Winner of the New Statesman SPERI Prize in Political Economy 2016


Tuesday, 15 June 2021

A government out of control

 

The commitment that the UK government gives 0.7% of its GDP as overseas aid is enshrined in law. Johnson’s government decided to cut this to 0.5%, but didn’t need to put this to parliament because the cut was supposed to be temporary. A large number of Conservative MPs were unhappy with this, and wanted to use parliament to reverse this cut. The parliament’s speaker ruled their attempt invalid, but requested the government to allow a vote on the issue. The government refused. The executive increasingly views parliament with contempt.


So much for the sovereignty of parliament. We knew this government thought little of parliamentary sovereignty when it closed it down, illegally, before the last election. The courts forced it to retract that measure, so now the government is intending to pass laws that would prevent the courts doing so again.


Of course it is open to MPs to pass a vote of no confidence in this government, just as it is possible for a majority of Tory MPs to bring down their leader. But that is never going to happen while Johnson looks like winning the next election. As a result, parliament has no effective control over what this government does.


The government, in the form of Michael Gove, has recently been found guilty of giving public money - our money - to friends in the form of a contract with no competition at all. That is breaking the law. This is corruption. He has no intention of resigning and Johnson will do nothing. In other words this government has been found to be corrupt, and no one can do anything about it.


Matt Hancock has recently been questioned by a select committee on his handling of the COVID pandemic that has killed around 130,000 people in the UK. One of the issues the committee raised was early shortages of PPE. He repeated that there has never been a national shortage of PPE. This statement could best be described as economical with the truth. He was asked about reports, from a whistleblower, that the department of health had pressured Public Health England to change its guidance on release of patients from hospitals to care homes to no longer include the need for a negative COVID test. He said he had no recollection of that - a clear non-denial denial. Mr. Hancock will remain in post.


The Education Secretary, Gavin Williamson, was quick to condemn 10 Oxford students who decided to take down a picture of the Queen from their common room. He knows what is important - it was going to be front page news in the Mail. What isn’t front page news in the Mail is that the new wave of the UK’s COVID pandemic, generated by the Delta (Indian) variant, is very strong among school children, and it is highly likely that these children are helping this variant to spread rapidly. Knowing all this, Gavin Williamson told schools they didn’t need to wear masks any more. Will Williamson resign or be sacked for helping this new wave spread rapidly? Silly question.


Then there was Priti Patel, Home Secretary, who was accused of bullying by, among others, her Permanent Secretary. Bullying is against the ministerial code, and an internal inquiry found her guilty. The Prime Minister refused to apply any sanction, and the only person to resign was the person in charge of upholding standards. The Permanent Secretary was sacked and received a large sum in settlement from the government after he took the case to an employment tribunal.


Then there was the Housing Secretary who unlawfully approved a housing scheme so that the developer could avoid paying £40 million odd to the council. Not even a rebuke from anyone in government. Corruption is particularly rife among building developers and this government. There is much more, but let me cut to the chase. Actions that would have led to pretty rapid resignation in past administrations have been ignored by this Prime Minister time and again.


It is not as if his predecessors in office have been shy of sacking ministers who transgressed in various ways, as this chart shows:



Why did Johnson keep Patel and the others? Why shouldn’t he? They are his people, and nothing bad is going to come from keeping the ministers he chose in the job. It is tempting to say that his own actions are too similar to these ministers (lying, breaking the ministerial code), but I don’t think that is the key here. The key is that this government is totally unaccountable, and does just what it likes.


It is unaccountable to parliament, because it has a large majority and Tory MPs are not prepared to bring the house down. It ignores the law when it can, and when the law does stop it doing something it then attempts to change the law so it won’t be stopped in the future. It gets away with this because it has effectively the one key check on its power - the media.


For a large part of the press, Johnson is their Prime Minister. They became propaganda outlets to persuade people to vote for Brexit, and they have remained propaganda outlets supporting the government ever since. It is tempting to say this has always been true, but the extent to which the right wing press has become the propaganda arm of the right in the Tory party has steadily increased over the last few decades. It is now fully signed up with the government’s culture war, which is why 10 students taking down a picture of the queen can become headline news. Talk of a free press in this context is laughable - these titles are now part of a Tory party run by one of their former journalists.


However the big change, begun by Thatcher and Cameron and completed by Johnson, is to tame the BBC. This is hardly surprising, when party donors are appointed to key positions and the government keeps attacking the BBC’s outputs, income and even its existence. The BBC does not push propaganda, but they do not take it on either, giving the press a largely open field for their propaganda to work. They avoid the truth if it embarrasses the government, and when its reporters do tell things straight, they are put down by the BBC’s leadership. (C4, Sky and sometimes ITV are better, but the BBC overwhelmingly dominates in terms of viewers.)


The only accountability that has any influence on this government is the electorate. But because of its natural advantage in the media, and unfortunately an opposition that seems pretty ineffective beyond PMQs, that influence on the government is partial and weak. Issues most voters will not notice, because their only sight of them is a news item towards the end of a bulletin (like the government breaking the law on contracts), can be safely ignored by the government.


Alas, because of the way the BBC fails in its reporting, even things that do have a large impact on voters, like tens of thousands of unnecessary deaths, will never be described in those terms. That lack of media accountability allows Johnson to ignore his scientists, and put personal ‘freedom’ above saving lives and the economy. This is what happens when the government becomes unaccountable. [1] It is allowed to make mistakes costing lives, and pays no price for these mistakes. 


None of this is a surprise. What I didn’t know then was that Johnson would choose ‘freedom’ over lives and the economy not once, not twice, not three times but now four times. Johnson prioritised getting a trade deal with India over protecting the UK from a new highly infectious variant. When Johnson went to stage 3 of removing the latest lockdown he knew SAGE was warning of hospital admissions on the scale of the previous wave, and he carried on regardless with little media comeback. He can only carry on ignoring scientific advice because the only institutions that could hold him to account in the eyes of most voters choose not to do so. This is why, for the first time in living memory, we have a government out of control.


[1] What has changed since Blair took us to war with Iraq? some on the left might ask. Blair went to war with parliament’s approval. Johnson takes key decisions with little or no reference to parliament. There was a huge demonstration against the war, which if this government gets its way a similar demonstration could be deemed illegal by this government.

Monday, 7 June 2021

How should we think about talk of an impending US inflationary spiral?

 

In 2013 I was presenting at a Bank of England conference. The UK recovery had stalled for three years. I cannot remember the details, but I was probably arguing that the economy desperately needed fiscal stimulus, not more austerity. A very well known academic and ex central banker started talking about inflation and the dangers of expectations becoming 'unhinged'. In my response I came quite close to losing my cool.


I wrote this post afterwards, which attempted to analyse why I had got so angry at that word ‘unhinged’. It is, after all, used a lot by central bankers and some economists. But its use makes no sense in today’s world. Here is a passage from that post:

“It is as if inflation expectations can be in one of two states: either low variance with mean reversion to the inflation target (or something close to it), or as highly volatile and could go anywhere. In this second imagined state, as expectations of inflation drive actual inflation, we could have ‘inflation bubbles’, which would become very costly for the central bank to prick. As we really do not want to go to that second state, we have to do everything we can to stay in the first state.

It is this view of the world that I find very difficult to believe - in fact I find it absurd.”

I still find it absurd. We cannot at the same time talk about how long term inflation expectations have become fairly anchored to the inflation targets as a result of central banks controlling interest rates to hit that target, and in the next breath talk about expectations becoming unhinged while the same central banker with the same or very similar inflation target is in place. That makes no sense, unless the aim is to permanently run the economy with a weak labour market as Kalecki suggested capitalism would.


All the evidence, direct or indirect, points to the story about fairly anchored long term inflation expectations due to inflation targets and independent central banks being correct. Most macroeconomists say they believe this story. That is why they prefer independent central banks (controlling inflation with inflation targets) setting interest rates instead of national governments controlling inflation by setting interest rates or fiscal policy. In that context, and when short term interest rates are at their lower bound, it seems bizarre in the extreme to start worrying about inflation expectations becoming unhinged.


The whole point about flexible inflation targets is that positive inflation shocks due to commodity prices increases, or temporary shortages (labour or goods), no longer kick off an inflationary spiral. If what was temporary becomes permanent, the central bank can raise rates to cure the problem. The clearest example of that was the oil price boom that started in 2004, which came nowhere near repeating the experience of the 1970s.


The whole point of the new state contingent policy regime that many macroeconomists now favour is that fiscal policy looks after recessions and interest rates stop inflationary spirals. If fiscal stimulus does not lead to inflationary pressure that requires interest rates to rise above their lower bound it is not a big enough stimulus.


The failure of the last decade in the US, UK and Eurozone has been the absence of that stimulus (and instead austerity), and unconventional monetary policy being insufficient to cope with severe recession. The failure is manifest in a largely unexplained shift down in the path of ‘trend’ output. As many of us explained before this happened, being conservative about policy risks a long term deterioration in output and prosperity. The upside risk was trivial in comparison because raising interest rates are very good at keeping inflation steady in the medium to long term.


This is the central argument about why it’s best to overshoot on fiscal stimulus rather than do exactly what you think you need to do to hit the level of output that stabilises inflation. It is the argument of asymmetric risks. If you are conservative or do exactly what you think you need to do, the risk that you get things wrong because the stimulus turns out to be insufficient (because your calculations were wrong or unexpected things happened) is much greater than the risk that you overshoot. If you overshoot you quickly get higher interest rates and a temporary blip in inflation. If you undershoot it will take you some time to realise what has happened, and you will have lost real resources for everyone in the economy forever.


As I noted here, the Eurozone and the UK seem to be intent on making the same mistake again, approaching a conservative view of the natural rate gradually from below. Only in the US do policymakers understand the mistakes they made before. After a failed coup against democracy and the opposition party in thrall to the coup maker that is hardly surprising.


Does the change in US monetary policy to a form of average inflation targeting change the logic of going bigger than you think you need to? In fact the opposite is true. It means that some excess inflation will be tolerated for a time, to make up for previous persistent undershooting of the target. That shouldn’t mean that long term inflation expectations rise above target, as long as the central bank is clear what it’s doing. It remains the case that in time interest rate rises will bring inflation down if necessary. As long as US monetary policy makers, who have high levels of credibility, make it clear that excess inflation will only be tolerated until a clearly defined state is achieved, they prevent long term inflation expectations rising.


When you add this to the argument of asymmetric risk, any fiscal stimulus needs to be targeting not just the higher inflation the Fed will tolerate, but higher than that. The Fed should have to raise interest rates in response, and if they didn’t need to you have a fiscal policy failure. (That failure is an all too likely outcome in the Eurozone and the UK.)


So those who say that Biden’s plans would raise inflation should be met with ‘I would hope so’. The same reply is appropriate if we replace ‘inflation’ with ‘interest rates’. Of course it is still possible that Biden’s plans (even after they are watered down?) are likely to raise inflation by far too much, requiring far too great an increase in interest rates, even allowing for the asymmetric risk outcomes argument. That I think is the view of, most notably, Summers and Blanchard.


I’m not going to add to the many different assessments of exactly what the first Biden stimulus will do. Instead I will point to why I think the Biden critics are wrong, which again goes back to the theory that macroeconomists teach today. The people who really need the stimulus cheques will spend a lot or all of it, but no one is arguing against supporting these people. The argument is that the cheques are also going to people who don't need them, and have saved a lot because of COVID. But being savers, these are people who will save most or all of the stimulus cheques (see Florin Bilbiie, Gauti Eggertsson and Giorgio Primiceri here). As a result, Summers’ assumption on the demand impact of the stimulus cheques seems too high. I have consistently argued that the end of pandemic will see an increase in pent-up consumption, but that is a very temporary affair.


The US is streets ahead in macroeconomic policy terms than both the Eurozone and the UK. Both the latter have not changed their monetary policy goal and still obsess about deficits. If the forecasts prove correct the US will come out of the COVID recession with no long term scarring, while across the Atlantic we will not. No doubt lots of what Krugman calls Very Serious People in the UK and EZ will find reasons for why that was inevitable and had nothing to do with an inadequate stimulus. The reality will be that the US learnt from past mistakes, but the same leaders who presided over the austerity disaster after the Global Financial Crisis haven’t fully understood what they did wrong.







Tuesday, 1 June 2021

Worried about another COVID wave? Here are some pictures of Johnson getting married again

 

When cases in another country start growing rapidly, you quarantine in hotels people coming from that country. If they have existing variants of concern, you do the same. You do not wait because the PM has a state visit planned hoping things will get better. Once a variant of concern enters the country, you direct all resources to isolating that variant and preventing spread. You do not persist with a failed test and trace system because it is politically embarrassing to overhaul it. You make payments to those asked to isolate automatically.


Our government made all these mistakes, and so now we are at the beginning of a new COVID wave. Yet rather than stop further relaxation of the lockdown (not doing stage 3), this government carried on regardless. It poured petrol on a fire, and crossed its fingers that it would be OK. Actually even that is too generous. It reduced lock down restrictions because the PM and the rest of the cabinet were prepared to see another wave of cases, hospitalisations and a fair number of deaths in the UK. The new variant is spreading rapidly in schools in areas where it is concentrated, so what did the government do - it told people in secondary schools they didn’t need to continue wearing masks.


All this will come as a big surprise to most people. They will not have watched the occasional interview with an expert warning that this will happen. They will certainly not have read the SAGE minutes predicting this will happen. The media seem to only do crises when they happen, rather than before they happen. Perhaps they are scared of being accused of spreading panic, but the media really should sound the warning bells when PHE, after pressure from the government, starts delaying publication of data on the spread of the Indian variant in schools. Not only does this media silence put no pressure on the government to prevent the crisis, it also creates the impression that this was an act of god that had nothing to do with the government’s actions.


We know the Indian variant spreads a lot more rapidly than anything we already have, and it has become the dominant form of COVID in the UK in mid-May. It is now the dominant form in most regions. We also have evidence that one dose of vaccine offers less protection against this variant than against other forms of COVID, but two doses does offer a similar amount of protection. Around half of the UK adult population has had two doses of vaccine, meaning the other half have one or none at all. That, according to SAGE projections available before the government went to stage 3, could cause a wave of hospitalisation similar to what happened in the New Year. [1]


The number of deaths should be less than past waves, but we are still talking about many people dying who didn’t need to die. But hospitals are only just beginning to reduce the backlog from other diseases like cancer created by previous COVID waves, and another wave of hospitalisations will reverse that process, leading to yet more deaths from non-COVID causes. Staff at hospitals are also exhausted from a year of this pandemic under a Prime Minister reluctant to lock down until the very last minute, and secretly (until Cummings) wanting to be the mayor in the Jaws film who kept the beaches open. (A long running theme from the PM: see here.)


Of course it is possible that this virus will suddenly start slowing down, and hospitalisations will be less than in the last wave. With the weather finally becoming more summer-like, more social mixing will take place outdoors, and this might limit the spread of this variant. COVID predictions can be wrong, it both directions. But for exactly that reason the Prime Minister cannot know that things will not be so bad in this new wave. He is following dates rather than the data, and yet again not following scientific advice, because he is more interested in giving people the freedom to spread the virus to others. 


A new wave is also highly likely to stop the UK economic recovery in its tracks. If the government does not lockdown when cases are rising, many people will choose to avoid pubs and restaurants. Vaccines, even with two doses, do not give you 100% protection in the middle of a growing pandemic. Plenty of those with a single dose will also avoid taking risks. The underlying myth of the anti-lockdown brigade is that without government lockdowns the economy will continue as normal. It won’t, because most people isolate themselves in a pandemic. The key difference is that voluntary lockdowns are just less effective at lowering cases than those led by the government.


There is also a fallacy in letting people make their own choices, as this government seems to want to do. You can travel to Amber list countries (if they will let you in), but you shouldn’t travel except for exceptional circumstances according to the PM. Many go anyway, partly because they mistake being allowed to for it being safe, but also because they are prepared to take the risk for themselves. It is a fallacy because if they have COVID as they return they can pass it on to others, who had no part in the choice of whether they went abroad.


The Prime Minister seems to think that as long as hospitals can (just) cope it will be OK. However a wave in cases with most people vaccinated is about the most irresponsible thing you could possibly do. It invites new variants to be created that are far better at bypassing the vaccines we have. The more cases you allow when most of the population is vaccinated the greater the chance that a variant will emerge that vaccines are far less effective against. Much of the gains of the vaccination programme could be lost, and we will have to start all over again.


Cummings’ message was that this Prime Minister is exactly the wrong person to be leading us in this pandemic, and most of the media chose to ignore his warnings. On the day the opposition leader effectively accused Johnson of causing thousands of unnecessary deaths in the second half of last year, and warned of the dangers we face today, newspapers had the Prime Minister’s ‘secret’ wedding on their front pages. Will the broadcast media start holding this government and its Prime Minister responsible for past and possible future deaths? Will voters finally realise that they are being lied to by this government all the time, and their lives and livelihoods are at risk as long as Johnson continues as Prime Minister?


[1] This risk is not unique to the UK, which is why some other countries are quarantining new arrivals from the UK. But some are not doing this, so UK travelers are likely to start waves of the Indian variant in enough other countries that its global spread is assured. Perhaps these countries will have vaccinated enough people in time, but the dangers are that others will not and we again have the perfect conditions for an even more dangerous variant to emerge.