What Carillion tells us about public sector outsourcing

Jeremy Warner, an editor at the Telegraph, once said there are either big state people or small state people. I felt the same way following the reaction to the collapse of Carillion: there are either private good, public bad people or public good, private bad people. Of course, reality is somewhere in between.

Corillion went bust because of cost overruns or delays in three large construction projects. The nature of such projects involve that kind of risk, but clearly the company - despite its size - was not resilient enough to withstand those failures. It did not go bust because of privatisation of public services, unless you think the government should build its own hospitals or roads. If anything, it shows that those contracting out public contracts were getting a good deal.

There will always be public projects contracted out to the private sector. Much of the increase in public investment planned by Labour if it wins the next election will be undertaken by private firms. Getting the contracting relationship right is difficult and fraught with dangers.

The government clearly has questions to answer about why it continued to award contracts after the profit warning, and we need some informed analysis to determine whether the government, as they claim, had fully protected all but one (!) of these projects and will not lose any money as a result of the collapse. As David Allen Green suggests, this smacks of ministerial failure. (The link also shows public procurement can have its funny side.) Also why was the position of the “crown representative” who was meant to be overseeing scrutiny of, among others, Carillion left vacant? The government should also ask whether companies should be allowed to pay large dividends when their own pension fund is underfunded. And why Carillion's auditors, KPMG, gave it a clean bill of health when its balance sheet was already showing signs of stress

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To see what lessons the collapse of Corillion does have for the debate over whether the public sector should privatise certain of its activities or do them in house, we need to go through some of the pros and cons

There is one main benefit of contracting out public services, which is that it can save money. To mention ‘the market’ here is not very helpful, because with one buyer and only a few sellers for something (the contract) agreed once every few years, this is hardly a normal market. [1] It is instead about the incentives faced by managers and workers, both in achieving efficiency and fostering innovation. Managers have a clearer incentive system in a private sector firm to maximise profits, and that incentive is provided by the need to bid low to win the contract and nevertheless make a profit. As Carillion shows, margins on most public sector outsourcing are not large. In that sense Carillion confirms that part of this mechanism is working. A single public sector entity cannot replicate this advantage, unless it too is in competition with private sector firms. In short, competition improves incentives.

One important qualification to this argument involves information. The temptation of a bidding system based on the lowest price is to cut quality. So the public sector has to have a clear means of not just specifying quality in the contract, but of ensuring the contract is being fulfilled once it is awarded. Sometimes politics can get in the way of that happening. For activities where quality is difficult to observe, contracting out is not a good idea.

Another qualification involves the attitude of public sector workers before privatisation. If they, for whatever reason, internalise the need for efficiency and innovation, because for example they can see how both improve the outcome for customers, then contracting out to the private sector will achieve little. The NHS could be a case in point.

A further problem with privatisation is finance. When people argue that public money should not be wasted paying the shareholders or creditors of private firms, they are both right and wrong. They are wrong in the sense that without contracting out the same amount of money has to be raised by the public sector, and so it “wastes” money by having to pay interest on government debt. But they are right in that the rate of interest on government debt is much less than the rate of interest a private firm has to pay on any debt, or in the form of dividends to shareholders. The reason for this is that investors do not like risk: people who lend to the UK government know they will always get their money back, while as the shareholders and creditors to Carillion have just found this is not true for private sector firms.

This is why PFI projects undertaken just so that the borrowing is done by the private rather than the public sector are costly from an economic point of view. It is why it makes sense to exclude public investment from any fiscal rule: fiscal rules that restrict public investment are an open invitation to politicians to undertake PFI type financing. In my view the best constraint on public investment is the expected social return, assessed with the help of an independent body. It is often said that PFI type projects ‘avoids risk to the taxpayer’. Again this is the wrong way round. It is far easier and cheaper for the public sector to take risks than the private sector, so PFI projects are paying far too high a price to avoid risk to the public sector. 

Another problem related to risk is the interrelationship between what the private company contracts to do and what actually happens when government forecasts go wrong, as they always will. This may have happened with the East Coast line “bailout” (but if it was, we should be told), and it did happen with privatising the probation service. Public sector contracting out forces each side to commit to guesses about the future, whereas if everything remains in-house there can be much more flexibility. There is also the cost of having to train more civil servants in the art of writing good contracts.

One further problem that Carillion reminds us of is that privatisation runs the risk of a degree of interruption if the company goes bankrupt. Disruption is nothing new. If privatisation is to have any benefits, the contract from the public sector has to come up for renewal every few years, and if the private sector provider is changed that will involve some dislocation of service.

One final point, which is contingent on what I hope will be a temporary state of affairs. Nowadays the management overheads for private sector firms are likely to be far higher than in the public sector, for reasons that have little to do with management quality. Ben Chu sets out how much management was being paid at Carillion compared to equivalent public sector managers. And what on earth were shareholders doing allowing the directors to relax clawback conditions on management’s pay if things went wrong, which even the Institute of Directors described as “highly inappropriate” and “lacking effective governance”. In truth the public sector is much better at stopping managers using their monopoly power to be paid over the odds than the private sector appears to be.

So the economist’s answer on public sector outsourcing is, it depends: on all the factors outlined above and probably more I have momentarily forgotten. (Like economies of scale and expertise: no one would ever suggest the public sector makes its own paperclips.) Where the balance will be is bound to be case dependent. But it would be incredibly surprising if at least some of the outsourcing undertaken by this government was not ideological rather than evidence based. This suggests that Labour, if it wins the next election, should undertake a thorough independent review when it has all the facts at its disposal. That at least might ease fears that we will lurch from one ideological position to its opposite.

[1] This is an interesting example of a longstanding debate with myself. If you want to claim that much of this kind of outsourcing represents neoliberal ideology at work (which it probably does), and also that neoliberalism is all about the market, then your definition of a market has to be pretty wide. But of course a large firm like Carillion, as Ronald Coase said, involves the large scale supersession of the price mechanism. By which he meant that firms are an alternative to markets, and large firms suppress what would be market activity if it was replaced by lots of smaller firms buying and selling to each other. This is a contradiction at the heart of neoliberalism as market worship: firms are alternatives to markets. 

The imaginary world of small state people

“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”

So said Jeremy Warner (assistant editor of the UK’s Daily Telegraph) last year. Jeremy is a small state person, and I think many other small state people think like this. But the statement is wrong. There are a large number of people - I suspect the vast majority - who do not have any prior view about the size of the state.

In many ways the bipolar view harks back to a bygone age, where - at least in Europe - there actually was a large constituency on the left that wanted a large state as a matter of principle. In the UK that constituency lost all its influence with Margaret Thatcher and New Labour, and it has also lost its influence in the rest of Europe. However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle. George Osborne’s plan for the UK over the next few years is the apotheosis of this neoliberal view.

I think I’m like the majority of people in not having any fixed ideological position about whether the state should be large or small. The state is clearly good at doing some things, and bad at doing others. In between there is a large and diverse set of activities which may or may not be better achieved through state direction or control, and they really need to be looked at item by item on their merits.

My first major problem with small state people is that they are not prepared to look at these items on their merits. Instead they have a blanket ideological distaste for all things to do with government. The evidence that government is ‘always the problem’ is just not there. The idea that private sector activity is always welfare enhancing and is best left alone was blown out of the water by the financial crisis. My second major difficulty with many small state people, like George Osborne, is that they are using fear of a debt crisis (a possibility which for the UK and US is non-existent) to achieve their ends. This is political deceit on a grand scale. My third major problem follows from the second: reducing government spending during a liquidity trap recession does real harm. It wastes resources on a huge scale.

For the UK, the OBR estimates - conservatively - that austerity reduced GDP by 1% in 2010/11, and by a further 1% in 2011/12, so GDP was 2% below what it could have been in 2011/12. As there has been no offsetting fiscal stimulus in later years, and because monetary policy has been constrained by the zero lower bound, this waste of resources will not necessarily be eliminated in subsequent years. So the cumulative cost of 2010 austerity could easily exceed 5% of GDP. That is a colossal sum to waste. The estimated numbers in the Eurozone, where the austerity squeeze continues, are even worse - nearer 10% territory and counting. As I argue in this new short piece for the Economist, the fact that Osborne risks doing the same thing again from 2015 onwards is a sufficient reason not to give him the chance.

Which brings me to a final problem I have with small state people, which is their disregard for the evidence. It is true that most people are bad at acknowledging counter evidence, but those with an ideological conviction are worse than most. A common theme among small state people following Osborne’s Autumn Statement is to ask what all the fuss is about. In his rant at the BBC, Osborne says “I would have thought the BBC would have learned from the last four years that its totally hyperbolic coverage of spending cuts has not been matched by what has actually happened. I had all that when I was interviewed four years ago and has the world fallen in? No it has not.” He remembers it well, because he tried to intimidate the BBC back then as well. The claim of hyperbole is nonsense of course, as Tony Yates sets out, but I want to focus on the ‘world fallen in’ point.

Here is Janan Ganesh in the FT making the same claim in spades:

“[Osborne] has also made the spending cuts he promised without the country turning into a medieval wasteland. This is a deeper intellectual wound to the left than we currently understand; it will change the terms of debate about the proper size of the state long after Mr Osborne has gone.”

With both Osborne and Ganesh the intended meaning is that cuts have been achieved at relatively little cost. They clearly hope this idea will become received wisdom in the media. But is it true? Take the one area that Osborne has earmarked for further cuts: welfare. [1] The argument that the cuts made so far to welfare have been achieved without significant costs flies in the face of the evidence. The number of food banks in the UK has grown massively over the last five years. The Trussell Trust estimate that more than half of their clients were receiving food because of benefit delays, sanctions, and financial difficulties relating to the bedroom tax and abolition of council tax relief. As James Harrison relates in this excellent long article, the government simply denies the evidence. The Economist notes: “Welfare reform was intended to be one of the big achievements of the coalition government. But almost all of the radical ideas promised are turning out to be duds.” These are duds that create real misery. Now maybe this is all just teething problems, but the prima facie evidence is hardly that cuts have been achieved at little cost.

So how can small state people have the audacity to claim otherwise? Perhaps it reflects the power of an ideology that its protagonists want to see no evil. Perhaps it is because those hurt by austerity somehow do not count. But the claim that Osborne’s cuts have been such a success that they will cause a “deeper intellectual wound to the left than we currently understand” is simply delusional. These are fantasy ideas from those living in an imaginary world, while in reality the policies they support do serious harm.

[1] I choose welfare only as an example. It does not appear to be an isolated one. Here is an account of Chris Grayling, prisons and the Howard League, or see Alex Marsh on the UK justice system more generally. Or think of those who suffered from flooding as the government cut back money for flood prevention, while the government still pretends there were no cuts.

The scandal of the austerity deception

I have been on holiday somewhere with understandably limited internet access, so I missed this post from assistant editor of the Daily Telegraph, Jeremy Warner. Forget most of the text, which comments on some recent posts by Paul Krugman and myself, and head to the last two paragraphs. The penultimate starts with this:

“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”

And the final paragraph starts:

“The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.”

There is the old joke that there are just two kinds of people in the world, those who think there are two kinds of people and those who don't. The trouble with following an ideology is that you tend to make this ‘with us or against us’ division on what is seen as fundamental. In these terms I am a non-person, because I have no idea what the ideal size of the state should be (although I suspect within an ideology that defines itself by the virtues of a small state that makes me ‘one of them’). For me the intellectual case against austerity has nothing to do with the size of the state. The key argument I and others are making for those who want a smaller state is that it is folly to try to achieve it in a recession when interest rates are at the zero lower bound.

The problem for ‘small state people’ like Warner is that “there is never any appetite for it in the good times”. I can only interpret this as meaning that in good times people appear to be quite content with the size of the state they have, and will not elect a government which aims to reduce the size of the state. So why are things different in a crisis? Do people’s preferences over the size of the state relative to GDP really change when we are in recession? Or could it be that in the current crisis people are told that government debt is ‘out of control’, and that a reduction in government spending is necessary to bring the nation’s finances to order. Cuts in government spending are being justified by the need to reduce debt and not because of the virtues of a small state.

Reducing the size of the state temporarily to reduce debt, and reducing it permanently are rather different things. There is apparently no appetite for the latter, so why not push for the former as a way of achieving the latter? As a political ruse it sounds very clever, and it is currently working in the Eurozone, US and UK. But it remains a ruse: a giant deception played on electorates across the globe.

So no wonder Jeremy Warner is tired of the austerity debate. As he says “if you attempt to rip big chunks of government demand out of the economy, it is bound to have negative short term consequences.” Seeing the government you support trying to avoid making this admission must be painful. It would have been much more honest to say that the loss of output was worth it for the long term benefits that a small state would (allegedly) bring, but that is not the argument that governments are making – instead it was all about a ‘debt crisis’. This becomes even more painful when the intellectual basis for the debt crisis argument falls away.

Surely this deception is scandalous. The Telegraph played a major role in the MPs expenses affair. Many UK MPs had been overinflating their expenses because they believed their salaries were unjustifiably low because the public never had the appetite to increase them. So the end justified the means. The Telegraph quite rightly exposed this practice, and those MPs were held to account. Yet in financial terms the cost of the austerity deception is infinitely greater. To some the end (a smaller state) justifies both the cost (percentages of output lost) and the means (telling people it is all about a debt crisis). Yet it involves deceiving electorates around the world, which is why no government politician is ever going to be as honest as Jeremy Warner has been.

Fiscal legacies and competence

I’m afraid this is more on Labour’s fiscal record, and the myth that this created a huge mess that current Labour leaders should apologise for. So if you have already been convinced that this is a myth, or if you will never be convinced that it is not, do not bother to read any further. However I will say something at the end about why this issue is so important, and therefore worth returning to.

The key thing to remember is that this debate is all about degree. I have argued (and repeat below) that UK fiscal policy was not tight enough in the years 2003-7, certainly in hindsight, but even given what we knew at the time. As I said before, some of the best myths are based on half-truths. The issue is how serious this fault was. The myth is that this was a mistake of the highest order, which had serious consequences and which therefore requires an apology [1].

Now the thing about myths of this kind based on half-truths is that those who perpetuate them have an ultimate fallback position. This is to switch back from myth to half-truth, and deny that they ever suggested the myth, or perhaps even to deny that the myth exists. Some of the comments on my earlier post have made this move, and Jeremy Warner in a response to my reply to his earlier post has done the same, although I have to add in a very courteous manner. I will return to this point after running through the facts.

One other point to bear in mind is the distinction between wisdom at the time and in hindsight. Any argument that is specific to the fact that we had a financial crisis and a huge recession in 2008 is likely to be in hindsight. So, for example, I have argued that Labour should have aimed for a declining rather than constant debt to GDP ratio, in part because it would have given itself a bit more room for manoeuvre once the recession hit. However I would never dream of labelling a past government irresponsible and reckless for not doing this, because few macroeconomists argued this before the Great Recession.

There are two types of argument put forward as to why the last Labour government’s fiscal record has been something that requires an apology. The first is that it left a serious economic mess that has been costly to clean up. Let’s call that the legacy argument. The second is that it demonstrates incompetence which, unless addressed, future Labour governments will suffer from.

Take the legacy argument first. The most obvious way in which a government can mess things up for the future is by an unwarranted increase in the level of government debt. This the last Labour government clearly did not do: before the recession hit the debt to GDP ratio was slightly lower than when they took office. Of course debt rose subsequently as a result of the recession, but I talked before about why that is irrelevant.

Looking at debt to GDP may be misleading for the obvious reason that it is a stock rather than a flow, and critics of Labour focus instead on the deficit. [2] However it is not so obvious that high deficits automatically represent a legacy problem. Those same critics usually add that Labour wasted money, and if this is the case then a new government can easily correct the problem by curtailing the wasteful expenditure. Everyone gains except those the money is being wasted on, and the new government gets the credit. The argument has to be that this ‘excessive spending’, once made, is costly to reverse. But let’s leave this point to one side, and just look at the figures.

Once again the data does not look promising for the critics. The current balance (which excludes investment spending) was -0.5% of GDP in 2006/7 and 2007/8, which is hardly a large number. Public sector net borrowing, which does include investment, was around 2.5% of GDP, which seems larger, but here zero is not the appropriate reference point. A sustainable deficit is one that leaves debt to GDP constant: to take some round numbers, if the debt to GDP ratio is to be sustained at 40%, and nominal GDP grows by 5%, we need net borrowing of 2% of GDP. So an actual deficit of 2.5% again does not seem that excessive.

But the critics say that is misleading, because the economy in 2007 was at the high point of a huge boom. (The phrase ‘credit fuelled’ usually gets added at this point.) They say, quite rightly, that such a boom will raise taxes, and it is wrong to follow that with higher spending. So was the UK economy in 2007 at the end of a huge boom? Here is the OBR’s assessment of the output gap.

The OBR’s output gap in 2007/8 was 2%, which could just count as a boom, although not huge by historical standards: the mid-70s, the end of the 1980s, and the end of the 1990s are all either larger or more sustained. [3] Here is the OBR’s series for net borrowing, both actual and cyclically adjusted.

Remember that 2% is a rough benchmark for a 40% debt to GDP ratio to be sustainable. The deficits from 2003/4 to 2007/8 were too high, as my paper clearly argues. But are they of a scale that leaves a really difficult legacy for subsequent governments? The obvious comparison is with the mid 1990s. Here we had a cyclically adjusted deficit that reached 6% of GDP, but it was brought down quickly by the then Conservative government. The idea that the deficits just before the recession were so large that they would inevitably create serious difficulties for a subsequent government does not stand up. [4]

So what about the economic competence charge? Here I have no interest in comparing Labour and Conservative governments in general - that is a completely different kind of exercise. What I am interested in, and have written about, is what we can learn from Labour’s record about macro fiscal management.

The first point is that the fiscal rules brought in by the Labour government in 1998 were progressive, both in terms of previous fiscal rules and compared to what was being done elsewhere. These included a ceiling of 40% for the debt to GDP ratio, which at the time few criticised for being too high or constant over time. Against this measure, fiscal policy was too tight in the early years of the administration. The subsequent relaxation can be seen as an attempt to correct that error, which it largely did. Debt was 36.4% of GDP in 2007/8, so correction was not complete: hence, Labour could argue, the fact that the deficit was above sustainable levels. The record shows that the Labour government did respond to fiscal outturns in the right direction. The budgets of 2006, 2007 and 2008 did involve fiscal tightening. [5] So at face value the main mistake the government made, relative to its own rules, was to run too tight a policy in its early years, but it successfully corrected that mistake in later years.

Looking at the actual record more closely, however, and you can see that there were two additional systematic mistakes that were made, which did not require hindsight and which we have learnt from. I go into detail in my paper, but they involve forecasts and cyclical correction. On forecasting, it really was a game of two halves: persistently too pessimistic, and then persistently too optimistic. On its own that is not crucial. What is important is that, towards the end of this period, Treasury forecasts were more optimistic than those of other forecasters, like the IFS or NIESR. One of the documented causes of deficit bias is overoptimistic forecasts by finance ministries, and this looks like a case in point. The second lesson is that looking at numbers ‘over the economic cycle’, as Labour’s rules did, is a problematic method of cyclical correction, for reasons I outline in my paper. Two mistakes, but neither merits a charge of incompetence.

Furthermore, both these mistakes have already been dealt with by the current coalition. As I have said many times, the Conservative party deserves praise for setting up the OBR. I am pleased to have played a very minor role in helping convince them it was a good idea, and it is a great pity I could not persuade the Labour government at the same time. The coalition’s remaining fiscal rule looks at a cyclically adjusted deficit, rather than at deficits ‘over the cycle’. So unless any future Labour administration scraps the OBR, or goes back to ‘over the cycle’ rules (both extremely unlikely), then Labour has nothing left to correct!

With hindsight there are additional lessons we can learn, and the one I have stressed is that we should have a declining rather than a constant debt to GDP target. But you cannot label politicians incompetent for not realising this at the time, for much the same reason as you cannot damn them for not foreseeing the financial crisis. By such standards we are nearly all incompetent. [6]

So neither the legacy nor the incompetence versions of the myth stand up, either with a simple look at the data, or after more in depth scrutiny. But why am I so bothered about this. Why should I care if the Prime Minister says things like:

“This deficit didn’t suddenly appear purely as a result of the global financial crisis. It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years.”

and that the media does not challenge him on this? After all, this is just the kind of thing politicians do - distort the truth by as much as they can get away with for political ends. (With this particular speech, the distortion in one respect went too far, as the PM found to his cost: see here.)

Well, this blog is about presenting the macroeconomic facts as I see them, so when they do not fit a widely promoted political (of whatever colour) line, I should say so. However there is a much more important reason in this case, which is that myths influence policy. This myth is part of a pattern, particularly evident in Europe, of seeing our current problems as being to a significant extent about fiscal excess, and of setting current policy accordingly. So in Europe everything is seen as if it was Greece. (Talking of which, if you want to see what reckless borrowing really looks like, see the chart below.)

OECD Economic Outlook: General Government Financial Balances

Explaining our current problems as being in significant part as a result of fiscal excess helps buttress the policy of austerity, which in a ‘zero lower bound’ recession is completely the wrong policy to pursue.

Myths may also distort policy in the longer term too. I have asked many times why the current coalition embarked on their austerity programme when it was obviously such a risky thing to do. (It was risky because it either relied on the recovery being strong enough to take this deflationary shock, which we all know it was not, or it relied on unconventional and untested monetary policy being able to put things right.) Part of the answer - and I suspect it is a small part - is that some politicians looked back to a previous episode where a Conservative government ignored academic advice, and that was the monetarist experiment of Margaret Thatcher. In this post I looked in particularly at the affair of the letter from 364 economists. The myth on the political right is that events proved Mrs Thatcher right and the academics wrong. The reality is that the verdict on Mrs Thatcher’s economic policy is much more mixed, as I discuss here. If this myth played any part in emboldening the Conservative party to ignore the warnings from economists this time around, then current events show how dangerous macroeconomic myths can be.

[1] As suggested by Janan Ganesh here, for example.

[2] The Labour government, like its predecessor, to some extent used PFI to artificially reduce public borrowing. However the OBR calculate that “If all investment undertaken through PFI had been undertaken through conventional debt finance, PSND would be around 2.1 per cent of GDP higher than currently measured”. So not good, but not that big an issue in macro terms.

[3] As I note in my paper, if you look at the output gap series as currently calculated by the OECD and IMF, you get much larger figures for the size of the 2006/7 boom, and hence for the cyclically adjusted deficit. However, these numbers take a particular view of the productivity loss that emerged after the recession. (In simple terms, the UK’s measured productivity performance shows a sharp deterioration from the recession onwards, and the methodology these bodies use assumes underlying productivity does not change abruptly, so therefore underlying productivity must have been growing more slowly than anyone - including these same institutions - thought at the time in 2006/7.) The same numbers calculated in 2006/7 are much lower. Whether their current view is right or not, it is an argument entirely in hindsight.

[4] Remember the argument is all about scale, and whether deficits of this size created a serious problem for a future government that they keep having to remind us about. To give these numbers some kind of meaning, the increase in VAT from 17.5% to 20% raised taxes by about three quarters of a percent of GDP. Now you could say, quite rightly, that deficits were more difficult to deal with this time around because we hit the ZLB, but again that is an argument in hindsight, and one which is particularly inappropriate for the current government to use.

[5] The 2008 budget did not tighten in that fiscal year, which given the signs of the financial crisis already apparent showed foresight.

[6] Of course Gordon Brown was foolish from a political point of view to first talk up his prudential credentials, and then through a series of minor manoeuvres (see my paper for details) undermine that image. But that is politics, and here I focus on the numbers.  

More on the myth of Labour Profligacy

“Oh boy! There was nothing wrong with fiscal policy under Labour, says top economics prof”

That was the headline on a piece by Jeremy Warner, assistant editor of the Daily Telegraph. He was reacting to this post, which apparently “blogs to the effect that there was no real problem of overspending under the last government”.

But he is puzzled. “By the way, the really weird thing about Wren-Lewis's analysis is that in an earlier post, he seems to accept that fiscal policy was way too loose towards the end of Mr Brown's tenure. Indeed, he had put his finger on the nub of the delusion that took place – Mr Brown began to believe that higher than expected tax receipts represented a structural and permanent shift in the tax base. He could therefore spend accordingly.”

All very strange. But lets go back the post Warner does not like, and look at the third paragraph, which he does not quote. After presenting the data which fails to show fiscal profligacy before 2008, I say “Of course it is possible to find fault, and I do. In hindsight it would have been better if the debt to GDP ratio had been kept nearer 30% of GDP, or even reduced further. But debt to GDP was lower before the recession than when Labour took office, and the current balance was almost zero. Hardly a profligate government.”

That is the point of the post. I was not saying that there was nothing wrong with fiscal policy under Labour, and in the paper I reference I am critical on a number of levels. What I was saying is that Labour’s performance does not justify the myth that its profligacy is responsible for most of our current economic woes. Its not a very difficult idea to grasp. But rather than grasp it, Warner prefers to suggest that I am just inconsistent, confused or worse.

He also plays the arrogant academic card, which is usually a significant tell that you do not want to address the real issue. He says “what really gets my goat about the Wren-Lewis blog is the arrogant suggestion that only qualified academics are capable of speaking the truth on matters such as these.” Funny that I don’t remember writing anything like that. Indeed I was saying the complete opposite: this was not a myth that required any expertise to unravel - you just needed to look at the data. My complaint against the media was not that it was incapable of speaking the truth, but that it was unwilling to do so.

Yet some journalists really do believe the myth. How can they do so, when it is a myth that is easy to unravel? Well maybe the same way they can take a piece of text, and so obviously misrepresent what it says. The same way they can have a headline which is not just untrue, but which the headline writer knows is untrue.