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October 20, 2008


Bob B

"A pedant writes: In fact, Keynes’ General Theory says very little about fiscal policy."

Absolutely. The main focus of the book as well as the motivation was to develop a theory that could explain how a capitalist market economy could get stuck for years in a slump.

The prevailing orthoxy argued that this was impossible - or merely a temporary aberration - and that unemployment could be reduced if all or most workers agreed to accept cuts in their wages.

Keynesians pointed out that lower money wages meant that workers would have less money in their wallets/pockets to spend so aggregate monetary demand would fall and competition between producers would result in lower prices. The compelling rationale of a market with price deflation is that so long as potential buyers expect prices to be lower next year compared with this, it's rational to stay out of the market and that increases the probability that prices will fall further.

Look what's happening in the housing market now:

"The Item Club predicts house prices will fall 14% by the end of this year, and drop a further 10% next year."

"The number of properties being sold across the UK has hit a 30-year low. . . In September, [estate agents] sold on average less than one property per week each, the worst since 1978, says the Royal Institution of Chartered Surveyors."

David Heigham

"Keynesianism" was an intellectual movement composed of people who had read the General Theory, but never re-read it. Alastrair Darling's speechwriter may be a late-comer to that group.

If the Government has managed to pull forward useful amounts of central government investment. that is unexpected good news. In all the downturns that I recall, Government efforts to do that have bourne fruit, if at all, only when the economy was already beginning to recover.

Bob B

That seems to have escaped the notice of Ben Bernanke:

"Oct. 20 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus, saying the credit crunch is `hitting home' as Americans find it harder to get loans, threatening a prolonged economic slump."

But then, by repute, he is a "Monetarist", not a "Keynesian".

Very likely, politicians on both sides of the Atlantic desperately want to be seen to be doing something populist to ease the pervasive plight of all those hard working families who are invariably invoked on these special occasions, possibly to assure everyone that our touchy-feelie governments emphatically reject Christian investment principles:

"29 For the one who has will be given more, and he will have more than enough. But the one who does not have, even what he has will be taken from him."
Matthew 25:29

Bob B

How about this paper assessing the effectiveness of fiscal stabilisation (subscription barrier):

Andrea Boltho: Did policy activism work?

Abstract: How macroeconomic policy activism influences business cycles remains a major unresolved question. This paper compares the degree of cyclical stability in industrialized countries over three periods (1870–1913, 1922–1937 and 1950–1979), two of which were little affected by demand management, while the third saw a large degree of policy involvement. The evidence shows that the 1950–1979 years were unprecedently stable. Neither problems of data reliability, nor the influence of the world cycle, nor the smaller role of agriculture appear to be responsible for this. The major reason seems to be the greater influence of government which operated via automatic and discretionary policies and by changing expectations.

However, as I recall, JCR Dow, in his much cited study: The management of the British economy, 1945–1960 (Cambridge UP, 1964), certainly took the position that that budgetary and monetary policy, between 1945 and 1960, was positively destabilising.

Bob B

For later assessments:

Alsopp: Macroeconomic policy rules in theory and practice

Pemberton and Oliver (2006): UK economic policy in the 1960s and 1970s and the challenge to learning

Andrew Garland

I think people are relying on "stimulus" or "getting the juices going" when they argue for government spending as a way to raise production. Somehow, more money floating around will generate wealth far beyond what is needed to pay back the money printed or borrowed for "injection". (Is an economy really like a person's body?)

Would there be enthusiasm if there were no stimulus, just the deadweight loss of collecting resources from some people, then giving them to others?

In The Myth of the Economic Multiplier I present that there is no stimulus. Is there a stimulus at the macro level, if there is no stimulus at the micro level?


Bob B

Links to empirical papers with academic standing with estimated values of the multiplier in a UK setting would be helpful at this stage, instead of the more usual recourse to reasserting ideologically driven positions. Suggested links would be appreciated, I think.

Btw I didn't even vote in the 2005 general election out of disgust with the political parties and otherwise have variously voted Conservative, Labour, Liberal, Lib-Dem and Social Democrat dependning on prevailing circumstances. Estimates of the numbers of floating voters in the UK electorate of c. 44 millions extend upwards from about 17%.

In the 2005 election, a larger percentage of the electorate didn't vote than the percentage which voted for New Labour candidates. But then between the 1997 and 2005 elections, Tony Blair lost nearly 4 million votes and half the membership of the Labour Party. New Labour called the Labour win in 2005 a historic achievement.

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