. . . though that will not stop the Telegraph following it, slavishly.
I’m afraid I’ve only skimmed Policy Exchange’s latest attempt to convince us that government spending really doesn’t have any useful economic effects. The theory section on page 25-27 seems to imply that:
- insufficient demand is never a problem unless financial markets are broken
- Ricardian equivalence is a proven fact that stops public spending working, ever, in normal conditions
- very little needs to be said of the zero bound constraint on monetary policy.
Given all these, and the evident bias, it is difficult to expect much from the voluminous history-description that follows, in terms of the endless macroeconomic debate about the efficacy of fiscal stimulus. Since they start with bad theory, there is likely to be some bad history. Moreover, the point about macroeconomic analysis, surely, is that it is fairly context-specific. Asking what happens on average is pointless if there is a crucial difference to this situation. The rule “Don’t throw buckets of water over people’s heads” is a pretty good one, on average. But not “if their hair is on fire”. Ditto “cutting back on public spending boosts growth on average” and “but not if we are threatened with deflation and the banking channel is f***ed”.
So in how many of the situations they examined were the interest rates needed minus 6%? Oh, none? Thought so.
This is really 101, and over the Atlantic, where the debate is really raging, pretty standard stuff. So I am not tempted to use a couple of hours reading it. To snark at just one bit of the theory section:
households will understand that if the government borrows extra today, it will have to raise taxes tomorrow to pay off that borrowing. In anticipation of those extra taxes tomorrow, households will save extra today
NO. (a) Households do not anticipate like this. If so, why did they spend so much when Brown was borrowing too much earlier? They would be magic-balancing-creatures, forever calibrating their consumption for long run fiscal equilibrium (b) when the economy is far below capacity, government spending can provide INCOMES that enable people to spend and save. As has been endlessly pointed out, since the beginning of time. Imagine an economy where 30% are unemployed. The government comes along and promises to do some spending – build some homes, say. Do the people with their incomes from this get all worried and not spend it, because of the taxes that might arise in 10 years’ time? No.
And this is a terrible explanation for why Keynesians think as they do:
it is precisely the denial that Ricardian equivalence applies in such cases that motivates the belief in Keynesian stimulus can work
No. A belief is not motivated by a denial. Keynesian stimulus is motivated by a combination of commonsense and inspiration about how economies operate in deflationary, sub-capacity situations. This sentence is the logical equivalent of “my belief in gravity is motivated by a denial of the existence of levitating elves”.
It is deeply tedious to keep bringing this up, so once more I refer to the far more vicious blogs of American geniuses similarly frustrated. In his musings on an intellectual train wreck, Brad De Long writes:
There is nothing illogical or inconsistent about the economy being in a state in which aggregate planned expenditure is greater or less than income. Today’s Chicago school would know this, had it not forgotten all of monetary economics from David Hume on.
Policy Exchange seem keen to join the Chicago School. What I can’t understand is the determination to have the SAME economic policy regardless of circumstances. Facts. Change. In 1-2 years’ time, I too will clamour for fiscal restraint. LIke Martin Wolf, I want a plan, but just not to have it implemented until it is safe. Now let’s move on*.
If there is a redeeming feature to this dip into pre-Keynesianism, it is that they seem to have done some work on the political problems of spending cuts. But in many ways, what is far more interesting than “Policy Exchange don’t like fiscal stimulus” is “Mervyn King won’t ALLOW fiscal stimulus” – which is what he effectively said yesterday. Who is in charge of fiscal policy? The Bank. We need an Independence of the Government bill soon.
Other news: Vince has fleshed out the National Infrastructure Bank idea.
I thought Charles Dumas’ letter to the FT was excellent:
the idea that the UK (and presumably the US) should have run fiscal surpluses in 2004-07, “saving up for the next crisis”, neglects the fact that a balanced overall policy to promote full employment and low inflation would have then entailed lower interest rates (and probably exchange rates) than we had. An even more extravagant housing boom would have resulted, with greater upward distortions in house prices and consumer debt than the “fools’ paradise” (Dr Weale’s words) that actually occurred.
The FT has a useful breakdown and scoring of the Government’s many small financial interventions.
Finally, for light relief, Don Paskini STILL thinks that asking people questions about how to fix the financial crisis is in any way relevant. The Don still thinks that democracy fixes problems. Quite apart from some of the ideas being really bad (CAP interest rates = Welcome Loan Sharks), and others really tired (“Educate in Financial literacy” is up there with “Spend more efficiently” and “no more wars”), and everything optimistic-statist (yes, a ‘charter for responsible lending’ should fix the mess), you have to ask: why are we asking citizens, as if this is all a political matter? Why does putting “citizens” in front of something make it suddenly wise and efficient?
I want the centre-left to do well. This sort of platitudinous talk-to-ourselves is going to go precisely nowhere – but make the participants feel important for a few minutes.
*(not moving on) If you want further, confusing but brilliant reasoning for how investment now can determine saving later, this blog of Andy Harless is wonderful. It proceeds with this assumption: all income is instantly saved. You then have a decision how much to dissave – the residual is saving. The dissaving is what gives someone else an income to save.