Everyone agrees that the UK Institute of Fiscal Studies is great. It is perhaps best known for its commentary of macro budgetary issues, but it does a great deal of detailed top class research into the micro impact of different forms of taxation, and much more. Today it released its assessment of the different political parties’ plans for spending and taxation policy after the election. It makes two very important points: that the Conservatives plan much greater cuts than the other parties, and that there are important gaps in how much each party have told us about how they will achieve their aggregate plans (with probably the biggest ‘black hole’ with the Conservatives, although do not expect to hear that comment on the BBC).
At the same time as reading this document, I was also writing my next macromedia myths post, where I complain about the lack of media exposure given to the problem of the liquidity trap or Zero Lower Bound, and why this problem is central to the critique of austerity during a recession. So I thought I would just check that these terms appeared somewhere in the IFS document. They do not. All I can find is this paragraph:
“A lower level of borrowing would imply debt falling more quickly. This would have the benefits of leading to a lower level of debt interest payment and potentially leaving the UK better placed to deal with any future adverse event (such as the public finance challenge posed by an ageing population or any future recession). But reducing debt more quickly would also require more in the way of tax rises and/or spending cuts.”
If I have missed a section where the risks of rapid deficit reduction when interest rates are still so low are discussed, I shall remove this post. But if such a discussion is indeed absent, I think I can reasonably complain. Why has the IFS chosen to go long on numbers, and short on ideas? Their analysis is a key resource for the media, and so if the IFS do not even mention such basic macro points when discussing macro policy, it becomes a little less surprising that the media also ignores them.
I have always tried to emphasise that I regard the mediamacro problem as a system failure, rather than a problem with particular newspapers or journalists or editors. I have also tried to stress that I remain unclear as to what the critical drivers of this problem are: a biased print media, the role of the City or something else. That something else could potentially include, at least in the UK, the way academic ideas fail to be transmitted to the media by academic think tanks.
I love how the Torygraph is reporting this as: "IFS says only a Conservative government would balance the books after the election" and "Labour would heap £90bn more debt on the UK and raise taxes by £12bn" (this is currently on Telegraph website homepage, I cannot find an actual article with those words to link to)ReplyDelete
Media macro at its most execrable
I suspect a large part of it is just the 'economy as household budget' paradigm. Thinking otherwise is counter-intuitive.ReplyDelete
If anything, you are being excessively restrained here. Serious economics tells us that there is a very close connection between appropriate macroeconomic policy at ZLB and proper long-term fiscal accountancy. In a recession at ZLB, the public sector should take advantage of low interest rates to borrow for public investment. This fiscal expansion does not worsen fiscal sustainability, if public investment is carefully appraised, because investment adds to future taxable income. The failure to invest our way out of recession is one of the biggest macroeconomic failures of the past 5 years. The IFS statement by focussing on borrowing but not on investment (and implicitly endorsing the misleading PSND as the correct indicator of fiscal sustainability) wrongly implies that we're in better shape to face the uncertainties of the future if we have less debt AND less public capital AND lower national income.ReplyDelete
You are right - the paragraph I quoted could have been written by an accountant. (Why do I always think of the best lines after posting!) But I have seen IFS people say much more intelligent things, so hopefully this lapse can be repaired in future.Delete
The BBC quoted this IFS report earlier today on their website. To be honest I was rather shocked that there was no mention of the ZLB - or even WHY all the parties said the deficit needed to be reduced right now. I am glad you wrote this article about the IFS slackness.ReplyDelete
It strikes me that all political parties have consistently allowed Cameron to set the agenda, right from before the 2010 election. By constantly reacting to him and not actually being proactive they give his policies unwarranted credibility.
My guess, put crudely:ReplyDelete
Getting macro ideas into the media mainstream requires:
1) the experts to be confident about their conclusions
2) the experts to believe that they can dumb it down enough to sell to journalists (while also not sounding partisan)
3) the journalists to believe that they can dumb it down enough to explain to the public
Saying that Labour will cut less and borrow more, for example, is just about ok - though most people still aren't clear about what "debt" and "deficit" mean.
Trying to explain "the problem of the liquidity trap or Zero Lower Bound, and why this problem is central to the critique of austerity during a recession" - that's trickier and its impact less certain right now.
I do not think this is right. The IFS are talking to often quite knowledgeable journalists, and not directly to the public. It is certainly an audience that can understand this idea, and I am sure they have the skills to translate it for the public.Delete
I think the IFS suffer, to a lesser extent, from the same affliction as the BBC - that is, a crippling anxiety of the need to appear neutral.ReplyDelete
Appearing neutral means that you cannot say anything controversial.
Given the ideological distribution in the media (financed by advertising and corporate interest), then many objectively true statements relating to debt are now exempt. Statements like "cutting the deficit at the zero lower bound will have large contractionary effects" are taboo.
By choosing this rather banal, but very selective discussion of the consequences of debt (and ignoring any discussion of multipliers at the ZLB), the IFS avoids controversy and thus maintains 'neutrality'.
Still, they're better than the IEA, you have to give them that.
Perhaps, but they were doing a 'pros and cons' exercise in that paragraph, so adding a con of rapid deficit reduction should not have been controversial.Delete
Well I guess that leaves incompetence then.Delete
Normally I would not associate incompetence with the IFS. However, i do note that none of the authors are (or I guess would describe themselves as) macroeconomists. Maybe the almost complete absence of macroeconomists amongst the IFS staff is problematic, in terms of their capacity to present a full assessment of the macroeconomic consequences of austerity.
The phrase is 'Shifting the Overton Window'. The idea is that there is a 'window' of political positions that are deemed reasonable, and concerted propaganda can shift this, generally by legitimizing more extreme positions at one end of the window.Delete
As you've noted the IFS says: "[Lower debt would be] potentially leaving the UK better placed to deal with any future adverse event".ReplyDelete
This ridiculous notion that we must bring the budget to surplus to be well placed to deal with future economic crisis is a myth. A extremely pervasive one that is often repeated by politicians and pundits, which I have never seen challenged, despite no one giving a shred of evidence to suggest it may be true.
You should bust this myth. Unless you don't agree that it's a myth?
As far as I can tell there is no economic theory that says we must run surpluses to be well-placed to deal with future economic crises. There is seemingly no mechanism by which surpluses or low debt softens the blow of economic crises. Spain and Ireland had surpluses and low debt, yet it was of no help to them in the financial crisis. The US and UK had high debt, yet that was not a hindrance. One common argument is that having low debt allows the government to engage in fiscal stimulus, but this is also a nonsense argument, as government borrowing costs in all advanced countries fell significantly during the crisis in part due to a rush for safe assets, so there's nothing to suggest stimulus isn't possible in a economic crisis even when the country has high debt or that it would trigger a debt crisis (not that they believe in stimulus anyway), particularly if the country borrows in its own currency.
Actually I would partially disagree. If fiscal stimulus is required to deal with severe negative shocks, this requires a gradually declining debt to GDP ratio in normal times if you want to avoid the debt level ratcheting up. I wrote a post some time back looking at possible debt paths post 2015 that allowed for just this.Delete
However what that also shows is that the kind of rapid debt reduction implied by Osborne's plans are quite unnecessary.
Unless, of course, you think we will have to bail out the banks every decade or so because we have not got the desire or will to solve the too big to fail problem!
You say “If fiscal stimulus is required to deal with severe negative shocks, this requires a gradually declining debt to GDP ratio in normal times if you want to avoid the debt level ratcheting up.” Why the need to avoid “ratcheting”?
If the private sector (mainly in the UK but also overseas) decides it wants to have a much bigger holding of UK government debt than previously (perhaps taking UK debt up to Japanese levels), then that increased desire to save just has to be met. If it isn't met, we get Keynsian paradox of thrift unemployment. Or as MMTers put it “savings desires” have to be met.
Alternatively, the private sector’s desired stock of savings might decline, in which case government just has to accommodate that reduced desire to save: government has to cut the debt.
Your analysis of the macromedia problem (above and in earlier articles) rather suggests that academics are free of blame and that the problem is failure to transmit acadmics’ flawless analysis to the press and so on. I suggest that in fact there are plenty of academic economists who are infected with the macromedia bug: Rogoff, Reinhart, IMF & OECD. Indeed you yourself question the competence of the IFS in this connection.
I.e. the root problem is that the question as to what is the best formula for optimising deficits and debts is a DIFFICULT PROBLEM. Given enough time, study and thought even twits like me can understand it. But someone who has just done a standard economics degree WITHOUT specialising in this problem probably won’t understand it.
Everyone agrees that the UK Institute of Fiscal Studies is great.ReplyDelete
I'd question their greatness! For instance they say:
The Conservatives are planning a reduction in borrowing over the next parliament of 5.2% of national income, which would result in a surplus of
0.2% of national income by 2018–19. "
It doesn't follow at all. If the Tories spend less, it cannot be assumed that taxation revenue will be unaffected. Why would it? If The Government reduces spending by cutting down on civil servants for example some 30-40% , depending on the their salary levels and therefore level of taxation, will also be cut. The remaining 60% or 70% won't be spent in the local economy either. Levels of VAT will fall. The income of those who would have been in receipt of that spending will fall. They will pay less tax too.
So most of the reduction in spending will manifest itself in lower taxation revenues. The deficit won't be reduced and maybe would even increase if additional social spending is necessary. Which of course it will be, Civil servants don't just disappear when they are laid off - they sign on for unemployment pay.
This does not mean that the government should just hire civil servants and have them hanging around doing nothing. It does mean that spending should be increased on sensible projects and/or taxation reduced when recession is the main problem. When inflation is the main problem the opposite would apply.
PS If anyone would care to place a friendly bet that any government will "achieve" a surplus , without crashing the economy, and while the country runs a deficit in its current account I'm open to offers!
"Unless, of course, you think we will have to bail out the banks every decade or so because we have not got the desire or will to solve the too big to fail problem! "ReplyDelete
2017 is my best guess as to the next big bail out for the banksters.
And it will all be Labour's fault, and those SNP's.
Have you never read Nicholas Shaxson?
His stance is that the City of London is basically a money centre to launder the ill-gotten gains from a corrupt elite from across the globe.
The best outcome for the common good has nothing to do with it.
But keep up the good work!!
Reagan famously said 'if you're explaining your losing'. To see media macro as a system failure would require a prior example of system success. That may be hard. The media tells moral fables, they always have and macro will need communicators who can tell moral fables if it is to succeed in being heard. The difficulty is that problems of dynamic coordination do not lend themselves to a blame game. For example my father was an anaesthetist and understood a complex system intimately. If he saw the heart rate rise he would look elsewhere in the system first, the airway or for a bleed. But I have never been able to persuade him to look at economy in the same way. I for one am at a loss at this point.ReplyDelete
The very first bullet point of the IFS report includes the sentence: "While the coalition government has overseen a reduction in borrowing from a peak of 10.2% of national income in 2009–10 to 5.0% in 2014–15, whoever forms the next government still faces the task of finishing the job of reducing borrowing back to sustainable levels."ReplyDelete
This implies that the IFS think that the current borrowing rate is unsustainable. I get the impression from the above discussion and your other blogs that you think that it would be a good idea to reduce borrowing while the economy is growing but also that current borrowing levels are perfectly sustainable given current (or target) levels of inflation and interest rates on UK bonds. Is that right? Also, have you somewhere set out what trajectory you think would be best for borrowing?
Thanks very much for the extremely helpful blogs. I'm not an economist so please forgive me if these comments and questions are silly.
Yes, here: http://mainlymacro.blogspot.co.uk/2014/06/uk-fiscal-policy-from-2015.htmlDelete
Simon, IFS models are flawed. They assume £20 million of spending cuts reduce the deficit by £20 million. It doesn't because there are effects further down the line. All govt spending leads to an amount of tax and saving happening each time every time as the money gets spent and respent and tax collected on transactions. For example cutting a teacher's wage reduces the amount collected in income tax and NI and the teacher might not spend on things that would generate VAT, etc.ReplyDelete
This can be very hard to understand so I will use an analogy - a credit card. This helped me understand it. If you think the govt spends on a credit card you have it about right.
"You might get a measly percentage when you spend money at Tesco, but when the government spends at Tesco not only does it get a percentage, but when Tesco pays its staff the government gets another percentage, and then when the staff buy beer at the pub the government takes another chunk. And so on until the initial government spending turns entirely into cashback.
For the government it is a cracking cashback deal - for every £100 it spends, it always gets £100 back in cashback. For everybody else it is known as taxation and besides death it is the only certainty in life.
So with this in place the only time they will run a balance on the credit card would be if people out there haven't spent everything they've earned. In other words a balance on the credit card is caused by people saving.
That balance on the credit card would then be known as the 'national debt' and the change in the balance as the 'deficit'. But the cause is still the same - people saving."
You can split this into foreigners net saving and the UK financing their desire to save ("CAD" or "trade deficit") and UK citizens net saving.
The other problem with the IFS is they believe in the mainstream nonsense about banking. That banks take deposits and loan them out. Actually bank loans generate deposits and banks borrow deposits from other banks at the interbank lending rate or the central bank. They then believe there is a greater risk of inflation than really. This video (and paper) from the BoE shows this is wrong:
The third problem with IFS is they think govt has to 'finance' spending. In fact because the UK is not in a gold standard or fixed system there are no financial constraints to government spending. In a gold standard system the government cannot spend more than they tax otherwise people would have excess money they could exchange for gold that isn't they. If they do, they have to borrow back the money with interest so people do not exchange it for Gold or whatever the currency too - dollars see e.g. argentina.Government spending works by crediting bank accounts it is not 'funded' by anywhere. Taxes debit bank accounts and make room for spending so it is not inflationary. Bonds are used to target a rate of interest.
It is easier to see this by consolidating the central bank and treasury, see for example the whole of government accounts:
This will give you a good understanding of the current fiscal and monetary system.
For example the IFS believe government "debt" is a "burden" on "future generations." This is false as future generations cannot send resources back in time. The next generation will consume what they produce. There is no point in the government "saving" in pounds as they can print as many as they like.
I agree with you, Simon. I've also become increasingly frustrated with the IFS's tendency to reflect some of media macro, when it comes to deficit reduction, in recent months.ReplyDelete
Another example that I would give is the way in which they present PSND levels being c.5% higher in 5 years time (all very uncertain) as being a significant concern, referencing the need to have space for the next crisis. But how likely is it that this slightly higher debt level is ever going to be the amount which tips us over the edge after another crisis? The chances are negligible. Yet, this is presented as being a factor of equal weight to the devastating rate of cuts planned by the Tories.
I think the problem (as well as being due to an obsession with being non-controversial as Alasdair says) is that the IFS believe they can separate out the public finance 'facts' from the economic 'debate' by presenting the former in clear terms, without needing to wade into the controversial territories of the impacts of fiscal policy at the ZLB. But the problem is that while this is possible, in some limited sense, it is a betrayal of the IFS's roots as an institution of economic analysis. As economists, they should be saying 1) that fiscal policy can have significant impacts at the ZLB 2) that additional debt of the levels proposed by Labour is very unlikely to be of macroeconomic significance. By failing to do this, and by presenting just the public finance 'facts', the IFS gives the impression that these are all that is important and that all of these 'facts' are of equal weight in the debate about deficit reduction. But this is completely out of step with the economic reality.
Your information is very useful and helpful. provide excellent benefits for us all. The first we share information with each other. thank you for the information.ReplyDelete
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