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.

UK Election Results and Brexit

I am writing this while we do not know the full results and have yet to hear Theresa May speak, so I expect much of what I write will quickly be irrelevant or overtaken by events.
But this is so important and interesting, it is worth recording some ideas.

Most likely outcome seems to be:
Minority Conservative government led by May with informal backing of DUP

This is the very likely outcome in the short term, because the other options look so terrible:

  1. DUP fail to back Conservatives
    Why would they not take this excellent opportunity to be central to government and push their agenda?
  2. May resigns
    Her main character trait seems to be her stubbornness, and it’s not clear why she would have an unprompted crisis of confidence now.
  3. Tory MPs force her resignation
    This is possible but the Brexit timeline makes this difficult and dangerous. The current rules of the Conservative party mean that any new leadership election takes months and how that would intersect with a new General Election is unclear to me. Either the whole process will take many months or the Conservatives are heading into an election with no clear leader appointed.
    The 2-year countdown to Brexit has already begun, this would make a disorderly exit highly likely.


If this minority government is formed what would it do?

The top priority of the DUP will be the Irish portion of the Brexit negotiation. I wrote at length about this here (https://appliedmacro.com/2017/05/02/brexit-and-ireland/). The only option which seems to make sense for an Ulster Unionist is for the UK to stay at least within the Customs Union and possibly within the Single Market. Hard Brexit involves Hard borders.

The next priority for the DUP will be on domestic Northern Ireland issues. The vote has been strongly polarised, with the DUP with 10 seats and Sinn Fein with 7 seats. If the DUP are successful in promoting their Unionist agenda for N Ireland, then this will bolster the Sinn Fein argument that the power sharing government in the Good Friday Agreement is not working, and a further breakdown in politics is likely.

For the Conservative Party, especially any aspiring Tory Prime Ministers, it may seem attractive to let May spend the next 2 years negotiating Brexit while they snipe at the side-lines. Then they can blame her for the deal, whatever it is. They can then say that she betrayed Brexit, was incompetent and if they had been in charge it would have been great.

But this path will likely be contested from day one. For true Brexiteers, acceding to the demands of the DUP, will not be acceptable and they will rebel. So I doubt this softer Brexit route will be a stable one.

Would another election solve anything?

Probably not.

All the parties are formed from coalitions of views and these intra-party divisions are becoming more critical. Look at the inability of the Republican party in the US to agree on anything, despite having control of both Houses and the Presidency. The electorate is similarly unstable. Such volatile opinion polling in an election campaign can often indicate something highly unusual is about to happen.

The ideal election would have been one in which the two main parties laid out clear, coherent, and different plans for Brexit. Then for one of them to win a clear majority, and to lead the country on that mandate.

But with such a conflicted electorate (https://appliedmacro.com/2017/05/24/uk-election-brexit-views/), Labour chose an incoherent policy so as not to offend anyone. The Conservatives, after running on a Hard Brexit platform, might be tempted to try the same although it is not clear this was the flaw in the campaign. The Brexiteers have perhaps done too good a job convincing people Brexit has already happened with the triggering of Article 50, as it became a shockingly minor issue in the campaign.

The UK is in danger of remaining in political chaos. It would have made more sense to have sought this mandate BEFORE triggering Article 50. But May has copied Cameron in choosing to play politics, more like a game of Russian Roulette.

Market implication

I have been extremely negative on the UK for a long time, in particular on the currency and I see nothing now to change my mind. May’s Brexit negotiating position never made any sense to me (https://appliedmacro.com/2017/05/04/what-game-are-brexiteers-playing/) and it remains unclear.  Her position, to stay stubbornly unreasonable, and then the EU will be forced to give in. A different character might be chastened by this election and move to a more centrist negotiating position, but that does not seem to be in her dogmatic manner.
After this election , a veneer of bravado may remain over what seems an ever more chaotic position but this may be a catalyst for more rapid problems in financial markets.

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 – Brexit Views

UK Election – Brexit views

I have found the shift in public sentiment on Brexit to be very striking. A recent YouGov poll shows how people who want the UK to remain in the EU are a minority, even amongst those who voted to Remain.

When I listen to interviews with the voting public, I am left confused.
Many appear to talk as though fears of the impact of Brexit have been disproved (i.e. Brexit has happened already), but then others talk about making a good deal (i.e. Brexit has not happened yet). It is not clear to me if this represents a form of widespread cognitive dissonance, or if the media is splicing together pieces of interviews from different people. It is also possible that it is the media that is confused.

This table gives my brief description of the camps.

uks

 

What are Re-Leavers thinking?

I can follow the argument that Re-Leavers do not want to reopen the debate, and prefer we leave than to try to change the decision. But I am left confused as to what they think is going on.

One hypothesis I have is that Re-Leavers are under the misapprehension that Brexit has already happened. My metaphor for Brexit is jumping off the ledge of a building.

Stage 1 Decide to jump

Stage 2 Jump and experience sensation of falling

Stage 3 Hit the ground

In this metaphor, we are currently at Stage 1 in Brexit.

Stage 1 It is not too late to step back from the ledge.

Stage 2 This may feel exhilarating, a sense of freedom and elation.

Stage 3 Depends on your view of the economics.

From the Leave campaign, it suggests we were on the ground floor of a prison and can now run and be free in the glorious countryside around us. My view is that we are on an upper floor and it is not yet clear how much damage we will sustain. At least some pain, likely a few broken bones, but hopefully not a critical injury.

I will do an economic analysis of Brexit and its implications for asset markets in another post.


How will Hard Remainers vote in the Election?

I found this FT graphic of the same YouGov poll enlightening. It shows why the Remain group are not having any impact and why Labour are struggling to put together any kind of coherent message.

  • Hard Remainers are not uniting behind any party.
    The Lib Dems are trying to court them but only a small fraction of Remainers are going to vote Lib Dem. In fact, the majority of Lib Dem voters are now in favour of Leaving.
  • Labour support is split evenly between the 3 tribes.
    This is why they have not formed any coherent message on Brexit at all. They are trying to appeal to all 3 Tribes, which of course turns into unintelligible policy pronouncements.
  • Conservative voters are overwhelmingly in favour of Leaving.
    This makes the policy message for Theresa May extremely easy.