Why Guido Fawkes and Tim Worstall are wrong on Keynesianism

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”

  1. Andrew Fenlon

    RT @leftfootfwd: According to the academic they cite, @GuidoFawkes and @Worstall are wrong on Keynesianism: http://bit.ly/i6eKkc by @wdj …

  2. 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.

  3. 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.

  4. Ellie Gellard

    . @wdjstraw responds 2 those trying 2 cite academic research to undermine Keynesianism…by quoting academic.Good piece http://bit.ly/g4eTRN

  5. TOMM L GABBARD

    RT @leftfootfwd: According to the academic they cite, @GuidoFawkes and @Worstall are wrong on Keynesianism: http://bit.ly/i6eKkc by @wdj …

  6. Guido Fawkes

    Doh! What Tim said, but you’re right about his wit.

    Once again I direct you to Bastiat’s “That Which is Seen, and That Which is Not Seen”

    http://bastiat.org/en/twisatwins.html

  7. Other TaxPayers Alli

    RT @leftfootfwd According to the academic they cite, @GuidoFawkes and @Worstall are wrong on Keynesianism: http://bit.ly/i6eKkc by @wdjstraw

  8. Sean

    At the end of the CEPR paper it says:

    “… we found that, in economies open to trade and operating under flexible exchange rates, a fiscal expansion leads to no significant output gains. Further, any gains will be, at best, short-lived in highly-indebted countries.”

  9. Spir.Sotiropoulou

    RT @leftfootfwd: Why Guido Fawkes and Tim Worstall are wrong on Keynesianism http://bit.ly/fVIifl

  10. Richard Murphy

    RT @leftfootfwd: According to the academic they cite, @GuidoFawkes and @Worstall are wrong on Keynesianism: http://bit.ly/i6eKkc by @wdj …

  11. Political Scrapbook

    Woops! >> RT @leftfootfwd: According to the academic they cite, @GuidoFawkes and @Worstall are wrong on Keynesianism: http://bit.ly/i6eKkc

  12. Mason Dixon, Autistic

    Their response is to simply repeat their mistake: they are taking a summary about an analysis of forty-five countries and applying it to just one.

  13. BenM

    So close the UK economy for a bit.

  14. Will Straw

    Tim, Guido – Thanks for engaging but I don’t think you can have read my article. As Mason Dixon says, you can’t apply these findings to a single country since they outline what tends to happen not what will happen in a given country. Indeed, the authors give exactly that health warning in their paper.

    It’s also worth remembering that a statistically significant result does not mean that there is no fiscal multiplier. Dr Ilzetzki was keen to stress today that the error range was from -1 to +1 so that means there’s as much statistical chance of it being zero as being 1. The result just means that you can’t draw any conclusions about the impact of government spending in the described situations.

    Will

  15. Will Straw

    ps Guido – thanks for constantly harping on about Bastiat. It won’t surprise you to know that I think he’s wrong and that I look to JS Mill and John Rawls as the liberals from whom to draw inspiration.

  16. Mr. Sensible

    I think it’s worth reminding ourselves what Vince Cable said to his party conference in September:
    “Economic recovery will not happen automatically, by magic. Government has a key role. It has to sustain demand. That is basic Keynes.”
    http://www.leftfootforward.org/2010/09/the-contradictions-of-vince-cable/

  17. Simon

    Keynes was a Sociologist trying to be an Economist. His Theory does not exist except in the heads of Left wing (State Funded) Academics and Ed Balls. All Fiscal Multipliers do is add to the “Velocity” of money, which in an established Economy fails to yield any real benefit. There are numerous studies that show this. In practical terms Guido and Tim are right, if you read any academic paper it’s easy to pull Para’s out to support an argument, if you read the over view it gives you the “key” points. In summary Keynes is dead and long may that be the case, his Theories have lead to a great tax burden upon all in Society and made the world a poorer place.

  18. BenM

    I’m not convinced by this report at all, and another thought struck me.

    Namely that Right Wing economics undermined the UKs industrial base, right wing economic policy looked the other way as that industrial base shrank as a proportion of GDP, it looked on indifferently as the UK consequently racked up trade deficits – and then the weird proponents of said economics have the gall to cheer victory when the impact of all that may undermine the ability of the UK to reflate its economy!

  19. Tim Worstall

    “Dr Ilzetzki was keen to stress today that the error range was from -1 to +1 so that means there’s as much statistical chance of it being zero as being 1.”

    Will, do try to keep up. That error range means that there’s as much statistical chance of it being -1 as it being plus 1. So that the paper is actually saying that the chance that fiscal expansion is positively harmful to economic growth is equal to the chance that it is beneficial.

    “It’s a 50/50 break that spending hundreds of billions will fuck us over” is not really a great rallying cry to spend hundreds of billions now, is it?

  20. Tim Worstall

    “thanks for constantly harping on about Bastiat. It won’t surprise you to know that I think he’s wrong”

    Well, doesn’t that just bugger over the idea of opportunity costs then…..

  21. Mathew

    Tim,

    I’m sorry but seem to be ignoring the main point of the article in an attempt to some how prove yourself right.

    It’ll only take you 5 minutes to read the article. Also I suggest you do a little research on how the Keynes Multiplier has worked in the past.

    There’s a good boy.

    Toodle

  22. Simon

    @BenM, is that really how bad the standard of History has got in school’s under Labour?

  23. Tim Worstall

    “Also I suggest you do a little research on how the Keynes Multiplier has worked in the past.”

    Matthew: the original paper is exactly that, a study of how the multiplier has worked in the past. Their conclusion? That in economies with flexible exchange rates that it doesn’t.

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