Since You Asked

Dr Osborne’s bitter medicine is no cure

The chancellor’s claim that Britain’s slow recovery vindicates his policies is drivel


‘The International Monetary Fund has dropped its criticism of George Osborne’s austerity drive after revising up the UK’s growth forecast by more than any other leading economy.’
Financial Times, October 8

Good news for the chancellor, then.

He’s had a pleasant week. The independent Office for Budget Responsibility also said this week that his austerity policies were “not the most obvious reason” that economic growth had been so weak until recently.

Pretty embarrassing for his Keynesian critics, eh?

That depends on whether his Keynesian critics are embarrassed by the sneers of cloth-eared nincompoops or not. I don’t see how any thoughtful, open-minded person can believe that Mr Osborne’s critics have been proved wrong by events.

How so? Growth is back! Isn’t that an endorsement of government policy?

OK. I’ll use small words to explain this. Let’s say that a man gets sick. He picks up some pills from the chemist.

What sort of pills?

Antibiotics.

That isn’t a small word.

Oh, shut up. So our man begins taking the antibiotics, but almost immediately gets an appointment with Dr Osborne, who declares the antibiotics a quack treatment. Dr Osborne confiscates them and instead prescribes prolonged bed rest. Our friend is sick for a long, long time. But recently, he’s been feeling better. He’s out of bed, pottering around and thinking about taking a shower, getting dressed and heading out for a walk. Dr Osborne claims vindication. He says the quacks who suggested antibiotics were wrong because the man’s getting better. But this is the argument of a fraud or a fool – or, of course, a politician. Sick people usually get better. Sick economies usually get better, too. That fact, enormously welcome though it is, proves nothing.

Mr Osborne has said that the opposition couldn’t explain why the economy was recovering despite continued austerity.

That’s drivel. No sane person would claim that austerity – a catch-all term for higher taxes and lower government spending – is the sole cause of economic performance. A simple textbook model would suggest short-run economic performance is determined by demand while long-run economic performance is determined by supply: of the British people, their skills, the buildings, infrastructure, equipment and institutions that surround them. We’d expect austerity to dent demand in the short run – two or three years. In the long run, as Keynes reminded us, we are all dead. This simple model says that Mr Osborne’s economic vandalism can hold the economy back for a long time, but not forever.

I’m sure there are kinder ways to characterise the chancellor’s policies.

It’s simple logic. Austerity doesn’t explain everything about the recession, but that doesn’t mean it explains nothing. Let’s be clear: the UK economy is suffering the slowest recovery of gross domestic product since credible records began by a colossal margin. Sixty-six months after each began, in the awful recessions of the 1920s, 1930s, early 1970s and early 1980s, GDP had recovered to 5-8 per cent above the pre-recession peak. This time, we are still about 2-3 per cent below it. We are looking back – I hope – at an unprecedented economic catastrophe. The OBR says Mr Osborne’s austerity wasn’t the only cause – or indeed the largest cause. He didn’t cause the financial crisis any more than Dr Osborne infected our patient. Our sick man had many things wrong with him and the antibiotics would have cured only one of the conditions. But it’s cheeky of the chancellor to claim the limpest recovery in British history vindicates him.

We don’t know that for sure – not like we know that antibiotics kill germs.

True. But we’re reasonably confident austerity damages economies in recessions.

You’re talking as though Mr Osborne had a choice. Our deficit was vast and it’s still big; he couldn’t have risked a debt crisis.

Markets – aided by the Bank of England, with unlimited ability to print sterling – have been happy to buy UK government debt. They might not have been so sanguine if the 2010 election had delivered a lame-duck minority government. But with a solid coalition Mr Osborne could have taken credible steps to encourage spending during the slump while charting a course to long-term fiscal rectitude.

Why didn’t he do that?

Political timing. Mr Osborne’s economic mismanagement has cost a lot of people their jobs. It may well keep his own secure.

Also published at ft.com.

12th of October, 2013Since You Asked • Comments off