Winner of the New Statesman SPERI Prize in Political Economy 2016


Tuesday 12 March 2024

On maxing out credit cards and magic money trees

 

“When you repeat a lie, you spread it.

When you spread a lie, you strengthen it.

When you strengthen a lie, you become an accomplice to it.

In this disinformation age, we must do better.”

George Lakoff


Keir Starmer, in commenting on the recent Budget, said “Britain in recession, the national credit card maxed out, and despite the measures today, the highest tax burden for 70 years”. The analogy of maxing out the nation’s credit card has been repeated by other Shadow ministers. Rachel Reeves, Shadow Chancellor, has joined many Conservative ministers in saying there is no ‘magic money tree’.


Anyone who knows any macroeconomics understands that these analogies are false. The nation does not have a credit card with an externally imposed credit limit that it can ‘max out’, and the UK government does have a magic money tree because it can create money. But are those of us who do know some (or rather a lot) of macroeconomics getting a bit pedantic in worrying about politicians who use these phrases for rhetorical flourish? After all, analogies are usually inexact, and if using inexact analogies gets across points to a lay audience why worry about this inexactitude?


Imagine, for example, if we forced politicians to be more precise. Rather than claiming that the government had ‘run out of money’ and ‘maxed out its credit card’, they would instead have to say that the government had almost hit their self-imposed borrowing limits. Rather than saying you couldn’t promise to spend this or reduce that tax because there is no magic money tree, politicians instead would say need to say that the government could create more money or borrow more, but that would add to aggregate demand which would risk higher inflation and so force the Bank of England to raise interest rates. You can see why speech writers, and authors of lines to take, prefer talking about credit cards and money trees, things most people can relate to that don’t involve macroeconomics.


Now of course those who know some macroeconomics will say that these false analogies were used by a Conservative government to persuade first the media and then voters to embark on the ruinous policy commonly known as austerity that began in 2010. But surely today’s Labour politicians would argue that purpose matters, and if these false analogies can be used for good, to finally get the party that imposed austerity out of office, why not embrace it. Use the enemies’ weapons against them.


Indeed, those who complain about politicians using these false analogies are in danger of being hypocritical. After all, the word austerity was originally used to describe the post-WWII situation in the UK, where rationing continued and didn’t finally end until the mid-1950s. Wasn’t co-opting that term to describe some (any?) cuts in government spending just the kind of rhetorical inexactitude involved in talking about magic money trees and national credit cards? Doesn’t using the term austerity create all kinds of difficulties. For example, is cutting government spending during a boom ‘austerity’? Are tax increases in a recession an austerity policy?.


OK, enough of playing devil’s advocate. I want to set out here why I think it’s important for people in the public domain to avoid false analogies, and in particular the false analogies discussed above. Let me start with the money tree, which any government with its own central bank has. Furlough during the pandemic was to a considerable extent financed by the Bank of England creating money (by creating what are called bank reserves). More generally, if a government really wants to do something it can, by creating money or borrowing. That is why money was borrowed or created during the pandemic.


So why do politicians say there is no money tree at their disposal? Because they don’t like telling the truth, which is that they don’t want to break their fiscal rule, or they don’t want the additional spending or tax cut adding to aggregate demand and leading the central bank to raise interest rates. That is a trade-off where many voters might take a different view, so it is much easier for them to say there is no money. It is a way of disguising a political choice, and not being honest about these choices.


So ‘there is no magic money tree’ is normally said by Chancellors or Prime Ministers who want an easy excuse for not spending money or cutting taxes. It is a straightforward deception to give politicians an easier life, and therefore it is difficult to defend its use. The phrase ‘maxing out the nation’s credit card’ is more often used by politicians attacking the borrowing record of others. Yet it too suggests politicians have less choice than they actually have. In this case it perpetuates the idea that governments can only borrow so much, and that they are currently hitting that limit.


This is nonsense. There is a limit to how much UK governments can borrow, but it is way above levels of debt ever historically recorded. (Debt was 2.7 times GDP after WWII.) [1] But it sounds more dramatic to say a government has maxed out its credit card than to say it is leaving insufficient headroom to meet its own fiscal rules. In the case of 2010 austerity, talking about maxing out the nations cedit card was a way of frightening people into believing it was more important to cut the deficit than help a fragile economic recovery. So again we have politicians deliberately misleading for political gain.


It really shouldn’t matter whether the politicians in question are those you support or not, when what they are doing is just wrong. Saying it is for a good cause is a poor excuse. Would you support a politician lying if it was for a good cause? What about the claim of hypocrisy by those happy to use the term austerity? I have some sympathy with that, and where the meaning is ambiguous I try to be clear about what I mean by the term. But co-opting an old word for something new is not the same as using false analogies, and there is not a huge difference between restricting parts of private consumption (1940/50s rationing) and restricting the consumption of public goods.


The use of these false analogies probably wouldn’t matter too much if we had an informed and informing media that was quick to correct these attempts to mislead. Unfortunately the complete opposite is the case. Because much of the media views macroeconomics as too complex and boring for its viewers, it laps up these incorrect attempts to relate fiscal policy to household budgets. I have discussed this at length in my book and many posts over the last twelve years.


Sometimes this media environment gives politicians little choice but to follow. But that is not the case with phrases like ‘no magic money tree’ and ‘maxing out the nation’s credit card’. No one is forcing politicians to use these phrases. Instead it is their own choice to do so. If they know they are false analogies that just mislead the public they shouldn't use them. If they don’t know that they are false, I'm afraid that is even worse.


[1] People will stop lending to a government that can create its own money if they think that government will choose to default (or if they think the government will direct the central bank to substantially increase inflation). That in turn happens when the political cost of raising taxes to pay the interest on debt exceeds the considerable political cost of default. Some of these issues are discussed in a paper by Corsetti and Dedola that I discussed here





Thursday 7 March 2024

How 14 years have shown the impossibility of shrinking the UK state

 

The Budget was predictable, and predictably boring. Hunt cut taxes, but the tax burden is still rising because of the tax increases already programmed in. Furthermore, he was only able to make the tax cuts he did (i.e. reduce the extent of tax increases) because he had previously pencilled in assumptions about public spending that were fantastically low. You can either portray those assumptions as Austerity 2.0 or just silly - I did the latter here.


However, with (I hope) the not silly assumption that this will be the last Conservative budget [1] for a while, I thought it might be useful to look back on the previous 14+ such events since 2010 to see if there are any general lessons we can draw from them all. One in particular runs through most of them and really sticks out. From 2010 onwards Conservative Chancellors have attempted to cut what they like to call the 'tax burden' by reducing the size of the state without any major changes in what the state is meant to do, and as the chart below shows (which includes the impact of yesterday's Budget) they have completely failed to achieve this objective. 



The professed aim of Austerity 1.0 from 2010 onwards was to reduce the budget deficit, but it quickly became clear that was not the only aim, because Osborne started cutting taxes in his budgets as well as reducing spending. (The initial VAT increase was deliberately designed to give the impression it was all about the deficit.) Yet despite cuts to corporation tax and personal tax thresholds, all Osborne could do was to keep the tax share stable at around 33% of GDP.


Then came Brexit and Boris Johnson. Johnson understood that trying to make Brexit work while continuing to shrink the state was politically impossible, so he undertook a partial and limited (in scope) reversal of Austerity 1.0 by raising spending on the NHS, schools and the police. This would inevitably mean a large increase in taxes, undertaken by then Chancellor Sunak for reasons he clearly set out here. Even without the intervention of Covid it is unlikely the additional spending would have been enough to start bringing NHS waiting lists down, so the government got the worst of all worlds in political terms: public services were inadequately funded yet the tax share was going up significantly.


When Johnson was thrown out of office, what little political sense he had brought on the size of the state left too. It was replaced by fantasy and deception, in that order. The fantasy was of course Truss, who had bought the Laffer curve idea that all you needed to do to get more revenue was to cut taxes because strong economic growth would surely follow. Very few people believe this, in large part because it’s not true. The deception is Jeremy Hunt, who is pretending he can cut taxes by using make-believe numbers for future public spending (Austerity 2.0).


Almost 15 years of trying to reduce taxes, and complete failure. There are many reasons why, but one for me stands out because it doomed the project to shrink the state from the start. The chart below shows health spending as a share of GDP in the UK, France, Germany and Italy since 1980.



Don’t worry about the details, just note that all four series are trending upwards by substantial amounts. There are many reasons for this trend, like people living longer or discovering new ways to help them live longer, but as yet we have not found anything to counteract health absorbing a steadily increasing share of national income.


If governments try to keep the health share constant (aka 'protecting it'), as the chart clearly shows the UK government did from 2010 until just before the pandemic, then the quality of healthcare provided for most of the population will steadily deteriorate. To avoid that deterioration, which is not sustainable politically, you have to pay more of national income into healthcare. If you have the NHS, that means a rising share of taxes in GDP.


Decades ago this trend rise in health spending as a share of GDP was offset by the ‘peace dividend’, with defence spending falling because of the end of the cold war. Those days have long gone, with no obvious replacement in terms of a major area of public spending where less and less money is needed.


None of this was unknown in 2010. The shrinking the state project was doomed from the start, and anyone familiar with these numbers knew it was doomed from the start. So why didn’t Conservative politicians realise this, and why are they still in denial about it? I think in 2010 at least there was a view among Conservatives that everything in the public sector was inefficient, and the way to improve efficiency was to squeeze resources or introduce market mechanisms. [2] Again there were international comparisons that suggested this wasn’t true, for the NHS at least, but the story fitted too easily with a neoliberal viewpoint.


However you have to ask if any Conservative who had realised the futility of trying to shrink the state would have been successful as politicians? It was and continues to be a message that Conservative members, press barons or donors don't want to hear. Look at how Sunak’s position has changed from one recognising realities as Chancellor to a Prime Minister who has to pretend he can get something for nothing. The way politics is done in the media doesn’t help either, where basic numerical facts like an international trend rise in the share of health spending in GDP seems too much for many political journalists to remember.


So the chances of the Conservatives giving up their obsession with tax cuts is close to zero. In addition the media will remain constantly surprised that UK tax shares are steadily rising. This is unfortunate, because in trying to do the impossible (reduce the tax share) the Conservative party has done a great deal of harm. Obvious harm to the public services, but also to the economy. 


Austerity 1.0 is a key reason why the UK’s recovery from the Global Financial Crisis recession was so weak, and austerity also played an important part in influencing the Brexit referendum result. The damage caused by Truss we all know, while the game played by Hunt/Sunak is in danger of preventing Labour doing enough when they gain power. The dire state of the NHS is also directly influencing the economy. As the OBR notes, the number of inactive working age adults has increased substantially since the pandemic, with many citing long-term illness. The OBR now expects no recovery in labour force participation over the next five years, making the UK quite different from other countries where post-pandemic participation rates have recovered. This seems quite consistent with the continuing squeeze on public sector spending. For more details on how poor health has a negative influence on the economy as well as wellbeing, see the reports from the IPPR's Commission on Health and Prosperity, and Bob Hawkings here.


While there will always be a debate about whether high or low tax countries grow faster, the UK's experience over the last 14 years show that trying to cut taxes by shrinking the state when it is impossible to do so is very damaging indeed. Unfortunately neither the Conservative party nor many political commentators in the media appear willing to recognise the damage these attempts have done to both social wellbeing and the UK economy. 


[1] I fear there will be one more Autumn Statement before the election, and because that will involve another year of nonsense public spending assumptions, it will give the government room within its fiscal rules for further tax cuts.

[2] What they also did was starve the NHS of investment, which was bound to decrease efficiency, and privatize increasing amounts of its provision, which reduced the quality of provision.   

Tuesday 5 March 2024

Rishi Sunak doesn’t want to talk about Islamophobia because he wants to use it

 This week I was going to post the final part of my ‘detoxifying government debt’ series, but Sunak’s statement from No.10 last week means that it will have to wait.


Lee Anderson had the Conservative Whip withdrawn because he said something wrong and didn’t apologise for it, but ministers were comically unable to say what was wrong about what he had said. They certainly didn’t want to say it was Islamophobic, although it certainly was. [1] Many commented that the Conservative party was reluctant to call Anderson’s words Islamophobic because that would expose the extent of Islamophobia within the party and its members.


I think it is worse than that, and these fears were confirmed by the Prime Minister’s No.10 lectern statement on 1st March. At first sight, and to most media commentators, that statement was a fairly standard call for unity and tolerance in the face of differences, and an attack on extremism. Much of it was that, but the statement bears closer inspection. All quotes until the final paragraph are from the statement.


The first point to make involves timing and context. The statement was given on the day that the Rochdale by-election result was announced, and that result was explicitly referred to at the start of the statement by Sunak as “beyond alarming”. Now try to put yourself in the shoes of someone who had voted for the winner in that by-election. You might have had many reasons, but what is currently happening in Gaza is likely to be one of them, if not the main one. As is often the case, you may have voted as much or more to ‘send a message’ than for the character of the person you voted for, and it is fundamental to a democracy that you can do so.


The Hamas attack on 7th October and the subsequent invasion of Gaza were inevitably going to lead to increased tensions, concerns and anxieties among Jewish and Muslims in the UK. It would be a statesman-like act from a Prime Minister to try and speak to those tensions and calm anxieties, including to those Rochdale voters. This is particularly the case when the UK government, and to a considerable extent the media, are not neutral. The UK supplies arms to Israel, and the government has withdrawn funding from UNRWA. It would be natural, therefore, for Muslims who take a different view to feel the need to make their voices heard, whatever you may think of the person they elected as their MP. [2]


In this context, saying that the by-election result was “beyond alarming” was hardly an attempt to empathize with the concerns of those voters, but instead a suggestion that their concerns were evidence of the extremism he was warning against. If that was not the intention you wanted to give, why chose this particular timing? [3]


But even before the reference to the by-election, we are given a strong clue about what the statement is really about. Sunak says

“What started as protests on our streets, has descended into intimidation, threats, and planned acts of violence.”

“Descended”? It is unbelievable to suggest that the peaceful marches that have taken place since 7th October in our capital cities have in any way caused any acts of intimidation etc. Why link peaceful protests to intimidation, threats, and planned acts of violence? Perhaps because that is a link you want to put in the mind of the listener.


At first the statement is full of appeals to pluralism and moderation, carefully coupling what Sunak calls “Islamist extremism” with that of the far right, but as it progresses it becomes clearer that the statement’s real intention is to link peaceful protests against what is happening in Gaza, reflecting the views of most Muslims and many others in this country, to Islamic extremism.


The first stage in that process of justifying this link is to misrepresent what the protests are about. He says

“Since October 7th there have been those trying to take advantage of the very human angst that we all feel about the terrible suffering that war brings to the innocent, to women and children to advance a divisive, hateful ideological agenda.”

But from the point of view of many on the peaceful protests, their concern about what is happening in Gaza is not just “human angst that we all feel about the terrible suffering that war brings to the innocent” but what an international court has found may amount to genocide.


The second stage is to suggest many legitimate concerns that many people have are in fact extreme. He talks about extremists who “want us to believe that our country, and the West more generally, is solely responsible for the world’s ills…and that we, along with our allies, are the problem.” Except plenty of people who are not extremists do see the government of Israel as the problem right now, and politicians in the US in particular who continue to unconditionally supply the weapons that are killing civilians. He talks about extremists who “claim that Britain is and has been on the wrong side of history, we should reject it, and reject it again”. Extremists who “tell children that the system is rigged against them or that Britain is a racist country”. This is casting the extremist net pretty wide, and I suspect deliberately so.


The third stage is to talk up the extremist threat. A speech designed to calm troubled waters would do the opposite, but this statement says “On too many occasions recently, our streets have been hijacked by small groups who are hostile to our values and have no respect for our democratic traditions.”


And then we have

“We must be prepared to stand up for our shared values in all circumstances, no matter how difficult. And I respect that the police have a tough job in policing the protests we have seen and that they are operationally independent. But we must draw a line.”

The idea that he is talking equally about the far right and Islamic extremists now disappears. Instead he talks about beaming “antisemitic tropes onto Big Ben”, support for “a proscribed terrorist group, like Hamas”, and calls “for the eradication of a State – or any kind of hatred or antisemitism.” He then adds 

“This week I have met with senior police officers and made clear it is the public’s expectation that they will not merely manage these protests, but police them.”

The threat from extremists has now morphed into the threat posed by peaceful protests against a possible genocide. He goes on [4] 

“And I want to speak directly to those who choose to continue to protest: Don’t let the extremists hijack your marches. You have a chance in the coming weeks to show that you can protest decently, peacefully and with empathy for your fellow citizens.”


It is a standard tactic of those who want to discredit protests, often to be found in the right wing press, to find the odd banner or chant that goes too far and tar everyone on the protest with that brush. Of course the organisers of large protests cannot police every banner that is raised or every chant that might be heard, but this is what Sunak now expects them to do, and he knows he is setting them up to inevitably fail. When they do inevitably fail he wants the police to “draw a line” and by implication act more forcefully than they have so far. Yet by all accounts the police have been active when they believe individual marchers are breaking the law, although the number of arrests remain tiny compared to the size of the marches. By suggesting the police need to do more Sunak is risking turning what have so far been well managed and peaceful events into something else.


Many have attacked the speech for its hypocrisy in ignoring Islamophobic statements from his own MPs, prospective MPs and the Islamophobia that is common among Conservative party members. But this treats the speech as what it pretended to be, a call for unity and against extremes, rather than what it actually was, which was much more dangerous. Rather than hypocrisy, on close reading the speech seems entirely consistent with the growing displays of Islamophobia in Conservative ranks.


The media, and the Labour opposition [5], like to present Sunak as a ‘moderate’ within his own party, constantly having to cope with the wilder statements of those to his right. In reality we have a politician about to enter an election where he is way behind, and where he seems prepared to do anything to reduce that polling deficit. From this speech it is clear that anything includes using what is happening in Gaza and the protests against it to reinforce prejudice and create a climate of fear among some voters that he hopes the government will benefit from.


When addressing police earlier Sunak said that “There is a growing consensus that mob rule is replacing democratic rule.” On the more hysterical pages of the right wing press, maybe, but in reality we are seeing peaceful protests against ever growing civilian deaths in Gaza. The Prime Minister wants the police to risk turning these peaceful protests into confrontations, confrontations that perhaps he believes his party can benefit from. It was not a speech seeking to heal divisions, but part of an attempt to inflame them for his own advantage.



[1] Anderson said “‘I don’t actually believe that the Islamists have got control of our country, but what I do believe is they’ve got control of Khan, and they’ve got control of London”. A useful thought experiment is to take what he said and replace Islamist by Jewish or Zionist and imagine it was referring to a Jewish mayor of London.


[2] More generally there is a clear gap between the stance of the media and the two main political parties in the UK on the one hand, and what polls suggest the public actually thinks on the other.


[3] It is telling that this part of the statement about the by-election was missing from the version posted on the government’s website, because it was described as ‘political content’.


[4] It is clear from this that he is talking about mass protests, rather than smaller groups outside MPs homes or offices.


[5] It suits both to do so. The Labour opposition can then claim weakness when he takes no action against these statements.