Winner of the New Statesman SPERI Prize in Political Economy 2016


Tuesday, 20 December 2022

The political, moral and intellectual bankruptcy of the current Conservative party

 

The UK is currently suffering a level of strike action not seen for decades. There is a simple reason for most of that - it is government policy. Take the continuing strikes in the rail industry. According to the Financial Times two weeks ago: “Employers had planned to offer a 10 per cent pay rise over two years to the RMT union, but were blocked by the government, which controls the industry’s finances, according to three people familiar with the matter” by adding tough new conditions at the last minute.


Or take the unprecedented strike by many nurses. Nurses have seen a large cut in their pay relative to those in the private sector since 2010. The government’s current pay offer will see that continue. Quite simply, nurses are being forced to strike because the government insists on reducing their standard of living compared to private sector workers as well as making their working conditions more intolerable. Now if for every nursing vacancy there were hundreds of applications then you could make a case for lower pay, but the opposite is true, partly because many nurses are leaving the NHS. It is a similar picture across the public sector.


Of course the government tries to assert that none of this is true. Instead they like to pretend that they are on the side of poor suffering Joe Public, and also like to claim that somehow it is the Labour opposition’s fault that we are seeing all these strikes. Given the level of misinformation we have in this country many (although for nurses certainly not a majority) will believe them. The reality is that the government thinks these strikes will work to their political advantage in returning some core Conservative support they have lost in recent months. In other words, they are making these strikes happen, despite the inconvenience this will cause and the damage it will do to the country, because they believe it’s to their party's political advantage.


Governing in a way that harms the country but boosts your flagging popularity is a good measure of political and moral bankruptcy.


But strikes are not an isolated example in an otherwise sea of policies the government is enacting to benefit the country. Take one of the most pressing issues of the moment, which is the crisis in the NHS. UK citizens are dying who would otherwise have lived because ambulance waiting times have sky-rocketed, A&E departments are overloaded and delays for many basic operations are at record levels. A key reason for this is a lack of beds and infrastructure, made acute by the number of patients being treated in hospitals with Covid, together with an inability to pass on patients to social care


Neither is an excuse for the government to do nothing! On the contrary, dealing with both is what any government is there to do. But where is the government action to create more NHS beds, and the staff that goes with them, following the emergence of Covid? What are the government’s plans to deal with the crisis in social care? Once again, by refusing to pay NHS staff more, and failing to provide the resources to attract more people into social care, the government is actively making things worse.


The new Prime Minister made a big speech announcing a new policy last week. But it wasn’t about the NHS or social care, or the growing poverty caused by the cost of living crisis. Instead it was about people crossing the Channel in small boats, mostly to claim asylum in the UK. Shortly afterwards some died trying to make that crossing in icy waters. Yet, as Lewis Goodall points out in this excellent summary, Sunak’s speech did not contain the one policy that could solve the problem of small boat crossings at a stroke, which is for the government to provide a means for asylum seekers from wherever they come to claim asylum safely.


Once again, the problem of Channel crossings is a problem of the government’s own making. By failing to provide any safe route for asylum seekers from all but a few countries to claim asylum in the UK, they create the demand for small boat crossings and the smuggler gangs that facilitate this. Why don’t they want to provide a safe route for asylum seekers? Because they want less asylum seekers in the UK compared to most other comparable countries. While some countries that have the same goal erect high barbed wire fences on their borders, we have the English Channel.


Those in the Conservative party, if they were being honest, would say they were just doing what their supporters want. Those in the Labour party who do not point out the truth about Channel crossings would say the same about the voters they need to attract to win the next election. There is some logic for such claims, because the UK’s FPTP voting system and our right wing press bias policy towards the interests of those who just want less people claiming asylum in the UK. But if this is the politicians’ excuse, why lie about it, and call those making the Channel Crossing ‘illegal migrants’? It means politicians are going beyond what they need to do to represent these voters. They are not only helping to put people’s lives at risk just for party political gain, but they are distorting or concealing the truth from those they represent. [1]


Take the biggest crisis facing the world today, climate change. What does the current government do? Opens a new coal mine. A government that lets people die just to win votes, or puts the future of humanity at risk for a bit more money today, is a good indication of political and moral bankruptcy.


It seems the government has given up on the business of governing, and instead its actions are determined only by what gains their party a few more votes. You might be cynical and say it is ever thus, but I think this is wrong. Whatever you might have thought about her vision, Margaret Thatcher did have ideas about how to make the UK a better place. Some of that might have been destructive, like reducing union power, but it was also constructive, like helping to create the Single Market for EU trade. There were of course some policies designed just to win votes, like selling council houses for example, but there was also a clear set of new ideas about how to improve the economy and individual opportunity.


The same is true for the Labour government of 1997-2010. Gordon Brown could list the many ways it had made lives better through specific policies in a conference speech. It too had a vision. If we call the vision of Thatcher neoliberalism, we could call Labour’s vision neoliberalism with a human face. Yet it is hard to imagine Rishi Sunak giving a similar speech about the achievements of Conservative led government since 2010. Austerity left the UK permanently poorer, put UK public services in a dire state, and yet UK taxes are at a record high. Brexit has bought further economic misery but hasn’t brought any benefits worth listing in a conference speech, with even immigration at record highs.


To describe all three governments as embodying neoliberalism misses these key differences, and therefore misses the political and moral bankruptcy of the current government. Yes, it still spouts neoliberal platitudes, but they have increasingly become clich├ęs designed not to try and make the country better off with more opportunities for its citizens, but instead used as a mask for funneling money to friends, donors or potential future employers. So the UK’s private water companies are protected at the expense of sewage in our rivers and on our beaches. Energy companies are allowed to keep their record profits if they invest in producing more climate warming oil. Private companies with the right political connections are paid over the odds with public money to provide unusable PPE, then paid with public money to store it and then other private companies are paid with public money to dispose of it. I have described all this as a transition from neoliberalism to a form of plutocracy elsewhere.


Once we see austerity as the huge mistake it undoubtedly was, we can see that the bankruptcy of the current government did not start after a referendum in 2016, but from its very start in 2010. Wanting less public services and taxes without changing what the public sector does turned out to be as foolish as it sounds. With this, and nonsense like Britannia Unchained, Conservative ministers took the platitudes of neoliberalism [2] and thought that together they made a coherent and realistic vision, yet they remain in denial that this pursuit has done nothing but harm to the UK economy.


All this represents an intellectual as well as a political and moral failure. A failure to see that growth under Labour before the financial crisis matched that under Thatcher, and also more than matched growth in other G7 countries, yet with better public services and without the advantages of growing North Sea Oil revenues. A failure to recognise that increasing taxes to bring NHS spending up to European levels was popular. A failure to learn from the fact that the Global Financial Crisis reflected a lack rather than an excess of government regulation. All these showed at the very least the limitations and dangers of unbridled neoliberalism, yet these lessons were ignored


This intellectual failure didn’t end once the Conservatives were in power. After unjustly blaming, with the invaluable help of their press, immigrants for many of society's problems in opposition, Cameron set up immigration targets he either couldn’t hit or wasn’t willing to hit, yet his party used immigrants as a scapegoat for the effects of austerity. This played into the hands of populist Brexiters, who only had to link immigration to free-movement to make their case. After Brexit it seemed that the exclusive motivation of Conservative MPs became power for power’s sake, exemplified by the election of Boris Johnson. His own moral bankruptcy does not need retelling, although it is worth noting that public money is still being used to defend his lies over Covid partying.


When a government refuses to use our money to pay nurses a decent wage or relieve severe rationing in the health service, but instead spends it on defending the obvious lies of a disgraced former party leader, that is a pretty clear sign of political and moral bankruptcy.


It is true that the Covid pandemic would severely test any government. But the current government, including the current Prime Minister, failed that test repeatedly. Long term planning for a pandemic in the form of stockpiles of equipment was allowed to become useless under austerity. Once the pandemic started, an initial hope that the pandemic could just be ignored led to little contingency planning, yet that hope was scuppered once data arrived. Over the summer of 2020 Sunak championed spending public money that helped create a second wave of infection, and pushed Johnson to listen to a tiny minority of experts who were against lockdowns. Johnson himself, under the influence of some newspaper owners, began to distrust the centuries old methods of dealing with pandemics, so scientific advice was frequently ignored and lockdowns delayed. Tens of thousands died unnecessarily as a result.


If there is one image that sums up the moral bankruptcy of the current Conservative party for me, it is the massed ranks of Conservative MPs in the summer of 2021 sitting on the crowded government benches with hardly a face mask to be seen, even though the government’s own advice at the time was to wear masks in crowded indoor places. It was just like partying in No.10, except it involved nearly all Conservative MPs in an unashamedly public way. Here were our elected representatives putting their own personal convenience, vanity or warped ideology above the interests of those around them, and by implication above the interests of those they represented. The Conservatives have been labelled the nasty party with much justification, but since 2010 they have become a party whose only aim seems to be to look after themselves.


[1] At the end of the day it’s a policy that makes a minority suffer, and a few die, so that some voters can feel happier. The primary responsibility for those policies lies with the politicians that enact them.


[2] For example 'government should get out of the way', reward the 'wealth creators', or 'regulations hold back business'.

Tuesday, 13 December 2022

The implications of a tipping point in public support for Brexit

 


Labour’s current policy on Brexit is designed to help them win power. There is nothing the government and their press would like more than to suggest Starmer intends to undo Brexit, and so the policy of “making [hard] Brexit work” is tailored to remove any credibility from such a claim. However the moment Labour wins power other considerations come into play.


In power Labour becomes responsible for the health of the economy, and Brexit has undoubtedly brought severe damage to the economy and average incomes. Starmer knows this, which is perhaps why he added “at this stage” when saying joining the Single Market would not help growth. In power he will not be able to avoid two clear truths. The first is that, Northern Ireland Protocol apart, the economic effects of being more cooperative with Europe within the context of Johnson’s hard Brexit are small. The second is that the gains from joining the EU’s customs union and, even more so, their single market are certainly not small, just as the costs of leaving both have not been small.


The dangers of alienating those voters who still identify with Brexit will remain, or more generally worrying those voters who fear that changing the Brexit deal in a fundamental way would paralyse the government just as the Brexit referendum did. However the size of the first group will diminish over time, in part because of simple demographics. The size of the second group will also diminish if Labour manages to handle negotiations with the EU over more minor matters with little fuss.


In addition, as Stephen Bush notes, “a Labour government would free up vast swaths of civic society and lobbying organisations, many of which think that Brexit is a disaster but feel they have to pussyfoot around the topic to remain on Downing Street’s Christmas card list”. I noted two weeks ago that we had passed a turning point, where the costs of Brexit had become so evident that the broadcast media felt compelled to start talking about them. With the focus on a Labour rather than Conservative government, there will be fewer voices defending Johnson’s Brexit deal and many more pointing out its problems.


Indeed, it seems likely that one of the last groups to change their mind on Brexit will be the Conservative party. This, combined with this trend in public opinion away from either believing in Brexit or fearing its modification, means that at some point support for Johnson’s Brexit deal (or something even harder) will become an electoral liability for the Conservatives. As it becomes clearer that Brexit has reduced living standards and held the economy back, an attachment to the policy will be associated with a party that wants to keep the country poorer.


There is therefore a tipping point in public opinion, when suggesting Johnson’s hard Brexit deal needs to be thrown in the dustbin of history no longer becomes a political liability but a political necessity for Labour. Some may think we have already reached that tipping point, but two key factors suggest otherwise. The first is that FPTP helps Brexit supporters, and works against those who want to change Brexit, because the latter are concentrated in cities. The second is that Brexit regret does not necessarily imply a wish to change Johnson’s Brexit deal, because the prospect of reopening the Brexit question reminds many of the three years after the referendum.


It may seem hard to imagine passing this tipping point, because before we get to that tipping point the opposite is true, hence Labour’s current commitment to making Brexit work. But the big Brexit divide cuts both ways, so that when enough voters see Brexit as a mistake that needs a fundamental correction it will become politically advantageous to argue for that correction, and a political liability to oppose this. Then the costs for the Conservatives of championing a policy mainly favoured by the elderly that incurs serious economic costs will finally come home to roost.


Labour are unlikely to reverse their current Brexit policy immediately on taking office. They should instead immediately start discussions with the EU about “making Brexit work”. It is important that such discussions start quietly and without diverting attention from more immediate concerns. It would for the same reason be an obvious political mistake to raise expectations about what such negotiations can achieve, because any economic gains that follow will be small. But the existence of a tipping point for public opinion on Brexit means not only that Labour need to be prepared to switch from making Brexit work to changing Brexit during their time in government, but also that it is in Labour’s interests to do anything it can to hasten the arrival of that tipping point.


The Conservatives ability to tag Miliband’s Labour party with economic incompetence was crucial in winning the 2015 election, and Johnson’s Brexit deal can do the same for a Labour party once it holds power. It is therefore in a Labour government’s interests, assuming we have one in 2025, to be as open and honest as possible about both the economic advantages of the alternative ways of softening a hard Brexit, and also about what is and is not possible in terms of any deals with the EU.


That raises the question as to when Labour should begin to suggest the possibility of going further, which in practice will almost certainly mean rejoining the EU’s customs union and/or single market? Should this happen during Labour’s first term, or its intended second term?


The point at which Labour changes from doing what it can with a hard Brexit to changing Brexit will depend on many things beside the tipping point in public opinion, such as the pressure from domestic events and willingness on the EU side of the table. Two other factors are worth noting here. The first is the likely lag between any agreement (which itself will take time) and the economic benefits that would follow. If one of key reasons for a Labour government to change Brexit would be to benefit the economy and therefore household incomes and public services, the sooner this happens the better.


This suggests moving as quickly as is feasible to join the EU’s customs union. While the economic benefits are probably less than being part of the single market, it would remove some of the paperwork that small businesses in particular find is a barrier to exporting to the EU. It would also provide a good excuse to revise or end the few genuinely new trade deals obtained by Liz Truss, which seem lopsided to the detriment of some UK sectors. There may also be some gains to be made through alignment of standards, cooperation in research etc.


In assessing the likelihood of the UK joining the single market we need to consider a second factor influencing timing, and that is the behaviour of the Conservative party in opposition. If the Labour government benefits from the economic recovery that follows from the current recession, then - as with the last Labour government - the Conservatives will have to focus on social rather than economic issues. Just as with the last Labour government, immigration is likely to be their most effective issue.


Attitudes to immigration have been changing over the last decade, but it remains the most potent social issue among potential Conservative voters. Furthermore, how important those voters feel that immigration is compared to other issues depends a great deal on how much coverage it is given in the Conservative press. That in turn will depend on whether the Conservatives are in power or not. [1] Newspaper stories about immigration or asylum seekers are therefore likely to begin to increase under a Labour government, and public concern will rise along with it.


It is therefore immigration, rather than attitudes to Brexit per se, that is likely to be the main barrier to Labour trying to negotiate membership of the Single Market, because of course that membership requires free movement of labour within that market. The best way Labour have to moderate this Conservative weapon is to move to some form of PR for general elections, for reasons noted above. There may be other means of making free movement politically acceptable, as Peter Kellner suggests here.


None of these arguments guarantees that Labour will or will not try to negotiate to join the Single Market, but they do suggest that negotiations to join the Single Market will be one of the last stages in the long road back from Brexit.


However this should not stop Labour being honest about the economic costs of leaving the EU’s single market, and therefore the benefits of joining. Chris Grey suggests an interesting additional idea, which is that Labour suggests that it would be unwise (or the EU might be unwilling) to consider the UK being part of the Single Market until there is cross-party agreement that this should happen. This would have the political benefit, for Labour, of emphasising the economic costs of the Conservative’s continuing attachment to a hard Brexit.


To summarise, the existence and proximity of a tipping point on public opinion about Brexit means it is important for any Labour government from 2025 to be open and honest about Brexit’s economic costs and what can and cannot be achieved in negotiations. It also means that it is quite possible to see Labour moving beyond ‘making Brexit work’ once they have power, although rejoining the Single Market remains the most difficult move in political terms.


Once the tipping point is passed, believing in a hard Brexit will become a serious political disadvantage for the Conservatives. Yet what is difficult to imagine is how they will escape from what will become a serious drag on their popularity. Johnson and others have made Brexit part of the Conservative party’s DNA. The conditions that make me confident in saying that no Conservative government will change a hard Brexit for at least a decade also make it difficult imagining them renouncing the policy in opposition. Perhaps it will take many years in opposition for MPs, but also crucially party members and the owners of the right wing press, to realise what a liability Brexit support is for them.


[1] The exception was during the Cameron government, but I don’t think it would be overly cynical to say that this had a great deal to do with Brexit, which the press favoured and Cameron did not. The data supports this, with the number of articles mentioning immigration rising rapidly from 2013 until 2016.



Tuesday, 6 December 2022

Why Voting under FPTP should always be tactical

 

Ever since I can remember, I have advocated tactical voting. This post tries to make that argument in the context of different motivations for voting. As this is not my area of expertise please let me know of anything I have missed.  


Why do people vote? Do we vote in an instrumental way to (help) achieve some outcome, or do we vote in an expressive way to say (often just to ourselves) something about our own views. From my own experience in talking to people, many do vote in an expressive way. Even where the effective choice in a First Past The Post (FPTP) seat is between just two parties (X and Y), and where the voter happily acknowledges that on all counts X is a better choice than Y on all issues they care about (X>Y), you will often hear people say that they still couldn’t vote for X because of their policy on one particular issue. It doesn’t seem to matter that Y has the same policy as X, they nevertheless choose either not to vote at all, or vote for another party that doesn’t have that particular policy, rather than vote for X, even though X>Y and only X or Y can win


This attitude makes little sense (but see below) if voting is instrumental, but does make sense if voting is expressive. There was an even more extreme case of this in the last UK General Election, where some people suggested to me that they couldn’t vote for Labour because Labour was not formally in favour of continuing EU membership, or they didn’t trust Corbyn on Brexit. They would vote LibDem or some other party instead, even if they were in a marginal Lab/Con constituency. It was more extreme because it was almost inevitable that Brexit would happen if Johnson won, while it was far from inevitable that it would happen if Johnson didn’t win, even if, as I suggested here, Labour got an overall majority. In this case people were voting in a way that, from an instrumental point of view, would make them worse off.


Expressive voting is one reason why it makes sense for the opposition parties under FPTP to not field candidates in seats they have no chance of winning in the next election. Even if the parties cooperate informally, there is nothing stopping expressive voters voting for the party closest to their own views even when that party has no chance of winning. I’ve seen it argued that such actions by political parties are bad because it ‘reduces voters choice’, but in reality it only reduces the choice of expressive voters. Unsurprisingly, as most party members are likely to be instrumental in their attitudes, most Labour members (e.g see this poll) would favour not putting up candidates in seats where doing so might split the anti-Tory vote. From an instrumental point of view, this majority is entirely correct.


Instrumental voting is very different from expressive voting. If voting is instrumental, it makes sense for your vote to have some purpose beyond self statement, which usually means voting for party X even if you don’t agree with everything X stands for, simply because the realistic choice is between X and Y and you prefer X to Y. In most cases (but see below) instrumental voters will vote tactically, because that is the most effective way of using their vote.


However instrumental voting is subject to a problem that is often called the ‘paradox of voting’. The problem is the chances that your vote influences the outcome are negligible. To use the language of economics which is quite descriptive, the voter is ‘small’ relative to the electorate in a constituency, so their own vote is hardly ever critical in deciding the result. The ‘paradox of voting’ could also be called the insignificance of the individual voter argument, where insignificance means very small indeed. Note that this paradox only applies to instrumental voting, and not expressive voting.


I remember one General Election trying to persuade someone to vote LibDem in a LibDem/Con marginal. They objected that it was a waste of their time because their vote would be insignificant, but they did it just to please me. The LibDem candidate ended up winning by 10 votes. I triumphantly said to the person I had persuaded to vote, look your vote did matter, to only be told that if they hadn’t voted the LibDem candidate would still have won by 9 votes, so it was they who had been proved right.


Instrumental voting can be rescued from this insignificance paradox by talking about the payoff from your side winning. If the benefit to you of the party you vote for winning is sufficiently large, this can offset in expected benefit terms the very low possibility of your vote being decisive. However that is not the route I want to go down. Instead I have a more fundamental problem with the paradox of voting.


The insignificance of the individual voter argument casts voting in individualistic, expected utility terms. I think that is the wrong way to look at it. Voting is instead a social activity. We can see that quite simply from the fact that large numbers of people do vote in an instrumental way, despite their individual insignificance, so either they are being irrational or there is something else going on. As economists like to think that most people are not irrational I think we can conclude that something else is going on.


You can see why there is a social norm that we should try and vote from imagining a contest between two parties, one of which had rational policies and the other had irrational policies. Rational people prefer the rational party and vice versa. As most people are rational, the rational party should win, but if all rational people decided it was irrational to vote because of the paradox of voting, the irrational party would win, and the rational people would be worse off. Whilst the insignificance of the individual voter argument works for the individual alone, it does not generalise to society. [1] It may not make sense voting as an individual, but as part of society (or as a member of a class) it certainly does. There is evidence that most people do see it as a social duty to vote.


Seen in this light, as I think it should, expressive voting becomes a rather selfish act when voting is done secretly. You vote to make yourself feel better about yourself, rather than for the good of society as a whole. It also follows that we should vote for the party that would make society (or a group of that society like a class) as a whole better, rather than voting for the party that would make ourselves individually better off. This is because the latter is voting based on the outcome for one individual, where the paradox of voting still applies.


If we should vote instrumentally to make society (in our personal view) better, then it almost follows automatically that tactical voting under FPTP is the only sensible way to vote. By the same logic, you will often, under FPTP, end up voting for the lesser evil, because even if there is a party you could vote for that is better than the lesser evil, voting for it will be a wasted vote because that party cannot win. If you don’t like voting for the lesser evil that probably means either you prefer expressive voting or you don’t like FPTP systems..


Why do I say that it almost follows automatically? There are two common arguments against voting tactically, which in particular (and I would say pretty exceptional) circumstances are valid. The first arises from voting being a repeated activity (a repeated game). This brings in the possibility that voting one way today may influence our choice in the next election. Suppose X>Y, but X is still pretty awful, and if X lost this time it might be replaced by Z, where Z>X>Y and Z was a lot better than X. In those circumstances the best social choice might be to allow X to lose, because it would allow Z to emerge next time (see here).


This is a way you can try and rationalise why some of those on the right of the Labour party, for example, might have worked to enable Corbyn to lose in 2019, because they believed that would allow a much better Labour party to emerge from the ashes of his defeat that wouldn’t have emerged if Labour had won.


The problems with this argument come from both the many ifs involved and from the present sacrifice made (party Y gets to rule badly for 5 years). The many ifs include whether defeat for X does lead to Z, and whether Z would have happened even if X had won, and that Z will win against Y in 5 years time. (The problems are intensified if during that 5 years party Y changes the rules of the game to make a future victory for Z less likely.) The argument has some similarities to accelerationism, which argues that the best way to achieve a 'good society' in the future is to intensify rather than try to ameliorate the current bad features of society. In my view it’s an argument that is not always wrong, but most of the time it is. On the particular example of the Labour right and Corbyn, I think the cost of a hard Brexit should pretty well dominate any perceived advantages that the Labour right might have imagined getting their party back might involve.


A second argument against tactical voting goes like this. If voters make their vote for party X conditional on X adopting some policy, then voters have some power over policy. If instead they always vote for X, they have no power. However, for this power to have any credible influence on party X, individuals have to be prepared not to vote for X if X doesn’t adopt their policy. It then becomes an argument like the one above but related to individual policies rather than party leadership or complete parties. (Because people didn’t vote for X because of some policy, X does badly and is forced to adopt the policy in the next election.)


The main problem with this argument is credibility: on most issues most voters for X will not be prepared to carry out the threat of not voting for X if they don’t get their way. For that reason most of the time those that do make this threat will be ignored. Equally there are very few issues where enough people can make common cause to pose a sufficient threat to X. But just occasionally the argument might work if the issue is central enough, voters feel strongly enough and they have a means to demonstrate the threat. The run up to the 2019 election provides one possible example, where the policy was Labour’s position on a second referendum. Voters who would normally vote for Labour voted against them in local and EU elections, and threatened to not vote for them in general election polls, and this did change Labour’s policy on a second referendum, for better or worse.


Putting these two exceptions against tactical voting aside, I want to end by saying something about responsibility. If voting is a social norm or duty, then with that goes the idea of responsibility for outcomes. (I’m indebted to @spinninghugo for thinking about this, although he has no responsibility for my current views!) If we go back to my example of people who voted LibDem (say) in a Lab/Con marginal because they didn’t trust Corbyn on Brexit, in what sense if any are they responsible for what Johnson’s government subsequently did?


The first and obvious point is that they share that responsibility with everyone who didn’t vote tactically against the Conservatives in 2019, and those who voted for the Conservatives have a greater responsibility. However pointing this out does not avoid the issue of responsibility. To see why, imagine someone was murdered by 100 people, each of whom struck once with a dagger. You would certainly say that each of the 100 was responsible for the death of the victim, and the fact that ‘he would have died anyway even if I hadn’t been one of the 100’ doesn’t absolve anyone of their responsibility for the murder. Suppose you were not one of the 100, but had the opportunity of trying to prevent the murder, but had chosen not to. You too would have some responsibility for allowing the murder to happen. It remains the case that anyone who didn’t vote tactically against the Conservatives in 2019 remains in some small way partly responsible for things the Conservative government did that Labour would not have done.


In contrast, as tactical voting is the choice of the lesser evil, it is not the case that the voter is responsible (among millions) for everything the winning party does. Instead they are just responsible for what the winning party does differently from the only credible alternative party (X-Y in implemented policy space, if that helps).


What the only credible alternative party would have done is a counterfactual, so it allows people to try and avoid responsibility by making claims about that counterfactual. It is why, for example, those who supported the Conservatives in 2019 like to make the unlikely claim that a Corbyn led government would have been even worse than a Johnson et al government, because otherwise they would bear some responsibility for the mess we are currently in. The fact that people make such incredible claims shows that the idea that voting is a choice we should be responsible for has some force. 



[1] To drill down a little more, the paradox of voting assumes that your action of not voting is peculiar to you, and will not be followed by anyone else. If instead you assume that other people will make the same calculation as you do, then you would want to vote to avoid the irrational party always winning. More generally social norms that voting is part of being a good citizen can be seen as a social response to the paradox of voting.


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Tuesday, 29 November 2022

How Scottish Independence has become entwined with Brexit

 

Introduction


Brexit is the main reason the SNP give for wanting another referendum so soon after the last. While an independent Scotland as part of the EU would enjoy a larger single market than it enjoys as part of the UK, leaving the UK’s single market would impose short term costs almost certainly greater than the costs of Brexit. The government that enacted Brexit refuses to allow another independence referendum. A future Labour government might be less inclined to deny the Scottish people any say on independence, but that government could also start a process that would undo much of the harm caused by Brexit.


With Conservatives in power independence involves short term pain and long term gain


I cannot comment on the legal reasoning that lay behind the Supreme Court ruling that a referendum on Scottish Independence would be illegal without the cooperation of the UK government. (On that, see Dave Allen Green here and here.) However I cannot defend the decision of the UK government to refuse a referendum, or any law that says this is sufficient to prevent a referendum on independence.

The UK government’s reason to refuse another referendum is that it is too soon after the last one. But the reason that the SNP give as justification for pushing for it is Brexit. In a very important sense they are right. Not only did Scotland not vote for Brexit, and the economic damage it is doing, but Brexit gives the SNP’s claim that the economic future will be brighter after independence something beyond mere wishful thinking. The EU Single Market is a lot bigger than the UK’s Single Market.

I wrote about this four years ago here. There is no doubt that in the short term Scottish Independence will be very costly for the people of Scotland. In 2014 the only real economic compensation on offer was that different governance after Independence would bring a fairer but poorer society. So the economic trade-off independence offered was clear and certain short term pain set against the hope of possible long term benefit. But if Scotland was part of the EU’s Single Market and Customs union, it could eventually avoid the long term pain that Brexit will bring the rest of Great Britain.

But there is a counterpoint to that, which is that when Scotland does join the Single Market and Customs Union, they will have the considerable short term pain of creating a border with their largest market: the rest of the UK (rUK). That is in addition to the cost that dominated the 2014 referendum, which was the loss of the fiscal transfer from the rUK to Scotland. Scotland might still be better off in the long run, as its exports reorientate from rUK to the larger EU market, but that takes decades to happen.

So in terms of the economics, what was in 2014 a trade-off between certain and pretty large costs in the short run versus the hopeful possibility of benefits in the longer term becomes much larger and still certain short term costs against more tangible long term [1] benefits of being part of the EU. Adopting the Euro also carries clear risks as long as the Eurozone’s fiscal rules remain a mess.

However the prospect of a Labour government changes that trade-off in a critical way. To see why, it is useful to first talk about inevitable Brexit stasis under the Conservatives.


Over the next decade at least, only one party can reduce the costs of Brexit


In the last few weeks there have been two changes that represent a turning point for Brexit. The first was the humiliation of Prime Minister Truss, coupled with her successor being chosen by MPs alone. Truss was the candidate of the Conservative party’s European Research Group (ERG), who have consistently pushed for the most extreme form of Brexit. The second is that we are finally seeing across the broadcast media discussion of the costs of Brexit. With the UK economy being alone among the G7 in failing to regain output levels seen before the pandemic, and about to go into recession, it just wasn’t possible to avoid the subject any longer.

But last week it also became clear (if it was ever doubted) that the Conservative government cannot change the Brexit deal that Johnson agreed in 2020, because it is hopelessly divided. The ERG may have lost their leader with the downfall of Truss, but they are still powerful enough to stop any attempt to change that deal. Leaks suggesting the government were looking for a Switzerland type deal have been met by a chorus of denials from ministers and Sunak himself. Given the party’s terrible position in the polls, and a general election not that far away, Sunak cannot afford to risk the internal division that any attempt to rewrite Johnson’s deal would cause. The best we can hope for is that he is able to come to an agreement with the EU on the Irish protocol.

Nor would anything change if he was able to win that General Election. Not only has he to pacify the ERG, both the right wing press and his party members remain solidly pro-Brexit. Even if that was not enough deterrent, there is the ever present threat of Farage or someone similar threatening to take Tory votes and even some Tory MPs. All this means that for the next decade at least, no progress in reversing the economic and political harm caused by Brexit can be made while the Conservative party is in power.

So just as a Conservative government will not allow another independence referendum, it will also do nothing to alter the heavy costs of Brexit that the UK is experiencing.

However we now have the strong prospect of a Labour government. In opposition Labour have been extremely cautious. The last thing they want to do is unite a divided Conservative party and revitalise the right wing press in labelling Starmer a rejoiner. With polls like this, it is far safer for him to talk about improving relations with the EU, without being specific about how that would be done. With the Conservatives offering nothing, while Labour offer hope, only Remain voters who have learnt nothing from 2019 would refuse to vote tactically against the Conservatives.

Once in government, however, the trade-offs for a Labour government will change. It will become clear that the economic gains from a closer relationship with the EU while still outside its customs union and single market are pretty small. Labour will become responsible for the health of the economy, and just as the costs of leaving the EU are now becoming clear, so will the economic benefits become clear of rejoining the EU’s Custom Union and particularly their Single Market. The political risk of doing either noted above will still be there, but they will diminish in size over time. For both reasons, becoming part of the EU’s single market will become more attractive over time, and the pressure on Labour to move in that direction will only grow.


Brexit has encouraged independence, but could also mean it fails


Brexit was missold to the UK. Almost everything the Leave campaign said was a lie. Saying there would be no economic costs and only benefits was a lie. Saying there would be more money for the NHS was a lie. Saying UK trade would flourish under ‘global Britain’ was a lie. Saying we could negotiate trade deals more advantageous to the UK was a lie. Saying prices would fall was a lie. Saying immigration would be lower was a lie. The list is endless. Whenever evidence that these were lies was put into the public domain during the referendum campaign Leavers had a simple response: they called it Project Fear. Project Fear became synonymous with don’t worry about the facts, just believe the lies.

But the term Project Fear did not originate with Brexit, but in the first Scottish Independence referendum. The short term fiscal costs of independence were large and undeniable, yet the Yes side, like Leavers, preferred to use denial and misdirection rather than acknowledge this fact. As with the Brexit referendum, they could get away with this because what was being proposed had not been done before. [2]

However the similarities between Brexit and an independent Scotland joining the EU are too great and too recent to dismiss as Project Fear. Leaving the EU’s Single Market has caused the UK significant economic loss, and there is every reason to expect that Scotland leaving the UK single market would cause even more in the short term. In the long term firms in an independent Scotland that was part of the EU would have a larger market, but it takes considerable time to reorientate firms from one market to another, including the time and costs involved in persuading that new market that you have something worth selling. That time period will at best involve Scottish firms producing less and employing less people, and at worst it means these firms might no longer exist.

It will be very hard for the proponents of Scottish Independence to on the one hand give Brexit as a key reason for wanting independence, and on the other hand to deny the costs of leaving a large single market on which Scotland is currently so dependent.

If the independence referendum had taken place under a Conservative led UK, then the UK government would have been in a bind, because it would not want to point to Brexit as evidence of the short term costs of leaving a single market. [3] But we now know that will not happen, because a Conservative government will not allow another independence referendum.

A Labour government would be less inhibited, but could still face difficulties if it was trying to pretend it could make a success of Brexit. As long as it stayed doing that for fear of opposition from Leavers, it would find it hard to fight an independence referendum and would therefore be disinclined to grant one. However the moment a Labour government became committed to seriously undoing parts of Brexit (by joining the EU’s single market, for example), the case for a second Scottish independence referendum becomes much weaker.

It would become weaker because Brexit could no longer be used as a justification for another referendum. But it also becomes weaker because the long term gains of an independent Scotland as part of the EU having a larger single market also disappear, because these gains could be had by staying in the UK. Finally, using Project Fear to discount the short term fiscal costs of independence becomes weaker because Brexit has discredited that form of defence.

Brexit has given Scotland a reason for having another referendum, and has also given some credibility to the long term economic future being brighter after independence. Unfortunately for those advocating independence, those arguments only work if Brexit in its current hard form is permanent. That would be the case for at least a decade if the UK is led by the Conservatives, but the Conservatives will not allow a referendum. The UK under Labour might, but it would only be wise to do so if that Labour government could admit that any hard Brexit is bound to bring large economic costs. A Labour government that was seeking to rejoin parts of the EU would severely undermine the case for another independence referendum. Thus Scottish independence and Brexit have become inextricably intertwined.


[1] Here long term means a few decades at least before there is any chance of the benefits of EU membership exceeding the costs.

[2] Some have suggested that the short term fiscal costs of independence could be overcome if an independent Scotland had its own currency. Then, it is claimed, having a large budget deficit would not be a problem , because all the new Scottish central bank needs to do is create the money equivalent to the previous transfer from the rUK. Because there would be no greater claim on Scottish resources, it is argued there would be no inflationary pressure.

This ignores the fact that an end to the rUK transfer doesn’t just create a budget deficit, it also creates a current account deficit. At present Scotland is consuming more goods and services than it produces because of the transfer. The rUK is financing both a Scottish current account deficit and a budget deficit. There is every reason to believe that this Scottish current account deficit is not sustainable (the private sector would not replace the rUK transfer by capital inflows), and so the Scottish real exchange rate would depreciate on independence.

That depreciation would help Scottish exports and diminish its imports such that the current account became sustainable. However a depreciation means a reduction in the purchasing power of Scottish consumers, making everyone in Scotland poorer. Higher exports and lower imports also means a larger demand on Scottish resources, creating inflationary pressure.  

[3] In many ways we may see a repeat of 2016, where Cameron having set immigration targets and having failed to meet them, left himself wide open to claims that immigration can only be controlled by ending free movement. The obvious retort that immigration was good for the economy was not open to him. The Brexiters, having created a customs border between Great Britain and the EU, will find it hard to wax lyrical about the harm an English/Scottish border will do.






Tuesday, 22 November 2022

The economics and politics of the three sides of aggregate fiscal policy

 

This post is prompted by the discussion around the Autumn Statement, but also in particular a post by Ian Mulheirn. Here is the key diagram from his post.




I think the diagram is useful because it distinguishes three aspects of aggregate fiscal policy that can easily become confused. However it is worth talking a bit about its limitations lest the diagram itself adds to confusion.


Each of the three circles above represents a non-central point on a spectrum. Take the ‘support short term growth’ for example. At one extreme (near to my own position [1]) you can believe that in a recession, or before an expected recession, or during the recovery from a recession, the need to stimulate the economy should take absolute priority over all other objectives. The other extreme would be to ignore the macroeconomic situation entirely, which Osborne/Cameron in 2010. There are plenty of intermediate positions between those two extremes, like Balls/Miliband over the same period.


The same is true for public services. I would go further and make a conceptual distinction between what you might call the ‘scope of the state’ and ‘how well the existing state is funded’. These both have to be continuums. My own view on the latter is that we are currently not even at an extreme point, but one which is not tenable.


What does fiscally conservative mean? I think the label here is misleading, because fiscal conservatism could equally be the label for the other circles. In my view the issue here is about the expected path of public debt, or public sector net wealth, over the long run. One extreme on this would be that public debt doesn’t matter at all. The other might be that debt should be reduced rapidly, and there are plenty of intermediate positions between these two extremes. Any good medium term current deficit fiscal rule will have to make a choice about where on this continuum it wants to go.


I would not include under this heading debates about the form of fiscal rules. This debate is more technical in nature, and involves whether it is better to target the current deficit or the total deficit, or whether some particular change in the debt/GDP ratio is a good target, and so on. Discussion often confuses the form of a target with the value it is set at. For example, a target for the medium term current deficit is a good rule in my view, but there is still a debate about what level the target should be at, and that will depend on how quickly public debt should fall or rise in the long run.


Making these distinctions help us see historical events in a clearer light. 2010 austerity, for example, combined two of these circles: a large contraction of public services, and ignoring the need for fiscal stimulus in a recession. It is also interesting to note that the level of taxes is influenced by at least two of these aspects of fiscal policy: higher public spending implies higher taxes, as does (for given public spending) a more conservative debt policy.  


The correct way to locate past Chancellors in all three dimensions of fiscal policy would be a three dimensional chart, with the three axes being ‘how high is public spending’, ‘the priority given to the macroeconomy during economic downturns’, and ‘how quickly should debt rise or fall over the long run’. But three dimensional diagrams are not easy to look at, which is why I suspect Ian uses the simpler formulation above. But that also creates problems.


While I have no problem with the classification of Osborne/Cameron, you could question whether Balls/Miliband were suggesting higher public spending or just less cuts than Osborne. Equally by putting Johnson/Sunak in the higher public spending circle, it’s clear that Ian is taking a conservative definition of ‘higher’. With Hunt/Sunak a budget that back loaded spending cuts and immediate energy subsidies could be spun as worrying about the economy in the short run, but they are still putting up taxes in a recession. I suspect the real reason that spending cuts have been delayed is not the coming recession but just that spending cannot be cut further, and the real reason for energy subsidies is political.


I think it’s clearer if we try and use one straight line and a 2D chart



The straight line just looks at the amount of government spending, and I’ve only included actual Chancellors, not PMs or shadows, and excluded Hammond and Javid for space. Brown is out in front for creating an NHS that worked, Sunak (under Johnson) increased spending as a share of GDP in a few public services but not others. Hunt gets to be to the right of Osborne mainly because his spending cuts have not happened yet. (I have put Darling in brackets because his period was dominated by the GFC.)



The second diagram plots the remaining two aspects of fiscal policy. Here I have only included four Chancellors, because Brown didn’t have a recession to deal with as Chancellor, and the GFC blew up his fiscal rules. Darling wins on stimulus in a recession because he did exactly that, while Sunak is next because of furlough. On debt reduction speed Osborne is clearly on top because of what he did once the deficit was brought down, and Darling is where he is because of plans he never got a chance to implement.


I think this is a more informative way to compare what Chancellors did, but it is a lot less pretty than Ian’s original.


I want to end by disagreeing with the main policy point that Ian makes, which is that Labour should aim for the intersection of his three circles. I have no problem with ‘higher government spending’ and ‘stimulus in recessions’. Indeed I think all good governments, from the starting point we are currently in, should increase public spending, and every government should follow basic macroeconomics. Where I differ is on a conservative policy towards public debt.


I understand that in opposition it may make political sense to match the government’s rolling target for falling debt to GDP. But I would hope, once in government, Labour would commission HMT (or the OBR) to do the kind of in depth analysis they did in 1998. This should show the drawbacks of that particular target that I outline here. The most pertinent from Labour’s point of view is that by focusing on debt rather than assets this target discourages the kind of Green investment that is a centrepiece of Labour’s economic policy offering. It is no good hoping these two things don’t conflict based on current forecasts, because at some point they almost certainly will.


Much more difficult is the judgement about the desirable path for net public sector wealth over the long run. Again a good analysis has to look at the costs of getting the judgement wrong. The costs of underfunding public services are today painfully clear. The cost of not reducing the current negative level of net public sector wealth is less clear, once you move beyond nonsense involving market pressure.


[1] I would not argue for immediate fiscal stimulus right now because it could be immediately offset by higher interest rates, but nor would I agree with tax increases. But I am probably at the extreme in believing fiscal stimulus should apply until the recovery from a recession is complete, which is why I think the Biden stimulus was a good idea.



Thursday, 17 November 2022

A Conservative government raises taxes by a lot, again

 

This was not quite the Autumn Statement many people were expecting. Public spending on health and schools was increased a bit in the short term, welfare payments were indexed to inflation with some icing on top, and cuts to public spending were postponed to after the next election so may never happen. If we discount the latter, the fiscal tightening was all about raising taxes by not indexing allowances. By 2023/4, the ratio of taxes to GDP (national accounts definition) will be nearly 37'5%, compared to just over 33% in 2019/20.


Of course none of that means that most public services are not still in crisis, or that the government’s assumptions about public sector pay are any less painful (and strike creating), or that higher food and energy prices are not going to stretch many people’s budgets beyond their limits. The OBR’s forecast for falling average real disposable income last March was terrible (the worst since WWII), but their forecast yesterday (with less energy subsidy from the government) was a lot worse.


The coming recession


The OBR has predictably followed the Bank in forecasting a recession, which we have already started. What is most eye-catching about their short term forecast is what they expect to happen to inflation. The chart below looks complicated but focus on the black line, which is their forecast for inflation.




The OBR expects inflation is currently near its peak, but it will soon come crashing down. Indeed during 2024 it will fall to zero, and be negative during 2025/6, helped by modest falls in energy and food prices.


If you think that is implausible, here is the reason (bottom left quadrant).



The OBR are following their normal practice of taking their forecast of interest rates from market expectations. These expectations have Bank rate rising to 5% early next year, and then falling back to about 3.5% by 2028. There is no way this will happen if inflation follows the path the OBR are predicting. As the Bank themselves say they don’t believe these market expectations about what they will do, it is slightly surprising that the OBR have stayed with them. It makes the OBR’s forecast a bit weird, but I will try and rescue what I can in the comments below.


The OBR’s forecast for GDP is similar to the Bank’s latest forecast until about the middle of next year (their Chart 14), with both predicting falling GDP. Thereafter the OBR is much more optimistic, forecasting a recovery in output of 1.3% GDP growth in 2024 compared to a predicted further fall of 0.9% by the Bank. But the OBR are much more pessimistic about the path of GDP than they were in March (see Chart 1), which in the short term is because in March they were not forecasting a recession, and in the medium term because they now think energy prices will be permanently higher which will reduce potential GDP. This is one of the reasons for the need for fiscal consolidation in the Autumn Statement.


Another is higher debt interest payments caused by higher interest rates and higher debt. But here the implausibility of the path for short term rates assumed by the OBR matters. These rates will undoubtedly be lower, which will reduce borrowing costs particularly into the medium term. So some if not all of the cuts to government spending pencilled in for later years might not be necessary even if Sunak remains PM by then (see Table 3 and page 51).


Of course with cuts to personal income like those forecast, higher interest rates and rising taxes (excluding energy subsidies), the recession could easily be deeper than the OBR or Bank are forecasting. Is the OBR’s forecast for the recovery plausible? Well lower interest rates than they are assuming would help, but much depends on consumers. The OBR have the savings ratio falling to just under 5% next year and 2024, but then only recovering slightly to just over 5% thereafter. That is below the historic average, but may be reasonable given how much consumers saved during the pandemic.


The fiscal stance


The Chancellor has sensibly avoided calls from some of his MPs and others to cut spending in the short term, as such cuts would not have been credible. His income tax increases over the next few years will not help ease the coming recession and subsequent recovery, but their demand impact will be smaller than spending cuts, and they are probably necessary in the longer term. His failure to allow more for public sector pay will cause considerable disruption in the short term.


The government likes to say it is fiscally responsible. But one definition of fiscal responsibility is sticking to your own fiscal rules. It’s worth remembering that in 1998 Labour set out fiscal rules which guided policy for 10 years until the Global Financial Crisis. In contrast, since 2010 I have lost count of the number of times the government has broken and then changed its own fiscal rules, and today added to that count as we regress from a current deficit to a total deficit target so public investment could be cut a little (it falls from 2024 onwards).


So in the short term this Autumn Statement does very little to end the crisis in most public services, and we will have public sector strikes to look forward to. It also does nothing to moderate the forthcoming recession or help the subsequent recovery, although responsibility for the former has to be shared with the Bank. In the medium term, more sensible fiscal rules (see here) plus likely changes in the forecast will reduce or eliminate the need for public spending cuts after the election.


In political terms this Autumn Statement does nothing to enhance the Conservatives chances at the next election. Far from setting traps for Labour, promising spending cuts after the election is not a winning strategy when public services are already on their knees. If the OBR is right, and 2024 does bring a recovery in output along with falling inflation and interest rates, it gives the government something to talk about, but with real personal disposable income having fallen by 3% in each of the previous two years then voters’ memories will have to be very short to celebrate this.


One final point. The Chancellor presented a plan with far higher debt and deficits than previously, and with public spending cuts in the medium term that almost certainly will not happen. The markets didn't care. All those who implied that the markets are just waiting to punish any Chancellor that presented medium term plans that were not credible and tough have been proved wrong, just as they were wrong in 2010. What Kwarteng did was cause major short term uncertainty about the path of interest rates, which is why the markets reacted to his fiscal event. Yesterdays Autumn statement, and the lack of reaction to it, show once again that the markets are not some kind of policeman enforcing fiscal orthodoxy.