Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 21 December 2017

Voting Labour isn’t going to turn the UK into Venezuela

but mainstream economists should make sure they are getting a hearing

It is tempting to laugh at the rhetoric of Conservative politicians or journalists when contemplating a possible future Labour government. As John Elledge writes, it isn’t long before Stalin or Trotsky or Venezuela is mentioned. As he notes, this is not a terribly clever tactic, particularly as many of the measures proposed by Labour are (by design) pretty popular. As Stephen Bush points out, the problem for the Conservatives is not that ‘young people’ have not learnt about the evils of communist regimes, but that this group are not impressed by Brexit or their wages and for many buying a house is something their parents generation did.

Yet this kind of hyperbole is not confined to politicians or journalists on the right. When John McDonnell, Labour’s shadow Chancellor, said at their party conference that they were ‘war-gaming’ for eventualities if they gained office like a run on sterling, I thought this showed mild paranoia. I was wrong. After I wrote that sterling was far more likely to rise at the prospect of a Labour government (standard macro: more fiscal, higher rates imply stronger currency), Buttonwood of the Economist wrote that there were at least five reasons why sterling might collapse, most of which involve some form of capital flight.

Although Buttonwood was careful to base analysis on measures that Labour proposed in 2017, I’m sure I was not imagining a subtext about what else could hard left politicians do. You can read much the same from some on the centre or soft left, who have learnt through experience to be wary of the hard left. Nick Cohen knows better than to call Labour’s new mass membership all militant entryists, but instead he says they are innocent (but should know better) lambs flocking towards wolves.

With language like this flying around, it is best to look for solid ground. In parliament Labour is a centre left party led by the hard left, to use popular labels. For that reason it would be impossible for it to pursue a hard left programme, and the leadership knows that. Contrast this with the current governing party: half soft, half hard right, with the latter having the upper hand because of the membership. The Conservative party’s ethos is such that the hard right have imposed a ruinous policy on our country without challenge, which actually did produce a collapse in sterling. Fortunately many Labour MPs have less loyalty and perhaps stronger principles, and would not allow anything similar if they were in power. As a result, I find pandering myths about Venezuela dishonest to be frank. If you want to fret about deselection, I suggest you talk to Nadine Dorries.

As far as City scare stories are concerned, as I indicated earlier and Ben Chu confirms, you will always be able to find those predicting doom. One of the refreshing things about this Labour leadership is that they do not cower defensively at such attacks, but come out fighting. As Corbyn’s video could have added, it was City economists who told us that austerity was necessary because otherwise there would be a flight from UK government debt. They were horribly wrong then, as interest rates on debt fell, and they are likely to be wrong again with new stories about capital flight under Corbyn.

While talk of Venezuela is ludicrous, there is a more interesting question about where the influences on future Labour policy are coming from. To set the scene, there was a recent prank outside the LSE designed to suggest heterodox economists were the Luther to economic mainstream Catholicism, and this was followed by a column from Larry Elliott in the Guardian. Now there are plenty of things to criticise about economics, but these are not them. As Frances Coppola recounts, the ‘economics reformation’ document is embarrassingly bad. If you want to read a short but to the point and well written response, see here.

So, in case you thought otherwise, mainstream economists do not spend their time attacking any form of market intervention, but instead try to design efficient market intervention. As I have argued many times, most mainstream macroeconomists did not endorse austerity, for the simple reason that textbooks and state of the art models suggest it would be a very bad idea. But there are some (not all) heterodox economists who would like you to believe otherwise.

What has this got to do with a future Labour government? Christine Berry presents a comprehensive account of who is shaping future Labour policy. It contains the following paragraph.
“John McDonnell’s Council of Economic Advisors, set up during the first days of the leadership, was a valiant effort to give the party’s economic policy some heavyweight academic backing. But many of its members were not natural Corbyn supporters, and ran alarmed from the public ridicule heaped on the leadership in the early days – resulting in the Council being largely disbanded. Academic input now seems to be ad hoc rather than systematised.”

That is not how it happened. It is true that some of us had to suffer some public ridicule when we joined, but that just reflected badly on those doing the ridiculing. The breakup of the Council was inevitable after the EU referendum. It is hard for any group of serious economists to publicly advise in such a forum any political party that appears to support a Brexit policy that is doing (see Chris Giles here) so much damage and could do much more.

The understandable wish of many heterodox economists to have an influence on Labour policy does mean there is a potential competition for influence. Will Labour policy be based on policies derived from mainstream analysis, or those favoured by some heterodox economists? It would be wrong to exaggerate this competition: most mainstream economists agree with most heterodox economists about austerity, for example. But there are some clear differences. (In some ways you see something similar on the right, where City economists compete with mainstream economists for influence on Conservative party policy, which is one reason Conservative macroeconomic policy can produce major disasters.)

Ann Pettifor has an article about why business would do well under Labour, which invokes some of the points made in an earlier Financial Times piece. Once you discount the scare stories, I agree with Ann that the economy and therefore businesses will do much better under Labour than under the Conservatives. But her article contains an interesting remark which I think tells us something about the current leadership. Ann’s says
“Here I must acknowledge a disagreement with Professor Simon Wren-Lewis, of Oxford University, who advised Labour to adopt a fiscal rule that once again prioritises monetary policy …”

Ann follows the heterodox MMT school that favours using fiscal rather than monetary policy to stabilise output and inflation. Of course both Ann and I were on Labour’s Economic Advisory Council, and so it is obvious that there was a similar discussion in this group.

The fact that McDonnell chose a more conventional but still innovative approach (which happened to be the one I put forward), and has also stressed the importance of central bank independence, shows us two things: he has a distinctly conservative streak, and he wants Labour not only to win but to be successful in economic terms. But while McDonnell may have opted for a mainstream approach on monetary and fiscal policy, there is still plenty to play for in other areas. I am not suggesting that mainstream economists should always win when conflicts occur, but it is important for mainstream economists not to arrive late to these battlefields, or worse still wait for politicians to read their papers.

Tuesday, 19 December 2017

The political consequences of Brexit Transition

Jacob Rees-Mogg is apparently the bookies favourite to succeed Theresa May. It is the same Rees-Mogg who has declared the UK would become a vassal state if we accepted a transition period under the terms on offer from the EU: staying in the Customs Union & Single Market (CU&SM) and accepting all the rules therein (the full Acquis, to use the technical term). I think the vassal state remark means he does not like the idea.

In one sense this is all rather silly. As with the first stage agreement, the Brexiters will march Theresa May up the hill only for May to march them back down again as the reality of the UK’s position becomes clear. As ever, the logic of Article 50 means that the EU can dictate terms. The Brexiters probably understand this, but they have an eye on who will replace May so they have to play the game: Johnson played catch-up on the vassal state meme pretty quickly.

There is a deeper and much more serious concern about the transition phase. A much simpler and logical alternative to a transition period would be to extend Article 50 until the outlines of any future trade arrangements were clear. It is the Brexiters who will have none of this. The transition phase is itself a creation of the Brexiters, and their fear that parliament or voters will change their mind about leaving the EU. What this amounts to is another piece of deception, or perhaps self-deception. The UK is being forced to leave without being told anything about the final deal, including whether freedom of movement will be curtailed in any way.

It is a deception because the nature of the final deal is in reality already clear. I last wrote about the Brexit negotiations in the days before a first stage agreement was finalised, but I still wrote:
“Having signed up to staying in CU&SM as a default, the EU has zero interest in concluding any other kind of agreement, particularly as it will not safeguard the border. It will just be a matter of time before the arrangement whereby we stay in the CU&SM is formalised.”

I was a little nervous about writing that, but I was relieved to see that other economic realists reached similar conclusions. (Economic realists is a term due to Alasdair Smith, to contrast to the magic realists in the government and elsewhere. See also Jill Rutter.) This result, whereby we stay in the CU&SM, apparently goes by the name of BINO: Brexit in name only.

I doubt the government (by which I mean Davis and May) sees it this way, partly because they still have faith that the cavalry, ridden by German car exporters, will come to the rescue at some point, and the larger economies in the EU will put Irish concerns over the border to one side. But why should they? The best result for the EU is BINO, and what the first stage agreement shows is they can get it, because at the end of the day the UK will fold.

As Rick explains, the Ireland border constraint may still allow some flexibility as far as the single market for services (rather than goods) is concerned. Of course there are good economic reasons why we would want to stay in the single market for services. The only point of trying to negotiate not to be from the UK government’s point of view would be if that allowed some kind of opt out from freedom of movement.

However, if there has been one overriding mistake that even the economic realists have made throughout this process, it is thinking too much about what the UK’s options are and too little about what the EU will tolerate. The moment it was clear that the Irish border question was a first stage issue for the EU, talk of a Canada+ deal should have been quietly forgotten. Equally the key question now is what tinkering with the single market, if any, the EU will allow and whether anything will buy flexibility on freedom of movement.

In an ideal world, I would agree with Jean Pisani-Ferry who writes that it should. Once the Eurozone was formed, the EU should have thought more seriously about a two-speed EU or whatever you want to call it. Besides the UK, both Sweden and Denmark do not wish to give up an independent currency, and Norway, Iceland and Switzerland have very close relationships with the EU. Unfortunately, however, I suspect what will drive what the EU will tolerate with Brexit is the need to remove any temptation for any member to exit. So rather than thinking about what options the UK could go for, it makes more sense to think of final arrangements that everyone in the EU can agree leaves the UK at a disadvantage compared to being a member.

Would an arrangement which involved being partially in the single market and ignoring free movement be such a relationship? This must be questionable, because so many in the EU see free movement as integral to the single market. Although being out of the single market for services would be a big economic cost to the UK, so is restricting EU immigration. What matters are political costs, and such a deal looks too much like the UK gaining something significant by leaving.

In contrast BINO is a relationship the EU would be happy with, because following EU rules but having no say in those rules would appear obviously worse to any politician than being a member. It will certainly appear that way to any Brexiter. If Rees-Mogg calls the UK under a BINO transition a vassal state, what is he and others likely to think of a permanent agreement along these lines? It would be the ultimate humiliation for Brexiters.

What can they do about it? They could go for the nuclear option, and quickly trigger a leadership contest. But this close to us leaving the EU, MPs may persuade May to stay on (for the moment at least), and May might then win a contest among Conservative MPs, and as a result there would be no election involving the membership. A safer tactic for Brexiters is to look towards a leadership contest after we have actually left the EU i.e. during the transition period. [1] But the road ahead is full of minor humiliations, like the end of the ‘nothing agreed until everything agreed’ myth. Who knows what they will be provoked to do, or their backers and right wing press will provoke them to do.

If BINO is the final destination, this should in an ideal world give Remainers a very strong weapon. As David Allen Green suggests, they can constantly ask what is the point of this Brexit? But we are very far from an ideal world. Besides Remainers, the group that should see most clearly that BINO is obviously inferior to remaining in the EU are MPs, [2] but they are still bound by the will of the people. What they should do is vote to extend Article 50 until the nature of the final deal is clear, but while this can still be portrayed as frustrating Brexit they will not. Not enough of the public will change their minds because the government and the media, with the usual exceptions, will do all they can to obscure BINO as the ultimate destination, and the transition period will help the government to keep its magic realism going. 

[1] I have previously assumed that May would not be allowed to fight the next election. But if the logic I describe above still holds in 2022, she might yet. It will mean I underestimated the Conservative zugzwang.

[2] Just as a single politically binding referendum was absurd because it allowed a vote to leave without knowing the destination, so giving MPs a final say on the deal before we leave in 2019 is pointless because the government will not make clear the nature of the final deal. 

Saturday, 16 December 2017

The politicisation of immigration

This is based on the UK experience, but I think some of this will also apply in the US.

Why do right wing politicians push an anti-immigration platform? The obvious answer is that immigration is an important concern to their voters, and that is certainly correct. However I think there is an additional factor, which is illustrated by this interesting graphic from a recent Financial Times piece by Sebastian Payne.

Look at the right hand panel, based I believe on British Election Study data. This is the two dimensional way of representing political views I have discussed before. What we call the vertical axis can vary (culture, identity): I prefer the labels ‘social conservatives’ and ‘social liberals’. *** Conservative voters tend to be right wing and socially conservative. But Labour voters, while clearly left wing, include an important segment that are also socially conservative. As a result, if right wing politicians can make elections about issues that are important to social conservatives (law and order, immigration, race and abortion in the US) they have a chance of picking off Labour voters that would otherwise vote for a left wing candidate.

Immigration is particularly attractive to right wing politicians for a reason I explored in a recent post. There is a common misperception that immigration brings economic bads like lower wages and reduced access to public services. Right wing politicians therefore have a chance of persuading Labour voters to substitute their economic concerns away from supporting a left wing candidate into supporting an anti-immigration candidate on economic grounds.

The standard story perpetuated by the broadcast media in the UK is that heightened concern among voters about immigration over the last decade is a response to high numbers. However it was more than that. The Shifting Ground study has an interesting chart shown below.

The blue line is the importance that voters attach to the issue of immigration. The grey line are the number of migrants coming into the UK. The black line are the number of news stories about immigration in the print media. (See here for the source.) The standard story suggests the blue line (importance) responds, in the first instance with a few years lag, to the grey line (immigration numbers), with the black line (news stories) reflecting people’s concerns with no lag at all. But it is obvious that you can tell a very different story: people’s perceptions about the importance of immigration reflect what they read in the press.

This different story, where the press leads opinion, makers much more sense. Why the long lag between the increase in immigration in the late 90s and public attitudes about the importance of immigration? As is well known, public concern about immigration tends to be greatest in areas where there are least migrants. In a poll commissioned by the Sun newspaper in 2007 only 15% said that migrants are causing problems in their own neighbourhood, while 69% said that migrants were not having a strong local impact, either good or bad. There is a nice story Nick Clegg tells on this:
“Years ago, before I became an MP, I was knocking on doors in Chesterfield, Derbyshire – this was at the height of the controversy about asylum seekers being dispersed around the country when Tony Blair was in power. The tabloid newspapers were going nuts about it every day. I remember speaking to a guy leaning on the fence outside his house and saying: “Any chance you’ll vote for the Liberal Democrats?” And he said: “No way.” And I said: “Why not?” And he said: “Because of all these asylum seekers.” And I knew for a fact that not a single asylum seeker had been dispersed to Chesterfield. So I said to him: “Oh, have you seen these asylum seekers in the supermarket or the GP’s surgery?” And he said something to me that has remained with me ever since. He said: “No, I haven’t seen any of them, but I know they’re everywhere.” You can’t dismiss the fear, but how on earth are you supposed to respond to that?”

Here is a more recent example.

The Shifting Ground report also looked, in 2004, at what best explained whether voters thought high immigration was important as a political issue. The best explanatory variables were readership of the Mail, Express and Sun, in that order. All three were better predictors of concern about immigration than whether people voted Conservative, which reinforces the point that immigration is a way for right wing politicians to gain votes from ‘natural’ Labour voters.

If you think about it, the idea implicit in the standard story that voters were observing greater immigration and as a result expressing concern, which the print media simply expressed, is slightly incredible. It seems unlikely during this period that voters were looking at official data: voters anyway tend to grossly overestimate the number of immigrants. A much more plausible story is that they were reading their papers. It is important to stress that these papers were not ‘brainwashing’ their readers, but instead playing on eternal fears about outsiders, particularly if these outsiders are seen as cheating the system.

Why would the print media start writing more stories about immigration? You could say they are just reflecting the numbers, again with a rather long lag. A more plausible explanation is political. In 2001 William Hague talked about Tony Blair wanting to turn the UK into a ‘foreign land’. In his 2005 General Election campaign, Michael Howard put immigration at the heart of the Conservative Party’s general election campaign. Tim Bale discusses these and later political responses here.

The right wing tabloid press in particular covered immigration in a way designed to generate hostility. As Ian Dunt noted in 2013:
“new research from the Migration Observatory at Oxford University shows just how pervasive and systematic this hate campaign is. After studying 58,000 articles in every national newspaper in Britain – over 43 million words – researchers found the word most closely associated with 'immigrant' was, you guessed it, 'illegal'. … For tabloids, other words closely associated with 'immigrant' were 'coming', 'stop', 'influx', 'wave', 'housing' and 'sham'.”

A recent report from the same source finds ‘mass’ as the most common way of describing immigration. Claims made about immigration in the tabloids are frequently untrue. They are almost always negative, often extremely negative. This is not a coincidence, or as a means of boosting sales: it is a deliberate editorial policy.

In opposition the Conservatives could do little more than ramp up the salience of the issue among their base and among readers of right wing tabloids. Labour on the whole triangulated in public. Gordon Brown’s famous remark after being challenged over the economic impact of immigration in the 2010 election showed both how Labour viewed anti-immigration arguments and also the problems with their triangulation. Once the Conservatives gained power as part of the Coalition in 2010, immigration as a major problem became official.

Furthermore, arguments linking immigration to economic problems that had nothing to do with immigration also became official, as the Conservatives used immigration as a useful scapegoat both for falling real wages and the impact of austerity on access to public services. This in turn fed back into the print media as a whole: whereas in 2006 many articles defending immigration could be found outside the right wing tabloids, these diminished in number by 2013.

If the right wing tabloids created an anti-immigration atmosphere in parts of the UK, after the Conservative’s ‘less than 100,000 target’ for net immigration it became government policy. Yet, as I argued here, it was - like the tabloids - a policy born in deceit. Every time Theresa May tried to suggest significant economic measures to reduce immigration, a combination of George Osborne and Vince Cable knocked it down for the very good reason that it would damage the economy. Her only choice was to create, literally, a hostile environment for immigrants into the UK.

Although formally the policy is only designed for illegal immigrants, it inevitably turns the anti-immigrant rhetoric of the tabloids into official government policy. Landlords are reluctant to let accomodation to EU immigrants in case their papers are not in order. The same applies to healthcare. I wrote about the bureaucratic cruelty shown to foreign students, and most academics will have similar stories from their own experience. Colin Talbot describes the experiences of EU academics after the Brexit vote. The simple cruelty of this policy does not go unnoticed abroad (for example here and here from Heiner Flassbeck and well worth reading), and the contrast with Germany’s policy towards refugees is stark. [1]

Brexit was the apotheosis of this policy towards immigration. Although Remain gained a few liberal Conservatives, they lost more left wing social conservatives, as the left hand side of the first figure shows. The right wing tabloids were of course not innocent bystanders in this, but the key point is that they didn’t need to do anything new except ramp up their anti-immigration stories and make sure they always mentioned the EU. The key point of this post is that what happened in the Brexit vote was simply what right wing politicians and newspapers have been trying to do for nearly 20 years: use immigration as a way of preventing socially conservative left wing voters from going with Labour.

[1] Viewing from abroad you might be forgiven for thinking the British were now an insular, uncaring, rather bigoted nation. Yet when a photograph of the body of a three-year-old refugee washed up on a Turkish beach went viral, the Sun - always quick to see the limits to how far it can distort news - launched an appeal and within two days had raised £350,000 to help other refugees. It was a brief and short-lived moment when natural compassion proved stronger than years of conditioning.

*** Postscript (18/12/17) These are the same terms as John Curtice uses here

Thursday, 14 December 2017

The advantage of a central bank not being ‘ahead of the curve’

Imagine the following economy. Growth has been strong for a number of years: 2.7% 2014, 3.8% 2015, 3.1% 2016 and is expected to be above 3% again in 2017. The OECD also think the output gap is positive i.e. output is above the sustainable rate. Inflation was bobbing around zero for a few years, but since 2016 has gradually crept up to the target of 2%. It was just over 2% in the summer, but dipped just below target in the last two months. Fiscal policy is broadly neutral, and is expected to remain so. The unemployment rate is still slightly above 6%, but the average rate since the crisis in the early 1990s is over 7%.

We are talking about the very healthy Swedish economy. An economy where inflation is at target and some experts think the economy is running hot. What level do you think the Riksbank, Sweden’s independent central bank, has set its interest rate at? The answer is -0.5%. What is more the general expectation (the Riksbank publishes its interest rate forecast) is that rates will not start rising above -0.5% before min-2018. In addition, the Riksbank is undertaking its form of QE.

What can explain this dovish behaviour? Central banks are supposed to be inflation averse, and elsewhere they talk about the need to ‘normalise’ rates the moment the economy starts recovering, so that they are ‘ahead of the curve’. Part of the answer lies in the past. I have told the story in real time (here, then here, then here), so just a short synopsis this time. The Riksbank started raising interest rates from its then lower bound of 0.25% towards the end of 2010, because they were worried about a potential housing bubble. Rates continued to rise to 2%, but inflation began to fall, and did not stop until it hit zero at the end of 2012. There was no growth in GDP in 2012. The eminent macroeconomist Lars Svensson resigned from the Riksbank in protest at this departure from inflation targeting.

Sweden: Consumer Price Inflation and Short Interest Rates, plus forecast (from OECD Economic Outlook)

In 2012 the Riksbank admitted their mistake, and started lowering rates to the new lower bound of -0.5%, where they have been since the beginning of 2016. Having made the error of prematurely raising rates once, they are in no hurry to risk doing so again.

The Swedish experience I think illustrates a number of points that could also be applied to other central banks.

  1. Macroprudential policy is the way to deal with financial instability like housing bubbles. Using the interest rate instead can be very costly. Controlling inflation should be the only thing short term interest rates are used for.

  2. Low, below target, inflation can be very sticky. Swedish interest rates went below zero at the beginning of 2015, but inflation only went above 1% just under 2 years later, and this despite growth in GDP of 3.8% in 2015.

  3. Inflation went above target in July, August and September of this year. But the central bank, looking at the basic determinants of inflation like wage growth relative to productivity growth, held their nerve and kept rates at -0.5%. Inflation fell back to 1.7% in October, and has stayed below 2% in November.

  4. The argument that interest rates must be raised above their floor so that central banks are ‘ahead of the curve’ has not been as influential in Sweden as it has been elsewhere.

It could still go wrong for Sweden, but if it does not then the Riksbank's 2010/11 mistake may have a silver lining. By making the central bank extremely dovish, they have allowed the Swedish economy to grow strongly and unemployment to fall substantially. Perhaps the mantra adopted by other central banks of needing to be ahead of the curve in terms of early ‘normalisation’ is not such a clever idea.

Tuesday, 12 December 2017

Immigration and Real Wages: Reality and Perceptions


Robert Skidelsky’s recent piece applies a textbook model to the question of immigration, which implies real wages do fall for some time. The story goes like this. There is sudden increase in labour supply because of a wave of immigration. Immigrants compete for jobs, which forces down real wages, encouraging firms to switch to more labour intensive forms of production (automatic car wash to hand car wash), which reduces labour productivity. However as firms respond to higher profitability and invest, everything including real wages and productivity goes back to where it was, the only difference being that the economy is now larger. So immigration leads to lower real wages for as long as it takes firms to invest.

Did the large increase in EU immigration that started in 2004 have this effect? There is no noticeable change in the rate of increase in nominal or real aggregate wages until after September 2007, which was when the Northern Rock crisis happened. Everything from 2008 onwards is dominated by the recession. But we have emerged from the recession with an economy with low productivity and low real wages, and as yet firms are not investing. Is this the model working, and has the second stage involving more investment somehow stalled for some reason? Do we need to cut immigration so we can have increasing real wages again?

There are many problems with this textbook model. First, there was a large increase in work related immigration from non-EU sources in the second half of the 1990s, but no associated decline in real wage growth. Second, the model treats immigration as an exogenous shock, by which I mean immigrants just turn up and start competing for jobs. If that was the case, we would expect to see a temporary increase in unemployment associated with immigration inflows. You do not see that in the late 1990s, or immediately after the start of EU migration in 2004. And third, econometric evidence suggests immigration has no noticeable impact on real wages (see also hereResults are similar in the US).

There is a simple explanation for all these difficulties: we are using the wrong model. An alternative model is one where firms find it advantageous to produce in the UK, but have problems getting workers, a problem that is solved by recruiting from overseas. It is very telling that under Theresa May the Home Office commissioned many studies designed to show how immigration was holding down real wages, and all were suppressed because they could find no evidence. In this production led model, there is no reason for real wages to fall. The additional employment, investment and output go hand in hand.

What about the experience of low real wages after the Global Financial Crisis (GFC)? The first point to make is that there is nothing about real wages that a combination of productivity growth, higher indirect taxes (in 2011) and exchange rate depreciations cannot explain. We have not seen a significant shift in the distribution of income towards profits. So any immigration effect would have to come through via lower productivity. As I explained here, you can tell a story where poor UK productivity performance since the GFC is the result of (a) a global productivity slowdown (b) poor UK investment in R&D and new technology (c) unexpected negative shocks: first the recession, then the lack of recovery (austerity) and finally Brexit.

I would say at the moment the evidence strongly suggests that real wages are not noticeably reduced as a result of immigration, but I remain open to seeing contrary evidence. We should also note the undisputed fact that immigration provides more resources to the public sector, so workers are better off via this route. But if this is the case, why on earth do the public believe the opposite so strongly?


To many, in all social classes, it is obvious that immigration reduces real wages. The logic appears watertight. If more people with skill X come into an area, that reduces what the existing workers with skill X can charge. For the self-employed plumber, it means more competition for a fixed number of plumbing jobs, so quotes for any job will have to fall. For workers being paid a wage, it means they can be more easily replaced if they or their union asks for a higher wages.

The same thing happens in reverse when people point to Brexit leading to shortages in labour in some sectors because immigrants are no longer coming. Are, they say, that will raise wages in that sector, which is bound to make the remaining workers in that sector better off.

Telling people that econometric evidence suggests that there is no evidence that immigration lowers real wages cuts little ice on its own, because the logic above seems so clear. There is also no point in telling them that immigrants will increase demand, because it is obvious that immigrant plumbers will do their own plumbing, or immigrant workers producing X will demand far less X than they produce.

The mistake people are making is right at the beginning of this thought experiment. By talking about real wages, people immediately think about themselves as workers. As a result, they imagine a world where there are more immigrants doing the kind of work they do. And, understandably, they keep everything else constant. But immigration controls are never about one group of workers, or the immigrants that have just appeared in the neighbourhood. They are about workers across the economy, influencing not just their nominal wage but the overall level of demand in the economy. 

How do we get over the failure to generalise? One way is to ask people to imagine the opposite of most people’s implicit thought experiment. Ask what would happen if there was more immigration in every trade except their own. They should realise that immigrants would require the services that this person provides, so the demand for their trade would increase, allowing them to increase their quotes and raise their standard of living.

Another mistake some people make is to assume that because many EU immigrants are from poorer East European countries, and immigration happens because of differences in standards of living, we have to get some kind of equalisation of living standards as a result of immigration. To see why this is the wrong way of thinking about it, imagine if workers were forced to move the other way, from rich to poor countries. Would this raise real wages in poor countries? Of course not: they would be paid the same as domestic workers producing the goods the poor country does.

A far better way of thinking about EU immigration is that it is allowing production in the UK to happen which would otherwise go abroad. Of course there may be a small number of cases where overseas workers are exploited by restricting their ability to leave their employment, but domestic laws and resources should exist to stop that happening.

One way proponents of less immigration play on these misleading perceptions is to talk about just controlling unskilled immigration. That is clever, because it diverts people away from thinking in terms of a labour shortage model. The best response to that is to suggest various occupations that are not classed as skilled, and ask people whether they really want less care workers or nurses and so on.

But what if people still feel that immigration must reduce wages in some way. Perhaps just the possibility of potential immigration restrains workers for asking for pay increases. The final mistake that people make so often is to assume that lower nominal wages means lower real wages. For that to happen prices have to be unresponsive to lower wages. And that in turn would mean the share of profits in national income would have steadily risen since we had large migrant inflows, which it has not. The main determinate of real wage growth in the UK has and always will be productivity growth.

Falling nominal wage growth would still have an important effect, however. It would keep inflation low, which would allow policymakers to let unemployment fall relative to previous trends while keeping inflation on target (it would allow the NAIRU to fall). And that has to be a good thing.


Although the evidence overwhelmingly suggests that immigration does not reduce real wages, it is fairly easy to see why people would think otherwise. That contrast is ripe for exploitation. How it was exploited, and how it is turned a previously outward looking, tolerant nation into one that tries to deport someone who have legally lived here for over 50 years, will be the subject of a second post.

Saturday, 9 December 2017

First Stage Reality and Brexiters

Now for the hard part, pronounced various media commentators after the first stage Brexit deal had been signed. The chances of No Deal have diminished, said others. It is strange watching the MSM sometimes. On political issues that involve expertise, like austerity and Brexit, it is generally an expert free zone. With Brexit you have to turn to the Financial Times and Economist who understand what is really going on, or other knowledgeable bloggers like Chris Grey. [1]

It is not difficult to discover how things really work in these strange days. You just need to see what the important facts are, and continue to apply them relentlessly despite what politicians say. The latest important fact that tells you all you need to know is that a Single Market and Customs Union needs a border to, as Martin Sandbu sets out, not just collect tariffs but also check compliance with rules of origin and standards. Therefore to avoid a border in Ireland, you need Northern Ireland to comply with all the tariffs, standards and regulations of the Single Market. The UK has now agreed, as I thought it would, that this must also apply to the UK as a whole.

This logic leads you inevitably to the conclusion that, after Brexit, the UK will to the first approximation [2] continue to obey all the rules of the Single Market and Customs Union. So it will be as if we are still in the EU, with the only difference being that we no longer have any say on what those rules are. Fintan O’Toole quotes Sherlock Holmes: eliminate the impossible and whatever remains, however improbable, must be the solution.

But, you may respond, all the UK have signed up to is that this is a default position, if they fail to find a technological fix for the border, or if they fail to conclude a trade agreement with the EU in stage 2, and what does alignment mean anyway? Here you need a second fact: there are no technological fixes that remove the need for some form of hard border. We also know two things from this first stage agreement: the UK desperately want a trade agreement with the EU and the EU will not allow any agreement that implies a hard border in Ireland. It therefore logically follows that, to a first approximation, any trade agreement will have to involve the UK staying in the Single Market and Customs Union.

Why then are the Brexiters not up in arms? It is partly because the agreement plays on their lack of realism, as I suggested two days ago. The UK government and Brexiters still pretend that they can, through some magical means, avoid a hard border. Given that belief, how can they object to this fall back position? And that will be the line that the UK takes from now into the indefinite future, and because the broadcast media mainly talks to politicians rather than experts that is the line the media will take as well, with some honorable exceptions like those noted above. In may come apart as the cabinet finally discusses what the trade deal might look like, which is why the threat of No Deal has not gone away. Or Brexiters like Gove may decide instead that as May will not be making these trade agreements, it is politically wiser to maintain unity and instead try to win the ultimate prize from Conservative party members.

Why is it important that this deceit continues? Because if everyone was honest, and respected the reality of the border issue, people would rightly ask whether our final destination (obeying the rules but with no say on the rules) is worth having. They would note that being to all intents and purposes part of the Customs Union means Mr. Fox cannot make new trade agreements. People might start asking MPs why are we doing this, and the line that we have to do this because the people voted for it would sound increasingly dumb.

Unless something amazing happens and the MSM do not allow this deceit to continue, we will end up with the softest of soft Brexits. If that is where the UK stays [3] there is a huge irony about all this. The Brexiters’ dream was to rid the UK of the shackles of the EU so it could become great again, but it is a legacy of empire that has brought this dream to an end. All the stuff about bringing back the glory of a once great trading nation will not happen. Instead we will still be acting under the rules of the EU, but because we are not part of it the UK will be largely ignored on the world stage. A rather large country, which nevertheless gets other countries (like Ireland!) to set its trade and associated rules for it, and which it is therefore not worth bothering with in the international arena. A Britain that can no longer pretend to be a world power, not as a result of the actions of some left wing government, but because of the delusions of Brexiters.

[1] To be fair to the broadcast media (as I always am), yesterday I did see interviews with ministers which raised the issue of what the implications of the border agreement are. But for whatever reason these interviewers allowed those ministers to bat away the question with waffle, and I strongly suspect the point will be forgotten in the days ahead.

[2] What do I mean by first approximation? For a start, we will not be part of the Customs Union and Single Market, but instead be part of bespoke versions of both. That may allow wiggle room, which in turn might just possibly allow something that could be called a deal on free movement, although this will probably just mean Free Movement to a first approximation. So a bit like Norway or Switzerland, but with rather less room for maneuver than those countries because both have borders with the EU. For more details see here.

[3] It will not be where it stays. First, there is the question of who May’s successor will be, and what they will do. If a soft Brexit goes ahead, the Brexiters will choose the right time (for them) to cry betrayal. It will only be a matter of time before they make a new attack, arguing that the UK should strike out for true independence. As I argue here, bigger things than just one failure have to happen before the UK rids itself of this particularly British form of plutocracy.  

Thursday, 7 December 2017

Has Ireland scuppered Brexit?

Should I be shocked that no quantitative Brexit impact assessments were commissioned by David Davis? Is it surprising that there has been no cabinet discussion of the final trade deal? Not if you accept the parallel I draw here between Brexit and Trump. Brexit is an expression of ideology or feeling, an act of faith. An impact assessment is therefore beside the point, and just dangerous to the project. I think you only get outraged by this if you haven’t really accepted what the true nature of Brexit is, and how it came to pass. By this I do not mean why people voted for Brexit, but why a large section of the UK press and Conservative party made it their primary political project. The true nature of Brexit means that the normal rules of politics do not apply, and could not apply.

I was surprised about Ireland. I did not realise until September [1] what it would require from Theresa May. Back in March as Article 50 was triggered I thought that would inevitably mean an open ended transition period (despite lots of talk about 2 years), and so the final destination of Brexit would not be decided until after the next election. If the Conservatives lost that, Corbyn would satisfy himself that the EU would not hinder his economic programme, and we would end up staying in the Customs Union and Single Market (CU&SM). [2]

But will the question of the Irish border change that? Those that constructed the Article 50 process understood that any country leaving the EU would be desperate for a deal, which is why there is a two stage process. The two stage structure maximises the chance that the EU will get the deal they want on the first stage issues. In terms of citizen’s rights and the leaving bill that has proved correct.

What the EU realised long before the UK was that Brexit involved a unique problem. The UK’s only land border with the remaining EU could not be allowed to become a hard border without putting the Good Friday agreement at serious risk. Yet the EU requires a hard border, and the WTO would insist that the UK recognised that (again Brexiter talk of not building one is just nonsense). Ireland’s most important priority was that there should be no hard border, and as a result the rest of the EU agreed to make that part of the first stage.

Once again, this shows you the nature of the Brexit project. Any Brexiter interested in reality would have realised that Brexit put the Good Friday agreement at serious risk, any would have at least thought about the problem. But Brexit is not a reality based project, and so they did not. We should be thankful that the Irish government made this a priority.

In simple terms there are therefore only two possibilities for Brexit that avoid a hard border. Either the UK stays in the Customs Union and Single Market (CU&SM), or just Northern Ireland does and there is a sea border between two parts of the UK. (What 'alignment' means is what the EU chooses it to mean.) The UK government still wants to pretend that other possibilities exist: something technological or that the stage 2 agreement they come to will not require a hard border. But the Irish government quite rightly insists that if neither of those two happen, the UK government recognise that at least part of the UK will stay in the CU&SM. That in the agreement the UK almost signed a few days ago.

It was scuppered because the DUP quite rightly wanted to know which of these two arrangements the UK government had in mind. Above all else, the DUP do not want a sea border between Northern Ireland and the rest of the UK, because they see that as making unification much more likely. I suspect the fact that whatever May said in her last minute phone call was not enough to satisfy the DUP means they will be prepared to bring down the government unless they get some sort of public guarantee that there will be no sea border.

In which case, May will finally have to call the Brexiters' bluff. Maybe she can convince them to keep faith in their rhetoric that there is a technological fix (there isn’t) or there will be a final trade agreement that deals with the problem (there won’t be) and let her commit to no sea border in the eventuality that neither happen. If she cannot, their only other option is the nuclear one of trying to force May out. As the latest poll I have seen suggests the Conservative party membership’s favoured candidate is Someone Else, that looks like a risky move. But if they take that risk, Ireland will indeed have made a difference.

But if they do not, and May does sign up to stage 2 on the basis of UK membership of CU&SM as the fallback position, does that change anything? You would think it should, but because it is the fallback position the UK government will start negotiations over a transition arrangement and a final trade agreement. After we officially leave May will then resign and the Conservatives will set about the task of trying to win the next election. Trade negotiations with the EU will be put on the back burner. We end up at in exactly the same place as I expected we would be back in March.

The only difference is that it will be blindingly obvious that this is all for show. Having signed up to staying in CU&SM as a default, the EU has zero interest in concluding any other kind of agreement, particularly as it will not safeguard the border. It will just be a matter of time before the arrangement whereby we stay in the CU&SM is formalised. But will any British politician that matters have the courage to tell the British people the truth?

The truth is that all their vote has achieved is that they will now have no say in the rules the UK has to follow. Instead whoever wins the next election will come back with some ‘deal’ over freedom of movement which few still care about because no one is coming to the failing UK economy. And of course the Brexiters will cry betrayal because we are, as far as they are concerned, still in the EU, and we will be back to where we were before the referendum, except with no say in the rules we have to obey.

I would really like to think that this can be avoided. Perhaps before we formally leave the EU, enough Conservative MPs (and despite all the noise from some Remainers about Corbyn, it is Conservative MPs who matter) will put country before party and call for a second referendum. Ireland increases that possibility, but from the evidence so far I do not see it happening.

[1] As someone told me, being ahead of the UK MSM on this is a very low bar.

[2] For all those who insist that the Labour leadership wants to leave, you have to realise two things. First, by the time Corbyn takes over we will have left, and he has no interest in pursuing the sunny uplands of trade deals with countries like the US. Second, there is nothing in the CU&SM that really hinders his immediate economic programme. So why leave the CU&SM just after he gets elected? It would profoundly alienate those who voted for him and damage the economy on his watch.