loading . . . The origins of mediamacro, and how to consign it to history <p><br/></p>
<p style="line-height: 140%; margin-bottom: 0cm;"><i><span style="font-family: helvetica; font-size: large;">“</span><span style="font-family: helvetica; font-size: medium;">Practical men who believe
themselves to be quite exempt from any intellectual influence, are
usually the slaves of some defunct economist. Madmen in authority,
who hear voices in the air, are distilling their frenzy from some
academic scribbler of a few years back”</span></i></p>
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</span></p><p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">For those new to this blog, mediamacro is a term I coined for how macroeconomics is generally talked about in the media, particularly when discussing the general direction of fiscal policy. By implication it is very different to what economics students are taught. What I mean by mediamacro will become clear in this discussion.</span></p><p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;"><br/></span></p>
<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The famous quote from Keynes is relevant, because with mediamacro the practical men
were the vast majority of journalists who were convinced after the
Global Financial Crisis (GFC) that governments had to tighten their
belt, and the madmen were of course the politicians who made this
their policy. But mediamacro survived the demise of the Cameron
government, and continues to dominate the way many political
journalists talk about the budget and other fiscal issues. A big
reason for this is that many politicians, in all parties, still think
keeping government debt to GDP falling is synonymous with being
responsible.</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">To understand
mediamacro you have to recognise that its origins are, in part, the
academic consensus that was dominant before the GFC. Governments have
two ways they can attempt to manage the aggregate economy: by
changing fiscal policy (tax and spend) and by changing interest
rates. There are other means (some often called unconventional
monetary policy), but none are as reliable and therefore as effective
as these two methods. The academic consensus that preceded the GFC was that
interest rate changes, delegated to an independent central bank with
an inflation target, was a better way to manage the economy than the
government changing fiscal policy.</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">So in this pre-GFC
consensus view what should govern fiscal policy at the aggregate
level? How big should government deficits be? The pre-GFC academic
consensus said that over the long term government debt should be
sustainable, which is a jargon word for the ratio of government debt
to GDP being stable in the long run, rather than either steadily
rising or falling. Of course government debt to GDP could be stable
at high or low levels, but academic theory had no strong message on
what the optimal level of this ratio should be. In the UK the 1997
Labour government devised fiscal rules to ensure this goal of long
run stability was met.</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">From an academic
point of view was there an equivalence in importance between the
goals of interest rate policy and fiscal policy? Absolutely not.
Academic macroeconomists wrote volumes about what interest rates
should be and how central banks should make decisions, because
macroeconomic stability was very important. In contrast, debt
sustainability was nice to have but, except in rare cases where
political failure led to uncontrolled large scale fiscal profligacy, failure to
achieve it was no big deal as it could be subsequently rectified. After all, between the 1970s and the
2000s government debt to GDP had almost doubled in the OECD, but
economists had no strong evidence that this had had any serious
impact on macroeconomic performance. One prominent idea, that higher
debt to GDP would raise real interest rates (interest rates less
expected inflation), turned out to be a false alarm as global real
interest rates fell over this period.</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The very long run need for debt stability left journalists with a problem. How were they meant to talk about
fiscal policy at the aggregate level if the only test of its
appropriateness was some long term goal of sustainability which
wasn’t that important anyway? The collective solution they
devised was to turn a long term goal into a short term goal, and to overemphasize its importance by morphing sustainability into
responsibility. This was so attractive because it made aggregate
fiscal policy easily understandable for non-economists: the
government became like a household. If its borrowing was too much,
journalists could write articles about how taxes would have to rise
if the government was to remain fiscally responsible, and if its
borrowing fell they could write articles about tax cuts to come.
Mediamacro was born, and it was very easy to write and understand.
</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">As long as the pre-GFC academic consensus held, mediamacro was irritating but not wildly wrong. Of course no government is like a household (it is longer-lived, it can create money, and it large relative to the economy), but as
long as central banks were doing the stabilisation job this analogy
wasn’t doing serious harm. Journalists, it is important to remember, have a
difficult job to do in explaining macroeconomics to non-economists.</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The academic
consensus was shattered by the GFC, although many macroeconomists had
seen the writing on the wall well before this by looking at what had
happened to Japan. As I have already noted, the global level of
real interest rates seemed to be on a downward trend, something macroeconomists often call secular stagnation. With inflation targets at 2%, a real interest of 1% would imply central banks setting a nominal interest rate of 3%. However in a recession, inflation would often be below target, and the central bank needed to achieve real interest rates well below normal levels to generate an economic recovery.</span></p><p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;"><br/></span></p><p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-size: medium;"><span style="font-family: helvetica;">This just wasn't possible, because c</span><span style="font-family: helvetica;">entral bankers also thought there was a lower bound to
nominal interest rates at around zero. That meant that central bankers could only achieve at best slightly negative real interest rates, which proved totally inadequate to lift Japan out of its 1990s stagnation and to combat the deep recession that followed the GFC. The upshot was that interest rate
changes could no longer be effective at fighting recessions.</span></span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">As a result during the GFC interest rate
policy stopped working, so fiscal stimulus was the only reliable
policy in town for stopping the recession and generating a recovery. Any first year economics student would tell you that,
and state of the art macro concurred. Macroeconomists whose
field this was (like myself), and/or who had seen what had happened in
Japan, understood this immediately, although it perhaps took a few
years from other economists to get the message that the old consensus
was dead.
</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The Prime Minister
at the time of the GFC, Gordon Brown, understood this and used fiscal
stimulus as a tool to limit the size of the 2009
recession. The Conservative opposition found it politically
convenient not to understand, and instead focused on rising government debt as a sign of 'government irresponsibility' and
pledged to introduce tough fiscal contraction (austerity) instead.
There were now two different, and competing, stories about what
fiscal policy should be doing: the old and much exaggerated story
about long run sustainability, and the more relevant story about
using fiscal policy to get out of recession. In academic terms the
first was downright dangerous during a recovery from recession, while
the second was correct.</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">I invented the term
mediamacro because almost all journalists during the austerity period
decided to stick with the old story. Mediamacro was now the opposite
of the truth, and a deeply damaging message for the public to hear. I
tried very hard, along with other more famous macroeconomic bloggers
located mainly in the US, to both educate journalists about this
error and work out why it persisted.</span></p>
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</span></p>
<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">Unfortunately we
faced an uphill struggle for three related reasons. The first was that some well known macroeconomists backed austerity, at least initially. It was clear to me from surveys and other evidence that they were in a clear minority, both in the UK and US, but from 2010 they were in tune with the political consensus so they got a lot of publicity. In the early stages we spent much time <a href="https://mainlymacro.blogspot.com/2012/01/mistakes-and-ideology-in-macroeconomics.html">successfully debunking</a> their ideas, such that by 2013 Paul Krugman could <a href="https://www.nybooks.com/articles/2013/06/06/how-case-austerity-has-crumbled/">convincing argue</a> that the intellectual case for austerity had crumbled. </span></p><p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;"><br/></span></p><p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The second reason was that
proponents of austerity claimed that without it chaos would occur
because the markets would stop buying government debt. Our attempts
to explain why this was highly unlikely were unpersuasive after the
shock of the GFC. A better approach was to explain why, even if it
did happen, it didn’t matter because the central bank would buy the
debt under its Quantitative Easing Programme, a point I made in one
of my <a href="https://mainlymacro.blogspot.com/2011/12/austerity-is-not-even-sensible.html"><span style="color: #1155cc;"><u>first
blog posts</u></span></a>. </span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The third reason
this was an uphill struggle was the Eurozone Crisis, where particular
EZ governments were having problems selling their debt. To many,
including those who <a href="https://mainlymacro.blogspot.com/2014/11/the-imfs-evaluation-of-2010-austerity.html"><span style="color: #1155cc;"><u>should
have known better in the IMF</u></span></a>, this seemed to validate
the austerity narrative. In reality it didn’t, because the European
Central Bank did not at the time have a Quantitative Easing
programme, and was not providing unlimited support to member
countries. The moment the ECB changed its policy in 2012 to do this, the
Eurozone Crisis came to an end. (For more detail, see <a href="https://www.lrb.co.uk/the-paper/v37/n04/simon-wren-lewis/the-austerity-con"><span style="color: #1155cc;"><u>here</u></span></a>
or <a href="https://bristoluniversitypress.co.uk/the-lies-we-were-told-1"><span style="color: #1155cc;"><u>here</u></span></a>.)
</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The damage done by
austerity, backed up by mediamacro, was huge in economic and
political terms, and the mistake was not repeated during the Covid
pandemic. Yet mediamacro lives on. Governments still have deficit
targets that are too short term, and journalists still write up
monthly (!) deficit outturns in terms of their implications for
future taxes. Only policy makers in the US understood the need for a
fiscal stimulus during the recovery from the pandemic, and as a
result major European countries <a href="https://mainlymacro.blogspot.com/2022/06/in-praise-of-bidens-fiscal-stimulus.html"><span style="color: #1155cc;"><u>look
like</u></span></a> they will permanently lose percentages of GDP
compared to the US, while still suffering from high inflation.
</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">There are now some very good economic journalists in the media. But how do other journalists
move beyond mediamacro, without having to explain everything I have
written in this post so far? I think above all else they need to do two
things. The first is to understand that the old academic consensus is
dead. In simple terms the new academic consensus is that interest rates are
still the favoured instrument to deal with inflation (as we are currently seeing), but it is
fiscal policy that is the main weapon needed to fight recessions. As
a result, if there is a risk of recession <i>or during the recovery phase from recession</i>, deficit targets reflecting
debt sustainability go out of the window, and macroeconomic
recovery becomes the only sensible goal of a government’s fiscal policy.</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">The second thing
journalists need to do is to stop treating increases in government
debt as bad, and falls in government debt as good. It’s just
terrible macroeconomics, and will mislead your audience. Is it always
bad if a government buys a financial or physical asset by issuing
debt? Of course not. Is it bad that government debt rises in
recessions? Quite the contrary: if it didn’t because the
government stopped it happening the recession would be far worse. Is
the high level of most government’s debt today a problem? Not obviously given how
low long term interest rates remain. As there is no academic consensus
about what the optimal level of government debt is, it would be just wrong for journalists to imply government debt is 'too high'.
</span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">Of course what I’m
suggesting is not necessarily how policymakers talk about the world. </span><span style="font-size: medium;"><span style="font-family: helvetica;">It is also the case that a large part of the print media will persist with mediamacro because it serves a certain ideological perspective.</span><span style="font-family: helvetica;"> However</span><span style="font-family: helvetica;"> knowing what the academic consensus is can only improve the
quality of impartial economic and political journalism. Good journalists should
never just follow a political consensus when it goes against expert
opinion without at least recognising what experts are saying. Ignoring knowledge is not being impartial. The
austerity period represented, among other things, a major failure of
mainstream journalism in the UK and elsewhere.</span></span></p>
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<p style="line-height: 140%; margin-bottom: 0cm;"><span style="font-family: helvetica; font-size: medium;">When there is a
consensus among economists does that consensus deserve to be
acknowledged? I think among some political journalists there is a
cynical view about economics in general, and academic economists in
particular. Do they deserve to be called experts when they are always
disagreeing with each other and failed to predict the financial
crisis (and so on). It would take another post to fully debunk that
view. But all I need to say here is that on the two major economic
policy issues in the UK over the last 12 years, first austerity and then Brexit,
it is the consensus among academic economists that has been proved
right, and those that dismissed this consensus as ‘out of touch
with the markets’ or ‘project fear’ respectively that have been
proved very wrong. </span></p>
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