Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 2 July 2013

Annoying Anti-Fiscal Stimulus Arguments Nos. 3 and 4

For numbers 1 and 2, see this post.

Number 3. We must reduce the size of the state.

This argument is often there but unstated, because to say it explicitly involves a deception. Instead it sometimes goes by the euphemism of ‘structural’ or ‘supply side’ reform. (No, I’m not saying there are no genuinely useful structural reforms out there, but just what some people mean when they use this term.) But as those making the case for austerity get more desperate, I have seen this argument a few times recently.

It involves a deception, because reducing the size of the state has nothing in principle to do with austerity and stimulus. I personally have no strong views about what the size of the state should be: some things are clearly done better by the private sector, while others are done better by the state, and how this eventually pans out for the aggregate I have no idea. But this has almost nothing to do with the need to increase demand when interest rates are at the zero lower bound. The deception comes when austerity mainly involves cutting spending (as in the UK), because it is anticipated that it will be very easy to cut taxes later on once austerity is over.

When I say it has almost nothing to do with stimulating demand, this is why I say almost. A long established and theoretically robust method of stimulating demand is a balanced budget fiscal expansion, where you temporarily increase government spending by temporarily raising taxes. However as it need involve nothing more than bringing investment projects forward in time (e.g. repairing roads and schools before they completely fall apart), it is not really increasing the size of the state. The idea that what is temporary is bound to become permanent does not stand up.

4. We must think of the children

This is annoying not because it is wrong in principle. Instead it is wrong because it either ignores who suffers the costs of austerity, or because it is not genuine. The argument that is right in principle is that, by increasing debt, we are ceteris paribus redistributing money from future generations to the current generation. There may be a complete offset if that increase in debt avoids hysteresis effects (or enables investment with beneficial supply side effects). Yet even leaving that aside, there are often very good reasons to redistribute income. When a country suffers a natural disaster, both governments and individuals freely give money to help those involved. We can think about the recession as a similar disaster.

If that does not convince you, ask who is bearing the brunt of this recession. All around the world, youth unemployment has risen by more than unemployment in general. If you asked those who cannot find a job after leaving school or college whether they would be willing to pay higher future taxes in order to get a job today, what do you think their answer would be?

Why do I suspect that this argument is sometimes not genuine? Because some of those who make this case also argue against measures to tackle climate change. Now even if you are sceptical about the science, the potential costs of you being wrong and 98% of scientists being right are so great that if you really cared about future generations you would support measures to reduce carbon emissions. (See Martin Wolf here or Martin Weitzman here.) So when, for example, a recent Wall Street Journal article argued that “we need an exclusive focus on supply-side reform [reducing the size of the state] to promote growth. Luxuries such as family-friendly employment legislation or green initiatives such as the carbon taxes are no longer affordable in the age of austerity” you know something is not right. The biggest risk to the well being of future generations right now is climate change, so what is the point of increasing future growth if the cost is doing nothing to reduce that risk. Of course that combination might make sense if you only care about what happens in the next few decades, but if that is your view then don’t tell me we should avoid a short run increase in debt for the sake of future generations. 


  1. Joseph Grossman3 July 2013 at 05:08

    If the vast majority grasp and support the basic shape of the stimulus solution, and if we live in democracies, isn't it time to shift the analysis to expose the exact and precise mechanisms by which our electoral systems are failing miserably?

  2. Argument number five: we must treat the over-spending as a moral issue.

    Answer: see Shiller column at Project Syndicate (May 31, 2013 'Austerity and Demoralization') and the link to Cameron's Daily Mail piece. Or Krugman blog on why economics is not a 'morality play'.

    Argument number six: the GDP figures pre-crisis were wrong because they had a big housing bubble puffing them up.

    Answer: home prices aren't a component of GDP, which means proper output went uselessly into an irrational housing bubble.

    1. Oooh, one more I forgot.

      Number seven:

      When in the neo-Venetian hall at the University of Birmingham (as some of us thought of Joseph Chamberlain to whittle away at the boredom) the three Party leaders in 2010 in their last leaders' debate did not discuss austerity, Britain’s most senior civil servant Sir Jeremy Heywood is the inevitable outcome:

      “This is not a two-year project or a five-year project. This is a 10-year project, a 20-year generational battle to beef up the economy in ways that we have not seen for many, many decades.”

  3. People are lazy and selfish by nature (for a big part) and definitly not as intelligent as they themselves think they are.

    The majority of the people cannot oversee much of the future (even things that are likely to happen).
    People usually first get active when something has to be done. Governments have had lots of fat on them. But it is no coincidence that now first people in general are asking questios about that. Before it was seen as colateral damage, you can afford.
    In that respect you can not blame the smaller government crowd using the occasion. Simply because when the economy is going 'normal' it won't happen.

    The children issue. People are thinking that their fuutre pensions are already paid for (funded). They are not. Hard to see that most of the people that now work will not see major cuts in their pensions. Debt comes on top of that. Reason why it doesnot come up there is easy to guess. It would reduce pensions of the present pensioners and increase premia.

    Climate change too far away to oversee. 99% cannot make a proper risk assessment of the situation. Next to it being sold completely the wrong way by the organic soybean eaters. It was made political and left (from the 'know it all' variety). Probably a majority of the people get red spots from that whatever they say (irrespective right or wrong) and so you get a natural huge opposition to that with it.

    This is not a perfect world and definitely not a 100% logical one, it comes with all the limitations of the human race (that in several ways is overestimating its own abilities and not only the low intelligence ones do that).

    1. "Next to it being sold completely the wrong way by the organic soybean eaters. It was made political and left (from the 'know it all' variety). Probably a majority of the people get red spots from that whatever they say (irrespective right or wrong) and so you get a natural huge opposition to that with it."


      An argument that proceeds from the idea that one would let the seas boil, the land bake, and allow the end of human civilization because one was embarrassed in an argument is something to expect from a poorly-written supervillain.

  4. It's not just climate change that demonstrates the insincerity of those who profess to care about future generations. Look at how the EMA, the Future Jobs Fund, the Child Trust Fund has been cut. How tuition fees have been raised. Then look at how the State Pension has been made more generous, how pensioners will be able to look to the taxpayer to protect having to eat into their assets for their care.

    It is strange how the party that uses the 'think of the children' argument has so blatantly put the interests of the elderly before the young (probably due to the different propensities to vote and relative size of different age groups).

    But presumably, the tight fiscal, loose monetary mix hurts pensioners. Low interest rates and gilt yields hurt their income. So their self-interest doesn't necessarily support austerity either.

  5. Does the "98% of scientists" include those scientists who are specialists in unrelated fields (and whose opinions are therefore no better informed than the layman) or just those working in the field of climate change (who use essentially the same methodology and therefore unsurprisingly arrive at similar conclusions)? Either way, it surely qualifies for the list of annoying pro-climate-change arguments.

    The essence of science is that we arrive at the truth based on experiment. We do not simply accept arguments from authority. In this case, it is not possible to test the theory of climate change by experiment. The best we can do, is wait and see if things turn out as the "scientists" predict. Even if that happens, they will not but proven correct as they might be by repeated controlled experiments, but it would be good reason to believe in the theory. At the moment, the evidence is far too limited to claim that climate change is occurring as a result of human activity.

    1. Incredible.

      One can easily imagine a similar argument made by a methamphetamine addict.

      After all, it is not possible to test the theory of whether constant use of this drug will eventually destroy my body. Even if my body is eventually destroyed, there is no way to tell whether it was due to drug abuse, as the "doctors" predict.

    2. The correct analogy would be if the first person to use the drug seemed fine after using it for a few months, and the doctors therefore concluded it was safe.

      We only know about the effects of drugs by carefully observing people who take them over a significant period of time. There's still a debate over the effects of marijuana!

      Why do you think drugs are tested on animals? We could just declare them safe and effective based on theory and simulation...


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