"The tale of the 364 may simply illustrate that the backing of economists – though rhetorically useful for politicians – is not a reliable guide to good policy..."Those following the on-going debate about how and when to reduce the deficit will have seen a letter printed in last Thursday’s Daily Telegraph. Signed by almost sixty academic economists, it is the second to back Labour’s plans to delay spending cuts until ‘the recovery is well underway’, and warned that Conservative plans to cut immediately could ‘imperil not only jobs but also the prospects for reducing the deficit’.
It serves as a response to similar letters from business leaders and yet more economists warning that the Labour Party’s approach to managing the economic recovery poses exactly the same risks as the Tory strategy for cutting the deficit.
Those with longer political memories, though, will recall a similar letter of March 1981, when Geoffrey Howe’s monetarist, deflationary budget provoked howls of derision from professional economists. In the depths of a recession and at a time of growing unemployment, Howe and Margaret Thatcher had proposed substantial increases in taxation alongside substantial cuts in public borrowing – precisely the reverse of the counter-cyclical policies advocated by the Keynesian economists who then dominated the profession.
The response to these measures was a letter to The Times, signed by 364 academic economists from universities across Britain, condemning the budget as having ‘no basis in economic theory’ and as posing a significant risk to ‘the industrial basis of our economy and… its social and political stability’. The signatories urged the government to ‘reject monetarist policies and consider urgently which alternative offers the best hope of sustained recovery’.
The letter had been signed by a cross-section of the most eminent names in economics – including James Meade, Amartya Sen, Alec Cairncross, and Nicholas Kaldor, alongside the present Governor of the Bank of England, Mervyn King (not to mention one of my former tutors) – and appeared to demonstrate the utter intellectual isolation of the government. When challenged, Mrs Thatcher was able to name two economists who supported the measures in the budget – her own advisors, Alan Walters and Patrick Minford – but one civil servant is said to have quipped afterwards that it was a good job she hadn’t been asked to name three.
Nearly thirty years on, however, the conventional wisdom would have it that the 364 economists were wrong and that Howe and Thatcher were right (although some of the signatories continue to defend their position). Although unemployment continued to rise, and would not peak until 1986, the prophesised depression never arrived. Indeed, an economic recovery began within weeks of the letter’s publication and seemed to make a mockery of the economists’ predictions.
The tale of the 364 may simply illustrate that the backing of economists – though rhetorically useful for politicians – is not a reliable guide to good policy.