Wednesday, 29 October 2014

The untold story of the Eurozone crisis

Everyone knows that the Eurozone suffered a crisis from 2010 to 2012, as periphery countries could no longer sell their debt. A superficial analysis puts this down to profligate governments, but look more closely and it becomes clear that the formation of the Euro itself led to an excessive monetary stimulus in these periphery countries. This is widely understood.

But this is not the whole story. It leaves out one key element that is vital if we are to understand the situation today. Here is a chart of nominal wage growth (compensation per employee) in the Eurozone and selected countries within it before the Great Recession.

Percentage change in compensation per employee (annual): source OECD Economic Outlook

Between 2000 and 2007 German wages increased by less than 10% compared to over 20% in the Eurozone as a whole (which of course includes Germany). This difference was not primarily caused by excessive growth in the periphery countries: wages in France, Belgium, the Netherlands, Italy and Spain all increased by between 20% and 30%. The outlier was Germany.

Of course growth in nominal wages of less than 2%, and sometimes less than 1%, is not consistent with a consumer price inflation target of close to 2%. It was for this reason that the ECB lowered short term interest rates from 4.4% in 2000 to 2.1% in 2004. They were not worried by excessive inflation in the periphery - they had to lower rates to counteract the effect of low nominal wage growth in Germany. [1] 

So the reason why Germany seems to have largely escaped the second Eurozone recession of 2012/3 is that it pursued (perhaps unintentionally) a beggar my neighbour policy within the Eurozone. Low nominal wage growth in Germany led to lower production costs and prices, which allowed German goods to displace goods produced in other Eurozone countries both in the Eurozone and in third markets. This might make sense if Germany had entered the Eurozone at an uncompetitive exchange rate, but my own analysis suggests it did not, and Germany’s current relative cyclical position and its current account surplus confirm this.

As I argued in an earlier post, I do not think this divergence in cyclical position is the main reason why Germany resists expansionary measures in the Eurozone. But it is a lot easier to take up these obstructive positions when you are benefiting from this beggar my neighbour policy, and other countries that have suffered as a result appear not to understand what you have done.

[1] One of the comments on my earlier post tried to justify this beggar my neighbour policy using the following argument. Although the ECB's inflation target was close to 2%, they suggested that inflation below this was clearly desirable. What the Eurozone provided was an incentive system to try and achieve below target inflation by becoming more competitive. Germany had successfully risen to this challenge, and now it was up to other countries to try and do the same. Now if this competitiveness had been achieved by improvements in productivity, then this idea - although still mistaken - would be worth discussing. When it is achieved by cutting nominal wages (such that real wage increases are below productivity growth), it is not clear what efficiency gains are being achieved.

Postscript: Simon Tilford of the Centre for European Reform makes much the same argument here (HT Zoe Keller). 

Sunday, 26 October 2014

Why the Eurozone suffers from a Germany problem

When, almost a year ago, Paul Krugman wrote six posts within three days laying into the stance of Germany on the Eurozone’s macroeconomic problems, even I thought that maybe this was a bit too strong, although there was nothing in what he wrote that I disagreed with. Yet as Germany’s stance proved unyielding in the face of the Eurozone’s continued woes, I found myself a couple of months ago doing much the same thing (1, 2, 3, 4, 5, 6), although at a slightly more leisurely pace. Now it seems the whole world (apart from Germany, or course) is at it: here is a particularly clear example from Matt O’Brien.

I’m not going to review the macroeconomics here. I’m going to take it as read that

1)    ECB monetary policy has been far too timid since the Great Recession began, in part because of the influence of its German members.

2)    This combined with austerity led to the second Eurozone recession, and austerity continues to be a drag on demand. The leading proponent of that austerity is Germany.

3)    Pretty well everyone outside Germany agrees that a Eurozone fiscal stimulus in the form of additional public investment, together with Quantitative Easing (QE) in the form of government debt purchases by the ECB, are required to help quickly end this second recession (see, for example, Guntram Wolff), and the main obstacle to both is the German government.
The question I want to raise is why Germany appears so successful in blocking or delaying these measures. At first the answer seems obvious: Germany is the dominant economy in the Eurozone. However that is too easy an explanation: while Germany’s GDP is less than a third of the Eurozone total, the combination of French, Italian and Spanish GDP is nearly one half. Now it could be that in the past France, Italy and Spain have failed to coordinate sufficiently to oppose Germany, in part because France has placed a high value on the French-German bilateral relationship. But that seems less of a problem today.

The puzzle remains if we just view these debates as being about national interest, rather than a battle over ideas. Germany is virtually unique in the Eurozone in not currently having a large negative output gap, and having low unemployment. So, you could argue, it is not in Germany’s national interest to allow Eurozone demand to expand, and inflation to rise. But Germany achieved this position because it undercut its Eurozone partners by keeping wages low before 2007. If political discourse was governed by basic macroeconomics, you would expect every other country to be very annoyed that this had happened, and be demanding that Germany put things right by restoring a sustainable relative competitive position through additional inflation.

These last two sentences contain a clue to resolving this puzzle. While nearly everyone recognises the internal competitiveness problem within the Eurozone, hardly anyone describes this as a problem caused by German policy. Instead, as Edward Hugh suggests for example, they believe “Germany’s unit labour costs are low not because Germans aren’t paid much, but because they are very productive, and at the end of the day, despite all the bleating about the current account this is the model other members of the Euro Area (including France) not only need to but are compelled to follow: high pay and high productivity”. I suspect many would agree with that sentiment.

Unfortunately it misses the point. International differences in productivity occur for a variety of reasons, and they are slow to change. The Eurozone’s current problem arises because one country - Germany - allowed nominal wage growth well below the Eurozone average, which undercut everyone else. (This post shows how real wage growth in Germany was below productivity growth in every year between 2000 and 2007.) Within a currency union, this is a beggar my neighbour policy.

In other words, as Simon Tilford suggests, Germany is viewed by many in the Eurozone as a model to follow, rather than as a source for their current problems. (He also plausibly suggests that Germany’s influence immediately after 2010 reflected its creditor position, but he argues that the importance of this factor should now be declining.) Of course in general terms Germany may well have many features which other countries might well want to emulate, like high levels of productivity, but the reason why it’s national interest is not currently aligned with other union members is because its inflation rate was too low from 2000 to 2007. That in itself was not a virtue (whatever the rights or wrongs of why it came about), and so if they had any sense other union members should be complaining bitterly about the German position.

I think the current Eurozone problem makes much more sense if we focus less on divergent national interests, and more on different macroeconomic points of view. The German perspective which sees the Eurozone problem in terms of profligate governments and lack of ‘structural reforms’ outside Germany is utterly inappropriate in understanding the Eurozone’s current position. Yet it is a point of view that too many outside Germany also share.

This is beginning to change. As this Reuters report makes clear, relations between Draghi and the Bundesbank have steadily deteriorated, as Draghi begins to understand the macroeconomic reality. (While I still have problems with the ECB’s current position, set out clearly in this speech by Benoît Cœuré, it makes much more sense than anything coming from the Bundesbank or German government.) Yet, as Simon Tilford notes, it is still not clear whether this will end in a significant departure from current policies, or just more of the minor adjustments we have seen so far.

It may well come down to the position taken by countries like the Netherlands. They have suffered as much as France in following the Eurozone’s fiscal rules to implement damaging fiscal contraction. As Giulio Mazzolini and Ashoka Mody note, “For the Netherlands …. less austerity would have been unambiguously better.” Yet until now, politicians in the Netherlands (and the central bank) appear to have taken the German line that this medicine is for their own good. If they can eat a bit of humble pie and support a kind of ‘grand bargain’ that would see fiscal expansion rather than contraction in the Eurozone as a whole, and a comprehensive QE programme by the ECB, then maybe some real progress can be made. Ultimately this is not the Eurozone’s Germany problem, but a problem created by the macroeconomic vision that German policymakers espouse.

Friday, 24 October 2014

Redistribution between generations

I ought to start a series on common macroeconomic misunderstandings. (I do not watch zombie films.) One would be that the central bank’s balance sheet normally matters, although this nice comment on my last post does the job pretty well. Here is one that crops up fairly regularly - that government debt does not involve redistribution between generations. The misunderstanding here is obvious once you see that generations overlap.

Take a really simple example. Suppose the amount of goods produced each period in the economy is always 100. Now if each period was the life of a generation, and generations did not overlap, then obviously each generation gets 100, and there can be no redistribution between them. But in real life generations do overlap.

So instead let each period involve two generations: the old and young. Suppose each produced 50 goods. But in one period, call it period T, the government decides that the young should pay 10 goods into a pension scheme, and the old should get that pension at T, even though they contributed nothing when young. In other words, the young pay the old. A fanciful idea? No, it is called an unfunded pension scheme, and it is how the state pension works in the UK. As a result of the scheme, the old at T get 60 goods, and the young only 40, of the 100 produced in period T. The old at T are clear winners. Who loses? Not the young at T if the scheme continues, because they get 60 when old (and assume for simplicity that people do not care when they get goods). The losers are the generation who are old in the period the scheme stops. Say that is period T+10, when the young get to keep their 50, but the old who only got 40 when young only get 50 when old. So we have a clear redistribution from the old in period T+10 to the old in period T. Yet output in period T and T+10 is unchanged at 100.

That example did not involve any debt, but I started with it because it shows so clearly how you can have redistribution between generations even if output is unchanged. To bring in debt, suppose government taxes both the old and young by 10 each period, and transforms this 20 into public goods. So each generation has a lifetime consumption of 80 of private goods.

Now in period T the government says that the young need pay no taxes, but will instead give 10 goods in exchange for a paper asset - government debt - that can be redeemed next period for 10 goods. In period T nothing changes, except that the young now have this asset. In period T+1 this allows them (the now old) to consume 50 private goods rather than 40: the 40 it produces less tax and the 10 it now gets from the government by selling the debt. Their total consumption of private goods has increased from 80 to 90. How does the government obtain these 10 to give the now old? It says to the young: either you pay 20 rather than 10 in taxes, or you can buy this government debt for 10. As people only care about their total consumption, the young obviously buy the debt. They now consume 30 in private goods in T+1, but 50 in T+2 when they sell their debt, which gets us back to the original 80 in total lifetime consumption.

This process continues until period T+10, say, when the government refuses to give the young the choice of buying debt, and just raises an extra 10 in taxes on the young. So the debt disappears, but the young are worse off, as they only have 30 of private goods to consume this period. Their total lifetime consumption of private goods is 70. We have a clear redistribution of 10 from the young in period T+10 to the young in period T enacted by the government issuing debt in period T.

If you are thinking that these redistributions need not occur if the debt is never repaid or the pension scheme never wound up, then we need to get a bit more realistic and bring in interest rates and growth (and the famous r<>g relationship), which these posts of mine (and these at least as good posts from Nick Rowe) discuss. But the idea with this post is to get across in a very simple way how redistribution between generations can work because generations overlap.

Nick Rowe

The burden of the (bad monetary policy) on future generations

Wednesday, 22 October 2014

Helicopter money

Periodically articles appear advocating, or discussing, helicopter money. Here is a simple guide to this strange sounding concept. I go in descending order of importance, covering the essential ground in points 1-7, and dealing with more esoteric matters after that.

  1. Helicopter money is a form of fiscal stimulus. The original Friedman thought experiment involved the central bank distributing money by helicopter, but the real world counterpart to that is a tax cut of some form.
  2. What makes helicopter money different from a conventional tax cut is that helicopter money is paid for by the central bank printing money, rather than the government issuing debt.
  3. The central bank printing money is nothing new: Quantitative Easing (QE) involves the central bank creating reserves and using them to buy financial assets - mainly government debt. As a result, helicopter money is actually the combination of two very familiar policies: QE coupled with a tax cut. Another way of thinking about it: instead of using money to buy assets (QE alone), the central bank gives it away to people. If you think intuitively that this would be a better use of the money as a means of stimulating the economy, I think you are right.
  4. Is it exactly the same as a conventional tax cut plus QE? A conventional tax cut would involve the government creating more debt, which the central bank would then buy under QE. With helicopter money no additional government debt would be created. But is government debt held by the central bank, where the central bank pays back to the Treasury the interest it receives on this debt, really government debt in anything more than name only? The answer would appear to be yes, because the central bank could decide to sell the debt, in which case it would revert back to being normal government debt.
  5. However at this point we have to ask what the aim of the central bank is. Suppose the central bank has an inflation target. It achieves that target by changing interest rates, which it can either control (at the short end) or influence (at the long end) by buying or selling assets of various kinds. So central bank decisions about buying and selling government debt are determined by the need to hit the inflation target. Given this, whether money is created by buying government debt (through QE) which finances the tax cut or by financing the tax cut directly seems immaterial, because decisions about how much money gets created in the long run are determined by the need to hit the inflation target.
  6. There is a general principle here that should always be born in mind when thinking about helicopter money. The central bank cannot independently control inflation and control money creation - the two are linked in the long run (although the short run may be much more unpredictable). Now it could be that advocates of helicopter money really want higher inflation targets, but do not want to be explicit about this, just as they may not want to call helicopter money a fiscal stimulus. The problem with this is that central bankers do understand the macroeconomics, so there seems little point trying to be deceptive. If helicopter money does not mean higher inflation targets, then this policy is just fiscal stimulus plus QE. (I elaborate on this point here, and discuss but largely discount possible differences here. A less technical discussion is here.)
  7. Saying that helicopter money is 'just' fiscal stimulus plus QE is not meant to be dismissive. Mark Blyth and Eric Lonergan make the quite legitimate point that our institutional separation between monetary and fiscal policy may not be appropriate to a world where the liquidity trap may be a frequent problem. Many years ago I suggested in a FT piece that the central bank might be given a limited ability to temporarily change a small number of fiscal instruments to enhance its control over the economy. The more recent proposal outlined by Jonathan Portes and myself has some similarities with this idea.
  8. Turning to the tax cut, would this work in stimulating consumption? A familiar objection to a bond financed tax cut is Ricardian Equivalence: people just save the tax cut because they know taxes will increase in the future to pay the interest on the new debt. Now we know that for very good reasons Ricardian Equivalence does not hold in the real world, so we are entering the territory of angels and pins here, and as a result you may want to stop reading now. If not, the question is: if Ricardian Equivalence did hold, would a tax cut financed by printing money be subject to the same problem? Here we come to the issue of whether central bank money is 'irredeemable'. The next point explains.
  9. Ricardian Equivalence works because, to avoid having to reduce future consumption when taxes rise to pay the interest on the government debt created by the original tax cut, consumers are forced to invest all of the tax cut. If a £100 tax cut implies taxes are higher by £5 each subsequent year to pay a 5% interest rate, then if the rate of interest consumers can receive is also 5%, to generate an extra £5 each year to pay those higher taxes they have to invest all £100 of the tax cut. Now suppose the tax cut is financed by printing money. There is now no interest to pay. So if the central bank never wanted to undo its money creation, there is no reason why private agents who hold this money should not regard it as wealth and at some point spend it. This is what is meant by money being irredeemable.
  10. However we need to recall that the central bank may have an inflation target. For that reason, it may want to undo its money creation. If people expect that to happen, they will not regard their money holding as wealth. The logic of Ricardian Equivalence does apply. (The central bank may not be able to reduce money by raising taxes, but it can sell its government debt instead. Now the government has to pay interest on its debt, so taxes will rise.) This is why Willem Buiter stresses that it is expected future money, not current money, that is regarded as wealth.
  11. Tony Yates has a recent post on this. He argues that if the central bank assumes money is irredeemable, and starts printing a lot of it, people may stop wanting to use it. If they do that, it will no longer be seen as wealth. This is real angels and pins stuff that can come from taking microfoundations too seriously. Just ask yourself what you would do if you received a cheque in the post from the central bank. As Nick Rowe points out in this post, we can cut through all this by noting the link between money creation and inflation targets. The money required to sustain an inflation target will not be redeemed, so it can be regarded as wealth.
  12. Suppose central banks do stick to their inflation targets, but are having trouble achieving them because inflation is too low and we are in a liquidity trap. Without helicopter money, the inflation target will be undershot. That is the context of the current discussion. Might agents save the tax cut, because they will anticipate higher prices and recognise that they will need the additional money as a medium of exchange? As I discuss here, this is not a problem because the increase in prices will reduce real interest rates, which will stimulate the economy that way. As Willem Buiter says, "there always exists a combined monetary and fiscal policy action that boosts private demand".

Tuesday, 21 October 2014

UK immigration and social attitudes

In a previous post I speculated on how the disaffected voter could be both part of the UKIP story and also a factor behind the decline in the popularity of the LibDems. But what about UKIP’s two key policy areas: leaving Europe and stopping immigration?

As I noted last time, for most UKIP voters Europe itself is no big deal. It is an issue which will sit naturally with disaffected voters: if UK politicians seem remote to their interests, politicians in Europe will seem even more so. It is not an issue that a large number of voters will regard as all important in itself. Immigration is much more interesting. This post looks at what evidence we can get from surveys about voter attitudes towards immigration.

The first point to make is that a large majority of the UK public have always favoured tighter controls on immigration. (Interestingly, given SNP policies for an independent Scotland, a majority of Scottish voters also want less immigration!) What has changed over the last two decades has been the salience of the issue. (The charts in this post come from the three sources listed at the end.)

This chart is a little busy, but the green line is the number of people rating race and immigration as one of the top issues. The issue was nowhere until the end of the 1990s. Within the space of about four years its importance rose dramatically, and it has stayed as a key issue since around 2003.

The temporal link with actual levels of migration cannot be a complete coincidence.

Note that immigration from the EU only took off from 2004. So freedom of movement for labour within the EU, which is discussed so much in the media, is not the key to understanding voter concern about immigration.

Nor does concern about immigration appear to involve class. Any differences between the standard social classifications (A-E) and voter concern seems to be swamped by a common movement, as this chart shows.

There is, however, an understandable difference between income groups when they are asked why they are concerned about immigration. Those with low incomes tend to want to reduce immigration because of the perceived impact on jobs and housing, while those on higher incomes are more concerned about the impact on public services.

There are also two additional class related factors which do distinguish between voters attitudes towards the impact of immigration. The first is whether the voter has a university degree. For those that do, the majority believe that immigration has benefited the country both economically and culturally, while those without a degree think the opposite. Second, there is a clear correlation between concern about immigration and the newspaper people read. In addition, people seriously overestimate the extent of UK immigration, probably because of the impression they get from reading certain newspapers. To some extent this may be inevitable, as sensationalism like this or this may help sell newspapers to those who worry about immigration. However the fact that large sections of the UK press want us to leave the EU may mean that causality runs the other way, as I note below. (I do not see this as a simple right-left issue, as many on the right are against tight immigration controls.)

Location is also important. One widely reported result is that concern about immigration tends to be higher where actual levels of immigration are low. (An exception seems to be where asylum seekers are placed.) Many have noted that UKIP’s first MP is in a constituency where levels of immigration are very low. Chris Dillow mentions one poll that found that while 76% think immigration is a very or fairly big problem for Britain, only 18% think it is in their own area. Furthermore those with migrant friends were far more likely to be positive about the impact of immigration than those without.

So immigration for many is about a fear rather than perceived experience. The fear is fed not by official statistics but stories in the media. In that sense it is like crime. In the case of crime, the general perception is that crime is rising, even though for many years nearly every type of crime has been falling in the UK. This encourages politicians to focus on the appearance of action: most calculate that they are better off talking about 'cracking down' on crime than in celebrating its decline. With immigration, the political benefits of appearing to 'deal with the problem of immigration' are greater than arguing that, in average economic terms at least, immigration may not be a problem at all.  

Two things make immigration particularly toxic as a political issue. The first is that economic issues (jobs, housing, public services) can so easily be linked to it. However the first chart should warn against a belief that immigration concerns will disappear if real wages begin to rise. The second is the link with EU membership. While it is clear that public concerns about immigration became important long before immigration from the EU rose substantially, it suits those that want us to leave the EU to suggest that EU immigration is critical to public perceptions on this issue. For that reason, it seems unlikely that the political 'problem of immigration' is going to go away as long as the UK remains in the EU. 

If this last statement is true, there is an interesting implication. UKIP can continue to receive strong support by saying that they have the only certain way of 'tackling immigration', and this will be true whatever actually happens to the numbers (immigration is like crime). The question that then arises is whether the Conservative party can live with that. Promising a referendum and then staying in the EU may win the next election but it will not make UKIP go away. Instead the party may calculate that the only way of making the issue of immigration less toxic is to take the UK out of the EU. 

Sources for charts:

Oxford’s Migration Observatory, Ipsos-Mori and the British Social Attitudes survey.

Tuesday, 14 October 2014

The mythical Phillips curve?

Suppose you had just an hour to teach the basics of macroeconomics, what relationship would you be sure to include? My answer would be the Phillips curve. With the Phillips curve you can go a long way to understanding what monetary policy is all about.

My faith in the Phillips curve comes from simple but highly plausible ideas. In a boom, demand is strong relative to the economy’s capacity to produce, so prices and wages tend to rise faster than in an economic downturn. However workers do not normally suffer from money illusion: in a boom they want higher real wages to go with increasing labour supply. Equally firms are interested in profit margins, so if costs rise, so will prices. As firms do not change prices every day, they will think about future as well as current costs. That means that inflation depends on expected inflation as well as some indicator of excess demand, like unemployment.

Microfoundations confirm this logic, but add a crucial point that is not immediately obvious. Inflation today will depend on expectations about inflation in the future, not expectations about current inflation. That is the major contribution of New Keynesian theory to macroeconomics.

This combination of simple and formal theory would be of little interest if it was inconsistent with the data. A few do periodically claim just this: that it is very hard to find a Phillips curve in the data. (For example here is Stephen Williamson talking about Europe - but see also this from László Andor claiming just the opposite - and this from Chris Dillow on the UK.) If this was true, it would mean that monetary policymakers the world over were using the wrong framework in taking their decisions.

So is it true? The problem is that we do not have good data series going back very far on inflation expectations. Results from estimating econometric equations can therefore vary a lot depending how this crucial variable is treated. What I want to do here is just look at the raw data on inflation and unemployment for the US, and see whether it is really true that it is hard to find a Phillips curve.

The first chart plots consumer price inflation (y axis) against unemployment (x axis), where a line joins one year to the next. We start down the bottom right in 1961, when inflation was about 1% and unemployment 6.7%. Over the next few years we get the kind of pattern Phillips originally observed: unemployment falls and inflation rises.

The problem is that with inflation rising to 5.5% in 1969, it made sense for agents to raise their expectations about inflation. (In fact they almost surely started doing this before 1969, which may give the line from 1961 to 1969 its curvature. For given expectations, the line might be quite flat, a point I will come back to later.) So when unemployment started rising again, inflation didn’t go back to 1%, because expected inflation had risen. The pattern we get are called Phillips curve loops: falling unemployment over time is clearly associated with rising inflation, but this short run pattern is overlaid on a trend rise in inflation because inflation expectations are rising. Of course the other thing going on here is that we had two oil price hikes in 1974 and 1979. The chart finishes in 1980.

Most economists agree that things changed in 1980, as Volker used monetary policy aggressively to get inflation down. The next chart plots inflation and unemployment from 1980 to 2000.

Inflation came down from 13.5% in 1980 to 3.2% in 1983 partly because unemployment was high, but also because inflation expectations fell rapidly. (We do have survey evidence showing this happening.) The remaining period is dominated by a large fall in unemployment. So why didn’t this fall in unemployment push inflation back up? In terms of the chart, why isn’t the 2000 point much higher? Again expectations are confusing things. One survey has inflation expectations at around 5% in 1983, falling towards 3% at the end of 1999. So inflation was being held back for that reason. A Phillips curve, and its loops, is still there, but pretty flat.

The final chart goes from 2000 to 2013. Note that the inflation axis has changed - it now peaks at 4.5% rather than 16%. The interesting point, which Paul Krugman and others have noted, is that this looks much more like Phillips’s original observation: a simple negative relationship between inflation and unemployment. This could happen if expectations had become much more anchored as a result of credible inflation targeting, and survey data on expectations do suggest this has happened to some extent. There are also important changes in commodity prices happening here too.

While the change in inflation scale allows us to see this more clearly, it hides an important point. Once again the Phillips curve is pretty flat. We go from 4% to 10% unemployment, but inflation changes by at most 4%. However from the previous discussion we can see that this is not necessarily a new phenomenon, once we allow for changing inflation expectations.

Is it this data which makes me believe in the Phillips curve? To be honest, no. Instead it is the basic theory that I discussed at the beginning of this post. It may also be because I’m old enough to remember the 1970s when there were still economists around who denied that lower unemployment would lead to higher inflation, or who thought that the influence of expectations on inflation was weak, or who thought any relationship could be negated by direct controls on wages and prices, with disastrous results. But given how ‘noisy’ macro data normally is, I find the data I have shown here pretty consistent with my beliefs.


Sunday, 12 October 2014


After Thursday’s UK by-elections, we have had a huge amount of ‘Oh God, what will it all mean, will politics ever be the same again’ speculation. As Labour nearly lost one of its safe seats, they as well as the Conservatives are trying hard not to panic. Some writers have optimistically coupled this result with the Scottish referendum turnout to suggest there is a new engagement in politics (but not of the conventional kind) and a search for ‘political identity’. Others have more pessimistically drawn parallels with the rise of fascism. (Are these two contradictory?)

If you see everything in terms of a left-right spectrum, then UKIP’s popularity seems to indicate a dramatic shift to the right. Here is the share of the popular vote gained in elections since 1945, but ending with an average of current polls.

If we place the LibDems as somewhere near the centre of this spectrum, then we have a fairly even balance between parties of the right and left - until now. So has there been a sharp movement to the right among the electorate? UKIP policies are clearly to the right of the Conservatives. But it may be a mistake to confuse the party and its policies with the views of those currently voting for them. Here is Owen Jones noting how UKIP voters tend to want to renationalise the railways and energy companies, increase the minimum wage substantially, and keep the NHS within the public sector.

Perhaps we should see UKIP as an anti-Europe party, something outside the left-right spectrum? Again the party is not the same as its supporters. Only a quarter of UKIP voters in this survey said resolving Britain’s future relations with the European Union is one of the three most important issues currently facing the country. Conservative MPs may be switching to UKIP because of Europe, but it is not clear that UKIP voters are.

Before leaving this chart, we should note that the rise in UKIP is not the only recent dramatic change. The other is the decline of the LibDem vote. In the by-election where Labour only just retained their seat, we actually saw Labour keep its 2010 share of the vote. The gain in UKIP’s share was accounted for by a roughly equal decline in the share of the Conservatives and LibDems. As many Conservatives will have been voting tactically, we once again see an apparent shift from LibDem to UKIP.

Now we know that around half of UKIP voters used to vote Conservative, not LibDem. We also know that a significant number of ex-LibDem voters (about a third?) have moved to Labour, as we might have expected as a result of forming a coalition with the Conservatives. But about 20% of UKIP voters who voted for another party in 2010 are ex-LibDem voters - that is about half a million voters. (The equivalent number for Labour is 15%) Anyone familiar with LibDem policies would be surprised the figure is this high: UKIP wants to leave Europe, but the LibDems have always been the most pro-Europe party. However this may be making the same mistake again: assuming that voters’ views map to party policies.

Here is an alternative idea that might be part (and only part) of the story. (It is far from original - see Adam Lent for example.) An important underlying trend since perhaps the 1960s is the rise of the disaffected voter. These are voters with no strong ideological affiliations, and with little interest or knowledge of politics. What they do feel strongly about, however, is that politicians in power do not represent their views or interests, and that ‘they are all as bad as each other’. What will attract these voters are politicians who are not part of the ‘Westminster elite’, because they are untainted by government. This is not a peculiar UK phenomenon - not being part ‘of Washington’ is a constant appeal in the US. This, rather than policies, may be the key factor for these voters.

The emergence of this group could explain some part of the rise in the LibDem vote since the 1970s. By joining the coalition after the 2010 election the LibDems not only lost their more left leaning supporters, they also lost the support of the disaffected voter, because they were now part of government. Very quickly their image changed from plucky outsiders to part of the Westminster establishment, and they could no longer be the party of the disaffected voter. But neither could Labour, who not only had been recently in government, but continued to behave as they did in government. The disaffected voter needed somewhere to go, and for some UKIP became their home.

Of course a large part of UKIP’s support is from disgruntled Conservatives. But if that was the complete story, UKIP’s rise would only be a problem for the Conservatives, and Labour would be quietly encouraging UKIP. This is clearly not the case. If this idea of the disaffected voter sounds similar to the old idea of the protest vote, that is partly true, but with an important difference. Protest votes are generally assumed to melt away come general elections, but this will not be true of the disaffected voter. For that reason, expecting UKIP to fade away may be naive. 

By now you are probably screaming: what about immigration! I think immigration is the kind of the issue that the disaffected voter would focus on. But this post is already too long so my thoughts will have to wait, although I think Chris Dillow is on the right track.