Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 16 January 2018

The problem with a second referendum

My last post upset a few people who are campaigning to reverse Brexit, because I was so pessimistic about the chances of a second referendum before we leave in early 2019. They mistook my pessimism for defeatism. I would never suggest that those fighting for a second referendum, or an end to Brexit by any other means, should give up, just because the outlook looks bleak. You can never be certain about how things will turn out.

The path to a second referendum is clearly laid out by Andrew Adonis in this Remainiacs Podcast. Two things have to happen. First Corbyn needs to start arguing for a second referendum, which Adonis thinks he will do in the summer or autumn. I think this is conceivable, although far from certain. I would merely note that Remainers who declare that Corbyn will never do so because he is a Brexiter at heart are not only wrong, but are therefore by implication far more pessimistic about Brexit than I am, because this first stage is a necessary condition if a second referendum is going to happen.

The second thing that has to happen is that a majority of MPs write in the need to hold a second referendum as an amendment to the Brexit bill, a bill which thanks to rebel Conservative MPs is now a requirement. Yet there is a world of difference between demanding a proper bill before leaving, and demanding a second referendum. The Brexiters will ensure the government throws everything into preventing a second referendum, including perhaps its own survival. As I said in that earlier post, I cannot see it happening in the current environment, and this is the source of my short term pessimism.

One of the reasons I am so pessimistic is related to an earlier post, where I talked about how anti-democratic the concept of the transition period is. I could imagine at least some Conservative MPs arguing for a second referendum when the exact nature of the final deal is known. The first referendum was a decision to put an offer in for a new house: now the surveys and council searches are in we can take a final decision.

But, because of the transition period, what the final deal will be remains unclear, at least to most of the media and the public. The transition allows the Brexiters to continue to live in a fantasy land, where the final deal keeps all the advantages of being in the EU without any of the costs. I have argued, as have others, that the first stage agreement restricts the scope for what the final deal could look like, but this is denied by the government who are still busy eating cake. There is no reason for this to change in the next year, because the focus will be on the government’s futile attempts to avoid transition on EU terms. In this sense a second referendum will be just like the first: the realists will argue as hard as they can for reality, but reality will either not get a look in with the right wing press, or be balanced against fantasy by the broadcast media.

To threaten to bring down their government by voting for a second referendum, rebel Conservative MPs need a cast iron moral case. Alas because of transition they cannot argue that the second referendum will be a vote on the final deal, because the Brexiters can still claim the final deal will be all things to all men and women.

Thursday, 11 January 2018

Does Brexit end not with a bang but a whimper?

Most media commentary on Brexit makes a huge mistake. It focuses on what the UK government may wish to do or should do. The first stage agreement told us one thing that we should have known the moment Article 50 was triggered: the EU is calling the shots in these negotiations. [1] But the fact that the UK agreed to the text, and particularly the parts on the Irish border, has told the EU something important: the current UK government is not going to walk away with no deal, and even if it did the current parliament would almost certainly stop it.

That in turn tells the EU that it can get, to the first approximation, the agreement it wants. So what we should be asking is not what the UK’s next move will be, but what the preferred outcome for the EU is. My guess would be that their preferred outcome is a formalisation of the transition arrangements. This satisfies their three criteria: it avoids a hard Irish border, it imposes no additional trade restrictions, and the UK is clearly worse off as a result of leaving (because it has no control over the rules it must obey).

As Martin Sandbu points out, the first criteria could be satisfied by a deal that kept the UK in the Customs Union and Single Market for goods, but not for services. As the UK exports more services than it imports to/from the EU, the EU’s second criteria might still be roughly satisfied by such a deal. If the UK avoids accepting free movement as part of the deal, whether the third criteria is satisfied becomes debatable. Still it would be a possibility. Anything beyond this would mean a hard border in Ireland. It is difficult to imagine why the rest of the EU would want to seriously harm relations with Ireland by agreeing to such a thing.

Suppose something between these two alternatives, of staying in the Single Market and staying in it just for goods, does become the final deal. I think the Labour leadership could live with it if they are in government when the deal is done. Perhaps a majority of Conservative MPs could. But it means that dreams of doing trade deals with other countries would no longer be possible, and for that and other reasons a large part of the Conservative party would not be happy. The Conservative’s Europe problem would not be solved.

The fact that the Brexiters will still be agitating for a more pronounced break from Europe will be one reason why the UK will still suffer in economic terms (albeit much less than with No Deal), and this will be increased if we are no longer in the Single Market for services. Firms will always be reluctant to locate in the UK because trade might be disrupted if the Brexiters win again. Less immigration from the EU will also hurt the economy. And of course the Brexiters will remind everyone that the UK is having to accept rules on trade that it plays no part in creating.

All that suggests any deal will not be sustainable in the longer term. Norway and Switzerland may be able to tolerate being out of the club but obeying its rules because they would probably reason their impact within the club would be small, although what Ireland will achieve with the Brexit deal is a counterexample. An economy with the size and more importantly the history of the UK will find that more difficult to accept this. 

Does this mean that any deal will just be the first stage of breaking away from Europe? The Brexiters will agitate for this, but I doubt it will happen. The Brexit is essentially a project of the old. It seems far more likely to me that as time passes a majority for rejoining will emerge, and Brexit will come to an end. This mad period of UK politics, and all the political and economic harm it has done, will be a complete dead end, a colossal and damaging waste of time. 

This is my best guess at how Brexit will end, although I take no pleasure in that. [2] Not with the bang of a second referendum or a parliamentary vote, but slowly over time. The vote that rules them all today will gradually be seen not as the liberation and empowerment that so many now believe, but instead as just the machinations of a small number of hollow men. Hollow men who dream of empire renewed, and as a result are casting their country from the world stage. Hollow men who dream of personal power, and who instead turn out to be powerless. Their day will soon pass, as wind in dry grass.

[1] Here I think informed analysis, from commentators like David Allen Green for example, got it right. As I wrote: "Anyone who actually wants a good deal from the EU when we leave should realise that the UK’s negotiating position becomes instantly weaker once Article 50 is triggered."

[2] The Brexiters will not let the government propose a second referendum. A majority of MPs will not vote for one unless public opinion becomes much more anti-Brexit. Without something like a major recession, which looks unlikely, I fear a shift in public opinion will not happen in time for 2019. The post-Brexit Remain campaign has not ‘broken through’ because the tabloid press, and broadcasters following the wishes of politicians, will see Brexit through to completion because they made Brexit possible.


Would things be different if Labour campaigned for a second referendum? In terms of public opinion, that would make a difference to how broadcasters treated the issue. But Corbyn will only consider that if he could be sure that enough Conservative would back him, and by making the issue party political he cannot be sure of that. It is the fact that too few Conservative MPs are prepared to stand up against their leadership, and the 'will of the people', that makes leaving inevitable.      

Tuesday, 9 January 2018

Why does economics get so much stick?

Because the advice of economists is so hopeless, you may say. Well think about the following thought experiment. After the financial crisis. suppose people had done the opposite of what the majority of economists said they should do. We do not need to imagine over Brexit, because most of the 52% who voted for Brexit chose to ignore, or more likely did not hear, the advice of 90+% of economists that Brexit would make them worse off. For those who work that belief was quickly shattered as their real wages fell as a direct result of Brexit.

Immediately after the financial crisis interest rates would not have been cut and austerity would have started in 2009, not 2010. Banks would have gone bust because economists said we needed to bail them out. In which case the Great Recession would have become the second Great Depression. Because the majority of economists did not support austerity you would have had continuing cuts in spending during this new depression.

So comparing this thought experiment with reality, we can see that economists have prevented a rerun of the 1930s depression, and if their majority advice had been taken we would have had a stronger recovery and the UK would not have left the EU. Sounds pretty good to me. But, as I’m sure you are now saying, what about the financial crisis the economists failed to warn of?

That was a mistake, but what are the consequences? Do you really think that if most economists had warned about how fragile the sector was anything would have happened? Banks would have continued to lend because they were making money and they had a guaranteed bail out from the state. Their campaign contributions would have weighed far more heavily in politicians’ minds than warnings from economists. So yes, not warning about the financial crisis was a mistake, but it would not have changed anything if the mistake had not happened. Economists are often told to stop being naive about politics, but the same needs to be said to their critics.

Despite such a strong record in macroeconomics since the crisis, why does economics get so much stick? I think there are three reasons. The first is simple: when the economy goes wrong, economists are easy to blame, particularly because of those forecasts that never predict downturns. In reality virtually no academic macroeconomists are involved in forecasting because they know that kind of unconditional forecasting is a mugs game [1], and furthermore most economists are not macroeconomists, but for some that kind of detail is irrelevant. (There are also plenty of highly successful pieces of microeconomics, but most critics act as if economics was just macroeconomics.)

The second reason is politics. Carlyle in 1849 called economics the dismal science because economists did not support his idea of reintroducing slavery. Ever since then economics has annoyed politicians and their supporters of various colours by pointing out the problems with various political programmes or schemes.

Politics is also at the heart of the third reason for criticism: politicians and ideologies of the right use the aspects of economics that suits their cause. Want to promote markets? Just take the idea from economics that an ideal market is an optimal way of exchanging goods, and ignore all the ways that real markets deviate from this ideal (ways which, incidentally, a great many economists spend a lot of their time studying). Some heterodox economists of the left, rather than use mainstream economics to point out how the right plays fast and loose with economic ideas, prefer to suggest that mainstream economics is much closer to the right wing caricature than it is in reality. It is why, as Noah Smith observes, so much of this criticism can be found in the pages of the Guardian.

This misrepresentation of mainstream economics is either deliberate or reflects ignorance. Ignorance about the fact that a lot of economics has become more empirical and therefore more eclectic in its use of theory over the last few decades, perhaps in part because of the influence of behavioural economics. Ignorance that even in macroeconomics, where ideological influences can be strong, there is more consensus around New Keynesian economics than some mainstream Keynesian economists imagine. (See my survey with André Moreira of post graduate teaching at the top schools here.) Nowadays you will find that in most areas of economics (alas not yet macro so much) there is nothing limiting the analysis to selfish individualistic behaviour. The idea that economics is like a religion is absurd.

But sometimes it is hard not to believe that popular criticisms of economics choose to ignore how far economics deviates from the neoliberal characterture. There is no excuse for ignoring that, for example, the best arguments against health care being left to the market can be found in a paper by Nobel prize winning economist Kenneth Arrow written decades ago. As the recent book by Colin Crouch suggests, the best critiques of neoliberalism come from within economics.

Another ridiculous charge against economics is that economics has a natural bias against state intervention. Indeed it is possible to argue the opposite. In my own field it is typical to assume the existence of a benevolent policy maker, who maximises social welfare. It is essentially just a useful analytical device, but you could argue if you wished to that this device biases those that use it to favour state intervention.

Judging by recent conversations I have had, many heterodox economists attack the mainstream because it uses the distinction between positive (value free) and normative economics. An example of positive economics would be me saying a temporary cut in government spending when interest rates are stuck at their lower bound reduces output. A normative statement would be that austerity is unfair. Heterodox economists like Sheila Dow seem to suggest that everything is value laden, and the positive/normative distinction allows economists to avoid being “morally implicated in the advice they give.”

I think this criticism is either trivial (yes, of course there may be normative reasons for choosing particular research topics) or dangerous. It is dangerous if it suggests that economists should be encouraged to base their analysis on assumptions that reflect their values. Economics, even though it is a social science, should conform to the scientific method: it should be as much like a science as medicine. Indeed I think it would greatly improve the public debate if both economists and their critics realised that economics, even though it is a unique and inexact science, is more like medicine than any of the hard sciences.

Dow writes “Getting policy-makers or the general public onside over a particular argument is therefore, critically, a matter of persuasion rather than demonstrable proof (since that proof is impossible).” But surely the best way of trying to persuade a policymaker not to impose austerity is to say that most models, including the consensus theoretical model, and nearly all the evidence suggests austerity will reduce output. In contrast it is far too easy to persuade a politician of things they want to hear. We do not want politicians to pick advice only if it is given by ‘one of us’ (by those who share their values), or as a result of the rhetorical skills of the academic.

The danger in encouraging plurality is that you make it much easier for politicians to select the advice they like, because there is almost certain to be a school of thought that gives the ‘right’ answers from the politicians point of view. The point is obvious once you make the comparison to medicine. Don’t like the idea of vaccination? Pick an expert from the anti-vaccination medical school. The lesson of the last seven years, in the UK in particular, is that we want mainstream economists to have more influence on politicians and the public, and not to dilute this influence through a plurality of schools of thought.

All this does not mean that economists are beyond criticism. As my last post pointed out, I have fundamental criticisms about current macroeconomic methodology. An important point to note about the microfoundations methodology is that it excludes economists who are not prepared to sign up to what is currently considered (by macroeconomists) acceptable microeconomics, or who do not think microfoundations is where you have to start in doing macro. But this critique has nothing to do with values. The mistake macroeconomics made in the 1980s was not in their desire to look for microfoundations, but in deciding that models that had internally consistent microfoundations were the only admissible models.

The big problem with most criticisms of economics you see in the media is not that economics is beyond criticism: as the paragraph above suggests it in many cases should be criticised, and there are plenty more interesting criticisms of economics available. The problem is that these more important criticisms are not those you find in the pages of the Guardian. The typical criticisms you see in the press are just not very good, and I fear reflect either ignorance or ideological antipathy.

[1] A lot of the criticisms of forecasters are themselves spurious. Someone who writes “economists should not need to pretend that we can predict things that do not really matter to several decimal places” are themselves pretending that there are any serious forecasters who do pretend this.

Saturday, 6 January 2018

Why the microfoundations hegemony holds back macroeconomic progress

When David Vines asked me to contribute to a OXREP (Oxford Review of Economic Policy) issue on “Rebuilding Macroeconomic Theory”, I think what he hoped I would write on how the core macro model needed to change to reflect macro developments since the crisis with a particular eye to modelling the impact of fiscal policy. That would be an interesting paper to write, but I decided fairly quickly that I wanted to say something that I thought was much more important.

In my view the biggest obstacle to the advance of macroeconomics is the hegemony of microfoundations. I wanted at least one of the papers in the collection to question this hegemony. It turned out that I was not alone, and a few papers did the same. I was particularly encouraged when Olivier Blanchard, in blog posts reflecting his thoughts before writing his contribution, was thinking along the same lines.

I will talk about the other papers when more people have had a chance to read them. Here I will focus on my own contribution. I have been pushing a similar line in blog posts for some time, and that experience suggests to me that most macroeconomists working within the hegemony have a simple mental block when they think about alternative modelling approaches. Let me see if I can break that block here.

Imagine a DSGE model, ‘estimated’ by Baynesian techniques. To be specific, suppose it contains a standard intertemporal consumption function. Now suppose someone adds a term into the model, say unemployment into the consumption function, and thereby significantly improves the fit of the model. It is not hard to think why the fit significantly improves: unemployment could be a proxy for the uncertainty of labour income, for example. The key question becomes which is the better model with which to examine macroeconomic policy: the DSGE or the augmented model?

A microfoundations macroeconomist will tend to say without doubt the original DSGE model, because only that model is known to be theoretically consistent. (They might instead say that only that model satisfies the Lucas critique, but internal consistency is the more general concept.) But an equally valid response is to say that the original DSGE model will give incorrect policy responses because it misses an important link between unemployment and consumption, and so the augmented model is preferred.

There is absolutely nothing that says that internal consistency is more important than (relative) misspecification. In my experience, when confronted with this fact, some DSGE modellers resort to two diversionary tactics. The first, which is to say that all models are misspecified, is not worthy of discussion. The second is that neither model is satisfactory, and research is needed to incorporate the unemployment effect in a consistent way.

I have no problem with that response in itself, and for that reason I have no problem with the microfoundations project as one way to do macroeconomic modelling. But in this particular context it is a dodge. There will never be, at least in my lifetime, a DSGE model that cannot be improved by adding plausible but potentially inconsistent effects like unemployment influencing consumption. Which means that, if you think models that are significantly better at fitting the data are to be preferred to the DSGE models from whence they came, then these augmented models will always beat the DSGE model as a way of modelling policy.

What this question tells you is that there is an alternative methodology for building macroeconomic models that is not inferior to the microfoundations approach. This starts with some theoretical specification, which could be a DSGE model as in the example, and then extends it in ways that are theoretically plausible and which also significantly improve the model’s fit, but which are not formally derived from micofoundations. I call that an example within the Structural Econometric Model (SEM) class, and Blanchard calls it a Policy Model.

An important point I make in my paper is that these are not competing methodologies, but instead they are complementary. SEMs as I describe them here start from microfounded theory. (Of course SEMs can also start from non-microfounded theory, but the pros and cons of that is a different debate I want to avoid here.) As a finished product they provide many research agendas for microfoundation modelling. So DSGE modelling can provide the starting point for builders of SEMs or Policy Models, and these models when completed provide a research agenda for DSGE modellers.

Once you see this complementarity, you can see why I think macroeconomics would develop much more rapidly if academics were involved in building SEMs as well as building DSGE models. The mistake the New Classical Counter Revolution made was to dismiss previous ways of modelling the economy, instead of augmenting these ways with additional approaches. Each methodology on its own will develop much more slowly than the two combined. Another way of putting it is that research based on SEMs is more efficient than the puzzle resolution approach used today. 

In the paper, I try to imagine what would have happened if the microfoundations project had just augmented the macroeconomics of the time (which was SEM modelling), rather than dismissing it out of hand. I think we have good evidence that active complementarity between SEM and microfoundations modelling would have investigated in depth links between the financial and real sectors before the financial crisis. The microfoundations hegemony chose the wrong puzzles to look at, deflecting macroeconomics from the more important empirical issues. The same thing may happen again if the microfoundations hegemony continues.



Thursday, 4 January 2018

Minimum Wages, Monopsony and Towns

Alan Manning has a very good article in Foreign Affairs about minimum wages. The impact of minimum wages on employment is a politically charged issue in economics, and so is similar in that sense to most of macro. With minimum wages, the battlefield is empirical. I often think of this battle when people accuse mainstream economics as being hopelessly neoliberal: it was mainstream economists (David Card and Alan Krueger) who first showed that the data did not conform to what Manning describes as Econ 101 economics, and other mainstream economists who have continued to find this result.

I think two conclusions can be drawn from the many studies that followed Card and Krueger. First, empirical work clearly shows plenty of examples where imposing or increasing minimum wages did not reduce employment. However few would argue that result will hold in all situations for all levels of the minimum wage. That is why, before George Osborne raised it, the UK minimum wage level was set by the Low Pay Commission, who tried to assess these issues. Perhaps the Commission became too cautious, but no doubt we will see more studies on the Osborne increase in due course.In my view another key issue future studies should address is whether increasing nominal wages has any impact on productivity.

Manning also makes a point about the limitations of minimum wages as a tool to deal with poverty. He points out that as “an hourly rate, the minimum wage on its own reveals little about the household income of those who earn it.” He suggests that minimum wages work well alongside earned income tax credits. Minimum wages can help prevent employers capturing part of tax credits by cutting wages in the knowledge that the state would make up the difference.

There are two main reasons why Econ 101 (first year undergraduate) economics gives the wrong answer on minimum wages: search and monopsony. Take search first. In the Econ 101 world no one celebrates getting a new job or worries about losing an existing one. One reason most people do both is search: it takes time and effort to find a new job. Equally it costs the firm money to recruit new people. That creates a zone around the Econ 101 wage within which variations in wages would not lead to job losses or people leaving. Where the actual wage is within that zone will depend on bargaining power between the worker and firm.

Monopsony is the situation where alternative employment opportunities for workers are scarce, which gives the firm the power to set wages below the perfectly competitive level of the standard Econ 101 model. (There is an element of search here too: the costs of moving location. These are much larger than the costs of looking for a job in your own area, particularly for families.) The classic example of monopsony is the town where there is just one major employer.

I suspect many labour economists regard monopsony in the labour market as something of a special case. That perception may need updating, argues Marshall Steinbaum here, drawing on recent work by him and coauthors for the US. They find “that most labor markets (as defined by occupation and geography) are very concentrated [few firms], and that this concentration has a robust negative impact on posted wages for job openings.” That is exactly what you would expect from monopsony: the fewer firms there are in a location, the less often vacancies occur, so the less these firms when suppressing wages have to worry that workers will quit.

The article considers a number of policy implications stemming from widespread monopsony that are worth reading. This could include, in the UK, improving rail communications into cities besides London. The one directly relevant to this post is that these results may help explain why minimum wages do not reduce employment. In the absence of minimum wages, relatively poorly performing firms may be able to shift the impact of poor performance from profits to wages. The minimum wage stops that happening. 

If monopsony is prevalent in large towns but not big cities, I couldn't help wondering if this might have something to do with the difference between towns and cities in the Brexit vote I mentioned in my last post. Support for Trump is also strong in the rural parts of the US, which is where Steinbaum et al find monopsony is prevalent. What this monopsony study suggests is that working conditions within firms are likely to be worse in towns than in cities. What impact might that have on voters? One response to worker exploitation in towns is for people to leave, as they do. For those who stay, an overriding concern might be the survival of firms within the town. This in turn could have an important impact on voter attitudes.  

Tuesday, 2 January 2018

Leave and the Left Behind

I argued at the end of last year that immigration was an attractive issue for the right, because it offered the possibility of capturing votes from those who would vote left on economic grounds, but who were also socially conservative. It was particularly attractive if you could convince leftish social conservatives that voting to reduce immigration would improve their economic situation. The EU referendum vote exemplified how successful that strategy could be. The socially conservative vote went to Leave, irrespective of where those voters were on a left right spectrum (see here).

In this situation, it is understandable that a lot of focus goes to the left/social conservative voters. As voting left clearly correlates with income and areas of social deprivation more generally, we get stories about the economically left behind Leavers. At the same time, some social scientists object, saying that voting Leave clearly correlates with socially conservative views, like hanging for example. There seems to be a contradiction here, but there is not. As I argued here, it is the fight over whether left social conservatives vote on economics or on their social views that swings these votes. The same point could be made for the US as the UK, particularly if we add in race as an issue.

Those controlling right wing media understand all this. Another post from last year looked at how economists had shown clear evidence that Fox news was not in the business of reflecting their viewers beliefs and voting patterns, but in moulding them. They did this by looking at what economists call natural experiments: events that in this case influenced whether people watched Fox that had nothing to do with their politics. Over Wren-Lewis Christmas we were talking about whether there were any natural experiments for assessing the influence of the Mail or Sun in the UK. One possibility we discussed was whether the Liverpool boycott of the Sun over Hillsborough might be a useful natural experiment.

I then read this twitter thread from @marwood_lennox. They first note the clear correlation between measures of deprivation by constituencies and votes in the 2017 general election. They then show the imputed EU referendum vote against measure of deprivation: apart from the least deprived areas voting to Remain, there is no clear correlation. So far much as we would expect from the analysis above. But it was these two tweets that really caught my attention:

“Deprivation doesn't clearly correlate with strength for Remain either. There are eight >60% Remain seats in most deprived decile …. Two of those eight are in very white working class Liverpool. What happened there?”

Is this the ‘natural experiment’ of Sun readership at work?

If only social science was this easy. There are, unfortunately, plenty of other explanations. First, cities tended to vote Remain, it was the towns that did not. Liverpool’s Remain vote was not that different from Manchester. True Manchester has less acute deprivation, but if deprivation and voting Leave are uncorrelated, so what? One reason that cities voted remain is that they have large universities.

Furthermore, as a result of twitter (thanks everyone), I learnt that the local papers had made much of EU funding for the docks and elsewhere. There is also a legacy of Irish immigration. Liverpool has a strong international tradition based on its port and football club, recently reinforced by being a European city of culture. Thus plenty of other reasons why Liverpool might be unusually Remain, if that is what they were.

Despite all this, I have learnt from experience not to let such difficulties get in the way of a potentially interesting result. So I would be very interested if by chance anyone who did proper multivariate analysis of the Leave vote is reading this, and noticed that Liverpool constituencies were, or were not, unusually Remain (given age, education etc). Or if anyone else has any ideas about natural experiments that might affect recent newspaper readership.     

Thursday, 21 December 2017

Voting Labour isn’t going to turn the UK into Venezuela

but mainstream economists should make sure they are getting a hearing

It is tempting to laugh at the rhetoric of Conservative politicians or journalists when contemplating a possible future Labour government. As John Elledge writes, it isn’t long before Stalin or Trotsky or Venezuela is mentioned. As he notes, this is not a terribly clever tactic, particularly as many of the measures proposed by Labour are (by design) pretty popular. As Stephen Bush points out, the problem for the Conservatives is not that ‘young people’ have not learnt about the evils of communist regimes, but that this group are not impressed by Brexit or their wages and for many buying a house is something their parents generation did.

Yet this kind of hyperbole is not confined to politicians or journalists on the right. When John McDonnell, Labour’s shadow Chancellor, said at their party conference that they were ‘war-gaming’ for eventualities if they gained office like a run on sterling, I thought this showed mild paranoia. I was wrong. After I wrote that sterling was far more likely to rise at the prospect of a Labour government (standard macro: more fiscal, higher rates imply stronger currency), Buttonwood of the Economist wrote that there were at least five reasons why sterling might collapse, most of which involve some form of capital flight.

Although Buttonwood was careful to base analysis on measures that Labour proposed in 2017, I’m sure I was not imagining a subtext about what else could hard left politicians do. You can read much the same from some on the centre or soft left, who have learnt through experience to be wary of the hard left. Nick Cohen knows better than to call Labour’s new mass membership all militant entryists, but instead he says they are innocent (but should know better) lambs flocking towards wolves.

With language like this flying around, it is best to look for solid ground. In parliament Labour is a centre left party led by the hard left, to use popular labels. For that reason it would be impossible for it to pursue a hard left programme, and the leadership knows that. Contrast this with the current governing party: half soft, half hard right, with the latter having the upper hand because of the membership. The Conservative party’s ethos is such that the hard right have imposed a ruinous policy on our country without challenge, which actually did produce a collapse in sterling. Fortunately many Labour MPs have less loyalty and perhaps stronger principles, and would not allow anything similar if they were in power. As a result, I find pandering myths about Venezuela dishonest to be frank. If you want to fret about deselection, I suggest you talk to Nadine Dorries.

As far as City scare stories are concerned, as I indicated earlier and Ben Chu confirms, you will always be able to find those predicting doom. One of the refreshing things about this Labour leadership is that they do not cower defensively at such attacks, but come out fighting. As Corbyn’s video could have added, it was City economists who told us that austerity was necessary because otherwise there would be a flight from UK government debt. They were horribly wrong then, as interest rates on debt fell, and they are likely to be wrong again with new stories about capital flight under Corbyn.

While talk of Venezuela is ludicrous, there is a more interesting question about where the influences on future Labour policy are coming from. To set the scene, there was a recent prank outside the LSE designed to suggest heterodox economists were the Luther to economic mainstream Catholicism, and this was followed by a column from Larry Elliott in the Guardian. Now there are plenty of things to criticise about economics, but these are not them. As Frances Coppola recounts, the ‘economics reformation’ document is embarrassingly bad. If you want to read a short but to the point and well written response, see here.

So, in case you thought otherwise, mainstream economists do not spend their time attacking any form of market intervention, but instead try to design efficient market intervention. As I have argued many times, most mainstream macroeconomists did not endorse austerity, for the simple reason that textbooks and state of the art models suggest it would be a very bad idea. But there are some (not all) heterodox economists who would like you to believe otherwise.

What has this got to do with a future Labour government? Christine Berry presents a comprehensive account of who is shaping future Labour policy. It contains the following paragraph.
“John McDonnell’s Council of Economic Advisors, set up during the first days of the leadership, was a valiant effort to give the party’s economic policy some heavyweight academic backing. But many of its members were not natural Corbyn supporters, and ran alarmed from the public ridicule heaped on the leadership in the early days – resulting in the Council being largely disbanded. Academic input now seems to be ad hoc rather than systematised.”

That is not how it happened. It is true that some of us had to suffer some public ridicule when we joined, but that just reflected badly on those doing the ridiculing. The breakup of the Council was inevitable after the EU referendum. It is hard for any group of serious economists to publicly advise in such a forum any political party that appears to support a Brexit policy that is doing (see Chris Giles here) so much damage and could do much more.

The understandable wish of many heterodox economists to have an influence on Labour policy does mean there is a potential competition for influence. Will Labour policy be based on policies derived from mainstream analysis, or those favoured by some heterodox economists? It would be wrong to exaggerate this competition: most mainstream economists agree with most heterodox economists about austerity, for example. But there are some clear differences. (In some ways you see something similar on the right, where City economists compete with mainstream economists for influence on Conservative party policy, which is one reason Conservative macroeconomic policy can produce major disasters.)

Ann Pettifor has an article about why business would do well under Labour, which invokes some of the points made in an earlier Financial Times piece. Once you discount the scare stories, I agree with Ann that the economy and therefore businesses will do much better under Labour than under the Conservatives. But her article contains an interesting remark which I think tells us something about the current leadership. Ann’s says
“Here I must acknowledge a disagreement with Professor Simon Wren-Lewis, of Oxford University, who advised Labour to adopt a fiscal rule that once again prioritises monetary policy …”

Ann follows the heterodox MMT school that favours using fiscal rather than monetary policy to stabilise output and inflation. Of course both Ann and I were on Labour’s Economic Advisory Council, and so it is obvious that there was a similar discussion in this group.

The fact that McDonnell chose a more conventional but still innovative approach (which happened to be the one I put forward), and has also stressed the importance of central bank independence, shows us two things: he has a distinctly conservative streak, and he wants Labour not only to win but to be successful in economic terms. But while McDonnell may have opted for a mainstream approach on monetary and fiscal policy, there is still plenty to play for in other areas. I am not suggesting that mainstream economists should always win when conflicts occur, but it is important for mainstream economists not to arrive late to these battlefields, or worse still wait for politicians to read their papers.