Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 6 May 2015

Was an anti-austerity policy politically possible in 2010?

Could left and centre politicians in the US or Europe have got away with saying forget about the deficit?

It is clear to some of us at least what the appropriate macroeconomic policy should have been in 2010. No switch to austerity. In my VoxEU piece I imagine that in the US, UK and Eurozone government spending on consumption and investment had grown at an average rate from 2010 onwards, rather than being cut back sharply. Back of the envelope calculations suggest that by 2013 GDP would have been about 4% higher in all three countries or country blocs. In that eventuality by 2013 short term interest rates would probably be on the rise, and then governments could begin to reduce deficits. There would of course have been no government funding crisis in the UK or US. In the Eurozone, with appropriate ECB policy, the debt crisis would have been confined to Greece. We would have all been much better off.

So would such a policy have been politically possible? I think if there had been a reasonable political consensus behind it, almost certainly yes. After all, G.W. Bush was quite happy to use Keynesian economics to support tax cuts in 2001. One of the points I have made about mediamacro is that it finds it difficult to argue a case when there is a political consensus going the other way. The media would, of course, have raised concerns about rising budget deficits, but if the political consensus had been that macroeconomics tells you not to worry about the deficit during a recession, I think it could have survived. (An exception might be Germany, where the thought experiment is perhaps too difficult to imagine.)

The moment that the major right wing political parties decided to abandon consensus macroeconomics and use the deficit as a political weapon, then it became much more difficult to say that the deficit was not an immediate concern. This was for two reasons.

First, the default position of many political commentators is that a government is like a household, so it should respond to a deficit by tightening its belt. To counter this requires referencing macroeconomic expertise (although of a very simple kind). However opinion among academic economists about ignoring the deficit is divided, and even if the clear majority supported the anti-austerity line the media’s default mode is to frame this as a two-sided debate. If academic economists are perceived to disagree, political commentators will fall back on household analogies.

Second, and perhaps more seriously, a large section of economists - mainly economists working in the City - would have been warning of an impending financial crisis if the deficit remained high. These are the bond vigilantes that are always just over the horizon. As one former economics editor said to me, bond economists never saw a fiscal tightening they didn't like.

In this situation, it could be politically fatal to try and argue that the deficit should only be dealt with when the recovery was assured. (Here an assured recovery is code for when interest rates start rising.) It is not only counterintuitive, but you would have lots of City economists saying that you are courting disaster. Every time that long term interest rates rose, they would pop up on the TV saying it was because of fears about the deficit. We do not have to imagine this, because it is what happened.

Finally, in Europe at least, there is a killer argument. The line that we should ignore the deficit would have been dealt a fatal blow by the Eurozone crisis. Those that had been warning of a financial crisis caused by the deficit pointed to Greece and said I told you so. The subsequent contagion was a result of decisions by the ECB, but again the media framed it as a result of excessive deficits in these countries. Even outside of the Eurozone, any politician that tried to say that a similar crisis could not happen here would have been treated by the media as completely out of touch.

In this situation it is not at all surprising that the left would adopt a degree of appeasement. Voters will be less worried if you say ‘I understand the concern about the deficit, and we are doing something about that’ than if you say ‘the concern about the deficit you are always hearing about is misplaced’. It is easy for someone who understands the macroeconomics to imagine the second line would have been tenable, but we are not in the business of getting votes.

To some extent you can see the proof in all this in the change in Labour’s rhetoric in the UK. They did go for stimulus rather than austerity when in government in 2009, even though the Conservatives opposed this. Before and after the election they labelled Osborne’s plans ‘too far, too fast’. Yet that line also failed to survive, so now Labour have committed to (try and?) reduce the deficit each year.

Some, like Robert Skidelsky for example, describe these movements, and a failure to extol the virtues of fiscal policy under Labour, as a mistake. However, I suspect that if Labour’s shadow Chancellor Ed Balls could ever speak the truth, he would say that he did not want to gradually acquiesce to the austerity line, but the evidence from focus groups was overwhelming. Defending Labour before the financial crisis was pointless because it just reminded people that the Great Recession happened under their watch, and that Labour (like everyone else) gave finance too free a hand. The ‘too far, too fast’ line just sounded feeble when the news was all about the Eurozone crisis. In the end, Labour just had to be ‘tough on the deficit’.

Of course this is speculation. We might also wonder if things would have been different if the press had not been relentless in emphasising the deficit. What if the Eurozone crisis had not happened? Questions like this are not just idle speculation. They help to answer whether countercyclical fiscal policy will ever be possible again. If, every time there is a large negative shock, the political right play the deficit card, then we are doomed to pro-cyclical policy and being stuck in a liquidity trap with ineffective monetary policy much too often. That suggests to me that we need to change the way monetary policy is done. 


  1. I think it was very difficult for the left because the focus was on spending rather than tax cuts as a fiscal policy measure. This is understandable because of the multiplier. But it meant automatic opposition from all on the right, who wanted cuts in spending for their own reasons.
    The Osborne strategy has been both dishonest and clever. He announced austerity then quietly dropped it when it was shown to be killing recovery. But he kept the rhetoric.
    This makes Labour's task very hard because there is no clear target to attack.
    On top of this we have the insanity of the Eurozone putting peer group pressure on both central bankers and civil servants in the UK.

    1. i think that the problem in the US was that the republican party considered underming Obama more important than fixing the American economy. Why the 1% felt that was in their best interests; I am not sure though clearly the S&P 500 has rewarded them while the bottom 90% have suffered.

  2. "whether countercyclical fiscal policy will ever be possible again."

    Your own history above gives the answer to that question. Yes if it accords with the electoral timetable. See (even) George W Bush in 2009.

    The one, and only, way in which the UK got lucky with the crash was that it happened in the run up to the General Election, meaning politics and economics aligned.

    After 7 May 2015, we'll have a fiscal tightening. Whoever wins.

    The part of the story you omit, or distort, is when you say

    "Before and after the election they labelled Osborne’s plans ‘too far, too fast’."

    Which is only half true. Darling also promised 'cuts worse than Thatcher' and had a proposed fiscal policy looking very similar indeed to what Osborne actually did (as opposed to what he said he would do).

    Balls' attack line was the correct and best one available at that time. Indeed it worked, see the polling in the era. Unfortunately it only worked when Osborne was indeed going too far and too fast. With the abandoning of 'austerity' (or mild fiscal tightening if we are to use words in their true meaning) in 2012, and the onset of recovery, it no longer had traction. Indeed, the foolish commentators (NOT S W-L) who had claimed that recovery would only come if Osborne changed course, but failed to spot that he had, allowed Osborne to claim vindication. It was Blanchflower wot lost it.

    Most people are like economists in the sense that they are remorselessly forward looking. "The Tories made a mistake in relation to fiscal policy in the early years of the last Parliament" is never going to have much traction today.

    The replacement attack line, the 'cost of living crisis', was always weaker as the policies to try and deal with the crisis (second generation rent controls, price freezes, taking the minimum wage setting away from the low pay commission) are (politely) not very good. As, to be fair, I am sure Balls knows.

    1. "After 7 May 2015, we'll have a fiscal tightening. Whoever wins."

      Actually, I take that back.

      We may have no fiscal tightening if nobody wins, and an early election looks possible.

      So, I wish for a hung Parliament, with no party anywhere near a majority, even in combination with the Lib Dems.

  3. Labour should have had the courage of their convictions in post-election 2010 and predicted, boldly and loudly, that the nascent recovery would be strangled off by austerity. They would have been vindicated and could have spent the remainder of the election cycle bludgeoning the coalition with that, regardless of what happened later. As it is, the electorate seem to have forgotten that a) the economy was growing in mid-2010 when Labour left office and b) quite how abysmal the early years of the current government were.

    I also think that many people (Labour and possibly yourself included) underestimate quite how ignorant of macroeconomics those in the media and the electorate at large really is. As an example, my other half, who is an intelligent, university-educated young professional had *literally no idea* that deficits "naturally" go up during a recession due to automatic stabiliser-type effects until I tried to explain it to her earlier this year (even then, I'm not sure she believed me because it's not something she's ever heard a pol/journo say). All this despite (because of?) the fact that she watches Question Time and the news quasi-religiously.

  4. I buy most of this, but I think the question now is about Labour strategy for the 2015 election. The concerns that were present in 2010 were certainly overblown, but of course were more potent at that moment.

    But vigilantes and contagion do not look so plausible now. We also have concrete evidence from the IMF that fiscal tightening damages economic performance. Perhaps the household analogy persists, but it doesn't seem that this should prevent the left from adopting a rational position against austerity now.

    I worry that the real and first order problems engendered by mediamacro are not helped when the Labour party unconditional promises to cut the debt year on year.

    1. I agree, but are they doing this because they think it is the right policy? I very much hope not. If they are they are either being terribly advised on the economics, or Balls has changed his views radically. If neither is true, why are they doing what they are doing?

      Now you could say they are making the wrong political choice. But again, these choices do not come out of thin air. They reflect lots of work with focus groups, and the politicians own experiences talking to the media and voters. We have to take as given the coalition's line, and the mediamacro myths that they have helped generate. Saying the deficit does not matter (which is certainly the right economics) may just not cut it with voters.

    2. No doubt the policy choice doesn't come out of thin air, but I don't have much faith in the focus group process and/or interactions with the media/Alastair Campbell etc.

      As I said in a comment on a previous post I think the Labour party generals have this time fought the previous war. In 1997 positioning yourself epsilon to the left of the Tories maximised your political territory and in circumstances which applied then wins a landslide.

      But this time, by making an unconditional promise to cut debt, they endorse the austerity position. This undermines the ideological territory argument.

      Moreover it is no surprise that the SNP, nationalists elsewhere and the greens have filled the anti-austerity void. As well as shedding votes on economic credibility Labour have also lost part of their own constituency.

      I completely agree with you on the pernicious effects of mediamacro. But I can't help thinking that Labour, in 2015 if not 2010, have to some extent exacerbated the problem.

    3. I hope you can see that 'economic credibility' should have had quotation marks around it...

    4. This evidence would support your case

      except that Labour could argue that, even if this survey is correct, they can try and have it both ways by talking the deficit talk but proposing much less deficit reduction. Perhaps Scotland didn't figure enough in their calculations. But really I would love to have that conversation with Ed Balls (or one of his advisers) to see what they really thought!

  5. Excellent analysis.
    Politics is ever the art of the possible.
    I think Balls is actually an astute economist (I referenced earlier to his Bloomberg speech in 2010) which is very much in line with the Prof's analysis.

    I think the Labour manifesto is not as good as one might hope but is actually quite clever in the current circumstances.

    The myths persist. Balls' predictions in 2010 have all been vindicated and none of Osborne's predictions have been. And yet, with a totally compliant media machine Osborne has managed to maintain this reputation for economic competence.

    I firmly believe that history will be very harsh of Osborne and rightly so. Conversely Brown and Darling will be greatly lauded for their handling of the crisis. Whatever view you come to on the run-up.

    1. Politics is, in the short term, the art of the possible, but not in the long term. Unremitting long term myth making by conservatives has succeeded against all objective evidence. It made the impossible possible. What was needed in response was unremitting long term myth busting. That is still what is needed. There is no practical alternative.

  6. This comment has been removed by the author.

    1. In the past few weeks, I've seen a huge number of academic economists engaging in the media in the way you say. Has it had any noticeable impact? In terms of macro, none that I can see. The idea that if only academic economists put in more effort this wouldn't happen is I'm afraid wrong.

    2. Sorry about the deletion and repost! Anyway...

      I wouldn't expect a few weeks worth of intense effort to make much difference.

    3. Not sure if this got through .. so I'll re-post.

      The problem comes down to the form of communication, doubly so in this age of sound bites. "Manage a country as you would a household" is a simple and succinct message, and something which people can readily imagine. If you want to counter it you have to first create correct comparisons which are equally simple and compelling.

      On the back of those comparisons you can describe better models which more accurately capture the state of the real world. You have you start off with those simple comparisons though.

      So if you know of any economists with that rare ability to really capture the imagination with a few words, then by all means they should engage a lot more. It's the only way to create a counter narrative.

    4. Hi Professor,

      A couple of days age, this blog post began to be shared. It has proved very popular.

      Of course, as I'm not an economist, (just someone who is trying to learn because I've been convinced for a while now that we, the public, are being misled) I'm not sure if you will agree with every detail of what Mr Studabaker says, but as you can see, he has had over 600 comments on the blog, and he couldn't keep up with replying, so had to make another blog post with the answers to the most common questions.

      There's also the work of Ross Ashcroft's team at Renegade Economist, who many people are listening to. There are videos online that people are sharing, made by indiviuals, there are other blogs, such as Scriptonite Daily and Another Angry Voice which discuss economics, as well as many other political issues. They have a large following.

      I'd encourage you not to give up with your effort. People are starting to listen. Maybe you could all work together and make some economics videos we can share on Facebook and Twitter, explaining why you disagree with the arguments the media has given us, in layman's terms?

      BTW, what does the news that the BOE has made a mistake with its data on UK debt sales actually mean for the picture of the health of the economy?

    5. I think that's right - work together and with others, harass the BBC, make videos, give SITP talks,... Occasional, reactive, and heroically but exasperatingly understated rejections of extreme stupidity/ignorance like this just aren't enough.

  7. “First, the default position of many political commentators is that a government is like a household, so it should respond to a deficit by tightening its belt. To counter this requires referencing macroeconomic expertise (although of a very simple kind).”

    Not really. (Meaning I think you academic economists ought to engage more proactively and forthrightly with the media, put your “quackademic” element in its place, and get us to the point where the media would be as embarrassed by such irresponsible and damaging economic nonsense as they now thankfully seem to be by AGW 'sceptic', anti-vaccine and homeopathy nonsense.)

  8. There is a recent analogue of duff macroeconomic thinking being applied and then abandoned, which is monetarist targets that began being watched and followed by the Labour government in the 1970s, which then morphed into the MTFS under Thatcher, and were finally abandoned in 1983 when Lawson missed them all.

    This monetarism caused the Thatcher government to create massive unemployment, but rhetorically is still seen by the Thatcherites as necessary, although comparing it to Volcker's contemporaneous double contraction to deal with inflation shows that it was not so.

    Taking the austerity argument apart will need to take the economic falsehoods of Thatcherism with it; the whole goes or nothing.

  9. Prof. Wren-Lewis,

    at least for the Eurozone I do not buy into your reasoning for the following reasons:

    There were fundamental structural issues between Southern and Northern countries that were set to explode sooner or later. This expressed itself in persistently higher inflation rates in the South, loss of competitiveness due to increasing wages and low productivity, increasing trade and current account deficits etc.
    The root causes of this were mainly the low interest introduced with the Euro that Southerners were not accustomed to and that led to real estate bubbles and debt fuelled consumption.
    When debts reached a certain limit the party stopped, bubbles burst and unemployment skyrocketed. This happened well before introduction of what you call austerity policies. And this happened to countries that sometimes had illiberal and two-tier labor markets and already quite bloated public sectors.
    The Euro currency crises was a result of these imbalances though it was amplified by a lack of monetary instruments, banking union etc.
    I strongly doubt that a more expansionary fiscal policy would have made a difference. You may temporarily reduce unemployment under construction workers by building another useless Spanish airport in a rural area. Syriza may get votes by undoing layoffs of room cleaners and reemploying them as public servants. But you delay the process of structural adaption to reallocate available resources to fields were they are actually used. It's hard to make a software engineer out of a construction worker. Even retraining them for elderly care cost money and time. Unemployment still is high in Spain and Ireland though their economies are booming.
    It took long to turn the development in inflation around as was the balancing of the current account and regaining competitiveness. It is of course painful to turn back pensions and benefits to sustainable levels that are not debt increasing. The resulting public deficits was an effect of these adaption processes and not of a primary focus on debt reduction.

    You state gdp would be higher today in case of fiscal expansion.

    Exactly the opposite argument could be made by assuming further fiscal expansion could have as well:

    - delayed structural reforms
    - funneled public funds into unsustainable projects
    - conserved corrupt political structures (Berlusconi et. al.)
    - decelerated buildup of competitive export industries due to extended domestic demand

    It probably needed the financial crises and the soaring interest rates to get rid of Berlusconi in Italy. In case of a fiscal expansion Italy might stand where Greece is today. We likely would have to talk of a debt write-off.

    1. The EZ position is obviously more complicated, but I do not think it is an exception. Just as elsewhere, the political right has chosen to see all the EZ problems as stemming from excessive government debt, which is clearly nonsense. The austerity that has followed has made the other problems the EZ has much more difficult to deal with.

      The EZ centre left has been unable to challenge the austerity orthodoxy. Is that their own fault, or was this inevitable given mediamacro? That question can only really be answered by detailed analysis of the political situation in the major EZ countries.

    2. "The EZ centre left has been unable to challenge the austerity orthodoxy. Is that their own fault,"
      Big difference - Eurozone countries do not issue their own currency.

  10. Your writings always stimulate and make me think. Today’s post made me think about what was the start of this love affair mediamacro has with deficit reduction?

    In Tony Blair’s first term, Gordon Brown ran a very tight ship and as time went by got more and more flack from the left of his party, but he gained a lot of respect from both the financial community and from economists.

    By the second term he began to loosen the purse strings. While some extra spending was used for infrastructure projects such as new schools and hospitals, perhaps too much was used just to increase salaries of NHS staff - such as the new GP contracts in 2004 that took mean earnings from £73,400 to £92,600 (Whalley, Gravelle, Sibbald, 2008 BJGP).

    Even the infrastructure investment used PFI money and created a new long term cost to pay for year after year through leasing arrangements. PFI was a Conservative idea, invented during the Major Government in 1992.

    Whether those spending increases were warranted or not, and they perhaps were since infrastructure and repairs had not been much invested in during the Thatcher-Major years, they did give ammunition to the opposition to make a fuss about Labour overspending.

    Since it is unfortunately the job of the opposition to oppose even sensible policies of the Government of the day (as we saw when Labour lost power and Ed Milliband rather disappointingly started opposing policies he had previously been supporting while in Government, thus losing the moral high ground in my opinion) the Conservative meme in the 2005 General Election was that Labour had overspent, was overspending, and would continue to overspend if reelected. As usual, mediamacro followed this lead.

    Nobody could see the financial crisis coming along, but when it did, of course suddenly there was ‘proof’ in numbers that what the Tories had been saying all along had come true: the deficit increased on Labour’s watch. It doesn’t matter it had nothing to do with Labour directly. The seeds had already been sown.

    The irony is that one of the main reasons long term government spending increased was because of the Tory PFI idea which benefitted the financial sector. The second irony is that the reason the Financial Crash hit the UK so hard was because of another Tory favourite, financial deregulation. And who is a major backer of the Tories? The finance industry.

    1. Just what I was looking for! PFI and other off-balance sheet stuff: taking the PV of the contracts, by how much does it increase debt in % terms? Does it support the idea of Labour profligacy or is it only relatively minor?

  11. It's a shame - and a surprise - that an analogy with business was not used instead of with domestic finances. If a business is in trouble, it will have to fold, or invest in marketing or innovation. A country does not have the option to fold, so the only solution is investment. But this would not have made such an interesting news polemic.

    1. Generally when businesses are in trouble they cut costs.

    2. No. A govt is not like a business or household. It is the issuer of the currency.

  12. "Of course this is speculation. We might also wonder if things would have been different if the press had not been relentless in emphasising the deficit. What if the Eurozone crisis had not happened? Questions like this are not just idle speculation. They help to answer whether countercyclical fiscal policy will ever be possible again. If, every time there is a large negative shock, the political right play the deficit card, then we are doomed to pro-cyclical policy and being stuck in a liquidity trap with ineffective monetary policy much too often."

    If Brown had been running a counter-cyclical policy in the first place then perhaps the Tories would have taken a different tack.

  13. "Saying the deficit does not matter (which is certainly the right economics) may just not cut it with voters." odd bedfellows; ex VP Dick Cheney said the same thing.

  14. Let's face it, to most voters the "correct" macroeconomic response is counterintuitive; they would say: let's get our house in order (aided and abetted as you say by the media and the right wing).

    As you also concede academic opinion itself was divided with those such as Alesina pushing the austerity view. You may have to accept that this will nearly always be the case and the type of consensus you postulate is simply impossible.

    When you pose the question as to whether countercyclical policy will ever be possible this implies that not even the automatic stabilisers would be allowed to work. Do you really think that this is possible either administratively, economically or, most of all, politically?Politicians are short termist but are they so stupid as to deny (or even mildly limit) the operation of the stabilisers? Surely this is inconceivable and if they start drawing lines (as Labour did re the investment spending component of the PSBR ) then this would complicate the argument enormously and rob them of the "Jack and Jill" simplicity.

  15. We have the basic problem that most of the public believes in Flat-Earth economics. This is encouraged by self-serving media and political interests. Many on the centre left don't have a clue either, or lack the courage even to hint at more complex realities out of fear of ridicule by the wilfully ignorant. The reality of economic feedback-loops, and especially of a flexible money supply, is often profoundly shocking even to the open-minded.

    Someone asked me today: "what backs all this money then - gold?" No - I argued: "And it doesn't matter. if 90% of the earth's gold vanished into a black hole, it wouldn't affect our capacity to feed or clothe ourselves, but if we lost 90% of the manure it would be far more serious." As Terry Pratchett implied in 'Making Money', "The commerce of the city creates the value of it's money." What's important is that the money supply matches the optimum productive capacity of an economy, rather than being a straighjacket

  16. Paul Krugman simply makes the Keynesian case -- your spending is my income. If nobody is spending you have a recession. The government should step in and spend when necessary. People get that.

    Over here in the U.S., some say you can't spend your way out of a recession. I tell them that's exactly what you do. Those spending are called customers! The gov can be a customer. People get that, too.

  17. Was an anti-austerity policy possible in 2010? What about in 2015? The SNP were the only party pushing an anti-austerity program, and look what happened to them - huge success at the polls, although there were other issues there.

    More depressingly, an interviewed 21 year old on the BBC election program in the early hours said he voted Conservative even though he shared few Conservative values "because when I heard Ed Milliband say Labour did not overspend when they were in power I just couldn't trust them on the economy any more." Now, that is one of the most depressing things I have heard this election. The lie has become "received wisdom".

    The UK has swallowed the biggest lie in a century. The LibDems have been annihilated for their naivety, while Ed Milliband clearly needs to take a leaf out of the SNP playbook. As for the Tories, well, it looks like Cameron is the kind of person who wants 100% of a tiny majority rather than 75% of a large one. Let's see how workable that turns out to be now he's going to be held hostage by his 70 odd Eurosceptic MPs.

    While for Cameron it's less a case of being careful what he wished for, for the rest of us it's more about being careful who we voted for.

  18. Actually everyting is possible nowadays, we should be aware of that.

  19. As an American I don't follow your politics so closely, but I think the Liberal Democrats bought into the austerity program. Last night I heard one of the leaders say that their coalition with the conservatives was because it was in the best interests of the nation. By implication I think he was saying that the economic policy (austerity) was a difficult decision, but the right thing to do.


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