Unrepentant Economists

A bit of history to remind us where the economists stood on the matter of fiscal austerity:

On February 14, 2010, the Sunday Times published this letter:

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"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

Most of the signatories were the cream of Britain’s economics establishment.

On February 18, 2010, the FT published a response, which I organised:

In their letter to the Sunday Times of February 14, Professor Tim Besley and 19 co-signatories called for an accelerated programme of fiscal consolidation. We believe they are wrong.

There is no disagreement that fiscal consolidation will be necessary to put UK public finances back on a sustainable basis. But the timing of the measures should depend on the strength of the recovery. The Treasury has committed itself to more than halving the budget deficit by 2013-14, with most of the consolidation taking place when recovery is firmly established. In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!

They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession? To ask – as they do – for independent appraisal of fiscal policy forecasts is sensible. But for the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth. The wealth of the nation lies in what its citizens can produce.

There were a hundred signatories, including

Marcus Miller, Professor of Economics, University of Warwick, UK
David Blanchflower, Bruce V. Rauner Professor of Economics, Dartmouth College, US and University of Stirling, UK
Paul De Grauwe, Professor of Economics, K. U. Leuven, Belgium
Brad DeLong, Professor of Economics, U.C. Berkeley, US
Jean-Paul Fitoussi, Professor of Economics, Sciences-po, Paris, France
Richard Freeman, Herbert Ascherman Chair in Economics, Harvard University, US
Rick van der Ploeg, Professor of Economics, University of Oxford, UK
Robert Rowthorn, Emeritus Professor of Economics, University of Cambridge, UK
Joseph Stiglitz, University Professor, Columbia University, US
John Van Reenen, Professor of Economics, LSE, UK

If anything, I now regard our letter as too timid. We were essentially supporting the slower rate of deficit reduction, which was the policy of the then Labour government, against the Conservative demand for accelerated deficit reduction. We should have been against any deficit reduction policy whatsoever in the circumstances of a severe recession, and should have been advocating accelerated spending. What do the signatories of the Sunday Times letter now think? In August 2012, the New Statesman contacted the 20 signatories. All but one out of those who replied agreed that there was scope for additional capital investment. None of them admitted they were wrong to write as they did in 2010, and none of them took any responsibility for the intellectual support they gave to the accelerated cutting program of the incoming Conservative-led government.