David Blanchflower: Osborne's 'consensus' has come crashing down

Economic Outlook: The consensus now seems to be that the Chancellor’s policies have resulted in failure

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The Independent Online

A letter to The Sunday Times on 14 February 2010 from 20 economists gave the Tories' plans for harsh austerity a much-needed credibility boost. In their letter the infamous 20, including four ex-Monetary Policy Committee members and a future Nobel prize winner, claimed that "in order to be credible, 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".

To be fair to them, they did say the exact timing of measures should be sensitive to developments in the economy. But George Osborne greeted the letter with unguarded delight, and in a Sky News interview even claimed the letter meant that his austerity plans were now "part of the mainstream economic consensus".

Indeed, in his Mais lecture of 24 February 2010, he went even further, claiming that he alone held the path to nirvana. He said: "Economic theory and evidence both suggest that the macroeconomic policy combination most likely to encourage that adjustment is tight fiscal policy, supportive monetary policy and countercyclical financial regulation." Rather bold claims that sadly have not withstood the test of time.

On the 18 February 2010 the Financial Times published two other letters on the same day from 67 arguably even more prominent economists vehemently disagreeing. The first, from nine economists organised by Lord Layard, included four ex-MPC members, an ex-vice chairman of the Federal Reserve, and one Nobel prize winner. They argued that "it would be dangerous to reduce the Government's contribution to aggregate demand beyond the cuts already planned for 2010-11. If next year the Government spent less and saved more than it currently plans, this would not make a sustainable recovery more likely."

The second, from 58 economists that I jointly organised with Lord Skidelsky and Marcus Miller, also included the Nobel prize winner Jo Stiglitz, Brad De Long, John Van Reenen, Paul de Grauwe and Richard Freeman. In that letter we argued: "There is no disagreement that fiscal consolidation will be necessary to put UK public finances back on a sustainable basis. But the timing of the measures should depend on the strength of the recovery… For the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth." So there never was any supporting "consensus".

But there does now seem to be a consensus among economists that Mr Osborne's policies have failed and it is time for an about-turn. I had the idea to go back and ask the 20 supporters of 2010 what they thought now, and their answers were reported in last week's New Statesman. Of the 10 we contacted, nine have now turned tail on the Chancellor and argued for further stimulus. David Newbery, for example, argued: "We need growth, and that requires investment. In a recession bordering on a depression, public investment in infrastructure that has a high pay-off even in good times must make sense."

There does now seem to be a consensus among economists that Mr Osborne's policies have failed. Danny Quah argued: "So, have I changed my mind since signing the letter? Yes. Because circumstances have changed." Ken Rogoff said: "I have always favoured investment in high-return infrastructure projects that significantly raise long-term growth." Oh dear, George.

There was one dissenter though: University of Minnesota-trained Albert Marcet. He argued that there is "no room for Keynesian-type policies to encourage growth; there is virtually no economic theory to support that" (my italics). Sadly he doesn't have a great track record on economic policy analysis, having argued in a Guardian op-ed piece in May 2011 that "there are no fundamental reasons to fear a Spanish sovereign debt crisis".

And his most recent work doesn't give me confidence that he has the slightest clue how the real world operates. Try this from the abstract of his most recent paper: "We obtain a recursive formulation for a general class of contracting problems involving incentive constraints. These constraints make the corresponding maximization sup problems non-recursive. Our approach consists of studying a recursive Lagrangian. Under standard conditions, there is a recursive saddle-point (infsup) functional equation (analogous to a Bellman equation) that characterizes the recursive solution to the planner's problem". Blah, blah, non-recursive, sup infsup gibberish and what about the doorman? This sort of drivel is what got us into this mess in the first place.

We have also been attempting to contact the 35 businessmen who wrote to The Daily Telegraph on 17 October to say: "It has been suggested that the deficit reduction programme set out by George Osborne in his emergency Budget should be watered down and spread over more than one parliament. We believe that this would be a mistake.There is no reason to think that the pace of consolidation envisaged in the Budget will undermine the recovery. The private sector should be more than capable of generating additional jobs to replace those lost in the public sector … In the long run it will deliver a healthier and more stable economy."

Of course that hasn't happened and there has been growing complaints from business groups including the CBI. I await with interest their responses on whether they have also changed their minds. Their silence, of course, would be golden. It would be great to hear from any economists or businessmen or women who are supportive of the Government's current (failed) economic strategy. Well, there is always that Marcet bloke.