Does democracy require implementing the referendum result?

We all know the EU referendum was not legally binding on parliament. That is not true of all UK referendums: the referendum on using AV did require parliament to enact whatever voters decided. Despite the lack of a legal requirement, there remains a powerful political argument that parliament was nevertheless duty bound to implement the referendum result. It is an argument that is often invoked by both government and opposition MPs. Now I have no doubt that in reality other motives are important, perhaps decisive, but because political arguments can be persuasive, it is important to debate this one.

The clearest argument along these lines comes from a post from Richard Ekins, who is a Professor of Law at Oxford University. He writes

“Parliament made clear that the decision about whether to leave the EU was to be settled by the referendum. There were good reasons, outlined above, why Parliament should not permit Brexit otherwise than by way of a referendum. Even if one denies all this, one should still accept that a referendum once held settles what should be done. For the decision to proceed thus is itself an important public decision that fairly governs how we jointly are to decide. That is, Parliament having decided to hold the referendum, and the public having participated fully in it, the result should be respected and not undone.

Political fairness and democratic principle require one to respect the outcome of the referendum even if one is persuaded that Brexit would be a very bad idea. One might think it wrong to hold the referendum, but it was held – and Parliament invited the people to decide this question. ... In short, the important constitutional question of whether Britain should remain in the EU was fairly settled by public vote.

The proposal to ignore or undo the vote is unjust. It bears noting that the relatively powerless in our polity – the poor – overwhelmingly supported exit. Ignoring the referendum would be particularly unfair to them.”

Note that this does not say that people like me should shut up about the harm that this action will cause. Instead it says that parliament, having invited people to decide, should respect that verdict. To do otherwise would be highly undemocratic, and would be particularly unjust to those who, for well known reasons, might justifiably claim that they are not well represented by the sovereignty of parliament. Arguing that the Leave campaign told lies, or that voters were deceived, does not seem to be a compelling argument against this, as exactly these charges can and are made after general elections

To help see why Ekins is wrong, it is useful to look at his discussion of the claim by Ken Rogoff that the “real lunacy of the United Kingdom’s vote to leave the European Union was not that British leaders dared to ask their populace to weigh the benefits of membership against the immigration pressures it presents. Rather, it was the absurdly low bar for exit, requiring only a simple majority.” But Ekins’ response strikes me as particularly weak. He essentially says parliament could do this because it has done it before. He goes on to say that there is “nothing at all perverse in Parliament choosing to make provision for a clear decision on point by way of a single referendum, inviting and encouraging public deliberation that culminates in a moment of clear and authoritative decision.”

This strikes me as completely ignoring Rogoff’s point. How can a 51.9% vote on one particular day represent a “clear and authoritative decision”. If a general election is close in terms of seats, that is reflected in the balance of parliament, and governments with small majorities and independently minded MPs face constraints on what they can do. What Rogoff is saying is that a referendum which only requires in theory a majority of only a single voter can never be clear and authoritative. Those who lost can justifiably claim that if the vote had been taken a day later or earlier the result could have been different, and we know they could be correct. The fact that UK governments have made this mistake in the past does not make it right. Remember we are talking about what is right politically, not what is right in law, so precedent is far less compelling.

Much the same point applies to the issue of a second referendum. He says: “Parliament having chosen already the decision-making procedure, it is not legitimate now to say that this should be set aside. The time for arguing for a two referenda requirement, or majority support in each part of the UK, was before this referendum was held.” He is certainly right that those who had won would think it is unfair to apparently change the rules of the game after the event, much as those who have lost think the whole process is deeply unfair and unjust. I also think that Ekins’ appeal to those who are otherwise unrepresented resonates with many Labour supporters, who feel that such a move would look just like the elite overriding the wishes of the people. (See Owen Jones, who questions Corbyn’s leadership but not his Brexit line.)

Except that is nonsense. If those who voted to Leave cannot get a simple majority in a second referendum when we have a lot more information about what leaving entails then that indicates something very wrong with the initial vote, and not some plot by the elite to cheat them. It is hardly undemocratic to hold a second referendum because the situation has become much clearer. As I have said before, when politicians argue that allowing a second vote is going against ‘the will of the people’ you know that you are in real trouble.

Is that unfair to one side? Of course not, because it is how politics works. Take the Scottish referendum, where Remain won by 55.4%. Just a few years later, and we could well see another referendum. To say that is different because something crucial has changed actually plays into the arguments for a second EU referendum. Unless voters perfectly anticipated the nature of the exit deal with the EU, that deal in itself is a huge and crucial change.

It seems to be neither politics nor fairness dictates that something poorly done in the past should dictate what politicians do in the future, when there is no legal constraint on them changing their minds. Holding further votes when the situation has changed cannot be undemocratic or unfair to anyone. [1]

I think all this is a useful perspective when we go back to the original question of whether parliament is obliged in some way to enact the result of the referendum we have had. Recall that Ekins says: “Parliament made clear that the decision about whether to leave the EU was to be settled by the referendum.” Now I have said in the past that I can understand why an individual MP, who has pledged to let the referendum decide their vote, should feel duty bound to keep their word. But I do question how exactly ‘parliament’ made such a pledge. An obvious way for a parliament to make such a pledge is to embed it into the terms of the referendum itself, as was done with the AV referendum. This was not done on this occasion.

It seems to me, therefore, well within the rights of any MP or Party to say that they do not regard a vote this close as binding on how they should vote. Indeed I would go further. Any MP or Party who thinks, based on the knowledge they have, that those voting Leave will over time regret their decision, has a duty to vote based on his or her judgement, rather than be tied by some vague notion around parliamentary commitment. 

But all this assumes that the Article 50 vote was just about implementing the referendum. It clearly was not just about that. Any sane discussion of the referendum has to recognise that voting Leave gave no guidance to politicians about how to leave. The referendum was not about the Single Market, the customs union etc. What the Prime Minister should have done was to allow parliament to debate the issue of how to leave, which is critical for the future of the UK. No doubt they would have given parliament a lead, but triggering Article 50 could have waited until that discussion had taken place. [2] Theresa May decided not to allow parliament that discussion.

As a result, the vote on Article 50 was not just about deciding to start the leaving process, but it also effectively became the last chance for MPs to express any view on how we should leave. That in effect made the vote a decision to leave the way May had decided, or might decide without recourse to parliament. The moment the Prime Minister did that, any obligation an MP might have felt regarding the referendum became null and void.

This is the crucial difference between 1975 and 2016, and another reason why arguments that appeal to precedent are wrong. In 1975, voters had a clear idea about what both In and Out involved. In 2016 what Leave meant was completely unclear, not least to those campaigning for it. That meant in practice that voters decided on the basis of the form of Leave they expected to happen, or perhaps were promised would happen, rather than the form of Leave the government would eventually choose.

It is for this reason that we appear to have a decidedly undemocratic result. If the referendum had set remaining against leaving for the type of hard Brexit that we are almost certain to have, it seems extremely unlikely that a majority would have voted for that. Yet those who argue that the referendum obliged MPs to vote for triggering Article 50 are in effect arguing for exactly that result. That is neither democratic, fair or indeed wise.

[1] I am sure many would argue that a referendum which came with the promise of a later referendum where you could change your mind would be too great an invitation to those who simply wanted to exercise a protest vote. I will leave that and similar arguments for others.

[2] The more people argue that such an arrangement would not have been practical, the more they illustrate how badly designed the original referendum was. Instead of debating and voting on a specific way of leaving (which could have been chosen jointly by those who wanted to leave) relative to remaining, we got a decision which was far too open ended. As a result, Leave campaigners said during the campaign that voting Leave did not imply leaving the Single Market. Once again, it seems odd to argue that parliament should not try and rectify past mistakes like this for the sake of some imagined commitment.   

Ann Pettifor on mainstream economics

Ann has a article that talks about the underlying factor behind the Brexit vote. Her thesis, that it represents the discontent of those left behind by globalisation, has been put forward by others. Unlike Brad DeLong, I have few problems with seeing this as a contributing factor to Brexit, because it is backed up by evidence, but like Brad DeLong I doubt it generalises to other countries. Unfortunately her piece is spoilt by a final section that is a tirade against mainstream economists which goes way over the top. Let me just go through the factual errors.

“Economists dictated the terms for austerity that has so harmed the British economy and society over the past ten years.”

The only support she gives for this statement is the 20 economists who signed a letter to the Times on 14th February 2010. She neglects to mention that 58 equally notable economists signed a response in the Financial Times on 18th February arguing the 20 were wrong. Austerity has always been a minority view among academic economists, a minority that has got smaller over time. Of course those that signed the first letter, and in particular Ken Rogoff, turned out to be a more prominent voice in the subsequent debate, but that is because he supported what policymakers were doing. He was mostly useful rather than influential.

“As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternatives.“

In the case of the 20 economists who signed that letter, nearly half did revise their views just two years later. More importantly, for the last few years pretty well every macroeconomist of note, including Ken Rogoff, has advocated a substantial increase in public investment. So this sentence, in so far as it relates to austerity, is almost as wrong as it could be

“[On Brexit} All the heavyweights of the economics profession … were wheeled out to warn the British people of economic facts known, and understood apparently, only to ‘experts’... But the ‘experts’ and the economic stories they tell have been well and truly walloped by the result of this referendum. And rightly so, because while there is truth in the story that international and in particular European cooperation and coordination are vital to economic activity and stability, there is no sound basis to the widely espoused economic ‘religion’ that markets—in money, trade, and labour—must be unfettered, detached from democratic regulatory oversight, and must be left to ‘govern’ whole countries, regions, and continents.”

Where did these heavyweights talk about “economic facts known, and understood apparently, only to experts”? When they were given the chance, they explained the common sense idea that trade would suffer if we left the EU because it is easier to trade with your neighbours, and the easy to understand empirical findings that more trade increases productivity and therefore economic growth. There is no religion involved at all, but rather statistical evidence. If you are looking for religion, you need to focus on the handful of economists supporting Brexit, who really did believe that it could usher in a neoliberal nirvana that would more than offset the costs of Brexit. To the extent that the public ignored the warnings of economists, it was probably because these warnings were ‘balanced’ in the media by this handful.

When Ann talks about the failings of economists related to the financial crisis she has a point, but it is one that she grossly exaggerates. Economists hardly “led the way to the re-regulation and ‘liberalization’ of the finance sector over the past 40 years”. The way was led by the financial sector itself. If more economists had backed up rather than dismissed Rajan’s warnings in 2005, I doubt if anything would have changed. Why do I think this? Because mainstream economists have subsequently argued that the only way to prevent another crisis is to substantially increase the capitalisation of banks, but they have been completely ignored by policymakers. If economists are being ignored after the financial crisis which created untold damage, why should things have been any different before the crisis?

I think the same point applies to globalisation. Most economists have certainly encouraged the idea that globalisation would increase overall prosperity, and they have been proved right. It is also true that many of these economists did not admit or stress enough that there would be losers as a result of this process who needed compensating from the increase in aggregate prosperity. But once again I doubt very much that anything would have changed if they had. And if they didn’t think enough about it in the past, they are now: see Paul De Grauwe here for example.

There is a regrettable (but understandable) tendency by heterodox economists on the left to try and pretend that economics and neoliberalism are somehow inextricably entwined. The reality is that neoliberal advocates do use some economic ideas as justification, but they ignore others which go in the opposite direction. As I often point out, many more academic economists spend their time analysing market imperfections than trying to show markets always work on their own. They get Nobel prizes for this work. I find attempts to suggest that economics somehow helped create austerity particularly annoying, as I (and many others) have spent many blog posts showing that economic theory and evidence demonstrates that austerity was a huge mistake.         

Public investment: has George started listening to economists?

I have in the past wondered just how large the majority among academic economists would be for additional public investment right now. The economic case for investing when the cost of borrowing is so cheap (particularly when the government can issue 30 year fixed interest debt) is overwhelming. I had guessed the majority would be pretty large just by personal observation. Economists who are not known for their anti-austerity views, like Ken Rogoff, tend to support additional public investment.

Thanks to a piece by Mark Thoma I now have some evidence. His article is actually about ideological bias in economics, and is well worth reading on that account, but it uses results from the ChicagoBooth survey of leading US economists. I have used this survey’s results on the impact of fiscal policy before, but they have asked a similar question about public investment. It is

“Because the US has underspent on new projects, maintenance, or both, the federal government has an opportunity to increase average incomes by spending more on roads, railways, bridges and airports.”

Not one of the nearly 50 economists surveyed disagreed with this statement. What was interesting was that the economists were under no illusions that the political process in the US would be such that some bad projects would be undertaken as a result (see the follow-up question). Despite this, they still thought increasing investment would raise incomes.

The case for additional public investment is as strong in the UK (and Germany) [1] as it is in the US. Yet since 2010 it appeared the government thought otherwise. Public net investment, which was 3.2% of GDP in financial year 2009/10, has fallen to an expected 1.5% of GDP in 2015/6. We are about to have a spending review where non-exempted departments have been asked to look at cuts of at least 25%. One of those departments is the department of transport, which is responsible for almost a quarter of public investment.

However since the election George Osborne seems to have had a change of heart. First he has implemented Labour’s proposal of a national infrastructure commission, which was in turn one of the ideas of the LSE’s growth commission. If it works it should reduce the number of political white elephants that US economists worry about. Second, he has talked about spending £100bn on these projects before 2020. That is a huge sum: the total for annual gross public investment is currently around £70 billion.

So how do you square £100bn extra public investment with the government’s goal of achieving surplus by 2019/20? Is the £100bn a smoke and mirrors number? We will find out when the Autumn Statement is published. Ignore any numbers quoted by the Chancellor. Instead have a look at the OBR’s figures for net public investment as a percentage of GDP (you can find a time series in their databank here). In the June budget public investment was expected over the next 5 years to stay at or below the 1.5% of GDP figure. If the numbers in the Autumn Statement forecast are significantly above that, we will know that the Chancellor really has started listening to economists.

[1] Postscript. An IMF study on German infrastructure investment is here.

Greece and Trust

Nick Rowe pulls me up on a point that I didn’t make in my account of what should have happened to Greece after 2010. I argued that some external body (e.g. IMF) should lend sufficient money for Greece to be able to achieve primary surplus (taxes less non-interest government spending) gradually, thereby avoiding unnecessary unemployment. Gradual adjustment is required because the improvement in competitiveness required to achieve ‘full employment’ with a primary surplus cannot happen overnight because of price rigidity.

Nick’s point is that for this to happen, the external body has to have a degree of trust in Greece: trust that it will not take the money and at some stage default on this new loan. This trust may be particularly problematic if Greece had defaulted on its original debt, which I think it should have done. This, after all, is one reason why Greece would not be able to get such finance from the markets.

This is what the IMF is for. Governments are more reluctant to upset the international community, and so defaults on IMF loans are rare. As Ken Rogoff writes: “Although some countries have gone into arrears, almost all have eventually repaid the IMF: the actual realized historical default rate is virtually nil.”

But does this help explain why other Eurozone countries keep going on about how Greece has lost their trust? I think the answer is a clear no. In fact I would go further: I think this talk of lost trust is largely spin. The issue of trust might have explained the total amount the Troika lent from 2010 to 2012. However, as I have said often, the mistake was not that the total sum lent to Greece was insufficient, but that far too much of it went to bail out Greece’s private sector creditors, and too little went to ease the transition to primary surplus. (The mistake is hardly ever acknowledged by the Troika’s supporters. Martin Sandbu discusses the - misguided - reasons for that mistake. [0])

The reason the Troika give for lack of trust is that Greece has repeatedly ‘failed to deliver’ on the various conditions that the Troika imposed in exchange for its loans. The Troika has tried to micromanage Greece to such an extent that there will always be ‘structural reforms’ that were not implemented, and it is very difficult to aggregate structural reforms. However this is exactly what the OECD tries to do in this document, and if I read Figure 1.2 (first panel) correctly, Greece has implemented more reform from 2011 to 2014 than any other country. [1] We can more easily quantify austerity, and here it is clear that Greece has implemented almost twice as much austerity as any other country. [4] The narrative about failing to deliver is just an attempt to disguise the fact that the Troika has largely run the Greek economy for the last five years and is therefore responsible for the results. [3]

You could argue with much more justification that the failure of trust has been on the Troika’s side. Greece was told that the austerity demanded of it would have just a small impact on growth and unemployment, and the Troika were completely wrong. They were then told if they only implemented all these structural reforms, things would come good, and they have not. You could reasonably say that the election of Syriza resulted from a realisation in Greece that the trust they had placed in the Troika was misguided.

Given these failures by the Troika, a reasonable response to the election of Syriza would have been to acknowledge past mistakes, and enter genuine negotiations. [2] After all, as Martin Sandbu points out in a separate piece, a pause in austerity in 2014 had allowed growth to return, and because Greece had achieved primary surplus new loans were only required to repay old loans. But it is now pretty clear that large parts of the Troika never had any real wish to reach an agreement. Over the last few months we were told (and the media dutifully repeated) that the lack of any agreement was because the ‘irresponsible adolescents’ of Syriza did not know how to negotiate and kept changing their minds. We now know that this was yet more spin to hide the truth that large parts of the Troika wanted Grexit.

The lesson of the last few months, and particularly the last few days, is not that Greece failed to gain the trust of the Troika. It is that creditors can be stupidly cruel, and when those creditors control your currency there is very little the debtor can do about it. 

 

[0] Greece was prevented from defaulting because of fears of contagion of one kind or another, which meant that Greece was taking on a burden for the sake of the rest of the Eurozone. The right response to these fears was OMT, and direct assistance to private banks, as Ashoka Mody explains clearly here. But given that this was not done, what should have then happened is that once that fear had passed, the debt should have been written off. But politicians cannot admit to what they did, so the debt that was once owed to private creditors and is now owed to the Troika remains non-negotiable.

 

[1] The Troika can also speak with forked tongues on this issue: see Mean Squared Errors here (HT MT).

[2] I am often told that the Troika had to stand firm because of a moral hazard problem: if Greek debts were written down, other countries would want the same. But the moral hazard argument has to be used proportionately. Crashing an economy to avoid others asking for debt reductions is the equivalent of the practice in 18th century England of hanging pickpockets.

[3] I am sometimes asked why I focus on the failures of the Troika rather than the mistakes of Syriza. The answer is straightforward - it is Troika policy that is the major influence on what happens in Greece. And when the Troika gives Greece’s leaders the choice between two different disasters, it seems rather strange to focus on the behaviour of Greece’s leaders.

[4] Postscript: Peter Doyle suggests that, all things considered, Greece overachieved on fiscal adjustment     

Fighting the last war

It is often said that generals fight the last war that they have won, even when those tactics are no longer appropriate to the war they are fighting today. The same point has been made about macroeconomic policy: policymakers cannot avoid thinking about the dangers of rising inflation, and in doing so they handicap efforts to fully recover from the Great Recession.

Another military idea is the benefit of using overwhelming force. In the case of inflation we have two legacies of the last war that are designed to prevent inflation reaching the heights of the late 1970s: inflation targets and in many countries independent central banks. Do we need both, or is just one sufficient? I think this question is relevant to the debate over helicopter money (financing deficits by printing money rather than selling debt).

Why are helicopter drops taboo in policy circles? Why is it illegal in the Eurozone? The answer is a fear that if you allow governments access to the printing presses, high inflation will surely follow at some point. Many of those who worry about helicopter money are fairly relaxed about Quantitative Easing (QE), which involves much more money creation than would be involved in a helicopter drop. (Of course some are not relaxed, and (still) think that QE is about to produce rapid inflation - I will ignore that group here.) The key reason they are more relaxed is that central banks are in control of QE, whereas governments would initiate money financing of deficits. [1]

Take the recent interchange between Tony Yates and myself on helicopter money (TY, SWL, TY), and consider the following hypothetical. The economy needs a fiscal stimulus, but for some irrational reason the government will not allow debt to rise. It therefore instructs the central bank to create money to fund a fiscal stimulus (i.e. a helicopter drop). However it also tells the central bank that this action should not compromise its inflation target (which is currently being undershot), and the central bank agrees that the helicopter drop will not compromise its ability to stop inflation exceeding the target, but instead it will help inflation rise to meet that target.

Tony’s problem with this is in the instruction. In these particular circumstances the actions are not a problem, and will do some good (given the government’s irrational fear of debt). However we have crossed a barrier - the government is telling the central bank what to so. The fact that in my hypothetical example the inflation target remains is not enough: he writes “the inflation target in the UK is a very fragile thing”. He goes on: “So I don’t view the inflation target as a cast iron protection against helicopter drops undermining monetary and fiscal policy.  There’s a good reason why monetary financing is outlawed by the Treaty of Rome.  Allowing yourself tightly regulated helicopter drops is not time-consistent.  Once government gets a taste for it, how could it resist not helping itself to more?”

I think it is possible to take two quite different views to Tony on this. The first is that, in most OECD economies today where macroeconomic understanding is better and information more available, inflation targets are more than sufficient to prevent us experiencing the inflation rates of the 1970s again. The hypothetical to think about here is a government that has direct control over the inflation target, but asks the central bank to vary interest rates to achieve that target. Of course we do need to imagine this - it is the UK set-up. Would such a government happily raise the inflation target in order to finance a bit more spending? Such a move would be highly unpopular, because most people think higher inflation means lower real wages. In the UK no political party has even hinted that raising the inflation target might be a good idea, despite obvious fiscal incentives to do so. Suppose a government pretended repeated money creation would not breach the inflation target, even when the central bank advised otherwise. Would that government survive when inflation took off?

A second view is that we have the story of the 1960s and 1970s all wrong. We did not get high inflation in advanced economies because governments wanted to monetise their own profligacy. There were, after all, independent central banks in the US and Germany. Inflation occurred because of the combination of a number of specific factors: trade union pressure in the face of shocks that tended to reduce real wages, underestimation of the natural rate (and a poor understanding of how monetary policy should work), and placing too great a priority on achieving full employment. The latter might have been a legacy of the 1930s: policymakers were also fighting the last war, except in the 1970s the last war was about unemployment, not inflation.

I think both views are probably correct. As a result, I’m much more relaxed about money financing of deficits in the current situation. However in one crucial respect I do agree with those who say we have no need for helicopter money today, because there is no reason for governments to have a fear of rising debt if their central bank can undertake QE. However irrational fear of rising debt in a recession has similar characteristics to fighting the last war: deficit bias is a problem, but a recession is not the time to worry about it. I think this is why I am not persuaded by this article by Ken Rogoff: yes, in the grand scheme of things we should worry about inflation and debt, but right now we are worrying about them too much and therefore failing to deal with more pressing concerns.

[1] Some people imagine the central bank could itself initiate a helicopter drop, independently of government. That is simply not possible given current institutional arrangements, but as I noted in my earlier post (point 7) I think it is interesting to explore institutional changes that give the central bank some role in countercyclical fiscal policy. A simpler confusion is that helicopter money involves giving money to everyone, while tax cuts just go to taxpayers. Helicopter money is really about financing a fiscal stimulus of any kind using money: the form of that fiscal stimulus is a separate matter.