Tuesday 27 September 2016

Compliments pass when big beast economists lock horns

Published 14/06/2015 | 02:30

Robert Skidelsky
Robert Skidelsky

It can be amusing to observe public figures engaging in public spats. If the matter in dispute is significant, it can be enlightening too.

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The recent clash between Niall Ferguson, a celebrity economic historian who holds a chair at Harvard University, and Robert Skidelsky, an ennobled biographer of John Maynard Keynes and professor of political economy at Warwick University, has been some spat.

These two public intellectuals have long taken diametrically opposing positions on what governments should do via their budgets to aid recovery and economic growth. Skidelsky is a darling of the left, whose three- volume biography on the life of Keynes - perhaps the most influential economist ever - has bolstered the latter's already high reputation.

Ferguson is a man of the right, whose backing for the invasion of Iraq and association with the George W Bush administration has made him a minor hate figure for many of those who hold Skidelsky in such high esteem.

That Ferguson's predictions on what would happen if Iraq were invaded ended up being very wide of the mark has not stopped him making very strong claims on the consequences of fiscal policy.

Skidelsky is just as certain in his views, and even more predictable. Ferguson has accused him, not without justification, of being more Keynesian than Keynes.

Over the past month, these two big beasts of the left and the right have had daggers drawn over their country's recent economic history and what it says about how best to manage economies.

Britain's 2010 election led to the creation of a government which believed that continuing to stimulate the economy was a riskier course of action than reining in the huge deficits that had emerged as the economy slumped in deep recession in 2008.

Skidelsky vehemently opposed this course of action, saying it was doomed to failure and would reduce the British economy to a "wasteland". Ferguson supported the Conservative-Lib Dem government's position and engaged in a number of high-profile spats with other commentators who opposed it.

Within days of last month's election across the water, and unable to resist the temptation to portray himself as being vindicated by the facts, Ferguson penned an opinion article in the Financial Times claiming that the prescriptions he argued for had worked a treat for Britain. To rub salt in the wounds of the defeated Labour Party and assorted opponents of British government policies of the past five years, he said that Ed Miliband had lost the election because his party was too Keynesian.

Perhaps most amazing thing about the article was Ferguson's cavalier treatment of the facts. So serious were the inaccuracies that the FT published a 16-page adjudication on the matter.

One inaccuracy was relatively minor, relating to the trends in business confidence which Ferguson inaccurately said had never fallen back to levels in the previous Labour administration after 2010 (in fact they did, if only for a short time). But that is the sort of error that someone rushing to meet a deadline can easily make.

The second error, however, was much bigger, and far less explicable. It claimed British workers' weekly earnings had increased by one-twelfth over the course of the last UK administration.

For anyone who watches the British economy even cursorily, the failure of wage growth to pick up despite strong employment growth and a tightening labour market has been a source of puzzlement for some time.

Ferguson's figures cited wages in cash terms, without accounting for inflation. But the article suggested the wage increases were real term gains. Either this was an error - and one which even an undergraduate would not make - or Ferguson was playing fast and loose with the facts.

But these errors do not necessarily mean he was wrong in his overall point, as Skidelsky is emphatic in saying. In a riposte to Ferguson's column and the claim that continuing to run bigger budget deficits could have led to disaster for Britain, he wrote: "It is basically a tissue of propaganda, with little support in theory and destructive effects in practice."

The truth is that there is a very great degree of uncertainty around the causes of economic growth and role of macroeconomic policy. Both men mix good points with views that can't be proven. Because neither is likely ever to budge in his position, their spat will continue to generate more heat than light.

It will also probably end up further confusing those who are not expert in the area, but who want to have a better understanding of such an important matter.

It can be said that the more evidence- based scholarly community has moved somewhat in the direction of Skidelsky over the past seven years. That is mostly based on the data across many (but not all) countries showing that the deficit-reducing effects of austerity have had less impact than in the past because the growth dampening effects have been greater in the current crisis.

But we also know that it is very unlikely that fiscal stimulus alone is the determining factor in growth and recovery, as the Skidelsky side claim.

Stimulus has been tried for a very long period in Japan, a relatively closed economy which should amplify its effects - yet it can in no way be called a success. The Baltic countries introduced massive, front-loaded austerity when the crash came in 2008 and they have recovered very strongly.

Ireland and Iberian economies had no stimulus when they were on the floor and they still managed to pull through, despite many voices claiming, with the certainty of a Ferguson or a Skidelsky, that recovery was simply impossible under the budgetary adjustment that was being implemented.

But if the focus on fiscal policy by Skidelsky and his ilk appears reductionist, those at the other end of the spectrum have as little reason to be so certain in their views - that fiscal consolidation, structural reforms and improved competitiveness will solve all problems. Finland, Denmark and the Netherlands are all Germanic when it comes to managing the public finances and the use of fiscal policy. They are also highly competitive economies by most measures of competitiveness. Their political systems tend to be proactive and reform-minded, ensuring that they address in a timely manner public policy issues - whether related directly to competitiveness or other big government-led endeavours, such as their health, education and welfare systems.

But they have all had terrible recessions and very weak recoveries, something that tends to be overlooked in the debate in Europe - owing to the commonly held view that there is a straight north-south split in economic performance.

The picture around the Continent has been far from straightforward. All three of these northern European economies are still smaller in both output and employment terms than seven years ago. This puts them much closer to the Mediterraneans than to Germany in terms of their post-crash performance. The unfortunate reality is that the comment made long ago by Robert Solow, the Nobel laureate who is the father of modern growth theory, still holds true: "We have not learned enough yet about how countries grow."

It may not make for great spectacle when experts display modesty about the limitations of their understanding of their subject, but in the case of what governments can do to make economies grow, it more accurately reflects what we actually know than the false certainties of the Fergusons and Skidelskys of this world.

Sunday Indo Business

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