A battle in a bigger culture war

I have tried over the last six years to look at the Brexit question mainly in terms of economics and deal with the politics only in so far as it distorts economic decision-making. However, it is becoming increasingly clear that Brexit is merely another front in what can broadly be termed a global culture war, defined as a conflict between conservative and liberal values. Perhaps the reason why I did not originally recognise Brexit in these terms is that we have never experienced such a phenomenon in the UK. Maybe the Thatcher era in the 1980s can be classified as a culture war but it always felt more of an economic than a social project, which is how I view it even thirty years on.

The election of Trump and the ongoing Brexit debate are merely the two most obvious manifestations of this clash. But it is happening elsewhere, too. In the course of this afternoon, I happened to read two German language newspaper articles within minutes of each other.  The Frankfurter Allgemeine Zeitung led with a story about how the AfD in Germany “demands a "strong military" with "relentless" soldiers and a leading role in Europe. Their plans for the Bundeswehr are reminiscent of old times.” The subtext of the story was the appeal of the AfD to those wishing to relive past glories – something that the majority of Germans reject. Meanwhile in Switzerland, the Neue Zürcher Zeitung pointed out that not everyone holding views associated with right-wing politics are necessarily extremists (“to be against the "right" has developed into a kind of national  sport, particularly in Germany”). The warning from the NZZ was that we should beware the temptation to generalise, for in doing so we end up talking past each other and hardening attitudes rather than resolving our differences.

However, it is difficult to take such a stance when it has become apparent just how much damage is being inflicted on long-standing institutions in the pursuit of victory in the culture war. The office of President of the United States, to which large parts of the western world looks in order to provide moral and political leadership, is being used as a bully pulpit by a man not fit to occupy the Oval Office. The premiership of the UK is about to be handed to a man who has routinely lied in order to serve his own interests and is about to inherit a country whose institutions have been assailed as never before. Boris Johnson is one of the last people in politics to provide the sort of healing that his country needs.

Those promoting Brexit campaigned three years ago for a UK parliament to oversee UK laws (never mind the fact that it already did). Yet this did not prevent the government from trying to sideline it in a bid to deliver Brexit, and last year the government was found in contempt of parliament after refusing to publish the legal advice underpinning its Brexit decisions. Meanwhile the independent judiciary was characterised as enemies of the people whilst large parts of the press parrot politicians’ fact-free agenda, with one organ in particular paying a considerable sum to the man likely to be the UK’s next PM. The civil service has also come into the line of fire, with Sir Ivan Rogers,former Permanent Secretary to the EU, resigning in January 2017 when it became clear that ministers did not want to hear what he had to say. 

But the resignation of Sir Kim Darroch, the UK’s Ambassador to Washington, following the leaking of confidential diplomatic information to the press, represents a new and sinister turn of events. We do not know who leaked the information and we can only speculate on the reasons. But the Ambassador’s position was totally undermined once Donald Trump refused to negotiate with him (and in the process confirmed Darroch’s views). By politicising diplomacy in this way, a line has been crossed. In effect, the US President has exercised his authority to determine who represents the UK in Washington. Where will it end? So far, the politicisation of central banking happening elsewhere has yet to infect the UK, but with the successor to Mark Carney to be chosen by the new government it is something to look out for.

It is all very well for the revolutionaries to want to overthrow the status quo but what do they propose to replace it with? To quote the late British politician Tony Benn – a firebrand member of the hard left in his day – there are five questions that should be posed to those seeking power: “What power do you have; where did you get it; in whose interests do you exercise it; to whom are you accountable; and how can we get rid of you?” These are questions that apply just as much to the defenders of the status quo as those who wish to overturn it, but what concerns me most is that the rebels cannot provide good answers to the third and fourth of these.

Any Leave supporters reading this will no doubt dismiss the arguments as more scare-mongering on the part of one who will not accept the democratic will of the people to leave the EU. But this is a much bigger issue than that. Whether or not the UK remains in the EU is far less important than maintaining the institutional framework around which the economy (and indeed the whole country) is organised. In the words of the economist Douglass C. North, “Institutions are the rules of the game in a society, the humanly devised constraints that shape human interaction … They structure incentives in human exchange, whether political, social or economic.” Whether you are a Leaver or a Remainer; a liberal or a conservative; a supporter of the political left or the right, a country’s political and economic health is determined by the quality of its institutions. It is vital that they are not undermined.

Productivity: It's a gas

Last November I experienced a leak in my gas supply which required the replacement of a pipe. All seemed to be well until last week when I again smelled gas. Having tried to call the original engineer to rectify the problem – to no avail – I contacted a different local engineer. He discovered that the person responsible for installing the replacement pipe had allowed soldering flux to drip onto it, despite the fact that the instructions for fitting such pipes advised covering it to avoid any contact with flux, with the result that it had started to corrode and required replacing. Away went the gas engineer to get a new pipe, only for him to find that the one he obtained did not fit which necessitated a second trip to the wholesale supplier.

In the end the job was successfully completed, but what should have been a simple one hour job last November turned out to require four hours of work spread over 8 months due to the shoddy initial job and the failure of the second engineer to measure the pipe before purchasing a replacement. This got me thinking about productivity and the reasons why it is so low.

Compared with the rest of the G7, UK productivity lags behind. On data to 2016, output per head in real terms across the other G7 countries was almost 6% higher than in the UK with German output per head 4% above UK levels and the US 7.4% higher. A study conducted by NIESR for the Department for Business, Innovation and Skills in 2015 concluded that although the UK performs well in an international context on the basis of the contribution of higher skills (i.e. university education) to productivity, “the UK’s intermediate (practical, technical and occupational) skills are of more concern.” This would accord with my own anecdotal experience in which an apparent lack of training resulted in poor basic skills with the result that fairly simple jobs take longer to complete than necessary (not to mention costing more money).

But it is not just a British problem. Policymakers have been exercised in recent years by the weakness of productivity growth, which has been one of the marked features of the recovery from the global financial crisis of 2008-09. Only 6 out of 36 OECD countries recorded faster productivity growth over the period 2010 to 2018 compared with the years 2002 to 2007. Across the OECD as a whole, labour productivity has averaged growth of 1% per year since 2010 versus 1.7% between 2002 and 2007. In the euro zone, where productivity growth was not especially rapid before the GFC, it has slowed from an average of 1.1% per year to 0.8% whilst in the US the slowdown has been much more pronounced (from 2.1% to 0.9%). The slowdown in the UK has been almost as severe, leaving the rate of productivity growth at a paltry post-GFC average of 0.6% per annum versus 1.7% in the five years prior to the recession.

Aside from impact on wasted time and higher outlays, why do we care? In the first instance, productivity is the key driver of living standards. In an economy where labour is paid roughly according to the amount of value added it generates, there is a strong link between (real) wage growth and output per worker. Thus, if productivity growth slows, so too will real wage growth and over the period 2008 to 2014 real wages in the UK fell by 9%. The “puzzle” in all of this is that the sustained general pattern of productivity stagnation contrasts with the pattern following previous economic downturns, when productivity initially fell but subsequently recovered towards the previous trend growth rate. Something has clearly changed but we cannot be sure what it is.

Chart 1, 2 and 3 show UK GDP, productivity (output per worker) and employment trends (respectively) in the current cycle compared to  the three major recessions since the 1970s (click to enlarge). The current GDP upswing broadly matches that of the 1970s and early-1980s but lags the 1980s and 1990s. But employment growth has far outstripped previous recovery phases whilst productivity has lagged. To the extent that output is a function of labour input, capital investment and technological progress, it appears that British companies have increased output by expanding labour input rather than capital investment or technological improvements. If these workers are lacking in the appropriate training, it is likely they will take time to get used to the systems and processes required to enable them to do their jobs efficiently with consequent adverse effects on productivity.

It also appears to be the case that there is a widening gap between the performance of firms in the upper quartile of the productivity distribution and those lower down. One reason for this is perhaps that the best educated workers tend to gravitate towards the best paying firms who then improve the company’s productivity performance and are then rewarded for their efforts. In other words, there is a self-reinforcing spiral which rewards those who already have the requisite skills. What is thus required is a more efficient transfer of skills throughout the economy. This is a problem which has long been recognised and the government’s apprenticeship scheme is a way to help give decent vocational training to younger workers (though changes to the Apprenticeship Levy in 2017 may be hampering the operation of this market).

However, there is no quick fix for poor productivity. In any case, measuring it is particularly difficult in an economy in which services account for an increasing share of output. Last December the OECD had a closer look at the way in which it measures productivity and concluded that once we account for differences in the way we measure labour input, particularly with regard to the way in which holidays are treated in the data, the UK’s international productivity does not lag quite as much we had previously thought. Ironically, if my original gas engineer had been on holiday when I called him last year, maybe I would have been spared the result of a lack of training. There again, I would have missed out on a learning experience.

Brexit demographics revisited

More than three years after the Brexit referendum, many of those who promoted the idea are more adamant than ever that the UK should leave the EU. We only need to listen to the candidates for the Conservative Party leadership attempting to outdo themselves in terms of their commitment to the Brexit cause to realise that something unpleasant has taken root in the public debate over the past three years. One of the contenders, Jeremy Hunt who in 2016 supported the Remain campaign, responded in a TV interview to the question whether he was prepared to let businesses go to the wall in the event of a no-deal Brexit that he “would do so but I would do it with a heavy heart … if in order to do what the people tell us to do, we have to leave without a deal, I would do that.“ In all my time watching UK politics, I do not think I have ever heard a politician say something as stupid – and there is a lot of competition.

Brexit has now become an article of faith in which politicians tell us that the will of the people has to be respected. These are the same politicians who respect the will of the people so much that they have twice changed an elected prime minister without consulting the wider electorate. Or, to put it another way, the next prime minister will be a leader without a general mandate, of a government without a majority, promising an outcome that is not deliverable to an unrepresentative slice of the electorate and foisting it on a public that arguably no longer wants it. Let there be no doubt that what is being offered today – a hard Brexit – is not what people voted for in 2016. Of course, a no-deal Brexit may not result in the worst case scenarios that many of us have highlighted. But the simple truth is we do not know what will happen, in which case politicians have a duty not to take unnecessary risks with the livelihoods of the electorate which they represent.

As a reminder, the 2017 Conservative manifesto promised “a strong economy that works for everyone.” It also promised “We will seek to replicate all existing EU free trade agreements and support the ratification of trade agreements entered into during our EU membership … We will introduce a Trade Bill in the next parliament.” So far it has failed to deliver on the first two of these and the Trade Bill has still not been ratified. Brexit is clearly not proceeding as planned. That being the case, what is stopping the government from putting the terms of the EU exit to the electorate for ratification?

What appears to be stopping them is that the Conservatives have nailed their colours to the Brexit mast, and it is far from certain that they will be able to get a second Brexit referendum across the line. A quick look at the demographics highlights the extent of the problem. Based on data through 14 June 2019, we know that 1.34 million people aged 65+ have passed away since the referendum in June 2016. By the same token, roughly 1.16 million young people who were not old enough to vote three years ago are now eligible to do so. Of course, not all those aged 65+ who are now deceased will have supported Brexit and not all those now old enough to cast a vote will necessarily support Remain.

I have thus made some assumptions based on varying degrees of Brexit support for deceased voters aged 65+, ranging from 50% to 75%. Similarly, new voters are assumed to support Brexit over the range 25% to 75%. In simple terms, the higher the degree of support for Brexit amongst deceased voters and the lower the degree of support from younger voters, the more the margin in favour of Leave narrows. This is illustrated in chart 1 (above). In the case where deceased voters are assumed to have voted 75% in favour of Brexit (right-hand column) whereas only 25% of new voters support it (top row) the margin in favour of leaving the EU narrows to 15k. Conversely if deceased voters only voted 50% in favour Brexit (left-hand column) and younger voters are 75% in favour (bottom row), the margin comes in at 1.85 million. Recall that the margin in favour of Remain in 2016 was 1.27 million.

On the basis of the figures presented here, there are no circumstances in which the demographics alone will flip the referendum result. Matters look slightly different if we account for a swing in voters’ preferences on top of the demographics. A swing of 2% in favour of Remain opens up the prospect that the result could be overturned (chart 2). A 4% swing would certainly make a Leave vote a realistic prospect (chart 3). Evidence to suggest there has been a swing in public opinion comes from the poll conducted by YouGov since summer 2016 asking whether people think the vote to leave in 2016 was right or wrong. Those who believe it was the wrong decision now hold a seven point lead over those who believe it was the right decision, whereas in summer 2016 they lagged by three percentage points.

With the Conservative Party comprised of mature voters with a clear bias towards Brexit, no candidate worth their salt is going to promise a second referendum. But the very narrowness of the victory margin in 2016 meant that it was always going to be vulnerable to small changes in demographics and voter preferences. Whilst a second referendum which produces a narrow vote for Remain will not resolve the issue either, it is clear that those politicians who argue that the electorate clearly supports Brexit (“do or die” to quote Boris Johnson) are deluding themselves and large parts of the electorate. The new prime minister has a big job on their hands to restore political unity – the evidence suggests that delivering a no-deal Brexit will not be the way to do that.

Factbombing

The old joke has it that you can prove anything with statistics but the evidence from the political debate over recent years is that the opposite is true. There is indeed such a thing as too much information. Full Fact, the charity that tries to assess the claims and counterclaims made in the course of the UK public debate, has called the weapons grade use of statistics ‘Factbombing’ which is a highly evocative and entirely accurate description of the phenomenon.

I first became aware of the extent to which politicians throw out huge quantities of statistics during George Osborne’s budget speeches without being able to put my finger on what was happening. But it has been taken to new levels in the course of day-to-day parliamentary business, particularly in the wake of the Brexit referendum. Full Fact quote a case from prime ministers’ questions in January when Jeremy Corbyn made 13 separate factual claims in the course of one question, which then did not relate to the question he subsequently asked. Of course, this makes it impossible to give a sensible answer, which is precisely the intention: Much of the pointless trading of facts is designed to gain political advantage and not to enhance the quality of the debate. The flip side is that data overload makes it very difficult for the average voter to follow the twists and turns of the debate.

As for accuracy, fact bombers do tend to quote accurate statistics, although they are often cherry-picked and therefore quoted out of context which reduces their usefulness when the subject matter is put under further scrutiny. But by the time we get to that point, the debate has moved on and nobody cares whether “a Labour government properly funded the police force” or that the Conservatives are responsible for “rising crime, less safe streets.” Perhaps an even bigger problem is that politicians are generally not trusted, so it is questionable whether the electorate believes or cares what “facts” politicians quote in the course of debate which further undermines the case for evidence-based policy.

Of course, one of the reasons why politicians are not trusted is that when they do lie, they lie big. Think about the claim made in 2016 that the UK could save £350 million per week by leaving the EU. This is based on the gross contribution to the EU budget before rebates and the amount returned in the form of EU funding. It is true that over the period 2013 to 2016 the UK’s gross contribution does correspond to this figure, but the net figure is 45% lower (£190 million per week). To the extent that UK fiscal finances never work off the gross figure but off the net number, which means that such a large figure never enters the budget calculations, it is simply untrue to quote the £350 million figure, as the UK Statistics Authority Chairman pointed out to Boris Johnson in 2017. Not that British politicians have a monopoly on untruth: One of the masters of the dark arts is Donald Trump (see here for a rebuttal of some his more egregious comments) and let’s not get started on Watergate.

One of the great problems in the use and misuse of economic statistics is the lack of context. I have made the point previously (here)  that spending “millions” on government outlays is to miss the point that overall revenues are measured in billions and the size of the economy is in the trillions. For example, an outlay of £100 million is worth 4.7% of annual GDP today compared with 9.7% 20 years ago. “Record spending” on the NHS is misleading if it has not kept pace with the overall size of the economy, particularly when the population is growing older and demands on healthcare resources are rising.

It is not just politicians who are guilty of overegging it. The Department for International Trade made a similar howler recently by sending out a tweet pointing out that “exports in the 12 months to April 2019 grew by 4.0% to a record high of £645.8bn.” Exports at a record high in money terms, yes. But as a share of GDP they are still below the high recorded in Q1 2012. Indeed, it is pretty likely that the latest release of economic time series such as exports or GDP will always post record highs so long as they continue to show positive growth. In statistical terms, such series are non-stationary, meaning that their mean and variance are not constant over time. I would be much more impressed if growth (which is statistically stationary) reaches a record high. But in a world where we need to reach for the superlative, it is much easier to go with the lazy headline regarding all-time high levels of exports.

Perhaps the real problem with Factbombing is that it diminishes the quality of debate. We need to know which facts we can trust and which we can discount; which are germane to the debate at hand and which are irrelevant? In a world where we are bombarded with information on a daily basis, it is more important than ever to remember that the singular of data is not anecdote.