16th August 2012
"Only one of the 20 economists who put their names to the letter in February 2010 backing Mr Osborne's deficit reduction plan said he continued to have faith in the Chancellor.
"Asked by the New Statesman whether they now regretted signing the letter, another nine urged Mr Osborne to abandon his opposition to fiscal stimulus, and to promote growth through tax cuts or higher spending on infrastructure."
The New Statesman piece was not entirely scientific. For example, half of the economists actually declined to answer and those that did are likely to be those that felt most strongly about the Chancellor's plans. The left-leaning magazine has certainly shaped the economists' responses to endorse a more left-wing solution to the economic crisis. Nevertheless, it is hardly a ratification of the Chancellor's strategy.
Sunday Times economist David Smith looks at the substance of the original letter here: "Britain entered the financial crisis with a big underlying or "structural" budget deficit, the letter adds, which has widened sharply as a result of the recession. The next government should seek to eliminate the bulk of that deficit within a parliament.
"There is "a compelling case" for the first measures to cut the deficit to begin in the 2010-11 fiscal year, the economists say, implying action immediately after the election. The Conservatives have promised, if elected, to deliver a budget within 50 days, although David Cameron has played down the prospect of "swingeing cuts" early on.
"Most of the deficit reduction should come from spending cuts, the letter says, rather than tax increases. Any tax hikes "should minimise damaging increases in marginal tax rates on employment and investment"."
Objectively, this is exactly what Osborne has done, so for the economists to suggest that they no longer endorse him because he hasn't spent enough on infrastructure suggests the economists have changed their mind about the right course of action rather than necessarily lost faith in the Chancellor.
Some admit this: Danny Quah, professor of economics at the LSE, is quoted as saying: "The fear that UK borrowing would become overly costly has become much less relevant. That has also reduced the pressure for dramatic debt reduction, compared to the perceived monetary stance at the time I signed the letter. So, have I changed my mind since signing the letter? Yes. Because circumstances have changed."
Roger Bootle, the managing director of Capital Economics, says: "If I were chancellor at this point, I would alter the plan, I would stop the cuts to public investment and I might even seek to increase it.
"The key thing is to try and get the private sector to spend its money and that may require a bit of government spending to prime the pump."
So Osborne's real crime has been not to respond quickly enough to changing circumstances. But the debate also exposes the desire of many economists to ‘have their cake and eat it'. Ponot says on the Telegraph site: "Given that I can't think of one economist or economic institution, including the government's own bunch of pet economists, the OBR, who has got anything right since 2008. (And very few saw even the biggest crash since the 1930's coming), I don't think that there is any reason to listen to a word they say, particularly as they have now turned 180°, making the scientific sounding rhetoric behind their original predictions utter, fatuous nonsense."
Paul Krugman wrote about the failure of economists earlier this year, saying that they were partly responsible for the inadequacy of the policy response to the crisis: "It should make them ashamed of their profession, which is certainly how I feel. For times of crisis are when economists are most needed. If they cannot get their advice accepted in the clinch – or, worse yet, if they have no useful advice to offer – the whole enterprise of economic scholarship has failed in its most essential duty…And that is, of course, what has just happened."
He concluded by saying that economists had been ‘incoherent in our hour of need'. Certainly it is difficult to see how politicians can be expected to get economic management right while some leading economists keep reserving the right to change their minds.
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