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.

Voting Labour isn’t going to turn the UK into Venezuela

but mainstream economists should make sure they are getting a hearing

It is tempting to laugh at the rhetoric of Conservative politicians or journalists when contemplating a possible future Labour government. As John Elledge writes, it isn’t long before Stalin or Trotsky or Venezuela is mentioned. As he notes, this is not a terribly clever tactic, particularly as many of the measures proposed by Labour are (by design) pretty popular. As Stephen Bush points out, the problem for the Conservatives is not that ‘young people’ have not learnt about the evils of communist regimes, but that this group are not impressed by Brexit or their wages and for many buying a house is something their parents generation did.

Yet this kind of hyperbole is not confined to politicians or journalists on the right. When John McDonnell, Labour’s shadow Chancellor, said at their party conference that they were ‘war-gaming’ for eventualities if they gained office like a run on sterling, I thought this showed mild paranoia. I was wrong. After I wrote that sterling was far more likely to rise at the prospect of a Labour government (standard macro: more fiscal, higher rates imply stronger currency), Buttonwood of the Economist wrote that there were at least five reasons why sterling might collapse, most of which involve some form of capital flight.

Although Buttonwood was careful to base analysis on measures that Labour proposed in 2017, I’m sure I was not imagining a subtext about what else could hard left politicians do. You can read much the same from some on the centre or soft left, who have learnt through experience to be wary of the hard left. Nick Cohen knows better than to call Labour’s new mass membership all militant entryists, but instead he says they are innocent (but should know better) lambs flocking towards wolves.

With language like this flying around, it is best to look for solid ground. In parliament Labour is a centre left party led by the hard left, to use popular labels. For that reason it would be impossible for it to pursue a hard left programme, and the leadership knows that. Contrast this with the current governing party: half soft, half hard right, with the latter having the upper hand because of the membership. The Conservative party’s ethos is such that the hard right have imposed a ruinous policy on our country without challenge, which actually did produce a collapse in sterling. Fortunately many Labour MPs have less loyalty and perhaps stronger principles, and would not allow anything similar if they were in power. As a result, I find pandering myths about Venezuela dishonest to be frank. If you want to fret about deselection, I suggest you talk to Nadine Dorries.

As far as City scare stories are concerned, as I indicated earlier and Ben Chu confirms, you will always be able to find those predicting doom. One of the refreshing things about this Labour leadership is that they do not cower defensively at such attacks, but come out fighting. As Corbyn’s video could have added, it was City economists who told us that austerity was necessary because otherwise there would be a flight from UK government debt. They were horribly wrong then, as interest rates on debt fell, and they are likely to be wrong again with new stories about capital flight under Corbyn.

While talk of Venezuela is ludicrous, there is a more interesting question about where the influences on future Labour policy are coming from. To set the scene, there was a recent prank outside the LSE designed to suggest heterodox economists were the Luther to economic mainstream Catholicism, and this was followed by a column from Larry Elliott in the Guardian. Now there are plenty of things to criticise about economics, but these are not them. As Frances Coppola recounts, the ‘economics reformation’ document is embarrassingly bad. If you want to read a short but to the point and well written response, see here.

So, in case you thought otherwise, mainstream economists do not spend their time attacking any form of market intervention, but instead try to design efficient market intervention. As I have argued many times, most mainstream macroeconomists did not endorse austerity, for the simple reason that textbooks and state of the art models suggest it would be a very bad idea. But there are some (not all) heterodox economists who would like you to believe otherwise.

What has this got to do with a future Labour government? Christine Berry presents a comprehensive account of who is shaping future Labour policy. It contains the following paragraph.

“John McDonnell’s Council of Economic Advisors, set up during the first days of the leadership, was a valiant effort to give the party’s economic policy some heavyweight academic backing. But many of its members were not natural Corbyn supporters, and ran alarmed from the public ridicule heaped on the leadership in the early days – resulting in the Council being largely disbanded. Academic input now seems to be ad hoc rather than systematised.”

That is not how it happened. It is true that some of us had to suffer some public ridicule when we joined, but that just reflected badly on those doing the ridiculing. The breakup of the Council was inevitable after the EU referendum. It is hard for any group of serious economists to publicly advise in such a forum any political party that appears to support a Brexit policy that is doing (see Chris Giles here) so much damage and could do much more.

The understandable wish of many heterodox economists to have an influence on Labour policy does mean there is a potential competition for influence. Will Labour policy be based on policies derived from mainstream analysis, or those favoured by some heterodox economists? It would be wrong to exaggerate this competition: most mainstream economists agree with most heterodox economists about austerity, for example. But there are some clear differences. (In some ways you see something similar on the right, where City economists compete with mainstream economists for influence on Conservative party policy, which is one reason Conservative macroeconomic policy can produce major disasters.)

Ann Pettifor has an article about why business would do well under Labour, which invokes some of the points made in an earlier Financial Times piece. Once you discount the scare stories, I agree with Ann that the economy and therefore businesses will do much better under Labour than under the Conservatives. But her article contains an interesting remark which I think tells us something about the current leadership. Ann’s says

“Here I must acknowledge a disagreement with Professor Simon Wren-Lewis, of Oxford University, who advised Labour to adopt a fiscal rule that once again prioritises monetary policy …”

Ann follows the heterodox MMT school that favours using fiscal rather than monetary policy to stabilise output and inflation. Of course both Ann and I were on Labour’s Economic Advisory Council, and so it is obvious that there was a similar discussion in this group.

The fact that McDonnell chose a more conventional but still innovative approach (which happened to be the one I put forward), and has also stressed the importance of central bank independence, shows us two things: he has a distinctly conservative streak, and he wants Labour not only to win but to be successful in economic terms. But while McDonnell may have opted for a mainstream approach on monetary and fiscal policy, there is still plenty to play for in other areas. I am not suggesting that mainstream economists should always win when conflicts occur, but it is important for mainstream economists not to arrive late to these battlefields, or worse still wait for politicians to read their papers.

The reporting of market ups and downs is not really a joke

It began as part of my undergraduate lectures. After teaching students about the key role of expectations in influencing exchange rate movements, I joked they too could now become one of those City economists who comment on market movements. X goes up and the market falls - you explain the fundamentals. X goes up and the market rises, appearing to contradict the fundamentals - you say the markets were expecting a bigger rise in X. There is no data to contradict you, so no one will question your wisdom.

Companies pay market researchers tons of money to find out why people do or do not buy their products, so the idea that an individual can know why the market moves within hours of it moving is just nonsense. Yet day after day we see City economists telling us just this. They hardly ever express any doubt or uncertainty. They know if they did the media would regard that as boring, and choose someone else next time.

In writing posts I talked about why the media used City economists for this kind of commentary, because academics would be hopeless at it. In my lecture I said an academic, if asked by the media to comment about why sterling fell by 1% yesterday, would give one of two replies. Either ‘oh, did it, I hadn’t noticed - too busy marking’ or ‘who knows, there could be lots of reasons, we have no evidence on this at all’. But as I said it during the lecture I realised that it some way this was not really a story about how hopeless academics are in talking about daily market changes, but a story about how the media treats knowledge. After all, the second response is the truthful one. Even the first conveys some truth: unless you are speculating on the markets why does one day’s modest market movement matter?

The media use City economists because they are used to telling stories. Stories that will impress clients with lots of money to invest. As I’m sure Chris Dillow has written, people are swayed by confidence, even if that confidence is completely unfounded. Put a climate scientist, who being a scientist knows about all their doubts and uncertainties and is honest about them, in a debate with a media savvy climate change denier, and you will see that many will find the climate denier more convincing.

So the fact that the media gets City economists to tell their stories day in and day out tells us something interesting about the media. They seem quite happy to allow people to tell stories as fact, because it appears that they are asking an expert who ‘knows’. Now I’m sure the response would be by both the media and the City economist that of course everyone really understands that these are stories and not knowledge, and they are worth repeating because they are plausible stories. They could be true, but everyone really knows they are just conjectures based on little solid evidence.

But does everyone really know this? I’m sure the City economist knows this. I’m less sure about the audience, and even sometimes about the person interviewing the economist. This is a game of pretend that has been going on for so long that what is pretend has become real. Wouldn’t it be a good idea to insist on these City economists prefacing everything they say by ‘Of course we do not know, but my hunch is that …’ Isn’t it better to properly inform viewers of what is going on here, even if it does become a little repetitive? Or is informing the viewer not what this is about? And does this constant repetition of false certainty not have something to do with how City economists can be regarded by some policymakers as high priests to the fickle god of the market. 

It was interesting that some of the reaction I got to Saturday’s post was ‘why don’t forecasters tell people about these uncertainties’. Why are they not more modest? But the better ones are, and any academic who knows about macro forecasting will tell you how uncertain unconditional forecasting is. The fact that this knowledge is not reflected in how the media (or politicians) talk about them has everything to do with the media (and politicians). It suits most of the media (not all) to exaggerate the certainty, and then to express shock/horror when forecasts are wrong. And in a way it is a perfect example about the dangers of treating the media as just a harmless purveyor of news: you end up blaming the forecasters for something which is not their doing.

Bond market fairy tales part 2

In part 1 I contrasted the way I think about how different speeds of deficit reduction in the UK or US today will influence interest rates on government debt with how at least some people in those markets say they think about the same issue. That was a particular example of a more general phenomenon. The macroeconomics coming from economists attached to financial institutions often seems to be rather different to the macroeconomics of academic economists. When it comes to an issue involving financial markets, then it seems obvious who mediamacro should believe. Those close to the markets surely must know more about how those markets work than some unworldly academic. This post will suggest a more nuanced view.

As is often the case in macroeconomics, it all depends on the time horizon. Are we talking about what may happen over the next few days or weeks, or are we talking about what will happen over the next few years?

In terms of very short term prediction, financial market economists beat academic economists hands down. The only thing most academic economists can usefully tell you is that it is unlikely you will outsmart market opinion. If you really want to try then you need lots of short term information and a good nose for how that short term information is interconnected. Most academics (there are exceptions) just do not have time to do that work. I always remember the reply an academic member of the Bank of England’s Monetary Policy Committee gave to some MP who asked him about the implications of some latest data. I must have been doing some marking (grading) at the time that came out, was the reply.

Perhaps more surprisingly, those working in the markets are not as concerned about the longer term (what might happen in three or five years time) as you might expect. That is because money is made in predicting short term movements, and knowledge of where things are going over the next few years is a relatively weak guide to what might happen over the next few days. When I first started doing work on ‘equilibrium exchange rates’, I got a lot of queries from those in the markets, but the interest largely disappeared when I told them that ‘equilibrium’ meant where rates might be in about five years time.

This may surprise you because economists attached to financial market institutions often tell longer term stories, and sometimes they even produce detailed numerical forecasts of the type produced by central banks or governments. (See the list that the UK Treasury compiles for example.) But as I have often said, macroeconomic forecasts are only slightly better than guesswork. So it is only really worth putting any significant resources into producing a macro forecast if you are taking or seriously influencing decisions - like setting interest rates - where the costs of getting things wrong are extremely large. My suspicion is that financial sector macro forecasts are mainly there to give the impression of expertise to the institution’s clients.

I also suspect that economists working for financial institutions spend rather more time talking to their institution’s clients than to market traders. They earn their money by telling stories that interest and impress their clients. To do that it helps if they have the same worldview as their clients. Getting things right over the longer term seems less important, as Paul Krugman keeps complaining about in the context of those who have been predicting rapid inflation as a result of Quantitative Easing. 

It is also useful if they leave their clients with the impression that they have some unique insight into how the markets work. So instead of suggesting - as an academic would - that markets are governed by basic principles, it is better to suggest that the market is like some capricious god, and they are one of a few high priests who can detect its mood. Now in the short term the market really can behave in volatile, unexpected and sometimes mysterious ways, but over the longer term there are some basic rules that markets obey.

The incentive system for academics is very different. They are judged by their peers. If they present stories to the media that differ greatly from conventional wisdom about theory or the empirical evidence, they will be given a hard time by their colleagues. They need to have an idea about how markets work to do good macroeconomics. They want to be more like scientists than high priests. (This has an unfortunate by-product. Most academics would rather not lose precious research time talking to journalists, particularly if the quotes they give may fail to contain the caveats normally demanded in academic work. In contrast talking to the media is part of a city economist’s job description.)   

So who should journalists trust on the economy? If you want to know about the latest retail sales numbers or where the economy might be heading over the next few months, with a few exceptions financial economists are better bets than academic economists. If you have a more long term question, like how alternative speeds of deficit reduction will influence interest rates, then perhaps surprisingly you may tend to get a more reliable answer from academics. Like most things in economics, this is a tendency: there are some seasoned city economists who I would trust over many academics.

There is an important implication about political bias as well. Academic economists are no saints on this, but I do not think there is a clear average bias among academic macroeconomists towards the left or right. However partly because financial economists need to be good at telling stories that their clients find sympathetic, their worldview tends to be one where a smaller state is good for the economy, higher taxes on top incomes are a bad idea, markets are generally efficient and regulation is harmful.

If you think this is just self-serving conjecture, look at this evidence. The question of whether, in the UK, the 2013 recovery vindicated 2010 austerity was a no-brainer. Anyone who thinks about the logic for a moment will realise the answer is no, even if they think austerity was a good idea. To suggest otherwise would be to argue that it was a good idea to close half the economy down for a year, because growth in the following year would be fantastic. To answer yes to this question probably indicates political bias rather than lack of thought. When the Financial Times asked this question, only two out of twelve academics gave the answer yes. About half the city economists who were asked said yes. 

Anti-intellectualism

The question in the title of this post - What Are Academics Good For? - was meant to be rhetorical. I took it for granted that as a collective academic economists did know rather more about economic policy than business leaders or city economists, and the point of my post was to ask why this often appeared not to be recognised by some journalists or some politicians. I included some quotes from a journalist suggesting otherwise because I found them rather shocking.

It serves me right of course. What I got almost universally in comments was a discussion of all things wrong with academic economists. Even the estimable Chris Dillow joined in. So what I should have done first is establish what academic economists are good for, and then complained about those who do not recognise this. But better to do things in the wrong order than not at all.

First a point on scope that I did make but is worth repeating. When it comes to short term macro forecasting, you are no better off asking academic economists. In fact you may be worse off, because most academics spend very little time looking at the latest indicators. The best macro forecasts, whoever makes them, are only marginally better than intelligent guesswork - this is a well established fact.

One area where academics typically have expertise relative to other people is on issues involving economic policy - for macroeconomics, for example, on issues involving monetary and fiscal policy. Issues like whether austerity is expansionary or contractionary. I took this for granted because academics spend a large amount of their time doing research on these issues. Much of this research involves assessing evidence. They do this in a highly competitive environment, constantly subject to peer review. In addition, they often compete for research grants, where the opinions of end users (like the Bank of England) can matter a lot.

Of course there are things that could be improved within academia, and as Chris notes I have not been shy of giving some of my own opinions about where this might be. But since economics first started being studied, we have accumulated a substantial body of knowledge which policymakers have found useful. Policymakers should never take advice uncritically, but they should and do treat academic advice as a bit more than just another opinion.

What evidence do I have for this claim? First, a lot of the time politicians and their civil servants do seek out and make use of this knowledge. Indeed I ventured that the previous UK government might have represented a high point in the influence of academic economics generally, including macro. I described the evaluation of the 5 tests over whether the UK should join the Euro as an exemplar of how the interaction between academics and policymakers should work.

You could also look at central banks. When it comes to issues of how best to conduct monetary policy, central banks predominantly look to academics (mainstream rather than heterodox) for ideas and analysis, rather than city economists or business leaders. The analysis they use in house is often based on techniques initially established by academics, and they hire new PhDs to undertake that analysis.

If you are not convinced by any of that, have a look at the simple test I described in that recent post. The assertion that the 2013 UK recovery validates 2010 austerity is not a complex issue or a matter of judgement – it’s a simple mistake. Most academics understood that, but only half of city economists did.

So that is why I found those quotes from a well known journalist shocking. As I suggested in that post, I think it reflects an anti-intellectual theme that affects other subjects as well. You will find this kind of thing on both sides of the political spectrum, although for whatever reason it seems to be more influential on the right than the left right now. I got sent today some correspondence about austerity involving an MP, where the MP said this. “You may come at this from an academic viewpoint - I come at it from a real world viewpoint and as someone who has worked in a sector where you have to earn money before you can spend it.” That statement is so wrong for many reasons, but it also illustrates a damaging contempt for academic knowledge.

What are academics good for?

A survey of US academic economists, which found that 36 thought the Obama fiscal stimulus reduced unemployment and only one thought otherwise, led to this cri de coeur from Paul Krugman. What is the point in having academic research if it is ignored, he asked? At the same time I was involved in a conversation on twitter, where the person I was tweeting with asked

“What I have never understood is what is so great about academic economists? Certainly not more objective.”

They also wrote

“Surely, rather a dangerous assumption to think that an academic whose subject is X > a non academic whose subject is X”

In other words, why should we take any more notice of what academic economists say about economics than, well, City economists or economic journalists?

Here is a very good example of why. The statement that the 2013 recovery vindicates 2010 austerity has a superficial plausibility because of the dates (one is before the other) and both involve macroeconomics. However just a little knowledge, or reflection, shows that the statement is nonsense. It is like saying taking regular cold showers is good for curing colds, because everyone who takes them eventually gets better. But the thing is George Osborne says the statement is true, so this is a test of objectivity as well as expertise.

In the Christmas 2013 FT survey of various economists, one question was “Has George Osborne’s “plan A” been vindicated by the recovery?”. Among the academic economists asked, ten said No, and two said Yes. So two gave the wrong answer, but if you knew who they were you would not be surprised. Among City economists surveyed, the split was about 50/50, with at least a dozen giving the wrong answer. Worth remembering that the next time someone says these guys must know what they are talking about because people pay for their advice. (Some do, some do not.)

And journalists? Well, there are some very good ones, particularly those working for newspapers like the Financial Times. Which is why I found the FT leader with the headline “Osborne wins the battle on austerity” so outrageous. If I also tell you the tweets above came from a well known economic journalist, you can see why I found them revealing.

This goes back to the question Paul asked. If we don’t think that academic economists’ opinions about economics are worth anymore than other peoples’ opinions, why do we bother to have academics in the first place? Now of course for some questions an academic economist’s opinions are indeed worth little more than those of anyone else: questions like what will economic growth be in two years time, for example. In fact academic research using models tells us that answering questions like that is almost all guesswork. (Some people find that puzzling, but can a doctor tell you the date on which you will have a heart attack? But if you have a heart attack, you would want a doctor nearby.) And if you want to know what is wrong with your car, you ask a car mechanic not an economist.

And yes of course academic economists cannot all be trusted, and we do make mistakes. (Not all car mechanics can be trusted, and they also make mistakes. But would anyone tweet what is so great about car mechanics when it comes to cars?) But as Paul Krugman quite rightly keeps reminding us, academic macroeconomists have also got some important things right recently: inflation did not take off following Quantitative Easing, interest rates have stayed low despite bigger deficits, and our models said that Eurozone austerity could cause a second recession.

This post so far has seemed far too self serving, but I think this devaluing of academic expertise is not just confined to economics. The obvious comparison is the science of climate change, where the media often appears to give as much weight to paid up apologists for the carbon extraction industry as they do to scientists. When a UK MP and a member of the House of Commons Health Committee and the Science and Technology Committee has “spent 20 years studying astrology and healthcare and was convinced it could work”, it is maybe time to get seriously worried. What is so great about doctors anyway? 

Austerity, journalists and the financial sector

The argument that current growth (since 2013 in the UK and maybe from 2014 in the Eurozone) vindicates austerity is ludicrous. Anyone who comes to the debate without existing baggage can see that developments in the UK and Eurozone have been entirely consistent with what academic critics of austerity have been saying. So rather than go over the arguments yet again, let me ask why some people continue to make or support this ludicrous argument.

In some cases asking this question does not tell you a great deal. For George Osborne, for example, you could simply say ‘he would, wouldn’t he’. Still I think there are two interesting points to note: first, here is a Chancellor who feels no inhibition in allowing sound bite to trounce economic logic, and second, he feels confident that he can get away with it, which tells you a great deal about the UK media.

Which brings me to the Financial Times (ex Martin Wolf). Now, to be pedantic, the FT tends not to say outright that current growth vindicates austerity, but instead that George Osborne is justified to claim that it does. Yet this subtlety aside, why do they pursue this line? It would be easy to lump them in with the politicians, but I think that would be both wrong, and miss some important points.

I thought about this partly because of the latest Chris Giles article on the issue (HT Alan Taylor), but also because of Paul Krugman’s comment on my earlier post that discussed the weakness of the European left on macro policy. He makes the point that Obama also showed similar weakness on austerity, and explains this in terms of the influence of what he terms ‘Very Serious People’ (VSP), “whose views on economics tend in turn to be driven largely by the financial industry.” Now at this point I usually add a caveat that there are some good economists who work for financial institutions, but generally the sector’s view on austerity is that it is necessary, and often that it is unlikely to have much impact on domestic output.

Why does the financial sector (the City, or Wall Street, or whatever the equivalent name is in other European countries) have this view? There are probably many reasons, but one that I think is very important is the 2008 recession. This recession should have been disastrous for the influence of finance: the activities of part of the financial sector brought the economy as a whole to its knees, and parts of that sector had to be bailed out with huge amounts of public money. Economists, the public and possibly some politicians began to question whether the continuing financialisation of economic activity might be detrimental rather than helpful to economic growth. No amount of expensive hospitality should have been able to repair that blow to its reputation and prestige.

Of course attempts were made to blame it all on US monetary policy, or global imbalances. The intellectual basis for these alternative stories was pretty thin, but also beyond the academic debate they did not resonate. What was really required was to change the story. The 2010 Eurozone debt crisis was therefore a godsend to finance. The focus was now on the dangers of high government debt, and the necessity of austerity to end this new crisis. Here was a story that certainly did resonate (just look at Greece), and was also an ideal distraction from the problems caused by the financial sector.

I’m not suggesting that one crisis was manufactured to distract from the other. What I am suggesting is that those working in finance understood the importance of changing the story. There was a clear party line, which fitted the dominant ideology. The state bailing out banks is terrible for neoliberalism, while a story based on the evils of excessive government spending fits the ideology perfectly. For VSPs, economic journalists or politicians it was natural to turn to the prophets of finance during the debt crisis, and so any distrust VSPs might have had of these prophets as a result of the financial crisis faded away. Although the level of economic analysis within the FT is generally high, they were perhaps also bound to follow the City/Wall Street line.

On Chris Giles’s article specifically there is much to say, and Jonathan Portes has the patience to say it once more. So let me make just one point. Chris as a good economic journalist recognises that the ‘growth vindicates austerity’ line is nonsense, so instead he tries to accuse the other side of equal mendacity. To see how silly this idea is, consider the following quote:

“It was precisely the chancellor’s fiercest critics who were themselves unable to distinguish between correlation and causation during the period of stagnation and have thereby legitimised Mr Osborne’s rhetorical victory lap. They have only themselves to blame. The lesson to learn is that the economy is complicated and everyone should be deeply sceptical of anyone drawing strong conclusions from simple links that appear momentarily true.”

Of course it is completely the other way around. If there is a simple idea here, it belongs to those who support austerity, and it is the view that monetary policy can always control the level of activity. It was austerity’s critics (beginning with Paul Krugman) who emphasised the complication of nominal interest rates hitting a lower bound. Analysis of austerity based on complex macro models almost always supports the critics view (e.g. here). Criticisms of austerity are rooted in long established theory, while the idea of expansionary austerity or the 90% critical debt level relied on simple correlations.

So Chris, there is no symmetry here between Osborne and most of his economist critics. One of the reasons I started this blog is that I found, perhaps for the first time in my adult life, finance ministers arguing positions which directly contradicted the received wisdom I was teaching undergraduate and graduate students. In an ideal world economics journalists would also recognise when this happens, and tell people about it. 

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! 

On city economists and the FT survey

Tony Yates believes the claim that the 2013 UK recovery vindicates austerity is “twaddle”. It is a politically motivated claim that makes no sense in terms of basic macroeconomics. Yet today we have the results of the FT’s survey of economists, which among other things asked “Has George Osborne’s “plan A” been vindicated by the recovery?”. Chris Giles and Claire Jones report that “A thin majority of 42 to 38 said the chancellor was “vindicated””. (All the FT’s questions and my replies are below.) Confused?

The first point to make is that of the economists surveyed, many gave equivocal replies. For example many pointed out, quite rightly, that Plan A had been put on hold in 2012. So there is a lot of interpretation involved to get that 42/38 split. Second, only little more than a dozen of the economists surveyed were academics: there were far more city economists, plus others from organisations ranging from the Institute of Economic Affairs to the TUC.

So what if we just looked at the replies from academics. Here I counted just two clear Yes responses, from Patrick Minford and Mike Wickens. There were ten clear Nos, and only a few equivocating.

For the much larger number of city economists surveyed, I actually thought the split was more even: as many No as Yes replies, and a large number of neither. Yet that still means that at least a dozen city economists gave a clear Yes.

So this sample clearly suggests a divide in the views of city versus academic economists. Where does this divide come from? Here are some possible answers, with some brief remarks. Sensitive city economists should look away now.

(1) Academics live in ivory towers, whereas city economists work with real data in real time.

(2) City economists are obsessed with short term forecasting, and so find it difficult to take a more considered, analytical view. They may also be more subject to outcome bias.

Remark: I’m biased, but here is a quote from one response: “Certainly, the hysteria among unreconstructed Keynesians about the consequences of “plan A” have been shown to be ridiculous.” And here is the data:

(3) A few city economists may be hired more for their ability to talk rather than for their knowledge of macroeconomics.

Remark: Please note the ‘A few’ in this sentence. Here is another quote: “The return of growth in 2013 … [is] an invalidation of the new [sic] Keynesian assertion that growth could not return during fiscal consolidation.” which would fail in any exam anywhere. A kinder way of making the same point would be that some city economists learnt their trade when RBC models were taken more seriously.

(4) City economists are influenced by the ideology that pervades the city. That ideology says that the financial sector is invariably a force for good, and government generally a force for bad. Advocating austerity fits with that ideology, and also has the advantage of distracting attention away from what caused the recession in the first place, and the massive bail out that the city received.

(5) One idea behind austerity, which is that the markets are poised to punish excessive debt, suits those who ‘are close to the market’ and can therefore interpret its moods.

Here are the FT questions and my replies.

1. Economy To what extent will the UK maintain its recent pace of economic growth in 2014? Will households start to feel better off?

Do not have a clue, and if they are honest neither does anyone else. Consumption, and the associated demand for credit, is the key, and we have very little evidence on this. Whether households 'feel' better off will depend on whether they are better off, which mainly depends on Q5.

2. Sustainability Is the recovery set fair, or will this upswing end in tears? Why?

If by tears you mean hitting supply constraints and inflation rising as a result, I would be surprised if this happens in 2014. My instinct is that there is scope for a substantial recovery.

3. Monetary Policy Will the Bank of England change its forward guidance in the coming year? Should it?

The MPC will change its forward guidance if there is a useful message it wants to get across. If at 7% unemployment there are still no signs of overheating in the labour market, they could well lower this threshold to 6.5% or less.

4. Fiscal policy Has George Osborne’s “plan A” been vindicated by the recovery in 2013 and should the planned pace of deficit reduction continue unaltered?

The economy was always going to recover at some point, so how can a recovery that occurred 4 years after the recession vindicate Plan A? And then there is the fact that the data appears to show Plan A was put on hold in 2012. This is basic economics and data guys - why are you even asking the question? Perhaps you have made the mistake of reading your own newspaper's leaders! 

The second part of the question should therefore be: should policy revert to Plan A now that the recovery has begun? The answer is no, because another dose of austerity will slow the recovery for sure (ask the OBR, the IMF, and pretty well any academic macroeconomist.) As long as interest rates are at the zero lower bound, and there is no problem selling debt, austerity is a major mistake. In 2010 they had Greece as an excuse - what is the excuse now?

5. Labour market and productivity By the end of next year, what are we most likely to be saying about the productivity puzzle?

I hope we will have some more clues about the puzzle, which is really THE issue at the moment. If the suspicions of many in the Bank and elsewhere are correct that this has a lot to do with bank lending to SMEs, we should be asking how we avoid SMEs being so dependent on a few large UK banks in the future.

6. Housing. To what extent does the housing market need to be restrained? If so, what policies might work?

Yes. There are plenty of instruments (but interest rates are not one of them), but a very simple thing both the Bank and the government could do is say that - as the government intends to substantially increase the supply of housing and the MPC will raise interest rates at some point - a large decline in house prices is quite likely over the next decade.

7. Scotland How would a yes vote for independence affect the Scottish economy and the rest of the UK in 2014?

On fiscal matters the negotiating position of an independent Scotland is weak, and as a result arrangements if they keep Sterling will be tough. I would not be surprised if we ended up with a new Scottish currency if Scotland votes for independence. I suspect the SNP know this, but want to avoid admitting it before the vote.