Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 2 June 2014

Tyrie and the IMF on austerity

Suppose you were given advice about the UK economy every year, and these were the outturns for growth. What, in retrospect, would you complain about? I think most people would complain that you should have been advised more robustly that growth would be weak in 2011, and non-existent in 2012. But Andrew Tyrie, chair of the Treasury Select Committee, seems unconcerned about that. He complains that when the IMF did become increasingly worried (as in April 2012 for example), it should have kept quiet. 

GDP Growth rates: source OECD Economic Outlook 2014:1


This is of course just another example of the establishment’s attempt to deny the evidence about austerity. It is particularly rich because the Treasury was also becoming increasingly worried that growth would not return before the election, which is why it eased off on austerity and brought in Help to Buy. Anyone who tells you they just knew the UK savings ratio would fall sharply in 2013 and so there was no need to worry is either lying or a fool.

There are two other absurdities in Mr Tyrie’s article worth noting. The first is that he says the IMF should have been more robust in its advice to the Eurozone. Apart from the fact that it was pretty robust, just exactly what does he expect the IMF to have said that might have prevented the second Eurozone recession? It should (and did) say less austerity, which is understandable given the central role austerity played in that second recession. That is the same austerity that in 2010-12 Mr. Tyrie thinks was sensible policy in the UK.

The second is this line. “Most ill-considered of all was the IMF’s specific policy recommendation to bring forward capital investment. Big infrastructure projects are hard enough to agree on, design and manage as it is.” Would that be infrastructure projects like flood protection for example, which were already on the drawing board but which were postponed?

Of course this article is really just a shot across the IMF’s bows. In your forthcoming report lay of the criticism about things like Help to Buy because there is an election on the way. But what Mr. Tyrie should really write about is this. On austerity the IMF were too sanguine in 2010/11, but they (and particular Olivier Blanchard) have looked at the evidence and changed their minds. That is something the UK establishment, Mr. Tyrie included, have completely failed to do.


5 comments:

  1. There was that lovely scene in which Tyrie was saying off-message things about the economy a few years ago, but after he disappeared into a room with Hilton at the Tory Party conference, he came out utterly group-think.

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  2. Why is it that very serious economists are obsessed with the timing of infrastructure investment? Is mistiming the investment in infrastructure of much consequence to the wider economy? Or are there just some pat little theories about infrastructure, which, even given their truth, economists can't help but cite even if their larger economic effects are completely minimal? Is this a sort of obsessive-compulsive disorder?

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  3. I agree with Simon, except that Tyrie has a point on infrastructure investment (II). II, as Tyrie rightly suggests, is a silly way of dealing with recessions because of the relatively long time between the decision to go ahead with II and the actual spending of money and employment of people on II: by which time the recession may be over, in which case all II does is to stoke the next boom.

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  4. Is this article not full of Krugman's 'zombies' and 'cockroaches' i.e. ideas and attitudes which have been disproved definitively years ago but which refuse to die or go away?

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  5. Re: infrastructure investment

    In recession, construction companies are, usually, one of the first to suffer, specially in this Great Recession. Infrastructure investment has several big advantages:
    They help industry that is certainly in need of help (that is, they certainly engage free resources)
    They help industry that (often) employs lots of subcontractors
    They are big
    They concentrate on spending (tax cuts, for example, could result in saving, thus not helping recovery, while construction companies have to pay workers, materials,... so, industry is employed and money circulates)
    Built objects will be used and will help other parts of economy (some sooner, some later, some more, some less, but eventually all will help some)
    Typically, each state and local government has several half-finished projects in drawer waiting for funding, so they should be easily and quickly prepared

    Major drawback: instead of quickly finishing projects discussed for years, politicians move slowly, discussing what is or isn't necessary, and that's why those projects don't start in time to really help economy in time of crisis. But, just imagine if flooding protection was accelerated, instead of delayed because of crisis...

    In short, when economy is against zero lower bound, effect of government spending on GDP has multiplier of around 1.5 (best estimate). Infrastructure projects are a way to quickly inject lots of money somewhere where it would certainly be useful (although, maybe not optimal).

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