When I was in London recently, I was repeatedly assailed with the idea that the…
Here is a list of my professional colleagues who have learned nothing in the last 5 years. That is no surprise because they didn’t learn very much before that about how the monetary system works anyway. If their ideas were to be implemented I would guess that very few of them would publicly recant and admit they were wrong. They would obfuscate, deny, misconstrue but they wouldn’t admit they were wrong. At least prospective students have a good list of departments to avoid should they wish to study economics in the US. Keep it handy for future reference. Back in February 2010, there was a letter by 20 economists supporting the Tory proposals for fiscal austerity published in the Sunday Times. It was an unashamed attempt to influence the result of the May 2010 election. A week later 60 economists wrote that the 20 were nuts. It seems that some of the 20 rats have now deserted the Tory ship but won’t really tell us why.
The Economists for Romney claim that the fiscal stimulus has worsened the situation in the US and created high unemployment. They want a range of cutbacks and deregulative moves which will, in any reasonable assessment, kill growth and redistribute national income to the high-income earners, and make life harder for the poorest Americans.
Pretty easy for them to advocate that scenario behind the protection (for most if not all of them) of tenure or secure pensions and prior wealth accumulation.
As I have said in the past would they sign such a document if they had to sacrifice their own tenure or lose a percent of their income and wealth should unemployment rise. The list would shrink to zero if that rule was applied.
Over the Atlantic, there was a story in yesterday’s (August 15, 2012) edition of the British New Statesman – Exclusive: Osborne’s supporters turn on him – which provided a summary of the about-turn by many of the 20 economists.
Looking back to February 2010, Britain was paralysed by the conservative scaremongering over budget deficits with all sort of dire predictions being pumped out in the media on a daily basis.
This snap from the pages of the UK Telegraph story (February 19, 201) – Economists warn deep spending cuts would be ‘dangerous’ – shows how obsessed the debate was becoming about the deficit and debt. The UK was to become Greece, even though no-one seemed to have the wit to point out that one issues its own currency while the other uses a foreign currency (the Euro).
And if you thought it was just the UK Telegraph going crazy consider the next graphic which captured the headline in the February 19, 2010 edition of the UK Times newspaper, purportedly a quality newspaper that appeals to thinking Brits.
At no time in either newspaper (or many others at the time) did we read about the inapplicability of conflating two incommensurate monetary systems (UK and EMU).
We recall that on February 14, 2010 – 20 so-called eminent economists sent a letter to the Sunday Times extolling the virtues of the proposed fiscal austerity plans of the Tories in the lead-up to the national election in May.
Anyway, courtesy of my databases, here is the full text of the Letter – UK economy cries out for credible rescue plan – with the signatures:
IT IS now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.
In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.
In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.
In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.
The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.
The bulk of this fiscal consolidation should be borne by reductions in government spending, but that process should be mindful of its impact on society’s more vulnerable groups. Tax increases should be broad-based and minimise damaging increases in marginal tax rates on employment and investment.
In order to restore trust in the fiscal framework, the government should also introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals.
Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides and Danny Quah, London School of Economics; Meghnad Desai and Andrew Turnbull, House of Lords; Orazio Attanasio and Costas Meghir, University College London; Sir John Vickers, Oxford University; John Muellbauer, Nuffield College, Oxford; David Newbery and Hashem Pesaran, Cambridge University; Ken Rogoff Harvard University; Thomas Sargent, New York University; Anne Sibert, Birkbeck College, University of London; Michael Wickens, University of York and Cardiff Business School; Roger Bootle, Capital Economics; Bridget Rosewell, GLA and Volterra Consulting
The article by the Economics Editor described the signatories as “leading economists” and said that in “an endorsement of the Conservatives’ position and an attack on Labour”:
… they warn that a failure to act could trigger a loss of confidence that could push up interest rates, undermine the pound and threaten the recovery.
The signatories included “the former chief economist of the International Monetary Fund, a former deputy governor of the Bank of England and head of the Financial Services Authority, and a former permanent secretary to the Treasury and cabinet secretary … four former members of the Bank of England’s monetary policy committee (MPC), a Labour peer, the former chief economists of the Bank of England, HSBC and the Greater London Authority, the head of the economics department at the London School of Economics (LSE) and the presidents of both the Royal Economic Society and the European Economic Association”. Cossetted elites to say the least.
Smith quoted the now Chancellor (George Osborne) who said, in relation to the letter, that:
This is a decisive moment in the economic debate in Britain – a moment when Gordon Brown’s argument on the deficit has collapsed and a new consensus for more decisive action emerges … An impressive array of top economists, not just from Britain but around the world, are clearly warning that the government does not have a credible plan to deal with the deficit and that this threatens the recovery with higher interest rates.
Crucially, these economic experts also say there is a compelling case for starting in 2010 and that there should be independent oversight of the forecasts – two arguments we Conservatives have been making with force for months now. It is clear today that the Conservative party is now speaking with the consensus of expert economic opinion and it is Gordon Brown who is threatening the British recovery.
At the time, I reported on the letter by the 20 economists. Please read my blog – The vandals are gathering – for the discussion.
I wrote that the letter by the conservative British economist was cast as being “non-partisan” but supported the Tory position on the need for greater budget austerity than was being proposed by the then Labour Government.
In relation to the letter, note there was no mention of unemployment. The letter was all about appeasing the amorphous financial markets.
I also issued the same challenge that I noted above might apply to the Romney economists. I wrote that: as a test of their sincerity, I suggest they offer to resign their own positions (or if retired, hand back their superannuation entitlements) if the unemployment rate rises as a result of their recommendations which are almost assuredly going to be introduced (in some form) by the spineless British government. I wonder if they would be so forthright with their arrogance if their jobs were on the line.
At the time it was obvious that the budget deficit had risen because the UK was in the throes of the most severe recession since the Great Depression with real GDP already falling by 6 per cent (in early 2010) on its previous peak. The fiscal stimulus (combined with the beneficial effects of the automatic stabilisers) was the only reason the British economy showed any signs of recovery.
A recovery that has been destroyed by the very policies that the 20 economists said were urgen and, compellingly, should be introduced immediately after the May 2010 election.
The budget deficit would have been much larger and the national debt correspondingly higher if the British government hadn’t have taken some discretionary measures.
Further all the breast beating in the letter about financial markets, yields, ratings and the rest of it, only divert attention away from the real purpose of the economy – to make things, provide services and provide incomes and dignity to workers.
The financial markets add very little value to our lives. Employment and outputs add significantly. As a sense of priorities, it is madness for us to allow politicians to kowtow to these amorphous financial markets (who caused the meltdown in the first place) and usurp the need for employment and income growth.
As I argued in this blog – Who is in charge? – a sovereign government always has the power over the markets!
In The Collected Writings of John Maynard Keynes, Vol. 21, Keynes wrote (1932: Page 61) that:
The voices which-in such a conjuncture-tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilizing the world’s potential production, are the voices of fools and madmen.
Well it seems that the rats – fools and madmen – use whatever epithet you like are deserting the Osborne ship. The New Statesman article noted above – Osborne’s supporters turn on him – recently followed up the 20 signatories some two and a half years later – with the UK now deeply in a double-dip recession (having recorded a real GDP contraction of 0.7 per cent in the second-quarter 2012 to follow the first-quarter contraction).
The data also shows that the British government is “set to borrow £11.8bn more than Labour planned” because the economy has deteriorated under the policy regime imposed by the Tories.
The New Statesman wrote to the 20 to ask them:
whether they regretted signing the letter and what they would do to stimulate growth.
Apparently, 9 of the 20 “urged the Chancellor to abandon his opposition to fiscal stimulus and to promote growth through tax cuts and higher infrastructure spending”, while another (Pissarides) had already written an open letter eschewing his earlier position (as one of the 20). Only one of those who replied indicated that he “was willing to repeat his endorsement of Osborne”
The New Statesman reports that the others “merely said ‘no comment’ or were ‘on holiday'”. There is one thing about unemployment – you get no holidays!
Apparently there is now a recognition that the UK is not Greece and is “able to borrow at the lowest interest rates for 300 years (largely owing to its non-membership of the euro and its independent monetary policy)”.
In noting that the Tories have cut investment by 48 per cent since coming to office, they say that 9 urge Osborne “to invest for growth”.
The article says that Osborne’s stubborness is an act of defending his “political pride” but if he fails to change direction then he will “condemn the UK economy – and his party’s poll ratings – to permanent stagnation”.
The full text of the economists responses were to appear in the print edition of the New Statesman and the on-line story summarises the “key lines”. What I was looking for was an admission that the underlying theoretical view that drove the to write the letter in the first place (and influence the public debate) was in error. I was disappointed.
One economist said that with private spending so flat, the policy mix:
… may require a bit of government spending to prime the pump.
So why did he advocate severe cuts in the government spending 2.5 years ago when private spending was similarly flat and the fiscal stimulus at that time was providing some growth and some signs of a return to private sector confidence?
Another economist claimed that the “fear that UK borrowing would become overly costly has become much less relevant” because the “Bank of England has made clear that it is willing to put considerable resources into monetary easing”. But at the time, the central bank was clearly maintaining a policy of low target rates and yields on public debt was low.
The reason was that the UK is fully sovereign in its own currency – that hasn’t changed. That means there is no risk of default and the bond markets knew that then and still know it.
Another said that:
It was necessary to cut current expenditure but, given the poor state of Britain’s publicly funded infrastructure and the looming recession, the necessary counterpart … is to increase public investment expenditure even if this worsened the short-run public deficit. That would stimulate private investment … We need growth, and that requires investment. In a recession bordering on a depression, public investment in infrastructure that has a high pay-off even in good times must make sense.
So what has changed? All of that was applicable when that character signed away his credibility in 2010. It was always the case that with private spending flat, aggregate demand could receive a fillip from public spending.
Another signatory said the government should not have cut investment spending because they are:
… expenditures that have to made at some time and would be cheaper to do now than in the future. This could be debt financed. If the government clearly explained this strategy, I believe that the market would not charge higher rates for this additional borrowing.
Same question – what has changed?
The lessons of history tell us that the resources saved through cutting public investment now always are dwarfed by the resources required in the future when essential infrastructure fails. I am talking about real resources but the same can be said for nominal monetary outlays to purchase those real resources.
Another Cambridge don claimed he still held the views expressed in the letter but that “this government’s policies have not followed the balance I had in mind when I signed the letter”. Which means what? Well apparently he may not agree “with this government’s obsession with credit ratings and fiscal reductions at the expense of growth-inducing policies”.
But he signed a letter that urged immediate cuts in government spending to avoid “a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.”
Obviously he is not willing to admit anything.
The organiser of the letter, LSE’s Tim Besley told the New Statesman that he wanted “to see government resources used in a targeted way and there may be creative ways of using the government balance sheet”. Which means what? Does he reject the claims in the letter that government had to use less resources by cutting spending immediately?
One economist (John Vickers, Oxford University) replied “Thanks, but I’ll pass on this”. That is, not even having the courage to defend his 2010 views in the light of evidence that the policies he promoted have made the situation much worse and increased poverty and suffering. Maybe he was relaxing in the staff room having a nice lunch when he was approached?
Another economist said:
There is a huge opportunity to carry out important infrastructure projects and improvements in education. Currently both capital and labour are very cheap and available; there is little danger of crowding out private investment; and infrastructure and human capital spending properly thought through … can have high returns in the future making the whole enterprise profitable.
As in 2010. So why did he sign a document that urged major cuts in spending based on notions of crowding out?
The same public infrastructure spending would have delivered high returns in 2010, 2011 and beyond and avoided the massive and permanent daily losses that have arisen since as a result of the austerity.
We also read that another signatory (Rogoff from Harvard – one of the duo who has provided fuel to the deficit terrorists to cut spending) has “always favoured investment in high-return infrastructure projects that significantly raise long-term growth”. That is not what he signed up for in the Letter. Why did he sign a letter that advocated massive cuts in public spending.
The Letter specifically said that the spending cuts “should be mindful of its impact on society’s more vulnerable groups” which would imply they preferred recurrent spending (cash payments etc) to be immunised in some way. That doesn’t sound like a prioritisation of investment spending.
The only one of the 20 who didn’t try to alter his view was one Albert Marcet from the Barcelona Graduate School of Economics. He made the following (extraordinary) comment:
I am quite sure there is no room for Keynesian-type policies to encourage growth in the fourth year of a recession; there is virtually no economic theory that will support that. I see no urgency to change the schedule in deficit reduction. The UK cannot unilaterally change the fact that there is a global recession, so growth will be below average. Furthermore, there is the danger of becoming the focus of the market’s speculation if there is any change in the commitment to reduce the public deficit.
What does “virtually no economic theory that will support that” mean. Basic macro theory supports the prediction that fiscal austerity in 2010 would damage growth and with non-government sources of spending flat and incapable of driving growth then government spending increases were the only option. Same applies now.
Note this claim that the UK has to sit tight and experience “below average” growth. If he looked up the Office of National Statistics he would see that the UK is plunging deeper in to its double-dip recession as the fiscal austerity bites harder. It is not a matter of “below average” growth – there is no growth!
And he also continues to rehearse the argument that the bond markets will push up UK interest rates if the government undertakes a growth strategy rather than an approach that is driving the economy towards a depression.
At least he has been consistently ignorant.
The obvious point is that these economists were wilfully wrong in February 2010 when they used their reputations to influence the course of the national election in Britain in that year.
The events that have followed – starting soon after they wrote the letter – have demonstrated that their demands were injurious to the prospects of the British economy and its people (in general).
Which tells me that the theoretical models that they were using to form their judgements were flawed. These models were the mainstream macroeconomic approach that dominates the undergraduate syllabus and treasury departments around the world.
Which means that some of these economists have either abandoned those models or fudging the public record to defend their tattered reputations.
The latter will be the most likely. Which means their opinions should be disregarded into the future.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.