The three mistakes of centrism

Paul Krugman quite rightly often complains about people he calls professional centrists, who always suggest there is a middle road between the ‘extreme’ views of Democrats or Republicans. He noted that such centrists always have to blame both sides, and would typically fail to note that although the Democrats have stayed pretty much in the centre of politics, the Republicans have been gradually moving further right.

Centrists of this type were quite rightly attacked during the height of austerity, because milder cuts were not the answer. In the UK the right answer was to have no cuts until the recovery was secure and interest rates were clear of their lower bound. The centrists at the time in the UK were the Labour party (too far, too fast) and that compromise policy not only missed the point but was also unpopular because it satisfied no one. It certainly didn’t satisfy Labour party members, which is why Labour are now led by Corbyn.

But doesn’t Corbyn’s victory mean that the UK today needs centrists, because we have not just got a Conservative government which has morphed into UKIP but also an opposition led by the hard left. Here is Philip Stephens attacking the Labour leadership peddling snake oil populism of the left variety. If you search my blog you will see that I normally think Stephens gets things right, but I think there are three major problems with this diagnosis of where we are.

The first mistake is a variety of the failure I talked about above, which is to fail to see how the political landscape has changed. Here is the first paragraph from Stephens' article.

“John McDonnell has a plan. The Labour party’s would-be chancellor prefers Marx to markets. So he intends to nationalise the energy, water and railway industries, impose big tax rises on businesses and wealthy individuals, shackle the banks, and pump up public spending and borrowing. The organising goal, he told the Financial Times in a revealing interview, is “an irreversible shift in the balance of power and wealth in favour of working people”.”

If you think this is damning stuff, look at the detail. Nationalisation - just returning some industries to public ownership, much as they are in many European countries. Taxes on business - just reversing cuts to corporation tax made by George Osborne since 2011. Higher taxes on the wealthy will only begin to reverse inequality at the top that began growing in the 80s. Shackle the banks? - about time too. Pump up spending and borrowing - in reality just borrowing to invest, with current spending held by a fiscal rule which, outwith a liquidity trap recession, is not very different from the rule of the Coalition government of 2010. The killer line about an irreversible shift in power - from Harold Wilson’s 1974 manifesto (HT George Eaton).

So Stephens is wrong to say this is another 1983 suicide note. McDonnell might prefer Marx to markets, but Labour’s 2017 manifesto gives us a world that if it had been proposed to Harold Wilson he would have thrown it out as involving too much privatisation and too many tax cuts for the rich. Labour’s manifesto is just a modest reversal of some of the things that have happened since Thatcher introduced us to neoliberalism.

But why wasn’t the 2017 manifesto like 1983, given the current Labour leadership? The answer leads us to the second mistake many centrists make: to imagine that any leader from the hard left can impose their will on a soft left parliamentary party. Stephens mentions this, but it is far more central than he suggests. Labour will be extremely lucky to get an overall majority at the next election, and even if they do there are plenty of MPs that will happily vote against their government the moment that Corbyn and McDonnell overstep the centre left mark. Give them 20 years and it is possible to imagine that they might be able to create a PLP more in their image, but they do not have 20 years and those who follow will be from a different generation with different reference points.

There is a third mistake which is in some ways the most important. I cannot beat Anthony Barnett’s way of expressing it: if all you want to do is stop Brexit and Trump and go back to what you regard as normal, you miss that what was normal led to Brexit and Trump. It all goes back to austerity. Even if you like aspects of neoliberalism, as centrists surely do, what happened with austerity and the scapegoating of immigrants is what I describe as neoliberal overreach. It was overreach not just because it was wrong and immensely destructive, but it laid the grounds for Brexit.

None of that happened by accident. Austerity might, just possibly, have started as pure political opportunism, but the fact that it was sustained despite all the harm it was doing suggests a deep malaise on the political right. No one can doubt this following Brexit. A party that can produce Prime Ministers as incompetent as first Cameron and then May, and can pursue without any real revolt a hard Brexit policy, is seriously sick and needs a long period of intensive care. The kind of care that you can only get with many years in opposition.

But that is only half the story of why Brexit happened. The other half is obvious, yet so many centrists seem to wish to ignore it. Brexit was brought to us by a right wing press that has become a propaganda vehicle for a few wealthy press barons. Britain has become a worse country because of this right wing press, which when it is not demonizing the EU and Remainers it is doing the same to immigrants and those it calls scroungers. It should be no surprise that newspapers that can show so little regard for truth and humanity would give us something like Brexit, and they will go on giving unless something changes.

A government of centrists will only take us back to where we were before all this kicked off in 2010. We need to do better than go back to the normal that gave us austerity and Brexit. We need a radical government that can begin the process of reforming our economy so that it works for all working people, that can tackle extreme inequality at the top and reform the press so that it is not a mouthpiece for a wealthy few. A government led from the left are our only real hope of achieving that. Centrists will be an important voice during that government, but they must not stop us ensuring the likes of austerity and Brexit will not happen again.

Economists: too much ideology, too little craft

Paul Krugman argued yesterday that the belief in the need for new economic thinking after the financial crisis was incorrect, but led to some crazy but influential ideas that suited big money and the political right. While I agree with a lot of what Paul says, I would want to add something. These thoughts are strongly influenced by the fact that I’m in the middle of reading Dani Rodrik’s new book, called ‘Straight Talk on Trade’ (of which hopefully more in a later post).

In the preface to that book he tells the story of how 20 odd years ago he asked an economist to endorse a previous book of his called ‘Has Globalisation Gone Too Far?’. The economist said he couldn’t, not because he disagreed with anything in the book, but because he thought the book would “provide ammunition to the barbarians”. Dani Rodrik argues that this attitude is still commonplace. That attitude is, of course, both very political and very unscientific.

I suspect that something similar might have been going on before the financial crisis among economists working in finance. Paul Krugman is certainly correct that mainstream economics contained models that could explain much of why the GFC happened, so little new thinking was required in that sense. But one reason why so few mainstream economists used those models before the event owed at least something to an ideological aversion to regulation, and perhaps also not wanting to bite the hand that feeds you.

One of the features of mainstream economics today is the huge diversity of models that are around. Academic prestige tends to come to those who add to that number. But how do you decide which model to use when investigating a particular problem? The answer is by looking at evidence about applicability. That is not a trivial task because of the probabilistic and diverse nature of economic evidence, and Dani Rodrik describes that process as more of a craft than a science.

So, in the case of the GFC, good craft was in seeing that new methods of spreading risk were vulnerable to system wide events. Good craft was to see, if you had access to the data, that rapid increases in bank leverage should always be a concern. And more generally that arguments that ‘this time was different’ do not generally end well.

In my own discipline, I can think at least one area that should not have got off the ground if the craft of model selection had been applied well. RBC models were never going to describe business cycles because we know increases in unemployment in a downturn are involuntary. If you do not apply the craft well, then what can replace it is ideology, politics or simple groupthink. This is not just an issue for some individual economists, but can sometimes be a concern for the majority.

The politics of lying

When people say ‘all politicians lie’, they cannot seriously mean they all hold to the same standards of veracity as Donald Trump. But how do you measure degrees of lying in politics?

Paul Krugman suggests that the Republican party’s problems began when they started pushing the idea that tax cuts pay for themselves. The notion that cutting taxes will bring in more rather than less tax revenue is a theoretical possibility but has been shown by study after study to be empirically false. But why was this lie worse than others?

I would suggest the following. The lie became (and continues to be) a major plank of Republican policy. We are not talking about being economical with the truth with statistics to present a party’s policies in a more favourable light. This lie was ultimately an attempt to legitimise cutting taxes on the very rich, and reducing the size of the state (because when the tax cuts did not pay for themselves the next step was to cut spending to control the deficit). It was a lie that went completely against expert opinion, and was at the heart of Republican economic strategy.

Lying in this fundamental way distorts the whole direction of political activity. It and its supporters begin to focus on ways to hide the truth. It means setting up think tanks whose aim is not just to push the party line, but also to provide a counter-weight to, and therefore neutralise the power of, real expertise. Such think tanks involve an element of ‘pay us your money and we will push your interests’, which is why right wing think tanks are the least transparent about their funding. It also means using partisan media outlets to present an alternative reality to voters.

If you can get away with this, then why stop at one crucial lie. Politics becomes about choosing the lies they can get away with that will promote their cause. It is about what lies sound plausible to particular voters, or what lies a partisan press can reliably sustain by selecting evidence to support them. Lines between politics and journalism in partisan outlets become blurred.

We see the politics of lying all the time in totalitarian regimes, or regimes that control much of the mean of information. What I think has surprised many is that two nations that pride themselves on their democratic traditions and independent media can reach a point where the leader and ruling party of one lies all the time, and the other undertakes a huge constitutional change on the basis of a campaign where one side lied with impunity. The Brexit campaign did not lie for the fun of it, but because it would gain them votes, and what evidence we have suggests their lies were believed.

It is not hard to understand why these two longstanding democracies succumbed so easily to the politics of lying. First, they tolerated the growth of a partisan media that danced to whatever tune their owners played. Second, the remaining non-partisan media placed even-handedness between each side, the political horse race and entertainment above informing the public and telling the truth. The Clinton email controversy illustrated clearly a failure to apply any notion of balance. Calling the £350 million a week figure ‘contested’ was literally being economical with the truth. The BBC’s mission to “inform, educate and entertain” has a secret caveat: informing and educating does not include anything deemed political.

What I find surprising is not just that this happened, but that the non-partisan broadcast media has so little interest in doing anything about it. In the US, when Trump complained about his coverage, CNN hired someone nominated by Trump. In the UK the BBC sees no evil, and bats away letters from the Royal Economic Society about its Brexit coverage as just one more irritating complainant. Understandable given business models and constant attacks on Fake News/Liberal bias by the political right, but it means both countries remain wide open to the politics of lying.

Longer read on similar themes: Post-truth and propaganda

Was Neoliberal Overreach Inevitable?

In June 2017 a member of the hard left of the Labour party, reviled by the right and centre for his association with left wing leaders and movements around the world and for his anti-nuclear views, in a few short weeks went from one of the most unpopular party leaders ever to achieving the highest vote share for his party since Tony Blair was leader. While this unexpected turn of events was in part the result of mistakes by, and inadequacies of, the Conservative Prime Minister, there is no doubt that many Labour voters were attracted by a programme that unashamedly increased the size of the state.

Contrast this with the United States. A Republican congress seems intent on passing into law a bill that combines taking away health insurance from a large number of citizens with tax cuts for the very rich. Let me quote a series of tweets from Paul Krugman:

“The thing I keep returning to on the Senate bill is the contrast between the intense hardship it imposes and the triviality of the gains. Losing health insurance -- especially if you're older, low-income, and unhealthy, which are precisely the people hit -- is a nightmare. And more than 20 million would face that nightmare. Meanwhile, the top 1% gets a tax cut. That cut is a lot of money, but because the 1% are already rich, it raises their after-tax income only 2 percent -- hardly life-changing. So vast suffering imposed to hand the rich a favor they'll barely even notice. How do we make sense of this, politically or morally?”

Or to put it another way, 200,000 more deaths over the next ten years for a marginal increase in the after tax income of the 1%. This is no anachronism created by a Trump presidency, but an inevitable consequence of Republican control of Congress and the White House.

Although these two events appear to be in complete contrast, I think they are part of (in the US) and a consequence of (in the UK) a common process, which I will call neoliberal overreach. [1] Why neoliberal? Why overreach? Neoliberal is the easy part. Although some people get hung up on the word, I use it simply to refer to the set of ideas associated with Ronald Reagan and Margaret Thatcher in the 1980s. That includes the goal of reducing the role of the state in many areas of society, including its role in either replacing or regulating markets and taxing individuals (see Kansas), particularly reducing taxes for the well off.

Overreach is more contentious. I use the term because I think, in the UK at least, the period from the 1990s until the global financial crisis could be described as a stable neoliberal hegemony. By this I mean that governments largely accepted the transformations that took place in the 1980s, even when Labour or Democrats were in power. Of course changes did occur. In the UK Labour were prepared to involve the state in alleviating poverty in ways that Thatcher never contemplated, but Labour’s concern did not extend to the other end of the income distribution, and the income share of the 1% continued to rise. They were prepared to see an expansion in the size of the state to meet a natural increase in the demand for health, but they also experimented with bringing in market elements into state provision. However none of these changes compared in size to what went before or came afterwards. (As Tom Clark argues, Labour did not change the [essentially neoliberal] political discourse.)

This period was also characterised in the UK and US by macroeconomic stability: inflation had been contained, perhaps through the delegation of monetary policy to central banks, and growth remained strong such that the high levels of unemployment seen in the 1980s gradually disappeared. This was the ‘great moderation’.

It was undone by a major flaw in the neoliberal project: the self-destructive nature of an unregulated financial sector. The reaction to that, if the left had remained in power, might have been greater controls on finance and perhaps some attempt to reduce inequality (as the two are related). But the left lost power, and we got what I call neoliberal overreach.

Neoliberal deceit in the UK

By 2008 the conversion of the right in the UK to neoliberal ideas was largely complete. This meant that they were determined to continue where Thatcher had left off. But they faced what appeared to be an insurmountable problem: voters wanted the NHS (and other public services) and they wanted more of it partly because they were getting older and wealthier. The recession gave the right the opportunity to continue the neoliberal project by deceit, using two mechanisms.

The first was austerity, which I have talked about many times, but alas what I and other macroeconomists say has so far reached only a small minority (a minority which, importantly, includes the Labour party). What I call deficit deceit was the pretence that we needed above all else to cut spending (that would reduce the size of the state) because otherwise the markets would not buy the government’s debt. There was never any real evidence to back this story up, and plenty to suggest it was nonsense. The fevered imagination of some market participants who turned out to be wrong does not count as evidence. But the politics to make deficit deceit possible was all there: a recent financial crisis, consumers cutting back on debt themselves, a Treasury worried as Treasuries do, a central bank head who acted as central bank heads often do, and a Eurozone crisis that mediamacro made no attempt to understand.

The second deceit was immigration. Elements in society are apt to blame immigrants at a time of rising unemployment and falling real wages, and terrorism gave this an extra twist. The right and their supporters in the press had decided before the crisis that they could exploit fears over immigration to their advantage, and after the recession this became a more powerful weapon. They talked about how immigration was responsible for reduced access to public services and falling real wages, and they promised to bring levels of immigration down. It was deceit because those in charge knew full well that immigration benefited the economy in various ways and as a result they had no intention of really controlling it. But, as with austerity, the deceit worked: so much so that an already weak opposition appeared not to know how to respond.

Some may disapprove of the language I use here. Should a normally sober Oxford macroeconomist talk about political parties deliberately deceiving the electorate? It is not a view I have adopted lightly, but when a Chancellor repeatedly argues that public spending must be cut to meet deficit targets at the same time as reducing inheritance or corporation tax, or a Prime Minister continually repeats the lie that immigration reduces access to public services, what other conclusion can you come to? They could get away with this deceit because academic economists (the majority of whom know that austerity would reduce output, and that immigration improves the public finances) are largely ignored by the media.

Austerity and the deceit required to achieve it was neoliberal overreach in the UK. Austerity quickly became a disaster because it was done at just the wrong time, when monetary policy was unable to offset its effects. That hurt the economy a lot. Whether GDP was reduced by a few percentage points temporarily or permanently we may never know for sure. But for the political reasons I have already outlined, combined with feeble opposition, the Conservatives got away with it sufficiently to win a general election in 2015.

Populism and anti-neoliberalism

The deceit over immigration was also key to a second disaster: the vote to leave the EU. Although the case to Remain in the EU was led by the Prime Minister and Chancellor, neither could combat anti-immigration rhetoric with a positive case because of their earlier deception. For this reason alone you could also label Brexit as a consequence of neoliberal overreach. More importantly, factions on the right that actively campaigned for Brexit did so in part because they believed they could only achieve their regulation free neoliberal nirvana by doing so.

As Jan-Werner Müller writes

“The image of an irresistible populist “wave” was always misleading. Farage did not bring about Brexit all by himself. He needed the help of established Conservatives such as Boris Johnson and Michael Gove (both now serve in Prime Minister Theresa May’s post-election cabinet). Likewise Trump was not elected as the candidate of a grassroots protest movement of the white working class; he represented a very established party and received the blessing of Republican heavyweights such as Rudy Giuliani and Newt Gingrich.”

It would be wrong to say that Brexit or Trump represent an evolution of neoliberalism. Both promote strong restrictions to trade, and so it would be more accurate to view Brexit as a split within neoliberalism. [2] What is clearer to me is that populism is a consequence of neoliberalism as reflected in the policies of the political right. In the UK immigration was used as a scapegoat for the impact of austerity, which fuelled the Brexit vote. In the US one of the first acts of Reagan was to repeal the Fairness Doctrine, which led eventually to the precursor and cheerleaders for Trump: talk radio and Fox news. In addition neoliberalism demonises any kind of regional or industrial strategy designed to alleviate the impact of globalisation.

Why was it Corbyn who led the revolt against austerity in 2017 rather than Miliband in 2015? One obvious explanation is that the more ‘moderate’ left in both the UK, much of Europe and the Democratic establishment in the US had become compromised by neoliberal hegemony. Instead it required those who had stayed faithful to socialist ideas together with the young who had not witnessed the defeats of the 1980s to mount an effective opposition to austerity and perhaps neoliberalism more generally. [***]

I am less familiar with the details of US politics, which are clearly different in some ways from the UK. The way the Republican party has co-opted both race and culture to their cause is different and clearly crucial. But there are plenty of similarities as well. Both countries have had austerity combined with tax cuts for the rich. Both countries have a right wing media which politicians can no longer control, leading to Brexit and Trump respectively. Bernie Sanders, like Corbyn, came from nowhere preaching socialism, but unlike the UK the established Democratic party halted his rise to power.

Was Overreach Inevitable

I’m not going to speculate whether and by how much this neoliberal overreach will prove fatal: whether Corbyn’s ‘glorious defeat’ marks the ‘death throes of neoliberalism’ or something more modest. Instead I want to ask whether overreach was inevitable, and if so why. Many in the centre ground of politics would argue that it would have been perfectly feasible, after the financial crisis, to change neoliberalism in some areas but maintain it in others. It is conceivable that this is where we will end up. But when you add up what ‘some areas’ would amount to, it becomes clear that it would be hard to label the subsequent regime neoliberal.

I think it is quite possible to imagine reforming finance in a way that allows neoliberalism to function elsewhere. Whether it is politically possible without additional reforms I will come to. If we think about populism, one key economic force behind its rise has been globalisation (see Dani Rodrik here for example). If we want to retain the benefits of globalisation, then counteracting its negative impact on some groups or communities becomes essential. Whether that involves the state directly, or indirectly through an industrial strategy, neither of those solutions is neoliberal.

Then consider inequality. I would argue that inequality, and more specifically the extreme wealth of a small number of individuals, has played an important role in both neoliberal overreach (in the US, the obsession within the Republican party with tax cuts for the wealthy) and populism (the financing of the Brexit campaign, Trump himself). More generally, extreme wealth disparities fuel political corruption. Yet ‘freeing’ ‘wealth creators’ of the ‘burden’ of taxation is central to neoliberalism: just look at how the loaded language in this sentence has become commonplace.

Indeed it could well be that gross inequality at the very top is an important dynamic created by neoliberalism. Piketty, Saez and Stantcheva have shown (paper) how reductions in top rates of tax - a hallmark of neoliberalism in the 1980s - may itself have encouraged rent seeking by CEOs which makes inequality even worse. Rent extractors naturally seek political defences to preserve their wealth, and the mechanisms that sets in place may not embody any sense of morality, leading to the grotesque spectacle of Republican lawmakers depriving huge numbers of health insurance to be able to cut taxes for those at the top. It may also explain why the controls on finance actually implemented have been so modest, and in the US so fragile.

The other key dynamic in neoliberal overreach has to be the ideology itself. In the UK surveys suggest that fewer than 10% of the population favour cutting taxes and government spending to achieve a smaller state (see my next post). There is equally no appetite to privatise key state functions: indeed renationalisation of some industries is quite popular. Yet the need to reduce the size and scope of the state has become embedded in the political right. Given that, it is not hard to understand the motivation behind the twin deceits of austerity and immigration control by Conservative led governments.

The dynamic consequences of extreme inequality and an unpopular ideology both suggest that neoliberal overreach may not be a bug but a feature.

[1] Reasons why this discussion might focus on the US and UK are discussed here.

[2] Among those who voted for Brexit, the two main groups were social conservatives who had a social rather than economic fear of immigration and the left behind who were deceived into thinking it was the EU and immigration that was behind their plight rather than neoliberalism itself. Liberal leavers may amount to little more than a few MPs and small businesses. Even among Conservative MPs, it is not clear that neoliberalism was the key factor in determining their position on Brexit.

***Postscript 06/07/17  It came out after I had written this post, but this article by William Davies expresses much better what I was trying to say in this paragraph.  

Kocherlakota’s argument for fiscal expansion in the US

Is there a macroeconomic case for tax cuts in the United States right now? Paul Krugman and I say no, using the following logic. The Fed thinks we are close to full employment, if we use the term to denote the level of employment that keeps inflation constant. Generalised tax cuts (rather than just tax cuts to the very rich) will tend to raise aggregate demand, which will lead inflation to increase. The Fed will therefore raise interest raise rates further to offset this increase in demand before it happens. As a result, the tax cuts will have no impact on demand, but simply make funding investment more expense.

There are clear grounds for saying that the Fed is wrong about the economy being close to full employment, and therefore any increase in aggregate demand from any source would not raise inflation. But a central bank that acts in the textbook manner will not wait for the higher inflation to materialise, but will anticipate it because it takes time for interest rates to influence demand and inflation. As a result, tax cuts will lead to higher interest rates and there will be no net impact on demand.

Narayana Kocherlakota, who used to be on the committee that sets US interest rates, presents another possible reason why an increase in demand will not raise inflation. He argues that aggregate supply has been suppressed by low demand, and that rising demand might itself stimulate supply. For example, a lot of technical innovations might have been shelved while demand was depressed, but would be brought into production if demand looked like expanding rapidly. As these technical innovations would expand the capacity of firms to produce more, they would not raise prices as a result of any increase in demand. As these innovations would produce more from the existing labour force, there would be no inflation pressure coming from wages either.

If this sounds like wishful thinking, remember than the US economy, like most, is still way below the level of output that pre-recession trends would have suggested were likely. Did research into new and better production techniques really slow down substantially during the recession years, or did the research still take place to be implemented at some later date?

Even if this argument is plausible, and I think it is, it would still be irrelevant if the Fed didn’t make any allowance for it. They would still believe that tax cuts would raise demand and inflation, and so they would raise interest rates and crowd out any increase in demand. Indeed, if the Fed believed this ‘endogenous supply’ argument, they surely wouldn’t have raised rates in 2016.

What Kocherlakota wants the Fed to do is follow an approach put forward by Federal Reserve Bank of Chicago President Charles Evans. He puts the case in this speech. Essentially the Fed should depart from the usual policy approach of targeting expected inflation, and wait for inflation to actually rise above target before it raises rates. This would mean that it ignored any fiscal stimulus (whether it be tax cuts or additional public investment), and focused simply on the actual inflation rate. If we were in fact below full employment, or if demand created its own supply, the fiscal expansion would raise output and welfare.

An important point that Kocherlakota makes, and I have made in the past, is that you do not need to believe with certainty that we are below full employment or that demand will create its own supply. All you have to do is give it some significant probability of being true. You then look at the costs and benefits of pursuing an Evans type monetary policy weighted by this probability. A key point here is that the costs of a short term overshoot of the 2% target are likely to be a lot smaller than the cost of missing out on a percent or two of national output for potentially some time.

Does this change my views on a prospective Trump stimulus package? Not really. There is a very strong case for more public sector investment on numerous grounds. But that investment should go to where it is most needed and where it will be of most social benefit, and I think it is very unlikely (along with I suspect most economists) that a Trump Presidency and a Republican House can deliver that. That extra public investment will give the economy the stimulus that could work with an Evans type monetary policy. From a macroeconomic viewpoint there seems no point in doubling up on stimulus through tax cuts, and in terms of how the Fed reacts it may even be counterproductive.

The public analyst in crazy times

My eldest granddaughter about a year ago went through that stage where she was always asking why. Now her favourite question is ‘what’s happening’. I thought of this when listening to this talk by Paul Krugman, titled ‘public discourse in a time of crazy’. Paul asks how should people who deal with facts and rational argument cope with a post-Trump world where those running the show appear to attach no positive value to either. [1]

While he says himself he is still adjusting to this new world, Paul suggests in this lecture that there are three paths which should be avoided. He calls them appeasement, emulation and quietism. The last is actually a real word, I discovered, and it means a “calm acceptance of things as they are without attempts to resist or change them”, a kind of retreat. I suspect it is the only one of the three that could tempt Paul himself.

It seems to me that appeasement is a good way to describe what has been happening to the UK’s parliamentary Labour party for perhaps a decade. First we had austerity, which began to be appeased in an apparently mild way while Darling was Chancellor, became stronger with ‘too much, too fast’, and ended up with some arguing after 2015 that austerity was the way forward. We are now seeing the same with immigration. What starts as the innocent ‘recognising people’s anxieties’ has now become ‘well at least Brexit allows us to control immigration’.

Appeasement is wrong for many reasons, not least because it is a terrible political strategy. If you no longer appear to champion anyone’s cause, but instead just become the ‘lite’ party (Brexit-lite, immigration-lite), you stop getting votes. Partly because people can vote for the 'real thing' (non-lite), and partly because you are not credible. This has got nothing to do with moving too far to the left or right, or Corbyn’s original [2] election: just look at Andy Burnham.

Emulation is to attempt to outdo Trump or Brexit in their own world of meaningless phrases and downright lies. But that is not a world that Paul Krugman (or myself) could live in. The scientific method is too deep in our bones to make this possible. We are not about the write posts which have the subtitle “a response to justified criticism’.

How does any of this relate to my granddaughter? The reason is that I think the premise for Paul’s talk is not real. There is no puzzle about what people like him should do now. We do what we have always done: ask what is happening and why. We put forward plans for what should happen once these dark times are over, plans that come from good explanations of the what and the why. When Paul talks about Appeasement and Emulation, he is really talking about what opposition politicians and their advisers should not do.

What people who analyse the evidence and ideas lose when Trump becomes President is any sense that we are participating in a conversation, a public discourse, that includes people who have power. Even those politicians who are in opposition cannot really listen because they will have their hands full limiting damage. Or in the UK case, they are too busy fighting each other.

2016 has not seen a sudden transition to this world, but more the blocking out of the remaining lights that pierced this post-truth darkness. We have effectively had a Republican Congress at constant war with a Democrat White House since 2011, and that Republican Congress increasingly under the control of the Tea Party and Fox News. The UK and Eurozone have been dominated by completely unnecessary austerity since 2010. As I used to say about austerity around 2012 or 2013, we had won the intellectual debate but the world went on as if we had lost.

I was thinking along these lines after talking to the Treasury Select Committee on Tuesday. I wrote a post just before I went, on why the OBR was perhaps being too optimistic about Brexit. Yet when I offered to explain the reasons for this to the Committee, no one seemed to want to hear. Politicians want to make the most of Brexit, when in reality all they can do is limit the damage. Politicians want to recognise people’s anxieties about immigration, when really they have to tell people that they are wrong: not about their grievances, but their belief that this has much to do with immigration.

We can, and should, continue to rage against the dying of the light. What is difficult, in this time of crazy, is being able to put that rage aside, and engage in a form of quietism, a retreat from the here and now of political discourse. Not a retreat into any kind of acceptance of where we now are, but instead into asking what and why, and from the answers to those questions to planning for the time when facts get back into fashion. But more than that. Using the answers to the what and why to prevent us lapsing back into our current post-truth world.

[1] Of course politics has always been driven by ideology as well as evidence, but there is a critical difference between wanting to find evidence to back your ideology, and not caring about evidence at all. We seem to have moved from the former to the latter in recent years. This is related to Frankfurt’s concept of political bullshit.

[2] I say ‘original’ here deliberately of course. Whatever his motives, Owen Smith did see why it was important to champion the anti-Brexit cause.

Brexit and Sterling

Is the Brexit induced decline in Sterling a blessing in disguise? So argues Ashoka Mody, and to a lesser extent Paul Krugman. Their basic argument is that Brexit will hit the City, and it is the City that has created an unbalanced economy and an overvalued currency. Reducing the size of the financial sector is a necessary condition to rebalancing the economy, and Brexit can achieve this.

Ashoka Mody’s disdain for the City is absolutely clear. He writes: “The banking-property complex has been a parasite on the British economy, creating pathologies of financial vulnerability and exchange rate overvaluation.” We can see the overvaluation in the large UK current account deficit. Paul Krugman is less pejorative. The City is just an important UK exporter that Brexit will cut down to size, so we will need to make other UK exporters more competitive to fill the gap.

Neither author disagrees that, because the depreciation of Sterling will raise import prices (in economic speak it will lead to a deterioration in the terms of trade), people in the UK will be poorer. But there is also a difference in mechanisms between the two authors, which has implications for how you view this effect. For Mody the City has caused Sterling to be temporarily overvalued as a result of a “finance-property bubble”. As this is a temporary effect (bubble), sterling was bound to fall at some point anyway. As a result, Brexit has only brought forward the day that UK citizens became poorer.

Krugman on the other hand does not argue that sterling was overvalued in this sense: the City is just an important export industry that will particularly suffer from Brexit. As a result, Brexit does make the average citizen poorer permanently. But he notes that, to the extent that this depreciation also results in a redistribution from the City to more dispersed manufacturing, it might benefit some of the parts of the UK that heavily voted for Brexit.

There is nothing wrong with the logic of both arguments, as you would expect given the authors. The key question is whether they are empirically appropriate in this case. I have argued, prior to Brexit, that Sterling was overvalued, and it also seems that the IMF agrees as well. The key issue is why it was overvalued. If the reason for the overvaluation was something Brexit has ‘cured’, then Brexit has indeed ended that overvaluation. If Brexit has not taken away the reason for overvaluation, then the correction to that overvaluation has still to come.

Paul Krugman’s logic is closer to the one I have also used in arguing that the Brexit depreciation is a result of Brexit making it more difficult for UK industry to export. The twist Paul applies is a distributional one: rather than Brexit making it more difficult to export across the board, it hits one particular industry, allowing other industries to grow. Once again the key issue is whether Brexit does have this distributional effect, hitting the City harder than UK manufacturing.

Suppose there is something in what both authors suggest. I would make a very basic point. If we wanted to cut the City down to size, we didn’t have to achieve this using Brexit. We could instead have imposed much stronger regulations on the UK financial sector (basically higher capital requirements), and watch some of the industry leave in disgust. That way we would have avoided all the additional costs that Brexit will impose (recently restated by the Treasury, but only now considered ‘news’ by the Times), and with the additional benefit of having a financial sector that was not too big to fail. My fear is that after Brexit the opposite will happen: policymakers will go even easier on City regulation in an effort to make up for the damage Brexit will do. So I’m still finding it hard to see any silver lining in the Brexit decision.