I’d like to see more Star Trek analogies on this site.

Right-wing immigration policy is clearly derived from The Trouble with Tribbles and Nick Clegg has obviously fallen victim to the process the Science Officer suffers in Spock’s Brain.

“as the Government gets out the way the private sector will step in so the economy will almost seamlessly rebalance from public demand to private demand, from consumption to exports and investment. ”

Followed seamlessly by The Rapture, no doubt.

Actually, it is you that is through the looking glass: http://www.econlib.org/library/Columns/y2010/Sumnerneoliberalism.html

Or perhaps we are all looking through the world with our own particular lenses, frames and distortions and sometimes we get it right, sometimes we get it wrong. This Manichean emphasis on right or left economics is not very productive.

FWIW my interpretion of what is here dubbed “right-wing” economics as not a mirage image of any coherent body of theory but more likely an invocation of unfiltered gut sentiments.

In so far as this barroom and Conservative club economics makes reference to any body of theories, the reference is to pre-keynesian notions when persisting high unemployment was attributed to a passing aberration in market capitalism, sunspots (I joke not) or insufficient cycling on the part of the jobless to search for work. The prescribed remedies were universal wage cuts and balanced budgets since, deep down, everyone knows Wilkins Micawber was fundamentally correct:

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
http://en.wikipedia.org/wiki/Wilkins_Micawber

I have had the real-world experience of this being said to me as the way forward !

International contagion of depressions – a frequent concomitant – remains a perennial mystery and has absolutely nothing to do deficient demand. Try instead Paul Krugman on babysitting cooperatives:
http://www.slate.com/id/2202165/pagenum/2

Btw I regard the whole left- right-wing distinction as completely misleading. Try this extract from a speech by Hermann Goering in 1936:

We must not reckon profit and loss according to the book, but only according to political needs. There must be no calculation of cost. I require that you do all that you can and to prove that part of the national fortune is in your hands. Whether new investment can be written off in every case is a matter of indifference.
[J Hiden: Republican and Fascist Germany (1996), p.186]

I’ve often read or listened to virtually identical sentiments coming from avowed left-wingers.

“I’m something of a closet Star Trek fan…”

I stopped reading at that point.

You’re incorrectly assigning motive, the ‘problem’ as such isn’t their policies, the problem is what you believe their motivation to be. Once you look down the other end of the telescope it makes a lot more sense.

Of course, Mirror World logic has existed on the right for a long-time. Most (in)famously there is the Laffer Curve, the idea that cutting tax rates raises tax revenues by making work more attractive. Now whilst there may be cases where taxes have been set too high and lowering them will therefore raise revenue, in the real world such cases are comparatively rare.

Whilst that may have been how it was portrayed at the time (and is still used in that manner as a faux intellectual shield by the grossly uninformed) that’s not what the laffer curve is.

The laffer curve is a picture of a curve, that’s pretty much it, it indicates the obvious – that there is some relationship between tax rates and revenue but it can’t tell you anything about that relationship.

@6 “it indicates the obvious – that there is some relationship between tax rates and revenue but it can’t tell you anything about that relationship.”

I don’t think that’s quite fair on Laffer. What the curve does show is that taxes can be too high as well as too low for revenue maximisation. This is worth banging on about because there are many people who don’t seem to believe that any tax on certain segments of society can ever be too high.

Sorry Duncan, but the Laffer curve is a concept, not an easily definaed rule or law.

Typically if you raise taxes, you *will* initially recieve more income. Over time though you will *proportionally* earn less from the same tax rate in inflation adjusted terms.

It might indeed incentivse people to work less, or more likely it makes people spend more time arranging their tax situation to minimise taxes paid.

Or, as in the example you put on the article on your very own site;

“Part of the Laffer effect may be nothing more than an activity switch away from the white towards the (hidden) black sector. This paper takes both effects into account: decreasing activities in the white sector combined with increasing activities in the black sector”

I.e. they wil avoid paying taxes by moving their earnings from the white economy to the black if possible, and will, in effect be *evading* taxes.

It goes on to say;

“It concludes that, with the exception of Sweden, the marginal taxation rate in these countries is below its optimum.”

Which you have totally misread – you’ve just read it as saying that tax rates are too low – leaving out the words “marginal” and “optimum”. What it really means, read as a whole, is that governments aren’t getting as much tax as they otherwise could, because people are incentivised to dodge/minimise their taxpaying.

So proving the Laffer curve, even if poorly defined, *is* valid according to your sources.

It does seem though that the free-spending keynesian Left are a little bit upset today though as Obama has effectively promised faster spending cuts ( deficit cut by 8.4% of GDP by 2015) than the coalition (8% deficit cut by 2015).

For the professional mainstream on optimal taxation, try Greg Mankiw et al: Optimal Taxation in Theory and Practice:
http://www.economics.harvard.edu/files/faculty/40_Optimal%20Taxation%20in%20Theory.pdf

IFS Charles Heady: Optimal taxation as a guide to policy (1993):
http://www.ifs.org.uk/fs/articles/heady_feb93.pdf

Not for the faint hearted – the original AER papers by Mirrlees and Diamond on: Optimal Taxation and Public Production I and II are accessible online via this link:
http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.101.1.1

For the IFS review of tax design, chaired by (Nobel laureate) James Mirrless and published last year, try this link:
http://www.ifs.org.uk/mirrleesReview

I don’t think that’s quite fair on Laffer. What the curve does show is that taxes can be too high as well as too low for revenue maximisation. This is worth banging on about because there are many people who don’t seem to believe that any tax on certain segments of society can ever be too low.

Go on then.

For those interested, this is the Amazon link to the Mirrlees review:

Tax By Design: The Mirrlees Review
http://www.amazon.co.uk/Tax-Design-Institute-Fiscal-Studies/dp/0199553742/ref=sr_1_1?s=books&ie=UTF8&qid=1303135539&sr=1-1

Here we are in a country where all three major parties are agreed on the need for cuts: Ed Miliband may do his whining Mandela impersonation for the no-cuts brigade in Hyde Park, but even his Shadow Chancellor accepts there should be some cuts, just not as much as the Coalition.

Naturally the economics of all three of those parties are in deluded mirror universe fantasy land, while the OP knows better.

Parasite

the point is not about the need to cut, it’s about imagining that cuts will lead to (short term) growth (as opposed to hurting growth and raising unemployment).

I suppose off topic a little, but it has always struck me that either Melanie Philips or I are living in parallel universes. Perhaps we both are.

Hers is not mine and mine is not hers.

In hers, the speed of right is infinite….

All right-wing ideology is based on magical thinking.

Actually I’ve thought for a long time that conservative economics is stuck in a 19th century timewarp. Somewhere around the age of Gladstone circa 1860.

Nearly all development in economic thought (Keynes et al) that have occured since then appear to have passed conservatives by. All they offer is a selection of ancient (and often already discredited) ideas reheated. Mostly based around simplistic (and false) notions of a nations economy being comparible to household finances.

I sometimes half expect them to start arguing for a return to the gold standard!

@16: “I sometimes half expect them to start arguing for a return to the gold standard!”

Someone posted only the other day wanting fixed global exchange rates but to its credit, it was Britain’s National Government which took Sterling off the gold standard in Seotember 1931 and the Heath government, with Anthony Barber as chancellor, which, in 1972, unlinked Sterling from the pegged exchange rates regime of the Bretton Woods agreement of 1944 and floated Sterling.

Btw recall that, on balance, Keynes regarded fixed exchange rates as more conducive to promoting international trade than floating exchange rates because of the inherent exchange risk with flexible rates and because he was sceptical about how far movements in exchange rates would reflect changes in fundamentals rather than passing speculative pressures.

Blair, Heseltine and Kenneth Clarke all wanted to join Britain up to the Eurozone – which would have fixed the Sterling-Euro exchange rate for the foreseeable future – but Brown, very sensibly, kept us out with his announcement in June 2003:
http://news.bbc.co.uk/1/hi/uk_politics/2975560.stm

There was no shortage of Euro enthusiasts on the Labour benches in Parliament – such as Lord Layard, Mandelson and Denis MacShane.

Yes what fools want to join a fixed rate regime like the gold standard, bretton woods or Euro….

“Nearly all development in economic thought (Keynes et al) that have occured since then appear to have passed conservatives by. All they offer is a selection of ancient (and often already discredited) ideas reheated. Mostly based around simplistic (and false) notions of a nations economy being comparible to household finances.”

Yeah, like Milton Friedman and FA Hayek who – hang on – were writing and developing economic ideas long after Keynes had (in the long run) died.

A little recap: never mind the economics for the moment, how’s this for sound political judgement?

Cabinet divisions over the euro were underlined yesterday when John Reid, the Leader of the Commons, declared it was not a question of ‘whether’ but ‘when’ Britain should join. [May 2003]
http://www.independent.co.uk/news/uk/politics/reid-says-joining-the-euro-is-matter-of-when-not-whether-538403.html

MARGARET BECKETT is set to defect from the anti-euro lobby and join Tony Blair, Robin Cook and Peter Hain among the Cabinet ministers seeking to take Britain into the single currency. [February 2002]
http://www.carlukegazette.co.uk/news/local-headlines/beckett_to_announce_her_support_for_euro_1_595889

Presumably in the Star Trek universe Clegg has spent the last year living the episode where tough, principled Captain Kirk is split into ineffectual wimp and evil bastard. Cameron must be the funny coloured android trying to be human that was in Star Trek TNG, Eric Pickles would be any planet, duplicitous nuclear obsessed pillock Chris Huhne could stand in for Mr Scott, Vince Cable is the anonymous red shirt who gets killed as soon as they land on a planet and the coalition’s economic policy is thinner and more wobbly than the original series’ sets.
Michael Gove is obviously on loan from an early Gerry Anderson series. I don’t recall any episode of Star Trek featuring a moronic gimp suited millionaire tax dodger with a nose like a miniature arse so that lets George Osborne off unless you had him stand in for Spock. Just for a laugh. Though he could be used as the captain’s log. In several senses of the phrase.

The closest I could get for Govey: http://memory-alpha.org/wiki/Sirna_Kolrami

@19: “Yeah, like Milton Friedman and FA Hayek who – hang on – were writing and developing economic ideas long after Keynes had (in the long run) died.”

Hayek, who explictly denied being a Conservative, was more renowned – and respected – for his contributions to political philosphy, such as: The Road to Serfdom, than for his contributions to economic analysis. Hayek’s papers on the depression of the interwar years seem very quaint nowadays. It tends to be overlooked that Hayek and Keynes were friends and Keynes explicitly rejected socialism: he was a signed-up and declared member of the Liberal Party, despite his dislike of Lloyd George.

As for Milton Friedman, his committed supporters tend to overlook his interview with the FT in 2003:

“Despite standing by his central formulations, Friedman somewhat conceded that the demand for money is not so easily predicted. In a 2003 interview with Milton Friedman published in the Financial Times, Friedman himself seemed to repudiate the monetary policy of monetarist theory and is quoted as saying ‘The use of quantity of money as a target has not been a success… I’m not sure I would–as of today–push it as hard as I once did.’”
http://www.newworldencyclopedia.org/entry/Monetarism

The IMF wrote the obituary for monetarism in 1996:

“…instability of monetary demand, especially in the context of supply shocks and declines in potential output growth, complicated the task of monetary authorities. As a result, during the 1980s most central banks – with some notable exceptions – either abandoned or downplayed the role of monetary targets”. [IMF World Economic Outlook, October 1996, p.106]

If the demand for money isn’t stable, it isn’t much use as an analytical tool.

Most modern macroeconomic texts have a definite keynesian flavour for all the later criticisms and caveats about an identified trade-off between inflation and unemployment in papers by AW Phillips (*) – try eg: Manfred Gartner: Macroeconomics (Financial Times, 3rd ed. 2009), which has a policy emphasis and where the author’s academic affiliation is at a Swiss university, outside the transatlantic keynesian mainstream.

I’ve posted here several times that JCR Dow (a Treasury insider) on: Management of the British Economy 1945-60 (Cambridge UP) had concluded that the applied policies of demand management in the period had contributed to economic instability.
(*) http://tutor2u.net/economics/revision-notes/a2-macro-phillips-curve.html

Bob B

“I’ve posted here several times that JCR Dow (a Treasury insider) on: Management of the British Economy 1945-60 (Cambridge UP) had concluded that the applied policies of demand management in the period had contributed to economic instability.”

So you are agreeing with a friedmanite view that experience has demonstrated that keynsianism was not a useful way of formulating economic policy. And between 1945 and 1960, the government was mostly formed by the Conservative party, which demonstrates the falsity of another comentator’s views about the so-called Right not having understood Keynes.

This really does take on the look of a parallel universe.

While the body of the article raises good points, I’m not sure the tone set by some of the aside in it, and most particularly the headline, is particularly helpful or conducive to debate, seeing as it more-or-less translates as “OMG right-wingers are fucking morons LOL”.

The Right wing in America has been peddling this clap trap for years that tax cuts are the holy grail, and the solution to every problem. The phrase “deficits don’t matter “ has been used over and over again. So they just kept cutting taxes, and cutting taxes, and cutting taxes, and now the govt debt is so huge that they are demanding the end of social security.

This was always the agenda.

Cutting taxes will always lead to cutting spending ,which means cutting spending on things the rich don’t want or need. No cuts to the military industrial complex however.

@26

Yup sounds about right. This article is interesting:

http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/

Fortunately UK conservatives aren’t quite as insane as their US counterparts.

I like Krugman’s attack against the Heritage Foundation, which provided the dishonest numbers for teabagger Paul Ryan’s budget proposal.

“When the proposal was released, it was praised as a “wonk-approved” plan that had been run by the experts. But the “experts” in question, it turned out, were at the Heritage Foundation, and few people outside the hard right found their conclusions credible. In the words of the consulting firm Macroeconomic Advisers — which makes its living telling businesses what they need to know, not telling politicians what they want to hear — the Heritage analysis was “both flawed and contrived.” Basically, Heritage went all in on the much-refuted claim that cutting taxes on the wealthy produces miraculous economic results, including a surge in revenue that actually reduces the deficit.
By the way, Heritage is always like this. Whenever there’s something the G.O.P. doesn’t like — say, environmental protection — Heritage can be counted on to produce a report, based on no economic model anyone else recognizes, claiming that this policy would cause huge job losses. Correspondingly, whenever there’s something Republicans want, like tax cuts for the wealthy or for corporations, Heritage can be counted on to claim that this policy would yield immense economic benefits.”

@24: “So you are agreeing with a friedmanite view that experience has demonstrated that keynsianism was not a useful way of formulating economic policy.”

Don’t be daft. Logically, demand management can go wrong for many reasons besides the Friedmanite critique of keynesianism.

What follows is moderately technical but then the substantive issues are unavoidably technical.

There was/is a substantial literature on the pitfalls of demand management post Keynes (who died in 1946) and independently of Friedman:

- early on, Kalecki suggested a political trade cycle influencing expectations as trade unions and business began to appreciate that governments would predictably intervene to maintain “full employment”:
http://gesd.free.fr/kalecki43.pdf

- there is an inevitable time lag before Treasuries can recognise on the basis of reported statistics that on the prevailing trajectories of the components of aggregate demand there will be predicted excessive or deficient aggregate demand to maintain stable employment at more or less stable prices with – crucially when exchange rates were pegged – an acceptable current balance of international payments

- and a further lag before the ensuing political decisions are put through to apply “appropriate” corrective fiscal/monetary measures along with a further lag for the effect of the corrective measures to work through – the BoE reckons that it currently takes about 2 years for the effects of the decisions of the Monetary Policy Committee to change interest rates to work through.

The implication of all that was a view that automatic stabilisers to dampen fluctuations are more dependable for most of the time than discretionary fiscal interventions where the unavoidable lags could inadvertently enhance instability – and also because it would take time to reverse fiscal interventions if it came to be recognised that mistakes had been made or that economic trends were on a different course from that previously believed:
http://en.wikipedia.org/wiki/Automatic_stabilizer

In the mid 1970s, there was a renewed spate of academic/policy debates about whether more frequent fiscal interventions would be appropriate to stabilise fluctuations – such as varying the rates of NI contributions contra-cyclically through a year, say. Callaghan, as PM, intervened to tell “the 1976 Party conference: ‘We used to think that you could spend your way out of a recession. I tell you in all candour that this option no longer exists.’” Fiscal intervention to maintain full-employment had dropped out of fashion.
http://www.workersliberty.org/story/2011/01/11/roots-blairism

Roger Farmer’s book: How the economy works (OUP 2010) is a good, recent starting point, in plain language, on the course of the macroeconomic debates – it departs from Keynes while still focussing on what drives aggregate demand:
http://www.amazon.co.uk/How-Economy-Works-Confidence-Self-Fulfilling/dp/0195397916/ref=sr_1_1?s=books&ie=UTF8&qid=1303152869&sr=1-1

For any who want more challenging stuff, try Olivier Blanchard et al: Macroeoconomics – A European Perspective (Financial Times, 2010) – which carries a strong endorsement on the front cover by Charles Bean, Deputy Governor of the BoE

“Fortunately UK conservatives aren’t quite as insane as their US counterparts.”

Sadly I think you may be mistaken there.

19. Nick

Yeah, like Milton Friedman and FA Hayek who – hang on – were writing and developing economic ideas

Given the abysmal failure of those “ideas” one almost wishes they hadn’t bothered.

“Sadly I think you may be mistaken there.”

The aspect to watch IMO is how close are the developing links between the G.O.P. Republicans and the Conservatives here?

There is a group among Conservatives who say the Democrats, not the Republicans, are the natural allies of the Conservatives and cite the close WW2 relationship between Churchill and Roosevelt or between Churchill and Truman after the war as examples. Not many Conservatives want to admit to wanting to stand shoulder to shoulder with Nixon and it was President Eisenhower who (fortunately) pulled the plug on the Suez intervention by Eden in 1956. Kennedy and Macmillan got on well, whereas Harold Wilson and Johnson didn’t, which is perhaps as well or we would have been sucked into Vietnam.

Bob b at 29

it seems that yoiu agree with me, then, after all your frenzied cross-linking.

David Cameron decided today to come clean about the standards of evidence and degree of intellectual rigour demanded by the Right. From his speech on AV:

“Politics shouldn’t be some mind-bending exercise. It’s about what you feel in your gut, about the values you hold dear and the beliefs you instinctively have. And I just feel it, in my gut, that AV is wrong.”

So there you have it: if you feel in your gut that cutting taxes (always) raises revenue, austerity stimulates growth, inequality promotes aspiration etc, logic and evidence are irrelevant.

Call me Dave….. “Politics shouldn’t be some mind-bending exercise. It’s about what you feel in your gut, about the values you hold dear and the beliefs you instinctively have. And I just feel it, in my gut, that AV is wrong.”

Translation into English……. “I love taking power with less than 40% of the vote, and I believe that my party have a divine right to rule”

“Politics shouldn’t be some mind-bending exercise. It’s about what you feel in your gut, about the values you hold dear and the beliefs you instinctively have. And I just feel it, in my gut, that AV is wrong.”

Rhetorically good, logically bad.

@33: “it seems that you agree with me, then, after all your frenzied cross-linking.”

No – I don’t agree with you and your invocation of Friedman, as should be clear from Friedman’s own admission, quoted @23, that monetarism is (fundamentally) flawed – because the demand for money isn’t stable, which means it is unreliable as a policy instrument. Nigel Lawson, as chancellor, formally abandoned “monetarism” (or the Medium Term Financial Strategy, to quote the official name) in the autumn of 1985.

As said, there was a substantial professional literature in the 1940s and 1950s, independently of Friedman, pointing to the risks of relying on fiscal interventions to manage aggregate demand in order to maintain full employment with tolerable inflation and an acceptable balance of international payments.

Where the critiques of Friedman and Edmund Phelps, another Nobel laureate, were telling related to a fashionable working policy assumption of the times, when demand management was fashionable, that a government could opt for a preferred mix of inflation and unemployment based on the papers of AW Phillips – see the link @23 at the bottom.

The presently prevailing consensus about stabilisation policy is to mostly rely on automatic stabilisers to stabilise demand and monetary policy to maintain a stable rate of inflation – although recent voices have suggested the BoE, like the US FED, should target employment as well as inflation. The trouble with that is that the inflation target might require a hike in central bank interest rates while the employment target requires a cut. What happens then?

When a prospect of a severe likely global recession looms, as in 2008/9, fiscal interventions become essential to avert a possible depression on the scale of the inter-war years. For all the hysterical rhetoric of the Conservatives, Darling’s fiscal boost of £28 billion, in his November 2009 PBR, was modest compared with the fiscal boosts applied by the Obama administration in America ($780 billion) or Merkel’s government in Germany.

Cheer leading for Friedman or whoever while ignoring the (difficult) substantive policy issues is a sure recipe for policy failures.

@24

And between 1945 and 1960, the government was mostly formed by the Conservative party, which demonstrates the falsity of another comentator’s views about the so-called Right not having understood Keynes.

Actually it’s funny you should mention that. There was a period during the 1950s and 60s when conservatives were mostly led from the left, eg left wing conservatives like Harold MacMillan, who broadly accepted the post-war keynesian consensus.

And in America, one thing which is often forgotten (and would give present day conservatives a heart attack) is that under the Republican presidency of Dwight D Eisenhower in the 1950s there was a 91% wealth tax.

http://politics.gather.com/viewArticle.action?articleId=281474977623449

And banking and finance was far more tightly regulated than it is today.

http://www.energybulletin.net/50615

However since the 1970s the right has mostly retreated back into its comfort zone of primitive pre-keynesian economics.

“Most (in)famously there is the Laffer Curve, the idea that cutting tax rates raises tax revenues by making work more attractive. Now whilst there may be cases where taxes have been set too high and lowering them will therefore raise revenue, in the real world such cases are comparatively rare.”

I am not sure they were. Thatcher cut income tax every year for about six years when she came to power. There was a genuine shrinking of the amount of GDP the government took – from 45% or so down to 39% or so I think from memory. And yet tax revenue rose.

“Not so in the Mirror World of the Tax Payers’ Alliance and the Spectator though, where we always seem to be on the right-hand side of the Laffer Curve and so any tax cut will increase revenues.”

We have yet to cut taxes seriously to find out. Does anyone really think that if income taxes were, say, a flat 19% that more people wouldn’t be working two jobs or doing more overtime or otherwise working longer hours?

“This theory,…., tells us that as the Government gets out the way the private sector will step in so the economy will almost seamlessly rebalance from public demand to private demand, from consumption to exports and investment.”

In the long run I find it hard to believe anyone could deny that. Seamlessly? Perhaps not. Most civil servants are probably unemployable. But over time, who would deny it?

“In the real world of course nothing is seamless, cutting public sector jobs does not automatically create private sector ones and slashing government demand doesn’t mean private demand will automatically take its place.”

Yes it does actually. There will be a lag perhaps, but the less the government taxes and borrows, the more that there will be private sector business activity. The less government demand there is, the more private sector demand there will be. Take interest rates for instance. Businesses and governments borrow from the same people. The more the government borrows, the higher interest rates go, the fewer businesses can borrow and the more expensive it is, the less private sector demand there is. Conversely, the more debt the government pays off, the lower interest rates, the higher private sector demand. This is not really open to debate. It is just a fact.

15. me – “All right-wing ideology is based on magical thinking.”

Like the belief that under socialism there will be no tramcar accidents? That men and women are totally the same except for how society raises them? That genes play no role in anything at all? These examples of magical thinking?

On the contrary I would have thought right-wing ideology is based on an overly pessimistic view of reality. The Left has a too naive view of the possibilities of magic and wonder.

16. Graham – “Actually I’ve thought for a long time that conservative economics is stuck in a 19th century timewarp. Somewhere around the age of Gladstone circa 1860. Nearly all development in economic thought (Keynes et al) that have occured since then appear to have passed conservatives by. All they offer is a selection of ancient (and often already discredited) ideas reheated.”

I tend to agree – except for your criticism. Yes, the Right often likes ideas from long dead economists. But of course it has been Keynes that has been shown to be wrong. Which is why most modern economists are neo-Classical. Those old guys from the Gladstone era have been shown to be right. Time and time again. Those ideas are not discredited. They are once more mainstream. Dare I say they are the consensus?

“I sometimes half expect them to start arguing for a return to the gold standard!”

I heard the other day that dollars from the Confederate States of America, an institution which no longer exists, have proven a better hedge against inflation than the Greenback.

Why on Earth would you think the gold standard was a bad idea?

@38: “However since the 1970s the right has mostly retreated back into its comfort zone of primitive pre-keynesian economics.”

That’s fair comment about Conservatives who base their economics on “gut feelings” – I assume Cameron concentrated on the politics options for his Oxford PPE degree and dropped the economics parts as quickly as he could, which is possible under the flexible arrangements.

However, as we’ve seen above here, there are Conservatives still wedded to notions of Friedman and monetarism even though Friedman effectively disowned monetarism in that FT interview of 2003 – see the quote and link @23 – and despite the Thatcher government abandoning its “Medium Term Financial Strategy” in the autumn of 1985 – the fact is that it was discredited by events, not the least of which was an inability to meet its own monetary targets so it lost credibility.

Keynes remains a bogey man for many who have never quite managed to read his General Theory of Employment, Interest and Money (1936) – possibly for understandable reasons as it is a difficult book for readers with no priors in academic economics:
http://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/

The important insight IMO is that this was the principal motivation:

“In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” [chp.18, p.249]

A persisting condition of “sub-normal activity” is not something which pre-Keynesian economics can cope with for reasons well-illustrated in Krugman’s homely narrative about babysitting cooperatives linked @4.

41. Bob B – “The important insight IMO is that this was the principal motivation: “In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” [chp.18, p.249]”

Except is it true? I have to say that persistent levels of sub-normal activity are not exactly easy to find. The Great Depression – which people tried to cure (and hence perhaps prolong) with Keynes. What else?

“A persisting condition of “sub-normal activity” is not something which pre-Keynesian economics can cope with for reasons well-illustrated in Krugman’s homely narrative about babysitting cooperatives linked @4.”

Except they can. They can cut and restore confidence. In the end demand picks up. The West did not seem to have many periods of extended subnormal activity before the Depression.

@39: “I am not sure they were. Thatcher cut income tax every year for about six years when she came to power. There was a genuine shrinking of the amount of GDP the government took – from 45% or so down to 39% or so I think from memory. And yet tax revenue rose.”

As Kinnock famously pointed out during the 1992 election campaign, government spending as a percentage of Britain’s GDP was about the same as it had been in May 1979 when Thatcher was first elected as PM.

The IFS Survey of Public Spending in the UK (September 2009) is here:
http://www.ifs.org.uk/bns/bn43.pdf

Quote: “During Margaret Thatcher’s premiership public spending grew in real terms by an average of 1.1% a year, while during John Major’s premiership it grew by an average of 2.4% a year.”
http://www.ifs.org.uk/bns/05ebn2.pdf

For comparison, here are World Bank figures for most countries showing ‘general government final consumption’ as a percentage of national GDP:
http://data.worldbank.org/indicator/NE.CON.GOVT.ZS

The percentage for Britain is about the same as that of France and lower than those of Denmark, Sweden, the Netherlands and Belgium but above the percentages for Germany – and the US or Switzerland.

For an Excel file with OECD data for 2007 (at the end of which the financial crisis started in Britain with that run on Northern Rock), try:
http://dx.doi.org/10.1787/738811605857

@40

Yes, the Right often likes ideas from long dead economists. But of course it has been Keynes that has been shown to be wrong. Which is why most modern economists are neo-Classical. Those old guys from the Gladstone era have been shown to be right. Time and time again. Those ideas are not discredited.

Really! Let me see. In the 1920s the last time laissez-fair economics was in fashion, we were told that all the government needed to do was withdraw, and the guiding hand of sef interest and markets would take care of everything.

Result = Rampant greed and crooked dealing by financiers and bankers created a massive bubble, and then a gigantic financial crash followed by a global economic depression.

Fast forward to the 1980s to 2000s, and laissez-fair economics is revived by Thatcher and Reagan. And again we are told that all the government needed to do was withdraw, and the guiding hand of sef interest and markets would take care of everything.

Result = Rampant greed and crooked dealing by financiers and bankers created a massive bubble, and then a gigantic financial crash followed by a global economic depression.

Now does anyone spot a pattern emerging here?

More on government spending for comparison:

Evidently from the lonks @43, advanced market economies with widely spread percentages of government consumption as a proportion of national GDP are able to attain more or less acceptable levels of total employment.

In that sense, it is true that private spending can make up for lower percentage rates of government spending and the issue becomes one of public welfare.

America spends more in total on healthcare as a percentage of its GDP than any other advanced counttry yet achieves lower average life expectancy than Britain, which has lower average life expectancy than a spread of other west European countries. Healthcare spending commitments are the largest cause of personal bankruptcy in America. So much for relying on private enterprise and “free markets” to provide healthcare.

Denmark was confirmed as the OECD’s highest-tax country, followed by Sweden.
By reports, Denmark’s Gini co-efficient shows the least inequality of post-tax income distribution among countries for which income distribution data are available :
http://en.wikipedia.org/wiki/List_of_countries_by_income_equality

Curiously, according to Eurostat data, Denmark is not impoverished, indeed it comes out as one of the most affluent countries in the EU. By other assessments, it also appears that Denmark is the ‘happiest place on earth’:
http://news.bbc.co.uk/1/hi/5224306.stm

Sorry for typos but as the result of ageing, both my keyboard and my eyesight are gradually failing !

@42: “The Great Depression – which people tried to cure (and hence perhaps prolong) with Keynes. What else?”

Before the deep depression of the inter-war years – when America’s GDP dropped by c. 25% between peak and trough – the standard texts on British economic history referred to the period 1873 through to the 1890s as the Great Depression. As Beveridge showed in his book: Full Employment in a Free Society (1944), historically, relatively low unemployment was unusual in the 19th century as judged from whatever stats were collected.

@42: “Except they can. They can cut and restore confidence. In the end demand picks up. ”

Nonsense. The National Government in Britain, elected after Macdonald’s Labour government of 1929-31 resigned, took Britain off the gold standard in September 1931.

Sterling depreciated by c. 25% as a result. That boosted exports. Without the need for the Bank of England to prop up Sterling with high interest rates to attract capital inflows sufficient to maintain the gold parity of Sterling, the bank rate was soon cut in stages to 2.5%. It remained at that low rate through to the start of WW2 in 1939.

A speculative housing boom ensued in the south of England and the Midlands – as well as cinema and modern factory and office building booms – but not in Wales or the north of Britain. Some councils built vast council estates in the late 1930s, like Braunstone in Leicester or the St Helier estate in Sutton/Mitcham around the St Helier Hospital where John Major was born in 1943.

France stayed on the gold standard and experienced miserable economic performance as a result. Germany also stayed with the gold parity of the Reich Mark and suffered an appalling, deep depression until the Nazis were appointed to government in January 1933.

The Nazis applied an extensive public works programme to create jobs by building autobahns, government offices and sports stadiums. The ensuing inflationary and distorting pressures were contained by government controls over prices, investment, foreign exchange transactions, imports etc. A spluge on rearament spending didn’t really start until 1936.

Unemployment fell ” . . from 6 million in October 1933 to 4.1 million a year later, 2.8 million in February 1935, 2.5 million in February 1936, and 1.2 million in February 1937.”
[CP Kindleberger: The World in Depression 1929-1939 (Allen Lane, 1973) p.240]

When the Roosevelt administration in America attempted to balance the US federal budget in 1937, the economy there dipped and strong growth didn’t resume until America got into making armaments for WW2.

IMO it’s better to find other means than wars and fascist parties as ways of escaping from depressions.

@43

The West did not seem to have many periods of extended subnormal activity before the Depression.

Actually, I think you’ll find that the uk economy spent most of the 1920s in a period of “extended subnormal activity”. Especially after Winston Churchill decided to put Britain back on the gold standard in 1925.

http://lachlan.bluehaze.com.au/churchill/gold_standard_1925/index.html

@47: “Especially after Winston Churchill decided to put Britain back on the gold standard in 1925.”

To his credit, Churchill had personal misgivings in 1925 about returning Sterling to the gold standard at the pre-WW1 parity but the apparently strong consensus of the City and Parliament favoured that move and he conformed with the weight of that (mistaken) consensus.

Before announcing the decision, he reportedly held a small dinner party at 11 Downing St (the chancellor’s official residence) for Montague Norman (governor of the Bank of England), Reginald McKenna (a banker who had been the Liberal chancellor at the outbreak of war) and JM keynes. The reported upshot of the discussion was a 2-to-1 split in favour of returning to to the gold standard at the pre-war parity – with Keynes dissenting.

Extracts from Keynes on: The Economics Consequences of Mr Churchill (1925) are accessible via this link but the access gets complicated:
http://www.gold.org/government_affairs/gold_as_a_monetary_asset/historical_records_back_to_the_17th_century/the_heyday_of_the_gold_standard/

It says something for Churchill that he set up this private debate to better inform himself about the issues. The fact is that the notion of the Gold Standard was so deeply embedded as the prevailing orthodoxy in establishment thinking at the time that Churchill stood little chance of taking a divergent course.

Recall, as I’ve mentioned @17, that Keynes favoured the pegged exchange rate regime of the Bretton Woods Conference in 1944 over floating rates because he thought the additional uncertainty from flexible rates would discourage the resumption of trade after WW2.

Graham,

Fast forward to the 1980s to 2000s, and laissez-fair economics is revived by Thatcher and Reagan. And again we are told that all the government needed to do was withdraw, and the guiding hand of sef interest and markets would take care of everything.

Result = Rampant greed and crooked dealing by financiers and bankers created a massive bubble, and then a gigantic financial crash followed by a global economic depression.

Now does anyone spot a pattern emerging here?

WRT the latest financial crisis (ongoing), page 9 of this week’s Private Eye – that organ so esteemed ’round these parts – claims that the-then City minister Lord Myners assured auditors from the Big Four that banks deemed too big to fail would not be allowed to fail. In this sense government did not “withdraw” and let the markets “take care of everything” but permitted the auditors to sign off their clients as going concerns.

@49

If successive governments had regulated properly in the first place, the bailout would not have been necessary. The bailout was put in place because the alternative (much favoured by libertarians who have either no imagination or no soul) would have been an arbitrary group of the population left financially ruined through no fault of their own because they kept their current accounts and savings in a bank that happened to fail.

As I’ve said many times, the supply-side/trickle-down economic theory espoused by the Right (and endorsed by Laffer) was dreamed up as a response to the question “how can we concentrate more wealth in the hands of the rich and have a majority of people go along with it?” rather than a serious economic concept in it’s own right.

@50

As I’ve said many times, the supply-side/trickle-down economic theory espoused by the Right (and endorsed by Laffer) was dreamed up as a response to the question “how can we concentrate more wealth in the hands of the rich and have a majority of people go along with it?” rather than a serious economic concept in it’s own right.

That reminds me of a famous quote by Aneurin Bevan in 1952

How can wealth persuade poverty to use its political freedom to keep wealth in power? Here lies the whole art of Conservative politics in the twentieth century.

Says it all really!!

bluepillnation,

If successive governments had regulated properly in the first place, the bailout would not have been necessary.

I don’t dispute that, I dispute the notion that “the guiding hand of self interest and markets [was allowed to] take care of everything”.

Please see paras 144 and 149 of this House of Lords Economic Affairs Select Committee report, Auditors: Market concentration and their role for something further to my (well, Private Eye’s) point.

WTF has monetarism got to do with anything? None of the main economies have been following Friedman monetarism for 25 years. Most economists follow New Keynesian, which is neither left or right. Krugman is a liberal and is a new Keynesian. Mankiw is a conservative and is a New Keynesian. Neoclassical real business cycle theory and New Keynesian have been the dominant thought since the 1980s. New Keynesian is a synthesis between monetarism and Keynesian economics. It is quasi-monetarism in that monetary policy should be what guides the economy not fiscal policy. Even a somewhat harder core Keynesian like Krugman does not believe the government should normally direct the economy through fiscal policy. Those ideas were discredited in the 1970s. However, he believes, the likes of the US is in a liquidity trap and as a consequence monetary policy has little traction. Most New Keynesian and quasi-monetarists do not accept that monetary policy is ineffective even at zero bound base rates.

The neoclassical RBC types have been discredited over the last three years. They do not believe that nominal shocks have real effects. Ignoring everything that has happened since 2008 appears to be their response. Probably wise, because according to their models the things that happened could not happen. Moreover, there is no involuntary unemployment in their models. The unemployed are just choosing leisure rather than work. Quasi-monetarists believe nominal shocks to the money supply and the banking crisis had real effects on output through monetary policy being too tight. Therefore, the unemployed are not choosing leisure over work but are involuntary unemployed through the economy operating below its potential. Monetary policy is the key to the economy. A lot of the RBC types do not even believe monetary policy affects the economy at all.

“If successive governments had regulated properly in the first place, the bailout would not have been necessary. ”

That is bound to be logically true because it implicitly defines “regulated properly” as that regulation which would have made the bail out of banks unnecessary.

Perhaps sadly, there is controversy over what kind of acceptable regulation would have achieved that. The recent interim report of the ICB does not venture proposals for completely preventing the failure of banks, only for protecting retail banking subsidiaries of banks by requiring minimum capital-to-asset ratios. Bank shares rose on the news.

There remains an imponderable about what might happen to systemic stability if one of the large UK-based investment banks or hedge funds went down. Remember what happened with Long Run Capital Management in the US?

“Long-Term Capital Management L.P. (LTCM) was a hedge fund management firm based in Greenwich, Connecticut that utilized absolute-return trading strategies (such as fixed-income arbitrage, statistical arbitrage, and pairs trading) combined with high leverage. The firm’s master hedge fund, Long-Term Capital Portfolio L.P., failed spectacularly in the late 1990s, leading to a massive bailout by other major financial institutions, which was supervised by the Federal Reserve.”
http://en.wikipedia.org/wiki/Long-Term_Capital_Management

The canard the libertarian right will play every time is that it is the collusion of government and the banking industry that caused the crises over the last 30 years or so. This ignores the question of how government and the financial industry became so intertwined in the first place.

It is true that monetarism first gained traction in circles of power with Thatcher in 1979, but it was the election of Reagan in 1980 that brought the US economy into the game and turned it from a manufacturing-based economy to a finance-based economy, a direction which Thatcher was only happy to follow. Of course, the fact that Reagan’s Vice President (and his coterie, widely considered the power behind the throne) was the eldest son of a member of the board of America’s oldest and most prestigious investment bank – Brown Brothers Harriman – is probably a good place to start.

In short, the banking industry put it’s man in government and has reaped the rewards with few consequences for their failures ever since.

Any here interested in knowing more about what happened during the depression of the inter-war years, I recommend these mainstream books:

Stevenson and Cook: The Slump – Britain in the Great Depression (Longman, 2009)

Feinstein, Temin and Toniolo: The European Economy between the Wars (OUP, 1997)

Temin: Lessons from the Great Depression (MIT Press, 1991)