Friday, 30 July 2010


Now there's a phrase I never thought I'd write.
One of the more remarkable phenomena of the discussion around the budget has been the emergence of, what can only be called, Pop-Keynesianism among the left-wing media.  Now there's a phrase I never thought I would ever say.  The financial crisis in general was widely reported to have brought about a resurgence of interest in and influence of Keynesian policies.  At least nominal adherence to keynesianism was the principle mark of economical policy-making from the 2nd World War until the end of the 1970's.  Now, Keynes was a genius, and one of the very few most important figures in the history of economics.  His great insight was to argue that governments could have role to support economic activity by borrowing and spending in times of recession to boost the economy, by boosting general demand, and thus easing the effects of recession and supporting growth by combating the generally deflationary spiral of recessions.  But too often, though, keynesianism was used as merely an ideological cover for ever higher state spending, and this, among other things led to its discrediting as a driver for policy in the neo-liberal reforms of the 1980's.  With the coming of the recession, though, we have experienced a supposed revival of keynesianism, as governments turned to fiscal stimulus to combat the effects of recession.

More recently still, the banner of Keynesianism has been seized by those opposing the austerity plans of the Coalition and the Conservatives particularly.  In a way it is good to see debate on public policy being supported by appeal to scientific principles, rather than vague emotion as is far too common.  However, recently this has reached the stage of the ridiculous.  Indeed, there was a period shortly following the budget, when, for a few weeks, the Independent and Guardian seemed to be running a rent-a-keynesian contest to see if between them they could manage to have at least one commentator a day accusing the Coalition of forgetting the lessons of Keynes and reverting to what was variously called pre-keynesian barbarism, a reversion to the economics of the 1930's, and various other mindless insults.  All with the intention of insinuating that the fiscal hawks were seemingly just naively unaware of the great Keynes' achievements, the poor, simple dears, and were certainly going to tip us back into economic Armageddon.  Suddenly, every half-baked leftist political commentator was an economics major (for example).

But the credibility of these new experts as invaluable fonts of economic theory would be considerably greater were it not for two niggling issues.  The first problem is the repeated claim, by a number of smug commentators, about the madness and ignorance of seeking to enact savage cuts whilst in a recession.  This criticism, if true, would be pretty decisive. But it has just one small problem, which hopefully you can spot:  we are not actually in recession.  For me, personally, the ability to totally miss this basic fact about our economy shakes my faith in their pronouncements on policy.  No one has suggested cutting during a recession, and not only are we not in a recession (and have not been for 9 months), but these commentators have equally seemed to miss the fact that the coalition's plans for balancing the budget are not all coming into effect now.  They represent the plan for the next 5 years, and, the fiscal tightening does not begin in earnest for another year, at which point we will have not been in recession for 21 months.  One of the more irritating episodes of this problem came with the initial announcement of £6 billion of cuts by Osbourne and Laws.  The papers were full of commentators quoting economists to the effect that what was necessary was a gentle start to any deficit reduction plan, seemingly oblivious to the fact that this is exactly what £6 billion is; whether you call it 6 out of £160 billion, 4% of the deficit, 6 out of £700 billion of public spending, or a 0.8% cut in public spending, this is a gradual start.  These people seem to suffer from a lack of awareness of economics and history and what Keynes was actually dealing with.  In the 1930's he was arguing against an economic approach of seeking to balance the budget during a recession, while the economy was still shrinking.  For someone to refer to a plan to balance a country's budget 5 years after a recession ends as "a return to pre-Keynesian history" suggest an ignorance of economics and history.

The second major hit to their credibility as Keynesians is the fact that pretty much to a man these are the same commentators who loudly demanded ever increasing public spending in the years leading up to the crisis, even though the government was running a deficit of around £30 billion before disaster struck, in direct contradiction to actual Keynesian theory.  Keynes sought to use governmental fiscal policy to smooth out the business cycle, by running a surplus in the good times, and thus cooling demand and the emergence of bubbles, so governments could afford to run a deficit in bad times, in order to help support growth and recovery.  He did not just advocate the idea that never-ending deficit spending on its own was a magical solution to all economics problems.  These commentators supported higher public spending and deficits in the good economic times and the bad economic times.  There seems to be literally no economic circumstance that they believe would not be helped by a healthy dose of central government spending more money and running a deficit.  The fact that these people do not seem to understand what keynesianism actually is, while being quite happy to act as its advocates, is the reason for labelling this Pop-Keynesianism.  What it really is, is a convenient scientific fig-leaf for their real aim, ever higher and more unsustainable public spending.  An ideological colour donned now it is convenient and presumably to be abandoned when it no longer is.  If these people were real Keynesians then they would argue for maintaining public spending for now while outlining their belief and awareness that once the economy has recovered public spending must be restrained and a budgetary surplus run to avoid us getting into this situation again.  Needless to say, they do not do this.    

If these people were real Keynesians then they would have supported the Conservative economic proposals at the 2005 election.  The Conservatives proposed £35 billion a year less public spending than Labour over the period of 2005-2010.  This smaller increase in public spending was shamefully labelled a plan for cuts, and widely shouted down in the media.  This figure is coincidentally just higher than the deficit labour ran until the recession.  Assuming the Conservatives would have followed a similar tax policy to Labour they would have run a near balanced budget, meaning that when the recession came we would have entered it with more than £100 billion less debt, having not artificially inflated the debt bubble further through government stimulus over the last few years, and with considerably more room to manoeuvre to stimulate the economy during the actual crisis.  Not to mention the fact that when the bubble popped that would have been £35 billion less cuts we now have to make.  In retrospect, it is clear that the Michael Howard's spending policy in 2005 was correct and Labour's was wrong, and all the media commentators who slammed the Conservatives were wrong too.


Anonymous said...

A nice summary.

One word of caution, we may not be emerging from recession next year. Not because of cuts to public spending, but because we are in a wider and much more vicious debt-deflationary cycle. There were numerous upticks in growth between 1929-33, each hailed as the end of the slump, before the downward trend continued. I hope I am proved wrong, but we have just witnessed the bursting of possibly the biggest credit bubble in the history of mankind. Neither our economy, nor many in the west, can support the sheer volume of unproductive credit built up since removal of credit controls in the 1980s. Look at the US - their housing bubble is continuing to collapse, with wider knock-on economic effects. And where the US goes, we usually follow.

Have a read of Steve Keen's blog - one of the only people to have genuinely* predicted the crash and who still predicts further gloom.

* Not one of these ridiculous, flip-flopping charlatans, ala Blanchflower.

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