Osborne's folly

I have an essay in the latest New Statesman marking what seems like the end of UK austerity, or more specifically the end of what I have call 'deficit deceit' in the UK: using a manufactured concern about high levels of government debt as a means of achieving an otherwise unpopular reduction in the size of the state. The article goes through the history of UK austerity because this is important in understanding what has and has not happened as a result of Brexit.

There have been two phases in UK austerity. The first began in 2010, and was mirrored by similar moves in the Eurozone and the US. The second began after the 2015 election, and was very much a uniquely UK affair, as Paul Krugman has remarked. By 2015 measures already in the pipeline had largely stabilised the level of the debt to GDP ratio. However as mediamacro's interpretation of 2010 austerity had helped win the Conservatives the 2015 election, Osborne decided to do it all over again by going for a budget surplus and relatively rapid reductions in the debt to GDP ratio.

It was an economic folly because with very low interest rates now is the time to increase the share of public investment in GDP, yet to achieve his surplus target Osborne planned to do the opposite. It was a political folly because it pushed deficit deceit to far. It is this 2015 austerity plan that the Conservatives appear to have repudiated with Osborne's departure. Their belief that what they did in 2010 was necessary seem to remain in tact.

This will be important in thinking about the fiscal rule that the new Chancellor could adopt. He may well go back to targeting the current balance, as both Labour have proposed and the coalition did, removing the straightjacket from public investment. What he is very unlikely to do is include a Zero Lower Bound knockout, of the kind that John McDonnell has proposed, which would have avoided 2010 austerity.

The EU referendum will go down in history as Cameron's great mistake. But as many have remarked, Brexit and austerity are not unconnected. Not in the direct sense that Brexit was a vote against austerity: the 2015 election result showed that many still believed 2010 austerity was necessary. Many people also erroneously believed the NHS had been protected from austerity: after all that was what the media repeated endlessly. Yet the NHS is clearly in crisis, so that had to be the result of immigration. The only way to stop immigration from the EU is Brexit.

To put it another way, it was Osborne's great mistake to think that he could embark on a new wave of austerity while continuing to remain silent on the benefits of immigration, and yet still win the referendum vote. It has often been remarked, in these posts and elsewhere, that Osborne has been a very political Chancellor. It is therefore perhaps fitting that he has been brought down by an essentially political mistake.

German macroeconomics revisited

At the end of April George Bratsiotis and David Cobham organised a conference with the provocative title “German macro: how it's different and why that matters” which I unfortunately was not able to attend. Six of the papers presented, plus some additional papers on related themes, are published here. The papers by Peter Bofinger and Michael Burda are related to earlier work by both authors that I have discussed in earlier posts here and here.

Many of the themes in these papers have been briefly discussed in past posts. Peter Bofinger notes that the macro taught in German universities is little different from that taught elsewhere, but stresses the prevailing influence of Ordoliberalism and the ideas of Walter Eucken. Michael Burda emphasises the role of German self-interest in influencing the policy positions of German macroeconomists. As I note here, it is often difficult to distinguish between the relative importance of ideas and self interest.

This is particularly true when ideas and self interest reinforce each other. According to Bofinger, Ordoliberalism reacted to the demand problem identified by Keynes by stressing the importance of wage flexibility and sound money. Germany’s distinctive wage bargaining structure allows an unusual degree of flexibility. In the context of a fixed rate system or monetary union where other countries cannot respond in kind, this does indeed allow a way out of demand deficiency as we saw in the early years of the Euro. As a result, virtually the only country to survive to Eurozone recession largely unscathed was Germany.

I hope it does not need spelling out that this route out of demand deficiency only works by taking demand from other countries. [1] If Germany had its own currency and a floating exchange rate, any fall in domestic prices would be offset by an exchange rate appreciation. Luckily for Germany its neighbours, perhaps attracted by its ability to keep inflation low, have been eager join fixed rate systems or monetary unions where the wage cutting trick will work (see the book by Yanis Varoufakis reviewed here for example).

The only points I would add is that this unusual economic outlook is not confined to macroeconomics, and that it depends to some extent on a degree of insularity from international mainstream discussions of economic policy. It is hard to imagine a reputable UK or US research institute talking about the minimum wage and saying “minimum wages have time and again been shown to help some workers earn more at the cost of the low-skilled losing their jobs”, as if the work of Card and Krueger had never happened. I have sometimes wondered whether in Germany business has an influence on the economic debate that in the UK and US has been replaced by the influence of finance, but that at the moment is purely a speculative idea.

[1] An important point to note here is that if you have a target for the level (or path) of the money stock, then wage and price flexibility might get a closed economy out of recession if it was successful in raising inflation expectations. However the ECB has an inflation target and not anything like a price level target.

A referendum on taxes

Suppose we had a referendum on taxes. A simple question: should taxes be reduced or not? Polling evidence suggests that the resounding answer would be yes. But polling evidence also suggests that most voters would also say yes to more money for schools and the NHS. They might also say yes to reducing the deficit. Referenda do not need to respect constraints, which in this case is a simple budget constraint.

You might say that polls are a bad guide to what might happen in a real referendum on lower taxes. Those in the No campaign would point out that you cannot have over the longer term both lower taxes and higher public spending. But those arguing yes would say that lower taxes could be 'paid for' through greater efficiency in public spending. They might even say that lower taxes pay for themselves because the incentives they provide would lead to more growth and therefore more tax receipts. Most economists would say that this was highly unlikely, but we know economists will be ignored.

There was a similar constraint in the EU referendum. Reject free movement of labour and you cannot be part of the single market, and if you are not in the single market growth will suffer. Some might say that the success of the Leave campaign lay in making the EU referendum into a referendum on immigration, but as I argued before the campaign started this was always likely to happen. While the equation relating free movement to EU membership was straightforward and uncontested, the constraint relating free movement to the single market and growth was contested.

The real failure of Cameron and Osborne was not to forsee this would happen when they agreed to a referendum in the first place. They should have known, because they had managed to shut out economic expertise in the 'debate' over austerity. Their mistake, and perhaps arrogance and conceit, was not to realise that their opponents would do the same to them over Brexit.

Opportunity costs

I wrote this about a month ago, but decided not to post it because it sounded a bit like a personal rant. Following the Brexit result, and more introspection among economists about what more they could have done, I think this basic point is worth making

When I complain about the media ignoring economic ideas or economics generally, I’m told that economists - and academics more generally - must learn about PR. Indeed it may be my moral responsibility to do so. When I wrote about how other social scientists made useful criticisms of economics, but were often ignored because it was couched in language economists did not understand, I was told that economists should learn that language. And when I said in my post on Mirowski that he knew more about the history of economics and neoliberalism than I did, Lars Syll says I should educate myself. Note that in none of these cases am I saying there should be no engagement from economists: all three examples come from cases where I did attempt to engage.

In economics we do not just learn about opportunity cost, we also know about comparative advantage and the division of labour. It makes sense to set up systems (in production, trade, research or other things) where people do what they are good at, rather than just do a bit of everything. In academia people specialise for good reasons. To understand the macroeconomy better it really is sensible that I spend most of my time reading macroeconomic research rather than doing PR, reading sociology or the history of economic thought. Note I said most, not all.

That does not mean that we all become isolated in our own little worlds of knowledge. Indeed I think both good research and good application often benefits from some breadth of knowledge. But I think it beholds those of us with some knowledge to try and communicate it in terms that are easy for outsiders to understand, and avoid them having to read our literature. That is why I try to avoid jargon in my blogs unless I only want to communicate with other economists. If policymakers want macroeconomic advice I do not tell them to go read some article or change their policies before I’ll talk to them - I just give them advice.

To some it seems terribly arrogant if you say I do not have time to read a new literature, or cultivate relationships with journalists, particularly if you work in that literature or you are a journalist. To see why it is not arrogant just turn it around: how would that person feel if I said you had to start reading a lot of macroeconomics literature. I never say that, but write blogs instead, and put a considerable effort into doing so. To be told that in addition I have to learn the arts of PR as well as reading other literatures is not only annoying, it makes no economic sense.

More on how it happened

My post ‘The triumph of the tabloids’ is now easily my most read post in the four and a half years I have been writing a blog. I suspect that partly reflects readers from overseas trying to understand how on earth British voters could have chosen to do something so obviously harmful to the economy. I have subsequently been pleased to see others picking up the same idea: Maria Kyriakidou here and Charles Grant here. As Grant says, the tabloids “became propaganda sheets” for Leave. He goes on : “as I discovered while knocking on doors during the campaign, many Britons believe all sort of bizarre things about the EU that have no basis in fact, and the source of which is ultimately newspapers”. Of course the media cannot alone win a referendum like this, and Charles Grant also focuses on other factors, but in many of the accounts of how Brexit happened that I have read the media often does not figure at all. The idea that the media does not matter, or just reflects public opinion, is simply wrong.

Although the title of my post referred to the tabloid press, their success was only possible because the broadcast media failed to provide any antidote. I have written about this a lot during the campaign. One link that I did not mentioned is suggested by Grant. He writes

One of the BBC’s most senior journalists confessed to me, a few days before the referendum: “If we give a Leaver a hard time, we know that the Mail or the Sun may pick on us and that that is bad for our careers. But if we are tough on Remainers it might upset the Guardian and that doesn’t matter at all. This affects the way some colleagues handle interviews.”

He also notes that many journalists failed to contest falsehoods put forward by Leave politicians simply because they were not knowledgeable enough, a point I have made many times about political commentators knowledge of economics. This is so important, because if politicians quote ‘facts’ that are false and interviewers let them pass, you are bound to leave an impression among viewers that these facts are true. As any macroeconomist will tell you, people make decisions based on the information they have.

But it is not just the Brexit vote that the tabloids are partly responsible for. It is the racism and intolerance that they have helped legitimise. Of course politicians must take most responsibility for this, but the tabloids play an important role. This will only become worse as those who voted Leave become disillusioned that nothing has improved, and of course no tabloid will ever apologise for getting it wrong. They are the epitome of power without responsibility. And because of the power these newspapers have, politicians dare not criticise them for it. One did, and he paid a heavy price.

The inadequacy of left and right

Chris Dillow writes:

“If we can ditch tribalism about left and right and think about how some good economic policies can fit in with people’s demands for control over their lives, the Labour party might just have a bright future.”

His conclusion follows from a very simple point, which is that Brexit has almost nothing to do with the traditional left/right metric.

The economic arguments would always be for Remain, because making it easier to trade is beneficial. While it is true in general that more trade can harm some even though it benefits the aggregate, it is unclear that there are any economic winners as a result of Brexit.

Some on the left try to argue that Brexit will be a fatal blow to a neoliberal EU. I have never been a great fan of making people’s lives worse just so that you can strike a blow at some evil empire.

In the EU, the single market goes together with free movement. It is tempting to present that as a political obstacle imposed by the EU, and it is indeed the case that there are very strong reasons why the EU will not compromise on this linkage. But there are good economic reasons why, if we focus on trade in services rather than just goods, the two should go together, and indeed that it is in the UK’s economic interests more than most that free movement is maintained.

So if the straight economics said Remain, it was counterbalanced mainly by the issue of immigration for Leave. Once again, it is difficult to see this as a left-right issue. Some have tried to explain the result as a consequence of the disenchantment that follows stagnation in wages and austerity, and I’m sure there is some truth in that. But while people have focused on the Leave vote in Labour’s heartlands, most Labour voters voted to Remain. In contrast most Conservative voters did the opposite. I suspect they are not talked about so much because to do so takes people away from the familiar territory of inequality and class, of left and right. [1]

Perhaps both the Corbynistas and their opposite numbers are stuck in a similar mindset that just prevents them seeing what is really going on. I have argued in the past that the election of Corbyn was not mainly the result of a ‘shift to the left’ among party members, but a rejection of a form of politics that had lost Labour two elections. That form of politics was based on a left/right frame: victory could be achieved by placing the party just to the left of the Conservatives, and thereby capturing the middle ground. It led to a disastrous drift on austerity and immigration. Yet it failed to deliver these imagined middle ground voters. The basic model was wrong, or at least hopelessly incomplete.

So yes it was the parliamentary party moving to the right rather than party members moving to the left that led to Corbyn’s victory. But perhaps more fundamentally it was the model of how to win elections that failed, based on focus groups and triangulation. Anti-Corbynistas are convinced that party members no longer want to win elections because they voted for Corbyn. I doubt that is true for most. It only appears to be obviously true if you imagine you know the true model of how to win elections. Given past failures and policy drift, it is understandable if party members did not share that belief.

The Corbynistas in turn may be in danger of making the same mistake: to assume that winning elections is not a priority for members, and that as Corbyn has not changed, his support will not change either. Of course most party members want desperately to win elections, as I suspect we shall see if Corbyn faces the right opponent. [2] But selecting the right opponent is not just about finding some sweet spot on a left-right scale, but about recognising the failures of focus group politics and triangulation, particularly when it comes to responding to the referendum result. [3]

[1] And there is also the rule in some circles that any bad news must be Jeremy Corbyn’s fault, plus the fact that journalists tend to dislike talking about the role of their own industry in influencing events.

[2] In saying this I am not suggesting that holding what will in effect be a referendum on Corbyn’s leadership is a good way out of the current impasse. As we have just learnt, referenda with a binary choice are far from ideal. One way forward would be to recognise that Corbyn has failed to convince most of the PLP and perhaps many of the membership that he can win any forthcoming election, but that someone from his group should be guaranteed to be on the ballot for the next leader. Of course the anti-Corbynistas will not want this because they do not trust and fear the membership, but perhaps there are some wiser heads that can prevail.

[3] As I have argued recently, Labour’s true heartlands are the very people who are devastated by Brexit. That does not mean giving up on the traditional heartlands, but instead it means convincing as many as possible there that their situation is not the result of higher immigration. As Sadiq Khan said, a successful Labour party has to “reach out and engage with all voters”.        

Economists, Brexit and the Media: Epilogue

In a thoughtful piece, Paul Johnson of the IFS says that economists must take some of the blame for not getting our message across. In fact he says: “But it is always a mistake simply to look at the media as a scapegoat. The real failings were with my profession.”

What were these failings. He identifies four. The first is that we have failed to get basic economic concepts across to the public, like that a depreciation does not make us richer. The second is that we have no means of getting our voice across as a collective, rather than as individual voices. Third, most of us cannot respond quickly to important issues. Fourth, we fail to translate impacts on ‘the economy’ into concepts people can relate to.

All of these things are indeed general problems. I have written about the lack of collective view here, so I completely agree that is something we should act on. I also think collective action is the only way economists have of dealing with the first problem (apart from individually writing non-economist friendly blogs of course). I do not think the third was an issue for Brexit. Of course the fourth is always likely to be true (more media training!).

But having said all that, Paul is basically wrong. Even if you had put all these things right, I do not think it would have made any difference to the result. In this referendum economists did do their collective best to inform the public. Failing to have a collective voice was compensated for on this occasion by letters and polls. The lack of knowledge of economics (and in this case Europe) among many political correspondents is not really something economists are in a position to rectify. And right from the start, the long term costs of Brexit were expressed in term of costs for the average household. (And when that was done in a perfectly reasonable way, the media mistakenly told us we were doing it wrong.)

This really is like blaming scientists for not warning enough about climate change. And the problem is not confined to the EU referendum. We saw the same problem arise during the Scottish referendum, when the term Project Fear was first coined as a way of dismissing difficult economic realities. The result of the referendum permitted a degree of complacency. I personally would argue, along with other economists, that much the same happened in the 2015 general election, when mediamacro turned perhaps the worst economic record since WWII plus the promise of a referendum into ‘economic competence’. But that was seen as partisan and so ignored. I don’t think either of those two events had much to do with a failure of the economics profession either, and I take no pleasure in having used that experience to anticipate how this referendum would go.

There are all kinds of people you can blame for ignoring economics expertise. Voters themselves, the politicians that call such advice Project Fear, the tabloid media that keeps expertise from the eyes of their readers (or trashes it), the broadcast media for an obsession with balance, underlying economic conditions that lead people to think it cannot get any worse (a phrase I have heard a number of times since the result). It is a long list, and in order of importance the failures of economists themselves comes a long way down it.

And before I get the inevitable comments about the failure to foresee the financial crisis and the sins of neoliberal orthodoxy, please note that the medium term costs of Brexit come largely from models of trade, productivity and international investment which are very empirical and hardly ideological. But if a respected Financial Times columnist calls economists’ assessment of what that literature implies “the profession’s intellectual arrogance” what can you do. Let’s get real: what we said was ignored, and the reasons for that have very little to do with economists themselves.