The economic (and political) effects of this coronavirus pandemic

This is an update of an earlier post where I described the results of a study I did with others on a flu pandemic. (It also appeared in a VoxEU ebook.) I have had a lot of enquiries from journalists in Europe about this blog and the paper, and of course what everyone wants to know is how similar is our modelling to the impact of this coronavirus. The features of this pandemic are now clearer than when I wrote the post, so I can say a few things on this issue.

Our study looked at two cases: a base case and a severe case. The key parameters were the attack rate (how many get the virus) and the fatality rate (how many who get the virus eventually die). The base case is far milder than this coronavirus, so I’m going to focus on the severe scenario we modelled. That had an attack rate of 50%, and a fatality rate of 2.5%.

How does this coronavirus compare to that? The attack rate is almost certainly higher: we are only beginning to know the number of people who get the virus without even knowing it. The fatality rate of this coronavirus is unknown, partly because of the uncertainty about the attack rate. At first it was thought to be above the 2.5% number in our severe scenario, but it now looks like it is lower. However this number is not critical for the direct economic impact of coronavirus.

The reason is obvious once you think about it. The fatality rate for coronavirus is mainly among those who are retired, so there will be little impact on the size of the long term workforce. However there is a huge indirect effect of a high mortality rate, and that is on how the government reacts to the pandemic. I will talk about that below.

So the severe case seems, so far, a useful guide. In our paper we also looked at the impact of a large fall in ‘social consumption’ (pubs and restaurants, travel etc). We looked at a pandemic with or without this, partly because our base case was mild, and partly because some previous studies had not looked at this. However it is already clear that we were absolutely right to look at this issue. Airline industries around the world are mothballing most of their planes, restaurant bookings were way down before they were ordered to close, and so on.

One final point, that I will also discuss below, is that we assumed the pandemic was just a three month affair. If we look at our severe pandemic case including falling social consumption, we had GDP in the pandemic quarter falling by 30%. There was a similar fall in consumption. However, because our severe pandemic lasted for just one quarter, GDP for the year as a whole fell by only 6%. So how good a guide - in rough orders of magnitude - are those numbers to this coronavirus pandemic?

Let us look at the first quarter impact first, because that we know most about. Pretty much all Western countries have a suppression regime in place, which will probably last around three months while the virus numbers are brought right down. This reduces GDP from both the supply and demand side, and this combination makes it tricky to model with any degree of accuracy. The reason the fall in demand and supply don’t completely complement each other is that the fall in demand is going to be concentrated in sectors, while the supply side impact is more widespread.

Our study suggested the main supply side impact comes from school closures. On the reasonable assumption that these last until the summer holidays, that means a large section of the workforce will have to stay at home rather than work. (It will be interesting how the ONS measure output from working at home!) In contrast those who get sick will be off work for only two weeks. Furthermore, and unlike our exercise, workers will be reluctant to use grandparents if they get a choice.

On the demand side the drop in social consumption that we assumed would happen through individual choice will now be made by government advice/instruction. You can do your own calculation by looking at a breakdown of consumption. There is a limit to how far GDP can fall because we will not eat less, and we will not spend less on housing or heating. Expenditure on clothing and particularly durables may be delayed to some extent, as people avoid personal contact, but online purchases should continue.

Given all this, our estimate of a fall in GDP in the first quarter of the outbreak of -30%, although huge, does not look obviously wrong and may well be an underestimate. But of course this is not a precise figure at all, and it will vary from country to country depending on the strength of social distancing controls, the degree of business and worker support from governments and whether governments can relax social distancing before 3 months are up. The GDP fall could easily be 20% or 40%. Because the crisis began in most Western countries at the end of the first quarter, the Q1 GDP fall will be a lot less than this, and the Q2 fall relative to Q1 will be slightly less. 

Where our study is less helpful is in thinking about what happens after the strict control period comes to an end because new cases come right down. We assumed there would be no attempt at suppression beyond school closures (because our main case was much milder), so our pandemic ended after three months. This coronavirus pandemic will not be a one quarter affair, because governments quite rightly have not been prepared to see a short sharp peak where their health services will be overwhelmed. 

Once the number of cases are brought right down, it is likely governments will do what China is currently doing, and move to a strict contain regime. This involves a very stringent regime to test those who might still get the virus and the isolation of all known contacts, combined with some continuation of social distancing controls. China even has an app that helps do the tracing. I think this will inevitably be how other countries deal with the virus once numbers are down. Some will do it well, and others may not, leading to controls being reintroduced.

Containment is, of course, what all Western countries tried to do at first, but in nearly every case they moved too slowly. (The UK even tried the herd immunity route, despite what ministers might say, and seem not to have done the basic sums of what that meant for the NHS and deaths.) This general initial failure was not inevitable: a few countries like Singapore have been much more successful. In short, nearly all Western governments underestimated how quickly the virus would spread. But it is easier to control the virus by relaxing controls than creating such controls from scratch, and hopefully lessons have been learnt. In addition, governments will have had time to ramp up testing capacity, and think about better tracing.

The key issue for the economy once numbers come down is how many controls can be reduced or eliminated while keeping a lid on new case numbers. Once again on the supply side whether schools reopen is key, and on the demand side it is what parts of social consumption can be made safer. Because some relaxation will almost certainly be possible, then GDP growth will partially bounce back, but how much they will bounce back is very unclear at present. Here our study, which had GDP being above the no-pandemic case in the second quarter, does not apply to the pandemic we are now in. As a result, the first year GDP impact of -6% in our study is much too small. It is impossible to predict what the full year impact will be until we know what controls are essential and what controls can be relaxed while maintaining an effective test/trace/isolate regime. We will get some idea from China.

I want to add a little, much more speculatively, on political consequences. There has been some talk about this pandemic provoking a scaling back of globalisation. You can see that happening if talk about this being a Chinese virus brought in by foreigners is given air time. But it is equally possible that the opposite will happen as a result of the virus.

As we relax controls, governments will want to know what countries it can open up travel to. That will depend on how effective their test/trace/isolate regime is. As we have already seen with Macron phoning Johnson to urge stronger controls, international pressure of this kind will happen. As this goes on, there will therefore be a huge incentive for countries to copy successful measures. At the start of this pandemic we saw a complete lack of global coordination, despite WHO’s best efforts. Subsequently we should see much more.

Left behind movements do not just reflect deindustrialisation, but also geography, inequality and lack of representation.

There was extensive analysis after the UK EU referendum of the characteristics of those who voted for Brexit and those who didn’t. A robust finding was that those who voted for Brexit tended to be older and had less years of education. But some noted a link between a tendency to vote Leave and areas of deindustrialisation. The idea of the ‘left behind’ was born. It gained force when rest-belt states in the US swung to Trump in the same year.

This characterisation of the left behind was attractive to many on the left, who have been critical of the globalisation they saw as the cause. Yet as Martin Sandbu points out, the period of what is often called hyper-globalisation is the 1990s, and much deindustrialisation occurred before then. Some of that was a result of automation rather than globalisation, and in the UK 1980s deindustrialisation was hastened by a large appreciation of sterling caused by a combination of discovering North Sea Oil and monetarism. Why the 30 year delay for the left behind to finally find its political voice?

If we look at the geography of the Brexit vote, areas of deindustrialisation is not the only thing that strikes you. Much more obvious is that people in large cities voted against Brexit, and those in smaller cities or towns or the countryside voted for Brexit. The same was true for Trump, and Trumps core support comes from rural areas. Is this simply a consequence of differences in age and education already discussed?

It could well be. As the Centre for Towns showed, UK villages and towns have been getting older and cities have been getting younger. Jobs that attract the university educated tend to be in cities rather than in towns and villages.The old tend to be more socially conservative, and so are attracted to the anti-immigration message that was a key part of the Leave and Trump campaigns.

There is no doubt these factors are important, but do they explain all the the geographical nature of the support for Brexit and Trump, or is there more to it? I think the gilet jaunes from France can shed some light on this question. As John Lichfield outlines, the gilet jaunes come from peripheral France: the outer suburbs and countryside. That may include some areas of deindustrialisation but it goes well beyond that. Their protests are self-organised and remarkably persistent. They do not fit any clear left/right categorisation. Immigration, or race, are not high up among their concerns, which is why they do not feel represented by the far right party of Marine Le Pen.

What do the gilet jaunes want? Specific demands are varied and often contradictory. But a dominant theme is that they want to be valued and represented. They feel that the centres of power in France, the government but also other organisations, do not speak for or even respect them. They think the major cities are getting all the benefits of growth while they are falling behind.

The gilet jaunes tend to be working or lower middle class, sometimes self-employed, sometimes retired. Initially their protests were sympathetically viewed by most French voters, which was one reason why Macron responded with tax breaks for pensioners and low income workers. As time goes on and the violence has continued their popularity among French voters has waned. Whether they have a future as a coherent force may depend on whether they can transform themselves into a conventional political group that wins seats in the forthcoming European elections, a process which has already led to some fragmentation along traditional left/right lines.

Macron’s election as President of France had led many to think that the wave of populism influencing democracies around the world could be held back or even beaten. What the gilet jaunes show is that this cannot be done just by electing a charismatic President. Indeed the character of Macron, clearly part of an affluent city elite, may even have been a provocation.

Can the gilet jaunes tell us anything about those who voted for Brexit or Trump? All three movements come from outside of the main cities, so perhaps geography is more than just an incidental factor. What is unique about the gilet jaunes has been self-organisation, made possible through social media, and the variety of their political demands. In contrast Trump is a Republican, and Brexit is a very specific cause. But perhaps this difference just reflects the ability of some politicians and parts of the media to capture the discontent of the geographical areas that feel left behind?

The EU was not considered an important issue among most voters until the referendum. Immigration was, but a good part of that was because the government and press had managed to deflect anger at declining public services and wages on to immigrants rather than their own policies. Whereas the gilet jaunes had to organise themselves using social media, Brexit and to some extent Trump had sections of the conventional media to do that job. While many gilet jaunes want to overturn the government, Brexit supporters succeeded because they had the help of politicians and the media.

Underlying causes in all three cases include geographical and financial inequality, and a feeling of being ignored by conventional politics. In the UK, looking mainly at the first decade of the century, a NEF report found that nearly all of the 20 fastest growing constituencies were in cities. Often the prosperity of towns depends on the success or otherwise of a nearby city. Those in the periphery see money going to projects like crossrail or HS2 while local bus services are cut.

People look at others to measure their own prosperity but they also look at their own past. In the UK real wages are still below levels before the financial crisis, and in the last year the disparity between the incomes of most people and those at the top of the income distribution has started to increase again. (It is one reason why the Chancellor is getting more tax receipts than he expected.) In the US most of the proceeds of growth have for some time been going to the top of the income distribution.

We can see the same thing, although to a lesser degree, in France. Here is a revealing graph from a study by Thomas Piketty and colleagues. It shows how average annual growth rates of pre-tax income has varied by where people are in the income distribution over three time periods. To the right we have the richer income deciles, including at the end the top 1%, 0.1% and 0.01% respectively. In the two periods before the 1980s incomes at the top grew less rapidly than all other groups. From 1983 to 2014 the opposite has been true: growth rates of top incomes have been up to three times those of everyone else. In addition the growth rate of incomes of the non-rich have been historically low.

Low average growth in most incomes together with much faster growth in incomes at the top is provocative, particularly if you are in parts of the country that are stagnating with few prospects. I do not think it is any coincidence that a week ago we saw the gilet jaunes targeting the exclusive shops and restaurants of the Champs-Élysées.

Inequality based on incomes or geography is not enough to get the gilet jaunes on to the streets, to get UK voters to want to take back control, or Trump voters to vote for the worst President in a century. This also requires a feeling that your voice is not heard in the political process. In the UK a feeling of powerlessness was hijacked by politicians and the press who pretended it was a result of the EU, or in the US by Trump who pretended to speak for ‘real America’.

Speaking up for those left behind should naturally be something parties on the left do. Yet in the UK, as the NEF report shows, Labour have been increasing their vote share in dynamic cities and the Conservatives from areas in decline. This may be part of a longer term trend in both the UK, US and France, where the left party that once represented the less educated now is the party of the educated. The chart below taken from another study by Piketty shows this trend, which he calls it the emergence of the “Brahmin Left”.

Yet I think this alone is an incomplete explanation. To explain recent developments we should add the adoption by traditional left parties of a neoliberal framework which discouraged regional, industrial and redisributive policies that might have transferred more of the benefits of city dynamism to the periphery. That created a left behind that went beyond areas of deindustrialisation, that felt unrepresented and deprived, and which in the UK and US was open to capture by a populist right.

Lexit

I often find that arguments for Lexit have many structural similarities to right wing arguments for Brexit. Take Larry Elliott’s latest piece for example. This includes

1. Sweeping exaggerations that seem designed to trigger nationalist sentiments. We are told that “under Tony Blair, the feeling was that globalisation had made the nation state redundant.”
   
   
2. Confusing the EU with the Eurozone. Larry talks about the problems with the ECB, the SGP, and mass unemployment, but these are all valid criticisms of the Eurozone. There is no attempt to say why that has any impact on the UK as part of the EU.
   
   
3. Inferring that all the UK’s problems are somehow down to the EU, without providing any evidence that they are.
   
   
4. Asserting that the EU prevents the UK doing what it needs to do to tackle (c) in ways that are economical with the truth (see more below).
   
   

But I also have complaints that I think are unique to Lexit arguments. When some people mock the use of the term neoliberalism, they should use the Lexit debate as ammunition. When I use the term, it is to signal a project that in various ways subordinates the state to the market. Yet we are told that the EU had neoliberalism hardwired into it. The EU is fundamentally about trade liberalisation, not about the role of the state. It is trade liberalism that is hardwired into the EU, not neoliberalism. (The Lexit advocacy here is more honest about that.)

Is levying a huge fine on Google because its search engine gives preference to its own shopping comparison site an example of neoliberalism? Is a maximum working week? Are their environmental standards? [1] These are all examples of a collective of states interfering with firms and the market. One of the strong and left wing arguments for the EU is that only at this level can you avoid large multinational corporations blackmailing states that attempted to challenge them in similar ways. I am sure there are many examples where the EU could do this more effectively, but at least they are trying.

The argument for Lexit is therefore similar to the argument against globalisation. The problems that a combination of globalisation and technical change has created for many communities are real enough. But Lexit arguments typically ignore two key points. First, globalisation has brought huge gains for many poorer countries. That applies as much to the poorer states of the EU as it does to China and India. Of course what is being done to Greece is appalling (and I have not hesitated to say so on many occasions), but this once again is a result of a common currency, not trade liberalisation under the EU. Indeed, one of the reasons the Eurozone’s blackmail of Greece worked is that a majority of Greeks want to stay in the EU.

Second, the gains for the UK that have followed most trade liberalisation are real enough, which is why there are large costs to leaving the Single Market or customs union. Larry spins this by saying the “left needs to be very careful about running with the idea that business should be able to veto decisions made by the electorate.” This is a line that shows the left at its worst. The costs of Brexit do not necessarily fall on business (which is often mobile) but on ordinary UK citizens. What proponents of Lexit have to show is that the benefits of the policy freedom Brexit gives you outweigh these costs.

The most promising way to help the losers from trade liberalisation (and technical progress) is through an active industrial and regional policy. Proponents of Lexit argue that the EU would prevent such a strategy. If we are talking about giving aid to declining uncompetitive sectors, then many would argue that it is a good thing that the EU does stop that happening. But to suggest that the EU is opposed to any kind of regional aid seems to conflict with the existence of the EU’s Cohesion Policy, that has benefited many areas in the UK. For a more general discussion of the justifications the EU gives for intervening in the market, see William Davies here. The set of policies that the EU prevents but which any reasonable trade deal with the EU would allow are pretty small, with the key exception of controlling immigration.

Larry says that freedom of movement has not benefited workers. I think he would find plenty of EU workers in the UK who would disagree (at least before Brexit). Just as the movement of goods across borders benefits all, so can the movement of people. Most of the analysis I have seen has shown that recent immigration into the UK has been beneficial to UK workers once you take everything into account. Ignoring all that by talking about the ‘lived experience of ordinary people’ (from here) suggests an attitude to knowledge and evidence worthy of UKIP. Which brings me full circle.

[1] The first of these interventions could reflect an ordoliberal rather than neoliberal view, but the second two not so much.   

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.  

Why are the UK and US more vulnerable to right wing populism?

Cartoon by @ThomasHTaylor

A week or so ago, anticipating Macron’s victory and following defeats of the far right in Holland and Austria, I asked on twitter why the US and UK seem to be more susceptible to right wing populism than elsewhere. It is a question that requires much more than a post to answer, but I thought the replies to my question were interesting.

Quite rightly, a large number of people questioned the premise. We have populist far right leaders in parts of Eastern Europe, for example. Maybe timing is also important, with the US and UK acting as warnings to other countries.

Nor should differences be exaggerated. Macron is quite unique in his achievements, and a runoff between Le Pen and the conventional right or left might have been closer. Trump lost the popular vote, and the Brexit vote was very close. What exactly is populism anyway: as someone said to me recently, elites use the label populist much as populists use the label elites.

On the other hand, one of the features of the Macron campaign is that he championed all the things that Brexit and Trump led us to believe were now politically unpopular and therefore to some extent compromised, especially globalisation and the EU. A number of people suggested specific features of European economies that might have cushioned the impact of globalisation more effectively: a stronger welfare state, for example, or stronger union power. One way of describing this is to say that neoliberalism has been less successful in Western Europe. Real wage growth has been poor in the UK and US, which may have a wider impact in electoral terms than higher unemployment in Europe.

Another set of suggested explanations focused on the rise of the very rich in the US and UK. Those who had recently achieved much higher incomes and wealth would be naturally keen to keep it, and would therefore do what they could to ensure democracy allowed them to keep (or increase) it. The obvious way to do this is through the media, although recent attempts at voter persuasion discovered by Carole Cadwalladr suggest it is not the only way. The UK press is perceived to be the most biased to the right among this sample of European countries apart from Finland. The US has talk radio and Fox news. These may persuade the non-partisan media to give undue coverage to far right individuals, which then increases their support. To the extent that the very rich are able to influence elections, we get what could be described as a managed democracy.

That in turn may be related to a remark by Matthew Yglesias: “You see in Trump vs Le Pen once again that authoritarian nationalist movements only win with the support of the establishment right.” (The centre-right candidate in the French elections, Fillon, recommended his supporters vote for Macron.) Brexit was enabled by a Conservative leader offering a referendum, and more importantly Brexit was encouraged by his party attempting to shift the blame for austerity on to immigrants. Trump has been embraced by the Republican party. This narrative fits with this past post of mine.

It seems to me that these various explanations are quite compatible with each other. Where what we might call neoliberal policies had been strong - weak unions, declining welfare state, stagnant wages - these policies created a very large group in society that were looking for someone to blame. In a managed economy that allowed the parties of the right either to use nationalism and anti-immigration rhetoric to deflect blame from themselves, or for the far right to capture those parties. As that rhetoric also hit out at globalisation it potentially was a direct threat to global business interests, but those interests could either do nothing about this or felt they could manage that threat.

One final set of answers to my original question focused on history. Europe still has enough memory of living under authoritarian nationalist governments to want to avoid going down that route again. (Macron’s vote was highest amongst the 70+ age group.) The UK and US do not have that experience, and perhaps nostalgia for empire (or WWII) in the case of the UK or watching an empire decline in the case of the US created unique tensions.

While these are dark times to be living through (and I suspect many others besides myself certainly think they are), for anyone interested in political economy they are also fascinating times.