Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 1 April 2015

Economists vs. Business Leaders?

Today illustrated very clearly why the monthly CFM survey of mainly academic, mostly macro UK economists was such a good idea. (And something that I should have included in this discussion.) I have often written that I thought austerity was only supported by a small minority of UK macroeconomists, but my evidence for this has been much thinner than I would like. Today CFM published their latest survey which asked: “Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?”

The response was clear: 15% agreed, 18% neither agreed nor disagreed, and 66% disagreed. As CFM reported: “Ignoring those who sat on the fence, 19% agree and 81% disagree with the proposition. This ratio is unaffected by confidence weighting.”

That was welcome confirmation of my prior, but what was much more important is that the survey came out on the same day as the Daily Telegraph published a letter from 100 business leaders saying exactly the opposite. To quote: “We believe this Conservative-led Government has been good for business and has pursued policies which have supported investment and job creation.” Now of course a letter (organised by whom?) is not a survey, and it is hardly news that Labour has policies that are unpopular with business leaders. Yet the letter was nevertheless the lead item on BBC news today.

However in at least some of the reports I heard that led on the letter ‘news’, the CFM survey was also mentioned. I myself participated in Radio 4’s World at One (about 11 minutes in) as a direct result of the survey. Robert Peston went as far as to ask: “Who to trust - business leaders or economists?” I liked the way he introduced his post:

“Neither business leaders nor economists have a monopoly of wisdom on what's good for Britain or are free from political bias. But it is perhaps therefore all the more important to remember that those paid to think about how best an economy should be run don't necessarily agree with those paid to run companies.”

He might have also added that, probably without exception, we are paid a lot less than business leaders, so the danger that our opinions might be influenced by Labour policies like reintroducing the 50p income tax rate or introducing a mansion tax is perhaps also smaller!



29 comments:

  1. “Do you agree that the austerity policies of the coalition government have had a positive effect on aggregate economic activity (employment and GDP) in the UK?"

    When does tightening fiscal policy ever have a "positive effect on aggregate economic activity"?

    That doesn't, of course, mean it should never be done.

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    1. An argument often used in the debate is that fiscal tightening increases confidence among businessmen because they feel that the national debt is on a sustainable track. They would therefore increase their spending even more than the government has decreased it. Of course there is no empirical evidence for this view but...

      Even the very basic point that 'fiscal tightening decreases economic activity' is not commonly understood among the general populace. If it was more well-known it would certainly weaken the popular support for austerity.

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    2. When we're off the zero lower bound and at the NAIRU then fiscal loosening is inflationary, at this point we would either need the central bank to step in and tighten monetary policy (which would offset the fiscal loosening) or suffer inflation. High levels of inflation are generally considered to have negative effects on long run economic growth.

      In a situation where inflation was high, fiscal tightening would have a positive effect on GDP growth in the long run. Examples of this would be present day Venezuela or Argentina, Britain in the 70s is another example.

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    3. To reduce inflation, that's when it should happen.

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    4. "at the NAIRU"
      The NAIRU is a complete load of rubbish. Economists are constantly redefining it and what the rate is.

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    5. Real question is not "when" but what kind of austerity can be good.
      The austerity where top marginal tax is raised is the only good kind of austerity.

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    6. Random - Yes, the NAIRU is a nebulous number but even though we're not really able to measure it doesn't mean we should dismiss it as a concept.

      Jure Jordan - Generally yes, certainly in any of the world's advanced (or what our oh so enlightened business leaders call "major") economies I'd agree. But I'm not sure it would apply in all cases, certainly Venezuela at the moment looks like an exception.

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    7. One could certainly imagine a situation where government austerity increased total economic activity. If the government was practicing conscription, for example, reduced government expenditures could free up working age population to do more productive jobs. North Korea is probably at that point right now. I have yet to see a compelling argument that the UK is or has been in that situation in the last two generations however.

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  2. The effects of Tightening of fiscal policy can under the right circumstances be offset with a steady inflation rate of 3-4% and a lowering of the interest rate.


    Obviously the zero lower bound problem means under today's circumstances fiscal austerity is a poor strategy.

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    1. "can ... be offset"

      Quite so.

      But all other things being equal, fiscal tightening always has a negative "effect on aggregate economic activity."

      The only puzzling thing is how they found anyone at all who agreed with the preposterous proposition put forward.

      It is also a mystery why S W-L thinks it proves anything worth knowing,

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    2. This is no April Fool's but here I completely agree with you...except for the last remark which is incomprehensible since SWL clearly states that "much more important is that the survey came out on the same day as the Daily Telegraph published a letter from 100 business leaders saying exactly the opposite." ie. he uses the survey to highlight the contrasting views of academics and business leaders.
      The shocking thing about the letter ploy by the Tories is that it hasn't been depicted by the media for what it is:
      Business leaders publicly declaring
      1. that they want to pay less tax,
      2. they want workers to have as few (or even fewer) rights and as weak (or an even weaker) bargaining position (eg zero-hour contracts to remain)
      3. 1&2 result in higher profits, salaries, bonuses and rising share prices and dividends...which the signatories of the letter directly benefit from enormously.

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    3. Simon, you forgot number 4: What's good for our individual businesses is good for the country as a whole. Which, of course, often is false regardless of whether the business leader realizes this (most don't, or only pretend to care at all).

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    4. Thanks PJR.
      5. Businesses and their owners/backers want a government who won't pry too much into their tax affairs, pursue them too hard in matters of tax avoidance and will only make weak gestures at cracking down on the use of tax havens and offshoring.

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    5. @SpinningHugo -- The proposition may be preposterous but that hasn't stopped the tories from running a campaign based on it. They've argued pretty strongly that their economic policies have supported both growth and employment. I see no mystery as to why it's worth pointing out that most economists disagree with the conservatives' self-assessment.

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  3. Spinning hugo^ It doesn't really ever have a good effect, unless the tax raises were on the 1% or loopholes are closed

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  4. Extraordinary. Presumably the shareholders of the businesses which those christmas loving turkeys lead are fools too.

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  5. Two questions came to mind when I read this headline in the Daily Telegraph: good for the individuals or the companies they represent? and/or good for the companies or the public in general? Another, interesting headline, this time in the Times stated something along the lines Osborne will argue that figures to be released close to the election, which will show that the economy is slowing down, will underline the need for the Conservatives to be given another term in office to finish off its work to the British economy. Indeed, that is what some of us are worried more austerity will do, finish off the British economy.

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  6. Given the wealth of evidence showing the damaging impact of austerity, like others here I am astonished that as many as 15% agreed that austerity had 'positive effects'.
    However, I would urge anyone to read the full survey responses via the link provided, and critically analyse the responses/reasoning of the 15%.
    Above all, they appear to be logically incoherent, evidence free claims.
    For those who cite 'avoid loss of market confidence' - this is an unprovable, unmeasurable factor with little/no evidence to suggest the UK would have suffered this; and even if austerity did avoid the 'loss in market confidence', this in turn implies a knowledge or ability to measure the resultant benefit of avoiding the loss of market confidence which offsets the 'known' (from various studies) losses to GDP caused by austerity. They cannot know this.
    Interestingly, as deficits and the fiscal position was dramatically worsening from 2008 onwards, with no commitment to austerity - in fact the opposite given the fiscal stimulus at the time, 10yr gilt yields were...continuing to rapidly fall!!
    http://data.okfn.org/data/core/bond-yields-uk-10y

    Whilst other reasoning is equally poor, the one that jumps out in particular is Patrick Minford (Cardiff) who notes that "the coalition has set a definite direction towards deficit reduction ‘without moving so rapidly to destabilise the economy."
    This claim runs contrary to all evidence.
    "a definite direction towards deficit reduction"? 'Definite'?? Robert Chote, Chair of the independent Office of Budget Responsibility, has pointed out, deficit reduction "appears to have stalled".
    http://www.huffingtonpost.co.uk/jonathan-portes/deficit-is-falling_b_3137277.html

    "without moving so rapidly to destabilise the economy"?? A number of empirical studies estimate that austerity cost the economy in terms of lost output anywhere between 5-10% of GDP. John VanReenen (down the survey page) elaborates on this with relevant links.

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    1. This comment has been removed by the author.

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    2. Should have said "in 2013, Robert Chote, Chair of the independent Office of Budget Responsibility, had pointed out, deficit reduction "appears to have stalled" (2012).
      Before/By then austerity was effectively put on hold once the government realised the damage it was doing.

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    3. You cannot expect the average person to read critically what business leaders have said. The point has already been made that business leaders are interested in their bottom line and not the performance of the economy or benefits to the workers.

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    4. “Given the wealth of evidence showing the damaging impact of austerity, like others here I am astonished that as many as 15% agreed that austerity had 'positive effects'. ”

      I'm not.

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    5. @Rob Sol: Perhaps I should have been clearer when i said about urging 'anyone to critically read...". That should have been 'anyone on here'...and of course not the average peron on the street...

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  7. I heard Robert Peston on BBC Radio 5 just after 11 am yesterday say a "small majority of academics" were in support of the idea that UK austerity under the Coalition had weakened economic growth, so it's nice to see that you were co-opted into an appearance with the sort of survey data this country has needed for some years.

    But this needs to be front and centre on the BBC in the run-up to the election, not a footnote.

    To quote Robert Shiller, "Most economic ideas are public goods that cannot be patented or otherwise owned by their inventors. Just because most economists are not rich does not mean that they have not made many people richer."

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  10. Yeah I agree that you can be one of them either an economist or a business leader. It’s quite tough to master both, though not impossible certainly. Our accounting professor Aloke Ghosh always used to tell that if you can master both aspects, sky is the limit for you.

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