The politicisation of truth

I showed some poll results yesterday suggesting that on Brexit the public trusted academics more than anyone except friends and family. Academic economists overwhelming think Brexit will be bad for the UK economy, and therefore bad for the average person’s prosperity. Ryan Bourne of the Institute of Economic Affairs (right wing think tank, second lowest level of funding openness) says the British people should not trust the academic consensus because of “the credibility of the individuals involved”.

He then gives some examples of where economists have have been wrong. I have dealt with many of these before, but Mr. Bourne goes further in a way that totally destroys his case. Here is the relevant paragraph.

“In fact, one would suspect George Osborne himself would be equally sceptical of consensuses given his own experience. For a recent Centre for Macroeconomics survey found that there was an overwhelming macroeconomic consensus, a full 81% surveyed, who thought his fiscal policy in the last parliament was bad for growth. The IMF, who the Chancellor now lauds as being a credible voice on Brexit, of course urged the Chancellor to soften his fiscal consolidation in 2013, with its economist Olivier Blanchard suggesting the Chancellor was ‘playing with fire’ if he did not ease up on deficit reduction, precisely at the time when the economy began to recover, despite the Chancellor not altering his discretionary fiscal plans.”

The impression you would get from that paragraph is that macroeconomic consensus about austerity was wrong. Here is my favourite chart, of UK GDP per head (logged).

Now explain to me how this data shows that 2010 austerity was good for the UK economy! Annual growth in every year from 2010 has been below the pre-crisis trend of two and a quarter per cent. Growth was highest in 2014, but that was still only 2%. UK recoveries in the past have involved above trend growth to return to a long run trend, but not this time.

I know you can try and explain this awful performance by other factors beside austerity, but that is not what Mr. Bourne tries to do. He just tries to pretend that it is obvious the consensus was wrong. He knows that in a world of politicised truth this kind of thing is possible.

Now you might think that the terrible performance of UK growth since the crisis is so obvious in the data it could not possibly be portrayed otherwise. In which case let’s go back to 1981, and the famous letter from 364 economists. It was an awfully confused letter, but at its heart was a criticism of the deflationary 1981 budget, and whether or not that budget was good for the economy is what the letter should be judged on. According to Mr. Bourne, the 1981 budget was “just about the time the economy began growing robustly.” So let’s look at the numbers from that period from the chart above

Growth in 1981 as a whole was -1%. Growth in 1982 as a whole was at trend at 2.2%. That is hardly a “robust recovery”. The quarterly growth numbers are erratic, but they show that a robust recovery (growth consistently above trend) only began at the end of 1982. I guess that accounts for the word ‘just’ in Mr. Bourne’s description quoted above!

So the deflationary budget of 1981 did appear to hold back the economy, delaying a recovery for another year or more. As Steve Nickell makes clear you needed growth above trend to stop the rise in unemployment. [1] Here is what happened to unemployment around 1981.

Unemployment stopped rising during 1984, three years after the 1981 budget.

On this basic point, the deflationary 1981 budget looks like it was bad for the economy, and the 364 appear to have been right. But that is not the received wisdom. As I noted yesterday (footnote 1) BBC journalists will happily state that the 364 were wrong as a simple fact. They do this because it has become a politicised fact: repeated as fact endlessly by those on the right. The Institute of Economic Affairs has done all it could to establish this as a politicised fact, including publishing a book in 2006 where all but one of the contributors agreed that the 364 were wrong.

This is what I mean by the politicisation of truth, and I can only thank Mr. Bourne for providing such a clear illustration of the process at work. And Mr. Bourne’s has the nerve to suggest that he has more credibility than the overwhelming majority of economists. Economists are certainly not infallible, but at least we as a collective do not attempt to distort what the data says.

 [1] Unemployment has declined rapidly since 2013 because UK productivity growth has been so bad, perhaps in turn because of a record and quite unexpected decline in real wages, something that did not happen in the 1980s.