Miliband's illusion of control

One of the oldest and best-attested cognitive biases is the illusion of control - our tendency to over-estimate our ability to control events.Ed Miliband's speech on the deficit was an example of this bias.

He omitted to state what should be obvious, that the government is not in control of the public finances; if it were, the errors in borrowing forecasts, even in times of economic stability, would not have been as huge as they have been. Instead, the government can only reduce its net borrowing if the rest of the economy - households, companies and foreigners - want to reduce their net lending. If they want to continue to run a financial surplus (that is, save more than they invest) then attempts by the government to reduce borrowing by cutting spending will merely lead to lower output, not to less borrowing.This is the paradox of thrift.

Now, maybe the rest of the world's financial surplus will decline in coming years, which would allow the government to reduce its deficit. Maybe lower oil prices will unleash a wave of capital spending around the world and more corporate borrowing. Maybe UK households will get into more debt as the OBR expects. And maybe the process of balance sheet repair in the euro area is almost over, and so borrowing will resume.

Or maybe not. We can't say.

But Miliband ignored all this basic economics, and perpetuated the error that politicians are in charge of events.

You might object that he came close to recognising the truth when he said that deficit reduction requires a higher-wage economy.

Close - but not close enough. Higher wages would reduce government borrowing if they raise aggregate demand - if workers spend their higher incomes whilst the drop in profit margins doesn't deter capital spending. If, however, workers use their higher wages to pay off debt, whilst firms respond to lower margins by cutting capital spending, then aggregate demand will fall, the private sector will run a financial surplus and the public finances will remain in deficit.

A high-wage economy would only cut the deficit if wage-led growth is a viable strategy. This might or might not be the case - but Miliband didn't make it today.

In this sense, his speech is bad economics.

There is, however, a defence of it. For one thing, his pledge to run a surplus on the current budget "as soon as possible" might be an acknowledgment that it won't be possible.

And for another, politics is not economics. The media (and perhaps voters) don't want economic expertise. They want someone who appears to be in charge of events.As I've said, in the hyperreal economy, the point is not to reduce the deficit but to appear to reduce it.

If Miliband is playing along with "mediamacro", I'll applaud him. My fear is that if a man feigns madness for any length of time, he eventually becomes genuinely mad.

Comments

[Metatone]

For various reasons I ended up watching the Andrew Marr show last Sunday and seeing Chuka Umunna continually barracked with the question "what would you cut?" no matter what other issues of the economy he tried to talk about.

Fundamentally, "mediamacro" is the strongest force in policy making at the moment. I don't think Milliband has any political choice but to play along with it. That doesn't mean I think he is doing very well at doing so, but that's a different issue.

Worth noting, as I have previously, that part of the strength of "mediamacro" is the way it has been given support and strength by mainstream economists, who face no come back from the profession. A great example of this is Krugman welcoming John Cochrane who is walking back from his most crazy statements:

http://krugman.blogs.nytimes.com/2014/12/09/on-not-being-stupid/

Fundamentally, as a profession, economics enables prominent members to "plausibly deny" all the statements they make in the WSJ, FT and elsewhere. (Rogoff is a great example of this.) As a result, we have economist backed "mediamacro" and it is winning.

[James]

The Tories use the deficit as an excuse to pursue political goals. The fact that privatising chunks of the NHS, abolishing regional development agencies, crippling local government etc doesn't actually shrink the deficit is basically irrelevant because people now associate these actions with reducing the deficit.

Miliband is learning to play the same game. By associating higher wages etc with eliminating the deficit, it can be used to end food poverty and exploitative contracts. If this doesn't end up reducing the deficit, well, so what?

Deficit reduction has the same status as "fairness". Both parties enact policies aimed at achieving fairness, but this means different things to different parties; to the Tories this means cutting high-end taxes, to Labour it means increasing them, both use the banner of fairness as justification for their pet policies.

Government is basically powerless when it comes to deficit reduction, but the public demands it. So, the important question is not how will they achieve the unachievable, but rather, what is being done in the name of deficit reduction. Today Miliband has set out his stall (higher wages and devolution of power and budgets), and it differs significantly from Osborne's (tax cuts and another huge raid on non-pension welfare spending). Both camps make dodgy claims about the deficit reduction arising from these plans, but surely that is shooting the decoy.

[Neil Wilson]

The solution to media macro is to state the truth constantly until it is accepted.

When anybody asks how you intend to pay for X state clearly 'by spending the money on X'. If that gets a response point out the circular flow.

Govt spending = excess saving + taxation, and excess saving acts economically as a voluntary tax - but has the advantage of making people feel more secure.

Kill the argument dead.

[CurmRincewind]

Given that the British public "don't trust Labour on the economy" as numerous polls attest, it strikes me as ingenuous to suggest that David Milliband should have announced Labour's impotence in this area - "the government is not in control of the public finances" - and reducing the deficit would be largely a matter of chance - "we can't say". That would be electoral suicide.

Nor do I believe that either voters or politicians really believe that governments are wholly in control of events. But it's not unreasonable for the public to ask politicians to set out their stall, as it were, on the concerns of the day even if those issues may ultimately prove trivial or wrongheaded.

And that's what's so patronising and contemptible about the whole idea of "media macro". It assumes that the public's concerns, which the mass media aim to reflect (that is their job, after all), simply don't matter, and that data and expertise trump feelings.

[windsock]

Dear CurmRincewind: who gives a flying frack what David Miliband thinks? He's working in New York.

Your last paragraph misses the point entirely. The main issue here is that the media does not reflect public opinion, but leads it and distorts it to its own ends.

Faithfully, Windsock.

[Stevenclarkesblog.wordpress.com]

Regarding that last sentence, hasn't this happened to the political system as a whole.

Lacking any broad consensus about what politics is about or what it can or should achieve, we live in a hyperreal polity.

We are waiting for a strong leader to control the deficit and immigration without wondering whether they could do these things or understanding the consequences even if they could.

Despite whatever sense these leaders may have, they have to go along with the pretence.

The cycle of a disappointed public, and foolish leaders goes ever on...

[CurmRincewind]

@ windsock: My apologies for mis-typing - of course I meant Ed not Dave.

However, I would disagree with your assertion that the media "does not reflect public opinion, but leads it and distorts it to its own ends". For straightforward commercial reasons, the independently owned media must reflect the opinions of its customers. Otherwise they haven't got a business.

[Pension60]

Miliband is ignorning that he can indeed payout the state pension at 60 denied since 2013, with absolutely no cost to the taxpayer, and generating business and creating youth jobs on the high street as a result.

The denied state pension is sitting pretty in the ring fenced and full National Insurance Fund since last year, to the amount of £30 billion, that is vital food and fuel money, when the flat rate pension will leave huge numbers of womenb orn from 1953 and men born from 1951
with NIL STATE PENSION FOR LIFE and the bulk of rest with far far less state pension not more as told wrongly (lots of small print).
https://you.38degrees.org.uk/petitions/state-pension-at-60-now

So it costs nothing for Labour to do a u-turn and repeal the Pension Bills 2010-2014.