How rude should I be about policymakers? Some may think this a strange question, but I personally have quite a high regard for them. Having spent some of my formative years working in government, I can certainly appreciate the difficulties they face. Sure, there are unspoken (in public) political imperatives that drive a lot of policy, but I don’t think politicians’ public concern with social welfare is entirely a facade, and it is certainly not among most of those who work for them – quite the opposite, in fact. So when I wrote this(see final paragraph) about belief in the confidence fairy, I did worry I was allowing rhetoric to get the better of me.
Now in mitigation, I have to say that the 2010 switch from fiscal expansion to austerity does make me very angry. I’d like to think that this is just because of the immense harm it is doing, but there is something else as well. It represents the abrogation of knowledge: knowledge which, largely through accident, I was particularly aware of. I think this is something that even economists who are not macroeconomists, and not just non-economists, do not fully appreciate. In the mid-2000s my main research was on monetary and fiscal policy interactions, and this was a field that appeared to be characterised by considerablecommon ground, and certainly not by alternative ‘schools of thought’. Some of this knowledge began to be applied in 2008/9, and even an institution like the IMF which was famed for its fiscal conservatism was quite happyapplying that knowledge.
It is as if you are a doctor, treating a patient with proven but also state of the art medication. The patient is not well but the treatment you are applying is working. Then suddenly the hospital administrator tells you to stop, because the drugs are expensive and they would like to try some spiritual healing instead. And, in case you ask, the financial crisis did not suddenly render the sum of macroeconomic knowledge accumulated over the previous decades obsolete (whether embodied in textbooksor DSGEmodels).
But in a sense all this makes trying to be dispassionate about the reasons for the switch to austerity all the more important. So here is a list. I’ve talked about all of these before, but not in one place. These reasons for advocating austerity are not in order of their relevance (see Farrell and Quiggin (pdf) for the basis of such an assessment), but I am going to give them marks out of ten, where the lower the mark the more rudeness is justified.
“Our government cannot sell any debt.” Here I draw a sharp distinction between those in these countries, and those outside. For those inside, I think the choice between austerity and default (there was no other option) was very difficult, and I would only have minor criticisms: sometimes a failure to adopt the right fiscal mix, sometimes going furtherthan was necessary, and sometimes being naive about the position and motivation of their creditors (perhaps through collective guilt). So 8/10: rudeness not appropriate. For those outside these countries (many in the ECB, Commission, Germany etc), a very different assessment – see below.
“After Greece, it could be anyone next” or more simply “Panic!”. Many policymakers convinced themselves that markets, in refusing to buy certain countries debt, were behaving irrationally – after all we had just had a financial crisis where they also seemed to behave in this way (either before, or during, or both). In these circumstances, ‘confidence’ becomes the word of the moment, and appeasement to a particular readingof market sentiment understandable (although wrong). Here I give (6-2x)/10, where x is the number of years after 2010. I can forgive policymakers being confused in the panic of 2010, but by 2011 we understood much better what was going on, and the evidence by 2012 that this was a particular Eurozone problem generatedby ECB behaviour became so clearthat even the ECB understood. (As you can see, 2/10 means I can be rude!)
“We want our money back.” Again a reason that is only relevant to those who lent to certain Eurozone economies. A common enough human motive, generally coupled with a belief that creditors bear no responsibility for properly assessing risk. Not a good way to lend money (see 2007/8 and earlier), and certainly not a good basisfor macroeconomic policy. (“Oh, did we play a major part in designingthis system?”) Also largelyself defeating. What comes into my head as I write is Destroyer of Worlds, and I don’t think that is far wrong. Does not deserve a mark.
“The recovery is well underway, so now is the time to deal with debt.” What this argument has going for it is that at some point it becomes correct. In addition there are policy lags, and forecasting is difficult. But it is also true in macro that timingis everything. The argument was wrong in 2010, because it failedto take seriously the asymmetric nature of the consequences of forecast errors. So (6-3x)/10. By now those who advocated austerity on this basis should have changed their minds, which somehave done to their credit (and I mean that – it is difficult to admit mistakes).
“Monetary policy can take care of demand.” What I have calledZero Lower Bound Denial. There is perhaps some evidence that this belief was part of the UK Conservative Party mindset (see end of this post), but I think it is more prevalent among some bloggers, or economists who are not macroeconomists or who ‘missed’ the lost decade in Japan and who thought the Great Depression was just history. There, I’ve revealed my mark by my language again: 2/10. A slight variantin the UK is “without austerity, interest rates would have been higher”, which owes a great deal to hindsight (and higher VAT).
“We need to reduce the size of the state” (apart, perhaps, from the bit that buys military hardware). 0/10, not for the belief itself (that is mostly politics, with very little macro), but for duplicity. Chris Dillow might add, follow Kalecki, a view that the working class needs to be controlled, but I thinkthat was UK 1981, not world 2010. Less than 0/10 for the variant that says what the state does in another country is a waste of money, because even if it happens to be true it combines duplicity with imperialism.
“What aggregate demand problem” or more succinctly Demand denial. A strange beliefthat should have died when J.B. Say realisedhis error, but which resurfaces from timeto time and placeto place. 0/10.
“Reducing debt is virtuous.” I hesitate to include this, because I do not seriously think any policymakers actually believe it (they are often the same people who happily spend or cut taxes in a boom). The macroeconomics is obviously silly – not everyone can run a surplus(so 0/10). Unfortunately this kind of economics as morality does seemto influence somepeople. The argument that “we cannot waste any time tackling the problem of debt” faces similar problems, and is also not really believedby many who make it.
So there you have it, and yes, I do feel much better having written this all down. But will it stop me being rude in the future?
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