Sunday, 3 May 2015

UK election: it was mediamacro wot won it

After the UK general election in 1992, which the Conservatives won to the surprise of many, the Murdoch owned tabloid newspaper the Sun splashed the headline “It's The Sun Wot Won It’. The headline is infamous enough to have its own Wikipedia entry. A few days ago I wrote what I hope was a calm, considered and rather academic post on the concept of mediamacro, following my posts on specific mediamacro myths, and I talked in abstract about the dangers it posed. Here I want to be more concrete.

Since the 2010 elections, YouGov has asked the following question: “Here is a list of problems facing the country. Could you say for each of them which political party you think would handle the problem best?” This is a simple table comparing the Labour lead in this poll just after the 2010 elections and today.

Lab lead 6/7 June 2010
26/27 April 2015
Law and Order
Economy in General
Source YouGov

Ignoring the normal academic caveats, the message is clear: the only topic on which the Conservatives are doing better today than shortly after they won the last election is their handling of the economy in general.

Yet when you look at any standard criteria of economic performance, the economy has done terribly during the coalition’s term of office. There is no doubt about this: numbers from GDP per head to real wages all tell a similar story. Average living standards have not increased, which means that they have fallen for many, a result which is almost unprecedented over a five year period. How much of this is the result of government policy is debatable, but that is not a debate that you see in the media. What you see in the media is an obsession with the government’s budget deficit, and on that criterion the coalition has left the economy in a better state than when it came in. So the only way to explain these poll results is that people have internalised the media’s obsession with the deficit.

Now normally you would ask how on earth something like the budget deficit could trump standards of living when judging economic performance. This is where the mediamacro myth of Labour profligacy is so important. One of the lasting images of this election was the man in the recent Leaders Question Time who accused Miliband of lying when he said that the global financial crisis rather than Labour profligacy had caused the deficit. (Second clip here.) He just knew that the last government had bankrupted the economy, and it appears many in the audience did too. And who could blame them: coalition politicians go unchallenged when they say it, and lots of newspapers repeat the line endlessly as fact.

It is a myth, pure and simple, but an important myth, because it places the blame for stagnant or falling living standards during the coalition government on their opponents. They created the mess the coalition had to clear up, and that was bound to be painful for a time. I’ve watched people who comment on this blog try to twist and turn figures in a desperate attempt to keep the myth alive. I’ve experienced being rubbished in the partisan media for trying to expose this myth. But in mediamacro this Question Time confrontation is described as an awkward moment for Miliband, rather than just the ranting of a bloke who had never looked at the numbers. I cannot recall any major coalition politician being seriously challenged for promulgating this myth.   

It is strange watching all this happen. I know that having written one of only 2 or 3 academic papers on Labour’s fiscal record does not guarantee what I say is correct, but it certainly gives me confidence that I am not talking rubbish. I write what I can, talk to any journalists who ask, trying to get the facts across. Facts like the deficit before the global financial crisis was only within a typical forecast error of its sustainable level. Facts like the debt to GDP ratio before the Great Recession was below the level Labour inherited.

Yet I know that this message will never be received, however indirectly, by the angry man in that debate, or by most of that audience. Perhaps some do not want to know the facts, but if they did, they are very unlikely to hear them. Instead they will get propaganda from most newspapers, and ‘views on the shape of the earth differ’ type comments from the TV, whose journalists are desperate not to appear to take sides. For that reason, if the coalition government remains in power after this election (or if the Conservatives win outright), then the title of this post will have rather more justification than the Sun’s original headline. [1]

[1] Although perhaps I should not be too rude about the Sun’s claim. Recent research suggests that readers of the Sun are considerably more trusting of the media than those who prefer other papers.

Saturday, 2 May 2015

Myths: a reply to Tony Yates

In this post Tony was responding to both my mediamacro series and Paul Krugman’s Guardian article, but I’m going to focus on the former. That is because I think Tony only really has a problem with the first in the series, which was about the 2010 ‘crisis’. So his ‘third way’ is really 7/8th my way! He also argues that 2010 austerity was not a major problem because of developments in consumer price inflation, but that is an argument that I did not cover in the myth series, because it is not part of the narrative I was criticising. I will address it here.

First the 2010 crisis. Tony agrees that there were no signs of a crisis in the markets, but he rightly says that a crisis could have subsequently happened. If I wanted to be pedantic, I would say that this means he agrees with my criticism of the mediamacro narrative, which at the very least allows politicians to pretend that there was an actual crisis. There is rather a big difference between “we saved the economy from a firestorm”, and “we took prudent action because bad things might have happened”. So maybe 15/16th my way.

As there was no actual crisis, what were the chances of one happening? Eric Lonergan has written a very good response to Tony on this, but he makes an additional point which I have made in the past but which I can too easily forget. Because austerity damages the real economy, it increases domestic credit risks. To the extent that governments stand behind those extending the credit (banks), then austerity can actually increase government default risk. So austerity as a precautionary policy can actually make the outcome you are trying to prevent more likely.

I also think I take a different view to Tony on what might have happened if markets had suddenly taken fright on the deficit and stopped buying UK debt. We agree that the Bank could have just bought the debt - as it was doing anyway under QE. But could it control inflation at the same time? At first sight it seems obvious that printing more money to buy government debt would compromise the inflation target. But that will not be true if you are at the Zero Lower Bound (ZLB), and austerity is only a problem at the ZLB. Paul Krugman has written a paper on this, but it becomes irrelevant because of our second disagreement.

This is that although the lack of recovery from 2010 to 2012 was regrettable, it was also inevitable given that inflation was way above target. Tony sees the MPC as trying - and largely succeeding - in getting the optimal balance between inflation being too high and output being too low. If that is the case, the ZLB was not actually a constraint during that period - interest rates combined with QE were doing just what the MPC would have wanted. This view is also a position that I think most MPC members hold.

Here I think we need to take a step back and think about what good policymaking is. A good policy is one that allows for what might happen, and not just what eventually did happen. In a sense this is a trivial observation: we do not want policies that are OK 51% of the time, but really screw up 49% of the time. However I think, after the event when we know how the world did turn out, it is so easy to forget this key point. We do not want to take taxis that generally get us there a bit quicker by taking risks, but occasionally crash. If we are unlikely enough to take such a taxi, and we do not crash, we do not say to ourselves ‘good choice’.

As Paul emphasises in his reply to Tony, you wait until you are well clear of the Zero Lower Bound (ZLB) before embarking on fiscal tightening. You are about to hit the economy hard, so you want to be pretty sure that someone else will be able to make sure it can absorb that blow. In the case of Osborne in June 2010, we do not know if he even understood the risk, because his keynote speech on macroeconomic policy ignores the ZLB issue. But if he did, he certainly did not think to himself that inflation was going to rise to 5% in 2011 so austerity is OK. (The OBR forecast for inflation was below 3%.)

While on that subject, Martin Sandbu says that as Danish and Swiss rates are now negative, 0.5% was not the ZLB anyway. This is completely beside the point. It was absolutely clear in 2010 that the Bank regarded 0.5% as the lower bound, so they were not going to cut rates further. The Bank was independent, so the Chancellor had to work around what the Bank was actually going to do (and not what five years later we might wonder what it might have done). 

What this all means is that Tony’s argument about inflation is not an excuse for austerity, but an argument about how much in practice it cost. I addressed this argument in detail here. I will not repeat what I said, because I do not want to detract from the more fundamental point above, but the upshot is that the £4000 per household figure that I often quote for the cost of austerity already incorporates some monetary policy reaction to fiscal decisions, so could well include any raising of rates in 2011 if austerity had not happened. But whatever the cost, 2010 austerity was a first order policy mistake, because it took unnecessary and large risks with the economy. 

Friday, 1 May 2015

On mediamacro

What do I mean by mediamacro? I realised reading this post from Tony Yates that I had never really defined what I meant by the term, so when some people started implying that it was just a conspiracy theory I thought it was time I should. A formal definition could be a set of ideas about macroeconomics promulgated by the media that seem very different to the macro taught to economic students. A clear example would be the idea that the 2013 UK recovery vindicated 2010 austerity, which was my mediamacro myth number six. I wrote a post in the form of a tutorial to illustrate this some time back.

Although the term mediamacro might have been new, the idea was not. Paul Krugman has for some time talked about VSPs, or Very Serious People, and I think we are talking about much the same thing. In particular, a common feature is to argue in the immediate aftermath of a large recession that reducing the deficit should be the top priority. Why did I use a different term? I think part of the reason was that I felt this was not a problem about individuals, but about a system. As Tony says, many economic journalists are “clever and opinionated and fiercely independent”, and are hardly material for a grand conspiracy.

In any case I think mediamacro has much more to do with how political commentators rather than economic journalists interpret macro issues. This is one reason why the mediamacro problem is different from well known issues about the reporting of scientific questions. Political commentators rarely talk about science, but they are talking about economics all the time, because so much of politics is about economics.

Again any conspiracy theory would just be silly. If we were only talking about the output of the right wing press, there would be little to remark upon. However, the idea that reducing the deficit is the overriding priority (and that we were in crisis in 2010 because of it) seems almost universal among political commentators whatever their political leaning, which is why my first post title using mediamacro was about Jon Snow berating Miliband for not mentioning the deficit.

The contrast between political and economic journalists can perhaps best be seen on the issue of Labour profligacy. The idea that fiscal policy under Labour was profligate (as opposed to mildly imprudent) would not be something that most economic journalists would sign up to. They know that the 2007-8 budget deficit of 2.7% of GDP is only about 1% of GDP away from the sustainable deficit with a 40% GDP target, and 1% of GDP is very little given the errors involved in predicting deficits. They also probably recall that in 2007 the consensus view was that the UK economy was pretty close to trend. So the profligacy charge is nonsense. But you would not know that from seeing political commentators routinely allowing charges of profligacy to go unchallenged and asking for apologies from Labour politicians. Partly as a result, many members of the ordinary public just know that Labour was profligate, and accuse either Labour politicians or academic bloggers of lying when they suggest otherwise.

This leads to another point, which is the link between mediamacro and politics in a party political sense. When many people see me make the point above, they assume that I am doing so because I am being politically partisan. The reality is that fiscal policy is probably my main specialism within academic macro, and I have written an academic study of fiscal policy under Labour, so I feel it is almost a duty to point out the truth. If this were not the case, maybe I would just shrug my shoulders and let it pass. But there is a more general issue here: is mediamacro something that could only happen because it supports a particular political point of view?

This raises the issue of why mediamacro exists. I do not have a well worked out theory on this. In the UK it is natural to think the dominance of the right wing press is important, but that is less of an issue in the US, which suggests it is not a necessary existence condition. I have also talked about the influence of City economists in the reporting of macroeconomic issues, which is obviously true on both sides of the Atlantic. The absence of a clear locus for received academic wisdom on fiscal policy, in contrast to monetary policy and central banks, could be important. Is the fact that all three political parties in the UK are signed up to the unconditional importance of deficit reduction important? That depends a bit on whether you think Labour chose to go that way or were pushed by the media.

How important you think the mediamacro problem is seems to depend on how bad you think the 2010 austerity mistake was. But it should not be like this. Even if you think, as Tony Yates does for example (and there are many good macroeconomists who would take a similar view), that 2010 UK austerity was justified because of the particular situation of the time, the mediamacro problem is more generic. In the UK, all the major parties are currently committed to unconditional targets for deficit reduction, even though interest rates remain at their lower bound. That is just dumb macro, as Tony has argued elsewhere, but it remains unquestioned in the media. In a world where fiscal policy decisions are made by politicians, this matters.     


Thursday, 30 April 2015

Chaos theory

There is some evidence that the Conservatives have finally found a scare story that works. We probably will not know how large or long lasting it will be until after the election. However, as scare stories are generally myths, and I now have a professional interest in mythmaking, I thought it would be worth asking why this one has stuck whereas earlier attempts have failed. [1]

Here were some earlier but unsuccessful attempts.

1)    ‘Labour will bankrupt the economy, again’. Given mediamacro, this should have worked. But I suspect this line was ruined when Cameron started to promise to tax less and spend more and reduce the deficit. You cannot base your fiscal policy on home economics and then ignore the household accounts.
2)    ‘Labour will put up your taxes’ flopped, perhaps because voters didn’t mind too much if this helps save the NHS. A smaller state is just not popular, which is probably one reason why they had to make so much of deficit reduction.

3)    The ‘Miliband looks funny’ strategy fell apart when people realised he was rather better than much of the press made out. The problem here was that there was no half-truth to build a myth upon (beside a rather dark one), but the Conservatives believed their own propaganda.

So why has the Lab+SNP=chaos line worked? A myth it certainly is. If you want chaos, see what will happen to the Conservative party during the EU referendum. One scenario I have not seen discussed is that a new Con/LibDem coalition breaks apart after the referendum, either because Cameron fails to recommend staying in, and/or because large numbers of Conservative MPs defect to UKIP, which makes the coalition dependent on their support.

With my mediamacro experience, I can think of three reasons why this myth has stuck. First a successful myth has to be based on a half-truth, and the half-truth is that the SNP would have some influence on any Labour government. Not much, because to vote down a Labour government would be a huge gamble for the SNP. Their support in Scotland could disappear overnight if they could be charged with letting a Conservative government back in without due cause. But clearly there would be some influence, which is only right in a democracy.

Second, the non-partisan media finds it difficult to counter a myth when no major political party is calling it a myth, particularly during an election. The SNP have encouraged the myth: some would unkindly say because they want a Conservative government, but even if that is not true they want to talk up the influence they would have on Labour. Labour itself does not want to promote the idea that they could happily work with the SNP because they in turn want to scare former Labour Scottish voters from voting SNP. With no political party challenging the chaos myth, the media finds it very difficult to do so off its own bat. A few journalists like Philip Stephens in the FT can add some reality, but if politicians are not being challenged repeatedly on the news, then there is little to counter the formidable power of the right wing press.

Third, this is new territory, with few reference points, so people cannot use their own experience of similar situations in the past. The parallel with austerity would be the Eurozone crisis.

But before I convince myself, there may be something less myth like and more basic going on here: pure and simple nationalism. Although many on the left would like to believe that the Scottish independence referendum marked a new engagement with politics away from the Westminster elite, it could also just be another example of the political power of nationalism. And if nationalism can have so much force north of the border, it is not surprising that there should not be at least some echo of this in England. English feelings of resentment and unfairness might be perfectly justified, but their monetary and political importance is tiny compared to the huge differences between the political parties on other issues. But nationalism does not respect that kind of calculus.

So maybe this all has nothing to do with chaos theory, but is simply about a more basic strategy: divide and rule.

[1] There has been some criticism within the Conservative party about the negative character of their campaign. Why not focus on the positive achievements of the last five years? What is not clear to me is whether this was ever a viable strategy. In my own sphere I can think of one positive achievement, which was setting up the OBR, but I suspect I attach more weight to that than the average voter.


Wednesday, 29 April 2015

Mediamacro myths: summing up

The story presented in much of the UK media is simple and intuitive. The previous government messed up: they spent too much, and it left the UK economy on the brink of financial meltdown. The coalition came to the rescue: clearing up the mess was tough at first, but now it is all coming good.

In previous posts I have shown that this is almost complete fiction. The increase in the government’s budget deficit under Labour was all about the recession, which in turn was created by the global financial crisis. There was no prospect of a UK financial crisis in 2010, which meant that austerity was not something the government was forced to undertake. Reducing the deficit could have been left until the recovery was secure (and crucially interest rates had risen above their lower bound), but the coalition chose to do otherwise. As a result they delayed the recovery by three years, at great cost. Even since 2013 we have simply seen a return to normal growth rates: there has been no catching up of lost ground. In that sense growth under the coalition hardly deserves the term recovery, and we have seen an unprecedented lack of growth in living standards. Productivity growth has been non-existent, yet the government has feted the employment growth that is its counterpart.

The government’s claims of macroeconomic success can therefore be dismissed without saying a word about the nature of the GDP growth that has taken place. But what growth there has been is itself worryingly unbalanced, as a new report discussed here sets out. Growth is too dependent on consumption, there is not enough investment, and the current account deficit is very large.

A large part of the media sees their role as supporting the government’s line, however far from the truth it may be. For whatever reason, most of the remaining media has bought this line, and failed to expose it as fiction. Even a headline in the Guardian yesterday talked about “rip-roaring growth rates of 2013 and 2014” when growth in GDP per head in those years was at best just average, and growth in income per head non-existent.

It is still commonplace to hear media commentators say that the economy is doing great, and ask why the government is not reaping the benefit in terms of political support. In truth the puzzle is the opposite - given how poor economic performance under the coalition has been, and that this poor performance has hit most people in their pockets, the real puzzle is why so many people think the government is economically competent. And the answer to that puzzle in turn lies in the myths that mediamacro has allowed to go unchallenged. Perhaps the latest growth figures might begin to dent them, but a remarkable feature of these myths is that they seem impervious to actual data.

I coined the term mediamacro because I obviously find it strange that public discourse on the macroeconomic fortunes of the UK economy seems so different from what the data and simple economics would suggest. For once I can be the one handed economist that Truman demanded, because the evidence is so clear and the economics (what little there is) so uncontentious. But mediamacro has implications well beyond macroeconomics. If the media has been capable of distorting reality by so much for so long in this case, are there other areas where it has done the same, and what does that tell us about the health of our democracy?

Previous posts in this series

Tuesday, 28 April 2015

The wrong kind of political economy

Thanks to Google I get to see when someone writes about me, so I read an article by Ryan Bourne in CityAM. It basically says that while Keynesians keep saying that their models have been vindicated by the economic effects of austerity (but economists always disagree with each other blah blah), they have lost the political debate. In the case of the UK, even Labour is no longer Keynesian. While Labour are planning hardly any additional austerity, but the Conservatives are planning a lot, according to Mr. Bourne Labour are not justifying this less contractionary stance in Keynesian terms.

For the sake of argument, let us assume that Mr. Bourne is correct about Labour. We also need to ignore the SNP of course. Suppose Mr. Bourne is right that Keynesians have lost the political argument. This line is not new, with more authoritative newspapers having said similar things in the past. What should seem very strange is that Mr. Bourne and others do not appear to view this as a cause for concern.

It is a concern because Keynesian economics is taught to pretty well every student who ever studies economics anywhere in the world, and usually not as just one competing theory among many but as how the world works. Nor is it the case that academic macroeconomists are hopeless divided over the issue: a large majority on both sides of the Atlantic agree that fiscal austerity/stimulus reduces/enhances growth when monetary policy cannot offset its impact. Most major central banks use Keynesian theory as a basis for their monetary policy decisions. The reason for all this is that the evidence overwhelmingly backs Keynesian ideas, including that fiscal contraction tends to reduce output.

Given all this, if all three major UK political parties are ignoring Keynesian economics that would be a real worry. Now this might not worry Mr. Bourne if he was just one of these politicos for whom politics creates its own truth and that is all that matters. However he is in fact head of public policy at an outfit called the Institute of Economic Affairs. Perhaps, given the level of debate about fiscal policy in the media nowadays, that would be economic affairs of the more homely kind.

Mediamacro myth 8: employment growth

We have had the slowest recovery from a recession almost since records began, and a large part of that is down to the sharp fiscal contraction that the coalition government chose to undertake, despite there being no market pressure to do so. But, supporters of the coalition might say, employment growth has been very strong. This is an argument that is almost as ludicrous as the 2013 recovery vindicates austerity idea, but there is still a half-truth behind it. [1]

To see why it is ludicrous, you just need to note that - by definition - labour productivity is output divided by employment, and that over the medium to long run living standards are largely determined by productivity. So to try and take credit for strong employment growth despite lack of output growth is to take credit for poor productivity growth (or, in the UK case, the virtual absence of productivity growth over the last five years). Which is very close to wanting to take credit for the lack of growth in real incomes.

In short, it is output that matters, not employment. Employment growth due to output growth is good, but employment growth without output growth is not. To extol employment growth without output growth could be described as a luddite point of view!

The half-truth concerns the distributional impact of a recession. On average we are worse off in a recession, but those that really feel it are workers that lose their jobs. For a given level of output in a recession, it would be better if the pain was evenly spread through cuts in living standards and little increase in unemployment. So, if (and this if is critical) productivity growth just paused during a recession, but then made up for all the lost ground afterwards, that would probably be a good thing.

So, in that very specific sense, lack of productivity growth might be a good thing given the lack of a recovery, on the assumption that we get it all back again later. However I doubt very much whether the government would want to take credit for stagnant productivity during their term of office for two reasons. First, it probably has very little to do with them, and rather more to do with the flexible labour markets encouraged by their predecessors. Second, there are very strong doubts that we will get back all the lost productivity growth: the OBR is assuming we get back virtually none.

So to claim credit for strong employment growth is the same as claiming credit for poor productivity, and it is hypocritical to try to do the first and not the second. [2] Given that many economists argue that poor productivity growth is our number one problem right now, implicitly claiming credit for creating the problem in the first place is somewhat bizarre.

Previous posts in this series

[1] There are many reasons to doubt the ‘quality’ of the employment growth (see for example David Blanchflower (pdf)), but that is not my concern here, except in so far as that helps explain lack of productivity.

[2] Although this highly unusual lack of productivity growth after a recession pretty well coincides with the period of the coalition government, it is far from clear whether there is a connection or not. If poor productivity is down to firms using workers rather than capital because the recession plus austerity has pushed down wages, then there is a connection between austerity and poor productivity. However other explanations are equally possible, which is why it is called the UK productivity puzzle.