Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 21 August 2018

The biggest economic policy mistake of the last decade, and it had nothing to do with academic economists


"The biggest policy mistake of the last decade" is the title of an article by Ryan Cooper, and the mistake is of course austerity. (It is a very US focused piece, so Brexit is not on the map.) Cooper goes through all the academics who gave reasons why austerity was necessary and how their analysis later fell to bits. (How much they fell to bits is still a matter of dispute as far as these authors are concerned.)

Here is his concluding paragraph:
“As we have seen, the evidence for the Keynesian position is overwhelming. And that means the decade of pointless austerity has severely harmed the American economy — leaving us perhaps $3 trillion below the previous growth trend. Through a combination of bad faith, motivated reasoning, and sheer incompetence, austerians have directly created the problem their entire program was supposed to avoid. Good riddance.”

There is a lot I could say about the details of the article, but this conclusion is essentially correct, and it applies at least as much to the UK and to the Eurozone countries. With Trump’s large tax cuts for the rich paid for in large part by borrowing, the Republicans can no longer credibly tell everyone austerity is essential. In contrast the political right’s enthusiasm for austerity in Europe remains strong.

Reading the article brought back memories of my first year or two writing this blog, where I became part of a mainly US blog scene of mainstream academics opposed to austerity, lead by Paul Krugman and Brad DeLong. We were trying to take down the academic arguments for austerity, and we succeeded. As Cooper’s article suggests it was not a very difficult task. Sometimes very senior economists who should have known better made simple mistakes of the kind I discussed here. On other occasions, like the predictions of massive inflation from Quantitative Easing that Cooper discussed, events quickly proved the Keynesians correct. Only in the case of the studies from the two pairs of Alesina and Ardagna and Reinhart and Rogoff was additional research required to challenge their conclusions.

As far as us Keynesians were concerned, the intellectual battles were won by the end of 2012 if not before. In particular Paul De Grauwe’s influential analysis of why Eurozone countries were experiencing a debt crisis, pointing to the lack of a sovereign lender of last resort, put an end to the academic credibility of ‘we are going to become like Greece’ stories. When the ECB introduced OMT in September 2012 and the Eurozone debt crisis came to an end De Grauwe was proved right. In 2013 Krugman wrote of austerity:
“Its predictions have proved utterly wrong; its founding academic documents haven’t just lost their canonized status, they’ve become the objects of much ridicule.”

What we didn’t know for sure then was the lasting damage that austerity would bring, and which Cooper notes.

I want to add two important points that Cooper’s article does not cover. The first is that although by 2013 most academics had become convinced about the austerity mistake (it was always a minority view anyway), economic journalists in the non-partisan media could not recognise that because the politicians were continuing to implement the policy. Here is Robert Peston in 2015:
“And before I am savaged (as I always am) by the Krugman crew of Keynesian economists for even allowing George Osborne’s argument an airing, I am not saying that the net negative impact on our national income and living standards of cutting the deficit faster is less than their alternative route of slower so called fiscal consolidation. I am simply pointing out that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly persuaded they’ve won this match – and take the somewhat patronising view that voters who think differently are ignorant sheep led astray by a malign or blinkered media).”

We now know that voters were indeed being led astray by a malign or blinkered media, or at least a media that did not have the courage to call the result of the academic debate.

The second point is that this academic debate had zero impact on politicians. In that sense Cooper’s article is of purely academic concern. Austerity was not begun because politicians chose the wrong academic macroeconomists to take advice from, and the fact that the Keynesians won the debate therefore had no impact on what they did. The academic debate was in this sense a complete sideshow. I think many Keynesian academics understood that: it was a fight we had to win but we were under no illusions it would change anything. I wrote in 2012 that if all academics were united we might have an impact on public opinion, but that illusion did not last very long and Brexit showed it was indeed an illusion.

I think this lack of influence that academic economics can have is not understood by many. It often suits some heterodox economists to pretend otherwise. Economists can be influential, but only when politicians want to listen, or the media is prepared to confront them with academic knowledge. For example politicians have not done nearly enough to ensure another financial crisis does not happen, but that isn’t because economists have told them not to or have not shown them how to do so. It is because politics prevents it happening.

The reason why economists like Alesina or Rogoff featured so much in the early discussion of austerity is not because they were influential, but because they were useful to provide some intellectual credibility to the policy that politicians of the right wanted to pursue. The influence of their work did not last long among academics, who now largely accept that there is no such thing as expansionary austerity or some danger point for debt. In contrast, the damage done by austerity does not seem to have done the politicians who promoted it much harm, in part because most of the media will keep insisting that maybe these politicians were right, but mainly because they are still in power.  

13 comments:

  1. The biggest scientific mistake of the last centuries, and it has much to do with academic economists
    Comment on Simon Wren-Lewis on ‘The biggest economic policy mistake of the last decade, and it had nothing to do with academic economists’

    Simon Wren-Lewis argues: “I think this lack of influence that academic economics can have is not understood by many. It often suits some heterodox economists to pretend otherwise. Economists can be influential, but only when politicians want to listen, or the media is prepared to confront them with academic knowledge.”

    Economists have it always BOTH ways. Keynes famously argued: “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

    In economics, everything and the exact opposite has already been said sometime, somewhere, by somebody. Self-contradiction is NOT a disadvantage. Just the opposite. If some major economic event happens, there is always somebody who ‘saw it coming’ or ‘who got it right but, unfortunately, was ignored’. The discussion about austerity is NOT different.

    Simon Wren-Lewis tells the story how he, Paul Krugman, Brad DeLong and others have successfully taken down the arguments for austerity: “As far as us Keynesians were concerned, the intellectual battles were won by the end of 2012 if not before.”

    This gives us the Iron Rule of Political Economics: If economic shit happens then it was NEVER the fault of economists but of politicians who do not understand economics and always listen to the incompetent economists and ignore the competent economists.” The truth is just the opposite: “Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

    This is why intelligent heads of state do not listen to economists but only employ them as useful idiots.

    The point is this: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    Now, this is the current state of economics: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit ― the pivotal concept of the subject matter ― wrong. With the pluralism of provably false theories, economists have not achieved anything of scientific value. They nonetheless hold up the claim to be scientists and experts.

    The key to understanding economics is that there are TWO economixes: political and theoretical economics. Theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. Economics claims to be a science but is NOT. Economists claim to know how the economy works but do NOT. From this follows that economic policy guidance from Smith/Marx onward NEVER had sound scientific foundations. This applies also to the issue of austerity.#1, #2, #3

    See part 2

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  2. Part 2

    Neither Simon Wren-Lewis nor Paul Krugman nor Brad DeLong nor the rest knows how the economy works yet all have very strong opinions what the politicians should do. Economists have entirely forgotten that agenda pushing is NOT AT ALL their business: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (J. S. Mill)

    All the more so, because economists messed up science.#4 After 200+ years of political agenda pushing, economics is one of the most embarrassing failures in the history of modern science.

    Egmont Kakarot-Handtke

    #1 Austerity and the idiocy of political economists
    http://axecorg.blogspot.com/2017/03/austerity-and-idiocy-of-political.html

    #2 Austerity and the utter scientific ignorance of economists
    http://axecorg.blogspot.com/2015/12/austerity-and-utter-scientific.html

    #3 Austerity and the total disconnect between economic policy and science
    http://axecorg.blogspot.com/2017/05/austerity-and-total-disconnect-between.html

    #4 See cross-references Failed/Fake Scientists
    http://axecorg.blogspot.com/2015/11/failedfake-scientists-cross-references.html

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  3. Some attention is paid to economists in the public arena and they are considered useful only when they facilitate and advance the desires and ruses of corporate capitalists and high net worth individuals (and the supremacy of the politicians the latter have suborned). "Austerity" has always been somewhat of a misnomer. In most of the advanced economies it was a crude political economy drive that could best be described as a modern version of Whiggery with a focus on small government, low taxes, sustained globalisation, weak corpprate and market governance and light-touch regulation. The objective was to shrink, curtail and remove the expansion of welfare transfer entitlements and automatic fiscal stabilisers that had often grown like Topsy under previous governments. For example, in the UK, Gordon Brown had tnkered endlessly with these entitlements and stabilisers during his 10 years in the Treasury. George Osborne in pure Whiggish mode was determined to cut them back. Wolfgang Schauble, in Ordoliberal mode, was determined to visit the same on the efforts of his Red predecessors, Hans Eichel and Peer Steinbruck. It was a crude political play of never letting a good crisis go to the waste as the effect was to shore up, resp. Tory and CDU support and to crush the centre-left (2015 UK and 2013 Germany elections).

    Ironically, Osborne's Whiggery fed the Brexit vote in Labour's heartlands and Schauble's pursuit of the schwarze null certainly contributed to the diminution of Black and Red support and the rise of the AfD.

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  4. Prof. Wren-Lewis,

    Have you seen Prof. James Galbraith's recent article in the Atlantic Monthly on how austerity devastated the Greek economy? He implies (actually, he states outright) that the unfair treatment of Greece by 'Europe' (i.e. Germany) was a catalyst in the Brexit vote. I am sure you have your own view on that...

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  5. "To regard the people of any time as particularly obtuse seems vaguely improper, yet it seems certain that those who offered economic counsel in the late Twenties and early Thirties were almost uniquely perverse."

    - John Kenneth Galbraith

    The more things change ...

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  6. Great article. It makes me wonder if as a society we will ever come to a point where academic and scientific research consensus holds any weight in debates

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  7. Another absolute beauty Simon. Keep them coming.

    I do like your Lord of the Rings photo!!

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  8. I cannot comment on the economics theory, but ...

    1. Surely the problem with the UK economy has been flatlining productivity. If the pre-2004 trend in productivity had continued we'd be in a completely different place, so aren't you looking at the wrong problem (in a UK sense)?

    2. The EU has indeed practised massive austerity. Talking to someone who had been in northern Greece recently, he said you had to be careful about petrol, because there were so few petrol stations, because the roads were empty hence no business, because there is no-one there. All the people of working age are working in Scandinavia, having left their children to be brought up by grandparents. And you want us to remain in the EU?

    3. All that workers have is their labour - by definition. If the state starts dishing out money to lots of people on the basis of "need" rather than whether the have earned it, then it makes a joke of people's skills, removes any ability of workers to make themselves better off on the basis of their own efforts and skills, and makes everyone dependent on the technocratic state. Perhaps that's why you left-wing economists love anti-austerity economics so much.

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  9. Perhaps experts on any subject who want to contribute to a political debate should first read "How to win friends and influence people".

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  10. yes, yes, and yes, but was the reason why Labour's 2010-15 Front bench failed to present a politically coherent critique and alternative (let alone an economic one) to Osborne's fiscal austerity was because Ed Balls and his team was blinkered by the power of mainstream media, or even frightened by its power?

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  11. Austerity is such a powerful force when the population has little grasp of ecomonics.
    I have a good education but I always struggled with where money comes from. It took a determined effort to self educate in order to grasp and start to understand the basics. There is so much misinformation.

    Unfortunately if you struggle with or have no desire to understand economics then its very easy for politicians to compare the state to a households finance. Austerity then becomes the powerful tighten your belts message.
    Its very important that very knowledgeable people like yourself try to keep things simple and relavent to help the inexperienced and spread the basics to stop us saps from being sheep fodder.

    So thanks for running this blog and for keeping things simple.

    MPC

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  12. The economic policy of austerity was the servant of political strategy. Propounding austerity was the flip side of undermining public confidence in Labour’s economic management.

    In what turned out to be the 1992-97 Parliament, Paddy Ashdown believed that the key indicator of the likelihood of a Labour victory was the polling question regularly examining the public’s confidence or lack of confidence in Labour economic management.

    It was natural, therefore for a political strategist in the Conservative Party in the 2005-10 Parliament to realise that the reverse would be the case. Undermining public confidence in that area would secure election victory. The platform to do this came in the Spring of 2010.

    An added but important bonus for the Conservatives was the realisation that the leadership of the Liberal Democrats were wedded to a smaller state and would support austerity, despite the fact that a large percentage of the LD vote was secured from supporters of an active state, and that therefore austerity was likely to diminish their future electoral support.

    Surely key, if not the key, political figures in the design of the policy were Rupert Harrison and David Laws.

    As recovery faltered in the early part of the Parliament and failed to materialise in 2011 and 2012, there was an attempt among some Liberal Democrats to persuade Laws to consider reflation through targeting a higher level of NGDP, but ultimately Laws feared that the Liberal Democrats would then be branded for the foreseeable future as the ‘Party of Inflation’. He may also have considered that such a change in stance, argued within the Quad, would have enhanced the reputation Vince Cable who had been excluded from the Quad. For the LDs it was cavalier self-destruction.

    Bill le Breton

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  13. Great Stuff. Send it to every MP.

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