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.

24 Responses to “Why Guido Fawkes and Tim Worstall are wrong on Keynesianism”

  1. 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…..

  2. 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

  3. Simon

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

  4. 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.

Comments are closed.