Inflation and pandemic recoveries in five major economies

My discussion about current inflation two weeks ago focused on the UK. Over a year ago I wrote a post called “Inflation and a potential recession in 4 major economies”, looking at the US, UK, France and Germany. I thought it was time to update that post for countries other than the UK, with the UK included for comparison and with Italy added for reasons that will become clear. I also want to discuss in general terms how central banks should deal with the problem of knowing when to stop raising interest rates, now that the Fed has paused its increases, at least for now.

How to set interest rates to control inflation

This section will be familiar to many and can be skipped.

If there were no lags between raising interest rates and their impact on inflation then inflation control would be just like driving a car, with two important exceptions. Changing interest rates is like changing the position of your foot on the accelerator (gas pedal), except that if the car’s speed is inflation then easing your foot off the pedal is like raising rates. So far so easy.

Exception number one is that, unlike nearly all drivers who have plenty of experience driving their car, the central banker is more like a novice who has only driven a car once or twice before. With inflation control, the lessons from the past are few and far between and are always approximate, and you cannot be sure the present is the same as the past. Exception number two is that the speedometer is faulty, and erratically wobbles around the correct speed. Inflation is always being hit by temporary factors, so it’s very difficult to know what the underlying trend is.

If driving was like this, the novice driver with a dodgy speedometer should drive very cautiously, and that is what central bankers do. Rapid and large increases in interest rates in response to increases in inflation might slow the economy uncomfortably quickly, and may turn out to be an inappropriate reaction to an erratic blip in inflation. So interest rate setters prefer to take things slowly by raising interest rates gradually. In this world with no lags our cautious central banker would steadily raise interest rates until inflation stopped increasing for a few quarters. Inflation would still be too high, so they might raise interest rates once or twice again to get inflation falling, and as it neared its target cut rates to get back to the interest rate that kept inflation steady. [1]

Lags make the whole exercise far more difficult. Imagine driving a car, where it took several minutes before moving your foot on the accelerator had a noticeable impact on the car’s speed. Furthermore when you did notice an impact, you had little idea whether that was the full impact or there was more to come from what you did several minutes ago. This is the problem faced by those who set interest rates. Not so easy.

With lags, together with little experience and erratic movements in inflation, just looking at inflation would be foolish. As interest rates largely influence inflation by influencing demand, an interest rate setter would want to look at what was happening to demand (for goods and labour). In addition, they would search for evidence that allowed them to distinguish between underlying and erratic movements in inflation, by looking at things like wage growth, commodity prices, mark-ups etc.

Understanding current inflation

There are essentially two stories you can tell about recent and current inflation in these countries, as Martin Sandbu notes. Both stories start with the commodity price inflation induced by both the pandemic recovery and, for Europe in particular, the war in Ukraine. In addition the recovery from the pandemic led to various supply shortages.

The first story notes that it was always wishful thinking that this initial burst of inflation would have no second round consequences. Most obviously, high energy prices would raise costs for most firms, and it would take time for this to feed through to prices. In addition nominal wages were bound to rise to some extent in an attempt to reduce the implied fall in real wages, and many firms were bound to take the opportunity presented by high inflation to raise their profit margins (copy cat inflation). But just as the commodity price inflation was temporary, so will be these second round effects. When headline inflation falls as commodity prices stabilise or fall, so will wage inflation and copy cat inflation. In this story, interest rate setters need to be patient.

The second story is rather different. For various (still uncertain) reasons, the pandemic recovery has created excess demand in the labour market, and perhaps also in the goods market. It is this, rather than or as well as higher energy and food prices, that is causing wage inflation and perhaps also higher profit margins. In this story underlying inflation will not come down as commodity prices stabilise or fall, but may go on increasing. Here interest rate setters need to keep raising rates until they are sure they have done enough to eliminate excess demand, and perhaps also to create a degree of excess supply to get inflation back down to target.

Of course reality could involve a combination of both stories. In last year’s post I put this collection of countries into two groups. The US and UK seemed to fit both the first and second story. The labour market was tight in the US because of a strong pandemic recovery helped by fiscal expansion, and in the UK because of a contraction in labour supply partly due to Brexit. In France and Germany the first story alone seemed more likely, because the pandemic recovery seemed fairly weak in terms of output (see below). 

Evidence

In my post two weeks ago I included a chart of actual inflation in these five countries. Here is a measure of core inflation from the OECD that excludes all energy and food, but does not exclude the impact of (say) higher energy prices on other parts of the index because energy is an important cost.

Core inflation is clearly falling in the US (green), and rising in the UK (red). In Germany (light blue) core inflation having risen seems to have stabilised, and the same may be true in France and Italy very recently. The same measure for the EU as a whole (not shown) also seems to have stabilised.

If there were no lags (see above) this might suggest that in the US there is no need to raise interest rates further (as inflation is falling), in the UK interest rates do need to rise (as they did last month), while in the Eurozone there might be a case for modest further tightening. However, once you allow for lags, then the impact of the increases in rates already seen has yet to come through, so the case for keeping US rates stable is stronger, the case for raising UK rates less clear (the latest MPC vote was split, with 2 out of 7 wanting to keep rates unchanged) , and the case for raising rates in the EZ significantly weaker. (The case against raising US rates increases further because of the contribution of housing, and falling wage inflation.)

As we noted at the start, because of lags and temporary shocks to inflation it is important to look at other evidence. A standard measure of excess demand for the goods market is the output gap. According to the IMF, their estimate for the output gap in 2023 is about 1% for the US (positive implies excess demand, negative insufficient demand), zero for Italy, -0.5% for the UK (and the EU area as a whole), and -1% for Germany and France. In practice this output gap measure just tells you what has been happening to output relative to some measure of trend. Output compared to pre-pandemic levels is strong in the US, has been pretty strong in Italy, has been quite weak in France, even weaker in Germany and terrible in the UK (see below for more on this).

I must admit that a year ago this convinced me that interest rate increases were not required in the Eurozone. However if we look at the labour market today things are rather different. Ignoring the pandemic period, unemployment has been falling steadily since 2015 in both Italy and France, and for the Euro area as a whole it is lower than at any time since 2000. In Germany, the US and UK unemployment seems to have stabilised at historically low levels. This doesn’t suggest insufficient demand in the labour market in the EZ. Unemployment data is far from an ideal measure of excess demand in the labour market, so the chart below plots another: employment divided by population, taken from the latest IMF WEO (with 23/24 as forecasts).

Once again there is no suggestion of insufficient demand in any of these five countries. (The UK is the one exception, until you note how much the NHS crisis and Brexit have reduced the numbers available for work since the pandemic.)

This and other labour market data suggests our second inflation story outlined in the previous section may not just be true for the US and UK, but may apply more generally. It is why there is so much focus on wage inflation in trying to understand where inflation may be heading. Of course a tight labour market does not necessarily imply interest rates need to rise further. For example in the US both wage and price inflation seem to be falling despite a reasonably strong labour market, as our first inflation story suggested they might. The Eurozone is six months to a year behind the US in the behaviour of both price and wage inflation, but of course interest rates in the EZ have not risen by as much as they have in the US.

Good, bad and ugly pandemic recoveries

The chart below looks at GDP per capita in these five countries, using the latest IMF WEO for estimates for 2023.

Initially I will focus on the recovery since the pandemic, so I have normalised all series to 100 in that year. The US has had a good recovery, with GDP per capita in 2023 expected to be five percent above pre-pandemic levels. So too has Italy, which is forecast to do almost as well. This is particularly good news given that pre-pandemic levels of GDP per capita were below levels achieved 12 years earlier in Italy.

Germany and France have had poor recoveries, with GDP per capita in 2023 expected to be similar to 2019 levels. The UK is the ugly one of this group, with GDP per capita still well below pre-pandemic levels, something I noted in my post two weeks ago. Unlike a year ago, there is no reason to think these differences are largely caused by excess demand or supply, so it is the right time to raise the question of why there has been such a sharp difference in the extent of bounce back from Covid. To put the same point another way, why has technical progress apparently stopped in Germany, France and the UK since 2019.

Part of the answer may be that this reflects long standing differences between the US and Europe. Here is a table illustrating this.

Real GDP per capita growth, average annual rates	2000/1980	2007/2000	2019/2007	2023/2019
France	1.8	1.2	0.5	0.1
Germany	1.8	1.4	1.0	-0.1
Italy	1.9	0.7	-0.5	0.8
United Kingdom	2.2	1.8	0.6	-0.7
United States	2.3	1.5	0.9	1.1

Growth in GDP per capita in the US has been significantly above that in Germany, France or Italy since 1980. At least part of that is because Europeans have chosen to take more of the proceeds of growth in leisure. However this difference is nothing like the gap in growth that has opened up since 2019. (I make no apology in repeating that growth in the UK, unlike France or Germany, kept pace with the US until 2007, but something must have happened after that date to reverse that.)

I have no idea why growth in the US since 2019 has been so much stronger than France or Germany, but only a list of questions. Is the absence of a European type furlough scheme in the US significant? Italy suggests otherwise, but Italy may simply have been recovering from a terrible previous decade. Does the large increase in self-employment that occurred during the pandemic in the US have any relevance? [1] Or are these differences nothing to do with Covid, and instead do they just reflect the larger impact in Europe of higher energy prices and potential shortages due to the Ukraine war. If so, will falling energy prices reverse these differences?

[1] If wage and price setting was based on rational expectations the dynamics would be rather different.

[2] Before anti-lockdown nutters get too excited, the IMF expect GDP per capita in Sweden to be similar in 2023 to 2019.

Is the German Debt Brake the worst fiscal rule ever?

The answer is probably not: a simple balance budget is worse. The German Schuldenbremse fixes the total cyclically adjusted deficit at 0.35% of GDP, which implies a gradually falling debt to GDP ratio. If actual outturns exceed this figure, there is a control mechanism which reduces the permitted deficit to get the path of debt back on target. So this debt brake improves on a simple balance budget by allowing a very modest deficit and cyclically adjusting. On the other hand it is worse than a simple balanced budget because it error corrects.

The fundamental mistake the rule makes is to make control of debt its central aim. Doing this only makes sense if you ignore macroeconomic common sense. The deficit and debt are macroeconomic shock absorbers. Running a variable deficit allows taxes and spending to be reasonably stable, which is beneficial for obvious and not so obvious reasons. Trying to tightly control the deficit and debt does the opposite. It makes sense to smooth taxes and government spending, but no sense whatsoever to smooth the deficit and debt.

The aim of a good fiscal rule is to eliminate deficit bias, which is the tendency of government debt to rise over time because, for example, politicians always want to spend more and tax less. The timescale for deficit bias is decades rather than years, so there is no need in principle to tightly constrain year to year deficits, or worse still to try and stay on some path for debt, and as I have already noted it is actually harmful from a macroeconomic point of view to do so.

Doesn’t the debt brake make some concession towards the macroeconomic stabilising role of the deficit by cyclical correction? There are two problems here. First, cyclical correction is a very imprecise art, and there is evidence the method used in the German debt brake and elsewhere does not work very well. Second, cyclical shocks are not the only thing that disturbs the government’s deficit. In practice all kinds of things can lead to erratic movements in the deficit, and it makes no sense to have to adjust tax rates or spending to exactly offset this erratic behaviour.

As Jonathan Portes and I explain in our paper on fiscal rules, a better way of keeping the stabilising role of deficits while still ensuring they do not steadily increase over time is to have a rolling target for the future deficit. Five years is the typical length of an economic cycle, so looking ahead five years makes sense, and also avoids the need for imperfect cyclical adjustment.

This kind of rolling future target is open to cheating, because the government can always promise but never intend to deliver on meeting the target. The problem here is that governments can cheat in so many ways when it comes to fiscal planning. No rule, even a draconian one like the debt brake, will stop all forms of cheating. The best way to avoid cheating is to establish a fiscal council with political weight that can distinguish between a government that fails to meet its targets through bad luck and one that fails because of cheating.

Do we need the debt error correction in the debt brake? A consistent result in academic research is that debt correction should be very slow, if it happens at all. That happens automatically with a deficit target, while the debt brake corrects too quickly. So the answer is no.

Another problem with the debt brake, alongside many other fiscal rules, is that it has a target for the overall deficit which includes public investment. Public investment should not be included in any deficit target, because there is no reason the current generation should pay for something that will benefit future generations. As investment is less painful to cut than current spending (or raising taxes), rules for the total deficit often lead to under investment, and we can see this in Germany. That only hurts future generations.

This is not about Anglo-Saxon economists telling Germany what to do. There are plenty of German economists who also see that the German debt brake makes no sense, and anyway economics is universal. The debt brake is a bad fiscal rule. It is doing the German people harm. It needs to change.

Implications of German export success

I have finally got around to reading this excellent CEPR ebook on Germany’s exceptional recovery. That German GDP growth since the Global Financial Crisis (GFC) is higher than average Eurozone growth or French growth can be seen below.

GDP growth (source OECD Economic Outlook)

However the relative performance in terms of unemployment is remarkable.

Unemployment (national definitions, source OECD Economic Outlook)

The tremendous success in reducing unemployment is discussed in two papers in the book, and both suggest that it had more to do with changes in the nature of firm-union bargaining than the Hartz reforms. (John Springford has a nice chart showing how the German Phillips curve has shifted.) I have for some time noted how wage increases in Germany after 2000 were too low in the context of a 2% inflation target, and this helped drive an export boom and is a factor behind a huge current account surplus of 8% of GDP.

Other chapters in the ebook argue that there were other, perhaps as or more important,  factors behind this export boom, and I’m convinced that other factors did play a role. However the point I want to make in this post is that, as long as these factors are permanent, they imply that the real exchange rate in Germany has to rise at some point. This is exactly the same point as saying that not all of the German current account surplus of 8% is structural. Some of that surplus is because the German real exchange rate is undervalued.

There are two ways the German real exchange rate can appreciate. The first is via an appreciation in the Euro, and the second is for German inflation to be higher than average Euro area inflation. Below is a chart of one measure of competitiveness for both Germany and the Euro area.

The level is arbitrary: it is how the two series move over time and relative to each other that matters. You can see how Germany gained competitiveness.over other Eurozone countries from 2000 to the GFC. You can also see how that gain has been partially but not fully unwound over the last 7 or 8 years. Looking at Euro area competitiveness, it is a little below its average level over the past and also its level in 2010 when I calculated it was close to its equilibrium rate to the dollar. (This work was unpublished, but uses a similar model to the one I used to calculate the optimal entry rate of Sterling into the Euro as part of the 5 tests.)

So there is perhaps some scope for a further appreciation in the Euro, but it seems unlikely that will be enough on its own to achieve the required German real appreciation. German nominal wages have increased by more than the Euro average in recent years, but the differences have been small. That difference needs to increase to get Germany's real exchange rate to sustainable levels. Germany should not think of that as a problem, but rather the way their export success has to be translated into higher incomes for German workers..

Fiscal policy remains in the stone age

Or maybe the middle ages, but certainly not anything more recent than the 1920s. Keynes advocated using fiscal expansion in what he called a liquidity trap in the 1930s. Nowadays we use a different terminology, and talk about the need for fiscal expansion when nominal interest rates are stuck at the Zero Lower Bound or Effective Lower Bound. (I slightly prefer the latter terminology because it is up to central banks to decide at what point reducing nominal interest rates further would be risky or counterproductive.) The logic is the same today as it was in the 1930s. When monetary policy loses its reliable and effective instrument to manage the economy, you need to bring in the next best reliable and effective instrument: fiscal policy.

The Eurozone as a whole is currently at the effective lower bound. Rates are just below zero and the ECB is creating money for large scale purchases of assets: a monetary policy instrument whose impact is much more uncertain than interest rate changes or fiscal policy changes (but certainly better than nothing). The reason monetary policy is at maximum stimulus setting is that Eurozone core inflation seems stuck at 1% or below. Time, clearly, for fiscal policy to start lending a hand with some fiscal stimulus.

Yet the goal of the new German Finance minister, from the supposedly left wing Social Democrats, is to achieve a budget surplus of 1%. To achieve that he is cutting public investment from 37.9 billion euros in the coming year to 33.5 billion euros by 2020. Yet German infrastructure, once world renowned, is falling apart. Its broadband connectivity could be greatly improved.

The macroeconomic case for a more expansionary German fiscal policy is overwhelming. Germany has a current account surplus of around 8% of GDP. There are some structural reasons why you might expect some current account surplus in Germany, but the IMF estimates that these structural factors account for less than half of the current surplus. It estimates that a third of the excess surplus is a result of an overly tight fiscal policy. As Guntram Wolff points out, the main counterpart to the surplus is saving by the corporate sector. Perhaps more public investment might encourage additional private investment.

But this is not another article about how Germany needs to expand to help the rest of the Eurozone. The problem, as Matthew Klein points out, is that the whole of the Eurozone is doing the same. In the area as a whole, the fiscal position is as tight as it was in the pre-crisis boom. Unemployment in the Eurozone is still too high. And the reason fiscal policy is too tight is that key Eurozone policymakers think that is the right thing to do. “The right deficit is zero” says the French finance minister. He goes on: “ Since France is not in an economic crisis, we need to have a balanced budget, so that we can afford a deficit in tougher times.” You hear the same in Germany: the economy is booming so we must have budget surpluses.

A booming economy is not one that is growing fast, but is one where the level of output and employment is above the level compatible with staying at target inflation. Measures of the output gap are only estimates of what that level is: underlying inflation is the ultimate guide. Core inflation is well below target right now, which is why interest rates are at their effective lower bound. This is why the actions and rhetoric of most European (and UK) finance ministers are simply wrong.

You would think that causing a second recession after the one following the GFC would have been a wake up call for European finance ministers to learn some macroeconomics. (Yes, I know that the ECB raising rates in 2011 did not help, but I expect most macro models will tell you the collective fiscal contraction did most of the harm.) Yet what little learning there has been is not to make huge mistakes but only large ones: we should balance the budget when there is no crisis.

This is not a dispute between left and right as it is now in the UK, but a problem with the policy consensus in Europe. What we are seeing I suspect is a potent combination of two forces: a German obsession with balancing the budget which has it roots in currently dominant ordoliberal/neoliberal ideology, and Keynes famous practical men: advisers who learnt what economics they have in an era of the great moderation where the worst economic problem we had was relatively benign deficit bias. Fighting the last war and all that.

Why German wages need to rise

An interesting disagreement occurred this week between Martin Sandbu and the Economist, which prompted a subsequent letter from Philippe Legrain (see also Martin again here). The key issue is whether the German current account surplus, which has steadily risen from a small deficit in 2000 to a large surplus of over 8% of GDP, is a problem or more particularly a drag on global growth.

To assess whether the surplus is a problem, it is helpful to discuss a key reason why it arose. I have talked about this in detail many times before, and a similar story has been told by one of the five members of Germany’s Council of Economic Experts, Peter Bofinger. A short summary is that from the moment the Eurozone was born Germany allowed wages to increase at a level that was inconsistent with the EZ inflation target of ‘just below 2%’. We can see this clearly in the following chart.

Relative unit labour costs, source OECD Economic Outlook, 2000=100

The blue line shows German unit labour costs relative to its competitors compared to the same for the Euro area average. Obviously Germany is part of that average, so this line reduces the extent of any competitiveness divergence between Germany and other union partners. By keeping wage inflation low from 2000 to 2009, Germany steadily gained a competitive advantage over other Eurozone countries.

At the time most people focused on the excessive inflation in the periphery. But as the red line shows, this was only half the story, because wage inflation was too low in Germany compared to everyone else. This growing competitive advantage was bound to lead to growing current account surpluses.

However that in itself is not enough to say there is a problem, for two related reasons. First, perhaps Germany entered the Eurozone at an uncompetitive exchange rate, so the chart above just shows a correction to that. Second, perhaps Germany needs to be this competitive because the private sector wants to save more than it invests and therefore to buy foreign assets.

There are good reasons, mainly to do with an ageing population, why the second point might be true. (If it was also true in 2000, the first point could also be true.) It makes sense on demographic grounds for Germany to run a current account surplus. The key issue is how big a surplus. Over 8% of GDP is huge, and I have always thought that it was much too big to simply represent the underlying preferences of German savers.

I’m glad to see the IMF agrees. It suggests that a current account surplus of between 2.5% to 5.5% represents a medium term equilibrium. That would suggest that the competitiveness correction that started in 2009 has still got some way to go. Why is it taking so long? This confuses some into believing that the 8% surplus must represent some kind of medium term equilibrium, because surely disequilibrium caused by price and wage rigidities should have unwound by now. The answer to that can also be found in an argument that I and others put forward a few years ago.

For this competitiveness imbalance to unwind, we need either high wage growth in Germany, low wage growth in the rest of the Eurozone, or both. Given how low inflation is on average in the Eurozone, getting below average wage inflation outside Germany is very difficult. The reluctance of firms to impose wage cuts, or workers to accept them, is well known. As a result, the unwinding of competitiveness imbalances in the Eurozone was always going to be slow if the Eurozone was still recovering from its fiscal and monetary policy induced recession and therefore Eurozone average inflation was low. [1]

In that sense German current account surpluses on their current scale are a symptom of two underlying problems: a successful attempt by Germany to undercut other Eurozone members before the GFC, and current low inflation in the Eurozone. To the extent that Germany can make up for their past mistakes by encouraging higher German wages (either directly, or indirectly through an expansionary fiscal policy) they should. Not only would that speed adjustment, but it would also discourage a culture within Germany that says it is generally legitimate to undercut other Eurozone members through low wage increases. [2]

From this perspective, does that mean that the current excess surpluses in Germany are a drag on global growth? Only in a very indirect way. If higher German wages, or the means used to achieve them, boosted demand and output in Germany then this would help global growth. (Remember that ECB interest rates are stuck at their lower bound, so there will be little monetary offset to any demand boost.) The important point is that this demand boost is not so that Germany can help out the world or other union members, but because Germany should do what it can to correct a problem of its own making.

[1] Resistance to nominal wage cuts becomes a much more powerful argument for a higher inflation target in a monetary union where asymmetries mean equilibrium exchange rates are likely to change over time.

[2] The rule in a currency union is very simple. Once we have achieved a competitiveness equilibrium, nominal wages should rise by 2% (the inflation target) more than underlying national productivity. I frequently get comments along the lines that setting wages lower than this improves the competitiveness of the Eurozone as a whole. This is incorrect, because if all union members moderate their wages in a similar fashion EZ inflation would fall, prompting a monetary stimulus to bring inflation back to 2% and wage inflation back to 2% plus productivity growth.    

Post-truth and propaganda

A long read on why it is time the rest of the media stopped treating Fox as TV news, and some UK tabloids as newspapers.

George Osborne becomes editor of the London Evening Standard. Donald Trump blames GCHC for bugging him because of something he saw on Fox News. The lines between right wing media and right wing politicians seem very blurred nowadays. This should not come as a surprise, because right wing media have been becoming much more like propaganda outlets than normal media organisations for some time. The conventions of journalism may have pretended otherwise, but it time we recognised reality.

Let me define two archetypes. The first, which could be called the truth purveyor, is the one we are familiar with, and which much of the mainstream media (MSM) like to imagine they correspond to. The aim is provide the best information to readers or viewers. The second is propaganda. One way of characterising the two archetypes is as follows. Readers have certain interests: objectives, goals, utilities etc. The truth purveyor will provide readers with the information they need to pursue those interests. (As exemplified here, for example.) Propaganda on the other hand, to borrow from Jacob Stanley, aims to provide information that will deceive people from seeing what is in their best interest. Propaganda provides information that supports a particular political goal or point of view.

Take, for example, the issue of welfare benefits. Media as the truth-purveyor type will try and present a rounded and accurate picture of those claiming welfare benefits. Right wing propaganda on the other hand will focus on examples of benefit fraud, or cases where the benefit recipient will be perceived by the reader as taking advantage of the system, with little or no attempt to put the example in any kind of context. This slanted coverage is designed to give the impression that benefit recipients are often scroungers and skivers. The political goal is to make it easier for governments to cut welfare payments, which in turn may allows taxes to be cut.

These are archetypes, and any media organisation will mix the two to some extent. Many would argue that even the most truth-purveyor type organisation may still embody certain assumptions or points of view that distort their readers view of what should be in their best interest. (As argued in Manufacturing Consent, for example.) Mediamacro is an example of this. But that should not blind us to what is happening elsewhere. Lines like “liberals’ nostalgia for factual politics seems designed to mask their own fraught relationship with the truth” [1] suggest nothing new is happening, let’s move on. That would be a huge mistake. It is like saying all news is propaganda, who cares. But because there are two archetypes, organisations can gradually move from one to another, and that movement is important. It played a crucial role in the success of Brexit and Trump.

In both in the UK and US there is a large part of the media which is becoming more and more like a pure propaganda outlet. We are used to thinking about propaganda as being associated with the state, but there is no reason why that has to be the case. In the UK and US, we now have propaganda machines that support political ideas that are associated with the far right, and political interests associated with the very wealthy. Their output is governed more and more by whether it assists those two goals.

Apologists for this right wing propaganda say that most media organisations have their particular political bias, and that will be reflected in the opinions you see in that media outlet. But I’m not talking about opinion pieces or leaders, but about the selection of stories and increasingly about making up stories. I cannot see either the Guardian, Mirror or MSNBC only reporting terrorist incidents by white supremacists, and ignoring those by Muslims. Nor would these organisations make up claims about foreign cities being ‘no go areas’. Suggesting an equivalence between The Mail and The Mirror, or between Fox and MSNBC, is a trap that many fall into.

Now it is natural, in a liberal democracy, that the part of the media that conveys propaganda should pretend it is just a purveyor of truth. When its propaganda becomes self-evident, it is also natural for it to claim that this is because it is others who are distorting the facts. In this sense, the fact that Trump and his supporters talk about the dominant liberal media producing fake news, and the right wing tabloids talk about bias at the BBC should not worry us at all. It is merely indicative that those making the allegations are in the business of, or supporting those, supplying propaganda. [2] More importantly, if we allow this attempt at deflection to move us away from examining what different parts of the media are doing, then the propagandists have won.

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I think it was Charlie Bean who first told me about the stupidity of a firm announcing that it was going to have to make redundancies, without specifying where those redundancies would be. It is foolish because the atmosphere of uncertainty created means that those most able to leave, who are almost certainly the brightest and best and therefore those that the firm would like to keep, end up leaving the firm because they can. Voluntary quits mean the firm no longer needs to create redundancies, but its loses its best quality staff to other firms.

I thought about this when reading about yet more examples of how EU citizens are currently being treated by this government. Colin Talbot has documented what is going on here, but there are literally thousands of similar stories. People who have lived and worked in the UK for years are told by the home office, when their application for permanent residence is turned down, to prepare to leave the UK. Applications which ask for a ridiculous amount of information and are turned down for often mindless reasons. It is a system designed to increase the chances that applicants will fail.

The effect this has, of course, is that those most able to leave the UK, who will often be the most able in terms of the importance of the work they do, will go. Refusing to confirm the rights of EU residents and sending them scary letters is how the UK government is making the same mistake as the firm that announces future unspecified redundancies. I am sometimes told that Brexit will allow the UK to choose the ‘best immigrants’, the ones that will contribute most to UK output and the public purse. Here we see Brexit achieving exactly the opposite: a system designed to encourage the best to leave.

But this is not a new Brexit phenomenon. As I described here, students wanting to come and study in the UK have faced a similar brutal regime, where a mistake by the UK bureaucracy - even when it is acknowledged as such - can lead to additional expense for the student and a period of uncertainty which can only set back their learning. Students midway through their course are told they have 60 days to find an alternative institution to sponsor them or face deportation. The UK Border Agency has no reason to believe that these are not perfectly genuine students who have paid good money to study in the UK, but it chooses to punish them because of alleged failings by a university.

There is an obvious pattern here. It is to treat those who are not UK nationals with a complete lack of humanity. It is, quite simply, very cruel. I talked above about how counterproductive it is, but even if it was not it remains very wrong. It is not something that any democratic government should do. Similar things are happening in the US as a result of Trump’s victory. This lack of humanity comes from a government that begins treating foreigners as a problem, as something to be discouraged, rather than as the people that they are. And it persists because a large part of the press deliberately ignores what is going on. That in turn reduces coverage in the broadcast media.

Contrast this with Germany, which has admitted around 1 million refugees over the last two years. Whatever the motives of the German government, German society adopted a ‘welcome culture’ to these refugees. There have been problems of course, but it is significant that the most serious you may have read about have been made up by certain US media organisations. Contrast this with the UK government shutting down the ‘Dubs amendment’ programme after only a few hundred refugee children had been admitted to the UK. For Germans it seems that refugees are people who have suffered and need help, but for the British they are something to fear and should be kept away at all costs.

Why is Germany welcoming a million refugees and the UK appears to do what they can to keep them out? Is the difference between the two countries something to do with an innate difference in national character? Do we in the UK allow our government to continue their inhuman treatment of foreign nationals because there is

“a special kind of British suggestibility – willingness to obey orders, thinking in generalisations, the search for panaceas, faith in power, which made many British capable of falling to deeper depths than many people of other nations”

Of course not. The above is a quote from Stephen Spender, visiting Germany in 1945, where I have changed German to British. After WWII it was common to believe that what happened in Germany under Hitler could only have happened if there had been some common abnormality in the German character. It was as mistaken then just as it is mistaken now to believe the British are particularly hostile to foreigners. But we should not be surprised when those outside the UK begin to think that way.

There is a much simpler explanation in both cases. The state propaganda machine of Nazi Germany was a critical ingredient in their rise to power and maintaining power. Hitler devoted chapters of Mein Kampf to the study and practice of propaganda. It is perhaps the best real world example of the propaganda archetype I described before. In the UK and US it is very different. Critically propaganda outlets do not have a monopoly of information, and they need to appear much like the rest of the media to retain their readers and their influence on the national stage. But a large part of the UK and US media is nevertheless increasingly acting as a propaganda vehicle, particularly in the area of immigration.

This change is measurable, as this report of a study shows. To quote “over the last 10 years [the UK press] appears to have been complicit in the narrowing of a discussion that is now characterised by an increasingly negative tone.” The anti-immigration propaganda in the Mail and Express reached a peak just before the referendum. As Liz Gerard describes here, these two papers printed on average two or three hostile immigration stories in each issue in 2016. The day before polling, the Mail printed six whole pages devoted to immigration. You would have to be a fool to believe these were ‘reflecting the interest of readers’: it was designed to push the referendum vote the way these papers wanted. It was pure propaganda.

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The are lots of stories around about a post-truth world created by social media. It is usually written up as if it is a new phenomenon created by new technology, but as Timothy Garton Ash notes ‘post-truth’ is nothing new. Equally the hype over Cambridge Analytica (here or here), whether it is accurate or not, is just the technological extension of something that is already happening, and has happened in the past. Most people still rely on the MSM for their news. Post-truth mainly comes from the part of the MSM whose business is propaganda, and the inability of others to treat it as such. Fake news stories on social media did not win the election for Trump. Fox News almost certainly did.

As Tim Harford notes, successful attempts to divert those in a democracy from the truth have a long history. Scientists published evidence that smoking caused lung cancer in the early 1950s. It took decades for that information to lead to campaigns to discourage smoking and for smokers to acknowledge there was a problem, and the reason it took decades was that the tobacco companies conducted a PR plan with that aim in mind. Exactly the same happened with climate change, with considerable success in the US as we are now witnessing with Trump’s election. As a tobacco firm wrote “doubt is our product”.

As Tim and George Lakoff explain, simply rebutting lies with facts can often be counterproductive. The Leave campaign's £350 million a week was a classic example. The more it was talked about, the more it became fixed in the mind of voters. The regrettable truth is that most people do not read the detail, but instead just absorb the headline. In many ways the EU referendum is a classic example of how facts can lose out to propaganda.

All this can just seem depressing, but it is not if we learn some obvious lessons. The first, which Ben Chu explains, is for policy makers not to fall into the trap of appeasement.

“Christina Boswell and James Hampshire have highlighted how the public discourse on immigration in Germany was transformed between 2000 and 2008. Social Democratic politicians used familiar arguments about the economic benefits of immigration. But they did this alongside a campaign to promote positive narratives about immigration and its place in the country’s history to counter entrenched perceptions of Germany being kein Einwanderunglsand (“not a country of immigration”). This twin approach largely succeeded in changing attitudes, flowering in the generous position taken by Angela Merkel’s Christian Democrat government towards Syrian refugees in the summer of 2015.

By contrast in the UK, at the same time, Labour began to talk up “British jobs for British workers” and never seriously rebutted the dominant and dismal narrative of the tabloid press about immigration being an economic burden and culturally corrosive, arguably helping to set the scene for the current bout of self-harming Brexit-related xenophobia.”

Now politicians here may respond that the German example is impossible given the strength of the propaganda coming from UK tabloids (compared to its relative absence in Germany), but that just strengthens my point that we should start recognising that propaganda for what it is. That recognition needs to start in the rest of the mainstream media. According to a study outlined here, “a right-wing media network anchored around Breitbart developed as a distinct and insulated media system ... This pro-Trump media sphere appears to have not only successfully set the agenda for the conservative media sphere, but also strongly influenced the broader media agenda, in particular coverage of Hillary Clinton.”

But the authors also note that “Our data strongly suggest that most Americans, including those who access news through social networks, continue to pay attention to traditional media, following professional journalistic practices, and cross-reference what they read on partisan sites with what they read on mass media sites.” What this traditional media needs to do, in both the UK and US, is to recognise propaganda for what it is, and treat it with the disdain that it deserves.

In the US that is quite a challenge because a lot of that propaganda is now created or recycled by the President himself. In the UK it is a challenge because the right wing tabloids have the government’s support, and the government holds the purse strings of the BBC. [4] It is very easy just to ignore what is happening, and carry on as usual. But this inability or unwillingness to recognise the danger posed by propaganda is part of the reason 2016 happened. Liberal democracy’s survival in the UK and US may depend on recognising and resisting what is in the process of destroying it.

[1] Taken from Stahl and Hansen. The implication that they draw, that propaganda as news or post-truth or whatever you want to call it can be combatted by a “democratic revival” seems simply naive. To see the profound difference between, say, the Blair government compared to what came before and after them, you only have to look at how they regarded academics.

[2] For those who say how do we know who is telling the truth, then you are part of the problem.

[3] And among academics, UK nationals as well. 

[4] And, it seems, increasingly supplies its journalists.