Gideon Keynes – The Memoirs

I got all my best lines from comedians and opponents.  It began on Oleg’s yacht, when I bet the Prince of Darkness a grand he couldn’t invent me a policy more blatantly bogus than “Neo-Classical Endogenous Growth Theory”.  After a few vodkas, Peter came up trumps.  “Expansionary Fiscal Contraction!” he spluttered, between giggles.  I cunningly insisted on sole rights to the phrase, and paid up.

Next – gulp – we won.  We were in The Thick of It – you remember, that comedy Tony wrote under an Italian pseudonym, which he kept secret until his trial at The Hague in 2022.  I was terrified.  So I made bloodcurdling speeches about financial catastrophe, laid terrible curses on Gordon, and prayed Labour wouldn’t call my bluff.  Instead, they called it “Osbornomics”.  Perfect!  They had given me credibility.  They made it sound – don’t laugh – as if I knew what I was doing.

The funny thing is though – After three years in the job, I finally did stumble across something that worked.  Well, after a fashion.

Again, the comics and the left rescued me.  “The Onion” said we needed a new bubble to invest in.  Then Labour kept going on about that intellectual genius, Maynard Keynes.  Suddenly I realised – it was all Balls!

Keynes had simply invented a way to create bubbles.  To be fair, his funny story about paying people to dig holes and fill them in again was a kind of admission of what a dodgy, almost crooked idea it was.  I began to warm to the guy.  The trouble was, Labour had got to him first.

That’s when I did some real thinking.  The big flaw was that Keynes wanted the State to take action, and we Tories have always been dead set against that.  Shall I tell you why?  It’s not the reason we tell the public.  It’s simply that, if you say the State will solve a problem, you get the blame when it doesn’t work.  Whereas if you go for a private sector solution, you can pass things over to your lobbying friends.  If it works, they get rich: if it doesn’t, they get the blame.

So Dave and I did a little comic double act of our own.  Dave put on a straight face and solemnly declared that one cannot possibly solve a debt crisis by taking on more debt.  Then, behind that clever smokescreen, I prepared to do just that.

“Help to Buy” was the anodyne name we found for it.  What it actually did was to promote an upsurge in private debt, and lift house prices back up into bubble territory.  All over Britain, people emerged from negative equity and began spending again.  A multiplier effect, just as Keynes predicted.  Frankensteinomics jolted the economy into an artificial boom.  Advertising rose manfully to the challenge of selling people shedloads of goods they didn’t need, which the planet couldn’t afford to produce.  We won easily in 2015, and we blew the Liberal Democrats away, straight into the history books.

We were right in the longer term as well.  Climate change never did get to matter much.  The bird flu pandemic, nuclear war with Iran, and mass evacuation of Bangladesh all hit us first.

The final twist – sadly discovered too late to save the planet – came when economists realised that “Gideon-Keynesianism” (I hate that name!) is actually almost respectable good practice.  That quite upset me, you know…

They call it the GO-MK semiautomatic stabiliser.  The Treasury should constantly fine-tune the gentle, controllable level of economic stimulus, aggregating its “Keynesian” public and “Gideonian” private sector components, and monitor economic response activity in real time to maintain equilibrium.  We truly can prevent boom and bust, these days.

Not that we politicians actually do.  People are still stupid enough to vote for an unsustainable boom.  So that’s what we usually give them.

And do you know, it was another comedian who first invented GO-MK?  My memory’s going, I can’t remember his name.  Was it that that Irish guy, who sat on a bar stool and made wisecracks…?

* David Allen is a member of the Rushcliffe Local Party and has been a member of the Lib Dems or its (SDP) predecessor since 1981

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21 Comments

  • So you are trying to say that stimulating house price inflation is a good thing, but the government is doing too much of it / doing it in the wrong way? Or am I reading to much into this?

    The use of an unreliable first person narrator, whilst fashionable, isn’t that suited to making a political point you know.

  • Simon: Broadly yes. I am certainly arguing that the “private sector stimulus” is important, can be just as important as important as a classic Keynesian “public sector stimulus”, and can also be subject to many of the same advantages and disadvantages. If done with care to stabilise prices rather than cause a bubble, it might be positive. The worry is that Osborne is just going to produce a false boom, either inadvertently, or by design to win in 2015.

    If I thought I knew definite answers to all these questions, I wouldn’t have used the unreliable narrator technique. I don’t know all the answers. I do think I know some good questions, which I would like people to think about. If Osborne’s memoirs have encouraged people to do that, then the technique will have worked!

  • OK.
    How about this for why Keynesian style, digging holes and filling them again, may not be the best solution to growth?
    http://www.oftwominds.com/blogjan13/keynesian-blindspots01-13.html
    Can Keynesianism handle detailed scrutiny, and an alternate view?

  • David Allen 30th Jul '13 - 6:08pm

    John Dunn – I partly agree, partly don’t. Certainly, hell-for-leather Keynesian public-debt-led reflation, or equally, Osborne’s new form of private-debt-led reflation, is a recipe for disaster. It’s recreating the bubble. It’s Frankensteinomics, the attempt to jolt an economic corpse into ever increasing production of things we don’t need.

    However, it doesn’t follow that we should do the polar opposite. When the bubble ends, when the nation is forced to end its “drugs binge”, a policy of cold turkey is not likely to be a good idea, either. Using austerity as an excuse to slash the welfare bill, flog off State assets to your friends in the private sector, and let the real economy just keep on running down, is not a good solution either.

    We need balance. We need to steer a course between irrational exuberance and irrational self-flagellation.

  • David Allen:
    Thanks for the considered reply. But how does a nation come off its “drugs binge”?
    You further state :
    “Using austerity as an excuse to slash the welfare bill, flog off State assets to your friends in the private sector”
    Which as you accurately point out, is exactly what is happening. And is this not indicative of the fact that the ‘well heeled’ in society want the poorest to take the hit of cold turkey, as they continue to binge?
    “We need balance”
    Indeed we do, and that means that the very necessary, cold turkey, to get off the drugs binge, should be endured proportionally by all income classes, surely?
    And finally. Even if your heart and soul is in the Keynesian camp, you must surely acknowledge that when several countries have pulled all the Keynesian levers for 5 years to no discernible benefit, then surely, simple reasoning would suggest that there is something wrong with the Keynesian theory?

  • @ John Dunn

    The article by Charles Hugh Smith that John Dunn gave the link for is more of a rant against Keynes than a serious discussion of the problems of pursuing Keynesian policies. The only other comment I want to make about this rant is that Keynesians are aware of the main problems of pursuing these policies which are the increase in national debt to GPD ratio, the pressure on interest rates, the opportunity costs and the possibility of the Ricardian effect.

    @ David Allen

    “ever increasing production of things we don’t need.”

    Governments want there to be economic growth, which I assume is what David Allen means by “ever increasing production”. Does David not want people to have the latest phone or tablet? My wish would be that governments would aim to create full employment and if the economy has to have non-economic active people these should be the retired (so reduce pension age to 65) and the disabled if they choose to be so and mothers of school age children if they wish to be so. This of course would mean these non-economic active people would need financing and that is the problem.

    @ John Dunn

    “Even if your heart and soul is in the Keynesian camp, you must surely acknowledge that when several countries have pulled all the Keynesian levers for 5 years to no discernible benefit, then surely, simple reasoning would suggest that there is something wrong with the Keynesian theory?”

    No. I can only think of Japan. It could be said that in 2008-09 Keynesian policies were used to moderate the depression but once they were stopped the depression got worse. The main policies being used are Monetary ones and not Keynesian.

    Lord Adair Turner states that it would be possible to pursue both Monetary and Keynesian policies by financing budget deficits by printing money as suggested by Friedman and others. He calls it “Overt Permanent Money Finance”. If you have a spare hour I found this speech interesting:

    http://www.positivemoney.org/2013/04/adair-turners-keynote-speech-at-inet-conference/

  • John Dunn,

    I don’t usually have trouble working out what you are driving at, but, I am this time. Maybe it’s my own fault for using humour and confusing metaphor. When I talked about coming off a “drugs binge”, I was referring to the collapse of the bubble in 2008.

    The article you cited threw a lot of vituperative criticism at Keynesianism. Some of it seemed to me very valid, some of it rather over the top. I don’t have a “heart and soul in the Keynesian camp”. On the contrary, I think there are many perils with Keynesian (and Gideonian!) economics. I also think there has to be a place for both.

    You seem to be saying that we should be austerians, but we should spread the pain more fairly. Well, I agree the second part. However, if we simply cut back the economy, we shall have many years of stagnation and depression, like the West in the 30s and Japan since the 90s. Simple austerity doesn’t work. Osborne has only achieved a belated recovery by adopting Plan D and applying a sly private-sector stimulus.

    My solution would be: First, don’t try to get the boom back. Just apply enough stimulus to climb a little way out of the depths of despair, the bottom of the pit of depression. A bubble isn’t healthy. Nor is its polar opposite. Secondly, don’t just stimulate the economy to produce any old thing, or roads because they’re easy to spend money on, or whatever luxury appeals to the public. Recognise that the planet is suffering. Spend on the things we need to spend money on, like houses that don’t need fossil fuel heating, like public transport, like building up our own manufacturing industry. Austerity with a purpose, perhaps!

  • Instead of mowing my own lawn, I’ve decided to mow my neighbour’s lawn and charge him £10. Then I’m going to ask him to mow my lawn, for a fee of £10.
    Sorted. Employment UP, Velocity of money UP, GDP UP
    I’m starting to like this Keynesian growth stimulus.

  • A clever post with some good insights.

    I totally agree about Osborne’s “Help to Buy” scheme. It’s a dodge to further inflate the private debt bubble – a way to privatise a Keynesian boost to the economy he must hope delivers a feel-good factor just in time for the next election.

    The problem is that private debt is already far too high. When the false confidence sustaining it collapsed last time around it devastated the banks. Exactly the same will happen again except that next time the government’s balance sheet is likely to be too compromised to help.

    The solution to too much debt is not more debt nor is it austerity – the false choice we are usually presented with. It is rather to write down unpayable debts. This would involve the government facing up to the banks, prosecuting law breaking where it has occurred and bringing them within the Rule of Law – as urgent a priority now as it was for over-powerful and unaccountable unions in the Thatcher era. That this is barely on the agenda suggests that the government is clueless or has suffered regulatory capture by financial interests or dare not admit what a disaster the finance-friendly neoliberal policies of the last 30 years have been or some combination of all of these.

  • Another example of Keynesian logic.?
    http://www.zerohedge.com/news/2013-07-31/save-spains-housing-market-it-must-first-be-destroyed
    Knocking down unsold and unoccupied properties in Spain, = creates industry,… industry = growth,…and growth = good for the GDP statistics.
    You can just hear the Spanish government three years hence, screaming at Brussels for more EU funding, so they can……. ‘build affordable homes!!’
    Can someone,.. anyone, explain the sense here?

  • David Allen 1st Aug '13 - 1:18pm

    “Instead of mowing my own lawn, I’ve decided to mow my neighbour’s lawn” etc

    You’ve shown that measuring GDP is subject to error and that a bogus element can creep in. You haven’t thereby shown that there is no such thing as GDP, or that it isn’t even worth trying to measure it.

  • “You’ve shown that measuring GDP is subject to error and that a bogus element can creep in”
    Creep in…? How about when a few large shovels of ‘bogus’, are deliberately thrown in, with the sole purpose of massaging the GDP figures upwards?
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/22/huzzah-the-u-s-economy-is-3-percent-bigger-than-we-thought-thanks-george-lucas/
    http://www.zerohedge.com/news/2013-07-31/how-us-just-added-550-billion-growth-full-gdp-chart-pre-and-post-revision.
    What is the measure of GDP worth, if it is knowingly falsified?

  • David Allen 1st Aug '13 - 11:52pm

    John Dunn: So OK, we should be warned that statistics can lie. OK, I am duly warned.

    Now, can you tell me something positive about how you would like to run the economy, please? Because, all the warnings in the world ain’t worth nothing unless you can draw a conclusion as to what should be done that will be successful.

  • David Allen 1st Aug '13 - 11:56pm

    GF,

    How do we go about writing down “unpayable” private debts? How do we choose whose debt should be cancelled? How do we avoid rewarding reckless borrowing?

  • David Allen 2nd Aug '13 - 12:00am

    Amalric.

    “Does David not want people to have the latest phone or tablet?”

    No, indeed I don’t. My mobile was made in 2002, and I’m proud of that. Excessive consumption is wrecking the planet, and threatens mass extinction. The latest I-Phone won’t look so cool then, will it?

  • @ David Allen

    (My mobile was made before 2002 I think and it was second-hand when I got it! I am not proud of that and think a phone with a camera might be nice.)

    “Now, can you tell me something positive about how you would like to run the economy, please?”

    As David doesn’t like economic growth what does he want the government to do regarding the economy? At least I have said what I want the government to do.

    @ GF & David Allen

    Re: writing down private debt – I believe there are schemes regarding writing off debts without having to be made bankrupt. Also banks etc. are being encouraged not to re-possess houses when people are having trouble with their mortgages. I think that if someone is having problems with a debt they can apply for no more interest to be applied. These are not total write-offs but do help a bit. Maybe the debts of the long term sick and the disabled could be written-off if taken out when they were working.

  • David Allen asks:
    “Now, can you tell me something positive about how you would like to run the economy, please?”
    This presupposes that something can be done to get us back to Y on Y growth and BAU, , as before. It can’t.
    The attached, shows a graph of world debt.
    http://research.stlouisfed.org/fred2/series/WCMITCMFODNS
    Notice how the growth of debt went exponential from around 1970? That debt growth that began as Nixon took us off the gold standard, was the turning point to financial ruin. We all, of course thought that that explosion of credit and growth was solid as a rock and forever, but it was just exuberant froth, and is absolutely and totally unsustainable.
    Take another look at that graph. That debt on the right hand side, will NEVER be paid off. This will be very painful. Whether we upgrade to the latest iToy or not, will be the very least of our problems.
    We need to be thinking ‘triage’, not growth stimulus.

  • David Allen 3rd Aug '13 - 12:05am

    @ Amalric

    “As David doesn’t like economic growth what does he want the government to do regarding the economy? At least I have said what I want the government to do.”

    Sigh, a re-paste of my previous comment follows:

    “Apply enough stimulus to climb a little way out of the depths of despair, the bottom of the pit of depression. … Don’t just stimulate the economy to produce any old thing, or roads because they’re easy to spend money on, or whatever luxury appeals to the public. Recognise that the planet is suffering. Spend on the things we need to spend money on, like houses that don’t need fossil fuel heating, like public transport, like building up our own manufacturing industry.”

    In other words, I do believe in a healthy economy, but not indiscriminate growth that will kill the planet. Does Amalric not care about the planet?

  • David Allen 3rd Aug '13 - 12:13am

    @ John Dunn,

    “This presupposes that something can be done to get us back to Y on Y growth and BAU, , as before. It can’t. …. We need to be thinking ‘triage’, not growth stimulus.”

    So, whereas Amalric thinks I’m a hopeless pessimist, you obviously think I’m a crazy optimist. You can’t both be right. You might, of course, both be wrong!

    Well John, you are entitled to a highly pessimistic point of view, but could you spell it out? What does “triage” mean? Does it mean (for example) that you expect mass starvation in some parts of the world, and you don’t believe anything can or should be done about it? If that isn’t what you mean, can you tell us what is?

  • @ John Dunn

    I disagree that the growth of debt is the problem. It has been argued that the reforms by Nixon and Heath in the 1970’s increased the money supply and were inflationary. Also the graph doesn’t show the debt as a ratio with total world output which is the normal way of assessing how bad the debt is. Part of government debt could be paid off by increasing the money supply (see Lord Adair Turner speaking at the INET Conference http://www.positivemoney.org/2013/04/adair-turners-keynote-speech-at-inet-conference/)

    @ David Allen

    I didn’t consciously think of David Allen as a hopeless pessimist. However I was interested to see if David Allen supported having no economic growth because of the drain on the world’s resources this causes. However he doesn’t. He seems to want more government control over the economy than I do ( he might be saying certain things shouldn’t be produced) but I have no problem with building more environmentally friendly houses as I have no problem with people having the latest iphone. I would also like to see cheap public transport but I don’t know how to do that without causing a real structural deficit. We both want healthy economic growth but may differ at what level it should be. I do accept that green policies are necessary and are liberal. We should not be causing harm to those who haven’t been born yet but getting the balance from where we are to where we should be will take time and there is no quick fix. I would like to see the poor protected from carrying most of the burden of protecting future generations hence why I want to look at what level of non-economic active people we should have and how we try to get these people to be volunteers (such as pensioners and others who wish not to be employment) and provide a level of support high enough for these volunteers.

  • David Allen:
    Triage essentially means using our limited, and reducing, resources, on things that are important to wellbeing, rather than pursuit of endless infinite growth, (which you and I both know is thermodynamically impossible on a finite planet!). We need to ‘decelerate’ to a steady state economy.
    Instead of me making a lengthy reply, look at the process of ‘triage’, that Cuba had to undertake when Russia could not give it any more economic support after it collapsed in 1989. And NO, I don’t mean its political bias and structures, I mean how it handled its economic ‘loss’, at the societal level.
    It’s just a matter of time before the penny drops, that Keynesians waiting for growth, is akin to waiting for Godot.

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