Mediamacro myth makers fight back

This may also be the first in a series!

In a recent blog, David Smith of the Times writes

“One of the most enduring claims about the British economy in recent years is that the then coalition government abandoned austerity in 2012. It is a claim that gives comfort to those who see everything that has happened to the economy through the lens of fiscal policy. Only when austerity was abandoned in 2012, some argue, did the economy begin to recover. Unfortunately it does not fit the facts. It is a myth.”

Chris Giles of the FT tweeted: “The shocking thing about this excellent post is the misinformation that forced @dsmitheconomics to write it”.

Now the reference to myths might make you think David Smith is having a go at yours truly, but I would never be so narcissistic. I know this cannot be the case because I have never said that austerity was abandoned in 2012. In fact I cannot think of anyone who did, but clearly I’m not reading the right people. Of course this could be another example of the straw man trick: to defend position X (plan A continued) against position Y (the pace of austerity slowed), create a third position Z (austerity abandoned) which is a silly exaggeration of Y, and show that Z is false. Ergo X must be true. Remember how critics of austerity had to be wrong because they claimed a recovery would never happen.

What David concludes, of course, is that the pace of austerity slowed from 2012 onwards, which is obvious if you just look at the data. So why does he think this is such a problem for critics of austerity? Again we need a straw man: someone who “see[s] everything that has happened to the economy through the lens of fiscal policy.” Now I’m sure I have never met anyone like that, but if such a person existed then the 2013 recovery would be inexplicable, because austerity was continuing (albeit more slowly).

This is terrible stuff. Every macroeconomist besides those of David Smith’s imagination knows that the economy is influenced by all kinds of factors, or which fiscal policy is but one. So a recovery is perfectly compatible with austerity being a drag on growth, particularly if monetary policy is highly expansionary.

One way of thinking about the impact of a fiscal contraction is that it has its maximum impact on the level of GDP when it happens, but this impact dies away as other forces, like monetary policy, bring GDP back to its ‘natural’ level. Whether that is the right way to model the impact of fiscal policy in a liquidity trap is debatable, but that is how the OBR treats the impact of fiscal policy, and from his post I’m glad to see that David thinks the OBR is an authority on these matters.  

Here is a chart from this OBR document.

The orange bars show the impact the original 2010 plan would have had, and the blue bars what actually happened (and what will happen) as seen in March 2014. The blue bars are the basis for my conservative estimate that austerity cost every UK household on average £4000 worth of resources. Even though in both cases austerity continues through 2012 and 2013, the impact on growth dies away (or even becomes positive), because the negative effect of any new austerity is offset by the impact of earlier austerity dying away.

Harmful austerity does not need to be abandoned before a recovery can happen. Slowing down austerity clearly makes a recovery easier, but that is not the main reason why the mediamacro myth that ‘Plan A’ continued is important. As I wrote here: “Not making it clear that the plan had changed was a serious failure. If that call had been made, the Chancellor would have had to account for why he had allowed deficit reduction to stall, and that in turn would have established quite clearly that previous austerity had delayed the recovery.”

It really is very simple. George Osborne campaigned in 2010 that Labour’s plan to cut the deficit by half in five years was much too slow, and so began a much tougher austerity programme. More rapid deficit reduction was at the centre of that plan. But deficit reduction was allowed to slow from 2012. Why did the media not challenge Osborne on why this was happening? Why did it go along with the fiction that the plan was unchanged? The media has no problem asking Labour politicians to account for why they borrowed too much (allegedly), but when George Osborne borrows much more than he planned, having previously stressed the importance of cutting the deficit quickly, this suddenly becomes unimportant. Strange that.  

Macroeconomic innumeracy

Anthony Seldon is perhaps best known for his biographies of recent UK Prime Ministers. He had a column in the FT recently, which suggested that the Prime Minister’s team had done rather better than popular perception might suggest. Two sentences caught my attention: “Credit for sticking to the so-called Plan A on deficit reduction must be tempered by the government’s reluctance to cut more vigorously” and “Downing Street insiders can claim to have managed to steer…..the recovery of a very battered economy”.

The first sentence suggests that the government stuck to its original 2010 deficit reduction plan, but it should have cut spending by more than this plan. I disagree with the opinion in the second part of the sentence, but that is not the issue here. The problem is that the factual statement in the first part of the sentence is very hard to justify. The numbers suggest otherwise, as Steven Toft sets out here. The second sentence also indicates no acquaintance with the numbers. As the well known (I thought) NIESR chart shows, this has been the slowest UK recovery this century - including those in the 1920s and 1930s. The financial crisis certainly battered the UK, but it also hit the US pretty hard too! Yet average growth 2011-13 in the US was 2.2%, in the UK 1%. The idea that macroeconomic mismanagement left the UK economy in a peculiar mess before the financial crisis is a politically generated myth which is also divorced from the data, as I have argued on a number of occasions.

In one sense it is unfair to single Anthony Seldon out in this respect, because I hear similar mistakes all the time from UK political commentators who profess to be, and may honestly believe they are, objective when it comes to macroeconomic reporting. I suspect the problem is threefold. First, the common feature of these mistakes is that they are repeated endlessly by the government and its supporters. Second, there is group self-affirmation - what Krugman calls ‘Very Serious People’ talk to each other more often than they talk to people acquainted with the data. Third, when some of this group do look for economic expertise, they often talk to ‘experts’ in the City or read the Financial Times. Unfortunately, both sources can and do have their own agendas.

Yet in another sense it is not unfair, because Seldon is a historian, and historians stress the importance of accessing primary sources. The main positive point I want to make is that political commentators need to check the data if they want to avoid making macroeconomic statements that are factually incorrect.      

What a fool I have been

When did the UK government’s Plan A (aka austerity) become Plan B? The table below show OBR estimates of UK cyclically adjusted underlying public sector net borrowing from various budget or autumn statements.

	9/10	10/11	11/12	12/13	13/14
March 11	8.9	7.4	5.3	3.7	2.0
Nov 11		7.1	6.4	5.5	4.0
March 12		7.0	6.4	5.7 (4.0)	4.1
Dec 12			6.0	4.8 (3.0)	3.8
March 13			6.0	5.9 (3.6)	5.1 (4.3)
Dec 13				5.5 (3.3)	5.2 (4.4)
March 14				5.3 (3.1)	5.0 (4.3)

Figures in brackets are ‘headline’ numbers, which include the impact of (from March 12) Royal Mail transfers and (from March 13) Bank of England APF transfers.

Here are the same figures for the cyclically adjusted primary deficit, which is a slightly better indicator of fiscal stance. (Unfortunately I cannot find any figures in 2011 documents.)

	9/10	10/11	11/12	12/13	13/14
March 12	-6.9	-4.2	-3.4	-3.1* (-1.3)	-1.6
Dec 12			-3.1	-2.9* (-1.1)	-1.8
March 13			-3.2	-3.3* (-1.5)	-3.1
Dec 13				-2.9 (-1.0)	-2.6
March 14				-2.8 (-1.0)	-2.5

*There do not appear to be any figures excl. Royal Mail and APF before December 2013, so I have just increased the deficit by 1.8% of GDP (the adjustment factor in the March 14 forecast) to get the underlying deficit in the first 3 rows. 2009/10 figure comes from the OBR databank. 

March 2011 was very much Plan A: a sharp and steady tightening of fiscal policy. By March 2014 it looks like Plan B: in 2012/3 and 2013/4 there is very little fiscal tightening.

When did Plan A become Plan B? It is clear that Plan A was in force in 2010/11 and 2011/12: we had significant fiscal tightening in both years. So we need to focus on 2012/3 and 2013/4. The contraction signalled in November 2011 for those years was less than in March, but it is still a fiscal contraction. If we look at the primary deficit, the contraction expected in March 2012 for 2012/13 is modest, but the OBR was still expecting a large contraction in the following year. Only in March 2013 do we find little or no contraction in both years.

This is where I have to own up. As some comments on my last post have asked, why did I not write about Plan A becoming Plan B earlier than December 2013? I did write a post on the March 2013 budget, but I chose to focus on the statement about monetary policy (given all the speculation about nominal GDP targeting). So why wait until December 2013? I could argue that others, like Jonathan Portes and the IFS, did talk about this in their commentary on the March budget. And I did acknowledge the point before December. I could also claim that I was ahead of George Osborne and Ed Balls. But these are pathetic excuses.

While we are at it, we should follow these same commentators and ask why I failed to forecast the 2013 recovery? I could say I didn’t forecast its absence either, because I do not do that kind of forecasting. Also in a second post after the March 2013 budget I did talk about Help to Buy, and I listed a number of reasons why this could help stimulate the economy. But if I’m not prepared to forecast exactly when economies are going to stagnate or recover, is anything else I say worth serious consideration?

Given these sins of omission I have therefore to acknowledge that anything I said about Plan B is totally discredited. Furthermore, my criticism of the Labour opposition for not taking the line that the plan had changed is obviously misplaced. Ed Balls did call for a Plan B before the March 2013 budget. But if an academic who has a full time job doing teaching and research cannot write about these things at the right time, how can you expect an opposition Treasury team to be able to notice that their request has been granted.

And I’m afraid this means that all of my criticism of George Osborne has to be retracted too. It is perfectly understandable that he should keep claiming that he has stuck to Plan A, because if it takes a professor of economics one budget statement before calling a change in policy, it is quite reasonable to assume that it will take a Chancellor and the entire Treasury a lot longer than that to recognise what is going on. And if the government is to be excused recognising what is happening to fiscal policy, then we really should also forgive them the effects of the contraction that did take place in the two preceding years.

So in the future I promise to ask myself before I write anything - could I have written this earlier? And if the answer is yes, I know it is best to keep quiet. I now understand that it is best to focus on when things are said, particularly at this time of year.  

Economic standards

I have used the following analogy before, but it remains pertinent. Imagine you are an academic scientist who is genuinely sceptical about climate change. I have met them so I know they exist. You are asked by a journalist whether the current spell of cold weather disproves man made global warming. Perhaps you are tempted to say yes, or ‘yes, although’, because it would encourage scepticism. But I’m almost certain you would instead say ‘of course not’. You would then give the journalist a little lecture about probabilities, averages, trends and so forth. It is exactly the same answer that a scientist who believes in climate change would give. You do not give the wrong answer just because it is convenient to your overall argument, because you are an academic and a scientist. You have standards.

Now imagine (maybe you do not need to) that you are an economist and you are asked by a journalist “Has George Osborne’s “plan A” [fiscal austerity] been vindicated by the recovery in 2013?” There is only one correct answer to this question - no. It is the correct answer, even if you believe plan A is the right policy. I rather like the analogy that Chris Dillow recently used: “To give Osborne credit for the recovery is like praising a taxi-driver for getting us home when he has taken us on a two-hour detour.” Chris says that the mistake of saying yes is an example of outcome bias. For some maybe, but for a trained economist it is no excuse. I think, like Paul Krugman, that it is just political opportunism.

It is important to understand that this has nothing to do with whether Plan A was a good or bad policy. What a supporter of Plan A should reply is  “No, but I still believe Plan A is the right policy for the following reasons”. If they are being generous they might even say “the fact that the recovery has been so delayed could be evidence against Plan A”. But for an economist, a recovery four years after the recession is never going to be evidence that supports Plan A.

I’m afraid this is an example of something we have seen before. When some economists enter a political arena (using political in its widest sense), there is a danger that they leave their scientific standards behind. Thankfully only two academics answered yes on this occasion, but many more city economists did so. So I should have been braver in my earlier post about the differences between academic and city economists - an explanation I should have added is that some city economists have lower scientific standards.

You could say I am naive to expect anything else. As a great deal of politics is about economics, then economics is also bound to be political, and cannot hope to have the same integrity as a science. There is a weak form of this proposition with which I agree: economic ideas are influenced by ideology, and it is foolish to pretend otherwise. But our reaction should be to expose these influences and try and reduce them, rather than shrugging our shoulders. What I refuse to accept is that economics cannot be an evidence based discipline.

So, if the hypothesis is “Plan A is the appropriate policy” and the evidence is “the economy recovered in 2013”, any economist can only give one response: the evidence does not support the hypothesis. Just because the question is political does not justify saying otherwise. In fact, being in a political arena means it is all the more important to maintain scientific standards. That is why we call economics a discipline.

Coda

I wrote this while listening to a Christmas present, a CD of this (Mercury nominated) album by Jon Hopkins (thanks again Sam). I think it is excellent music to blog by. But if you think I’ve gone too far in this post, do say so in comments, as it would allow me to respond that I was entitled to let my normal standards slip because I was under the influence of the music!