Balls here

Ed Balls that is:

First he made the extraordinary claim that Britain could have gone the same way as Portugal if it were not for his deficit reduction plan. Leave aside the fact that Portugal is locked into the eurozone – so has no exchange-rate flexibility and the same interest rates as growing countries like Germany – or that Britain\’s debt is more long term than any advanced economy.

Osborne\’s logic is that if only Portugal had made cuts and tax rises on the scale and speed of his plan, it would not be facing this crisis. Yet Portugal has had austerity packages including two VAT rises in the last year. But just like Ireland and Greece, it has found that it does not matter how much the government cuts spending or raises taxes – if it cannot create jobs and growth, its deficit problem and the loss of market confidence will get worse, not better.

Well, possibly, but take that as being true. The UK is not in the eurozone, has contol of its own interest rates and most importantly, a currency which has depreciated by 25%.

Don\’t forget, all this fiscal expansion malarky depends upon ignoring the effects of the exchange rate upon the economy, the imports/exports lot etc.

When we include all of that we find that we\’ve actually alternatives. In the model (yes, the Keynesian model) fiscal expansion can substitute for those exchange rate changes: as exchange rate changes can substitute for fiscal expansion.

And don\’t forget, we\’ve just had a nice little report showing that fiscal expansion doesn\’t actually work in economies with flexible exchange rates….for changes in the exchange rate do the multiplier to death.

Which brings me to one of my favourite observations about macroeconomics. Umm, a favourite observation made by me that is. There\’s a rather large tendency to always be fighting the last war, as with Generals. Let\’s assume that all this Keynes stuff, the crude version of it, really does work in a world of fixed exchange rates.

But we\’re not in a world of fixed exchange rates, at least not in the UK we\’re not. So we really rather need to examine that assumption that because Keynes worked in 1950, 1960, whenever, whether it all still works today in these different circumstances. And as I say, there\’s been recent empirical research to show that it doesn\’t.

Which, if true (and of course, given that I know little about macroeconomics, this might not be true, but bear with me) would mean something really rather cute. That St. Maggie wasn\’t in fact correct that Keynesian economics did not work. But further, that she made Keynesian economics not work by allowing the currency to truly float and abolishing capital controls etc.

And isn\’t that fun?

7 comments on “Balls here

  1. “Osborne’s logic is that if only Portugal had made cuts and tax rises on the scale and speed of his plan, it would not be facing this crisis. ”

    No it’s not. Osborne’s logic is that Portugal is screwed, as can be seen by it’s borrowing costs are going up and up. Unless we in the UK have cuts, we will suffer the same fate. He has not made any recommendations about how to save Portugal (which would be most undiplomatic).

  2. All this stuff about whether or not Keynes will work is rather academic. In the real world no politician that wants to win an election in good times will talk about either not reducing taxes (Tories) or not increasing spending (Labour and LibDems) to reduce the national debt so that during the next down turn we are in a strong position to borrow.

  3. “Leave aside the fact that Portugal is locked into the eurozone – so has no exchange-rate flexibility and the same interest rates as growing countries like Germany”

    YAY! The Euro-Deniers were right and the Shadow Chancellor has admitted that in a national newspaper.

    Sod the rest of that article, that admission must be framed and carried on banners throughout the land.

  4. Economists: what’s a good introductory book on macro, so I can see phrases like ‘fiscal expansion’ and not display Murphy-like levels of fuckwittery?

    Tim adds: Econ textbooks cost a fortune. You cuold bouncde through the variouspafes on wikipedia through….

  5. “You cuold bouncde through the variouspafes on wikipedia through….”

    Do I need to buy an expensive textbook to make some – any – sense of that Tim? ;-P

  6. @David

    I’ve used Economics by Sloman and Wride which provides a good basic grounding in areas of micro and macro and isn’t too technical.

    If you’re just wanting a macro book Macroeconomics: a European Perspective by Blanchard et al is suitable although a slightly higher level than Sloman. Mankiw is another well known macro author, but there are plenty of other macro books out there if you’re interested.

Leave a Reply

Name and email are required. Your email address will not be published.