Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 2 March 2021

The budget should create a balanced recovery, but instead it will be about the deficit


Some obvious points first. We are still in a pandemic, and so support measures for employees, the self-employed and businesses should continue. The chancellor should also, belatedly, increase sick pay substantially. The success of the government’s COVID strategy will depend on persuading those who otherwise cannot afford to isolate to do so.

The following remarks are based on the assumption that the government’s strategy works, and there is no return to NHS crises and lockdowns. Contrary to the perception you get from the media, encouraged by the government, it is far from certain that their strategy will work as planned. In addition, what I’m proposing here is what a Conservative Chancellor could conceivably do, rather than the budget I would enact if I was Chancellor. For reasons I will give later, it is not the budget I expect to see.

The overall macroeconomic context is for once fairly straightforward. Most academic economists, as well as the IMF and OECD, agree that you use fiscal stimulus (i.e. tax cuts or spending increases) to get you out of recessions, leaving monetary policy to control inflation outwith recessions. That means this budget should be all about ensuring a balanced recovery and not at all about fiscal consolidation. The last ‘recovery’ we had from a major recession was in 2010, when George Osborne thought the priority was to reduce the deficit. The result was a disaster, as this chart shows.

After the Global Financial Crisis the Treasury estimated trend GDP might fall by 5%. By 2010 GDP was 10% below the pre-austerity trend, and by 2013 that gap had increased to 14%. Of course austerity was not the only reason for this: productivity was gradually falling in most advanced economies and the UK was hit hard by the banking crisis. However it stretches credibility to believe that austerity was not a part of the reason why GDP and real wages fell by so much around that time, and failed to recover before Brexit hit. 

We need after this recession to focus on a recovery, but importantly on a balanced recovery. I think there is a good chance that most consumers will take the opportunity to spend some of the savings they have built up during the pandemic without any incentives from government. A lot depends on psychology and how COVID cases evolve. If cases this summer fall to levels that are similar to last summer, then with the additional protection of vaccination many will take the opportunity to do rather more of the things they would do normally but couldn’t do in the pandemic. We could call this ‘pent-up consumption’. However if cases start rising again in the autumn this may be short-lived.

In short, what will determine the consumption of most consumers will be the success or otherwise of the strategy to end the pandemic rather than any tax cuts. Because of the risk of cases increasing in the autumn another subsidy to eating out would be a bad idea. All this means that in terms of stimulus, tax cuts (either general or specific) should not be on the agenda. There is also no need to extend the stamp duty holiday, which moves house prices in the wrong direction. However tax increases, in the form of not uprating allowances, would be a bad idea because they focus on the deficit and not the recovery.

There is a very important exception to the bounce back in consumption, and that is the 20% of households in the lowest income quintile. They have seen savings fall rather than rise during the pandemic. This is no fault of their own, but a consequence of the jobs hit by the pandemic and the way the benefits system works. The Chancellor has agreed to the principle that people should be supported during the pandemic, yet those who need that support most have not received it.

If we want a balanced recovery, in which everyone participates, then the Chancellor should use the benefits system to help the lowest quintile. That means at the very least making the universal credit uplift permanent, and should include going further to reverse the real terms cut to benefits over the last decade. In addition it makes sense to provide incentives for people made redundant during the pandemic to get back into work as soon as possible. All this should be popular, because public opinion on welfare has shifted a lot, but the Chancellor will do a lot less because he is worrying about the deficit. 

All this applies just as much to sectors of the economy as it does to income quintiles. The cap on public sector pay is a bad idea during an economic recovery, and should be scrapped. There is an incredibly strong case for giving a thank-you payment to all the doctors and nurses that have worked so hard this year, and risked their lives in doing so.

A balanced recovery requires increases in investment as well as consumption. The impact of corporation tax on investment is very uncertain, but higher corporation tax will probably discourage investment and FDI to some extent. As a result, there seems no reason to announce any increases in corporation tax in this budget, particularly if the motivation for it is to reduce debt. (Expectations matter, so delaying increases by a year or two does not make much difference to their impact on investment.) Raising corporation tax makes sense when the recovery is complete, but there is a strong economic case not to anticipate or pre-announce this. [1]

A balanced recovery should also involve additional public spending as well as private spending. The demand for most public services does not go down in a recovery. There is a strong case against cutting overseas aid, and for additional funds to certain parts of the public sector including local authorities. A large increase in council tax is again not a good idea in a recovery, and it is up to central government to give local authorities funding to avoid this and more.

Last but not least, the 3% cap on public investment should be thrown out of the window. It is incredibly fortuitous that a desperate need for public investment to help green the economy takes place during a period of historically low real interest rates. It would be criminal if that opportunity was not exploited so that every potential investment that effectively reduced carbon use or protected us from things like flooding was undertaken. Keeping a lid on public investment that prevents projects with a high social return makes no sense at any time, least of all today.

How long should stimulating the economy through fiscal policy go on? The key here is not highly uncertain guesses about the output gap, but what is happening to short term interest rates and inflation. Fiscal policy makers should want to hand over macroeconomic stabilisation policy to central bankers (the MPC in the UK) when they are sure the economic recovery has gone as far as it can.

Looking at inflation alone is not adequate, because monetary policy is designed to keep inflation at target. Looking at interest rates alone is not adequate because we have very little idea of what a ‘neutral’ interest rate would be. So I suggest that stimulus continues until both forecast inflation is expected to be above 2% and the Bank’s base rate is above 2%. In other words, delay fiscal consolidation until both short interest rates and forecast inflation are above 2%.

Although a Conservative government could have a budget like the one I have set out, our current one will not. The reason is straightforward. Much of the public still associate fiscal consolidation with acting responsibly whatever the context. They haven’t learnt the folly of 2010 onwards because much of the media has not learnt it either. The big international economic institutions may have understood the need for fiscal activism during a recovery, but our media have not.

This is one of the reasons that a party that has done so much damage to the UK economy can be seen by the electorate as the more competent to run the economy. Since 1979 we have had high unemployment in the 1980s under Thatcher, botched (recession-inducing) ERM entry leading to Black Wednesday under Major, austerity under Cameron and Brexit under Johnson. Until a global financial crisis hit the UK, economic growth under Labour was strong, steady and accident free. The one big decision they had to take was Euro entry, which they managed very well and made the right call. On past evidence Labour are far better at running the economy than the Conservatives: stability and strong growth under Labour and chaos under the Conservatives.

Labour are right to call for no tax rises that could hurt the economy in this budget. The economic recovery may disappoint, and Labour need to point the finger at the Chancellor for this. Apart from this, Labour seem to have missed the one golden opportunity they had to try and dent the Tory lead on economic competence by not wanting to talk about Brexit. But the election is still a long way off, and in the meantime Labour can at least base their economic stance on the economic consensus rather than the mistaken beliefs of the media and voters.

[1] The left have criticised the Labour leadership a lot on this, with nonsense like this makes Labour to the right of the Tories. The position that you want to combine an increase in CT with additional stimulus (particularly anything helping investment) is perfectly respectable, but not transparent when the debate will be the economic consensus versus the mediamacro (we should worry about the deficit). When Sunak's economic stimulus falls short this Wednesday, the argument for raising CT becomes much harder to make.

Tuesday, 23 February 2021

Two paths to controlling COVID with vaccinations


As vaccination is rolled out across advanced economies, the main danger has become mutations of the virus, or variants. We all know about the B.1.1.7 variant that emerged in the UK in September and helped generate the rapid rise in cases in December. We also know about the ‘South African’ variant (B.1.351), which appears to reduce the effectiveness of all vaccines to some degree. But these are just two of the better known variants, which seem to be emerging all the time (see also here).

COVID variants are the reason that so many countries have now severely restricted travel (‘almost closed borders’) into their countries in recent weeks. One of these variants could severely reduce the effectiveness of a country’s vaccination programme. It is likely that scientists would be able to change their vaccines to deal with these variants, but that will still mean at least another year before everyone is re-vaccinated and therefore means another year of lockdowns. We also do not know whether scientists could ever win a race between vaccine development and the ability of the virus to mutate.

Virus variants arise when there is a large amount of the virus about. One of the many failings of Western countries during this pandemic is to believe that you could safely vaccinate in an environment where domestic cases were high. That is exactly the environment that encourages mutations that are better at avoiding vaccines. If Western countries had followed an elimination strategy after the initial outbreaks in Spring last year, it would have been possible to keep borders open between these countries and the chances of producing a variant that can bypass vaccines within these countries would have been eliminated. In addition we would have had a small fraction of the deaths we have seen, with much less disruption to the economy.

Western countries now face a choice of how they handle COVID as vaccines are rolled out. Although no doubt reality will be far more complex than this, I think we can illustrate two types of outcomes available to them by thinking about two possible paths. I will call these two alternative paths ‘elimination’ and ‘living with COVID’. As with any attempt to look into the future, it assumes an existing technology that could change, and it involves some assessments that may prove wide of the mark (or maybe just wrong).


This path tries to use a combination of almost closed borders, vaccination and other measures to enforce social distancing (including lockdowns) to get cases down to very low levels. At these very low levels, measures to enforce social distancing can be relaxed and an efficient test, trace and isolate (TTI) programme can keep R<1. During the summer, zero-COVID is achieved. The advantages of elimination are (see also here)

  1. Once elimination is achieved, there is no chance that COVID variants that can bypass vaccines will emerge at home. While elimination is being achieved those chances are greatly reduced. This gives scientists a chance to develop new vaccines that can deal with known overseas variants while keeping everyone safe and COVID-free.

  2. Countries that have achieved elimination can very easily open their borders to other countries that have done the same. Obviously this advantage is not that great if no other Western countries eliminate the virus.

  3. Once elimination is achieved, the domestic economy can fully recover, there will be no more deaths from COVID, and there will be no more new cases of long COVID.

There is an important caveat to these three advantages. No ‘almost closed border’ is going to be foolproof, as both Australia and New Zealand have seen. When failure occurs, if TTI cannot eliminate the new cases, a short sharp lockdown is required to ensure the country returns to zero-COVID.

Living with COVID

This alternative arises when governments do not make any attempt at elimination, and two other outcomes prevail

  1. Because of widespread vaccination together with TTI, countries can ensure R is very slightly below one in the summer months (If R is a lot less than one, elimination may occur naturally.)

  2. However because COVID cases are still around by the end of summer, as winter approaches R increases to be above one, and cases increase. However because of vaccination cases never increase by enough to threaten health services, and once spring appears (or possibly before that) cases start to decrease again. (If cases rise in winter sufficiently to overwhelm the NHS, a further lockdown will be required.)

In this situation COVID becomes more like flu (it clearly isn’t like flu without vaccination), causing many deaths in winter but largely disappearing in summer. We learn to live with COVID.

Opening up borders now becomes a more messy affair. Countries would have to take informed guesses about whether other countries COVID cases were ‘safe’ (meaning they contained no dangerous variants) or not. However if most countries do not eliminate COVID, it will be easier to open borders to many countries than under elimination, once those countries have a similar number of cases that don’t include dangerous variants

There are two risks under this strategy. The positive risk is that vaccination turns out to be able to keep R<1 for most of the time, so COVID gradually dies out. This may happen because people feel more confident about being vaccinated as time goes on, and vaccines get better. Under this outcome, we don’t have to live with COVID for very long.

The negative risk is that during winter months when cases are high a mutation may develop that could bypass existing vaccines (partially or completely). This would be a very dangerous outcome, because it is likely to be some time before this variant is detected, by which time its numbers have multiplied substantially. (An advantage of the elimination strategy is that all outbreaks are treated as if they were dangerous, and are obviously much easier to see.) It is not clear to me how such a situation could be controlled without at least a year of lockdowns while new vaccines are developed and/or rolled out. The same danger arises from a failure in the ‘almost closed border’ that lets in a case with a COVID variant that can bypass vaccines.

Compared to the elimination strategy, there are two obvious advantages in living with COVID. The first is that lockdown can be relaxed or ended earlier. The second is that the country becomes less vulnerable to failures in its ‘almost closed borders’. The certain disadvantage compared to elimination is more deaths, and there is also the risk of allowing the development of variants that can bypass existing vaccines.

East versus West

At present the elimination strategy is being adopted by a group of countries which is small in number but does include China as well as Australia, New Zealand and Taiwan. There is no indication at the moment that any other countries are likely to join this group. It is also unclear whether these countries will continue with elimination once vaccination is widespread. They may be doing similar analysis to this (although no doubt better) to help them decide.

One prudent policy for the existing elimination countries is to wait and see how ‘living with the virus’ works out. If Western countries do learn to live with that strategy, the negative risks I point out above do not in practice occur, and they succeed in opening borders to each other at least, then there will be a strong incentive for the elimination countries to abandon that strategy. Equally, however, if it looks like Western countries are constantly playing catch-up with new domestically generated virus variants that bypass existing vaccines we may begin to see some Western countries begin to adopt elimination.

The UK government’s strategy for ending lockdown

Of the four criteria the UK government is going to use in deciding how quickly to ease its lockdown, steadily reducing cases is not among them. Instead we have “Infection rates do not risk a surge in hospital admissions” which is a much weaker criteria. It is actually exactly the criteria you would have under the ‘living with COVID’ strategy. It is therefore clear if unsurprising that the UK government has no intention of switching to an elimination strategy.

Much has been made of the government’s new step by step, data driven patient approach. What is less often said is that such an approach is essential to avoiding another resurgence in cases when most people have not yet been vaccinated. (Perhaps Tory MPs wanting to open everything quickly are only there to make the government look good?) Opening schools all at once in March is a risk. While it is good that secondary school children will be required to wear masks at all times, in France children aged six and over are told to do this. There is probably a lot more that could be done for schools in terms of ventilation, bubble sizes and so on. We also need to prepare for the possibility that schools going back may raise R to almost one, which would effectively invalidate the government's approach.

What is also not widely appreciated is that SAGE forecasts, like those released yesterday, are going to play a critical role in deciding how quickly lockdown is relaxed. Only in this context does the need to ensure “Infection rates do not risk a surge in hospital admissions” make sense. What SAGE needs to forecast is what level of cases in the summer, with lockdown at an end, is sufficient to ensure that the increase in cases over autumn and winter does not overwhelm the NHS. It is a very difficult forecast to make because we have no experience of what happens when most people are vaccinated, and if the government is wise it will base its calculations (on when to ease lockdown) on a worse case scenario. Unfortunately if it did that it would be acting out of character.

You also have to ask whether, if you intend to follow data rather than dates, it is wise to then announce a complete set of dates attached to a detailed list of the restrictions that will be lifted all the way to the end of lockdown? This gives a mixed message at the very least. In reality, given that we are far from clear how effective each element of the lockdown is, there may be a danger that the whole timetable is built on sand. But in political terms, this timetable is going to have a strong influence on expectations (where caveats are forgotten or just ignored by print media). The net result may be that disappointing those expectations will be a large political cost that politicians will not want to incur. A timetable this precise may have the effect of taking decisions away from the scientists when the data turns out to be worse than expected.  

Tuesday, 16 February 2021

COVID-19, experts and the media


On February 4th, the British Medical Journal (BMJ) published an editorial which suggested that the actions of most government’s in mishandling the COVD-19 pandemic could be described as ‘social murder’. They write:

“The “social murder” of populations is more than a relic of a bygone age. It is very real today, exposed and magnified by covid-19. It cannot be ignored or spun away. Politicians must be held to account by legal and electoral means, indeed by any national and international constitutional means necessary. State failures that led us to two million deaths are “actions” and “inactions” that should shame us all.”

The biggest state failure of them all is the UK Chancellor persuading the UK Prime Minister to ignore his expert scientific advisers last autumn.

This damning verdict should come as no surprise, as in most countries most medics have despaired at the failure of politicians to be able to lockdown hard and early. Time and time again leaders want to delay what is inevitable, which just means that more people die, and the lockdowns when they come last longer than if they had been put in place earlier. Equally academic economists with some expertise in pandemics have despaired when governments have used the economy as an excuse for not saving lives, because these economists know there is no trade-off between health and the economy beyond a few weeks.

The interesting thing about this editorial was not that it was written, but that it received virtually no coverage in the mainstream media. As far as I can see using Google, it wasn’t covered by the BBC, ITV, Sky or Channel 4, and it wasn’t covered by any newspapers. Richard Horton’s book “The COVID Catastrophe” covers similar ground, and has been discussed by the Guardian, openDemocracy, the Financial Times and Channel4 News, but not by any other newspapers or broadcasters as far as I can see. (I strongly recommend this interview with Horton on Novara Media.) Happy to correct if I'm wrong.

The problem is not that the media have had enough of experts. Some experts on the pandemic have become regular faces if you watch Channel4, and the other broadcasters have interviewed them as well. The problem I think is that they are typically treated by most broadcasters (Channel 4 is perhaps an exception) as having one particular opinion, to be put alongside the views of politicians and political pundits. This after all is the standard broadcast media format: a panel with two or more people expressing different views. When experts are interviewed one on one, they are rarely asked whether their view represents the scientific consensus.

The media do have a hierarchy of opinion holders, and at the top are politicians. My guess is that in terms of airtime you see much more politicians talking about pandemic policy than you do experts. There is a similar hierarchy in terms of journalists, with political editors at the top and subject journalists (health, economics etc) below them. The problem with these formats and hierarchies is that it marginalises knowledge. Scientific knowledge isn’t another opinion. As long as the media treats scientific knowledge as opinion, it removes itself from reality and diminishes its audience.

Let me take a topical example that has nothing to do with COVID. Before Brexit, the overwhelming majority of economists would have told you that leaving the European Single Market (SM) and Customs Union (CU) would create significant barriers to trade, even if tariffs were aligned. This is an almost universally accepted truth among academic trade economists, many of whom spend a great deal of time assessing non-tariff barriers to trade because those barriers matter. These barriers include form filling and customs checks and different standards. It’s as near as you can get to an economic fact in trade economics that these barriers deter trade.

The European SM and CU effectively eliminated those barriers for trade between the UK and other members of the EU. It therefore follows that leaving the SM and CU creates significant barriers to trade, so that some firms will no longer find it profitable (or even in rare cases possible) to trade with the EU and others will move part or all of the business to the EU to avoid these barriers. As the UK Brexit negotiators focused on sovereignty, ways around these barriers were scorned.

Before we left the CU and SM various politicians claimed that such talk was Project Fear. Other politicians went with the economic evidence about the impact it might have. According to the rules by which the media works, this division among politicians automatically turned an economic fact into a contested truth. The media needs to reflect that since we left the SM and CU Project Fear has become fact, but it always was a fact. What turned it into an opinion was the way it was treated by the media.

This problem becomes obvious when populist politicians start telling voters obvious lies. However obvious lies should be less of a problem because most journalists will recognise them as lies, and have the potential to call them such. So engrained is the notion of balance that often journalists do not even do that. But more clever politicians know that facts that are not commonly known to journalists are the better ones to lie about.

The last decade has seen three huge lies perpetrated in the UK as a result of politicians telling lies, where the media has failed to call the politicians out.

The first was austerity, where the lie was that we had to cut spending to reduce the deficit even though we were at the bottom of a recession. In this case this idea seemed obviously true to most journalists, so they treated it as a fact. The majority of academic economists knew that it was in fact false, but that view was excluded from media discussion because both the Coalition and Labour accepted debt needed to be reduced. We now know that the media and politicians were wrong, and the majority of experts were right.

The second was the economics of Brexit. Here most journalists did not have a ‘common sense’ view and politicians were split, so they treated this as a ‘two sides’ issue. This was despite the overwhelming majority of academic economists, and every academic trade economist I know, thinking that Brexit would have a significant negative impact on UK trade and the economy. We had the ludicrous situation where studies from numerous economists or economic institutions were balanced with the tiny minority of economists that supported Brexit. Once again the experts are being proved right. Experts knew that trade barriers reduce trade, and this knowledge should not have been treated as an opinion but as a fact.

The third is the COVID pandemic. Once again the media has decided that politics rather than expertise will drive its coverage. As a result, even after over 120,000 deaths, we have media coverage which sometimes balances the government’s policy against the opposition who want to follow SAGE, or worse the government’s policy against COVID nutters who happen to be Tory MPs. Worse still, the tiny minority of Barrington Declaration academics are given airtime even after they have been proved wrong time and time again. As a result, the elimination (or zero-COVID) policy that is supported by many medics and is being followed by some countries, and is today being debated among medical experts has hardly been discussed at all in most media outlets (again Channel4 News and a few newspapers are a partial exception).

This exclusion seems to be a deliberate policy in some quarters, as this thread from Deepti Gurdasani shows. Elimination is just not practical, it has been decided. Whether this goes more widely as a BBC policy remains to be seen, but it is not the BBC’s job to decide that a policy recommended by many medics and economists familiar with pandemics, and implemented in many countries, is not practical.

The BBC periodically accepts that climate change is not a subject for two-sided debate, but why is climate change special among academic disciplines? In all other areas of knowledge, if politicians get involved then knowledge goes out of the window. No wonder certain politicians lie all the time when most of the media provides no deterrent. Equally when a politician contradicts knowledge that is not known to journalists there is no deterrent provided by the media. This has nothing to do with any left/right bias. As Martin McKee wrote well before the COVID pandemic, “this is a profound challenge to the very idea of science”.

Maybe the BBC’s mandate is in reality: "to act in the public interest, serving all audiences through the provision of impartial, high-quality and distinctive output and services which inform and educate the public about what politicians are saying, and to entertain".

This problem will be with us again with Scottish Independence. We know that independence will involve a big short term economic hit for the Scottish people. Just as a Cameron Government that had established immigration targets that were never met were the worst people to argue the case against Brexit, our current government that lied their way to Brexit are the worst people to argue against Scottish Independence. If nothing changes the media will once again make this short term economic hit from independence a ‘two sides differ’ issue, and knowledge based on expertise will be treated as just another opinion.

It was science, not opinion, that gave us many vaccines against COVID. As long as we have a media where knowledge becomes opinion if politicians contradict knowledge, we will continue to make disastrous mistakes as a country.

Monday, 8 February 2021

Media radicalisation in the US and UK


Perhaps many people outside the United States do not realise how dangerous the attack on the United States Capitol was. The views from outside the Capitol, which is all the media could immediately show, seemed harmless enough. The reality was very different. Five people died, including one policeman. As one Republican described, seeing the faces of those trying to force their way through a police barricade to get into the House Chamber

“I saw this crowd of people banging on that glass screaming. Looking at their faces, it occurred to me, these aren’t protesters. These are people who want to do harm. What I saw in front of me was basically home-grown fascism, out of control.”

We now know that this was a well organised attempt to capture leading politicians. We don’t yet know, as some Democrats have alleged, whether the attackers had inside help from some Republican politicians. What we do know is that the attackers believed that the elections had been stolen from them, and these claims were repeated and acted on by a majority of the Republican politicians even after the Capitol attack. As there is not a shred of evidence that Biden’s election was illegitimate, those Republican members of Congress are guilty of supporting a democratic destroying lie that was behind the attack on Congress.

There are a minority among Republican politicians that would like to break from Trump. Liz Cheney, the House Republican Conference Chair, said

“There’s no question the president formed the mob, the president incited the mob, the president addressed the mob. He lit the flame”.

But only 10 Republicans in the House voted to impeach Trump, while the remaining 201 abstained or voted against. It is very unlikely that enough Republican senators will find him guilty in the Senate. A key question is why.

It should be in the interests of Republicans to impeach Trump, because that is the only certain way to stop him running again in 2024. Republicans shouldn’t want Trump to run again because his behaviour has put off a minority of Republican voters. That was true before the election (Trump did worse than the party in Senate and House races) and it is even more true as a result of his behaviour since. The two seats in Georgia, which looked like going Republican, voted Democrat after the events at the Capitol and Trump campaigned there. Immediately after the attack on the Capitol many Republican politicians disowned Trump.

But then the Republican base fought back. The reason why Republican politicians will not impeach him is the support he still enjoys among Republican voters, and particularly Republican activists. 64% of Republicans support Trump’s recent behaviour, and 57% want him to run again in 2024. As many Republican voters approved the attack on the Capitol as opposed it. There is a history of extreme Republican candidates defeating moderate candidates in primaries, so few Republicans want to upset the Republican base by opposing Trump, even after the attack on the Capitol. Trump himself is ready to finance campaigns against his critics in the Republican party.

So the Republican party are trapped by their pro-Trump base, and there is no obvious way out for those who oppose Trump. The Republican party therefore remains the party that does not respect democracy. A key question for the future of democracy in the United States will be whether voters understand that when they vote in two and four years time. Do they understand that a vote for the Republicans could be the last time they get a real choice in who governs them? As I argued some time ago, the only way you can rescue right wing political parties from the extreme place they have got to in the US and UK is to defeat them time and time again, or to change what is keeping extremism going.

Academic analysis of how the media influences people has normally focused on elections, and all of the studies I have seen suggest a strong influence on voters. I think their influence on party activists on the right is just as important. The traditional and respectable media in the US was clear that there was no evidence of fraud in the 2020 election, and that Biden won fairly. It was the extreme right wing media, including Murdoch’s Fox News but also One America News, Rush Limbaugh and numerous social media outlets, that pushed the idea that Trump had really won.

This media is crucial in allowing many Republicans to believe what Trump was telling them. I think this is the key difference between now and when the last Republican president was impeached. For a long time voters were reluctant to have Nixon impeached, but eventually they agreed it should be done. But back then there was no significant media pretending it was all a giant conspiracy. Back then there were no significant people or organisations with money threatening to bring down any politicians who voted to have Nixon impeached.

I doubt if Biden has the votes to curtail the ability of Fox News and others to continue to radicalise the Republican base, even if he was minded to do so. We therefore have to hope that voters will continue to vote against this Republican party. The danger is that the mainstream media begins to normalise the Republican party once again, and a President with a Senate that blocks many of his reforms finds his popularity falling, and ends up in the position Obama was for six of his eight years.

In the UK we do not have primaries, so the direct power of the Conservative Party base is much less. The way the authoritarian right was able to win power in the UK was through a new party of the right that threatened the hegemony of the Conservative party, and through a referendum. Yet voters still had to be convinced to vote for a Prime Minister that illegally suspended parliament. That happened in part because the media landscape in the UK is much worse than in the US. I thought otherwise when I first started this blog, but that was before the Conservative party started turning the screws on the BBC. While in the US both the Trump supporting press and broadcast media are in a minority, in the UK the right wing press is a majority of the printed media and the BBC finds it difficult to deviate from the lines pushed by the government and that press.

However the situation in the UK may be about to get a lot worse, with GB News headed by Andrew Neil and the Murdoch owned News UK TV. Both new channels look like they are pitching to a right wing audience, and both are funded by people or organisations that have funded other right wing endeavours. Ofcom is supposed to ensure balance in broadcasting, which is why Sky News has never become Fox News. But with comment rather than news outlets like LBC and Talk Radio, Ofcom has taken a less strict view about what balance is.

The danger is that the two new TV channels will try and push that boundary further to the right. This is the context in which totally unfit Paul Dacre’s rumoured chairmanship of Ofcom should be seen. The danger is the creation of a right wing media bubble, where people who read the right wing press do not watch BBC News but one of these two new channels. Coupled with a FPTP system which favours social conservatives, and a Conservative party that exploits that and a social liberal vote which is divided among many parties, if these new media outlets are successful such a right wing bubble could ensure Conservative governments for a very long time.

Monday, 1 February 2021

Why vaccines alone are not enough, how the UK government could mess things up again and which European country will eliminate COVID first?


Why has the UK government decided to apply serious travel restrictions to incomers because of COVID now, almost a year after the pandemic began? What took them so long, and what has changed? The obvious answer to the second question is vaccination and mutation.

We don’t know how much the vaccines so far approved will stop people passing on the infection to others, but what evidence we have suggests there will be at least some dampening effect. Israel is likely to provide the first firm evidence on this. That will reduce R, the number of people one infected person passes the illness on to. What vaccines will certainly do is substantially reduce the chance of people getting ill from COVID.

The danger is that, as vaccines are rolled out, the virus develops the ability to bypass them through mutation, so vaccines either don’t work at all against this new variant or work less well. This doesn’t seem to have happened to a large extent yet, and it isn’t inevitable, but it has happened to a small extent and it would be unwise to assume it will not happen. The chances are that variants are likely to emerge in other countries first, so it makes sense to try and stop that variant entering into the UK for at least as long as possible.

While this provides an excellent justification for creating travel restrictions today, it doesn’t explain why effective general restrictions were not imposed before. (There have been requirements to self-isolate, but these seem largely voluntary.) A cynic might say that the underlying UK strategy is and always has been herd immunity, but I think that only applied at the beginning of the pandemic. After then, with UK cases more often than not higher than elsewhere, the incentive for effective and generalised border controls was not enough to motivate this government.

While the chances are that any variants that can bypass vaccines will emerge abroad, it is possible they will emerge in the UK because we are vaccinated in an environment of widespread infection. The big danger left is that Johnson will once again relax lockdown restrictions too soon, before enough people have been vaccinated. The quicker we reduce case numbers in the UK, the less chance there is that a vaccine-resistant mutation develops in the UK. In addition the more cases there are, the easier it is for an overseas variant to multiply. No restrictions on people entering can be 100% safe, as New Zealand recently found, and a complete ban on people entering is not feasible because of returning nationals. Johnson should know this because his failure to get case numbers really low over the summer allowed the UK variant to develop and multiply.

It makes sense to reduce UK cases as quickly as possible to very low numbers, to reduce the chances of mutation and increase the chances of isolating any variant that comes in from abroad. Whether you call it zero-COVID or elimination or whatever, that strategy has always been the one that minimizes deaths and gets the UK back to normal as quickly as possible. Vaccines don’t change that reality, they just make it easier to implement. One argument put forward against an eradication strategy has been the costs of quarantine in hotels, but now the UK government is doing quarantine that argument falls away.

Just as the UK is now imposing quarantine for incoming travellers, or requiring recent tests, the same is likely to happen in other countries for similar reasons as their vaccine programmes are rolled out. For a period of time we will have many Western countries where there is much reduced inward human travel. This is an outcome that I imagined happening many months ago once the scale of the pandemic became clear, and should have happened if best practice had been followed.

Once such a situation comes about, it creates two sets of very positive incentives for countries imposing quarantine. First, each country has a strong incentive to eliminate the virus, so that they can free travel up with other countries that have done the same. We will get travel bubbles being formed. Those bubbles will be fragile, as they have been for Australia and New Zealand, but they represent the beginnings of international cooperation to eliminate the virus.

The second incentive for those countries that do eliminate COVID is to get other countries to do the same, so free travel between countries becomes possible again. But even with quarantine, risk can only be completely eliminated when all countries have eliminated the virus. So the second incentive is to get the vaccine to poorer parts of the world as quickly as possible, with the help of international cooperation.

That is the strategy that the UK should now follow. However the UK is a country that has more than a 100,000 dead from the virus, with currently one of the highest death rates in the world. This reflects in part the fact that we have a weak Prime Minister, who is very indecisive, puts off decisions, wants to please and is easily swayed by pressure from others. We already have a large number of Tory MPs and business people who are clamouring to end the lockdown whatever dangers that brings.

The problem is that Johnson does not only listen to scientific advice, which is to avoid any relaxation for some time. He also listens to his MPs, some of whom have very strange but strongly held views on lockdowns. He has already said that he hopes to reduce some restrictions at the end of February, despite also saying that closing schools will be the first restriction to end and it probably will not happen until Easter. Of all the restrictions in the current lockdown there is a strong case for getting schools back first, but any relaxation of other elements of lockdown before then makes that less likely or more dangerous. Time and time again Johnson has gone for short term popularity with terrible long term costs, using as an excuse a trade-off between health and the economy that does not exist beyond the very short term.

Another indicator that Johnson may mess things up is how he has oversold vaccines. They have been presented as the solution to the pandemic, rather than as a key tool among many in ending the pandemic. With new infectious variants already circulating, we cannot be sure that the vaccination of everyone who is willing to be vaccinated will be enough to achieve herd immunity (see also here). But the main reason why vaccination is not enough on its own is the generation of variants. As this excellent discussion from Anjana Ahuja suggests, Taiwan, China, Australia and New Zealand are the examples to follow, and vaccination will make it much easier to follow that strategy.

It would be nice to be optimistic that some other Western countries will follow this advice. Unfortunately, while most European governments are not as foolish as ours, very few have shown much wisdom either. Read this from Le Monde on how Macron is also putting off the inevitable as cases climb. To quote, Macron “does not want to let this measure be imposed as long as the figures do not show the urgent need for it. With around 20,000 new cases per day, France can still avoid it, he believes.” You only need to look at the data to see how unlikely he is to be right.

It is an interesting question why no Western government has learnt the lessons from the East. Why do none have a leader who is prepared to go with the science? Instead we have politicians who balance what the experts say with pressure from small businesses and others in various sectors to do the opposite. Everyone wants financial support and Ministers of Finance worry about the cost. Few with any power seem to realise that the strategy that minimises costs, disruption to business and saves the most lives is locking down hard and fast, and trying to minimise cases. The media reflects the myopia of actors rather than leading. (How many discussions on how Australia has handled the pandemic have you seen in the UK broadcast media, and has it been greater than discussions of Sweden?)

The common idea as to why Australia and New Zealand have followed an eradication strategy from the start is that it is easy because they are islands with less international travel than European countries. That is not quite right for Australia. COVID policy is determined at the state level, and the states have imposed land border restrictions between each other when outbreaks have occurred. We can only hope that once European countries start imposing international travel quarantines as their vaccine programmes are rolled out, and now they have a better understanding about how not to handle the virus, some at least will follow Australia and adopt eradication as a goal.

I think it is likely that once a few European countries do this, most will follow as the advantages of an eradication policy become clear. As Norway already has a variety of border controls including hotel quarantine in place, and a low number of cases, my guess is that Norway may be among the first European countries to adopt elimination of COVID as a strategy. Finland, which also has strict entry requirements and a relatively low number of cases, is another possibility. With a head start in terms of vaccine supply it could be the UK, but with a Prime Minister who says he wants to wait before learning from past mistakes I somehow think it won't be. 

Monday, 25 January 2021

The two sides of austerity.


I thought I’d use the FT’s mea culpa on austerity to make a point which is easily missed in public debate. Sustained austerity of the kind inflicted on the UK from 2010 until quite recently was terrible for two types of reason. The first, that most people focus on, are the cuts to government spending (shrinking the state) that went well beyond trimming any fat and caused real hardship. The second is macroeconomic. Cutting government spending in a recession is never a good idea, and when interest rates were stuck at zero it was a disaster.

To highlight that distinction, I’m going to claim (with a few provisos) that the current Chancellor in this recession has so far not made the second, macroeconomic mistake. In that sense we have not seen a second wave of austerity. However with very limited exceptions he has continued to maintain the cuts in government spending that were made during the earlier austerity period. In that sense austerity has never gone away.

Austerity in terms of shrinking the state has not gone away

There is so much misleading analysis based on public spending aggregates around. Here are figures for the main components of current public spending over the austerity period. They are as a percentage of GDP, as they always should be for this kind of analysis but hardly ever are (Source IFS).

You can see that all these components of public spending have fallen substantially as a share of GDP over the austerity period from 2010. I have started the chart from financial year 2004/5, because spending in 2009/10 may be unusually high because of the recession. As it is difficult to read from the chart, here is the percentage of spending as a share of GDP in 2017/8 compared to 2004/5 for each component (figures for 2017/8 compared to 2009/10 in brackets): Pensioners social security 87% (82%), other social security 82% (73%), Health 111% (93%), Education 86% (74%), Defence 85% (77%), Law and Order 74% (69%). The extent of the squeeze on public spending over the austerity period is crystal clear. As the per capita numbers from this chart from a different IFS source makes clear, recent increases in public spending hardly dent this picture.

The one apparent exception to the tale of devastating cuts in public spending is health. Yet the idea that the government proposed and the media accepted that health had been protected is an illusion, because historically health spending as a share of GDP has tended to increase, as this chart shows (source).

Health spending in the 1950s was around 3% of GDP, in the 1990s just under 5%, and in 2005/6 around 6.5%. The reasons are many. As we grow wealthier we like to spend more of our income on health, a gradually ageing population, innovations in what medicine can do and so on. That implies that keeping the share constant is actually a squeeze. That is why the health service was near collapse before the COVID crisis, which forced the government to relax the squeeze to some extent. The fact that health spending needs a growing share of total national spending has profound implications for taxes that I’ll come back to later.

All these numbers square with experience on the ground. Delays in the administration of justice are getting worse and worse, and it is not just because of COVID. The squeeze on welfare has helped lead to the widespread use of foodbanks:

If you want to know why foodbank use has gone up so much, it’s a combination of a cruel and arbitrary punishment regime for claimants and a dramatic fall in the relative incomes of the poorest households, part of which is a consequence of austerity. (Chart from The Resolution Foundation.)

We now have ample evidence that the attempt to squeeze the state since 2010 has caused widespread hardship and dislocation. The belief among many on the right was that there was substantial inefficiency within the public sector and starving resources would increase productivity. It might have done that, but it has clearly gone too far in many areas. This is one half of the fundamental problem for those who want to squeeze the state in order to reduce the tax burden (as Osborne did). The other is health spending.

As I noted earlier, the share of health spending in GDP has been steadily rising. That in turn reflects greater demand for health services. With a health service that is largely free to those who use it, that means a rising level of taxation to pay for it unless you can cut elsewhere. For decades you could cut elsewhere, because the end of empire and then the peace dividend allowed large cuts in defence spending. That option seems to be no longer available, which means taxes in some form have to rise to pay for the NHS. The Conservative party is still in denial about this. As the media and therefore parts of the public are also in denial, that forces Labour to match Tory promises not to raise certain taxes in order to win elections.

Austerity in terms of macroeconomics has largely gone away

In 2010 the idea that it was a good to cut government spending in the middle of a deep recession where interest rates were stuck at their lower bound went against macroeconomic theory (undergraduate and state of the art) and evidence, and as a result most academic macroeconomists did not support austerity. However macroeconomic institutions like the IMF and OECD did for a time, and this, along with governments in the UK, US and Eurozone, is the consensus that the Financial Times refers to in their mea culpa.

Why governments and international organisations supported austerity is a complex question that I have spent many posts analysing. Without doubt, a desire to reduce the size of the state was part of the story. The important point, which is not completely clear from the FT piece, is that most academic opinion thought it wrong at the time, so in that sense the facts have not changed. All the evidence in 2010 said austerity would reduce output, and it did.

The short term cost of austerity was a delayed and weaker recovery. That is standard macro, as I was at pains to point out when the FT declared in 2013 that Osborne had won the battle over austerity. My own estimates put the cost of that delayed and weaker recovery at around £10,000 in lost resources per average household. That is bad enough, particularly for those who became unemployed, but it may not be the worst macroeconomic outcome of austerity.

The productivity puzzle, about why UK productivity growth was so weak after 2010 compared to other countries, has many potential explanations, but I suspect one important part of the puzzle is austerity. Again I’ve tried to explain why in economic terms before, but we can make the point very simply as follows. The experience of firms since WWII has been that almost without exception governments support recoveries from recessions. They cannot stop recessions happening, but they can ensure through monetary and fiscal policy that they are short lived. 2010 broke that understanding, which is bound to have had a significant negative impact on firm’s willingness to invest and innovate. In other words austerity may have permanent effect in reducing GDP and real wages.

As the FT notes, both the OECD and IMF now recognise that in a recession where interest rates are at their lower bound you need fiscal stimulus. Does this government? No, in the sense that it has never recognised its mistake in 2010. Yes, in the sense of how it has dealt with the pandemic. If you applied George Osborne’s logic to the pandemic, the priority should be to cut spending to reduce the deficit caused by fear of the virus and lockdowns. There would be no support for those furloughed. Policy would be like the US but with austerity rather than fiscal stimulus.

That Sunak has done the right thing, and not followed Osborne’s example, suggests he also recognises the folly of austerity. Indeed, his ill-fated (because far too early) Eat Out to Help Out scheme suggests he’s also prepared to actively help any recovery. Osborne’s measures in contrast hindered any recovery.

However we have to add a large number of caveats. The first is that his support has not been complete, and he has done little to cover gaps. His refusal to increase sick pay is both mystifying and dangerous. His successful attempt to delay a national lockdown to deal with a second wave was criminal, and that has had a terrible impact on the economy as well as health. He was too late to recognise that the second wave would need a furlough scheme like the first, and many lost their jobs as a result. I describe these as caveats because they could be motivated by attempting to gain favour among the ‘reckless right’ group of Tory MPs who don’t believe in lockdowns. However they could also be motivated by a worry about the public finances, which qualifies the extent to which he has thrown off austerity at a macroeconomic level.

To add to this is a forward looking caveat, clearly set out in Dodds recent impressive Mais lecture. There is a danger that Sunak will want to cut taxes just before the next election (if it is 2024), and to achieve that he may embark on fiscal consolidation before an economic recovery from the pandemic is complete. His public sector wage freeze may be part of that. This suggests that Sunak, like Osborne, is tempted to make macro policy fit the political cycle rather than fit the needs of the economy. We don’t know if he will do this, but that is something to look out for.

What is clear is that Sunak believes that he should follow a responsible fiscal policy once the recovery is over. The key here is not the word responsible, but how he defines it and how that is achieved. The danger is that he may, through his own wishes or those of his backbenchers, focus on spending cuts as well as tax increases. That is why the Universal Credit issue is a problem for him, but it is also a much more serious problem for those in poverty. Reversing the recent increase in Universal Credit, even if there is a one-off payment or some short delay, would substantially increase the unacceptable and growing level of child poverty in the UK, as the Resolution Foundation has shown (figure 20).

That Sunak is contemplating a cut rather than an increase in Universal Credit illustrates that, even if he has forsaked austerity in terms of macroeconomic strategy, he is unlikely to forsake austerity in terms of lower public spending and a reduced welfare state.