French lessons for Miliband and Balls

“Take it from me mate, don’t…”

“Bliss was it in that dawn to be alive” wrote Wordsworth in middle age, reflecting on the euphoria his younger self felt at the French Revolution. Ed Miliband felt a similar sense of elation when François Hollande was elected President of France in May 2012 albeit expressed in slightly more prosaic terms.

Mr Miliband said that President Hollande’s campaign “has shown that the centre-left can offer hope and win elections with a vision of a better, more equal and just world”. Mr Miliband declared “This new leadership is sorely needed as Europe seeks to escape from austerity” and assured us that “I know from our conversations in London earlier this year and from [Mr Hollande’s] victory speech tonight of his determination to help create a Europe of growth and jobs”

Alas, since he spoke of President Hollande’s “determination to help create a Europe of growth and jobs” French unemployment has risen from 10.2% to 10.9% and Britain’s has fallen from 8% to 7.1%. The French economy has averaged growth of 0.13% per year while Britain’s has averaged 0.16% a year.

Mr Hollande’s strategy was to tax and spend France back to prosperity. A raft of new taxes, most notoriously a 75% top rate of income tax, would pay for the hiring of 60,000 new teachers, the creation of 150,000 subsidised jobs, and a reduction in the retirement age. This strategy has failed. Like Louis XIV’s revocation of the Edict of Nantes in 1685 which flooded east London with entrepreneurial Huguenots, Mr Hollande has simply driven the French men and women who can afford to leave out of the country. Those who can’t are left stuck with unemployment and stagnation, Mr Miliband’s “better, more equal and just world”.

Yet, just as Mr Hollande abandons this strategy in favour of a €30 billion payroll tax cut and €50 billion worth of spending cuts in the next two years, ‘austerity’ if you like, Ed Miliband’s Labour Party are committing themselves to it afresh. Last Friday Shadow Chancellor Ed Balls made one of his increasingly rare appearances and committed a post-2015 Labour government to eliminating the deficit by 2020. The tool with which he intends to achieve this is a reintroduced 50 per cent top rate of income tax.

Mr Balls apparently needs to learn the lesson so painfully learned by France; that as per the Laffer Curve, beyond a certain level increasing tax rates ≠ increasing tax revenues. Indeed, in the last two years of the 50 per cent rate, 2011/2012 and 2012/2013, top rate taxpayers paid £41.3bn and £41.6bn in tax respectively. Under the 45 per cent rate that amount has risen to £49.36bn. Ed Balls was immediately in the unusual position of having to explain how he would fund a tax rise.

This presents the Conservatives with an opportunity. David Cameron and George Osborne should be pointing across the Channel and saying that Hollande’s abandoned France of high taxes, high government spending, rising unemployment, and falling growth, is Miliband’s Britain.

Ultimately the high ideals of the French Revolution were drowned in the blood of the Terror, replaced by the dictatorship of Napoleon, and a disillusioned Wordsworth retired to the Lake District and Romantic poetry. What will it take to educate Mr Miliband?

Debt limit nonsense

The sky’s the limit

Some things are stated as fact which are nothing of the kind. Right up until the Congressional deal raising the debt ceiling news anchors were parroting that without it the United States government would default. This is nonsense.

Over the next year the US government will take in around $3 trillion in taxes. The interest payments on its $16.9 trillion debt in that period are estimated at around $240 billion. As long as its income is greater than its debt repayments there is no reason whatsoever why the US government should default on those debt repayments.

It may choose to do so, deciding to anger China rather than domestic recipients of Federal money, but there is nothing automatic about it. But at some point the US government will default on somebody.

Since 2002 US government debt has risen from $6 trillion to nearly $17 trillion, a rise of 183%. Under George W. Bush it increased at $625 billion a year, and in 2008 Senator Obama was moved to declare “That’s irresponsible. It’s unpatriotic.” Under President Obama that debt has increased by $900 billion a year. It now stands at around 73% of GDP, or $131,368 for every man, woman, and child in America. Even with record low interest rates, by 2015 repayments on this debt will come to $50,000 a year for each American family [1].

And the situation is forecast to get worse. The Congressional Budget Office’s September 2013 Long-Term Budget Outlook warns that government spending is set to outstrip revenues in each of at least the next twenty-five years with the gap opening from 2% of GDP at its narrowest point in 2015 to 6.5% of GDP at its widest in 2038, “larger than in any year between 1947 and 2008”. As a result, after a slight improvement between 2014 and 2018, Federal government debt as a percentage of GDP is projected to rise from about 75% to around 100% in 2038.

The CBO identifies the drivers of this increased spending and debt as “increasing interest costs and growing spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges)”. Spending on the “major health care programs and Social Security”, the CBO writes, “would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years” and “The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years”.

The CBO’s conclusion is stark; “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past”. Sadly for the taxpayers of 2038 these are just the changes President Obama and Congressional Democrats steadfastly refuse to consider.

But a refusal to see reality doesn’t make that reality go away. These sorts of figures are unprecedented in peacetime and unsustainable and as the saying goes, ‘If something can’t continue it won’t’. The essential problem is that the US government, as with other western governments, has made spending commitments its tax base cannot support. And a promise that can’t be kept won’t be kept. Drastic change will come to Medicare, Medicaid, and Social Security, not because of ‘evil’ or ‘heartless’ Republicans, but because of math, because there isn’t the money to pay for them.

The desperately sad truth is that Uncle Sam won’t keep his current promise to pay pensions, pay for medical care for the poor or the elderly at a given level because he won’t be able to. This will amount to defaulting on elderly and sick Americans, the only question is whether it happens through some entitlement reform (whether the Democrats want it or not) or through meeting these commitments with devalued dollars (over to you Janet Yellen). Either way, if ‘default’ means a repudiation of a promise of payment this will be America’s default. The US government has a choice about ‘default’ now, it won’t in the future.


[1] The Telegraph, 8 October 2013.

This article originally appeared at The Cobden Centre

Motown breaks down

The 2,500 seat Eastown Theatre hosted The Who and The Kinks. The Cass Tech High School taught Diana Ross and John DeLorean. Michigan Central Station, almost 100 feet long, 230 feet wide, and graced with 14 grand marble pillars, once had Franklin Roosevelt, Charlie Chaplin, and Thomas Edison pass along its platforms.

Nowadays these buildings are just three of the 78,000 abandoned and blighted structures in Detroit. Reminders of a bygone golden age, the authorities can’t afford to demolish them.

The decline and fall of Detroit, which recently filed for bankruptcy, is a staggering tale. In 1950 Detroit was home to 1,849,568 people, hundreds of thousands of them working in the booming motor industry. In 1955 80% of the planet’s cars were made in America, 40% by Detroit-based General Motors alone. GM’s German subsidiary, Opel, was only a little smaller than the largest non-American car maker, Volkswagen. And Toyota only built 23,000 cars that year compared to GM’s 4 million. In the 1950s the Detroit area had the highest median income and highest rate of home ownership of any major American city.

But as they grew together, so they died together. Between 1955 and 2000 global car production increased by 273% but the US motor industry saw little of that action, increasing its output by just 39%. Even at home, despite a hastily erected wall of tariffs and quotas, US car companies lost market share; between 1970 and 2000 Japanese car companies’ share of sales in the US rose from less than 5% to 30%. In the same period the share of US car manufacturers fell from 86% to a little over 50%.

The reason was productivity. In 2005 the average Toyota worker produced 16% more cars than the average GM worker and a staggering 128% more than the average worker at Daimler/Chrysler. Toyota made a profit of $12.5 billion, GM a loss of $10.9 billion.

In part as a result of the demise of the motor industry, less than half of Detroit’s over 16s are now employed. And as the jobs disappeared so did the workforce. In 2010 the population was down to 713,777, a fall of 61% in 60 years.

But the city’s government was left with the spending commitments and liabilities it had incurred in the not-so-bad times. One half of Detroit’s $18 billion debt is made up of pension and healthcare spending commitments to city employees. The share of city revenues being spent on debt servicing, pensions, and retiree healthcare has risen from 30% in 2010 to 40% today. It is forecast to rise to 65% by 2017.

The city tried to fund these commitments with higher taxes. Detroit imposes a per capita tax burden on its residents 80% higher than neighbouring Dearborn even though its residents have a per capita income 33% lower. Detroit residents face the highest property tax rates of any similarly sized city in Michigan, but with 3 bed, all brick, colonial houses on the market for under $10,000 many don’t bother paying. Nearly a third of property tax owed in Detroit went uncollected in 2011.

So Detroit slashed spending, even on ‘core’ functions of government. 40% of streetlights don’t work and aren’t being repaired. Last winter just 10 to 14 of the city’s 36 ambulances were in service at any time, some with enough miles on the clock to have circled the planet 10 times. In February, Detroit fire fighters were told not to use hydraulic ladders unless there is an “immediate threat to life” because they hadn’t been inspected in years.

But even with this, spending commitments without the tax base necessary to fund them have caused Detroit to add $700 million to its debt in the last seven years and brought it to bankruptcy. This is a real American horror story.

Is the death of Detroit “just one of those things” as Paul Krugman wrote on Monday? Or are there lessons to be drawn for the rest of us?

The essential problem of Detroit, that for decades its leaders have been writing cheques their tax base can’t cash, is true now to varying degrees of all western governments facing ageing populations. As I wrote elsewhere late last year

America’s unfunded liabilities (including Medicare, Medicaid and Social Security), rose by $11 trillion last year to $222 trillion. To put that in context, the entire US economy is just $15 trillion, of which $3 trillion a year is paid in tax. If you expropriated all the wealth of the richest 400 Americans…the $1.7 trillion you would get wouldn’t make a dent.

In Britain the Office of Budget Responsibility reported last week that with zero migration the costs of an ageing population would push government debt up to 174% of GDP by 2062. To hold it where it is Britain would need, the OBR estimates, immigration of 260,000 people a year.

Like the ruins described by Shelley’s “traveller from an antique land” the ruins of Detroit are a warning of hubris and complacency, of the belief that it’ll never happen to us. We should heed the warning.

This article originally appeared at The Cobden Centre

Living in the Age of Keynes

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The path to prosperity

In 1935 John Maynard Keynes wrote to his friend George Bernard Shaw: “I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way the world thinks about economic problems.”

That book, The General Theory of Employment, Interest and Money, published the following year, would go on to fully realise Keynes’s expectations. After World War Two, following Keynes’s analysis, policy makers and economists around the world used fiscal and monetary tools to pursue the goal of ‘full employment’. Keynes gave his name to both the economics and the age itself.

It is conventionally said that this Keynesian Age was brought to an end by the Stagflation of the 1970s. To the extent that responsibility for ‘economic management’ was simply transferred from politicians with primarily fiscal tools to central bankers with monetary tools this can be argued. But there is another sense in which we never left the Age of Keynes.

The first substantive chapter of The General Theory is chapter two, ‘The Postulates of the Classical Economics’. Here Keynes ridicules a set of beliefs which he ascribes to an ill-defined group of ‘Classical economists’. For these Classicals income was either spent on consumption or saved. These savings, as capital, were invested with the two quantities, savings and investment, being equilibrated by the interest rate. As Keynes’s Classical mentor Alfred Marshall put it:

“[I]t is a familiar economic axiom that a man purchases labour and commodities with that portion of his income which he saves just as much as he does with that he is said to spend. He is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labour and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.”

Keynes, by contrast, saw no such essential unity between savings and investment. In The General Theory he wrote that the “decisions which determine Saving and Investment respectively are taken by two different sets of people influenced by different sets of motives, each not paying very much attention to the other”.

It was possible, Keynes argued, that investors driven by mercurial “animal spirits” could become so pessimistic that the Marginal Efficiency of Capital (the expected return on their investment) could plunge below the interest rate (the cost of funding that investment) so that no investment would take place. The Marginal Efficiency of Capital could, indeed, sink so low that nominal interest rates couldn’t offset it, giving rise to the ‘liquidity trap’ and monetary impotence. Marshall’s link would be broken and aggregate demand would fall.

For Keynes, the way to guarantee the continued investment which not only guaranteed aggregate demand in the present but also increased prosperity in the future, was for the government to underwrite the profitability of investment by acting as spender of last resort, via fiscal stimulus, to prop up the Marginal Efficiency of Capital.

This was the polar opposite of the Classical view. Whereas Keynes believed that spending made you rich enough to save, the Classicals believed that saving made you rich enough to spend. Though Keynes would have agreed with the father of the Classicals, Adam Smith, that “Consumption is the sole end and purpose of all production”, they took totally different routes to get there.

This stems from a striking difference in attitudes to saving. Adam Smith, anticipating Marshall, wrote, “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people…by labourers, manufacturers, and artificers”. Keynes, by contrast, said that “whenever you save five shillings, you put a man out of work for a day”.

Is it Smith or Keynes’s attitude towards consumption and saving which animates western policymakers today? Since 2008 we are supposed to have seen ‘The Return of the Master’. In truth he never went away. We’ve been living in the Age of Keynes for decades.

This article originally appeared at The Commentator

I hate to say it but…

This last week has seen articles from Roger Bootle and Allister Heath warning of the consequences of a bursting in the “bond bubble”. Now we have the Bank of England’s Andrew Haldane saying

If I were to single out what for me would be the biggest risk to global financial stability right now, it would be a disorderly reversion in government bond yields globally.

We’ve seen shades of that over the last two to three weeks.

We have intentionally blown the biggest government bond bubble in history. We’ve been vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted. That’s a risk we as FPC need to be very vigilant to.”

As I asked on The Commentator last August, Is the bond bubble the biggest yet?

IDS is the heir to Beveridge

A jolly nice chap

“Iain Duncan Smith is scum” announced a former friend of mine on her Facebook wall recently. Actually, as anyone who has met him will attest, IDS is a perfectly affable chap. But he is sceptical of the present size and nature of Britain’s welfare state. This, apparently, makes him “scum”.

Between 2001 and 2007 British government spending increased by 54 percent in real terms. In nominal terms the coalition is actually raising spending even further, from £661 billion in 2010 to a projected £729 billion in 2015. What cutting is being done is coming from above target inflation so that, in real terms, spending will fall by 2.7 percent. And remember, that’s a real terms cut of 2.7 percent after a real terms increase of 54 percent.

But the reaction from sections of the left to this bare snipping has, as with my former friend, been nothing short of demented.

Nick Cohen frequently says very sensible things but at the end of the day he writes for the Observer and he has to sing for his supper – hence a steady flow of silly articles about barely existent ‘austerity’ and mythical ‘Tory cuts’. In a recent article he wrote that “Iain Duncan Smith’s universal credit poses a serious threat to women’s independence.” You actually have to ask how independent someone who is dependent on state welfare actually is in the first place, but to have done so would have been to intrude on the usual orgy of hysteria which accompanied the article.

One of Cohen’s Facebook friends commented, “Yes, yes, yes. Duncan Smith has a nasty agenda, fired by his own sense of Christian mission. A very creepy man.” Another warned that “The Tories especially are making attacks on the poorest, that are remarkably similar to the sort of thing the eugenicists of the nineteenth century used to say.” Sections of the left are currently consumed with lunatic levels of fear and loathing.

It never seems to occur to these people that someone could question the present size and nature of Britain’s welfare state from any motivation other than pure evil. It never enters their minds that someone might be critical of the welfare state as it stands for the simple reason that it is a massively expensive failure.

“Flat rate of subsistence benefit; flat rate of contribution”;

“Unemployment benefit will…normally be subject to a condition of attendance at a work or training centre after a certain period”;

“National assistance (a means tested benefit) is an essential subsidiary method in the whole plan…The scope of assistance will be narrowed from the beginning and will diminish”;

“Assistance…must be felt to be something less desirable then insurance benefit; otherwise the insured persons get nothing for their contributions. Assistance therefore will be given always subject to proof of needs and examination of means; it will be subject also to any conditions as to behaviour which may seem likely to hasten restoration of earning capacity”;

“The proposal to adjust benefit according to the rent actually paid by individuals should, provisionally, be rejected”.

These quotes, recommending conditions on eligibility for welfare, proposing a reduction of benefits over time, supporting the notion that benefits must not match employment income, and rejecting housing benefit, do not come from someone like Iain Duncan Smith who the contemporary left would brand as evil. They come, in fact, from the Report of the Inter-Departmental Committee on Social Insurance and Allied Services of 1942, written by William Beveridge, which laid the foundations for the welfare state.

Beveridge’s plan was, as James Bartholomew writes,

“very simple. Everyone would make flat-rate contributions to a national insurance scheme. Those who fell ill, became unemployed or reached retirement age would, in return, receive flat rate payments. That is it. The rest was detail”.

John Maynard Keynes reportedly told his friend Beveridge: “The Chancellor of the Exchequer should thank his lucky stars that he has got off so cheap”.

Keynes was wrong. Over the years Beveridge’s safety net became a vast hammock. Since the welfare state got under way in earnest in 1948, social security spending as a percentage of GDP has increased from 4 percent to nearly 14 percent; a 250 percent increase.

Source: IFS

Those on the right and this coalition government are often accused of launching an attack on the welfare state bequeathed us by Beveridge and the Attlee government. That ship has long since sailed. Beveridge’s welfare state died decades ago when it became the bloated, expensive, counterproductive monster it is today. And it wasn’t the right that killed it, the left did.

There is a new film out by dreary, overrated Marxist Ken Loach titled The Spirit of ’45. In it, among other things, Loach calls for the Brits of 2013 to resist coalition welfare reforms and redouble their commitment to state welfare spending. But that is not the spirit of 1945. The spirit of 1945 was of work, contribution, and insurance.

And that appears to be the spirit of 2013 too. As a recent report by the National Conversation found: “Wherever they stood on the political spectrum, we were told that the welfare system was broken, and that no one party held the answer to fixing it… A key concern, shared by respondents from different backgrounds, was the degree to which the modern welfare system had moved away from Beveridge’s original plans for social insurance. With the gradual erosion of Beveridge’s contributory principle, governments found themselves paying out ever larger welfare disbursements to people who had never paid into the system”.

Sensing this even Ed Miliband has begun making noises about “recognising contribution”.

Iain Duncan Smith is not “scum”. Rather, unlike Loach and Cohen and his loony friends, he is the heir to Beveridge. If the spirit of ’45 lives on anywhere, it is in the coalition’s welfare reforms.

This article originally appeared at The Commentator

Deficit and debt: Does anyone know the difference?

“OK, so there’s the water in the tub…”

In a recent conversation, a Labour Party member told me that the coalition was “borrowing more than we did in power”. I pointed out that this was wrong, that the deficit, what we are “borrowing”, is, in fact, down by a third under this government. He replied: “The deficit may be but the current government is still borrowing more money than the last government.”

You could write this off as simply the pig-headed economic illiteracy of a paid-up member of the party that helped us into the current mess. After all, Ed Balls, Labour’s man on the economy, can stand up in front of Parliament and say “The national deficit is not rising…er…is rising, not falling” (he was right the first time). But then you hear Nick Clegg say that the coalition is working to “wipe the slate clean for our children and our grandchildren”. Even David Cameron himself announced that “We’re paying down Britain’s debts”.

You begin to wonder if anyone knows what they are talking about. I’ve addressed the issue of what exactly is happening to the British government’s finances before but it seems it needs repeating.

We have two concepts here: a stock and a flow. Think of it like a bathtub. The stock is the water in the bathtub, the flow is the water either flowing in or out of the tub through the taps or plughole.

In this analogy the debt is the stock, the water in the tub; the deficit is the flow, the water pouring in from the tap (if our government was running a budget surplus water would be flowing out through the plughole but we’re some way off worrying about that). In other words, the deficit (flow) is the amount by which the debt (stock) is increasing.

Thus, it is possible to have a situation like we have now where the debt is increasing while the deficit is decreasing (imagine yourself turning off the tap and seeing the flow of water dwindle – water is still flowing into the tub). Borrowing is down, what has been borrowed is up.

In the final year of the last Labour government Alistair Darling borrowed £156 billion. In 2012 George Osborne borrowed £99 billion. The deficit had fallen but while ever there is any deficit at all debt will be rising. Another way of putting it is to say that in his last year Darling increased the debt by £156 billion and last year Osborne increased it by £99 billion.

This is why you can have a chart like this…

showing falling deficits coexisting with a chart like this…

showing rising debt.

This might all sound a rather long-winded way of stating the obvious but a ComRes poll late last year found that 49 percent of people wrongly think “The Coalition Government is planning to REDUCE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”. The correct answer, that “The Coalition Government is planning to INCREASE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”, was given by just 6 percent.

The British government’s out of control spending is the central issue in British politics today yet there is mass ignorance as to what is really going on with it. In large part this can be attributed to the misleading statements pumped out by the sloppy Cameron and Clegg and the dishonest Balls.

What actually is happening to the British government’s finances under Cameron and Clegg is that the debt is growing and will continue to grow but the pace at which it grows, the deficit, is declining. This is simple stuff even if our politicians struggle with it.

This article originally appeared at The Commentator

In defence of Reinhart and Rogoff

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Facepalm, as they say

Academic economic papers rarely receive the sort of mass reception that brings coverage in the Guardian and the Telegraph so by the standards of its field ‘Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff was something of a blockbuster.

The eponymous Carmen Reinhart and Kenneth Rogoff are economists who, in a 2010 paper,  ‘Growth In a Time of Debt‘ found that “whereas the link between growth and debt seems relatively weak at ‘normal’ debt levels, median growth rates for countries with public debt over roughly 90 percent of GDP are about one percent lower than otherwise; (mean) growth rates are several percent lower.”

These results, fleshed out to book length for the successful ‘This Time Is Different’, have been quoted by George Osborne, Paul Ryan, and Olli Rehn in support of their measures to get spiralling government debts under control.

Last week’s paper by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts Amherst claimed to have proved this wrong. They had recreated Reinhart and Rogoff’s results and found that the pair had reached their figure of a GDP ‘growth’ rate of -0.1 percent per annum for economies with government debt of over 90 percent of GDP thanks to “coding errors, selective exclusion of available data, and unconventional weighting of summary statistics.” Most embarrassingly, the ‘coding error’ was a proper schoolboy error; Reinhart and Rogoff missed some of the numbers out of their calculations.

In truth the idea that there was an Iron Law such that an economy would shrink as soon as it’s government debt hit 90 percent of GDP, the ‘strong form’ of Reinhart and Rogoff (pushed more by the political practitioners than them it ought to be said), was always iffy. It smacks of the sort of bogus causation derived from correlation which is the basis for much modern macroeconomics.

There are, for example, different types of debt. Advocates of higher spending often point to the 260 percent of GDP the British government owed in 1816, the 180 percent it owed in 1919, or the 220 percent it owed in 1945. This, they tell you, proves that Britain’s economy can bear an even greater burden of debt than the 70 percent of GDP it has doubled to in the last five years.

But you don’t have to be David Starkey to know that in 1816, 1919, and 1945 Britain had run up that debt to pay the cost of defeating a tyrant and as soon as that was done we stopped. It was an expense we had to meet and defray over time, the wartime borrowing was classic ‘consumption smoothing’.

To put it another way, when the British government started spending heavily in 1792, 1914, or 1939 there was a definite endgame for this spending: the restoration of the Bourbon monarchy, the defeat of the Kaiser, the overthrow of Hitler. The very moment those goals were accomplished spending would fall rapidly.

Our current level of government spending, by contrast, is not being undertaken to safeguard this country and its neighbours from conquest but to maintain a public sector and welfare state grown fat on borrowing and tax revenue from an unsustainable bubble in the absence of that bubble and those tax revenues. We are not smoothing consumption, we are sucking it out of tomorrow. And, unlike Pitt the Younger, Herbert Asquith, or Neville Chamberlain, present day advocates of higher spending cannot give an endgame for their proposed accrual of debt.

The point of this for evaluating Reinhart and Rogoff’s work is to note that one load of debt is not necessarily the same as another. There ought to be a little nuance to the picture, there are no magic numbers.

But even with that said it can still be argued that Reinhart and Rogoff have been hard done to this last week. They are, as they say in ‘This Time Is Different’, involved in the on-going process of growing their data set (which, rather unwisely, they have been quite proprietary about) and since 2010 they have revised their conclusions in the light of new data which Herndon, Ash, and Pollin had access to.

As Reinhart and Rogoff wrote in the Wall Street Journal, in a 2012 paper with Vincent Reinhart they found GDP growth rates of 2.4 percent for economies with government debt over 90 percent of GDP, pretty close to the 2.2 percent calculated by Herndon, Ash, and Pollin.

Indeed, and despite what some excitable commentators have proclaimed, Herndon, Ash, and Pollin have not found no correlation between high debt and low growth. They have found a weaker one than Reinhart and Rogoff in 2010 and about the same as they found in 2012, but they have still found one.

As page 21 of their paper states: if debt is below 30 percent GDP growth comes in at 4.2 percent, if debt is between 30 percent and 60 percent of GDP growth comes in at 3.1 percent, if debt is between 60 percent and 90 percent of GDP growth comes in at 3.2 percent, and if debt is over 90 percent of GDP growth comes in at 2.2 percent. Even on Herndon, Ash, and Pollin’s figures higher debt is correlated with lower GDP growth.

And there is perhaps a more profound point to note. Reinhart and Rogoff have fessed up to the coding error but the “selective exclusion of available data, and unconventional weighting of summary statistics” which Herndon, Ash, and Pollin accuse them of is, in fact, the very stuff of modern macroeconomics.

The ‘facts’ which dominate and guide our economic lives such as GDP, the CPI, or even unemployment, are not objectively given but are constructed using just such subjective methods, a prime example are the nonsensical unemployment figures of the United States. If this furore provokes a little scepticism so much the better, but it should spread much further than one paper.

This article originally appeared at The Commentator

Why is David Blanchflower so scared of the truth?

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The Michael Howard of economics

A couple of weeks back I took David Blanchflower of the New Statesman to task over the failure of his recent attempt to justify his infamous 2009 prediction that “unemployment could easily reach four million”. Blanchflower responded on Twitter: “If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn “if crucial- buffooonery” (sic).

In fairness to Blanchflower he did preface his 2009 doomsday scenario with exactly those words. But let’s look a little more closely at Blanchflower’s warnings of the twin evils of tight money and spending cuts.

First, monetary policy. Who, in 2009, was advocating the tightening monetary policy? Possibly a few Austrians (though not all of them). Not many others. Certainly, as far I recall, no one in the Conservative Party as Blanchflower claimed. If I am wrong (and I have scoured the internet) and there were leading Conservatives advocating monetary tightness in 2009 then please, let me know.

But if, as I’m pretty sure is the case, nobody in the Conservative Party was advocating the early withdrawal of monetary stimuli then why on earth did Blanchflower waste anyone’s time warning them about it?

And what about the fiscal side of Blanchflower’s prediction? He loudly and regularly makes the point that ‘Slasher’ Osborne (I know, not much as nicknames go) has cut government spending and plunged Britain into renewed recession. I asked Blanchflower once or twice (or thrice) by how much ‘Slasher’ Osborne has cut government spending to send us into recession.

The answers I got ranged from “go and look it up yourself” to “go back into your hole” and “If you want to hire me to do consulting work for you I will bill at my normal high rates min 3hrs half up front”. How sad that when given a chance to engage and educate, a man who holds a teaching position chose instead to act in such a petulant and childish manner. How terrifying that someone so shifty, evasive, and brittle under pressure, was once a member of the Monetary Policy Committee.

Well, I went and looked up the numbers and the reasons for Blanchflower’s reticence quickly became apparent. In the fiscal year ending April 2010, Labour’s last in office, the British government spent £660.8 billion and in the year ending April 2012 it was £688 billion: an increase of 4.1 percent. Over the same period, however, we have had above target inflation which has given us a real terms cut in government spending of of 2.7 percent.

That’s it. After a decade which saw Labour double government spending in real terms it has been pruned by 2.7 percent. Hardly ‘slashing’ and all delivered by Mervyn King and his failure to keep inflation at 2 percent. If he had we’d have had a very slight real terms increase in spending; but that, presumably, really would have meant the monetary tightness Blanchflower was wailing about back in 2009.

I don’t suppose the monikers ‘Slasher King’ or ‘Trimmer’ Osborne would be much LOLZ for the Prof on Twitter. You can see why he was desperate to avoid giving a straight answer; his whole shtick would collapse if he did.

Blanchflower might argue that some areas of government spending have been cut quite drastically but there are two points to be made there. First, The Master himself, John Maynard Keynes, famously said that it didn’t matter too much what you spent your fiscal stimulus on, whether it’s Pyramids, wars, or burying old bottles full of cash and digging them up again. The key thing was to get the money spent.

Second, you have to wonder what else Blanchflower expects. Even with record low interest rates, British government debt, for which we are all liable, has risen so vertiginously that by 2015 it is estimated that we will be spending £70 billion a year on debt interest, up from £31 billion in 2008. To some extent we are seeing spending on welfare being cut so we can give the money to bond investors instead. Don’t like it? Don’t run up a load of debt.

Of course, Blanchflower would argue that we don’t actually need to worry. We just keep printing and borrowing the money we need. The £450 billion the coalition will have added to the national debt by April 2013 is too stingy; the doubling of the national debt over its lifetime too miserly. With views like that you can understand why Blanchflower runs scared from any rational discussion.

So, back in 2009, Blanchflower was warning us about something that wasn’t going to happen. After trying and failing to exonerate his 2009 prediction his argument now is that he wasn’t wrong, just irrelevant. But then you might find yourself asking why we should pay much attention to a slippery peddler of irrelevancies. Why indeed.

With his affected rudeness and terror of reasonable discussion with anyone who might disagree with him, Blanchflower is a sort of pound store Paul Krugman. But, without a bestselling book, a Nobel Prize, and with a column in the Independent rather than the New York Times, that’s a bit like comparing Donovan to Bob Dylan.