Two Cambridge economists turn on Chancellor of the Exchequer

Michael Yoganayagam – Associate News Editor 16 August 2012

Two prominent economists at Cambridge University have dealt a blow to Chancellor George Osborne’s already damaged political credibility.

Asked by the New Statesman whether they regretted signing an influential letter ahead of the May 2010 general election which was widely interpreted as backing Osborne’s plan for reducing the budget deficit, both professors have now signalled their opposition to the Chancellor’s current economic policy.

On 14 February 2010, 20 leading economists signed a letter published in The Sunday Times entitled “UK economy cries out for credible rescue plan” which called for a plan to “reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report” given by Labour Chancellor Alistair Darling in December 2009. The letter’s call “to eliminate the structural current budget deficit over the course of a parliament” with “the first measures beginning to take effect in the 2010-11 fiscal year” were so similar to Conservative economic policy at the time that the letter – intended “to not be about party politics” according to one signatory – was widely seen as backing George Osborne’s deficit reduction plans over those of the Labour Party.

At the time, Osborne (pictured above) himself referred to the letter as “a decisive moment in the economic debate in Britain – a moment when Gordon Brown’s argument on the deficit has collapsed”.

The letter’s signatories included Cambridge professors Hashem Pesaran, Professor of Economics and Fellow of Trinity College, and David Newbery, Emeritus Professor of Economics and Fellow of Churchill College. Professor Newbery was appointed CBE in the Queen’s Birthday Honours in June this year “for services to economics”.

Other signatories included Sir Howard Davies, a former deputy governor of the Bank of England, and academics from the universities of Oxford and Harvard, as well as the London School of Economics.

With the economy now in a double-dip recession, the latest issue of the left-leaning New Statesman magazine, published today, asked all 20 signatories of the Sunday Timesletter whether they regretted signing the letter and what they would do to stimulate growth. Only one, Albert Marcet of the Barcelona Graduate School of Economics, repeated his endorsement of Osborne’s policies, while nine, including professors Pesaran and Newbery, urged Osborne to rethink his approach. The other 10 failed to comment.

Professor Newbery told the New Statesman: “It was necessary to cut current expenditure but, given the poor state of Britain’s publicly funded infrastructure and the looming recession, the necessary counterpart (taught us by Keynes in the Great Depression whose length we have now exceeded) is to increase public investment expenditure even if this worsened the short-run public deficit. That would stimulate private investment, particularly if it relaxed important transport bottlenecks, in a far more positive way than just cutting total government expenditure. That was indeed what the United States did with its immediate response, although many argued that it was at too modest a scale.

“We need growth, and that requires investment. In a recession bordering on a depression, public investment in infrastructure that has a high pay-off even in good times must make sense.”

Professor Pesaran, who retires at the end of this month, said: “My views have not changed – but this does not mean that I have agreed with this government’s obsession with credit ratings and fiscal reductions at the expense of growth-inducing policies. I was in favour of taking account of the possible adverse effects of large and unsustainable government deficits on borrowing costs and financial stability. I believe this government’s policies have not followed the balance I had in mind when I signed the letter.”

Indeed, a few days after the publication of the Sunday Times letter in 2010, six other Cambridge economists were among 59 economists who signed a letter in the Financial Times on 18 February in opposition to the former letter’s call for an accelerated programme of fiscal consolidation, saying that it had sought “to frighten us with the present level of the deficit”. The FT letter stated instead: “For the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth.”

Among this letter’s signatories were Professor Richard Smith, Caius Fellow and current Chair of the Faculty of Economics, and Professor William Brown CBE, Montague Burton Professor of Industrial Relations and Master of Darwin College.

Michael Yoganayagam – Associate News Editor