How UK deficit hysteria began

Laura Basu has a good book just out on UK media coverage of events from the Global Financial Crisis (GFC) until 2015, which I have reviewed for Open Democracy. Among other things, it tells the story of how what Mark Blyth calls the ‘biggest bait and switch in history’ happened in the UK. Laura argues that it can be dated almost exactly to the Budget of April 2009.

That the right wing press would start talking about the horrors of the rising UK deficit is no surprise. Osborne had decided in the previous year to oppose the Labour government’s stimulus measures because he saw in the rising deficit a way to beat Labour. The puzzle is why a broadcast media, ever conscious of balance, pushed the same line, even though it was clearly advantageous to one side politically.

The following story is mine, not Laura’s. Before the GFC, the way that the broadcast media covered budgets had become quite formulaic. Each budget would present estimates of the deficit over the next five years, and with the help of the IFS commentators broadcasters would discuss not only what tax changes had been announced, but also what might be implicit in the projections. No doubt this framework suited journalists well, because it allowed easy analogies with households. If the IFS felt that the projections were over optimistic and therefore fiscal rules might be broken, they said so and that became one of the budget talking points. The state of the economy was hardly ever discussed, because the Bank of England seemed to be doing a pretty good job of keeping things stable.

That all changed with the GFC, when monetary policy ran out of reliable levers to manage the economy. However journalists wouldn’t know that from the Bank of England, who tended to talk as if Quantitative Easing was a close substitute to interest rates as a monetary policy instrument. They would know it from academic macroeconomists, but journalists were generally too busy to make the effort to talk to them. For whatever reason, they did not fully appreciate how much the world had changed as a result of the GFC.

So when in the budget of April 2009 the Treasury showed the full extent of the deficits that the recession (and to a smaller extent the government’s stimulus measures) had created, journalists behaved exactly as they would have done before the GFC. Compared to deficits seen before the financial crisis, the numbers were indeed large. But crucially, because the Treasury estimated that the GFC had reduced the trend level of GDP, fiscal savings were necessary as a result. When these took the form of efficiency savings, the IFS were rightly skeptical.

So the coverage was all about higher taxes and lower spending, and whether they would be enough to close the record deficit. At no point in the subsequent discussion does anyone ask whether the current deficits are large enough to create a strong recovery. The growth forecasts are taken as given, and only their fiscal consequences are discussed, as if the former had nothing to do with the latter: an assumption that is only appropriate if monetary policy is in complete control of the economy. The government’s line that these deficits were necessary to ‘support’ the economy was almost entirely ignored.

Furthermore, the issue of whether the markets would purchase all this extra debt was already being raised. This is City speak, seeing a recession as involving more government debt and therefore perhaps higher rates, rather than understanding that the recession was caused by more saving and less borrowing so there would be plenty of new savings to buy the additional debt.

In other words the broadcasters had a framework for commenting on the budget which was appropriate before the financial crisis, but totally inappropriate after it. What they should have been asking is whether the Chancellor had done enough to ensure the recovery that was forecast, or whether perhaps larger deficits might be needed. In retrospect, that was exactly the right question to ask.

At the time, the reason for these deficits was clearly spelt out by the IFS as well as the Treasury. "The Treasury's assessment of the fiscal damage wrought by the current economic and financial crisis is breathtaking," said IFS director Robert Chote. "It will require two full parliaments of mounting austerity to repair." But in a telling indicator of things to come, the headline paragraph loses the bit about the GFC. As Laura’s book shows, it became so easy for a media prone to amnesia to forget about the financial crisis and blame everything on Labour profligacy, as after a time most voters began to believe. But the fundamental mistake was focusing on the deficit as a problem rather than as an instrument designed to produce a strong economy. The mistake came from the media’s inability to see how the GFC had changed the macroeconomic rules of the game.

How the broadcast media created mediamacro

If you do not watch Carlos Maza’s short commentaries on the US media you should. Here is his latest, on why comparisons between the investigations into Nixon and Trump fall short. The reason, quite simply, is Fox News. With Nixon most Republican voters were getting their information straight from one of the established networks. As a result, Republican politicians were coming under Republican voter pressure to impeach Nixon when the extent of the cover-up became clear. Today, Republican voters get aggressive attacks on the investigations into Trump and his associates, attacks which are completely divorced from reality. And Republican politicians, reflecting the views of their base, repeat the attack lines from Fox News.

In the UK we have our equivalent of Fox News, but because our aggressively partisan media is the press there is a chance for the broadcast media to modify its impact. That it did not do so over Brexit because it failed to call out the lies of the Leave campaign is why the vote went the way it did. But Brexit was not the first time this happened. As some of the essays in a new book show, austerity was also an occasion where the broadcast media reinforced rather than countered the lies of the right wing press.

Laura Basu and Mike Berry show how virtual hysteria about the UK budget deficit was strongest in the right wing press, but as Mike Berry writes:

“Whilst BBC coverage lacked the strident editorialising seen in the press, it still operated within a framework which stressed the necessity of pre-emptive austerity to placate the financial markets.”

Historians will find this extraordinary. It is standard textbook macroeconomics that tells you not to try and counteract the deficits that arise when taxes fall and spending rises as output growth declines in a business cycle: that is why they are called automatic stabilisers. Keynes taught us and modern theory confirms you particularly do not do this when interest rates are stuck at their effective lower bound. It was natural to expect record deficits because it was a record recession and because conventional monetary policy was impotent.

So why did the BBC and other broadcasters largely ignore this point of view, and instead promoted what I call mediamacro? This is the subject of my own contribution, and here is a very brief and partial summary

1. Journalists typically had no direct contacts with academic macroeconomists, with just one or two exceptions. The economists you tend to hear in the broadcast media are City economists, who for various reasons over-exaggerated the deficit problem.
   
   
2. The IFS do appear regularly in the broadcast media. But the IFS do not do macroeconomics, and there is no equivalent of the IFS for macroeconomics. Initially the IMF supported fiscal stimulus, but they became spooked by the Eurozone crisis.
   
   
3. The main way that academic expertise about the macroeconomy was filtered through to journalists was via the Bank of England. It should have been they who warned of the danger of austerity at the interest rate lower bound. However, in a then very hierarchical set-up, its governor Mervyn King was a strong supporter of austerity.
   
   
4. The message of probably a majority of academic economists, which was to focus on the recovery and stop worrying about the deficit in the short term, ran counter to journalist’s intuition, particularly after a financial crisis where financial panic had just brought down the economy.
   
   

There is a more conventional radical political economy point of view, which is set out in another essay by Aeron Davis. That is that the media, including the broadcast media, has a default position that supports an essentially neoliberal, financialised order. That position was disrupted by the financial crisis, but once that crisis had stabilised the media took the opportunity to return to where it was comfortable.

I do not think these two accounts are incompatible, as long as you do not see this political economy view as some kind of neoliberal conspiracy. Davis certainly does not see it that way. He describes, for example, why journalists often depend on City expertise: not because someone tells them that is what they have to do, but because they need readily available expertise that they themselves often lack. Try asking most academic economists to explain the latest retail sales data with virtually no notice. The fact that the expertise they receive is often presented as fact when the reason for market moves are generally unknowable is similar to the media’s attitude to macro forecasts.

We can make the same point about the role of central banks. There was no inevitability that they supported austerity, as the US experience under Ben Bernanke showed. Bernanke’s view made little difference in a highly polarised Congress, but I have often wondered whether a Bank of England warning of the dangers of austerity might have made a difference to the media’s coverage of austerity in the UK.

I was reminded of all this by the recent TUC march. After austerity we had the 2015 election, which I argued mediamacro won for the Conservatives. They did so by tending to affirm rather than critique the idea that the economy was ‘strong’, despite the fact that the data said quite clearly that it was in fact very weak. Once again we had a huge gulf between what workers and academic economists were saying and the message journalists were getting from City economists, and how journalists generally went with the latter. The BBC really needs to hold an inquiry into how they handle economics, similar to their inquiry into statistics, but I doubt it will happen under this government.