What you need to think if you are calling for a NGDP target

Don’t worry. I am not going to write another post arguing that the world’s problems would all go away if its central banks adopted a NGDP level target (it has been over 10 years now, give it a rest!). There are plenty out there already: this one by Sam Dumitriu is a good place to start, this by David Beckworth, or if you are really dedicated, go back to when Tyler Cowen introduced Scott Sumner to the world in 2009 and read on from there.

And if you want a sober, understanding rejection of the idea, this speech by Charlie Bean from 2013 is the place to go.

But recent weeks have seen a series of Conservatives step up to call for a NGDP target*, and I would like to think aloud on what this means about their view of the economy. Here is Bim Afolami with the SMF (where I am on the advisory board); Gerard Lyons et al at Policy Exchange, and now Sajid Javid at the CPS. Ultimately, if people near the room where it happens are calling for this, it is interesting to reflect on how the arguments must be proceeding in the Tory soul.

So what do you need to think if you are calling for a NGDP target?

  • You think there is a problem with aggregate demand You have to – that is what monetary policy operates upon. The internet is full of central bankers’ speeches complaining that it is not their fault if the supply side is failing. Go and talk to the Treasury about skills, innovation investment and all that stuff
  • That means worrying about insufficient demand Right now, that’s not hard – spending in the economy fell some 20%-plus in April – but longer-standing fans of the idea probably suspect that the economy would have been much healthier this last 10 years if spending had not done this:

That is a £100bn/quarter gap on its pre-2009 trend. Even if you think just a tenth of that was unnecessary, that is a giant amount to leave on the table. A Brexit-sized amount, if you like. Not everyone has always felt this – Charlie Bean clearly didn’t. But this also means…

you need to think that extra NGDP would mean some extra RGDP Which is not always the case. For much of the postwar period, we were up against the UK economy’s limits. Giving people more to spend – which the combined Bank-Government authorities somehow managed to do – normally just meant prices being higher, and wages too, with the deleterious effects that such inflation brings. Another way of putting this: you feel in some way that simply giving people extra spending might unlock extra real resources – despite all this stuff put out there about a productivity problem. I have always liked the way a man called Howard Bogod put it in a letter to the FT:

My brothers and I run a relatively small family business with a turnover of below £20m. We could easily cope with a 20 per cent increase in business with no extra staff, and even a 50 per cent increase might require only a 10 per cent increase in staff. This would mean a huge growth in productivity, and I strongly the suspect the same is true for most smaller and even many larger businesses across the UK.

So you probably need to agree with Howard. And in a largely services-based economy, it is easier to. An estate agency serving 20 transactions a month doesn’t need twice the shiny-suited employees to serve 40. And in the short run we have seen this in the corona-crisis – employment is far less elastic than production on the downside, so why not on the up?

  • You have to believe that monetary policy is not entirely ineffective This is where things get more heated. Opponents of a higher AD policy on the right tend to be those who think you are wrong to want it – it is inflationary, or bound to lead us into some other sinful pathway like credit bubbles. On the left, in my experience they are more likely to deride monetary policy as some kind of evasion from the duties of fiscal policy to keep aggregate demand up instead. It seems to let off the wicked Austerians of 2009-16. There are a dozen reasons to dislike the pace and nature of Osborne’s fiscal approach, but if you want the entire bingo-card, you need a macro one too – “killed the recovery”
  • But “effective” does not just mean “capable of boosting the economy when rates are zero”. If you think too tight a Bank of England target might constrain the demand-boost that came from fiscal policy, then you should still worry about the inflation target. Both monetary and fiscal stimulus just contribute towards aggregate demand growth. If one does more, when we were already on target, the other might just do less. That central banks know and take into account fiscal policy has been called The Sumner Critique and a NGDP targeter probably believes in it. This is conventional wisdom for 1993-2007, by the way: the government’s fiscal balance swung around considerably, the Bank kept NGDP growing just steadily (see chart).
  •  You probably also care about how expectations guide the economy Sajid Javid (and authors) touch on this towards the end of their bit on the Policy

… over time, so long as the Bank’s commitment to keep nominal GDP on a stable growth path was seen as credible and binding, market expectations for inflation and total spending would start to rise, pushing up nominal interest rates. In turn, this would allow the Bank to raise the base rate away from the zero lower bound and reduce its reliance on quantitative easing

Here the maddening circularity of the policy rears its head. An economy convinced of the credibility of the Bank’s commitment to NGDP targeting doesn’t need the Bank to do much to hit that target: expectations cluster around that pathway, and it becomes self-fulfilling. Ultimately this is where the more purist advocates end up – suggesting a target can be so credible that the Bank does not have to do much to meet it. Rather like the way Mervyn King saw the Bank of England in 2005, as a sort of Maradona.

  • And you think current members of the MPC are only human. It is uncontroversial that a strict inflation target can cause all sorts of misfiring when negative supply side shocks hit – Bim Afolami hints at this. Inflation rises, some hawk calls for tighter policy (weaker demand) – so a supply shock has a demand shock added to it. Charlie Bean thinks the “flexible” in Flexible Inflation Targeting handles this:

inflation targeting as practised, here and elsewhere, allows for an accommodating response to cost shocks, so long as it is consistent with inflation being stabilised in the medium term. Such flexible inflation targeting can thus look quite similar to targeting nominal income growth.

Maybe. But some MPC members were far from this in the summer of 2008 and the spring of 2011, and market-probabilities of rates rising soon shot up. Because NGDP targeters place great store by expectations and market reactions, they think these mistakes matter. Just because those nutters on the MPC never actually raised rates in those depressed days of 2011, doesn’t mean the small chance they might have didn’t damage economic sentiment.

Could such mistakes be made again? You need to believe they could. We face in the corona-crisis a very confusing mixture of demand and supply damage, and plenty of voices warning about medium term inflation risks. Suppose we recover three quarters of the loss and then the scarred economy starts to send bleeping red signals about inflation … do you think the MPC will tough it out?

There you have it. These people calling for a new NGDP target for the Bank have to believe that there is a significant demand problem with the economy that won’t be resolved within inflation targets, that dealing with it will produce more real growth, and and that you need a different target because otherwise monetary policy might constrain the recovery through an unnecessarily tight stance, no matter what you think of using fiscal policy.

As for whether the Johnson administration is tempted, I just don’t know. They like focus groups. And this sort of thing really struggles in a focus group …

*The last time there was such a kerfuffle was 2012 – read Duncan Weldon’s Touchstone Blog – which was triggered by a few events: the shift in the US monetary approach which inspired talk of Scott Sumner Day, also the UK’s stubborn refusal to grow through austerity, and the advent of Mark Carney at the Bank, he having sort-of called for NGDP targets when back in Canada

Keynes on how to pay for the War, and what to worry about most

It is marvellously calming to pick up a hitherto unread piece by Keynes at a time like this. For some reason, a number of the epoch-making economists of the past were also wonderful writers – I am thinking Smith, Keynes, Friedman and Hayek, whether you agree with them or not – and it is nice to be subject to the prose of the best of them. (Not Ricardo though, I don’t think I have ever got anywhere with him).

Keynes’ “How to pay for the War” (nice Prospect article here) is think-tank pamphlet in length, based upon a few long articles for the Times, and clad in the sort of stiff brown cardboard that suggests the first answer to his title is “begin by economising on book coverings”.

What is calming is the beautiful writing and clear thought, rather than the ready provision of applicable answers to our current situation; in fact, the situation Keynes analyses with such brisk clarity is almost diametrically different to today, and to what he spent the middle years of his career fixing.  In early 1940, Keynes had no doubt that the British economy could and would produce far more. GDP was growing explosively.  He was confident to the point of blitheness on this point, writing casually “we shall, I assume, raise our output to the highest figure which our resources and our organisation permit” – the problem the whole world of economists grappled with unsuccessfully for much of the 1930s.

Instead, he identifies the problem as how to restrict consumer spending – the less of which there is, the more there is for war production.  And with GDP and therefore national income soaring, you cannot just let people’s earnings turn into their consumption – again in his words, “we cannot allow the amount of mere money in the pockets of the public to have a significant influence … on the amount which is released to civilians”. How to break the link between the higher incomes the civilians are all earning by working more and harder, with the amount of stuff they get to enjoy?

What follows is for me an object lesson in clear exposition, as Keynes walks us through the various methods possible and proposed for this – forced saving, voluntary saving, price inflation, taxation and so on – all of the time keeping the reader’s mind on the essential underlying logic of the thing: that people are “paying” for the war by consuming far less than they are producing.  He glides smoothly into the justice of the matter, even attempts some IFS-esque analysis of which classes (by income) ought to suffer which restrictions, and cleverly muses on how his proposed answer (basically, forced savings*) might contain a ready-made answer to the post-war problem of a sudden spike in unemployment.  Force everyone to save now, get them to release it later when we are going to need a lot of work for the demobilised, it all fits beautifully.  And in the meantime distort markets and preferences as little as you can – try to avoid rationing or dictating who exactly should consume what. It is true what they say – Keynes was never trying to replace capitalism, but to save it.

It is not hard to see the diametric differences to today. Here, we have plummeting GDP, and consumption much lower than we would want it.  We want those retail-facing industries working again – if they can do so safely.  If national accounting identities hold then incomes are plummeting too, and the most lauded of the government’s interventions are those like the Coronavirus Job Retention Scheme that try to keep said incomes high.  With the exception of healthcare and some other businesses like delivery, no sector of the economy is running hot.

There are some similarities, such as soaring government borrowing, and its mirror image, higher private saving, I assume (I carried out a brief analysis of my household and found collapsing spending on restaurants, coffee, entertainment and transport, and slightly more on groceries and household goods) – in particular for those with incomes intact. But only the most optimistic V-shape-er can now think that all those pent-up savings are about to release a symmetric recovery in spending when the healthcare rules allow (but for a monetarist view on this, worth reading Simon Ward).

Keynes makes it look easy, and I am sure it was anything but. It is probably a function of his genius that he makes the most extreme financial challenge the British state would ever face look soluble in 70 or so pages.

But I’ll say it: the problem he addressed feels analytically more straightforward than the one we face now.  Do we want higher demand now, or later? How serious is the supply problem? Is it even useful to think in terms of supply or demand (the same restaurant may be suffering a supply problem – same space, fewer tables allowed – and demand problem – smaller clientele willing to risk their health)?  The country is almost certainly facing a structural adjustment, affecting urban economics, the future of the office, the size and role of the state, even how we think about social insurance – but when is the right time to start work on that? Are market forces working? Landed property values are almost certainly much lower now – surely one of the key values of land is that it where you physically meet, and that now comes with a steep negative externality – but is the system robust enough to cope with a sudden adjustment to the trillions of pounds tied up in land? And what about corporate equity – thousands of balance sheets have taken a heavy hit in last three months (my god, it has been only three months) and surely an ideal government policy would somehow address this– but how on earth can you do that in a way that is fair?**

Oh, and I understand that the question of how to relax the lockdown itself may throw up a dilemma or two, and even some ugly politics. Then, after that (or perhaps during it all …) we have the fiscal dilemmas, and the financial risks to the state.  In a sense, the whole problem is a cousin to the one Keynes was musing about: there is damage to be taken, and so who should take it? But back in 1940 it was an actual war, and actual wars are conducted by governments, who seize all the levers, and force all the payment. That is no longer possible now.

I have the sort of worrying mind that wakes each day convinced nothing is soluble. It is only by the end of a fast run and a stiff coffee that I feel remotely up to the task of thinking about difficult things.  For this one, I struggle even to know what to worry about first. So I do hope this era turns out its own Keynes.

*In his words “a proportion of each man’s earnings which must be deferred – withdrawn, that is to say, from immediate consumption and only made available as a right to consumer after the war is over”.  That is forced savings in my book though he adds a nice progressive twist (p10-11)

**Jim O’Neill has co-authored an article calling for this, but in my view does not really tell us how


Some of the bailout reading I compiled

OK, so my technique when asked to write a big piece (like my newly published report on Bailout Policy for the Coronavirus Crisis) is to engage in a constant, mind-wearying conversation with myself over email and sometimes with Twitter on the back of all the stuff I read that may have some tangential relationship with the topic.

Here are some of the links I set aside when writing about bailouts and coronavirus-crisis.  They start with news pieces that pertain to the thing, and then a sample of the many blogposts etc that I bookmark on Feedly when doing this work.

Here I am going to post them as an aide memoire, but hey you might find something useful in there too.  And also it helps me to reflect on how much I have needed to absorb to develop even half an opinion on this impossible topic.


Rana Faroohar: we’re subsidizing the US corporations responsible for the hire-and-fire culture we don’t need

Big hedge funds are raising money: there is private sector cash if you look for it (late March)

Equity stakes serve two purposes: they are affordable for the debt-laden, and they give the public a seat at the table

The IPPR “Beyond Bailouts”: a bailout plan where ” The government is likely to generate very high
returns on its equity investments – as much as three times its investment, over
a decade, if not a lot more”

Nick Rowe thinks aloud about having to redistribute between affected and less-affected sectors

The State as Insurer of last resort, and many other ideas

Bailouts get abused: evidence from the FT “UK language trainer to use job scheme for already planned redundancies”-

Not going as fast as people want: “Frustration despite UK coronavirus bailout loans reaching £450m”-

Supply chains are a specific problem and need some love during the coronavirus pandemic – 

Serious evidence on Labour Market Scarring from VOX – it is about “matching capital”

The Economist “Unicorn Reality Check” – no, not every hyped up company needs “saving”

Brilliant starting thoughts on Vox on Trying Equity

You cannot bail out Investment bank profits which may be under pressure later – https://www.ft.com/content/43dcabdd-68af-4d9c-83a4-46a74265d4a1?shareType=nongift

A small example of a supply-important sector that may need help  – Ferries

News on the financial and other restructuring that companies are doing anyway – THE MYTH OF THE ECONOMY IN DEEP FREEZE

Mohamed El-Erian warning that you cannot rule out a depression

Cash-rich Gulf funds hunt for bargains as asset prices plunge – 16th April.  THERE IS MONEY OUT THERE

Even big cinema operators can raise money at some price via @FT

And HMT has a right to be not impressed by Virgin

Jonathan Ford points out the laid back approach to financial risk that went before this

Bloggy things

Sumner on Yellen and Bernanke on monetary policy options https://www.themoneyillusion.com/bernanke-and-yellen-on-monetary-policy-options/

The Resolution Foundation welcomes the JRS et al

Simon Wren Lewis on the economic effects of it

An early assessment of what the stockmarkets were telling us

A smart guy called Zachary Booker thinks about how bridge loans can’t work

Tyler Cowen says minimum wage hikes are a very poor idea right now 

and also that wages have become flexible again

“This column argues that in light of already elevated debt burdens, provisions for future debt restructuring should be made as soon as possible.”

Tyler Cowen discusses the idea behind bridge loans

this is a good bit: “you might actually want those resources to be reallocated to good transport, biomedical testing, and so on.  If the wartime analogy is apt, you don’t want to freeze the previous capital structure into place, unless of course you get lucky and win the war early”

how the crisis is different from 2008

Iza Kaminska’s idea for a Prudential Authority for the real economy

The economics of wage compensation and corona loans: Why and how the state should bear most of the economic cost of the COVID lockdown

Greg Mankiw’s future-income contingent idea for social insurance

The “Fix NGDP and the rest follows” view and Lars’ crazy-level optimism

James Bullard’s key early points about the US during the pandemic

John Cochrane thinks moral hazard is still a thing in a pandemic.  He also wonders why the landlords need to get off lightly

We didn’t buy pandemic insurance and can’t forever pretend that we did

Several aeons have passed since I began thinking about covid-19 bailouts (IFG pamphlet out shortly, watch this space), and still I struggle to get my thoughts straight.  During that time, the blogosphere and in particular VoxEU have drenched us in high-speed, quality thought, even as the facts on the ground have shifted at speed.  Just a month or so ago, it was possible for the superlative Richard Baldwin to write the clause “given the transient nature of the underlying medical shock”.  This presumed transience has helped to condition the policy advice in turn, which I will shamefully attempt to summarise:

  • Non culpability: The shock is an unforeseeable one-off that hits the economy irrespective of prior behaviour (unlike, say, a tidal wave that affects everyone who chose to live near the coast)
  • Preservation: the economy that went into this crisis is the one you want coming out of it. So try to “freeze financial time”: stop the accumulating bills from burying the hibernating economy when it re-emerges into the Covid-free sunlight
  • Fiscal superpowers: whatever the bill, it can be afforded.
  • Treasury man is dead The Man from the Treasury is the nagging voice on one shoulder* making awkward points like:
    • “Doesn’t this just discourage the company seeking private sector help?”
    • “Won’t this distort competition – what about all the companies well-run enough not to need our help?”
    • “Don’t believe these sob-stories about lost jobs – new jobs are always being created – aid just postpones necessary change”

So there sprung into life many proposals that were best captured in this piece by Gollier and Straub as “the state as insurer of last resort”:

The containment strategy is a necessary collective sacrifice for the common good. This effort must be shared fairly from an economic and financial point of view …. Ex-post solidarity is ex-ante insurance. Only the state can set up such an insurance mechanism as a last resort.

We didn’t all buy pandemic insurance, but now the infinite-pocketed state needs to act like we did, and pay out, in proportion to the losses brought about by the enforced hibernation.  For, as James Bullard of the US FOMC put it, the coronavirus shutdown is “not a recession but an investment in survival”.  Bullard says it very simply: match any lost wages. Match any lost business. No questions asked.

And that is what Chancellor Rishi Sunak’s Treasury implicitly set out to do with his “whatever it takes”, through a rolling landslide of welfare payments, furlough schemes, sickness pay, tax holidays, grants, low-condition guaranteed loans, Bank of England purchased loans, and so on. It was easy analytically but an impressive achievement administratively, given how hard it is to identify all those pockets of lost income in our complicated economy full of varied employment models.

But at least we did not have to worry about those dumb, forward-looking Treasury questions.  No one when claiming insurance has to explain what the money is for. They just need to show they are entitled to it. In fact, that is how much of the to-and-fro commentary between Treasury,  business and its representatives went in the following weeks – it was about entitlement. “Firms/people that are entitled to money are not getting it – go back and find another scheme”. And so they did.   The preservation assumption is a great fairness rule – it avoids awkward decisions about desert.  None of you caused coronavirus, so you should be helped (never mind that, as Grumpy Economist observes, individual companies are seldom “culpable” for a recession).

Which is all right – for so long as we are in that world of V-shaped, temporary passing recession expected those aeons ago.  But what about if or when we are not?

In some regards, the Bullard assumptions were never going to be aimed for, let alone met.  No one believes in making investors whole, for example: the point of corporate aid is to help the underlying people, social and organisational capital, not give the fund manager a retrospective put.

And are all companies really blameless for current financial distress? What about one that financed itself such that the smallest downturn was always going to blow it away – should it be rescued by covid?  Or what about a start-up taking a long-odds bet on space travel – is it the state’s job to keep that particular dream alive?

But the grand ex post social insurance idea has been steadily crumbling for a while.  At some point in April it became horribly obvious that the preservation assumption was not going to be fit for purpose. The economy due to exist in May 2021 was not going to be the same as May 2019.

We can’t be disingenuous about the shape of the future economy. Oil has collapsed from $50 to $20.  Some of the lost income pre-to-post Covid was premised on higher oil.  It doesn’t make sense for the government to keep hosing money towards companies as if oil was still $50 because, hey, coronavirus was not their fault and we would love November 2019 back. Oil is only the most visible financial market emblem of a new world.  What are your assumptions about: hotel bookings, flights, restaurant visits, commercial property transactions, sales conferences organised, and so on? Imagine how many pre-covid business propositions are riddled with assumptions about economic inputs like those, and now need rewriting.

At some point, the Treasury has to work towards the economy of Christmas Future, not Christmas Past.  If it sticks with “no questions asked”, the money keeps inflated a corporate structure built for the wrong time, and the chances of a robust return to growth are undermined.  And this is incredibly important, because while I believe the Fiscal Superpowers assumption, this is very much premised on a one-off, 1%-cost investment now yielding great returns in terms of the future pathway.   Pull up a spreadsheet and work out how much it costs to finance £300bn of extra borrowing, repaid over 20 years – it is not all much, arguably not as expensive as, say, committing to raising the income tax threshold all the darned time.

But lower the future growth pathway by 0.5% and suddenly we are in deep trouble.

To be precise, the point is not what the Treasury thinks about any particular business (many of those guys struggle to get served in bar, let alone evaluate a business case 😉), but what the market does.  That is why commercial tyre-kicking has value, and dropping it for ideas like a 100% loan guarantee is dangerous. More to the point, the sifting of business opportunities into sheep and goats is a phenomenal job of work, one that only a million private sector interactions can pull off.  If, for example, there will need to be 20% fewer restaurants in post Covid Britain, that can only be done through countless nagging and unpleasant conversations between lenders, investors and managers.

Business organisations will continue to clamour for maximum, conditions-free money; they are doing their job.  Whatever your assumption about the political economy of business lobbies, their payoff matrix is not “the average level of productivity of the business class”. It is much more related to survival, and you should not expect hymns to creative destruction.  Turn on the TV, listen to the stories of any entrepreneur and I would challenge you to feel or act otherwise.

But the Treasury has to look out for the health of the whole economy, and handle what I think may be the most difficult pivot ever in economic policy-making: the one from “every business insolvency is bad news, everyone is entitled to help” to “the market is working again, and we need it to”.

*you decide which

What the betting markets are saying …. It’s complicated

I am pathologically fascinated by political probabilities, and have been for easily 20 years: my first big speculative win in life was to “buy” Labour seats in the 1997 General Election at around 350, and I have been hooked every since.

Here are some of the current odds.

  1. A meaningful vote to pass in 2019  ~31%
  2. No Deal in 2019 ~ 18%
  3. UK to leave the EU by end of October ~28%
  4. UK to leave the EU by the end of December ~34%
  5. Brexit to happen before a General Election ~33%
  6. General Election this year ~68%
  7. Conservatives to win majority in next GE ~ 32% (Labour: 6%)
  8. Conservatives to win most seats ~70%
  9. GNU! Ken Clarke, Harriet Harman or Margaret Beckett to be next PM ~19%

There are a lot of overlapping probabilities in there that I would love to disentangle.  So here I am trying, looking at the possibilities (excluding 5 and 8).


What a mess, eh? But I think it gets across a few things. A Government of National Unity means no Brexit before 2020, but does NOT mean no MV passing – it might put through one with a referendum rider, for example. And a GNU might also be followed by a Tory Majority in a 2019 election.  No Deal Brexit might happen before end of October 2019, or it might happen in the months after.  There is a chance it happens even if a Meaningful Vote passes (See Maddy Thimont Jack). And it might happen if the Tories win a working majority – their mandate might fail to win over something workable from the EU.

Here it is with a few of the more salient probabilities given some kind of a name. (It goes without saying that the shape is not built to be proportional to the size of the probabilities.  That would be impossible for my poor brain. )

Anyway, my intention when sitting down to do this was to attempt some smartypants Bayesian logic to work out what one or two of the derived probabilities might be from the above.  For example, what does the Market think is the chance of the Benn Act forcing an extension? What does the market think is the chance of Johnson getting his new deal past the EU and then Parliament? Not the 31% chance above – some of those odds refer to meaningful votes on OTHER scenarios passing (like with a referendum rider). But right now all it has done is just warn me of the multiple different possibilities we as a country currently face.  I labelled 11 scenarios there, and I did not cover all of them by any means.

Perhaps if I earn myself the brain space at some other point I will try to work out some flow chart of possibilities, but I know others have done this, and better than I can. I will be humble and search them out first.

The defeat of the Treasury must not be final

For most advisers toiling within government, the standard daily routine is simple: “wake up/go to work/try to do things/get told you can’t by the Treasury/grumble a lot/go home”.

OK, I exaggerate: there is the whole maddening business of government by collective agreement to wade through. This means that any other department, from the mighty Home Office down to the, er, plucky Welsh Office might throw a spanner in your works.

But mostly it’s the Treasury telling you No, and then twice a year itself getting to announce whatever it damned well wants under some convention called “we control the purse strings, what you want to do about it?”  Usually it’s the likes of a beer duty cut, to show that They Get People (the omnishambles Budget casts a looong shadow). If you can detect notes of resentment in my preamble, well duh; I even wrote a pamphlet (with Stian) calling for HMT to be broken up.

So I ought to be feeling some smidgeon of schaudenfreude at the seeming overthrow of the once mighty HMT, in particular with regard to industrial strategy.  First with Vince Cable, and then later with Theresa May, half of my job for 6 years was building the  case for economic intervention, and always against the sharp brains and ruthless negotiators of Horseguards.

Now it feels like one of those episodes of Game of Thrones where a longstanding warlord is suddenly, ruthlessly murdered. Recent days have seen staggering announcements from my old stamping ground, now under the hitherto dry-ish Andrea Leadsom: a billion for electric vehicles, £200m for Fusion, a few more forests … and all of this against a backdrop of disintegrating fiscal rules . This is all before much of what the PM promised in his leadership charge is even costed.  All of these were ideas being worked up during Theresa May’s time, some amongst those refused by the then-Chancellor in the dying days (hard to believe, but nuclear fusion wheezes don’t just spring up from a few feverish caffeinated hours of pre-conference brainstorming. Forest wheezes, coin wheezes, maybe … ). 

This is politics, and it makes sense that the new administration frames everything as a pure consequence of their thrusting optimism about Britain’s future, even if this is somewhat unfair.  Well, forget the “somewhat”: for me this is the most galling paragraph of the weekend so far:

“Mrs Leadsom is a Brexit true believer. While her predecessor Greg Clark agonised about its impact, she sees a path to a shining future in which the UK will lead the world in artificial intelligence, green energy, automation and life sciences.”

Sorry to shout, but WHAT? Greg Clark, with the close and energetic support of Downing Street, led the charge in setting goals and missions for industrial strategy around the life sciences, Artificial Intelligence , the Future of Mobility, green energy, the Ageing Society, and much more. Rather unfair to imply that his widely-shared concerns about damage from the wrong Brexit betrays a lack of belief in our technological potential. Greg fought hard for R&D.

But as I said, politics – and there is some cynical truth to the implicit claim, “if it were not for us, these things would not happen”.  The current prime minister appears to be de facto First Lord of the Treasury to a degree that his predecessor wasn’t. Good advisers have a talent for feeling the winds of change; four years ago, the promise-threat of endless austerity was the recipe for winning elections, and now it’s the opposite. Principle should not become blind.  You can see no starker example than the shift of the current Chancellor – today’s Santa Claus was four years ago planning to convert grants to loans, not just for student maintenance but even for innovation, despite being warned of “potentially disastrous consequences”.  People who see George Osborne’s downfall as entirely stemming from the EU referendum forget the knock he had already taken from trying to cut tax credits too hard in 2015. The wind was already changing, and I suspect our current PM had detected it.

So, industrial strategists rejoice? I would throw in a few words of caution. I always felt that a good industrial strategy was one that beat the Treasury on the merits of the argument, not through political force majeure. Principles like:

  • avoid distorting competition
  • respect value for money
  • go with the grain of the country’s long term direction (ageing, services-led, inherently globalist, knowledge economy)
  • be realistic about gaming, crowding out, additionality
  • you are being lobbied, and everything seems more convincing than it really is

are worth heeding, always. There is a huge opportunity between mindless laissez faire and “do whatever the latest overpromoted Spad feels like” and the processes, arm’s length organisations, and continuous tedious challenge is part of finding that space.

I am reasonably sure that these announcements are good ones, because they have been brewing a long time. It makes sense to go for it on electric vehicles; I even like the Labour plan of massive subsidized loans to buy them (though bear in mind most of the cars bought will be foreign-made at first. And building three battery plants in the UK is punchy: I wonder if the Labour leadership realises that this will basically involve a lot of hard bargaining with the rare capitalists who are good at this). Nuclear fusion is a gamble worth taking: even if it is a one in ten shot, it is a technology that just might transform the whole planet’s energy system.

But, for the future, an industrial strategy constructed in a Treasury-free zone is a worrying thought. Its sudden, seeming defeat reminds me, unforgivably, of further Game of Thrones themes, in particular: the nature of the real enemy can shift.* Back in 2015, the people pointlessly urging us towards a fiscal surplus were a threat to national prosperity, in my view.  Now a far worse threat comes from those urging us on to a No Deal Brexit, and pretending it is somehow embracing the future.

Deciding you want a future filled with autonomous electric vehicles, AI-powered care assistants, green energy and quantum mechanics is the easy bit. Actually getting there means two things: staying relentlessly open to all the world best ideas, and being prepared to hear the word No a whole lot more. The Treasury may be a pain, but in the more recent chapters of this saga it has weirdly become one of the good guys.

*face it, it would have been helpful for Tywin Lannister to have taken on the Night King

When concentrating your vote flips over into being a disadvantage

There was a fascinating discussion on my Twitter timeline with Rob Ford, Will Jennings, Iron Economist and many other distinguished people, triggered by concerns about the Liberal Democrat revoke A50 policy.  In short: the concerns expressed by some are that the Liberal Democrats might get the total majority they would need to enact this Revoke with a mere 30-35% of the vote, and that would be way short of the 50% endorsement sought by those wanting a referendum.  And the fact that they could get this majority with just 35% was bolstered by the modelling I did ages ago in this popular blog post.

Which blog post I still stand by in outline, but developments since have shown up even more glitches in the system, including this feature: the LibDem seat total climbs very slowly at first, but then at some point it rockets as all sorts of seats fall.  What this highlights is how having a very evenly spread vote across all constituencies is a massive disadvantage below a certain threshold, and only flips over to being an advantage when you hit the 30s in terms of vote share.

There is a corollary: learning how to concentrate your vote share is essential if you want to go above a small number of seats, as a small party: contrast the fortunes of the SNP and UKIP in the 2015 election.

Since that post, I have written a number of others exploring methods a model user might concentrate the LibDem vote share and get a different result; generally speaking, the outcome was about 20-30 more seats for the LibDems when their vote share is in the high teens/low 20s. Again, just what you would expect.

What I thought I would also share before heading off for my nighttime cocoa: that same variable becomes a disadvantage for the LibDems if they are looking for a majority. In other words, they begin to pile up pointlessly large majorities rather than gain more seats – just as hit the Tories in 1997, say, or Labour in 2017, when their votes did not go as far as they might in seats.

Here is a graphical representation: first the behaviour of party seats when there is no use of “historical LibDemmyness” in the machine (Solid line) and second the same relationship with a high degree of LibDemmyness and a little tactical voting

The dotted line suggests a much higher threshold for the LibDems is needed to get a majority – but still in the 30s. Maybe 5 percentage points higher.  And none of this loopy, “450 seats plus” style outcome.  Another reason to doubt whether a purely smooth swing is what we might expect.


Trying to start a fight between the Bank of England and Resolution Foundation

It is excellent that the Resolution Foundation has embarked upon serious macro-economic wonkery. Their opening salvo – “Recession Ready?: Assessing the UK’s macroeconomic framework” – is as good an introduction to the state of play as you can find. They call it “the most comprehensive assessment of the UK’s macroeconomic policy framework since the financial crisis”. Damnit, they are right.
You could also argue that it is way overdue. The Resolution Foundation is “an independent think-tank focused on improving the living standards for those on low to middle incomes”. Around three years into its existence, the biggest macro economic event of the past 80 years hit the UK causing Gross National Income to fall some 20% off trend. To calibrate that, any policy intervention that might raise GDP by 1% deserves a serious prize. Twenty times that is epoch-making. Future historians will wonder why we don’t go on about it more.
I have started and restarted this blog many times because a single post cannot asses something so comprehensive, and invariably does the thing a disservice. I will need to pick my target.
Anyway, first a shamefully short summary of the RF position:

  • Government macro support matters – the crisis might have been 16 percentage points worse without any
  • Of that 16 percent, the bulk came from monetary policy. The fiscal lever was maybe responsible for just 3 percentage points
  • Yet for the next recession (which RF thinks has never been more likely), monetary policy will have less juice, “reflecting what appears to be a secular decline in the level of interest rates
  • Therefore, “fiscal policy needs to play a more active role which necessitates a change in the framework”

That is a lot to unpack. Each superficially reasonable, the positions above might together add up to something revolutionary- a shift in the framework bigger than anything since 1992, or possibly since the Thatcher revolution dethroned fiscal demand management.
Revolutionary conclusions should not go down as easy as buttered toast. Ten or twelve years of argument and reflection have led me to perceive varying positions out there that cannot be adjudicated as settled. I want to address this from the hypothetical point of view of an adviser telling a Chancellor whether they should follow this scheme and pursue “a change in the framework so that fiscal policy can play an explicit stabilisation role within a credible framework for achieving long-run debt sustainability and low and stable inflation.”
Here are some minor reasons they might entertain:

Is weak aggregate demand the problem? By assumption it is – the RF is explicit in saying it is discussing policies for a recession. But absent some really sharp events, this will remain a point of contention. Inflation is on target, and by some measures the economy at capacity (e.g. record employment). Against this, some of us wonder if the capacity of the economy is endogenously determined – could we really have lost 20% of our know-how, irretrievably?

Don’t debt levels matter more? Chris Giles in the FT has reopened this, arguing that the commitment to have Debt/GDP falling is a damaging constraint on investment and should be ditched. But just four years ago, the view of Osborne’s Treasury was that outstanding debt was such a big deal that the government needed to target an absolute surplus by 2018. Relatedly …

Is a sterling crisis possible? Another big limit on the government getting to do what it wants is the ancient risk of the currency being repudiated – Britain as an emerging market country. Absurd, you might say; but that was before Brexit. It was what happened in the mid-1970s: no one was saying “hey, you borrow in your own currency, go nuts!”
I don’t personally think any of these objections should weigh too strongly – but they would all be considered in a traditional Treasury, and that Treasury is always worth bearing in mind.
Here is my larger problem: I am not convinced that fiscal policy would do the job the RF intends it to; more to the point, I don’t think the Bank thinks it would, in which case I am not sure the Bank’s “tacit cooperation” would be achieved. It very much depends on how you answer the question of how monetary and fiscal policy really interact. For me, this is the biggie and needs to be broken into a sub questions. When is fiscal policy effective at boosting demand

A. Always.

B. During a crisis.

C. Only when the Bank “can’t boost the economy any more” and

D. Never

Why would you answer D? Well, go back to 2005. Rates are 4-5% or so and the government produces an unexpected £20bn fiscal boost, in spending and tax cuts. The Bank forecasts inflation to be on track (because that is its job). What does the Bank do? Not nothing; it already thinks aggregate demand is at the right level. Any uncalled-for increase in AD needs to be battled. So they tighten policy, until demand is basically back where it was. Fiscal policy has changed the composition of demand, but not its level (barring lags).
This is known in places as the Sumner Critique, and is acknowledged by RF, but in my view not emphasised enough. Until the Bank literally does not think it can in good faith forecast CPI inflation landing where it should, it does not think it is out of fuel. And as a result, it ought not to passively accept any fiscal boost.
This is not just a fairy tale, but literally how things turned out for 1994-2007. See the chart; in that period, the UK fiscal position swung from borrowing 7% to a net surplus, and then back to borrowing 2.5%; yet nominal GDP growth stayed absolutely steady. The fiscal stance was trumped by the Bank’s monetary stance. In the game of macro, the Bank moves last.

Are there other reasons to doubt fiscal policy? Here is one that niggles me, when I imagine advising that Chancellor. Suppose GDP growth is weak, and you plan a stimulus package of 1% to boost it. Pretend the Sumner critique does not apply. Fine; next year’s growth is 1% higher than it might have been – but your deficit is permanently higher. If you want to maintain that pace, do you not have to boost the deficit again? But an accelerating deficit is not sustainable. Ultimately, you have to reverse what you did and (ceteris paribis) you are back at the low growth you didn’t want in the first place. AFAIK, the case has to rest on a bunch of other nice things that will happen – perhaps one year of extra government-inspired growth boosts the private sector’s confidence permanently, or helps the supply side, or hits the exact right spot when growth was temporarily weak (there is a predictable cycle). But they are all rather nice assumptions.
Obviously, this critique falls away if monetary policy is really ineffective, and for some people that is true when rates are low. We are at risk of being in position C. Monetary policy “runs out of fuel”. But at some level that cannot be the case. Someone in possession of a printing press can surely boost nominal (i.e. cash) growth in an economy, at some limit.
What the authors half-assume is that monetary policy is really about lowering interest rates (either spot or long) and that this basically induces people/business to spend money. Other channels are brought up from time to time, such as portfolio rebalancing or expectations or commitment to being lower for longer (it is an excellent, comprehensive document) but the basic stance is that we hit diminishing returns as we get near zero.
I tend not to take this view, being over-influenced by the market-monetarists. This is no time to try to reincarnate all those arguments: I recommend reading Sumner in particular, pieces like this or this. But I am also very influenced by two other things. First, there is the record of Japan since Abenomics, which since 2012 is really remarkable, given the collapsing working age population. It has not been easy, but then Japan has other disadvantages that make it particularly hard – not least, their currency being a safe-haven that is continuously being bolstered in a crisis. And the rebound in NGDP has been incredible, and has happened despite fiscal policy being unhelpful. What Abe has done is painfully reorient expectations – a critical channel for monetary policy.

But, second, I come back to this: the case for fiscal policy “taking over” in particular circumstances, when monetary policy is weak, suffers when you think that monetary policy is in any way really still in control. And we can blog and tweet and argue, but as far as I can see, outside the absolute depths of a financial panic, for over 20 years, the Bank of England has forecast CPI inflation returning to exactly where it needs to be, without the help of the Government. It does not itself think it cannot control aggregate demand sufficiently. And that means whatever you are doing fiscally, the Bank in some sense does not think is necessary.
It is like a driver determined to drive at 50mph that notices the passenger sneakily leaning on the accelerator. The driver just leans on the brake a little more. The key point is the policy – 50mph. The Bank is the driver. And this is why I think all these arguments should always, always, return to what the Bank of England is actually targeting.

The vast, unknowable potential of tactical voting

TL;DR summary: if you adjust the uniform swing so that voting patterns reflect echoes of past Labour or LibDem strength, the predicted Tory majority vanishes. If you add onto this a measure of tactical voting, their seat share might fall by dozens of seats more.  But detecting whether this is realistic is very, very hard. 

Before launching into this, a recap.

I have been on quite a journey, hopefully towards a decent model for the impending* General Election. It began with a straight arithmetical exercise, intended to turn headline voting numbers into seats, done in a very naive way: take a certain chunk of Conservative and Labour votes, and reassign them uniformly so that you get the national vote share.  Like this:

The result of this kind of exercise was set out in this post which reflected on the sheer volatility and sometimes arbitrariness of the results.  For example, the numbers above produce for me a 33%-26%-18% win for the Conservatives over Labour, but 338-202-35 in terms of seats. Brutal. The method  was destined to deliver a very poor outcome to a split opposition with the Tories in a clear lead.

However, it also looked naive, in at least two ways.

First, LibDem votes just head heedlessly to every seat in an even manner. This struck me as unlikely: recent European election results showed a much lumpier, more motivated voting surge.  For example, there are Labour seats where the model spits out a significantly better result for the LibDems than they achieved in May: places like Blackpool South were showing a LibDem vote share of 13%, despite their only scoring 9% just four months ago.  And that meant that in other places the LibDem surge was being undermeasured in the model – places like Harrogate that went 28% in EU2019, and 43% as recently as 2010. 

So I designed a factor to reflect this “LibDemmyness“, and found that a modest application of that factor might raise the LibDem gains off the Conservatives by around 20-30-40 seats.  

This also applied to Labour.  The steep fall in their vote share (from 40% in 2017 to 26% now) meant a quite vertiginous fall everywhere, even places that are historically very pro-Labour. Is this realistic? Lord Mandelson in a recent event cited Hartlepool, his old seat, as an example – in each of the past three elections, Labour had beaten the Conservatives by a minimum of 14% – yet my model had that shrinking to 5%.  Now, maybe that is possible: the Brexit Party took 52% of the vote in May, so who knows. Mandelson may be out of touch.  But the Conservative party took just 5% in EU2019 and so a model suggesting they are competitive looks a bit odd.

So I added a “Labourishness” factor, and found that a modest application of this might raise the Labour seat total by 10 – mostly, taken from the Conservatives’ total.  Here are two examples: a seat that stops turning blue, and a seat that goes LibDem, thanks to these factors.


To emphasize, this is not a prediction. It merely says that if these older voting propensities come good, then you get results 30-40 seats worse for the Conservatives.  Put another way, the “unfair” luck they enjoy from the voting system is partially eroded.

Now, getting to the point. What about tactical voting? You could argue that these factors already take it into account – they basically instruct voters to emphasize their past Labour and LibDem patterns, which quite inevitably pushes in a tactical direction.  But given the stakes, it is not unreasonable to wonder if voters will think hard about whether their vote will have the effect they want and change accordingly.  Matthew Goodwin, the expert academic, has written about this and modelled a situation where dozens of LibDem and Labour candidates just stand down (and, presumably, just hand their votes to the other one).  The result – Conservatives collapse from 366 seats to around 100 less.

For me, that is too extreme. Candidates don’t stand down, and their voters do not obey like sheep.  Instead, I have set up a milder version like this:

  • Choose four categories of seat where LD-LAB tactical voting may take place.  They are
    1. Labour held, less than 50% of the vote (39 seats)
    2. LibDem held in 2017 (12 – I appreciate I must now update this!)
    3. Conservative held, and even if the LibDems were polling 25% nationally they would still be third (72)
    4. Conservative held, and even if Labour were polling 35% nationally, they would still be third. (53)
  • Then apply a % to the votes that the ‘conceding’ party would pass to the other party.

The result? For every 10% of tactical voting, there is a loss to the Conservatives of around 8-9 seats. Here is a chart:

Incidentally, Labour gain 5 seats for every 1 that the LibDems gain – what you would expect, but still a reason to stop and think about its political saleability as a bargain.

Which brings me to 1997 and 2001.  These are the elections that give us the best sense of what degree of Tactical Voter-iness is possible.

I wanted to work out how much TV went on there, according to my model, and so rebuilt the machine using 1992’s data, and went to work trying to reverse engineer a 1997-style Labour majority. (This is a very ugly way of operating, with all sorts of assumptions – the 1990s were very different from today.) I found that without any tactical voting aspect, the Tories would have won 190 seats. So to deliver them their 165 seat nightmare, you would have needed a 45% tactical voting switch across 200 seats that they won in 1992.

Apply that much tactical voting this time round and you obviously produce a very poor result for the Conservatives, even if they gain some of the higher national vote share totals they have recently scored (around 33-4%).  This may explain why the Conservatives internal polling was weaker.

Apply it to some of the weaker outcomes recently polled – e.g. 31% Con, 28% Lab – and the result is a total rout against the Conservatives – seat numbers in the low 200s.

Bottom line: it is impossible to predict, but if this highly confrontational behaviour by the Conservatives inspires tactical voting against them anywhere near what we saw in the 1990s, their chance of a majority vanishes. I cannot tell if that is a realistic assumption; I hope to illustrate many more specific seat model-predictions in order that the hive mind can tear it to pieces (or perhaps validate).

*Though the odds of a 2019 vote have slipped to around 65%, at time of writing, down from 90%

Conventional wisdom comes good, with a time fuse

I’ve had this thought for a while, and wanted to get it down in case it proves to be an enduring one. 

We have seen recently – by which I mean, since I have been paying attention – a number of sharp examples of the conventional wisdom being overthrown. By this, I mean suggestions or predictions like these:

The party that promises and delivers austerity is doomed – “out of government for a generation”. That last quote came courtesy the seldom-reliable Mervyn King, pre 2010, but it felt true enough at the time: governments are popular for spending money, hated for cuts. Gordon Brown really struggled to use the word “cuts” in the months before, and having marmelized the Tories in the mid 1990s during a gentler spell of austerity, you can understand why. 

Yet George Osborne et al turned this on its head. Austerity became a dividing line they could actually deploy against Labour in 2015 – the prospect of more cuts to come put the opposition in a worse bind than the Government. 

Electing a far-left Trot spelled doom for Labour at the next election This felt utterly obvious at the time. I recall, vividly, the FT editorials out during that 2015 Labour leadership contest as the impossible became possible, became likely and then inevitable.  Here are some choice picks. 

Janan Ganesh, “It’s as simple as it seems: Corbyn spells disaster for Labour”, with this brave complacency: “If a socialist peacenik becomes leader of Britain’s Labour party on September 12, it is not somehow a problem for the Conservatives, too. Tories high-fiving each other at the prospect of facing Jeremy Corbyn should not “be careful what they wish for””. 

Or how about “Labour’s disastrous choice”, the FT editorial lamenting his capturing the leadership, which alongside suggesting Corbyn may be forced to “tack to the centre”, did at least predict that some MPs would break away, and that “with the opposition in turmoil, the risk is that Tory MPs will lose discipline, especially over the neuralgic issue of Europe.” Nor arf.  But it basically assumed Labour were now unelectable, bad for Labour, bad for the country. 

Yet by 2017 Corbyn had seemingly transmuted into a near-election winner, conducting possibly the most successful election campaign (from 25% to 40%) in my memory, and changing history in the process. That manifesto was incredibly popular; every item listed in those disapproving editorials looked like a winner

An OUT vote will split the Tories I remember being astonished when Janan revealed that up to one third of Tory MPs might support a Leave vote in an EU referendum. What is with these extremists? Then it happened, Theresa May came in, and the Conservatives enjoyed the happiest conference of the past thirty years (this is what I hear from people who attended: activists who had grizzled under Cameron felt blissfully happy to be Citizens of Somewhere again). 

Now here we are.  The Tories are split over Europe, Labour Party polling in the low twenties and Corbyn the most unpopular Opposition leader since ever, and everyone competing to see who can spend the most money.  By many accounts austerity played a serious role in GE2017, and I have a view that Sajid Javid’s harsh spending review choices at BIS in 2015 – scrapping maintenance grants, in particular – cost a good dozen seats.  

All the conventional wisdom came true, but with a time fuse. Reality can only be defied for so long. 

The latest example of conventional wisdom, temporarily thwarted: the view that you cannot run a government in a hideously partisan way without it horribly fracturing.  This divisive character Cummings will tear them apart; Matthew Parris wrote the best column about the new Cabinet: 

That he will fall out with his new master within months is almost certain. That, when he does, the world will know about it in coruscating language, equally so. Not least among the compensations for the chaos that awaits us is the anticipation of Mr Cummings’s blogs, once he turns against Mr Johnson.”

Then August happened, gravity defied, all that Quentin-Letts-delighting decisiveness and suddenly the conventional intelligentsia had a loss of nerve, seeing Cummings Plans round every corner, to the point of self-parody. 

The conventional wisdom often rebounds. Not always – we are waiting a long time for Trump to lose favour with his base, for example. But sometimes with extraordinary rapidity.  Conventional wisdom was that this sort of government cannot go on like this for long.   A general election in 2019 is now a 85% possibility, and Tory private polling suggests they would fail to gain anything close to a majority.  Matthew Parris has not been proven right … yet.