Media myths

At first sight the research reported here is something that only political science researchers should worry about. In trying to explain election results, it is better to use ‘real time’ data rather than ‘revised, final or vintage’ data. But as the authors point out, it has wider implications. Voters do not seem to respond to how the economy actually is (which is best measured by the final revised data), but how it is reported to be. (This does not just matter for elections: here is a discussion of some other research which suggests how the way recessions are reported can influence economic decisions.)

Just one more indication that the media really matters. I would not bother to report such things, if this point was generally accepted as an obvious truth. That it is not, in the UK at least, reflects various different tendencies. Those on the right know that the print media is heavily biased their way, and that this has a big impact on television, so they have an interest in denying that this matters (while funding think tanks whose job is in part to harass the BBC about its alleged left wing bias). Those on the centre left often react negatively to a few of those further left who discount all awkward facts by blaming the media. And the media itself is very reluctant to concede its own power.

As an example, here is Rafael Behr in the Guardian talking disapprovingly about Labour supporters:

“I heard constant complaints about failure to “challenge myths” about the economy, benefits, immigration and other areas where Labour is deemed unfit to govern by the people who choose governments. The voters are wrong, and what is required is a louder exposition of their wrongness.”

What is really revealing about this paragraph is what is not there. We go straight from myths to voters, as if no one else is involved. I doubt very much that many who voice the ‘constant complaints’ Behr is talking about think that voters created and sustained these myths all by themselves.

The discussion of issues involving the economy, the welfare system and immigration among most of the ‘political class’ is often so removed from reality that it deserves the label myth. In the case of the economy, I provided chapter and verse in my ‘mediamacro myth’ series before the election. It was not just the myth that Labour profligacy was responsible for austerity, but also the myth about the ‘strong recovery’ when the recovery was the weakest for at least a century, and that this recovery had 'vindicated' austerity. Given the importance that voters attach to economic credibility, I do not believe I was exaggerating in suggesting that the mediamacro myth was in good part responsible for the Conservatives winning the election.

The media is vital in allowing myths to be sustained or dispelled. That does not mean that the media itself creates myths out of thin air. These myths on the economy were created by the Conservative party and their supporters, and sustained by the media’s reliance on City economists. They get support from half truths: pre-crisis deficits were a little too large, GDP growth rates for the UK did sometimes exceed all other major economies.

Myths on welfare do come from real concerns: there is benefit fraud, and it is deeply resented by most voters. But who can deny that much of the media (including the makers of certain television programmes) have stoked that resentment? When the public think that £24 out of every £100 spent on benefits is claimed fraudulently, compared with official estimates of £0.70 per £100, that means that the public is wrong, and we have a myth. (An excellent source for an objective view of the UK’s welfare system is John Hills’ book, which has myth in its subtitle) As I noted in that post, when people are asked questions where they have much more direct experience, they tend to give (on average of course) much more accurate answers. Its when they source the media that things can go wrong. It is well known that fears about immigration tend to be greatest where there is least immigration.

Of course reluctance to acknowledge myths may not be denial but fatalism. Fatalism in believing that voters will always believe that migrants want to come to the UK because of our generous benefit system because it suits their prejudices. Encouraging those beliefs will be in the interests of what will always be a right wing dominated press. Some argue that myths can only be changed from a position of power. But myths are not the preserve of governments to initiate. According to this, over 60% of Trump supporters think their president is a Muslim who was born overseas. [1]

Myths need to be confronted, not tolerated. The initial UK media coverage of the European migrant crisis played to a mythical narrative that migrants were a threat to our standard of living and social infrastructure (to quote the UK’s Foreign Secretary!). This reporting was not grounded in facts, as Patrick Kingsley shows. That changed when reporters saw who migrants really were and why they had made the perilous journey north. It changed when Germany started welcoming them rather than trying to build bigger fences. These facts did not fit the mythical narrative.

The UK government was clearly rattled when it realised that many people were not happy with their narrative and policies. Myths can be challenged, but it is not easy. Policy has been changed somewhat, but attempts are also being made to repair the narrative: to take some of those who have made it to the EU will only encourage more (a variant of the previous European policy of reducing the number of rescue boats), and a long term solution is to drop more bombs. Such idiotic claims need to be treated with contempt, before they become a new myth that the opposition feels it is too dangerous to challenge. Challenging these myths does not imply pretending real voter anxieties about migration do not exist, but grounding discussion and policy around the causes of those anxieties rather than the myths they have spawned.

Yes, the non-partisan media needs to recognise the responsibility they have, and use objective measures and academic analysis to judge whether they are meeting that responsibility. But more generally myths are real and have to be confronted. The biggest myth of all is that there are no myths.

[1] The probability pedants among you who read the link will know that I’m actually making an assumption in writing this!

Recognising the success of macroeconomic myths

The Conservative led government of 2010 to 2015 had a terrible macroeconomic record. Partly through their own actions they had presided over the worst recovery from a recession for hundreds of years, and an unprecedented fall in real wages. Employment had increased, but only because productivity had stagnated. Yet the Conservatives were seen by voters as the more competent political party when it came to running the economy, and this probably had a decisive role in winning them the election.

This paradox is easily explained. Voters were sold a lie: that Labour through its profligacy had run up budget deficits that had required painful measures to correct, but that recent growth rates showed that these measures had been a success. And the lie worked.

I think at least two groups have yet to understand the huge significance of this. The first is the Labour party itself. The reaction of some in the party to this situation is to want to ‘admit’ that they borrowed too much, and try and move on. Yet this seems just like the strategic error they made from 2010 in not trying to challenge the Conservative narrative. Back then they seem to have judged that it was pointless to continue to fight the issues that had dominated the 2010 election, and instead they should ‘move on’. What this strategy did was concede the writing of history to their opponents.

Perhaps those that want to fall into the trap of saying that they borrowed too much before the Great Recession think this is no big deal, because if they had known in 2005, say, that a recession was going to come in 2009, they might well have been more fiscally prudent. It should be blindingly obvious that this will not be how any admission is read. Instead the lie that Labour governments are always fiscally profligate will be cemented in stone: their opponents will say that even the party itself now admits it, after years of trying to deny it: how irresponsible is that!

The second group that has yet to comprehend the significance of the success of Conservative myth making are the media. Not of course the large part of the media that helped manufacture and promulgate the lie: they fully understand how successful their propaganda has been. The media I am talking about is the part which, to use the BBC’s mission statement, aims to “enrich people's lives with programmes and services that inform, educate and entertain.” When it came to analysing the myth of Labour profligacy and success of austerity, the ‘educate and inform’ part of that mission seems to have failed miserably.

Of course this media failure was not just during the few weeks of the election. In the years before, political commentators who have the potential to hold politicians to account allowed coalition ministers to repeat their ‘clearing up the mess’ metaphor without serious challenge. Indeed, to the extent that they continued to challenge Labour on their borrowing record, they became part of the deception.

This failure reveals two conceptual flaws in the media’s approach to macroeconomic issues: one with much wider implications, and one specific to fiscal policy. The first is to assume that there are no objective facts, but simply the claims of political parties. So if Labour chose not to challenge the ‘clearing up the mess’ narrative, it was not the media’s job to do so. Conversely, it was not the media’s business to assess the Labour profligacy myth: if the government put the myth forward, it was the media’s job to continue to challenge Labour on it. This is the ‘views differ on whether Earth is flat’ approach.

The second relates to how fiscal policy issues are reported. The government continually drew analogies between government budgets and household budgets: the UK had maxed out its credit card. To the extent that this analogy is used to imply that government deficits have to be reduced immediately come what may, economists know such analogies are false. A media that took its duty to educate and inform seriously would recognise this. What the media appeared to do instead was to accept the line that the deficit had to be reduced as quickly as possible, and obsess about the deficit numbers as if they were as important as data on inflation or unemployment.

Let me give examples that illustrate both of these problems. On the day that the Telegraph published a letter from 100 business leaders, the CFM published a survey of macroeconomists which asked a question about whether the austerity policies of the coalition government have had a positive effect on aggregate economic activity. Initially on BBC TV and radio both were covered - they made an obvious pair, as the majority of economists were saying something rather different from these particular business leaders. However by the time it came to the evening news, only the Telegraph’s letter seemed to feature. I would love to hear a justification for that strange decision. Was it because the Conservatives used the letter throughout the day, but Labour failed to use the survey? By any objective criteria the Telegraph letter was less informative: it was from a self-selected group, while the CFM results came from a survey of leading economists. But if the media sees its job not to inform but to simply report what politicians say, the decision made sense.

A key difference between the Labour and Conservative plans was the degree of fiscal consolidation over the next few years. The implications for welfare programmes and other government spending were addressed by the media. But that is not macroeconomics. The macroeconomics is that a large fiscal consolidation when interest rates are very low is risky. I cannot remember seeing that argument appearing at all in the media, which given its potential importance is extraordinary.

As a result of both failures, people believed that the coalition were more competent at running the economy than Labour would be, and remained largely ignorant of the major risk that electing a Conservative government would involve. That is likely to have been one of the critical factors in deciding the election result. On this issue, therefore, the media failed to educate and inform, and this had a significant - perhaps decisive - impact on the outcome of the election. A more serious failure of the media to fulfil its mission is hard to imagine. Yet I suspect those in the relevant media organisations are not even concerned about this, but even if some of them were they would probably be too timid to raise these issues.

So both the Labour party, and the independent media, are failing to address the issues raised by the success of the Conservative’s macroeconomic myths. There is perhaps a third group that also needs to think hard about what this all means. Often when scientists complain about how scientific issues are portrayed (or ignored) in the media and by politicians, we get a lot of stuff about how scientists should be more helpful. But in this election a number of major efforts by academic economists were made to get information out there, in ways that were deliberately designed to be accessible. A number covered macroeconomics, and directly addressed issues about the coalition’s record, competence and future plans (as here or here or here, for example). The information was there, but both the Labour party and the media hardly used it. Economists need to reflect about whether this means what they did was a waste of time. Political scientists need to reflect on what this means for their models of how elections are won and lost.

Mediamacro myths: summing up

The story presented in much of the UK media is simple and intuitive. The previous government messed up: they spent too much, and it left the UK economy on the brink of financial meltdown. The coalition came to the rescue: clearing up the mess was tough at first, but now it is all coming good.

In previous posts I have shown that this is almost complete fiction. The increase in the government’s budget deficit under Labour was all about the recession, which in turn was created by the global financial crisis. There was no prospect of a UK financial crisis in 2010, which meant that austerity was not something the government was forced to undertake. Reducing the deficit could have been left until the recovery was secure (and crucially interest rates had risen above their lower bound), but the coalition chose to do otherwise. As a result they delayed the recovery by three years, at great cost. Even since 2013 we have simply seen a return to normal growth rates: there has been no catching up of lost ground. In that sense growth under the coalition hardly deserves the term recovery, and we have seen an unprecedented lack of growth in living standards. Productivity growth has been non-existent, yet the government has feted the employment growth that is its counterpart.

The government’s claims of macroeconomic success can therefore be dismissed without saying a word about the nature of the GDP growth that has taken place. But what growth there has been is itself worryingly unbalanced, as a new report discussed here sets out. Growth is too dependent on consumption, there is not enough investment, and the current account deficit is very large.

A large part of the media sees their role as supporting the government’s line, however far from the truth it may be. For whatever reason, most of the remaining media has bought this line, and failed to expose it as fiction. Even a headline in the Guardian yesterday talked about “rip-roaring growth rates of 2013 and 2014” when growth in GDP per head in those years was at best just average, and growth in income per head non-existent.

It is still commonplace to hear media commentators say that the economy is doing great, and ask why the government is not reaping the benefit in terms of political support. In truth the puzzle is the opposite - given how poor economic performance under the coalition has been, and that this poor performance has hit most people in their pockets, the real puzzle is why so many people think the government is economically competent. And the answer to that puzzle in turn lies in the myths that mediamacro has allowed to go unchallenged. Perhaps the latest growth figures might begin to dent them, but a remarkable feature of these myths is that they seem impervious to actual data.

I coined the term mediamacro because I obviously find it strange that public discourse on the macroeconomic fortunes of the UK economy seems so different from what the data and simple economics would suggest. For once I can be the one handed economist that Truman demanded, because the evidence is so clear and the economics (what little there is) so uncontentious. But mediamacro has implications well beyond macroeconomics. If the media has been capable of distorting reality by so much for so long in this case, are there other areas where it has done the same, and what does that tell us about the health of our democracy?

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

(4) The immediate necessity of belt tightening

(5) The long term plan

(6) 2013 recovery vindication

(7) The strong recovery

(8) Employment growth

Mediamacro myth 8: employment growth

We have had the slowest recovery from a recession almost since records began, and a large part of that is down to the sharp fiscal contraction that the coalition government chose to undertake, despite there being no market pressure to do so. But, supporters of the coalition might say, employment growth has been very strong. This is an argument that is almost as ludicrous as the 2013 recovery vindicates austerity idea, but there is still a half-truth behind it. [1]

To see why it is ludicrous, you just need to note that - by definition - labour productivity is output divided by employment, and that over the medium to long run living standards are largely determined by productivity. So to try and take credit for strong employment growth despite lack of output growth is to take credit for poor productivity growth (or, in the UK case, the virtual absence of productivity growth over the last five years). Which is very close to wanting to take credit for the lack of growth in real incomes.

In short, it is output that matters, not employment. Employment growth due to output growth is good, but employment growth without output growth is not. To extol employment growth without output growth could be described as a luddite point of view!

The half-truth concerns the distributional impact of a recession. On average we are worse off in a recession, but those that really feel it are workers that lose their jobs. For a given level of output in a recession, it would be better if the pain was evenly spread through cuts in living standards and little increase in unemployment. So, if (and this if is critical) productivity growth just paused during a recession, but then made up for all the lost ground afterwards, that would probably be a good thing.

So, in that very specific sense, lack of productivity growth might be a good thing given the lack of a recovery, on the assumption that we get it all back again later. However I doubt very much whether the government would want to take credit for stagnant productivity during their term of office for two reasons. First, it probably has very little to do with them, and rather more to do with the flexible labour markets encouraged by their predecessors. Second, there are very strong doubts that we will get back all the lost productivity growth: the OBR is assuming we get back virtually none.

So to claim credit for strong employment growth is the same as claiming credit for poor productivity, and it is hypocritical to try to do the first and not the second. [2] Given that many economists argue that poor productivity growth is our number one problem right now, implicitly claiming credit for creating the problem in the first place is somewhat bizarre.

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

(4) The immediate necessity of belt tightening

(5) The long term plan

(6) 2013 recovery vindication

(7) The strong recovery

[1] There are many reasons to doubt the ‘quality’ of the employment growth (see for example David Blanchflower (pdf)), but that is not my concern here, except in so far as that helps explain lack of productivity.

[2] Although this highly unusual lack of productivity growth after a recession pretty well coincides with the period of the coalition government, it is far from clear whether there is a connection or not. If poor productivity is down to firms using workers rather than capital because the recession plus austerity has pushed down wages, then there is a connection between austerity and poor productivity. However other explanations are equally possible, which is why it is called the UK productivity puzzle. 

Mediamacro myth 7: the strong recovery

It was perhaps inevitable that when output did start growing again in 2013, everyone would breathe a huge sigh of relief, and extol what was happening. But that time has passed, and yet mediamacro - with few exceptions - has not told people the truth about the recovery. What they have not said is that the recovery does not really deserve that name. This picture tells you why.

The first point is to stop talking about GDP, and start talking about GDP per head. An economy that grows because it has more people in it is not obviously a good or bad thing, and from the government’s point of view - given its (missed) net migration target - it represents a failure. It is GDP per head that determines living standards, which is what matters.

Now if you were on a journey, and in one part of your journey you were delayed by 10 minutes because of a traffic jam, you would be relieved when that jam came to an end, but would you call moving again a recovery? Surely you would only talk about a recovery if you made up for some of that lost time. As the chart shows, we have failed as yet to make up for any of the ground lost not just in the 2009 recession, but also ground lost as a result of fiscal austerity in 2010 and 2011.

So we have not really seen a recovery. Maybe the pessimists are right, and we will never recover any of that lost output, but still you do not call it a recovery.

I can put it another way. Quarterly growth in GDP per head since the beginning of 2013 has averaged about 2% at an annual rate. That is below the average growth rate since 1955. A recovery from a deep recession would have growth rates well above the long term average.

So current growth is unexceptional, and nothing to write home about. The half-truth here is that growth elsewhere has also been poor, but largely because other countries have also implemented premature fiscal austerity. (In terms of GDP per head, both the US and Japan have done better than the UK since the recession.) But even GDP per head may be giving us an overoptimistic picture about average living standards. I’m going to break my one chart rule for this series to add this from the ONS. It plots GDP per head, and Net National Disposable Income (NNDI). The first measures production per head before depreciation, whereas NNDI measures income per head after depreciation.

NNDI has not increased at all under the coalition government, and the reason is that while overseas agents have been receiving some of the income from UK production, domestic residents’ income from overseas production has not been increasing by as much. This is a key reason why the UK current account deficit has been increasing.

In a nutshell, the prosperity of the average citizen in this country has hardly increased over the period of this coalition government - a result that is totally unprecedented since at least WWII. As recoveries from recessions go, this does not seem like a recovery worthy of the name. Yet we keep being told by mediamacro that the Coalition’s strong card is its economic record!

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

(4) The immediate necessity of belt tightening

(5) The long term plan

(6) 2013 recovery vindication

  

Mediamacro myth 6: 2013 recovery vindication

The idea that austerity during the first two years of the coalition government was vindicated by the 2013 recovery is so ludicrous that it is almost embarrassing to have to explain why. The half-truths in this case are so flimsy they do not deserve that label. I can think of two reasons why that claim could have any credibility. The first is that people confuse levels and rates or change. The second is that some critics of austerity might have occasionally overstated their case.

To see the first point, imagine that a government on a whim decided to close down half the economy for a year. That would be a crazy thing to do, and with only half as much produced everyone would be a lot poorer. However a year later when that half of the economy started up again, economic growth would be around 100%. The government could claim that this miraculous recovery vindicated its decision to close half the economy down the year before. That would be absurd, but it is a pretty good analogy with claiming that the 2013 recovery vindicated 2010 austerity.

The second point is that some critics of austerity did on a few occasions allow their rhetoric to get the better of them, and suggested that if austerity continued a recovery would never come. That was always an overstatement. It became particularly inappropriate because, as I noted in my last post, fiscal contraction did pause in 2012. But serious analysis should not be about rhetoric, or as Paul Krugman notes about passing off perception as reality. (Sometimes in my rather British way I think Paul is a little too combative with those he might have a chance to persuade, but I’m in 100% agreement with him here.)

What any knowledgeable and honest media reporting should have done is tear the vindication argument to shreds. It should have asked what contribution fiscal austerity made to the slowest recovery from a recession for centuries. That would be an honest debate. No doubt there are factors behind the delayed recovery that the government were powerless to influence, like a weak banking sector for instance. But if the banking sector is unable to support an expanding private sector, which in a recession isn’t too keen on expanding anyway, you have no business throwing public sector employees out of jobs. [1]

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

(4) The immediate necessity of belt tightening

(5) The long term plan

  
[1] And please, before anyone comments about how fast employment has grown, look at the data for unemployment - it went up in 2011. The deeper problems with the 'didn't we do well on employment' line will be addressed in the penultimate post in this series.

Mediamacro myth 5: the long term plan

People should by now know the Orwellian character on this government’s spin enough to suspect that if they keep on asserting something, it is almost certainly not true. So it is with the idea of the ‘long term economic plan’. Here is a chart of the original plan for the deficit, and what has actually happened.

  

UK current budget deficit: June 2010 plans and outturns (per cent GDP).

The government kept their word on reducing the deficit in financial years 2010-11 and 2011-12, in part through sharp reductions in public investment: cancelling repairs to schools, reducing spending on flood defences etc. But that helped kill the recovery, so they allowed deficit reduction to stall.

The 2010 plan put the pace of deficit reduction at the centre of policy making, and the data make it clear that in 2012 the plan changed. Why did mediamacro not call this for what it was. There are two half-truths here. First, austerity in terms of squeezing lots of government departments continued. Welfare reform continued to cause plenty of misery, and food banks continued to grow. So in that very visible sense, the policy of squeezing the state was not abandoned. Second, the Chancellor’s main fiscal rule allowed him to delay austerity in this way (because the form of the rule, since abandoned, was sensible in that respect), so in that sense there was no dramatic change. However in terms of the deficit numbers, fiscal austerity was put on hold in 2012. 

Not making it clear that the plan had changed was a serious failure. If that call had been made, the Chancellor would have had to account for why he had allowed deficit reduction to stall, and that in turn would have established quite clearly that previous austerity had delayed the recovery. Failure to make that call allowed (and continues to allow) the Chancellor to pretend that the delayed recovery was not his fault, when it so clearly was. (Some journalists also got sidetracked in focusing on OBR forecasts, rather than on the OBR’s assessment of the impact of austerity.) Finally not saying that the plan had changed encouraged the ludicrous claim that the 2013 recovery vindicated austerity, which is tomorrows myth.

So this is why the Chancellor keeps on talking about his ‘long term economic plan’, because to admit he changed his plan (as a sensible reaction to the delayed recovery) would open the door to questions about why the plan had changed, and therefore about the damage that austerity had done. It that sense the ‘long term economic plan’ is a key part of the mediamacro myth. 

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

(4) The immediate necessity of belt tightening

Mediamacro myth 4: The immediate necessity of belt tightening

In previous posts in this series (0, 1, 2, 3) we have established that the large increase in the deficit in 2010 was a consequence of the recession and not Labour profligacy - the Labour government was clearly not profligate - and that this deficit was not causing any panic in the financial markets. But surely it is a good idea for the government to tighten its belt when it runs a large deficit, just as individuals who spend more than they earn need to take action? Mediamacro is fond of drawing this analogy.

The first point to clear out of the way is that individuals do not always try and ‘balance their books’. People generally spend more around Christmas, and make up any deficit through the rest of the year. You can think about deficits and surpluses that are just the result of the normal economic cycle in a similar way.

As the 2010 deficit was a consequence of the recession, can we therefore assume that it will correct itself as the economy recovers? The answer depends on the extent of the recovery. If we returned to the pre-recession trend level of output then roughly yes [1], but not many economists think that is likely. Instead organisations like the OBR assume that much of the impact of the recession on output will be permanent. We can call the additional deficit that arises from this permanent loss of output ‘structural’. The structural deficit will not go away without some government action.

A good rule for an individual with a ‘structural deficit’ is to take action to correct it sooner rather than later, particularly if there are limits to their ability to borrow. Our mediamacro myth is that the same applies to governments: the 'maxing out the national credit card' idea. This is something that every economics student learns is wrong in the first year of their studies. Cutting the government’s deficit reduces aggregate demand, which reduces output. An individual that cuts their spending does not need to worry about the impact their decision will have on the rest of the economy, but the government because it is so large does have to think about this. When the government is free to borrow more at no extra cost (which we have seen that in the UK it was), then it has an important choice about when to start reducing its deficit.

Is there ever a good time to reduce the deficit, if output will always take a hit? There are two reasons why some times are much better than others. First, there is now quite a lot of evidence that cutting deficits in a recession has a larger impact on output than cutting deficits at other times (see here and here). Second, theory tells us that cutting deficits need not in principle harm the economy at all if monetary policy can offset their deflationary impact. If the Bank of England can cut interest rates at the same time as the government cuts its spending, the net effect on the economy could be zero.

This is a crucial point. Indeed it is the half-truth on which the coalition’s policy of immediate austerity seems to have been based. Modern mainstream macroeconomics says that in normal times governments do not need to worry about the impact their fiscal decisions (like austerity) will have on the economy, because monetary policy will offset that impact. In a speech to the RSA in 2009 this was the idea that the future Chancellor put at the centre of his macro strategy.

There was only one problem, which turned out to be extremely serious. Just before he made that speech, UK short term interest rates hit 0.5%, and the Bank of England decided they could be cut no further. They had reached what economists call the ‘Zero Lower Bound’, sometimes described as a liquidity trap. As a result conventional monetary policy was unable to offset the deflationary impact of austerity, and 2010 austerity killed the recovery that seemed to have just started. We had to wait until 2013 for a period of sustained output growth. The Bank did have some unconventional policies that it tried - most notably Quantitative Easing - but as it had no idea how effective these were, they were hardly an adequate substitute for cuts in interest rates.

Was the problem of nominal interest rates hitting a floor and therefore not being able to offset the impact of fiscal austerity on output something economists had not foreseen? Is that why the Chancellor ignored this possibility in his 2009 speech? Far from it! Keynes had dealt with the problem in the Great Depression in the 1930s. More recently, the same problem had arisen in Japan in the 1990s. By 2009 a large number of articles had been written about this problem, which is why economists like Paul Krugman and myself were such strong critics of fiscal austerity the moment it was proposed.   

Most mediamacro myths in this series just need a look at the data and common sense to bust. In those cases it is natural to look at the media itself for the source of the mediamacro problem. In this particular case busting the myth requires some (entirely conventional) macroeconomics. The fact that this macroeconomics has not found its way into political discussion of fiscal policy may reflect other problems in the knowledge transmission mechanism, including the fact that outside the US central banks seem very reluctant to acknowledge the severity of the Zero Lower Bound/liquidity trap problem.

It is difficult to overstate the consequences of this. As we have seen, the prospective Chancellor in a 2009 speech setting out the theoretical framework behind his policy ignored the problem, even though it was in front of his eyes. Each household in this country lost on average at least £4000 as a result. Yet incredibly, the same person proposes to make exactly the same mistake after 2015, and it is largely left to a few academic bloggers to point this out.

 

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

[1] Not a complete yes, because although the deficits caused by this kind of recession would be temporary, they will have raised the level of debt, and the interest on that debt will add to future deficits. We can only ignore that if we soon expect a future boom of equal magnitude, which would be an unwise thing to do. 

Mediamacro myth 3: the 2007 boom

The only way you can sustain the myth that Labour was fiscally profligate is by suggesting that immediately before the recession the UK was experiencing a massive boom. In an economic boom tax receipts are high and spending on transfers low, so the budget should be in surplus. If it is in fact in significant deficit, that indicates serious fiscal laxity.

There are two half-truths here. First, everyone remembers talk of a housing boom, and a housing boom sounds pretty similar to a more general economic boom. But more seriously, the idea that there was a huge boom in 2007 appears to be backed up by data from the IMF and OECD. Let us take each in turn.

This chart of house prices clearly shows a housing boom in the middle of the last decade. But does it indicate a general economic boom in 2007? There are two problems: there is clearly an underlying trend in the data, and house prices rose most rapidly at the beginning of the decade. When you take any trend into account, the middle years of that decade look like a plateau.

The upward trend in house prices is likely to be due to two factors: a growing mismatch between demand (encouraged in part by inward migration) and supply (very few new houses being built), and lower real interest rates. (The reason why low rates are important is explained here, and the link with demand and supply here.) As all these factors can also vary in the short term, this indicates that the house price cycle need not always be correlated with the more general economic cycle. The clearest indication of this is what has happened to London and South East house prices over the last two years, which are now well above 2007 levels. Does that mean the region is in the middle of an even more massive boom? Of course not.

If you look at both the OECD and IMF’s current measures of the output gap (the difference between actual output and the level that would keep inflation constant), they suggest a large positive gap for the UK in 2007. (3.5% in the latest OECD Economic Outlook.) That is a pretty large boom. The problem here is that in 2007, the OECD only thought the output gap at the time was less than 0.5%, which is no boom at all. Why the change in view? The answer is the recession, and the UK’s slow recovery. To cut a long story short, the OECD in effect retrospectively fit a gradually moving trend through the data (for productivity rather than output, but it comes to the same thing), so the longer the UK fails to catch up with its pre-recession trend, the more the OECD has to bend that trend over the past. The more it bends the trend, the more 2007 looks like a boom.

Could the OECD be right now and wrong back in 2007? The big problem here is that none of the more reliable measures behaved in 2007 as you would expect in a large boom. Inflation was happily bobbing around the Bank’s 2% target. Interest rates were rising, but not rapidly. Unemployment was a little higher than a couple of years before. Consumer debt was rising, but mainly because of rising house prices and mortgages. As the Bank’s Ben Broadbent points out, in the subsequent recession “losses on most domestic loans have actually been unexceptional. Instead, it is UK banks’ substantial overseas assets that caused much of the damage.”

This gets us to the key point as far as Labour profligacy is concerned. What is relevant to this issue is not what we think about the 2007 UK economy today, but what the general consensus was at the time. As we have already noted, the 2007 OECD Economic Outlook thought at the time that the UK economy was pretty close to trend. As far as I can see, this was a consensus view. The IFS Green Budget for 2007 had an output gap of effectively zero. The IMF’s Article IV assessment published around Budget time in 2007 came to a similar conclusion. The reason this was the consensus view is the data noted in the previous paragraph.

One final look at the numbers. If we assume real growth of 2.5% (again a consensus view at the time) and 2% inflation, then a debt to GDP ratio of 40% would imply that the sustainable deficit was 1.8% of GDP. As the estimate of the output gap at the time was around zero, there was no reason to adjust this for the state of the cycle. The actual deficits for financial years 2006-7 and 2007-8 were slightly over 2.5% of GDP. The difference is what I call mild imprudence, and would have been fairly easily to correct in subsequent budgets. By 2009-10 the deficit had risen to 10.2% of GDP because of the recession. So the deficit in 2010 was a consequence of the recession, not Labour profligacy before the recession.

And if you cannot shake off that idea that Gordon Brown was profligate, one final set of figures. Between financial years 1979 to 1996 (the 18 years of Conservative government), the deficit averaged 3.2% of GDP. From 1997 to 2007 it was 1.3%. Now maybe the Conservatives were a bit unlucky with having two recessions on their watch, so the equivalent cyclically adjusted figures are 2.6% and 2.1%. One last time: Labour fiscal profligacy is as mythical as the unicorn.

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

My New Statesman article that provides a summary of this series is also now available online.

Mediamacro myth 2: Labour profligacy

As I noted in my previous post, the very big government budget deficit in 2010 was largely the result of the recession. That fact is difficult to square with the myth that the coalition government rescued the economy from an impending financial crisis, so it is important to push another explanation for the large deficit: that it reflected the profligacy of the previous government.

Economic journalists know full well this is a myth. Yet it is a myth repeated on countless occasions by the coalition parties, and by journalists working for the partisan press. On one occasion one of these journalists tried to rubbish a post where I wrote it was a myth, and I hope learnt to regret the experience.

Just inspecting the chart in my last post shows this myth is nonsense. But the political commentators that are central to mediamacro seldom look at economic data. What they do remember of the pre-recession budgets of Gordon Brown was some criticism that he was not being as prudent as he might be. That memory is both correct (both the IFS and NIESR made that criticism) and the criticism is valid, as I set out in my study of this period. (To read the study free before the election, go here.) This is the half-truth that sustains the myth.

But mild imprudence is not profligacy. We can see that by looking at another chart, for the debt to GDP ratio. Profligacy would imply a rapidly rising ratio, but this ratio before the recession (37% in 2008) was below the level Labour inherited (42% in 1997), and below its fiscal rule figure of 40%. No profligacy there.

So the Labour profligacy argument on its own would fall apart, if it was not itself buttressed by another myth: the argument that the government should have been running large surpluses in 2007, because we were in the midst of a major boom. That myth is important and widespread enough to deserve a post of its own tomorrow.

One final point. There was no impending financial crisis in 2010, but there was a very real financial collapse in 2008. Even though Labour was not profligate, if it had been more prudent wouldn't that have given it more ammunition to fight the recession caused by the financial collapse? To the extent that Labour's countercyclical fiscal policy in 2009 was moderated by a worry about debt (which I suspect it was), this is a half-truth. But as Vicky Pryce, Andy Ross and Peter Unwin state in their book 'Its the Economy Stupid: Economics for Voters' (which I happily recommend, and which in its initial chapters covers much of the ground of this series):

"The elimination of the UK's structural deficit [under Labour before the recession] would not have been even a sticking plaster in the face of the haemorrhaging of the finance sector's jugular"

I would also add that the Conservatives not only argued for even less financial regulation before the financial collapse, but opposed Labour's measures to moderate the recession in 2009.

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

Mediamacro myth 1: 2010 Britain faced a financial crisis

The idea that the Coalition rescued Britain from a crisis is routinely put forward as fact by both the Conservatives and Nick Clegg. Every time the media let such statements pass (as they invariably do), the language seems to get more florid: Clegg’s latest is that the coalition was born in the “midst of an economic firestorm”. [1]

The facts say this is pure nonsense. The economy had begun to recover from the recession, and this recovery might have continued if it had not been hit on the head by domestic and Eurozone austerity. As Larry Elliott makes clear (see also here), there was no sign of any market panic, either in the markets for Sterling or government debt. 

But the government’s budget deficit was very large, and debt as a proportion of GDP was therefore growing. If, through a separate myth, you have created the idea that the major (perhaps only) goal of aggregate fiscal policy is to reduce deficits, this seems like a serious problem. But the deficit was rising because of the recession. It always does rise in a recession and fall in a boom, as the chart below shows. It was particularly high in 2010 because this recession was particularly deep.

Any economist would cringe at the idea that policy should try and eliminate deficits and surpluses created by the economic cycle, because that would mean destabilising the economy. This is sufficiently well known (cyclical deficits and surplus are called ‘the automatic stabiliser’) that it could undermine the idea that the high deficit was an immediate problem. This is one reason why it is important to push another mediamacro myth - the idea of Labour profligacy, which we debunk tomorrow. [2]

So where is the half-truth that gives the ‘firestorm’ myth some credence? It is of course the Eurozone crisis, and the idea that the UK could suffer a similar fate to the Eurozone periphery. But academic macroeconomists understand that the situation of a country with its own central bank, like the UK, is quite different from a country without, because the central bank can (and in the UK will) act as a lender of last resort, so the government will never ‘run out of money’. That simple fact is sufficient to prevent any crisis happening for an economy like the UK. Greece was profligate, and had to default, but the crisis in the rest of the Eurozone ended the moment the European Central Bank agreed to act as a lender of last resort in 2012.

Why is it so important to keep up the pretence that in 2010 the UK economy was ‘on the brink’ of a financial crisis? Because only then can the pain of the subsequent few years be excused. The truth is that the failure to recover until 2013 was not the inevitable cost of rescuing the economy from crisis, but an avoidable choice by the Coalition government. The delayed recovery, and the damage that did to living standards, was at least in part a direct consequence of attempts to reduce the deficit far too early, and there was no impending crisis that forced the government's hand. [3]

Previous posts in this series

(0) UK mediamacro myths: an introduction

[1] There is something about Clegg that wants me to see him in the best possible light. So I imagine that, when confronted just after the 2010 election by briefings from the Treasury and the Bank about the dire economic situation, he really believed what he was reading. He did not realise that, from the Treasury at least, it is standard practice to say this to any incoming government. (One of the interesting untold stories of austerity is the extent to which it was encouraged by senior Treasury civil servants.) But I suspect my imagine of 'Clegg the naive' is, well, imaginary.

[2] If the financial crisis had permanently lowered UK GDP, or the tax potential of GDP, then that would also imply the need to reduce government spending at some point. But, as most economists agree, you do that when monetary policy can offset the impact of these cuts on demand. You do not choose to undertake austerity when short term interest rates cannot fall any further.

[3] The clear majority of macroeconomists agree that austerity when short term interest rates cannot fall any further will reduce output. The OBR calculate that austerity cut growth in financial years 2010-11 and 2011-12 by 1%, but there are good reasons for thinking this may be an underestimate. 

UK mediamacro myths: an introduction

I’ve written an article for the New Statesman entitled “Covering up the austerity mistake”. The first half is about the nature of the mistake, which readers of this blog will be familiar with. The second half is how this mistake was effectively ignored by most of the media. Given the size of the mistake - lost resources worth on average at least £4000 for each UK household - calling this a media cover-up is hardly an exaggeration.

Let’s be absolutely clear: this £4000 figure is not just the opinion of one economist. It is based on analysis by the OBR, which the media is happy to treat as authoritative on most occasions. The OBR say austerity reduced GDP growth by 1% in both financial years 2010-11 and 2011-12. With no significant growth in 2012, that means a total output cost of at least 5% of GDP, which is about £1,500 per person or £4,000 per household. The only serious challenges I have seen of this analysis are that the numbers are too small. My own estimate of the total cost of austerity would be considerably higher, but I tend to use the OBR based figure because the OBR rightly has authority.

This cover-up is only part of the story. What I call ‘mediamacro’ continues to portray the economy as the Coalition’s strong card, yet all the data suggests this has been the worst recovery on record, with an unprecedented failure of living standards to rise. The combination of supposed competence and terrible outturns can only be sustained through a series of interlinked macroeconomic myths. Mediamacro - and particularly the political commentators who either perpetuate or fail to challenge these myths - have created an alternative reality, where a return to average growth rates during what should be a recovery period is treated as a triumph, and where stagnant productivity is either ignored or celebrated (by praising rapid employment growth).

That the governing parties want to cover-up such a big mistake and create this alternative reality is understandable. They enjoy the privilege of having at least half of the print media available to create and promulgate the myths that allow the cover-up. But myths cannot be created out of thin air. To get the majority of the remaining media to perpetuate these stories requires that they have some link to reality - what I call a half-truth, but which is really a much smaller fraction of a truth.

As a result we have the bizarre situation that this last five years has been terrible for the average person’s living standards, but nevertheless a majority think the government is relatively competent at managing the economy. This paradox can only be explained by the widespread belief in a set of interlinked myths supported by the media. It should be the task of the non-partisan media to expose myths rather than sustain them, and failure to fulfil that task diminishes our democracy.

As this is so central to the election, I want in each of the next 8 days to discuss a particular macro myth: how it springs from a half-truth and interlinks with other myths, but why it is clearly not supported by the facts. (Apologies to non-UK readers whose interest may be less direct, but I hope you understand that occasionally I really should be parochial. Normal service will be resumed shortly after 7th May.) Each post will be short, with one diagram at most, and easily accessible to non-economists. It is really important that the facts they contain get across to as many as possible.