With the Conservative Party Conference beginning yesterday in Birmingham, there is no doubt that anyone tuning in to the news over the next few days will be subjected to the annual, tiresome jubilant exultation of this current government's previous successes, basking in a honeymoon period that is set to continue indefinitely as long as the opposition is viewed by the electorate as incompetent, both intellectually and practically, which seems set to continue. Forgive me for not posting any other blogs on other political party conferences (though as this is not the BBC, balance is not a priority!), but there is a certain aspect of the current Conservative administrations which really grinds my axe.
No, it is not the fact that the Conservative Party appears to pick and choose precisely what it is conservative about, nor the fact that it is no longer 'conservative' in any philosophically respectable sense, instead smuggling a form of libertarianism in by the back door (indeed John Gray, the highly respected liberal-conservative philosopher has argued repeatedly in the last 20 or so years that it is a 'paleo-liberal' party). Though undoubtedly these things are irritating, showing British Conservatism to be somewhat enigmatic in terms of what it truly stands for. Rather, it is fundamentally an economic illiteracy combined with partisan rhetoric, and its caricatures of the role of the government, that appear to be misleading and a little embarrassing at best, and at worst dishonest and dogmatic.
The now classic analogy between the government and the household - employed wilfully by George Osborne seemingly every week and the driving justification and logic for the promised decade of austerity, before he was unduly sacked by Theresa May after the Brexit vote - is older than economics itself, and at the very least predates even Adam Smith's Wealth of Nations (widely regarded as the foundation of modern economics, though another book selectively read by many economists). If one picks up a copy of Jean-Jacques Rousseau's (Yes, Rousseau of all people!) Discourse on Political Economy (1755), we are told very clearly at the beginning that "Even if there were as close an analogy as many authors maintain between the State and the Family, it would not follow that the rules of conduct proper for one of these societies would be also proper for the other. They differ too much in extent to be regulated in the same manner..." Although this analogy has proved a very successful one in communicating an economic problem to the public - namely, that of sustainable public debt dynamics - as Rousseau reminds us, the State has very different roles and facets to it which make this analogy false.
Anyone who has taken even first year undergraduate macro courses should be able to appreciate that this analogy is overly simple. The very existence and constitutional position of government necessarily means that government has vastly more direct economic relationships than the vast majority of individuals, which means the impact of government cutting back on spending is substantial and can directly lead to individuals cutting back on spending in turn. Moreover, the government is in the position of having a secure tax base as income, which is why sovereign debt is viewed as being the safest financial asset. Which is also why government can borrow at lower rates than individuals, and why governments effectively borrow for individuals to provide various public goods. And so on. Despite this, I was reassured by Phillip Booth of the IEA when I questioned the analogy after a talk that it is indeed an accurate analogy, to all intents and purposes. Further, anyone who has taken intermediate macro knows that at steady-state (depending on growth and the base interest rate, as in periods of growth debt becomes easier to service and the overall debt burden reduces over time), a budget deficit is in fact sustainable - despite the beliefs of many delegates at the Conservative Party conference. Simon Wren-Lewis has written about such issues extensively over the last few years, and is certainly more qualified than me to feel aggrieved.
Another piece of economic illiteracy - or rather political opportunism - is the failure to comprehend what a recession entails, the existence of a business cycle more generally and how stabilisation policy actually works. This is what has enabled politicians firstly to blame a global financial crisis and following recession on Gordon Brown and Ed Balls, and also to claim that recovery from recession was, of course, the result of good government policy and 'difficult decisions'. Firstly, the narrative that Labour was irresponsible and was recklessly spending in the run up to 2008 is nonsense. Moreover, it is one of the roles of government in the economy to provide social insurance and other 'automatic stabilisers' in response to a major recession, and it is therefore unsurprising that deficit to GDP ratios are at 'record levels' after the second largest recession on record.
The argument we should have been engaged with was not whether this additional government spending as a result of the recession should be permanent (before being accused of 'collectivism'), but rather when fiscal consolidation should occur, and at what rate. Standard economic theory suggests that fiscal consolidation should only occur when monetary policy is in a position to counteract the negative effect a cut in government spending has on aggregate demand in the economy. However, this was emphatically not the case in 2010, when monetary policy lowered interest rates to record low levels, and when we embarked on austerity, let alone in 2009 when George Osborne proposed austerity as necessary for recovery. Estimates suggest that as a result, recovery in the UK was stalled until 2013, at the permanent cost of 5% of GDP. Rather than fiscal consolidation being expansionary, at the zero lower bound both theory and evidence suggests otherwise.
This begs the question as to why academic macroeconomics was ignored in the aftermath of the Great Recession. True, the economics profession had failed to model adequately the role of finance in their models, and thus failed to predict and further struggled to explain the causes of the crisis, leading to great and understandable mistrust from the public in the profession. However, economics has comprehensive studies of recessions and how best to support recoveries - in particular lessons from the Great Depression - which should have been consulted. One explanation is an obsession by some on the right with the budget deficit as a proxy for the size of the state - reducing the deficit in effect hits two birds with one stone. This is not a sensible debate to engage in. This vague libertarianism, obsessed with shrinking the size of the state, denies that the state has any meaningful role in enhancing the opportunities and well-being of individuals. Whilst having a convincing critique of central planning in an economy, this conclusion does not follow. It is a separate question as to whether public policy debate can ever be free of ideology, but the past few years have shown, as Noah Smith puts it, that "being an ideologue means never having to say you're wrong". We all lose as a result of this.
No, it is not the fact that the Conservative Party appears to pick and choose precisely what it is conservative about, nor the fact that it is no longer 'conservative' in any philosophically respectable sense, instead smuggling a form of libertarianism in by the back door (indeed John Gray, the highly respected liberal-conservative philosopher has argued repeatedly in the last 20 or so years that it is a 'paleo-liberal' party). Though undoubtedly these things are irritating, showing British Conservatism to be somewhat enigmatic in terms of what it truly stands for. Rather, it is fundamentally an economic illiteracy combined with partisan rhetoric, and its caricatures of the role of the government, that appear to be misleading and a little embarrassing at best, and at worst dishonest and dogmatic.
The now classic analogy between the government and the household - employed wilfully by George Osborne seemingly every week and the driving justification and logic for the promised decade of austerity, before he was unduly sacked by Theresa May after the Brexit vote - is older than economics itself, and at the very least predates even Adam Smith's Wealth of Nations (widely regarded as the foundation of modern economics, though another book selectively read by many economists). If one picks up a copy of Jean-Jacques Rousseau's (Yes, Rousseau of all people!) Discourse on Political Economy (1755), we are told very clearly at the beginning that "Even if there were as close an analogy as many authors maintain between the State and the Family, it would not follow that the rules of conduct proper for one of these societies would be also proper for the other. They differ too much in extent to be regulated in the same manner..." Although this analogy has proved a very successful one in communicating an economic problem to the public - namely, that of sustainable public debt dynamics - as Rousseau reminds us, the State has very different roles and facets to it which make this analogy false.
Anyone who has taken even first year undergraduate macro courses should be able to appreciate that this analogy is overly simple. The very existence and constitutional position of government necessarily means that government has vastly more direct economic relationships than the vast majority of individuals, which means the impact of government cutting back on spending is substantial and can directly lead to individuals cutting back on spending in turn. Moreover, the government is in the position of having a secure tax base as income, which is why sovereign debt is viewed as being the safest financial asset. Which is also why government can borrow at lower rates than individuals, and why governments effectively borrow for individuals to provide various public goods. And so on. Despite this, I was reassured by Phillip Booth of the IEA when I questioned the analogy after a talk that it is indeed an accurate analogy, to all intents and purposes. Further, anyone who has taken intermediate macro knows that at steady-state (depending on growth and the base interest rate, as in periods of growth debt becomes easier to service and the overall debt burden reduces over time), a budget deficit is in fact sustainable - despite the beliefs of many delegates at the Conservative Party conference. Simon Wren-Lewis has written about such issues extensively over the last few years, and is certainly more qualified than me to feel aggrieved.
Another piece of economic illiteracy - or rather political opportunism - is the failure to comprehend what a recession entails, the existence of a business cycle more generally and how stabilisation policy actually works. This is what has enabled politicians firstly to blame a global financial crisis and following recession on Gordon Brown and Ed Balls, and also to claim that recovery from recession was, of course, the result of good government policy and 'difficult decisions'. Firstly, the narrative that Labour was irresponsible and was recklessly spending in the run up to 2008 is nonsense. Moreover, it is one of the roles of government in the economy to provide social insurance and other 'automatic stabilisers' in response to a major recession, and it is therefore unsurprising that deficit to GDP ratios are at 'record levels' after the second largest recession on record.
The argument we should have been engaged with was not whether this additional government spending as a result of the recession should be permanent (before being accused of 'collectivism'), but rather when fiscal consolidation should occur, and at what rate. Standard economic theory suggests that fiscal consolidation should only occur when monetary policy is in a position to counteract the negative effect a cut in government spending has on aggregate demand in the economy. However, this was emphatically not the case in 2010, when monetary policy lowered interest rates to record low levels, and when we embarked on austerity, let alone in 2009 when George Osborne proposed austerity as necessary for recovery. Estimates suggest that as a result, recovery in the UK was stalled until 2013, at the permanent cost of 5% of GDP. Rather than fiscal consolidation being expansionary, at the zero lower bound both theory and evidence suggests otherwise.
This begs the question as to why academic macroeconomics was ignored in the aftermath of the Great Recession. True, the economics profession had failed to model adequately the role of finance in their models, and thus failed to predict and further struggled to explain the causes of the crisis, leading to great and understandable mistrust from the public in the profession. However, economics has comprehensive studies of recessions and how best to support recoveries - in particular lessons from the Great Depression - which should have been consulted. One explanation is an obsession by some on the right with the budget deficit as a proxy for the size of the state - reducing the deficit in effect hits two birds with one stone. This is not a sensible debate to engage in. This vague libertarianism, obsessed with shrinking the size of the state, denies that the state has any meaningful role in enhancing the opportunities and well-being of individuals. Whilst having a convincing critique of central planning in an economy, this conclusion does not follow. It is a separate question as to whether public policy debate can ever be free of ideology, but the past few years have shown, as Noah Smith puts it, that "being an ideologue means never having to say you're wrong". We all lose as a result of this.
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