Links between austerity and immigration, and the power of information

This discussion by Roger Scully about why people in the Welsh Valleys voted Leave is depressing although not surprising. In essence it is immigration, bolstered by local stories of Polish people coming into communities and reducing wages. I doubt if quoting econometric studies about how little immigration influences wages would make much difference to these attitudes (although that is no excuse for people in authority who should know better ignoring these studies). I think it is attitudes like this, in places unused to immigration partly because work is not plentiful, that makes some politicians say that arguing in favour of immigration is ‘politically impossible’.

This is the first link between immigration and austerity I want to draw. The Labour party before 2015 had also decided that attacking austerity was politically impossible: ‘the argument had been lost’. Focus groups told them that people had become convinced that the government should tighten its belt because governments were just like households. The mistake here, as I wrote many times, was to assume attitudes were fixed rather than contextual. I was right: austerity is no longer a vote winner. [1]

Why might attitudes to immigration change? I strongly suspect that anti-immigration attitudes, along with suspicion about benefit claimants, become stronger in bad times. When real wages are rising it is difficult to fire people up with arguments that they would have risen even faster in the absence of immigration. But when real wages are falling, as they have been in the UK in an unprecedented way over the last decade, it is much easier to blame outsiders. Equally when public services deteriorate it is easy to blame newcomers.

It is wrong to think that this only happens among working class, left behind communities. Catalonia is a relatively rich part of Spain, and there has always been resentment about this area ‘subsidising’ the rest of the country. But it is very noticeable how support for pro-independence parties increased sharply as Spain turned to austerity, although that could also be a reaction to corruption scandals.

Here is the second link between immigration attitudes and austerity. Austerity has contributed to the slow growth in real wages and is the main cause of deteriorating public services, but often outsiders are easier to blame.

This is particularly true when it is in the interests of the governing political party and its supporters in the press to deflect criticism of austerity by pretending immigration is the real cause of people's woes. This is the third link between austerity and immigration, and it is one deliberately created and encouraged by right wing political parties. In this way Brexit has its own self-reinforcing dynamic. People vote for it because of immigration, its prospect leads to falling real wages as sterling falls and the economy falters, which adds to bad times and anti-immigrant attitudes.

If all this seems very pessimistic, it shouldn’t be. While the right will almost certainly continue to play the anti-immigration card in the short term, because they have few other cards to play, they can be opposed by a left that makes the case for immigration. As just as views on austerity have clearly changed, so can views on immigration. particularly once hard times come to an end.

However it is a mistake to imagine it is all about economics, or even ‘culture’. One of the unfortunate consequences of the culture vs economics debate over populism is the implication that one way or another views are deterministic, and the only issue is what kind of determinism. The reason I go on about the media so much is that information matters a lot too. Although people may be anti-immigration because they have xenophobic tendencies which are reinforced when times are bad, they can also be anti-immigration because they have poor information, or worse still have been fed deliberately misleading facts.

In my intray of studies to write about for some time has been this paper by Alexis Grigorieff, Christopher Roth and Diego Ubfal. (Sam Bowman reminded me it was there from this piece.) It is well known that people tend to overestimate the number of immigrants in their country. This international experiment showed that when people were given the correct information, a significant number changed their views. What is more, this change of view was permanent rather than temporary. Here is a VoxEU post about an experiment from Japan pointing in the same direction.

As well as emphasising simple information like this, politicians should expose the kind of tricks people promoting tougher controls on immigration play. The public tends to be receptive to the idea that it is beneficial for the economy to have immigrants with important skills, so they switch to calling for controls on low paid, low skilled workers. As Jonathan Portes demonstrates, that in practice can involve plenty of pretty skilled workers. The trick for pro-immigration politicians is to ask which occupations do we want to exclude: nurses, care workers, construction workers, primary school teachers, chefs? With UK unemployment relatively low, there are not many jobs where employers are not complaining of shortages.

Of course most people want to stop immigrants coming here and claiming unemployment benefit. This is why newspapers keep playing the trick of talking about the large number of migrants ‘who are not employed’, conveniently forgetting to mention that this includes people like mothers looking after children. In reality unemployment among EU immigrants is below that among the native population. In addition, we can already deport EU immigrants that remain unemployed under EU law if the government could be bothered to do so.

For politicians who do want to start making the case for immigration, the place I would start is public services. Few economists would dispute that immigrants pay more in tax than they take out in using public services. Yet most of the public believe the opposite. In this post entitled ‘Is Austerity to blame for Brexit’ I show a poll where the biggest reason people give for EU immigration being bad is its impact on the NHS. Getting the true information out there will have a big effect. Just as public attitudes to austerity can change, so can they over immigration, but only if politicians on the left start getting the facts out there.

[1] To be fair, whether I would have been right in 2014/15 if Labour had taken a clear anti-austerity line we do not know.   

The OBR, productivity and policy failures

Chris Giles had an article in the FT yesterday about the UK’s continuing dreadful productivity performance, and the implications this might have for forecasts of the public finances. It has the following chart comparing successive OBR forecasts and actual data.

I want to make two points about this. The first is about the OBR’s forecast. [1] It is easy to say looking at this chart that the OBR has for a long time been foolishly optimistic about UK productivity growth. Too often growth was expected to return to its long run trend shortly after the forecast was published but it failed to do so. Expect lots of articles about how hopeless macro forecasts are in general, or perhaps how hopeless OBR forecasts are in particular. It was obvious, these articles might say, that trend productivity growth in the UK has taken a permanent hit following the financial crisis.

Anyone saying this is ignoring the history of the UK economy for the 50 years before the GFC. After each downturn or recession, labour productivity growth has initially fallen, but it has within a few years recovered to return to its underlying trend of around 2.25% per annum. This means not just returning to growth of 2.25%, but initially exceeding it as productivity caught up with the ground lost in the recession. In a boom sometimes growth exceeded this trend line, but it soon fell back towards it.

This made sense. Productivity growth reflects technical progress and innovation, and they tend to continue despite recessions. A firm may not be able to implement innovations during a recession, but once the recession is over experience suggests they make up for lost ground in terms of putting innovations into practice.

Given this experience, OBR forecasts have always been pretty pessimistic. They have assumed a return to trend growth, but no catch up to make up for lost ground. If they had also forecast, in 2014 say, that given recent experience they expected productivity growth to be almost flat for the next five years that would have been regarded as extreme at the time. Why would UK firms continue to ignore productivity enhancing innovations when the macroeconomic outlook looked reasonable?

And of course in 2014 UK productivity growth was positive. This brings me to my second point, which follows from this quote from the FT article:

“In the Budget, both the OBR and Mr Hammond are likely to stress that the downgraded forecasts do not reflect a new assessment of the damage to the UK economy from Brexit, but a reassessment of likely productivity growth after so many recent disappointments.”

Chris may be right that they will say this, but is it remotely plausible? As my recent post tried to suggest, UK productivity growth can be seen as suffering from three large shocks: the recession following the GFC, the absence of a normal recovery as a result of austerity, and then Brexit. The first two of those shocks led to a period of intense uncertainty, causing UK firms to put on hold any plans to innovate. Just as they thought things had returned to a subdued version of normal they were hit by the third, Brexit. During periods of intense uncertainty, productivity stalls or may even decline a little, as firms meet any increase in demand by increasing employment but not investing in new techniques. [2]

This story involving uncertainty seems to fit the data. Once the recovery (of sorts) finally began in 2013, productivity growth picked up. That sustained growth came to a halt when the Conservatives won the 2015 election, and the possibility of Brexit began to be an important factor for firms. [3]

These two points are related in the following way. The experience of the 50 years before the GFC suggested that you could hit the economy with pretty large hammers, but it would eventually bounce back. However that may have been contingent on a belief by firms that if policymakers were wielding the hammer (using high interest rates for example) they would take it away fairly soon, and replace it by stimulus. That belief was shattered in the UK by the GFC and austerity, where policymakers decided to keep using the hammer. What little confidence remained was destroyed by Brexit.

Discoveries are still be being made in universities around the world, and we know innovations are still being implemented by leading UK firms. It seems completely far fetched to imagine the GFC is still having some mysterious impact on the remainder of UK firms such that they refuse to adopt these innovations. A much more plausible story is that we are seeing what happens when most firms lose confidence in the ability of policymakers to manage the economy.

[1] I am on the OBR’s advisory panel, but as our job when we meet once a year is to be critical of OBR assumptions, and as we have no role in producing their forecasts, I think what I say here can be completely objective.

[2] Productivity can initially fall because new employees are not as productive as those who have been working in the firms for some time, for example.
Postscript (7/10/17) For evidence on the impact of Brexit on productivity, see work by Bloom and Mizen here.

[3] An alternative story is that the UK has settled into a new slow growth ‘equilibrium’, where the majority of firms are so pessimistic they hardly innovate at all.      

Defining austerity redux

This is a rather dull post about definitions

In a previous piece I talked about how there is no clear definition of what we mean by austerity, and how different people mean different things. In the context of my ‘General Theory’ paper, I attempted a definition which made precise one strand of common usage. However, if you look at the comments to that post, others were not convinced.

Some recent exchanges on twitter have convinced me that we still need a clear definition, but that my own earlier attempt could be improved. In that earlier post I argued that equating austerity with one type fiscal consolidation - public spending cuts - was inadequate for two reasons. First, why not use ‘public spending cuts'! But second and more important, it would equate such consolidation taken at the height of a boom that did no damage to the economy with cuts in the depth of a recession.

The definition (call it Def A) I suggested was

“fiscal consolidation that leads to a significant increase in involuntary unemployment, or pwerhaps more formally but less colloquially as leading to a noticeably more negative output gap”.

If people wanted to restrict the definition to spending cuts, simply replace ‘fiscal consolidation’ with ‘cuts to government spending’.

One minor change I would now want to make is to remove the reference to involuntary unemployment. For a start unemployment may lag output, and conceivably unemployment could be avoided by workers pricing themselves into jobs, but this does not negate the fact that fiscal consolidation has reduced output and wasted aggregate resources.

However rephrasing the definition (Def B) to

“Fiscal consolidation/cuts to public spending that leads to a significantly more negative output gap”

still involves the problem that the output gap is poorly measured. For example, some think the UK output gap is currently zero, but I would want to apply the term austerity to the current fiscal consolidation. Replacing ‘negative output gap’ by ‘economic downturn’ does not help, and saying ‘in a recession’ actually makes it very restrictive given the formal definition of a recession. Another possibility would be to simply say (Def C) that austerity was

“Fiscal consolidation/cuts to public spending that leads to a significant fall in output”

The trouble with this is it allows austerity to be in some cases entirely appropriate: for example if spending was too high in a boom. Indeed that is the obvious problem with simply denoting austerity as cuts in public spending. There should I think be some connection with the other meaning of austerity i.e. hard times. Reducing spending in a boom is hardly that.

Let me go back to why I had a problem with definition B i.e. why would I want to apply the term austerity to current cuts in spending. The answer is that interest rates are at their lower bound. That suggests an alternative definition (Def D):

“fiscal consolidation/spending cuts that have a negative impact on aggregate demand which monetary policy is unable to offset.”

I prefer definition D to B because it gets to the heart of why austerity is a problem. The key idea is not that fiscal consolidation in some form is always bad or inappropriate, but that it should not take place when monetary policy is unable to offset its impact on output.

One of the criticisms of my original definition B, which also applies to D, is that it rules out the possibility of ‘expansionary austerity’. Instead we would have to call it expansionary fiscal consolidation. Once again, if we want this meaning of austerity to have some connection to hard times, then expansionary austerity seems a misnomer anyway.

I did warn you it was dull, but I really would be interested in comments on all this. Perhaps I should end on one reason why I think it is important. Suppose I asked what part of Labour's 2017 manifesto was anti-austerity? I think many would say the proposed increases in current government spending, but if you take the manifesto at its word that is not anti-austerity, because the spending increases are tax financed. What is anti-austerity, if you accept my definition, are the increases in public investment and the fiscal credibility rule.

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.

Measuring the impact of austerity

Ben Chu has a good article disposing of some of the nonsense ideas associated with austerity (which refuse to die, because they are useful to politicians, and much of the media is generally clueless). Perhaps the most silly, which I encounter a lot, is that the UK has not really endured austerity because debt has been increasing, or some other irrelevant measure has been rising.

If trying to reduce the deficit - what economists call fiscal consolidation - had no adverse effects on the economy as a whole it would not be called austerity. Austerity is all about the negative aggregate impact on output that a fiscal consolidation can have. As a result, the appropriate measure of austerity is a measure of that impact. So it is not the level of government spending or taxes that matter, but how they change.

An obvious measure to use is the change in the deficit itself, generally adjusted for changes that happen automatically because output is changing. I have used that measure many times, because it is produced by the OBR, IMF and OECD among others. But it is not ideal, because the impact of changes in taxes on demand and therefore output is generally smaller than the impact of a change in government spending, because some of any tax increase comes from reduced saving. (This is also true, but perhaps to a lesser extent, of government transfers.)

There is no simple way of dealing with this measurement problem, because the amount of any tax increase people will find from their savings will depend in part on how long they expect taxes to be higher. As a result, some people prefer to focus just on government spending to measure fiscal impact (although the data you will easily find is government consumption, and as fiscal consolidation normally involves cuts to government investment it is important to add that on). However it is also possible to apply some simple average propensities to consume from tax cuts and transfers to get a fiscal impact measure.

This is what the Hutchins Center fiscal impact measure does for the US.

These are not multipliers (so are different from what the OBR does for the UK, for example [1]), but just the direct impact of government spending and taxes on aggregate demand and hence GDP. The average total impact is something like 0.4%, so this would be fiscal policy that was in this sense neutral.

Compare the mild 2001 recession with the much larger 2008/9 recession. In both cases during the recession fiscal policy was strongly counter-cyclical, helping to reduce the recession’s impact. After the 2001 recession ended, fiscal policy continued to support the recovery for around two years: these were the Bush tax cuts. The recovery in GDP was reasonably strong: growth from 2003 to 2005 of 2.8%, 3.8% and 3.3%.

In 2010, we had a much deeper and longer recession, but the fiscal support was only marginally greater than 2001, despite interest rates being stuck at their lower bound. On this occasion fiscal support was strongly opposed by the Republicans. It continued for another year and a quarter, and then became strongly contractionary from 2011 to 2015. GDP growth was slower than in the previous recovery, despite the deeper recession: from 2010 to 2014 2.5%, 1.6%, 2.2%, 1.7%, 2.4%. This is not surprising, as fiscal policy was reducing GDP by around 1% during 2011,2012 and 2013, rather than adding the normal 0.4%.

The speed and extent to which austerity was applied after the Great Recession was very unusual: the textbook says secure the recovery first, allow interest rates to rise, and then worry about government debt. There was no economic justification for switching to austerity so quickly after 2010: the motivation (as in the UK) was entirely political. It produced the slowest US recovery in output since WWII. (This is a very useful resource in comparing US upswings.) As I showed here using simple calculations, if total government spending from 2011 had remained neutral instead of becoming sharply contractionary, US output could easily have got close to capacity (as measured by the CBO) by 2013.

To subtract 1.5% from GDP would not matter if something (consumption, investment or net exports) filled its place. But that will only happen by chance or because of a monetary policy stimulus, and monetary policy was stuck in a liquidity trap. This is the real crime of austerity. Decreasing demand and output just when the economy is beginning its recovery from the deepest recession since WWII is as foolish as it sounds, but to do this at just the time that monetary policy was unable to effectively fight back is macroeconomic madness. As I will argue in later posts, it looks increasingly likely that this has made us all permanently poorer.

[1] If somebody publishes similar estimates for the UK, please let me know. Personally I think it makes more sense to publish data like this than use a multiplier based analysis, simply because these measures are more direct, and involve fewer ‘whole economy’ assumptions. Crucially, there are no implicit assumptions about monetary policy being made. It would be interesting to know why the OBR decided not to take this approach.

Austerity Confusion, or why the Tories are trapped by austerity

What do we mean by an end to austerity? There seem to be two meanings being used currently. The first, used by Conservative politicians in particular, is equivalent to what economists call fiscal consolidation: cutting spending (or raising taxes) in order to reduce the deficit (as a share of GDP). However when Labour say they will end austerity, I think they mean something even simpler: to stop (and reverse) cuts to government spending as a share of GDP.

The confusion has been compounded by two factors. First, Conservative Chancellors have mainly used cuts to spending rather than tax increases as part of their austerity programme. Second, they have also justified cuts to spending that were needed to finance tax cuts (corporation tax, inheritance tax etc) as austerity, which is a clearly not fiscal consolidation and is simply a reduction in the size of the state.

How do I know Labour do not mainly mean ending fiscal consolidation when they talk about ending austerity. Just look at their GE2017 manifesto. That involved various increases in current spending financed entirely by higher taxes (including corporation and inheritance taxes). This manifesto, which helped gain them such rapid popularity in the GE2017 campaign, was a proposal to increase the size of the state.

I explore in a shortcut piece for the London Review of Books how this ambiguity is a serious problem for the Conservatives. Even if they ended austerity completely (made no further attempts to reduce the deficit), Labour would be able to offer a much more attractive fiscal package to the voters because Labour are prepared to undo the tax cuts the Conservatives have made over the last seven years. 

How do I know such a package would be attractive? Here I reproduce my favourite chart from the latest Social Attitudes survey that I talk about in the LRB piece.

The ‘neoliberal’ line is in yellow at the bottom. In 2010 nearly 90% either wanted to keep the size of the state the same or increase it. It is why the Conservatives were forced to use what I call deficit deceit - pretending cuts to the size of the state were about cutting the deficit - to pursue neoliberal goals (see my last post). By using deficit deceit to reduce the size of the state, when concern about the deficit was bound to wane, the Conservatives have condemned themselves to current unpopularity as voters realise what they are losing.

Why didn't this stop the Conservatives winning the 2015 General Election? Here is a YouGov poll that explains why.

In 2015 more people blamed Labour that the Conservatives for spending cuts. This was translated into views about economic competence because the Conservatives, with the help of mediamacro, made reducing the deficit the key variable in judging economic policy. We are now in a period where this narrative still has an influence but it is no longer enough to win an election. The Conservatives dare not throw it away because many voters still believe it. They have become trapped by their own austerity policy and the reduction in the size of the state that went with it..

Was Neoliberal Overreach Inevitable?

In June 2017 a member of the hard left of the Labour party, reviled by the right and centre for his association with left wing leaders and movements around the world and for his anti-nuclear views, in a few short weeks went from one of the most unpopular party leaders ever to achieving the highest vote share for his party since Tony Blair was leader. While this unexpected turn of events was in part the result of mistakes by, and inadequacies of, the Conservative Prime Minister, there is no doubt that many Labour voters were attracted by a programme that unashamedly increased the size of the state.

Contrast this with the United States. A Republican congress seems intent on passing into law a bill that combines taking away health insurance from a large number of citizens with tax cuts for the very rich. Let me quote a series of tweets from Paul Krugman:

“The thing I keep returning to on the Senate bill is the contrast between the intense hardship it imposes and the triviality of the gains. Losing health insurance -- especially if you're older, low-income, and unhealthy, which are precisely the people hit -- is a nightmare. And more than 20 million would face that nightmare. Meanwhile, the top 1% gets a tax cut. That cut is a lot of money, but because the 1% are already rich, it raises their after-tax income only 2 percent -- hardly life-changing. So vast suffering imposed to hand the rich a favor they'll barely even notice. How do we make sense of this, politically or morally?”

Or to put it another way, 200,000 more deaths over the next ten years for a marginal increase in the after tax income of the 1%. This is no anachronism created by a Trump presidency, but an inevitable consequence of Republican control of Congress and the White House.

Although these two events appear to be in complete contrast, I think they are part of (in the US) and a consequence of (in the UK) a common process, which I will call neoliberal overreach. [1] Why neoliberal? Why overreach? Neoliberal is the easy part. Although some people get hung up on the word, I use it simply to refer to the set of ideas associated with Ronald Reagan and Margaret Thatcher in the 1980s. That includes the goal of reducing the role of the state in many areas of society, including its role in either replacing or regulating markets and taxing individuals (see Kansas), particularly reducing taxes for the well off.

Overreach is more contentious. I use the term because I think, in the UK at least, the period from the 1990s until the global financial crisis could be described as a stable neoliberal hegemony. By this I mean that governments largely accepted the transformations that took place in the 1980s, even when Labour or Democrats were in power. Of course changes did occur. In the UK Labour were prepared to involve the state in alleviating poverty in ways that Thatcher never contemplated, but Labour’s concern did not extend to the other end of the income distribution, and the income share of the 1% continued to rise. They were prepared to see an expansion in the size of the state to meet a natural increase in the demand for health, but they also experimented with bringing in market elements into state provision. However none of these changes compared in size to what went before or came afterwards. (As Tom Clark argues, Labour did not change the [essentially neoliberal] political discourse.)

This period was also characterised in the UK and US by macroeconomic stability: inflation had been contained, perhaps through the delegation of monetary policy to central banks, and growth remained strong such that the high levels of unemployment seen in the 1980s gradually disappeared. This was the ‘great moderation’.

It was undone by a major flaw in the neoliberal project: the self-destructive nature of an unregulated financial sector. The reaction to that, if the left had remained in power, might have been greater controls on finance and perhaps some attempt to reduce inequality (as the two are related). But the left lost power, and we got what I call neoliberal overreach.

Neoliberal deceit in the UK

By 2008 the conversion of the right in the UK to neoliberal ideas was largely complete. This meant that they were determined to continue where Thatcher had left off. But they faced what appeared to be an insurmountable problem: voters wanted the NHS (and other public services) and they wanted more of it partly because they were getting older and wealthier. The recession gave the right the opportunity to continue the neoliberal project by deceit, using two mechanisms.

The first was austerity, which I have talked about many times, but alas what I and other macroeconomists say has so far reached only a small minority (a minority which, importantly, includes the Labour party). What I call deficit deceit was the pretence that we needed above all else to cut spending (that would reduce the size of the state) because otherwise the markets would not buy the government’s debt. There was never any real evidence to back this story up, and plenty to suggest it was nonsense. The fevered imagination of some market participants who turned out to be wrong does not count as evidence. But the politics to make deficit deceit possible was all there: a recent financial crisis, consumers cutting back on debt themselves, a Treasury worried as Treasuries do, a central bank head who acted as central bank heads often do, and a Eurozone crisis that mediamacro made no attempt to understand.

The second deceit was immigration. Elements in society are apt to blame immigrants at a time of rising unemployment and falling real wages, and terrorism gave this an extra twist. The right and their supporters in the press had decided before the crisis that they could exploit fears over immigration to their advantage, and after the recession this became a more powerful weapon. They talked about how immigration was responsible for reduced access to public services and falling real wages, and they promised to bring levels of immigration down. It was deceit because those in charge knew full well that immigration benefited the economy in various ways and as a result they had no intention of really controlling it. But, as with austerity, the deceit worked: so much so that an already weak opposition appeared not to know how to respond.

Some may disapprove of the language I use here. Should a normally sober Oxford macroeconomist talk about political parties deliberately deceiving the electorate? It is not a view I have adopted lightly, but when a Chancellor repeatedly argues that public spending must be cut to meet deficit targets at the same time as reducing inheritance or corporation tax, or a Prime Minister continually repeats the lie that immigration reduces access to public services, what other conclusion can you come to? They could get away with this deceit because academic economists (the majority of whom know that austerity would reduce output, and that immigration improves the public finances) are largely ignored by the media.

Austerity and the deceit required to achieve it was neoliberal overreach in the UK. Austerity quickly became a disaster because it was done at just the wrong time, when monetary policy was unable to offset its effects. That hurt the economy a lot. Whether GDP was reduced by a few percentage points temporarily or permanently we may never know for sure. But for the political reasons I have already outlined, combined with feeble opposition, the Conservatives got away with it sufficiently to win a general election in 2015.

Populism and anti-neoliberalism

The deceit over immigration was also key to a second disaster: the vote to leave the EU. Although the case to Remain in the EU was led by the Prime Minister and Chancellor, neither could combat anti-immigration rhetoric with a positive case because of their earlier deception. For this reason alone you could also label Brexit as a consequence of neoliberal overreach. More importantly, factions on the right that actively campaigned for Brexit did so in part because they believed they could only achieve their regulation free neoliberal nirvana by doing so.

As Jan-Werner Müller writes

“The image of an irresistible populist “wave” was always misleading. Farage did not bring about Brexit all by himself. He needed the help of established Conservatives such as Boris Johnson and Michael Gove (both now serve in Prime Minister Theresa May’s post-election cabinet). Likewise Trump was not elected as the candidate of a grassroots protest movement of the white working class; he represented a very established party and received the blessing of Republican heavyweights such as Rudy Giuliani and Newt Gingrich.”

It would be wrong to say that Brexit or Trump represent an evolution of neoliberalism. Both promote strong restrictions to trade, and so it would be more accurate to view Brexit as a split within neoliberalism. [2] What is clearer to me is that populism is a consequence of neoliberalism as reflected in the policies of the political right. In the UK immigration was used as a scapegoat for the impact of austerity, which fuelled the Brexit vote. In the US one of the first acts of Reagan was to repeal the Fairness Doctrine, which led eventually to the precursor and cheerleaders for Trump: talk radio and Fox news. In addition neoliberalism demonises any kind of regional or industrial strategy designed to alleviate the impact of globalisation.

Why was it Corbyn who led the revolt against austerity in 2017 rather than Miliband in 2015? One obvious explanation is that the more ‘moderate’ left in both the UK, much of Europe and the Democratic establishment in the US had become compromised by neoliberal hegemony. Instead it required those who had stayed faithful to socialist ideas together with the young who had not witnessed the defeats of the 1980s to mount an effective opposition to austerity and perhaps neoliberalism more generally. [***]

I am less familiar with the details of US politics, which are clearly different in some ways from the UK. The way the Republican party has co-opted both race and culture to their cause is different and clearly crucial. But there are plenty of similarities as well. Both countries have had austerity combined with tax cuts for the rich. Both countries have a right wing media which politicians can no longer control, leading to Brexit and Trump respectively. Bernie Sanders, like Corbyn, came from nowhere preaching socialism, but unlike the UK the established Democratic party halted his rise to power.

Was Overreach Inevitable

I’m not going to speculate whether and by how much this neoliberal overreach will prove fatal: whether Corbyn’s ‘glorious defeat’ marks the ‘death throes of neoliberalism’ or something more modest. Instead I want to ask whether overreach was inevitable, and if so why. Many in the centre ground of politics would argue that it would have been perfectly feasible, after the financial crisis, to change neoliberalism in some areas but maintain it in others. It is conceivable that this is where we will end up. But when you add up what ‘some areas’ would amount to, it becomes clear that it would be hard to label the subsequent regime neoliberal.

I think it is quite possible to imagine reforming finance in a way that allows neoliberalism to function elsewhere. Whether it is politically possible without additional reforms I will come to. If we think about populism, one key economic force behind its rise has been globalisation (see Dani Rodrik here for example). If we want to retain the benefits of globalisation, then counteracting its negative impact on some groups or communities becomes essential. Whether that involves the state directly, or indirectly through an industrial strategy, neither of those solutions is neoliberal.

Then consider inequality. I would argue that inequality, and more specifically the extreme wealth of a small number of individuals, has played an important role in both neoliberal overreach (in the US, the obsession within the Republican party with tax cuts for the wealthy) and populism (the financing of the Brexit campaign, Trump himself). More generally, extreme wealth disparities fuel political corruption. Yet ‘freeing’ ‘wealth creators’ of the ‘burden’ of taxation is central to neoliberalism: just look at how the loaded language in this sentence has become commonplace.

Indeed it could well be that gross inequality at the very top is an important dynamic created by neoliberalism. Piketty, Saez and Stantcheva have shown (paper) how reductions in top rates of tax - a hallmark of neoliberalism in the 1980s - may itself have encouraged rent seeking by CEOs which makes inequality even worse. Rent extractors naturally seek political defences to preserve their wealth, and the mechanisms that sets in place may not embody any sense of morality, leading to the grotesque spectacle of Republican lawmakers depriving huge numbers of health insurance to be able to cut taxes for those at the top. It may also explain why the controls on finance actually implemented have been so modest, and in the US so fragile.

The other key dynamic in neoliberal overreach has to be the ideology itself. In the UK surveys suggest that fewer than 10% of the population favour cutting taxes and government spending to achieve a smaller state (see my next post). There is equally no appetite to privatise key state functions: indeed renationalisation of some industries is quite popular. Yet the need to reduce the size and scope of the state has become embedded in the political right. Given that, it is not hard to understand the motivation behind the twin deceits of austerity and immigration control by Conservative led governments.

The dynamic consequences of extreme inequality and an unpopular ideology both suggest that neoliberal overreach may not be a bug but a feature.

[1] Reasons why this discussion might focus on the US and UK are discussed here.

[2] Among those who voted for Brexit, the two main groups were social conservatives who had a social rather than economic fear of immigration and the left behind who were deceived into thinking it was the EU and immigration that was behind their plight rather than neoliberalism itself. Liberal leavers may amount to little more than a few MPs and small businesses. Even among Conservative MPs, it is not clear that neoliberalism was the key factor in determining their position on Brexit.

***Postscript 06/07/17  It came out after I had written this post, but this article by William Davies expresses much better what I was trying to say in this paragraph.  

When capturing the middle ground works or fails

In 2015 Labour went for austerity-lite compared to Osborne’s full on austerity. It failed. Yet in 2017 Labour went for Brexit-lite, and it worked. Why does capturing the middle ground (often called triangulation) sometimes work and sometimes fail?

The theory behind why it should work is straightforward. Suppose you can grade an issue from 1 to 10, and we have a two party system: you can vote Labour or Conservative. In the case of Brexit, 1 would be staying in the EU and joining the Euro, and 10 would be No Deal. Now suppose voters are evenly distributed along this spectrum of possibilities: 10% want No Deal (10), 10% want a deal where we leave with minimal trade deals with the EU (9) and so on. An even distribution means 50% of the population want options between 1 and 5, and 50% want options between 6 and 10. Suppose the Conservatives go for option 8, which in this case is a fairly hard Brexit. Suppose Labour actually believe in option 3. What option should they campaign for in an election?

If all voters are well informed and are certain to vote, and there are no third parties, the answer is to go for the middle ground. If they campaigned for 3, they would capture only 50% of voters (those who prefer options 1 to 5), and the Conservatives would win those preferring 6 to 10. But if they campaigned for option 7, they would capture 70% of the vote. Indeed those voters who understood triangulation might have reasoned that although Labour were campaigning for 7, they were only doing that to appease some of their traditional core voters, and if elected they would actually go for a more EU friendly option.

You could read Labour’s position on Brexit in GE2017 as being very close to the Conservatives. But the language that stressed the importance of the economy allowed those who prefered options 1 to 7 to think Labour would be better than the Conservatives. Labour did indeed appear to go for something like option 7 in GE2017, and it seems to have worked: the swing to Labour was higher in areas that voted to Remain (their did not alienate voters who wanted options 2 or 3), but they captured some Leave voters as well. Whether that Labour positioning was based on triangulation or did actually reflect the leadership's true beliefs I honestly do not know.

Compare this to the 2015 election and austerity, where option 1 is wanting fiscal stimulus and more public investment because interest rates were stuck close to their lower bound, and 10 was an even sharper austerity than George Osborne was proposing. Instead he proposed option 8, and Labour went for something more moderate: on paper maybe 6, but they kept quiet about the difference so maybe in practice 7. Labour’s positioning is generally thought to have failed. Not only did they lose the election, but afterwards an ‘outsider’ became party leader on a platform that was clearly anti-austerity.

So why did triangulation work with Brexit in 2017 but fail with austerity in 2015? There are many ways of changing this very simple model to resolve this puzzle. My current favourite is as follows. What is missing from the linear scale of options outlined above is any account of the framework by which voters judge competence, and the option of not voting. In 2015 the dominant narrative was the one set out by the Conservatives: austerity was required because they were clearing up the mess left by Labour. By positioning themselves as austerity-lite Labour in effect did nothing to challenge that narrative. This had two consequences. First, those who took a strong anti-austerity line might have been tempted not to vote. Second, those in the middle did not go with Labour because Labour’s competence was questionable: they had caused the deficit problem in the first place.

So Labour’s positioning in 2015 to capture the middle ground failed. By not challenging the dominant narrative they appeared to accept their alleged past incompetence, and committed anti-austerity voters may have not turned up. In 2017 Labour openly challenged the austerity narrative. That meant they didn’t capture the middle ground, but they did not lose it either. (It should also be added that the middle ground on austerity has probably been shifting as the deficit itself falls.)

In 2017 with Brexit, there was no dominant narrative. As I have remarked before, the country is as divided as it was in the original vote. Labour had two options. It could oppose Brexit, and get the anti-Brexit vote. Or it could attempt to capture the middle ground by accepting Brexit but stressing that they would put the economy first. They, by preference or design, went with the second triangulation option and it seems to have worked.

Why were hard line Remainers not put off from voting Labour as anti-austerity voters may have been in 2015? In part I suspect because Brexit was not the only dominant issue. Labour campaigned on its anti-austerity manifesto, and for many Remain voters this was at least as important as Brexit. This meant that not voting was not an option. There may also have been the realisation that had Labour campaigned to Remain, this would have allowed the Conservatives to make the election a rerun of the Brexit vote, and the distribution of voters by constituency would mean the Conservatives would have won more seats even if the national vote had been evenly split. So in the case of Brexit, but not austerity, triangulation made sense.

Whether this is right or not I have no idea as I am very much an amateur on these issues. I only write about it here because I have not seen this comparison between the two elections made elsewhere. To the extent that Labour’s triangulation on Brexit was tactical, it means if (following May's failed election) the Conservatives move to a softer Brexit (from 8 to 7, say), it is important that Labour moves as well (from 7 to 6) to keep their Remain voters on side.