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.
You asked a few days ago why the Coalition government does not mention the productivity puzzle, and here presents an answer: neoliberalism can never be wrong, so the productivity puzzle (despite many nations being mired in liquidity traps) must be something of the British disease that only neoliberal austerity can cure.ReplyDelete
Understandable frustration. The request for the effect of austerity on productivity growth to be explained is not unreasonable, even if much of the rest of Murray's commentary will do little to add to the body of public knowledge on the links between austerity policies, reduced GDP and poor productivity performance in the UK.ReplyDelete
As well as the point you make about all rational economic commentators agreeing that GDP was suppressed by austerity policies, there is a further point of general accord. The fiscal contraction in the area of capital and public housing expenditure, in particular is reckoned to have had a disproportionately negative effect on growth since 2010, the London Olympics a disproportionately positive one in Q3 2012.
Other factors that are almost certainly far more important than any cited by Murray for poor productivity are:
The hollowing out of middle wage jobs in the economy; with many driven down to the minimum wage and fewer earning even higher multiples. Eg the minimum wage has not kept pace with inflation. Lower earners have a greater propensity to spend disposable income. They have just had rather less of it since 2008.
The substantial increase in the use of zero hours contracts and self-employment are arguably less efficient than for full-time employees. There is more "down" and travel time proportionate to "earning" time for employees and more administration for employers. These contracts have excluded millions from access to conventional finance, meaning they have spent much increased sums, through higher rates of interest such as on pay-day lending schemes rather than say an overdraft.
One area that must also be of concern, though apparently not to at least one member of the MPC, according to the recent Broadbent BoE paper, although it has a direct impact on GDP figures, as the UK's export performance and the negative balance of payments differential. An excess of 4.5% of national output above imports is not trivial and a large increase from 1.5% in 2011.
Murray's suggestion about companies being kept alive by low interest rates is an ideological explanation from the very extremes of this debate and arguably the most misleading of all. It is a myth that needs debunking. Both individuals' and firms' access to capital has been substantially reduced by increased measures from banks to protect against default. Certain banks have been much criticised for unnecessarily forcing some businesses under. The Bank of England produced a paper a little while back, which illustrated that interest rate differentials between the BoE base rate and that which retail banks typically lend out at had quadrupled since before the Great Recession. So real interest rates are proportionately much higher now.
Experience of recoveries from previous big contractions would also have shown Murray that a great number of firms have failed post recession, due to an inability to manage cash flow and arguably due to reduced profitability, once the expansion takes off again. The UK's major problem has been a much deeper and longer recession than most other countries; including many in the Euro zone, despite claims in certain quarters to the contrary.
The extent to which the austerity policies; in particular the choices about which public spending to cut, by how much and when caused sustained depressed GDP figures and productivity should be the stuff of debate for the next General Election . It remains to be seen how and if such a debate by politicians may be conducted entirely without mendacity. It could not before the last election.
Austerity was always about ideology rather than economic sense. In any case, anyone can see it has been delayed, if not abandoned, by comparing government spending vs income on ukpublicspending.co.uk.ReplyDelete
It shows the fall off in tax income 2009-2010, before bouncing back in 2011.
Meanwhile, gov spending shows a brief dip in 2013 before resuming it's upward trend.
Having been elected on the basis of austerity, the coalition can hardly about face and say it was a miserable mistake without losing the economic credibility they claim as bastions of fiscal competence.
2000 340.8 359.71
2001 366.09 382.94
2002 389.07 389.9
2003 420.48 396.08
2004 455.07 423.31
2005 491.8 453.2
2006 523.51 487.76
2007 549.4 518.85
2008 582.23 549.05
2009 633.81 535.87
2010 672.26 516
2011 693.55 555.43
2012 694.28 576.63
2013 675.1 593.4
2014 718.8 619.8
2015 728.7 648.1
2016 741.2 675.4
Grossing government expenditure is always a mistake.Delete
Thanks Gastro - can you let the OBR know, as that's where the numbers are from?Delete
I'm not suggesting that the numbers are incorrect. It's just that you have to be careful about attributing meaning to them.Delete
For example, in a recession, unemployment might rise, and therefore social security payments rise automatically, as will, absent other factors, total goverment expenditure. But you wouldn't logically say from that that the government had adopted an expansionary fiscal policy. You need to look at the detail of what expenditure is rising.
ok, so what is the long term economic plan then?Delete
I thought austerity meant reducing government spending, otherwise the UK was going to end up like Greece. And that was the 2010 election campaign. Now we know it's a falsehood. The US had the same rubbish with the so called debt cliff.
Printing money at the ZIRB perhaps affects the exchange rate, and the GBP could do with being lower.
Values are important in politics.Technical arguments for policies that support the outcomes you value will always be seen as ideological by those who value a different set of outcomes.ReplyDelete
The Wealthy Elites want cheap labor, low taxes, low rates of transfer to the poor and special subsidies for themselves.
Stimulus to create jobs might raise the cost of Labor, raise taxes & would transfer money from the wealthy to the poor. Austerity meets most of the values of the elite ruling class. They like cheap labor and are willing to tolerate high unemployment because it depresses wages. For the wealthy elites, Austerity is not "wrong" policy: it delivers for those who have an elite set of values in spite of the harm in might do to others. They don't care about others or value fairness. They value wealth and you don't become wealthy unless you demand more than you fair share and seek to tilt the rules in your favor.
You and most economists are asking what policies could help the largest number of people, you value less inequality and worry about social costs related to poverty and unemployment. The wealthy elites in their gated communities and exclusive social networks don't give a rats ass about the rest of us. Their values are different. From their perspective, we are ideologue, not because of our economics, but because of our policy goals conflict with their values.
You are making a technical argument about the policy that best supports your values. Your set of values has lost politically for the moment. As long as the values of the wealthy elite dominate politically, we will get economic policies that reflect their values: cheap labor, etc. Only after those who want a more egalitarian society can wrest political power from entrenched wealthy elites, can we begin policies that promote those outcomes and our alternative values. Technical arguments will only be an academic exercise unless the values are addressed.
Simon - as a heterodox monetary/macro economist always enjoy your blogs! I wonder if you have seen the RES conference paper published in the May 2014 EJ by Blundell, Crawford and Jin on the Productivity puzzle. This paper makes it abundantly clear that the solution is simply downward pressure on real wages, without ever quite allowing itself to admit this! Would you accept that what is going on here is an ontological confusion between 'productivity' as simply the arithmetical result of real GDP (of which real wages are a component) divided by units of labour, and 'productivity' as the effort and efficiency applied by actual workers? Of course it's a confusion mainstream economists will tend to deny because they are wedded to the assumption that factors are always earning their marginal products!ReplyDelete
First great blog. It's one of the all star blogs with Krugman, Thoma, Delong et. al.ReplyDelete
I'm American so I don't get the British/European situation except what I read in news reports.
But in America we had a small stimulus they neutral observers agree (35 to 1 as economists) agree improved the growth/employment.
But the aching problem is that in the US most states have to have balanced budgets; essentially poison for Keynesian policy. Thousands of cops/teachers/nurses were laid off after the housing bubble. So the ARAA was like pisssing in the wind.
What won the day, was the ESM and the rule of law, namely "strict conditionality" for any OMT afterwards, the creditors deciding on IF and the conditions of credits, especially accompanying turn around programs.ReplyDelete
There was never one cent OMT done, for good reason.