A Response to ‘Why Politicians Ignore Economists on Austerity’

Simon Wren-Lewis:

… So why are politicians, in the Netherlands and elsewhere, pursuing a policy that most economists regard as an elementary error? This was a question raised by Coen Teulings, who is the director of the CPB, the Dutch fiscal council. He was commenting on an IMF sponsored conference in Sweden, at which most economists argued against short run austerity when the economy was weak, and instead advocated dealing with budgetary problems through long term structural reform. The politicians in the audience, led by the Swedish finance minister Anders Borg, disagreed. He summarizes their view as follows: “Politicians lack the ability to commit today to austerity measures to be implemented tomorrow. Hence, the only option is to take action straightaway.” …

Tuelings does not take this argument seriously, for good reasons. Instead he provides three suggestions as to why politicians are ignoring the economists. The first is a memory of the 1970s, when Keynesian policies were pursued because many failed to see the structural impact of the oil crisis. Politicians do not want to make the same mistake again. The second is that economists neglected countercyclical fiscal policy for too long, and therefore have failed to provide politicians with a clear guide to what policy should be, like perhaps an equivalent to the Taylor rule for monetary policy. Third, while both structural reform and short term austerity have political costs, politicians can sell the latter more easily, and success can be demonstrated more quickly. …

Why do politicians ignore economists? It’s a chance to implement ideological goals. Make an argument that sounds good — if we don’t get the debt under control bad things will happen! — and use it to argue for spending cuts, smaller government, and ultimately lower taxes on wealthy contributors to reelection campaigns.

In good times or bad, conservatives will find a way to argue that tax cuts for the wealthy are the key to economic success.

This piece is cross-posted from Economist’s View with permission.

4 Responses to "A Response to ‘Why Politicians Ignore Economists on Austerity’"

  1. Erich   March 6, 2013 at 3:43 am

    In 2012 Spain increased its debt level by 147 Billion Euros, which corresponds to about 15% of the national income. Of course a big chunk of that was used to save failed investors, many other parts of the budget, especially for social expenses, were reduced.
    But to call such a huge deficit an austerity budget seems a little bit strange in my eyes. I think the real scandal is how the creditors who made wrong investment decisions are saved by the tax payers, who never had a chance to influence such wrong decisions.

  2. John Rosenfield   March 6, 2013 at 3:19 pm

    Most politicians respond to those financial sources that help them get reelected and provide financial opportunities post public service — obviously economists do not offer these services to the politicians. Austerity measures reduce labor costs which pleases most of those sources (with the obvious exception of labor, teacher and publc service unions) that are the large financial supporters of the politicians.

    The bottom line is that most politicians do what is in their own best financial interest.

  3. Michael   March 6, 2013 at 5:54 pm

    Why do some bloggers flog dead horses?

  4. DINESH DESAI   March 13, 2013 at 12:48 am

    SHORT RUNS AND LONG RUNS ARE FUZZY CONCEPTS. THERE IS A DISCONNECT BETWEEN A SHORT RUN AND A LONG RUN. ECONOMISTS HAVE YET TO FULLY INTEGRATE THEM INTO ONE. A LAYMAN VIEWS A LONG RUN AS A SUM TOTAL OF SHORT RUNS. SO, WHEN ECONOMISTS SAY THAT A POLICY IS GOOD FOR THE SHORT RUN, BUT NOT IN THE LONG RUN, IT PUZZLES THE PUBLIC. HOW CAN SPENDING BE GOOD IN THE SHORT RUN, WHILE SAVING BE GOOD IN THE LONG RUN? BLAME THE ECONOMISTS FOR THIS CONFUSION.