Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 13 June 2015

Signing letters

The Guardian today publishes a letter from 79 economists, including yours truly, about George Osborne’s plan to outlaw government budget deficits in normal times. I’ve written two recent posts on this, so I will not go through the issues again here, but I thought I’d say a couple of things about the business of signing letters and whether they are worth the effort.

The first is whether the reader or potential signatory should worry about the details of the text of multi-signatory letters. You might think the letter could be better written, and someone asked to sign it might think they could have put it much better themselves. The person asked to sign might agree strongly with the overall message of the letter, but could have some misgivings about particular sentences. The problem of course is that, because the letter is signed by X number of people, where X is large, having all X making their own attempts at redrafting becomes a nightmare in coordination. So these letters should never be read for the details of the text, but instead for their overall message.

The second is whether there is any point in these multi-signatory letters from economists. Alan Manning makes a number of good points here. When these letters involve issues where there is genuine division among economists, then a letter followed by a counter letter just encourages further jokes about economists never agreeing. (But because there is some news value in getting in first, letters on this type of issue keep coming.) The letter format is also too short for making proper arguments: other forms of media are better in that respect.

That argument does not I believe apply to this particular letter, or to the other which I recently signed on the Greece-Troika negotiations. In both cases there is probably a clear majority view among economists. Multi-signatory letters then have an important information value to both readers and political commentators.

This brings us - inevitably - to perhaps the most famous example in the UK of such a letter, from 364 economists protesting at Margaret Thatcher's 1981 deflationary budget. It is also a good example of not worrying too much about the text, as I’m sure many/most who signed that letter would have found at least one sentence objectionable.

If you have previously heard about this letter it may well have been accompanied by a comment on how the letter is now ‘generally regarded’ as reflecting badly on economists. The reasons for this view are in themselves interesting. Ask anyone on the political right, and they will tell you this is because Margaret Thatcher was correct and the economists were wrong. But you can equally well make the opposite claim. The economic strategy at the time was monetary targeting, and that policy in itself failed dismally: monetary targets were hopelessly missed and the policy framework was abandoned shortly after the letter was written. In terms of overall outcomes, it took two decades before UK unemployment returned to pre-1981 levels.

So why is it ‘generally regarded’ as reflecting badly on economists? Essentially because many supporters of Conservative governments - some economists but also many politicos - have gone out of their way to say so. (I go into more detail in this post.) As we have witnessed recently, the political right tends to be much better than the left at rewriting history for its own purposes. But that in itself is a form of flattery. Why bother to spend time and effort rubbishing a letter from 364 economists unless that letter, and any similar letters that might follow it, had some impact? So maybe letters from economists on issues on which most economists agree are important and can have some small influence.  


  1. Why would you want a deficit in normal times? Keynes didn't as Roger Farmer shows and as I have always understood it.

    Are we arguing about what normal times are?

    1. In the private sector would you restrict a firm from borrowing to invest in good times?

  2. Even though I entirely agree that this kind of policy in economically nonsensical, I would like to quote your response to Sen's excellent article: "This neglects one small issue: democracy. The Greek people have elected a government with a mandate."

    Applying that same idea here is it not right that the government pursues such a policy as that is the only kind on policy they have a mandate to implement.

  3. I'm not sure about the logic of your last point. For the right, It's worthwhile rubbishing that letter whether or not it had any impact.

  4. The argument today seems to some extent to be a continuation of the argument behind that 1981 letter.

    I think that infamous 1981 letter (and today's argument) might be a classic case of different agendas. The people signing the letter perhaps saw output and employment as being the measure of "success"; the people who rubbished the letter perhaps saw terms of trade as being the measure of "success". The same debate behind that 1981 letter seems unresolved today and worse it doesn't even seem to be clearly framed yet (sorry if it is only me that finds this a muddle).
    Thatcher's policies may have de-industrialized the UK but they made the UK a much better repository for financial savings. That enticed capital flows into the UK and that gave us terms of trade that allowed us to afford more of global output. So we may have made less ourselves, but we were the ones who could afford to buy what other countries produced because the money we paid was just sent back over here to our asset markets thanks to Thatcher's capital friendly policies.
    Thatcherism did provide the UK with a free lunch via terms of trade. I don't think we have a hope as progressives unless we acknowledge and confront that whole minefield head on. We need to unpick and expose it all and point out how it leads to global as well as local inequality and poverty.

    I tried to get at this with

    1. Stone, I agree that 'terms of trade' is an issue that requires greater acknowledgement amongst politicians and media in general (the E.U.'s attempt to push through the European to USA trade agreement is a case in point: TTIP -apologies if I've got the acronym wrong). I'm sure you are aware of the long-term consequences of Mrs T's financial revolution and the financial crisis of 2008. Lastly, your comment about from who's perspective 'success' is viewed, may. or may no,t have a some worth to it, but looking at who gains from each perspective is most enlightening, unemployment, industrial production and output (i.e. employees and industrialists) as opposed to those who make money from financial services. Certainly, the Financial Services Sector (and in particular those at the top of the feeding chain) have, almost, done infinitely better than those who produce industrial products. Finally, I will take time to read the document you so kindly provided a link to.
      Regards, ShaunT

    2. Shaun T, I totally agree with you about who were the main losers and winners from Thatcher.

      Just to clarify about what I was meaning by "terms of trade" :- I wasn't thinking of trade deals such as TTIP but rather as in the meaning in

      "Terms of trade (TOT) refers to the relative price of exports in terms of imports[1] and is defined as the ratio of export prices to import prices.[2] It can be interpreted as the amount of import goods an economy can purchase per unit of export goods."

      It is really astonishing how much those "terms of trade" swing around. The commodity price surges in the 1970s could be seen as us in the developed world not being able to out-bid the rest of the world in buying all of global output. The reversal of that in the 1980s was because neoliberal policies gave developed world currencies the strength to buy all global output once again.

    3. «Thatcher's policies may have de-industrialized the UK but they made the UK a much better repository for financial savings. That enticed capital flows into the UK»

      That means that the UK borrowed capital from the rest of the world.

      Perhaps managing that borrowed capital generated significant income for some people, but only in London and the South East, but as 2008 shows, over the cycle the financial sector lost more than it earned, and those losses were passed on to the average unemployed or disabled loser and everybody else.

      «and that gave us terms of trade that allowed us to afford more of global output.
      So we may have made less ourselves,»

      Translation: by pushing up the pound by favouring incoming capital flow, Thatcherite policies undermined UK industries and UK exports and boosted foreign industries and UK imports.

      The argument is that it is a great thing that the UK policy for 30 years has been to export jobs (especially jobs in unionized industries) to other countries, because this meant cheraper imports and local wages for UK rentiers.

      Curiously in the past 30 years many countries around the world have been trying to do their utmost to export capital (the "savings glut", more properly called "vendor financing") and thus import jobs from other countries, and it has been mostly the anglo-american culture countries that have tried hard to do the opposite, in order to destroy the unions and please rentiers.

      «but we were the ones who could afford to buy what other countries produced because the money we paid was just sent back over here to our asset markets thanks to Thatcher's capital friendly policies.»

      That "just sent back" seems to be a big knowing euphemism for "lent back to us".

      Because the Thatcherite and Blairite economy has been fueled by an immense surge in borrowing in the private sector. Those debts were not free money as the euphemism "just sent back" seems to suggest. They will have to be repaid.

      «Thatcherism did provide the UK with a free lunch via terms of trade.»

      That is ridiculous: the UK does not have only rentiers and stockjobbers, and a stronger pound and weaker employment have considerably hurt the living standards outside Londong and the South East, even if import prices have been favourable.

      The argument that a stronger pound gained by favouring capital inflows and job outflows has been good for the UK is really founded on the idea typically argued by Boris Johnson that the future for the UK is as a bigger version of Singapore or Hong Kong or Dubai, an international entrepot and money laundering center selliing "confidental wealth" custody and management services. The problem with that is it does not scale beyond London, as demonstrated by the fact that all other international money laundering centers are city-states. Even the whole of Switzerland has a population equal to that of just London.

    4. «The commodity price surges in the 1970s could be seen as us in the developed world not being able to out-bid the rest of the world in buying all of global output.»

      Uhmmm, my guess is that they were the combination of two main things. One was indeed the extra demand from Japan and newly industrializing nations, just as presently there is upward price pressure from China.

      But the other main factor was the great dollar inflation which caused the end of dollar convertibility into gold. In particular the arab rulers appear to have been quite traditional in thinking and seem to have looked at oil prices in terms of gold. The great oil price trebling happened after the dollar fell to one third of its previous value in gold. The obvious worry of suppliers of strategic commodities like oil is that the USA will pay them in freshly printed pieces of paper.

      An interesting chart by none other than "legendary" J Wanniski shows:

      and on on the ratio, which oscilates around 15 barrels per ounce:

    5. Blissex, I totally agree with all that you say. I also think Thatcher's policies were a nightmare. I just think we need to spell out how they "worked". It is no good just saying that they didn't work when many (but as you say far from all) people in the UK benefited from them. They then accuse us of just putting our heads in the sand and pretending that neoliberal polices don't work.

  5. The letter writes: "Economies rely on the principle of sectoral balancing, which states that sectors of the economy borrow and lend from and to each other, and their surpluses and debts must arithmetically balance out in monetary terms, because every credit has a corresponding debit. In other words, if one sector of the economy lends to another, it must be in debt by the same amount as the borrower is in credit. The economy is always in balance as a result, if just not at the right place. The government’s budget position is not independent of the rest of the economy, and if it chooses to try to inflexibly run surpluses, and therefore no longer borrow, the knock-on effect to the rest of the economy will be significant. Households, consumers and businesses may have to borrow more overall, and the risk of a personal debt crisis to rival 2008 could be very real indeed."

    This is MMT.

    1. To be honest, its just an identity with no behavioural content at all. I think it can be useful because it reminds people about how macroeconomic sectors interact - running public sector surpluses has consequences. The normal way to make the same point is to trace through the macro consequences of how a surplus is achieved, but sometimes thinking about these balances can get you where you want to go quickly or more intuitively.

    2. In essence, a pointless letter that reflects very badly on the signatories when they say so boldly that Osborne's policy "has no basis in economics".
      No wonder they are ignored when they appear so blatantly political. What a great result.

    3. You have not actually offered any economic justification for the policy, while there are plenty of reasons why it could be stupid. I would also note that it was rubbished in the FT and Economist. In fact I have not seen anyone defending it using economics, perhaps because there is no basis on which to do so!

    4. When "economics" has been so crafted by academic economists as to be little but a certain type of socialist politics anything any sceptical anti-socialist non-professional says will be dismissed as having "no basis in economics". At least this seems to be the case in the UK where supply-side economists seem very thin on the ground.

      Anyway, is it not prudent to run surpluses in the good times so in the bad times deficits can be created, but keeping the overall gross debt level steady? Maybe prudence has no role in "economics" but it should have when it comes to running a government.

  6. One thing about the 1981 letter is that it was written by real Keynesians (I am not making a value judgement about whether this is good or bad, only that they were people likely to be educated by the likes of Kaldor, Meade and Robinson). They were generally unconvinced (unlike Thatcher) with Milton Friedman and unimpressed by Lucas and Sargent. Given that the latter two emerged as the giants of the field, still even now after 2008, and their methodology dominates in UK universities as in many other places, I do not think such universal damnation of government practice would happen now.

    1. This methodology did not come to dominate UK university teaching by accident or entirely or perhaps even partially on its merits. You can use powerful political science theory, such as hegemony theory, to explain how it happened:

      People wanted to publish in the journals of, and influence people in, the world's most powerful country. This necessitates that you work according to the rules they set down. In such a way we get homogenisation of knowledge in a globalised system that is essentially determined by the hegemonic power.

    2. I made my own comment on this idea of Osborne's on Wednesday 10th, albeit an unkind one. Daft beyond description.

    3. I made my own comment on this idea of Osborne's on Wednesday 10th, albeit an unkind one. Daft beyond description.

    4. Original anon - I think you are simply wrong on this. The going for surplus policy not only offends old and new Keynesians alike because it ignores the ZLB problem, but it would also offend more optimal taxation types for reasons set out in the recent IMF paper I looked at. I suspect (I do not know) the number of people signing this letter was limited partly because of a short deadline and maybe worries about the wording. Its hard to think of any independently minded macroeconomist who would support this policy.

    5. From the Guardian and thence from a report issued by Cambridge University (I've not had sight of the actual report so caveats abound)

      'Growth what growth? Thatcherism fails to produce the goods'

      Katie Allen

      'Cambridge University analysis casts doubt on free market economics showing GDP and productivity grew faster before 1979.'

      'Margaret Thatcher
      New economic analysis shows growth and productivity was faster before Margaret Thatcher implemented free market policies'.
      Wednesday 10 June 2015 00.01 BST Last modified on Wednesday 10 June 2015 00.03 BST.
      '“This is an appropriate time to question whether the UK is following the most appropriate form of capitalism,” write Coutts and Gudgin.'

      “A wider range of varieties of capitalism are available to policymakers than is commonly assumed.”
      ShaunT. thanks to daughter for reference

  7. In my trawl of the BBC website, although there was the unflattering comments on the 364 economists by Stephanie Flanders - although not by Nick Robinson when he refers to that letter, incidentally - there is nothing on the 1976 IMF 'crisis', that other rightist canard.

    Whether J'accuse-style letters work or not in the general debate, they at least show how far a certain idea in letter form will travel in different forms and platforms of the media.

    And as for the arrogant Howe, Paul Volcker has a story of heroism just as jaunty as Howe does, but Volcker stuck to the textbooks in dealing with exactly the same problem as Howe.

    And that's Howe for now.

  8. If the economy is producing at full tilt, then I think that taxing people rather than borrowing should be sensible unless there is a project of such vast scale that it cannot be paid for by current revenues.

  9. Taking a step back, perhaps the whole ethos of economics is what is best for the common good?
    The contrarian position is, perhaps, stated by another infamous Chancellor :
    "The basic feature of our economic theory is that we have no theory at all."
    and very popular it was, for a while.
    If historians repeat the mistakes of the past, perhaps they don't see them as mistakes?

  10. I was surprised that you signed the letter, given that in the past you've argued that fiscal stimulus should be used if (and I believe you said only if) monetary policy is otherwise constrained (e.g. the zero lower bound). Do you no longer believe this?

    There are political economy reasons why governments might be tempted to "cheat" and run budget deficits in good times, and a commitment device seems like a sensible way to deal with this problem. A nuanced critique of this policy would have focused on the appropriate definition of normal (e.g. reference to the ZLB) and the appropriate definition of the deficit (overall vs. current). Instead we get nonsense about government surpluses *causing* private sector debt crises. Tell me where we can see that in the literature? Any evidence at all?

    And I disagree: the precise language matters. Your letter was forwarded to me by a US-based friend who doesn't read this blog as a matter of some derision about the state of UK academe. You and other excellent economists on this list may have good reasons to oppose this legislation, but the reasons set out in this letter make little or no sense - they are MMT. It makes as look like you're a bunch of disgruntled lefties upset by the result of the election rather than serious economists bringing your expertise to bear on an important policy question.

    1. You put "causing" in quotes because the letter does not say that. It talks about the knock on effects of running a surplus. This is just standard macro. I wouldn't have put it this way, but there is nothing incorrect in the way it is put, and sometimes talking about financial balances can be helpful for non-economists - I have used that device myself, and Martin Wolf has many times. Perhaps you and your friend need to be a bit more careful in distinguishing form and substance.

      As to 'its all in the details', I'm afraid that will not wash. Osborne clearly means actual not current deficit, and abnormal means exceptional. I have written a great deal on fiscal rules, both in this blog and in academic papers. I have praised the form of Osborne's original rule (if not the numbers and time of implementation), and now he seems to be going backwards. Why you think the letter conflicts with my views on the ZLB I do not know.

    2. The key quote:

      "The government’s budget position is not independent of the rest of the economy, and if it chooses to try to inflexibly run surpluses ... Households, consumers and businesses may have to borrow more overall, and the risk of a personal debt crisis to rival 2008 could be very real indeed."

      This is not simply a question of distinguishing “form and substance”. The substance of the letter is an argument that a side effect of the Government choosing to run surpluses could be to increase the risk of a financial crisis. I called this nonsense as I know of no academic theory or empirical study which would support this. Even if there is a working paper somewhere, it certainly isn't "standard macro".

      As for the ZLB, the final paragraph of the letter states that the legislation will “tie the government’s hands” in responding to “constantly evolving economic circumstances”. I inferred from this that it meant it restricted the ability of the government to conduct countercyclical fiscal policy. Am I wrong to do so? (If so, what else could it mean?). If it did mean countercyclical fiscal policy, you stated in the final paragraph here: ( that:

      "Apart from a few academic caveats, I’m a fully paid up member of the ‘monetary policy is all you need’ club outside of a potential ZLB or monetary union. "

      So unless the UK joins the Euro, this suggests that you don't think that active fiscal policy is appropriate if interest rates are away from the zero lower bound. As such, you shouldn't have any problem with running (or indeed legislating for) a surplus on demand management grounds when interest rates are away from zero. Am I wrong, or have you changed your mind?

    3. The mechanisms by which this could happen are not difficult to see. For example, fiscal contraction will keep real interest rates very low for longer. This will keep house prices high or rising (as they are in the UK), encouraging some of the problems we saw in a number of countries before the financial crisis. (Sometimes called a housing bubble in the press.) Its not the main risk I see with aiming for surpluses, but it is hardly nonsense either.

      UK interest rates are currently at 0.5%. I've no idea what the MPC thinks the ZLB is right now, but I doubt it is very far from 0.5%. So my main worry with going for surpluses along the lines this government plans is precisely the concern that we again hit the ZLB. So I thought the letter covered my main concern.

    4. I think its more the other way round. If there is a credit binge it results in a surge in tax revenue. See Australia under the Howard government.

    5. If your main concern with this policy is that we again hit the ZLB, then it would make sense for you and the others who agree on this list to make that point, and to argue that when we hit the ZLB then conditions should be described as non normal (and the rules for surpluses suspended).

      Osborne clearly has decided that this policy should apply in normal times, but hasn't got a definition of normal in mind. This is precisely where outside commentary from the academic community is most useful. This concern *can* be addressed by changing the details of the policy, in contrast to your first reply to me.

      I am sorry that you aren't resiling from the debt crisis conjecture. I would just point out that it's stuff like this polluting the public debate which lends credence to nonsense from the right (e.g. to push for higher interest rates in a depressed economy to ward off supposed asset price bubbles).

    6. Starting with your last point, I could say the opposite - the letter suggests why it is tight fiscal policy that is requiring these low rates in the first place. The implication is that if you are worried about the impact of low rates, relax fiscal policy.

      There is no chance Osborne would include interest rates at the ZLB as part of his definition of abnormal, for obvious reasons. But to send the message that the rule is OK if the details are right is wrong - the rule makes no sense from any economics perspective that I can see.

      This is why I decided to sign the letter. The most important sentence in the letter for me is 'They have no basis in economics'. This letter, together with unfavourable editorials in the FT and Economist, has managed to get the message through to some of the political commentariat that this is not a question where there are two sides to the economic debate. I judged that was much more important than the precise text.

      I guess we will have to disagree on that point. But thank you for the discussion - it is good to go through these issues.

    7. Yes, I think we will have to disagree. Thank you for the discussion, and for engaging with comments from below the line.

  11. I think it is a mistake to enshrine a "no deficit in 'normal' times" (even if we were sure "normal" meant "when NGDP is not below it's target trend level") in that it short circuits standard public finance criteria: making expenditures whose NPV is greater than zero when discounted by the borrowing rate. (Something similar goes on with taxes. Cutting/raising taxes allows/impedes the private sector from making expenditures with NPV greater than zero.)

    A movement from recession back to "normal," when it occurs, will mean that deficits should shrink in standard Keynesian economics, but exactly when deficits should become surpluses depends on the value of the expenditures to be financed, which income or consumption will be taxed to finance them and the borrowing rate. The "no deficit" rule seems to be a sub-optimal rule of thumb.

  12. Osborne's sounds like he had never heard of the classic "dead hand" fallacy. Sure, it might make sense if we ever get out of the current depression to have a period of budget surpluses, though I personally cannot imagine why. On the other hand, the living are the ones who should make their own choices. Given the duration of the current depression so far and the powerful fight by such as Osborne to prevent full recovery, I may not be alive when the serious surplus debate starts.

    I recently redid my will and my lawyer warned me about the dead hand fallacy. His parents had, in their lifetime, owned and lived on a lovely piece of rural property. They had wanted this property to remain in the family forever, so they built a concrete "mausoleum", more of a block house, in which they had their ashes interred and sealed. He and his sister, the heirs, decided to sell, and as a condition for closing had to remove their parents' remains. So, as part of the legal process, they rented a jack hammer, put on heavy work clothes and safety goggles and hammered their way through a fair bit of concrete, extracted their parents' ashes, cleaned up the site a bit, and, some time later, sold the property.

    Now I gather it was a charming property, and even my lawyer admitted that he and his sister had had many good times there growing up, but now their parents were dead. Why should they run budget surpluses? Why should they be bound by some antiquated standard regarding "normal times"?

    Needless to say, this account led me to simplify my will somewhat. After all, the idea is that the terms will become effective AFTER I am dead. It is not as if the living are going to come back and haunt me.


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