There is an underlying truth about the 27 deaths of people trying to get to the UK across the English Channel. It is a truth you are very unlikely to hear in the acres of coverage this issue gets in the media. The truth is that this is a problem created by a government determined not to give refuge to asylum seekers. It is unspoken because of a political system where the opposition calculates it is not in their interest to mention it either, and a media that thinks that because politicians don't talk about it that makes it not worth mentioning.

People are risking their lives to cross the Channel because the government has largely cut off any other safe roots for people to claim asylum here. Many people talk about illegal migrants, but there are no legal routes. If the UK was to offer all those currently in France a safe way of getting to the UK, enabling an asylum application to be processed, the criminal gangs sending people across the Channel in unsafe boats would be out of business.

Nor, to dispel another myth widely propagated by Priti Patel and the Brexit press, are most of the people crossing the Channel economic migrants. Nearly all those crossing come from war torn areas or countries with serious persecution, and nearly all claim asylum. Well over 70% of these claims are accepted. It is not the fault of those making these claims that the Home Offices system for processing asylum seekers is so inefficient that even those that are rejected end up staying here.

This UK policy of trying to prevent asylum claims at all costs just shifts deaths from one place to another. A few years ago the headlines were about people risking their lives trying to get on lorries or trains crossing the channel. As the authorities got better at preventing that, people inevitably try crossing the Channel, and gangs will get rich providing the means to do so.

So why is this simple fact, of deaths caused by government policy, hardly ever mentioned? Hereis the generally very good Ros Atkins giving us a lot of information about what he calls migrant crossings, but this most simple and basic fact is not mentioned. This is, I’m afraid, routine. To take just one example, the BBC News at Ten for 26/11/21 had an extended segment on this issue, where the lack of safe routes was not mentioned.

The UK is obliged, under international and domestic law, to accept asylum seekers who want to live in the UK. The 1951 Convention on refugees has been signed by nearly 150 countries, including European countries and the United States. Our current government is attempting to get around this Convention by exploiting the fact that the British Isles are an island, so it is very difficult for refugees to get here.

The policy works, to an extent. In 2020, there were 6 asylum applications for every 10,000 of the population. In the EU the average is 11. The UK is ranked below France and Germany and many others. In terms of actual numbers, Germany and France receivednearly 4 and 3 times as many applicants as the UK respectively. One cost of that policy is a loss of what is often a skilled workforce: about 1,200 refugees are recorded on the BMA’s database. Another cost is deaths in the Channel.

So why have most BBC journalists (exceptions include Newsnightand here) internalised government policy so much that it doesn’t deserve mention? Why are people most of whom will be refugees alwayscalled migrants? One reason is that this is not a party political issue, which for the BBC means whether Labour contests it, of which more later. Another is political history starting with the election of the 1997 Labour government.

As a result of various conflicts around the world, asylum applications to the UK were already increasingsubstantially as Labour came to power. The Conservative opposition and the right wing press started focusing on this issue, often in alarmist terms. As a result, immigration in general became a major issue of concern. Rather than extolling the virtues of immigration, Labour chose to tighten up on rules. As a result, both major political parties and a large proportion of the media started treating immigration and migrants, including refugees’, as a problem.

Did it have to be that way? The basic problem for Labour is that many of their voters are social conservatives, so arguing the virtues of immigration and asylum would be risking losing those voters. The influence of Labour politicians is small compared to the right wing press, Unfortunately FPTP is biased in favour of social conservatives, because social liberals are concentrated in cities. The process of the press and Tory politicians talking up the ‘dangers’ of immigration led to the referendum in 2016 where the UK voted to leave the EU.

I suspect this history leads many to take it for granted that the majority of people in the UK want to restrict immigration. Broadcast journalists are often socially liberal, so they may overcompensate in their reporting. I think it is time to re-evaluate this. Since the referendum, attitudes to immigration have become more favourable (although how much variesby survey), and immigration is no longer the important issue for voters it once was. More importantly, just because one half of the population is socially conservative, that leaves a lot of people who are not.

Most important of all, nothing justifies being economical with the facts when talking about Channel Crossings. I fear what we are seeing here is an example of where media stories no longer reflect reality, but instead reflect what politicians talk or say about reality. The broadcast media owes its existence to politicians (in the case of the BBC and Channel 4 very directly), and so it’s hardly surprising that media content should reflect what politicians talk about.

Another example of this is COVID. The UK over the last few months has been almost the only country that did not demand masks in public places, and UK cases have stayed high partly as a result. By contrast France and Spain, which were in a similar position in the summer, saw cases steadily falling until quite recently. There seems to be almost no discussion of this in the broadcast media. Once Johnson started talking about cases rising again in Europe, broadcasters began talking about COVID once more.

There are three consequences of this. First social liberals, despite the impression (deliberately) given by the Tories’ woke agenda, are not well represented in the media. Second, if politicians are not talking about facts then it is quite possible that the media will not either. Third, this gives the right wing press even more influence on the public debate.

On the issue of people crossing the channel to seek asylum, the right wing press has been playingits usual demonising role. The result is that, although it’s not a top issue, when asked about it half the people polled by YouGov had little or no sympathy for the migrants (sic) travelling from France to England. But just as significant is how misinformed the public is. From the same poll nearly half of people think the UK has done more than its fair share in accommodating refugees, even though the figures above suggest the opposite. Not surprising when this misinformation is reinforced by politicians.

Why is the press and the government telling so many lies about what are still relatively small numbers. Visibility and Farage are reasons, but another is Brexit. The stand out slogan of Brexit was to take back control, but it is clear that the only country that can have any impact in controlling the number of refugees crossing the channel is France. We live in a global world where often to gain control you need to cooperate with other countries, a reality lost in the Brexit debate.

But it’s worse than that. Tory politicians keep talking about refugees having to settle in the first country they arrive in, but nowhere in international law or the refugee convention will you find that. Refugees are free to choose where they apply for asylum. The rule politicians are talking about appliedin the EU. The UK has no automatic right to send these refugees back to France because of Brexit.

As Stephen Bush outlined here, and I foreshadowed here, the reason why the new high speed Northern Powerhouse Rail line has been cut, HS2 will no longer go to Leeds, and the less newsworthy cuts to Tfl infrastructure projects, is the government’s 3% cap on public investment, and its determination that government debt will be falling once the pandemic is over. [1] The excuse of long delivery periods for the cancelled projects does not wash when the government’s current scaled back plans also have the same long implementation period.

Is there some reason why public investment should be held to 3% of GDP? In my primer on fiscal rules I wrote nearly two years ago, I wrote:

“Public investment should not be part of any deficit target. To abandon good investment projects to reduce the deficit is a cure worse than the disease. The best way to stop white elephant investment projects is not some arbitrary limits on the share of investment to GDP, but an infrastructure commission with some power.”

In other words investment caps in fiscal rules should be thrown in the bin for a country like the UK. These caps make no economic sense and can actually do a lot of harm. Investment projects should be judged on an individual basis, and it makes no sense to cut or delay a good investment project because of some arbitrary aggregate cap. This isn’t a controversial point and there should be no serious economic debate about this.

So why do we have these caps? To answer that we need to go back into the history of UK fiscal rules. It has long been accepted that the primary fiscal target should be the current deficit, which is the total deficit less public investment. The reason is that a target for the total deficit encourages governments to cut investment to meet fiscal rules, because cutting investment does not have a direct impact on voters compared to cutting spending or raising taxes. Note there is no reason why the current deficit target has always to be a zero balance.

But if you have a current balance target, it is in theory possible for debt to GDP to rise because of high levels of public investment. In the past governments have got around that by having some form of debt to GDP target, either by having some upper limit or by saying debt has to be falling at some point. Another way to do this is to have a cap on the public investment to GDP ratio. This government does both.

If you have followed so far, you should have stopped at the first sentence in the last paragraph. You should have asked why does it matter if debt does rise because of a lot of public investment. Provided the individual projects within the public investment total are worth doing (either on a cost/benefit basis or some wider strategic basis like levelling up), debt should rise and there is nothing wrong with it rising. In short, borrowing to invest in good projects makes sense, as anyone running a firm will tell you. That is why it makes more sense to think about public net wealth rather than public debt.

Despite the obvious wisdom of this statement, there seems to be a political imperative for UK governments to say that the debt to GDP ratio is falling before the next election. The perception, encouraged by past politicians and the media, that government debt is somehow bad, leads Chancellors wanting to claim debt to GDP will be falling under their watch. Even political parties that received the best macroeconomic advice felt politically compelled to have some ‘falling debt’ provision in their fiscal rule. This perception goes back a long way, and is at least partly responsible for the extensive use of PFI under the Labour government. To ensure debt is falling, even when you meet your current deficit rule, you need to control public investment.

All of this is madness, stemming from Treasury orthodoxy and strengthened by Osborn’s fatal austerity programme. Some future government or opposition needs to be brave [2], and break this cycle of feeling some imperative to target government debt to GDP, and therefore control public investment to meet some arbitrary fiscal rule that makes no economic sense. Arguments about debt being a burden on future generations just do not apply to debt rising because of public investment, because public investment benefits future generations!

The main point of a fiscal rule is to stop an irresponsible government persistently paying for current spending or lower taxes by borrowing for no good reason. [3] It is to stop, for example, Donald Trump and Congress cutting taxes on the rich by increasing borrowing. You can do that by having a rolling aggregate current deficit target for 3 or (better) 5 years ahead, together with a strong fiscal council that can call out accounting tricks and other dodges. You do not need anything else in periods when interest rates are well above their lower bound. (The reason why you need a different rule when rates look like hitting their lower bound I discuss most recently here.)

A further point, made in Portes and Wren-Lewis, is that including anything involving a stock variable (like debt or net wealth) in a fiscal rule is a bad idea. The whole point about government debt is that it should act as a shock absorber for macroeconomic or fiscal shocks. Putting the stock variable in a short term rule negates that. Instead desired paths of net wealth should inform the value of the current deficit the government targets.

As the recent cuts to Northern rail plans show, this isn’t some academic (as in largely pointless) issue. It is one reason why governments appear excessively short-termist when it comes to its own investment projects. Start, stop, start again, stop again and so on. If the project does eventually get done it is long delayed and probably much costlier as a result of the on/off way it happened.

These broken promises put the government’s rhetoric on levelling up into perspective. At least as important, they make greening the economy much more difficult. Greening the economy is a mission, and missions of this kind require governments to take the lead. That requires a considerable amount of green public investment. The Chancellor, and the government more widely, has yet to indicate that he takes this mission seriously through actions rather than words. [4]

[1] As these project mainly involve spending in the 2030s, it’s not the current 3% rule that limits it, but a similar limit imposed by the Treasury on infrastructure projects given to the infrastructure commission, as Giles Wilkes points out here

[2] The Labour party in 2019 did replace debt with net government wealth, but as I argue below while this is better than debt it isn't a good idea for other reasons.

[3] What are good reasons to spend more on day to day expenditure than the revenue the government receives? A downturn in the economy is the obvious reason, but it is not the only one. A persistent but certain temporary drop in tax receipts would be another.

[4] Any Chancellor who was serious about greening the economy would increase petrol duty, for a start. Over the last few decades the costs of going by train has increased a lot more than the cost of driving by car.

Here is a chart from the resolution foundation

It shows how growth in real disposable income has been well below the post war average since the Global Financial Crisis (GFC). However trend growth rates have been falling in many major economies for some time. What this chart doesn't show is something else has happened, which a chart of levels rather than growth rates reveals. Below I’ve added GDP per head as this is the main determinant of household income.

I have shown previously that before the GFC, real GDP per head grew at a remarkably constant trend growth rate of 2.25% a year from 1955 to before the GFC, although with perhaps a slight dip in the 2000s. It collapsed during the GFC. The key point this illustrates is that while previous recessions were followed by a bounce back that returned the economy to its underlying trend, that didn’t happen after the GFC. Instead the path of GDP and household income shifted to a lower level and then grew at a slower rate.

According to the OBR, a similar although more modest pattern will be seen after the pandemic: a permanent downward shift and thereafter permanently lower growth, the latter largely as a result of Brexit.

The two main reasons that real household income will differ from real GDP per head is changes in tax policy and the real exchange rate. In the immediate aftermath of the GFC the Labour government stimulated incomes by cutting VAT, but that was more than reversed subsequently. Incomes benefited from falling commodity prices during 2015 and an appreciation in sterling, but that was quickly reversed after the sterling collapse following the Brexit referendum. Finally the furlough scheme protected incomes during the pandemic. But these are fluctuations around an underlying trend set by GDP per head.

The big question we need to ask is why, for the first time since WWII, GDP per head didn’t return to its pre-recession trend after 2010, and why it will not completely recover from the pandemic. I think the answer lies in this chart.

UK bank rate

Why? Because before the GFC recession, interest rates were used to stabilise the economy. Since the GFC they have not been higher than 0.75%, and most of the time they have been as low as the Bank of England dare push them. Unconventional monetary policies are no substitute. As a result, when interest rates are at their lower bound you know the economy is not being stimulated enough.

Although the Labour government did use fiscal stimulus during the recession, this policy was quickly reversed by George Osborne as deficit reduction rather than macroeconomic stabilisation became the central goal of fiscal policy. In my view this was a key reason why the slump in GDP caused by the recession became permanent. Equally Rishi Sunak is now squeezing fiscal policy before the recovery is complete.

Few economists dispute that 2010 austerity was a disaster for the UK’s recovery from recession, and today organisations like the IFS or NIESRhave argued that Sunak is making a similar mistake. What economists find harder to explain is why the lack of fiscal stimulus led to a permanent loss in UK incomes, rather than just a delayed recovery. The standard macromodels assume the economy always recovers after a recession, although theory has always been very weak on how that happens without policy intervention [1]

But as the 1930s showed, without help from monetary (interest rates) or fiscal policy recovery may not happen. With interest rates stuck at the lower bound, and no fiscal stimulus, there is no reason why the recovery will come from consumption. The UK savings ratio, which rose sharply during the 2009 recession, stayed high until the year of the Brexit referendum. With austerity in Europe as well there was no boost to exports. So any recovery in private sector demand had to begin with investment.

UK investment collapsed in 2009, and although its growth rate bounced back to average over 3% in the next six years, that was only enough to help offset the deflationary effect of austerity, implying the economy as a whole showed average growth at best, and did not recover the ground lost from the recession. The most robust determinant of investment is GDP growth, because growing demand forces firms to invest more to meet it. Since the second world war governments have ensured that after economic downturns it took the lead in stimulating the economy. That ended in 2010.

Why isn’t this talked about more? Why doesn’t the media talk about how recent Conservative governments have, and perhaps currently are, permanently cut our living standards? This is a question I have asked many times on this blog since it started almost 10 years ago, but following the pandemic and seeing the coverage of COP26 I think this problem isn’t peculiar to economics. With economics, pandemic management and dealing with climate change we have a common theme in the broadcast media, which is that expertise either isn’t referenced, or is devalued compared to party political discourse. [2]

[1] After the GFC, there have been some papers that have looked at why recovery may not happen, and the economy shifts to a worse equilibrium.

[2] This is something I hope to return to in a subsequent post

Malversation is corrupt behaviour in a position of trust, especially in public office. That this government is corrupt in that sense should not be a surprise. In September 2019 I talked aboutthe government then led by Johnson as rogue, and the most dangerous government we have seen in our lifetimes. This didn’t take any special insight. The man had just shut down parliament for his own convenience (and lied to the queen to do so), and this action was in turn unsurprising given his past deeds. Others need to explain why they missed all that, or thought Johnson would change, or indeed why they saw Corbyn as a greater danger than both Johnson and Brexit.

So Johnson’s attempt to use sympathy for Patterson in some Tory circles to get rid of a potential embarrassment to him is unsurprising. His standard reaction to any institution that holds him or his government accountable is to abolish that threat. What tells us more is his dramatic U turn a day later. I think it is worth asking why he did the U turn to analyse the limits to Johnson’s power. It tells us why, even in its timid state, the BBC is worth preserving, why corruption could be this government’s Achilles Heel, and why the lack of opposition cooperation will nevertheless save Johnson.

Johnson’s attempt to remove the commissioner and committee for standards is hardly the first act of malversation committed by Johnson. Priti Patel breached the Ministerial Code, but Johnson overruled the Independent Advisor on Ministerial Standards, who then had no choice but to resign. When an independent panel failed to choose former Daily Mail editor Paul Dacre for the chair of Ofcom, Johnson simply appointed another panel. There are many more examples, like the pay off from public money to the senior civil servant who resigned after Patel bullied his staff, the COVID contracts, Jennifer Arcuri and many more.

In each of these cases Johnson got his way, and got away with it. No doubt this encouraged him to think he could get away with saving Paterson, ousting the standards commissioner and remodelling the committee so it would have a Tory majority. So why was this case different from the others? Why did Johnson feel he had to backtrack in such a visible way?

It is tempting to say this issue broke through with voters becauseBrexit is long done (sort of) and Brexit voters and newspapers are beginning to view the government more critically. That is certainly possible, but I think there are other factors that help explain why Johnson felt he had to U turn. After all, some items in the corruption list have happened or emerged since the Brexit deal was agreed, and in addition Brexit is hardly over with the UK threatening to renege on that deal.

For a more structural answer I think we have to start with the BBC. In the News at 10 that I watched, the narrow vote in parliament was the lead item. Although the headline was ‘MPs vote’ to overturn Paterson’s suspension, it was quickly obvious from the subsequent narrative that it was Tory MPs and that there was a three line whip imposed by Johnson. What made it more newsworthy than previous examples of corruption? I suspect it was because you had the drama of a vote in parliament, with many Tory MPs rebelling combined with a simple story to tell. In addition Johnson was unlucky there was not a more important news item that day.

Why was this so important? Because many people watch the BBC’s main news programmes, including those that also read the Tory press. That had two outcomes. First, MPs would have heard directly from supporters (and others) who were unhappy with this episode. Secondly, editors of the right wing press would know that many of their readers would be angered by the story and expect their newspaper to reflect that.

This had no effect on the Express and Telegraph: the latter chose to go with Patterson’s own account of his ‘2 years of hell’ story. The Sun didn’t put it on the front page, but their editorial did describe it as a mistake by Johnson. The Mail put it on the front page. They too had a headline that talked about MPs rather than Tory MPs (‘MPs sink back into sleaze’), but for those that read further the facts became clear quickly.

Johnson fears two things: his own MPs or the electorate turning against him. The two are closely related. Johnson became Conservative party leader not because most MPs like or admire him but because so many voters like him, so he helps win elections. If that popularity goes, so does he. So the combination of many Tory MPs being angry anyway and reporting widespread public disquiet, and the Mail coming out against his position, was enough to generate a very embarrassing U turn.

What are the lessons of this episode for those who oppose this government? The first is that the BBC, even in its current timid state, is still important. It is why the government continues to attack it. The second is that this government’s corruption may well be its Achilles Heel. It will not be nearly enough on its own to lead to Johnson’s defeat, but it will be an important weapon.

But if that is good news for those, like me, who want to see this government fall at the next general election, the bad news is Labour’s continuing resistance to any kind of cooperation with other opposition parties. After a brief discussion, the opposition parties decided not to cooperate in the forthcoming byelection for Paterson’s old seat. I think the idea of putting forward a non-party political anti-corruption candidate was not a viable plan, but doing nothing will mean the anti-climax of an easy Conservative win. Worse still, in true blue seats Conservative voters that want to protest about government corruption are likely to vote LibDem. It is possible that Labour could be embarrassed by coming third in a seat where they were second last time, and that rather than corruption will be the headline.

As I argued here, it is virtually impossible for Labour to win enough seats to form a government at the next election. Not only is the opposition split between three parties in England, but Labour’s socially liberal core electorate are also concentrated in cities, both of which work against Labour under FPTP. As a result, Labour has to try not to antagonise socially conservative voters, but that gets it into trouble with social liberals who may defect to the Greens or Liberal Democrats. If everyone voted tactically to get the Tories out this wouldn’t be a problem, but in reality too many voters think voting expresses their identity, even under FPTP.

There are various forms that cooperation among opposition parties could take, but these all require a will to do something from the Labour leadership. So far the Labour leadership shows no such will. There are some, on the left and right of Labour, who see Starmer as simply a placeholder until one of their own can take over after the next election. But accepting that a government whose inactions have left around 100,000 to die from COVID, who seem intent on plundering the NHS and other parts of the state, and whose corruption steadily weakens UK democracy, should have another five years in office seems far too high a price to pay.

If you think fiscal rules are a waste of time, tell me how you would conduct fiscal policy. Your answer is an implicit fiscal rule. Fiscal rules are a useful way of talking about good and bad fiscal policy in this very imperfect world.  

The Chancellor’s new fiscal rule contains a statement that the rule will no longer apply after “significant negative shocks”. In a twitter thread I called this ‘dangerously imprecise’, and in this short post I will explain why it is imprecise and why the Autumn Statement is an example of why it is dangerous.

I fear too many non-economists think this kind of exception from a fiscal rules is because a large negative shock will blow any fiscal rule out of the water as a result of the automatic stabilisers operating in a severe recession [1]. A far more important reason is that in a significant recession monetary policy will quickly become unreliable and ineffective because interest rates will hit the lower bound.

Macroeconomists and policymakers generally prefer using interest rate changes set by an independent central bank (usually following some form of inflation target) as the primary method of macroeconomic stabilisation. This is why hitting the lower bound for interest rates is so significant.

Quantitative Easing, or other forms of unconventional monetary policy, are not a substitute for interest rate changes for a number of unavoidable reasons, including the lack of an extensive evidence base for evaluating them. Fiscal policy is far more effective and reliable than unconventional monetary policy as a method of stimulating the economy in a recession.

It follows automatically that once interest rates look like they may hit their lower bound, deficit based fiscal rules should be replaced by whatever fiscal stimulus is required to quickly end the recession, whatever this means for government debt and deficits. Moreover that policy of stimulus rather than hitting some deficit target should remain as long as interest rates remain at their lower bound.

Saying that a deficit based fiscal rule should be suspended following a significant negative shock is entirely passive. Unlike normal fiscal rules, it doesn’t tell policy makers what they should do. By contrast, ‘fiscal stimulus once interest rates are likely to hit their lower bound’ is an active instruction to policy makers. The former is dangerous because it does not specify what the policy maker should do after a large negative shock, or how long the exception should last.

We can see that danger being realised in the recent Autumn Statement. Interest rates are still at their lower bound, and economic activity is not forecast to reach its previous trend. [2] So a good fiscal rule would prescribe some form of fiscal stimulus. Instead Sunak is giving us a fiscal contraction over the next few years. Bad fiscal rules (including those that are dangerously imprecise) lead to bad outcomes.

The worst thing a Chancellor can do is to facilitate, or be passive to, permanent losses in average incomes. Chancellors since WWII have strived to avoid such outcomes, until a decade ago. A permanent loss happened to a large extent after the Global Financial Crisis because of austerity, it happened through Brexit, and it looks like happening in a more minor but still significant way after the pandemic. Bad fiscal rules can enable such disasters, and a good fiscal rule can help stop it happening.

[1] Here I’m using ‘recession’ to mean a significant downturn, rather than two quarters of negative growth.

[2] The OBR says that the pandemic has permanently reduced the level of sustainable activity in the UK. For the reasons I gave here, I don’t believe this is inevitable. Creating a strong economy would over a few years make up for what had been lost in the pandemic. We see no such fatalism in the US, and I don’t see why the UK should be different.

We are looking after grandchildren this week, so there may some delay before the next post. That is also the week of Sunak’s Autumn Statement, so no immediate reaction from me I’m afraid. Instead I want to set the scene for the statement, and suggest what I expect he will get wrong.

A good place to start is the latest IMF forecast. As Chris Giles notesin the FT, the UK is expected to have the worst recovery from the pandemic in the G7.

The question everyone should ask Sunak is why. Why should the UK expected to suffer a permanent blow to output and incomes as a result of the pandemic, while the United States is not. I expect the OBR forecast for the UK released with the Statement to maintain this broad ordering, so he cannot brush it off by saying it’s just a forecast. After all, the US recovery already far stronger than in the UK.

I think there are three reasonable answers, all of which are too embarrassing for the Chancellor to admit.

1. Brexit. This was always expected to cut the UK’s growth rate, but the mechanism most economists focused on was reduced trade and foreign investment. These are slowly evolving processes which are unlikely to make headline news. What we have seen in the last few months are widespread shortages, many of which are the result of the government’s immigration policy that accompanied their hard Brexit. That policy was designed to discourage ‘low skilled’ immigration, which in practice means low paid workers. As I examined here, these shortages might be good for the workers currently working in those sectors, but they will do nothing for the economy as a whole (at best it’s a redistribution), and it has scope to do the economy considerable harm.
   
   

2. Pandemic. The toll of the pandemic in terms of deaths and long covid has been worse in the UK than most other countries because of incompetent handling by this government. This might produce more economic scarring than other countries. I’m a little skeptical about this, for reasons outlined below. More immediately, cases in the UK are running at a much higher level than other countries, and if this continues I expect it to reduce the amount of social consumption undertaken by consumers. As the Chancellor appears not to recognise this link between cases and economic activity, I doubt he will mention this problem.
   
   

3. Fiscal. It is no coincidence that the largest fiscal stimulus package to boost the recovery after the pandemic has been in the US, whereas both in the Eurozone and particularly the UK the fiscal stimulus has been much more modest. Here looking at aggregate numbers misses the point, because they are confused by furlough and other factors. (Attempts to look at underlying or structural balances are heroic in the circumstances.)
   
   It makes more sense just to look at the stimulus measures in each case. In the US we have had a huge lump sum transfer of income which helped the poorest, and the prospect of an extensive boost to government spending. This is a demand rich stimulus. In the UK we have a tax giveaway to companies for investment, most of which will just bring forward investment and end up in company profits. In addition we have a cut to universal credit, and an increase in national insurance payments. True the latter is going to finance additional public spending in health, but the Autumn Statement is likely to announce cuts in other areas of public spending. While the US is undertaking a substantial stimulus, the UK is doing nothing like this.

As I suggested, I don’t think you will hear any of the above from Sunak next week. Instead he will talk about record growth of GDP as if the pandemic had never happened. The OBR will talk about the extent of long term scarring caused by the pandemic, but the question they should address is why no such scarring appears to be happening in the US. I’m highly sceptical of assuming a permanent hit to GDP from a pandemic the worst of which is now over. Sunak, and I fear much of the media, will mostly talk about the importance of hitting his targets for the deficit and debt.

As I outlined here, I also think the evidence is clear that currently rising inflation is caused by temporary factors (including some overseas), and there is no indication of generalised excess demand. Raising UK interest rates will not reduce world commodity prices, or solve labour shortages caused by Brexit. For this reason, Sunak and others cannot hide behind rising inflation to justify deflationary measures. There are some similarities to 2011, which saw a big rise in inflation while the economy remained profoundly depressed.

The focus on the public finances, rather than the state of the economy, is the same mistake as happened in 2010 with austerity. True, back then the government worried about the deficit before the recovery had begun, while now at least most of the recovery from the pandemic has occurred. But it is shocking that Sunak is playing the deficit card before the recovery is complete. Holding back on stimulus because of some arbitrary target for debt or deficit makes no macroeconomic sense according to any theory I know, and almost all the empirical evidence suggests its a major mistake. Even the crude political reasons for doing this far ahead of an election are unclear.

It is time to substantially strengthen the fiscal stimulus, by for example reversing the cut in universal credit and increasing public investment (and certainly not cutting back on areas like criminal justice or local authority spending). Even the IFS agrees, saying “we think policy should err on the side of providing more rather than less support”. The lesson of austerity is that if you start to worry about the deficit before the recovery is complete, you are likely to permanently lower the level of UK GDP, and thus reduce average incomes.

Short note on fiscal rules

The Chancellor is likely to unveil a new fiscal rule in this Autumn Statement. People are very cynical about fiscal rules, but that is because in practice they tend to be very bad rules. A fiscal rule is just a guide to good macro fiscal policy, for a Chancellor or a fiscal council. Any good rule has to recognise the need for fiscal stimulus when interest rates can no longer give a monetary stimulus. Jonathan Portes and I suggestedthat a fiscal rule should have an automatic switch in it when interest rates are at or may be about to hit their lower bound. Any rule that does not do this or something very similar is a bad fiscal rule.

I don’t share the IFS’s pessimism about fiscal rules. All the half decent rules that have been proposed or enacted (like those of Gordon Brown) blew up because they failed to incorporate some form of lower bound knock out. Once you include some form of recognition that fiscal policy has to provide a ‘whatever it takes’ stimulus once interest rates hit their lower bound, there is no reason why a good fiscal rule should not last.

The government has also operated a cap on public investment of 3% of GDP. That is far too small in the age of climate change, plus the need to level up. You will not hear it in the budget speech, but I fear the Chancellor may cut back on green investment and transport spending in the north to meet this arbitrary target (and have debt falling). What you will get from the OBR is a projection of future public investment, and if it stays at or below 3% of GDP you will know the Chancellor is impoverishing future generations.

The biggest challenge to fiscal rules is not MMT. I don’t see any countries telling their central banks to stop trying to stabilise their economies, and as I explain herethat means good fiscal rules are worth having. The real challenge to fiscal rules is climate change. Because of the size of public investment required to green our economy, we shouldn’t expect to start reducing debt to GDP ratios for some time. But more fundamentally, pricing carbon properly will and shouldhit personal incomes, and those that cannot afford for this to happen need help. That may make the idea of balancing current spending with taxes politically impossible.

On this issue, Sunak is still in the stone age, insisting climate change is not a reason to allow debt to rise (even for green investment!). In the Treasury’s submissionon climate change, they point to the polluter pays principle, which is fine if you are prepared to raise taxes to pay for measures to tackle climate change today. As Sunak is not prepared to do this (Conservative Chancellors have each year cancelled the increase in fuel duty for example), then the polluter pays principle cannot apply. While he invokes fairness on future generations, ask yourself if we meet debt targets by not doing enough to tackle climate change, will future generations thank us?

From this leak, it appears even modest green public investment is being resisted by the Treasury. Unless spending on green expenditure and tax changes can be separated out to allow fiscal rules still to apply on non-green taxes and spending, then fiscal rules may just not be worth having if we are serious about tackling climate change.

In September the right wing press began a campaign to get GPs to see more patients face to face. All the right wing papers joined in, with the Mail having a five-point manifesto for GPs which included calls for the Government to “act to ensure a greater proportion of GP appointments are in person”. It might seem odd that the Mail should launch this campaign at a time that COVID is still widespread in the population, and GPs are already overworked from both this and also vaccinating a large number of their patients.

In mid October, the new Health minister Sajid Javid offered GPs new money, but only if they increased the number of patients they saw face to face. League tables giving data on how many people have seen their GP face to face will be published. The 2 metre rule in surgeries will be scrapped to allow more patients to attend surgery. Javid clearly thinks, like the rest of the government, that the pandemic in England is over, even though the data thinks otherwise.

Although over time the number of GPs has grown faster than the population, the demand for GP services has grown faster still. As the pandemic began the UK had 2.8 doctors per 1,000 people, compared with an average of 3.5 doctors across the OECD, so the UK has one of the lowest number of GPs among similar countries in Europe. Furthermore the number of GP appointments has increased, not fallen: practices in England delivered 31.1 million appointments in June 2021, of which 4.2 million were for covid vaccinations, which was 7.3 million more appointments than in June 2019 (23.8). Doctors in England need to be efficient in how they interact with patients, particularly during a pandemic.

Given all this, and the recent failure of Conservative governments to increase the number of GPs (0.46 fully qualified GPs per 1000 patients in England, down from 0.52 in 2015), it seems a crazy time for the Health minister to be trying to impose more face to face visits on GPs. It may well be that the existing pattern of visits is optimal for GPs during a pandemic or more generally. So why is Javid introducing this measure at this time. It brings back memories of another government’s attempts to force a ‘7 days a week’ policy on an already weak NHS without spending the necessary money. It also echoes calls by various Tory MPs for workers to go back into offices, rather than work from home.

However the main point I want to make is about timing. The right wing press run a campaign, and the minister for Health responds. Of course it is possible that the government encouraged the papers to run the campaign, but we cannot possibly know that, so I have no alternative to assume the timing is as it appeared to be. It could be that a big factor in why Javid has introduced his measures is so he can get a good press among the newspapers that matter on the right. This will not be the first time a minister, from either party, has responded to a newspaper campaign. If it was an occasional event, over relatively minor issues, it might not be too big a deal. But it isn’t occasional.

The background to the Mail’s campaign has been the view of all the right wing papers on the pandemic. They have hosted opinion writers that have been against pretty well any government intervention besides vaccines to keep cases in check. They have taken a crude libertarian view, which is that people should be encouraged to do what they like, including infecting other people. This may or may not have something to do with the pandemic hitting newspaper sales.

Now it is easy to say that Johnson’s terrible decisions about the pandemic were all his own. He, after all, also holds crude libertarian views. But there can be no doubt that the opposition of the right wing press to lockdowns (before a vaccine became available) influenced at least some MPs, and those MPs mattered to the PM. However, according to Dominic Cummings, the link was much more direct. The right wing press view, including the Telegraph who Cummings says Johnson would sometimes call his real boss, weighed heavily on Johnson such that he thought he had made a mistake in following scientific advice to lockdown in March. It is therefore not surprising that the lockdowns in the Autumn and around Christmas came far too late.

Last but not least we should consider Brexit. Just suppose that the right wing press had been solidly in favour of staying in the EU, would Johnson (or Gove) have stepped up to lead the Brexit campaign? In reality I doubt they thought that they would win, but by gaining favour with the right wing media, and the Tory members who are influenced by it, they would do their careers no harm. In addition it was the propaganda campaign of these right wing newspapers that got the slender majority for Brexit.

If this makes sense, then the answer to the question in the title is, in part, the owners of the Telegraph, Sun and Mail. I am of course not suggesting that our current set of politicians don’t govern. Most of the time they do, and nearly all of the time these newspapers give them loyal backing. However it appears that some of the time, often on very important issues, the newspapers call the tune.

One reaction to this is that newspapers just reflect reader opinion, rather than newspapers influencing readers. If that is what you think, you need to explain the now substantialempirical evidence that the media does indeed influence opinions. After all, why do politicians spend so much time talking to newspaper owners and editors if they could get better information from polling?

Another reaction may be that this is just conspiracy thinking. Conspiracies tend either to be fanciful in the extreme or easily refuted. What I’m suggesting here is neither. In fact I would suggest that if there is any conspiracy, it is to downplay the influence of the press within the media and among politicians.

A more considered view is that it is best to view the Conservative press and the Conservative party as one. Under this view, everything the right wing press advocates the Conservative party would do anyway, so the agency of the press is irrelevant. I must admit it is very difficult to show this view is clearly wrong, because few politicians are prepared to say in public that parts of the media pushed them to do things. All I have been able to do above is provide hints that it is otherwise.

If I’m right that the right wing press influences what, in particular, right wing governments sometimes do, is this a problem? You don’t need to believe that newspapers only represent their readers to think that sometimes their campaigns reflect the views of a large part of their readership. Maybe it’s a good idea that sometimes governments are challenged by newspapers expressing their reader’s views.

Let’s look at the second of my examples above, controlling the pandemic. As I pointed out here, most polls suggest the public are by and large in favour of lockdowns and other restrictions to control the pandemic when case numbers get out of control and not many were vaccinated. Here the newspapers’ view was quite different from public opinion, and it seems highly unlikely that those who were against lockdowns represented a majority of newspaper readers.

The truth is that newspaper editors and owners decide what issues newspapers campaign on. These editors and owners are not elected, and they remain almost totally unaccountable for what they do, yet their power and influence is immense. A free press is meant to hold the government to account, but if the Conservatives are in power this right wing press acts not just as a state media, but a state media with considerable power of its own. If you combine this with a public service broadcaster which, for its own survival, is inclined to not ask difficult questions, and you have the ability to continually distort the information a section of the electorate receive, a section large enough to keep the Conservatives in power indefinitely. 

The recently published Select Committee report of the pandemic is biased in a number of ways. In particular it downplayed the mistakes Johnson made in September and before Christmas, and that he made in July this year. But an equally important omission from the committee's text, as far as I could see, was any mention of the influence of the right wing press. The first rule of the Conservative party is you never mention the power of the Conservative press.

Of course it is impossible to know for sure. However the following graph is suggestive.

Since Johnson abolished all English COVID restrictions, including mask wearing on 19th July, UK cases have oscillated around a number like 500 per million. In contrast, Spain (which had a similar Delta peak to the UK) has seen cases gradually falling to around 50 per million, and has also kept compulsory mask wearing in various situations along with other restrictions.. France’s Delta wave was a little later and smaller than the UK’s, but since that ended, cases have also come down steadily, and they too have kept some COVID restrictions including mask wearing in risky situations. [1]

Have I chosen France and Spain because it fits this pattern? Other European countries of a similar size, like Germany and Italy, didn’t have a large Delta peak like the UK, and have remained low at or under 100 cases per million. High cases matter for three reasons besides the small proportion who die. First the more cases the more long covid, second more cases means more people off work, and third it stops the economy getting back to normal because many people still minimise social interaction, which reduces social consumption.

What does that mean in terms of deaths?

We see deaths following cases with the expected lag. Whereas we saw cases in Spain fall at the beginning of August and France towards the end, deaths in Spain started falling at the beginning of September and in France a few weeks later. To see what that means in terms of the actual number of deaths, let’s look at the same chart in terms of actual numbers of people.

Currently in the UK just under 120 people are dying of COVID each day, while in France and Spain the number is less than half that. So to answer the question of the title, it is likely that around 70 people are currently dying each day as a result of Johnson’s decision to remove all COVID restrictions. That is about 1,700 extra deaths (comparing UK to France) and rising since the beginning of September. Were those extra deaths worth it in terms of freeing many people from wearing a mask and from other modest inconveniences?

For those who are tempted to say 1,700 deaths are small compared to the pandemic total of 137,000 we have already seen, I would say you are not comparing like with like. That huge total was mainly a result of poor use of lockdowns before most people were vaccinated. What we have seen since September, and is likely to continue for some months to come, are deaths when most but not all people were vaccinated, and could have been avoided with modest preventative measures enforced while vaccine coverage was extended to everyone willing. Allowing those people to die when the end (complete as possible coverage) is in sight because he and his MPs didn’t like wearing masks reflects the values of our Prime Minister and his party.

Complicit in all this are those who are supposed to hold our politicians to account, but many of whom instead act more like cheerleaders. Summary numbers appear on news bulletins in a way that makes them meaningless. There is rarely any attempt to place them in context by comparing them with other countries, or to give them a human face. When the BBC finally did the international comparison, as I was writing this blog (but see here), they had the gall to say it had “gone almost unnoticed”. Our leader has declared that we now live with COVID, and our media has by and large decided it is therefore yesterday’s news.

[1] Of course it’s not just about ending compulsory mask wearing that led to these extra deaths. There is an indifference to children getting COVID, starting with abolishing mask wearing before adults, and continuing with no programme to increase school ventilation, and ending with a much slower extension of vaccination to teenagers than in other countries, like Scotland, which is ultimately under the government’s control. It’s about not imposing vaccine passports for certain events, something France has done which has encouraged vaccine take-up. Basically while nearly all other countries continued with personal restrictions designed to bring down cases and continued the drive to vaccinate, Johnson’s government effectively declared in July that the pandemic was over.

The Democratic primaries for the 2020 presidential election turned into a two horse race between the candidate of the left, Sanders, and the candidate of the centre, former Vice President Biden. Their political style and positions were very different, with Sanders being a bit like Jeremy Corbyn and Biden a bit like Kier Starmer. But when Biden won, he united the party under a common platform, and his government in some areas has been surprisingly left wing.

Starmer too won against a candidate from the left, and he did so on a unity ticket. In reality Starmer has followed a very different path. I don’t want to examine whether Starmer always planned to confront the left, or whether he wanted to try unity but was persuaded or pushed to do otherwise, because I doubt anyone really knows. Instead I want to look at whether the unity approach that Biden had followed could have succeeded in the UK?

The reasons for asking that question are fairly obvious. Biden was successful, and although differences remain sharp the Democratic party has so far avoided any major schisms, in part because in some areas Democratic policy has shifted to the left. In contrast the template for Starmer today is the divisions of the 1980s, and it took two election defeats (under Kinnock) before Labour regained power. For these and many other reasons, the unity approach would seem more attractive.

I can think of two broad classes of explanation for why the Biden approach cannot be replicated here. The first relates to the Labour party itself, and the second relates to the media. Please remember that in setting these arguments out I’m trying to test if they hold water rather than advocating them.

In the US having politicians who call themselves socialists is something of a novelty. In contrast the left and centre in Labour go back a long way, to the battles of the 1980s. The general feeling among many party centrists is that Labour were only able to win in 1997 by ‘taking on’ the left in the 1980s.

To this group, the election of Jeremy Corbyn in 2015 was a total disaster, and many did their best to undermine his leadership. The 2017 result, rather than leading this group to revise its view that the left can never win, is put down to a poor Tory campaign. Any unity campaign would have to overcome such views.

On the left, too often principles far outweigh the need to win elections. Too often the last Labour government is derided for its failures and its successes ignored. There is a danger that any leader who tried a unity path would find the left gradually peeling themselves away as red line after red line (for them) was crossed. It is much easier in the US political structure to hold a diversity of views and not feel personally compromised by the compromises of others.

The right wing media is more powerful in the UK than in the US. The reach of the right wing press as a proportion of the population is greater than Fox News, and crucially it also has a strong influence on what the BBC shows in its flagship news programmes. Their default story about Labour is battles between left and centre, so they are likely to highlight any differences as part of a never ending war. They would constantly try to derail a unity ticket.

Perhaps the clearest example of that was after the EHRC report on antisemitism within the Labour party. In Starmer’s responseto the report he warned that he would not tolerate anyone seeking to downplay the problem. He added that the Labour Party would not “tolerate the argument that denies or minimises antisemitism on the basis that it’s been exaggerated”. When Corbyn in his response to the report claimed that the problem had been “dramatically overstated for political reasons by our opponents inside and outside the party, as well as by much of the media”, he was suspended by Starmer.

As I said at the time, to say that anyone claiming the media exaggerates the extent of antisemitism within Labour is minimising actual antisemitism is not only factually false, but also gives the media license to claim what they like with no possible comeback from the Labour leadership. But in ruling that any claim of media exaggeration was minimising the problem, Starmer was only followingthe media itself.

So if Starmer had not reacted to Corbyn’s response, I would have no doubt that the media (including much of the Jewish press) would have said he wasn’t taking the problem seriously. The presence of Corbyn in the Labour party is a problem for some Jewish voters. Starmer clearly wanted to stop the antisemitism issue hanging over Labour, and he would have found that much more difficult if he had ignored Corbyn’s response. On the other hand, by taking the stand he did, he started a war with the left which probably contributed to a decline in his poll ratings.

To the right wing press, and therefore BBC journalists as well, Starmer would have been constantly associated with the 2019 failure and the Corbyn left if he had attempted to unite the party. Every statement by left wing MPs that the right wing press could portray in a bad light would be thrown at Starmer to condemn. It is for reasons like this that every new Labour leader likes to draw a line between themselves and an unsuccessful past.

If those arguments seem compelling, you have to acknowledge the problems with the path Starmer has chosen. To much of the public, being tough on the left of the party just looks to them like a reminder of internal divisions. Indeed that is one reason why the right wing media encourages that approach. You also lose a large number of Labour members, and the income that goes with those members, and a good part of your activist army to deploy during elections. You also lose many voters to either not voting, or voting Green, which is a serious problem if (as at present) there are no attempts at cooperation.

Ironically the split between the Labour leadership and the Labour left is not fundamentally about policy, unless you believe (as some on the left do) that any departure from Corbyn’s agenda or Starmer’s 10 pledges is a betrayal. As Andrew Fisher notes, many of the policies that Starmer has already announced are from the 2019 manifesto. The pledge on Green Investment is substantial, and abolishing VAT relief on private school fees is a significant attack on privilege. Labour’s appeal to the electorate has to be radical on economics to attract the socially conservative voters that put Johnson in power. This could have been the basis of a Biden style united left, if only Labour’s centre could tolerate the left, compromise was more acceptable to the left, and Starmer could have ignored constant media attempts to divide the party. That was not the path Starmer chose, and if he fails badly at the next election (and I hope he does not) he may regret not choosing it.

Anyone on the left or centre whose plan involves a loss in the next election, because they are playing a long game, has to ask themselves whether there will still be a game by then. As Jonathan Freedland notes, at the next we will have a rigged electorate and no independent electoral commission (although I argued in 2019 that it was obvious that Johnson would do things like this after he suspended parliament). If he wins another five years in power, Johnson could try and make it completely impossible for Labour, or even a progressive alliance, to ever win again.

The general expectation is that they will, but is this the right thing to do?

Inflation in August was above target at over 3% (total or core). UK earnings are estimated to be back to their pre-pandemic levels, despite GDP being well below pre-pandemic levels. Chris Giles forcefully puts the case for some tightening.

It is tempting to argue against any tightening by drawing analogies with the US. Their inflation has been running at around 5%, yet the Fed has not yet started tightening, despite a far stronger fiscal stimulus in the US compared to the UK. One argument for ‘seeing through’ current inflation is that it stems from temporary shortages following the end of the pandemic. Latest data for core inflation suggestsinflation rates are now beginning to fall.

This applies to the UK, but we also have to add in the impact of Brexit, and more specifically the exodus of EU workers during COVID which is either unable or unwilling to come back. We also need to add in higher gas prices. But these too should be short term effects. Wages in occupations where labour demand exceeds supply will see higher wages, leading to higher prices. This will lead to higher real wages in shortage sectors, and lower real wages everywhere else. That process of adjustment should not take that long.

Of course it is possible that other workers will not accept lower real wages, and they will attempt to avoid that by raising their nominal wage demands. That could lead to a return of stagflation. The headline hereis a more polite version of what I actually said, which was that talk of stagflation is dumb. There are two reasons for that. First, workers just do not have the power they had in the 1970s to set wages. Second, a credible central bank with an inflation target stops inflationary shocks leading to higher inflation expectations, and therefore persistent inflation.

So both the ‘end of pandemic’ inflation shock and the Brexit inflation shock should lead to only temporary increases in inflation. During a recovery period my view, and the view of US policy makers, is that good central banks should ignore such temporary increases in inflation. But is the UK still in the recovery period, or has our recovery finished?

While UK GDP has faltered in the latest month, it is still 2-2.5% below its pre-pandemic peak. I don’t buy estimates of the permanent damage from the pandemic that amount to that large a gap, just as I don’t believe that the Global Financial Crisis was bound to reduce trend GDP by over 7%. The US is likely to soon show that there has been little to no permanent damage there from the pandemic.

There will, however, be some permanent damage to GDP as a result of the exodus of EU workers. The size of that is very uncertain because of the unreliability of the statistics. ONS statistics for labour utilisation are more reliable.

All these series have recent trends, which makes interpretation tricky. But in no case is there even the suggestion that in the early summer the UK had exhausted available labour.

At first sight, the aggregate vacancies data suggest a different picture. However they are strongly influenced by shortages in particular sectors, as the IFS notes here. They estimate that for the majority of workers, competition for relevant new job openings is at least 10% greater than pre-pandemic. Hours worked are also still significantly below pre-pandemic levels, and the number of self-employed workers has fallensubstantially (perhaps partly because of recent court judgements).

In summary, the data is consistent with temporary shortages, particularly caused by Brexit, and not an aggregate economy returning to trend. Why is the UK recovery incomplete? There are two important factors. First, the level of fiscal stimulus is modest, and measures like reducing universal credit and future national insurance increases will dampen demand. Second, the pandemic is not over yet in the UK, and some caution may still be present among some consumers.

There seems no case, therefore, for monetary tightening.

What the Bank may well do is to bring their QE programme to a premature end. The direct impact of that is zero, and it’s sufficiently small to have little impact on expectations. What the Bank says may matter more. Again I expect a lot of talk (as here, for example) about monitoring inflation carefully, but if they indicate that a rate rise may be quite soon that would be a mistake. The argument that the Bank’s credibility will fall if they don’t do something is rubbish, equivalent to the idea that expectations may become unhinged. As 2011 showed, it is perfectly possible to ignore temporary increases in inflation and retain credibility.

.

These thoughts have been inspired by reading James Meadway’s fascinating essayon the future of neoliberalism, and Terry Hathaway’s articleentitled “Neoliberalism as Corporate Power”, both of which I strongly recommend. Needless to say both authors may strongly disagree with what I say here, which as ever is ‘untutored’.

Neoliberalism and Corporations

If I had to offer one piece of evidence to those who are sceptical about the concept of neoliberalism, I would look at Investor State Dispute Settlement (ISDS). These entities are set up as part of trade or investment deals, and essentially allow a corporation to sue governments if governments do something to disadvantage the corporation. For some examples of cases brought by companies against governments see here. These actions are often used against smaller states, but companies have also sued Germany(for ending nuclear power) and Canada(for banning a dangerous chemical).

The motives for corporations for having such agreements are straightforward, and amount to de-risking investment. The motives of governments in signing them is presumably to facilitate investment or trade. But the idea that a government can be sued by a corporation because the government has banned a dangerous substance that this corporation is using seems very odd. If nothing else, it sets up completely the wrong incentives for that government and corporation.

I chose the example of ISDS because it illustrates a case where corporations have legal powers over governments. I think enhancing the power of corporations is at the heart of how to understand neoliberalism in practice. That may involve using the law to sue governments, as here, or it may involve using governments to enhance corporate power.

This description and my choice of example may surprise many, because it is often said that neoliberalism is all about the primacy of markets. This is certainly how many of what Mirowski calls the Neoliberal Thought Collective, and many commentators on neoliberalism, see it. I would argue the distinction is between neoliberalism as a theory or ideology, and neoliberalism in practice. Of course each influences the other, but they are distinct. In many if not all cases of neoliberalism in practice, neoliberalism has strengthened the power of corporations and large companies.

The clearest example of that for me is unionism. Everyone would agree that what was central in the arrival of neoliberalism in the US and UK was an attack on the union movement. What has this got to do with markets? The standard response is that unions interfere with the operation of a free market. But for an economist, so does monopoly, or any form of imperfect competition among firms. On this, neoliberalism in practice seems silent.

Colin Crouch talks about market-neoliberals and corporate-neoliberals to deal with this problem, but it hardly resolves it. You can see the contradiction being resolved in favour of corporations in Will Davies’ fascinating paperon how ideas about the virtues of competition, and the need to break up monopolies, changed within the University of Chicago from the 1930s until the 1980s. (I talked about this and other aspects of the problem here.) You could describe this period as a good example of where interests influenced ideas. As I noted here, I don’t think this is the only case where neoliberal governments are prepared to ignore the market in the interest of large companies.

This apart, it is fairly clear why corporations should like the idea of the primacy of markets, as long as its position in markets is unchallenged. Markets, after all, are how a corporation makes money. It is natural that it should want to avoid anything that interferes with this, like market regulations of any kind. Equally some corporations would want to extend the scope of markets into areas that might previously have been undertaken by governments.

On page 22 of this paper, Mirowski lists eleven ideas associated with neoliberal thought. I don’t think any of them go against the interests of corporations. Indeed number 9 is “Corporations can do no wrong—by definition”! This is at least compatible with viewing neoliberalism as an ideology that protects and enhances corporate interests and power. Of course this doesn’t mean that neoliberalism is only about enhancing corporate interests, or that neoliberalism as ideology is not capable of unwittingly acting against corporate interests (see below).

Of course the advent of neoliberalism was not the first time corporations had been politically powerful. The Polanyi-like tussle between corporate power and labour or democratic power began in the 19th century with the advent of corporations. The ‘Gilded Age’ in the US or the military industrial complex may be examples of strong corporate power before the ‘neoliberal era’. Corporations in the post-war period, in contrast, were relatively weak, which no doubt helped inspire neoliberal ideology.

Neoliberalism, Wealth Inequality and Crisis

One of the important acts of the neoliberal pioneer governments of Thatcher and Reagan was to reduce the tax on high incomes. I have talked about elsewherehow that may have encouraged CEOs to bargain harder, leading to ever growing CEO pay. But lower tax rates on high incomes would also have another effect, which is to incentivizecorporations to divert money to dividends, which of course go to the shareholders who are the owners of corporations. Here is the share of dividend income in GDP for the US.

Towards the end of the 1980s, after the 1985 cut in the top rate of income tax from 90% to 50%, the share of US dividends in national income began increasing. (The share in GDP is low, but the share of corporate profits is of course greater.) This increasing share has continued through to today. Of course shareholders as a collective do not choose dividend levels, but the tendency that began at the same time to reward CEOs partly through stock options gave those who did choose dividend levels an interest in raising them.

A higher permanent share of dividends will mean the return from stocks will increase, and that in turn will raise stock prices. A recent studyby Daniel L. Greenwald, Martin Lettau and Sydney C. Ludvigson is particularly interesting in this respect. They showed that over the period 1952 to 1988 the growth in the stock market could all be explained by the growth in output. In contrast from 1989 to 2017 a massive $34 trillion of real equity wealth (2017:Q4 dollars) was created by the U.S. corporate sector, and 44% of this increase was attributable to a reallocation of rewards to shareholders. In turn, a higher stock market price increases the wealth share of the 1%.

It gets worse. They also estimate that most of this reallocation was at the expense of labour compensation. Not only was the stock market booming because dividends were rising, but workers wages were lower as a result. In contrast to the 1952-88 period, output growth accounted for just 25% of the stock market rise. (Playing a more minor role in stock market growth were a lower risk price (18% contribution), and lower interest rates (14%) due to secular stagnation.

It is perhaps not surprising that an ideology that enhanced the power of corporations would lead to an increase in the income and wealth for the owners of corporations. However I have also arguedthat it led to a crisis for neoliberalism in at least the two countries where the influence of neoliberalism was strongest.

In the UK, the biggest blow to corporate power came not from unions or left wing governments, but from forces created by neoliberalism itself. High incomes and wealth generate a demand for innovative forms of financial investment, which because of financial deregulation were allowed to multiply. If you look at who helped Brexit by providing finance or, in one case, directly helping to win votes, we know of two very wealthy hedge fund managers (Robert Mercer and Paul Marshall). Critical to persuading people to vote for Brexit were very wealthy newspaper owners. More than 40 per cent of the Leader’s Group of top Conservative donors (who meet the PM and ministers regularly) owe their wealth to investment firms – a combination of finance, hedge funds, private banking and private equity.

In this sense Brexit was where one form of capital, the personal financial wealth of a few, helped set back the interest of another form of capital, a large number of corporations in the UK. The Conservative party that had previously always supported business interests in general became a populist plutocracy. Donald Trump in the US departed from the neoliberalism playbook by messing with free trade and by restricting immigration, neither of which were in the interests of corporations as a whole. [1] Whether this is a hiccup in the forward march of neoliberalism, or is a more fundamental challenge, we will see.

[1] From the early days of the Labour government the Conservative party has talked the talk on reducing immigration. However once in power, the pre-Brexit Conservative coalition and then government was very reluctant to take effective measures to reduce it. That changed with Brexit and the ending of EU free movement.

Most of the controversy around the extra spending for the NHS and social care announced last week focused on the higher rates for national insurance. As Rachel Cunliffe explained here, national insurance contributions are a tax just like income tax or VAT. The misconception that they are payments into some pot of money that you get back later helps explain why this was the tax of choice for Johnson, although the fact that it is not as progressive as income tax (excluding, in particular, rent or interest income) probably helped too.

I'm not going to talk about why national insurance is a very bad way to fund this additional spending because that has been covered else. However my first myth is that this unfairness has something about ‘generation wars’. When the post war Labour government introduced the state pension in 1946 I don’t know whether anyone said that because money was being taken from the young to give to the old (true) it was unfair on the younger generation, but if they had it would have been nonsense. It is difficult to get your head around, but with that kind of scheme, the old at the time it starts gain a huge amount, but there is no corresponding loser if the scheme continues forever. Some things are about generational transfer (like higher house prices), but schemes where the young will benefit when they are old are not. [1] The reason to oppose the use of national insurance is on normal equity grounds considering who benefits, rather than anything intergenerational.

The second myth I want to talk about is that this package shows that this government is not Thatcherite, or Osbornite, but instead favours a bigger state (and therefore it is more left wing). This myth is believed by a number of Tory MPs, some journalists (the Telegraph’s editor even calledit the triumph of socialism) and some on the left. The reality is that it shows no such thing. Instead it is just bowing to the inevitable consequence of having a state funded health service.

The fact of life that few journalists are prepared to admit, and many Tory MPs pretend not to understand, is that in economies such as ours the share of health spending in GDP rises over time. This is something I have talked about for some time, ever since Osborne pretended that he was ‘protecting the NHS’ which journalists parroted. Here, for example, is a post from 2015 that shows a graph of the share of NHS spending in GDP rising from 3% of GDP in the 1950s to over 7% in the 2010s.

There are a number of reasons for this. As our incomes rise our wish to spend money on our health rises faster than our income, while our spending on food (for example) rises less. Doctors are finding better ways (or sometimes ways that didn’t exist previously) of treating us, which often seems to involve expensive drugs or capital equipment. But perhaps most important of all, we are on average living longer but the age our bodies start needing attention has not been rising so rapidly. This point applies to social care as well as the NHS. 

The inevitable consequence is that taxes need to rise to match this rising spending. [2] This was masked for a long time by an opposing trend: falling defence spending as a share of GDP. That however came to an end certainly by the turn of the century, which is why the Blair/Brown government increased national insurance to get the NHS to a reasonable level of operation. In contrast Cameron/Osborne were able to run the NHS into the ground again not just because they ran a right wing, small state government, but because they used the false excuse of a runaway government deficit which most of the media and the public believed and because their squeeze began from a fairly good position.

This chart, of how many cancer cases were treated within the target number of days, shows what happened clearly.

This chart is one of many that show a gradually deteriorating health service since 2010: see herefor more information.

This deterioration has stepped up substantiallyin 2020 because of the COVID pandemic. No government, whether left or right, could have failed to react to this, if it wants to survive in office. So Johnson had to put additional resources into the NHS to clear the backlog created by COVID, and that is what the higher national insurance increase is initially about. It does not make him left wing, it does not raise the scope of the state (which is what really matters politically), and it certainly doesn’t herald a victory for socialism.

At this point we do need to ask whether permanently higher taxes make sense for what is a temporary problem - clearing the COVID backlog of cases. Just as most of the costs of COVID have been paid for with borrowing, why not this? It makes no macroeconomic sense to raise taxes now to cover transitional spending. The obvious answer to this puzzle is that nothing has changed since Osborne, in that we still have a Chancellor who is distorting economic policy just so he will meet some arbitrary deficit targets. This, in turn, is why it is so inaccurate to describe this as a left wing, big state government. Talk to those in local authorities, or in criminal justice, to see that Sunak (whatever Johnson’s wishes) continues to be a small state Chancellor.

But there might be another reason why the government chose to permanently raise taxes? This brings us to myth number three, which is that this package is about improving the quality of social care, even in the longer run. In the short term most of the money raised by the new tax will go to the NHS. What is left for social care will have to cover the cost of reducing the amount the elderly need to pay for their care (but not their living costs). As the IFS says, this aspect has not been costed by the government, but “can be expected to be several billion pounds a year.” Not much if any will be left over to improve the quality of care for the next three years.

Thus the IFS writes

“While the precise path for spending – and hence for the availability and quality of care – is unclear, it is clear that the extra funding will not be sufficient to reverse the cuts in the numbers receiving care seen during the 2010s. Thus, while more people will become entitled to financial support as a result of the reforms planned, many people with care needs not considered severe enough will continue to miss out.”

Even the cap on personal social care costs will not necessarily prevent some people having to sell their homes. If your only asset is a £200,000 flat or house you still have to find the 86,000 that is the cap on payments. The government respondsby talking about a growing insurance market, but that market is small at present for obvious reasons (adverse selection) and that will not change much with these plans.

What will happen in the longer term, once the pandemic backlog has been dealt with? Here we have to come back to the state of waiting lists before COVID. The NHS does not just need money to catch up with the backlog caused by COVID, it needs money to stop (and even reverse) the deterioration in waiting times that began under austerity.

There are other pressures on NHS budgets too. One is pay. It is not sustainable to keep funding the NHS by decreasing the real value of nurses’ pay. Another is privatisation. The bill currently going through parliament gives ministers the powerto circumvent normal procurement rules (competitive tendering), and their past actions suggest they favour giving contracts to private sector friends rather than allowing the NHS to do work in-house. Whatever these private sector companies may claim, that means higher cost to the public sector to fund the profits these companies need to make. [3]

The risk therefore is that after three years not much, if any, of the money created by the national insurance tax increase will end up in social care. As Graham Atkins of the Institute for Government says, “There is a risk that the funding for the NHS to tackle backlogs goes into the baseline NHS budget and the funding never ends up going to local authorities to reform social care.” This risk will be intensified if the government continues to squeeze local authority budgets, which in the short term at least seems likely to happen as Sunak tries to meet his deficit targets.

If higher taxes were really for social care, then it would have made sense to give the NHS temporary money to cover costs arising from the pandemic by borrowing, and direct the funds from higher taxes to social care immediately. Better still delay the tax rise but increase funding straight away to give the economy the boost it clearly needs. One of the reasons this didn't happen is that the NHS needs more money on a permanent basis, and Johnson is a Prime Minister who knows further deterioration in NHS waiting times beyond 2019 levels will risk losing power. Thus the tax increase says very little about the ideology of this government, and instead reflects the continuing desire of Conservative Prime Ministers to retain power. .

[1] The young could lose a bit if they could do better saving themselves and then investing in social care insurance, but when that insurance is scarce and expensive because of adverse selection it seems unlikely.

[2] This is a red flag to twitter MMT, who will say you could borrow or create money instead. But doing so year after year will overheat the economy, so if we are talking about several decades it’s not a very helpful remark. I talk about the immediate short run below.

[3] The usual counterpoint to this is that the private sector have more of an interest in improving efficiency. While that may be true in some areas, it seems highly unlikely for the NHS. The inefficiencies in the current NHS largely stem from a lack of public sector investment.

The combination of Brexit, Covid, and an immigration policy that favours skilled (in practice higher paid) workers has created severe shortages of some lower paid workers. We are seeing that today among lorry drivers, crop pickers, food processors, butchersand other occupations. There are two, seemingly compelling, arguments for why this might be a good thing.

The first is straight supply and demand: a worker shortage means employers raise wages to attract workers. The second is that shortages increase productivity, as firms seek labour saving machines that will reduce their demand for labour. If, like me, you think reducing low pay and increasing low productivity are good things, what is there not to like? Few should begrudge the wages in some of the industries discussed by John Harris or Sarah O’Connor rising.

There are many caveats to these arguments. The most obvious caveat is that it would be far better to have much more modest shortages, which would have the same effect on productivity and wages but which wouldn’t disrupt the wider economy. It should be possible to allow some immigration on a short term basis, without diminishing employers’ knowledge that wages will have to be higher. So far the government has refused to do this. The result is significant damage to the economy as a whole. The rest of this post is about those more modest shortages.

Another caveat is that some of these workers, like those working for the NHS or in social care, are paid for by the state, and it is highly unlikely that their pay will be allowed to rise under this government. A consequence will be permanent shortages unless the government adjusts its immigration rules to allow these workers in.

A third caveat is if workers are working in industries that produce products that can be easily produced abroad, another response to worker shortages is to take production overseas. Production may no longer be able to compete with overseas production if domestic wages rise. But this caveat obviously does not apply to goods that cannot be traded, like social care or, after Brexit, lorry drivers.

A fourth point to never forget is that there are clear losers from ending immigration - immigrants themselves. They are prepared to undertake the considerable costs of working in a foreign country because they are much better off financially from doing so. If you think in global terms rather than from the point of view of natives alone, there are large global benefits to be gained from immigration. One economist arguedthat barriers to immigration were Trillion Dollar bills on the sidewalk. 

The fifth caveat, which is often ignored when talking about immigration, is that we are ignoring one side of what has happened. Immigrants leaving has created labour shortages in many industries, but it has also reduced the overall level of aggregate demand. [1] We cannot have one without the other. As a result, there is going to be less employment in all the industries unskilled immigrants didn’t work in. Not enough unemployment to fill all the jobs immigrants used to do, but enough to question what the macroeconomic impact of reduced unskilled immigration will be.

This is a crucial question we need to answer before we can accept Larry Elliot’s claimthat Brexit has solved a problem (low wages in some industries) created by free movement. We need to look at the economy as a whole, not just workers in a particular industry.

To do this I want to suggest a thought experiment. Imagine a country where (for simplicity) there is no foreign trade. Jobs are either ‘good’ (high wage because they are relatively productive) or bad (low wage that are relatively unproductive). All the good jobs are taken by native workers, while all the low paid jobs are filled by immigrant labour. Although the jobs done by immigrants were badly paid, they still want to do them because they are much better than wages in the countries immigrants came from. Goods produced in the country are consumed by both native and immigrant workers, and both groups have similar preferences.

Now suppose this country sent all the immigrants home. Suddenly the demand for good jobs would fall (because immigrants were not buying them), and there would be many vacancies for bad jobs. Filling the vacancies comes partly from the unemployment caused by high wage workers losing their jobs, but also an increase in the wage of low skilled workers relative to high skilled workers.

Now consider who is better off. Former immigrants are worse off because they have been thrown out of jobs they wanted to do. How about native workers? Whereas before all had been working in high wage jobs, now some of the native workers are working in low paid jobs (although not as low as they once were). As you would expect high paid jobs to be better than low paid jobs, it would seem that no one in the economy is actually better off.

How is that possible? The economy has shrunk because immigrants have left, but the mix of goods produced is unchanged. Without immigrants, some native workers have to be low paid. From native workers’ point of view, some have lost good jobs and are doing worse jobs. Average income per head is unchanged, but whereas before native workers were in the better part because immigrants were in the lower part, now some native workers are in the lower part. 

This was the point of an earlier post, which argued that restricting ‘low skilled’ (aka low paid) immigration would mean more native born workers doing lower paid jobs. True, they might not be as low paid as they were when immigrants did them, but I doubt if anyone would call them ‘good jobs’. [2]

What about low paid jobs getting higher pay stimulating productivity? Again from a macro perspective we need to look at the higher paid jobs, where wages have fallen, reducing the incentive to innovate. I have for some time arguedthat the best way of increasing productivity is to run the economy hot. Giles Wilkes arguesthe same in the context of an interesting discussion of worker shortages. In general creating shortages is definitely an inferior way of inspiring productivity growth, because excess demand is a stronger motivator of new investment than higher costs. One of the problems of worker shortages is that it may lead to inflation, which encourages fiscal or monetary policy makers to deflate the economy.

Of course the UK is not like my thought experiment in many ways. In particular, native born workers work alongside many immigrants in low paid jobs. They clearly gain from restricting immigration. But this doesn’t change the result from the thought experiment that on average the position of native workers will get worse. This is a very similar situation to free trade agreements, which often increase overall welfare but where some workers lose out. [3]

Considerations like this mean that economists tend to think low skilled immigration is a good thing from a purely economic point of view. Focusing on those who gain from reduced immigration is misleading, because it ignores those who lose out. Now there may be good social or political reasons to limit immigration as a whole, but if you want to improve the position of low paid workers a better policy is to increase the minimum wage, or in some industries enforce restrictions in hours worked and ensure better pay for working unsocial hours (bring back and extend the agricultural wages board).

Labour shortages among workers deemed to be unskilled by this government are damaging to the majority of workers in the UK and damaging to those overseas who are prevented from filling the shortages by immigration rules. It will improve the relative position in the income distribution of those working in the industries immigrants have left, but there seem to be better ways of achieving redistribution that do not reduce average incomes at the same time. If you still think the redistribution is worth it, remember you have also made the global distribution of income more unequal.

[1] Expansionary fiscal or monetary policy are good at dealing with temporary demand shocks, but not permanent ones.

[2] A simple numerical example may help. Suppose the economy is initially made up of 10 million immigrant workers, and 90 million native workers. Native workers are on average paid 10 units a week, although that is a distribution where some will be getting much less. The immigrants get paid on average 5 units a week (also a distribution). Total national income is equal to 10*5 + 90*10 = 950 units, where 10 is the average income for native workers.

The 10 million immigrants now leave. Immediately aggregate demand falls by 50 units. The demand for native jobs is now 900/950^th of its previous level, which makes just over 5% of native workers redundant (just over 5 million). But because preferences are the same and assuming no economies of scale, our new economy must have just under 9 million native workers moving over into the jobs immigrants used to do. So relative wages have to move until we attract just under 4 million native worker to do the work immigrants used to do. These assumptions imply that, once relative prices have adjusted, the new economy is just a scaled down version of the old one, where total income is 950*9/10=855 and average native income has fallen from 10 to 9.5.

[3] Another thought experiment can illustrate this. Suppose wages are low in a particular industry not because of immigration, but because of foreign competition from low wage economies. Let’s say the industry was textile production. Would we think it was a good idea to create shortages of textiles domestically by restricting imports of textiles? That would lead to more domestic production and therefore almost certainly higher wages and prices in the domestic textile industry. But equally, more people would work in the textile industry, and less in other industries which were more competitive internationally. Productivity in the textile industry might improve, but in the economy as a whole it might fall because workers had been diverted to a relatively low productivity industry.

Economic policy in most countries for decades has been to do the opposite of this thought experiment, by reducing barriers on trade. By specialising in producing the goods we are relatively good at producing, we increase productivity in those industries. Not everyone in the economy gains from this (e.g. domestic textile workers), but average incomes rise.

This was something Keynes saidin a 1942 BBC address, where 'we' meant the government. He was talking about what he hoped would happen after the war, and against the austerity policies that had seen mass unemployment in the late 1920s and 1930s. He says in the same address:

“With a big programme carried out at a regulated pace we can hope to keep employment good for many years to come. We shall, in fact, have built our New Jerusalem out of the labour which in our former vain folly we were keeping unused and unhappy in enforced idleness.”

It was a policy the UK pursued in the next few decades, after a few years producing full employment on average along with rapid growth and, initially at least, with little or no inflation. Keynes was proved correct. However in the 1960s and 1970s that was no longer the case, and we learnt through double digit inflation, and in the UK widespread disruption, that the real constraint on what you can do is inflation rather than full employment. It was always clear, however, at least to UK and other European economists, that how close you could get to full employment before inflation set in was governed by a complex and variable set of institutional factors. So Keynes’ statement became ‘governments can do anything as long as inflation remains stable’.

If inflation is the ultimate constraint on what we can actually do, why did governments start to worry about their own finances? Why did bodies like the IMF start advocating fiscal rules to limit government borrowing and later independent fiscal institutions to monitor government deficits? Some may have wanted to reduce the growth of government spending, but the official reason was real enough: deficit bias.

Deficit bias has been long forgotten as a result of the macroeconomic disaster that began in 2010, but it is crucial to understanding the origin of financial considerations influencing what we can actually do. To understand deficit bias you also need to understand another change that began in the 1970s and has now become dominant, which is how demand management is done.

In the UK in the decades after WWII, fiscal policy was used to stabilise the economy at full employment. Interest rates played a minor role, and arbitrary limits on personal borrowing were common. (This is similar to the policy proposal associated with MMT.) This made sense under the system of fixed exchange rates created by Bretton Woods. When that came to an end in the early 1970s, interest rate changes became more powerful because of their impact on exchange rates, and that was enhanced as credit controls were gradually abolished.

The world moved, often erratically, towards a system we have today: macroeconomic stabilisation using interest rates set by central banks trying to hit inflation targets. This in turn created the problem of deficit bias. In a world where fiscal policy stabilises the economy, deficit bias isn’t an issue because deficits increase in recessions but fall in booms. The economic cycle and the need for fiscal policy stabilisation means that government debt broadly looks after itself. To put it another way, labour shortages and high inflation are the cost an irresponsible government pays for spending to much or taxing too little.

In a world where interest rates are varied to stabilise the economy, inflation is no longer a constraint on fiscal policy. In this world, Keynes’ statement of the title again becomes true, because central banks will look after inflation. The only cost of spending a lot or taxing too little would be high interest rates, but as these rates were set by someone else, the political cost to governments of running large deficits is more opaque as long as the increase in rates wasn’t too rapid.

This is perhaps the most important point of this post. Deficit targets or more sophisticated fiscal rules only make sense in a world where interest rates are able to be used to target inflation. It follows automatically that fiscal rules make no sense when rates are stuck at their lower bound. These two sentences are sufficient to show that 2010 austerity makes no sense. The reason MMTers don’t like fiscal rules follows automatically from their wish that fiscal policy rather than interest rates target inflation.

In the three decades after the fall in Bretton Woods, governments in the US and Europe (not the UK) took advantage of this new freedom monetary policy stabilisation had given them. Global debt to GDP ratios almost doubled. This is deficit bias. [1]

To what extent was this deficit bias a problem? In the short and medium term for the major economies (treating the Eurozone as a country) not much, but in the longer term (by which I mean centuries rather than decades) there is bound to be a limit on how large government debt could be in relation to GDP. [2] So for that reason alone it makes sense to try and make it hard, through rules and institutions, for governments to increase debt at that rate. It should also increase welfare if governments are discouraged from increasing debt for no good reason beyond buying elections.

I think the evidence that inflation stabilisation by independent central banks was highly successful compared to all the other stabilisation regimes that preceded it is overwhelming. So having good fiscal rules that make it difficult for governments to try and win elections by increasing debt is also worth having. This is why I support good fiscal rules.

However, I also think bad fiscal rules are far worse than no fiscal rules at all. It is vitally important that government debt should be allowed to rise in a number of situations. Fiscal rules that prevent that do far more harm than good. There are two clear situations today where debt needs to rise. The first is in severe recessions, where interest rates get stuck at their lower bound [3]. The second is where large investments are required to produce a large future benefit. The most obvious example of the latter is climate change.

Why are there so many bad fiscal rules around today? I think one important reason is that the political right has seen them as a way of reducing the size of the state. The media have not helped, by grossly exaggerating the cost of higher debt and using any departure from a (bad) fiscal rule as a sign of government irresponsibility.

Which brings me to what inspired this post, Adam Tooze’s Chartbook No.34. This takes an MMT perspective, and ignores all the points I make about interest rate stabilisation and inflation. Which is understandable, when interest rates have been at or close to their lower bound for over a decade and inflation has not been an issue. The puzzle he addresses is how can we describe a government project (project X) as crowding out something else, when the amount the government could borrow before hitting an inflation constraint far exceeds what it actually borrows. You cannot say doing X stopped you doing Y and Z, because you could have done X, Y and Z.

I suspect this is usually an artificial question, because for me at least doing X, Y and Z would bring the economy to the point where it either hits the inflation constraint (in an MMT world) or where interest rates start rising (in today’s world). This would be a certainty if Y was greening the economy and Z were the fiscal transfers to make a carbon tax (or equivalent) politically acceptable. In both cases there is a clear opportunity cost of doing X.

An example of X where this arose recently was Trump’s tax cuts for the rich. I am happy to say the main problem with this is it was a transfer of income from the many to the few. The rich were better off, and that money either comes from the rest of the population now or in the future. Most people don’t see that because Trump paid for it by borrowing. For me [4], that means it’s also an example of deficit bias: raising the deficit just to pay off those who gave you money to win the election. [5]

I agree with Adam Tooze when he says there is no fixed pot of money. The government is the owner of the magic money tree, and in the US, UK and collective Eurozone today can borrow freely. I disagree on three points. First, I think the constraint in MMT type economies (where only fiscal policy does macro stabilisation) is normally inflation and not available resources, and second I think we can talk about the opportunity cost of bad policies even when the inflation constraint does not bite for the reason I gave above. Third, in today’s economies, it does make sense to ask whether deficits are justified or not, just as it did over the period of deficit bias and subsequently.

[1] The term deficit bias is bound to involve value judgments. No one should describe the rise in government debt after the GFC and the pandemic as deficit bias, because debt rose for very good reasons. Deficit bias is a rising government debt to GDP ratio over decades for no obviously good reason, and what a good reason is has to be a value judgement.

[2] Debt around 100% of GDP is fine. But if it doubles every 30 years for no good reason, you are over 1000% a century later and over 10,000% after that.

[3] This is why the fiscal rule that Jonathan Portes and I proposed herecontained a knock-out where the rule no longer applies when interest rates hit the lower bound. Any fiscal rule today that fails to have something similar is a bad fiscal rule. It also focused on the current balance, putting no constraint on investment to green the economy, for example.

[4] I admit that a Republican who thought the economy was better off if taxes on the rich were reduced would not call this deficit bias. In that case all you can do is point out that there is little sign his belief is correct (e.g.)

[5] Does the relationship between r (the interest rate) and g (the nominal growth rate) matter here? I don’t think so, because we are talking about a permanent flow (tax cuts) rather than a one-off project.

If there was ever one picture that tells you all you needed to know about why this government is almost unique in the world in abandoning almost all measures to tackle the pandemic, it is the Tory benches during the Afghanistan debate. Hardly a mask to be seen among them, despite the government’s own advice to wear masks in crowded indoor places. Do they care that their lack of masks could potentially give other MPs and parliamentary staff COVID? They care not at all. This is the true ‘I’m alright, Jack’ generation of Tory MPs.

With COVID this government no longer feels it needs to even give the pretence of trying to reduce deaths from COVID or cases of long covid. It seems to have convinced enough of the electorate that it has led the world in vaccinating its adult population, and anything else is just detail. For these MPs, and those who lead them, living with COVID has become synonymous with doing almost nothing about it beyond the vaccination of adults. As a result, cases and hospitalisations are now rising again even before schools return, and deaths are now averaging around 100 a week.

This callous disregard for the people it is governing, just so long as they get enough votes, is not confined to COVID. Of course all political parties favour some groups over others, but this is the first administration in the UK that cares about themselves, friends and financial backers alone, as long as their survival in power is assured. It is why I call this government a populist plutocracy.

All this is crucial when thinking about the greatest crisis facing humanity over the next few decades, climate change. While we can try for 1.5 or 2 degrees higher temperatures, if we do little or nothing things will become far far worse causing mass movements of population around the globe. In addition there is a concern that we may be close to setting off natural processes which could raise temperatures well beyond what is tolerable for large parts of the world, leading to global chaos and massive human depopulation. It’s perhaps not yet the most likely outcome, but it is not an insignificant possibility either. It may have happened, for different reasons, on the Earth hundreds of million years ago.

Given these possibilities, if civilisation as we know it is to survive, the world has no choice but to work together to all but eliminate carbon emissions within a few decades. But this is not how many MPs in our current government see it. The choice our government sees is whether to pay lip service to tough climate change change targets while not doing nearly enough to meet those targets, or to do almost nothing at all.

The Committee on Climate Change is an independent bodyset up by an act of parliament to advise on all matters to do with climate change, and in particular it monitors the UK’s progress in meeting its climate change targets. In June this year it issued two reports which foundthat the government had failed to enact sufficient measures to meet its own targets by a huge margin.

This is hardly surprising. It is easy for this government to avoid spending money or taking difficult decisions, because it knows the Prime Minister setting targets gets much more publicity than reports explaining how they will be missed by a mile. An additional reason for taking the ‘promise a lot, do almost nothing’ approach is that there is serious disquiet among some Tory MPs about doing anything.

Opposition to action on climate change is beginning to organise among Tory backbenchers. Ian Dunt suggestsa new group may soon form, perhaps called the Environmental Research Group following in the Orwellian tradition of similar groups for Brexit and COVID, to campaign against any further measures to meet climate change targets. Just as worrying, sectionsof the UK press, includingMurdoch, have long questioned the scientific consensus.

They will have no impact before the COP26 summit hosted by the UK later this year. This summit is a gift for Johnson, as it allows him to present himself as a global leader and crusader on global warming simultaneously. The UK’s own record on implementation is not conducive to a successful conference, but Johnson knows his press and the BBC will follow his line that the meeting was a personal triumph whatever the outcome really is.

He needs this success because polls suggest voters are overwhelminglyfrightened about climate change, and this concern goes acrossall age groups. He hopes that a self-styled Johnson success in the autumn at COP26 will be his equivalent of the UK vaccination programme - the success that allows his voters to excuse all other failures. Once that is achieved, the climate change deniers in his party can hold sway, much as a similar group of MPs eventually had their day on COVID.

They, rather than expert opinion (aka metropolitan elite) and moral imperatives (aka WOKE), will get their way because the Conservatives of the last decade have boxed themselves into failing to act on climate change in two ways. The first is most obvious: deficit targets. One way measures to tackle climate change (much cheaperthan dealing with the effects of the higher temperatures they will avoid) can happen is through deficit finance. But as long as the Tories follow the macropolicy of the Serbian housewife this will not happen.

The second involves the private sector costs of dealing with climate change. Things like carbon taxes or the equivalent. What proponents of the Green New Deal have always understood is that many individuals who have to pay higher prices for the carbon they are indirectly creating need some compensation for the impact of those higher prices on their budgets. You can do this in two ways. One is through deficit finance, and the other is through redistribution. Both go against Tory policy. A failure to compensate leads to political unpopularity, or worse (the gilet jaunes of France, for example).

This is why it is almost impossible for the current Conservative party to tackle climate change. It is why Cameron ended up wanting to‘get rid of the green crap’. If we and others keep electing similar governments the world’s progress in fighting climate change will be too slow, with catastrophic consequences. The UK plays a role beyond its carbon footprint as a result of hosting COP26 this autumn, and it is a tragedy that the UK’s leader at this time is an irresponsible showman with little respect outside our shores.

Sado-populism is a term used by Timothy Snyder, a Professor of history at Yale University, in the fourthof a series of short lectures he published in 2017. The lecture was perhaps inspired by the election of Trump. It was publicisedin the UK recently by Alastair Campbell in The New European, who applied it to Brexit and Johnson. In this post I want to relate this idea to my own discussion (e.g here) of plutocratic populism.

The most trivial difference is terminology. Snyder talks about oligarchy, and how the US under Trump was an oligarchy. However in his third lecture in the same series Snyder is clear that you can use the terms oligarchy, populism or kleptocracy to describe what he is talking about, so there is no difference here.

Why sado-populism? Snyder says that normal populists offer policies that will benefit the people they appeal to to get their support, but Trump didn’t do this. Instead he offered policies, like a large tax cut to the rich, that will hurt most those who voted for Trump, because to a first approximation lower taxes for the rich mean higher taxes or less spending on the poor. The idea that tax cuts for the rich create aggregate wealth which trickles down to everyone else is a right wing myth.

So he uses sado-populism to denote a form of populism that in reality does harm to most of those that support it. So how do sado-populists like Trump (and, I would agree with Campbell, Johnson) get elected. To some extent it is by fooling people about who will benefit from their policies (hence trickle-down), but mainly through a culture war. The aspect of the culture war that Snyder talks about for the US of course is race. More generally, the offer made to supporters of a sado-populist is status rather than income.

Typically the way to create status is to hark back to the past when such status was very evident. One of the things that differentiates sado-populism from a more typical democratic platform is that it is more about the past than the future. Here the link to Brexit is very clear. As Campbell notes, in the US it’s “not ‘Make America Great’ but ‘Make America Great AGAIN.’ Or, bringing it to Britain once more, Take BACK control”. One of the fascinating things about the Ashcroft poll published after the referendum is how Brexit voters thought the past was better than today, while Remain voters did not.

This is why Johnson keeps talking about ‘world-beating’, and right wing ‘journalists’ keep harping back to WWII or even Empire. A sado-populist looks for ‘the other’ who can be demonised and then tormented so that at least their supporters can feel they are better than someone else. So this government is brutal to asylum seekers, and hard on benefit claimants, not because they happen to be mean but because that is how to win votes. The UK government is also is very antagonistic to attempts to reduce racism, for similar reasons.

I think Snyder's analysis is broadly correct, and his discussion complements my own thoughts on populist plutocracy. As I have sometimes said, the focus of my discussion tends to be on the supply rather than the demand side, by which I mean how did part of the rich elite set out to transform democracy into a populist plutocracy rather than just support one of the two dominant political parties. In doing this I focus on two elements that Snyder also mentions as critical to the formation of rule by oligarchy: the media and inequality.

One interesting aspect of Snyder’s discussion of the rise of oligarchy in the US is the emphasis he puts on the decline of local newspapers. He suggests that with local newspapers readers could relate the news to things they knew about and that were therefore clearly true or false. With the decline of local newspapers we now have just ‘media’ which largely talks about facts that are remote from readers/viewers and can therefore be described as fake news.

It’s an interesting idea. It is certainly true that a feature of both Trump and Johnson’s government is that they lie all the time, and that it would be hard to convince others to go with you, internet based cults aside, if the entire media reported reality. This is why Fox News and talk radio in the US, and the right wing press in the UK, are so essential to sado-populist leaders. In the UK having a public broadcaster with a huge audience that is vulnerable to state funding cuts turns out, like so much of the UK’s pluralist democracy, to be highly vulnerable when a lying sado-populist is in charge.

The BBC aside, understanding why parts of the UK press went rogue is hard, because we are talking about the psychology of a few men. My guess is that Brexit was a radicalising moment in this respect. All the right wing press have supported it for some time, but getting it over the line required them to argue against the leader of the party they normally support, and also meant they lied their socks off. (In truth they had had practice from what they had done before.) Later they saw the chance of getting their journalists to lead that party. As Johnson sometimes says, the owner of the Telegraph is his real boss. By forsaking truth they gained influence like never before.

As to those that read these papers, I think we should never underestimate the power of propaganda for the majority that spend so little time thinking about politics.

Should I talk about sado-populism rather than talk about plutocratic populism? As I have always tried to make clear, I use populismin the sense Jan-Werner Müller uses it. A populist in this sense will always talk as if they are representing the views of the people, when in fact they only speak for some of the people. Remember how Brexit was ‘the will of the people’ when around half the people opposed it. Almost by definition this form of populism is divisive, with a clear ‘them’ whose wishes are irrelevant. By ignoring this 'them' and calling them the elite they can give some status to 'the people' who appear to have finally beaten the elite (although in reality the elite has just fragmented).

If you add in plutocracy, then it is clear the true interests of a plutocratic populist will be the interests of those in that plutocracy. Again it almost follows that everyone else, particularly those who are not ‘the people’, will suffer as a result. What I think Snyder’s discussion adds to my own is that what is offered to ‘the people’ by populists is status: an ‘other’ which is clearly beneath ‘the people’. Furthermore that status may have been lost compared to what it was, and the populist plutocrat or sado populist aims to return it to ‘the people’.

Snyder talks about the US as being on a knife edge between plutocratic populism and democracy. At the end of his talk Snyder briefly discusses how the US can end up on the right side of this knife edge, and then get off it. He suggests the opposition to plutocratic populism has to talk about the future, with clear policies about how to make the future better.

I was reminded of this when reading this piece by Alan Finlayson. He argues that Labour spends too much time talking about values and not enough time formulating demands. Values are timeless, and our plutocratic populist leaders are more than happy to talk about values. In contrast the future is about demands: demands for a better future. Get the demands right and detailed enough to move beyond three word slogans, and you also make it clear what your values are.

One of the rules in this pandemic is that Johnson’s government does not learn from mistakes. Johnson, his ministers and many of his MPs prefer a self-serving libertarianism to looking at evidence. As a result, England has got rid of every measure aimed at reducing the chance of passing on the virus, while most other countries have retained some controls like mask wearing. Ministers are even telling workers to go back into the office, just as they did last summer.

The lesson they failed to learn from the summer of last year is not to imagine you have solved the COVID problem. Last summer cases and deaths were low, restrictions were lifted and despite what their scientists were telling them many in government thought it was time to focus on other issues. Sunak encouraged people to eat out which helped start cases rising again. In the autumn and winter it became clear how foolish that belief was..

This year we are again seeing a similar attitude. This is not helped in some quarters by a kind of perverse triumphalism that COVID cases have for a time fallen or stabilised in England. They said the experts were wrong, we didn’t get 100,000 cases, which implies for them that they were right to ignore the experts when they abandoned all controls. For those of us with painful memories of Brexit, we see a similar pattern repeating itself.

Forecasts in any social science are inherently very difficult. I suspect forecasting in a pandemic, where so much depends on how many people are being cautious, is a bit like economic forecasting: both are almost certain to be wrong. But in both cases it’s the wrong way to judge disciplines. What matters is if they get the policy analysis right. Economists were right that Brexit would be costly for the UK economy. Equally the experts were right that abandoning all restrictions on 19th July would tend to raise case numbers compared to what they would have otherwise been. Unfortunately many on the political right are so determined to ignore science they will take any opportunity to rubbish it.

As the Chart below shows, cases in England began falling from July 17th, while cases in Scotland have been falling since the beginning of July. The difference is probably due to a combination of school holidays and the Euros.

What about the end of restrictions on 19th July. The whole point of Johnson urging people to be careful after 19th July was to minimise that effect. Evidence suggeststhe advice (or common sense) succeeded in moderating the rise after 19th July. However inevitably that effect will wear off as time goes on. Although cases are now roughly flat in both countries, they are nearly half the level relative to population in Scotland compared to England. Cases are likely to increase again in England, in September if not before.

The government says we have to ‘live with COVID’. But there is a world of difference between COVID being endemic with average cases below 100 or even 1,000 a day compared to average cases at 20,000 a day. Living with COVID is not equivalent to ignoring it. So what should the government be doing now to prepare for autumn and winter. The first obvious move is to vaccinate older children: 12-18 rather than the 17-18 already planned.

Expert opinion is mixed on this issue, but the cost benefit analysis presented in this paper is persuasive. Perhaps for that reason, many other countries are going ahead with vaccinating teens, as this chart from the FT shows.

Devi Sridhar has a good discussion of the issues here.

Vaccinating teens with two doses will take some time, so in the meantime the government needs to help making schools safer. Yet making schools safer seems to be the opposite of what Schools minister Gavin Williamson has been doing. His record is lamentable, as a recent report from the Institute for Government shows(good summary also here), and he ended compulsory masks in schools before the government extended that to adults. Apart from bringing back mask wearing, the government should be improving ventilation in schools, following other countries as Stephen Reicher suggests.

The government should also reverse their mistake in reintroducing mandatory mask-wearing in situations where people gather indoors (shops and transport). As I noted here, most people want them to do this, and most experts want this too, but so far the government has allowed the irresponsible minority to determine policy. Why not publicise the use of more effective masks, as well as providing them in hospitals, care homes and to the vulnerable?

As the chart below shows, the UK continues to be the worst performer alongside Spain in terms of the last wave of COVID cases compared to our closest neighbours, although the US with even worse political problemsinvolving the Republican opposition and vaccination may end up surpassing us.(On hospitalisations we are joined by the US, and for deaths Portugal.)

While both the UK and US have particular problems with self-serving libertarianism, this is not absent in other countries, and most governments have struggled to understand the basic rules for dealing with a pandemic, with or without vaccines.

The basic rules of how to handle a pandemic during and after people are vaccinated are straightforward. After an outbreak caused by a new variant, governments should use restrictions and mitigation to bring cases down to a level that allows nearly all people to fully participate in the economy and public life. Once you have cases at that level, you release restrictions to a point that ensures that R stays at or below one. The level of restrictions can vary with the seasons to avoid autumn/winter surges. If that is done, new variants are less likely to emerge at home, deaths, hospitalisations and cases of long covid will be lower and the economy can fully recover. In addition, if dominant variants arrive from abroad (lambda?) you have more resources to react to avoid the point at which hospitals start cancelling cancer operations.

If instead governments allow cases to remain high because they abolished restrictions and failed to fully mitigate, and excuse this failure by talking about saving the economy, they are both lying and are negligent with public health and the economy.

This post is a follow up to a postby Chris Dillow. He makes two claims about macroeconomics. To understand this you need to know about the distinction between mainstream and heterodox economics. It is difficult to define what divides the two groups (papers/chapters are writtentrying to do so), but we can make some observations. Most economists in academic departments are mainstream, and heterodox economists fall into lots of different schools. Another observation is that mainstream economists almost completely ignore what heterodox economists do. What is not true is that all heterodox economists are left wing and all mainstream economists are not. 

Chris’s first claim is that much of heterodox economics is the macro that was fashionable many years ago. The second is about the mainstream. He suggests there was a ‘great forgetting’ in the 1980s, such that apparently new ideas today are just rehashed old ideas that seem to have been forgotten. I think there is some validity to both these points, and I hope to explain here why this has happened and how they are related.

The great forgetting happened because of a methodological revolution in macro, the New Classical Counter Revolution (NCCR). Many at the time focused on one aspect of that revolution - an attack on the mainstream Keynesian macroeconomics of the time. That failed fairly quickly, but what lasted was a methodological revolution, which is often called the microfoundation of macroeconomics. I have written about the NCCR here.

Before the NCCR, macro was almost a different subject to microeconomics. Macro’s main theory, Keynesian economics, could be written in aggregate equations and could be estimated using aggregate data, but it was sometimes hard to relate it to microeconomic theory. Partly for that reason, macro contained different schools of thought, where it was hard to relate one ‘school’ to another.

The NCCR insisted that any macro model should not only be derived from microeconomic theory, but also that the theory was used in a consistent manner. By unifying macro and micro economics, it appealed to young economists in particular. Very quickly academics realised you could also formalise aspects of pre-NCCR Keynesian economics in a microfounded way, and the microfoundations hegemony within mainstream economics became complete. As all macroeconomists within the mainstream talked the same language (microeconomics), to the extent there existed schools of thought, these related to beliefs about parameter values within a common theoretical framework (which in turn those beliefs might reflect ideological preferences).

This reduction in the fragmentation in mainstream macro is an important unifying force. Pre-NCCR you could go to a macro seminar given by someone from a different school of thought and have little idea what they were talking about. Post-NCCR you could do the same and know exactly what they are talking about, and even make comments on their work, but just think it was not very relevant to the real world.

One of the negative aspects of the NCCR was it led to the ‘great forgetting’ Dillow talks about. For some the NCCR was year zero in macroeconomics, with everything that had gone before (that was outside the microfoundations hegemony) of little interest. The example that is close to home for me is described here. I had done a lot of work applying the John Williamson’s FEER model of equilibrium exchange rates, which uses pre-microfoundations techniques. The approach was rediscovered by Obstfeld and Rogoff who used a microfounded model (the ‘New Open Economy’ approach, which applied the microfoundations of imperfect competition to international trade). Which was fine, but as far as I know Obstfeld and Rogoff never acknowledged that earlier literature started by John Williamson. It was a perfect example of a great forgetting.

Having year zeros in any discipline is a bad idea. My view reflects an argument I have often made: microfoundations are fine, but the microfoundations hegemony is not. By hegemony I mean seeing other macro as old fashioned and not.worthy of publication in top journals. Some economists had a stronger reaction and chose to be heterodox economists outside the mainstream. They felt microeconomics didn’t deserve this central role in macroeconomics, or felt it made no sense microfounding macro. I think it’s fair to say that after the NCCR it was more difficult if not impossible for those economists to get on the mainstream train.

The analogue to this is the point Dillow makes, that a lot of heterodox economics is what he remembers learning before the NCCR. That observation isn't a slur on heterodox economists, but rather to note that some of what they do is a continuation of pre-NCCR macro.

A good example of that comes from MMT, where a key idea is that we should use fiscal policy rather than monetary policy for macroeconomic stabilisation at all times (and not just when rates are at the lower bound). That reflects how macro policy was done in the UK in the 1960s and mid 1970s. It is quite possible to argue that case within the mainstream (although most mainstream economists would disagree), but I don’t believe MMT economists would wish to do that.

However the NCCR didn't create heterodox macroeconomics. The heterodox economics I remember from studying at Cambridge in the early 1970s was a rejection of ‘neo-classical economics’. At its simplest, neoclassical economics is how producers who maximise profits interact with consumers who maximise utility in perfect markets (where perfect means there are a large number of producers and consumers for the same product so everyone is a price taker). As Chris notes, the theory implies people are paid their ‘marginal products’.

If you asked most mainstream economists today if what they do assumes the validity of neo-classical economics, they would probably laugh. As I repeatedly say, much of economics today is about studying markets that are far from perfect. (We can debate endlessly whether having perfect markets (and associated optimality conditions) is a useful or misleading reference point.) Economics has also grown well beyond the study of markets and their imperfections, to include game theory and behavioural economics for example. None of this stops right wing economists using ideas from neoclassical economics when it suits them.

Another feature of microeconomics today is that it is dominatedby empirical analysis. The days when the heights of the subject were highly mathematical proofs about the nature of general equilibrium are long gone.

However we now need to go back to the NCCR in macro. The microeconomics the proponents of the NCCR took to remake macroeconomics was essentially the neoclassical economics that microeconomists were simultaneously moving beyond. New Keynesian economists brought a form of imperfect competition into DSGE models to enable a formalisation of price or wage rigidity, but it remains the case that the basic DSGE model is based on pretty neoclassical microfoundations. (The clearest exposition of this is a bookby Athreya.)

We can now see an additional reason for the barrier between heterodox and mainstream macroeconomists. Macroeconomics has adopted the neoclassical economics that heterodox economists had objected to over decades before the NCCR.

While I personally regard post-NCCR macro as progressive in a Lakatos sense, I believe its hegemony is unwarranted. I learnt a great deal about the world working in pre-NCCR macro, and this has been complemented rather than duplicated by what I learnt from microfounded macro. (I have published plenty of papers in both.) Mainstream macroeconomics now needs to follow micro in becoming more empirical, and one of the ways it can do this is by resurrecting the pre-NCCR style of modelling. This involves both econometric studies of individual relationships or sub-systems, and the use of structural econometric models (what Blanchard calls policy models) that Chris mentions in his post. These models are an eclectic mix of theory and econometric studies of individual relationships or sub-systems.

As I note in this paper, it should be worrying that policy institutions like the IMF and Fed still do a great deal of this kind of analysis, but mainstream macro in the top journals does almost none. The time has passed when we can excuse this fact as reflecting old-fashioned policy institutions, or that such analysis is flawed because of identification problems or the Lucas critique. If mainstream academic macro will not venture into these directions, perhaps some heterodox economists can take their place.

Everyone knows that central banks, like the Bank of England, create money. We often talk about this as central banks printing more money, but in reality when central banks want to create money they do so by creating a kind of electronic money held by commercial banks called ‘reserves’. Quantitative Easing is when a central bank creates reserves to buy its own government’s debt.

Central banks do this in a recession when the short term interest rate set by the central bank is so low that it does not want to reduce it further (the lower bound for interest rates), but it still wants to stimulate the economy. They cannot reduce short term interest rates any further, but can they reduce long term interest rates (the interest rate on assets held for many years)? The idea is that if the central bank buys government debt, there is less government debt for the private sector to buy, so the private sector is willing to accept a slightly lower interest rate on government debt. That in turn will put downward pressure on other longer term interest rates, stimulating the economy.

There is an extensive literature on how effective this Quantitative Easing (QE) is in stimulating the economy, but that is not my concern here. All I need to assume is that it has some limited effect in stimulating the economy. The question is whether this is something the central bank should be doing during recessionary periods. [1] For example, in a recent reportby the Lords Economic Affairs Committee, the chairman said the Bank of England had become addicted to QE.

The problem with a great deal of public discourse on QE is that it takes QE as an alternative to fiscal stimulus, rather than a complement to it. There is a good reason for this confusion. During the aftermath of the Global Financial Crisis (GFC) many governments failed to enact fiscal stimulus and instead enacted austerity, saying that monetary policy could do the job. As interest rates were stuck at their lower bound, unconventional monetary was used, and QE was a key component of that. In the event the prolonged recession showed clearly that QE could not take the place of fiscal stimulus. But the problem was the lack of fiscal stimulus (and its replacement by the opposite, austerity), not QE itself.

The most common charge against QE is that it worsens inequality. As explained earlier, one aim of QE is to slightly lower long term interest rates. A fall in long term interest rates tends to raise asset prices, which includes the market value of existing government debt, stock prices and house prices. [2]

As the wealthy rather than the poor hold these assets, QE tends to raise the wealth of the wealthy, and so increases wealth inequality. However QE is not the most important influence on long term interest rates. Long term interest rates change mainly because expectations of future short term interest rates change. [3]

The best way to reduce inequality in a recession, therefore, is enact a large fiscal stimulus. This raises demand and inflation tends to rise. As a result, central banks will raise short term interest rates, which in turn will increase long term rates and lower asset prices. We can immediately see that, if you are concerned about wealth inequality, it’s the lack of fiscal stimulus that is the real problem, not QE.

Another, more primitive, argument against QE is that it causes inflation. This is primitive because it’s simple monetarism, which for most macroeconomists died a death in the 1980s. I could go through the theoretical reasons why it is nonsense, but it’s easier to note that the same people made the same claim last time there was a lot of QE (after the GFC) and there was no significant increase in domestically generated inflation.

Is it better to have a fiscal expansion combined with QE, rather than just a fiscal expansion? The only difference is that in the first case the central bank buys some government debt for some undefined period, and in the second case it doesn’t. The two options are often referred to by economists as money and bond financed fiscal expansion. [4] In very simple textbook models money financing involves greater stimulus, but often in those textbooks this is because the government is imagined to target the money supply, and that stopped happening in the early 1980s.

A more modern response would be that QE still has some impact in reducing long term interest rates , and that extra stimulus is worth having. On the other hand you could just increase the size of fiscal stimulus to compensate, and not do any QE at all. So the question remains whether there is any point in doing QE alongside fiscal expansion.

One significant positive point in favour of doing so is that money financing (fiscal stimulus plus QE) is cheaper than bond financing. Instead of the government paying interest on its debt, it gets paid to the central bank instead, and the central bank passes that money on to the Treasury. However there is currently a cost to QE in the UK and US, which is that the central bank pays its short term interest rate on the reserves held by commercial banks. Nevertheless, as short term interest rates are lower than the interest on longer term government debt, QE still reduces the borrowing cost of a fiscal stimulus. The OBR estimatesthat QE will save the government just under £18 billion in 2021/2.

However this has led some, including the OBR, to suggest that the financing costs of government debt are now much more sensitive to interest rates than they would be without QE. Without QE, if the Bank raised short term interest rates this would have a very limited immediate impact on the cost of UK government debt because of its long maturity. However with QE, if the Bank continued to pay its short term interest rate on reserves, the overall cost to the public sector would rise much more quickly.

This logic is based on a very unlikely assumption. It assumes that if short term interest rates rose the Bank would continue its practice of paying that rate on all its reserves. If nothing else that would be a large fiscal transfer from the Bank to commercial banks. As Karl Whelan sets out very clearly, it is far more likely the Bank would follow Japan and the ECB and adopt a tiering system, which would mean that most reserves would pay nothing. The scare about how vulnerable QE makes the government to higher rates is simply something the Bank can make disappear.

Occasionally you hear people say that QE (or monetary financing) is dangerous because it damages central bank independence. The idea is that governments will pressurise central banks to continue to issue new QE, after a recovery from recession is complete, because it makes its debt cheaper. Again we can discount that fear because we saw none of that after the GFC. [5]

I would add a final reason why expanding QE is a good idea in recessions. It prevents panics in the government debt market. If the market suddenly decides it doesn’t want to buy any debt, the Bank can step in. This happened at the start of the global COVID pandemic, and central banks did just that. More generally, it kills the argument that we cannot have fiscal stimulus in a recession because of the bond market, a point I made in one of my first posts. My own view, therefore, is that QE is worth doing, and it only has a bad name because in the past it has been used instead of fiscal stimulus.

Unfortunately there is a real danger that situation will happen again in the UK, as the Chancellor finds it more and more difficult to meet his deficit and debt targets and so asks for greater austerity. Once the latest COVID wave is over, our aim should be to use fiscal stimulus to expand the economy, as they are doing in the US. Instead it looks like we will have austerity trying to hit some arbitrary target for debt or the deficit.

There are many differences between austerity now and the austerity that began in 2010. In 2010 the Bank had a Governor who believed he could continue to effectively stabilise the economy with Quantitative Easing. Now central bankers are increasingly acknowledging the need for fiscal stimulus to end recessions. The US fiscal stimulus is forecast to return the US economy to where it would have been without any pandemic, and any failure of the UK economy to do the same may be largely down to our current Chancellor’s obsession with debt targets. Once again we will see QE without the necessary fiscal stimulus that should go with it. 

[1] By recessionary periods, I mean the whole period between when output starts growing less than normal (or falling), and when output has completely recovered. This has nothing to do with the ‘technical’ definition of a recession (two periods of falling output), which I find can be misleading and unhelpful.

[2] The reason for this is simple. Ignoring any capital gains, the pay out from these assets are a fixed interest rate (or coupon) for most government debt, dividends for stock prices and rents (actual or implicit) for house prices. If interest rates fall and these payouts remain unchanged, all these assets become more attractive to hold (their pay out becomes more attractive relative to lower long term interest rates), so the price of these assets rise.

[3] If traders start expecting short term interest rates to go up in the future, and long term interest rates are low, it’s more attractive to short term assets rather than long term debt. If people are still going to hold long term debt, long term interest rates need to rise to compensate for higher expected future short term interest rates.

[4] There is some confusion about whether QE is monetary financing. This site, for example, says it’s not because QE is only a temporary creation of money, as central banks intend to sell the government debt it bought with the new money at some future date. However most examples of fiscal stimulus are temporary, so it seems perfectly sensible to compare money finance stimulus with debt financed stimulus, where the difference between the two is QE.

[5] A government that did this is what I call a government of central bank nightmares, and such a government is equally likely to just end central bank independence. I see no reason to believe that QE encourages governments to turn into this nightmare state.

Republican Senators Ron Johnson and Rand Paul have saidthey will not get vaccinated. They are the tip of an anti-vax icebergin the Republican party. Many Republican governors and legislators are repeating far-right messages denying the safety and effectiveness of coronavirus vaccines. Seventeen out of the 18 states with the lowest vaccination rates voted for Trump. This is one reason why the Delta variant could have a large impact on some parts of the US. The Republican party has become a kind of Russian roulette cult when it comes to the pandemic.

Needless to say this is a minority movement in the US. Most people saythey have or will get vaccinated. So why are some prominent Republican politicians associating themselves with what will become a very unpopular position as Delta variant cases increase? In one sense this is nothing new, as we saw when most Republican politicians refused to disassociate themselves from Trump’s claim that he had won in 2020 and acknowledge Biden as the winner. Republican politicians that stood against Trump’s nonsense claims were condemned by the Republican base, and subsequentlyby the party.

This example shows how a minority view that is pretty unpopular in the country can gain influence on the right in the US. Most Republican politicians are scared of their base because of primary elections, and so to be elected (or nominated in presidential elections) they have to pander to this minority view. While appealing to the majority may be the ultimate step, they need to appeal to a minority to take the first step, and they hope that appeal is effectively forgotten or ignored when they face the electorate at large. It’s a risky strategy, but they have no choice if they want to succeed.

Of course it shouldn’t be this way. Leaders should try and educate their party that anti-vax is nonsense and (in a pandemic especially) very harmful. I don’t think this is an example of what Timothy Snyder calls sado-populism. Instead it seems to me to be an example of something more organic and bottom-up. In 1964 the historian Richard Hofstadter wrotean essay entitled “The Paranoid Style in American Politics”. It was at the time that Barry Goldwater became the Republican nominee for president, beating the more moderate Rockefeller, and what he saw as the influence of conspiracy theory and "movements of suspicious discontent" throughout American history. His attempt to portray movements on the left as well as the right in this way has been criticised, but a lot rings true of the parts of the right in the US which has produced both McCarthy and Trump.

The danger is greater if this rule by a minority can elect true believers to positions of power. That is what happened with Trump. An open question is how long those true believers can stay in power, as their beliefs are gradually revealed to the voting public. The question of the moment is whether an ever more extreme right wing minority, once their views are exposed, can ever be re-elected, or whether they will drive their party to ever greater electoral losses. In other words does the extreme right inevitably self-destruct by becoming yet more extreme.

A crucial difference between the UK and US is that the UK does not hold primaries either for MPs or general elections. This greatly reduces the power of the extreme right. However both the national party and members get to influence who gets chosen as an MP. It is possible that party members can be radicalised (by Brexit for example) and select MPs with similar views to them. Most importantly, it is possible that owners and editors of the right wing press can begin to push more extreme right wing ideas that influence MPs and ministers. However will the party leadership, and more particularly the Prime Minister, ever adopt ideas from the right that are both extreme and unpopular among all voters?

Two recent developments shed some light on that question. The first is taking the knee. One MP said they would refuse to watch the England football team play in the recent Euros competition because players took the knee. One prominent minister failed to condemn a minority of fans booing the team while they took the knee. A new television channel designed to appeal to those on the right faceda mass boycott when one presenter took the knee. In the end the channel decided taking the knee was an “unacceptable breach of [their] standards”!

This all reached a critical point after England lost the final to Italy, and three of their black players missed penalties. The racist attacks on social media were horrendous, but they reflected a minority. Throughout the country as a whole the England team, including its black players, is very popular and most supportedthem taking the knee. As a result, the Prime Minister Johnson changed his previous stance and swung behind the team, condemning those fans who booed taking the knee and pretending he had never said anything different. In this case popularity won out over supporting some of his base.

The second is about removing most restrictions, including wearing a mask, on 19th July. As the number of Delta variant cases, and with a lag hospitalisations and deaths, continue to rise, the policy of abandoning the last checks on spread seems more and more foolish. Experts from around the world have condemned it, and it could produce the ultimate horror - a variant against which vaccines are ineffective.

Johnson and other members of government say ‘if not now, then when?’. The obvious response to this is when everyone, including school children, have been double vaccinated. The government, in response, shows analysis from SAGE that suggests opening up when all adults (not children) have been vaccinated may produce a worse outcome because it will happen before winter. The obvious response to that is why leave children as virus spreaders who have a chance of getting long covid, rather than vaccinating them?

We know the government is wrong on masks because they are now in the position of saying that continuing to wear a mask is the responsible thing to do. They want to rely on individual responsibility rather than ‘government diktat’. If people follow this advice, then by logical deduction the only people who don’t wear masks will be the irresponsible, so ending government compulsion is simply a license for the irresponsible.

As I noted here, most people want restrictions to continue. Those that don’t include a number of journalists who work for the right wing press and many Tory MPs, Both groups go on about ‘freedom’. Here again we have the right pushing an unpopular (and unsafe) policy, but in this case Johnson is siding with the right, either out of inclination or because he will find himself on the wrong side of a majority in his party. In this case Johnson has chosen supporting his base over popularity. How this will influence his popularity we shall see. [1]

The fate of the Republican party in the US will depend on how much voters will ignore the dangerous nonsense that Republican leaders have said and done in the past, and whether there is any chance that they will re-elect a president who helped inspire an attempted insurrection when he lost last time. In either case there is a real chance that the current Republican party will self-destruct. The fate of Johnson’s government may depend on how he chooses between following the views of his base or following the views of most of the country. But either way, with the total support of half the print media and a tame BBC influenced by this press, the chances of this government's self-destruction seem remote.

[1] It may seem ironic that English footballers seem to carry more weight for Johnson than countless COVID experts, but less so once you recognise that celebrity carries much more impact among the voters Johnson is targeting than expertise coming from academics and medics. One of these footballers, Rashford, has forced the government’s hand before.