The problem with promises

"He who fights with monsters should be careful lest he thereby become a monster." Labour's manifesto reminded me of these famous words of Friedrich Nietzsche.

It begins thus:

A Labour government will cut the deficit every year. The first line of Labour’s first Budget will be: “This Budget cuts the deficit every year.”

This is, of course, silly. It amounts to a promise to tighten fiscal policy even if the economy weakens. The statement could be rewritten: "if a recession occurs, we'll make it worse."

Granted, few people expect a recession in the next five years. But this means little. Recessions are unpredictable - or at least unpredicted.Any sensible economic policy would take into account the risk of bad times. Labour's doesn't.

You might object that recessions could be offset by monetary policy instead. I'm not sure. A rough and ready calculation shows the problem.   

The OBR's current forecast is for the output gap to narrow from 0.6% now to zero by 2019*. However, its data show that the standard deviation of the gap since 1973 has been 2.2 percentage points. So let's assume that a shock of this magnitude happens. The OBR estimates (pdf) that this would increase government borrowing by 1.1 per cent of GDP through normal automatic stabilizers. To cut the deficit every year in the face of this incipient increase thus requires a discretionary fiscal tightening of 1.2 percentage points. How much monetary loosening would be necessary to offset this?

Obviously, it depends upon the size of the fiscal multipliers. Let's call these one. We'd then need a monetary stimulus sufficient to raise GDP by 3.4%: 1.2% to offset the fiscal tightening and 2.2% to close the output gap.

Now, the Bank of England estimates that the first £200bn of QE raised GDP by 1.5 per cent. Simply scaling this up implies that we'd need £450bn of QE to raise GDP by 3.4%. This would take total QE to £825bn.

I reckon this is errs on the low side. For one thing, my assumption about multipliers might be low given that these are bigger (pdf) in recessions and at the zero bound. And for another, QE was probably more effective in 2009 than it would be now because gilt and corporate bond yields back then were higher.

I'm not sure this is attractive. It's would mean nationalizing more than half of government debt. And - given that QE raises asset prices - it has distributional effects which Labour supporters might not like.

Granted, there might arguably be more effective forms of monetary ju-ju such as raising the inflation target or green QE. But Labour's manifesto, as far as I can see, is silent on these.

Labour's promise to cut the deficit is, therefore, not a sensible one. Deficit reduction should be contingent upon the state of the economy.

It is, though, easy to see why they have made it. The party is simply bowing to the economically illiterate demands of mediamacro and bubblethink. When much of our ruling class - the coalition and the media - is stupid, then acting stupid yourself might be the best option.

Herein, though, lies my problem. I like to think that this promise is just a lie - that if the economy does weaken, Labour would claim force majeure and abandon it.

But there's a danger here. In Influence, Robert Cialdini describes how some Americans who were captured (pdf) by the Chinese during the Korean war were asked to make pro-Communist statements.Many of those who did so subsequently collaborated with the Communists to a greater extent than necessary. This, says Cialdini, shows that we have an instinctive desire for consistency. Having made a statement under duress which we believe to be false, we go onto behave in a way consistent with it.

In the same way, Labour's promise, daft as it is, might actually constrain their future behaviour. People who act stupid might become stupid.  

* The output gap is a nonsensical idea, but let's suspend disbelief.

Comments

[pablopatito]

"Having made a statement under duress which we believe to be false, we go onto behave in a way consistent with it."

The big difference being that manifesto lies are not made under duress. They're sales brochures written by ad-men. How else could the Tories have the cheek to claim that reducing the deficit by half is some kind of victory when their previous manifesto promised to eliminate it? They're not even remotely embarrassed by their previous lie.

[pablopatito]

They are also given huge amounts of wriggle room by the fact that no party is going to win a majority, so no party is going to bound by their manifesto. They won't need to claim force majeure, they will just need to claim "coalition agreement".

So by definition, manifestos are now just stakes in the ground prior to beginning negotiations with other parties on coalition policy.

Unless, of course, you make a pledge rather than a manifesto promise, because a pledge definitely can't be br..oh.

[Chris Purnell]

I read this after reading Eichengreen's 'Hall of Mirrors' and your mediamacro and bubblethink are far from time-specific to this era.

[e]

Does a promise to cut automatically denote fiscal tightening? In another political universe could it not equally plausibly denote a promise to redistribute and promote broad investment spending; for the time being, fiscally neutral or thereabouts? And, in any case, I’m naive maybe, but I would never expect to find actual economic policy in election manifestos; only ever how promised/chosen directions of travel are being dressed up for sale.

[Blissex]

«It is, though, easy to see why they have made it. The party is simply bowing to the economically illiterate demands of mediamacro and bubblethink. When much of our ruling class - the coalition and the media - is stupid, then acting stupid yourself might be the best option.»

What about the voters? They are grown up adults, and if they are perfectly capable of seeing through the stupidity of of the coalition and the media.

In the past the propaganda of the reactionaries and the media and the established church(es) was even more oppressive, and yet large parts of the voters did vote for decades against all that, and eventually reaped the benefits.

And in any case the voters are sovereign: if they choose to hand over their vote to knaves and spivs, for whatever reasons including laziness or cognitive capture, that is democracy at its best: democracy ensures that voters suffer the consequences of their voting for knaves and spivs.