6th June, 2010.
I am privileged to have as a mentor Professor Victoria Chick, Emeritus Professor of Economics at University College, London. Prof. Chick is both an eminent and distinguished Keynesian, but also a fine teacher and a woman of great taste and sensibility. She bears an uncanny resemblance to Virginia Woolf, and has reached the top of a very male-dominated profession, although her work has not always been fully appreciated by neo-liberal colleagues.
Anyway, she and I have become alarmed by the overwhelming political consensus, parroted each day by the BBC’s economic correspondents, that ‘balancing the budget’ and ‘slashing the deficit’ must now become a national priority. We are particularly alarmed because this analysis, based as it is on micro-economic reasoning, has dire macro-economic consequences. These consequences appear not to be understood by EU and US politicians and policy-makers at the OECD, the ECB and IMF. As a result the world now faces the terrifying prospect of globally synchronised austerity.
As my readers know, I have long argued that Britain needs to ‘spend away the debt’, and in earlier posts have demonstrated the consequences of the 1945 Labour government’s post-war spending: namely, a steady reduction in government debt. Prof. Chick and I have been digging deeper into the numbers, and have produced the attached paper on the evidence that fiscal consolidation increases, rather than ‘slashes’ the debt. It is a more academic document than my readers will be used to, but riveting all the same.
Click here to download the PDF.
7 thoughts on “The Economic Consequences of Mr Osborne”
This deficit slashing rubbish will I am afraid prove to be a disaster unless a miracle occurs. But it isn’t only the BBC taking this line. Channel 4 has done virtually the same.
I have so far gone through the paper quickly but I have one query – I’m not certain that I understand how the correlations in the final two graphs in the Appendix are arrived at. The next to last graph looks as though it might contain a statistical outlier (and thus might need a little interpretation); and the two scatterplots don’t look as similar as the correlations linked to them suggest they should. I’m obviously missing something.
In Fig 2, if you ignore the two wars, there is a rather nice correlation between cutting spending and the rise in debt. Even for a die-hard cutter, the conclusion seems inescapable. An explanation of this disjunction between ideology and reality given by Nassim Taleb is that the politicians and their economic advisors don’t know what they are doing (He actually makes his point more scathingly than I feel may be appropriate.).
If you look at the ’30s data, as I know you have Ann, 1937-38 I think supports your case, as does the limp escape from the Depression exhibited by the US in the ’30s, even with the fiscal stimulus (which has been argued wasn’t sufficient), until Roosevelt began to prepare for war (when it was more than sufficient). War is not a way out, I trust, so we must find another.
So, if this time isn’t different, as shown by your analysis, then the current justifications for engaging in rapid deficit reduction must rest on foundations other than those so far provided. One or three come to mind. None salutary for the many.
If Dean Baker is right, the deficit “solution” facing the average person may be worse in the US – Href=http://www.guardian.co.uk/commentisfree/cifamerica/2010/may/31/deficit-hawks-social-security-wall-streetWhy should we listen to deficit hawks?
Yes – the whole ‘cuts to save the nation’ seems presented by the media as though it ws an empirical matter of fact, where all were agreed – rather than for the ideological spin that it is…
Very depressing – and for those in the public sector who will be sacked to pay for the protection of the rich – rather annoying!
This is a very timely piece of work but will it be featured on the Today programme? Will it take another FDR to point out fundamental truths about economics?
Our Republican leaders tell us economic laws – sacred, inviolable, unchangeable – cause panics which no one could prevent. But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings. Franklin Delano Roosevelt, Acceptance speech, Democratic Party convention, 1932.
I’ve just read your paper which has left me curious about 2003-2009 where we see each year an increase in public expenditure but, counter to the conclusion of your paper, we see an increase in public debt (this is except for 2005 where we see a 1% point decrease in public debt – but I note that this is the year with only the slimmest increase in public expenditure).
Why wasn’t your conclusion working over this period and so why would it work over the next few years, even though it didn’t work from 03-09?
I found this interesting having noticed decades ago in the course of a class on US economic history, that downturns accompanied a return to hard money, but there is no causation established, as there never is hy Keynesians, between economic recovery and govt spending, nor indeed is it made clear in what economic recovery or growth consists. If you have a govt expenditure increase and no increase in public debt, it, by no means, means a productivity increase, but may be merely an expansion of govt involvement in the economy, and you can have a considerable concomitant decline in private sector productivity, and stagflation, a fact with which I do not think anyone would have argued in the ’70s and ’80s and was the reason for the IMF bailout and austerity prescription. The Keynesian policy was permissive and it created moral hazard. Then, too, any actual increases in productivity could make possible the increase in govt income and expenditure, and the lower interest rates. The period after WWII, unlike the situation after WWI, saw Britain shed the weight of empire, face the need for reconstruction, as well as, garner immense Marshall Plan support.
Inflation IS everywhere a monetary phenomenon, and the effect of too much debt, because the latter raises the price of assets and equities, and this is not only inherently bad, but differentially as well, skewing the distribution of wealth and income, and squeezing the middle-class and limiting its entrepreneurial possibilities. This point was made by Robbins in 1934, a short, but clear exposition of the depression, which the authors might want to pay more attention to. The issue here goes far beyond the size debt, public or private, but with its long-term effects, the ability to service it, and of course reduce it, because the creation of credit is always inflationary. And it should go without saying that productivity always decreases prices, and never increases them.
Overall, the theorizing in this note bears the same characteristics as that of the hedge fund wizards, like forecasting the weather without bothering to look out the window. I made add, too, that this is not necessarily a Tory budget, but a Liberal one.
I agree we’re trying to cut the borrowing over a far too short period of time and the other side of the atlantic is laughing at us.