Labour and Growth

 

Is this Labour government right to make achieving growth so central to its missions? Does making higher growth a central priority require Labour has a theory of growth?

I think the answer to the first question is yes and no! Wanting better economic growth is just the same thing as saying you want better living standards for UK citizens in the future. Of course growth is not everything. It matters what that growth involves and how that growth is distributed, In addition stable growth is better than erratic growth, and the wellbeing of citizens depends on many other things besides their standard of living. But given the importance of living standards, it would be rather odd if the government didn’t prioritise better growth

Indeed Labour’s emphasis on growth is quite normal if you look at nearly all post-war governments. Pre-Thatcher, governments were obsessed by the fact that UK economic growth seemed to be lagging behind other major economies. Thatcher and neoliberalism were all about freeing the private sector from what they saw as the impediments of government and trade union interference in markets, and it was claimed that doing this was the way to boost growth. Gordon Brown’s budgets regularly included measures designed to increase UK productivity and growth.

The only potential exception is the Conservative administration that began in 2010 and ended last year. Initially that government deliberately shifted the goal of macroeconomic policy away from growth and living standrads towards balancing the government’s budget. In truth that was a cover for wanting to reduce the size of the state and have lower taxes, which could be (and under Liz Truss was) justified as a means of boosting overall prosperity and growth. That it didn’t feature more strongly after the Osborne period might have been because his tax cuts (in particular cuts in corporation tax) coincided with historically mediocre UK growth. Indeed, given the relative decline in growth that the UK experienced over the last fifteen years, it would be very surprising if the new Labour government did not put growth centre stage.

As talking about growth is much the same as talking about better living standards, debates involve pretty well all the same issues that are familiar from left versus right economic discourse. For example, does the economy perform better if the government gets out of the way, or do we need an active state to spur the private sector. Any sensible government understands that the state can have an important positive role in influencing the economy, so it will naturally be looking at what it can do to increase growth. That is the yes part of the answer to whether Labour are right to make growth a priority.

Does the government need a ‘theory of growth’ before it can successfully encourage it? In looking at different approaches to increasing growth I think the political economy frame is more helpful than looking at different academic theories of economic growth. Ben Ansell makes a heroic attempt to do the latter, but it’s problematic because economic growth theories are not generally alternatives, but rather building blocks to aid understanding. For example what Brown/Ball called post-neoclassical growth theories build on rather than contradict earlier growth models by modelling (endogenising) technical progress. Encouraging investment or technical progress are not really alternatives, as much technical progress is embodied in new investment, and often technical progress needs better human capital to be successful.

Take for example public investment. Labour rightly sees such investment as a way to boost growth, both in itself and often because it facilitates private investment. This isn’t really a ‘theory of growth’, but just common sense backed up by basic economic theory and empirical evidence. Suspicion or hostility to public investment on the political right is ideological rather than coming from any alternative economic theory. Unfortunately, as I noted here, so far Labour has done little more than end the previous government's plans to cut public investment, so it’s incorrect to say so far that higher public investment is a centre-piece of Labour’s growth strategy.

In other respects elements of Labour’s growth strategy seem to borrow from the political right. In October Starmer said

“We will rip up the bureaucracy that blocks investment. We will march through the institutions and make sure that every regulator in this country, especially our economic and competition regulators, take growth as seriously as this room does.”

Of course what you think of this depends on what regulations and institutions are involved. If it’s political regulations blocking building inland wind turbines, then getting rid of those has to be a good thing, but if its regulations designed to avoid another financial meltdown, not so much. If deregulation is aimed at building more homes by giving less power to NIMBYs, then it could be regarded as a clever political move to do something the political right were generally too scared to do. If it’s building additional airport runways that the Climate Change Commission have said should not take place, that doesn’t sound clever at all.

There is a danger here that the current government is giving undue prominence to achieving growth in areas where the growth benefits are relatively small or where the costs are high, which brings us to the negative answer to the prioritising growth question. More specifically, there is a danger Labour are making a number of mistakes.

1. Asking regulators how they can boost growth is asking the wrong question. The right question is whether regulations get trade-offs correct. While it is pretty clear that in many cases planning regulations have become excessive, it should not be presumed that this is true in other cases. Sometimes a clear regulatory framework can help growth. In the past one of the most successful measures to boost UK growth was adopting the set of regulations embodied in the European Single Market.

2. Politicians are nearly always tempted to prioritise near term growth over longer term growth. Growth that involves speeding climate change is not sustainable, and instead involves the current generation taking resources away from future generations.

3. Equally measures that appear to enhance growth at the cost of increasing economic instability may reduce future wellbeing, and may even be counterproductive in terms of long run growth.

4. There is a danger of equating measures favoured by business with measures that enhance growth. For example business often prefers less competition, but competition often increases the incentives for businesses to invest, as well as directly increasing output by reducing the degree of monopoly.

5. It is even more dangerous to assume that measures that favour the wealthy must help growth. It is not at all clear why we should be worried that some of those who became wealthy during a period of economic decline now want to leave.

We can bring the yes and no answers together, and help answer what really matters for growth, by asking what the key lessons are from the growth disaster of the last fifteen years. Here it is not so much about what helps growth, but what holds it back. In understanding why UK growth declined so dramatically during this period, three episodes stand out: the financial crisis, subsequent austerity and Brexit. In all these cases the root cause of the problems were ideological or political.

It was an ideological view that deregulation was always desirable that allowed the financial crisis to happen. It was an ideological desire to shrink the state that led to growth-sapping austerity. It was political antagonism to the EU that led to Brexit. 

We know that changes made to financial regulations after the financial crisis did not go far enough to prevent another crisis, so the last thing we need is political pressure to water down the inadequate changes that were made. Ruling out tax increases and reacting to fiscal pressures by cutting public spending risks perpetuating the austerity regime which destroyed the economic recovery after 2010. Labour’s ‘red lines’ for EU cooperation just bake in the reductions in UK growth that Brexit is bringing about.

Of course Labour may make new political mistakes that impede growth, but it would be foolish indeed for them to make the same mistakes that led to fifteen years of UK economic decline. Perhaps the most important ‘theory’ of economic growth is to learn from rather than repeat past mistakes.

Mediamacro melodrama

 

The UK macroeconomy was one of the big stories of the previous two weeks, so you might think this blog post should have covered it earlier. However my guess at the time was that media coverage was a bit like a nervous flyer who, when the plane hits a bit of normal turbulence, decides it's is going to crash and everyone will die. As I’m not a journalist, it seemed better to wait a week to see if I was right.

I’m glad I did. This is what got the media so excited about, and what happened next

From around the 6th January interest rates on UK 10 year government debt rose over a week from around 4.6% to around 4.9%. But then interest rates fell back as quickly as they had increased to around 4.65%.

Was this a UK or global blip? To answer that we need to look at US rates.

We see something very similar, but of slightly smaller amplitude. This tells us that what we saw in the first half of January was mainly a movement in global long term interest rates, with a little bit of UK specific icing on top that largely disappeared once the latest UK inflation data came out.

I’ll come to why this might have happened in a minute. But why did virtually the entire the UK media get this all so wrong? The main lesson here is that data is volatile, and you can have a lot of egg on your face if you treat every short term movement up or down as permanent, or worse still the beginning of a trend. It’s a lesson that all economists know but journalists are increasingly paid to forget. But that is not the only reason journalists got over excited a week or two ago.

Another is the Truss fiscal event. Conservative politicians, and those journalists aligned to them, are desperate for Labour to suffer something comparable to what happened to the Conservatives under the leadership of Liz Truss. So they are tempted to shout fire whenever they see a puff of smoke, even when that smoke looks like it’s mainly coming from a long way away! That then led other journalists to feel they had to cover the same story, and political journalists put a UK political spin on it because that is what they do.

When journalists cover anything to do with fiscal policy, we know from long experience that the language and reasoning they use can be very different from the macroeconomics taught in universities. I call it mediamacro. It involves for example treating the government as if it's a household, treating deficits as a sign of political irresponsibility, and personifying financial markets as a kind of vengeful god. As is often the case, it is much better to read good academic economists, like Jonathan Portes here, than the stuff most journalists write.

The end result of the media's uninformed overreaction and distorted coverage was that many people were seriously misled, and the media almost manufactured a crisis out of nothing. In case you have forgotten, just a week ago newspapers were speculating that Reeves was about to be sacked and who might replace her, all because of largely global movements in interest rates over which she had no influence. I used the word melodrama in the title of this post, but I could have equally used madness.

What caused the upward blip in global longer term interest rates? To be honest, who knows and who cares? When I was much younger I was approached about moving to a much better paid job working in the City, and I said no because I thought worrying about such things would soon bore me to tears. I found real macroeconomics much more interesting, and still do. If, unlike me, you are interested in short term bond market fluctuations, here is the Toby Nangle looking at what evidence we do have, and here is Paul Krugman speculating that it might be all about Trump. It must certainly be true that as a result of Trump becoming POTUS, the degree of macro policy uncertainty has shifted sharply upwards and this will mean longer term interest rate movements are likely to become more erratic.

What about the exchange rate? Sterling did depreciate in January, and that hasn’t been reversed, but the scale of movement is small and therefore not at all unusual, so once again there is nothing of interest here unless you speculate on currency movements.

This whole episode did raise two other issues that are worth discussing.

Fiscal vulnerability

Because Reeves like previous Chancellors has pledged to follow the golden rule, which is that day to day (current) spending should over the medium term be paid for out of taxes. As a result, anything that looks like it will increase spending over the medium term will lead to speculation of what other items of spending will be cut to compensate, or whether taxes will have to rise. Higher long term interest rates mean higher spending servicing the government’s debt.

The most important point here is to again ignore a lot of what you read or hear in the media. First, the fiscal rule that Reeves is committed to looks at the expected balance between spending and taxes in a few years time, so there is absolutely no need to cut spending in the short term. Second, there are all kinds of macroeconomic developments that could have an impact on the government’s current deficit in a few years time, so this kind of thing will happen constantly. As a result, and as this episode clearly illustrates, it is generally better to wait and see rather than react immediately. Third, there is no reason why higher spending in one area has to be met with lower spending elsewhere. It can also be met with higher taxes. That the media tended to talk about spending cuts rather than higher taxes has no macroeconomic justification.

So Reeves was absolutely right to ignore all the media hysteria. However it has to be said that Reeves did earlier make two mistakes that contributed to the way the media covered this aspect of the story. First, the fiscal rule that balances current spending with taxes used to apply to forecasts five years ahead, for good reasons. In the Budget she changed this so it will eventually apply to just three years ahead, which was simply a bad decision. Second after the budget Reeves made the mistake of appearing to rule out significant increases in taxes in the future.

Many react to talk about spending cuts by blaming this particular fiscal rule, but that in my view is a mistake. As long as the golden rule looks far enough ahead, any short term volatility caused by fluctuations in spending or taxes is likely to be reflected in volatile economic reporting rather than erratic economic policy, and it is a mistake to conflate the two. I put the case for the golden rule as a fiscal rule here.

Short term economic growth

The second lesson is about data on economic growth, which was also mentioned frequently in reporting. However monthly or quarterly growth figures are also erratic, so the lesson about not being misled by short term fluctuations in the bond market also applies to growth figures. The Conservatives are currently boasting that they left office with economic growth the highest in the G7, but because that is based on a particular quarterly growth rate it is a meaningless claim.

Equally any impact policy may have in increasing underlying growth normally involves considerable lags. It is very unlikely that anything the new Labour government has done will have had any impact on the growth numbers currently being reported (i.e. end 2024). If policy has anything to do with recent growth numbers, it is the policy of the last government.

To take just one example, you will read a lot about how employers dislike the NIC hike imposed in the budget. Below is the OBR’s assessment of the impact of this on GDP, alongside the impact of the modest increase in public investment also announced then.

They estimate that higher employers’ NICs will reduce the level of GDP by 0.1% in financial year 2026/7. Less than half of that will occur in the forthcoming financial year. These estimates are relatively uncertain, but anything much larger or quicker is pretty unlikely. While it is easy for a journalist to link the October budget to recent growth data, that does not mean that in reality there is any causal link at all. 

What this chart also shows is that fiscal policy can boost demand and therefore growth in the short run, as long as this impact is not offset by a more restrictive monetary policy. We are on more solid ground in quantifying these effects. The last budget was expansionary, and should boost GDP growth in 2025/6 by around 0.5%. To the extent that Labour are ‘kick-starting growth’ this is it, but don’t expect to start seeing it in the data until at least six months time.

Although monthly or even quarterly changes in economic growth are not very interesting, growth in the longer term and the impact the Labour government might have on it are worth discussing. These questions, rather than mediamacro melodrama, are subjects I hope to return to fairly soon.

The battle of our age

 

In my last post of 2024 I noted that the main political battles in many countries would be between on the one hand socially conservative right wing plutocratic populists and on the other centre or centre/left parties tentatively moving away from neoliberalism. The populists might be represented by what had once been a mainstream centre/right or right wing party or they could be represented by an insurgent party from the further right, but it really didn’t matter which it was, because their rhetoric and policies would be much the same. The last week in UK political discourse has been entirely consistent with that proposition.

Until November 2024 it was still possible to see right wing populism as an insurgency, as an entertaining interruption to the more sober business of conventional politics. At least that is how the mainstream media typically portrayed it. That was never the reality in the UK, the US and elsewhere, but with Trump about to enter the White House it is no longer even a story you can tell.

After Musk on 3rd January called Jess Phillips a “rape genocide apologist”, the Conservative leadership could have taken the high ground. They could (and of course should) have said that Musk’s comments about Phillips were both ludicrous and dangerous, exposing his lack of knowledge about the UK. They could also have said that we have had a national inquiry, and now what was needed was action. After all when in government the Conservatives had also turned down a request from Oldham councillors for a national inquiry.

In short, they could have said what Starmer said on 6th January, but before he said it. That would have turned the media debate into one between the Conservatives and Farage, where Farage would be parroting Musk. Clashes of this kind are just what the Conservatives need if they are to stem the rise in Reform. As this high ground is also the right ground, it is a debate that they could have won.

Instead the Conservatives followed Farage in refusing to condemn Musk’s remarks about Phillips and Starmer, and repeating his call for another national public inquiry. This is hardly surprising, as the Conservatives have followed a populist path since they chose Johnson as their leader, and also since Johnson they have shown no qualms in going for the Islamophobic vote.

For Farage, Musk and the Conservative party, anything that highlights the awful exploitation and criminality that happened in Oldham, Rotherham and elsewhere, and which was for far too long ignored by the authorities, is gold dust. Not only does it feed the old racist trope that some groups, in this case Mulsims or immigrants, are criminals and rapists, but it also allows them to show that concerns about racism can sometimes have negative effects. They know that individual stories selected to fit their racist agenda are for many voters more powerful than the statistics that say race, religion, or immigration is not the issue when it comes to men sexually exploiting women and girls. Of course anyone who supports the Trump administration, or who has as one of their five MPs someone who was sentenced for kicking his girlfriend and thinks Andrew Tate is an “important voice” for men is not really concerned about the victims in these cases. Their concern is to whip up Islamophobia, which is why they want yet another inquiry rather than actions based on previous inquiries.

On this there appears to be no difference between Musk/Farage and Badenoch/Jenrick/Philp. If anything, the latter group appears worse. Take the case of extreme far right leader Tommy Robinson (real name Stephen Yaxley-Lennon), who is in jail for 18 months for contempt of court. (A good summary of why he is in jail is here, HT Helen Lewis.) Farage has for some time distanced himself from Robinson, but Musk thinks he should be free. Badenoch refused to say whether she agreed with Musk or otherwise.

Musk’s interventions, and the right wing bandwagon that followed, are not just designed to stoke Islamophobia and anti-immigrant sentiment. They are also a classic example of how you turn reality on its head. Jess Phillips has done far more than most to help vulnerable women, and Keir Starmer made it easier to prosecute those that exploit them. But by attacking them personally, and suggesting the opposite, Musk and the political right play the mainstream media to hide that truth. Most of the mainstream media has done its usual ‘two sides’ thing, making Phillips and Starmer’s record on this issue ‘controversial’ in the eyes of most voters. The truth is lost to all but high information voters, and the strategy of distorting the truth is successful. The other thing the far right’s professed concern about male exploitation of women ends up achieving is retraumatizing the victims and putting the life of a female MP at greater risk.

As the UK’s political right has become more extreme and populist it has also increasingly aligned itself to Trump and a Republican party, who have been playing the US mainstream media in this way for years. As a result, we can expect to see this and similar tactics used more and more often in the UK. Of course the right wing press has often tried and sometimes succeeded in doing similar things, but in combination with Trump, Musk and others in the US they can become much more successful.

Increasingly the populist plutocratic right is an international project, and Trump’s victory gives its national representatives much more power. The UK is far from alone in having to contend with this kind of political interference. There is a danger that individual national governments that are not right wing populists may be too weak to combat this attack, particularly when resistance can result in economic retaliation from Trump in the form of tariffs. In addition, the uncertainty he creates will have other negative impacts on their economies, as it is doing currently in the UK.

Appeasement in the face of this onslaught just doesn’t work, but instead just assists those who want to see populist far right governments everywhere. If the first thought among policymakers outside the US is to avoid saying or doing anything that might annoy or upset Trump, then they have already lost. If there might be one silver lining to Musk's intervention, it would be to make Starmer realise that Trump is never going to helpful to the UK while Labour is in power, and pretending otherwise will just have domestic political costs. Given the strength of the threat, mainstream governments around the world need to cooperate and act together in planning resistance. With Musk that means using and enhancing the laws they already have to make social media platforms accountable. As I argued here, we should be prepared to stop the spread of disinformation via the media in the same way as we already stop other companies misselling their products. The new US government will fight very hard to prevent its social media companies being regulated, and to fight back other countries need to act together.

The fight against right wing plutocratic populism is not like previous post-warpolitical battles between the right and left, over how society should be organised to best serve its citizens. Instead it is a battle over whether politics addresses the real world problems voters face, or whether it is instead preoccupied with a fantasy world. A world where politicians make stuff up all the time, pretend problems are caused by convenient scapegoats to feed off the divisions that causes, and when these scapegoats don’t exist, as with climate change, they deny the problem even exists at all. The fight against right wing plutocratic populism is the battle of this age, and it would be foolish at this stage to bet on which side will win.

[1] The BBC, on this issue as before, has helped the far right, as Ian Dunt notes here. Another approach is possible, as Beth Rigby shows here, but unfortunately it’s the exception rather than the rule for the broadcast media. The moment the headline is something like ‘Starmer defends his record against attacks from Musk’ it has distorted the truth.

Vibes for the economy and other things

 

As I and many others noted after Trump won, real median household income didn’t grow nearly as much under Biden as it did during Trump’s first presidency. But there is more to the story of why 45% of voters said they had become worse off under Biden. Paul Krugman, in his new subtrack that is obviousy essential reading, points to the Michigan Consumer Survey that asks consumers about their personal financial situation compared to five years ago. In October 2024, before the election, 45% said they were worse off, while 39% said they were better off. When the same question was asked one month later, after the election, the numbers were 41% and 45% respectively.

Nothing happened in that month to make 6% of the respondents better off. There are two possibilities. One is that a significant proportion of respondents were answering the question in a politically strategic way. The other is that the election result changed their perception of their personal financial position. But how could an election today change perceptions about the past?

Paul presents two pieces of useful survey evidence that may help answer that question. The first is that people generally thought that the economy in their own state (the ‘local’ economy) was doing better than the economy in the national as a whole. Obviously this might be true in some states, but for all states to be doing better than the US economy as a whole doesn’t make sense. Second, people had a more favourable view of their own financial well-being than the economy at local or national level.

Now if people were answering in a politically strategic way, we shouldn’t observe those differences. Instead it suggests that, when people are asked about how they think the economy is doing, they don’t just reference their own financial situation. Most people have a conception of how the economy as a whole is doing which doesn’t come from their own or even their friends and neighbours financial positions, but something else. For a tiny minority of people, like myself, that perception comes from looking at macroeconomic data. For everyone else, their perception comes from what they read or see in the media.

People know that ‘the economy’ is important. When the economy is in crisis, that will affect most people. In addition most people think that politicians are at least partly responsible for how the economy is doing. They probably grossly overestimate this responsibility, in part because economic and political news is so often linked in the media, and in part because politicians make false claims about what they can achieve and the failures of opponents. In short, what the media says about the economy influences how people vote, even if what they are saying is different from the individual knowledge people have about their own and local economic conditions.

A clear example of this in the UK was during the 2015 election. Voters generally agreed that pretty well everything was worse in 2015 than in 2010, with one exception: “the economy”. Media pundits agreed that the economy was the Conservative party’s strong card. Yet real wages had been falling every year from 2010 until 2014, and had only begun to grow during 2015. This was a period that should have seen a strong recovery from a very deep recession. So why did people think the economy was the Conservative party’s strong card? Because they believed reducing the deficit was the absolute priority, and the government had succeeded in doing this. Why did they think reducing the deficit was more important than an economic recovery or their own wages? Because that is what the media said or implied day after day.

The part of the media that is used by its owners as a vehicle for propaganda in favour of right wing parties will obviously push a view of the economy that is favourable to their side, be it the Conservative led government in 2015 or the Republicans and Trump in 2024. I wrote about this immediately after Trump’s victory, but this part of the media is not my concern in this post. Instead I’m interested in how the part of the media that thinks it’s being objective in its reporting (the ‘mainstream media’ for short) treats the economy and other subjects.

For this part of the media, it is wrong to see their negative reporting of the economy under Biden, or their positive reporting of the UK economy in 2015, as some kind of conspiracy. Large government deficits do sound bad if you constantly make analogies between governments and households, and the Eurozone crisis appeared to show how high deficits could create financial crises. Equally inflation was higher under Biden, and living standards didn’t grow as fast as they had under Trump as a result. The mistake the media made in both cases was to ignore economic expertise. The majority of expertise told them in 2015 that their household analogies were awful and why the Eurozone crisis wouldn’t happen in the UK. Any unbiased expertise told them over the last few years that US economic performance was the envy of the world, and many would have said this was in part because of Biden’s policies.

There is nothing particularly special about the economy that allows the media to sometimes present a view (a 'vibe') that departs from expert opinion. All you need is any issue that most of the public believe is important to their wellbeing and/or which touches on common fears, but where direct experience or knowledge is limited and most do not have the time and knowledge to directly access data and expertise. In an ideal world expertise and the media would cooperate, but all too often that doesn’t happen, particularly when debate involves senior politicians and so is handled by political reporters rather than reporters who are subject specialists.

Another example which I wrote about at the time was how the pandemic was treated by the UK media, especially in the early months of 2020. The UK has a large amount of expertise on pandemics, how they spread and how policy should react, but we hardly saw any of that expertise used by the mainstream broadcast media. Instead the UK media mainly acted as a mouthpiece for the government. As a result, it largely failed to inform the public about basic concepts and alternative policy options. It was left to broadcasters on Irish TV to point out the absurdity of the UK’s ‘herd immunity’ strategy, and when that strategy was abandoned the mainstream media parroted the politicians in saying the ‘science had changed’.

In this case the media took the reasonable idea that in emergencies it was bad to scare people and translated that into the dangerous vibe that it should just act as a mouthpiece for politicians because politicians would ‘follow the science’. That made no sense in scientific terms (there is too much uncertainty to believe there is a uniquely optimal way of handling pandemics known ex ante), but most political journalists have little scientific background. It also made no sense in political terms, but too often political journalists assume that if something is not contested among the two main political parties then it must be right. Maybe at the time they thought it was the responsible thing to do to become the government's mouthpiece, but instead the vibe that the government was 'following the science' was extremely irresponsible and the media became complicit in the unnecessary deaths of thousands of people.

I have written a lot about why the mainstream media often ignores expertise, and instead creates vibes that at best reflect only part of reality, and at worst gets things very wrong. There are clear similarities, interactions and overlaps with the knowledge transmission mechanism between academics and policy. The fault may sometimes lie as much with expertise as with hard pressed journalists with very little time. One thing political journalists seem to do, however, is read or watch what other political journalists say, which makes the persistence of vibes easier. It also means it is easier to create vibes that benefit the political right, but not so easy that it happens all the time. Why and when the mainstream media collectively create and push stories about reality that conflict with a majority of expert opinion without being told to do so is an interesting area of study, made that much harder by a belief in much of the media that it never happens.