Boris Johnson's extraordinary newspaper article yesterday
outlining his vision for Brexit
was an outrageous piece of political opportunism. It was also a vision for the
future of post-Brexit Britain that not only lacked substance but repeated a
number of misconceptions about the nature of the UK’s relationship with the EU
– not to mention outright lies. It was fake news writ large: repeat the lies often enough until people
believe them. But what was bad enough in the spring of 2016 becomes more
politically dangerous now that the UK is in exit negotiations with the EU.
Since context is more important than content in this debate,
let us start with the political background. Theresa May, the prime minister
described by former Chancellor George Osborne as "a dead woman
walking" following the disastrous election campaign, is due to hold a
speech in Florence on 22 September. Whether it is to offer an olive branch or
take a hard line does not matter at this point (we do not know the nature of
the speech): The fact is it is deemed to be sufficiently important that the EU
has suggested that the fourth round of negotiations could be postponed.
Johnson's intervention could thus not have come at a worse time for the
government.
His was an appeal to the hardline Brexiteers, and whilst it
was a well-written piece as befitting a former journalist, it represented a
triumph of form over content. Coming two weeks ahead of the Conservative Party
conference, it is impossible to see this as anything other than a domestic
power grab by a politician whose mendacity knows few limits. It never gets
tiring to point out that Johnson was fired from his first job at The Times for
falsifying quotes, whilst he irritated fellow journalists with his articles
from Brussels for The Telegraph which portrayed the workings of the EU in an
absurdly exaggerated way. It is thus hard to take seriously his claim that he
is "all behind" Theresa May. If I were the prime minister, I would
never want Johnson behind me: I would want him where I can see him.
That the government is in disarray is pretty evident. Not
only did it trigger Article 50 before it decided what it wanted out of the EU
negotiations, but it damaged its bargaining position by holding an election and
losing its slim parliamentary majority. Speculation has mounted that a
leadership challenge to the prime minister will come from those on the right
wing of the Conservative Party who supported Brexit. More of a concern is the
fact that all this in-fighting is forcing the government to take its eye off
the ball. Brexit is hard enough that it will dominate pretty much all of its
legislative efforts. But then to find it is being distracted from its main task
by sniping from the sidelines, it is no wonder that negotiations are not going well.
Michel Barnier is right: the British government simply does not know what it
wants, nor how to ask for it. Their actions remind me of young teenage boys
trying to chat up girls, whilst simultaneously trying to impress the group of
mates who are hanging around within earshot. Oddly enough, such occasions almost
never deliver the desired outcomes.
As for the content of Johnson's article, it was designed to put some steel into the backbones of those who voted leave. The implication was that the current government has not done what it planned but he was the man to deliver. "I detect
scepticism about whether we have the stamina, the guts, the persistence to pull
it [Brexit] off ... I am here to tell you that this country will succeed in our
new national enterprise, and will succeed mightily." Classic Johnson
guff. You don't have to go too far in to find the first lie: "Before the referendum, we all agreed on what
leaving the EU logically must entail: leaving the customs union and the single
market." But as Brexiteer-in-arms Daniel Hannan said before the
referendum "absolutely no-one is talking about threatening our place in the Single Market."
However, Johnson goes on to repeat the most egregious of all
the lies told during the campaign: "once
we have settled our accounts, we will take back control of roughly £350 million
per week. It would be a fine thing, as many of us have pointed out, if a lot of
that money went on the NHS." This prompted a response from the head of
the UK Statistics Authority who responded today with a letter
which stated: “I am
surprised and disappointed
that you have
chosen to repeat
the figure of
£350 million per week, in
connection with the
amount that might
be available for
extra public spending when we leave the European Union.
This confuses gross and net contributions. It also assumes that payments
currently made to the UK by the
EU, including for
example for the
support of agriculture
and scientific research, will not
be paid by the UK government when we leave. It is a clear misuse of official statistics.”
A Brexit piece of this nature would not be complete without conflating the
failings of UK government and the EU. "We
should use the opportunities afforded by historically low interest rates to
give this country the infrastructure it deserves." And there was me
thinking that it was George Osborne's policy to pass up this once in a lifetime
opportunity. Finally, there was the appeal to nationalism. "I look at so many young people with the 12
stars lipsticked on their faces and I am troubled with the thought that people
are beginning to have genuinely split allegiances.”
The whole 4000 word essay was, in the words of my American
friends, a crock. It is an appeal to emotion over reason, the sort of thing we
put up with during the referendum campaign. But the time for posturing is over.
It was an appeal to the sunny uplands vision of what might be possible, but
which made no recognition of the fact that you might have to go deep into the
valley first. I thought we were over this kind of nonsense. Dammit, you won the
vote. Show us you have what it takes to get the deal you promised.
Remember how Brexit was all about taking back control? It
increasingly looks as though the prime minister is not in control of her government.
If she wants to assert her authority, Johnson should be sacked. If she fails to
do so, it will confirm the suspicions of the EU that it is facing a weak and
divided government and will be even less minded to begin talking about trade
anytime soon. We know that Brexit is not a viable economic prospect and that it
is purely a political exercise. But it appears that the politicians cannot even
get the politics right at present.
Sunday 17 September 2017
Saturday 16 September 2017
Taking back control
It is convenient to link the current state of the UK’s
relationship with the EU to the events of 25 years ago today, when on 16
September 1992 the UK suspended its membership of the European Exchange Rate
Mechanism (ERM). This is not as ridiculous as it sounds: 1992 proved to be a
liberating experience for the UK which some have argued could be achieved on an
even bigger scale by leaving the EU. The event was also significant from a policy
perspective in that it marked the end of British attempts to peg the exchange
rate. The ERM departure marked the third devaluation of a fixed peg,
following those of 1949 and 1967. It finally proved to policymakers what many
economists had said all along, that it was impossible to simultaneously operate
a fixed exchange rate and an independent monetary policy whilst allowing free
capital movement.
To set the scene, recall that the UK had been shadowing the DM since early 1987 in a bid to hang onto the coat tails of German policy credibility. It formally joined the ERM in October 1990 at an exchange rate of 2.95 to the DM which many people, including the Bundesbank, thought was too high. It is important also to recall that in spring 1992 Danish voters rejected the Maastricht Treaty and on 20 September, the French electorate was to due vote on the issue. European tensions were thus running high and currency markets were testing European government's commitment to maintaining their currency parities. As is now well known, sterling came under speculative pressure and the British government realised that the markets could throw more capital to attack the pound than it could muster to defend it. After a day of drama, which included a 500 bps rise in interest rates, the UK decided to leave the ERM.
Many lessons were learned that day as the recriminations began to fly. The Bank of England was disappointed that the Bundesbank did not do more to provide support. This reinforced the resistance of the policy establishment to fixed exchange rates and is one reason why the BoE came out so strongly against joining the European single currency. At the time, my view was that the debacle highlighted flaws in the ERM. The Bundesbank did not have an obligation to support ERM countries in trouble and was in any case battling with problems of its own in post reunification Germany. With hindsight, the BoE was perhaps right. The Bundesbank put its own interests first and whilst it could perhaps get away with this in the ERM, which after all was a voluntary arrangement, it raised questions about its motives, which resurfaced during the euro zone crisis of 2012. If Jens Weidmann had had his way, Greece would not have received additional aid and would surely have been ejected from the euro, which might have changed the European political landscape today.
Domestically, ERM exit changed the nature of the political debate. Conservative eurosceptics were emboldened by the lack of European cooperation to start challenging the government more aggressively on its position on EU issues. Whilst many of the political class of 1992 are no longer active in front line politics, the likes of John Redwood are still around who continues to occupy a prominent position on the right of the Conservative Party. The Chancellor in office at the time was Norman Lamont, whose career was effectively terminated by the ERM affair, and he became a trenchant EU critic who in 2016 was a prominent supporter of Brexit.
However, departure from the ERM was a liberating economic experience for the UK. It literally could take back control of its monetary policy which had effectively been subordinated to maintaining the currency parity. This allowed the BoE to cut interest rates from 10% pre-crisis to 5.25% less than 18 months later which helped to propel an economic recovery that occurred without a major pickup in domestic inflation. Not for nothing did some commentators try to portray what became known as Black Wednesday as White Wednesday.
But for those who believe that leaving the EU will prove similarly liberating, I suspect they will be disappointed. The ERM was a simple fixed exchange rate mechanism with no institutional commitments. Countries could come and go as they pleased. Indeed Italy, which also left the ERM in 1992, rejoined in 1996. Leaving the EU is a whole sight more complicated, and explains why the UK is still a member 15 months after the referendum. And unlike 1992, there has been a pickup in domestic inflation in the wake of sterling's depreciation which has proven to be very damaging to household real incomes.
That there were real benefits to be had from the ERM departure is not in dispute. Although it felt painful at the time, it hardened the UK's resolve not to join the single currency which proved to be a wise decision for a country whose currency has been devalued by two-thirds over the past century. But it also arguably heightened the belief that the UK is economically better off on its own. This is a falsehood. European monetary arrangements left a lot to be desired in 1992, and perhaps still do today. But the UK has become ever more strongly intertwined with the EU over the past 25 years, thanks to the establishment of the single market, which has largely been to its economic benefit. The lesson of 1992 is that it pays to have an independent monetary policy and that taking back control can be positive. However, as the Brexit negotiations have proven, taking back control is harder than it looks.
To set the scene, recall that the UK had been shadowing the DM since early 1987 in a bid to hang onto the coat tails of German policy credibility. It formally joined the ERM in October 1990 at an exchange rate of 2.95 to the DM which many people, including the Bundesbank, thought was too high. It is important also to recall that in spring 1992 Danish voters rejected the Maastricht Treaty and on 20 September, the French electorate was to due vote on the issue. European tensions were thus running high and currency markets were testing European government's commitment to maintaining their currency parities. As is now well known, sterling came under speculative pressure and the British government realised that the markets could throw more capital to attack the pound than it could muster to defend it. After a day of drama, which included a 500 bps rise in interest rates, the UK decided to leave the ERM.
Many lessons were learned that day as the recriminations began to fly. The Bank of England was disappointed that the Bundesbank did not do more to provide support. This reinforced the resistance of the policy establishment to fixed exchange rates and is one reason why the BoE came out so strongly against joining the European single currency. At the time, my view was that the debacle highlighted flaws in the ERM. The Bundesbank did not have an obligation to support ERM countries in trouble and was in any case battling with problems of its own in post reunification Germany. With hindsight, the BoE was perhaps right. The Bundesbank put its own interests first and whilst it could perhaps get away with this in the ERM, which after all was a voluntary arrangement, it raised questions about its motives, which resurfaced during the euro zone crisis of 2012. If Jens Weidmann had had his way, Greece would not have received additional aid and would surely have been ejected from the euro, which might have changed the European political landscape today.
Domestically, ERM exit changed the nature of the political debate. Conservative eurosceptics were emboldened by the lack of European cooperation to start challenging the government more aggressively on its position on EU issues. Whilst many of the political class of 1992 are no longer active in front line politics, the likes of John Redwood are still around who continues to occupy a prominent position on the right of the Conservative Party. The Chancellor in office at the time was Norman Lamont, whose career was effectively terminated by the ERM affair, and he became a trenchant EU critic who in 2016 was a prominent supporter of Brexit.
However, departure from the ERM was a liberating economic experience for the UK. It literally could take back control of its monetary policy which had effectively been subordinated to maintaining the currency parity. This allowed the BoE to cut interest rates from 10% pre-crisis to 5.25% less than 18 months later which helped to propel an economic recovery that occurred without a major pickup in domestic inflation. Not for nothing did some commentators try to portray what became known as Black Wednesday as White Wednesday.
But for those who believe that leaving the EU will prove similarly liberating, I suspect they will be disappointed. The ERM was a simple fixed exchange rate mechanism with no institutional commitments. Countries could come and go as they pleased. Indeed Italy, which also left the ERM in 1992, rejoined in 1996. Leaving the EU is a whole sight more complicated, and explains why the UK is still a member 15 months after the referendum. And unlike 1992, there has been a pickup in domestic inflation in the wake of sterling's depreciation which has proven to be very damaging to household real incomes.
That there were real benefits to be had from the ERM departure is not in dispute. Although it felt painful at the time, it hardened the UK's resolve not to join the single currency which proved to be a wise decision for a country whose currency has been devalued by two-thirds over the past century. But it also arguably heightened the belief that the UK is economically better off on its own. This is a falsehood. European monetary arrangements left a lot to be desired in 1992, and perhaps still do today. But the UK has become ever more strongly intertwined with the EU over the past 25 years, thanks to the establishment of the single market, which has largely been to its economic benefit. The lesson of 1992 is that it pays to have an independent monetary policy and that taking back control can be positive. However, as the Brexit negotiations have proven, taking back control is harder than it looks.
Tuesday 12 September 2017
Universities challenged
Concerns over ‘fat cat’ salaries have been a recurrent
feature in the UK over the years and the issue has been raised again in the
context of the earnings of university vice-chancellors. Although it has been
going for a long time, my first recollection of the popular outrage associated
with excessive pay was in the mid-1990s when Cedric Brown, chief executive of
the formerly state-owned British Gas, was criticised for his £500k annual pay
packet (equivalent to £900k today). The outrage was not so much the amount he
was paid – after all, he was ranked in the middle of the range for FTSE 100
CEOs of the time – as the fact that senior managers in formerly state-owned
utilities enjoyed massive increases in pay following privatisation.
Nonetheless, it struck at the heart of the debate over the nature of market economics. The
Conservative government of 1979-1997 turned state monopolies over to the market
and a lot of UK households, which bought British Gas shares following its 1986
privatisation, benefited handsomely from the surge in share prices that
followed. Yet still there was outrage (manufactured or otherwise) over the fact
that world class companies competing in a tough global market should have the
temerity to pay their management salaries commensurate with that position.
Fast forward more than 20 years and elements of the same debate are evident in the current furore regarding the salaries paid to vice-chancellors at British universities. These are very senior management positions, equivalent to the post of chief executive who essentially oversee the management of the institution. According to a survey by the University and College Union published in February, university bosses received an average salary package of £278k in the academic year 2015/16 which is “an increase of 2% on the previous year and 6.5 times the average pay of their staff.” Whilst a 2% rise sounds modest, it is double the rate of the average university employee and comes after several years of faster increases: In 2014-15, for instance, average remuneration including pensions jumped by 5.4%.
Some universities rewarded their chief executives exceptionally well: The best paid vice-chancellor was at the University of Bath who received a compensation package of £451k (an 11% increase on the previous year). Even more rapid rates of increase were reported elsewhere, with the vice-chancellor at Bournemouth University getting a 19.6% pay rise whilst Ulster University raised the value of total compensation by 16.6%. Pay increases of this magnitude have raised a lot of political eyebrows. But as has been pointed out in a number of quarters, the current government has gone a long way towards creating a market for education so should they be surprised when market forces operate in the market for talent capable of managing in the cut-throat university sector?
What has changed in UK universities in recent years is that the state provides far less direct funding than previously, with only around a quarter coming from the public purse. University managers have to rely far more heavily on private sector sources to drum up business – in other words, they have to be far more commercially minded than previously. But the main source of funds comes from tuition fees which account for around 45% of university income. UK students now have to pay up to £9,000 per year for tuition, which for most is funded via a student loan. Once we add living costs such as food and accommodation, many students can expect to graduate with up to £50,000 of debt. As monopoly suppliers of higher education, there are those who argue that universities are exploiting their clients and paying their senior management handsomely into the bargain. It certainly is not a satisfactory situation when viewed from the position of a young student who will struggle to get a well-paid job on graduation which comfortably covers their living costs and repayment of student debt (let alone some form of long-term savings plan).
Another often overlooked fact is that UK universities enjoy charitable status. Indeed, English institutions are even exempt from registration with the Charity Commission because “they were considered to be adequately supervised by, or accountable to, some other body or authority, such as Parliament.” Scottish and Welsh universities are required to register for some reason. Nonetheless, all of them are designated as non-profit organisations whose primary purpose is to promote social well-being and serve the common good. This means that the vast majority of university income is exempt from corporation tax though they do pay VAT on certain items and are liable for payroll taxes. To give some perspective, Cambridge University paid £3 million of tax in fiscal 2015-16 on profits of £287 million (including investments) and the University of Manchester paid £2 million on earnings of £61 million, both of which are lower tax rates than paid by the much-maligned Google (20%) and Amazon (41%).
The vice-chancellor of Oxford University recently expressed the view that university managers deserve their pay packages because they operate in the “global marketplace” for talent. I have no doubt that they are good at their job, but given the tax status under which universities operate and the fact that in effect these big packages are being funded by students, this came across as a very self-serving statement (and was indeed disowned by many of her Oxford colleagues).
Nobody denies that the challenges of running a university are far greater today than even ten years ago. But academic institutions are not private sector profit maximising organisations – they are non-profit organisations which still rely on the state for part of their revenue – and to argue that university bosses are poorly paid compared with footballers may be true, but the only way to earn a footballer’s obscenely high salary is to be good at football. Indeed, perhaps universities are just the latest in a line of businesses to demonstrate that the pure application of market forces can result in perverse outcomes which benefit managers at the expense of customers.
Fast forward more than 20 years and elements of the same debate are evident in the current furore regarding the salaries paid to vice-chancellors at British universities. These are very senior management positions, equivalent to the post of chief executive who essentially oversee the management of the institution. According to a survey by the University and College Union published in February, university bosses received an average salary package of £278k in the academic year 2015/16 which is “an increase of 2% on the previous year and 6.5 times the average pay of their staff.” Whilst a 2% rise sounds modest, it is double the rate of the average university employee and comes after several years of faster increases: In 2014-15, for instance, average remuneration including pensions jumped by 5.4%.
Some universities rewarded their chief executives exceptionally well: The best paid vice-chancellor was at the University of Bath who received a compensation package of £451k (an 11% increase on the previous year). Even more rapid rates of increase were reported elsewhere, with the vice-chancellor at Bournemouth University getting a 19.6% pay rise whilst Ulster University raised the value of total compensation by 16.6%. Pay increases of this magnitude have raised a lot of political eyebrows. But as has been pointed out in a number of quarters, the current government has gone a long way towards creating a market for education so should they be surprised when market forces operate in the market for talent capable of managing in the cut-throat university sector?
What has changed in UK universities in recent years is that the state provides far less direct funding than previously, with only around a quarter coming from the public purse. University managers have to rely far more heavily on private sector sources to drum up business – in other words, they have to be far more commercially minded than previously. But the main source of funds comes from tuition fees which account for around 45% of university income. UK students now have to pay up to £9,000 per year for tuition, which for most is funded via a student loan. Once we add living costs such as food and accommodation, many students can expect to graduate with up to £50,000 of debt. As monopoly suppliers of higher education, there are those who argue that universities are exploiting their clients and paying their senior management handsomely into the bargain. It certainly is not a satisfactory situation when viewed from the position of a young student who will struggle to get a well-paid job on graduation which comfortably covers their living costs and repayment of student debt (let alone some form of long-term savings plan).
Another often overlooked fact is that UK universities enjoy charitable status. Indeed, English institutions are even exempt from registration with the Charity Commission because “they were considered to be adequately supervised by, or accountable to, some other body or authority, such as Parliament.” Scottish and Welsh universities are required to register for some reason. Nonetheless, all of them are designated as non-profit organisations whose primary purpose is to promote social well-being and serve the common good. This means that the vast majority of university income is exempt from corporation tax though they do pay VAT on certain items and are liable for payroll taxes. To give some perspective, Cambridge University paid £3 million of tax in fiscal 2015-16 on profits of £287 million (including investments) and the University of Manchester paid £2 million on earnings of £61 million, both of which are lower tax rates than paid by the much-maligned Google (20%) and Amazon (41%).
The vice-chancellor of Oxford University recently expressed the view that university managers deserve their pay packages because they operate in the “global marketplace” for talent. I have no doubt that they are good at their job, but given the tax status under which universities operate and the fact that in effect these big packages are being funded by students, this came across as a very self-serving statement (and was indeed disowned by many of her Oxford colleagues).
Nobody denies that the challenges of running a university are far greater today than even ten years ago. But academic institutions are not private sector profit maximising organisations – they are non-profit organisations which still rely on the state for part of their revenue – and to argue that university bosses are poorly paid compared with footballers may be true, but the only way to earn a footballer’s obscenely high salary is to be good at football. Indeed, perhaps universities are just the latest in a line of businesses to demonstrate that the pure application of market forces can result in perverse outcomes which benefit managers at the expense of customers.
Sunday 10 September 2017
If it's broke, fix it!
To say that Britain is a country ill at ease with itself
would be an understatement. Almost every day new information comes to light
which highlights that the divisions fostered by the EU referendum are not
healing. Maybe my sensitivity to the issue is heightened by the fact I live in
a region which voted overwhelmingly to remain in the EU and I work in an
industry that depends very heavily on open borders, and now has to make
preparations for the possibility that in 18 months’ time those conditions will
no longer be in place. But as evidence mounts that Brexit will not be the
costless process that the electorate was promised, there is some evidence of buyer's remorse.
As the chart below suggests, there has been a modest, but distinct shift since
May in the proportion of those believing that leaving the EU is the wrong
decision. The government, however, seems intent on ploughing along its
pre-defined course.
The leaked document earlier this week highlighting that the
UK plans to impose tougher immigration curbs on EU citizens as soon as Brexit
is implemented made for profoundly depressing reading. It certainly did not
play well in Brussels and was sufficiently inflammatory that it could scupper
attempts to start trade talks next month. Aside from the economic damage that
migration curbs will cause, particularly in the short run, a related concern is
how this changes the perception of the UK in the rest of the world. The British
like to portray themselves as welcoming hosts to immigrants fleeing repression
at home. It is hard to square that with the government's current policy which looks
increasingly illiberal on a number of social issues.
Not for nothing did the Archbishop of Canterbury describe the current British model as "broken." I take this man's view on economics and finance more seriously than most other men of the cloth, since the Archbishop was formerly a senior executive in the oil industry and knows a thing or two about business. His comments came in the context of a report published by the Institute for Public Policy Research whose Commission on Economic Justice features senior business and public figures alongside the Archbishop. The report argues very strongly that “the British economy today is not generating rising prosperity for a majority of the population. Economic growth no longer leads to higher pay: the period from 2008 to 2021 will be the longest period of earnings stagnation for around 150 years.” The report further argues that workers are not sharing in the recovery in corporate profitability, which is furthering inequality.
Whilst this is all true, in some ways this is to miss the point. As the Chancellor of the Exchequer pointed out the Gini co-efficient measure of income inequality is at a 30-year low. There does appear, however, to be a deep-seated sense that something is wrong. For one thing, it is not income inequality per se that is the problem – everyone is being squeezed by the downward pressure on incomes as the UK economy struggles to recover from the fallout of the financial crisis at the same time as global competition is intensifying. As the IPPR points out, the UK is one of only six OECD countries where real earnings are still below their 2007 level. There is also a sense that wealth inequality is rising as younger people find themselves increasingly priced out of the housing market. In 1991, two-thirds of those aged 25-34 were homeowners: today that figure is around 36%, with the result that people of any given age cohort own less wealth today than in previous decades. But more than monetary equality measures, one of the biggest unspoken concerns is the apparent lack of equality in opportunity.
Younger generations who have entered the workforce in the last 10-15 years certainly do not have the same opportunities that their parents had. Education is a case in point. University students in the UK finish their studies with debts averaging £50,000 according to the IFS, whereas their parents educations was funded by the state. Even in the 1990s when charges were initially levied, they were relatively small and students graduated with relatively low levels of debt. Worse still, the relatively high paying jobs required to fund student loans (which, it should be noted, are subject to an almost usurious interest rate of 6.1%) are far harder to come by. This in part is the result of financial crisis of 2008-09 which has made the country poorer than it would otherwise have been. It is also the reflection of intensified global competition, which means that many skilled jobs (e.g. in manufacturing or finance) are relocating elsewhere. Automation and digitisation increasingly mean that many students emerge from education without the requisite skills. A generalist degree might have sufficed in the past as young people learned on the job, but that is increasingly no longer the case. A university degree no longer appears to be the passport to riches.
None of these problems are easy to resolve. However, the policy of successive governments to rely on markets rather than the state to improve the UK’s economic prosperity is being challenged as never before. Perhaps we have to accept that given the scale of globalisation, digitisation and environmental challenges, incomes in the UK (and indeed many other western economies) simply will not be able to grow as rapidly as in the past. That makes it all the more important that we get the policy mix right. A little less reliance on monetary policy in favour of more joined-up fiscal thinking would be a start. After all, monetary policy only brings forward consumption by enabling households to borrow more cheaply today but they have to repay those loans in the longer term. Fiscal policy will not resolve all the problems though we can be pretty certain that Brexit will exacerbate the scale of the challenges. It is thus imperative to get the Brexit strategy right – and I am not hearing any indications from either the British or EU side that this is likely to happen.
Not for nothing did the Archbishop of Canterbury describe the current British model as "broken." I take this man's view on economics and finance more seriously than most other men of the cloth, since the Archbishop was formerly a senior executive in the oil industry and knows a thing or two about business. His comments came in the context of a report published by the Institute for Public Policy Research whose Commission on Economic Justice features senior business and public figures alongside the Archbishop. The report argues very strongly that “the British economy today is not generating rising prosperity for a majority of the population. Economic growth no longer leads to higher pay: the period from 2008 to 2021 will be the longest period of earnings stagnation for around 150 years.” The report further argues that workers are not sharing in the recovery in corporate profitability, which is furthering inequality.
Whilst this is all true, in some ways this is to miss the point. As the Chancellor of the Exchequer pointed out the Gini co-efficient measure of income inequality is at a 30-year low. There does appear, however, to be a deep-seated sense that something is wrong. For one thing, it is not income inequality per se that is the problem – everyone is being squeezed by the downward pressure on incomes as the UK economy struggles to recover from the fallout of the financial crisis at the same time as global competition is intensifying. As the IPPR points out, the UK is one of only six OECD countries where real earnings are still below their 2007 level. There is also a sense that wealth inequality is rising as younger people find themselves increasingly priced out of the housing market. In 1991, two-thirds of those aged 25-34 were homeowners: today that figure is around 36%, with the result that people of any given age cohort own less wealth today than in previous decades. But more than monetary equality measures, one of the biggest unspoken concerns is the apparent lack of equality in opportunity.
Younger generations who have entered the workforce in the last 10-15 years certainly do not have the same opportunities that their parents had. Education is a case in point. University students in the UK finish their studies with debts averaging £50,000 according to the IFS, whereas their parents educations was funded by the state. Even in the 1990s when charges were initially levied, they were relatively small and students graduated with relatively low levels of debt. Worse still, the relatively high paying jobs required to fund student loans (which, it should be noted, are subject to an almost usurious interest rate of 6.1%) are far harder to come by. This in part is the result of financial crisis of 2008-09 which has made the country poorer than it would otherwise have been. It is also the reflection of intensified global competition, which means that many skilled jobs (e.g. in manufacturing or finance) are relocating elsewhere. Automation and digitisation increasingly mean that many students emerge from education without the requisite skills. A generalist degree might have sufficed in the past as young people learned on the job, but that is increasingly no longer the case. A university degree no longer appears to be the passport to riches.
None of these problems are easy to resolve. However, the policy of successive governments to rely on markets rather than the state to improve the UK’s economic prosperity is being challenged as never before. Perhaps we have to accept that given the scale of globalisation, digitisation and environmental challenges, incomes in the UK (and indeed many other western economies) simply will not be able to grow as rapidly as in the past. That makes it all the more important that we get the policy mix right. A little less reliance on monetary policy in favour of more joined-up fiscal thinking would be a start. After all, monetary policy only brings forward consumption by enabling households to borrow more cheaply today but they have to repay those loans in the longer term. Fiscal policy will not resolve all the problems though we can be pretty certain that Brexit will exacerbate the scale of the challenges. It is thus imperative to get the Brexit strategy right – and I am not hearing any indications from either the British or EU side that this is likely to happen.
Monday 4 September 2017
When boring is good
The weekend’s big TV debate between the two main candidates
in the German election highlighted both the good and bad sides of German
politics. It was a pretty tame affair. Even the German press called it the duel
that never was, with both Angela Merkel and the challenger Martin Schulz
trading pleasantries rather than political blows. In fairness, neither Merkel
nor Schulz are particularly charismatic and the format was not conducive to a
lively debate. For one thing there were four interviewers from rival channels,
all keen to get their questions across. Moreover the interviewers were perhaps rather
more respectful towards the candidates than was warranted by an occasion as
important as this. The absence of a studio audience was another buzz-killer and
as a result there was no interaction with the general public, which is
guaranteed to keep politicians on their toes. That said, German voters like
their politicians serious and sober (ironically Schulz is a reformed alcoholic)
and do not expect to see their representatives treat the political stage as
another branch of showbusiness, as happens elsewhere.
Merkel was deemed to have won on points with Schulz unable to land any decisive blows, and as a result she looks a shoo-in to be re-elected as Chancellor on 24 September. As might be expected, the debate was focused on those issues important to German voters so no surprise that Brexit never got a mention. Immigration topped the bill with a large slice of the available time devoted to this hot topic. But according to Thorsten Benner, Director of the Global Public Policy Institute, immigration is not the biggest problem facing Germany (see box below). Whilst acknowledging his superior knowledge of the German political scene, I am not sure I would totally agree. It is not the biggest economic issue but it remains a huge political problem. After all it has helped fuel the surge in support for AfD, and although they may struggle to pass the 5% threshold required for Bundestag representation, the fact the party has any support at all worries mainstream politicians.
Merkel was deemed to have won on points with Schulz unable to land any decisive blows, and as a result she looks a shoo-in to be re-elected as Chancellor on 24 September. As might be expected, the debate was focused on those issues important to German voters so no surprise that Brexit never got a mention. Immigration topped the bill with a large slice of the available time devoted to this hot topic. But according to Thorsten Benner, Director of the Global Public Policy Institute, immigration is not the biggest problem facing Germany (see box below). Whilst acknowledging his superior knowledge of the German political scene, I am not sure I would totally agree. It is not the biggest economic issue but it remains a huge political problem. After all it has helped fuel the surge in support for AfD, and although they may struggle to pass the 5% threshold required for Bundestag representation, the fact the party has any support at all worries mainstream politicians.
Like most political debates of recent years, the economy did
not figure highly. Why should it? After all, Germany is growing relatively
rapidly, inflation and unemployment are low and it is an export powerhouse
producing some of the highest quality manufactured goods in the world. In
short, everything looks to be running smoothly. But as Benner pointed out, the
car industry also enjoyed a good run, but it has recently been undone by the
problems of dieselgate.
Criticism has come from many other quarters too: The newspaper Die Welt has been particularly critical of the Merkel government of late and following the debate, it pointed out that although Germany is one of the most interesting countries in Europe with the world looking to Berlin, its domestic politics is curiously austere and provincial. In an article last weekend, the newspaper highlighted that Germany has under-invested in infrastructure and education. There is some truth in this: After all, the huge current account surplus represents an excess of domestic saving over investment. But as Wolfgang Schäuble has suggested, it makes sense for an ageing society to save for a rainy day. The problem is that Germany has been running a big surplus for the past 10 years with no sign of a reduction. The fact that what are increasingly seen across Europe as excessively large surpluses are rarely spoken about at home is a sign that the savings investment problem is unlikely to be addressed any time soon.
For all that the debate was a bit dull and skirted around many of the issues which economists might wish to have seen tackled, it was also devoid of the bombast that accompanied the US election and the emotionally-charged atmosphere of the Brexit referendum. For that we should be thankful, since at least one significant western power offers political stability. From an international perspective, four more years of Merkel at the helm would not be the worst outcome in these turbulent times. Those of us dealing with dysfunctional governments in the UK, let alone the US, look to German political stability with a degree of envy.
Criticism has come from many other quarters too: The newspaper Die Welt has been particularly critical of the Merkel government of late and following the debate, it pointed out that although Germany is one of the most interesting countries in Europe with the world looking to Berlin, its domestic politics is curiously austere and provincial. In an article last weekend, the newspaper highlighted that Germany has under-invested in infrastructure and education. There is some truth in this: After all, the huge current account surplus represents an excess of domestic saving over investment. But as Wolfgang Schäuble has suggested, it makes sense for an ageing society to save for a rainy day. The problem is that Germany has been running a big surplus for the past 10 years with no sign of a reduction. The fact that what are increasingly seen across Europe as excessively large surpluses are rarely spoken about at home is a sign that the savings investment problem is unlikely to be addressed any time soon.
For all that the debate was a bit dull and skirted around many of the issues which economists might wish to have seen tackled, it was also devoid of the bombast that accompanied the US election and the emotionally-charged atmosphere of the Brexit referendum. For that we should be thankful, since at least one significant western power offers political stability. From an international perspective, four more years of Merkel at the helm would not be the worst outcome in these turbulent times. Those of us dealing with dysfunctional governments in the UK, let alone the US, look to German political stability with a degree of envy.
Sunday 3 September 2017
Dawning realisation
The third round of Brexit
negotiations, which started this week, has not gone well. Michel Barnier has
called on the UK to start "negotiating seriously” as the mood across the
continent hardens against the British government's policy of constructive
ambiguity. There are, of course, two sides to this story. One is the domestic
shenanigans which increasingly dominate the UK debate as the government slowly
gets to grips with the enormity of the task at hand (shamefully slowly, many
would say). The view from continental Europe is far less strident, almost
bordering on indifference. Brexit is seen as a problem for Britain to sort out
and come to terms with.
The domestic narrative is viewed from two sides. The Remainers have little confidence in politicians to deliver a deal, with chief negotiator David Davis known for his breezy confidence rather than his ability to knuckle down and deliver. Meanwhile, Leavers such as international trade secretary, Liam Fox, have hit back by suggesting that the EU’s position on the exit bill amounts to blackmail. Whilst I share the Remainers’ lack of confidence in the UK government’s position, the EU's approach should not be accepted uncritically as the application of fair-minded logic.
When Barnier talks about serious negotiations he really means the UK should fall into line with the EU's payment demands and only then might it be willing to talk about a trade deal. In doing so, the EU is behaving in the time-honoured fashion of a big economic block using its position to try and intimidate a smaller one, as the Greek government found to its cost, and as the UK will discover further when (or if) Fox is allowed to complete the many trade deals he claims are possible. But as I have noted before, the UK cannot realistically commit to paying a sum, the magnitude of which will likely only be revealed in 2018, without getting something concrete in return. None of this should come as a surprise, of course: We all knew that the EU would play hardball and that the UK is negotiating from a position of weakness.
There are ways out of this impasse. One possible solution floated earlier this week was that the UK pays a sum of around €10bn per year into the EU budget for the next three years in return for a transitional arrangement. This effectively means continuing to accept EU laws (freedom of movement and ECJ oversight) in return for single market access whilst losing voting rights. Indeed this is similar to the idea I floated in March except for the fact that the annual cost is too high, as it is broadly what the UK pays now in net terms. The government would have to be desperate to maintain the status quo without any voting rights. Yet according to today's Sunday Times, “Theresa May is set to approve a politically explosive Brexit bill of up to £50bn after the Conservative Party conference in October in an effort to kickstart trade talks with the European Union. Under plans being drawn up in Whitehall, Britain would pay between £7bn and £17bn a year to Brussels for three years after Brexit before ending sizeable direct payments into EU coffers in time for the 2022 general election.” So much for saving £350m per week (£18.2bn per year) to spend on the NHS.
Meanwhile, the public appear to be getting a little restless. There is concern that negotiations are not proceeding as rapidly as anticipated and that the UK will be forced to accept a deal on terms which they were promised would not happen. Indeed, the DailyTelegraph recently carried an article by the European Parliament's chief Brexit negotiator, Guy Verhofstadt, who responded to claims that the EU was being inflexible in its negotiating tactics by pointing out that the EU had actually been very flexible in offering membership on terms which suited Britain. "An opt-out from the euro, but banker to the Eurozone. An opt-out from Schengen, but access to the security databases linked to it. A blanket opt-out from Justice and Home Affairs, with the possibility to opt back into the most effective crime-fighting measures. The list goes on." All true, of course, and exactly what I pointed out in the wake of the referendum. What was notable was that the Telegraph offered Verhofstadt such a platform in the first place. This was after all the newspaper which in August 2016 blamed the economic problems facing the UK on "the pessimism of the previous government, the Labour Party, Barack Obama, global institutions, sections of the media and, of course, the Bank [of England]". The gung-ho confidence of the Brexiteers which characterised parts of the media a year ago has dissipated.
For that, much of the blame should be directed at those prominent campaigners who argued that the EU would be begging to do a deal and "they need us more than we need them". Moreover, those naive campaigners who suggested that "absolutely nobody is talking about threatening our place in the single market" clearly miscalculated the EU's position. Unfortunately, this problem has been exacerbated by the UK government's own decision to leave the single market and customs union (even if the letter to Donald Tusk triggering Article 50 did not explicitly suggest the latter).
In a way, this goes to the heart of the domestic Brexit contradiction. The electorate apparently voted to regain sovereignty, which for many meant controlling borders (i.e. immigration). But many of the leading campaigners are free marketeers who simply want to trade more freely. The fact that they are fantasists with an old-fashioned liberal view of the world (some call themselves Whigs) is where the trouble starts. They have the influence and political clout but no practical idea of how to achieve what they want. More importantly they have totally failed to understand the EU and what it stands for. For many Brits EU membership is a transactional arrangement, but for the original six members there is a much deeper political commitment. The hero of many free-traders is Adam Smith, who pointed out the benefits of comparative advantage – specialising in what you are good at. But that only works if the trading arrangements under which we operate allow everyone to benefit. The ideological thrust at the heart of the free-traders’ campaign is not consistent with the realities of modern day trading arrangements in which the UK is not a major exporter of goods and relies heavily on a services industry which sells to the rest of the EU. Faced with the evidence, maybe even a rationalist like Smith would be forced to agree that the free-trade case for Brexit is weak.
As a final thought, it is worth pointing out that Brexit is not the issue in other EU countries that it is in Britain. The EU has moved on, with France dealing with its own issues and Germany preparing for an election. Ultimately, Brexit boils down to a domestic debate about what role Britain wants to play on the world stage. It can either choose to be outward looking and deal with rising economic powers as an equal, or it can leave the EU and suffer the increasing economic irrelevance that goes with it. Boris Johnson is about to be proved wrong: you can't have your cake and eat it.
The domestic narrative is viewed from two sides. The Remainers have little confidence in politicians to deliver a deal, with chief negotiator David Davis known for his breezy confidence rather than his ability to knuckle down and deliver. Meanwhile, Leavers such as international trade secretary, Liam Fox, have hit back by suggesting that the EU’s position on the exit bill amounts to blackmail. Whilst I share the Remainers’ lack of confidence in the UK government’s position, the EU's approach should not be accepted uncritically as the application of fair-minded logic.
When Barnier talks about serious negotiations he really means the UK should fall into line with the EU's payment demands and only then might it be willing to talk about a trade deal. In doing so, the EU is behaving in the time-honoured fashion of a big economic block using its position to try and intimidate a smaller one, as the Greek government found to its cost, and as the UK will discover further when (or if) Fox is allowed to complete the many trade deals he claims are possible. But as I have noted before, the UK cannot realistically commit to paying a sum, the magnitude of which will likely only be revealed in 2018, without getting something concrete in return. None of this should come as a surprise, of course: We all knew that the EU would play hardball and that the UK is negotiating from a position of weakness.
There are ways out of this impasse. One possible solution floated earlier this week was that the UK pays a sum of around €10bn per year into the EU budget for the next three years in return for a transitional arrangement. This effectively means continuing to accept EU laws (freedom of movement and ECJ oversight) in return for single market access whilst losing voting rights. Indeed this is similar to the idea I floated in March except for the fact that the annual cost is too high, as it is broadly what the UK pays now in net terms. The government would have to be desperate to maintain the status quo without any voting rights. Yet according to today's Sunday Times, “Theresa May is set to approve a politically explosive Brexit bill of up to £50bn after the Conservative Party conference in October in an effort to kickstart trade talks with the European Union. Under plans being drawn up in Whitehall, Britain would pay between £7bn and £17bn a year to Brussels for three years after Brexit before ending sizeable direct payments into EU coffers in time for the 2022 general election.” So much for saving £350m per week (£18.2bn per year) to spend on the NHS.
Meanwhile, the public appear to be getting a little restless. There is concern that negotiations are not proceeding as rapidly as anticipated and that the UK will be forced to accept a deal on terms which they were promised would not happen. Indeed, the DailyTelegraph recently carried an article by the European Parliament's chief Brexit negotiator, Guy Verhofstadt, who responded to claims that the EU was being inflexible in its negotiating tactics by pointing out that the EU had actually been very flexible in offering membership on terms which suited Britain. "An opt-out from the euro, but banker to the Eurozone. An opt-out from Schengen, but access to the security databases linked to it. A blanket opt-out from Justice and Home Affairs, with the possibility to opt back into the most effective crime-fighting measures. The list goes on." All true, of course, and exactly what I pointed out in the wake of the referendum. What was notable was that the Telegraph offered Verhofstadt such a platform in the first place. This was after all the newspaper which in August 2016 blamed the economic problems facing the UK on "the pessimism of the previous government, the Labour Party, Barack Obama, global institutions, sections of the media and, of course, the Bank [of England]". The gung-ho confidence of the Brexiteers which characterised parts of the media a year ago has dissipated.
For that, much of the blame should be directed at those prominent campaigners who argued that the EU would be begging to do a deal and "they need us more than we need them". Moreover, those naive campaigners who suggested that "absolutely nobody is talking about threatening our place in the single market" clearly miscalculated the EU's position. Unfortunately, this problem has been exacerbated by the UK government's own decision to leave the single market and customs union (even if the letter to Donald Tusk triggering Article 50 did not explicitly suggest the latter).
In a way, this goes to the heart of the domestic Brexit contradiction. The electorate apparently voted to regain sovereignty, which for many meant controlling borders (i.e. immigration). But many of the leading campaigners are free marketeers who simply want to trade more freely. The fact that they are fantasists with an old-fashioned liberal view of the world (some call themselves Whigs) is where the trouble starts. They have the influence and political clout but no practical idea of how to achieve what they want. More importantly they have totally failed to understand the EU and what it stands for. For many Brits EU membership is a transactional arrangement, but for the original six members there is a much deeper political commitment. The hero of many free-traders is Adam Smith, who pointed out the benefits of comparative advantage – specialising in what you are good at. But that only works if the trading arrangements under which we operate allow everyone to benefit. The ideological thrust at the heart of the free-traders’ campaign is not consistent with the realities of modern day trading arrangements in which the UK is not a major exporter of goods and relies heavily on a services industry which sells to the rest of the EU. Faced with the evidence, maybe even a rationalist like Smith would be forced to agree that the free-trade case for Brexit is weak.
As a final thought, it is worth pointing out that Brexit is not the issue in other EU countries that it is in Britain. The EU has moved on, with France dealing with its own issues and Germany preparing for an election. Ultimately, Brexit boils down to a domestic debate about what role Britain wants to play on the world stage. It can either choose to be outward looking and deal with rising economic powers as an equal, or it can leave the EU and suffer the increasing economic irrelevance that goes with it. Boris Johnson is about to be proved wrong: you can't have your cake and eat it.
Wednesday 30 August 2017
How to spot a fake
They say that if you can fake sincerity you've got it made. These days it's fake news
we worry about. But it is rare that anyone goes to such great lengths to highlight it as this fascinating Twitter thread I found the other day (also picked up by The Times). A data scientist with the Twitter handle Conspirador
Norteño (CN) observed that bot and troll accounts on Twitter often have names
that end with 8 random digits. He then took the time to trawl through a series
of Twitter accounts, searching for those that referenced #unitetheright and
#firemcmaster, both of which are trends followed by those on the Alt-right end
of the political spectrum, and found 824 accounts with an 8 digit handle at the
end of their user name. Searching their followers for similarly named accounts,
and subsequently their followers' followers yielded 63099 accounts. It was (for
CN) a simple task to trawl through the followers of these accounts in order to
plot the node network. This research yielded the nugget that the largest node
in the network belongs to a David Jones based in Southampton.
It then starts to get a little murky thereafter. CN observed that said account posted only between 8am to 8pm Moscow time "almost like it's his job or something". Breaking down the subject matter of the account reveals that this account posted a lot about Ukraine in 2014, then in 2016 moved on to the issues of Brexit and Trump (see chart). Some of the material on the Brexit topic was very inflammatory, particularly with regard to immigration. When it came to the US election, CN pointed out that the language was very similar to that used by adherents of the Alt-right, despite the fact the poster was supposed to be British. CN concludes that this account was "one of the more interesting troll accounts I've seen (and almost certainly human operated and not a bot)". Furthermore, the variety of topics was "aligned with the interests of the Kremlin at the time."
It then starts to get a little murky thereafter. CN observed that said account posted only between 8am to 8pm Moscow time "almost like it's his job or something". Breaking down the subject matter of the account reveals that this account posted a lot about Ukraine in 2014, then in 2016 moved on to the issues of Brexit and Trump (see chart). Some of the material on the Brexit topic was very inflammatory, particularly with regard to immigration. When it came to the US election, CN pointed out that the language was very similar to that used by adherents of the Alt-right, despite the fact the poster was supposed to be British. CN concludes that this account was "one of the more interesting troll accounts I've seen (and almost certainly human operated and not a bot)". Furthermore, the variety of topics was "aligned with the interests of the Kremlin at the time."
Now we may be maligning David Jones of Southampton unfairly
and perhaps he really feels very strongly about the issues at stake. But as one
commentator pointed out, if it were a UK based Tweeter their times would vary
with the switch to daylight saving in the UK, which would change the time
vis-a-vis Russia which has no DST. But they do not, hence accentuating CN's
suspicions. This clearly highlights the ease with which it is possible to
influence issues of the day by disseminating a particular view and creating a
fake network of followers to provide "likes" and recommendations.
This is not to say that the likes of Russia are unduly influencing the democratic process in western economies – at least no more so than usual. Foreign powers have always used propaganda to influence beliefs in other countries. There is evidence to suggest its use as far back as the sixth century BC and it reached new heights during the Second World War, and the Cold War that followed. Even today, the TV channel RT and the BBC World Service provide a view of the world as seen from Moscow and London respectively. Fake news is not new either: One of the more historically notable events was the publication by the Daily Mail of the infamous Zinoviev Letter in 1924 which purported to be a directive from the head of the international Communist movement, based in Moscow, to the British Communist Party encouraging it to engage in seditious activities. What appeared to be a direct attempt to influence British domestic policy turned out to be a forgery, but it cast a shadow over the Labour Party for decades thereafter, which (unfairly) blamed its heavy election defeat on the letter.
However, the rise of social media has changed the way in which propaganda can be disseminated. For one thing, it is easy to maintain online anonymity which means we can never be 100% sure of the source of the material. Moreover, social media operates on a decentralised basis so that it is straightforward to set up a series of apparently independent channels all feeding the same message. In this way, the message can be drip-fed rather than blasted out.
The impact of fake news on voting patterns is believed to be very small. In one study (Spenkuch and Toniatti 2016[1]) the authors suggest that exposing voters to one additional television campaign ad changes vote shares by approximately 0.02 percentage points. If exposure to one TV ad is as persuasive as one fake news article, each fake tweet influences voting patterns by mere hundredths of a percent. Preaching to the converted will not win more votes, so it does not matter how many times those convinced of a particular view are exposed to fake news because they only have one vote. But the cumulative effect of many thousands of such fake messages will start to mount up if they then influence other voters who otherwise might not be susceptible to such tactics. According to one source (Gottfried and Shearer 2016[2]), 62 percent of US adults get their news from social media and 18 percent do so often, with Facebook the most popular medium. Not everyone will believe the fake news of course, but the dissemination of fake news may have more of an effect than we often credit.
This appears to be a serious problem but I will leave it for others to debate the impact on voting patterns. As an economist, my concern is how such tactics could change the way politicians react to the groundswell of apparent public opinion. If social media is abuzz with reports of how health spending, for example, is scandalously low, do governments react by changing their priorities in order to win votes at the next election? And how would they do so: Do they change their defence budget? Given the low costs associated with fake news dissemination, it is easy to understand why foreign powers with a different world view might try to influence the policies of other governments. But the same applies to domestic interest groups which want to prioritize spending on one area over another. Companies might also apply the same tactics to make the case for a change in the law. If anything this highlights the extent to which all members with a vested interest in our society have a duty to do a little bit of due diligence rather than simply accepting the newsfeeds put before us.
Otherwise, as the often prescient and always quotable HL Mencken put it, "As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron."
This is not to say that the likes of Russia are unduly influencing the democratic process in western economies – at least no more so than usual. Foreign powers have always used propaganda to influence beliefs in other countries. There is evidence to suggest its use as far back as the sixth century BC and it reached new heights during the Second World War, and the Cold War that followed. Even today, the TV channel RT and the BBC World Service provide a view of the world as seen from Moscow and London respectively. Fake news is not new either: One of the more historically notable events was the publication by the Daily Mail of the infamous Zinoviev Letter in 1924 which purported to be a directive from the head of the international Communist movement, based in Moscow, to the British Communist Party encouraging it to engage in seditious activities. What appeared to be a direct attempt to influence British domestic policy turned out to be a forgery, but it cast a shadow over the Labour Party for decades thereafter, which (unfairly) blamed its heavy election defeat on the letter.
However, the rise of social media has changed the way in which propaganda can be disseminated. For one thing, it is easy to maintain online anonymity which means we can never be 100% sure of the source of the material. Moreover, social media operates on a decentralised basis so that it is straightforward to set up a series of apparently independent channels all feeding the same message. In this way, the message can be drip-fed rather than blasted out.
The impact of fake news on voting patterns is believed to be very small. In one study (Spenkuch and Toniatti 2016[1]) the authors suggest that exposing voters to one additional television campaign ad changes vote shares by approximately 0.02 percentage points. If exposure to one TV ad is as persuasive as one fake news article, each fake tweet influences voting patterns by mere hundredths of a percent. Preaching to the converted will not win more votes, so it does not matter how many times those convinced of a particular view are exposed to fake news because they only have one vote. But the cumulative effect of many thousands of such fake messages will start to mount up if they then influence other voters who otherwise might not be susceptible to such tactics. According to one source (Gottfried and Shearer 2016[2]), 62 percent of US adults get their news from social media and 18 percent do so often, with Facebook the most popular medium. Not everyone will believe the fake news of course, but the dissemination of fake news may have more of an effect than we often credit.
This appears to be a serious problem but I will leave it for others to debate the impact on voting patterns. As an economist, my concern is how such tactics could change the way politicians react to the groundswell of apparent public opinion. If social media is abuzz with reports of how health spending, for example, is scandalously low, do governments react by changing their priorities in order to win votes at the next election? And how would they do so: Do they change their defence budget? Given the low costs associated with fake news dissemination, it is easy to understand why foreign powers with a different world view might try to influence the policies of other governments. But the same applies to domestic interest groups which want to prioritize spending on one area over another. Companies might also apply the same tactics to make the case for a change in the law. If anything this highlights the extent to which all members with a vested interest in our society have a duty to do a little bit of due diligence rather than simply accepting the newsfeeds put before us.
Otherwise, as the often prescient and always quotable HL Mencken put it, "As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron."
[1] Spenkuch, Jörg L., and David Toniatti. 2016 “Political Advertising and Election Outcomes.” CESifo Working Paper Series 5780
[2] Gottfried, Jeffrey, and Elisa Shearer. 2016. “News Use across Social Media Platforms 2016.” Pew Research Center, May 26. http://www.journalism.org/2016/05/26/news-use-across-social-media-platforms-2016
[2] Gottfried, Jeffrey, and Elisa Shearer. 2016. “News Use across Social Media Platforms 2016.” Pew Research Center, May 26. http://www.journalism.org/2016/05/26/news-use-across-social-media-platforms-2016
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