by now that the debate between MMT and mainstream macro about whether to use fiscal policy all the time or just when interest rates hit their lower bound is pretty technical and best left to macroeconomists. I think that conclusion is correct. But why do many MMTers, as they are known, call Labour’s rule neoliberal? To understand this, you have to understand that MMT is far from just another school of macroeconomics.

MMT is also a political movement of the left. Mitchell himself supports Lexit. They are therefore naturally indignant that a Corbyn led government has adopted a rule that is derived from mainstream economics rather than adopting MMT. Their aim is to win a political as well as an economic battle. Pretty much anything is fair game in this political battle, including describing those like myself who defend Labour’s fiscal rule as neoliberal. (To see how ludicrous this charge is, see here.)

These attacks do however raise a legitimate issue. Why the need for a fiscal rule at all? Why not let the Chancellor choose the deficit depending on the economic circumstances? The answer is provided by something called deficit bias, which preoccupied economic policy before the global financial crisis (GFC). In the 30 years before this crisis, the ratio of OECD government debt to GDP almost doubled for no justifiable reason.

Deficit bias happens because politicians like cutting taxes or raising spending through borrowing, because it puts off any obvious economic pain. But if deficit bias does substantially raise the debt to GDP ratio, as it did before the GFC, then more debt requires paying more interest which in turn requires higher taxes or lower spending. Deficit bias does not avoid the downside of cutting taxes or increasing spending, it just puts it off until a later date. Deficit bias has not gone away. Donald Trump cut taxes for the rich, but he avoided a lot of political flack by doing this through borrowing.

Contrary to many alarmists in the City, the world does not come to an end if you have deficit bias. Deficit bias just makes life harder for future governments. So it is good practice, and a sign of fiscal responsibility, for governments to follow a fiscal rule. Nothing about this good practice need be neoliberal.

You can certainly make a fiscal rule neoliberal through asymmetry (deficits matter, but surpluses do not) and saying the only spending should be cut and not taxes raised to reduce an excessive deficit. Labour’s fiscal credibility rule does neither of these things. It targets the current deficit, leaving public investment free to meet public needs and benefit from low borrowing costs. The target only needs to be met in 5 years time and this period rolls forward. As a result the rule is compatible with the Chancellor enacting a modest stimulus during a mild recession. In a severe recession a fiscal stimulus is mandatory, making austerity impossible.

MMTers like to suggest that government spending could be higher under MMT than under the FCR. This is simply false if the MPC is doing its job. Indeed if higher interest rates reduce demand, as most empirical evidence suggests, for given taxes government spending will be higher under the FCR than under an MMT policy.

MMTers might argue that leaving interest rates decisions to a central bank is neoliberal. That charge has less force for the UK, where the Chancellor has complete control of the Bank’s mandate, than in the Eurozone for example. Delegation of decisions to experts is hardly neoliberal. Is the UK organisation that decides whether drugs are cost effective, NICE, a neoliberal organisation? There is a legitimate issue of what happens when experts fail to do their job, but that is an issue for UK monetary policy that has nothing to do with Labour’s fiscal rule.

MMTers over the top criticisms of Labour’s fiscal rule do however raise some serious questions about MMT. MMT has been important in the US in helping to counteract excessive concern among many Democrats about budget deficits, and in fighting nonsense that says we cannot afford to tackle climate change. However both points can be made using entirely conventional macroeconomics, as my article on the Green New Deal showed. Yet MMT also wants to be a revolutionary movement that overthrows mainstream macroeconomics.

There have been two revolutions in macroeconomics in the last 100 years, but both have brought major and radical new ideas to the table. As yet, MMT only offers ideas that can easily be expressed as part of the mainstream. For example using fiscal rather than monetary policy was a big debate when I was studying as an undergraduate more than 40 years ago. That does not make MMT’s ideas wrong, but they are certainly not revolutionary and they will certainly not replace the mainstream, even if MMTers call all their opponents neoliberal.