Stumbling and Mumbling

Author: chris dillow   |   Latest post: Tue, 26 May 2020, 2:30 PM


Why we can't have nice things

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We can't have nice things. That's the message of Ed Davey's speech yesterday, in which he called for a structural current budget surplus and denounced Labour's spending plans as "fantasy economics". Voters seem to agree. Although many individual Labour policies are popular, the majority think Labour's plans are unaffordable, and very few trust Corbyn on the economy.

From one perspective, all this is wrong. Over the last 25 years, two big things have changed. 20yilgy

One is that real risk-free interest rates have slumped. This means government borrowing and investment is much more affordable than it used to be. Governments should therefore be investing more, especially where (as with fibre broadband) the private sector is not doing so sufficiently. The failure of private sector capex to respond to ultra-low interest rates vindicates Keynes' point:

It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment.

Secondly, we used to think that the Nairu was high, so that increased aggregate demand would swiftly lead to higher inflation. But this is no longer the case. Even if it exists at all, the Phillips curve is quite flat, and anyway there is much more slack in the labour market than headline unemployment numbers suggest. Inflation, then, is less of a constraint on public spending than it used to be.

Economics, then, says governments can and should borrow more.

So why do so many people think otherwise?

There are legitimate objections to Labour's plans. The party seems to have underestimated the annual cost of free broadband, and is ignoring the fact that some local providers of fibre to the door are doing a decent job. But these, I suspect are technical matters which can be sorted out.

Also, although "where's the money coming from?" is the stupidest question in the world, "where are the workers coming from?" is not. Even though there is lots of aggregate slack in the labour market, specific shortages of doctors and engineers could stymie Labour's ambitious spending plans. Again, though, I'm not sure this is a decisive objection: such shortages can be overcome with freedom of movement.

Instead, I suspect animus to Labour's plans are founded - at least in part - in less rational considerations.

What we have here might be yet another example of what I've called good ideas going bad. The belief that a big fiscal expansion would run into trouble was reasonable once. But people often hold onto ideas long after they've ceased to be valid. One reason for this, as researchers such as Erin McGuire and Ulrike Malmendier (pdf) have shown, is that our ideas are formed in our youth and we stick to them even when their empirical base has vanished.

Secondly, there's a halo effect. There are good reasons to worry about Mr Corbyn's judgment; his support for the Palestinian cause has led him to some regrettable associations. Such misgivings can easily spill over into distrust of him on other issues.

Thirdly, centre-right politicians have for years played a rhetorical trick. They have invited us to believe that "tough" talk about "hard choices" is a sign of economic competence. But as Simon says. it isn't. Sometimes, a hard heart is a sign of a soft head.

Finally, there is resignation. Frederic Jameson (or Mark Fisher or Slavoj Zizek) said that it is easier to imagine an end to the world than an end to capitalism - or even, I'd add, a transition to moderate social democracy. He had a point. Research shows that people resign themselves to poverty and inequality, and so stop imagining that a better world is possible.

One thing that reinforces this is cynicism. People have stopped believing that politicians can create a better world.

Another reinforcer is deference. Adam Smith was right:

The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness.

Even the most incompetent and parasitic monopolist will therefore find vocal defenders.

Now, here I part company with many on the left who like to blame media bias. Yes, this might well amplify these sources of hostility to Labour's economic plans. But as Daniel Kahneman showed, people often go wrong without any prompting from the media. Cognitive biases matter in politics, as they do in all other walks of life.

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