Remain denial and Labour’s heartlands

When I suggested after the vote a possible way that Brexit might be avoided, I was conscious that I might simply be in denial. I have subsequently been encouraged by others suggesting similar things - first Jolyon Maugham, then Nick Pearce and Gideon Rachman in the FT - but of course they may also be in denial. If you ask a Conservative or Labour politician right now they will say that the referendum result must be respected: to do otherwise appears to disrespect voters. Equally European politicians want to make it clear as quickly as possible that there will be no extra concessions to avoid encouraging other exit movements.

That is why delaying Article 50 for at least a month or two is so important. It allows the immediate passion of the vote to die down, and its immediate economic consequences to sink in. Hopefully that will also discourage other EU countries from going down the same route. By September it will also become obvious to people in the UK that as part of bargaining with the EU it might be a good idea to keep delaying implementing Article 50, and this may also encourage European governments to think about concessions. Maybe.

I don’t think Boris Johnson would have any problems going down that path, once he was elected leader. (In the meantime he will continue to imagine we can have the impossible, because it allows him to get the votes of MPs in his party who are hardline Leavers.) But what about Labour - assuming it still exists of course. Will it worry about losing its ‘heartlands’, and so be tempted to insist that the referendum means free movement is no longer an option?

I think this would be a disastrous political error. Whatever they might propose in the form of controlling EU immigration, they will be outdone by UKIP. That part of the heartlands that really dislikes foreigners are lost to Labour and will not return. (Of course many Conservative voters share similar views.) But if Labour appear to block free movement (and therefore continued EU membership) they will lose a large section of the electorate who voted to Remain. (Remember most Labour voters did vote Remain.) If Labour rejects free movement in any substantive sense, and therefore denies the possibility of remaining, many of these voters will go to the LibDems or elsewhere.

The best Labour can hope for, when it comes to the heartlands, is to capture the many voters who dislike immigration not for itself, but because of what they believe it creates: more competition for public services, and worse working conditions. (For the majority of Leavers immigration is a fear rather than a direct experience.) Labour can target those voters in two ways: by promising more money for public services across the board, but also by proposing a substantial and very visible scheme by which money follows people.

This is also a critical point for anyone aspiring to be Labour leader. Labour heartlands are now the cosmopolitan cities like London, Manchester and Bristol. They see the personal benefits of migration and being part of the EU. They have no problem with, and many happily embrace, policies that divert more resources to public services and the lower paid. But they are highly mobile in the political as well as the geographical sense. If a Labour leader tries to appeal to both this group and voters that want above all else to control EU migration by leaving the EU, then they will fail. 

Defending George Osborne on Brexit once again

When a good part of the electorate are in cloud cuckoo land, you may have to leave planet earth to talk to them.

Economists are pretty certain - as certain as they ever are - that Brexit will reduce medium to long term growth relative to staying in the EU. A large section of the UK public either do not know that, or do not believe them. They have been told, in some cases by people that should know better, that these assessments by economists are ‘just another forecast’. They are told that economists cannot forecast one year ahead, so how can they possibly know what will happen in 10 years time. [1]

Against this they have the certainty that you cannot control EU migration from within the EU. They feel intuitively that austerity was the right thing to do, and the government confirms this, so the pressure they see on public services must be due to immigration. The papers they read say this day in and day out, and never mention that migration helps the public finances. And then there is the money - however much it is - that we would certainly save by not paying into the EU budget.

As a Chancellor you know this is fantasy. You know the OBR will take account of consensus opinion after Brexit and revise down their projection of UK trend growth over the next decade or two. You know that will inevitably mean lower tax receipts, so you will have to raise taxes or cut spending at some point. But you also know that if you try and add realism, by saying this might not have to happen immediately (and should not happen immediately if Brexit causes a short term recession), you just muddle the message. So to bring home to people this is not just ‘another forecast’, you talk about an emergency budget immediately after Brexit.

Is that scaremongering? Well it is not in the same league as pretending we will soon be ‘flooded’ with Turkish migrants because they are about to join the EU.

When Jeremy Corbyn was asked how he rated his enthusiasm for staying in the EU out of 10, he said 7 to 7.5. It was an honest answer. But the general consensus was that it was not a good answer in terms of the politics of the moment. He needed to send a ‘clear message’ that we needed to stay in the EU, and so should have avoided answering the question. All this makes me glad I’m not a politician. But as far as George Osborne is concerned, I think he just sent a ‘clear message’.

[1] Just in case it needs spelling out, assessments of the long term impact of Brexit are counterfactuals, or conditional forecasts. Of the ‘if the supply of apples falls, their price will go up’ kind. They are much less uncertain than the unconditional forecasts about what will happen to inflation and growth in a year or two.  

How to avoid Brexit

My initial fears about how the EU referendum would play out appear, unfortunately, to have been realised. The debate over the size of the economic costs has been turned into Project Fear by Brexit campaigners (with the media’s help), leaving most voters to believe they would be no worse off if we left. Media coverage has been dominated by Conservative politicians and political commentators, rather than those with some expertise who might have been able to convince the public that the costs of Brexit were not just another macroeconomic forecast. Among all the tedious noise of claim and counter claim, one apparent fact stands out: we cannot control EU immigration from within the EU. How can Conservative leaders who have pandered to popular concerns about immigration with impossible targets now convincingly turn around and say immigration isn’t really so important? To do so would lack credibility, so they have not even tried.

Just as in the Scottish independence referendum, it is going to be up to those who are not Conservative politicians to save the day for Remain. One way to do that would be to take the immigration issue and play on the general public distrust of politicians. [1] Ask this: if we Leave, why do you think those in charge will really cut immigration from the EU? After all, net immigration into the UK from outside the EU is at least as high as from the EU, and the UK has complete control over non-EU immigration. Yet non-EU immigration has hardly fallen since 2010, and is itself way above the government’s own target.

There is a simple reason that Conservative politicians have not brought non-EU immigration down, and that is because the costs to the economy of doing so clearly outweigh the benefits. They continue to pretend they are trying to bring immigration down (and doing some harm in the process) only because immigration is a convenient scapegoat for the impact of their own policies.

If we cut immigration, it would not ease pressure on public services, because on average migrants - because they are young - pay more in taxes and utilise public services less than non-immigrants. In fact the reverse would happen: a larger government deficit would see more cuts to the NHS and to tax credits. As Conservative MP Dr Sarah Wollaston, who defected from Leave to Remain, said: “If you meet a migrant in the NHS, they are more likely to be treating you than ahead of you in the queue.” Yes of course we could train more doctors and nurses, but the politicians in charge of Leave and who would be running things after Brexit have been reducing the share of national income spent on the NHS.

Cutting immigration might in itself directly improve the pay of low earners if the numbers of jobs remained the same. But the number of jobs would not remain the same. Both UK and overseas companies would take their jobs abroad so that these companies benefited from being inside the single markets. The net outcome for British workers would almost certainly be worse. [2]

Leaving the EU does not give UK voters control over their border and who comes in. It gives control to the politicians running the Leave campaign. Politicians who have so far cut spending on the Border Force budget. In particular do you trust Boris Johnson, whose main interest in supporting Brexit is that it will let him rather than George Osborne be the next Prime Minister, and who has argued in the past that low immigration could lead to economic stagnation?

This referendum is about trust. Do you trust 9 out of 10 economists who say that Brexit will be bad for the economy, or do you trust the politicians who say they will cut immigration if you Vote Leave, but have failed to significantly reduce immigration from outside the EU over the last six years?

[1] This line of attack is partly suggested by this post by Jonathan Portes, but also by the finding here that although immigration is the main issue for those voting leave, they are somewhat divided on how much Brexit will solve the ‘migration problem’. See also this and this. A worthy but ineffectual alternative is to stress the benefits of immigration head on. Desirable though that might be in the longer term I don’t think you can turn around the ‘received wisdom’ in 10 days. An unwise alternative is to emulate what the Conservatives did, which is to say that we need to convince the EU that migration needs to be controlled more strongly than it is at present.

[2] I suspect arguing about the size of the impact of immigration on low pay (is it large or small) will achieve little, particularly as reasonable opinions differ. It is a bit like arguing over the £350 million a week figure: it plays into Leave’s hands by focusing on the negative (there is a negative effect of immigration on low pay, and there is a net contribution to the EU).

The financial crisis, austerity and the drift from the centre

John Quiggin starts a recent post on Crooked Timber (more below) with the warning ‘Amateur political analysis ahead’, and that applies even more to what follows. I start with the UK, but then broaden the discussion out.

A recent piece by Steve Richards for The Independent has some similarities to a recent post of mine trying to explain the popularity of Corbyn and Sanders. His byline is “The financial crash of 2008 made it impossible for both parties to exist united in their current forms”. On Corbyn his argument is similar to my own. He writes

During Labour’s astonishing leadership contest, Corbyn pitched his message solely against the background of the financial crash. At the beginning of each speech he proclaimed that the 2008 crisis was not caused by “firefighters, nurses, street cleaners, but by deregulation and sheer levels of greed”. As a climactic he declared: “I want a civilised society where everyone cares for everyone else. Enough of free market economics! Enough of being told austerity works!”

In contrast some Labour MPs

were thrilled when Labour’s acting leader Harriet Harman declared her support for Osborne’s proposed welfare cuts immediately after the party’s election defeat. They argued this was a sign of a ‘responsible’ opposition showing Labour had learned its lessons about being ‘profligate’ in the run-up to the 2008 crash. If those MPs had retained that early position, they would have been to the right of Duncan Smith - who resigned over welfare cuts - and to the right of those Conservative MPs who rebelled against the cuts to tax credits on the working poor last autumn.

I would add that those MPs standing against Corbyn failed to place at centre stage the contradiction and injustice of how a crisis caused by the financial sector should lead to a reduction in the size of the state.

His account of the problems on the right, and how that too stems from the financial crisis, is as follows:

The row over the recent Budget, Duncan Smith’s resignation and the revolt over welfare cuts also has its roots in the financial crash. Osborne’s economic policy was shaped by what happened in 2008. After initially pretending to support Labour’s spending plans, he made deficit reduction his defining mission, missing his target in the last parliament and now resolved to reach a surplus in this one. But a significant number of Conservative MPs will not tolerate the spending cuts required for Osborne to keep to his chosen course. In effect they are rebelling against his highly contentious interpretation of what needed to be done after 2008.

There are two obvious points here. First, the much more serious divisions within the Conservatives appear to be over Europe, which also appear completely unconnected to the financial crisis. Second, which I will return to at the end, is the extent to which the financial crisis and austerity are linked.

To think about this further, and broaden it beyond the UK, I want to bring in John Quiggin’s ‘amateaur political analysis’. He writes

There are three major political forces in contemporary politics in developed countries: tribalism, neoliberalism and leftism (defined in more detail below). Until recently, the party system involved competition between different versions of neoliberalism. Since the Global Financial Crisis, neoliberals have remained in power almost everywhere, but can no longer command the electoral support needed to marginalise both tribalists and leftists at the same time. So, we are seeing the emergence of a three-party system, which is inherently unstable because of the Condorcet problem and for other reasons.

On neoliberalism he says

Neoliberalism is mostly used to mean one thing in the US (former liberals who have embraced some version of Third Way politics, most notably Bill Clinton) and something related, but different, everywhere else (market liberals dedicated to dismantling the social democratic welfare state, most notably Margaret Thatcher).

Later on

The difference between the two versions turns essentially on whether [globalised capitalism, dominated by the financial sector] requires destruction of the welfare state or merely “reform”.

This would place the majority of Labour party MPs as neoliberal using the US definition. We could describe the Republican establishment as neoliberals of the UK Conservative kind. Quiggin argues that the financial crisis discredited neoliberalism in both its forms (also the starting point of my post). In the US

Trump has shown that the tribalist vote can be mobilised more successfully if it is unmoored from the Wall Street agenda of orthodox rightwing Republicans like Cruz

Tribalism is “politics based on affirmation of some group identity against others”. We could make a similar argument about the rise of the ‘further right’ in Europe, and UKIP in the UK.

The final link is to spell out why the global financial crisis should lead to an increase in tribalism. The standard account is to blame the high unemployment (Eurozone) or lower real wages (UK, US) that followed the crisis, and how this can be easily blamed on immigration or those perceived to be living off the state. We could perhaps go further. Those in the Republican and Conservative parties (and their supporters) are happy to use and even encourage this tribalism as scapegoats to deflect criticism away from the financial sector and austerity policies. For some that works, but not always, and the tribalism can become detached from traditional right wing parties.

This account is neat as it seems to fit the current POTUS election. It could also supply the missing ingredient from Steve Richards’ account if the divisions over Europe on the right in the UK are tribal in Quiggin’s sense. However I think I would like to reframe this account in a slightly different way. Think of two separate one dimensional continuums: one economic, with neoliberal at one end and statist at the other, and the other something like identity. Identity can take many forms. It can be national identity (nationalism at one end and internationalism at the other), or race, or religion, or culture, or class.

Identity politics is stronger on the right, particularly since the left moved away from being the party of the working class. For the political right identity in terms of class can work happily with neoliberalism, but identity in terms of the nation state, culture and perhaps race less so. Neoliberalism tends to favour a more internationalist outlook (e.g. free movement of labour, low tariffs etc). When neoliberalism is discredited, this potential contradiction on the right becomes more evident. This is emphasised when politicians on the right use identity politics to deflect attention from the consequences of neoliberalism.

Why do I prefer this framing? First, in the case of the role of the state, I think it is artificial to make a division between those who are neoliberal and those who are not. I prefer to see neoliberalism as an extreme point or range on a continuum. Only when you do this can you see that there are the tensions on the right as well as the left over neoliberalism, which is the point that Steve Richards makes. (See here for a rather amusing example.) A right wing identification in terms of class does not inevitably imply a belief in neoliberalism. Second, I think an emphasis on identity has always been strong on the right, so it is a little misleading to see it as only something that the right uses in an instrumental way. Third, seeing identity in its various forms as a continuum can explain continuing debates on the left on this issue: here is an example I read only yesterday.

None of this detracts from the basic point that Quiggin makes: the apparent drift from the political centre ground is a consequence, for both left and right, of the financial crisis. I would add that what today counts as the centre in economic terms, which is pretty neoliberal, is rather different from what was thought of as centre ground politics before the 1990s. Now some of those on the left would like to think that this collapse of the centre was an inevitable consequence of the financial crisis. I am less sure about that. On its own, that crisis might have shifted the centre on economic issues to be a bit less neoliberal, and that might have been that.

One interesting question for me is how much the current situation has been magnified by austerity. If a larger fiscal stimulus had been put in place in 2009, and we had not shifted to austerity in 2010, would the political fragmentation we are now seeing have still occurred? If the answer is no, to what extent was austerity an inevitable political consequence of the financial crisis, or did it owe much more to opportunism by neoliberals on the right, using popular concern about the deficit as a means by which to achieve a smaller state? Why did we have austerity in this recession and not in earlier recessions? I think these are questions a lot more people on the right as well as the left should be asking.

It’s the politics, stupid

Those looking for any kind of economic logic from yesterday’s budget will look in vain. The budget had one goal, and only one, goal - the election of George Osborne as David Cameron’s successor. Now that mayor of London Boris Johnson has come out in favour of leaving the EU, a position also favoured by the majority of Conservative Party members who will elect the next leader, Osborne has a real fight on his hands.

Once upon a time Osborne could have actually played the prudent Chancellor role for real, but those times are gone. Getting the deficit down no longer appears (to the media and Conservative MPs and party members) the overriding priority it once was. So it has to be tax cuts designed to benefit most those in the upper quarter of the income distribution, plus yet more cuts to corporation tax. (As I noted in a piece for The Independent, the OBR’s downward revision to expected productivity growth suggests the extra dynamism these cuts were meant to induce stubbornly refuses to materialise.)

That is why a Budget where the main external news was a deterioration in the outlook for the UK economy, and where the centrepiece is a (ludicrous) target for the budget surplus at a fixed date, could end up being all about tax cuts. (Apart from the new sugar tax, which is welcome and long overdue.) It is achieved by a combination of more cuts to welfare (the disabled) and spending. Yes there is a lot of creative accounting as well, but when those chickens come home to roost you can be sure that the response of this government will be how public spending has become unaffordable and more cuts are required.

Cut taxes, and use the deficit as an excuse to cut spending. For the Conservatives it has proved to be a winning formula, and Osborne intends to milk it for as long as mediamacro lets him get away with it.

Another good rule with this Chancellor, apart from it is always about the politics, is that whatever phrase he keeps repeating tells you where he thinks he is vulnerable. Hence 'long term economic plan' to cover decisions made to achieve short term political ends. That is why the current slogan is ‘putting the next generation first’, because everything Osborne has done so far has achieved the opposite. The slogan is not meant to signal a sudden change, but just to distract from more of the same. Climate change? He failed to raise fuel duty, and more. Public investment? As I say in The Independent, lots of talk but the OBR numbers tell us he plans in this parliament a level of net public investment almost 25% below the level in the previous parliament. The rhetoric may be enough to win the votes of (generally old) Conservative party members, but the next generation will not thank him for it.     

What are ABC to do?

This is quite a long piece about politics, that I suspect no one will like. I have said before that I depart from my comfort zone of macroeconomics when I think an important point is being missed from the public debate. In this case the second sentence may follow from the first.

What should the strategy be for the great majority of Labour MPs who did not vote for Jeremy Corbyn (ABC=anyone but Corbyn)? They can continue to expound their misery to receptive political journalists. They can continue to stand aghast at the dislike that some now in power hold for their predecessors. But for a group that has lost two crucial elections within the space of a few months, they really need a more positive focus.

Tony Payne, director of SPERI at Sheffield University, has a suggestion which I think has a great deal of merit. They should “come to terms fully, properly and honestly with Labour’s record in government under Blair and Brown between 1997 and 2010”. This is not in some kind of masochistic, ‘what we got wrong’ kind of exercise, but rather to recognise what that Labour government got right. I was part of a group of academics that looked at economic policy under Labour, and the sense I got was that there were an awful lot of positives to note. But in looking at the negatives, one point that should be recognised is that these (e.g. Iraq, not enough banking regulation, perhaps not enough local support for inward migration) did not come from any tendency to be too populist. Instead rather the opposite.

I’ll come back to that in a second, but actually I decided to write this in response to another post by Tony Payne, which could perhaps be described as a lament for the centre-left. You can get the flavour from this passage:

“what underpins and ultimately characterises centrist politics (whether in its left or right variant) is a rejection of what I see as the easy moral simplicities of populist politics in favour of the complex, awkward and often unsatisfying and unsatisfactory world of governing, of trying to find the best way through the most difficult problems, even if that involves compromise. The latter is of course the dirtiest of words in the lexicon of the populist left (and right).”

I think that speaks to where a lot of the ABCs are right now. They say we tried to be sensible in the face of difficult problems, but we were outflanked on both sides by the moral simplicities of populist politics. I suspect (and to be fair Tony Payne does not make this link) it also passes as some sort of explanation as to why ABC lost two elections. They were the realists who lost out to the idealists and populists. As an explanation I think it is completely inadequate, and to be frank comes close to denial.

Let me take my own subject as an example, partly because austerity is also central to much else. In the end what quite a few of the ABCs wanted to do was to junk the complex and perhaps awkward truths of how to run a sensible fiscal policy in favour of the populist politics of talking about the nation’s credit card. Osborne’s fiscal charter is not supported by a single economist I know, but many of the ABC’s have advocated supporting it. In this case what those ABCs have been doing is adopting - or at least flirting with - populist politics, but the popular politics of the right rather than the left.

That in turns comes from what seems to be the dominant mantra of the ABCs, which is that only they are serious about trying to win elections. That is why, we are told, they have to adopt the populist policies of the other side, because only that way can they win. Notice first how different this is from the noble Weberian concept of the centre that Tony Payne puts forward. Notice second that these populist policies seem to come from the right rather than the left: whenever there is a populist policy from the left (like renationalising rail), then it becomes time to cast aside populism and be ‘sensible’.

I have struggled to understand what is going on here. But the thought that I keep coming back to is regulatory capture. This is the idea that the regulators of an industry become captured by the industry itself: by its objectives, values and methods. In some cases the reason for capture is straightforward (revolving doors), but in some cases it reflects the fact that regulators cannot match their industry in terms of knowledge and analysis. My idea is that in this case instead of an industry you have a Westminster discourse which, under the coalition, was dominated by the thinking of the centre-right. Most Labour MPs simply didn’t have the time or resources to find alternatives to this, and gradually became hostage to this discourse. As Paul Krugman might say, after a time all they hear are the views of Very Serious People.

Part of this Westminster discourse involves the tactic of exclusion for individuals and ideas that are deemed to be outlandish. (Outside the Overton window, if you like.) I have experienced that on a personal level recently: imagine a biologist being told that they would be ‘branded’ if they gave technical advice to a major political party!? Rather more important it leads some politicians on the centre left with strong skills and expertise reluctant to sit at the same table as those in their own party with more radical views, even when those holding more radical views have every incentive to seek compromise. You have to ask who benefits from this.

It is often said in politics that voters vote for and against incumbents, not oppositions. I doubt very much if Labour party members voted for Corbyn because they had suddenly become converted wholesale to a Bennite type platform. Instead they voted against what the parliamentary party had become. I think recognising their responsibility for their own failure is the first step to recovery. I said that the ABCs would do well to follow Tony Payne’s advice and focus on what the Labour government did right. One of those things was the regime of tax credits, which cut poverty and made it easier for people to work. They might then reflect on the reasoning, forces and processes that led so many of them this July to abstain on the bill that cut those credits.

The centre left needs to retrace its steps as a first stage to recovery, and learn from the many things it got right when in government. In the UK and elsewhere in Europe it is important this happens sooner rather than later. Hopefully in doing this it will rediscover positive virtues and ideals that go beyond simply a negation of populism. I strongly suspect a strong political centre (left or right) is vital for good governance, and that both the UK and Europe is suffering from its absence.   

Linking tax credits and the fiscal charter

I have made fun in the past about Labour politicians and supporters who in public trip up once the word borrowing is mentioned. An interviewer only has to ask ‘but if Labour reverses this cut it will mean more borrowing’ and the interviewee stumbles around in a way that shouts to anyone watching that Labour have a vulnerability here.

It is a vulnerability that helped lead to the disastrous decision under the interim leadership not to oppose Osborne’s cuts in tax credits, and to McDonnell’s embarrassing initial decision (now reversed) to support the charter. But now that Labour has sorted itself out on both issues, it needs to stop avoiding the borrowing question. Take this otherwise assured performance by Owen Smith on Newsnight last night (27 minutes in, HT Owen Jones).

Here is what Owen Smith should have said when asked whether reversing the cuts to tax credits would lead to more borrowing.

“The Chancellor has said he needs to cut tax credits to meet his new fiscal charter. Labour oppose this charter, because it makes no economic sense. Osborne cannot find a single economist who supports his plan. Imposing a work penalty to pay borrowing off more quickly is just counterproductive, because discouraging people from working makes the economy weaker. This was supposed to be a government that encouraged work, yet here is the Chancellor doing the opposite in order to meet a charter that only his MPs support.”

If the interviewer persists with “so you will borrow more”, say

“Labour would not need to cut tax credits because we would balance current income and spending, leaving room for the country to invest. Labour would borrow to invest, whereas Osborne is paying for the little public investment he is doing by cutting tax credits. What matters is government debt in relation to GDP, and our policy would mean that debt relative to GDP would fall under Labour.”

I am sure those skilled in spin could sharpen this, but you get the idea. The days when deficit fetishism gripped voters are coming to an end. Labour needs to change its rhetoric to reflect this, and paint Osborne into the ideological corner he occupies.  

When economists play political games

I saw you talking to those people the other day. You really should think twice before being seen to talk to people like that.

Similar lines could be taken from countless novels about class, race or some other form of social exclusion. When I agreed to be part of a group that would occasionally advise the new Shadow Chancellor John McDonnell on economic policy, I must admit I hadn’t expected something like that to be said to me by economists I respect. Political hacks would say it for sure, but economists interested in promoting good policy?

Just to be clear, McDonnell’s group places no restrictions on what its members can say in public about policy. We are not required to support or endorse Labour policy. Indeed, to the extent that Labour does adopt a policy that any of its members disagree with, the group gives those members a slightly higher public profile if we make that disagreement public. As the media generally fails to distinguish good economic advice from political spin, a direct channel like this group seemed like a good idea, with no cost to its members except their time. Except ...

On Monday McDonnell announced a U-turn: he would no longer support Osborne’s new fiscal charter. The media focus, as ever, was on the ‘political shambles’ of a U-turn, with only the occasional suggestion that the charter itself was economic nonsense. (The body of this FT leader was an exception.) A few economists on twitter, however, suggested that this political shambles somehow reflected badly on the members of the advisory group. One described the members of the group being ‘branded’ by association. If other economists reading this sympathise with that view, you need to read on.

As this FT piece suggests, the new Labour position of not supporting the charter is likely to find general support among the advisory group. (We have not yet met.) Indeed, as I said to the FT, a huge majority of macroeconomists — particularly if they know something about fiscal policy — would recommend opposing the charter. I have no idea if the views of any of the group had any influence on this U-turn, but if it did that means the group is having some influence, which has to be a positive thing. Indeed, as I know some of those making this ‘guilt by association’ charge actually oppose Osborne’s charter, they should welcome the fact that we may have helped change Labour’s position. Instead they are saying his change of mind reflects badly on us!? It makes no logical sense, unless something else is going on here.

As I said in an earlier post, I am happy to give advice on macro policy to any of the mainstream political parties, whether I agree with their current macro or other policies or not. Over the past five or more years I have given public and private advice to Treasury officials working for the actual Chancellor. I feel strongly that governments should and can follow good macroeconomics whatever their political persuasion. For me to say I’m not going to talk to you because I do not like your policy on X would be as silly and childish as it sounds.

So what is going on with economists who would not blink an eye at me giving advice to a Chancellor whose policies I often (but not always) oppose, but suggest that when it comes to the Labour party there is some kind of guilt by association? It seems to me that they are, knowingly or not, part of a political game. The game is to give the current Labour leadership some kind of pariah status. If we were talking about a party like the BNP, that might make some sense, but for the main opposition party in which a radical leadership is going to have to reach a consensus with their less radical MPs it does not. Unless of course your primary interest is to support another party. Which is why the government and many journalists want to foster this pariah status frame of mind. It is a shame that some economists who are parroting this guilt by association line seem not to understand the political game they are inevitably playing.

A stimulus junkie's lament

One ‘stimulus junkie’ has already had a go at this FT piece by the chief economist of the German finance ministry, but let me add three points. The first is just factual. What is the unusual feature of this recovery compared to previous recessions? It is fiscal austerity. In the past governments have not generally cut spending or increased taxes just as recoveries have begun, but this time they did. Now perhaps the slow recovery and fiscal austerity are not related. But textbook macroeconomics, a large majority of economists, and all the macro models I know say they are. If German officials and economists continue to ignore this fact, they will lose international credibility.

Second, German officials need to be very careful before they claim that recent German macro performance justifies their anti-Keynesian views, because it might just prompt people to look at what has actually happened. Germany did undertake a stimulus package in 2009. But more importantly, in the years preceding that, it built up a huge competitive advantage by undercutting its Eurozone neighbours via low wage increases. This is little different in effect from beggar my neighbour devaluation. It is a demand stimulus, but (unlike fiscal stimulus) one that steals demand from other countries. This may or may not have been intended, but it should make German officials think twice before they laud their own performance to their Eurozone neighbours. If these neighbours start getting decent macro advice and some political courage, they might start replying that Germany’s current prosperity is a result of theft.

Third, they should also think twice before writing that a misguided concern about the impact of austerity “contrasts with much more convincing global action to repair the banking sector”. As this IMF analysis suggests, very little has been done to reduce the effective public subsidy to large banks in the major economies, and hence to avoid the ‘too important to fail’ problem. This is because politicians continue to ignore calls for much larger capital requirements. The financial system may have been partially 'repaired', but it still has the potential to create another global financial crisis.

There is a pattern here. Simple, basic economics is being ignored. That cutting demand or transfers from government reduces overall demand. That a country in a properly formulated monetary union that experiences a period of below average inflation will gain a short term competitive advantage, but it subsequently has to undergo a period of above average inflation to undo that advantage. That equity rather than debt for firms performs an important role as a shock absorber, and financial firms are no exception. It is not too hard to understand why these basic points are ignored. When the interests of politics and money collide with straightforward economics, economics does not stand a chance. If the incentives for getting the economics right are weak, the idea that economics loses out to money and politics is also just basic economics.  

The trouble with macro

Diane Coyle, writing in an FT blog, says

 “There are two tribes of economists, the macro and the micro. I’m one of the latter group. We have our empirical controversies, of course – much of our applied research concerns public policy choices in areas such as education and health, so vigorous disagreement is inevitable. But I think it’s fair to say that few of the micro disagreements compare in intensity to the all-out war of words between different macroeconomists about the effects of fiscal stimulus or austerity.”

She goes on to say that it is macroeconomists’ “certainty that’s astonishing”. Her comments could be summarised as asking why macroeconomists are so sure and shrill compared to their micro colleagues.

Now it could be that there is something odd about those who choose macro rather than other types of economics, but I’m not sure I’ve noticed any character traits more evident in macro people. (But who am I to judge - an open invitation for microeconomists to comment!?) It could be something to do with the nature of the theory and empirics involved, but since macro became microfounded that seems unlikely. I think the problem is in a way much more straightforward.

I think you only need to look at the recent UK election to understand the problem. One of the central themes of the Conservative’s attack on Labour involved their alleged incompetence at running the macroeconomy when they were in power. For whatever reason, macro rather than micro policy issues become central in political debates. That makes macro unusual for various reasons.

One immediate consequence is that many beyond the tribe of macroeconomists think they can write with authority of macroeconomic issues. As a recent example of a shrill macro debate Diane cites Krugman vs Ferguson. But this is not to compare like with like. On one side you have an economics Nobel Prize winner who has made important contributions to macroeconomics, and as a result is careful about what he writes. Both data and theory are respected. On the other side … well I’ve said what I think in an earlier post.

To take another politically charged topic, I have seen plenty of debates between climate change scientists and deniers who are not scientists. Often the scientist will go into detail to get the facts straight, and say how uncertain everything is, while their opponent by contrast will be confident and clear. A scientist will not be fooled by this confidence, but many others will be. When one side argues out of conviction or ideology or political bias rather than knowledge, it is difficult for someone who does have that knowledge not to respond in kind if they want to be convincing.

There is a deeper reason for shrillness, however. The debate over austerity is not a normal academic discussion about the likely size of parameter values. Here Diane is mistaken in saying that the key issue is whether the multiplier (the size of the impact of cuts in government spending on output) is greater or less than one. In talking about UK austerity, I have typically quoted OBR figures which assume a multiplier below one, which gives me the £4000 per average household cost of UK austerity. My own best guess would be that the multiplier has been larger than one, which gives me significantly higher costs, but I have never suggested that I know with certainty what the size of the multiplier has actually been. However there has, to my knowledge, been no public debate on these terms.

Instead supporters of austerity typically want to suggest that the multiplier is close to zero. They want to suggest that sacking nurses and cutting back on flood defences will be very rapidly met by an increase in private sector labour demand and investment. Although theoretically possible via various different mechanisms, the evidence and recent experience overwhelmingly suggests this does not normally happen in the kind of situation we are currently in. For much of the time those arguing for the virtues of current austerity seem to be doing so from a position of faith or political convenience rather than evidence.

Why is it important to recognise this? Because there is a danger that microeconomists may misdiagnose the problem, and suggest that macro contains some fundamental flaw which undermines eighty years of intellectual endeavour. This provides useful cover to those who have an ideological or political agenda, and want policymakers to ignore the bits of the discipline that clearly work. Sometimes microeconomists seem to think that if only they could disassociate themselves from macro, economics would become a better and more respectable subject. That is an illusion: the ideological and political forces that cause such problems for macro are not unique to it.

So I’m not sure that academic macroeconomists suffer from an excess of certainty compared to their micro colleagues. Instead I think the trouble with macro is that it is prone to ideological and political influence: like all economics, but just more so.

Should economists rule?

Tim Harford in the FT talks to seven random mainstream economists about their radical ideas for economic policy. (Podcast, not pay walled, here.) Nick Stern wants green cities (with much greater economic autonomy), Jonathan Haskel wants more spent on research (because the returns are very high), Gemma Tetlow wants to merge income tax with national insurance, Diane Coyle wants to reduce boardroom pay, John van Reenen wants new institutions to promote infrastructure, Kate Barker wants changes to how housing is taxed, including capital gains on main residences, and Simon Wren-Lewis wants ‘democratic helicopter money’.

You can find more details about democratic helicopter money here. The democratic bit is that the central bank gives the created money to the government on condition that it is used for a stimulus package, but the form of the stimulus package would be the government’s choosing. I was impressed that Tim managed to turn a very pleasant chat over coffee (while taking few notes) into a coherent account of my argument. The only point I might have added is that my suggestion of turning helicopter money democratic is in part to avoid some of the political difficulties he alluded to.

The common strand in many of these suggestions, which Tim draws out, is a desire to replace direct political control by something more technocratic. Now you could say that this is simply a power grab by economists. However if you think about the examples here, they represent important and widely recognised policy mistakes which tend to be universal and persistent: failure to deal with climate change, failure to invest enough in R&D, unnecessary complications in the tax system, runaway boardroom pay, failure to invest in infrastructure even when borrowing is ultra cheap, a broken housing sector and procyclical fiscal policy. It is not as if the status quo is doing just fine.

I would add just two observations. First, the argument is often not about ‘losing democratic control’, but instead about advice being open and transparent. The alternative to some advisory body, whose deliberations should be publicly available and subject to scrutiny, is often secret advice from the civil service, or worse still from policy entrepreneurs. Second, what is thought political infeasible today may relatively quickly become commonly accepted.

I was quite surprised that Tim thought democratic helicopter money was particularly radical and politically infeasible. But then I remembered fiscal councils. My first published piece advocating (advisory) fiscal councils was in 1996, and for more than a decade this was considered the impractical idea of a few ‘out of touch’ economists, who were obviously anti-democratic. Then, little more than a decade later, the idea very quickly became acceptable. Nowadays, it seems like fiscal councils are everywhere. So the one part of Tim’s piece that I would not take too seriously are his scores for political feasibility and radicalism. Today’s supposedly radical idea can quite quickly become received wisdom.