It has been said that the politics of academia is the most vicious and bitter form of politics, because the stakes are so low. The phrase comes to mind when considering the exchange of views between different groups of economists this week. First a group of twenty wrote a letter to the Sunday Times arguing that fiscal tightening, or cuts in public spending as it really is, should start sooner rather than later. This was jumped on by the Tories as proof that Labour was threatening the long term credit worthiness of the UK. Then today two groups of economists, headed by lord Skidelsky and Lord Layard, had letters published in the Financial Times refuting the first group. Skidelsky and Layard argued that early fiscal tightening would lead to a plunge back into recession. This argument is interpreted as support for Labour.
The onset of the recession has left the economics profession effectively discredited. The numbers of economists who predicted the recession were so small that they are the stopped clock part of the economics profession. If you predict recession for long enough then you will eventually be right. Neither the free market economists or the neo Keynesians have any remaining intellectual credibility.
This intellectual paralysis has contributed to a situation in which serious global analysis of the causes of the recession has been inadequate. Most discussions have focused on the symptoms of the crisis, such as the credit bubble, rather than the causes. As a result the current position of most economists on recovery is to cross their fingers and hope for the best.
The current ‘controversy’ over fiscal tightening revolves in effect around whether the small cuts now proposed by the Tories for the next financial year, around £2 billion-a lot of money for you and me but a drop in the ocean for the UK economy, should go ahead or not. That this relatively tiny amount should be so controversial indicates how limited the debate about the UK economy really is. What is even worse is that the wider discussion of the future has been boiled down to how far and how fast public spending should be cut.
In reality all the participants in this discussion know that even if it was desitrable that large cuts in public spending should take place over the next year or two it is not a realistic option. It would require a huge effort of political will of which there is no evidence that it exists. Everybody understands that it ios only the massive supprt given to the economy through support for the banks and through pubblic spending which is keeping the UK economy afloat.
The main underlying worry in all of this is that there is no plan to get the UK economy back to growth. As the Financial Times commented on the spat between economists, there is no alternative to continued state support for the economy. It argued that major cuts now, which nobody is suggesting anyway, would lead to a further contraction of the economy,
It is not clear what forces could offset such a contraction. Easier monetary policy would be of limited use: domestic credit growth is not a route to sustainable recovery and exports are unreliable. At a time when most of the world wants to export its way out of trouble, who is going to buy all those British goods?
In other words the only option on the horizon is to wait for help from the world economy, which is essentially ‘unreliable’.
The dispute between economists is significant only because of its insignificance. The identification of one side with Labour and the other with the Tories shows just how narrow the differences between the parties are on the central question of the economy.
A version of this article also appeared on Spiked