Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 25 January 2015

Keeping quiet about hidden motives?

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. [1] 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.

[1] 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). 


  1. Oliver Kamm, the person you were debating with in Prospect presumably also has this hidden motive?

    A bit surprising of course as the Times' leader writer is a long term Labour supporter.

    Presumably Alistair Darling, who said "Cuts worse than Thatcher" were coming in 2010 was also another one with this hidden agenda.

    Every single policy maker in power in the eurozone, whether of left or right, is also in on it.

    My view is the same as Rentoul's. It is a better debating tactic to accuse those who disagree of being mistaken than dishonest. A lifetime of teaching undergraduates should teach someone how easy it is for intelligent people to get things wrong, but some are slow learners.

    Osborne is dishonest but in a quite different way. Taxes overall have gone up, although there have been some giveaways in the lead up to the election (outrageous, I know). His dishonesty takes the form of agreeing with you. Austerity was abandoned at the end of 2011. There hasn't been any further reduction in the size of the State. Labour cannot pounce on this uturn as Osborne did what they were urging him to do. Osborne's critics as a class failed to point out the change at the time it was made. He now announces that he will make some more in the next Parliament, but nobody serious thinks the plans remotely plausible.

    1. As I have pointed out before, the net change in taxes over the last five years is very small - probably over 90% of the deficit reduction that has taken place since 2010 has been on spending. The slowdown in austerity from 2012 was mainly because of lower than expected tax receipts rather than less spending cuts. The deficit reduction from 2015 is all on spending (plus further cuts to fund tax cuts).

      Of course there may be many who support Osborne's proposals who are not small state people. As you say, people make mistakes. But Osborne is no ordinary person, and certainly no undergraduate. He has been doing this job for 5 years, and gets expert advice. You could maybe get away with the mistake argument plus being a politician and not wanting to admit mistakes if he was not proposing to do it all again.

    2. "A bit surprising of course as the Times' leader writer is a long term Labour supporter."

      Only to the extent that he can drag them as far to the right as possible. He's disingenuous.

    3. We need to differentiate between Osborne's actions and his words.

      On his actions, as you and Blanchflower have not hesitated to point out this is the slowest recovery ever. Is this attributable to Osbourne (sic) as so many want to claim?

      Well, it looks a bit unlikely as this is the slowest recovery ever for every country in the west.

      Is it attributable to a general policy of austerity then?

      Well, that looks a bit unlikely as we have had far larger deficits (with a corresponding stimulus) this time than in any previous downturn. In the 20s and 30s we had strong pro-cycle policies (before the dawn of Keynes) but the dips were not as long.

      Osborne, like almost everyone, didn't expect this time to prove so much worse, leaving more room for cuts (the political timetable alao required them to be made early).

      The world had changed in ways we did not then understand. In previous dips commodity prices fell as the west fell into recession, cutting costs and brining forward the upswing. This time commodity prices shot up in 2010. The main reason is that the west is not as large a part of the world's economy as it was. Increased demand, particularly in China, made this time different.

      The two other differences were firstly the eurozone and its disastrous attempt to rerun the gold standard policies of the 20s, second the tightening of bank regulation which operated as a de facto sharp monetary tightening.

      Osborne was not alone in thinking that the pattern of past recoveries would repeat itself, and normality return. See also the ECB's raising of rates in 2011. What evil surreptitious motive did they have?

      As to his words now, the motive is transparent: votes. This is a sign of weakness not strength. Crackpot policies from parties with no hope of gaining a majority are commonplace (see Ukip and the Greens). For the Tories to have sunk so low (see also Cameron's crazy pledge to get the other member states to agree to treaty changes for his convenience) is shocking. But the words have little relation to what will happen.

    4. I find this whole debate a bit strange. Osborne is just running an argument designed to box Labour into a corner. The economic fundamentals are largely irrelevant, and the agenda is only hidden to the extent that most people aren't paying attention.

    5. Spinning Hugo >> Is it attributable to a general policy of austerity then?

      Well, that looks a bit unlikely as we have had far larger deficits (with a corresponding stimulus) this time than in any previous downturn. In the 20s and 30s we had strong pro-cycle policies (before the dawn of Keynes) but the dips were not as long.

      This is not a good comparison, the recessions of the GFC have more severe than anything since the 30s, the 30s themselves are not a good comparison in terms of deficits as government spending was a smaller part of the overall economy so we would expect smaller deficits. You also seem to make the mistake of assuming that deficits = stimulus, this isn't necessarily the case, the UK's stimulus measures were only around 1-1.5%% of GDP for example.

      I really don't see why you dismiss the general policy of austerity, since as far as I can tell some degree of austerity has occurred in the States, Europe and the UK over the past few years.

    6. Indeed - you wouldn't use the size or change in deficit to judge how much austerity occured... you could use the 'Cyclically adjusted primary balance'.

      There has been significant fiscal consolidation in UK and US, and of course the Eurozone. The impact of which on retarding growth has been extensively documented on this blog (for the UK) and throughout the literature.

  2. I am interested in the reasons as to why such a view would generate hostility. Is it not partially due to the insistence of most academic economists of drawing a sharp dividing line between the allegedly objective scientific approach of economics and the messy world of politics? What this does is to generate a smokescreen for politicians to implement ideologically-motivated economic policies without economists being able to call them out. This touches on recently debated deeper issues of how economics is taught, the role of history of economic thought and history in learning, and so on.

    1. Would you make the same argument about climate change science?

    2. That's an interesting analogy because of the degree of complexity and uncertainty in the modelling. But no I wouldn't make the argument because, despite the complexity, there are objective physical certainties involved in climate science (Heisenberg notwithstanding) that I don't believe have parallels in economics. I don't think that the first law of thermodynamics and subjective utility maximisation are on a par.

    3. Well there are no “objective physical certainties” involved in any science (irrational philosophers and statisticians notwithstanding) but of course there are propositions (in the form of values of measurable quantities, laws, models etc.) which are sufficiently well established that, depending on context, the uncertainties in them can be neglected. For example, in climatology there is negligible uncertainty in the AGW hypothesis but non-negligible uncertainty in the value of the sensitivity in the respective contexts in which those two propositions are usually considered. Now I don't know what [the] subjective utility maximisation [law?] is, or much else about economics, but is it really so dismal that there is nothing (useful) in it that we can be pretty sure of?

  3. It is not too surprising to find Blairite John Rentoul trying to find two extremes and then position himself as the Third Way.

    I think it is time for the Blairites to put up or shut up, or else they are going to carry on sounding like "all I can see here is...pathological centrism...[an]...intense desire to see that the truth is in the middle, never mind actual facts — requires that he invent a history in which Keynesians were just as guilty of politicization as the other side. Unfortunately, those actual facts — with their well-known liberal bias — do exist, and are right there in the public record" (Paul Krugman blog May 7, 2013 'The Stimulus Debate, Revisited').

    And we all know what happened the last time Blairites sounded like Republicans.

  4. “The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis."
    I don't think this is true. Public spending hit a multi-decade low at the end of the 1990s, the best part of a decade into an economic recovery. That it increased sharply afterwards was a political decision by the Labour government. More accurate I think would be to say that Osborne thinks that an economic crisis that can be squarely pinned on the previous administration is a good time to cut spending, because the decision can be packaged as regrettable-but-necessary-after-the-last-lot.

  5. I am astonished that anyone takes issue with the proposition that politicians have ulterior motives which must be hidden from the voters.

  6. S W-L: What are your hidden motives?

  7. After the victory of Syriza in Greece in overturning a Government that won 40% of the popular vote four years ago I imagine any austerity-led party or Government seeking re-election will be rethinking their strategies, and revisiting their numbers again. Newsnight this evening had an interesting discussion about that victory in which they showed a very simple but powerful fact: Greek Debt to GDP ratio in 2008: 109%; after severe austerity for six years resulting in a fall in GDP of 25% the ratio was in 2014: 160+%. All austerity did was to cut tax receipts faster than it cut spending.

    In that discussion it was once again a German - this time, Artur Fischer, Joint CEO of the Berlin Börse - who was sticking with the ubiquitous argument (in Germany) that not just austerity, but also restructuring is necessary in order for Greece to get out of trouble. I can understand why many Germans hold that view after the painful restructuring Germany went through in the mid-noughties was followed by growth and success for Germany, but as Nassim Nicolas Taleb argues, we should beware of attributing success to our actions when really it was just down to luck. Or was it?

    So, after Syriza, and in the current climate, if Osborne keeps on trumpeting austerity and the need for more cuts in the same way that Churchill did in the run up to the first post-WWII election, he could once again hand power to the same sort of party as set up the Welfare State he is trying so hard to dismantle - or as in Greece, an alliance between the leftmost and rightmost parties (Labour and UKIP?). Ironic that it was another Tory, Churchill, who described politics as "the art of the possible".

    One thing will probably ensure that doesn't happen though: Ed Milliband's Labour Party has a questionable strategy, letting the Conservatives dictate their agenda while the Conservatives are letting UKIP dictate theirs. I suppose all this really proves is if you want to muck out your stable, you don't need a spad, you need a spade.

  8. Politicians pursue power as an end in itself. Its rare to find a politician acting in a way which will diminish his power.

    If you want to understand why Osborne has behaved as he has I suggest that macroeconomic analysis is probably not the right diagnostic tool. Having used that tool and found it wanting Simon speculates that the desire for a smaller state might explain his actions.

    Well it might but I suggest that Osborne's actions can be better explained by his desire for power.

    Recall the conservative pledge before the crisis to share the dividends of growth when the great moderation looked never ending.

    Recall the switch to household economics (maxing out the nations credit card) post the crash and before the election

    Recall expansionary fiscal contraction after the election and its silent demise a couple of years later.

    I could go on but the over riding feature of all of these tactics is that they did not emerge from macroeconomic but political calculation. Well he is still the Chancellor and he might well be the foreign secretary in the next govt. I imagine by his lights its all going swimmingly.

    And the latest round of nonsense over post election cuts to public spending is of course driven by politics of the worst kind but its politics not economics.

    PS, Simon's point that the British People don't want a smaller state is I suspect contingent on the tax system that pays for it rather than an absolute position

  9. I don't like saying it's about an ideology, as it implies that right wingers really think a small state is good. I think "small-state ideology" is actually the smokescreen that the right wing use to hide their real motives!!

    Bondholders, or indeed anybody on a fixed-interest income, benefits financially from low inflation. They benefit even more from deflation, even though it's bad for everyone else. And the simplest way to cause low inflation, or even deflation, is to order your government chums to switch off spending.


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