Trump: Misleading the People

Introduction (added 10/11/16)

I originally wrote this piece with a start and ending that assumed Trump had lost (yes, I know), and re-wrote it after he had won. I mention that because I think an unfortunate consequence of that is that many will read this as another 'why did he win' piece. It is not that, It is more a 'how did someone who was openly despised by most Republican politicians (included past Presidents), who broke all the normal rules, and generally acts like the dictator of some poor country unused to democracy, get a clear chance at being POTUS' type of question. Whether he won or not is irrelevant to that type of question.

Asking why he won is a whole different type of question, because you are looking at marginal shifts in the way people vote. His appeal to those in the rest belt who were adversely effected by globalisation is clearly relevant in that case.   


So the US has had its Brexit moment. Perhaps the lesson is that if people are promised impossible things and no one tells them they are impossible, you can motivate some potential voters to vote who would not otherwise have done so. But it would be wrong to get hung up on the polls: Nate Silver was clear that there was a good chance Trump could win.

The question to ask is how could the United States elect to its most powerful office not just a demagogue, but someone who lied openly all the time, incited hatred against other religions and ethnic groups, and promised to lock his opponent up if he won. We have to ask how this could happen.

You will hear a lot of talk about those left behind by globalisation, looking at charts like this

Share of income growth going to income groups from 1975 to 2007. Source OECD

They are remarkable, and they may explain some of the detail of how he swung votes at the margin. But, as Ezra Klein notes in an interesting article in Vox (written when he thought Trump would just lose), Trump support comes from people who are well off, do not live in areas hit by globalisation and are not in areas of recent immigration. They do not explain how a demagogue and liar gets to win so many votes. And they don’t explain how the chart above can lead to people electing a President who now almost certainly will cut taxes for the 1%.

His explanation instead comes from political scientist Julia Azari, who writes “The defining characteristic of our moment is that parties are weak while partisanship is strong.” It is certainly true that the Republican party hierarchy failed to stop Trump, and that a great many of them then went on to endorse him. It is also true that Sanders, an insurgent from the left, did very well in the Democrat primaries. But there the equivalence ends. Sanders is no demagogue who lies openly all the time, incited hatred against other religions and ethnic groups (unless perhaps you count bankers as an ethnic group), and promised to lock his opponent up if he won. He is hardly a threat to the democratic process.

This is one problem that I have with this argument. It implies a symmetry which is just not there. That is because it ignores a key feature of politics in the US over the last few decades, which is a steady march to the right. The threat to democracy comes only from the Republicans and their base. Let me put it another way. Republicans have become more partisan because the believe a centrist, experienced and relatively honest Hillary Clinton is beyond the pale, while Democrats have become more partisan because Republican policies are often mad. (Think climate change, guns, teaching evolution)

The other problem is that the analysis does not spell out why the Republican base has become so extreme, and why plenty of people who are not so extreme will have voted for Trump. You can certainly say that this extremism was encouraged by Republican politicians before the rise of the Tea Party: think of holding the government to ransom when Bill Clinton was President. But I think the biggest factor missing from Klein’s account - as it often is by those in the media - is the media itself.

This consists of two parts, much as it does in the UK. First there is Fox news: a highly partisan news provider with a clear right wing bias. Second there is an inability of the non-partisan media to provide any kind of counterweight when someone like Trump arrives, and in some cases provides help to his cause. I have talked about this second factor before, here and more briefly here, so let me concentrate on the first today.

The story is in fact told better than I ever could by Bruce Bartlett, who worked in the Reagan White House and for George HW Bush, so I’ll just summarise it here. The story starts under Reagan, who provided pressure to withdraw the Fairness Doctrine, which was similar to what keeps UK broadcasters from being partisan. Initially that allowed the rise of talk radio, and then Fox News. Gradually being partisan at Fox meant misinforming its viewers, such that Fox viewers are clearly less well informed than viewers of other news providers. One analysis suggested over half of the facts stated on Fox are untrue: UK readers may well remember them reporting that Birmingham was a no-go area for non-Muslims.

But why is this causal, rather than simply being a mirror on the rightward drift of the Republican base? The first point is that there is clear evidence that watching Fox news is more likely to make you vote Republican. The second is that, like the tabloids in the UK, this propaganda machine can turn on party leaders and keep them from moving left. The third is that it is also a machine for keeping the base angry and fired up and believing that nothing could be worse than voting for a Democrat. It is Fox News that stops Republican voters seeing that they are voting for a demagogue, conceals that he lies openly all the time, incites hatred against other religions and ethnic groups, and makes its viewers believe that Clinton deserves to be locked up. Just as UKIP (and perhaps now the Conservative party) is the political wing of the tabloids, so Trump is a creature of Fox news.

Trump’s election is a disaster for humanity. That may be true in ways we can only speculate about, but we know that he does not believe in climate change, thinks it is a Chinese hoax, will not follow the Paris agreement and will do all he can to support coal. With a Republican congress no one will stop him. When you think about that, remember also that Fox news (like sections of the UK press) encourages climate change denial, and the issue was not mentioned by the non-partisan nightly news election coverage (which obsessed about emails) or raised in any of the presidential debates. If you continue to mislead people in this way, they will continue to make terrible mistakes when they vote.

Greece and Trust

Nick Rowe pulls me up on a point that I didn’t make in my account of what should have happened to Greece after 2010. I argued that some external body (e.g. IMF) should lend sufficient money for Greece to be able to achieve primary surplus (taxes less non-interest government spending) gradually, thereby avoiding unnecessary unemployment. Gradual adjustment is required because the improvement in competitiveness required to achieve ‘full employment’ with a primary surplus cannot happen overnight because of price rigidity.

Nick’s point is that for this to happen, the external body has to have a degree of trust in Greece: trust that it will not take the money and at some stage default on this new loan. This trust may be particularly problematic if Greece had defaulted on its original debt, which I think it should have done. This, after all, is one reason why Greece would not be able to get such finance from the markets.

This is what the IMF is for. Governments are more reluctant to upset the international community, and so defaults on IMF loans are rare. As Ken Rogoff writes: “Although some countries have gone into arrears, almost all have eventually repaid the IMF: the actual realized historical default rate is virtually nil.”

But does this help explain why other Eurozone countries keep going on about how Greece has lost their trust? I think the answer is a clear no. In fact I would go further: I think this talk of lost trust is largely spin. The issue of trust might have explained the total amount the Troika lent from 2010 to 2012. However, as I have said often, the mistake was not that the total sum lent to Greece was insufficient, but that far too much of it went to bail out Greece’s private sector creditors, and too little went to ease the transition to primary surplus. (The mistake is hardly ever acknowledged by the Troika’s supporters. Martin Sandbu discusses the - misguided - reasons for that mistake. [0])

The reason the Troika give for lack of trust is that Greece has repeatedly ‘failed to deliver’ on the various conditions that the Troika imposed in exchange for its loans. The Troika has tried to micromanage Greece to such an extent that there will always be ‘structural reforms’ that were not implemented, and it is very difficult to aggregate structural reforms. However this is exactly what the OECD tries to do in this document, and if I read Figure 1.2 (first panel) correctly, Greece has implemented more reform from 2011 to 2014 than any other country. [1] We can more easily quantify austerity, and here it is clear that Greece has implemented almost twice as much austerity as any other country. [4] The narrative about failing to deliver is just an attempt to disguise the fact that the Troika has largely run the Greek economy for the last five years and is therefore responsible for the results. [3]

You could argue with much more justification that the failure of trust has been on the Troika’s side. Greece was told that the austerity demanded of it would have just a small impact on growth and unemployment, and the Troika were completely wrong. They were then told if they only implemented all these structural reforms, things would come good, and they have not. You could reasonably say that the election of Syriza resulted from a realisation in Greece that the trust they had placed in the Troika was misguided.

Given these failures by the Troika, a reasonable response to the election of Syriza would have been to acknowledge past mistakes, and enter genuine negotiations. [2] After all, as Martin Sandbu points out in a separate piece, a pause in austerity in 2014 had allowed growth to return, and because Greece had achieved primary surplus new loans were only required to repay old loans. But it is now pretty clear that large parts of the Troika never had any real wish to reach an agreement. Over the last few months we were told (and the media dutifully repeated) that the lack of any agreement was because the ‘irresponsible adolescents’ of Syriza did not know how to negotiate and kept changing their minds. We now know that this was yet more spin to hide the truth that large parts of the Troika wanted Grexit.

The lesson of the last few months, and particularly the last few days, is not that Greece failed to gain the trust of the Troika. It is that creditors can be stupidly cruel, and when those creditors control your currency there is very little the debtor can do about it. 

 

[0] Greece was prevented from defaulting because of fears of contagion of one kind or another, which meant that Greece was taking on a burden for the sake of the rest of the Eurozone. The right response to these fears was OMT, and direct assistance to private banks, as Ashoka Mody explains clearly here. But given that this was not done, what should have then happened is that once that fear had passed, the debt should have been written off. But politicians cannot admit to what they did, so the debt that was once owed to private creditors and is now owed to the Troika remains non-negotiable.

 

[1] The Troika can also speak with forked tongues on this issue: see Mean Squared Errors here (HT MT).

[2] I am often told that the Troika had to stand firm because of a moral hazard problem: if Greek debts were written down, other countries would want the same. But the moral hazard argument has to be used proportionately. Crashing an economy to avoid others asking for debt reductions is the equivalent of the practice in 18th century England of hanging pickpockets.

[3] I am sometimes asked why I focus on the failures of the Troika rather than the mistakes of Syriza. The answer is straightforward - it is Troika policy that is the major influence on what happens in Greece. And when the Troika gives Greece’s leaders the choice between two different disasters, it seems rather strange to focus on the behaviour of Greece’s leaders.

[4] Postscript: Peter Doyle suggests that, all things considered, Greece overachieved on fiscal adjustment     

The View from Brussels

When incomplete ideas get embodied in institutions and the people in them

As I have said before, its too easy to be rude about austerity. It is harder to put yourself in the mindset of reasonable individuals who take a different view, and pinpoint exactly - in ways that they will understand - why their view is wrong. So this paper from Marco Buti and Nicolas Carnot (HT Philip Lane) is useful because it shows us that mindset. [1]

The argument in the paper is essentially this. “We recall that large adjustments are needed

in most economies to restore sustainable fiscal positions, not because of the arbitrary will of the markets or of EU institutions.” So the debate is about the precise speed of adjustment, and the Commission is trying to strike the “right balance”. In particular, it recognises the need for different speeds in different countries. I think this view characterises the position of many international organisations, including the OECD, and many in the IMF.

There is a big mistake being made here. It essentially involves the prioritisation of issues. Fiscal adjustment is seen as the overriding priority. Issues involving the state of the economy are secondary: they are one factor in judging the appropriate speed of adjustment. This is the wrong way around.

The major priority at the moment should be doing something about the demand led recession in the Eurozone (and other countries like the UK). The budgetary position of some countries is a secondary factor that may influence the country by country balance of any fiscal actions required to deal with this priority.

This point about priorities is not an expression of political preferences. It is about what basic macroeconomics tells us. The recession is a problem right now. If it is not dealt with now, the loss of resources is permanent and irretrievable, and in addition there is likely to be a more permanent scarring effect through hysteresis. Given the imbalances within the Eurozone, and the political tensions generated by creditor/debtor relationships, the costs of a recession could be greater still. Budget consolidation is a permanent, long term issue, and there is clearly a right and a wrong time to deal with it. Recessions are the wrong time, not just because it conflicts with other priorities, but because it may not even work, because of hysteresis effects, or political effects, or banking effects.

So why is this obvious to me, but not to those running policy? To repeat, my own view is in no sense about the relative importance, in some abstract sense, of deficit bias versus avoiding recessions. As regular readers will know, on deficit bias and long run goals for debt I am something of a hawk. I just do not see why we cannot avoid recessions and bring down government debt.

In some cases those running policy take a different view because of ulterior political motives, but not in all cases. I’m prepared to give those in the Commission, and other international organisations like the OECD and IMF, the benefit of the doubt on this. I believe an important influence on their mindset is that they are working in a framework in which overall demand stabilisation is not their problem. That is monetary policy, not fiscal policy. It is very revealing that in the Commission paper two phrases do not appear at all: they are  ‘zero lower bound’ (ZLB) and ‘liquidity trap’. Too few in government have recognised that when we hit the ZLB, the rules of the macroeconomic game fundamentally change, and the institutions of government - and those in them - have to adapt too.

This is hardly a novel point, but as Paul Krugman keeps stressing, it is absolutely central. It is why I get annoyed by those who insist that, if only we did monetary policy differently, all would be well - what I call ZLB denial. Few (unfortunately not all) deny the central role and importance of monetary policy in getting us out of recessions. When monetary policy fails - which it patently has, mainly [2] because of the ZLB - fiscal policy has to take its place. Countercyclical fiscal policy becomes as important as monetary policy normally is. Institutions, and habits of thinking, that are set up for normal times must adapt. The IMF recognised this in 2009, but I’m not sure the OECD or European Commission ever did.

We can see how this failure to change priorities influences the subsequent discourse by looking at two issues that are covered by the paper: OMT and Germany. The paper recognises the importance of OMT in altering market expectations. But they then say “As is clear as well however, the OMT announcement per se does not address the underlying sustainability concerns.” Of course OMT does not directly change the outlook for future primary balances. However it is a game changer in allowing periphery countries to change priorities. When you cannot sell your debt, this has to take priority over recession concerns (although fiscal consolidation can still be designed to try and avoid recession). What OMT allows countries to do is change priorities. If it had been implemented earlier, priorities could have been changed earlier. The paper does not see this, because for them fiscal consolidation remains the key priority.

The paper says “In Germany, the fiscal stance is now broadly neutral [3], hence consistent with

the call for a differentiated fiscal stance according to the budgetary space”. Which makes perfect sense (albeit using the rather tortured language of international organisation space), except at the ZLB. At the ZLB we need overall fiscal expansion in the Eurozone. The differentiation point still stands, so from an overall Eurozone perspective the Commission (and the OECD, and the IMF) should be arguing for substantial fiscal expansion in Germany. However, if your priority is fiscal consolidation, advocating doing nothing can seem quite radical and brave.

Right at the end there is a hint of recognition, but in a way that reinforces my point. To quote in full:

“A dedicated stabilisation fund could improve the conduct of fiscal policies throughout

the cycle by enforcing tighter policies in good times and providing additional leeway for cushioning downturns. Such a tool could strengthen the existing automatic

stabilisers while maintaining a credible rule-based framework. It would be particularly useful in the current predicament characterised by large cyclical differentials across the zone as well as a not insignificant average output gap. However, according to the Commission blueprint such a tool should only be considered in the longer term in the context of full fiscal and economic union.”

In other words countercyclical policy at the overall Eurozone level would be useful right now, but it needs to wait until we have the institutional change that can accommodate it. [4] Which tells me that those in the Commission think institutions are very important, but it does not tell me why existing institutions (and those within them) have to be behave in such a blinkered way.

[1] This can be seen as a companion piece to two others that looked at the power austerity has over politicians, and why some economists are suspicious of Keynesian fiscal stimulus. This post is about economists working in policy institutions.

[2] Unfortunately the ECB often gives the impression that as long as consumer price inflation is around about 2%, then nothing else (like other measures of inflation, or a recession) has anything to do with them. However I doubt very much that if the ECB had done what the Fed is now doing, a Eurozone recession would have been avoided.

[3] Whether this is true is another matter: see here for example. The latest OECD Economic Outlook has the German debt to GDP ratio falling steadily since 2011, despite a widening output gap.

[4] That institutional change will come too late for the current recession. I take a critical view of whether fiscal union for the Euro is either feasible or desirable here.