So, driving home today, I was told by the BBC that the Prime
Minister had just made a ‘robust’ defence of his government’s economic policies.
One definition of robust (for an object) is ‘sturdy in construction.’
Well let us see, by looking at some
of the sections discussing the fiscal strategy.
(1)
“First,
the deficit. This deficit didn’t suddenly appear purely as a result of the
global financial crisis. It was driven by persistent, reckless and completely
unaffordable government spending and borrowing over many years. By 2008, we
already had a structural deficit of more than 7 per cent – the biggest in the
G7.”
UK GDP
fell by 1% in 2008. Here is OBR data on public sector net debt before
the recession.
As I suggested here,
it would have been better if the Labour government had sustained the reduction in debt they achieved in the early years. However this chart does not
look like a “reckless and completely unaffordable” policy. But if the Prime
Minister says it was, I guess he must have robust reasons for saying so. [a]
(2) “There are some people who think we don’t have to take all these tough
decisions to deal with our debts. They say that our focus on deficit
reduction is damaging growth. And what we need to do is to spend more and
borrow more. It’s as if they think there’s some magic money tree. Well let me
tell you a plain truth: there isn’t.”
People and companies
borrow all the time. I do not think they believe in a “magic money tree”.
People and firms borrow more when the cost of borrowing is very cheap – that is
common sense. The government is trying to encourage individuals and firms to
borrow more. So why is it good for the private sector to borrow more to invest
in good projects when the cost of borrowing is cheap, but when the government
does the same thing it involves believing in magic? Strange, but our Prime
Minister says it is so, and he is saying it in a robust manner.
(3) “As the independent Office for Budget
Responsibility has made clear……growth has been depressed by the financial
crisis……the problems in the Eurozone……and a 60 per cent rise in oil prices
between August 2010 and April 2011. They are absolutely clear that the deficit
reduction plan is not responsible. In fact, quite the opposite.”
If this were true,
then one would seriously wonder about the competence of the OBR. There has been
much recent debate about the size of multipliers, but not the sign: greater
austerity almost surely reduces growth. The theoretical plausibility and
empirical evidence for expansionary austerity is practically zero: for more on
the former see this short
account by Campbell Leith of joint research with Eric Leeper and Huixin Bi recently
published in the Economic Journal.
However, as far as I
am aware, the OBR has never said that austerity has had no impact on growth.
What they have talked about is why growth has been lower than they expected back
in 2010. As they had austerity built in to their forecasts of 2010, then they
have naturally looked elsewhere for events they were not expecting. [b] So this
statement deliberately misrepresents what the OBR has been saying, to imply
that the OBR believes in expansionary austerity. But the Prime Minister knows
that the OBR will let this misrepresentation of its views pass – which is a
shame. [Update - the OBR did not let this pass: see this subsequent post. ] I guess you can robustly misrepresent.
(4) “Last month’s downgrade was the starkest
possible reminder of the debt problem we face. If we don’t deal with it……interest
rates will rise, homes will be repossessed and businesses will go bust…”
Interest rates might
rise if the markets thought that the UK government might default on its debt or
if the UK was about to enter an inflationary spiral, but there is no sign of that (in fact, quite the opposite),
for very good reasons. Interest rates might rise if the MPC decides they
should. At the moment all the talk is whether the MPC will go for more, not
less, stimulus, and if the FT is to be believed
the government will give the MPC more room to act in this way. So no sign that
interest rates might rise on that account either, but I guess there must be a
robust logic to this assertion somewhere, otherwise why would the Prime
Minister be so certain?
(5) “So
those who think we can afford to slow down the rate of fiscal consolidation by
borrowing and spending more are jeopardising the nation’s finances……and they
are putting at risk the livelihoods of families up and down the country. Labour’s
central argument is exactly that. They say that by borrowing more they would
miraculously end up borrowing less. Let me just say that again: they think
borrowing more money would mean borrowing less. Yes, it really is as incredible
as that. The Institute of Fiscal Studies has completely demolished this
argument.”
The argument that by
borrowing more you may end up borrowing less has been set
out by DeLong and Summers. If you search for references to these authors on
the IFS website, or for both on Google, nothing comes up, so I do not know what
demolition is being referred to here. [c] Perhaps the Prime Minister has seen
something I have not. In any case, given what the Prime Minister has said, I’m sure DeLong and Summers will now retract their patently wild and obviously non robust
proposition. [Update - Jonathan Portes finds that in fact the latest IFS Green Budget says almost the complete opposite of what the Prime Minister suggests.]
(6) “But we are making the right choices. If
there was another way I would take it. But there is no alternative.”
The resort to TINA is
the ultimate ‘reveal’: if the arguments for the policy being pursued have been
lost, the evidence is stacking up against you, and there are plenty of
perfectly feasible alternatives, then assert as dogmatically ('robustly') as possible that
you are pursuing the only possible path. Of course the smart thing to do is to
assert this at exactly the time that you actually change your policy in favour
of one of the alternatives. Well, we can always hope, although I fear to hope
in this way would not be a robust thing to do.
[a] The
following quote from the IFS February 2012 Green Budget (page
52) makes the key point:
“To
assert that the Labour government should have done even more before 2008, while
accepting the latest official estimates for the output gap up to 2007–08, one
would have to believe that it should have been able to forecast more accurately
the path of trend output growth beyond 2007–08. Over the period from 2007–08 to
2016–17, the OBR’s latest figures imply that trend output will grow on average
by just 1.2% a year. This compares with the 2½% a year that underpinned the
official public finance forecasts produced prior to the crisis. While at the
time Mr Darling’s assessment of the path of trend growth was not seen as being
particularly cautious, it also was not widely seen as being unduly optimistic
either.”
[b] The
OBR could have concluded that they underestimated the size of multipliers in
doing their original forecast, and as the numbers they use for the mulitipliers
are low (substantially less than one),
this would be a reasonable conclusion, as the much quoted recent research by
the IMF suggests. (For more details, see Jonathan Portes here.)
But the OBR were never assuming negative multipliers, as this passage in the
speech suggests.
[c] The
2012 IFS Green Budget does discuss hysteresis, with no refutation of this idea that
I could see.
