Notice two arguments in George Osborne’s ‘mission accomplished’ speech.
1. After several years of declining or stagnant output, we at last have evidence of moderate growth in official data and other positive, survey indicators. This demonstrates that those that argued that the government’s ‘Plan A’ austerity deficit-reduction policies were wrong.
2. We shouldn’t judge the Bank of England’s forward guidance policies a failure, because yields may have been even higher in a counterfactual world in which forward guidance hadn’t taken place.
Oh, the irony! Surely he and his speechwriters must be aware of it! Argument 2, of course, is watertight. We might be sceptical of it, because yields did not really fall on the announcement of forward guidance, during which short period one might think that there was little else affecting them. But it is still logically correct. Argument 1, of course, as forcefully argued by Simon Wren-Lewis and Paul Krugman, is completely fallacious. The argument that looser fiscal policy would have meant a shallower and shorter recession is not undermined by output eventually starting to grow.
Can we rescue the Chancellor from this absurd boast? Some were arguing that the austerity implemented will tip us into a vicious circle of ever larger deficits and ever-declining output. The turnaround in the data makes that less likely to happen now. Can we consider that particular argument won? Not really, no. First, since Plan A was embarked on, we have had two measurable relaxations in the deficit reduction targets. Who knows, if Plan A had been stuck to (as the Government promised at the time) we might have experienced this vicious circle. Second, even the reduced probability that something will happen does not make it wrong to have forecast that this would happen back in 2010 when Plan A was first embarked on. Just as the fact that I roll a double six does not make my initial forecast that this was not very likely wrong.
Krugman pointed out that although this is bad economics, it is probably good politics. I think he is sadly right. But it is a shame that politicians get away with it. Speeches like this debase economic discourse, and political discourse about economics. Osborne would probably like to be remembered for his good work in setting up the Office for Budget Responsibility, and introducing apolitical oversight and restraint on fiscal policy. But if this is the case, it is strange that he succumbed to the temptation to run these cynical, false arguments about his austerity plans, cynical because they count on the economic illiteracy of the listener, a cloak behind which you can do with fiscal tools what you feel like to make sure that you get elected.
(And I say this as someone who was arguing that looser fiscal policy was not necessary (eg on account of high and stable inflation) nor prudent (need to save for another rainy day in the financial system)).