Unrepentant Economists: A bit of history to remind us where the economists stood on the matter of fiscal austerity: On February 14, 2010, the Sunday Times published this letter:
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…. 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. The bulk of this fiscal consolidation should be borne by reductions in government spending….
Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides, Danny Quah, Meghnad Desai, Andrew Turnbull, Orazio Attanasio, Costas Meghir, Sir John Vickers, John Muellbauer, David Newbery, Hashem Pesaran, Ken Rogoff, Thomas Sargent, Anne Sibert, Michael Wickens, Roger Bootle, Bridget Rosewell….
Most of the signatories were the cream of Britain’s economics establishment.
On February 18, 2010, the FT published a response, which I organised….
The Treasury has committed itself to more than halving the budget deficit by 2013-14, with most of the consolidation taking place when recovery is firmly established. In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place! They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession?… The first priority must be to restore robust economic growth. The wealth of the nation lies in what its citizens can produce.
There were a hundred signatories, including
Marcus Miller, David Blanchflower, Paul De Grauwe, Brad DeLong, Jean-Paul Fitoussi, Richard Freeman, Rick van der Ploeg, Robert Rowthorn, Joseph Stiglitz, John Van Reenen….
If anything, I now regard our letter as too timid. We were essentially supporting the slower rate of deficit reduction, which was the policy of the then Labour government, against the Conservative demand for accelerated deficit reduction. We should have been against any deficit reduction policy whatsoever in the circumstances of a severe recession, and should have been advocating accelerated spending
What do the signatories of the Sunday Times letter now think? In August 2012, the New Statesman contacted the 20 signatories. All but one out of those who replied agreed that there was scope for additional capital investment. None of them admitted they were wrong to write as they did in 2010, and none of them took any responsibility for the intellectual support they gave to the accelerated cutting program of the incoming Conservative-led government.