Cameron’s chickens

As many have written, although Donald Trump is despised by the Republican party establishment, he is an unintended and unfortunate creation of that party. They built up a system where you needed money to enter politics, because they controlled the money. (It is to Sanders’ credit, and the popular will behind his campaign, that he has overcome this hurdle.) But that allowed someone very rich to highjack the system. The Republicans have exploited prejudice to win votes, which allowed someone to throw away the dog whistle and openly attack those from other religions. [1] And so on. In these ways, Trump represents the Republican’s chickens coming home to roost. As Matt Taibbi writes (sorry about ad in link), Trump is a rather good con man and so for him the US political system is an easy mark.

Will the EU referendum be the moment David Cameron’s chickens come home? Although economic arguments are central, and the case for staying is strong and the case for leaving weak, how much will voters without any economics background be able to come to that conclusion? Most newspapers will push the weak arguments, or more generally just try and muddy the waters as they do all the time on climate change. The visual media’s natural format is to set this up as a two-sided debate, and if the leave campaign can find enough credible advocates to put the economic case for leaving the main outcome might be confusion. [2]

In contrast, to many voters the other key issue - immigration - looks clear cut. For the large section of the UK electorate that place migration among their top concerns the logic of the Leave campaign’s claim that we will finally ‘control our borders’ will seem obvious. This will be constantly reinforced by news about refugees and fears about terrorism. Here the Conservative government’s focus on the costs of migration (and the pretense that UK benefits are a big draw) may come home to roost. Many in the Conservative Party truly believe large scale migration is a threat to the country, but I suspect Cameron and others running the party are not among them. Until now ‘cracking down on immigration’ has been a useful ruse for the Conservatives to win votes, but for the Remain campaign it has become a huge liability.

That is one of Cameron’s chickens that may come home to roost. Another is his deal. From what I have seen so far, Cameron will not try and counter migration concerns by arguing the benefits of migration, because it runs counter to what he has previously said. For the same reason he will not emphasise that to maintain preferential trade agreements after leaving we would probably have to accept free movement. Instead he will argue that his deal will make all the difference, and in this case he will not impress. His deal will make no tangible difference to migration flows, and for once the right wing press will go with the evidence.

Nor can Cameron expect that much help from other party leaders. Andrew Rawnsley and Polly Toynbee give some of the reasons, but one they do not mention is what happened immediately after the Scottish referendum. Labour, and Gordon Brown in particular, came to Cameron's rescue when it became clear in the final days of the referendum that he could lose Scotland. The thanks they got was a speech from the steps of Downing Street the next day proposing English votes for English laws. In that case it was in Labour’s self-interest (in terms of being able to win an election) to be Cameron’s chicken, but the political arithmetic is far less clear this time.

The EU referendum is therefore another test of how much economic expertise can influence public opinion. As regular readers will know, we have been here before, and not just on austerity. The overwhelming evidence was that independence would initially leave Scottish people worse off, but for many this evidence was successfully counteracted by the SNP’s wishful thinking projections. From recent experience, therefore, I am not too optimistic that the economic evidence will prevail. [3] For a Prime Minister who has preferred the economics of the Swabian housewife to anything taught in universities, this too is a chicken come home to roost.

[1] Tactics those supporting the Conservative candidate for London mayor seem happy to employ, as Mehdi Hasan notes.

[2] In terms of the economics, you have first to guess what type of trade arrangements would be made if the UK left, and then quantify the impact of the reduction in trade that would result. Like most economics this is not a precise science, but the only question is what the size of the income loss will be. Yet the many alternatives if the UK left adds to any confusion.

Patrick Minford, on the other hand, argues that increased regulation and market interference will lead to large output falls if we stay in. Patrick is a very good and inventive macroeconomist who I learnt a great deal from, but his conclusions have always followed his political views. In this case his numbers depend on very dubious assumptions about how staying in the EU will raise future ‘costs’.

[3] For the record, as some will ask, I will be voting Remain. Apart from the economic arguments, in my own experience interventions from Brussels have more often been positive than negative. I also have an instinctive feeling that in today’s globalised world the UK should be part of Europe, for the reasons John Harris gives for example.

How Osborne and Cameron turned a crisis into a disaster

Would it be a wild, politically motivated jibe to call these the Osborne/Cameron floods? Of course it is nonsense to suggest that there would have been no floods over the last five years under a different government, but it is equally nonsense to deny that Osborne/Cameron policies have significantly increased the damage and human misery caused by these floods. Consider the following:

1. We have known since at least the Pitt review of 2007 that climate change was going to greatly increase the incidence of record breaking bursts of rainfall in the UK. Government ministers can carry on claiming they are unprecedented, but they are not unexpected.
   
   
2. The Labour government responded by greatly increasing their spending on flood defences, in the spending review which ended in 2010/11. In contrast Osborne demanded and obtained sharp cuts in 2011/12 and beyond. Only the arrival of floods dragged those numbers up in later years. Ministers can play around with dates as much as they like to try and tell a different story, but the evidence for those cuts is there in the data (see this post). Every news report that allows ministers to claim they did not cut spending on flood defences is complicit in deception.
   
   
3. The number of specific schemes cut or downsized in areas that were subsequently flooded becomes longer with every new event, as it was bound to do: Damian Carrington in the Guardian notes a £58 million scheme in Leeds cut, extra flood defences in recently flooded Kendal repeatedly postponed, schemes cut in the Somerset Levels and Yalding in Kent before the floods of 2013/14, before that Dawlish and the Thames Valley.
   
   
4. And for what purpose. The argument that spending had to be tight is utter nonsense. There is absolutely no evidence that if flood defence spending had been increased rather than cut by 27% in 2011/12 (as it should have been), and that higher spending maintained, the market would have stopped buying UK government debt. The UK recently sold oversubscribed 50 year debt at only 2.5% interest: with a 2% inflation target that is a real cost of only 0.5% a year. By contrast the National Audit Office in 2014 reported that the Environment Agency estimated current schemes had a benefit cost ratio of over 9:1! You have to be slightly mad to cut schemes like that when they would cost you so little to finance.
   
   
5. David (‘greenest government ever’) Cameron in 2013 appointed Owen Paterson, a climate sceptic, to be minister in charge of DEFRA, the ministry responsible for the environment and flood defences. He cut the number of officials working on a climate change adaptation programme from 38 to six. A rather sinister aspect to this whole affair is the influence of widespread climate denial on the right might have had on all these bad and costly decisions.
   
   
6. As it became clear how many farming practices can worsen flooding, the Labour government introduced regulations on land use with the specific aim of reducing flood damage. The coalition government scrapped these regulations.
   
   
7. In November this year, as part of Osborne’s spending review, local authority spending on flood defences was cut by a third. The Environment Agency has to cut staff as fast as the flood risk increases, and then through gritted teeth deny this matters. This report says the Environment Agency had 800 fewer flood risk management staff in March 2014 than in September 2010.
8. The independent, government established Committee on Climate Change has issued repeated warnings to government that spending needed to be increased, not decreased. They have all been ignored.
   
   

As Carrington says, Cameron and Osborne have ignored red flag after red flag. Cuts that make no sense in economic terms have been made with costs that probably now run in the order of a billion and counting, with plenty of human misery attached. Cameron has calculated that an appearance in wellies at each flood sight will be enough to assuage public concern. As Steve Richards notes, after each crisis when no cost is too great, Osborne goes back to playing the responsible one as he cuts regardless.

After the 2013/14 floods I wondered if this would be Cameron’s and Osborne’s Katrina. That was a mistake. For all its faults, and Fox News, the US has a more open media than the UK, particularly when the BBC is cowed by government threats. The Guardian, Independent and Mirror will complain (and the Morning Star will channel my blog!), but the large majority that never read these papers will remain ignorant of what has gone on. A chaotic Labour Party will be unable to coordinate any attack, and fail to effectively voice justifiable rage, and that will give the BBC an excuse to ignore them.

But forget austerity and partisan politics. This is fundamentally about incompetence: about ignoring repeated warnings for no good reason and causing huge costs and heartache as a result. Is no one on the right prepared to call the government to account for its failures on this issue? Will no one at the BBC confront politicians with what they have done? If they do not, I fear all we will get are fine words, one-off emergency cash, and the existing policy of effectively ignoring the threat will continue once again.          

Paris, climate change and the UK government

In a recent column, Paul Krugman bemoans the consensus view among Republican politicians that we should do nothing about climate change, and that many of the Republican nominees for president actually deny the science. He also complains about how the conventions of political journalism mean that public perceptions about the science become distorted as a result. He says that this situation - where parties on the right deny the need to take action on climate change - is unique to the US and Australia.

What about the UK? While everyone remembers Cameron promising to make his 2010 government the ‘greenest ever’, three and a half years later the Sun reported him as ordering aides to "get rid of all the green crap" from energy bills. Of course actions speak larger than words. The Conservative’s hostility to onshore wind farms is well known, and subsidies are due to be phased out soon. Subsidies for solar also face severe cuts. The government has passed legislation ‘to maximise economic recovery of UK oil’. A scheme to encourage home owners to improve energy efficiency is to end, the aim to make all new homes ‘zero carbon’ is to be scrapped, the Green Investment Bank is to largely sold off, tax breaks for buyers of ‘green cars’ ended.

Now all this might be understandable if the UK was well ahead in the amount of power produced by renewables. In fact, among EU members, only 3 have a smaller proportion. The government expects its EU target of 15% by 2020 will be missed by a wide margin.

Does all this reflect climate change denial of the kind we see in the US, with the only difference being that the Conservatives are acting duplicity in still paying lip service to the aims of the Paris summit? Duplicity may be understandable given Cameron’s 2010 ‘greenest ever’ commitment. However the UK government have just signed a deal for a Chinese state-controlled company to help build a new nuclear plant at Hinkley Point. Ministers have undertaken to guarantee for 35 years an index-linked price of £92.50 per megawatt hour. That is more than twice the current market rate, and it is also higher than for every renewable source except offshore wind. Yet unlike renewables those subsidies will be paid by consumers when the plant starts producing around 2025.

Put alongside virtually abandoning measures to encourage renewables, and this seems more like economic incompetence than ideology. In a classic piece of irony, a wind farm application near to Hinkley was turned down by the government. It is not as if the UK is currently awash with energy capacity. Last month an unexpected surge in demand led the national electricity grid to ask heavy users to reduce consumption.

So it is difficult to tell whether this is about ideology masked with duplicity, or politically driven economic incompetence. Ideology, duplicity and incompetence: have I combined those words together before?

Osborne, Cameron and fiscal irresponsibility

Is there anyone left who really believes that George Osborne is cutting public spending because he wants to be prudent with the nation’s finances? Unfortunately I think the answer is far too many.

Most macroeconomists have had deep suspicions or worse for some time, as we could see what damage austerity was doing to the economy. You might say that issue is past as growth has returned, but this would be quite wrong. What is now becoming clear is that the fears that some economists had all along that delaying the recovery in demand would lead to permanent damage to supply have indeed come to pass.

Those who were not macroeconomists should have realised what was going on when the government started cutting taxes. How do you explain cutting inheritance tax one day, and then trying to justify cuts in tax credits because ‘we have to get rid of the budget deficit’ the next, other than helping your own at the expense of the poor?

Even if that did not convince you, I suspect what will happen in the next few years will leave you in no doubt. Everyone knows it is crazy to cut spending that would have generated more income than it costs. Appearing to balance the books by paying for current spending (or tax cuts) by selling off your assets is not being prudent at all. Yet I suspect we will see more and more announcements from the government that do exactly this in the next few years.

To take just one example, we have the announcement of yet more cuts to HMRC, the government’s tax collectors, as part of the new spending review. No doubt we will hear a lot of talk about reorganisations to make the service more efficient. Just as we did with the previous cuts. In March 2015 it took an average of almost 15 minutes to have your phone call answered by HMRC. For the government that is a sign that the service needs less people! I do not know if the OBR allow something for the impact of HMRC cuts in their estimate of overall tax receipts, but if they have not done so already I think they should start.

This is a very obvious example of apparent savings that in fact reduce net revenue. Many more involve cutting public spending in a way that increases costs to the private sector, leading to lower productivity, lower incomes and then lower taxes. But for a politician facing a tame media who just has an eye for the headline numbers none of this matters.

The letter that the Prime Minister wrote to his local council complaining about its cuts has got some publicity. But what I found most revealing was Cameron’s suggestion that the council pay from some ongoing frontline services by selling more assets. The council leader in his reply explains that using the income from these sales to pay for the council’s running costs “is neither legal, nor sustainable in the long-term since they are one-off receipts”. The Prime Minister offered the services of No. 10’s policy unit to help the council. It sounds to me that the council should in turn be offering some of its wisdom next door at No. 11.

How television fails in its duty to inform

When a Tory voter emotionally complained about how she had been deceived about cuts to her tax credits, it caught the media’s attention. I don’t want to get into the debate that followed about whether she deserved sympathy or not, except to say this just shows up some elements of the left at their sanctimonious worst. What struck me was the juxtaposition of this with another remark I saw elsewhere, which is that everyone who had looked at the numbers knew Osborne would cut tax credits after the election. This remark is correct, if be ‘knew’ we mean highly likely.

That information had clearly not got through to this Tory voter. Conservative MPs know she is not alone, which is of course why the Prime Minister lied about it before the general election, and why he and Osborne continue to try and cover up the facts. It is the media’s job to get information across, and on this it clearly failed. Most in the parts of the print media that see that as part of their job did their best: those in the part who are paid to deceive also did their job well. Whether we should let those who produce news like celebrity gossip and sports reporting use that platform to peddle political propaganda is an interesting issue. But these do not arise in the UK with the television media, which has a duty to inform in an impartial way which it is clearly failing to fulfill.

This is not about the television media’s coverage as a whole, but how information is presented in the kinds of programmes that this Tory voter is likely to watch: the major news programmes, interviews with the Prime Minister or Chancellor etc. Take for example the clip where the Prime Minister lied about cuts to tax credits. There David Dimbleby asks him by saying “some people” have suggested tax credits would be cut, rather than “every non-partisan expert”. This may seem small, but this kind of detailed textual analysis is critical (and it is what many journalists have been trained to do).

Of course this is not an isolated incident. The idea that the deficit was a consequence of Labour profligacy rather than the recession is widely believed (as another pre-election debate illustrated), which means the television media again failed. In other areas where the partisan right wing press do their best to mislead, like welfare and immigration, the average person’s perception of key facts is wildly wrong (in the direction they are misled), which means the television media has also failed. Journalists seem happy to quote large sums of money on magnitudes like government debt in a way designed to make them sound scary, but fail to put them into historical context (it needs just one chart), which would mean focusing on the debt to GDP ratio and pointing out that this will fall even if we run modest deficits. The politically loaded and inaccurate term taxpayers money is freely used, and the term welfare benefits misused. I could go on and on, and have.

Political journalists working in television try hard to be unbiased in a party political sense. They do this partly because there are political machines that try and hold them to that. I would suggest being unbiased towards the facts, and more positively their duty to inform, are at least as important. Unfortunately there are no equivalent mechanisms to ensure this happens.

Oh what a lucky man

A few weeks ago I was having dinner with David Cameron. Well, almost - we were at the same restaurant but on tables at the opposite side of the room. He was taking a break from campaigning. I remember thinking he must be one of the luckiest Prime Ministers the UK has ever had. Two strokes of luck in particular stand out: the economy and Scotland. They stand out because between them they enabled him to win an election that he really should have lost.

I’ve talked at length about mediamacro: a network of myths which enable failure to be turned into success. I’ve not come across a single non-City, non-partisan economist who does not concur with the view that the performance of the coalition has been pretty poor (or simply terrible), yet polls repeatedly show that people believe managing the economy is the Conservatives’ strength. This trick has been accomplished by equating the government’s budget with the household, and elevating reducing the deficit as the be all and end all of economic policy.

This allowed Cameron to pass off the impact of bad macro management in delaying the recovery as inevitable pain because they had to ‘clear up the mess’ left by their predecessor. In a recent poll a third of people blamed Labour for austerity. Yet for that story to work well, the economy had to improve towards the end of the coalition’s term in office. The coalition understood this, which was why austerity was put on hold, and everything was thrown at the economy to get a recovery, including pumping up the housing market. In the end the recovery was pretty minimal (no more than average growth), and far from secure (as the 2015Q1 growth figures showed), but it was enough for mediamacro to pretend that earlier austerity had been vindicated. (And, to give them their due, they are very good at pretending.) 

So why do I say Cameron is lucky? First, largely by chance (but also because other countries had been undertaking fiscal austerity), UK growth in 2014 was the highest among major economies. This statistic was played for all it was worth. Second, although (in reality) modest growth was not enough to raise real incomes, just in the nick of time oil prices fell, so real wages have now begun to rise. Third, playing the game of shutting down part of the economy so that you can boast when it starts up again is a dangerous game, and you need a bit of fortune to get it right. (Of course if there really was no plan, and the recovery was delayed through incompetence, then he is luckier still.)

The Scottish independence referendum in September last year was close. 45% of Scots voted in September to leave the UK. One of the major push factors was the Conservative led government. If Scotland had voted for independence in 2014, it would have been a disaster for Cameron: after all, the full title of his party is the Conservative and Unionist Party. That was his first piece of Scottish fortune. The second was that the referendum dealt a huge blow to Labour in Scotland. Labour are far from blameless here, and their support had been gradually declining, but there can be no doubt that the aftermath of the referendum lost them many Scottish seats, and therefore reduced their seat total in the UK.

Yet that led to a third piece of luck. The SNP tidal wave in Scotland gave him one additional card he could play to his advantage: English nationalism. The wall of sound coming from the right wing press about how the SNP would hold Miliband to ransom was enough to get potential UKIP supporters to vote Conservative in sufficient numbers for him to win the election.

With the economy you could perhaps argue that there was some judgement as well as luck involved. That is very difficult to believe with Scotland. The man who almost presided over the break-up of the United Kingdom, and had to rely on Labour efforts (including his predecessor as PM) to avoid that outcome, will continue as Prime Minister as an indirect result. That is why, as I watched David Cameron eat supper at a nearby table, I thought something to the effect of you lucky person.  

Putting party before country

Philip Stephens in the FT says the idea that a Labour-SNP understanding would amount to Labour being held hostage by the SNP is nonsense. He is of course correct. In a vote on any particular issue, 50 odd SNP MPs could hardly impose their will on 600 MPs from other parties. More interesting is what this line tells us about the media, about the current Conservative Party, and about what the future might hold if they remain in power.

First the media. In my continuing series on mediamacro, I stress that myths are best based on half-truths. Half-truths are the grain of truth on which you can erect a huge lie. With the SNP and Labour, the half-truth is that SNP views on an issue could perhaps weigh a little more heavily on Labour than, say, the views of UKIP, because UKIP will always vote to bring down a minority Labour government, but the SNP will not. That fact will never make Labour go where it does not want to go, but at the margin it could nudge it a bit more in one direction. Conceivably, we might get a bit less austerity, we might treat welfare recipients a bit more humanely - that kind of thing. But would we get some policy that was against the interests of the rest of the union? Of course not. Colin Talbot makes it clear how limited the SNP’s power would in practice be here. [1]

With mediamacro, you generally need some expertise, or some knowledge of the data, to see that the half-truth is very far from the myth, knowledge political commentators may not have. In the case of ‘SNP blackmail’, political commentators have the required knowledge more than most. So for me the success of the scaremongering about a minority Labour government will be an interesting test: is lack of economic expertise or knowledge important in explaining mediamacro, or is control of the majority of the UK press sufficient. There are signs that the scaremongering is working.

As Lord Forsyth (former Scottish secretary in a Conservative government) said, his own party is putting electoral tactics above a historic commitment to the defence of the UK union. This can hardly come as a surprise. The Scottish independence referendum was a close run thing, so you might expect a party with the integrity of the nation at heart to tread carefully in the subsequent days and months to heal wounds. Instead, Cameron chose in the morning after the vote to attempt to wrong foot Labour on ‘English votes on English issues’, saying: "We have heard the voice of Scotland and now the millions of voices of England must be heard." It was a gift to the SNP.

What does all this tell us about the Conservative Party? Does it tell us that it secretly wants the SNP to get so strong that it could win a future referendum and break up the union? No, what it tells us is that this is a party that is prepared to take large long term risks for minor short term political advantage. As I have suggested on a number of occasions, that seems to be a common pattern in its macroeconomic policy (premature deficit reduction and Help to Buy being two obvious cases).

One of the clearest examples of this is our relationship with Europe. The decision to hold a referendum was taken to appease the right in his own party and potential UKIP voters, even though the uncertainty it creates will damage the economy and even though there is no chance that Cameron will be able to renegotiate to any significant extent. But large sections of what we might call the Establishment seem unperturbed as long as it helps return a Conservative led government. The assumption seems to be that Cameron will be able to sort things out when the time comes, and it will be business as usual. As Polly Toynbee puts it, the view is that “Cameron is “one of us” so he’ll somehow secure an “in” result for his 2017 referendum”

This ignores all the evidence about party before country. A Cameron recommendation to stay in the EU will split his party: after the election a majority of MPs may favour leaving, and a majority of party members already do. In two years time, all the senior figures in the party will be thinking about the elections for Cameron’s replacement. (This is why Cameron’s announcement that he would step down before 2020 was so significant.) In this situation, what are the chances that Cameron will either be equivocal or recommend exit (leaving his successor to negotiate what they can in the way of trade deals)? In that case, what are the chances of the electorate voting to stay in, when the right wing press that helped win the 2015 election for the Conservatives will be in full cry to leave? I would be foolish to say that exit was a probability, but I would be just as foolish to assume that the risk of leaving was small.

Voting for a political party that repeatedly puts itself before the national interest is not a good call in the best of times. When it could influence our position in Europe and even the Union itself, it becomes a huge mistake. Too many in the UK seem prepared to walk into that minefield, for the sake of avoiding what would be the mild inconvenience for them of a Labour led administration.

[1] I doubt very much that it will make any Labour government give additional preferential treatment to Scotland. The opposition will cry foul on this if that ever happened (and probably sometimes when it does not). As a result, Labour will go out of their way to avoid such an outcome. Would the SNP bring down a Labour government just because they failed to get some minor fiscal advantage? I think that is also highly unlikely. What the SNP will fear most is being seen as the party that brought down a Labour government and helped their opponents into power.

   

Controlling the past

In his novel 1984 George Orwell wrote: “Who controls the past controls the future: who controls the present controls the past.” We are not quite in this Orwellian world yet, which means attempts to rewrite history can at least be contested. A few days ago the UK Prime Minister in Brussels said this. [3]

“When I first came here as prime minister five years ago, Britain and Greece were virtually in the same boat, we had similar sized budget deficits. The reason we are in a different position is we took long-term difficult decisions and we had all of the hard work and effort of the British people. I am determined we do not go backwards.”

In other words if only those lazy Greeks had taken the difficult decisions that the UK took, they too could be like the UK today.

This is such as travesty of the truth, as well as a huge insult to the Greek people, that it is difficult to know where to begin. Let’s start with the simple statement of fact. According to OECD data, the 2010 government deficit in Greece was 11%, and in the UK 9.5%. The Prime Minister is normally well briefed enough not to tell outright lies. But look at this chart you can see why the statement ‘virtually in the same boat’ is complete nonsense.

General government financial balances, % GDP: source OECD Economic Outlook

  

The real travesty however is in the implication that somehow Greece failed to take the ‘difficult decisions’ that the UK took. ‘Difficult decisions’ is code for austerity. A good measure of austerity is the underlying primary balance. According to the OECD, the UK underlying primary balance was -7% in 2009, and it fell to -3.5% in 2014: a fiscal contraction worth 3.5% of GDP. In Greece it was -12.1% in 2009, and was turned into a surplus of 7.6% by 2014: a fiscal contraction worth 19.7% of GDP! So Greece had far more austerity, which is of course why Greek GDP has fallen by 25% over the same period. A far more accurate statement would be that the UK started taking the same ‘difficult decisions’ as Greece took, albeit in a much milder form, but realised the folly of this and stopped. Greece did not get that choice. And I have not even mentioned the small matter of being in or out of a currency union. 

From the Prime Minister, let’s move to Janan Ganesh, FT columnist and Osborne biographer. He says that Osborne’s secret weapon is his “monstrously incompetent adversaries”. If only the Labour party had “owned up to its profligacy in office during the previous decade” it would have more authority in the macroeconomic debate today. I have written a great deal on this, but actually you can get the key points from the chart above. If you have a target for government debt which is 40% of annual GDP, and nominal annual growth is around 4%, you want to aim for a deficit of 1.6% of GDP. Labour clearly exceeded that, which is why the debt to GDP ratio drifted up from 30% of GDP in FY 2000 to 37% in FY 2007 (OBR figures).

A mistake? Yes, particularly in hindsight. Profligacy - absolute nonsense. The debt to GDP ratio in FY 2007 was below the level Labour inherited, which does not sound like a profligate government to me. Nor does a deficit in 2007 that is only about 1% above a long run sustainable level signal profligacy.

What blew the deficit was the recession. Ganesh acknowledges that, but says “there was no excuse at all for pretending that a recession was never going to happen “. This is pure hindsight stuff. In 2007, the consensus was that the UK was close to balance in terms of the output gap. It is only subsequently that some have tried to suggest, rather unconvincingly, that 2007 was really a global boom. So Labour was not pretending anything.

But why this urge for Labour to apologise for what is a relatively minor misdemeanour which had no major consequences. [1] Because it plays to the Conservative narrative: their version of history where Labour was responsible for the mess that the Conservatives had to clean up. Labour has been forced by mediamacro to buy into the deficit reduction narrative enough as it is: asking for more is just self-serving political nonsense.

As I explained here, it is really important for the coalition parties to sustain this narrative, because without it Osborne’s record looks pretty awful. When people realise that this poor record was not an inevitable result of ‘Labour profligacy’ or any other mess Osborne inherited, and that to focus on reducing debt was a choice rather than a necessity, then the responsibility becomes clear, and support for yet more sharp austerity quickly disappears. [2]

As for the phrase ‘monstrously incompetent’, I really wonder what world Ganesh lives in. When I look back at Chancellors of the past, I see few candidates for this label, and Brown and Darling are not among them. However what term would you use for a Chancellor that freely chose a policy of premature austerity, and as a result lost every UK adult and child resources worth at least £1,500? That unforced error does sound like something worth owning up to. 

[1] The worst that can be said is that, had Labour kept debt at 30% of GDP, they might have felt less constrained in 2009 and undertaken greater countercyclical fiscal action. But George Osborne argued against the countercyclical fiscal actions Labour did take in 2009! 

[2] That is of course an unsubstantiated conjecture, and the following is not meant to be evidence, because its a small and unrepresentative sample. In a previous post I mentioned a debate that Prospect magazine organised between myself and Oliver Kamm. I hadn’t realised until someone pointed it out (along with a rather biased editorial in that same issue), but readers get a chance to vote after reading this debate on whether ‘austerity is right for Britain’. At time of writing, we had 17% voting Yes and 83% voting No.

[3] HT Ari Andricopoulos

A campaign based on ignorance

If facts had anything to do with it, the economy should be the Conservatives’ weak point in the forthcoming UK election. Since 2010 we have seen the weakest recovery in at least the last 200 years. The government’s actions are partly responsible for that, and the only debate is how much. Real wages have been falling steadily, and only a fall in global oil prices might be finally bringing that to an end. Living standards have taken a big hit. Yet I keep reading how the economy is the Conservatives' strong card. How can this be?

What mediamacro generally fall back on are the polls, and it is true that people still believe the Conservatives are more likely to raise their living standards than Labour, even though they understand that they have become worse off over the last five years. There is no factual basis for the view that the Conservatives are better at managing the economy, and plenty to suggest the opposite. However this belief is not too hard to explain. The Labour government ended with the Great Recession which in turn produced a huge increase in the government’s budget deficit. With the help of mediamacro, that has become ‘a mess’ that Labour are responsible for and which the Conservatives have had to clean up.

The beauty of this story is that it pins the blame for the weak recovery on the previous government, in a way that every individual can understand. Spend too much, and you will have a hard time paying back the debt. Those that read stuff about economics vaguely remember Gordon Brown taking small liberties with his fiscal rules, and that half truth is enough to create a myth of past profligacy.

These myths and misunderstandings are easily dispelled with a few facts. The two charts at the end of this post can do most of the work. So it is an inevitable part of the Conservatives’ campaign to ensure that facts are kept out of it as much as possible. Sound bites are great. Endless discussion of so called ‘gaffes’ - perfect. Anything to keep the electorate away from useful information.

Ruling out a leadership debate with Miliband is part of this pattern. As Peter Oborne has observed, Miliband’s record as an opposition leader has included some impressive accomplishments. But his opinion poll ratings are low, because most people just see unglamorous pictures of him and note that he does not have that Blair appeal. That could be changed if they saw him in a one on one debate with Cameron, so there was never any chance that the Conservatives would let this happen. The debates last time had huge audiences, so no one can dispute that democracy has been dealt a huge blow as a result of what the FT rightly calls Cameron’s cowardice.

Some people say I go on about the media too much, but in an election like this you can see how critical a role they will play. If they see their job as getting as much information as possible to the electorate, the Conservatives will be in big trouble. If instead they go with stories based on fake indignation over who said what when (like weaponising the NHS) the Conservatives will be safe. If they do nothing but give politicians sound bites that is also fine for the Conservatives. As Janan Ganesh – always a useful barometer of the government's thinking - observed, the Conservatives can bore their way to victory.

Cameron’s refusal to debate one on one with Miliband is a key test for the media. Will they ‘play safe’ and let one side's spin doctors dictate what people are allowed to see? That is what Cameron is counting on. Or will they decide that it is their duty to allow the British people to see some sort of intensive debate involving their potential future Prime Minister, and that the ruling party is not able to decide how much democracy people are allowed?

Has Cameron blown the austerity cover?

What I had expected to happen was that the Conservatives would keep to the line that spending had to be reduced because debt and the deficit were too high. The need for austerity because you have borrowed too much was a simple message that everyone understood, even if it didn’t make much sense when applied to a government during a recession. There would be appropriate nudges and winks that, once elected, this tough fiscal line might be modified to make room for tax cuts, but the official line would be ‘debt implies austerity’.

Those who are better informed about the macroeconomics, whether on the right or left, have always understood that this was cover for a desire to shrink the size of the state. However this perspective hardly ever saw the light of day in the media. It is tempting to lapse into conspiracy mode at this point - to believe that the rules of mediamacro are whatever suits a particular set of interests. I suspect this is too simple. For myths to work well they have to be based on half-truths, and they have to obey some internal logic.

So when John Snow berated Ed Miliband for forgetting to talk about the deficit, I think he actually believed that the deficit was this all important constraint that was driving austerity. People understand that when they borrow too much, hard times have to follow. That cornerstone can support many other beliefs. The bank manager who says you must reduce your spending is not popular, but you know he is being responsible. I suspect a great deal of the advantage that the Conservatives enjoy in terms of economic competence in the polls simply comes from this idea (and associating Labour with creating the debt problem). It is difficult to see where else it comes from, with deficit targets missed and stagnant real wages and productivity.

Now that Cameron has promised large tax cuts, does this blow away the cover? Nice if it happened, but unlikely. The Conservative line that only they were prepared to take the debt problem seriously still works. For every person who, as a result of the promised tax cuts, begins to question whether the size of the deficit really was such a major problem, there will be many more that continue to believe it is and will scold the Conservatives for not being responsible enough (but still vote for them).

As a result, I do not think it will change how voters see the past. Looking to the future, on the other hand, it is will be very difficult for Osborne to argue that his future austerity is a painful necessity, and the plans of others dangerously profligate. The retort ‘how come there is room for large tax cuts’ is too strong. If they have any sense Labour will turn the tables. Whereas they have costed all their new commitments, Cameron’s tax cuts are to be paid for by yet unspecified spending cuts (the ‘magic asterisk’). The political danger of the magic asterisk is that it is left to the voter’s imagination to fill them in. If Labour are clever (which may be a big if) they will make appropriate suggestions depending on the audience. Furthermore, interviewers with any self respect will press the Conservatives to outline exactly where ‘the money will come from’ to pay for the tax cuts.

It also lets Labour free of all those questions about the commitments they do have, and whether the country can really afford them. The choice becomes should we spend money on the NHS or on tax cuts, and that I think is ground Labour should be happy to fight on. (There is also the danger that these tax cuts, which mainly benefit the better off, will be viewed in the same way as the cut in the 50p rate.) It is also a more honest debate. Hopefully Labour will spell out exactly how they will achieve their fiscal targets, so that the contrast between their fully costed plans and the Conservative’s uncosted plans will be crystal clear. Add to this the uncertainty created by the proposed EU referendum (see Roger Liddle here reinforcing some of my own thoughts), and perhaps the Conservatives will no longer be seen as the safer pair of hands. (For an example of this train of thought, see these remarks about UK credit ratings.)

For these reasons, I do not think that announcing large tax breaks was always part of the Conservative’s plan. Of course offering tax cuts will gain some votes, but it puts at risk one of their main political assets, which is the perception of future economic responsibility. This in turn may suggest that the Conservatives are far from confident about winning in 2015, as the polls so far have not shown the hoped for pre-election drift to the governing party. Whatever happens, watching how mediamacro develops just got more interesting.   

Why uncosted tax cuts are apparently a problem for Labour

Just a short addition to today’s post. I had assumed that the Conservatives’ macroeconomic pitch for the next election was going to be based on prudence and ‘responsibility’. Only we will achieve a budget surplus by 2020, because only we recognise how dangerously high the current level of government debt is. We will achieve this, because unlike the other parties we do not go around making unfunded spending commitments. Of course the Conservatives would plan targeted tax breaks for the (very) well off, like the one on pensions announced earlier this week and well described by the Economist here, but these would be sufficiently specialised that they would not dent the public image.

I was wrong, as Cameron revealed today with commitments to large tax cuts mainly for middle and high income earners by 2020 whatever. These commitments are totally unfunded, in the sense that we are not told how they would be paid for (except that it will not be by additional borrowing). So the pretence that government spending had to be cut to get debt down has gone - we now have lower government spending (which, given existing commitments, has to mean additional money from the working poor and disabled) in order to cut taxes.

I mentioned last week the drubbing the supposedly left leaning Channel 4 news gave Ed Miliband because he forgot to mention the deficit. As anticipated, John Snow’s interview with Cameron was an altogether more friendly affair. But today their economics editor Paul Mason, whose journalism can be very good, was forced to acknowledge that this unfunded tax give away broke from the recent tradition where particular fiscal pledges were fully costed. But no fear, even Mr. Mason lives in mediamacro land. His final thought on this unfunded tax pledge - it puts Labour in a very difficult position!?! Unbelievable.

  

How many UK elections can a nasty party win?

This last month I wrote my most widely read post in this blog’s nearly three years existence. Over 20,000 read this on Scottish independence. Yet I wrote that post with some regret, because I was acting as the typical economist killjoy. I had a lot of sympathy behind much of the support for the Yes campaign, which was to avoid being governed by a fairly extreme right wing party. I hope no one ever writes that the No vote was a victory for David Cameron’s Conservatives, because that would be a truly Orwellian distortion of reality. One of the most telling contrasts for me was Gordon Brown’s impassioned speech for the union compared to Cameron’s opportunistic attempt to appease his own MPs the morning after the result.

A post I have no regrets writing is this about Theresa May’s one time concern about the Conservative party being seen as the ‘nasty party’. Everything in the months since I wrote it, including the current party conference, confirms that this image no longer worries the leadership. The puzzle I raised in that post is why as late as 2010 Cameron was still keen to foster the idea of a more compassionate conservatism. What has changed so completely in just four years?

One answer is UKIP. Yet trying to prevent losses to another party of the right should not alter the traditional logic that a party needs to occupy the centre to win an election. Another answer is the recession, which has perhaps led to a hardening of attitudes among the electorate as a whole. The hypothesis is that in a recession people are more inclined to believe those on welfare are scroungers, and that immigrants steal their jobs. This hardening should reverse as the economy recovers, but we also know that real wages are still likely to be lower in 2015 compared to 2010.

That was where I ended that previous post. I wrote “although nastiness might accord with voter sentiments today, at some point in the future voters in more generous times will have no problem forgetting this, and just remembering the Conservatives as the nasty party.” But in writing this I might have been both unfair to the British electorate and to the strategy of the Conservative party.

To see why, take a temporary detour from welfare to macro. Chris Dillow rightly questioned the “groupthink bubble” that sees George Osborne’s stewardship of the economy as the Conservative’s strongest card. Yet those in the bubble could respond that they were simply reflecting what the public appear to be saying in the polls. The problem here is establishing cause and effect. What I call mediamacro believes that the last Labour government seriously mismanaged the public finances, when in reality its sins were relatively minor. Mediamacro thinks that the deficit somehow helped cause the recession, whereas in reality the causality goes the other way. Mediamacro thinks that the deficit is the most important problem of today, and largely ignores the stagnation of productivity. Mediamacro celebrates the 2013 recovery as vindicating austerity, which is an argument only the most politically committed academic economist would endorse.

So why do those answering polls think the Conservatives are more competent at managing the economy? It can hardly be because of their own experience, with real wages falling since 2010 compared to steady increases before then. While they might think that Labour allowed excessive leverage by UK banks which helped cause the recession, they are unlikely to also believe that the Conservatives were urging much greater caution at the time! Or could it be that their answers about competence are influenced by what mediamacro itself believes?

If there is this huge disconnect between reality and media portrayal for the macroeconomy, could the same thing be happening with attitudes to welfare? There is no doubt that the representation of disability in the print media has changed substantially over the last decade or so. Television has, after a lag, followed this trend. There is scant evidence that this reflects any significant change in the degree of benefit fraud. It could reflect a ‘hardening of attitudes’ as a result of the recession, but causality could also run the other way. Do people vastly overestimate the amount of benefit fraud because they want to do so, or because of the information they get through the media? Is this overestimation a reflection of a recession induced hardening of attitudes, or a cause of it?

This is crucial to answering the question posed in the title to this post. If squeezing the poor and disabled is a policy that reflects a recession induced change in public attitudes, then the party that follows this change may be vulnerable when the recession ends (although perhaps not before 2015). If it reflects misinformation provided by the media, then the relevant question is whether this misinformation might continue well beyond the economic recovery. If it does, the Conservative party may have a much more durable election strategy. 

David Cameron (from Wikipedia 2100)

Prime Minister of UK (including Scotland until 2014) from 2010 to 2017. Widely seen as the catalyst behind the renewed decline of the UK, after a brief respite in the 30 years previously (see entries for Margaret Thatcher and Gordon Brown). On becoming Prime Minister in 2010, embarked on a fiscal austerity programme which delayed a recovery from the Great Recession until 2013, accelerated the privatisation of public services and encouraged social hostility to immigration and the poor.

This proved to be a decisive factor in Scotland narrowly voting Yes to independence in 2014. (The other was his decision not to allow a third option for greater devolution.) His administration was then bogged down in negotiations with Scotland for the next two years, which caused increasing bitterness between the two countries. In the UK election of 2015 the SNP captured many Scottish Labour seats, but refused to form a coalition government with Labour, allowing Cameron to continue to lead a minority government with tacit support from the LibDems and (initially) UKIP.

Most analysts naturally point to his promise of a referendum on EU membership as his biggest mistake. In the short term this meant that UKIP’s success in the 2015 election was as much at the expense of Labour as his own party. But his decision to recommend voting Yes to continued membership in the EU referendum in 2017 led to an attempt to unseat him as leader which narrowly failed (see entry on Boris Johnson), and then large scale defections of MPs from his party to UKIP. Campaigning under the slogan ‘If Scotland can do it, so can we’, and with the support of large sections of the press, UKIP leader Nigel Farage achieved a very narrow majority to leave the EU, forcing Cameron to resign. Some argue that the Scottish independence decision was critical here, as he would have won the referendum vote if Scotland had stayed part of the UK. A few argue that the decision to break up the BBC and allow partisan broadcasting, and in particular the rebranding of ITV into FOX-UK, was a more important factor in losing the EU vote.

There is some dispute as to how much Cameron himself is to blame for these events, or how much was the work of his Chancellor (and his successor as Prime Minister) George Osborne. There also remains some controversy over whether the inability of the economy to make up the ground it lost during the recession was due to the initial austerity plan, renewed austerity after 2015, controls on immigration or the uncertainty created by the referendum itself and subsequent EU exit.

It is a great irony that the only leader of this period whose current reputation is lower than Cameron’s is his opponent in the Scottish independence debate Alex Salmond, now widely known in Scotland as the Great Deceiver. Scotland’s own economic decline following independence was far greater, following a collapse in oil prices and the loss in UK markets when Scotland joined the EU.

     

Why strong UK employment growth could be really bad news

Some of the better reporting and interviews with George Osborne yesterday did try and put the strongish 2014Q2 output growth in context. Yet the much stronger growth in UK employment continues to be greeted by many as unqualified good news - even by some who should know better. So, rather than trying to be satirical, let me attempt to be as clear as I can. Those who already understand the problem can skip the next three paragraphs.

By identity, strong employment growth relative to output growth means a reduction in labour productivity. In the short term when unemployment is above its ‘natural’ (non-inflationary) level, falling labour productivity is good news. It means that a given level of output is being produced by more people, so there are less people unemployed. This is good news because our evidence is that the costs of being unemployed are very high. Of course if more workers are producing the same amount of stuff, their real wages will fall, but that just means that the cost of a recession is being evenly spread rather than being concentrated among the unemployed.

Now lets move on until unemployment has fallen to its natural rate. It is what happens next that is crucial. If labour productivity starts increasingly rapidly, such that we make up all or nearly all of the ground lost over the last five years, that will be fantastic. Rapid productivity growth will bring rapid growth in real wages, meaning that much of the unprecedented fall in real wages we have seen in recent years is reversed. After a decade or so, UK living standards will end up somewhere around where they would have been if there had been no recession. The UK ‘productivity puzzle’ will have been a short term affair that economists can mull over at their leisure. Analysis will not look kindly on the policies that allowed output to be so low for so long, but - hysteresis effects aside - that will be history.

The alternative is that labour productivity does not make up lost ground. If this happens, the average UK citizen will be 15-20% poorer forever following the Great Recession. Living standards in the UK, which before the recession appeared to be growing at least as fast as those in other major established economies, will have fallen back substantially relative to citizens in the US and Europe. This is the alternative that most forecasters, including the OBR (see chart reproduced here), are assuming will happen. 

So the absence of labour productivity growth is good in the short term, but is potentially disastrous in the long term. The problem is that the absence of growth in labour productivity since the recession is unprecedented (see chart below): nothing like this has happened in living memory. The reason to be concerned is that the rapid growth in productivity required to catch up the ground already lost is also unprecedented for the UK, which is why most economists assume it will not happen. Which brings me to another puzzle.

As long as I can remember, UK governments have been obsessed by long term productivity growth, and its level relative to the US, France and Germany. They have put considerable effort into understanding what influences this growth, and what policies can help increase it. This was true when UK labour productivity was steadily increasing at a slightly slower rate than in other countries, or increasing at a slightly faster rate. Given this, you would imagine that the UK government would be frantic to know what was currently going on. Why has UK productivity stalled, why are we falling behind our competitors at such a fast rate?

GDP per hour worked: source OECD

Instead this government seems strangely indifferent. If they have an explanation for the absence of UK productivity growth, I have not seen it. You generally need to understand something before you know what to do about it. Instead the Prime Minister and Chancellor would seem to prefer not to talk about it, because it ‘feeds into’ the opposition’s complaints about low wages. This really is irresponsible. Is it simple arrogance? - they know what is good for the economy, even if they do not understand it. Or is it indifference? - we do not care too much about long term UK prosperity, as long as you keep voting for us. Or is it just too embarrassing to admit that the most calamitous period for UK living standards since the WWII has happened on their watch.