Jamie Murray of Bloomberg writes “U.K. Austerity Critics Must Explain Productivity Link”. To which my immediate reaction is ??!? When have those who criticise UK austerity ever claimed it is responsible for the UK productivity puzzle? Certainly not me, and I’m the only critic quoted in the piece.
The problem is in the framing, set out in the first paragraph. There is apparently a debate between those who blame poor UK growth since 2010 on austerity, and those who blame it on other factors like the Eurozone crisis and a risk averse banking sector. No, there is no such debate. The reason there is no such debate is given in the first line of the next paragraph: “Both are likely to be true to some degree ….” Exactly right! But then the sentence goes on “and the extreme polarization of views reflects badly on economists and commentators, some of whom may be motivated by political ideology rather than reason.” You talkin’ to me?
This is classic “plague on both houses” stuff - both sides are too extreme (probably because they are ideologically motivated), so let’s take a more reasonable middle view. The only problem in this case is that to do this you have to misrepresent one side. There is very little disagreement among serious economists that UK austerity in 2010 and 2011 reduced UK GDP. The OBR, using rather conservative multipliers, thinks that GDP in 2010 was about 1% lower, and in 2011 about 1.5% lower as a result of fiscal policy, with significant knock on effects into later years. The estimates by Jorda and Taylor involve similar magnitudes, but perhaps if you added in large expectations effects you could double the OBR’s numbers, although whether you could then also assume no offset from monetary policy becomes an important issue. Whatever you do, there is no way you are going to get close to the fact that GDP is currently around 15% below its pre-recession trend. Put simply, the productivity puzzle matters more. But that does not mean austerity is unimportant: just 1% of GDP completely wasted is a big deal.
Now it could be that the productivity puzzle is not completely independent of austerity, and Murray’s article actually makes some suggestions about possible links. But the bottom line is that, among serious economists, austerity is highly unlikely to explain all or indeed most of poor UK growth. So this side of the 'debate' does not really exist. But the other side does exist, if only in the shape of the UK government. They want to avoid as far as possible any discussion of exactly how much austerity reduced GDP, and instead they want to claim that austerity produced the recovery! It is that side of the debate that has some explaining to do. Given the links between austerity and productivity the article discusses, a much fairer headline would have been 'impact of UK austerity may be even worse than critics suggest'.
While I’m in complaining mode, two other things that I get annoyed at. Murray says a good place to start is the OBR’s analysis of how its forecast changed between 2010 and 2014. He is not the only one to focus on the OBR’s forecast errors when addressing this ‘debate’. But this makes no sense, because the 2010 OBR forecast already had their estimates of austerity (see above) embodied within it! The government loves to play this trick, but good journalists should not follow their lead.
The second point is that critics of UK austerity would never argue that external factors were not important, if only because a key external factor was the impact of austerity in the Eurozone. As this Commission analysis shows, backed up by similar analysis at NIESR, austerity was a key factor behind the second Eurozone recession, and most of that austerity came from core rather than periphery countries. The argument that this was all a necessary response to the debt crisis just does not wash after the obvious impact of OMT.
What is really going on here is this. The intellectual debate over austerity is largely over, and the right side won. Good commentators who do not have an axe to grind know this. But they also know that the political debate went the other way. Writing about this paradox would appear politically one-sided. Much better to portray critics of this political outcome as much more extreme than they actually are, and get to something like the truth by being more ‘balanced’. It is not a game I like, and I like even less being misrepresented.