Tuesday, 3 August 2010

Nonsense about the deficit

The way Labour politicians are prognosticating about the effects of public expenditure cuts would lead one to believe the Conservative/Liberal coalition is adopting the policy of Jonathan Swift and his Modest Proposal i.e. eating children to solve the problem of hunger.  In cash terms, public spending is going to be higher in 2015 than it is in 2010.  No government has cut spending since the Attlee government.  It has been slowed, and has risen beneath the rate of inflation however.  As Tim Congdon recently stated in his excellent MarketPlace column for StandPoint magazine;

''In 1977, public sector capital expenditure cuts were the most drastic since the war, yet the economy recovered in 1978. In 1981, the Thatcher government raised taxes by three per cent of national income and was roundly condemned by 364 economists in a letter to The Times, on the grounds that the fiscal contraction would deepen an alleged "depression". Instead, aggregate demand started to grow within months of the Budget, and the next eight years saw large increases in output and employment. After a bad recession in the early 1990s, the Major government combined tax increases and spending cuts from 1992 to 1996, and again the economy enjoyed above-trend growth.''

And, as this article explains, the evidence for the success of deficit financed government expenditure is as flimsy as the evidence for anthropogenic global warming.  Here is an extract of the article by Robert Murphy

''As we've seen above, Romer's account relies on an implausibly large sensitivity of the economy to deficits; going from a deficit of 4.5% of GDP to one of 5.1%, meant the difference between disaster and impressive recovery.  Yet even if Romer could come up with a fancy model to yield that result, she would then face the opposite problem: government spending and the deficit absolutely collapsed at the end of World War II, and yet the economy adjusted fairly quickly. Specifically, in FY 1945 the deficit was 21.5 percent of GDP. Yet two years later, the budget surplus was 1.7 percent of GDP!''


The Labour representative on Newsnight tonight namechecked several prominent Keyneisan economists e.g. Stiglitz, Krugman and Blanchflower.  Fair enough.  However, getting consensus amongst economists is a notoriously difficult task, as there is so much politics involved.  Krugman is just an economically literate hack on a morally corrupt newspaper.  I can name dozens of economists who have produced lots of evidence that destroys the postulates of Keynesian economics e.g. Friedman, Hayek, Rothbard, Bob Murphy, Frank Shostak, Jeffrey Tucker, Andrew Lilico, Ambrose Evans Pritchard etc. 

Keynesian economics fails the Karl Popper test of falsifiability.  All economics experience cycles.  If the economy witnesses a cyclical upturn, the Keynesians will pounce on it as evidence of their Gnostic greatness.  If a recovery fails to occur, the Keynesians will exclaim that not enough fiscal stimulus was put in place.  This is why Keynesian economics has not died yet, despite the vast swathes of evidence to disprove its basic hypotheses.  However, those on the Left have never let facts get in the way of mindless bigotry and anti-intellectualism.

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