Polly Toynbee says something very sad in the Guardian today. In talking about the Labour opposition in the UK, she writes
They have lost the Keynesian argument (for now): the paradox of thrift is just too paradoxical for the public.
I agree that the line that the recession was caused by everyone (public and government) borrowing too much, and that just as consumers are now having to tighten their belts, so should government, plays well because it seems virtuous. On the other hand the idea that if consumers and government start to save more at the same time there will not be enough demand and so output will fall seems fairly intuitive, and certainly not rocket science. However I’m not really in a position to judge how someone unfamiliar with macroeconomics would see this argument, and I guess it is called a paradox for a reason.
Obviously Toynbee is not implying that every macroeconomic idea that is incomprehensible to the layperson will be ignored by policymakers. What she does seem to be saying is that when macroeconomics enters politically contested waters, politics should look to what goes down well with the public rather than what most economists think is right.
Is this true? Well just imagine the following. The opposition announces that it intends to cut most tax rates. It asserts that this will incentivise everyone to work harder, so tax revenues will actually increase. Now I’d like to think that if this happened in the UK today, the media would find it very difficult to get hold of an academic economist who would support the view that revenues would actually rise following tax cuts. The opposition would be asked at every turn, why do the experts not agree with you? As a result, although the policy might be popular initially, it would gradually lose votes. In addition, the opposition itself might begin to doubt their own claim.
Now imagine another country where there is a small minority of economists who are prepared to support this view. The media would switch to describing the claim about revenues as controversial, and would revel in setting up confrontations between economists on opposing sides. The opposition gets elected and implements the policy. Similarities between this and the story of the Laffer curve and Ronald Reagan that Paul Krugman describes in Peddling Prosperity are of course deliberate.
It therefore seems to require a near universal consensus among economists to prevent bad but populist policies either emerging in the first place, or being enacted if proposed. We need to add at least two other factors that might be important. The first is the influence of academics on the civil service. Civil servants do try and weigh up the evidence, and will be influenced by whether a particular view is a majority or minority one among academics. However politicians can override civil service advice, particularly if they have an electoral mandate, as my little story about the first Thatcher government illustrates. Second, we need nowadays to factor in the role of think tanks which are established to promote a particular point of view, and which can often manufacture apparent expertise. (There is a very nice observation from Menzie Chinn on how many staff from various US think tanks went to the ASSA meeting in Chicago. George Monbiot follows the money financing UK think tanks.) Such think tanks can generate the appearance of ‘controversy’ among experts where little actually exists, as the climate change debate illustrates.
What this all suggests is that the academic balance of opinion on macroeconomic issues carries very little weight when these issues are politically divisive. The chances of achieving the near consensus required for academic opinion to matter is also reduced by the two way interaction between politics and academic economics. Not only will politicians and their advisors seek out the academics whose views support their political prejudices, but unfortunately ideology sometimes seems to influence the academic debate. I have written about the influence of free market ideology on academic macroeconomics in the context of fiscal policy and Keynesian theory more generally, but in the past the influence has come from the left as well as the right.
All this is very pessimistic from my point of view. Indeed, as the paradox of thrift is both a very old idea and obviously correct, it is enough to make someone who wants better policy despair. In another 75 years, will the paradox of thrift still be a ‘controversial’ idea in media terms? I think it may just be possible to tell a more optimistic story on this, but that will have to wait for another post when I'm feeling less gloomy.
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