The one thing most people think they know about economics is wrong

Keynesian deficit spending makes sense – but over and over again it has not worked

16 January 2016

9:00 AM

16 January 2016

9:00 AM

Some things are universally accepted as true. Water finds its own level; crumpets are best eaten in winter; and the England football team will not win the World Cup again, ever.

On a par with these things, the most accepted part of economics is Keynesianism. Of course, John Maynard Keynes said lots of things about economics in between his many and varied sexual encounters. But, as is the way of the world, one of the things he said turned out to be particularly influential. It is so influential that it has gone around the world. It is repeated and relied upon by Japanese finance ministers, New York Times columnists, Nobel prize winners and anti-austerity demonstrators. It is in textbooks around the globe. It is on page 262 of the Edexcel Economics A-level text book. In fact, it crops up several times in the book in various forms. Keynes, personally, is mentioned more frequently than any other economist living or dead. The idea guides government policy around the world and certainly here in Britain.

There is just one little problem: the idea is wrong. And as China — a devout follower of Keynes these days as much as of Marx — falters, it is becoming more and more apparent just how wrong it is.

The key idea is that if the economy is in the doldrums, the government should pep things up by borrowing and spending. If the public is reluctant to spend for one reason or another, the government should gallop along like the cavalry to rescue the day. The government should build roads, giving employment to builders who will then spend their wages on nights out, giving employment to waiters who will then buy new clothes, giving employment to shop assistants — and so on. The economy is thus given a boost by the good old government and all is well again.

In the Edexcel textbook this is referred to in capital letters because it is so central to how things work. It is called ‘demand management’. And, to take one example, in 2008 Gordon Brown decided the government should do some extra borrowing and spending to resist the downward force of the crisis. I remember appearing on Radio 5 Live at the time, and when I resisted the idea, I was firmly told by the BBC economics correspondent that the vast majority of economists thought it was the right thing to do. And after all, if everybody believes it, it must be true.

In fact, during the past 50 years, there have been a number of times when the validity of this central part of Keynesianism has been put in doubt. But the idea has been like Tom, the cat in Tom and Jerry. However many times it is squashed under a ten-ton weight or falls from a great height on to rocks, it comes up smiling and unrepentant.

Gradually, however, reasons to think it is not true have grown in number and received a heavier weight of support from academics. The most significant work has come from a group of Italian economists. A landmark paper was written by Francesco Giavazzi and Marco Pagano in 1990. This has been followed up by more work by Alberto Alesina, Silvia Ardagna and others. They have been dubbed ‘the Bocconi boys’, which makes them sound like a mafia gang but is in fact a reference to the university in Milan where many of them have been professors or students.

The 1990 paper looked at the performance of Ireland and Denmark in the 1980s. It noted how these countries had reduced their government budget deficits, which according to Keynesian theory should have depressed the economy. But on the contrary, the economies did particularly well. From that beginning, the Bocconi boys have gained territory and influence, spreading representatives into the Bank of England, the European Union and Harvard.

Most recently, our own Professor Tim Congdon has written a couple of papers with a thorough summary of how the Keynesian theory has not worked since 1980 in Britain and America. He compares the changes in the budget deficit after adjustment for the business cycle with changes in the ‘output gap’ — how much the economy is performing below its non-inflationary potential. All the figures come from the International Monetary Fund.

The results do not fit Keynesian theory one little bit. Take the period from 1981 to 1988. It started with a budget produced by Geoffrey Howe in which he set out how he was going to cut the budget deficit, year after year. Appalled and disgusted, 364 economists representing the overwhelming Keynesian consensus wrote to the Times saying this would be disastrous. As it turned out, the following seven years of deficit reduction saw a reduction in the output gap and above-trend growth. Another period of reducing deficits, from 1994 to 2000, saw another period of above-average performance. In contrast, there were two periods when the government did more borrowing and spending — 1989–93 and 2001–09. In theory the expanding deficits should have boosted demand. In fact, they were times when the economy underperformed.

Most recently, the government has been cutting the budget deficit again. As in 1981, we know that the Keynesian consensus expected this to go badly. In 2011, Martin Wolf, for the Financial Times, said that the planned deficit reductions were ‘a huge gamble’. He repeated with approval the view of Larry Summers, a former US treasury secretary no less, that the UK plans were ‘not going to work out well’. But as it has turned out, the output gap has been narrowed.

In America, too, Keynesian theory has kept on being wrong-footed. During the Clinton presidency, spending was being cut on both defence and welfare. According to the Keynesians, the cutting of the structural budget deficit should have depressed the economy. But the very opposite happened. It boomed. Output moved from being 3 per cent below trend to 1.5 per cent above. And in late 2012, Keynesians got very distressed about the ‘fiscal cliff’. This was the moment when taxes were increased and government spending reduced. Keynesians foresaw doom and gloom. Instead, growth accelerated in the following year.

We can also make some comparisons between countries. President Hollande was elected to power in 2012 explicitly on an ‘anti-austerity’ platform. In contrast to Britain, France did not attack its spending level. So, according to Keynesian theory, he was bravely fending off an economic downturn. But France’s economy, with its Keynesian cavalry, has done worse than Britain’s. France, the country that ‘rejected’ austerity, got it in full measure. Britain, the country that tried to be prudent, was the one that came out of the crisis better.

You might possibly be thinking: ‘OK. So it seems that there are lots of reasons to think that Keynesian deficit spending is not the clever thing we were brought up to accept as an obvious truth. But what’s wrong with it? It sounds so logical!’

Now this is embarrassing. I am afraid we are not quite sure why. There are several ideas knocking about. There is Milton Friedman’s idea that the financing of the government borrowing counterbalances the positive effects. The Bocconi boys have suggested that prudent deficit reduction increases confidence and so increases spending. Then there is the ‘Ricardian equivalence theorem’ — a name crying out to be used in a pub quiz — according to which rising deficits make people nervous, so they save instead of spending. Tim Congdon provides evidence that the big flaw is in the neo-Keynesian assumption that the money people spend consists of income after tax after allowing for a consistent level of saving. In fact, he suggests, changes in their net worth are the most powerful influence on changes in how people spend.

Let’s stop for a minute and, for the time being at least, accept the proposition that the textbooks are wrong and all the deficit spending around the world to avoid recessions has been misguided. What has been the result? Does it matter? I would like to suggest that the result has been a long-term tendency for governments to run deficits for too long and thus to create massive national debts. Japan is a prime case. I was a correspondent there in the early 1980s and remember being told repeatedly that recent growth was rather disappointing but not to worry because the government would do a lot more spending which would boost demand. More than 30 years later, Japan’s debt has gradually increased to a massive 230 per cent of GDP and ever since the early 1990s its growth rate has been dismal.

And so it is now around the world. Most advanced countries now carry huge national debts by past standards. In the USA it is 103 per cent of GDP, in France 95 per cent and in Britain 89 per cent. It seems very possible that these heavy debt levels are part of the cause of the chronically low growth in the modern world. It seems likely that what has led us to this high-debt, low-growth world is the dominance of the Keynesian fallacy.

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  • grutchyngfysch

    To be fair to Keynes, the fiscal stimulus in a bust period is only one half of his counter-cyclical economics. The other half involves cutting in a boom – but naturally, nobody ever does this (well, actually I think Tony Abbott might have been in the process of beginning to do this, but virtually never). Can you imagine any democratically elected government lasting through such a policy?

    In theory, were a government to do so, they could successfully deal with deficits when reduced government spending would have the least impact on the economy. Part of the trouble in many of the examples cited is that the governments went into a downturn with colossal amounts of debt already stacked up. That’s like setting off in a sabotaged car and expecting to win the Grand Prix.

    Would a fully applied counter-cyclical policy work? I dunno; possibly? But the point is that in democracies we are highly unlikely to see any full application of the theory in both boom and bust, which is why personally I favour seeing probable human responses (expecting them to be micro-rational and macro-irrational) as ultimately of greater importance than econometric theory.

    • Malcolm Knott

      I agree. Keynesian theory breaks down in practice because it requires cutbacks in government expenditure during the good years and democratic governments find this almost impossible to achieve. They risk losing electoral support and they are beset by well-funded and persuasive pressure groups all of whom have the same message: Think of the children! Catastrophe looms! Spend more money now! We can’t afford not to! The benefits will outweigh the costs! You know it makes sense!

      The Civil Service is always looking to expand (‘Of course we need more resources, Minister’), ministers who resist Treasury economies are promoted and every crisis (e.g. flooding) evokes the same response ‘Don’t worry. It’s all in hand. We have spent / are spending / will spend more money.’

      And in the background are the political advisers and party managers. ‘Minister, these cutbacks will not go down well with The Guardian, the BBC, social media, your constituency party, women voters, etc., etc.

      My suggestion: We should outlaw the terms ‘government money’, government funding’ ‘additional resources’ etc., etc. It’s all taxpayers’ money (i.e. other people’s money) and that’s what we should call it.

      • disruptivethoughts

        On the current basis, it is not only taxpayers’ money but the money of people who are yet to be born and become taxpayers. There is no guarantee that they will want or successfully be coerced into paying such taxes for today’s folly.

        • Todd Unctious

          We have just finished paying off the debt incurred to fight WW1. We have had a national debt averaging 90% of GDP since 1692. Why will our great children object to money that helped build the infrastructure of the civilised society they will be born into?

          • disruptivethoughts

            It is our responsibility to ensure that they do not object!

          • Todd Unctious

            If interest rates go back to their long term average of 4.2% and debt refinancing rates/bond rates go back to say 5% then we would have to find an extra £45 billion a year to finance our previous largesse. This would add a modest burden to annual government finance on a par with doubling defence spending.

          • Malcolm Knott

            Is that true? I thought we had only just finished paying for the Boer War.

          • Todd Unctious

            9 March 2015. Gideon redeemed the last £1.9 billion of War debt from 1918.

    • WillyTheFish

      I think there is a further problem for Keynesianism in today’s world because of the greater volume of international trade. In Keynes’ time spending tax payers’ money injected spending power into the economy and boosted aggregate demand most of which was satisfied by British industry. Today, a similar boost will suck in a larger volume of imports, i.e. the Chinese will (ceteris paribus) probably do better out of it than the British.

      • balakris

        Well said.
        If govt spending does not leak into imports,the case for a Keynesian stimulus is undeniable.
        One is reminded of the Hayek Kahn exchange at the lse circa 1930 in which Hayek was asked if it was his case that if Kahn went out and bought an overcoat -it was Great Depression time- it would increase unemployment. Hayek had no answer except to point to the blackboard full of triangles.probably the early days of the nonsense we today know as ‘ rational expectations and Ricardian equivalence’.

    • LoveMeIamALiberal

      It’s right to say that those who call for borrowing to spend during a downturn as a Keynesian solution to recession don’t understand that Keynes saw deficits as being financed from surpluses made during economic good times. I also think the size of deficits (as percentage of GDP) were much more modest than his contemporary fans appreciate.

  • Bobserver

    Government spending to build up NECESSARY infrastructure as in China in the 1980s and 1990s help facilitate manufacturing and exports that made China the 2nd largest economy in the world. Spending money to bail out State owned banks was probably needed but the continuing support for state owned companies that are not a national or security concern is an inefficient use of resources and privatization would be better. Also bailing out investors (speculators) is another inefficient use of resources and should not be the remit of government. As this website continually reminds us the Chinese stock market is not reflective of the real Chinese economy.

  • WFB56

    An excellent article with a well considered argument.

    We are told that the economy is weak or shaky and that low interest rates and high government spending are needed to compensate but investors and entrepreneurs see this and it restrains decisions that would boost the economy. That this robs investors of confidence is evident when one looks at the cash on corporate balance sheets around the world.

    For all my friends that carried on to do their Phd’s in economics, they wasted their time, its simple, its confidence, stupid.

    • disruptivethoughts

      I submit that economics is a discipline worthy of the most fascinating profundity of study, but that it will never be a science until Artificial Intelligence is sufficiently well-developed that it can understand and process the mass of interdependent data and make some sense of human behaviour, or at least reduce the boundary conditions. Until then, our theories and experiences will not match up and the ‘science’ is invalid.

      • BS it is POLITICALLY IMPERITIVE that certain people (i.e. big-govt apologists) wilfully believe that deficit/stimulus spending works. Thus, it is already heavily politisised, so will probably never become a science.

        • disruptivethoughts

          Maybe so but the point I was making concerned the impossibility of making a science out of something that cannot reliably be measured and tested, although perhaps that is why it must give way to politics for the time being.

          • Todd Unctious

            Economics is a failure because it has built itself up as a pseudo-science. A ridiculous pretence to reassure governments that financial matters can be predicted according to set formulae. They may as well revert to soothsayers and the tealeaves given how many black swans we are thrown.

  • HJ777

    “Take the period from 1981 to 1988. It started with a budget produced by Geoffrey Howe in which he set out how he was going to cut the budget deficit, year after year. Appalled and disgusted, 364 economists representing the overwhelming Keynesian consensus wrote to the Times saying this would be disastrous. As it turned out, the following seven years of deficit reduction saw a reduction in the output gap and above-trend growth.”

    Indeed, if you read Ed Balls’s “Bloomberg Speech” of which he was so proud, he claimed that the 1981 budget caused a recession, whereas the figures clearly show that not only did it not cause a recession but that the economy grew steadily for many years thereafter.

    • GUBU

      We should be thankful that, unlike 1981, in 2010 and then 2015 there was indeed an alternative – to Mr Balls as Chancellor of the Exchequer, and then as MP for Normanton.

      • HJ777

        Indeed, especially as in that speech Balls also made the following ludicrous claim:

        “And there was no significant structural deficit in the public finances until the collapse of tax revenues from the City of London in 2008.”

        Whereas the OBR (around the time of his speech) estimated that the structural deficit averaged 2.7% of GDP from 2003 onwards.

        Indeed, in 2012, the iMF estimated that the UK structural deficit had been 4.6% of GDP in 2006 and 5.2% of GDP in 2007.

        • GUBU

          We can all rest easy in the knowledge that Mr Ball’s economic competence will now only be tested within the confines of Norwich City’s boardroom.

          The quote is interesting in terms of illustrating how important tax revenues from the City were to the New Labour project.

          • HJ777

            At least Norwich City weren’t foolish enough to make him FD.

          • GUBU


            Though I suspect Mr Balls will be offering plenty of advice to whoever is – after all, he was involved in running the country (albeit into the ground).

          • HJ777

            Well, Delia is a Labour Party supporter and she probably believes Balls’s line that all our economic problems of the time simply blew in from America.

          • GUBU

            She may well do, but I suspect that Mr Balls doesn’t really get much opportunity to hold forth on the major economic issues of our time in his new role – much as he might try.

            After all, most locals wouldn’t want to hear about neo endogenous growth theory – unless it could help make their beets bigger.

        • …until the collapse of tax revenues from the City of London in 2008.”

          Problem this “revenue” was “smoke and mirrors.” Like a virtual particle, it was created from nothing, and in an instant returned to nothing, indeed less than nothing when the later costs to “rescue” the City are considered.

          • HJ777

            Yes, and the “smoke and mirrors” revenue covered up for the lack of sustainable revenue from real business activity.

    • It all depends where/what you cut.

      • HJ777

        The Keynesian argument is that you should spend more and it’s the spending, in itself, that does the trick. Balls never argued that cutting was fine as long as you cut the right things – he opposed spending cuts.

  • HJ777

    James Bartholomew asks why the Keynesian response to a downturn doesn’t work and says we don’t really know.

    Hayek explained why it doesn’t work rather well, I thought.

  • SPPaul

    When a Keynesian is in full flood . . . . . more spending = more jobs = more taxes is one simple version beloved of panellists on Question Time, then the audience all cheer and applaud. But they know in their hearts that it is too good to be true and vote differently when election day comes. (I generalise!)

    Snooty economists are fond of saying that a country’s economy is not the same as a household one. But sensible people know that if you max out the credit card – there will be trouble stacked
    up around the corner.

    • Dunciad

      Oh dear. You say you’ve heard people educated to the nth degree say that a country’s economy isn’t the same as a household one – and then you go and claim that it is! I’d hate to have been your teacher. “No SPP, 2 + 2 is 4. I told you this last week. Why do you go on insisting it’s 15? I’m going to have to have a word with your parents…”

      • SPPaul

        . . . . a touching faith in degrees.

        • fundamentallyflawed

          Can you stop arguing with me and proving me wrong as you are violating my safe space…….

          • SPPaul

            Fair point . .

      • HJ777

        There are plenty of foolish and mistaken people who have been educated to the ‘nth degree’.

        By the way, the likes of Hayek disagreed with those economists – and he was awarded the Nobel Memorial Prize for his work.

        • Dunciad

          There are indeed plenty such people. But there are also plenty people who are ineducable – and anyone who believes that national economy is the same as a household purse is patently one of them.

          • HJ777

            Nobody said it was the same.

            But certain fundamental principles always apply.

          • Dunciad

            Actually, there are people who’ve said it was the same. SPPaul for one. George Osborne for another. Margaret Thatcher for another.

            But yes, certain fundamental principles do indeed apply. Such as that if everyone stops spending to look after their own wallet, the economy as a whole seizes up.

          • HJ777

            Ever heard of an analogy?

            Everybody can’t stop spending as we have a division of labour and hence people need to trade with others. They can only reduce (or increase) the amount.

            I reject the idea that you or anyone else knows how much people should spend and how much they should save. You don’t think that the former is always preferable to the latter, do you?

          • Dunciad

            Analogy? Is that like talking out of your backside? I’ve heard plenty of that tonight, yes.

            Everybody can’t stop spending, you say. Fair enough – though Mr Cameron was telling everyone to do just that in the early stages of the coalition. More, he said that since the people were cutting their outgoings it was incumbent on the govt to do the same. Durr…

            Sorry, but I have no idea what you’re talking about in your second par.

            And sorry again, but I have to go now – and shan’t be around for a few days so won’t be able to banter.

          • HJ777

            It’s obvious that you have no idea what I’m talking about – or what you’re talking about.

            No idea at all, hence your resort to abuse.

          • fundamentallyflawed

            You know when you are winning when they insult you and then take their ball home.

      • grutchyngfysch

        The thing I now most value my experience in academia for is the realisation that people with high-level degrees exhibit broadly the same range of intelligence as the general population, with a marked deficiency in common sense.

  • rolandfleming

    This all sounds fine in theory, but while ‘talking the austerity talk’, Osborne has not in fact ‘walked the austerity walk’. Instead, he has bloated the National Debt to levels undreamt of in even the most feverish of Brown’s dreams. Not to mention the QE. So, is it not in fact the case that the UK has been spending like a raving Keynesian? In which case the UK’s relatively benign recovery, hardly supplies a good counterexample to the Keynesian canon, does it?

    Perhaps it is all about confidence. As long as everybody thinks everything is going to be OK, spending goes up. Hence it was not the stimulus per se in France, but simply Holland’s anti-austerity rhetoric that caused the problems. However, in a different context, short-term government largesse could also boost confidence.

    In other words there is no fixed relationship between government spending and recovery. If it looks like the government is ‘doing the right thing’ (which may be spending or austerity, depending on the context), then confidence will go up, and the economy recovers.

    • HJ777

      Not really the case. The Keynesian argument is about the deficit, not the debt.

      For all his faults, Osborne has gradually been reducing the deficit and reducing government spending as a proportion of GDP. He had no influence over the starting point as he inherited a record peacetime deficit. Therefore, it could not be argued that he was increasing government spending to supply a ‘stimulus’.

      • Dunciad

        Just as a matter of interest, what has happened to the debt under Osborne? Almost doubled it, hasn’t he? Since you’re a deficit hawk, I wonder why you don’t seem worried about this, too?

        As for that record peacetime deficit, need I remind you that Osborne came into office following the biggest global financial crash in history? Or that until the crash, he was committed to sticking with Labour’s spending plans? Or that over the course of Labour’s first ten years in office, the deficit had been falling – from the 3/9% Brown inherited from the Tories in 1997 to 2.1% in 2008 (an almost 50% reduction)?

        In other words, and I’m sure you’ve been told this before but I think it bears repeating, the deficit didn’t cause the crash; the crash caused the deficit – precisely because Brown, like governments all around the world, did what Bartholomew says is the wrong thing and stepped up to the plate at a time of international crisis.

        Meanwhile, what do you think Osborne will do when the global economy goes belly up again sometime in the next 12 months or so? Do you really believe he won’t get the chequebook out and start spending, just like Brown did?

        • HJ777

          I am worried about the debt – I was merely pointing out that the Keynesian argument is about the deficit, not the debt.

          It is not true to say that over the first ten years of Labour the deficit had been falling. They inherited a rapidly falling deficit (which had arisen as a result of the early 90s crash under the Tories) which turned into a surplus when they followed the spending plans they had inherited. However, after 2001, they turned on the spending taps and surplus turned to deficit. Indeed, in every single year after 2001, Brown missed his own budget deficit forecast. Labour was running a deficit of nearly 3% of GDP at the height of a credit boom – both the EU and the IMF warned of the dangers. By comparison, before the early 90s crash (also caused by an unwisely stoked credit boom) the Tory government at least had the sense to run a 2% surplus and they got the debt down to 26% of GDP (in other words, fiscal policy was counter-cyclical). This meant that when the inevitable crash came, we were starting from a fiscal position 5% of GDP more favourable (and a much lower debt ratio).

          I never suggested (who ever has?) that the deficit caused the crash. The crash was the inevitable consequence of a credit boom, although the boom was exacerbated (but not caused) by big increases in government spending. But when we were running a sizeable deficit at the height of an unsustainable credit boom, it is not reasonable to say that the deficit following the crash was all down to the crash. Indeed, the boom largely concealed the size of the structural deficit – since estimated at 5.2% of GDP by the IMF – before the crash.

          In 2007, Osborne (unwisely, in my opinion) said he would commit to Labour spending totals for the following three years. Leaving aside the issue that he was not in power (so it was academic) the problem was that Labour didn’t stick to the spending plans it announced in 2007 – it spent far, far, more.

          The global financial crash was, indeed, huge – but that doesn’t explain why our deficit was so much larger than that of other major economies. The extent of the credit boom and the poor shape of the public finances before the crash do.

          • Dunciad

            Apologies, I mistook you for an Osbornite.

            I never said you said the deficit caused the crash. But you need only read the pages of this magazine, or the Telegraph, or the Mail or the Times or the Express to see people claiming that very thing, day in and day out.

            Meanwhile, I stand by my figures about the deficit over the course of the first ten years of the Labour govt. Of course, they’re not my figures: they’re those of the Treasury – and I append the relevant graph below. I hope its legible. Whatever, it shows that the deficit in 96-7, when the Tories left office, was just below 4 per cent; and that the deficit in 07-8, when the crash hit, was at just over 2 per cent.

            It could, of course, be said that Brown was spending too much anyway – but it would have to be acknowledged that was what the people wanted: increased investment on schools and hospitals after the rape of 18 years of Tory misrule. It could, again, be said, that most of that money was wasted. But that would be another argument, not at all related to the question of whether GB had run up a massive deficit. As the charts show, he hadn’t.

            To be sure, Labour didn’t stick to the spending plans it announced in 2007 – but that is because the next year the crash came along and, well, you know the rest.

            Except that you wonder why, after the crash, our deficit was so much larger than that of other countries. The answer is simple. The crash was caused by the financial sector – and thanks to the late Mrs Thatcher we have an enormous financial sector and, er, nothing else. (Yes, I’d have liked Brown and Blair to do something about that, but still: the problem began under the Tories.) Hence, while other countries were bailing out part of their economy, we were bailing out practically the whole of ours. There isn’t a financial adviser in the world who’d advise you to put all your investment eggs in one basket. But that is what we have been doing the past 30 years. And we go on doing it. There has been no march of the makers under Osborne – merely another crazy housing boom.

          • HJ777

            “I never said you said the deficit caused the crash. But you need only read the pages of this magazine, or the Telegraph, or the Mail or the Times or the Express to see people claiming that very thing, day in and day out.”

            On the contrary, the claim is made by the left (for example, The Guardian) that the right says, this but I defy you to provide an example of where it has actually been claimed.

            “Except that you wonder why, after the crash, our deficit was so much larger than that of other countries. The answer is simple. The crash was caused by the financial sector – and thanks to the late Mrs Thatcher we have an enormous financial sector and, er, nothing else.”

            That is nonsense. Manufacturing output grew by around 20% under Thatcher/Major. It stopped growing after 2001 (it was at the same level in 2007) and then fell under Labour. In 1997 our trade was approximately in balance – by 2007 we were running a huge trade deficit.

            The credit boom happened under Labour. It covered up the lack of sustainable growth for many years, until it came to its inevitable end.

            “Whatever, it shows that the deficit in 96-7, when the Tories left office, was just below 4 per cent; and that the deficit in 07-8, when the crash hit, was at just over 2 per cent.”

            The deficit in 1997 had long peaked and was falling rapidly after the early 90s recession. By sticking to the spending plans Labour had inherited initially, it turned to surplus. After that it increased – even in a boom. As I said, the Tories were running a 2% surplus at the same point in the economic cycle.

          • Dunciad

            David Cameron has spent the past 8 years saying that big government was responsible for the deficit. Since, until the crash, the deficit was lower under Labour than it had been under the Tories in the 90s, this cannot be true – unless the Major administration was operating even bigger government than Brown / Blair. (Thank you, by the way, for reminding me that the deficit the Tories left the Labour govt in 1997 wasn’t actually at its peak. This only makes my arguments all the stronger.)

            As for manufacturing, I said earlier that I’d have liked B/B to do something about our over-reliance on banking. Nonetheless, to insinuate that Thatcher and co were friends of industry is, shall we say, disingenuous.

            And a surplus, as you know, is just demand sucked out of an economy. Why would Osborne be aiming to do that in an economy already short on demand? Oh yeah, I remember, in order to be able to offer tax cuts for the rich in the 2020 manifesto. I assume you’re one of the putative beneficiaries. Most of us aren’t. I just wish most of us realised it…

          • HJ777

            I see you are not willing to be rational or consider the data and have moved to spouting nonsense.

            “Since, until the crash, the deficit was lower under Labour than it had been under the Tories in the 90s”

            It’s very simple – you are not comparing like with like. You are comparing the early 90s crash under the Tories (but not the late 80s boom which preceded and led to it), with only the boom under Labour (but not the crash that followed). You are deliberately comparing only the worst years under the Tories with the best under Labour.

            “As for manufacturing, I said earlier that I’d have liked B/B to do something about our over-reliance on banking. Nonetheless, to insinuate that Thatcher and co were friends of industry is, shall we say, disingenuous.”

            I have spent my career working in manufacturing industry, including my first job out of university in NE England starting in 1982 as a young engineer. Manufacturing industry was growing strongly by then following an initial severe shakeout of old and overmanned industries (and some good ones – nobody is pretending that mistakes weren’t made in economic policy in 1979 and 1980)

            The Thatcher/Major governments went to huge lengths to encourage new manufacturing investment. To name just a few – Fujitsu, Komatsu and Nissan in the NE, Toyota in Derby and countless electronics facilities in Scotland. There were many hundreds of less high profile/smaller investments – record inward investment, in fact.

            And here are the figures for manufacturing output:


            Note the rapid growth after 1981. Note the overall growth under Thatcher/Major. Note that output peaked in 2000 and was no higher by 2007 and then fell.

            Some of us don’t believe in managing demand and neither you nor I know what will be in the 2020 manifesto. So far Osborne has tended to increase taxes on the better off most (the figures on this are pretty clear) and help the least well off by raising personal allowances. Brown, of course, made the lowest earners pay more income tax.

      • Frank

        One could also argue that increasing the population by circa 10 million since 2005 (thus inter alia destroying wage inflation) without bothering to add any major government costs in respect of housing/schools/hospitals/utilities/roads/etc made Britain operate more cost efficiently even if the pips are now beginning to squeak and are close to breaking.

        • Todd Unctious

          2005 UK population 60.4 million. 2015 UK population 64.8 million. Ten year increase 4.4 million.

          • Frank

            Given that the Government’s issuance of National Insurance numbers contradict their numbers for immigrants, where do you get your figures and why should you trust this source?

          • Todd Unctious

            I accept there are up to 1 million here illegally, plus around 400,000 foreign students and any number of tourists. Why do you think there are an e tra 10 million in ten years?

          • Frank

            Because that seems to be the number a significant commentators are using. Even if it is only half that, it is clear that it is beyond the country’s capacity to absorb.

          • Todd Unctious

            You misunderstand. They are saying there are 10 million different, new people here, not 10 million more. If 10 million enter and 6 million leave the net gain is 4 million but there are 10 million new people here.

          • Frank

            I don’t, I suspect that virtually all of the leavers are OAPs going off to Spain, etc; but equally suspect that they will in due course return for their final years of medical treatment, etc. In other words the Government counts them as permanently departed (and perhaps releasing housing, school places, hospital beds, etc), but the reality is that they are only away for a few years.

          • Todd Unctious

            In which case a large number of your 10 million are just OAPs returning after a few years away.

          • Frank

            Look, you two are Tories up to the hilt. I get that, but perhaps you would accept that an open door immigration policy has been disastrous for Britain, is proving to be disastrous for Germany, etc, and finally that this country looks and sounds as though it is swamped.

    • grutchyngfysch

      Confidence certainly is critical. Actually, it’s one interesting element that relates to a criticism of Austrian school economics: that it is incredible that financial players are easily duped by government plans. I’m not sure whether duped is the right verb, but the Osborne/Balls double-act of talking up austerity (conducive to both party’s political narratives) whilst Osborne actually did nothing of the sort does indeed seem to have taken in both the rating agencies and the bond markets. Perhaps they did see through it – I find it difficult to imagine that they didn’t – but they, like the politicians seem to have banked on the fact that everyone else wouldn’t.

    • Ludwig Van

      We have the same thing in Australia where the big bad evil neo-liberal Liberal party is cutting, cutting, cutting but when you actually look at the figures, they tax more and spend more than any government in the history of the country.

  • ohforheavensake

    Oh, dear. Let’s take the most recent example; the coalition government cut heavily in 2010-12, and the economy suffered. George Osborne then began a stealthy programme of Keynesian demand management (in the housing sector first of all, which was the wrong place to do it, but never mind), and the economy started to grow. And the output gap shrunk, as it would do- and as Keynes predicted.

    Check your facts, James. This is very sloppy work.

    • ohforheavensake

      And on that letter signed by 364 economists? Here’s the real story-


    • HJ777

      They didn’t ‘cut heavily’ in 2010-12 – that’s a myth.

      Indeed, during those years deficit reduction was more about raising taxes than cutting spending.

      Remember that government spending rose by 8% in the last two years of the Labour government – even now that hasn’t been reversed. It’s very easy to make the GDP figures look good for a period if you borrow and spend a lot more – the problem is that it is not sustainable. Debt was growing faster than GDP in money terms and the ‘growth’ was all in the public sector, not the private sector, so there was a negative return on that spending.

      • grutchyngfysch

        To add to this: the “stealthy Keynesian programme” ohforheavensake mentions (the fact of which I’m not disputing) also happened to coincide with a redefinition of GDP to include the grey market – which accounts for the bulk of the “success” he’s talking about. Actual productivity rates are far more interesting than fiddled GDP, and also far more depressing.

    • Cameronio

      The economy was already bad when inherited from Gordon Brown, as is always the case when a Labour government ends, so the *growth* of spending was reduced. Spending was not cut.

      • Todd Unctious

        There have been only four occasions when Labour Governments have ended; 1951, 1970, 1979 and 2010. How was the economy bad in 1951 and 1970?
        Labour had minority administrations in 1924 and 1931 but these would not count. Just like the Tories refuse any blame for their coalition with Clegg.

  • Texas Sunday Morning

    Except Krugman et al have already dealt with the Irish and Danish examples.

    If you are a small country,
    And you can export your unemployment
    And a major export market is in a much larger economy close by
    And elements of that large economy are doing quite well
    And your people have the requisite language skills to easily move

    Then you can reduce spending without a blow to the wider economy.

    Which is rather like saying you can kill flocks of sheep with voodoo, as long as you have plenty of anthrax as well.

    • disruptivethoughts

      I have often wondered what the proportion might be of Irish citizens to residents in the Republic of Ireland. Notwithstanding that we British are also keen to leave our country of birth, to the tune of about a million citizens apparently living across continental Europe, it must also be a high proportion for the Irish.

      • Todd Unctious

        It was estimated last year, for the Irish Times that 800,000 Irish born people live abroad. Almost half of these in the UK. This is a drop from nearly 1 million in 1990.

        • disruptivethoughts

          That is a very large number, considering the population of Ireland!

          I love the pseudonym.

          • Todd Unctious

            It is 18% of all Irish born who are currently alive. The Irish diaspora is close to 70 million.

  • We seem to have a problem in that Keynes economic stimulation seems to have worked in the 1930s but not in the 2000s. It is suggested the problem is not with Keynes but rather the application of Keynes theories/insights to economies/situations far different than the ones Keynes analyzed, one implicit assumption being that the increased production would be occur in the same economy which had been stimulated by the injection of new governmental funding. Given the huge balance of trade deficits in most countries it should be evident this is no longer the case.

    There is also the problem that Keynes “solutions” were only ever applied by the politicians to one-half of the business cycle, namely higher taxes during the “up” half of the cycle were never imposed to both repay the deficits incurred during the down cycle, and to dampen the “animal spirits” resulting in the booms which produce the busts. Indeed, deficit governmental spending was maintained during the “booms,” resulting in higher highs, and governmental competition with the private sector for labor and materials, driving these costs higher.

    There is also the problem that the increased governmental spending, in many cases, was not for “investment” into productive projects such as infrastructure improvement, but rather into running costs to maintain/increase “the dole.”

    Given that increasingly the increased “production” induced by governmental spending no longer occurs in the economic area “stimulated, and that governmental spending is increasingly directed into direct consumption without production, it is not surprising that Keynes theories/models no longer apply.

    • HJ777

      Keynesian economic stimulation didn’t work in the 1930s.

      The UK cut spending and ran a balanced budget from 1931 (i.e. rejected the idea of economic stimulus) – and was rewarded by strong growth.

      The US tried Keynesian policies (New Deal, etc.) and grew much less and ran up large debt doing it.

      • disruptivethoughts

        The oft-repeated wisdom is that the US didn’t apply really recover from the Great Depression until World War II, during which time American manufacturers benefitted enormously from Allied spending which was arguably a form of forced Keynesianism, albeit not to the economic benefit of the economies providing the funds or repaying the loans.

        • HJ777

          That analysis is certainly consistent with the economic data.

          • disruptivethoughts

            And I’m not even an economist, which is a good thing because I would then necessarily have to be wrong 90% of the time, especially when signing ‘open letters’ to the papers.

  • King Zog

    “But the idea has been like Tom, the cat in Tom and Jerry. However many times it is squashed under a ten-ton weight or falls from a great height on to rocks, it comes up smiling and unrepentant.”

    Wrong cartoon.

  • LG

    Obviously if you want to trash someone’s economic theories you say “in between his many and varied sexual encounters”?

  • balakris

    More than economists, businessmen know the virtues of Keynesian policies.
    A group unfortunately hardly consulted by those in ivory towers imagining they know what’s good and right but generally getting it massively wrong.

  • rodger the dodger

    US Economist Martin Armstrong writes:

    “Just before his death in 1946, Keynes told Henry Clay, a professor of Social Economics and Adviser to the Bank of England that he hoped that Adam Smith’s “Invisible Hand” would help Britain out of the economic hole it is in: “I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.””

    And also, Keynes said: “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”

    In other words, lowering taxation stimulates the economy. Who knew? Certainly not people who call themselves ‘Keynesians’, who either conveniently forget, or are simply unaware, he ever said this.

    • HJ777

      There is an interesting interview with Hayek, which you can find on Youtube, in which he discusses Keynes.

      Hayek is generally very complimentary about Keynes but he explains that Keynes knew very little about economics or previous economic theories. According to Hayek, Keynes felt his ideas were right and so never bothered to investigate the work of a great body of earlier economists. Hayek is quite specific about this and as they were friends, I see no reason why Hayek should have been anything other than entirely honest in his remarks.

  • sarahsmith232

    Japan’s gdp per capita growth has been higher than ours. why our we even still talking about gdp growth? Osborne’s beeb blocking immigration reduction ’cause he needs the population increase to mask our anaemic growth. absolutely stupid that we should consider this a success. japan hasn’t been using mass immigration to mask anaemic growth. their population has been in decline, so add that to the calculation and they’ve prob’ been growing relatively faster. certainly, their quality of life has been improving better.

  • Caractacus

    And here’s this article conveyed through the medium of rap music.


    • Cool Slim

      Great vid, although I do think that the Austrian school of economics is controlled opposition.

      • Quest for Liberty

        What do you mean by ‘controlled opposition’?

    • Ivan Ewan

      Good rap battle. Quite fitting to see at the end who won and who was celebrated.

    • Peter Bensley

      I can’t help noticing that both rappers make better points than most of the discussion in this thread.

  • Cool Slim

    The national debt is meaningless. Why would we need to borrow in
    our own currency? The answer is that we don’t.

    People have
    been predicting debt problems since the 1940s and yet they never materialise.
    Look at this article:


    Fact is, the debt is simply a stock of money in savings accounts at the Federal

    The government spends by printing. Look at this video


    go to 8:00

    Even Greenspan admits it


    We spend by
    printing, we don’t need to borrow, we choose to sell bonds for the sake of
    investors. Google Modern Monetary Theory.

  • “If the public is reluctant to spend for one reason or another, the government should gallop along like the cavalry to rescue the day.”

    • WISteve

      “For example, when a government agency spends monies on infrastructure,
      e.g. roads, the money spent doesn’t increase the productivity of road
      building. However, if consumers saved that money instead and the money
      went towards new more efficient road building technologies, then one can
      rightly say that the productivity of the nation has increased.”

      So instead of actually building something (roads) we should just think about it for awhile and then build them in the future? It sounds like your “paralysis by analysis” applied economy-wide would grind things to a complete halt.

      What in the world makes you think that there are not all sorts of entities world-wide already engaged in figuring out “more efficient road building technologies”? The incentives are there.

      Do you live your life in a cubicle?

      • “So instead of actually building something (roads) we should just think about it for awhile and then build them in the future? It sounds like your “paralysis by analysis” applied economy-wide would grind things to a complete halt.”

        I’ve explained how productivity is achieved, nothing more. How you read into my observations a “paralysis by analysis” is a mystery.

        • WISteve

          “I’ve explained how productivity is achieved and how it differs from
          consumption, nothing more. How you read into my observations a
          “paralysis by analysis” is a mystery.”

          Not a mystery at all. You implied that present day road building is not “productivity increasing” and advocated “saving” until some future date when “new more efficient road building technologies” will increase productivity. So why not just stop all human activity until some future date when we can do everything more efficiently? Perhaps then you can let us all know when we pass your threshold of efficiency.

          Do you have any idea of what these “new more efficient road building technologies” are? I am always looking for investment opportunities.

          • “You implied that present day road building is not “productivity increasing” and advocated “saving” until some future date when “new more efficient road building technologies” will increase productivity.”

            You misread my comment! Where did I say “advocated “saving” until some future date when “new more efficient road building technologies”‘? That’s not what I said. Once more, I differentiated between consumption and saving using road building as an example. Nothing more.

    • WISteve

      Prevailing interest rates tell us that there is plenty of low-interest capital available for non-consumer spending aka “investment”.

      • “Prevailing interest rates tell us that there is plenty of low-interest capital available for non-consumer spending aka “investment”.”

        Do people tend to save more when interest rates are relatively high or relatively low?

        • WISteve

          It’s irrelevant whether people save more when interest rates are higher. The point is that there is no shortage of low cost funds for investment.

          Why not consume now AND in the future. That’s what workers are for. They produce the things that people want.

  • MrBishi

    With a national debt of £1.5 trillion and rising and after £375 billion of QE and an austerity bill of £200 billion to date over and above the estimated cost, I for one remain unconvinced by this article.

  • Cameronio

    Where Keynes’ method work in the past, it was because the spending was enabled from a surplus position, rather than through borrowing!

    • Ludwig Van

      Why not just return the money to the people in tax cuts and let them do the spending in ways that all the different millions of individuals each believe is important and valuable rather than having a few civil servants decide that we need to spend billions on ‘free’ roof insulation or a $100b fibre optic network like in Australia? I mean, seriously, why not? If taxing people enough to have leftover money not even being spent is a good thing, why not tax everyone at 100% and make all their decisions for them?

  • Part of the problem for the UK is that in a globalised world, we are no longer just recycling money within our own economy. When people unleash the purse strings or buy on credit, it doesn’t so much send money to the man up the street who makes furniture or the car factory down the road. More often than not, it sends a large part of the wealth abroad, enriching German car makers and their factory hands or converting into luxury spending by Chinese millionaires. How much of most car purchases stays in the UK? Ten or fifteen percent? Twenty? I don’t know, but until we resurrect our manufacturing industry we are likely to be condemning a large part of our population to very low paid service jobs.

    • newminster

      I don’t have the figures, but you could look at how much foreign money comes into the UK through Honda, Toyota, and Nissan.
      In theory at least while money goes to enrich German car makers, a similar amount ought to be coming into the UK to enrich assorted workers in UK industries.

      • “Ought” and “should” are always red flags. The large and increasing current accounts trade deficit shows this is not the case, and on an aggregate basis the real assets of the UK are being traded away to partially off-set the deficits, e.g. “trophy” real estate including luxury homes. What exactly does the UK now produce that anyone wants? Some niche markets such as Scotch whiskey and tweeds, and highest level products such as Rolls automobiles still exist, but the domestic manufacturing and even the financial services are increasingly foreign owned, thus the any profits are exported, rather than being reinvested in domestic economic expansion.

      • That would only be true if they were building the car parts and sourcing materials from British factories. If they are importing kits and simply assembling them here, most of the value added work would be imported.

        • disruptivethoughts

          The automotive supply chain is thoroughly globalised but many of the suppliers are based in the UK, so the ‘kits’ for most cars whether made in the UK, Germany or elsewhere, could easily contain parts from multiple sources. Industry can no longer be broken down to the simplistic notion that Japan makes all the parts and ships them to an assembly shop in Swindon or Sunderland.

  • MrJones

    long explanation: too boring

    short explanation: the banksters are wrong about everything except the fastest way to enrich themselves at the expense of everybody else

    caveat: the way people like McDoom apply Keynes is just an excuse to spend money

  • sidor

    One thing is quite obvious and trivial: before printing money to save the economy, the government has to take care of the money leaking from the (real) economy. This is what Roosevelt did, by closing the stock exchange and controlling the banks, and what Obama failed to do in 2008. The main channel of draining the real economy is the link between banks and the stock market. Banks shouldn’t be allowed to play in the stock market using people’s money. Then the money will start working in the real economy.

  • Watt

    “It seems very possible that these heavy debt levels are part of the cause of the chronically low growth in the modern world.”

    Nope. It’s low interest rates. Low interest rates are deflationary. Low rates have already led to gaping pension deficits and lower bank profits, while the returns on savers’ deposits have also been eroded.

    • brandroodrum

      But aren’t low interest rates necessary to compensate for the high levels of debt caused by deficit spending? Because otherwise the debtors would default.

      • IMNSHO it is the other way round.
        higher debt = higher risk
        higher risk (should) = higher interest

        We seem to be trapped in an economic system which now requires continually expanding debt to function.

        As long as sufficient real assets are generated to offset the increasing debt this *MAY* be tolerable, but increasingly the debt is incurred for non-, even counter-, productive activities, e.g. the AB-InBev SAB-Miller merger.

  • brandroodrum

    This is a very interesting article, thank you. One thing I don’t understand is that the author seems to take for granted that Keynesianism is still dominant in the US and UK. It was my understanding that the Keynesian system was largely dismantled following the abandonment of the Bretton Woods system (the Nixon shock) in 1971 and especially during the Thatcher and Reagan governments.Can anyone explain this?

    • Peter

      When you have inflation at 30% its pretty difficult for governments or anyone to borrow money, but now we have near zero interest rates Keynesian policies now make more sense.

  • pobjoy

    Of course, John Maynard Keynes said lots of things about economics in between his many and varied sexual encounters.

    Conservatives providing the proper model of propriety, of course. 🙂

    Keynes realised that capital requires consumers, and consumers require buying power. He wrote knowing that Marx overshadowed all, and that his own nostrum was for temporary adjustment, within the capitalist cycle. So this does not mean that Keynesianism is dead. Some think that it is time for more of his idea.

    Unless the blogger disagrees, admitting that capitalism has run aground, as Marx predicted it would.

  • mickey667

    Its equally true of austerity,

    Every country has turned away from it, most significantly America which is outperforming us.

    We are the only ones left cutting like this. Growth could have been so much stronger and, you know what we could have built with government money?

    Bloody houses. As it is our ecominy is propped up on another housing bubble. Another benefits and idea behind the Keynesian approach is stability. You don’t have the rockets and sticks of the current approach.

    Another bubble is about to go pop in housing and we’ll be no further forward

  • King Zog

    Whatever you say about his economic theories, one thing is certainly true of Keynes: he was one ugly m*therf***er.

    Sorry to lower the tone, and all that…

    • T Gould

      I think the tone of the article was lowered irrevocably when the writer decided to insert “Of course, John Maynard Keynes said lots of things about economics in between his many and varied sexual encounters.” very early on in the article.

      Not a particularly tasteful preface to a relatively serious article on economics.

      • pobjoy

        Does the juvenile, distasteful comment not disqualify the economic content? Does it not make the author contemptible? Surely, the owners of The Spectator need to get a permanent sense of commercial reality if they are going to charge money for the magazine.

  • Peter

    Complete nonsense! For a start interest rates are at record lows so Governments can borrow at near zero interest rates so they would be mad not to take advantage of that. Secondly borrowing to invest makes sense just like a company might invest to build a new factory, well guess what governments can and should do the same but of course its important to invest in things that will produce economic growth and tax revenues otherwise its just like a “dig a hole fill it in again” type scheme. Schemes such as Crossrail, the H2 link, building council houses, high speed broadband or flood defences are the sort things that a government should invest in and would grow the economy. That is why we need a National Investment Bank as proposed by Jeremy Corbyn so money that is government day to day spending is separated from money that is for investment purposes.

  • John Andrews

    Borrowing to invest in profitable enterprises makes sense. Borrow money to pour down drains makes no sense. The key issue is not borrowing. It is judgement.

    • Ludwig Van

      No but governments base their investment decisions on political considerations not business judgement. There are no repercussions for bad financial performance like there would be in a listed company. Here we had government building outdoor learning areas not even requested by anyone, because it was calculated to lead to positive reinforcement via signs on school gates and amongst people employed in the building industry. If people receive tax cuts what stops them making their own “investment in profitable enterprises” based on their own specialist knowledge?

      • John Andrews

        They are different issues but I like outdoor learning areas and don’t support government interference in the running of schools. Nor do I support ‘investing’ in higher pay for eg train drivers.

      • sidor

        You confuse two absolutely different things. The goal of a financial investor is getting money from speculation. A government, unless it consists of paranoidal monetarists, isn’t interested in getting money from speculation: it can print money. The goal of a (responsible) government is to increase GDP, that is the real production. Which can be done by direct investment in real economy by stimulating the demand which is depressed when money move from the real market to “financial market”, that is to useless speculations.

        • Copyright101

          But one big problem is that the government doesn’t print money, it borrows it.

  • disqus_xoLqvHgqmd

    This article is nonsense. The reality is that the countries that have maintained demand as best they can a la Keynes have survived OK. The austerity countries have had a much more difficult time – Greece, Spain, Ireland. If the USA, China, Japan and the UK had not stoked demand we would all be in a much worse place.

  • George

    The problem, surely, is not that Keynes was technically wrong about government spending when capital and labour are under-performing, but that governments have serially abused the Keynesian system for their own ideological ends?

    Take just one very large feature of, particularly western economies: massive government borrowing to fund a voracious welfare state.

    Governments borrow money to give to the unemployed (unemployable?), and not, as Keynes suggested, to fund investment that would reduce unemployment. Governments, for election purposes, borrow money to keep people unemployed by offering free money at a rate above what the market would deliver for work. That does not help growth.

    Similar arguments apply to other aspects of the welfare state, such as tax credits and pensions.

    Keynesianism is essentially a technical argument about macroeconomic equilibrium. It states that full employment of capital and labour is only one of many possible macroeconomic relationships. If labour and capital are under employed, then technically—and if done sensibly—the government can “kick-start” the economy without danger of inflation.

    • pobjoy

      Governments, for election purposes, borrow money to keep people unemployed by offering free money at a rate above what the market would deliver for work. That does not help growth.

      It keeps money in circulation, which increases consumption, that leads to investment. All spending power comes out of capital, and all capital comes out of labour, so there is circulation of value. So ‘work’ and ‘debt’ have become meaningless words, to a degree.

      • Ludwig Van

        So why stop there? Is there no trade-off? If not, can the government keep twice as much money in circulation and have twice as much “investment’?

        • pobjoy

          If twice as much spending power comes out of capital production, of course it can. The controlling factor is capital production, not the whim of government.

    • sidor

      What does it mean “capital is underperforming”? The dealers at NYSE are lazy to buy and sell, and drinking beer?

  • Rich Paul

    Deficit spending never makes sense. When you consume something, you raise the price of that thing. When you produce something, you reduce the price of that thing. When the government borrows money, it increases the cost to business of borrowing that same money. This slows the expansion of business, and the creation of jobs. Government spends money on less important things, while preventing it from being spent on more important things. People spend their money on that which is most important to them.

    • sidor

      This is a ridiculous argument. A government can print money in any amount it wants to. And distribute the money among people the way it likes. In this way the market demand, and, respectively, production can be stimulated. Effectively, the rich will pay for that. Which is a necessary regulation.

      • stevetierney

        Oh dear. Sir, I very much hope you have your hands nowhere near any levers of power.

        • sidor

          In 2008 Obama acted against you hope. He massively printed money and thereby saved the country from the crisis.

          Merkel, on the other hand, acted according to your hope, and created a huge crisis in the EZ.

    • Peter Bensley

      Businesses do not grow through borrowing, but by doing business, by actually having customers. Borrowing is merely a catalyst that allows that growth to happen more rapidly and efficiently.

      This seems to me to be the essential fallacy of right wing economic dogma: Mistaking the spice for the soup. Managers are considered ‘wealth creators’, but their business could be better accomplished by their workers without them than by them without their workers. Investment and borrowing are seen as the cause of growth, and it certainly helps, but a company with customers and no investment is in a far better place than one with investment and no customers.

      So while you are correct that competition for capital will reduce the rate of creation of jobs, you should consider that first of all, if capital is not scarce then reducing supply may have no particular effect; and second, that businesses will not want to borrow to expand in the first place if they do not have customers to expand *for*.

  • alasdair galloway

    Thank goodness the man is dead so he doesnt have to be aware that he is being traduced by a mental pygmy of the capacity of your correspondent.
    One of the main problems with Keynesianism is that it has been managed by politicians and you know what they are like – they want to get elected. Keynes’ argument was that over the course of a business cycle a govt should be revenue neutral. In other words, as the economy contracts as it moves into recession then the govt should increase spending, borrowing as required, or cutting taxes in the optimal way to increase demand for goods and services, so as to maintain demand in the economy and prevent, as far as possible economic resources (particularly labour) becoming unemployed. Then as the economy recovers, tax can be increased and spending cut in such a way that the “cost” during the recession is repaid over the course of recovery and boom. The problem is that this cycle, rather inconsiderately, doesnt always correspond to the political election cycle. Few politicians would go to the country raising tax and cutting spending, thus while politicians are quite happy to follow Keynes’ advice as their economy heads for recession they too often ignore the “paying back” bit.
    Secondly, your correspondent quotes extensive and varied research on growth. However, growth comes about for a wide range of reasons, some of which we dont understand, or even know about (if we did know …….), but more importantly Keynes did not direct his theory at economic growth. Keynes was a highly practical economist who, inter alia forecast with great insight the consequences of the Treaty of Versailles in “The Economic Consequences of the Peace”, but in the General Theory of Employment, Interest and Money the debate that Keynes engaged with was not one of economic growth, but how to save economies from permanently sinking into increasingly deep and long term recession as a result of the crash of 1929. His target was to rebut that the level of employment is determined by the price of labour, as in neoclassical economics, but was instead determined by the spending of money (aggregate demand).For instance, an economy, with other things equal, has a limit on its growth potential set by the amount of available labour, so if labour is fully employed the possibility of economic growth is at best limited. If an economy, due to an unwillingness to lend for investment is in long term decline, Keynes’ ideas on demand management would still apply.

    • sidor

      Any economist is a charlatan. There is no such science. Just an absolutely meaningless BS. “Mental pigmy” is an undeserved compliment for any economist.

      • Todd Unctious

        I totally agree. Failed pseudo-science.

      • stevetierney

        Actually, economics is an incredible field of study. A fascinating social science which has the potential to help us all in almost everything we want to do. But like any social science, the success of that does depend on listening to the people who are actually good at it – rather than the ones who tell you exactly what you want to hear.

    • larrikin

      The Chinese communist dictatorship is unconcerned by democratic elections, so I’m looking forward to the PRC proving Lord Keynes (and Alastair Galloway) right. But it’s not looking promising.
      I wonder which shibboleth our betters will abandon first: Keynsianism, man made global warming or Islam the religion of peace.

    • Thank you. Well explained, the real problem of course is people (or politicians in this case). Off topic: Communism would be great too if it weren’t for the same problem: people.

  • sidor

    The one thing most people think they know about economics is wrong: we (in the West) are living in a welfare economy. The entire wealth of the society is produced by a rathe small minority. The rest are either absolute or relative parasites. The latter still have to be provided with means to consume in order to provide the necessary demand for the goods produced by the minority in order to avoid an economic collapse. It is absolutely clear that no market economy can provide a reasonable mechanism for distributing goods produced by a minority in the entire population. In a reasonable way, it can only be done by the government. Alternatively, the distribution will be controlled by gangster organisations, the so-called “financial sector”. This is what we see now, and this was the main reason for the 2008 crisis. It isn’t a moral problem: it is an existential economic problem.

    • Todd Unctious

      You imply that work is noble. Why refer to those left idle by technology as parasites? Would you have them toul in the fields as penance?

      • sidor

        I call a spade a spade. The modern economy makes most of the people useless parasites. It isn’t their guilt. It is a sad and clear fact. The same kind of economy existed in Rome in its last period. Unemployed crowd on the streets demanding bread, wine and entertainment.

        • Todd Unctious

          Surely wealth and the economy serve the people. You suggest we are parasitic on the greater good.

          • sidor

            I don’t. It is very bad when most of the people are parasites. It has nothing to do with the wealth: most of the parasites are poor whereas a minority of parasites are wealthy. The same was in Rome. Such a society cannot exist long. The government has to find a useful occupation for the people, doing something for the general Good.

          • Todd Unctious

            They have. Spending.

          • sidor

            Right. The most useful occupation is reprocessing the products of agriculture into organic fertiliser.

  • Sounds like Common Sense to me.
    There is an interesting correlation between converts to a theory that is literally incredible, illogical or mathematically unlikely. The Converts become acolytes, and display an almost religious fervour and faith in their theory.
    Keynesian Spending
    Global Warming
    Free NHS Care
    And they refuse viciously, religiously and hysterically any possibility that they are wrong.

    ‘The answer to high debt is more debt’ – er, OK.
    ‘The answer to high borrowing, is, er, more borrowing’ – er Riiiiiight.

    Great article – thank you.

    • Peter Bensley

      Further examples:
      The Moon Landing

      Sometimes people get angry when you try to denounce their beliefs not because of religious fervour, but because their beliefs are true, well-established, and important, and they are tired of dealing with crackpots spreading misinformation and failing to grasp simple principles.

      For example, no Keynsian ever said ‘The answer to high debt is more debt’. You would surely get angry if a crackpot came along and started claiming things you know to be true were false, insulting you, and then to top it all off arguing against things you never said. When you argue against an imaginary version of someone’s argument, they automatically know that you are talking nonsense, because they have intimate knowledge of their genuine argument and can tell the difference at a glance.

      • I am not denouncing any beliefs, merely pointing out the Messianic nature of belief in unlikely theories.
        More borrowing and more debt (more taxes as well) were what the 2 Eds promised, and presumably they believed those nostrums.
        They also referred to them as Keynesian.
        That was THEIR argument, which was rejected by the electorate, and now, in further demonstration of my proposal, along comes Mr Corbyn with QE for the public!

        I suppose it is a case of people exercising their right to believe what they will, against all the evidence such belief clearly requires a high degree of faith.
        Or fanaticism.
        Or obsession.
        A further example is the very election of Mr Corbyn, but I’m really not complaining, best three quid I’ve spent for ten years!

        • Peter Bensley

          >not denouncing
          >unlikely theories.

          If you’re going to contradict yourself at least try not to do it in the same sentence.

          >More borrowing and more debt (more taxes as well) were what the 2 Eds promised, and presumably they believed those nostrums.

          So you don’t actually know what you’re criticising as “unlikely”?

          Leaving aside that your knowledge of the subject comes entirely from guesses based on campaign promises, it still isn’t the case that anyone ever said that more debt would solve debt. They may have said that debt isn’t a particular problem, or that more debt would stimulate the economy, but neither of those is quite the same as the oxymoron you attribute to them.

          >along comes Mr Corbyn

          The thin veneer of anti-dogmatism over your argument scratched off real fast, didn’t it?

          >Or obsession.

          Corbyn Corbyn Corbyn Corbyn Corbyn

          Yeah obsessed people are just *dreadful*, aren’t they?

          >A further example is the very election of Mr Corbyn,

          Corbyn may not win the next election, but he has a chance. Between the loss of Scotland to the left-wing SNP, Conservative gerrymandering, and the other candidates having nothing much offer the Labour membership made the right choice. Whether it will pay off remains to be seen, but if he hadn’t won I’d have already placed my bets on the next election.

          >not complaining, best three quid I’ve spent for ten years!

          What did the confirmation email say?

  • sidor

    In fact, there is nothing new in what Keynes suggested: his so-called theory just represents common sense. The government simply must interfere in the economy if something goes wrong, which is a regular event. To expect that the notorious “invisible hand of the market” will regulate any trouble is thoroughly idiotic. The government’s interference must be drastic if the scale of the problem is big.

    • orsonhinds

      That is palpably the precise opposite of the reality as time will tell. Watch China. You won’t learn anything – people like you never do – but watch anyway. Its imminent economic collapse will be (has been) made vastly worse by the kind of ‘drastic’ intervention about which you and your kind spout such endless nonsense.

      The invisible hand is about to exert itself once more and correct China’s vast Keynesian programme of inward investment creating an utterly false boom based on cheap fiat money, a rigged market and a galactic asset bubble.

      Of course, that could never happen to us, could it. Oh, wait…

      • sidor

        Don’t you think believing in the idiotic 19th century superstition of “invisible hand” is a form of a pagan religion?

        It is also interesting about China. What kind of “imminent economic collapse” are you about? Rational people discuss facts, not astrological predictions. And I guess you have no idea of the economic history of China within the last 3 millennia. They had a developed market economy much before anyone heard about Rome.

        • orsonhinds

          So you are a moron. Thank-you for the confirmation with your latest litany of complacent, pig-ignorant nonsense.

          • sidor

            Please don’t take it as an offence: you sound like an economist. Are you?

        • stevetierney

          Forget slang terms and just think it through. You’ll get there. The invisible hand is actually the collective wants, needs, desires and demands of billions of human beings across the world. You don’t get a much more brilliant and powerful force than that.

          • sidor

            You seem to be a man of literature. I commend your colourful style. Let me educate you about science.

            Have you ever heard of the game theory theorem by Morgenstern and von Neumann? It proves that the market game has no solution, that is no coherent strategy is possible. Therefore, the market game cannot be self-regulating and cannot regulate anything. An external regulation of the market economy by an actor who is not involved in the market is absolutely necessary.

          • oldoddjobs

            “I see something I don’t understand. Solution: government regulation. What is government regulation? It’s the solution, idiot.”

        • oldoddjobs

          It’s a metaphor. Is that really so hard to grasp?

          • sidor

            Something like Santa?

        • Peter Bensley

          Perhaps you should read Adam Smith before you criticise him, or at least ask someone what he actually said. His metaphor of the invisible hand bears no resemblance to the religion of cargo cult market fundamentalists who now worship it as their one true god.

          You are correct that the market needs regulation, and Smith would agree with you, but confusing him with his idiot heirs makes you look ignorant, offers him a disservice, and does them a great favour.

    • stevetierney

      Possibly the most false statement in regards to macroeconomics I have ever read. But beautiful in its perfect wrongness.

      • sidor

        Could you please elaborate on wrongness? Thanks in advance.

        • jeffersonian

          Where does one begin?!

          • sidor

            With Adam Smith, I suppose.

          • jeffersonian

            Oh no, you’re thousands of miles away from Adam Smith.

          • sidor

            That’s right. I stay away from charlatans.

          • hobspawn

             “That’s right. I stay away from other charlatans.”


          • sidor

            That’s right. I stay away from him and other charlatans.

          • hobspawn

            All but one.

          • sidor

            I accept this remark. Your self-criticism is commendable.

  • Cobbett

    “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent”

    Dr John Kenneth Galbraith,

    • sidor

      We saw recently that billions of the EU taxpayers’ money were moved to the pockets of private bankers: this operation was called “Saving Greece”. Not a single Euro of these money have crossed the Greek border. A trivial robbery disguised by so many words.

      • Cobbett

        The world’s financial system is rotten to the core.

        • sidor

          It’s not the “financial system” which is rotten: it’s the society which doesn’t mind to be robbed by a bunch of swindlers, in a very primitive and cynical manner, under the accompaniment of the chorus of liberal economists.

        • hoss2013

          It is an old old game. Well explained here but mainly found in the last 1/3 of the book


    • Roger Hudson

      Allowing the creation of ‘money’ out of thin air by a small elite has been at the heart of the problem. If only we could create food or medicine out of thin air.

  • Ian Walker

    Sentence one: bland and superfluous. Sentence two: a list of opinions-as-fact. Sentence three: equivocation of those opinions with another, in an effort to underscore the essential “truth” of the article. Sentence four: a good old fashioned ad hominem attack.

    I gave up after that.

    • SimonToo

      That’s idle of you. You ducked out just before the article started motoring. With the benefit of the headline, you might at least have persevered to the end of the second paragraph.

      • Callipygian

        His loss! Meanswhile, I’m getting an education.

    • sidor

      What else did you expect from an article about economics? What kind of meaning could be found in discussing a non-existent science?

  • greggf

    Economics is a social science: as such it’s never exact and always part of the trials of tribulations of man(&women)kind.

  • sidor

    Many years ago, Stanislaw Ulam, a famous mathematician and theoretical physicist, challenged the famous economist Samuelson to present a prediction of an economic theory that would be (a) non-trivial and (b) true.

    Still waiting for the answer.

    • Mark Myword

      I think you will find that Samuelson did answer the challenge. His response was to propose the theory of Comparative Advantage – first stated by Ricardo – which demonstrates that foreign trade between nations depends upon comparative not absolute advantage in the use of scarce resources.

      • sidor

        That was indeed the only thing Samuelson could find. In this way he admitted his failure to answer the question: the economic history demonstrated that the principle of comparative advantage was counterproductive. The US economy was persistently protectionist during all its history until after WWII, and as a result of this policy it has been growing much faster than the British economy which followed the principle of free trade.

        Any other result produced by the “economic theory” within the last 200 years?

  • stevetierney

    “This is embarrasing, we are not sure why.” Um, really? Because using Government money to distort free market signals and cause incorrect investment is pretty obvious. As is the fact that resources are not imaginary but real, so if you are using them to build bridges to nowhere and roads that generate no profit, they are not available to promote genuine growth through productivity improvement in response to demand. Might I recommend this as a good primer: http://www.amazon.co.uk/How-Economy-Grows-Why-Crashes/dp/047052670X

    • sidor

      The only reason for the productivity growth is new technology. And the only source of new technology is fundamental science (mathematics and physics). The latter have nothing to do with any economic theories and economic systems. Feynman has pointed out that the most important event of the 19th century providing our current enormous prosperity were Maxwell’s equations.

      Conclusion: in order to provide conditions for the economic growth, all the useless bullshitting economists should be fired and all the available resources should be allocated to the fundamental research.

      • oldoddjobs

        Let’s drop microwaves and iphones into Malawi and they will become rich

      • Copyright101

        The only reason for the productivity growth is new technology

        Mostly yes. But I would argue that skills, training or just a new way of looking at something can also increase productivity. Finding a better way to do something.

        Too often what is meant by increased productivity means making people work for longer hours for the same pay. Thats not really greater productivity, thats just a redistribution of wealth from workers to employers.

  • jeffersonian
  • walstir

    “The key idea is that if the economy is in the doldrums, the government should pep things up by borrowing and spending.”

    As John Maynard Keynes wrote in 1937: “The boom, not the slump, is the right time for austerity at the Treasury.” The problem is that for most self proclaimed Keynesians, now is never the right time for austerity. During the boom, their argument is that austerity is unnecessary since government revenue is rising as a result of the boom and total debt (even though it is growing) is nevertheless shrinking as a percentage of GDP and is therefore not a concern. In the runup to the next boom, austerity threatens the fragile recovery. As the boom fades, it is argued that austerity will precipitate a collapse. Then when the economy slumps, it is back to pepping things up. When it comes to austerity it is always jam tomorrow; but never jam today. William McChesney Martin, a former US Federal Reserve chairman, famously observed that the job of the Federal Reserve was to take the punch bowl away just as the party got going. However, when the voters ultimately get to decide who comes to the party in the first place; the punch bowl is going to be around most of the time.

    • Callipygian

      Your astute observation also shows that ‘austerity’ is entirely the wrong word. Much more fitting would be ‘prudent restraint’ or ‘fiscal moderation’.

  • Lyle

    The article cites a number of examples where “Keynesian” intervention made things worse, and moving toward a balanced budget made them better. Surely it’s incumbent on critics to produce counter-examples, or argue why those cited are wrong?

    Seems to me there’s little point in mounting an a priori argument against an empirical position, especially as the author makes it clear that he doesn’t know why “Keynesian” measures don’t work – there’s just this data.

  • jackguthrie

    Keynesians routinely ignore the negative relationship between G/GDP and economic growth. And of course the simple mathematics of the spending multiplier is nuts.

  • Anonymous Coward

    “It seems very possible that these heavy debt levels are part of the cause of the chronically low growth in the modern world.”

    Yes, “seems”, important word there. The author fails to explain at all, in any way whatsoever, how government debt causes low growth. So how is he any better than the people he complains about?

    If the world hasn’t had six years of austerity since 2010, what has it had? And I put the question, has austerity worked? Is Europe thriving and prosperous? Is America? or England?

    Perhaps the Spectator could have a real Keynesian like Robert Skidelsky or even Steve Keen bat away these absurd arguments in support of a policy that doesn’t work: austerity!

  • Richard Ferguson

    That which you attribute to Tim Congdon is a theory that has been in existence since the late 1960s and was, I believe, first postulated by members of the Chicago School.

  • There seems to be an obvious flaw in the argument: “Government spending to increase demand does not work to stimulate an economy; the evidence for this is that reducing debt hasn’t had the opposite effect of depressing the economy.”

    Who said reducing spending would deflate the economy? There are many factors that contribute to a flourishing economy. Government spending is just one of them. The Keynesian argument is to claim that in the absence of those other factors, government spending can replace some of their impact.

  • mikewaller

    I think that the core of the problem is that Keynesian economics is like antibiotics: when first used on a population not previously exposed to them, they work wonders. Sadly, with the latter, killing all the most vulnerable microbes simply makes additional space for those which are more resistant. With the former, humans being humans, the possibility of government action starts to get factored in. Where there is no possibility of such action, the long-term interests of the workers better approximate to those of the shareholders and managers; but where governments can be expected to step in if things are pushed too far, that partial alignment is lost. And that, I fear, was the story of much of British industry in period 1960-80.

  • M P Jones

    “And after all, if everybody believes it, it must be true.”

    Yes, the eternal question: are the most the best – or just the most? 🙂

    One fundamental economic problem is that with the honest price discovery of capital put out to grass (never to return if the plundering statists get their way) misallocation of capital has become endemic. I think that the more capital is concentrated the less efficiently it is used. Dead money simply sucking interest payments out of the economy is worse than reduced money supply. For that reason QE (as implemented) doesn’t work with regard to stimulating demand or creating inflation. In a fiat system with interest payments money needs to be created at a steadily increasing rate just to keep the amount of capital available for productive purposes constant. This leads to an exponentially expanding money supply just to stand still in terms of available capital for productive investment.

    The psychology of consumer demand is another matter. Perhaps the size of households’ interest burden plays a greater role than most economists assume. In any event, when the wide lower part of the pyramid is sucked dry there is no demand – the economy cannot run on new super yachts and wars alone.

  • Baron

    In the past when, in the advanced economies such as Britain, the government borrowed, spent the money could not have but boosted the productive side because most of the demand for the sort of stuff the government spent the money on was made in-house as it were, and the economy got an additional kick from higher exports, too.

    In a globalised world, in countries such as Britain, the government spends the money, but the demand is mostly served from imports (and that includes imports of manpower, i.e. foreign workers who get wages here, transfer a chunk abroad to the countries they came from).

    Furthermore, most of the investigation into the Keynesian paradox fail to distinguish between the two constituent parts of any Government spending (that on consumption, and that on investment).

  • Brady Waddington

    Biased article. Very first paragraph 1) JMK “…said lots of things about economics in between his many and varied sexual encounters” 2) “…the idea ( Keynesianism ) guides government policy around the world and certainly here in Britain” when in fact, post Reagan and Thatcher, the predominant “idea” has been Friedmanite supply side economics coupled with deregulation…. NOT demand management.

  • dissidentvoice

    This piece doesn’t demonstrate causation at all. What you assume is that a deficit is always discretionary and that it precipitates the economic conditions. You take the example of 2001, when a recession hit. When recession hits the automatic stabilisers kick in, so things like benefit
    payments go up.
    To say that George Osborne’s deficit-hacking did not harm the economy at all is quite absurd; if you look at the first three years, where he achieved his targets, the economy did badly. Once he stopped achieving them, it did well.
    Most of this is straw-manning: “According to the Keynesians, the cutting of the structural budget deficit should have depressed the economy.” No, no-one thinks that. The point is you don’t try and cut it when spending is already depressed.

  • Tom Sykes

    Why did you need mention Keynes sexuality? How did it add to your argument?

    • The_greyhound

      Why not mention Keynes’s sexuality? Are you ashamed by its louche degeneracy?

      • Tom Sykes

        It is not relevant to the article. Only of interest to onanists.

  • AdrianM

    A benign, informed dictatorship is the only economic model that would work for this country. If only we could find a benign, informed dictator. (Don’t bother looking for one, they don’t exist.)

  • So many words and not one mention of ‘private debt bubble’.

  • Peter Bensley

    Nothing in this article actually demonstrates or even suggests that Keynsian stimulus does not work.

    The author appears to be making up a fundamentalist strawman form of Keynsianism that believes cutting spending is always bad and will lead to instantaneous disaster, then critiquing that. And yes, that imaginary form of Keynsianism does not work.

  • Tubby_Isaacs

    So a couple of economist and a few examples? Some of this is demonstrable rubbish. America hasn’t had “chronically low growth” recently. Nor Britain’s growth particularly “disappoint” from 2001.

    You realize that any youngster reading this and confidently asserting it in a tutorial is going to be laughed out of class? Do you care? You could try and do an honest review of the literature/evidence.

    Not that anyone’s ever said cutting spending is always bad anyway. Canada and Sweden did it at the right time.

    • Davros64

      According to a Retarded Phat man, you think I am ‘Gonzo’ or something on the WSC MB.
      At least check yer facts FFS.

  • Kieran

    Keynes did not argue that reducing government spending would automatically lead to a depression, he suggested that it would be a contributing factor to potential depression.

    There are dozens of other factors that could have lead to GDP growth during this period of government austerity (speculative bubbles, debt fueled consumption, individual private sector successes etc). The absence of a recession in these circumstances does nothing to disprove the idea that austerity programs could still be doing more harm than good to growth.

    I don’t disagree with this being a worthwhile debate but drawing logically incorrect assumptions as above is not a good starting point.

  • Migru Ghee

    All this talk about Keynes is odd. His theories are so unrefined and old, outdated, overrated, overexposed in the public eye, omnipresent in pseudo-economic discourse amongst novices. The hard truth is, economics is not a science, it’s a religion and oh boy have the West crucified their G.O.D.

  • Peter Bensley

    What I’ve proven, I think, is that some ideas are defended for twitchy emotional reasons and others because they are important and true. This is demonstrable and something that everyone has experienced at some time or other, so it’s a very easy case to make.

    I’ve also demonstrated that your objection isn’t based on the fanaticism of your opponents or any particular implausibility of their theories, but on predictable partisan animosity. You don’t like Keynsians, belief in climate change or the provision of healthcare free at the point of use because you are generically and dogmatically right wing and you don’t like the left wing, in the same predictable way that Elmer Fudd does not like wabbits, and with more or less the same results. This is also readily observable.

    You claimed that your opponents said things that they have never said, and you haven’t done anything to justify or explain that after being called on it, you’ve just avoided the question. That’s obviously quite a serious problem with your argument, if it’s essentially just you arguing with something you said to yourself, so I don’t think you can prove your point without addressing it.

    You’ve also ignored my other question, what did the confirmation email say when you signed up as a labour supporter last year? Or did you lose it, delete it? I have this funny suspicion that you keep a fastidiously clean inbox, don’t you? Call it a hunch.

    You seem to think I’m upset or fanatical or whatever your lazy thesis demands of me, but it’s interesting that you are the one spamming lols, caps and emojis and I’m the one still capable of putting together a coherent, step by step argument to support my position.

    • Q.E.D.
      Wonderful, do keep it up.

  • charles kinbote

    you appear to be quite the expert on the subject of Keynes’ many and varied sexual encounters
    so why in heaven’s name did you wander into the field of macroeconomics, which is very capably handled by Paul Krugman and Nobelist colleagues

  • Tom M

    Well the one thing that I don’t thnk Keynes takes into account but has a big effect upon how economists profess to predict economic traits is that there are left wing economists and right wing economists.

  • Postkey

    “As it turned out, the following seven years of deficit reduction saw a reduction in the output gap and above-trend growth. ”

    As it turned out:

    ‘As Smallwood points out, the Treasury and Bank drew the wrong conclusion from the apparent success of the combination of fiscal contraction and monetary expansion in the 1980s and 1990s. “In both cases, the contractionary impact of tax rises and spending cuts was counterbalanced by substantial falls in interest rates, and of the sterling exchange rate at a time when our export markets were growing,” he writes. Exports and investment took up the slack left by budgetary cuts.’

    21 Feb 2013