The political right is in an illiberal trap of its own making, which offers their opponents opportunities

 

A new CPS report 'Taking Back Control’, co-written by the relatively sensible and numerate among Conservative MPs Neil O’Brien, proposes a national commitment to return net migration to the historical norm of the tens of thousands. The last government to do such a thing was of course the Cameron coalition, and their failure to meet these targets was a key factor behind the rise of UKIP and Brexit.

Others are more qualified to discuss the report in detail. Instead I want to set it within a much broader political economy framework, mainly focused on the UK but with references to the US where there are obvious parallels or differences. I will begin by describing how the political right of Thatcher and Reagan, which came to be associated with the emergence and then dominance of neoliberalism, ended up becoming an authoritarian party proposing limits on immigration, trade, and human rights. As I have discussed this in more detail in earlier posts I will be more brief here.

If you tend to describe everything that came from Thatcher and Reagan as neoliberal, let me emphasise why there is a huge contradiction between neoliberalism and controls on immigration and trade. If you like to think of neoliberalism as an ideology that favours free markets, then erecting trade barriers or telling firms what labour they can hire is not promoting free markets but instead state interference in markets. [1] I tend to think about neoliberalism as a collection of ideas that helps existing capital in general (e.g. reducing union power), or at least some parts of capital without harming others (privatisation). If you like, under neoliberalism the executive is at least in part “a committee for managing the common affairs of the whole bourgeoisie”. In technical terms they represent ideas that are Pareto improvements for capital. Yet immigration controls or trade barriers harm large sections of capital, so how can politicians that enact them be categorised as neoliberal?

Of course neoliberal ideology remains a core part of how most right wing politicians think, and it remains a pervasive influence on society more generally. Yet while it is obvious to describe the Thatcher and Reagan governments as neoliberal, it is much harder to use that label for politicians that erect rather than lower barriers to trade, and politicians who attempt to stop firms hiring workers from overseas.

Party membership on the right has always been pretty socially conservative. Yet this hasn’t been true of right wing politicians in the UK at least. As this study by Bale et al shows, most Conservative MPs tend to be as socially liberal as the average voter (and therefore much more liberal than Conservative party members), but much more right wing on economics. (I don’t know if similar data exists for the US.)

This suggests that for these politicians, the focus on attracting socially conservative voters was at least initially a political tactic rather than anything based on personal conviction. In a sense this is not surprising. Arguing for yet more tax cuts for the rich, or for less regulations in the labour market, may be consistent with neoliberalism but is not likely to attract that many voters. In addition, the UK voting system (as in the US) favours social conservative over socially liberal voters. As I argue here, the initial popularity of Thatcherism was time limited, as the failure of the privatised water industry clearly shows.

The problem with using immigration as an insincere tactic is that it has led, on both sides of the Atlantic, to the dominance of social conservatism on the political right. In the US the Republican’s Southern Strategy broadened out into culture wars, was followed by the Tea Party and then by Donald Trump. In the UK the failure of the Cameron coalition to meet its immigration targets, because Cameron and Osborne knew that trying to do so would harm the economy, led to the UKIP insurgency and Cameron’s Brexit referendum pledge. The rest, as they say, is painful history that everyone in the UK knows all too well.

While the mechanisms that led to Trump and Brexit are rather different, reflecting constitutional differences between the two countries, [2] there are also some common elements. Two in particular are the role of money from rich individuals, and the role of the media (in particular Fox News in the US and the right wing press in the UK). Both signal the growing importance of plutocracy in both countries, which I started writing about back in 2017, and is now becoming more mainstream in the UK (for example see Martin Wolf’s latest book “The Crisis of Democratic Capitalism” (interesting review here)).

At the time many focused on the populist nature of Brexit and Trump. It is tempting to argue that this aspect, though real enough (enemies of the people and all that), is an inevitable consequence of the triumph of social conservatism over both social liberalism and neoliberal economics. A label often used for social conservatism is authoritarian, because social conservative and authoritarian views tend to go together. Social conservatives prefer dominant, uncompromising leaders. [3] While social conservatism may naturally go together with authoritarianism and populist leaders, in my view it is social conservatism rather than populism that provides the driving force here.

The key factor that led to Brexit in the UK, and which continues to haunt the Conservative party, is the party’s vulnerability to electoral challenge from insurgent parties that can promise stronger action on immigration. This alone will ensure immigration continues to be perhaps the central policy of a Conservative opposition: hence the CPS report noted in the introduction. In truth a Conservative opposition also has little choice as long as a Labour government avoids obviously left wing economic policies and providing that it provides considerable support for public services. If the economy does better than it has over the last fourteen years (and it would be unlucky not to), then a focus by a Conservative opposition on socially conservative issues is inevitable.

The other key factor behind Brexit was the strong support from the right wing press, and for the foreseeable future this will ensure the Conservatives remain a pro-Brexit party, even though this is likely to be unpopular among a majority of voters. In addition, the readership of the right wing press tends to be older and therefore more socially conservative, so this force will help maintain the dominance of social conservatism among Conservative politicians.

Ironically, and in contrast to the US, I believe the composition of party members has been much less important in the UK than insurgency from the right, the right wing press and the influence of wealthy political donors. Although these members do get to choose the party leader, their choice is limited by MPs, and these MPs can ensure that members never get the choice of electing the likes of Suella Braverman. However party members do get to choose new MPs, so their influence via this route will be important over the longer run.

All this means that, barring economic misfortune, the UK political battleground will remain centred on the social conservative/liberal divide. The replacement of class by age as the key division in mainstream politics will persist. I suspect the same is true in the US [4], although it is hard to see past the chaos that even a Trump defeat will bring. In electoral terms this is bad news for the Conservatives. Brexit is likely to become more unpopular over time, if only for demographic reasons. In addition, as John Burn-Murdoch observes, in anglophone countries younger voters tend to be more tolerant of immigration than older voters. The more the right focuses on socially conservative issues, the less likely it is that younger voters will naturally transition to the right for economic reasons as they age.

This in turn will give a Labour government more freedom to adopt more socially liberal policies. They will need that freedom, because just as the Conservatives have had to worry in government about insurgent parties on the right, so a Labour government after an initial honeymoon period will need to worry about losing votes to parties that are either more liberal and/or left wing. This is hard to imagine today, where Labour are trading off government failure to court Conservative voters, and where (as the local elections showed) Conservative unpopularity means that the efforts of Labour, the Liberals and Greens are largely complementary.

Once Labour has become established in government that situation will change. As it seems increasingly likely that Labour will be cautious on using higher taxes to improve public services (i.e. will not follow the approach I suggested here), and the mess the current government has left things in is so great, dissatisfaction with the slow speed of progress is bound to grow. That is much more likely to see the polls shifting towards the Greens and Liberal Democrats than the Conservatives, whose record on public services will persist in voter memories for some time.

That dissatisfaction will only intensify if Labour attempts to fight the Conservatives on their socially Conservative territory. In addition, controlling immigration rather than tackling the causes of immigration does economic damage which Labour cannot afford. The same is true if Labour are too cautious on Europe, and I suspect the Lib Dems will be quick to return to trying to outflank Labour on this issue. (I discussed the importance of a tipping point in public attitudes to Brexit here.) A Labour government will find, if it tries, that trying to follow the Conservatives down their socially conservative rabbit hole will cause way more electoral problems than it solves. [5] Instead they should see that the hole the Conservatives have dug for themselves (and Braverman wants them to continue to dig) is an opportunity for a fresh, more liberal approach.

[1] John Elledge suggested an way in which Brexit could still be described as favouring free markets, if you see ‘free’ as the absence of any government involvement in trade. (Free from rather than free to trade.) While I thought this ingenious at the time, I now suspect that this is an ex-post rationalisation rather than any fundamental division within neoliberalism. After all, there is nothing within neoliberalism that objects to the state making life easier for business, and that is what the international harmonisation of regulations within the Single Market essentially is.

[2] The existence of primary elections in the US allowed those who wanted to elect politicians who would place a greater weight on socially conservative policies in government a direct route of achieving their ends. Money and media influence could be employed to support more socially conservative politicians in elections for Congress and, ultimately, for the White House. That is much more difficult in the UK for individual MPs.

[3] There is more to it than that of course. While right wing economic views are often justified on the basis that they work for everyone (trickle down, efficiency of the private sector etc), with the social conservative liberal divide it is much more clearly a matter of personal preference. In addition, it is clear that over the last fifty years or so social liberalism has been winning. So it suits the social conservative to believe not only in the myth of the silent majority, but also to be attracted by the idea that their views are the ‘will of the people’.

[4] The importance of the Christian right in the US, a force largely absent in the more secular UK, is an additional factor.

[5] Just as the Conservatives in government are prevented from locating their policy positions near the centre of the social conservative/liberal divide because of an insurgent party to their right, so Labour in government will find it dangerous to stay close to that centre because voters will move to a more socially liberal party.

When are large and persistent increases in debt to GDP justified?

 

In this post I showed a chart of UK government debt to GDP since 1900. It starts off at below 50%, then rises sharply to 200% during WWI. It rose to 250% during WWII, but then fell steadily during the post war golden age, going below 50% by the mid-1970s. The next sharp rise is after the Global Financial Crisis, followed by a smaller rise during the pandemic, getting to current levels of around 100% of GDP.

This brief chronology suggests that debt to GDP (and more recently also central bank issued reserves to GDP) rise sharply in extreme crises. But climate change is an extreme crisis facing every country, so why are most governments (maybe US excluded) resisting the idea that they should be running large deficits to pay for measures to reduce the extent of climate change? Is there a clear way of deciding when it is OK to allow large and persistent government deficits and when it is not?

In this post I set out why there is. To make things simple, I will assume the case for higher spending is overwhelming, so the issue is only how it should be paid for. The obvious alternative to allowing this additional spending to generate persistently large deficits is to substantially increase taxes. There is a standard economic proposition called ‘tax smoothing’, which states that it is better to smooth taxes over time than have erratic increases or decreases. In economic terms most taxes have distortionary costs, where the costs associated with a unit increase in taxes are likely to increase with the level of taxes, so it is less costly to smooth taxes over time. It is also intuitive: if a government offered people the chance of paying no tax for 5 years followed by the certainty of paying double normal tax for the next five, then most people would reject this offer.

A key point is that while there are clear benefits from keeping taxes smooth rather than allowing their path to be dictated by erratic movements in government spending, and occasionally periods of very high spending, there are no costs to erratic movements in government deficits, government debt or bank reserves. So it makes perfect sense to try and smooth taxes, letting government deficits take the strain of both erratic and sometimes high levels of government spending.

It is tax smoothing that justifies allowing debt or reserves to rise substantially during periods of unusually high spending. However note that the higher government spending that justifies a high deficit is temporary. If it was permanent, tax smoothing would not apply, and taxes would need to rise in line with government spending, with no increase in the deficit. Even if the expenditure has long lasting benefits, such as better education for example, that doesn’t imply it should be funded by borrowing or money creation if that higher spending is permanent. (This abstracts from Keynesian arguments, which we consider below.)

The centrality of tax smoothing to thinking about deficits and debt is why many papers written on fiscal rules, including my own (see here for example) often start by setting out that idea. Tax smoothing also tells us why balanced budget rules are bad economics. As government spending is inevitably lumpy and/or erratic, balancing the budget would match that with a lumpy, erratic path for taxes. More generally it shows why fiscal rules should, if possible, [1] always take the long view, to avoid ‘shocks’ to government spending being translated into a bumpy path for taxes.

Tax smoothing also implies that in a downturn or recession the ‘automatic stabilisers’ (e.g. lower taxes, more unemployment benefits) should be allowed to operate, but obviously tax smoothing can say nothing about countercyclical fiscal policy, because the argument for such policy comes from Keynesian macroeconomics. For moderate downturns or recessions any deficits that come from either the automatic stabilisers or fiscal stimulus will be matched in later years by boom periods where we get automatic surpluses because taxes are unusually high, and also perhaps because of fiscal contractions to moderate demand. In other words the normal business cycle should not lead to persistently higher debt or reserves.

Unfortunately history tells us that occasionally we get very deep recessions, and these are not matched by very large booms. Not only will the deficits caused by the automatic stabilisers be particularly large in these recessions, but fiscal stimulus is likely to be essential because interest rates will hit their lower bound. This is of course what happened during the Global Financial Crisis.

Tax smoothing implies that large deficits during the GFC, to allow for both the automatic stabilisers and fiscal stimulus, were sensible. Once the recovery from a deep recession is complete, it makes sense to - if required - return any deficits to normal levels using spending or taxes. The great sin of 2010 austerity was starting fiscal consolidation in the middle of the recession rather than when the recovery was complete.

Investment is also a lumpy activity: sometimes you need a lot and sometimes not so much. Tax smoothing implies that it would be a mistake to match annual public investment with taxes, which is why I argue that public investment should be paid for by borrowing or issuing reserves, with taxes only matching some long term average of investment expenditure. That is why it makes sense to exclude public investment from any medium term deficit target, and also why the falling debt to GDP rule is a bad target.

Tax smoothing accounts for and justifies large increases in debt during wars and, together with Keynesian policy, implies persistently higher debt after a very deep recession. What about a global pandemic? The justification at the time for large deficits was that this too created a deep recession. In a recent post I questioned whether the extent of deficits run up in the UK and other European countries was justified, but this is really an argument about the extent of the additional spending on the furlough scheme, not tax smoothing.

How does tax smoothing apply to spending to reduce the extent of climate change? It has become increasingly clear that such spending is temporary, in the sense that green energy is likely to be cheaper once the capacity to produce, store and distribute it is in place. So we are talking about a green transition requiring temporarily higher public and private spending to change how we produce energy. Even if that spending lasts for a decade or so the tax smoothing argument once again applies. Spending to green the economy should not be ‘paid for’ by higher taxes, but instead should see a rise in the ratio of debt or reserves to GDP. [2]

How quickly should debt be brought down after one of these crises? In the stylised smoothing model where people live forever (or care about future generations as if they live forever, by leaving appropriate bequests to children) the answer is debt should never be brought back down. Even in more realistic models the answer is that debt should be brought back down very slowly indeed, as I helped show here. If you think that the current generation is more likely to be selfish than caring about future generations, then how quickly debt is brought down will also depend on how much the original spending helps future generations.

The idea that it is politically responsible to keep government debt to GDP constant or bring it down is deeply ingrained in parts of the population and much of the media. This idea is not entirely baseless, as some politicians have in the past increased deficits for their own political advantages, rather than because it made sense in economic terms. But it is equally important to recognise when it is economically irresponsible not to allow large deficits to fund temporary but essential expenditure, particularly if that expenditure might not happen if it had to be paid for by higher taxes. Spending to green the economy and reduce the extent of climate change is a clear example of that.

Note that the tax smoothing argument applies to public spending to green the economy whether that spending is classed as public investment, day to day public spending or involves tax breaks to incentivise firms or consumers to reduce their carbon footprint. The key reason why this spending should lead to higher deficits rather than higher taxes is that it is temporary as part of a green transition.

How can we be sure that a government that says debt is increasing because of measures to green the economy is not in reality abusing this idea to just avoid having to put up taxes to pay for other areas of permanent spending? Checking this in an economy like the UK is perfectly feasible, but it needs to be done by an independent body that is very familiar with the details of government spending and accounting. This sounds like a worthy task for a fiscal council, like the Office of Budget Responsibility in the UK.

[1] Portes & Wren-Lewis discusses what ‘if possible’ means in this case. The more a government (with the help of a fiscal council) can be trusted to abide by the spirit of the rules, the more long term these rules can be.

[2] A carbon tax alongside green investment and subsidies still makes economic sense, which if other taxes remain unchanged would reduce the size of additional deficits. However the political problems with implementation may mean such taxes remain well below effective levels.