What British austerity?

Ken Rogoff is back in the news with a FT piece that defends the Cameron government’s fiscal policy. Here’s something that caught my attention:

According to the debt panglossians, UK leaders watched as the economy stagnated, rationing stimulus out of a baseless concern over credit risks. Even though the UK ran one of the largest deficits of any advanced country, the panglossians say it should have borrowed more. Perhaps, but their logic is based on a shallow reading of the evidence -and on amnesia about recent risks to eurozone stability.

I believe the size of the UK deficits is an underreported story.  I did a number of posts on this last year, beginning in January 2012.  At the time, here were the three biggest budget deficits in the world (in 2011, of those countries covered by The Economist):

1.  Egypt  10% of GDP

2.  Greece:  9.5% of GDP

3.  Britain:   8.8% of GDP

Here are the 5 largest deficits for 2013:

1.  Egypt  13.0% of GDP

2.  Pakistan   8.8% of GDP

3.  Venezuela   8.6% of GDP

4.  Japan   8.3% of GDP

5.  Britain  7.6% of GDP

BTW, the US is 4% and the eurozone is 3.3%.  Britain really does have a huge deficit.

Even at the time I knew the reply would be that the budget was actually quite contractionary on a cyclically adjusted basis.  I suspected that excuse was weak, but now we know with almost 100% certainty that it is flat out wrong.  And that’s because the Keynesians totally misjudged the nature of the UK recession.

Even by the beginning of 2013 the UK was hitting record employment levels, month after month, while the US lagged 3 or 4 million below the peak.  So why did the Keynesians think the UK was so depressed? (Matthew Klein say “Many economists” (guess who he linked to) say it’s worse than the Great Depression.)

They were wrong because they looked at real GDP.  But that’s the wrong variable!!!!  And the reason is simple:

NEVER REASON FROM A QUANTITY CHANGE.

They were trying to figure out the size of the demand shortfall, and instead of looking at NGDP growth they looked at RGDP.  But RGDP is affected by both demand and supply shocks.  The method used by the Keynesians would make it a 100% tautology that all recessions are 100% demand-side.  No wonder they are so dismissive of the RBC people.

Update:  Since Tyler Cowen linked to me, I suppose more readers will see this.  Here’s another tidbit from The Economist about Britain’s depression worse than the Great Depression:

Yet the Netherlands is hardly the country most affected by the free movement of Europeans: less than 1% of its population is made up of citizens from central and eastern Europe, compared with 5% in Ireland, 2.5% in Spain, 2% in Britain and 1.5% in Germany. Since 2010 the biggest flows have been to Britain and Germany.

Britain does face a demand shortfall, but it’s nothing at all unusual.  They have an unemployment rate that is perhaps 2% above the natural rate, and an output level that is perhaps 4% below the natural rate (less in my view.)  That means the huge gap between actual RGDP and a trend line drawn through 2008 is very misleading.

If you want to understand what’s wrong with Britain read all of Tyler Cowen’s post on the US.  He’s maybe 65% right about the US.  But if you applied his arguments to the UK, he’d be virtually 100% right.

So if Britain’s output gap is nothing special, which is now abundantly clear, then it is fair to compare the UK budget deficit to those of other countries.  And that means it’s clear that Britain’s fiscal policy has been, and still is, far more expansionary than in other developed countries, excluding Japan.

The Keynesians are wrong about Britain for a multitude of reasons:

1.  The output shortfall is at least 75% productivity, and at most 25% demand-side.

2.  They have not been doing austerity.

3.  Even if they had been doing austerity, it would not have reduced British AD because of monetary offset.

4.  Even if you argue that monetary offset would not have occurred, there would be no reason for the Conservatives to avoid fiscal austerity for reasons on non-monetary offset, because they give the BoE its mandate.  The BoE will only adopt an excessively contractionary monetary policy if Osborne orders them to do so.

The huge deficits in the UK result from Gordon Brown’s reckless decision to greatly increase the size of the British state in the good years (2000-07), combined with a decision to double down on an even bigger British state in the bad years (after 2007.)  Government spending rose from 37% of GDP to 50% of GDP. Then productivity plunged.  That’s the mess the Tories inherited.  They really didn’t have any good options. Yes, monetary policy should have been somewhat more expansionary.  But if it had been then inflation would have been even higher, and Ed Balls would still be hammering them for a failed policy.  He’d talk about falling real wages from the higher inflation.  And he’d still complain about a demand shortfall even if the actual shortfall was 100% supply-side.

PS.  Some austerians can be blamed for also opposing monetary stimulus.  But not Rogoff, he’s advocated a 4% inflation target.


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78 Responses to “What British austerity?”

  1. Gravatar of Mike Mike
    5. October 2013 at 16:26

    If monetary policy functioned efficiently the gov wouldnt need to create stimulus to pick up the economy, it could just run balanced budgets. The problem is an overdependance on banks and the dysfunctional credit channel.

  2. Gravatar of Steve Steve
    5. October 2013 at 17:28

    “Government spending rose from 37% of GDP to 50% of GDP. Then productivity plunged.”

    Coming soon to a USA near you.

    Once the government takes over the health and energy sectors, American productivity will plunge, too. Government spending as a percentage of GDP is a misleading statistic when the taxes and spending are hidden in a tangled web of “private” mandates and subsidies.

  3. Gravatar of ChrisA ChrisA
    5. October 2013 at 17:35

    Totally right Scott. It is amazing to me that the Labour Party and Balls can retain any shred of credibility after what they did in the 2000’s. The expansion of big government was even worse than in the seventies, at least in the seventies they were buying up industries that we could sell again later. this latest batch of proflicacy didn’t even do that.

  4. Gravatar of Monetary Policy trumps Fiscal Policy: UK vs. US | Historinhas Monetary Policy trumps Fiscal Policy: UK vs. US | Historinhas
    5. October 2013 at 17:40

    […] Mark Carney hasn´t (yet) lived up to expectations. And the austerity debate rages […]

  5. Gravatar of Ben Ben
    5. October 2013 at 17:45

    Uk record car “sales”. 75% on credit.

    Govt underwriting first 20% of housing “sales”.

    Main job growth. Realtors.

    Deficit still huge. No real work going on just finance games like real estate flipping. About to stop state benefits for under 25s. Demographics are bad. Ukip polling strongly.

    Much fiddling of inflation and employment figures. Only real “growth” is imputed rent.

    The uk is gonna go under. No way back from these numbers.

  6. Gravatar of Geoff Geoff
    5. October 2013 at 18:15

    “NEVER REASON FROM A QUANTITY CHANGE.”

    AND POOF GOES REASONING FROM NGDP. SELF-DESTRUCT.

  7. Gravatar of A.W. Carus A.W. Carus
    5. October 2013 at 21:11

    “now we know with almost 100% certainty that it is flat out wrong” — for someone who has no use for any notion of objectivity (and even claims “it” doesn’t “exist”), you implicitly rely on one an awful lot. Perhaps you should clean up your language, and use only proper Rorty-sanitized circumlocutions, e.g. “now we have persuaded everyone, not just the 99% but the last die-hard ideologue, that it is wrong.” Trouble is, that’s not what you mean, is it?

  8. Gravatar of anon anon
    5. October 2013 at 23:51

    Scott – this is not up to your usual standards.

    “Government spending rose from 37% of GDP to 50% of GDP. Then productivity plunged.”

    Government spending was 38.93% of GDP in 1996, and 39.08% in 2007, are you really claiming that an increase in spending of 0.15pp was reckless?

    http://www.ukpublicspending.co.uk/total_spending_chart

    Government spending as a % of GDP only increased after 2008. This, as you have pointed out literally thousands of times, was because NGDP crashed due to *tight* monetary policy. The MPC was debating raising interest rates mid-2008. The UK’s economic woes can be laid firmly at Mervyn King’s door.

  9. Gravatar of Mike Sax Mike Sax
    6. October 2013 at 00:27

    So to judge a country’s fiscal policy you just look at the deficit, the structural deficit is an irrelevant variable.

    And all Britian’s problems are the fault of Gordon Brown. Got it. Just like in the U.S. the Republicans tell us the Great Recession is all Jimmy Carter’s fault-after all he wanted to increase minority homeownership. Austerity in no way is harmful. In fact the trouble is there hasn’t been nearly enough of it. Cameron should have been much more bloodthirsty then he already has been.

    Yet if we buy this claim of yours that Britain has had ‘record employment’-though I don’t get why 7.8% unemployment is record setting-then maybe Brown’s allegedly wild eyed Keynesian spending is to be thanked for it.

    The fact that Japan has an even higher deficit than Britain again shows that maybe Cehney was right when he said ‘Reagan proved deficits don’t matter.’

  10. Gravatar of ssumner ssumner
    6. October 2013 at 05:18

    Geoff provides more comic relief, as he doesn’t know the difference between P*Q and Q.

    I need to start reading Geoff more often, just for the humor.

    AW. I really hope you are joking.

    anon, I’m afraid you are flat out wrong. This source is the Treasury of Great Britain.

    http://www.economicshelp.org/blog/5326/economics/government-spending/

    And they show government spending rising from 34% of GDP in 2000, to 41% in 2001, to 48% in 2010. I don’t know why the numbers are a bit lower than the other figures I saw, but my rate of increase numbers were correct.

    I would add that if government spending as a share of GDP had been flat during 2000 to 2007, I would still consider that a recklessly expansionary policy, for reasons you should be aware of, the ratio normally falls during booms and rises during recessions.

    I also find it annoying when commenters act like they are finding mistakes in my numbers, when they are actually using completely different dates. That is very misleading, and makes me doubt everything else they have to say.

    Mike Sax, Let’s start with this:

    “So to judge a country’s fiscal policy you just look at the deficit, the structural deficit is an irrelevant variable.”

    If you actually read my post, and understood what I wrote, I said exactly the opposite.

    You said;

    “Yet if we buy this claim of yours that Britain has had ‘record employment’-though I don’t get why 7.8% unemployment is record setting”

    It is certainly possible for a country to have record setting levels of employment, and 7.8% unemployment. They are separate statistics. But I guess you don’t know that.

    Then you point to Japan, a country that has seen the slowest growth in AD in modern history, and point to it in support of your argument that fiscal deficits are expansionary. Well done!

    Basically you are not able to contradict any substantive point made in the post. That makes me feel very good about the post. It must be frustrating to see your cherished worldview crash and burn around you.

    Come back when you’ve learned enough economics to actually engage in a debate without making a fool of yourself.

  11. Gravatar of TravisV TravisV
    6. October 2013 at 07:34

    Yglesias:

    “The Shutdown Seems To Be Killing Economic Confidence”

    http://www.slate.com/blogs/moneybox/2013/10/04/economic_confidence_gallup_poll_hints_that_the_shutdown_is_killing_it.html

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. October 2013 at 08:24

    Scott,
    “They have an unemployment rate that is perhaps 2% above the natural rate, and an output level that is perhaps 4% below the natural rate (less in my view.)”

    This is probably being a tad generous.

    1) Unemployment
    The unemployment rate is 7.7%. To my knowledge there’s only two sources for the UK’s natural rate of unemployment available in series form: 1) the OECD ‘s NAIRU and 2) the European Commission’s NAWRU. The OECD’s and the European Commission’s estimates are 6.9% and 7.7% respectively.

    Personally I think the European Commission’s estimates are worthless, but fortunately the EC’s Output Gap Working Group is in the process of potentially addressing this matter. The OECD’s estimate is perhaps a little high for my tastes, but it is reasonable. Furthermore it is available for all the OECD members.

    Using the OECD’s estimate we see that the UK’s unemployment gap is only 0.8 points. For comparison it is 1.2 and 2.2 points in the US and the eurozone respectively. In fact the UK’s unemployment gap is as small or smaller than every EU member that is also a OECD member with the exception of Austria, Germany, Estonia, Luxembourg, Poland and Slovakia.

    2) Output Gap
    There are four major sources for estimates of the UK’s Output Gap: 1) the OBR, 2) the IMF, 3) the OECD and 4) the European Commission. The estimates from these sources are 3.6%, 4.4%, 2.4% and 3.2% respectively. Although lower than the other estimates in this case, in my opinion the OECD’s estimates are usually better than the IMF’s, and are almost always much better than the European Commission’s. You can debate the exact magnitude of the OECD’s estimates but the relative values are on the mark.

    For comparison the OECD’s estimate of the output gap in the US and the eurozone are 3.1% and 4.2% respectively. Furthermore the UK’s output gap is as small or smaller than every EU member that is also a OECD member with the exception of Germany and Poland.

    Yes, the UK’s RGDP growth has been weak, but this is due to the fact productivity (GDP per hour worked) was lower in 2012 than in 2007, it is not due to a shortfall in labor (or capital) input. The headline unemployment rate may be high, but unlike the US, the UK’s labor force participation rate is as high, or higher, than it was before the recession.

    The UK is closer to a full recovery than most countries that were hit hard by the Great Recession. This is due in no small part to its relatively expansionary monetary policy, and consequently NGDP growth since 2008Q2 that has been better than every other major advanced currency area that are currently at or near the zero lower bound with the sole exception of the US.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. October 2013 at 08:56

    Scott,
    “And they show government spending rising from 34% of GDP in 2000, to 41% in 2001, to 48% in 2010. I don’t know why the numbers are a bit lower than the other figures I saw, but my rate of increase numbers were correct.”

    Different sources will give you different numbers based on the accounting standards, time period (fiscal year versus calendar) and the source of the NGDP figures. Both anon’s source and the source you site are on the low side (evidently they are both Treasury estimates) but are similar to IMF figures. In contrast the OECD estimates UK general government expenditures to be 50.7% of GDP in 2009 and 50.3% of GDP in 2010:

    http://stats.oecd.org/Index.aspx?QueryId=48233#

    This is up from 36.5% of GDP in 2000.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. October 2013 at 09:04

    Eurostat shows UK general government spending rising from 36.4% of GDP in 2000 to 50.7% of GDP in 2009:

    http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-054156_QID_D1825FE_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;UNIT,L,Z,0;SECTOR,L,Z,1;INDIC_NA,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-054156UNIT,PC_GDP;DS-054156INDICATORS,OBS_FLAG;DS-054156INDIC_NA,TE;DS-054156SECTOR,S13;&rankName1=SECTOR_1_2_-1_2&rankName2=INDIC-NA_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23

    In this particular instance these figures are identical to the European Commission’s (AMECO). (You would think Eurostat’s and AMECO’s numbers would be the same but they aren’t always.)

    In theory the OECD’s numbers and the European Union’s numbers should be identical since they both come from the same data survey and have almost identical accounting standards but if you compare them you’ll notice they differ.

  15. Gravatar of Steve Steve
    6. October 2013 at 09:55

    Been spending all weekend trying to get past the “glitches” in the Obamacare system, with limited success.

    But here’s what I’ve been able to estimate: (single adult, not old, not young invincible)

    Bronze
    4k premium, 5k deductible, 6k max out of pocket

    Gold
    6k premium, 1.5k deductible, 4k max out of pocket

    The notion of choice is illusory. All plans cap total (premium + out of pocket) at 10k. All have narrow networks. The total cost variance is only about 1k, if I misjudge my health costs.

    Of course, if I earned around 20k per year (150-200% FPL), I could get:
    500 premium, 2k deductible.
    The subsidies are massive at low income levels. But at 45k+ income, I pay the full way, with after tax money.

    The joke is on the American people. Obamacare came in with slightly less premium than expected, but mostly because it used narrow networks and 5k deductibles.

    I expect lots of middle income people (the ones just above 45k single or 90k family, about 4x FPL) to opt out and take their chances, rather than pay 10% of pretax for premium to get another 10% of pretax deductible. This is about 30% of after-tax take home before insurance pays anything. The numbers are absolutely brutal for the middle class.

    I also expect lots of older Americans (aged 50-65) to eventually “become low income” in order to get the full subsidy and virtually free care. Quit their jobs and spend 25 hours/week bagging groceries to get free Obamacare until Medicare kicks in.

    Totally off-topic here, but now that I’ve seem the plans, I’m definitely expecting Obamacare to be more contractionary than thought, due to higher fiscal outlays, and more supply-side contraction of the labor market.

  16. Gravatar of anon anon
    6. October 2013 at 10:03

    Apologies, I did not mean to imply that your numbers were wrong. It’s just I am not used to you blaming the economic collapse on fiscal policy.

    You usually persuasively argue that the economic crisis occurred because of overly tight monetary policy, which caused NGDP growth to collapse, as shown for the UK by Britmouse here:

    http://uneconomical.wordpress.com/2013/03/27/broad-monetarism-and-uk-ngdp/

    IN brief between 1997Q2 and 2008Q1 on average UK NGP (ONS:YBHA) grew at 5.3% per year. Whereas between 2008Q1 and 2013Q2 it grew at 1.4% a year. Had NGDP grown on its pre-crisis trend after 2008, NGDP would have been 11% higher in 2010Q2. In which case government spending would have been 42.6% of GDP not 48%.

    In 2008Q2 UK NGDP fell at a 2.8% annualized rate. In April 2008 the MPC voted to lower interest rates from 5.25% to 5.0%. In 2008Q3 NGDP fell at a 4.3% annualized rate. Yet in July and August Tim Besley, a member of the MPC, voted to increase interest rates by 0.25%, despite this interest rates were left unchanged. By October the MPC finally realized something was up and lowered rates to 4.5%. This was insufficient as NGDP fell by 2.7% and 10.3% annualized rates in 2008Q4 and 2009Q1. The MPC progressively lowered rates to 0.5% from October 2008 to March 2009 and subsequently started QE.

    So surely the collapse in private sector output you describe was due to monetary policy makers’ mistakes and tardiness, not mistakes in fiscal policy 2000-2007?

    P.s. I have written this quickly, so please check the NGDP numbers here:

    http://www.ons.gov.uk/ons/datasets-and-tables/downloads/csv.csv?dataset=ukea&cdid=YBHA

    and the voting here:

    http://www.bankofengland.co.uk/monetarypolicy/Documents/mpcvoting.xls

  17. Gravatar of Vivian Darkbloomt Vivian Darkbloomt
    6. October 2013 at 10:21

    The cost estimates for ObamaCare are woefully understated.

    Here’s my suggestion for ending the impasse over ObamaCare funding:

    The GOP should drop its insistence on delaying ObamaCare for one year. They should also fund it for FY 2014 and agree to raise the debt limit at the same time. *However*, the funding should be capped at the (net) amount the CBO calculated the program will cost in FY 2014 (and beyond) rather than the blank check that it now essentially is. Those estimates were, after all, the basis on which that bill was passed and became law by the thinnest of majorities. The funding bill should include the protocols for scorekeeping on an on-going basis. If the amount appropriated is exceeded, Obama would need to come back for an additional special appropriation.

    This is, after all, a “budget” that is being debated.

  18. Gravatar of Steve Steve
    6. October 2013 at 11:20

    Vivian,

    The Republicans need to separate the debt ceiling from the budget debate. Increase the debt ceiling now, unconditionally. Then keep the government shut until Christmas.

    Of course the better political strategy is probably to allow Obamacare to go into effect, and then say “I told you so” later. Like letting teenagers make their own mistakes.

    It’s a very difficult time for Republicans. These policies have steep costs, but until people see the costs themselves, they will blame the Republicans for obstructionism. It’s probably better to take conscientious objector status now, so the Democrats will own failure later. Too much obstructionism, and people will blame the obstructionists rather than the policies.

  19. Gravatar of ssumner ssumner
    6. October 2013 at 11:43

    Mark, Thanks, that makes my point even stronger, the output gap is probably less than I thought.

    Steve, Interesting, but someone help me here. If the out of pocket is capped at 10k, why would any healthy person in their right mind buy the gold over the bronze? That makes no sense.

    anon, You said;

    “Apologies, I did not mean to imply that your numbers were wrong. It’s just I am not used to you blaming the economic collapse on fiscal policy.”

    I did not blame the economic collapse on fiscal policy, it was caused by tight money, mostly in the US, but also in other places like Europe. The question is what should Britain have done given that collapse, and given their horrible productivity numbers.

    Reckless fiscal policy does not create sharp breaks in the business cycle like 2008, it drags down productivity growth over the long run. It’s a supply-side problem. Countries face both cyclical and secular problems, sometimes they have to be disentangled. I’ve done many posts arguing that Britain faces severe supply-side problems. The evidence seems overwhelming to me. And fiscal stimulus cannot overcome low productivity, indeed it tends to make it worse. Productivity is the main factor explaining the low RGDP in Britain, less so in America. Having said that, I agree that tight money has also slowed growth, just as in America.

    Steve, I agree that the debt ceiling brinksmanship is ineffective (unless Obama is stupider than he looks.) As far as the government shutdown, I’m dubious it will work. It seems to me that Obama has the upper hand, and little reason to negotiate. His only chance of passing the legislation he supports is if he takes the House in 2014. That’s really tough to do in the 6th year of a Presidency. His only hope for doing so is if the GOP shuts down the government for a very long period of time.

  20. Gravatar of Steve Steve
    6. October 2013 at 11:58

    “If the out of pocket is capped at 10k, why would any healthy person in their right mind buy the gold over the bronze?”

    You wouldn’t. The gold plan will cost 2k extra if you have zero health expenses. It will save about 1k if your expenses are roughly between 5k and 10k. It will cost the same if your expenses are much higher. Since actual costs are hard to predict and maximum savings with gold are very small, it appears to be actuarially correct for a risky customer. Unless you are getting subsidies, then gold might be a better deal.

    The also might be a small difference in the “free preventive” but I haven’t figured that part out yet. Much of the “free preventive” is things like HIV testing, STI testing, syphilis testing, pregnancy, birth control, well-baby. Basically promiscuity after-effects. Also drug, alcohol and domestic violence screening.

  21. Gravatar of Steve Steve
    6. October 2013 at 12:04

    I think the subsidies are fixed based on a silver plan costs, so I don’t *think* there is an incentive for low-income subsidized people to all be running around with gold and platinum plans.

    But I’m researching this for myself, under ACA I believe I can buy basically the same plan direct from the insurer without the government portal if I’m not applying for subsidy.

  22. Gravatar of Steve Steve
    6. October 2013 at 12:35

    A couple of things are clear about Obamacare:

    * The unions are wealthy are getting a free ride. They get expensive tax-deductible group health plans, and aren’t paying their “fair share” of the Obamacare budget buster.

    * Middle class families, 50k-100k incomes, are getting completely destroyed. Just utter destruction. The pay income tax, payroll tax, and then 10-20k in after tax money on Obamacare exchanges.

    * The poor are getting a fabulous deal. 10k almost free health benefits on 20k salaries. It’s a wonderful deal for low-income unwed baby mama types.

    The roadmap ahead is pretty clear. Either you repeal Obamacare, or you remove the employer health tax deduction to fund this mess and then dump everyone into the exchanges.

  23. Gravatar of Steve Steve
    6. October 2013 at 12:42

    This is a problem for Republicans, because the majority don’t want to repeal Obamacare. And the political lobby supporting employer health plans is very powerful. But I suspect the majority will strongly favor dismantling employer health plans once they better understand the situation. Unions and health insurers will rue the day they supported Obamacare.

  24. Gravatar of Mike Sax Mike Sax
    6. October 2013 at 17:19

    “Basically you are not able to contradict any substantive point made in the post. That makes me feel very good about the post. It must be frustrating to see your cherished worldview crash and burn around you”

    I doubt it Scott. If any such thing had happened you wouldn’t need to be so bush league about it. I guess you’re a true conservative-uncharitable down to your toes. I don’t now that Japan has had the slowest AD in modern history. It’s true that they’ve been a lot slower than they would have wanted to be. However, their unemployment has been much lower than Britian’s who you rave about as having record employment-‘aha austerity does work!’

    I mean you can make a case that Japan has not been so bad for most Japanese over the last 20 yaers-at least they’ve had jobs.

    With Britian you want to both claim they didn’t have austerity and yet also when you’re talking about their employment rate you claim it’s record breaking-which I guess is a feather in austerity’s cap.

    I don’t know what substantive point you think you made in the post. If it’s that austerity is expansionary after all and you’ve somehow redeemed Rogoff then you’re just deluding yourself. Talking about frustrating I get that you get very frustrated when your self-delusion is pointed out to you.

    Your snark here is again showing it. You have no idea what my worldviews is because as closed minded as you are you would never take the effort to actually know it, not that I need a boor-and bore like you-to get it.

    However, if you think that all this causitry you engage in has somehow made the world safe for pre-Keynesian economics well I have bad news for you.

    I was kind of engagaing in my own causitry in my original comments. Of course, it went right over your head as you keep your irony meter permanently shutoff.

  25. Gravatar of S Nokes S Nokes
    6. October 2013 at 23:22

    Do your numbers for the UK, “5. Britain 7.6% of GDP,” include (a) unfunded state sector pension liabilities and (b) off-balance sheet liabilities such as PFI risks that are in practice government risks rather than private sector risks? An example of the latter was Railtrack PLC, the off balance sheet railway infrastructure company set up by the UK government, which pretended that the financial risks in Railtrack were somehow not going to end up in the public sector. When it went bust the government did indeed inject new capital. My understanding is that if those PFI obligations that are in practice underwritten by the UK Government and the unfunded state pension liabilities are included, then UK government borrowing is at over 100% of GDP. If so, it might be a reason why all the official government and EU statistics try to ignore these liabilities.

  26. Gravatar of anon anon
    6. October 2013 at 23:49

    “Government spending rose from 37% of GDP to 50% of GDP. Then productivity plunged.”

    This statement is still not correct. Government spending was around 40% of GDP in 2008, yet labour productivity was already falling. Labour productivity peaked in 2007Q3 and then fell by 6% in the next 18 months. The fall in productivity occurred in the year before the crash, and before the increase in Government spending/collapse in private output.

    The initial fall in productivity was likely due to commodity price increases, (a supply shock), but then the subsequent falls from 2008Q2-2009Q1 are surely due to tight or inappropriate monetary policy?

    If you look at firm data it’s even more obvious, why would car plants suddenly get less productive between 2008Q2-2009Q1? They had the same number of workers and machines, yet they produced less. The collapse in demand led to the fall in productivity, not a change in government spending.

    http://www.ons.gov.uk/ons/datasets-and-tables/downloads/xls-download.xls?dataset=prdy

  27. Gravatar of Mike Sax Mike Sax
    7. October 2013 at 00:46

    That you get so uptight Scott tells me that I’ve always been right about you-you’re a sophist trying to foist your zombie ideas on an unsuspecting public.

    I’m sure soon you’ll be saying that the Republican shutdown of the Govt. also somehow validates you next it will be that defaulting on the debt is fine because we have monetary offset.

    But you can’t fool all of the people all of the time.

  28. Gravatar of Luis Enrique Luis Enrique
    7. October 2013 at 00:48

    Yes, I don’t understand this distinction between productivity and demand. The term is ambiguous

    1. Productivity in the production function sense. A description of the production possibility frontier.
    2. Observed ratios of inputs to output: 1. above plus distance from frontier (capacity utilization.)

    Also, to repeat a point that never seems to gain any traction here: never reason from a deficit.

    Suppose your tax revenues are heavily dependent on the financial sector, and fall sharply. You find yourself running a large deficit.

    If you react by cutting government spending yet the deficit does not fall (much) because fiscal multipliers are large, you still have a large deficit and austerity.

    The UK government has been slashing departmental budgets. This matters and cannot be waved away with deficit numbers. Public sector employment peaked in Q3 2008 and is now 10 per cent lower.

    http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-303285#tab-all-tables

    [I don’t know where to get data on how employment in private sector government contractors]

  29. Gravatar of Nick Edmonds Nick Edmonds
    7. October 2013 at 01:55

    Scott,

    Rising import prices have played a key role in UK inflation in the last few years. In your opinion, does loose fiscal policy with monetary offset have different implications for the exchange rate to tight fiscal policy with monetary offset? And does that affect the relationship between the output gap and inflation, at least in the short run?

  30. Gravatar of Matt McOsker Matt McOsker
    7. October 2013 at 04:47

    I’d say there are 3 important financial flows. Deficit, trade balance, and credit growth (or lack therof).

    So UK CAD of nearly 4% of GDP. That is a big negative that offsets some of the deficit.

    I don’t know the best measure of credit growth there, but I do know credit has slowed since the 2008 drop, but recently may be picking up. If credit continues to grow then you will see things pick up at some point. Economies are not instantaneous all the time. So it seems to me the UK has been moving in the right direction on employment and nominal GDP. Inflation has been stable.

  31. Gravatar of What British Austerity? « Economics Info What British Austerity? « Economics Info
    7. October 2013 at 05:00

    […] Source […]

  32. Gravatar of ssumner ssumner
    7. October 2013 at 15:59

    Mike, When people like you act like jerks, and then start whining when you get paid in kind, you are simply showing your immaturity. If you can’t take the heat . . .

    You said;

    “I don’t now that Japan has had the slowest AD in modern history. It’s true that they’ve been a lot slower than they would have wanted to be. However, their unemployment has been much lower than Britain’s who you rave about as having record employment-‘aha austerity does work!'”

    Where do I even start? The data shows AD has risen far faster in Britain than Japan. Do you pay no attention to the data? And it’s absurd to look at unemployment rates as an indicator of the growth rates of AD. But thanks for proving my point about Keynesianism.

    You said;

    “I don’t know what substantive point you think you made in the post.”

    Yes, that’s very clear.

    You said:

    “I’m sure soon you’ll be saying that the Republican shutdown of the Govt. also somehow validates you next it will be that defaulting on the debt is fine because we have monetary offset.”

    Wrong again.

    anon, You seem to be missing the point. I simply don’t buy your numbers. My numbers show a big increase in the G/GDP ratio between 2000 and 2008. When you adjust for the business cycle the increase was even more massive. That’s why productivity declined. But it’s not the sort of factor that produces a sudden drop in RGDP, that was demand-side. Rather it gradually erodes a country’s productivity.

    Luis, Demand is NGDP, productivity is output per worker.

    Nick, That’s possible, although I doubt it would have a major effect.

  33. Gravatar of Mike Sax Mike Sax
    7. October 2013 at 18:07

    Scott I think me acting like a jerk with you is what economists call a free good. Whether I act like a jerk or not you’re going to answer me like a jerk. So what difference does it make for me?

    And I don’t always act like a jerk. Often I don’t razz you at all but it makes no difference. You can never speak to me with any kind of ahem, maturity. I can only chalk this up to you being someone who holds grudges.

    Even here you didn’t actually ‘respond in kind’ but were much more jerk than I had been-you tried to claim I know nothing about economics which is an obvious lie said out of spite. Yes, there was a little edge to what I said but I’m sick of you seizing every data point as somehow once and for all ‘disproving Keynesianism’ or proving that austerity works, that it stimulates, a la Rogoff and Alesina.

    Now you don’t put this in so many words-you’re not as stupid as most Republican Congressmen, you get that saying what you really think is a virtue than can quickly become a vice.

    Nevertheless, what you are trying to do is keeping the world safe for austerity. That is what the point of this post is. Let’s get specific. How many times have I asked you this very straightforwardly: as you crow about the 2013 U.S. job numbers are you claiming that they would have been worse had there been no sequester?

    You can never give me a straight answer to that. You’ve admitted recently-in the comments somewhere-that the Fed didn’t do monetary offset in WWII. The question is why?

    I take it the obvious answer is that the Fed wanted to accomodate the war effort. However, if the Fed can choose not to offset then the idea that the multiplier is zero is not some immutable Law of Physics but simply a policy choice. The Fed could do otherwise. It could decide that just as winning the War was more important than worrying over inflation it could choose to do the same thing during another kind of ‘war’-the war against a stubborn recession.

    So the argument over monetary offset is not about some immutable laws of Nature but rather the policy preferences of the Fed. However, even if the Fed acts in just the way you say it does, the fact is that this isn’t inevitable-simply install a different policy regime; it’s been done before. Eccles Fed was different. The Fed of the 50s and 60s was different.

    As to immaturity even if I were as unreasoning a fool as you want to believe I am you still do yourself quiet a disservice by responding in a way that’s even more immature. You might consider taking a page out of your friend and fellow MMer David Glasner’s book who doesn’t suffer fools gladly but just the same always seems to be able to answer all comments without making himself look worse than any of the supposed immature commentators.

  34. Gravatar of Don Geddis Don Geddis
    7. October 2013 at 20:56

    Mike Sax wrote: “if the Fed can choose not to offset then the idea that the multiplier is zero is not some immutable Law of Physics but simply a policy choice.

    Who do you think you’re arguing against? Have you ever seen anybody claim that “the multiplier is zero” was a fixed law?

    Sumner has always said, not that the multiplier is always zero, but instead that the fiscal multiplier is an estimate of the central bank’s incompetence. The bigger the observed multiplier, the less competent the central bank.

    Where do you get this “Law of Physics” stuff?

  35. Gravatar of W. Peden W. Peden
    7. October 2013 at 23:32

    It’s worth noting that the Blair years were a period of rapidly falling public sector productivity, during a boom time when productivity should have been doing well. It was this productivity crisis which inspired even many left-wing Labour politicians to support public-sector reforms.

  36. Gravatar of W. Peden W. Peden
    7. October 2013 at 23:41

    After which the decline in public sector productivity reversed a bit-

    http://blogs.lse.ac.uk/politicsandpolicy/files/2010/05/Productivity3-26-May.jpg

    – while private sector productivity was growing-

    http://cdn.dupress.com/wp-content/uploads/2013/02/GovGo-Fig2_UK-Productivity1.jpg?0ba1d8

    If the UK’s public sector productivity problems are not reversed, we’re facing exponential public debt growth-

    http://blogs.telegraph.co.uk/finance/files/2013/07/healthcare-productivity-cha.jpg

    Blair understood this but struggled to carry his party with him. Gordon Brown basically ignored the problem. David Cameron understands it but like Blair he has to work in partnership with a party that depends on public-sector workers in order to survive, and understandably most of us in general don’t like being “reformed”.

  37. Gravatar of Luis Enrique Luis Enrique
    8. October 2013 at 01:51

    “Luis, Demand is NGDP, productivity is output per worker.”

    come on Scott, that’s not addressing the point.

    If productivity is “output per worker”, then output per work can fall because demand has fallen and capacity utilization is low. So what does it mean to attribute the decline in real output to 75% productivity and 25% demand. If you were using productivity in the production function sense, then what basis do you have for claiming that the production possibility frontier has retreated in the UK?

  38. Gravatar of Simon Reynolds Simon Reynolds
    8. October 2013 at 04:13

    “The huge deficits in the UK result from Gordon Brown’s reckless decision to greatly increase the size of the British state in the good years (2000-07)…”

    I don’t think the “reckless Gordon” gibe stands up to scrutiny.

    The Blair / Brown governments spent less than the European average over the same period, and less than the Tories before them. And the Tories were going to match Brown’s spending in 2007 to 2009.

    Yes Gordon Brown grew public expenditure. But was it profligate, reckless spending? Er, no

    Eurostat figures show:

    a) Expenditure of the UK government for the thirteen years of the last Labour government (1998-2010, starting with the first full calendar year) averaged 42.8% of GDP per year.

    b) Expenditure of governments of the 27 European Union countries averaged (weighted) 47.1% of GDP per year over the same period.

    c) Expenditure of the UK government for the eighteen years of the previous Conservative administration (1980-1997, starting with the first full calendar year) averaged 44.7% of GDP per year.

    d) In 2007, expenditure of the UK government was 43.2% of GDP, lower than the average of 43.4% per year over the twenty eight year period 1980-2007.

    http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_main&lang=en

    In September 2007 George Osborne committed the Conservatives to match Labour’s projected public spending totals for the next three years:

    http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm

    Note that Eurostat figures for government spending seem to be consistently higher then the UK Treasury figures — not sure why.

  39. Gravatar of ssumner ssumner
    8. October 2013 at 05:49

    Mike, You said;

    “And I don’t always act like a jerk.”

    And you are proud of that?

    As far as you claim that you understand economics, I’d say either you are in way over your head, or you are a liar. Which is it? For instance, when you say:

    “I’m sick of you seizing every data point as somehow once and for all ‘disproving Keynesianism’ or proving that austerity works, that it stimulates, a la Rogoff and Alesina.”

    Are you intentionally lying, or just clueless as to what I am arguing?

    BTW, are you equally “sick” of Krugman seizing every single data point in support of Keynesianism?

    You said;

    So the argument over monetary offset is not about some immutable laws of Nature but rather the policy preferences of the Fed. However, even if the Fed acts in just the way you say it does, the fact is that this isn’t inevitable-simply install a different policy regime; it’s been done before. Eccles Fed was different. The Fed of the 50s and 60s was different.”

    The problem is that Obama appointed the regime that is sabotaging his policy, and he wanted to appoint Summers! By all means, let’s get a good Fed in place. But when we do so, it will still sabotage monetary stimulus, because only incompetent central banks do not sabotage monetary stimulus.

    Mike, I told you from the very beginning that you should not be blogging on economics. You don’t understand the field, and there’s no point in writing a blog on economics if you don’t understand the topic you are writing about. You need to stop writing your blog and start studying economics. When you’ve learned some economics you can resume your blog.

    I see that Don found another inaccuracy in your comment.

    Luis, Employment in the UK is at record levels, while output is lower than 5 years ago. I can’t even imagine how a demand shock could produce that result.

    Simon, To say that’s misleading is an understatement. I never claimed that labor spent too much on average, I claimed they dramatically increased the level of spending, which is entirely another issue. You are comparing apples and oranges. Levels vs. changes. People can drown in lakes that “average” 3 feet in depth. I would add that it makes more sense to compare the UK to other all developed countries, not just Europe, and by that criteria they spend too much. For instance the UK spends far more than Australia and Canada, whereas back in 2000 they were fairly close.

    You also failed to address my point that G/GDP should fall during expansions and rise during recessions. Do you disagree?

  40. Gravatar of Simon Reynolds Simon Reynolds
    8. October 2013 at 12:36

    Scott,

    I’m not an economist but I’m trying to understand.

    1) I didn’t say that you “claimed that Labour spent too much on average” over their period in office. I am claiming that Labour didn’t spend too much on average during their time in office.

    2) The point about averages is that what you call a “reckless” and “dramatic” increase in UK government spending from 2000 to 2007 was an increase from a historically very low level in 2000 to somewhere near the historical average in 2007. To highlight that some value has increased from a low value to near a historical average is not an apples and oranges comparison.

    3) You seem to be arguing that it is self-evident the UK government should not have increased G/GDP while GDP was growing. Why is that? What if government spending in 2000 was too low? What is the right level of government spending?

    4) Yes, I think it is legitimate to argue that G/GDP can rise during expansions. The bulk of the increase in UK government expenditure in the years after 2000 went on state education and the national health service. Do you know enough about the UK’s state provision of education and health services to argue that both sectors did not need increased spending?

    5) What is the economic basis for preferring to compare government spending of the UK with that of Australia and Canada rather than that of Germany or France?

    6) Your statement that ‘people can drown in lakes that “average” 3 feet in depth’ may be true but so what? People can drown in lakes that are nowhere more than three feet deep. Equally people can survive in lakes that everywhere more than five hundred feet deep. None of these statements help us understand more about government expenditure.

  41. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. October 2013 at 13:45

    Simon Reynolds,
    One thing I don’t think you’re taking into account is that according to almost every estimate the UK’s GDP was considerably above potential in 2007. For example the OECD estimates the output gap was positive 4.4% in 2007:

    http://stats.oecd.org/Index.aspx?QueryId=48222

    Thus if you adjust the Eurostat estimates of general government spending by the output gap what you’ll find is spending rose from 36.6% of potential GDP in 2000 to 45.2% of potential GDP in 2007. That’s a whopping 23.5% expansion of general government expenditures above the growth in potential GDP in just seven years. Another way of putting this is that real growth in potential GDP averaged 2.4% from 2000 to 2007 but real general government spending grew at an average rate of 5.5% annually.

    The other issues you raise are matters of debate, but I don’t think there’s any doubt there was an enormous increase in UK general government spending from 2000 to 2007.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. October 2013 at 14:39

    Scott,
    “And that means it’s clear that Britain’s fiscal policy has been, and still is, far more expansionary than in other developed countries, excluding Japan.”

    I probably should have said something about this before but I’m sure you’ll agree with me when I say this is an incorrect use of the word “expansionary”. By themselves deficits are not expansionary fiscal policy, only *decreases* in cyclically adjusted budget balances are expansionary.

    Here is the IMF’s estimates of the UK’s cyclically adjusted general government budget balance:

    http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weorept.aspx?sy=2000&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=112&s=GGSB_NPGDP&grp=0&a=&pr.x=44&pr.y=11

    Note that UK fiscal policy was significantly expansionary in 2001-03 and again in 2008-09. It has been significantly contractionary in 2010-11 and 2013. The fact that the UK’s NGDP has expanded as much as it has during the recovery from the recession is evidence of the monetary policy offset of fiscal policy.

    One reason why the UK’s fiscal policy has had to be so contractionary this recovery is that it was so expansionary in 2001-03, a period of time when the UK was above potential GDP two thirds of the time.

    I think this also underscores the limitations of fiscal stimulus, as it only provides positive economic stimulus so long as the cyclically adjusted budget balance is decreased. This cannot be done for very long before things become unsustainable.

  43. Gravatar of Britmouse Britmouse
    8. October 2013 at 14:47

    There really is no debate about UK government spending 2000-7, it went up, Brown/Blair were re-elected twice on the basis that they’d keep pushing it up. Manifesto promises of 10s of thousands of public sector jobs, investment in hospitals, schools, etc, etc. Labour politicians defend their record in office on that basis.

    However, I am sceptical about the level of certainty for the supply vs demand-side explanation expressed here. UK productivity has been strongly pro-cyclical. It has moved in lock step with NGDP over the last few years. Demand collapse leads to output/hour collapse (notably 2008, 2012), demand recovers (2010… hopefully 2013!) and output/hour recovers. This is not purely an oil or finance sector issue. Manufacturing productivity fell about 4% in 2012 as I recall.

  44. Gravatar of Mike Sax Mike Sax
    8. October 2013 at 16:29

    “As far as you claim that you understand economics, I’d say either you are in way over your head, or you are a liar. Which is it? For instance, when you say:

    “I’m sick of you seizing every data point as somehow once and for all ‘disproving Keynesianism’ or proving that austerity works, that it stimulates, a la Rogoff and Alesina.”

    “Are you intentionally lying, or just clueless as to what I am arguing?”

    Ok so you oppose fiscal austerity? Do you oppose the sequester? This post is meant to be an attack on those who criticize fiscal austerity. Do you claim otherwise?

    Don Gleddis if it’s not a law of nature then we should get Fed in here who’s not going to offset fiscal stimulus.

    I’m not a Larry Summers fan. I’m glad that the Democrats were able to sink him. Let’s hope the choice is Yellen.

    I don’t see where you’ve proven I’m in over my head. I think the trouble is that you’re mistaking not liking what I say with ignorance, which is just the temperature of your own bias.

    Again Scott you can fool maybe a lot of the people. I see through all your word games and that’s your real problem with me. At the end of the day you support fiscal austerity policies. You don’t say this you instead criticize those who criticize them. At the end of the day it’s the same difference.

    I think maybe all your pompous talk about me not being qualifed to speak about econ is just what the establishment econ is always doing-trying to give themselves some air of authority. Like I should just accept everything you say as gospel because you’re allegedly an expert.

    I liken it the old Church that would speak in Latin. Anyone who doesn’t speak the language was outside the conversation. Let me apologize for that in advance: I’m sure you’re going to be confused by that analogy.

    Again, I’ve said it before, I find much of your sophism impressive but it never intimidates me-nor is your attempts to belittle me personally-I just consider the source.

  45. Gravatar of Mike Sax Mike Sax
    8. October 2013 at 16:42

    Actually Scott I do study economics. Let’s go at it this way. You claim that this statement shows that I’m either a liar or way over my head:

    “”I’m sick of you seizing every data point as somehow once and for all ‘disproving Keynesianism’ or proving that austerity works, that it stimulates, a la Rogoff and Alesina.”

    Tell me which econ textbook I should read that would stop me making this error? I mean as far as I know there’s no textbook that tells us whether Scott Sumner is a supporter of fiscal austerity-which of course he is.

    Maybe you’re calling me a liar is you projecting. You give yourself away even more here in your comment to Morgan:

    “Morgan I’m still skeptical of the GOP position. They seem to be in too weak of a position to win this. I hope I’m wrong.”

    https://www.themoneyillusion.com/?p=24043

    So you support the GOP brinksmanship but you just fear it won’t work. In other words you support both shutting down the government and not raising the debt ceiling just as I’ve always said-you support the goals of the Republicans though you do see that they often use hopeless tactics.

    If saying so makes me ignorant of economic theory tell me which theory specifically. Or admit you’re just hand waving.

  46. Gravatar of Mike Sax Mike Sax
    8. October 2013 at 17:20

    “Mike, I told you from the very beginning that you should not be blogging on economics. You don’t understand the field, and there’s no point in writing a blog on economics if you don’t understand the topic you are writing about. You need to stop writing your blog and start studying economics. When you’ve learned some economics you can resume your blog.”

    Well Scott we live in a free society and a free market so even the ignorant can write blogs assuming they find a market. I have indeed done so. Some of my readers are actually economists, including friends of yours. Nick Rowe has regularly read me as has Marcus Nunes. Lars Christensen has read me and even wrote a post about my blog.

    Delong has linked to me. Steve Waldman at Interfluidity has linked to me.

    Why would guys like this read a blog where the writer doesn’t understand the field?

    I’m sure you’ll try to duck the question but it’s obvious in any case. You say I’m ignorant not because I am but because you’re full of sour grapes and spite.

  47. Gravatar of ssumner ssumner
    8. October 2013 at 18:45

    Simon, I have a number of posts arguing that smaller government is more efficient. Britain did a good job of shrinking government in the period from 1980 to 2000 (both parties), then squandered those gains. When it was shrinking the government the British economy caught up with and passed France, and caught up with Germany. BTW, The government sector in Germany is now smaller than the UK. Historical averages depend on your starting and ending points. Yes, the British state was quite large in the 1960s and 1970s, but that was the period when Britain lagged in terms of economic performance (compared to the continent.) Britain cannot handle big government as well as France—the Brits simply are not as good at centralization as the French. But don’t feel bad, almost no one is. Certainly not America.

    I believe the Canadian and Australian economies are models the Brits would do well to emulate. Notice I don’t pick the US, as I understand that British people don’t like our lack of public health care, etc. But you can’t say that about Australia and Canada. I’m sure there are also aspects of the German and French economies worth emulating. The Germans have no minimum wage, for instance. Copy the French rail and nuclear sectors, if you can.

    Mark, What matters in NK models is not current deficits, but changes in the expected path of spending. I was actually talking about the overall policy since 2008. Britain has had a path of fiscal policy that is much more expansionary than most other developed countries. Yes, you can argue it’s slightly tighter than the year before, but of course other countries have also shrunk their deficits. The point is that the total deficit over 2008-13 has been unusually big, bigger than other countries. And they really don’t have anything to show for it. Depreciating the pound would have worked just as well, at no cost to taxpayers.

    Britmouse, You may be right. But given the record employment levels, I very much doubt Britain will ever get anywhere near back to the old growth trajectory. One way or another we’ll find out in the next three years. I predict trend growth, meaning no makeup of the lost ground in productivity. I hope I’m wrong.

    Mike you said:

    “”Morgan I’m still skeptical of the GOP position. They seem to be in too weak of a position to win this. I hope I’m wrong.”

    https://www.themoneyillusion.com/?p=24043

    So you support the GOP brinksmanship but you just fear it won’t work.”

    I’ve never ever seen someone so bad at logic as you are. I don’t support the GOP policy, and I hope it works. That’s a contradiction? Bizarre.

    And here’s another whopper in the same post:

    “Actually Scott I do study economics. Let’s go at it this way. You claim that this statement shows that I’m either a liar or way over my head:

    “”I’m sick of you seizing every data point as somehow once and for all ‘disproving Keynesianism’ or proving that austerity works, that it stimulates, a la Rogoff and Alesina.”

    Tell me which econ textbook I should read that would stop me making this error? I mean as far as I know there’s no textbook that tells us whether Scott Sumner is a supporter of fiscal austerity-which of course he is.”

    So now “supporting austerity” implies believing that it “stimulates?” Bizarre.

  48. Gravatar of Mike Sax Mike Sax
    8. October 2013 at 18:50

    What’s so hard to understand? You support the GOP objectives but you think they way they’re going absout it won’t work. But you hope it will work.

    Where exactly are you having trouble.

    As to austerity we can end this very easily if you just answer me directly. Do you or do you not support fiscal austerity? Can you answer this with a simple yes or no? I bet you can’t.

    Sumner on the GOP’s cunning plan

    http://diaryofarepublicanhater.blogspot.com/2013/10/scott-sumner-on-gops-cunning-plan.html

  49. Gravatar of Mike Sax Mike Sax
    8. October 2013 at 19:01

    C’mon, you have to admit I’m prophetic. Just as I was saying this:

    “I’m not a Larry Summers fan. I’m glad that the Democrats were able to sink him. Let’s hope the choice is Yellen.”

    This headline was coming out-I wasn’t aware of the breaking story.

    http://www.politico.com/story/2013/10/janet-yellen-federal-reserve-nomination-98020.html?hp=t2_3

  50. Gravatar of Simon Reynolds Simon Reynolds
    9. October 2013 at 12:19

    Mark,

    It depends on your starting point. If you take 1997 as the starting point then (adjusting for the output gap) the Eurostat figures show the rise in UK public spending from 1997 (39.8%) to 2007 (45.1%) is 13.3% over ten years, rather than your “whopping 23.5% expansion…in just seven years.” Expenditure in 2000 was very low by historical standards.

    As Britmouse says, there is no debate that UK government spending went up 2000 to 2007. What I am not clear about is whether this was a “reckless/whopping” increase. If the increase in spending brought the level back to near a historical average then what is the problem?

    I suspect that the “reckless Gordon” concept is not based on sound economics but is deployed as as political weapon by those who prefer a smaller state.

  51. Gravatar of Simon Reynolds Simon Reynolds
    9. October 2013 at 12:21

    Scott,

    Interesting points — can I ask you some questions:

    1) You say again: “I believe the Canadian and Australian economies are models the Brits would do well to emulate. ” But why? On what economic grounds should the UK emulate Canada and Australia, rather than say Germany which has been the most powerful post-war economy in Europe, which beats every other economy in terms of its export performance, and which has generally had a public expenditure much higher than that of the UK?

    2) Also, I’d like to ask you again: do you know enough about the UK’s state provision of education and health services to argue that both sectors did not need increased spending in the years after 2000? Can you point to any studies you have read pro or anti the need for increased investment in UK state education and health provision?

    3) You say “smaller government is more efficient”. Have you read John van Reenen’s post:

    http://blogs.lse.ac.uk/politicsandpolicy/archives/32568

    This seems to show (figure 3) that UK GDP per working age adult outperformed that of France, Germany and the US most markedly during 2000 to 2007, exactly the period of increased public spending.

    4) Also, can you quantify the effect of start up of North Sea oil and gas production on UK GDP post-1980?

  52. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. October 2013 at 13:53

    Simon Reynolds,
    “If you take 1997 as the starting point then (adjusting for the output gap) the Eurostat figures show the rise in UK public spending from 1997 (39.8%) to 2007 (45.1%) is 13.3% over ten years, rather than your “whopping 23.5% expansion…in just seven years.””

    What meaning does the year 1997 have other than the change in governments?

    “If the increase in spending brought the level back to near a historical average then what is the problem?”

    It depends on what one means by “historical average”.

    Using AMECO estimates of potential GDP the only time in all of the UK’s peacetime history that general government expenditures ever exceeded 45% of potential GDP was 1974-85 and since 2007.

    Also, if one considers the IMF’s estimates of the cyclically adjusted budget balance, the 5.3% of potential GDP deficit of 2007 was only ever exceeded once (5.4% in 2004) on estimates going back to 1980.

  53. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. October 2013 at 14:23

    “1974-85” should read “1973-85”

  54. Gravatar of TheMoneyIllusion » Real GDP, employment, and demand shocks TheMoneyIllusion » Real GDP, employment, and demand shocks
    9. October 2013 at 15:10

    […] recently argued that the Keynesians are probably wrong about Britain, on the basis that the employment data is more reliable than real GDP data.  Today I’ll […]

  55. Gravatar of Joe Eagar Joe Eagar
    9. October 2013 at 18:57

    Mike Sox, you are reading Sumner’s words through a set of petty partisan blinders. Summers is not shilling for the GOP; he isn’t trying to create evidence to support movement conservative talking points.

    Yet you keep insisting that Sumner is doing precisely that. He didn’t argue that austerity was expansionary in this post. He simply argued that the existing stance of policy wasn’t contradictory.

    Sumner’s view (as I understand it) is that austerity is contradictory, but can be offset with central bank money printing (“printing money to fund smaller government” is how I like to put it). That’s not a popular view in movement conservative/partisan GOP circles right now.

  56. Gravatar of Joe Eagar Joe Eagar
    9. October 2013 at 18:58

    Erm, contractionary, not contradictory. Sorry about that.

  57. Gravatar of Joe Eagar Joe Eagar
    9. October 2013 at 19:12

    Ah, “printing money to fund smaller government” is not meant to be pejorative, by the way. I thought it up as a way to explain monetary offset in a way your average goldbug-type libertarian could understand. I think it’s a cool little soundbite, though I’ve not had much success with using it to actually communicate with goldbug types.

  58. Gravatar of Simon Reynolds Simon Reynolds
    10. October 2013 at 01:55

    Mark,

    “What meaning does the year 1997 have other than the change in governments?”

    That’s exactly the point. What meaning does 2000 or 1975 have as a starting point?

    Look, I’m a non-economist here trying to understand. If I view a chart of UK public spending history, say:

    http://www.ukpublicspending.co.uk/past_spending

    it shows 2007 as nothing out of the ordinary. (I know that this chart uses figures that are not adjusted for the output gap. Not sure how useful the output gap is anyway (or retrospectively calculated cyclically adjusted budget balances for that matter) — another discussion).

    But where I’m coming from is this:

    1) UK public spending rose from 2000 to 2007, but spending in 2007 wasn’t historically unusual. Also UK public spending has been consistently lower than that in some very successful economies. Germany has historically year after year had government expenditure of around 45%-48% of GDP. Why is it “reckless” for the UK to spend at this level also?

    2) None of this discussion about percentages addresses the question of what the spending was used for.

    As I asked Scott could I also ask you — do you know enough about the UK’s state provision of education and health services to argue that both sectors did not need increased spending in the years after 2000? Can you point to any studies you have read pro or anti the need for increased investment in UK state education and health provision?

  59. Gravatar of Britmouse Britmouse
    10. October 2013 at 03:24

    Simon, the case against Brown really is as simple as Scott stated in the post: Blair/Brown supply-side policy involved a significant increase in public spending 2000-7. And then productivity collapsed. Ex-post that supply-side policy was a disastrous failure.

    I am sceptical about the productivity data, and I don’t think Blair/Brown did great supply-side damage, but that’s little more than blind faith (or denial). Simon Wren-Lewis has a good summary of the “broken financial system” hypothesis, but I’m sceptical about that too.

    http://mainlymacro.blogspot.co.uk/2013/10/bank-deleveraging-and-productivity.html

  60. Gravatar of MFFA MFFA
    10. October 2013 at 03:26

    from Mike Sax
    “Lars Christensen has read me and even wrote a post about my blog.”

    This is awesome because I went to check lars’ blog and here is he has to say about Mike Sax:

    “Frankly speaking, Mike of course have no clue about economics, but he is 100% right – I should of course have said that there is no such thing as fiscal stimulus (and not policy), but then he would have had nothing to write about. Mike don’t know this, but I hate everything “postmodernist” so he succeed with his low blow.”

    Quite an endorsment! I think I will also set a blog, insult a few economist and use those who reply as proofs that my blog exists and is respected by known economists, this will be faster than learning economics!

  61. Gravatar of Simon Reynolds Simon Reynolds
    10. October 2013 at 04:32

    Britmouse,
    Thanks for the insight and also for the mainlymacro link. I’d missed that post but I like Simon Wren-Lewis’s blog and his analysis, eg:

    http://mainlymacro.blogspot.co.uk/2013/06/more-on-myth-of-labour-profligacy.html

    I’m more sympathetic to Labour than many. I’m happy with a 45-48% of GDP state. I suppose that clouds my judgment. But if I had to choose a view of the last Labour government between Scott and Simon Wren-Lewis then it would have to be the latter.

    But then I also think that any discussion of public spending that doesn’t take account of sectoral balances is pretty worthless. And I’m not sure that Wren-Lewis does that.

    We need Wynne Godley.

    I’d still like to know what Scott and Mark know of the need for investment in UK public education and health in 2000. I suspect nothing — but why would they? But there’s must be much more depth to this discussion that just thinking about % of GDP.

  62. Gravatar of ssumner ssumner
    10. October 2013 at 07:51

    Mike, I support some forms of austerity and oppose others.

    Simon, Lots of good questions and I’m afraid I don’t have time (or knowledge) for complete answers. So just a few observations:

    1. I don’t believe G/GDP is the only statistic that matters. I’d guess the ratio is lower in Afghanistan than Switzerland. Lots of other things matter too.

    2. I do believe that bigger governments are less efficient, ceteris paribus. You may not accept that, but I’ve done many blog posts explaining why.

    3. I believe that big government offers very puny benefits, at least when you get beyond the 35% ratio of Australia, or the 38% of Canada.

    4. I think some Brits cherry pick things they like about other European countries, especially Germany and the Nordics. Not much discussion of how the Nordics are highly decentralized, and both raise taxes and spend money at the local level. Or how they’ve privatized almost everything in sight. Or the 100% voucherized educational system in Sweden. Or the lack of any minimum wage in Germany, combined with large number of very low wage jobs. Or the highly paternalistic and intrusive nature of Nordic welfare. Are these things that also need to be emulated, or just the big government part?

    5. I don’t think British or American culture is as good at “doing big government” as the highly conformist Swedes and Germans. In Denmark the share of adults who say (in polls) “it is unacceptable to take government benefits to which you are not entitled,” is higher than anywhere else in the world. When I lived in Britain I knew an able-bodied 30 year old who simply choose to live off welfare. That’s not “OK” in Sweden.

    MFFA, Beautiful.

  63. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. October 2013 at 09:57

    Simon Reynolds,
    “What meaning does 2000 or 1975 have as a starting point?”

    General government spending as a percent of potential GDP increased significantly after 2000. I think 2007 is a useful comparison because it predated any discretionary fiscal policy response to the Great Recession.

    “Not sure how useful the output gap is anyway (or retrospectively calculated cyclically adjusted budget balances for that matter) “” another discussion).”

    Failure to correct for the output gap will tend to inflate the relative size of general government spending in recessions and understate its relative size in booms.

    “UK public spending rose from 2000 to 2007, but spending in 2007 wasn’t historically unusual.”

    This is only true if you fail to take into account the fact that the UK’s GDP was above potential GDP by a considerable amount in 2007. In fact the positive 4.4% of potential GDP output gap is the UK’s largest on OECD estimates going back to 1985. AMECO’s estimates of the UK’s output gap only show a larger positive output gap in 1973.

    Perhaps a simpler way of seeing this is to simply note that general government spending increased by 46.1% from 2000 to 2007. On AMECO data going back to 1970 the largest expansion over any seven year period that I can find prior to that is the 32.5% increase from 1971 to 1978. So the real increase in general government spending from 2000 to 2007 is really without parallel in the last forty years.

    And one problem with this expansion is there was no corresponding increase in general government revenues. According to IMF estimates the UK went from having a cyclically adjusted budget surplus in 2000 to the largest cyclically adjusted deficit among the advanced economies with the sole exceptions of Greece and Ireland.

    “Also UK public spending has been consistently lower than that in some very successful economies. Germany has historically year after year had government expenditure of around 45%-48% of GDP. Why is it “reckless” for the UK to spend at this level also?”

    This is a completely different question. But before we can even discuss this, first one would have to admit there was an enormous expansion in the level of general government spending from 2000 to 2007, apparently without any plan for how to pay for it in a sustainable fashion, and so far you seem to be in extreme denial about the reality of this fact.

    “Can you point to any studies you have read pro or anti the need for increased investment in UK state education and health provision?”

    Scott has suggested that the expansion of government spending has contributed to the productivity decline that the UK has experienced since 2007. In my opinion the analysis of the productivity puzzle has so far been rather inconclusive. See this for example:

    http://www.bruegel.org/nc/blog/detail/article/906-blogs-review-the-uks-output-employment-and-productivity-puzzle/

    Furthermore in my opinion the research literature on the relationship between the extent of government and economic growth is highly inconclusive. There is however a developing body of literature that suggests tha the *structure* of government may have an impact on economic growth.

    But once again, you seem to me to be more concerned with proving that the sky is green and the grass is blue than with admitting what is in fact reality.

  64. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. October 2013 at 10:04

    “According to IMF estimates the UK went from having a cyclically adjusted budget surplus in 2000 to the largest cyclically adjusted deficit among the advanced economies with the sole exceptions of Greece and Ireland.”

    should read

    “According to IMF estimates the UK went from having a cyclically adjusted budget surplus in 2000 to having the largest cyclically adjusted deficit among the advanced economies in 2007 with the sole exceptions of Greece and Ireland.”

  65. Gravatar of Simon Reynolds Simon Reynolds
    10. October 2013 at 14:54

    Mark,

    Thanks for your reply. I’m seriously not trying to show that grass is blue and sky is green. I want to understand the reality. I think is is legitimate to question your arguments.

    How sure are you of the validity of the AMECO output gap estimate of 4.4% in 2007? I believe the AMECO output gap data is based on statistical filters (such as Hodrick-Prescott, Baxter-King or Christiano-Fitzgerald — not sure which) rather than production functions or cyclical indicators.

    In contrast to AMECO, the UK’s Office of Budget Responsibility (OBR) seems to show the UK output gap in 2007 at 2%, see Chart 3.1 of the following OBR paper:

    http://budgetresponsibility.org.uk/wordpress/docs/briefing%20paper%20No2%20FINAL.pdf

    The following paper points to difficulties in measuring the output gap:

    http://budgetresponsibility.org.uk/wordpress/docs/WorkingPaperNo1-Estimating-the-UKs-historical-output-gap.pdf

    “Any output gap estimate remains highly uncertain, even when it relates to the past: the level of potential output is never observed, and while a longer run of data undoubtedly helps the identification of cyclical and trend fluctuations in output, estimates of the historical output gap remain sensitive to the assumptions, data and methodology used to construct the series.”

    Chart 3.8 in the above shows different estimates of the output gap for 2007, including one from the UK Treasury at under 1%.

    This problem is further highlighted by the summary of estimates of the output gap for 2012 shown in Chart 3.3 of the latest OBR forecast.

    http://budgetresponsibility.org.uk/wordpress/docs/March-2013-EFO-44734674673453.pdf

    This shows OECD, IMF, EU and independent forecasters estimating 2012 output gap in a range between -0.8% and -6.0%.

    How can any argument be based on wildly different figures. Are you sure that the AMECO figures reflect reality? Have you studied different output gap measurement methods and come to a conclusion about the veracity of each? Since you seem to be relying heavily on output gap data to make you point I assume you must have done.

  66. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. October 2013 at 17:48

    Simon Reynolds,
    “How sure are you of the validity of the AMECO output gap estimate of 4.4% in 2007? I believe the AMECO output gap data is based on statistical filters (such as Hodrick-Prescott, Baxter-King or Christiano-Fitzgerald “” not sure which) rather than production functions or cyclical indicators.”

    The 4.4% estimate comes from the OECD which is based on a production function approach. AMECO’s estimates are also based on a production function approach, but I consider them less reliable than the AMECO estimates, hence that is why whenever possible I use OECD estimates.

    “In contrast to AMECO, the UK’s Office of Budget Responsibility (OBR) seems to show the UK output gap in 2007 at 2%, see Chart 3.1 of the following OBR paper:”

    The OBR uses a cyclical indicator approach which to my knowledge is unique. My principle complaint about it is its inaccessibility. I have only been able to download the series back to 2007 so it’s very hard to evaluate its usefulness.

    “This problem is further highlighted by the summary of estimates of the output gap for 2012 shown in Chart 3.3 of the latest OBR forecast…This shows OECD, IMF, EU and independent forecasters estimating 2012 output gap in a range between -0.8% and -6.0%.”

    Yes, but notice the current OECD, IMF and European Commission (AMECO) estimates only range from (-2.2%) to (-4.4%). The range is only so large because it includes many independent estimates on either extreme that I don’t think are very reliable.

    “How can any argument be based on wildly different figures. Are you sure that the AMECO figures reflect reality? Have you studied different output gap measurement methods and come to a conclusion about the veracity of each? Since you seem to be relying heavily on output gap data to make you point I assume you must have done.”

    As I pointed out near the beginning of this comment thread, of the three major estimates of the UK’s output gap I consider the OECD’s to be the most reliable, followed by the IMF. I don’t have much faith in AMECO’s estimates, but they are available as far back as 1965 unlike the other two series.

    In terms of the current discussion consider the following.

    The UK’s real GDP has grown at an average rate of about 2.5% from 1985 to 2012. The OECD, the IMF and AMECO estimate that the UK’s potential GDP to have grown at an average rate of 2.5%, 2.3% and 2.3% respectively from 1985 to 2012. The OECD, the IMF and AMECO estimate that the UK’s potential GDP to have grown at an average rate of 2.5%, 2.7% and 2.7% respectively from 2000 to 2007. The OECD, the IMF and AMECO estimate that the UK’s output gap to be 4.4%, 3.7% and 3.5% respectively in 2007.

    So all three of the major estimates of the UK’s potential GDP show it growing at about 2.5% from 1985 to 2012, and at about the same rate from 2000 to 2007. All three estimate the UK’s real GDP to be about 4% above potential GDP in 2007.

    In short, all of the major estimates of the UK’s potential GDP suggest that general government spending grew at over twice the rate (5.5%) of potential GDP from 2000 to 2007, and all three of the major estimates of the output gap suggest that by 2007 the UK’ general government spending had reached a level (45% of potential GDP) only previously experienced from 1973 to 1985.

  67. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. October 2013 at 17:50

    “AMECO’s estimates are also based on a production function approach, but I consider them less reliable than the AMECO estimates, hence that is why whenever possible I use OECD estimates.”

    should read

    “AMECO’s estimates are also based on a production function approach, but I consider them less reliable than the OECD estimates, hence that is why whenever possible I use OECD estimates.”

  68. Gravatar of Simon Reynolds Simon Reynolds
    11. October 2013 at 01:46

    Mark,

    Thank you for your thoughtful reply.

    I understand that you prefer the OECD measures of output gap. I’m still not sure why they are more reliable — you don’t say. Again I’m not sure why the OBR or independent economists (and the data they derive) should be less reliable than those working for international organisations like OECD. I’m very sceptical of arguments based on the output gap — I like to see error bars on data before accepting it.

    Anyway, I agree public spending rose sharply in the UK 2000 to 2007. I think the figures show spending grew in a non-reckless manner. You think it was reckless growth.
    That’s fine. No point arguing any more about this.

    I think the spending was needed — I live in the UK and I know what the state of public education and health was in 2000. I’m glad the money was spent. I’m glad that public spending is back to 1973-85 levels — right where it should be.

  69. Gravatar of Simon Reynolds Simon Reynolds
    11. October 2013 at 01:52

    Scott,
    Thanks for taking the time to try to answer my questions. Yours is a very interesting blog, very informative (apart from the weird spat with Mike Sax — what is going on there?)

    I don’t know when you were living over in the UK but your 30 year old acquaintance would find it much harder to live on welfare here today.

    I seriously don’t want the UK to emulate Australia or Canada. We are European over here now.

  70. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. October 2013 at 09:42

    Simon Reynolds,
    “I understand that you prefer the OECD measures of output gap. I’m still not sure why they are more reliable “” you don’t say.”

    The OECD estimates of potential GDP are much more stable than the IMF and AMECO measures. The other two measures are much more influenced by the business cycle so they tend to understate both the extent of booms and understate the severity of recessions.

    The IMF’s methodology is very dependent on the particular country so it’s difficult to generalize why this is the case, but in the case of AMECO the primary problem is that their methodology for estimating the natural rate of unemployment seems to be flawed. The EC Output Gap Working Group has recognized there may be problems and is looking into the matter.

    “Again I’m not sure why the OBR or independent economists (and the data they derive) should be less reliable than those working for international organisations like OECD. I’m very sceptical of arguments based on the output gap “” I like to see error bars on data before accepting it.”

    The output gap measures of the OECD, the IMF and AMECO are publicly available and their methodology is open knowledge. This not the case of the independent estimates. If it weren’t for the OBR’s publication of those estimates we wouldn’t even know what their values are and for all we know they are derived at random. I suspect the main reason why the OBR publishes those estimates is to make their own estimate look less like an outlier by comparison.

    In the case of the OBR we know what their methodology is but to my knowledge it is completely unique. If it were a good method one would expect other organizations to emulate it but they haven’t. Furthermore to my knowledge it is only publicly available to 2007 which makes it virtually useless for economic analysis. This stands in stark contrast to the US output gap measure produced by the CBO which uses a production function approach just like the OECD and AMECO (and the IMF in the case of the G7) and is easily downloaded from a variety of sources in quarterly form all the way back to 1949.

    “Anyway, I agree public spending rose sharply in the UK 2000 to 2007.”

    Well thank goodness for that. It only took three days for you to admit what was perfectly obvious to anyone who is reality based.

    “I think the figures show spending grew in a non-reckless manner. You think it was reckless growth.”

    I never used the word “reckless”. I think the main problem with increasing general government spending by such an enormous amount is that revenues were not increased by a comensurate amount. Consequently the UK is now looking forward to years, if not a decade, of continued fiscal austerity apparently at a time when its economy is least able to cope with it.

  71. Gravatar of Simon Reynolds Simon Reynolds
    11. October 2013 at 14:11

    Mark,

    Very interesting points about the output gap. Thanks for clarifying again.

    You quote me: “Anyway, I agree public spending rose sharply in the UK 2000 to 2007.”

    And then say: “Well thank goodness for that. It only took three days for you to admit what was perfectly obvious to anyone who is reality based.”

    That’s not true. You talk like your arguments have got me to “admit” something. Nonsense. I said three days ago on this thread, “Yes Gordon Brown grew public expenditure. But was it profligate, reckless spending? Er, no”

    I argue that the growth in expenditure 2000-2007 was needed and was reasonable. You call the growth “whopping” and “enormous”. Scott calls it “reckless”. I was wrong to say you called it reckless.

    I much prefer Simon Wren-Lewis’s analysis to yours:

    http://mainlymacro.blogspot.co.uk/2013/06/fiscal-legacies-and-competence.html

    but I think the true answer to all this is somewhere in a mix of the stock-flow consistent analysis of Godley and Lavoie, and MMT.

    I think the 2008 financial crisis stuffed public revenues.

  72. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. October 2013 at 16:18

    Simon Reynolds,
    Simon Wren-Lewis’s first graph is useful because it reveals just what I suspected about the OBR’s potential GDP estimates. They are even more unstable than AMECO’s. Note that the output gap in 2000 is positive 2% implying real potential GDP growth from 2000 to 2007 was 3.0%, or more than any of the major estimates.

    Wren-Lewis also links to an earlier post where he more clearly argues that UK fiscal policy was simply too loose in 2003-07, certainly in hindsight, but even given what was known at the time:

    http://mainlymacro.blogspot.co.uk/2012/08/facts-and-spin-about-fiscal-policy.html

    1. Fiscal policy was too loose because the government overestimated potential GDP.

    2. Rather than use cyclically adjusted budget balances, the government’s rules looked at average deficits over the course of an economic cycle. That allowed them to trade off tight policy in the early years against loose policy towards the end, and they just barely met that rule.

    The first point we know more clearly in hindsight, although with the UK’s growth history over the last few decades I don’t really understand how anyone could rationally think that the higher than expected tax receipts in the mid-2000s represented anything other than a temporary aberation. All I can say there seems to be a tremendous amount of cluelessness among the people responsible for formulating UK’s fiscal policy.

    The second point was known to be true at the time and was certainly independent of the 2008 financial crisis. Sure the budget had been balanced it over the previous ten years, but what did they really think was going to happen in the next ten years with the cyclically adjusted deficit as high as it was in 2007? Obviously to bring things into balance they were going to have to tighten fiscal policy. And didn’t it cross anyone’s mind that there was bound to be a recession sooner or later?

    P.S. What I personally think about MMT can’t be said in polite company. Godley and Lavoie’s textbook on the other hand is harmless Post Keynesian piffle.

  73. Gravatar of Simon Reynolds Simon Reynolds
    24. October 2013 at 00:33

    Mark,

    The tenor of Simon Wren-Lewis’s discussion is very different to yours. In the post you link to, he refers to a historical chart of UK’s net debt as a percentage of GDP and says:

    “What this chart does not show are the actions of a spendthrift Chancellor who left the economy in a dire state just before the Great Recession. ”

    http://mainlymacro.blogspot.co.uk/2012/08/facts-and-spin-about-fiscal-policy.html

    Compare with Scott Sumner who says above: “The huge deficits in the UK result from Gordon Brown’s reckless decision to greatly increase the size of the British state in the good years (2000-07)…That’s the mess the Tories inherited.”

    It so frustrating as a non-economist to read two completely different views of the past. These two views are so divergent that they cannot both be correct. Who is right? Wren-Lewis or Sumner?

    In a later post Wren-Lewis seems promote fiscal councils, like the OBR, as likely providing the best estimates of a country’s output gap:

    “Many Eurozone countries already have their own ‘fiscal councils’…So why not get estimates of the output gap from these institutions who will be able to take into account country specific factors, and use the academic expertise that exists in those countries to maximum effect.”

    http://mainlymacro.blogspot.co.uk/2013/10/how-not-to-run-fiscal-policy-more.html

    You say the growth of public spending in the 2000-2007 was “enormous” or “whopping”, Scott says it was “reckless”.
    Output gap measurements are clearly difficult, prone to error. Regarding different output gap measurement methodologies: you choose to argue based on one that best supports your view; you dismiss one that doesn’t best support your view.

    As Wren-Lewis also notes:

    “…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.” Helpful thing hindsight.

    http://mainlymacro.blogspot.co.uk/2013/06/fiscal-legacies-and-competence.html

    As a non-economist I don’t know whether you, Scott, or Wren-Lewis is correct. I’m taking a punt that Wren-Lewis knows the UK economy better than you or Scott. Also, I repeat that you and Scott, with your overarching focus on on the headline figure of growth in spending as a percentage of GDP 2000-2007, take no account of what that spending was used for or whether the increased spending was necessary.

    PS: It shouldn’t be difficult to back up your anti-MMT and anti-Godley/Lavoie stance with printable arguments, surely? Just saying something is piffle won’t persuade anyone.

  74. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. October 2013 at 06:50

    Simon Reynolds,
    “The tenor of Simon Wren-Lewis’s discussion is very different to yours. In the post you link to, he refers to a historical chart of UK’s net debt as a percentage of GDP and says:…”

    The tenor may be different but the facts are identical.

    Wren-Lewis:
    “…Why was fiscal policy insufficiently tight over most of this period? Despite what Gordon Brown said at the end of his term, I do not think this had anything to do with the business cycle. In one sense there is nothing unusual to explain: we are used to politicians being reluctant to raise taxes by enough to cover their spending, which leads to just this kind of deficit bias….”

    “…Was this intended? The answer is to some extent not, which brings us to the second reason policy was too loose, and that is forecast error. One of the striking things about reading through the budget reports is how persistent these errors were. Outturns seemed always more favourable than expected over the first part of this period, until they became persistently unfavourable in the second. The former encouraged forecasters to believe higher than expected tax receipts represented a structural shift, and they were reluctant to give up that view in the second period. Unlucky or an aspect of wishful thinking that is often part of deficit bias?

    To their credit, the current Conservative led government learnt from both these mistakes. Most notably, they set up the independent Office for Budget Responsibility with the task of producing forecasts without any wishful thinking…”

    “…The spin that our current woes are the result of the awful mess Gordon Brown left the UK economy in is a distortion based on a half-truth. The half truth is that it would have been better if fiscal policy had been tighter, leaving debt at 30% rather than 37% when the recession hit…”

    The key phrases are “insufficiently tight”, “reluctant to raise taxes”, “deficit bias”, “too loose”, “errors”, “wishful thinking” and “better if fiscal policy had been tighter”.

    Simon Reynolds:
    “You say the growth of public spending in the 2000-2007 was “enormous” or “whopping”, Scott says it was “reckless”. Output gap measurements are clearly difficult, prone to error.”

    Even the OBR’s estimate of real potential GDP growth during 2000-07, which I find incredible, is only 3.0%. Real spending increased at an average rate of 5.5%. That rate of increase is obviously “enormous” and “whopping” regardless of the measure of potential GDP growth you use.

    Simon Reynolds:
    “Helpful thing hindsight.”

    Of course, and in hindsight all of the major estimates of potential GDP agree that GDP was above potential in 2007. So why are you still questioning this?

    Simon Reynolds:
    “As a non-economist I don’t know whether you, Scott, or Wren-Lewis is correct. I’m taking a punt that Wren-Lewis knows the UK economy better than you or Scott.”

    I don’t think that I disagree with Simon Wren-Lewis. We both think that, because they were “reluctant to raise taxes”, fiscal policy during 2000-07 was “too loose”. This was due to “errors” and “wishful thinking” and it would have been “better if fiscal policy had been tighter”.

    Simon Reynolds:
    “Also, I repeat that you and Scott, with your overarching focus on on the headline figure of growth in spending as a percentage of GDP 2000-2007, take no account of what that spending was used for or whether the increased spending was necessary.”

    My point is that there was an enormous expansion in the level of general government spending from 2000 to 2007 without any plan for how to pay for it in a sustainable fashion. That has now caught up with UK fiscal policymakers with a vengeance.

    Simon Reynolds:
    “It shouldn’t be difficult to back up your anti-MMT and anti-Godley/Lavoie stance with printable arguments, surely? Just saying something is piffle won’t persuade anyone.”

    Godley and Lavoie’s textbook has just one 14 page section out of nearly 600 pages that is devoted to fiscal and monetary policy. The rest of it is a seemingly endless series of accounting identities. There’s nothing particularly wrong with what they do, but it is extremely narrow in focus and it can hardly be considered a comprehensive macroeconomics textbook despite its prodigious length.

    Furthermore I find that almost all of the people who cite it haven’t actually read it, or if they have read it, they almost certainly don’t understand it.

    MMT on the other hand is nothing more than a pseudo-religious cult backed up by a well to do benefactor. In my opinion the world is already full of enough mindless odolatry.

  75. Gravatar of Simon Reynolds Simon Reynolds
    25. October 2013 at 03:52

    Mark,

    Thanks for taking the time to respond. As usual, you make very interesting and coherent points.

    But…

    I’m feeling beaten up in a “selective Simon Wren-Lewis quotes contest”. I know I started it. It may be that we’ve reached the useful limit of that method of argument but I’m going to use it one more time.

    Yes, UK public spending went up 2000-2007. I think; “Good. Much needed extra spending on public health and education.”

    I think this is a discussion about language rather than economics. It’s the word “reckless” that gets to me. Scott, not you, uses the word “reckless”.

    Wren-Lewis, in a post entitled “Must we live with a post-truth media?” includes the following:

    “So the idea that the last Labour government seriously mismanaged the nation’s finances is a myth.”

    http://mainlymacro.blogspot.co.uk/2013/06/must-we-live-with-post-truth-media.html

    I think I know what Wren-Lewis means by that: I think he means that the idea that the last Labour government seriously mismanaged the nation’s finances is a myth. I don’t think he means that the last Labour government was reckless with public spending.

    And here’s more of the same from Wren-Lewis:

    “In the year after the 2010 election, the new government relentlessly plugged the line that Labour’s past fiscal profligacy was central to the need for current austerity. It was a smart line to push, so it didn’t worry those making it that it was not true.”

    http://mainlymacro.blogspot.co.uk/2013/09/labours-obr-proposal.html

    I think I know what Wren-Lewis means by that: I think he means that it was not true to argue that Labour’s past profligacy was central to the need for current austerity. I don’t think he means that the last Labour government was reckless with public spending.

    That’s the problem with the “reckless Gordon” position — George Osborne, David Cameron, Nick Clegg and Danny Alexander *have* used it to argue that Labour cannot be trusted with the public finances, and to justify macroeconomic policies that have delayed the UK’s recovery from recession.

    This really is the worst kind of politics.

    In a speech soon after the May 2010 election Osborne said:

    “This is the legacy of thirteen years of fiscal irresponsibility. And it poses a very real threat to the recovery.”

    https://www.gov.uk/government/speeches/speech-by-the-chancellor-of-the-exchequer-rt-hon-george-osborne-mp-on-the-obr-and-spending-announcements

    And yet, in 2007 Osborne had promised, if elected then, to match Labour’s spending over the following three years:

    http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm

    What posed a real threat to the economic recovery in the UK in 2010 — what has delayed recovery for three years — has been Osborne’s policies.

    PS1: Who is the MMT “well to do benefactor”?

    PS2: I’m trying to understand Godley and Lavoie’s text book.

  76. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. October 2013 at 06:27

    Simon Reynolds,
    “I think I know what Wren-Lewis means by that: I think he means that the idea that the last Labour government seriously mismanaged the nation’s finances is a myth.”

    “Seriously mismanaged” is a vague phrase. I have little interest in debating something that really just amounts to semantics.

    Simon Reynolds:
    “I think I know what Wren-Lewis means by that: I think he means that it was not true to argue that Labour’s past profligacy was central to the need for current austerity.”

    Ditto. “Profligacy” is vague. Wren-Lewis wants to wade into arguments over semantics because he would like to see Labour advocate what he thinks would be a more sensible fiscal policy.

    Simon Reynolds:
    “That’s the problem with the “reckless Gordon” position “” George Osborne, David Cameron, Nick Clegg and Danny Alexander *have* used it to argue that Labour cannot be trusted with the public finances, and to justify macroeconomic policies that have delayed the UK’s recovery from recession.”

    That’s mostly politics and doesn’t really interest me. But as for policies that have delayed the UK’s recovery you’re obviously talking about fiscal policy, and that is very much debatable. The effect of fiscal policy can only be measured in reference to monetary policy.

    If fiscal policy had been less tight would the BOE have done as much QE as it has done? I very much doubt it. So I also doubt that a different fiscal policy would have much if any difference in the recovery.

    Simon Reynolds:
    “PS1: Who is the MMT “well to do benefactor”?”

    Warren Mosler.

  77. Gravatar of Simon Reynolds Simon Reynolds
    31. October 2013 at 09:29

    Mark,

    Ah, the old “that just amounts to semantics” argument. I’m very suspicious of such statements.

    I’ve been following english.stackexchange recently, and there are some interesting discussions there of the pejorative use of “it’s just semantics”, ie where that phrase is deployed to dismiss the points of others in various different ways. It seems that the phrase is often thought by those using it to be a winning trump card in an argument. Very unlikely.

    http://english.stackexchange.com/questions/97318/is-the-phrase-its-just-a-matter-of-semantics-meaningless

    I think that there’s no fancy wordplay, nor attempts to disguise meaning, in Simon Wren-Lewis’s blog posts.

    Regarding the UK public spending of the last Labour government:

    1) I think it is clear and unambiguous that Wren-Lewis thinks that:

    a) spending was “insufficiently tight”, the government was “reluctant to raise taxes”, there was a “deficit bias”, spending was “too loose”, the government made “errors”, including errors of “wishful thinking”, and that it would have “better if fiscal policy had been tighter”

    but,

    b) hindsight shows all this more clearly, and

    c) the growth in spending during Labour’s last period in office wasn’t reckless.

    2) Mark A Sadowski says that:

    a) “…there was an enormous expansion in the level of general government spending from 2000 to 2007 without any plan for how to pay for it in a sustainable fashion. That has now caught up with UK fiscal policymakers with a vengeance.”

    but,

    b) “I never used the word ‘reckless'”,

    c) it was a “whopping increase” in spending by Labour, though.

    3) Scott Sumner thinks that:

    a) Government spending rose from 37% of GDP to 50% of GDP. Then productivity plunged. That’s the mess the Tories inherited.”

    b) “The huge deficits in the UK result from Gordon Brown’s reckless decision to greatly increase the size of the British state in the good years (2000-07), combined with a decision to double down on an even bigger British state in the bad years (after 2007.)

    c) it *was* reckless spending.

    These are three very different views of what happened.

    PS1: I don’t think you can dismiss the politics so lightly. We suffer or benefit from the economic policies of the elected government.

    PS2: Does Warren Mosler fund Bill Mitchell and / or Randall Wray? Is MMT a cult?

    http://heteconomist.com/mmt-chilling-new-cult-a-channel-79-special-report-for-an-affair-tonight/

  78. Gravatar of Raymond Munson Raymond Munson
    3. November 2013 at 16:03

    Steve, Why are you posting Obamascare garbage in a
    British austerity blog? Are you that afraid of encountering
    someone who knows or cares wtf you are talking about?

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