Fake News UK style

So yesterday Jeremy Corbyn gave a speech which journalists had been given advance notice of. The Independent tweeted “Jeremy Corbyn to highlight economic 'benefit' of Brexit as he demands UK stop relying on 'cheap labour from abroad'” and referenced an article by their political correspondent Ben Kentish. As you might expect, the great and the good piled in to condemn the speech as anti-immigrant and pro-Brexit.

I was alerted to all being not what it seemed by this tweet from Financial Times Chief Political Correspondent Jim Pickard. He wrote: “Corbyn team is complaining that his words about "cheap labour" have been taken out of context and on this occasion they are absolutely right: he was talking about "imports" made abroad with cheap labour, not cheap labour coming here - here's the relevant passage. Please retweet.” My interest was aroused, but I could not find a copy of the speech online because it had not been given yet.

An example of the advantages of twitter follows. I asked in a tweet if anyone could provide me with the speech, and I received both the press briefing and the ‘check with delivery’ speech itself. You can now read the final speech in full yourself here, or watch an excerpt here. I then did something I do not think I have done before, and quickly composed a thread about the speech. The rest of the day saw lots of people using my own thread to correct others who had reacted to the original Independent tweet. If anyone wanted to notify me about anything else yesterday I’m afraid it has been lost in a mountain of what seems like thousands of notifications referencing my thread.

What we can say for certain is that the Independent’s tweet, which at the time of writing has not been withdrawn, is very misleading. Corbyn was not giving a speech about the benefit of Brexit, and the ‘cheap labour’ he referred to was that used to produce imported goods. Instead the speech was all about the active industrial policy that a Labour government would put in place to help manufacturing industry, which made sense as he was addressing a manufacturers organisation in Birmingham.

But surely he must of said something about the benefits of Brexit? The speech said this: “exporters should be able to take proper advantage of the one benefit to them that Brexit has already brought – a more competitive pound.” He suggested they had not because of the absence of any industrial policy. His statement about a benefit to exporters of the depreciation is innocuous.

To many Corbyn supporters this is just par for the course - it is happening all the time. I am no Corbynista, but I would agree. Much of the media, both Labour friends or foes, appears happy to distort things the Labour leadership says to an extent that I cannot remember happening to another Labour or Conservative leader in my lifetime. The macro evidence for this is the 2017 election, where Labour destroyed the accepted wisdom that election campaigns made little difference to the polls.

Labour’s extraordinary surge in the three weeks of the campaign is far too large to be due to just some mistakes by the Conservatives. The more plausible explanation is that both parties had direct access to the media, and for the first time voters were seeing the parties and their policies directly, rather than being filtered through media interpretation. This also helps explain why Labour’s position in the polls began to steadily deteriorate soon after their election bounce: the media filter came back on, with a constant stream of negative stories about Labour and its leadership. I have talked before about the contrast between coverage of Labour’s antisemitism problem and the Conservative’s islamophobia problem.

That is the context in which to see the events I described yesterday. A very small example of a much bigger and very serious problem. There is of course a lot you can say about the speech that is not misrepresentation. Is it right to be so focused on manufacturing when so much of our economy involves services, for example? Did it appear to promote an insular UK? For my own part I would be very critical to the reference to cheap labour. The reference occurs in the following sentence:

“We’ve been told that it’s good, even advanced, for our country to manufacture less and less and to rely instead on cheap labour abroad to produce imports while we focus on the City of London and the financial sector.”

This is a standard argument on the left against financialisation and City dominance, but the words ‘cheap labour abroad to produce’ are completely unnecessary, unless someone was trying their hand at dog whistling.

Can the misrepresentation of that tweet be forgiven in wanting to make this a story about Brexit? Well there is a Brexit story in the speech, and it is the opposite of the one suggested by the tweet. Corbyn is always accused of being a Lexiter: wanting to leave the Single Market so that he can use state aid to support domestic industry. Here is what he said on that:

“Too often, we have been told by Conservatives who are ideologically opposed to supporting our industries that EU rules prevent us from supporting our own economy. But if you go to Germany you’ll struggle to find a train that wasn’t built there, even though they’re currently governed by the same rules as us. When the steel crisis hit in 2016 Italy, Germany and France all intervened legally under existing state aid rules but our government sat back and did nothing. We have made clear we would seek exemptions or clarifications from EU state aid and procurement rules where necessary as part of the Brexit negotiations to take further steps to support cutting edge industries and local businesses.”

That, I would suggest, is not what a Lexiter would say.

Austerity past and future

It is tempting for journalists in particular to treat arguments against fiscal consolidation (austerity) during the depth of the recession as the same as arguments against fiscal consolidation now. Of course there are connections, but there are also important differences.

Austerity during a recession

Case against

The case against austerity in the depth of the recession is that it makes the recession worse. Because interest rates have hit their lower bound, monetary policy can no longer solve the recession problem on its own, and fiscal policy needs to help. That is what the world agreed in 2009. There are two legitimate economic arguments which, if true, would override this view.

Counterargument 1

The interest rate lower bound is not a problem, because we have unconventional monetary policies like QE. This argument’s flaw is that the reliability of unconventional monetary policy (knowing how much is required to achieve a particular result) is of an order smaller than both interest rate changes and fiscal policy.

Counterargument 2

If governments continued to borrow in order to end the recession, the markets would stop buying government debt. This argument normally appeals to the Eurozone crisis as evidence, but we now know that - before OMT at least - Eurozone governments were uniquely vulnerable because the ECB would not be a sovereign lender of last resort. Other evidence suggests the markets were totally unworried about the size of UK, US or Japanese deficits.

Austerity now

Here I will focus on the UK, because planned fiscal consolidation in the UK over the next five years is greater than in other major countries. During the recession, George Osborne had a target of current balance, which excludes spending on public investment. He now has a much tougher target of a surplus on the total budget balance, which includes investment spending.

Case against

There is a specific problem with Osborne’s current fiscal charter, which is that by targeting a surplus each year from 2020 it fails the basic test of a good fiscal rule, which is that debt and deficits should be shock absorbers. But in terms of the path of fiscal policy until 2020, there are three additional problems:

1. The policy restricts public investment at just the time that public investment should be high because borrowing and labour are cheap. It is a near universal view among economists that now is the time for higher public investment.
   
   
2. It will bring debt down too fast, penalising the current working generation who have already suffered from the Great Recession
   
   
3. Continuing fiscal austerity is keeping interest rates low, which means central banks are short of reliable ammunition if another recession happens.

I discuss these arguments, and the last in particular, in today’s The Independent. The point I want to stress in this post is that of the two arguments in favour of past austerity outlined above, only one - the lower bound is not a problem - is relevant here, and then only for the third criticism above. With debt now falling the argument about a potential funding crisis is not even remotely plausible.

You could say that the market panic argument is still relevant to Osborne’s justification for reducing debt fast, which is to prepare for the next global crisis. I think one way to show the silliness of this argument is to adapt a point I made in The Independent article. Imagine a firm which had lots of promising projects it could invest in, all of which would turn a handsome profit. Banks were knocking on the door of the CEO to offer the firm interest free loans to invest in these projects. But the CEO said no, because someday - maybe in 20 years time - there might be a credit crunch and the firm might get into difficulties if it took on more debt. As a result of the firm’s ‘prudence’, its sales stop growing and its profits fell. I wonder what the firm’s shareholders would think about their CEO’s decision?

A letter to Tony Blair

Dear Mr. Blair

We have not met, but I have talked to your former colleague Gordon a few times and I did some academic work on his 5 tests for Euro entry. I saw a report that you were mystified by the popularity of Jeremy Corbyn and Bernie Sanders. I have an article today in The Independent that might help you understand your puzzle.

I know you find it strange that people that appear to you like those your predecessor Neil Kinnock did battle with over the future of the Labour Party in the 1980s are now running the party. It must also seem strange that in the US where socialism once seemed to be regarded as a perversion, large numbers should be supporting a socialist candidate. You suggest some explanations, but you do not mention the power of finance, inequality and the senselessness of austerity. You say that these new leaders will not be electable. But if the alternative is to try and elect leaders from the centre who will do nothing to confront these great issues, and will instead cut spending, accept stagnation and wait for the next financial crisis, is it any wonder that many people would rather take their chance with someone different?

Please do not take this the wrong way. I generally look favourably on the achievements of your government when you were Prime Minister (that war apart). I hope, by reading my piece, or articles others have written, you will understand that the situation today is not the same as the early 1980s. At that time the expansion of the financial sector had only just begun, and the income share of the 1% was only beginning to turn upwards. If you can see this, I would ask that you do one final thing for Labour party members and for those, like me, who try and challenge the damaging policies of the current government.

There are many Labour MPs and left leaning journalists who seem to share your puzzlement, and have decided that they have to fight again the battles of the 1980s by doing everything to undermine their new Labour leadership. For example your friend Peter has recently reaffirmed that Labour is a broad church, but it seems for him it is like a church where those once in charge cannot countenance others being in the priesthood. Rather than celebrating the enthusiasm and interest of the many young people that have recently joined (even if they regard some of their aspirations as naive), and who will be vital in future election campaigns, this overtly anti-Corbyn group seem to regard them as a threat.

You know the electorate above all else hates divided political parties. You might note that the strategy of this group, by creating division at every turn as a means of achieving what they see as their ultimate goal, is not so different from that of some of the left wing militants that you and your predecessors had to deal with. Please tell them to stop. I fear they need someone they respect like you to point out the foolishness of their actions.

Yours

Simon Wren-Lewis

A crisis made in Germany

The headline in my latest article for The Independent may seem like a wild exaggeration. But if we are talking about a crisis that impacted on unemployment in the entire Eurozone (except Germany) rather than just the periphery, then I think it is reasonable. It was German policy makers that insisted that the Eurozone embark on general austerity in response to problems in the Eurozone periphery. It was the influence of the Bundesbank and others in Germany that helped the ECB raise interest rates in 2011, and delayed a QE programme until 2015. Those two things together created a second Eurozone recession.

Even if we stick to the periphery countries, the crisis outside Greece would have been a lot more manageable if the ECB’s OMT programme (which allowed the ECB to act as a sovereign lender of last resort) had been implemented in 2010 rather than 2012. It is politicians in Germany that have attempted to declare the OMT programme illegal. And none of this touches on the impact of Germany on Greece. I could also add (although it is not in the article) that if the Eurozone had adopted sensible countercyclical fiscal rules from 2000 the scale of the periphery crisis would have been reduced, and Germany had a large role in the deficit focused rules that were actually adopted.

Of course Germany did not make Greek governments behave in a profligate manner. Of course Germany did not force Irish banks into reckless lending. Their own banks may have helped facilitate both, but so did banks in other core countries like France, and in the UK for that matter. Yet German influence helped magnify the periphery crisis, and Germany was central in turning a periphery crisis into an existential event that impacted on pretty well every Eurozone country, except Germany.     

The UK as a test case for NGDP targets

In an article in the Independent today, I argue that it is about time the Bank of England changed UK interest rates. But they should go down, not up. The essence of the argument is there remains a significant risk that we have substantial deficient demand. Even if the probability of this is below 50%, if it is true the costs of it persisting far outweigh the costs of some mild inflation overshooting.

One point I do not consider in the article are the implications for nominal GDP (NGDP) targeting. Here is the picture.

I use nominal GDP per head, because that is robust to changes in migration flows, which for the UK have been important and variable. The serious arguments are for a levels target, so I’ve drawn in a reference path for 4.25% growth. That is a combination of 2% output price inflation and 2.25% real growth per head, the latter being the 1955-2008 average rate.

If the Bank of England had adopted a NGDP target, as many have recommended, the MPC would be tearing their collective hair out right now trying to stimulate the economy. There would be zero talk of interest rate increases. So there seem to be just two possibilities. Either NGDP targeting is nuts, or monetary policy has slowly gone off the rails by focusing on CPI inflation alone.

Time will tell. But if the possibility that the UK could really grow quite fast right now without inflation getting out of control turns out to be true (and the argument I make in the Independent is just that there is a non-trivial possibility that it might be true), what will history say? I suspect they will talk about Goodhart’s law, which says “when a measure becomes a target, it ceases to be a good measure”. Targeting inflation and ignoring output seemed like a good idea, because of what is called the divine coincidence. I talked about this in what I think is one of my better posts. Goodhart’s law applied to this case says CPI inflation ceases to be a good indicator of both the state of the economy and maybe also the costs of inflation when you try using it as a target.

A budget for our next Prime Minister

There is a simple way to read George Osborne’s budgets. Forget the economics, and just think politics.

Take the macroeconomics of aggregate fiscal policy, for example. Many pages have been filled (in some cases by me) about the folly of fiscal austerity while interest rates are near their lower bound. Under the coalition I calculated (with the OBR’s help) that this policy cost the average household the equivalent of at least £4,000 over the last five years. The arguments put forward to support this misguided policy have changed, but they seem to get worse rather than better: I go through the latest in this short piece for today’s Independent. But the focus on the deficit helped Osborne win the last election (admittedly with the help of Labour’s reluctance to challenge what he said), and is on course to lead to a radical reduction in the size of the UK state, as Colin Talbot sets out here.

How about his bold move of a substantial increase in the minimum wage? At first sight it seems very strange: it is a policy that if introduced by Labour would have much of the press, and most economic journalists, screaming about unnecessary interference with the market and the onset of socialism. Until now the level of the minimum wage has been carefully calculated by the Low Pay Commission to avoid significant job losses. The OBR calculate that Osborne’s proposed hike will lose about 60,000 people their jobs. But as Tim Harford explains, it is not as if Osborne has an alternative economic view. He just needed a dramatic move to give him political cover for his large cuts in tax credits.

Most of those on low earnings will still be worse off - by a lot in some cases, often decreasing work incentives - but he knows from the last election that impressions are more significant than numbers. [1] Probably the most important impact of this budget will be to raise poverty, particularly child poverty. The previous coalition’s policy changes also increased poverty, but their impact on the official statistics was offset by the overall decline in real wages. Over the next five years that will no longer happen, so again the cover is being put in place: change the definition of poverty. The economics is ludicrous, but we should have got used to that by now.

Then there is inheritance tax. It is not often I agree with Janan Ganesh, but he is correct when he wrote just before the budget:

 “George Osborne wants to refurbish the Conservatives as the natural habitation for working people … But the message will always be muffled as long as the tax system favours assets, including those bequeathed, over earned income … the greatest perversity of the system survives and will only worsen if the threshold for inheritance tax is lifted this week.”

But this year, and probably for the next one or two, George Osborne has a more important political goal in mind than confining Labour to opposition (particularly when they are doing just fine without his help). He wants to be sure that when David Cameron steps down, as he has promised to do, it will be George Osborne who is seen as the natural successor. Most of the Conservative base is not devoted to the cause of free markets, but is passionate about their own families’ income and wealth. It also likes high defence spending, so the budget contained a commitment to keep to the 2% Nato target. For those who hope for measures to tackle what Chris Dillow calls the true ‘something for nothing’ culture, the UK housing market, I suspect that too will not happen before the Conservative Party have elected their new leader (if it happens at all).    

If this sounds too cynical to you, all I can say is that I learn from experience. When I wrote this three years ago, Paul Krugman no less said I was getting “remarkably cynical”. Unfortunately, save for one detail, my cynicism proved pretty accurate. When it comes to implementing good (evidence based) economic policy, in both the UK and the rest of Europe, we are living through very depressing times.

[1] Postscript: the reaction of the UK press is outlined here

The Independent, the Union and utter nonsense

I made the mistake of reading the UK newspaper The Independent’s leader endorsing the current coalition last night. It included this:

“For all his talk of no deals with the SNP, Miliband is bound to rely on that party to get his legislative programme through. This would be a disaster for the country, unleashing justified fury in England at the decisive influence of MPs who – unlike this title – do not wish the Union to exist. If that were to be the case while Labour were the second biggest party either in terms of vote share, or seats – or both – how could Labour govern with authority? They could not. Any partnership between Labour and the SNP will harm Britain’s fragile democracy. For all its faults, another Lib-Con Coalition would both prolong recovery and give our kingdom a better chance of continued existence.”

I’ve read a lot of nonsense during this election, but I do not think I have seen anything quite so idiotic as this.

It seems likely that around half of Scottish voters will vote SNP in this election. They might be voting SNP because they want independence, but they may also be voting SNP because they like their policies for how the UK should be governed. Perhaps voters think the SNP will better stand up for Scottish interests. But whatever their reason, they are being told that if they vote this way, they will be effectively disenfranchised. The Independent agrees with both the Conservatives and Liberal Democrats that SNP MPs must at all costs have no influence, however slight, on the government of the United Kingdom.

I fully understand why the Conservatives are taking this view. They hope that by playing the English nationalist card, which they have done since the morning after the independence vote, they can attract more votes in England. Nick Clegg has gone along with the idea because he wants excuses to avoid a coalition with Labour. Of course the right wing press have been shouting about the ‘threat’ posed by the SNP, not because it makes any sense, but because their role is to maximise the Conservative vote. But I did not think that anyone who was supposed to be independent took any of this nonsense seriously. Apparently I was wrong.

The Independent believes that because the SNP want independence, they must have no influence on the government of the UK. What terrible things would any SNP influence lead to? How exactly could 50 odd SNP MPs force the 600 remainder to do unspeakable things to this country? The Independent does not say, but it does say that there would be justified fury in England at the prospect. Why justified fury? Again no hint. It is just asserted that any partnership between Labour and the SNP will harm Britain’s fragile democracy.

Now it seems to me blindingly obvious that one way to harm a democracy is to tell a group of people that their votes can only count as long as they do not vote for a particular party. It does not matter how many people in Scotland vote for the SNP, it seems we have to ensure that the SNP plays no role in the government of the UK. Which means your vote cannot count. The logic of this argument is that the SNP, because it advocates independence, should not be allowed to put up MPs for election. That would be ridiculous and profoundly undemocratic. So instead we will allow the Scottish people to vote for the SNP, but then ensure their elected MPs can have no influence. That seems even more undemocratic!

Now if I was a SNP voter, I would be furious at being disenfranchised in this way. I would think to myself, am I only allowed to take part in UK elections as long as the people who I vote for play no part in government? What kind of United Kingdom is that? If I was one of the 55% who voted against independence, I might wonder if I had made the wrong decision. Even if I did not vote for the SNP, I would be very concerned that my choices were being limited in this way.

And then there is the idea that the Union is somehow safer in the coalition’s hands. What the Union needed from its Prime Minister the morning after the vote was a statesman like speech about the healing of divisions and the importance of working together. What we got from Cameron was an attempt to placate some of those in his own party by talking about English votes for English laws. Whatever the merits of the argument, it was the wrong time and place if you were serious about preserving the Union. Cameron has continued to play the English nationalist card in this election: not because he wants to end the Union, but because he wants more votes. He has no concern about how this goes down north of the border, because his party have so few votes there. But if the Union ends, it will be through Scottish votes and not voters in England.

So how exactly does electing a government whose main party has no interest in Scotland, and which therefore is happy to stoke up English resentment against Scotland, supposed to be better for the continuing existence of the United Kingdom? How is denying certain Scottish MPs any role in UK government suppose to encourage Scotland to remain part of the United Kingdom? Now maybe the leader writers at the Independent were looking around for arguments to support the coalition, and given how difficult that is, this was the best they could do. Perhaps their heart was not in it. But to argue that to encourage Scotland to remain part of the Union we should disenfranchise a good proportion of Scottish voters, and that this will be good for democracy, is truly Orwellian.