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.