Keynesianism vindicated!!
Narrative one:
One story after another of record employment in the UK:
Meanwhile American employment continues to lag 3 million behind the levels of early 2008, despite the fact that America’s population growth rate is higher. What explains the UK employment miracle? Deficit spending. Only Japan and Egypt run larger budget deficits than the UK. How can the UK be running massive budget deficits as employment surges to records? Only the Keynesian model can explain this correlation.
Narrative two:
One story after another of near-zero RGDP growth in the UK.
And what explains this slow RGDP growth? The government has been talking “austerity” for the past three years. And the Keynesian model predicts that austerity will correlate with slow growth. So perhaps there’s also a link between austerity talk and RGDP. Let’s see . . . I’ve got it, the expectations channel!
So it doesn’t matter which narrative you prefer, either way the Keynesian model has been completely vindicated—it explains Britain’s situation perfectly.
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10. April 2013 at 11:57
http://i.imgur.com/QlYraDg.png
10. April 2013 at 12:04
Geoff: Are budget deficits boosting employment, or is fiscal austerity depressing growth?
10. April 2013 at 12:13
Low RGDP growth has a lot to do with productivity. And if government had avoided austerity, don’t you think unemployment would be lower than 7.8%?
“Record employment!!!!” ignores difference in population since 1970.
See the brilliance of this post is it passes Bryan Caplan’s “Ideological Turing Test” perfectly. (If your embodiment of Keynesianism is Paul Krugman, and I’d agree with him on this point).
10. April 2013 at 12:18
This post doesn’t really make sense. The UK is practicing growth killing austerity. The Keynesian model predicts bad results from that strategy. So yes, the poor results in the UK do tend to vindicate the Keynesian worldview.
10. April 2013 at 12:22
Niklas:
“Are budget deficits boosting employment, or is fiscal austerity depressing growth?”
Not sure, I’ll first have to stop throwing a coin where heads you win and tails I lose.
10. April 2013 at 12:32
@Sean, I think Sumner means that the media (or somebody, I’m not sure who) repeats both those narratives even though they are mutually exclusive.
10. April 2013 at 12:39
Ashok, You said;
“And if government had avoided austerity, don’t you think unemployment would be lower than 7.8%?”
By “avoided austerity” do you mean what would have happened if their deficit was even larger than Egypt’s and Japan’s, instead of just the third largest in the world?
Let me put it this way—if Ed Balls had his way, and the BoE targeted a 2% inflation rate, unemployment would be even higher.
Sean, That’s what I said. So the post does make sense! But don’t forget the record high employment levels and budget deficits that are higher than virtually any other country in the world, that also supports the Keynesian model!
10. April 2013 at 12:51
I don’t think now was the time to cut deficits. It’s counterproductive to cut deficits when you need them the most, and it’s cyclical in nature. Since you know they’ll come down, don’t cut it at the trough.
You mentioned “the record high employment levels”. Record vis-a-vis what?
http://bit.ly/ZhVDxf
Doesn’t look like a record to me.
10. April 2013 at 13:00
Austerity is a measure of net funding and tax levels relative to previous funding and tax levels, not an absolute function of the size of a deficit.
Cut spending and raise taxes, that’s austerity, even if by doing so you choke growth and thus end up with an even larger deficit than before because the demand for support increases even as revenues drop. We’re seeing that all over the place in the UK and Euorpe, and trying to emulate it here, too. (Particularly when most people are diverting private income to the paying down the inevitable hangover that comes from monetary credit as opposed to being able to retain and renvest the profits from fiscal grants and purchases)
On the other hand increase support spending and cut taxes where they cut into the ability of people to contribute to AD and the deficit will shrink as the demand for that support falls and increased growth leads to stronger revenues.
10. April 2013 at 13:21
I live in the UK and I can tell you it’s a total mess. State spending is keeping the zombies going but the state dominates. We will never have any real wealth creation – why bother – the state is the best employer in most regions. Pity all the jobs they support are of no benefit or even of negative value.
If you lived in the UK you’d understand that all the “stats” coming out of the UK are a complete joke. Stagflation is the experience for the man on the street.
The UK is doing what it does best: playing with money. But reality keeps leaking in. Stats say things are getting better but the public say it is getting worse. The inflation figures are a waste of time. Unemployment figures are fudged. More fool you guys for believing it.
10. April 2013 at 13:45
@Ashok: “It’s counterproductive to cut deficits when you need them the most” Have you even been reading this blog? You’re assuming the primary claim that Sumner most disputes.
(Namely, the Keynesian idea that fiscal policy is a significant lever on the macro economy, whereas the Sumner Critique suggests that monetary policy is dominant. Instead, we should have a balanced fiscal budget under every economic situation!)
10. April 2013 at 14:56
KRG,
The analogy between the UK and particular European countries like Greece is awful, since they don’t have a independent central bank with an overshot inflation target.
“On the other hand increase support spending and cut taxes where they cut into the ability of people to contribute to AD and the deficit will shrink as the demand for that support falls and increased growth leads to stronger revenues.”
And where is the monetary policy reaction function in this analysis?
10. April 2013 at 15:04
Ashok Rao,
I’m pretty sure “employment” and “unempolyment” mean different things.
10. April 2013 at 15:10
* “unemployment”.
10. April 2013 at 17:24
Nice, and you can use the mirror image to vindicate austerity too!
10. April 2013 at 20:22
“@Ashok: “It’s counterproductive to cut deficits when you need them the most” Have you even been reading this blog? You’re assuming the primary claim that Sumner most disputes.”
Maybe if there was monetary policy to smooth crash in nominal output. Was there?
10. April 2013 at 20:36
2008: UK unemployment 5%.
2009: Close to 8 %.
2013: Still close to 8 %
Some growth.
10. April 2013 at 20:56
2008: Us unemployment 5%
2009: tops out at 10%.
2013: down to 7.5
Penden, says…”I’m pretty sure “employment” and “unempolyment” mean different things.”
Sure. In this case the difference means that the growth in the economy, and employment is not keeping up with the demand for jobs by new folks entering the job market.
11. April 2013 at 01:11
Bill Ellis,
I don’t think that cum hoc, ergo propter hoc constitutes good scientific method.
As Keynes put it, the central bank can make the Treasury View true. Independent inflation-targeting central banks are the kind of central banks that Keynes was talking about. Smart guy, that John Maynard.
11. April 2013 at 05:04
Surely what is happening in the UK is a massive mix shift that makes the aggregates not respond consistent with theory and that has the press confused (these were the people napping in survey econ classes at school).
How is it possible for employment to be strong while the RGDP is weak. Well, a productivity collapse would seem obvious. Individuals are unlikely to suddenly get significantly less productive in the same jobs, so very likely we are seeing mix shift with low productivity jobs gaining and high productivity jobs falling. Evidence from energy and finance sectors suggest this is happening. Keynesian/austerity really does not matter much, since pushing up employment more in low productivity jobs would be a really weak way to improve AD and RGDP with the cost of more and potentially unsustainable debt. NGDP targeting would be better, but the mix shift would still be a problem.
Seems to me the real issue is finance since the decline in energy is mostly geological. Like it or not politically, finance has been the engine of UK growth for a long time. Since the crisis, regulatory, compensation and tax policies have all made the environment less desirable for UK finance, pushing jobs, compensation and tax revenues to places like Zurich, NY and Hong Kong.
11. April 2013 at 06:28
Ashok, Please don’t distort what I say. I talked about employment and you provided a graph of unemployment. Please don’t become like Geoff, I’d hate to have to start tuning you out.
As you undoubtedly know, many economists think employment is a better indicator of demand conditions than unemployment.
KRG, You said;
“Cut spending and raise taxes, that’s austerity, even if by doing so you choke growth and thus end up with an even larger deficit than before because the demand for support increases even as revenues drop.”
There are lots of problems with this. First of all there is no Laffer curve effect in the Keynesian model. Obviously Keynesians can throw out their traditional models and make whatever crazy claims about self-financing tax cuts they like, but don’t expect the rest of us to take it seriously.
Second, what you are actually discussing is cyclically adjusted budget deficits. But since most other developed countries are just as deep in the hole as Britain, they also are close to the top in terms of cyclically-adjusted budget deficit. So even using the Keynesian’s preferred indicator, policy is highly expansionary.
In any case, even if you were right it would disprove Keynesianism, as employment should not be hitting record highs with austerity, while other countries languish much deeper in recession. US employment is still 3 million below peak.
Pemakin, I’ve discussed those issues in other posts.
11. April 2013 at 06:52
Every time I read a comment that states “you need to run counter-cyclical deficits” I want to hurt someone.
11. April 2013 at 08:29
Scott you said, “Ashok, Please don’t distort what I say. I talked about employment and you provided a graph of unemployment. Please don’t become like Geoff, I’d hate to have to start tuning you out.
As you undoubtedly know, many economists think employment is a better indicator of demand conditions than unemployment.”
I realize that many economists think that employment is a better indicator of demand conditions. I was questioning the validity of this premise in the particular case of the UK. I should have made that more explicit, no intention to distort you.
Assuming this is a narrative pro-Keynsianism (which you clearly dispute, but no less) would not a lot of the increased “employment” be a function of, well, increased population? Employment-population still seems unhealthy. Keynesian or not, one would (naturally) expect an increased population to have increased absolute employment.
11. April 2013 at 08:41
I have no interest in confriming or denying Kenesyism, per se. Just in fighting austerity/deficit myths. The best short term outcome as far as I’m concerned to for people to stop referring to “federal deficit” and “federal debt” and use their more accurat accounting analogs of “net non-federal income” and “net non-federal financial savings”
I don’t see where you’re getting employment at record highs from- the chart shows 7.8% unemployment with the record at less than 5.5%. The absolute number of people employed is a function of population growth and is meaningless for past comparison without being adusted for population. What we can see is that the contribution of each individual to AD at current income levels is less than what is currently needed to employ that individual, translating to higher unemployment levels. Real household income needs to be boosted to that people can afford to push the need for investment and employment back up to more sustainable levels.
On the more basic level, though, fiscal policy shouldn’t be about second guessing what central monetary policy will or won’t be, and it absolutely shouldn’t regard debt or deficit levels as anything but economic indicators, certainly not policy goals.
Spending should be set purely based on real needs and resource avialblility (specifically in ensuring that basline income is sufficient across the board to eleminate poverty within the jusrisdiction on the government and to buy up unused surplus in times of plenty to convert into a buffer against possible future shortages where possible. That includes excess labor that can be converted into public works, art, reasearch, etc… until private markets grow enough to reabsorb the people so employed), and taxes and fees should be set based on the need to discourage certain behavoirs or prevent cost shifting by moving long term distributed costs of certain behavoirs to the present (eg: charge companies up front for the long term costs of treating the asthma or other health effects that we can predict from certain levels of air polution).
It’s the direct fiscal analog of NGDP targeting, really. With such a fixed fiscal policy in place, Moneytary Policy would be fully free to operate as the central bank saw fit to maintain growth targets above the stable fiscal baseline.
11. April 2013 at 08:48
“The analogy between the UK and particular European countries like Greece is awful, since they don’t have a independent central bank with an overshot inflation target.”
What’s awful is that the UK is chosing to do it to itself, despite the evidence from the EZ that it’s a path to self destruction.
“And where is the monetary policy reaction function in this analysis?”
The reaction of monetary policy isn’t direectly relevant to it because fiscal policy should be setbased on immediate real needs specifically so that monetary policy can independently focus on overall long term growth without the deadlock that comes from each trying to second-guess the other.
11. April 2013 at 08:48
[…] worry about the unemployment effects of minimum wage (wrongly so, perhaps) and austerity (rightly so?). Theoretically, unemployment should be measured in value – this would even remove the need to […]
11. April 2013 at 09:01
Scott – you wrote in October that you don’t consider the employment to population ratio a reliable indicator because it failed to capture the severity of the UK’s recession in comparison to the US. You wrote this specifically:
“John, Here’s the point I was trying to make. It’s quite likely that the unemployment rate provides a better picture of the labor market than the employment/population ratio. That was my claim for the US, and it’s certainly true for the UK.”
Do you that that net employment is provides a better picture of the labor market than the unemployment rate? Do you think record employment levels is a useful statistic while the employment to population ratio is not?
11. April 2013 at 09:10
Why do you say this?
“Every time I read a comment that states “you need to run counter-cyclical deficits” I want to hurt someone.”
I am new here so trying to learn:
Is it because, if it were necessary to run counter-cyclical deficits to support demand, etc…that suggests that the Central Bank is being incompetent according to market monetarism??
12. April 2013 at 05:01
Scott, looking back, my comment comes across as much more distortionary than I meant it to be, didn’t mean for that.
Still am curious why you think plain employment is a good indicator of demand as that would be expected from the UK’s pop growth rate.
12. April 2013 at 05:24
Ashok, As I said, the US population is growing faster than in Britain. So that’s why the comparison suggests the UK is doing much better than the US. Maybe it isn’t—but that variable suggests it is.
KRG, You said;
“I don’t see where you’re getting employment at record highs from”
From the three articles I linked to, and also you might want to read my various replies to Ashok.
KRG, You said;
“It’s the direct fiscal analog of NGDP targeting, really. With such a fixed fiscal policy in place, Moneytary Policy would be fully free to operate as the central bank saw fit to maintain growth targets above the stable fiscal baseline.”
I have no idea what this means.
Aidan, I think the unemployment rate is the better indicator of whether a country is below the natural rate of output, i.e whether the labor market is out of equilibrium.
I view employment changes as better indicators of short term growth in AD.
Note that this post presented both the pro and con as to the severity of the UK recession, so I wasn’t necessarily taking sides, I was trying to present both views. The main reason I mentioned employment is because I see lots of Keynesian economists saying employment is a better indicator than unemployment. OK, let’s go with that and see where it leads.
Ashok, Don’t worry about it.
12. April 2013 at 07:24
Yep, I noticed you compared the UK to the US population growth, but I suspect this for two reasons:
1. The working age population growth differences have thinned this past decade, and basically converged during the recession. Since we’re talking about labor force dynamics during the recession, this shouldn’t matter. Data here (http://research.stlouisfed.org/fredgraph.png?g=hsz)
2. In terms of total population growth, America and the UK are a lot closer when it comes to fertility than overall population growth. Immigrants are probably more likely to hold jobs, so America has had a higher quality of population growth.
This is blurred by the fact that most of the delta between American and British fertility rates comes from immigrants, but I’d guess 1st gen are better than their kids in terms of holding jobs etc.
12. April 2013 at 19:10
Ashok, So you agree. Britain is hitting record employment levels and the US is still 3 million down. The demographics are similar. Ergo the Conservative massive deficit recovery is far better than the Obama smaller deficit recovery. So we agree. Keynesianism is vindicated.
12. April 2013 at 23:04
No, I’m saying that because working age population growth is effectively the same for both the UK and USA recently, unemployment rate is a better indicator of recovery.
I would agree if the number of discouraged workers and the rate of exit from the labor force (aside from retirement etc.) was higher in the UK.