How a Labour government could be the tipping point for public discussion about immigration

 

Just over a year ago I wrote about the tipping point in public support for Brexit. The tipping point (in reality tipping points) is when trying to make Brexit work becomes an electoral liability for Labour, and they would gain votes in marginal seats if they instead talked about rejoining the EU’s customs union or single market. Despite what John Curtice has recently said, I agree with Chris Grey that the tipping point will not be before the next election, but it will only be hastened if Labour win that election.

This post asks the same question for public views on immigration. They are obviously linked, because attitudes to immigration will influence attitudes to the Single Market. At the moment both the Conservatives and Labour are saying they think net immigration numbers should come down substantially, and a majority of the public still think immigration levels should be reduced. However since around the Brexit referendum, public opinion on immigration has shifted substantially, as this chart from the Migration Observatory shows.

At first some speculated that this shift was because Brexit voters assumed that leaving the Single Market had solved their immigration numbers problem, but that idea must have been well and truly shattered by the recent figures for net immigration. To some extent more favourable views about immigration may reflect a backlash against populist rhetoric. However in the UK I think instead the major reason for this shift is a perception that immigration is no longer about more people looking for a fixed number of jobs, but instead a realisation that immigration is in large part about firms or organisations needing additional labour.

In an important sense Brexit has facilitated this change in perspective, both because of the end of free movement and because of well publicised job shortages in particular sectors. John Burn-Murdoch presents evidence along these lines in the FT (see also here), but you can also see this if people are asked about immigration to particular jobs.

For most of these occupations, more people wanted an increase than a decrease in immigration, even though they would say they wanted less immigration overall.

In this respect immigration is a bit like taxes. If people are asked whether they would like lower taxes they generally say yes, but if they are asked whether they want lower taxes and lower spending on health, education and welfare they generally say no. Equally if they are just asked about immigration you are likely to get a different response than if they are asked about immigrants to staff the NHS, for example, particularly if they are aware of NHS staff shortages. Note that, just with taxes, these are not two equally valid questions. With our current immigration regime for sure (and in practice before that) a question that links immigrants to the jobs that immigrants will do makes much more sense. The gradual reduction in opposition to immigration since Brexit noted above may be because some people are making this connection without needing to be prompted.

If this analysis is correct, will this trend towards more favourable views on immigration continue? This may depend in part on the state of the UK labour market. With a probable Labour government committed to increasing growth, it seems likely that we will see a strong labour market for at least some of Labour's first term in office. This, together with the impact of demographic change (younger people are more liberal), suggests that the trend towards a more favourable view about immigration will continue. Working in the opposite direction is that, under a Labour government, the right wing press will go back to their pre-Brexit ways with stories about ‘waves’ of immigrants who live on benefits and steal jobs, and this in turn will influence the broadcast media.

The tipping point for Brexit is when a Labour government, whose politicians are not as constrained by ideology or their members/donors/newspaper owners, find it is no longer to their electoral advantage to pretend to be ‘making Brexit work’. This happens the moment Labour would gain more votes than they would lose in key marginals by, say, joining the EU’s customs union or single market. In principle this shouldn’t just depend on what voters tell pollsters about these options, but also indirect effects like benefits to growth.

Is there a similar tipping point for immigration? As with Brexit, that tipping point would be well beyond half of the population taking a favourable view of immigration. This is because our electoral FPTP system is biased towards social conservatives, so taking a pro-immigration stance could still harm Labour in marginal seats even if only a minority of voters want less immigration.

However I’m not sure Labour have the luxury of waiting for their pollsters to tell them the tipping point on immigration has been reached. In this respect immigration is not like Brexit. With Brexit Labour can move gradually in the direction of greater cooperation with the EU from day one, and judge the viability of key steps in reversing the Brexit process. With immigration Labour will find it much more difficult to talk about numbers being too high initially, and then switch to stressing the benefits of immigration later on. In other words, with Brexit the direction of travel is the same, whereas with immigration it is not.

Labour’s discourse on immigration today, in opposition, is almost too easy. With the Conservative government simultaneously presiding over record immigration, and its MPs demanding immigration be lower, Labour’s work is being done for it. Those voters that want lower immigration will think the Conservatives have failed them, while many others will be rightly appalled at Conservative rhetoric and actions on asylum.

The situation will become very different after Labour has been in power for a year or two. The Conservative opposition (including its press) will be saying immigration is too high, and now it will be a Labour government that will be seen as responsible for immigration numbers.

Any government, Labour or Conservative, faces a strong trade-off with immigration policy. Actually restricting the ability of immigrants to fill jobs in the UK hurts the economy, which is why successive governments (of both parties) have been very reluctant to do this. Instead governments tend to resort to different sorts of gimmicks or cruelty, where Sunak’s latest measures are a prime example of the latter. However neither gimmicks or selective cruelty will have much impact on immigration numbers, and so over years those who are concerned about immigration numbers will turn on the government. A government that talks the talk on reducing immigration but fails to bring numbers down is storing up trouble for itself.

With popular attitudes to immigration becoming more divided, an alternative approach which Labour could follow may be politically wiser. Instead of seeing immigration as a numbers problem, Labour could instead focus on the role immigration plays in helping the economy. It could actively oppose the Conservative narrative, rather than presenting a slightly milder version of it. By presenting the benefits of immigration in terms of additional output and better public services, it could strengthen the growing numbers who are in favour of immigration for specific professions. It might even make pollsters stop asking questions about immigration in abstract, and instead link immigration to the jobs immigrants do. [1]

Taking this approach would mean no targets for immigration numbers, or even aspirations to reduce numbers, as the media will treat these as targets. It can involve improving pay and training to reduce the need for immigration to particular sectors, but if that influences immigration numbers at all it will take many years to do so. Labour could also talk about the contribution overseas students make to universities, and how they save taxpayers money. It could talk about the UK taking its fair share of refugees, rather than trying to pretend it can just take a selected few.

Is such a shift in rhetoric the pipe dream it may seem today? The key electoral argument for such a shift in approach from Labour is that the alternative of doing what it and Conservative governments have done in the past does not work. Pretending to be concerned about immigration, but not doing anything significant to reduce numbers because of the impact this will have on the economy, has played a key role in bringing down three administrations. Immigration was the Conservatives main weapon against New Labour before the Global Financial Crisis, it was key in bringing about Brexit and the end of the Cameron administration, and it is currently doing Sunak’s government no favours either.

With the public shift in attitudes to immigration, the next Labour government may be the point where being honest with the public about immigration and the economy could pay electoral dividends. However to work effectively that change has to begin the moment Keir Starmer walks through the doors of No.10.

Have a great Christmas, and let's hope for a new start in 2024

[1] Such an approach will not convince those who oppose immigration on principle because of xenophobia or racism, but such voters will probably go to the Conservatives or another right wing party anyway.

Lessons (so far) from the inflation bubble of 2021-3

 

Inflation went up, but now it’s coming down again. Not just in the UK, but pretty well everywhere. What macroeconomic lessons can we learn from this, and what questions still remain? Were ‘team transitory’ right after all? Were central banks too slow to raise rates, and once they started rising did they rise too fast?

The preliminary point to make is that inflation is not the cost of living. A period where inflation goes up and then comes down again means prices end up a lot higher at the end of this period than they were at the start. Those whose incomes have not matched the inflation they have experienced will be worse off, perhaps substantially so. For some who were already finding it hard to make ends meet, that is a very serious problem, which has not gone away just because inflation has fallen.

What should now be well understood is that this period of high inflation was not just about high energy and food prices. There were additional supply problems that pushed up prices, but more importantly labour markets in most of the major economies were also tight. Almost without exception, unemployment in 2022 was lower than at any time this century in the United States, Germany, France and the UK.

This meant that any increase in energy and food prices was likely to lead to some increase in wage inflation. This in turn would make the inflationary shock caused by higher food and energy prices more persistent, because firms not producing energy or food would pass on much of any increase in labour costs. To avoid this turning into a permanent increase in inflation, central banks raised interest rates in the US, UK and Euro area.

Were central banks too slow in raising interest rates? It is important to understand that central banks cannot and should not try to always keep inflation at target. When the relative price of commodities increases, it would be deeply damaging to try and reduce all other prices so that aggregate inflation did not rise. So there was always going to be an inflationary bubble in 2021-3. The issue is whether central banks could have moderated it more than they did.

It is also important to remember that in 2021 the main concern was and should have been ensuring a full recovery from the pandemic. Few anticipated the size of the inflationary shock (i.e that Russia would invade Ukraine, or that there would be so many supply side bottlenecks), and the pandemic made it difficult to read the state of the labour market. My own view, and in contrast to many others including various Lordships, is that central banks were right to delay raising rates until 2022. Once they understood that the recovery from the pandemic had been strong and that as a result the labour market was tight, they acted by raising rates pretty fast.

The fact that inflation is now falling quite rapidly strongly suggests that central banks have done enough to stop this energy and food price shock leading to permanently higher inflation. What we don’t know yet is whether they did too much, because the lag between nominal interest rate increases and falls in economic activity can be quite long. [1] However we can still make one important point.

When inflation was near its peak some economists (let’s call them the inflation pessimists) argued that a significant period of depressed economic activity would be necessary to bring inflation back down to be close to the 2% target. Only when unemployment was significantly higher than it is today, they suggested, would wage inflation start to fall back towards levels that are consistent with a 2% target.

We now know that that argument is almost certainly wrong. Wage inflation has fallen in the US and elsewhere without any large increase in unemployment. Of course unemployment may still rise because of the delayed effect of higher interest rates, but it is a bit of a stretch in the US at least to suggest that falling wage inflation in the US is a response to expectations of above trend unemployment.

What is not often discussed is that current macroeconomic theory does not suggest a period of significantly higher unemployment is necessary to reduce wage inflation. In this sense the inflation pessimists could be accused of being old fashioned. The idea that ‘if it’s not hurting it isn’t working’ comes from a traditional Phillips curve, where price and wage setters only look at past inflation when forming expectations about future inflation. The key point about a central bank trying to hit an inflation target is that price and wage setters take the actions of that central bank into account when forming expectations.

If the central bank has credibility (an overused word simply meaning here that central banks will be successful in hitting their inflation target), then this anchors future expectations about inflation at the inflation target. Wage and price setters know that inflation will come down to 2% once inflation shocks disappear or excess demand is eliminated, and so form their expectations accordingly. In this situation, there is no need for a period of excess labour or goods supply to bring inflation down. To use another much overused macroeconomic cliche, soft landings are quite possible and should be what central banks aim for.

Of course central banks can still get things wrong. They may not do enough to eliminate excess demand, in which case inflation above target will persist. They also may do too much to deflate demand leading to a period of excess supply, which could lead to inflation undershooting it's target. This second possibility is still very real in the UK and Europe, although it is looking less likely in the US.

As De Grauwe and Yi show, getting inflation down in the 2020s has been much easier than in the 1970s. This is partly because the inflationary shock was more short lived (gas prices have fallen and post-pandemic supply disruption is over, although food prices remain high) so no permanent contraction in supply was required. However it is also because we now have independent central banks with inflation targets, and a recent history where inflation has been close to target (so these central banks have credibility).

If the inflation pessimists, who thought a period of excess supply and higher unemployment was necessary to get inflation down, have been proved wrong, have ‘team transitory’ been proved right? Well that depends on what ‘team transitory’ believed and said. For the sake of exposition, let me define team transitory as saying that inflation would have come back to target without the large increase in interest rates we have actually seen.

This question is difficult to judge, because we do not know what the path of inflation would have been if central banks had not raised interest rates so much. As someone who initially argued against the size and speed of interest rate increases, it would be nice to answer yes, I was right. A great deal will depend on what happens to economic activity and inflation over the next year or so. There seem to be two possibilities, and it is may be that the major economies end up illustrating both cases.

The first possibility is that the economy achieves a soft landing: inflation comes down close to target without any economic downturn relative to trend. If this happens, it suggests increases in interest rates were required, and in that sense team transitory was wrong. [2] The second possibility is if economic activity becomes depressed and inflation undershoots its 2% target. In that case central banks will have overdone their monetary tightening, and team transitory may well have been right.

All the indications are that for the US a soft landing is more likely than not. If this transpires then both the inflation pessimists and team transitory will have been wrong, and the Fed (the US central bank) will have done very well. For both the UK and Eurozone it’s too early to say whether we get a soft landing or not. But in the US at least, at the moment it looks like the experts in the central bank are rather better at managing inflation that many outside pundits. Not a popular conclusion I know, but also perhaps not a surprising one either.

[1] Part of the reason for this is that economic activity is influenced by real interest rates (nominal rates less expected inflation). Only now, with inflation falling, are real rates becoming positive.

[2] This assumes that higher interest rates reduce aggregate demand. As I argued here, the evidence is very strong that they do.

Unofficial lockdowns, and Sunak’s deadly incompetence during the pandemic

 

It is now well established that Rishi Sunak as Chancellor played a significant role in increasing the death toll from the pandemic on at least two occasions. The first was to introduce ‘Eat Out to Help Out’ in the summer of 2020, and the second was to advise Prime Minister Johnson to ignore the medical advice from SAGE to impose a lockdown in the early Autumn and subsequently.

In both cases he will argue that, as Chancellor, his role was to protect the economy. Yet he did no such thing. As Chancellor, he failed to understand that to protect the economy you had to control the virus, which means keeping the number of people infected low. I and other economists argued this at the time, but in this post I want to set out the logic in a new way to show why there never was a health/economy trade-off.

A decade before the pandemic a group of us published an article on the economic effects of a pandemic. One of the main findings of the paper was that a severe pandemic can involve serious economic costs because consumers will avoid what we called ‘social consumption’. Social consumption involves anything that brings consumers into contact with others, so includes eating out, going to pubs or the cinema, using public transport etc. Social consumption involves a third of total consumption, so if people significantly reduce their participation in these activities the impact on the economy will be large [1].

We could call this effect an ‘unofficial lockdown’. Individuals stay at home rather than eat out or go to the cinema because they want to avoid catching the virus, not because they have been told to by the government. The key point is that if the government does nothing, individual actions attempting to avoid catching a potentially deadly virus will lead to a substantial economic slowdown. Swedish GDP fell by 7.6% in 2020Q2, even though no official lockdown was imposed.

This is why reducing the number of people infected also helps the economy recover. There is no health/economy trade-off in this kind of pandemic. If economic policy encourages people to put themselves at greater risk of getting infected, as Eat Out to Help Out (EOTHO) did, then any boost to the economy would have been limited to when the scheme operated, and thereafter there would only be economic damage as infections increased. The only situation where this might not happen is if R (the average number of people infected by one person) was sufficiently less than one and it remained below one despite EOTHO, but we know this wasn’t the case and Sunak made a point of not asking SAGE about it.

While EOTHO played some part in the second wave that grew during the Autumn of 2020, just as serious a failure was Sunak arguing against the SAGE proposal for a second lockdown in September. It is the case that an official lockdown has a bigger immediate negative impact on the economy than an unofficial lockdown. This is because, for example, in an unofficial lockdown

1. Many people will not be well informed, and will not reduce their social consumption much if at all

2. Some people will be well informed, but decide the risk to themselves is small so they will not reduce their social consumption, and discount the risk of them infecting the more vulnerable.

3. Employers may force workers to continue to travel work, even though both the work environment and travelling to it may risk infection.

Yet for the same reasons, an unofficial lockdown has less of an effect in reducing R than an official one. [2] This is what the UK experienced in the Autumn of 2020, even with the addition of some regionally based restrictions imposed by the government. With R>1, not only are more people being infected, with some dying or getting Long Covid, but the economic damage persists as individuals try to protect themselves by withdrawing from social consumption.

The UK and other countries experience of full official lockdowns is that they reduce R to less than one, so with a short lag infections start falling. This was the case for the lockdown at the end of March, the one month lockdown in November and the lockdown in January 2021. Because R<1, the number of infections fall and then the economic damage caused by individuals avoiding social consumption dissipates.

My focus on what happens to R is crucial, because there is a world of difference between R<1 and R>1. In the former the pandemic is being controlled, so that when lockdown ends the situation is manageable, and the hit to the economy from reduced social consumption will be relatively small. If R>1 the damage to the economy just keeps getting larger.

So while an official lockdown might do more damage to the economy than an unofficial one while it lasts, the official one deals with the problem, so reduces the time that Covid damages the economy. In contrast doing nothing, or taking measures that fall short of a full lockdown, allows infection numbers to increase and so allows damage to the economy to persist.

This is exactly what we saw in the Autumn of 2020. Thanks in part to pressure from Sunak, the government rejected advice from the experts to impose a full lockdown, and so infection numbers grew and consumption remained over 10% below its end-2019 level. When a sustained lockdown came in 2021Q1 consumption was only a few percentage points lower than 2020Q3 (GDP was actually higher), but that lockdown brought cases right down, and vaccines then removed the need for further lockdowns.

It is really difficult to rationalise what Sunak did during the summer and autumn of 2020. By deliberately not asking SAGE about the impact of EOTHO, he must have known this would increase infection rates. Did he really think the economy would be largely unaffected by a second wave? Unlikely, as in enacting EOTHO he was aware of people reducing social consumption because of the pandemic! Perhaps his actions were guided by perceived political advantage rather than economic or health impacts.

Gross incompetence is a strong term, but I fear it clearly applies to Sunak in these two cases. His thinking appears not to have got beyond the level of a right wing newspaper column, despite having the resources of the Treasury at his disposal. [3] His actions not only led to many people dying, but his actions also damaged the economy when he was the minister in charge of protecting it.

[1] This response modelled in our paper involves individuals trying to avoid catching the virus. It was not coordinated by governments in any way. In the paper we didn’t look at government imposed lockdowns beyond school closures.

[2] Obviously this judgement is country dependent. In countries where people and employers are better informed and more socially minded, unofficial lockdowns may come closer to replicating official lockdowns. This is why comparisons between countries that did lockdown and Sweden are potentially misleading, and why comparisons between Sweden and other Scandinavian countries are much more informative.

[3] Reporting on the Covid inquiry has naturally focused on political culpability rather than the advice politicians were being given. In this particular case it is inconceivable that the Treasury was unaware of the analysis I outline here. What happened to that analysis, and how far up the civil service hierarchy it got, are interesting questions we do not know the answer to. Until we know, we can only wonder whether senior Treasury officials' concern about higher government borrowing in lockdowns mattered more than the health of the economy.