The damage that Gordon did

Despite the Coalition’s five-year programme of spending cuts and tax increases, the national debt is to rise from 72 per cent of gross domestic product this year to 76 per cent in 2014-15. Debt will peak at £1.5?trillion in 2016-17.

As a sensible precaution against future crises, the OECD said the developed countries should have a long-term goal of bringing debt down to 50 per cent of GDP.

He should have been spending a lot less than he was precisely so as to leave room for Keynsian fiscal manouvering as, if and when, the bust came.

That\’s the real crime, he wasn\’t Keynesian enough. At the end of the longest boom in modern history he should have been running budget surpluses of several percentage poiints of GDP. Not splashing the cash around as he was.

But then of course that\’s why such crude Keynesianism doesn\’t actually work. There\’s just no way, given political reality, that a government can run such budget surpluses of the necessary size, year after year. The pressure to spend it all is just too strong (really, try reading Polly\’s columns from 2002-2008. She can always find something to spend the oceans of cash upon).

47 comments on “The damage that Gordon did

  1. What if the OBR were given a remit for retaining any surplus as a sort of wealth fund. then say the piggy bank can only be raided following a quarter of actual negative growth (i.e. not based on ridiculous fan charts)

  2. I agree with you about this. There are no votes in running a budget surplus: a governing party that pays off debt is likely to lose not only the next general election but subsequent elections also as the other lot takes advantage of the relatively favourable debt position to run a deficit to bribe the electorate with.

    This is not Brown’s fault: I don’t think there’s a left/right difference in fiscal responsibility. In the US (where these things are starker) the Republicans are in favour of unfunded tax cuts because they will stimulate growth, and the Democrats are in favour of unfunded government spending because it stimulates growth. They are both right, and if you get enough growth the deficit doesn’t matter (in that debt doesn’t grow as a proportion of GDP). The problem is that we are no longer getting enough growth: it seems to me that only in special circumstances will deficits pay for themselves in this way, that much of the growth in the last century was coincidental to deficits, and that the period of high growth in the developed economies has come to an end.

    Brown does look foolish because of his promise to run a balanced budget “over the course of the economic cycle” and because of his prediction of “no return to boom and bust”. So he gave the impression that he meant to balance the budget but failed.

  3. Could the spending post 2001 have been the Keynsian fiscal manouvering but was spent on the wrong things?

    Perhaps the ‘tax gap’ played a part. I could easily imagine a bureaucrat convincing Brown that he could spend the bigger figure of what HMRC collects and what HMRC claims it should collect on the belief it would eventually get collected.

    On the matter of Chile I remember this story: Gordon Brown embarrassed by Chile president on economy

    “Miss Bachelet boasted that Chile was in good economic shape “because of our decision during the good times to save some of the money for the bad times.””

  4. Gareth

    I’ve been told that the person responsible was Ed Balls rather than a bureaucrat. It supposedly infuriated some of the economists in the civil service. But, it doesnt really alter Paul B’s point that the political economy of the problem is such that profligacy is a dominant strategy.

    On the other hand, it is true that by 2005 Brown knew he should be trying to cut back spending, but his own personal political situation (overthrowing Blair) meant that he spent more than was prudent.

    Looking back, you have to admire Blair’s timing – he remained PM until the end of the feast and left Brown with the bill.

    If we were to argue about what Brown did badly, it was the failure to regulate financial services, to improve productivity and spend wildly on inefficient government consumption. He really was a bad chancellor once he dropped the Tory spending plans post 2000.

  5. PaulB-

    it seems to me that only in special circumstances will deficits pay for themselves in this way, that much of the growth in the last century was coincidental to deficits, and that the period of high growth in the developed economies has come to an end.

    ISTM that the problem with Keynesian theory is that “growth” is presented as a function of investment. Neither logic nor experience seems to support this idea. If growth is simply the manifestation of the efficiency gains of technological progress, then no mature economy can grow faster than those new technologies are being developed. Underdeveloped ones can, because they are playing catch-up, and because there’s a huge leap in growth from a horse plough to a tractor, or from a hand loom to a steam loom.

    The point then being, there is no such thing as stimulus. An economy can suffer from a shortage of available investment funds (but why would this occur anyway???) but pumping more and more money into the economy won’t create more and more investment and thus growth, because people will simply run out of useful stuff to invest in. Which means, as you say, that then there is no hope of implausibly high growth paying off excessive government debt burdens.

    The diminishing returns may be particularly true in the infrastructure governents like to build. If they build a schoolhouse where none was before, the ROI in terms of innovators (and thus growth) might be very large. If they replace a 1970s comprehensive with a new building, there may be none at all.

  6. Ahhh but you miss the point. Keynesiansim is yet another tool to take power from the elected representatives and indeed the people.

    Government’s can’t be trusted to run monetary policy because they will use it to achieve short term political gain therefore we must make the central bank independent and let the “experts” run monetary policy. The role of the government is to simply set the parameters.

    The next logical step in the introduction of a new aristocracy of intellectual elites is to remove fiscal policy from the purview of the pesky politicians. They should just set the policy and let the “experts” get on with the business of running prudent fiscal policy as well.

    It is already happening in Greece and Italy, just you wait at some point in the future the Office of Budget Responsibility will have more than just the power to comment on the government’s spending policy it will have the power to control them. If it isn’t the OBR it will be the EU.

    As you can see I am feeling a little paranoid today.

  7. @MMJ: “the ability to delay gratification.”

    Precisely what is totally lacking in the UK today. Which is why Keynesianism can never work in practice (if it would in a perfect world anyway).

    What is required is a cast iron law that everyone agrees on (and cannot be amended by less than a 2/3rds majority referendum) – the State may never spend more than say 2% (in real terms) more from one year to the next. Thus in boom times when tax revenues rise significantly they cannot be spent, but used to pay down debt, create a wealth fund, or cut taxes if there is no debt left to repay.

  8. Of course, forget reasoned debate, what we really need are assertions with added abuse, without evidence. Oh, thanks Tim Newman, that’s one step in the right direction.

    Back on topic, I think this is a fascinating piece, Tim W, because it reads as if Keynes is just a convenient argument for those-who-like-government-spending. Can anybody defend the Labour party, i.e. how do they justify running deficits throughout their time in office? It’s a simple enough question.

  9. You can look at Australia as well. The Liberal (ie conservative) government ran surpluses. They also supervised their banks properly. As a result they went into the downturn in robust shape and without needing to prop up their banks.(See Gordon, it was possible to avoid the effects of a global crisis)

    What the Liberals also did was to pour the proceeds of privatisations, most notably of Telstra, the monopoly telecoms provider, into the Future Fund. Budget surpluses were also directed there. The Future Fund covers future state sector pension liabilities. So the Australian conservative government were also addressing what is Britain’s greatest time bomb.

    It wasn’t hard. There was an example. Gordon and Balls ignored it.

    And Tim Newman is right: Cameron and Osborne were backing the Gordon/Balls approach right up to the end of 2008. Clueless twats.

    The current Labor Government in Australia is squandering this inheritance in almost a replay of Britain circa 2000 onwards. Clueless twats.

  10. IanB: ISTM that you don’t know what Keynesian theory actual says.

    Jim: I see some merit in something like a constitutional requirement to keep deficits within bounds. But it should allow countercyclical deficits, so the rules would have to be rather complicated. And the unwritten British constitution doesn’t readily support that sort of restraint on future governments.

  11. SJH: Yes it is true that the Liberals ran surpluses but that was due to such booming revenues that they couldn’t think what to spend the money on. There was plenty of middle class welfare and pork barrelling such as the baby bonus, family assistance payments and subsidised private health insurance for the middle classes. So while the libs did a better job that the current labour government they weren’t particularly reforming.

    The real reforms came inte 1980s with the deregulation of the banking sector, the floating of the Aussie dollar, reduction of import tarrifs the privatisation of the commonwealth bank, Qantas and Telecom Australia. As well as the introduction of enterprise bargaining and reforms the labour market along with other microeconomic reforms.

    All of those things were done by the Hawke/Keating Labour government, although I have heard it said that they were probably the best conservative government Australia ever had.

    Oh yes and there is also the booming commodities prices, massive mining boom, and resources boom from China which might have had something to do with it.

    But actually you are right in this respect if the government’s fiscal positionis strong in the good times, then it is better placed to deal with the bad times. makes economic sense to me.

  12. PaulB-

    ISTM that you don’t know what Keynesian theory actual says.

    Specifically in what way? I’ve read the General Theory and various commentaries and refer to them quite often.

  13. (18) Then you’ll know that Keynes wrote bollocks, then, Ian.
    The theory rests on 4 foundations:
    1. Human desires are limited. (bollocks)
    2. Goverment investment is better than private investment (bollocks)
    3. Demand can be deficient. (bollocks, it just oscillates between spending and saving)
    4. You can fool most of the people with some fancy differential maths. (true)

  14. This is a great post, Tim. So great that the great Chris Dillow has written a post about it. Here’s the link:

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/04/political-reality-and-political-change.html

    From my own (admittedly cynical) perspective, it doesn’t matter what colour politicians favour, they are all after one thing, namely enough votes to get them into power and remain there. Therefore they will do whatever achieves that objective – and if that involves stuffing the economy, they will stuff the economy. Therefore they actually don’t give a stuff about the economy.

  15. Mario (22) WTF?
    Leaving the sprogeny lots of debt, versus leaving them some seed corn.
    Which would you choose?

  16. IanB: perhaps you skipped chapter 1 (which is very short):

    I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium.

    Keynes argued that an economy has many possible equilibrium states, and that governments can encourage a switch from a low employment state to a high employment state by stimulating aggregate demand. Your attempt at an offhand refutation of Keynesian stimulus seems blithely unaware of this.

    blokeinfrance: of the four points you list, I’d say that (3) is true, and necessary to Keynesian economics, and the others are irrelevant. It’s bizarre to accuse Keynes of attempting to fool people with mathematics: Backhouse discusses the mathematical complexity of the General Theory here. Perhaps IanB would lend you his copy when he’s finished re-reading it so you can check for yourself.

  17. #13. Thomas Jones. Defending the Labour Party. (and the Conservatives by proxy)

    The reasoning behind the decision to run deficits in the later stages of the economic boom is that people thought that UK economic growth had reached a new higher rate. Even though monetary policy was loose, inflation wasnt a problem (although asset price inflation turned out to be). Thus it could be argued that the moderate deficits being run at the time were consonant with a prudent fiscal policy. It turned out that it represented a bubble, but this wasnt clear at the time (some people argued that it was, but this number was vanishingly small at the time, and did not include Vince Cable).

    Yes, it was foolish, but no one thought that the temporary growth was so much more of total growth in the period post 2001. A lot of the excess was in the banking sector, which ended up on the government balance sheet due to poor regulation.

    And politically for the Tories demanding lower spending would have been politically suicidal. Even today when the Tories are doing bugger all in the way of actually cutting expenditure, they are demonised by the press and the left. Which neatly illustrates the point – there are no votes in running surpluses.

  18. Paul, you don’t seem to have answered my question. Keyne’s model of the stimulus is that you get a multiplier k by dividing consumption by investment, then turns the equation around so that more investment (i.e. government spending) will increase C by the multiplier k until such point as full employment is reached. That’s the particular part I was addressing.

    Consumption being synonymous with production (you can only consume that which is produced), production will increase by kI (he swaps arbitrarily between variables and their first derivatives by throwing “marginal” in at random, but we’ll let that pass). That is, dC=kdI. (using d for delta).

    Do you agree he said that?

  19. @Mario: “Why should a budget surplus favour those living in the future?”

    It won’t, because if there is debt to pay off, then that is a burden on the future generations, so its entirely fair that the people who spent it pay it off.

    If there is no debt left to pay off one can reduce taxes until there is no surplus. Or if people agree, build up a fund for the future, which as people tend to want their children to fare better than they do, would actually be quite popular. Not all of us want to live like there’s no tomorrow and leave our descendants with a huge bill.

  20. Ian B: Keynes derived his multiplier from the “marginal propensity to consume”; he held that government spending has a multiplied effect on aggregate demand. That is obviously true.

    There are serious arguments to be made against Keynesian stimulus. But your claim that growth is possible only through technological progress is not one of them. Plainly, in times of high unemployment, growth can be achieved by currently unemployed people providing services in which they have a comparative advantage.

  21. Hmm, so far as I can see it’s obviously untrue, not least because there is meaningfully no such thing as the propensity to consume (which is another name for k. He did love reusing his variables under different names, did our Keynes).

    Anyway, there are numerous ways to debunk “government spending has a multiplied effect on aggregate demand”. Perhaps the simplest is to note that currency units are fungible; one pound is the same as another. The economy has no idea whether a pound came from the State or somewhere else. They just all circulate.

    It thus follows that any pound should multiply the same as a government pound, at which point the economy would rapidly multiply itself towards infinity. Which doesn’t happen. There isn’t any multiplier. The government spends a pound, and gets a pounds worth of goods. That’s your lot, I’m afraid.

    Another simple argument is that demand can’t be aggregated anyway, which brings us to the basic problem with Keynes, which is that his arithmetic is in the “not even wrong” category. There is no aggregate investment, no aggegate consumption and, worst of all, he continually reverses the imagined cause and effect relationships making matters even worse.

    To put that in persepective, a Keynesian might note that aggregate sari consumption is proportional to the number of ethnic Indians in the economy (S=kI). He thus concludes that, in order to raise the number of Indians, he must manufacture more saris (I=kS). It is total codswallop of the finest kind.

  22. IanB: No. k=1/(1-MPC). One way to get this is by summing the infinite series of effects from the infinite recirculation you mention. You need to understand the theory before you can make an argument about it worth reading.

  23. I do understand the theory very thoroughly Paul. I’m trying to explain why it’s bollocks to you.

    The first (minor perhaps) point is that there isn’t any “propensity to consume”. Nobody actually decides their spending on a ratio principle i.e. “I will spend 70% of whatever I earn”. The mind doesn’t work that way. Keynes pretends it does because he wants a multiplier variable to put in his arithmetic. But it isn’t actually true.

    The second point is that there is no infinite series. Firstly, because there isn’t one (see below) and secondly because Keynes didn’t say that. The “Adam pays Bob, Bob pays Carol, Carol pays Debbie, Debbie pays Eric” you’re referring to is what we may call the “Vernacular Multiplier” which is a different theory to Keynes’s, which is his C=kI thing.

    So, why doesn’t the vernacular multiplier work either? Because each of the terms is in a separate spending round of the economy. You cannot add them up. Try it with another pound; this pound I have right here in front of me. I go to Patel’s and buy some alcopops with it. Now Patel has the pound and I do not. He pays his assistant Alice’s wages with it; she buys a box of cornflakes. Has the pound now added the value of both the alcopops and the cornflakes to the economy?

    No, it hasn’t. They aren’t simultaneous. The economy is still the same size. There isn’t any multiplier.

  24. Sorry, just to add, “Vernacular Multiplier” is my name for it, because people trot it out as a justification for state spending in an everyday (vernacular) kind of a way, as if it is what Keynes was describing. But it isn’t.

  25. (24) PaulB
    Thanks for showing us chapter 1. Clearly the guy was infatuated with the physicists of the time. Hence the “General Theory” multiple equilibria codswallop and bullshit. Any historian can tell you that there is no enduring equilibrium any more than there is an enduring present.
    Is there any need for differential equations in Keynes? Yes there is, because if you used ordinary maths or % rates you’d soon see the multiplier as being a ludicrous invention. But the great thing about the differential is that it is self limiting and so you don’t see the card switch.

  26. @Jim
    Sure, but there are other ways individuals can provide for their own future. I just don’t think you can prima facie say that any budget surplus should be going to wealth funds or pay off debt, it still depends on certain circumstances. Perhaps sometimes it is better to give a tax cut, other times not…

  27. Is there another problem with Keynes’ ideas in practice rather than theory, namely that in a true crisis politicians lose their nerve and don’t spend/borrow enough? I’m thinking of Martin Wolf’s comment in relation to low bond rates: “What the markets are saying is “Borrow and spend. Please.””. (quote from memory)

  28. blokeinfrance: Keynes’ remarks about multiple equilibria should be understood in the context of the then prevailing classical theory which held that there was a single equilibrium (as does most modern economics). It makes no difference to him whether the equilibria are fixed in the long term “in the long run we are all dead”.

    Keynes’ derived his aggregate multiplier from equilibrium considerations, using simple algebra. He would have been aware that the same result is obtained by summing the infinite series of diminishing recirculations.

    IanB: the parenthetic part of your statement “there is meaningfully no such thing as the propensity to consume (which is another name for k. He did love reusing his variables under different names, did our Keynes)” disqualifies you from saying “I do understand the theory very thoroughly”.

  29. Having ploughed through the above without falling asleep, the following conclusions:
    Keynsian economics as applied to representative democracies is like some of the more obscure mathematics – 4 dimensional plane geometry for instance – all very interesting but no real world application.
    Governments are doing their level best to re-jig the democratic system so it does.

  30. 37
    Paul, you cite one of the most famous bits of Keynesian BS.
    “In the long run…” life goes on.
    Granted, if you had to sit through Keynes’s missus at the ballet, you might wish it didn’t go on and on.
    As for his other famous idea about burying money down mines, Bastiat nailed that crap before Keynes was born. See “Broken Windows”.

  31. Blokeinfrance.

    The multiple equilibria point is trivial. What Keynes said was that at a given moment in time we will be at an equilibrium, BUT we did not need to be at that equilibrium, because through policy decisions we can shift to a (better) equilibrium point. Your original point about no enduring equilibrium is correct, but doesnt address the point that Keynes is making – at the same time there are multiple potential outcomes.

  32. PaulB-

    You can only declare a constant of proportionality between two variables A and B if you can first demonstrate that A actually is proportional to B. You can also only rearrange the causality in an equation if you can demonstrate that causality is indeed reversible between the variables.

    If Alice has £100/week of disposable income and spends £10 on tobacco, you can apparently divide the second by the first and say her Propensity To Consume Tobacco is 0.1. However, this is only a genuine constant if you know that she will always spend 0.1 of her dispsoable income on tobacco- if her income rises to £200, she will buy £20 of tobacco. Otherwise it isn’t a valid constant. All you’ve done is divided two unrelated figures.

    The Propensity To Consume assumes that economic agents have such an internal constant such that whatever they earn, they divide proportionally between consumption and saving. There is no evidence, nor is it logical, that humans make economic decisions in this manner. The constant MPC (or k) does not exist.

    Even if such constants did exist, they are not necessarily reversible. Alice’s spending on tobacco may be proportional to her income. Her income, however, is not proportional to her expenditure on tobacco; that is, if she spends £20, it does not follow that her income will become £200. This is the second fallacy into which Keynes keeps tumbling.

    Tim adds: “The constant MPC (or k) does not exist.”

    MPC is marginal propensity to consume. It is thus not a constant but something that changes with income levels. That word “marginal” already incorporates your critique of the concept.

    Using your fags example. Sure, her spending on baccy does not double when her income does. But nor does her total consumption double when her income does: in aggregate we are pretty certain that savings as a portion of income rises as income does. Thus MPC.

  33. Bloke in France: The point about “in the long run”, expressed in the colourful language you think appropriate, is that if you’re up to your neck in a barrel of bullshit then even if there’s a small leak in the bottom of the barrel you might still want to climb out.

    Keynes never advocated burying money down mines – he wanted a more productive stimulus. He did say that in a time of very high unemployment it would be better than nothing – the opportunity cost is tiny if the labour used to dig it up would otherwise be idle.

  34. Tim,

    Keynes was a terrible arithmetician, and if you look through Chapter 10 of his Magnum Bilge you’ll find him swapping at whim from PC to MPC; in particular presuming (in the multiplier) that the MPC has the same value as the PC.

    The Marginal PC would be the first derivative of his imagined “consumption function”, but that is still presuming that there is a proportionality involved, and there is simply no such proportionality. Alice consumes (in this case) tobacco until her desire for tobacco is satisfied. There is no reason at all to think she will like cigarettes more if she has more money. There simply is not an equation to be had. The consumption function is psuedo-mathematics.

    This is a very simple concept to understand, but also surprisingly hard (I find at least) to convey to others. You can only write “A=kB” or “A=f(B)” if A is actually demonstrably a function of B. You can’t just take two variables, divide one by the other, and invent a “k” (or a function).

    Bob has 4 hats and an income of £10,000. It simply does not follow that if his wage rises to £20,000 he will have 8 hats (or any other proportionate number of hats). There simply isn’t any such function.

  35. IanB: all the MPC says is that if Alice earns more money she’ll spend some and save the rest. Why on earth would you want to deny that?

    MPC is not another name for a multiplier k, however many times you say it is.

    I’ll leave you to your incoherence on the subject now.

  36. IanB: all the MPC says is that if Alice earns more money she’ll spend some and save the rest. Why on earth would you want to deny that?

    If that was all it said, it would be true but trivial. Unfortunately Keynes piled a great wobbly edifice of pseudo-math on top of it.

    In particular, quite clearly and contrary to what you just said, and which in fact you’ve said earlier in the thread, Keynes (the immortal CHapter 10 again) states that the muliplier k is the same figure as the MPC. Or the PC. Depending which paragraph you’re on. For instance, he thinks that if the government know the PC (or the MPC), they can calculate how much to spend to create full employment[1] without toppling into inflation.

    [1] He suddenly starts using the investment multiplier as an employment multiplier, presumably because he has a “commodity labour” paradigm in which the two are effectively interchangeable.

  37. Sorry, I said I was going to stop, but there’s something clear there I can reply to.

    Keynes says that the aggregate demand multiplier is a function of the MPC, not that they’re the same thing.

    I doubt that anyone, including Keynes, would deny that the real-world calculation is more complicated than the simple formula he derives, for example because different people have different MPCs. But that doesn’t mean the effects he wrote about don’t exist.

    I ask you to consider the possibility that your inherent lack of sympathy to Keynes’ ideas is causing you to read them carelessly and assume they’re much less intelligent than they really are. Keynes, like any other economist, wasn’t always right, and he was limited by the computational tools available to him, but he was certainly brilliant.

  38. Paul, for my sins, this thread has had me reading the General Theory again. It’s not brilliant. It’s virtually word salad. In fact several people including Rothbard and Hazlitt argued that that was one of the reaosns for its success; being inconsistent, confused and baffling, it immediately spawned an industry in exegesis, much like Hegelian philosophy.

    But it still comes down to the fact that his basic ideas are wrong, when clearly stated. Let’s do this again. If any total is divided into two portions, you can define a multiplier of the portions. THat does not mean there is one. All you can say is that if T=A+B, then A=T-B. You can certainly find some k which is A/B, but that doesn’t actually mean that A=kB. This is fundamental arithmetic, and it is really important in deciding if his ideas have any merit.

    Keynes’s arithmetic is just bad. He flips and flops around his terminology; one minute we have a constant, then it might be a complex function, then the constant is just assumed in an equation. He is making the case that (governments) can actually do these calculations to achieve full employment, full output, etc. Governments actually tried this in the Post-War period. It did not work. The arithmetic cannot be done; it is an illusion, a mirage. Because his math is just plain wrong. You cannot do these things with aggregate variables that Keynes claims you can do. There simply isn’t any aggregate demand function to be calculated.

    It really isn’t brilliant. It’s complexified nonsense. The effects he wrote about don’t exist.

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