Winner of the New Statesman SPERI Prize in Political Economy 2016


Monday, 17 May 2021

Is the spread of the Indian variant in the UK an inevitable result of living with COVID?

 

Acting fast


The Indian variant (B.1.671.2) of COVID-19 is now fairly well entrenched in parts of the UK and is increasing rapidly. Cases in the North West are rising, sharply among the young. For detailed analysis of what we know about this variant and how quickly it is spreading (once we exclude carriers who came from India) it is best to follow Christina Pagel (@chrischirp) e.g. here. She and other experts think that it is of sufficient concern that we should have stopped today's relaxation of the lockdown.


If there is one thing we should have learnt in dealing with COVID (and some of those dealing with pandemics already knew, like Mike Ryan here) is to act fast. If you wait until you know you are right you will lose, because the virus would have already won. Moving fast is an example of the precautionary principle: you plan for the worst outcome even if you are not sure you need to act at all.


At the moment we have rather poor information on how effective our vaccines will be in stopping this new variant. But if we wait for clear evidence on that question, it will be too late because by then the variant will have spread too much, such that only a lockdown can stop the spread. This is because the Indian variant is more infectious than the other variants of concern.


Living with COVID


Some of those who read this post about how well the elimination strategy had done compared to the approach in most of the West before vaccines rollout asked how does it apply to a world that is vaccinated? In a post in February I talked about two paths to dealing with COVID once vaccines have been rolled out: elimination and living with COVID. While elimination is clearly superior when we have no vaccine, the issue is more balanced after everyone is vaccinated.


I didn’t get the arguments quite right in the February post, so let me give an amended version. The big negative of the elimination strategy is that it makes it much harder for international travel from or to other countries that follow a living with COVID strategy. That is not a problem if enough other countries follow an elimination strategy, but no Western countries seem likely to do that now that vaccines are here. Turning to the living with COVID strategy that we in the UK are now following, the big negative is the country becomes susceptible to COVID variants.


A question I didn’t address in February, but should have, is whether a compromise between the two strategies would be both possible and desirable. The compromise abandons quarantine for all travellers, but is much stricter in when it does impose quarantine. It does not wait for weeks until it is sure a new variant is a serious concern before putting visitors in hotel quarantine (in the UK the red list). If the UK had followed this compromise solution involving a precautionary approach to variants, the Indian variant would be much less of a threat than it is now. The extent of UK incidence of the Indian variant isn't a consequence of living with COVID, its a consequence of ignoring the precautionary principle in pandemics.


Not controlling our borders


The Indian variant was first identified in October. Cases in India started rising rapidly in March, and the Indian authorities expressed concern about the variant on 24th March. Yet it wasn’t until 23rd April that India was put on the red list.


This delay was particularly odd given that both Pakistan and Bangladesh were put on the red list on 9th April, despite having less COVID cases per head on that date. The criteria for being put on the red list is long and vague, so it seems highly likely that there were political elements to the delay in putting India on that list. Is it really a coincidence that India was put on the red list within hours after Johnson cancelled his trip? The reason the Prime Minister gave for the delay in putting India on the red list is that the Indian variant had not yet been identified as a variant of concern. However there is plenty of the South African variant in India as well as Bangladesh, and Pakistan has not identified that variant. 


It is also unclear why there were days between that announcement (April 19th) and the implementation of that decision (April 23rd). The quarantine system needs to have inbuilt spare capacity to handle passengers who started travelling before the country was put on the red list. At the very least the travellers between those two dates could have been tested at the airport, before they used public transport. We know that the red list decision without implementation led to a surge in travel from India.


Why do you need to stop these variants coming into the country sooner than later? Because when numbers are small, the test, trace and isolate (TTI) infrastructure will have more time to deal with them. That assumes, of course, that you have a TTI system that is efficient. That means a system based around those that are trained to do this job (in contrast to this government’s system based on private sector firms with no local knowledge), and incentives to isolate properly (unlike the current UK system).


There are three choices for a country where everyone is vaccinated. If a country does not choose elimination for understandable reasons, then they can quarantine visitors in hotels when they are sure that is necessary (as the UK is doing) or they can quarantine visitors in hotels when that might be necessary. The first is making sure you are right before imposing restrictions, and the second is acting fast. If you do the first you will at some point get it wrong and the virus will beat you.


The UK government is waiting to see


At his press conference last Friday the Prime Minister declined to stop the relaxation of lockdown due today. [1] It was absolutely clear at that conference that this was a government waiting to make sure it was doing the right thing, rather than a government taking precautionary action. [2] Indeed the Prime Minister talked about only acting if it looked like the NHS was going to be overwhelmed. Such a high bar for action together with a government that waits until it is sure it needs to act is a recipe for disaster during a pandemic, as it was throughout 2020.


SAGE in their latest analysis says “If this variant were to have a 40-50% transmission advantage nationally compared to B.1.1.7, sensitivity analyses in the modelling of the roadmap in England (SAGE 88) indicate that it is likely that progressing with step 3 alone (with no other local, regional, or national changes to measures) would lead to a substantial resurgence of hospitalisations (similar to, or larger than, previous peaks).” It describes that extra transmissibility as a “realistic possibility”. I would be very surprised if SAGE would have done nothing but wait and see if they had been in charge. Once again the UK is not following the science.


Perhaps the Indian variant will turn out to be quite weak against vaccination, and as more people are vaccinated it will die out. I really hope that happens. But the Indian variant will not be the last overseas variant to enter the UK. In putting countries on the red list, if we continue to wait until we are sure they should go on that list we will be open to these variants spreading in the UK. If this variant doesn’t get us, another might.


In addition, a further danger of ‘living with COVID’ is that you produce your own variant which is capable of bypassing the vaccines defences. COVID cases in the UK are still high: according to the testing they have settled down to just over 2,000 a day, although the ONS survey suggests a modest decline. For that reason, it is not clear whether R is above or below 1. It would be much wiser to not relax the lockdown further and try and bring that number down, because the lower the number of cases the lower the chance of producing a home grown variant.


In short, if a country chooses to ‘live with COVID’ because it has vaccinated most people, it has to adopt a precautionary approach. This means putting countries on the red list if there is a small chance of a new dangerous variant, ensuring you have a TTI system that works, getting case numbers as low as you can and keeping them there. Only by doing that can you avoid constant scares about new overseas or home grown variants. If you wait until you know you are right to act you will lose.


The unfortunate truth is that we have a government incapable of applying a precautionary approach. If you have any doubt about this, please read “Failures of State” by two Sunday Times journalists. Johnson has caused tens of thousands of unnecessary deaths by failing to act on scientific advice not once, not twice but three times. It is unfortunately true that most of the UK deaths in this pandemic could have been avoided. [3]


After my last post on what Labour needs to do, I got some comments along the lines that Johnson’s lying is priced in, and exposing his and his government’s lies will achieve little. This government’s inactions have directly killed tens of thousands of its citizens. The biggest lie of all is that the government did everything they could and followed the science in this pandemic. I refuse to believe that if voters understood the truth of what this government actually did during this pandemic, and is continuing to do, it would still look set to win the next election. This government’s popularity relies on suppressing the truth.



[1] I thought he might continue to relax the lockdown in most places but have a stricter regime in areas where the Indian variant is concentrated. The lessons from the emergence of the British variant last year show that this doesn’t work. First, many people just don’t know what rules apply to them. Second, people move around whatever the rules say. It is like getting in the fire brigade to fight a fire in one building and covering the neighbouring buildings with petrol. But he didn’t even do that. Instead he just suggested people acted cautiously in travelling to the Bolton area. He is advising caution for individuals but ignoring caution in government.


[2] The same applies to removing masks in schools.


[3] Johnson continues to lie to the public, talking about it’s ‘very tough’ quarantine regime for travellers not from red list countries. Calling a scheme where a virus is easily transmitted to other members of a household very tough is a sick joke. Why does he think the Indian variant has so easily spread to UK residents if his quarantine regime is very tough?!


Monday, 10 May 2021

Some lessons in how to combat the Tory propaganda machine

 

The initial results of voting last Thursday are very easily explained. First, voters had a terrible year in 2020 and government help in getting the vaccine out means 2021 is looking much better, so naturally voters will reward the government. That means the Tories in England, Labour in Wales and the SNP in Scotland (modified by tactical voting against a second independence referendum). It’s like Brown’s poll bounce as he saved the banks, and therefore large parts of the economy, from the effects of the Global Financial Crisis.


Second, on top of that, Conservatives have recreated their Brexit success, because to many who voted Brexit, the vaccine rollout doesn’t just reflect well on the current UK government, it validates their choice to vote Leave and the party that got Brexit done. While many Brexit voters were beginning to doubt the wisdom of their choice in the second half of 2020, those doubts have disappeared. As a result to a first approximation in England the polls last Thursday were a repeat of the 2019 election, with the Conservative party becoming the Brexit party.

In hindsight, do you think Britain was right or wrong to vote to leave the European Union?


As the results further south came in, the picture was reversed. The Tories lost Oxfordshire and Cambridgeshire, lost the Cotswold's Chipping Norton to Labour, lost Tumbridge Wells and elsewhere, and Labour lost many contests in Bristol to the Greens. 


The odd thing about these elections was Starmer’s reaction to them. As he hasn’t given left wing social conservatives something left wing to vote for, how did he expect anything different from 2019 in red wall seats? Sacking Rayner is, to quote Stephen Bush, just “mystifyingly stupid, self-discrediting and self-destructive”. Johnson is a populist and to his target voters he promises whatever they want to hear. Starmer needs to start demonstrating that those promises are empty and he can do better, and not keep making the story about Labour’s internal wars. .


In terms of political deception, this idea that the UK’s vaccine rollout vindicates Brexit is the best kind of myth because it’s based on a half-truth. It is true that the UK’s vaccine rollout has been faster than the EU’s, and the EU had a joint vaccine procurement programme. That is easily enough for Boris Johnson, and it is enough for pretty well all Brexit voters. In terms of public perception it just doesn’t matter that what is stated as a truth is at best a conjecture (if the UK had stayed in the EU would it have joined the joint programme?). What makes this myth particularly powerful is that many Brexit voters want to believe they made the right choice, so they want to believe it is true.


Johnson is not the first Tory Prime Minister to create a powerful myth out of a half-truth. Perhaps the most successful in recent times was the Coalition government’s claim that austerity was necessary because of the previous Labour government’s profligacy. This was a myth that could be easily shown to be false by looking at just one chart, but that was too much for the media to do. They just recalled Labour being criticised over insufficient consolidation, which was a half-truth because any lack of consolidation was tiny compared to the impact of the GFC. Labour’s failure to challenge the myth ensured it became ‘common knowledge’, and it ended up forming the basis of Cameron’s 2015 election win.


That episode points to the first lesson in how to begin combatting the Tory propaganda machine: counter myths quickly and hard. Combating Tory spin and propaganda does not mean the odd fact check or statement by a minor minister - it means a senior opposition minister of better still the Labour leader doing the rounds of the broadcast media studios, because that is Labour’s only hope of communicating with most people. In addition only by doing this do you have any chance of preventing the political journalists from the broadcast media accepting the myth as truth, and this matters because the broadcast media is the only route to countering the Tory propaganda machine.


The Tory propaganda machine is formidable because it has most of the daily press on its side. The broadcast media tends to follow the press. It is one reason why people seem to have forgiven Johnson allowing the second wave to grow but credited him for the vaccine rollout. The only thing Labour has going for it is rules about balance that apply to the broadcast media. It will be hard for the broadcast media to ignore senior opposition ministers or their leader. It will also be hard for this media to accept as true something the opposition party fiercely contests.


This leads to a second lesson for Labour. Commission research on the airtime each party gets on each broadcast platform, and use it if (as I suspect) it shows Tory politicians appearing many times more often than Labour. (Comparable figures from the past are available.) Use that as a lever to get senior Labour politicians appearing on the broadcast media to counter important Tory misinformation.


The third lesson is to choose which myths Labour tries to counter wisely. As I have already noted, attacking the idea that Brexit allowed the UK’s superior vaccine rollout is hard to contest, partly because so many Brexit voters want to believe it but mainly because it might have been true. In contrast, the idea that the government’s policy of Freeports is only possible because of Brexit is easy to refute because some EU countries have freeports and parts of the UK used to have them while we were in the EU. Contest those lies that are important and easy to refute.


The advantage of this strategy is that it will begin to create the idea that Johnson is not trustworthy. Starmer’s approach to PMQs does not do that for most voters. Yes Johnson avoids his questions, but all most people see are the soundbites that may appear on TV. In that context Johnson’s avoidance of the question is not obvious but he gets to rattle off various uncontested and often false claims. When one of these claims is false Labour has to contest them, otherwise many voters who see the claim unchallenged on TV and in the papers will unsurprisingly assume it is true.


That is about correcting misinformation. But Labour also needs to counteract Tory spin. This government is very good at spin, partly because they are happy to depart from facts, and if you take this spin at face value you would believe it is championing a Green revolution (it is not), leveling up economic activity northwards (it is not) and spending large amounts of public money on public services (it is not). So the fourth lesson for Labour is to do far more to counteract this spin. If Labour is to have any chance of winning back any of the Brexit seats they lost in 2019 they have not just to make a strong economic offer before the election but also convince the voters that the government is not doing the same. The former means nothing without the latter.


For those rightly saying Labour needs to say what it stands for, challenging Tory spin will go a long way to fixing that, because a standard line of most journalists confronted with an opposition pointing out obvious government lies or spin is ‘what would you do then?’ Even if it isn’t asked Labour can say where their policy differs from the government. (What you do not do is this.)


Highlighting things that are not said is as important as attacking misinformation. For example Labour really should be making more noise about NHS privatisation. Rather than a general attack I would focus on one aspect almost exclusively: the takeover of 58 GP practices by Operose Health, a UK subsidiary of the US company Centene, and the likelihood that others will follow. This is a result of the 2012 reforms, and Labour can point out that a CEO of Operose has become a No10 advisor. Labour can hammer home that a GP services run for profit is not compatible with the ethos of the NHS. The NHS may remain free at the point of use, but GPs service run for profit do not guarantee quality of service, and almost certainly will reduce quality. [1]


Labour has had some success attacking sleaze and corruption, and there is enough material there to take us to the next election. This is important to do, not only because it will influence voters at some point, but also because corruption is so close to what this government is. I think trying to equate it to sleaze under Major (‘same old’) is a mistake, because the scale of it today is well beyond that. Instead two points need to be hammered home. First, how its scale is unprecedented. Second, why it matters to ordinary people, such as here.


I’m sure there are other areas like this where Labour just are not making enough noise. Above it all is the economy, but it will be hard to make much headway in the near future when the media will be banging on about record growth (which is just the consequence of the record recession caused by the pandemic). Over the next year Labour need to relentlessly point that out, by making comparisons to 2019. What it does after the recovery is over can wait for another post.


Why have I not talked about policies? Good policies are important, but there is no point having good policies if you are not getting them across. A populist government aims to dominate the media, which is why Labour must get better at being a counterpoint to the government's propaganda machine. A populist government will only be defeated when enough voters, with the help of the opposition, realise there is little substance behind the spin and lies.


Even if Labour did all this, I still think it has almost no chance of winning the next election without cooperation with the LibDems and Greens over which party stands in marginals. The reason is structural and simple. Labour do need to appeal to left wing social conservative voters, and that is bound to alienate many social liberals who feel Labour is failing to champion enough social liberal causes. (This is not helped by making those on the left in Labour feel unwelcome [2]). The Green party did well on Thursday, and will continue to pick up votes as a result of Labour’s strategy from those unwilling to vote tactically. Without cooperation with other opposition parties Labour’s strategy is highly likely to be self-defeating. This seems like a basic problem with Labour’s strategy that Labour have failed to address.[3]



[1] To any Tory apologist that talks about private sector efficiency gains, just compare the vaccine rollout under the NHS to the government’s test and trace infrastructure that had substantial private sector involvement, cost billions and kept failing its targets.


[2] Those on Labour’s right who think they have to replay the 1980s to win again should look at the US, which is a far more relevant parallel when fighting a populist.


[3] I know Labour’s constitution prevents this kind of cooperation, so change the constitution! I suspect the main hurdle to this is not Labour members but the Labour leadership.




Tuesday, 4 May 2021

How most of the West got the pandemic so badly wrong?


It takes a lot to shock me nowadays, but the failure of most OECD countries over this pandemic I do find shocking. Not in the case of the UK under Johnson, the US under Trump, Brazil under Bolsonaro or India under Modi, as the reasons for their failures are all too obvious. After all Johnson had the idea before the pandemic that the UK should be the one country to opt out of restricting the economy to save lives, and that this would give the UK some big global economic advantage. Only when the implied NHS chaos was explained to him did he change his mind. What I find shocking is the failure of mainland Europe almost without exception


A few countries did completely understand what they needed to do, which was to follow an elimination strategy. If you are still not convinced of the wisdom of this strategy, a recent article in the Lancet should help. It compares the small number of OECD countries (Australia, New Zealand, South Korea, Iceland and Japan) that did undertake an elimination strategy (sometimes called zero-COVID) with most of the other OECD countries that did not. Here is the first chart from that study:



Quite simply the elimination strategy is infinitely better at avoiding COVID deaths. It is infinitely better at avoiding cases of long-COVID. It is also better for the economy as the chart below from that study shows (the red line represents the elimination countries):



Elimination countries saw a smaller fall in GDP, and a faster recovery at the end of 2020 and so far in 2021. The big lie perpetuated in the majority of OECD countries that failed to go for elimination is that there was a health/economy trade-off. As this table shows that is not true, and as I argued quite soon after the pandemic hit we knew it was not true. The reason it is not true is very simple: if you fail to lockdown hard and early to eliminate the virus, it will carry on growing exponentially either forcing a much longer and stricter lockdown later on and/or people will just stay at home anyway which will have a huge impact on the economy. This is shown clearly in the final chart from the Lancet article:



Were the countries that adopted elimination worse off in any way? As far as I can see in only one way: freedom of overseas travel. Elimination requires hotel quarantine or just travel bans to stop COVID cases coming in from abroad. Of course if more countries had adopted an elimination strategy, the less severe those travel restrictions would be because travel would often be possible between elimination countries.


Could the extent of international travel explain why most OECD countries rejected elimination? There is one major reason why this may be important. The bigger your tourism industry is, the bigger is your loss if you essentially end it. However it is difficult to argue that this provides a clear difference between the few countries that have adopted an elimination strategy and those who have not. France certainly has a large number of inward international travellers per head of population compared to most countries, but not compared to Iceland. Germany has a similar level of inward tourism per head as Australia and South Korea, and less than New Zealand. So while pressure from the tourist industry and the airline industry matters, it does not seem critical in preventing countries adopting an elimination strategy.


Having heard countless arguments about why the elimination countries can adopt elimination and other countries cannot, I’ve concluded that looking for any kind of demographic explanation is futile. It is, I believe, much more productive to look at the quality of expert advice received and the quality of governments involved. With just one exception, all the countries that have adopted anything like an elimination strategy (including outside the OECD like China and Vietnam) are in or are close to what we call the far East, and have had recent experience with severe pandemics. Australia and New Zealand have undoubtedly been influenced by that experience. In contrast the West has not, and is more used to pandemics involving much less fatal flu viruses.


The exception is Iceland, but it is a small island run by a pretty rational government with excellent testing facilities. New Zealand also had good advice and a rational government. COVID policy in Australia is state specific, and it was states run by Labour that led the way in pursuing an elimination strategy and closing their state borders.


However it is not the failure to adopt an elimination strategy that I find shocking. After all there was no clear consensus among epidemiologists in Europe in favour of elimination before the pandemic started, and there still isn’t even today despite the evidence above. What is true is that this evidence requires before the next pandemic that some consensus is reached among epidemiologists in the West about when (in terms of how infectious and deadly a virus is) eradication becomes a sensible strategy.


What I find shocking is the failure of governments to learn a much simpler and less controversial point, which is that when cases start increasing you lockdown hard and quickly. In other words the second and now third waves we are seeing in Europe is a terrible indictment of the quality of the politicians leading these countries. No one disputes that if countries had locked down earlier and with full severity during the first wave less people would have died and the lockdown would have lasted for less time. (Eradication is about going the extra mile after any lockdown has brought cases right down.)


Yet despite this obvious truth, European politicians have failed to implement this lesson. Failed not once, but twice. In the cases I know about they rejected advice from experts, and tried to get away with weaker restrictions that failed to stem the rise in cases. As I have previously speculated during the second wave, one way to explain it is that businesses hit by lockdowns have a loud voice heard by governments, while the elderly and medics have a much weaker voice. But that explanation is hardly an excuse, particularly as governments are simply responding to myopia or lack of understanding by those pushing against lockdown.


One answer to this political failure is to get better politicians, but that is hard to do. Another which should be much more achievable is to give a greater and much more public voice to experts, so that politicians find it much harder to deviate from their advice. But we also need, and this is a sentence I never expected to write, to give loss of life a greater weight in political calculations. The average COVID death leads to between 10 and 20 years of life lost (e.g. here), but those lost years seem to carry far too little weight among the politicians of the West. That is shocking. 





Tuesday, 27 April 2021

Eurozone fiscal rules should be based on national macroeconomic stabilisation, not national debt stabilisation

 

In memory of Andrew Hughes Hallett


Eurozone fiscal rules have been suspended during the COVID crisis, thankfully. But I have argued on this blog since it began in 2012 (e.g. here) that the Eurozone fiscal rules, or any modified version thereof, were not fit for purpose. Now is the time to rethink the whole basis on which those rules were introduced.


Olivier Blanchard, Álvaro Leandro, and Jeromin Zettelmeyer also think the existing rules should be scrapped, but their alternative still has concerns about debt as central. It is the obsession with debt that has helped cause so many problems. We need a much more radical rethink, by going back to basic macroeconomics.


Before the Euro was formed, I argued in academic papers with others (e.g. here) that the Euro could only work well if fiscal policy was allowed to perform a macroeconomic (not debt) stabilisation role. That work continued after it was ignored when the Eurozone was set up (e.g. here). The idea reflects basic macro. During periods where the economy is growing rapidly relative to the EU average individual countries need to contract fiscal policy, and in relative downturns individual countries need fiscal stimulus. This follows once it is recognised that a monetary union takes away effective national monetary policy.


When the Eurozone was set up all this was ignored, and the Eurozone fiscal rules focused on debt stabilisation rather than macroeconomic stabilisation. The result was a disaster. From the beginning of the Eurozone until the global financial crisis (GFC), the smaller European countries experienced a boom because their interest rates were now tied to the Eurozone average, and the resultant fiscal surpluses were used as an excuse for fiscal excess. In contrast a recession in Germany was not met with fiscal expansion there, and produced below average inflation that gradually undercut other Eurozone countries.


These chickens came home to roost during the Eurozone crisis. Germany decided, regardless of the fact that most countries were only just recovering from the GFC, that the Eurozone crisis was because of generalised fiscal excess. A wave of fiscal contraction (with the help of an increase in ECB interest rates) produced a second recession. Because Germany had undercut everyone in the decade before, the only country not to suffer much during this recession was Germany, and the Periphery countries were subject to excessive austerity. For those unfamiliar with some of the horror stories over this period, you only need to read the chapter on the Eurozone in my book.


I can confidently say that if only the Eurozone had followed fiscal rules of the kind we suggested before the Eurozone’s creation, none of this (besides the GFC itself of course) would have happened to the extent it did. (For some analysis that backs this up, see the study I discuss here.) To see why this is, we have to return to macro basics.


Imagine a country that keeps interest rates fixed, but successfully uses fiscal policy to control inflation at target. That is close to how some countries tried to run their economies under the fixed exchange rates of Bretton Woods. What keeps government debt stable in these countries if the macro stabilisation policy is successful? The answer is booms and recessions. With booms and recessions following each other in what we call the business cycle, every period of fiscal stimulus (during a downturn) is followed by a period of fiscal contraction (during a boom). To a first approximation it nets out over time, so government debt is stable and sustainable. .


The Eurozone reproduces that situation with one important difference. When ECB interest rates are not stuck at their lower bound, the ECB controls the average rate of inflation. What national fiscal policy needs to do is to look at domestic inflation relative to the average Eurozone rate. [1] If a country’s inflation is above average, fiscal contraction is required and vice versa.


How would this have worked out before the GFC?


Inflation (HICP) differences to Euro area average: source Eurostat


2000

2001

2002

2003

2004

2005

2006

2007

Germany

-0.7

-0.4

-1

-1

-0.3

-0.3

-0.4

0.2

Spain

1.4

0.5

1.3

1

1

1.2

1.4

0.7

Ireland

3.2

1.7

2.4

1.9

0.2

0

0.5

0.8

Portugal

0.7

2.1

1.4

1.1

0.4

-0.1

0.8

0.3

Greece

0.8

1.3

1.6

1.3

0.9

1.3

1.1

0.9


If Eurozone countries had followed this ‘basic macro’ fiscal rule, we would have seen fiscal contraction in the periphery countries, and fiscal expansion in Germany. As a result the fiscal position of the periphery countries would have been much healthier, and Germany would not have undercut everyone else. The actual fiscal rule that focused on excess deficits failed, because the periphery countries fiscal position looked healthy because output was growing too fast.


Focusing on relative inflation only works when the ECB is effectively controlling average inflation, as it was during the period above. Once ECB interest rates hit the lower bound, this is no longer the case. As a result, Eurozone fiscal rules need to switch from looking at relative to absolute inflation when interest rates are at or close to this lower bound. How would that have worked out during the period since 2013 when Eurozone inflation has been stuck below target?


Inflation (HICP) rates: source Eurostat


2013

2014

2015

2016

2017

2018

2019

2020

Germany

0.5

0.4

0.2

0.0

1.1

0.7

0.7

0.3

Spain

1.5

-0.2

-0.6

-0.3

2.0

1.7

0.8

-0.3

Ireland

0.5

0.3

0.0

-0.2

0.3

0.7

0.9

-0.5

Portugal

0.4

-0.2

0.5

0.6

1.6

1.2

0.3

-0.1

Greece

-0.9

-1.4

-1.1

0.0

1.1

0.8

0.5

-1.3



As we can see both German and Periphery inflation was below 2% throughout this period, so fiscal policy should have been more expansionary to get inflation back on track. What stopped this? The existing not fit for purpose Eurozone rules. You can also see excessive fiscal contraction in Greece over this period.


There is plenty of detail around the edges of these ‘basic macro’ fiscal rules for the Eurozone. For example, what is the best inflation index to use? Answer, one that excludes fast moving prices like commodities. Do you need to do anything about countries that fail to follow their rule by persistent excess (or deficient) inflation? Answer, yes. This is where external monitoring needs to come in.


Even in cases where countries persistently fail to get to average Eurozone inflation, the response by the Commission should not be to talk about excess debt but to talk about competitiveness misalignments. Judgement is required because sometimes changes in real exchange rates are required in monetary unions. That apart, any external intervention would be clearly symmetrical, with attempts to undercut other Eurozone countries treated as equally serious to emerging overvaluation. If you focus just on debt, the former is ignored. [1]


In the simulation studies I have been involved with, fiscal rules of this kind tend to reduce by around half the costs of asymmetric shocks to the Eurozone. The current rules seem to amplify the welfare cost of shocks. In reality macro stabilisation among Eurozone countries, trying to eliminate periods of relative boom and recession, may have a critical influence on the fortunes of some of the more extreme right wing national political parties.


Basing European fiscal rules around debt have proved a complete failure. I remember arguing with people from Spain before the GFC saying you need for fiscal contraction, and the incredulous reactions I got. But we are running surpluses, they replied, your suggestion makes no sense. Unfortunately after the GFC it made perfect sense. Having any Eurozone fiscal rules based on deficits and debt has failed, and is bound to fail.


Of course nothing like this will happen. The mindset of policymakers in much of Europe is dominated by the failed ideas that depart from basic macro, and that were hard-copied with the formation of the Euro. But it is important that at least some people outline what fiscal rules derived from basic macroeconomics would actually look like, and why they are much superior to those we have today.


[1] Why do I focus on inflation, rather than output gaps? Simply because output gap measurement is very poor.

[2] There is one possible scenario when the commission needs to worry about debt, and that is when all countries simultaneously fail to enact fiscal contraction in a boom, and the inflationary impact of that is counteracted by higher interest rates. That is the equivalent to why you need deficit based fiscal rules in a single country with a floating exchange rate outwith the zero lower bound. But that can be easily dealt with by the commission requiring an equal fiscal contraction across all Eurozone countries. Problems occur when government debt is used to call for fiscal contraction in some countries and not others. Once again the problem is symmetrical: if countries are simultaneously failing to enact sufficient fiscal stimulus in a recession, leading ECB interest rates close to the zero bound, or worse still not undertaking fiscal stimulus at the lower bound, all countries can be told by the commission to enact more fiscal stimulus.











Tuesday, 20 April 2021

Why neoliberalism’s evolution into a populist plutocracy was inevitable

If anyone gets these blogs via an email alert, unfortunately the platform I use is ending these in July. Sorry about this (outside my control), so please find another way to regularly receive this blog.


In last week’s post I referenced an earlier post I had written in 2017 called “Was Neoliberal Overreach Inevitable? The question it posed was whether Trump and Brexit were an inevitable consequence of Thatcher and Reagan, or whether there was an alternative ‘fork in the road’ which if taken could have saved neoliberalism from that fate. That post was written in the aftershock of Trump’s election and the Brexit referendum. Four years on I think it is worth revisiting that question. (This post is a slightly more focused version of something I wrote six months ago.)


The best way to look at this is to ask what normally stops plutocracies happening? The first obvious but important point is that the threat of plutocracy depends on the number of the very rich, and also perhaps the extent to which they gained their wealth by actions that could easily be reversed politically. Those who have money will often want to influence politics either to increase or preserve their wealth, and this can be done by lobbying or political donation that compromises but does not end democracy. However the more very wealthy people there are, the more likely it is that some will wish to go beyond this, and try and influence the nature of democracy.


A plutocracy is where at least some of the very rich play a much larger part in determining key political decisions than lobbying or donations allow. This is quite compatible with the continuation of a nominal democracy as long as the party that will ensure the influence of the plutocrats is dominant always gets elected to power. If that fails to happen the plutocracy can just attempt to win next time, or can attempt to overturn the democratic decision that saw them lose power.


So what stops some wealthy people trying to change a democratic system into a plutocracy that is almost bound to serve their interests? The most obvious answer is the democratic process. A party run by a tiny minority of the very rich is not likely to be seen favourably by most voters if they see it as such, and so has little chance of being created. The way plutocrats can get around this is by persuading the members of a political party (inevitably a party of the right) to follow their wishes.


The first sense in which neoliberalism makes a transition to plutocracy easier is by increasing the number of the very wealthy. The 1980s saw a huge reduction in the marginal tax rate on high incomes in the US and UK. A bit of neoliberal mythology is that this wealth is actually good for everyone else, because the wealthy are ‘wealth creators’. That myth was increasingly accepted in part because of another defining aspect of neoliberalism, the destruction of the unions as an effective political force.


By substantially reducing the power of trade unions, neoliberalism reduces the influence of organised Labour on the electorate. That makes it easier to spread the myth that the wealthy are wealth creators, rather than the reality that the high incomes of the wealthy are at the expense of everyone else. Reducing union influence also increases the potential influence of the media on voters’ opinions.


The third way neoliberalism makes plutocracy easier is that, in the name of reducing regulations, restrictions on bias in the media are reduced. Under Thatcher, Murdoch was able to significantly increase his share of UK newspapers he owned, and Reagan abolished the Fairness Doctrine. The link between plutocracy and media ownership is very direct because media barons are part of the plutocracy and their influence on both right wing party members and voters more generally is considerable.


These three aspects of neoliberalism in the US and UK are necessary for plutocracy to emerge, but not I think sufficient. The main reason for this is that, after an initial decade or so, progressing neoliberalism from the right becomes unpopular. Starving public services in order to reduce taxes (particularly if the main beneficiaries are the wealthy) is not what most people want. Partly as a result the Conservatives lost to Labour in 1997. Labour, while accepting the neoliberal changes under Thatcher, actually increased health spending by raising taxes.


The way around this for both the Republican party and (later) the Conservatives was to shift the political debate away from economic left/right issues towards a culture war. Taking the socially conservative side in culture wars is attractive to parties of the right in both the UK and US partly because it detracts from the right’s less popular right wing policies, but also because of the properties of the electoral system. Social liberalism flourishes in cities and university towns, so the bias in the US Senate (and therefore the electoral college) towards rural communities and the bias of FPTP towards social conservatives means the right can win without a majority of the popular vote.


Culture wars are possible because of the tremendous social liberalisation of society over the last 60 odd years. That transformation is led by the young and those who have been to university, so there will always be many voters who feel left behind by this pace of change. Furthermore, as much of the material on the broadcast media is made by university educated socially liberals, social conservatives are open to talk about a liberal elite. Culture wars are a natural consequence of neoliberalism because right wing parties will adopt them, and that becomes a fourth reason why neoliberalism encourages populism.


In the US the Republican party had for some time allowed money to greatly influence elections, and had fought culture wars. The radicalisation of the party increased substantially when the Koch brothers helped finance the Tea Party, and Murdoch’s Fox News stopped just being supportive of the Republican party and started trying to change it in a more radical direction. In both cases we have very rich individuals pushing their political line not only because it is in their interest, but also because their ideology tells them it is right for the country.


The Tea Party and Fox meant the Republican party lost control of its base, and therefore who stood for election for the house, senate or President. In truth Trump was nobody’s candidate initially, but his appeal to the Republican base reflected two main factors. The first is that he said in plain language what had been dog whistled before in terms of the culture war. Second, he broke with neoliberalism in two important populist directions: controls on trade to ‘save jobs’, and controls on immigration. With his election the transformation from consensus neoliberalism to right wing populism became complete.


While Trump is unique, a right wing party controlled by its more militant base fighting a culture war is always vulnerable to a populist leader. In some ways the US was lucky that the populist they got was also fairly inept at strategy once in power, although we should note that it is quite possible he could be re-elected having learnt important lessons. Neoliberalism, having created the conditions where there are plenty of wealthy people able to mount a Presidential campaign, and having lost control of their base because of the actions of wealthy people, provided ideal conditions for a very wealth populist leader to win the Presidency, and through charisma then take over the right wing party.


The route taken by Trump to control the main right wing party was not available in the UK, because MPs could exclude any of their number they didn’t like from standing to be their leader. That, together with the absence of primaries, reduces the power of the right wing base. So if populism was to come to the UK, it would be through using a majority of voters to enable a populist takeover of the main right wing party. That could only be achieved by the right wing press and a charismatic politician who could convince a majority of voters that Brexit would allow them to take back control, which of course can only be done through lying on an industrial level. But it also needed a populist outside of the Conservative party that threatened its hegemony, Nigel Farage.


After Brexit the right wing party tried to keep control from populists, but the reality of those lies threatened to end the right’s control on power because they were being eclipsed by Farage, so Conservative MPs finally turned to Johnson as their saviour. A divided opposition and FPTP ensured the takeover of the right by a populist government under Johnson was complete. For those who still doubt Johnson’s government is a plutocracy, the group that provides 80% of Conservative party funds is called the Leaders group, and they meet regularly with senior politicians. Matthew d'Ancona describes the plutocratic world of senior Tory politicians. A defining characteristic of the Johnson government is that it provides public money to many of its donors through non-competitive contracts. With most of the press and a fearful BBC permanently on side, there is no accountability and so no reason why public wishes should be respected (see Barnard’s Castle, a second wave, bullying, corruption and so on).


Should we call the populism of Trump and Johnson a variant or evolution of neoliberalism? Certainly neoliberal ideas among both live on. That is for another time, but I would make one point on this. Neoliberalism (more precisely monopoly neoliberalism) as an ideology that acts in favour of the existing structure of capital. The populism of Johnson and Trump favours parts of capital (friends and donors) at the expense of others (particularly trading firms).


For the US it’s hard to argue against the proposition that the Republican party was wide open to a Trump like figure emerging. For the UK, it is tempting to focus on some 'if only' event. If only Cameron hadn’t agreed to a referendum, or Johnson had sent his other article, or Cameron’s campaign had been better and so on. But in a choice between losing power and giving in, at some point any Conservative leader was bound to give in, and a charismatic populist leader was bound to take over.


To summarise, neoliberalism in the US and UK was bound to lead to plutocratic populism, because it promoted growing inequality at the top, drastically reduced the power of trade unions, deregulated the media, and adopted culture war politics. These create the conditions in which populists acting in the interests of private money can take over the main party of the right.