Government debt phobias, and possible cures

After my Thursday post and New Statesman piece, I had a lot of comments that said something along the lines of: I see what you are saying, but we really cannot afford more government debt in this country. This is perhaps not surprising. After seven or more years of a constant stream of politicians and media folk talking about the UK maxing out its credit card, many people just feel it in their bones that the UK government has a serious debt problem. (It isn’t just the UK: here is a compilation from the US.)

How do we undo 7+ years of conditioning? It depends in part on what the fear is. Here are five

1. The country will go bankrupt
   
   
2. When will the debt be paid off?
   
   
3. Money could go on something more useful than paying interest
   
   
4. Why should my taxes be higher just to pay interest on debt?
   
   
5. What about the ‘burden’ on the children?
   

1. The country will go bankrupt

A simple truth, which you will not hear in the media, is that in an economy with a flexible exchange rate and its own central bank like the UK, the government can never be forced to go bankrupt, because the central bank can buy the government’s debt.

That of course is exactly what has been happening across the globe - not because central banks were trying to avoid the government going bankrupt, but because these banks were trying to keep long term interest rates low using Quantitative Easing (creating money). For example the Bank of England owns about a quarter of UK government debt (source). That meant that, at the slightest hint that the private sector might not have wanted to buy government debt, the central bank would have done so as part of its policy to control inflation.

At the end of the day, the central bank is a part of government, and so will always buy the debt of the government if necessary. That is why the government cannot be forced into bankruptcy. Could high and rising debt lead to inflation getting out of control? Yes, as Zimbabwe shows. When inflation is well above target and the central bank is creating a ton of money we can worry about that. When inflation is low and close to the target it would be daft to worry about this possibility.

2. When will the debt be paid off?

Here you should just stop thinking about government debt as being like personal debt. One reason it is different is that while a person dies, the country and therefore its government never do. Suppose you lived forever. Would you worry about paying your debt off?

What you should do is two things. First, use debt to spread the costs of investment over a large number of years. Many people are familiar with this, because they take out a mortgage to buy a house or a loan to buy a car. Second, use debt to smooth out fluctuations in your income. So in bad times let debt run up, but be sure to run it down in good times. Governments are exactly the same. For that reason they never have to pay all that debt back, but the ratio of debt to GDP should rise in bad times and fall in good times.

What level of debt to GDP should governments be aiming for in the very long run? This is a very good and interesting question, but to answer it you will probably have to become an economist, because it remains an unanswered question in macroeconomics.

3. All this debt interest could go on something more useful, like paying nurses more.

This was the fallacy I tried to deal with in my New Statesman piece, but here is another way of squashing this fallacy. We cannot just stop paying interest on debt, because that would involve the government defaulting on its debt. So the only way we can replace debt interest with spending more on nurses pay is to pay off all government debt. To do that, we would either have to raise taxes or spend less, and spending less means paying nurses less. It would also likely take about 30 years if you didn’t want a revolution. So 30 years of lower nurses pay just to get, after 30 years, higher nurses pay.

That does not make the idea wrong. But it does make it look rather less attractive than the impossible idea of swapping debt interest with something more useful tomorrow.

4. Why should my taxes go up just to pay interest on government debt

To help answer this question, we need to ask who gets these interest payments? For reasons we have already noted, a quarter of these interest payments go to the Bank of England as a result of its Quantitative Easing programme. The Bank then returns these interest payments to the government. In other words, on a quarter of UK government debt the government pays itself. [1]

Half of UK government debt is owned by the UK private sector. The majority of this is insurance or pension funds. In other words, the interest on government debt is in part helping to pay for your pension. And if by some magic that government debt was not there for your pension fund to buy, that fund would be forced to invest instead in some other, less desirable asset. If you are in the UK and have some money saved in the form of national savings, that is government debt too. The interest of this debt goes to you.

The key takeaway from this is that government debt is always someone else’s asset. If you think that you will end up paying more taxes to pay this debt interest than you will get back in pension payments or whatever, then debt is a distributional issue. You are complaining that you pay taxes (a small amount of which goes on debt interest payments) but you do not have enough wealth to buy government debt and receive these payments. That is a legitimate complaint, but it is part of a general complaint about how income and wealth is distributed, and not something unique to government debt.

And there is this point. If you think you want to reduce government debt because you are paying higher taxes and none of that is coming back to you or your pension, how do you think the government is going to reduce its debt? By raising your taxes of course.

So we come to the quarter of UK government debt where the taxes you pay that are then paid by the government as debt interest end up overseas. Surely that bit of debt interest is wasted, because it is going to someone overseas rather than someone here. But think about this. Suppose all government debt was owned domestically, and then some pension fund decided they would be better off by swapping their government debt with an overseas asset. Is that pension fund worse off? No, it is better off if its calculations are right. No one anywhere else in the UK is worse off because some government interest is now being paid overseas? If lots of people in the UK decide to do the same it still will not matter. It must therefore be true that selling debt to people overseas, whether directly or indirectly, makes no difference. Your concern is still a distributional issue.

To make this point another way, it would be possible to arrange the distribution of government debt such that everyone who paid higher taxes to cover debt interest received that debt interest back as a return, directly or indirectly via pensions, to their wealth. In that sense, the government paying interest on its debt is just like paying ourselves. To the extent that this isn’t true for you personally is a distributional issue. [2]

5. What about the children?

It is theoretically possible for the current generation’s government to go on a huge spending and tax cutting binge and leave the tab to be paid for by future generations. But that is not what has happened over the last ten years. Debt went up because we had a massive recession, and government deficits help cushion the impact of recessions. Should the government have stopped teaching children to avoid the deficit rising? Of course not, because that would have hurt future generations. Should the government have cut welfare payments to the unemployed to stop debt rising. Again we have good evidence that has a scarring effect on children. Should the government have embarked on an austerity programme that reduced public investment making future generations worse off. It should not.

Trying to cut the deficit by cutting public investment, or government spending that has long lasting effects like education or health, because you are worried about the burden of debt on future generations is, quite simply, idiotic. You are hurting the people you say you want to help.

Does this mean I should never worry about government debt?

In today’s economy, it is quite wrong to say government debt does not matter at all. There is a kind of simple golden rule here. When times are good, the government should be reducing its debt: debt to GDP ratios should be falling. How do you know when times are good? Not by asking politicians, obviously. One reliable sign that times are good is if interest rates are well above their floor. When interest rates are this high, cutting them can completely cushion the negative demand effects of fiscal consolidation (i.e. reducing the deficit). For this reason, austerity - fiscal consolidation in bad times - is completely unnecessary for economies like the UK.

For MMT readers

Before you start writing comments, a simple point. In an MMT world, where fiscal policy rather than monetary policy stabilises inflation, you would never worry about government debt or deficits beyond their impact on inflation. If you like that kind of world, then say that is how governments should be controlling inflation. But as it is, outwith the zero lower bound, governments are using interest rates to do this job. So to tell people not to worry about debt without mentioning the controlling inflation part is just confusing, to say the least.

Summary

We can sum all this up as follows. It makes perfect sense in many situations for the government to increase its debt. Investing when interest rates are very low is one of those situations, a recession is another. Those who tell you government debt should be reduced in all situation at whatever the cost should be ignored, because they are either fools or they have a hidden motive.

It also makes sense for governments to reduce their debt in good times, when interest rates are higher than they are now. [3] But in a economically advanced democracy the reasons why ever rising debt (often called deficit bias) is a problem are to do with economicky things like disincentive effects, and not because it will mean we are all doomed. You should not be frightened about allowing debt to rise when the situation demands it.

[1] Why is the debt held by the central bank counted as debt? One answer is that one day the Bank might sell it to the private sector, so it is a potential liability. But central banks may just let this debt run to term, so it will never be a liability. An alternative theory is that government debt owned by the central banks is kept in the figures to make them look more scary.

[2] Of course no one knows if their taxes are paying this debt interest or not. Even if we are paying ourselves, there is still a problem, which is that these taxes are not lump sum, so they involve a disincentive effect. This is a valid reason for wanting to keep government debt low, but it is not the reason most people worry about.

[3] How about now in the US? Should we worry about the Republican tax bill because it will increase the deficit? As interest rates are off their lower bound and rising, I would say we should, particularly as those who get most of the tax cuts are unlikely to spend them. But we should worry about it a lot more because it is a transfer from most people to a plutocratic elite.      

If we treat plutocracy as democracy, democracy dies

The snake-oil salesmen

There are many similarities between Brexit and Trump. They are both authoritarian movements, where authority either lies with a single individual or a single vote: the vote that bindsthem all. This authority expresses the movement’s identity. They are irrational movements, by which I mean that they cast aside expertise where that conflicts with the movements wishes. As a result, you will find their base of supporters among the less well educated, and that universities are seen as an enemy.  Both groups are intensely nationalistic: both want to make America or England great again.

It is easy to relate each group to familiar concepts: class, race or whatever. But I think this classification misses something important. It misses what sustains these groups in their beliefs, allows them to maintain their world view which is so often contradicted by reality. Both groups get their information about the world from a section of the media that has turned news into propaganda. In the US this is Fox, and in the UK the right wing tabloids and the Telegraph.

A profound mistake is to see this media as a symptom rather than a cause. As the study I spoke about here clearly demonstrates, the output of Fox news is not designed to maximise its readership, but to maximise the impact of its propaganda on its readership. I think you could say exactly the same about the Sun and the Mail in the UK. Fox and the Sun are owned by the same man.

Even those who manage to cast off the idea that this unregulated media just reflects the attitude of its readers, generally think of this media as supportive of political parties. There is the Conservative and Labour supporting press in the UK, and similarly for the US. In my view that idea is ten or twenty years out of date, and even then it underestimates the independence of the media organisations. (The Sun famously supported Blair in 1997). More and more it is the media that calls the shots, and the political parties follow.

Brexit would not have happened if it had remained the wish of a minority of Conservative MPs. It happened because of the right wing UK press. Brexit happened because this right wing press recognised a large section of their readership were disaffected from conventional politics, and began grooming them with stories of EU immigrants taking jobs, lowering wages and taking benefits (and sometimes much worse). These stories were not (always) false, but like all good propaganda they elevated a half-truth into a firm belief. Of course this grooming played on age old insecurities, but it magnified them into a political movement. Nationalism does the same. It did not just reflect readers existing views, but rather played on their doubts and fears and hopes and turned this into votes.

This is not to discount some of the very real grievances that led to the Brexit vote, or the racism that led to the election of Trump. This analysis of today's populism is important, as long as it does not get sidetracked into debates over identity versus economics. Stressing economic causes of populism does not devalue identity issues (like race or immigration), but it is the economics that causes the swings that help put populists in power. It was crucial, for example, to the trick that the media played to convince many to vote for Brexit: that EU immigrants and payments were reducing access to public services, whereas in reality the opposite is true.

Yet while economic issues may have created a winning majority for both Brexit and Trump, the identity issues sustained by the media make support for both hard to diminish. Brexit and Trump are expressions of identity, and often of what has been lost, which are very difficult to break down when sustained by the group’s media. In addition both Trump and Brexit maintain, because their proponents want it to be maintained, the idea that it represents the normally ignored, striking back against the government machine in the capital city with all its experts.

But to focus on what some call the ‘demand’ for populism is in danger of missing at least half the story. Whatever legitimate grievances Brexit and Trump supporters may have had, they were used and will be betrayed. There is nothing in leaving the EU that will help the forgotten towns of England and Wales. Although he may try, Trump will not bring many manufacturing jobs back to the rust belt, and his antics with NAFTA may make things worse. Identifying the left behind is only half the story, because it does not tell you why they fell for the remedies of snake-oil salesmen.

As I wrote immediately after the vote in my most widely read post, Brexit was first and foremost a triumph for the UK right wing press. That press first fostered a party, UKIP, that embodied the views the press pushed. The threat of that party and defections to it then forced the Prime Minister to offer the referendum the press wanted. It was a right wing press that sold a huge lie about the UK economy, a lie the broadcast media bought, to ensure the Conservatives won the next election. When the referendum came, it was this right wing press that ensured enough votes were won and thereby overturned the government.

Equally Donald Trump was first and foremost the candidate of Fox News. As Bruce Bartlett has so eloquently written, Fox may have started off as a network that just supported Republicans, but its power steadily grew. Being partisan at Fox became misinforming its viewers, such that Fox viewers are clearly less well informed than viewers of other news providers. One analysis suggested over half of the facts stated on Fox are untrue: UK readers may well remember them reporting that Birmingham was a no-go area for non-Muslims.

Fox became a machine for keeping the base angry and fired up, believing that nothing could be worse than voting for a Democrat. It was Fox News that stopped Republican voters seeing that they were voting for a demagogue, concealed that he lied openly all the time, that incites hatred against other religions and ethnic groups, and makes its viewers believe that Clinton deserves to be locked up. It is not reflecting the views of its viewers, but moulding them. As economists have shown, the output of Fox does not optimise their readership, but optimises the propaganda power of its output. Despite occasional tiffs, Trump was the candidate of Fox in the primaries.

We have a right wing media organisation that has overthrown the Republican political establishment, and a right wing press that has overthrown a right wing government. How some political scientists can continue to analyse this as if the media were simply passive, supportive or even invisible when it brings down governments or subverts political parties I do not know.

The plutocracy

Trump and Brexit are the creations of a kind of plutocracy. Politics in the US has had strong plutocratic elements for some time, because of the way that money can sway elections. That gave finance a powerful influence in the Democratic party, and made the Republicans obsessive about cutting higher tax rates. In the UK plutocracy has been almost non-existent by comparison, and operated mainly through party funding and seats in the House of Lords, although we are still finding out where the money behind the Brexit campaign came from.

By focusing on what some call the demand side of populism rather than the supply side, we fail to see both Trump and Brexit as primarily expressions of plutocratic power. Trump’s administration is plutocracy personified, and as Paul Pierson argues, its substantive agenda constitutes a full-throated endorsement of the GOP economic elite’s long-standing agenda. The Brexiteers want to turn the UK into Singapore, a kind of neoliberalism that stresses markets should be free from government interference, rather than free to work for everyone, and that trade should be free from regulations, rather than regulations being harmonised so that business is free to trade.

It is also a mistake to see this plutocracy as designed to support capital. This should again be obvious from Brexit and Trump. It is in capital’s interest to have borders open to goods and people rather than creating barriers and erecting walls. What a plutocracy will do is ensure that high inequality, in terms of the 1% or 0.1% etc, is maintained or even increased. Indeed many plutocrats amassed their wealth by extracting large sums from the firms for which they worked, wealth that might otherwise have gone to investors in the form of dividends. In this sense they are parasitic to capital. And this plutocracy will also ensure that social mobility is kept low so the membership of the plutocracy is sustained: social mobility goes with equality, as Pickett and Wilkinson show.

It is also a mistake to see what is happening as somehow the result of some kind of invisible committee of the 1% (or 0.1% and so on). The interests of the Koch brothers are not necessarily the interests of Trump (it is no accident the former want to help buy Time magazine). The interests of Arron Banks are not those of Lloyd Blankfein. Instead we are finding individual media moguls forming partnerships with particular politicians to press not only their business interests, but their individual political views as well. And in this partnership it is often clear who is dependent on whom. After all, media competition is slim while there are plenty of politicians.

What has this got to do with neoliberalism? which is supposed to be the dominant culture of the political right. As I argued here, it is a mistake to see neoliberalism as some kind of unified ideology. It may have a common core in terms of the primacy of the market, but how that is interpreted is not uniform. Are neoliberals in favour of free trade, or against? It appears that they can be both. Instead neoliberalism is a set of ideas based around a common belief in the market that different groups have used and interpreted to their advantage, while at the same time also being influenced by the ideology. Both interests and ideas matter. While some neoliberals see competition as the most valuable feature of capitalism, others will seek to stifle competition to preserve monopoly power. Brexiters and their press backers are neoliberals, just as the Cameron government they brought down were neoliberals.

I think there is some truth in the argument, made by Philip Mirowski among others, that a belief in neoliberalism can easily involve an anti-enlightenment belief that people need to be persuaded to subject themselves fully to the market. Certainly those on the neoliberal right are more easily persuaded to invest time and effort in the dark arts of spin than those on the left. But it would be going too far to suggest that all neoliberals are anti-democratic: as I have said, neoliberalism is diverse and divided. What I argued in my neoliberal overreach post was that neoliberalism as formulated in the UK and US had made it possible for the plutocracy we now see to become dominant.

By the nature of an unorganised plutocracy, what types of neoliberalism hold sway may be largely random, and depend a lot on who owns media organisations. It leads to a form of politics which is in many ways unpredictable and irrational, with an ever present tendency to autocracy. This is what we are witnessing, right now, in the UK and US. It is not the normal politics that either of these countries are used to, although it may be more familiar to those in quasi-dictatorships. We all know about how the Republican’s tax cutting bill just happens to favour real estate moguls who inherit their money as Trump did. This is simple corruption, enacted in a corrupt way. That the President of the United States retweeted a British far right group that inspired an individual to murder a British MP is not normal. When Brexit supporting MPs respond to the Irish border problem by saying ‘we are not going to put one up’ this should not pass as an acceptable response: it should be laughed at as the nonsense it is.

When politics becomes the whims and mad schemes of a small minority that only listen to themselves, unmodified by the normal checks and balances of a functioning democracy, it should be treated by the non-partisan media for what it is, not normalised as just more of the same. If we treat a plutocracy as a democracy, democracy dies. We should not be fooled that this plutocracy looks like normal politics just because the plutocrats have taken over the main party of the right.

A dividing point

We are very close to a point where neoliberalism becomes something much worse. The POTUS is following a fascist strategy of demonising a religious minority. If Mueller’s investigations proceed as expected, but he is sacked and/or the Republicans block any attempt at impeachment, we may have passed that critical point. If the Brexiters succeed in breaking away from the EU’s customs union and single market, the UK may have nowhere else to go but the arms of a permanently Republican US.

If there is a way of escaping this fate, and rescuing democracy in both the UK and US, it has to involve a democratic defeat of the right wing parties that allowed this plutocracy to emerge, and indeed encouraged it and then made bargains with it when it believed it was still in control. The defeat has to be overwhelming and total. Those who brought us Brexit and backed or tolerated Trump have to be disgraced as the harbingers of disaster. Their control of the Republican and Conservative parties must end.

Only that will allow the left, and I think it has to be the left, to end a system by which elements of the plutocracy can control so much of the means of information. In the UK that means extending rules that apply to broadcasters, suitably adapted, to the press. In the US it means not just bringing back the Fairness doctrine repealed under Reagan, but also bringing controls on election spending similar to those in the UK (and the UK controls need to be strengthened). In short, we need to take money out of politics to ensure democracy survives. Give journalists the freedom to write about or broadcast the news as they see it, rather than as their employer want it to be seen.

Why the left rather than the centre? The centre will agonise over what this means for freedom of expression or freedom of the press and therefore nothing much will happen (see Leveson), as nothing happened under Clinton or Blair. That may be a little unfair to both leaders, because the danger of plutocracy may have been less obvious back then, and the media was more restrained. But with Brexit and Trump no further evidence is needed. The left should see more clearly how in practice this freedom is in reality just a freedom to sustain a plutocracy. Only it will have the courage to radically reverse the power and wealth of the 1%. I fear the centre will not have the will to do it. Although Anthony Barnett’s focus differs from mine, he puts this point very well here: if all you want to do is stop Brexit and Trump and go back to what you regard as normal, you miss that what was normal led to Brexit and Trump.

That will have many wise and sensible people shaking their head, but the alternative does not work. Defeating or impeaching Trump and letting the Republican party survive in its current form achieves little, because they will go on gerrymandering and Fox news will go on poisoning minds. The energy of Democrats will be spent on trying to clear up the damage Trump has caused, and the next autocrat from Republican ranks who wins power because they will ‘clear the swamp’ will be smarter than Trump. In the UK, if the Conservatives survive in their current form, their ageing membership is in danger of selecting more Brexit nutters who will overwhelm the dwindling number of reasonable Conservative MPs. We will find the BBC, if it survives at all, will become more and more like the mouthpiece of a press dominated by plutocrats. [1] In either case a critical point will have passed.

I know from many conversations I have had that there is a deep fear among many of leadership from the left. Here the UK is ahead of the US. The story in the UK used to be that the left could never win, and it was a plausible story, but recent events have cast great doubt on it. That remains the story in the US, but there are good reasons for doubting it there too. There is no reason why all of the disenchanted who fell for the lies of the snake-oil salesmen could not support radical remedies from the left: identity and the media are strong but it is economics that dictates the swings.

In the UK now the story seems much more elemental: that somehow the left threatens the existence of capitalism and democracy. In truth there is no way Corbyn could persuade the Labour party to abandon democratic capitalism, just as there is no way Sanders or Warren could do the same in the US. All we are talking about is rolling back many of the results of neoliberalism. But it is difficult to logically convince someone the ghosts they see do not exist. In contrast to these ghosts on the left, the dynamic of plutocracy that I have described here is very real, and it requires radical change to bring an end to this dynamic.

[1] This is why arguments that say the UK press is becoming less powerful because of its falling readership fail. If this press dominate the news agenda of the broadcasters, they do not need many readers. 

Mediamacro is alive and well, unfortunately

I didn’t see Andrew Neil’s interview with John McDonnell which seems to have started the media’s obsession with interest on government debt, and how it would increase under Labour. But I did see the Peston interview where he was asked a similar question (see here). McDonnell’s answer was good, but the fact that Peston felt obliged to ask it told me that mediamacro was still alive and well.

But before I come to that, I need to link to the piece I wrote in the New Statesman that tries to explain why the question is a silly one (and what a much better question would be). It wasn’t the first time I had come across the power of this debt interest idea to fool people. I remember I did a debate with Oliver Kamm in Prospect, and the then editor said she thought I was getting the better of the argument but that Kamm’s point about debt interest finally swayed her. I remember thinking what!? How can you be so foolish. That was in my younger days (look at the photo) when I was still learning about mediamacro.

So why did Peston feel he had to follow up on Neil’s question? I think it is pretty simple. When McDonnell did not answer Neil’s question, the reaction of journalists was not to think maybe that was a silly question, but instead here was some weakness that the journalist had found. Journalists love catching politicians out: it means that the interview when it happens gets repeated and repeated and the journalist gets congratulated by their peers. It is just a numerical version of political gaffs. And most of the time it is just as childish.

There may be some point in doing this when there is a real issue involved. If you managed to show, for example, that a politician really didn’t know the difference or relationship between debt and the deficit, that would tell us something meaningful. (I can remember one Chancellor who did need helping through such things.) But that normally requires a knowledge most interviewers, who might talk about paying off the deficit, do not have. (Even fact checking sites can confuse rather than enlighten: in this case here. The BBC's site in the past has made similar errors.) Not being able to remember numbers is a memory test more than testing whether someone is numerically minded. I’m pretty numerically minded, but ask me what the size of UK GDP is on a bad day and I’d get it wrong.

But asking a prospective Chancellor about what the debt interest will be on any borrowing they will do for investment possibly four years ahead is a silly question, as my New Statesman article makes clear. I’m sure Peston knows this, but he nevertheless felt obliged to follow a mediamacro theme. Which is how a lot of journalism works. Attack lines dreamt up by right wing newspapers or journalists become questions of public interest that every journalist feels obliged to ask. Even when they know better, they are not going to upset their colleagues by saying I’m not going to ask that question because it is a nonsense question and instead ask something more intelligent. As a result, the mediocrity that is mediamacro persists.

Disentangling the UK productivity problem

As it has become clear to the non-FT/Economist media, and as it has been clear to economists for a long time, productivity growth is a far more important problem for the UK than the deficit. However I think discussion can get confused if it fails to distinguish between three aspects to the problem.

First, the UK is not alone in seeing large falls in productivity growth. Now some of that may be related to the global financial crisis, but not all of it is. As this chart taken from the excellent paper by Richard Jones shows, in the G7 productivity appears to have been declining since at least the 1980s.

For simplicity’s sake I will call that the global productivity decline.

The second element in the UK’s productivity performance is a structural weakness relative to other countries. I know of no better way of convincing you this exists than this chart, taken from the latest OECD survey of the UK economy.

The robots may be coming to take our jobs, but at this rate UK manufacturing will be the last place this will happen. As this report and the Jones paper also show, the UK’s R&D expenditure is weak and below the OECD average. Polly Toynbee shows it is no better on the workforce training side. [1] 

I am fairly sure, however, that what we have seen since the Global Financial crisis is an additional third weakness. Here is the annual growth in UK output per hour.

The historic trend, which showed no clear sign of following the global trend and declining after 1980 (a clear UK success), is around 2.25%. Now it is clearly possible to argue that this data shows a decline from this long run trend starting in the mid-2000s based on this aggregate data. If you factor in as well that these aggregate numbers are flattered by unsustainably fast productivity growth in financial services from 2001 to 2006 then you can maybe detect the beginning of a slowdown from the start of the millennium. This would not be surprising, as it would be very hard for the UK to buck the slowdown in global productivity for very long.

Having said all that, what happened after the Great Recession is something quite different. But it is wrong to view this period as just one of constant zero growth gloom. Productivity began to recover in 2010 and 2011, to levels that do not look too bad by international standards, but hit negative territory in the following two years. Another, this time more modest, two year recovery was followed by another collapse in 2016. This does not look like just the global productivity decline plus some additional structural weakness. Achieving negative productivity growth two years running indicates a deeper malaise.

This is why I think there is a third factor behind this terrible performance. To explain it we need to start thinking about productivity growth as not some kind of manna from heaven, churned out by our universities, or even the product of R&D by firms, but also as something akin to an investment. If you are confident of future growth and profitability, you are more likely to invest in productivity improvements (which may or may not involve physical investment) than if you are unusually uncertain or gloomy.

After recessions are over, productivity usually picks up. Firms understand the business cycle, and in UK business cycles over the last 40 odd years recessions are followed by strong growth. So when recessions have levelled out, it makes sense for firms to invest in productivity improvements. That is one reason why productivity growth resumed in 2010 and 2011. The only problem is that something quite unexpected happened. Growth did not return at all. At one stage people were talking about a second UK recession. Firms became both uncertain and gloomy, and productivity growth stopped. That shock, which we can reasonably call austerity, was the first shock that hit the economy after the GFC.

By 2013 it looked like the recovery had finally arrived. Productivity growth could resume, but maybe more cautiously than before. And that caution was justified because in the election of 2015 a new uncertainty arose: the possibility of Brexit. Brexit would be one of the most profound shocks to hit the UK for decades: certainly for firms involved in trading or international supply chains and probably wider than that. Just as the costs of waiting are small for a large investment decision when there is serious uncertainty, so Brexit meant that productivity improvements would once again be put on hold.

Thus we have three aspects to the UK’s productivity slowdown. The first is the global slowdown, which we managed to avoid for two decades but no longer. The second is a long term structural weakness in developing and applying new technology. The third is the impact of two shocks, austerity and Brexit, which has caused UK firms to put productivity improvements on hold and become very gloomy about the UK’s future. I somehow doubt that we can start doing something about the UK’s long term structural weaknesses while we continue to shoot ourselves in the foot with crazy policies like austerity or Brexit.

[1] If you think the budget made a significant difference to all this, read Anna Valero here       

Austerity and mortality

In a footnote in a recent post, I noted the recent controversy over a BMJ paper relating changes in the English mortality trend to austerity, and in particular cuts in NHS and social care spending. With the journal’s blog headlining the paper as saying “Health and social care spending cuts linked to 120,000 excess deaths in England”, headlines in the press were inevitable. The BBC decided, however, to ignore the study, based (in part?) on advice from the Science Media Centre (SMC). One look at who funds that centre (and putting aside bodies like the Medical Research Council!), and a conspiracy was born.

Was the SMC’s advice correct? Here is a chart from the paper that allows me to explain the basic idea behind it. (The latest ONS data on mortality for the UK is here.)

The vertical axis is the mortality rate (see the paper for the exact definition). Since 2001 it has been declining over time. The blue line is what extrapolating that trend would imply. However, as the red line shows, since 2012 the mortality rate has flattened off. We could call the difference between the actual and the trend line excess deaths, which are the grey bars. Further analysis by the authors showed that these excess deaths occurred in the over 60 age group.

Reductions in hospital and social care spending could explain these excess deaths, with lower social care spending in particular leading to a higher number of deaths in care homes. The figure of 120,000 is the total number of excess deaths between 2010 and 2017 estimated to be due to cuts. As you might say, austerity kills.

This description should I hope immediately show the potential fragility of the results. Calculating the number of excess deaths relies on assuming a simple trend decline in mortality which may not be realistic. Even if it is, there are many other possible causes for these excess deaths, and the authors were only able to test for a small number. The number of data points is not large.

One obvious way to try and see how speculative this analysis is would be to look at other countries over this period. Has there been a similar levelling off in mortality rates? What follows comes with a huge health warning (forgive the inevitable pun): I am a complete amateaur at handling data of this kind. Because data for the UK is more immediately available to compare to other countries, I will look at the UK rather than England.

Using data from the World Health Organisation, we can indeed observe mortality (defined simply as deaths divided by population) in the 75+ group actually increasing between 2009 and 2013 in France as well as the UK, but decreasing in Germany and Norway. (The reason for the choice of countries will become clear.) Among the 55-74 age group, there were declines of a similar size in all four countries.

Unfortunately we really want to focus on the 65+ group. Another way of looking at this issue is to examine data for life expectancy. The OECD produce this data at age 65. Obviously if mortality rates level off, so does life expectancy. If we look at the UK, we can do something similar (although rather simpler) to the analysis from the BMJ study shown above.

UK life expectancy for women at 65 over time (source OECD), and 2001-2010 trend 

We can see that actual life expectancy at 65 for women (the blue line) was increasing from 2001 until 2011 (the red line is a trend over this period), but has subsequently levelled off, much as the mortality rate does in the BMJ study. A similar pattern occurs for men, although the actual numbers are lower throughout (unfortunately).

Has the same levelling off happened in other countries? Which other countries should we compare the UK to? We have two problems. First, mortality and therefore life expectancy is related to geographically specific factors, like average winter temperatures or local flu epidemics. It therefore makes more sense to compare the UK to France than Australia, say. Second, many other countries embarked on austerity besides the UK. In the chart below I plot actual life expectancy for women at 65 in the UK (as above), France, Germany, Norway and Denmark. (Again the analysis would be similar for men.)

Life expectancy for women at 65 over time, various countries (source OECD)

One thing I did not know until I did this analysis was how much higher French life expectancy is. Yet as you can see from the red line, it too has levelled off since 2011. That could be because expectancy is so high, it could also be because French people also experienced austerity, or because of some other unexplained factor. Austerity in Germany was more modest than in France, and perhaps by coincidence the recent levelling off (the yellow line) is more moderate compared to its previous trend. One country that had no austerity was Norway. As the green line shows any levelling off in the rise in life expectancy since 2011 has been small. The rise in life expectancy in Denmark (where again there was no austerity until 2013) did not change after 2011, but maybe that involves some catching up.

I admit it is difficult to visualise trends on a chart with so many lines, so I have done one for another country that has data very similar to Norway and experienced no austerity, which is Sweden.

Swedish life expectancy for women at 65 over time (source OECD), and 2001-2010 trend 

The trend, as with the UK above, is estimated from data beginning in 2001 and ending in 2010. As we can see, actual life expectancy does appear to deviate from trend in a downward direction from 2012 onwards, just as it did in the UK. The difference is that whereas life expectancy is still rising after 2011 in Sweden, in the UK it is flat. The gap between the trend line and actual in Sweden is just 0.3 years, but in the UK it is almost one year.

Thus the two of this group of countries that have experienced a complete levelling off in life expectancy are France and the UK. Is this because both have experienced significant austerity. As far as health expenditures are concerned, the answer is no, as the chart below shows. For comparability I've shown the data relative to a trend for the 2001-10 period.

Health expenditure as a % of GDP  (Source World Bank), and Trends 2001 to 2010

French health expenditure from 2011 has increased at the same trend as 2001 to 2010, whereas UK health expenditure has fallen away substantially.

All this suggests that there has been in many neighbouring countries some decline in the rate at which life expectancy has been rising since 2011, but only France and the UK have seen no rise in life expectancy since 2011. French life expectancy was already very high, so perhaps some levelling off was inevitable. Or alternatively there is some missing factor that explains the levelling off in life expectancy in France and the UK. One final statistic, to show that my choice of countries has not been rigged. If we compare life expectancy for women at 65 in 2015 to 2011, among all the OECD countries only one has seen a (slightly) bigger fall than the UK, which is Austria. The only country with the same decline as the UK is France. The real message is that this is an ideal area for some proper research using proper econometrics on a wider sample of countries.

I want to end by making a more general point. Linking austerity to health is nothing new. In this post from 2013 I talked about the work of David Stuckler and others. He has a recent paper with coauthors on the health impact of Brexit in the Lancet. As Danny Dorling explains in this excellent verbal account of the UK data in the LRB, there have been a number of studies linking excess deaths to austerity before the one discussed above. You would think that a combination of the data and these studies would prompt the government to at least investigate what is happening, but they have so far done nothing. Perhaps they know what the result of any investigation would be.

To see why this is such a sensitive topic for the government, you only need to look at a recent Question Time (9 minutes in) where Aditya Chakrabortty talked about government policy leading to deaths. It is one thing for economists like me to say that austerity has cost each household at least £4,000: this can be dismissed with ‘what do economists know’? But when doctors say the policy has led to premature deaths, that is something else. If I was being cynical, I would say it is no surprise that the BBC did not want to have anything to do with this study.