“Voices of Fools and Madmen”

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In the Guardian, a quote from Keynes; “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 utilising the world’s potential production, are the voices of fools and madmen.

 

The Sunday Times published a letter by 20 “leading economists” which George Osborne (Bless Him) was quick to pounce upon as proof that someone important somewhere agrees with him (finally):

Sunday Times: “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,” said George Osborne, the shadow chancellor.

“An impressive array of top economists… 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…

“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.”

Wrong!!!! I’m not sure if they sent two different letters but the one I read said something slightly different (actually, it might be me just not being clever enough).

  1. “Gordon Brown’s argument on the deficit has collapsed”; Er, no. They do not say anything about the budget deficit which is a cyclical deficit caused by the recession which will be rectified when the economy returns to growth. They do talk about the structural deficit but no one disagrees with that. It’s just the timing that is different.
  2. “compelling case for starting in 2010”. They do say that, but I think he forgot the massive caveat between “case” and “2010” in their letter; “all else being equal,” as well as the beginning of the paragraph; “the exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery.” I think he will find that has been Brown’s argument.
  3. “It is clear that the Con Party is now speaking with the consensus of expert economic opinion.” There is no consensus for what the Tories want. The only consensuses are that world deficits should be cut in the medium term (generally medium term doesn’t mean tomorrow) and that the retrenchment should be managed so as not to harm the recovery.
  4. “It is Gordon Brown who is threatening the British recovery.” I have no clue where that came from. Maybe he thinks the government should be acting to head off a possible threat to the economy while directly inflicting injury on the economy. (I’m sure that makes sense somewhere).

Anyway, Tim Besley, the co-ordinator of the letter emails Brad DeLong:

I Have No Quarrel with Tim Besley Save for that Line About How There Is a Compelling Case to Start "Fiscal Consolidation" in the 2010-11 Fiscal Year

Tim Besley emails:

You referred to our letter on a blog that I saw and there seems to be a fair bit of misunderstanding around – as if we are arguing that we are hell bent on choking off recovery. But we explicitly recognize that the timing of measures of measures have to be sensitive to economic developments and the fragility of the recovery. This is a letter about the medium term and is based on the concern that there could be insufficient political will to tackle our structural deficit over a parliament. What we are suggesting is around a further 2.5% of fiscal tightening over five years compared to the government’s stated intentions. But equally importantly, this needs to be backed with proper independent evaluation of fiscal forecasts (our final point) something which we do not have in the UK.

I hope that this makes clear where we are coming from.

Which I’m sure is not a u-turn, but it is possibly a clarification.

Now, and this is the interesting bit, more than 60 leading economists have hit back (including 3 from my university- making them right) with two letters supporting “Alistair Darling’s decision to delay spending cuts until 2011.” So much for speaking with the consensus.

FT: The letters, while not overtly political, reject the Tories’ claim that cuts are needed now to reassure the markets and head off the risk of Britain losing its triple A credit rating.

One letter, organised by Lord Skidelsky, the cross-bench peer, asks instead how “foreign creditors will react if implementing fierce spending cuts tips the economy back into recession”.

The other backs the chancellor’s “sensible” plan for tackling the deficit, warning that “with people’s livelihoods at stake, a responsible government should avoid reckless actions”.

Their position was supported almost immediately by another Nobel laureate, Paul Krugman, who wrote on the New York Times website: “The crucial thing to understand is that fiscal contraction of an additional one or two percent of GDP in the near future has essentially no significance for the sustainability of government finances, either in Britain or here.”

They argue that the important thing in the short run (this year and next) is to make sure the economy regains a strong footing and that plans must be made to begin cutting debt after this period. They also explode some myths about govt. debt;

FT: First, while unemployment is still high, it would be dangerous to reduce the government’s contribution to aggregate demand beyond the cuts already planned for 2010-11 (which amount to 1 per cent of gross domestic product). Further immediate cuts – even supposing they are practicable – would not produce an offsetting increase in private sector aggregate demand, and could easily reduce it. History is littered with examples of premature withdrawal of the government stimulus, from the US in 1937 to Japan in 1997. With people’s livelihoods at stake, a responsible government should avoid reckless actions.

Second, Britain’s level of government debt is not out of control. The net debt relative to GDP is lower than the Group of Seven average, and on present government plans it will peak at 78 per cent of annual GDP in 2014-15, and then fall. Even at its peak, the debt ratio will be lower than in the majority of peacetime years since 1815. Moreover British debt has a longer maturity than most other countries, and current interest rates on government debt at 4 per cent are also low by recent standards.

Third, since the crisis began, private households and businesses have had to increase their saving in order to reduce their debts. It is this saving that finances the government deficit. If the government did not take up the slack, there would be a deeper recession. But fortunately, wise counsel has prevailed so far, and public spending has been maintained as an offset to reduced spending by the private sector.

I’ve always thought Labour had the economics on its side, now I’m definitely sure. It just remains to get the message out to those in the public who really don’t care what some economists have said.

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