Why did the knowledge transmission mechanism fail
for austerity?
Simon Wren-Lewis describes a process where academics come up with theories and test them and then through intermediaries that are translated into policies which can be implemented by policy decision makers. He provides the handy diagram below.
So why did this mechanism, which for the most part is usually effective, fail during the macroeconomic crisis? I’m going to link this to a recent econo-blogosphere conversation started by Russ Roberts when he said:
“Just a curious coincidence that economists who like stimulus want bigger government and those who oppose it prefer smaller.”
For
context: He is in the camp of opposing fiscal stimulus and smaller Government
and many have rightly praised him for persistently trying to identify his own
possible biases.
However, in my opinion he’s got it slightly wrong, many of those who want small government also think that austerity is damaging during a crisis, but they stayed quiet during this debate. This is because they knew that in a time of non-crisis they would not have been able to convince people of the benefits of small government, so to achieve the goal of a small state, they let people believe this mistruth.
Due to the fact that academic economists are not the people directly making policy they had plausible deniability and were still able to afterward agree with the macroeconomic consensus, indeed in a recent survey: “Only 15% [of economists] agreed that the austerity policies of the coalition government have had a positive effect on aggregate economic activity, while 66% disagreed.”
Small state Keynesians from my experience make up a sizeable percentage of economists, and in the 2010 election the only major parties they had to choose from were a larger state Keynesians and smaller state austerian. There was no mass outcry from economists to correct the marcro-media failure because many saw austerity as a necessary falsehood to achieve a smaller state, when constrained by politics. The transmission mechanism failed because of the oldest reason in the economics book: misaligned incentives.
The bias over austerity presented itself not in the content of what was being said but merely in how loudly it was being said. Therefore those small-state Keynesians and large-state austerian (I have never met any but some must exist somewhere), fell quiet and so the argument simply defaulted to the usual large-state vs small-state argument. It became about the minimum wage, benefits, inequality; and traditional left/right lines were drawn for battle. So I think Russ Roberts is wrong to aim the above statement at economists, and instead should aim it at economist when are constrained by political acceptability.
I end with a quote from Kristian Niemitz of the Institute of Economic Affairs who typifies my shy small-state Keynesian:
“There is some theoretical attraction in the Keynesian idea of running a deficit during recessions, and a surplus in boom times, but politics does not work that way. I’d rather say, whenever there is a window of opportunity for cutting the deficit, politicians should use it. In the medium term, spending will increase again anyway, both because of demographic pressure and because of the ‘normal’ political pressures. It is absurd to worry about politicians being too reluctant to spend.”
However, in my opinion he’s got it slightly wrong, many of those who want small government also think that austerity is damaging during a crisis, but they stayed quiet during this debate. This is because they knew that in a time of non-crisis they would not have been able to convince people of the benefits of small government, so to achieve the goal of a small state, they let people believe this mistruth.
Due to the fact that academic economists are not the people directly making policy they had plausible deniability and were still able to afterward agree with the macroeconomic consensus, indeed in a recent survey: “Only 15% [of economists] agreed that the austerity policies of the coalition government have had a positive effect on aggregate economic activity, while 66% disagreed.”
Small state Keynesians from my experience make up a sizeable percentage of economists, and in the 2010 election the only major parties they had to choose from were a larger state Keynesians and smaller state austerian. There was no mass outcry from economists to correct the marcro-media failure because many saw austerity as a necessary falsehood to achieve a smaller state, when constrained by politics. The transmission mechanism failed because of the oldest reason in the economics book: misaligned incentives.
The bias over austerity presented itself not in the content of what was being said but merely in how loudly it was being said. Therefore those small-state Keynesians and large-state austerian (I have never met any but some must exist somewhere), fell quiet and so the argument simply defaulted to the usual large-state vs small-state argument. It became about the minimum wage, benefits, inequality; and traditional left/right lines were drawn for battle. So I think Russ Roberts is wrong to aim the above statement at economists, and instead should aim it at economist when are constrained by political acceptability.
I end with a quote from Kristian Niemitz of the Institute of Economic Affairs who typifies my shy small-state Keynesian:
“There is some theoretical attraction in the Keynesian idea of running a deficit during recessions, and a surplus in boom times, but politics does not work that way. I’d rather say, whenever there is a window of opportunity for cutting the deficit, politicians should use it. In the medium term, spending will increase again anyway, both because of demographic pressure and because of the ‘normal’ political pressures. It is absurd to worry about politicians being too reluctant to spend.”
Post
script: This post is not a comment on the arguments for and against austerity
in a downturn but just an explanation about why the transmission mechanism failed to pass the prevailing macroeconomic
theory to policy makers.
