Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 29 November 2021

Death by government policy, assisted by the Brexit press


There is an underlying truth about the 27 deaths of people trying to get to the UK across the English Channel. It is a truth you are very unlikely to hear in the acres of coverage this issue gets in the media. The truth is that this is a problem created by a government determined not to give refuge to asylum seekers. It is unspoken because of a political system where the opposition calculates it is not in their interest to mention it either, and a media that thinks that because politicians don't talk about it that makes it not worth mentioning.

People are risking their lives to cross the Channel because the government has largely cut off any other safe roots for people to claim asylum here. Many people talk about illegal migrants, but there are no legal routes. If the UK was to offer all those currently in France a safe way of getting to the UK, enabling an asylum application to be processed, the criminal gangs sending people across the Channel in unsafe boats would be out of business.

Nor, to dispel another myth widely propagated by Priti Patel and the Brexit press, are most of the people crossing the Channel economic migrants. Nearly all those crossing come from war torn areas or countries with serious persecution, and nearly all claim asylum. Well over 70% of these claims are accepted. It is not the fault of those making these claims that the Home Offices system for processing asylum seekers is so inefficient that even those that are rejected end up staying here.

This UK policy of trying to prevent asylum claims at all costs just shifts deaths from one place to another. A few years ago the headlines were about people risking their lives trying to get on lorries or trains crossing the channel. As the authorities got better at preventing that, people inevitably try crossing the Channel, and gangs will get rich providing the means to do so.

So why is this simple fact, of deaths caused by government policy, hardly ever mentioned? Here is the generally very good Ros Atkins giving us a lot of information about what he calls migrant crossings, but this most simple and basic fact is not mentioned. This is, I’m afraid, routine. To take just one example, the BBC News at Ten for 26/11/21 had an extended segment on this issue, where the lack of safe routes was not mentioned.

The UK is obliged, under international and domestic law, to accept asylum seekers who want to live in the UK. The 1951 Convention on refugees has been signed by nearly 150 countries, including European countries and the United States. Our current government is attempting to get around this Convention by exploiting the fact that the British Isles are an island, so it is very difficult for refugees to get here.

The policy works, to an extent. In 2020, there were 6 asylum applications for every 10,000 of the population. In the EU the average is 11. The UK is ranked below France and Germany and many others. In terms of actual numbers, Germany and France received nearly 4 and 3 times as many applicants as the UK respectively. One cost of that policy is a loss of what is often a skilled workforce: about 1,200 refugees are recorded on the BMA’s database. Another cost is deaths in the Channel.

So why have most BBC journalists (exceptions include Newsnight and here) internalised government policy so much that it doesn’t deserve mention? Why are people most of whom will be refugees always called migrants? One reason is that this is not a party political issue, which for the BBC means whether Labour contests it, of which more later. Another is political history starting with the election of the 1997 Labour government.

As a result of various conflicts around the world, asylum applications to the UK were already increasing substantially as Labour came to power. The Conservative opposition and the right wing press started focusing on this issue, often in alarmist terms. As a result, immigration in general became a major issue of concern. Rather than extolling the virtues of immigration, Labour chose to tighten up on rules. As a result, both major political parties and a large proportion of the media started treating immigration and migrants, including refugees’, as a problem.

Did it have to be that way? The basic problem for Labour is that many of their voters are social conservatives, so arguing the virtues of immigration and asylum would be risking losing those voters. The influence of Labour politicians is small compared to the right wing press, Unfortunately FPTP is biased in favour of social conservatives, because social liberals are concentrated in cities. The process of the press and Tory politicians talking up the ‘dangers’ of immigration led to the referendum in 2016 where the UK voted to leave the EU.

I suspect this history leads many to take it for granted that the majority of people in the UK want to restrict immigration. Broadcast journalists are often socially liberal, so they may overcompensate in their reporting. I think it is time to re-evaluate this. Since the referendum, attitudes to immigration have become more favourable (although how much varies by survey), and immigration is no longer the important issue for voters it once was. More importantly, just because one half of the population is socially conservative, that leaves a lot of people who are not.

Most important of all, nothing justifies being economical with the facts when talking about Channel Crossings. I fear what we are seeing here is an example of where media stories no longer reflect reality, but instead reflect what politicians talk or say about reality. The broadcast media owes its existence to politicians (in the case of the BBC and Channel 4 very directly), and so it’s hardly surprising that media content should reflect what politicians talk about.

Another example of this is COVID. The UK over the last few months has been almost the only country that did not demand masks in public places, and UK cases have stayed high partly as a result. By contrast France and Spain, which were in a similar position in the summer, saw cases steadily falling until quite recently. There seems to be almost no discussion of this in the broadcast media. Once Johnson started talking about cases rising again in Europe, broadcasters began talking about COVID once more.

There are three consequences of this. First social liberals, despite the impression (deliberately) given by the Tories’ woke agenda, are not well represented in the media. Second, if politicians are not talking about facts then it is quite possible that the media will not either. Third, this gives the right wing press even more influence on the public debate.

On the issue of people crossing the channel to seek asylum, the right wing press has been playing its usual demonising role. The result is that, although it’s not a top issue, when asked about it half the people polled by YouGov had little or no sympathy for the migrants (sic) travelling from France to England. But just as significant is how misinformed the public is. From the same poll nearly half of people think the UK has done more than its fair share in accommodating refugees, even though the figures above suggest the opposite. Not surprising when this misinformation is reinforced by politicians.

Why is the press and the government telling so many lies about what are still relatively small numbers. Visibility and Farage are reasons, but another is Brexit. The stand out slogan of Brexit was to take back control, but it is clear that the only country that can have any impact in controlling the number of refugees crossing the channel is France. We live in a global world where often to gain control you need to cooperate with other countries, a reality lost in the Brexit debate.

But it’s worse than that. Tory politicians keep talking about refugees having to settle in the first country they arrive in, but nowhere in international law or the refugee convention will you find that. Refugees are free to choose where they apply for asylum. The rule politicians are talking about applied in the EU. The UK has no automatic right to send these refugees back to France because of Brexit.

Monday 22 November 2021

Cancellation of rail projects in Northern England shows why fiscal rules with investment caps and debt targets just create short-termism


As Stephen Bush outlined here, and I foreshadowed here, the reason why the new high speed Northern Powerhouse Rail line has been cut, HS2 will no longer go to Leeds, and the less newsworthy cuts to Tfl infrastructure projects, is the government’s 3% cap on public investment, and its determination that government debt will be falling once the pandemic is over. [1] The excuse of long delivery periods for the cancelled projects does not wash when the government’s current scaled back plans also have the same long implementation period.

Is there some reason why public investment should be held to 3% of GDP? In my primer on fiscal rules I wrote nearly two years ago, I wrote:

“Public investment should not be part of any deficit target. To abandon good investment projects to reduce the deficit is a cure worse than the disease. The best way to stop white elephant investment projects is not some arbitrary limits on the share of investment to GDP, but an infrastructure commission with some power.”

In other words investment caps in fiscal rules should be thrown in the bin for a country like the UK. These caps make no economic sense and can actually do a lot of harm. Investment projects should be judged on an individual basis, and it makes no sense to cut or delay a good investment project because of some arbitrary aggregate cap. This isn’t a controversial point and there should be no serious economic debate about this.

So why do we have these caps? To answer that we need to go back into the history of UK fiscal rules. It has long been accepted that the primary fiscal target should be the current deficit, which is the total deficit less public investment. The reason is that a target for the total deficit encourages governments to cut investment to meet fiscal rules, because cutting investment does not have a direct impact on voters compared to cutting spending or raising taxes. Note there is no reason why the current deficit target has always to be a zero balance.

But if you have a current balance target, it is in theory possible for debt to GDP to rise because of high levels of public investment. In the past governments have got around that by having some form of debt to GDP target, either by having some upper limit or by saying debt has to be falling at some point. Another way to do this is to have a cap on the public investment to GDP ratio. This government does both.

If you have followed so far, you should have stopped at the first sentence in the last paragraph. You should have asked why does it matter if debt does rise because of a lot of public investment. Provided the individual projects within the public investment total are worth doing (either on a cost/benefit basis or some wider strategic basis like levelling up), debt should rise and there is nothing wrong with it rising. In short, borrowing to invest in good projects makes sense, as anyone running a firm will tell you. That is why it makes more sense to think about public net wealth rather than public debt.

Despite the obvious wisdom of this statement, there seems to be a political imperative for UK governments to say that the debt to GDP ratio is falling before the next election. The perception, encouraged by past politicians and the media, that government debt is somehow bad, leads Chancellors wanting to claim debt to GDP will be falling under their watch. Even political parties that received the best macroeconomic advice felt politically compelled to have some ‘falling debt’ provision in their fiscal rule. This perception goes back a long way, and is at least partly responsible for the extensive use of PFI under the Labour government. To ensure debt is falling, even when you meet your current deficit rule, you need to control public investment.

All of this is madness, stemming from Treasury orthodoxy and strengthened by Osborn’s fatal austerity programme. Some future government or opposition needs to be brave [2], and break this cycle of feeling some imperative to target government debt to GDP, and therefore control public investment to meet some arbitrary fiscal rule that makes no economic sense. Arguments about debt being a burden on future generations just do not apply to debt rising because of public investment, because public investment benefits future generations!

The main point of a fiscal rule is to stop an irresponsible government persistently paying for current spending or lower taxes by borrowing for no good reason. [3] It is to stop, for example, Donald Trump and Congress cutting taxes on the rich by increasing borrowing. You can do that by having a rolling aggregate current deficit target for 3 or (better) 5 years ahead, together with a strong fiscal council that can call out accounting tricks and other dodges. You do not need anything else in periods when interest rates are well above their lower bound. (The reason why you need a different rule when rates look like hitting their lower bound I discuss most recently here.)

A further point, made in Portes and Wren-Lewis, is that including anything involving a stock variable (like debt or net wealth) in a fiscal rule is a bad idea. The whole point about government debt is that it should act as a shock absorber for macroeconomic or fiscal shocks. Putting the stock variable in a short term rule negates that. Instead desired paths of net wealth should inform the value of the current deficit the government targets.

As the recent cuts to Northern rail plans show, this isn’t some academic (as in largely pointless) issue. It is one reason why governments appear excessively short-termist when it comes to its own investment projects. Start, stop, start again, stop again and so on. If the project does eventually get done it is long delayed and probably much costlier as a result of the on/off way it happened.

These broken promises put the government’s rhetoric on levelling up into perspective. At least as important, they make greening the economy much more difficult. Greening the economy is a mission, and missions of this kind require governments to take the lead. That requires a considerable amount of green public investment. The Chancellor, and the government more widely, has yet to indicate that he takes this mission seriously through actions rather than words. [4]

[1] As these project mainly involve spending in the 2030s, it’s not the current 3% rule that limits it, but a similar limit imposed by the Treasury on infrastructure projects given to the infrastructure commission, as Giles Wilkes points out here

[2] The Labour party in 2019 did replace debt with net government wealth, but as I argue below while this is better than debt it isn't a good idea for other reasons.

[3] What are good reasons to spend more on day to day expenditure than the revenue the government receives? A downturn in the economy is the obvious reason, but it is not the only one. A persistent but certain temporary drop in tax receipts would be another.

[4] Any Chancellor who was serious about greening the economy would increase petrol duty, for a start. Over the last few decades the costs of going by train has increased a lot more than the cost of driving by car.

Tuesday 16 November 2021

Why have Conservative Chancellors since Osborne been bad for households?


Here is a chart from the resolution foundation

It shows how growth in real disposable income has been well below the post war average since the Global Financial Crisis (GFC). However trend growth rates have been falling in many major economies for some time. What this chart doesn't show is something else has happened, which a chart of levels rather than growth rates reveals. Below I’ve added GDP per head as this is the main determinant of household income.

I have shown previously that before the GFC, real GDP per head grew at a remarkably constant trend growth rate of 2.25% a year from 1955 to before the GFC, although with perhaps a slight dip in the 2000s. It collapsed during the GFC. The key point this illustrates is that while previous recessions were followed by a bounce back that returned the economy to its underlying trend, that didn’t happen after the GFC. Instead the path of GDP and household income shifted to a lower level and then grew at a slower rate.

According to the OBR, a similar although more modest pattern will be seen after the pandemic: a permanent downward shift and thereafter permanently lower growth, the latter largely as a result of Brexit.

The two main reasons that real household income will differ from real GDP per head is changes in tax policy and the real exchange rate. In the immediate aftermath of the GFC the Labour government stimulated incomes by cutting VAT, but that was more than reversed subsequently. Incomes benefited from falling commodity prices during 2015 and an appreciation in sterling, but that was quickly reversed after the sterling collapse following the Brexit referendum. Finally the furlough scheme protected incomes during the pandemic. But these are fluctuations around an underlying trend set by GDP per head.

The big question we need to ask is why, for the first time since WWII, GDP per head didn’t return to its pre-recession trend after 2010, and why it will not completely recover from the pandemic. I think the answer lies in this chart.

UK bank rate

Why? Because before the GFC recession, interest rates were used to stabilise the economy. Since the GFC they have not been higher than 0.75%, and most of the time they have been as low as the Bank of England dare push them. Unconventional monetary policies are no substitute. As a result, when interest rates are at their lower bound you know the economy is not being stimulated enough.

Although the Labour government did use fiscal stimulus during the recession, this policy was quickly reversed by George Osborne as deficit reduction rather than macroeconomic stabilisation became the central goal of fiscal policy. In my view this was a key reason why the slump in GDP caused by the recession became permanent. Equally Rishi Sunak is now squeezing fiscal policy before the recovery is complete.

Few economists dispute that 2010 austerity was a disaster for the UK’s recovery from recession, and today organisations like the IFS or NIESR have argued that Sunak is making a similar mistake. What economists find harder to explain is why the lack of fiscal stimulus led to a permanent loss in UK incomes, rather than just a delayed recovery. The standard macromodels assume the economy always recovers after a recession, although theory has always been very weak on how that happens without policy intervention [1]

But as the 1930s showed, without help from monetary (interest rates) or fiscal policy recovery may not happen. With interest rates stuck at the lower bound, and no fiscal stimulus, there is no reason why the recovery will come from consumption. The UK savings ratio, which rose sharply during the 2009 recession, stayed high until the year of the Brexit referendum. With austerity in Europe as well there was no boost to exports. So any recovery in private sector demand had to begin with investment.

UK investment collapsed in 2009, and although its growth rate bounced back to average over 3% in the next six years, that was only enough to help offset the deflationary effect of austerity, implying the economy as a whole showed average growth at best, and did not recover the ground lost from the recession. The most robust determinant of investment is GDP growth, because growing demand forces firms to invest more to meet it. Since the second world war governments have ensured that after economic downturns it took the lead in stimulating the economy. That ended in 2010.

Why isn’t this talked about more? Why doesn’t the media talk about how recent Conservative governments have, and perhaps currently are, permanently cut our living standards? This is a question I have asked many times on this blog since it started almost 10 years ago, but following the pandemic and seeing the coverage of COP26 I think this problem isn’t peculiar to economics. With economics, pandemic management and dealing with climate change we have a common theme in the broadcast media, which is that expertise either isn’t referenced, or is devalued compared to party political discourse. [2]

[1] After the GFC, there have been some papers that have looked at why recovery may not happen, and the economy shifts to a worse equilibrium.

[2] This is something I hope to return to in a subsequent post

Monday 8 November 2021

The malversation of this government is not a surprise. The U turn tells us more.


Malversation is corrupt behaviour in a position of trust, especially in public office. That this government is corrupt in that sense should not be a surprise. In September 2019 I talked about the government then led by Johnson as rogue, and the most dangerous government we have seen in our lifetimes. This didn’t take any special insight. The man had just shut down parliament for his own convenience (and lied to the queen to do so), and this action was in turn unsurprising given his past deeds. Others need to explain why they missed all that, or thought Johnson would change, or indeed why they saw Corbyn as a greater danger than both Johnson and Brexit.

So Johnson’s attempt to use sympathy for Patterson in some Tory circles to get rid of a potential embarrassment to him is unsurprising. His standard reaction to any institution that holds him or his government accountable is to abolish that threat. What tells us more is his dramatic U turn a day later. I think it is worth asking why he did the U turn to analyse the limits to Johnson’s power. It tells us why, even in its timid state, the BBC is worth preserving, why corruption could be this government’s Achilles Heel, and why the lack of opposition cooperation will nevertheless save Johnson.

Johnson’s attempt to remove the commissioner and committee for standards is hardly the first act of malversation committed by Johnson. Priti Patel breached the Ministerial Code, but Johnson overruled the Independent Advisor on Ministerial Standards, who then had no choice but to resign. When an independent panel failed to choose former Daily Mail editor Paul Dacre for the chair of Ofcom, Johnson simply appointed another panel. There are many more examples, like the pay off from public money to the senior civil servant who resigned after Patel bullied his staff, the COVID contracts, Jennifer Arcuri and many more.

In each of these cases Johnson got his way, and got away with it. No doubt this encouraged him to think he could get away with saving Paterson, ousting the standards commissioner and remodelling the committee so it would have a Tory majority. So why was this case different from the others? Why did Johnson feel he had to backtrack in such a visible way?

It is tempting to say this issue broke through with voters because Brexit is long done (sort of) and Brexit voters and newspapers are beginning to view the government more critically. That is certainly possible, but I think there are other factors that help explain why Johnson felt he had to U turn. After all, some items in the corruption list have happened or emerged since the Brexit deal was agreed, and in addition Brexit is hardly over with the UK threatening to renege on that deal.

For a more structural answer I think we have to start with the BBC. In the News at 10 that I watched, the narrow vote in parliament was the lead item. Although the headline was ‘MPs vote’ to overturn Paterson’s suspension, it was quickly obvious from the subsequent narrative that it was Tory MPs and that there was a three line whip imposed by Johnson. What made it more newsworthy than previous examples of corruption? I suspect it was because you had the drama of a vote in parliament, with many Tory MPs rebelling combined with a simple story to tell. In addition Johnson was unlucky there was not a more important news item that day.

Why was this so important? Because many people watch the BBC’s main news programmes, including those that also read the Tory press. That had two outcomes. First, MPs would have heard directly from supporters (and others) who were unhappy with this episode. Secondly, editors of the right wing press would know that many of their readers would be angered by the story and expect their newspaper to reflect that.

This had no effect on the Express and Telegraph: the latter chose to go with Patterson’s own account of his ‘2 years of hell’ story. The Sun didn’t put it on the front page, but their editorial did describe it as a mistake by Johnson. The Mail put it on the front page. They too had a headline that talked about MPs rather than Tory MPs (‘MPs sink back into sleaze’), but for those that read further the facts became clear quickly.

Johnson fears two things: his own MPs or the electorate turning against him. The two are closely related. Johnson became Conservative party leader not because most MPs like or admire him but because so many voters like him, so he helps win elections. If that popularity goes, so does he. So the combination of many Tory MPs being angry anyway and reporting widespread public disquiet, and the Mail coming out against his position, was enough to generate a very embarrassing U turn.

What are the lessons of this episode for those who oppose this government? The first is that the BBC, even in its current timid state, is still important. It is why the government continues to attack it. The second is that this government’s corruption may well be its Achilles Heel. It will not be nearly enough on its own to lead to Johnson’s defeat, but it will be an important weapon.

But if that is good news for those, like me, who want to see this government fall at the next general election, the bad news is Labour’s continuing resistance to any kind of cooperation with other opposition parties. After a brief discussion, the opposition parties decided not to cooperate in the forthcoming byelection for Paterson’s old seat. I think the idea of putting forward a non-party political anti-corruption candidate was not a viable plan, but doing nothing will mean the anti-climax of an easy Conservative win. Worse still, in true blue seats Conservative voters that want to protest about government corruption are likely to vote LibDem. It is possible that Labour could be embarrassed by coming third in a seat where they were second last time, and that rather than corruption will be the headline.

As I argued here, it is virtually impossible for Labour to win enough seats to form a government at the next election. Not only is the opposition split between three parties in England, but Labour’s socially liberal core electorate are also concentrated in cities, both of which work against Labour under FPTP. As a result, Labour has to try not to antagonise socially conservative voters, but that gets it into trouble with social liberals who may defect to the Greens or Liberal Democrats. If everyone voted tactically to get the Tories out this wouldn’t be a problem, but in reality too many voters think voting expresses their identity, even under FPTP.

There are various forms that cooperation among opposition parties could take, but these all require a will to do something from the Labour leadership. So far the Labour leadership shows no such will. There are some, on the left and right of Labour, who see Starmer as simply a placeholder until one of their own can take over after the next election. But accepting that a government whose inactions have left around 100,000 to die from COVID, who seem intent on plundering the NHS and other parts of the state, and whose corruption steadily weakens UK democracy, should have another five years in office seems far too high a price to pay.

Tuesday 2 November 2021

The danger of imprecise exceptions from fiscal rules


If you think fiscal rules are a waste of time, tell me how you would conduct fiscal policy. Your answer is an implicit fiscal rule. Fiscal rules are a useful way of talking about good and bad fiscal policy in this very imperfect world.  

The Chancellor’s new fiscal rule contains a statement that the rule will no longer apply after “significant negative shocks”. In a twitter thread I called this ‘dangerously imprecise’, and in this short post I will explain why it is imprecise and why the Autumn Statement is an example of why it is dangerous.

I fear too many non-economists think this kind of exception from a fiscal rules is because a large negative shock will blow any fiscal rule out of the water as a result of the automatic stabilisers operating in a severe recession [1]. A far more important reason is that in a significant recession monetary policy will quickly become unreliable and ineffective because interest rates will hit the lower bound.

Macroeconomists and policymakers generally prefer using interest rate changes set by an independent central bank (usually following some form of inflation target) as the primary method of macroeconomic stabilisation. This is why hitting the lower bound for interest rates is so significant.

Quantitative Easing, or other forms of unconventional monetary policy, are not a substitute for interest rate changes for a number of unavoidable reasons, including the lack of an extensive evidence base for evaluating them. Fiscal policy is far more effective and reliable than unconventional monetary policy as a method of stimulating the economy in a recession.

It follows automatically that once interest rates look like they may hit their lower bound, deficit based fiscal rules should be replaced by whatever fiscal stimulus is required to quickly end the recession, whatever this means for government debt and deficits. Moreover that policy of stimulus rather than hitting some deficit target should remain as long as interest rates remain at their lower bound.

Saying that a deficit based fiscal rule should be suspended following a significant negative shock is entirely passive. Unlike normal fiscal rules, it doesn’t tell policy makers what they should do. By contrast, ‘fiscal stimulus once interest rates are likely to hit their lower bound’ is an active instruction to policy makers. The former is dangerous because it does not specify what the policy maker should do after a large negative shock, or how long the exception should last.

We can see that danger being realised in the recent Autumn Statement. Interest rates are still at their lower bound, and economic activity is not forecast to reach its previous trend. [2] So a good fiscal rule would prescribe some form of fiscal stimulus. Instead Sunak is giving us a fiscal contraction over the next few years. Bad fiscal rules (including those that are dangerously imprecise) lead to bad outcomes.

The worst thing a Chancellor can do is to facilitate, or be passive to, permanent losses in average incomes. Chancellors since WWII have strived to avoid such outcomes, until a decade ago. A permanent loss happened to a large extent after the Global Financial Crisis because of austerity, it happened through Brexit, and it looks like happening in a more minor but still significant way after the pandemic. Bad fiscal rules can enable such disasters, and a good fiscal rule can help stop it happening.

[1] Here I’m using ‘recession’ to mean a significant downturn, rather than two quarters of negative growth.

[2] The OBR says that the pandemic has permanently reduced the level of sustainable activity in the UK. For the reasons I gave here, I don’t believe this is inevitable. Creating a strong economy would over a few years make up for what had been lost in the pandemic. We see no such fatalism in the US, and I don’t see why the UK should be different.