More Keynesian than Keynes

Niall Ferguson

Niall Ferguson is Laurence A. Tisch Professor of History at Harvard University and a senior fellow at the Hoover Institution, Stanford.
 

CAMBRIDGE – Like most people who create an “ism,” John Maynard Keynes quickly found his followers running ahead of him. “You are more Keynesian than I am,” he once told a young American economist. Now it is the turn of his biographer, Robert Skidelsky, to become distinctly more Keynesian than Keynes.

Keynes was not averse to changing his mind. But, as far I am aware, he did not change his predictions after the fact. This does not seem to be the case for Skidelsky.

In November 2010, Skidelsky described British Chancellor of the Exchequer George Osborne as a “menace to the future of the economy,” whose policies “doomed” the United Kingdom to “years of interminable recession.” In July 2011, he declared that Osborne was making a “wasteland.” 

None of this happened; the honest thing to do would be to admit that. But, in pseudo-science, you never acknowledge that a prediction was wrong and thus that the model might be defective. So now Skidelsky retrospectively “predicts” something quite different: “that the start of austerity aborted the recovery in 2010; that recovery would have come sooner if the pre-austerity level of public spending had been maintained; [and] that it was the reduction of austerity in 2012 that enabled the economy to expand again.” With a flourish, he concludes: “The facts are consistent with Keynesian theory. Keynesians said austerity would cut output growth. Output growth fell.”

Yet even Skidelsky admits that he and his fellow Keynesians “cannot prove” this. Indeed, nothing in Keynes’ theory would allow such simplistic causal inferences. After all, other forces were at work after 2010 – not least the eurozone crisis (which some non-Keynesians, including me, actually predicted before it happened).

Nor would Keynes have been as confident as Skidelsky that the counterfactual of continued high deficits would have been without risk or cost. Historical experience – including in the United Kingdom in the 1970s – tells us that financial markets are not always convinced by heavily indebted governments that promise to solve their problems by borrowing even more.

Responding to some early critics of his General Theory, Keynes showed that he recognized the importance of uncertainty in economic life, and consequently the difficulty of making predictions. “The whole object of the accumulation of wealth,” he wrote, “is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date.”

But, Keynes continued, “our knowledge of the future is fluctuating, vague, and uncertain.” There are simply too many things – from the “prospect of a European war” to the “price of copper and the interest rate 20 years hence” – about which “there is no scientific basis on which to form any calculable probability whatever.”

There was much that we did not know in 2010. We did not know if the UK’s banking crisis was over; if its very large fiscal deficit (amounting to nearly 12% of GDP) was sustainable; or what the interest rate would be in two years, much less 20. The situation was so grave that no responsible politician favored the type of policies that Skidelsky argues should have been adopted.

In fact, at that point, the only real difference between the approach of the Labour government’s chancellor of the exchequer, Alistair Darling, and that of Osborne consisted – as is clear from Darling’s last budget statement – in the timing of austerity. In March 2010, Darling vowed to reduce the deficit to 5.2% of GDP by 2013-2014. Under his Conservative successor, the actual deficit in that year was 5.9%.

Skidelsky argues that “austerity hit the economy, and by hitting the economy, it worsened the fiscal balance.” But that presupposes what he cannot prove: that a larger deficit could have been run without any costs.

All Skidelsky can offer as evidence to support this supposition is the view of the bond markets: “Long-term nominal and real interest rates were already very low before Osborne became chancellor, and they stayed low afterwards.” But, if it were true that “austerity worsened the fiscal balance,” the markets should have punished Osborne. They did not.

Likewise, if it was true that higher deficits carried no risks, but brought increased benefits, then the Financial Times would have been full of articles by investment-bank economists saying just that. It was not.

To be sure, I must acknowledge that I erred in one respect, which I am grateful to Skidelsky for pointing out. In May, I wrote that “at no point after May 2010 did [business confidence] sink back to where it had been throughout the past two years of Gordon Brown’s catastrophic premiership.” As Skidelsky rightly pointed out, confidence recovered from its low point in the first quarter of 2009, and reached a plateau in the first half of 2010. So I should have written: “At no point after May 2010 did it sink back to its nadir during Gordon Brown’s catastrophic premiership.”

But that does not alter my point that the more Paul Krugman talked about the “confidence fairy” – a term he coined after Osborne became Chancellor to ridicule anyone who argued for fiscal restraint – the more business confidence recovered in the UK. Although confidence fell somewhat in the first two years under Prime Minister David Cameron, it never approached the low point of the Brown period, and it later recovered.

Nowadays, some economists seem to believe that pointing out a single factual error (out of more than 20 statements of fact) invalidates an entire argument. But, while it may cause a flutter on Twitter, that is not the way serious intellectual debate works.

Similarly, Skidelsky cannot prove that austerity was responsible for the dip in confidence. The eurozone crisis is a more likely culprit. After all, Darling had promised his own version of austerity in March 2010.

Skidelsky attempts to salvage his and Krugman’s claim that the UK’s economic performance since 2010 was somehow worse than its performance during the Great Depression, writing that “real per capita GDP has taken longer to recover this time around.” But a serious student of the Depression – which Skidelsky used to be – knows that, compared to the 1920s, the UK had a relatively smooth ride in the 1930s, not least because abandoning the gold standard in 1931 allowed for monetary-policy easing. In any case, unemployment was far higher in the 1930s than in the 2010s. And that is the measure that should matter to Keynesians.

To muddy the waters, Skidelsky cites work by David Bell and David Blanchflower on “underemployment.” He also raises the issue of productivity, referring to research by the Trades Union Congress. But at no point in this discussion have I made any claims about the quality of the jobs created in the UK since 2010, or about the productivity of workers.

As a general rule, union leaders would rather see their members in “good” jobs, even if that means unemployment for others. My view is that employment, even in low-paid or part-time jobs, is better than unemployment. Were he alive today, I think Keynes would agree.

Nevertheless, I am glad to see that Skidelsky (unlike Krugman) acknowledges the need for supply-side reforms “to improve skills, infrastructure, and access to finance,” and concedes that he and his fellow Keynesians “have been slow to understand that a government cannot increase the national debt without limit for a cause in which most people do not believe.” He may be beginning to see the light.

  Learn More

Given the way Keynesianism came to be associated with inflationary fiscal and monetary policies in the 1970s, it is easy to forget what a hawk Keynes was in his final years. The whole point of his 1940 pamphlet How to Pay for the War was that higher taxes were needed to avoid the kind of inflation Britain had experienced during World War I. Toward the end of World War II, he fretted about the high level of military spending, and was depressed by the loss of power that came with Britain’s large external debts.

How do I know all this? Because I read it in the third volume of Skidelsky’s masterful biography of Keynes. Perhaps, before firing any more salvos at a fellow historian, its author should re-read his own book. It might make him a bit less Keynesian.