Simon Wren-Lewis: The intellectual bankruptcy of the austerians:
It is both amusing and tragic to watch the advocates of fiscal austerity try and deal with the fact that the thin intellectual foundations for their approach have crumbled away, while at the same time the empirical evidence of their folly accumulates… economic textbooks tell us that this policy was foolish… austerians were always arguing something like ‘forget the accumulated wisdom of the past century, on the basis of two or three papers we know better’.
So we have the latest annual report from the Bank of International Settlements, which is telling central banks to stop all this unconventional monetary policy stuff and get back to the serious business of eliminating… no sorry, ‘controlling’ inflation… we have… "even if the short-term adverse effects of fiscal policy on output (or fiscal multipliers) are somewhat greater than in the pre-crisis period, there is considerable uncertainty about their magnitude and no compelling evidence that they are large enough to render fiscal consolidation more difficult (or actually self-defeating)." Just look at the language here: ‘sceptical’, ‘somewhat greater’, ‘considerable uncertainty’, ‘no compelling evidence’. You could write a paragraph like this about virtually any economic idea. Notice also the target and how it changes: it starts off in the wrong place, by implicitly assuming that if multipliers were smaller the policy would be costless, and then at the end the target is the much stronger position that fiscal consolidation is self-defeating. It gets worse…. Don’t worry, it's coming to an end:
Finally, the impact of fiscal consolidation on growth extends beyond the short run. By restoring sound financial conditions, eliminating the risks associated with high debt and reducing the resources needed to service the debt, consolidation will lead to higher sustainable economic growth. As a result, its long-term benefits will more than offset its short-term costs.
This is more like a recitation of an article of faith than an argument…. It is the final sentence that just does not follow. Because there are long run benefits to reducing government debt, it must be the case that the sooner we start the better? No. Exercise is good for you, but you don’t start when you are down with the flu. This kind of thing is amusing sport for academics who are trying to put off getting down to serious work on a Monday morning. But of course it is tragic because the austerians, even though they have been soundly defeated on the battlefield of ideas and evidence, continue to call the shots on policy…. What to do about this tragedy? Just keep plugging away… although a bit of ridicule also helps convey the poverty of the austerian argument…
Antonio Fatas: BIS: Bank for Inconsistent Studies:
Both the BIS report and the speech by Rajan present a critical view of the fiscal and monetary policy stimulus we have witnessed over the last years…. There is a recognition that this is a crisis caused by low demand but at some point the arguments is turned around to argue that more demand might not be a solution… let me focus on two issues….
The BIS… criticizes those who argue in favor of additional stimulus on the basis that they ignore structural problems. But this is not correct. Those of us who have argued in favor of demand policies have never denied that there is room for structural reform in many advanced economies. It is a matter of timing. And what about the evidence? The argument from Rajan that "what is true is that we have had plenty of stimulus." is at odds with the evidence. Both fiscal policy and monetary policy have been less expansionary (or more contractionary) than in any previous recession.
When it comes to monetary policy the report adopts a similar attitude: while it admits that many of the policies were necessary there is a criticism that central banks have gone too far and now they are going to cause trouble… central banks has been too accommodative and that interest rates have been too low…. If it is true that monetary policy has been so accommodative for about 13 years, where is inflation? The Taylor rule was partly proposed as a benchmark on how to maintain a stable rate of inflation. If we keep the interest rate below what is appropriate for 13 years we should see massive inflation everywhere in the world. But there is no inflation. Isn't this enough evidence to stop the BIS from producing the chart above as a proof that central banks have gone too far?
Yet another day when one feels that this crisis has been a wasted crisis for economists to learn about our mistakes.