Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 31 January 2023

Sewage in rivers and on beaches may sink the Conservatives at the next election


I have always found psychological analysis of voting behaviour interesting, but was never sure where it led. So what if research suggests conservatives tend to desire security, predictability and authority more than liberals do, and liberals are more comfortable with novelty, nuance and complexity. These psychological differences may tend to make liberals more concerned about the welfare of minorities or immigrants than conservatives, but that has no bearing on whether it is right or wrong to care about the welfare of minorities.

Where it does matter, however, is in understanding what issues resonate with particular groups. Winning elections is normally presented as persuading undecided or floating voters to vote for a particular party. It is also important for political parties to get their own vote out by either attracting or scaring them. But it may be just as important to persuade the other side’s voters not to vote for their natural party, and instead vote for another party (not necessarily your own) or not vote at all.

A good example of the last point were the claims of antisemitism within the Labour party when Corbyn was leader. Precisely because those with socially liberal views tend to be more concerned about discrimination against minorities, this issue was ideal for peeling off what might otherwise have been natural Labour voters. In this post I want to suggest that the controversy over sewage being continuously released by the privatised water companies into rivers and onto beaches could become a voting deterrent for natural Conservative supporters.

One of the pretty robust findings linking political preferences to psychological traits is that conservative voters react more strongly to what we might call disgusting images or descriptions. As Kathleen McAuliffe describes in the Atlantic, “the brains of liberals and conservatives reacted in wildly different ways to repulsive pictures: Both groups reacted, but different brain networks were stimulated.” High sensitivity to disgust tends to go hand in hand with a “conservative ethos.” Whether this correlation reflects the reaction of disgust in general, or disgust to particular things, is an interesting issue but not relevant in the current context. What the research does seem to suggest is that Conservative voters, or more generally socially conservative voters, may be more affected by stories of sewage pollution than voters of a more liberal persuasion. [1]

Linking the pollution of beaches and rivers (and, after floods, even streets) to the Conservative party is very easy. Those immediately at fault are private water companies, but the privatisation of water has always been championed by the Conservative party as a clear improvement over public ownership. If the news is full of examples of beaches and rivers polluted by these private companies, alongside the usual leaks and occasional gaps in supply, the advantages of privatisation are far from obvious.

Of course just because water companies were privatised does not mean the government is powerless to act. The problem the government has is their actions seem to be more sympathetic to the water companies than the environment. In August 2021 Conservative MPs voted to make the release of sewage by water companies into the environment legal, and gave them until 2050 to completely deal with the problem. The government has also deprived the Environment Agency of the resources and leadership needed to effectively monitor water quality. They, along with previous governments, have sat back while the regulator allowed these companies to pile up debt in order to pay large dividends to shareholders, rather than use an era of low interest rates to invest in the infrastructure needed to avoid pollution.

Natural monopolies like water companies, where there is no competition or customer choice, have little incentive to invest in sewage treatment or fixing leaks. Regulators, without external pressure from politicians, may tend to go easy on firms because, in part, of the problem of revolving doors. One way to avoid this is to give groups who have an interest in better investment a say in what the regulator does. What you don’t do, and what this government has done, is pass legislation that removes what little legal incentive there was for water companies to deal with the problems they have created.

The pollution story also gets to the heart of those claims that Brexit allows the UK to make its own laws and decisions. While we were part of the EU, UK beaches and rivers gradually became cleaner in large part because EU regulations helped that happen. By ‘taking back control’, the UK government has now allowed water companies decades before we might return to standards we achieved whilst in the EU. The reality is that most of the EU regulations Leavers go on about are popular with many Leave voters, just not most Leave politicians and opinion writers.

With the government failing on major issues like managing the economy and the NHS, the problems of pollution of rivers and beaches might seem relatively small beer. Up until now, most of the political noise on this issue has come from interest groups (e.g. river fishing), ad hoc groups or individual campaigners (most noticeably Feargal Sharkey) rather than the main opposition parties. This is not to suggest that Jim McMahon, Labour’s environment spokesman, has been silent on the issue - he hasn’t. Starmer and the Liberal Democrats have also made statements on the issue; see also here. But just as the Conservatives used to get references to antisemitism into almost every statement they made about Labour under Corbyn, perhaps Labour need to do the same about how the government has allowed privatised water companies to pollute our rivers and beaches with sometimes very serious consequences (see also here).

[1] Of course these are tendencies, no more. It certainly does not mean that if you exercised by pollution in rivers or beaches you must be socially conservative!

Tuesday 24 January 2023

Should Quantitative Easing be reducing public services?


The Autumn Statement saw yet more cuts in public services planned for after the next election in order to get the debt/GDP ratio falling after 5 years. One item of spending that is expected to be higher after the next election compared to previous forecasts is debt interest. In part this is a result of the Bank of England’s Quantitative Easing (hereafter QE) programme. This created a large quantity of what are called bank reserves (explanations to follow), which currently earn interest for the commercial private banks that hold these reserves at the short term interest rate set by the Monetary Policy Committee of the Bank of England.

The Bank of England didn’t start paying interest on reserves until 2005-6. As long as interest rates were close to zero, or the quantity of bank reserves were much smaller than now, paying the short term interest rate on reserves didn’t cost very much. However after QE, and with short term interest rates climbing rapidly, they are costing not just the UK government, but all governments that undertook QE, serious sums of money. The money markets expect UK short term interest rates to stay reasonably high over the next few years, and as the OBR's forecast is based on these expectations this means that a significant amount of the austerity in the government’s current fiscal plan is a direct result of paying interest on reserves to commercial banks. The New Economics Foundation (NEF) calculate that the banking sector could receive over £50 billion of public money by mid-2025 because of interest paid on reserves. [1] Hence the title of this post.

If this all seems rather puzzling, it is because bank reserves are not well understood, and many of the explanations you will find just make things worse (see this from Frances Coppola who points to some all too common mistakes). To make things simpler I’m going to treat the Bank of England as part of the government (looking at what economists call the consolidated public sector). This is realistic, as any profits or losses the Bank makes end up being pocketed or paid for by the government. So I will talk about the government creating reserves and paying interest on them.

Why did the government create these reserves in the first place? After the Global Financial Crisis, short term interest rates hit their lower bound. Quantitative Easing (QE) was a programme where the government bought back some of its own debt with money the government created. The government has the ability to create money, either by issuing notes and coins (cash) or by creating reserves. I will not go into why they did QE, and how successful the QE programme was, because I and many others have written a lot about this already. Even if you think QE was a bad idea, as the Bank of England is understandably reluctant to sell all its holdings of government debt at once we are where we are.

Reserves are electronic money, in much the same way as your current account is electronic money that you use in, for example, online banking. Whereas you need to initially provide the bank with money, or get a loan from the bank, to create a current account, the government can just create that money. The amount of money created is the amount of the reserve held by the private bank. Private banks can only sell reserves to each other, so banks as a whole get no choice about how much reserves they collectively hold.

If reserves are like the government’s current account, why does it pay interest on them to individual banks? You and I don’t pay interest on our current accounts. The answer is that paying interest on reserves is a relatively recent innovation in most countries, and was designed to ensure the government can continue to set short term interest rates for the economy as a whole. When interest rates were very low that didn’t cost the government much, but now it does. For the private banks, getting today’s short term interest rate paid on its holdings of reserves is a bit of a windfall.

Do private banks deserve this windfall? The short answer is no. The reason they are getting paid interest on these reserves is because it helps the government set short term interest rates, and not in return for any kind of loan from the banks. So why isn’t the government finding some way to get this windfall back from banks, just as it (reluctantly) set up windfall taxes for energy producers? The answer is that this government cares rather more about bank profits than public services, which is an example of something I wrote about last week.

To be fair, a bank might argue that it is providing some services when it holds reserves. Your bank does not ask you to pay interest on your current account balance: indeed some banks pay you interest on your main current account. Banks compete for current accounts partly because they get to use the money provided when they are set up, but this isn’t the case for reserves. There is an argument, outlined by Paul Tucker here, that over some long period paying interest rates on reserves might happen to compensate banks for the use of any service the bank provides, but this seems very unlikely. There is also the question of the services the government provides to private banks that are not paid for, which I discuss here.

So if banks don't earn the interest they receive on reserves, how should the government get that money back? Some have suggested a tax to reclaim at least some of this windfall private banks are currently receiving. The windfall tax should be based on the income banks received from interest on reserves over the past year, and could be set at 100% of that income. However creating a tax to claim back what is a subsidy seems rather convoluted, and calling it a tax hands those that oppose it an immediate advantage.

The alternative is to change the way monetary policy works, so the government no longer needs to pay interest rates on all the reserves it has created. I have seen two quite similar proposals. The first is to move to what is called a tiered reserve system. Under this interest would only be paid on marginal reserves, with the majority receiving no interest, as suggested by Karl Whelan here or NEF here for example. The second is to insist that banks hold a large amount of ‘required reserves’ [2] that pay zero interest, as described by Paul De Grauwe and Yuemei Ji here. The two schemes sound very similar, and they illustrate that paying interest on reserves is not necessary for the operation of monetary policy.

As either a windfall tax, or changing the way monetary policy operates so that interest was not paid on most reserves, involves the banks losing a large amount of money while interest rates remain high, you will see a lot of misleading arguments about why this should not happen. The silliest is that not paying interest on reserves is a form of default: silly because most governments didn’t pay interest on reserves until quite recently, and governments not banks choose the quantity of reserves. Another argument is that not paying interest on reserves is a tax on banks, and taxes create inefficiency. But why not call paying interest on reserves a distorting subsidy?

Although changing the way monetary policy operates is a more elegant solution than a windfall tax on banks, political economy factors currently favour the latter. Here we have to disentangle the Bank of England from the rest of government. The government may feel that it is up to the Bank to suggest changing how it does monetary policy, because otherwise it would appear that the government is forcing the Bank’s hand just to save money. Unfortunately the Bank in turn may be too influenced by private banks to do this in a hurry. So changing how monetary policy operates is unlikely to happen soon.

Of course in the UK our current government is also unlikely to impose a windfall tax on banks. It was eventually forced to impose a windfall tax on energy producers, but that was because consumers were paying the higher prices that energy producers were benefiting from. If Labour wins the next election it should not feel so inhibited, and should be more interested in getting better public services than giving a subsidy to banks. This suggests a windfall tax on banks to recover recent interest paid on reserves should be an immediate priority for a new Labour government.

[1] That is not the only sense in which the QE programme may end up costing public money (or taxpayers money, as the media often likes to inaccurately call it). The bank reserves created as part of the QE programme were mainly used by the Bank of England to buy fixed interest government debt (gilts), during a period in which interest rates on gilts were very low, so the price of gilts was high. Now the Bank of England has begun selling those gilts, and because interest rates have risen the price of those gilts has fallen, leading to capital losses. (As the FT headline misleadingly put it, Treasury bails out Bank of England.) However it should never be forgotten that during the period when short term interest rates were low QE saved the government a lot of interest it would otherwise have paid on its debt.

[2] The phrase 'required reserves' is in itself confusing, as the banking sector as a whole gets no choice over the amount of reserves they hold.

Tuesday 17 January 2023

What makes politicians act in society’s interests, and how have these mechanisms worked since 1979?


A cynical view would be that politicians always act in their own interests. [1] I think that is unrealistic, in that many politicians go into politics because they want to make society better. Nevertheless it may be interesting to look at why purely self-interested politicians might nevertheless also act in society’s interest. The obvious mechanism that might achieve this is democracy. It is in a politician’s own interest to be re-elected, and to gain votes a politician needs to do things that make people’s lives better. An important qualification, of course, is that they only need to make a proportion of people’s lives better, and this could involve making a small minority of people much worse off.

The imperfections of this mechanism are obvious, but it is also clear it works. Most politicians in a democracy work hard to garner favourable public opinion. Although general elections in the UK need only happen every five years, if it looks like a Prime Minister is not going to win in two or more years time MPs may decide to replace them, as we saw happen twice last year. The major proviso is that, just as advertising can sell you things you do not need, politicians can also fool voters.

One obvious limitation of a normal democracy is that voters only get to choose between political parties rather than individual policies. Under FPTP they in reality only get to choose between just two parties, which means a ‘bad’ government may still get re-elected if the opposition appears even worse. A clear example where a politician that has not tried or failed to improve society may nevertheless get re-elected is if they can find some issue which gains support despite these failures: fighting a popular war, for example. Another reason a bad government may be re-elected is if voters are fed misinformation by a biased media.

If we drop the assumption of self-interest, it may also be useful to think about different ways in which a politician can imagine they can help improve society. They may just believe, in David Cameron’s words, that they would be “rather good at it”, which may be a belief about competence at management and decision taking, but could also be about charming or fooling people. Alternatively they may believe they have a set of ideas that will improve society. Those ideas may or may not be part of a commonly shared ideology.

At the end of last year I wrote a piece in which I tried to think about why the government that began in 2010 appeared to be particularly uninterested in making society better, at least compared to the governments that began in 1979 and 1997. The evidence that they made society worse in economic terms is almost irrefutable: the UK’s poor growth performance over the last 13 years may be partly bad luck, but it is almost surely also a consequence of 2010 austerity and Brexit. I also suggested that, in failing to resolve today’s strikes or the NHS crisis, or in demonising asylum seekers, or starting new coal mines, or in being willing to "let the bodies pile high" during the pandemic, this government seemed to be putting political self-interest above national interest.

I want to use the points above about motives and democratic constraints to explore in more depth why the government that began in 2010 stopped even trying to act in the national interest. In the earlier post I speculated that ideology played some role. All three governments (1979,1997,2010) signed up to a broadly similar neoliberal ideology, but the contexts were very different.

The government under Thatcher can be thought of as pioneering basic neoliberal ideas, initially within a society (and even party) where there was some strong resistance to those ideas. These new ideas were therefore being continually challenged and argued for, their strengths and weaknesses tested. The economic arguments for privatisation, reduced union power and reducing the top rate of tax were real and serious, even if you think there were stronger countervailing arguments. Whatever the merits of those ideas, by the end of Thatcher’s reign and during Major’s, the major opposition parties had largely accepted these key innovations.

The Blair/Brown government wanted among other things to introduce changes that would reduce poverty, like tax credits, the minimum wage, sure start and so on. Later on they were able to raise taxes to expand public services, and in particular the NHS, which had been steadily underfunded under the previous government. This has been called neoliberalism with a human face, and it was broadly popular. In particular, even by 2020 only a small minority of people wanted to reduce public spending on health, education and welfare in return for lower taxes, and far more wanted the opposite.

Both governments, therefore, fought and won elections based on economic ideas that were not obviously nonsense, and which at least turned out to be popular among a majority or near-majority of voters. Labour under Gordon Brown lost power not because of incompetence at handling the economy, or the unpopularity of his economic views, but because the finance bubble - facilitated by both governments - finally broke in the United States as he became PM.

Although a larger state, and particularly a well funded NHS, were popular among voters, they were not accepted by the Conservative party at large (MPs, members, donors and the press). Before the Global Financial Crisis Osborne had been forced to promise to match Labour’s spending plans, but this was an example of voters forcing an opposition’s hands rather than an ideological conversion. The Global Financial Crisis allowed Osborne to return to the idea of a smaller state, by elevating deficit reduction as the major macroeconomic goal of the government.

If Osborne and Cameron believed this was a sensible policy, they were simply ignorant of basic macroeconomics, which suggests fiscal expansion not contraction in a recession where interest rates cannot fall further. Perhaps the idea was just too attractive for them to question. Once in government, however, and as Osborne cut taxes alongside spending, the policy surely became deceit if it hadn’t been to start with. The key motivation for focusing on the deficit was to reduce public spending.

Deficit deceit was required because of the popularity of ‘neoliberalism with a human face’, and in particular the level of spending and taxes we ended up with under the Labour government. The Conservative government was in the small minority that wanted a smaller public sector and lower taxes. As an opposition Cameron and Osborne had lost this battle of ideas, so they planned to get what they wanted by the back door, which was by manufacturing an urgent need to reduce the deficit and to achieve that goal largely by cutting public spending.

The 2010 government therefore started and continued until 2016 with its central economic policy being based on at best ignorance and more probably deceit, in pursuing an underlying goal they knew was unpopular. Whatever you might think of the Thatcher or Blair governments, that cannot be said of either. In most cases they were prepared to argue for the economic goals they wanted to achieve.

Brexit, like austerity, was based on at best ignorance (‘there will be no economic downsides’, more money for the NHS) and more probably simple lies. For many Conservative MPs, it too involved deceit, with the real aim to deregulate from EU labour and environmental laws.

In both cases (austerity and Brexit), we still see neoliberal ideas being pursued, but now they were pursued surreptitiously rather than argued for at the ballot box. It is not surprising, therefore, that after some time when the impact of either policy became clear they would also become unpopular with a majority of the public. Because the deceit involved doing things that economists knew would create economic harm, then economic growth suffered.

A basic idea of neoliberalism was that a smaller government and lower taxes, together with reduced regulation, would help the economy grow faster. But neither Cameron nor Johnson were unlucky that neither happened. By 2010 the evidence against the idea that only small states or deregulated states could grow strongly was overwhelming. The Global Financial Crisis (GFC) alone should have made politicians question the idea that less ‘red tape’ is always better. The strong and steady growth of many large and small European countries with higher levels of taxation than the UK or US, and indeed strong and steady growth under a Labour government before the GFC, should have led any politicians who respected evidence to question the social benefits of pursuing low taxes and deregulation, let alone trying to achieve those policies by the back door.

This is why in my earlier piece I called austerity and Brexit an intellectual failure. The failure is easy to understand, however. Low taxes and deregulation were still in the interests of a small but wealthy minority, who could fund political parties and think tanks, a few of whom also owned major newspapers. For most politicians on the right, there was little incentive to try and rethink neoliberal dogma after the success of the Labour years and the failure of a deregulated global financial system. Those that tried would not have been successful because their message was unpopular within the party. As I have argued elsewhere, the influence of money and media ownership can turn parties of the right away from their early conceptions of neoliberalism as an ideology designed in the interests of business generally, into neoliberal platitudes becoming a cover for government in the interests of a wealthy few. The election and subsequent demise of PM Truss exemplified this transformation of Thatcher’s neoliberalism into something more resembling a plutocracy.

There remains an important question to answer, however. If democracy was doing its job, the deceit behind austerity and Brexit should have been exposed, and the politicians pursuing the deceit should have failed at the ballot box. So why, after five years as Prime Minister and Chancellor, did Cameron and Osborne win a majority outright in 2015? Why were the lies of the Brexiters not clearly exposed when they were first proposed? To regular readers this is old ground so I’ll only give one sentence answers to both. By 2015 the mainstream media had almost completely adopted the ignorance that was prioritising the deficit, despite the weakest economic recovery on record and stagnant real wage growth. In 2016 the broadcast media, and especially the BBC, preferred providing balance to providing knowledge. In both cases, the democratic constraint on self-interested politicians failed.

Unfortunately there is a dynamic involved in these particular failures. If a party that wants to represent the interests of a wealthy few at the expense of society as a whole sees how the media can fail to hold it to account, it will naturally devote itself to trying to make this happen again. It encourages that political party to see itself as apart and above the rest of society, including society's own laws. That in turn can lead to widespread corruption, which is another feature of Conservative  led governments that began in 2010. 

[1] By own interests, I do not mean their own personal interests. A self-interested politician unconstrained by democratic pressure may still act in the interest of friends, donors or future employers.

Tuesday 10 January 2023

Did 2010 austerity permanently reduce UK output?


An issue that is likely to preoccupy economists for some time, and which I have written the occasional post about, is whether 2010 austerity led to a permanent reduction in UK output. Permanent is probably too strong a word, but we can safely substitute ‘output today’ for ‘permanent’. Let’s start by redrawing a chart I have shown many times, which contrasts the path of UK GDP per capita with its pre-Global Financial Crisis (GFC) trend to show the extent of the sea-change that appeared to happen after the GFC. (Looking at GDP alone understates that sea-change, because GDP growth in the latter half of the period was supported by much higher immigration. GDP per capita is also more relevant for individual incomes.)

The GFC appeared to lead to an immediate and sustained loss of 10% in income per capita, and rather than that gap shrinking during a subsequent recovery (as it had after all previous recessions) the gap grew to be around 15% by 2019. Both figures are well above calculations done at the time of the GFC which suggested a permanent output loss of around 5% at most.

The first point to make is that there were signs that underlying growth was slowing before the GFC, particularly if you allow for the excessive growth in the banking sector before the GFC, so using a constant trend line exaggerates the amount of lost output, by a small amount in 2010 but by much more in 2019. But there is no doubt that a significant puzzle remains about why the 2008/9 recession led to such a large permanent loss in output.

Output growth is all about productivity growth, and the decline in the growth in output per head or output per hour since 2010 is well documented (the UK ‘productivity puzzle’). A key way that productivity growth occurs is through investment (‘embodied technical progress’), so if investment was substantially lower as a result of 2010 austerity then this might account for some (certainly not all) of the productivity shortfall.

Below is a chart of the share of business investment in GDP. I look at business investment so as to exclude investment in housing and the public sector.

Investment always falls by more than GDP in a recession, so its share also falls. A notable point we can make immediately is that the investment share did eventually recover to pre-GFC levels by 2016, but has subsequently fallen as a result of Brexit. Whether the share would have risen above the pre-GFC peak without Brexit, as it did following the 1980/1 and 1991 recessions, we will never know.

The chart below compares how the investment share evolved in three recessions and recoveries. (indexed to 100 at the start of each recession, and plotted from two years before that date.)

In the 1980/1 recession the business investment to GDP share fell least, by around 8%. In 1991 the business investment share fell more sharply (by over 15%, although with a bit of a delay), but it recovered rapidly. In 2008/9 we saw similar sharp falls in the investment share, but with a more protracted recovery.

How much potentially productivity improving investment was lost in each recession? Suppose we average the investment share in the three years before each recession, calculate how much the investment share was lower than this average during the recession, and then accumulate these losses in investment share up until it regained that pre-recession average. After the 1980/1 recession the investment share had recovered to its pre-recession average by 1985, with an accumulated loss of only 2%. After the 1991 recession the share had recovered by 1996, with an accumulated loss of 4%. Following the 2008/9 recession, it took two additional years for the investment share to regain its pre-recession average, with an accumulated loss of nearly 7%, which amounts to losing the best part of a whole year’s worth of business investment.

The following chart looks at the growth in productivity (output per hour) from the start of each recession.

Output per hour recovered more rapidly following the 80/81 recession than the 91 recession, perhaps reflecting the larger fall in investment in the latter. What stands out, of course, is that the recovery in productivity following the 2008/9 recession was almost non-existent by comparison. That suggests that lower business investment is associated with lower productivity growth, but it also points to other factors contributing to low growth after the GFC recession, as there was still plenty of business investment going on but productivity hardly improved.

If we accept that lower business investment can result in lower productivity growth, then it also follows that anything that delayed the recovery from the 2008/9 recession is likely to have led to more postponed or delayed investment projects, and therefore almost certainly to less productivity growth. Without austerity, the 2008/9 recession might have looked more like the 1991 recession, with a rapid recovery to a higher level of GDP by 2016.

I have made the point before that productivity improving investment often requires output growth to make it happen. Without output growth, a firm needs to trade off the cost of investment against the future reduction in costs the investment will generate. In contrast if demand is growing, the firm will probably want to invest to meet that demand anyway, and so the trade-off largely disappears. In other words how much firms initially invest in productivity improvements will depend on how much they expect output to expand after a recession.

As I have already noted, after the 2008/9 recession firms could reasonably expect a period of reasonably strong growth. Output had fallen by nearly 5% between 2007 and 2009, so there was still the potential for above trend growth. That appeared to be happening, with GDP rising by 2.4% in 2010. However these expectations were dashed over the next two years, with growth of only just over 1% in 2011 and just under 1.5% in 2012. At that point firms might have revised down their expectations about future demand, and delayed productivity enhancing investment projects.

The Chart below looks at the growth in output per hour during and after the 2008/9 recession

Productivity fell in the recession as it always does, as firms try to hang on to at least some of its workforce. But in 2010 productivity rebounded as the recovery started. The collapse in productivity happened subsequently, as this early promise of a quick rebound from the recession was dashed. Austerity, and in particular the large cuts in public investment in 2011 and 2012, played a key role in reducing output growth in 2011/12.

I therefore think there is evidence that austerity, in creating an unusually protracted recovery in aggregate demand from the GFC recession, did have a negative impact on productivity growth and therefore a persistent negative impact on output supply. What we cannot know is how long that negative impact on output supply would have lasted in the absence of Brexit. Without Brexit, perhaps business investment would have stayed at 10.5% of GDP, and the productivity enhancing investment projects that had been delayed after the weak recovery from the GFC would have finally been undertaken. In other words, while Brexit in itself was always going to reduce UK output permanently, it may have also prevented an eventual recovery in terms of investment led productivity from the impact of austerity. 

If an economy gets hit hard by a global economic shock, it seems reasonable to hope for an almost full recovery fairly quickly if policymakers do the right thing. Hit it hard again as that recovery starts, and any recovery is bound to be more delayed and may not be as complete as it might have otherwise been. If you hit it with a third big negative shock less than a decade after the first, then it is much more likely that the first two shocks will leave lasting scars.

Tuesday 3 January 2023

Health service and real wage decline: why are we only now talking about trends that began over a decade ago?


John Burn-Murdoch’s article entitled “Britain’s winter of discontent is the inevitable result of austerity” justifiably got considerable attention on social media, or at least as much as any article published just before Christmas can. It was noteworthy because it presented data on various measures of public spending and real wages compared to the same data for similar countries. In almost every case, spending and real wages in the UK started in 2010 near the average of similar countries, but since then has fallen to the bottom of that group.

The article closes with the following paragraph:

“Lives lost, earnings lost, years lost. Unlike Trussonomics, austerity is a slow and silent killer. For the best part of twelve years, the Conservatives sowed the seeds. This year they’re reaping the harvest.”

The terrible impact of austerity on public services, including the NHS and social care, cannot be denied. Of course, it is frequently denied. The favourite denial of the moment used by Conservative politicians is the pandemic, but here the article has the perfect response. If you run a public service like the NHS with barely the minimum resources required to produce a normal service (or ‘efficiently’, as the government might say), then there is no spare capacity to deal with emergencies like the pandemic. The pandemic is not an excuse for the current collapse in the NHS, but instead exposes for all to see the harm that was being done by underfunding over the previous decade.

Of course the signs that the NHS was being steadily deprived of funding was evident well before the pandemic hit, for those that bothered to look at NHS performance data. Waiting times for operations or emergency care were steadily rising. But unfortunately most of the time many prominent political journalists did not look at the data, but instead parroted the government line that the NHS was ‘protected’ from cuts.

In doing this these journalists played their part in being responsible for one of the most insidious deceits of the 2010s. I wrote about it back in 2015. The first deceit is in the definition of protected. A natural way of thinking about protection would be to keep NHS spending constant as a share of GDP, or at least constant in terms of spending per head. The way the government defined protection was constant in real terms, which with an expanding population meant less spending per head, and a shrinking share of GDP. The second deceit was to ignore the many reasons why this natural definition is not a good one. NHS spending has increased as a share of GDP since the 1950s, just as health spending in most countries has increased, because of an ageing population and many other good reasons. Health spending therefore needed to increase as a share of GDP just to maintain existing services at a reasonable standard. In most of the 2010s the government reduced rather than increased health spending as a share of GDP, so the service steadily deteriorated.

Were the many political correspondents who repeated the lie in the 2010s that NHS spending was being protected aware of these points? If not, then they were pretty bad at their job using any standard definition of journalism. The lie that NHS spending was being protected was repeated so often as fact that voters naturally wondered why their access to the health service seemed to be getting worse. If it wasn’t lack of money, some reasoned, it must be because of the ‘waves of immigration’ they kept reading about in newspapers. Government ministers said much the same: another lie that ignored the fact that the more people who work the greater the taxes available to fund additional spending. For this and more general reasons, it is not hard to understand why austerity was followed by the political populism of Brexit.

Public discussion of public spending cuts since 2010 is littered with lies and misdirection of the ‘protected’ kind. When I last took a comprehensive look at public spending data two years ago, Johnson was promoting the idea that austerity was at an end. What this meant in practice was some small increases in spending in a few areas. So Johnson brought the policy of constantly cutting all areas of public spending to an end, but if you talk about an end to austerity it sounds like you are completely reversing what had been done since 2010. It was a classic piece of misdirection, again repeated in much of the media. In reality the likely increase in health spending between 18/19 and 22/23 only matches the increases of the Thatcher/Major administrations, and remains below the 55-78 average.

Johnson encouraged this misapprehension with talk of 40 new hospitals - just one more lie. The reality of investment in the NHS since 2010 is clearly shown in one chart from the Burn-Murdoch article. The grey area includes all the data from comparator countries, and the dotted line is their average.

UK investment in healthcare, which the last Labour government had increased to around the average in comparator countries, has since 2010 been cut to well below that in any of these other countries. It is the consequent lack of capacity (beds, equipment etc) that is behind a large part of the current NHS crisis.

The FT article shows a similar pattern for UK real wages, in PPP terms, compared to comparator countries. Although it was less dramatic than in health spending, real wages slightly improved compared to similar countries under Labour, but since 2010 the UK has been heading towards the bottom of this league. This reflects general trends in economic performance since 2010, as I have often noted. Those trying to portray events since 2010 as just the latest chapter in an uninterrupted century of UK economic decline are also guilty ignoring the data, as Adam Tooze has recently emphasised.

Are the declines in UK health spending and real wages relative to other countries connected, as the closing paragraph quoted above of the Burn-Murdoch article suggests? To be fair the case is not made, and because austerity after 2010 happened in most similar countries to varying degrees the connection is not obvious. I think it is highly likely that UK real wages would be significantly higher today if Osborne had not cut public investment in the middle of a recession, but the same would be true in other countries that also undertook spending cuts after 2010.

However there is a similarity between developments in UK real wages and health spending which Burn-Murdoch does point out. The stagnation in real wages has been evident for a decade but it takes a cost of living crisis created by high food and energy prices to make that decline evident to those who don’t look at data, just as the pandemic has exposed the underlying fragility in the NHS. Once again the media has played a large part in hiding this reality until recently, with talk among Conservative politicians of a ‘strong economy’ going unchallenged for years when the opposite has been true.

In both the case of public spending and real wages, large parts of the media were complicit in hiding the truth from the public by repeating or not challenging the lies coming from the government. I think a large part of this stems from adopting the view, as much of the media did from 2009 onwards, that reducing the deficit was the primary and most urgent goal of macroeconomic policy. Once you accept that myth, which had little to do with macroeconomic reality, then it seems pointless reporting about the consequent declines in public services, and the economy must be strong because the deficit was coming down. It was why I had no hesitation in calling my book “The Lies We Were Told”. 

But I want to end on a more positive note. The best journalists have always made sure what they wrote or said was firmly based on facts, and I think we are now seeing more prominence being given to data-based journalism, exemplified in the work of John Burn-Murdoch at the FT and journalists like Ben Chu on Newsnight and Ed Conway on Sky.

For much political and economic discussion, being able to access and understand data is at least as important as the ability to write well. There is a phrase about damn lies and statistics, but the best way to call out misleading statistics is to just present the data. [1] Political journalists in particular need to write less about who is up and who is down, and instead to start filling their column inches with charts of data. If that had happened more often in the past, then it wouldn’t have required a pandemic or cost of living crisis to reveal to everyone what was happening to the health service and real wages.

[1] An anecdote does not prove anything, but I cannot resist this one as a footnote. During the flooding in late 2013, I wrote a few posts (e.g. here) on its links with austerity. At the time Cameron was claiming that spending on flood prevention had not been cut, and the media was doing its ‘he said, they said’ thing. My articles were based on official data that clearly showed spending on flood prevention had been sharply cut as part of austerity. Yet to my knowledge no one in the media showed that (publicly available) data. That is called hiding the truth.

As a result of these posts, two years later when further floods occurred Newsnight contacted me thinking I was an expert on flood prevention. I’m not, but I implored them to just show the data on which my articles had been based, which I knew would be more powerful than anything said in a talking heads discussion. They did, and this made impossible any attempt to deny spending on flood prevention had been cut under austerity.