Three former members of the Bank of England’s Monetary Policy Committee (MPC) have launched a scathing attack on George Osborne’s handling of the economy, ahead of Wednesday’s Budget.
Speaking to the Huffington Post UK, economists Sushil Wadhwani, Adam Posen and David Blanchflower call the chancellor’s austerity measures "premature", “self-defeating” and "completely at odds with economic theory". They argue that the UK is now in the midst of a Japanese-style 'lost decade' of economic stagnation and high unemployment.
“It’s difficult to believe that coalition policy hasn’t made things worse,” says Wadhwani. "The debate is: how much worse?"
‘MOST INEPT CHANCELLOR IN 100 YEARS’
Between them, these three leading economists have almost a decade’s experience on the MPC, with Posen’s term on the Bank of England committee having overlapped with Osborne’s first two years at the Treasury.
Now president of the Peterson Institute for International Economics in Washington DC, Posen says the prime minister and his chancellor are in denial. “They seem to be ignoring the negative feedback loop from their own austerity measures - and particularly their killing of public investment - on their actual revenues,” he tells HuffPost UK. “They seem to be ignoring all the evidence from the past two or three years.”
He adds: "The current programme is not even working on its narrow terms of reducing the deficit so any responsible government should reconsider its programme."
According to Wadhwani, founder and CEO of Wadhwani Asset Management and a visiting professor at the London School of Economics (LSE): “This is by far the weakest recovery – if you want to call it a recovery – since the inter-war years. We’ve underperformed many other economies in a similar situation.”
To what does he attribute this underperformance? “I think it was premature fiscal tightening… it would have been more appropriate to delay the fiscal tightening.”
Blanchflower goes further. The chancellor’s austerity measures have “completely failed”, says the professor of economics at Dartmouth College in the United States. Osborne, he adds, is the “most inept chancellor in 100 years. We have the worst economic recovery since the late 19th century.”
So why hasn’t the Conservative-led coalition changed course? Senior Labour figures have long argued that Osborne’s growth-free ‘age of austerity’ is a convenient cover for cutting the size of government and ‘rolling back the state’. Posen seems to agree. “The [austerity] debate is ongoing because there are people in positions of power who are politically or ideologically committed to maintaining this proven position.” Nonetheless, he says, “the current policies are completely at odds with the economic theory”.
MORE BORROWING, LOWER DEBT
The three former MPC members reject Osborne’s oft-repeated mantra that “you can’t get out of a debt crisis by borrowing more and more”.
They argue the exact opposite. “In these situations,” says Wadhwani, “what you have to do is be very aggressive and change expectations. And then the debt will take care itself. The best way to deal with leverage is to get some growth…quickly and aggressively.”
Blanchflower is scathing in his denunciation of the chancellor’s rhetoric. “If a freshman student one week into an economics class said that, I’d fail them,” says the Dartmouth College professor. “They don’t understand the role of capital financing. The question of [borrowing] is what you spend it on.” To argue otherwise, he says, is “moronic”.
All three economists also reject the chancellor’s claim that the UK cannot afford to pay for a fiscal stimulus – and support the business secretary Vince Cable’s recent call for increased spending on capital projects funded via higher borrowing.
“If [the chancellor] borrowed for capital spending, I don’t think he’d be penalised by the markets,” says Wadhwani. “It’s less a markets-related question [and] more that he thinks the credibility of his political strategy depends on not moving away from Plan A.”
Cable is “broadly right”, notes Posen, adding: “It’s not just Keynesian but realistic and responsible to change your mind when the facts change. In this case it’s not the facts change, the benighted policy ideas were proven to be wrong.”
So borrowing more in the short-term won’t, as David Cameron and George Osborne have repeatedly argued, lead to higher interest rates or a collapse in market confidence? “Absolutely not,” says Blanchflower. “The reason that rates are low is because there is no growth”. As a result, he argues, the chancellor “absolutely could go and do a huge fiscal stimulus” on Wednesday.
So far, says Posen, Osborne’s austerity policies have been “self-defeating”. The US economist, who left the MPC last August, says the chancellor’s deficit reduction programme is based on three “false premises”. First, “that the UK would become Greece if it didn’t do radical austerity. And the minimal reaction of the pound and interest rates to the [credit] downgrade show that’s a false premise”. Second, “that is it’s okay to have a 4 to 1 ratio of spending cuts to tax rises rather than worrying about public investment”. And third, he says, “they assumed the confidence effects would be large in terms of increasing revenue and growth and the effects of consolidation would be small and both those have been shown to be opposite”.
'DIGGING A DEEP HOLE'
What about the Tory right’s demands for deeper and faster cuts to public spending as a route out of this mess? Last week, the former shadow defence secretary, Liam Fox, used a speech at the Institute for Economic Affairs (IEA) to demand a five-year spending freeze to help slash the deficit and spur growth.
“This is really digging a deep hole when you are already in a dismal situation,” observes a sceptical Wadhwani.
“It would take us to 25% unemployment,” warns Blanchflower. The Dartmouth College professor says the impact of a protracted, front-loaded programme of austerity would be catastrophic: “Firms would die at a stroke. It would scare people absolutely senseless. It would be like the Great Depression…”
The three former committer members are also agreed that whether or not the UK economy ‘triple dips’ into recession later this year is irrelevant. “I just think we’re flatlining,” says Wadhwani. “Whether we get a couple of negative quarters [of growth] is neither here nor there… the fact is we’re just not growing enough.”
According to Posen, “the economy should be recovering at 2%-plus and we’re going to be well below that for at least another year or two even if we avoid a triple dip”.
Blanchflower isn’t optimistic. “There is no evidence that you’re going to see any growth at all by 2015. Osborne and Cameron believe these OBR [Office for Budget Responsibility] and MPC forecasts, which are bullshit.”
‘LOST DECADE’
The debate over whether or not Britain is on the verge of a Japanese-style 'lost decade' of prolonged economic stagnation, says Blanchflower, is over: “We’re in one already.” Wadhwani agrees: “The numbers are in… we are halfway through a lost decade.”
Blanchflower notes that in “the 1930s, lost output was restored after 48 months; we’re now 65 months in and we’ve only restored half the level of [lost] output”.
Posen highlights the long-term damage being done to the British economy through “hysteresis”: "When you have young people out of work for long periods of time they have a much harder time getting back into work, their skills erode, and their attractiveness to employers takes a lasting hit. Even those who do get back into work generally have permanently lower incomes than they would have had without a long-term stay in unemployment.”
As with Japan in the 1990s, he argues, Osborne’s embrace of austerity is “taking a normal recession and making it longer and worse than it has to be”.
There is, however, another way. Posen, who sits on the panel of economic advisers to the United States Congressional Budget Office (CBO), contrasts the Cameron/Osborne plan in the UK with the Barack Obama plan in the US: “There is no frontloaded austerity [in the United States]… It’s spread out over many more years than the Cameron and Osborne plan ever was. It’s far more balanced between tax increases and spending cuts and more public investment-friendly than the Osborne plan.” And austerity in America is being implemented, adds Posen, “after [the Obama administration] did the stimulus and [after the US economy] had recovered”.
Will Wednesday’s Budget make a significant difference to the state of the UK economy and the prospects for growth? Is it, in the words of former Tory party deputy chairman Lord Ashcroft, “one of the last big changes Osborne will have” to turn things around, ahead of the next general election in 2015?
The prognosis from this particular trio of ex-MPC members is pretty gloomy. “They can make things much worse or they can make things somewhat better,” says Posen. “The longer they keep repeating the mistakes the worse it’s going to get… It’s not do or die but they can do an awful lot of harm if they don’t fix their Budget plans.”