Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 20 April 2017

GE2017: Why economic facts will be ignored once again

In 2015, the Conservatives spun the line that Labour profligacy had messed up the economy, and they had no choice but to clear up the mess. In short, austerity was Labour’s fault. As Labour chose not to challenge this narrative, almost all the media and half the voters assumed it must be true. The reality was the complete opposite. The rising deficit was a consequence of the global financial crisis, not Labour profligacy. Doing something about it should and could have been delayed until the recovery was underway. By acting prematurely, Osborne delayed the recovery and lost the average UK household resources worth thousands of pounds. The story that we had to cut now because of the markets was completely false. 

Indeed, if you define the term economic recovery properly, as growth above previous trends, there has been no economic recovery from the Great Recession. I have shown this chart many times, and the story it tells is clear. In every post-war recession the economy recovered. The exception is this one, where we have seen no recovery while Conservatives were running the economy.



We can put the same point another way. The average growth in GDP per head during the Labour government period, which included the recession caused by the global financial crisis, is greater than average growth since 2010. The last decade has seen a unique period of falling real wages. Now this might not be the fault of the government in charge at the time, but it is that government that should have some explaining to do. But they never do have to explain, because mediamacro take it as given that the Conservatives are better at running the economy.

The 2015 General Election was the first recent occasion that the economic facts were ignored. The second was of course the EU referendum. Academic economists were united in thinking that Brexit would be bad for living standards: the only question was how much would incomes fall. The non-partisan media decided to portray that not as knowledge, but as just another view, to be always matched by someone saying the opposite.

A critical issue during the referendum was a belief that immigration had reduced the access of UK natives to public services. Economists know that is simply wrong for the economy as a whole, and if it happens locally it is because the government has pocketed the taxes immigrants pay. But the media did little to inform voters of why it is wrong, and I suspect this is why most of those voting Leave believed they would be no worse off in the long run outside the EU. This majority were not willing to lose income to reduce immigration for the simple reason that they believed, erroneously, that reducing immigration would make them better off.

Brexit may not have led to the immediate economic downturn that some expected, but the Brexit depreciation has brought to a halt the short period during of rising real wages. The economic pain that economists said would follow any vote to leave is starting to happen. Will that change the broadcast media’s view about how to present the economic consequences of Brexit? When Conservative politicians and their media backers choose to focus on GDP, will broadcast media journalists have the nous to ask what about real wages?

Unfortunately we know the answer to these questions. As far as economics is concerned GE2017 is likely to be nothing more than a combination of GE2015 and the EU referendum. The economy has not got any better than in 2015, and is about to get worse, but mediamacro will let Conservatives insist that the economy is strong. It is one year on from the referendum, but we still do not know what kind of Brexit we will have, a reason May gave for not holding another referendum in Scotland. The exchange rate has fallen and real wages have stopped rising, but we will still be told this is just Project Fear and the consensus among economists will get ignored once again. So, for the third time, we will have a vote where economics is critical but economic facts will be largely ignored.

We might be appalled at the authoritarian way May justified her decision to hold an election, which the Mail only slightly beefed up in their Leninist talk of crushing the saboteurs. But the depressing truth is that a majority of voters have bought this story. According to a snap poll by ICM for the Guardian, 54% of voters thought May was right to change her mind about an election because the situation has changed. They have been sold the narrative that Brexit is the will of the people, and now they must get behind May so she can get the best Brexit deal. As inflation rises and real wages fall the facts may be changing, but the narrative survives.

Narratives are a way people can try to understand things they know little about, and most people know little about economics or politics. Mediamacro is a set of narratives. Project fear is a narrative. The right and the ideologues are very good at selling narratives, and they have a media machine to invent them, road test them and spread them. The left and the realists have none of those things, and are hopeless at it anyway because they know reality is more complex than most narratives. That is why they have lost two elections, and look like losing a third big time.

17 comments:

  1. Thanks Simon. Keep plugging away. I similarly despair at how easily facts are squashed by soundbites.

    AFZ

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  2. "The left and the realists have none of those things, and are hopeless at it anyway because they know reality is more complex than most narratives. That is why they have lost two elections, and look like losing a third big time."

    Your analysis at the time of the 2015 election was that Labour had made an error by pandering to economic myths, primarily the need for austerity. For one of many examples, see

    https://mainlymacro.blogspot.co.uk/2015/05/do-politicians-need-to-pander-to-myths.html

    I think you were part of the movement that gave us Corbyn. "Pandering doesn't work, no more compromise."

    Well, now Labour is not pandering to those myths. £500bn of investment etc.

    We will see whether your preferred tactic proves more successful than the one you denounced two years ago. Time will tell.

    But. I would suggest that there is a large and profound gap between

    1. good macroeconomics

    and

    2. what politicians need to say to win elections.

    My understanding is that your expertise lies in the field of 1. I don't think it has very much, if any, relation to 2, frustrating as that may be for those who know about 1.

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  3. The "belief that immigration had reduced the access of UK natives to public services" is actually (partly) correct because immigration increased the population and therefore demand for public services: that immigration increased the CAPACITY for the government to provide public services beyond the incremental demand is not in doubt, but it is not widely understood that the economic dividend was not spent which is what caused reduced access.

    I think it is very important to point out that reduced access to public services is due to a COMBINATION of immigration and Tory ideology masquerading as prudent austerity, because if one makes the argument that immigration doesn't increase demand for public services then one is at risk of not being believed.

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  4. Lol.
    So, everything was fine in the decade up to the crash ???
    And governments 'run the economy' ???
    Hilarious.

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  5. Well I think we will get a hiding too.
    I agree with you in part an unwillingness to create narratives (thats Oxford Latin for lies) is a problem.
    However there is a real tactical incompetence. For me, Corbyn, Sturgeon and Farron should have said "Now is the wrong time for a GE. "
    The trouble is republics fall because the opposition factions focus on being the biggest opposition rather than uniting to face the danger. In this case genuine desire for self immolation, Indy 2 & recovering from post-coalition meltdown.
    If a unified opposition had said "We have triggered Article 50, This is a biggest challenge we face". Force May to repeal Parliament Act or vote no confidence. Quote her own words endlessly about no need for election. Look how badly she did on radio 4. She is vulnerable because you can see she lacks insight.
    Next decry her aloof arrogance, what sort of leader refuses to debate etc? Hammer on what Brexit she will deliver, how much economic damage etc.
    Could we win? Maybe not, but it would have been a better than the confused message "An election is a good thing but bad because May asked for it"

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  6. Just imagine if the Tories had won the 2005 election and convinced George W Bush to have no economic stimulus immediately after the 2008 crisis.

    Despite the slagheap of contradictions that the liberals and socialists are putting themselves through in Parliament, that bomb-crater in our GDP is going nowhere and remains a truth that should provide a rallying point against whatever the Tories do on Brexit.

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  7. Media-fake-farce-fraud-storytelling macro
    Comment on Simon Wren-Lewis on ‘GE2017: Why economic facts will be ignored once again’

    You say: “Narratives are a way people can try to understand things they know little about, and most people know little about economics or politics. Mediamacro is a set of narratives.”

    This holds for 99.9 percent of the people and 99.9 percent of the issues. The average person simply dislikes an objective explanation (e.g. the thunderbolt is an electromagnetic phenomenon subject to physical laws) and likes a subjective explanation (e.g. Zeus threw the thunderbolt because he was angry). Human communication is storytelling/myth/gossip/spoof. The only exception is science.

    Scientific explanation takes the form of the true theory with truth defined as material/formal consistency. For the economist this means: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    And here is the snag: economists do not have the true theory. Economics claims to be a science, yet has never risen above the level of storytelling. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent.

    Because of his lack of the true theory what the professional economist has to offer is educated common sense, his personal opinion, and poultry entrails reading. The narrative of the representative economist is qualitatively NOT different from the narrative of an experienced journalist. Economists’ policy guidance has NO sound scientific foundation since 200+ years.

    Egmont Kakarot-Handtke

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    Replies
    1. I personally feel your analysis is a bit severe.

      For example, consider someone suffering from a mental health problem and goes to the doctor who refers them to have some counselling. There aren't any laws of physics that instruct the therapist to help the patient, instead there are theories and types of analysis employed by the therapist to help the patient improve. People tend to be able to deal with their problems through therapy and become more resilient in the future to deal with challenging situations that they previously struggled with.

      I don't believe a therapist just uses educated common sense, but instead has become knowledgeable in theories, methods and experiences in their field. This example, I feel can also be applied to an economist and would argue an economist uses more than just educated common knowledge.

      As you rightly say Economics is not an exact science, but it is the application of a way of thinking and simplifying the world into models in order to improve understanding of something very complex (just like the human brain), the economy.

      I believe that economists have a lot to contribute on these types of issues and the narrative of the economist is built upon from past experiences (think 1930s depression) and the application of models and rational thinking. Common knowledge concerns things that are obvious and well known.

      We still do not understand the economy fully, nor will we ever, but our understanding over the past 200 years has improved greatly. In summary, the economic narrative is based on strong foundations and is a valuable way to analysis the contemporary issues today.

      Delete
  8. I don't wish to defend the Conservative's economic policy, but your chart is very misleading. For a start the population growth started accelerating after 2004 and grew around 8% from from 2006-2015. Nearly all of this was under 16 or over 65 which explains a lot of the slowdown. Crude GDP per capita is a misleading statistic. Other significant factor was a big reduction in oil output during this period and lower output of financial services after the bubble leading to the crash. Productivity slowdown was evident during the Labour period as highlighted by Andy Haldane in his recent speech. These problems are endemic and cannot be simply blamed on austerity.

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  9. I just hope the Labour people who scorned the 'triangulation' and spin of New Labour come to understand that the likes of Alistair Campbell are a necessity.

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  10. Excellent piece. It's a crying shame that most of these points won't enter most voters' minds.

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  11. I don't agree thaat the left and realists cannot create narratives. Aside from the endless delusionist left-wing online content, there are plenty of alternative allegories available. The problem comes down to strength of leadership and communication, coupled with the amount of work Labour is prepared to put in. Miliband's strategy of silence was born of idleness and cowardice not tactics or lack of options. I wonder if Corbyn's team will do some work in this area, or whether they will just continue to trot out the same narrow, underdeveloped policy speeches.

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  12. And there was an identical pattern while Obama was running the US economy. Perhaps this is not a question of politics at all but something deeper.

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  13. Professor,
    a few questions from a non-economist: (My apologies, we do exist!)
    - why have you shown the GDP per head as logged? (As opposed to not-logged)
    - what evidence (multivariable regression or otherwise) is there to show that the below-trend growth is due to coalition/conservative austerity and not, say, the aftershock of the largest economic contraction since the 1930s?

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    Replies
    1. The graph shows GDP per head in 1955 as the logarithm (to base 10?) of 9.08 (approx.)
      This is a very big number, it's around 1.2 billion (pounds?) per head. I've used the American definition of "a billion" as "a thousand million" which now seems to have replaced the old British definition.

      Delete
  14. I wonder what you think of Richard Murphy's contention
    http://www.taxresearch.org.uk/Blog/2016/03/13/the-conservatives-have-been-the-biggest-borrowers-over-the-last-70-years/

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  15. Why has no one here mentioned the flawed economic policy adopted by the idiot chancellor in 2010 to 2016. Economics is not rocket science. Ask any housewife who balances the household budget. Simply cutting expenditure leads to disaster. If I reduce my expenditure to a level where I can buy the bare essentials then all the other people from who I used to purchase goods go out of business. However, if I increase my income and my ability to spend I can ensure that these other sources remain in business. This simplistic example is what Osborne forgot. He seemed to think if he decreased his expenditure at the expense of the poorest he would balance his books.Dad he? No! He forgot to increase the nations income by allowing massive tax cuts for the wealthy and the major corporations. Sadly May and Hammond seem to be following the same path. Do we need a war to return the country to full employment and a decent level of taxation or can we not simply apply a little Keynesian economics and get a country that cannot only balance its books but also look after the poorest and the sick. We did it in 1948 we can do it again!

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