Labour’s dead cat bounce

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In my weekly survey of Britain’s general election, it does not look to have been a bad week for Labour. Their poll rating has hardened from the lower twenties to the upper twenties, and the leak of their manifesto moved the election agenda away from “strong and stable”, the Tory slogan, to policy choices.  Can Labour claw back further? I think not.

I hold fast to my predictions of last week that the Tories will achieve about 400 seats to Labour’s 170 or so. The Conservative vote is holding up well; the Lib Dem challenge is in the doldrums; and Tory prospects in Scotland look positive.

Labour in fact have done little to address their fundamental weakness – their lack of credibility. Take the manifesto. The final version is published today, with a lot of the media attention focused on the costings and how spending commitments are to be funded. Unlike the news media, I don’t like to use this medium to speculate, when those speculations can be turned to facts in a very short time. But it is clear is that this manifesto will be unchallenging. The leaks showed a lot of popular policies but very few new ideas. Labour spinners referred to it as “radical”. In only one sense could that said to be true: their idea is to raise levels of public spending substantially, and also taxes on businesses and people with higher incomes (I nearly wrote “the wealthy”, but actually that isn’t true – I am wealthy in the Labour conception, but have little to fear from their ideas of higher taxes). And, indeed, the whole enterprise is a challenge to the public policy consensus that the left likes to refer to as “neoliberalism”.

But this is radicalism by default. What we have heard so far of Labour’s promises is “no lobbyist left behind” policy formation. Every Labour supporting interest group seems to have come forward with their wishes, and these have been granted. When challenged about how this is to be paid for, and the answer comes: “somebody else”. There seems to have no serious question of choosing or prioritising. This is in stark contrast to Tony Blair and Gordon Brown in 1997, before Labour’s greatest ever electoral triumph. They had decided to hold to Conservative spending plans, and had spent most of the previous year or two saying “no”, while confining themselves to a quite limited and focused set of promises.

And that gets to the heart of the matter. Messrs Blair and Brown were not opponents of public spending. Indeed they oversaw a massive expansion of the public sector in their three terms. But they understood the need to appear to be credible managers in order to win public trust first. The public don’t like entrusting politicians with spending decisions if they can’t say “no” to their friends from time to time.

There is, in fact, quite an interesting debate to be had about what scope there is to increase public spending, and what sorts of taxes are needed to support this – and even the extent to which it has to be backed by direct tax funding. And since I believe that public spending must be expanded (if only from the logic of the late, great economist William Baumol who died recently), it is a discussion I really want to engage in. But Labour’s manifesto is not the right place to begin that debate. That would give it too much credit for coherence. Effective management is always about making choices between things that you want to do – Labour’s leadership shows no inclination to confront that truth.

So what explains Labour’s slight bounce? I have not seen much evidence to explain it, so I’m back to speculation. I suspect that it reflects weakness. Labour-inclined voters don’t have any sense that Labour will actually win, so they have little to lose by voting for them. They are open to be swayed by their local candidate, or the general principle of disliking the Tories.

This factor should help the Lib Dems too. The perception that the 2015 election was a close one was a disaster for them, as the Conservative national campaign were able to promote fears that they might let Labour in by the back door. This is still a problem that Lib Dem strategists have done little to address – and I have my doubts whether they will ever have the courage to do so. But that is a problem for another day. And yet Lib Dem poll rating are at best stuck, and may be slipping. The surge of new members when the election was announced has slowed to a trickle. What the party lacks is enough compelling reasons for voters to support it. They have one: an expression of anger at the result of the last year’s referendum on Europe. That plays well here in Wandsworth in London, where I’m expecting the party to do quite well. But only about 20% of the electorate at large now want to reverse the result of the referendum. Other Remainers are trying to move on, and are in the depression stage of grief over the result, or perhaps even acceptance. This leaves too small a pool of voters to fish in and win the seats the party needs to.

The Lib Dems next message that “we are the opposition”, based on the shambles of Jeremy Corbyn’s leadership, has some traction, but it is not enough in itself. It is yet another variation on the theme of “vote for us because we are not one of the other two” which is superficially attractive (and seems to play well in focus groups, given how popular it has been amongst the party’s professionals) but doesn’t get enough people across the line in the end. It may yet gain traction. If Labour do succeed in getting more people to think about Conservative policies (and their manifesto was successful in doing that), and if they are unable to maintain discipline themselves, then who knows? But I fear that the election has come a bit too early in the party’s revival for strong electoral results – though it will be a useful learning experience. I would urge all Lib Dem supporters who want to help to go to one of the small number of target seats.

In my Facebook bubble, I see growing support for anti-Conservative tactical voting. I place little credence in this. It is not clear what all this for. It may limit the Tory majority a bit, but that will change little. There is no credible coalition of anti-Tory parties. If there ever is one, it needs to be put in place long before an election with an agreed platform. Labour show no interest; they observe how the Conservatives have absorbed Ukip voters by crushing the smaller party, and they want to carry out their own version of that manoeuvre. And the critical task is to persuade people who want to vote Conservative to vote for somebody else – and talk of a “progressive alliance” does not help here at all.

And so I conclude that Labour’s relatively good week is what City traders used to call “dead cat bounce” – the sort of bounce you get when you hit rock bottom. There is no game-changing happening.


7 thoughts on “Labour’s dead cat bounce”

  1. When challenged about how this is to be paid for, and the answer comes: “somebody else”

    I see the problem. But what’s the solution? How would you explain to the public?

    We read the usual arguments that all election promises have to be “fully costed”. You must know, as an economist, that this is all stuff and nonsense.

    So, typically politicians say if we put N pence on income tax it will raise X billion in revenue. No it won’t! We can’t know that. If everyone pays more in income tax or VAT, or whatever, that means they will have to less to spend on something else. So even if a rise in income tax produces more income tax revenue, it probably will mean that VAT revenue will fall as the number of financial transactions falls.

    It may well mean that those involved in those lost transactions will lose their jobs or not earn so much. So income tax revenue may well not increase anyway. If Government has then to pay out more in JSA it may even come out worse than previously.
    So we need to consider spending and taxation in a slightly different light. All Government spending comes back as taxation revenue unless it is saved. So we can’t on the one hand consider savings to be a good thing and a government deficit to be a bad thing. The two are identical to the penny.

    It all seems pretty straightfoward to me. I’m sure it must to most politicians who aren’t without a certain level of intelligence but they seem reluctant to tell it like it is.

    1. Yes I agree that the way economists look at it is different from the general public, and that the politicians follow the latter. And that promises that spending commitments should be “fully costed” have an unreal element. But when crafting an alternative message we need to be very careful about what the important practical differences are.

      We use taxes to regulate demand. Raising public spending carries the risk of excess demand – and inflation, asset bubbles, excess private borrowing, unsustainable overseas financing, and such. The amount of tax needed to regulate demand is an unknown, depending on many things, some of which are unpredictable. True, it might be none. It may be even more than the incremental spending. One of the biggest risks is that politicians let excess demand run longer than it should – like Labour did in the mid-noughties (though I appreciate you don’t accept that – which sort of reinforces my point – it is so hard to agree when excess demand is happening!).
      So the pointed of costed spending promises is a bit of signalling. It shows that your commitment is firm enough for you to raise taxes to support it. The problem with Labour’s “somebody else pays” strategy is that it looks too much like free money and makes it look as if either their commitment to the promise is not that firm (all those vox pops saying “they’ll never do it”) or its commitment to the proper regulation of the macro-economy is weak.

      So I think that costed manifestos may be bit farcical on one level, but quite useful on another, to signal political resolve. On the other hand commitment to run the budget deficit or national debt at a particular level, is much more nonsensical. It is a signal of intent to manage the budget firmly – but it suggests that you do without taking macroeconomic conditions into account.

  2. “We use taxes to regulate demand”

    Yes I do along with that as you know. But that’s not what politicians say. They say, quite dishonestly, that they use taxes to raise the money they need to spend.

    Was demand excessive in the 00’s? If we look at levels of inflation and growth then that’s a difficult argument to make. But just about possible maybe. Taxation is only one lever used to regulate demand. So if we say it was excessive then it could be that monetary policy was too lax leading to excessive private borrowing. The same story in the USA too.

    So what would have happened if monetary policy had been tighter? There would have been less demand due to less build up of private debt. But, could lower levels of private debt have prevented the 2008 crash?

    And if we’d (ie us, the Americans, the Australians etc) wanted a tighter monetary policy but still the same level of demand we’d have had to have a looser fiscal policy. Or, we’d have had to push the pound, and the dollar, down to create the demand from our overseas customers. Would either of those options have led to a 2008 type crash too?

    1. I guess I’m a bit more tolerant of what politicians say – it is very hard to explain to the general voter actually how things work. In the long run it is true that taxes fund spending (i.e. you would not need latter would no happen without the former) – and it frames it like a contract, which is often helpful to getting democratic consent to taxation.

      Interesting point about monetary policy in the mid-noughties. Actually in globally very loose monetary conditions, thanks to surpluses from China and commodity exporters, this would have been quite hard – it would have taken the pound even higher, which would have caused problems in job-intensive industries. Tighter fiscal policy would have been a more sensible way forward.

  3. ‘Labour’s “somebody else pays” strategy’

    I really should say something about this. If the economy needs a boost to restore growth then you know very well that its isn’t about making someone “pay” for it. If Labour was to impose extra taxes on those of modest earnings, the level of aggregate demand would fall. This would defeat the object of the exercise. Labour is saying that the rich should pay, for political reasons, even though there’s no chance of getting anywhere enough money out of them. The savings are largely held by the central banks of the big exporters anyway.

    I suppose they could try sending a tax bill to the Bundesbank! But it doesn’t really matter. If the Germans aren’t spending the money they earn selling us stuff, then the UK government can just as well spend it anyway and not cause any inflation. That’s the right way to look at it. So the Germans aren’t paying and the UK population isn’t paying -not even the rich ones.

    In a way this isn’t a good time for Labour to win an election. Vince Cable and others are quite right to warn about a slump caused by the falling off of UK lending. The property market is flattening. Bad debts are rising. It will all be blamed on Brexit no doubt. But it could well be that the fall in the value of the pound has given us a bit of a boost to kept the wheels turning a little longer than they might have done otherwise

    I just looked up what the UK Govt has to pay on borrowed money. If we look at the long term yields for gilts, the interest rates are 0.1%, 0.49%, 1.07%, and 1.7% on 2, 5,10, and 30 year terms respectively. These seem pretty reasonable rates to me. And incidentally they are also four very good reasons for any publicly owned body to stay away from so-called PFI agreements. They are a complete rip-off!

    If you were a foreign investor who was concerned that Brexit meant ‘ruin’ or even significant ‘harm’ to our country, would you be prepared to lend at such low rates? So it would make sense for the UK Govt to do a bit more borrowing, at these very cheap rates, to take the strain and keep the wheels moving when the crunch finally does hit.

    1. I have to say that I agree with pretty much all of that Peter. Actually I have a lot of sympathy with the idea of taxing the rich, and companies, more – though this is best done as part of a global, coordinated strategy (working with the EU, dare I say). There is too much lazy money. Having said that, it is exactly the laziness of this money that is giving governments the opportunity to borrow so cheaply. The macroeconomics of taxing lazy money is not enticing, but well-designed it might have beneficial effects. My problem with the Labour manifesto is that it is less than the sum of its parts. It is designed so that interested parties can pick out something they like (one commenter of FB said that she preferred the Labour manifesto to the LD one because it had a policy on puppy farming). It is not a coherent programme for government.

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