Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 19 January 2016

The political right’s dangerous support for economic quackery

You may remember Niall Ferguson’s disastrous attempt to claim that George Osborne’s imagined success proved Keynesians and Keynes were wrong. That kind of nonsense makes it into a serious paper like the Financial Times because it is written by a famous history professor, or maybe on other occasions by a senior policy maker. But for those who only read this serious press, it is in fact one example of many. There is a little cottage industry out there of so called journalists and think tanks who peddle economic quackery to support right wing policies.

Take, for example, this recent piece by James Bartholomew in the Spectator. Deficit spending by the government never works, he claims. Presumably the opposite also holds, which is that fiscal consolidation (aka austerity) never hurt anyone. Mainstream economics has it all wrong. One of the skills writers like this have is to make very little evidence seem like a lot. Mr. Bartholomew has two bits of evidence.

  1. Papers by Alesina et al. He is quite right they briefly gained a lot of influence in Europe in particular, among policy makers who wanted to cut deficits and liked to argue this would not reduce output. What Bartholomew does not tell you is that following this policy of cutting deficits, we had a second Eurozone recession. Nor does he tell you that subsequent analysis by the IMF and others explained why these authors got the results they did, because of countervailing influences that did not apply in the Eurozone in the years following 2010. Nor does he mention the huge number of past and recent studies that confirm fiscal policy does what Keynesians say it does. The only other authority he quotes is Tim Congdon.

  2. Lots of historical examples where fiscal action did not, supposedly, have the expected impact. The thing is, anyone can write this kind of stuff about anything in macroeconomics, because in the economy there are lots of things going on. I’m sure I could come up with an equally impressive list to show you that monetary policy has no effect. Just look at 2009 and 2010: interest rates on the floor and the economy still crashed. That is why economists do econometric studies, the overwhelming (like 95%) majority of which show fiscal policy drives the economy in the expected direction.

To his credit Bartholomew does admit that logically Keynesian policies should work. But there is an awful lot he does not tell you. He does not tell you that the reason it should work is that additional private sector demand does increase output (except perhaps in booms), and that this, rather than fiscal stimulus, was the key insight that Keynes had. It is the insight that every central bank uses to guide monetary policy, using Keynesian models. Models that all say that without countervailing factors fiscal stimulus increases output and fiscal consolidation reduces it. There is no way that his article is a measured piece of journalism. It is designed to discredit the economics that is taught to every student the world over.

There is plenty of this on the left too: people who want to tell you mainstream economics is all wrong. Yet until very recently at least, the influence of this group on politicians on the mainstream left had been minimal, and this group has a far smaller public presence than their equivalent on the right. On the right they are ubiquitous.

Policy makers on the right might tell you that of course they are not influenced by this group, but instead consult serious economic analysis that you can find in mainstream universities. But how can we tell if they are telling the truth. When campaigning senior politicians on the right seem quite happy to talk about the government maxing out its credit card, the classic first year undergraduate ‘schoolboy’ error of treating the government like a household. In the UK, while the fiscal strategy of the Labour government was written up in Treasury documents that referenced the academic literature, there is nothing equivalent from the current government. Even the most technical of Osborne’s speeches just seemed horribly out of date in terms of its macroeconomics.

This is dangerous for two reasons. The first is that it can lead to major macroeconomic policy errors: in the UK think money supply targets, entering the ERM at an overvalued rate, and 2010 fiscal consolidation, in the Eurozone think of the Stability and Growth Pact and the 2011-13 recession. The second is that it encourages a lazy anti-science attitude, all too evident in climate change denial. If the political right in the UK and Europe want to see where this could lead, look across the Atlantic. With the left in disarray and flirting with non-mainstream economics, the right has an excellent opportunity (when a new Chancellor takes over in the UK, for example) to re-engage with mainstream economics, and cast off the quackery of the Ferguson and Bartholomew ilk.




29 comments:

  1. You are far too kind to these clowns.

    The Spectator should not be treated as a serious newspaper.

    Beyond economic quackery we get in Bartholomew's piece what I can only presume to be latent homophobia:

    "Of course, John Maynard Keynes said lots of things about economics in between his many and varied sexual encounters."

    WTF?

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    1. If you read the post carefully (Bartholomew is neither famous or a policy maker) you will see how I place the Spectator.

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  2. Once again we see a lot of dangerous typecasting. Right through it.

    But I will just pick up on one. Niall Ferguson may be famous, but his use of counterfactuals and a tendency towards sweeping generalisation makes him very controversial within his own profession. He is famous as a public intellectual, much less authoritative as an academic.

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    1. Everyone should be very wary of Niall Ferguson. Google 'niall ferguson inflation' and you can find articles showing up a certain lack of rigour or ability to admit error. This would be embarrassing for a random blogger, but should never happen to a Harvard professor.

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  3. I have also noticed that much of this so called evidence is hidden from the public by pay walls & academic super injunctions,ie it is so weak they fear placing it were a school boy would show them up,obviously to protect there reputation for as long as possible.

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    1. The Alesina papers, particularly the latest one, are state of the art pieces of econometric work. But isolating the impact of fiscal policy is very tricky, so once and a while a paper is bound to come up with outlier results.

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    2. As I remember it, the trouble with the famous [infamous?] Alesina paper, the one that was widely cited as a justification for austerity is 2010ff., was not the econometric techniques. It was rather not taking the trouble to look at the individual episodes thrown-up by his measure as being fiscal tightening, and seeing whether their contexts made sense as the bases for a general proposition that cutting government spending would be expansionary. Even before the IMF study, other economists had discussed some of the episodes and pointed out that the circumstances in which they were introduced meant that they were inappropriate to serve as examples of expansionary austerity as a general rule.
      Almar

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  4. Conservatives will, as a general thing, attempt to pass moral scolding off as objective economic analysis. We therefore hear iddntical arguments in regard to fiscal policy as to the poor; "they make bad decisions/ don't live within their means/ god is angry with them", etc. Their biases in terms of proper and improper personal behaviors are simply and superficially applied to government.

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  5. On that subject, it's a shame Labour are listing among their official advisors one Stiglitz, another eNobeled economist who clearly doesn't understand money creation :-(

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    1. You are using a very strange method of judging economists.

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  6. SW-L;
    "There is a little cottage industry out there of so called journalists and think tanks who peddle economic quackery to support right wing policies."

    I'm afraid this is not quite correct. It should read;
    "There is a little cottage industry out there of so called journalists and think tanks who peddle economic quackery to support [right wing] the policies paid for."

    There. Fixed it. It's the major reason the mainstream media journalists, politicians and many academic writers are held in such low esteem; their conscience is priced so low.

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  7. 1) If government spending, paid for by debt, increases demand (which in a very obvious way it does) is that an argument for deferring the public spend on projects that wash their economic face until a downturn, or an argument for spending money on things that lack an economic rationale during downturns?

    2) If everything on which borrowed money is spent is ex hypothesi "output" does that mean that if Greek civil servants look out of the window, financed by borrowed German money, this "output" should be reckoned as (at least) the input cost? Do we know that Japan's concrete-lined rivers and non-functioning concrete tetrapods must be delivering utility, precisely because they are so expensive?

    3) If government spending during downturns reliably bails out all private enterprise, and in particular the building industry, do we know that having them bake that assumption into their spending and investment decisions isn't a great negative?

    4) If government spending during downturns creates structures, organisations and labour arrangements which can be remarkably resistant to reform, are we sure that the problems this causes during (and for) an upturn aren't greater than any possible benefit?

    5) Given that debt has to be repaid with interest are we certain that debt-fuelled deficit spending doesn't needlessly distort economic development during upturns, and serve to prevent the financing and development of genuinely productive enterprises?

    Just curious. I'm on the political right, so these are the considerations that follow from my lack of understanding.

    Craig Ross

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    1. If you think all public spending is naturally bad (in the way you describe) then of course you want to reduce it. Just not in a recession. Of course all public spending is not bad, as Cameron is finding out (flood defences, language lessons ....)

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    2. I see. So if we agreed that some particular piece of spending was bad then you'd argue that it should take place during a downturn, although you wouldn't countenance it during an upturn?

      You say that "...the fiscal strategy of the Labour government was written up in Treasury documents that referenced the academic literature, there is nothing equivalent from the current government." Given that economics can arguably be summed up in one word - incentives - which group of economists advised Brown that giving a single parent with three kids £3,000 a month in welfare payments for £500 of activity (16 hours a week) wouldn't produce perverse incentives for them, and harmful attitudes in their children?

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  8. Who are the non-mainstream economists the left are now flirting with?

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    1. Yes, could you be more specific on this please.

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  9. What evidence is there that Conservative politics works in this way since the 1880s?

    And as for Ferguson, my advice is that his exhibitionism is best ignored. He has been going around like the bear with a sore head since Alan Bennett (History Boys introduction pages xxiii-xxv (2004)) cut-and-shut him with Alastair Campbell into the character of 'Irwin', leaving Ferguson knowing that he will probably always have Bennett's very successful play and film attached to his reputation.

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    1. I address you first point in my post.

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  10. How can Labour make a strong economic case while fighting a hostile press while Corbyn proposes giving back the Falklands, back channel negotiations with ISIS, and ballistic missile submarines with no trident missiles? His foreign policy is so far to the left and incompetent he has no chance of helping people suffering from austerity. People simply do not take him seriously.

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    1. I do not particularly want to defend Corbyn, but please do not fall for gotcha journalism. What he does is give honest answers to questions that are deliberately crafted to make headlines. If you would prefer politicians to lie to you ("we never negotiate with terrorists"), you tend to get what you want.

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  11. Maybe it is time to fight fire with fire. The next time some politician talks about "the national credit card" the response should be something like: "Look, the private sector is having a massive blowout sale, with low prices and low, low interest rates. We aren't saving the taxpayer any money by waiting for the sale to end to buy the things we need to buy." An argument like that might have more impact than going on about the IS-LM model, or some such thing.

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  12. In Bartholomew's defence, his opening paragraph is utterly hilarious, as is his chortling reference to Keynes's sexuality. Ferguson, too, if I recall, has not been above a bit of homophobia in his commentary on Keynes.

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  13. "There is _plenty_ of this on the left too: people who want to tell you mainstream economics is all wrong."

    "With the left in disarray and flirting with non-mainstream economics"

    I think these need some explanation, rather than just being dropped in as asides. It is very unclear that they are true on a natural reading of their intended meaning.

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    1. Well said, some common sense and non partisanship displayed in your comment.

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    2. The left are daring to engage with others. How dare they!

      If you want to see the alternative take a look:

      http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

      http://www.3spoken.co.uk/2013/05/making-banks-work.html

      http://www.3spoken.co.uk/2015/12/the-helicopters-already-exist-if-you.html

      SWL just abuses his position to justify the 'creditor view' of the world - that the economy should be ruled by a committee of elders at the central bank, and that you need to maintain 5% unemployment permanently to control inflation.

      No amount of dressing things up and softly spoken words changes that. SWL pretends to be pluralist to neutralise debate.

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  14. Are you blogging from Davos this week?

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  15. "When campaigning senior politicians on the right seem quite happy to talk about the government maxing out its credit card, the classic first year undergraduate ‘schoolboy’ error of treating the government like a household."

    Well, again the answer is that what 'works' in electoral terms is not the same thing as appears in the General Theory. What you need to say to win elections in a democracy doesn't have a very close relation to what makes sense in economic terms.

    Even you, in the quiet solitude of your room, might admit that there is a huge gap between the harsh language of austerity Osborne employs, and the degree of fiscal tightening there has in fact been.

    Very galling if you happen to be a Professor of Economics, but there we are.

    Why anyone at all would take any interest in what someone like james Batholomew (or on the left someone like Zoe Williams) has to say about economics is beyond me. The usual problem of journos in need of copy writing about areas they know nothing about. Annoying whenever you happen to know about the field into which they have drifted.

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  16. Oh, and I would also have thought that within (or nearly within) the academic discipline of economics, there are far, far more radicals of the left who want to tear the building down. There are plenty of rightwing economists but they are observably still playing the game. Where are the Steve Keen's of the right, claiming that the entire discipline is rotten to the core?

    Indeed, it is McDonnell who has launched a series on the 'New Economics'. which plays into his lifelong commitment to the idea that orthodox economics is bankrupt and needs to be abandoned.

    You can't imagine Osborne (or any Tory) claiming we need to abandon economic orthodoxy (however wrong they may be about what that orthodoxy actually requires).

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  17. This post is so important. "Journalism" had already become too low paid in junior staff to attract minds. (David Gregory leading Meet the Press. Is he even a B student?) And so then post 1999 the Internet takes Journalism to the age of "click bait". Seriously? Google is evil and garbage peddling. They care about what? Clicks. Its ALL SHIT. And just adds to the nonsense and the fear. I mean people!!! We did Nazis and Communists BEFORE the Internet. When George Orwell and Hemmingway wrote for newspapers!!! Cmon. This is dangerous.

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