Tuesday, September 27, 2016
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In a recent poll of British economists by the Centre for Macroeconomics, two-thirds agreed that austerity had harmed the UK economy.

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No Pain, No Gain for Britain?

LONDON – The economic historian Niall Ferguson reminds me of the late Oxford historian A.J.P. Taylor. Though Taylor maintained that he tried to tell the truth in his historical writing, he was quite ready to spin the facts for a good cause. Ferguson, too, is a wonderful historian – but equally ready to spin when he shifts into political gear.

Ferguson’s cause is American neo-conservatism, coupled with a relentless aversion to Keynes and Keynesians. His latest defense of fiscal austerity came immediately after the United Kingdom’s recent election, when he wrote in the Financial Times that, “Labour should blame Keynes for their defeat.”

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Ferguson’s argument amounts to that of a brutal disciplinarian who claims vindication for his methods by pointing out that the victim is still alive. In pleading on behalf of British Chancellor of the Exchequer George Osborne, he points out that the UK economy grew by 2.6% last year (the “best performing of the G-7 economies”), but ignores the damage that Osborne inflicted on the economy en route to this recovery.

There is now much agreement about this damage. The Office of Budget Responsibility, the independent agency set up by Osborne to assess the government’s macroeconomic performance, has just concluded that austerity reduced GDP growth by 2% from 2010 to 2012, bringing the cumulative cost of austerity since 2010 to 5% of GDP. Simon Wren-Lewis of Oxford University estimates that the damage might be as high as 15% of GDP. In a recent poll of British economists by the Centre for Macroeconomics, two-thirds agreed that austerity had harmed the UK economy.

Moreover, Britain is not alone. In its October 2012 World Economic Outlook, the IMF admitted that, “fiscal multipliers were underestimated across the world.” In plain English: the forecasters underestimated the extent of spare capacity and hence the scope for fiscal expansion to raise output.

Was it an honest mistake? Or was it because the forecasters were in thrall to economic models that implied that economies were at full employment, in which case the only result of fiscal expansion would be inflation? They now know better, and Ferguson should now know better as well.

A depressing aspect of Ferguson’s interpretation is his failure to acknowledge the impact of the Great Recession on government performance and business expectations. Thus, he compares 2.6% growth in 2014 with the 4.3% contraction in 2009, which he describes as “the last full year of Labour government” – as though Labour policy produced the collapse in growth. Similarly, “At no point after May 2010 did [confidence] sink back to where it had been throughout the last two years of Gordon Brown’s catastrophic premiership” – as though the Brown government’s performance caused business confidence to collapse.

The claim that “Keynes is to blame” for Labour’s election defeat is peculiarly odd. After all, the one thing Labour’s leadership tried hardest to do in the campaign was to distance the party from any “taint” of Keynesianism. Perhaps Ferguson meant that it was Labour’s past association with Keynes that had damned them – “their disastrous stewardship before and during the financial crisis,” as he puts it.

In fact, Labour’s most recent governments were determinedly non-Keynesian; monetary policy was geared to hitting a 2% inflation target, and fiscal policy aimed at balancing the budget over the business cycle: standard macro-economic fare before the recession struck. The most damning charge against their stewardship is that they embraced the idea that financial markets are optimally self-regulating – a view that Keynes rejected.

Keynes was not to blame for Labour’s defeat; in large part, Scotland was. The Scottish National Party’s crushing victory left Labour with only one seat in the country. There are no doubt many reasons for the SNP’s overwhelming triumph, but support for austerity is not one of them. (The Conservatives did as badly as Labour.)

Nicola Sturgeon, First Minister of Scotland and leader of the SNP, attacked the “cozy consensus” around fiscal consolidation in Westminster. The deficit, she rightly said, was “a symptom of economic difficulties, not just the cause of them.” The SNP manifesto promised “at least an additional £140 billion ($220 billion) across the UK to invest in skills and infrastructure.”

So if the SNP did so well with a “Keynesian” program of fiscal expansion, is it not arguable that Labour would have done better had it mounted a more vigorous defense of its own record in office and a more aggressive attack on Osborne’s austerity policy? This is what leaders of the Labour party like Alistair Darling, Gordon Brown’s Chancellor of the Exchequer, are now saying. But they seem to have had no influence on the two architects of Labour’s election strategy, Ed Miliband and Ed Balls, both now removed from front-line politics.

What the Conservatives did succeed in doing, and doing brilliantly, was to persuade English people that they were only “cleaning up Labour’s mess,” and that, but for austerity, Britain would have “gone the way of Greece” – exactly Ferguson’s view.

One might conclude that all of this is history: the voters have spoken. But it would be a mistake to accept the Conservative narrative as the last word. It is basically a tissue of propaganda, with little support in theory and destructive effects in practice.

This might not matter so much had there been a change of government. But Osborne is back as Chancellor, promising even tougher cuts over the next five years. And fiscal austerity is still the reigning doctrine in the eurozone, thanks to Germany. So the damage is set to continue. In the absence of a compelling counter-narrative, we may be fated to find out just how much pain the victims can withstand.


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'Austerity' was not nearly as harmful as...predicted. Fiscal stabilization may have contributed to a revival of confidence.

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The Economic Consequences of Mr. Osborne

CAMBRIDGE – “If the facts change,” John Maynard Keynes is supposed to have said, “I change my opinion. What do you do, sir?” It is a question his latter-day disciples should be asking themselves now.

Long before the United Kingdom’s recent general election, which the Conservatives won by a margin that stunned their critics, the facts about the country’s economic performance had indeed changed. Yet there is no sign of today’s Keynesians changing their minds.

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Because I admire him as an historian, not least for his Keynes biography, I omitted Lord Robert Skidelsky’s name from my post-election commentary critiquing the contemporary Keynesian take on the UK economy. Opprobrium was best heaped, I believed, on Paul Krugman, as he makes such a virtue of heaping it on others. Unwisely, Skidelsky has leapt to Krugman’s defense.

Let me restate why the Keynesians were wrong. In the wake of the 2010 British election, Skidelsky, like Krugman, predicted that Chancellor of the Exchequer George Osborne was gravely wrong in seeking to reduce the budget deficit. In November 2010, he described Osborne as “a menace to the future of the economy” whose policies “doomed [the UK] to years of interminable recession.” In July 2011, he told the Financial Times that Osborne was “making a wasteland,” warning that financial markets might soon lose confidence in his policies.

In June 2012, Skidelsky argued that “since May 2010, when US and British fiscal policy diverged, the US economy has grown – albeit slowly. The British economy is currently contracting. … For Keynesians, this is not surprising: By cutting its spending, the government is also cutting its income. Austerity policies have plunged most European economies (including Britain’s) into double-dip recessions.” And, in May 2013, he reported that “The results of austerity had been “what any Keynesian would have expected: hardly any growth in the UK … in the last two and a half years … little reduction in public deficits, despite large spending cuts;…higher national debts… [and] prolonged unemployment.”

By this time, groupthink had taken hold. Skidelsky approvingly quoted Krugman’s claim that Britain was “doing worse this time than it did during the Great Depression.” More than once he echoed Krugman’s assertion that Osborne had been motivated by an erroneous belief that if he did not reduce the deficit, he might forfeit investor confidence (the “confidence fairy”).

Just a week before the UK voted this month, Skidelsky speculated that voters, “still wobbly from Osborne’s medicine,” might “decide that they should have stayed in bed.” Instead, the Tories won an outright majority, confounding pollsters and Keynesians alike. What could possibly have gone wrong – or, rather, right?

The last-ditch argument now put forward by Krugman is that the UK electorate was fooled into voting Conservative by a one-year pre-election boom, cynically generated by a covert Keynesian stimulus. It cannot have been easy for him to abandon his cherished macroeconomic model in favor of a conspiracy theory, especially one that two decades ago lost whatever explanatory power it ever had for UK elections.

But there is an alternative explanation: the Keynesians were wrong. “Austerity” was not nearly as harmful as they predicted. Fiscal stabilization may have contributed to a revival of confidence. In any case, nothing in modern British economic history told Osborne that he could risk running larger deficits with impunity.

There has been some sleight of hand in assessing Britain’s recent economic performance. For example, Dean Baker took International Monetary Fund data for the G-7 countries’ GDPs and made 2007 his base year. But a more appropriate benchmark is 2010, in the middle of which Cameron and Osborne took office. It is also worth including the latest IMF projections. And per capita GDP must surely be preferable to aggregate GDP.

No doubt, recovery in the UK began more slowly than in other G7 economies, except Italy. But there is also no doubt that the UK recovery picked up speed after 2012. Last year, its growth rate was the highest in the G-7. According to the IMF, only the US economy will grow faster over the next four years, with the UK then regaining the lead.

It is wrong to assume that the UK could somehow have replicated the German or American recovery, if only Keynesian policies had been followed. The UK’s position in 2010 was exceptionally bad in at least four respects, and certainly much worse than that of the US.

First, public finances were extremely weak, as a 2010 Bank for International Settlements study of trends in debt-to-GDP ratios clearly showed. The baseline scenario for the UK at that time was that, in the absence of fiscal reform, public debt would rise from 50% of GDP to above 500% by 2040. Only Japan was forecast to have a higher debt ratio by 2040 in the absence of reform.

Second, including financial-sector debt, non-financial business debt, and household debt the pre-crisis UK had become, under Labour governments, one of the world’s most leveraged economies. In 1997, Labour’s first year in power, aggregate UK debt stood at around 250% of GDP. By 2007, the figure exceeded 450%, compared with 290% for the United States and 274% for Germany. Government debt was in fact the smallest component; banks, businesses, and households each had twice as much.

Third, inflation was above the Bank of England’s target. From 2000 until 2008, the inflation rate had crept upward, from below 1% to 3.6%. Among G-7 countries, only the US rate was higher in 2008; but, whereas US inflation cratered when the crisis erupted, the UK rate remained stubbornly elevated, peaking at 4.5% in 2011.

Finally, the UK was much more exposed than the US to the eurozone crisis of 2012-2013, as its principal trading partner suffered two years of negative growth.

So the real question is this: Did Osborne successfully stabilize the UK’s public finances? If the Keynesians had been correct, he would undoubtedly have failed; growth would have turned negative and the fiscal/debt position would have worsened.

That is not what happened. Net government debt as a percentage of GDP had soared from 38% to 69% from 2007 to 2010. It rose under Osborne, too, but at a far slower pace, and is forecast to peak at 83% this year, after which it will decline. By 2020, according to the IMF, only Canada and Germany will be in better fiscal health.

Stabilization of the public debt has been achieved by a drastic reduction of the government’s deficit from a peak of just under 11% of GDP in 2009 to 6% last year. By 2018, according to the IMF, the deficit will have all but vanished. The same story can be told of the government’s structural balance, which fell from 10% of GDP in 2009 to 4% in 2014 and should be just 0.5% in 2018.

This is an impressive performance in comparative terms. The US, for example, will still have a 4%-of-GDP deficit by 2020 on either of the above measures.

To be sure, the UK did not “deleverage”; but, under Osborne, the debt explosion was contained. Among advanced economies, only Germany, Norway, and the US achieved smaller increases in aggregate public and private debt/GDP ratios from 2007 to 2014.

UK inflation was also brought under control, without the overshoot into deflation experienced by some developed countries. Osborne cannot claim direct credit for this, of course; but the choice of Mark Carney to serve as Governor of the Bank of England was unquestionably his.

Most important, no prolonged or double-dip depression occurred. Far from being worse than in the Great Depression, the economy’s performance after 2010 was better than it had been in the recessions of the early 1980s and early 1990s. Indeed, the UK outstripped the other G-7 economies in terms of growth last year, and its unemployment rate, which never rose as high as the rates in the US and Canada in the teeth of the crisis, currently stands at roughly half those of Italy and France.

Measured by job creation, too, UK performance was as good as the best, with employment increasing by roughly 5% between 2010 and 2014. As Jeffrey Sachs has noted, the UK employment rate, now at a record-high 73%, exceeds by far the US rate of 59%.

The fact is that the more Keynesians like Skidelsky and Krugman talked about the “confidence fairy,” the more confidence returned to UK business. One can argue about why that was, but it seems unlikely that Osborne’s successful fiscal consolidation was irrelevant. There is certainly no evidence to support Krugman’s repeated assertion that a country in the UK’s situation – with its own currency and with debt denominated in that currency – could borrow without constraint in the aftermath of a major banking crisis. (Perhaps the Keynesians prefer to efface from their memories the mid-1970s, when Labour politicians, encouraged by Keynesian advisers, attempted to do just that.)

And the Keynesians’ comparisons with the Great Depression were plainly risible from the outset. In terms of unemployment, even the recessions of the 1980s and 1990s were twice as painful.

Without question, the UK has endured some real pain. From 2010 to 2015, average inflation-adjusted weekly earnings fell more than under any postwar government. But the electorate has decided that the right time to draw a conclusion about the performance of Cameron’s team (now only at its likely half-way point) will be in 2020, not 2015. The good news is that since September 2014, earnings have been growing in real terms. The plunge that began under Labour took time to stop, but it is finally over.

Like Krugman (though his tone has been much less obnoxious), Lord Skidelsky has made the un-Keynesian mistake of sticking to an erroneous view in the face of changing facts. I look forward to the time when both have the intellectual honesty to admit that they were wrong – horribly wrong – about the economic consequences of Osborne’s strategy.


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The Keynesian argument, in sum, is that austerity hit the economy, and by hitting the economy, it worsened the fiscal balance.

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Niall Ferguson’s Wishful Thinking

LONDON – Niall Ferguson begins his rejoinder to my rejoinder to his interpretation of the results of the United Kingdom’s recent general election by citing an apocryphal Keynes quote: “If the facts change, I change my opinion. What do you do, sir?” But should the fact that the British economy grew last year by 2.6% have caused Keynesians to change their minds? Would it have caused Keynes to rewrite his General Theory of Employment, Interest and Money?

Ferguson seems to think so. I do not.

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Keynes never thought that an economy, felled by a shock, would remain on the floor. There would always be some rebound, regardless of government policy. What he emphasized was the “time-element” in the cycle. With depressed profit expectations, an economy could remain in a semi-slump for years. There would be alternating periods of recovery and collapse, but this oscillation would occur around an anemic average level of activity.

Neither the suddenness of the financial collapse of 2008-2009 nor the sluggishness of the recovery since then would have led Keynes to change his mind; nor has it discredited the claims of today’s Keynesians. While Ferguson includes several quotes from my past commentaries, he omits a very important passage: “All economies recover in the end. The question is how fast and how far.” The task of government was – and remains – to strengthen whatever “natural forces” of recovery exist, if necessary by providing businesses with a larger market, and, beyond this, to offset the inherent volatility of private investment through a stable program of public investment.

My argument with Ferguson concerns three main issues.

For starters, there is his view of the impact of austerity on Britain’s GDP. He cites the 2.6% growth in 2014 as a measure of austerity’s success. But this is nonsense. The real question is what austerity did to the economy over the five years of George Osborne’s tenure as Chancellor of the Exchequer. It is now widely agreed that, far from speeding up the recovery, Osborne’s austerity policy prolonged the slump:

Simon Wren-Lewis of Oxford University has pointed out that UK austerity was at its “most intense” in the first two years of Osborne’s chancellorship (2010-2011). The UK Office of Budget Responsibility, using conservative multipliers, calculated that austerity in this period reduced GDP growth by 1% in each year. That was the basis of Wren-Lewis’s calculation that austerity cost the average UK household the equivalent of at least £4,000. The economic recovery after 2012 coincided with the cessation of fiscal tightening.

Of course, coincidences are not causes. Keynesians cannot prove that the start of austerity aborted the recovery in 2010; that recovery would have come sooner if the pre-austerity level of public spending had been maintained; or that it was the reduction of austerity in 2012 that enabled the economy to expand again.

Nonetheless, the facts are consistent with Keynesian theory. Keynesians said austerity would cut output growth. Output growth fell. “[T]he Keynesians’ comparisons with the Great Depression [of 1929-1932] were plainly risible,” wrote Ferguson. In fact, real per capita GDP has taken longer to recover this time around. While it regained its 1929 level five years later, today, it is still below the 2008 level and looks as though it will take eight or nine years to regain it.

Keynesians also predicted that austerity would make it harder, not easier, for Osborne to hit his fiscal targets. Osborne said he would eliminate the structural deficit and have the debt/GDP ratio falling by 2015. Five years on, Osborne has failed to liquidate the deficit, no matter how you define it, and the debt/GDP ratio has risen from 69% to 80%.

Unlike Ferguson, Keynesians have a theory to explain why the targets were missed: If fiscal tightening makes the economy smaller than it would have been otherwise, it is much more costly to balance the books; and the attempt is likely to be abandoned or suspended for fear of social and political consequences. This is precisely what happened.

As a historian, Ferguson must know that it is growth, not austerity, that is most conducive to reducing the national debt as a share of GDP. Consider the following:

For numbers from 1900-2015 click here.

In 1929, the UK’s national debt was higher than it had been when World War I ended, despite (or because of) eight years of fiscal austerity. Conversely, from 1945 to 1970, the national debt shrank from 240% of GDP to 64% after 25 years of economic growth, most of it “real” (inflation-adjusted). Likewise, Paul Johnson, Director of the Institute for Fiscal Studies, said in December 2014 that it was not for lack of effort that the fiscal deficit had not fallen further. Rather, it was “because the economy performed so poorly in the first half of the parliament, hitting revenues very hard.”

The Keynesian argument, in sum, is that austerity hit the economy, and by hitting the economy, it worsened the fiscal balance. Does Ferguson accept this? If not, why not?

One of Ferguson’s key arguments is that austerity was necessary to restore confidence. Apparently, the bond markets did not agree. Long-term nominal and real interest rates were already very low before Osborne became chancellor, and they stayed low afterwards. The government could have taken advantage of this to borrow at negative real rates to invest, as all Keynesians advocated. It refused to do so.

In the Financial Times commentary to which I was responding, Ferguson wrote: “...at no point after May 2010 did [confidence] sink back to where it had been throughout the past two years of Gordon Brown’s catastrophic premiership” (my italics). But a graph that Ferguson himself posted gives the lie to this assertion:

This shows confidence increasing from the low point of -45.3 in the first quarter of 2009 (the trough of the slump) to +25.8 in May 2010. It then went down, and did not regain its May 2010 level until the third quarter of 2013 – an interval of three years. In other words, contrary to Ferguson’s assertion, business confidence was higher in the last six months of Brown’s premiership than in the first two years of Osborne’s chancellorship.

A comparison with Figure 1 shows that confidence closely tracks the actual performance of the economy. Austerity did not pull confidence up; it pushed it down, because it pushed the economy down. It takes a particularly perverse form of rational expectations to argue that confidence will be increased by policies that cause the economy to stall.

In his Financial Times commentary, Ferguson cited the UK’s post-crash earnings and employment performance as proof that “austerity works.” “UK unemployment is now 5.6%, roughly half the rates in Italy and France,” he gushed. “Weekly earnings are up by more than 8%; in the private sector, the figure is above 10%. Inflation is below 2% and falling.”

Take earnings first. To show nominal earnings over five years side by side with inflation over one year is sleight of hand. After a correction from Jonathan Portes, Director of the UK’s Institute of Policy and Economic Research (and after first denouncing the correction as “contemptible”), Ferguson conceded in his Project Syndicate rejoinder that “from 2010 to 2015, average inflation-adjusted weekly earnings fell more than under any postwar government.”

Quite simply, with inflation rising faster than nominal wages, average real wages have fallen, and employment has grown, as standard theory would lead one to expect. The combination of tight fiscal policy and loose monetary policy failed, until 2013, to produce a recovery in output. It did, however, lower the unemployment cost of reduced output – though not entirely: if the rise in involuntary part-time work is included in the cost, and as David Bell and David Blanchflower have done with their “underemployment index,” the UK government’s employment record is worse than Ferguson claims.

There was another cost to the relatively low unemployment of the recent recession, which Ferguson does not even mention: the collapse of productivity.

This is contrary to previous slump experience, when labor-shedding produced a rise in productivity. The explanation is probably to be found in the way the labor market has adapted to government policy. A recent report by the UK’s Trade Union Congress (TUC) argues that austerity “has led directly to weaker economic growth, not only in the UK but across the world.”

In the UK, according to the TUC, “the reduction in growth has been met (almost) entirely by lower earnings growth rather than lower employment growth….Many new opportunities have been concentrated in low-pay occupations, and there has been an associated increase in underemployment, involuntary part-time work, poor quality self-employment and temporary work alongside greater insecurity through zero-hours contracts, agency work and other insecure or short- term contracts.” Lower productivity “follows simply as an arithmetic consequence of this adjustment, with lower economic growth set against ongoing growth in the employment headcount.”

The austerity debate is of more than parochial British interest. Fiscal austerity remains the reigning orthodoxy in the eurozone. With soaring private-sector and household debt, the current global recovery looks very shaky, so it is important to attempt an accurate audit of the policy responses to the last collapse before the next one occurs.

Ferguson is right that everyone should learn from experience. Keynesians cannot expect to have it all their way. Demand-side policies should be coupled with supply-side measures to improve skills, infrastructure, and access to finance, and Keynesians have been slow to understand that a government cannot increase the national debt without limit for a cause in which most people do not believe.

But it seems to me that Ferguson is more interested in making political points than in developing properly grounded arguments. Until he tells us why he thinks that austerity was a good thing, his critics will be forgiven for seeing his economic pronouncements as nothing more than political propaganda.


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If it were true that 'austerity worsened the fiscal balance,' the markets should have punished Osborne. They did not.

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More Keynesian than Keynes

CAMBRIDGE – Like most people who create an “ism,” John Maynard Keynes quickly found his followers running ahead of him. “You are more Keynesian than I am,” he once told a young American economist. Now it is the turn of his biographer, Robert Skidelsky, to become distinctly more Keynesian than Keynes.

Keynes was not averse to changing his mind. But, as far I am aware, he did not change his predictions after the fact. This does not seem to be the case for Skidelsky.

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In November 2010, Skidelsky described British Chancellor of the Exchequer George Osborne as a “menace to the future of the economy,” whose policies “doomed” the United Kingdom to “years of interminable recession.” In July 2011, he declared that Osborne was making a “wasteland.”

None of this happened; the honest thing to do would be to admit that. But, in pseudo-science, you never acknowledge that a prediction was wrong and thus that the model might be defective. So now Skidelsky retrospectively “predicts” something quite different: “that the start of austerity aborted the recovery in 2010; that recovery would have come sooner if the pre-austerity level of public spending had been maintained; [and] that it was the reduction of austerity in 2012 that enabled the economy to expand again.” With a flourish, he concludes: “The facts are consistent with Keynesian theory. Keynesians said austerity would cut output growth. Output growth fell.”

Yet even Skidelsky admits that he and his fellow Keynesians “cannot prove” this. Indeed, nothing in Keynes’ theory would allow such simplistic causal inferences. After all, other forces were at work after 2010 – not least the eurozone crisis (which some non-Keynesians, including me, actually predicted before it happened).

Nor would Keynes have been as confident as Skidelsky that the counterfactual of continued high deficits would have been without risk or cost. Historical experience – including in the United Kingdom in the 1970s – tells us that financial markets are not always convinced by heavily indebted governments that promise to solve their problems by borrowing even more.

Responding to some early critics of his General Theory, Keynes showed that he recognized the importance of uncertainty in economic life, and consequently the difficulty of making predictions. “The whole object of the accumulation of wealth,” he wrote, “is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date.”

But, Keynes continued, “our knowledge of the future is fluctuating, vague, and uncertain.” There are simply too many things – from the “prospect of a European war” to the “price of copper and the interest rate 20 years hence” – about which “there is no scientific basis on which to form any calculable probability whatever.”

There was much that we did not know in 2010. We did not know if the UK’s banking crisis was over; if its very large fiscal deficit (amounting to nearly 12% of GDP) was sustainable; or what the interest rate would be in two years, much less 20. The situation was so grave that no responsible politician favored the type of policies that Skidelsky argues should have been adopted.

In fact, at that point, the only real difference between the approach of the Labour government’s chancellor of the exchequer, Alistair Darling, and that of Osborne consisted – as is clear from Darling’s last budget statement – in the timing of austerity. In March 2010, Darling vowed to reduce the deficit to 5.2% of GDP by 2013-2014. Under his Conservative successor, the actual deficit in that year was 5.9%.

Skidelsky argues that “austerity hit the economy, and by hitting the economy, it worsened the fiscal balance.” But that presupposes what he cannot prove: that a larger deficit could have been run without any costs.

All Skidelsky can offer as evidence to support this supposition is the view of the bond markets: “Long-term nominal and real interest rates were already very low before Osborne became chancellor, and they stayed low afterwards.” But, if it were true that “austerity worsened the fiscal balance,” the markets should have punished Osborne. They did not.

Likewise, if it was true that higher deficits carried no risks, but brought increased benefits, then the Financial Times would have been full of articles by investment-bank economists saying just that. It was not.

To be sure, I must acknowledge that I erred in one respect, which I am grateful to Skidelsky for pointing out. In May, I wrote that “at no point after May 2010 did [business confidence] sink back to where it had been throughout the past two years of Gordon Brown’s catastrophic premiership.” As Skidelsky rightly pointed out, confidence recovered from its low point in the first quarter of 2009, and reached a plateau in the first half of 2010. So I should have written: “At no point after May 2010 did it sink back to its nadir during Gordon Brown’s catastrophic premiership.”

But that does not alter my point that the more Paul Krugman talked about the “confidence fairy” – a term he coined after Osborne became Chancellor to ridicule anyone who argued for fiscal restraint – the more business confidence recovered in the UK. Although confidence fell somewhat in the first two years under Prime Minister David Cameron, it never approached the low point of the Brown period, and it later recovered.

Nowadays, some economists seem to believe that pointing out a single factual error (out of more than 20 statements of fact) invalidates an entire argument. But, while it may cause a flutter on Twitter, that is not the way serious intellectual debate works.

Similarly, Skidelsky cannot prove that austerity was responsible for the dip in confidence. The eurozone crisis is a more likely culprit. After all, Darling had promised his own version of austerity in March 2010.

Skidelsky attempts to salvage his and Krugman’s claim that the UK’s economic performance since 2010 was somehow worse than its performance during the Great Depression, writing that “real per capita GDP has taken longer to recover this time around.” But a serious student of the Depression – which Skidelsky used to be – knows that, compared to the 1920s, the UK had a relatively smooth ride in the 1930s, not least because abandoning the gold standard in 1931 allowed for monetary-policy easing. In any case, unemployment was far higher in the 1930s than in the 2010s. And that is the measure that should matter to Keynesians.

To muddy the waters, Skidelsky cites work by David Bell and David Blanchflower on “underemployment.” He also raises the issue of productivity, referring to research by the Trades Union Congress. But at no point in this discussion have I made any claims about the quality of the jobs created in the UK since 2010, or about the productivity of workers.

As a general rule, union leaders would rather see their members in “good” jobs, even if that means unemployment for others. My view is that employment, even in low-paid or part-time jobs, is better than unemployment. Were he alive today, I think Keynes would agree.

Nevertheless, I am glad to see that Skidelsky (unlike Krugman) acknowledges the need for supply-side reforms “to improve skills, infrastructure, and access to finance,” and concedes that he and his fellow Keynesians “have been slow to understand that a government cannot increase the national debt without limit for a cause in which most people do not believe.” He may be beginning to see the light.

Given the way Keynesianism came to be associated with inflationary fiscal and monetary policies in the 1970s, it is easy to forget what a hawk Keynes was in his final years. The whole point of his 1940 pamphlet How to Pay for the War was that higher taxes were needed to avoid the kind of inflation Britain had experienced during World War I. Toward the end of World War II, he fretted about the high level of military spending, and was depressed by the loss of power that came with Britain’s large external debts.

How do I know all this? Because I read it in the third volume of Skidelsky’s masterful biography of Keynes. Perhaps, before firing any more salvos at a fellow historian, its author should re-read his own book. It might make him a bit less Keynesian.


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[T]aking money out of an economy in a slump will damage GDP growth, thereby damaging business confidence as well.

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A Final Word With Ferguson

LONDON – Like any skilful controversialist, Niall Ferguson knows that when you have lost the main battle, it is time for diversionary tactics.

His latest charge against me is that I “changed my predictions after the fact.” He quotes me as saying in November 2010 that Chancellor of the Exchequer George Osborne’s policies doomed the United Kingdom to “years of interminable recession.” He claims that the pickup in UK GDP growth in 2013 – nearly three years after Osborne’s austerity budget of June 2010 – refutes my prediction.

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But this is nonsense, and Ferguson must know it. Has he never heard of ceteris paribus? Every prediction in economics is conditional on some things staying the same. If he took the trouble to read what I said in November 2010, he would see that my prediction was conditional on existing policies.

In fact, the policies changed. The second bout of quantitative easing, from October 2011 to July 2012, injected £175 billion ($272 billion) into the economy. And the austerity measures were sufficiently relaxed after two years for Osborne to be called a “closet Keynesian.” But Osborne’s about-face did not come – and this is the point – before his original policies had done considerable harm.

Another diversionary tactic is to call in aid Alastair Darling, Labour’s Chancellor of the Exchequer in the crisis years of 2008-2010. The only difference between the Darling and Osborne approaches, writes Ferguson, was “the timing of austerity,” as if this difference were not crucial. But it is, because it was Osborne’s first two years that did the damage.

In his budget statement of March 24, 2010, Alistair Darling said:

“I know there are some demanding immediate cuts to public spending. I believe such a policy would be both wrong and dangerous. To start cutting now risks derailing the recovery – which is already bringing down borrowing more rapidly than expected. To go faster, in the face of uncertainty, would mean taking a huge risk with people’s jobs, incomes and our future. I am not prepared to take that risk.”

So he postponed the cuts until 2011 and plotted a shallower deficit-reduction path.

Both Darling and Osborne faced a balance of risks in the spring of 2010. Darling chose not to take risks with “people’s jobs and incomes.” Osborne chose not to take risks with business (more precisely, bond market) confidence. Osborne’s choice resulted in almost three years of stagnation – and business was not too pleased, either.

This brings us to the heart of the matter. Ferguson’s case against the Keynesians hinges crucially on the assertion that the Osborne package of 2010 was necessary to restore business confidence, and that it duly did so: “the more Keynesians like Skidelsky and Krugman talked about the ‘confidence fairy,’ the more confidence returned to UK business.”

The factual basis for this assertion was that business confidence after May 2010 (when Osborne took over the Treasury) never sank to “where it had been throughout the past two years of Gordon Brown’s catastrophic premiership.” Ferguson now admits that he was wrong – that “confidence fell somewhat in the first two years under Prime Minister David Cameron” – but urges in mitigation that a “single factual error” does not invalidate “an entire argument.” In fact, Ferguson’s entire case rests on this single factual error.

The graph below shows very clearly how closely confidence rises and falls with GDP growth. This explains why confidence fell to the low point that it did during Gordon Brown’s premiership: just look at what was happening to the economy as a result of the global collapse. Indeed, the fit is even better than the graph suggests, because the GDP figures shown for 2011-2012 have been revised upward – that is, they were expected to be worse.

Ferguson says that I cannot prove that austerity lowered UK GDP growth, or that it was responsible for the dip in confidence. And he is of course right: Economists cannot prove anything. But that does not mean that people are entitled to talk nonsense. I have made an economic argument that taking money out of an economy in a slump will damage GDP growth, thereby damaging business confidence as well. I have provided factual evidence that this might well have happened. As far as I can see, Ferguson has provided no argument at all, while the factual evidence on which he relies to controvert my argument was wrong.

Here matters can surely rest.