Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 12 December 2017

Immigration and Real Wages: Reality and Perceptions

Reality

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?

Perceptions

Too 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.

Implications

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.  

Tuesday, 5 December 2017

Government debt phobias, and possible cures

After my Thursday post and New Statesman piece, I had a lot of comments that said something along the lines of: I see what you are saying, but we really cannot afford more government debt in this country. This is perhaps not surprising. After seven or more years of a constant stream of politicians and media folk talking about the UK maxing out its credit card, many people just feel it in their bones that the UK government has a serious debt problem. (It isn’t just the UK: here is a compilation from the US.)

How do we undo 7+ years of conditioning? It depends in part on what the fear is. Here are five
  1. The country will go bankrupt

  2. When will the debt be paid off?

  3. Money could go on something more useful than paying interest

  4. Why should my taxes be higher just to pay interest on debt?

  5. What about the ‘burden’ on the children?
1. The country will go bankrupt

A simple truth, which you will not hear in the media, is that in an economy with a flexible exchange rate and its own central bank like the UK, the government can never be forced to go bankrupt, because the central bank can buy the government’s debt.

That of course is exactly what has been happening across the globe - not because central banks were trying to avoid the government going bankrupt, but because these banks were trying to keep long term interest rates low using Quantitative Easing (creating money). For example the Bank of England owns about a quarter of UK government debt (source). That meant that, at the slightest hint that the private sector might not have wanted to buy government debt, the central bank would have done so as part of its policy to control inflation.

At the end of the day, the central bank is a part of government, and so will always buy the debt of the government if necessary. That is why the government cannot be forced into bankruptcy. Could high and rising debt lead to inflation getting out of control? Yes, as Zimbabwe shows. When inflation is well above target and the central bank is creating a ton of money we can worry about that. When inflation is low and close to the target it would be daft to worry about this possibility.

2. When will the debt be paid off?

Here you should just stop thinking about government debt as being like personal debt. One reason it is different is that while a person dies, the country and therefore its government never do. Suppose you lived forever. Would you worry about paying your debt off?

What you should do is two things. First, use debt to spread the costs of investment over a large number of years. Many people are familiar with this, because they take out a mortgage to buy a house or a loan to buy a car. Second, use debt to smooth out fluctuations in your income. So in bad times let debt run up, but be sure to run it down in good times. Governments are exactly the same. For that reason they never have to pay all that debt back, but the ratio of debt to GDP should rise in bad times and fall in good times.

What level of debt to GDP should governments be aiming for in the very long run? This is a very good and interesting question, but to answer it you will probably have to become an economist, because it remains an unanswered question in macroeconomics.

3. All this debt interest could go on something more useful, like paying nurses more.

This was the fallacy I tried to deal with in my New Statesman piece, but here is another way of squashing this fallacy. We cannot just stop paying interest on debt, because that would involve the government defaulting on its debt. So the only way we can replace debt interest with spending more on nurses pay is to pay off all government debt. To do that, we would either have to raise taxes or spend less, and spending less means paying nurses less. It would also likely take about 30 years if you didn’t want a revolution. So 30 years of lower nurses pay just to get, after 30 years, higher nurses pay.

That does not make the idea wrong. But it does make it look rather less attractive than the impossible idea of swapping debt interest with something more useful tomorrow.

4. Why should my taxes go up just to pay interest on government debt

To help answer this question, we need to ask who gets these interest payments? For reasons we have already noted, a quarter of these interest payments go to the Bank of England as a result of its Quantitative Easing programme. The Bank then returns these interest payments to the government. In other words, on a quarter of UK government debt the government pays itself. [1]

Half of UK government debt is owned by the UK private sector. The majority of this is insurance or pension funds. In other words, the interest on government debt is in part helping to pay for your pension. And if by some magic that government debt was not there for your pension fund to buy, that fund would be forced to invest instead in some other, less desirable asset. If you are in the UK and have some money saved in the form of national savings, that is government debt too. The interest of this debt goes to you.

The key takeaway from this is that government debt is always someone else’s asset. If you think that you will end up paying more taxes to pay this debt interest than you will get back in pension payments or whatever, then debt is a distributional issue. You are complaining that you pay taxes (a small amount of which goes on debt interest payments) but you do not have enough wealth to buy government debt and receive these payments. That is a legitimate complaint, but it is part of a general complaint about how income and wealth is distributed, and not something unique to government debt.

And there is this point. If you think you want to reduce government debt because you are paying higher taxes and none of that is coming back to you or your pension, how do you think the government is going to reduce its debt? By raising your taxes of course.

So we come to the quarter of UK government debt where the taxes you pay that are then paid by the government as debt interest end up overseas. Surely that bit of debt interest is wasted, because it is going to someone overseas rather than someone here. But think about this. Suppose all government debt was owned domestically, and then some pension fund decided they would be better off by swapping their government debt with an overseas asset. Is that pension fund worse off? No, it is better off if its calculations are right. No one anywhere else in the UK is worse off because some government interest is now being paid overseas? If lots of people in the UK decide to do the same it still will not matter. It must therefore be true that selling debt to people overseas, whether directly or indirectly, makes no difference. Your concern is still a distributional issue.

To make this point another way, it would be possible to arrange the distribution of government debt such that everyone who paid higher taxes to cover debt interest received that debt interest back as a return, directly or indirectly via pensions, to their wealth. In that sense, the government paying interest on its debt is just like paying ourselves. To the extent that this isn’t true for you personally is a distributional issue. [2]

5. What about the children?

It is theoretically possible for the current generation’s government to go on a huge spending and tax cutting binge and leave the tab to be paid for by future generations. But that is not what has happened over the last ten years. Debt went up because we had a massive recession, and government deficits help cushion the impact of recessions. Should the government have stopped teaching children to avoid the deficit rising? Of course not, because that would have hurt future generations. Should the government have cut welfare payments to the unemployed to stop debt rising. Again we have good evidence that has a scarring effect on children. Should the government have embarked on an austerity programme that reduced public investment making future generations worse off. It should not.

Trying to cut the deficit by cutting public investment, or government spending that has long lasting effects like education or health, because you are worried about the burden of debt on future generations is, quite simply, idiotic. You are hurting the people you say you want to help.

Does this mean I should never worry about government debt?

In today’s economy, it is quite wrong to say government debt does not matter at all. There is a kind of simple golden rule here. When times are good, the government should be reducing its debt: debt to GDP ratios should be falling. How do you know when times are good? Not by asking politicians, obviously. One reliable sign that times are good is if interest rates are well above their floor. When interest rates are this high, cutting them can completely cushion the negative demand effects of fiscal consolidation (i.e. reducing the deficit). For this reason, austerity - fiscal consolidation in bad times - is completely unnecessary for economies like the UK.

For MMT readers

Before you start writing comments, a simple point. In an MMT world, where fiscal policy rather than monetary policy stabilises inflation, you would never worry about government debt or deficits beyond their impact on inflation. If you like that kind of world, then say that is how governments should be controlling inflation. But as it is, outwith the zero lower bound, governments are using interest rates to do this job. So to tell people not to worry about debt without mentioning the controlling inflation part is just confusing, to say the least.

Summary

We can sum all this up as follows. It makes perfect sense in many situations for the government to increase its debt. Investing when interest rates are very low is one of those situations, a recession is another. Those who tell you government debt should be reduced in all situation at whatever the cost should be ignored, because they are either fools or they have a hidden motive.

It also makes sense for governments to reduce their debt in good times, when interest rates are higher than they are now. [3] But in a economically advanced democracy the reasons why ever rising debt (often called deficit bias) is a problem are to do with economicky things like disincentive effects, and not because it will mean we are all doomed. You should not be frightened about allowing debt to rise when the situation demands it.

[1] Why is the debt held by the central bank counted as debt? One answer is that one day the Bank might sell it to the private sector, so it is a potential liability. But central banks may just let this debt run to term, so it will never be a liability. An alternative theory is that government debt owned by the central banks is kept in the figures to make them look more scary.

[2] Of course no one knows if their taxes are paying this debt interest or not. Even if we are paying ourselves, there is still a problem, which is that these taxes are not lump sum, so they involve a disincentive effect. This is a valid reason for wanting to keep government debt low, but it is not the reason most people worry about.

[3] How about now in the US? Should we worry about the Republican tax bill because it will increase the deficit? As interest rates are off their lower bound and rising, I would say we should, particularly as those who get most of the tax cuts are unlikely to spend them. But we should worry about it a lot more because it is a transfer from most people to a plutocratic elite.      

Saturday, 2 December 2017

If we treat plutocracy as democracy, democracy dies

The snake-oil salesmen

There are many similarities between Brexit and Trump. They are both authoritarian movements, where authority either lies with a single individual or a single vote: the vote that bindsthem all. This authority expresses the movement’s identity. They are irrational movements, by which I mean that they cast aside expertise where that conflicts with the movements wishes. As a result, you will find their base of supporters among the less well educated, and that universities are seen as an enemy.  Both groups are intensely nationalistic: both want to make America or England great again.

It is easy to relate each group to familiar concepts: class, race or whatever. But I think this classification misses something important. It misses what sustains these groups in their beliefs, allows them to maintain their world view which is so often contradicted by reality. Both groups get their information about the world from a section of the media that has turned news into propaganda. In the US this is Fox, and in the UK the right wing tabloids and the Telegraph.

A profound mistake is to see this media as a symptom rather than a cause. As the study I spoke about here clearly demonstrates, the output of Fox news is not designed to maximise its readership, but to maximise the impact of its propaganda on its readership. I think you could say exactly the same about the Sun and the Mail in the UK. Fox and the Sun are owned by the same man.

Even those who manage to cast off the idea that this unregulated media just reflects the attitude of its readers, generally think of this media as supportive of political parties. There is the Conservative and Labour supporting press in the UK, and similarly for the US. In my view that idea is ten or twenty years out of date, and even then it underestimates the independence of the media organisations. (The Sun famously supported Blair in 1997). More and more it is the media that calls the shots, and the political parties follow.

Brexit would not have happened if it had remained the wish of a minority of Conservative MPs. It happened because of the right wing UK press. Brexit happened because this right wing press recognised a large section of their readership were disaffected from conventional politics, and began grooming them with stories of EU immigrants taking jobs, lowering wages and taking benefits (and sometimes much worse). These stories were not (always) false, but like all good propaganda they elevated a half-truth into a firm belief. Of course this grooming played on age old insecurities, but it magnified them into a political movement. Nationalism does the same. It did not just reflect readers existing views, but rather played on their doubts and fears and hopes and turned this into votes.

This is not to discount some of the very real grievances that led to the Brexit vote, or the racism that led to the election of Trump. This analysis of today's populism is important, as long as it does not get sidetracked into debates over identity versus economics. Stressing economic causes of populism does not devalue identity issues (like race or immigration), but it is the economics that causes the swings that help put populists in power. It was crucial, for example, to the trick that the media played to convince many to vote for Brexit: that EU immigrants and payments were reducing access to public services, whereas in reality the opposite is true.

Yet while economic issues may have created a winning majority for both Brexit and Trump, the identity issues sustained by the media make support for both hard to diminish. Brexit and Trump are expressions of identity, and often of what has been lost, which are very difficult to break down when sustained by the group’s media. In addition both Trump and Brexit maintain, because their proponents want it to be maintained, the idea that it represents the normally ignored, striking back against the government machine in the capital city with all its experts.

But to focus on what some call the ‘demand’ for populism is in danger of missing at least half the story. Whatever legitimate grievances Brexit and Trump supporters may have had, they were used and will be betrayed. There is nothing in leaving the EU that will help the forgotten towns of England and Wales. Although he may try, Trump will not bring many manufacturing jobs back to the rust belt, and his antics with NAFTA may make things worse. Identifying the left behind is only half the story, because it does not tell you why they fell for the remedies of snake-oil salesmen.

As I wrote immediately after the vote in my most widely read post, Brexit was first and foremost a triumph for the UK right wing press. That press first fostered a party, UKIP, that embodied the views the press pushed. The threat of that party and defections to it then forced the Prime Minister to offer the referendum the press wanted. It was a right wing press that sold a huge lie about the UK economy, a lie the broadcast media bought, to ensure the Conservatives won the next election. When the referendum came, it was this right wing press that ensured enough votes were won and thereby overturned the government.

Equally Donald Trump was first and foremost the candidate of Fox News. As Bruce Bartlett has so eloquently written, Fox may have started off as a network that just supported Republicans, but its power steadily grew. Being partisan at Fox became misinforming its viewers, such that Fox viewers are clearly less well informed than viewers of other news providers. One analysis suggested over half of the facts stated on Fox are untrue: UK readers may well remember them reporting that Birmingham was a no-go area for non-Muslims.

Fox became a machine for keeping the base angry and fired up, believing that nothing could be worse than voting for a Democrat. It was Fox News that stopped Republican voters seeing that they were voting for a demagogue, concealed that he lied openly all the time, that incites hatred against other religions and ethnic groups, and makes its viewers believe that Clinton deserves to be locked up. It is not reflecting the views of its viewers, but moulding them. As economists have shown, the output of Fox does not optimise their readership, but optimises the propaganda power of its output. Despite occasional tiffs, Trump was the candidate of Fox in the primaries.

We have a right wing media organisation that has overthrown the Republican political establishment, and a right wing press that has overthrown a right wing government. How some political scientists can continue to analyse this as if the media were simply passive, supportive or even invisible when it brings down governments or subverts political parties I do not know.

The plutocracy

Trump and Brexit are the creations of a kind of plutocracy. Politics in the US has had strong plutocratic elements for some time, because of the way that money can sway elections. That gave finance a powerful influence in the Democratic party, and made the Republicans obsessive about cutting higher tax rates. In the UK plutocracy has been almost non-existent by comparison, and operated mainly through party funding and seats in the House of Lords, although we are still finding out where the money behind the Brexit campaign came from.

By focusing on what some call the demand side of populism rather than the supply side, we fail to see both Trump and Brexit as primarily expressions of plutocratic power. Trump’s administration is plutocracy personified, and as Paul Pierson argues, its substantive agenda constitutes a full-throated endorsement of the GOP economic elite’s long-standing agenda. The Brexiteers want to turn the UK into Singapore, a kind of neoliberalism that stresses markets should be free from government interference, rather than free to work for everyone, and that trade should be free from regulations, rather than regulations being harmonised so that business is free to trade.

It is also a mistake to see this plutocracy as designed to support capital. This should again be obvious from Brexit and Trump. It is in capital’s interest to have borders open to goods and people rather than creating barriers and erecting walls. What a plutocracy will do is ensure that high inequality, in terms of the 1% or 0.1% etc, is maintained or even increased. Indeed many plutocrats amassed their wealth by extracting large sums from the firms for which they worked, wealth that might otherwise have gone to investors in the form of dividends. In this sense they are parasitic to capital. And this plutocracy will also ensure that social mobility is kept low so the membership of the plutocracy is sustained: social mobility goes with equality, as Pickett and Wilkinson show.

It is also a mistake to see what is happening as somehow the result of some kind of invisible committee of the 1% (or 0.1% and so on). The interests of the Koch brothers are not necessarily the interests of Trump (it is no accident the former want to help buy Time magazine). The interests of Arron Banks are not those of Lloyd Blankfein. Instead we are finding individual media moguls forming partnerships with particular politicians to press not only their business interests, but their individual political views as well. And in this partnership it is often clear who is dependent on whom. After all, media competition is slim while there are plenty of politicians.

What has this got to do with neoliberalism? which is supposed to be the dominant culture of the political right. As I argued here, it is a mistake to see neoliberalism as some kind of unified ideology. It may have a common core in terms of the primacy of the market, but how that is interpreted is not uniform. Are neoliberals in favour of free trade, or against? It appears that they can be both. Instead neoliberalism is a set of ideas based around a common belief in the market that different groups have used and interpreted to their advantage, while at the same time also being influenced by the ideology. Both interests and ideas matter. While some neoliberals see competition as the most valuable feature of capitalism, others will seek to stifle competition to preserve monopoly power. Brexiters and their press backers are neoliberals, just as the Cameron government they brought down were neoliberals.

I think there is some truth in the argument, made by Philip Mirowski among others, that a belief in neoliberalism can easily involve an anti-enlightenment belief that people need to be persuaded to subject themselves fully to the market. Certainly those on the neoliberal right are more easily persuaded to invest time and effort in the dark arts of spin than those on the left. But it would be going too far to suggest that all neoliberals are anti-democratic: as I have said, neoliberalism is diverse and divided. What I argued in my neoliberal overreach post was that neoliberalism as formulated in the UK and US had made it possible for the plutocracy we now see to become dominant.

By the nature of an unorganised plutocracy, what types of neoliberalism hold sway may be largely random, and depend a lot on who owns media organisations. It leads to a form of politics which is in many ways unpredictable and irrational, with an ever present tendency to autocracy. This is what we are witnessing, right now, in the UK and US. It is not the normal politics that either of these countries are used to, although it may be more familiar to those in quasi-dictatorships. We all know about how the Republican’s tax cutting bill just happens to favour real estate moguls who inherit their money as Trump did. This is simple corruption, enacted in a corrupt way. That the President of the United States retweeted a British far right group that inspired an individual to murder a British MP is not normal. When Brexit supporting MPs respond to the Irish border problem by saying ‘we are not going to put one up’ this should not pass as an acceptable response: it should be laughed at as the nonsense it is.

When politics becomes the whims and mad schemes of a small minority that only listen to themselves, unmodified by the normal checks and balances of a functioning democracy, it should be treated by the non-partisan media for what it is, not normalised as just more of the same. If we treat a plutocracy as a democracy, democracy dies. We should not be fooled that this plutocracy looks like normal politics just because the plutocrats have taken over the main party of the right.

A dividing point

We are very close to a point where neoliberalism becomes something much worse. The POTUS is following a fascist strategy of demonising a religious minority. If Mueller’s investigations proceed as expected, but he is sacked and/or the Republicans block any attempt at impeachment, we may have passed that critical point. If the Brexiters succeed in breaking away from the EU’s customs union and single market, the UK may have nowhere else to go but the arms of a permanently Republican US.

If there is a way of escaping this fate, and rescuing democracy in both the UK and US, it has to involve a democratic defeat of the right wing parties that allowed this plutocracy to emerge, and indeed encouraged it and then made bargains with it when it believed it was still in control. The defeat has to be overwhelming and total. Those who brought us Brexit and backed or tolerated Trump have to be disgraced as the harbingers of disaster. Their control of the Republican and Conservative parties must end.

Only that will allow the left, and I think it has to be the left, to end a system by which elements of the plutocracy can control so much of the means of information. In the UK that means extending rules that apply to broadcasters, suitably adapted, to the press. In the US it means not just bringing back the Fairness doctrine repealed under Reagan, but also bringing controls on election spending similar to those in the UK (and the UK controls need to be strengthened). In short, we need to take money out of politics to ensure democracy survives. Give journalists the freedom to write about or broadcast the news as they see it, rather than as their employer want it to be seen.

Why the left rather than the centre? The centre will agonise over what this means for freedom of expression or freedom of the press and therefore nothing much will happen (see Leveson), as nothing happened under Clinton or Blair. That may be a little unfair to both leaders, because the danger of plutocracy may have been less obvious back then, and the media was more restrained. But with Brexit and Trump no further evidence is needed. The left should see more clearly how in practice this freedom is in reality just a freedom to sustain a plutocracy. Only it will have the courage to radically reverse the power and wealth of the 1%. I fear the centre will not have the will to do it. Although Anthony Barnett’s focus differs from mine, he puts this point very well here: if all you want to do is stop Brexit and Trump and go back to what you regard as normal, you miss that what was normal led to Brexit and Trump.

That will have many wise and sensible people shaking their head, but the alternative does not work. Defeating or impeaching Trump and letting the Republican party survive in its current form achieves little, because they will go on gerrymandering and Fox news will go on poisoning minds. The energy of Democrats will be spent on trying to clear up the damage Trump has caused, and the next autocrat from Republican ranks who wins power because they will ‘clear the swamp’ will be smarter than Trump. In the UK, if the Conservatives survive in their current form, their ageing membership is in danger of selecting more Brexit nutters who will overwhelm the dwindling number of reasonable Conservative MPs. We will find the BBC, if it survives at all, will become more and more like the mouthpiece of a press dominated by plutocrats. [1] In either case a critical point will have passed.

I know from many conversations I have had that there is a deep fear among many of leadership from the left. Here the UK is ahead of the US. The story in the UK used to be that the left could never win, and it was a plausible story, but recent events have cast great doubt on it. That remains the story in the US, but there are good reasons for doubting it there too. There is no reason why all of the disenchanted who fell for the lies of the snake-oil salesmen could not support radical remedies from the left: identity and the media are strong but it is economics that dictates the swings.

In the UK now the story seems much more elemental: that somehow the left threatens the existence of capitalism and democracy. In truth there is no way Corbyn could persuade the Labour party to abandon democratic capitalism, just as there is no way Sanders or Warren could do the same in the US. All we are talking about is rolling back many of the results of neoliberalism. But it is difficult to logically convince someone the ghosts they see do not exist. In contrast to these ghosts on the left, the dynamic of plutocracy that I have described here is very real, and it requires radical change to bring an end to this dynamic.

[1] This is why arguments that say the UK press is becoming less powerful because of its falling readership fail. If this press dominate the news agenda of the broadcasters, they do not need many readers.