Keynesian economics

Economic Nonsense: 30. In economic downturns government can boost growth by increased spending


The problem with this is that in economic downturns the government often does not have the money to do this. In a downturn tax receipts tend to go down because there is less economic activity. With less being earned, less tax is paid. If government wants to expand its spending it will need to raise more in taxes or borrow more, neither of which are good at stimulating recovery and growth. If, during times of economic growth, government builds up a reserve surplus, then it might have the resources to do things such as infrastructure projects when a downturn comes. Unfortunately governments rarely do this. When money comes in, the pressures are on them to spend it, and if they spend it during the good times, it is not there any more when the bad times come.

Tax taken and spent by government is money that cannot be spent by the private sector. The goods and services that people might have bought, or the investments made possible by their savings do not take place if the government has taken the money to spend on its own projects.

Some commentators say that in a downturn businesses and private citizens are simply not doing the investing, and therefore government has to step in and do some of its own. There might be very good reasons why people are not investing in a downturn, and they are even less likely to invest if government has raised their taxes or by borrowing money to pay for its projects has raised the cost of borrowing.

There are things that government can do to make investment more attractive and encourage more businesses to start up or to expand. It can lower Corporation Tax; it can tweak Capital Gains Tax; it can give small and new businesses a holiday from National Insurance contributions. All of these are on the supply side, where the effort is needed, rather than on the demand side subject to all of the above caveats.

Another reason why Keynesian economics doesn't work


Let us imagine that this Keynesian idea that government should spend more money in a recession stands. Not that we'd want to give in to the case in general, but let us assume it for the moment. Why might it still not be a good idea to depend upon this tactic? As Larry Elliot explains:

The second drawback is that the investment – even assuming it happens – will take time to arrive. Every EU country has sent in a list of pet projects and these will have to be assessed by a panel of experts before a final list can be drawn up. This is a recipe for bureaucratic delay and the customary horse-trading as each country demands its share of the action. It is unlikely work will begin on a single project until 2016, when what Europe needs is an immediate boost to demand.

That could come in three ways. It could come from a more meaningful push from the centre, perhaps through the European Investment Bank. It could come from nation states if they were given more budgetary leeway by Brussels to run bigger deficits until growth has returned. And it could come from the European Central Bank through a quantitative easing process. The latter is by far the most likely and will dwarf in size what the commission has just announced.

Government, most especially at the EU level, is simply such a lumbering and inefficient giant that it's not possible for it to get such fiscal stimulus moving in the required timescale. Very much like the American experience of insisting that there were all sorts of "shovel ready" projects out there, then finding that government rules mean that nothing is ever shovel ready. There's always a year or more of paperwork to fill out before anything can be done.

With us still accepting the basic premise, that the deficit should widen, that there should be a greater gap between tax revenues and government expenditure in a recession, perhaps we should be looking for something that acts near immediately instead of increased spending? Like, say, an automatic reduction in national insurance payments in a recession? Like, umm, Keynes himself said would be a good idea?

So where has all of Keynes' leisure gone?


In Economic Possibilities for our Grandchildren Keynes famously proposed that by about now we'd all be working 15 hours a week. As a result we've had endless little reports from the likes of the not economics frankly people suggesting that we should all indeed work only 15 hours a week and spend the rest of our time being poor. But there is another answer, the correct answer, to where all of Keynes' predicted leisure time has gone:

Women devote well over the equivalent of a working day each week to household chores – double the amount undertaken by men.

They spend an average of 11-and-a-half hours doing housework, while men complete just six.

A survey, commissioned by BBC Radio 4's Woman's Hour, found cooking was the most popular job.

Women said their chief responsibilities included changing sheets (86 per cent) and cleaning the toilet (83 per cent).

Whereas men were in charge of bins (80 per cent) and DIY (78 per cent).

The least popular tasks for both sexes were loo cleaning and ironing.

Keynes was proposing that as we got richer then we'd take more of our increased wealth as leisure. Which we have, in terms of our market working hours, to some extent at least. In the 1930s Saturday was still, for many, at least a half-working day. The standard 37.5 hour week of today would have been regarded as being near a part-time rather than full-time work load. But the real reduction in working hours has come as a result of the mechanisation of household production. Those microwaves, vacuum cleaners, gas ovens, central heating and so on, what Ha Joon Chang and Hans Rosling refer to collectively as the "washing machine", have led to a massive drop in the hours spent on running a home.

It would be stretching it a bit to say that a housewife in 1930 was working 11.5 hours a day on housework but not much: it was certainly 8-10 hours a day, very much a full time job. And it's that labour that just isn't being done any more: leading to the explosion of leisure time that we all currently enjoy. Keynes was right in that we've taken more of our increased wealth in the form of leisure. It's just that we've taken it from the non-market, household, part of our labours rather than the market and paid side.

The Keynesian case against the minimum wage

Bryan Caplan lists a few reasons to be sceptical about the Card & Krueger study that purportedly shows no unemployment effect from minimum wages. His overall point is that, beyond traditional labour economics, there is quite a lot of empirical evidence to show that minimum wages create unemployment. My favourite point:

4. The literature on Keynesian macroeconomics.  If you're even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment.  If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment.  The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

I wrote about the labour economics research into minimum wages in a paper on the Living Wage last year. Even if you think minimum wages are a good thing, the levelof ambiguity around the consequences of raising the minimum wage should give you pause for thought. There are no straightforward solutions to low pay, but if there are ways of increasing the net income of the poor that don't risk putting people on the margin out of work, aren't these the ones that we should focus on?