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NiallFergusonsWishfulThinkingbyRobertSkidelskyProjectSyndicate

ECONOMICS
ROBERTSKIDELSKY
RobertSkidelsky,ProfessorEmeritusofPoliticalEconomyatWarwickUniversity
andafellowoftheBritishAcademyinhistoryandeconomics,isamemberofthe
BritishHouseofLords.TheauthorofathreevolumebiographyofJohnMaynard
Keynes,hebeganhispoliticalcareerintheLabourparty,becametheConservative
PartysspokesmanforTreasuryaffairsintheHouseofLords,andwaseventually
forcedoutoftheConservativePartyforhisoppositiontoNATOsinterventioninKosovoin1999.

MAY28,2015

NiallFergusonsWishful
Thinking
LONDONNiallFergusonbeginshisrejoindertomyrejoindertohisinterpretationof
theresultsoftheUnitedKingdomsrecentgeneralelectionbycitinganapocryphal
Keynesquote:Ifthefactschange,Ichangemyopinion.Whatdoyoudo,sir?But
shouldthefactthattheBritisheconomygrewlastyearby2.6%havecaused
Keynesianstochangetheirminds?WouldithavecausedKeynestorewritehisGeneral
TheoryofEmployment,InterestandMoney?
Fergusonseemstothinkso.Idonot.
Keynesneverthoughtthataneconomy,felledbyashock,wouldremainonthefloor.
Therewouldalwaysbesomerebound,regardlessofgovernmentpolicy.Whathe
emphasizedwasthetimeelementinthecycle.Withdepressedprofitexpectations,
aneconomycouldremaininasemislumpforyears.Therewouldbealternating
periodsofrecoveryandcollapse,butthisoscillationwouldoccuraroundananemic
averagelevelofactivity.
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Neitherthesuddennessofthefinancialcollapseof20082009northesluggishnessof
therecoverysincethenwouldhaveledKeynestochangehismind;norhasit
discreditedtheclaimsoftodaysKeynesians.WhileFergusonincludesseveralquotes
frommypastcommentaries,heomitsaveryimportantpassage:Alleconomies
recoverintheend.Thequestionishowfastandhowfar.Thetaskofgovernmentwas
andremainstostrengthenwhatevernaturalforcesofrecoveryexist,ifnecessary
byprovidingbusinesseswithalargermarket,and,beyondthis,tooffsettheinherent
volatilityofprivateinvestmentthroughastableprogramofpublicinvestment.
MyargumentwithFergusonconcernsthreemainissues.
Forstarters,thereishisviewoftheimpactofausterityonBritainsGDP.Hecitesthe
2.6%growthin2014asameasureofausterityssuccess.Butthisisnonsense.Thereal
questioniswhatausteritydidtotheeconomyoverthefiveyearsofGeorgeOsbornes
tenureasChancelloroftheExchequer.Itisnowwidelyagreedthat,farfromspeeding
uptherecovery,Osbornesausteritypolicyprolongedtheslump:

SimonWrenLewisofOxfordUniversityhaspointedoutthatUKausteritywasatits
mostintenseinthefirsttwoyearsofOsborneschancellorship(20102011).TheUK
OfficeofBudgetResponsibility,usingconservativemultipliers,calculatedthat
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austerityinthisperiodreducedGDPgrowthby1%ineachyear.Thatwasthebasisof
WrenLewisscalculationthatausteritycosttheaverageUKhouseholdtheequivalent
ofatleast4,000.Theeconomicrecoveryafter2012coincidedwiththecessationof
fiscaltightening.
Ofcourse,coincidencesarenotcauses.Keynesianscannotprovethatthestartof
austerityabortedtherecoveryin2010;thatrecoverywouldhavecomesoonerifthe
preausteritylevelofpublicspendinghadbeenmaintained;orthatitwasthe
reductionofausterityin2012thatenabledtheeconomytoexpandagain.
Nonetheless,thefactsareconsistentwithKeynesiantheory.Keynesianssaidausterity
wouldcutoutputgrowth.Outputgrowthfell.[T]heKeynesianscomparisonswiththe
GreatDepression[of19291932]wereplainlyrisible,wroteFerguson.Infact,realper
capitaGDPhastakenlongertorecoverthistimearound.Whileitregainedits1929
levelfiveyearslater,today,itisstillbelowthe2008levelandlooksasthoughitwill
takeeightornineyearstoregainit.
Keynesiansalsopredictedthatausteritywouldmakeitharder,noteasier,forOsborne
tohithisfiscaltargets.Osbornesaidhewouldeliminatethestructuraldeficitandhave
thedebt/GDPratiofallingby2015.Fiveyearson,Osbornehasfailedtoliquidatethe
deficit,nomatterhowyoudefineit,andthedebt/GDPratiohasrisenfrom69%to
80%.
UnlikeFerguson,Keynesianshaveatheorytoexplainwhythetargetsweremissed:If
fiscaltighteningmakestheeconomysmallerthanitwouldhavebeenotherwise,itis
muchmorecostlytobalancethebooks;andtheattemptislikelytobeabandonedor
suspendedforfearofsocialandpoliticalconsequences.Thisispreciselywhat
happened.
Asahistorian,Fergusonmustknowthatitisgrowth,notausterity,thatismost
conducivetoreducingthenationaldebtasashareofGDP.Considerthefollowing:

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Fornumbersfrom19002015clickhere.
In1929,theUKsnationaldebtwashigherthanithadbeenwhenWorldWarIended,
despite(orbecauseof)eightyearsoffiscalausterity.Conversely,from1945to1970,
thenationaldebtshrankfrom240%ofGDPto64%after25yearsofeconomicgrowth,
mostofitreal(inflationadjusted).Likewise,PaulJohnson,DirectoroftheInstitute
forFiscalStudies,saidinDecember2014thatitwasnotforlackofeffortthatthefiscal
deficithadnotfallenfurther.Rather,itwasbecausetheeconomyperformedsopoorly
inthefirsthalfoftheparliament,hittingrevenuesveryhard.
TheKeynesianargument,insum,isthatausterityhittheeconomy,andbyhittingthe
economy,itworsenedthefiscalbalance.DoesFergusonacceptthis?Ifnot,whynot?
OneofFergusonskeyargumentsisthatausteritywasnecessarytorestoreconfidence.
Apparently,thebondmarketsdidnotagree.Longtermnominalandrealinterestrates
werealreadyverylowbeforeOsbornebecamechancellor,andtheystayedlow
afterwards.Thegovernmentcouldhavetakenadvantageofthistoborrowatnegative
realratestoinvest,asallKeynesiansadvocated.Itrefusedtodoso.
IntheFinancialTimescommentarytowhichIwasresponding,Fergusonwrote:...at
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nopointafterMay2010did[confidence]sinkbacktowhereithadbeenthroughout
thepasttwoyearsofGordonBrownscatastrophicpremiership(myitalics).Buta
graphthatFergusonhimselfpostedgivesthelietothisassertion:

Thisshowsconfidenceincreasingfromthelowpointof45.3inthefirstquarterof
2009(thetroughoftheslump)to+25.8inMay2010.Itthenwentdown,anddidnot
regainitsMay2010leveluntilthethirdquarterof2013anintervalofthreeyears.In
otherwords,contrarytoFergusonsassertion,businessconfidencewashigherinthe
lastsixmonthsofBrownspremiershipthaninthefirsttwoyearsofOsbornes
chancellorship.
AcomparisonwithFigure1showsthatconfidencecloselytrackstheactual
performanceoftheeconomy.Austeritydidnotpullconfidenceup;itpusheditdown,
becauseitpushedtheeconomydown.Ittakesaparticularlyperverseformofrational
expectationstoarguethatconfidencewillbeincreasedbypoliciesthatcausethe
economytostall.
InhisFinancialTimescommentary,FergusoncitedtheUKspostcrashearningsand
employmentperformanceasproofthatausterityworks.UKunemploymentisnow
5.6%,roughlyhalftheratesinItalyandFrance,hegushed.Weeklyearningsareup
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bymorethan8%;intheprivatesector,thefigureisabove10%.Inflationisbelow2%
andfalling.
Takeearningsfirst.Toshownominalearningsoverfiveyearssidebysidewith
inflationoveroneyearissleightofhand.AfteracorrectionfromJonathanPortes,
DirectoroftheUKsInstituteofPolicyandEconomicResearch(andafterfirst
denouncingthecorrectionascontemptible),FergusonconcededinhisProject
Syndicaterejoinderthatfrom2010to2015,averageinflationadjustedweekly
earningsfellmorethanunderanypostwargovernment.
Quitesimply,withinflationrisingfasterthannominalwages,averagerealwageshave
fallen,andemploymenthasgrown,asstandardtheorywouldleadonetoexpect.The
combinationoftightfiscalpolicyandloosemonetarypolicyfailed,until2013,to
producearecoveryinoutput.Itdid,however,lowertheunemploymentcostof
reducedoutputthoughnotentirely:iftheriseininvoluntaryparttimeworkis
includedinthecost,andasDavidBellandDavidBlanchflowerhavedonewiththeir
underemploymentindex,theUKgovernmentsemploymentrecordisworsethan
Fergusonclaims.

Therewasanothercosttotherelativelylowunemploymentoftherecentrecession,
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whichFergusondoesnotevenmention:thecollapseofproductivity.

Thisiscontrarytopreviousslumpexperience,whenlaborsheddingproducedarisein
productivity.Theexplanationisprobablytobefoundinthewaythelabormarkethas
adaptedtogovernmentpolicy.ArecentreportbytheUKsTradeUnionCongress
(TUC)arguesthatausterityhasleddirectlytoweakereconomicgrowth,notonlyin
theUKbutacrosstheworld.
IntheUK,accordingtotheTUC,thereductioningrowthhasbeenmet(almost)
entirelybylowerearningsgrowthratherthanloweremploymentgrowth.Manynew
opportunitieshavebeenconcentratedinlowpayoccupations,andtherehasbeenan
associatedincreaseinunderemployment,involuntaryparttimework,poorquality
selfemploymentandtemporaryworkalongsidegreaterinsecuritythroughzerohours
contracts,agencyworkandotherinsecureorshorttermcontracts.Lower
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productivityfollowssimplyasanarithmeticconsequenceofthisadjustment,with
lowereconomicgrowthsetagainstongoinggrowthintheemploymentheadcount.
TheausteritydebateisofmorethanparochialBritishinterest.Fiscalausterityremains
thereigningorthodoxyintheeurozone.Withsoaringprivatesectorandhousehold
debt,thecurrentglobalrecoverylooksveryshaky,soitisimportanttoattemptan
accurateauditofthepolicyresponsestothelastcollapsebeforethenextoneoccurs.
Fergusonisrightthateveryoneshouldlearnfromexperience.Keynesianscannot
expecttohaveitalltheirway.Demandsidepoliciesshouldbecoupledwithsupply
sidemeasurestoimproveskills,infrastructure,andaccesstofinance,andKeynesians
havebeenslowtounderstandthatagovernmentcannotincreasethenationaldebt
withoutlimitforacauseinwhichmostpeopledonotbelieve.
ButitseemstomethatFergusonismoreinterestedinmakingpoliticalpointsthanin
developingproperlygroundedarguments.Untilhetellsuswhyhethinksthatausterity
wasagoodthing,hiscriticswillbeforgivenforseeinghiseconomicpronouncements
asnothingmorethanpoliticalpropaganda.
https://www.projectsyndicate.org/commentary/niallfergusonbritishausterityby
robertskidelsky201505
19952015ProjectSyndicate

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