Why populism should be no surprise

As well as watching and listening to my SPERI/New Statesman prize lecture, you can now read it in the form of a SPERI paper (slightly more coherent and comprehensive that the lecture I gave). I have also written an article that is now up at the New Statesman, which attacks the same issue a slightly different way. This post is aimed at encouraging you to read that article.

It suggests that we should not find either the Brexit vote or Trump’s election a surprise. Once we recognise that a large proportion of (most?) voters are not that interested and therefore not that informed about politics, and then ask what information these voters actually received from the media, then both Brexit and Trump were quite rational choices.

If that statement sounds shocking, I think it is because those of us who are interested in politics and are well informed find it difficult to imagine what it would be like not being so. We ask how can Trump be more trusted than Clinton, because we have read and indeed listened to all his lies, but if the only source of information you look at is the nightly news you will have mainly heard about Clinton’s emails. We ask how can half of those who voted in the EU referendum opt for evident self-harm, because we have read that economists think it will be self harm by a margin of 22 to 1. But if all you have seen is he said/she said reporting in the media, it just looks like economists are divided on the issue.

I’m not arguing that the impact of globalisation is not important. It helps people lose trust in mainstream politicians. Instead I’m asking why legitimate grievances should lead people to start believing in snake-oil salesmen. People will go for populist policies, if the knowledge that these policies will not work is denied them, or portrayed as just one more opinion rather than knowledge.

The power of the media to distort truth should never be underestimated. In 2015 voters elected a Conservative government because they thought they were more competent at running the economy. They blamed Labour for causing austerity. Pretty well all the evidence suggested the opposite was true. But all most people heard was the Conservative narrative about ‘clearing up the mess’. You should blame Labour for letting that happen, but if you do you also have to concede that the information people receive is critical in the decisions they make. The power of a simple but false narrative is immense: remember most workers had experienced an unprecedented fall their real earnings over this period, yet they still chose to blame Labour for this rather than the global financial crisis and austerity.

After everything that has happened over the last two years, these points should by now be self-evident, and to some they are. But a great deal of analysis just ignores the role of the media. I surveyed a great deal of work on the Brexit vote, trying to relate it to all kinds of variables, but I saw no analysis that looked at the media people were exposed to. In the UK there is not much we can do about the partisan press in the short term, but we can do something about the broadcast media. How many more Brexits and Trumps do we need before we do?

What are populist policies?

Populist is a term like neoliberalism: vaguely defined and used as a derogatory term. A key aspect of populism involves attacks against elites, and as Jan-Werner Müller stresses this goes with populists identifying with ‘the people’. The populist does not want any kind of direct democracy, but instead argues that they (and only they) are uniquely qualified to ensure that the will of the people prevails. This ties in both with identity politics, but also an emphatic denial of the importance of different people with different interests.

But populist is a term used about policies as well as certain political leaders, and is often applied to policies proposed by conventional (not populist) leaders. Is this simply a term of abuse, or is there some systematic logic behind such claims? I do not think those that use the idea of a populist policy simply mean a policy that might be invoked by a populist politician. 

I can think of two meanings, beyond the obvious that populist policies have to be popular. The first is that a populist policy is harmful to society on average, even though it might be beneficial to a significant sub-group within society. The second is stronger: a policy that will be harmful to almost everyone. Economists will see the parallel with Kaldor Hicks and Pareto welfare measures. I want to suggest that in practice only the second, stronger version has any teeth.

One set of policies that are frequently called populist in the first sense are specific trade barriers, designed to protect a particular domestic industry against foreign competition. These are obviously popular with those whose jobs are threatened. Using populist in the first sense notes that the economy as a whole gains from cheaper imports, and these gains are large enough to compensate the losers in the domestic industry such that everyone could be better off. But to use populist as a derogatory term in this context only really makes sense if the transfers that would compensate the losers are sufficient to do so, and fairly certain to be enacted. If they are not, then maybe trade protection measures are popular because people really do want to avoid the pain caused by domestic job losses, and are prepared to forgo any gains to see that happen.

Brexit would seem to be a good example of a populist policy in the second sense, where the number of people who will actually gain from the measure are pretty small. Its popularity comes from people incorrectly thinking they will be no worse off as a result of Brexit, when in truth they will be (or indeed they already are, as the Brexit induced depreciation feeds into higher prices and, almost certainly, lower real wages). Before the vote, polls showed that a large proportion of those intending to vote to leave the EU were not expecting to be worse off as a result, and more importantly they would vote differently if they thought they would be worse off, a result recently confirmed by a YouGov poll reported in the Guardian. In my view that was what made the media’s trashing of the economic case against leaving so crucial: it is what made Brexit a populist policy in the sense that I want to use the term.

Is Brexit an example of a populist policy promoted by non-populist politicians? Only in part. Major drivers behind Brexit were the right wing tabloid press and UKIP. They are clearly populist using Müller's criterion, as they show every time they invoke the ‘will of the people’ to attack judges who are simply trying to uphold the rights of parliament.

A clearer UK example of a populist policy driven by non-populist politicians might be austerity. This was popular, in the sense that most people thought the government ought to tighten its belt because it had maxed out its credit card, but it also did most people a lot of harm. I calculated that UK austerity lost the average UK household at least £4,000, and the true figure could easily be two or three times that, and it is difficult to see a large section of the population who gained.

Do populist policies promoted by conventional (non-populist) politicians have anything to do with the rise of populist politicians? Perhaps they do, when it turns out that populist policies do in reality make people worse off. That can discredit conventional politicians and open the doors to populists. I provide one example of that in this SPERI post, which links Brexit to austerity.

Reactionary Keynesianism

Under Donald Trump we might get what some have called Reactionary Keynesianism. But a stimulus is a stimulus, right, and for those of us who think most OECD economies should be ‘run hot’ to try and make up some of the ground still lost from the Great Recession any fiscal stimulus should be welcomed? So Martin Sandbu writes

“it is hypocritical of anyone to warn that Trump’s promised tax cuts will endanger the public finances if they called for fiscal stimulus under Obama and his putative Democratic successor. …. While the composition of tax cuts and spending increases may matter, the overall size of any deficit increase matters at least as much.”

If by this he means don’t worry too much about the composition, the overall size of the deficit is more important, I think this is terrible macroeconomics. It is foolish to believe that anything that raises the deficit will stimulate.

We know that a part of any Trump stimulus will be large tax breaks for the very rich. The very rich will almost certainly consume virtually none of this tax break in the short term. It is the one part of the population where Ricardian Equivalence almost holds. You might think that therefore it does at least do no harm to short term aggregate demand. But this could be wrong, because the logic of the intertemporal budget constraint still operates. Those tax cuts will not be paid for by higher activity in the short term, so they may mean higher taxes down the road. Now if people who are not very rich think that these might be their taxes that are increased down the road, they will reduce their consumption today. The net effect could be a drop in demand.

You may think that consumers may not be so foresighted, so demand will not actually fall. But the logic of the intertemporal budget constraint still holds. If tax cuts for the rich just raise the deficit with almost no short run demand boost, then that is a transfer to the rich today from the non-rich tomorrow. If tax cuts for the rich were paid for by tax increases on everyone else today many politicians would be up in arms. Delaying the tax increase on everyone else by borrowing is a trick that should be seen straight through.

Yet I fear this is still not the case, and talking about tax cuts for the rich as part of a stimulus just helps confuse politicians. Those on the right understand this: tax cuts for the rich are nearly always part of a general stimulus: when Nigel Lawson did this it helped bust the UK economy. We should just repeat again and again: tax cuts for the rich paid for by borrowing are really tax increases for everyone else.

The example of tax cuts for the rich is the example that refutes the general proposition that the composition of any fiscal stimulus matters less than the overall size of any increase in the deficit.

Trump has also said he wants more investment in public infrastructure. That is something the US desperately needs, but remember that Trump will usher in an era of crony capitalism and politics like never before. The infrastructure that you might get could be far from the infrastructure the US actually needs, and instead may be whatever buys votes or other kinds of deals that help a Trump administration. Now if that infrastructure was produced entirely by those who otherwise would be out of the workforce but would like the jobs involved, then aggregate welfare would still increase: it is Keynes’s famous digging holes example. But in practice that seems unlikely to be completely or even mainly true, and so these white elephants may in practice crowd out better projects. In that case US citizens would not be better off in the short term as a result of this fiscal stimulus, even if GDP did rise. And the stimulus would not pay for itself, so once again other people should worry about the government’s intertemporal budget constraint.

If the economics of Reactionary Keynesian is bad, I think the politics is even worse. Quite simply, by achieving very little beyond redistributing to the rich and unworthy, it gives Keynesian policy a bad name. But we can avoid that, when we can, by not calling every increase in the deficit a stimulus. And by saying tax cuts for the rich paid for by borrowing are really tax increases for everyone else.

The public analyst in crazy times

My eldest granddaughter about a year ago went through that stage where she was always asking why. Now her favourite question is ‘what’s happening’. I thought of this when listening to this talk by Paul Krugman, titled ‘public discourse in a time of crazy’. Paul asks how should people who deal with facts and rational argument cope with a post-Trump world where those running the show appear to attach no positive value to either. [1]

While he says himself he is still adjusting to this new world, Paul suggests in this lecture that there are three paths which should be avoided. He calls them appeasement, emulation and quietism. The last is actually a real word, I discovered, and it means a “calm acceptance of things as they are without attempts to resist or change them”, a kind of retreat. I suspect it is the only one of the three that could tempt Paul himself.

It seems to me that appeasement is a good way to describe what has been happening to the UK’s parliamentary Labour party for perhaps a decade. First we had austerity, which began to be appeased in an apparently mild way while Darling was Chancellor, became stronger with ‘too much, too fast’, and ended up with some arguing after 2015 that austerity was the way forward. We are now seeing the same with immigration. What starts as the innocent ‘recognising people’s anxieties’ has now become ‘well at least Brexit allows us to control immigration’.

Appeasement is wrong for many reasons, not least because it is a terrible political strategy. If you no longer appear to champion anyone’s cause, but instead just become the ‘lite’ party (Brexit-lite, immigration-lite), you stop getting votes. Partly because people can vote for the 'real thing' (non-lite), and partly because you are not credible. This has got nothing to do with moving too far to the left or right, or Corbyn’s original [2] election: just look at Andy Burnham.

Emulation is to attempt to outdo Trump or Brexit in their own world of meaningless phrases and downright lies. But that is not a world that Paul Krugman (or myself) could live in. The scientific method is too deep in our bones to make this possible. We are not about the write posts which have the subtitle “a response to justified criticism’.

How does any of this relate to my granddaughter? The reason is that I think the premise for Paul’s talk is not real. There is no puzzle about what people like him should do now. We do what we have always done: ask what is happening and why. We put forward plans for what should happen once these dark times are over, plans that come from good explanations of the what and the why. When Paul talks about Appeasement and Emulation, he is really talking about what opposition politicians and their advisers should not do.

What people who analyse the evidence and ideas lose when Trump becomes President is any sense that we are participating in a conversation, a public discourse, that includes people who have power. Even those politicians who are in opposition cannot really listen because they will have their hands full limiting damage. Or in the UK case, they are too busy fighting each other.

2016 has not seen a sudden transition to this world, but more the blocking out of the remaining lights that pierced this post-truth darkness. We have effectively had a Republican Congress at constant war with a Democrat White House since 2011, and that Republican Congress increasingly under the control of the Tea Party and Fox News. The UK and Eurozone have been dominated by completely unnecessary austerity since 2010. As I used to say about austerity around 2012 or 2013, we had won the intellectual debate but the world went on as if we had lost.

I was thinking along these lines after talking to the Treasury Select Committee on Tuesday. I wrote a post just before I went, on why the OBR was perhaps being too optimistic about Brexit. Yet when I offered to explain the reasons for this to the Committee, no one seemed to want to hear. Politicians want to make the most of Brexit, when in reality all they can do is limit the damage. Politicians want to recognise people’s anxieties about immigration, when really they have to tell people that they are wrong: not about their grievances, but their belief that this has much to do with immigration.

We can, and should, continue to rage against the dying of the light. What is difficult, in this time of crazy, is being able to put that rage aside, and engage in a form of quietism, a retreat from the here and now of political discourse. Not a retreat into any kind of acceptance of where we now are, but instead into asking what and why, and from the answers to those questions to planning for the time when facts get back into fashion. But more than that. Using the answers to the what and why to prevent us lapsing back into our current post-truth world.

[1] Of course politics has always been driven by ideology as well as evidence, but there is a critical difference between wanting to find evidence to back your ideology, and not caring about evidence at all. We seem to have moved from the former to the latter in recent years. This is related to Frankfurt’s concept of political bullshit.

[2] I say ‘original’ here deliberately of course. Whatever his motives, Owen Smith did see why it was important to champion the anti-Brexit cause.

The reporting of market ups and downs is not really a joke

It began as part of my undergraduate lectures. After teaching students about the key role of expectations in influencing exchange rate movements, I joked they too could now become one of those City economists who comment on market movements. X goes up and the market falls - you explain the fundamentals. X goes up and the market rises, appearing to contradict the fundamentals - you say the markets were expecting a bigger rise in X. There is no data to contradict you, so no one will question your wisdom.

Companies pay market researchers tons of money to find out why people do or do not buy their products, so the idea that an individual can know why the market moves within hours of it moving is just nonsense. Yet day after day we see City economists telling us just this. They hardly ever express any doubt or uncertainty. They know if they did the media would regard that as boring, and choose someone else next time.

In writing posts I talked about why the media used City economists for this kind of commentary, because academics would be hopeless at it. In my lecture I said an academic, if asked by the media to comment about why sterling fell by 1% yesterday, would give one of two replies. Either ‘oh, did it, I hadn’t noticed - too busy marking’ or ‘who knows, there could be lots of reasons, we have no evidence on this at all’. But as I said it during the lecture I realised that it some way this was not really a story about how hopeless academics are in talking about daily market changes, but a story about how the media treats knowledge. After all, the second response is the truthful one. Even the first conveys some truth: unless you are speculating on the markets why does one day’s modest market movement matter?

The media use City economists because they are used to telling stories. Stories that will impress clients with lots of money to invest. As I’m sure Chris Dillow has written, people are swayed by confidence, even if that confidence is completely unfounded. Put a climate scientist, who being a scientist knows about all their doubts and uncertainties and is honest about them, in a debate with a media savvy climate change denier, and you will see that many will find the climate denier more convincing.

So the fact that the media gets City economists to tell their stories day in and day out tells us something interesting about the media. They seem quite happy to allow people to tell stories as fact, because it appears that they are asking an expert who ‘knows’. Now I’m sure the response would be by both the media and the City economist that of course everyone really understands that these are stories and not knowledge, and they are worth repeating because they are plausible stories. They could be true, but everyone really knows they are just conjectures based on little solid evidence.

But does everyone really know this? I’m sure the City economist knows this. I’m less sure about the audience, and even sometimes about the person interviewing the economist. This is a game of pretend that has been going on for so long that what is pretend has become real. Wouldn’t it be a good idea to insist on these City economists prefacing everything they say by ‘Of course we do not know, but my hunch is that …’ Isn’t it better to properly inform viewers of what is going on here, even if it does become a little repetitive? Or is informing the viewer not what this is about? And does this constant repetition of false certainty not have something to do with how City economists can be regarded by some policymakers as high priests to the fickle god of the market. 

It was interesting that some of the reaction I got to Saturday’s post was ‘why don’t forecasters tell people about these uncertainties’. Why are they not more modest? But the better ones are, and any academic who knows about macro forecasting will tell you how uncertain unconditional forecasting is. The fact that this knowledge is not reflected in how the media (or politicians) talk about them has everything to do with the media (and politicians). It suits most of the media (not all) to exaggerate the certainty, and then to express shock/horror when forecasts are wrong. And in a way it is a perfect example about the dangers of treating the media as just a harmless purveyor of news: you end up blaming the forecasters for something which is not their doing.

The OBR and the impact of Brexit

In doing my homework for an appearance at the Treasury Select Committee this morning, I noticed one point which is of some relevance to the debate about whether the OBR is being too pessimistic about the impact of Brexit. Two major ways in which Brexit will have an influence on the public finances is through lower immigration from the EU and lower productivity. The two are linked, because the OBR correctly assumes that lower immigration of skilled labour will in itself reduce productivity. (Productivity also falls in the OBR’s analysis because of reduced investment.)

The OBR also assumes that Brexit will reduce the trade intensity of the UK: less exports and imports. This is pretty obvious to anyone who has looked at international trade: transport costs may not be as high as they once were, but gravity equations tell us that geographical distance is still a key factor in influencing whether trade takes place, which means that reduced trade with the EU will not be matched by new trade outside the EU.

The Treasury analysis of Brexit assumed that this lower trade intensity would also reduce productivity. The OBR do not include this effect, calling it too uncertain. This is a slightly surprising judgement. To see this, look at this piece by Maurice Obstfeld, chief economist at the IMF. Here is a quote:

“Empirical research supports Ricardo’s fundamental insight that trade fosters productivity [by increasing efficiency through comparative advantage]. But the productivity and growth benefits of trade go far beyond Ricardo’s insight. With trade, competition from abroad forces domestic producers to raise their game. Trade also offers a wider variety of intermediate production inputs firms can use to produce at lower cost. Finally, exporters can learn better techniques through their engagement in foreign markets, and are forced to compete for customers by raising efficiency and upgrading product quality (for example, Dabla-Norris and Duval, 2016).”

Now few things are ever certain in economics, but none of these transmission mechanisms from greater trade to higher productivity are particularly fanciful: they all make common sense (at least as seen by an economist). They are all one directional, which means assuming an effect of zero is an extreme point in every case. In this sense, the OBR is being rather optimistic about the impact of Brexit on the UK economy.

Hitting back

Not a post about a certain byelection, but a reaction to reading this:

“A more serious incident was the forecast by the Office for Budget Responsibility in the UK, which said last week that Brexit would have severe economic consequences. Coming only a few months after the economics profession discredited itself with a doomy forecast about the consequences of Brexit, this is an astonishing reminder of the inadequacy of economic forecasting models.

The truth about the impact of Brexit is that it is uncertain, beyond the ability of any human being to forecast and almost entirely dependent on how the process will be managed. “Don’t know” is the technically correct answer. Before the referendum, Project Fear was merely a monumental tactical miscalculation. Today it is stupidity. One of the debates was whether people should be listening to experts. We have moved beyond that. Because of a tendency to exaggerate, macroeconomists are no longer considered experts on the macroeconomy.”

Shrug your shoulders and move on? If it had appeared in the partisan press that would be a sensible reaction, but this was written by a widely respected journalist in the UK’s internationally renown financial newspaper. Furthermore - lest my motives be misunderstood - written by someone whose knowledge on the Eurozone is beyond dispute and whose views I often agree with. Well on this occasion this particular member of a discredited profession who is no longer apparently considered an expert on macroeconomics is not prepared to take this kind of stuff anymore, whoever it may come from.

It is difficult to know where to start with such apparent and complete ignorance. Nonsense expressed as platitudes. You can only make sense of “beyond the ability of any human to forecast” if you either think we know nothing about the impact of trade restrictions, which is false, or that forecasts are non-probabilistic. No journalist has any excuse nowadays for misunderstanding the probabilistic nature of forecasts (Bank of England fan charts), and any academic economist who knows anything about forecasting will tell you that unconditional macro forecasts are only slightly better than intelligent guesswork. They exist because it is worth being slightly better than guesswork when the stakes are so high.

You can also only make sense of these two paragraph if the writer is unaware or is just choosing to ignore the difference between conditional and unconditional forecasts. These are long words for a very simple concept. You would not dream of asking your doctor to forecast the number of times you would catch a cold over the next year (an unconditional forecast), but if you gave them all your relevant data they could probably make a better guess than your own. Their forecast would be probabilistic, but if you took the mean as ‘the forecast’ then in any particular year your doctor would generally be wrong. It would be absurd for you to then say that, having ‘discredited the profession with this inaccuracy’ you were now going to ignore their advice about how to avoid catching colds (advice based on conditional forecasts). But this is the logic of these two paragraphs.

As for a tendency to exaggerate, the simplest response involves a black kettle. But on this particular occasion I think there is a more honest response. In the Brexit campaign I felt the temptation to exaggerate (I don’t think I ever succumbed), because the media was failing to get the message from economists across. Our collective knowledge about the impact of trade restrictions was treated as just one more opinion, or described as Project Fear. When you are effectively being ignored you tend to shout louder.

But this is all defensive. Trying to explain yet again some basic economic ideas, and to be honest about what you can or cannot do and any failings you have. I’m just tired of doing this stuff over and over again, so it is time not just to defend. There are many good journalists out there, who when they write about macroeconomics do try to check with academics that what they are writing makes sense. (It was one of those journalists who drew my attention to the article I quote above.) It simply lets them down when others think they can write this sort of stuff without any of the kind of basic fact checking that journalists are supposed to do. It brings the profession of journalism into disrepute.

And they can only get away with it because academic economists only get a media voice by the grace and favour of journalists. If anyone should be doing some serious introspection after the Brexit result it should be journalists and the media. Warning of the dangers of trade restrictions was not a ‘tactical mistake’. What was a mistake was for journalists to allow those warnings, that knowledge, to be characterised as Project Fear, all in the name of ‘balance’ or cheap copy. But this was not a temporary lapse in an otherwise good record, but just another example of a growing tendency for the media to allow politicians to define economic facts and truths, a record I described in my lecture.

To have the nerve to blame economists for the Brexit result, to suggest that using their knowledge was a ‘tactical mistake’, to imply that the OBR should pretend they know nothing about Brexit, all that is itself amazing malevolent chutzpah. But it goes beyond audacity to criticise a profession and subject matter you appear not to understand when it is this lack of understanding that has contributed so much to the damage over the last few years.