George Osborne and Christine Lagarde, 2011. Photograph by Chatham House
From London Review of Books:
In the UK, 2013 was the year a moderate but sustained recovery finally began. The chancellor announced that this showed his plan was working, and that his critics were wrong. This would have been an extraordinary enough claim even if he had kept to Plan A. A Keynesian analysis of austerity would have predicted a delayed recovery followed by growth, which is what we saw; if positive growth is good even if it has been preceded by stagnation, why not just close down part of the economy for a few years so you can hype the growth that will occur when it starts up again? It was an even more extraordinary claim because the plan had been changed: austerity had largely halted, which gave more room for a recovery. Once again mediamacro largely allowed these claims to go unchallenged; even the Financial Times chimed in with a leader that said Osborne had won the political argument on austerity.
To my mind, the disconnect between mediamacro and macroeconomics as understood by a clear majority of academics was most clearly visible when, last autumn, Ed Miliband gave a speech to the Labour Party Conference in which he forgot to mention the deficit. The media reported this as a huge gaffe: ‘How could you not mention paying off this appalling deficit?’ Jon Snow, not normally thought to be sympathetic to the coalition, asked in an interview with Miliband the following day. ‘Surely it is the most important issue of all. It is the essence of our economic crisis.’ At about the same time the IMF completed an internal evaluation of its policy advice since the beginning of the recession. As I mentioned, it had advocated fiscal expansion in 2009, but switched to recommending austerity in 2010. Unlike mediamacro, it changed its view again in the following years. Here are some key quotes:
The IMF’s call for fiscal expansion and accommodative monetary policies in 2008-9, particularly for large advanced economies and others that had the fiscal space, was appropriate and timely.
IMF advocacy of fiscal consolidation [in 2010] proved to be premature for major advanced economies, as growth projections turned out to be optimistic. Moreover, the policy mix of fiscal consolidation coupled with monetary expansion that the IMF advocated for advanced economies since 2010 appears to be at odds with longstanding assessments of the relative effectiveness of these policies.
In articulating its concerns [in 2010], the IMF was influenced by the fiscal crises in the euro area periphery economies … although their experiences were of limited relevance given their inability to conduct independent monetary policy or borrow in their own currencies.
In other words, the IMF’s move to advocate austerity in 2010 had been a mistake, and that mistake was caused by a misreading of the Eurozone crisis. Its analysis is particularly pertinent to the UK.
In many senses this echoes Labour’s original line that the coalition’s austerity policy was too far, too fast. Yet such is the influence of mediamacro’s alternative view that the Labour Party has abandoned that stance, and now wants to portray itself as being just as tough on the deficit as the coalition. This has led to a ludicrous situation as the election approaches. Respected economists and think tanks agree that there is a large gap between Labour and Tory plans on future austerity. Even under the most conservative interpretation, Labour’s plans involve fewer spending cuts, amounting to 1.5 per cent of GDP per year less than the Tories are proposing. That’s equivalent to half the UK defence budget, every year. Yet the Labour Party itself seems reluctant to acknowledge this fact, because it doesn’t want to appear weak on the deficit.