Wednesday, 25 September 2013

Sound bite economics

A holiday means that I’m late commenting on George Osborne’s  9th September speech, but I cannot let it pass. It attempts to show that those, like me, who oppose the government’s austerity policy, have lost the argument. As exactly the reverse is true, I need to show where his analysis is wrong. Actually that is quite easy, because there is no coherent analysis, just a series of sound bites.


I’ll begin with the section which starts ‘the headline facts are not in dispute’. There follows a highly selective and misleading set of facts. I could retaliate in kind, but instead here is a chart from economists at the Bank of England, who should be objective in their selection of data. It shows that the UK recovery has been weaker than is normal even allowing for the fact that the recession was caused by a banking crisis. The only area that has done as badly as the UK is the Eurozone. This is a dismal record, given the unique problems faced by many Eurozone periphery countries. They really did have a government funding crisis, whereas the UK just acted as if it had one.

Evolution of GDP around recessions and banking crises. Source and definitions: Dale and Talbot, Vox, 13 September


Not surprisingly, Osborne chooses to focus on employment rather than output. As everything that is relatively good about UK employment is equivalently bad about UK productivity, this just emphasises how appalling the record since 2010 has been.

He then says: “These are the facts. The controversy has been why GDP growth has been weaker than originally forecast.” No no no!!! The argument is simply that without austerity the recovery would have come quicker and the recession less deep. It is not, and never has been, about forecasts. The reason why Osborne plays this sleight of hand is obvious – he wants to persist in giving the impression that austerity is not contractionary. [1]

Then comes the most pathetic bit. “Those in favour of a Plan B have lost the argument. The reason is simple: proponents of the ‘fiscalist’ story cannot explain why the UK recovery has strengthened rapidly over the last six months.” What nonsense. A balance sheet recession ends when private sector balance sheets have been adjusted. In the textbook case austerity implies a deeper recession but then a subsequent recovery that is stronger as a result. So in that case rapid growth provides evidence in favour of the ‘fiscalist’ case, not against it. [2] [3]

The irony of all this, as Jonathan Portes points out, is that the pace of fiscal consolidation in the UK has recently slowed compared to the first two years of this administration. (According to the latest estimates from the OECD, the underlying primary fiscal deficit, after shrinking sharply in 2010 and 2011, actually rose in 2012.) So the simple implication would be: ease off on austerity, and you allow a recovery to begin. Jonathan says “we should give the government credit for not digging us further into a hole by trying to stick to its original plans.” I might be inclined to agree if they were being honest about what they were doing.  Instead we have this Orwellian world were the Chancellor says we have a recovery because he stuck to his plans, when it appears exactly the opposite is true. 

There is no attempt in the Chancellor’s speech to address the academic estimates of the amount of UK output lost through austerity, such as those of Oscar Jorda and Alan Taylor discussed here. No attempt to look at how monetary and fiscal policy interaction is changed at the zero lower bound – perhaps because the UK Chancellor is also ultimately responsible for the monetary framework. [4] I also see (HT Alan Taylor) that Mark Carney confirmed to the Treasury Select Committee that fiscal policy had been a drag on growth. It would be interesting to know by how much according to the Bank’s model.

But the Chancellor knows he does not need to address these arguments. Instead, if he keeps on repeating that rapid growth shows critics of austerity are wrong, he will get away with it. Just as he has with the myth that much of our current problems are down to the fiscal profligacy of the previous government. Most of the press will parrot his arguments (even those that really should know better [4]). Any hope that the BBC might provide some objectivity have disappeared as a result of threats and intimidation. So Stephanie Flanders writes: “As ever, there is no black and white here, but Mr Osborne's speech makes a serious case.” I guess this is the same sense of ‘serious’ as in Very Serious Person.

This will all mean that the public will never find out that many of the minority of UK academics that originally supported austerity have changed their minds, that it is difficult to find prominent academic macroeconomists currently supporting austerity, and that more widely the academic argument for austerity has been decisively lost.  Unfortunately, as Paul Krugman suggests, there is evidence that this strategy of initially closing down parts of the economy so you can claim credit when it starts up again can help win elections. All very depressing, although also rather predictable.

[1] If he was being honest, he would say that the issue is how many percentage points of GDP have been lost as a result of his additional austerity. Are the multipliers low, as the OBR suggest, or higher, as the IMF and others suggest. By instead referring to a baseline of the OBR forecasts which already embodied their low multiplier estimates, he simply (but deliberately) muddles the issue.

[2] In traditional business cycle theory, the economy always returns to a level of activity that is independent of the depth of a demand led recession. So if you increase the depth of the recession through austerity, you automatically increase the strength of the recovery. This will be true even if austerity is ongoing, because private sector demand does eventually replace public sector demand in this standard model. 

[3] If you think this is ex post rationalisation on my part, here is what I wrote in February. “For the Chancellor, from now on things may start to get better, if only because they have become so bad. The UK may just avoid a triple dip recession, and may even grow at more than the snails pace predicted by forecasters. Any growth will be talked up as if it is a new dawn ...”

[4] The sound bite about monetary policy activism is repeated, with no reference to the zero lower bound. There is a statement about how “economic theory and academic evidence both suggest that multipliers are likely to be relatively low in an open economy with a floating exchange rate and independent monetary policy”, with no acknowledgement that an independent monetary policy may be of limited use at the zero lower bound.

[5] I am not sure which is worse here: Osborne because he has power, or the FT editorial page because it should have no political axe to grind. But really, you would hope an FT editorial would contain at least some economics to back up the rhetoric. 

8 comments:

  1. Simon,

    Thank you for this. When I heard Osborne crowing about this economic miracle earlier this month, I was pretty perturbed (Can the man not see the obvious?) and was awaiting your riposte, which is spot on.

    As Paul Krugman commented, Osborne's story is unfortunately (for most of us) gaining traction to judge from my conversations with people in general.

    I find people think it odd when, in contrast to their roseate view of the future, I mention that I think we still are in a 'low-grade' depression where growth is possible but does not indicate a durable improvement.

    Mindset is a key factor in this discussion. As all the main tenets of Austerity have been shown to be false in fact, we can only account for its continuance on the grounds that it is an ideology, or even perhaps an article of faith.

    This would explain why, politically at least, the argument for Austerity still has the upper hand and how, sound-bit by sound-bite, it has been built into a nostrum for most people, including those who regard themselves as informed.

    I would be interested to hear yours and others' views on the psychology (psychosis?!) of this issue.




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    1. Why is expansive fiscal policy helpful in pulling out of a recesion? Is it the expansion of money entering the economy?

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    2. I think you have to ask where people get their information from. When even the Financial Times parrots Osborne's sound bites, how are people to know they are wrong?

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    3. In reply to Simon's comments but also those below; I share your views entirely.

      Two thoughts have already occurred to me in the past few weeks prior to this discussion:

      1. The BBC now seems to take on the political hue of the party in power. I used to believe that it was the voice of New Labour in the Blair/Brown years. And now I hear the same harsh accents of Cameron and Co. in the voices of Peston, Robinson and so on. I really find I no longer trust the impartiality of the BBC. Nor does it seem to be a voice of balance and reason. The same goes for the FT.

      There are few places in the media where an impartial and considered alternative view is made. Most discussion is dogmatic and emotional. What a shame!

      However, it is certain that if the BBC disappeared, things would be far worse and UK media would certainly be in Fox territory.

      I agree that the culture to sustain a public broadcaster has been eroded, most notably by the creeping crassness and coarseness in the media and, in some ways, in every day life. Thus there is already a huge market for the GOP view of the world in this country. You can see it already in Sky and other Murdoch outlets such as The Times.

      No surprise then that, bombarded by all the above, most people have swallowed the Austerity propaganda.

      2. On Simon's point about Osborne's approach, as a mere layman I had been wondering whether, in fact, he knows perfectly well that Austerity is a sham but cannot disown it publicly for fear of undermining Coalition credibility.

      Better to ease up imperceptibly and in effect reflate, he calculates, particularly in areas guaranteed to instil greater optimism such as the housing market with a view to 2015.

      Mark Carney's new Fed-style approach of linking interest rate decisions mainly to the rate of unemployment appears to have injected a note of humanity hitherto entirely lacking.

      This explicitly makes people and jobs the priority, something that sits at odds with the Coalition policy: Think IDS.

      Osborne, to my knowledge, has not savaged this most un-Tory of attitudes.

      Perhaps Carney and he had some discussions on how to manoeuvre into a co-ordinated position to roll back Austerity. Pure supposition of course.

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    4. "even the Financial Times parrots Osborne's sound bites"

      yes they do, depressing.

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  2. The BBC was created to reflect a market failure, namely that flows of information coming from press barons was likely to be one-sided. This last five years has made me question and I think now reach the conclusion that the UK does not have the sort of culture necessary to sustain a public service broadcaster.

    Would the UK be the sort place that would revert to a Fox News type output if broadcasting were left to the marketplace? That seems to be the only reason for keeping the BBC in the age of the internet.

    It is a real shame, as the idea of a state broadcaster is sound in practice, but has been ruined. Just think of all the economic graphs that could have been put up on high-definition TV screens to tell a thousand words, but we are instead left with Osborne's verbiage.

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  3. I would like to call attention to the following clause of the Chancellor's speech - the venerable triad of explanations the Coalition has trotted out for their having presided over stagnation.

    "Instead, the composition and timing of the slowdown in GDP growth relative to forecast is better explained by external inflation shocks, the eurozone crisis and the ongoing impact of the financial crisis on financial conditions."

    Remarkable to me has been the consistent failure of not only opposition politicians but also the commentariat at large to point out and reflexively howl with laughter at the obvious irony of excuse #2. It wasn't Coalition austerity wot laid the economy low (that was expansionary?); it was that of the perfidious Europeans! Awesome!

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  4. Michael Burke

    The OBR has noted but not fully quantified the effect that fiscal easing has had on the recent very modest growth rate.

    In fact, turning to the National Accounts data, it can be seen that it is an increase in real government consumption from Q1 2012 onwards which more than accounts for the uplift in real GDP over the same period.

    http://socialisteconomicbulletin.blogspot.co.uk/2013/09/did-austerity-lead-to-recovery-no-it.html

    Therefore, far from austerity leading to recovery, it is a (wholly unsustainable) version of Plan B which has lifted the economy.

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