Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 6 November 2015

Bernanke on austerity and the fiscal charter

When I and others say that the intellectual debate on the wisdom of embarking on fiscal austerity as we recovered from the Great Depression is over, some think I am indulging in exaggerated bluster. I'm not. Central bankers are notorious for their conservatism and their aversion to budget deficits, so you would expect the man who until recently ran probably the most important central bank in the world to be at best equivocal on this subject.

Here is an extract from an interview with Ben Bernanke by George Eaton in the New Statesman:
Though a depression was averted in 2008, the recovery in the US and the UK has been slow. Bernanke partly blames the imposition of fiscal austerity (spending cuts and tax rises), which limited the effectiveness of monetary stimulus. “All the major industrial countries – US, UK, eurozone – ran too quickly to budget-cutting, given the severity of the recession and the level of unemployment.”

Partly thanks to Bernanke’s leadership (and knowledge), the Great Recession was not as bad as the Great Depression of the 1930s. Monetary policy reacted much more quickly, and financial institutions were (nearly all) bailed out. In 2009 we also enacted fiscal stimulus, but in 2010 we reverted to the policies of the early 1930s with fiscal austerity. That mistake was partly the result of panic following events in the Eurozone (see the IMF analysis discussed here), but it also reflected political opportunism on the right.

In the UK that opportunism continues with the new fiscal charter. Here is more from the Bernanke interview:
He criticises George Osborne’s new budget surplus law, which prohibits government borrowing when the economy is growing by more than 1 per cent. “I would be very cautious about putting in rules that would prevent a timely fiscal response to a slowing economy, particularly in a world of very low interest rates.” He adds that “a period of excess labour supply and low interest rates is not only a good time to invest, from the perspective of the recovery, it also makes sense from a long-term productivity perspective”.

Bernanke is again reflecting the consensus among economists: I have not found a single one who supports this charter. Alas winning the intellectual argument does not mean immediately winning the political argument. But even though I am scathing about what I call mediamacro, surely our political commentariat must notice at some stage that the rationale George Osborne gives for cutting tax credits and yet more departmental spending is built on sand.


  1. I noticed that the BBC on Radio 4 this morning (just before 8 am) was at it again over their push to have interest rates hiked because of their putatively unnatural low. Another City economist and Justin Somebody of the BBC in agreement.

    I'm starting to think that Osborne doesn't exist, and that an Osborne-shaped hole was created by the media in 2008-10 for someone, anyone of his persuasion to step into it.

  2. whereas there was and remains support for Osborne's austerity measures among the commentariat I have seen far less support for the fiscal charter in the main stream media.

    I think there are two reasons: the 'common sense' justification of austerity doesn't seem to work for the charter, perhaps because its more complex; and the shine is coming off the chancellor with the tax credit disaster with particularly strong criticism of the chancellor in usually supportive publications such as the Times, the Telegraph and even the spectator where Fraser Nelson picked apart the serious flaws in Osborne's approach.

  3. "When all individual transactions are summed across all unconventional LOLR facilities, the Fed spent a total of $29,616.4 billion dollars! Note this includes direct lending plus asset purchases. Table 16 and Figure 21 depict the cumulative amounts for all facilities; any amount outstanding as of November 10, 2011 is in parentheses below the total in Table 16. Three facilities—CBLS, PDCF, and TAF—would overshadow all other unconventional LOLR programs, and make up 71.1 percent ($22,826.8 billion) of all assistance."

    The above is the best I have read on the first half of the 2008 GFC. . It comes from one of the three prime institutions where it is worth studying macro-economics in its modern form, (the other two are in Australia and Switzerland). A form that has had all its boxes ticked by the events of the last eight years.

    Alas, you won't find an explanation anywhere near as clear or accurate as the above, from a UK academic institution, on the UK contribution to the GFC of 2008. Even though the UK LOLR situation, was much bigger in percent of GDP terms than the US or the Eurozone.


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