El Twatto is Twatty

For once, what that view is is pretty well summarised on Wikipedia, where it is noted that:

In macroeconomics, particularly in the history of economic thought, the Treasury view is the assertion that fiscal policy has no effect on the total amount of economic activity and unemployment, even during times of economic recession. This view was most famously advanced in the 1930s (during the Great Depression) by the staff of the British Chancellor of the Exchequer. The position can be characterized as:

Any increase in government spending necessarily crowds out an equal amount of private spending or investment, and thus has no net impact on economic activity.

In his 1929 budget speech, Winston Churchill explained:

The orthodox Treasury view … is that when the Government borrow[s] in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process raises the rent of money to all who have need of it.

The idea is then that the state produces no value, and that only the private sector does.

The further idea is that there is only a limited amount of money and if the state uses it the private sector cannot, meaning that growth is necessarily harmed.

The Treasury View is indeed as above. It’s, to be usefully wrong, an insistence that Ricardian Equivalence holds (note that this analogy is wrong!). Or that crowding out is 100%.

It’s also probably not correct.

But it says nothing at all about whether the state produces value or not. If the activity the state finances is more valuable than that produced by the same resources in private hands then the state activity adds value. The Treasury View is only that the simple transference to state hands doesn’t automatically make things better.

It’s also fiscal policy which is nothing to do with the money supply.


4 thoughts on “El Twatto is Twatty”

  1. But Shirley, if a government is spending money in the economy, it is because the private sector does not want to, or cannot afford to (eg it cannot borrow enough money to build a 1,000 mile railway) or that it is not allowed to do so (eg building dreadnoughts). Public works can eventually add value to an economy but the return on investment is decades into the future, which is another reason why private enetrprise might not be too keen.
    Also as we saw with FDR’s New deal, the state might be spending money just to keep people employed. In 1930s USA consumption remained sluggish and until the UK started buying Liberators, Mustangs and Grant tanks actual industrial production remained in the doldrums.
    Did the federal state splashing cash around suppress production ? ( That is a genuine question for any experts).

  2. I think that a significant difference between public and private spending is that, in the case of the latter, I get to decide whether to part with my cash, voluntarily, for something that I have decided that I want. In the former case the government helps itself to my money and decides what to spend it on without my input. Some of the stuff that they spend it on I would be in agreement with but the vast majority of it I would not. I would keep the money in my pocket if I had a choice in the matter.

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