On February 14, 2010, the Sunday Times published a letter signed by nineteen of the UK’s leading economists plus Kenneth Rogoff of Harvard, America’s leading debt-phobe. That was at the height of the crisis and the letter advocated consolidation (i.e. austerity) of all things. I’ll refer to those economists as “numpties”. The complete list of numpties is in an article entitled “Unrepentant Economists” and authored by Robert Skidelsky.
You might think the word numpty is offensive. As you’ll discover by the end of this article, “numpty” is if anything too polite.
I’ll run through the letter paragraph by paragraph, with excerpts in green italics. The letter starts:
"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.”
As regards “higher long-term interest rates”, as Keynes pointed out in the early 1930s, a government which issues its own currency does not need to borrow at all: for stimulus purposes, it can simply print money and spend it (and/or cut taxes). Maybe the numpties haven’t heard of Keynes, or if they have, perhaps they aren’t acquainted with his ideas.
Thus potential creditors of the UK can raise the interest rate they demand if they like. But the UK (or any country which issues its own currency) can respond by employing Keynes’s “print” strategy: more or less what several countries actually did in the event, in the form of QE.
Of course QE took place AFTER the numptie letter, so perhaps at the time of the letter, the numpties didn’t realize QE was an option. Certainly Rogoff referred to QE as “very experimental” which rather indicates the whole QE idea was new to him.
It’s sad that I need to spell out this sort of basic economics for the benefit of so called “professional” economists, isn't it?
Next, why the concern about the DEFICIT rather than the DEBT? A very large deficit is no problem as long as it lasts a relatively short time, and solves the problem (the recession) which in the event it did. In contrast, if a large deficit lasts SEVERAL YEARS and started to look like it might cause a record sized NATIONAL DEBT, that might be cause for concern. But at the time of the numpties’ letter, the UK debt was around ONE THIRD its maximum just after WWII, i.e. around 240% of GDP. And paying down the latter debt proved no problem at all in the 1950s and 60s. So what were the numpties on about? Darned if I know.
Next, the above excerpt refers to “currency instability”. Now why would that occur? Presumably the numpties have in mind the “a loss of confidence in the UK’s economic policy framework” to which they referred earlier in the same sentence.
Well now, if foreigners or UK individuals and organisations likely to shift their money abroad think excessive deficits will lead to excessive inflation, then they’d mark down Sterling by some amount or other. But there is no obvious reason why they should change their minds on that every week or month and thus cause “instability”.
Moreover, in the event, the largish deficit continued for some time after the numpties’ letter, and the pound did not crash in value, nor did it suffer an great “instability”.
The “balanced budget” myth.
The next couple of paragraphs run as follows.
"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.”
This is grotesque incompetence. There is a very simple reason why a more or less PERMANENT deficit will be required. Coincidentally I set out the reasons (for the umpteenth time) just recently here. (Title of article: “Top UK Treasury official does not understand deficits.”)
At least the reason ought to be “simple” for an economics professor. But of course it is naïve to suppose an economics professor necessarily knows all that much about economics. Thus the numpties would probably struggle with the reasons why permanent deficits are inevitable.
The fact that it is not necessary to dispose of deficits in order to reduce the debt/GDP ratio is nicely illustrated by the chart below, produced by Prof Roger Farmer. As the chart shows, the debt/GDP ratio for the UK fell from around 240% in 1945 (as just mentioned) to around 50% in 1990. But during that time there was a non-stop deficit!!
Mixing politics and economics.
Next, the numpties say:
"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.”
Now wait a moment: what’s a PURELY POLITICAL matter, like what proportion of GDP goes to the public sector, got to do with economists (or should I say “self-styled economists”)? The answer is “absolutely nothing”.
Just to drive that point home, for the benefit of numpties, any democratically elected political party is fully entitled to increase or decrease public spending, particularly if such an increase or decrease is in line with its manifesto. In short, it is not the job of economists to tell governments what “government spending” should be relative to GDP: that amounts to telling democratically elected governments how socialist or non-socialist they should be.
The final para.
The final para reads:
"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."
Well nothing wrong with that suggestion. In fact the UK’s “Office for Budget Responsibility” was set up with precisely that in mind just three months after the “numptie letter”.
So the only worthwhile idea in the numpties' letter was an idea that the leading lights in the UK were already in the process of putting into effect!