Economic Theory

No, Observer: free-market think-tanks have not changed their tune


This Sunday the Observer ran a frontpage story headlined ‘rightwing thinktanks call time on austerity era’. I was quoted in the article, wearing my IEA hat, as were representatives of the Adam Smith Institute, Centre for Policy Studies and Policy Exchange. As it happens, I am happy with the specific comments attributed to me, which fairly reflected both my support for a temporary increase in government borrowing and my concerns about the duration of the lockdown. However, the inferences drawn, and indeed the thrust of the whole article, were badly misleading.

Let’s skip over the dubious assumption that a think-tank is ‘right-wing’ just because it favours free-market solutions to economic and social problems, or that any think-tank always speaks with a single voice. The bigger issue here is the claim that there had been a fundamental ‘shift in stance’ in favour of ‘sustained increases’ in public spending as a result of the Covid crisis.

This is simply wrong. There is a huge difference between a temporary increase in public spending and borrowing in response to a one-off shock, which I for one would support, and a permanent increase in public spending and in the role of the state, which I would continue to oppose. Similarly, whether this year’s budget deficit is £200 billion or £400 billion matters far less than whether this is a temporary increase or a longer lasting, structural deterioration.

But the article was also oddly flattering. It seems to assume that my support, or that of any other person or think tank mentioned, somehow gives the Chancellor the green light to do something he wouldn’t otherwise do. In reality, borrowing and debt will inevitably surge this year as a result of the economic and social impact of the crisis and the need to save lives and protect businesses, jobs and incomes. Accepting this is no different to accepting that GDP this year will be far lower than anyone would like.

This is not about politics, or ideology, and economic policymakers in other countries are responding to much the same problems in much the same way. Mr Sunak does not need ‘political clearance’ for this – and it would not be the place of the IEA to provide it anyway.

Looking forward, I do happen to believe there is a case for some small increases in state-funded investment over the coming years, but my view here has not been changed by the Covid crisis. The government’s cost of borrowing, for example, was already very low before the virus struck. Instead, the state can best support the recovery by stepping aside as soon as possible and letting the market economy get back to work again.

I suspect this is also the view of most ‘free-marketeers’. Or, as the Observer article itself put it, ‘the four thinktanks continue to believe the Treasury should examine tax-cutting measures to promote innovation and entrepreneurial activity, saying that over the longer term, Whitehall was poor at allocating funds to the economy in the most effective way.’

Indeed, this last throwaway line was helpful, both because it is actually true, and because it corrects the mistaken impression that the four think tanks support a large and sustained increase in public spending as a result of the current crisis. I am pretty confident that if they had been asked directly whether the crisis has changed their views, the answers would not have justified the Observer’s headline.

Finally, the IEA is a fairly broad church of people united in a belief in the positive role of free markets but often with quite different views on what this might mean in practice. (For example, the IEA does not have a single ‘house view’ on Brexit.) If anyone does want to judge a fundamental ‘shift of stance’, I would suggest talking to more than one person, or at least to someone more senior than me.

On this occasion, though, a quick glance at the output of the IEA over the last few months would tell a consistent story. I especially recommend ‘Some classical liberal thoughts on the coronavirus pandemic’ by the IEA’s Research Director, Syed Kamall. In short, the fact that classical liberals or other free-marketeers may support a bigger role for the state in these extraordinary circumstances does not mean a change of tune in more normal times.

 



2 thoughts on “No, Observer: free-market think-tanks have not changed their tune”

  1. Posted 22/05/2020 at 12:14 | Permalink

    Oh no, not a small increase in state funded investment please; give them an inch and they will take a mile. Boosting state spending on infrastrucure investment seems to be very much in favour at the moment, but the state has shown its inability time and again to invest capital wisely. My recent book (Motorway Age , chapter 14) shows how even the celebrated 1960s-70s motorway programme was mis-timed and wrongly located. And most infrastructure takes an age to bring to fruition (Hs2!!!) so does little to boost today’s economy (little better than digging holes and filling them again).

  2. Posted 23/05/2020 at 14:45 | Permalink

    Thanks for sharing! Really interesting is the idea that the Treasury should study measures to reduce taxes to stimulate innovation and entrepreneurship. In any case, in this situation, state assistance is needed for small businesses and not only …

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