“Oh boy! There was nothing wrong with fiscal policy under Labour, says top economics prof”
That was the headline on a piece by Jeremy Warner, assistant editor of the Daily Telegraph. He was reacting to this post, which apparently “blogs to the effect that there was no real problem of overspending under the last government”.
But he is puzzled. “By the way, the really weird thing about Wren-Lewis's analysis is that in an earlier post, he seems to accept that fiscal policy was way too loose towards the end of Mr Brown's tenure. Indeed, he had put his finger on the nub of the delusion that took place – Mr Brown began to believe that higher than expected tax receipts represented a structural and permanent shift in the tax base. He could therefore spend accordingly.”
All very strange. But lets go back the post Warner does not like, and look at the third paragraph, which he does not quote. After presenting the data which fails to show fiscal profligacy before 2008, I say “Of course it is possible to find fault, and I do. In hindsight it would have been better if the debt to GDP ratio had been kept nearer 30% of GDP, or even reduced further. But debt to GDP was lower before the recession than when Labour took office, and the current balance was almost zero. Hardly a profligate government.”
That is the point of the post. I was not saying that there was nothing wrong with fiscal policy under Labour, and in the paper I reference I am critical on a number of levels. What I was saying is that Labour’s performance does not justify the myth that its profligacy is responsible for most of our current economic woes. Its not a very difficult idea to grasp. But rather than grasp it, Warner prefers to suggest that I am just inconsistent, confused or worse.
He also plays the arrogant academic card, which is usually a significant tell that you do not want to address the real issue. He says “what really gets my goat about the Wren-Lewis blog is the arrogant suggestion that only qualified academics are capable of speaking the truth on matters such as these.” Funny that I don’t remember writing anything like that. Indeed I was saying the complete opposite: this was not a myth that required any expertise to unravel - you just needed to look at the data. My complaint against the media was not that it was incapable of speaking the truth, but that it was unwilling to do so.
Yet some journalists really do believe the myth. How can they do so, when it is a myth that is easy to unravel? Well maybe the same way they can take a piece of text, and so obviously misrepresent what it says. The same way they can have a headline which is not just untrue, but which the headline writer knows is untrue.
Hacks gotta hack!ReplyDelete
Two things intrigue me:ReplyDelete
1. I used to believe the myth. Indeed Labour is having to wrestle with the effect it has had on voters, who now won't trust them to go anywhere near the economy. So where did the myth come from?
2. You argue convincingly that the amount of spending could hardly be described as profligate. But what about the things Labour spent that money on? If it all went on caviar for the Downing Street cat then I reckon we could probably upgrade them to 'profligate' status anyway.
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First chart shows that majority of deficit in 2005-07 was investment, i.e. assets that would produce some societal value in subsequent years. This seems to further debunk the profligacy charge to me.Delete
Warner is a fully paid up member of the “Rogoff / Reinhart / IMF” school of economically illiterate ideas on debts and deficits: a set of ideas that doesn’t get the difference between macro and micro – i.e. the difference between a household debt and the debt of a country that issues its own currency.ReplyDelete
Why would it have helped if Labour had reduced the level of public debt even more? It would just have opened the way to even more private debt creation.ReplyDelete
And since the idea that we cannot go above 90% debt has now been exploded, why does it matter where the debt level starts?
The myth fits well in the brandimage laour has, so is easy for nearly everybody to believe in.ReplyDelete
Example if Bama has to act tough he has to be much tougher than Bush just to make it credible. Same the other way around on say welfare. Before these policies do their electoral work they have to be 'bigger' than with someone with which these policies fit in with the brandimage.
Anyway labour did a lot of inefficient spending, but on the other hand unclear if may be on other stuff Conservatives had not spend as much.
Brown spent imho way too much to safe the banks. But again right wing cabinets all over the place did the same.
So relatively it was sort of ok in reality, but not in the perception of most voters. But in absolute terms it was as crap as everybody else. Seen you being at least I derive that from your comments on people like Osborne (who does relatively well compared to say Europe, but absolute is a big ?) and your hobby for consistency and being coherent I would have expected some critical notes I have to say.
The arrogant academic card works great btw in these times. Left, urban, academics are probably this moment the most unpopular group. In the 70's it was the opposite. You are basically the main target for the populist vote.
It is probably so that with the general public everything you say (as part of the 'left elite') will be considered in advance as purely negative by an equal size group as the one that will support you (btw this is political support which has little to do with academic agreeing with).
And you only take away (may be) the perception with a very small (more academic) group. With a large majority you are guilty before the trial. You may be won the academic discussion but Warner probably could not care less about that. From a general electorate pov it is simply confirmation that a) Labour cannot deal money matters and academics especially the left ones with beard should get out of their ivory towers.
As said earlier if you want to succeed in the public domain you have to change your communication style considerably to be successful.
Economist simply have completely missed the fact that economics is now full in the public domain (and you deal mainly with the brainless general voter) and are still struggling with that.
Can you recommend and reading that would support your view?
"Admittedly, these deficits were not of themselves off the scale - in the six years running up to the crisis, public sector net borrowing was £26m, £33.3bn, £41.1bn, £37.9bn, £33.1bn and £36.7bn - but cumulatively, they amounted to a big number, and were in any case flattered by what even at the time looked like the wholly unsustainable tax revenues being generated by the credit boom."ReplyDelete
Yeah, I think that if Mr Warner's rebuttal is that 'these are big numbers', then he has no substantive contribution to make.
I was interested by the comment in the article that Labour wanted to build a client state. My take on this is that one "reasonable right" argument against Keysian stimulus is "fine in theory, but we know governments won't really do what is needed in the good times." That sounds plausible, but is undermined by the fact that govt borrowing did not in fact go out of control but gradually came down post WW2. I think you posted about that earlier.ReplyDelete
So if you can't argue it leads to "Greece/hyperinflation", you have to go for "client state". I wonder how much there is in that - fwiw I believe that under the Keynsian socialist Kenyan, the US has *lost* a lot of government jobs (if you include state as well as Federal).
So many newspapers and business groups backed the Tory Party and its economic strategy before the election, which then received 37% of the vote only.ReplyDelete
Running up to May 2015 will be ugly.
Do you not take the trouble to read what you write?
You say here that: ""What I was saying is that Labour’s performance does not justify the myth that its profligacy is responsible for most of our current economic woes."
But nobody, least of all Jeremy Warner, has said that its profligacy is responsible for most of our economic woes. You've constructed a straw man. What has been said is that its profligacy exacerbated the boom and has given us a huge deficit problem in the downturn.
You previously didn't make this argument anyway. You wrote in you previous blog entry that: " the idea that the last Labour government seriously mismanaged the nation’s finances is a myth. " You didn't say anything about anybody claiming that it supposedly caused 'most of our current economic woes' and so, unsurprisingly, Jeremy Warner wasn't arguing that it did in his piece. He was responding to the claims you made about Labour supposedly not mismanaging the nations' finances.
Any fair-minded person can see that Jeremy Warner was right and that your response is disingenuous.
It is not a self-evident fact that Labour was 'profligate' at all. It moderately reduced the debt to GDP ratio. If this 'gives us a huge deficit problem in the downturn', you'd better explain why - given that many in the know would actually argue that there is *no deficit problem*, only that the deficit is a symptom of, and to some extent a treatment for, the deeper underlying problem of the recession itself.Delete
When Labour came to power, the debt (as a % of GDP) had just peaked following the early 90s recession. The deficit was reducing rapidly and headed towards surplus. Look at the graphs (The Guardian has a good one) - the trend was clearly favourable for both the deficit and debt.Delete
Labour, however, managed, even in the absence of a recession (in fact, during the biggest credit boom in history), to change this trend to one of running deficits and increasing debt as a percentage of GDP (it stopped decreasing after 2001). We saw the fastest ever peacetime rise in public spending in this country and the fastest in government spending in any G8, or European, country - all BEFORE the crash.
Labour was running a deficit of nearly 3% of GDP during a boom - the Tories had run a surplus of 2% of GDP during the same stage of the late 80s/early 90s credit boom/crash. Just think about how much smaller our deficit (and debt) would be now if the starting point for the deficit/surplus had been 5%of GDP better than it was. Think how much less painful the situation would be. The cuts that Labour is now screaming about (which, in reality are modest) wouldn't be necessary at all.
I am no Tory. This government and the last Tory government made big mistakes, but they were infinitely more responsible than the fiscal recklessness of Labour.
And I haven't even mentioned Brown's redefinition of much current spending as 'investment' spending nor debts run up on PFI, nor the plundering of pension funds to fund current spending, nor the huge rise in public sector pension liabilities.
Clearly not everything was done great under Labour (Brown/Blair).Delete
But the most important point is would the other side have done really better. And that is hard to believe to be honest.
Basically all over Europe looking back governments have spend too much. And it were governments from the left and from the right. Just take Ms 'Austerity' Merkel as an example. She not only spends more (on which you can discuss if it is good or bad), but she does it mainly on programms with long term effect. While it looks uncertain that the future can carry those costs. And there are a lot other examples.
The Conservatives have been moving to the centre (as a consequence of Blair and as a political trend). Usually that went (as other countries show) accompanied by social programms (aka more spending). With weak candidates as they have had during the Blair period, usually elections are won by vote buying (basically what Merkel is doing now), so any Conservative government would most likely have done the same.
And it is roughly the same in the US. Both sides are 'overspending', only partly on other things. And probably the Democrats a bit more as they have more expensive political hobbies.
It is also hard to see that Labour under Brown if still in power would not have adjusted. Have a look at what is happening all over Europe. Right is in power and the left is aginst all cuts (but usually doesnot give alternatives). And when the right is replaced by the left it is the other way around (Spain, Holland and Italy being excellent examples as well as Hollande who knows he has to make a u-turn but has no idea how to sell that to his electorate). Margins are very small especially with all parties moving to the centre as well.
Bankrescue hard to see that the Conservatives would have done better (as everybody was doing the same thing).
Also in business people first start to cut the fat when they come under pressure. In business they come under pressure earlier but the mechanism is exactly the same.
Again hard to see that the Conservatives would have done substantially better.
Please remind that there has been a game changer (parly at least) people are aware generally that government spending has to come down. But this first happened at the very end of labour's reign. The problem now being who will be thrown before the cut-bus, with the general opinion roughly being: cuts have to be made, but with others'.
Overseen this it is hard to see that the Conservatives would have done really much better (not 5% or so less debt). As said that is hard to see.
What is happening is that people are comparing a fictional idolised situation under the Conservatives with real life under Labour, simply apples and pears.
And I agree with the fact that calling spending , investment is not the way to go and Brown was wrong on being able to have put an end to bust. And I definitely was and am not a supporter of most of the new policies that cost alot of money, but those are not the points of discussion here. Hard to see that the UK would have went into this crisis with a debtlevel of say 10-20% under a Conservative government. Or would have made less debt to rescue the banks.
HJ, well put. You should elaborate on the points made in your last paragraph, especially the point about massive unfunded public sector pension liabilities to Labour's client constituencies. Labour also went out of their way to ignore inflation (especially asset-price inflation) so as to stoke the bubble of private consumption, especially housing. Hence they went out of their way to encourage, in addition to huge levels of public borrowing, even huger levels of private borrowing, with little credible underpinning. Once that all began to come apart at the seams in 2007-8 (RBS, HBOS, Northern Wreck, Bradford & Bingley), Labour (and now the Coalition) committed themselves to even higher levels of public debt to replace private sector debt and consumption which was totally unsustainable in the first place. The economics of the madhouse for which the under-35's are paying through the nose....begun by Brown with his hubristic nonsense about having abolished boom and bust and now continued by his heir, Gideon Osbrowne, another conceited general arts graduate from the University of Oxford.ReplyDelete
Wren-Lewis is quite right. Our economic problems have not mainly been caused by the Labour Party. The real culprits are the dingbat academic economists, among whose numbers the University of Oxford is disproportionately represented (think of Ed Balls, Will Hutton and countless others all the way back to Harold Wilson), who have given the world such concepts as 'the pound in your pocket', 'no more boom and bust', various 'new paradigms', the euro ... and on and on. No-one who has spent his life in academic institutions should be allowed to describe himself as an 'economist'. That requires experience of the real world.ReplyDelete
Surely the real point is that Gordon Brown kept telling us that he had put an end to 'boom and bust' so the 'fiscal profligacy' was actually perfectly prudent.ReplyDelete
And of course that proved to be nonsense, as could have been predicted: it was the equivalent of the Met Office telling us all that they'd abolished rain and spending all our money on hawaiian shirts and sun screen whilst disposing of our umbrellas.
I much prefer Simon Wren-Lewis's description of the last Labour government's economic performance to Jeremy Warner's. The only point where I disagree with W-L is where he says that it would be preferable if public debt had been at 30% of GDP rather than 37% at the start of the recession. What real difference would that have made?ReplyDelete
I think that Warner (and more importantly Osborne, Cameron, Alexander and Clegg) should be less obsessed with the public deficit / debt. They should rather spend more time understanding Godley and Minsky.
I agree with you -- anyone who, like Jeremy Warner, adds up public deficits for six years and thinks it might be interesting or relevant to write that the total is a "big number" is unlikely to have anything useful to contribute to a rational debate about the UK's macroeconomy.
Warner also wrote that: “Mr Brown began to believe that higher than expected tax receipts represented a structural and permanent shift in the tax base.”
Well, anyone looking at the historical trend of public revenues, say from the helpful IFS spreadsheet:
could not sensibly argue that revenues prior to the financial crash were anything out of the ordinary – certainly not “higher than expected.”
There wasn't a boom -- GDP per capita grew at an average 2.7% pa during the run up to the financial crash from 2000-2008, compared with an average 2.3% pa 1948 to date. No boom.
Ben Broadbent gave an interesting insight into the “debt-fuelled boom” nonsense in a speech last year, arguing that: “For one thing, it ignores entirely the assets side of the balance sheet. This matters because, if the implication that the country as a whole is unusually indebted to the rest of the world, it is inaccurate...the UK’s net overseas liabilities are moderate. It matters too because, to the extent they take account of balance sheet effects at all, most models of consumer and investment demand are driven not by gross debts but by net wealth. On this score the position of UK households is also unexceptional”
I think that the “debt/deficit is bad” arguments of HJ and Warner take no account of the equation:
public sector balance + domestic private sector balance + foreign balance = 0
Given that, for the UK, the foreign balance has historically been positive (we buy more from foreigners than they buy from us) then a positive public surplus would imply a private sector deficit.
Why is a public deficit worse than a private deficit?
The one big lesson of the Iraq fiasco for me is that governments do not pursue evidence-based policy but policy-based evidence. And the media, preferring a clear pre-digested narrative to actually seeking evidence for themselves, will always swallow such "evidence" unthinkingly. This is just another case of it.ReplyDelete