How rude should I be about policymakers? Some may think this
a strange question, but I personally have quite a high regard for them. Having
spent some of my formative years working in government, I can certainly
appreciate the difficulties they face. Sure, there are unspoken (in public)
political imperatives that drive a lot of policy, but I don’t think politicians’
public concern with social welfare is entirely a facade, and it is certainly
not among most of those who work for them – quite the opposite, in fact. So
when I wrote this
(see final paragraph) about belief in the confidence fairy, I did worry I was
allowing rhetoric to get the better of me.
Now in mitigation, I have to say that the 2010 switch from
fiscal expansion to austerity does make me very angry. I’d like to think that
this is just because of the immense harm it is doing, but there is something
else as well. It represents the abrogation of knowledge: knowledge which,
largely through accident, I was particularly aware of. I think this is
something that even economists who are not macroeconomists, and not just
non-economists, do not fully appreciate. In the mid-2000s my main research was
on monetary and fiscal policy interactions, and this was a field that appeared
to be characterised by considerable
common ground, and certainly not by alternative ‘schools of thought’. Some of
this knowledge began to be applied in 2008/9, and even an institution like the
IMF which was famed for its fiscal conservatism was quite happy
applying that knowledge.
It is as if you are a doctor, treating a patient with proven
but also state of the art medication. The patient is not well but the treatment
you are applying is working. Then suddenly the hospital administrator tells you
to stop, because the drugs are expensive and they would like to try some
spiritual healing instead. And, in case you ask, the financial crisis did not suddenly
render the sum of macroeconomic knowledge accumulated over the previous decades
obsolete (whether embodied in textbooks
or DSGE
models).
But in a sense all this makes trying to be dispassionate about
the reasons for the switch to austerity all the more important. So here is a
list. I’ve talked about all of these before,
but not in one place. These reasons for advocating austerity are not in order
of their relevance (see Farrell and Quiggin (pdf) for the basis of such an assessment), but I am going to give them marks out of
ten, where the lower the mark the more rudeness is justified.
“Our government cannot
sell any debt.” Here I draw a sharp distinction between those in these
countries, and those outside. For those inside, I think the choice between
austerity and default (there was no other option) was very difficult, and I
would only have minor criticisms: sometimes a failure to adopt the right fiscal
mix,
sometimes going further
than was necessary, and sometimes being naive about the position and motivation
of their creditors (perhaps through collective guilt). So 8/10: rudeness not
appropriate. For those outside these countries (many in the ECB, Commission,
Germany etc), a very different assessment – see below.
“After Greece, it could be anyone next” or
more simply “Panic!”. Many
policymakers convinced themselves that markets, in refusing to buy certain
countries debt, were behaving irrationally – after all we had just had a
financial crisis where they also seemed to behave in this way (either before,
or during, or both). In these circumstances, ‘confidence’ becomes the word of
the moment, and appeasement to a particular reading
of market sentiment understandable (although wrong).
Here I give (6-2x)/10, where x is the number of years after 2010. I can forgive
policymakers being confused in the panic of 2010, but by 2011 we understood
much better what was going on, and the evidence by 2012 that this was a
particular Eurozone problem generated
by ECB behaviour became so clear
that even the ECB understood. (As you can see, 2/10 means I can be rude!)
“We want our money
back.” Again a reason that is only relevant to those who lent to certain
Eurozone economies. A common enough human motive, generally coupled with a
belief that creditors bear no responsibility for properly assessing risk. Not a
good way to lend money (see 2007/8 and earlier),
and certainly not a good basis
for macroeconomic policy. (“Oh, did we play a major part in designing
this system?”) Also largely
self defeating. What comes into my head as I write is Destroyer of Worlds,
and I don’t think that is far wrong.
Does not deserve a mark.
“The recovery is well
underway, so now is the time to deal with debt.” What this argument has
going for it is that at some point it becomes correct. In addition there are
policy lags, and forecasting is difficult. But it is also true in macro that timing
is everything. The argument was wrong in 2010, because it failed
to take seriously the asymmetric nature of the consequences of forecast errors.
So (6-3x)/10. By now those who advocated austerity on this basis should have
changed their minds, which some
have done to their credit (and I mean that – it is difficult to admit mistakes).
“Monetary policy can
take care of demand.” What I have called
Zero Lower Bound Denial. There is perhaps some evidence that this belief was
part of the UK Conservative Party mindset (see end of this post),
but I think it is more prevalent among some bloggers, or economists who are not
macroeconomists or who ‘missed’ the lost decade in Japan and who thought the
Great Depression was just history. There, I’ve revealed my mark by my language
again: 2/10. A slight variant
in the UK is “without austerity, interest rates would have been higher”, which
owes a great deal to hindsight (and higher VAT).
“We need to reduce
the size of the state” (apart, perhaps, from the bit that buys military
hardware). 0/10, not for the belief itself (that is mostly politics, with very
little macro), but for duplicity.
Chris Dillow might add,
follow Kalecki, a view that the working class needs to be controlled, but I think
that was UK 1981, not world 2010. Less than 0/10 for the variant that says what the state does in another country is a waste of money, because even if it happens to be true it combines duplicity with imperialism.
“What aggregate demand
problem” or more succinctly Demand
denial. A strange belief
that should have died when J.B. Say realised
his error, but which resurfaces from time
to time and place
to place.
0/10.
“Reducing debt is
virtuous.” I hesitate to include this, because I do not seriously think any
policymakers actually believe it (they are often the same people who happily
spend or cut taxes in a boom). The macroeconomics is obviously silly – not everyone
can run a surplus
(so 0/10). Unfortunately this kind of economics as morality does seem
to influence some
people. The argument that “we cannot waste any time tackling the problem of
debt” faces similar problems,
and is also not really believed
by many who make it.
So there you have it, and yes, I do feel much better having
written this all down. But will it stop me being rude in the future?
