For those who think I’m exaggerating when I say the intellectual case for austerity is crumbling, have a look at Alan Taylor’s Vox column. His analysis is particularly nice because it demonstrates two key problems with some earlier research. If you ignore the endogeneity of fiscal policy, and you ignore the state of the economy, then his study (joint with Oscar Jorda) replicates the ‘expansionary austerity’ result. If you take account of these things, you get numbers much more consistent with, for example, this widely cited IMF study (although their analysis attempts to improve on that work). So (journalists please note) it is not a matter of X says this and Y says something different: if you do the analysis properly austerity is clearly contractionary in bad economic times.
Alan Taylor also uses his estimates to cost the impact of UK austerity: GDP would be 3% higher today without it. Here the the relevant chart.
He warns that this number is “likely [to be] a biased underestimate of the effects of current UK austerity. This caveat is the zero lower bound, when fiscal multipliers are known to be much larger in both theory and evidence.” Controlling for booms and slumps makes sense for various reasons, but controlling for monetary policy is at least as important. That also means that the 3% should carry the health warning that if UK GDP had been this much higher, this might have raised inflation, which might have led the MPC to raise interest rates, by more than is implicit in their estimates. But these are all big ifs.
He warns that this number is “likely [to be] a biased underestimate of the effects of current UK austerity. This caveat is the zero lower bound, when fiscal multipliers are known to be much larger in both theory and evidence.” Controlling for booms and slumps makes sense for various reasons, but controlling for monetary policy is at least as important. That also means that the 3% should carry the health warning that if UK GDP had been this much higher, this might have raised inflation, which might have led the MPC to raise interest rates, by more than is implicit in their estimates. But these are all big ifs.
When I did a back of the envelope calculation of the impact of cuts in just UK government spending since 2010, I came up with GDP being around 2% lower by 2013. As this ignored the impact of tax increases (e.g. VAT) and transfer cuts, then this seems quite consistent with Alan Taylor’s 3%. So if we make that 1%, 2% and 3% for 2011, 2012 and 2013, that is a total cost of 6% of GDP so far. Gross National Income was £1,557,503 million in 2012, and there were 26.4 million households, so that gives gross income of £59,000 per household. So the 6% figure implies that austerity has cost the average UK household a total of about £3,500 over these three years. Although all governments like to give the impression that they can have a big impact on people’s prosperity, few actually do. These numbers suggest that the current UK government has managed to do so, but unfortunately by making us all poorer.
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