The Markets, the Budget, the Media and electing a Fascist

 

Our readers are too stupid to understand financial arbitrage and very basic macroeconomics, so we will pretend financial markets are like economic oracles or jealous gods. This seems to be the attitude of much of the media when it comes to events like the Budget.

Let me start with a brief summary of what actually happened after the Budget. For those who want a more detailed account and can read the FT, this from Toby Nangle is (of course) very good and very clear. The Budget was what macroeconomists call expansionary, which means that it had the effect of increasing the total demand for UK produced goods and services. This was because government spending was increased by more than taxes, with the balance made up with higher borrowing. An expansionary budget tends to raise output in the short term compared to what it otherwise would have been, which puts upward pressure on inflation. This in turn will mean that interest rates set by the Bank of England are likely to be higher than they otherwise would have been in the short term as a result of the Budget.

The financial markets, like most commentators including myself, had been expecting a Budget like this, but the degree of expansion was a bit more than average market expectations. As a result, these markets revised up a little their expectations of near term rates set by the Bank, which because of financial arbitrage meant that interest rates on financial assets with a longer term duration, like government debt (‘gilts’), increased slightly after the Budget.

How this was portrayed in the media depended on politics. Among the propaganda media in particular there were clearly some who wanted to make this into Labour’s Truss event. It has to be said that excited talk of this kind was not limited to this section of the media, and I was reminded of this. But elsewhere we mostly got the personification of markets. To take just one example, consider these opening two paragraphs from an article in the Guardian.

“Rachel Reeves has been warned an extra £9bn of tax rises may be required to avoid a fresh austerity drive in key public services as her record tax-raising budget sent tremors through the financial markets.

Threatening to undermine the chancellor’s claim that her budget would restore economic stability to Britain, government borrowing costs rose sharply in the City on Thursday as traders turned on Reeves’s tax and spending measures.”

To say that the “record tax-raising budget sent tremors through the financial markets” is doubly misleading. The use of hyperbole with the earthquake analogy I’ve grown used to from the black hole nonsense. What is worse is the implication that what surprised markets was the high amount of taxes being raised, whereas the opposite was true. What surprised the markets was that the tax increases were smaller than expected given the Budget’s spending projections.

In the second paragraph, in what world is mildly higher longer term interest rates a threat to what the Chancellor means by stability? I doubt that if the Bank cuts interest rates this week anyone will write that this threatens Reeves’s stability claims. Indeed the Bank moving interest rates up and down is designed to give us economic stability! So when interest rates on government debt move slightly because of expectations of the Bank doing their job in the future, how does that undermine economic stability? But what is really bad is the idea that “traders turned on Reeves’s tax and spending measures”.

Financial traders are trying to predict future decisions by the Bank of England. Their individual or collective views about the Budget measures are neither here nor there. Suppose the budget had raised the top rates of income tax paid by market traders, and had also been unexpectedly contractionary, leading to lower interest rates. It would be silly to write about the latter as ‘traders welcoming the budget’s measures’. It is equally silly to use that language here.

If you get beyond the first two paragraphs, then it becomes clear that the authors do understand what is actually going on in the markets, although they do their best to suggest different views when all their quotes they give are consistent with each other and with what actually happened. It is as if a sub-editor had taken a factual piece and said ‘this is dull: here are a couple of opening paragraphs to spice it up a bit, and make sure you mention Truss at every opportunity’.

Why does this kind of thing bother me so much? (I wrote something similar just before the budget.) The answer is that I believe it matters a lot, and is an example of something very dangerous. It matters because this budget is all about beginning the process of extracting us from the disaster of 2010 austerity, a disaster which at the time the media thought was great economics, in part because they believed and wrote nonsense about imminent disaster in financial markets using the same type of language as I flagged above.

The media got 2010 austerity so wrong because they chose to believe their own stories, and the stories of the politically motivated, over the knowledge that every first year undergraduate student in economics is taught. Most journalists are overworked and have little time to think, let alone consult experts. In the case of economics, representative bodies make little attempt to provide information about consensus views to journalists. Ironically for something that is supposed to be about reality, journalism is a self-referential system in which speed and novelty is valued more than being informative. It is therefore possible for the media to present readers or viewers with a completely distorted view of reality, and for most journalists to be almost unaware that this is happening or that it is a problem.

We see the aversion or inability to provide information and knowledge most clearly in political journalism. Policy differences are rarely discussed in any depth, while endless time is given to surveys of popularity, horse races, insider information and other trivia. In part this comes from an obsession with balance, even though in practice balance often seems to be just an excuse for making life easier for those that run media organisations. Providing knowledge may often be incompatible with preserving political balance, particularly when one side routinely lies and distorts the truth.

This is one reason why the potential disconnect between the media and expertise is magnified when one half of the media are doing simple propaganda, but the rest of the media act as if this wasn’t happening. So the right wing press sets the agenda for the BBC. So, when Joe Biden mumbles something that was wilfully misinterpreted by his opponents as being disparaging about Republican voters it is headline news, while when Trump routinely describes Democrats as the enemy within it is not, perhaps because he does it all the time.

It was in large part because the media thought austerity was good economics that we got Cameron re-elected in 2015, which led to the Brexit referendum. One side lied constantly and called consensus views about the economic and other consequences of leaving ‘Project Fear’. The propaganda media amplified those lies. Yet the other half of the media said our job is to be balanced rather than to convey knowledge. In these circumstances is it any wonder that UK voters chose narrowly to commit one of the most obvious acts of collective self harm in recent history.

In countries like the UK and US where half the media is promoting political propaganda, what the rest of the media need to do above all else is not to provide balance but to provide good information and expose misinformation. When the propaganda media want to pretend that the market reaction to Reeves’s first budget is like what happened under Truss, writing that “traders turned on Reeves’s tax and spending measures” promotes misinformation rather than knowledge. When the propaganda media want to claim that Biden insulted all Republicans, calling it a gaffe and saying it is a problem for Harris is promoting misinformation rather than knowledge.

We will see very shortly whether that kind of journalism will help US voters commit perhaps their biggest act of self harm in recent history.