Anne Pettifor again

Sigh.

This is a chart of Britain’s public debt as a share of GDP – from 1858 until 2002. For American readers I will paste a chart of US public debt for a similar period on my Huff Post blog in a day or two. The same economic lessons apply, even though much of the history is different.

Britain’s debt today – as a proportion of the national cake or GDP – is about 55% and rising. It is expected to hit 70% soon. Study the chart and you will see that it was twice that in 1858 – about 100% of GDP.

After the outbreak of war in 1914 it started rising. The 1929 crisis caused it to rocket upwards, as indeed did the financing of a very destructive war – World War II.  In 1945 Britain’s debt stood at 250% of GDP – roughly 5 times what it is today.  At that point an extraordinary thing happened (largely as a result of Keynes’ sound advice.)

The heavily indebted Labour government began to spend – as soon as legislation was agreed by Parliament.

Labour started to invest in a bold and visionary project: – a publicly funded health service free at the point of use -  the NHS – in 1946. (The American Congress is today proposing a similarly bold investment in a ‘public option’ for their health service.)  Back then, the Labour government carried out a massive slum clearance programme, and built houses. They revived the ancient universities, provided pensions and welfare to the poor. They trained ex-soldiers to become teachers.

What happened, you might ask, to the total public debt, as a result of this flouting of the economic orthodoxy – and  flagrant extravagance?   Well – exactly what Keynes had predicted would happen.  The debt fell.   Steadily, but unremittingly – as a share of GDP.    Look closely at the chart.

This is because government spending kick-started economic activity. (Of course it had done so during the war too – but on destructive, not productive activity. That had helped defeat a profound threat – Nazism – but had not helped much to fix losses and generate income.)

So thanks to government intervention, economic activity revived the comatose and exhausted body that was the post-war UK economy. Soon it began to recover. With recovery, government revenues rose, expenditure on  unemployment benefits fell – and hey presto! – government repaid its debts, which fell dramatically as a share of GDP.  Soon the spending began to pay for itself.

Apologies for the long quote but thought you might want to really understand her argument.

We\’re in a deep hole as regards debt, the way out is to have more debt to fund more spending because such spending pays for itself. The proof being that this is what happened last time.

Hmm, well, of course everyone is entitled to their own opinions but not to their own facts. So, what actually was the spending stance of the Labour Government immediately post war?

Anyone? Bueller?

Ah, the IFS:

So how can the path of the deficit best be summarised? The immediate aftermath of the Second World War saw the steady closure over 1946 and 1947 of the huge wartime deficit, producing a few years of surplus as government expenditure was reined in by demobilisation.

Oh. The Labour Government was not in fact fiscally expansionary. They actually ran budget surpluses. Until the Korean War led to deficits again.

So, err, that rather knocks a hole in her argument, doesn\’t it?

In fact, her argument is entirely bollocks.

Oh, and do please note, after this repayment of debts up until 1950 the government didn\’t in fact pay back any of its debts until 69 and 70 (and then again under Lawson). Nope, they really did not pay off any of the debt. It is true that the debt fell as a percentage of GDP, for GDP was growing faster than the debt was, but that really is not the same as \”government repaid its debts\”.

We\’ll mark this one down as a beautiful theory destroyed by ugly facts shall we?

8 comments on “Anne Pettifor again

  1. A massive reduction in spending in the post war period because we weren’t at war and we’d stopped destroying things. In effect going from spending billions on armaments which then got blown up to spending millions on council houses, hospitals, schools and road, many of which are still standing today. Shit the bed. How do you miss that?

    Plus of course demobbing brought millions of workers back into productive employment. If you’ve cut your outgoings and started earning again you’re going to do well aren’t you.

    I also seem to have missed the bit where she justifies wartime levels of debt when we are not at war.

    Tim adds: I’ve not missed it, simply ignored it, for it’s irrelevant to her argument. For her argument is that at the moment we should be borrowing more money to be spent by hte government. When people say “Hey! but we’ll go bust!” she says “But look at post WWII”. And, if they had been borrowing post WWII she might have a point. But they weren’t: they were fiscally contractionary, they were paying back debt.

    That’s why her argument falls. It’s nothing to do with “what” government spent the money on: it’s to do with the balance between tax collections and spending and thus the influence that gap has on hte public debt.

  2. gareth, are you sure they spent millions on hospitals? My understanding is that they spent bugger all; they nationalised the existing hospitals – i.e. stole them from the local authorities and charities – but built practically none. That’s why decades later people were complaining about having to use “Victorian hospitals”.

  3. The Lefties don’t actually believe any of this; they just wish it were true. And in modern politics, economics or science, if you shut your eyes and wish REALLY REALLY HARD that something is true, it becomes true.

  4. Brian nails it. But most people cling to some vague beliefs for which there is no evidence whatsoever, including right wingers, Lib Dems, Greenies, NIMBYs, the lot.

    I also fail to see why it is better for government to borrow and spend than it is to leave people alone. For the most part, people are itching to spend and invest in new stuff, like new houses, power stations, airport expansions, but the NIMBYs and Greenies won’t let them.

  5. Just read Correlli Barnett (the most mind numbingly analytical economic historian writing for the general public) and you will see that Tim is quite right. The post war labour government agonised about cutting up the limited fiscal cake
    to award the British public a war winning prize, whilst desperately trying to hold on to Empire. They had to run budget surpluses in order to pay back the Americans for the Marshal Aid (which most Brits deny the UK ever getting.

  6. The big difference between 1945 and now is the way things were spent.

    At the end of the war the spending was shifted from running cost expenditure (paying millions of men in the armed forces, buying loads of shells, bullets tanks and so on) to building stuff (houses, a health service etc). On top of that, as noted above, all those demobbed squaddies went and started making stuff Britain could sell and therefore increase national revenue.

    Compare that to the situation today. Gordon is spending like a madman but to what end? There are no great national investment schemes, no massive New Deal construction projects (the Olympic infrastructure hardly counts) – things which might just justify the huge expense in terms of Keynesian economics. Instead he’s borrowing to keep his turkey army mobilised and hence out of revenue earning jobs.

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