Andrew Lilico is Policy Exchange's Chief Economist.
Over the past year, I have read many articles by opponents of spending cuts containing sentiments such as these, from David Marquand last week: “No reputable economist I can think of has endorsed the Osborne Budget.” Others have echoed the sentiments of David Blanchflower: “Mr Osborne, I really don't know which economists are advising you on this brilliant strategy to increase unemployment, but feel free to give me a call.”
Now, I have no interest in battling academic credentials with these illustrious men. And I don’t wish to claim that the economics profession is uniformly behind my view any more than that it is uniformly behind theirs. There is a genuine split on what is the best thing to do from here. The Blanchflower/Marquand view is held by an important minority, whose arguments deserve a hearing. But they are just that: a minority. It simply isn’t true that “all reputable economists” agree with them, unless you fancy defining “reputable economist” to mean “anyone agreeing with David Blanchflower”.
For example, the Telegraph recently did a survey of 25 leading economists. One of the questions was: “is the Government right to cut spending by £6bn this year?” During the General Election campaign, this sadly modest cuts programme was condemned in blood-curdling terms, as liable to induce a double-dip recession and cast millions onto the dole. Was that the view of “all reputable economists”? You can see for yourself – of the 25 economists surveyed, only one (Blanchflower) opposed them, one other (Mellor) had no view, and one (Shaw) said there were advantages to early cuts but they could perhaps have waited until next year. Every other one of these 25 leading economists declared it a good idea.
And of course Blanchflower himself doesn’t consistently claim to be the spokesman of mainstream academia. Here are a few quotes from that same New Statesman article: “Academic economists were of little help. Since the events of a year ago, it is interesting how few of them have stood up and told us where the profession went wrong and why, and what we should do to get out of this mess... The collapse of Lehman was a body blow to those economists around the world who had designed worthless mathematical models, based on unrealistic assumptions that they then used to convince themselves that a recession of this kind could never happen again. Some even got Nobel prizes for trotting out this worthless twaddle, such as Robert E Lucas Jr…. Unsubstantiated assertion ruled, which meant that large parts of economics had become closer to theology than to the natural sciences…where did all these useless economic models get us? Actually, in pretty dire straits.”
The reality is that, despite Blanchflower et al. being an interesting minority, worth hearing, the true voice of reputable economics in this area is that expressed in the Bank of International Settlements’ Annual Report. Section V considers Fiscal sustainability in the industrial countries, in which p70 onwards deals with “Addressing fiscal imbalances”. This notes that “countries making the adjustments [i.e. cutting their deficits] enjoyed real GDP growth over the adjustment period that was comparable to the growth rates prevailing in several industrial countries in the years preceding the recent crisis.” It goes on to note that “large consolidation efforts took place amid a wide range of conditions regarding real exchange rates and real interest rates. In particular, currency depreciation and monetary policy accommodation may have facilitated fiscal adjustment in some countries, but not in all.” In other words, it isn’t that it was just interest rate cuts or exchange rate depreciation that drove the growth (though some monetary loosening might well be a good idea.) Academic and central bank research has been, according to the BIS, quite clear on one point, namely what the best form of fiscal consolidation is: “Most of the successful consolidations were biased towards expenditure cuts – specifically, reductions in government consumption including public wages – while the least effective were biased towards cuts to productive public investment.”
And now for the money quote: “Countries with a high and rapidly increasing level of public debt and whose creditworthiness has been questioned have no option but to implement fiscal adjustment immediately. For those countries, any delay is itself a threat to the financial system and the economic recovery. Indeed, if they undertake fiscal tightening now, the improved confidence and lowered risk premia that result will outweigh the short-term output cost.”
This, insofar as any consensus exists, is the true consensus view. It is not my job to advise the Great Minds of the British Left how to present themselves, and of course as I said they are free to define “reputable economist” any way they like. But their danger is that, rather like a historian defining all “reputable history” as Marxist, or a climate change scientist defining all “objective scientists” as those disbelieving in global warming, they will find that their discussion concerning “reputable economics” involves talking to themselves, and opting out of the serious debate.
