Labour’s Brexit stance is a tragedy for Labour but the current Brexit mess is an entirely Tory failure.

Before deciding that I’m writing about Labour when I should be writing about the disaster that is Theresa May, please read to the end.

As it becomes obvious (sort of) that there is no majority among MPs for a People’s Vote (something that has actually been clear for some time), the argument has been made that this justifies Labour’s failure to support a People’s vote and instead to seek a compromise, a softer Brexit. I have talked about the wisdom of compromise over Brexit before, but I want to make a different point here, about the stance that Labour has taken over Brexit.

In 2015 Labour lost a General Election where the strong card, perhaps the only strong card, of the Conservatives was their handling of the economy: in other words austerity. It would therefore not be ridiculous to claim that the vote was a verdict on austerity. Some Labour MPs did just that, and argued that if Labour were to win the next election it had to match George Osborne’s policy.

Thankfully on that occasion a new Labour leadership did not take their advice. There were three compelling reasons to continue to argue against austerity - indeed to argue against it much more strongly than Balls and Miliband had done. First and most importantly, it was a policy that made pretty well everyone worse off, and almost certainly led to premature deaths. Second, austerity was a policy that was very unpopular among party members. Third, there were good reasons to believe that the popularity of austerity among the public at large would fade away over time.

I think all these points apply to Brexit as well. Does the fact that 2016 was a referendum while 2015 was a General Election make a difference? Here we have to talk about the nature of the 2016 referendum result. It was not, and could never be, an unconditional instruction to leave under any circumstances. As the form of leaving was unspecified, and the conditions under which we would leave were strongly disputed (with the winning side proving to be completely wrong), it should only have been a request for the government to investigate how we might leave.

It was also won narrowly, with the winning side spending significantly more than was legal. That alone casts a question of legitimacy over the result. I find it extremely odd that some on the left say otherwise, and suggest Remainers have to prove that the additional spending made the difference, something that it is almost impossible to do. Do they realise the precedent they are setting? The right always has more money for obvious reasons, and if the only consequence of overspending by the right is a fine then that is an open invitation to try and buy elections.

Labour’s early approach to Brexit was successful in avoiding the 2017 election being a rerun of the referendum, but there were other ways of doing that. A reasonable strategy that would have achieved the same end was to accept the vote (obviously), but to reserve judgement while the government was negotiating. It would make sense to put down markers about being extremely skeptical that Brexit promises could be met and, crucially, whether a deal that was beneficial could be found.

As the outlines of the government’s deal became clear, Labour should have done what was right and what its members wanted, and campaigned for a second referendum. Once Labour had to put its cards on the table, triangulation ran out of road. The case for a vote on the final deal became unassailable once it was clear Leave promises about what the EU would do were worthless, that there were alternative ways of leaving each of which had some public support, and the public were not getting behind Brexit but were still deeply divided about whether to Leave and how to Leave. 

The Labour leadership’s arguments against doing that were of exactly the same form of those who wanted to adopt Osborne austerity after 2015: the policy that members wanted was seen as a vote loser. Even if they are right about backing a second referendum being a vote loser (and I strongly suspect they are wrong), the only argument I can see for treating austerity and Brexit differently is a belief that one matters much more than the other, and such a belief is very misguided.

What about the argument that there are not enough MPs in parliament to support a second referendum? In my view that is an entirely separate point. In general opposition parties cannot get their way, but that does not mean they stop campaigning for what they think is right. It may well be that parliament will never vote for a second referendum, and some compromise - a softer Brexit - is all that can be achieved. I hope that is not the case, but it could well be. But that does not mean a party should start off campaigning for the compromise you may be forced to reach, rather than campaigning for what is right.

Some people argue that we have to support Brexit to show solidarity with those left behind who support it. That ignores those left behind who voted against it, but even so it is not a good way to proceed. You could say exactly the same about immigration, which many of those left behind blame for their situation. It would be quite wrong for Labour to adopt an anti-immigration policy they did not believe in just to show solidarity with those who wanted it. The same is true of Brexit.

But I have to make one final, and critical, point. I think Labour’s Brexit policy is tragic because it has, directly or indirectly, diminished support for Labour and its leadership among many people who might vote Labour. By triggering Article 50 Labour bear some responsibility for Brexit, and I have suggested before that the successors to the current leadership should come from those who voted otherwise. However I cannot say with any certainty at all that Labour’s policy has had any effect on the Brexit process as such. It is not at all clear that if Labour had adopted the stance I suggest above it could have stopped Brexit, This Brexit mess is entirely Tory affair. To quote Alison McGovern, “This is a Tory problem, a Tory solution and a Tory obsession.” It is Tory disunity and madness that has delayed Brexit. It is a terrible Tory Prime Minister that has made democracy in the UK become a laughing stock among the rest of the world. Those who claim the Tories and Labour are equally to blame or equally responsible for Brexit are wrong. 

May's speech to the public on Wednesday night was Trumpesque, and extremely dangerous. She blamed MPs for delaying Brexit when she had delayed one vote for no good reason, and then basically said its my deal or no deal. She pretended she was acting for the people while parliament was frustrating the people’s will, when in reality less than 40% of voters support her deal and parliament is reflecting that. She seems on the point of taking us over the cliff edge and it is only Tory MPs that can stop her. To make such an authoritarian, populist speech without realising what she was doing tells you all you need to know about her character and political ability.

Her proposal to the EU only made sense if she was prepared to leave with No Deal, which in turn signals to the ERG that they should not vote for her deal. The EU is much too sensible to agree with that, and has in effect given parliament three weeks to work out an alternative to May’s deal. That requires Tory MPs to cooperate with the Labour leadership, something they have not yet been prepared to do [1]. To the many who suggest that somehow the Labour leadership could have prevented the mess we are in I say show me how you can be sure of that, because to me this looks like all the Tories own work from David Cameron to today.

[1] If Tory MPs do finally have serious discussions with the Labour leadership, the Single Market is critical. If all the leadership does is demand to stay in a Customs Union (something inevitable with May's deal given the backstop), it will be equally responsible for the damage caused by leaving the Single Market. Phrases about 'access to' or 'staying close to' the Single Market bind the government to nothing. 

Where would you get the money from?

In the recent furore in the UK over tax credits, I do not recall any government minister being asked the following question by a journalist: why don’t you just borrow more? Yet to any economist that is the most sensible, and indeed obvious, question to ask.

I just do not think most journalists (and I’m tempted to write and therefore politicians) have yet realised this crucial difference between austerity in 2010 and austerity now. [1] In 2010 debt to GDP ratios were rising fast, everyone was talking about market panic, so people like me who thought deficits should be larger had some explaining to do (although, as Ben Bernanke recently said, we were right). But now austerity already enacted has stabilised debt to GDP ratios, not just in the UK but in the US and Euro area. Over the next five years debt to GDP ratios in the UK will be falling.

This means that further austerity is no longer about stabilising debt and an imagined market panic. Instead it is about an obsessive need to cut debt to GDP really fast, or more likely a desire to shrink the state. It isn’t primarily about Keynesian economics any more [2], but instead about any kind of economics. Remember there are no economists prepared to defend Osborne’s fiscal charter. In economic terms the fiscal charter itself is the real embarrassment. The issue is no longer do we increase the level of government debt for the sake of the economy, but do we need to raise tax credits or cut vital public services just in order to cut government debt quickly.

Perhaps the most charitable explanation for this failure of journalism is that most people do not understand some very basic points. Governments running surpluses are rare. Unlike individuals, nearly all governments have always had a large amount of debt. Unlike individuals, nation states live for a very long time. Because the amount they produce also grows over time (real growth and inflation) that means that the ratio of debt to GDP (which is what matters) can stay constant even if they run deficits. For example with debt at 80% of GDP, and a conservative estimate of average 4% nominal growth, the UK’s debt to GDP ratio would stay constant with a deficit of 3.2% of GDP.

3.2% of GDP is a lot of money. It means the government could run deficits of £60 billion today (£70 billion by 2020) and not raise the debt to GDP ratio. By comparison, the now derailed cuts to tax credits were worth less than £5 billion, and the spending review is trying to save £20 billion.

So here is a simple exam question for journalists. If any politician over the next 5 years proposes not to cut some item of expenditure, or not to raise some tax, and they are asked where is the money to do this coming from, which of the following answers is most convincing?

1. We would generate more tax receipts by making the economy stronger.

1/10. Every political party thinks their policies will raise growth and therefore bring in more revenue, but they should never rely on this happening. In some cases political parties (pretend to?) believe things that we know are untrue, like tax cuts will pay for themselves. Of course some policies, like cutting tax credits, could well damage the economy by reducing labour supply, but again it is highly unlikely that such damage would make tax credits self-funding. So any interviewer would be quite right to raise their eyebrows at this answer.

2. We would save money by making public spending more efficient.
   

1/10. Same problem as above.

3. We would print more money.
   

3/10. Not as silly as it may sound when central banks have already created a huge amount of money (QE) to buy government debt. So no raising of eyebrows (or worse) appropriate in this case. But in the current UK and US context (but not the Eurozone) where central banks are talking about when they might start reducing QE it looks like an answer which is out of its time.

4. We would cut the following expenditure instead, or raise the following taxes, or get rid of the following tax breaks.

8/10. A good answer, particularly if the funding measures are specified and the sums are realistic and not double counted. Works in all seasons. Right now opposition parties have plenty of scope here, as Jolyon Maugham spells out.

5. We would borrow more.

10/10. In the current UK context the best answer, although if you had given this answer in Ireland or Spain in 2004 you would get 0/10. It may seem too easy to be true, but in the rather peculiar circumstances where you have a Chancellor that is pursuing reckless austerity for extremely dubious reasons it would be utter foolishness to turn your back on this gift horse.

Yet most politicians are incredibly reluctant to give that answer, in large part because they think they will get the raised eyebrow treatment from journalists or worse. So we have the crazy situation that no single economist is prepared to endorse the fiscal charter, but pretty well every journalist treats any suggestion that we should depart from it as unacceptable. That just cannot be right.

[1] Andrew Rawnsley rightly points out that the political reaction to the tax credit cuts over the last five months shows how little most journalists know about ordinary people as well as economics (yes, that Westminster bubble), but he fails to note the critical role of the fiscal charter, and so treats the need to find some extra money as self-evident.

[2] There still is a Keynesian argument about risk, but take that away and the case for a more gradual pace of deficit reduction is still very strong.   

Rollercoasters and rules

Chris Giles says today that “there is a gap [between Labour and Conservatives plans] of more than £30bn a year in public spending by the end of the decade, at least 1.4 per cent of national income. This is a bigger political divide seen in any election since the days of Margaret Thatcher.” Chris is absolutely right to focus on this fact, and it is really important that other journalists (including those on the political side) do the same. The reason is that neither Labour nor the Conservatives want to admit this. Labour wants to appear as if they are being ‘tough on the deficit’ and the Conservatives want to turn this into a ‘Labour would put up taxes’ election. With all the noise that these phoney debates throw up, it is important that someone tells people what the consequences of their vote will be.

Chris may also be right that the rollercoaster for public spending set out in the Budget (sharp cuts followed by increases) will not happen. However I think it would be wrong to expect a smooth ride under the Conservatives either. They will have won an election based on an initial two years of substantial spending cuts (particularly to public investment), followed by later years when the overall pace of fiscal consolidation slowed substantially (in part because of Budget tax cuts). If that wins them this election, they will want to repeat that pattern. [1]

The term rollercoaster was coined by Robert Chote, head of the Office for Budget Responsibility. But if the rollercoaster will never happen, was Robert wrong to use this word? Absolutely not - in using that term he was doing his job in a very effective way.

As Chris explains, the reason why the numbers given to the OBR generate a rollercoaster profile is the revised fiscal rule, which says that there should be (cyclically adjusted) balance within three years. Like the old rule, this is a rolling target (but now for three years ahead rather than five), so it means in effect that governments can keep putting off the date balance is achieved as each year rolls past.

If governments start planning their fiscal actions with this in mind, the rule becomes largely worthless: it means reducing deficits mañana. As I explained here, rolling targets are a good idea because they allow policy to be flexible in the face of shocks. But rolling targets can also be abused by an irresponsible government to forever put off deficit reduction.

As I argued here, there was no good reason for Osborne to switch from a five to three year rolling target, and good reasons to stick to five years. The move to three years looked like a political ploy to embarrass the opposition. When politicians start messing around with fiscal rules for political ends, and these rules then produce silly results which politicians have no intention of sticking to, it is important that an independent institution with the words ‘budget responsibility’ in their title calls attention to what is going on. Robert Chote did that very effectively by using the term rollercoaster. 

[1] Where I think Chris is wrong is in describing plans to decrease debt slowly as risky. The opposite is the case. With interest rates near their floor, sharp austerity puts the economy at risk from adverse macroeconomic shocks. 

Fantasy macroeconomics

The prize for the biggest piece of pure fantasy yesterday must go to the Chancellor when he said this: “Today, our goal is for Britain to become the most prosperous of any major economy in the world in the coming generation, with that prosperity widely shared across our country.” In terms of a key measure of our long term prosperity - output per hour worked - we were indeed catching up with the US, France and Germany until 2008, but since then we have lost ground as productivity growth has stagnated.

But the fantasy that was most on display yesterday in commentary about the budget was the idea that the budget deficit was or is our major problem. I watched Robert Peston go into great detail about just how large the budget deficit still was (how much we were borrowing every minute - that kind of thing). I saw Financial Times editor Tony Barber describe what a hole the UK was in when the Coalition came to power, because the deficit was 11% of GDP. [1] The implication in both cases is that these numbers are so large we have to immediately focus on bringing them down.

The hole I remember from 2010 and before was the Great Recession, which in turn was caused by a financial crisis. They really were major events, which had major impacts on people, and which therefore demanded an immediate policy response. The deficit exceeding 10% of GDP had no real impact whatsoever. Interest rates on government debt stayed well below the level of the previous ten years, and over time fell further.

Here is the growth in GDP per head and the public sector net borrowing to GDP ratio going back to 1985. In the early 1990s we had a small recession as we tried to stay in the European Exchange Rate Mechanism at an overvalued exchange rate. Public borrowing rose to 7% of GDP for two years. But the economy recovered rapidly following the 1992 depreciation and associated monetary policy easing, and the deficit came back down. In 2008/9 we had a much larger recession, and as a consequence the deficit ratio rose rather more. But the key point was that this rise in the deficit in both periods was largely a response to the decline in GDP, which helped moderate the recession, and not an immediate problem in itself.

So the idea that in 2010 we were in a deep hole because of the deficit is just fantasy macroeconomics. It replaces something real (a financial crisis and deep recession) with something of little immediate consequence. The problem with living in a fantasy world but taking actions in the real world is that you make big mistakes, like starting fiscal austerity while still in a liquidity trap, which has made each UK adult and child on average at least £1,500 poorer.

For mediamacro, which inhabits the same fantasy world, it means you ignore the important issues. So we had everyone getting excited about the completely meaningless fact that the Chancellor had pencilled in an expansion in spending in 2019 and 2020. (Thank goodness for the OBR, whose use of the word 'rollercoaster' helped expose this circus.) As a result, comment largely ignored the problem of productivity stagnation, the absence of any expected growth in net trade, and more generally the persistence of macroeconomic imbalances that on earlier occasions the Chancellor had said it was vital to correct.

Martin Wolf, who thankfully is very much part of the real world, said the Chancellor had “made the best of what is, in truth, not that strong a hand”. [2] I think Martin is being too generous. The Chancellor asked us to enter a fantasy world, where the fact that living standards just might end up higher than when he came into office is regarded as a success, where employment growth that matches or exceeds output growth is regarded as a triumph, where finally achieving what are no more than average growth rates in GDP per capita during what should be a recovery phase is praised, and where reducing the deficit is all important. It is a shame that too many others seem happy to share this fantasy.

[1] In financial year 2009 the PSNB was actually 10.2% of GDP.

[2] Chris Giles, Sarah O’Connor and Vanessa Houlder at the FT have a nice graphical summary of key variables that backs this up.

A productive budget?

What exactly was George Osborne trying to achieve in his budget? Janan Ganesh says “To his gut, he worries about debt.” But if reducing the deficit and debt really was his number one priority, then why spend £5.7 billion over five years increasing the income tax personal allowance, give £3 billion away to savers, and add a £2.2 billion subsidy for first time house buyers? It is true that these giveaways were matched, in theory, by various ‘takeaways’ (mainly a £4.4 billion increase in the bank levy), but if getting the deficit down was the priority, he could have done the takeaways without the giveaways.

Everyone knows the answer of course. Winning the next election is much nearer Osborne’s gut than worries about debt. [1] Much has been made of Labour’s alleged core vote strategy, but what this and earlier budgets suggest is that the Conservatives have been following a core vote strategy. There are income tax cuts that mainly benefit the well off, bribes or tax breaks for the elderly with large savings or pensions, and measures to help those expecting to buy a house (and consequently those planning to sell them their house). Why do commentators complain about a core vote strategy for Labour but not the Conservatives? I’ll leave that as an exercise for the reader.

The Chancellor could not give away more because he needed to maintain the image of prudence. The sharp cuts in spending after the election remain: to quote the OBR: “a much sharper squeeze on real spending in 2016-17 and 2017-18 than anything seen over the past five years”. With the OBR predicting interest rates will be very close to their lower bound over that period, this still amounts to taking a big risk with the economy. [2] He was unlucky the last time he tried this in 2010 (and we are on average at least £1,500 poorer as a result), so I guess he hopes he will get lucky this time.

Is this all because of worries about debt, at a time when interest rates on debt are very low, and the chances of a debt funding crisis are non-existent? Even the Economist now suggests that maybe the terrible performance of UK productivity over the last five years might be a rather more important issue to focus on. Anna Valero and Isabelle Roland have a nice LSE briefing paper on this, from which this figure is taken.

The good news is that UK productivity growth has been relatively strong from 1979 to 2008, perhaps partly because we had some catching up to do. The bad news is that from 2008 it has been a disaster. Yet the word ‘productivity’ does not appear in the Budget speech. There are of course small measures here and there that could be filed under ‘improving productivity’, but it is, as Frances Coppola notes, peanuts compared to both the size of the problem and the cuts to public investment undertaken in the first few years of this government. The LSE paper has some interesting things to say about the UK’s productivity gap with other countries (poor investment, low firm and government R&D expenditure, poor management quality), and is fairly critical of the Coalition government’s policies that could influence this.

It is fairly easy to make fun of Osborne’s references to his ‘long term plan’, and it is tempting to conclude that the frequent repetition of the phrase means there actually isn’t one. But perhaps it is all very simple. In this piece for The Conversation I suggest that maybe there has been a clear plan all along: to reduce the size of the state over a ten year period, using the deficit as cover. Here is a chart from the OBR’s forecast document showing the projected share of government consumption in GDP.

One of the more absurd features of the budget is the kick up in spending pencilled in for the final year, which appeared to be designed only to avoid the Labour jibe that we were going back to the 1930s. Otherwise, the idea is to fundamentally reduce the size of the state, and so far it is going to plan. To finish the job, the Conservatives need to get re-elected, and that required easing up on austerity from 2012 onwards by either cutting taxes or not raising them to achieve the original targets. If this is the real long term plan, then there is no reason to believe that we will not get the promised second period of severe spending cuts once the Conservatives have won the election, with of course tax cuts later on to make it all seem worthwhile.

From this perspective, the criticism that Osborne is ignoring the productivity issue may also be unfair. The Conservatives may genuinely believe that the best way of increasing productivity is to reduce the size of the state, and get the ‘government off the backs’ of private enterprise. This theory does not look too good just now, but I guess the lags on this may be long. Alternatively, of course, they may have got completely the wrong idea about the role that government needs to play in encouraging growth generally and innovation in particular.

[1] Am I right to assume that these tax giveaways are essentially political? Take the increase in the personal allowance for example. The IFS suggest that aligning the employee national insurance threshold with the income tax personal allowance would be a better policy than raising the income tax threshold, both on distributional grounds (it benefits around 4.6 million low paid workers who pay no income tax), and in terms of work incentives (as it applies only to earned income). On the Help to Buy ISA, see John McDermott in the FT.  

[2] In passing, it is worth noting that the OBR are also forecasting inflation coming back to 2%  - by 2019! This is despite a view that the current output gap is pretty small. Some of the capacity utilisation indicators that go into that estimate do look very strange (tables 3.2 and 3.3).  

Policy, risks and public discourse

Another post where I use the UK as an example to illustrate a more general point

Along with their normal forecast, the National Institute has also used their model NIGEM to analyse the macroeconomic impact of the different political parties fiscal plans post 2015, which is published in the latest Review. (Chris Giles has a FT write-up.) There is no great surprise here: the more fiscal austerity you undertake, and if monetary policy fails to perfectly offset the impact on demand, the lower output will be.

This is not the main reason why I am against further fiscal consolidation post 2015. If you go back to 2010, the OBR’s main forecast didn’t look too bad: the recovery was continuing, and interest rates were able to rise as a result. But good policy does not just look at central projections, but it also looks at risks. Then the risks were asymmetric: if the recovery became too strong, interest rates could always rise further too cool things, but if the recovery did not happen, interest rates would be stuck at their lower bound and monetary policy would be unable to keep the recovery on track.

In 2010 and beyond that downside risk came to pass, and the recovery was delayed. Fiscal policy put the economy in a position where it was particularly vulnerable to downside risks, which is why it was an entirely foreseeable mistake. Quite how large a mistake is something I discuss in my article in the same Review (see also this recent post). Exactly this point applies to 2015 and beyond. The problem with further fiscal consolidation while interest rates remain at their lower bound is that it makes the economy much more vulnerable to downside risks.

This is something that all economists understand, and economists do their fair share of complaining about how difficult it is to get policymakers, let alone the public, to recognise the importance of risk analysis. However in writing about the role of fiscal policy in creating a weak recovery not just in the UK but the world generally, I was struck by how little public model based quantification of this there was even after the event, let alone before. (For some of the few ex post studies related to the Eurozone, see here.) Central banks nearly all maintain models capable of doing the kind of risk analysis I am talking about, but how much of that work gets into the public domain, or is even seen by fiscal policymakers? In the UK there has definitely been technological regress in this respect, as I note here.

So we have a paradox. In academic macro there has never been so much quantified model based policy analysis, some of it analysing just the kind of robustness to risks that I have been talking about. Yet in public discussion of macro policy, it is quite rare to see this. Central banks tend to keep what they do to themselves, and they appear to have a taboo on analysing alternative fiscal policies. In the UK the OBR, which does the government’s fiscal forecasting, is not allowed to look at alternative fiscal policies in the short term. I think I know why this paradox has arisen, but that will have to wait for a later post.

  

Going for balance

The Green Budget analysis just released by the IFS contains a lot of material. (For a very reasonable summary, see this from the FT.) One point that a number of papers have picked up is, to quote the Independent, that the UK “Coalition’s fiscal plans for the next Parliament imply the largest dose of austerity anywhere in the developed world”. Actually the analysis appears to come from the IMF’s World Economic Outlook forecast. Here is a chart of the IMF's estimated and forecast structural budget deficits for a number of countries as a proportion of potential GDP.

The extent of additional consolidation planned for the UK beyond 2015 is clear. It is important to note that structural balance (zero on this chart) is not in any sense a neutral position. It means that debt to GDP will be falling as long as GDP is growing. That is what Germany is currently doing, and France is aiming for, while both the US and Japan are only going for a roughly stable debt to GDP ratio.

As I have emphasised many times, the critical issue is not whether it is desirable to gradually reduce net government debt as a percentage of GDP (I think it is), but when you try to do this. Theory and evidence clearly tell you not to try during a liquidity trap, when interest rates are stuck at their Zero Lower Bound. This will waste a great deal of resources, and cause unnecessary hardship. In my recent VoxEU piece, I argued that real GDP in 2014 could have been up to 4% higher in the US, UK and Eurozone if government consumption and investment had followed a fairly neutral trajectory, rather than being cut back substantially.

That result did not come from assuming some outrageous multiplier, but largely reflects the extent of austerity already undertaken. Compared to that neutral path, government consumption and investment were between 10% and 15% lower by 2014 in those countries or country blocs.

One explanation for the extent of austerity is that it represents political opportunism by those who seek a smaller state. Now I know that some do not like to entertain such thoughts: they think to suggest such things indicates a lack of political balance. However as I discussed here, there seem to be compelling reasons to at least explore that possibility. If we do, then the size of these cuts in spending are important, because they clearly show that - for the moment at least - opportunism has been remarkably successful in its own terms. By this measure the size of the state has been substantially reduced by making deficit reduction the number one macroeconomic priority.

This is in turn important because it influences the lessons to draw from this experience. To a macroeconomist, losing up to 4% of GDP a year is a huge cost. Such a cost might be excusable if it had been required to get inflation down from some high level, but instead it has lead to inflation well below target. The obvious question to ask therefore is how to avoid such costs happening again. If the basic cause has been political opportunism, and that opportunism has been successful in its objectives, then it seems highly likely that it might happen again the next time we have a major global recession. If that is the case then macroeconomists need to rethink how policy is made after major recessions. In the meantime, if political opportunism is what is driving policy, we will see in countries like the UK how far that opportunism can be pushed.

Delusions on the UK left

Syriza has won the Greek election, which is the result I hoped for. For some this heralds the death of neoliberalism. To celebrate, George Monbiot - whose journalism consistently tells me more than most other journalists - says that here in the UK we should no longer vote tactically, but instead vote for what we want. What dangerous nonsense!

At least he is honest in what such an approach implies. Anyone who votes Green in any seat where Labour has a chance to win, aside from maybe a few seats where the Greens have a chance (more realistically one or two), is voting for a Conservative government. They will be in small part responsible for what happens under that government. (Not voting in a seat Labour has a chance to win is almost as bad.) This is going to be a tight election, so it matters. [1]

Monbiot says “If Labour wins in May, it is likely to destroy itself faster and more surely than if it loses, through the continued implementation of austerity.” His normal high standards of journalism based on solid research go out of the window. I have, along with the IFS and Resolution Foundation and many others, repeatedly pointed out that there is a huge difference between Labour and Conservative fiscal plans beyond 2015. It is quite possible that we will see very little additional fiscal tightening under Labour, and a lot more public investment.

But with Monbiot in this mood, all this means nothing. The additional hardship that those that depend on the state will undoubtedly suffer if Labour do not win: collateral damage for the eventual triumph of the left. The disintegration of the NHS starved of funds: it will happen anyway  - but the last Labour government raised taxes to increase NHS spending! This is not a strategy based on any kind of analysis, but wishful thinking because he finds it distasteful to vote tactically. (The British people had a chance to change their electoral system, and they chose not to.)

In looking at Labour, he sees only their departures from his own vision, and ignores their virtues and the realities of gaining power in today’s environment. He thinks Labour is currently silent on the evils of austerity because they believe in its virtues, whereas in reality they have been forced into this position by mediamacro’s obsession with the deficit. That is why they do not publicise their very different fiscal plans, but good journalism should see through that. Wouldn’t it be nice to have a prime minister who was prepared to stand up to the Murdoch press - oh wait. Wouldn’t it be nice to have a prime minister who said: “This country is too unequal. And we need to change it." - oh wait again (see postscript).

To say that Monbiot’s analysis represents a profound misreading of history seems trivially obvious, but not for left utopianism. Monbiot says “Fearful voting shifts the whole polity to the right.” Where is the evidence for that? Neoliberalism did not triumph because the left decided to compromise. Yes Greece voted for Syriza, but only when half of its young people were stuck in unemployment. Is that the future that he hopes for by abandoning tactical voting?

Parts of the radical left has always suffered from this misty eyed idealism, where through blurred vision everyone else looks the same. I remember being told by otherwise very intelligent people on the left that there was no real difference between George Bush and Al Gore. Monbiot described voting No in the Scottish referendum as “an astonishing act of self-harm”: no matter that the SNP tried to deceive the electorate that they would at all times be better off independent; a sorry claim given what has subsequently happened to the oil price. No doubt some said in 2010 that a future Labour government would be much the same as a Conservative government. Please, just look at the evidence.  

So, to repeat, anyone voting Green (or failing to vote) in a seat that Labour can win but the Greens cannot will in part be responsible for the consequences of a future Conservative government.

Postscript (19/2/15): Here is a link to those seats where this might apply. 

[1] An interesting question, from an academic point of view, is whether this argument is symmetrical, applying to UKIP and the Conservatives. Perhaps not in one sense. If Labour loses because of votes lost to the Greens, the reaction within the party will simply be to look for a more telegenic leader. If the Conservatives lose because of votes lost to UKIP, perhaps there is a chance that the Conservative Party will merge with UKIP, and adopt leaving the EU as policy.

To all UK journalists

who plan to talk about the economy over the next 100 days. Here is a very simple fact. [3] GDP per head (a much better guide to average prosperity than GDP itself) grew at an average rate of less than 1% in the four years from 2010 to 2014. [1] In the previous 13 years (1997 to 2010), growth averaged over 1.5%. So growth in GDP per head was more than 50% higher under Labour than under the Conservatives, even though the biggest recession since the 1930s is included in the Labour period!

You have all read, and perhaps written, that the Conservatives will focus on the economy, because they think that is their strong point. Compared to their performance on other issues, maybe it is their strong point. But relative to the previous administration, this simple fact suggests otherwise.

George Osborne says: “Britain has had the fastest growing major economy in the world in 2014.” However GDP per head in the UK in 2014 remains below 2007 levels, but it had exceeded those levels in the US and Japan by 2013. The UK is not bottom of the league in these terms only because the Eurozone’s performance has been so poor. That GDP per head growth under 1.9% in 2014 can be trumpeted as a great success when it is no more than average growth between 1971 and 2010, and when we should be recovering from a huge recession, and when there are signs that this growth may not be sustainable, shows how diminished our expectations have become.  

In terms of a historical comparison between the record of this government and the previous administration Labour has no case to answer, because its performance is miles better. I am sure a supporter of the current government would say at this point that they had to clear up the mess that Labour created. But just think what such an excuse implies:

(1)  The Great Recession was in 2009, so it is included in the Labour government’s growth average, not that of the current government. You can see the impact of the recession on the average (the red line) in the chart below. [2] Are they really saying that the mess Labour left was worse than the impact of the global financial crisis!?

(2)  This excuse implies that bringing the government deficit down rapidly (austerity) meant that GDP growth is bound to be lower. This is something that the government’s critics have long argued, and which the OBR agrees with [4], but the government has always denied. Are they now admitting that austerity was (really) bad for growth?

(3)  If a government was elected just after a major recession, you would normally expect the exact opposite from these figures to be true. The new government would benefit from the recovery from the recession, while their predecessors average would be weighed down by the recession itself. So in any normal world, you would expect GDP per head to have grown much more rapidly over the last four years than any long run average. The fact that it has grown by considerably less means that the government should have a lot of explaining to do.

Growth under Labour, including the Great Recession, was 50% better than under the Coalition. So please, if you want to make your reporting on the economy over the next 100 days objective, use this fact. If the Conservatives win this election because enough people believe that they are more competent than the previous government at handling the economy, it will be a devastating verdict - on the UK media and its journalists.  

Quarter on previous year's quarter growth in UK GDP per head, 1997Q2 to 2014Q3

[1] The ONS data can easily be found here. The fourth quarter data is not out yet, so I have taken the ONS data updated on 21st January, and assumed growth of 0.5% in the final quarter, which is the first estimate of GDP growth in that quarter. That is obviously an overestimate, as it assumes no population growth in that quarter.

[2] The chart uses quarter on previous year’s quarter growth rates for the actual data (no estimates), and the average shown there is simply the average of these growth rates.

[3] A tweet from Ann Pettifor inspired this post, but of course responsibility for it is entirely mine.

[4] The OBR estimate, somewhat conservatively, that austerity reduced GDP growth by 1% in both FY 2010-11 and 2011-12. That alone would raise the average growth in GDP per head over the four years from 0.9% to 1.4%. Research by Jorda and Taylor suggests austerity had larger and more prolonged effects. 

That £170 billion bombshell

Paul Johnson of the IFS has written that under Labour “national debt [could be] around £170 billion higher (in today’s terms) by the end of the 2020s than would be achieved through a balanced budget.” That was all that certain newspapers needed to start talking about a borrowing bombshell under Labour.

£170 billion is a meaningless number, and the end of the 2020s is a meaningless date. First, we should put everything as shares of GDP. £170 billion is about 10% of GDP, and debt is currently around 80% of GDP. However it would be completely wrong to infer that under Labour debt to GDP would be 90% of GDP by 2030. If they achieved current balance by financial year 2017/18, then my excel spreadsheet says that with nominal GDP growth of 4% a year, by 2030 debt to GDP would be around 65% of GDP. (A few points below 65% if investment remained at 1.5% of GDP, a few points above it became 2% of GDP.) If the Conservatives balanced the overall deficit each year debt to GDP would be about 47% of GDP by 2030.

So a £170 billion bombshell actually means debt to GDP would have been reduced from 80% of GDP to around 65% of GDP. So the correct headline should have been “debt to GDP cut by a fifth in 2030 under Labour’s plans”. That is debt, which is much more difficult to reduce than the deficit. To say this is a ‘different interpretation’ is too polite – newspaper reports got it completely wrong. Who should you blame for this: Paul Johnson, innumerate journalists, biased newspapers? I’ll leave that to you.

There remains a real question of how quickly debt to GDP should be reduced. In terms of the analysis I did here and here, Labour’s plans - if it did achieve current balance by 2017/18 - are tougher than the path I described as ‘fast’ debt reduction, although not nearly as tough as Osborne’s plans. (This analysis was done before the Autumn Statement, but to pretend that the analysis needs to be revised on that account gives these numbers spurious precision.) However my ‘fast’ path did not keep to current balance after 2020, but had some further deficit reduction over the next five years. (As a result, debt to GDP was below 60% by 2030 under this fast path.) I have not seen Labour commit to sticking to current balance until the end of the 2020s. So in that sense as well the £170 billion number is meaningless.

What you should conclude from this is simple. First, as Paul Johnson and many others have pointed out, both Labour and Conservatives are aiming for tight fiscal policies (tighter than I and others think sensible given the macroeconomic situation), but the Conservatives’ plans involve substantially more cuts than Labour. Both involve reducing debt to GDP quite rapidly, so there is no question that both plans would not trouble the markets. So the only reason for going for Osborne’s plan, now apparently involving budget surpluses, is if you expect another financial crisis in the 2030s, and want debt to GDP to be something like it was before the last one. [1] Or, as a headline writer might put it (but somehow I doubt many would): “budget surpluses and austerity so we can afford to bail out the banks again soon”.

   

[1] For those who are really into fiscal rules, there is a technical question about whether it is better to have a target for the overall deficit or the current balance. As George Osborne has moved from the latter to the former, it may be best to read his detailed analysis of the issue. Cannot find anything? Well maybe, as I note here, he is simply following the discussion in Portes and Wren-Lewis (2014), which argues for deficit targets but a separate target for the public investment to GDP ratio.

Mediamacro and responsibility

The Chancellor gives a huge pre-election bribe to the moderately wealthy over 65s, and describes the fact that everyone who can is trying to get hold of the bribe (and completely overwhelming the NS&I as a result) as a great success. [1] Chris Dillow describes this as corruption. To their credit, right wing think tanks have also condemned it for what it is. But the Chancellor says this is all part of his economic plan.

I suspect the penny is beginning to drop in mediamacro. This was supposed to be a government where deficit reduction was the overriding priority. It was of such importance that it was worth the risk (which materialised) of delaying the recovery until 2013 to achieve. Hard, sometimes painful choices had to be made to achieve the goal of reducing the deficit. A Chancellor who was prepared to do unpopular things for the greater good. The essence of responsibility.

Unless you were a top rate tax payer, of course. Or, following the Prime Minister’s conference speech last year, a moderately well off taxpayer. And now if you are moderately well off and over 65. Penny dropped? But this last example also tells mediamacro a difficult truth. Its modus operandi is that it can rely on the opposition to expose such things, but Labour appears to have been silent on this. Obviously, because these kind of bribes work because those that receive it are thankful and the much larger number who pay for it are not so fussed. [2] So it needs to seek out those who will call a spade a spade. It has a responsibility to do so. This time it could use right wing think tanks. Next time it may have to resort to economists who write blogs.

Chris Giles, economics editor of the FT, wrote an interesting opinion piece a few days ago. It appears at first sight to be an attack on Labour’s record in opposition. But it ends with “the intriguing thing about Mr Miliband’s Labour party is that its broad economic prospectus for the 2015 general election is perfectly sensible.” In contrast “the Tories’ plans appear ideological and border on calamitous for many public services.” If you want more detail on this, see my debate with Oliver Kamm in Prospect magazine. So his article is a form of puzzle: how did responsible Tories and reckless Labour change places?

One possibility, of course, is that there never was a puzzle. Chris lists many alleged failings by Labour, but a lot look superficial and presentational to me. Furthermore (and I know Chris will not want to admit this) when Ed Balls said Osborne was cutting too far too fast, he was right. In particular, public investment (school repairs, flood prevention) was cut immediately when there was no need to do so to meet the coalition's fiscal rules. Those who think it had to be done to appease the market should reflect on the fact that Britain lost its AAA rating because of weak growth, and pretty well everyone thinks that public investment has the largest GDP multiplier.

It is the media’s responsibility, which Chris for his part has grudgingly fulfilled, to point out - one way or another - who has the more responsible macroeconomic plan post 2015. The opposition will not make that case, because it has become terrified of being labelled spendthrift. Yet it is hard to find a macroeconomist who does not think Labour has the better macro policy from 2015, whatever their views about 2010 austerity. A responsible media needs to get this point across, just as it needs to point out pre-election bribes.

[1] Once upon a time NS&I was just a way that the government could sell its debt to ordinary people at slightly below market rates because it was safer than banks. However after the financial crisis, when it became clear how risky banks were, the government seems to have contracted the range of products that NS&I sell, I guess because of lobbying by these same banks. Once you could buy indexed linked assets from NS&I - no longer. Now it has become a vehicle for giving bribes to selected groups of savers.

[2] This is the ‘common pool problem’, one of the reasons economists give to explain deficit bias, which is of course being irresponsible about the deficit. 

Who is lying about UK budget plans? The OBR test.

Over the next five months you will be told by the Conservatives that Labour’s spending plans will ‘cost billions’, are unaffordable, will put the recovery at risk - I could go on and on. Is there any truth in all this? Well you can read what I and others have written, but that involves looking at lots of numbers which, even if you are an economist or economic journalist, takes time. So here is a very simple reason why you can ignore all these Conservative claims.

Some months ago Ed Balls asked the Chancellor if the OBR, which does all the government’s number crunching, could also look at Labour’s fiscal plans. Now the OBR is independent, and interrogates what the government tells it to make sure it is not being deceived. So they would do the same to Labour’s fiscal plans, if instructed to do so. If Labour’s fiscal plans really are irresponsible, or do not add up, here was an excellent opportunity to expose that using an independent authority.

George Osborne refused Ed Ball’s request. Now Osborne will say that there were various technical issues, and that such a move might damage the OBR’s impartiality, but remember that Osborne is the most political of Chancellors. If he saw a clear way to damage Labour’s economic credibility, do you think he would let such concerns bother him for a second? (The OBR’s equivalent in the Netherlands does this kind of exercise, and the Dutch political debate is much better as a result.) So there really is only one conclusion to draw. Allowing the OBR to cost Labour’s plans would have done Labour more good than harm.

So it really is that easy. Do by all means look at all the numbers (which come to the same conclusion), but if you want a simpler reason to ignore Conservative claims about Labour’s future plans, this is it. The OBR test is clear, compelling and correct. (And any fair minded journalist who reports these Conservative claims should at least note the OBR request and refusal.)

What about the other way around: is what Labour say about Conservative plans just fear mongering? In this case we do have OBR numbers, and they said about existing plans (which exclude Cameron’s conference tax give-away but also any additions to the coalition’s welfare cuts):

“Consistent historical data for RDEL [Departmental Spending] are not available over a long period, but the closest equivalent in the National Accounts implies that by 2019-20 day-to-day spending on public services would be at its lowest level since 2002-03 in real terms (based on whole economy inflation), since 2001-02 in real terms per capita and since the late-1930s as a share of GDP.”

To see what those numbers might mean in practice, let Rick start you off.

Update

At their press conference today where the Conservatives ‘costed’ Labour’s plans, Osborne was twice asked about the OBR refusal. According to the Guardian the first time he did not answer. The second time he said

“The OBR brought in an external reviewer last year. The review concluded that it was not right to let the OBR audit opposition spending plans now. But this can be looked at in the next parliament.”

Balls proposal was first made, and rejected, in October 2013. Kevin Page’s review was not published until nearly a year later, so will not have been the basis of Osborne’s rejection. [1] Osborne’s reply is interesting – he is not rejecting the idea in principle, but just for now. Now it is true that the OBR is relatively young, and would need more resources to do this, but they are reportedly up for the task if asked. So my key point still stands. If the Chancellor really thought that OBR analysis would damage Labour, would he let caution and some small extra costs get in his way?

[1] Here is what Kevin Page’s review actually said:

“Given that the organisational underpinnings of the OBR are in their institutional infancy and are interdependent with a host of government departments and agencies, it is recommended that caution be exercised in considering the expansion of the OBR’s mandate (e.g. costing certification of opposition manifestos). The OBR may not have the organisational capacity to expand its remit without further drawing on the resources of other government departments. In addition, the particularly narrow legal framework of the OBR and its interdependencies with the executive branch may risk creating perceptions of conflicts-of-interest.”

The OBR confirm the dangers of Osborne's gamble

A point I have repeatedly made about George Osborne’s plans for a new wave of austerity, confirmed in his Autumn Statement today, is that they risk making the same mistake as 2010. Short term interest rates will be only just above their lower bound in 2015, at best. Large cuts in government spending from 2015 on will reduce aggregate demand. So if something goes wrong (and the list of possibilities is long), monetary policy will not be able to come to the rescue.

The OBR conservatively calculate that austerity reduced growth by 1% in financial year 2010/11, and by 1% in 2011/12. As a result, the recovery in those years faltered. Are we going to be saying the same thing in 2016 or 2017?

It is a pretty obvious point, even if it appears beyond most of mediamacro. So it was good to see the OBR hinting at much the same in their forecast that accompanies the autumn statement. First, in discussing why their forecast of medium term growth is subdued, with the output gap closing very slowly, they say this (para 1.19):

“the Government’s fiscal plans imply three successive years of cash reductions in government consumption of goods and services from 2016 onwards, the first since 1948. The corresponding real cuts directly reduce GDP. The economy should be able to adjust to such changes over time, but it is unlikely to be a simple process when monetary policy is already very loose and external demand subdued.”

The words may be a little obtuse (‘unlikely to be a simple process’), but the meaning is clear. Monetary policy will not be able to offset all of the demand implications of a second wave of austerity even in the base forecast.

But the real concern involves risks, just as it did in 2010. In para 1.25 they first note that government consumption of goods and services falls to its lowest share of GDP since 1938. Then they relate that their forecast implies a sharp rise in the real share of GDP accounted for by business investment and a rising household debt to income ratio following higher house prices. They also assume that the UK will partially arrest the decline in export market share that was a feature of the pre-crisis decade. In the following paragraph they say:

“While these assumptions are mutually consistent – private spending would be expected to rise as a share of GDP when the share of household income and corporate profits derived from government pay and procurement falls – they do illustrate the challenge facing the UK economy in adjusting to the further fiscal tightening that the Government is assuming.”

Politicians are fond of talking about the challenges facing the economy, but this is one that the government itself proposes to create. It is a challenge the UK economy could do without.