The IPPR Commission’s plan for a new economy

The final report of the IPPR’s Commission on Economic Justice is released today, with the full title of Prosperity and Justice: A Plan for a New Economy. [1] I was lucky enough to get an advance copy, and it is a very impressive document: very well researched and well argued. It is nothing less than a blueprint for a new progressive government. Of course there are some proposals I have doubts about, but it is sufficiently authoritative that in future anyone should ask of any progressive economic programme how does it relate to the recommendations of this report.

As far as my own area of monetary and fiscal policy is concerned, I’m not sure I have seen in one place as clear and comprehensive a summary of the lessons of the recent past and a better set of proposals for the future. I wrote about an early draft of this chapter in April, so I will be brief here. Their proposed fiscal rule separates current and investment spending, but suggests the ONS and OBR look to obtain a measure of spending that helps future generations that is better than the national accounts definition of public investment. They suggest a substantial increase in public investment, while current spending in constrained by a rolling five year target for balance. However they suggest that if interest rates are stuck at their lower bound, the focus of fiscal policy (current spending and taxes as well as investment) should be stimulus. Readers familiar with this blog will know this is very similar to the proposals in Portes and Wren-Lewis, 2015 and the Labour Party’s fiscal credibility rule.

For monetary policy they suggest ending the primacy of inflation, and adding underemployment and nominal income as primary targets. In addition, they suggest that QE involve creating money directly to expand the activities of a National Investment Bank (NIB) when a large macroeconomic stimulus is required. Note that, unlike a fleeting proposal by Corbyn, money creation to expand the NIB remains a call made by the independent Bank of England in a recession rather than by the NIB itself or anyone else. I would go further on the Bank’s mandate, but otherwise the IPPR’s proposals look eminently sensible.

The chapter on industrial policy seems sensible, with some ideas from Mazzucato (e.g. public sector led missions) clearly evident. Beside the NIB already mentioned, there is an emphasis on direct support rather than via the tax system (e.g. patent box) which often have large deadweight losses. They argue an industrial strategy should not just be about helping and adding to innovation clusters based around universities, but also in increasing productivity in what they call the ‘everyday economy’. In my view it is higher productivity and not greater union bargaining power that will raise real wages in a sustainable way, although in other areas a greater union presence can be helpful (see below).

For many one of the most interesting ideas - of course not new - is to end the shareholder model, and replace it with a stakeholders model where workers have an influence on the board and executive pay. It represents a move from a US to a more European model. While I find this argument fairly convincing, the idea under reforming the financial system that the Financial Policy Committee (FPC) of the Bank should target house price inflation is misconceived. What the economy needs is falling house prices, and once you make house prices a target the pressure will be to stop that happening.

The idea of a citizen’s (social) wealth fund is interesting, but I’m not sure a strong case for it is made here. Why should a government hold assets and issue debt, for example? If you want to redistribute wealth from the wealthy old to the poorer young, why not do so directly? On tax the proposal to combine income tax and national insurance seems sensible, as is the idea of a replacing bands with a formula based system (as in Germany). The same goes for a lifetime gifts tax to replace inheritance tax, and a land value tax.

There is so much else in the report, but let me end by talking about one issue: executive pay. There is a cute chart in the report that I reproduce below.

The report starts, quite rightly in my view, by emphasising the dangers of inequality. It also suggests that this cannot just be tackled ‘after the fact’ i.e. by tax and welfare measures. But will the stakeholder measures talked about above, or greater union influence, be enough to reverse runaway corporate pay? The rise of the share of the 1% starts with the advent of a neoliberal US and UK, and it has made the rest of us noticeably poorer. The report involves reversing many aspects of neoliberalism, but an interesting question is whether that is enough to achieve a decline in the 1% share, or whether other measures like higher top taxes are an essential part of doing that?

It is a fascinating report for anyone interested in a progressive economic policy. Do read it.

[1] This is a personal nostalgic footnote, which I am only writing because I could not easily see this information online. New Economy also happened to be the title of the IPPR’s journal in the early 1990s, which is now called Progressive Review. I remember it well because between 1993 and 1995/6 I wrote a number of articles for it based around simulations of the macroeconometric model I had developed with Julia Darby and John Ireland. The idea to do that came from IPPR’s Economic Director Dan Corry, with Gerry Holtham as overall Director at the time. Apart from members of the modelling team, Rebecca Driver helped write a number of the articles. The first article over that period had the title “What’s so Bad about Borrowing?” (plus ça change), and the last “Avoiding Fiscal Fudge” which proposed an independent fiscal institution or fiscal council for the UK. That took 14 years to come to fruition, and I hope many of the proposals in this report do not have to wait so long.

On free trade and free markets

Jonn Elledge had a nice piece in the New Statesman about free trade. The question he poses is how Brexiteers can exalt free trade but want to leave the most developed free trade area in the world, the EU. The answer he gives is to distinguish between ‘free to’ and ‘free from’. When economists talk about free trade they mean free to trade, which is what the EU has achieved through regulatory harmonisation in particular. Brexiteers mean ‘free from’ in the sense of trade free from government intervention.

I think we can go beyond what Elledge says and make exactly the same point about the term ‘free market’. A Brexiteer might think of a free market as a market free from government interference, including government regulations. An economist would be more likely to talk about a free market as one where people were free to trade in a socially optimal way. The state might be required to make that happen in many ways.

To take just one example, markets can sometimes not exist because of information asymmetries, but if those asymmetries are removed then people can beneficially trade. (Economists will immediately recognise this as Akerlof’s famous market for lemons.) Removing those asymmetries does not necessarily require government, but government could play that role. If it did, we would have a free market as an economist would define it, but only as a result of what some on the right might call government ‘interference’. As Mariana Mazzucato would argue, the state can also create markets through organising research and development.

Two governments that harmonise each others regulations can create better markets in both countries by increasing competition. Equally there are other government measures that make markets work better. The most obvious example is to reduce monopoly power, which reduces prices and increases the quantity traded in that market. In truth the idea of a market completely free from government is semi-mythical: all markets work within a legal framework created and enforced by the state. When some people complain about government interference in markets, and eulogise ‘free markets’, they are really just complaining about forms of interference they do not like and are using the notion of freedom to glorify their distaste.

Nevertheless, I think this distinction between ‘free to’ and ‘free from’ its perhaps a way of resolving something of a paradox that I talked about in my neoliberal overreach piece. The paradox was whether Brexit can be described as neoliberal, as it involves the apparent illiberal destruction of a free trade area. If you see neoliberalism in practice or ‘in action’ as not so much a coherent (if flawed) unified theory (as here, for example), but rather a collection of views that encompass not just free trade but also promotion of the market and dislike of certain market interference, then neoliberal overreach can occur in any of those dimensions. [1]

So those like Osborne who wanted a smaller state so taxes could be lower (and perhaps for other reasons to) went for austerity as a means of achieving that. Those, like most Brexiteers, who wanted less regulation (including no state interference in how they personally avoid paying tax) pushed Brexit, even though it involved reducing the ability to trade. What Colin Crouch calls corporate neoliberals turned a blind eye to growing monopoly and rent extraction.

While all three groups were happy to eulogise free trade and free markets, conflicts arise over the interpretation of free. For the Brexteers free trade means freedom from government interference, while for Osborne it meant free to trade. For corporate neoliberals free markets means markets that are free from government limits on monopoly and attempts to avoid rent seeking, while ordoliberals want the state to control monopoly so markets are free to work for society.

Today for most people most of the time the idea of freedom generates positive emotions (although that itself is a social phenomenon, as Adam Curtis among others explored.) It is therefore a word worth expropriating for a political cause if you can. But by noting that conflicts arise between ‘free to’ and ‘free from’ we can perhaps see that all politicians are doing is trying to promote a form of freedom that suits their cause.

[1] In an interesting piece, Will Davies argues against the need to want to define political or social terms precisely as if they “connect cleanly and unambiguously to some object”.

Brexit: a battle lost but who will fight the war?

The Brexit vote was, in economic terms, an act of self harm. You do not need to just ‘trust the experts’ on this: it is pretty close to common sense. As Rebecca Driver clearly explains, leaving the single market will make it much more difficult for (particularly small) firms to trade in Europe. As Europe is on our doorstep and geography matters, that cannot and will not be compensated for by trading more elsewhere. [1] Finally greater trade is associated, for clear reasons, with higher growth. Lower growth will impact unfavourably on every area in the UK, whether they voted Leave or Remain.

The harm done is not just economic. As Ben Chu writes, “The crude majoritarian politics of this referendum has seen half of the population (a generally poorer, less well-educated and elderly half) effectively strip major freedoms and even a cherished identity from the other half (a more prosperous and predominantly younger half)”. Before the referendum, I had conversations with people arguing that a Brexit vote would be more harmful than a Trump presidency, and this deep sense of anger, loss and despondency will not go away. We therefore need to understand why it happened.

In my last post I argued that Brexit was a protest vote against both the impact of globalisation and social liberalism. The two come together over immigration, and of course the one certainty of the Brexit debate was that free movement prevented controls on EU migration. Globalisation has benefited the majority in the UK, so those who had not benefited could not alone have won a Brexit vote. Equally social conservatives have lost battle after battle in the UK on specific social issues. Brexit was the perfect storm where these two groups came together, and combined they just managed to win.

Explanations do not imply inevitability, but instead tell us why the result could easily have been different. We need a sensible discussion about immigration, rather than assume it is always and everywhere a problem. However to follow the social conservative route and say concern over immigration is just xenophobia is not helpful. [2] We need to challenge the view the right wing press has patiently built up that immigration is responsible for declining public services and making it difficult to get housing. Too many people continue to discount the power and influence of the media: that is a mistake, as this research on Fox news shows. It is not difficult to get across the benefits of immigration, given how much the NHS and our construction sector depend on immigrants, but it is not something many of our leading politicians have done for some time.

More generally it is becoming increasingly clear how destructive the doctrine of neoliberalisation has been. Neoliberalism combines the encouragement of globalisation with demands for a much reduced role for the state. In the advanced economies the deindustrialisation implied by globalisation and the growth of China and elsewhere has been beneficial overall, but there are sections of society that have lost out, which invites a backlash. As Kevin O’Rourke shows, globalisation has often led to fierce resistance in the past. Dani Rodrik has demonstrated how state spending can protect, and has often in the past protected, the losers from trade. [3] (As an economist mights say, globalisation is a Kaldor/Hicks improvement, but in recent times the compensation part has been missing.) Brexit, like the financial crisis and perhaps also Donald Trump, are in this sense problems created not by globalisation alone but by neoliberalism.

For the UK it is worse than that. It is not just that austerity is the real cause of declining public services, and a failure to build houses is the cause of rising prices and rents. (See Chris Dillow or Mariana Mazzucato) It is that this government in particular has connived with the right wing press to transfer blame for an NHS in crisis and unaffordable housing from their own policies on to immigration. The Remain campaign was Cameron and Osborne, and neither were prepared to change their tune and start talking about how limiting immigration would mean there was even less money for public services. As I noted in the previous post, the NHS was an important concern for Leave voters, and they thought Brexit would make things better. Can you imagine a worse background for the EU referendum vote than a government that continually stressed the importance of limiting immigration, but failed to achieve those limits so spectacularly. [4]

This was not the only problem with the Remain campaign. In terms of getting the message across, Leave seemed to understand their target audience much better. (It is not my field, but this from Mark Hind makes sense.) To get the message across the Remain campaign relied on the institutions of the establishment: the Treasury, Bank of England, IMF etc. Fine for those for whom the establishment is respected, less so for those who regard it as remote and detached from their lives. Remain made very little use of academics, despite the fact that this group is trusted by the public. [5] Leave did seem to understand this, which is why they went to ridiculous extremes to discredit these experts. The broadcast media hardly ever noted the consensus among economists that Brexit would reduce everyone's standard of living, and instead did their ‘he says, she says’ thing. This media also failed to point out the lies Leave told, preferring ‘balance’ over truth.

All this implies that while the potential for a Brexit vote was always there, reflecting the perfect storm of anger against globalisation and social liberalism, it might not have been realised if the Remain campaign had been better, the Leave campaign had been honest and the broadcast media had not departed from its mission to educate and explain. The lies of the Leave camp are already apparent. The depreciation in sterling that immediately followed the vote is a cut in living standards for everyone in the UK with no lasting compensation. It is permanent unless the markets have got things spectacularly wrong. The economic downturn that is underway is as predicted. In both cases voters were told this was fear mongering by the Remain side: now those that promoted Leave are in the ludicrous situation of arguing that markets and firms have somehow been deceived by Project Fear.

In normal circumstances this would all be a cause for optimism. We do not need many voters to realise that they were conned by the Leave campaign before Leavers become a minority, or at least for the majority to favour a deal that can keep the UK in the single market with essentially free movement of labour. (There may have even been such a majority on the day of the vote.) To call this the denial stage in some ‘grieving process’ by Remain voters misunderstands the nature of the decision. Leaving is compatible with a whole range of alternative arrangements: some quite close to EU membership, some not. In that sense the vote only gave the green light to an ongoing struggle over what these arrangements will be. (For a discussion of the politics involved, see here but also here.) Thus those who say we should accept the verdict of the people are wrong, because a great deal is still to play for.

Yet circumstances are far from normal, and there seems little ground for optimism. Our new Prime Minister - who was as complicit in the sham targets for immigration as Cameron and Osborne - has appointed those who supported Leave to handle negotiations. She knows that the only way she can unite her party is to end free movement and therefore leave the single market.

Worse still, the government will do whatever it wants to do when it comes to the type of Brexit we have. Our official opposition will, if the polls are right, be the same opposition that was both ineffective and conflicted in the Brexit campaign, preoccupied as it will almost certainly be with cleansing the PLP rather than the details of trade arrangements. There is no alternative opposition with any strength. The SNP cannot speak for the rest of the UK, and anyway will be focused on trying (and probably failing) to drum up enough support for independence. As a result the 48% or more who did not want an end to the single market will not be able to do much about it. I fear that if you want a vision of what Britain after Brexit will become, you just need to look in the pages of the newspapers that were a vital part in bringing Brexit about.

[1] My impression was that discussion on broadcast news programmes, which is the main source many people have to unbiased news coverage, or even the debates never got to this point. We had someone from Remain saying trade with Europe would suffer, and someone from Leave saying we would be ‘free’ to trade with other countries. You do not need the Treasury’s gravity equations to make this simple point about geography and trade, but you need to go a little beyond soundbites.

[2] A similar point can be made about nationalism, which is hard to combat and may be a symptom rather than a cause.

[3] Rodrik, D. (1998), "Why do More Open Economies Have Bigger Governments?" Journal of Political Economy 106(5): 997-1032

[4] None of this was hard to see before the last general election. Those who in 2015 voted Conservative but also wanted to Remain need to ask why they took no notice of the warnings that some of us made. Those ‘business leaders’ who seemed to unanimously endorse Cameron need to ask, or be asked, why they were gambling with their company’s future in doing so.

[5] Part of the problem is that Leave voters tended not to trust anyone. This, by Jean Pisani-Ferry, is good on experts and trust.

Neoliberalism

The term ‘neoliberalism’ has become so ubiquitous that some might think that it has lost all meaning, beyond a useful catch-all for everything some people on the left dislike about current social and economic trends, or more specifically for those on the left to be rude about those on the centre-left. That is in my view far too dismissive, but the reasons for both the use of the term and confusion over its meaning have real historic and cultural roots.

I know what I mean when I (occasionally) use the term neoliberal. Neoliberalism is a political movement or ideology that hates ‘big’ government, dislikes any form of market interference by the state, favours business interests and opposes organised labour. The obvious response to this is why ‘neo’. In the European tradition we could perhaps define that collection as being the beliefs of a (market) liberal (although that would be misleading for reasons I give below). The main problem here is that in US discourse in particular the word ‘liberal’ has a very different meaning. As Corey Robin writes, neoliberals

would recoil in horror at the policies and programs of mid-century liberals like Walter Reuther or John Kenneth Galbraith or even Arthur Schlesinger, who claimed that “class conflict is essential if freedom is to be preserved, because it is the only barrier against class domination.”

So in this US line of thought, neoliberalism is an adaptation of a position on the left towards the ideas of the right.

Contrary to some perceptions, the term neoliberal was not a US invention, but was first used by Rüstow, as this excellent account by Hartwich and Sally sets out. It was designed to be a ‘third way’ between socialism and a German version of capitalism. It was adopted by a group that later became the Mont Pèlerin Society, which included Mises and Hayek and Milton Friedman, but it would be a great error to view that group as some kind of united intellectual conspiracy. As Hartwich and Sally remark, it is “named after the location as the participants could not agree on anything else”. The group was sufficiently diverse that the idea of what we now call a social market economy can also trace some of its roots to this group.

One of the disagreements in the group was over the problem of what we might call ‘corporatism’: the domination of markets by a small number of large firms or cartels that is a long way from the ideal of a perfectly competitive market. Rüstow saw that as a problem that was inherent to capitalism and required a strong state to prevent it (an idea that is central of what we now call ordoliberalism), whereas Mises thought corporatism is the result of state intervention. (Economists would just say that both are potentially true and it all depends, which is one reason why many economists find it hard to talk about ideologies that involve their own discipline.)

From this group we have the term neoliberal being adopted as a modification of European liberalism and (for some at least) it involved a move from the right to the left. I think the clearest way of thinking about the Mont Pèlerin group is that it was a group that had in common a dislike of communism, but out of which different ideologies emerged, including ordoliberalism and neoliberalism as we understand these terms today. I am tempted to argue that what we now call the neoliberal element of the Mont Pèlerin discussions placed such an emphasis on their dislike of the state that they were prepared to ignore the market imperfections that a state could correct.

I think this alone would be a good reason for the use of the term neoliberal rather than, say, market liberal. Neoliberalism as most people use the term seems quite relaxed about departures from the ideal of a market as seen by economists. A clear example, as Chris Dillow points out, is CEO pay. When people argue that CEO pay ‘should be left to the market’ they mean something very different from ‘be determined by the market’. The role of any market in determining CEO pay is marginal compared to most ordinary workers: pay is set by remuneration committees who reference to the pay of other CEOs.[1] What ‘left to the market’ actually means here is ‘no state or union interference’.

Yet this example also tells us that dismissing neoliberalism as a non-existent ideology is wrong. How often have you heard people arguing that CEO pay should be left to the market, and this assertion has gone unchallenged? This common acceptance of ‘left to the market’ really meaning ‘no state or union interference’ suggests something like an ideology at work. Other commonly used language, like taxpayers money (by which is normally meant income taxpayers) rather than public money, or wealth creators for the 1%, does the same.

Attitudes to the state, both on the right and centre of politics, are very different to those I (distantly!) remember from the 1960s. The ability of the state to achieve economic goals is today routinely denigrated. Part of the reason for the success of Mazzucato’s The Entrepreneurial State (apart from it being a very good book) is that it points out how creative and wealth creating the state can be. What would have seemed obvious in the days when we put a man on the moon today needs to be argued case by case.

This is why I do not think it is a problem that few today would describe themselves as neoliberal. Indeed that may be part of the greater problem as perceived on the left: neoliberal ideas have become so commonplace, not just on the right but also the centre of politics, that no self-identification by label is required. But there may be another reason why few call themselves neoliberal, and that is because if we try and regard it as a coherent and consistent set of beliefs it can very quickly be shown to be inadequate and confused. Commonly held beliefs do not have to be coherent and consistent.

This is where many accounts on the left go wrong. Rather than seeing ‘left to the market’ as a deliberately misleading shorthand for no state or union interference, they think neoliberalism involves a devotion to free markets, or worse still (see this piece by George Monbiot for example) they equate neoliberalism with unbridled competition. While that might have been true for some of those at Mont Pèlerin, it is no longer true of neoliberalism today.

The reason is obvious enough. Neoliberalism has been adopted and promoted by monied interests on the right, and that money often resulted from what we might call today crony capitalism. So, for example, there is a big difference between promoting competition within the NHS (which some research suggests works if done in the right context, such as fixed prices), and the privatisation of health contracts. Privatisation is neither necessary nor sufficient for competition. To describe the promotion of competition within the NHS as neoliberalism is confusing and alienating.

More generally, it is a huge error to think that because neoliberalism invokes a highly selective and distorted view of basic economics, the left must therefore oppose mainstream economics. It is a huge error because using mainstream economics is an excellent way of challenging neoliberal ideas. Take the example of banking. At first sight the financial crisis was simply a failure to regulate a free market. But it was a market which included what is to all intents and purposes a huge state subsidy, which is that if the market goes wrong the state (either directly or through its central bank) will come to the rescue. Here state interference in the market encourages lack of competition: only those too big to fail could be sure of support.

For this and other reasons (natural monopolies and other forms of rent seeking), the financial sector embodies many of the things that those who first used the term neoliberalism were opposed to. It is important that those who use the term neoliberalism today recognise this contradiction. It does not mean that using the term neoliberalism to describe the dominant ideology is wrong, but it is a mistake to assume the ideology has not be moulded/adapted/distorted by those in whose interest it works. These changes have made it intellectually weak at the same time as making it politically strong.

[1] This is very similar to how pay was determined under UK ‘incomes policies’ in the 1960s and 1970s. Here the state would set up a committee that would fix the pay of some group of workers with reference to the pay of comparable occupations. At least in that case, however, some of the reference occupations may have had pay that was actually market determined!

Its ideology, stupid

Wolfgang Münchau takes to task in today’s FT the latest example of German opposition, and in particular opposition from finance minister Schäuble, to ECB policies. However I think he ends up missing the obvious target. He discusses the particular problems negative rates pose for Germany’s financial sector, and in his last paragraph writes

“This episode is a reminder that the collective spirit that was so strongly present in the first years of the eurozone has gone. That — not the presence of imbalances or other technical problems — constitutes the single biggest danger to the long-term viability of Europe’s monetary union.”

I would suggest this has the causality wrong. Any collective spirit has gone because of these ‘technical problems’. The biggest technical problem is an obsession with inappropriate collective fiscal consolidation (austerity). In the Eurozone the ECB is being forced to try negative interest rates because it is having to undo the impact of fiscal consolidation. And the man most responsible for this obsession is Schäuble.  

Gavyn Davies nicely sums up my own view about negative interest rates. Without radical institutional and social changes (which may not be desirable), bank profitability puts a limit on how far central banks can go, and for that reason exploring these frontiers could be counterproductive. But the alternative of more QE, possibly directed at other assets besides government debt, is way down the list of effective and reliable instruments for managing aggregate demand right now. Helicopter money is a much better way of giving central banks more ammunition. But the focus right now should not be on any of this, if we are genuinely concerned about social welfare. As John Kay says, “we need less financial ingenuity and more common sense”.

What we should be talking about is why governments are not doing much more public investment. Yet in the US, Germany and the UK any dramatic increase in public investment seems out of the question. Barry Eichengreen, in an article entitled “Confronting the Fiscal Bogeyman”, writes of Germany:

“The ordoliberal emphasis on personal responsibility fostered an unreasoning hostility to the idea that actions that are individually responsible do not automatically produce desirable aggregate outcomes. In other words, it rendered Germans allergic to macroeconomics.”

In the US, antagonism to the Federal government rooted in the past has meant Republican leaders are  

“antagonistic to all exercise of federal power except for the enforcement of contracts and competition – a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.”

He ends

“Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?”

He does not mention the UK, where the antagonism to public investment seems to lack any deep historical explanation, and may just reflect stupidity or an ideology imported from the US.

When I talk about public investment people normally think about big projects, like HS2 in the UK. I like to point out that simpler and perhaps more boring things, like repairing roads, are at least as important, and can be done immediately. But if there is one area above all else where much more needs to be done right now it is investment in renewable energy.

The recent news on climate change is not good. It is foolish to read too much into one or two months figures, but this chart is nevertheless quite scary. It is scary because we know of various possible ‘tipping points’ (like the melting of all Arctic ice or the mass release of methane from permafros) which could accelerate global warming. Most climate models assume we will control carbon emissions in time to stop that happening, but we cannot be sure of that, because we are in uncharted territory.

We know we need a massive expansion of renewable energy, but one problem that has so far stopped that being a complete solution to climate change has been that sometimes the wind neither blows nor the sun shines. We need to be able to cheaply store electricity, but our current battery technology is not good enough. Battery technology is also crucial in making electric cars as attractive as petrol based cars. But technology could come to the rescue. Existing batteries could be made much more efficient, or completely new battery technologies could be made viable. Much more efficient transmission could also help. And if you look at all three links, you may notice one common factor. These potential breakthroughs have all come from research undertaken in the public sector. As Mariana Mazucato has argued, the state is “better able to attract top talent and pursue radical innovation”.   

China put over $80 billion into the renewable energy sector in 2014. That is nearly 1% of its GDP. It has committed to spend 25 times that amount over the next 15 years on clean energy. Both the US and Europe spent much smaller amounts ($38 and $58 billion respectively), even though their economies are much larger (the US figure is around 0.07% of its GDP). In dollar terms, the Chinese government also spent more on Green R&D than Europe or the US. [1] The scope for US and European governments to spend more on researching and help with developing green technology is huge. Yet in the UK the government has recently cut back its support for renewable energy, even though the UK’s need for renewable energy is urgent.

Climate change may be the most important example, but it is not alone. It is absurd that when the potential for technological change leads people to write about robots taking over, actual productivity growth is slowing everywhere. As an IMF report says, "innovation [is] highly dependent on government policies." I think Brad DeLong, in commenting on Eichengreen’s article, has it exactly right when he writes “it is long past time for a frontal intellectual assault on the[se] dangerous and destructive ideologies”.   

 

[1] If we include corporate R&D, Europe moves ahead of China in $ spend, but China is still ahead of the US.       

Is evidence based policy left wing?

The answer in principle is of course not. In practice, not so clear. This is something I talked about back in October 2013, and there are no signs that things are getting better. Alex Marsh makes the same point in the context of the latest budget. This antagonism to ‘unhelpful’ evidence is out there in plain sight for all to see in the UK government’s current attempt to deny academics in receipt of public funding the ability to talk about the policy implications of their work. I talked about this in terms of the misuse of the term ‘public money’ a few weeks ago, but it is also a pretty direct attempt to suppress unhelpful advice. (Note that ministers have the power under this proposed legislation to revoke this ban in individual cases, presumably when evidence is ‘helpful’ - to them.)

Of course we are not talking about a hostility to evidence based policy by everyone on the right on all occasions. In a THE article by Ben Goldacre, where he also highlights the dangers of the government’s proposed legislation, he details the extent to which he is talking to ministers about evidence based policy. But that interest does not seem to extend to big macro decisions. I was reminded in reading this about what I regard as a triumph of evidence based policy making in my own area: the UK Treasury analysis of Euro entry in 2003. (Disclaimer: my little contribution is the fourth one down in the picture of the reports.) Why didn’t this government do something similar for both the Scottish referendum and the EU referendum?

Everytime I mention the 2003 exercise someone responds that it was just a smokescreen for a power play between Brown and Blair. I think this is an overly cynical view, a view that evidence never changes anyone’s mind. Ramsden’s own view is that the civil service, using the evidence, “ultimately persuaded both the Chancellor and in particular the Prime Minister that it wasn't right to join." It was also the right decision. With both recent referendums we have seen proponents of change putting out documents suggesting that change will not be economically damaging, when most evidence shows pretty clearly that it will be. With the EU referendum in particular, would it not have been better if the government had asked the Treasury to do a similar exercise to 2003, using outside experts where appropriate to provide or validate the technical analysis?

Ben Goldacre’s piece reminded me of my own recent place on John McDonnell’s Economic Advisory Council (EAC). From Ben’s tweets I knew that he was not the greatest fan of this government, and in particular their current treatment of junior doctors, so I asked him whether he had received any negative comments from doctors or others about him giving advice to the government. I was not surprised to hear he had not. Who could object to him taking the opportunity to argue for better use of data and trials in medicine and elsewhere with people who just might do something about it?

It is a shame that some people did not take the same view when I agreed to be on the EAC. I would lose credibility as a macroeconomist, I was told. When McDonnell did his U-turn about supporting the fiscal charter, some suggested this reflected badly on me, even though he had turned in the direction I thought was correct! One charge in particular was levelled at the time. We were being used to make the leadership look respectable, but our advice would in practice be ignored. A couple of weeks ago Labour adopted a fiscal rule which is based on my own work with Jonathan Portes, and in particular by a presentation I made to the group. Mariana Mazzucato’s own work has also featured strongly in Labour party speeches, with good reason.

At the end of the day, policy makers need to look at evidence. If they do not we need strong mechanisms that allow them to be confronted by this evidence. Policy makers that make space for evidence and take decisions based on it need to be congratulated for this, rather than being told their efforts were just a smokescreen. They should be congratulated because letting evidence in often involves a risk: not just to the policy maker’s priors or preferences but also for scrutiny of past actions. Equally we should regard policymakers who knowingly ignore evidence with great suspicion, and those that try to deliberately keep evidence out of the public domain should be condemned.

The dead hand of austerity; left and right

Those who care to see know the real damage that austerity has had on people’s lives. From those needing care who now get so little, to those waiting longer for hospital treatment, and those whose homes might not have been flooded without the cuts from 2011. There is nothing unusual about the UK in this respect: austerity (cuts in spending that are either mistimed or unnecessary) causes harm, wherever it is imposed. But the political cost has also been huge.

This is true in the Eurozone, but in this post I want to focus on the UK. The cost on the left could not be greater. Austerity and the reaction to it were central to Labour losing the election. The Conservatives managed to pin the blame for Osborne’s austerity on Labour, and as the recent Beckett report acknowledges (rather tellingly): “Whether implicitly or explicitly (opinion and evidence differ somewhat), it was decided not to concentrate on countering the myth … ” It was also central in the revolution of the ranks that happened subsequently.

Austerity is a trap for the left as long as they refuse to challenge it. You cannot say that you will spend more doing worthwhile things, and when (inevitably) asked how you will pay for it try and change the subject. Voters may not be experts on economics, but they can sense weakness and vulnerability. If instead you restrict yourself to changes at the margin, you appear to be ‘just the same’.

I think many of those on the centre left still do not see this trap. There are some problems you cannot triangulate around, but have to tackle head on. Here is a recent example from Rachel Reeves. Much of what she proposes, when she talks about securing the necessary investment in flood defences for example, makes total sense, but it also tends to cost money. Rather than confront Osborne’s unnecessary cuts, she talks about a failure “to demonstrate that we understood that dealing with the deficit and controlling public spending are the precondition of effective progressive government.”

The urge to move on, and not talk about the dry subject of the public finances, is quite understandable and not confined to the parliamentary Labour party. Here is Mariana Mazzucato giving a brief summary of her excellent innovation agenda for Labour (or indeed any political party that is not hamstrung by a neoliberal romantic view that technical advance is all down to the entrepreneur and the state just gets in the way, a view completely destroyed by her excellent book). I was struck by the juxtaposition of the following two sentences:

“Likewise, it is time to move on from the debate over austerity to a new conversation about how to build smart, mutually beneficial public-private partnerships to fuel decades of growth.
For starters, we must invest in education, human capital, technology, and research.”

But of course it becomes so difficult to achieve that investment when the dead hand of austerity is demanding cuts from everything it touches.

That dead hand is not just left handed, but touches the reformist right just as it does the left. Some regard David Cameron’s speeches that talk about reducing the causes of poverty and social deprivation as just window dressing, but I agree with Raphael Bahr that these come from a genuine desire on his part to be remembered as a socially reforming prime minister. Yet as a result of austerity such speeches seem ridiculous now, and will only be disregarded by history: meaningless when set aside the reality of the poverty and harm caused by government actions. Here is a self explanatory chart from the IFS.

There were genuine hopes on all sides that Universal Credit (UC) might achieve the aim of simplifying the benefit system, and thereby reduce the number who fail to claim benefits they are entitled to and need. But as a result of austerity, and those cuts to tax credit that the Chancellor was forced to postpone, UC will now be seen as a way of cutting benefits and will be either extremely unpopular and/or be quickly killed. It would be useful to be able to assess what aspects of the health reform brought in by the coalition worked and which did not, but I suspect all that will be lost in the chaos caused by underfunding.

So the dead hand of austerity kills hope of reform from both left and right. The years of austerity will be seen as wasted years, when no new progress was achieved and plenty that had been achieved in the past setback. Recovery from recessions need not be like this, and indeed has not been like this in the past. They can be a time of renewal and reform: if not from a credit squeezed private sector then at least from government. And it could have been like that again, because there was absolutely no necessity to embark on austerity in the depth of a recession.

Those on the right may say well at least we are getting a smaller state. But attempts to force people to in effect spend less on health, education, justice and even a welfare state, are not durable for more than a decade or two. It will be a hollow victory.

In the US and most of Europe the obsession with austerity is coming to an end. It is still killing Greece and holding back Germany, but elsewhere deficit targets are either being achieved through growth or quietly ignored. Yet in the UK that dead hand continues, seen or unseen, to dominate policy and debate. And with its architect set to become Prince Minister and large parts of the opposition still too timid to challenge it, it looks like another five wasted years lie ahead for us.