Populist tendencies on the UK left, and the puzzle that never was

 

Don’t shoot the messager

The Treasury Select Committee (TSC) has just published a report on the Office of Budget Responsibility, the UK’s Fiscal Council or Independent Fiscal Institution. It addresses in particular many calls from some on the left for reform of the OBR, amid claims that the OBR rather than the elected government is running fiscal policy. The TSC largely rejects such claims. It argues that critics, including those within government, “must resist the temptation to blame the messenger when confronted by politically difficult decisions in a fiscally constrained space.”

It will come as no surprise to regular readers that I agree with the Select Committee’s conclusions. The OBR provides a fiscal forecast, and nothing more. It doesn’t choose the fiscal rules, or how the government meets those rules. In those circumstances describing the OBR as ‘undemocratic’ amounts to an attack on expertise rather than a call for greater democracy. Such calls reveal an unfortunate populist tendency on the left.

Of course criticism of the OBR’s implementation of technical knowledge is to be welcomed. Someone could believe that, for example, the OBR underestimates the beneficial impact of public investment on economic growth. If so, they need to look at the academic evidence and make a case based on that. Fortunately the OBR is very open about its methods and why it makes the assumptions it does. Indeed one of the great advantages of allowing technical decisions behind government policy to be made by an independent body is exactly this openness.

Some suggest that the OBR makes economic assumptions that are conservative, or reflect an establishment view. What this criticism often means in practice is that the OBR follows mainstream economics rather than heterodox economics of a left wing variety. As the great majority of academic economists work within this mainstream I think the OBR is correct in doing this. Of course mainstream economics is not immune from political influence, but I have seen no evidence that the OBR’s economic judgments are particularly affected by this.

The whole point about delegating technical decisions to independent bodies is to open up how governments use expertise, and to avoid the government making technical judgements just because those particular judgements are politically convenient. It is about making evidence based decisions, rather than finding evidence to justify politically motivated decisions. [1]

That means, of course, that the judgements the OBR makes will often be politically inconvenient for the government. A recent example is the downgrading of expected productivity growth. No politician likes this, but populist politicians in particular hate it. One of the first decisions that the former leader of Hungary, Victor Orban, took in his long populist reign was to abolish the nation’s independent Fiscal Council. Nigel Farage has toyed with the same idea.

Populists dislike expertise that goes against their politics or policies. Brexit is a clear example for the UK. The overwhelming economic consensus was that Brexit would harm the UK economy and reduce GDP, and the populist response to that was to attack the messenger. Just as right wing populists justify such attacks by claiming that they are implementing the will of the people, it is difficult not to see attacks from the left claiming that independent institutions like the OBR are undemocratic in a similar light.

On a more positive note, one idea that did find favour with the Select Committee was looking at forecasts over ten years as well as the more familiar five year horizon. To quote

“The OBR should continually seek to improve its forecasts and economic modelling, especially by incorporating a new, additional medium-term 10-year forecast.”

Here I’m a little sceptical. The OBR already produces a 50 year projection that I examined recently. What those fifty year projections typically assume is that the economy five years ahead is at trend, and then project the trend forward. It’s not clear how a ten year forecast would be different from the ten year point of this fifty year projection.

It is possible that focusing on ten years ahead rather than fifty would allow the OBR to highlight the longer term costs or benefits of government policies. Public investment, for example, is likely to begin to have a significant impact on GDP after ten years. Ten year forecasts could also discourage governments from measures that met its fiscal rules only by postponing fiscal costs just beyond those rule’s horizons.

Critical to any ten year forecast would be the assumptions made about government spending. In their fifty year forecast the OBR after the five year point makes its own estimates of spending taking into account longer term pressures like an aging population. If instead the government was asked to estimate spending levels ten years ahead, the fiscal forecast would be a lot less informative, because the government would probably choose to ignore those pressures.

More productive than we thought

In most advanced economies productivity growth has been slower in the decades following the millennium than before. But this slowdown appeared to have been particularly acute in the UK from 2007 onwards. This became known as the UK’s productivity puzzle. It was a puzzle, because there was no obvious explanation. Over the last decade many economists have investigated this puzzle with attempts at an explanation, but I think it is fair to say that no one has come up with a compelling story.

The obvious place to look was the financial crisis itself, but a number of problems emerged, not least the absence of any productivity impact on the country that originated the crisis: the US. I would have loved to blame austerity, but the UK wasn’t the only country to cut back public spending sharply in the decade after the crisis, and the obvious transmission mechanisms didn’t seem enough to explain much of the puzzle.

It turns out that our collective failure to explain this puzzle was a good thing, because there never was a puzzle. What appears to have happened is that the Office of National Statistics' normal way of measuring hours worked, using the Labour Force Survey, has become increasingly unreliable. It now looks like the ONS had overestimated the number of hours we all worked, and therefore underestimated UK productivity.

The Resolution Foundation has a good short explainer here. Below is a chart from this.

While UK productivity growth after 2007 has hardly been spectacular using the new data, it is no longer below most other countries. In short the UK productivity puzzle has disappeared. As I noted here, using this new data also paints a more optimistic picture of UK productivity growth in the last two years.

This episode is a good example of something most seasoned macroeconomists already knew, which is that the data we work with is a lot less reliable than we might wish. But otherwise not having to explain the puzzle of relatively poor UK productivity is good news. As the Resolution Foundation notes, the UK still has a lot of catching up to do when comparing productivity to France, Germany or the US, but at least before Brexit this gap was not getting worse.

[1] A terrible argument against the OBR is that it was created by George Osborne, so it must be a bad idea. I’m hardly a fan of Osborne’s economic policy, but setting up the OBR was one thing he got right. In doing this he was following many advocates for independent fiscal institutions, including myself, from the political left, centre and right. Some argue that Osborne created an independent fiscal institution that suited his austerity policy. This is correct, but ironically it undermines rather than justifies attacks on the OBR. What Osborne did was ensure the OBR couldn’t look at alternative economic policies, which avoided the OBR exposing the basic macroeconomic problems with austerity. I have always advocated removing this restriction on what the OBR can do.