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.

Fiscal failures: The UK Autumn Statement and the German debt brake

 

Many people fear debt, because they worry about the consequences of not being able to pay the interest on it, or pay it back. However it is a huge mistake to let that fear override another truth, which is that debt is a brilliant device. It allowed me and millions of others to buy a house, and for many years continue to buy houses. More generally, it allows individuals to spend more money early in life, and pay for it during middle age when they are normally earning much more.

The extent to which we can transfer our own income intertemporally to smooth consumption over time has been growing over my lifetime. The opportunity to borrow when young is undoubtedly a good thing, yet despite this many on both left and right complain about the corresponding increase in debt that automatically comes from that.

Exactly the same is true for government debt. It allows governments to keep their spending on health, education and everything else stable when revenue streams fluctuate because of booms and recessions. In addition, it allows governments to cushion the impact of recessions on individuals who lose their jobs (unemployment benefit), and this ‘automatic stabiliser’ helps moderate the impact of the recession for everyone else. It allows the government to spread the cost of investment in roads and hospitals, so that those who benefit (current and future generations) help pay for it. It allows the government to respond effectively to a crisis, like the Covid pandemic.[1]

This is all possible because it is fairly costless to allow debt to fluctuate when revenue fluctuates or spending needs to temporarily rise. Imagine the harm that would follow if public service provision had to go up and down during the business cycle, with the NHS carrying out less operations in recessions, or children getting taught less.

A key corollary of the idea that debt allows smooth taxes and spending is that if debt increases substantially in a crisis it should be reduced back (if at all) very slowly. Debt to GDP can be reduced gradually over many decades (as UK debt from WWII was), or not reduced at all if there is no reason to think the level of government debt is excessive. [2] I have suggested that action to control climate change should also be regarded as a similar crisis.

Once this has become clear (as it will be to any economist), the idea of a debt target immediately becomes problematic. The whole point of debt is that it can go up and down depending on economic circumstance, so trying to fix it (or the change in it, the deficit) at some number is in danger of undoing all the good things debt can do outlined above. A target for debt is a bit like setting a target for how much fuel your central heating boiler can use, and as a result you freeze on cold days but get over hot on warm days.

So why do governments have targets for debt or deficits? The answer is that government debt can be abused by politicians for political advantage. In the early years of the Trump presidency he and the Republican Congress cut taxes for the better off, and paid for it by increasing the government’s deficit rather than raising taxes on everyone else. The political reasons why this was done are obvious, but this is an abuse of government debt, because there is no intertemporal smoothing involved.

Last week we saw our own government do much the same thing. The Chancellor cut taxes by pencilling in future public spending numbers that were pure fantasy. As these public spending numbers could never be implemented, taxes are bound to have to rise again after the election whoever wins it, to pay for more realistic public spending plans.

Why did the Chancellor do this? It’s a political win-win for him. He can claim that the Conservatives are the tax cutting party, and hope to get a bounce in the polls from voters who didn’t read the IFS, Resolution Foundation or another good analysis of what was going on. [3] He wins if that means the Conservatives stay in power. He also wins if they lose the election, because then it will be a Labour government that raises taxes and he can say I told you so.

This type of abuse of government debt by politicians is why we have debt or deficit targets. To put it starkly, if we always had governments that just acted in society’s interest, debt or deficit targets would not be necessary. It is also why saying we have to have these targets ‘because of the markets’ is quite wrong. For economies like the UK, the markets are not a kind of policeman taking action if governments abuse government debt.

Although this explains why targets for debt or deficits exist, the problem remains that trying to hit a target for debt or the deficit makes no sense in the short term, because debt is what allows the government to smooth its spending and taxes. There is a real conflict between allowing good governments to use debt wisely, and stopping governments abusing debt for political ends. [4]

There are three approaches to this conflict. The first is to ignore political abuse of government debt, and have no targets for the deficit or debt. This is kind of [5] what happens in the US, and leads to a bizarre situation where Republicans are seen as tough on the deficit but in reality are not and the Democrats have in the past reduced the deficit and suffered the associated political costs.

The second approach is to largely ignore the economic advantages of government debt and focus everything on controlling it. The clearest example of this approach is Germany, and its debt brake. (The historical background to its imposition is described by Adam Toose here. The brake is popular among the public, but not with economists.) Essentially this involves imposing a fixed path (strictly an upper bound) for nominal debt, with deviations only allowed in two circumstances..The first is a cyclical downturn, but any deviation (excess deficits) have to be corrected in the subsequent upturn (with deficits less than the target) . The second is a designated (by parliament) crisis, where any excess deficit has to be steadily paid back over a set time period (e.g. 20 years).

This debt brake has been made part of the German constitution, so the courts can overrule the government if it thinks the rules are not being obeyed. This happened very recently, where the court ruled that the government couldn’t use some of the unspent crisis money from the pandemic to spend on greening the economy. You can think of a constitutional debt brake as a natural expression of German ordoliberalism, or as just a huge mistake.

In an earlier post I described Germany’s debt brake as perhaps the worst fiscal rule ever applied by a modern government to itself. It turns government debt from a flexible instrument that allows various forms of beneficial smoothing into a rigid straightjacket that stops the government doing important things, like investing in greening the economy. Rigid targets for the total deficit or debt invariably lead to underinvestment in the public sector, and that is exactly what has happened in Germany. Lack of public investment in time leads to less private investment, and a weak economy. Germany is a textbook example of the problem I recently described here, where deficit obsession leads to economic stagnation.

The third option is to have some form of deficit target, but to make it as flexible as possible to allow the government to use its debt in a beneficial way. I have consistently argued that this is best done with a five year ahead rolling target for the government’s current deficit (excluding public investment), with no additional targets and to apply only outside recessionary periods. But I have also argued that any fiscal rule alone will always be inadequate, either because governments will always find ways to cheat or because occasionally even the best fiscal rule should be ignored. You also need a fiscal watchdog: an independent organisation that can act as a referee for aggregate fiscal policy. Osborne, when he set the remit for the OBR, ensured it would not be such a watchdog, but it would be quite easy to change its remit so it could become one.

This third, middle way can provide the benefits that government debt makes possible, but also ensure that debt is not abused by politicians for their own ends. The problem we have had in most countries that have imposed fiscal rules is that both politicians and the media have focused on the latter at the expense of the former, perhaps because they think about politics more than economics. As a result, these rules have done and are doing considerable economic harm, while any benefits remain difficult to see. [6] However, forsaking any fiscal rules would mean that the kind of fiscal deceit we saw in last weeks Autumn Statement becomes routine, rewarding irresponsible governments and penalising the more responsible.

[1] One or two economies have governments whose financial assets are greater than their debt, so they are able to finance investment and intertemporally smooth by changing their asset levels rather than their amount of debt. The political reasons why these countries are unusual will become clear.

[2] We have very little idea of what the optimal level of government debt is.

[3] As should now be clear, governments abusing debt works in political terms because voters do not regard increases in debt as future taxes. This in general is not completely irrational, because voters can always hope that someone else pays the future taxes. In the case of the Autumn Statement, however, because taxes will rise immediately after the election, then believing the Chancellor’s rhetoric or the right wing press is either being irrational or more probably reflects being ill-informed.

[4] This conflict is the basis of my paper with Jonathan Portes.

[5] Except when a Republican Congress tries to impose a debt ceiling.

[6] Advocates for rigid fiscal rules, like the German debt brake, normally count falling government debt to GDP as a benefit. This confuses means with ends. There is no solid evidence, or indeed relevant economic theory, that suggests countries with low debt to GDP derive any benefit compared to countries with higher debt to GDP.

Why does the political right have such a problem with reality, and how should experts respond?

 

The UK Supreme Court has ruled that the government’s plan to send some asylum seekers to Rwanda is illegal because the Court does not believe Rwanda to be safe for refugees. The evidence does indeed back this judgement. Part of the government’s immediate response appears to be passing a law saying that Rwanda is a safe place for refugees. The logic, presumably, is that if the law says something then the Supreme Court cannot say the opposite. As one former Supreme Court judge said, such a law would be “constitutionally really quite extraordinary”. But for politicians on the right, in the UK and US at least, denying reality and preventing people pointing out that they are denying reality seems increasingly par for the course.

The political right started ignoring experts well before Michael Gove said publicly that he had had enough of them. Mrs Thatcher had a well known problem with most economists after 364 attacked her economic policy, and Keith Joseph tried to close down the social science research council. Austerity was thought to be a big mistake according to a majority of academic economists at the time. By now the list of things that the political right in the UK have defied the expert consensus on is pretty long, with Brexit, climate change and lockdowns during a pandemic being major examples. [1] The US is much worse, of course: there we can add vote counts and whether vaccines work to the list.

Why does the political right increasingly seem to be on the wrong side of facts and science, and what should scientists do about it? One answer to the first question comes from asking another. Do some on the left, by which I mean those whose views are to the left of the positions adopted by the current Labour leadership, occasionally have problems with facts and science? My own answer would be that some can, at least in the area I know best which is economics. The example that is freshest in my mind is UK inflation.

As I have explained in earlier posts, the inflationary episode we have recently been through in the UK was in part generated by higher energy and food prices, but it was also a result of strong labour markets, where unemployment was low by recent historical standards and vacancies were very high. Nominal wage increases far exceeded what could be consistent with the inflation target. From my experience, some on the left were much happier talking about imported inflation than labour markets being too strong. Many claimed inflation was profit led. Yet the evidence so far for the UK is pretty clear that profit shares, outside of the energy sector, have remained pretty stable. (See most recently this Bank study, with a FT write up here.) Of course the monopoly power of many firms is part of the inflationary process, but in the UK there is little evidence that it has been a major driver of inflation.

My point is not that left and right are much the same. They are obviously not, and the right has power while the left do not. Instead it is to suggest one source of reality denial is ideology. The ideological source of the left’s focus on profits rather than a strong labour market is obvious. On the right, neoliberalism typically argues against state ‘interference’ with firms and markets. Both climate change and lockdowns are about the state taking measures to avoid extreme externalities. Equally a libertarian ideology would see both policies as restricting personal liberty.

Arguments I sometimes hear when I talk about how ideology may lead people to ignore evidence is that it is impossible to separate facts from values, or even that science itself is an ideology. I’m never sure how to take such points. If the argument is that ideology is bound to influence the priors that evidence confronts, then of course, but if the argument is that it’s OK to continue to always deny evidence because of these priors then I would strongly disagree.

However I don’t think ideology is the only reason why the political right has a problem with reality. Another, that is widespread in the US and is increasing in the UK (helped by GB news), involve conspiracy theories involving vaccines, 15 minute cities and so on. I think these are a continuing manifestation of what Richard Hofstadter called the “Paranoid Style” in American politics, which has a more limited purchase in the UK. This sits mainly [2] on the right because these involve an extreme distrust of the state, with conspiracies often involving malevolent (and secret) activity by the state. “A vast and sinister conspiracy, a gigantic yet subtle machinery of influence set in motion to undermine and destroy a way of life” is how Hofstadter described this paranoid style.

While many right wing politicians in the US are prepared to embrace this paranoid style, few in the UK do. Instead the current Conservative party leadership flirts with the paranoid style. When Conservative MP Nick Fletcher talked about the international socialist concept of 15 minute cities in the Commons, the then Leader of the House Penny Mordaunt replied that it was “right that people raise concerns about this particular kind of policy.” The same is true of the right wing press. The Daily Telegraph managed to get ‘climate lockdown’ into its headline about a proposed traffic scheme in Oxford. In both cases we have the established right in the UK trying to get the best of both worlds, in not openly leading with the conspiracy, but not knocking it down either.

To see how this paranoid style sits far too easily with today’s politics on the right we can look at right wing media, and in the UK with the strong crossover in recent years between those writing in that media and Conservative political leaders and their advisers. As James O’Brien says, a lot of what can be found in the right wing tabloid press is not about informing readers with facts, but about creating an emotional reaction. If the aim is to do this, then the more you can distort or invent facts to intensify this reaction the better. One of our former Prime Ministers made his journalistic reputation doing just this by making things up about the EU.

This kind of journalism is normally designed to appeal to readers’ social conservatism, rather than any right wing ideology. Here is a direct link with the paranoid style of politics. The best way of creating a feeling of fear and outrage among a socially conservative readership is to suggest that the way of life they have known is being threatened in some way. Unlike the paranoid style, this threat does not involve some conspiracy at the heart of government, but instead it comes from outsiders in some form, such as immigrants or the socially liberal ‘woke’ elite.

How should experts respond to this right wing disregard of both expertise and reality itself? I have lost count of the number of pieces I have read by scientists lamenting the decline in public trust in experts, and how experts should get that trust back. Many suggest that academics should engage more with the public to win back that trust. While I could hardly disagree that it’s good that some academics engage with the wider public, I’m not at all sure that most academics should. It is not, after all, their comparative advantage.

Despite their best efforts, academics will always be at a disadvantage compared to politicians or their side-kicks pushing snake-oil. The moment an academic loses their doubts and scepticism they stop being good academics, yet in argument doubt and uncertainty play less well than conviction among most of an undecided audience. In addition, public engagement takes a lot of time that might be better spent on research and scholarship.

I would also question, in the UK at least, whether there is a crisis of trust in experts. The UK government constantly pretended it was 'following the science' because they knew that is what people wanted to hear. The response to the first lockdown showed that most people were willing to follow government advice because they thought it was expert advice, and that trust only began to fall apart when it became clear the government was neither following the science nor even its own advice. It seems to me, following the first part of this post, that the problem for experts is political rather than about trust.

However there are still plenty of things that expertise can do more of to expose the snake-oil salesman. Unfortunately there will always be experts who are prepared to leave the science behind in exchange for money and notoriety. The best way to counter their influence is to ensure that the non-partisan media has easy access to what the scientific consensus actually is, and that is something that scientific institutions should constantly be doing. Initiatives like the Science Media Centre are worth extending.

In addition, the UK’s response to Covid has also shown us the danger of a right wing government misusing its own scientists or its links with scientists to give a false impression of what expert opinion is. Again scientific institutions informing the media can help counteract that (as well as ad-hoc groups like Independent Sage), but it also seems important for scientists advising the government to make sure they retain an independent voice, and that they are not used to give a policy the appearance of scientific merit when it has none.

As the Covid pandemic showed, a political right that has become increasingly hostile to expertise, science and even universities is very dangerous, because it can cost thousands of lives. Our current Prime Minister spent his time, in the middle of the pandemic, 'handling the scientists' rather than handling the virus. He was not favouring economics over medicine, because he didn't bother to consult economists who had studied pandemics, and so got the economics horribly wrong. The most effective way of tilting the scales back towards reality and science is to endeavour to ensure these politicians and this political viewpoint are kept well away from power in the future.

[1] Strictly most Conservative politicians don’t publicly deny the need to phase out burning carbon, but they just support giving subsidies to new oil fields and opening coal mines instead.

[2] The scare stories around Charter Cities would be an example of a left wing version of right wing fantasies about 15 minute cities. However this study for the US provides evidence that misinformation is much more prevalent on the right/social conservative divide than on the left/liberal side.

Current UK and EU stagnation are in part the consequence of deficit obsession

 

The rule of thumb journalists use to define a recession, two quarters of negative GDP growth, is unhelpful in many ways. If the economy grows by 0.1%, the headline is ‘UK avoids recession’, but if it grows by -0.1% in two consecutive quarters, the headline is ‘UK enters recession’. Yet the difference between those two, 0.2% of GDP, is well within the measurement errors typical associated with GDP growth. From an economic point of view there is no material difference between 0.1% growth and -0.1% growth, so calling the later a recession but the former not is rediculous.

Another problem with this way of defining a recession is that it makes no reference to trend growth. If the economy typically grows by 3%, then zero growth is a big difference (3% less than normal). However if trend growth is more like 1%, then zero growth is not such a big deal (just 1% less than normal). This can lead to serious misreporting when talking about a recovery from a recession. For example some have claimed that because GDP started growing in 1982 after the 1980/1 recession the famous letter from 364 economists was wrong. As I noted here, growth in 1982 was around the trend rate. The recovery, in the sense of getting back to trend, only really started in 1983.

One final problem with the ‘official’ definition of recession is that it refers to GDP, rather than GDP per head. The latter is far more relevant in almost every way.

UK Quarterly growth	Real GDP	Real GDP per head
2022Q1	0.5	0.2
2022Q2	0.1	-0.2
2022Q3	-0.1	-0.2
2022Q4	0.1	0.0
2023Q1	0.3	0.2
2023Q2	0.2	0.1
2023Q3	0.0	-0.1

As the table above shows (source), if we used GDP per head in the official definition of recession, then we had a recession in 2022, and we could be heading for a second recession in the second half of this year. Again this shows the nonsense of being so literal about defining a recession.

A much better way of describing 2022 and (so far) in 2023 is that the economy has flatlined. It is tempting to ascribe this period of very weak growth as a consequence of rising interest rates to combat high inflation. Growth in the major EU economies has also been weak over the last two years. However one important counterexample should make us question this simple explanation. As the graph below shows, growth in the US has been much stronger.

Martin Sandbu shows a similar graph comparing US GDP to EU GDP. While UK GDP per capita remains at similar levels to just before the pandemic, US GDP per capita is almost 6% higher. The UK recorded a slight fall in GDP per capita in 2023Q3, but US GDP per capita increased by over 1%!

As Martin notes, this is not because US GDP per capita growth is always higher than in Europe. Equally, as I showed here, UK growth in GDP per capita was at least as strong as the US before the financial crisis and austerity. Something has been happening in the US since the pandemic that has not been happening in the UK and EU.

As with any puzzle there are many possible answers, and not enough evidence to know for sure which is correct. One answer is that the energy price shock hit Europe much harder than the US, because gas markets are more local than the oil market and gas supplies were restricted by Russia’s invasion of Ukraine. If that was the case, then in 2023 we should be seeing some rebound in Europe relative to the US as gas prices came down, but as yet there is no sign of this. So this is only a partial explanation.

The argument I have made before, and Martin also makes, is that US fiscal policy has been much more expansionary since the worst of the pandemic than in Europe. The details are discussed at length in that previous post and in Martin’s article so I will not repeat them here, except to say that they involve a combination of the timing of fiscal stimulus and directing that stimulus to those who will spend more of it. Instead I want to broaden this out to make a much more general point.

One feature of Biden’s tenure as President is that policy has not put the budget deficit or debt at the centre of fiscal decisions. This is in contrast to Europe, where in both the EU and UK constraints on debt or deficits imposed by politicians always seem to bite, and also in contrast to previous Democratic administrations which have ‘worried about the deficit’ to varying degrees. In my view the strength of the US economy coming out of the pandemic owes a great deal to this difference, and this holds important lessons for European policymakers who remain obsessed with and constrained by deficit or debt targets.

What do I mean by deficit obsession? After all, I have consistently argued that setting fiscal policy over the medium term to follow the golden rule (matching day to day spending to taxes) during normal times is a good objective. Deficit obsession, by contrast, implicitly views public debt as always a bad thing, erects totally arbitrary targets to reduce that debt, and allows this to dictate policy at almost all times, which invariably means underinvestment in public services and infrastructure.

Deficit and debt obsession matters most after a severe economic downturn, caused for example by a financial crisis or a pandemic. After the Global Financial Crisis the key mistake was not the absence of fiscal support during the period when output was falling, but during the period after that when we would normally expect a recovery from that recession. This was because in the US and UK, Democrats and Labour were in power. However even in Europe there was some fiscal support during the worst of the recession. During the worst of the pandemic all governments offered considerable fiscal support. It is after the immediate crisis that mistakes were made. It is as if policymakers were prepared to suspend their deficit obsession while output was falling, but once output stopped falling that suspension ended. In a way, they were also being misled by the 'official definition' of a recession.

We know from the 1930s depression that the level of output after a crisis does not always bounce back to its pre-crisis trend. Thanks to Keynes we also know why. If consumers and firms think that perhaps such a bounce back will not occur, it will not, because consumption and investment will remain depressed. In the 1930s unemployment stayed high, yet wages and prices stopped falling. It needed a fiscal stimulus, in the form of the New Deal or a war, to reduce unemployment. Unemployment did fall after the Global Financial Crisis, but output did not return to its pre-crisis trend.

We are seeing the same pattern after the pandemic. We had a V-shaped recession, but output in Europe has not returned to its pre-pandemic trend, because in the EU and in the UK policymakers have returned to imposing deficit or debt targets that leave no room for encouraging a full recovery. The one exception is the US, and it is there that output has returned to something like its pre-pandemic trend.

In the EU and UK policy makers typically view the increase in debt during the crisis as an unfortunate outcome, rather than a beneficial means of softening the impact of the crisis. As a result, as soon as the crisis is over they try to reduce the new higher level of debt through fiscal consolidation rather than stimulating the recovery. We know that is unlikely to work on its own terms (fiscal consolidations when the output gap is negative tend to increase debt to GDP) , and it also risks permanently damaging average incomes.

I have been making this argument consistently over the decade I have been writing this blog, but for most of this time all the major economies have been afflicted by deficit obsession so I have been unable to point to a current example of how things could be done much better. Thanks to President Biden and Democrat policymakers, now I can, and the results speak for themselves.

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How could Johnson have become Prime Minister?

 

The Covid inquiry has become a trial of Boris Johnson, showing how hopeless and harmful a Prime Minister he was. If you are unconvinced, read this from Andrew Rawnsley. Johnson is not the first political leader whose only virtue was charming (some) voters, but the combination of refusing to delegate and being completely indecisive was a disaster. Combine that with the selection device, Brexit, that he imposed, and you ensure that only the worst of MPs would become ministers or advisors. That is a recipe for a calamitous administration, with or without a pandemic.

As many have noted, Johnson’s unsuitability to be a cabinet minister, let alone a Prime Minister, was well known before his rise to power. If you look back at past posts on this blog (e.g. here for example) you will see this spelt out, and I’m hardly a political insider. Everything I wrote there and more was well known to most Conservative MPs. So what is so wrong with our political system that someone so ill-suited to the job could become Prime Minister?

It is tempting to answer this question very simply with a single word, Brexit. Brexit was Johnson’s route to power, and indeed he probably chose to back the Leave side because it would advance that cause. While there is a lot of truth in that answer, to leave things there would in my view be a mistake. It suggests that Johnson became Prime Minister almost by an accident of history, and crucially that without Brexit he could never have become Prime Minister. I think there are more fundamental forces that propelled his rise to power. .

The most obvious point is that winning the EU referendum in 2016 did not bring Johnson the job he craved. In the election among MPs to replace David Cameron, Johnson withdrew before the first ballot because he lost the support of his partner in arms during the referendum campaign. Michael Gove, in announcing his own candidature, stated that Johnson could not "provide the leadership or build the team for the task ahead." At the time the Telegraph described this as "the most spectacular political assassination in a generation”, but the press cannot be trusted on this matter. Instead I suspect the absence of support for Johnson represented MPs doing their job of ensuring anyone as unsuited to being leader as he was did not get near No. 10.

What was rather more surprising than his failed leadership bid was that May appointed him Foreign Secretary. This promotion to what is traditionally regarded as a very senior ministerial position was unusual. As one commentator put it, this “made public what British diplomats have been trying to hide for years: The Foreign Office is a shadow of its former self.” May, who knew the Conservative party well, may have judged that Johnson’s popularity among the membership and press was a potential danger to her, and so it was better to have him inside the tent in a relatively harmless role.

Suppose Leave had not won the EU referendum, and Cameron had continued as Prime Minister. He may well have reasoned in a similar way, and given Johnson a senior post after the referendum. Even if Cameron had not held a referendum in 2016, and managed somehow to fend off calls to do so yet retained power, Johnson’s popularity with the membership and the press may have ensured that he would soon find himself in the cabinet. The key question therefore becomes why Conservative MPs, after failing to support him in 2016, changed their minds so dramatically within three years.

What changed between 2016 and 2019 was the obstruction by Brexit hardliners of May’s attempts to get a deal with the EU, and the electoral threat of Nigel Farage. After the disastrous European election results of 2019, a majority of Tory MPs decided that to defeat one hardline Brexit populist they needed another, and Johnson was the only candidate that could match Farage.

The combination of party unpopularity and a threat from Farage created by the inability of May to ‘get Brexit done’ was certainly intense. The key question again is whether it was a unique outcome that could not have occurred if Leave had not won the referendum, or if the referendum had never been called. A key reason that Brexit was popular was immigration, which was blamed by many voters for stagnant real wages and deteriorating public services caused by austerity. That would have remained the case even if Leave had narrowly lost the referendum (and a narrow loss was the only possibility given the campaign mounted by the right wing press), or if there had been no referendum at all. In either case the threat from Farage would have remained. It is not impossible to believe that without Brexit the government might have found itself losing many votes to Farage, and might have turned to Johnson as their best way of retaining power.

None of this implies that it was inevitable that Johnson became the leader of the Conservative party. For example, he could have made enough major blunders as a minister that his popularity among the Conservative membership could have waned. (Of course he did make blunders as Foreign Secretary under May, as Nazanin Zaghari-Ratcliffe found to her cost.) What I want to suggest is that it is more than possible that circumstances could have led Johnson to have become the leader of the Conservative party, despite most Conservative MPs knowing how unsuitable he was for that job. What we do know from 2019 is that when it comes to the choice between losing their seats or putting an incompetent into No.10, enough Conservative MPs will choose power over responsibility.

The argument so far has suggested that Johnson’s popularity among Conservative party members and voters, together with the active support of the right wing press, could have led to him becoming party leader without Brexit. [1] However that does not necessarily mean that he would become Prime Minister, at least for very long. We also have to ask why, given his known unsuitability for the post among political journalists and commentators, he was able to win a General Election.

Once again, I expect many would answer this with a single name: Corbyn. There was one last chance to stop Johnson being Prime Minister in 2020, and that was the 2019 General Election. I agree that Corbyn also had many faults as a potential PM, which is why I argued strongly against him during Labour’s 2016 leadership contest. However I also thought it was clear that he was preferable to Johnson. Even though expressing that view was enough to get me sacked from writing for the online edition of the New Statesman (here is the article they initially published and then quickly withdrew), I think I was right for two clear reasons. The first is that some form of hard Brexit was inevitable under a Johnson administration, but far from inevitable under a government led by Corbyn. The second was that there is no way Corbyn would have ever suggested that Covid was nature’s way of dealing with old people. Tens of thousands less people would have died if he had been PM. Now perhaps Corbyn would have done worse things than Johnson, outweighing the economic costs of hard Brexit and tens of thousands of UK lives lost to Covid indecision, but I have yet to hear any suggestions of what that might be that are at all convincing.

But this argument is really a distraction from the topic of this post. The reality was that in months before the election the media rightly spent plenty of time discussing Corbyn’s mistakes, particularly over the issue of antisemitism, but much less time talking about Johnson’s record, racist comments and past failures. If there were extensive discussions about how illegally proroguing parliament signalled an authoritarian style and a threat to parliamentary sovereignty I missed it. I also missed the constant questioning of whether you could trust someone who in the past had made stories up and had lost two jobs through lying.

Why did most of the broadcast media fail to warn the public about Johnson’s inadequacies? One reason is the power the government and their press have over the BBC in particular. The BBC’s obsession with balance rather than revealing the truth comes in part from the constant attacks on the BBC from the right wing press, attacks that are regularly backed up by threats from Conservative ministers and MPs.

Which brings me back to the Covid inquiry. Comments from various witnesses have shown us that perhaps the main influence on Johnson in government was the media, and in particular the right wing print media. He described the Telegraph as his real boss. Johnson was reluctant to lockdown in the autumn and winter of 2020 in large part because he read articles in the right wing press arguing against lockdowns.

Johnson’s premiership was the point at which the right wing press gained maximum influence. They knew Johnson would give them that, which is the main reason they boosted his career for so long. Prime Minister Johnson was in good part the result of a few press barons having immense power with little responsibility. The same press that was critical in giving us Brexit was also critical in giving us such a hopeless Prime Minister, and it was their influence that helped delay lockdowns leading to tens of thousands of unnecessary deaths.

In any assessment of how our political system could have allowed someone like Boris Johnson to become Prime Minister, the role of the right wing press should play a prominent part.

[1] An alternative line of argument, which I also find persuasive, is that the Conservative party was eventually going to support a referendum and Brexit even if Cameron had not promised one in 2013.