I started with what turned out to be the wrong assumption about John Quiggin’s use of the term “zombie”. From the following I could only think it was intended to mean something of unparalleled and unusual excellence, as in the following passage:
Yesterday’s Fin ran a piece from Stephen Kirchner and Robert Carling of the Centre for Independent Studies, under the headline ‘Give austerity a chance’ which was a pretty accurate summary of the contents…. The piece relies almost exclusively on the work of Alberto Alesina and his colleagues, promoting the zombie idea of expansionary austerity.
But on further reading, I have reluctantly had to conclude that he uses “zombie” as a negative. He thinks, apparently, that “expansionary austerity” is a contradiction in terms, and like a true blue Keynesian believes, based on the models he learned when he was young and impressionable, that cutting spending and balancing budgets are bad for an economy. This, in spite of the fact that on the two occasions we balanced budgets in this economy during the past quarter century, once by Paul Keating in 1988 and the second time by Peter Costello in 1996-97, the results were a stunning acceleration of economic growth. Funny, in a peculiar kind of way, that when Keating did it, within a year he was worrying about the economy overheating, and when Costello did it, we passed through the Asian Financial Crisis with hardly a blip on the screen.
Now I realise we have gone through this referencing of Quiggin’s discussion of Alesina’s work already on this site – here and here. But as I am heading off to a conference at the end of next week where I will be speaking with Alesina and about him, I have been doing quite a bit of research. And even though Quiggin thinks Alesina’s research is “the most-refuted piece of economic analysis put out in recent decades”, I cannot see how that can be, given our own experience here in Australia.
Alesina, you see, has discovered that if you try to balance your budget by raising taxes it may not work at all, and worse still, that whatever success it may have, higher taxation does not work as well as cutting spending. I’m not even sure he expected to find what he found, but he did the empirical research and found these results. Cutting public spending is “associated with” – as academics like to put it – with an upturn in the economy. That every Keynesian hysteric has since then run round with a meat axe to try to refute these results proves nothing other than it must be extremely annoying to have to learn about Say’s Law again, just like our ancestral economists had to do a century ago.
The reason I now know that “Zombie Economics” is meant to be a bad thing is because I consulted Quiggin’s new book which has that very title. Catchy. Next time I write a book I may come to him for a title, but not necessarily for much else. Say’s Law, for example, at least according to Quiggin, “states in essence that recessions are impossible”. Does he really think that for a couple of centuries until Keynes came along economists had argued and believed that recessions could not happen even though they would take place every ten or so years, often devastating whole economies for years on end? Now if he really thinks that, there is a zombie belief if ever I heard one.
Then when he discusses Say’s Law, he writes that it had been “misleadingly” attributed to J.-B. Say (1762-1834) although “developed by later economists such as James Mill” (1773-1836). Eleven years is hardly a difference as these things go. And as it happens Say and James Mill jointly developed the fundamental concepts over the period 1803-1825, each feeding off what the other had written. I can only hope Quiggin wasn’t confusing James with his son John Stuart (1806-73) who wrote the final polished classical version of Say’s Law in 1848.
A year ago I would have said that Keynesian economics was dead beyond revival. There was no way such obviously wrong ideas could survive the irrefutable evidence of such massive failure. Everywhere policy makers are going in the other direction irrespective of the nature of the economy. Even here in Australia, the Government feels compelled to pretend that it is going to balance its budget in 2012-13 and would do so if it could. This is so even with just about every part of the economy but the mining sector struggling. Someone therefore needs to find a word to use about economic theories that have been refuted beyond question but which economists still continue to apply, because that is the word, I’m afraid, that needs to be used about Keynesian economics. Keynesian theory remains in all the texts - with the sole exception of mine, of course - but for all practical purposes is dead as a dodo.
Because here is how it is. Whatever economists might tell them, policy makers will pay them little attention if they continue to argue that public spending needs to be maintained and more debt is the answer to recession. That is why Alesina’s results are so interesting. Unintuitive for a Keynesian economist no doubt, but of immense importance if strong economies are the aim.
John Quiggin Replies and I respond: It was nice of John to respond which is how knowledge is supposed to move forward. Of my post, here is how he walks away from what I wrote, saying only this in direct reply as if all I wanted to do was:
quibble about the chronological relationship [in the development of Say's Law] between Jean-Baptiste Say and the Mills, father and son.
This does not at all capture what I was trying to get at. But at least he concedes that he did not get right the story about how Say’s Law developed. But that wasn’t what I was really writing about. Nor is it my ambition to defend Alesina chapter and verse since there are by nature deficiencies in all such studies, not least because the data are generally designed for Keynesian models and not for other kinds of analysis. But if Alesina has been able to demonstrate in a series of cross-country studies that increased public spending is not beneficial for long-term growth, he seems to be onto something.
I don’t even really wish to get into a discussion about what happened to Australia after Keating balanced the budget in 1988 but somehow John’s take appears to me deficient so far as the actual circumstances of the subsequent recession are concerned. He writes:
The severe recession that began just after the triumphant return to budget surplus (when Paul Keating went from bragging that ‘this is the one that brings home the bacon’ to observing that ‘this is the recession we had to have’) wiped out all of the fiscal consolidation of the previous decade – balance wasn’t restored until years into the expansion with a consolidation that produced an increase (admittedly temporary) in unemployment, as Keynesian theory would predict.
To omit the decision to raise interest rates to 20% during 1990-92 somehow leaves out what was the most important part. The economy boomed and then the Labor Government refused to accept things really were going well and did all they could to slow things down. Is that part of what Keynesian theory would predict?
Nor does John mention of the Costello recovery after 1996 which came on the tail of a downturn brought on by high interest rates again in 1994-95. Balanced budget and cuts to spending were associated with a robust recovery. Alesina’s views on things seem dead on about that episode, which he unfortunately never discussed.
But to really get to my point, Keynesian economics has been tried during the most recent stimulus and it has failed. There has been the grand experiment worldwide from which, it seems, no Keynesian is capable of reaching any conclusion other than they were proven right. Where they find evidence fo this is a mystery, but they have declared themselves the winners and still champions even as policy makers have begun to reverse every stimulus program in the world.
Had our economies raced out of recession and unemployment fallen like a rock, there can be no doubt that Keynesians across the world would have had their trumpets out and we would never have heard the end of it. And they would have been vindicated. But that is not what happened. There have been no recoveries anywhere from what was really a minor tempest in credit markets that was over within six months. The recession we now have has been caused by the stimulus and not the credit squeeze. It is debt and not the banking system that is the problem.
Keynesian economics is an absolutely rotten guide to policy. If John would like to understand why, he could do worse than reading James Mill and J.-B. Say to find out what it was they said.