Keeping quiet about hidden motives?

This is about UK politics, but it involves a wider point that applies in all countries where austerity policies are being justified by the need for immediate deficit reduction  

John Rentoul, chief political commentator for The Independent on Sunday, liked my Prospect debate with Oliver Kamm. To quote:

“I found it usefully clarifying. I started off on Kamm’s side, because I worry about running a huge deficit in case interest rates return to normal. But Wren-Lewis makes a convincing case for worrying about that later, although he threw away some of his advantage at the end by suggesting George Osborne has an ulterior motive for cutting public spending, namely the ideology of a smaller state. Who wants the state to be larger than it need be?”

There is an awful lot I could talk about in that paragraph, but let me focus on the ulterior motive point. [1] First the bit of my argument that Rentoul is referring to.

“Why is this government proposing to repeat past mistakes, and embark on a policy that makes so little sense in terms of the macroeconomics taught to students around the world? As an academic I have tried and failed to find a macroeconomic logic to what the government is proposing. Could it be that in reality the deficit is a smokescreen to hide the underlying goal, which is a smaller state? The British people do not want a smaller state, so the only way it can be achieved is by maintaining the myth that reducing the deficit is our top priority. The government can only get away with this myth as long as enough of the media, with the help of City economists, support it.”

Let me be honest here. I did think twice before writing this, because I knew it might evoke a negative reaction among some who read it. Why not, as Rentoul suggests, just stick to the ‘no macroeconomic rationale’ point?

Before directly addressing this, let me draw an analogy. Here is a piece by Jeffrey Sachs in the FT about climate change which on this occasion I’m happy to agree with. He does not waste time with a point by point refutation of everything that climate change sceptics put forward. Here is his conclusion:

“At the end of the day, we have a classic story of political economy. There is a very concentrated but very weighty interest group with an interest in finding and pumping oil, and then there is the rest of humanity, with an interest in a rapid transition to a low-carbon future. The interest group owns Congress and much of the airwaves; it moves election results in Australia and Canada, two other carbon economies; it drives politics in the Middle East and Russia. Politics is often a close call. This one – for the survival of the planet – is going down to the wire, with a crucial rendezvous in Paris at the end of the year.”

Now you might equally say on this occasion why taint a perfectly good scientific case about climate change with conspiracy theories about oil interests? There are two excellent reasons. First, the trouble with debating the 'scientific' arguments of this interest group at face value is that it gives the impression that there is genuine debate going on, and that the key facts about climate change are controversial in scientific terms. That is nonsense, but it is also exactly the impression that this interest group wants to create. Most people will not go through the science and realise that the sceptics case is virtually non-existent. Instead they will think the science is controversial, and so go with their instinct, or with whatever those who support their politics advocate. This is why the US has an unusually low number of people who think climate change is a major threat. Second, I think social scientists have a duty to explain the world as they see it, and not hide these truths away because it might be too much for some.

Of course climate change and austerity debates are not completely comparable for many reasons. However when it comes to the macroeconomics of Osborne’s policy, I think we have now reached a similar point. Back in 2010, there was an arguable case for rapid deficit reduction, particularly as the source of the Eurozone crisis was unclear. In 2014 we know a lot more. Let me justify that with three arguments.

First, the paragraph I wrote is quite truthful in describing my own thought process. I have searched hard to find a macroeconomic rationale for Osborne’s policy stance. A belief that QE is as effective as conventional monetary policy (there is no liquidity trap) comes close, but as I explained here it does not really fit with what Osborne has said (or not said). Osborne is certainly no market monetarist, as he has shown no interest in nominal GDP targeting. So there does not appear to be a coherent case for Osborne’s fiscal proposals that a macroeconomist could take seriously.

Second, the idea that the real motive is a small state is not the preserve of some small group of left wing conspiracy theorists. Here I quote Jeremy Warner, economics editor of the Telegraph (for non-UK readers, a newspaper firmly to the right): “In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.” He also wrote: “The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.” I also think many of my non-UK readers will wonder why I am having to justify what is obvious in their countries.

Third, it must have become clear to many people now that reducing the deficit cannot be the overriding priority when there have been so many tax giveaways (50p rate, Help to Buy which creates large contingent liabilities, Cameron’s conference commitments, stamp duty changes that are far from fiscally neutral, pensioner bonds). Putting these down to ‘politics’, but counting spending cuts as ‘economics’, will not wash. (See Brad DeLong for the equivalent in the US). You cannot pretend that deficit reduction is driving government policy, when that driver only operates on the spending side of the accounts.

Economists in the media are beginning to realise this. It is really important that political commentators do so as well, so that those without an economics background get a clearer idea of the nature of the choices they will have to make in 100 days time.

[1] Who wants the state to be larger than it need be? I couldn’t agree more, but then each state activity should be examined on a case by case basis. Osborne’s cuts are not based on analysis of that kind, because it presupposes the result (there have to be cuts of a certain size). 

Small states, economics and food banks

I often know I have hit a raw nerve with one of my posts when I get responses of the ‘surely an economics professor at Oxford should know’ type. As an example, here is Tim Worstall responding to this post, where I suggested that statements from small state people that the cuts that have already been made have been achieved at little cost seemed to fly in the face of evidence. I used welfare cuts and the increasing use of food banks as an example.

In fact I was quite careful about the point I wanted to make. I did not claim that the fact that half of those using food banks said they did so because of problems with benefit payments proved that welfare reform had not worked. All I needed to show was that assertions by small state people that the cuts had been achieved at little cost seemed to ignore this obvious evidence which appeared to suggest otherwise.

Tim Worstall says that evidence should be ignored, as anyone with any knowledge of economics would know. Food banks offer free food. The demand for a free good is potentially limitless. So lots of people taking advantage of free food proves nothing. He says “it’s odd for an economist (even a macroeconomist) to miss this”. Worstall is not alone in discovering the reason for the popularity of food banks in elementary economics. Here is Lord Freud, Work and Pensions minister, making the same point.

Now this idea raises a little puzzle. Why exactly are the people running these food banks spending time and effort obtaining food from supermarkets and members of the public only to give it away free to people who do not really need it? That is not a question Mr Worstall asks, but not to worry, economist Paul Ormerod is on hand to provide the answer. “Some of those who set up food banks are undoubtedly sincere, and think their efforts are needed. But an opportunity exists for others to show conspicuously their concern for the poor, and at the same time demonstrate opposition to austerity.”

Well perhaps it is because I’m an economist (even a macroeconomist) that I would never make such silly economic arguments. How many times has Mr Worstall been down to the food bank to get his free food? It costs nothing after all, so it would be pointless for him not to at least see what they had on offer. Actually for most food banks you cannot just turn up - you have to be referred by another charity or by a local job centre. But still, if it’s free, why doesn’t he get himself referred by some obliging charity? I’m sure he wouldn’t mind pretending to be hungry - after all he is suggesting lots of other people do just that.

The less important reason why most people do not go to such efforts to get free food is that it is not free - you have to spend time and effort to get it, and that is a cost. For most people this cost far outweighs any benefit. In fact it is quite possible that the only group where the cost does not outweigh the benefit is those who would go hungry otherwise. The more important reason is that most people are quite ashamed to get food from a food bank, or to pretend they are hungry when they are not just to get a few bags of free food. Economists are allowed to take account of such feelings, even if sometimes they fail to do so. That is why the Financial Times says:

“Multiple case studies show people only turn to a charity for food if they have no alternative. Such visits are often described as a humiliating experience undertaken as a last resort. It is neither a lifestyle choice nor a wheeze to save a few pounds on tins of soup.”

Once you understand this, there is no need for Paul Ormerod’s rather contrived explanation of why people run food banks. They run them because it helps people who would go hungry otherwise. [1]

You might think that these arguments are so poor that they are hardly worth addressing. But I think they are indicative, and there is a danger that they end up giving economics a bad name. Anyone can misuse economic ideas, and small state people like Tim Worstall are no exception. Yet ironically by pretending that the rapid growth in UK food banks over the last decade is not a problem, they only reinforce the conclusions of my earlier post. Small state people are in danger of living in an imaginary world, while in reality the policies they support do serious harm.        

[1] While his idea might be applicable to millionaires at American style charity events, as an explanation for those working in food banks it seems both unlikely and insulting. 

The imaginary world of small state people

“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”

So said Jeremy Warner (assistant editor of the UK’s Daily Telegraph) last year. Jeremy is a small state person, and I think many other small state people think like this. But the statement is wrong. There are a large number of people - I suspect the vast majority - who do not have any prior view about the size of the state.

In many ways the bipolar view harks back to a bygone age, where - at least in Europe - there actually was a large constituency on the left that wanted a large state as a matter of principle. In the UK that constituency lost all its influence with Margaret Thatcher and New Labour, and it has also lost its influence in the rest of Europe. However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle. George Osborne’s plan for the UK over the next few years is the apotheosis of this neoliberal view.

I think I’m like the majority of people in not having any fixed ideological position about whether the state should be large or small. The state is clearly good at doing some things, and bad at doing others. In between there is a large and diverse set of activities which may or may not be better achieved through state direction or control, and they really need to be looked at item by item on their merits.

My first major problem with small state people is that they are not prepared to look at these items on their merits. Instead they have a blanket ideological distaste for all things to do with government. The evidence that government is ‘always the problem’ is just not there. The idea that private sector activity is always welfare enhancing and is best left alone was blown out of the water by the financial crisis. My second major difficulty with many small state people, like George Osborne, is that they are using fear of a debt crisis (a possibility which for the UK and US is non-existent) to achieve their ends. This is political deceit on a grand scale. My third major problem follows from the second: reducing government spending during a liquidity trap recession does real harm. It wastes resources on a huge scale.

For the UK, the OBR estimates - conservatively - that austerity reduced GDP by 1% in 2010/11, and by a further 1% in 2011/12, so GDP was 2% below what it could have been in 2011/12. As there has been no offsetting fiscal stimulus in later years, and because monetary policy has been constrained by the zero lower bound, this waste of resources will not necessarily be eliminated in subsequent years. So the cumulative cost of 2010 austerity could easily exceed 5% of GDP. That is a colossal sum to waste. The estimated numbers in the Eurozone, where the austerity squeeze continues, are even worse - nearer 10% territory and counting. As I argue in this new short piece for the Economist, the fact that Osborne risks doing the same thing again from 2015 onwards is a sufficient reason not to give him the chance.

Which brings me to a final problem I have with small state people, which is their disregard for the evidence. It is true that most people are bad at acknowledging counter evidence, but those with an ideological conviction are worse than most. A common theme among small state people following Osborne’s Autumn Statement is to ask what all the fuss is about. In his rant at the BBC, Osborne says “I would have thought the BBC would have learned from the last four years that its totally hyperbolic coverage of spending cuts has not been matched by what has actually happened. I had all that when I was interviewed four years ago and has the world fallen in? No it has not.” He remembers it well, because he tried to intimidate the BBC back then as well. The claim of hyperbole is nonsense of course, as Tony Yates sets out, but I want to focus on the ‘world fallen in’ point.

Here is Janan Ganesh in the FT making the same claim in spades:

“[Osborne] has also made the spending cuts he promised without the country turning into a medieval wasteland. This is a deeper intellectual wound to the left than we currently understand; it will change the terms of debate about the proper size of the state long after Mr Osborne has gone.”

With both Osborne and Ganesh the intended meaning is that cuts have been achieved at relatively little cost. They clearly hope this idea will become received wisdom in the media. But is it true? Take the one area that Osborne has earmarked for further cuts: welfare. [1] The argument that the cuts made so far to welfare have been achieved without significant costs flies in the face of the evidence. The number of food banks in the UK has grown massively over the last five years. The Trussell Trust estimate that more than half of their clients were receiving food because of benefit delays, sanctions, and financial difficulties relating to the bedroom tax and abolition of council tax relief. As James Harrison relates in this excellent long article, the government simply denies the evidence. The Economist notes: “Welfare reform was intended to be one of the big achievements of the coalition government. But almost all of the radical ideas promised are turning out to be duds.” These are duds that create real misery. Now maybe this is all just teething problems, but the prima facie evidence is hardly that cuts have been achieved at little cost.

So how can small state people have the audacity to claim otherwise? Perhaps it reflects the power of an ideology that its protagonists want to see no evil. Perhaps it is because those hurt by austerity somehow do not count. But the claim that Osborne’s cuts have been such a success that they will cause a “deeper intellectual wound to the left than we currently understand” is simply delusional. These are fantasy ideas from those living in an imaginary world, while in reality the policies they support do serious harm.

[1] I choose welfare only as an example. It does not appear to be an isolated one. Here is an account of Chris Grayling, prisons and the Howard League, or see Alex Marsh on the UK justice system more generally. Or think of those who suffered from flooding as the government cut back money for flood prevention, while the government still pretends there were no cuts.