The Austerity Delusion?

The continued dismal performance of the UK economy is entirely consistent with the predictions of those of us who have argued consistently for the last two years that premature fiscal consolidation would be severely contractionary in the short term, and risked doing significant long-term economic and social damage. As has been widely reported, this analysis is now generally shared by most serious economists, including most notably the Chief Economist of the IMF, Olivier Blanchard, probably the most distinguished empirical macroeconomist working on policy issues at present.

It is obviously impossible to argue that an economy that has grown less than 1 percent in the period since the fiscal consolidation was introduced, compared to the approximately 6 percent that the government forecast at the time, is performing acceptably. So some commentators who supported the government's programme - or indeed, argued that it did not go far enough - are taking a different approach, arguing that economic weakness cannot be attributed to austerity because, in fact, there is no austerity.

Debating debt ratios with Michael Fabricant

Last night I got into a Twitter "debate" with Michael Fabricant, who is Vice Chairman of the Conservative Party.   I replay it here to set out the facts (which are fairly simple) and perhaps to give Mr Fabricant one more change to correct his position gracefully.  

[Updated, 2.45pm: Mr Fabricant has done exactly that, tweeting: 

"Lesson learned. NEVER take a 'fact' from a colleague at face value. I withdraw the remark on Debt to GDP ratio. Apologies to all."

This is both gracious and appropriate in content and tone, and I am grateful to Mr Fabricant. So what follows is now simply for the record; if you just want the facts on debt/GDP, no need to read past the chart.]

It started when Mr Fabricant tweeted the following:

"GDP to debt ratio almost as big now as WW2. Total war achieved the same debt ratio as total incompetence achieved in 2000's by Gordon."

II responded, I thought factually, politely, and self-explanatorily, as follows: 

"I hope @Mike_Fabricant will retract that last tweet; simply wrong, as chart shows."

and provided this chart, showing the debt to GDP ratio from 1900 to 2011:

Credit and credibility: France and the UK

At the Treasury Committee in October, I came under sustained questioning as to my view that low long-term interest rates in the UK reflect economic weakness (domestic and global) and expectations that short-term interest rates set by the Bank of England will remain very low (again, reflecting economic weakness); and not, in any meaningful sense, the "credibility" of government fiscal policy or economic strategy more generally.  A much more detailed discussion is here. 

European labour markets: six key lessons from the Commission report

I haven't always been complimentary about the European Commission - either its economic analysis or its policy advice.  So it's nice to be able to be wholeheartedly positive about the excellent report "Employment and Social Developments in Europe 2012" (brought to my attention by this article by Ambrose Evans-Pritchard in the Telegraph, also excellent) produced by the Commission's Directorate-General for Employment, Social Affairs and Inclusion.

The report is really worth reading.  But it's close to 500 pages, and the main messages deserve as wide an audience as possible, so I thought I'd try to highlight them with some commentary. To my mind, the key ones are the following:

The government's mid term review: deficit reduction

Yesterday the Government published  the "Midterm Review: Programme for Government Update." This was intended to be a comprehensive assessment of progress against the commitments made in the original Coalition Agreement.  The Prime Minister said that this "audit" would be "full, frank and unvarnished."   Naturally, I was particularly interested in how the Review described progress in deficit reduction, particular, given my view (set out here) that the Government has effectively abandoned its initial "Plan A" for deficit reduction.   

Immigration as a growth strategy

[My chapter in the Fabian Society pamphlet "The Great Rebalancing: How to fix the broken economy", edited by Andrew Harrop, which also features chapters by Maurice Glasman, Stephany Griffith-Jones, Chi Onwurah, Duncan Weldon, Mariana Mazzucato, Vicky Pryce, and Chris Leslie]. 

What forms of supply-side reform would do most to boost UK growth over the medium to long term?  Bizarrely, much of the recent debate has concentrated on reducing various forms of labour market regulation (procedures for unfair dismissal, health and safety, etc).  The evidence base supporting such proposals is remarkably thin.  The UK labour market, as many have observed, is doing remarkably well. Hiring - given economic conditions - is surprisingly healthy, and employment is rising, despite weak or no growth .   Labour market economists, and international organisations like the OECD, agree that three decades of successful reform have given the UK a flexible and generally well-functioning labour market, by international standards.  There is no reason to believe labour market regulation is currently a significant barrier to job creation. This suggests that - while doubtless there are improvements that could be made around the edges -  there is little to gain from further wholesale deregulation.  Spain and Italy need radical labour market reform; we don't.  

The macroeconomics of recessions: AEA panel discussion

Brad Delong has posted the full (rough) transcript of the panel that he chaired at the San Diego meetings of the American Economic Association: 

STIMULUS OR STYMIED?: THE MACROECONOMICS OF RECESSIONS

• CARLO COTTARELLI (International Monetary Fund)

• PAUL KRUGMAN (Princeton University)

• VALERIE A. RAMEY (University of California-San Diego)

• HARALD UHLIG (University of Chicago)

Panel Moderator: J. BRADFORD DELONG (University of California-Berkeley)

The economic impact of uprating policy

[This article, an expansion of my earlier blog, was written for the Child Poverty Action Group (CPAG) report "The Double Lockout".  Obviously I do not necessarily share or endorse the views expressed by CPAG or by other authors whose chapters are included in the report (or they mine)]. 

Leaving aside normative questions about the "appropriate" or "fair" level of benefits for those who are out of work, disabled, or on low incomes, there are two principal issues raised by the Coalition Government’s decision to cut most working age welfare benefits in real terms over the next three years:

• First, macroeconomic; is this sensible and/or necessary given the short-run prospects for the public finances?

• Second, long-term sustainability; is this sensible and/or necessary given long-run trends on benefit expenditure and rates?

Predictions for 2013: my answers to the FT Survey

Here are my answers to the Financial Times' annual economists' survey (the survey is reported in full here):