Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 3 November 2015

Politically impossible

An article in the Financial Times recently said of me: “He has opposed deficit reduction when the economy was weak and when it was strong.” Ah yes, this would be the same economist who has suggested the left aims to reduce the current deficit (all current spending less revenue) to zero, that pre-crisis fiscal policy in the Euro periphery should have been much more contractionary, and has championed fiscal councils as a way of eliminating deficit bias.

Should I have demanded a retraction? I didn’t: life is short, maybe it was a kind of joke, or even a misprint, and if not perhaps it said more about the writer than it did about me.

But I was reminded of it last week when I was discussing pre-crisis fiscal policy. As I noted in one of those earlier posts, I am repeatedly told that pre-crisis fiscal policy in Spain could not have been tighter. It was ‘politically impossible’, given the budget surpluses at the time. I heard a similar point made about Ireland last week. (While a big part of Ireland’s post-crisis fiscal problems were down to socialising its financial sector’s debts, a significant part was also due to relying too much before the crisis from receipts based on an unsustainable housing boom, as was the case in Spain.)

It occurred to me (and yes, I know it is obvious) that such complaints are just the mirror image of those who say we have to have austerity because running up higher government deficits is just ‘politically impossible’. The argument that governments cannot run very large surpluses because voters would demand that they be spent relies on the same logic which says that governments need to tighten their belts when the private sector is doing the same. In other words you cannot complain about austerity on the one hand and then say that it was politically impossible to run larger surpluses in a boom.

Equally it makes no sense obsessing about the need to reduce deficits in a recession and then turning a blind eye when surpluses are spent in a boom. Unfortunately just that kind of inconsistent thinking became hard-wired in the form of the Stability and Growth Pact (SGP), with its focus on a limit of 3% for deficits. Those who say that all that was wrong with the SGP is that it was not enforced have learnt nothing. This is why we need to move influence away from the Commission and towards independent national fiscal councils.               

9 comments:

  1. Did you by chance have the pleasure of reading andrew sentence's article in Saturday's telegraph concerning the "austerity myth"? Central to his argument was to measure/ judge austerity by looking at the change in gdp in cash terms or real gdp, thus showing the reader that there had in fact been little or no austerity in the uk. Is this really an accurate way of gauging austerity? Isn't the underlying primary structural balance one correct way? As a former Mpc member, surely he knows this yet still he writes the article?
    Your thoughts?

    ReplyDelete
    Replies
    1. For what it's worth, here's my thoughts.
      Sentence craves the attention of being a high profile economist. And he gets attention by supplying to the right wing media the type of analysis they demand. It's an ego thing and it's a supply and demand thing.

      Delete
  2. "Ah yes, this would be the same economist who has suggested the left aims to reduce the current deficit (all current spending less revenue) to zero, that pre-crisis fiscal policy in the Euro periphery should have been much more contractionary, and has championed fiscal councils as a way of eliminating deficit bias."
    Indeed. Not so different.
    The current account idea makes no sense, for reasons I have explained before.
    Your policies would have resulted in a larger crisis.
    You would probably get an earlier crisis, especially if it was at the same time as Germany etc were persuing contractionary policies in the early 2000s.
    Fiscal councils are undemocratic but (probably) better than the current mad setup in the eurozone. A democratically elected central government or breakup are better ideas, IMV.

    ReplyDelete
    Replies
    1. "The current account idea makes no sense, for reasons I have explained before.
      Your policies would have resulted in a larger crisis."
      For those of us who missed it, any chance of explaining it again so we can see how wrong SWLs ideas are?

      Delete
  3. In the U.S. what happened was that Clinton ran budget surpluses thanks in part to the tech stock bubble of the late 1990s. Bush and the Republicans turned around and squandered it with tax cuts for the rich and two wars of choice in Iraq and Afghanistan. This left less room to maneuver when the financial crisis hit without boosting the productivity or supply side of the economy very much.

    After reading the Financial Times piece, I noticed the first comment at the website was pretty spot on:

    "Miffy 4 hours ago

    Wren-Lewis has already called Giles on his assertion that "has opposed deficit reduction when the economy was weak and when it was strong" here: http://mainlymacro.blogspot.co.uk/2015/11/politically-impossible.html?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed:+MainlyMacro+(mainly+macro)

    I'm a fairly regular reader of Wren-Lewis's blog, but could have missed this. Citation please, Mr Giles?

    Or possibly Chris is still miffed at last year's crossing of swords with Picketty over his data sources in Capital, and coming off somewhat worse, and fancies having a crack at an older member of the herd instead. "

    ReplyDelete
  4. Of course the piece by Chris Giles is filled with similarly inaccurate descriptions. He remembers of Piketty that: "His book was acclaimed and criticised in equal measure for its theory and data work." He does not remember his unfortunate and backfired attempt at a takedown of Piketty.

    ReplyDelete
    Replies
    1. Indeed. Mr Giles makes things up as he goes along and some readers of the FT love him for telling porkies.

      I really did enjoy reading Pikketty's counterblast. The excerpt below in particular.

      "[FT's argument]would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal that Sweden, and in fact a lot more equal than what Sweden as ever been (including in the 1980s). This does not look particularly plausible."

      Absolutely gold.

      Delete
  5. "This is why we need to move influence away from the Commission and towards independent national fiscal councils."

    That isn't quite as appalling as the anti-democratic line you usually take on this kind of issue, but only just. The reason for that is the lack of adequate democratic oversight of the Commission, and so handing control over to another undemocratic body is not quite as terrible as it would be in, say, the UK. On the importance of democracy, I find myself on the side of John McDonnell, and I predict your chances of persuading him otherwise is slight. The hard left have always been very much in favour of more democracy (although usually for instrumental reasons).

    As for the FT quote, you wouldn't get a retraction because it is true (unless you think the UK growing at 2.6% per annum is not 'strong', which I suppose you might.)

    I do know that there are good reasons not to tighten fiscal policy when rates are at their floor (although they aren't really now as we know the bottom is below zero).

    Chris Giles knows that too.

    ReplyDelete
    Replies
    1. 1) "The operational independence of the Monetary Policy Committee is sacrosanct" John McDonnell 18th October 2015

      2) Your attempt to defend a deliberately misleading statement by CG says a lot.

      Delete

Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time.