I have to tell you something. I never had any doubt that George Osborne’s austerity nonsense was going to be a disaster. None. Not even for the time it takes for light to travel a mile, which is apparently one-186,283rd of a second, did I even consider the possibility that he had any chance of success. I went so far, stupidly, as to say that I was 100 per cent certain that austerity would result in a double-dip recession. There had never been any examples in the past in which austerity led to growth in the midst of a deep recession when a country’s neighbours were also in trouble. All the empirical evidence was exactly to the contrary.
It has come as no surprise, then, to find that many of the 20 economists who wrote to the Sunday Times in February 2010 arguing that the “government’s goal should be to eliminate the structural current Budget deficit over the course of a parliament” have come running back with their tail between their legs, now that the economy has tanked. The two dissenting letters from nearly 70 economists, published in the Financial Times a few days after the Sunday Times letter and arguing that the first priority had to be growth, were prescient.
The New Statesman was able to contact 11 of the infamous 20 for an article in last week’s issue. The cowardly John Vickers refused to say why he had got it wrong. Albert Marcet from Spain remained supportive of Osborne, even though he has a very poor forecasting record, having argued in a Guardian piece in May 2011: “There are no fundamental reasons to fear a Spanish sovereign debt crisis.” Duh! Two other plonkers told the Daily Telegraph a few days later that they also remained supportive. Neither has a terribly impressive forecasting record, to say the least.
On 3 January 2011, in the Financial Times, in response to the question “Will the fiscal consolidation be on track in a year’s time or will there be a need for serious consideration of a plan B?” the ex-Monetary Policy Committee member Charles Goodhart said: “It will succeed better than expected.” Oops! Bridget Rosewell, who was consultant chief economic adviser to Boris Johnson’s Greater London Authority and so was hardly neutral, said in the same FT article: “Surprises on the upside may well continue – but there will also be some downsides. It will be a roller-coaster year but at the end we will look back and realise it went quite well.” She even argued that, in a year’s time, there would be no need for a plan B: “Fiscal consolidation will be on track. Plan B can stay in the box.” It’s hard to take either of them seriously.
Nine of the 20 told the NS that they thought the facts had changed and it was time to invest in infrastructure. Danny Quah of the London School of Economics said: “So, have I changed my mind since signing the letter? Yes. Because circumstances have changed.” Yet, as Paul Krugman has noted in his New York Times blog, the facts have not changed materially; there was never any credible empirical support for slashing and burning in the face of a once-in- a-century financial shock. The 20 economists got it wrong and it is time they all admitted it. There is more new evidence that the economy is flatlining and that Osborne’s deficit reduction programme is in disarray. The public finance data was bad, with unexpected and large declines in corporate tax receipts. The Confederation of British Industry’s latest industrial trends survey provided further evidence that the economy is cooling. The latest release by the Bank of England’s agents (who report monthly on conditions in the private sector) makes scary reading for the recession deniers.
Their scores on a wide range of outcomes fell sharply in 2008, giving an early sign of recession approaching. Their latest report was filled with evidence of a slowing economy. There was “a slowing in the annual growth rate of consumer demand”. There were “further signs of weakening in the housing market”. Investment intentions “had softened a little”. Export growth “had slowed further on the month”. Turnover “had slowed a little over the past few months”. Manufacturing output “had weakened”. The agents also said that private-sector employers “did not expect much change in staff numbers over the next six months”. No wonder there are calls for a U-turn.
Mind the gap
Much of the strain of recession has been taken by earnings, which have fallen in real terms, not least because more people are being forced to work for fewer hours than they would have wished. Over the past year, there has also been growth in self-employment of 218,000, against a decline of 33,000 in the number of employees. In all likelihood, these new self-employed jobs are low-paid.
In the table (below), I examine the main data source on self-employment earnings from the Survey of Personal Incomes published by HMRC. The gap between mean and median self-employed earnings is greater than for employees, because their mean is pulled up by small numbers of highly paid individuals who earn many millions. But the typical self-employed person earns much less than the typical employee. Moreover, the earnings of the typical self-employed person have fallen in nominal terms, while median employee earnings have risen by nearly a third. The reason why mean self-employed earnings have risen (while median earnings have fallen) is that self-employed earnings at the top have risen by a lot. We are not all in this together.
The London Olympics certainly gave a temporary boost to employment but that is sure to dissipate. Perhaps Iain Duncan Smith, the Secretary of State for Work and Pensions, will accuse me of peeing on the data. He wouldn’t dare.
David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire