Winner of the New Statesman SPERI Prize in Political Economy 2016


Monday, 26 October 2020

Starve a kid to save a quid [1]

 

One of the myths perpetuated by mediamacro is that management of the public finances is all about controlling our debt by keeping deficits down. As with so much of mediamacro, this is something no academic macroeconomist would say. Econ 101 (first year undergraduate economics) tells you that the deficit should rise and fall with the economic cycle. In particular in major recessions deficits rise rather a lot, and that is exactly what they should do.


Econ101 also tells you that in a recession caused by collapsing demand, it makes sense to increase the size of an already large deficit through fiscal stimulus. It becomes absolutely necessary to do so when interest rates can no longer stimulate the economy because they are stuck at their lower bound. Fiscal stimulus is the way you get out of recession much quicker, and according to some models the only way to get out of recession.


Much the same applies to a national crisis. No one worries about rising debt in a war, and no one should worry about rising debt in a pandemic. Government debt and monetary financing are all about being able to spend big in emergencies without having to worry about running out of money. Worrying about debt and future generations is particularly inappropriate in the current circumstances, when new borrowing attracts a fixed interest rate that is below, and sometimes well below, the underlying rate of growth of the nominal economy. For more on all this see here.


In contrast mediamacro (macroeconomics as understood by much of the media) treats the economy as a household. The government is not like a household, and trying to treat it like a household causes huge damage. Mediamacro’s failure cannot be put down to the simplicity of their message. Here is an equally simple one that is much nearer the truth than mediamacro: worry about the deficit in booms but not recessions. [2]


George Osborne acted as if he didn’t understand that, and it would seem Rishi Sunak does not understand that either. And like Osborne, Sunak too is already causing a lot of damage by worrying about a deficit in a recession. Worse still for Sunak deficit obsession seems to have taken on a religious dimension. In his conference speech he said the government has a “sacred responsibility” to balance the books for future generations.


When the pandemic hit things seemed as if they might be different. Sunak followed other European countries in rolling out a generous furlough scheme (although some fell through its cracks). It is as if he has been regretting that policy ever since. [3]


Let’s look at some of the damage Sunak has already caused. At every opportunity, he encouraged Johnson to end aspects of the lockdown quickly, thereby ensuring that lockdown would finally end with a significant amount of COVID around. He then undertook a stimulus measure then would inevitably increase infection levels, just before a period when first returning schools and then universities were bound to put pressure on the test and trace regime. As we saw a second wave, he announced a support scheme that was less generous and far more limited than his original scheme. Since then he has had to backtrack somewhat (nothing to do with London going into Tier 2 of course), but many will have been made unemployed before his change of mind. He continues to refuse to increase statutory sick pay, even though this would help fight the pandemic. Perhaps worst of all, he encourages Johnson to think about balancing health and the economy (balancing SAGE with Sunak), when this just ensures the second wave will grow.


Then we have Marcus Rashford’s appeal to continue free school meals in the holiday period to stop some children going underfed as parts of the economy collapse. What was provided during the summer following Rashford’s first appeal is apparently no longer necessary, even though the pandemic is now at least as bad as it was in the summer. The decision to ignore Rashford’s appeal was terrible in so many ways, including politically. Putting Conservative MPs into the limelight to reveal all their prejudices about the poor is never a good idea.


It is a very human instinct to protect those who are most vulnerable in a crisis. Yet many Conservative MPs talk about parental responsibility and feckless parents, as if extending free meals to school holidays would significantly encourage such behaviour. Instead such arguments reveal that these MPs would see no problem in getting rid of free school meals completely. The truth is that Conservative governments have installed a benefit system that fails to provide some of its recipients enough to live on, and those failures become more acute in a crisis. That these failures are pervasive even outside a crisis is clear from the huge growth in food banks.


Why is this failure built into universal credit and our welfare system more generally? In part it reflects governments responding to stories of irresponsible parents with large families that regularly appear in the Tory tabloids. But it also reflects George Osborne’s obsession with the deficit. He cut universal credit supposedly in an effort to balance the books, while at the same time cutting various taxes. (For a good discussion of the impact of policy measures on the distribution of income since 2010, see here - HT Jonathan Portes.) Using concern about the deficit to make the poor poorer was pure deceit on his part, deceit mediamacro were happy to go along with.


The tax giveaways under Osborne tell us why he used to obsess about the deficit. It isn’t that he really believed cutting the deficit in bad times is a good idea. If Osborne was really so concerned about the deficit why did he cut taxes so often? Sunak seems to be following a similar path, showing no attempt to exert some control over the government wasting money on a defunct centralised and privatised test and trace system, or trying to stop the government overpaying for PPE.


This suggests that Sunak, like Osborne, only pretends to misunderstand the nature of government debt. I used to say this deficit deceit was really a pretext to reduce the size of the state, but I think we need to be more precise in the current climate. Many Conservative MPs today seem quite happy about the state paying too much money out to corporations who have previously or will subsequently give Conservative politicians seats on the board, and/or have given the party financial support. What they fear is government money going to the wrong people, people who are not their friends, donors or the very rich, and who are unlikely to vote for them.


[1] Title credit https://twitter.com/BremainInSpain/status/1319948693169209344?s=20

[2] For MMT devotees. You say governments should focus on how much resources are used and not the deficit. But that is only true if interest rates are unable to control inflation in booms or you prefer to use fiscal policy to control booms. As most people think interest rate policy is both effective at dealing with booms and should be used, then controlling the deficit in booms is important to prevent deficit bias. Try imagining most people are right, and think outside your MMT box.

[3] Stephen Bush suggests this change of mind is because Sunak now thinks the cavalry, in the form of a vaccine, will no longer arrive. However the alternative to a vaccine is not permanent lockdown, but reducing cases to near zero and keeping them there using an effective test and trace system. The problem here is in getting the government to admit that their world beating test and trace system is a failure.


Postscript (27/10/2020). I could have added so much more examples of inappropriate penny pinching going on right bow. Adding VAT on PPE equipment for example, or reducing the number of laptops schools get to help children. All this is penny pinching. Extending free school meals to cover the half term break costs about half a day's worth of Eat out to Help out. 


Monday, 19 October 2020

Why do some find the economics/health trade-off so hard to get? Because it’s like the Phillips curve.


The distinction between the short run and long run traditional Phillips curve (not the New Keynesian variety) is so ingrained in economists that it seems obvious to us. We sometimes forget that it took many years for policymakers to understand it. I think something similar is happening with the economics/health trade-off in this pandemic.


There is undoubtedly a short term trade-off between imposing greater restrictions (in extremis, lockdowns) to improve health outcomes (a good) and the negative effect that has on the economy (a bad). In much the same way as there is generally a short term trade off between expanding the economy to reduce unemployment (a good) and getting higher inflation (a bad). But in both cases that is not the end of the story.


The problem highlighted by the traditional Phillips curve model is that this extra inflation just grows over time. What may be an optimal trade-off between lower unemployment and higher inflation today will tomorrow become sub-optimal, because inflation feeds on itself and will rise again. The theory of the vertical long run Phillips curve is that there is only one level of unemployment that keeps inflation steady. Anything less than that will lead to steadily rising inflation. (Please don’t bombard me with comments about the validity of the Phillips curve, because I’m only interested in the theory here as I think it tells us something about how we are failing to deal with coronavirus.)


The trade-off between health and the economy works the same way in a pandemic. Boris Johnson got advice from SAGE about what was required to bring the virus under control, but he also knew that this advice would damage the economy. The way he put it at a news conference is that he was trying to balance the good (less infections) with the bad (hit to the economy) by doing less than SAGE asked.


Unfortunately, even if that trade-off made sense at the time, if R>1 (as it now is) the number of infections will grow over time. So a balancing act that makes sense today makes no sense tomorrow. The analogy with the Phillips curve is that there is only one level of economic restrictions which will get R=1, and that is much more restrictive than what might seem optimal in the short run if you ignore the dynamics.


The analogy can be pushed further. If you keep on trying to get unemployment below its natural rate (the rate at which inflation is steady), inflation will keep rising. After a time it is no good just stabilising inflation, because its level is much too high. Equally we now need a period of R<1 to get the number of cases down, and that means a period when economic restrictions are greater than the level that would keep R=1. The longer government puts this off, the longer and deeper any lockdown will be, and therefore the bigger the hit to the economy will eventually be.


This is why the government’s attempts to balance what SAGE suggests with the impact on the economy are not only misguided, but positively bad for the economy. Even when policymakers are convinced to impose sufficient restrictions to get R=1, because it took too long getting there infections and therefore deaths are much too high, so we will need some kind of strict lockdown to get back to something tolerable. In short, delays in getting R=1 mean a lockdown becomes inevitable, and in a lockdown with high infection numbers the economy really suffers


If analogies with the Phillips curve are not meaningful for you, just think of what the government is doing as ignoring the dynamics. Balancing the economy with health in the short run is futile, because it ignores the dynamic problem that infections will increase. Having modest economic restrictions now keep R>1, so the problem gets worse, hospitals become overwhelmed and governments are forced to do much more harm to the economy later on. The only exception is if they follow the anti-lockdown crusade, which means letting hundreds of thousands of people die. It is the equivalent, using our Phillips curve analogy, to generating hyperinflation. 


Policymakers in many countries, not just the UK, have failed to grasp the nature of this dynamic problem. In the first wave they typically imposed the harshest of lockdowns to be sure of getting R well below one. They gradually relaxed lockdown, achieving in the summer a position where R was close to one. After that three kinds of mistakes occurred.


The first was the one described above. In the UK, for example, even with cases beginning to rise in August, policymakers tried to encourage people to mix in restaurants and stop working at home. (Of course they came under intense pressure from sectors that had been closed down to relax prematurely.) The second mistake is more speculative. As time goes on, people relax and forget what they are supposed to do and what they are not supposed to do. To use the Phillips curve analogy, in both cases the natural rate begins to rise.


But by far the biggest mistake was the third. Everyone wanted schools to restart in September, and the government thought universities should restart in October. Those are two large increases in social mixing, which mean that to keep R at one some further restrictions were required. In terms of the Phillips curve there was an upward shift in the natural rate. Policymakers failed to understand that, and so the second wave began. Looking at it this way, the second wave was completely preventable if policymakers had recognised that shift and taken appropriate action, but instead they just crossed their fingers.


If we want schools and maybe universities to stay open, does that mean we have to keep pubs and restaurants permanently closed to avoid a repeat of what happened this Autumn? The evidence from countries like South Korea is not necessarily. A really good test, trace and isolate (TTI) infrastructure can exert strong downward pressure on R, and can handle the occasional spike before we need to resort to lockdown. Using the Phillips curve analogy, TTI puts downward pressure on the natural rate.


The biggest failure of this government and others over the summer was to be content with TTI operations that were unable to handle spikes. The failures of the UK’s centralised and privatised operation are well known, and have been described repeatedly in earlier posts. A good TTI system requires being able to get tests locally on demand and having the results back within 24 hours for around 80% or more of people. But it also requires people to isolate after being told they might have the virus, and the UK has put little effort into ensuring people are willing and able to do that. Indeed the Cummings episode did the opposite. 


The message of this post is that anyone who talks of balancing health against the economy in this pandemic is being very short-sighted. Unfortunately many politicians are naturally short-sighted, and are used to balancing pressures from different directions, which is why we have seen cases rise in many countries around the world. The irony is that taking firm action to suppress the virus to very low levels is popular, and as we have seen very recently will reward any politician with the foresight to think about health rather than the economy.  




Monday, 12 October 2020

The anti-lockdown crusade gains oxygen from this government's ineptitude

 

If anyone still doubts that Brexit was our Trump moment, look at some of the same characters (Tory MPs, newspapers, even voters) who supported Brexit getting behind what has become an anti-lockdown crusade. I use the word crusade deliberately. Rather than religion it is ideology that drives most anti-lockdown proponents. That ideology is libertarian, although to borrow a phrase from Chris Dillow on mask phobia, this libertarianism is just solipsistic narcissism. What the crusade isn't, for most of the anti-lockdown brigade, is evidence led.


That is not to say that some scientists may genuinely believe that lockdowns are never worthwhile. Science shouldn't be closed to heretical ideas, and there will always be scientists who put forward such ideas. Occasionally the heretical turns out to be true. So any defence of the need for lockdowns should be science based. Merely noting the correlation between Brexit and the anti-lockdown crusade, or the fact that an institute funded by the Koch brothers helped create the Barrington Declaration, is interesting politically but it is irrelevant to the science.


The alternative proposed in the Barrington Declaration is herd immunity plus protection for the vulnerable. As Mark Reynolds from Wired notes, there is no mention of test and trace, or mask wearing, in the Declaration. This is because the authors want everyone except the vulnerable to catch the virus as soon as possible.


On the vulnerable, everyone agrees that they should be protected, but the twist that herd immunity gives you is that if carers and others who meet the vulnerable are immune as a result of herd immunity they are not going to become infectious again and pass this on to the vulnerable. However the Declaration glosses over the rather critical problem in the interim before care workers have caught COVID. As I note below, without lockdowns it is likely to be at least 6 months before we reach herd immunity. 


That apart, their proposal for the vulnerable is identical to what the government should have been doing as part of its lockdown strategy. The other point they gloss over is that there is no neat dividing line between the vulnerable and non-vulnerable. The risk of death increases sharply with age, but it doesn’t start once you are retired. There is a significant risk from death if you are in your 50s and male, data from Spain suggests. Furthermore, we know very little about ‘long COVID’: those who are suffering from severe effects from COVID long after the virus has left.


The real dividing line between the Declaration and the public health consensus is herd immunity. Herd immunity is bound to result in a large number of deaths, because before herd immunity is reached more non-vulnerable will die and the risk to the vulnerable is bound to be higher (because they are more likely to come into contact with virus carriers). But the counterargument is that at least normal life will not be disrupted in the way it was during the lockdown.


The counterargument is simply wrong. As I have argued many times (e.g. here), it is not the lockdown that kills the economy but fear of catching the virus. As long as those who are not vulnerable think there is a real risk of death or serious complications from COVID-19, most will stay away from pubs, restaurants and other areas of social consumption of their own accord. Risk lovers and those who believe they are invulnerable will continue as normal, but there are not enough of them to make most social consumption businesses viable while the pandemic lasts.


The same point can be made about the impact on cancer cases and other areas of hospital care that the pandemic crowds out. This happens not because of lockdown, but because hospitals are full with COVID-19 cases, and when they are not because people fear catching the virus in hospitals. Herd immunity would make both problems worse.


A consequence of fear of catching the virus is that it takes much longer to achieve herd immunity than it would if most people ignored the pandemic. That in turn means that many social consumption firms will go out of business without government support. That leads to a second consequence, which is that the economy takes a big hit over at least six months, and without government support suffers some lasting damage on top of that.


So it is difficult to see how herd immunity with protection would bring any benefits, and it is certain that it would bring greater costs. It would be great for the selfish who are prepared to take risks for themselves and don’t care about others they may infect, but that minority is a key reason why lockdowns are necessary. For the crusaders all this doesn’t matter. Like smoking, climate change and Brexit, it is just too easy to get our (power without responsibility) media to run ‘two sides’ stories, and the work of the Declaration is done.


The reason herd immunity has made a comeback, after the short period in which the UK government flirted with it and killed thousands as a consequence, is the current mess the government has created. It has allowed a second wave to emerge, and has delayed an effective response. One reason for this delay is that Johnson and his circle share libertarian (think solipsistic narcissism) tendencies, and the other is that they find it hard to admit the mistakes they made over the summer.


The alternative to herd immunity that many more public health experts would sign up to is to use lockdown to reduce case numbers to virtually zero, and then have an effective test and trace system that can not only keep the numbers low but can also bring to an end any increase brought about by more social mixing. That last point is critical. If you wanted schools to go back in September and universities in October, you had to have a large amount of spare capacity in your test, trace and isolate infrastructure to deal with the increase in possible infections that will inevitably arise from both events. Students in particular require intensive testing. That means starting from a very low level of cases so there is less virus going around and the testing infrastructure has plenty of spare capacity.


Our ultra short-termist government did not have the patience to get case numbers right down in the late Spring. Johnson was too eager to give good news about lockdown relaxation and Sunak was too obsessed with the government's deficit (while ignoring the many millions handed out to friends and donors). The summer was the time to build up testing capacity and see if the centralised, private sector system could be made to work, but Dido Harding failed to anticipate higher demands and so did superforecaster Cummings. (A better option would have been to start building a new test and trace system that started with local public health teams, but I suspect that is a step too far for this government.) Instead of the summer being one of preparation, for our government it was about getting the economy back to normal. Their only mitigation is that other governments made the same mistake.


Once the test and trace system failed, another lockdown was inevitable, and should have happened immediately. It is no good prioritising cases with clear symptoms, when the number of asymptomatic cases is so large. The lesson from the past and around the world is to lockdown quickly and hard, so the government is doing the opposite. It will have to lockdown hard eventually, so why not during the second half of September or even earlier. Is this just incompetence, or the influence of the anti-lockdown crusade? To make one mistake that costs tens of thousands of lives is bad enough, but to repeat the same mistake just six months later should be unforgivable.


Postscript (13/10/20) 


We learnt yesterday that the government ignored SAGE advice three weeks ago for a much tougher lockdown. While the advice was not surprising given a runaway pandemic in large parts of the country, it does confirm that the government is now ignoring the science. Even Chris Whitty said at the press conference yesterday that he didn't think the government's measures go far enough to bring the pandemic in some parts of the country under control.


Which raises the question of why Prime Minister is ignoring his (and most other) scientists. Is it, as suggested above, the influence on him of the anti-lockdown crusade. Or is it the Chancellor who wants to spend as little money as he can get away with in the very short term. Both must surely know that a pandemic will set back the economy and the public finances far more than any measures proposed by SAGE. Whatever the reason, the government has shown that it alone is responsible for the many deaths and crippled economy that will surely follow from their inaction. 

Tuesday, 6 October 2020

Are there turning points in recent UK history?

This post follows on from my post two weeks ago, where I argued that there was a degree of inevitability that led us to governments led by Boris Johnson and Donald Trump. To summarise that argument, it is that right wing neoliberal governments in both countries have pursued policies that benefit the few rather than the many, and so to win elections they have pushed socially conservative ideas. But that push has been limited by a knowledge that some socially conservative policies can damage business interests: so in the US immigration control was not on the agenda and in the UK targets were missed.


However neoliberalism also encouraged and legitimised wealthy individuals to meddle in politics, and some chose to push for even greater redistribution and less regulations. They could achieve this by radicalising the right wing voter base (the US Tea Party) and in the UK by pursuing Brexit, in both cases in effect taking over the main right wing party. FPTP and the two party system were critical in both cases, because more moderate right wing politicians were unable to ignore this threat from the right. If that brief summary sounds unconvincing, please read the post in full.


The title of that post had a ‘can’ rather than a ‘will’, because I remain unsure whether neoliberalism in its original Reagan/Thatcher form was bound to end this way (an issue I initially explored here). I explore this issue further in this post. Were there points over the last forty years when some people could have done something different to avoid ending up with a populist plutocracy? I’m going to restrict myself to the UK here, because my knowledge of the US is less, but I would be very interested in thoughts about possible turning points in the US.


I’m going to take the emergence of neoliberalism in the UK as given. Both Thatcher and Reagan cut higher rate taxes, so I think it is also given that these governments both encouraged and legitimised the importance of money in politics. It is possible to imagine a form of neoliberalism that sees challenging monopoly power as part of its ideology (ordoliberalism?), but that never seemed a strong part of the neoliberalism of Thatcher and Reagan.


It is possible in theory to conceive of a neoliberal government that might avoid the temptation to exploit social conservatism as an election winning device, but hard to imagine a government in the Thatcher/Reagan tradition doing so. Power is everything for these governments, and attracting left wing socially conservative voters by pushing socially conservative policies and rhetoric is too tempting (and effective). It also chimes well with some traditional party members of the hanging and flogging variety.


As a result, I think a turning point has to involve the final stage of the process I described in my earlier post, which in the UK involved the takeover of the Conservative party by Brexiters. Could this have been avoided in the UK at some turning point in history? We can start from the present and go backwards through time.


The threat from UKIP


It is often suggested in the UK that if May had been prepared to do a deal with Corbyn for a much softer Brexit then Johnson/Gove/Cummings would not be in power today. Was the turning point the attempt by May to define a Brexit that pleased most of the Conservative party (together with her antagonism to immigration)? To discuss this and some of the other potential turning points we need to talk about UKIP.


UKIP was the key ingredient in taking over the Conservative party. It posed a constant perceived threat to the Conservative’s ability to win a general election. As we noted above, the electoral strategy of the main right wing party in both the US and UK was to capture the left wing socially conservative voter. UKIP threatened to undercut that strategy by winning those voters themselves, along with socially conservative Tory voters.


Thus any Brexit settlement that could have been credibly described by Farage as not a true Brexit would have kept the UKIP threat alive. May and most of the Conservative party understood that, which is one of the reasons why she tried so hard to reach an accommodation with the ERG group. (Another with that she hated the idea of potentially splitting the party.) So any soft Brexit deal was an existential threat to the Conservatives retaining power.


Many people might see the EU referendum's narrow result as a turning point, but again I’m not so sure. A close defeat would not have shut Brexiters up, but encouraged them. Every new development in the EU would become an excuse to ask the question again. Could a Conservative Prime Minister refuse another referendum? To answer that we need to look at another possible turning point.


Is this all Cameron’s fault for allowing an EU referendum in the first place? Suppose he had stood firm in 2013, and said there would be no EU referendum. Partly because he had put in place immigration targets that he had no intention of sacrificing the economy to hit, UKIP’s strength would have grown, and his 2015 general election victory would have been put in doubt. It may be a contradiction in terms to suggest a neoliberal PM would stand by principle even though it could cost them power: the last Conservative PM who did that was Edward Heath, which was one reason I talked about Enoch Powell in the earlier post. Cameron could have avoided setting the rules of the referendum in such a favourable way to Brexit, but then we go back to what would have happened if Brexit had narrowly been defeated.


Austerity


I have long thought a more credible candidate for a turning point was 2008-10, the period between where the idea of austerity was born in the mind of George Osborne to when it began to be implemented by him. Austerity is important because it laid a good deal of the ground work for UKIP and Brexit. After austerity, immigration could be blamed for declining access to public services. It delayed and dampened the recovery from the 2009 recession, which intensified the feeling among many that life was getting worse and looking for something to blame.


I still don’t know whether in 2008 Osborne developed the idea of austerity because it was a way of shrinking the state, or because he guessed it would be a good election tactic, and whether he was ignorant of the macroeconomic damage that policy would do. Probably all three were true. Yet for 2008 to be a turning point you have to believe that a Conservative Shadow Chancellor, seeing the opportunity to win the next election and shrink the state at the same time, would forsake that opportunity.


A more credible candidate for turning point are some key individuals that made austerity a vote winner. While the Treasury traditionally tries to control spending, it should have known that basic macroeconomic theory and past UK experience says you don’t cut during a recovery, and especially not when interest rates are at the lower bound. Crucially, it persuaded Darling that austerity should begin when the recovery began, which gave a green light to both Osborne and mediamacro. The same applies to Mervyn King. Both of them persuaded the Liberal Democrats to drop their manifesto plans and endorse Osborne’s by telling the lie that markets were about to panic.


Both were necessary but not sufficient to stop austerity being a vote winner. The third group of “guilty men” were the political commentators in the broadcast media who ignored basic macroeconomics, and their economic correspondents who should have known better but kept quiet. As Mike Berry writes


“However as the analysis [shows] in 2009 when the deficit became a major political issue there were no sources - outside of Labour - who were given space to put the Keynesian view in comparison to a range of sources who put the case for a faster pace of fiscal consolidation.”


To justify this period being a turning point you have to believe the following. After the failure of Osborne’s focus on the deficit in 2010, Gordon Brown retained power and presided over a normal recovery from the 2009 recession. By the time fiscal consolidation began in 2013, real wages were already increasing and investment growth was strong. Interest rates had risen with the recovery, and so could be cut to soften the macroeconomic impact of (more modest) austerity. The Conservative Prime Minister elected in 2015 did promise an EU referendum in the following term, but by 2022 when it that referendum came immigration was no longer such a major issue and, despite the support of some of the Tory press, the Leave side was unable to get close to 40% of the vote. After that, voters lost interest in the issue and in the politicians that promoted Brexit.


I don’t know if I believe that, but I would note that far right wing populism often does best when economic hard times persist (e.g. de Bromhead, Eichengreen and O'Rourke generally and more particularly GalofrĂ©-VilĂ  et al who look at the impact of austerity in 1930s Germany). And for those who think support for the far right can only increase, see Germany and Austria today, where the far right is in retreat (odd this is hardly reported in the press).


If austerity was a turning point, then those who could have done something to avoid our slide to autocratic and incompetent plutocracy were not the politicians, but public figures who should have followed the science but instead decided to sell snake oil to the UK public.