Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 20 May 2015

On what I said before

This is something of a personal indulgence, but my excuse is obvious given recent posts.

I always smile when certain people claim that Keynesians said there would be no recovery. There are two reasons. The first is personal. A well known UK economist (clue: someone who the economics editor at a well known newspaper finds it best to ignore!) reminded me of this post I wrote three years ago. Here is an excerpt:

“Good spin is simple, and plays off real events. So the line “we have to reduce debt quickly because otherwise we will be like Greece, or Spain” works, while the response “but the Eurozone is special because member countries do not have their own central bank” is too technical to be an effective counter. In contrast the argument that Wolf and Portes put forward above – why not invest when it’s so cheap to borrow – is effective, which is why it is dangerous. So of course is “austerity is stifling growth”, as long as growth is negative or negligible. However, come 2015, the spin “we have done the hard work and the strategy has worked” will accord with (relatively) strong growth, while talk of output gaps and lost capacity will have less resonance. True, unemployment will still be high, but not many of the unemployed are Conservative voters, and the immunising spin about lack of willingness to work can be quite effective.

Will the strategy, and the associated spin, work? The risk that growth will not be respectable in 2014 must be low: by then consumers and firms should have adjusted their borrowing and wealth sufficiently such that growth can resume.  If there is a chance that it might not be, I expect to see some measures in next year’s budget that do not conflict with the overriding ideological objective, such as incentives for firms to bring forward investment.”

I got two things wrong here. First, I did not foresee the continuing stagnation in productivity, and therefore that unemployment would fall rapidly despite at best average output growth. (Perhaps another piece of Cameron ‘luck’?) Second, I got the example of a budget stimulus measure wrong (we in fact got Help to Buy), because I was thinking like an economist and not a certain politician. But one thing I did not get wrong is that there would be a recovery. Indeed I was if anything expecting a rather stronger recovery than actually took place.

The reason I got this right, and the second reason I smile, is that this has nothing to do with any personal insight on my part. As Paul Krugman explains, I was just using the standard Keynesian model. What amuses me is how some anti-Keynesians seem to think that Keynesian ideas are embodied in the words of certain well known Keynesians, rather than in the journals, textbooks and central bank models. As Paul has rightly said many times, the basic ideas of Keynesian economics have been pretty well vindicated by macroeconomic developments in recent years. This, you might argue, is why they are in the textbooks and central bank models in the first place. 


  1. I think unemployment doesn't matter to Thatcherite voters who are sold on a certain economic policy being good for business, as evidenced by 1980-87, so that shouldn't have affected Cameron's failure or success at the ballot box amongst his type of voter.

    I wonder what percentage of academics and graduates voted for the Tories in 2015: I would estimate that the party would have about 10% of the former and maybe 30% of the latter, which explains much of the standard of what is going on from the Tory side.

  2. I' m still not sure if you were not right about the unemployment situation, I think the political class, both sides of it, has been deft for many years at disguising the true figures. I think both here and in the USA it would now be very difficult to get a true set of figures. How do you count an individual on a zero hour contract, in classical terms it's unemployment, today it's employment so off the register for you. The unemployment figures then look good, but demand and consumption fall because of the insecurity of the worker and the cost on the state rises but on another part of the budget. Which allows the politico's to look good and walk the walk on the economic miracle.
    I also think you could be forgiven for missing the great vote buy in the form of the "pensioner bonds", 600k+ bought , at a future huge cost to the tax payer in the form of interest rate guarantees and payments. Perhaps a thanks from the taxpayer for voting Tory.
    I think we all wait for next quarters growth figures with interest.

  3. Economic reality has a tendency of surprising everyone. In the meantime, away from the textbook wars there is the oil price, food prices, housing supply...

  4. I think we need to be very wary of productivity figures related to the past given the extent of both structural changes, functional technology advances and other things. Also, what about the impact of the extensive regulations of recent years?

  5. "Sir, Sir, Sir!"
    "Yes, what is it, Wren-Lewis?"
    "Please Sir, can I use the school printer to run-off loads of money and everyone will be rich and happy?"
    "I've told you a hundred times before, Wren-Lewis, NO. If I have to tell you again it will be detention."
    "But Sir, this time it is different: this time it will really work.
    I've thought of everything: I've got an equation with two variables that shows it must work.
    Please can I?"
    "That's it, Wren-Lewis, I've told you before: money is a means of exchange, unit of account, and store of value. It's existence does not in itself generate goods or services for the individual to consume, so printing more of it does not make everyone richer, just the counterfeiter.
    It is detention for you, my boy. See me after class."
    "One day, I'll be Teacher and everyone will listen to me!!"

    1. It would be wittier if the point you were making was non-idiotic.

    2. I think you meant to write Friedman, not Wren-Lewis.

    3. It's the dunce's hat for you Anon. Put it on and stand in the corner boy!

    4. That was for the clueless Anonymous, not of course the one above my comment

    5. Grade F for conflating monetary and fiscal policy.

      The Bank of England has already "run off loads of money" to little effect.

      You should read some of Simon's blog posts about monetary policy at the zero lower bound, and how ineffective it is.

    6. Inflation is always caused by lack of real resources and is a function of a *flow* of money, not the stock. Well, if Simon spends the 'school printer' on stuff the economy may price expand or quantity expand.
      "The Bank of England has already "run off loads of money" to little effect. "
      Monetary policy is not very effective anyways.
      No it has not. There is no "printing money." Govt spending always works by crediting bank accounts.

  6. The point is that in a recession the Macro Economists' answer always seems to boil down to 'create more money'.
    This can be expressed in different ways, depending on whether they are 'Keynsian' or not, but always, ultimately, the same answer.
    Silly, really.

    1. Surely Keynesians recommend stimulating the economy in a recession, and paying down debt in a boom? That way you borrow money when it's cheap to do so, and pay it back as it becomes more expensive. Sounds eminently sensible to me.

  7. I didn't understand this:

    "First, I did not foresee the continuing stagnation in productivity, and therefore that unemployment would fall rapidly despite at best average output growth."

    How did the one lead to the other?


    1. It's just a mathematical relationship:

      Output = Labour Force x Productivity

      So in the context of slow growth in output, we would expect slow growth in the labour force and productivity. What we actually got was slow output growth but quite rapid labour force growth (falling unemployment) hence productivity must have fallen.

    2. But doesn't "therefore" in SWL's original sentence suggest that stagnant productivity drives up employment somehow? How does the causal relationship work?

    3. SWL's phrasing is a bit confusing here. I think the therefore refers to what would happen in the context of the relationship between output, productivity and the labour force rather than implying a causal effect. Ultimately, no, a fall in productivity shouldn't cause a fall in unemployment.

    4. Increasing productivity means relatively fewer workers to produce the same output. (Lower employment/higher unemployment). If productivity stagnates, relatively more workers are required for the given level of output than would have been predicted. (Higher employment/lower unemployment).

    5. I see.

      How far can that relationship hold, because at some point output will slow and stop because labour is too expensive because it is inefficient?

  8. "Average" growth after a recession would only normally result in a slow rise in employment, as we would expect productivity to continue to rise, as it normally does historically. Instead we have productivity flat-lining, and "employment" rising much faster.


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