By Tony Yates
Post-Brexit, post-Trump and post-financial crisis, there’s a desire to respond to the perceived grievances of those who voted to give incumbent governments a kick. But in so far as these grievances are not genuine, responding to them in ways that harm everyone and don’t address the economy’s underlying problems sets us all up for a vortex of ever diminishing prosperity and more spiteful policies and politics.
So, for example, we had ‘quantitative easing for the people’, framed to respond to quantitative easing that was just for bankers, and harmed old savers. This policy would dismantle monetary and fiscal credibility, likely harming those whose portfolios are unsophisticated.
Now the UK is embarked on Brexit, voted for by the older, less educated, less skilled. This will shrink the size of the economy in the long run and seems likely to pitch us into a protracted period of weak growth or recession to which we are ill-placed to respond. Both malaises, certainly the latter, will be disproportionately felt by those at the bottom of the pile whose Brexit vote got us here. The journey of concluding new trade arrangements will set off a new round of industrial reallocation, and choke off immigration. This will not benefit those who voted for Brexit, except in their imaginations. In fact the process of reallocation may well, if past such experiences are to be repeated, hit hardest those who are oldest, and have least time or aptitude to retrain, or are least able to relocate.
Taking perceived grievances at face value entails several risks.
The policy response shrinks the aggregate size of the pie, hurting all, and does not help the aggrieved constituency. In the next round, the wounded group takes aim at a new component of the status quo, dismantling our wealth creating machine even further.
Another risk is that responding legitimises unfounded prejudice: a slope more slippery than those involving a purely economic calculus. It is hard to write about this without descending myself into a level of vitriol which leaves me little different from the populists. But the point has been addressed by many others.
Yet another risk of the unfounded sop response to the perceived grievance is that it rewards dishonest political opportunism. That industry is a machine that searches for prejudicial diagnoses, manufactures them into political power and chaos, but producing, this blog contends, just more grievance to begin the process afresh, each time more vigorously than the last.
Is there a way out of this? I’ve no idea, but it’s incumbent on the believers to keep banging on the many drums of rational policy discourse. That our state capacity should focus on the real problems; improving its insurance functions for those subject to more of the adjustment costs posed by closed and open economies alike; redistributing to the young; relatedly, addressing the housing and planning problem (specific to the UK); doubling down on the functions where there is a comparative advantage and need, like health and education, and not invading spheres where there is little (like industrial scale pharmaceutical research); that migration, whatever focus groups and opinion polls say, is almost entirely beneficial.
If only all that could be sloganised effectively to get enough people angry enough to vote.
Tony Yates is the professor of Economics at the University of Birmingham and teaches International Macro.
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