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) 

Economic Competence Revisited

My last post was designed to show clearly that the UK has not been a strong economy since the Conservatives started running it. Now I would be the first to say that this proves nothing about how competent the Conservatives are. It may be just bad luck. My point was about the media debate. This should be about whether it is the government’s fault that we have a weak economy, or alternatively whether they have done the best they could in the circumstances. Instead of that discussion, we have mediamacro’s presumption that we have a strong economy when clearly we do not.

The political debate should really be about economic competence. Mediamacro assumes that the Conservatives are more competent at running the economy because that is what the polls say, and the polls say that in part because mediamacro assumes it. It is a self-reinforcing loop, where the last thing the media thinks of doing is asking academic economists. How would I, as an academic macroeconomist, assess competence when it comes to running the macroeconomy?

The obvious thing to do is to look at key macroeconomic decisions made by governments, and how they turned out. I would be particularly hard on governments when they chose to go against the prevailing academic consensus, and this choice did not turn out well. I have written about this before on a few occasions: see here and here for example. Let me summarise why I think, once again, it is the Conservatives rather than Labour who have a lot of explaining to do.

We can start with monetarism, which in its most basic form is setting policy according to movements in monetary aggregates (the ‘money supply’). It was a short lived failure. A particular failure was the 1981 budget, raising taxes in the middle of a recession, which was famously opposed by 364 economists. The economists were right: the recovery (properly defined) was delayed by 18 months. This is not the story told by mediamacro, but it is an account that fits the facts.

The next economic disaster was the Lawson boom of the late 1980s, which combined a monetary and fiscal stimulus that increased inflation. I was once told by someone close to decisions at the time that Lawson wanted to reduce the top tax rate to 40% in 1988, and it was thought to be politically expedient to combine this was a standard rate cut even though we were in the middle of a boom. Monetary policy involved shadowing the DM, so could not counteract the fiscal stimulus and other inflationary pressures.

By 1990, the Lawson boom was becoming a recession, and the Conservative government decided to formally fix the exchange rate. Their chosen rate was much too high, as the work I carried out with colleagues at NIESR clearly showed. Black Wednesday, when the UK was forced to abandon the fixed exchange rate regime, rightly lost the Conservatives their reputation for economic competence for some time to come.

Between 1992 and 1997 the management of the economy was better, but without any major decisions or events. Widening the definition of policy you can justifiably credit Thatcher with weakening trade union power, but her failure to emulate Norway and establish a sovereign wealth fund from North Sea Oil revenues was a clear mistake.

Under Labour there were three major macroeconomic decisions, and all three were successes. First most academics agree with central bank independence, and I think most would agree that the design of the Monetary Policy Committee in 1997 was particularly good. Second, the decision not to join the Euro in 2003 was clearly correct, which was taken after extensive economic analysis. Third, the decision to embark on fiscal stimulus after the Great Recession was correct, in much the same way as Obama’s slightly later stimulus was correct.

Should we count the financial crisis, and the failure to prevent it happening, as a clear negative against economic competence? I would argue not, as (a) the opposition argued for less financial regulation, and (b) the government did follow the consensus view at the time. If any institution is to blame, it is the Bank of England for ignoring the rise in bank leverage. As to a profligate fiscal policy, this is simply a myth.

The incoming coalition government set up the OBR, which deserves credit just as setting up the MPC under Labour does. However their decision to embark on austerity in 2010 was a huge mistake, which once again probably went against majority academic opinion, particularly as it involved cutting public investment sharply. And then we have Brexit. Although arguably mandated by a referendum, the decision to leave the Single Market and customs union are down to the Conservative government alone.

We will be able to compare the economic policies of the two parties this time when they publish their manifestos. This post is about track records. It shows clearly that Labour tend to get things right, while the Conservatives have created a number of major policy-induced disasters. As with the ‘strong economy’, mediamacro have got it completely wrong about macroeconomic competence. But I’m afraid, as was the case in 2015 and 2016, it will be mediamacro rather than reality that carries the day. That, alas, is how democracy currently works in the UK.  

Breaking the ‘strong economy’ narrative

My last post talked about the gap between the macroeconomic narrative in the UK media (‘mediamacro’) and macroeconomic facts. The gap is created or encouraged to a considerable extent by narratives employed by the political right. So how might that change, to let reality back in?

As with other things, Labour under Miliband had the right idea but did not follow it through. They talked about a ‘cost of living’ crisis, but in doing so they implicitly suggested this was some unfortunate by-product of a strong economy. The aim should be to redefine a strong economy as one that delivers solid real wage growth.

To do so makes perfect sense in current circumstances, when we have just had a policy-induced large depreciation in sterling. GDP measures the output produced in the economy, but not how much people in that economy can buy. Welfare depends on the latter, not the former.

It also makes sense if real wages have fallen because workers have priced themselves into jobs, by in effect discouraging firms to invest in labour saving machinery. Boasts that employment is at record levels make no sense in that situation, because high employment comes from lower wages rather than from additional output. [1]

I have stressed in the past (including my last post) how weak recent UK performance has been by historical standards. But a favourite trick of the government is to make international comparisons, of GDP rather than the more appropriate GDP per head. So how does our economy look if we focus, more appropriately as I argue above, on international comparisons of real wage growth?

Luckily the ILO and Geoff Tily have already done the spade work. Here is a chart for all countries, with blue denoting OECD countries.

International comparison of average real wage growth since the crisis 

Source: Geoff Tily, ILO. 

Among OECD countries the answer is striking: only Greece has seen real wages falls greater than the UK. The UK is second best among the OECD at achieving a decline in real wages! Geoff looks at data from 2008, but a quick check suggests the result holds good if we start in 2010 instead.

The data in this comparison only goes to 2015. You could, rightly, argue that 2016 was a better year for the UK, but then you would have to address what will happen to real wages this year and next. [2] You could argue that this poor performance was a consequence of the 2008 depreciation (which had lagged effects): again you would be right, but the Brexit depreciation which is not yet in these figures is just as large.

Either way this data provides strong evidence of just how terrible UK economic performance has been over the last several years. [3] What is more, unlike GDP, it is data that directly relates to the experience of ordinary people. But as Miliband found out, to quote this data is not enough. What you need to do is start proclaiming that the UK economy under a Conservative Chancellor has performed worse than any other OECD economy besides Greece. Just that, no caveats, no qualifications, no ‘cost of living’ label. Only that way will you begin to shift the narrative that we have a strong economy.

[1] If you are worried that this might help justify calls to reduce immigration, fear not. What they show is that policymakers failed to create an adequate level of aggregate demand: another consequence of austerity.

[2] If we look at the ONS series for real average earnings, normalised to 100 for 2015, it was at 101.8 in May 2010, and in February 2015 it is 100.3, a fall of 1.5%

[3] It has even been fact checked: see here.              

Budget Day Nonsense

For the last several budgets/autumn statements I have agreed to write an immediate response for some media outlet, and have therefore felt obliged to watch either the speech itself, or the media reports on the day. The good news is that no one has asked this year, and so I can ignore all budget coverage until tomorrow. This will leave me better off, because in macroeconomic terms most budget day coverage has over the last seven years been largely nonsense.

I can confidently forecast that today you will hear a great deal, at great length, about how the path of government borrowing has changed since the Autumn Statement. Journalists will ask endlessly whether he has done enough to reduce borrowing, or whether he had enough money to spend more. At the moment this is all utterly meaningless. In fact it is worse than that. It encourages people to think that government budgeting is just like household budgeting. It is, to be blunt, what gave us the disaster that was austerity.

What any macroeconomist should ask of this budget is has the Chancellor done enough to get UK interest rates off the zero lower bound: to get us out of what economists call a liquidity trap. When interest rates have gone as low as the Bank of England feels able to take them, then it has lost control of the economy. That is the situation right now. The only duty of the Chancellor in that situation is to give the Bank back control through a fiscal stimulus. [1] If he does do that the short term deficit and borrowing numbers that go with that stimulus are completely irrelevant. If he does not do that his budget has failed.

That is basic macroeconomics. But you will not hear any macroeconomics from the Chancellor, or most of the mainstream media. The idea that the Bank does macroeconomic stabilisation and the Chancellor does bookkeeping has become embedded in mediamacro, and even seven years in a liquidity trap has not been able to change this. Alas even the IFS, which is so brilliant at everything else, does not do macro and so reinforces the household budgeting metaphor.

Mediamacro will also spend hours talking about the OBR forecasts for this year and next. This too is pointless. I am sure the OBR will do what it normally does, which is put together a short term forecast that is not far from the average of other forecasters. To their great credit, they also forecast GDP per capita. It will be interesting to see who in the media picks that up. No doubt Brexiteers will go on about how great the economy has been in 2016 despite all the gloomy forecasts. There is a simple antidote to this, which any journalist can apply. Note that a great deal of the growth in GDP in 2016 was due to immigration, the same immigration that the Prime Minister has said was the cause of the Leave vote. [2]

What the better journalists focus on from the OBR is its forecast of where trend output is and how fast this trend will grow in the future. That is the only thing that will influence how much the Chancellor thinks he can borrow in future years. It is the only forecast that matters for future budgets, and as I have already noted it should have no influence on the current budget. Note particularly how the OBR has had to adjust its forecasts for future growth and tax receipts as a result of Brexit. (On this, see some good analysis by IPPR’s Catherine Colebrook.)

Of course the individual measures the Chancellor announces (either in his speech or elsewhere) are important. But even here a day’s reflection is useful, to deconstruct the spin and put the measures in context. (Once again, the OBR’s document can be very useful in that respect.) For pretty well anything the Chancellor does on the spending side, one important context is the extent to which he is just reversing the cuts his predecessor ordered. This is why the IFS wisely waits a day before presenting its post-budget analysis.

What I hate most about budget days nowadays is the constant repetition by government politicians, echoed by mediamacro, about not being able to afford improvements to public services. The reality, the detail of which Polly Toynbee sets out clearly, is that this government has managed to cut plenty of taxes which seem to have been affordable. But there is a deeper concern.

As I showed in this post, the performance of the economy since 2010 has been terrible. There has been no recovery, using the proper meaning of the word, from the Great Recession. All this time the Bank has been forced to keep interest rates at or near their floor, and use incredibly inefficient instruments like QE, because the government has kept on cutting spending. It is not normal to cut spending in what should be a recovery phase of the business cycle: at least not normal since the mistakes of the 1920s and 1930s.

In the years immediately following 2010 the government could claim its austerity policies were the international consensus, but no longer. In the Eurozone outside Greece austerity has come to an end and their recovery is gathering pace. In the US the central bank, for better or worse, is raising rates. Only in the UK does austerity continue and the economy continues to stagnate. Which is why I’m glad I do not have to watch lots of people completely ignoring all these points today.

[1] I’m not talking measures that might allow the Bank to raise interest rates by a quarter of 1%. I’m suggesting a stimulus such that members of the MPC say unequivocally rates will need to rise, and the only debate is by how much. Anything less than this just allows the economy to get blown back into a liquidity trap when something mildly bad happens.

[2] As background, GDP per capita increased by just over 1% in 2016, which does not sound so good. Average growth from 2010 to 2016 has been 1.2%, compared to 1997-2010 when the average was 1.4%, a period which included a global financial crisis and the worse recession since WWII. Having to get the deficit down is no excuse for this terrible performance, because fiscal consolidation need not reduce GDP if it is done outside a liquidity trap. This is the basic bit of macroeconomics that both this government and mediamacro fail to recognise.   

Very Serious People and the deficit

I'm glad Paul Krugman liked my General Theory of Austerity paper. But he wonders whether I might be missing something, in not explaining why Very Serious People (VSPs) in the US, or mediamacro in the UK, presume that deficit reduction is always a good thing. The constant call for deficit reduction seems to transcends party politics, and furthermore should be something that the wise always promote.

I do talk about the influence of the City/Wall Street and central banks, but perhaps there is something in addition which I talked about in a recent post: deficit bias. Keynes talked about 'practical men' who tended to absorb some of the wisdom of 'academic scribblers' of 'a few years back'. The wisdom in this case was deficit bias: the tendency that many economists discussed before the financial crisis for deficits and debt to tend to rise over time, across cycles.  Perhaps VSPs and mediamacro have absorbed this particular area of academic analysis?

I think you can tell a similar story about academic scribbling of years past when it comes to the roles of monetary and fiscal policy. In the UK George Osborne argued explicitly that the economic consensus was now that monetary policy should deal with stabilising output and inflation, while fiscal policy makers should look after their own deficit. I have called this the consensus assignment. If he, or his advisors, absorbed this piece of conventional wisdom, so may VSPs and mediamacro.

So the headline academic scribbling was governments should control deficits, not the economy, and they are bad at it. Some of the theories put forward to explain deficit bias involve politicians knowingly deceiving voters by pretending tax cuts or spending designed to capture votes were 'affordable', and relying on general lack of understanding of the government finances to not be found out. That gives VSPs and the media more generally a clear role in providing a public service to help counteract the wickedness of politicians. VSPs might even think it was their public duty to constantly advocate deficit reduction to counter deficit bias.

As they say, a little knowledge can be a dangerous thing. Those of us working on the front line of monetary and fiscal interaction, or who had studied economic history or looked at the lost decade in Japan, knew the conventional assignment broke down when interest rates hit their lower bound. We knew that a liquidity trap was absolutely not the time to worry about deficits, and if you did so you would cause tremendous damage. And we were right.

So if you believe this story, the lesson for VSPs and mediamacro is you really need to talk to economists in the front line more often.

Economists, Brexit and the Media: Epilogue

In a thoughtful piece, Paul Johnson of the IFS says that economists must take some of the blame for not getting our message across. In fact he says: “But it is always a mistake simply to look at the media as a scapegoat. The real failings were with my profession.”

What were these failings. He identifies four. The first is that we have failed to get basic economic concepts across to the public, like that a depreciation does not make us richer. The second is that we have no means of getting our voice across as a collective, rather than as individual voices. Third, most of us cannot respond quickly to important issues. Fourth, we fail to translate impacts on ‘the economy’ into concepts people can relate to.

All of these things are indeed general problems. I have written about the lack of collective view here, so I completely agree that is something we should act on. I also think collective action is the only way economists have of dealing with the first problem (apart from individually writing non-economist friendly blogs of course). I do not think the third was an issue for Brexit. Of course the fourth is always likely to be true (more media training!).

But having said all that, Paul is basically wrong. Even if you had put all these things right, I do not think it would have made any difference to the result. In this referendum economists did do their collective best to inform the public. Failing to have a collective voice was compensated for on this occasion by letters and polls. The lack of knowledge of economics (and in this case Europe) among many political correspondents is not really something economists are in a position to rectify. And right from the start, the long term costs of Brexit were expressed in term of costs for the average household. (And when that was done in a perfectly reasonable way, the media mistakenly told us we were doing it wrong.)

This really is like blaming scientists for not warning enough about climate change. And the problem is not confined to the EU referendum. We saw the same problem arise during the Scottish referendum, when the term Project Fear was first coined as a way of dismissing difficult economic realities. The result of the referendum permitted a degree of complacency. I personally would argue, along with other economists, that much the same happened in the 2015 general election, when mediamacro turned perhaps the worst economic record since WWII plus the promise of a referendum into ‘economic competence’. But that was seen as partisan and so ignored. I don’t think either of those two events had much to do with a failure of the economics profession either, and I take no pleasure in having used that experience to anticipate how this referendum would go.

There are all kinds of people you can blame for ignoring economics expertise. Voters themselves, the politicians that call such advice Project Fear, the tabloid media that keeps expertise from the eyes of their readers (or trashes it), the broadcast media for an obsession with balance, underlying economic conditions that lead people to think it cannot get any worse (a phrase I have heard a number of times since the result). It is a long list, and in order of importance the failures of economists themselves comes a long way down it.

And before I get the inevitable comments about the failure to foresee the financial crisis and the sins of neoliberal orthodoxy, please note that the medium term costs of Brexit come largely from models of trade, productivity and international investment which are very empirical and hardly ideological. But if a respected Financial Times columnist calls economists’ assessment of what that literature implies “the profession’s intellectual arrogance” what can you do. Let’s get real: what we said was ignored, and the reasons for that have very little to do with economists themselves.

The triumph of the tabloids

There is a lot of talk right now about an angry, mainly old working class who used Brexit as a way of kicking back at an establishment that had brought them nothing but grief over the last decade. The Leave campaign managed to channel that into anger at the EU, even though it had precious little to do with the EU. The key is to ask how did that happen, and why did it not happen just one year ago?

In the 2015 general election Labour highlighted the decline in UK real wages, and promised more money for public services. They were defeated - no angry electorate wanting to get rid of the establishment then. Did that electorate feel passionate about European migration? UKIP only managed to get one MP elected. 

In 2015 the electorate voted Cameron back in because they thought the Conservatives were more competent at running the economy, and that Cameron would be a better leader than Miliband. In the last few hours we can clearly see that both beliefs are incorrect, and some of us said it back then. But that cannot be the whole story because that same leader with the same economic competence has just been heavily defeated.

Did people just vote for the higher food and petrol prices that sterling’s depreciation will bring? Of course not. Nor did they vote for a possible recession. They did vote for lower immigration, but only in a small minority of cases because they dislike immigrants. People thought less immigration would lead to a better NHS, more secure jobs and higher real wages. They may get lower immigration, in time, but they will certainly will not get a better NHS and substantially better working conditions as a result.

It is tragic that we have left the EU. But what is equally tragic is that people who voted for that are very quickly going to find out that they were sold a pig in a poke. They have been deceived, and that will only increase the disillusion and disenchantment with the political system. Of course we should blame Johnson and Farage and the rest: the UK has paid a very high price to facilitate political ambition. Of course we should blame Cameron and Osborne for taking the referendum gamble and stoking anger with austerity. But a few politicians alone are not capable of fooling the electorate so consistently. To do that they need to control the means of communicating information.

In 2015 I argued that mediamacro had won it for Cameron and Osborne, and pretty well no one took this seriously. Just a year later, the united voice of economists has been successfully dismissed as Project Fear. Not by the people, but by politicians working together with most of the tabloid press, and a broadcast media obsessed with 'balance'. The tabloid press has groomed its readers for Brexit. If any good is to come out of this, it will involve defeating most of the tabloid press, and then forever reducing their influence. And given the power of that media, this can only be done by a united opposition that is prepared to cooperate in an effort to beat Johnson and Farage.

There is also a very big warning here for the US. Clinton may be ahead now, but do not underestimate the power of the media (which is still giving Trump much more coverage) to turn that around.

Brexit is perhaps the first major casualty of the political populism that has followed the financial crisis and austerity. That populism triumphed in the UK because the establishment underestimated its power and did nothing to tackle the resentment on which it feeds and the misinformation on which it thrives. It has been strong enough to turn a traditionally outward looking nation into one that turns its back on its neighbours. The leaders as well as the people of other countries should not make the same mistake as the UK just made.

Economics reporting without any economics

Mike Berry explains in this article how the UK media began to see the increase in the deficit in 2009 as a serious problem, and sometimes as a crisis. The government were “court[ing] disaster by borrowing too much”. In terms of basic economics - the economics that anyone doing Econ101 (a first year undergraduate course) would know - there was nothing surprising or problematic about a rising deficit in a recession. It is what you expect to happen. The UK deficit hit record levels because it was a record recession. There was no evidence whatsoever that financing this deficit might be a problem: again basic Keynesian economics shows how in a recession an increase in the supply of government debt is accompanied by an increase in the private sector’s demand for financial assets. [1]

It was a case of economics reporting without any economics. It is a bit like a weather forecaster who reports the weather without any reference to the time of year. (In the Autumn they say ‘Its getting colder and colder - at this rate in nine months time all the rivers will freeze over’) Add politics and you have a dangerous mix, particularly when the partisan press has a significant influence on the non-partisan media.

I have sometimes put this down to a lack of economic knowledge among most political journalists. Of course political journalists talk about economics a lot, yet there seems to be a curious lack of interest in what those that study the subject have to say. I find the story of our ‘lost’ Brexit letter, which I summarised in this piece for The Conversation yesterday, rather scandalous: the mission to educate and inform thrown out of the window. [2]

Which I guess is one reason I started writing a blog. I say I guess because it all happened rather accidentally, so I never had any clear plan. Its success really did surprise me, and I soon realised that I had multiple audiences: many economists in the big economic institutions, but also many interested non-economists. It makes writing challenging and I know I often fail to adequately explain, but I was encouraged by whoever wrote the commentary on my blog in this knowledgeable list of the 100 top economics blogs.

But the people who most need to read economics blogs are I suspect one group that fail to do so: political journalists who talk about economics all the time, and the people who write and research economic news. It is not who appears on Newsnight debates that concerns me, but the unwritten assumptions of those who decide what is news, and write news bulletins. It was these people who decided that the growing deficit in 2009 was ‘courting disaster’, and made the tragedy of austerity possible.

[1] One comment I often get when I say this is that a good part of that deficit has proved to be structural. But if that is the case it is because a large part of the fall in GDP relative to trend following the recession seems to have been permanent. That means you do need to worry about the deficit at some point (after the recession is over), but your immediate focus should be on why GDP has departed from previous trends.

[2] In case you are unconvinced of this: the economic cost of Brexit is critical for most voters, the Remain campaign says this cost will be large but Leave dispute this, and who knows most about the basis and validity of the large cost claim?        

When the media is biased against the facts

When I write about what I call mediamacro, which includes bad reporting of macroeconomic issues by the media, I often receive comments suggesting that the importance of the media’s bias against Labour is exaggerated, and anyway there is nothing that can be done about it. Now of course the print media is biased against Labour, and what evidence we have also suggested a BBC bias against Labour under Miliband. But most of the time when I complain about BBC and other non-partisan media reporting on macroeconomic issues, it is not a bias against Labour that concerns me, but a bias against the facts.

Take the proposition that austerity was required because Labour borrowed too much. That proposition is simply false. The increase in the government’s deficit occurred in 2008/9 and 2009/10 as a result of the recession caused by the global financial crisis. As I noted most recently here, the Labour government before the recession was clearly not profligate in the normal meaning of that term. So when Conservatives constantly talk about having to clear up the mess Labour left, and this goes unchallenged in the media, that has the effect of legitimising a false statement.

What we have in this case is a variation on what they call in the US a ‘shape of the earth: views differ’ style of reporting. In that case one side claims the earth is flat and the other side says it is round, and the media in an effort not to appear politically biased report it as a disputed fact. If you think that example is too wild, think about climate change, or maybe wait until the US election where Trump is one of the two candidates. Was Obama a US citizen: views differ.

What we get as a result is a bias against the facts. In the case of Labour and the deficit, because Labour chose fatefully not to challenge the Conservatives on this, the media takes this as confirmation that it must be true rather than checking the facts themselves, or shy away from presenting the facts because that would be seen as ‘too political’. Myth then becomes a fact that even some Labour MPs start believing, and when someone actually stands up for the facts they are assumed to be dishonest or a slightly mad professor. So the BBC fails in its mission, which is to inform and educate as well as entertain.

I was going to advertise my talk in Bristol at this point, which will also explain how this failure played a major role in the 2015 election, but I see that it is now sold out. If there is sufficient demand I will write up what I say and publish it here. 

Where would you get the money from?

In the recent furore in the UK over tax credits, I do not recall any government minister being asked the following question by a journalist: why don’t you just borrow more? Yet to any economist that is the most sensible, and indeed obvious, question to ask.

I just do not think most journalists (and I’m tempted to write and therefore politicians) have yet realised this crucial difference between austerity in 2010 and austerity now. [1] In 2010 debt to GDP ratios were rising fast, everyone was talking about market panic, so people like me who thought deficits should be larger had some explaining to do (although, as Ben Bernanke recently said, we were right). But now austerity already enacted has stabilised debt to GDP ratios, not just in the UK but in the US and Euro area. Over the next five years debt to GDP ratios in the UK will be falling.

This means that further austerity is no longer about stabilising debt and an imagined market panic. Instead it is about an obsessive need to cut debt to GDP really fast, or more likely a desire to shrink the state. It isn’t primarily about Keynesian economics any more [2], but instead about any kind of economics. Remember there are no economists prepared to defend Osborne’s fiscal charter. In economic terms the fiscal charter itself is the real embarrassment. The issue is no longer do we increase the level of government debt for the sake of the economy, but do we need to raise tax credits or cut vital public services just in order to cut government debt quickly.

Perhaps the most charitable explanation for this failure of journalism is that most people do not understand some very basic points. Governments running surpluses are rare. Unlike individuals, nearly all governments have always had a large amount of debt. Unlike individuals, nation states live for a very long time. Because the amount they produce also grows over time (real growth and inflation) that means that the ratio of debt to GDP (which is what matters) can stay constant even if they run deficits. For example with debt at 80% of GDP, and a conservative estimate of average 4% nominal growth, the UK’s debt to GDP ratio would stay constant with a deficit of 3.2% of GDP.

3.2% of GDP is a lot of money. It means the government could run deficits of £60 billion today (£70 billion by 2020) and not raise the debt to GDP ratio. By comparison, the now derailed cuts to tax credits were worth less than £5 billion, and the spending review is trying to save £20 billion.

So here is a simple exam question for journalists. If any politician over the next 5 years proposes not to cut some item of expenditure, or not to raise some tax, and they are asked where is the money to do this coming from, which of the following answers is most convincing?

1. We would generate more tax receipts by making the economy stronger.

1/10. Every political party thinks their policies will raise growth and therefore bring in more revenue, but they should never rely on this happening. In some cases political parties (pretend to?) believe things that we know are untrue, like tax cuts will pay for themselves. Of course some policies, like cutting tax credits, could well damage the economy by reducing labour supply, but again it is highly unlikely that such damage would make tax credits self-funding. So any interviewer would be quite right to raise their eyebrows at this answer.

2. We would save money by making public spending more efficient.
   

1/10. Same problem as above.

3. We would print more money.
   

3/10. Not as silly as it may sound when central banks have already created a huge amount of money (QE) to buy government debt. So no raising of eyebrows (or worse) appropriate in this case. But in the current UK and US context (but not the Eurozone) where central banks are talking about when they might start reducing QE it looks like an answer which is out of its time.

4. We would cut the following expenditure instead, or raise the following taxes, or get rid of the following tax breaks.

8/10. A good answer, particularly if the funding measures are specified and the sums are realistic and not double counted. Works in all seasons. Right now opposition parties have plenty of scope here, as Jolyon Maugham spells out.

5. We would borrow more.

10/10. In the current UK context the best answer, although if you had given this answer in Ireland or Spain in 2004 you would get 0/10. It may seem too easy to be true, but in the rather peculiar circumstances where you have a Chancellor that is pursuing reckless austerity for extremely dubious reasons it would be utter foolishness to turn your back on this gift horse.

Yet most politicians are incredibly reluctant to give that answer, in large part because they think they will get the raised eyebrow treatment from journalists or worse. So we have the crazy situation that no single economist is prepared to endorse the fiscal charter, but pretty well every journalist treats any suggestion that we should depart from it as unacceptable. That just cannot be right.

[1] Andrew Rawnsley rightly points out that the political reaction to the tax credit cuts over the last five months shows how little most journalists know about ordinary people as well as economics (yes, that Westminster bubble), but he fails to note the critical role of the fiscal charter, and so treats the need to find some extra money as self-evident.

[2] There still is a Keynesian argument about risk, but take that away and the case for a more gradual pace of deficit reduction is still very strong.   

The fiscal charter media fiasco

The House of Commons passes into law a fiscal charter which enshrines in the short term another period of severe austerity, and thereafter commits the government to a crazy fiscal rule. The media (with one or two notable exceptions) focus on Labour U-turns and 20 odd abstentions. The Labour leadership have only themselves to blame of course. Which given the way the media operates is true. But does it have to be this way?

Behind the gimmick of a charter is a real policy that will impact on everyone. This policy is the reason the government will make substantial cuts to tax credits for millions of poorer working people, making their already difficult lives substantially harder. George Osborne said as much in his budget speech . Would these people really think that this was of less interest than endless discussion of Labour embarrassment? Who are television news programmes made for: ordinary people who receive tax credits or a Westminister bubble obsessed with political process?

The charter is all about macroeconomics: fiscal policy and fiscal rules. There is an academic literature on fiscal policy and fiscal rules. I have not come across a single non-partisan academic economist who supports this charter, and certainly not one who knows about this literature. For an academic discipline that is always accused of being hopelessly divided, that is saying something. The reasons are not that difficult to get across:

• The policy restricts public investment at just the time that public investment should be high because borrowing and labour are cheap. Its a near universal view among economists that now is the time for higher public investment.
  
  
• Targeting a surplus year in and year out is likely to lead to harmful volatility in tax rates or spending. All macro theory says the deficit in the short-term should be a shock absorber.
  
  
• If the charter is achieved, it will bring debt down ridiculously fast, penalising the current working generation.
  
  
• Fiscal austerity when interest rates are very low is never a good idea

Again with the exception of a few newspapers, I heard nothing of this in media reporting. Instead I heard misleading statements, like you needed surpluses to get debt down when what matters is the debt/GDP ratio. (2% deficits with normal growth will reduce the debt ratio.)

Even the ‘highbrow’ news programmes like Channel 4 news and Newsnight chose to spend most of its time talking about U-turns on either side. No mention of the complete lack of economic support for this charter. On an issue with such important consequences, is that fulfilling a duty to inform? We have millions of hardworking but poor families who will be made substantially worse off as a result of a fiscal rule which no academic economist has supported? Will these families ever find that out? What does that tell us about our media, and our democracy?

Media myths

At first sight the research reported here is something that only political science researchers should worry about. In trying to explain election results, it is better to use ‘real time’ data rather than ‘revised, final or vintage’ data. But as the authors point out, it has wider implications. Voters do not seem to respond to how the economy actually is (which is best measured by the final revised data), but how it is reported to be. (This does not just matter for elections: here is a discussion of some other research which suggests how the way recessions are reported can influence economic decisions.)

Just one more indication that the media really matters. I would not bother to report such things, if this point was generally accepted as an obvious truth. That it is not, in the UK at least, reflects various different tendencies. Those on the right know that the print media is heavily biased their way, and that this has a big impact on television, so they have an interest in denying that this matters (while funding think tanks whose job is in part to harass the BBC about its alleged left wing bias). Those on the centre left often react negatively to a few of those further left who discount all awkward facts by blaming the media. And the media itself is very reluctant to concede its own power.

As an example, here is Rafael Behr in the Guardian talking disapprovingly about Labour supporters:

“I heard constant complaints about failure to “challenge myths” about the economy, benefits, immigration and other areas where Labour is deemed unfit to govern by the people who choose governments. The voters are wrong, and what is required is a louder exposition of their wrongness.”

What is really revealing about this paragraph is what is not there. We go straight from myths to voters, as if no one else is involved. I doubt very much that many who voice the ‘constant complaints’ Behr is talking about think that voters created and sustained these myths all by themselves.

The discussion of issues involving the economy, the welfare system and immigration among most of the ‘political class’ is often so removed from reality that it deserves the label myth. In the case of the economy, I provided chapter and verse in my ‘mediamacro myth’ series before the election. It was not just the myth that Labour profligacy was responsible for austerity, but also the myth about the ‘strong recovery’ when the recovery was the weakest for at least a century, and that this recovery had 'vindicated' austerity. Given the importance that voters attach to economic credibility, I do not believe I was exaggerating in suggesting that the mediamacro myth was in good part responsible for the Conservatives winning the election.

The media is vital in allowing myths to be sustained or dispelled. That does not mean that the media itself creates myths out of thin air. These myths on the economy were created by the Conservative party and their supporters, and sustained by the media’s reliance on City economists. They get support from half truths: pre-crisis deficits were a little too large, GDP growth rates for the UK did sometimes exceed all other major economies.

Myths on welfare do come from real concerns: there is benefit fraud, and it is deeply resented by most voters. But who can deny that much of the media (including the makers of certain television programmes) have stoked that resentment? When the public think that £24 out of every £100 spent on benefits is claimed fraudulently, compared with official estimates of £0.70 per £100, that means that the public is wrong, and we have a myth. (An excellent source for an objective view of the UK’s welfare system is John Hills’ book, which has myth in its subtitle) As I noted in that post, when people are asked questions where they have much more direct experience, they tend to give (on average of course) much more accurate answers. Its when they source the media that things can go wrong. It is well known that fears about immigration tend to be greatest where there is least immigration.

Of course reluctance to acknowledge myths may not be denial but fatalism. Fatalism in believing that voters will always believe that migrants want to come to the UK because of our generous benefit system because it suits their prejudices. Encouraging those beliefs will be in the interests of what will always be a right wing dominated press. Some argue that myths can only be changed from a position of power. But myths are not the preserve of governments to initiate. According to this, over 60% of Trump supporters think their president is a Muslim who was born overseas. [1]

Myths need to be confronted, not tolerated. The initial UK media coverage of the European migrant crisis played to a mythical narrative that migrants were a threat to our standard of living and social infrastructure (to quote the UK’s Foreign Secretary!). This reporting was not grounded in facts, as Patrick Kingsley shows. That changed when reporters saw who migrants really were and why they had made the perilous journey north. It changed when Germany started welcoming them rather than trying to build bigger fences. These facts did not fit the mythical narrative.

The UK government was clearly rattled when it realised that many people were not happy with their narrative and policies. Myths can be challenged, but it is not easy. Policy has been changed somewhat, but attempts are also being made to repair the narrative: to take some of those who have made it to the EU will only encourage more (a variant of the previous European policy of reducing the number of rescue boats), and a long term solution is to drop more bombs. Such idiotic claims need to be treated with contempt, before they become a new myth that the opposition feels it is too dangerous to challenge. Challenging these myths does not imply pretending real voter anxieties about migration do not exist, but grounding discussion and policy around the causes of those anxieties rather than the myths they have spawned.

Yes, the non-partisan media needs to recognise the responsibility they have, and use objective measures and academic analysis to judge whether they are meeting that responsibility. But more generally myths are real and have to be confronted. The biggest myth of all is that there are no myths.

[1] The probability pedants among you who read the link will know that I’m actually making an assumption in writing this!