Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 28 March 2016

Austerity and the mainstream: for the record

When I say that textbook macro, and the macro used by most mainstream macroeconomists, says austerity of the kind implemented in 2010 was a big mistake, I am sometimes told ‘but that was not what economists said at the time’. The names of one or two well known economists are often mentioned, or the letter from 20 economists in the Sunday Times in February 2010.

What is often forgotten is that this letter sparked an immediate response. Over 60 economists wrote in one or other of two letters published in the Financial Times that now was not the time for strong fiscal consolidation. The recovery had to be properly established first. Given that these responses were put together in haste (which probably explains why I did not get the chance to sign either), but still managed to attract over three times as many signatures as the original, I would suggest that shows pretty clearly that a clear majority of UK macroeconomists at the time followed current and textbook analysis on austerity.

Even some of the original 20 later admitted they had made a misjudgement. So why is this letter remembered, but the responses to it are not - particularly as the responders were clearly proved right by subsequent events? Using OBR figures I calculated that Osborne’s austerity has cost each UK household at least £4,000, and probably more. This number has never been seriously challenged, but I also think it is not widely known. When it comes to austerity, the problem is not and never has been mainstream macro theory or mainstream macroeconomists.


  1. 60 out of 80 economists opposed to austerity is no enough consensus for the public or mtedia to be confident who is right. Compare climate change which has about 99%. And even is some of the 20 changed their minds later no-one noticed. And the key point is this - if mainstream macro is so clearly opposed to austerity why is the consensus not bigger? Are 25% of economists incompetent or politically biased? It is not surprising the public is sceptical. And as others have pointed out, the most influential institutions were all for austerity.

    1. Actually, as given by those two polls, especially the one concerning the UK (where Mr. Wren Lewis has also participated), the consensus against austerity is pretty big.
      I am not so well informed about the studies of climate change, but it is hardly possible in the economics profession to go beyond a 80 - 85 % consensus on almost any topic I would say, both because of methodological preferences, as well as ideological and political biases. Summed up - you cannot get more consensus than this.
      Concerning institutions - the official positions of the influential institutions and the positions of their staff/macroeconomists/research departments, often diverge, as we have seen in the past years. The reasons behind this might differ, but are all pretty understandable.

  2. I have suggested putting up a statue to Robert Maxwell, perhaps the major macroeconomist of the 20th Century.

  3. Well, bless my soul, and all this time I thought the jury was out between Keynesians and Austerians, and really different economists just have differing opinions and we have to give them all equal weight... or did I spend too much time listening to Robert Peston?

  4. I've said this before, but the problem is that there are no consequences in the profession for wrongly advocating austerity. No-one is tarred and feathered, no-one is excluded from conferences, no-one is pushed out into second tier journals. Indeed, plenty of austerity friendly working papers were given the usual time and space and respect. Likewise, the advocates remain prominent and high-status.

    As I said to Mark Thoma in a discussion in 2005, the key problem mainstream macroeconomists have to take responsibility for is the way they police their profession. Until they do that, prominent macroeconomists will continue to abuse their public standing to help push public policy in the wrong directions. Of course the media play a big part in amplifying the wrong views and of course politicians go cherry-picking for policy views that support their agendas. But it does all start with the legitimation conferred by the profession.

    (The discussion then was not about austerity, rather about inflation, interest rates and assets, as I recall. Mark Thoma conceded the philosophy behind my point, but couldn't see any practical likelihood of change - and indeed, here we are a decade later discussing the same old phenomena, just a different topic.)

  5. This is a tangential request, but do you know if anyone has done any work on the difference between Bank of England Base Rate and the actual lending rate available to various kinds of business. As a small business owner, I ask around and it appears that while Base Rate has headed towards zero, and mortgage rates have often followed them, new business lending rates hit a floor at around 5% (and that's for lending banks perceive to be very safe). There's also the issue that banks have continued to up their collateral requirements.

    It seems to me that when property lending rates go from about 5% to about 1%, but business lending rates go from around 7% (there was always a premium) to about 5% that differential has an effect.

  6. Interesting article here :

    I commented :
    An earlier poster "Julia" asked what Neoliberalism meant.
    I posted in reply, saying that the post-war consensus (1945-1972) was replaced by the Washington Consensus, and that Simon Wren Lewis had repeatedly explained alternatives to austerity in his blog :

    Oddly, my comment was deleted. #mediamacro ?

  7. Once again the Germans want to have it both ways. They keep complaining about the low interest rates that boost house prices and represent an increasing difficulty for pension funds, insurances, etc that have to invest in safe assets while guaranteeing some long term return.
    On the other hand they are fiercely resisting anything that could benefit the real economy and hence increase rates.
    Hans Werner Sinn was again warning this morning that hyperinflation is around the corner and linked the hyperinflation of the 20s "to the rise a decade later of a dangerous con man" (my translation).

    The talk about helicopter money has already ignited hysteria and of course the sky-high unemployment levels in part of the eurozone are rarely mentioned in the debate.

    In fact Germany expects the monetary policy of the monetary union to be tailored to its own economy and at the same time doesn't want to have any transfers (unless fellow members essentially become german colonies) and is scared of leaving this union because of the surge of its exchange rate. And if you think it is exaggerated see this:


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