In which @richardjmurphy shows he doesn\’t understand Keynes. Or budget deficits. Or macroeconomics

So, the evil right wing neo-liberal bastards that control the European Union (no, don\’t laugh, he\’s serious here) are going to make Keynesian economics, leftism, all that is good an holy in democracy, illegal.

It’s hard to say what the biggest threat of 2012 is but I’ll nominate one all the same.

Andrew Rawnsley celebrates democracy in the Observer this morning but democracy counts for nothing if there is no choice on offer. That is the goal of neoliberalism, which has long seen democracy as a market impediment. But now neoliberals are seeking to enshrine their thinking in EU law by outlawing Keynesian intervention in the economy. That is the aim of the December 2011 agreement on the future economic management of Europe which effectively bans deficit funding even though this is the only known and proven mechanism for ending recessions. In effect the neoliberal leadership of Europe is as a result seeking to end democratic choice and the role of government in the management of the economy henceforth – guaranteed by international law that will over-write local choice. The only option that will legally be offered to electorates henceforth will be a right wing one. No other option will be allowed, by law.

I call that the biggest threat of 2012.

And it’s happening on our doorstep and with the implicit consent of our government – which has removed itself from the debate so that progress can be made on this measure designed to reward the 1% at cost to the 99% without the UK ever being heard to even make comment, let alone objection.

If you want some idea of the size of the mountain the left has to climb then this is it. In effect a totalitarian neoliberal regime is being built across Europe and the press isn’t even raising comment or objection.

Perhaps that’s the most worrying bit. It certainly proves that Rawnsley has entirely missed the point. Having democracy when there’s nothing to choose from is not democracy at all.

His proof of all of this is this announcement from the Federasts. The claimed outlawing of Keynesian intervention in the economy is this:

 4. We commit to establishing a new fiscal rule, containing the following elements:
• General government budgets shall be balanced or in surplus; this principle shall be deemed
respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.

Which doesn\’t outlaw Keynesian demand management, Keynesian intervention in the economy at all. In fact, it\’s entirely silent upon the subject. Further, that they\’ve defined the deficit in one particular manner rather leaves open the possibility of such Keynesian intervention.

For, the bit that Ritchie\’s missed is \”structural\”.

Identifying exactly which bit is which can be, in empirical terms, a tad difficult, true, but the basic logical distinction is between structural deficits and cyclical ones. A cyclical deficit is one that varies with the economic cycle. When aggregate demand is down then the deficit goes up. This is what Keynes was arguing should in fact happen: and quite a lot of our economy is in fact now the sort of automatic stabilisers which make this happen. Tax receipts decline in a recession, benefits, unemployment pay etc go up, this increases the deficit. Similarly, in the boom times taxes rise and benefits fall leading to, one would hope (as Keynes would have hoped, as \”hard\” Keynesianism now hopes) to a budget surplus and thus a trimming of the national debt.

A structural deficit is one that doesn\’t disappear in the boom times. The permanent overspending of government if you like, permanent overspending that doesn\’t go away with the ebbs and flows of the business cycle.

Whether what the EU is proposing is a good idea or not is an entirely different question from the point that needs to be made here. Outlawing structural deficits does not hamper Keynesian responses to falls in aggregate demand, does not outlaw fiscal stimulus, does not outlaw Keynesian demand management.

Ritchie only thinks it does because he\’s ignorant of Keynes, deficits and macroeconomics.

What worries of course is that there will be the usual idiots who will believe him on this point.

6 thoughts on “In which @richardjmurphy shows he doesn\’t understand Keynes. Or budget deficits. Or macroeconomics”

  1. As Ritchie’s useful idiots are unlikely to regain the reins of power for some considerable time, surely their belief or otherwise is moot?

  2. “deficit funding … the only known and proven mechanism for ending recessions”

    Forget about his misunderstanding of the nature of structural deficits, this quote alone should disqualify Ritchie from making any economic comment at all…

  3. In the early 1980s similar doomladen special pleading moved Nigel Lawson to deliver the rebuttal: “If neo-Keynesian demand management were the necessary condition of economic growth, we would all still be living in caves and wearing woad, instead of listening to lectures at the centrally-heated Charing Cross Hotel.”

    His successors seem to have an even more challenging educational project on their hands today.

  4. One of the basic problems with arguing about economics is that most people don’t understand it. Most Keynesians, for instance, don’t actually understand Keynes. As an example, they will talk about the magic multiplier, but if you ask them to describe Keyne’s reasoning in the General Theory they don’t know it, and instead start waffling about the butcher pays the baker, the baker pays the candlestick maker, which is nothing whatever to do with Keynes’s schtick about the ratio of consumption to investment.

    Being an Austrian, I find this immensely frustrating. We seem to have read and understood everybody else’s economic theories as well as our own, but most everyone else doesn’t even understand their own theories, let alone ours. It’s like arguing with a Christian who replies, “Jesus who??? What resurrection???”.

  5. And the whole thing’s open to fudge anyway:

    – Structural deficit is supposed “as a rule” not to exceed 0.5% of GDP – presumably that means over the business cycle. Rules are made to be broken, aren’t they?

    – Cyclical deficits are supposed not to exceed 3% of GDP – unless a qualified majority of member states say it’s ok. Which, of course, they are all going to, aren’t they.

    That 3% limit does allow for some deficit spending in a downturn, doesn’t it, if the 0.5% structural deficit limit is maintained?

    Anyway, how the hell do you know what is structural and what is cyclical? Yes, if you run an actual deficit during a boom it is fair to say that it is structural. But if you run a surplus during a boom and a deficit during a downturn – which is Keynsian macroeconomics, of course – how do you know whether your surplus should be bigger and your deficit smaller? Do economies EVER run in “neutral”?

    Oh, and countries can run as large a surplus as they like without penalty. So much for “balanced budgets”.

  6. Frances,

    Well there’s the whole problem isn’t there? Where do you set your datum? When was the neutral point in the last business cycle? Can we even agree when it started?

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