Triangulation or bipartisanship does not work when one side goes off the scale

Brad DeLong describes himself as a Rubin Democrat, which he defines as “largely neoliberal, market-oriented, and market-regulation and tuning aimed at social democratic ends.” It is a natural position for an economist to be: it is generally more efficient to tweek markets than destroy them. But he thinks the time has come for this kind of Democrat to pass the baton over to the left. “We are still here, but it is not our time to lead.”

That is an unusual thing to say, on either side of the Atlantic. In the UK the left under Corbyn is in the lead, but you see few of the people who used to run the Labour party saying anything similar. Instead some have conducted a relentless campaign to undermine him. Not only is DeLong unusual, I also think he is probably right, so I want to examine the reasons he gives.

The key point he makes is that the political right has torn up the normal rules of the game, by both moving further to the right and becoming totally partisan. This was very clear in the Obama years. Obama pursued Romney’s health care policy and John McCain’s climate policy and George H.W. Bush’s foreign policy. “And did George H.W. Bush, did Mitt Romney, did John McCain say a single good word about anything Barack Obama ever did over the course of eight solid years? No, they fucking did not.”

There is much less bipartisan cooperation in the UK compared to the US, but I think there is a clear analogy with triangulation. The lesson Brown and Blair drew from the defeats of the 1980s was that Labour needed to win the middle class, and that meant moving policy to the centre ground. There was little attempt to reverse the neoliberalism of Thatcher, but instead to mitigate its social effects.

But the problem is that the political right in both countries were not playing by the same rules. They had a quite different strategy, which was to shift policy on issues like taxation and the size of the state to the right, and instead try and win elections by pushing a socially conservative agenda. (Here is a formalisation.) There is no triangulation here, but instead an attempt to hide a right wing agenda by starting a culture war. [1] As the right has control over a section of the media, they can also misrepresent their own and their opponents position. That control, together with ineffective scrutiny by the non-partisan media, allows politicians to lie to an extent that would have been thought inconceivable a couple of decades earlier.

When the right adopts this strategy (what I have called elsewhere neoliberal overreach), attempts by the left to get bipartisan agreement or triangulate policies moves what most political commentators call the centre ground of policy to the right. This has two effects. The first is that policies that would be popular among a majority of the population don’t happen. It is often noted that Corbyn’s policies are popular, and the same seems to be true in the US. Second, those supporting the left wing party become dissatisfied with it, and try and move it back to where it once was.

A vivid illustration from the UK of how triangulation fails is immigration. The Conservatives, together with their allies in the media, decided to use immigration as a major weapon against the Labour government. Gradually the increase in the number of stories about immigrants living on welfare and ‘taking our jobs’ began to move immigration up the list of issues voters were concerned about. Immigration numbers were increasing because the government knew this was good for both the economy and public services, but newspapers used words like “mass”, “vast”, “large scale”, “floods”,“waves”“army”, or “hordes”. With a few exceptions it was not voters in areas where migration was increasing that were reacting, and the best predictor of voter concern was which newspapers voters read.

Eventually Labour decided they had to try and triangulate, by talking tough on immigration. The case for immigration was no longer made. The false belief that immigrants made access to public services worse became ingrained. This allowed the Conservative government to deflect a lot of anger over austerity on to immigrants, and it eventually led to Brexit. The strategy of triangulation was a disaster. It is interesting that since the negative impact of reduced immigration on the economy has become clear with Brexit, views on immigration in the UK have shifted to become positive rather than negative.

Another consequence of the right not playing by the old rules is a lack of proportionality. I remember reading Paul Krugman during the Clinton vs Sanders primaries. I think Paul mainly favoured Clinton because Sanders was too populist, which naturally grates for someone who knows and cares about the detail and the difficulties involved in populist policies. But I also remember him writing that the Republicans might be hard on Clinton but that would be nothing compared to what the right would do if Sanders was the Democratic candidate. I’m not sure that was correct, because the right were not playing by the old rules where you had to stick to facts.

As a result, Clinton was accused of all kinds of imagined crimes by Trump, and the non-partisan media played along by obsessing about her email server. Much the same happened in the UK if we look at the 2015 and 2017 elections. The right wing press relentlessly attacked Corbyn in 2017 with wild charges about what he would do as PM, but what they did to centre-left Ed Miliband (‘red Ed’) in 2015 was not that different. Their attacks were not proportionate to how left wing their opponent was.

I think you need to add in one additional point here, and that is a public that is looking for radical solutions, by which I means solutions that move away from the status quo. The reason for this is not hard to understand: the worst recession since WWII following the financial crisis, stagnant and declining real wages, and geographical areas (rural, towns) that seem to be falling behind more dynamic cities.

The lesson of Brexit and Trump is if you fight a culture war and lies with just well researched and targeted policy proposals, you lose. It is better to fight a culture war with an alternative vision and popular policy proposals, and a bit of class war too. I am not suggesting that you don’t have well researched and targeted policy proposals behind that: as DeLong says “we are still here”. But this is the time for radicals on both sides. I suspect Sanders would have been more effective than Clinton at taking on Trump, just as Corbyn was very effective at taking on Theresa May.

You might have noticed that I have said very little about policy divisions between the left and centre-left, and that is because in practice I don’t think they are very important. In both countries the left cannot implement much that the centre-left disagrees with, and much of what the left want to do the centre-left are prepared to accept. [2] (Maybe not rich Democrat or Labour donors, but crowdfunding means that is unfortunate rather than fatal.) The key question is whether the centre-left allows the left to lead when it needs to lead, or instead fights against the left and keeps the right in power.

Let me end with Brad again.

“Our current bunch of leftists are wonderful people, as far as leftists in the past are concerned. They’re social democrats, they’re very strong believers in democracy. They’re very strong believers in fair distribution of wealth. They could use a little more education about what is likely to work and what is not. But they’re people who we’re very, very lucky to have on our side.”

Some in the UK may feel that statement just does not apply here, but they need to ask whether DeLong is right and it is the left’s time to lead, because what he says about the political right in the US applies equally to the UK.

[1] Cameron talked the talk of centre triangulation, but that did not happen in practice (with the exception of one or two issues like Gay marriage and the aid budget). With austerity he pursued an attempt to shrink the state that Thatcher could only dream of, and the degree to which the Tories wanted to shift policy to the right was masked by the Coalition’s other partner.

[2] One of the problems we have in the UK is supporters of the left who do not understand this, and act as if the centre-left is the enemy and it can win without them. But the centre-left also needs to recognise that on some big issues like financialisation they have been wrong and the left has been right. Some discussion on US issues here from Paul Krugman.

Delusions on the UK left

Syriza has won the Greek election, which is the result I hoped for. For some this heralds the death of neoliberalism. To celebrate, George Monbiot - whose journalism consistently tells me more than most other journalists - says that here in the UK we should no longer vote tactically, but instead vote for what we want. What dangerous nonsense!

At least he is honest in what such an approach implies. Anyone who votes Green in any seat where Labour has a chance to win, aside from maybe a few seats where the Greens have a chance (more realistically one or two), is voting for a Conservative government. They will be in small part responsible for what happens under that government. (Not voting in a seat Labour has a chance to win is almost as bad.) This is going to be a tight election, so it matters. [1]

Monbiot says “If Labour wins in May, it is likely to destroy itself faster and more surely than if it loses, through the continued implementation of austerity.” His normal high standards of journalism based on solid research go out of the window. I have, along with the IFS and Resolution Foundation and many others, repeatedly pointed out that there is a huge difference between Labour and Conservative fiscal plans beyond 2015. It is quite possible that we will see very little additional fiscal tightening under Labour, and a lot more public investment.

But with Monbiot in this mood, all this means nothing. The additional hardship that those that depend on the state will undoubtedly suffer if Labour do not win: collateral damage for the eventual triumph of the left. The disintegration of the NHS starved of funds: it will happen anyway  - but the last Labour government raised taxes to increase NHS spending! This is not a strategy based on any kind of analysis, but wishful thinking because he finds it distasteful to vote tactically. (The British people had a chance to change their electoral system, and they chose not to.)

In looking at Labour, he sees only their departures from his own vision, and ignores their virtues and the realities of gaining power in today’s environment. He thinks Labour is currently silent on the evils of austerity because they believe in its virtues, whereas in reality they have been forced into this position by mediamacro’s obsession with the deficit. That is why they do not publicise their very different fiscal plans, but good journalism should see through that. Wouldn’t it be nice to have a prime minister who was prepared to stand up to the Murdoch press - oh wait. Wouldn’t it be nice to have a prime minister who said: “This country is too unequal. And we need to change it." - oh wait again (see postscript).

To say that Monbiot’s analysis represents a profound misreading of history seems trivially obvious, but not for left utopianism. Monbiot says “Fearful voting shifts the whole polity to the right.” Where is the evidence for that? Neoliberalism did not triumph because the left decided to compromise. Yes Greece voted for Syriza, but only when half of its young people were stuck in unemployment. Is that the future that he hopes for by abandoning tactical voting?

Parts of the radical left has always suffered from this misty eyed idealism, where through blurred vision everyone else looks the same. I remember being told by otherwise very intelligent people on the left that there was no real difference between George Bush and Al Gore. Monbiot described voting No in the Scottish referendum as “an astonishing act of self-harm”: no matter that the SNP tried to deceive the electorate that they would at all times be better off independent; a sorry claim given what has subsequently happened to the oil price. No doubt some said in 2010 that a future Labour government would be much the same as a Conservative government. Please, just look at the evidence.  

So, to repeat, anyone voting Green (or failing to vote) in a seat that Labour can win but the Greens cannot will in part be responsible for the consequences of a future Conservative government.

Postscript (19/2/15): Here is a link to those seats where this might apply. 

[1] An interesting question, from an academic point of view, is whether this argument is symmetrical, applying to UKIP and the Conservatives. Perhaps not in one sense. If Labour loses because of votes lost to the Greens, the reaction within the party will simply be to look for a more telegenic leader. If the Conservatives lose because of votes lost to UKIP, perhaps there is a chance that the Conservative Party will merge with UKIP, and adopt leaving the EU as policy.

Left, Right and Macroeconomic Competence

The title of one of my recent posts was a bit of a cheat. It was meant to surprise, because it contradicted the prevailing view, but the post didn’t actually try to answer the question the title posed. This post does try to assess whether a political party’s place on the left-right spectrum might influence its macroeconomic competence.

It should be obvious that, for any individual country, looking at some macro outcome (like growth) and drawing some conclusion can be meaningless. For example, growth under Republican presidents has been far worse than under Democratic presidents, but that could so easily be down to luck rather than judgement. To make headway we need to think of mechanisms and particular instances when they applied.

In the US, for example, there is a belief on the right that cutting taxes will increase tax revenue, a belief that is also clearly wrong. So you would expect Republican administrations that acted on that belief to run up bigger budget deficits than their Democratic counterparts, and that seems to be what they do. That may not be the whole story, but at least it is a mechanism that seems to fit. However it seems like a story that is rather specific to the US, at least for the moment.

Just now you could argue that parties of the right are more prone to austerity, because they want a smaller state than those of the left, and austerity can be used as a cover to undertake policies that reduce the size of the state. In a situation where interest rates are stuck at zero that has the damaging macroeconomic consequences that we are seeing today. However this is a story that is specific to liquidity traps.

An alternative source could be different views about the relative costs of inflation and unemployment. You might expect governments of the left to have higher inflation and those of the right to have higher unemployment. While that mechanism loses much of its force when you have independent central banks, it can resurface in a liquidity trap.

A final left/right difference that might impact on macroeconomic outcomes is different views on the need for state intervention. Those on the right might favour less intervention, leading them to favour simple rules, and to argue against the use of fiscal policy for macroeconomic stabilisation.

Is any of the above helpful in looking at UK policy since 1979? I use this place and period as a case study because I am most familiar with it. In the past I have talked about three major macroeconomic policy errors over this period, all of which occurred when the Conservatives were in power. However that alone proves nothing: Labour was in power for fewer years and might have been lucky. [1] 

The period starts with Margaret Thatcher and the brief experiment with monetarism. Here you could use the inflation/unemployment contrast - the policy succeeded in getting inflation down very rapidly, but at high costs in terms of unemployment, which persisted because of hysteresis effects. A secondary question is whether, given any particular preferences between inflation and unemployment, the policy was inefficient because it attempted to run monetary policy according to a simple rule which failed. Many at the time argued it was, because it put far too much of the burden of lost output on the traded sector, which in turn was because the policy generated Dornbusch type overshooting effects (i.e. a large appreciation in the exchange rate).

The 1990 recession can also be linked to left/right influences. The rise in inflation that preceded the recession (and to some extent made it necessary) was partly down to Nigel Lawson’s tax cuts. I have been told by one insider that the key wish at the time was to cut the top rate of tax, but it was felt that to do this alone would be politically damaging, so tax cuts were made across the board. That was not the only reason for the late 80s boom - there was also the decline in the aggregate savings ratio that in my view had a great deal to do with financial deregulation - but it was a factor.

The macroeconomic failure that everyone knows about from that period was the forced exit from the ERM in 1992, and that was costly because it made monetary policy too tight beforehand. Although you could say fixing the exchange rate is a simple rule that the right might prefer, that would be stretching things: ERM entry was favoured by Labour as well (although with the notable exception of Bryan Gould). According to my own and colleagues analysis at the National Institute the entry rate was too high, which might follow from a preference for low inflation, although it could just have been a choice based on poor macroeconomic analysis.

Inflation targeting followed the ERM debacle, and it was augmented by central bank independence at the start of the Labour government of 1997. One major decision that, if it had gone the other way, we might be scoring as a major error would have been if the UK had joined the Euro in 2003. I have argued that the decision not to was based on an intelligent and well researched application of current academic knowledge (subsequently vindicated by additional but related problems that academics did not anticipate), rather than any left/right policy preference.

Which brings us to George Osborne. I have just finished the first draft of a paper that appraises the coalition’s macroeconomic policy, and an interesting question that arises from that is why the coalition went for austerity despite the liquidity trap. While the 2010 Eurozone crisis might explain the change of mind of the minority partners in the coalition, it does not explain Conservative policy, which was against fiscal stimulus in 2009. If you look at some of Osborne’s speeches (and I’m not sure there is much else to go on), the rationale for austerity was a belief that monetary policy was sufficient to stabilise the economy, even in a liquidity trap (see the second part of this post). At the time that represented a minority view amongst macroeconomists. It could be explained in left/right terms in various ways: a dislike of additional state intervention, taking a risk that would lead to higher unemployment rather than higher inflation, or a devious way of reducing the size of the state.

So we have three major UK macroeconomic policy errors: the monetarist experiment of Thatcher, ERM entry and exit (and the boom that preceded it), and current austerity. In all three cases it is possible to link these to some extent to right wing political preferences. It may be equally possible to go back further and link the increased inflation of the 1970s to a left wing dislike of unemployment, but I cannot do that from memory alone so it would require some additional work going over the detailed history of that period.

However one additional point strikes me. Two of these three errors can be attributed to following a minority academic view. That monetarism was a minority academic view in the UK in the early 1980s became clear with the famous letter from 364 economists in 1981. In UK right wing mythology that episode represents the triumph of Thatcher over the academics. I have also noted that the Labour/Brown period perhaps represented a high point in the influence of academic economists within government, and the analysis behind the 2003 entry decision was an example of that. A belief that fiscal policy is not required in a liquidity trap is a minority academic view.

It may seem odd to some that those on the right might be more disposed to ignore mainstream academic opinion within economics, but of course academic economics can be described as the analysis of market failure. No one looking at debate in the US would dispute that minority academic views, or a more general anti-intellectualism, finds an easier home on the right than the left at the moment. Of course you can also find anti-intellectualism on the left - see here for a recent UK example - and my distant memories of the UK in the mid 1970s suggest that during this period they might have been at least as prevalent as those on the right. What may have happened over the last few decades is that what is currently called the left has become ideology light, and therefore more receptive to academic expertise and evidence based policy.

[1] If you want to call the gradual liberalisation of financial controls that facilitated the financial crisis a macroeconomic policy error that would make four, but I do not think anyone would seriously argue that this occurred under Labour because they were more predisposed to market liberalisation than the Conservatives.

More asymmetries: Is Keynesian economics left wing?

In the textbooks it is suggested that Keynesian economics is what happens when ‘prices are sticky’. Sticky prices sound like prices failing to equate supply and demand, which in turn sounds like markets not working. Hence whether you believe in Keynesian theory depends on whether you think markets work, so it obviously maps to a left/right political perspective.

Reality is rather different. Suppose we start from a position where firms are selling all they wish. Aggregate demand equals aggregate supply. If then aggregate demand for goods falls, perhaps because consumers or firms are trying to rebuild their balance sheets after a financial crisis, producers of these goods will start to reduce output, and lay off workers. The idea that they would ignore the fall in demand and just carry on producing the same amount is ludicrous. So output appears to be influenced by aggregate demand at least in the short run, which is at the heart of what most economists think of as Keynesian theory.

So where do sticky prices come in? Here we have to go back to the textbooks, and to an imaginary world where the monetary authority fixes the money supply. Firms, in an effort to stimulate demand for their goods, cut prices. Lower prices mean people do not need to hold so much money to buy goods. However if the nominal money supply is fixed, interest rates will fall to encourage people to hold more money. The textbooks encourage us to think of a market for money, with interest rates as the price that equates supply and demand. Lower interest rates provide an incentive to consumers and firms to increase demand, which in turn raises output.

Now suppose that firms carry on cutting prices as long as they are selling less than they would like. The process just described will continue, with interest rates getting lower and aggregate demand rising in response. The process stops when firms stop cutting prices, which means aggregate demand has increased back to its original level. Suppose further that prices adjusted very quickly. This mechanism would work very quickly, so we would only observe aggregate demand being below supply for very short periods. If prices were extremely flexible, we could ignore aggregate demand altogether in thinking about output. Hence aggregate demand matters only if ‘prices are sticky’.

Note that this correction mechanism is quite complex, and some way from the simple microeconomic world of the market for a single good. But we need to move back to the real world again. Monetary authorities do not fix the money supply; they fix short term interest rates. So they are directly in charge of the correction mechanism that is at the heart of this story. If central banks had some way of knowing what aggregate supply was, and also had perfect knowledge of aggregate demand and how interest rates influenced it, they could make sure aggregate demand equalled supply without any need for prices to change at all. Equally, if prices were very flexible but the monetary authority always moved nominal rates in such a way as to fail to stimulate aggregate demand, aggregate demand and therefore output would not return back to equal aggregate supply. Demand would still matter, even with flexible prices.

Once you see things as they are in the real world, rather than as they are portrayed in the textbooks, the importance of aggregate demand (and therefore of Keynesian theory) is all about how good monetary policy is, and not about sticky prices. If monetary policy was perfect, then Keynesian theory would only be used by central banks in order to be perfect, and everyone else could ignore it. Of course for many good reasons monetary policy is not perfect, and so Keynesian theory matters.

We could re-establish the link between Keynesian theory and price flexibility by assuming the monetary authority follows a rule which would make policy perfect if and only if prices moved very fast, but the key point remains. The importance or otherwise of Keynesian theory depends on monetary policy. It is not about market failure. Keynesian economics is not left wing, but it is about how the economy actually works, which is why all monetary policymakers use it.

It is also common sense, which is why I’m often perplexed by those who dispute Keynesian ideas. Now maybe they are confused by the strange world portrayed in textbooks, but even if they think it is all about ‘sticky prices’, the evidence that prices are slow to adjust is overwhelming, so it is hard to dispute Keynesian theory on those grounds. Yet a whole revolution in macroeconomic theory was based around a movement that wanted to overthrow Keynesian ideas, and build models where this correction mechanism I described happened automatically. The people who built these models did not describe them as assuming monetary policy worked perfectly: instead they said it was all about assuming markets worked. As a description this was at best opaque and at worst a deliberate deception.

So why is there this desire to deny the importance of Keynesian theory coming from the political right? Perhaps it is precisely because monetary policy is necessary to ensure aggregate demand is neither excessive nor deficient. Monetary policy is state intervention: by setting a market price, an arm of the state ensures the macroeconomy works. When this particular procedure fails to work, in a liquidity trap for example, state intervention of another kind is required (fiscal policy). While these statements are self-evident to many mainstream economists, to someone of a neoliberal or ordoliberal persuasion they are discomforting. At the macroeconomic level, things only work well because of state intervention. This was so discomforting that New Classical economists attempted to create an alternative theory of business cycles where booms and recessions were nothing to be concerned about, but just the optimal response of agents to exogenous shocks.

So my argument is that Keynesian theory is not left wing, because it is not about market failure - it is just about how the macroeconomy works. On the other hand anti-Keynesian views are often politically motivated, because the pivotal role the state plays in managing the macroeconomy does not fit the ideology. Is this asymmetry odd? I do not think so - just think about the debate over climate change. Now of course it is true that there are a small minority of scientists who do not believe in manmade climate change and who are not politically motivated to do so, and I’m sure the same is true for Keynesian theory. But to claim that the majority of anti-Keynesian views were innocent of ideological preference would be like – well like trying to pretend that monetary policy has no role in stabilising the business cycle.

There are of course many differences between climate change denial and anti-Keynesian positions. One is the extent to which the antagonism has infiltrated the subject itself. Another is the extent to which the mainstream wants to deny this influence. I do wonder if the unreal view of monetary policy that remains in the textbooks does so in part so as to not offend a particular ideological position. I do know that macroeconomics is often taught as if this ideological influence was non-existent, or at least not important to the development of the discipline. I think doing good social science involves recognising ideological influence, rather than pretending it does not exist.