People's QE and Corbyn’s QE

Politicians can be adept at co-opting attractive sounding terms to their own cause, even when they distort their meaning while doing so. Osborne announced what was in reality a partial but large increase in the minimum wage, but he called it a ‘living wage’. This was especially devious, as calculations of the actual living wage take into account the tax credits that Osborne was at the same time cutting.

Is Labour leadership contender Jeremy Corbyn’s ‘Peoples QE’ an example of the same thing? It is certainly true that the way that some macroeconomists, including myself, have used the term is different from Corbyn’s idea. For us Peoples QE is just another term for helicopter money. Helicopter money was a term first used by that well known radical Milton Friedman. It involves the central bank creating money, and distributing it directly to the people by some means. It is a sure fire way [1] for the central bank to boost demand: what economists sometimes call a money financed fiscal stimulus.

The idea has been recently revived, most prominently in the UK by Adair Turner, because of the failure of conventional monetary policy (changing interest rates) to bring a quick end to the Great Recession, which in turn is because governments were undertaking fiscal austerity (a bond financed fiscal contraction) rather than fiscal stimulus. In contrast central banks in Japan, the US and UK, and now the Eurozone, have been creating money to buy financial assets (mainly government debt), which is called Quantitative Easing (QE). Hence the term People’s QE for helicopter money: instead of the central bank creating money to buy assets, it creates money and gives it to the people.

The genesis of Corbyn’s QE seems rather different. Corbyn adviser Richard Murphy had previously suggested what he called a Green Infrastructure QE, which is that a “new [QE] programme should buy the new debt that will be issued in the form of bonds by the Green Investment Bank to fund sustainable energy, local authorities to pay for new houses, NHS trusts to build new hospitals and education authorities to build schools.” This in turn is related to two ideas: first a near universal view among macroeconomists that public sector investment in infrastructure should be rising not falling when interest rates are low and labour is cheap, and second that a National Investment Bank (NIB) might be useful in helping to encourage private sector investment. (See, for example, the recommendations of the LSE growth commission.)

The main difference between helicopter money and Corbyn’s QE therefore seems to be where the money created by the central bank goes: to individuals in the form of a cheque from the central bank, or to financing investment projects. I think that is wrong, and to see why we need to ask an obvious question: what is this policy innovation designed to achieve. I think it is here that confusion has arisen.

As I noted above, the idea behind helicopter money is to provide a tool for the central bank to use when interest rate changes are no longer possible or effective. With an independent central bank, that means that they, not the government, get to decide when helicopter money happens. In contrast, if your goal is to increase either public or private investment (or both) for a prolonged period, then its timing and amount should be something the government decides. While QE is hopefully going to be something that is unusual and rare, the goal of an investment bank is generally thought to be more long term, and not something that only happens in severe recessions.

For that reason, Corbyn’s QE looks like one of those ideas that is superficially attractive because it seems to kill two birds with one stone, but on reflection turns out to be a bad idea. If we want to keep an independent central bank we do not want the government putting the bank under pressure to do QE because the government wants more investment, and if that does not happen we do not want the central bank deciding whether extra investment happens. Indeed some of those who dislike the idea of helicopter money have already been using Corbyn’s QE to say ‘I told you helicopter money was a slippery slope that would lead to the end of central bank independence’.

However I think it is unfair and unproductive to leave it there. Suppose that a NIB is created, not on the back of QE but using more conventional forms of finance. (If the government wants to encourage it, just directly subsidise that finance with conventional borrowing. Don’t be put off doing so by deficit fetishism.) Suppose we also like the concept of helicopter money - not for now, but for the next time interest rates hit their lower bound and the central bank wants more stimulus. In those circumstances, it might well make sense for helicopter money to be used not only to send cheques to individuals, but also to bring forward investment financed by the NIB, or public sector investment financed directly by the state. If those investment projects could get off the ground quickly, and crucially would not have happened for some time otherwise, then what I have elsewhere described as ‘democratic helicopter money’ would make sense. [2] This is because investment that also boosts the supply side is likely to be a far more effective form of stimulus than cheques posted to individuals.

So one day, this form of Corbyn’s QE could happen. But we need to get the idea of helicopter money, and the need for public investment and a National Investment Bank, accepted in their own right first. Putting the two ideas together right now is misconceived, and is in danger of discrediting two potentially good ideas.

[1] Unless you believe in complete Ricardian Equivalence

[2] When I put forward the idea of ‘democratic helicopter money’ here to Tim Harford, Tim responded that he thought it was probably the most radical and politically infeasible idea of those he had canvassed. If Corbyn wins, I will have pleasure in reminding him of that!  

German Self-Interest

Michael Burda from Berlin’s Humboldt University has an interesting article in the Royal Economic Society newsletter, which is critical of views that I and others have expressed about the ‘problem with German (macro)economics.’ The key argument Michael Burda wants to make is that there is nothing peculiar or unusual about German economics, and what many of the critics interpret as either economic ignorance or distinctiveness is actually self-interest. To quote from his final paragraph: “It is not ordoliberal religion, but a mixture of national self-interest and healthy mistrust informed by experience that guides German economic policy today.”

Often trying to decide whether policies are the result of self-interest or particular ideas is difficult because both explanations fit the facts. What we really need are examples of German economic policy which follow self-interest but not dominant ideas, or vice versa. Now some might suggest ‘bailing out’ Greece and other periphery countries was a clear example, where the idea of European solidarity triumphed over self-interest. Unfortunately that will not work: the fact that Greece in particular did not default in 2010 and had only limited default in 2012 was in part to protect the interest of other EU banks. You could plausibly argue that Greece has suffered precisely because of German and other EU countries' self-interest.

In fact in many ways Germany has done rather well out of the EZ crisis. Henning Meyer points us to a study which suggests that, as a result of the crisis and Germany’s ‘safe haven’ status, the German government has saved more than E100 billion from 2010 to 2015 in debt interest. As Henning notes, this has helped Germany ‘set an example’ on deficits without having to do anything too painful. That is slightly more than its total loss if Greece completely defaults. It has also not done badly as a result of the profits the ECB has made on its lending.

Perhaps the largest benefit Germany has received from the Eurozone has been as a result of undercutting its fellow members around ten years ago. Everyone knows about the ‘excess inflation’ in the periphery during those years, but the story of insufficient wage inflation in Germany at the same time is not often told. This policy - which if it had occurred via exchange rates rather than domestic inflation would be called beggar my neighbour - may well have been accidental, but it is a key reason why Germany is the only Eurozone economy that has not suffered since 2010. Indeed, one interesting explanation of the general lack of interest in using fiscal policy for demand management in Germany is that for some time the country has been part of a fixed exchange rate system in which, with its particular wage bargaining system, it can fairly easily boost demand by changing domestic inflation.

What about the pressure from Germany on the ECB: first not to undertake the OMT programme in September 2012 which ended the non-Greek crisis, and then not to undertake QE? That is generally put down to extreme fears of inflation and fiscal dominance of monetary policy in Germany. Unfortunately it is also been in Germany’s self-interest. For example, if the ECB had been able to keep to its 2% inflation target, the earlier undercutting of its neighbours would have had to result in a subsequent period of German inflation above 2%. However Germany may well avoid this outcome as a result of Eurozone deflation, so that countries outside Germany will bear the cost of correcting the German competitiveness problem.

That self-interest is key to German policy gets important support from 2009 when alongside other counties Germany enacted a form of countercyclical Keynesian policy. Here we have a clear case where self-interest appeared to win out over a prevalent distrust of countercyclical fiscal policy.

In some senses I’m attracted to Michael Burda’s hypothesis. I once believed that the “problem with German macroeconomic policy is not that it is acting in the national interest, or otherwise, but that it is based on a discredited and harmful set of ideas”. But in my recent discussion on why these discredited ideas persisted, while I threw doubt on some popular accounts, I still failed to come up with a convincing story. There may also be an element of false optimism in focusing on belief in poor economic ideas rather than self-interest, if you also think (hope?) that these beliefs can be more easily changed.

For much the same reason I also think it is futile to try and convince Germany that it should embark on fiscal expansion ‘for the sake of the rest of the Eurozone’, partly because it contradicts self-interest, but also because Eurozone deflation means that we need fiscal expansion not just in Germany, but the whole of the Eurozone, so that ECB interest rates can be lifted above their lower bound. The problem over the last few years has not just been austerity in Germany, but austerity in the Eurozone as a whole.

So perhaps it is all just self-interest. But if that means there is nothing unusual about German economics, it does not let German economists off the hook. Germany was central to creating the second Eurozone recession through its insistence on fiscal austerity everywhere, together with unhelpful pressure on the ECB. Germany was also central in imposing harmful debt levels and austerity on Greece. Mainstream economics tells us this, but few German economists have been prepared to say so in public. German Keynesians who are involved in the policy debate that I have talked to tell me the prevailing climate is definitely anti-Keynesian. It is not the job of German academics to stay quiet about what mainstream macroeconomics tells us just because doing so suits the national interest.

The Corbyn Phenomenon

For readers not in the UK, some background. When Ed Miliband resigned as Labour leader after the 2015 election defeat, the election process for a new leader went like this. You needed 35 MPs (members of parliament) to nominate potential successors, and there would then be a contest over a few months before party members got to vote to choose one of the nominated candidates as leader. 3 people got the required number of MPs to nominate them, but the candidate from the left - Jeremy Corbyn - did not have enough MPs. Some MPs felt it would be good for balance to have someone from the left standing, so they switched their nominations in order that he too got the required 35.

From this you will gather that the left of the Labour party is pretty weak in parliament. It was also thought to be weak among Labour party members: the candidate of the left in the elections of 2010, Diane Abbott, received little support from the membership. So the general expectation was that Corbyn - who is not a particularly charismatic speaker - would also get little support this time. This expectation has proved completely wrong: polls put him in front, his meetings have been attracting growing audiences, and senior party figures are now panicking that he might actually win (in a similar manner to the reaction of Republican grandees to Trump winning their nomination).

Perhaps as a result, a few people have asked me to write about Corbyn’s macroeconomic policies - in some cases in the expectation that I would rubbish them, and in other cases in the hope that I would provide support. But the real question people should ask first is why is Corbyn proving to be so popular. It is nonsense to suggest that the Labour party membership has suddenly become markedly more left wing than it used to be. Corbyn’s popularity has much more to do with how the party in parliament has responded to both election defeats.

On issues like welfare, immigration, business or inequality, you can see Labour as having two impulses: one to go with its natural inclination, and another to try and woo the floating middle or working class voter whose views seem to be nearer those of the Daily Mail or Sun respectively (i.e. much more regressive). In terms of policy, this tended to produce either inoffensive emptiness, focusing on small differences from the government, or simple right wing appeasement. But perhaps more importantly, in terms of style it produced a kind of defensiveness where the chief goal of their leaders was to avoid anything that could be used against them by the right wing press. And not without reason: when Miliband gave a thoughtful speech where he talked about how you could have irresponsible capitalism that just went for the quick buck whatever the long term or social costs, he was forever after dubbed anti-business. This resulted in an opposition seemingly devoid of any clear policy message.

The issue of austerity is indicative. Labour have never adopted a clear anti-austerity line, even during the 2010-11 period of acute cuts. This is because they knew that much of the press would label this as fiscal irresponsibility, and that the BBC follows the lead of the press and the financial markets on these things. Their actual proposals in the 2015 elections involved far fewer cuts than Osborne promised, but because they were desperate to appear to be ‘tough on the deficit’, they either gave out a confused message or tried to talk about other things. Crucially, they failed to defend their record in government. As a result of their 2015 defeat, many senior party figures are now suggesting it is best for Labour to essentially follow Osborne’s macro plans.

The reaction of most of the parliamentary party to the 2015 defeat seems to be that the pre-2015 strategy was right in principle but had just not focused enough in placating the marginal English voter, which they believe means more appeasement and shifting further to the right. The party membership seems to have reacted very differently to the 2015 defeat. The membership appears to believe that the pre-2015 strategy has clearly failed, and it is time to start talking with conviction about the issues you believe in. This is exactly what Jeremy Corbyn does: he is a conviction politician, who is not prepared to try and be someone else to win votes.

Does that mean the choice is between arguing for your convictions and losing or trying to appease the right wing press and maybe winning? No, there is a way through this dilemma, but it is a way that is alien to most of those in the Labour party, and that is to spend much more time thinking about political spin. Labour lost the election because they lost the battle of spin. Labour did not lose in 2015 because they were anti-business, but because they were perceived as anti-business. They did not lose in 2015 because they had been fiscally irresponsible in government, but because they were perceived to be. They did not lose Scotland because their policies were damaging to Scotland, but because they were perceived to be.

Again, lets use fiscal policy as an indicative example. Labour lost because they were perceived to have been, and perceived to continue to be, fiscally irresponsible. That perception did not just arise because of a biased press or bad luck, but also because of good political judgement by Osborne and bad judgement by Miliband and Balls. Before the financial crisis it was generally thought popular support for a higher level of public spending was too strong, which is why the Conservatives had pledged to match Labour’s spending plans. But Osborne was quick to see that the recession changed things, because he could attempt to blame Labour for the deficit that was bound to arise as a result of the recession, and use deficit reduction to achieve their political goal of a smaller state. Labour’s counter to this in the first few years of the coalition government was to focus on the stalled recovery, but that in contrast was poor political judgement because eventually the economy was bound to recover, and at that point Labour appeared weak. In addition by failing to effectively challenge the Osborne narrative about the past, Labour lost a crucial battle of political spin.

As I tried to argue here, if Labour is to have any hope in 2020 it has to start attacking Osborne’s unnecessary and obsessive austerity, as well as getting the past history straight. There are also reasons for thinking that the power of deficit fetishism for voters will steadily decline. In that sense, on this issue and perhaps others, Corbyn seems to have an advantage.

But, and it is a huge but, as I have also argued on the deficit, you can only successfully run an anti-austerity line if you have a clear and robust counter to the irresponsible borrowing charge. You do have to reassure enough marginal voters, and as a means to that the non-partisan political pundits that determine the political tone in a lot of the media. It is not clear that Corbyn will be able to do this. Firing up the base, as Corbyn clearly does, is only part of a successful winning strategy. There is a strong danger that he will lose credibility on the budget through overoptimistic claims on tax avoidance or misguided ideas about monetary financing. You will not shift the Overton window on austerity and other issues if your position is too easily discredited. Blair and Brown won in 1997 partly by imposing strong discipline on the party, which collectively gave out a clear set of messages to the electorate.

Part of Corbyn’s problem is not of his making (unless you take a long historical view), and that is his fellow MPs. It was their majority that chose not to oppose Osborne’s welfare bill, which epitomised the disastrous strategy that I have described above. It is very regrettable that two of the three other leadership candidates have refused to serve under him. If, following a Corbyn win, the party united around him in exchange for Corbyn parking some of his less popular policy positions, Labour could once again become an effective opposition. If instead his leadership is accompanied by constant public division within the party, there is a danger that this will overshadow everything else.

It seems very unlikely that Corbyn as leader could win the 2020 election. Perhaps the most optimistic yet still plausible outcome is that the period of a brief Corbyn leadership will be sufficient to shift the centre of political debate (the Overton window) to the left on a sufficient number of issues like austerity. He would then step down to allow a new candidate from the centre left to take over before 2020, and win enough popular support by appearing to be less of a risk and a more natural leader, while retaining key Corbyn positions like a strong anti-austerity line. Whether that would happen I have no idea. 

Whether Corbyn wins or loses, Labour MPs and associated politicos have to recognise that his popularity is not the result of entryism, or some strange flight of fancy by Labour’s quarter of a million plus members, but a consequence of the political strategy and style that lost the 2015 election. They should reflect that if they are so sure they know what will win elections, how come they failed to predict the Corbyn phenomenon. A large proportion of the membership believe that Labour will not win again by accepting the current political narrative on austerity or immigration or welfare or inequality and offering only marginal changes to current government policy. On economic policy in particular they need to offer reasons for voters to believe that there are alternatives to the current status quo of poor quality jobs, deteriorating public services and infrastructure, and growing poverty alongside gross inequality at the top. That means, whether he wins or loses, working with the Corbyn phenomenon rather than dismissing it.

The Ethics of Helicopter Money

 A lot of the discussion of helicopter money is about macroeconomic mechanisms, which is of course fair enough and - for me at least - interesting. But helicopter money, because it is quite like fiscal policy, also raises ethical issues, and these are taken up in a recent post by Jeremy Stangroom. It is this and related issues that I want to talk about here.

To avoid distractions, let’s focus on a specific type of helicopter money (HM). The state sets up a distribution mechanism (the flight path of the helicopter, if you like) which the central bank is mandated to use if interest rates are in danger of hitting the zero lower bound, and it judges that without using this mechanism it will probably undershoot its inflation target. If at some later date the central bank finds that it is danger of becoming ‘policy insolvent’, the government agrees to recapitalise it. Thus there is no question of abandoning the inflation target in the distant future: HM is being used to avoid undershooting the inflation target in the near future.

This policy is close to being identical to a reverse poll tax. The key difference is that, unlike an actual government cash transfer that is debt financed and therefore appears to be almost surely matched by some tax increase or equivalent later, with HM the future tax increase may or may not happen, depending on whether the central bank does or does not need recapitalising.

The other key difference between HM and a reverse poll tax is that HM is initiated by the central bank. This encounters a form of the ‘no taxation without representation’ argument: redistributions should be made by the democratically elected government. However in the case of HM, the distribution mechanism is set up and endorsed by the government. Many distribution mechanisms are possible, and which is used is the government's choice. The only qualification is that the mechanism has to have a powerful, immediate and reasonably predictable impact on aggregate demand. (Paying for infrastructure investment could only be on this list of potential uses for HM if the investment could be immediate, and not just substituting for investment the government would have undertaken anyway.)

Thus HM is still government sanctioned. In addition the circumstances in which HM would be used are limited and precisely described, and the agent making these decisions - the central bank - should be accountable to the government. Of course many government agencies already make decisions that have huge impacts on particular individuals: in the case of the UK, NICE for example.

An additional argument that I together with Mark Blyth and Eric Lonergan have made is that conventional monetary policy also involves redistributions between savers and borrowers. Here Jeremy Stangroom makes a good point: savers and borrowers undertook their debt contracts knowing that interest rates could well rise or fall. In contrast, no one has contracted for helicopter money.

However I think there is an additional point to be made here. Savers and borrowers generally take out nominal debt contracts, and so they will be affected by movements in inflation. They may well undertake these debt contracts in the expectation that inflation will average the central bank’s inflation target. HM money is a way for the central bank to ensure this expectation is fulfilled.

I also think it is always important to discuss HM in comparative terms, and in particular thinking about it as an alternative to QE. Indeed I think this should become mandatory in discussing HM: after all most people who propose it do so because they think it does the same job QE is meant to do but better. To the extent that the central bank makes a loss on QE (and if QE is temporary they really could make a loss, which is why the Bank of England got the government to cover these losses), it involves given newly created money away. In this case the beneficiaries are those who sold their government debt to the central bank and then subsequently bought it back at a profit. It is not clear that most people would regard those profits gifted by an arm of the state as a just desert. [1]

I think at the end of the day the ethical issue does all come down to the extent that the government can delegate decisions which have distributional impacts on the population. After all, the relevant budget constraint from the private sector’s point of view is the consolidated public sector which includes the central bank. Newly created money has to go to someone. Absent QE the profits the central bank makes are returned to the government. With QE, there is a good chance that the central bank may be transferring this money to the financial sector. With HM, money goes to the public. HM has not been called ‘QE for the people’ for no reason. Arguably the state provides too much support to the financial sector as it is, even without QE.

[1] QE is not about buying assets to make a profit. The central bank buys existing government debt when it is expensive, because QE only happens when actual and expected short rates are low, and then sells it back to the market when short rates are higher (QE is expected to be unwound after short rates rise). This saves the government money on interest payments but also involves a capital loss.  

The Bank, helicopter money and fiscal conservatism

I want to connect two apparently quite different blogs. The first is by Fergus Cumming from the Bank of England on helicopter money, and the second is by Labour MP Jon Cruddas on why Labour lost the election.

Eric Lonergan gives a detailed response to Fergus Cumming’s post. I will only make two basic points. Here is one critical sentence right at the beginning (my italics):

“This post discusses why such a policy is different to quantitative easing, why it is unlikely to have much impact relative to conventional fiscal measures and the pitfalls associated with pursuing it.”

Read it carefully – it says helicopter money will be shown to be different from QE, but will then be compared not to QE, but conventional fiscal measures. If this seems strange to you (the Bank implements QE and in most serious proposals would implement helicopter money, while governments do fiscal policy) you are correct, as I will argue.

Later, in talking about what might happen if (and it is an if) - after implementing helicopter money - the bank ran out of assets to sell, he writes:

“In some senses the central bank is now ‘insolvent’. [This is later described as 'policy insolvency'] Ordinarily, a government could recapitalise the central bank by gifting it government securities. But this requires issuing new debt, all else equal, which reduces the initial stimulus to a vanilla, bond-financed fiscal transfer.”

So helicopter money that is financed later by recapitalising the central bank is just like a normal fiscal stimulus, and is therefore presumably unproblematic from the central bank’s point of view. Perhaps for that reason it is not discussed further in the post, but that makes subsequent statements about the hazards of helicopter money almost beside the point. After all, the Bank has already addressed the issue of this ‘policy insolvency’ as a result of potential losses from QE, and its response was to get the government to commit to recapitalise. So the same solution for helicopter money is the obvious way to go. In other words, what’s the problem? It only makes sense to ignore this possibility because helicopter money is being compared to fiscal policy rather than QE, something that as we shall see makes little sense.

The key conclusion to the blog is

“For helicopter money to work, households and firms have to believe that all future central bankers and governments want to abandon inflation targeting.”

This does not follow from what has gone before. As we have already seen, helicopter money that is accompanied by subsequent recapitalisation if necessary avoids any inflation problems. In addition, this statement implicitly assumes that the central bank is always able to hit its inflation target. That is a bit like assuming your conclusion. If a combination of inflation and the output gap are below the level the central bank wants to achieve, then the right amount of helicopter money will not lead to ‘policy insolvency’, but instead the central bank being able to hit its targets.

Jon Cruddas presents opinion poll evidence about why Labour lost the 2015 election. The headline is “Labour lost because voters believed it was anti-austerity”. His evidence seems to be very simple. When voters are asked whether the agree or not with

“We must live within our means so cutting the deficit is the top priority”

most agree. The only positive thing you can say about a question like that it was well chosen to get the required result. It is a bit like asking whether people agree with the statement “the welfare system is out of control so the government needs to take action to reduce benefits”. How the response to this question justifies a headline that people believed Labour was anti-austerity is not clear. However I agree with Cruddas’ final conclusion, which is that

“We can seek to change the views of the public, but it’s best not to ignore them.”

Labour’s policy some time before the 2015 election seemed to be about trying to ignore the issue.

What is the connection between the two blogs? The implication that Cruddas draws is that voters are fiscally conservative. Indeed if you take the poll response at face value, voters would prefer balanced budgets even during recessions. If politicians follow/exploit that conservatism, it means that appropriate countercyclical fiscal policy will not occur during a severe recession, and an unhelpful procyclical policy is more likely. Given that, dismissing one version of helicopter money because it is just like these appropriate fiscal measures is bizarre.

Helicopter money has become popular because of the absence of the appropriate fiscal policy response and the inadequacies of QE. As long as most mainstream politicians continue to argue against sensible fiscal policy in a liquidity trap recession, critics of helicopter money should stop assuming that this sensible fiscal policy will happen. It is strangely hypocritical for those in a central bank which is implementing QE in part because of inappropriate fiscal actions to compare helicopter money not to QE but the very fiscal measures that are not happening, and then to ignore the case where helicopter money successfully substitutes for those measures. It is saying I'm doing the second best policy B because policy A is not happening, but I'm not going to do policy C because it can be just like policy A! I'm beginning to think the critics of helicopter money have no clothes.

A way forward for the centre left on deficits

When it comes to fiscal policy the politics of the right at the moment [1] could be reasonably described as deficit fetishism. The policy of the centre left in Europe could also with some justification be described as growing appeasement towards deficit fetishism. Given its success for the right in Europe, it seems unlikely that this side of the political spectrum will change its policy any time soon. [2] Things appear a little more malleable on the centre left. In the UK, in particular, we will shortly have new leaders of both Labour and the Liberal Democrats. In addition, the Scottish Nationalists have adopted the rhetoric of anti-austerity, even though their fiscal numbers were not far from the other opposition parties during the elections.

Attempts to get the centre left to avoid deficit fetishism need to fight on two separate fronts. First, politicians and/or their advisers need to be taught some macroeconomics. Academics too often assume that politicians either know more than they actually do, or have behind them a network of researchers some of whom do know some macroeconomics, or who have access to macro expertise. (I used to believe that.) The reality seems to be very different: through lack of resources or lack of interest, the knowledge of left of centre politicians and their advisers often does not extend beyond mediamacro.

The second front involves the politics of persuasion: how can politicians successfully persuade voters that deficit fetishism, far from representing responsible government, in fact represents a simplistic approach that can do (and has done) serious harm? I think for academics this is a far more difficult task for two reasons. First our skills are not those of an advertising agency, and we are trained to follow the scientific method rather than act as a lawyer arguing their case (although, if you believe Paul Romer, the scientific method is not universally adopted among macroeconomists). Second, the experience of the last five years on the centre left is that deficit fetishism helps win elections.

It my last post I tried to argue why the success of deficit fetishism was peculiar to a particular time: the period after the recession when households were also cutting back on their borrowing, and where the Eurozone crisis appeared to validate the case for austerity. In other times households try to borrow to invest in a house, and firms try to borrow to invest in good projects. As a result, once the debt to GDP ratio has begun to fall, and yet interest rates remain low, the power of alternative narratives like ‘it makes sense to borrow to invest in the future when borrowing is cheap’ will increase.

Yet responding to deficit fetishism by implying the deficit does not matter, or that we can print money instead, or even that we can grow our way out of the problem, is unlikely to convince many. [3] It just seems too easy, and contradicts people’s personal experience. The trick is to appear responsible on the deficit, but at the same time suggesting that responsibility is not equivalent to fetishism, and other things matter too. I think this provides a powerful motivation at this time for a policy that is designed to obtain balance on the current balance (taxes less non-investment spending) rather than eliminating the total deficit. This is far from ideal from a macroeconomic point of view, as I discuss here, but as a political strategy in the current context it has considerable appeal. In the UK it allows you to attack the ‘excessive and obsessive austerity’ of Osborne, who is ‘failing to invest in the future’, while following a policy that it is difficult to label irresponsible. [4]

Of course this policy was close to that adopted by Labour, the Liberal Democrats and the SNP at the last election, so many will just say it has already failed. I think this is nonsense for three reasons. First, the policy I’m advocating is a combination of targeting a zero current balance, and at the same time arguing aggressively against excessive austerity. Labour deliberately avoided being dubbed anti-austerity during the election. (The Liberal Democrats were handicapped by arguing for austerity for the previous 5 years as part of the coalition.) The only party to adopt an anti-austerity line was the SNP, and it did them no harm at all. Second, the reason Labour wanted to avoid pushing the policy at the election was that they felt they had tried this a few years before and failed, but as I argued in the previous post deficit fetishism only shrives in a particular context, and that context is passing. Third, what sank Labour on fiscal policy was that people swallowed the Conservative line that it was Labour’s profligacy that caused the need for austerity, essentially because this line went unchallenged for five years.

This last point is worth expanding on. Too many in the Labour party think that because many people now believe this idea, the best thing to do is pretend it is true and apologise for past minor misdemeanours (knowing full well it will be interpreted by everyone else as validating the Conservative line). This is almost guaranteed to lose them the next election. It will just confirm that the last Labour government was fiscally profligate, and the Conservatives will quote Labour’s apology for all it is worth. To believe that this will not matter by 2020 is foolish - it is the same mistake that was made in the run up to 2015. It is no accident that political commentators on the right are arguing that this is what Labour has to do. So the first task for Labour after the leadership election is to start to contest this view. They should follow the advice that Alastair Campbell is said to have given after 2010, and set-up an ‘expert commission’ to examine the validity of the Conservatives claim, and then follow through on the inevitable findings. [5]

I can understand why it may seem easier right now to avoid all this, adopt deficit fetishism and ‘move on’. But to do this accepts the framing of economic competency as being equivalent to deficit fetishism, and therefore forfeits a key political battleground to the right. In addition, once you accept severe deficit reduction targets, it becomes much more difficult to argue against the measures designed to achieve them, as on every occasion you have to specify where else the money would come from. (In the UK, that partly accounts for the disaster we saw on the welfare bill. In Europe it leads to the travesty of what was recently done to Greece, where Greece was only allowed to stay in the Eurozone at the cost of adopting harmful additional austerity.) As we have seen in the UK and elsewhere in Europe, there is a large amount of popular support for an anti-austerity line, and if the centre left vacates that ground the vacuum will be filled by others. Arguing against deficit fetishism (or in more populist terms ‘obsessive austerity’) while pursuing fiscal responsibility through a balanced current budget can become a winning strategy for the centre-left in Europe over the next few years.

[1] It is easy to forget that there is nothing that makes this the inevitable policy of the right. George W. Bush took the reduction in the US deficit under Clinton as a cue to cut taxes and raise the deficit.

[2] This sentence is just for those who like to ask why I tend to write more posts giving advice to the centre-left rather than to the right on this issue.

[3] I have argued for ‘QE for the people’, but always as a more effective tool for the Bank of England to stabilise the economy and not as a more general way for governments to finance investment. (Even if this becomes ‘democratic’ along the lines suggested here, the initiative must always come from the Bank.) As for growing your way out of debt, this is much closer to the policies that I and many others have argued for, but it may unfortunately be the case that at the low point of a recession this line is not strong enough to counter deficit fetishism.

[4] It was also the main fiscal mandate of the last coalition government, of course. This could be supplemented by targets for the ratio of government investment as a share of GDP. As long as these are not excessive, an additional debt or deficit target seems unnecessary.

[5] The question should not be ‘did Labour spend too much before the recession’, because that is not the line that did the damage. The question should be more like ‘did the Labour government’s pre-2008 fiscal policy or the global financial crisis cause the 2009 recession and the subsequent rise in the UK deficit?’  

Is deficit fetishism innate or contextual?

In a couple of interesting posts, Jonathan Hopkin and Ben Rosamond, political scientists from the LSE and Copenhagen respectively, talk about ‘political bullshit’. They use ‘bullshit’ as a technical term due to Princeton philosopher Harry Frankfurt. Unlike lying, bullshit tells false stories that pay no heed to the truth. Their appeal is more to common sense, or what Tyler Cowen calls common sense morality. At a primitive level it is the stuff of political sound bites, but at a slightly more detailed level it is the language of what Krugman ironically calls ‘Very Serious People’.

The implication which can then be drawn is that because bullshit does not reside in the “court of truth”, trying to combat it with facts, knowledge or expertise may have limited effectiveness. The conditions under which this might be true, and the extent to which information technology impacts on this, are fascinating issues which the authors briefly discuss. But what makes their discussion even more interesting for me is that they use what they call ‘deficit fetishism’, and in particular the stories that the UK government told before the last election, as their subject matter.

In the case of fiscal policy, deficit fetishism as bullshit involves appeals to ‘common sense’ by invoking simple analogies with households, often coupled with an element of morality - it is responsible to pay down debts. The point in calling it bullshit (in this technical sense) is that attempts to counter it by appeals to facts or knowledge (e.g. the government is not like a household, as every economist knows) may have limited effectiveness. Instead it might be better to fight bullshit with bullshit, by talking about the need to borrow to invest, or even that it is best to ‘grow your way out of debt’. (If you think the latter is nonsense, you are still in the wrong court: the court of truth rather than bullshit. As long as the phrase contains what I have sometimes called a ‘half-truth’, it has the potential to be effective bullshit.)

If for the sake of argument we accept all this, I want to ask whether deficit fetishism will always be powerful bullshit, or whether its force is a symptom of a particular time, and what is more a time that may by now have passed. This, rather than discussions of the technical merits of particular fiscal policies, may be the crucial political discussion that needs to take place right now for all those in Europe that want to put an end to needless austerity. (In the US deficit fetishism, and also austerity itself, seems to be taking a breather or having a prolonged rest: which may depend on the forthcoming elections.) Just to be clear, I’m not discussing bullshit more generally, but just the appeal of the particular example of deficit fetishism.

At first sight deficit fetishism seems to be innate, because it appeals to the basic intuition of the household and the morality of good housekeeping. However households also borrow to invest (such as in a house), and most people understand that this is what firms also do. The reason why the bullshit involving paying back borrowing may have been particularly powerful over the last five years is that this is exactly what many households have also been doing.

Although the Great Recession may have started with a financial crisis, its persistence despite low real interest rates is often put down to what many economists call a balance sheet recession: individuals and firms cutting back on borrowing (or saving more) over a number of years. That process has been particularly evident in the US and UK, with sustained increases in the aggregate savings ratio. However that process now appears to have come to an end. As individuals start to borrowing again (or at least stop running down their debt), perhaps they will become more tolerant of governments doing the same.

To this we could add an obvious external factor. In 2010 and the following two years, deficit fetishism seemed to be validated by a superficial view of external events. The difficulties that some countries were getting into because their governments had ‘borrowed too much’ was top of the news night after night. In that context, is it any wonder that most people believed the bullshit?

One final indication that the power of deficit fetishism is contextual is what economists call deficit bias. Before the Great Recession, there was a tendency in many countries for government debt as a share of GDP to rise over time for no justifiable reason. Fiscal rules and then fiscal councils were created largely to prevent this. It is difficult to square this phenomenon with the idea that deficit fetishism is always powerful.

Many political parties on the centre left in Europe (such as the UK) currently seemed resigned to deficit fetishism remaining a powerful force that can sway elections. So, if you cannot beat them, join them (and never mind what is good macroeconomics). This assumption at the very least seems debatable.