Osborne’s RES speech and proposed new fiscal rule – mainly macro

Bottom of the class: George Osborne based his 'Long-Term Economic Plan' on a spreadsheet error by American economists. [Image: Gaianeconomics]

Bottom of the class: George Osborne based his ‘Long-Term Economic Plan’ on a spreadsheet error by American economists. [Image: Gaianeconomics]

I suppose I should say something about this, even though I find it painful reading his speeches, writes Simon Wren-Lewis.

Not because they are so partisan – what would you expect? Perhaps I can describe it by comparing it to an academic reading a student’s essay. With something like Vince Cable’s speech last year, you can read whole paragraphs quite happily, and then make a comment at the end like ‘yes, but you have ignored this etc’. With Osborne’s speeches, you feel the need to get the red pen out after every sentence. Each sentence seems as if it is crafted to mislead.

Take, for example, the issue about whether high debt inhibits growth. Now I happen to think that there are good theoretical reasons why high debt might reduce growth. However my reading of the empirical evidence – exhaustively examined following the critique of Reinhart and Rogoff – is that while there may be some (rather weak) correlation between high debt and low growth, there is no evidence of causality running from debt to growth, and more evidence that causality goes the other way. This is what Osborne’s speech says:

“And the conclusion of the academic literature is that high debt is undoubtedly correlated with lower growth. Even the possibility should give us cause for concern given the huge impact that small growth differentials can have over time.”

Does this give a rather different impression? But read it carefully – does he say anything that is clearly wrong? As I say, it is calculated to mislead, and the speech is full of this stuff.

For more insight on this speech, and a view on Osborne’s new fiscal rules, visit Mainly Macro.

Follow me on Twitter: @MidWalesMike

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  1. aturtle05 January 18, 2015 at 2:50 pm - Reply

    Wonder what FullFact.org would make of this speech, slicing into lie after lie after lie.

  2. Andy January 18, 2015 at 5:01 pm - Reply

    My god, that is painful to read. On the face of it we should send Mr Osborne back to school to take ‘A’ level economics and read some Keynes. As Simon Wren-Lewis say’s it’s so vague and misleading. I like it when Mr Osborne sites Canada & Sweden, and yes they are economic success stories, but their economies are radically different to ours. For A Start their financial sectors haven’t been allowed to run amok. Simon Wren-Lewis also says “There also seems to be an unnecessary obsession with surpluses, but I expect that is just a consequence of his short term goal of shrinking the state.” But hey what does a professor in economics know?

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