Oh what a lucky man

A few weeks ago I was having dinner with David Cameron. Well, almost - we were at the same restaurant but on tables at the opposite side of the room. He was taking a break from campaigning. I remember thinking he must be one of the luckiest Prime Ministers the UK has ever had. Two strokes of luck in particular stand out: the economy and Scotland. They stand out because between them they enabled him to win an election that he really should have lost.

I’ve talked at length about mediamacro: a network of myths which enable failure to be turned into success. I’ve not come across a single non-City, non-partisan economist who does not concur with the view that the performance of the coalition has been pretty poor (or simply terrible), yet polls repeatedly show that people believe managing the economy is the Conservatives’ strength. This trick has been accomplished by equating the government’s budget with the household, and elevating reducing the deficit as the be all and end all of economic policy.

This allowed Cameron to pass off the impact of bad macro management in delaying the recovery as inevitable pain because they had to ‘clear up the mess’ left by their predecessor. In a recent poll a third of people blamed Labour for austerity. Yet for that story to work well, the economy had to improve towards the end of the coalition’s term in office. The coalition understood this, which was why austerity was put on hold, and everything was thrown at the economy to get a recovery, including pumping up the housing market. In the end the recovery was pretty minimal (no more than average growth), and far from secure (as the 2015Q1 growth figures showed), but it was enough for mediamacro to pretend that earlier austerity had been vindicated. (And, to give them their due, they are very good at pretending.) 

So why do I say Cameron is lucky? First, largely by chance (but also because other countries had been undertaking fiscal austerity), UK growth in 2014 was the highest among major economies. This statistic was played for all it was worth. Second, although (in reality) modest growth was not enough to raise real incomes, just in the nick of time oil prices fell, so real wages have now begun to rise. Third, playing the game of shutting down part of the economy so that you can boast when it starts up again is a dangerous game, and you need a bit of fortune to get it right. (Of course if there really was no plan, and the recovery was delayed through incompetence, then he is luckier still.)

The Scottish independence referendum in September last year was close. 45% of Scots voted in September to leave the UK. One of the major push factors was the Conservative led government. If Scotland had voted for independence in 2014, it would have been a disaster for Cameron: after all, the full title of his party is the Conservative and Unionist Party. That was his first piece of Scottish fortune. The second was that the referendum dealt a huge blow to Labour in Scotland. Labour are far from blameless here, and their support had been gradually declining, but there can be no doubt that the aftermath of the referendum lost them many Scottish seats, and therefore reduced their seat total in the UK.

Yet that led to a third piece of luck. The SNP tidal wave in Scotland gave him one additional card he could play to his advantage: English nationalism. The wall of sound coming from the right wing press about how the SNP would hold Miliband to ransom was enough to get potential UKIP supporters to vote Conservative in sufficient numbers for him to win the election.

With the economy you could perhaps argue that there was some judgement as well as luck involved. That is very difficult to believe with Scotland. The man who almost presided over the break-up of the United Kingdom, and had to rely on Labour efforts (including his predecessor as PM) to avoid that outcome, will continue as Prime Minister as an indirect result. That is why, as I watched David Cameron eat supper at a nearby table, I thought something to the effect of you lucky person.  

When to go to bed tonight

For UK readers

I did this analysis for my own benefit, but there may be others who need to be wide awake on Friday who might find this information useful. But if you retire early on the basis of this post and find out things are very different when you wake up, I take no responsibility! My macro you can believe in; with this stuff I’m an amateur.

Unless current polls are wildly wrong, there are only two likely results: the continuation of the current coalition (except in the unlikely event that the LibDem party rejects its leadership), or a Labour government with SNP support. There will be plenty of interesting side-issues going on as well (how dominant will the SNP be, how many seats will UKIP win), but the main result will depend on the Labour/Conservative marginals which Labour must win to form a government, and that is what I focus on here.

10pm

One obvious strategy is to switch the TV off when the exit polls are announced after the polls close. They will of course tell us a lot, but they are not nearly as infallible as you might at first think - in fact the information they provide has to be processed in various ways, as these two studies spell out (HT Chris Giles). Those producing the poll know they could easily be wrong.

11pm-1am

No important marginals are expected to declare before 1pm, but the first results will be an additional indicator of the national swing. (Remember the Conservative's actual vote share is usually greater than in the final opinion polls: the 'shy Tory' effect.) To give you an idea of how close it will be, both YouGov and Elections etc suggest that a 3% point Conservative lead (e.g. 35 to 32) will produce a Cameron victory (but probably depending on the DUP), while Election forecasts suggest a 2% point Conservative lead gives a final Lab+SNP seat total of just over 315, which should be enough for a Miliband minority government with SNP and minor party support. 

However, like the exit polls, these early indications may be misleading. A great deal depends on the extent of tactical voting, and in particular about many UKIP supporters are prepared to vote for another party in a marginal seat. 

1am-3am

Many Labour/Conservative marginals are predicted to declare around 3am, but there are five exceptions. Probably the first is Nuneton, expected at 1am. This should be a Labour gain - if it is not, things are looking very good for the Conservatives. If Labour win this then the next critical seat could be Northampton North at about 2am - a real knife edge seat. If Labour win this easily things are looking good for them, but a close loss might not be fatal. (Look at what happens to the UKIP vote: if the Conservatives win with a UKIP vote share of around 10% or less, that is a good sign for the Conservatives.)

Two other Lab/Con marginals that might declare before 3am are Chester and Warrington South. Chester should be a Labour gain, but Warrington South is another knife edge seat. Both LibDem and UKIP support is significant here (15% and 10% respectively) so if either breaks in one direction this could decide the result. Cleethorpes may also declare before 3am: a recent Ashcroft poll gave the Conservatives a 2 point lead here, so a Labour gain would be a great result for them.

If Labour lose four or more of these five, I think you can almost certainly go to bed at this stage knowing that Cameron will remain Prime Minister. If Labour wins four or five, Miliband is looking good, but to be sure you need to stay up a bit longer. Another interesting seat that may come in around 2am is Rutherglen & Hamilton West - if Labour with a good local MP lose this to the SNP, they will probably lose nearly all their Scottish seats.

3am

Around 3am a whole clutch of seats are due to declare:

Amber Valley: probable Lab gain, but with a potentially large UKIP (>10%) vote

Bedford: another likely Lab gain, but with significant (around 12%) UKIP and LibDem support

Brent Central: almost certain Lab gain, but if close a worry for Labour’s potential London gains

Bristol West: very likely Labour gain if Ashcroft poll is right - outside Green chance

Bury North: likely Lab gain, but again potentially large (13%) UKIP support

Carlisle: as above

Croydon Central: a very significant London seat. This was thought to be a potential Lab gain, but a very recent Ashcroft poll gave this to the Cons.

Erewash: as Bury North

Hastings: should be a Labour gain, but UKIP could spoil things here

Hornsey: potential Labour gain from LibDems, but will Cons vote tactically?

Peterborough: If Labour wins this (as a recent Ashcroft poll suggested) this will be a good result for them. UKIP could again be crucial.

Stockton S: Another real marginal, that a recent Ashcroft poll gave to Labour

If Labour gain less than eight of these seats, Cameron is probably going to be the next PM. If they gain them all, Miliband probably will be. Anything in between, and you will have to wait another hour before things become clearer. Or with 8 or 9 key marginals not expected to declare until around 5pm, you could just decide to call it a night and find out in the morning!

The IMF, Greece and economic reality

I’m glad I was not the only one who was disappointed to hear that Yanis Varoufakis had been sidelined in Greece’s ongoing negotiations with the group formally known as the Troika. Mohamed El-Erian writes (HT Ann Pettifor)

“Varoufakis was a breath of fresh air in this protracted and exhausting Greek economic drama, which involves alarming human costs in terms of unemployment, poverty and lost opportunities. Backed by considerable economic logic and a desire to do better, he pressed for more realism in the policy conditions demanded by Greece’s creditors. And he never tired of reminding people that Greece's recovery wasn't that country's responsibility alone.”

I have also never met him, although we once commented on each other’s views on the Eurozone before he became finance minister, and we may even have linked to each other’s blogs. Although I am no Marxist (whether ‘erratic’ or any other kind), Yanis has is a sensible macroeconomist’s view of the world. That alone may have made him the wrong kind of person to negotiate with Eurozone finance ministers.

The other economists who get a look in during these negotiations are at the IMF. Their position has always been problematic. It was they, partly through an inexplicable under estimation of the fiscal multiplier, who allowed the Troika to trash the Greek economy with austerity on an epic scale. They also foolishly allowed the rest of the Troika to believe that partial rather than full default would allow Greece to regain solvency. (For the details, see this short guide.) However, unlike their Troika colleagues, the IMF can admit and learn from its mistakes, rather than trying to cover them up. It is now reported to be telling the Eurozone finance ministers that they must write off more of Greece’s debt before the Fund will release more money.

Will the IMF force Greece’s creditors to see some sense? The problem is that we have been here before, and the IMF backed down. It may be full of economists, but it is ultimately run by politicians who may have too many ties to those in the Eurozone. But as Ashoka Mody says, the IMF’s credibility is at stake. It should stop trying to pressurise the new Greek government into making reforms that contradict its election platform, and instead focus its efforts on getting the rest of the Troika to be realistic. Above all else, Greece must be helped out of its depression as quickly as possible. Sensible macroeconomists, including those at the IMF, know that makes sense. If Yanis Varoufakis could not achieve this, perhaps the economists at the IMF can do better.

Was an anti-austerity policy politically possible in 2010?

Could left and centre politicians in the US or Europe have got away with saying forget about the deficit?

It is clear to some of us at least what the appropriate macroeconomic policy should have been in 2010. No switch to austerity. In my VoxEU piece I imagine that in the US, UK and Eurozone government spending on consumption and investment had grown at an average rate from 2010 onwards, rather than being cut back sharply. Back of the envelope calculations suggest that by 2013 GDP would have been about 4% higher in all three countries or country blocs. In that eventuality by 2013 short term interest rates would probably be on the rise, and then governments could begin to reduce deficits. There would of course have been no government funding crisis in the UK or US. In the Eurozone, with appropriate ECB policy, the debt crisis would have been confined to Greece. We would have all been much better off.

So would such a policy have been politically possible? I think if there had been a reasonable political consensus behind it, almost certainly yes. After all, G.W. Bush was quite happy to use Keynesian economics to support tax cuts in 2001. One of the points I have made about mediamacro is that it finds it difficult to argue a case when there is a political consensus going the other way. The media would, of course, have raised concerns about rising budget deficits, but if the political consensus had been that macroeconomics tells you not to worry about the deficit during a recession, I think it could have survived. (An exception might be Germany, where the thought experiment is perhaps too difficult to imagine.)

The moment that the major right wing political parties decided to abandon consensus macroeconomics and use the deficit as a political weapon, then it became much more difficult to say that the deficit was not an immediate concern. This was for two reasons.

First, the default position of many political commentators is that a government is like a household, so it should respond to a deficit by tightening its belt. To counter this requires referencing macroeconomic expertise (although of a very simple kind). However opinion among academic economists about ignoring the deficit is divided, and even if the clear majority supported the anti-austerity line the media’s default mode is to frame this as a two-sided debate. If academic economists are perceived to disagree, political commentators will fall back on household analogies.

Second, and perhaps more seriously, a large section of economists - mainly economists working in the City - would have been warning of an impending financial crisis if the deficit remained high. These are the bond vigilantes that are always just over the horizon. As one former economics editor said to me, bond economists never saw a fiscal tightening they didn't like.

In this situation, it could be politically fatal to try and argue that the deficit should only be dealt with when the recovery was assured. (Here an assured recovery is code for when interest rates start rising.) It is not only counterintuitive, but you would have lots of City economists saying that you are courting disaster. Every time that long term interest rates rose, they would pop up on the TV saying it was because of fears about the deficit. We do not have to imagine this, because it is what happened.

Finally, in Europe at least, there is a killer argument. The line that we should ignore the deficit would have been dealt a fatal blow by the Eurozone crisis. Those that had been warning of a financial crisis caused by the deficit pointed to Greece and said I told you so. The subsequent contagion was a result of decisions by the ECB, but again the media framed it as a result of excessive deficits in these countries. Even outside of the Eurozone, any politician that tried to say that a similar crisis could not happen here would have been treated by the media as completely out of touch.

In this situation it is not at all surprising that the left would adopt a degree of appeasement. Voters will be less worried if you say ‘I understand the concern about the deficit, and we are doing something about that’ than if you say ‘the concern about the deficit you are always hearing about is misplaced’. It is easy for someone who understands the macroeconomics to imagine the second line would have been tenable, but we are not in the business of getting votes.

To some extent you can see the proof in all this in the change in Labour’s rhetoric in the UK. They did go for stimulus rather than austerity when in government in 2009, even though the Conservatives opposed this. Before and after the election they labelled Osborne’s plans ‘too far, too fast’. Yet that line also failed to survive, so now Labour have committed to (try and?) reduce the deficit each year.

Some, like Robert Skidelsky for example, describe these movements, and a failure to extol the virtues of fiscal policy under Labour, as a mistake. However, I suspect that if Labour’s shadow Chancellor Ed Balls could ever speak the truth, he would say that he did not want to gradually acquiesce to the austerity line, but the evidence from focus groups was overwhelming. Defending Labour before the financial crisis was pointless because it just reminded people that the Great Recession happened under their watch, and that Labour (like everyone else) gave finance too free a hand. The ‘too far, too fast’ line just sounded feeble when the news was all about the Eurozone crisis. In the end, Labour just had to be ‘tough on the deficit’.

Of course this is speculation. We might also wonder if things would have been different if the press had not been relentless in emphasising the deficit. What if the Eurozone crisis had not happened? Questions like this are not just idle speculation. They help to answer whether countercyclical fiscal policy will ever be possible again. If, every time there is a large negative shock, the political right play the deficit card, then we are doomed to pro-cyclical policy and being stuck in a liquidity trap with ineffective monetary policy much too often. That suggests to me that we need to change the way monetary policy is done. 

The Independent, the Union and utter nonsense

I made the mistake of reading the UK newspaper The Independent’s leader endorsing the current coalition last night. It included this:

“For all his talk of no deals with the SNP, Miliband is bound to rely on that party to get his legislative programme through. This would be a disaster for the country, unleashing justified fury in England at the decisive influence of MPs who – unlike this title – do not wish the Union to exist. If that were to be the case while Labour were the second biggest party either in terms of vote share, or seats – or both – how could Labour govern with authority? They could not. Any partnership between Labour and the SNP will harm Britain’s fragile democracy. For all its faults, another Lib-Con Coalition would both prolong recovery and give our kingdom a better chance of continued existence.”

I’ve read a lot of nonsense during this election, but I do not think I have seen anything quite so idiotic as this.

It seems likely that around half of Scottish voters will vote SNP in this election. They might be voting SNP because they want independence, but they may also be voting SNP because they like their policies for how the UK should be governed. Perhaps voters think the SNP will better stand up for Scottish interests. But whatever their reason, they are being told that if they vote this way, they will be effectively disenfranchised. The Independent agrees with both the Conservatives and Liberal Democrats that SNP MPs must at all costs have no influence, however slight, on the government of the United Kingdom.

I fully understand why the Conservatives are taking this view. They hope that by playing the English nationalist card, which they have done since the morning after the independence vote, they can attract more votes in England. Nick Clegg has gone along with the idea because he wants excuses to avoid a coalition with Labour. Of course the right wing press have been shouting about the ‘threat’ posed by the SNP, not because it makes any sense, but because their role is to maximise the Conservative vote. But I did not think that anyone who was supposed to be independent took any of this nonsense seriously. Apparently I was wrong.

The Independent believes that because the SNP want independence, they must have no influence on the government of the UK. What terrible things would any SNP influence lead to? How exactly could 50 odd SNP MPs force the 600 remainder to do unspeakable things to this country? The Independent does not say, but it does say that there would be justified fury in England at the prospect. Why justified fury? Again no hint. It is just asserted that any partnership between Labour and the SNP will harm Britain’s fragile democracy.

Now it seems to me blindingly obvious that one way to harm a democracy is to tell a group of people that their votes can only count as long as they do not vote for a particular party. It does not matter how many people in Scotland vote for the SNP, it seems we have to ensure that the SNP plays no role in the government of the UK. Which means your vote cannot count. The logic of this argument is that the SNP, because it advocates independence, should not be allowed to put up MPs for election. That would be ridiculous and profoundly undemocratic. So instead we will allow the Scottish people to vote for the SNP, but then ensure their elected MPs can have no influence. That seems even more undemocratic!

Now if I was a SNP voter, I would be furious at being disenfranchised in this way. I would think to myself, am I only allowed to take part in UK elections as long as the people who I vote for play no part in government? What kind of United Kingdom is that? If I was one of the 55% who voted against independence, I might wonder if I had made the wrong decision. Even if I did not vote for the SNP, I would be very concerned that my choices were being limited in this way.

And then there is the idea that the Union is somehow safer in the coalition’s hands. What the Union needed from its Prime Minister the morning after the vote was a statesman like speech about the healing of divisions and the importance of working together. What we got from Cameron was an attempt to placate some of those in his own party by talking about English votes for English laws. Whatever the merits of the argument, it was the wrong time and place if you were serious about preserving the Union. Cameron has continued to play the English nationalist card in this election: not because he wants to end the Union, but because he wants more votes. He has no concern about how this goes down north of the border, because his party have so few votes there. But if the Union ends, it will be through Scottish votes and not voters in England.

So how exactly does electing a government whose main party has no interest in Scotland, and which therefore is happy to stoke up English resentment against Scotland, supposed to be better for the continuing existence of the United Kingdom? How is denying certain Scottish MPs any role in UK government suppose to encourage Scotland to remain part of the United Kingdom? Now maybe the leader writers at the Independent were looking around for arguments to support the coalition, and given how difficult that is, this was the best they could do. Perhaps their heart was not in it. But to argue that to encourage Scotland to remain part of the Union we should disenfranchise a good proportion of Scottish voters, and that this will be good for democracy, is truly Orwellian.

UK election: it was mediamacro wot won it

After the UK general election in 1992, which the Conservatives won to the surprise of many, the Murdoch owned tabloid newspaper the Sun splashed the headline “It's The Sun Wot Won It’. The headline is infamous enough to have its own Wikipedia entry. A few days ago I wrote what I hope was a calm, considered and rather academic post on the concept of mediamacro, following my posts on specific mediamacro myths, and I talked in abstract about the dangers it posed. Here I want to be more concrete.

Since the 2010 elections, YouGov has asked the following question: “Here is a list of problems facing the country. Could you say for each of them which political party you think would handle the problem best?” This is a simple table comparing the Labour lead in this poll just after the 2010 elections and today.

Issue	Lab lead 6/7 June 2010	26/27 April 2015	Difference
NHS	-1	14	+15
Immigration	-26	-6	+20
Law and Order	-21	-12	+9
Education	-4	6	+10
Taxation	-10	-8	+2
Unemployment	-7	-4	+3
Economy in General	-11	-18	-7

Source YouGov

Ignoring the normal academic caveats, the message is clear: the only topic on which the Conservatives are doing better today than shortly after they won the last election is their handling of the economy in general.

Yet when you look at any standard criteria of economic performance, the economy has done terribly during the coalition’s term of office. There is no doubt about this: numbers from GDP per head to real wages all tell a similar story. Average living standards have not increased, which means that they have fallen for many, a result which is almost unprecedented over a five year period. How much of this is the result of government policy is debatable, but that is not a debate that you see in the media. What you see in the media is an obsession with the government’s budget deficit, and on that criterion the coalition has left the economy in a better state than when it came in. So the only way to explain these poll results is that people have internalised the media’s obsession with the deficit.

Now normally you would ask how on earth something like the budget deficit could trump standards of living when judging economic performance. This is where the mediamacro myth of Labour profligacy is so important. One of the lasting images of this election was the man in the recent Leaders Question Time who accused Miliband of lying when he said that the global financial crisis rather than Labour profligacy had caused the deficit. (Second clip here.) He just knew that the last government had bankrupted the economy, and it appears many in the audience did too. And who could blame them: coalition politicians go unchallenged when they say it, and lots of newspapers repeat the line endlessly as fact.

It is a myth, pure and simple, but an important myth, because it places the blame for stagnant or falling living standards during the coalition government on their opponents. They created the mess the coalition had to clear up, and that was bound to be painful for a time. I’ve watched people who comment on this blog try to twist and turn figures in a desperate attempt to keep the myth alive. I’ve experienced being rubbished in the partisan media for trying to expose this myth. But in mediamacro this Question Time confrontation is described as an awkward moment for Miliband, rather than just the ranting of a bloke who had never looked at the numbers. I cannot recall any major coalition politician being seriously challenged for promulgating this myth.   

It is strange watching all this happen. I know that having written one of only 2 or 3 academic papers on Labour’s fiscal record does not guarantee what I say is correct, but it certainly gives me confidence that I am not talking rubbish. I write what I can, talk to any journalists who ask, trying to get the facts across. Facts like the deficit before the global financial crisis was only within a typical forecast error of its sustainable level. Facts like the debt to GDP ratio before the Great Recession was below the level Labour inherited.

Yet I know that this message will never be received, however indirectly, by the angry man in that debate, or by most of that audience. Perhaps some do not want to know the facts, but if they did, they are very unlikely to hear them. Instead they will get propaganda from most newspapers, and ‘views on the shape of the earth differ’ type comments from the TV, whose journalists are desperate not to appear to take sides. For that reason, if the coalition government remains in power after this election (or if the Conservatives win outright), then the title of this post will have rather more justification than the Sun’s original headline. [1]

[1] Although perhaps I should not be too rude about the Sun’s claim. Recent research suggests that readers of the Sun are considerably more trusting of the media than those who prefer other papers.

Myths: a reply to Tony Yates

In this post Tony was responding to both my mediamacro series and Paul Krugman’s Guardian article, but I’m going to focus on the former. That is because I think Tony only really has a problem with the first in the series, which was about the 2010 ‘crisis’. So his ‘third way’ is really 7/8th my way! He also argues that 2010 austerity was not a major problem because of developments in consumer price inflation, but that is an argument that I did not cover in the myth series, because it is not part of the narrative I was criticising. I will address it here.

First the 2010 crisis. Tony agrees that there were no signs of a crisis in the markets, but he rightly says that a crisis could have subsequently happened. If I wanted to be pedantic, I would say that this means he agrees with my criticism of the mediamacro narrative, which at the very least allows politicians to pretend that there was an actual crisis. There is rather a big difference between “we saved the economy from a firestorm”, and “we took prudent action because bad things might have happened”. So maybe 15/16th my way.

As there was no actual crisis, what were the chances of one happening? Eric Lonergan has written a very good response to Tony on this, but he makes an additional point which I have made in the past but which I can too easily forget. Because austerity damages the real economy, it increases domestic credit risks. To the extent that governments stand behind those extending the credit (banks), then austerity can actually increase government default risk. So austerity as a precautionary policy can actually make the outcome you are trying to prevent more likely.

I also think I take a different view to Tony on what might have happened if markets had suddenly taken fright on the deficit and stopped buying UK debt. We agree that the Bank could have just bought the debt - as it was doing anyway under QE. But could it control inflation at the same time? At first sight it seems obvious that printing more money to buy government debt would compromise the inflation target. But that will not be true if you are at the Zero Lower Bound (ZLB), and austerity is only a problem at the ZLB. Paul Krugman has written a paper on this, but it becomes irrelevant because of our second disagreement.

This is that although the lack of recovery from 2010 to 2012 was regrettable, it was also inevitable given that inflation was way above target. Tony sees the MPC as trying - and largely succeeding - in getting the optimal balance between inflation being too high and output being too low. If that is the case, the ZLB was not actually a constraint during that period - interest rates combined with QE were doing just what the MPC would have wanted. This view is also a position that I think most MPC members hold.

Here I think we need to take a step back and think about what good policymaking is. A good policy is one that allows for what might happen, and not just what eventually did happen. In a sense this is a trivial observation: we do not want policies that are OK 51% of the time, but really screw up 49% of the time. However I think, after the event when we know how the world did turn out, it is so easy to forget this key point. We do not want to take taxis that generally get us there a bit quicker by taking risks, but occasionally crash. If we are unlikely enough to take such a taxi, and we do not crash, we do not say to ourselves ‘good choice’.

As Paul emphasises in his reply to Tony, you wait until you are well clear of the Zero Lower Bound (ZLB) before embarking on fiscal tightening. You are about to hit the economy hard, so you want to be pretty sure that someone else will be able to make sure it can absorb that blow. In the case of Osborne in June 2010, we do not know if he even understood the risk, because his keynote speech on macroeconomic policy ignores the ZLB issue. But if he did, he certainly did not think to himself that inflation was going to rise to 5% in 2011 so austerity is OK. (The OBR forecast for inflation was below 3%.)

While on that subject, Martin Sandbu says that as Danish and Swiss rates are now negative, 0.5% was not the ZLB anyway. This is completely beside the point. It was absolutely clear in 2010 that the Bank regarded 0.5% as the lower bound, so they were not going to cut rates further. The Bank was independent, so the Chancellor had to work around what the Bank was actually going to do (and not what five years later we might wonder what it might have done). 

What this all means is that Tony’s argument about inflation is not an excuse for austerity, but an argument about how much in practice it cost. I addressed this argument in detail here. I will not repeat what I said, because I do not want to detract from the more fundamental point above, but the upshot is that the £4000 per household figure that I often quote for the cost of austerity already incorporates some monetary policy reaction to fiscal decisions, so could well include any raising of rates in 2011 if austerity had not happened. But whatever the cost, 2010 austerity was a first order policy mistake, because it took unnecessary and large risks with the economy.