The post-Brexit vote trade boost that never was

There is still a huge disconnect between the reality of the state of the UK economy since the Brexit vote and media perceptions. I heard one presenter on BBC News say the economy is doing pretty well following the Brexit vote. The reality is very different. According to the latest CER study the economy is 2.5% smaller than it would have been without that vote, which is nearly £2000 per household. We are back in the situation we were in before the 2015 election, where the reality for most households was pretty bad but the media kept on talking about a strong economy.  

But why has the Brexit vote had such a large negative impact on the economy, when Brexit has not happened yet. When I talked about what to expect immediately after the vote, when Brexiters were arguing that the collapse in sterling would be a big boost for the economy, I tried to point out that any boost would be temporary, because sterling had fallen for a reason: trade could become more difficult. That was a major reason for the depreciation, to compensate for future trade barriers. (I elaborated here, and talked about why real wages were falling here.)

It looks like I was being too optimistic. Here, from the ONS, is the breakdown of what contributed to GDP growth in each quarter since the vote. The contribution of net trade (the yellow bars) is always erratic, but there is no clear positive contribution emerging.

This aggregate data is backed up by the survey evidence from the manufacturing sector  reported here. Many firms have already lost export orders as they were cut out of EU based supply chains because of Brexit. A recent study from INET and Cambridge found that firms were either not entering into new agreements to export products because of Brexit or were more likely to exit from such agreements. Most recently another study used statistical methods to estimate what trade would have been without Brexit, and this suggested that exports to both the EU and non-EU were not increasing as you might hope as a result of the depreciation.

That exports to non-EU countries are lower as a result of the Brexit depreciation might seem puzzling, but it is important to remember the number of trade agreements that the EU has with other countries, which we will probably lose under some types of Brexit.

What is going on here? Why are exporting firms not increasing their volume of exports in the short term to benefit from the competitive advantage they have gained at least before barriers to trade are erected? No doubt some are, but they are being offset by others that are decreasing exports because contracts are getting cancelled or it is just not worth continuing to export or enter new markets.

The reason is something that trade economists have known about for decades. Trade involves important fixed costs. Supply chains have to be established, or the infrastructure to trade in overseas markets has to be set up. That means that those setting up supply chains do not want to be changing them every year, and as a result find it too risky to include UK firms when various barriers might arise as soon as March 2019. Equally firms selling direct to overseas consumers find that the investment required to set them up is greater than any profits they might only make for a few years.

All this would not matter so much in terms of GDP if similar things were happening to imports, but the most recent study I surveyed suggested this was not happening so much to imports. An important reason why exports are hit more than imports is specialisation. Increasingly there are products which the UK does not produce, so it is more difficult to substitute from overseas to domestic production. In contrast exports are generally competing with producers from many countries, so substituting from a version of the product coming from the UK is much easier. That I believe is an important reason why sterling fell so much after the Brexit vote.

Although all this is painful for people in the UK, it is also interesting for a macroeconomist. We have a ‘natural experiment’ involving a future event, but with the complication that what the future event exactly is remains uncertain. The negative impact on investment is exactly what we would expect: it is always safer to wait and see. The negative impact on exports is rather different from what standard models would imply, but can be explained by well known trade theory. The impact on consumption has perhaps been less than many expected, but that could be explained by many having incorrect expectations of what Brexit means for their future incomes. All this shows how important expectations are and how misleading naive expectations processes would be, but also why it is often important to allow for how distorted information sets can generate errors from rational expectations.  

Would a Corbyn Brexit heal the nation or wound Labour?

Just suppose May fails to get a deal, or her proposed Withdrawal Agreement (WA) fails to be passed by a majority of MPs. Suppose for some reason this results in an election that Labour wins. Labour have not pledged to have a referendum in those circumstances, and I think this is more than triangulation. It is increasingly clear that the Labour leadership want to do a Brexit deal with the EU.

I think it is also becoming clear that this deal will be essentially Brexit in Name Only (BINO): we stay in the Customs Union and Single Market. The Labour leadership will want assurances on nationalisation as well as other elements in their manifesto, and the EU will give the (substantial) assurances it can without changing EU policy in any way. Labour will I suspect also come back with a package on Freedom of Movement that involves enforcing the existing rules (EU nationals have to find work within 3 months) and any other sweeteners the EU care to throw them. That all adds up to BINO.

The key characteristic of BINO (which is what gives it its name) is that everything it does can be achieved by staying in the EU. As far as any sweetners are concerned, it is plausible that the UK is more likely to get those being part of the EU than being outside it. All that BINO achieves is to give up a direct say in how the EU evolves, and giving that up without any compensation cannot be in the national interest.

So why would Labour bother to do this? The answer I think is that they want to keep the minority of Labour voters who still favour Leave voting Labour. When the leadership says that they must respect the referendum result they do not really mean that it is undemocratic to hold another referendum: they are not that stupid. What they mean is that they do not want to antagonise Labour Leavers. In addition they believe that BINO with sweeteners would convince enough Labour Leavers that Labour had got the job done, and these voters would not worry too much about the details.

Before getting on to whether they are right, it is worthwhile noting that this has nothing to do with the Labour leadership being Leavers at heart. In a smart tactical move, Corbyn in his closing conference speech said he would back a WA that came from May if she delivered “a deal that includes a customs union and no hard border in Ireland, if you protect jobs, people’s rights at work and environmental and consumer standards - then we will support that sensible deal.” The inclusion of Ireland and protecting jobs means in practice staying in the Single Market. You just wouldn’t make that pledge if you wanted Lexit.

Of course exactly the same question arises for Theresa May and the Conservatives, if as I suspect the EU is not prepared to extend the backstop to the UK and so BINO is the only deal that avoids an Irish border anywhere.

So would BINO heal the wounds opened up by the original referendum or would it satisfy no one? A positive argument would start by suggesting that most Remainers will not mind losing any say in the EU, because they would be so relieved that we had avoided a hard Brexit. The people who should be worried about this loss of sovereignty are Leavers, but they will be more concerned with actually leaving. And both groups will be relieved it is all over.

The argument against is that BINO is clearly inferior with being a member of the EU, so Remainers will know we have done something that is clearly nonsensical. Leavers on the other hand will be convinced (by the Brexit press in particular) that this result is a sham Brexit, and therefore a betrayal of the original referendum, which is roughly how May herself has described it. As time goes on both sides will forget that the government was fulfilling a democratic mandate, and instead blame it for agreeing a Brexit that nobody likes.

I don’t see how it is possible to know which of these outcomes will come to pass, which in turn means a government that enacts Brexit is risking a lot. Of course politicians are used to taking risks, but these risks normally involve trying to achieve something they think will do the country, or part of it, some good. It is somewhat novel to take risks to achieve something that in itself does nothing but reduce the country’s influence and sovereignty.

The Next Referendum Question

I wrote in January about the “unanswerable case” for a referendum on the Withdrawal Agreement (it is not a second referendum but nor is it a referendum on the final deal), and I have not changed my mind in the slightest. To say such a referendum would not be democratic is self-contradictory. I personally would be happy for parliament alone to call a halt to Brexit, but if MPs believe that to do so would be seen as undemocratic then we have to have a referendum on the Withdrawal Agreement (WA).

Does it bother me that this will not be a referendum on the final deal, because the WA is likely to be vague on the final trade arrangement? No, for two reasons. First a referendum on the final deal will be meaningless because we will have already left (something which I do think is undemocratic). Second, we now have a huge amount of information compared to 2016.

We now know that there are essentially two types of deal with the EU we can do. The first is some kind of FTA (free trade agreement), where Northern Ireland would stay in the Single Market for goods and Customs Union (the Irish backstop). Theresa May says that is something no Prime Minister could agree to, but more worrying from my point of view is that we would be a lot poorer as a result because we would do less trade with the EU and many of the third countries that currently have trade agreements with the EU. Those who tell you that getting our own trade deals with those third countries would be a piece of cake are the same people who told you that we held all the cards with the EU.

The second option is that we stay in the Single Market and Customs Union, but have little say in how those emerge. That avoids the need to implement the Irish backstop, which is why it will be the most likely option that May will agree to in the end. The economic hit from that would be much smaller than the first option, but we end up with substantially less sovereignty than if we stayed in. May would like to persuade the EU to leave open the idea of extending the backstop to the whole of the UK, meaning we stay in the CU and SM for goods only, but I think the chances of the EU agreeing to this at the end of the day are slim, and as geography is as important to services as goods we would be worse off as a result.

This choice was not clear to even experts at the time of the referendum, and it was certainly not clear to voters. The campaign hardly mentioned Ireland (and when it did, it did not imagine a backstop), and voters were told there would be more money for the NHS (there will be less), Turkey was about to join (it is not), EU immigration hurt the public finances (it does the opposite), we held all the cards in any negotiation etc. The Remain side may have exaggerated the immediate economic hit, but two years later GDP is around 2% lower as a result of the uncertainty created by Brexit and the fall in Sterling has in addition cost each household an average of £400 per year. That is fact not Project Fear.

So the case for a referendum on the WA is overwhelming, given all the extra information we have. That nearly all this information has been negative for Brexit is reflected in the polls. So what should the referendum question be? I do not think No Deal should be an option. No one seriously campaigned for No Deal in the first referendum, and only a minority of Conservative MPs (60?) support it. The obvious question to ask is do you want to accept the WA negotiated or do you want to Remain in the EU. This does not disrespect the original referendum vote any more than the 2017 general election disrespected the 2015 one.

John McDonnell on the Today programme yesterday (here, 2:10 hours in) seemed to suggest a question like do you accept the WA, yes or no? Some took the 'no' as implying No Deal, but I doubt that as Labour would be campaigning for no and have already said No Deal is not an option. Instead it would be a suggestion to reopen negotiations. But if Labour cannot force a General Election, and with May saying this is the best deal she can get, what is the point? If you think a no result would put pressure on the EU, see what happened after the Greek referendum in 2015. I think many voters would realise this, and just vote for the WA to speed the end of the paralysis in government that Brexit had created.

Not only does his suggestion make little sense, but it was politically disastrous, given the overwhelming support for a referendum that included the Remain option among Labour voters and members. Just after a composite motion had been agreed which is itself a compromise between Remain members and the leadership, he appears to undercut it at a stroke. The words he should have said came from Starmer later in the day.

So the referendum on the WA should be a simple choice between accepting the WA as negotiated or cancelling Article 50 and remaining in the EU. What about all those working class Labour voters in the towns of England and Wales who will feel betrayed if we stay in the EU? Those people were sold snake-oil, and you do not expose snake-oil by prescribing it on the NHS. Instead you make sure you enact policies that reduce the demand for snake-oil, and hopefully that is what a future Labour government will do.

Theresa May has qualities, but negotiation skill is not one of them

One of the important criteria I used in selecting posts for my new book out this November, The Lies we were Told, is that each chapter (collection of posts) must tell a coherent story. (It can be ordered at a 20% discount here, rising to 35% if you join the publisher’s mailing list.) So, for example, the chapter on austerity had to contain at least one post that covered each of the mistaken arguments made for rapid deficit reduction, as well as discussing the real reasons the government pursued this policy long after it was obviously damaging the economy.

Those criteria, plus the need to avoid writing too large a book, inevitably meant that I had to end my discussion of Brexit with the EU referendum. It is still impossible to say which of the many things I have written on Brexit after the referendum will be part of a coherent story and which will be tangential. But if I ever do have to select which posts were important, this talking about the qualities of Theresa May as a person would be one. The reason is largely because it contains this quote from a discussion by David Runciman in LRB of Rosa Prince’s biography of May.

“May didn’t do negotiation; in the words of Eric Pickles, one of her cabinet colleagues, she is not a ‘transactional’ politician. She takes a position and then she sticks to it, seeing it as a matter of principle that she delivers on what she has committed to. This doesn’t mean that she is a conviction politician. Often she arrives at a position reluctantly after much agonising – as home secretary she became notorious for being painfully slow to decide on matters over which she had personal authority. Many of the positions she adopts are ones she has inherited, seeing no option but to make good on other people’s promises. This has frequently brought her into conflict with the politicians from whom she inherited these commitments. By making fixed what her colleagues regarded as lines in the sand, she drove some of them mad.”

If you want to know why the Salzburg meeting was such a failure for her, you need only read this paragraph. May invests far too much in whatever plan she puts forward, and presents it as the only possible way forward. She is in that sense the embodiment of Thatcher’s TINA (There Is No Alternative). She did that with her Chequers plan at Salzburg, and yet she is surprised that the EU showed no inclination to offer anything new as a counter proposal. Maybe the EU never will offer anything new, but you will never find out if you give no hint of flexibility yourself.

If being a hopeless negotiator is not bad enough, the last two years have also shown that whatever political knowledge she has does not extend beyond understanding how the Conservative party works. Her closest advisers, who she relies on a lot, may be little different. After she became Prime Minister she made a series of terrible decisions that have turned a bad situation for the UK into a terrible position. The most important of course was invoking Article 50 without any plan about what might happen next, for no better reason than the Brexiters were anxious people might change their minds. As I wrote in November 2016

“Anyone who actually wants a good deal from the EU when we leave should realise that the UK’s negotiating position becomes instantly weaker once Article 50 is triggered.”

There are plenty of other blunders: choosing a prominent Brexiter as her chief negotiator, fighting the need for parliamentary approval for triggering A50 in the courts, forcing Ivan Rogers out, her red lines and so on. Her focus on keeping the Conservative party together meant that she failed to understand and continues to fail to understand how the EU works. Above all else she has failed to see that the A50 process is less a negotiation and more like agreeing a terms of surrender.

Does this mean, as Stephen Bush among others suggest, that No Deal is a more likely outcome? In reality all Salzburg and May’s subsequent ‘statement to the people’ mean is more time has been lost. (The statement could mean nothing more than she has a party conference coming up.) As Martin Sandbu explains, there is concession the EU could make that is worth playing for, and that is extending the NI arrangement (in CU and SM for goods) to the rest of the UK. At the very least, she needs the EU to say in the Withdrawal Agreement that they would entertain some trade arrangement that negated the need for a border in the Irish Sea but fell short of staying in the complete single market. Unfortunately May’s lack of negotiating skills and knowledge means she is less likely to get either.

If she does not get those things, will she take the UK out with No Deal? As the quote from David Runciman suggests, many of the positions May adopts with apparent rigidity are inherited, and the EU referendum result is one of that type. She is not a conviction politician, and her primary interest is always going to be her survival. We can also take comfort in her knowledge of her own party, which means she must know her future lies with MPs who are not Brexiters. Enough of this group knows, to use Corbyn’s words, that no deal is not an option. They might tolerate May pretending it is as part of the negotiations, but they will do everything they can to stop her actually going through with it. May is useful, or indeed essential, to that group only so long as she does not give the Brexiters what they want, which is No Deal. All these things point to May being prepared, at the end of the day, to accept the backstop with just warm words from the EU on future arrangements.

If you still think May has recently drawn a line in the sand so deep that she couldn’t possibly cross it without falling, a good exercise would be to list all the other red lines she has drawn but then crossed over. If you doubt her capacity to survive come what may think of the 2017 election. But of course I may be mistaken. One of the nice things about the book was being able to look back at what I got right and got wrong using the device of postscripts. If I ever write up my best posts on events after the referendum two of my mistakes stand out: not understanding the key role Ireland would play until September 2017, and not seeing how May’s inevitable split with the Brexiters could change the dynamics on voting over any final deal. I hope a third mistake will not be in misjudging May’s character.

Why Brexiters look defeated

One reason Brexiters split in stage one of the Brexit endgame is that there is no good way forward for them. When Boris Johnson calls the EU’s Irish border backstop “a monstrosity” he is talking about its impact on the plans of the Brexiters rather than its impact on the UK. It destroys their hope of a Canada type Free Trade Deal with the EU, because the EU will not agree to anything like that without the backstop, but the Conservative and Unionist party cannot agree to a backstop that ends the UK single market.

Those that split over Chequers (the quitters) have one hope left, which is we crash out with No Deal. Those that did not, like Gove and Javid (the schemers), hope that one of their number can at some stage grab the party leadership and then change any agreement to their liking. But neither strategy is likely to work because of that ‘monstrous backstop’ and parliament’s ability to stop No Deal.

One way No Deal could happen is that May fails to compromise enough to get a Withdrawal Agreement (WA). If nothing else then happens, we get a catastrophic No Deal. But if she cannot make a deal with the EU she has to report to parliament on 21st January (ht Steve Lawrence). Parliament can then vote down this ‘neutral’ motion, and perhaps amend it if the speaker allows. But I suspect this is a bit academic, because what parliament is likely to request is what May herself would want, which is an extension of Article 50 (A50).

The EU does not want No Deal anymore than May does. So they are likely to agree to that request, but probably at some political price. The whole point of A50 is that all the power lies with the EU. What that price will be I do not know, but in any iteration between the EU and parliament I cannot see a No Deal outcome unless either party seriously miscalculates. This is not a sequence of events that looks good for May, which is one of the reasons why May is likely to conclude a deal.

In that eventually (there is a WA) the quitters will hope that they can defeat the deal in parliament. How many of the quitters will stay firm in that resolve is unclear, because the outcome of the deal being defeated is unlikely to be No Deal. Quitters apart, MPs want No Deal even less than they want whatever WA May puts to them. In the political chaos that results something like a referendum or a general election may emerge as a way forward (and the EU will extend A50 to allow time for this). Brexiters do not want a referendum, because for all their talk of the will of the people they only want that will if it agrees with their own wishes.

Given all this, the schemers may seem to be on firmer ground. Let the WA pass, and then change anything that is agreed subsequently once one of their number becomes Prime Minister. Note in passing that the Brexiters and May have a common interest in what I have called a perpetual Brexit: the Brexiters because it keeps the issue in members minds when they come to vote for May’s replacement, and for May because for that very reason the majority of Conservative MPs who are not Brexiters will want her to stay.

The problem for the schemers is that after the WA they face exactly the same problem Brexiters face now but more so. The Irish backstop will now be enshrined in a treaty. Any attempt to reduce the degree of alignment of regulations between the UK and EU, for example, would end the UK’s single market. Enough Conservative MPs will object to that and so prevent it happening.

The big flaw in the Brexiters’ plans to free ourselves of pesky EU regulations on employment, the environment etc is the Good Friday Agreement, the laudable wish of the Irish government to keep the spirit of that agreement intact, and the admirable wish of the EU to stand by one of its members. If that had not been the case, they might have got away with a FTA with the EU, but instead they are stuck with the ‘monstrous’ backstop. In the end the Brexiters have failed because they are just not very good at what they see as details. The critical detail in this case is the large island to the west of Great Britain.

The Brexiters may have failed in their primary aim, but they have caused considerable damage nevertheless. Estimates of the GDP loss so far are around 2%, and real wages have fallen by a lot more than that because of the depreciation. Unless MPs can, directly or indirectly, stop Brexit, we will end up at best with less sovereignty than we had as members of the EU. The damage to the UK's reputation, both as a safe place to export from and more generally as a pragmatic tolerant nation, will take a very long time to repair, and that time will not start until the Brexiters themselves lose their political influence.

How to predict a crisis

I was sorting through some old papers over the weekend (don’t ask) and I found an article I wrote for the Financial Times on 19th October 1990, which is also the month we entered the European Exchange Rate Mechanism (ERM). The article, based on work I had done earlier with colleagues at the National Institute (final published version here), argues that we were entering at the wrong exchange rate. The final paragraph starts with

“The danger is that the government will attempt to defend the present exchange rate bands at all costs. As a result it may produce, or fail to prevent, a recession on the same scale as 1980-81.”

According the current data vintage, GDP was already falling at that point, yet interest rates were not reduced by enough to prevent a recession because of concerns about pressure on sterling. GDP continued to fall almost continuously until we were forced out of the ERM (Black Wednesday). Leaving the ERM allowed interest rates to be lower and produced a 10% depreciation in sterling, which helped ensure a strong recovery.

I’m sure I wasn’t alone in making this prediction, but we were in a minority and we did produce the best analysis. The Global Financial Crisis (GFC) was of course a much bigger event, and far fewer saw it coming, so quite rightly 10 years later those economists who predicted something like it are getting media attention. They were very different events, so can we draw any parallels between them, or more generally is there anything that links disasters of this kind?

One common factor is using the markets as an excuse to avoid economic analysis. One of the two main excuses to ignore our ERM analysis was to look at the exchange rate at the time as say ‘the market must know what it is doing’.Of course before the crisis too many people who saw the data thought the banks must know what they are doing as they pumped up leverage.

Perhaps another is never let new ideas crowd out the knowledge embodied in older ideas. The other excuse that particularly academics used to disregard our analysis about the ERM entry rate was that the models we were using were a little old fashioned. (I talk more about that here.) Bankers fooled themselves that they had new methods of evaluating risk that meant they could ignore systemic risks. If we think of the other two major UK macroeconomic crises, the same applies. The Treasury predicted the recession of 1980 pretty well, but the analysis was trashed as the work of old fashioned Keynesians by Lawson et al from the Thatcher government. Austerity of course also ignored basic Keynesian truths.

One obvious final question is whether we learn from crises of this kind. Ten years after we left the ERM the Treasury asked me to do their entry rate analysis for possibly joining the Euro, so that at least implies some learning, but maybe being a different government helped. Perhaps Black Wednesday created a general distrust of fixed exchange rate regimes in the UK that helped Gordon Brown argue against joining the Euro.

Have we learnt the lessons of the GFC? Some changes to the banking system have been made, but I think the general consensus is its is not enough, and there still seems to exist a large implicit public subsidy for the major banks. If for no other reason that is why you should take note of what those who predicted the GFC say. In terms of how you recover from a financial crisis we certainly had learnt some of the lessons of the 1930s, but not all. As I argue in my last post, we have hardly begun the process of creating a macroeconomic policy regime that can deal with a future recession, let alone a crisis.

Another lesson of the GFC unlearnt: the Consensus Assignment is dead

Martin Sandbu recently responded to critics of an earlier piece of his arguing that central bankers could and should have done more to tackle the aftermath of the Global Financial Crisis. I stress aftermath here, because I have no doubt that central banks (including the Bank of England) were culpable in both ignoring warning signs before the crisis, and in the UK and Eurozone not reacting quickly enough to the consequent recession. (It is extraordinary that on the MPC only Danny Blanchflower understood what was going on, and I would argue that part of the reason for this was the primacy of the inflation target.)

It is also obvious that the ECB were wrong to raise rates in 2011 and not to introduce QE much earlier. That the UK almost raised rates in 2011 is not reassuring, and suggests they did take their foot off the peddle over that period. I would also argue that the ECB were very wrong to wait until September 2012 to introduce OMT.

In the UK and US I do not buy the argument that no further stimulus was needed.

UK unemployment rose from around 5% to around 8% in 2008/9, and stayed at that level until it began coming down in 2013. US unemployment was also above 8% until 2013. Both economies needed more stimulus in 2009, and in its absence in 2010 and so on. To think otherwise means you are placing too high a weight on temporary changes in inflation and too low a weight on the costs of the recession. 

Where I think I might disagree with Martin is that this stimulus could have reliably come from monetary policy. A good policy instrument is one that has a reliable impact on demand, and the only reliable monetary policy instrument that fulfills that criteria is short interest rates. Central banks could have done more QE, or they could have reduced rates below the Effective Lower Bound (ELB), but they wouldn’t have known how much to do. They might have got there in the end, but extra years of unemployment and probably a permanent hit to output through hysteresis were an avoidable cost.

The biggest mistake central banks made was not to recognise this and be honest with the public. They should have said, clearly and repeatedly, that once rates hit the ELB monetary policy was no longer the most reliable instrument to stabilise the economy, and fiscal policy should be used. This does not break any implicit concordat about not commenting on fiscal policy (which most central banks break anyway), because the statement is about a delegated authority being honest with the public about whether it can reliably do its job..

The fact that central banks in the UK and Eurozone didn’t do that may reflect dishonesty or it may reflect negligent ignorance. The fact that options like QE existed may have allowed central banks to convince themselves that they could still do the job assigned to them, and it discouraged them from being honest with the public. I say negligent ignorance, because instrument reliability is pretty basic stuff.

Martin writes

“Besides, there was broadly shared understanding among macroeconomists and central bankers of the best division of labour. Fiscal and budgetary policy should be set to achieve microeconomic and distributive goals, and the desired share of the state in the economy; while monetary policy should take care of stabilising aggregate demand.”

This is what I call the Consensus Assignment, and as the name implies it was certainly the consensus among mainstream macroeconomists before the 1990s. But the experience of Japan’s lost decade where they also had interest rates stuck at the ELB began a process of rethinking. By the time the GFC came around many macroeconomists had realised that there was an Achilles Heel in the Consensus Assignment. Fiscal stabilisation was still required when interest rates hit their ELB. That is why we had fiscal stimulus in 2009.

The importance of this cannot be overstated. The policy consensus in 2009 was that fiscal stimulus was required, because monetary policy was not enough. This consensus didn’t evaporate in 2010. What overrode it was mainly politics - what I call deficit deceit. There was also a bit of panic in some quarters caused by the Eurozone crisis. However a majority of academic macroeconomists continued to believe that further fiscal stimulus was required, and that majority got steadily larger as time went on.

Which means that the Consensus Assignment that Martin talks about is dead, or at least dead until monetary policy makers can agree some form of fiscal delegation (e.g. helicopter money) with governments. As this paper from the Boston Fed points out, downturns where interest rates hit their ELB are likely to become the new normal, but policymakers have not adjusted to this. (The exception is Labour’s fiscal credibility rule.) Quite simply, most policymakers have not learnt a major lesson of the Global Financial Crisis.