Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 12 June 2015

An interview that will never happen

Interviewer. Chancellor, in your Mansion House speech you said we must reduce government debt rapidly to prepare for an uncertain future. What uncertain future do you have in mind.

Osborne. As my colleague the Prime Minister put it just six months ago, red warning lights are once again flashing on the dashboard of the global economy. There is Greece, the Middle East, and Ukraine.

Interviewer. But Chancellor, economists are agreed that any imminent global downturn will be more difficult to deal with if fiscal austerity is also being a drag on growth.

Osborne. I am confident that the Bank of England can deal with any immediate threats to the economy.

Interviewer. Even with interest rates already near zero?

Osborne. As the Governor has often said, he has the tools to do the job.

Interviewer. Is that why inflation is currently negative?

Osborne. As you know that has a great deal to do with the fall in oil prices. More generally I think we should celebrate the fact that prices have stopped rising so that real wages and living standards can at last increase.

Interviewer. But isn’t core inflation, that excludes oil prices, at 0.8%? The 2% inflation target is yours, Chancellor. Mark Carney has also said that reducing fiscal deficits will be a drag on growth.

Osborne. To repeat, I have complete confidence in the Governor of the Bank of England to keep the economy on track. I have not been disappointed in my choice of Governor so far, but if I need to reprimand him for any failures in the future I will not shirk from that responsibility.

Interviewer. Going back to the proposed legislation to outlaw deficits, you have also made election commitments to cut some taxes, and intend to legislate to outlaw raising others. That means that public spending will have to be cut to achieve these surpluses. Some people have suggested these laws are just a backdoor means to achieve an ideological objective of a smaller state.

Osborne. That is nonsense. I just think it is important not to place any further burden on this country’s hard working families. These families also know that you cannot go on borrowing forever.

Interviewer. Many people borrow for years to buy a house, and many successful companies continue to borrow to grow. These companies also know that it is best to borrow when interest rates are low, and interest rates on UK government debt are currently very low.

Osborne. And I will never stop trying to take credit for that. But as a prudent Chancellor, I need to ensure we have room to run deficits safely in abnormal times.

Interviewer. Is that to enable the government to undertake fiscal stimulus to support the economy during a major recession?

Osborne. No, that would not be appropriate, as I said in 2009. But as I have also said many times, it is important to allow the automatic stabilisers to operate.

Interviewer. The automatic stabilisers operate even during mild economic downturns, because low growth reduces tax revenues for example. So does your definition of abnormal simply mean when growth would be below average?

Osborne. No, I am talking about more serious events than that, but I will leave the experts at the OBR to decide precisely what is abnormal.

Interviewer. I am sure they would welcome your guidance. But if abnormal does not include mild downturns, and you want to make it a legal requirement to run surpluses during those times as well, that will require either switching the automatic stabilisers off during these mild downturns, or running pretty large surpluses when the economy is on track so as to avoid going into deficit if a negative shock of the normal kind hits.

Osborne. As I said, I think it is important to allow the automatic stabilisers to operate.

Interviewer. Chancellor, I may be being stupid here, but why is it important to allow taxes to fall automatically in a recession, but wrong to actually cut taxes further to help bring the recession to an end quickly, particularly if interest rates are stuck at zero?

Osborne. I think the experience of 2010 shows us the limits of what governments should do. It was right to let the automatic stabilisers increase the deficit following the 2009 recession, but any action by the government to increase those deficits puts our credibility at risk.

Interviewer. Now I’m a little confused. You and your colleagues said repeatedly during the recent election that the deficit in 2010 was so large due to the profligacy of the last Labour government, and not because of the recession. Austerity was because you had to clear up the mess that Labour created. It also seems that a significant proportion of the public sees it that way too. Are you now saying that is wrong?

Osborne. Look, no one is denying that 2008 saw a global financial crisis. It is to prepare for that kind of event that we need to run surpluses, perhaps as you suggest quite large surpluses when the economy is growing normally, to get debt down quickly.

Interviewer. So we need to bring debt down rapidly so that we can afford to bail out the banks again when the next financial crisis hits. I thought you had taken the measures necessary to prevent us having to rescue the banks again.

Osborne. We have done what we can, but it is important to maintain London as the leading financial centre, which means keeping banks profitable and allowing them to pay large bonuses to attract the best international talent. We do not want to impose regulations so severe that these banks and other financial companies go elsewhere. We made these points many times before 2008.

Interviewer. Thank you, Chancellor. That has been very helpful in understanding why you believe we need to legislate for budget surpluses. One last question if I may. Can you tell me what percentage of donations to the Conservative party come from the financial sector?


  1. To get an idea of the answer to the last question, browse the guest list of the Conservative 2014 Summer fundraising event...can't think why so many Russian oligarchs were so interested in donating to the Conservative party!

    1. I think you will find that it was the other lot who gave all our money to the banks.

    2. You mean labour and the bank bail-out? What has that got to do with people connected heavily with the financial sector- bankers, oligarchs etc - lobbying and influencing the Conservative party?

  2. "Chancellor, I may be being stupid here, but why is it important to allow taxes to fall automatically in a recession, but wrong to actually cut taxes further to help bring the recession to an end quickly, particularly if interest rates are stuck at zero?"

    Osborne: May I refer you to Lucas and Stokey (1983) to answer the first part of your question. As for the second part of the question, if interest rates are zero, then it seems plausible that the OBR would deem that "abnormal" would it not?

    1. You can but I've no idea why. This question is about countercyclical fiscal policy, not about allowing automatic stabilisers.

    2. No. The question is about whether it is consistent to be in favour automatic stabilisers but to be opposed to discretionary tax cuts. If you have an old-style Cowles commission type model, these are equivalent. But there are other models which suggest that it would not be optimal to cut tax rates (much) in a recession. Lucas/Stokey (and the extension by Aiyagari et al) is one such framework.

    3. does your model involve all-knowing robot clones that can see the future?

    4. Its a long time since I read it, but isn't the monetary model in L/S flex price? Not terribly helpful in my view if you want to talk about recessions.

  3. More from my BBC retrospective.

    8 May 2015, BBC website, 'Shares and pound surge as Conservatives head for victory; Shares and pound surge on election outcome': ‘The FTSE 100 rose 2.32% to 7,046.82, with shares in banks and energy companies seeing big gains. On the currency markets, the pound was up more than two cents against the US dollar at $1.5455. The Conservatives have unexpectedly managed to secure a slender majority, to the relief of investors who had expected a long period of uncertainty.’

    Markets, nuncle.

  4. "One last question if I may. Can you tell me what percentage of donations to the Conservative party come from the financial sector?"

    What was the point of including this? It doesn't strengthen any of your arguments, it makes any Conservative supporters likely to ignore the whole article, and it makes you look like you're just using this whole argument as a way to attack the Conservatives, rather than because it's correct.

    To be clear, I entirely agree with the rest of the article. But the last sentence was pointless.

    1. The point of the article was to show how interviews with government ministers might go if interviewers did their homework. If the post was attacking anyone, it was the media.

  5. Far from pointless. It serves to highlight the extent of the political capture by the financial sector of the Conservative party, and the resultant shape of both fiscal and monetary policy...lower taxes and less regulation for 'the rich' in the financial sector, whilst at the same time more regressive taxes and huge cuts to welfare and public spending generally for those who were not directly responsible for the financial crisis and recession which caused the massive deterioration in the deficit and overall public debt.

  6. To both Simon and anonymous, My guess is that the big money from the financial sector will try to capture whomever it needs to. Add the news media to the heady mix of near unlimited resources and it would be difficult for any party to withstand the benefits on offer. That noted the Prime minister's family were/are closely involved in the City, and of course there is the deregulate, deregulate mantra of the Conservatives that make it their preferred favourite (in fact the deregulate policy is what brought Britain and the developed world down in the first place, and to varying degrees implemented by both political parties) . But if that party looks as if its not going to get in power at the next election the City will do its best to capture Labour; indeed, that prospect is at the centre of the present Labour leader contest. Or to put it another way: it's the puppet master's policy implementation we need to centre on most, not who the puppet is!

  7. If we might return briefly to Greece, it's rather amazing how little serious reporting is done using actual numbers as opposed to media pieces are largely derivatives of other largely inaccurate reports.

    The tales of Greek bureaucrats suddenly taking a leap to collect their inflated pensions is a much repeated story that to a large degree ignores a EU decree imposed on the Greek government years ago that required the ratio of replacement employees to be a fraction of those displaced by retirement or dismissal. There's the issue of the much repeated tale of exorbitant pensions paid to retirees in general, everyone retiring early.

    The reality is a little different. Of all places, the Wall Street Journal offers this. I've looked at the OECD numbers and Greece isn't generally that different. More of its workers stay at work from 55-59 than Germany. More retire, but not hugely, from 60-64, than Germany.

    Nothing compares to the United States where the same shrill sound is heard of having people work longer. Reality check, American workers work in far greater percentages at ages beyond those of their OECD counterparts, early retirement to late retirement. With the exception of a mere handful of countries in Asia, no OECD country has a significant percentage of people working past 70, the United States has 5 percent working. By that standard, it's retirement system should be a breeze. Only right wing politics and fake economics make it otherwise.

  8. Great post, and idea.

    For this one:

    "Osborne. As you know that has a great deal to do with the fall in oil prices. More generally I think we should celebrate the fact that prices have stopped rising so that real wages and living standards can at last increase."

    I might have the interviewer also note that low or negative inflation does not necessarily mean a higher living standard for most people because wages are part of inflation. So, with higher inflation, wages might have gone up as much, or more than, prices of goods and services.

    This seems obvious to an economist, but I've seen indications that perhaps a large percentage of the population does not understand this. They think that inflation must make them poorer in real terms because the things they buy go up in price. This may be a point that it's important to get out. Maybe later, I'll look for some surveys, or other systematic evidence, of how widespread this misunderstanding of inflation is.

    Of course, there is the effect that higher inflation makes it easier for an employer to cut real wages. Psychologically, it's clear that employees are less disgruntled, or even aware, when inflation gives them their wage cut, than when it's done nominally. But, I think greater likelihood of a wage cut is a whole lot better than greater likelihood of unemployment due to lowflation, especially in the U.S. with how little of a safety net is left after a generation of right-wing dominance.

    1. Plus, if recessions can be countered a lot better, due to not having lowflation, then the labor market can be a lot less slack, which would tend to push real wages higher. Again, I think for most people lowflation is bad, very bad, and very risky for them and their families, especially in the US where there is so little govenrment safety net left.

    2. The point here is that price rises are not connected to wages as implied here. Wages are not included in the usual measures of inflation (CPi/RPI-X). An alternate reading of this is that if goods inflation is negative, it's like a real wage increase provided wage inflation is less negative than goods inflation.

  9. Subserviance to the financial sector may be part of the problem. However, the trend to model the organisational and accounting accounting arrangements of government on private sector models can not have helped. Perhaps another trend that has reduced the voice of macro economists compared to management consultants and accountants. And one wonders if low interest rates or moderate inflation is the real political target for the Bank?

  10. It is time for a TV programme dedicated to economics. That would enable a much better quality of debate, and facilitate multiple views to be aired, not just the finance economists' view. (Having said that, it has been Labour's failure so far that most TV political debates have not had this quality of economic analytical content.)

    1. The most cost effective thing to do would be to give political commentators a crash course in economics (mainly macro of course!) That would also be the quickest way to get politicians to improve their economics knowledge.

  11. As well as awarding ASBOs (Anti-Social Behavior Orders), we should award OSBOs. Named after the first winner of the award, George Osborne, the award would be for the more serious offence of proposing the most destructive economic policy of the year.

    1. Ha! I love that Ralph.

      And this is a great article, Simon. Never has the need been greater to challenge the Tory pseudo-economic waffle that the public seem to have accepted as somehow "expert". Despite the official rebukes for the fierce Tory fibs from the ONS and OBR, too.

      Tell a lie enough times, and all of that


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