What have we learned about the parties from the election?

I think worth laying out a few ideas on what I have learned after this election.

Things that seem clear – but we probably knew already

  • May is a terrible leader
  • May is a terrible campaigner
  • The Conservative Party is deeply divided
    and may break out into open civil war at any moment

Things that seem new

  • The country is dominated by division on age lines not class lines
    I found this chart to be shockingly good as a model for voting behaviour.
    I am at exactly the crossover age, which perhaps explains why I dislike both so much!

  • Your income says nothing about who you will vote for
    The next chart is also stunning

Things that seem incorrect

· For Labour, Corbyn is an electoral asset whose positive campaign resonated with the electorate and he is poised to win next time.

Corbyn set expectations so low this feels like a landslide victory for him. But it was not.

1979 Callaghan 269 seats, he admitted defeat & resigned.

1992 Kinnock 271 seats, he admitted defeat & resigned.

2017 Corbyn 262 seats, claims victory and orders the winner to resign.

This was yet another vote AGAINST the elites.
Labour’s campaign was much better than the Tories but the idea of a Progressive Alliance doesn’t really exist. The Progressive Alliance is defined by its OPPOSITION to the Tories.
In that way, it reminds me of the Lib Dem party. A group of disparate protest votes united through negative cohesion as they all hate the same things. But once in power, they fall to pieces losing large portions of their supporters feel betrayed by almost any action they take.

However if the seemingly inevitable Tory civil war is bitter enough, maybe even Corbyn can win.

  • Hard Brexit is unpopular

A mandate for a Hard Brexit was the central theme of May’s campaign. But the Brexiteers have perhaps, done far too good a job of convincing the electorate that Brexit has already happened. The continual media suggestions that the economy is doing much better than predicted post the Brexit vote, helps to support the myth that Brexit has already happened.  If Brexit has already happened then it is hard to argue that it is still the most important issue.

If this is the case then it was not just the negative campaign against Corbyn that backfired, it was that the central “positive” element just didn’t make any sense and Labour’s focus on more traditional election issues such as Health and Education resonated far more strongly.

Hard Brexit is very unpopular with me and I think is the dominant issue we face. But I do not think my views are commonly shared by the electorate.

  • Opinion polls are worthless

I think the problem is that people do not understand what a poll is, and especially what uncertainties are inherent in them. This means that they get over-interpreted, and then the source is later blamed for not producing for which was impossible in the first place.

What I learned from the opinion polls during the election period was, not that the Tories had a big lead, but that the polls were massively volatile. Minor changes in methodology between polling companies seemed to be part of the outsized swings day to day – this is extremely useful information. The conclusion being that the uncertainty band around the poll should be seen to be extremely high, and this result fell easily within my uncertainty band.

Fiscal transfers within a country

The ONS has calculated an estimate of the fiscal transfers within the UK for the first time. It shows that London and the South East generate more tax revenue than they receive in government spending, whilst other regions are significant net beneficiaries.

What I find important is not the numbers themselves which are entirely unsurprising, it is the fact they were calculated and published at all. Fiscal transfers within a nation state are a key feature of a stable society. If people begin to associate themselves with a region, rather than the overall country, then the cohesion of the country is called into question.

The move towards devolution of power within the UK has been growing, with mayors, local powers and of course the devolved administrations such as the Scottish parliament. The evidence so far is that granting more powers to the regions of the UK will not satisfy the desire for autonomy, In fact, it reinforces the sense of a separate identity. Publication of figures like those above works to further emphasise our differences.


Comparison to the US and the EU

To get a sense for how important fiscal transfers are to the cohesion of a state, this comparison between the US and the EU is striking. Each blue dot is a EU country, each red dot is a US state. I have used the same scale in both charts to make the differences in the dispersion clear.

Y axis Relative income per head of the population (100 is the average for each group)
Shows much greater inequality between EU countries than between US states.

X axis Net fiscal transfer between states (% of GDP)
Shows fiscal transfers between EU states are tiny compared with those between US states.

The US data is characteristic of a country i.e. large fiscal transfers are necessary within a single currency zone, given any lack of flexibility in monetary policy to deal with cyclical or structural differences. The low level of EU transfers helps show why the Eurozone is having such difficulties. One way forward for the Eurozone is to become more integrated, developing into a proper federal state, including large permanent fiscal transfers.

Perhaps the most remarkable difference between the EU and the US, is the level of attention these figures receive. In the US, this issue gets virtually no attention. If I ask Americans, they have generally no idea what the numbers might be and have never given it any thought. They pay federal taxes but do worry about the geographical split of Federal spending. On the other hand, in the EU it is a massive political issue, despite the numbers being an order of magnitude smaller. The EU budget is only 2% of GDP but generates vastly more hostility than national budgets of 20 times the size. This is a major political hurdle for the Eurozone to deal with, perhaps having the most hostile country leave the EU will help them.

My concern is that the UK is moving away from a “US level” of large fiscal transfers without political awareness or opposition. If the United Kingdom cannot regain its sense of being “United”, then the road leads to full separation.

UK Election – Costing Manifestos

I have a lot of sympathy with supporters’ frustrations with the simplification in the media of the Labour manifesto to a reductionist analysis of “costing”. Especially when the Conservatives do not even make an attempt to assess the costs of their own manifesto.

Simon Wren-Lewis does his best to articulate how this misses the key parts of the debate. https://mainlymacro.blogspot.co.uk/2017/05/but-do-numbers-add-up.html I also found this post by the IFS very clear. https://www.ifs.org.uk/publications/9218.

The Labour manifesto is a properly radical document and imagines a set of dramatic changes to the UK economy and the role of the government. No simplistic “costing” will come close to capturing what it is proposing.

However, I do not agree with some of the defences of the economic plan and so think it is worth writing down what I understood the manifesto to mean, and why some of the language used is not helpful.

Spending vs Investment

I find that both sides are guilty of being misleading here. The right calls all expenditure spending when it suits them and the left calls all spending investment. From what I can see Corbyn is in favour of expenditure of all kinds. Here are some guestimate numbers from the manifesto pledges (I am not claiming forensic accounting as I see that as pointless).

  1. Investment in infrastructure – £25bn
  2. Extra spending (NHS, tuition fees etc.) – £25bn
  3. Tax Rises – mainly on corporate earnings and high earners – £25bn
  4. Nationalisation – if done well can argue this is a balance sheet expansion but the amount paid equals the value and so no impact on the government’s fiscal health. It is neither investment nor spending.

If you want to examine the increase in “spending” – this figure of £25bn seems sensible.
Lumping in investment and nationalisation makes it scarier but is misleading.


Should we nationalise?

I agree with S W-L that the debate focuses on the wrong topic. The issue is not whether we can afford it. We should “ask Labour politicians why they think the industry would be more efficiently run under public ownership”. For natural monopolies, there is a legitimate debate to be had.


Should we increase investment
?

In general, there is a good case for higher investment, made by many economists. But I wish they would also acknowledge the actual problem is not with the economics. The obstacle is political from both the left and the right. Whenever the government is increasing investment, there is often an outcry saying we should prioritise “investment” in the NHS and education. But “investment” in the NHS and education is really spending. The right will perceive arguments for “investment” as a Trojan horse for increasing government spending and the left probably sees it the same way, they are just on the side of the Trojans. The ease with which the left talk about pay rises for NHS staff as “investment” always reinforces my perception that they are happily loose with the distinction.


Budget Deficit – does it get bigger?

What happens to this depends on

  1. How much tax is raised
  2. The dynamic effects of the economic changes

To think about this a bit more

  1. How much tax is raised from increases in higher rate tax rates and corporate tax rates is extremely hard to estimate. It is reasonable to assume that higher tax rates raise a lot less than hoped and so there would likely be a significant increase in the deficit. It is an important issue but also the only one generally mentioned and so I would prefer to park that issue for now.
  2. The dynamic effects of all the proposed changes are very complex – for example
  • Higher spending increases demand
  • Higher taxes reduce demand

If we assume for now that taxes raised roughly offset spending increases, then the net impact on demand and growth is, perhaps surprisingly, not zero. It represents a net increase in demand because the marginal propensity to consume of the rich people being taxed more is lower than the people the extra spending has gone to. This is called the balanced budget multiplier.

Simon Wren-Lewis says that this is clearly a good thing because “when interest rates are at their lowest bound – a tax funded spending increase would provide a much-needed boost to activity, which itself would raise taxes.” He castigates the IFS saying it is time for them “to learn a bit of macro”. He states his view as though it is self-evidently true but I do not follow his argument.

I think the above statement is true only if you assume that rates are at the zero bound and you would prefer them to be lower. He defines austerity as having fiscal policy too tight compared with where you would want to have it from a demand management perspective. While he may personally have that view, it is far from objectively true at the moment. For example, on 10th May the Bank of England Monetary Policy Committee met: 7 members voted to keep monetary policy and rates as they are, 1 member (Kristen Forbes) voted to increase rates by 25bp!

If the Bank of England do not wish to increase stimulus it is not clear why we should assume as obvious that increasing demand would lead to higher growth and higher tax yield. If the Bank of England are correct it would not lead to higher growth, more likely just higher inflation.

What really matters in the Labour manifesto

What is clear from the manifesto is that the current Labour Party have a radical agenda for the reshaping of the UK. Starting with an increase of government spending of around 5% and a similar sized increase in investment. This would be, at least partially, paid for by raising taxes. This is a vision of a country with a larger and more central role for the government and a view to intervene via the tax system to work against inequality by taxing the rich.

This is a set of policies around a vision to get everyone’s partisan spirits engaged. The left and the right will love/hate it on ideological grounds. Perhaps this is why most policy analysis is so misleading.

What is the cost of the Conservative manifesto?

This issue barely gets discussed, but from my quick analysis the Conservative manifesto has plans which damage the fiscal position significantly more than the Labour one. The big issue is Theresa May’s continuing pledge to reduce immigration to below 100k. Back in 2012 the OBR produced projections for national debt with different levels of net migration. http://budgetresponsibility.org.uk/fsr/fiscal-sustainability-report-july-2012/ The impact is stunning and hugely more important than relatively small changes to current NHS funding.

Conclusion

Understanding the impact of government policy on the deficit and debt profile is important. But the way it is done can be misleading and distract from more important economic ideas. Even more crucial is that we properly explore the economic consequences of all policies, not just the ones that directly affect spending and tax.

Will the GOP turn on Trump?

A simple yet reliable model for politicians can be just to consider what gets them re-elected. If we use that model for the GOP, it works very well for their relationship with Trump.

During the Presidential primaries last year, there were some vocal opponents of Trump from within the GOP but despite some major provocations they mostly moved to support him. Those expecting his behaviour and performance of the past months to lead to him losing the support of the GOP is based upon:

  1. He is doing a bad job
  2. He is at record levels of unpopularity for an incoming President

But if we use our simple model both of these arguments quickly disappear.

  1. They would prefer a better President but this is not their major concern
  2. The electoral rationale is compelling. Trump’s popularity with non-Republicans is already at record low levels and keeps declining rapidly. But he is still overwhelmingly popular with Republican voters. By contrast virtually no-one likes Congress, with just 27% of Americans having a favourable opinion of them. So, if these really unpopular members of Congress move against a Trump they are offending the vast majority of people who might vote for them. Until this week, the GOP quickly defended him irrespective of what he had done.

Can this change?

The way that this could change is if Trump starts to bleed support from within his own supporters. But this has been predicted so many times and has always been wrong that again I have a simple model that says that they will support him irrespective of what he does. I actually think that his popularity might be best modelled as chaotic – by which I mean it could be very stable but then change enormously with what seems a small incremental catalyst.

The other way that it could change is if my simple model of the GOP is not true. Senators such as John McCain are clearly loyal to the party but prize their loyalty to their country and its Constitution more highly. What if there are some ethical lines which cannot be crossed?

Vive La France!

I am excited about the election of Macron. Unlike the UK and the US, France has rejected the nationalist, isolationist Right and elected a centrist by a ratio of 2:1.

The rejection of Le Pen was critical of course. If she had been elected then the prospects for the EU would have been chaotic at best. He does of course face obstacles. His victory was primarily driven by negative cohesion i.e. people voted against Le Pen more than voted in support of his ideas. But that is true of most recent elections and certainly also true of Brexit and Trump. But with Macron –

  • After so many successes for the right we see a success for the centre. This is the area of politics that has been wiped out in the UK and US. Can he provide a template for a broader revival of the centre in politics in Europe? He is socially liberal, fiscally conservative, pro-market and pro-EU.
  • He has shown that a rejection of the status quo does not have to mean a move to the extremes.
  • He is a technocrat. Can a smart technocrat come up with a policy programme to deal with France’s problems such as unemployment?
  • He is pro-EU. Varoufakis cites him as one of the few who was sympathetic to negotiation with Greece on debt burden reduction.
  • He sees Brexit as an opportunity for France. He will likely do his best to attract financial services to migrate from London to Paris and move the border camps for refugees from Calais to Kent.

A day of French triumph over fascism is one to be celebrated.

https://www.youtube.com/watch?v=HM-E2H1ChJM