What’s wrong with Britain?

Scott Sumner has the microphone:

I was curious to see just how tight British fiscal policy actually is, so I checked the “Economic and Financial indicators” section at the back of a recent issue of The Economist.They list indicators for 44 countries, including virtually all of the important economies in the world.  Here are the three biggest budget deficits of 2011:

1.  Egypt  10% of GDP

2.  Greece:  9.5% of GDP

3.  Britain:   8.8% of GDP

Egypt was thrown into turmoil by a revolution in early 2011.  Greece is, well, we all know about Greece.  And then there’s Great Britain, third biggest deficit in the world.

I suppose some Keynesians work backward, if there is a demand problem it must, ipso facto, be due to lack of fiscal stimulus.  If the deficit is third largest in the world, it should have been second largest, or first largest.

A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.)  But that shouldn’t cause a recession.  Think about the Keynesian model you studied in school.   If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession?  That’s not the model I studied.  Deficits were supposed to provide a temporary boost to get you out of a recession.  At worst, you’d expect a slowdown in growth.

To get a sense of just how expansionary UK fiscal policy really is, compare it to France (5.8% of GDP), Germany (1.0% of GDP), or Italy (4.0% of GDP).  Lots of people blame ECB policies for the recession, but Britain is not in the eurozone.  Outside the eurozone you have Denmark (3.9% of GDP), Sweden (zero), Switzerland (1% surplus).

Obviously there must be some problem in Britain that isn’t affecting some of its more prosperous northern European neighbors.

Most blogosphere writings on this topic do not demonstrate nearly enough sophistication, fact, or detail.  The rest of Scott’s post discusses ngdp for Britain.  I have a piece in the Sunday Times (of London) this weekend on these topics and TGS, though no link because the whole system is gated.  If you have a pdf, I would be appreciative if you could send it to me, for my private use only.

Comments

The UK went from being a major net exporter of oil and gas to an ever increasing net importer of oil and gas over the last few years.

'That meant that although exports kept growing, the trade deficit in goods widened from October’s upwardly revised £8.6bn to £8.7bn, its highest ever, according to the Office for National Statistics (ONS).

Economists had expected the trade gap to shrink to £8.3bn.

“This [widening gap] reflected a sharp rise in the value of oil imports, partly reflecting the recent rise in oil prices,” said Vicky Redwood, senior UK economist at Capital Economics.

Higher prices for oil and other commodities are driving up the costs of imports and posing a headache for policymakers worried about imported inflationary pressures.

Between October and November, the figures showed that the UK’s trade in oil swung from an unusual surplus of £21m to a deficit of £660m.'
http://www.telegraph.co.uk/finance/economics/8254977/Oil-prices-help-widen-UKs-trade-gap.html

Anyone want to venture to guess how much the UK government received in revenue back when the country was a net oil and gas exporter? Anyone want to venture to guess what has replaced that revenue source? 'Nothing' is a reasonable guess, though debt might be a better answer.

Am I missing something, or is Scott being purposefully dense? British government debt shot up after the 2008 financial crisis because British banks were heavily involved in the crisis, much more so than French or German banks. 2008 was only a couple years ago. This was the very first thing I found when I googled "British debt as a percentage of GDP". Is Scott just pretending not to understand the reason for the (current) high debt levels?

You answered your own question. De Long and others have been writing recently about Britains austerity woes. Look it up.

If a deficit like that is austerity, what does stimulus look like? 20% of GDP? 30%?

You cant say scott didn't predict it.
" I suppose some Keynesians work backward, if there is a demand problem it must, ipso facto, be due to lack of fiscal stimulus. If the deficit is third largest in the world, it should have been second largest, or first largest."

No we just look at actual increases in discretionary spending rather than net figures that are mostly large due to tax revenue fall offs.

Um... what does it matter to the keynesians if its discretionary or mandatory spending?

Sorry it doesn't. Increases in spending.

Stimulus doesn't look like any deficit level in particular.

Let's start with a simple definition:

Fiscal Stimulus: Increasing public expenditures and/or decreasing tax revenues.

Fiscal Austerity: Decreasing public expenditures and/or increasing tax revenues.

Well, here's two things:

http://www.guardian.co.uk/news/datablog/2010/apr/25/uk-public-spending-1963

http://www.guardian.co.uk/news/datablog/2010/apr/25/tax-receipts-1963

Or even better, take this site on public spending

http://www.ukpublicspending.co.uk/charts

Look over the data for yourself. It's pretty clear what's going on.

Tax revenues? Up since 2009
Public expenditures? Down since 2009.

In other words you get something that looks a lot like austerity and very little like stimulus.

But what do I know. I'm probably lacking in sophistication, fact, and detail.

Your link appears to show that public spending has gone up every year, including from 2009 onwards.

Of course expenditures went up. Did they go up at an increasing or a decreasing rate?

Did they go up as a percent of GDP?

There is a secular increase in public expenditures, just as there is a secular increase in rGDP, nGDP, tax receipts, population, etc. Annualized growth rates have been generally positive for, oh, thousands of years. They have been especially positive during the last few hundred years.

If you want to think about them meaningfully you have to think in terms of derivatives.

"Your link appears to show that public spending has gone up every year, including from 2009 onwards."

The stock Keynesian response has become it's too small a stimulus, until it's not. Which is not much of an answer.

Pretty deceptive to say "Public expenditures? Down since 2009" if you actually mean the rate of growth has declined since 2009 (as the chart shows). I guess you think that in any downturn the rate of increase should go up and up so that spending increases exponentially, and anything less is "not stimulus"? That is pretty absurd.

I was hoping I wouldn't have to explain why revenues as a % of GDP or changes in rates of increase relative to secular trendlines were what it was important to look at. Do you really need to be told that you have to normalize expenditures for inflation, secular growth in GDP, and previously projected increases in government spending beyond those driven by inflation and GDP growth rates if you want to know whether expenditures are increasing relative to the previous period when you're dealing with a continuously growing economy? (I originally had typed all that up in the first post, but then figured it was pedantic and unnecessary, so I just posted the links and assumed people were economically literate enough to figure things out themselves. Shame on me.)

If I go into debt a thousand dollars every year to finance my lifestyle, and if I'm expected to stimulate the economy by spending more, going into debt a thousand dollars this year is not stimulative, it's expected. If I go into debt 500 dollars, it's contractionary. (And the UK goes into debt pretty much every year: http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data#_)

If I go into debt 10% of my income every year to finance my lifestyle, and my income increases 10% every year, a 10% increase in the amount of debt I take on relative to last year is not stimulative. (And GDP has pretty much always gone up for.... a really long time. Not 2007 to 2009 though, of course. http://www.measuringworth.com/datasets/ukgdp/graph.php)

A stimulus is an increase in the expected amount of input from the Government for the year(s) in question.
As such, an increase in the amount of input from the Government relative to the previous year is not necessarily stimulative.
I take Scott's point to be that a lack of an increase in the amount of input from Government relative to the previous year is not necessarily stimulative (if 1. the economy is shrinking or 2. the last year was supposed to be a stimulus year.)

If you look at the data I posted looking for changes in rates of increase, I don't think things look like fiscal stimulus, which could be simply defined as an increase in the expected expenditures of government and a decrease in the expected tax receipts of government. 'Expected' there does a lot of work - a lot of work I didn't think I had to explain.

GiT got called out and based on his latest response, he knows it.

If I was afraid of being called out I wouldn't have posted links to the data I was looking at for everyone to see in the first place.

Here's what I was looking at:

Expenditures as a % of GDP: http://www.ukpublicspending.co.uk/spending_chart_2000_2015UKp_11s1li011mcn_F0t

Trend from 2000-2010: increasing
Trend from 2010 onward: decreasing

Tax Receipts as a % of GDP: http://www.guardian.co.uk/news/datablog/2010/apr/25/tax-receipts-1963

Trend from 2007-2009: decreasing
Trend from 2009 onwards: increasing at decreasing rate.

My thoughts? Maybe policy was stimulative in 08-09, but it mostly looks like it was just on trend for gov expenditures and receipts without a recession.
Past 2010, everything looks like austerity if you don't consider 08-10 stimulus. If you do consider it stimulus then things are ambiguous and a lot depends on the counterfactual of what spending would have been without stimulus and how present policy compares to that counterfactual.

Are you talking about deficits or debt? Are the British still bailing out their banks now?

Probably. By normalizing he can continue to pretend that his world view isn't being smacked down by reality and have to reconsider.

Nominal spending matters. Actually from looking at current austerity countries the best way to increase the deficit is to cut spending: the hit to AD hurts revenue by more than the savings from lower spending. The multiplier is real, and in an AD-driven recession, huge.

Nominal spending has increased significantly since the recession

Context must be given priority in this matter: the UK's fiscal situation was more dire than it is today--at least in terms of budget deficits. The Cameron government's policy of "budget balancing" is financed through tax-hikes and budget cuts. It doesn't require an oracle to ascertain whether such policies dampen demand.

But the budget has continued to grow

I am no economist, but this seems to me to be either an extraordinarily naive or deliberately obtuse argument. Doesn't the word "stimulus" refer not to the level of government spending but to the increase from a given level of government spending?

I'm with you.

The question isn't whether Britain spends a lot relative to other governments, it's whether Britain spends a lot relative to how much it was spending before the recession. Changes in level over time, not the absolute size of the level at any given time.

It does

Not by anymore than it was increasing its spending year to year prior to the recession

http://www.ukpublicspending.co.uk/spending_chart_2000_2015UKk_11s1li011mcn_F0t

Larry you are completely right and I can't believe Scott is being this dense. He simply must be being disingenuous.

So many comments making the same point, and it was my first reaction as well. Plus, equally baffling, we all give our selves a 'dope-slap' every now and then, but then it gets reposted here?

The original article has a larger point that starts with 'stimulus isn't working' and ends with maybe the real need is for more monetary actions.

But it's hard getting past that initial lazy? opening.

"A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.) But that shouldn’t cause a recession."

This would be a NET CHANGE that is CONTRACTIONARY. Going from a 10% deficit to an 8% deficit is easing off from the accelerator, so to speak. If you ease off on the accelerator while going up a hill... well you slow down.

The British economy is driving up a hill?

A demographic hill, maybe?

But isn't having your foot on the accelerator at all a stimulus? It's just a question of degree.

So if the UK went from a 1000% deficit to a 999% deficit you would call that contractionary?

If it had been running 1000% deficits for the past 10 years, yes.

Bait taken. Talk about circular logic.

It's the worst of both worlds. UK has done no stimulus recently and its austerity plan is half-assed enough that it is not putting a large dent debt, nor is it inspiring GDP growth.

"Obviously there must be some problem in Britain that isn’t affecting some of its more prosperous northern European neighbors."

All the countries Sumner cites with good GDP to debt ratios have significantly higher taxes than overall than the UK. Tends to help your debt ratio.

By what mechanism do you expect greater austerity to inspire GDP growth? Magic?

The real interest rate was -2.5% and the nominal interest rate was 0.5% in 2010 (nominal up from -0.8% in 2009), so lower government spending isn't going to lower interest rates. Unemployment is 8.4%, so private industry doesn't need the workers such cuts would leave jobless. I'm genuinely curious: what other mechanism do you see at work here?

The cuts are deep enough that it would be lowering debt if tax receipts had stayed where they were before the cuts. Austerity proponents have to engage with the now-obvious fact that cutting spending lowers tax revenue and explain when it is a good thing, because it is equally obvious that the answer isn't "always". Blind faith in the power of cuts is insufficient rational for hobbling future economic growth by cutting investment in infrastructure, health and education.

Scott would be the first to say that interest rates do not reveals whether monetary policy is loose or tight, he should see that deficits are not the measure of fiscal policy either.

We've got a deficit because tax revenues collapsed. Look at the data (IMF did a breakdown of sources of deficit, it's not finanacial sector support in the UK its tax shortfall). Fine, there's some automatic stabilisers at work there, if you like.

But the government is cutting expenditure and shrinking public sector employment. You can't pretend that has the same effect on the economy as a counterfactual with the same deficit but a government hiring and spending. Public sector workers are losing jobs and businesses that rely on state spending are also firing as a result of government cuts. If you like, this contradicts crude Keynesianismthat just looks at G-T, and is a story about labour markets, confidence and coordination.

I would point out that the government is increasing expenditure and not cutting it.

I agree it's cutting public sector employment.

I disagree that tax revenues have collapsed. From the IFS December bulletin: "Central government current receipts in November were 7.1% higher than in the same month last year. Receipts between April and November 2011 were 4.8% higher than in the same months of 2010." December's tax revenues were pretty strong too, according to the latest IFS bulletin.

The UK government is planning a massive cut in public spending - at least according to their own official estimates.

Have a look at 4th chart on http://www.hm-treasury.gov.uk/spend_sr2010_keyannouncements.htm

This chart shows government receipts and expenditure up to 2015-16.

This shows a cut in spending of about 7% of GDP between 2011-12 and 2015-16.

As the UK Treasury notes: ” In the 20 years to 2006-07 and the beginning of the financial crisis, public spending averaged around 40 per cent of GDP. It then increased to a historically high level of 48 per cent by 2009-10. Receipts by contrast did not exceed 40 per cent over the whole period, and fell to 37 per cent in 2009-10.”

So the aim appears to be get back to spending of around 40% of GDP in four or so years.

Is it more useful to consider Britain as more in sync with "English-speaking countries" and their "liberal" economies rather than Europe? A generalization, of course- Britain is part of the EU and proximity, Austrailia and Canada are heavy natural resources, etc., but this "sync-ing" appears to have obtained over the past couple decades.

US fiscal deficit is right there with Britain (8.7%).

The neo-Keynesian narrative is that the economy is recovering because of the stimulus, but there is still cyclical unemployment. GDP, the measure of output, has been restored to pre-recession levels and growth is tepid but positive. If there is still an output gap, has the full employment level of GDP increased? It could have increased if aggregate supply has increased, but then the price level would be dropping. It's not.

Forget about the prescription for our troubles for a moment. What is the explanation for the current symptoms within the neo-Keynesian framework? They refuse to accept structural unemployment as a major explanation.

Labor recoveries have been getting slower and slower. What is causing that?

A few factors are frequently mentioned besides structural unemployment: lack of mobility caused by underwater mortgages, trailing aggregate demand as we dig ourselves out of this hole and the general increase in productivity (i.e. shifting balance to less labor-intensive industries). The people with the marginal propensity to consume goods produced by labor-intensive industries have been those with the greatest uncertainty, greatest de-leveraging and stagnate wages.

Structural unemployment suggests that there are industries that are growing while others shrink; so far the economy has appeared to move mostly in lock-step as far as adding or shedding jobs. That doesn't mean the employment characteristics remain consistent, though: the rise in productivity is real, though we could wish it had been accompanied by rising real wages. That isn't to say that additional money put towards voluntary adult education wouldn't lower unemployment, if only by taking unemployed workers out of the workforce and boosting aggregate demand like all government spending. We don't appear to be in danger of over-heating any time soon.

The Keynesian view is cautiously optimistic on the US economy right now. Housing isn't fully recovering, nor should we wish it too since that would require another bubble to emerge, but durable good purchases have been increasing. At this point the biggest drag on the economy is falling government spending (federal stimulus never fully offset the state-level cuts, and federal stimulus is now ending.) And we could still use a period of 4-6% inflation to help us play catch up. The biggest danger is from Europe, where the economies are headed straight off a cliff, or a repeat of the near-collapse of the financial system due to a lack of reform.

Tyler, your article wasn't published in the Sunday Times, it was published in the regulat (London) Times (Saturday 28th). I'm afraid because its gated, I can't seem to find a way of downloading it as a .pdf

that's helpful, thanks

your example of using more detail and sophistication is a paper using one parameter for one year?

Hmmm. A very long time ago Jan Kregel told me that there is a difference between a deficit caused by a contraction and a deficit caused by additional (!) spending. The UK deficit is to quite some extent caused by the contraction, as tax receipts fell from 39,5% of GDP to 37,4% of GDP between 2008 and 2009. Add this to the already existing deficit of 5%...
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php?title=File:6_Total_tax_revenue_by_country_%28millions_of_eur_%25_of_GDP%29.PNG&filetimestamp=20120105121146

However, two clicks on the Eurostat website yield this:http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-21102011-AP/EN/2-21102011-AP-EN.PDF

This shows, comparing debt with deficits, that debt increased a full 10% more than the combined deficits in 2008 and 2009. Guess who got that money (to continue paying bonuses). Scott Sumner should really, really consult such data instead of just The Economist. I mean, it exists and is easily available, which mean that we, economists, have no other option as to use it - even if we were not educated to do this as there was not yet something called 'the internet' in those days. Again, P.K. does do this.

Scott's claim is way more carefully worded than some of you are giving him credit for. If one wishes to explain the *level* of current UK gdp growth, and not just the recent change in gdp growth rates, it involves a lot more than citing the recent *change* in fiscal policy. As Scott notes, it is a few years after the recession. Scott is not being dense here.

What? Are you and Sumner suggesting the UK economy is anywhere close to full capacity?

Tyler = Tool

I think from the tone Scott (as if I know him) is asking them to put out the nominal GDP number so he can figure out if the problem is the nominator or the denominator. The whole point is you can't tell from the figures available. We know they raised the price of everything with the VAT , should cause a spike in inflation and have nominal GDP increase with prices. It also seems even though they raised taxes the shrinking of the economy caused tax receipts to go down. Did they manage to make the deficit worse by raising taxes and killng demand, very Keynesian. Are they stimulating the economy with big deficit spending and failing miserably, very not Keynesian.

Do we all suspect and answer already?

It's like the wife who catches his husband cheating. "How many times?!" she asks. "A lot less than I wanted to" he says.

(I must have been referring to California)

It's a structural problem - the UK is full of British people - which causes lower growth rates.

Are you baiting for Bob Solow quotes?

13 years of Blair-Brown.

And here we have the right's catch-all argument for everything bad that happens in the UK economy for a long time.

Yes - if you redefine austerity as stimulus, you surely will have an argument that stimulus does not work.

Is this is a joke?

This is Scott Sumner.

Sumner said "If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession?"

I'm even less of an economist that Sumner, but I did have a week and a half on Keynes in an economics 101 course in 1980. And while I only learned maybe two things in that section one of them was that "Keynesianism" only works if the deficit you run up is spent on more employment (preferably as far down the spend vs. save line as possible) whereas if you just spend it on something like bond repayments of if you just outright stop spending at all then it's not "Keynisanism."

So since I'm less of an economist than Sumner I'm sure I don't understand all the factors he does. And since I'm unable to access any gated articles (academic or in the Times) I'm simply ignorant of the factors he does assess.

So. Before I can assess the truthfulness, falsity, or even "truthiness" of his claim that his UK example proves Keynesianism is false doctrine I'd probably want to know how the deficit changes he cites are driven. If the decline was, say, 100% in employement and/or employment equivalents then I wouldn't be surprised at all that their recession was deepening. And if instead the decline was 100% bond payments (particularly debt payments to entities outside Great Britain) I'd also expect to see their recession deepening (though not so much as if it was all direct employment reductions.)

In fact, I'd only be convinced that Keynesianism was failing if Sumner reassured me that, no, England is actually increasing high-multiplier employment but the recession is increasing.

Now. If Sumner was dishonest (or perhaps only self-deceiving) and engaging in propaganda (seeking and disclosing only information that supports his claim and withholding information that contradicts him) then it makes sense that he wouldn't clarify whether England's deficit alterations were allocated in favor of or in opposition to Keynesian policy recommendations. If Sumner instead was honest and engaging in science (seeking and disclosing information that might weaken his claims) but merely neglected to include this information then he's a pretty poor scientist.

Fortunately it should be very easy to clear it all up by filling in the important but seemingly missing information. Or even just to point out the obvious information I'm too poor an economist to recognize. It's probably still worth the exercise because while I might be a poor economist that only means I've had as much education on the subject as the average American.

figleaf

One of the problems with the way UK public spending is structured is that a lot of it goes on housing benefit - rent subisidy to 30th percentile of the market rate - and rents have risen recently. So the spending goes not on consumption but on rents to landlords, and from there it tends to get saved rather than spent. Arguably this is part of the necessary deleveraging, but it's bad for jobs.

People are starting to talk about rent caps. Not an ideal solution, but there is definitely a lot wrong with the housing situation in the UK.

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Interesting reply from the Austrian perspective

These blog-posts by Cowen and Sumner must be jokes. "Radical Britain" is the motherland of post-2009 austerity. The logical error of equating a budget deficit with expansionary fiscal policy just too obvious..

http://www.economist.com/node/16791650

"Radical Britain
The unlikely revolutionary
David Cameron’s Britain has embarked on the toughest fiscal tightening and most drastic decentralisation of any big, rich country."

What deficit level would you like?

Or are you guys in agreement with Dick Cheney?

As long as bond rates stay low, I don't care what the deficit level is. I would like a spending level that adds jobs to the government payroll when private employment falls and cuts them when private employment rises. Ideally those jobs would contribute to infrastructure, education or common goods, but even that isn't necessary. After all, if the projects have a positive yield above and beyond the yield of that money in private hands there would be no reason to cut them when private employment rose again anyway.

The deficit only becomes inherently relevant when real interest rates are higher than 0. Right now it's just a meaningless byproduct of the values that do matter.

The point: it's about aggregate spending. Not just government spending. It's a fundamental Keynesian insight that increasing private investments can make up for lower government spending. It's even a fundamental Keynesian insight that if private consumption and investment increase and exports increase too it's time for government to cut back on spending.

But it's also about the financing of spending. It's not just the government which can spend beyond its means. Read this one:

http://rwer.wordpress.com/2012/01/01/debt-britannia-with-16-graphs/

And yes: this means that there are situations when government borrowing has to cushion a large and sudden fall in private borrowing (especially graph 4).

We do have, of course, a 'total debt' problem nowadays. Which, in the medium run, of course means that more of our spending has to be financed from income: building new houses, care for the elderly, education and the like.

I've said it before, but it's worth repeating: the UK is Detroit. It's a one trick pony (finance) and when that pony is sick, it suffers.

Here's an example:

http://www.theatlantic.com/business/archive/2012/01/what-would-new-york-look-like-with-a-smaller-financial-sector/251523/

Financial services is maybe 10% of UK GDP.

Yes, but it was the main source of economic growth.

One important factor may be a measurement artifact. The U.K. has the most centralized government in the world, so there is very little borrowing at the state and local level that is omitted from its deficit as a percentage of GDP figure. In countries where state and local governments engaged in meaningful borrowing, that borrowing is omitted from the national government budget deficit as a percentage of GDP figure.

Ezra's second law of economic blog reading: anytime someone mentions a number that is obtained by division, without mentioning the numerator and denominator seperately, STOP READING
That person is not being fully forth coming
I don't know if the brits deficit is or isn't related to spending or output, but to say % of GDP wihthout telling us that RIGHT away is not right, and an indicator that the attention conservation ethic demands that your attention go elswhere

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