Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 28 September 2020

Sunak and most Tory MPs do not understand the economics/health trade-off, and many people will die as a result


It is well known and generally accepted that despite warnings from China, Italy and elsewhere, the UK government were late in imposing a lockdown that reversed the march of the virus . That mistake cost tens of thousands of lives, and a severe hit to national output.

You might have thought that this colossal error would have made the government fear the virus. Surely mistakes would not be repeated. But as Harvard epidemiology professor William Hanage notes, having not learnt the lessons from its neighbours its now failing to learn the lessons from itself. The Prime Minister, despite getting the virus in a life threatening way himself, is predisposed to tell good news stories, and so was too eager to relax the lockdown. Sunak egged him on, thinking only about how much money the Treasury was spending and the immediate impact on GDP. 

There seems to have been no strategic thinking about stopping a second wave developing. It was as if the government can only focus on one idea at a time, and after a belated focus on saving lives they moved on to restarting the economy, with no thought to how the pandemic might develop. The crucial failure over the summer was a failure to fix the problems with the private sector (not NHS) testing and tracing system, at the same time as expanding capacity to deal with an inevitable Autumn surge.

Any thought about strategy would have signalled the return to school and then the return to university as danger points that had to be handled very carefully, and almost certainly offset by restrictions elsewhere. Yet Dido Harding, who runs the privatised test and trace operation, said with a straight face that no one could have anticipated a rise in the demand for tests in late August and September. But it wasn’t just Dido Harding. Everyone in government, from Matt Hancock to superforecaster Cummings to the Prime Minister himself must have agreed that there was no reason why all this increased mixing among schoolchildren would lead to an increase in the demand for tests.

Perhaps they had their minds on other things. For example Hancock decided that the end of August was a good time to announce the abolition of Public Health England, with a new body to be run by none other than Dido Harding. It was another U-turn, undoing part of the Lansley reforms. The Conservatives seem to like reforming parts of the health service at times of maximum stress to that service. The reforms were supposed to take a few months, in time for a second wave, but instead they are happening during a second wave..

It is difficult to understand quite what ministers thought would happen once new coronavirus case numbers began to plateau at around 700 per day in July. It was obvious at that point that there was a big danger that people would become complacent, and relax on social distancing etc, leading to cases beginning to rise, which in August they began to do. Yet rather than the government emphasising the dangers of such relaxation, they were in full ‘save the economy’ mode, with things like Eat Out to Help Out, which may have helped the virus as well as restaurants. The Prime Minister and Chancellor began a big campaign to stop people working from home and instead come back to their offices. Luckily most ignored them, which may be one reason why most of the south east (excluding London) is relatively COVID-free.

These actions give the lie to attempts by the government to suggest that the only guilty party responsible for the second wave is the public. (Of course the government should lead by example, as it famously failed to do with Cummings’ eye tests.) Blaming the public is an absurd excuse anyway. Any government that assumed there wouldn’t be a gradual forgetting or ignoring of the oft-changing coronavirus rules is incompetent. A government should plan for what they expect behaviour to be, rather than assume everyone sticks to their rules.

This month things have gone from bad to worse. With reported cases rising rapidly, and true cases rising even more rapidly because of the failure of the testing system, the Prime Minister is repeating the mistake he made in March. The lesson from the first wave of the virus is that you act fast and act hard. You do not gradually tighten restrictions in the hope that this will be enough. You may get to the same place eventually, but the difference is measured in lives lost to coronavirus. Even if the Prime Minister had wanted to go further in combating the virus, his Chancellor, cabinet and Tory MPs could have stopped him.

In a similar spirit, the Chancellor replaced what was initially a generous furlough scheme with a modest wage subsidy scheme that, in the words of the Resolution Foundation, has design flaws that limit its ability to maintain employment and help firms. If there are design flaws coming out of a Treasury scheme that probably means the flaws are intentional.

The Chancellor talks about supporting jobs that are viable in the longer term. This is doublespeak unless the Chancellor thinks no vaccine will ever work and we are not going to eliminate the virus by other means. There is a real question about whether people who temporarily cannot work because of the virus could do something that benefits themselves and society instead, but the answer to that question is not unemployment. With incompetence comes a lack of imagination.

Collectively the Tory party, reading anti-lockdown nonsense in the Telegraph and other newspapers, has collectively failed to understand the economics/health trade off. Of course there is a very short run trade off, but this trade off disappears after a few months, because a failure to keep virus numbers low will kill the economy. This is not an idiosyncratic view, but the view of most economists, who understand that during a pandemic social consumption collapses. For most this is not because they are prevented from going to pubs, restaurants, football matches, concerts and so on, but because they do not want to risk their health and the health of others by doing these things. So even if you didn’t care about the thousands of deaths that would result from an anti-lockdown policy, that policy doesn’t do the economy any good either.

Once again the Tory party is ignoring the experts, and while in previous years that has led to lower incomes for most people and poorer public services, this time it will do those things and also lead to many more deaths from the virus. Why do Tory MPs and the columnists they read live in a fantasy land where they ignore the fact that Sweden has the highest death rate by far compared to other Scandivian countries, and as Nick Cohen points out has far more generous unemployment benefits and far better help for the unemployed than the UK? Is this the point where an ideology that idealises the market finally drives its followers mad, or are jobs and businesses in the areas that would suffer from a second wave, as well as thousands of deaths, of little interest to the party’s backers?

Tuesday 22 September 2020

Why neoliberalism can end in autocratic, populist and incompetent plutocracy


Is it a coincidence that the two countries that first championed neoliberalism (under Thatcher and Reagan), should end up with autocratic, populist and incompetent leaders (Johnson and Trump) in what is best described as a plutocracy? The thoughts below are, to use a phrase that Philip Mirowski once used about something I wrote, untutored, so comments via twitter (or DMs, or emails) will be gratefully received.

Before addressing that question, there will be some who will think I am exaggerating. Both countries are still democracies after all. But being a democracy did not stop both Johnson and Trump being elected. Both leaders are undoubtedly autocratic, in the sense that they or a tiny group around them wield far more power than their predecessors did, and they spend considerable resources trying to destroy the obstacles a pluralistic democracy puts in their way. Both leaders are populist in the sense that they either describe their own policy agenda as the ‘will of the people’, or suggest their opponents should be locked up. Both employ crude nationalism at any opportunity.

I suspect in most cases populism generates incompetence. Take Brexit for example. Brexit makes no sense on many grounds. Besides the economic hit, it reduces sovereignty to autarky by ignoring the gains to cooperation. One illustration of this is how it has reduced the UK’s influence on world events. Such policies repel intelligence and the open minded, and promote the mediocre and yes men (or women). Just look at the UK cabinet today, or the type of people that advise Trump.

What about plutocracy? The US has always had elements of plutocracy built in because money plays a huge role in all forms of election. That has got worse in recent years. The result is that the Republican party is now the party of wealthy donors, and it is noticeable that the first major legislation that Trump passed was to give large tax breaks to the very wealthy.

In the past money has been less influential on UK elections, largely because of strict election laws. However these laws have not kept pace with social media. The group that provides 80% of Conservative party funds is called the Leaders group, and they meet regularly with senior politicians. Recently some large coronavirus related contracts have been given to companies that donate to the Conservative party, or who have close connections to Conservative politicians. When the recent ‘rule of six’ for coronavirus mitigation came into effect, ministers called a special meeting just to ensure grouse shooting parties were exempt. Little attempt has been made to close UK tax havens. Like the US, what we are seeing today in the UK is not completely new, but its scale has intensified and the government’s embarrassment about it has decreased.

It is important to say that being a plutocracy does not, in these cases, imply that the government is really run by some kind of committee of all those with wealth. The impossibility of such a thing illustrates that plutocracies can be quite selective in the forms of wealth they favour.. To talk about the power of ‘capital’ or even 'financial capital' is misleading for this reason. In the UK those who run large hedge funds are particularly influential, and under Johnson and Trump most of those businesses involved in international trade are ignored and policies are directed against them.

There is a more basic reason for describing the UK and US as plutocracies, and that is by analysing how we got here. The place to start is neoliberalism. Neoliberalism eulogizes the market. In the past I’ve characterised the ideology as what you might believe if you did Econ 101 (a first year course) and skipped some of the lectures on market imperfections. However an ideal market for any economist involves competition, and as any student doing Econ 101 would know, any form of imperfect competition takes you away from that ideal. However neoliberalism in practice has become increasingly relaxed about monopoly power. Colin Crouch distinguishes between what he calls market-neoliberals and monopoly-neoliberals.

Why neoliberals use social conservatism as a vote winner

Neoliberalism's success owes a great deal to it being a very attractive ideology for the wealthy, and that in turn helps explain why it has been increasingly relaxed about monopoly. Wealthy funders of think tanks that promote neoliberalism, like the IEA in the UK, will not look kindly on the think tank suggesting their monopoly should be broken up. This is an illustration of how neoliberalism has increasingly adapted as an ideology to serve the interests of wealthy individuals. It is no accident that under neoliberalism the relative incomes of the 1% and 0.1% have taken off, which greatly increases both the ability and incentive for the wealthly to meddle in politics.

The obvious problem with an ideology championed and reinterpreted by the wealthy is that it won’t be very popular with a majority of the 99%. Neoliberal ideology pretends that the huge salaries of CEOs reflect what they add to their firms and the economy, but in reality high CEO pay means that everyone else gets less of the cake. Wars on red tape are fine for businesses, but they come unstuck when a building goes up in flames or a financial system collapses. While initially Reagan and Thatcher were able to win elections (with Thatcher, in part by giving bits of the state away at bargain prices), being at the right of the economic spectrum will eventually have a cost.

The way round that problem that the political right has adopted in both the US and UK is to appeal to social conservatives. In the US the obvious way to do that was through race, while in the UK the main route has been immigration. In an important sense this appeal to social conservatives is quite false: many right wing politicians are liberal in some of their social views, and they depend on immigrants to wait on them in restaurants or clean their houses. It is an electoral tactic to win over left wing social conservatives for a right wing party, but not one most neoliberal governments would want to carry through to the extent of damaging the economy. . .

Sometimes the interaction between social conservatism and right wing goals can be positively helpful. A clear case is austerity in the UK. Whatever its initial motivation, austerity became a means of shrinking the state and thereby releasing more resources for the private sector, and in particular the wealthy. Austerity has strong negative effects on the 99%, but these can be (falsely) blamed on immigrants taking away resources from the indigenous population.

However the major party of the right in both countries knows that taken too far this social conservatism can have negative effects. Before Trump, immigration was not politicized in the US to the same extent as the UK, because immigrants are useful for sectors of US business. In the UK the Conservatives set targets for immigrants, but were never prepared to suffer major economic damage to achieve those targets. In that sense the shift to social conservatism was a partial deceit, which was in danger of being found out.

The transition to populism

How do we get from here to populism? The key I think is that modest and insincere appeals to social conservatism can be undercut by those who are more socially conservative, and these insurgencies can be backed by extremely wealthy individuals who think they can get something out of it by promoting it or aligning with it. These individuals can include media barons. In the UK this took the form of UKIP, and in the US by the tea party (financed and promoted by the Koch brothers) pushing more right wing/socially conservative candidates in primaries. For example the tea party’s anti-regulation/anti-tax stance fitted nicely with the interests of big tobacco. The tea party could take over the Republicans through primaries where their candidates could appeal to core voters, spend a lot on advertising, and even get right-wing media support. 

Trump in the US was the final step in such an insurgency. He was very much an outsider in terms of the traditional Republican party, but he had his own resources to launch his campaign. He appealed to social conservative left wing voters because of his position on immigration and trade, and mobilised apathetic voters through his populist rhetoric, enhanced by his racist views. Weakened by the tea party, the Republican party was not able to stop him becoming the Republican candidate.

In the UK a populist take over of the Conservative party worked through opposition to the EU. UKIP gained popularity because the Conservatives actions on immigration did not match their rhetoric for reasons already discussed. UKIPs leader, Nigel Farage was, like Trump, a populist who had no qualms supporting the right wing fringe parties of Europe. But the absence of primaries in the UK meant he had no way to beat the FPTP system. Why did some wealthy individuals back Farage? UKIP was founded not as an anti-immigration party, but an anti-EU party, and some wealthy individuals were anti-EU. David Cameron agreed to a referendum on UK membership because of UKIP’s threat to steal Conservative votes and MPs. EU membership was hardly a major issue among voters before the referendum, but as the referendum approached voters had to make up their minds.

Probably the most crucial wealthy individuals that had an interest in Brexit were media barons. The Tory press, who had much of the daily English newspaper readership, had for some time attacked the EU. It was Johnson who first started writing largely made-up or wildly exaggerated stories about decisions made in the EU that might impact on the UK. These powerful newspaper owners essentially groomed their readers to have unfavourable opinions about the EU.

This press had a strong influence on Conservative party members, who became more Eurosceptic, and some younger neoliberal Conservative MPs began championing the Brexit cause. The motive force was similar I suspect to those who controlled newspapers: a belief the EU was preventing the UK becoming a low regulation neoliberal exemplar. When the press successfully suggested that Freedom of Movement was the reason immigration targets had not been hit a referendum victory became a possibility. (The suggestion was of course false, and after Brexit EU migrants were essentially replaced with non-EU migrants.)

The Leave campaign and Trump were similar in many ways, and one was that both lied without shame, and the media in both countries failed to attack those lies sufficiently. Once the Brexiters had their narrow referendum victory, they started talking about the ‘will of the people’ in true populist fashion. Because the Brexiters hadn’t put forward a coherent route map of how to leave, chaos followed the referendum vote and UKIP continued to attract voters. Eventually the leaders of the Leave campaign were invited to take over the Conservative party. Equally Trump gets very little opposition from Republicans in Congress.

How can those at the extreme of the social values and economic policy spectrum win an election? One pedantic answer is they didn’t: Clinton got more votes than Trump, and a much better campaign filled with lies gave Leave a one-off boost that they haven’t enjoyed since. A more substantive answer for the UK is that Labour find it difficult to occupy the centre ground on social issues, as their members tend to be at the other extreme, and the media tries to ensure social issues are dominant in the campaign. (I also have the feeling that in elections many better off socially liberal voters are unlikely ever to vote Labour.) In the US there is an ongoing debate about whether Trump won because of race or because his economic populism appealed to the working class, but when the racially prejudiced and the religious vote get you at least a third of the electorate it is not too surprising that outlandish (populist) promises promoted in the media can get someone elected for the first time.

The lessons of the 1930s were forgotten

Is this symmetrical? Could politicians who are strongly left wing and socially liberal take over the party of the left and win? Recent events suggest it is more difficult, but it is important to understand why. The overtly biased right wing media is an important factor here for the obvious reasons. However I think among the well paid political commentators in the less partisan media, and among the Democrat or Labour machine, there is a deep aversion to the left. It is often justified with ‘middle ground’ logic (used extensively for example when it looked like Sanders could win the Democrat primary), but post-war US history and events more than a generation ago in the UK may play a role.

There once was a similar aversion to the extreme right, for obvious historical reasons. In 1968 Enoch Powell gave a speech where he talked about the rivers of blood that would result from what we now call the Windrush generation. The Conservative Prime Minister Edward Heath sacked him from the cabinet after the speech. I cannot help but think that if he had been active in politics ten years ago and had given s similar speech about Muslim immigration, he would not have suffered the same fate. Indeed I suspect he would be appearing frequently on Question Time and would be a leading Brexiter, and perhaps even Prime Minister. History also shows us the danger of using racial or religious minorities as scapegoats for economic misfortune and declining national influence.

Did things have to go this way? Is neoliberalism doomed to degenerate into the populism we see today. Of course both Trump and the Leave campaign could easily have lost. Yet neoliberalism not only increases inequality, but it enables and even encourages wealthy individuals to influence politics. Once the main neoliberal right wing party starts using social conservatism as a way of distracting from their right wing policies, wealthy individuals (including those that own parts of the media) can use more hardline populist views to promote their goals, and have a strong chance of becoming successful insurgents. FPTP and the two party system is a necessary condition for the extreme right to take over a more moderate right wing party and still win an election.

Once this has happened, it is difficult to see how either right wing party returns to its former self. In both countries a radicalised party membership, well funded by wealthy individuals and maintained in part by sections of the media, can continue to outvote more moderate conservatives. I argue here that what could change things is successive electoral defeats, but only where centre-left governments change some of the conditions that allowed populist governments to win.

On the other hand populist autocrats hate media criticism, or opposition coming from the legal system. The longer these populists remain in power, the greater is the danger to the independent media and judiciary. Right now in the US we are on a knife edge: if Trump decides to declare victory before postal votes are counted, will loyal Republican judges override democracy? In the UK the Conservative party is already putting strong pressure on the BBC, and has suggested abolishing the electoral commission. They have four more years to go further.

Monday 14 September 2020

Whether its COVID or Brexit, this government is continuing to fail terribly at everything it does. Will Conservative MPs do anything about it?

Testing failure

So for many visits to grandparents are off. No one should dispute that the government needed to do something after a sharp increase in the number of positive tests. However there is also no doubt that one of the factors pushing them to act was the partial collapse of the test and trace infrastructure. Stories of people being told their nearest test was tens or even hundreds of miles away, or that no tests were available, abound, and now we have leaks of hundreds of tests being thrown away because they cannot be processed and cases returning to care homes.

The specific reason for this failure remains unclear. Keir Starmer tried repeatedly at PMQs to get some explanation from the Prime Minister, but the best Johnson could manage is that demand was high. Which of course was completely unforeseeable with schools going back and other forms of increased mixing encouraged by this government. Matt Hancock at one point blamed people who were not meant to get a test being tested, which is the first time he has ever suggested that some people should get tested and others shouldn’t. At least the director of NHS test and trace had the decency to apologise.

As an aside, the inability of the Prime Minister to either answer straight forward questions or handle any kind of detail at PMQs is a sign of his own personal incompetence. His initial response to criticisms of how his government is performing is to suggest that somehow the leader of the opposition is unpatriotic to even question such things, and he comes close to suggesting that to be an opposition is itself unpatriotic, which of course is the typical stance of a autocratic populist. In other words PMQs are a clear demonstration of the kind of administration Johnson runs and his severe inadequacies. No wonder Cummings makes sure he avoids scrutiny on a scale far in excess of any  previous Prime Minister 

The underlying reason for the failure of the UK’s testing system, just at the point it is most needed, stems from this government’s decision to outsource the whole operation to private companies (but still calling it NHS test and trace in their usual duplicitous way.) Starmer has been right to highlight testing failures, but so far has failed to link it explicitly to the privatised system which many voters will not be aware of. This privatised system is also a big reason why the source of the failure is unclear: when you farm things out to private companies who then delegate to other companies, getting to the truth quickly is hard. The money would have been much better spent increasing the budget of local authority public health teams, and backing that up with government oversight that could get additional resources to hotspots quickly.

Looking at France, Spain and some other European countries, it may be tempting to conclude that nothing could have stopped a rebound in cases. If you are tempted to think that way, consider New York, where there is no sign of any rebound. As Miguel HernĂ¡n suggests here, New York has so far avoided a rebound by having more tests, more tracers, and being more cautious in opening up social consumption like eating out. Sunak may come to regret his £10 off meals idea. But Spain and France, as with last time, were a warning to the UK. And just as last March, the UK government took no notice and made things worse, 

It is just so typical of this government that at the moment they are having to restrict individual freedom partly because of the failures with their own testing system, they announce a grandiose scheme to test everyone everyday, or something like that. At a cost of £100 billion, which is the same order of magnitude as the annual NHS budget. From the people who gave us a testing system that cannot get enough tests today, do we think that this £100 billion will be spent wisely? Even if it works, will it be value for money, will it detract from getting the current testing regime right, and will it be quickly superseded by a vaccine. Johnson’s record on these things (Garden Bridge anyone?) is not good, but like all autocrats he loves grand projects, and there is nothing we can do to stop him wasting yet more public money.

Breaking the law

The decision to break the Withdrawal Agreement (WA), an international treaty, is quite shocking but it shouldn’t come as a surprise. As I noted at the time, Johnson only got the ERG to agree to his deal because his partners in crime told them it could all be changed later. Either the ERG was being duped, or they were being told the truth, and with Cummings and Gove running the show it was always likely they were being told the truth. Of course it makes a nonsense of everything Johnson said during the election about his deal, but this is the Vote Leave team that lied through their teeth to get the result they wanted in 2016, so why not do it again in a General Election? If his track record counted for anything, the media would ignore every word he says. (Oh, and ministers are almost certainly breaking the ministerial code,but don’t expect that to worry them.)

What we don’t know is whether this is a piece of theatre to detract from pandemic failings and taunt Starmer at PMQs with being a Remainer, or their idea of a negotiation tactic, or the start of a futile and costly trade war. I think we can discount the first possibility. Although this government is in continuous campaign mode, this explanation seems unlikely because, as Chris Grey observes, this move has been in the planning for months, and as I suggest above was thought up before the last election.

Putting down domestic legislation allowing the government to break the WA may be the government’s idea of putting pressure on the EU to get a better deal. In reality it will make the EU less likely to trust anything the UK says and determined to drive a hard bargain. Brexiters have never understood how you negotiate when you are the weaker partner. The damage to the UK from this negotiating tactic goes well beyond the EU negotiations, and includes what is left of our international reputation and a US trade deal.

The third and most worrying explanation is that Johnson has decided that no deal is his preferred option, and hoped this action would make the EU break off negotiations. The fact that they had every right to do so suggests he doesn’t fear no deal. The problem with blowing up the negotiations by revoking the WA is not just the short term disruption and the longer term hit to UK industry, although all that is bad enough. By breaking the WA the government is threatening to reopen the Irish border issue, and that could lead to a full blown trade war.

Everyone with any sense knows that there has to be customs checks between the UK and the EU. The Withdrawal Agreement puts those checks in the ports on the Irish Sea - between Northern Ireland and the rest of the UK. The only other place those checks can be is the border on the Irish mainland, and anyone who wants to retain peace in Northern Ireland wants to avoid that. (Gove, however, compared the Good Friday agreement that gave Northernn Ireland peace to appeasing the Nazi’s in the 30s, so he has no worries on this account.) But if the UK fails to impose the necessary checks on the Irish Sea, what is the EU going to do? They will not just give in and accept a border on the mainland.

The same applies to state aid. If the UK decided it was going to subsidize some part of UK industry to gain a competitive advantage over EU industries, the EU’s ultimate sanction is to impose tariffs on the goods or services that these subsidized UK companies produce. As Northern Ireland is in the same tariff zone as the EU, it cannot apply that sanction to any Northern Irish company, so any such company (whether based in Northern Ireland or not) has to be subject to EU state aid rules. If the government is saying they didn’t understand that at the time they signed the WA then they are not fit to govern, but in this case they are just lying as usual.

If the EU will not accept a border on the mainland, what will they do if the UK refuses to put one in the Irish Sea? The ultimate sanction the EU has is to restrict exports of UK goods into the EU in some way or other. Ending the WA in the absence of a deal can only mean the beginning of a trade war with the EU. The UK cannot win such a trade war, because the EU knows it will hurt the UK much more than it will hurt themselves. Perhaps that is the outcome Johnson relishes, so he can pretend to emulate his hero Churchill. But would the party that got rid of Thatcher over the poll tax really stand by as whole UK industries collapsed, and farmers dumped the produce they could not sell in Whitehall?

The Conservative Party

Johnson, Cummings and Gove are all very different from Trump, but their actions are similar to Trump’s. They are happy to override or destroy every element of our pluralist democracy, but are incompetent at government. Until now they have got away with it because they were popular with enough voters and very popular with their base. Most Conservative MPs will suffer most things to retain power, including a Prime Minister that likes suspending parliament. They chose Johnson knowing all his faults because he was the man who could save their seats and keep their power.

However the failures of government that occurred before recent events have had an impact on this government’s popularity among voters, and I suspect these latest events will continue to eat away at their support. Many Leavers will be annoyed that something they voted to get done is back in the headlines again, and voters can see the faults with the government test and trace system. If the government provokes a trade war, then we will see how far manufactured nationalistic bluster can carry voters through economic disaster.

Conservative MPs now have a choice. Do they go down with the sinking ship that is Cummings/Gove/Johnson as it destroys the fabric of UK democracy and becomes steadily more unpopular because of its failures, or do they call a halt to all this. Things are not going to get better, because these three are incurably incompetent as well as destroyers of democracy. The time to call a halt is now, by telling Johnson that Cummings has to be confined to campaigns and kept well clear of government, and the internal market bill that breaks international law must be withdrawn . If they don’t, the Conservative party becomes the party of law breaking that despises democracy. It will go down the rabbit hole that the Republicans have in their blind support of Trump.

There is some puzzlement about whether Johnson represents an end to neoliberalism as the dominant ideology of the party. I think that is the wrong way to think about what is happening. Neoliberalism contains a dynamic that tends to lead to autocratic plutocracy sustained by a culture war. Conservative MPs and the cabinet remain fundamentally neoliberal, as is evidenced with the UK’s test and trace system. If there is a change, it is from abandoning the attempt to squeeze the state to reduce taxes that austerity represented, to a belief that the state is a pot of gold that certain companies can plunder.

What about spending lots of money to create a tech giant, as Cummings seems to want? Does that represent an end to the idea that the state should not try to pick winners, which among neoliberals follows from a distrust of the abilities and motives of government. Not really, because it will be Cummings rather than any kind of government apparatus that is doing the picking, and it is the idea of an individual (Cummings) rather than a movement. It will be a bit like our privatised track and trace: a lot of money wasted in failure that will make certain individuals - including associates of Cummings - richer. Politics under a plutocracy always involves the mad ideas of those in charge: just look at Trump. The key question of the moment is whether Conservative MPs will allow this to happen.

Wednesday 9 September 2020

In the UK Treasury cutting the deficit generally takes priority over the health of the economy

The UK Treasury bears some responsibility for the disaster of 2010 austerity, yet it has not accepted or understood the mistake it made. As a result it risks repeating the mistake, albeit in a milder form.

The problem is that fiscal prudence is basic to the way the Treasury operates, and with few exceptions other priorities, including the macroeconomic health of the nation, are not allowed to get in the way of that goal. Only the most determined Chancellor can change that. It is a longstanding problem. Back in the 1960s Harold Wilson tried to solve it by creating a separate ministry, but the Treasury maintained its power.

This was a key issue for the Kerslake review, of which I was a member. As we noted, the problem of prioritising the public finances over macroeconomic goals has got worse in recent decades, with outsourcing stabilisation policy to the Bank of England and fiscal forecasting to the OBR. This transfer of powers has weakened macroeconomics within the Treasury, because the idea was that macroeconomic stabilisation had been delegated to the Bank of England. The possibility that fiscal policy would need to be used for macro stabilisation when interest rates hit their lower bound was not on the raidar, and remains alien to Treasury thinking.

Of course politicians are ultimately in charge, but the Treasury can have a powerful influence on ministers' thinking. In 2009 the Labour government was, to its great credit, determined to combat the recession that followed the Global Financial Crisis (GFC) with fiscal stimulus, but the Treasury convinced Alistair Darling to publish forecasts that included substantial fiscal contraction during the recovery phase. If Labour had remained in power and the recovery had faltered as it did in reality (less likely because Labour's austerity was not front-loaded), it is unlikely that these austerity plans would have been enacted. However the key point is that it should not have been part of any fiscal plan for at least the first few years of the recovery. Its political impact was to give ammunition to deficit panic in the media.

In 2010 it was a briefing from the Treasury that helped convince the Liberal Democrats that the harsh austerity in the Cnservative programme was necessary, even though it wasn’t in the Liberal Democrat manifesto.

Despite all this, and many suggestions made to us, the Kerslake review did not recommend splitting off macroeconomic policy from the Treasury. Instead it recommended greatly enhancing its macroeconomic capability, as part of a general remit to look at major risks to the economy. The obvious risk at the moment, besides the resurgence in the pandemic itself, is that premature tax increases will stifle a full recovery from the pandemic (when the pandemic ends), and some of what should have been just a temporary fall in demand gets hard-baked into a permanent fall in the size of the economy. There is a strong case that this happened after the GFC as a result of austerity.

It is important to distinguish between two different questions, and mixing the two can lead to the kind of confusion I highlighted in my last post. The first question is whether taxes will have to rise at some point as a counterpart to politically essential higher levels of public spending. My guess is that it will to avoid interest rates going too high, but it’s a guess and I could be wrong.The second question is whether taxes need to rise anytime soon. The right answer to that question is no, because interest rates remain low as we are early in the recovery phase following the pandemic. Any increase in taxes before significant increases in interest rates will reduce the strength of the recovery.

In some respects the damage is already happening. Consumers that can will look forward when planning spending, such that expectations of future tax rises will have some impact on consumption today because of consumption smoothing. (An exception is expectations of a future VAT increase, which can stimulate consumption before the tax rise.) The Treasury and the Chancellor have let it be known that tax increases are coming since May (e.g. here, and more recently here), creating exactly those sort of unhelpful expectations.

In addition, the Chancellor is also showing little flexibility over the furlough scheme, in contrast to neighbouring countries. Once again the justification appears to be the financial cost (a larger deficit), which puts that above the cost of large increases in unemployment. As I have noted before, an obsession with re-opening the economy as fast as possible after the first COVID-19 peak is also counterproductive.

As Chris Giles has noted, there is an obvious motive for the Chancellor to raise taxes sooner rather than later, and that is the election in 2025. The Chancellor is among those who think taxes will need to rise eventually, and he would rather increase them sooner rather than a year before the election. As is often the case, the politics is not helping the economics. We have been here before of course. Osborne front loaded austerity for the same political reasons, which stopped the post-GFC recovery in its tracks.

Tuesday 1 September 2020

Will taxes have to rise?

That is the question addressed in this debate between Jonathan Portes and Bill Mitchell. I found the discussion very frustrating, because it is really a debate about medium term inflation forecasts dressed up as something more fundamental. Both Mitchell and Portes agree that there is no need for taxes to rise to ‘pay for’ the fiscal costs of the pandemic. In an age of ultra-low real interest rates, shocks to the debt to GDP ratio like the Global Financial Crisis and the pandemic should be allowed to gradually wither away as growth outstrips interest rates on that debt. Trying to reduce debt by running deficits close to zero, or even surpluses, as Osborne tried to do, threatens to derail a full recovery.

I think it would be fair to say that the argument from Jonathan Portes is that we should increase the share of current public spending in GDP in various ways over the next few years, and without higher taxes, or substantially higher interest rates, that will at some point lead to a permanent rise in inflation above target. To prevent that, taxes should rise. Bill Mitchell would agree that public spending should rise, but he doesn’t think inflation will rise as a consequence. If inflation did rise, it is standard MMT (at least according to Stephanie Kelton) that fiscal policy should be the “primary tool for macroeconomic stabilisation”. Thus the debate between the two on whether taxes should rise is essentially a disagreement about medium term inflation forecasts.

This point is illustrated in the final statement from Bill Mitchell. He writes:

Should the government seek to command a far bigger share of productive resources—say, for a green transition—then, yes, perhaps tax rises would have a role in offsetting the extra spending and warding off inflation.”

Jonathan Portes might well respond that his argument is premised on just such a situation. In his opening statement he writes:

And as well as more on the NHS and social care, structural economic shifts—from the aftermath of Covid-19 to decarbonisation—will mean more is needed for education and training. We don’t need higher taxes to pay for the virus; but the virus has exposed, economically, socially and politically, that we need them to build a better future.”

This illustrates that there is no disagreement in principle here, but just a disagreement about what levels of public spending increase would tend to lead to above target inflation. Indeed as these quotes suggest, there may not even be a disagreement here, but just a distinction between what should happen to public spending (Portes) and what is likely under current or prospective governments (Mitchell).

I want to argue that the whole debate about whether taxes should rise to pay for additional public spending is unnecessary. We can afford to wait and see. If inflation does appear to be permanently rising above target, you can be sure that the central bank will raise interest rates to bring inflation back down. Exactly when central banks should act is a live issue right now in the US, where the Federal Reserve has decided it will allow inflation above target for some time to ‘make up’ for inflation being below target in the past. But important though this change is, it remains the case that no independent central bank worth its salt is going to allow inflation to permanently rise above the inflation target.

It is only when central banks start raising interest rates in earnest that governments need to think about raising taxes. By raising taxes they reduce the pressure on aggregate demand and inflation, and therefore moderate the extent to which interest rates need to rise. It would be foolish for governments to make the same mistake that central banks made before the pandemic hit, and try and anticipate what might happen to inflation based on outdated ideas about the NAIRU. [1].

What about deficits? Isn’t good fiscal policy all about trying to achieve sustainable deficits (deficits that stabilise the government debt to GDP ratio)? As Jonathan Portes and I have argued, those rules should not apply when interest rates are stuck at their lower bound. When interest rates are at their lower bound, fiscal policy should become the primary tool for macroeconomic stabilisation. When interest rates are at their lower bound, standard academic macro and MMT should be on the same page.

While academic macroeconomists now generally accept that fiscal consolidation is a bad idea when interest rates are at the lower bound, the UK Treasury appears to think otherwise. There is much talk of tax rises or spending cuts to 'pay for the (fiscal) costs of the pandemic'. No doubt this will be justified by OBR forecasts and talk of structural deficits, just as it was in 2010. But whether its spending cuts or tax rises, fiscal consolidation coming out of a recession where interest rates are at the lower bound risks turning what should be a temporary downturn into a permanent fall in output.

[1] The changes at the Fed are welcome, because they address an error that central banks have been making since the Global Financial Crisis (GFC). Before that crisis, they tried to guess where inflation would go in the future by looking at forecasts and indicators like unemployment, and they were pretty successful at that. But, as some of us argued at the time, after the GFC it was foolish to continue in the same way, because the crisis had fundamentally changed the way the economy worked and because the risks of getting it wrong were asymmetric.