Different kinds of fiscal stimulus

Newspaper day. In the Guardian I have a piece that looks at how we should regard any tax cuts that Boris Johnson may announce as part of the forthcoming election. And make no mistake tax cuts are coming (we already know they intend to cut the tax on petrol), because the spending review signalled that the governments rule will change, as Chris Giles discusses in a good article in today’s FT in which I among other economists are quoted. .

In the Guardian piece I argue that tax cuts are a bad idea because in the context of us leaving the EU they will almost certainly produce unsustainable increases in the deficit without much of a compensation in higher output. As I say in the Giles FT article, policies that if unchanged would lead to steady and permanent increases in debt to GDP are not a good idea. That in turn will mean that at some stage either taxes will have to rise or we will be back to austerity.

But why did I also imply that Wednesday’s spending review was to be welcomed? Are not spending increases and tax cuts not two sides of the same fiscal stimulus coin? There is the obvious point that in many areas public spending cuts have gone way too far. But there is a macroeconomic point as well. Spending increases directly raise aggregate demand by the same amount. Things like income tax cuts, particularly if they go to the better off, are largely saved. (A number of around a third is commonly found in empirically studies for the amount actually spent.) So you get less demand stimulus for your money.

According to calculations done in a separate article by the Financial Times, Labour’s likely plans will also raise the ratio of debt to GDP. But if you look beyond the ‘scare’ headline, the reasons are quite different. Labour will still meet its fiscal rule for current spending, but the amount of investment planned could lead to the ‘falling debt to trend GDP’ part of the rule being breached. These calculations need to be taken with a pinch of salt, because they assume the additional investment produces no increase in GDP, and therefore no higher tax take. Even the IFS when they evaluated Labour’s election plans in 2017 allowed additional public investment to boost GDP. Which is just one reason why the FT’s analysis annoyed the large number of economists, including me, who signed this letter published in the FT today.

I didn’t like the FT write up for another reason. It seemed to be designed simply to be one more fiscal scare story. If I had been writing this I would have asked whether, if the policy did in fact break the debt to trend GDP part of the rule because of more public investment, that part of the rule made sense. A company increasing investment would happily increase its debt to sales ratio if it did a lot of investment, as would an individual increase their debt to income ratio when buying a house. Perhaps that part of Labour’s fiscal rule is a hangover from the days when mediamacro thought government borrowing was a bad thing, even when it was additional investment?

That is the key difference between Labour and the Conservative policies. If the debt to GDP ratio rises because of supposedly permanent tax cuts, that leads to steadily increasing debt to GDP and so cannot be sustained. Running public investment at high levels because you are restoring the public capital stock and as part of a Green New Deal may be prolonged but it is not permanent, and temporary increases in debt to GDP to finance investment make sense.

Islamophobia and Antisemitism: a case study in BBC bias

In March and April, there was constant BBC coverage of Labour’s problems with antisemitism. One piece, in March, talked about a ‘saga’. I have no general problem with this coverage. Labour does have a problem, so it should be covered by the BBC. However there has been far less coverage of the problems the Conservative party has with Islamophobia. Is there an objective reason to justify this?

The antisemitism story was notable for two important reasons. First religious organisations had publicly complained. Second these complaints had been supported by prominent Labour figures. However exactly the same applies to Islamophobia. The Muslim Council of Britain (MCB) have called for an inquiry, as have other leaders and groups. Sayeeda Warsi, former co-chairman of the Conservative party, has repeatedly called for more action (the latest here).

But to suggest equivalence between the two stories is misleading. The Conservatives’ Islamophobia problem is a much bigger issue for two reasons. First, the senior Conservative Sajid Javid has attacked the MCB for harbouring members with unacceptable views on extremism and not representing Muslims. In contrast Labour leaders have not attacked the Jewish organisations in the same way (by saying, for example, that their views come from a pro-Israel stance), and have met directly with them. Whatever the truth of Javid’s claim about extremism, the charge that they are unrepresentative is rather undermined by an organisation affiliated to the Conservative party, the Conservative Muslim Forum, also calling for an inquiry. (Letter to Theresa May here.)

Second, while Labour has never to my knowledge run an anti-Jewish campaign to win a general or mayoral election, the Conservatives did exactly that against Sadiq Khan who is now mayor of London. David Cameron even libeled an ex-Imam in his attempts to link Khan to Muslim terrorism.

Thus on any objective criteria, the Conservative Islamophobia problem has been a more serious story than Labour antisemistism. Yet the balance on the BBC has been the other way around, with far more coverage of the latter than the former.

What is the source of the bias? One may be that BBC News tends to ‘follow the story’, which invariably means following stories in the press. Corbyn has few friends in the major press titles, whereas the Conservatives are openly supported be much of the press. Another, I’m afraid to say, is that the BBC is very reluctant to criticise the government on its own account, something that goes back many years.

Case studies such as these are critical in establishing that the media has a clear bias against the current Labour leadership. (There are others: this is rather fun, and also academic research: here for example) The BBC itself, which is deluged with criticism from all quarters, seems to find it difficult to sort the wheat from the chaff. The classic line that because they get criticism from both sides they must be doing something right is nonsense. The political right in particular, because they know the BBC is sensitive to criticism, puts a lot of resources into criticising the BBC, and it will continue to do so whatever the BBC’s output.

All this presumes that Islamophobia and Antisemtism are viewed as equally bad. I personally think they should be, but unfortunately terrorism and Western wars in Islamic countries may have confused many people. Here is Sajid Javid again:

“All communities can do more to try and help deal with terrorists, try and help track them down. But I think it is absolutely fair to say that there is a special burden on Muslim communities because whether we like it or not these terrorists call themselves Muslims. It is no good for people to say they are not Muslims, that is what they call themselves. They do try to take what is a great peaceful religion and warp it for their own means.”

The idea that Muslims bear a ‘special burden’ has been the excuse used by the right wing press for consistent Islamophobia. When a member of the ‘non-Muslim community’ kills Muslims outside of a mosque, and says when arrested that he wanted to kill all Muslims, he is described by the Times as a mentally troubled lone-wolf, as if to emphasise that there is no special burden there. As in so many things, the irresponsibility of the right wing press has influenced sections of society for the worse. Perhaps it has also influenced the BBC.

The big story behind Port Talbot

In today’s print edition of the New Statesman I have a brief review of Yanis Varoufakis’s new book. (The review also looks at Piketty’s newly published collection and translation of newspaper articles. I’ll talk more about each when the review appears online, but for now you can read a similar (in parts) double review by Paul Mason.) The organising macroeconomic theme in his book is the need to find systems capable of successfully dealing with current account surpluses. In my review I say I’m not sure whether this framework is really capable of holding up everything that the author wants it to support, but there is no doubt of the importance of the issue. For example, it seems to me this is the framework, albeit at a more industry specific level, with which to see the current crisis over the threatened closure of the UK’s steel plant at Port Talbot.

The surplus in question here is the surplus Chinese capacity to produce steel. Ambrose Evans-Pritchard in the Telegraph, who has a similar perspective, reports an OECD estimate that China's excess capacity is over twice the size of total European Steel production. Because China is able to subsidise production in various ways, this means this steel can beat UK production on price. The US department of commerce is reported as thinking that the subsidy on some types of steel justifies a tariff of 236%!

If this is correct, then this story is not about neoliberalism or the free market, but a story of a rigged market. To put it another way, it is a market where one set of producers have the ability to eliminate their competitors by flooding the market at a loss because they have the ‘deep pockets’ of a state behind them.

The EU have been trying to raise tariffs against Chinese steel producers for three years, but have been blocked by a coalition of countries led by the UK. The UK Business minister Sajid Javid has been quite explicit about this: he prefers cheap steel because it helps other parts of UK industry. It may also have something to do with wanting to curry favour with China because of other matters (which was the point of John McDonnell’s Little Red Book stunt, if only he hadn’t started reading from it!). This is not Javid upholding the principles of a free market, but instead allowing a large state to rig a market. The irony in this case is that the state in question is not the one he works for. 

Postscript (11/4/16) For more detail, see this from Ben Chu