The story presented in much of the UK media is simple and
intuitive. The previous government messed up: they spent too much, and it left
the UK economy on the brink of financial meltdown. The coalition came to the
rescue: clearing up the mess was tough at first, but now it is all coming good.
In previous posts I have shown that this is almost complete
fiction. The increase in the government’s budget deficit under Labour was all
about the recession, which in turn was created by the global financial crisis. There
was no prospect of a UK financial crisis in 2010, which meant that austerity
was not something the government was forced to undertake. Reducing the deficit
could have been left until the recovery was secure (and crucially interest
rates had risen above their lower bound), but the coalition chose to do
otherwise. As a result they delayed the recovery by three years, at great
cost. Even since 2013 we have simply seen a return to normal growth rates:
there has been no catching up of lost ground. In that sense growth under the
coalition hardly deserves the term recovery, and we have seen an unprecedented
lack of growth in living standards. Productivity growth has been non-existent,
yet the government has feted the employment growth that is its counterpart.
The government’s claims of macroeconomic success can therefore
be dismissed without saying a word about the nature of the GDP growth that has
taken place. But what growth there has been is itself worryingly unbalanced, as
a new report discussed here sets out. Growth is too
dependent on consumption, there is not enough investment, and the current
account deficit is very large.
A large part of the media sees their role as supporting the
government’s line, however far from the truth it may be. For whatever reason,
most of the remaining media has bought this line, and failed to expose it as
fiction. Even a headline in the Guardian yesterday talked about “rip-roaring
growth rates of 2013 and 2014” when growth in GDP per head in those years was at best just average, and growth in income
per head non-existent.
It is still commonplace to hear media commentators say that the
economy is doing great, and ask why the government is not reaping the benefit
in terms of political support. In truth the puzzle is the opposite - given how
poor economic performance under the coalition has been, and that this poor performance has hit most people in their
pockets, the real puzzle is why so many people think the government is
economically competent. And the answer to that puzzle in turn lies in the myths
that mediamacro has allowed to go unchallenged. Perhaps the latest
growth figures might begin to dent them, but a remarkable feature of these
myths is that they seem impervious to actual data.
I coined the term mediamacro because I obviously find it
strange that public discourse on the macroeconomic fortunes of the UK economy
seems so different from what the data and simple economics would suggest. For
once I can be the one handed economist that Truman demanded,
because the evidence is so clear and the economics (what little there is) so uncontentious. But mediamacro
has implications well beyond macroeconomics. If the media has been capable of
distorting reality by so much for so long in this case, are there other areas
where it has done the same, and what does that tell us about the health of our
democracy?
Previous posts in this
series
(3) The 2007 boom
“If the media has been capable of distorting reality by so much for so long in this case, are there other areas where it has done the same?”
ReplyDeleteThe MMR scare was like this. Even now you sometimes still see claims that the Wakefield paper gave the media some justification. As if it wasn't always obvious that it was as bad as that R&R paper and/or as if this wasn't published in the same issue of The Lancet.
I too have made the connection with the MMR scare when talking to friends about the way mainstream media doesn't tackle economics in a scientific manner. Indeed I think much of the stuff that Ben Goldacre writes about falls in to a similar category - the likes of the BBC being too concerned about appearing biased to come out and call a fact a fact. Other examples would be homeopathy and climate change. On homeopathy scientific fact is 'balanced' with views from homeopaths who insist it isn't hocum. And of course climate change is far too often presented as merely an unproven theory rather than an observable fact.
DeleteThe common theme in all these areas appears to be that they are issues which the man on the clapham omnibus decides are 'too complicated' and leaves to 'experts'. Unfortunately the 'experts' that the media pick are not always genuine experts so rather than the most accurate/reliable/evidence based theory being promoted it's the one that works best in the media - generally the one that sells the most papers and/or serves the interests of the newspapers owners.
Where do you get your data from? The numbers I have found show a slightly different picture:
Deletehttp://www.parliament.uk/Templates/BriefingPapers/Pages/BPPdfDownload.aspx?bp-id=sn05745
http://www.parliament.uk/Templates/BriefingPapers/Pages/BPPdfDownload.aspx?bp-id=sn05745
In this series the striking thing to me (before the financial crisis hit) is the reckless fiscal expansion under the socialist government of John Major.
Sorry that was supposed to be a reply to another post. Not sure what happened.
DeleteAn excellent exposition. I think Keynesian economics is very hard to explain to the public in political debate and that's why Labour rarely tries to explain it.
ReplyDeletePeter Shore in the 1983 election campaign did put the case for Keynesian demand expansion quite well but he didn't win the argument then.
PETER SHORE:
PETER SHORE (http://www.politicsresources.net/area/uk/pebs/lab83.htm) If at the general election four years ago I had said to you that if you had elected a Conservative government Britain would have three and a half million people unemployed four years later I don't think you would have believed me. You'd've said that that was a a wild political er exaggeration. But of course that has been our experience. And it is er ironic indeed, that the very government that has created this appalling problem for Britain should now claim that governments can do nothing at all in order to reverse the trend. And that it was they're saying. They're saying that Britain is stuck with three and a half million unemployed and that there is nothing that government or anyone else can do about it. But I say that's a council of despair and I don't believe it, and on the contrary I believe that there's a great deal that government can do. Governments are not all powerful, we know that, but the impact of government on the economy, the impact of government on job-creation, is very great. And what I want to do, is to use the resource of government, the power of government, not to destroy jobs, but to create them.
And I believe we can do it. I believe we can do it if we set about bringing into use, all those idle resources of plant and machinery, of capital and of course of people who want to work, who want to contribute to our national life, and who want to help meet the enormous and varied needs of all our people. But in given the depth of our present slump it is government that has got to make the first move. It is government that has got to increase, not decrease, increase its expenditure - at least initially - in order to get the economy moving again. That it was I intend to do. Not a wild splurge, but a clear increase of something of the order of six percent expenditure in our first year and yes, some cut too in the great burden of taxation that we now have to face.
Of course Mrs Thatcher says 'where's the money coming from?' but the answer to that you know isn't difficult to find. We will need to borrow, we need to borrow I reckon about six billion pounds a year. More than twelve billion pounds a year have been leaving Britain to be invested by the managers of great institutions - your money and my money in pension funds and insurance companies - in the industries and in the economies of our competitors overseas. I want only about a half of that sum to really start the first major move to get Britain back to work. And in addition to that, I want to see the massive oil revenues from Britain turned to productive use, to refurbish and strengthen our industries throughout the land. We certainly need to. Now I believe the government can, as I say, change the whole prospect, providing they have the support of the people, of this country. We've got to change, there is an alternative, and we must seize it on election day.
This comment has been removed by the author.
ReplyDeleteWhat democracy? What Britain? What work?
ReplyDeleteEconomists should be far humbler when (leaving aside the poor record on predicting the financial crisis) none seem to have anything useful to say on what the limits of government debt /GDP are, or how much money should be printed as opposed to created via fractional reserve banking. Instead we get the Krugman - "spend more" mantra. How much more?
ReplyDeleteWe all know the government should (and did) spend in a recession. But how much? For how long? The coalition has increased spending every year. What is the evidence that spending even more would create growth? What is the wealth creation engine in the UK? If the government pays twice as much in benefits, or builds a totally useless high speed rail line, why is that a good thing? Did the fact the Labour government kept the growth engine on track by never running a balanced budget post 2000 and paying council officials and others £100K+ not have any impact at all? Why was that better than just printing some money and sending everyone a cheque?
Blaming the media is a bit funny when on the contrary the media allows lines like "we can't afford austerity" from the likes of Labour, SNP, Green, and to a degree Lib Dems to go unchallenged.
Economics is in crisis. Does it even exist as a discipline?
"The coalition has increased spending every year"
DeleteAre you Sir/Madam in the same reality as the rest of us?
And, of course, every serious economist can give you quite accurate figures on when to increase spending (and when not), and, roughly, by how much. You have detailed empirical studies estimating the multiplier (which is how many times the increase in spending is added to the GDP) in different conditions. It's basic math from there. Krugman's "mantra" is to increase spending in a slump, not just to increase it always (Keynes said exactly the same years earlier), and he knew in advance that the Obama stimulus in the US was too small. That's because he did the numbers, while you, Sir/Madam, are just puffing pretentious hot air.
It has been interesting to watch the Tories and the rightist media cut into the UK's armed forces. I believe the clichéd reason for this is that there are 'very few votes to be gained from the military'.
ReplyDeleteIt does show, perhaps best shows, how deep the politico-economic ideology of the last five years has become.
Looking through your blog it is also remarkable that you see it as your role as an Oxford academic to say "vote Labour" (party before country etc). Is that because the economic content is quite thin?!
ReplyDeleteI write posts when I think I have got something interesting to say that isn't being said by everyone else. Mostly, given my expertise, that is macro, but not always. If my posts have any implication for voting, it would be do not vote for this government (directly or indirectly). Given their macro record, it would be very strange if I suggested anything else. And, while we are at it, the empirical evidence that I have seen suggests the BBC is biased to the right
Deletehttp://www.newstatesman.com/broadcast/2013/08/hard-evidence-how-biased-bbc
This is bizarre. Are you really trying to suggest we should take the BBC Trust, university lecturer and New Statesman view on BBC bias?! Why not the Rupert Murdoch / Times / Sun one? Did you see the softball nationalist party interview with Evan Davis (Sturgeon) and compare it with the hardball one (Farage)?
DeleteSecond, as Pseudonym says below, how can you be intellectually satisfied with your arguments when they are so vague? The coalition has increased spending every year. How much should it increase further? Does your analysis of Labour spending include the enormous increase via pay increases in public sector pension obligations (not accounted in the debt figures) or the insanity of PFI (started by the Tories, brought to its apotheosis by Brown)?
It is because the level of intellectual debate is so poor that we are in trouble, don't blame the "media". There is more than enough blame to go around. Why didn't Thatcher or Blair introduce pre-funded public pensions as they have in Sweden or Canada to address demographic issues? What do we do in a democracy when more than half voters are net recipients of government largesse over their lifetimes? You really need to try harder!!
Yes, you should take the view of academic research, which actually looks at properly compiled data, over (self) selected individual opinions.
Delete"rightist media"?! The BBC is now the preponderant news organisation as the print media is in decline. And the Guardian a key news website. The BBC is not an impartial player - Labour seems in favour of even higher licence fees, UKIP would cut by two thirds - and as has been regularly noted is "institutionally" leftist.
ReplyDeleteFinally the comment just above about the armed forces is just bizarre. The coalition cut the military so it would not have to cut the NHS or benefits. There are few conservative votes in the NHS or among benefit claimants, certainly fewer than in the military...
ReplyDeleteI must say having studied myself at Oxford, very often it makes me feel ashamed. Heath, Balls, Cooper...
Prof Wren-Lewis, this is an excellent summary of the falsehoods that have been spread since 2008.
ReplyDeleteIt seems that somewhere in the world of mediamacro, the word 'unbiased' was redefined so that opinion is considered with the same weight as fact, and the role of 'reporter' recast as conveyor, rather than as investigator.
This can be clearly seen in the BBC where many of the most challenging news programs have been watered down (eg Newsnight), refocussed (eg Panorama) or shortened (eg Dateline London), and 'balance' is considered to have been attained by having taken the views of opposing extremists over shades of the centre because the extremists can always be relied on to engage in a shouting match where facts go out the window. And if for heaven's sake any facts are in danger of being mentioned, you can be sure the interviewer will interrupt so they remain hidden.
You are absolutely right. The health of the British democracy is not what it was.
I disagree with you a lot about the value of particularly post-1978 macro. But this is a great post. You have put the argument across very well indeed - I hope it is heard where it counts. Austerity during a slump is an affront to very basic macro-economics which few sane people can disagree with. Macro went off the rails during the Great Moderation and I do strongly believe a ahistorical and philosophically dubious agenda to link macro with micro played a role in not putting macro-policy under enough scrutiny. And this played a role in poorly conceived macro-policy, part of factors leading to 2008. But right now for democracy's sake, the basic Keynesian message needs to get across.
ReplyDeleteI think you could dig a little deeper into the political economy here. In particular the intellectual roots of austerity and anti-Keynesianism (the role of Barro, Lucas, Sargent and Fama) and the role of the City in calling for austerity policies (and why it does) and its influence over party politics, political discussion and government policy.
ReplyDeleteI have highlighted the role of the City, and its economists, on a few occasions:
Deletehttp://mainlymacro.blogspot.co.uk/2014/01/on-city-economists-and-ft-survey.html
and in my London Review of Books article. Part of the problem is that for the media City economists are so easy to use (always available, able to talk about the latest data, in London etc).
Thanks SImon, I will follow those up. But a key part of the question is WHY does the City hate government deficits? Honestly they do, and always have even if leads to more economic growth and demand for funds, and therefore rising yields? Well I just read Lars Syll's blog who quotes Kalecki:
Delete"Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness."
A fascinating thought. No-wonder they dislike Keynesian economics. They dislike it having such a prominent role in the bond markets - so they want it to step back - after they have been rescued of course. Perhaps this is the answer? It makes sense - its about power. Mind you some CIty firms do very nicely out of their privileged access to the Government bond market. Easy job, largely routine work for big money. But perhaps very large scale bond purchases by the central bank means this privilege has to be shared around more?
What both the City and the Tories both like for sure are low taxes. Wait and see, when the country recovers you can be sure they will reduce taxes. The City will ask them to do reduce taxes and continue to cut the deficit. The Tories will see reducing government expenditure, the deficit, and taxes as means to enable a reduction in the role of the state.
DeleteSimon - thank you for this lucid and well argued series. It's hard not to agree with the Keynesian position of advocating fiscal stimulus in a liquidity trap (provided there is a runway of capital projects lined up for the government to spend money on at short notice, which may be a practical difficulty). A couple of points:
ReplyDelete1) I think you let Labour off the hook a little too easily. According to the ONS, national debt rose from 29% of GDP in 2002 to 37% in 2007, reflecting increased government spending on projects like PFI hospitals etc. As a Keynesian, shouldn't you be regretting the fact that this figure didn't come down during these boom years? Then, in 2007, Labour committed to the findings of its Comprehensive Spending Review, which bound them in to increased spending levels across the board just before the financial crisis, and then stuck to them even when tax receipts fell off a cliff between 2007-2010. Surely these factors contributed to the creation of a larger than necessary deficit in 2009?
2) The efficacy of increasing government spending in a recession is well established, but had the deficit risen to 15-20% of GDP in 2011 there is at least an argument that investors/businesses (perhaps fuelled by the rating agencies) would have pulled their capital out of the UK. They might have done so based on a misunderstanding of basic macroeconomics, but they might have done so anyway. Fiscal stimulus relies on the assumption that the economy will grow in the short-mid term future. But I understand it to be unprecedented for a developed nation to transition into economic growth whilst running a deficit in excess of 15% of GDP. How do you respond to this?
3) I believe that the political landscape in the UK is such that beginning fiscal retrenchment in a later period of more stable growth is likely to be very, very difficult. Politicians always have elections around the corner, and a government would have to show considerable bravery to raise taxes/make spending cuts just as the economy appears to be on a good run. My sense is that there would simply never be a 'good time' to take the unpalatable steps required to close the deficit in a boom: governments would kick the can down the road and then, when the next crisis arrives in the cycle, our economy would be in an even worse state. How do you counter this?
1) In my paper on fiscal policy under Labour, I did say that it would have been better if they had kept debt to GDP at 30%. But that was in hindsight - neither I or virtually anyone else said that at the time, and their fiscal rule was for 40% (which, again, hardly anyone objected to at the time). But you are quite wrong about 2009 - they were right to keep spending, because it reduced the size of the recession.
Delete2) Read my New Statesman article for more detail on this. If investors had stopped buying UK government debt, the Bank of England would have just bought more of it. Nothing would have happened, apart from QE being a little larger.
3) I just do not buy this argument. Governments have often reduced debt in good times.
If things are as bad as you say they are, and that the population is fooled by "mediamacro" into thinking things are actually much better, then there is no hope.
ReplyDeleteIt is funny, though, to see you and your readers exasperated with the IEA, when I see it as never having been less influential. One problem with them we can both agree on is their poor grasp of monetary economics, their Austrian-macro is truly terrible. The Adam Smith Institute chaps are much better on macro, but sadly they too are still way less influential overall than in years gone by. If they were more influential NGDP-targeting might be taken more seriously by those in power.
Gosh - we agree on two things, the IEA and NGDP targets! I do not know what has to happen to get a central bank to try NGDP targets - perhaps a huge fail with inflation targets? Or just maybe, when a 20 year continuous recovery gets us back to pre-2007 GDP trends, and some people say couldn't we have done this a little quicker?
DeleteI'm an non-economist who finds Prof WL's economic analysis persuasive and credible; although there must be arguments for austerity around, I haven't yet discovered any that I don't find transparent or that he hasn't answered somewhere or other in his blogs. Of course, that might just mean I don't understand the arguments, but a citizen can only decide on what they know and can work out, so I'll be voting against austerity on Thursday.
ReplyDeleteHowever, I disagree about the pro-austerity tendencies or biases SWL sees in non-tabloid media. Labour and the Liberals are also promoting austerity, albeit diluted; until recently no party in Parliament even admitted there was an alternative. Given that all the parties have been shouting about the deficit and debt for five years, what's the BBC or the Guardian or the Indy or ITN or the FT to do? I wouldn't say a journalist's job is to seek out academic economists, however plentiful they are, just to tell us that the Conservatives are wrong and the LDs are wrong and Labour are wrong and... are all wrong on this.
It seems to me that Milliband and Balls took the decision in 2010 not to nail this lie; and so the economic agenda was set. (I'm not saying Labour's strategy was a mistake - even after Thursday, we won't be sure of that!)
Of course I think the tabloids and their naked propaganda are disgusting, and I suspect the Times and the Telegraph, both of whom are finding it increasingly difficult to tell the difference between news and opinion, are no longer papers of record; but we still have good living journalism in this country.
Robert Loughrey
If politicians ignore the facts, should the media? In addition, I've often written about the 'forgetting to mention the deficit' episode, because this was not an occasion when the media just followed what politicians did. Miliband gave a speech where he left out a paragraph about the deficit because he wanted to focus on other issues, like inequality, and he was taken to the cleaners for it.
DeleteSimon, your analysis is missing a crucial element - qui bono? Why did the coalition go along the path of reducing welfare safety nets while carpet bombing the social economy? You almost make it sound like an error in judgement, like a slight mismanagement due to incompetence, when it's exactly the opposite. These policies have been tremendously effective for their key beneficiaries, the wealthy few.
ReplyDelete“Given that all the parties have been shouting about the deficit and debt for five years, what's the BBC or the Guardian or the Indy or ITN or the FT to do? I wouldn't say a journalist's job is to seek out academic economists [...] ”
ReplyDeleteThe BBC at least has a remit. It certainly is their job.
As a layman (and hopelessly unqualified to argue with the likes of you and Krugman) I can see that increased investment as opposed to austerity would boost demand during these down periods, and also that government borrowing isn't automatically a problem. However, at what point does a deficit require attention? At what fraction of GDP does the debt level become too high?
ReplyDeleteThe EU has defined both of these (although they have rather demonstrated their fallibility) with a deficit of 3% and a debt to GDP of 60%, well the UK went into the recession already busting both of these targets during a boom period. Does this not restrict scope for stimulus or are these targets irrational? What targets, if any, would be rational?
Finally, economists don't appear to consider where government money gets spent in these circumstances, is it just as worthwhile to increase public sector pay or pensions or welfare payments as it is to build infrastructure? Does it matter where it gets spent? Would it have made sense to slash welfare and borrow to fund huge cuts to rates and corporation tax?
The EU's 60% figure was made up: there is no science behind it. To answer the too big question, you first have to answer the what size is best question. There is no generally accepted answer to that in macro. However what macro does say is
Delete1) Its a long term, not short term issue
2) Debt should be gradually reduced (if need be) towards that optimum
3) Unless interest rates are at their lower bound, when you should ignore the debt issue.
On your last, they do, but these are mostly micro and distributional issues
Thanks for responding.
DeleteI'm still not clear on whether there's a debt/deficit level that would require cuts, had the coalition government come to power facing double the problem, a well over 140% debt and a deficit running at 20% would that have required action? Or double it again?
Is there any point where you would have accepted that spending cuts were justified?
I tried to answer this question here:
Deletehttp://mainlymacro.blogspot.co.uk/2015/03/austerity-nick-rowes-not-so-silly.html
This is bizarre. Are you really trying to suggest we should take the BBC Trust, university lecturer and New Statesman view on BBC bias?! Why not the Rupert Murdoch / Times / Sun one? Did you see the softball nationalist party interview with Evan Davis (Sturgeon) and compare it with the hardball one (Farage)?
ReplyDeleteSecond, as Pseudonym says below, how can you be intellectually satisfied with your arguments when they are so vague? The coalition has increased spending every year. How much should it increase further? Does your analysis of Labour spending include the enormous increase via pay increases in public sector pension obligations (not accounted in the debt figures) or the insanity of PFI (started by the Tories, brought to its apotheosis by Brown)?
It is because the level of intellectual debate is so poor that we are in trouble, don't blame the "media". There is more than enough blame to go around. Why didn't Thatcher or Blair introduce pre-funded public pensions as they have in Sweden or Canada to address demographic issues? What do we do in a democracy when more than half voters are net recipients of government largesse over their lifetimes? If interest rates are at their lower bound, how do you know they will stay there? You really need to try harder!!
I'm sorry, some of this is very poorly argued. Either > 50% of people are net recipients from <50% of net payees, or <50% people are net recipients from > 50% of net payees. Given the prior distribution of wealth is extremely concentrated, it's natural that redistribution involves the many giving to the few rather than the few giving to the many. This isn't politics, it's just maths. You ask the loaded question "What do we do in a democracy when more than half voters are net recipients of government largesse over their lifetimes?" but fail to give any reason why this is a question worth asking.
DeleteAlso a question on previous slumps. You show the sluggish recovery this time in a chart elsewhere on a blog. What did government spending do in 1930-34? How about Latvia in the recent recession? What about Iceland? How does government spending impact incentives to work or to care for one another?
ReplyDeleteWhat is the impact on working people of significant immigration? How do we make the EU a democratic organisation? Were you in favour of us joining the euro? Should we actually join the euro now? (The fact noone dares to recommend it makes me think maybe we should!)
ReplyDeleteLet's not ask difficult questions, let's blame the media.
' The story presented in much of the UK media is simple and intuitive. The previous government messed up: they spent too much, and it left the UK economy on the brink of financial meltdown. The coalition came to the rescue: clearing up the mess was tough at first, but now it is all coming good.
ReplyDeleteIn previous posts I have shown that this is almost complete fiction. The increase in the government’s budget deficit under Labour was all about the recession, which in turn was created by the global financial crisis.'
Your assertions here are false. Here are the net debt numbers and corresponding debt GDP ratios taken directly from last week's public sector finances release for the period from1997/1998 (£ billion, %)
1997/98 358.6 39.3
1998/99 357.8 37.5
1999/00 349.1 34.6
2000/01 316.4 30.1
2001/02 323.1 29.3
2002/03 354.9 30.3
2003/04 393.6 31.7
2004/05 448.1 34.3
2005/06 490.2 35.4
2006/07 526.7 36.0
2007/08 652.6 42.9
2008/09 2,132.2 144.1
2009/10 2,245.3 145.6
2010/11 2,261.8 141.2
2011/12 2,185.0 132.6
2012/13 2,211.9 130.6
2013/14 1,975.2 111.4
2014/15 1,796.0 97.3
Simple arithmetic, that an Oxford professor ought to be capable of, confirms that GDP grew at 3.861% a year over the first five years while debt to GDP fell 10 percentage points. This is not surprising as the socialists followed the previous government's financial plan in this period.
Now look at the period from 2001/2 to 2007/2008 - the final financial year before the 'financial crisis'. GDP increased by 37.95% ~ 5.51% a year ~ in this six year period. At the same time the ratio of debt to GDP rose from 29.3% to 49.2%, with net debt increasing at the rate of 12.43% a year. from just £323.1 billion to £652.6 billion.
It is unarguable that the (unprecedented during peace time) splurge in public spending in the second period drove excessive output growth. The 'boom' was brought low not by others' behaviour but by reckless spending by the socialist government of the day. In time honoured style it ran out of other people's money to spend.
You cannot seriously contend that fiscal policy before 2008/2009 was not highly expansionary and expect to be regarded credibly as a 'professional' economist.
The figures you are using include public sector banks rescued in the crash. No professional economist would use those. If you exclude them, the 2007/8 figure would be 36.7. You just cannot spin a deficit of 2.7% of GDP, at a time when everyone thought the output gap was zero, into a 'highly expansionary' policy, unless you get the numbers wrong of course.
DeleteYou seem intent on making yourself ridiculous. So be it.
DeleteGDP growth over the five years from the end of 2001/2002 was 5.82% a year while debt, with none at all being issued to finance insolvent banks, grew at 11.56% a year over the same period. You cannot seriously contend that that is not a highly expansionary.fiscal stance. Has there been a more expansionary fiscal policy over a five year period in the UK in peacetime?
Now let us turn to your magical debt that sort of exists and sort of doesn't. Why, people will ask, in 2007/2008 was it necessary to preempt another £94.4 billion of taxpayer wealth - in addition to the other needless and wasteful expenditure already racked up - in order to finance insolvent banks? Of course! It was because the government's deficit financed boom had pushed asset prices higher encouraging financial institutions into unsound lending and leading directly to the first run on a UK bank in 141 years. Doubtless you were all singing the red flag over brandy in Hall that evening.
Needless to say, while you are confidently able to exclude that additional debt burden from your ratios, heaven forbid you would use actual data rather than the kind that you make up yourself, that debt does retain its one salient characteristic - that of being repayable. Yes, creating a liability of just about £1,500 for every man woman and child in the UK just in that year alone.
It is trite to say that from a balanced position, or even from a coherent position such as the one the socialists inherited in 1997 and, in essence, maintained until 2001 there would have been scope to use fiscal policy to counter an economic contraction. Unfortunately the socialist government had already committed itself to an inexorably higher spending path that constrained its (and the incoming government's) ability to borrow any more hence the resort to money printing.
The present government has performed excellently in the last five years to put the UK back on track economically and with continued sound policy debt to GDP is on a clear downward track. Despite this, net debt (of the kind that has to be repaid not the kind that can be ignored by biased academics) still stands at more than £28,000 a head - more than most people earn in a year - and will continue to rise for a number of years as the legacy of that period of socialist profligacy works its way through the system. Growth potential is necessarily limited by such onerous burdens as people must provide for higher taxes in future in order to repay that debt.
The OBR looks at debt excluding public banks, as does everyone else. I really think you should stop.
DeleteI demonstrated that your argument was incorrect. You objected that the data I used was the wrong data. I used the data you said was correct and again demonstrated, unequivocally, that your argument was incorrect.
DeleteNow you offer no counter at all. It is clear that that is because their is none.
Referring to your first reply you seem to be saying that the socialist government was running a deficit of only 2.7% of GDP in the period before the recent recession.
Here is the data for net borrowing (excluding borrowing to finance insolvent banks) as a percentage of GDP
1997/98 1.66%
1998/99 -1.24%
1999/00 -4.17%
2000/01 -5.35%
2001/02 0.23%
2002/03 7.58%
2003/04 8.03%
2004/05 9.71%
2005/06 8.44%
2006/07 7.01%
2007/08 7.32%
2008/09 13.91%
2009/10 16.05%
2010/11 12.25%
2011/12 9.53%
2012/13 9.21%
2013/14 7.02%
2014/15 5.88%
Clearly borrowing was much more than 2.7% of GDP throughout the period 2002/2003 - 2007/2008. Mean borrowing as a proportion of GDP is 8.01% in this period.
Doubtless you will now claim that the ONS data is incorrect.
The plain truth is that the socialist government ran a reckless fiscal expansion for at least six years, creating a short term economic boom that failed spectacularly but entirely predictably in 2008.
Where do you get your data from? They don't match the ONS data I found:
Deletehttp://www.parliament.uk/Templates/BriefingPapers/Pages/BPPdfDownload.aspx?bp-id=sn05745
The striking thing about this series is the reckless fiscal expansion under the socialist government of John Major.
Well you might endeavour to pre-empt the question but your data indeed look like nonsense to me.
DeleteAccording to your most recent post debt rose by a cumulative total of 57% of GDP (I reach that by adding up the net increases from 2002/03 to 07/08 inclusive.) According to the first post you wrote debt was at 42.9% of GDP in 07/08, and at 30.3% in 02/03.
On what planet does 42.9 - 30.3 = 57?
Quite often, when semi-intelligent people look at data, they do so with a mind to reinforce their 'priors'. If it turns out that said priors are subsequently reinforced, then their capacity to critically asses the data is not quite so high as when they are not.
DeleteI suspect that MRE might want to actually look at this data a bit more critically, and having done that, revisit her/his priors.
JD
DeleteThank you for your question. As noted I have used the most recent ONS public finance data which was released last week and is published in
http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-359025
The data seem to be consistent for example 2013/14 net borrowing (excl) = £98,479 billion c/f your £98.5 billion.
I retrieved GDP from the published GDP net debt GDP ratio and calculated the net borrowing GDP ratio from that. Clearly I made some error doing that. The correct data is
0.65%
-0.47%
-1.44%
-1.61%
0.07%
2.30%
2.55%
3.33%
2.99%
2.52%
2.69%
6.82%
9.95%
8.41%
6.89%
7.07%
5.56%
4.73%
which should be is consistent with your table Mr Wren Lewis's 2.7% figure.
The fact is that there was a deficit led expansion at a time of strong growth (as well as ignoring the impetus off balance sheet spending). In my view 2.7% of GDP is an enormous boost - being more than GDP growth itself in most periods.
Your point about fiscal policy under the Major government is salient. Major's government was managing recovery after a deep contraction exactly as, I'm sure, Mr Wren Lewis would advocate and they are the kind of numbers one would expect to see - essentially returning to structural balance at the end of his term. The less said about Mr Major's monetary stance at the time the better.
Well done for spotting my mistake and thanks again for pointing it out to me.
So it's not 8.01% per year debt increases, but 2.7%. Thanks for correcting your small typo.
DeleteNow how about a similar analysis of debt increases in the Major years?
Magnus
DeleteThe 30.3 and 42.9 are correct. Mr Wren Lewis objected to my use of the data including borrowing to finance insolvent banks. Excluding that borrowing the later number reduces to 36.7.
Magnus
DeleteI think I've pretty much covered that in my reply to JD. I'd add that the 1990 recession was much more manageable simply because the budget was in balance going into it. In fact debt was being repaid in the 1988 and 1989. That's the position the socialist government would have been in in 2008 but for its recklessness in the previous half dozen years.
ok, so now we've done our maths, we agree that debt rose by a whopping 6.4% over the 5 years between 2002/3 - 2007/8. To me this looks like SWL's characterization of this period, with the benefit of hindsight, as being somewhat loose, but in no way some sort of reckless expansion.
DeleteIt does not take too much effort to characterize the public debt increases in the Major years (going from around 26% to 40%) as the same, and indeed quite plausibly worse.
MRE,
DeleteDebt was being repaid in the late 80s because of oil receipts and privatisation revenue. Labour did not have this income stream, at least not to the same extent.
The right way to interpret our net debt position at the end of the 1980s would be to compare us with Norway, where oil revenue was being saved. There, debt levels were negative (aka their sovereign wealth fund). So why is it that we still had 26% debt even though we had this huge bonanza?
The Conservative wholesale give-away of State assets below market prices indeed gave them a tidy income stream to finance their tax cuts, and of course also managed to buy them a shed-load of votes. To my mind the degree of fiscal irresponsibility in this period dwarfs that in the New Labour period.
Magnus
DeleteNo. Debt (excluding borrowings to finance insolvent banks) rose from £354.9 billion at end 2002/2003 to £558.2 billion at the end of 2007/2008 - an increase of 57.3% over the period equivalent to 9.48% a year.
That increase was around £3,200 per head - an enormous additional - I stress additional - burden in an economy where even at their peak in 2007 incomes per head were around £20,000.
Magnus
Delete'Debt was being repaid in the late 80s because of oil receipts and privatisation revenue. Labour did not have this income stream, at least not to the same extent....'
I don't have data to hand to verify your claims. Having experienced the whole period my instinct is that tax and other revenues were probably more favourable in the 1997/1998 - 2009/10 period than at any other time in my life. There were certainly plenty of asset disposals in this period. I'd have to do a lot of research to assess your idea.
Looking again at JD's table I see that the debt GDP ratio actually fell as low as 24.2% in 1990/1991 - my recollection was that it was that it never got anywhere near as low as that! It all seems a very long time ago now.
Thanks for your interest.
Even if we resort to nominal terms (which is your best chance - even though it is highly misleading), debt increased by about 60% between 02-03 and 07-08.
DeleteIt increased by about 130% between 1991 (when it was 151.30) and 1997 (when it was 347.00).
Let's be very generous and allow Major 50% of his increase to deal with the end of the recession (which ended in 1991). He's still more profligate than the 'socialists'.
Given your ability with numbers, you will not be surprised I am not inclined to trust your instinct! Oil revenues as a % of GDP certainly peaked in the 1980s. My (in this instance imperfect) recollection is that privatisation revenues peaked prior to 1997. But I would concede that this needs some more concrete numbers.
DeleteMagnus
DeleteSo there's no doubt my position is not that deficit financing is inherently bad or that there is some absolute limit on debt assumption. My point is that the socialist expansion of the last decade was pro cyclical and that's what did for the economy. Excessive financial leverage was a wholly predictable symptom of an unjustified - emphasis unjustified - deficit led boom. The notion that it was all the fault of some big boys is just hooey.
My recollection is that the Major period pretty much allowed endogenous spending/taxes to rise/fall and fall/rise at their own paces. How long it took was how long it took. I'm happy to be proved wrong but I simply can't recall any material fiscal interventions at all through that whole period.
"My point is that the socialist expansion of the last decade was pro cyclical and that's what did for the economy. Excessive financial leverage was a wholly predictable symptom of an unjustified - emphasis unjustified - deficit led boom. The notion that it was all the fault of some big boys is just hooey."
DeleteThis is hilarious.
The first part of the first sentence is correct in an accounting sense, though as we've established the numbers are quite small relative to what happened under Major, and moreover there is no way that the administration knew at the time where they were in the cycle.
But as for "that's what did for the economy" my word that is a leap of faith.
I love the idea that the financial sector is some sort of passive victim here. Government spending "led to" excessive financial leverage - well maybe, if the financial sector is criminally unregulated. (Hint - it is not immediate that the policy implication here is to set limits on government spending.)
This argument is hooey. e.g. as we've already established the fiscal expansion in the Major years was in the same order of magnitude in real terms, and yet there was no apparent problem of excessive leverage in the late 1990s.
Fiscal expansions occur quite regularly. Financial crises, at least in this country do not.
e.g. Major's fiscal expansion was achieved not via activist spending, but by activist (and not 'endogenous') tax-cutting. The basic rate was cut, A new lower band was introduced, and corporation taxes were cut. Check this graph from wikipedia:
http://en.wikipedia.org/wiki/History_of_taxation_in_the_United_Kingdom#/media/File:U.K.-Tax-Revenues-As-GDP-Percentage-(75-05).jpg
Do you notice anything unusual about UK tax revenues? This was most certainly not a passive accident.
Magnus
DeleteGood afternoon.
I neither said nor suggested that the financial sector was any kind of 'passive victim'. The period saw very large loan demand growth. Some institutions lent too much and/or wrote too low quality business leading several of them into insolvency. It was rising income that drove credit growth and that rising income was largely attributable to reckless public spending spending increase.
I don't understand what point you are trying to make when you talk about setting limits on government spending. Perhaps you meant to write 'it is not immediately obvious' in which case I agree. However monetary policy needed to be much tighter if the deficit led boom was not simply to flow through into excessive credit growth.
Mr Major was out of Government in the first half of 1997 having operated a policy that returned balance and allowed surpluses to be run from 1998 through 2001 bring the debt ratio down from 39.9% at the end of 1996/1997 to 29.3% in at the end of 2001/2002. In fact the socialists committed in their first term to adhere to the Major government's fiscal plans in order to persuade the electorate that they were no longer financially irresponsible. By and large those plans were followed hence the outturn. What growth there was at the time was productivity driven and not the result of government pumping money into people's pockets. Excess leverage was to be seen at that time but it was not attributable to consumer credit expansion.
Thank you for the tax link. I can now remember that now and of course it was entirely sensible to reduce taxes for cyclical reasons at that time although I suspect the policy was influenced by other things too.
Sargent was asked by a journalist after he won the Nobel Prize in 2011 "are current deficits sustainable". His answer was "the budget constraint (!) will make it sustainable". He could have said "in a depressed demand economy with a liquidity glut, it is not the immediate issue". But, no. Who needs enemies in the media?
ReplyDeleteMagnus
ReplyDelete'Given your ability with numbers, you will not be surprised I am not inclined to trust your instinct! Oil revenues as a % of GDP certainly peaked in the 1980s. My (in this instance imperfect) recollection is that privatisation revenues peaked prior to 1997. But I would concede that this needs some more concrete numbers.'
I seem to recall looking at such a long run analysis recently. My guess is it may have been in the Red Book the other week. I'll have a look tomorrow.
So, to get back to the subject of this post, last night we saw the apogee of mediamacro on the Question Time election "debate".
ReplyDeleteFirstly Cameron waves, in Chamberlain-like fashion, the infamous Liam Byrne Note ("There is no money") as if it were meaningful in any sense other than Byrne is an idiot.
Then Miliband (rather bravely) refuses to confess to Labour over-spending in the previous government and is called a liar by the audience, or "greeted with incredulity" as reported on the morning news.
Not much sign of progress, then ...
Simon
ReplyDeleteThis is slightly off-topic, but have you written anywhere about Japan's economy and its national debt? As an economics novice I look at Japan and am puzzled as to how it can maintain a combination of (1) Debt-GDP of 227%; (2) a budget deficit of 7.4% of GDP; (3) a 'quadruple dip' recession since 2008 on the one hand; and (1) comparatively low bond yields; (2) low unemployment; and (3) a current account surplus on the other hand.
This would appear to me to be fundamentally contradictory data. Should the combination of high national debt and erratic economic growth be a warning to the UK? Would the UK be able to keep its bond yields as low as Japan's if it allowed its national debt to increase to, say, in excess of 150% of GDP? Does the fact that Japan has a current account surplus and the UK has a large deficit make the economies impossible to compare?
Apologies for the somewhat crude/rudimentary nature of this enquiry!
Hi Simon - I seem to remember you writing something countering the old 'fixing the roof when the sun shines' meme. Am I right? I think it dealt with how, when and if it is a good to run a surplus. Could you point me to the post that dealt with it, or if I am remembering it wrongly could you write some on this in another post?
ReplyDelete