Why is no one talking about the angry Remainers?

I would not normally write this kind of post, but I couldn’t find anything on this by searching so I wrote it myself.

One very good answer to the question posed by the title would be if they did not exist, or more specifically that they might make a lot of noise in certain circles but in electoral terms do not amount to much. The main evidence we have that might raise doubt about this explanation is a series of remarkable by-election results for the Liberal Democrats. Everyone knows about Richmond, and earlier they had done very well at Witney, but their gain in vote was much more modest at Sleaford. What is less known is their steady success since the referendum in council by-elections. Each council by-election involves small numbers compared to Westminster seats, but there have been many more. What is interesting at this level is that the LibDems have been winning seats from both Labour and Conservatives, and in both Remain and Leave areas.

So why are political commentators continuing to talk about the UKIP threat to Labour much more than the LibDem threat to both main parties. Part of the answer is I’m sure the importance of the Brexit tabloids in influencing the Westminster bubble. But I think there is also some legitimate caution in not reading too much into these by-election results. First, the national polls have shown much more modest gains for the LibDems. Second, the power of the LibDem by-election machine is well known, and those with long memories know that spectacular by-election victories can come to nothing when we move to a general election. This would also help explain the non-uniform nature of the victories: for nearly every success you can find a relative failure.

While all that justifies caution, it does not provide any evidence against the angry Remainer idea. Nor does the fact that victories have happened in Leave constituencies, for two reasons. First, even if a constituency voted 60% for Leave, that still leaves 40% who voted Remain, and council elections in particular are where genuine anger is likely to motivate people to vote when the turnout is typically low. Second, quite a few people may have voted Leave but do not want a Hard Brexit.

The first factor may also help explain the discrepancy between local election results and the small movement in the LibDem’s national poll ratings. But, for Remainers, there may be a potentially more optimistic explanation. Responding to opinion polls may involve little thought. In an election people can read election leaflets, and they may think more before casting their vote. If so, local election results could be what economists would call a leading indicator of national polls in this particular case.

However, I say potentially because there is a less optimistic interpretation. In individual local elections the national media is not in election mode, and so local election literature may be unusually persuasive. In a national election, as we saw with the referendum itself, the broadcast media allows itself to be influenced by the pro-Brexit press. The LibDems may also be given little airtime as a small party, so there will be an automatic Leave bias.

For reasons like this, I’m afraid I find the outlook for Remainers like myself pretty grim. I can see one possible way of avoiding leaving the EU, but it requires a number of things to all work out. First, the march on 25th March is really, really big. Second, the LibDems make very large gains in the local elections in May. The combination of these two events could put the idea of the angry Remainer on the map. It might start encouraging some psephologists to speculate on which politicians would be vulnerable to a LibDem surge.

Third, the Brexit negotiations have to be seen as going badly. If ministers start blaming the EU for their intransigence, that is a good sign. Fourth, Labour keep Corbyn as leader. Fifth, it becomes clear that Article 50 can be revoked. Sixth, a run of polls have clear majorities for Remain over Leave. All that might just start making enough MPs seriously worried about keeping their own seats that they finally get the courage, and by some means a way, to vote to stay in the EU, or to call a second referendum. I have not tried to work out the probability of all those things happening, but as a fictional dwarf once said: “Certainty of death. Small chance of success. What are we waiting for?”

For those pining for a more macro post, the next one will be on the Bank of England's forecasts

Stories MPs tell

It is not true to say that the UK holds a referendum only when a big constitutional decision has to be made. We hold a referendum when the ruling party has deep internal divisions on an issue which the Prime Minister needs to put to bed. Our first referendum in 1975 was not held on whether we should join the EU (that happened two years earlier), but because the new Labour government was divided on the issue. Cameron held a referendum to appease those who wanted to leave in his own party. In both cases the rebels did not really believe in some deep right for the people to decide on these issues, but because they knew they could not win in parliament and stood more of a chance in a referendum.

There was a key difference between the two referendums. In 1975 it was pretty clear what both staying in and leaving meant. In 2016 leaving the EU could mean many things. This was a major weakness: it is like having a referendum on whether taxes should be cut without any information on what bits of government spending would be cut as a result. One of the many mistakes Cameron made was not to force his rebel MPs to come up with a common programme explaining exactly what leaving the EU would mean. As a result, many of the main Leave campaigners assured us it did not mean leaving the Single Market, even though they now say that is inevitable.

Given that, and the uncertainty over what the EU might be prepared to agree to, it is absolutely reasonable to hold another referendum, once the terms are clear, on whether we should accept these terms or Remain. Yet it is noticeable that Leavers are adamant that such a referendum should not be held, and continue to insist that the first vote is all that is required. This shows that they have no real respect for the ‘will of the people’ at all. They have got what they wanted, and want as little democratic interference in how it is done as possible.

The strongest arguments I have heard in recent days from Remain MPs for voting with the government have come from Conservatives. They have said that they promised voters that the referendum would not be advisory but would determine their vote. It is understandable that they would want to keep their promise. But leaving the EU could mean many things. They never promised to give the Prime Minister the right to decide how we leave. It would not be beyond the wit of these politicians to organise with others to vote to stay in the Single Market. As far as I can see no such attempt has been made by these MPs.

Indeed I think future historians will puzzle over this. Given that the referendum was only about leaving and not how to leave, was so close, and the majority of MPs want to Remain, why didn’t parliament simply agree the least harmful way of leaving, which is the Norway style option much discussed before the referendum? Of course that is obviously worse than being in the EU because you lose your right to help decide issues, but to use that as an argument for not doing it is nonsense. It is like deciding you have to go over a cliff edge, and there are two options: scrambling down to a ridge or jumping to the bottom. You note that scrambling would be uncomfortable so decide to jump instead. Or more formally, if A>B and B>C, you don't do C because A>B. 

The arguments of Labour MPs were much weaker. You are under no obligation to follow your constituents, particularly as you know much more about a subject than most of them do. That is not arrogance, but our system of government called representative democracy. One argument I heard was that voters would lose faith in democracy if parliament did not follow their lead. I would turn that around and say it would be a good lesson in what a representative democracy means. And if you respond that voters would not see it that way then you are either arguing that they are too dumb to do so or our media is incapable of making that distinction, both themselves excellent arguments for representative democracy.

In this recent post I included some lines by Winston Churchill on the duties of an MP. I was going to elaborate on that a bit, but the post was already too long, so I did not. Let me do so here. Suppose, for some reason, we had held a referendum in 1936 about whether we should rearm or not. It seems quite likely that the people would have voted No. The Daily Mail will have told its readers how Hitler was our friend, and that his bark was far worse than his bite, but the costs of war were too painful for most. Would we really have wanted MPs, like Winston Churchill to have felt bound by that referendum?

If you say that back then the facts changed, it means you have not taken Donald Trump seriously. To have a remote chance of getting trade deals that could partially compensate from the lack of access to the EU, we need good deals with China, India and the US. China has already said that leaving the EU makes us a lot less interesting as a country to do business with. India wants more freedom of movement of people as part of any deal. Liam Fox now says that is something we should seriously consider, but it is incompatible with the goal that is driving all of May’s actions - reducing immigration. Which leaves the US, which under Trump is focusing on reducing its trade deficit with countries where it runs a large deficit - like the UK. So a deal could be done, but is it likely that we would benefit?

All this means there were plenty of valid reasons for not voting to trigger Article 50, or at the very least of not giving away any chance of determining what sort of Brexit we have. What seems to have swayed too many MPs is the perception that whatever entirely reasonable reason they may have had for not triggering Article 50 right now, the perception would be that they were acting against the ‘will of the people’. 

So much of the Brexit process has been about perceptions of reality rather than reality itself. Perceptions that immigration reduces access to public services, when the opposite is true. Perceptions that leaving the EU would give us more money to spend on the NHS, rather than less as we are now finding out. And perceptions that Turkey was about to join the EU. But above all else, if you believe the Ashcroft findings, a feeling of a loss in sovereignty. Here feeling is not my word, but from the White paper the government released yesterday. To quote (para 2,1):

"Whilst Parliament has remained sovereign throughout our membership of the EU, it has not always felt like that."

Now where would all those misperceptions have come from?  

Why the reassuring stories about Donald Trump are quickly falling apart

When May visited Trump, the UK media were full of comparisons with Thatcher and Reagan. The US free press paid little attention to the visit, because they were fully preoccupied by the enormity of what was happening to their country. They were not seeing the first few tentative steps of another Republican president, they were seeing the confident strides of the equivalent in the UK not of Nigel Farage, but the leader of the BNP or the EDL. If you think this is going over the top, read on.

There were three kinds of story about Trump that encouraged people to think things wouldn’t be so bad. The first, which we now know is untrue, is that he would surround himself with more experienced and wiser counsel. Instead probably the most powerful man in Trump’s White House is Steve Bannon. He is executive chairman of Breitbart News, essentially a far right, or what is called in the US alt-right, news and opinion outlet that promotes white supremacist, anti-Muslim, anti-Semitic ideas. One of Trump’s latest actions is to oust the director of intelligence and the chairman of the Joint Chiefs of Staff from always attending the Principals Committee of the National Security Council and replacing them with Bannon. John McCain said the appointment of Mr. Bannon is a radical departure from any National Security Council in history.

The second story was that everything said on the campaign trail was to win the presidency, and that once that was achieved more ‘serious’ (aka traditional Republican) measures would be introduced. (US financial markets might have bought into that idea, and are now beginning to realise their error.) Once again the first few days, and particularly this travel ban, have proved that wrong. Trump is enacting the headline measures that were both highly controversial and also effective on the campaign trail, and doing that fast. This is smart politics. His strength was never in the Republican party or in the business community, but in those who watch propaganda networks like Fox News and who helped him into the White House.

The final story, which continues on both the left and right, is that Trump and his team are inexperienced buffoons who will quickly make fools of themselves, and will be brought to heel by the checks and balances of the US constitutional system. Its too early to tell, but the signs so far do not look good. Take the holocaust statement. According to this story, leaving out any mention of Jews or anti-Semitism from the Holocaust Day statement was perhaps an oversight that would get corrected later. But it was not, but instead intentional and purposeful.

A far more plausible explanation of what is going on is that it is part of a strategy, not only to firm up Trump’s base but also to test those checks and balances. Telling border agency staff to ignore court orders is not confusion but deliberate, to see how far they can go. Initial reports that the top state department officials had resigned were perhaps deliberate misinformation: they were all fired by the White House, with no replacements in sight. What this looks like is a concentration of power at the very centre. The lack of consultation about the immigration order was not inexperienced oversight but the shape of things to come.

The trouble with checks and balances are that they are designed to work on the margin, stopping small acts of overreach by different parts of a normal government. Whether they can cope with a determined and fast moving small team in the White House we have yet to see. These checks and balances are often slow. For example Trump has become president with his business affairs hardly altered. The travel ban excluded the four countries in the area in which Trump has business interests. “This isn’t the way the presidency has worked since Congress passed the Ethics in Government Act in 1978,” said the director of the U.S. Office of Government Ethics, but what is anyone going to do about it?

Given all this, for Prime Minister May to celebrate a “new era of American renewal” after meeting Trump represents either craven grovelling or a complete misreading of what is going on, or both. As Simon Schama tweets:

“Nothing is being renewed in USA except hatred. Nothing is being renewed in USA except ignorance and the dissolving of distinction between lies and truth. Nothing is being renewed in USA but much is being destroyed: equity under law, the climate, civil decency, public education, public health.”

If you think that quote, and this post more generally, are overreactions of the type often found in the worst kind of left-wing hyperbole, here is Charles Koch, scourge of the American Left: “We have a tremendous danger because we can go the authoritarian route ….”.

All this is going to have huge consequences for the people of the US and the world. But I make no apology for ending on a more parochial point, because it is critical and happening right now. Brexit is like a train with no way of stopping before its destination, full of people who think they are going to paradise, but their paradise has just been taken over by someone who is turning it into hell. Does our leader say we must get off the train before it starts, fit it with more brakes or even that we must pause before we leave? No, she says she sees and hears nothing, and even the normally rebellious guard says we must follow the will of the people. As Trump goes about putting his campaign pledges into action within days of taking office, Boris Johnson in the Commons yesterday actually said that it was clear that “Trump’s bark is considerably worse than his bite”. Keynes may not have said “When the facts change I change my mind. What do you do, sir?”, but it is the right question to ask right now..

Why voting for Article 50 may ruin an MP's career

The last time I did something like this was to urge Labour party members to vote for Smith rather than Corbyn, knowing full well that Corbyn was almost certain to win. Being proved right on that occasion is no consolation, because I would rather have been wrong. This is even more futile, but now as then I feel a decision is about to be made that is both disastrous and irreversible.[1] I also want to say something about the longer term interests of MPs that I have not seen said elsewhere.

There are so many principled reasons for MPs to vote against triggering Article 50. Let me summarise what I see as the main ones here, but this is far from comprehensive.

1. The vote was close, and is advisory. Unlike the Scottish referendum, it excluded 16 and 17 year olds, who by the time we actually leave will be able to vote. Demographic trends suggest that at some time in the near future the referendum would go the other way. Migrants from the UK were excluded, even though they are directly affected by the vote and legislation is on the table to give them votes for life in a UK election.
   
   
2. The vote was also won on the basis of clear lies of a kind that have never been used in a UK election before. There is strong evidence that these lies helped swing votes. I would add that the broadcast media facilitated the propaganda coming from most of the tabloid press, in particular by treating knowledge as opinion.
   
   
3. The referendum was only about leaving the EU, and not about how we leave the EU. In particular, it was not about leaving the Single Market. We have no way of knowing which way a referendum on the Single Market would go. May’s logic that the referendum was ‘really’ about immigration and that therefore we have to leave the Single Market is conjecture. Polls on immigration that do not also note the costs of reducing immigration are worthless, like polls that ask about cutting taxes.
   
   
4. A proper response to the referendum would be to note that many ways exist to leave the EU, including staying in the Single Market, and allow parliament to decide what the UK’s negotiating position should be. The statesman like response to such a narrow vote would be to seak the softest of Brexits. The fact that May does not wish that to happen is an affront to parliamentary democracy. That alone is reason enough to vote against.
   
   
5. [Added 30/1/17] What triggering Article 50 actually means is still unclear. Is it reversible? Do we have to wait until we leave before we can negotiate new trade agreements with the EU? As Rick says, you would not exchange contracts on a house with these kind of fundamental uncertainties unresolved. Why has everything to be so rushed?   

But alas, being realistic, this is not the basis on which many MPs will vote. Instead they will think about their political careers, and the backlash they will encounter if they vote No to Article 50. But conventional wisdom on this is at best incomplete and quite probably wrong for many MPs.

The assumption in much of the media, encouraged of course by the tabloids, is that MPs in constituencies that voted Leave will face a backlash from angry Leave voters if they personally vote No to triggering Article 50. However it is far from clear that the number of Leave voters who would change their vote on this basis is greater than the number of Remain voters who will do the opposite. My reason for thinking this is partly the local and national election results since the Brexit votes, where we have seen huge swings to the LibDems in both Remain and Leave constituencies. It is also because, unlike Leave voters, many remain voters are personally affected by the referendum result. They may have family living in the EU, or have close colleagues who are from the EU. They may work in firms that could well decide or be forced to downsize if we leave the Single Market.

If May is defeated on Article 50, she will almost certainly call an immediate election. How will the fortunes of a MP that voted for Yes to triggering Article 50 compare to any that vote No? Labour MPs that vote No will lose some Leave voters, but these are likely to split between Conservatives and UKIP. They may do this even if they vote Yes because they will have read in their papers that Labour is stalling Brexit. Conservative voters that vote No are unlikely to lose many votes to UKIP. Those from either the Conservatives or Labour that vote Yes are likely to lose many Remain voters to the LibDems. How these opposing forces pan out is very difficult to judge, and is likely to vary a great deal across constituencies, and without additional information it is far from obvious why MPs should only worry about Leave voters.

Labour MPs may feel that they are bound to lose badly in a quick election because Corbyn is so unpopular. I think that is right, but for every reason why that might get better by 2020 I can think of reasons why it will get worse.

But all this is thinking short term. MPs that are not ideologically opposed to the EU must surely know that Brexit is very likely to be a disaster. The impact of leaving the Single Market is going to be pretty bad, but as the OBR has made clear the impact of reduced immigration from the EU on the public finances is also going to be large. To tell yourself that this is all uncertain is to deliberately ignore the judgement of the best economists both at home and overseas and the major economic institutions. The outlook for the NHS and other public services is therefore dire.

The government’s position is full of contradictions. They are desperate to make trade deals with anyone, but are prepared to see a sharp fall in trade with the huge market that is our closest neighbour. They say that leaving the EU is to regain sovereignty, but every expert knows that the major gains from trade, particularly for the service orientated UK economy, come from reducing non-tariff barriers which inevitably compromise sovereignty (look at UK trade to the EU before and after we helped create the Single Market). Do we really want to take back control from Europe only to give it to Donald Trump?

The political implications of May’s strategy are more speculative, but initial signs are not good. May now finds herself unable to condemn the immigration policy of President Trump that overtly discriminates against Muslims including UK MPs, and which is the biggest gift to terrorists since Bush talked about a crusade. (At least when that happened Blair was quick to tell him to stop.) May has threatened to turn the UK into a tax haven if the EU do not meet our demands, once again without parliament having any say. All this makes her desire to help the left behind and the just managing into empty words that will become a sick joke. She sees reducing immigration as an absolute priority, which will further hurt business and feed growing UK xenophobia.

All this means that Conservative MPs who will vote with the government because they have ambitions for a ministerial career will find if they succeed that they will spend most of their time administering cuts. If it passes, the Article 50 vote will soon be regarded by Labour members as they now regard the vote over the Iraq war, meaning that those that vote Yes will find it very difficult to achieve a senior position in the Party. Another comparison with similar implications is Suez, another failed attempt to regain a lost imperial past.

All this should make MPs very reluctant to base their decision on perceived self interest, when that cuts so many ways. They should instead heed the words of a well known ex-MP.

“The first duty of a member of Parliament is to do what he thinks in his faithful and disinterested judgement is right and necessary for the honour and safety of Great Britain. His second duty is to his constituents, of whom he is the representative but not the delegate. Burke's famous declaration on this subject is well known. It is only in the third place that his duty to party organization or programme takes rank. All these three loyalties should be observed, but there in no doubt of the order in which they stand under any healthy manifestation of democracy.” Sir Winston Churchill on the Duties of a Member of Parliament. (Source)

MPs should ask where stands the honour of Great Britain when its leader feels that Brexit
prevents her joining leaders in Europe and Canada in condemning Trump's Muslim ban.

[1] At present there is no mechanism for parliament to stop the process of leaving the EU once they trigger A50, whatever Corbyn may imply. Once we leave, rejoining will almost certainly mean we would have to join the Euro, which is not a good idea..  

The UK’s 1976 IMF crisis in the light of modern theory

During the arguments over austerity, its supporters would often point to 1976 as evidence that it was possible for a country with its own currency to have a debt funding crisis. At the time this was frustrating for me, because I had been a very junior economist in the Treasury at the time, and my dim recollection was of an exchange rate crisis rather than a debt funding crisis. But I could not trust my memory and did not have time to do much research myself.

So with the publication of a new book by Richard Roberts on this exact subject (many thanks to Diane Coyle, whose FT review of the book is here), I thought it was time to revisit that episode combining Robert's comprehensive account with our current understanding of macroeconomic theory. I think any macroeconomist would find what happened in 1976 puzzling until they realised that senior policymakers did not have two key pieces of modern knowledge: the centrality of the Phillips curve, and an understanding of how the foreign exchange market works.

In terms of where the economy was, there is one crucial difference between 1976 and 2010. In the previous year of 1975 CPI inflation had reached a postwar peak of 24.2%. Although that peak owed a lot to a disastrous agreement with the unions, it probably also had a lot to do with the ‘Barber boom’ which had led to output being 6.5% above the level at which inflation would be stable in 1973 (using the OBR’s measure of the output gap). Although this output gap had disappeared by 1975 and 1976, inflation was still 16.5%. Given the lack of any kind of credible inflation target a period of negative output gaps would almost certainly be required to reduce inflation to reasonable levels.

The lack of understanding by senior policymakers of how the foreign exchange market worked was due to floating exchange rates being a novelty, Bretton Woods having broken down only 5 years earlier. We had a policy of ‘managed floating’, where policymakers thought the Bank of England could intervene in the FOREX markets to ‘smooth’ the trajectory of the exchange rate. My job at the time - forecasting the world economy - was a long way from where the action was, but my main recollection of the time comes from one of the periodic meetings of all the Treasury’s economists. It seemed as if the Treasury’s senior economists believed in the ‘cliff model’ of the exchange rate. The cliff theory suggests that if the rate moves significantly away from the target that the Bank was aiming at, it would collapse with no lower bound in sight. At the meeting I remember some more junior economists (but more senior than I) trying to explain ideas about fundamentals and Uncovered Interest Parity, but their seniors seemed unconvinced.

It is much easier to understand the 1976 crisis if you see it as a classic attempt to peg the currency when the markets wanted to depreciate it, and this is the main story Roberts tells.. The immediate need of the IMF money was to be able to repay a credit from the G10 central banks that had been used to support sterling. It is also true that sales of government debt had been weak, but Roberts describes this as stemming from a (correct) belief that rates on new debt were about to rise - a classic buyers strike. Although nominal interest rates at the time were at a record high, they were still at a similar level to inflation, implying real rates of around zero.

Here we get to the heart of the difference between 2010 and 1976. If there had been a strike of gilt buyers in 2010, the Bank of England would have simply increased its purchases of government debt through the QE programme, the whole aim of which was to keep long rates low. They could do this because inflation was low and showed no sign of rising. Contrast this with 1976, with inflation in double figures but real rates were near zero.

I think what would strike a macroeconomist even more about this period was the absence of the Phillips curve from the way policymakers thought. Take this extract from the famous Callaghan speech to the party conference that Peter Jay helped draft.

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you with all candour that that option no longer exists, and so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step”

As a piece of text it only makes sense to modern ears if there is a missing sentence: that we failed to raise taxes and cut spending in a boom. Far from a denunciation of Keynesian countercyclical fiscal policy, it was an admission that politicians could not be trusted with operating such a policy, essentially because they imagined they could beat the Phillips curve using direct controls on prices and incomes. The fact that fiscal rather than (government controlled) interest rate policy was being used as the countercyclical instrument here was incidental.

Reading this book also confirmed to me how misleading the Friedman (1977) story of the Great Inflation was, at least applied to the UK. These were not policymakers trying the exploit a permanent inflation output trade-off, but policymakers trying to escape the discipline of any kind of Phillips curve. They were also policymakers who had not fully adjusted to a floating rate world, and the IMF crisis was superficially a failed attempt to manage the exchange rate. More fundamentally It was also a reaction by the markets to a government that was not doing enough to bring down an inflation rate that was way too high. The IMF loan was useful both as a means of paying back existing foreign currency loans, but also a means of getting fiscal policy and therefore demand to the level required to reduce inflation.

Although inflation fell steadily until 1979, another boom in 1978 together with rising oil prices reversed this, and through the winterof discontent helped elect Margaret Thatcher. Unfortunately the IMF crisis and the 1970s more generally is another example of the consequences of politicians, in this case particularly those on the left, not accepting basic lessons from economics.            

Did centrism beget populism?

Warning: amateur political science below

Stewart Wood has a well argued piece in the New Statesman, saying that it was the move by left and right towards a common centrism that laid the foundations for populism. Although parts of his argument ring true, I find others less convincing..Labour certainly moved to the centre and beyond in terms of its economic policies. The Conservatives moved to the centre in terms of social policy. But on economic policy, the Conservatives moved strongly to the right with austerity. Senior Labour thinkers still seem to have a blind spot on austerity.

Let me start by looking at the country that now has populism in spades as a result of electing Donald Trump as President. To argue that the Republican party has been moving to the centre over the last 30 years is obvious nonsense. The traditional centre right virtue of fiscal rectitude went out of the door with Ronald Reagan, and was completely ignored under the second Bush. The Republicans only extol the virtue of cutting budget deficits when they are not in power. When they are in power, they want cuts in taxes for the rich, increases in military spending but cuts in other government programmes.

Margaret Thatcher was considered pretty right wing when she was in power. Many of her key achievement in terms of her own agenda, such as a diminished union movement and shrinking the state through privatisation, were not reversed by Blair and Brown. It is difficult to argue that the Cameron/Osborne duo made any attempt to undo the Thatcher legacy. Instead they tried to go beyond it, by shrinking the state to a size relative to GDP not seen since the end of WWII. They did it under the pretense that they were forced to because otherwise the markets would no longer buy government debt. This was a colossal deceit. There no evidence that markets were concerned about government debt, and strong evidence that they were not. [1] This deceit should have become clear when Osborne cut taxes at the same time as continuing to cut spending.

Let me use a diagram to illustrate what I mean. [2] (The vertical axis could also be labelled 'identity' as well as 'culture'.) No doubt we could discuss the detail of the size and direction of the arrows, but I think this is roughly right.

In the US, the Republicans had moved steadily in a downward, socially conservative right wing direction, whereas the broad church that are the Democrats have largely remained in the same place (unless you go as far back as the southern Democrats). One possible argument is that this move by Republican politicians helped create the Tea Party. Republicans have always pretended their policies would help ordinary people, whereas in reality they have helped a rich elite. This has laid the ground for a populist leader who was prepared to move economic policy in certain respects away from the right (in particular advocating protectionism). The growing loss of respect of Republicans for their party elite allowed voters to ignore the views of senior Republican leaders in selecting Trump as their candidate.

In the UK David Cameron moved the Conservatives to become much more liberal, by in particular supporting gay marriage. (When I argued in an earlier post that the Conservatives had moved to the right, I was surprised how many comments I got back telling me this was nonsense, and naming gay marriage as the main reason why.) In the UK this left a large gap in this political space, which UKIP - the first successful mass party in England since the SDP - filled. As Jonathan Wheatley showed, UKIP members are social conservatives, but are much more left wing than the Conservatives in terms of economics.

Labour moved to the right under Blair, while remaining socially liberal. I agree with Stewart Wood that this alone was important in preparing the way for populism. As well as the lack of a major industrial policy, they did nothing to curb a rampant financial sector or reverse the gains of the 1% that were a feature of the Thatcher period, a point emphasised by Jean Pisani-Ferry in respect of both the UK and US. I think New Labour’s position is better described as liberal rather than neoliberal: New Labour substantially increased the amount of resources (as a proportion of GDP) going to the NHS, and they also did a great deal to try and reduce child poverty. Labour moved further right (and more neoliberal) as they became more accommodating towards austerity. It was hardly a surprise that party members tried to pull the party back by electing Corbyn as leader.

As I argued here, Brexit was a perfect storm where the economically left behind united with social conservatives. With Labour no longer seen as representing the working class, this allowed the right wing media (with the support of the Conservatives) to help convince the left behind that their problems were a consequence of immigration. The Leave campaign was populist in the sense I describe here: advocating a superficially attractive policy to some that would leave everyone worse off. Much the same is true for Trump, who won the electoral college by convincing the left behind that he really could bring back their traditional jobs, something he will be unable to do in any kind of general way.

So the idea of growing centrism in the US makes no sense, yet it is they who have just voted for a populist President. In the UK it only makes any kind of sense if you think in one dimensional terms.

[1] This is essentially because the Bank of England was pledged to buy whatever it took in the way of government debt to keep interest rates low.

[2] I think the first time I began thinking in this two dimensional way was this post, but more recently I used it to analyse the forthcoming French election.  

Attacking economics is a diversionary tactic

Forgive the numbered note form. For some reason it seems appropriate to me in this case

1. The financial crisis in the UK was the result of losses by banks on overseas assets, originating from the collapse in the US subprime market. It was not a result of excessive borrowing by UK consumers, firms or our government. As the Bank’s Ben Broadbent points out, “Thanks to the international exposure of its banks the UK has been, in some sense, a “net importer” of the financial crisis.” This overseas lending caused a crisis because banks were far too highly levered, and so could not absorb these losses and had to be bailed out by the government.
   
   
2. This is why UK macroeconomists failed to pick up the impending crisis. They did routinely monitor personal, corporate and government borrowing, but not the amount of bank leverage. Macroeconomists generally acknowledge that they were at fault in ignoring the crucial role that financial sector leverage can play in influencing the macroeconomy. There has been a huge increase in the amount of research on these finance-macro linkages since the crisis.
   
   
3. But supposing economists had ensured that they knew about the increase in bank leverage and had collectively warned of the dangers of excessive risk taking that this represented. Would it have made any difference? There are good reasons for thinking it would not.
   
   
4. The main evidence for this is what has happened after the crisis. Admati and Hellweg have written persuasively that we need a huge increase in bank capital requirements to bring the ‘too big to fail’ problem to an end and avoid a future banking crisis, and the work of David Miles in the UK has a similar message. I have not come across an academic economist who seriously dissents from this analysis, but it has no impact on policy at all. The power of the banking lobby is just too strong.
   
   
5. So the response of economists to the financial crisis has been as it should be. The error in neglecting bank leverage is being addressed. Economists have come up with clear proposals about how to avoid the crisis happening again. And these proposals have been pretty well ignored.
   
   
6. In terms of conventional monetary and fiscal policy, academic economists got the response to the crisis right, and policymakers got it very wrong. Central banks, full of economists, relaxed monetary policy to its full extent. They created additional money, rightly ignoring those who said it would bring rapid inflation. Many economists, almost certainly a majority, supported fiscal stimulus for as long as interest rates were stuck at their lower bound, were ignored by policymakers in 2010, and have again been proved right.
   
   
7. So given all this, why do some continue to attack economists? On the left there are heterodox economists who want nothing less than revolution, the overthrow of mainstream economics. It is the same revolution that their counterparts were saying was about to happen in the early 1970s when I learnt my first economics. They want people to believe that the bowdlerised version of economics used by neoliberals to support their ideology is in fact mainstream economics.
   
   
8. The right on the other hand is uncomfortable when evidence based economics conflicts with their politics. Their response is to attack economists. This is not a new phenomenon, as I showed in connection with the famous letter from 364 economists. With austerity they cherry picked the minority of economists who supported it, and then implemented a policy that even some of them would have disagreed with. (Rogoff did not support the cuts in public investment in 2010/11 which did most of the damage to the UK economy.) The media did the rest of the job for them by hardly ever talking about the majority of economists who did not support austerity.
   
   
9. The economic costs of Brexit is just the latest example. Critics have focused on the most uncertain and least important predictions about Brexit, made only by a few, to attack all Brexit analysis. The fact that this prediction involved an unconditional macro forecast, while the assessment made by a number of groups about the long term cost involves a conditional projection based largely on trade equations, seems to have completely escaped the critics. More important, the fact that the predicted depreciation in sterling happened, and is in the process of already causing a large drop in living standards, is completely ignored by these critics.
   
   
10. Attacking economists over Brexit is designed to discredit those who point out awkward and uncomfortable truths. Continuing to attack economists over not predicting the financial crisis, but failing to ignore their successes, has the effect of distracting people from the group who actually caused this crisis, and the fact that very little has been done to prevent a similar crisis happening in the future.