The idea that austerity during the first two years of the
coalition government was vindicated by the 2013 recovery is so ludicrous that
it is almost embarrassing to have to explain why. The half-truths in this case
are so flimsy they do not deserve that label. I can think of two reasons why
that claim could have any credibility. The first is that people confuse levels
and rates or change. The second is that some critics of austerity might have
occasionally overstated their case.
To see the first point, imagine that a government on a whim
decided to close down half the economy for a year. That would be a crazy thing
to do, and with only half as much produced everyone would be a lot poorer.
However a year later when that half of the economy started up again, economic
growth would be around 100%. The government could claim that this miraculous
recovery vindicated its decision to close half the economy down the year
before. That would be absurd, but it is a pretty good analogy with claiming
that the 2013 recovery vindicated 2010 austerity.
The second point is that some critics of austerity did on a few
occasions allow their rhetoric to get the better of them, and suggested that if
austerity continued a recovery would never come. That was always an
overstatement. It became particularly inappropriate because, as I noted in my
last post, fiscal contraction did pause in 2012. But serious analysis should
not be about rhetoric, or as Paul Krugman notes about passing off perception as
reality. (Sometimes in my rather British way I think Paul is a little too
combative with those he might have a chance to persuade, but I’m in 100%
agreement with him here.)
What any knowledgeable and honest media reporting should have
done is tear the vindication argument to shreds. It should have asked what contribution fiscal austerity made to the
slowest recovery from a recession for centuries. That would be an honest
debate. No doubt there are factors behind the delayed recovery that the
government were powerless to influence, like a weak banking sector for
instance. But if the banking sector is unable to support an expanding private
sector, which in a recession isn’t too keen on expanding anyway, you have no
business throwing public sector employees out of jobs. [1]
Previous posts in this series
(3) The
2007 boom
[1] And please, before anyone comments about how fast employment has grown, look at the data for unemployment - it went up in 2011. The deeper problems with the 'didn't we do well on employment' line will be addressed in the penultimate post in this series.
"some critics of austerity did on a few occasions allow their rhetoric to get the better of them"
ReplyDeleteYou think?
"The UK may just avoid a triple dip recession, and may even grow at more than the snails pace predicted by forecasters"
http://mainlymacro.blogspot.co.uk/2013/02/the-final-verdict-on-george-osborne-as_23.html
Feb 2013.
This particular 'media myth' is firmly attributable to the critics of Osborne. You need to put the blame where it belongs more squarely.
So firm and certain were the views that recovery would not come, and so long and loud were the calls for a looser fiscal policy, that when recovery did come the critics allowed Osborne to claim vindication. They were indeed proven wrong.
Prominent critics with newspaper platforms like Blanchflower
"falling over laughing" at predictions that recovery was in sight
http://www.newstatesman.com/economics/economics/2013/05/i-nearly-fell-over-laughing-when-i-heard-mervyn-king-say-theres-recover
Triple Dip a 'real prospect'
http://www.independent.co.uk/voices/comment/george-osborne-called-us-deficit-deniers-but-we-were-right-his-economic-era-is-over-8558380.html
0.2% growth projections
http://www.independent.co.uk/voices/comment/osborne-isnt-going-to-get-the-growth-he-needs-8546395.html
or people like Bill Keegan
June 16
"The fact of the matter is that the only way an economy can emerge from depression is by spending its way out. And if the banking system has, to all intents and purposes, gone absent without leave, and the private sector is in the doldrums, then the public sector has to step in. Month by month, analysts grasp at straws whenever there is an economic indicator suggesting that there could possibly be the beginnings of an upturn"
http://www.theguardian.com/business/2013/jun/16/austerity-uturn-ed-balls-mistake
5 May
"The fact is the economy remains in depression"
http://www.theguardian.com/business/2013/may/05/double-dip-economy-lurching-potholes
February
"we have certainly avoided complete collapse – so far!"
http://www.theguardian.com/business/2013/feb/24/osborne-reverse-gear-uk-recovery
"Fiscal policy is counteracting monetary policy. Carney evidently believes in the power of exhortation. But when he summons the spirits from the deep, will they come if there is no dramatic change in fiscal policy? I have my doubts."
http://www.theguardian.com/business/2013/feb/10/spirits-vasty-deep-economic-depression
I could do the same with lots of other media critics, like Larry Elliott.
Even serious people like Jonathan Portes were saying fiscal policy was too tight into 2013, without seemingly noticing Osborne's change of course (until the recovery actually happened).
These people, and others, by over-egging the criticism created the 'myth'.
The significant factors that led to the UK slowdown (other than fiscal tightening) were
1. A sharp rise in commodity prices in 2010, oil going up 70%
2. The eurozone crisis
3. The tightening of bank regulation, which operated as de facto monetary policy tightening.
When these 3 factors eased in early 2013, so recovery began, giving at least the impression of cause and effect.
So what exactly is your comment. I say "some critics of austerity did on a few occasions allow their rhetoric to get the better of them" and you give me some examples. Do you seriously think that allows people to say that the 2013 recovery vindicated austerity.
DeleteThank you also for quoting my own post, where as you show I did not allow rhetoric to get the better of my judgement. Which allows me to reference this even earlier post, where I anticipated the generation of the very myth I talk about here
http://mainlymacro.blogspot.co.uk/2012/02/when-growth-returns-prediction.html
Really, your credibility lies on the strength of your PREDICTIONS.
DeleteIf you think that you have some credible economic theories, predict some outcomes from the current circumstances. You know, test your theories like a scientist would.
MrSauce.
http://mainlymacro.blogspot.co.uk/2014/08/conditional-and-unconditional.html
DeleteYep, that's a fair analogy: until you are willing to test your theories, it is essentially quackery.
DeleteBut they cannot be tested in the simplistic way you imply. What we can do is econometrics, and what you call 'my theories' receive overwhelming support. So you think econometrics is quackery?
DeleteIt might be. It needs to be tested, then we'll know.
DeleteTo the casual observer, it looks like the principle reason why economists don't want to test their theories is that they don't want to be proved wrong: 'The Blanchflower Effect'. But it is only by testing these theories with predictions that any rigor can be developed.
I believe there is an animal testing facility around the corner from Merton. That will give you access to scientists. You should be able to devise a test to see who has the best grasp of economic outcomes given the current available data: an economist, or a non-human primate. Maybe you could also throw in a Professor of Divinity for good measure.
Where does the 375billion QE come into this equation and the billions poured into the creation of another housing bubble. Is that not the source of the "miracle growth" rather than industrial productive growth. Are the falling unemployment figures a measure of that industrial growth or a measure of people finding alternative unsustainable self employment or just giving up altogether and freeing themselves from the DWP's toxic embrace. I still feel it's all smoke and mirrors rather than a real industrial resurrection with wages that follow.
ReplyDeleteMy guess, and this applies whoever wins the election, by about next February we will be entering into another recession. More time may give us the hindsight to know that the recovery that is taking place is no more than another consumer-driven recovery fuelled by the 'the housing market is picking up again' and so the confidence to take on more credit.
DeleteHotel Azzi Florence hotel center is located in the historical centre of Florence.It’s situated inside an ancient palace in the district of San Lorenzo (famous for its market), just a few minutes walk from the station, Santa Maria Novella, from the Fortezza da Basso and from the Cathedral.It ‘a special hotel combining hospitality and creativity, to give to its guests all the flavor of a warm and original environment.Our staff is always helpful and will welcome you with simplicity and kindness to let you organize your stay in Florence at best.
ReplyDeleteBd Boy, I should join the Conservative party. As it places P.R. above integrity.
DeleteThink is about Paul being combative, your right wingers aren't comically evil/crazy. The American right is heading in very dark places and PK is a prime target for them. Believe, he couldn't convince them the sky is blue.
ReplyDeleteAs far as I can tell, as long as you aren't bleeding the economy after a slump, it will rebound as you say. To paraphrase Nelson from the Simpsons (via PK), "Stop hitting yourself!"
Sorry for typos, still haven't mastered laptop typing.
Delete“your right wingers aren't comically evil/crazy. The American right is heading in very dark places”
ReplyDeleteReally? I think the sewers of Trumpton are home to some clowns just as nasty as any of yours.
I fear your 50 percent analogy is Osborne's result of deficit elimination if reelected. The surplus can then be used at ground zero UK to start afresh.
ReplyDelete