Anatole Kaletsky still inhabits the mental world where debt-driven crises are cured by more debt, where the damage inflicted by madly cheap money can be cured by, er, even cheaper money. And in the process, he dismisses anyone who might demur from this fantastical notion as mad ideologues or right-wing troublemakers:
“These unabashedly Keynesian policies, which Mr Brown did not just implement in Britain but proselytised around the world, are now almost universally acknowledged to have contributed to economic recovery, not just in Britain, but also in the US, Europe, Japan and China. It might well be argued, therefore, that the Tories discredited themselves as potential economic managers by choosing the wrong side of the debate over fiscal stimulus, aligning themselves with right-wing Republicans, German neo-Marxists and anti-Keynesian academic ideologues, all of whom insisted that you cannot cure debt with more debt and that government stimulus plans would prove counter-productive.”
So perhaps Mr Kaletsky can explain why, if Brown was such a great man, he presided over a situation as finance minister when the UK ran a budget deficit even when the economy was – according to official statistics – growing reasonably strongly before the crisis. And maybe he can explain why, in previous historical episodes, such as in Britain during the early 80s or in the early 1920s in the US, the economy recovered from recession without massive government spending and oodles of cheap central bank money.
Of course, Kaletsky is right to point out that this massive pile of public debt that has now been built up will have to be reduced, and probably far more severely, than the UK’s opposition Conservatives have been willing to let on. But then such a process is bound, by the logic of Mr Kaletsky’s own neo-Keynesian macro-economics, to drag on any future recovery, since such a debt reduction programme is bound to involve tax rises as well as public spending cuts.
By “anti-Keynesian academic ideologues” – as opposed to sober-minded sages such as himself – Mr Kaletsky is presumably referring to what can be loosely described as the Austrian school of economics, a school that regards money not as a metaphysical abstraction to be manipulated at will by a handful of central bankers and their political overlords, but as a claim on real resources, which cannot be simultaneously used by different people at the same time. Instead of sneering at such views, it would be more edifying if Mr Kaletsky, and those who share his views, could address them cogently.
Here is a decent article on a related theme.
These unabashedly Keynesian policies, which Mr Brown did not just implement in Britain but proselytised around the world, are now almost universally acknowledged to have contributed to economic recovery, not just in Britain
I wasn’t aware that we “had” an “economic recovery” in Britain as yet?
Did blink and miss it?
Kaletsky is wrong even on his own terms – Brown’s policies have not been Keynesian. Keynes believed in a balanced budget except in times of depression. There is nothing in his work to suggest that governments can borrow ad infinitum without debauching the currency.
Kaletsky is a demented liar, agreed. However, he’s just a particularly obnoxious sypmtom of an amazingly widespread phenomenon that has infected a great deal even of the righteous. Take this for example. Sure he makes some sound points and he’s making a basically correct case, but what the chuff is he talking about with all this *debt is not intrinsically a problem* gibberish? Not only is it mad economically, but it seems to totally ignore the moral dimension as if forcing those not yet born to pay for the “investment” of those living was somehow licit as long as one is *responsible* about it. What is needed is nothing less than a heresy hunt against economic voodoo and the supply-siders must be first in line.
As for “gibberish”, that paragraph contains a good deal of it. People borrow money for perfectly sound reasons, such as firms that tap the capital markets to build factories, or whatnot, and issue bonds to pay for them over several years. This has been done for a long time: think of all those bonds used, for example, to build railways in North and South America in the 19th century. So long as the institutions issuing the debt have plenty of collateral, there is not a problem.
The problem, both moral and economic, with debt is when, as in the current case, governments recklessly pass on the burden of paying it off to future generations, as yet unborn, or try to reduce its cost by inflation, or outright repudiation. Debt per se is neither good or bad; you need to look at the context.
As for your crack about supply side economics, it is in fact based on the perfectly commonsense observation that high marginal tax rates blunt economic incentives and hence reduce, rather than increase, revenues. Cuts in the absurd high tax rates in the 1980s in countries like the UK did a lot of good. If you are going to try to refute that, you might as well refute the law of gravity.
I have no idea what you are going on about JP. Perhaps you have not watched the video, in which case my comment was entirely clear. The CATO chap was arguing that government debts and balanced budgets don’t matter, as long as spending is kept low. That’s demented and wicked, just as all government debt is necessarily destructive and wicked (and the idea was no less demented in the 1980s since you mention it).
You’re just wrong, Gabriel. The point Dan Mitchell is making in the Cato video is that whether government spending is financed by debt or by increased taxes is a secondary problem*; the primary problem is the overall level of spending. Indeed, debt incurred to finance true capital investment, which will provide long-term benefits, can be a wise choice; it is a means of spreading out the cost of the asset over its economic life, and those who receive the benefits will be the ones paying the debt. It is only borrowing for the purpose of current consumption that is “destructive and wicked”; only in that case will future generations be paying for the enjoyments of those now living. There we can agree, but of course current consumption is most of what government spending is for.
As to your snide remark about supply-siders being somehow economic heretics, that’s also nonsense. It is demand-side economics (i.e., Keynsianism) which is the true lunacy. Production (that is, supply) is the engine which drives economic growth. Read (and comprehend) Say’s Law; it’s a bedrock economic principle which was completely misunderstood by the non-economist Keynes. But of course, Keynsianism is a superficial and simplistic doctrine which gives academic cover to the true goal of politicians: expansion of their power via growth of government. Which, of course, is why that doctrine is so popular among the political and chattering classes. Hence Kaletsky.
Speaking of whom, I appreciate the irony in the title of his nonsensical little essay: “It’s not the economy – and voters aren’t stupid“. Of course it’s the ecomony, and of course voters are stupid. Which is precisely what Kaletsky and his ilk are relying upon.
* We can have a separate discussion about the effects of disintermediation.
Gabriel, you seemed to be arguing that debt per se was somehow dodgy; if you are arguing that government borrowing is dodgy, your point has greater force, but even then, if a democratically elected government borrowed say, to meet shortfalls in revenues and balanced its books in the next year or so, that hardly is like the kind of demented government debt buildup we now have. And Dan Mitchell is damn right, as Laird says, to focus on the issue of spending. It is government spending which is the problem, not simply how it is paid for. And sometimes, if the choice is between say, flatter, lower taxes, and a slight rise in borrowing, I’d choose the former, given the benefits of greater economic growth, greater efficiency, etc.
I note you did not come back to me on your comments on supply side economics. I see that Laird has nicely done so, so I will not press the point further.
Yes, it is fine to borrow if you can pay back.
But.
The huge amount of “money” that has been created out of thin air (counterfeiting) – the worst aspect is that it will devalue all the rest of the money going around that represents true wealth. Just like counterfeiting does.
The government is a legal counterfeiter.
What it will do is destroy the value of savings in that currency.
The value of the dollar/pound, whatever, can go nowhere but severely down.
Zimbabwe anyone?
Thanks Laird for neatly proving my point about just how deeply Keynesian lunacy has penetrated into the heart of the right. It’s amazing to think that barely a hundred years ago if you’d have tried to pull that junk in conservative or Gladsonian circles you’d have been laughed out of the room as some sort of pie-in-the sky maniac. Such is the precipitate degeneration of the age.
Let’s just look at the Milton Friedman quote in the video:
Utterly insane.
And of course tax cuts can act as effective spurs to economic growth even whilst adding to the deficit, but once upon a time driving economic growth through mad tricks was the preserve of whacky leftists. Of course, not so very long ago economic growth in he absence of genuine advances in technology or the division of labour was regarded as moonshine. Ahh well.
Remember, strictly speaking, “the Left” played only a partial role in bringing about our current disaster. Third Wayers and compassionate conservatives, both in hoc to supply side lunacy and “neo-classical” claptrap, led us here and almost destroyed (and still might destroy) capitalism.
Deficits do matters, they do, they do, they do.
You’ll bury us all.
Regarding the blip of a recovery – one cannot throw all that vast amount of money at the problem without causing a brief respite. Like give the exhausted athlete an amphetamine pill.
The result, beyond the immediate short term, will of course be disastrous.
I sometimes wonder if iDave would not do himself a favour and stay out of No10.
But perhaps the blip recovery will last more than a few days?
Another point to make on debt, is that with companies and governments, their incomes – or tax revenues – fluctuate, for various reasons (not necessarily sinister). To cover cashflows in the interim, borrowing is needed. Nothing odd or “wicked” about that, so long as over the long haul, income and spending match.
A short-term deficit, in that case, is no reason for alarm, but a deficit that builds up even when conditions are benign – as happened under Gordon Brown – is clearly bad.
Well I am glad that you accept tax cuts can spur growth, but as the supply side school have pointed out, lower, flatter taxes can actually increase revenues, thereby reducing deficits, not raising them, in the long run.
presumably Keynesian ideologues, academic or not, are fine. First I heard Ms. Merkel described as a neo-Marxist though. I wonder why her economy is recovering quicker and better than ours?
Still its nice to have Mr. Kaletsky’s assurance that my friends have all found jobs- doubtless there are some Americans who will be glad of the same comfort.
“And of course tax cuts can act as effective spurs to economic growth even whilst adding to the deficit, but once upon a time driving economic growth through mad tricks was the preserve of whacky leftists.”
Gabriel, you have an interesting way of mixing sensible points with utter tosh, viz the above quote. Tax cuts do “act as effective spurs to economic growth”, but the result is to increase governmental revenue and thereby reduce deficits. Every tax cut (which really means a cut in the marginal rate of taxation) in the twentieth century has proven this. How much empirical evidence is necessary to drive home this simple point?
You’re probably one of those who sneers at the Laffer curve, but it contains a profound truth. No nation in the West is anywhere near the inflection point of that curve, so any tax cuts will increase governmental revenues. After a brief explanation, this apparently counterintuitive concept is readily understood by all but the terminally shallow or willfully obtuse.
And I would have thought that my argument was obviously anti-Keynsian, but apparently that slipped by you, too.
Laird, while I agree with the Laffer curve in general, there are some serious issues with actually putting it to use. Firstly, is that it was originally sketched, off-the-cuff on a napkin at a dinner table. There doesn’t appear to be much in the way of actual data to justify its shape or where the inflexion point (if, indeed, there is only one) is. Only the endpoints can really be pinned down. Secondly, it is used perhaps a little too broadly. All taxes cannot be at the same point. Are some taxes on one side of the inflection point? How do we tell?
Perhaps the biggest problem financially is that even if you do cut taxes and that spurs growth, without cuts in spending, borrowing has to make up the shortfall. Now your growth has to outpace the interest on the borrowing. In general, you might be confident that that will occur but, as ever, things happen. What happens when growth falters? You are now not repaying the debt and incurring interest on the interest and digging yourself in a hole. I have to agree with Gabriel here that government debt is problematic in general. The only place it should ever really be used is when revenues fall short to carry over next year when spending cuts should be put in place to make up the difference. Even then, that could mostly be avoided by carrying a small surplus (savings) or, what an idea, only spending the revenue collected the previous year.
The biggest problem I have with the Laffer curve, however, is simply that the aim of life should not be to maximize government revenues. We should be wary of falling into the utilitarian trap.
That’s what you think and that’s what’s so sad.
Richard, of course the Laffer Curve is just a generality. It was never intended to be used as an actual model; it’s merely an easy-to-grasp illustration of an important concept. You couldn’t “put it to use” any more than you could a supply/demand curve. I don’t think it’s even susceptible to quantification.* What it does do is show very clearly why a cut in marginal tax rates can (and almost always does, given the level of modern tax rates) result in increased revenues, a concept which is counterintuitive on its face.
And I never argued that there shouldn’t be spending cuts; quite the contrary. Indeed, I agree that spending cuts are what is most needed today. The whole “Laffer Curve” discussion was a side point, part of my response to Gabriel’s snide dismissal of “supply-siders” as “economic heretics”. But if we were to couple spending cuts with tax cuts we could begin to whittle away at the deficit, which (utilitarianism aside) is going to require revenues. Might as well try to maximize them until not only the current deficit but the total national debt has been eliminated.
Gabriel, I think (oops, there’s that word again!) you can be a little more clear about precisely what it is that you find “so sad”.
* Incidentally, in that respect the Laffer Curve is far more honest than all those elaborate mathematical formulae with which modern economic writing is festooned. You can’t put any of them to practical use either, but the economics profession likes to pretend otherwise because it desperately wants to be seen as a “hard” science which is both quantifiable and predictable. Unfortunately, since it is in fact a “social” science, it is neither.
Gentlemen, I think you actually generally agree, and there is some mis-communication.
I do take issue, however, with the Laffer Curve being a merely academical construct – please see Art Laffer himself discuss it here, with abundant evidence. Money quote (about the 1997 capital gains tax cut): “Seldom in economics does real life conform so conveniently to theory as this capital gains example does to the Laffer Curve.”
Admittedly, we cannot replicate the Laffer Curve in lab conditions, and thus one can always question the direction of the causality, the timing, and the mix of taxes involved. It’s also preferable (to the audience of this blog, at least) that government spending be curtailed. Yet, even ceteris paribus, a cut in tax rates boosts growth, and a wealthier populace is generally a freer populace. You are arguing whether a delta-decrease in taxes is more urgent in the current situation that a delta-decrease in gov’t spending. Either should enable the other, and I’ll take either, but would probably tend to prefer the decrease in gov’t spending first, just to minimize gov’t’s noxious meddling in our lives. Gov’ts have this nasty tendency not to save “unexpected windfalls”, but to spend them, and in an entitlement-fortified manner at that – see California 2004-Current. Cutting spending disables run-arounds like debt or inflation, and also I know people on federal jobs, who get paid about as much as I do to do worse than diddly-squat cubed – they actually interfere with people’s productive activity. I do not want their job; I just want them not to have it, so I hope (naive me!) that they’ll be the victims of the gov’t spending cuts.
My preference, however, is conditional on my US milieu. It might well be that in the UK the better approach (due to institutional, historical, etc. peculiarities) is the lower-taxes-first one. All in all, I’ll slay Goliath with a sling, because it’s what I have, but if you have a Beretta Px4 Storm, all the power to you.
Cheers!
When Britain was governed in a civilized manner, the aim of a chancellor was to cut unnecessary spending in order to build up a budget surplus after which he would cut taxes for the forthcoming year. People took this job seriously and rightly so because they were dealing with other people’s money and understood the perils of compound interest. Two men came along, in relatively quick succession to wreck all this: the first was Lloyd George (may his name be a curse) and the second was Keynes (may he rot in hell). After they were done the given idea became that the job of a chancellor was to do all sorts of crazy messing about with the figures in pursuit of various chimerical schemes, among them boosting economic growth and ceating full employment.
So again, what is sad is that you think you are an anti-Keynesian, but you’re not and, what is truly awful, is that most people on the Right are the same.
The idea that you can boost the economy by debt financed tax cuts is functionally equivalent to the idea that you can boost an economy through debt-financed spending. Indeed, the only difference lies in which mode of delivery is most efficient. Both are Keynesian derived ideas.
It’s also sad how throughly the Right have endorsed the initially leftist idea that it is the job of government (by one means or another) to busy itself boosting economic growth at all.
Nothing in Laird’s remarks, on any honest reading, would suggest he thinks it is the job of government to boost growth (or for that matter, reduce it.). But given where we are, rather than in some sort of minimal state system, it is good that government activity does not hamper enteprise – hence the wisdom of the Lafferite argument.
And nothing in Laird’s remarks suggests he favours the sort of spending you are attacking. You’re being your usual tiresome self of accusing people of holding views that they don’t hold. It is one reason why it is usually a waste of time to debate with you, given your lack of good faith and habit of making big statements that are seldom backed up by any facts or coherent argument. A very tiresome individual you are.
And anyway, we have said enough times we want to roll the state back and cut spending for this point not to have to be elaborated further. This is a pretty hardline classical liberal blog that wants to get the state out of our economic, social and personal lives. Indeed, such liberalism is something to which you have objected, for your own social-conservative reasons.
“The idea that you can boost the economy by debt financed tax cuts is functionally equivalent to the idea that you can boost an economy through debt-financed spending.”
Once again you miss my entire point. Tax cuts (reductions in marginal tax rates) are not “debt-financed”; history has proven repeatedly that they are self-financing, indeed, revenue-positive. If you can’t comprehend that, you’re as bad as the politicians who talk about raising taxes as a means of generating additional revenue when, in truth, the result would be exactly the opposite.
Hi Laird, I think we’re in general agreement but the main thrust of my point, directed more at those that think debt is OK than yourself, is that given (as I believe) we are on the correct side of the Laffer curve that cutting taxes will, theoretically, in time, lead to increased revenue and therefore an increased defecit, in the short term, if spending is not cut, you have an increased defecit. If things don’t turn out as planned and there is a downturn in the economy (as is often possibly with the current economic system), your debt has created a problem (just as it would for an individual).
It’s been a while since I read about Laffer but I believe that this was his plan, to cut taxes and not spending and let things work themselves out in time. It appears that it worked out OK for Reagan but how much of that was helped out by the dot-com boom (or indeed, perhaps the bubble and accompanying bust was somehow facilitated, directly or indirectly by those policies)
So, by my estimation, cuts in taxes should be accompanied by cuts in spending. Even if cuts in spending are difficult, any at all would mean the opportunity for lower taxation with no borrowing. Lower taxation would lead to increased revenue (per the Laffer curve), increased revenue would lead to less need for taxation (with fixed spending) and the chance to pay off some debt (leading to less need for taxation)
With all that said, taxes, debt and spending are are problems but really they’re just symptoms. The real problem is policy. The politicians just can’t stop making more of it and until and unless that is fixed, any other discussion is just us chasing our tails.
Tax cuts (reductions in marginal tax rates) are not “debt-financed”
Unfortunately, unless you are running a surplus, cuts in tax rates can only be funded by debt. It takes a while for the effect of the cuts to be seen in increased revenues. I believe even Laffer his self admitted as much. I’ll have to find the web page I read that again.
Sorry, third post in a row. Bad form and all.
Just to say that I think it may also be instructive to take things back towards first principles a little too. As has been stated before, money is a claim on resources. The manifestation of excessive government on the economy is the diversion of people and goods from productive activities. It really doesn’t matter if the money is obtained from taxes or borrowing, people sitting around at home or shuffling papers in a government office have to have their needs (Food, shelter, flat screen TV) met somehow and that is a draw on the productivity of the people out there doing something worthwhile. You cannot solve the problem without stopping these people from being a drain and, ideally, making them part of positive productivity.
This is also part of the reason I’m a little skeptical at private schemes being an answer to the social security issues in the US (Let me first state that I do believe that the private option is preferable). The root issue is that there will not be enough productive people to comfortably support the unproductive. Diverting pension funds to private rather than government schemes will assist somewhat due to more productive use of the funds but the issue is, at heart a demographic one and I believe that kind of injection of cash to the private sector will lead to yet another boom/bust bubble (though, again, the outcome of the government option is worse, as ever)
What matters is the proportion of the economy (of civil society) taken up by government borrowing and debt – NOT the percentage of the government budget taken up by borrowing.
Let me try to explain.
Let us say that Government spending was 3% of the economy and that EVERY BIT OF IT was from borrowing (nothing from taxing at all).
“That is terrible it means a government deficit of 100%” No it means the government deficit is 3% – because it is the proportion of the economy that matters.
Still bad (yes I agree Gabriel, it is bad) – but not terrible at all.
Now let us say that government spending was 50% of the economy (about what it is in Britain now – if one is not fooled by government tricks).
Now let us also say that ALL of this was financed by taxation – no borrowing at all.
“Good – a government deficit of zero”.
No – terrible, because the economy would be utterly crushed (especially an economy like Britain – which has been eaten away at by inflation and so since World War II).
“So you are saying the government should borrow the money instead?”
No, No, No – a thousand times No.
What I am saying is that government spending must be CUT.
What David Cameron says – if only I could believe he meant what he says.
As for Anatole Kaletsky – he is a degenerate and always has been.
One of his main themes has been (for years) “cut interest rates” or “keep them down”.
He was the biggest cheer leader for the credit money expansion in British journalism.
“Why?”
Because his boss had borrowed lots of money of course – and he wanted to please Rupert by argueing keeping the cost of money down.
This makes him a degenerate because Rupert M. did not fire people who argued against this policy – i.e. argued against his own financial interests.
So Anatole Kaletsky did not have the excuse of “I would have lost my job and my family would have starved” (or whatever). Kaletsky was just backside licking in the hope of favour.
In short – a degenerate.
Sorry Paul, I don’t buy it (or I least don’t buy that the principle can be extended beyond your extreme example). High taxes can always be cut; debt passes on the burden to those who had no say in creating it and, thanks to compound interest it’s a much, much bigger burden than it would otherwise be. Then there are all the inflationary issues to condiser. High taxes slow down the economy, but government debt fundamentally distorts both it and the body politic in nefarious ways.
As for Art Laffer, he’s a total dolt who has been proven specatularly wrong on fundamental economic principles. I have no idea why people still cite him.
Gabriel, the reason people cite Arthur Laffer is that his insight about the nefarious impact of high marginal tax rates is correct, useful and has been validated time and again. And I would point out that Peter Schiff – who is a terrific writer and with whom I agree on many things, does not refute Laffer’s contention about the importance of tax rates.
If we want to reduce the burden of debt – and I take your entirely valid point about the issue of compounding – we want to maximise revenues as part of that process. Raising taxes on the rich to confiscatory levels – which is what the current UK government is doing – will not increase revenues. It will drive people away, and will reduce revenues.
And I also think you under-state the bad effects of high taxes; they destroy wealth creation and job growth. Yes it is true that high debt effects future generations, but high taxes also affect future generations, such as by dampening entrepreneurship and the jobs on which future generations will benefit. My descendants will not be happy that our country became no-go zone for people who want to work hard.
In any event, the central evil we need to confront is high government spending.