Remain denial and Labour’s heartlands

When I suggested after the vote a possible way that Brexit might be avoided, I was conscious that I might simply be in denial. I have subsequently been encouraged by others suggesting similar things - first Jolyon Maugham, then Nick Pearce and Gideon Rachman in the FT - but of course they may also be in denial. If you ask a Conservative or Labour politician right now they will say that the referendum result must be respected: to do otherwise appears to disrespect voters. Equally European politicians want to make it clear as quickly as possible that there will be no extra concessions to avoid encouraging other exit movements.

That is why delaying Article 50 for at least a month or two is so important. It allows the immediate passion of the vote to die down, and its immediate economic consequences to sink in. Hopefully that will also discourage other EU countries from going down the same route. By September it will also become obvious to people in the UK that as part of bargaining with the EU it might be a good idea to keep delaying implementing Article 50, and this may also encourage European governments to think about concessions. Maybe.

I don’t think Boris Johnson would have any problems going down that path, once he was elected leader. (In the meantime he will continue to imagine we can have the impossible, because it allows him to get the votes of MPs in his party who are hardline Leavers.) But what about Labour - assuming it still exists of course. Will it worry about losing its ‘heartlands’, and so be tempted to insist that the referendum means free movement is no longer an option?

I think this would be a disastrous political error. Whatever they might propose in the form of controlling EU immigration, they will be outdone by UKIP. That part of the heartlands that really dislikes foreigners are lost to Labour and will not return. (Of course many Conservative voters share similar views.) But if Labour appear to block free movement (and therefore continued EU membership) they will lose a large section of the electorate who voted to Remain. (Remember most Labour voters did vote Remain.) If Labour rejects free movement in any substantive sense, and therefore denies the possibility of remaining, many of these voters will go to the LibDems or elsewhere.

The best Labour can hope for, when it comes to the heartlands, is to capture the many voters who dislike immigration not for itself, but because of what they believe it creates: more competition for public services, and worse working conditions. (For the majority of Leavers immigration is a fear rather than a direct experience.) Labour can target those voters in two ways: by promising more money for public services across the board, but also by proposing a substantial and very visible scheme by which money follows people.

This is also a critical point for anyone aspiring to be Labour leader. Labour heartlands are now the cosmopolitan cities like London, Manchester and Bristol. They see the personal benefits of migration and being part of the EU. They have no problem with, and many happily embrace, policies that divert more resources to public services and the lower paid. But they are highly mobile in the political as well as the geographical sense. If a Labour leader tries to appeal to both this group and voters that want above all else to control EU migration by leaving the EU, then they will fail. 

Budget accounting tricks

One of the problems with fixed date deficit (or in this case surplus) targets is that they encourage playing around with the public finances to hit the target. Generally, but not always, this involves making a saving today by shifting costs into the future. Privatisation is an obvious example. It may be justified if the net present value of the sale is positive, or if privatisation really improves efficiency, but all to often it is a device to meet a short term target.

As Jolyon Maugham shows clearly, Osborne has done his fair share of such tricks, and not just in the latest budget. I have nothing to add, except a thought on where this should take us. There are two roads not to take. The first, which is taken by many on the right, is to say that the Chancellor should have imposed more ‘real’ cuts to meet those targets. The second is to suggest that really the Chancellor is doing sensible macro after all, but is just trying to disguise the fact.

What accounting tricks show is that the target itself is nonsense, and not that the Chancellor should try harder to hit them. While these tricks should clearly be exposed, there is a danger that by focusing too much on them, we inadvertently legitimise the target they are designed to achieve. What they show is how difficult the Chancellor now finds it to cut public spending any further. I do wonder sometimes at the mindset of those who write that Osborne has failed because he did not cut enough to meet his targets. Have they internalised the anti-Keynesian propaganda so much that they actually believe it?

For the same reason, these accounting tricks do not show that Osborne is relaxing austerity in the way I and others have argued should happen. The planned decline in public investment is real enough. There were plenty of cuts in the budget, and while disability cuts as proposed have now gone (is this a record for the speed of reversal of a budget measure), they may simply return repackaged. The savage cuts to ‘unprotected’ department spending remain, as does the myth of protection itself. The Chancellor used tricks not because he had a change of heart, but because he ran out of options. Nor do cuts in capital gains tax or higher rate tax bands make for much of a fiscal stimulus, as they fall on groups who will tend to save much of it.

The Chancellor is culpable for sure. But his mistake was not to use accounting tricks, but in putting at the centre of his budget strategy a politically inspired target which makes no economic sense whatsoever.     

Will Trident be Corbyn’s undoing?

and why Trident is not like austerity

Not being a Labour Party person, I’ve not until now thought much about what Corbyn should do about the Trident issue. (For non-UK readers Trident is the UK’s independent nuclear deterrent.) On a personal level I have never heard a convincing argument for keeping Trident, and a great many bad ones, and it is a very large amount of money. So unless anyone convinces me otherwise I would happily votes against keeping it.

Labour leader Jeremy Corbyn is firmly against Trident, but current Labour policy and many Labour MPs strongly hold the opposite view. It is a far more fundamental issue for Labour MPs, with deep roots, than any debate about Syria. (Postscript: this LRB article by David Runciman is well worth reading.) This post/article from Steve Richards of The Independent, coupled with the recent Labour reshuffle, suggests it may define Corbyn’s leadership.

I have written in the past that Corbyn’s election by Labour Party members was in good part a response to the inept drift in policy that the other three candidates were associated with. (As Jolyon Maugham says, it may be unfair on the non-Corbyn candidates that they were so clearly associated with this failed strategy, but elections are often unfair in this sense.) I suspect the many Labour MPs and commentators who think that Corbyn got elected because most party members prefer purity to government do this because they do not want to admit how hopeless their own electoral strategy clearly was. I have talked about this before, but Chris Dillow does it better.

The implications are that if in the few years a rival candidate emerges who seriously looked like they could beat the Conservatives while remaining close to the policies of the Blair/Brown government (minus Iraq and City regulation, obviously), I suspect they could easily win against Corbyn if the Corbyn/McDonnell combination looked like it was both incompetent and unable to lead more than a small number of their MPs.

That is why I have also written that Corbyn/McDonnell are likely to play a long game: to adopt for now policies that the majority of Labour MPs can unite behind, and try and gradually change the platform once they had shown that they could competently lead this majority (which means after 2020). As a poll disaster could still ruin this strategy, what they should also do (but I have always doubted that they would do) is focus on improving the Labour party’s spin machine. (Notions that Corbyn would automatically galvanise disenfranchised working class voters seem problematic for various reasons. The fact that almost no one in the media supports the current Labour leadership means that more, not less, energy has to be put into getting their message across.)

You can see why trying to change the Trident policy might go against that strategy of playing a long game. Damian Carrington, who has done more work exposing the government’s flooding débâcle than anyone I know, recently tweeted: “when @UKLabour shd have been holding Cameron to account for huge failings on #flooding, they put on a late Christmas pantomime”. It is pointless to say it is not his fault but that of the Labour MPs and media, because these are facts that Corbyn has to work with.

Please note that I’m not arguing that Trident might be better left as a battle to be fought on another day because most voters want to keep Trident. Voters views on the issue of Trident are not as clear as some Trident supporters like to pretend, and any poll that does not make the opportunity cost clear in any question (how many less teachers, nurses …) is meaningless anyway. The Conservatives are going to argue that Labour threaten national security whatever Labour’s actual policy is as long as Corbyn is leader. I am arguing that anything that breaks the long game strategy is not in Corbyn’s own interest. Remember also that Corbyn’s choice will have no influence on what actually happens to Trident before 2020, because the Conservatives will win any vote in parliament.

Now someone might say I’m being inconsistent here, because I would not apply the same argument to the macroeconomic policy of austerity. Is this because I have a deep professional interest in macroeconomics but not in defence policy? It is a good point, but my response would be this. If Labour under any leader agreed to follow Osborne’s fiscal charter, they would be going down exactly the same road as the parliamentary party seemed to heading before Corbyn was elected - the road to nowhere. Or as John Harris put it, they were “in danger of shrinking into meaninglessness”. Their ambivalence on the austerity issue under Miliband/Balls (having a sensible policy but trying not to talk about it) helped lose them the election for a variety of reasons I have talked about before.¹ Austerity, not Trident, was a key reason that Corbyn was elected. 

The Trident issue may therefore be critical for Corbyn. He would obviously like to campaign in 2020 on a manifesto that clearly pledges to scrap it, and there may even be electoral advantages in clarity. But if in doing so he alienates so many Labour MPs that the only image in voters minds for the next few years is Labour disunity, he may lose his support among the majority of party members, who actually meet those voters on the doorstep. Compared to getting this choice right, fixing his economic policy right must seem easy.

1 My previous posts have focused on Labour’s huge tactical failure: the only area before the election where the the Conservatives had real strength was economic competence, and how this was based on a false narrative that Labour failed to challenge. I have briefly talked about the demise of the European left more generally in terms of ‘political capture’ by the dominant elite’s narrative: some more articulate thoughts are discussed by Henry Farrell here.   

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.