Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 1 April 2014

What a fool I have been

When did the UK government’s Plan A (aka austerity) become Plan B? The table below show OBR estimates of UK cyclically adjusted underlying public sector net borrowing from various budget or autumn statements.


9/10
10/11
11/12
12/13
13/14
March 11
8.9
7.4
5.3
3.7
2.0
Nov 11

7.1
6.4
5.5
4.0
March 12

7.0
6.4
5.7 (4.0)
4.1
Dec 12


6.0
4.8 (3.0)
3.8
March 13


6.0
5.9 (3.6)
5.1 (4.3)
Dec 13



5.5 (3.3)
5.2 (4.4)
March 14



5.3 (3.1)
5.0 (4.3)
Figures in brackets are ‘headline’ numbers, which include the impact of (from March 12) Royal Mail transfers and (from March 13) Bank of England APF transfers.

Here are the same figures for the cyclically adjusted primary deficit, which is a slightly better indicator of fiscal stance. (Unfortunately I cannot find any figures in 2011 documents.)


9/10
10/11
11/12
12/13
13/14
March 12
 -6.9
-4.2
-3.4
-3.1* (-1.3)
-1.6
Dec 12


-3.1
-2.9* (-1.1)
-1.8
March 13


-3.2
-3.3* (-1.5)
-3.1
Dec 13



-2.9 (-1.0)
-2.6
March 14



-2.8 (-1.0)
-2.5
*There do not appear to be any figures excl. Royal Mail and APF before December 2013, so I have just increased the deficit by 1.8% of GDP (the adjustment factor in the March 14 forecast) to get the underlying deficit in the first 3 rows. 2009/10 figure comes from the OBR databank. 

March 2011 was very much Plan A: a sharp and steady tightening of fiscal policy. By March 2014 it looks like Plan B: in 2012/3 and 2013/4 there is very little fiscal tightening.

When did Plan A become Plan B? It is clear that Plan A was in force in 2010/11 and 2011/12: we had significant fiscal tightening in both years. So we need to focus on 2012/3 and 2013/4. The contraction signalled in November 2011 for those years was less than in March, but it is still a fiscal contraction. If we look at the primary deficit, the contraction expected in March 2012 for 2012/13 is modest, but the OBR was still expecting a large contraction in the following year. Only in March 2013 do we find little or no contraction in both years.

This is where I have to own up. As some comments on my last post have asked, why did I not write about Plan A becoming Plan B earlier than December 2013? I did write a post on the March 2013 budget, but I chose to focus on the statement about monetary policy (given all the speculation about nominal GDP targeting). So why wait until December 2013? I could argue that others, like Jonathan Portes and the IFS, did talk about this in their commentary on the March budget. And I did acknowledge the point before December. I could also claim that I was ahead of George Osborne and Ed Balls. But these are pathetic excuses.

While we are at it, we should follow these same commentators and ask why I failed to forecast the 2013 recovery? I could say I didn’t forecast its absence either, because I do not do that kind of forecasting. Also in a second post after the March 2013 budget I did talk about Help to Buy, and I listed a number of reasons why this could help stimulate the economy. But if I’m not prepared to forecast exactly when economies are going to stagnate or recover, is anything else I say worth serious consideration?

Given these sins of omission I have therefore to acknowledge that anything I said about Plan B is totally discredited. Furthermore, my criticism of the Labour opposition for not taking the line that the plan had changed is obviously misplaced. Ed Balls did call for a Plan B before the March 2013 budget. But if an academic who has a full time job doing teaching and research cannot write about these things at the right time, how can you expect an opposition Treasury team to be able to notice that their request has been granted.

And I’m afraid this means that all of my criticism of George Osborne has to be retracted too. It is perfectly understandable that he should keep claiming that he has stuck to Plan A, because if it takes a professor of economics one budget statement before calling a change in policy, it is quite reasonable to assume that it will take a Chancellor and the entire Treasury a lot longer than that to recognise what is going on. And if the government is to be excused recognising what is happening to fiscal policy, then we really should also forgive them the effects of the contraction that did take place in the two preceding years.


So in the future I promise to ask myself before I write anything - could I have written this earlier? And if the answer is yes, I know it is best to keep quiet. I now understand that it is best to focus on when things are said, particularly at this time of year.  

15 comments:

  1. Is it just me or was this post just a tad acerbic?

    Really though Mr Wren-Lewis, there are always going to be trolls/idiots commenting on every economics blog (or any comments section anywhere on the internet). They're like junkmail: annoying but hard to avoid.

    I can say with some certainty that none of the informed, thinking readers of your blog (most likely a very large majority) believe economists are able to reliably predict recoveries or that this fact means we should stop paying attention to what they say.

    In short: Ignore the trolls and keep writing good stuff!

    ReplyDelete
  2. Don't take it so personally. It isn't all about you.

    None of the prominent (serious) critics of Osborne pointed out that plan A had been abandoned until after the upturn had become apparent. So, for example, the Portes' link you give above was in April 2013. In January 2013 in the FT he was still arguing that fiscal policy was too tight (which by then we now know it wasn't).

    The cyclically adjusted primary balance has hardly budged since 11/12. Almost all of 'austerity' was frontloaded, as was inevitable given that we live in a democracy with elections every 5 years. On a change of government the easiest cuts to make are to the other side's pet projects (the same will happen in 2015 when, for example, free schools funding will be withdrawn by Labour)

    Nobody sensible could criticise you in an intermittent and very valuable blog from failing to give a month by month or quarter by quarter update on where we are on the UK economy.

    However, the critics of Osborne (as a general class) cannot have it both ways. Either

    (i) Austerity was abandoned in 2011/12, and that contributed to the upturn. Portes argues that here

    http://www.newstatesman.com/politics/2013/09/what-osborne-wont-admit-growth-has-increased-because-slower-cuts

    but if so there was a consequent failure to point out this change of policy at the relevant time. There certainly isn't anything by Portes (or any other prominent critic) pointing out Osborne's change of course until the need to explain the upturn arose in the late Spring of 2013.

    or

    (ii) Austerity was not abandoned until much later ("Only in March 2013 do we find little or no contraction in both years") but if that is so then this obviously could not have contributed to the upturn.

    I believe (i) FWIIW.

    Some economists (Blanchflower most obviously) use the credibility of the Academy for political purposes. I do not think this is true of S W-L. I do however think he expects more of politicians than is realistic. How could Balls, for example, make political capital out of the abandonment of 'austerity' when he along with the other critics of Osborne persisted in calling for slower and shallower long after that had been adopted? That is why 'living standards' is the preferred line of attack.

    [He does in fact mention the abandonment of plan A today, here, under "Growth and Deficit"


    http://www.labouremail.org.uk/emails/12346/2/15/292191/8632/a3cd46183ee1d71a1529cd2b87fd0273/

    ]

    ReplyDelete
  3. "why did I not write about Plan A becoming Plan B earlier than December 2013?"

    That is a question, but the question I was asking is how the "facts" of austerity as viewed in October 2012 changed ex post.

    http://mainlymacro.blogspot.co.uk/2012/10/the-uk-and-austerity-some-facts.html

    I find the CAPB stuff particularly unconvincing. The slowing of the reduction in actual deficit/actual GDP was known in 2012, but generally discounted by Keynesians at the time (such as your post above), in favour of the cyclically adjusted deficit which was still shown to be contracting.

    After the 2012 productivity disaster, most forecasters downgraded potential GDP growth, and hence there were large revisions to (forecast) adjusted deficit/potential GDP. It would be perverse to argue those supply-side changes meant the demand-side effects of fiscal policy changed, even if spending and taxation plans were unchanged.

    The two more obvious major policy changes which have occurred were the change to UK monetary policy mooted from late 2012 and crystallised in 2013, and Help to Buy. It still puzzles me that Keynesians insist on reaching for the CAPB to explain the pick up in UK growth in 2013.

    The political "problem" is that Balls has followed the Keynesian line in arguing both that UK fiscal policy was contractionary and that Osborne stupidly refused to change course, and both of these meant Osborne was responsible for the double-dip, slow growth, etc. And then Keynesians decided that neither of those things were true. U-turns are hard for the opposition too!

    ReplyDelete
    Replies
    1. There are two levels here: an economic level and a political level.

      On the political level you are right that it would have been difficult for Balls to change overnight from calling for more action to initiate a recovery to saying that Osborne had moved to Plan B. But by the second half of 2013 I think that would have been possible. Its quite feasible to argue that Osborne changed course, but did not change as quickly as he could and by as much as he should.

      On the economic, the main damage done by fiscal policy was the contraction initiated in 2010. Some of that is captured by the CAPB, but I suspect there was also a large expectations effect. That does mean that austerity was responsible for delaying the recovery. The impact of movements since 2012 have probably been small. For the recovery I also suspect that Help to Buy was more important, and part of the pick up in 2013 was probably a natural balance sheet effect. I doubt if there are any major disagreements among most economists here, just differences in emphasis.

      But I would also say this. Of course, as I often write, the CAPB is a simplistic measure of the quite diverse impacts of different fiscal instruments. But in terms of the big picture rather than the details, developments around the world since the recession have been a huge win for Keynesian analysis. I think you have to be quite stubborn not to accept that.



      Delete
    2. As usual, strong claims about the effects of deficit reduction quickly dissolve into weaker claims when challenged, and we throw out the CAPB and start talking about expectations. But tomorrow those Jordà/Taylor estimates (based on the CAPB) will be pulled out as "evidence" of the effects of fiscal policy, and Krugman will throw up his scatter plot of delta CAPB vs RGDP in the Eurozone.

      It depends what you mean by "Keynesian analysis". Japan has followed Bernanke (1998), the BoJ devalued and raised inflation, similarly the BoE printed money like crazy and kept hitting their inflation target. The SNB and more recently the CNB also showed they can peg and devalue per Svensson (2000). Bernanke's Fed offset the massive fiscal austerity in the US with forward guidance and QE. All these examples showed there was never really any "constraint" at the ZLB, just a question of choosing the right monetary policy - a huge success for New Keynesian theory.

      Is that what you mean? I would be stubborn if I ignored all that data from around the world?

      c.f. http://econlog.econlib.org/archives/2014/01/keynesian_confi.html

      Delete
    3. Your first paragraph suggests its pointless trying to have a serious discussion here. Anyone who knows anything about Keynesian theory can see why CAPB is an imperfect measure of fiscal impact, but also why its the best simple measure we have. To do better you need to use a model, as here:

      http://mainlymacro.blogspot.co.uk/2013/10/the-official-cost-of-austerity.html

      But one of the first things I learnt writing this blog was that Scott Sumner did not understand Keynesian theory:

      http://mainlymacro.blogspot.co.uk/2012/01/comments-on-comments.html

      So there is this deep disdain for something that is not understood. So the interesting question to explore is where this disdain comes from.

      Delete
    4. The sort of disdain I was trying to get to the bottom of in my discussion on the comments thread in the previous blog post...

      Delete
  4. Great post, thanks for taking the time to clear this up. And nice April fools style exposé of the 'You and no other economist predicted XYZ so nothing you or any other economists say is worth listening to and the entire discipline of economics is rubbish' brigade for what they are...
    I'm with Hugo André (above comments) on this one, and look forward to continue reading and learning from your persistently excellent, insightful and given the state of so much of UK economic/political media coverage, VERY much needed blog posts.
    Keep up the fantastic work and no need to respond to or clarify anything for the trolls.

    ReplyDelete
  5. Many decades ago Paolo Sylos-Labini added to his simple regression based models a variable P (for politics) that was 1 for election campaign years and 0 for other years, and found that models started behaving a lot better...

    I reckon that one can ascribe the switch from plan A to plan B, including Help-to-Buy and now encouraging people to invest their pension capital in buy-to-let to when the results of the local elections came in and UKIP looked like having stolen half or more of Conservative voters.

    ReplyDelete
    Replies
    1. Although checking election years can explain some things, I don't believe the end to austerity is one of them.
      Here is an alternative story that feels more plausible (to me at least):
      1. They believed in expansionary austerity and got elected on an austerity ticket
      2. After a couple of years they realized that fiscal contraction did in fact lead to economic contraction and that the slump was losing them votes.
      3. They abandoned austerity in practice but kept up the rethoric since admitting to such a big mistake would lead to certain electoral defeat. (Whoops, looks like the austerity that has been the centerpiece of our economic policy was a disaster for Britain, sorry about that!)

      The scary thing is that Osborne may very well become the next leader of the conservative party.

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    2. Agree...and the idea of Osborne becoming the next leader of the Conservative party and who knows, Prime Minister one (fateful) day is truly frightening.

      Delete
  6. «They believed in expansionary austerity and got elected on an austerity ticket»

    My impression is that *some* conservatives believed that, and some still believe it, but I reckon that George Osborne and several of his advisors don't believe the "expansionary austerity" fantasy, because they are clever and cunning.

    I have read in a few places the guess that the "expansionary austerity" might have been an excuseto pursue the goal of simply shrinking down the state, because tories are most concerned about downward redistribution (from productive, deserving rentiers, to lazy, exploitative workers) and they think that the state as currently setup works only in that direction. So shrinking the state means shrinking downward redistribution, until the state can be redesigned to achieve
    the opposite, in which case its expansion will become a
    tory objective.

    But sometimes I think that George Osborne's real aim was to do what he think is best for the country, which was to have a policy of contractionary austerity, because what the UK needed (and probably still needs) is a significant contraction of living standards. The Chancellor is surely well briefed and knows by heart the projections for energy exports and imports.

    In 2007 the UK switched massively from a net exporter of oil to a net importer more or less on the day that Tony Blair handed over the consequences to his successor, and Tony Blair is the author of one of the most penetrating summaries of economic policy (which has been credit and financial regulatory policy) in the past 30 years:

    http://www.lrb.co.uk/v09/n19/tony-blair/diary

    Given the massive switch in the terms of trade for the UK, a pretty colossal exogenous shock, the task for George Osborne was to cut average living standard in the UK by 10-20% (so far) as gently as possible, and I think that he has achieved that with great skill, and with great political ability, protecting his party's core constituencies (incumbents in
    property rents and in financial rents), and loading most
    of the cut in living standards on the other side's core constituencies, slowly enough and with enough spin to
    "boil the frog".

    George Osborne said many times that he was committed to a tight fiscal policy and a loose monetary policy, and he has delivered (especially on the latter part) so far.

    My impression is that there has been a (partial) switch in policy because:

    * A large part of the goal of cutting average living
    standards by 10-20% has been achieved, in part by the
    large fall in the pound, the resulting high inflation
    in consumer goods mostly purchased by lower income
    voters, and the stagnation or worse in low or middle]
    incomes. Therefore policy can become a bit more
    accomodative, in particular credit policy and financial
    regulatory policy, which still are by far the biggest
    components of monetary policy.

    * The UKIP poses an existential threat to the Conservatives,
    because by splitting the tory vote the Conservatives could
    become the second party in many constituencies in which the
    tory vote has a solid majority. The existential threat is
    that many Conservative candidates could lose their jobs
    if that happens, and they are extremely opportunistic and
    biddable, and would be very angry, because there would
    not be enough well paid directorships in the City for all
    of them.

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  7. «the idea of Osborne becoming the next leader of the Conservative party and who knows, Prime Minister one (fateful) day is truly frightening»

    He seems committed to advancing as much as he can the interests of incumbent rentiers, but he may also give some respect to broader interests. I would be rather more worried about Boris Johnson.

    I was reading with amusement a recent issue of The Spectator where the theme was that the race between Osborne and Johnson for the post-Cameron leadership has already started, that Osborne has substantially slimmed down to look more presidential, and that Gove has already taken sides; I just did a search and this has been reflected in the rougher tory press:

    http://www.dailymail.co.uk/news/article-2581925/Tipsy-Michael-Gove-launches-Exocet-against-Boris-100-bottle-wine-flows-Mayor-no-gravitas-Theresa-May-no-friends-Osborne-fit-lead.html

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  8. Well let that be a lesson to you! unless you are both right and on time the deficit scolds will discount your rightness because of your tardiness. Of course you know that if you are wrong but timely they will then discount your timeliness. Their actual purpose is simply to discount the (for them) discouraging truth.

    That is how this cyber game of nitpicking for nitwits is played....

    ReplyDelete

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