Next Gen News

Professionals cannot simply agree to disagree. Economics is behaviour, and subject to science as much as politics

Why is there no economist royal, to shoot in time of trouble? We need someone to tell us clearly whether George Osborne, in next week's budget, is going to save the economy or ruin it. The hawks and doves cannot both be true. The first say the chancellor will slash public spending, restore Britain's financial credit and secure swift economic recovery. The second say he will slash public spending, increase unemployment, cut demand and wreck economic recovery. Is the difference political or intellectual? Someone must know.

The chancellor, the Treasury and their attendant advisers seem like doctors standing round a sick patient and arguing whether it is the heart or lungs that are failing. The answer cannot depend on the doctors being Tories or socialists, on where they went to school or who pays their salaries. The answer is surely not an opinion but a fact.

Yet I read that Professor Tim Congdon, Mark Littlewood of the Institute of Economic Affairs, and Andrew Lilico of Policy Exchange are lined up as hawks, while David Blanchflower, Paul Krugman and Geoffrey Harcourt are doves. This is just six of them. Nobody dares bang their heads together, because they say no economists can ever agree.

One of the coalition's more imaginative decisions was to set up an Office for Budget Responsibility (OBR) to take the politics out of economic analysis. We now get a supposedly objective view of the statistical aggregates behind the so-called budget judgment. But we are still at sea on the resulting decisions â€" 100 economists famously have 101 opinions.

I am sure Osborne has no desire to plunge the economy into double-dip recession, any more than Alistair Darling wished to trash Britain's credit rating. On the brink of the election they even seemed agreed on spectacular cuts, Darling promising an unspecified £44bn. Yet now they are at each other's throats.

Deep in the ideological swamp of a politician's id are instinctive responses. Conservatives will be predisposed to cut public jobs and taxes and "reassure" credit markets, while Labour is more relaxed about spending and borrowing. But these are attitudes of mind rather than policy prescriptions. In power the Tories increased the size of the public sector, while Gordon Brown and Alistair Darling proved putty in the hands of bankers.

Professional economists should be immune to such prejudice. Theirs are judgments on matters of high state importance. Their science is "applied" if it is worth anything at all. They cannot just throw up their hands and say, sorry chaps, we are unable to agree.

We are supposedly all Keynesians now and accept that governments should use public money to even out recessionary cycles. Policies should keep people in jobs and maintain demand. In 2009, when Darling was hurling tax revenues at bank balance sheets, he took money from the real economy and starved it of cash. Monetarists howled, so he printed more, but still gave it to banks.

Not surprisingly growth forecasts for the next two years are now proved seriously overoptimistic, being cut by the OBR from 3.5% to 2.6%. Darling was a ruthless contractionist, now parading as an expansionist. This will not do.

Darling's error, which has given Britain a longer recession than the rest of Europe, might suggest an agreement that the economy should not be further contracted, but subjected to a counter-cyclical boost. Yet the hawks feel that public spending has "got out of hand". Darling's legacy of debt interest will rise from £30bn to £67bn in four years and, say the hawks, risks upsetting "the markets" and increasing debt interest.

True, but how big is that risk, on which so much seems to turn? Britain's credit rating seems secure. This is not Greece or Portugal or Spain. Labour was spending recklessly last year, but the election ended that. Lenders are surely happy as long as their interest payments are met. It can't help their cause to see the Treasury axing jobs, cutting demand and forcing down tax revenues while the economy is still in the doldrums.

A responsible government does not spend or borrow more than it needs, but there must be some formal judgment on how far it can go before spooking the bond market. This will determine the fate of thousands of jobs and months of recession. So what is the quantitative relationship between cuts and creditworthiness? What are the economic modellers doing with their time and our money? Are they totally useless?

At this point a different, more obviously political, argument kicks in. Assuming agreement is reached on the necessary priming of demand at this stage in the recession, how far should government action operate on public rather than private spending? Hence the argument over Osborne's 80:20 split of spending cuts to tax rises to achieve his debt reduction. We do not know if this split is a guess or an equation.

The Labour government appears to have wasted large amounts of money. The pile of cuts offered by new ministers on the Treasury altar grows by the day. It began modestly with ministerial cars and home information packs. It swelled with school quangos, regional agencies, Heathrow runways, student fees, criminal records computers and ID cards. This week the big beasts came into sight: public sector pensions, sickness benefits and even defence procurement.

It is hard to believe most of these cuts will materially deteriorate the public weal. Productivity in hospitals and social services is said to have plummeted in recent years. Simply wasting public money that could be returned to private expenditure is daft, like Keynes's workers digging holes while others fill them up â€" a good description of Whitehall management consultants.

Yet such a perception is quite different from judging the consequence of declaring tens of thousands of public workers redundant overnight, with no action to expand the private economy to use their labour and sustain spending power. It is far easier to cut than build. This in turn requires the government to boost retail and corporate activity in the high street â€" the opposite of what it seems minded to do by raising taxes.

Economics, as Schumacher preached, is essentially about behaviour. But that behaviour is subject to laws of science as much as politics. The only sure thing at present is that no one who should know is saying. We are left in a fog. The Office for Budgetary Responsibility was clearly given far too limited a remit.