Austerity in the mainstream

Economics and Westminster politics have parted company. That's the message of this claim by James Bloodworth:

There is no longer a mainstream anti-austerity narrative. The Tories and the Lib Dems are making cuts, Labour are going to make cuts and no one who isn’t is going to get anywhere near power anytime soon.

There might not be an anti-austerity narrative in the narrow Overton window of Westminster politics, but there sure as hell is in mainstream economics. There's now widespread ageement, even at the IMF, that austerity did hurt the economy: Oxford professors and the Director of the NIESR might be marginalized by politics and the media, but they are mainstream in economics.

You might reply that this is mere history. Although we know that austerity has depressed output, isn't there a case for cuts now the economy is growing? Maybe, but not necessarily. There are three issues here:

1. Why should policy tighten, rather than merely allow the standard automatic stabilizers - the cyclicality of tax revenues - to work?

The Westminster answer is that some of the deficit is "structural" and won't be eliminated by growth; the OBR claims there was a cyclically-adjusted deficit of 4.3% of GDP last year.

However, this estimate is far from certain; it relies upon an attempt to quantify the extent to which GDP is below potential and such quantification is grossly unreliable. The Bank of England says there's "considerable uncertainty" about the size of the output gap, which must mean there's also considerable uncertainty about the size of the structural deficit.

2. If policy must tighten as the economy grows, why should fiscal policy do so more than monetary policy?

One could argue that monetary policy should adjust first for two reasons. One is that getting us away from the zero bound means that we'll be able to use monetary policy to cushion us when the next recession comes - which will relieve fiscal policy of the job. The other is that sustained low interest rates run the risk of igniting bubbles in asset prices, and it's an open question whether these are remediable by macro-prudential policies such as curbs on bank lending.

3. Can we be sure that the economy will continue to grow? It's quite possible that there'll be a recession at some time in the next parliament. It is therefore imprudent for a government to plan on tightening without considering this possibility.   

I'll concede that I have maverick opinions on many things. But I suspect that, on these questions, I'm close to the mainstream. Granted, there might be a case for austerity, but it is far from as clear-cut as the Westminster village pretends.

The issue here, though, isn't merely about fiscal policy. It's about the extent to which politics should be informed by orthodox economic expertise. If anti-austerity arguments fall outside mainstream politics then it is not just the left that has been defeated, but rationality too.  

Comments

[Paul]

James Bloodworth is incorrect to say that there is no mainstream (party) anti-austerity narrative.

While it's certainly not as strong and committee as most on the left would like, there is talk from Labour of social investment, and the freeing up on spend through decentralisation (the mechanics for which are not yet clear). Last week's IPPR report has plenty of reference to it, in the bits no-one read because Labour's PR machine was broken.

For all the talk of fiscal neutral balances on spending, that's not actually what is being planned in earnest now, at least for the first two years of a new parliament.

Labour has decided - mistakenly in my view - that only the 'economic credibility' message will get it elected, but (just like Van Rompuy in his investment-focused, SGP-flexibility agenda for the new Commission), they want to do as much anti-austerity stuff as they can via the backdoor.

Given this, there's an argument that the economic mainstream you rightly describe should be getting behind this backdoor narrative. It would seem rational to do so.

[Phil]

You shouldn't let these politicians get away with talking economese. When David Cameron said four years ago that the recession was a "once in a lifetime opportunity", he was admitting that cutting the public sector is a political goal, not a response to economic conditions. Why cut when the economy's shrinking? Ooh, deficit. Why cut when the economy's growing? Ooh, *structural* deficit. It's pure politics - calling it voodoo economics would be an insult to voodoo.

[theOnlySanePersonOnPlanetEarth]

We have not had austerity but a targeted war on the poor.

I am all for austerity, get rid of all the private swimming pools, the big houses, no house can have more than one car and that car should be cheap and reliable. No more than one foreign holiday a year. No replacing perfectly good products to get the latest one. Bring in water meters and charge through the nose for wastage. No one can own more than one house.

The problem isn't austerity but a total lack of it!

[Ralph Musgrave]

The IMF and the “professors” that Chris links to at the start of the above article are all a bit slow off the mark. MMTers were pointing out the absurdities of fiscal consolidation three years ago.

Phil,

Re your use of the word “voo-doo” in reference to Cameron’s ideas, you might like this article (if you haven’t yet seen it) by Johann Hari in the Independent written in 2009. It’s entitled, “Why do we remain silent as Cameron preaches voo-doo economics”.

[Phil]

And what of the human impact of austerity? The jobs lost, the wages froze, the libraries and day care centres closed, the services cut?

And for what? To pay for the world's largest bank bailout? £900bn of toxic private banking assets sitting rotting on the public sheet.

''We'll make a profit'' they said. The £45 bn injected into RBS has already gone up in smoke. And the fact that RBS is still in government control SIX years after the crisis illustrates that NO ONE in their right mind is going to buy it with all those toxic assets.

And here's the kicker, those assets have owners. Very wealthy owners whose investments were bust in 2008 but for government intervention. WE are paying them for crap.

It is one long robbery.

[Thornton Hall]

Isn't the confusion and what if an argument for: if you need something badly and they will loan you the money, then buy it. Shouldn't somebody just say, f the macro, is there something worthwhile to invest in?

[aragon]

How can anyone make claims for Economics been rational when we have Reinhart-Rogoff and their error prone and non-peer reviewed, dubious data, Excel spreadsheet. Supported by the mainstream IMF etc.

University of Manchester students.

http://www.qfinance.com/blogs/robert-skidelsky/2014/06/18/post-crash-economics

"The deeper message is that mainstream economics is in fact an ideology"

"These ideas were tailored to the views of the financial oligarchy."

"mainstream economics is a pitifully thin distillation of historical wisdom on the topics that it addresses."

Of course the offspring of the elite who are too thick to go into banking, enter politics.

http://www.mirror.co.uk/news/uk-news/ed-miliband-should-sacked-just-3730920

"It's just depressing to realise that the reason your side is doing badly is simply because they are rubbish."

Perhaps Economics should have less of a role in politics. Economics is used as a stick with which to beat the population.

Politics is about arguing about the number of angels on the head of a pin and economics is validating the desired (by finance) outcome.

[ChrisA]

Chris
I agree with Ralph above, your "consensus" is a very thin one. Here is a simple question, to which the answer is either yes or no; do you accept the Sumner critique?
If no, perhaps you would like to explore the ramifications of that including the free lunch that we can get by reducing deficits without inflationary consequences, if yes then you have to accept that you can have austerity and stimulation at the same time.

[chris]

@ Ralph, ChrisA - yes, the IMF was appallingly slow, and MMTers were right. I didn't mention MMT simply because it is (alas) not so mainstream as the IMF: I wanted to emphasize that the mainstream consensus is now against austerity.
@ aragon - yes, some economics is bad and just a stick that politicians use and of course some economists are just shills for the rich. However, R&R's errors were spotted by other economists; the economics profession in aggregate isn't as bad as you paint it.

[fake]

I don't know what side I fall on.

But the argument for austerity is easier to win in the media than stimulus.

Austerity is straight forward, spend too much, debt is bad (mkay), everybody wants a responsible government.

Stimulus is so much harder to argue for, you are arguing to spend on debt, people are afraid of debt, it doesn’t help that (in the media) a lot of the arguments for stimulus lack vision, there is no real "grand plan" as to what to stimulate, just a general "anti cuts" rhetoric, and certainly no strong argument that we can just “carry on”.

Maybe those arguments exist on economics blogs, but the politicians are not carrying that message.

I fully support a stimulus that has a defined purpose, but if it doesn’t have one, then austerity seems a safer bet, I think I speak for joe public.

[Joe]

Point one: the 'structural' deficit depends on estimates of the output gap which you correctly point out are difficult to quantify. If the OBR says it is around 4%, and you imply this is wrong, then there's an equal chance the structural deficit could be BIGGER than the estimate.

I'd lean towards the output gap being smaller than estimates might say. There are a lot of obstacles for the economy in the medium/long term and the days of 3%-ish trend growth may be long gone.

[FromArseToElbow]

Austerity is politically hegemonic because it has been, in strong and weak forms, the dominant narrative since the late 1970s. Despite the blather about investment in education etc, New Labour was pro-austerity ("prudent") from the off.

No UK political party has seriously advanced a programme of vigorous investment or generosity since the 1960s, which means that the "Treasury view" was dominant for all but a couple of (non-wartime) decades over the last 100 years.

Whether it make sense in academic economics is incidental, which perhaps reveals the limited political value of academic economics: useful to reinforce priors, ignored when contentious.

[Dipper]

"There is no longer a mainstream anti-austerity narrative"

I must have missed the austerity drive. Osborne is borrowng c£100Bn pa which is £50Bn more than he said he would do at this stage in the cycle. Still looks like massive uncontrolled borrowing to me.

[gordon]

When do we stop worrying about the "output gap"? Should we still be worrying about the output gap caused by the Great Depression? How about Genghis Khan? The Dark Age?

[jcee]

"How about Genghis Khan? The Dark Age?"

It's going to take something seriously radical. Short of another meltdown it's hard to see where needed change will come from. It certainly won't come from the current crew... irrespective of political stripe. The term "Left" should really be appended to pseudo-Left given that neoliberal sensibilities seem contagious in some quarters.

[leslie48]

Austerity is politically hegemonic as said above but so is the idea that Labour's policies 'crashed the economy'. Of course the great body of economists see no blame on Gordon B for the global financial crisis (2008) nor do any claim Labour were fiscally irresponsible (1997-2008). So we conclude all media coverage of the economy is very ideological and at a standard driven by the D/Mail. This clearly puts the BBC to serious shame if true.