Tuesday, 23 August 2016

Minority rule: Migration, Brexit and Mandates

It is generally (not universally) agreed that the issue of migration played a large role in leading 52% of UK voters to want to leave the EU. However that does not mean there is a mandate to end Freedom of Movement (FoM) at the cost of losing access to the single market. I’m rather surprised by the number of people who think it does. There are lots of reasons why it does not, like voters being told they could end FoM and still stay in the single market, like that many people voted to end FoM because they wanted a better NHS, whereas the opposite will be true in practice. (Tony Yates discusses this general point here).

However the clearest reason why Brexit does not mean there is a mandate for ending FoM was made by Ian Dunt yesterday. Put simply, it is that a majority of a majority can be a minority. The fact that many people voted Brexit because they wanted more control over immigration does not imply that a majority of all voters did.

Suppose that everyone understood that there was an unbreakable link between freedom of movement (FoM) and membership of the single market. Suppose all the 48% who voted to Remain prefered to keep membership at the ‘cost’ of retaining FoM. Suppose 48% of those voting Leave felt the opposite. But 4% of those voting Leave wanted a Norway style arrangement, and wanted to leave for some other reason than FoM . In this case a majority want to keep FoM, and do not want further migration controls if that means being out of the single market.

Of course these numbers are made up, although polling evidence does suggest a majority of people prefer being in the single market to ending free movement. But the key point is that we do not know what the true numbers are. Yet the presumption seems to be being made in lots of quarters, from researchers to politicians, that the referendum result means that we cannot go for any arrangement involving FoM. This just does not follow.

Nor does the fact that the Leave campaign focused on immigration make any difference. Again imagine that the 4% who wanted to leave for reasons other than immigration were rock solid about voting Leave. For the undecideds, however, immigration was critical. In which case any decent campaign would focus on the undecideds. We could change the figures to make it even clearer: 30% of Leavers were rock solid because of sovereignty or financial issues, but 22% were undecided and also worried about immigration. Again a good campaign would focus on immigration, even though it was a minority concern. Election results, like prices, are determined at the margin.

There is therefore no mandate from the referendum result to sacrifice membership of the single market in order to end free movements. Which is one excellent reason why we need a second referendum on the final terms for Brexit before we leave.  

Monday, 22 August 2016

New Labour and neoliberalism

Anyone who talks about New Labour as being a “disciple of neoliberalism” really should define what they mean by neoliberal. One of the defining characteristics of neoliberalism as far as I am concerned is a dislike of ‘big government’. Neoliberals are not libertarians: they are happy to use the state and make it powerful in particular ways (e.g. defence). However neoliberals are in favour of the privatisation of many government activities, and cutting its welfare and redistributive roles. That is the only reason why austerity was a neoliberal policy.

There are lots of ways of measuring the size of the UK government, but here is one: government consumption as a share of GDP, using world bank data.

The share of UK government spending on this measure, as with others, rose steadily and significantly under the 1997-2010 Labour government. The contrast with the previous Conservative government could not be clearer. The positive benefit that brought to public services like the NHS was real and substantial.

There are other ways in which New Labour attempted to undo the impact of the market. One concerned child poverty. While they did not manage to reverse the increase in child poverty that occurred under Thatcher, it was not for want of trying. Relaxed about the inequality that came with neoliberalism for sure, but not relaxed about poverty. New Labour introduced the minimum wage.

New Labour could be described as neoliberal in some of the other things it did, or did not do. But true disciples do not usually pick and choose which of their leader’s teachings they follow. When it comes to the rather important issue of the size of the state, New Labour was not neoliberal.

Saturday, 20 August 2016

Brexit, economists and journalists

What does a macroeconomist say when confronted with evidence that output has stopped growing since Brexit, but that retail sales growth is strong and employment is holding up? The first thing they would probably say is that monthly figures are erratic, and we really should wait and see (although the Bank was right to cut rates as a precautionary measure given the negative evidence we already have). Second, they might also say that a short term burst in the consumption of consumer goods made overseas is quite a sensible response to the collapse in sterling, as there is often a lag before an exchange rate fall is passed through into higher prices in the shops. Buy your washing machine now before the price goes up. Third, they might note the collapse in sterling has (for good economic reasons) preceded the negative impact of Brexit on trade, and trading firms might benefit from that in the short term. The real worry about the short term impact of Brexit is a collapse in investment, as firms put projects on hold until the nature of the Brexit deal becomes clear, but it is very difficult to guess how large that effect will be. But finally they would also note that if the depreciation in sterling we saw as the vote was announced is permanent, that means every person in the UK is poorer as a result. That has to be reflected in lower consumption eventually.

What does a journalist say confronted with the same evidence? If they voted for Brexit they say economists forecast Armageddon, and it has not happened. They say “ it is obvious that the sky has not fallen in as a result of the referendum, and those who said it would look a bit silly.”

This is an old trick. Completely exaggerate what the other side says, and then cry victory when that exaggerated fiction does not come to pass. I remember 2013, and how the first sign of UK growth (growth in income per head that was at best on trend, rather than above trend as you would expect in a recovery) was proclaimed as vindication of 2010 austerity. When I pointed out that this argument made zero economic sense, I was referred to statements by someone or other that said growth would never happen under austerity. Of course they did: when governments are doing stuff that is causing serious harm and appear not to be listening it is human nature to overstate your case.

Exactly the same no doubt happened over Brexit. But most economists, most of the time, have been absolutely consistent. The real damage that Brexit will do is medium/long term, and results from the straightforward fact that making it more difficult to trade with our immediate neighbours will harm growth. How much harm varies depending on the type of Brexit (which is still to be determined) and which study you look at, but in most cases the impact is large and permanent, and we will not know exactly how large for years. Economists also said there would be noticeable short term disruption caused by uncertainty about the exact nature of Brexit, but how large that short term impact would be is very difficult to estimate, and it was of secondary importance compared to the longer term costs. They did not talk about Armageddon, and they did not talk about the sky falling in.    

The lesson of all this is that the reporting of economics in a good deal of the UK press is hopelessly biased by politics. Of course academic economists are not immune from this failing (and it is a failing), but most try not to succumb. Any group that is so consistently misrepresented in the press, and whose advice is so consistently ignored, would organise some form of resistance and defence. Just how much harm has to be done to the UK economy before academic economists do the same?

Helicopter Money: missing the point

I am tired of reading discussions of helicopter money (HM) that have the following structure:

  1. HM is like a money financed fiscal stimulus
  2. HM would threaten central bank independence
  3. So HM is a bad idea

(Admittedly here (3) is only implicit.) What these discussions never seem to ask, even when discussing (2), is why we have independent central banks (ICB) in the first place. And what they never seem to note, even in establishing (1), is that ICBs deny the possibility of a money financed fiscal stimulus (MFFS).

ICBs exist to avoid problems when politicians do macro stabilisation. But creating an ICB means that a MFFS is no longer possible. It could only happen through ICB/government cooperation, which would negate independence. But proponents of ICBs say this is no problem, because macro stabilisation can be done entirely by using changes in interest rates, so a MFFS is never going to be needed.

Then we hit the Zero Lower Bound. Unconventional monetary policy (e.g. QE) is a far more uncertain and unreliable stabilisation tool than fiscal policy. Which means ICBs cannot do the job there are required to do, and their existence prevents a MMFS.

To then say no problem, governments can do a bond financed fiscal expansion is to completely forget why ICBs were favoured in the first place. Politicians are not good at macroeconomic stabilisation. If you had any doubt about that, global austerity should be all the proof you need.

So demonstrating (1) does not, I repeat not, imply that ICBs do not need to do HM. Implying that it does is a bit like saying governments could set interest rates, so why do we need ICBs. Most macroeconomists would never dream of doing that, so why are they happy to use this argument with HM?

Which brings us to (2). Now (2) is never in my experience examined with the same rigour as (1): it seems almost that just mentioning ‘fiscal dominance’ is enough to frighten the horses. The only circumstances I can see where (2) would be true is if, following HM and a subsequent upswing, the central bank finds that it runs out of assets to sell in order to keep rates high and prevent inflation exceeding its target. One obvious solution is for the government to recapitalise the central bank.

Does that compromise central bank independence? The Bank of England does not think so. It got the government to agree to make good any losses from QE. Have people worried that this compromises the independence of the Bank of England Of course not: no one can seriously imagine a UK government ever reneging on this commitment. So why would HM be any different?

Let me put it another way. Imagine the set of all governments that would refuse a request from an ICB for recapitalisation during a boom when inflation was rising: - governments of central bank nightmares. Now imagine the set of all governments that, in a boom with inflation rising, would happily take away the independence of the central bank to prevent it raising rates. I would suggest the two sets are identical. In other words, HM does not seem to compromise independence at all.

So please, no more elaborate demonstrations that HM is equivalent to a MFFS, as if that is an argument against HM, without even noting that ICBs prevent a MFFS. No more vague references to HM threatening independence, without being precise about why that is. And please some recognition that the whole point of ICBs is not to have to rely on governments to do macro stabilisation.

Friday, 19 August 2016

Hard truths for the IMF

It is to the IMF’s credit that they have an Independent Evaluation Office, and their recent report on the Eurozone crisis is highly critical of the IMF’s actions. The IMF’s own staff told them in 2010 that Greek debt could well not be sustainable, but the IMF gave in to European pressure not to restructure Greek debt. Instead the Troika went down the disastrous route of excessive austerity, and the IMF underestimated (unwittingly or because they had to) the impact that austerity would have. In the last few years we keep hearing about an ultimatum the IMF has given European leaders to agree to restructure this debt, and on each occasion the IMF appears to fold under pressure.

These repeated errors suggest a structural problem. Back in 2015, Poul Thomsen, who runs the IMF’s European department, said “we need to ensure that we treat our member states equally, that we apply our rules uniformly.” But that is exactly what the IMF has failed to do with the Eurozone and Greece. As Barry Eichengreen writes
“When negotiating with a country, the IMF ordinarily demands conditions of its government and central bank. In its programs with Greece, Ireland, and Portugal, however, the IMF and the central bank demanded conditions of the government. This struck more than a few people as bizarre.
It would have been better if, in 2010, the IMF had demanded of the ECB a pledge “to do whatever it takes” and a program of “outright monetary transactions,” like those ECB President Mario Draghi eventually offered two years later. This would have addressed the contagion problem that was one basis for European officials’ resistance to a Greek debt restructuring.”

We could add that, since the Asian crisis of the late 1990s, the fund have understood the dangers of taking actions which just favour creditors, but as part of the Troika it sits down on the same side of the table as the creditors.

As Eichengreen also notes, it is not as if the IMF have had problems demanding commitments from regional bodies such as African or Caribbean monetary unions and central banks in the past. The problem is much more straightforward. He notes that European governments are large shareholders in the Fund, and that “the IMF is a predominantly European institution, with a European managing director, a heavily European staff, and a European culture.”

In other words we have something akin to regulatory capture. The IMF’s job is to be an impartial arbitrator between creditor and debtor, ensuring that the creditor takes appropriate losses for imprudent lending but also that the debtor adjusts its policies so they become sustainable. In the case of the Eurozone it has in effect sided with the creditors, and ruinous austerity has been the result of that.  

Wednesday, 17 August 2016

Hope, experience and the left

Paul Mason has an article in the Guardian which I think exemplifies where many on the left are right now. He looks back at the electoral failure of Michael Foot in 1983 and the formation of the SDP, which together began the gradual marginalisation of the left in the UK. He goes through the obvious differences between that history and now, but then notes a key similarity:
“As with the SDP, there is a prospect that a few entitled Labour MPs will split, and that the media will get behind the narrative that they are the “true” Labour party. Disunity has already damaged Labour in the polls, just as it did with Michael Foot.”

Why will that not matter this time? His answer seems to be that neoliberalism is on its last legs and the Labour party has 300,000 new members, which he describes as the main event of 2016. These are times of hope for the left, he says.

Of course a revitalised membership is great, as long as that membership understands that it is just one small part of what has to happen to actually change things. It has to combine with a united parliamentary party if it is to have any hope of victory. Just try putting yourself in voters’ shoes: voters who know little of politics, but want to elect a prime minister and a party that will govern well and govern in their interests. In Labour they see a party that has voted no confidence in their leader. It really does not matter if that happened yesterday or 4 years ago because the media will remind all concerned as if it was yesterday. They will say to themselves if their own MPs have no confidence in Labour’s leader, how can I?

I have made this point so many times over the last few weeks. Responses fall into two kinds. The first says that if Corbyn is reelected, MPs must unite behind him, and it will be disgraceful if they do not. If it all breaks down, it will be their fault. But MPs are not soldiers who must carry out orders (although even soldiers ordered into battle by a commander they think is hopeless do not fight very well), but people who have experienced Corbyn’s leadership at first hand. To disregard their experience as just the smears of Blairite plotters is escapism. There are some smears of course, but there is also real frustration and anger among MPs at failures of leadership. If this experience of MPs is ignored, it will be Labour party members, and they alone, who are responsible for the consequences of the votes they cast.

The second response is that the party will have to replace its troublesome MPs. Here history does suggest that this is a excellent way of achieving the split on the left that Paul Mason agrees may happen. To cross fingers and hope it does not happen, or to imagine it will not matter this time, is a triumph of hope over experience, to put it kindly.

But what about the imminent demise of neoliberalism? Here I have to disagree with Paul Mason. The main event of 2016 was the Brexit vote, not 300,000 new Labour members. To think otherwise is delusion. The Brexit vote, in its way, was a blow against neoliberalism, but of an entirely reactionary kind. Economic crises embolden both the radical left (those 300,000 new members) and the reactionary right, and how that turns out depends in part on how united, organised and smart each side is. Under Corbyn, even with 300,000 new members, the left was not able to stop Brexit. Thinking the next time will be different is again putting hope over experience.

What is more, this hope seems rather selective to me. What about putting hope a leader who is standing on a radical economic programme with no question marks over their commitment to closer ties with Europe. He cannot be trusted, I am told, even though he was once ‘core group plus’. Little hope extended there. What about a leader who will be able to unite the party, with a chance of taking power back from this Conservative government that is doing so much harm. He will be overthrown by the Blairites, I am told, even though according to the Corbyn camp the original number of hostile MPs numbered less than 40. This is close to paranoia. 

This is not a hopeful left, but a left that wants to rerun past victories rather than adapt to reality. A left that will not allow itself to believe that by electing Corbyn in 2015 the membership has stopped the drift of the party to the right. A left that does not want to see how Brexit has changed the political landscape. And above all else a left that will not let go of a leader who started out with less than 40 hostile MPs and ended up with 172. A man who is not a victim of some Blairite plot but of his own inability to lead.

Brexit and Trump supporters

This study that looked at Trump supporters has got quite a bit of publicity. Some have been surprised that “his supporters are less educated and more likely to work in blue collar occupations, but they earn relative high household incomes, and living in areas more exposed to trade or immigration does not increase Trump support.” They also tend to be a little older. Having looked at who voted for Brexit, I was not surprised.

The two clear explanatory variables for those who voted that the UK should leave the EU were education and age. Much has also been made of the fact that, other things equal, those from areas of the country that suffered from deindustrialisation over the last 30 years tended to vote Leave, but there was no correlation with levels or rates of change of income. Nor is there any clear correlation between Brexit support and levels of immigration, again matching this study’s findings for Trump support.

One of the most striking findings from the post-Brexit Ashcroft poll was the answer to the following question: “Overall, life in Britain today is better/worse than it was 30 years ago’. While Remain voters overwhelming chose better, a clear majority of Leave voters chose worse. If you take that question to be only about individual living standards, then there is no way half the population have had declining living standards over the last 30 years. But why should a question about ‘life in Britain today’ be interpreted in narrow economic terms?

In the case of Brexit we had a coalition between two groups who had reason to feel aggrieved at trends over the last 30 years: social conservatives within an increasingly liberal society and those living in areas that had not shared in metropolitan economic success. You could say that both groups, in different ways, had been left behind and therefore become alienated by the dominant sectors of society. (See this study by Jennings and Stoker, for example.)

The Trump study finds “more subtle measures at the commuting zone level provide evidence that social well-being, measured by longevity and intergenerational mobility, is significantly lower among in the communities of Trump supporters. The causal mechanisms linking health and intergenerational well-being to political views are not well-understood in the social science literature. It may be the case that material circumstances caused by economic shocks manifest themselves in depression, disappointment, and ill-health, and those are the true underlying causes. Or, it may be that material well-being and health are undermined by a cultural or psychological failure to adjust and adapt to a changing world.” [typos corrected]

Times of rapid economic and social change can leave large parts of society left behind, particularly if they are not equipped with the skills required to adapt. When incomes then stop growing, these groups long for things to be how they used to be (to 'make America great again'). The most obvious manifestation of change is the prospect (not actuality) of living with different people and cultures: hence 'taking back control' over immigration in the UK and building a wall in the US. What the Brexit vote showed is that when this fear of the new is combined with a protest over relative economic deprivation it can become a dangerous political force. For the US we can just hope that to be forewarned is to be forearmed.