Saturday, 18 November 2017
Thursday, 16 November 2017
What we are seeing in the UK right now is quite incredible. The referendum vote itself was quite something: people voting to make themselves poorer than they might otherwise be for some ill-defined notion of control or because of myths about immigration. But what has happened subsequently is even more extraordinary.
With a referendum vote so close, it would have been both natural and statesmanlike for the government to go with the majority in the most unifying way possible. The obvious way forward would have been to arrange a open-ended transition where we were out of the EU but still in the Customs Union and Single Market, leaving the government to see what it might be possible to negotiate as an alternative. In other words the policy the Labour party are currently suggesting. From the polls that seems to be what the majority of people want. Little would change for business, so this way forward from the vote would have caused only minor immediate economic damage.
Instead of this, it seems that the leaders of the Leave campaign have not just won that vote, but have effectively taken over the government, dictating not just the government's preferred terms and timetable of leaving but also taking away large chunks of power from parliament at the same time, Henry VIII style. A few brave Conservative MPs plea for parliament to be given just a minimal say in some of the most profound changes in the UK in decades, and their faces are put on the front page of the main ‘serious’ right wing newspaper under the headline ‘mutineers’.
How can this be happening in a country known for its pragmatism? It seems more like the revolution that happened 100 years ago, where the revolution’s leaders declare any doubt or deviation from the path they decide as treachery. Any suggestion that it might be to our advantage to conduct negotiations to Leave in a slightly different way is declared as nothing more than a plot to overturn the Revolution. At one stage business leaders had to pretend Brexit was going to be wonderful before they were allowed to talk to ministers. Anyone who dares to point out bits of reality that might get in the way of the one true path is a saboteur that really wants to overturn the will of the people. This is a regime in a democracy that seems at times more like a dictatorship.
How can this be happening? How can so few wield so much power? Why does the Prime Minister, who was a Remainer, now dance to the tune of the revolution's leaders? A referendum in which 52% of voters chose just to leave the EU, nothing more, cannot confer this kind of power. Even the right wing press are not that powerful on their own. The answer I think lies in a group of perhaps little more than 100,000 people, two thirds men and around half of whom are over 65. They are the membership of the Conservative party.
These members are far more anti-European than the party’s MPs or its current Prime Minister. The threat the Brexiters have, which Remain MPs fear and which has governed so many of the Prime Minister’s actions, is that they will force a leadership election. In any election a Brexiter is almost certain to be on the ballot that goes to party members, and given that electorate (and the influence the Tory press have on them) a Brexiter will almost certainly win. They will then go for a clean break from the EU, or what is commonly known as No Deal.
What else could explain a Prime Minister putting forward legislation involving a fixed date to leave that might make her own life more difficult, just because it was suggested (one might guess) by the editor of a right wing tabloid at his birthday party? Why else does she tolerate almost open insubordination by her foreign secretary that would in any other situation have led to him losing his job. Why is she so concerned about keeping her Brexiter ministers happy and as a result ignores the rest of her MPs and by now the majority of the country? She has focused all her energy on preventing a rebellion from her right and as a result has completely neglected the discussions with the EU.
Although the influence of Conservative party members is talked about a bit, I still find the contrast with Labour just a year or two ago extraordinary. Then all that political commentators could talk about was the malign influence that half a million Labour party members were having on the opposition party. Yet here we have a much smaller group of Conservative party members effectively holding the government, parliament, the Prime Minister and therefore the country hostage, during the most important period of UK politics in a generation. Will our political commentariat that are not part of this revolution please wake up.
Tuesday, 14 November 2017
Jonn Elledge had a nice piece in the New Statesman about free trade. The question he poses is how Brexiteers can exalt free trade but want to leave the most developed free trade area in the world, the EU. The answer he gives is to distinguish between ‘free to’ and ‘free from’. When economists talk about free trade they mean free to trade, which is what the EU has achieved through regulatory harmonisation in particular. Brexiteers mean ‘free from’ in the sense of trade free from government intervention.
I think we can go beyond what Elledge says and make exactly the same point about the term ‘free market’. A Brexiteer might think of a free market as a market free from government interference, including government regulations. An economist would be more likely to talk about a free market as one where people were free to trade in a socially optimal way. The state might be required to make that happen in many ways.
To take just one example, markets can sometimes not exist because of information asymmetries, but if those asymmetries are removed then people can beneficially trade. (Economists will immediately recognise this as Akerlof’s famous market for lemons.) Removing those asymmetries does not necessarily require government, but government could play that role. If it did, we would have a free market as an economist would define it, but only as a result of what some on the right might call government ‘interference’. As Mariana Mazzucato would argue, the state can also create markets through organising research and development.
Two governments that harmonise each others regulations can create better markets in both countries by increasing competition. Equally there are other government measures that make markets work better. The most obvious example is to reduce monopoly power, which reduces prices and increases the quantity traded in that market. In truth the idea of a market completely free from government is semi-mythical: all markets work within a legal framework created and enforced by the state. When some people complain about government interference in markets, and eulogise ‘free markets’, they are really just complaining about forms of interference they do not like and are using the notion of freedom to glorify their distaste.
Nevertheless, I think this distinction between ‘free to’ and ‘free from’ its perhaps a way of resolving something of a paradox that I talked about in my neoliberal overreach piece. The paradox was whether Brexit can be described as neoliberal, as it involves the apparent illiberal destruction of a free trade area. If you see neoliberalism in practice or ‘in action’ as not so much a coherent (if flawed) unified theory (as here, for example), but rather a collection of views that encompass not just free trade but also promotion of the market and dislike of certain market interference, then neoliberal overreach can occur in any of those dimensions. 
So those like Osborne who wanted a smaller state so taxes could be lower (and perhaps for other reasons to) went for austerity as a means of achieving that. Those, like most Brexiteers, who wanted less regulation (including no state interference in how they personally avoid paying tax) pushed Brexit, even though it involved reducing the ability to trade. What Colin Crouch calls corporate neoliberals turned a blind eye to growing monopoly and rent extraction.
While all three groups were happy to eulogise free trade and free markets, conflicts arise over the interpretation of free. For the Brexteers free trade means freedom from government interference, while for Osborne it meant free to trade. For corporate neoliberals free markets means markets that are free from government limits on monopoly and attempts to avoid rent seeking, while ordoliberals want the state to control monopoly so markets are free to work for society.
Today for most people most of the time the idea of freedom generates positive emotions (although that itself is a social phenomenon, as Adam Curtis among others explored.) It is therefore a word worth expropriating for a political cause if you can. But by noting that conflicts arise between ‘free to’ and ‘free from’ we can perhaps see that all politicians are doing is trying to promote a form of freedom that suits their cause.
 In an interesting piece, Will Davies argues against the need to want to define political or social terms precisely as if they “connect cleanly and unambiguously to some object”.
Sunday, 12 November 2017
The hapless progress of the Brexit negotiations continues. I do not mean the almost childish nonsense of May’s new wheeze. Instead I’m talking about the Irish border. It seems, if you read most of the UK press, that out of the blue this new obstacle has been sprung on the UK at the last minute. Some of the press talk about surprise, while the Guardian talks about it ‘emerging’. Some have even decided to cover up their ignorance by inventing conspiracy theories. With political commentary in the UK largely reflecting the beliefs of the UK side, then this also means that this surprise extends to our negotiating team.
In reality there is nothing to be surprised about. The Irish border was one of the three issues to be dealt with in the first stage. As the UK government has consistently said they are leaving the Customs Union and Single Market (CU/SM), and have failed to convince even themselves that they can invent a new magically invisible border that can police countries that have different customs and regulatory regimes, it was only natural that an EU paper would suggest that Northern Ireland stay in the CU/SM to avoid a hard land border.
So why did the UK, and its media, seem to forget about this third issue, when even I had flagged it up as the critical issue a couple of months ago. What I think happened is that the Brexit side convinced itself that, because a hard border would only arise as a result of different trade regimes, then the border was really a trade issue and so should be in stage 2. In other words the EU had simply made a mistake in putting it in Stage 1, and would therefore quietly forget about it.
That reasoning was part wishful thinking and part delusion. Wishful thinking because, as I wrote back in September, it is a problem with no obvious solution that Brexiteers would accept. And delusion because the UK side continues to imagine that the EU is governed by Franco/German interests, and why would these countries be concerned about what happens in Ireland. What it completely failed to understand, and what the EU had understood, was the importance of the border issue to the people on both sides of it. It was an important reason why Northern Ireland voted to Remain.
But I wonder if there is something deeper behind the UK attitude. For too many people in England, the ‘troubles’ in Ireland were a quarrel in a strange country between people of whom we know little, to paraphrase Neville Chamberlain. As a result, there is little comprehension of why a hard border should be such a big deal. You would think memories of bombs going off in England’s cities would change that, but I’m not sure it did, anymore than more recent terrorism has led to a better understanding among English people of tensions within Islam. In contrast, most people in Northern Ireland would move heaven and earth not to go back to those times.
Even while all this might be true, it is no excuse for the same attitudes to be held by our political leaders. John Major knew better than this, as did Tony Blair. Only the arrogant disdain for different realities displayed by Brexiteers can explain a mistake of the magnitude of ignoring the border issue. I suspect any politician that lied the way the Brexiteers lie, or lived in the alternative reality they appear to live in, would not have survived long in UK politics two decades ago, whereas now it has become a criteria for holding high office.
At the end of the day there is little difference between Brexiteers who tell people that new trade deals with countries outside the EU can make up for trade lost with the EU, and Republicans who say scrapping Obamacare will extend coverage and their tax bill reduces taxes for most people. In both countries when the ability to gain office is determined by how well you can fire up or charm a base, because a large part of the media will then assure you have a good chance of winning elections, is it any wonder the political system fails to select for competence, understanding or respect for wisdom and knowledge.
There is a simple solution to the problem of the border. It is for the UK side to commit to only negotiate new trade arrangements that would be consistent with a soft border.  That would mean staying in the Customs Union and parts of the Single Market, but it could leave open the possibility of negotiating over the remaining parts of the Single market and perhaps free movement. Anyone who tells you that this concession by the UK side does not respect the referendum result is once again lying: Leave won precisely because they ruled no arrangement out. Any red lines erected after the referendum carry as much weight as the Prime Minister currently has authority.
Already we have many people in the UK saying why should we adapt our policies to keep the people of Ireland happy. This is the Chamberlain type attitude that I talked about earlier. The Irish border is at least as much our creation and our concern as it is of anyone else. Maintaining peace within the UK should be any government’s top priority. The fact that it has failed to make it onto Brexiteers to do list tells you as much about their outlook and competence as you need to know.
 Whether the UK will be forced to take this position I do not know. I stand by what I wrote recently that there will almost certainly be a deal, one element of which will be a transition where we stay in the EU/SM. Indeed I understated my case there. First, there can be no such thing as no deal. As Davis has explained, there are things that have to be sorted to keep planes flying and the like. He has described this as “some sort of basic deal without the bits we really want”. What that remark shows is that the ‘no deal is better than a bad deal’ line is simply a bluff and he knows it. The bad deal is no deal. And finally there is parliament. I know it has been pathetic until now, but that does not mean it would sign off on the worst possible kind of Brexit. But what the border issue will most likely show is that it is unlikely we will get to a deal involving transition without cabinet resignations.
Thursday, 9 November 2017
The Global Financial Crisis (GFC) defines how we think about our recent past, our present and our future, yet there is no clear consensus account of why it happened. There have been so many explanations put forward. On the US side these have included the Asian savings glut overwhelming the financial system, a failure of US monetary policy and a US housing bubble (and too much lending to poor people).  On the European side the focus has been on excess borrowing by, or excess lending to, the Eurozone periphery, and sometimes on the poor Eurozone architecture. Yet as I have read more and more on this, it seemed to me that we should be focusing on the financial sector in both the US and the Eurozone, and of course the UK. My view has become that the crisis happened because banks in the US and Europe became too highly leveraged, and were therefore a crisis waiting to happen.
It was for this reason that I found Tam Bayoumi’s presentation of his new book so interesting.
He argues that by 2002 almost all the ingredients for the crisis were in place. In Europe we had very large universal banks (combining retail and investment banking) which were far too highly leveraged. In the US retail and investment banking were separate, with tight regulations on retail banks but little regulation on investment banking leading to shadow banking (deposits effectively moved to investment banks, like Lehmans, that again became too highly leveraged). In 2002 these two were separated by geography, but a small regulation change in 2003 allowed linkages between the two to develop, and then it was only a matter of time before we had the GFC, where ‘Global’ here means the US and Europe.
How did these banks become over leveraged? According to Bayoumi in Europe the creation of Universal Banks represented a flawed attempt to create a single European market in banking. There were subsequent failures in regulation that allowed these banks to expand (increase leverage) by manipulating their own risk weighting. This allowed these banks to move into Southern Europe and North America in a big way. In the US investment banks were not regulated because of a firm belief by the Fed that competition provided its own regulation for this type of bank.
Thus the GFC was the story of an over leveraged, interconnected banking system on both sides of the North Atlantic, just waiting for a shock significant enough to bring the whole system to crisis point. The presumption, which history confirms, is that finance is naturally prone to such crises, which is why the sector is regulated, so this story is also one of regulation errors. Bayoumi argues that each one of these errors can be put down to genuine intellectual mistakes, but he did agree with me that it was sometimes difficult to tell to what extent they were also the result of political pressure from powerful financial interests.
Have governments and regulators on either side of the North Atlantic done enough since the GFC to correct the mistakes that were made? The answer is complex, and it is best you read the book to find out Bayoumi's answer. Instead I want to end by making one observation of my own. Whenever a crisis happens, in the immediate aftermath people bring their own biases to understanding why it happened. So those who had been writing about global imbalances re orientated their analysis to explain the GFC. Those who wanted to attack US monetary policy, sometimes as a way of distracting attention from the culpability of the financial sector, did so. Those that had designed the Eurozone in such a way as to avoid profligate periphery governments talked about excess borrowing by those governments.
You can see the same with Brexit and Trump. Although a protest by the ‘left behind’ played some role, the idea that they are the full story suits some narratives but it is simply incorrect, as the new paper by Gurminder K. Bhambra argues. Over time things become clearer. What this analysis by Tam Bayoumi convincingly shows is that finance always has to be carefully regulated, and failures in regulation can have catastrophic consequences.
 New evidence suggests that the housing crash may have actually had more to do with lending to property speculators than low income mortgage holders.
Tuesday, 7 November 2017
Last week’s rise in UK rates has been extensively analysed (see for example Tony Yates here) so I will be very selective. First, the justification for the title of this post is provided by an extract from the inflation report:
“The overshoot of inflation throughout the forecast predominantly reflects the effects on import prices of the referendum-related fall in sterling. Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly. And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures.”
The last sentence is particularly important: in plain language it is saying that Brexit is contributing to lower trend productivity growth, which the Bank now put at 1.5% compared to a pre-recession level of 2.25%. The wording is chosen carefully: they are not talking about uncertainty effects, but permanent effects from a likely deal. So last year worries about the demand side effects of Brexit led the Bank to reduce rates, and now concerns about the supply side effects of Brexit are contributing to higher rates.
Whether these modest increases in interest rates continue, as the Bank are signalling, should largely depend on whether the pickup in earnings growth they anticipate actually happens. As Torsten Bell from the Resolution Foundation argues here, the set of information that might justify the Bank’s expectations of an imminent recovery in earnings growth is not empty, but nevertheless many economists regard it as a brave forecast.
However the labour market is not the only reason the Bank is raising rates. Putting labour market issues aside, they think that because firms are operating with little ‘spare capacity’, any large increases in demand will be met by firms raising prices. Ergo the Bank’s job is to use higher interest rates to stop demand rising too fast. I think this is conceptually wrong, because it underestimates the role that demand and expectations about demand play in determining investment decisions.
A firm can meet rising demand in three ways: by investing in more productive processes, by raising prices or by using more of its spare capacity. In a traditional economic upswing firms first use spare capacity, then invest, and when capacity utilisation is at a peak and there are no profitable investments to make it raises prices. At that point it is right for a central bank to step in to moderate demand growth.
This has not been a typical recovery from a recession. Firms have used up spare capacity, but have not invested in more efficient processes. This is what measures of capacity utilisation suggest (taken from an earlier Bank of England Inflation Report).
If you just take these surveys as measuring the state of the cycle (and if we ignore the Bank Agents) since 2013 the economy has been experiencing an economic boom. Yet from 2013 core inflation has been below target and falling. You can resolve this paradox by thinking about firms acting unusually, by failing to invest and meeting additional demand by utilising capacity as if they are in a boom The result of that is stagnant productivity growth.
The conceptual error is to read these capacity utilisation numbers as indicating that there are no profitable investments to make. We know these profitable investments exist, because leading firms are improving their productivity.* What we have is an innovations gap, where lagging firms are not copying leading firms and are instead holding back on investing. We do not know why they are holding back, but one obvious reason is they have expectations of low future growth and/or high uncertainty about this growth. Empirical evidence shows the strongest determinant of investment is output growth, and the obvious rationalisation for that ‘accelerator effect’ is that current growth influences expectations about future growth.
If this is right, increases in demand will be met by firms finally coming off the fence and investing, rather than raising prices. But if the central bank starts raising interest rates to choke off demand, even when it is growing slowly by historical standards, it will validate the pessimism that has been holding back investment and productivity will continue to stagnate. There is a very real danger that the Bank may be playing its part in a self-fulfilling low growth recovery.
*Postscript (8/11/17) Discussion here by Berlingieri et al shows this growing divergence between leading and lagging firms is a global phenomenon.
*Postscript (8/11/17) Discussion here by Berlingieri et al shows this growing divergence between leading and lagging firms is a global phenomenon.
Saturday, 4 November 2017
Paul Romer has talked about two types of discourse, one political and one scientific. He uses that distinction to critique aspects of current practice among economists. I want to do the same for journalism.
Political discourse involves taking sides, and promoting things that your side favours. It is like a school debate: you consider only evidence that favours the point of view you want to promote. Scientific discourse involves considering each piece of evidence on its merits. You do not aim to promote, but assess and come to a conclusion based on the evidence. That does not prevent the scientist arguing a case, but their argument is based on considering all the relevant evidence. There are no sides that are always right or invariably wrong.
Of course, any scientist makes choices about what evidence is relevant, and this will be influenced by existing theories. Ideally the theory you prefer can be changed by new evidence, but scientists being only humans can sometimes be reluctant to accept evidence that contradicts long held theories. But there are always younger scientists looking for new ideas to make their name. The scientific method works in time, which is why we are where we are today.
My argument is that journalists should be like amateur scientists. Amateur because part of their work will involve seeking out expertise rather than starting from scratch, and they do not have the time or resources to investigate each story as a scientist might. A term frequently used is ‘investigative journalist’, but that normally means someone who has weeks to work on one story. Instead I’m talking about journalists who only have a day. The key point is that they should not search for evidence that fits the story they wanted to write before doing any research, but allow the evidence to shape the story.
For example, suppose the story is about EU immigrants and benefits. What a journalist should note is that unemployment among EU immigrants is lower than natives. What a journalist who wants to write a story that makes immigrants look bad might do is say that the number of EU immigrants without a job make up a city the size of Bristol. This combines selection of evidence (where is the equivalent figure for natives is not reported) with simple deception: most people conflate ‘without a job’ with ‘unemployed’, rather than being people happy looking after children, for example.
If this all strikes you as obvious, at least to journalists working in broadsheet newspapers, the example above is taken from the Telegraph, and the post in which I discuss it contains a tweet from a Times economics editor saying that all journalists (and yours truly) take a stance and select facts that supports this stance.
There is actually a third type of journalism, which you could call acrobatic discourse, because it is always looking for balance. It is sometimes called ‘shape of the earth: sides differ’ journalism. Its merit is that it appears not to take sides, but as this extended name is meant to demonstrate, it is certainly not scientific. It is the kind of journalism that says the claim that £350 million a week goes to Brussels and could be spent on the NHS is ‘contested’, rather than simply untrue. In that sense, it can be uninformative and misleading, whereas scientific reporting is informative and is not misleading. Here is a twitter thread from Eric Umansky on a particularly bad example from the New York Times. Of course acrobatic journalism is easier and keeps the journalist out of trouble.
One of the side effects of acrobatic journalism is that it typically defines the two sides it wishes to balance. It therefore tends to be consensus journalism, where the consensus is defined by the politicians on either side. To see why this is problematic you just need to look at how Brexit is discussed and reported by the BBC since the referendum.
I began writing this post during the debate surrounding Nick Robinson’s Steve Hewlett Memorial Lecture. It is certainly strange for that debate to focus on outfits like The Canary, rather than the elephants in the room that produce political journalism to millions every day, who also tend to criticise the BBC whenever they get the opportunity. Yet the copy from these newspapers, and not The Canary, is regularly discussed by the broadcast media. The emergence of left social media journalism is a result of the consensus defining by-product of acrobatic journalism, which for a year or more defined the other side as the PLP rather than the Labour leadership.
I suspect many journalists would say that my idea of them being an amateur scientist is just impractical in this day and age, when they have so little time and resources. But what I have in mind (journalism as amateur scientists) is not very different from what journalists on the Financial Times do day in and day out. Chris Cook is an example of a journalist working in the broadcast media who does the same. But it is wrong to blame individual journalists for being more acrobatic than scientific, because the institutions they work for often demand it.
Nick Robinson’s lecture is much more nuanced and interesting that the subsequent media discussion would suggest. For example he identifies the problem with the way Facebook selects news that is discussed in more detail by Zeynep Tufekci in this TED talk. But there are two elephants in the room that he fails to discuss: the role of the increasingly politicised right wing press I have already mentioned, and the conflict between scientific and acrobatic journalism, both of which he praises without addressing the conflicts between them. 
 There is a clear example of this in the comments he recalls making on the Brexit debate just before the vote. He proudly says he called the £350 million claim untrue, but he then adds
Wednesday, 1 November 2017
This discussion by Roger Scully about why people in the Welsh Valleys voted Leave is depressing although not surprising. In essence it is immigration, bolstered by local stories of Polish people coming into communities and reducing wages. I doubt if quoting econometric studies about how little immigration influences wages would make much difference to these attitudes (although that is no excuse for people in authority who should know better ignoring these studies). I think it is attitudes like this, in places unused to immigration partly because work is not plentiful, that makes some politicians say that arguing in favour of immigration is ‘politically impossible’.
This is the first link between immigration and austerity I want to draw. The Labour party before 2015 had also decided that attacking austerity was politically impossible: ‘the argument had been lost’. Focus groups told them that people had become convinced that the government should tighten its belt because governments were just like households. The mistake here, as I wrote many times, was to assume attitudes were fixed rather than contextual. I was right: austerity is no longer a vote winner. 
Why might attitudes to immigration change? I strongly suspect that anti-immigration attitudes, along with suspicion about benefit claimants, become stronger in bad times. When real wages are rising it is difficult to fire people up with arguments that they would have risen even faster in the absence of immigration. But when real wages are falling, as they have been in the UK in an unprecedented way over the last decade, it is much easier to blame outsiders. Equally when public services deteriorate it is easy to blame newcomers.
It is wrong to think that this only happens among working class, left behind communities. Catalonia is a relatively rich part of Spain, and there has always been resentment about this area ‘subsidising’ the rest of the country. But it is very noticeable how support for pro-independence parties increased sharply as Spain turned to austerity, although that could also be a reaction to corruption scandals.
Here is the second link between immigration attitudes and austerity. Austerity has contributed to the slow growth in real wages and is the main cause of deteriorating public services, but often outsiders are easier to blame.
This is particularly true when it is in the interests of the governing political party and its supporters in the press to deflect criticism of austerity by pretending immigration is the real cause of people's woes. This is the third link between austerity and immigration, and it is one deliberately created and encouraged by right wing political parties. In this way Brexit has its own self-reinforcing dynamic. People vote for it because of immigration, its prospect leads to falling real wages as sterling falls and the economy falters, which adds to bad times and anti-immigrant attitudes.
If all this seems very pessimistic, it shouldn’t be. While the right will almost certainly continue to play the anti-immigration card in the short term, because they have few other cards to play, they can be opposed by a left that makes the case for immigration. As just as views on austerity have clearly changed, so can views on immigration. particularly once hard times come to an end.
However it is a mistake to imagine it is all about economics, or even ‘culture’. One of the unfortunate consequences of the culture vs economics debate over populism is the implication that one way or another views are deterministic, and the only issue is what kind of determinism. The reason I go on about the media so much is that information matters a lot too. Although people may be anti-immigration because they have xenophobic tendencies which are reinforced when times are bad, they can also be anti-immigration because they have poor information, or worse still have been fed deliberately misleading facts.
In my intray of studies to write about for some time has been this paper by Alexis Grigorieff, Christopher Roth and Diego Ubfal. (Sam Bowman reminded me it was there from this piece.) It is well known that people tend to overestimate the number of immigrants in their country. This international experiment showed that when people were given the correct information, a significant number changed their views. What is more, this change of view was permanent rather than temporary. Here is a VoxEU post about an experiment from Japan pointing in the same direction.
As well as emphasising simple information like this, politicians should expose the kind of tricks people promoting tougher controls on immigration play. The public tends to be receptive to the idea that it is beneficial for the economy to have immigrants with important skills, so they switch to calling for controls on low paid, low skilled workers. As Jonathan Portes demonstrates, that in practice can involve plenty of pretty skilled workers. The trick for pro-immigration politicians is to ask which occupations do we want to exclude: nurses, care workers, construction workers, primary school teachers, chefs? With UK unemployment relatively low, there are not many jobs where employers are not complaining of shortages.
Of course most people want to stop immigrants coming here and claiming unemployment benefit. This is why newspapers keep playing the trick of talking about the large number of migrants ‘who are not employed’, conveniently forgetting to mention that this includes people like mothers looking after children. In reality unemployment among EU immigrants is below that among the native population. In addition, we can already deport EU immigrants that remain unemployed under EU law if the government could be bothered to do so.
For politicians who do want to start making the case for immigration, the place I would start is public services. Few economists would dispute that immigrants pay more in tax than they take out in using public services. Yet most of the public believe the opposite. In this post entitled ‘Is Austerity to blame for Brexit’ I show a poll where the biggest reason people give for EU immigration being bad is its impact on the NHS. Getting the true information out there will have a big effect. Just as public attitudes to austerity can change, so can they over immigration, but only if politicians on the left start getting the facts out there.
 To be fair, whether I would have been right in 2014/15 if Labour had taken a clear anti-austerity line we do not know.
Monday, 30 October 2017
Everyone expects the MPC to raise rates on Thursday. This would be a mistake. Discussion about interest rate changes in the press normally involve large amounts of data and charts about the state of the economy. Here I want to do the opposite: to present the minimum you need to know to understand that raising UK rates right now is the wrong thing to do.
Everyone should know that UK inflation is currently around 3% because of the Brexit depreciation. But because the impact of a deprecation on price inflation is temporary if wage inflation remains flat, the Bank said they would ignore this temporary rise. The key is to look at whether average earnings inflation is responding to higher consumer price inflation. The answer is they are not: average earnings growth has been slightly above 2% all this year, which is a little lower than the average for 2016.
But what about unemployment being at a 42 year low? Surely that means earnings growth is just waiting to kick off. The first point is that unemployment is not currently a good measure of labour market slack. A better measure is the Resolution Foundation’s underemployment index, which is still above levels before the global financial crisis. And before you say but that was a boom period, it wasn’t. UK core inflation was below 2% throughout, and earnings growth was consistent with this.
The other thing to say is that it is quite wrong to assume that we know what the level of labour market slack is that would lead to increases in earnings growth (what economists call the NAIRU). The NAIRU moves over time. As just one example of why it might move, a labour force that rents is likely to be more mobile than one that owns a house, and so the trend towards renting should reduce the NAIRU.
So looking at the labour market, there is no sign that we are close to a level where earnings inflation might pick up. And that is pretty well a precondition for inflation to exceed its target of 2% over the medium term. That is all you really need to know. If you want to know why the MPC probably will raise rates, read on.
What I suspect the Bank are worrying about is that Brexit has created what economists call a negative supply shock. In particular, both investment and productivity growth are much lower than the Bank were expecting before Brexit. They will point to various survey measures which show firms do not have any spare capacity. But this reasoning I think indicates a conceptual weakness.
Firms have two responses to lack of capacity: raising prices or investment. By choking off demand and raising rates when firms run out of capacity the Bank will discourage investment, and right now what the economy desperately needs is more investment and the productivity improvements that brings with it. The Bank shouldn’t worry about a bit of inflation that might come with higher investment, because 2% earnings growth is an anchor that will prevent inflation deviating from target for any length of time.
That should be enough, but there are two other reasons why the Bank should not raise rates. First, right now the downside risk on the demand side from Brexit surely exceeds the upside risk. Second, as the OBR chart here shows (look at orange bars), after a pause in 2017 austerity is planned to return in 2018 and 2019. Combining fiscal and monetary tightening in a boom would make sense, but we are currently in an economic downturn, with GDP per head growing this year at a third of its average pace since the recession of 2009. 
Finally, it is always important to consider risks. Suppose earnings growth does pick up sharply just after the MPC’s monthly meeting. The Bank always says it wants to be ‘ahead of the curve’, to avoid too rapid an increase in rates. This is the mentality that has led inflation to undershoot in the US and Eurozone since the recession, and if you take out the impact of depreciations by looking at the GDP deflator the same is true for the UK. The problem for the UK economy since the recession has not been too much inflation, but far too little demand.
 Specifically, average growth in 2017 is 0.1% per quarter, and averaging quarterly growth rates from 2010 Q1 to 2016 Q4 gives 0.3% per quarter
Friday, 27 October 2017
The obvious answer to this question is that the negotiator, the UK government, is completely split on what it wants. But that is only part of an explanation for this shambles. In the first year I think actions were dictated by a completely unreal perception about power, and perhaps more recently by a need to avoid a coup by the hardline Brexiteers.
The people who might have thought about the negotiations before the vote itself, the Leave side, didn’t do so partly because they didn’t expect to win. But they also had completely unrealistic expectations of the relative power of each side. This was an advantage during the campaign, because they could say ridiculous things about the economic consequences of Brexit without knowing it was a lie. But once they had won, there were only two ways to go, and either of them led to an early implementation of Article 50.
The first possibility is that after the campaign they continued to believe that German car makers would pressure the German government and the EU to give us what we want, so why not bring that on by triggering A50. The second was that they began to doubt this, but that in turn led to a fear that once the people found out they had been told falsehoods about leaving they would change their minds. That too lead to an urgent need to trigger A50 before this happened.
But Leavers did not have a majority in parliament. Remain MPs must surely have realised that the EU had much more power than the UK (the proportionate cost of no deal is much greater for the UK), and that once A50 was triggered the clock was ticking for the UK, not the EU. David Allen Green has justifiably said I told you so, and I knew when I wrote a post entitled “The Folly of triggering Article 50” in November 2016 that I was just repeating expert opinion, and to be honest common sense. As I said there
“this has absolutely nothing to do with whether you voted to Remain or Leave. Anyone who actually wants a good deal from the EU when we leave should realise that the UK’s negotiating position becomes instantly weaker once Article 50 is triggered.”
The worst explanation for why the majority of MPs ignored this advice was that they didn’t hear it. (We know the Prime Minister did hear that advice from Sir Ivan Rogers.) Almost as bad was that they heard it but thought it was just a desperate ploy by experts to delay leaving. Those who want to say it is all because of mixed motives from the Labour leadership will do so. But I suspect there is a simpler explanation: MPs felt voting to delay was ‘politically impossible’.
Part of the reason it was ‘politically impossible’ is that the standard of reporting and debate among broadcasters on these issues is so poor that the argument that triggering A50 was bad tactics would simply not have got a proper hearing. In addition the tabloids would have screamed “enemies of the people” just as they did when three judges allowed MPs a vote. In this sense our media not only gave us a Leave vote, they forced an early triggering of A50 which was not in the country’s interests.
As I wrote in that earlier post, it “would only be a slight exaggeration to say [triggering A50] allows the EU to dictate terms” which is exactly what they are doing. In these circumstances, the best approach to the negotiations is to treat them as a cooperative exercise rather than a zero sum game. Yet we were led by Theresa May and David Davis, who were instead determined to treat this as a classical zero sum negotiation where, because you had more power, your best hope was to make the other side believe you will walk away. Yet that walking away threat was never credible, partly because of reasons already given, but more importantly because a deal on the EU's terms was better than no deal.
But despite this, in our negotiators minds the delusion that we have power in these negotiations as long as we threaten to walk away seems to persist. The lack of flexibility by the EU can be dismissed as them playing hardball. As firms move abroad because they need to plan and they cannot be certain of any transition arrangements, the cost of delusion will be paid for in lost UK output and lower incomes.
It is just possible that both May and Davis have begun to realise this, but the delusion of power has been replaced by something else, which is the fear of a coup by Brexiteers. The pro-Brexit views of Tory party members makes such a threat credible, but any coup would have to happen well before the negotiations ended. Perhaps the reason May is now being so slow to move is to make the possibility of a coup less likely. But perhaps that involves a level of strategic thinking the Prime Minister is not capable of and Davis has simply given up.
Whatever the motivation, the end result has one certain consequence: the economy is damaged. As one final example, take the length of the transition period. The logical thing to do is to have a transition period until a new trade agreement is agreed. Anything else involves significant economic and administrative costs. But the UK government does not seek this because it pretends a trade agreement can be done quickly, and it pretends this nonsense to avoid a confrontation with the hardliners.
Even if this turns out to be pretend and extend, because the transition period will keep on being rolled forward at the last minute, this arrangement suits the EU and damages the UK. It is good for the EU because their exports to the UK do not suffer. It damages the UK because the uncertainty continues to make moving production to the EU rather than exporting to the EU attractive. Just one more way that the fantasies of Brexit hardliners are costing us all.