Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 21 May 2015

Ferguson tries again

Perhaps stung by the widespread criticism of the way he treated data in his original FT op-ed piece, Professor Niall Ferguson has had another go. This new piece is distinctly better than the original. For example, he now acknowledges that “From 2010 to 2015, average inflation-adjusted weekly earnings fell more than under any postwar government.” Let me focus here on his central claim, which is that the economy did far better than Keynesians had predicted, and that Keynesians have refused to acknowledge this. (There are some other problematic points in the piece, but they are largely distractions from the main idea.)

Rather than get into the pointless business of comparing quotes, let us do this the academic way, which is to see what the Keynesian model says. Recall this is the model that pretty well all central banks use to regulate the economy. Everyone agrees that UK austerity was at its most intense in the first two years of Osborne’s Chancellorship. The UK Office of Budget Responsibility, which does the number crunching for Osborne, calculates using standard (although conservative in the current context) Keynesian multipliers that austerity in those first two years reduced GDP growth by 1% in each year. That is the basis for my calculation that austerity cost the average UK household at least the equivalent of £4,000. The OBR also calculate that overall UK austerity had no significant impact on growth in subsequent years.

Does the data show that Keynesian assessment is clearly wrong? Ferguson includes an IMF chart in his article, and I commend the fact that it uses GDP per head. Unfortunately it also includes a forecast, which is as reliable as most macro forecasts, so just focus on the part that is data. In 2011 and 2012 the UK flat lined, and only started recovering when the drag imposed by austerity came to an end. This is entirely consistent with my and the OBR’s analysis. (For the record, I also said three years ago that we would see a recovery in subsequent years.) Anti-Keynesians like to point to UK growth from 2013 onwards being healthy compared to other countries, but this is also entirely consistent with Keynesian analysis, because if you look at underlying primary balances UK fiscal austerity was much weaker in those years than in the US or the Eurozone.

General government underlying primary balances: source OECD Economic Outlook

In a way Ferguson acknowledges all this, because he lists other potential reasons why UK growth might have been weak in those early years. Fair enough, except that his central claim is that the numbers show the Keynesian analysis of austerity is wrong. But his chart shows that the numbers are in fact completely consistent with the Keynesian story. That does not prove the Keynesian story is right, but it sure does not show it is wrong!

Macroeconomics is a messy subject, because there are always so many things going on. For this reason the impact of policy is often not immediately apparent in the data, and some econometrics is required to sort things out. The unusual feature of the last few years across the UK and Eurozone is that events have largely followed the Keynesian script - no econometrics required. An election result does not change this fact.


  1. Macro-economics is messy. History if anything is even messier. Macro-economists believe you can handle this mess with econometrics and abstraction, historians don't; you have to deal with it head on, and all of it, including a lot of unquantifiable and contradictory matter.

    The last post of Ferguson (a controversial figure) was cynical. His latest, however, is another matter. There are problems with it - it relies too much on forecasts etc as you point out. However, he makes an important point: countries with very high levels of government debt and large volumes of non-performing private sector loans often find it difficult to implement effective macro-economic policy to exit deflation. In the 1930s, Keynesian policies were almost undeniably successful. However, there were strong arguments that prior consolidation in the industrial and financial sectors was a necessary prerequisite for their effectiveness.

    1. The problem is that there are always many things going on at once. The economy is always being hit by a number of shocks, both positive and negative. This includes things like changes in peoples expectations (about inflation, growth etc) which are hard to foresee but can have a large effect on the economy. In concrete terms, even if austerity has a large and negative effect on the economy, this effect can be offset if some unrelated positive shocks occur.

      With this kind of backdrop, what does it mean to as you put it "deal with it head on" ? The kind of approach used by Niall Ferguson means you can pick and choose which events and policies you prefer to explain what has occurred. To put your point on it's head, what if the cause and effect goes the other way round and countries that have trouble creating inflation and growth accumulate large debts as a result?

      Econometric work becomes necessary in order to tease out what actually causes what and how large the effect is. Just because it is hard for the layman to understand doesn't mean we should avoid econometrics.

      Apologies for the overly long reply.

    2. Hugo, econometrics can add some value, but the value of what it adds to the raw data is usually marginal, and conclusions from them taken with much caution. A complex social system has many interrelated variables that are also externally influenced. If we were to say what caused WWI, it was a lot of things that came together. It was the fact that they were interrelated and came together which is what is important. You cannot isolate and suppress factors and say X and Y caused Z. If you do, you do not understand the nature of causation between them. Likewise for what has caused major financial crises.Time series analysis is questionable methodology and you should not put too much weight on it. It should only supplement other analysis. Also never let a theoretical model dictate your analysis. Start with a blank page. Go to the primary historical evidence, and build up the story, piece by piece. Do not exclude anything.

      Ferguson is a controversial historian. Most historians I know are very critical of his work. I would generally agree with them. One thing he has looked at though, is the importance of institutions in explaining industrialisation and growth. For example he pointed decades ago the importance of government bond markets and fiscal institutions in explaining why Britain was the first country to industrialise and the institutional weaknesses that have left many countries behind (Sorry Acemoglu - and it is much deeper than your work- although not as good as many others, including that by economists, sociologists, anthropologists, and others in Britain, who worked on this in the 1960s). Although I think it has become partisan, I would not describe his work as autistic.

      The growth-debt type of causation error you mention is likely to be a gross mistake that an econometrician and macro-economist makes before an historian does; the former will probably not properly understand the context and therefore the true meaning behind the data, and the latter by examining primary historical documentation and piecing together the evidence like a true investigator, is more likely to pick the real causation up and not overlook something crucial.

  2. “From 2010 to 2015, average inflation-adjusted weekly earnings fell more than under any postwar government.” That statement must have had Professor Niall Ferguson choking on his porridge and since the Governor of the BOE has since confirmed , through clenched teeth and before he was in the job that austerity caused a significant fiscal drag on growth. I think you have carried the day Simon. Not sure if it will help us survive the next 5 years, but it allows us to mock from a higher ground.

  3. My two cents or pence. I have a very simple model, which is: the government can use fiscal deficits to improve growth, but it costs debt (both nominal and as a percentage of GDP). If that model is correct, then there is a trade-off, between growth and debt, which means there is no correct answer as to which policy to follow since the answer depends on the value one puts on growth vs the value one puts on debt. So I'm less interested in this "fiscal deficits help growth in the short-term" debate. It seems, yeah, if the government spends money, you'll get better growth in general. If you need to add in the condition "as long as you're at the zero bound", then I can live with that too. If that makes me a Keynesian, then so be it, but I don't think it does. I don't think it does because I value low debt highly and so I usually arrive at conclusions different from Keynesians.

    Do Keynesians dispute this simple model? Would they claim that deficits (perhaps in the zero-bound condition) lead to lower debt/GDP? Always, never, or just in particular cases? If in particular cases what are the determinants?

    1. Your concern about low debt should also include a time frame. Stimulating an economy to full production produces the potential for more tax which could be used to lower debt. And it will certainly increase GDP which would affect the debt/GDP.

      Consider the individual who is out of work but needs a new suit and transportation to find a job. If he values low debt, you could aruge, given your tendency to dislike debt, he should sit at home and save the money that he might spend on resumes and job interviews. Ever hear of the adage penny wise and pound foolish.

    2. @rob sol. I don't think you example works. Your individual might argue, "If I go into debt to buy a suit and still don't get a job, then I'm in worse shape than before. Therefore I shouldn't go in debt" That's entirely consistent; it's just an implication of different values. You or I may not make the same choice, but the individual is not *wrong* except in the sense that he has values different from you or perhaps the majority of people.

      In any case I certainly wouldn't accept a time frame of "the long term". I'm dead by then. (Does that make me a Keynesian?)

    3. Keynesians wouldn't dispute this. As you say, it's a matter of quantifying the cost associated with output losses, and the cost of higher debt.

      But at the Zero Lower Bound, the latter is zero.

      I'm not sure many would agree that it's preferable to incur costs conservatively estimated at £4,000 per household in order to reduce debt on which interest payments are zero.

    4. The cost of higher debt is not zero, even at the Zero Lower Bound. Even if you take a limited view of cost (e.g. as just interest rate payments), then the cost of UK and US debt for instance is not, and has not been during the past 5 years, zero (e.g; looking at the 10-year bond or gilt), although I'm told both the UK and US have been at the Zero Lower Bound.

      "I'm not sure many would agree that it's preferable to incur costs conservatively estimated at £4,000 per household in order to reduce debt on which interest payments are zero." Well you did just lose an election perhaps over this very issue, do don't be too sure.

    5. Anon at 6:13. I'm interested why you "value low debt highly" - I assume you mean government debt. I have written about why high government debt might be costly in the long term, but none of these factors apply very much at present.

    6. SWL, thanks for your reply. On the one hand I don't believe I owe you an explanation. Values don't have to have - and actually usually don't, even if they are dredged up ex post - justifications. But to attempt a reply, I guess it has something to do with a belief that the present needs to suffer the consequences of any advantages it accrues. That's why, for instance, I am against nuclear power; the present has the benefits, and the future suffers the inconveniences of nuclear waste. That doesn't seem to me to be very moral. But that's just hand-wavey, and like I said I don't think there is a justification. I just don't like debt - either personal or government.

    7. @anon 8:09: "Values don't have to have - and actually usually don't, even if they are dredged up ex post - justifications." I.e. I believe that I want to believe, regardless and exempt for any judgment (moral or empirical).

      But let's go further: "I guess it has something to do with a belief that the present needs to suffer the consequences of any advantages it accrues. That's why, for instance, I am against nuclear power; the present has the benefits, and the future suffers the inconveniences of nuclear waste." Well, you might want to believe this, but you are presuming causal relations, which can and should be tested--otherwise, your claim is worthless. Hiding on your "values" are empirical claims that DO require justification. Else they are dogma, or Republican pablum (take your pick).

      Do try to give it a proper go next time.

    8. @Anonymous @10:48. Intertemporal preference is a thorny topic, and the weak-minded would be best to steer clear. There are moral judgments which can be used to justify eating an ice cream now as opposed to eating it tomorrow, but there are other moral judgments which justify the contrary. There is no right and wrong.

    9. Anonymous: Sure, someone unemployed - just as we have unemployed resources in our economy in capital and labor - can just say; i will not bother applying for jobs because there is some cost, and i am adverse to laying on debt. But is that really how you would react if you lost your job?

    10. I understand that is a choice, but i do not know many people - who are not in the financial condition to retire - who would make such a choice.

  4. Anonymous21 May 2015 at 06:13

    Excellent questions, and I hope Simon Wren-Lewis will answer them.

  5. At Project Syndicate, Skidelsky's 'Models Behaving Badly' has it that:

    'Forecasting organizations are finally admitting that they underestimated the fiscal multiplier. The OBR, reviewing its recent mistakes, accepted that “the average [fiscal] multiplier over the two years would have needed to be 1.3 – more than double our estimate – to fully explain the weak level of GDP in 2011-12.” The IMF has conceded that “multipliers have actually been in the 0.9 and 1.7 range since the Great Recession.” The effect of underestimating the fiscal multiplier has been systematic misjudgment of the damage that “fiscal consolidation” does to the economy.'

    And Skidelsky's 'Britain’s Closet Keynesian' goes over the Keynesian position of Osborne's bait and switch from 2012.

    1. No doubt Robert will also respond to Ferguson in due course. But the point I would make is that the multiplier does not need to be greater than one for austerity to have been a mistake: greater than zero is enough. It is all about when to reduce deficits.

    2. Niall Ferguson is still fudging; GDP/capita in GB has not improved in real terms, just in nominal terms since 2007.

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  7. Before we all get too triumphalist let us not forget the great Keynesian prediction failure of disaster if the US fiscal cliff was enacted. The result was a halving of the deficit and a reasonably growing economy. The model didn't work, yet all we have seen is ducking and diving from Keynesians since then.

    1. er... are sure the fiscal cliff was enacted?

    2. to be fair to James, Keynesians said that things would be worse in the US if there was austerity. But the US economy has underperformed and there is still a large gap between out-put and potential. So, what is the problem with Krugman and the Keynesians?

    3. Krugman said that things would be worse if there was austerity, and guess, what things were worse.

  8. James in London: check your facts; know your theory.

  9. I gritted it out to this far in Ferguson's piece before I got up and went for a walk and a fag to calm down.
    "First, public finances were extremely weak, as a 2010 Bank for International Settlements study of trends in debt-to-GDP ratios clearly showed. The baseline scenario for the UK at that time was that, in the absence of fiscal reform, public debt would rise from 50% of GDP to above 500% by 2040."

    This is a famous professor at one of the world's leading bastions of intellectual effort basing his argument on a ridiculous finger-in-the-wind, scare-the-children prediction which is built on the assumption "...that government total revenue and non-age-related primary spending remain (for 30 years!!!) a constant percentage of GDP at the 2011 level as projected by the OECD." ( p.8). The "prediction" did not take into account AT ALL, the effect of debt or debt mitigation on GDP levels.

    Such a "prediction" is considering a scenario so divorced from reality that it is utterly pointless and worthless as anything more than a "Oooh! Look at how big THESE numbers are!" game. For Ferguson to build an argument around them is either idiocy or mendacity. Either way, it's not what I'd expect from a distinguished academic.

    Now, he COULD have said that in 2010, the UK had one of the worst debt:GDP ratios in the world and that was unsustainable. But then if he was an honest academic, he'd have had to get into the discussion of the fact that this can be addressed via a combination of changes to both the numerator AND the denominator, and then he's have been back to addressing the fact (FACT!) that the denominator flat-lined for two years which is precisely the bloody point! But of course, he's not acting as an honest academic. He's acting as a biased polemicist with a personal axe to grind.

    Does Harvard give out chairs with cornflakes packet tokens? Ferguson's piece is barely above the standards of internet trolling. I'm a professor of engineering. If I wrote such a ridiculously lop-sided article as that, basing grand conclusions on piss and wind like Ferguson does, I would be eviscerated by the academic community and hauled in front of my Dean to explain why I was bringing my Faculty into disrepute. Ferguson's use of the BIS baseline "predictions" is analogous to me making an argument predicated on the observation that if an aircraft carried on accelerating at the rate that it does during take-off, it would be able to reach the moon in 5 hours. If we ignore details like drag forces. And the intervening vacuum. It is THAT silly.

  10. I always find this blog interesting, and I've learned a lot here. Some of the comments are brilliant, both in content and wit eg Anonymous 10.08.

    While I find the main ideas of Keynes to be quite logical, is it possible that econometric modelling that is based on these may not be perfect? Could it be that the assumption I understand most models make (that people in aggregate always think rationally and with self-interest) is incorrect?

    The World Bank's World Development Report (referred to yesterday in an article on VoxEU) found three things: people think automatically, socially, and use mental models.

    If true, the implications of this have a lot of ramifications in explaining why predictions made based on econometric models are so often incorrect; why in the face of rational facts people still choose the irrational; and how it is possible to have people do what you want them to do rather than what is best for their self-interest.

    I expect the more mathematically minded might shudder at the introduction of this "woolly thinking" into their nice neat formulae but if they did, might it not help to reduce predictive inaccuracy and thereby aid the wider acceptance of what the Keynesians are saying?

    Well, aid predictions at least. As the report says "In order to make sense of the vast array of information in their environment, people draw on conceptual tools such as categories, social identities, schemas, and taken-for-granted worldviews to derive meaning from situations."

    The anti-Keynesians are clearly driven by a taken-for-granted world view, are mostly of the same social identity, and categorise those who disagree with them as being of a different social identity, thereby making them opponents to be aggressively fought against. Of course, the same might be said for Keynesians I suppose, but that would be conflating Keynesianism with the econometrics based on it, a different thing altogether.

    The article is interesting and worth a read nonetheless.

    1. “I expect the more mathematically minded might shudder at the introduction of this "woolly thinking" into their nice neat formulae but if they did, might it not help to reduce predictive inaccuracy and thereby aid the wider acceptance of what the Keynesians are saying?”

      Speaking as a mathematically minded person, what's struck me about [what I've seen of [the results of]] economic modelling is the *lack* of [evidence of] “woolly thinking” aka “probabilistic thinking” / “uncertainty quantification” in it. Where are the error bars and the confidence bands?

      Not that it matters much in the present context: Ferguson is a merchant of fallacy not a merchant of doubt. An irony meter melting crackpot rather than a plausible contrarian.

  11. Anonymous at 10:08, it is worse still. Of all the bloviating acronyms, the BIS is well-known as the bastion of the most unreconstructed Austerians. I stopped reading at the citation and started laughing.

  12. SWL means well but ...

    Its pointless arguing with Ferguson. Niall is for hire. Someone is paying him to write the stuff or he thinks he will be in with the rich people if he writes it. The only way to deal with him is to pay him more to say something else.

    The Merton College endowment is about £200 Million. SWL could use some of this simoleon to buy Ferguson off. You would have to dress it up as grant of some kind. Offer him £1 Million to spend five year studing the history of Ulan Bator. It would be money well spent just to get rid of him for a bit.

    That it Fartig

    1. "Offer him £1 Million to spend five year studing the history of Ulan Bator."

      Money worst spent than on studying rational expectations models with Calvo Pricing?

      At least Ulan Bator exists.

  13. SWL's problem is that he insists on a rational discussion of macro economics based on reason and facts.

    Niall Ferguson will be having none of that. Take this from CNBC a few days ago.

    “The unexpected results of last week's parliamentary elections in the U.K. have reignited a debate that has been raging ever since the global financial crisis took hold in 2007: spending vs. austerity.

    “On one side of the argument is Nobel prize-winning economist Paul Krugman”

    “This weekend, however, Krugman was on the receiving end of a stinging retort.

    "Shame where shame is due," Harvard historian Niall Ferguson said in a comment piece in the Financial Times on Sunday, adding that Keynesian economists have been "ignominiously humbled."

    (I edited that down, but if you insist on reading it. )

    Ferguson is as Anon 12:01 suggests a media whore. The moment he admits he might have been wrong with his broad brush dismissal of all things Keynesian —he’s worthless to those who consistently expect him to represent their thinking.

    No matter that Reagan’s policy was essentially Keynesian — describing it as “Supply Side” is akin to what the fellows on Westminster Bridge were doing the last time I walked over it. No matter, that as SWL says, that central banks all work through Keynesian principles. Surely they’re not all homosexual or we’d have heard about it from the ever so apologetic Niall Ferguson.

    He attacks serious economist (and other critics generally) in the same smarmy, Keynes was gay, you don’t know anything about anything.

    It’s as though Reinhart-Rogoff had no effect at all on economic policy, not only in the EU but elsewhere — or that the Reinhart-Rogoff conceptual theory suffered from very serious programming errors, data omissions and weird statistical techniques.. Reinhart-Rogoff sheepishly admitted some errors, but none that really mattered.

    What gives Niall Ferguson’s gassy emissions credence is that like Reinhart-Roggoff is that it can be used to justify his essentially silly claims. Just as he can play with the numbers to say what he wants.

    Niall Ferguson does not believe in Keynes at all and doesn’t really have any use for Macro which is prevalent on the right. He believes that Macro Economics as a whole only succeed when a Tory (or Republican) government is in power. And the numbers must support him, therefore they do because he says so.

    Otherwise people might think he’s a charlatan.

  14. Niall Ferguson is just another right-wing hack; get rid of him and 2 will take his place. Someone such as John Taylor would be worse as he is a credentialed economist.


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