The benefit cap: more media driving policy

Yesterday I talked about how the media, and the right wing tabloid press in particular, plays a major role in determining not only government policy on immigration and the EU, but also determining the policy of the Labour opposition (on austerity, immigration and the EU). Yesterday also saw the introduction of a reduced benefit cap in the UK, which is another issue where both government and opposition policy has its origins in the tabloid press.

The benefit cap imposes a maximum figure you can receive in benefits (where benefits include child benefit). The previous cap hit around 20,000 households, mainly those with large numbers of children or paying very high London rents. (This and subsequent figures come from here.) The new lower cap will hit nearly 90,000, and its impact will be felt throughout the country. Those already capped will lose a further £3,000 per year (in London) or £6,000 per year (elsewhere). The government expects those households newly affected by the cap to lose an average of £2,000 a year.

The origin of this cap come from countless stories like this in the tabloid newspapers. Such stories, which are hardly ever contextualised in terms of how typical they might be, understandably annoy many people. As a result, the policy of a benefit cap has proved very popular. The government formalised motivation for the original cap with the idea that no one on benefits should receive more than they could by working. But as Declan Gaffney explained in this superb post:

“people are not generally better off on benefits than working: that’s the effect of having a minimum wage to which levels of in-work support (tax credits and housing benefit) are calibrated. As long as someone is working 16 hours a week at the legal minimum hourly wage, they are better off in work. So the principle that the public approves – the one they are in fact approving when they give their support to the cap- is already built into the social security system. But as the public is not generally familiar with the workings of the system (why should they be?), they are not necessarily aware of this.”

However the cap was quantified by comparing all the income of those out of work with just some of the income of those in work.

“So child benefit, child tax credit and housing benefit are included on one side of the comparison (out of work) and excluded on the other (working). You can demonstrate anything if you’re prepared to rig the comparison in this way, and that is precisely what the government has been doing.”

It is difficult to imagine any other motivation beside garnering popularity or appeasing the press for why the government introduced the benefit cap. The original cap raised relatively small amounts, but had a large negative impact on already poor children. The evidence suggests that only a very small percentage of those hit by the cap were encouraged to find work or move. But such was the popularity of the cap, that both the LibDems and Labour accepted it ‘in principle’. Gaffney’s post contains this very revealing quote from the LibDem Lord Kirkwood

“I want to make it clear that I am implacably opposed to a household benefit cap in principle. People's eyes glaze over when I try to explain my main reasons. I tried it in Grand Committee and by the end people looked at me as though I was possessed..... What I should really like to do with Clause 94 is vote against the whole thing. However, my noble friend Lord German and one or two others took me into a dark room, sat me down and said, "That wouldn't be sensible because the great British public know the square root of next to nothing at all about the detail of the technicalities". He has persuaded me that I should mitigate Clause 94, and I am prepared to do that.”

The benefit cap is also an example of where an opposition tactic of ‘accepting in principle’ but tinkering at the edges just becomes failed appeasement. Gaffney ends by saying: “there are costs attached to this strategy, in terms of the quality of political debate and more generally in the endorsement it gives to a big untruth about the social security system and those who are relying on it.” His post was written about the initial cap in 2012, and yesterday’s intensification of the policy suggests he was absolutely right. (Contrast with the bedroom tax, which Labour did oppose.) [1]

In 1966, Ken Loach made the television play Cathy Come Home about homelessness. In a small way it shocked the nation, by making many people aware of something that was otherwise unreported. Today what we have on television is Benefit Street. Ken Loach recently made the film I, Daniel Blake about the victims of the government’s benefit system which has helped create the huge expansion of food banks. But if the film was shown on TV today, I doubt whether it would have the same impact as Cathy Come Home. The idea that most benefit claimants are in some sense fake remains embedded in the public consciousness, and the belief is supported by the same media that initially helped create it. It is another politicised truth: a falsehood that politicians and the political media pretend is true.

 [1] The danger of conceding the principle can also be illustrated by austerity. Once you accept that the deficit is a problem that requires an immediate solution, there are no limits on how much austerity you have, as public credit will always go to those to try and solve the deficit problem quickly.

Freedom of Movement, Austerity, Labour and MPs votes on Brexit

In three important ways Labour’s current attitude to Freedom of Movement reminds me of their pre-Corbyn attitude to austerity. First, Labour while in government encouraged immigration from the EU, and the UK economy was probably a lot better off for it. But they now tend to say that was a mistake. To his credit Miliband never conceded that Labour while in government borrowed too much, but he deliberately chose not to strongly contest Conservative and media claims that they had.

Second, their policy for the future is now to call on some controls on Freedom of Movement as part of the Brexit negotiations. That is rather different from May’s view that ending Freedom of Movement is a red line, but I doubt many voters will notice the difference. The fiscal policy Labour campaigned on in 2015 was significantly more sensible than Osborne’s policy, but they chose not to campaign very much on the difference, insisting that they too ‘were tough on the deficit’. Immediately after 2015 a number of MPs argued that Labour should accept the need for austerity.

Third, in both cases - austerity and restricting Freedom of Movement - the policies as enacted or proposed by the Conservatives did and will damage the economy. Austerity cost every household at least £4,000 (it could easily be £10,000), and reducing immigration from the EU is likely to have a large negative impact on the public finances, both directly and because we will have to leave the single market. Yet because Labour in effect conceded the issue (on austerity) and concedes the issue (on FoM) they find it difficult to say this in public. That in turn means that the public hardly hear these economic arguments.

In both cases Labour is not assessing what policies best enable them to achieve their principles, but instead what they need to do to avoid losing votes. [0] With austerity Labour became convinced that voters could not see beyond simple ‘government like a household’ analogies. After Brexit (and in some cases before that) Labour is convinced that they will lose votes heavily in their traditional heartlands if they fail to argue for controls on European migration.

You might think this is just normal politics. If voters want something strongly enough, it is self-defeating to fight that. Better to move your policies towards what voters want. But that ignores my third point of similarity between austerity and Freedom of Movement. In the case of austerity, and for a significant number with Freedom of Movement, voters’ views are based on misunderstandings involving economics. As I argued in this post, many voters think restricting immigration will improve their own access to public services, whereas in reality it will do exactly the opposite.

If you think it just seems wrong for politicians to support (or not actively oppose) policies that would make people worse off just because people erroneously believe the opposite, I would agree. [1] But it is important to understand one important reason why they do this. It reflects an environment which gives virtually no time to economic expertise, by which I mean treating it as knowledge rather than just one opinion to be balanced against another. The BBC refuses to treat economics, unlike climate change, as knowledge whenever it is politically contested, and it is deliberately excluded from most of the tabloid press.

If you think that account is reasonable, now think about Brexit, and the vote which (hopefully) MPs will have on whether to trigger Article 50. The referendum was advisory (as even Nigel Farage admits), and won by only a tiny majority. They could say that on a matter of such importance that is too slim a majority on which to leave, but they will not. They could insist that given the closeness of the vote the government should try and again negotiate with the EU, but they will not. Labour MPs in particular might reason that because they opposed offering a referendum in the first place*, the argument that they have to respect the ‘will of the people’ makes no logical sense. [2]

Even if they do not vote against invoking Article 50, they could say that while a majority voted to leave the EU, that is not equivalent to leaving the single market, and therefore any negotiation that did involve leaving the single market would require a separate referendum. Probably a majority of MPs would like to vote that way, because they know the extent of the harm leaving the single market will cause. But the majority will not, because they will be branded by the tabloid press as denying the will of the people. They fear that will lose them votes, and perhaps even threaten their physical safety. Once again, as with austerity and EU migration, the media will prevent many MPs doing what they believe is right. [3]

[0] As Wolfgang Münchau correctly argues here, what centre-left parties around the world were actually chasing were short term votes, or worse still focus groups. Supporting austerity was a disaster for the centre-left in the medium term, just as alllowing Brexit will be for Labour. (One very minor but annoying point on Münchau's piece: we wrote our Brexit letter all by ourselves. No one 'got us' to do it.) 

[1] The alternative is that MPs like voters do not understand the economics. I’m not sure if this is better or worse.

[2] You do not want to hold a referendum because there are no grounds for doing so, and therefore it is not something a referendum should decide. Or because you want to stay in even if a majority said they didn’t. Actually holding a referendum does not change these views..

[3] The situation is of course much worse because of the stance taken by either leader. May’s statement that the headlines in the Mail and Sun after the court decisions were reasonable is quite extraordinary. Corbyn’s position is hopelessly compromised by his own antagonism for the single market, and it was naive if Labour party members who voted for him ever thought otherwise.

*Postscript (7/11/16) Although this was true under Miliband, in their shell shocked state after the election they actually voted in favour (thanks Sunder Katwala @sundersays for reminding me).

Public investment and fiscal rules

When I started writing this paper with Jonathan Portes, I was genuinely unclear about whether fiscal targets should be for the total deficit (which includes public investment) or for the current balance (which excludes it). This was partly because some of the conventional reasons for excluding investment seemed poor. For example, to assume all investment paid for itself in the form of higher activity and therefore higher taxes is obviously wrong. To avoid this by having each project treated on its own merits (it would happen if it generated a social return greater than some cut-off or interest rate) is better but ignores the uncertainties that any such calculation inevitably involves.

By the time the paper was finalised, and later when it came to proposing a rule that the Labour party could adopt, it was clear to me that any target should be for the current balance, with a separate target for the public investment to GDP ratio. We can see a very strong argument for doing that right now. Jean Pisani-Ferry is one of a steady stream of economists saying that it really is time to increase public investment, and they are backed up by international organisations. But despite all this being true for some time, there is very little sign of governments taking much notice. As Pisani-Ferry notes: “On average, governments are using the gains implied by lower interest rates to spend a bit more or to reduce taxes, rather than to launch comprehensive investment programs.”

The political economy reason why this is happening is straightforward enough. When both current and capital spending have been squeezed for some time, if this constraint is partially relaxed governments have a choice. Public investment generally benefits future generations as well as voters today, while current spending all goes to the current generation. Governments who aim to maximise votes for themselves will therefore tend to ignore investment spending.

Exactly the same process happens in a recession. It is generally easier and less painful to cut an investment project than fire some nurses or teachers. The danger with deficit targets is therefore than whenever these targets bite, public investment is the first to suffer. This is exactly what happened in the UK in 2010 and 2011, which accounted for a great deal of the deflationary impact of the Coalition government’s fiscal consolidation.

Those in the know will point out that the Coalition’s main fiscal target was for the current balance. That is why it is vital to also have a separate target for the public investment to GDP ratio. That would ensure that over the next few years governments do not just pretend to do something about infrastructure and other public investments by funding one or two high profile projects, while continuing to keep overall public investment low. That is what George Osborne did, with planned investment over the next five years between 1.5% and 1.9% of GDP. If Philip Hammond does not change these plans to something more like 3%, we will have another Chancellor who talked the talk on investment but is not prepared to put money where his mouth is.

Ann Pettifor on mainstream economics

Ann has a article that talks about the underlying factor behind the Brexit vote. Her thesis, that it represents the discontent of those left behind by globalisation, has been put forward by others. Unlike Brad DeLong, I have few problems with seeing this as a contributing factor to Brexit, because it is backed up by evidence, but like Brad DeLong I doubt it generalises to other countries. Unfortunately her piece is spoilt by a final section that is a tirade against mainstream economists which goes way over the top. Let me just go through the factual errors.

“Economists dictated the terms for austerity that has so harmed the British economy and society over the past ten years.”

The only support she gives for this statement is the 20 economists who signed a letter to the Times on 14th February 2010. She neglects to mention that 58 equally notable economists signed a response in the Financial Times on 18th February arguing the 20 were wrong. Austerity has always been a minority view among academic economists, a minority that has got smaller over time. Of course those that signed the first letter, and in particular Ken Rogoff, turned out to be a more prominent voice in the subsequent debate, but that is because he supported what policymakers were doing. He was mostly useful rather than influential.

“As the policies have failed, the vast majority of economists have refused to concede wrongdoing, nor have societies been offered alternatives.“

In the case of the 20 economists who signed that letter, nearly half did revise their views just two years later. More importantly, for the last few years pretty well every macroeconomist of note, including Ken Rogoff, has advocated a substantial increase in public investment. So this sentence, in so far as it relates to austerity, is almost as wrong as it could be

“[On Brexit} All the heavyweights of the economics profession … were wheeled out to warn the British people of economic facts known, and understood apparently, only to ‘experts’... But the ‘experts’ and the economic stories they tell have been well and truly walloped by the result of this referendum. And rightly so, because while there is truth in the story that international and in particular European cooperation and coordination are vital to economic activity and stability, there is no sound basis to the widely espoused economic ‘religion’ that markets—in money, trade, and labour—must be unfettered, detached from democratic regulatory oversight, and must be left to ‘govern’ whole countries, regions, and continents.”

Where did these heavyweights talk about “economic facts known, and understood apparently, only to experts”? When they were given the chance, they explained the common sense idea that trade would suffer if we left the EU because it is easier to trade with your neighbours, and the easy to understand empirical findings that more trade increases productivity and therefore economic growth. There is no religion involved at all, but rather statistical evidence. If you are looking for religion, you need to focus on the handful of economists supporting Brexit, who really did believe that it could usher in a neoliberal nirvana that would more than offset the costs of Brexit. To the extent that the public ignored the warnings of economists, it was probably because these warnings were ‘balanced’ in the media by this handful.

When Ann talks about the failings of economists related to the financial crisis she has a point, but it is one that she grossly exaggerates. Economists hardly “led the way to the re-regulation and ‘liberalization’ of the finance sector over the past 40 years”. The way was led by the financial sector itself. If more economists had backed up rather than dismissed Rajan’s warnings in 2005, I doubt if anything would have changed. Why do I think this? Because mainstream economists have subsequently argued that the only way to prevent another crisis is to substantially increase the capitalisation of banks, but they have been completely ignored by policymakers. If economists are being ignored after the financial crisis which created untold damage, why should things have been any different before the crisis?

I think the same point applies to globalisation. Most economists have certainly encouraged the idea that globalisation would increase overall prosperity, and they have been proved right. It is also true that many of these economists did not admit or stress enough that there would be losers as a result of this process who needed compensating from the increase in aggregate prosperity. But once again I doubt very much that anything would have changed if they had. And if they didn’t think enough about it in the past, they are now: see Paul De Grauwe here for example.

There is a regrettable (but understandable) tendency by heterodox economists on the left to try and pretend that economics and neoliberalism are somehow inextricably entwined. The reality is that neoliberal advocates do use some economic ideas as justification, but they ignore others which go in the opposite direction. As I often point out, many more academic economists spend their time analysing market imperfections than trying to show markets always work on their own. They get Nobel prizes for this work. I find attempts to suggest that economics somehow helped create austerity particularly annoying, as I (and many others) have spent many blog posts showing that economic theory and evidence demonstrates that austerity was a huge mistake.         

Is austerity to blame for Brexit?

Mark Blyth writes

“Strip away all the electoral politics at the moment in the U.S., the U.K., Italy, Spain and elsewhere, and that's the underlying political economy. It's a creditor/debtor stand-off where the creditors have the whip hand. And yet, the more they crack the whip, the more the backlash against austerity, in all its forms, gains strength.”

Or in other words, it is all about austerity. That is a big claim, particularly when applied to the current US elections, but I want to examine it in the specific case of the EU referendum. In short, did austerity cause Brexit? Given how opposition to austerity has been such an important part of this blog, in some ways it is an attractive line for me to take, but I do try and base what I say on evidence rather than on what is convenient.

In the past I’ve argued that there is a massive problem with this idea, and the related idea that Brexit was a more general protest vote against elites. The obvious time to protest against austerity was the 2015 General Election. Yet rather than protest against the party that introduced austerity and promised much more of it, the British people gave the Conservatives a surprise victory.

It is nevertheless possible to argue that austerity caused Brexit in more subtle ways. I’ve also argued in the past that some of the concern over immigration is actually the result over concern about reduced public services and low wages, and a belief that the issues are linked. To the extent that reduced access to public services and to some extent low wages is actually the result of austerity, and if much of the public believe that austerity is nevertheless necessary, then what should be a protest over austerity could get displaced as a protest about immigration.

If your response to this idea is to say that concern over immigration is also a result of racism and xenophobia, I would agree, but argue that this is beside the point. When talking about the Brexit vote, we should be concerned about what you might call the swing voters, a point that Chris Dillow also makes. Remember that a large number of those voting Leave would not have been prepared to pay anything to reduce immigration: they do not sound like voters whose overriding concern is to see less foreigners on their streets. It is the Brexit voters who thought Brexit would make them better off that we should be concerned about.

So there is a possible mechanism by which austerity could have caused Brexit. That mechanism is part of a more general phenomenon: when things get tough, people become much more receptive to potential unfairness. It is what helps drive a belief that welfare goes to scroungers, a belief that some Conservative ministers seem happy to encourage.

Is there any evidence to support the idea that the mechanism I’ve outlined was important? Here is polling on the EU referendum over a long time period (source).

If there is a general recession effect here (i.e. applying to every UK recession) it is masked by other factors. However after the global financial crisis and austerity we did see a big shift against the EU, although that could also be explained by the Eurozone crisis. The drop in support for leaving before the 2015 election seems to go against the austerity caused Brexit hypothesis, but that was also a time the government and much of the media was claiming that the UK economy was recovering strongly. The true state of the NHS only became apparent to most people after the election, when support for Leaving revived. So I do not think this historical evidence is conclusive either way.

There is some econometric evidence for a link between the extent of public service cutbacks and the proportion of people voting Leave (for a summary, see this VoxEU article). But as the article itself notes, the measure of austerity used could simply be acting as a proxy for more long term deprivation, which is a widely acknowledged influence on Brexit.

In my view more compelling evidence for an impact of austerity on the Leave vote comes from the little polling evidence we have on why people think high levels of EU immigration is a problem. Here is the result of a poll on this that I have reproduced before, which speaks for itself.

As I have argued here, the current squeeze on the NHS is unprecedented. The share of NHS spending in GDP has a natural tendency to rise over time, for reasons that are well understood. Yet not only did few in the media contest the ‘common sense’ idea that austerity was necessary, but also voters hear time and again that NHS spending is being protected. As they see services deteriorate, it is not surprising that they conclude that there is just too much demand. I doubt very much that it is coincidence that the Leave campaign’s bus had the £350 million a week going to the NHS.

So there is evidence that links austerity to the Brexit vote, particularly if we remember we are not talking about a core vote that would have voted Leave anyway (because of xenophobia, for example), but the swing voters who at other times and circumstances might have voted the other way. But what about arguments that the Leave vote reflected a reaction to deprivation caused by globalisation, or that it was the result of the malign influence of the tabloid press? (I’ve made both arguments in the past.)

There is some complementarity here. As I noted at the beginning, the media is important in transforming concern about austerity from the politicians that impose it into concern about immigration. More importantly, there is no need to find the cause of Brexit. It seems quite possible to believe that the vote would have gone the other way if we had not had austerity, or if we had a tabloid press that was not just a cheerleader for Leave and a broadcast media indifferent to expertise, or if the impact of globalisation had been offset in various ways. With the vote so close, it is legitimate to argue that all three on their own might have been responsible for Brexit, or equivalently that the Brexit result was a consequence of a perfect storm of bad policies and institutions.