Osborne’s illiterate economics – Mainly Macro


Oxford University Professor Simon Wren-Lewis reckons George Osborne is determined to continue his ‘Starve the Beast’ policy of shrinking the state – no matter who it harms – by continuing his “scarcely credible”, “illiterate” policies that “virtually no-one wants”. Writing in his Mainly Macro blog, he tells us:

Yesterday I spoke at the Resolution Foundation’s launch of their analysis of the UK political parties’ fiscal plans post 2015. I believe this analysis shows two things very clearly.

First, there is potentially a large gap between the amount of austerity planned by the two major parties.

Second, George Osborne’s plans are scarcely credible. They represent a shrinking of the UK state that is unprecedented and which in my view virtually no one wants.

I would add one other charge – Osborne’s plans are illiterate in macroeconomic terms.

The UK economy desperately needs more growth. There remains plenty of slack in the labour market, and real wages are continuing to fall. This and the inflation numbers tell us that the problem comes from the demand side. Yet monetary policy can do very little about this lack of demand, because interest rates are at their lower bound and – judging the Bank’s actions – the power of QE is largely spent. This is not a short term problem that is sure to disappear in a year. The risks that world developments will make the problem worse are real – as David Cameron has recently warned.

In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who argues that Osborne’s plans for renewed austerity will not in themselves reduce aggregate demand. So doing this when the recovery could go much further but is still fragile is just plain dumb. It is even dumber if you have done this once before, in a very similar situation, and the risks I outlined above have indeed materialised.

So why is the Chancellor proposing to make the same mistake twice? My problem is that I cannot come up with a coherent macroeconomic explanation that fits his words and deeds. So let me list three possible justifications and why each fails.

You’ll have to visit Mainly Macro to see who those justifications are. Back to Professor Wren-Lewis for his conclusion:

I cannot think of any way to rationalise what the Chancellor is planning in macroeconomic terms. But perhaps I’m looking for something that does not exist. Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election.

But this explanation would imply we have a Chancellor who quite cynically puts the welfare of the majority of the UK’s citizens at major risk for ideological and political ends, and I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But as Sherlock Holmes famously said

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3 thoughts on “Osborne’s illiterate economics – Mainly Macro

  1. casalealex

    “So why is the Chancellor proposing to make the same mistake twice?”

    I am unable to answer this question, but after watching today’s PMQs, and keeping an eye on Giddy’s quiet performance, I am worried the guy is either ill, or was stoned out of his head – seriously! Just saying….

  2. Florence

    You’re referring to the look of total incomprehension the Gidiot has perfected. It’s not an act, it’s his actual perpetual state being in a situation he is totally unqualified for, and too thick to make good out of.

    It’s the look of an idiot who exists to take orders from others (great pay!), without comprehension of what it is or why. Perhaps he does have the “why” wander lonely as a cloud through the empty space between his ears……..

    (inside the empty noggin)……………. “they told me I would make rich people like my mates the Bullys in the cabinet richer, and then they would all like me more.. Job done……. I do hope they stop dropping me on my head soon……….The other stuff – you know, like these little poor people starving and dying, well, I’ve been told they would all do better if they became rich people, like us…not my fault, oh no………Glad that’s sorted, now off for a little recreation to boost the only part of the economy that’s growing………”

    (Background noise of enormous crash of the UK economy, and the jets taking the rich to safer places with their loot…………)

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