Stumbling and Mumbling

On moral self-licensing

There’s a piece in the Guardian on hipster racism – the “domain of white, often progressive people who think they are hip to racism, which they mistakenly believe gives them permission to say and do racist things without actually being racist”.

This, I suspect, highlights an under-appreciated change in popular attitudes to ethics.

In principle, moral thinking could be a form of self-doubt: “am I doing the right thing?”, “What is the right thing to do?” How can we tell?”

But it isn’t. Instead, morality serves as a form of self-licensing. Our belief in our own righteousness permits us to behave badly whilst condemning others. As Tim Farron says:

Five minutes on social media will give you a window into a society that condemns and judges, that leaps to take offence and pounces to cause it – liberals condemning those who don’t conform as nasty and hateful, the right condemning liberals as fragile snowflakes.

I think we see this in whites’ attitudes to racism. They attribute this to others (“the white working class”) whilst overlooking their own racism. Bosses in creative industries no doubt pride themselves on not being racist. But they don’t bother to employ black people. And don't get me started on men who claim to be feminists.

Not that moral self-licensing is confined to the left. On the right, pride in their own patriotism has self-licensed them to weaken the country by pursuing Brexit. And in the centre, Blair has justified the invasion of Iraq by saying “I thought it was right”, thereby missing the fact that what matters is not whether you believe you are right, but whether you in fact are right. 

More troublingly still, Paul Bloom describes how morality has licensed some of the very worst of crimes:

In many instances, violence is neither a cold-blooded solution to a problem nor a failure of inhibition; most of all, it doesn’t entail a blindness to moral considerations. On the contrary, morality is often a motivating force.

We have, then, a curious paradox. Everybody is certain they are morally right but very few, I suspect, are capable of rigorous ethical reasoning. Self-righteousness is all they have. How many, for example, could give a coherent answer to the question: are moral judgments questions of fact, or emotion, or what? And few seem exercised by genuine moral dilemmas: personally, I believe Brexit to be one of these.

Which poses the question: why is this?

It would be wrong to say it’s a wholly recent development. We see moral self-licensing in Howards End, where the Schlegels’ belief in their self-righteousness costs Leonard Bast a loss of wages and then his job. And Alasdair Macintyre complained back in 1981 that “we have - very largely if not entirely – lost our comprehension, both theoretical and practical, of morality.” (After Virtue, p 2)

I suspect, though, that three things have compounded the problem; these are tentative suggestions - feel free to correct them.

One is the decline of religion. Yes, religion has licensed some of the worst crimes, and still does. On the other hand, though, it also preaches humility and urges us not to judge others: “let he who is without sin cast the first stone”. Of course, this lesson was often ignored – but it is more so now.

A second factor might be the rise of homogenous communities – especially, but not perhaps solely, on-line. When you are surrounded by people of different views, you naturally ask: am I right? Why do reasonable people disagree? When you’re with like-minded people, though, you fall into groupthink and asymmetric Bayesianism. 

Thirdly, there is the decline of the public intellectual. Back in the 70s and 80s the BBC broadcast a series of interviews by Bryan Magee with leading philosophers. Such programmes today are pretty much unthinkable. What we have instead is the Moral Maze, which comprises nothing more than shouty egomaniac gobshites.

What I’m pleading for here is less self-righteousness and more self-doubt. This plea will, I am sure, be ignored.

The politics of debt fetishism

One of the sillier sights of the last few days has been the media’s pestering of John McDonnell over the costs of government borrowing: I’m not just thinking of Andrew Neil’s childish “gotcha” question about current debt interest payments, but also the demand that McDonnell say how much extra a Labour government would pay in interest.

Such questions are a form of statistical fetishism – an obsession with numbers in the abstract whilst ignoring important realities.

What matters – insofar as they do at all - are the public finances as a whole, rather than any single line of them. It is possible that McDonnell’s extra borrowing will boost GDP and tax revenues, as 23 economists have argued (pdf).

Frankly, their claim is questionable. The Bank of England believes – maybe wrongly – that there’s little slack in the economy. It might well therefore respond to the incipient boost to GDP given by looser fiscal policy by raising interest rates. If so, the multiplier will be small and the 23 wrong*.

This, however, is what the debate should be about: how big is the multiplier? What exactly will we get with McDonnell’s extra borrowing? Reality-based journalism would ask these questions. The BBC, though, prefers statistical fetishism.

Let’s put this another way. How often have Tory chancellors been asked: “how much tax revenue are we losing because austerity is depressing economic activity? But this is the question that matters when thinking about the public finances.

There's something else. The fetish of debt fails to ask the question: who is suffering because of debt interest payments? The answer is: nobody, not least because they are low by historic standards.

Meanwhile, of course, real people are suffering real harm because of Universal Credit and austerity. In fact, it’s quite possible that people are dying because of the latter.

What we have here is a clash of two different types of politics – one that troubles itself with abstractions, versus one concerned with real lives and ground truth.

The point here, of course, is not confined to government debt. It’s a more general issue than that. Jonathan Parry complains that politics is

dominated by a “lumpen intelligentsia”: “earnest types who enthuse about ideas, simplify them and believe fervently that their crude and wholesale application will solve complex social problems.” 

It’s this mentality which gave us Brexit.

It’s from this perspective that we see the BBC’s bias. In obsessing about debt (and about many other things such as the ups and downs of ministers’ careers) whilst under-reporting real suffering**, the BBC isn’t just making a choice between left and right. It is prioritizing the politics of fetishism and abstraction over the politics of real people. And this is anything but impartial.

* Update: Simon Wren-Lewis on Twitter corrects me here. At negative real interest rates, infrastructure spending pays for itself even if the multiplier is zero.  

** The BBC’s decision not to report the BMJ paper which claimed that austerity has killed thousands – on the grounds that its “conclusions were “highly speculative” and should be treated with “caution” - is of course laughable. It has not always applied such high standards.

A clarification: I’m not complaining here about right-wing bias. I would much prefer the BBC to have an intelligent and honest bias to the right than what we have now, which is a perhaps unthinking bias towards stupidity.

The rich as heroes

Here are three things I’ve read recently:

 - Phil describes how opposition to a citizens’ income is based in part upon a “cult of work” – the idea that work is virtuous even if it is mind-numbing and exploitative.

 - Kate says that Universal Credit is founded upon a “contempt for people in poverty”

The (highly misleading) idea behind Universal Credit (and its strict in-and-out-of-work jobfinding conditionaility) is that people only need a kick up the backside to get out of poverty. With Universal Credit, those kicks take the form of sanctions threats, constant reminders to find more hours in jobs that already pay almost nothing, and days on meaningless, fruitless, privately-provided “employability” courses. In other words – if you’re poor, stop being poor, or else. That’s it.

 - Jonn notes that some right-wingers profess to love free markets unless they hurt right-wing tabloids – as when a threatened consumer boycott caused Paperchase to withdraw a promotion in the Daily Mail.

There’s a common theme here. The link is a recent interview with Corey Robin in Jacobin.

Corey describes how many right-wingers regard the marketplace in the way that they used to regard politics or the battlefield - as an arena where great men reveal their heroic virtues. The successful entrepreneur is a part of an “economic aristocracy”, a “maker and breaker of how we do things, and transforms our world”. Although this view is associated with Ayn Rand, Corey shows that it is by no means confined to her. A paper by Olivier Fournot supports Corey’s point. He shows how bosses present themselves as Hollywood-type heroes.

From this perspective, the otherwise-odd views described by Jonn, Kate and Phil become much more understandable. There should indeed be a “cult of work” because work is the arena in which humans reveal their virtue and worth to others. Contempt for the poor arises because poverty is indeed a moral failing; in not making a living, people demonstrate their lack of worth. And a boycott of the Daily Mail is to be deplored because the poor should not fight back against the heroes who have been a success in the market economy.

As with any good theory, Corey’s explains a lot of things that otherwise don’t make sense, for example:

 - Why there has generally been little opposition on the right to the countless ways in which the economy is rigged in favour of the rich: restrictive intellectual property laws; planning restrictions; regulatory capture; corporate welfare, bank subsidies and so on. From the point of view of free markets, these things are deplorable. Perhaps instead we should regard them as our ancestors regarded honours and grants of land to successful generals – as prizes for revealing heroic virtues.

 - Why so many markets that could help spread risk do not in fact exist, or are relatively undeveloped: GDP futures, house price futures, insurance against social care costs and so on. The function of markets is not to allocate risk and resources, but to enable “great men” to make money and so reveal their heroism. This is why so much financial innovation has been downright dangerous rather than of the useful form Robert Shiller proposed.

 - Why we defer to successful businessmen. It’s because they have revealed leadership skills and virtues. Whether these skills are transferable, or whether business success was just dumb luck is not important.  We ask of business leaders what Napoleon asked of generals: I would rather have a general who was lucky than one who was good. It’s not just the hard right that does this. Gordon Brown forever praised “courageous” business leaders, and just listen to how the Today programme tends to fawn over them.

 - Why so many on the right are relaxed about inequality even though it often arises from market failure. It’s because success even in a rigged market is to be applauded. The general who wins a battle is seen as a hero even if the battle wasn’t fought on a level field. Why should things be different in other domains in which heroism is revealed.

In these ways, I find Corey’s theory illuminating. Maybe we economists have missed an important fact about markets. They are not just technical means for allocating resources. They are also freighted with moral meanings - though of course we cannot agree what these are. 

Notes on productivity

As had been trailed, the OBR cut its forecasts for productivity growth and hence GDP growth yesterday. Here are some miscellaneous thoughts on this.

1. If the OBR is right, this means the 20 years to 2022 will see the worst productivity growth since 1891-1911, and close to the slowest growth since the early 1800s.

2. The OBR might not be right. It says there’s “huge uncertainty” about its forecasts. One reason for this is that we don’t really have a terribly robust theory for forecasting such growth. The OBR’s past forecasts were too optimistic because it essentially assumed growth would return to trend. We know that was wrong. But we don’t really have much better ideas.

3. The ONS estimates that productivity grew 0.9% in Q3. That’s inconsistent with the OBR’s forecast of zero growth this year – but it is little more than a straw in the wind.

4. Weak productivity growth isn’t wholly a bad thing, as it keeps people in jobs. As Amit Kara and Ana Rincon-Aznar point out, there has been a negative relationship between employment and productivity.  Granted, this trade-off might be the result of bad macroeconomic policy. But bad macro policy is what we’ve got.

5. There’s a significant difference between the UK and US. In the US the main reason for flat real wages has been that monopoly power has risen and the labour share has fallen. In the UK, the labour share has been reasonably stable recently; the main reason for weak real wages is weak productivity.

6. History tells us that productivity growth has really only been much above 2% during the post-war era. This poses the question: to what extent was that growth due to us catching up on innovations which had been delayed by the war, and to what extent to the possibility that neoliberalism in fact retards productivity growth? A lot hinges upon this question of economic history.

7. If productivity and income growth remains weak, future governments will have to look elsewhere for revenues. The possibility of taxes on wealth (as advocated by Roger Farmer) or land thus loom larger.

8. Robert Colville – who’s more sympathetic to Hammond than I – says there “was little sign of a serious assault” on the productivity problem in the Budget. He’s right. For example, the National Productivity Investment Fund won’t launch until 2022.  

9. We don’t really know the precise causes of the productivity slowdown. There are many contenders. I’m not sure, though, that we need to know for policy purposes. I’d advocate a broad spectrum approach of many measures such as: policies to encourage investment and innovation, which might range from tax reform to a state investment bank; more infrastructure spending; better education and training; greater worker democracy; an attack upon rent-seeking and measures to raise entry (pdf) and exit in product markets. Most of these policies are worth doing even if their impact on productivity is slight.  

10. Duncan Weldon tweeted:

I suppose a small open economy slashing its growth forecasts even as global growth picks up at least shows that policymakers aren’t powerless in this globalised world.

But maybe their power is asymmetric. Governments with trend growth rates might be like monkeys with computers: they can’t improve them, but they can wreck them.

Technical change and house prices

There’s much talk that Philip Hammond will use tomorrow’s Budget to address the problem of high housing costs.

I have little doubt that high housing costs are, on balance, a blight upon the economy. What’s less clear to me, though, is whether increased housebuilding alone is sufficient to greatly reduce them. I don’t think it is. Jonathan Eley and Ian Mulheirn agree with me, whilst Jonn Elledge and James Gleeson disagree.

So, what would cut house prices, especially in expensive areas?

Teleportation, that’s what. If we could beam ourselves from one place to another Star Trek-stylee, nobody would need to pay a fortune in rents in high-cost areas such as London or Cambridge. They could buy somewhere cheap and simply teleport to London for work or nights out. Houses in (say) Burnley would become close substitutes for ones in Brixton. Prices of the latter would thus slump. Problem solved.

Pedants will object that teleportation won’t be developed anytime soon.

True. But my point isn’t wholly fictitious. There’s a precedent. A team of German researchers estimate that house prices in south east England fell by a third between 1899 and 1938 – a path roughly matched in several other developed countries. In the 30s, impecunious writers and artists lived in areas of London that only oligarchs and hedge fundies can afford today.

A big reason for this fall was an improvement in public transport. The opening up of the Metropolitan line, for example, allowed houses to be built miles out of London. These became substitutes for central London homes, with the result that prices of the latter fell.

You could read this as a story of increased supply forcing down prices. But it’s also a story of how technical progress reduced prices. The availability of suburban housing meant workers no longer needed to live in central London, so prices there fell.

This poses the question: what chance is there of a repeat of this? I suppose it’s possible that HS2 might make Birmingham more feasible for commuters as the Metropolitan line made Amersham. A more obvious possibility, of course, is the internet. This allows me to – in effect – teleport my labours into London from Rutland. If enough people were like me, London property prices would have fallen as we sold up to telecommute.

But this hasn’t happened even years after it has been feasible.

Of course, it isn’t technically possible for everyone; baristas and chambermaids can’t work from home. I suspect, though, that there are other barriers to doing so, among them:

 - Agglomeration benefits. People need to live in London to benefit from knowledge spillovers. Personally, I’m conflicted here. I know the data is consistent with Londoners benefiting from such effects. But my experience of London is that the idea of cities as serendipity engines in which great ideas emerge from chance meetings in cafes is just bollocks.

 - Social capital. Young workers in particular need to build contacts so they learn of better job matches. They do this by physical proximity to others.

 - Uncertainty. Living near where there are lots of potential job opportunities gives you flexibility, which is necessary if your job is at risk. I on the other hand am tied to my job.

 - Domination. Even if working from home is technically feasible, bosses might block it because they want direct oversight of their underlings. As Stephen Marglin famously pointed out (pdf), capitalist hierarchies can emerge and persist because they benefit bosses rather than because of their technical superiority.

 - Time lags. Erik Brynjolfsson points out (pdf) that it can take decades for technical changes to affect working practices. For example although electric power was available in the 1890s most US factories did not make best use of it until the 1920s. This was because it only raised productivity once bosses learned that motors on every machine allowed them to re-organize production. Maybe we’re living through a time lag now, and telecommuting will eventually become more common. As it does so, London’s house prices should fall.

This, of course, is not really a story about house prices. It’s a story about technology. On the one hand, this has unintended effects: the builders of the Metropolitan didn’t intend to cut house prices. On the other hand, though, it’s effects upon the economy are constrained by social, institutional and cultural factors. Technology alone doesn’t determine our future.

On the Brexit "divorce bill"

Robert Halfon says voters will “go bananas” if the government pays the EU a £40bn “divorce bill”. There might be a simple solution here.

Mr Halfon is right to think it unacceptable to fund the (say) £40bn payment by raising taxes or cutting spending. It is vanishingly unlikely that a fiscal tightening of 2% of GDP will be justified in the next couple of years.

Nor is it right that the bill be paid by borrowing, even though the government can borrow at negative real interest rates. Borrowing is deferred taxation. Even if we set aside considerations of Ricardian equivalence, as perhaps we should, it’s unacceptable that young people today will face higher taxes in future to pay for a decision taken by their elders. And it would be astoundingly hypocritical of a government that has justified austerity on the grounds that public debt imposes a burden on future generations to demand that they do so.

But there is, of course, a trivially simple alternative here. Quite simply, the bill could be paid by printing money. The Bank of England can print £40bn and hand it over to the government; in effect, we’d have another £40bn of quantitative easing.

This would not be inflationary, except to the extent that converting £40bn into euros would tend to weaken sterling: this would be a neat test of just how liquid the FX market is. This is because the £40bn is not being spent on domestic goods and services, and so will not raise aggregate demand. If you want to see this in MV=PT terms, the increase in M will be offset by a fall in V – so there’s no inflation.

There’s no reason therefore to get het up about handing over £40bn. Because we can print our own money, giving £40bn to the EU does not mean we have to sacrifice real resources. The analogy with a divorce bill is misleading. When a man pays to divorce his wife, he suffers a loss of real wealth – some of record collection and DVDs and so on. This need not be the case with leaving the EU.

Of course, I believe Brexit will make us genuinely poorer. But this is because we’ll have less favourable trading terms with the EU and tougher immigration restrictions. The “divorce bill” is (barring the impact on sterling) neither here nor there.

Which poses the question: why are the Tories making such a big issue of it?

Simple. It’s because creating £40bn in this way would raise the question: if the government can easily find £40bn for the EU, why couldn’t it find £40bn for the NHS?

In principle, there is a good reason. Spending an extra £40bn in the domestic economy could be inflationary, whereas giving it to the EU is not. The constraint upon government spending is inflation.

The Tories, however, cannot use this argument. For years, they have claimed that austerity was necessary because the constraint upon spending was the state of public finances. That was false. If they were to pay off the EU in a rational way, they therefore have to admit that austerity was largely unnecessary.

In this sense, the Tories’ past stupidity compels them into making even more mistakes.

The politics of death

Austerity kills. That’s the message of new research in the BMJ:

Spending constraints between 2010 and 2014 were associated with an estimated 45 368 (95% CI 34 530 to 56 206) higher than expected number of deaths compared with pre-2010 trends…. Projections to 2020 based on 2009-2014 trend was cumulatively linked to an estimated 152 141 (95% CI 134 597 and 169 685) additional deaths.

This is consistent with a point made recently by Danny Dorling:

For the first time in well over a century the health of people in England and Wales as measured by the most basic feature – life – has stopped improving…The most plausible explanation would blame the politics of austerity, which has had an excessive impact on the poor and the elderly; the withdrawal of care support to half a million elderly people that had taken place by 2013; the effect of a million fewer social care visits being carried out every year; the cuts to NHS budgets and its reorganisation as a result of the 2012 Health and Social Care Act; increased rates of bankruptcy and general decline in the quality of care homes; the rise in fuel poverty among the old; cuts to or removal of disability benefits. The stalling of life expectancy was the result of political choice.

It's also consistent with international evidence gathered by David Stuckler and Sanjay Basu; with Sarah O’Connor’s report of a “quietly unfolding health crisis” in deprived seaside towns such as Blackpool, and with the fact that benefit sanctions have driven people to suicide.

It’s obvious what the left’s reaction to this should be. But what about the right and centre’s?

There is an intelligent response. You could argue that all this is only part of the story. Christopher Ruhm, for example, has shown that austerity can improve health in other ways. If we’re not building houses, for example, fewer men die in accidents on building sites. Hard-up people can’t afford to smoke or drink themselves to death. And if we’re under-employed we’re less likely to suffer stress-related illnesses.

Alternatively, you could invoke the trolley problem. Maybe deaths from austerity are the lesser of two evils. If the alternative to austerity is higher taxes or higher debt, it could lead to lower future growth and hence less heath spending and more death in the long run. (I don’t believe this, but some Tories sincerely do).

Neither response, though, is what we get. Instead, when Aditya Chakrabortty said on Question Time last week that the government is “send[ing] disabled people to their deaths” the reaction was as if he’d spat in the church’s collection plate (9 mins in).

Which in a sense he had. Aditya had the bad manners to point out that politics is a matter of life and death - at least for the poor - thereby puncturing his audience’s illusion that it is just a cosy little debating game in which the only costs are that a few MPs move down the career ladder. I had hoped that the Grenfell disaster would destroy this illusion, but it seems the imbecilities of posh folk don’t die as quickly as do the poor.

Here, though, is the thing. The supposedly impartial BBC is complicit in this. Its politics coverage too often carries a matey undertone broken only when confronted by someone who has the temerity to challenge the privilege of the rich or to enter politics without being posh. And it gives disproportionate weight to inconsequential tittle-tattle. Priti Patel’s flight from Uganda last week was given the sort of coverage due to Churchill’s return from Yalta. I very much doubt if the BMJ’s report will get so much attention.

What we have here are two competing conceptions of politics: one which sees it as a serious matter of life and death, the other as a game among careerists. The BBC is not impartial between these, and therefore not impartial at all.  

Selecting for inadequates

“Why are Brexit’s political champions so unimpressive?” asks Janan Ganesh. Making the same point, Simon says:

The political system fails to select for competence, understanding or respect for wisdom and knowledge.

But why do we have such underwhelming politicians?

Here, we must guard against two errors. One is the tendency to believe that people are stupid just because they disagree with us. The other is a tendency to romanticize the past: it’s not that politicians were all giants years ago, but that we have grown up.

Nevertheless, I suspect Janan and Simon have a point. Looking just at Tories (so as to avoid the former error) I am less impressed now than I was in the 80s. No top Tory has the clarity of mind and purpose that Thatcher had: Thatcher inspired hatred on the left whereas May arouses only contempt - that's a big difference. Boris Johnson’s predecessors at the Foreign Office such as Carrington, Howe and Hurd had an integrity and seriousness of purpose which he wholly lacks. And – I’m showing my age here – even Nigella’s dad once had an intellectual credibility which is absent from most senior Tories now.

This poses the question: what are the mechanisms which have selected for such mediocrities?

Politics has always been a profession where once can succeed through luck as well as merit (maybe even more than merit), and so attracts overconfident second-raters. But there might be other things at work. Here are a few theories.

 - Declining Tory party membership. The Tories were once a mass party; they had over two million members in the 50s. Today, they are a handful of “weirdos and oddballs” who are “apart from reality”, to use Richard Bridger’s words. This means that whereas Tory MPs were once selected for their ability to appeal to sane and reasonable folk, today one can become a Tory candidate by enthusing weirdos.

 - The rise of narcissism. The only thing we expect of politicians today is that they echo our prejudices, not that they exercise good independent judgment or promote the public good; the fact that there is a demand for referendums demonstrates a distrust of our elected representatives to do their job. We thus prefer the third-rate fanatic to the serious sober-minded man. The media, of course, is complicit in this. The right-wing press bullies independent-mined MPs, whilst the BBC – in its pursuit of balance – describes outright lies as “controversial claims”.  

 - The Tories' loss of contact with business. In backing Brexit and immigration controls, Tory policies are not business interests. Of course, relations between the Tories and business haven’t always been close: in 1980 CBI boss Terry Beckett threatened a “bare-knuckle fight” over monetarism. But the Tories then had links to corporate life which gave them roots in a reality-based community. Today, those roots are weaker.

 - Increased inequality. Financial rewards in finance or business are now higher, relative to those in politics, than they were in the 70s and 80s. People of even moderate ability are, therefore, more likely to stay away from politics. Why become a cabinet minister to be harangued by a bigot earning five times as much as you, when you can earn more, with more dignity, elsewhere?

 - The loss of public intellectuals. Thatcher could (and did) draw upon serious thinkers such as Popper, Hayek and Friedman. There are no equivalents of these today. The best Brexiters can manage are a bunch of cranks whose work doesn’t withstand scrutiny.

Of course, none of this is to say that intelligent public-spirited people are always weeded out: they are not. It's just that there are mechanisms which tend to select against such people. Nor is it the case that politics is unique in tending to select against honesty and merit. There are adverse selection mechanisms in many organizations. The point is, though, that we should not just decry the mediocrity of our political leaders, but ask what mechanisms give us such inadequates? And how, if at all, can these be changed?

Inequality, investment & trickle down

I’ve never been sure whether trickle-down economics was a genuine theory or a straw man which leftists attribute to the right. I was therefore surprised to see Tim Worstall write in defence of the idea that:

greater investment by the richer among us (this being the flip side of the obviously true greater marginal propensity to spend of the poor) creates a wealthier society over time.

This claim, however, doesn’t seem to me to be true. If it were, we’d expect to see higher inequality leading to higher investment. But this isn’t the case. My chart shows that the share of investment in GDP rose in the 50s and 60s as inequality fell, and has fallen since the mid-80s as inequality rose.

This is the exact opposite of what we’d expect if Tim were right. It is, though, consistent with research at the IMF, which shows that inequality tends to reduce economic growth; for explanations of how this can happen, see the brilliant Sam Bowles (pdf.)

To see why might inequality reduce investment, first remember Keynes’ point that a decision to abstain from consumption does not necessarily mean a decision to invest in productive assets. The rich’s lower marginal propensity to consume might merely mean that they hoard their wealth.

This in itself is one reason for the pattern in my chart: insofar as greater equality means a higher propensity to consume, it tends to raise aggregate demand and hence strengthen the accelerator effect. We thus get more investment and wage-led growth. By the same token, inequality weakens the accelerator and so reduces investment and growth.

Alternatively, high inequality might cause the rich to fear a backlash in the form of higher taxes, political unrest or leftist governments which would deter them from investing: uncertainty alone depresses investment.

And then there’s the fact that inequality causes the rich to try to entrench their privilege by investing in guard labour rather than more productive jobs, or by using the state to protect them from competition – for example by enforcing tough intellectual property laws, extracting subsidies for banks and corporate welfare, or imposing regulations which restrict creative destruction. In this way, investment and growth are choked off. In saying this, I’m not making a terribly radical point. In a new book Steven Teles and Brink Lindsey, who are no raving lefties, write:

The economic game has been rigged in favour of people at the top…the US economy has become less open to competition and more clogged by insider-protecting deals than it was just a few decades ago. Those deals make our economy less dynamic and innovative (The Captured Economy, p5)

I’m not sure you can argue against all this on the grounds that inequality would raise investment and growth if all else were equal. The problem is that inequality affects pretty much everything – policies, institutions and the likelihood of financial crises. Very little is exogenous to inequality.

Instead, I suppose you could argue the following:

After WWII there was massive pent-up demand for investment, because the war had delayed the adoption of recent innovations. That led to rising capital spending. By the 1980s, however, that pent-up demand had disappeared, and a slower pace of innovation meant less investment. Quite by accident, these developments coincided with a decline and then rise in inequality.

I suppose this might explain the pattern in my chart. But it doesn’t explain the IMF’s finding that inequality depresses growth. Nor does it dispose of the many mechanisms whereby it might do so.

I therefore side with Richard Murphy. Trickle down is indeed discredited. Defenders of inequality must come up with something better.

Is Redwood right?

Frances Coppola points out that whilst John Redwood the politician is talking up the benefits of a hard Brexit, John Redwood the financial advisor is telling us to invest outside the UK.

There’s a danger here of Mr Redwood’s opponents seeing a conspiracy – that he’s talking pish about Brexit but the telling the truth in his capacity as a financial advisor. I’m not so sure. It might be that he’s wrong in the latter capacity, and that investing overseas isn’t in fact such a good idea.

I say so because Brexit isn’t the only consideration here. There’s also this paper (pdf) by Martin Eichenbaum, Benjamin K. Johannsen and Sergio Rebelo. They say:

the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years.

My chart shows this for the $/£ rate. The correlation between the real rate (the nominal rate multiplied by relative CPIs) and subsequent three-year changes in the nominal $/£ rate is minus 0.68. By the standards of exchange rates, this is enormous. For example, a high real rate in 1990, 1997, 2006 and 2014 led to sterling falling, and a low real rate in 2001 and 2009 led to it rising.

Sterling’s rise from last October’s lows is consistent with this pattern.

This is, essentially, a variation on Rudiger Dornbusch’s theory of exchange rate overshooting. Which in turn is a generalization of the idea that asset prices tend to over-react.

With sterling’s real rate now low, this relationship points to the pound rising. It’s quite possible therefore that even if foreign shares out-perform UK ones in the future – as they have for years – this out-performance will be offset by exchange rate losses. It’s not clear, therefore, that Mr Redwood is right.

What might cause sterling to rise? It could be that FX markets are already discounting a hard Brexit, so there’s not much more downside on this score; sterling’s trade-weighted index is 12% below its pre-referendum levels. And it could be that the same interest rate rises that concern Mr Redwood might help drive the pound up.

Now, I don’t say this with much confidence. For one thing, non-sterling cash is a useful hedge against the risk of either global crises or UK recessions, because sterling tends to fall in both. And despite this evidence, a bit of me cleaves to my priors that exchange rates are largely (pdf) unpredictable and that only fools try to forecast them. 

My point is instead a weaker one – that we should not assume that, in this case, Brexiters have especial wisdom that they are withholding from the electorate.