All entries for October 2011

Plan B or not to B

Writing about web page http://clients.squareeye.net/uploads/compass/documents/Compass_Plan_B_web.pdf

Plan B was launched over the weekend to much fanfare. There was much excited analysis in The Guardian. In The Observer, one hundred economists told George Osborne that Plan A is failing.

I will focus on one small aspect, the Plan B critique of current fiscal policies. Behind Plan B is the idea that "current policies … may do the very opposite of their avowed intention, by actually increasing the deficit." The logic underlying this argument extends he Keynesian multiplier: public spending cuts put people out of jobs and reduce their incomes, so that they pay less in tax; if taxes fall by more than spending, the deficit will widen, ending in higher, not lower public debt. Turn this argument around and there would be scope, apparently, for Britain to spend its way out of debt.

Another idea behind Plan B is that "the UK national debt is not large by long-run historical standards." Judging from the historical record, it seems, Britain can easily afford a higher public debt. While debt reduction may sound virtuous, it is suggested, it is currently unecessary (and the policies designed to achieve it may be actively harmful).

The outcome of Plan A, according to Plan B, is economic "sado-masochism": We are enduring the pain of public spending cutbacks to no purpose (since the cutbacks will not reduce the deficit) when the purpose (to reduce the public debt) is not even necessary in the first place. Or is there pleasure for some in the pain of others?

This weekend, by coincidence, the Royal Economic Society Newsletter (no. 155, October 2011) published my short paper Surely You're Joking, Mr Keynes?This paper makes two points.

First, it's true that Britain has carried much larger debts relative to its GDP in the past, but this was almost entirely the result of wars; do we have a comparable excuse today? It's completely unhistorical, moreover, to compare Britain's credit today with that obtainable when Britain was the world's dominant economic and financial power. The world has changed; is that something we still need to get used to?

On this, I conclude:

Historically, having a debt twice the size of the national income has been a sign that something went terribly wrong: a run of major wars, for example. Faced with the worst recession in 80 years, the British government was right to let its budget go into deficit temporarily. At that moment an increase in Britain’s debt was inevitable. Now it looks essential to bring it back under control over a few years.

Second, there is no robust evidence in the historical data that deficit reduction is self-defeating. There is claimed to be evidence, but I show that it crumbles when you touch it. On average, in fact, deficit reduction has reduced the national debt -- as one would expect.

Here, I conclude:

It remains true that, once the public debt is set on a particular course, it is hard to change that course quickly. But this is only momentum that takes time to reverse; there is no evidence of destabilizing pushback from Keynesian multipliers.

To sum up: I have taken aim at two common beliefs about the British public finances. One is that we should borrow our way out of recession; the other is that we can spend our way of debt. These beliefs are based on intriguing stories. But, like many good stories, they are fictions. Our country cannot spend its way out debt. In today’s world, we can afford to borrow much less than in the past, and that may be just as well.

Mark Harrison : 31 Oct 2011 15:26 |  Tags: Economics Politics Recession |  Comments (4) |  Close comments |  Report a problem

Afghanistan: Ten Years in a Dead End Street

Writing about web page http://www.bbc.co.uk/news/world-south-asia-15209793

Marking ten years since the coalition invasion of Afghanistan, former U.S. commander Stanley McChrystal has said that the U.S. and its NATO allies are only a little better than half way towards reaching their war goals. He added:

Most of us -- me included -- had a very superficial understanding of the situation and history [of Afghanistan], and we had a frighteningly simplistic view of recent history, the last 50 years.

Respectfully, I disagree. The problem was not a lack of understanding specifically of Afghanistan's history, or of recent history. The problem was a lack of history in general. They did not understand how our modern world has been created.

The most basic acquaintance with European history since the tenth century would have told them two things.

• Democracy cannot be built overnight. It is a long, long process. A successful democracy depends on the rule of law. The rule of law comes first. Without the rule of law, electoral competition leads swiftly to chaos.
• A society based on patronage and rent sharing -- the kind of state that Afghans had before it was destroyed by a communist coup d'état and Soviet intervention -- can be more stable, more prosperous, and provide more rights than one based on chaos and looting. In fact, the right kind of patronage and rent sharing can foster the rule of law.

Based on ignorance of these two simple things, coalition policies in Afghanistan have been set up to fail from the word Go. We have failed to achieve our goals because the goals were fundamentally misconceived. Tens of thousands of troops and civilians have paid for this with their lives. The immense damage that has been done in Afghanistan and neighbouring countries will persist for decades.

Twenty/twenty hindsight? No. The first time I wrote this was on December 4, 2001. (I updated it on January 9, 2002, and expanded on it in 2009 on July 18 and August 30, and on January 1, 2010.)

I'll be modest about this -- I should be. I have made few predictions that have stood the test of time. Actually I have made few predictions, period. Not having to have a crystal ball is one of the good things about studying history.

I am not saying: Look, I got it right. I'm saying: Look, even I got it right. Why couldn't they?

Maybe because they didn't know the right kind of history.

Mark Harrison : 07 Oct 2011 09:38 |  Tags: Afghanistan History |  Comments (1) |  Close comments |  Report a problem