It is inevitable that Labour in opposition will not be a champion of social liberalism

 

Trump has been defeated, but only just. Trump, that most ludicrous and destructive of US presidents, still won 46.8% of the vote. More importantly, the number of votes between Biden and Trump in the Electoral College was very small. Voters still turned out for a Repubican party that backed Trump all the way. Perhaps worst of all, the aftermath of the election showed that the Republican party backed Trump’s attempts to overturn democracy. What Republicans do on a smaller scale with gerrymandering they are happy to do at a national level. The future of the US is still very uncertain when one of the two main parties does not respect democracy.

The Conservative party in the UK is only beginning down that particular route, with its plans for voter ID. Yet do they need to rig elections, having ruled for more than twice as many years as Labour since 1979? (To put it very simply, while in the UK the opposition to the right had just one election winner in Blair, in the US they had Clinton and Obama and now Biden.) More particularly, UK Conservatives by following the US strategy of right wing populism based on social conservatism seem to have a winning formula under the FPTP system.

Labour has two structural disadvantages in General Elections. First, it is one of three socially liberal UK wide parties and two socially liberal parties in Wales and Scotland. Second, social conservatives benefit significantly from the FPTP system, because social liberals are concentrated in the cities. The 2019 election was a clear demonstration of that structural disadvantage: when an election is fought on social issues Labour loses badly.

Many on the left dismiss this social conservatism, reflected particularly in dislike of immigration, as reflecting racism or xenophobia. However social conservatism is more general than that. It is in large part a reaction to the tremendous success social liberalism has enjoyed since the 1960s. I discussed this at length in this post from a year ago, and a recent tweet from @cakeylaura gives a personal illustration of what I mean. But my post had a title that was weakly justified by its contents. Is it really true that in all cases Labour should argue for social liberalism?

Socially conservative views reflect the left behind in the sense that they are out of tune with both the law and the broadcast media. Conservative MPs are far more socially liberal than their supporters, which is why we have socially liberal laws. The media is populated by younger university educated people who reflect today’s social liberal attitudes. This combination, over the last 60 years or so, has meant that social conservatives have been overwhelmed. As that earlier post pointed out aggregate attitudes have become more liberal. (Demographics help as well, of course.)

If that was the end of the story, then the resistance to socially liberal views expressed at the ballot box would be weak. However most of our newspapers reflect a different world, geared to the more socially conservative views of most of their readership. This socially conservative media both reinforces and organises social conservatives. Brexit is the exemplar of this, and is why views on Brexit were impervious to economic realities.

The left talked a lot about the left behind after the Brexit vote, but typically they meant the economically left behind. While undoubtedly there was an element of that, research suggests the left behind were more those who hadn’t kept pace with society’s social liberalism. Outside the cities, the south voted for Brexit as much as the North.

The key role played by the Brexit press in reinforcing and organising social conservatism makes it very hard for Labour to change minds. Perhaps for this reason the strategy that Labour has followed since Blair has involved appeasement rather than persuasion. The way to win elections, so this argument goes, is to make any election about economic (or more recently competence) issues, rather than social issues. The best thing Labour can therefore do is dodge alienating the Red Wall voter, and that seems to be Starmer’s strategy. On its own that is not enough, as Miliband’s defeat showed, so you need something positive to put to the electorate. Corbyn did that in 2017, but still lost. Can Starmer do better?

The alternative suggested by the title of my earlier post is for Labour to argue for social liberalism. The point I made in that post is that attitudes have changed over time, so it is possible to persuade on social liberal issues, particularly where they intersect with economics. More favourable public attitudes to immigration in the last few years is a clear example. Obviously social liberals would like to believe the main social liberal party can stand up for their beliefs, but how much of that is wishful thinking?

Again the role of the right wing press is crucial. The recent trend to more positive views on immigration will reflect in part the absence since 2016 of negative stories about immigrants in the press. The power of the right wing press to mobilise on particular issues when their government is in power should never be underestimated. Compared to articles in newspapers that are read every day, how can Labour politicians persuade on social issues when they get at best a soundbite on the main news?

I think it is important to distinguish between Labour in government and Labour in opposition. Governments get considerable exposure in the broadcast media, and so it is possible to believe that they can provide a counter-argument to the right wing press on social issues. In opposition it is much harder. While Labour should argue for social liberalism while in government, to do so in opposition would seem to be a recipe for worthy failure.

There is a third argument, in between persuasion and appeasement, which has been recently put by Timothy Garton Ash in a recent Prospect article. He writes

“What follows from this analysis is that, where possible, we need to slow down the rate of change to one that most human natures can bear, while preserving the overall liberal direction of travel…..This means, for example, limiting immigration, securing frontiers, and strengthening a sense of community, trust and reciprocity inside them.”

I have strong doubts about this. It might make sense with immigration, but is it tolerable when it comes to enforcing rights and tackling discrimination? Even with immigration, I continue to argue it was newspaper coverage of immigration rather than its scale that raised concerns about immigration.

So it seems inevitable that without a progressive alliance and with a FPTP system biased towards social conservatism, it is bound to be the case that Labour will be forced to appease the Red Wall voter. That is why the leadership will vote for the Brexit deal, and why it will dodge all the socially conservative traps that the Conservative government puts in its path. When the marginal voter is socially conservative, that is what you have to do.

While this strategy avoids an almost certain loss at the next election, it is fraught with danger. If Labour seems to be adopting Blue Labour ideas, that risks alienating its own supporters sufficiently for them to abstain or vote for other social liberal parties. Even if the leadership manages this difficult balancing act, the right wing press can still suggest that at its heart Labour is now the party of social liberals, which of course is true. Labour’s positive message on competence or the economy may fail to attract voters sufficiently to counteract voters socially conservative inclinations.

Just because the path is fraught with danger does not mean a better one exists. It may be the case that, with FPTP biased towards social conservative voters and competition for the social liberal vote, it is just highly unlikely that over the next decade or more that the Conservatives can be defeated. In the long run demographics are on Labour’s side, but that is not going to ride to the rescue anytime soon.

Brexit may be pointless, but it will be with us for some time

 

You have probably read a lot of stuff asking what, precisely, are the benefits of Brexit. I’m going to make some points that try and look at this from the point of view of those who supported Brexit, whether we get a trade deal or not. For those who voted for Brexit the main concrete preoccupation was immigration. Here is the latest version of a chart I have shown before (source):

Those voting for Brexit because they wanted low migration will have been disappointed (although I’m not sure how many realise this), because the fall in EU immigration has been matched by an increase in non-EU immigration. Net immigration is slightly higher than it was when the referendum took place. Seems to confirm that immigration really is dominated by firms demanding the best labour (wages unaffected) rather than an increase in labour supply requiring employment (wages fall).

What about sovereignty? For many voters it is about wanting more control over their lives because of things that had nothing to do with being in the EU. For others it is about memories of stories in newspapers which were largely lies. There is no gain in sovereignty for voters as a result of Brexit. Increasingly sovereignty has morphed into crude nationalism.

I have consistently argued that Brexit is much more about the political players who pushed it rather than the voters who adopted it. So what have they gained as a result of Brexit actually happening? The short answer is political power, but that makes Brexit nothing more than a pretext. Those leading Brexiters who were nostalgic for the glory days of ‘global Britain’ have got political isolation, with the UK becoming a country that the outside world increasingly sees as governed by people who don’t know what they are doing and cannot be trusted.

Those who desired a close relationship with the US rather than Europe are finding that the USA in Democrat hands is far more interested in European countries than us. Those who wanted a country that would be dynamised by a bonfire of red tape, labour and environmental regulations are discovering that instead they have landed exporting firms with many extra forms to fill in and that the EU is still able to exert considerable power on these issues even though we are no longer part of the club. Those who, following late-Thatcher, see the EU as threatening attempts to minimise the role of the state realise that they have replaced the EU with the Red Wall voters to whom they promised so much that can only be delivered by state action.

However the power of the Red Wall voter cuts both ways. Those Labour members who despair that every decision that Starmer makes seems to be governed by what Red Wall voters might think have not understood the arithmetic that now determines how elections are won. The distribution of voters by seats means that any party that commands the socially conservative voter always wins. As a result, Labour cannot afford to give the media any issue that might allow Labour to be painted as social liberals. 

This also has profound implications for Brexit. Although I have argued that it has ended up doing little for those who either voted for it or championed it, and although it will do extensive damage to the economy, it will be very difficult for any government to begin to reverse it for some time. Fairly obviously no Conservative government will admit that what they have dragged the country through for four years was just pain with no gain. But equally any Labour government will not dare to reignite the Brexit identity that saw them lose so decisively in 2019. There may by now be a majority of voters who think Brexit was a mistake, but that would probably not be enough to win an election even if the anti-Brexit parties were united, and they are not. If Scotland becomes independent the situation only gets worse.

I suspect some Remainers think the economic hit from Brexit will be so obvious that Brexit will lose its current popularity. There are two problems with that view. The first is that, beyond a few big firms in some sectors that initially downsize or close, the economic impact of Brexit is too gradual for our media to pick up. GDP is already estimated to be at least 2% lower as a result of Brexit, and how often have you heard that in the main BBC news bulletins? Remember the media talked about a strong economy in 2015 after the disaster of austerity. Memories of goods shortages and lorry parks will fad as the government and its media puts a COVID recovery down to our new found 'freedom' (HT - RB). The second problem is that, just as the Conservative party will not admit its folly for a long time, neither will the right wing media which played a major part in giving us Brexit. It may take a decade or more before the Brexit identity becomes politically unimportant, unless we adopt a more proportional voting system for General Elections. 

This is why I get annoyed by the idea that Remainers should have pushed for a soft Brexit. Remainers were not only right about Brexit, the Remain movement grew in part because the power of the hard line Brexiters became clear. Just suppose May had enacted a softer Brexit (basically staying in the Customs Union) with Labour help. That would just be unfinished business for the Brexiters. The threat from UKIP at the elections, demanding a true Brexit, would still frighten enough Tory MPs and members into choosing Johnson at PM, and we would be back to where we are. Just as UKIP and UKIP-minded Tory MPs forced Cameron to hold a referendum, so they would push the Conservative party to a hard Brexit which could not be defeated at the polls. 

Maybe I’m wrong about all this, jaded from four years of Brexit madness, and I hope I am. With that thought, have a good COVID-free Christmas.

If the UK government fails to do a deal over unfair competition it is not because of UK sovereignty. It’s because of crazy stupidity.

 

Why do people keep saying the impasse over a trade deal with the EU has to do with UK sovereignty? I know the government says this, but the government says a lot of things that are just untrue. They are standard lines the go down well in focus groups. For those who are not paid to follow the government line, to repeat the government's line seems odd. The current impasse seems to me to be about EU sovereignty, not UK sovereignty.

As present (see date of post) the main stumbling block in agreeing a deal is the EU’s insistence that it should be able to increase tariffs if it feels that UK goods have a competitive advantage because of future UK government subsidies or rule divergence. Avoiding these retaliatory tariffs requires keeping a level playing field for EU firms, or LPF for short. Understandably the UK does not like that idea. But the sovereignty here is the EU’s right to raise tariffs. UK sovereignty is not involved.

The mistake I think comes from the idea that to avoid this outcome, the UK would have to follow EU standards (using standards in a wide sense to include any government action that influences competition). But to say that is about UK sovereignty seems to me to be a perversion of the concept. National sovereignty is about a nation being able to make decisions itself. The EU is not stopping us making decisions, it is just saying there will be consequences. If you want to avoid those consequences, you need to avoid making those decisions.

I am sure that if the EU were likely to cut employment or environmental standards in such a way as to disadvantage UK firms, any government interested in the health of UK firms would wish to keep the option of responding in the most obvious way, which is to raise tariffs on the relevant EU goods. If the EU tried to prevent the UK doing that in some way the UK would be absolutely right to say its sovereign right to raise tariffs was threatened. So the reverse must also be true.

But this is only half the reason that not doing a deal because of the LPF is crazy. What happens if there is no deal? The EU raises tariffs on all UK goods for sure, as if we are a third country. What happens if the UK breaches the LPF after a deal? The EU raises tariffs on some goods. The first is a certainty and wide ranging, the second is a possibility and limited. If we don’t do a deal because of the possibility of limited action, we get for certain the same result for a wide range of UK firms.

In other words the outcome of no deal is far worse than the outcome of a deal where the UK accepts the LPF, just in the very limited sense of EU tariffs imposed on the UK. You might say what is new and that it is all about UK sovereignty, but as I explained above it is not. By not agreeing to a deal, the UK would literally be subjecting everyone in the UK to EU third country tariffs for the sake of not being able to limit EU sovereignty. That is crazily stupid.

If the government does end up doing a deal this is why.

But no deal would be no surprise for this government. We have a government that didn’t follow expert advice on the second wave for the sake of the economy, only to have to impose a subsequent lockdown that did more damage to the economy. I expect this government to make crazy stupid decisions. Maybe Johnson wants no deal for some reason. But in this case the craziness should be obvious, and it is being excused by too many people (not all[1]) erroneously thinking this has something to do with UK sovereignty.

[1] Examples of people who get it that I have seen include trade experts of course (like @samuelMarcLowe for some time), and @faisalislam in this excellent piece, and @stephenkb here.

 

A Christmas for the Coronavirus

Forget for a moment locking down late when the pandemic first hit. Forget itching to end lockdown restrictions, leaving us with too high a case load once the first lockdown ended. Forget the utterly stupid decision to ignore local public health teams in an attempt to construct a centralised test and trace regime. Forget Eat Out to Help Out the virus. Forget trying to persuade people to go back to work. Forget still pretending the pandemic was over when planning to reopen schools and universities. Forget even ignoring the advice of the experts as the second wave got going. Forget many other failures besides.

Just focus on Christmas. Yes of course many would celebrate Christmas in the usual way whatever the government said. But there are probably just as many people who are rightly concerned about the additional social mixing that a normal Christmas is bound to bring, and these people need an authority to give them an excuse not have a normal Christmas. The only authority most will see is the government. 

No problem, you might say. Let everyone decide for themselves. That might be a tenable position to take, except for two things. The first is that public health experts are also very worried about a spike that Christmas is almost bound to create in COVID cases just a week or two after Christmas. That information must be made very clear to everyone, and the only way that will happen is if the government does so.

The second is that a national celebration like Christmas creates social pressure to take part. There is the personal pressure of wanting to see family members who you have not seen for some time at a traditional time of meeting. There is the interpersonal pressure of not wanting to tell family that you will not be hosting Christmas. And last but not least, there is the considerable social pressure that Christmas creates. Apart from friends and neighbours, don’t expect the media to act differently this year.

Which is where national leadership should come in. A responsible politician should want to avoid a second spike in cases (followed a few weeks later by deaths). They know that they cannot stop people celebrating Christmas, but equally they would want to get over the idea that it is not wise to bring households together to do so. As they know that, this is what they should say. Here is an example of what to say: short term unpopularity to save lives. It’s called leadership.

In almost every way Boris Johnson is the worst Prime Minister to have in this situation. (I say almost because there are some Tory MPs who would appear to be even more clueless.) His natural instincts are to ‘bring good news’, which means in the words of the irresponsible Tory press ‘saving Christmas’. He loves telling people to have a good time with no thought of future consequences, because that has been how he has run his charmed life. His libertarian instincts are not to interfere, and his political instincts are not to be the man who stopped people getting together at Christmas.

As a result, we get the worst of all worlds. Just saying ‘be careful’ while having a normal Christmas is less than helpful, because it suggests that if you mix households it will be alright as long as you're careful, whatever that means. As Devi Sridhar writes "[The virus] rapidly spreads indoors and in poorly ventilated settings, particularly in households, when people gather together informally in comfortable and close conditions. Disinfecting surfaces and sitting two metres apart just isn’t going to stop transmission.” In addition, trying to pack travel into 5 days around Christmas will, if people don’t ignore it, create dangerous overcrowding on trains. Is Christmas with the family so important that it is worth the possibility that you will be burying family in January, a few months before they were due to get a vaccine?

Christmas was always going to be something of a party for the virus, letting it make up some of the ground it lost during the second wave lockdown. But it didn’t need to be a state sanctioned affair. It will be yet another occasion when many will ask how on earth did we ended up with a Prime Minister who finds it so hard to make difficult decisions. Because, if we now remember the many mistakes of the last 9 months, Christmas will just take its place among many. 

These are not errors that make some people poorer or inconvenience others, but mistakes that cost many many lives. We don't often see the relatives of those who have died from the virus, just news bulletins giving cold statistics for a few seconds. But those deaths are now equivalent of a plane crash in the UK every day. Just imagine the questions we would ask about who was responsible after only one single plane crash, let alone one every day. Why isn't everyone asking those questions of the government that is largely responsible for this level of deaths? 

Fiscal policy during and after the coronavirus pandemic

 

This post was partly inspired by this recent seminar, but also by this excellent paper from The Resolution Foundation. Apologies for the length, but there is a lot to cover. 

This post is in five parts. The first looks at how our understanding of fiscal policy has evolved over the last decade or so. It is an essential background to how fiscal policy should be employed during the pandemic. The second looks at fiscal policy support during the pandemic. The third looks at what could be quite a short period between when the pandemic is effectively over as a result of mass vaccination, and when the economy has fully recovered. The fourth asks whether, once the economic recovery is complete, we should attempt to gradually reduce the debt to GDP ratio. Finally I look at the Chancellor's recent actions and how they are reported by the media.

Background

Just before the Global Financial Crisis (GFC), I talked of a Consensus Assignment between monetary and fiscal policy. Here is a quote from the introduction.

“The consensus assignment from the title refers to the idea that monetary policy (in a closed economy, or a small open economy with flexible exchange rates)5 should normally focus on business cycle stabilisation and inflation control, while fiscal policy (at the macro level) should focus on the control of government debt or deficits. This conventional assignment leaves open the possibility of using fiscal policy in situations where monetary policy is constrained in some way, either by design (such as a monetary union member subject to asymmetric shocks) or misfortune (where interest rates hit a zero lower bound). It is a consensus only if it applies to situations in which monetary policy is unconstrained in its ability to stabilise the business cycle.”

I did not know it at the time, but that caveat concerning the lower bound for interest rates was going to become the Achilles Heel of the Consensus Assignment.

Having written that paragraph, it was obvious to me that when countries hit the lower bound for interest rates during the GFC, fiscal stimulus would be essential to speed up the recovery from that recession. Unconventional monetary policy, almost by definition (‘unconventional’), was not going to be as reliable as fiscal policy and therefore would be an inferior stabilisation instrument.

In the years following the GFC it became clear to many academic macroeconomists that the GFC was not going to be an exception in driving interest rates to their lower bound. What has been called secular stagnation is the phenomenon that the underlying or equilibrium real interest is now so low that downturns would often trigger rates hitting their lower bound. This in turn means that what I called the consensus assignment has to change.

In my view, and the view of an increasingly large number of academics, we need a new assignment that includes fiscal policy stabilisation at least some of the time. The MMT school suggests switching the old assignment around, and using fiscal policy at all times to stabilise demand. However that seems to ignore our pre-GFC history, where monetary policy was very successful at stopping domestically generated inflation expectations exceeding an inflation target.

The alternative I have recently called the state dependent assignment uses fiscal policy to help stabilise recessions, and monetary policy to help stabilise inflation. When fiscal policy is being used to fight a recession, fiscal policymakers should be completely unconcerned about what is happening to government deficits and debt. The time for fiscal policy makers to focus on deficits and debt is when we have largely recovered from a recession. The obvious way to measure when fiscal policy should switch from stabilising the economy to stabilising debt is when interest rates are no longer at their lower bound. (Lags between fiscal policy decisions and the impact of fiscal policy on demand means that the switch point cannot be that simple in practice, but the key point to remember is that the costs of too much fiscal stimulus are far less than the costs of too little.)

Fiscal policy during this pandemic

The need for fiscal stimulus is acute when economies suffer from large demand shocks. There has been endless debate among macroeconomists about whether the pandemic represents a demand shock or a supply shock. When I began looking over a decade ago with public health experts at the economic effects of flu pandemic (paper here), I started off thinking about the pandemic as a supply shock and ended up realising that a severe pandemic would mainly be a demand shock.

With mild flu pandemics, the main economic effects are supply-side, such as people taking a couple of weeks off work. However with severe pandemics, many people take active steps to try and avoid catching the virus. That means they cut back on, or may even stop completely, forms of social consumption: going to shops, pubs or restaurants, going to public sporting or cultural events and so on. What surprised me when thinking about the extent of the demand fall that produces was that social consumption accounts for around a third of total consumption. A government lockdown may enhance and extend that response.

Does that all imply the need for massive fiscal stimulus? Yes and no. First the yes. What should be clear is that whatever reduces the extent of the virus is good for the economy beyond the short term. The economy just will not recover while the risk of catching the virus is perceived to be significant, because social consumption will remain depressed. The most important way fiscal policy can help in eliminating the virus is by providing support to those workers and firms that suffer from the reduction in social consumption. A possible but imperfect analogy is with the automatic stabilisers that work in a normal recession.

The no relates to whether additional substantial stimulus is required beyond that already supplied by rates at their lower bound. As the previous section made clear, for a normal recession that is essential. But the pandemic is not a normal recession, for two reasons. The first is that the demand shock is sector specific. A standard fiscal stimulus like a tax cut is likely to increase demand in sectors that have not been hit by the virus.

You could get round this with a sector specific stimulus, but then we hit the second problem, which is that to the extent that stimulus is effective it will make the pandemic worse. That was the ultimate fate of the Chancellor’s Eat Out to Help Out scheme. The conclusion has to be that if fiscal support measures are comprehensive, then the case for a large additional fiscal stimulus is weak. (For more formal analysis, see Woodford and references therein.) If support is not comprehensive, or largely absent as in the US, then the case for stimulus to reduce unemployment is much stronger.

When the pandemic is over

The Chancellor has indicated that he is prepared to look at measures to boost the economy once the pandemic is over. This would make sense if consumers are slow to resume social consumption even though it is quite safe to do so. The last proviso is critical, if the Chancellor wants to avoid stimulating the pandemic as well as the economy (in only the short term).

But will consumers in aggregate be over-cautious. In that study I did a decade ago looking at a flu pandemic, I made the assumption that consumers might to a limited extent binge on social consumption once the pandemic was over. After all consumers who have continued working or have benefited from fiscal support will have increased their wealth significantly by not spending on social consumption during the pandemic. In realistic models of consumption consumers will begin to unwind some of that when the pandemic ends.

This suggests that any fiscal stimulus during the recovery phase should focus on the public rather than private sector, and particularly public investment. There is little point in trying to second guess how much permanent scarring the pandemic has left, so as I noted earlier it is always better to assume there is a demand gap, because the costs of being wrong (a short term inflation blip) are much less than the cost of assuming potential output is lower than it actually is.

What is clear is that we have a desperate need for public investment. The government is planning investment worth, in net terms, just under 3% of GDP each year. That is high by recent historical standards, but when you think of all we need to do to reduce the extent of climate change and the risks from climate change, it is probably inadequate. There are many other areas where public investment is needed. 

When the economy has recovered

I have not mentioned government deficits or debt until now, for the very good reason that they are irrelevant in a recession. The mistake of UK policy after 2010 should never be repeated. But when short term interest rates rise significantly because of clear inflationary pressure because the recovery is complete, then this the time to switch to monetary stabilisation and allow fiscal policy to focus on government debt.

In my paper with Jonathan Portes, we argued that in normal times a medium term rolling deficit target should be set with the aim of achieving some long term trajectory for the government debt to GDP ratio. However given the need for substantial government investment already mentioned, a better measure might be government net wealth (net worth) to GDP. After the pandemic net wealth will be well below levels seen before the pandemic, and there is a case for setting a deficit to achieve a very gradual increase in that ratio over time. If that requires fiscal consolidation, there is an overwhelming case that this should be achieved using tax increases rather than spending cuts. Indeed in a number of areas there is a strong case for increasing current government spending, and once the recession is over and interest rates are well above their lower bound because domestically generated inflation is likely to permanently exceed its target, these need to be matched by higher taxes.

However even when the economy has recovered from the recession caused by the pandemic, we will not be in normal times. The threat of man made climate change is now both very real and imminent. As I have already argued, public investment aimed to achieve our carbon emission targets, like all public investment, should not be restrained by any fiscal rule. The argument that the polluter pays still holds, which means taxes to discourage carbon production and use are essential.

All of this is perfectly compatible with a gradual increase in the government’s net wealth ratio, and indeed carbon taxes should help here. The political problem that may arise, and anticipated in the Green New Deal in 2008, is that it may be politically impossible to enact the necessary taxes without compensating fiscal rebates of various kinds. We live in an imperfect information world, or more accurately a misinformation world, and as a result it is tempting for some political parties to pretend measures to prevent climate change can be achieved with no costs, or worse still that deny the problem is imminent.

If that turns out to be true, the least important goal is an increase in the net wealth ratio or a reduction in the government’s debt to GDP ratio. If we fail to tackle climate change, and in 50 years time our children or grandchildren are suffering the consequences of significant global warming, they will not forgive us failing to do what needed to be done because we were ‘responsible’ with the public finances.

Austerity redux?

As I have tried to stress, looking after our public finances is a second order problem compared to the first order problems of supporting people during the pandemic, getting a complete economic recovery and tackling climate change. I think most academic macroeconomists would agree with that, and the IMF also agrees with that.

However, you wouldn’t know that from the discourse of the Chancellor and from much of the media. The notion that the government’s finances are like that of a household should have been well and truly buried after the disaster of 2010 austerity, yet they live on among many of the political journalists you will see on the broadcast media. (There are, unlike 2010, a few notable exceptions.)

When we talk about a possible repeat of austerity, we have to be careful what we mean. The original spending cuts from the 2010-18 period have only been partially unwound. What people therefore mean by a second round of austerity is yet further cut backs in spending or tax increases. The first period of austerity was a disaster for two reasons. The first was that the supply of public spending was cut without any attempt to reduce the demand for public services, so problems with services for health, welfare, prisons, police, the justice system and much more were inevitable. The idea that there were substantial efficiency gains in all this provision proved largely mythical.

The second reason it was a disaster is macroeconomic. In a recession due to demand deficiency, taking more demand out of the economy is bound to make things worse if interest rates are stuck at their lower bound. (If demand was not deficient interest rates would be well above the lower bound, and could therefore fall to boost demand and compensate for the demand impact of fiscal consolidation.) If you continue austerity during a period of deficient demand for a number of years there is a significant danger that output will be permanently lower as a result.

Given all this, why does the Chancellor encourage talk of austerity while we are still coping with the pandemic? The obvious answer is that it provides cover for essentially political decisions, like cutting the aid budget or the real wages of public sector employees, while increasing spending on defence. It provides cover because the media (what I call mediamacro) is still largely using the household analogy when it comes to government debt. 

An equally serious problem is that the political cycle in the UK is likely to lead to decisions being taken at the wrong time. If taxes do need to rise, they must only rise after the recovery is complete. That might be in 2023 and 2024. Only then will be know the recovery is complete, because interest rates are significantly higher in an attempt to prevent a rise in inflation becoming permanent. The Chancellor and government might think this timing will jeopardize their re-election chances. This leaves a danger that tax rises (or worse still public spending cuts) happen earlier, which might damage the recovery. The alternative that tax rises are delayed until after the election carries much smaller economic costs.

Politicians and experts: austerity, Brexit and the pandemic

 

I’ll be talking about fiscal policy during and after the pandemic at a Resolution Foundation/MMF event in a week’s time: https://www.mmf.ac.uk/resolution-foundation/

I have written quite a few posts on the relationship between policy and expertise, and between expertise and the media. The better ones are in my book, but they were all written before the COVID pandemic. How does the relationship between experts on the one hand and politicians and the media on the other that we saw with economists over austerity and Brexit play out with medics and the pandemic?

All three cases are different from each other. Although the evidence set out in my book suggests that the majority of academic economists opposed austerity (a majority that got larger as time went on), this plurality had no impact on either the media or the politicians pushing austerity. A few well known academics who supported austerity got a lot of publicity, but this was because they supported a policy pushed by politicians and the media, and not because they were influential in driving the policy. An obvious example in the UK was Ken Rogoff, who supported protecting public investment from any cuts while the government did much economic harm by cutting public investment.

The most notable feature of austerity was the almost total disregard by the media of the views of the majority of academics. As Alan Winters in his analysis of experts and Brexit points out, it was David Henderson who said in his Reith Lectures of 1985 “There is no doubt that the policies of governments … are influenced by economic ideas. But … these have not necessarily been the ideas of economists”. This applies with equal force to the media. The media appeared to apply the logic of the household to governments, so that the necessity of paying back debt as soon as possible became common sense, even though saying this would be a fail for any first year economics undergraduate. For that reason I called it mediamacro.

The power of media narratives should never be underestimated, as the Labour party has experienced many times to its cost. Austerity was just another example. It was a particularly devastating example, because in this case the media’s common sense did terrible harm to the economy, and the media was ignoring what it should have regarded as a key source of knowledge, academic macroeconomics. Needless to say, media organisations have never examined their own mistakes in this regard.

Brexit was different in two respects. First, what was a plurality over austerity was an almost total consensus on Brexit. Making trade more difficult, which almost any form of Brexit did, would cause considerable harm to the economy. The second difference compared to austerity was that the broadcast media had less of any common sense to appeal to, and so they played the ‘two sides’ game. On the one hand was the overwhelming consensus of academics, together with all the major economics institutions, and on the other was a handful of pro-Brexit economists the most noticeable of whom was Patrick Minford. (A few media outlets, and particularly the Financial Times, did follow the academic consensus.)

In defence of the broadcast media, this ‘two sided debate’ format is their default on most issues, and it doesn’t normally matter what the expert consensus is (which is typically not mentioned). However as we saw with austerity, there are exceptions. Whereas the exceptions should be based on the expert consensus, they instead seem to be based on common sense narratives. As with austerity, the media has never examined its own mistakes in relation to Brexit. As the referendum was very tight, the actions of the broadcast media in treating the overwhelming consensus of academic economists as just one opinion could well have influenced the result.

This trivialising of expert opinion is not inevitable. Strong pressure from academic bodies can yield results. The obvious example is climate change. When broadcasters began to increasingly ‘two-side’ the climate change issue, academics and others protested, and the BBC trust acknowledged that on this issue the expert consensus had to be followed. Not all BBC programmes have subsequently respected the Trust’s findings, but nevertheless you will generally see broadcasters treating the need to reduce man made climate change as a fact, and not as a controversial opinion.

The obvious difference between austerity or Brexit and climate change is that the former involves economists and the latter involves scientists. Actually the difference in methodology between climate change scientists and economists is not that great: both attempt to predict in a highly stochastic environment, and neither can easily conduct experiments. There are differences in public perception, of course. Besides the insight of Henderson noted above, there are various myths about economics that are part of the public debate. But the most relevant difference in my view is the absence of institutional pressure on the media from economists that matched the pressure over climate change.

Another academic discipline that has similarities to economics is medicine, and more specifically public health and epidemiology. The story of COVID-19 initially appeared to be more optimistic than austerity and Brexit. In many European countries, including the UK, governments took scientific advice, although in the UK with a short delay that probably cost tens of thousands of lives. But as Alan Winters notes, that optimism has been short lived. In most countries in Europe, including the UK, the second wave has been far worse because politicians ignored the expert advice.

The rationale they have given for ignoring the medical experts has been to balance health with the economy. The irony is that once again most economists I have seen who have studied this issue have agreed with me that there is no meaningful trade-off between the economy and health beyond the very short term. Once again academic economists are ignored, this time where lives are directly at stake.

The media have faithfully echoed the excuses for ignoring the expert advice, seemingly ignorant of the fact that they have little basis. From what I have seen they have given air time to experts and particularly politicians pushing the ‘lockdowns do not work’ nonsense, as if this is just another opinion. I suspect once again this is because it is ‘common sense’ that there is a health/economy trade-off, because most people do not think in dynamic terms. I have not seen government politicians questioned in interviews for not following expert advice in a similar manner to the way Labour politicians were questioned for doubting Osborne’s austerity.

Why did politicians initially say they were following the science of how to deal with the pandemic, while the same politicians ignored economists on Brexit? It is not because medicine is a science and economics is not. As I have argued elsewhere, the two disciplines have many structural similarities. Henderson’s point about prior beliefs is undoubtedly one reason: not many non-medics thought about pandemics before there was one. For politicians another reason is ideology. With austerity and Brexit it was ideologically convenient, and perhaps even necessary, for its proponents to discount expertise. Initially there appeared to be little ideology involved with controlling a pandemic, beyond libertarian instincts.

One reason attitudes to medical experts changed among government politicians between the first and second wave was the emergence of ideology dressed up as science: the Barrington Declaration and all that, and the influence that has had on many Conservative MPs. Once again, it became in the interests of those politicians to ignore expertise, just as they did with Brexit. The correlation with pro-Brexit and anti-lockdown views is no accident. The lesson is simply not to elect politicians who can so easily cast aside expertise.

Unfortunately that is less likely to happen as long as the media fails to tell viewers what the consensus among experts is. I have made this point before, but I think the lesson of climate change is instructive. The media are not going to change what they do, particularly when some feel their existence may depend on keeping certain politicians happy. What changed the media’s approach to climate change, at least in principle, was pressure from science itself. The reason academic economics gets ignored is that academic economists don’t organise to apply pressure.

I have seen so many accounts of why economics was ignored over Brexit that blame themselves: things should have been presented more clearly, economists should have been more open about uncertainties, and so on. All have some truth, but none will make any difference as long as the media treats the consensus among academic economists as just another opinion. For the media to do otherwise requires the strongest pressure from groups who represent academic economists. At the very least, we need institutions representing economists telling the media what the consensus view (if any) is on particular economic issues. [1]

I suspect that some medics will be beginning to ask similar questions about the pandemic: why did politicians ignore consensus advice, why did anti-lockdown politicians get so much airtime and so on. The answers I suspect are similar to those I have just given for economics. Medics have one big advantage over economists: the bodies that represent them are used to applying public pressure. They should apply that pressure on the media if they want to avoid expert views about the safety of COVID-19 vaccines to be treated as just one opinion to set beside the opinion of anti-vaxxers.

[1] When I make this point I often get comments along the lines that I’m trying to impose conformity, and the public should be told about mavericks opinions because (very occasionally) they turn out to be right. I’m doing neither of those things. What is missing from the media is any sense of what the expert consensus is, and for politicians who depart from the consensus being interrogated on why they think they know better than the expert consensus.

How the electoral system in the US, and to a lesser extent the UK, is biased towards social conservatism.

 

The UK is often torn between following the US or following Europe. We share a language with the US, and a lot of popular culture. But we also share a voting system that ensures the political right has a heavy built in advantage. The United States may be too far down that road to change, but in the UK there is still hope if only the current opposition leadership see sense.

Once we get over the relief that Donald Trump is no longer President, comes the realisation of just how bad the US election results really were for Democrats. Trump was a Republican, and the Republican party backed him almost without exception. Even in the current ludicrous situation where Trump is refusing to concede, many senior Republican politicians continue to back him.

It should come as no surprise that Republicans have an ambiguous relationship to democracy. Republicans see nothing wrong in distorting district borders to give themselves better election results in terms of seats than their polling numbers deserve. Gerrymandering is endemic, and it gives the Republicans an inbuilt advantage in one half of Congress, the House of Representatives. They also habitually make it hard for democrat voters (particularly black voters) to vote: the long lines we see during US elections are there for a reason.

Recently Republican senator Mike Lee said “Democracy isn’t the objective; liberty, peace, and prospefity [sic] are. We want the human condition to flourish. Rank democracy can thwart that.” This view is not unusual among Republican politicians, it is just that most are not so foolish as to say it out loud.

But Trump’s attempt to cling to power is not the problem. The problem is that the Republican party won seats in the House, and is likely to retain its majority in the Senate. Why the Democrats did so badly in both of these contests is something that will be analysed by others at length later. But I suspect what few outside the US understand is just how difficult it is for the Democrats to win big in the Senate.

As Shaun Lawson explains in an excellent piece, the Senate is constructed such that each state has two senators, whatever its population. To take the most extreme example, Wyoming with a population of 563,626 gets the same representation in the Senate as California with a population of 37,253,956. Now if political support was evenly distributed among big and small states alike this would not be an issue . However it is not: Wyoming has two Republican senators and California has two Democratic senators. The Senate structure influences the Electoral College used to choose a President.

The basic problem with the Senate is that it gives rural and small town states much more political clout than their population warrants. With political polarisation increasingly between liberals and social conservatives (the culture war), and with liberals concentrated in the big dynamic cities and conservatives in the rest of the country, anything that gives the latter an advantage relative to their number is a political problem.

The example of the US senate is far more extreme than anything in the UK, but that does not mean that the problem does not exist here. We saw that very clearly with Brexit, which is essentially a culture war issue. The referendum of course involved the whole population, and we all know the result of that. But if a general election had been held on just that issue, it is estimated that Leave would have won a landslide: 406 Leave | 242 Remain.

We can do a similar calculation for the 2019 election. If you add up the vote totals of parties supporting a second referendum, it was just more than 50%, but of course the Conservatives won a landslide and Brexit went ahead. That partly reflects the fact that the second referendum vote was more divided among different parties than the Brexit vote, but it also reflects the way the social liberal/conservative divide is split among parliamentary seats.

Socially liberal votes are concentrated in the cities. Seats outside the cities have many social liberals as well, but they are typically outnumbered by social conservatives. However you will find very few social conservatives in big city seats. That means that even if social liberals are in a small majority in the population as a whole, they are outnumbered in terms of seats. When it comes to culture war issues, the First Past The Post (FPTP) UK constituency system for general elections represents accidental gerrymandering favouring social conservatives.

An illustration of this is to compare the 2017 and 2019 elections. In 2017 both main parties backed Brexit and the Remain movement hardly existed, so Labour could focus on a relatively popular economic programme and do relatively well. In contrast, the 2019 election was mainly about Brexit, and the seat totals (once you allow for other parties) was not very different from those implied by the 2016 referendum result. 2019 also reflects the difficulty Labour had in focusing on economic issues given a slanted media.

If you think this is just about Brexit, or that Cummings’ departure means that Johnson will reveal his true social liberal self, think again. The Conservatives were using immigration as a weapon against Blair under William “foreign land” Hague, and will continue to try and capture socially conservative voters after Cummings' exit, because it works at winning elections.

One solution is for Labour to try and do what it did in 2017, and effectively match the Conservatives on the key culture war issues. However, that creates two related problems. The first is that Labour’s current base is very socially liberal. The second is that other socially liberal parties exist. The danger is that we see a repeat of what happened in the period before the 2019 election, where voters defecting over Labour’s socially conservative stance leads to lost votes whatever choice it makes. I'm not saying that Labour cannot succeed doing this, but it is hard and divisive. 

Both this problem, and the problem of the socially liberal vote being split among parties, can be overcome by elections determined by some form of proportional representation (PR).

A traditional argument for the UK’s existing first past the post system, and the constitutional system in the US, is that it keeps out political extremes as both major parties strive to capture the centre ground. This has been completely refuted by events over the last decade. It appears, in fact, that both systems allow governments that are politically extreme to capture power.

While there seems little chance that the US will change its system, there is more hope in the UK. It requires a Labour government to be elected that is committed to some form of PR. It has to be a commitment before they gain power, because once elected every Labour government believes it can now become the natural party of government. One advantage of a prior commitment to PR is that it makes cooperation between Labour and other socially liberal parties easier during the election.

There is considerable support for electoral reform within the Labour party. Unfortunately any Labour leadership that thinks it can win power is also a leadership that prefers to remain in power rather than becoming part of a coalition that any subsequent PR election is more likely to bring. While we can appeal to statistics to show the dominance of Conservative governments, political leadership is naturally focused on its own short term.