Helicopter Ben and Hurricane Ed have some explaining to do

According to punk Keynsians a large public deficit stimulates an economy, whilst public spending restraint or cuts pushes it back into recession.

In the UK Mr Ed Balls has warned that there could be an economic hurricane hitting as a result of the Coalition government’s “cuts” in public spending. In the US Ben Bernanke has pursued low interest rates and quantitative easing as the President has run very large budget deficits. Despite this, the word is that the growth reported for the second quarter of 2010 is about to be revised down substantially.

Ben and Ed have some explaining to do. Why did Germany grow the fastest of the major western economies in the second quarter, when they were running a relatively low budget deficit and announced spending cuts? Why did the Uk record reasonable growth in the second quarter when Labour had already legislated to halve the budget deficit,imposed a range of tax increases and spending cuts to capital spending and the Opposition made clear its intention to press on more rapidly with deficit reduction? Why didn’t the combination of QE and a large deficit with no immediate plan to cut it boost the US economy to the top of the pile?

We can discount Ed’s words. As a back runner in the Labour leadership contest he has to adopt more aggressive language to get some attention. The media should not take him quite so seriously, as there is little economic foundation to his UK hurricane forecast.

We need to study Ben’s words very seriously tonight. If the US does revise down its figures and if the US authorities are now very worried about a slow pace of recovery, we should expect more extraordinary monetary action. Mr Bernanke cannot cut interest rates, so he will end up printing more dollars.

Meanwhile the failed experiment with a very large budget deficit may gradually draw to a close after the mid term elections, when both Republicans and Democrats might think they need to slow the growth in the massive debt build up which current policy is encouraging. Debt can be to economic growth as alcohol is to happiness. Drink too much and you may get depressed. Borrow more and you may have a headache.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

30 Comments

  1. Mick Anderson
    Posted August 27, 2010 at 7:30 am | Permalink

    The Labour party has only ever read the bits of economic policy that it liked, even though it only makes sense when read in full.

    Running a deficit during recession is permissable to help stimulate the economy, but only if it has been covered by having a surplus during the good years. Labour were stupid enough to run a deficit during to peak of the boom, meaning the Country was already in debt when the recession started.

    A deficit does not have to be caused by extra spending; it can be caused by lowering taxation. It simply means that Government is spending more than it is reaising in taxation. Also, it's not compulsary to have a deficit during recession, it's merely one of the options open when the money saved during the boom years has been exhausted.

  2. JohnnyNorfolk
    Posted August 27, 2010 at 9:12 am | Permalink

    They just think its an easy optoion. but you cannot continue to spend more than you earn. The day arrives when you have to cut back and start to spend less than you earn and pay back the debt. This creates difficulties at first but slowly you recover even if you have to stay at home and work out how you spend every penny for a while.

  3. Stuart Fairney
    Posted August 27, 2010 at 9:28 am | Permalink

    Since the economies are behaving exactly as Ludwig von Mises predicted they would, it might be wise to revisit his theories.

  4. Nick
    Posted August 27, 2010 at 9:47 am | Permalink

    We have had an recession and are still in one. 3 quarters of growth to get out, and even longer to get back to where we were.

    This recession was caused by a huge increase in borrowing and spending by the government.

    To suggest that more government borrowing and spending is the solution is nothing more than economic homeopathy.

  5. waramess
    Posted August 27, 2010 at 10:50 am | Permalink

    Maybe not quite as clear cut as you say. Printing money will have a short term effect and has had exactly that effect in our economy. Problem is that the printing has to stop at some point and unless the economy has started to move by then the recession will continue.

    Bernanke wants to do it all again because the recession has recommenced and he can see the prospect of mass unemployment if it is allowed to continue. He sees another quick fix facilitated by a devaluation of the purchasing power of the currency as at least a temporary way out. There are limits and Bernanke hopes the economy will start to recover before those limits are reached.

  6. waramess
    Posted August 27, 2010 at 10:50 am | Permalink

    We have done the same thing under Labour and we, like Bernanke are faced with the same situation: the economy is not moving again. Balls can see the prospect of unemployment rising if there is not a further stimulus but the Coalition think that their talk of cutting the deficit will stimulate the economy.

    They may or may not be cutting the deficit but Government spending remains at a ridiculously high proportion of GDP, and seems likely to stay that way.

    The Coalition are stuck in no-mans land; they don't want to get involved in more counterfeiting and yet seem to want to move the economy out of recession by simply "trimming the sails".

    My guess is that Balls is probably right, they can't just sit on the fence. Either they go the way of the counterfeiters or they do some serious cutting and release resources back into the private sector if they are to avoid a material increase in unemployment levels.

  7. StevenL
    Posted August 27, 2010 at 11:38 am | Permalink

    "so he will end up printing more dollars"

    Should help get my silver moving again if nothing else.

  8. Sally C.
    Posted August 27, 2010 at 12:11 pm | Permalink

    I am hoping against hope that instead of resorting to the printing press, Bernanke will tell the government to get its fiscal house in order – in other words tell them that they have to cut the deficit one way or another, whether by spending cuts or tax increases. Neither of these options will be particularly palatable, but America, unlike Western Europe, still has plenty of scope to raise taxes and if Americans want a European style health system, they will have to pay for it somehow.

  9. oldrightie
    Posted August 27, 2010 at 12:11 pm | Permalink

    The madness of those who have lost or are about to lose power?

  10. Richard1
    Posted August 27, 2010 at 12:51 pm | Permalink

    Mr Balls is the natural 'go to' politician when the BBC wants an articulate attack from the left on deficit control. He shouldn't be under-estimated. He may be wrong – and, as a leading adviser to Gordon Brown, responsible with his colleagues for the mess we are now in – but he does put the left case much better than any other Labour figures. I would be interested to explore the extent to which public money has, and continues to fund the left-axis. e.g. would you be able to ask in Parliament how much taxpayers' money has been chanelled through public bodies (inc the BBC) to the Guardian Media Group since May 1997?

  11. jasonmanc
    Posted August 27, 2010 at 1:09 pm | Permalink

    I do wonder what Labour's line will be if double-dip recession is avoided. They're betting the ranch on a disaster happening – if it does not, they'll be seen by the regular voter as irrelevant scaremongers.

  12. Mike Stallard
    Posted August 27, 2010 at 1:09 pm | Permalink

    This ties in with the BBC's use of the IFS leftie words "recessive" and "progressive".
    Getting rid of debt, overspend(ing) and thoroughly shabby and sloppy use of our money because – hey! who is counting? – is "recessive". What is "progressive" is efficiency, respect for voters and moving forward into a world where even the "vulnerable" can hold their heads up high because they are "steakholders" in a "pluralist" economy. An economy where people can start up new businesses easily. Where the government keeps its greedy and ignorant snout out.
    At the moment the "steakholders" are mainly in the jobs which are 'recessive" because they haven't yet been "progressively" cleaned up.

  13. Bill
    Posted August 27, 2010 at 1:12 pm | Permalink

    Completely agree that Ed talks a lot of tosh. And the Labour Party, once he is removed from the protection of Brown, seems to think the same. Even John Cruddas is not supporting his leadership bid.

  14. G Valentine
    Posted August 27, 2010 at 1:17 pm | Permalink

    The problem is that the UK is still borrowing huge amounts and there are no plans to pay back any of the national debt at all. At what point does the system collapse?

  15. Kevin Laws
    Posted August 27, 2010 at 2:31 pm | Permalink

    Government action to prop up an economy during a crisis as severe as this is never a good idea because it creates totally artificial conditions. All the massive expenditure of QE has achieved is to protect us from learning the lessons of the credit bubble. It is telling that countries with right leaning governments are seeing growth, and those with interventionist governments are stalling.
    As a prime mover in creating Britain's current problems Ed Balls is the last person we should be looking to for guidance.

  16. Steve
    Posted August 27, 2010 at 2:58 pm | Permalink

    Well said, John. If you believe the neo-Keynsians (aka old-fashioned socialists) then the UK, US and Eurozone all starting the so-called 'austerity measures' at the same time will tip the world back into recession (except for the parts of it where most people live, of course!). So we should really be egging Helicopter Ben on to crank up the printing presses, so that the world's largest economy can support the poorer and wiser nations that have already started to try and reduce their deficits. Somebody has to spend, so why not good old Helicopter Ben? However, please tell Mervyn King that he will be publicly emasculated if he ever starts printing money again.

  17. THE ESSEX GIRLS
    Posted August 27, 2010 at 3:31 pm | Permalink

    Further to this site's comments calling for EU spending restraint 'in passim ad nauseum' as Private Eye might say, we note the Brussels 2-finger wave as reported in the Daily Telegraph:

    "The European Union is defying David Cameron’s call for cuts to budgets in Brussels by planning an eight per cent increase in spending over the next three years. At a time of deep cuts to the British public sector, documents, seen by The Daily Telegraph, disclose controversial plans to snub the Prime Minister by raising the EU’s budget by more than £8.8 billion to £125 billion in 2013, a 7.6 per cent rise on this year’s spending levels. The increase will mean that the British contribution to the EU rises to £10.3 billion over the next three years."

    As the Eye might add – Triples all round!

  18. Yarnefromhorsham
    Posted August 27, 2010 at 4:21 pm | Permalink

    Wish that some one from the Government front bench would get this message across. Not sure whether you do follow up these comments John but on a slightly different tack the Government in recent weeks seem to have made a number of unforced errors – mainly communicational BUT it makes one think whether there is a lack of joined up thinking. Lets not give the opposition/Guardian/BBC ammunition.

  19. Michael Lewis
    Posted August 27, 2010 at 5:25 pm | Permalink

    Ben Bernanke is printing more money. Just as most people predicted, as warned by Jim Rogers and Co. for some time. Its good for Gold, Commodites and the like – I hope we don't hear stories in the press about banks forcing up the price of food – its central banks debasing their currencies that is forcing the price up. Some hard assets will just hold their value a bit more than paper money.

  20. Mark
    Posted August 27, 2010 at 5:34 pm | Permalink

    "I'll huff and I'll puff and I'll blow your house down!"

    We all know how that one ends – for those who have forgotten:
    http://www.shol.com/agita/pigs.htm

    "For they have sown the wind, and they shall reap the whirlwind: it hath no stalk; the bud shall yield no meal: if so be it yield, the strangers shall swallow it up."

    It seems that the Prophet Hosea understood rather more about macroeconomics than he was given credit for.

  21. gac
    Posted August 27, 2010 at 5:46 pm | Permalink

    I do not think we should get too worked up about Mr Balls who seems to be a busted flush in the public's mind. Wasn't he the author of that well studied policy document which used the 'post-neoclassical endogenous growth theory'? At least Mr (now Lord) Heseltine said it was Balls!

    I always thought that Mr Keynes preached that you should spend your way out of a recession but not borrow to do it.

    Happy to be corrected on this.

  22. Demetrius
    Posted August 27, 2010 at 5:53 pm | Permalink

    The trouble with with Latter Day Keynsians is that they do not understand either the context of his theories or the financial and economic structures within which he set them and are necessary conditions of the funtioning of his ideas. We are in a very different world that is less controllable, more complex and with so many differing elements it is possibly beyond any current theoretical system. Also, it is changing constantly and so rapidly that by the time you begin to understand then you are already behind the game.

  23. whistle
    Posted August 27, 2010 at 6:21 pm | Permalink

    According to Mr. Micawber, income £1,expenditure 19/6p, result is happiness,however, income£1 expenditure £1 and six pence,result is disaster!
    Perhaps our elected Politicians should think of that more often.

  24. Gideon Mack
    Posted August 27, 2010 at 8:31 pm | Permalink

    Labour commenting on economic policy is akin to the Chinese government commenting on crowd control.

  25. wab
    Posted August 27, 2010 at 10:22 pm | Permalink

    The Germans ran a huge deficit in 2009 (pretty much the same as the Americans as a percentage of GDP when you tally it all up), so looking at one quarter in 2010 is just plain silly. Also, the Germans didn't have such a ridiculous housing bubble as the US and UK did, and there is presumably also some relationship between that and the economic situation today.

  26. Martin
    Posted August 28, 2010 at 12:01 am | Permalink

    At first glance I thought "punk" Keynsian was being a bit tabloid.

    I then noted that the USA deficit (the newly printed dollar bills) is being spent in China!

    Throttling back consumer demand for imports by raising VAT etc isn't as daft as some suggest.

    As for Mr Balls well see http://www.independent.co.uk/news/uk/politics/ali

  27. DBC Reed
    Posted August 28, 2010 at 9:36 am | Permalink

    Would have thought a choice of small schools would increase travel,as pupils commute to the better schools,often at great distance.Since we have a State or National Curricululum introduced by the Thatcherite, Keith Joseph,there is not going to be a choice of subject any way,not until A levels.
    With A levels you could, with whole-day teaching have students attending three different institutions for three different subjects .( I once taught a one-year morning -only English Language and Literature level at an FE College that got students up to A level in one year : same duration for evening classes in the same subject.Results were good.One "full- time" student doing three A levels at the College took on two other subjects at evening -classes and ended up with 5 A's at A level. The problem is with time-tabling :schools often spread A levels over three days, teaching say six hours but in two-hour blocks over the whole week.Students are often sitting around doing private study (at best) ,with one session 9-11 o'clock and another 3-5 o'clock .There is a built-in incentive to bunk off .There is more boredom than is good for young people.

  28. Steve
    Posted August 28, 2010 at 1:26 pm | Permalink

    For GOD'S sake John get Peter Schiff over here and uninterupted on television for one hour! He will completely destroy Socialism for even the stupidest person.He was on Newsnight but really you need to hear him uninterupted and I absolutely guarantee that everyone will see that money printing is pure theft of purchasing power.He made a good showing in the Connecticut Senate primary with a virtual media blackout and will very likely defeat Lieberman in 2012.
    Newsnight link: http://www.youtube.com/watch?v=1oQOwvMCnzQ

  29. @Quietzapple
    Posted August 29, 2010 at 6:22 am | Permalink

    "Why did Germany grow the fastest of the major western economies in the second quarter?"

    I gather because her construction industry was catching up after an utterly disastrous winter.

    More remarkable was our second place in terms of growth among the principal EU economies, now firmed up to 1.2%.

    The Tories and their wobbly ones inherited an economy growing at 4.8% pa, based on that quarter.

  30. SMI
    Posted September 25, 2010 at 6:42 am | Permalink

    Hey can I copy and paste this post on my web site? What references must I give? You might give this info for other people too.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page