The Brexiteers know the war is far from over

It is easy to view the letter from 72 MPs criticising the BBC for being biased against Brexit as just another example of the government putting pressure on the news organisation. But if that is all it was, it is odd to have another conservative MP, Nicky Morgan, describe the letter as chilling.

I would argue that this letter as another example of the fear I talked about in this post. Fear by Brexiteers that their little English coup may still unravel. Their reasons for fearing this are real enough. The original Leave vote was based on lies and on obscuring the truth. These lies are perpetuated by those who now feel obliged to advance the Leave cause. I talked in my last post about how Tim Harford had recently noted that tobacco firms had managed to delay by decades the response to the first studies in the early 1950s that smoking was harmful. What chance, then, did economists have before the referendum? But the lies told and truths dismissed in the referendum are going to start to unravel as soon as negotiations begin.

One of the main initial topics of those negotiations will be how much the UK will have to pay the EU. Many of those who voted Leave expected it to be the other way around. For this reason, the UK would like everything to be discussed together, so that this bad news can be hidden. But this is not the way the EU likes to do things, and the negotiations are going to be done the way the EU dictates. Remember they hold all the cards, because it is the UK who suffers most with no deal.

This bad news could be avoided if the UK walked away, which is one reason why the option of no deal is beginning to sound attractive to the Brexiteers. But the British people do not want this. Here is a recent poll that contrasts the popularity of a EEA/Norway option with no deal.

What is described as ‘Hard Brexit’ here is really ‘No Deal Brexit’. The poll says that as many Conservative voters will be as unhappy with no deal as they would be with the EEA option. While the full horror of no deal for the UK economy will take years to manifest itself in lower GDP, the consequences in terms of firms leaving will be immediate. David Davis has not modeled the impact of no deal because he already knows the results would be terrible. [1]

If this is what people feel when confronted with the truth, the only option left to the Brexiteers is to try and hide the truth. Little things are all they ask for from the BBC. Like not mentioning Brexit when talking about rising inflation, because to do so would be ‘controversial’. To play down news of firms planning to leave the UK, because that was the news last week. To not present the view of the EU in negotiations, because this is like a battle and the BBC must be patriotic. The Brexiteers hope that with these ‘small modifications’ to broadcast news, and the pure propaganda from much of the press, they can get away with a deal that is not in the UK’s interests.

If those pursuing this agenda do not think the war is over, it would be foolish for those opposed to leaving the EU to believe it ended with the triggering of Article 50. The Brexiteers fear that if there is no deal, MPs in parliament will at last find their voice to say no. Those opposed to leaving the EU must do all they can to encourage that possibility.

[1] Among political commentators, all predictions by economists are assumed to have equal weight, so even Janan Ganesh writing in the FT can say “politicians are allowed to question [economists] record of clairvoyance”. That is not true, because economists’ predictions are not all alike, as I have explained many times. One of his favourite politicians, George Osborne, has said that Brexit is the “biggest single act of protectionism in history”. History as well as economics tells us that protectionism of this kind is invariably harmful.

The unique blindness of some commentators on the right

Janan Ganesh of the FT talks about the unique moral arrogance of the left. They have too often “impugned the motives of Conservatives”. He says that “the reality of politics in a rich, modern country is that parties are squabbling over marginalia”. He is wrong, and should get out more.

For example, take the issue of benefit sanctions. No doubt he might say that sanctions existed, and indeed the regime was tightened, during the Labour government. But the reality is that something very horrible, and morally shameful, is currently going on. The number of sanctions per claimant remained below 4% from 2000 to 2010. In 2013 it peaked at above 7%, and in 2014 was between 5% and 6%. Behind these statistics are a wealth of examples of where sanctions have been applied for minor infringements, and have ignored excellent reasons like the death of a spouse, or the long que at the jobcentre. Frances Coppola gives these and more examples here.

She points out that Department of Work and Pension (DWP) guidance states “It would be usual for a normal healthy adult to suffer some deterioration in their health if they were without essential items, such as food, clothing, heating and accommodation or sufficient money to buy essential items for a period of two weeks…” Sanctions often operate for 4 weeks or even longer. It is causing people to become homeless, and children to go hungry. This is not “marginalia”.

The current sanctions regime is one of the main causes of the increased use of food banks in the UK. Yet Ganesh instead likes to focus on inaccurate use of foodbank data. The DWP says that the sanctions regime is important in providing incentives to get people back to work. But is there any evidence that it does this? You would think that the department would have produced some evidence by now, although one of the comments on Frances’s post (and yes, we cannot know it is genuine) suggests why we have not. Yet this did not deter the department. They put out on their website (now unsurprisingly withdrawn) quotes and a picture from ‘Sarah’ who had been sanctioned and as a result had been encouraged to produce a CV. The only problem was that Sarah was completely fictitious.

There is widespread talk of jobcentre staff being put under pressure to sanction. The relevant select committee of MPs has asked for an inquiry, but this has been refused. Benefit sanctions are just one of a range of policy mistakes by this department that is causing real harm to the disadvantaged, and will continue to do so. All these problems were quite clear before the election, but the Prime Minister has kept Iain Duncan Smith in post. George Osborne has been happy to feed off the stigmatisation of benefit claimants stoked by the tabloids.

So please, Mr. Ganesh, no more lectures about moral arrogance on the left. Not, at least, until you have recognised what is actually happening to many of those who are unfortunate enough to be claiming benefits administered under this government, and the government’s apparent indifference to that.

A budget for our next Prime Minister

There is a simple way to read George Osborne’s budgets. Forget the economics, and just think politics.

Take the macroeconomics of aggregate fiscal policy, for example. Many pages have been filled (in some cases by me) about the folly of fiscal austerity while interest rates are near their lower bound. Under the coalition I calculated (with the OBR’s help) that this policy cost the average household the equivalent of at least £4,000 over the last five years. The arguments put forward to support this misguided policy have changed, but they seem to get worse rather than better: I go through the latest in this short piece for today’s Independent. But the focus on the deficit helped Osborne win the last election (admittedly with the help of Labour’s reluctance to challenge what he said), and is on course to lead to a radical reduction in the size of the UK state, as Colin Talbot sets out here.

How about his bold move of a substantial increase in the minimum wage? At first sight it seems very strange: it is a policy that if introduced by Labour would have much of the press, and most economic journalists, screaming about unnecessary interference with the market and the onset of socialism. Until now the level of the minimum wage has been carefully calculated by the Low Pay Commission to avoid significant job losses. The OBR calculate that Osborne’s proposed hike will lose about 60,000 people their jobs. But as Tim Harford explains, it is not as if Osborne has an alternative economic view. He just needed a dramatic move to give him political cover for his large cuts in tax credits.

Most of those on low earnings will still be worse off - by a lot in some cases, often decreasing work incentives - but he knows from the last election that impressions are more significant than numbers. [1] Probably the most important impact of this budget will be to raise poverty, particularly child poverty. The previous coalition’s policy changes also increased poverty, but their impact on the official statistics was offset by the overall decline in real wages. Over the next five years that will no longer happen, so again the cover is being put in place: change the definition of poverty. The economics is ludicrous, but we should have got used to that by now.

Then there is inheritance tax. It is not often I agree with Janan Ganesh, but he is correct when he wrote just before the budget:

 “George Osborne wants to refurbish the Conservatives as the natural habitation for working people … But the message will always be muffled as long as the tax system favours assets, including those bequeathed, over earned income … the greatest perversity of the system survives and will only worsen if the threshold for inheritance tax is lifted this week.”

But this year, and probably for the next one or two, George Osborne has a more important political goal in mind than confining Labour to opposition (particularly when they are doing just fine without his help). He wants to be sure that when David Cameron steps down, as he has promised to do, it will be George Osborne who is seen as the natural successor. Most of the Conservative base is not devoted to the cause of free markets, but is passionate about their own families’ income and wealth. It also likes high defence spending, so the budget contained a commitment to keep to the 2% Nato target. For those who hope for measures to tackle what Chris Dillow calls the true ‘something for nothing’ culture, the UK housing market, I suspect that too will not happen before the Conservative Party have elected their new leader (if it happens at all).    

If this sounds too cynical to you, all I can say is that I learn from experience. When I wrote this three years ago, Paul Krugman no less said I was getting “remarkably cynical”. Unfortunately, save for one detail, my cynicism proved pretty accurate. When it comes to implementing good (evidence based) economic policy, in both the UK and the rest of Europe, we are living through very depressing times.

[1] Postscript: the reaction of the UK press is outlined here

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?

The imaginary world of small state people

“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”

So said Jeremy Warner (assistant editor of the UK’s Daily Telegraph) last year. Jeremy is a small state person, and I think many other small state people think like this. But the statement is wrong. There are a large number of people - I suspect the vast majority - who do not have any prior view about the size of the state.

In many ways the bipolar view harks back to a bygone age, where - at least in Europe - there actually was a large constituency on the left that wanted a large state as a matter of principle. In the UK that constituency lost all its influence with Margaret Thatcher and New Labour, and it has also lost its influence in the rest of Europe. However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle. George Osborne’s plan for the UK over the next few years is the apotheosis of this neoliberal view.

I think I’m like the majority of people in not having any fixed ideological position about whether the state should be large or small. The state is clearly good at doing some things, and bad at doing others. In between there is a large and diverse set of activities which may or may not be better achieved through state direction or control, and they really need to be looked at item by item on their merits.

My first major problem with small state people is that they are not prepared to look at these items on their merits. Instead they have a blanket ideological distaste for all things to do with government. The evidence that government is ‘always the problem’ is just not there. The idea that private sector activity is always welfare enhancing and is best left alone was blown out of the water by the financial crisis. My second major difficulty with many small state people, like George Osborne, is that they are using fear of a debt crisis (a possibility which for the UK and US is non-existent) to achieve their ends. This is political deceit on a grand scale. My third major problem follows from the second: reducing government spending during a liquidity trap recession does real harm. It wastes resources on a huge scale.

For the UK, the OBR estimates - conservatively - that austerity reduced GDP by 1% in 2010/11, and by a further 1% in 2011/12, so GDP was 2% below what it could have been in 2011/12. As there has been no offsetting fiscal stimulus in later years, and because monetary policy has been constrained by the zero lower bound, this waste of resources will not necessarily be eliminated in subsequent years. So the cumulative cost of 2010 austerity could easily exceed 5% of GDP. That is a colossal sum to waste. The estimated numbers in the Eurozone, where the austerity squeeze continues, are even worse - nearer 10% territory and counting. As I argue in this new short piece for the Economist, the fact that Osborne risks doing the same thing again from 2015 onwards is a sufficient reason not to give him the chance.

Which brings me to a final problem I have with small state people, which is their disregard for the evidence. It is true that most people are bad at acknowledging counter evidence, but those with an ideological conviction are worse than most. A common theme among small state people following Osborne’s Autumn Statement is to ask what all the fuss is about. In his rant at the BBC, Osborne says “I would have thought the BBC would have learned from the last four years that its totally hyperbolic coverage of spending cuts has not been matched by what has actually happened. I had all that when I was interviewed four years ago and has the world fallen in? No it has not.” He remembers it well, because he tried to intimidate the BBC back then as well. The claim of hyperbole is nonsense of course, as Tony Yates sets out, but I want to focus on the ‘world fallen in’ point.

Here is Janan Ganesh in the FT making the same claim in spades:

“[Osborne] has also made the spending cuts he promised without the country turning into a medieval wasteland. This is a deeper intellectual wound to the left than we currently understand; it will change the terms of debate about the proper size of the state long after Mr Osborne has gone.”

With both Osborne and Ganesh the intended meaning is that cuts have been achieved at relatively little cost. They clearly hope this idea will become received wisdom in the media. But is it true? Take the one area that Osborne has earmarked for further cuts: welfare. [1] The argument that the cuts made so far to welfare have been achieved without significant costs flies in the face of the evidence. The number of food banks in the UK has grown massively over the last five years. The Trussell Trust estimate that more than half of their clients were receiving food because of benefit delays, sanctions, and financial difficulties relating to the bedroom tax and abolition of council tax relief. As James Harrison relates in this excellent long article, the government simply denies the evidence. The Economist notes: “Welfare reform was intended to be one of the big achievements of the coalition government. But almost all of the radical ideas promised are turning out to be duds.” These are duds that create real misery. Now maybe this is all just teething problems, but the prima facie evidence is hardly that cuts have been achieved at little cost.

So how can small state people have the audacity to claim otherwise? Perhaps it reflects the power of an ideology that its protagonists want to see no evil. Perhaps it is because those hurt by austerity somehow do not count. But the claim that Osborne’s cuts have been such a success that they will cause a “deeper intellectual wound to the left than we currently understand” is simply delusional. These are fantasy ideas from those living in an imaginary world, while in reality the policies they support do serious harm.

[1] I choose welfare only as an example. It does not appear to be an isolated one. Here is an account of Chris Grayling, prisons and the Howard League, or see Alex Marsh on the UK justice system more generally. Or think of those who suffered from flooding as the government cut back money for flood prevention, while the government still pretends there were no cuts.

Why no public fury over austerity?

Janan Ganesh has an article in the FT today that made me so cross I just have to write about it, even though I should probably let it pass. The theme of the article is how mature the British have been in accepting austerity. To quote: “For countries menaced by the symbiosis of economic suffering and political turmoil, Britain has lessons to impart.”

Of course I see it rather differently. Austerity is either a major technical error, or a political con. According to very conservative estimates from the OBR, it has already cost around 5% of UK GDP. That is a huge amount of money to waste: resources that wanted to be used to produce goods and income that everyone could enjoy, but which have been kept idle as a result of government action. Of course this cost has not been spread evenly, and has been much greater for some.

If this was just my personal view, or the view of a cranky minority, then there is not much more to be said. But instead it is the view you will find in the economic textbooks, and I suspect among the majority of macroeconomists. So given this, the fact that the policy has been accepted with little protest is not something to be commended (unless you are in the business of manipulating opinion), but a major problem. It is a huge failure for good government, and our democratic system. In fact you see similar failings elsewhere. Austerity as a policy has not been seriously challenged in Europe among mainstream parties, and even in the US I think it would be fair to say that views both within the Democratic Party and from the President have been mixed.

So how can Ganesh have completely the opposite view: that the British have shown “impressive calm” in taking their medicine with little protest, and that the lack of any passionate public debate about austerity in the UK is somehow a virtue? I can think of three reasons, none of which is very flattering.

1) That the “elite dialogue” that did take place on austerity is just so much intellectual hand wringing, and that the public know better what the real score is. I might not be surprised if a government politician took that line, but you would expect that a journalist working at the FT, and previously at the Economist, would know better.

2) That his admiration for George Osborne has distorted his view of the real world. Or, to put it slightly more kindly, if you spend your time talking to people who think austerity is inevitable, you begin to believe the propaganda.

3) That he is trying to analyse how the Conservatives have got away with the con of achieving a smaller state by fueling a panic over debt, without of course admitting that that is what he is doing.

Yet whichever of these is the case, the article seems to miss two obvious points. Could it be that the reason there is not a passionate public debate in the UK about austerity is that there is no one to lead that debate? When the political class, of which he is a member, view austerity as inevitable, is it any wonder that the public takes a similar view (particularly when it is dressed up in terms of household economics). He acknowledges that the trade union movement has been vocal about austerity, but does not examine why this voice is largely ignored by the UK media.

There is also no discussion about how popular anger against the impact of austerity may still be there, but that in the absence of any public debate on the policy, it is manifested in other ways. He writes that “Britain remains gloriously free of a serious far right or far left”, which of course is a put down of UKIP. But although Ganesh may not find UKIP serious, Cameron certainly takes UKIP seriously, and has geared his policy on Europe and immigration with them in mind. Perhaps he sees the current obsession in the media (and government) about welfare cheats and benefit tourists as totally unconnected with the unemployment and cuts in living standards that austerity has helped bring about. (For some serious analysis on these issues, see Alan de Bromhead, Barry Eichengreen and Kevin O’Rourke here.)

But none of that was what made me so cross reading the article. Instead it was its juxtaposition with something that I heard about 4 days ago. A reader of my blog, a retired teacher of A level economics and a LibDem member, is about to give a talk on austerity related themes. The features writer on a local newspaper was interested, and spent an hour interviewing him, later writing 750 words. The article was spiked by the editor, because it was controversial and critical of the government. Perhaps the editor was also showing the “impressive calm” which so pleases Mr. Ganesh.