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.