My London Review of Books article is now available online. It is much longer than the normal blog post, so it allows me to put together a lot of points in one place. It tells the history of the macroeconomic policy response to the Great Recession. How in 2009 policy responded in the right way (in terms of direction if not magnitudes), but how in 2010 it all went very wrong with the move to austerity. It is told from a UK perspective, but similar stories can be told for the US and Eurozone. It says why austerity was a mistake, and how both politicians and most of the media have tried to avoid this conclusion.
Besides length, the other main difference is the effort I have made to write clearly for non-economists. (Whether I have succeeded you can judge, but to the extent I have the editorial team at LRB deserve a lot of the credit.) Of course I would like to do this all the time in my posts (unless I signal otherwise at the beginning), but I’m acutely aware that I often fail. Mostly it reflects lack of time. I try to always do one read through thinking how would a non-economist interpret this, but as anyone who reads through their own work knows, if it is something you have just written it is quite difficult to be objective. My ‘post the next day’ rule helps here, but I do not always stick to that rule! (Occasionally jargon can be descriptive: ‘automatic stabiliser’ and ‘lender of last resort’ spring to mind from the article.)
Writing a piece like this also makes it clear how difficult macroeconomics in particular is. Everything is, at least potentially, connected. To tell the story of fiscal austerity you do not only need to talk about the impact of spending cuts on demand and output. You also need to talk about monetary policy, and therefore Quantitative Easing. Not just to discuss potential monetary policy offset, but also why the Eurozone is different, which means talking about the relationship between short term interest rates and interest rates on government debt. I do this all the time when writing academic papers of course, but for a non-academic audience the rules for what you include and what you leave out have to be different.
The hardest thing is to switch off the academic part of me which is saying: you really should cover that, or that is a very imprecise way of making that point. For example in the LRB article I did not go into a discussion of whether, because UK inflation was high in 2011, interest rates might have increased if there had not been austerity. That discussion you can find in detail in my NIER article, but I decided including it in the LRB discussion was both unnecessary and distracting. However I did mention helicopter money (by request), because a natural question for a non-economist to ask is why the central bank is creating money to buy financial assets rather than giving it directly to people? (Actually that is a pretty good question for an economist to ask as well!) What I wrote was that financial assets can be sold again when the recovery is complete if the bank judges that there is too much money in the economy, but that of course begs the question of whether there are other means of reversing helicopter money. You just have to stop somewhere, and leave important issues out.
The other thing that struck me writing both the LRB and NIER articles was how little depends on the benefits of hindsight. When I did my analysis of fiscal policy under Labour, the major criticisms did reflect subsequent events: in particular that the fiscal rules should have aimed for a gradually falling debt to GDP ratio. With the Coalition, the key mistake was obvious at the time. What has come with hindsight are in a sense details, albeit important ones: exactly why the Eurozone was special, the motivations behind the policy, and mediamacro. However I think the more interesting comparison, from a UK perspective, is between macroeconomic policy under the Coalition and the 1979 government under Margaret Thatcher. That would be an article I would like to write sometime.
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