This is about UK politics, but it involves a wider point that applies in all countries where austerity policies are being justified by the need for immediate deficit reduction
John Rentoul, chief political commentator for The Independent on Sunday, liked my Prospect debate with Oliver Kamm. To quote:
“I found it usefully clarifying. I started off on Kamm’s side, because I worry about running a huge deficit in case interest rates return to normal. But Wren-Lewis makes a convincing case for worrying about that later, although he threw away some of his advantage at the end by suggesting George Osborne has an ulterior motive for cutting public spending, namely the ideology of a smaller state. Who wants the state to be larger than it need be?”
There is an awful lot I could talk about in that paragraph, but let me focus on the ulterior motive point.  First the bit of my argument that Rentoul is referring to.
“Why is this government proposing to repeat past mistakes, and embark on a policy that makes so little sense in terms of the macroeconomics taught to students around the world? As an academic I have tried and failed to find a macroeconomic logic to what the government is proposing. Could it be that in reality the deficit is a smokescreen to hide the underlying goal, which is a smaller state? The British people do not want a smaller state, so the only way it can be achieved is by maintaining the myth that reducing the deficit is our top priority. The government can only get away with this myth as long as enough of the media, with the help of City economists, support it.”
Let me be honest here. I did think twice before writing this, because I knew it might evoke a negative reaction among some who read it. Why not, as Rentoul suggests, just stick to the ‘no macroeconomic rationale’ point?
Before directly addressing this, let me draw an analogy. Here is a piece by Jeffrey Sachs in the FT about climate change which on this occasion I’m happy to agree with. He does not waste time with a point by point refutation of everything that climate change sceptics put forward. Here is his conclusion:
“At the end of the day, we have a classic story of political economy. There is a very concentrated but very weighty interest group with an interest in finding and pumping oil, and then there is the rest of humanity, with an interest in a rapid transition to a low-carbon future. The interest group owns Congress and much of the airwaves; it moves election results in Australia and Canada, two other carbon economies; it drives politics in the Middle East and Russia. Politics is often a close call. This one – for the survival of the planet – is going down to the wire, with a crucial rendezvous in Paris at the end of the year.”
Now you might equally say on this occasion why taint a perfectly good scientific case about climate change with conspiracy theories about oil interests? There are two excellent reasons. First, the trouble with debating the 'scientific' arguments of this interest group at face value is that it gives the impression that there is genuine debate going on, and that the key facts about climate change are controversial in scientific terms. That is nonsense, but it is also exactly the impression that this interest group wants to create. Most people will not go through the science and realise that the sceptics case is virtually non-existent. Instead they will think the science is controversial, and so go with their instinct, or with whatever those who support their politics advocate. This is why the US has an unusually low number of people who think climate change is a major threat. Second, I think social scientists have a duty to explain the world as they see it, and not hide these truths away because it might be too much for some.
Of course climate change and austerity debates are not completely comparable for many reasons. However when it comes to the macroeconomics of Osborne’s policy, I think we have now reached a similar point. Back in 2010, there was an arguable case for rapid deficit reduction, particularly as the source of the Eurozone crisis was unclear. In 2014 we know a lot more. Let me justify that with three arguments.
First, the paragraph I wrote is quite truthful in describing my own thought process. I have searched hard to find a macroeconomic rationale for Osborne’s policy stance. A belief that QE is as effective as conventional monetary policy (there is no liquidity trap) comes close, but as I explained here it does not really fit with what Osborne has said (or not said). Osborne is certainly no market monetarist, as he has shown no interest in nominal GDP targeting. So there does not appear to be a coherent case for Osborne’s fiscal proposals that a macroeconomist could take seriously.
Second, the idea that the real motive is a small state is not the preserve of some small group of left wing conspiracy theorists. Here I quote Jeremy Warner, economics editor of the Telegraph (for non-UK readers, a newspaper firmly to the right): “In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.” He also wrote: “The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.” I also think many of my non-UK readers will wonder why I am having to justify what is obvious in their countries.
Third, it must have become clear to many people now that reducing the deficit cannot be the overriding priority when there have been so many tax giveaways (50p rate, Help to Buy which creates large contingent liabilities, Cameron’s conference commitments, stamp duty changes that are far from fiscally neutral, pensioner bonds). Putting these down to ‘politics’, but counting spending cuts as ‘economics’, will not wash. (See Brad DeLong for the equivalent in the US). You cannot pretend that deficit reduction is driving government policy, when that driver only operates on the spending side of the accounts.
Economists in the media are beginning to realise this. It is really important that political commentators do so as well, so that those without an economics background get a clearer idea of the nature of the choices they will have to make in 100 days time.
 Who wants the state to be larger than it need be? I couldn’t agree more, but then each state activity should be examined on a case by case basis. Osborne’s cuts are not based on analysis of that kind, because it presupposes the result (there have to be cuts of a certain size).