And into the general election

MPs here in Britain have just agreed a General Election on 12 December. I will be much more closely involved in this election than normal, as I am agent for the Liberal Democrats in Battersea, a seat that has become highly winnable for the party. Since I do not use this blog to spout party propaganda, it will be very hard for me to post much of interest on this blog in the meantime. So there will be a period of silence.

Is an election the right thing? The government does not have a majority and it is hard to see it getting significant legislation through. This is one way of trying to resolve that, though it may not. Each party has approached the election decision with their short term advantage primarily in mind (and all four main parties played a role). There are two main reasons not to, apart from the inconvenience of the time of year. On the government side many reckoned it was feasible to push through Brexit legislation, now that many Labour MPs are softening, and this would turn an election into a victory parade. On the opposition side there was a chance that this legislation might be changed to allow a further Brexit referendum, which many feel would be desirable before an election. Depending on which of these arguments you accept or reject, the election makes Brexit more or less likely to go through. I have no opinion on this.

All three main parties in England (Scottish politics is very different, and I am much less informed; Wales follows broadly similar trends to England) plan to put Brexit at the centre of their campaigns, alongside other arguments, depending on who they are talking to. The Conservatives will say “Get Brexit Done” to Brexit supporters and “Stop Corbyn” to others. Labour will say “Labour is the only Remain option” to Remain supporters, as our local Labour MP is telling us here in Battersea, and “reject Austerity” to others. The Lib Dems will also lay claim to Remain supporters, with its less equivocal stance, while presenting themselves as the only sensible party left now that Labour and the Conservatives have veered off to idealistic extremes.

How will it play out? Many voters are utterly disgusted with both Labour and Tory leaderships, and will be tempted vote Lib Dem. That is why the party is, astonishingly, in contention in places like Battersea, after generations in the desert. Will they be ground down by a relentless focus on “the two main parties” in the media, as happened at the last election, in 2017? The party starts in a much stronger position, in polling, money and organisational strength than in 2017, or 2015, come to that, so it should do better. But it seeks a radical lift-off in its performance. That is harder. There is evidence that Labour have been making some headway with their pro-Remain message since the party conferences, eating into Lib Dem support. That will come at a cost, though, as anti-Brexit parties eat into Labour support, for which there is also evidence.

The critical factor will be how the Labour leader Jeremy Corbyn and his team goes down with the public. His supporters point to a spectacular performance in 2017 once he hit the campaign trail. But that was in a very different situation. There are problems with Labour’s stance on Brexit if you start to press it, especially around their idea of renegotiating the exit deal, and then recommending its rejection in a referendum. But since the Lib Dems adopted their revoke without referendum policy (albeit only if they are in majority), Labour can present their policy as more moderate and democratic. I actually find Labour spokesmen a bit clearer on the details of their Brexit policy than Lib Dem ones.

But the main question about Labour is over the rest of their policy. Their manifesto is sure to be radical, though how many of the party’s preferred policies (like taking over private schools) make it there is uncertain. Personally I think current Labour policy is horrific, full of the worst ideas from the left. Their plans to nationalise railways and other industries, and roll back public sector outsourcing look like a sop to unions that will get bogged down very quickly. The idea of a “National Education Service” is doubtless meant to evince the warm glow that the National Health Service supposedly does, but in me it evokes the worst aspects of the NHS, politicisation, leaden management and useless user interfaces, for example, and not the good bits. And on top of that Labour’s leadership looks inexperienced on not up to executing such a radical platform successfully. If there were no Lib Dem option it I would sooner support the Conservatives, notwithstanding Brexit. But I am a creature of my class and age (I remember the 1970s); others could react very differently.

And what of the Conservatives’ non-Brexit stance? This mainly seems to be based on scaring people about Labour policies, but they are also trying to reassure people that they will provide more funding for popular public services, such as the police, the NHS and education. Clearly things have moved on from the period of uber-austerity from 2015 to 2018, but it is hard to trust them. That may not matter too much as the much of the public distrusts liberal public spending, unless it benefits them personally, which it mostly doesn’t. Arguments about Keynesian economic stimulus benefiting all tend not to cut ice, rightly or wrongly.

How will The Brexit Party do? TBP was rampant in the European elections in May, and present a tempting proposition to angry Brexiteers, of whom there are many. The usual view is that they will spit the anti-Brexit vote and impede the Conservatives. But the new Tory leadership under Boris Johnson, has done much to contain that threat. The fact that Mr Johnson has not kept his promise to implement Brexit on 31 October “do or die” may not help TBP as much as many thought. I expect few people believed him in the first place, and there are ready scapegoats. TBP might prove just as much a problem for Labour, and their very public leaning towards opposing Brexit.

And the Greens? They may benefit from an electoral pact with the Lib Dems and Plaid Cymru, but it is hard to see them having a major impact. Labour has pretty much shot their fox. Environmental issues certainly have more traction than they used to, but politicians from all parties have noticed. Labour in particular are trying hard to scoop up the angry young environmentalists.

It is all very hard to predict. If Labour start to do well, Tory scare tactics will gain traction and the Lib Dems will suffer. If Labour get stuck, the reverse could happen. Most people think that the SNP will do well in Scotland at the expense of both Conservatives and Labour, though the Lib Dems could make some limited progress there. It will be interesting to see how well the Democratic Unionist Party will do in Northern Ireland, after their very prominent role in this parliament. The betting markets show a Conservative victory and a hung parliament as nearly equally probable at about 45%, with the former having an edge. I don’t disagree.

The inflation condundrum: orthodox economics under challenge

Last week The Economist published a special report on the world economy by Henry  Curr, who took as his subject the strange behaviour of inflation statistics. This is a worthy topic, but, all too typically of that news magazine, he retreats from saying anything too radical. And yet radical thoughts are warranted.

This is because, when economic orthodoxy was reformed after the nightmare of the 1970s, inflation took a central role. The core tenet of this orthodoxy is that the main way of managing the booms and busts of a country’s overall economy is something referred to as “monetary policy”. I use quotation marks because the semantics of the idea have become a problem: what sounds like one thing ends up by being another. By and large it has come to mean, in the orthodoxy, the management of interest rates in the domestic currency. The idea is that by lowering interest rates (“loosening”), you increase levels of aggregate demand in the economy, and by raising them (“tightening”) you reduce it. This, it is suggested, is a much better way of managing the economy than through taxes and public spending (fiscal policy – at least this piece of the jargon is well-defined), whose effect on demand is more direct, but brings with it problems of political management. How do you tell when policy needs tightening or loosening? Well, inflation, of course. It becomes too high if policy is too loose, and too low if it is too tight. The ideal method of managing the economy is through an independent central bank with an inflation target.

Buttressing this belief is another one: that the primary driver
of inflation is public expectations. This was an important theoretical
development, largely driven the economist Milton Friedman, after the
“stagflation” of the 1970s destroyed the previous understanding that
inflation  depended on the tightness of
the labour market. Inflation expectations interact with monetary policy and the
combined result dictates how well the economy as a whole operates. If inflation
expectations are high, and monetary policy is tight, then you have high
inflation and high unemployment. In a well functioning economy the central bank
maintains inflation in a Goldilocks zone of about 2% while keeping economic
growth ticking over at some natural healthy rate driven by productivity and
changes to the size of the workforce, keeping unemployment low. The central
bank anchors public inflation expectations because the public know they will be
punished by high interest rates and unemployment if they start asking for big
pay rises. This is a caricature, but the point is that inflation is central to
the story.

Which means that when inflation starts to behave strangely,
the whole edifice is threatened. Or it would be if the power of orthodox
thinking did not exert such an iron grip on policy makers. Mr Curr points out
that inflation has indeed been behaving oddly, but fails to point out that this
undermines the evidence for orthodox economic beliefs, meaning that more
radical ideas need to entertained.

How is inflation behaving oddly? In the developed world, and to a lesser extent elsewhere, inflation is strangely dormant, and does not seem to respond to changes in interest rates or less orthodox monetary policy, and neither to fiscal policy, to the extent that it has been tried. He discusses some reasons why this might be. Globalisation might mean that inflation is dictated at the level of global economies rather than national ones; the link between wages and prices has been loosened; technological developments have so changed what we buy and how that measuring prices has become arbitrary. This analysis is fine as far as it goes. What it boils down to is that prices and wages are determined in a radically different way to the 1970s, which provided the evidence base on which the current orthodoxy is based. Then large trade unions and manufacturing businesses, such as car makers, loomed large over the whole process. Now both are much diminished, while a vast new labour reserve in China has entered the picture, exerting its influence in all sorts of direct and indirect ways. The giants of modern industry, Google, Apple and so on, employ very few people compared to the old days of Ford and General Motors, and most of their manufacturing, such as it is,  is done outside the countries where product is sold.

Common sense suggests that when the way economies function changes, you have to manage them in differently. Alas economists prefer the analogy that managing an economy is like driving a car: you don’t have to worry what is happening under the bonnet. What happens under the bonnet of a car has changed a lot since the 1970s, but you still drive it in much the same way. So it is with economic management, Mr Curr seems to say. Managing inflation expectations is still the central problem in his view. They are too low for monetary policy to work properly and need to be jogged up somehow. This probably involves more global coordination. He suggests that fiscal policy needs to play more of a role in economic management, and that central banks should target nominal GDP rather than inflation (an idea I first tread about over 40 years ago). But he dismisses the idea of Modern Monetary Theory (MMT), which gives fiscal policy a central role, as “wacky”. To my mind it is no wackier than the idea, popular among orthodox economists, that policy makers should raise the level of inflation so that negative real interest rates can become a tool of their beloved monetary policy.

But Mr Curr avoids talking about two questions that really
need to be addressed. The first is that if inflation is anchored to a low and
fixed level, then what other consequences are there of an overheated economy?
And hows do they matter? An obvious one is a current account deficit (i.e.
importing more stuff than you export), but when some countries, notably in the
north and centre of Europe, seem to adopt a surplus as a matter of public
policy, that might not be so dangerous. The UK has been running a huge current
account deficit for years will little obvious ill-effect. It is all very
ill-understood. What is clear to me is that the answer lies in the complexities
of the global financial system. That much was shown by the financial crash
following 2007, and yet economists are strangely reluctant to take this on. The
orthodox belief about the financial system is along the lines that “it all nets
out to zero” and so they don’t need to worry too much about it. The crash was a
malfunction of the car’s engine that needs a mechanic to fix, and doesn’t
change the way you drive the car.

And this leads to the second question, which is what is the proper role and scope of monetary policy? There are some disturbing questions about the orthodox interpretation, which focuses so heavily on the short-term interest rate charged by central banks to commercial banks. The era of monetary policy has seen an explosion of private sector debt, which is one of the things that destabilised the system in 2007. The first question is whether this really is more benign than the explosion of public sector debt feared by those economists in the 1980s. It has promoted greater inequality between rich and poor, and between generations (since one of the collateral effects has been an inflation of the price of land, largely held by the elder generation).

In fact I think that monetary policy should not focus on inflation, but on financial stability as a whole. This is happening in practice, but the institutional mandate is unclear, which make it much less effective. Secondly I suspect that the MMTers are right that fiscal policy are right that fiscal policy should play the central role in the regulation of aggregate demand. Where they are wrong is ascribing inflation as the primary warning signal for overheating, for the same reason as this is wrong for monetary policy. If it provides a signal at all, it will be too late. They also seem blasé about the political risks.

Perhaps  Mr Curr’s article represents an incremental advance towards such a change in thinking. But it is hard not to be disappointed that orthodox economists are so little interested in the evidence for their core beliefs and unwilling to subject them to more fundamental challenge.

The Brexit endgame: the two mostly likely outcomes for 31 October

Britain is due to leave the European Union on 31 October, but there is no agreed deal about how this is to happen. Nevertheless, the government insists that it will happen on that date come what may. We’ve been here before, when when Britain was due to leave on 29 March, only for it to collapse at the last minute. What will happen this time?

The first question is whether the UK can get a deal in time. Government supporters say that the EU will buckle at the last minute because the consequences of leaving without a deal would be so dire for them. The one thing that could spoil this, according to this narrative, is if the EU are convinced that the UK is so scared of a no-deal itself that it would ask for an extension. This the EU would accept because secretly they want Britain to stay in, and the constant game of deferral is the only way to keep this possibility in play, while the pro-EU forces gather strength in the UK.

According to this version, the Benn Act, which would force the government to ask for an extension if a deal is not forthcoming by 19th October, is a shot in the foot, which guarantees that the EU will call the government’s bluff. They hint that there is a way around it. What might this be? Perhaps they can persuade one of the EU awkward squad, like Hungary, to veto an extension. But the Hungarian government picks its fights with the EU carefully and it isn’t clear what the upside for them would be. But, then again, if there was no clear rationale for an extension, such as waiting for an election or a referendum, they might be pushing at an open door. Other EU countries are getting fed up with the charade and they might think that a no-deal will work to their advantage; the real hurt will be concentrated in only a few countries.

But could the EU offer Britain anything its government and parliament could accept? The conventional wisdom is that if the EU gave way on the Irish backstop, then a parliamentary majority could be found. The government also wants to point the political declaration part of the deal towards a Canada-style free trade deal, rather than the closer relationship that its predecessor under Theresa May had advocated. Officially the EU has no grounds to oppose this, but they may secretly worry that this would undermine the Single Market in the continuing EU, given the UK’s proximity compared to Canada. Still, that issue can be dealt with later. It is the backstop that is the crunch issue for now.

Here there is a gulf in the way the two sides look at this, or at any rate between how the UK and Irish governments do. On the British side, the EU referendum applies to Northern Ireland by virtue of its membership of the UK. They also take the view that being a member of a customs union is an unacceptable loss of sovereignty, and that special treatment for the province would undermine the integrity of the UK. So the Irish government has just got to lump it; they simply have to accept the Will of the People. The Irish view this differently. To them the North never assented to Brexit, and would almost certainly be happy with some sort of fudge that created a customs border in the Irish Sea. The British government is simply behaving like a colonial occupier in forcing this unwanted policy on an unwilling province, with only the support of hated colonial hardcore, represented by the Democratic Unionist Party (DUP). They are sick that Brexit has undermined the Northern Ireland peace settlement, as this was based largely on the ambiguity that arose from the membership of the EU of both nations. This narrative goes to the heart of Ireland’s idea of itself, and they might well be prepared to accept the pain of no-deal rather than buckle to the demands of what they see as British arrogance, aided and abetted by the most toxic politicians on the island. With such a gulf in political perceptions it is hard to see how a deal can be reached that will get through the British parliament, as the Irish government has an effective veto.

So, though doubtless the EU is more flexible than it lets on,
getting a deal that sticks looks too big an ask. The next question is whether
the result will be a further delay or a crash-out. The surest way of securing a
delay is for Boris Johnson’s administration to be turfed out and some form of
short-term government replace it, pending a general election. But there is a
big problem with this. While there is a clear parliamentary majority against a
no-deal, this is an awkward coalition between those that want Brexit to happen
with a deal, and those who don’t want Brexit to happen at all, subject to a
referendum. That makes it hard for such a temporary government to agree on
anything useful. It surely could not take forward a referendum before any
election. And there is a further problem, who would lead it? The Leader of the
Opposition, Jeremy Corbyn has, justifiably or not, become a toxic figure in British
politics, and it is highly unlikely that he can command a parliamentary majority
even for a short-term government. This is regardless of how the growing number
of Liberal Democrat MPs view the matter, but it would be fatal for that party
to lend him their support. And yet so far Mr Corbyn insists that it is him or
nobody, based on a not dissimilar political calculation.

So if Mr Johnson cannot be ejected from office, might he ask for a delay, as required by the Benn Act, and go for an immediate general election? This is a real possibility. The conventional wisdom is that if he did so he would be fatally open to attack by The Brexit Party (TBP), who were so devastatingly effective as gathering Tory voters in the May European elections. But I suspect the government is slowly winning a battle of attrition with TBP, and that party could pose a greater threat to Labour, and help the Tories in Labour seats. The will be able to blame the “remoaners” – whom they will have purged from their own party.

And so this boils down to what might happen in a general
election, as this will lie behind all the political calculations. As things
stand things are looking up for the Conservatives. Labour is losing traction,
partly because of the awkwardness of its Brexit policy, and partly because Mr
Corbyn has such a low standing with the public. The Liberal Democrats are doing
well, and this could cost the Conservatives a lot of seats, and the SNP are set
to reverse the Conservative revival in Scotland, but the Tories could do well
enough elsewhere to make up for this.

But two questions hang over this analysis. How might a no-deal Brexit alter things? The conventional wisdom is that it would puncture TBP overnight, and that is probably right. But would the Lib Dems benefit from a Remainer backlash, or would they lose out, like TBP, because of the failure of their signature policy, to stop Brexit? On both counts this could work for Labour. The second question is whether Labour’s socialist policies and railing against “Austerity” will gain the party traction once the election gets underway, as it apparently did in 2017. Personally I don’t think it will, but that is not based on any clear evidence. The Labour leadership presumably take a very different view; but I suspect the Tory leadership think that the Labour manifesto will be another suicide note, like its 1983 manifesto, according to legend (and which accords with my memory of 1983). That led to a Tory super-majority.

That leaves two main possibilities. That the government succeeds in engineering a crash out on 31 October. How quickly this will be followed by an election is hard to say, just as what the short term impact of a crash out would be. The other is that the government gets another deferral and goes to the country straightaway. The result of that will either be a Tory majority or yet another hung parliament.

So the anticlimax of 29 March looks very unlikely. One way or another the country is heading for a momentous reckoning.