Brexit and neoliberalism

In a recent post I talked about the “neoliberal fantasists who voted Leave”. Here is Ryan Bourne from the influential Institute of Economic Affairs. He notes that “the mood music from the post-referendum Conservative party — with former Remain backers in No 10 and the Home Office overcompensating with a caricatured view of what voters want — is not a good sign for the short-term”. But he still believes that Brexit can be transformed into some kind of neoliberal wet dream, with a bonfire of regulations and a unilateral abolition of UK tariffs on trade.

The economics of this was always fantasy, as John Van Reenen and colleagues painstakingly demonstrate here, but it also seems politically naive. After all the Leave campaign was a success largely because it promised to control immigration as a result of leaving the EU, controls which are distinctly anti-neoliberal. Controlling immigration is not a caricature of what the majority of Leave voters wanted, but instead what most were voting for. It does seem naive to believe that a government after Brexit would try and quietly forget about this, particularly when led by someone who had spent the previous 6 years trying and failing to control immigration. It also seems naive to imagine that this turn against neoliberalism would not go beyond immigration.

And yet, the ‘southern strategy’ was highly successful for the Republican party in the US. This combined an economic policy that favoured finance and corporates, increased inequality and free markets with an identity politics that appealed to race, religion and cultural identity. (I could perhaps add geographical identity here as well: see this article by David Wong.) Perhaps the UK party of the right could follow a similar course, using immigration as a substitute (and for some a proxy) for race, whilst pursuing an otherwise neoliberal agenda?

Is this what the Conservative party tried to do under Cameron and Osborne? Actually I think that is the wrong question, for reasons I will come to shortly. In terms of what the Coalition government actually did, Jonathan Portes summarises it thus:

“The promise to cut net migration to the “tens of thousands” was generally regarded by immigration policy experts as unachievable, or achievable only at an economic cost no sensible government was willing to pay. In practice, the latter course was never tested: resistance from within government from the Department of Business, supported to a greater or lesser extent by the Treasury, meant that even non-EU migration was only reduced very substantially for non-HE students; for most other routes it has stabilised. Non-EU net migration is currently about 150,000 a year, slightly higher than EU net migration

This does not mean the policy changes had no impact: the increase in the regulatory burden on business and the education sector has been substantial, and has certainly resulted in some reduction in skilled and student migration. The most damaging single decision was probably the closing of the Post-Study Work Route. However, overall, any economic damage was considerably mitigated.”

Of course that resistance from the Department of Business came from a Liberal Democrat, Vince Cable, and not a Conservative. Which leaves open the possibility that the economic damage from attempts to hit the immigration target might have been greater if just the Conservatives had been in power. So it is not clear that the Conservative focus on immigration was just so they could win elections with zero cost to their more neoliberal objectives. It still remains the case that, just as Trump exposed the flaw in the Republican’s southern strategy, so Brexit was the critical flaw in Cameron’s emphasis on the problem of immigration and his failure to meet his own targets.

I said it was the wrong question, because I think in this case it was not a political party that was calling the shots but a section of the print media: the right wing tabloids. As Andy Beckett writes in this comprehensive history of this part of the UK media:

“[Brexit] was an outcome for which the tabloids had campaigned doggedly for decades, but never more intensely – or with less factual scrupulousness – than this spring and summer, when the front pages of the Sun, Mail and Express bellowed for Brexit, talking up Britain’s prospects afterwards, in deafening unison, day after day. Two days before the referendum, the Sun gave over its first 10 pages to pro-Brexit coverage.”

And the principle means the tabloids used to obtain this result was the “endless xenophobic nudges of its immigration coverage.” Of course these newspapers will say they were just expressing their readers fears, but when they are reduced to making up stories to encourage this fear any claim to innocence becomes very hollow. Fueling anti-immigration feeling was their version of a southern strategy, and Brexit saw its culmination.

Having achieved this objective, will the tabloids start ignoring the immigration issue, enabling the greater immigration and zero tariffs that Mr. Bourne desires? Or will the influence of these tabloids, perhaps now greater than it has ever been, start to fade away? To the extent that these seem silly questions reveals the political naivety of the neoliberal Leavers. It is highly unlikely that Theresa May will become squeamish about damaging business through immigration controls to enable her to meet her immigration target. The best hope of those who do not want to go down this path is that, as Jonathan Portes expects, the Brexit vote itself starts to reduce the immigration numbers.

Brexit will also put other pressures on May which are likely to move her away from neoliberal policies, as the assurances given to Nissan indicate. As Bourne writes in a recent blog: “if this is a commitment to permanent or semi-permanent support to almost ‘make up for’ changed trade arrangements then it is hugely misguided.” Misguided it may be, but that is the direction the politics will push a Prime Minister determined to be seen as making a success of Brexit. Just as Republican’s have agonised over how to deal with Donald Trump, so it will become clear to UK neoliberals the damage to their cause that Brexit will generate.

The politicisation of truth

I showed some poll results yesterday suggesting that on Brexit the public trusted academics more than anyone except friends and family. Academic economists overwhelming think Brexit will be bad for the UK economy, and therefore bad for the average person’s prosperity. Ryan Bourne of the Institute of Economic Affairs (right wing think tank, second lowest level of funding openness) says the British people should not trust the academic consensus because of “the credibility of the individuals involved”.

He then gives some examples of where economists have have been wrong. I have dealt with many of these before, but Mr. Bourne goes further in a way that totally destroys his case. Here is the relevant paragraph.

“In fact, one would suspect George Osborne himself would be equally sceptical of consensuses given his own experience. For a recent Centre for Macroeconomics survey found that there was an overwhelming macroeconomic consensus, a full 81% surveyed, who thought his fiscal policy in the last parliament was bad for growth. The IMF, who the Chancellor now lauds as being a credible voice on Brexit, of course urged the Chancellor to soften his fiscal consolidation in 2013, with its economist Olivier Blanchard suggesting the Chancellor was ‘playing with fire’ if he did not ease up on deficit reduction, precisely at the time when the economy began to recover, despite the Chancellor not altering his discretionary fiscal plans.”

The impression you would get from that paragraph is that macroeconomic consensus about austerity was wrong. Here is my favourite chart, of UK GDP per head (logged).

Now explain to me how this data shows that 2010 austerity was good for the UK economy! Annual growth in every year from 2010 has been below the pre-crisis trend of two and a quarter per cent. Growth was highest in 2014, but that was still only 2%. UK recoveries in the past have involved above trend growth to return to a long run trend, but not this time.

I know you can try and explain this awful performance by other factors beside austerity, but that is not what Mr. Bourne tries to do. He just tries to pretend that it is obvious the consensus was wrong. He knows that in a world of politicised truth this kind of thing is possible.

Now you might think that the terrible performance of UK growth since the crisis is so obvious in the data it could not possibly be portrayed otherwise. In which case let’s go back to 1981, and the famous letter from 364 economists. It was an awfully confused letter, but at its heart was a criticism of the deflationary 1981 budget, and whether or not that budget was good for the economy is what the letter should be judged on. According to Mr. Bourne, the 1981 budget was “just about the time the economy began growing robustly.” So let’s look at the numbers from that period from the chart above

Growth in 1981 as a whole was -1%. Growth in 1982 as a whole was at trend at 2.2%. That is hardly a “robust recovery”. The quarterly growth numbers are erratic, but they show that a robust recovery (growth consistently above trend) only began at the end of 1982. I guess that accounts for the word ‘just’ in Mr. Bourne’s description quoted above!

So the deflationary budget of 1981 did appear to hold back the economy, delaying a recovery for another year or more. As Steve Nickell makes clear you needed growth above trend to stop the rise in unemployment. [1] Here is what happened to unemployment around 1981.

Unemployment stopped rising during 1984, three years after the 1981 budget.

On this basic point, the deflationary 1981 budget looks like it was bad for the economy, and the 364 appear to have been right. But that is not the received wisdom. As I noted yesterday (footnote 1) BBC journalists will happily state that the 364 were wrong as a simple fact. They do this because it has become a politicised fact: repeated as fact endlessly by those on the right. The Institute of Economic Affairs has done all it could to establish this as a politicised fact, including publishing a book in 2006 where all but one of the contributors agreed that the 364 were wrong.

This is what I mean by the politicisation of truth, and I can only thank Mr. Bourne for providing such a clear illustration of the process at work. And Mr. Bourne’s has the nerve to suggest that he has more credibility than the overwhelming majority of economists. Economists are certainly not infallible, but at least we as a collective do not attempt to distort what the data says.

 [1] Unemployment has declined rapidly since 2013 because UK productivity growth has been so bad, perhaps in turn because of a record and quite unexpected decline in real wages, something that did not happen in the 1980s.

Speak for yourself, or why anti-Keynesian views survive

“The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.”

Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark. Of course there is confirmation bias, and ideological bias, but as the term ‘bias’ suggests, it does not mean that evidence has no impact on the views of the majority of academics.

The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state.

It is also obviously false empirically. In the UK and US a large majority of economists appear to hold Keynesian views. I think it rather unlikely that a similar majority want a large state, and I can think of some notable Keynesians who clearly do not. Central bank models are typically Keynesian. Does that mean central banks want a larger state? No, it means the evidence suggests Keynesian economics works.

Russ Roberts says more recently:

“The evidence is a mess leaving each of us free to cherry-pick what sustains our worldview be it ideological or philosophical or just consistent with our flavor of economics.”

Ryan Bourne of the Institute of Economic Affairs goes further:

“when the facts change, the Keynesians don’t change their minds.”

To illustrate their belief that Keynesians ignore awkward facts both the authors above use the example of US growth following the 2013 sequester. (In my experience anti-Keynesians tend to shy away from data series, and especially econometrics, and prefer evidence of the ‘they said this, and it didn’t happen’ kind - particularly if ‘they’ happens to be Paul Krugman.) The problem is that this episode actually illustrates the opposite: that anti-Keynesians are so keen to grasp anything that appears to conflict with Keynesian ideas that they fail to do simple analysis and ignore others that do.

In this post I just looked at the data and did some simple arithmetic to show that this episode was quite consistent with Keynesian fiscal policy analysis. I’m sure others have done the same. But such analysis just gets ignored: they have a superficially good story, and that is all that matters. (Read this post to see how Scott Sumner in response to my work dug himself an even deeper hole.)

Why do we have to go over, yet again, that the clear majority of studies show that Obama’s stimulus worked. Why do we have to keep going over why UK growth in 2013 does not prove austerity works? Why do these people never mention the meta studies that confirm basic Keynesian analysis of fiscal policy? Because they want to believe that the “evidence is a mess” so they can carry on holding their anti-Keynesian views.

Parts of the political right have always had a deep ideological problem with Keynesian analysis. As Colander and Landreth describe, the first US Keynesian textbook was banned. New Classical economists, for all the many positive contributions they brought to macro (in the view of most mainstream Keynesians), also tried to overthrow Keynesian analysis and they failed. 

When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favour of Keynesian theory.

The wrong kind of political economy

Thanks to Google I get to see when someone writes about me, so I read an article by Ryan Bourne in CityAM. It basically says that while Keynesians keep saying that their models have been vindicated by the economic effects of austerity (but economists always disagree with each other blah blah), they have lost the political debate. In the case of the UK, even Labour is no longer Keynesian. While Labour are planning hardly any additional austerity, but the Conservatives are planning a lot, according to Mr. Bourne Labour are not justifying this less contractionary stance in Keynesian terms.

For the sake of argument, let us assume that Mr. Bourne is correct about Labour. We also need to ignore the SNP of course. Suppose Mr. Bourne is right that Keynesians have lost the political argument. This line is not new, with more authoritative newspapers having said similar things in the past. What should seem very strange is that Mr. Bourne and others do not appear to view this as a cause for concern.

It is a concern because Keynesian economics is taught to pretty well every student who ever studies economics anywhere in the world, and usually not as just one competing theory among many but as how the world works. Nor is it the case that academic macroeconomists are hopeless divided over the issue: a large majority on both sides of the Atlantic agree that fiscal austerity/stimulus reduces/enhances growth when monetary policy cannot offset its impact. Most major central banks use Keynesian theory as a basis for their monetary policy decisions. The reason for all this is that the evidence overwhelmingly backs Keynesian ideas, including that fiscal contraction tends to reduce output.

Given all this, if all three major UK political parties are ignoring Keynesian economics that would be a real worry. Now this might not worry Mr. Bourne if he was just one of these politicos for whom politics creates its own truth and that is all that matters. However he is in fact head of public policy at an outfit called the Institute of Economic Affairs. Perhaps, given the level of debate about fiscal policy in the media nowadays, that would be economic affairs of the more homely kind.

Silly questions or silly economics

On cue to confirm what I wrote yesterday, Ryan Bourne at the Institute of Economic Affairs complains about the BBC coupling the Telegraph business leaders story with the CFM economists survey. [1] Mr. Bourne’s main gripe is that the CFM question on austerity was silly. The question was “Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?”

Why was it silly? To quote: “the overwhelming majority of even supporters of austerity would disagree with the question, because in the short-term they would also believe that cutting spending and raising taxes would dampen growth. Indeed, the OBR and others factored this into their models. It is well known.” And later on: “these proponents of austerity were willing to make a trade-off: slightly slower growth today, in order to achieve other objectives.” [2] So they would be forced to disagree with the statement, even if they agreed with austerity. 

This tells us two things. First, it emphasises something I and others have occasionally said, which is how far austerity supporters have lost the intellectual debate. I remember not that long ago the arguments being about expansionary austerity, or how monetary policy could (would) offset any impact that fiscal policy might have on activity. Or it was about how we had to have austerity, because without it there would have been market panic. Apparently not - it was really all about current sacrifice for future gain.

Second, it illustrates the gulf between what most economists understand and mediamacro. In mediamacro, austerity was necessary because without it terrible things would happen (or at least there was a good chance of them happening). Not sometime in the future, but pretty soon. To quote the Prime Minister: “Britain was on the brink“. This of course is why some of the non-partisan media found the CFM survey interesting.

There is a huge amount in Mr. Bourne’s post that I could take issue with [3], but let me just focus on one point. He says: “Certain commentators are keen to claim that employment growth has only been strong because the productivity performance of the economy has been weak. This is an utterly bizarre claim.” He mentions this, of course, because the government is making great play over the number of jobs ‘they have created’.

To say that this is a bizarre claim is, frankly, bizarre? Let me explain why. No one disputes that our labour productivity performance over the last five years has been terrible. Here is a chart from the latest ONS release.

  

Note that a fall in productivity during a recession is not unusual. What is unusual is what has happened during the period of the coalition government. (See more on UK productivity from Ken Mayhew at the coalition economics site.)

Labour productivity is just output divided by employment (or hours worked). Why is stagnant productivity a problem? Because over the long term (across booms and recessions) the level of employment is essentially tied down by how many people want to work and how many hours they want to work, so productivity growth means output growth. Improving living standards depend on improving productivity. So if over the last four years we have lost productivity growth that we are not going to get back for some time, this will mean lower average UK prosperity.

Does this not also imply that had productivity growth been stronger over the last four years, output would have been higher and employment growth much the same? No, because coming out of a recession caused by a collapse in demand, most economists see output as being determined by aggregate demand: how much people want to spend, how much firms want to invest, and how internationally competitive UK firms are. That is exactly why austerity hurts output, a point which Mr. Bourne seems happy to concede. It therefore follows that if productivity growth had been stronger, output would have been much the same because aggregate demand would have been much the same, but employment growth would have been weaker. Over the last five years strong employment growth and weak productivity growth is much the same thing. Which is why celebrating strong employment growth is effectively celebrating poor productivity, which does seem silly.

[1] Mr. Bourne will have been pleased to note that, at least from what I saw, none of the evening news bulletins covered the CFM survey, while the business leaders’ letter retained its top spot. I’d love to know the reason for this change.

[2] Mr. Bourne gave three reasons why sacrifice now would lead to later gains: (a) lower borrowing costs, (b) preparing for the next recession, and (c) a smaller state increases productivity. As I have argued before, there is no evidence that at the beginning of 2010 interest rates on UK debt involved any noticeable default premium. I have discussed at length how we might be better prepared for the next recession, but strangely sacrificing large chunks of GDP today was not on my list. As for (c), look at the record on productivity.

[3] For example, the question Mr. Bourne would have rather seen is whether fiscal policy was the main cause of weak growth from 2010 to 2012, or whether external factors were more important? He does not say why this is a much better question. Of course the question Mr. Bourne would really like is why the economy did worse than the OBR expected, because the OBR were always expecting austerity to reduce growth. Personally I find questions like what impact did government policy have on the economy rather relevant, particularly coming up to an election.