Monday, October 20, 2008

Have Keynesian Economics Made a Comeback?

The letters PSBR don't mean much to people nowadays. In the 1970s the Public Sector Borrowing Requirement figures ranked as important as the inflation, unemployment and trade figures. Panic used to ensue if it was thought government borrowing might exceed £3 billion. Those were the days, my friends.

Today it was revealed the PSBR for the last six months was a massive £37.5 billion, the highest ever. The full year figure for 2008-9 is likely to be between £80bn and £90bn. Even though public spending is already out of control, the Chancellor's plan to avoid recession is to spend, spend and spend again, increasing public borrowing still further. Government ministers cling to the mantra that government debt is only 37 of GDP when it is in fact 43 per cent (so says the ONS) and once you add in all the new liabilities it must now be far higher than that.

Alistair Darling clings to the hope that old fashioned pump prime Keynesian economics will increase consumption and therefore boost economic activity. And he may be right. Sadly though, it will increase economic activity in all the countries we import consumer goods from rather than our own.

Of course, if he were a true Keynesian, Darling would also be putting up taxes. I don't need to spell out both the economic and political pitfalls of doing so. If he does, he will copy his predecessor and do it very stealthily.

The best way to generate meaningful and long lasting economic activity and jobs is surely to cut interest rates further.

The other thing the government could do is stop spending taxpayers' money in the wrong areas and spend it more efficiently. Even with only a 5 per cent efficiency saving, £30 billion would be freed up to either cut taxes on the low paid or to spend in other areas.

When I was doing economics A Level in the late 1970s I constantly asked why 90 per cent of the syllabus was based on discredited Keynesian economic theories with monetarism only getting a passing mention. I don't know what is on the A Level economics syllabus nowadays, but I bet J M Keynes is getting a bit of a revival.


Andrew Allison said...

We are living in dangerous times.

Tim Roll-Pickering said...

I took the A-Level in the late 1990s and I remember it was quite mixed, although I got the impression at the time that all economic theories were a bit discredited and "muddling along" was the order of the day!

Paul Pinfield said...

Iain, this idea of massive injections of cash in the economy is bollocks. Why does NuLab think that they could spend the money any better than we can.

The Blair/Brooon boom has been supported by consumer spending. Surely the answer is to enact massive tax cuts (the all of the implications for NuLab's mad pet projects). This would put the money back into our pockets so that we can spend it as we see fit. I know I am ready for a new car. How about the rest of you? Or would you all prefer ID cards...?

Valleys Mam said...

OMG Iain that made me shiver
I remember studying Keynes and asking the same questions.
Surely we are not going that far back, especially when we have such excellent forward thinking economists to read. Amartya Sen for example.

joseph said...

a level economics these days is about 50/50 - the most interesting theories taken from each

Anonymous said...

Does Camera On do anything or say anything that isnt fomulated by Caulson.

I see he has decided on the Friday Monday strategy. You will here nothing Tue Wed or Thur.

Also the bright red or Blue tiess have gone, replaced by darker colours ( to make him look more sombre )...Yawn.

1p off the tax of a £12,000pa will enable that person by an extra mars bar a day.

Anonymous said...

"I don't know what is on the A Level economics syllabus nowadays, but I bet J M Keynes is getting a bit of a revival."

I bet 90% Keynes never came off the syllabus.

Blue Eyes said...

The question that I have been asking is: who is Darling planning to borrow *from*? If it's from banks and consumers, isn't he just stifling investment and spending elsewhere? If it's from abroad then the pound will just collapse forcing up inflation.

SPL said...

This posting is confused.

"If he were a true Keynesian, Darling would also be putting up taxes."

Keynes would not advocate counter-cyclical fiscal policy. He would not put up taxes, and nor has Darling.

"The best way to generate meaningful and long lasting economic activity and jobs is surely to cut interest rates further."

How is a monetary stimulus which ignores inflation not Keynesian, but a fiscal stimulus is? How would looser money not benefit foreign exporters, but a cash injection would?

Finally, the £3bn PSBR which you compare to £90bn today is not controlled for inflation, so the comparison is meaningless.

no longer anonymous said...

I did A Levels in 2002 and Keynesianism was on the syllabus then, although we were told it was out of fashion. Apparently it was taken off the syllabus the next year.

Methinks there will be a revival of Austrian economics as well - the Austrians saw the crash coming (as they did in 1929) and have a persuasive analysis of how it was cu

David Anthony said...

Tied up most o the day, so little opportunity for blogging. Sorry!

Give Max Mosely my regards.

judith said...

I see Dirty European Socialist is out on day release again.

Anonymous said...

And that's why Iain Dale shouldn't write about economics.

Paul Pinfield said...

Anonymous @7:22 PM

You really are pretty transparent...

Hello Dolly!

Anonymous said...

Wasn't it wild spending and low interest rates that got us where we are today? We are trying to mix two ideologies. Either have the State run everything or leave it all to competition.
freedom to prosper

daniel said...

The problem is that Cameron has, yet again, boxed himself on this one - Cameron has said, according to Nick Robinson, " if all (that) ministers are planning is a re-ordering of their spending priorities he would back that".

So we have the Government's plan, which will include greater investment on major public projects, and a Tory Leader who appears (subject to caveats),to support this Keynesian plan.

The Conservative leadership appear to be like rabbits caught in the headlights, unsure which way to turn. It seems that Cameron has abandoned monetarist or Thatcherite responses.

A party needs to have core values, which give it purpose and can help shape its long term strategy as opposed to its short term tactics. It seems that the Cameron has lost his sense of purpose, with no strategic response to the current crisis - he suggests minor changes at the edges, but no long term answers.

Anonymous said...

Looks like it.
Then again Keynsian economics meant SFA to me until I just Googled them.

Is this a bad turn of events?

James Higham said...

Of course, if he were a true Keynesian, Darling would also be putting up taxes.

They have put up the stealth taxes.

Dick Puddlecote said...

SPL: "Finally, the £3bn PSBR which you compare to £90bn today is not controlled for inflation, so the comparison is meaningless."

Yes, the figure perhaps hasn't been controlled for inflation, but unless inflation in the interim has been 3,000% then I'd say it was a f***ing HUGE increase!

Let's see. Price of a pint back then? About 50p. Now? About £3 - you do the maths.

stormgrade said...

Whatever else he believed, Im pretty sure Keynes said no tax rate should be more than 25%.

Anoneumouse said...

I 'Say' I 'Say'

"prosperity should be increased by stimulating production, not consumption" (Say said)

Anonymous said...

"We cannot solve our problems with the same thinking we used when we created them."

Albert Einstein

norman said...

Anon 7.22 or Dolly!

Have you read the ICM poll out in the guardian this evening. Not comfortable reading for Gordo. Tories 42 Labour 30 Hardly not changed. Cameron has a double digit lead.

Don't waste your time, take an evening course in an university to keep yourslf engaged!

Anonymous said...

"When we created thoughts we are thinking"

Alex said...

We have been living in a quasi-Keynesian economy for the last 11 years. Why do you think Brown relies on GDP as a measure?

GDP is supposed to be a measure of economic activity. Brown inflates this figure by spending grossly inflated amounts on public services, knowing that a lot of the income paid out will come back to the government as taxes. Meanwhile he is spending more and more on items of questionable value (IT systems, Olympics etc, etc). PFI only helps push up these figured. The cash invested pays construction cuompanies who pay their staff who spend the money, but the funding remains off the national balance sheet.

Every time he boosts measured GDP Grown gives himself more headroom ro say borrowing is lower as a proportion of GDP. The problem with this version of events is that the borrowing is real and understated, but a lot of the GDP (value of services provided to government) is totally overstated.

Sandy Jamieson said...

I did economics in the early 70s when Keynesian economics was the orthodox in Economic Departments so that we used Paul Samuelson and JK Galbriath as standard texts.
People like Madsen Pirie and Stephen Eyres introduced me to alternatives such as Milton Friedman, Hayek and Von Mises.Trouble was Gordon Brown who was at a University only 51 miles away at the same time was not introduced to the self-evident truths that these three formidable intellects advocated

You cite the PSBR as a figure whose meaning has disappeared to the media. Another important stat was the Balance of Trade Figures. These were eagerly anticipated every month and were the lead stories in the news for that day. Indeed it is argued that the balance of trade figures for May 1970 cost Wilson the election (mainly in serious deficit since BOAC (now BA) bought two Jumbo Jets from Boeing.

But an increase in the PSBR i.e. an increase in the money supply means inflation. A balance of trade should be exactly that and the present crises in over supply of cheap credit caused by whatever reason (and I'm sympathetic to that arguement in the Spectator that blamed Bill Clintons equal opportunties policy)means we have forgotten the lessons of that past (and a near immediate past at that)

Actually one thing, I do remember our Prof making a statement claiming "Keynes was not a Keynsian" Discuss!

tory boys never grow up said...

"Of course, if he were a true Keynesian, Darling would also be putting up taxes"

You obviously were not listening during your A Level economics. To the best of my knowledge Keynes never advocated tax increases as a means of stimulating the economy - he may have said public spending was more expansionary than tax cuts, but that is not the same thing.

Perhaps you might also wish to comment on how the monetarism theories have fared since the 1970s - which measure of money supply are you onto now M25 or some other such rubbish. As for the view that free markets are self regulating and find their natural equilibrium - not even John Redwood believes that anymore.

As for stimulating an economy by interest rate cuts - perhaps you should look at the experience of Japan.

Alcuin said...

I remember being told that recession and inflation were not possible together according to Keynesian economics. Yet the 1974-9 Labour Government managed it, and it took monetarism and a massive shakeout of old industry to fix it.

The man at the helm when it all went belly up, James Callaghan also said "You cannot spend your way out of recession". It all looks like New Labour are about to make things much worse.

Clark said...

My A levels never came close to these levels of interest but thankfully my degree does. Currently doing a course (within my Politics degree) on economic ideas, which is taught by two teachers, one Hayekian, one Keynesian, who disagree furiously. Very interesting, very topical. Needless to say both hold their heads in their respective hands re the Government, and any agreement between them has to be taken very seriously.

Joe said...

Most Economics taught is from a socialist type viewpoint (and I did it to Masters level and deal alot with academics in the field now), as most lecturers are (and of course A levels feed into that). Remember nearly all academics in UK wrote to papers in 1981 saying Thatcher's economic policies would never work... oops!

The official deficit this year (80-90 bn) will be the largest since 1946 as a % of GDP- so all those comments re inflation etc, although they have some validity, the reality is this is the worst ever peacetime deficit.

The problem of course is not the rise this year- there are good arguments for that- but the fact the deficit was so large already, and rising, despite a long time booming economy.

The other problem is the deficit (and public debt) exclude many items that rally are public debt- Northern Rock, bank bailout package, PFIs, public sector pensions, etc.

The real level of pulic sector debt is not 37% of GDP as claimed by Govt but around 100%- indeed noone knows exactly as Government does not publish most figures- but public sector pensions are most of the difference (they are largelly unfunded).

The public sector deficit for this year would of course be 80-90bn PLUS bank bailout (charitably, say 50bn), plus increase in liability for pensions, plus increase in PFIs etc- say at least 150bn.

In due course this will all have to be paid. Maybe by our children, maybe by slashing public sector pensions, but for sure these are all liabilities being built up by our Government for us to repay later...

215cu said...

Did my A-level Economics in 1987. Keynesianism was taught as well as Monetarism. Although I must say, Keynes was something of a busted flush at the time.

One thing that struck me was Keynesianism in any of its guises was never a 'get out of jail' card, it either cost you a devalued currency (through higher government debt), inflation or lower productivity.

None of which are especially good news.

On the other hand, Monetarism places much more trust on the individual as tens of millions of micro-economic consumers made up the 'pie'.

Slashing interest rates and strict control of the money supply tamed inflation by taming the micro-economics. Cutting taxes and government spending put more money into the micro-economics and they by and large chose the most efficient and productive ways of releasing money's true value through incomes multipliers.

Way more efficient than Keynesian top-down trickle.

I've always erred to Von Mises, Hayek & Friedmann.

Sadly we've had two Chancellors that have ignored Monetarism for Keynesian inflation of the economy since 1997.

And that is the problem, when downturn threatened in 2001 and 2005, Brown inflated the economy using government spending.

I suspect this time it will not work.

Yet again Tory medicine to wean the economy off the opiates of Keynesianism will be painful.

Ben said...

It seems we're indeed living in dangerous times, as Andrew Allison says. Boris Johnson recommends bonkers schemes for digging ourselves out of this hole by digging more holes in the ground.

This morning I walked past a TV discussion (Hard Talk) and noticed Chris Patten was on the panel: they always like to include a real conservative. I heard enough to catch Stephen Sachur saying 'So we're all Keynesians now...'

Worldwide recession, Governments spending money they don't have, hyper inflation, the rise of National Socialism ...

simon said...

I did A-Level Economics in 1996. We were shown all the theories and the Keynesian v Monetarist comparison, but it was clear that Keynesianism was a bit old hat.

Programs of public works sound so 1970s, so socialist, so big-government, so doomed to failure.

Everyone shouting their own opinion on interest rates is also not helpful. Remember before 1997 when every month business leaders piped up to call for rate cuts? Leave it to the Bank!

The best thing we can do is keep public finances steady, stop inflation rising, take the pain of recession and then start to pay off our public debt. We've got about £600bn to get rid of, so better start as soon as we can.

I'm not sure everyone appreciates the distinction between annual borrowings (the £80bn or £90bn that Iain mentions) and the stock of debt to which this adds itself each year, currently £645.3bn or about 43% of GDP. Even if the gov't lives within its means next year, we still have this huge stock of debt (previous years' borrowings) to pay back.

"Living within our means" should be a theme of the Tory election campaign.

Labour seem to have two lines of defence on their huge debt, to defend their wanton profligacy. One (a la harman in PMQs last week) is "I don't regret for one minute investing in public services", i.e. we went on a splurge and we enjoyed it. The other is "because we've paid back public debt we're now able to spend when we need to". This is the more dangerous of the two because it's so misleading.

Yes, from 1997 to 2002 the gov't was relatively frugal and the debt as % of GDP fell from 44 % to 29%. Since 2002 they've spent spent spent like there's no tomorrow (schoolsnhospitals) and now we're heading for well above the 44% when they came in.

Roger Thornhill said...

Keynes was quoted as saying

"When the facts change, I change my mind".

Unfortunately he was wrong from the start, and so he remained.