Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 3 August 2015

Is deficit fetishism innate or contextual?

In a couple of interesting posts, Jonathan Hopkin and Ben Rosamond, political scientists from the LSE and Copenhagen respectively, talk about ‘political bullshit’. They use ‘bullshit’ as a technical term due to Princeton philosopher Harry Frankfurt. Unlike lying, bullshit tells false stories that pay no heed to the truth. Their appeal is more to common sense, or what Tyler Cowen calls common sense morality. At a primitive level it is the stuff of political sound bites, but at a slightly more detailed level it is the language of what Krugman ironically calls ‘Very Serious People’.

The implication which can then be drawn is that because bullshit does not reside in the “court of truth”, trying to combat it with facts, knowledge or expertise may have limited effectiveness. The conditions under which this might be true, and the extent to which information technology impacts on this, are fascinating issues which the authors briefly discuss. But what makes their discussion even more interesting for me is that they use what they call ‘deficit fetishism’, and in particular the stories that the UK government told before the last election, as their subject matter.

In the case of fiscal policy, deficit fetishism as bullshit involves appeals to ‘common sense’ by invoking simple analogies with households, often coupled with an element of morality - it is responsible to pay down debts. The point in calling it bullshit (in this technical sense) is that attempts to counter it by appeals to facts or knowledge (e.g. the government is not like a household, as every economist knows) may have limited effectiveness. Instead it might be better to fight bullshit with bullshit, by talking about the need to borrow to invest, or even that it is best to ‘grow your way out of debt’. (If you think the latter is nonsense, you are still in the wrong court: the court of truth rather than bullshit. As long as the phrase contains what I have sometimes called a ‘half-truth’, it has the potential to be effective bullshit.)

If for the sake of argument we accept all this, I want to ask whether deficit fetishism will always be powerful bullshit, or whether its force is a symptom of a particular time, and what is more a time that may by now have passed. This, rather than discussions of the technical merits of particular fiscal policies, may be the crucial political discussion that needs to take place right now for all those in Europe that want to put an end to needless austerity. (In the US deficit fetishism, and also austerity itself, seems to be taking a breather or having a prolonged rest: which may depend on the forthcoming elections.) Just to be clear, I’m not discussing bullshit more generally, but just the appeal of the particular example of deficit fetishism.

At first sight deficit fetishism seems to be innate, because it appeals to the basic intuition of the household and the morality of good housekeeping. However households also borrow to invest (such as in a house), and most people understand that this is what firms also do. The reason why the bullshit involving paying back borrowing may have been particularly powerful over the last five years is that this is exactly what many households have also been doing.

Although the Great Recession may have started with a financial crisis, its persistence despite low real interest rates is often put down to what many economists call a balance sheet recession: individuals and firms cutting back on borrowing (or saving more) over a number of years. That process has been particularly evident in the US and UK, with sustained increases in the aggregate savings ratio. However that process now appears to have come to an end. As individuals start to borrowing again (or at least stop running down their debt), perhaps they will become more tolerant of governments doing the same.

To this we could add an obvious external factor. In 2010 and the following two years, deficit fetishism seemed to be validated by a superficial view of external events. The difficulties that some countries were getting into because their governments had ‘borrowed too much’ was top of the news night after night. In that context, is it any wonder that most people believed the bullshit?

One final indication that the power of deficit fetishism is contextual is what economists call deficit bias. Before the Great Recession, there was a tendency in many countries for government debt as a share of GDP to rise over time for no justifiable reason. Fiscal rules and then fiscal councils were created largely to prevent this. It is difficult to square this phenomenon with the idea that deficit fetishism is always powerful.

Many political parties on the centre left in Europe (such as the UK) currently seemed resigned to deficit fetishism remaining a powerful force that can sway elections. So, if you cannot beat them, join them (and never mind what is good macroeconomics). This assumption at the very least seems debatable.


  1. What I find puzzling is the lack of, or total absence of articles in supposedly intelligent left of centre newspapers like the Guardian and Independent that spell out loud and clear that everything we hear from Tory politicians about the national debt and the deficit is total, complete, 100% proof bullshit.

    Maybe those newspaper editors think that if they did blurt out the truth, everyone would then ask why the Labour Party doesn’t also blurt out the truth. To which the answer is perhaps that Labour daren’t because Tory bullshit is so convincing, and that “cowardice” as you might call it by Labour would make Labour look feeble, which would lose them votes.

    1. Prior to the election, the Guardian ran a long article by Krugman, in which he laid out the details of the minor disaster that GB has endured.

  2. Deficit fetishism has crowded out all alternatives from the Overton window. It takes some effort to change that. Not possible for a politician on campaign, or in a few soundsbites, without running the risk of instant ridiculisation by the deficit fetishist mainstream.

    Who's job is it, to explore and explain things that are not obvious in the mainstream world view? Certainly not politicians.

    1. I disagree with this. In the UK academics did argue against austerity, but this gained virtually no traction in the media because it was not adopted by the three main UK parties. Among the non-partisan media, if a point of view is not adopted by mainstream political parties it is almost automatically branded as a fringe view.

    2. I don't believe it isn't possible for politicians to counter this mainstream idiocy and make the deficit fetishist idiots the ones who run the risk of ridicule but of course it is harder than it should be when the Bubblethink Broadcasting Corporation isn't doing its job.

    3. Perhaps, post 2007/08 failure of Neoliberalism, a certain amount of experimentation is going on?
      Certainly Martin Wolf in "The Shifts and the Shocks" expected experimentation as the old models had failed.

      Apparently, Ernst and Young use the same modelling as the treasury. I suppose you've already written to your MP and asked for more specifics on the "Long Term Economic Plan"tm, and insisted they pass your questions to the "Minister Concerned" - that, by law, should elicit a reply (from the Civil Servants in the Treasury).

      I suppose a completely contrary Neo-Keynesian view could be Neo-Feudalism.
      Perhaps that is a "more efficient" system than Neo-liberalism ?

      In any case, the owners of genuine production (as opposed to virtual production, eg. the derivatives "markets"), will be highly resistant to any redistributional change.

      Does it help to see FIAT currency as anything other than another commodity?
      What gives such a currency any credibility (seeing as it is created by FIAT)?

      Perhaps, when it comes down to it, it's a question of efficient geographical trading.
      ie. some areas have an inherent advantage in trading a given commodity, purely because of the physical resource within that politcal boundary.

      Looking forward to your response.

    4. i do not think that the old models failed; they were ignored

    5. Ordoliberalism is another choice.
      Perhaps the UK prefers Neofeudalism, as it's the most efficient way to launder resource from ex-colonies?
      eg. no need for much military, as it's just sucked up by human nature?

  3. In the US, Krugman is reporting that we may get a dash of austerity this fall just as the Fed starts to raise rates. The Republicans might shut down the government again, this time over the funding of Planned Parenthood, a reproductive rights organization.

    Why we can't have nice things: budget deficits and inflation.

    Why can't you raise taxes in the face of inflation? Shadow secretary Leslie who is backing Yvette Cooper says that Jeremy Corbyn's QE for the people plan would be inflationary.

    More growth would help with the budget deficit and you could raises taxes further to slow the economy if need be.

    So the Bank of England is providing the stimulus, they can't resort to arguments over austerity and budget deficits. So instead they turn to inflation.

  4. Sixty odd years ago when serving in the Army, the fount of all wisdom, the drill sergeant used to tell us not gently but firmly that Bullxxxx baffles brains. However, if an officer was on parade such language could not be used. An offender would be described simply as a lying piece of filth. Whether philosophic economists have advanced the concept and full meaning is debatable.

  5. It appears to me that, in the US at least, deficit fetishism is indeed contextual.

    For Very Serious People, the concern over deficits its a function of the size and recent change in size of annual deficits. This might seem like an intuitively logical and prudent way to behave, until one realizes that such a reaction function is a recipe for pro-cyclical budgeting, which is a completely illogical and imprudent way to behave.

    For the GOP, the context is which party holds the White House. If the President is a Democrat, then Republicans are suddenly deeply concerned about deficits. If the President is a Republican, Republicans are unconcerned about deficits, because somehow their tax cuts will work magic and balance out their deficits with rapid growth (supposedly).

    It would be great if there were a strong faction promoting counter-cyclical budgeting as a general practice. However, there isn't. The Democrats aren't opposed to the notion, but they seem too cowed to actually advocate for it.

  6. When we talk about morality in economics we often are talking about whom we can blame to feel good about ourselves. Blacks , Greeks, single moms , hobos, gypsies, it's a tired tale.

    My beef is this, politicians don't even try to explain macro. Liberals are right to attack Wall Street, but that's low hanging fruit.

  7. Satanic Ritual Abuse was another bullshit story from the past. It never disappeared, but it did recede into the netherworld of conspiracy theory.

    And people never called it out as bullshit until it began to threaten things they held dear: in my city, the press credulously reported an SRA story as true until allegations were made against a local TV station, at which point the bullshit became clear to all.

  8. But there is a very big grain of truth in "deficit fetishism": that both government and trade deficits in general lead to more borrowing, and in particular to *pro-cyclical* borrowing, and therefore to a significant worsening of the resilience of an economy to shocks.

    This is a point made with compelling arguments by M Pettis in his book "The volatility machine", and the "Economists" systematically disregard, about balance-sheet fragility.

    Of course responsible, limited, counter-cycling, "lucky" borrowing to finance deficit spending can be a very good idea, especially if within the context of a national policy of limiting balance-sheet fragility.

    But there are very many examples of the opposite happening. And then one must consider the alternatives: just suffering less-than-optimal conditions during a recession, versus a suffering the consequences of a potentially catastrophic national bankruptcy or devaluation.

    Sure, middle class and upper income residents can invest in protecting their personal wealth from such events, usually by exporting wealth to countries that do have "deficit fetishim". but for lower income residents national bankruptcies or devaluations can have devastating effects. Perhaps cumulatively less-then-optimal post-recession periods cost more than a shorter is much larger shock due to national bankruptcy or devaluation, but those shocks tend to hit disproportionately the poor and low income earners as many of them are close to personal bankruptcy.

    1. Except, as we've seen in history (post-WWII for example) and in the present across the developed world, large countries with independent currencies have enormous borrowing capacity.

      Further, we know from the same history, and from simple theory, that such countries don't have to suffer "catastrophic" bankruptcies or devaluations, as they can simply have moderate inflation/devaluation that is anything but catastrophic.

      So we're suffering "less-than optimal conditions," namely high long term unemployment that comes at an enormous human cost and is a detriment to potential in the medium term, to mitigate a risk that isn't very risky.

      Further ... we're doing so at a time when deficit cuts are largely self-defeating anyway, since they are offset by reduced tax revenues and increased transfers from diminished output.

      So, I don't think the grain of truth in deficit fetishism is actually all that large.

    2. «Except, as we've seen in history (post-WWII for example) and in the present across the developed world, large countries with independent currencies have enormous borrowing capacity.»

      That's a complete joke: Argentina would like to borrow in their pesos, Cambodia would like to borrow in their riels, and nobody is sort of willing to do so. If you wan to lend a few dozen billion dollars to Argentina or Cambodia in their own currency, please go ahead!

      Conversely, "deficit-fetishist" countries like Germany can borrow at -0.25% in a "foreign" (one that they don't control) currency like the euro. Norway can also borrow at -.25% in their own currency but only because it has real liquid (oil) wealth to back the value of that currency.

      It is one of the common delusionary conclusions of those who misunderstand MMT (which is a sound description of monetary matters) that issuing own currency is a magic money tree as in "enormous borrowing capacity". The latter happens when there is little chance of capital losses due to default or devaluation.

      More precisely bankers operate in one of two modes: when there is a giant credit boom created by a "core" country they don't care whom or at what conditions they lend to, they care only about making the sale; otherwise they look at both the risk of default, for debt issued in a foreign currency, and the risk of devaluation, for debt issued in own currency.

      «such countries don't have to suffer "catastrophic" bankruptcies or devaluations, as they can simply have moderate inflation/devaluation that is anything but catastrophic.»

      Just look at greek government borrowing interest rates and drachma exchange rates in 1985-1995.

  9. I don't think the household comparison actually gets to the heart of why deficit fetishism is so convincing. People associate hard times with the siege of winter, which thousands of their ancestors dealt with in the same way - by rationing their consumption. I think it is this, not learned behavior around household budgeting, which is the source of the 'gut feel' we are concerned with. In order to combat this, appeal must be made to some equally powerful metaphor.

  10. As the old epithet goes: bullshit baffles brains.


  11. It seems to me that most people who preach against deficit fetishism in today’s world have not really thought through what it means to simply increase deficits in order to solve our employment problem. Specifically, they have not clearly thought through or explained under what conditions the full employment deficit that results from eliminating unemployment by increasing deficits will lead to a decrease in debt relative to income over time as opposed to an increase in debt relative to income over time.

    I do not know very much about the situation in Europe, but it seems to me it is going to take more than deficits to solve our employment problem in the U.S. in the absence of a decrease in the standard of living of the vast majority of our population. See: and

    1. The Fed can cap interest rates at a %.
      Remember interest payments are spent, which generates tax.

  12. I don't know the historical origins of 'black propaganda' i.e. lies, 'grey propaganda' i.e. half-truth half lie, and white propaganda i.e. selective truths but they tend to be terms that have found their most thorough analysis at times of war.

    Perhaps Vince Cable was right when he said in 2010 that as a country we need to pretend it is war time to improve the economy, just not in the way he practiced.

    When Krugman is talking about American presidential elections he likes to cite evidence that the economic performance 6 months before the election has been crucial in deciding which candidate wins. For example, Krugman blog April 15, 2011, 'Do Issues Matter For Elections? A Test':

    "Now that Republicans have voted for the Ryan plan, big tax cuts for the rich, ending Medicare as we know it, and all, we may have a chance to test a major proposition in political science. What I hear from my colleagues in the next building is basically that issues matter very little; election results are determined by whether the economy is worsening or improving in the year, or maybe even the six months, before the election."

    But in the UK that did not hold for our 1997 election, in which the economy had been doing well after the ERM crisis for years, and still Major went down big.

    I'd say if I were looking to remove the Tories from office, I'd hope the EU referendum breaks them and their newspaper versus business backers asunder.

  13. The points you make are helping to bring us closer to understanding some of the complex reasons underlying people's attitudes to public debt and deficits. And when, and when not, to use rational arguments. From what you say, it's worth exploring some further paradoxes linked to the different attitudes people have to similar subjects, depending on the role they are performing. To take your ‘contextual vs innate’ categories, it may be useful to distinguish between the attitudes of people as consumers and as voters. As voters, they may not make the same choices and may be open to different arguments :
    - as investors in housing, or borrowers to finance a house purchase, people may think they have made the right calculation about the debt they are taking on relative to their income (even if it is many multiples of their annual income in a way which commentators about public finance would describe as profligate, risky and 'unsustainable'). But when it comes to 'the country as a whole' , why should they trust politicians (who fiddled their expenses, admit they lied, said one thing and did another etc...) to decide something which is much bigger and potentially damaging if the whole economy goes wrong ? As voters, this group of people might be amenable to arguments related to 'growing out of debt', or the good sense of borrowing at very low interest rates. But they may not trust them coming out of the mouths of politicians whom they suspect will 'wreck the economy'. The messenger may be as important as the message. This may explain part of the success of the SNP anti-austerity message.
    - as borrowers who are struggling to reduce debt from maxed out credit cards, people will feel guilty, perhaps resentful that they had to borrow on credit in the first place, and defiant - no amount of argument relating to low interest rates is likely to be convincing, nor is one about growing out of debt. 'if I'm struggling to do this, why should i have to pay more taxes and let the government off the hook?' may be the sort of feeling which dominates. They may not even trust themselves with money, they certainly don’t trust the banks nor the politicians who bailed them out. As voters, the debt-reduction argument is overwhelming. The consequences of the banking collapse are playing out in people's attitudes in ways which we may not yet understand.
    - as holders of student loans, the only hope is to grow out of debt. So this argument is attractive. But again it depends if you believe the politician who says that they can deliver growth. If it just looks like a debt-financed money creation plan, it may not convince. Arguments related to specific investments may be more convincing. But people may not have much faith in the quality of public investment decisions - it depends if you can believe what the money will be spent on, and the benefits it will bring.
    So to explain Macro, it might help to think Micro, at least just for a while.
    You have hit on something else, though, which may become more important - explanations linked to the sectoral financial balances of the economy. People may understand the implicit threat - if everyone is trying to cut their debt at the same time, and exports aren't doing so well, then what does that mean for the success of the plan to reduce my own debt ? what might it mean for my own future income to repay the mortgage ? could the government not take a bit more of the slack just to help tide me over until things get better ? Financial balances may be easier to grasp than other macro arguments.

  14. ST is exactly right with regards to the US. Our very serious people believe in big deficits when we have Republicans in power and small deficits when we have Democrats in power. Democrats tend to spend money by giving money to poor people, those in the bottom 99% or so. Republicans tend to spend money on tax cuts for the top 1% or so.

    I think you find a very similar pattern elsewhere. When the party that spends money on the top 1% (or so) is in power, the very serious people, basically the rentiers and those who fellate them, insist that there is nothing better than a big deficit. When the party that spends money on people in the other 99% (or so) is in power the very serious people insist that the nation should be running a surplus.

  15. The economics of anti-austerity and deficit denial are conceived essentially to try to recreate the economic conditions which existed during the financial bubble and are every bit illusory as the economics of the financial sector which created it in the first place.

    1. The difference is that the government should start paying down the debt once the economy is using the factors fullly. What happened earlier was allowing the econnomy to grow a bubble even though the economy was growing rapidly.

    2. All that should be done is to get back to full employment of the factors and then the government should start paying down debt. And how about ensuring that banks force borrowers to put down 20% minimum on the purchase of a property.

    3. not exactly, the idea is to get the economy to fully utilize the factors and then have the government switch to austerity to pay down the debt.

    4. not exactly, the idea is to get the economy to fully utilize the factors and then have the government switch to austerity to pay down the debt.

  16. I think it's easier for academic economists to be relaxed about deficits than actual politicians making actual decisions. The simple fact is that borrowing like a bandit in a recession *is* counter-intuitive. It's much easier to get over that if you are removed from the fray.

    It's like when a ski-instructor tells you to lean forward to stop your skis pointing straight down-hill. You (sort of) believe him when you're standing still, but it's hard to bring yourself to do it as you start careering down a steep slope. So this bullshit is hard to beat.

  17. Is any one here, with time to explain me this, please?

    From the article:
    "In the case of fiscal policy, deficit fetishism as bullshit involves appeals to ‘common sense’ by invoking simple analogies with households, often coupled with an element of morality - it is responsible to pay down debts. "

    #1) I see this as fractal type of phenomena. For example, a person earns, saves, consumes/invests. The households make exactly the same decision. The organizations (for profit or not) make exactly the same decision. Why governments can not do it?

    #2) The "only" variation from the person to the governments is "SIZE". Regardless what Pamela Andersson says about size ☺, I think that even the size in this case might not matter if we think in relative terms. Of course the unit of study for a person even though smaller in terms of size of the aggregate it is however of equal relative importance for the person as it is for the government: the "income and debt" of person represent "ALL" the person can get on the same way the "tax, dividends, debt" represent of the government represent "ALL" the government can get.

    Please, educate me on this because I want to understand how my view is "wrong".

    1. One person's liability is another person's asset, we can't all save at the same time.
      Pretty picture here:

  18. Blah blah blah...verbal diarrhoea! 'Deficit fetishism', 'austerity', 'ordoliberalism', 'neofeudalism' etc... looks like mutual masturbation to me. Watch Yuval Noah Harari's TED lecture to understand the way we invent illusive words, ideas and scenarios, then act on them as if they were true. None of the above commentators knows the way the world works; the poor suckers are simultaneously victims and perpetrators, prolonging the current political Theatre of Crass Stupidity!

    1. Haha, yep, I know wankers when I see them - so here's a link to a TED talk... (!)

  19. RE: The article heading the page: why does a central bank need to be independent?

    Indeed, independence is a recent innovation : the Bank of england was under the auspices
    of Government for centuries.

  20. Two issues:
    For families, it makes sense to run down savings or increase debt in bad times - consumption smoothing. The family analogy just doesn't work to start with.
    I have the impression that for many really well-off people the government deficit was the crisis. It was not a result of the crisis but the deficit = the crisis.

  21. Greetings from Finland. Here in Finland a term "rehnism" replaces "bullshit"; "rehnism" means that must one must turn around everything a person says to get to the truth. "Rehnism" is named after ex-commissar Olli Rehn, who himself is called Olli "contra-indicator" Rehn: if Rehn said Greece is doing better, it implied to those in the know that Greece is faring worse and it will show in a couple of weeks.

    An excellent example of "rehnisms" with which Contra-indicator Rehn assaults the public is Szu Ping Chan´s article Eurozone condemned to permanent crisis without reforms"

    According to article, Rehn does not see euroarea becoming a transfer union where stronger economies pay for weaker economies. Eurozone/EU already is a transfer union where both surplus- and deficit countries transfer money via different "help-packages" to the banking system of the surplus countries. Just think where all the money shoveled to Greece´s aid ended up.

    That - transferring money to the banking system - is the stability Rehn talks about. If the banks were made to write-off all the bad loans they´ve given ie. if banks were forced to pay for themselves of their self-inflicted losses, that would be instability to Rehn. To wit: there will be no stability in the eurozone/EU without continuous flood of "help-packages". And "stability" will be paid by forcing us to accept the "structural reforms" with which Rehn means stagnating/ cut wages, lower social security, smaller pensions, longer workweek, shorter vacations and the rest of the toolkit.

    Like in Greece... where, says Rehn, political turbulence has led into economic crisis. Political turbulence was created by economic crisis, not the other way around. Rehn also says that Greece has not done economic reforms. Not so. Greece has done more economic reforms than almost any other country. For detail see for example "Excessive austerity, not lack of structural reforms is holding back investment in Greece" by Andrew Wyatt, head of IMK, Institut für Makroökonomie und Konjunkturforschung.

    Rehn also states that the debt and deficit rules he helped to to enforce should be matched by policies that promote employment growth and investment. How? Rules of the Maastricht Treaty and ECB´s inflation target outlaw active fiscal policies that could help to reduce unemployment!

    Rehn refers offhandedly to stronger Banking Union as a means of creating a more stable eurozone. Rehn does not mention Financial Stability Board´s release "Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution" in which it says (hidden in pr-speech and codelanguage) that if the Too Big To Fail -banks start falling apart, they will be recapitalized out of uninsured debts meaning that in the case of SiFi´s banktruptcy looming in the future, deposits will be rendered as investments that can be used to recapitalize the bank. Deposit is bank´s debt to depositor. Bail-in means that bail-outs will be handled via direct debiting from your account.

    I will not go and study in detail what "rehnisms" Rehn had on Finland´s situation. I am convinced that You already see my point and are amply lightened about the quintessence of "rehnisms"- and have figured out that Rehn isn´t the only politician to strew "rehnisms" around.

    Instead I leave You smiling. Rehn tells a joke: He is rejoicing that after Greece´s PM Tsipras´ resignation, Greece now has finally a chance to implement similar reforms Spain, Portugal and Ireland have done. I wonder, whether Rehn means tax loopholes such as Ireland has, or does he mean taxation such as in Spain and Portugal where retired Finnish persons with "remarkable merits in industry" and even more remarkable pension, go to avoid paying taxes.

    Riikka Söyring


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