A Labour run on Sterling?

The news that John McDonnell was looking at a scenario where the election of a Labour government was met with a run on Sterling was all over the news yesterday. The Conservatives, who of course know all about runs on Sterling having created one just a year ago with the Brexit vote, immediately grasped the political gift they had been given.

Paranoia on the left meets prejudice on the right. But what would really happen to Sterling if Labour were to win the next election? Given announced policies, the answer is quite clear: Sterling would appreciate. The main reason is that under Labour there would be a large fiscal expansion: for certain in term of public investment and to a lesser extent with current spending. (I assume by then interest rates will be above their ZLB: if they are not, the fiscal expansion could be even larger.) There would also be a balanced budget fiscal expansion: even if government spending increases are financed by tax increases, this is likely to be expansionary to some extent because some of the tax will come out of savings.

This fiscal expansion, together perhaps with other labour market measures, would put upward pressure on inflation, prompting higher interest rates from the Monetary Policy Committee of the Bank of England. It is the prospect of those higher interest rates that would make Sterling appreciate. How much inflation rather than output would rise depends on how pessimistic you are about the supply side. If the MPC were doing their job properly, that increase in interest rates plus the appreciation would stop inflation rising very much. We will finally get the rebalancing between monetary and fiscal policy that we should have had for the last decade.

If we are also in a transition period for Brexit, with the final destination unclear, then Labour being elected would also lead to an appreciation because Labour are softer on Brexit than the Conservatives.

So where does the run on Sterling idea come from? The idea that all those traders in currency will get together and engineer one because they do not like a Labour government is nonsense. They may not like a Labour government, but they dislike losing money even more. Capital flight? You might see the share price of power or rail companies fall, but that is not going to be enough to move a currency like sterling. Any depreciation in sterling would be the equivalent of pound notes waiting to be picked up in the City and Wall Street: with higher expected interest rates and a likely future appreciation, who wouldn’t buy sterling?

The only way I can see that you could get a run on Sterling is if enough traders in the markets came to believe that Labour was going to abolish BoE independence because it wanted to keep interest rates low. In that case you could get significantly higher inflation under Labour, which would justify a nominal Sterling depreciation.

Which, of course, is why McDonnell committed to keeping Bank of England independence as one of the first things he did. And which is also why he was very foolish to say what he said, because it might lead some to speculate that he might renege on that commitment. Something tells me he is missing his Economic Advisory Council.

Brexit remains an exercise in deception

I talked last week about how the Leave campaign involved lies at its centre. Not the occasional exaggerations of the Remain campaign, but claiming things that were the opposite of the truth. Like there will be more money for the NHS, when in fact there will be less. That particular lie probably swung the result, according to the man who organised the Leave campaign.

Labour people tell me that public opinion on Brexit will turn once these lies become apparent, and at that point Labour can safely take up the Remain cause. What this overlooks is that the managing of information characterised by the Brexit campaign continues. The Tory tabloids continue to distort the truth, and the Telegraph acts in a very similar fashion. The UK government appears more interested in saying stuff to please its UK audience than actually negotiating with the EU, and its studies of the impact of Brexit remain secret [1].

Meanwhile the opposition give no hint of the costs that Brexit will involve, and by design or conflicted confusion are just a tiny bit less pro-Brexit than the government. The broadcast media, and particularly the BBC, appear hopeless at questioning the facade that both main parties and supporting think tanks have erected. I have never heard a politician pulled up for saying we must retain access to the Single Market: all countries have access to that market! (This is the kind of journalism we should be seeing.) Individual MPs are intimidated into silence by the power of the Tory tabloids.

When I talk to Leave voters, all they tell me is how the economic ‘catastrophe’ predicted by Remain did not come to pass, or other Leave nonsense talking points like the exchange rate was overvalued anyway. They are often unaware that falling real wages are the direct result of the Brexit depreciation, and as a result the economy hardly grew in the first half of this year. They, and many people who voted Remain, do not realise that the government’s position papers are largely fantasy and that the EU is in a position to dictate terms. This is not because these voters minds are closed. They just get their information from sources that go along with the government’s Brexit fantasy, unless they are fortunate enough to read the Financial Times. No wonder there has been no major change in public opinion since the referendum.

Those in the Labour party should realise more than most how the media can present a one-sided reality which many non-political voters accept, until they see for themselves the other side during a general election campaign. The problem with a ‘wait and see’ attitude to Brexit is that its major economic cost will not become apparent until years after we actually leave the Single Market. Few realise that the original Treasury study, with the central estimate of an average annual cost of £4,300 per household (6.2% of GDP) was not some piece of Remain spin but a perfectly reputable study, which economists at the LSE said was “overly cautious”. Instead we get nonsense like this reported by the BBC. [2]

Some time ago I calculated a conservative estimate for the cost of austerity, and it was £4,000 per household. Ironically it was based on OBR estimates that the MSM largely ignored, just as they ignore the OBR’s estimates for the short term cost of Brexit. But my austerity cost estimate was a total cost, over all the years of austerity. The Treasury estimate is a cost each year. There is therefore a strong liklihood that Brexit will be far far worse than austerity in terms of lost resources, and unlike austerity there is no way of avoiding these costs once we are outside the Single Market.

For Labour party members and MPs I would put it this way. Imagine winning the next election but having to accept continuing austerity. Winning an election after leaving the Single Market will probably be much worse, and of course the media and voters will blame it all not on Brexit but on Labour’s ‘far left’ policies. Winning an election after Brexit is a poisoned chalice.

[1] Here is Mike Galsworthy on this and the earlier 'Balance of Competences' reviews that the government kept very quiet about before and during the referendum.

[2] I’ve talked to people at the BBC, including their economics editor, about why they cannot apply the BBC Trust’s recommendations on science coverage to economics. (The Trust’s conclusion, in summary, is that in controversial areas the BBC should go with the overwhelming scientific consensus. In other words recognise scientific knowledge, and not treat it as just an opinion.) I think a summary of their response to my question is that economics should not be regarded as a science: there is no economic knowledge, just opinions. What that attitude means in practice is that the public do not hear from the many experts in international trade we have in the UK (and there are many), but instead they hear from Patrick Minford.

How Brexit will constrain a future Labour government

Those who suggest that Brexit is of second order importance to getting a Labour government need to think about what that government will be able to do and how long it will survive if we leave the Single Market and customs union. The OBR did a rough and ready estimate of the near term impact of Brexit [1], and concluded that productivity growth would fall (which means lower GDP and real wage growth) and the government deficit would deteriorate by around £15 billion by 2020. That sum is about a third of the current defence budget, or a tenth of the entire health care budget.

It is simply wrong to imply that this can be ignored, because Labour is anti-austerity. That large deterioration in the deficit due to Brexit is mainly the result of low productivity and less immigration, not the consequence of an economic downturn. It cannot be undone by the government spending more on infrastructure: public investment is not some magic instrument that can get you any GDP you want.

No economic theory that I know of suggests you can safely ignore the public finances outside of a recession. In a world where monetary policy regulates demand (absent the lower bound) then a build up in government debt risks crowding out private capital, discouraging labour supply (because higher debt has to be serviced through higher taxes) and redistributing income between generations. This is why Labour’s fiscal credibility rule aims to balance current public spending outside of a recession. Every £billion lost to Brexit is a £billion that cannot be spent on public services, or has to be raised in taxes.

The same logic meant that Labour’s election manifesto in 2017 had a large increase in current public spending entirely financed by higher taxes. Their programme is anti-austerity because their fiscal credibility rule would do the opposite of what Osborne did in 2010 if interest rates were at their lower bound. It also sensibly allows public investment to rise when borrowing costs are so low.  But once interest rates begin to rise, the Labour government would have a current deficit it needed to finance, and its difficulty in doing this would be made much worse by Brexit. [2]

In all this it is vital to not be distracted by some of those who see Brexit as an opportunity for Corbyn-bashing. Those that do so seem to forget two key points. First, the attitude of a large number of Labour MPs in Leave voting areas is just as much of a problem as the views of the leadership. Second, there is a purely political argument for Labour being just a bit less supportive of Brexit than the government right now. My own view is similar to this discussion by Mike Galsworthy.

However I feel I have to end by responding to a second post from Owen Jones. Let me do so by imagining the following scenario. Suppose the Conservative leadership changed, and the new leader said this on being elected: “we tried as hard as we could to respect the result of the referendum, but we found there was no way of doing so without causing the economy great harm. As a result, I have regrettably decided to revoke Article 50, and remain in the EU.” What should Labour’s response to that be? The logic of Owen’s position is that Labour should oppose this, and side with the Hard Brexit faction of the Tories and defeat the new Tory leader.

A highly unlikely scenario I agree, but it helps establish this point. Owen, unlike many Corbyn supporters, is not arguing that Labour should remain pro-Brexit while in opposition as simply a strategic move to gain votes. He is saying that Labour has to support leaving the EU because of the referendum demands it. Indeed he says anyone arguing otherwise because the referendum was advisory is “beyond delusional”: It seems I have become a beyond delusional ‘Hard Remainer’.

Does democracy mean being bound by a referendum that was called only to appease the hard right, decided by lies using a rigged electorate, and apparently made mandatory as a result of the words of a now departed Prime Minister? Is it a democracy when we are unable to change course because new facts clearly deviate from promises made, resulting in a decision that imposes costs on the young largely as the result of votes by the old? These are difficult questions, but not delusional questions.

I doubt it will happen, but would ignoring the referendum destabilise democracy? Let me turn the question around. If the final Brexit deal involves staying in the Single Market and therefore accepting free movement, will that destabilise democracy? The number of people who voted Brexit but wanted to stay in the Single Market may be more than 2% of the population, but it is bound to be small. There will therefore be plenty of people who will say that accepting free movement ignores the referendum, and plenty of aggrieved voters to back them up. Is that going to produce a reaction which is very different from the reaction to actually ignoring the referendum?

The hard truth is that any deal which avoids serious economic costs for the UK is going to make most of the 52% pissed off. And they will remain pissed off until either we reduce immigration, with the economic costs that will bring (less schools, less hospitals, higher taxes), or senior politicians start being honest about the benefits of immigration.

[1] Stupidly, the OBR were not asked to estimate the impact of Brexit before the referendum, and their mandate prevented them from doing so themselves.

[2] And please no MMT inspired comments about how taxes are not needed to finance spending. The MMT world is very different from our current world: fiscal policy rather than monetary policy regulates demand. In that case you never worry about the deficit, but spending is constrained by inflation.  

Why Owen Jones is wrong about Brexit

Owen has written a very clear account of why he supports the referendum result, even though he campaigned against it. He is, to use one terminology, a ‘re-leaver’, and as he points out there are many like him. He is quite right that those advocating overturning the referendum result have devoted insufficient attention to this group. However I think in key respects his argument is wrong.

I think it is helpful, as I have done before, to set this debate in the context of future decisions that may realistically face MPs. I can see four:

1. Having left in 2019, we are likely to remain in the Single Market and customs union while we negotiate some kind of trade agreement to allow us to leave one or both. The first decision, which could face an incoming Labour government, is should those negotiations continue or be abandoned.
   

Owen does not explicitly address the Single Market, which is surprising. In my view leaving the EU but staying in the Single Market (the ‘Norway option’) is what Labour should choose to do if it gains power. That is fully consistent with respecting the referendum result. Those who say that the referendum was about immigration and therefore we have to end freedom of movement commit a simple logical error. A majority (those who voted Leave because of immigration) of a majority (52%) is not necessarily a majority. There is no mandate of any kind for leaving the Single Market.

2. During the vote on whether to leave in 2019, there is a vote to hold a second referendum where the choice is to accept the deal or remain in the EU.

Again he does not directly address a second referendum, but some of his arguments are relevant to it.  You could argue that holding a second referendum would disrespect the first. If the Brexit decision was changed as a result, then Owen’s arguments about a large section of the population losing faith in democracy would perhaps still apply. However it seems to me the rationale for holding a second referendum is overwhelming. In the first referendum, what leaving would entail was very unclear. In particular, we did not know what the divorce bill would be, and what the economic implications would be. Information is crucial in voting decisions. We now know much more, and therefore it seems only right that people should be allowed to change their minds. We are familiar with the idea of requiring new information to reopen issues in other contexts, so why not for a referendum.

To argue that the 1975 referendum over joining was a once in a generation event is irrelevant, because by then the nature of the deal was clear. Why should the fact that Cameron or anyone else said this would be a once in a generation vote bind parliament? The bottom line has to be that if Leave cannot win two votes just a few years apart then we should not be leaving. Remember the first referendum had an electorate chosen to keep the Brexiteers happy, and likewise it had no super majority. To argue that we have to respect the first referendum to uphold faith in democracy and at the same time argue that to hold a second referendum would be undemocratic seems a bizarre, and very worrying, notion of democracy.

3. During the vote on whether to leave in 2019, there is a vote to remain in the EU without a second referendum

Here the referendum would have been overruled by parliament. Owen has two, related arguments why this would be wrong. First, both government and opposition said that they would be bound by the referendum result. Second, the people will have been overruled by parliament. On the first, I agree that any MP that said their vote would be bound by the referendum and then went against that has some explaining to do. But an explanation along the lines of ‘I had no idea how bad Brexit was going to be’ sounds reasonable to me. MPs, like people, are allowed to change their minds.

I also cannot see why pledges by the government and opposition have to bind MPs who did not so pledge. This gets back to the nature of our representative democracy. Although Owen does not think much of people, like me, who keep noting that the referendum is advisory, this does express the fact that parliament is sovereign. We live in a representative democracy. People may be upset to learn that, but it is true. Ed Miliband was right to rule out holding a referendum. Just because Cameron chose to hold one to appease his right wing should not bind the actions of MPs.

The fact that the referendum result was achieved as the result of a completely inadequate campaign matters. The Remain side (and the media) failed to adequately put across their case, because the positive case for immigration was not made. The Leave side lied their socks off. To equate the dishonesty on the Remain side with that of the Leave campaign, as Owen does, is quite wrong. Two central planks of the Leave case, that the NHS would have more money and that Turkey was about to join the EU, were complete lies. The main plank of the Remain campaign that Brexit would reduce the real income of UK citizens has been shown to be true. Information matters.

If such a vote was almost certain to fail because it lacked the backing of enough Conservative MPs, then there might be a tactical reason for not supporting it for reasons I outlined here. But this is not the case that Owen makes. Barry Gardiner has also departed radically from this script. As I said in that post I did not know if Labour's Brexit position was strategic or just confused and conflicted, and Owen's piece together with these recent developments reinforce such doubts.  

4. The government fails to negotiate a deal but wants us to leave despite this. There is a vote in parliament to revoke Article 50 and not leave the EU.

If you remain unconvinced by the above, consider this outcome. No deal would be a disaster, and bring immediate chaos. But all of Owen’s arguments for respecting the referendum would still apply! Would Owen really argue that Labour should not support such a vote for the sake of Leave voters’ faith in democracy? If it did that it would be complicit in the chaos that followed. 

Owen keeps coming back to the impact of any decision on how those who voted Brexit would feel. In this sense he is in the same spirit as John Harris’s article that I discussed here. It is an utterly defeatist argument: we must let people harm themselves because only then might they learn that they were mistaken in what they wanted. A much more progressive policy is to persuade people they are wrong.

If Labour did form the next government, as I very much hope it would, the consequences of leaving the Single Market would be on its watch. Would those who voted Leave forgive slow growth in their living standards as their own fault for wanting Brexit? Would they accept the implications of low immigration for the public finances as a price worth paying to control immigration. Of course not. Much of the media would argue that these problems were all down to the Labour government, not Brexit. A Labour government that presides over leaving the Single Market could be a one term government.

In an earlier post I talked about the logic of a triangulation strategy for Labour, but I said at the outset that I did not know if this what they were doing. As a result, there is currently a serious danger that Labour would squash any attempt from the Tory backbenches to hold a second referendum, or if they won the next election that they would leave the Single Market. Although everyone focuses on Corbyn, this is as much a problem with many Labour MPs in Leave voting areas. It is an area where we need the membership to influence Labour policy, as both Jeremy Corbyn and Owen Jones have always suggested they should.

Should Labour triangulate over Brexit?

There are two schools of thought about why Labour is adopting a confusing and conflicting position over Brexit which is almost the same as the government’s line. The first is that Labour is simply confused and conflicted. The more interesting is that this is deliberate triangulation: sound slightly less enthusiastic about Brexit to keep its core anti-Brexit vote, but also not to antagonise its minority pro-Brexit vote. I do not know which view is correct, and it is possible that both are. To the extent that it is triangulation, is this the right thing for Labour to do? This question is related to a recent Guardian article where John Harris argues that although Brexit will be a disaster it has to happen.

If triangulation is how Labour justifies its own position on Brexit, the obvious question to ask is why they made so much fuss when their predecessors appeared to triangulate over austerity. Brexit, like austerity, will be extremely harmful for the economy. So what made triangulation (or appeasement, if you want to use a more pejorative word) over austerity a huge political mistake, but allows the same for Brexit acceptable?

If you take the position that political parties and politicians should always argue for what they or their members believe in, rather than adapting their positions to what is politically possible or smart, then there is indeed no difference. Those who said that Labour’s failure to campaign loudly against austerity in 2015 represented some kind of moral betrayal should, for consistency, be arguing the same over Brexit.

A more political answer would be that in the case of Brexit triangulation worked, while for austerity it did not. In 2015 the election was all about economic competence, and Labour triangulation on austerity had the effect of conceding competence given the prevailing ‘clearing up the mess’ narrative. Of course Labour did not win the 2017 election, but they achieved during the campaign a surge in popularity that is virtually unprecedented. Labour supporters who are also anti-Brexit will tell you that this was because Labour made the election about austerity (or more accurately the size of the state) rather than about Brexit. If instead Labour had campaigned against Brexit, the election would have been a rerun of the referendum (as May wanted it to be) and because of the geographical concentration of the pro-EU vote Labour would have lost badly.

Even if you buy this, however, there remains a question of whether the triangulation strategy will continue to work, and whether it could have the unfortunate side-effect of ensuring Brexit will happen when otherwise it might be stopped. To assess this question, we need to take a realistic view of how the Brexit process is likely to evolve.

We know pretty well what the final deal will look like. It will be along the lines of the deal put on the table by the EU, together with a transition period during which we stay in the customs union and Single Market (and continue to pay for that privilege). We know this because the Article 50 process gives the EU the whip hand: the No Deal outcome, which is what happens if time runs out, is so much worse for the leaving country and there is no time to negotiate a trade deal. [1] As a result, to use a term loved by Conservative politicians but which in this case happens to be true, there is no alternative deal to be done.

The only risk before the election would be that the government would walk away. The election had made that much less likely. As there has been virtually no preparation for that outcome, it would bring chaos. This chaos would ensure that Theresa May’s successor lost any subsequent election. While the Brexiteers in safe seats might be prepared to see that happen, the rest of the party would not. Faced with a split in the Conservative party, Labour could not side with the government, as it would flip its triangulation strategy and lose a lot of its core support. As a result, a No Deal Brexit would fail. [2]

What this means is that we will leave the EU in 2019, but remain in the Single Market and customs union until both sides negotiate something else. Can a final deal of this kind be stopped? Logically you might think that MPs would realise that, compared to EU membership, all this deal does is mean the UK gets no say in the rules governing the Single Market and in addition we have to pay a significant sum of money for that lack of control! It is pure lose, lose, with the only positive (from a Leavers point of view) being the possibility of avoiding Freedom of Movement at some future date.

Unfortunately logic is something not normally associated with Brexit. In reality I suspect most Conservative MPs will agree to this (for the moment) softest of soft Brexits with a sigh of relief, telling themselves that they have fulfilled the will of the people with as little damage as possible. The triangulation strategy, which is essentially designed to prevent Brexit becoming a pro/anti party political issue, suggests Labour will go along with this. The only way either of these things might not happen is if public opinion turns against Brexit over the next year.

Will opinion move by enough to at least make it possible to get a vote for a second referendum through parliament? Who knows, but there are some structural factors against it. The first is the right wing press, which after all are the people who got us into this mess. The second concerns the broadcast media. Its operating model is based on a two party system, and if neither of these parties are making the case that our current difficulties are a result of Brexit then that case will not receive the exposure it deserves.

Here we get to why many of those who oppose Brexit are angry at Labour’s position. They feel that without a major party constantly reminding the public of the problems that Brexit is creating their chance of turning public opinion is much reduced. I suspect Labour’s response, if it was honest about what it was doing, would be to say that they will not risk the next election by taking a public anti-Brexit position. It is the Conservatives who got us into this mess, and they have to make the first move to get us out. The retort that Labour are reducing the scope of what they can do in government by allowing Brexit to happen has less force if we are staying in the Single Market and customs union.

This is related to the argument made by John Harris, which is that a vote to reverse Brexit would do nothing to reverse what caused the Brexit vote in the first place. If Brexit was stopped, UKIP would be given a new lease of life, and “the myth of betrayal ... would sit at the heart of our politics”. To recast what he is saying in my own words, you cannot undo social conservatism and the effects of economic deprivation, plus a decade or more of propaganda from the press, with a single vote of parliament. It is related to the earlier argument because Labour might say that they cannot reverse these same forces by a year of campaigning against Brexit before we leave.

Unfortunately there seems to be no reason why this state of affairs should change during the transition period. The government, committed to controlling immigration, will be determined to get a deal that ends free movement. Labour, to avoid immigration becoming too much of an election issue, will continue to triangulate. The best [3] hope I can see to avoid further Brexit damage is for Labour to defeat the Conservatives at an election, and quickly realise that they are better off staying in the Single Market and encouraging free movement. Which of course gets us back to why they are triangulating in the first place.

[1] It was designed in part to discourage countries leaving the EU. As David Allen Green suggests, there was a better way to leave the EU.

[2] We have gradually seen the government inching their way towards the EU proposals. (Remarks by Boris Johnson, like those of Donald Trump, are a distraction that it is best to ignore.) They are taking their time because the UK side has almost no power in the negotiations, and it is better to gradually concede to minimise any negative reaction among Brexiteers or the public. (Part of the problem here is that because the government still maintains a public stance that is pure fantasy, and the opposition wants to stay deliberately vague, the media feel unable to be straight on these issues with the public. It also requires effort to dispel fantasy with reality.)

[3] ‘best’ as in better than any other likely outcome.

GE2017 and the Media

There is a danger of missing the point about Labour’s surge and the media. The issue is absolutely not that political commentators were surprised by Labour’s sudden popularity among voters. Of course they were surprised, because there was no evidence for it before May 2017. The dismal showing of Labour in the council elections at the start of May was real enough. Those on the left who say they knew it would happen are using the word ‘knew’ in the same sense as football supporters knowing their own side is going to win.

We all have a pretty good idea why the surge happened. In style Corbyn was everything May was not, and Labour’s policies were popular. What the media should be worried about was that both those things came as a surprise to the public. As I said here, a general election campaign is unusual because the public get to see much more of the party leaders and hear much more about their policies, and the broadcasters are duty bound to be impartial. But the character of May and Corbyn did not change overnight, and neither were the policies offered by either side very different from the stance they took before the election. So why were people so surprised?

Someone more cynical than I might suggest that the media’s job is to distort reality: to portray May as more competent than she was and to portray Corbyn as incompetent. What happened in the election campaign is that the electorate got a proper look at the two main leaders and their policies, and realised what the media had been saying was false.

That cynical view is completely appropriate to most of the right wing press, whose job is to distort reality as much as they can get away with. (Remember that damning article about May just before the election that was pulled by the Telegraph?) But why did the truth about May and Corbyn not make any impression on the public until the election? Did political commentators know no more than the public, and were just as surprised as the public about May and Corbyn’s character and their policies during the campaign? If that is the case, they were poor journalists. Or is it that they failed to communicate what they did know?.

Is the problem that the broadcast media feels duty bound to just present soundbites (May can do those), and the independent press in the UK is just too small? Or is the problem that the right wing media for one reason or another sets the parameters for other journalists. Is it that political journalists like winners and despise losers, so let the polls influence how they portrayed individuals and parties? I do not know the answers, but these are the questions the media needs to reflect on.   

Labour and its Left

The 1980s were a battle between what eventually became New Labour, and what is often referred to as the Hard Left. 1983 to 1997 was a long period where the Hard Left gradually lost influence within both the party (then the membership and trade unions) and among the parliamentary party (the PLP). But this didn’t mollify the distaste New Labour had for the Hard Left.

This period meant that those opposing the left adopted two propositions which became almost hard-wired into their decisions.

1. The left within Labour were more concerned with controlling the party than winning elections. That has often been said about Jeremy Corbyn over the last two years.
   
   
2. That the Left, and their ideas and policies, were toxic to most voters. The right wing press assisted in this by talking about the loony left.
   
   

In short, it was best to act as if Labour’s Left were a political pariah. As a result of these ideas the left minority within the PLP was tolerated (Labour needed to be a broad church), as long as it remained small and powerless. Triangulation became the way to win power: to adopt policies that were never from the Left, but adopted a centre ground between the Left and the Conservatives. New Labour was not old Labour.

The strategy was extremely successful. Tony Blair won three elections, and it took the deepest recession since the 1930s to (just) remove Labour from office. The Blair government achieved a lot, particularly for the poor, but it also made serious mistakes, most notably Iraq. That stopped a lot of those on the left actively supporting the party.

In 2015, when Labour under Ed Miliband was defeated, the general mood among the PLP seemed to be that it needed to triangulate once more and move further to the right. Crucially, some leading figures suggested Labour should all but embrace George Osborne’s austerity policy. The three main candidates to take over from Miliband were seen (with justification or not) as representing this thinking. Austerity was a critical issue, in part because - if accepted - it potentially constrained what Labour could do to a large extent. It was also an economically illiterate policy, which I can safely say with authority. Worse than that, it was a policy that - as the deficit fell - began to lose its popularity, so for Labour to adopt it at just the point it was losing its popular appeal seemed a doubly crazy thing to do.

Before Corbyn won that election I wrote

“Whether Corbyn wins or loses, Labour MPs and associated politicos have to recognise that his popularity is not the result of entryism, or some strange flight of fancy by Labour’s quarter of a million plus members, but a consequence of the political strategy and style that lost the 2015 election. …. A large proportion of the membership believe that Labour will not win again by accepting the current political narrative on austerity or immigration or welfare or inequality and offering only marginal changes to current government policy.”

At this point I was receiving impassioned pleas by some to come out against Corbyn. These mainly went along the lines that Corbyn was unreformed from the 70s/80s, and wanted to take over the party for the ‘old left’. Many said he could not win an election because his policies would be too radical. He would be a disaster with the electorate. It was unmodified 1980s thinking. These arguments sounded unconvincing to me, mainly because Corbyn would have to work with the PLP. Unlike the 1980s, the left were now such a small minority within the PLP that they would have no other choice.

As I had anticipated, Corbyn and McDonnell did form a shadow cabinet of all the (willing) talents, and as far as economic policy was concerned they were far from radical. McDonnell set up the Economic Advisory Council (EAC), which I and I suspect others were happy to join because it involved no endorsement of Labour’s policies. Arguments that we should have withheld our advice because Corbyn was somehow ‘beyond the pale’ were again straight from the post-83 playbook, and I am very glad that I ignored them. I helped Labour adopt a fiscal rule which in my view exemplified where mainstream macroeconomics was, and which incidentally some sections of the Left were very critical of. It formed a key part of their 2017 manifesto

What I had not anticipated, back when Corbyn was about to be elected, was how foolish some Labour MPs would be in those months following his election. Critical briefing of the press was constant, and tolerated by many in the PLP. As I wrote at the time, this strategy was stupid even if you hated Corbyn, because it gave the membership the excuse to ignore Corbyn’s failings. I was more right than I could have imagined. This was the first major mistake that the PLP made after the election.

The other thing I had not anticipated was Brexit. This triggered the second major mistake by the PLP, which was the vote of no confidence. It was in many cases an emotional reaction to Brexit, the leadership’s role in the campaign and earlier incompetence. It was understandable, but it was nevertheless terrible politics. Corbyn’s supporters were gifted the perfect narrative in the subsequent leadership election: the PLP had sabotaged Corbyn’s leadership.

The two mistakes made by the PLP ensured that for many members the 2016 vote became the PLP against the membership. One big mistake Owen Smith made was to not side with the membership in terms of changing the 15% leadership rule, so naturally they said if you do not trust us we will not trust you. Nevertheless I supported Smith over Corbyn, because I could not see a future for a party that had become so deeply divided. I thought the next election was winnable for Labour, but not if the party was seen by the electorate as at war with itself. That was one of the key reasons I resigned from the EAC: whether that was the reason three others also left I cannot say.

After Corbyn won for a second time, the polls suggested Labour’s future was bleak. This is what led May to call her snap election. However two things happened after Corbyn’s re-election which surprised me and many others, and meant that my predictions of no future under Corbyn proved wrong. First, the internal squabbling within Labour stopped almost completely. Second, the leadership started putting together a manifesto that would prove very popular, with a competence that had earlier been missing. During the general election divisions within Labour were not part of May’s main attack, in part because she chose to make the campaign presidential in style..

Many will say that Labour achieving 40% of the popular vote vindicated the membership’s faith in Corbyn. Others will go further and say ‘if only the PLP had been more cooperative we could have won’. That is going too far..The election result was also a consequence of a truly terrible Conservatives campaign, headed by a Prime Minister who exposed herself as just the wrong person to lead the country through Brexit  The economic environment couldn’t have been better for Labour: unlike 2015 we had falling real wages and the slowest quarterly GDP growth rate in the EU. Labour’s manifesto held out hope, while the Conservative manifesto was a liability. Despite all this, the Conservative vote share was above Labour.

What the election does show beyond doubt is that the attitudes most of the PLP had towards the Left, which they had carried with them from the 1980s, are no longer appropriate. The result was not the disaster they had been so sure would happen. That showed some left wing policies can be very popular, even if they are called anti-capitalist by those on the right. The curse of austerity on the UK electorate has lifted. Unlike the ‘dementia tax’, none of the policies in Labour’s manifesto proved to be a millstone around Corbyn’s neck. The days when Labour politicians needed to worry about headlines in the Mail or Sun are over.

The big lessons of the last two years are for Labour’s centre and centre-left. The rules that applied in the 1980s no longer apply. The centre have to admit that sometimes the Left can get things right (Iraq, financialisation), and they deserve some respect as a result (and vice versa of course). The centre and Left have to live with each other to the extent of allowing someone from the Left to lead the party. Corbyn has shown that the Left are capable of leading with centre-left policies, and the electorate will not shun them. With the new minority government so fragile, it is time for the centre and centre-left within Labour to bury old hatchets and work with Corbyn’s leadership.

But do the numbers add up?

The (official) launch of Labour’s manifesto saw mediamacro on display in all its unabashed pre-Keynesian ignorance. The idea that we could spend more on health and education by raising taxes on companies and high earners was so novel and (to many) attractive, the broadcast media collectively decided there had to be something wrong. The manifesto appeared to have increases in current spending exactly covered by increases in taxes, so surely there had to be some mistake.

Step forward the Institute of Fiscal Studies (IFS). Now I have huge respect for the IFS and the way it is run. Over the years it has established itself as the organisation of choice from where the media can get unbiased assessments of the size of individual fiscal measures or fiscal packages like budgets and election manifestos. But with this influence comes responsibility. Paul Johnson will freely admit that the IFS does not do macroeconomics. For many years before 2008 the IFS could get away with that, but no longer.

The IFS quite rightly said that tax estimates were uncertain because people can take measures to avoid tax increases or new taxes. The manifesto had made an allowance for this, but presumably the IFS thought it was not enough. In the media framing of measures having to ‘add up’ that suggested a potential problem with Labour’s figures. What the IFS did not say (or at least were not reported as saying) is that - when interest rates are at their lower bound - a tax funded spending increase would provide a much needed boost to activity, which itself would raise taxes. This is the famous balanced budget multiplier, which still holds in state of the art New Keynesian models when rates are stuck at their lower bound.

The IFS said raising corporation tax would cut investment, but did not note that raising demand would have the opposite effect. Because the IFS does not do macro, these points were simply not made. No one made the point that increasing public investment when real interest rates were about zero not only made good economic sense, but would also boost the economy, probably raise productivity, and itself bring in more taxes. In other words the IFS were implicitly assuming that this package would have no impact on output. [1] When interest rates are at their lower bound that is highly unlikely to be true. Even if interest rates did rise to exactly offset the demand impact of the balanced budget expansion, the increase in public investment will have positive supply side effects. I’m afraid this is a case where not doing macro means that what the IFS says is hopelessly one-sided. It has been 7 years since 2010, which is surely time enough to learn a bit of macro.

But this was nothing compared to media incredulity over failing to ‘cost’ the various nationalisation measures. Again the media have had years of being told that privatisation saves the government money, so surely reversing privatisations must cost them money. Of course neither is true in a macro sense. As any business will tell you, if you borrow to buy an asset, you get a return which should pay for the borrowing. When the government has no problem selling its debt at around zero real interest, the question ‘how much will it cost’ is completely irrelevant. The issue is whether this industry should be a private monopoly or state owned.

I should record two caveats to this familiar complaint about mediamacro in the coverage I saw. First, the BBC’s economics editor Kamal Ahmed did give a 30 second slot to someone from the IPPR, who very succinctly made the macroeconomics case for both a balanced budget spending increase and additional public investment. It was a single ray of sunshine in an otherwise dreary day. Second, senior Labour politicians still seem unable to robustly defend their own position on this. You don’t respond to questions about why nationalisations have not been costed by saying you do not know what the share price will be. You say as long as we pay a fair price it does not matter what it costs, because the state is buying an asset that brings a return that more than pays for the borrowing.

Of course journalists should ask hard questions at a time like this. I just wish they would not persist with questions which show their own macroeconomic ignorance. (It is a problem that arises with Budgets just as much as with election manifestos.) As any macroeconomist knows, there is no reason why the numbers have to add up, and if they didn’t on this occasion that is actually a benefit given rates are at their lower bound. The media’s focus on adding up misinforms viewers, and is classic mediamacro. As any economist knows if this government buys an asset by borrowing at zero real interest rates it really does not matter how much you have to borrow. Ask Labour politicians why they think the industry would be more efficiently run under public ownership, not how much will it cost.

But let me end on a positive note. It is great to finally have at least one of the two main parties putting the case for a large increase in public investment when the government’s borrowing costs are so low. It is great to see one party prepared to raise taxes to stop the growing squeeze on the NHS and the new squeeze on education. It is great that Labour have a fiscal rule which tries to represent current macroeconomic understanding rather than the wisdom of the Swabian housewife. Let’s hope this lasts beyond this election.

[1] In principle that could influence the ‘highest tax take since 1940s' line, but the impact on GDP would have to be quite large to do that. (HT GT) 

The media’s unbalanced referendum

We now have a number of studies of how the media as a whole treated the EU referendum.

1. Levy, Aslan and Bironzo from The Reuters Institute for the Study of Journalism
   
   
2. A short piece by Deacon et al from Loughborough in this volume.
   
   
3. Cushion and Lewis from Cardiff (full paper here)
   
   
4. Moore and Ramsay from King’s College, London
   
   

The Reuters Institute study looked at the press, and after weighting for readership and visibility they found that pro-Leave articles outnumbered pro-Remain articles 68:32 (page 34). One interesting finding that I had not seen before is that voters generally split in a similar way to the balance of articles in the paper they read: the only notable exceptions were the Times (more pro-Leave articles but more pro-Remain voters) and the Mirror (more pro-Remain articles but roughly even voting split). Of course you can read this result two ways: voters were influenced by their paper or their paper reflected their reader’s views.

The King’s College study shows how the Leave campaign, through the newspapers that supported it, were able to reframe the debate on the economics of Brexit. An example that sticks in my memory was Obama’s intervention. I remember seeing an interview with a random voter asking what she thought of this, and she responded by saying how dare Obama interfere with our referendum and blackmail us over trade. It struck me as a very odd reaction at the time (particularly as Obama is popular in the UK), but of course she was simply parroting what she had read in her newspaper. The King's study clearly reveals how the Leave press used the techniques of propaganda to support their side.

The Cardiff study focused on the main news broadcasts. In contrast with the press, there was no bias in favour of Leave or Remain. However what they did find was that broadcasters essentially acted as mirrors for the two campaigns. The Remain campaign focused on Tory politicians, so the broadcasters did as well. As a result, Conservatives received much more coverage than politicians from other political parties. As the Loughborough study noted, this made the coverage ‘presidential’ in character. Journalists normally did not question statistics themselves, preferring to let the other side do any challenging. This also meant that the broadcasters focused on the details of the two campaigns, rather than providing the background information and independent assessment that many viewers clearly wanted. Rather than focus on their duty to inform, they played it safe by just letting the two campaigns do all the talking.

A consequence of the broadcast media largely providing a showcase for the politicians running the campaigns is the marginalisation of other groups, and in particular those who actually knew something about the issues being talked about. I’m not just talking about economics, but also law and international relations. The Remain campaign prefered to use international institutions (IMF, OECD etc) rather than local experts. The Leave campaign did use one academic, Patrick Minford (who figured in 90 of the articles examined by the King’s group), with the consequence that the academic economist that voters were most likely to have heard of during the campaign represented just 4% of the profession.

The danger of the broadcast media taking this approach is illustrated by the example of immigration and public services. The King’s study noted the following:

“The most consistent economic argument made by the Leave campaign – that immigration placed unsustainable pressure on public services – was frequently repeated in the editorials of some news outlets without being subject to the skeptical or forensic analysis applied to Remain’s economic arguments across the whole range of publications.”

Economists assume, for sound reasons, that in fact immigration benefits the public finances, which is one reason why the OBR thinks the deficit will be around £15 billion higher each year as a result of Brexit. So why did the Remain campaign not say this more loudly? The answer could well be because the campaign was headed by a government that had used immigration as a scapegoat for poor public services. This absence of a critique mattered a lot: at least one poll showed that the reason voters most often gave for limiting immigration was pressure on public services. Therefore by relying on the political campaigns, the broadcast media misled the public.

It is for this reason that I have argued that broadcasters should treat what an overwhelming majority of experts think are facts as facts, whatever politicians say. But I see no sign that broadcasters see the problem (with the exception of climate change), let alone have any inclination to deal with it. As far as economics is concerned, I fear the bodies that represent academic economists also want to avoid any fights. Which means that we are stuck with the status quo for some time.

I think this has a major implication for those like me who see Brexit as a huge mistake which people must be given the chance to reverse. The next few years are going to show that the many claims the Leave side made are completely false. The EU will ensure the UK is worse off as a result of leaving. Trade deals with other countries will not come to the rescue. There will be less, not more, money for public services and so on. The government’s response (unless May makes the most courageous U-turn ever) will be to wrap themselves in the flag and say that anyone who is critical is being unpatriotic, and with a large majority no effective opposition within the Conservative party will be possible. .

If Labour continues to support a Hard Brexit, all they can do is claim setbacks are the result of government incompetence. Here I disagree with Ian Dunt: criticism that takes Hard Brexit as given and just focuses on a claim that we could do the negotiation better will lose out to nationalist fervour. The reality is also that the LibDem voice is too weak, and will remain so even if they double their number of seats at the election. Given the way our media works, the only way you can constantly remind people that Brexit is a choice we could reverse is if Labour after the election adopts a much more critical position that involves support for a second referendum.

GE2017: Why economic facts will be ignored once again

In 2015, the Conservatives spun the line that Labour profligacy had messed up the economy, and they had no choice but to clear up the mess. In short, austerity was Labour’s fault. As Labour chose not to challenge this narrative, almost all the media and half the voters assumed it must be true. The reality was the complete opposite. The rising deficit was a consequence of the global financial crisis, not Labour profligacy. Doing something about it should and could have been delayed until the recovery was underway. By acting prematurely, Osborne delayed the recovery and lost the average UK household resources worth thousands of pounds. The story that we had to cut now because of the markets was completely false. 

Indeed, if you define the term economic recovery properly, as growth above previous trends, there has been no economic recovery from the Great Recession. I have shown this chart many times, and the story it tells is clear. In every post-war recession the economy recovered. The exception is this one, where we have seen no recovery while Conservatives were running the economy.

We can put the same point another way. The average growth in GDP per head during the Labour government period, which included the recession caused by the global financial crisis, is greater than average growth since 2010. The last decade has seen a unique period of falling real wages. Now this might not be the fault of the government in charge at the time, but it is that government that should have some explaining to do. But they never do have to explain, because mediamacro take it as given that the Conservatives are better at running the economy.

The 2015 General Election was the first recent occasion that the economic facts were ignored. The second was of course the EU referendum. Academic economists were united in thinking that Brexit would be bad for living standards: the only question was how much would incomes fall. The non-partisan media decided to portray that not as knowledge, but as just another view, to be always matched by someone saying the opposite.

A critical issue during the referendum was a belief that immigration had reduced the access of UK natives to public services. Economists know that is simply wrong for the economy as a whole, and if it happens locally it is because the government has pocketed the taxes immigrants pay. But the media did little to inform voters of why it is wrong, and I suspect this is why most of those voting Leave believed they would be no worse off in the long run outside the EU. This majority were not willing to lose income to reduce immigration for the simple reason that they believed, erroneously, that reducing immigration would make them better off.

Brexit may not have led to the immediate economic downturn that some expected, but the Brexit depreciation has brought to a halt the short period during of rising real wages. The economic pain that economists said would follow any vote to leave is starting to happen. Will that change the broadcast media’s view about how to present the economic consequences of Brexit? When Conservative politicians and their media backers choose to focus on GDP, will broadcast media journalists have the nous to ask what about real wages?

Unfortunately we know the answer to these questions. As far as economics is concerned GE2017 is likely to be nothing more than a combination of GE2015 and the EU referendum. The economy has not got any better than in 2015, and is about to get worse, but mediamacro will let Conservatives insist that the economy is strong. It is one year on from the referendum, but we still do not know what kind of Brexit we will have, a reason May gave for not holding another referendum in Scotland. The exchange rate has fallen and real wages have stopped rising, but we will still be told this is just Project Fear and the consensus among economists will get ignored once again. So, for the third time, we will have a vote where economics is critical but economic facts will be largely ignored.

We might be appalled at the authoritarian way May justified her decision to hold an election, which the Mail only slightly beefed up in their Leninist talk of crushing the saboteurs. But the depressing truth is that a majority of voters have bought this story. According to a snap poll by ICM for the Guardian, 54% of voters thought May was right to change her mind about an election because the situation has changed. They have been sold the narrative that Brexit is the will of the people, and now they must get behind May so she can get the best Brexit deal. As inflation rises and real wages fall the facts may be changing, but the narrative survives.

Narratives are a way people can try to understand things they know little about, and most people know little about economics or politics. Mediamacro is a set of narratives. Project fear is a narrative. The right and the ideologues are very good at selling narratives, and they have a media machine to invent them, road test them and spread them. The left and the realists have none of those things, and are hopeless at it anyway because they know reality is more complex than most narratives. That is why they have lost two elections, and look like losing a third big time.