This week’s prize for an epic lack of self-awareness goes to Philip Hammond, who told us that a Labour government would lead to “a collapse in business investment and a crash in the value of the pound, causing a shockwave of inflation”.
Even if he has a point – which he hasn’t – this provokes the reply: how will we tell the difference from a Tory government?
The Tories have given us not one, not two but three of the worst economic policy errors of modern times: austerity; the vote to leave the EU (which was due in part to austerity); and then the pursuit of a hard Brexit. They have set the bar for economic competence lower than a snake’s belly. Even if you think Labour’s policies leave much to be desired*, they clear this low hurdle.
How, then, can anyone believe otherwise?
One answer, of course, is motivated reasoning: it’s easy to believe what you want to believe.
Another is ambiguity aversion. To people accustomed to 30 years of neoliberalism, Labour looks like an uncertain prospect even if it is offering what is really only mildish social democracy – and people hate uncertainty.
A third answer is that Tory policies favour the 1% whereas Labour’s don’t, and these have massively disproportionate political influence. They also – unlike the poor – have an over-inflated sense of entitlement and take umbrage at Labour’s challenge to those entitlements.
But there’s a fourth thing I’d like to emphasize. It’s adaptation. Many people have adapted to Tory mismanagement but not (arguendo) to Labour mismanagement. And the old adage – and Steps song – is right: better the devil you know.
Some economic research is relevant here. Reto Odermatt and Alois Stutzer show that people adapt to even devastating events such as widowhood and disability; this confirms research by Andrew Clark. And – what is relevant – they fail to see that they will adapt. They expect that changes will hurt more than they in fact do. Psychologists call this the impact bias.
Some work by Christoph Merkle corroborates this. He surveyed UK stock market investors just before the crisis and found that they said that big losses would make them miserable. After incurring those losses, however, investors were much more content than they expected to be. We’re prone, he says, to loss aversion illusion.
All this is of course another way of saying there’s a status quo bias: we prefer current bads to prospective ones, even if the latter are milder. This is because we fail to see that we've adapted to our current situation and fail to anticipate future adaptation.
In this sense, when Labour policies are compared to Tory ones, we don't compare like with like and so judge Labour more harshly. We give the Tories an easy ride because we fail to see that we've adapted to their incompetence without anticipating we'll also adapt to Labour's. This bias is exacerbated by a tendency to attribute feared policies as well as real ones to a future Labour government; a failure to appreciate that Labour's worst policies will be abandoned or watered down; and by an under-estimation of the resilience of the economy to bad policy.
I fear, however, that this isn’t just a cognitive bias but also a media one. Listen, for example, to this (14’55” in) hilarious exchange between posh people who know nothing. Which brings me to a point I’ve made before: the BBC is biased not so much because it’s chock full of right-wing gits, but because of more insidious subtle biases to which it is insufficiently alert.
* I’d describe them as macro good, micro bad (with the exception of McDonnell’s wholly admirable support for coops), but it takes a lot of Harberger triangles to fill an Okun gap.