Henry Farrell has an
article
in the Washington Post that links a forthcoming paper by him and John
Quiggin with a debate that several bloggers have been involved in
over the role of academic economists in promoting (or otherwise)
austerity. The paper is very rich in historical detail, but the line
he takes in the article is that politicians went with fiscal
expansion when economists appeared united in their advice, but the
switch to austerity began when economists appeared more divided.
I tend to agree with
Kevin Drum in this: he says
that basically politicians did what they wanted to do, and economists
were simply used to provide some kind of cover for politicians’
decisions. This is the argument I make in my General Theory of
Austerity paper.
The clearest case of this is probably the UK. George Osborne opposed
the fiscal stimulus in 2009, and what changed is that he became
Chancellor in 2010. So in this case there was no change of view, just
a change in who was in power.
The example which
fits Farrell’s case much better is Germany. He argues that German politicians were persuaded to conduct stimulus in 2009 by the
(surprising) unanimity of their own economists, but switched to
austerity when German economists reverted to type. On this he may be
right. But even here I think you can tell a different story, which
stresses what politicians were most afraid of. In 2009 they were
(rightly) concerned that we might be seeing another Great Depression,
and so their instinct was to follow their economic advisors who had
exactly the same fear. By 2010 it appeared that this fear had been
averted, and now a new concern (for both politicians and austerity
inclined German economists) arose over European debt.
In the case of
Germany, therefore, the story is one
of ‘events, dear boy, events’. In the US and UK it was that
Republicans and Conservatives gained enough power to enact the policy
they wanted to implement all along. The policy was what I call
deficit deceit: reducing the state using fears about the deficit as a
pretext. You could perhaps argue that the Treasury and the Governor
of the Bank encouraged George Osborne, but I think he would have done
it anyway: he was never one to let economics get in the way of
achieving a political goal.
But as Drum says, it
is not all gloom for economists. To quote: “If we had responded to
the 2007-08 financial crisis the same way we did to the 1929-32
financial crisis, we'd still be waiting for a rerun of World War II
to pull us back to normal.” I get very annoyed when people ask me
what economists have done to deserve respect over the last decade. We
avoided another Great Depression, that’s all. It may have been
politicians top priority, but we told them what needed to be done, as
Farrell makes clear.
But when Farrell
suggests that austerity could have been avoided if only economists
had stayed united, I think he is wrong. If you view 2016 as an
experiment to see if policy can really ignore the united view of
academic economists, the result is that it can. While it is important
to hammer home what a mistake austerity was, and that it was never
the policy recommendation of the majority of economists, the key
question is why on occasion that often overwhelming majority can be
so easily ignored on issues economists know more about than anyone
else.
Until the 2008 'crisis' is seen as the result of the previous decade's economic behaviour we won't get anywhere.
ReplyDelete" ..austerity was, and that it was never the policy recommendation of the majority of economists"
ReplyDeleteIt's impossible to tell from your writing whether you can't see the obvious point being made repeatedly to you or you won't regarding this mistake. Politicians were able to impose austerity policies BECAUSE so much of mainstream economic advice 'foamed the runway' for it. Your continual attempts to parse this fact away are becoming embarrassing.
Correct that problem before bleating once again about how awful the press treatment of mainstream macroeconomists is or how dogmatic politicians are when selecting from the palette of policy advice or even how dim we the public are when failing to give you as much consideration and respect as you think you deserve.
How did we 'foam the runway'?
DeleteThere does seem to be a serious problem with your position. I've tried to draw your attention to this link before. Apparently, the austerity recommenders were a minority but they were "the cream of the British economics establishment" and their opponents were a majority but were really only pro-mild austerity rather than anti-austerity anyway.
DeleteRemember the high-profile letter of February 2010 from leading economists in the Sunday Times which was echoed and re-echoed across the media?
Deletehttp://news.bbc.co.uk/1/hi/8514767.stm
As Skidelsky reminds us;
https://www.project-syndicate.org/blog/unrepentant-economists-by-robert-skidelsky
And upon which you have commented before;
https://mainlymacro.blogspot.co.uk/2016/03/austerity-and-mainstream-for-record.html
Of course you remember it but even you noticed;
” So why is this letter remembered, but the responses to it are not”
And that’s because it was the tip of the sword, the culmination of a long-term and continuous push that was ineffectively countered. The perception of one push-back letter was swamped by the continuous deluge of pro-austerity news. The political and general perception had been firmly fixed by February 2010 after years of ‘deficit reduction’, ‘household finances analogy’ and ‘living beyond our means’ rhetoric, supported by economists. No piece was complete without the quoted economist pronouncing doom unless ‘sails are trimmed’. More than half of ALL contributions to these news reports were made by economists from the financial markets. This neoliberal framing was captured for precisely this period by analysing news articles;
http://speri.dept.shef.ac.uk/wp-content/uploads/2015/12/brief18-neoliberalism-austerity-and-the-UK-media.pdf
And here for particular segments of the news;
http://journals.sagepub.com/doi/abs/10.1177/0163443715620931
And since 2010 here;
http://www.truth-out.org/opinion/item/17209-the-british-media-cheerleaders-for-austerity
And Krugman describes it in Chapter 2 of this piece;
https://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion
But if you want some specifics, here’s the Grauniad in 2007 with the headline ‘Britain plagued by worst deficit since 1697’;
https://www.theguardian.com/business/2007/feb/10/politics.economicpolicy
Or this;
http://www.telegraph.co.uk/comment/columnists/iainmartin/4295219/Gordon-Brown-brings-Britain-to-the-edge-of-bankruptcy.html
Or who can forget the cherry on top of the cake, Reinhardt and Rogoff;
https://blogs.wsj.com/economics/2010/01/04/reinhart-and-rogoff-higher-debt-may-stunt-economic-growth/
Or this;
http://www.res.org.uk/view/article5Oct12Feature.html
The whole of Day 2 of the Tory conference in Manchester in 2009 was devoted to deficit reduction strategies and the talking-heads economists who supported them;
http://www.channel4.com/news/articles/uk/conservative%20conference%202009/3372097.html
And we received regular pressure from the austerity-hungry EU, of course;
https://www.euractiv.com/section/uk-europe/news/uk-given-until-2007-to-bring-public-deficit-below-3-ceiling/
All of which guff resulted in this policy paper;
https://www.gov.uk/government/publications/2010-to-2015-government-policy-deficit-reduction
http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/the-public-finances/the-economic-recovery-and-the-deficit/
You may argue ‘that wasn’t me!’ or ‘honourable exceptions existed’ and I would of course acknowledge the truth of those statements while at the same time pointing out that this heterodox position was as effective as a fart in the wind against the typhoon which policy-makers were riding that was supplied by the constant thermals every think-tank and every commentator and every paid-for economist in the centre and right was supplying. It may be true that they were on theoretically wobbly ground but that did not stop them dominating the airwaves. And neither did the force or scale of your counter arguments.
If the best-considered and most high profile response to Osborne’s austerity campaign at the time was Labour’s ‘austerity and a balanced budget but not quite so quickly’ official line then even you must accept the reality of my original point;
‘Politicians were able to impose austerity policies BECAUSE so much of mainstream economic advice 'foamed the runway' for it.’
The last two paras have the causal direction wrong. In the UK orthodox macro had no influence because both government and opposition bought the City economists' framing.
DeleteWhen all three major parties bought the austerians' framing of the issue it became impossible for dissenting voices, no matter how expert or simply correct, to be heard in the media.
All 3 UK major parties have, since the fall of Brown, exhibited in different ways and at different times extreme political and policy incompetence. You guys really have no right to laugh at the Yanks for electing Trump.
The problem with the 'we saved the economy' argument often used to support flooding the financial markets with £s in the immediate aftermath of the crisis is that the banks could and should have been hung out to dry and a depression could still have been avoided with the added bonus of a slimmer and more financial sector at the end of the day, most obviously in the US.
ReplyDeleteWho would have financed firms?
DeleteThat could have been financed by spending money. Whether it was a Republican Congress or Labour under Brown, there's no reason to presume those people who all have to stand for re-election would have frustrated spending plans so they could see double digit unemployment. Just look how enough Republicans quickly caved on 'reform' of Obamacare when they thought about their chances of retaining their seats if they followed Trump's/Ryan's directives.
DeleteJust noticed 'firms' (perils of blogging on a mobile) in your reply. The FDIC would have been able to keep the payments system going pending bank restructuring etc.
DeleteThe banks should have been allowed to go into administration, the share and bond holders should have lost their shirts (capitalism's creative destruction), then the government should have it bought it from the administrators (for £1), without obligations to share and bond holders. Instead the give threw money at the banks and subverted capitalism.
DeleteThat is where economists should have made their contribution: answer the question, how do we finance firms?
DeleteOne suggestion is to replace debt with equity. Is that good enough?
I suggest you contact the Washington Post and offer your own op-ed. Obviously, in the US, Paul Krugman does his best, making similar points as yours, but his is a rare voice. The Post economics columnist, Robert Samuelson, appears to be reasonably conservative, according to my non-economics professional viewpoint.
ReplyDeleteThe Post editorial page favored stimulus, but it also seems to take for granted the line on government expenditures "adding to the deficit" without raising the issue of one way to reduce deficits is to tax the wealthy more, rather than less.
This is a memory from way back to the late 1980, do it's not going to be that accurate, but the sense of what was said is correct. It's from an interview given by Alan Budd as part of an Open University education course. Essentially he was asked about his role in advising the Conservative government, particularly with respect to Monetary policy. Amongst others he said, I do not believe the Government believed in it, but following its policies meant they would achieve their political policies. Anecdotal, for sure, however it does seem to fit much modern evidence.
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ReplyDelete