Guido Fawkes and Tim Worstall claim that Keynesianism doesn't work. But the academic they cite says that there's no compelling reason for the Government's "extreme austerity measures".
Right-wing bloggers Guido Fawkes and the less witty but equally acerbic Tim Worstall have got excited by a piece of research which they claim shows that Keynesianism in the UK should be consigned to the “dustbin of history“.
The problem for Fawkes and Worstall is that they appear to have read only a summary of the research and not the original findings which were published in a 2009 paper which asked ‘How big are fiscal multipliers?”.
The research by Ethan Ilzetzki, Enrique G. Mendoza and Carlos A.Vegh looked at data from 20 high-income and 25 developing/emerging nations from 1960 to 2007 and found that developing countries, open economies, and those with flexible exchange rates tend to have fiscal multipliers which are statistically insignificant. They also show that, in the US, government investment has an impact multiplier (in the very short run) of 2.31 and that government consumption has an impact multiplier of 0.32. These figures fall in the range estimated by the independent Office of Budget Responsibility which have been used by this blog.
The right-wing bloggers jump on the general conclusions but ignore the US evidence to claim that the policy approach of fiscal stimulus taken by the US, UK, and most other G20 countries following the financial crash would not work. But the conclusion of the paper, which look almost entirely at the policy implications for emerging countries, concludes that:
“All in all, our findings suggest that drawing sweeping generalisations on the size of the fiscal multipliers is probably an exercise in futility.”
Indeed, when I spoke to one of the authors, Ethan Ilzetzki, earlier today he outlined two problems with applying the model to the UK. First, the sample size for the UK is too small to be conclusive. Second, it is very hard to estimate the impact of fiscal policy when, as in current circumstances, monetary policy has been exhausted with interest rates close to zero. In such circumstances, Mr Ilzetzki theorised, the impact of government spending might be closer to those under fixed exchange rates when his research found that fiscal multipliers do work.
Commenting on the UK government’s policy of eliminating the deficit in four years, Mr Ilzetzki said:
“I can’t see a compelling pressure for taking these extreme austerity measures. There is lots of appetite for UK sovereign debt so why take a risk for unclear gains on the other side.”
Guido Fawkes and Tim Worstall should be more careful in future over who they cite in support of their ideological approach to economics.
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24 Responses to “Why Guido Fawkes and Tim Worstall are wrong on Keynesianism”
Andrew Fenlon
RT @leftfootfwd: According to the academic they cite, @GuidoFawkes and @Worstall are wrong on Keynesianism: http://bit.ly/i6eKkc by @wdj …
Anon
“Guido Fawkes and the less witty but equally acerbic Tim Worstall”
Unfair. Tim Worstall is far more witty than Guido, who is not witty at all.
Tim Worstall
My claims:
“If this paper is correct then that’s it for Keynesianism in the UK, into the dustbin of history with it. For if the fiscal multiplier just don’t multiply, there’s no point to it all at all.”
We agree that I make this claim solely about the UK, yes? We agree that the UK has a flexible exchange rate regime? Yes? we would call an exchange rate which can decline by 25% over a period of a couple of years flexible, yes?
Good, the paper then says that, as you quote:
“those with flexible exchange rates tend to have fiscal multipliers which are statistically insignificant.”
So, the UK as a country with a flexible exchange rate will tend to have fiscal multipliers which are statistically insignificant, yes?
We do accept the logic of this?
We also might not want to go off on other wibble as you mention: I did not say that the paper showed that fiscal multipliers in the US made Keynesianism dead there (as a much larger economy it is less open and thus exchange rates matter a great deal less, just as one example). Nor did I say that the paper had enough samples to be certain about the UK. Rather, the paper says flexible exchange rates tends to equal no multiplier. The UK has a flexible exchange rate, thus it’s not all that terrible to then conclude that the UK, on the evidence of this paper, has a zero or statistically insignificant fiscal multiplier, is it?
“the less witty but equally acerbic Tim Worstall ”
Why thank you. And M’Wah to you too.
Ellie Gellard
. @wdjstraw responds 2 those trying 2 cite academic research to undermine Keynesianism…by quoting academic.Good piece http://bit.ly/g4eTRN
TOMM L GABBARD
RT @leftfootfwd: According to the academic they cite, @GuidoFawkes and @Worstall are wrong on Keynesianism: http://bit.ly/i6eKkc by @wdj …