Why economists kept getting the policies wrong

 Philip Stephens in The FT

The other week I caught sight of a headline declaring that the IMF was warning against cuts in public spending and borrowing. The report stopped me in my tracks. After half a century or so as keeper of the sacred flame of fiscal prudence, the IMF was telling policymakers in rich industrial nations they should not fret overmuch about huge build-ups of public debt during the Covid-19 crisis. John Maynard Keynes had been disinterred, and the world turned upside down. 

To be clear, there is nothing irresponsible about the IMF’s advice that policymakers in advanced economies should prioritise a restoration of growth after the deflationary shock of the pandemic. The fund prefaced a shift last year, and most people would say it was common sense to allow economic recovery to take hold. Nations such as Britain might have learned that lesson from the damage inflicted by the ill-judged austerity programme imposed by David Cameron’s government after the 2008 financial crash. 

And yet. This was the IMF speaking — the hallowed (for some, hated) institution that, as many Brits will recall, formally read the rites over Keynesianism when in 1976 it forced James Callaghan’s Labour government to impose politically calamitous cuts in spending and borrowing. This is the organisation that in the intervening years had a few simple answers to any economic problem you care to think of: fiscal retrenchment, a smaller state and/or market liberalisation. The advice was heralded as the Washington consensus because of the IMF’s location.  

My first job after joining the Financial Times during the early 1980s was to learn the language of the new economic orthodoxy. Kindly officials at the UK Treasury explained to me that the technique of using fiscal policy to manage demand, put to rest in 1976, had been replaced by a new theory. Monetarism decreed that as long as the authorities kept control of the money supply, and thus inflation, everything would be fine. 

The snag was that every time the Treasury alighted on a particular measure of the money supply to target — sterling M3, PSL2, and M0 come in mind — it ceased to be a reliable guide to price changes. Goodhart’s law, this was called, after the eponymous economist Charles. By the end of the 1980s, monetarism had been ditched, and targeting the exchange rate had become the holy grail. If sterling’s rate was fixed against the Deutschmark, the UK would import stability from Germany.  

It was about this time that a senior aide to the chancellor took me to one side to explain that one of the great skills of the Treasury was to perform perfect U-turns while persuading the world it had deviated not a jot from previous policy. This proved its worth again when the exchange rate policy was blown up by sterling’s ejection from the European exchange rate mechanism in 1992. The currency was quickly replaced by an inflation target as an infallible lodestar of policy. 

The eternal truths amid the missteps and swerves were that public spending and borrowing were bad, tax cuts were good, and market liberalisation was the route to sunlit uplands. The pound’s ERM debacle was followed by a ferocious budgetary squeeze, and, across the channel, the eurozone was designed to fit a fiscal straitjacket. Financial market deregulation, we were told, oiled the wheels of globalisation. If madcap profits and bonuses at big financial institutions prompted unease, the answer was that markets would self-correct. Britain’s Labour government backed “light-touch” regulation in the 2000s. The Bank of England reduced its oversight of systemic financial stability. 

The abiding sin threaded through it all was that of certitude. Perfectly plausible but untested theories, whether about the money supply, fiscal balances and debt levels, or market risk, were elevated to the level of irrefutable facts. Economics, essentially a faith-based discipline, represented itself as a hard science. The real world was reduced by the 1990s to a set of complex mathematical equations that no one, least of all democratically elected politicians, dared challenge. 

Thus detached from reality, economic policy swept away the postwar balance between the interests of society and markets. Arid econometrics replaced a measured understanding of political economy. It scarcely mattered that the gains of globalisation were scooped up by the super-rich, that markets became casinos and that fiscal fundamentalism was widening social divisions. Nothing counted above the equations. And now? After Donald Trump, Brexit and Covid-19, it seems we are back at the beginning. Time to dust off Keynes’s general theory.

Asaram Bapu's moment of reckoning

Dileep Padgaonkar in the Times of India

Every murky controversy that involves a self-appointed dispenser of cures for all physical, psychic and societal ailments sheds a harsh light on two on developments that have surfaced across the world in the late twentieth and early twenty-first centuries: the rise of blind faith at a personal level and of politics rooted in religious radicalism. Both seek to provide an anchor to individuals and communities trapped in a maelstrom of unprecedented change spear-headed by technological innovations and the globalised economy.

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Modern Indian Spirituality

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These are perceived as threats to cultures and ways of life, to deeply-entrenched religious beliefs and to moral certitudes. And the riposte of ordinary folk to such threats is to repose their trust in those who claim to have a privileged access to God. Indeed, even when such individuals are caught with, so to speak, their pants down, the faithful are willing to overlook their trespasses. The yawning gap between what they preach – austerity, abstinence, altruism – and what they practice – an opulent life-style, sexual promiscuity and a no-holds-barred acquisitiveness – is of little concern to them.

The case of Asumal Harpalani aka Asaram Bapu is significant in this regard. Ever since he was accused of molesting a minor girl, the media have unveiled his trajectory from his birth in a family of modest means in the Sindh province of British India to one of the country’s most prosperous and influential ‘spiritual’ gurus. It tells a fascinating story of the transformation of a bootlegger – whose family arrived in Ahmedabad after Partition -into a figure who has built an empire that is conservatively estimated to be worth more than Rs. 10,000 crores and who, according to his official website, has twenty million followers in India and abroad. 

These followers have apparently not turned hostile to Asaram despite the contrasts between what he preaches and what he practices. He owns a posse of expensive cars, travels business class, ensures that he isn’t frisked by security at airports and continues to expand his real estate empire. Neither the cases of land-grabbing nor the cases of four youths who ‘disappeared’ in his institutions – the mutilated bodies of two of them were later found on the banks of the Sabarmati – have diminished his appeal.

That explains why most politicians take care not to rub him the wrong way. To take him to task is to alienate a sizeable section of the Hindu vote. Or so they reckon.  Congress leaders have yet to pull him up for his alleged sexual assault on a minor girl. But it is the BJP that takes the cake. Leaders like Uma Bharati and Pravin Togadia have rushed to his defence. In videos that have gone viral on Youtube other worthies of the Sangh Parivar have hailed him as a genuine saint. And the ‘saint’ himself has called the latest allegations a political conspiracy to frame him while son and presumptive heir has dubbed the minor girl as ‘mentally deranged.’

Armed with this support, Asaram has been able to defy law enforcers with impunity. On the grounds that he was engaged in meditation, he kept police waiting for several hours before he deigned to receive a summons to appear for questioning. He then grandly declared that he would not appear before the concerned authorities right away since he has a busy schedule until September 18. And he has continued to visit his scores of ashrams and educational institutions, address the faithful, heap scorn of the media and denounce his critics in a language that suits not a spiritual leader but, well, a clandestine seller of adulterated spirits. Such are the methods of the proponents of a Hindu Rashtra – the very ones that are dear to the proponents of a strident, Islamic rule in Muslim-majority countries or to literalist Christian evangelists in many parts of the world.

The only hope in this sordid saga is that the girl who has accused Asaram of molesting her will stick, along with her parents, to her courageous stand to expose him for what he is: a charlatan who tarnishes the uplifting traditions of Hinduism with his questionable conduct. Should the police do their job and arrest him without delay and haul him up before the courts, the victim would be vindicated.

The parties that swear by the rule of law will then fall in line while those who place their religious faith above the law and the Constitution will be shamed to follow suit. By and by, his blind devotees, too, would realise that the ‘saint’ they venerate is a man of straw. Keep your fingers crossed.