The EU Commission has put forward proposals for the next version of fiscal rules for the Eurozone, and these have now been agreed with some amendments (see below). (Here is a useful summary of the proposals.) That changes are needed in what existed before the pandemic is undeniable.

The original Stability and Growth Pact rules were a disaster. They were the clearest example of something I wrote recently about deficit targets:

“The cyclical nature of the government’s deficit (rising in bad times, falling in good) encourages politicians to do fiscal consolidation at the wrong time and discourage them from doing fiscal consolidation at the right time.”

These original rules encouraged periphery members of the Eurozone (EZ) to spend too much/tax too little in the early and mid-2000s (leading to inflation above the EZ average), and then encouraged the whole of the EZ to cut spending just when higher spending was needed (the austerity period), producing a second recession after the Global Financial Crisis.

The Commission attempted to rectify these problems by introducing cyclically adjusted deficit targets and other modifications to the SGP rules, but the resulting complexity suited no one, in effect giving considerable discretionary power to the Commission and EZ as a whole over elected national governments.

I wrote a lot about the perverse nature of EZ fiscal decisions during the austerity period, but much less since then. The reason is set out here. I have always thought that the focus of fiscal policy in individual EZ countries should be national stabilisation, not debt stabilisation. If individual countries focus on their own inflation rate relative to the EZ average, for example, then you avoid the dangers of pro-cyclical fiscal policy outlined above. This has always been the message of macroeconomic theory.

The academic rationale for the Eurozone imposing rules for the national deficit was that a common currency would increase the incentives for national deficit bias. What the Eurozone crisis showed was the exact opposite. When deficits rose after the GFC, it was countries with their own central bank that found interest rates on their debt falling. Because the ECB is not a buyer of last resort for national debt, it was EZ countries with excessive deficits that the markets worried about. Market discipline over excessive deficits was greater, not less, with a common currency. There are no good reasons, therefore, for the Commission or other EZ countries to be able to dictate the level of national deficits: instead they should focus on countries with persistently above or below average inflation.

Even if I’m right about this, political pressures will mean the EZ will persist with worrying about national deficits rather than national inflation differentials for some time. So when talking about changes to EZ fiscal rules, I‘m in a similar position to someone who doesn’t believe in dieting having to write about the wisdom of the latest dietary fad. Instead of asking whether the Commission’s new proposals will help reduce national deficits, I will instead ask four questions:

1. Do the proposals make it more or less difficult for national governments to stabilise output and inflation relative to the EZ average using fiscal policy, which is what they should be doing?

2. Do the proposals address the issue of the zero lower bound?

3. Is public investment excluded from the fiscal rules? Will fiscal rules stop contributing to a serious decline in public investment in the EZ?

4. Do the proposals reduce or increase the amount of interference by the Commission or other EZ countries in national fiscal policy
   
   

This last point needs some explanation. Those that wish less national sovereignty for EZ members, and more decision making at the EZ level, may have the opposite criteria. Fiscal rules imposed by the Commission may be a way of getting Fiscal Union by the back door. My own view is that fiscal union by the back door would be a potential political disaster at this point in time, so I want to increase rather than reduce national fiscal sovereignty within the EZ.

Returning to the new rules suggested by the Commission, one aspect might help national governments do countercyclical fiscal policy. The proposals emphasise medium term planning (4 years rather than year to year, and possibly extendable) and the concept of sustainability. However, countries that exceed the 3% deficit limit will not only be expected to reduce their deficit to this limit within the plan period, but will have to reduce the deficit by 0.5% a year at least. The issue of what happens at the zero lower bound, where fiscal policy at the EZ level should take over responsibility from the ECB in enhancing economic recovery, remains unaddressed.

What might seem striking about the proposals is the switch from a focus on cyclically adjusted deficits to adjusted net expenditure. As ‘net’ here means net of cyclically adjusted taxes, and ‘adjusted’ here means excluding cyclical changes in unemployment benefit, this switch is less important than the terminology might suggest. Nevertheless, Charles Wyplosz argues that the new measure is “convoluted and much less intuitive” than the cyclically adjusted balance, and also has a number of technical disadvantages. If the motivation was in part because of very real difficulties in doing the cyclical adjustment, then the new measure also involves doing very similar things. The advantage of true medium term plans and targets (5 years is better than 4) is that most forecasts assume the economy 5 years out is ‘at trend’, so there is no reason to cyclically adjust.

The new ‘adjusted net expenditure’ measure does have one advantage, however. It excludes “above trend” public investment, As a result, an EZ country that decides to increase levels of public investment beyond normal levels will not be penalised for doing so. This is better than nothing, but it doesn’t seem to stop governments from cutting public investment below normal levels to meet suggested net adjusted spending levels proposed by the Commission. This is always a temptation for governments, because cutting investment is less politically painful than cutting current spending or raising taxes. This is why low levels of public investment in the EZ are, in part at least, due to poorly specified fiscal rules.

The proposals nod towards giving “‘independent fiscal institutions’ (IFIs, or fiscal councils) a greater role in the process, but it is not clear to me how substantive that is. Blanchard, Sapir and Zettelmeyer are concerned about the “outsized role” the Commission has in the process. To quote

“The Commission would propose the reference scenario, assess the country’s counteroffer, and recommend a modified plan if it finds the counteroffer lacking. If the country does not accept the modified plan, the Council is expected to adopt the Commission’s reference scenario for surveillance and enforcement purposes.”

One option the Commission had was to transfer its own oversight role to an IFI for any country that appeared not to be ‘at risk’ and if the IFI was truly independent, but this opportunity was not taken. Hopefully the shift to a more medium term perspective will give national governments more freedom, although whether that is achieved in practice we will have to see.

This continuing lack of fiscal sovereignty within the Eurozone is not just (and not mostly) because it gives an unelected Commission power over elected governments. The more serious problem is that it gives other EZ countries, some of whom have a very hawkish and macroeconomically naive view, power over national fiscal policymaking, as this account of the negotiations over these proposals makes clear. (This was most evident, of course, in the case of Greece during the last decade.)

This in turn makes the current EZ stance that any new EU members must also join the EZ very punitive. It is a very good reason why a future UK might stop at joining the EU Single Market and Customs Union, and refrain from full membership, even though that gives it no say in rule making.

The attitude of the two main parties to those further to the right (for the Conservatives) or the left (for Labour) is very different. In the case of the Conservatives since Cameron, until very recently at least, the best word to use would be appeasement. We left the EU as a result. The attitude of Labour leaders (with the obvious exception of when Corbyn was leader) can be characterised as exclusion.

Is this asymmetry just the result of the choices of particular party leaders, or is there something more structural behind this. Another way of asking the same question is whether the success of UKIP (in terms of winning votes and influencing policy) could ever be duplicated on the left? Equally will Sunak suffer if he continues to marginalise the Brexit ultras, and would he have the political capital to replace his current home secretary, if he ever wished to do so (which he shows no sign of as yet) ?

The first point to note is that attitudes have changed over time. Prime Minister Heath famously sacked Enoch Powell, and Major was pretty intolerant of his Brexit “bastards”, which is very different from more recent Conservative leaders. The attitude of Kinnock, Smith, Blair, Brown, Miliband and Starmer is more consistent, and stems from the major internal battles of the 1980s.

A second point is that basic two party theory suggests it makes sense for leaders of either party to lean to the centre, rather than worry about those on the political flanks. A third party on one of the two political flanks breaks that model, but only if voters vote for it. Under a FPTP (First Past The Post) type electoral system, if they do in any numbers they are making it much more likely that the side whose vote is not split will win. If such a third party does emerge, and a political leader attempts to reduce its vote by appealing to potential voters of that third party, it runs the danger of alienating voters in the centre and losing to the other major party.

This basic model is too simple in many respects, and suggests an excessive advantage in playing to the centre ground. In reality new parties are relatively easy to set up, but they find it much harder getting serious political traction. It makes sense for governments in particular to try and stop that happening by appealing to their flanks as well as the centre. Political parties also need to keep their members happy to help win elections, and these members tend to be significantly more to the left/right than the marginal voter.

A final and crucial point in today’s UK environment is that the media is not symmetrical in two important respects. First, what I have in the past called the directed propaganda media (in the UK to varying extents the press and the new TV ‘news’ channels of the extreme right) is weighted towards the right because it follows the money. [1] Second, and just as important, is what is often called the non-partisan media, which we could equally call the ‘manufacturing consent media’, which in the UK comprises the major broadcasters and a few newspapers like the Financial Times. This second part of the media can be asymmetric for two reasons: it may be heavily influenced by an asymmetric press, and it can be intolerant of what it sees as political extremes. [2]

The most successful third party from the flanks of the political spectrum in recent years has to be Farage’s UKIP/ Brexit party. Evans and Mellon argue that the rise of UKIP can be largely explained by one issue, immigration, and the growing linkage of that with EU free movement following the UK government’s decision to allow immediate unlimited immigration from accession countries. While the Conservative opposition did use concern about immigration as a primary weapon against the Labour government, UKIP benefited as well because (a) Cameron was seen by some as too socially liberal on some issues (b) the Conservative leadership was in favour of staying in the EU, and (c) UKIP attracted some former Labour voters who were more left wing than the Conservatives on economic issues.

Yet throughout the Labour government of 1997-2010 UKIP never won more than 3.5% of the votes in General Elections in the seats it contested. UKIP’s power increased immeasurably under a Conservative led government. In many ways Cameron enacted the best possible combination of policies from a Brexit supporters point of view. He kept immigration in the public eye by creating targets for numbers that he didn’t have the means, or was unwilling to use the means, to come close to hitting. Yet he also used immigration as an excuse for the economic effects of his austerity policies. Immigration according to Conservatives was why voters found access to public services more difficult, and competition from immigrants was why your real wages were not increasing. All that UKIP and the the right wing press (and later the Leave campaign) needed to do was link a failure to meet immigration targets with Freedom of Movement, which they found very easy to do.

In this way the Conservative led government of 2010-15 precluded the option of exclusion towards UKIP, so appeasement (and in particular conceding a referendum) was the only option left. As both UKIP and the Conservatives stressed the importance of controlling immigration, and the right wing press did all it could to worry voters about this issue, it was not credible of Cameron to portray UKIP’s stance on this as extreme. Yet Cameron was not prepared to damage the economy in order to meet his immigration targets, and did not want to leave the EU. In addition he made many potential UKIP voters worse off through austerity, yet blamed that on immigration. Thus he handed UKIP all the ammunition they needed to attract socially conservative voters. [3]

If this interpretation is correct, then two things might seem to follow. First, after the referendum result a form of Brexit where we left the Single Market was inevitable under a Conservative government. Anything otherwise would enhance Farage’s threat to the Conservatives. Second, even if Remain had narrowly won rather than lost the referendum Cameron would not have been able park the Brexit issue for long. His only hope of doing so would have been to start declaring the virtues of immigration, but the right wing press would not have played ball.

Could something similar happen with a Labour government and a more left wing political party? The Green party is associated in voters’ minds with one clear objective (tackling climate change and improving the environment more generally) just as UKIP was, and it tends to be more left wing than Labour (just as UKIP was more socially Conservative than the Conservatives). Yet while Labour is in opposition, like UKIP it does much better in local elections than in general elections.

Under a Labour government could the Greens repeat the success of UKIP? A little piece of imagination might help answer this. One of the centrepieces of Labour policy is increased public investment in greening the economy, which they argue is critical to both tackling climate change and improving economic prospects. Most Labour voters and members share that view. Suppose in government Labour continued to talk this talk, but at the same time completely failed to raise public investment in greening the economy because of deficit targets, say. The Guardian runs an article on how Starmer told the cabinet that it needs to “cut the Green crap” to meet those targets, and the economy continues to languish. In those circumstances it is not impossible to imagine the Green party becoming a vehicle of protest for Labour voters. .

The point of this bit of (hopefully) make believe is that the success or otherwise of a UKIP of the left depends rather more on what a Labour government does than what any more left wing party does. Cameron reneged on his pledges to control immigration, while still blaming immigration for the country’s economic woes, many of which were of his own making. Under FPTP if, and perhaps only if, a future Labour or Conservative government makes a central part of their political campaigning an issue central to their voters but on which they have little intention to act, will a party from the political flanks threaten the big two. [4]

[1] Tim Bale calls the right wing press ‘the party in the media’. While this phrase nicely captures the extent of its partisanship, it could be misread as implying an excessive degree of control by the political party. This media is ultimately controlled by its owners, and while on some occasions they may be happy for their papers to follow the party’s lead, on others it may be the party that has to bend to the tunes played by the press.

[2] This may affect both major parties. The non-partisan media tends to be both younger and so more socially liberal and also from privileged backgrounds resistant to radical left wing policies. This may cause difficulties for mainstream parties that push socially conservative policies or left wing economic policies. The former, however, may be neutralised through the influence of the press, or when third parties that are socially conservative have large scale popular support. Finally the BBC, through financial pressure and via senior appointments, has become less independent of the government.

[3] What Cameron and Osborne knew was that achieving a socially conservative goal (much lower immigration) would seriously harm the economy, and that this was the last thing they could afford to do when hitting the economy with austerity. The same was true for another policy favoured by social conservatives, Brexit, as the current government is finding out. Many of the conflicts/contradictions in the current government can be traced to this source.

[4] What is also possible is that, if the leader changes, the party membership may elect a more radical leader, much as Corbyn’s election represented frustration within the membership that the mainstream candidates seem to be accepting austerity just at the point that public dissatisfaction with the policy was growing.

Russell Jones has written a history of the UK economy since the 1970s, and as narratives go this is very good. While I inevitably had minor points of disagreement, on most issues I think the author makes the right calls. The narrative is clear and not unnecessarily technical, so you don’t need to be an economist to read it. (The book is also chart free, which I think is a shame.) It is very comprehensive implying extensive research, which is quite an achievement when writing about 50 years of economic developments and policies.

These virtues have costs, of course, at least for an academic like me. Being comprehensive can mean that you give too many reasons why this or that happened, or particular policies failed, rather than focusing on the key drivers. That in turn can lead to ambiguities or inconsistencies. One rather interesting one is the conflict that emerged between PM Brown and Chancellor Darling over the relative priorities to be given to the recovery (requiring fiscal stimulus) and controlling the growing budget deficit (requiring fiscal consolidation). While I sense that the author favours Darling on this, his later discussion on austerity rather suggests that Brown was right.

As this blog has featured many of the episodes covered by this book, I will not try to go over this ground again here with a short narrative about a longer narrative. (For this, see William Keegan’s nice review). Instead let me try and do something different. I want to use the book as material to bust several widely held myths about the macroeconomic history of the UK over the last fifty years.

1. There is no relentless decline. This is a point I have made before but cannot be repeated too often, given the UK economic declinism temptation many fall into. This period might have started and ended in relative decline compared to the US, Germany and France, but from the 1980s until around the Global Financial Crisis the UK economy grew as fast or faster than these economies. This is a point the author notes at various places in the text, although the book’s title and conclusions do relapse somewhat. .

It is this relative performance that really matters. Those who say Thatcherism and New Labour disappointed because growth was no better or maybe even worse than in the golden age after WWII ignore that starting point! The reality is that much of Europe and Japan were rebuilding their economies after large scale destruction during the war, and the UK was bound to see some of the benefit of that. The UK economy may have never had it so good in the 1950s, but it was falling behind other major economies, which is one of the reasons we kept trying, and eventually succeeded, in joining the EU.

2. The relative unimportance of economic thought. The myth that it is otherwise is often promulgated by economists, suggesting that economic history is to a considerable extent determined by changing economic ideas within academia. So, for example, the story goes that In the UK Keynes ruled from WWII, but Keynesianism failed in the 1970s with high inflation, so Freidman and monetarism took over from the 1980s. While the author does describe changing academic fashions at various points in the book, reading his account confirmed my view that these changing academic winds were generally not the key driver of policy changes.

In my view the key policy failure of the 1960s and 1970s was that policymakers were determined to avoid using demand management as a means of moderating inflation. It is not, as James Forder has pointed out, that policy makers were using the wrong Phillips curve, but just that UK policymakers didn’t want to use the Phillips curve at all. To call this reluctance ‘Keynesian’ is really too far a stretch, as neither Keynes nor those who developed Keynesian theory were great proponents of prices and incomes policies.

Equally, in the narrow sense of the term, what came after the 1970s was not monetarism. As the book makes clear, money supply targets were briefly tried and failed miserably, with great harm done to UK manufacturing and many who worked in it. What changed in 1979 was the UK got a Prime Minister and Chancellor who were no longer committed to maintaining full employment, but were determined to get inflation down without resorting to prices and incomes policies. Today the reluctance of policymakers in the 1960s and 1970s to use the Phillips curve to control inflation looks like a temporary aberration reflecting a determination not to repeat the disaster of the Great Depression. [1]

Equally the idea that austerity was the result of work by Alesina or Reinhart and Rogoff is nonsense. The unfortunate truth is that there will always be some economists around to give even the craziest policies some respectability, as Brexit showed. The pandemic taught us that this is not a peculiarity of economics, but can happen with supposedly harder sciences as well. (Actually, as my own book argued, medicine is perhaps the closest discipline to economics.)

If there is an exception to this argument that economic ideas matter very little to recent UK economic history, I think you can find that too in this fifty year period. The idea that macroeconomic stabilisation should come from independent central banks pursuing inflation targets did come in large part from current academic economics, rather than politics or Keynes’s 30 year old academic scribblers.

3. Another favourite myth of mine that I have talked about before, but which is clearly shown to be a myth by this book, is that Conservative politicians are better at managing the economy than Labour politicians. Labour tends to get the blame for the IMF crisis in the mid-70s, but this had a lot to do with the earlier Barber boom, where the author reminds us that policy aimed for 5% growth. The Thatcher period may have seen relatively good growth on average, but it was a really bumpy ride because of what can best be described as destabilisation policy: monetarism, the 1981 budget (Jones describes this as “an admission of failure”) followed by the Lawson boom, then ERM membership at an overvalued rate leading to Black Wednesday. The author is right that Labour inherited a reasonably healthy economy, but the 1997-2007 period was incredibly stable compared to the 1980s and early 1990s, in part because macro policy was much better. Unfortunately 2010 to today has seen a return to destabilisation policy, first with austerity, then Brexit, then the government’s reaction to Covid and finally Liz Truss.
   
   

4. 2010 sea change. 1979 rightly represents an important shift in how UK economic policy was done, although I would argue this is not so much from Keynesian to monetarism (see 2 above) as the advent of neoliberalsm. However 2010 (to 2024?) may also come to be seen as a similar sea change.
   
   From reading this book it is clear that from WWII until 2010 policymakers were constantly looking forward, trying (and sometimes failing) to deal with real and serious economic problems. Policymakers constantly worried about the productivity gap (and therefore prosperity gap) between the UK and Germany, France or the US, and tried to do something about it. It is a major reason why UK policymakers wanted to be part of the EU, and then the Single Market.
   
   In contrast since 2010 Prime Ministers and Chancellors have based policy on largely imaginary problems, like austerity or sovereignty, to further either minority or individual goals. Since 2010 policymakers have stopped focusing on the UK’s relative productivity compared to Germany, France and the US, and instead have preferred to tell us that everything they do is ‘world beating’. It is the shift in focus that is perhaps the underlying story behind the UK’s relative decline since 2010.

If you want a comprehensive and well researched book on which to compose your own ideas (or bust myths) about UK economic policy over the last 50 years, this book is for you. Alternatively if the subject just interests you, and you want a well written account that avoids dogma, I can recommend this book. One thing you can say unequivocally about UK economic policy over the last half decade is that it has been far from uneventful or boring.

[1] Just to preempt the inevitable responses, although basic MMT does hark back to post-war policies it does also use demand management and the Phillips curve to control inflation. With a job guarantee what changes is the number of people on the JG scheme, rather than unemployment.

“Healthy People, Prosperous Lives” is the first interim report of the IPPR’s Commission on Health and Prosperity. (I am a member.of the Commission, but not an author of this report.) This analysis could not have come at a more topical moment, as suspicion mounts that there may be a link between the worsening state of our health services and the dire state of our economy. This report uses research to quantify that link.

Let me start by looking at the contraction of labour supply since the pandemic that has persisted in the UK, while in other countries it has largely or completely disappeared. This chart is taken from an earlier FT article by John Burn-Murdoch.

There has been some debate about whether this deterioration in UK labour supply is a result of poor UK health outcomes, or whether it represents a post-pandemic increase in early retirement. As the report points out, early retirement may well be the result of poor health. The chart below looks at pre-pandemic exits from employment following the onset of chronic or mental ill health. Among those under 50, the most common outcome is unemployment, but for all ages the most common result is retirement. So retirement since the pandemic may in part reflect the consequences of ill-health.

UK relative economic decline did not start after the pandemic. As my comparison with the US showed, GDP per capita grew at similar rates in both countries from 1955 to 1990. In the 90s and 2000’s UK GDP per capita grew more rapidly in the UK than the US. Some of this may have been due to an expansion in the UK financial sector that came to an end with the Global Financial Crisis, but another important factor could have been service sector growth as a result of the EU’s Single Market. Towards the end of the 2010s, however, US growth catches up with the UK, and overtakes it during and after the pandemic. Between 2010 and 2021, US GDP per capita grew by 16%, but UK GDP per capita grew by only 8.3%.

There is no doubt that there are many reasons for this reversal of fortunes for the UK relative to other economies since 2010, with Brexit being the most obvious. However poor health caused by a deterioration in healthcare could also have been an important factor. The IPPR report looks at the impact of poor health from the bottom up, by calculating the earnings lost as a result of the onset of chronic illness or mental illness. The main reason for earnings loss is employment exit. In addition, the research suggests that the onset of either form of illness on a household member has a large impact on the earnings of other members of the household.

The report estimates that those that became chronically or mentally ill between 2015 and 2021 led to a reduction in GDP of about 2% in 2021. Of course how much of that could have been prevented as a result of better health provision is unknown, but it does suggest that a steady or sharp deterioration in health provision will have noticeable consequences on the performance of the aggregate economy. As these two charts shows, in the UK we have had both a steady (from 2010) and then a sharp deterioration (since the pandemic) in health provision, with over 7 million people currently waiting for treatment.

One final chart on waiting lists, from John Burn-Murdoch at the FT, illustrates the clear correlation between how well the NHS is performing and the party in power.

Health provision gets worse under the Conservatives and better under Labour. Some see the squeeze in NHS and social care funding since 2010 as part of some grand plan to end the NHS, but I’m not convinced the Conservative party will ever have the political capital to do this. The dynamics work the wrong way. As long as the NHS improves under Labour, then a prolonged period of worsening services under the Conservatives is required to motivate NHS abolition, but by that time the Conservatives will be much less popular and will not want to risk losing further votes by ending the NHS.

Instead I think the clear empirical association between Conservative governments and an increase in weighting times is just a by-product of these government’s desire to reduce taxation. What this IPPR report shows is that this deterioration isn’t just bad for patients, but is bad for the economy as a whole.

There has since 2010 been a clear plan to increase the farming out of NHS services to the private sector (which started before 2010), and as this map from EveryDoctor shows that plan has been very successful. However because the NHS is relatively efficient, privatisation for profit is likely to either raise costs or reduce the quality of care, thereby intensifying the deterioration in healthcare that comes from a political obsession with tax cuts.

With Labour leading in the polls and a general election not too far away, thoughts are naturally turning to how Labour could turn the tide on NHS performance. The Commission report has plenty of ideas on that front (as have others), and I cannot do justice to these ideas here. Labour in opposition talk a lot about reform, but at best this is a political device to avoid saying the truth out loud before an election. The reality is that the most obvious and effective way to improve health outcomes in the UK is to spend more money on health and social care, and that in turn requires higher taxes. What this report shows is that doing this would improve the economy as well.

Before answering this question, we need to define what the OECD counts as social expenditure. It is mainly a combination of what we call welfare spending (including pensions) and health spending, but it also includes incapacity-related benefits, active labour market programmes, as well as unemployment and housing benefits. What it is not is just public social spending. In all OECD countries individuals spend some of their own money (either directly or through their employer) on social expenditure. In the UK, for example, private social expenditure exceeded 6% of GDP in 2019 according to the OECD, mainly in the form of pension contributions.

The answer to the question posed by the title, using this data, comes from the diamonds in the chart below.

That France is top is probably not a huge surprise , but that the United States is second (just below France) might. The blue columns represent public (state) social spending, and the US is indeed fairly low here, but the US has the second highest private sector social spending among OECD countries. France is at the top partly because it has a very generous pension system (see this recent post), while the US is so high in part because it has a very expensive (and inefficient) health system.

Given how many hits of the keyboard are spent discussing public spending on health, pensions and other items, combining public and private spending in this way can be a useful corrective. What matters to most people is how big their pension is, or the quality and accessibility healthcare is, rather than the form in which they pay for it.

The OECD splits private social expenditure into two types: mandatory and voluntary.

In countries where private social spending is high, in both Switzerland and Iceland it is largely mandatory, in Canada and the UK it is almost all voluntary, while the Netherlands and the US it is mixed. The last two involve mandatory health payments (Obamacare in the US). Mandatory payments might give consumers some choice over providers, but otherwise mandatory payments are similar to a tax. In the UK the largest component of voluntary social expenditure involves private pensions. Again this gives consumers more choice than any state pension would, but for individuals the option of not buying is hardly advisable, which means they do not have additional money to spend on other things. The big advantage of a state pension over private pensions is that the latter exposes individuals to interest rate risk at the time their pensions need to be turned into an annuity.

So while the choice between public, mandatory private and voluntary private provision is important, the amount of social expenditure from whatever source is at least as important. Of the G7 countries, which spent the least on social expenditure in 2019? In the chart above it is the UK. This has not always been the case, as the following chart shows [1].

In 2010 the UK had the third highest social spending in the G7, but the trend over the following decade has been consistently downwards. Because our Conservative government has been obsessed with cutting taxes and squeezing the state, without much attempt at reducing the scope of what the state provides in the UK, we end up having less spent in many areas (including social expenditure) than most people want. [2]

This is a crucial fact to bear in mind the next time someone moans about how much the state spends on health, pensions or some other item of welfare spending. It is a point I try to emphasise whenever I discuss public spending on health or pensions, or aggregate public spending figures. An emphasis on total social spending is also crucial when looking at data on tax.

According to OECD figures for 2020 for the G7, the country with the highest total tax as a share of GDP is France at 45%, followed by Italy at 43%. Germany is significantly lower at 38%, and then Canada and Japan lower still at 34% and 33% respectively. The UK is at 32%, while the US is lowest at 26%. The UK is a low tax country, with only the US lower among the G7. But as the figures above show, these differences reflect the form of financing of social spending at least as much as the total amount of social spending. Those who suggest that low taxes in the US mean that people there have more money to spend are being disingenuous, because US citizens need to pay, either directly or indirectly, for social goods that are provided free in other countries.

For this reason much of the public debate about the size of the state misses key issues. What should be central to this debate is how types of spending, including social spending, are financed rather than the amount that is spent. For example, is it better for the state to provide most pensions (as in France) or is it better for individuals to pay for their own pension schemes? Is a health service privately funded via insurance companies (either voluntarily or through mandated payments) less efficient than something like the NHS. How much tax people pay will follow from that discussion, yet tax is all too often how such discussions start.

[1] Data for 2019 in four of the G7 countries are not shown here, perhaps because data in the previous chart is partially estimated.

[2] Those who can afford it can try and make up the difference by, for example, buying private medical insurance, but the quality of private sector health care in terms of medical outcomes is highly dependent on the NHS.

The claim often made for fiscal consolidations (cuts in public spending or increases in taxes) is that they are required to reduce the ratio of public sector debt to GDP. But while fiscal consolidations are likely to reduce public sector debt, they are also likely to reduce GDP, so the impact on the debt to GDP ratio is unclear. Research just published by the IMF suggests that, based on past evidence, the average effect of fiscal consolidations on the debt to GDP ratio is negligible (i.e. virtually zero).

Looking at the study in more detail, the results are even worse for proponents of austerity. By austerity I don’t mean fiscal consolidation in the form of spending cuts, but any fiscal consolidation undertaken when output is below trend. Here is a figure from the study.

On the left hand axis is the probability that a fiscal consolidation will reduce the debt to GDP ratio, where the average probability is 51%. The first column shows that a positive output gap (GDP is above trend i.e. a boom period) turns that probability into 57%. The second column shows that if the world economy is above trend that ratio goes from 51% to 60%. The final column shows that if private credit is high relative to GDP, the probability that a fiscal consolidation will reduce the debt to GDP ratio falls to 42%.

In 2010, all economies were recovering from recession (so the domestic and world output gaps were negative) and private credit was high relative to GDP (although falling rapidly following the financial crisis). So 2010 austerity was significantly more likely to increase the debt to GDP ratio than to reduce it. As many of us said at the time, 2010 was exactly the wrong time (indeed, probably the worst time) to embark on fiscal consolidation, because not only would austerity lower GDP, but it would raise debt to GDP because lower GDP would more than offset lower debt. Which is exactly what National Institute modelling, among others, said would happen back in 2011.

Some have suggested that while that lesson might have been relevant in an environment of low interest rates (where rates can easily hit their lower bound), that era has recently come to an end. This is where a second piece of IMF research, in the same WEO, becomes very relevant. It looks at historical trends in real interest rates, tries to explain them in terms of key drivers, and then assesses where they might go in the future.

The bottom line is that we have not entered a new era. Instead real interest rates are likely to go back to the same low levels that we saw before the pandemic. One reason for this, demographics, is relatively predictable. Another is the global slowdown in productivity growth. Productivity growth is less predictable, but with no pick up in sight continuing modest productivity growth seems like a good assumption. Unless there is something big that is missing from the analysis, the age of low real interest rates (what economists call secular stagnation) is still with us.

In practical terms this means that the trend level of nominal interest rates in the advanced economies, the level that would neither stimulate or depress activity in the medium term and where inflation is at target, is between 1% and 3%. That means that as inflation falls, so will current interest rates. We have not left the era when an economic downturn could easily put interest rates at their lower bound. As a result, it will remain the case that while monetary policy is the first choice for controlling (excess) inflation, it is fiscal policy that needs to be the

first choice for avoiding recessions and boosting recoveries.

The message of this evidence is familiar to anyone who understood macroeconomic theory well before 2010: leave fiscal consolidation for the good times. Yet this is a lesson politicians, and those that advise them, find it very difficult to learn.

So why are so many politicians, and much of the media, so resistant to accepting that fiscal consolidations - if necessary - should be reserved for good times and never undertaken in bad times. A large part of the answer is that, for most politicians on the right, fiscal consolidations are not primarily about reducing the debt to GDP ratio, but instead an excuse to cut public spending and reduce the size of the state. It is what I have called ‘deficit deceit’. No wonder that in the UK over the last 13 years the government’s fiscal rules seem to change very few years, because they are typically chosen to squeeze public spending rather than enhance macroeconomic management.

However I don’t think that is all. The cyclical nature of the government’s deficit (rising in bad times, falling in good) encourages politicians to do fiscal consolidation at the wrong time and discourage them from doing fiscal consolidation at the right time. [1] They do this because deficit targets treat governments like cash-constrained individuals, who if they are short of money have to spend less and if they are flush with money they have to spend more.

In theory this need not happen if credible governments ditch debt targets, and ensure deficit targets are medium term, like a 5 year rolling deficit target. It shouldn’t happen if credible governments ensure this medium term deficit target excludes public investment, allowing public investment to reflect social returns, government missions and the cost of borrowing. It shouldn’t happen if these medium term deficit targets are chosen intelligently, allowing debt/GDP to rise when it makes sense to do so. And finally it shouldn’t happen if these medium term deficit targets are ignored if fiscal policy is needed to avoid a recession, or to stimulate the recovery from one.

That is how sensible fiscal policy would work. If it did, fiscal consolidation would only occur in good times, and it would be effective in reducing debt/GDP. Fiscal consolidation would not happen in bad times, allowing fiscal stimulus to end bad times, and consolidation would only happen in good times if that made economic sense.

But small state politicians are not the only reason why this doesn’t happen. The other reason is the media. Not just the right wing media, that wants a small state, but also the media that likes to think of itself as non-partisan. As I explained here, in the world of mediamacro meeting deficit targets are indicators of ‘government responsibility’, and rolling targets that never arrive just don’t wash. We have a medium term rolling deficit target today, but the media still gives us monthly (!) commentary on the latest numbers for the deficit, with predictable and endless speculation of tax cuts or spending cuts.

This isn’t because most journalists in the media have the wrong model of how economic policy should work, but rather they have no model at all. As a recent BBC report implied, the main feature of much journalism about economic issues is economic ignorance. That is why, for example, ministers can keep asserting that giving doctors or nurses more money would raise inflation without such statements being challenged. (Higher pay for NHS staff or teachers does not put pressure on prices, so it is not surprising that the evidence shows no link to inflation.) If all journalists think they know is government deficits or debt are ‘a bad thing’, then this creates what I have called mediamacro.

Politicians work in a media environment, so many find it hard to combat mediamacro. If the media wildly inflate the importance of deficit targets, and fail to understand why these targets are much more long term than inflation targets, then politicians will be tempted to act as if the media’s view is correct. For this reason deficit targets encourage politicians to do exactly the wrong thing with fiscal policy, consolidating when the economy is weak and the deficit is rising, and undertaking fiscal expansion when the economy is strong and the deficit is falling (or in surplus). [2]

How do you counteract both deficit deceit from the right and mainstream media ignorance? The obvious answer, as Chris Dillow suggests, is to give knowledge an institutional voice, which in this case means enhancing an independent fiscal council. Our own, the OBR, was set up by George Osborne to play a much more limited role. The Treasury farmed out its fiscal forecasting, but none of its macroeconomic analysis. That split makes little economic sense, and it needs to change.

An OBR that was able to provide fiscal policy analysis alongside its forecasts could enhance public discussion of fiscal policy options, and give space for politicians who want to promote good policy to counter media ignorance. That advice could range from acting as a watchdog to stop the government fiddling the process to more general advice about the form of fiscal policy rules. As long as it took its lead from the academic literature and remained independent, this enhanced OBR would improve public debate about fiscal policy, which in turn should help improve policy itself.

[1] Basing targets on cyclically adjusted deficits does not work, because cyclical adjustment is too uncertain.

[2] The example that always springs to my mind here is Spain after the creation of the Euro. Spain should have been running a more restrictive fiscal policy because its inflation rate was above the Euro average, but because the budget was in surplus and because of the centrality of deficit targets in the EZ, the political/media just couldn’t cope with the idea of even larger surpluses.

For someone who has been described as the “economic brain of Thatcherism”, it was inevitable that evaluations of his career would be ideologically polarised. He was after all the person who started privatisation, created the City’s ‘Big Bang’ and who cut top tax rates. Yet in the eyes of history, successful politicians need competence as well as ideology in order to make good decisions and judgements. The view I want to put forward here is that Lawson had an uncanny knack of making bad decisions.

It is perhaps telling that a number of articles following his death contrast his period in office favourably compared to our more recent Chancellors. It has to be said that this is an incredibly low bar. Equally some have focused on his undoubted intellect while in office, and prefer not to dwell on his more recent championing of Brexit and climate change denial. I want to suggest that the Nigel Lawson who was in charge at the Treasury had the same quality of judgement as the later Nigel Lawson who promoted Brexit and climate change denial.

To be fair, let me start with some of the things he got right. Abolishing corporation tax stock relief made sense, and as far as I know no one has thought to bring it back since. Abolishing corporation tax investment allowances survived for a considerable period of time, but they have returned in recent years. He was right to try and align income and capital gains taxes, something today's politicians should note. He was right to want to abolish mortgage tax relief, but Thatcher prevented him doing so. He also fought a long running battle to prevent Thatcher introducing the poll tax.

The first major thing he got wrong was monetarism. He was part of the Treasury team when Thatcher got elected, and although Howe was Chancellor it was Lawson who was the intellectual heavyweight in those initial years. (He moved from the Treasury to become energy secretary in September 1981). Although some people talk about monetarism in ideological terms, here I want to use the term in a more technical way, as a means of stabilising the economy through hitting targets for the quantity of money.

Monetarism didn’t make sense either in theory or practice. In terms of theory it made little sense to set interest rates to hit an intermediate target (some measure of money) rather than the final objective (inflation and output). It was a bad policy in practice because it caused a recession that decimated UK manufacturing, resulting in a prolonged period of very high unemployment. This was never the intention of the policy, because those putting it forward thought it would cause little disruption.

Ironically the 80/81 recession was predicted by initial internal Treasury forecasts. Macro forecasts are notoriously bad at predicting recessions, but for once a key forecast got it right. However the team of politicians and advisors that came with the new government, of which Lawson was a key member, regarded both the model and the civil servants that produced that forecast to be hopelessly Keynesian, so they ignored the warnings. A final desperate attempt to hit monetary targets led to the notorious 1981 Budget, where taxes were raised in the middle of a recession, delaying the subsequent recovery.

With the demise of monetarism, Lawson looked to an alternative intermediate target - the exchange rate. He decided to peg sterling at 3 Deutschmarks from March 1987, at a time when interest rates were too low. In addition, in the 1988 budget he reduced the top rate of tax from 60 per cent to 40 per cent, and to avoid appearing to favour the rich he also continued to reduce the basic rate. This combination of monetary and fiscal largesse, together with a credit boom (see below), meant that inflation doubled from around 5% to around 10% just after Lawson resigned in October 1989. Once again it seems he ignored Treasury advice on this.

In 1986 he presided over the biggest deregulation of the UK’s financial sector: the “Big Bang”. As well as preparing the ground for the failure of UK banks during the Global Financial Crisis thirty years later, it also led to the demutualisation of many Building Societies, with banks increasing their involvement in the UK mortgage market. Both led to much easier credit conditions for UK borrowers, leading to a housing boom. House prices rose 16% in 1987 and a further 25% in 1988. This also increased goods and services consumption, adding to what today is known as the Lawson boom.

In his time in the Treasury Lawson therefore helped create one recession, and laid the groundwork for a second. While his successor’s decision to enter the ERM at an overvalued exchange rate undoubtedly made the 1991 recession sharper than it had to be, some sort of downturn was likely in order to reduce the high level of inflation caused by the Lawson boom.

Of course these major mistakes may have had an ideological motivation, but it is possible to combine political motivations with good judgement. Lawson failed to do that. While Liz Truss as Prime Minister is rightly derided for blowing up the bond market, Lawson played a major role in blowing up the UK economy, twice. Indeed I suspect it is ideology that sustains Lawson’s reputation in many quarters. In reality, although their knowledge and intellects may have been very different, there is a similarity between the arrogance of Truss and Lawson in terms of pursuing ideological convenient but predictably disastrous economic ideas.

Lawson was Chancellor for 6 years, which is a relatively long period, and we can justifiably add an extra 2 for the period from 79 to 81 when he was Financial Secretary. The obvious recent comparison, therefore, is with Gordon Brown (10 years). Brown may have had a degree of luck in presiding over 10 years without any significant fluctuations in inflation or output (there was no boom or bust), but the contrast with a recession and a boom for Lawson does tell us something about both [1]. Of course Brown (as PM) was eventually brought down by the Global Financial Crisis, but arguably the groundwork for the impact of that global shock on UK banks was laid down by Lawson’s Big Bang rather than Brown. [2] In contrast the decimation of UK manufacturing in the early 80s owed a lot to the arrogance of the monetarist revolutionaries who took over the Treasury in 1979, and the Lawson boom of the late eighties rightly bears his name.

It should also never be forgotten that Lawson was Chancellor when North Sea Oil started bringing large amounts of money into the exchequer. Standard macroeconomic theory suggests that a temporary resource bonanza like that should mainly be saved, so that future generations can benefit from it. That is what happened in Norway. This saving does not have to be done by the government, but by using it to cut taxes (the basic rate was reduced from 30 per cent in 1983 to 25 per cent by 1988) Lawson gave no indication to taxpayers that this was a temporary bonus that should be saved. This policy failure can be contrasted with Brown’s decision in 2003 not to join the Euro, which most people would now regard as the right decision.

In 2013 Lawson advocated Britain leaving the European Union, arguing that “economic gains would substantially outweigh the costs”. In 2009 Lawson became chairman of The Global Warming Policy Foundation, a registered charity involved in promoting climate change denial. I hope the account above suggests that both were not some kind of later life aberration, but just more examples of making very poor choices.

So when people argue that we’d be a lot better off if there were more people like Lawson in public life today, I have to disagree. There is no doubt that Lawson was far better qualified than many other Chancellors, and also that he was clever, so why did he get these major judgements wrong? I think a large part of the answer is arrogance. As Julia Langdon writes: “His fierce intellectual approach to all aspects of policy meant that he always gave a higher priority to achieving his aims than to what others thought.” Those ‘others’ it seems included Treasury civil servants, many of whom were his intellectual equal, and who warned him about the mistakes he was about to make. If you take off the ideological blinkers, Lawson’s legacy is getting most major judgements wrong.

[1] By creating the independent Monetary Policy Committee of the Bank of England in 1977 Brown handed over stabilisation policy to others, and until 2007 they did a pretty good job.

[2] To his credit Brown played a major role in bringing that global crisis under control.

If you read some of the UK headlines, it seems that France is having difficulty adjusting to the reality of longer lifespans. Its previous retirement age (the age when you can get a state pension) was 62, which is well below most other countries. Macron has made that 64, in a reform imposed on parliament. 64 is still relatively low, yet there have been strikes and demonstrations against this change that have been large even by French standards. A rolling strike by bin collectors in Paris has left rubbish on the streets. Commentators are asking whether these protests will bring about the end of the current constitutional order in France.

At a macro level, it makes sense to raise the pension age alongside life expectancy. In most European countries, including France and the UK, state pension schemes are unfunded, which means that today’s pensions are paid for by those working today. If people live longer you either need to reduce the value of the state pension, raise those contributions, or raise the retirement age. Yet while the life expectancy of those reaching 65 increased substantially in the decades before 2010, increases have been more modest since then. The OECD data below is for women in the G7 countries. Note that UK life expectancy has always been low compared to all other G7 countries except the US.

The French pension age was raised to 62 from 60 in 2010, and by 2019 (before Covid) life expectancy at 65 had risen by around half a year since 2010. So the case for raising the retirement age in France from 62 to 64 is not obviously because of increases in life expectancy since 2010. Indeed projections suggest that the French pension system, while it will go into deficit at the end of this decade, will break even again by 2035 without any increase in pension age.

So how does France afford to have a relatively low retirement age compared to other countries? It is not because state pension levels are low. France spends around 12% of GDP on state pensions, which is significantly higher than the OECD average, which itself is above the UK. The answer therefore has to be higher levels of contributions, either directly or indirectly through a tax subsidy. I noted in a recent post that although France had higher levels of productivity than the UK, mean household incomes were not higher, and a major reason for this is that French workers retired earlier. Higher French productivity was paying for a lower retirement age than the UK and elsewhere, rather than higher post-tax incomes.

France has not always been an outlier in terms of having a low retirement age. It was the socialist President François Mitterrand who in 1981 cut the retirement age from 65 to 60. Has France got this trade-off between income and retirement right, as Simon Kuper suggests, and most other countries have it wrong? The strength of popular feeling against Macron’s higher retirement age would suggest French people think so, although it is impossible to know how much of this is seeing a benefit (retiring early) without seeing the cost of that benefit (lower post-tax incomes while working).

The first lesson that France has to teach the UK (and perhaps other countries) is to have that debate. One of the consequences of having a predominantly right wing press and a predominantly right wing government is that early retirement in the UK is seen as a problem, rather than an achievement. Debates over pensions in the UK too often treat contribution rates as given, rather than part of a trade-off between the retirement age and contribution levels. As I have noted before, the UK debate typically fails to place things into an intertemporal context, and instead talks about workers versus pensioners as if workers will never retire.

The second lesson that France has to teach the UK is whether it makes sense to have a national retirement age at all. Once we move from the aggregate to thinking about individuals, the unfairness of a uniform retirement age becomes obvious. If the retirement age was 64, someone who starts work from the age of 18 will work (and therefore contribute) for 46 years before retiring. Someone who has a degree will, if they retire at 64, work three years less but still get a state pension. It would seem to be fairer at an individual level to do away with a retirement age, and instead be allowed a full state pension after working a certain number of years. (The option to retire before that number of years should always be available, but with a less than full pension.)

This unfairness is recognised in France, but not in the UK. France has had a ‘long careers’ provision where those who started working at an early age can retire on a full pension before the official retirement age. That system is strengthened as part of raising the retirement age to 64, so people who have worked for 43 years can retire with a state pension before 64. Thomas Piketty argues that If you have 43 years of service, then you should be able to take your full pension, full stop. [1]

However this idea of replacing a retirement age by a years worked criteria emphasises a different potential unfairness problem, because state pensions are annuities that you receive for as long as you live. If everyone had the same life expectancy, then those who started work early and therefore retired early would receive a pension for longer than those who retired later. How much is this an issue? Just as when you start work varies by (or perhaps even defines) class, so life expectancy also varies by class.

It would be easy to argue that this potential unfairness, created by replacing a fixed retirement age by years of service criteria, doesn’t arise in practice because of an ‘unhappy coincidence’ that the life expectancy of those who start work earlier is shorter by the same number of years than those who work later. The evidence we have from France for those benefiting from ‘long careers’ and therefore early retirement in France is complex, but does not suggest such an unhappy coincidence exists. However, even if there was no difference in life expectancy between those who start work at 18 and those who start work at 21, say, that is not an argument for a common retirement age, because that is obviously unfair to those who start work at 18 and therefore contribute more to their pension with no additional benefit. [2]

If those who started work at 18 can retire on a full pension at 61 through the long career route, why does France have a retirement age at all and why is it being raised? The answer lies in the detail, and in particular the allowances for taking time off to look after children. In this respect the UK system, which gives credit for those receiving child benefit, is more generous than the system in France, although of course it is easier to be generous when the level of the state pension is so much lower. It might seem odd that these details have provoked so much anger, but as Piketty points out if they didn’t affect a lot of people by a considerable amount Macron wouldn’t be using so much political capital on insisting on raising the retirement age to 64.

The controversy in France over pensions has rather little to do with affordability, and instead is about lifetime choice and fairness across class. France was unusual compared to most countries because workers paid more to fund and enjoy a longer retirement, particularly for the working class who started work at 18 and particularly working class women. The danger in ending this is it will create one more weapon for the populist right.

[1] Why does France recognise the unfairness to those who start work early created by a fixed retirement age, while the UK does not? Indeed, why does raising the retirement age in the UK cause so little controversy compared to France. The obvious reason is class, and in particular the lack of political power in the UK for those who didn’t do a degree. Raising the retirement age from 62 to 64 in France primarily affects the working class, because those who did a degree and started work in their early twenties will need and often want to work beyond the age of 64 to get their full pension. It is the trade union movement in France that is leading the protests against raising the retirement age.

[2] One way of dealing with different life expectancies across occupations has been proposed by Ian Mulheirn. He suggests treating the pension as a lump sum that would have to be invested in an annuity, and the annuity provider would adjust for different group life expectancies. My own view is that a government run scheme would be preferable, because private annuities expose pension holders to interest rate risk.

For many, BBC bias is straightforward. It is about government supporters running the organisation, and others being scared of the financial implications of upsetting the government. While both are undoubtedly important, on their own they would imply that other broadcasters, like ITV for example, should behave very differently. So when both the BBC and ITV fail to hold the government to account over a key mistake, where thousands of lives were at stake, we need to look at other sources of pro-government bias.

We should all remember how the government decided, in the crucial initial stages of the pandemic, that herd immunity was the right approach. Everybody was going to get Covid, so the argument went, so all the government should do is try and manage when people became ill to avoid over stretching the NHS. It was an incredibly stupid strategy [1], and an immensely harmful one, but that wasn’t obvious to most people, including myself, in the beginning of March.

In my case that was and wasn't surprising. Was because I had helped write a paper about a flu endemic ten years earlier, so I was familiar with the key variables that would govern how serious a pandemic would be. Wasn't because the flu pandemic we modelled as a base case was not serious enough to depart from herd immunity. In addition I think I put too much trust in the way medical advice was being channelled into government [2], and there was no real debate about strategy in the media. So I wrote something in early March about what my paper was about - the economic effects of a flu pandemic - without really realising what was and wasn’t relevant for the pandemic we were entering.

Yet by mid-March I wrote a second post on the pandemic, with the title “Coronavirus and the consequences of a compliant media”. The government’s strategy was coming apart, and I was looking for the reasons why I hadn’t spotted that it would earlier. I had seen, for example, what Irish media were saying about what the UK was doing, thanks to this tweet from James Meadway. It was one of those moments when you see a really simple argument put forward, and think why didn’t I see that, and then why didn’t the government see that. My post was in essence an elaboration of James’s reminder of Amartya Sen's point that more press freedom means fewer deaths in famines, because well-informed citizens can monitor their government better & make demands of it. My post argued the same might be true in pandemics, and our media had failed to allow UK citizens to be well informed.

That is a very personal view, and there is always the possibility that my impressions of what the broadcast media was doing in the UK was unfair. Some recent academic research suggests it was not. A study by Greg Philo and Mike Berry in the British Journal of Sociology looked at ITV and BBC coverage before the first lockdown on 23rd March 2020. Here is an extract from their conclusions:

“the scientific critics of government policy were sparsely featured. They occasionally appear in isolated, free floating comments but their views are not developed into an alternative perspective on policy. In contrast, broadcasters devoted substantial coverage to explaining and endorsing the government's approach to the pandemic. Little of the coverage on international responses focused on countries which have suppressed the virus and their successful containment measures appear as discrete fragments that are not unpacked or contrasted with the British approach.”

The study shows that the BBC and ITV were very similar in this respect, so we are not talking about a specific BBC problem here.

People often complain about contrarian views not being given adequate exposure when issues are contested, but in this case we know the government’s herd immunity strategy was a huge mistake, that costtens of thousands of lives. So it is very important to know why the media chose to spend so little time discussing alternative strategies, including the one the government eventually adopted.

The first possible reason for the uncritical attitude in most of the broadcast media is the idea that the media should become more of a government mouthpiece in a ‘national emergency’. Governments always have a fear of mass panic, and see broadcasters as a means of preventing that happening. Broadcasters normally accept they should play this role to some extent at least. Yet ironically in early March reassurance was completely the wrong advice to give people. More importantly, while uncritical coverage might make some sense when there is little disagreement about what the government was doing, in this case there was substantial disagreement among UK experts, with many believing the government was taking the wrong course. Indeed, alarm bells should have been ringing when it became clear that the UK was almost an international outlier in its initial Covid policy. Just as in a famine, the media becoming a mouthpiece for official policy in a pandemic increases the number of lives lost. 

The second reason for this media failure, and I think in this case much more important, is that most of the reporting on the pandemic was done by Westminster based political correspondents. To again quote from the paper:

“Much reporting, as our analysis demonstrated, came from Lobby journalists—particularly the political editors at both channels—who were key framers of the government's policy responses. As noted earlier, this immersion within the ‘Westminster bubble’, and the need to maintain access and cordial relations with government sources, may mitigate against critical journalism.”

This is a point I have increasingly made about poor economics reporting, and it is also clear from reading the recent report on the BBC’s coverage of fiscal policy issues. The major broadcasters [3] seem to think that all the headline stories that have a political dimension should be covered by their front-line political reporters, and this ensures two things. First, that the reporters will almost certainly know very little about the issue they are reporting on, and second that they are the reporters that are most subject to government pressure (but not command) because they need to maintain access (and the BBC’s case because of external and internal pressure).

While it is tempting to think about this in political terms, I think it is equally about skewed journalistic values. Why do Westminster's political journalists crave access to government thinking? I suspect there are two reasons. The first is the excessive importance journalists give to the ‘scoop’, or ‘exclusive’. I say this is excessive, because in today’s age news travels so fast that no one outside journalism cares very much about which broadcaster is the first to reveal some government policy or announcement. The scoops people remember don’t come from government spin doctors but from elsewhere.

The second is the idea of the political journalist being an insider in the political horse race. We hear constantly about policy in terms of how one side thinks it will affect their political chances, rather than the actual impact that policy will have on citizens. This is something that may benefit the journalists involved (as some move to become party spin doctors), but it is actually harmful for viewers. It is not a problem unique to the UK. Abolishing the Lobby will not change it. Political journalists don't have the incentives to change it. The only people who can change it are those in charge of news at the major broadcasters. [4]

When I saw how the media were happy to push macroeconomic ignorance during the first austerity period I initially looked for reasons that were peculiar to economics (such as the role played by City economists). However the media failure during the pandemic was at least as bad (after the end of herd immunity, they pushed the flawed health vs economy message), and I suspect medical experts felt just as frustrated by the media’s failure to distinguish between knowledge and spin as experts on macroeconomics had a few years earlier. 

But those are just two examples among many. I will never forget the BBC news report after Johnson secured a Brexit deal with the EU. Laura Kuenssberg repeated what must have been the government’s spin that Johnson had achieved what few thought possible, while their Brussels correspondent Katya Adler in the same bulletin pointed out that Johnson had essentially just accepted the first proposal put forward by Brussels over a year earlier. Yet Kuenssberg began and ended the bulletin, so it was the spin rather than the reality that most viewers would have remembered.

This idea that broadcasting repeatedly fails to explain, and instead focuses far too much on Westminster politicking, is far from new. As long as broadcasters give prominence to political journalists, at the expense of journalists with subject knowledge derived in part through contacts with experts, then politicians will continue to exert undue influence on what is reported, and broadcasters will fail to alert their viewers to major mistakes the government is making, even though those mistakes are obvious to most experts.

[1] In a pandemic where the infection is new, there has to be a good chance that either a vaccine will be developed, or that knowledge about how to mitigate its effects will quickly improve, or both. For this reason, once it was clear how dangerous Covid was, herd immunity was a terrible strategy.   

[2] If I'm being self critical I should have known better. Government's can all too easily set the terms of reference for expert committees that narrow options, sometimes without participants being fully aware of what is happening until too late.  

[3] This problem was perhaps less acute with C4 News, where I have the impression they give more space and prominence to subject editors. (I have less personal knowledge of Sky News.) Jackie Long was one of the better reporters during the pandemic.

[4] A related aspect of seeing everything in a party political frame is that the two-sided debate becomes the default format. This format is so misleading when the scientific consensus is on one side. For various reasons, including money, you will always find contrarian scientists prepared to oppose the consensus, but it is completely misleading for the media to use this fact to suggest to viewers there is division when there is almost none. 

As Chris Giles explains here, Chancellor Hunt is gaming his fiscal rules. He is not the first Conservative Chancellor to do so. In particular, it is now routine for Conservative Chancellors to announce that they are freezing fuel duty, but they then tell the OBR that they will raise them with inflation in every forthcoming Budget. They have repeated this fiction for the last dozen years. The fiction that the duty will be raised in the future, just not now, flatters future revenue projections and makes it easier for the Chancellor to meet his fiscal rules.

This particular problem arises because the OBR is legally obliged to produce a forecast on the basis of what the government claims is its policy. However there is the letter of the law, and there is politics. Suppose the head of the OBR decided next year that it would ignore the government and instead use past data to assume that fuel duty would not be uprated in future, what exactly would the Chancellor do? Fire him? It just wouldn’t happen.

I know the previous head of the OBR thought about doing this. The current head, Richard Hughes, would have his hand strengthened considerably if the Treasury Select Committee stated that in future it expects the OBR to do this. This committee has to approve senior appointments to the OBR. Whether the Committee has the political courage to do this is another matter. In the longer run the legislation governing the OBR should be changed so as to allow it to base its projections on what it believes the government will do in the future. [1]

Much the most difficult and serious element of gaming, that I mentioned myself after the budget, involves the projections for public spending. As was clear from the last Autumn Statement, the Chancellor’s plans involve two things that almost certainly will not happen. The first is that we have a renewed round of public spending cuts, in a public sector that is already cut to the bone. The second is that the relative pay of public sector workers continues to be reduced relative to other workers, in a situation where public sector vacancies are at critical levels and public sector workers are either striking or have won awards that exceed the government’s assumptions. This bit of gaming is more difficult to fix, yet it risks making a mockery of the whole Budget forecast.

Some might say that fiscal rules are a fiction anyway, so who cares about this. I don’t like the particular fiscal rules the Chancellor has chosen [2], but I do think fiscal rules are there for a good reason. I partially disagree with Stephen Bush on why they are important. They are not there to keep the markets happy, and nor are they required to keep departmental spending in place. The purpose of fiscal rules is to stop the Chancellor fooling voters, by for example cutting taxes just before an election and pretending that these cuts are sustainable. Voters deserve to know whether pre-election tax cuts or other bits of fiscal largesse are bribes that will disappear once the government is elected or something that is more permanent. That is why gaming the fiscal rules matters.

If we go into why the rules are currently being gamed, it helps to understand why it’s difficult to stop. Paragraph 4.46 of the OBR report explains why assumed pay growth for the public sector is about 1% lower than that for the private sector, thereby continuing the relative fall in the pay of public sector workers that we have seen since 2010/11. There are two points to make. The first involves implausibility, given the increase in vacancies, quit rates and strikes we are currently seeing in the public sector. But just because something is implausible doesn’t mean it is impossible. The second is visibility - you have to dig deep in the OBR’s report to find this analysis.

On public spending, the numbers the government have pencilled in are broad aggregates, so you have to make some assumptions to see what this means for individual departments. Luckily the IFS post-budget analysis has a go in the chart below.

NHS spending increases are at the past long term average, which is the minimum conceivable in that it does nothing to relieve current pressures. Spending on schools declines as a share of GDP, while it is announced policy that defence spending does the opposite. That leaves an annual real term fall in spending of 3.2% in everything else. We have the same two problems. The government’s assumptions are opaque, so they can always say they don’t ‘recognise these numbers’, and they are highly implausible but it is hard to say they are totally impossible.

So the OBR under its current remit cannot say that these projections cannot happen, but because the detail is hidden (pay) or not spelled out (departmental totals) the Chancellor bears little cost in putting these implausible numbers forward.

One way around this problem is to make fiscal rules apply to the short term rather than medium term, but there are excellent reasons why this cure would be worse than the disease. A much better option is to strengthen the watchdog role of the OBR, to make it more in line with some other fiscal councils. This would require two changes to the legislation that set up the OBR.

First, the OBR needs to be able to do policy variants: simulations/forecasts where policy variables are different from the government’s announced plans. That goes well beyond the minor tweak suggested for fuel duty, because no evidence would be required that this would be what the government might actually do. The Treasury were insistent that the OBR would not be able to do this when it was set up, partly I suspect because it didn’t want to see alternatives to austerity.

Second, the OBR would be mandated to comment on the feasibility of aggregate public spending plans, and if the government’s projected plans were unlikely to be feasible, to prepare an alternative forecast based on plans that were feasible. Very quickly this alternative, more plausible forecast would be the one that everyone quotes.

Of course neither of these things will happen under the current government, so what is to be done next year if, as some have suggested, the government not only cuts taxes but pencils in even more tax cuts, and combines these with even more unlikely paths for public spending than are already there. The IFS and Resolution Foundation will no doubt call the government out on this, and the text in the OBR forecast will provide plenty of hints, but both are likely to pass most voters by.

Ironically the government will see these tax cuts as a ‘trap for Labour’. If Labour say they will not implement these tax cuts if they win the election then they give a real ‘higher taxes under Labour’ weapon to the Conservatives. If they say they will cut taxes then journalists, with some justice, will ask Labour about the clear implications for public spending. A compromise for Labour would be to accept the immediate cuts, but not future cuts, saying the Conservatives couldn’t afford these either. There are no easy answers here, but these dilemmas stem from the government’s ability to game the system. The government’s ability to game the system in turn stems from the weakness of the OBR as a watchdog.

[1] Another example of possible gaming that Giles and others have mentioned is investment allowances for firms. In the OBR projections this is a three year policy, but Hunt announced that he would like to make it permanent if and when resources allow. There is the expectation that the Chancellor probably will make it permanent at some point, but this is based on politics rather than experience. In this case the OBR would have little past evidence on which to warrant overruling what the Chancellor says his current plans are. For that reason I don’t think this is an example of gaming the rules. Chancellors should be able to announce aspirations, but if the fiscal rules don’t allow those aspirations to happen I can see no reason why the OBR should do otherwise than take the Chancellor at his word. I think this is an example of the rules working.

[2] I have always argued that falling debt to GDP is a silly rule, and I’m glad the consensus seems to be shifting that way even if Labour policy is not. In addition, targeting the total deficit rather than the current deficit that excludes private investment is wrong both in principle and in practice.

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As my posts are usually written just before Budgets happen, I will add a postscript after the Budget

To say that much of the media treats Budgets as if the government was a household is not really accurate. Much Budget analysis treats the government as a cash constrained household, such that any change in expected tax revenue is regarded as money the Chancellor has to spend or give away. Most households don’t work like that, because they have the capacity to save and borrow. The government of course finds it much easier to borrow than households.

Unfortunately some governments encourage the media’s attitude to Budgets. On this occasion, however, the government’s fiscal rules are medium term, with targets always five years into the future. So there is nothing in these fiscal rules to suggest that temporary improvements to the government’s fiscal position need to be spent or given away. The reason they are likely to be spent or given away in the forthcoming budget is because we are close to an election. But because many in the media treat the government like a cash constrained household, what in reality is fiscal electioneering will be portrayed as normal practice.

The forthcoming election is likely to influence Chancellor Hunt’s first Budget in two ways. First, he will want to produce fiscal giveaways that will make newspaper front page headlines the next day, and perhaps sway some voters to vote Conservative. Second, he will want to try and get the economy growing again as quickly as possible. The reason why can be seen from this chart.

Whereas the US economy at the end of last year had GDP per head around 4% above its level at the end of 2019, the UK economy had GDP per head around 2% lower. This number may be flattering to the US because at the end of last year at least it was probably running a little hot, but the same is true of the UK yet GDP per head is still significantly lower than before the pandemic. The UK’s relative performance over the last three years has been even worse than its performance in the decade since 2010. The Chancellor will be desperate to see some positive economic news before the election, and hope that enough voters are myopic enough to forget how bad things have been since 2010.

One of the reasons why the US has performed so much better than the UK since 2019 is that Biden had a clear long term plan of how he was going to support growth, while the UK did not. That plan involved first ensuring a strong vaccine enabled recovery from the pandemic using a fiscal stimulus focused on poorer citizens. Then came large instructure projects, followed last year with incentives for greening the economy. In contrast the strategy of the Conservative government since 2010 has involved shrinking government, tax cuts for firms and Brexit. The aim was to let an ‘unburdened’ private sector do all the work, and it has been a complete failure.

A conventional pre-election fiscal stimulus runs the risk of encouraging the Bank of England to raise interest rates yet further. That suggests he will look at measures that increase aggregate supply as well as aggregate demand, and so might be regarded by the Bank as inflation neutral. Trying to increase aggregate supply is laudable of course, but unfortunately he is likely to shun the two most obvious choices: more public investment and better health.

In his Autumn Statement he had already cut back on public investment, and it will be interesting if he goes further. Delaying the completion of HS2 is an example of what John Elledge had earlier called ‘Treasury brain’. Such delays in investment rarely save money in the longer term, and obviously they delay getting the benefit of the investment. It’s not as if the UK is ‘world beating’ with high speed rail - it’s actually way behind much of Europe. What is important here is not the rhetoric, which is always positive in Budget speeches, but the actual numbers for aggregate public investment, which I will report on in the postscript after the Budget. With so many good reasons to increase public investment in so many areas, it is so short sighted to be cutting it back. If public net investment over the next few years remains below 3% of GDP this will be a consequence of the stupidityof including public investment in the fiscal rule targets.

The Chancellor will probably do something to tackle the large number of inactive people of working age that is one of the two key factors behind the UK’s current labour shortage (the other is Brexit). However, as this report argues, the main reason why this problem has been so uniquely persistent in the UK since the pandemic is the large number of people not working because they are sick, which in turn reflects the chronic state of the NHS after thirteen years of Conservative government.. Providing more money to the NHS (the report dubs this “check-ups to pay cheques”) is the best way to achieve this. Yet other reportssuggest that the Treasury is trying to stop plans for more NHS nurses and doctors, which in turn suggests the Chancellor is unlikely to provide assistance where it can be most effective.

One area where he may well act to increase demand and supply is incentives for investment by firms. While these incentives generally sound like a good idea, there is a danger that all they do is bring forward investment to years where the incentive applies from years when it doesn’t. If that is all that happens then little has been achieved from a long term point of view, yet with the cost of government payouts to the firms doing the intertemporal switching. However if the Chancellor wants to boost investment in an election year, at the expense of lower investment under what may well be a Labour government, this may not be his major concern!

Low public investment, ignoring the long term sick, and politically motivated subsidies to firms are all examples of where poor political decisions mean that fiscal policy fails to improve the economy in the longer term. If the headline grabbing giveaways include not raising petrol duty yet again, then we can add that to the list. The media will report this as ‘popular with motorists’, as if motorists are united in welcoming climate change.

As I noted in this post, the United States has for the first time a clear plan to encourage the kind of green industries which will play such an important part in all major economies over the next few decades. As their plan is also protectionist, it has encouraged the EU to increase subsidies for these industries. The UK needs its own response. As Torsten Bell points out, it cannot just be an attempt to duplicate what the US and EU are doing, because the UK is a smaller, more open economy that needs to play to its strengths. It will be interesting if we get any idea from the Budget about whether the current government has started to think about what the UK’s strategy on encouraging green industries should be, or whether it is continuing with the failed plan of hoping general corporate tax breaks will invigorate the economy.

The BBC has never been completely independent of the government. But that is no reason to ignore its gradual transformation over the last thirteen years into a media organisation that has become increasingly prone to do the government’s bidding. A process that began out of fear has now become institutionalised through the appointment of a once deputy chairman of a local Conservative party and council candidate as director general, a Conservative party donor deeply involved in party politics as Chairman, and a former Communications Director for Theresa May on the BBC Board.

Political appointments have been made to these senior positions at the BBC before, but we have not had a government like this before. A government that is far more prepared to interfere with established institutions to get its own way will mean that its political appointees in public institutions will be prepared to exert far more party political pressure than their predecessors ever have.

The means which today’s political right have used so effectively to make the BBC an instrument to advance their political ends is to elevate their interpretation of impartiality above all else and then to apply that concept selectively.

As I outlined here, the primacy of impartiality as balance between two political sides is a means by which a populist right can obscure truth and create bias. It allowed the populist right (the party of Johnson and the right wing press) to gain power through the Brexit referendum, when the truth about Brexit was buried because the BBC chose balance over facts and explanation. Since then it has allowed the government, through its press, to selectively squash things said by anyone involved with the BBC that embarrasses the government, but ignore equivalent cases involving opposition politicians.

So BBC presenters like Alan Sugar can freely use social media to attack opposition politicians, but because no right wing newspapers splash headlines about this the BBC does nothing. But if Gary Lineker states facts about the government’s latest illegal immigration bill (yes it is cruel to refugees and yes the language used to promote it incites violence) he is fired. The BBC’s rules on impartiality are applied in a biased way.

So when that same BBC presenter criticised Qatar’s human rights record on the BBC before its coverage of the world cup that was fine, because that was “something which is a matter of fact.” But when the same presenter in a tweet stands up for the human rights of refugees coming by irregular means to the UK (yes the proposed bill does break international law protecting the human rights of refugees), facts suddenly become unimportant and the BBC’s notion of impartiality rules. The BBC’s rules on impartiality are applied in a biased way

So the BBC lost no time in responding to complaints from 10 Downing Street in itself criticising its Newsnight team and presenter Emily Maitlis for an introduction about public anger over the way Dominic Cummings had broken lockdown rules. There was no investigation, just a statement that the introduction had not been impartial. There was no attempt to suggest that anything in the introduction was factually wrong, or expressed an opinion about matters that remained uncertain. Instead simply stating facts that put the government in a bad light was sufficient to have something labelled as not impartial. But when the Chairman of a well established right wing magazine chaired a flagship BBC political programme, and tweeted his views freely, the BBC turned a blind eye. Once again, the BBC’s rules on impartiality are applied in a biased way.

It may seem ironic that rules designed to promote impartiality should lead the BBC to become biased and subject to the government’s bidding, but it is inevitable when the government and its press have more power than other politicians and newspapers, and when those in charge at the BBC are appointed by that government. In the past facts and the truth have been an important defence against political inference at the BBC, but once stating facts that embarrass the government is deemed impermissible for anyone working at the BBC that defence against political interference disappears. It is no accident that the current leaders at the BBC promote their definition of impartiality so strongly. It is no accident that the BBC’s impartiality rules apply not just to what its political journalists say on the BBC, but also to what already famous sports presenters say in a personal capacity on twitter. The latter presents no threat to the reputation of the BBC, but it does represent a threat to the government.

The selective promotion of political balance over facts is doing the BBC a great deal of harm. It has lost some excellent journalists as a result, and it is now in danger of losing its flagship sports programme. It is losing the trust of the public. But today’s political right wins either way. A BBC that does its bidding is just fine because it helps them keep power just as it helped them win power. If the BBC loses its reputation and its audience declines, that suits them too, because it gives more space for our equivalents of Fox News to gain an audience.

This is why it is imperative that any future Labour government creates a truly independent BBC, where once again the BBC’s mission becomes to inform, educate and entertain. A BBC where political operatives can no longer take control, and a BBC where broadcasting facts, knowledge and truth are never subservient to party political balance. Until then those who want to see this kind of public service broadcaster should have no hesitation in criticising what the BBC has become, in pointing out how today’s BBC acts in a manner that is biased towards this government and in supporting those working at the BBC who try to tell the truth but are attacked by the BBC as a result. A media independent of the government is crucial to the survival of democracy.

Quantitative Easing (QE) is not a well loved policy instrument in many quarters. What I want to argue in this post is that this unpopularity is in many cases misplaced, and also why QE will and should always be with us as long as central banks remain independent. To understand why, we need to talk about how fiscal policy (changes in government spending or taxes) is financed, and what happened at the start of the Covid pandemic.

Macroeconomic textbooks are full of discussion and analysis contrasting bond financed and money financed fiscal policy. With a bond financed fiscal expansion the extra spending (or tax cuts) are matched by higher borrowing, while a money financed fiscal expansion is paid for by creating more money. But in the real world governments do not debate whether to finance the deficit by issuing bonds or creating money. That is because money creation has been delegated to their independent central bank.

Central banks in turn typically determine short term interest rates to achieve inflation targets. But a money financed fiscal expansion is still possible, if a fiscal expansion is accompanied by Quantitative Easing (QE). This is what happened in the UK during the pandemic. Furlough was paid for by increasing government borrowing, but the Bank of England bought a very similar quantity of government debt by creating bank reserves (electronic money). So if you treat the central bank as part of the consolidated public sector (as you should here, because central bank profits and losses go to the government), furlough was largely paid for by creating money. It was similar to a classic money financed fiscal expansion. [1]

If QE is very similar to textbook money creation, why was it initially treated as something new, and why has it become so unpopular in some quarters? Before the Global Financial Crisis (GFC) most mainstream economists signed up to the idea that macroeconomic stabilisation (and therefore control of inflation) should be exclusively done by independent central banks varying interest rates. In such a world, there would be no need for fiscal stimulus during recessions, because lower interest rates would do the job more quickly and efficiently. Any money creation done by the central bank would just be a bi-product of its interest rate setting process.

In effect, independent inflation targeting central banks removed the option of governments choosing to finance their deficits by creating money rather than by borrowing. But that was fine, because there was no reason for governments to want to finance fiscal policy by creating money rather than borrowing as long as the central bank was able to control demand and inflation by varying short term interest rates.

That idea broke down during the GFC, because interest rates fell so low they hit a level (roughly zero) that central banks were reluctant to go below. QE was adopted by both the UK and US as an alternative way to stimulate the economy. Money creation was back on the menu. Unfortunately, this also helps explain some of its unpopularity. When fiscal stimulus in 2009 turned to austerity in 2010 in most major economies, too many people who should have known better suggested this wouldn’t matter because QE could do the job interest rates could no longer do.

There is a simple reason why this was not, and will never be, true. Fiscal stimulus has a much more reliable impact on aggregate demand than QE. It is now generally recognised by most academic economists that fiscal consolidation in 2010, at the start of the recovery from the biggest recession since WWII, was a major mistake. But this mistake didn’t happen because of QE. It happened in part because some, including many senior central bankers, oversold what QE was able to achieve.

Quantitative Easing is also unpopular because it’s associated in many people’s minds with increasing wealth inequality. Once again, I think QE is being unfairly judged. What causes asset prices to rise is low long term interest rates. The decline in long term interest rates since the 1980s is in large part outside the control of policy makers. Long term rates are influenced by central banks varying short term rates, but they do this to keep inflation on target and aggregate demand reasonably strong. The contribution of QE to the level of asset prices is marginal compared to other factors, including the impact of the central bank’s interest rate decisions. Of course low interest rates also mean the income received from financial assets is lower, so what the wealthy gain on the wealth side they lose on the income side.

The wealth effect of very low interest rates is also not inherent to interest rate stabilisation, but is instead a reflection of bad fiscal policy. Good fiscal policy should ensure that interest rates never need to fall to zero, except in extreme circumstances where fiscal policy has not had time to have an impact on the economy. The fact that we had interest rates at their lower bound for so long after the GFC reflects the 2010 austerity mistake in the UK, US and the Eurozone.

There is a serious issue involved in reversing QE, which I have looked at in a recent post. Central banks are understandably reluctant to sell the large quantities of government debt they hold quickly (and use it to reduce reserves), which means money creation is slow to be reversed. As central banks pay interest on these reserves, when interest rates are high and rising as they are today the public sector ends up transferring funds to the private banks holding the reserves. But as my post points out, this is not a necessary consequence of QE, and can be fixed in more than one way.

Last, but definitely least, there is an argument some make that the expansion of QE during the pandemic helped cause today's high inflation. This is in my view largely nonsense, and relies on either inflated views of the importance of central bank money creation (a form of monetarism), or incorrect views on what determines bank lending. If pandemic QE hadn't happened we would still have had higher energy prices and the invasion of Ukraine. More generally, given what happened after the GFC, it was important that policy ensured a strong and quick recovery from the pandemic, which is why I still think Biden's fiscal stimulus in 2020/21 was the right thing to do. As I note above, good fiscal policy should always ensure interest rates are well above their lower bound.

While QE is not the evil that some make out, a legitimate question is whether it has any positive virtues. Why do you need an unreliable replacement for cutting interest rates when interest rates hit their lower bound if fiscal expansion is always superior? To answer that we need to go back to the last time a money financed fiscal expansion occurred, which was the pandemic. What the onset of the pandemic showed is that bond markets (the markets for government debt) can be fickle. As the pandemic broke they initially refused to buy government debt (not just in the UK but elsewhere), so without QE the government would have been forced to repeat the mistake of 2010 and cut spending or raise taxes.

This is why the QE option always has to be there, and why QE will always be part of the policy toolkit. When a fiscal expansion is vital but the government cannot sell its debt, there has to be the option of a money financed fiscal expansion.

We can make the same point another way. One of the excuses for 2010 austerity was precisely that without it the bond markets might panic. QE was the key reason why that argument was false, as I outlined in one of my first blog posts. When bond financed fiscal expansion is not possible because of fickle bond markets, yet fiscal expansion is necessary for the health of the economy, money financed fiscal expansion has to be an option. QE is what makes that option possible. It is very ironic that while central banks mis-sold QE as an alternative to fiscal expansion, in reality QE was all you needed to blow the main argument against fiscal expansion out of the water. [2]

So in my view the bad press QE gets is largely unwarranted. It is true that QE is a pretty unreliable stimulus tool in itself, and it should never be a substitute for fiscal expansion during recessions. However QE is an important policy instrument that allows those fiscal expansions when the economy needs it, interest rates are so low they cannot provide it, yet bond markets will not buy government debt. This combination of circumstances is unlikely to happen very often, but even when it doesn't happen the existence of QE knocks down claims that it might.

[1] In a textbook money financed fiscal expansion, the government saves having to pay the current interest rate on the government bonds it would otherwise have had to sell. With QE, the consolidated public sector (government+central bank) saves having to pay the interest on the bonds the central bank happens to buy. Another difference in detail is that furlough was more like fiscal support rather than fiscal expansion.

[2] Is there a problem because governments do fiscal expansions, but central banks do QE? There shouldn’t be, because in recessions caused by deficient demand central banks will want long term interest rates to be low, and if the bond market is reluctant to buy government debt long term interest rates will rise, so the central bank will buy that government debt.

In May last year I wrote about a new bookby Eric Lonergan and Corinne Sawers called Supercharge Me. The book argued, in essence, that economists should stop thinking about carbon taxes as the way to tackle climate change, what we could call the big stick, and instead think about carrots in the form of subsidies and public investment designed to get green industries to a scale where their rapid growth would be inevitable.

The Inflation Reduction Act (IRA) is essentially a climate bill passed in the US that does exactly that. It is full of carrots, sometimes open ended carrots, designed to promote greener industries, financed not with carbon taxes but higher corporate taxes and lower drug prices for medicare. As I largely agreed with the central idea behind Supercharge Me, I thought it would be interesting to see how that strategy had proved successful in one of the most difficult countries to convince to go green.

The IRA started as Build Back Better, which was a massive programme of infrastructure spending with a large green component and welfare spending. Some of that was diverted into the Infrastructure Investment and Jobs Act, which was passed into law in November 2021, but the climate part became stuck because one Democratic Senator, Joe Manchin from the Coal and Gas state of West Virginia, refused to support it. (The Republican party was of course united in opposition.)

It looked as if once again the US Congress would block effective green action in the US. But then, to the surprise of many and with a name change the IRA was passed in August 2022. So why did Manchin change his mind, and what was lost as a result? What follows leans very heavily on this excellent talk and discussion, so if you want to know more than I can write here have a look.

A key idea from Supercharge Me is to use the story of solar power as a model for how to green large parts (not all) of the economy. Solar power started off as a relatively expensive form of energy that also required large capital costs to install. However, partly as a result of what the book calls Extreme Positive Incentives, costs came down, more solar power was installed which allowed costs to come down even further, until now solar is one of the cheapest forms of energy.

Electric Vehicles (EVs) are another example of where strong incentives or regulations could produce similar effects. In the UK at the moment not many people buy EVs because they cost more to buy and the charging network is far from ideal. However if the government provides incentives for people to buy EVs their costs will fall, and if they ensure the charging network is substantially improved more people will want to buy them. The IRA includes incentives to buy EVs (which are already working), heat pumps and a lot more besides.

So what made Senator Manchin decide to finally support this bill? The answer is complex, and there are certainly some changes in the bill that he insisted on which are far from progressive. One example is that green incentives no longer require union labour. No one is suggesting the IRA is everything those supporting a Green New Deal would want. But something is better than nothing, so it is interesting to see why Manchin changed his mind, and why Big Oil did not fight against the IRA.

One answer is the invasion of Ukraine. As I have already noted, green energy is now cheap energy, and that is intensified when the price of carbon based energy suddenly shoots up. That is one reason for the change of name to IRA. But perhaps more importantly, with US energy producers getting huge profits and exporting large amounts of gas to Europe, green energy seemed less of an existential threat to Big Oil. Republicans pleaded with oil companies to fight the IRA, and they refused.

There are some signs that the IRA may also be robust enough to survive a Republican Congress. There is a new ‘battery belt’ in the US in a similar position to the old bible belt: southern red states which will be reluctant to give up the subsidies the IRA has created.

The other factor that helped get the IRA passed in the Senate was China. Once you see Green Energy as at least part of the future, then most politicians will want their own country to be part of that. As with IT, there was a common concern that China was becoming too successful in providing key parts of the green revolution, and so the IRA is actually a very protectionist measure. Trump’s Make America Great Again has become an insistence that green goods should be Made in America. Again this aspect of the IRA may be far from ideal, but the link between greening the US and protection is not one I would have guessed beforehand. It has also created difficultiesfor the EU in how to respond.

Hopefully the Ukraine war will also acceleratethe global move towards renewable energy. For any significant movement in the UK we will have to waitfor a Labour government, which has pledged a substantial programme of green investment, includinga publicly owned renewable energy company. The main threat to this happening on the scale required to avoid harmful global warming, both in the UK and elsewhere, is an obsession with the government’s deficit and public debt.

The IRA is fully financed by higher taxes, and that was the only political option Biden had. But whether we are talking about conventional public investment, or incentives to encourage private investment in green energy, using borrowing rather than taxes makes a lot more sense from an economic and political point of view. This is, after all, temporary government spending to spur investment with future benefits, so its costs should be spread over generations. There are strong economic arguments for higher carbon taxes because the polluter should pay, but the political constraints on achieving this seem high. In the UK at least there is a strong argument that permanent revenue from higher taxes should be used to fund permanent increases in current public spending to allow our public sector to recover from 15 years of Conservative governance.

So how do we avoid deficit targets slowing down the transition to a green economy? Once again I need to stress that in an ideal world this would not be a problem. I have argued many times that targets for the total deficit or for falling debt to GDP make no sense, because public investment should not be constrained by fiscal rules. If public investment yields a good social return then it should happen, whatever the implications are for public debt. But unfortunately we are not in that ideal world, and so we need to start thinking about more imaginative ways to get around the obsession with public debt.

One of these has recently been proposed in an interesting article by Peter Bofinger. He makes the casefor funding public missions through increases in public debt, which is a kind of ‘project based golden rule’. (This idea of missions for government has recently been championed by Mariana Mazzucato, but it goes back further than this.) In the UK context this would allow the debt to GDP ratio to increase only to the extent that it represented spending to undertake a mission, in this case to green the economy. This generalises an idea I put forward in my post on Supercharge Me, which was to create a ‘green account’ that was outside normal fiscal rules. As I noted there, it would also require monitoring by the OBR to ensure mission spending was clearly defined.

As the IRA illustrates, the obstacles to fighting climate change can with compromise and imagination be overcome. It is a mistake to prevent such compromise when the ideal is not politically possible. Providing incentives for greener energy is politically easier than making the polluter pay. While in an ideal world fiscal rules would not get in the way of such incentives, we live in a world that is obsessed by public debt. This too requires imagination and compromise to ensure this obsession does not get in the way of tackling climate change.

Paul Krugman once said that to improve a country’s standard of living over time “productivity isn't everything, but, in the long run, it is almost everything”. I want to use a recent Resolution Foundation study to examine a slightly different question, which is what determines differences in prosperity across countries. The answer is very similar, but with an important modification.

The Resolution Foundation report by Krishan Shah and Gregory Thwaites compares productivity and (PPP adjusted) incomes per household in the UK with the US, Germany and France, and with France it looks at both 2008 and 2019 so we can look at the comparison over time. But it starts with the following chart which includes many more countries.

This plots GDP per hour (productivity) on the horizontal axis against median income (both logged) for a number of countries. The line passing through the points is the 45 degree line, and the fact that the points are clustered around this line shows that differences in productivity are crucially important. However there are big divergences from that line, suggesting other factors are important.

The first key point, which can get lost in the detail of the report, is that incomes are not the same as prosperity, if you define prosperity in a more general sense. Three of the most important aspects of prosperity that are not captured by incomes are leisure, public goods and investment. Consider each in turn.

Imagine two countries. In one, people work long hours, have few holidays and have a long working life, and as a result their incomes are high. In another, people work less hours, have longer holidays and retire earlier, and their incomes are less as a result. It would clearly be a mistake to call the country where people work more hours a more prosperous country. We could ask the same question where incomes differ because of different levels of tax, where tax goes to pay for more public goods. The country where incomes are higher but less goods are provided by the state is not necessarily more prosperous, particularly if private sector provision of these goods is less efficient (think US healthcare). These are key issues when comparing the US and France, for example.

The final point is that you could raise incomes by not investing in the future. As future productivity depends on investment today, this might raise people’s incomes today, but at the expense of their incomes tomorrow. Differences in investment may occur not just in producing more capital goods, buildings etc, but also with investment in education, or simply in terms of income from overseas assets.

These factors are important to consider when we look at the relationship between comparisons of productivity and comparisons of income per household. Here is the report’s comparison between the UK and France in 2019.

On the left we have GDP/hour worked, a measure of productivity [1]. That shows that France is 17% more productive than the UK. The penultimate column is average household income, where France and the UK are almost equal. Why is France more productive but incomes are no higher? The main answer is the ‘worker/population’ column, which in this case mainly reflects earlier retirement in France (but also longer life expectancy). Does that mean that the average French person is not more prosperous than the average person in the UK, despite being more productive? Almost certainly [2] not, because people in France have decided to use their greater productivity to retire earlier.

Differences in the proportion of workers to the population doesn’t just reflect retirement. There are fewer young people in the workforce in France. This is partly an investment effect (more education) but also reflects high youth unemployment. The other big factor reducing average incomes in France is the ratio of domestic household income to national domestic income. This partly reflects the fact that French firms invest more so the share of profits in GDP is higher (and the wage share lower), but it also reflects higher taxes and (almost certainly) therefore more public goods. [3]

I hope it is now clear why I wanted to stress the distinction between incomes and prosperity. Although average incomes in France may be no higher than in the UK, the French are still more prosperous because they have used their productivity advantage to have a longer retirement, have more public goods and to invest more in the future. So productivity remains crucial to prosperity, but how people enjoy that prosperity can be quite different between countries.

A final but crucial point comes from comparing the last two columns. Median income is the income of the person in the middle of the income distribution, where you have as much chance of having an income above or below that level. If the distribution of income is very unequal, and in particular if it is skewed in favour of those at the top, median income will be below average income. Median incomes are significantly higher in France than in the UK, because the UK is more unequal. So although productivity is crucial in making cross country comparisons of prosperity, inequality is also important. (For a more detailed comparative analysis of different income brackets, see John Burn-Murdoch here. For a discussion of the impact of changes in the proportion of income taken by the top 1% in the UK over time, see hereand particularly here.)

The comparison for 2008 rather than 2019 illustrates a key point that is familiar. While the productivity gap in 2019 was 17%, it was only 7% in 2009. The last 10/15 years really has been a period of UK decline. The 2019 comparison with Germany throws up similarities and differences to France that the report goes into. While the productivity gap is similar, the benefits are taken in terms of working less hours rather than less years. Turning to the US, the productivity gap with the UK is similar to the gap with Germany and France, but US income is much higher. Some of that big gap is because workers in the US work more hours, and taxes are lower because public good provision is lower, but there are also differences that must reflect problems with the data used.

This analysis by the Resolution Foundation illustrates two general points. First, comparisons of personal (post-tax) income levels are a partial indicator of relative prosperity, because they ignore leisure, investment and public goods. For that reason, a comparison of productivity levels may be a better indicator of comparative prosperity than relative income levels. Second, what productivity ignores is the often significant impact different levels of inequality can have on the prosperity of the typical household.

[1] GDP/hour worked is a very aggregate measure of productivity, and could reflect different compositions of output as well as how productive similar firms are.

[2] We could drop the almost if we could be sure that the difference in retirement ages represented national preferences, including choices about retirement incomes.

[3] In theory higher profits could reflect higher dividends rather than higher investment, of course. This links to the decoupling debate (between productivity and real wages) I talked about here, based on work by Teichgräber and Van Reenen.

This isn’t a headline from the pre-Truss era, or immediately after the ill-fated Kwarteng budget - see the date. It’s as if they believe Truss was not brought down by the markets but instead by some left-wing plot. That the Mail and Telegraph could print headlines like these so soon after the Kwarteng/Truss debacle might seem extraordinary, but I fear it’s just an extreme example of something I wrote about a few weeks ago, and that is the failure of the Conservative right to learn from its own failures and events generally. This post explores why there seems to be an inability to learn and adapt on the political right in the UK.

As Steve Richards emphasised recently, the Conservatives after their catastrophic defeat in 1997 did not undergo the soul searching and upheavals that Labour had after their heavy defeat in 1983. Perhaps more surprisingly, this didn’t happen after they lost the following two general elections. Despite the GFC demonstrating the dangers of deregulation, the Conservative party continued to push for less ‘red tape’, including recently in the financial sector. Osborne was forced to match Labour’s spending plans before the Global Financial Crisis (GFC) because they were popular, but rather than accepting this he used that crisis as a device for achieving a small state (less spending, lower taxes).

This failure to learn has not always been true of the Conservative party. After the shocking (to them at least) defeat of Churchill in 1945, the Conservatives under Macmillan largely accepted the innovations introduced by the 1945 Labour government. More recently, Theresa May at least talked as if she wanted to shift the party away from the ‘government should get out of the way’ attitude that was behind austerity. (This interview between Steve Richards and Nick Timothy is interesting in this respect.) To an extent Johnson also understood that a low spending, low tax, low regulations platform would not appeal to the Red Wall voters who swept him to power.

Yet neither May nor Johnson succeeded in taking their party with them. Tacking to the centre on the economy while staying conservative on social issues makes good electoral sense, but many Conservative MPs, most Conservative members and pretty well all the right wing press want lower taxes and less regulation. Even if the Conservative party loses heavy in 2024/5, it is hard to see this party shifting its economic policy towards the centre.

I think this failure to learn and adapt is linked to another aspect of modern Conservatism, which is notable in both the UK and US, and this is a hostility to experts and science more generally. Again I don’t think this was as strong in Conservatism before Thatcher. Thatcher, and her mentor Keith Joseph, tried to abolish funding for social science in the UK. Austerity, although it had a few high profile academic supporters, went against basic and state of the art macroeconomics. More recently, Johnson began to ignore the advice on Covid that he received from his own group of medical scientists. Although Conservative party leaders sign up to the net zero agenda, their actions show a distinct lack of enthusiasm. Conservatives seem deeply distrustful of universities and academics.

Science is all about the experimental method, which in turn is all about learning. Crudely, you have a theory, do an experiment to see if it works, and if it doesn’t you dump the theory and think again. Of course scientists are more attached to their theories than this Popperian characterisation suggests, sometimes for good reason and sometimes not, but there would be little scientific progress without learning.

Right wing anti-science in the UK is not nearly as bad as in the US, where the front runners to be the next Republican President are using their opponent’s support for vaccines as a weapon against them. But using nonsense arguments to suggest pandemic lockdowns were always a bad idea, which is now just standard in the right wing press, is just one step away from where the US is right now. I have argued that the Conservative party’s obsession with tax cuts just isn’t possible without ending the NHS as we know it (see also George Eaton more recently), but the party either lies about this or is in denial. This refusal to respect basic arithmetic and evidence often initiates the party’s antagonismto democratic pluralism, and may even be a factor behind why some ministers resort to bullying civil servants.

Which brings us, inevitably, to neoliberalism ideology. Why ideology more generally rather than neoliberalism? A standard definition of ideology is “a system of ideas and ideals, especially one which forms the basis of economic or political theory and policy”. Ideology, being a system of ideas, is like a theory in that it can be right or wrong. But one characteristic of ideologies seems to be that they are particularly resistant to evidence that they are wrong.

Neoliberalism is an ideology that borrows a lot from economics, but as I have sometimes said it is the economics you get from doing a Principles (Econ 101) course and missing half the lectures. Or as Dani Rodrik explains more eloquently here, it is just bad economics. As economics is a science, we can show its wrong using evidence. That is one reason why Thatcher so early on clashed with economists, and Keith Joseph tried to cut their funding. Has neoliberalism adapted to the evidence about its errors and limitations? Of course it has not.

There are also ideologies on the left that can be just as resistant to evidence. To take just one example, after the recent energy and food price hike there are some who deny that higher private sector wages will lead to greater inflationary pressure. The lessons of the 1970s have not been learned. Ideologies often connect to specific interests, and allow these interests to be portrayed as benefiting society rather than just specific groups. One reason an ideology persists despite some of its elements being clearly wrong is that these interests prevail.

However, to say that the modern Conservative party fails to learn from and adapt to failures, and can be anti-science, because of an attachment to an ideology is only half the story, and today may be even less than half the story. While neoliberalism began as an ideology that benefited businesses and corporations as a whole, in both the UK and US it seems to have degenerated into an excuse for some rich people, a few of whom own parts of the mainstream media, to demand lower taxes and deregulation.

These monied interests connect with each other and networksof journalists and politicians (some of whom may also be pretty wealthy, while others just want to be). But the origins of these networks in schools or universities attended is less important than it might have been with the old Establishment, because what drives them is the desire of those with money to have power. Sometimes this may be a general desire for power or influence, but more often it may be much more specific, such as the ability to get a government contract for example. In this case donations to the Conservative party become little more than investments with an expected return. For the very wealthy who pay a lot in taxes, donations to politicians campaigning for tax cuts can easily repay themselves over time.

For this reason the Truss premiership, and attempts to resurrect it, should not be regarded as some aberration but instead as the culmination of a transformation of the Conservative party that began with Thatcher and neoliberalism but has ended up with corruption and endless calls for tax cuts. Equally the scandal of the VIP lane for PPE equipment should not be seen as some oddity caused by a pandemic but instead as how today’s Conservative party thinks it should spend public money. We should not be surprised that this government seems so unresponsive to public opinion when it is monied interests that are calling the shots. In short, it doesn’t learn from its mistakes because it pays not to do so.

After 1997 the Conservative party didn’t learn from its mistakes because it was still in thrall to an ideology and the Prime Minister that championed it. If the party loses power at the next election, it will be the influence of money rather than ideology that prevents it from learning the obvious lessons, and money that stops it changing to better reflect public opinion on economic issues.

The BBC intends to commission reviews on impartiality in various subject areas, and last week it published its first on fiscal policy (taxes, spending, government debt and all that) written by Michael Blastland and Andrew Dilnot. I think it’s a good report, and the BBC’s coverage in this area would be a lot better if its suggestions were widely followed. As I coined the term mediamacro to signify the disconnect between macroeconomic knowledge and what was said in the media, I very much welcome this attempt to bridge that gap. However at the end I want to note two fundamental problems, one of which at least the authors could not avoid.

The report starts brilliantly with a chart published by the BBC. Although this just plots ONS data, it is biased. Why?

For most people this chart looks scary, and there is a danger that this is why it was presented this way. (Laziness may be another reason.) I and most other economists would say it is highly misleading because debt is not normalised (divided by some other economic variable, like GDP). The way the report describes this is that “it brings a high risk to impartiality and can lead to the appearance of bias”.

Both economists and the report are right. If you look at the path over time of debt divided by GDP (as you should) the picture looks a lot less scary, especially if you take the series back to just after WWII. By presenting this chart, the BBC was both misleading and biased, even though it was just presenting data. The report then goes on to criticise more general alarmism in reporting about government debt. In reporting there is too often a presumption that debt is bad, and more debt is always worse. I would just say that presumption is wrong, while the report would say that views differ, and that to assume its bad is therefore biased. [1]

To say that the government is not like a household and therefore household analogies should never be used is too strong. Sometimes these analogies can be useful and helpful for audiences. However at other times they can be terribly misleading, as my blog pointed out many times during the austerity period. The report rightly says that “it helps to know that household analogies are dangerous territory, intensely contested, and can easily mislead.”

Some may say that using household analogies represents deliberate political bias by journalists. The report suggests, and I think this is correct, that it normally represents ignorance. Most political reporters are not economists, and the breadth of what they cover means that they end up being experts in little except who is up and who is down in a political pecking order. It is worth quoting the report on this:

“It’s clear to us that political perspectives can be partial, neglecting others. Political journalists can likewise miss or misunderstand or underweight economic perspectives. We could simply say that’s why the BBC has other specialists. But if they’re all bound from the outset to work within a political frame that shapes the choice of subjects, interviewees, the running order, the line of questioning and the shape of the story – perhaps squeezing it into binary politics - how much can other specialists really exercise influential judgement? A risk is the BBC overlooks interests that lack current political salience.”

I think the report isolates a key problem here, and one whose scope goes well beyond fiscal issues, but it ducks exploring the fundamental reasons for it. Its recommendation here is really little more than ‘must try harder’. As I have suggested elsewhere, the problem lies in an explicit hierarchy which puts Westminster politics in the most narrow sense (who is up, who is down) above all else. To take a very recent example, the government can only get away with claiming that higher public sector pay will increase inflation because it knows that political journalists won’t subject the claim to the ridicule it deserves because these journalists don’t know it’s ridiculous (HT Tim Bale).

This may seem like bias. Journalists will too often adopt a political frame provided by the government because they are ignorant that other frames are possible. The report is rightly critical of reporting that says, for example, that a rising deficit means the government will have to cut spending. What it should do is report that a rising deficit will mean the government will say it has to cut spending, but other choices like higher taxes or accepting higher borrowing are possible.

As the reports says: “Governments often claim their choices are acts of necessity; this does not make them so.” It also points out that reference to the government’s fiscal rules can invoke similar dangers, because the rules are themselves contestable and contested. They may be rules for the government (although for this government frequently broken and revised), but not rules for society.

More generally the report talks about the dangers of journalists projecting a consensus where none exists except perhaps between the two main parties. It suggests that

“in economics we think there’s a case for a small shift in the balance of perceived risks towards more breadth of expert view. We mentioned a well-known academic who felt his views on debt were largely ignored during austerity, and who many might now say had a reasonable argument.”

That could be me, as I did give evidence to the report, but of course it could have been countless other economists. I personally would say we need much more than a small shift towards more expert views.

Now to the two elephants. The report doesn’t say that over the 2009-16 period the BBC, along with the rest of the broadcast media, made a colossal mistake in adopting the line that reducing the deficit was the most important priority for fiscal policy. This was not at first a failure of treating a political consensus as an economic one: initially Labour opposed the extent of austerity. It is possible to argue that this mistake had profound consequences, not only in pushing Labour towards the government’s position, but also in influencing the 2015 election, and after 2015 in creating the space for Corbyn to become Labour leader. Whatever you think of those consequences, it all stemmed from the broadcast media getting the economics completely wrong.

That is the first elephant in the room that the report fails to confront head on. It is important because the media’s near consensus that austerity was necessary was not just the result of ignorance on the part of political journalists. If you read Mike Berry’s book, for example, it is clear that the austerity consensus included the economic journalists at the time. As I have pointed out in my own book, the evidence suggests the majority of academic economists always disagreed with austerity, and by 2015 that majority was a consensus. The reason for this disconnect between economic journalists and state of the art knowledge over the austerity period is not addressed in the report.

Why did most economic journalists adopt the media consensus that reducing the deficit was more important than ensuring a swift recovery from the deepest recession since WWII? I have written about the influence of economists employed by City firms in my book, and I have also written more recently (at the time I talked to the authors of this report) about the origins of mediamacro. But the fact remains that, even after publishing my blog, none of the economic journalists working for the broadcast media ever contacted me about austerity. [2] That either suggests huge arrogance by journalists about their own intellectual abilities, or more probably it reflects that getting the economics right was both not important and also possibly dangerous for the journalists concerned. [3]    

The second elephant is one which the report could not avoid, and that is in adopting impartiality as the overriding frame of reference. I have written about this in detail here, but its biggest problem is that the truth becomes of secondary importance. Impartiality seems to be defined in terms of what people think, even if what they think is just wrong. So under impartiality, anti-vaxxers should get some air-time, as should climate change deniers.

To see how disastrous this impartiality framework is, you only need to look at the Brexit referendum. The BBC, following impartiality, gave equal airtime to both sides whenever the economic consequences were discussed, and drew back from calling out obvious lies that largely came from the Leave side. On the economics of Brexit there was as close to a consensus among academic economists as you will ever get, and the BBC mostly ignored it. Arguably the consequences of that failure have been with us ever since, because the academic consensus was right. [4]

So it is quite plausible that two major errors in the way the BBC has treated economic issues have had a crucial role in political developments since 2010, with the terrible consequences we see today. If the BBC follows the report’s recommendations its reporting will certainly improve, but it remains only a first step to correcting the disastrous errors that the BBC and others made over the last fourteen years.

[1] There is a way of making this point, popular among some, which carries risk. The argument is that government debt represents someone else’s wealth, and we normally think wealth going up is a good thing, not a bad thing. All true, but most people do not own government debt directly, and even those who own it indirectly may be unaware of that, so it remains the case for these people that government debt is a potential liability and not an asset.

[2] Why should they have contacted me? Because at the time I was one of a small number of senior UK academics working on monetary/fiscal interaction, and austerity was all about monetary/fiscal interaction. I had a track record of advising the Bank of England and the Treasury, and on major policy issues my advice had been right.   

[3] If you think dangerous is too strong a word, can I remind you what happened to Stephanie Flanders when she made the obvious point that strong employment growth coupled with weak output growth was problematic because it implied weak productivity growth. I'm also fond of this post I wrote on that.

[4] I used to think the media making political impartiality more important than knowledge was peculiar to economics, but the pandemic showed it was not. 

I have always found psychological analysis of voting behaviour interesting, but was never sure where it led. So what if research suggests conservatives tend to desire security, predictability and authority more than liberals do, and liberals are more comfortable with novelty, nuance and complexity. These psychological differences may tend to make liberals more concerned about the welfare of minorities or immigrants than conservatives, but that has no bearing on whether it is right or wrong to care about the welfare of minorities.

Where it does matter, however, is in understanding what issues resonate with particular groups. Winning elections is normally presented as persuading undecided or floating voters to vote for a particular party. It is also important for political parties to get their own vote out by either attracting or scaring them. But it may be just as important to persuade the other side’s voters not to vote for their natural party, and instead vote for another party (not necessarily your own) or not vote at all.

A good example of the last point were the claims of antisemitism within the Labour party when Corbyn was leader. Precisely because those with socially liberal views tend to be more concerned about discrimination against minorities, this issue was ideal for peeling off what might otherwise have been natural Labour voters. In this post I want to suggest that the controversy over sewage being continuously released by the privatised water companies into rivers and onto beaches could become a voting deterrent for natural Conservative supporters.

One of the pretty robust findings linking political preferences to psychological traits is that conservative voters react more strongly to what we might call disgusting images or descriptions. As Kathleen McAuliffe describesin the Atlantic, “the brains of liberals and conservatives reacted in wildly different ways to repulsive pictures: Both groups reacted, but different brain networks were stimulated.” High sensitivity to disgust tends to go hand in hand with a “conservative ethos.” Whether this correlation reflects the reaction of disgust in general, or disgust to particular things, is an interesting issue but not relevant in the current context. What the research does seem to suggest is that Conservative voters, or more generally socially conservative voters, may be more affected by stories of sewage pollution than voters of a more liberal persuasion. [1]

Linking the pollution of beaches and rivers (and, after floods, even streets) to the Conservative party is very easy. Those immediately at fault are private water companies, but the privatisation of water has always been championed by the Conservative party as a clear improvement over public ownership. If the news is full of examples of beaches and rivers polluted by these private companies, alongside the usual leaks and occasional gaps in supply, the advantages of privatisation are far from obvious.

Of course just because water companies were privatised does not mean the government is powerless to act. The problem the government has is their actions seem to be more sympathetic to the water companies than the environment. In August 2021 Conservative MPs voted to make the release of sewage by water companies into the environment legal, and gave them until 2050 to completely deal with the problem. The government has also deprived the Environment Agency of the resources and leadership needed to effectively monitor water quality. They, along with previous governments, have sat back while the regulator allowed these companies to pile up debt in order to pay large dividends to shareholders, rather than use an era of low interest rates to invest in the infrastructure needed to avoid pollution.

Natural monopolies like water companies, where there is no competition or customer choice, have little incentive to invest in sewage treatment or fixing leaks. Regulators, without external pressure from politicians, may tend to go easy on firms because, in part, of the problem of revolving doors. One way to avoid this is to give groups who have an interest in better investment a say in what the regulator does. What you don’t do, and what this government has done, is pass legislation that removes what little legal incentive there was for water companies to deal with the problems they have created.

The pollution story also gets to the heart of those claims that Brexit allows the UK to make its own laws and decisions. While we were part of the EU, UK beaches and rivers gradually became cleaner in large part because EU regulations helped that happen. By ‘taking back control’, the UK government has now allowed water companies decades before we might return to standards we achieved whilst in the EU. The reality is that most of the EU regulations Leavers go on about are popular with many Leave voters, just not most Leave politicians and opinion writers.

With the government failing on major issues like managing the economy and the NHS, the problems of pollution of rivers and beaches might seem relatively small beer. Up until now, most of the political noise on this issue has come from interest groups (e.g. river fishing), ad hoc groups or individual campaigners (most noticeably Feargal Sharkey) rather than the main opposition parties. This is not to suggest that Jim McMahon, Labour’s environment spokesman, has been silent on the issue - he hasn’t. Starmer and the Liberal Democrats have also made statements on the issue; see also here. But just as the Conservatives used to get references to antisemitism into almost every statement they made about Labour under Corbyn, perhaps Labour need to do the same about how the government has allowed privatised water companies to pollute our rivers and beaches with sometimes very serious consequences(see also here).

[1] Of course these are tendencies, no more. It certainly does not mean that if you exercised by pollution in rivers or beaches you must be socially conservative!

The Autumn Statement saw yet more cuts in public services planned for after the next election in order to get the debt/GDP ratio falling after 5 years. One item of spending that is expected to be higher after the next election compared to previous forecasts is debt interest. In part this is a result of the Bank of England’s Quantitative Easing (hereafter QE) programme. This created a large quantity of what are called bank reserves (explanations to follow), which currently earn interest for the commercial private banks that hold these reserves at the short term interest rate set by the Monetary Policy Committee of the Bank of England.

The Bank of England didn’t start paying interest on reserves until2005-6. As long as interest rates were close to zero, or the quantity of bank reserves were much smaller than now, paying the short term interest rate on reserves didn’t cost very much. However after QE, and with short term interest rates climbing rapidly, they are costing not just the UK government, but all governments that undertook QE, serious sums of money. The money markets expect UK short term interest rates to stay reasonably high over the next few years, and as the OBR's forecast is based on these expectations this means that a significant amount of the austerity in the government’s current fiscal plan is a direct result of paying interest on reserves to commercial banks. The New Economics Foundation (NEF) calculatethat the banking sector could receive over £50 billion of public money by mid-2025 because of interest paid on reserves. [1] Hence the title of this post.

If this all seems rather puzzling, it is because bank reserves are not well understood, and many of the explanations you will find just make things worse (see this from Frances Coppolawho points to some all too common mistakes). To make things simpler I’m going to treat the Bank of England as part of the government (looking at what economists call the consolidated public sector). This is realistic, as any profits or losses the Bank makes end up being pocketed or paid for by the government. So I will talk about the government creating reserves and paying interest on them.

Why did the government create these reserves in the first place? After the Global Financial Crisis, short term interest rates hit their lower bound. Quantitative Easing (QE) was a programme where the government bought back some of its own debt with money the government created. The government has the ability to create money, either by issuing notes and coins (cash) or by creating reserves. I will not go into why they did QE, and how successful the QE programme was, because I and many others have written a lot about this already. Even if you think QE was a bad idea, as the Bank of England is understandably reluctant to sell all its holdings of government debt at once we are where we are.

Reserves are electronic money, in much the same way as your current account is electronic money that you use in, for example, online banking. Whereas you need to initially provide the bank with money, or get a loan from the bank, to create a current account, the government can just create that money. The amount of money created is the amount of the reserve held by the private bank. Private banks can only sell reserves to each other, so banks as a whole get no choice about how much reserves they collectively hold.

If reserves are like the government’s current account, why does it pay interest on them to individual banks? You and I don’t pay interest on our current accounts. The answer is that paying interest on reserves is a relatively recent innovation in most countries, and was designed to ensure the government can continue to set short term interest rates for the economy as a whole. When interest rates were very low that didn’t cost the government much, but now it does. For the private banks, getting today’s short term interest rate paid on its holdings of reserves is a bit of a windfall.

Do private banks deserve this windfall? The short answer is no. The reason they are getting paid interest on these reserves is because it helps the government set short term interest rates, and not in return for any kind of loan from the banks. So why isn’t the government finding some way to get this windfall back from banks, just as it (reluctantly) set up windfall taxes for energy producers? The answer is that this government cares rather more about bank profits than public services, which is an example of something I wrote about last week.

To be fair, a bank might argue that it is providing some services when it holds reserves. Your bank does not ask you to pay interest on your current account balance: indeed some banks pay you interest on your main current account. Banks compete for current accounts partly because they get to use the money provided when they are set up, but this isn’t the case for reserves. There is an argument, outlined by Paul Tucker here, that over some long period paying interest rates on reserves might happen to compensate banks for the use of any service the bank provides, but this seems very unlikely. There is also the question of the services the government provides to private banks that are not paid for, which I discuss here.

So if banks don't earn the interest they receive on reserves, how should the government get that money back? Some have suggested a tax to reclaim at least some of this windfall private banks are currently receiving. The windfall tax should be based on the income banks received from interest on reserves over the past year, and could be set at 100% of that income. However creating a tax to claim back what is a subsidy seems rather convoluted, and calling it a tax hands those that oppose it an immediate advantage.

The alternative is to change the way monetary policy works, so the government no longer needs to pay interest rates on all the reserves it has created. I have seen two quite similar proposals. The first is to move to what is called a tiered reserve system. Under this interest would only be paid on marginal reserves, with the majority receiving no interest, as suggested by Karl Whelan here or NEF here for example. The second is to insist that banks hold a large amount of ‘required reserves’ [2] that pay zero interest, as described by Paul De Grauwe and Yuemei Ji here. The two schemes sound very similar, and they illustrate that paying interest on reserves is not necessary for the operation of monetary policy.

As either a windfall tax, or changing the way monetary policy operates so that interest was not paid on most reserves, involves the banks losing a large amount of money while interest rates remain high, you will see a lot of misleading arguments about why this should not happen. The silliest is that not paying interest on reserves is a form of default: silly because most governments didn’t pay interest on reserves until quite recently, and governments not banks choose the quantity of reserves. Another argument is that not paying interest on reserves is a tax on banks, and taxes create inefficiency. But why not call paying interest on reserves a distorting subsidy?

Although changing the way monetary policy operates is a more elegant solution than a windfall tax on banks, political economy factors currently favour the latter. Here we have to disentangle the Bank of England from the rest of government. The government may feel that it is up to the Bank to suggest changing how it does monetary policy, because otherwise it would appear that the government is forcing the Bank’s hand just to save money. Unfortunately the Bank in turn may be too influenced by private banks to do this in a hurry. So changing how monetary policy operates is unlikely to happen soon.

Of course in the UK our current government is also unlikely to impose a windfall tax on banks. It was eventually forced to impose a windfall tax on energy producers, but that was because consumers were paying the higher prices that energy producers were benefiting from. If Labour wins the next election it should not feel so inhibited, and should be more interested in getting better public services than giving a subsidy to banks. This suggests a windfall tax on banks to recover recent interest paid on reserves should be an immediate priority for a new Labour government.

[1] That is not the only sense in which the QE programme may end up costing public money (or taxpayers money, as the media often likes to inaccurately call it). The bank reserves created as part of the QE programme were mainly used by the Bank of England to buy fixed interest government debt (gilts), during a period in which interest rates on gilts were very low, so the price of gilts was high. Now the Bank of England has begun selling those gilts, and because interest rates have risen the price of those gilts has fallen, leading to capital losses. (As the FT headline misleadingly put it, Treasury bails out Bank of England.) However it should never be forgotten that during the period when short term interest rates were low QE saved the government a lot of interest it would otherwise have paid on its debt.

[2] The phrase 'required reserves' is in itself confusing, as the banking sector as a whole gets no choice over the amount of reserves they hold.

A cynical view would be that politicians always act in their own interests. [1] I think that is unrealistic, in that many politicians go into politics because they want to make society better. Nevertheless it may be interesting to look at why purely self-interested politicians might nevertheless also act in society’s interest. The obvious mechanism that might achieve this is democracy. It is in a politician’s own interest to be re-elected, and to gain votes a politician needs to do things that make people’s lives better. An important qualification, of course, is that they only need to make a proportion of people’s lives better, and this could involve making a small minority of people much worse off.

The imperfections of this mechanism are obvious, but it is also clear it works. Most politicians in a democracy work hard to garner favourable public opinion. Although general elections in the UK need only happen every five years, if it looks like a Prime Minister is not going to win in two or more years time MPs may decide to replace them, as we saw happen twice last year. The major proviso is that, just as advertising can sell you things you do not need, politicians can also fool voters.

One obvious limitation of a normal democracy is that voters only get to choose between political parties rather than individual policies. Under FPTP they in reality only get to choose between just two parties, which means a ‘bad’ government may still get re-elected if the opposition appears even worse. A clear example where a politician that has not tried or failed to improve society may nevertheless get re-elected is if they can find some issue which gains support despite these failures: fighting a popular war, for example. Another reason a bad government may be re-elected is if voters are fed misinformation by a biased media.

If we drop the assumption of self-interest, it may also be useful to think about different ways in which a politician can imagine they can help improve society. They may just believe, in David Cameron’s words, that they would be “rather good at it”, which may be a belief about competence at management and decision taking, but could also be about charming or fooling people. Alternatively they may believe they have a set of ideas that will improve society. Those ideas may or may not be part of a commonly shared ideology.

At the end of last year I wrote a piece in which I tried to think about why the government that began in 2010 appeared to be particularly uninterested in making society better, at least compared to the governments that began in 1979 and 1997. The evidence that they made society worse in economic terms is almost irrefutable: the UK’s poor growth performance over the last 13 years may be partly bad luck, but it is almost surely also a consequence of 2010 austerity and Brexit. I also suggested that, in failing to resolve today’s strikes or the NHS crisis, or in demonising asylum seekers, or starting new coal mines, or in being willing to "let the bodies pile high" during the pandemic, this government seemed to be putting political self-interest above national interest.

I want to use the points above about motives and democratic constraints to explore in more depth why the government that began in 2010 stopped even trying to act in the national interest. In the earlier post I speculated that ideology played some role. All three governments (1979,1979,2010) signed up to a broadly similar neoliberal ideology, but the contexts were very different.

The government under Thatcher can be thought of as pioneering basic neoliberal ideas, initially within a society (and even party) where there was some strong resistance to those ideas. These new ideas were therefore being continually challenged and argued for, their strengths and weaknesses tested. The economic arguments for privatisation, reduced union power and reducing the top rate of tax were real and serious, even if you think there were stronger countervailing arguments. Whatever the merits of those ideas, by the end of Thatcher’s reign and during Major’s, the major opposition parties had largely accepted these key innovations.

The Blair/Brown government wanted among other things to introduce changes that would reduce poverty, like tax credits, the minimum wage, sure start and so on. Later on they were able to raise taxes to expand public services, and in particular the NHS, which had been steadily underfunded under the previous government. This has been called this neoliberalism with a human face, and it was broadly popular. In particular, even by 2020 only a small minority of people wanted to reduce public spending on health, education and welfare in return for higher taxes, and far more wanted the opposite.

Both governments, therefore, fought and won elections based on economic ideas that were not obviously nonsense, and which at least turned out to be popular among a majority or near-majority of voters. Labour under Gordon Brown lost power not because of incompetence at handling the economy, or the unpopularity of his economic views, but because the finance bubble - facilitated by both governments - finally broke in the United States as he became PM.

Although a larger state, and particularly a well funded NHS, were popular among voters, they were not accepted by the Conservative party at large (MPs, members, donors and the press). Before the Global Financial Crisis Osborne had been forced to promise to match Labour’s spending plans, but this was an example of voters forcing an opposition’s hands rather than an ideological conversion. The Global Financial Crisis allowed Osborne to return to the idea of a smaller state, by elevating deficit reduction as the major macroeconomic goal of the government.

If Osborne and Cameron believed this was a sensible policy, they were simply ignorant of basic macroeconomics, which suggests fiscal expansion not contraction in a recession where interest rates cannot fall further. Perhaps the idea was just too attractive for them to question. Once in government, however, and as Osborne cut taxes alongside spending, the policy surely became deceit if it hadn’t been to start with. The key motivation for focusing on the deficit was to reduce public spending.

Deficit deceit was required because of the popularity of ‘neoliberalism with a human face’, and in particular the level of spending and taxes we ended up with under the Labour government. The Conservative government was in the small minority that wanted a smaller public sector and lower taxes. As an opposition Cameron and Osborne had lost this battle of ideas, so they planned to get what they wanted by the back door, which was by manufacturing an urgent need to reduce the deficit and to achieve that goal largely by cutting public spending.

The 2010 government therefore started and continued until 2016 with its central economic policy being based on at best ignorance and more probably deceit, in pursuing an underlying goal they knew was unpopular. Whatever you might think of the Thatcher or Blair governments, that cannot be said of either. In most cases they were prepared to argue for the economic goals they wanted to achieve.

Brexit, like austerity, was based on at best ignorance (‘there will be no economic downsides’, more money for the NHS) and more probably simple lies. For many Conservative MPs, it too involved deceit, with the real aim to deregulate from EU labour and environmental laws.

In both cases (austerity and Brexit), we still see neoliberal ideas being pursued, but now they were pursued surreptitiously rather than argued for at the ballot box. It is not surprising, therefore, that after some time when the impact of either policy became clear they would also become unpopular with a majority of the public. Because the deceit involved doing things that economists knew would create economic harm, then economic growth suffered.

A basic idea of neoliberalism was that a smaller government and lower taxes, together with reduced regulation, would help the economy grow faster. But neither Cameron nor Johnson were unlucky that neither happened. By 2010 the evidence against the idea that only small states or deregulated states could grow strongly was overwhelming. The Global Financial Crisis (GFC) alone should have made politicians question the idea that less ‘red tape’ is always better. The strong and steady growth of many large and small European countries with higher levels of taxation than the UK or US, and indeed strong and steady growth under a Labour government before the GFC, should have led any politicians who respected evidence to question the social benefits of pursuing low taxes and deregulation, let alone trying to achieve those policies by the back door.

This is why in my earlier piece I called austerity and Brexit an intellectual failure. The failure is easy to understand, however. Low taxes and deregulation were still in the interests of a small but wealthy minority, who could fund political parties and think tanks, a few of whom also owned major newspapers. For most politicians on the right, there was little incentive to try and rethink neoliberal dogma after the success of the Labour years and the failure of a deregulated global financial system. Those that tried would not have been successful because their message was unpopular within the party. As I have argued elsewhere, the influence of money and media ownership can turn parties of the right away from their early conceptions of neoliberalism as an ideology designed in the interests of business generally, into neoliberal platitudes becoming a cover for government in the interests of a wealthy few. The election and subsequent demise of PM Truss exemplified this transformation of Thatcher’s neoliberalism into something more resembling a plutocracy.

There remains an important question to answer, however. If democracy was doing its job, the deceit behind austerity and Brexit should have been exposed, and the politicians pursuing the deceit should have failed at the ballot box. So why, after five years as Prime Minister and Chancellor, did Cameron and Osborne win a majority outright in 2015? Why were the lies of the Brexiters not clearly exposed when they were first proposed? To regular readers this is old ground so I’ll only give one sentence answers to both. By 2015 the mainstream media had almost completely adopted the ignorance that was prioritising the deficit, despite the weakest economic recovery on record and stagnant real wage growth. In 2016 the broadcast media, and especially the BBC, preferred providing balance to providing knowledge. In both cases, the democratic constraint on self-interested politicians failed.

Unfortunately there is a dynamic involved in these particular failures. If a party that wants to represent the interests of a wealthy few at the expense of society as a whole sees how the media can fail to hold it to account, it will naturally devote itself to trying to make this happen again. It encourages that political party to see itself as apart and above the rest of society, including society's own laws. That in turn can lead to widespread corruption, which is another feature of Conservative  led governments that began in 2010. 

[1] By own interests, I do not mean their own personal interests. A self-interested politician unconstrained by democratic pressure may still act in the interest of friends, donors or future employers.