What’s wrong with populist policies?

Last year Jeremy Corbyn overwhelmingly won the Labour Party’s leadership contest here in the UK, on what is widely regarded as a “populist” platform – a range of policies that are popular amongst those on the left of the political spectrum. These include the renationalisation of utilities and other industries like the railways, and a more pacifistic approach to national defence. Corbyn also had the advantage of not being the “establishment” candidate, the one tainted with previous government, and the one perceived to be a “typical politician”.

This year the next President of the United States of America will be determined in a November election, and as current incumbent Barack Obama has served his two terms, both Democrats and Republicans are currently determining who will be their nominated candidate for the November election.

Last night, both of the non-establishment candidates won handsome victories in New Hampshire, one of the many contests around the US that contribute towards determine who is nominated by each party. For the Democrats, Bernie Sanders won apparently by a 20 percentage point margin – a huge win. For the Republicans, the controversial Donald Trump won, again by a large margin.

What does this mean? The common thinking is that as both candidates are more populist, and appealing to non-standard political audiences (Sanders, aged 74, is massively popular amongst younger voters, something that happened for Corbyn here), that the likelihood is of more populist policies in the future.

What are populist policies? Very simply, they are ideas that are popular amongst a substantial proportion of the population. As such, can this really be a bad thing? Populist policies are often disparaged by mainstream, or “establishment” politicians, because although they may be popular, they are probably quite unrealistic in their nature. Those “tainted” by government likely know the kinds of compromises that need to be made in order for policies to be practical and workable, and the kinds of interest groups and power factions that impact eventual policy outcomes in the political decision-making.

Perhaps as a result such “establishment” politicians tend towards promoting what they view as more work-able policies, which are less popular due to appearing watered down. This maybe explains why many people felt at the last General Election here in the UK that there wasn’t very much between the two major parties.

Hence if populism simply means some candidates proposing popular policies, with others arguing against them, this can hardly, in itself, be a bad thing? Debate about policies is surely important, as is a wider engagement in the political process, since the outcomes of elections do matter so much to many of us. Jeremy Corbyn has ploughed a lonely furrow in recent months arguing in favour of refugees displaced around the Middle East and Europe, even visiting the camps in Calais and Dunkirk – and being mocked in the press and by other politicians, including the Prime Minister, for doing so.

There is an additional element, however. Even if Trump and Sanders become the party candidates in November, only one will win, and even if they win, there is the likelihood they could not enact all the populist policies they wish because of the role Congress plays in decisionmaking in the US – current president Obama has repeatedly be blocked in attempts to take action by a Congress dominated by Republicans. The Labour Party in the UK is widely expected to perform miserably at the next General Election, meaning that for all the time spent developing interesting policy debate, there may really be little actual impact on policies, which will be conceived by and put into place by Labour’s opponents, the Conservative Party.

The big question, as it is often put, is whether politicians should follow their “principles” given that those principles risk making them “unelectable”. If unelectable, then the policies in question will never be put into practice, it is argued, and hence to a large extent any ensuing debate is pointless.

Regardless, these are interesting times when it comes to political events, and given that so much of politics is policies, and so many policies are economic in nature, there’s never been a better time to be studying economics!

Further Reflections on the Autumn Statement

Here’s an blog post at a blog I regularly read: “So what has happened to the long-term plan, George?” It’s another set of reflections on last week’s Autumn Statement, adding in the current fiasco surrounding the Labour Party.
The Chancellor put off cutting the deficit based on a better than expected forecast of government revenues at last week’s Autumn Statement.
That decision probably won’t have great consequences – although it does raise questions of consistency, since as the blog article points out, the Prime Minister and Chancellor have long made the point that Labour didn’t “fix the roof while the sun was shining” back before the financial crisis.
The point it makes though is that weak oppositions, as Labour is currently providing to the Conservatives, allow potentially lazy, or complacent decisions to be made, which could have economic consequences.
I’d highly recommend the Political Betting blog that this article was motivated by; it’s a very interesting take on politics from the perspective of people who regularly place bets on political outcomes. The placing of bets is an economic decision, and many argue it’s an effective way of forcing rigorous thinking: if one’s money is at stake, one will be more conscious of potential biases that would result in betting losses.

Fiscal Charter: Vote today

Yesterday I blogged on the Fiscal Charter the Chancellor, George Osborne, is proposing. Today it goes to vote in Parliament, and Osborne is calling on Labour voters to defy their leader and vote for the charter. Again, that’s politics, but what about the economics of it?

Is supporting the charter good economically, or is opposing it? To avoid being political we need to avoid the kinds of responses politicians might make; for example:

Mr Osborne said Labour’s U-turn “confirmed they want to go on borrowing forever – loading debts onto our children that they can never hope to repay”.

As mentioned yesterday, British governments have managed to run surpluses in just 83 of the last 315 years, suggesting they aren’t very good at doing so. And despite running so many deficits, the UK national debt (crudely: cumulated deficits) is far from large by international, or historical standards.

This is, in part, because government borrowing and spending is different from individual borrowing and spending in a way that the simple comparison of government to household, which politicians often make, doesn’t reflect: The UK government prints its own money and legislates that we must all accept that money as “legal tender”.

I can’t print my own money and keep spending when I want more things, but the UK government can. Now, of course, if the UK government does too much of that, we may get high levels of inflation and economic instability. Much of monetary policy is attempting to restrain the government from doing that, one way or another. But because the government can always print money, it can always repay its debts, and hence it can borrow at lower interest rates than the rest of us.

Hence large scale public projects (upgrading our telecommunications or transport networks, for example) can be financed much more cheaply via government and public investment than they would be in the private sector.

The fiscal charter rules out any such public investment projects by requiring that in “good economic times” the government run a surplus. It is, of course, a fine line. Nobody wants a fiscally irresponsible government in place prepared to “go on borrowing forever – loading debts onto our children they can never hope to repay”. But if instead we want a government that borrows to invest in public infrastructure that makes our country a better, more efficient, more pleasant place to be, then our children will certainly be able to repay those debts with interest because of the extra economic growth they have produced.

We’ll learn a lot more about fiscal and monetary policy towards the end of the Spring term. In the meantime, you can look up chapters 13 and 14 in the course textbook.

What is this “Fiscal Charter”?

The main news this morning is overtly political: Labour have apparently performed a U-turn and now oppose the Fiscal Charter than the Chancellor, George Osborne, has proposed. While the U-turn is obviously a political story, and Labour is a political party with plenty of problems at the moment, the Fiscal Charter is something that very much invokes economics, and economic analysis.

What is this Fiscal Charter? Here’s what George Osborne said in his Summer Budget Speech back on July 8 2015:


While we move from deficit to surplus, this Charter commits us to keeping debt falling as a share of GDP [Gross Domestic Product] each and every year– and to achieving that budget surplus by 2019-20.

Thereafter, governments will be required to maintain that surplus in normal times – in other words, when there isn’t a recession or a marked slowdown.

Only when the OBR [Office for Budget Responsibility] judge that we have real GDP growth of less than 1% a year, as measured on a rolling four-quarter basis, will that surplus no longer be required.

So in “normal” economic times, governments must run a budget surplus – something that will be enshrined in law should it be passed through parliament this Autumn.

The budget surplus is the difference between government receipts and government spending: T-G, in econ-maths-speak. It is different from government debt, which can crudely be thought of as the cumulation of previous budget deficits – when (T-G)<0.

It seems eminently sensible that when the economy is growing, governments should not be running deficits: in the good times, governments do not need to stimulate economic activity via tax cuts and extra spending projects, and indeed they collect more in various taxes: income tax, corporation tax, VAT, and so on.

However, this next graph suggests that UK governments for centuries have not been very good at this:


Going back to 1700, looking at 315 years of data, in only 83 of those has the UK government run a surplus; less than a third of the time. A casual glance also shows that the positive/negative split bears no resemblance to which party, left or right, has been in power; for almost all of the 1960s and 1970s, when both major parties had spells in power, the government almost exclusively ran deficits.

Of course, this doesn’t mean that Osborne’s charter is a bad thing: if it forces governments to run surpluses, this must be a good thing for the national debt? There’s loads to say about this, and we’ll say a lot more come the Spring in EC114, but for now it’s worth pointing out that the national debt (the cumulated overspends of UK governments) is not only reduced by running a surplus; despite the UK running deficits for much of the post-WW2 period, the following graph shows that UK national debt fell from 238% of GDP in 1948 to 42% by 1980:



So a budget surplus is not essential for reducing the national debt burden. Indeed, many argue it may even hinder this; after all, the UK economy has performed well over the last 315 years despite predominantly having a government operating a deficit. In part, this is because governments invest in public infrastructure projects that can facilitate growth: transport and telecommunications networks, for example.

And this is where Labour appears to be in a muddle about the Fiscal Charter. The Fiscal Charter as Osborne outlined makes no room even for investing in public projects, focussing only on the budget as a whole. Often we split the budget into that for current consumption and that for investment: the part for current consumption (things we spend now: benefits mainly) is referred to often as the structural balance. Labour wants to still be able to spend on infrastructure projects in the good times, whereas Osborne’s Fiscal Charter rules even that out.

More in the Spring 🙂