Sunday, 24 March 2013

A Socratic dialogue with @ToryTreasury

Yesterday I spotted a tweet from @ToryTreasury, who describes him/herself as "Official CCHQ voice for all things Treasury".
Ed Miliband's spending plans he repeated today would mean £33bn more borrowing this year - driving the deficit back up to double-digits.
I tweeted back
Out of curiosity, what multiplier are you using?
I wasn't looking for an argument. I certainly wasn't endorsing (or opposing) Labour's "five point plan for jobs and growth"; in particular, as I've said numerous times (eg here), I'm not at all enthusiastic about a VAT cut in current circumstances. But NIESR's views, or my own, weren't the point at all; I was genuinely curious about ToryTreasury's methodology.

Now, in order to assess the impact of a so-called "plan for jobs and growth", it is obviously necessary to assess the impact of tax and spending changes, how much it boosts "jobs and growth", what that does to tax and spending, and hence the impact on borrowing. That is exactly what the Office of Budgetary Responsibility (OBR) does with the government's tax and spending plans, as it has just done in the Budget.   The OBR has not done the same for Labour's plan; nor has NIESR. But apparently CCHQ and/or the Treasury had; I assumed that they had used some version of the OBR methodology, albeit presumably in a cruder fashion.

The first step in such an assessment, as the OBR makes clear, is the "multiplier"; what's the impact on growth of tax and spending changes. The OBR commendably sets out its assumptions on multipliers and hence the impact of tax and spending changes on growth. For example, it has stated (paras 3.22 and 3.23) that its best assessment, recognising the uncertainties, of the impact of the government's fiscal consolidation plan - tax rises and spending cuts - is that it has reduced GDP by about 2.4% up to and including 2012-13. It would be easy enough to apply a similar approach to Labour's tax changes if, as ToryTreasury clearly had, you make assumptions about the cost and timing.

ToryTreasury seemed rather reluctant to answer the question, but eventually the reply was: 
@jdportes OBR multipliers. They don't see any evidence to justify the higher multipliers you assume
Well, that's a perfectly good response. It made absolutely clear, I thought, that ToryTreasury had indeed done exactly the exercise I outlined above. And while I have in the past argued (along with the IMF and many others) that I think the OBR's multipliers are underestimated, I wouldn't expect CCHQ or the Treasury to agree.

Using OBR multipliers, of course, implies that "Labour's plans" (for tax cuts and spending increases, or at least slower spending cuts, relative to the government's plans) would increase GDP (especially any increased investment, for which the OBR assumes a multiplier of 1). So I asked how much, and this is where it gets interesting:
Jonathan Portes ‏@jdportes  You are using OBR multipliers! Excellent. So what's the increase in GDP that results from the £33 bn?
Tory Treasury @ToryTreasury ‏ @GDP would plummet due to a spike in interest rates and a loss of confidence in the UK, as peter mandelson warned this week
Jonathan Portes ‏@jdportes so you're not using OBR multipliers! But you just said you were. Did you apply OBR multipliers or not?

Tory Treasury ‏@ToryTreasury you really are a fantasist if you think £33bn more discretionary borrowing this year would not lead to a loss of market confidence

Jonathan Portes ‏@jdportes We're not talking about me! Positive multiplier on the £33 bn (as OBR), negative, or zero. Just answer..

Tory Treasury ‏@ToryTreasury  yr simplistic approach to multipliers ignores reality of market risk + loss of confidence - why yr recommended policy so dangerous

Jonathan Portes ‏@jdportes  You're back to talking about me! Simply asked whether your explicit statement that you used OBR multipliers was true or not?
I have omitted some of my other duplicative tweets, which simply firmly but politely repeated requests for an answer to my question; was ToryTreasury's tweet saying that they had used OBR multipliers true or not? ToryTreasury was neither prepared to reaffirm the original tweet, nor to withdraw or correct it, although their subsequent tweets make it clear that it was not in fact correct. 

So, having established that,contrary to his/her original tweet, ToryTreasury had completely ignored the OBR multipliers and methodology in their calculation, and was adopting a different approach, I tried again to establish what methodology they had used:
Jonathan Portes ‏@jdportes  There's nothing wrong with disagreeing with OBR - as you say, I do too -- but you should tell us if you do and explain why
Tory Treasury ‏@ToryTreasury as OBR say multipliers work OK for small changes in fiscal policy but can't account for market risk - clearly too complex fr you
Another error; it is wrong to say that the OBR thinks multipliers work only for "small changes".  As I say above, the OBR uses its multipliers to estimate the impact of the government's entire fiscal consolidation programme: a much larger change in fiscal policy than any conceivable interpretation of Labour's plan.  It seems highly probable that if the OBR were asked to assess the impact of that plan, they would start with their published multipliers, albeit recognising the uncertainties.  

But it's worse than that.  Without a multiplier assumption, ToryTreasury's original tweet is not just wrong, but simply meaningless, because it is not possible to calculate the impact of "Labour's plans" on the deficit.  ToryTreasury's actual argument is "any discretionary borrowing would be catastrophic because of [the credit rating agencies/Greece/bond vigilantes/the confidence fairy]."  Now I pointed out the flaws in this argument two years ago; and the empirical evidence since then has overwhelmingly confirmed my view, as the IMF, for example, says. But it's a legitimate, if faith-based, perspective. What is not legitimate is to claim that it is a basis for quantifying the impact of discretionary borrowing on the deficit.

In the end, the most succinct and accurate summary of ToryTreasury's position came not from me but from @RedEaredRabbit
@RedEaredRabbit We’re using OBR multipliers but we’ve multiplied them by -1 and it is inappropriate to use multipliers for this anyway.
Where does this leave us?  As I said above, I am not endorsing Labour's specific policy proposals; nor do I wish to rehearse yet again here the broader case for an alternative fiscal policy.  It is perfectly legitimate for ToryTreasury to use whatever assumptions it wants to assess the impact of Labour's plans on growth, borrowing and so on.  But making a quantitative statement without any underlying quantitative assumptions; then making incorrect statements about those assumptions (or their absence) and then refusing to correct such statements, means that any such assessment has little credibility.  

[Updated.  I have been asked to acknowledge that it's not inconsistent for ToryTreasury to argue, as they have done on twitter, that the positive direct impact on GDP, and hence on the deficit, is exactly offset by the negative impact of market reaction.  This is true.  There's nothing logically inconsistent about that at all, although it would in my view be a remarkable and economically implausible coincidence. However, if ToryTreasury is claiming that the £33 billion number in the original tweet was based on such an analysis, then they should be able to show their working - that is, explain, in quantitative terms, what both the direct and indirect impact on GDP, interest rates, etc, is, and why that translates to a net impact of £33 billion.  If they wish to do so, I'm happy to post it here.]. 


  1. Rather despairing all of this. It seems that on several economic topics (public finances, labour market regulation, QE/ monetary policy) a good chunk of the opinion- makers are not part of the reality based community.

  2. How exciting to see tour own conservatives conducting politics in the modern muscular American fashion! There's no need for multiplers or an economic model or any of that academic stuff that hurts your brain, and who needs logical argument when there's always a ready supply of cheap and cheerful insults to hand.

  3. The trouble is some Tory minister (Pickles is a good bet) will put the original tweet (Ed Miliband's spending plans he repeated today would mean £33bn more borrowing this year - driving the deficit back up to double-digits.) in a press release. Journalists will pick it up, repeat it as 'Government' fact and before you know it the debate is about borrowing an extra £33bn rather than the different policies from the parties.The Tory spin doctors know what they're doing .

  4. This is the story of the current government in a microcosm.
    Don't let inconveniences like empirical evidence, data and reality get in the way of ideologically driven goals.
    Then, anyone who dares to question, disagree or simply seek clarification (as you do), is met with the tell-tale response which confirms that they have no evidence or substantive basis for their arguments - responses characterized by ad-hominem's, logical fallacies and a general impatient, frustrated tone which screams "who do you think you dare you challenge our views".

    Interestingly, on Question Time last week Michael Gove made a comment which he had to stop himself from completing, but revealed their ideology regarding government spending and multipliers:
    (Not verbatim) "Only private sector investment can create wealth; the public sector......." At which point he stopped himself, but given the structure, context and direct comparison being made in the statement, I wonder if the missing word was "cannot".
    Thereby denying and refuting reams of empirical evidence which shows that, particularly in economies at the ZLB, public sector investment can due to the positive multiplier (usually >1 in ZLB conditions).

    1. @ Simon:
      'particularly in economies at the ZLB, public sector investment can due to the positive multiplier (usually >1 in ZLB conditions). '
      Presumably you write this because there is plenty of historical evidence showing so, which is confusing seeing that rates are at Historic lows...
      @ Portes
      'This is true. There's nothing logically inconsistent about that at all, although it would in my view be a remarkable and economically implausible coincidence.' Well at least you concede, Sir, that it is not logically inconsistent. I would add that the last few years have shown that tails have become fatter, would you not agree? In essence, what in the past has seemed implausible has actually come to pass so whilst I watch TV screens full of people crying that they have lost their pensions/ money savings in Cyprus, I really do feel that extra precaustion is worth AT LEAST considering when we all avow that borrowing more now would DEFINITELY boost growth. It was not so long ago we saw a collapse in the velocity of money and since then very little has been done to structurally change western indebted economies. For instance, as we debate this, there is a chance that Europe may experience the capital flight (was it 60 billion out of Spain in 1 quarter?)that we saw only a VERY SHORT while ago- does anyone seriously contend >1 multipliers in these scenarios? In these extraordinary times perhaps economists greatest weapon will be their humility in assessing scenarios.
      I apologise in advance for the offence that will be perceived but not intended.

    2. @Robert
      Baffling, incoherent and illogical (again).
      You wrote "Presumably you write this because there is plenty of historical evidence showing so".
      Why write "Presumably..."? Surely after our last discussion regarding positive multipliers in ZLB conditions (and thus the positive economic impact from public sector investment spending), you must now be well aware (and surely can't have forgotten already?) that there is "plenty of historical evidence" since YOU cited evidence/examples which showed this to be the case! Remember your Fishback & Kachanovskaya reference to the New Deal evidence?..."the multiplier ranges from 0.91 for a combination of government grants and loans to 1.39 when only grants are considered. The personal income multiplier for public works and relief was around 1.67". Remember that was the bit you left out when presenting your case after having complained about dishonest, selective economists? Don't 'do an @ToryTreasury' and ignore the data/evidence please.
      The last sentence makes no sense as it stands unless you clearly state which 'rates' you mean. Base rates, govt borrowing rates (short/long?), public sector investment rates?

      As I wrote at the end of the last discussion, I simply do not have the time or desire to engage in and correct erroneous and incoherent narrative and arguments, so with this in mind (and perhaps like the other economist bloggers you previously mentioned who failed to answer you)I will only respond if there is some degree of coherence to your arguments.

    3. @Robert
      Generally agree with you that precaution and a lot of consideration is necessary for those individual countries involved when considering a fiscal boost to growth, due to as you say the extraordinary circumstances, danger of capital flight and potential impact on the multiplier (in a country experiencing capital flight).
      Not sure about the constant attacks on economists in general (lack of humility you imply), when as I said before its not their actual policies which are in place right now causing/prolonging all of the economic damage and social misery in the UK and Europe especially. Greater humility and recognition of the ideological folly of their policies is required by those politicians in charge, such as Osborne whose remedy to his failing (deficit worsening, growth stagnant/worsening) UK austerity policy is...more austerity! But then again austerity is not really about improving the economy, its a weapon used to achieve the ideological goal of a much smaller state, disregarding the timing and appropriateness of shrinking the state right now when all other components of the economy are depressed.

    4. Simon
      On the one hand you seem to disagree with me regarding the level of multipliers, on the other you then accept that currently the global picture is precarious and that, for instance, capital flight might well have a negative impact on the multiplier. We do not need to agree on what the actual multiplier will turn out to be and certainly you believe you have EVIDENCE that it must be higher than what I believe it to be, only time will tell though- I do wonder however how long economists would cling to the concept of a multiplier were the numbers to show a continually negative number i.e. there is a certain hardwiredness in the brain of economists that wants the multiplier to be positive.
      My point about humility is simply that the ego clouds the minds ability to deeply reflect on problems. As Kuhn wrote in the 'Structure of scientific revolution', there are moments/periods where old theories are essentially binned and paradigm shifts occur in which a new theory becomes the accepted model as baseline. None of this can happen if ego stands in the way, and as you have already agreed with me we inhabit an extraordinary time- it may be that the model adopted since the second world war accros western economies may need to be revisited, and THIS is why I'm wary of claims to CERTAINTY, especially in the field of economics and ESPECIALLY multipliers. You might further agree that IF one were to anticipate a period in which multipliers might well be lower than the long term average, it will PROBABLY be in a period of unprecedented tumultuousness, like, ahem, currently?
      As to how busy you are, welcome to the west pal. As for Osborne, go easy on the man... we have low unemployment compared to Europe, probably the most economic indicator of them all! (If preventing human tragedy is your thing)

    5. I'm going to break the pledge at the end of my last but one comment above, which certainly applies here, because your views on the value of multipliers and logic when considering them is truly baffling. The multiplier can be negative, <1,1 or >1, depending on economic circumstances. As a lot studies show, inluding the NBER study of 40 countries you showed me before illustrated, in many 'normal' economic circumstances it is low (<1) and sometimes negative. WE ARE NOT IN THESE CIRCUMSTANCES NOW.
      In the extraordinary economic circumstances of PROLONGED RECESSION WITH INTEREST RATES AT THE ZLB, a great many studies independently investigating the value of the multiplier have found it to be >1 for these particular circumstances (from past episodes of these conditions eg. New Deal evidence above).
      Therefore, when considering the value of the multipler, which evidence should we base our estimates on? 'Normal' conditions, or 'ZLB' conditions?
      Your low value? When all of the evidence from those specific studies relevant to recession/ZLB conditions (our conditions now!) indicate UNUSUALLY HIGH MULTIPLIERS (>1)? Its not a question of faith and BELIEVING in a value for the multiplier, its simple,evidence based observation updated over time in the light of research.
      I've gone with available evidence; should that change ( indicate low multipliers in ZLB conditions), then I'll amend my views , provided it is reliable /robust). Whereas you appear to going on blind faith, simply ignoring evidence which runs contrary to your belief. So the question is how long can you cling to your unfounded (appropriate to ZLB conditions) multiplier values when studies show a continually positive (>1) number? The problem of hardwiredness in the brain and desire for a certain multiplier value despite overwhelming evidence seems to be a problem for yourself, rather than for economists in general.

      "a period in which multipliers might well be lower than the long term average, it will PROBABLY be in a period of unprecedented tumultuousness, like, ahem, currently?"
      Completely nonsensical - make up a fictional situation, then without any basis/reasoning or logic attribute low multipliers "PROBABLY" to periods of "tumultuousness". Why should low multipliers 'probably' arise in tumultuous periods??...Especially when the actual real-world evidence finds completely the opposite in our "tumultuous" period!! (Low multipliers in more normal conditions, high multipliers in ZLB conditions).

      Since WW2, economists have continuosly questioned, revisited and updated models, including multiplier models, rarely, if ever, claiming "certainty". Why do you think they don't question/revisit when all the studies are out there, waiting for you to read and scrutinise them? - Oh, wait... As was very clear in your responses and as JPortes illustrated in the previous multiplier discussion, the real problem is you just don't read them or do the necessary 'homework'.

      Welcome to the west pal?? Oh dear.
      A great false comparison in your last statement; comparing our unemployment with Europe then claiming Osborne is doing OK is like claiming the South African police are doing a good job because their crime rates are low compared to say, Somalia. They're both terrible, just one is less terrible and through no efforts/policies of Osborne.
      What kind of person asks "if preventing human tragedy is your thing"? "if"?? When would it ever not be the thing to do? From previous discussion you know its at the top of my agenda. Isn't it "your thing"?
      You're frightening me now Robert, so I'll take this opportunity to end the discussion before things get more disturbing, and WILL stick to my original pledge regarding incoherent, nonsensical arguments.

    6. You wrote:
      'Why should low multipliers 'probably' arise in tumultuous periods??'
      I rest my case m'lud...

    7. Ah, in common with @ToryTreasury, a Socratic dialogue. Recall that the above was YOUR claim in the fictional, tumultuous world you described, not my claim.
      So just answer my question...Why did YOU claim low multipliers 'probably' arise in tumultuous periods? Any substantive basis or evidence?

      Remember Robert before answering, that the actual real-world evidence finds completely the opposite in our particular "tumultuous" period which you directly referred to!! (Low multipliers in more normal conditions, high multipliers in ZLB conditions).

      Might I also take this opportunity to say I have genuinely learned a valuable lesson from this exchange: Never spend time/effort trying to debate with someone who has no respect or regard for the conventions of rational,evidence based arguments, reasoning, and the pursuit of the truth.

      @Jonathan Portes
      I apologise for my part in clogging up this blog by inadvertently encouraging such a volume of incoherent, inaccurate, fallacy riddled responses which have no place on any informative,serious economic blog.

    8. Simon
      Subtlety is not your finest point!
      You wrote;
      'Generally agree with you that precaution and a lot of consideration is necessary for those individual countries involved when considering a fiscal boost to growth, due to as you say the extraordinary circumstances, danger of capital flight and potential impact on the multiplier (in a country experiencing capital flight).'
      This is the basis for the claim that multipliers will be lower, I'm sorry i wasn't explicit as I thought it self-evident. Trying to actually prove what they will be exactly would be equivalent to trying to prove the economic impact of Keynes 'animal spirits', a nonsense.
      It does not fall upon me to explain to you why 2 year Bunds yielding negatively is connected to youth unemployment in Greece, or how this might cause multipliers to turn out lower than the research Lawrence cobducted- what I will say though is that the 80,000 people in france who everymonth LOSE their claim to unemployment benefit (it is chronologically capped in France and there are 2 million who have been out of work for MORE than 1 year)and this is NOT something Summers has factored into his calculations, for how could he?
      I believe one can make these links as you agreed with me that caution is due in current volatile and extreme conditions- capita flight will crash the multiplier, capital protection may not affect so adversely- we will all see.

    9. Hi Robert
      We can obviously agree that significant capital flight will lower the multiplier for an economy. But this is a good starting point to begin highlighting the massive incoherence in your overall argument regarding low multipliers:

      1. No where in our original discussion did you cite or even begin hint at capital flight being the basis of your claim for low multipliers when questioning DeLong & Summers' value. Recall that you cherry picked data from incomparable studies in an attempt to justify your claim. Or perhaps you were being very subtle?
      Once other justifications were proved weak or plain wrong, it appears that the 'capital flight' reason has been belatedly introduced and seized upon.

      2. Both the original argument was centred upon the UK and as DeLong & Summers’ say “the policy-relevant multiplier in an economy which is, like the U.S. today, at the zero nominal lower bound on safe short-term interest rates". However, you have strayed away from this clearly defined context into the very different economic context of periphery Eurozone and Cyprus, where yes, capital flight is a risk, but we weren’t talking about those countries and neither was DeLong & Summers’ when estimating their multiplier!
      Unlike these countries, over the last 3 years and looking forward, there is very little risk of the UK or US facing serious capital flight, as the UK/USA are not about to default on their debt, and don’t face a big inflationary spiral. In fact the greatest risk of it happening likely stems from chronic government mismanagement of the domestic economy – so thanks to Osborne you may yet be proved right!
      So using ‘capital flight’ as the basis for low multipliers, and therefore the rationale not to enact a fiscal expansion, in the context of our discussion (the UK, USA and advanced economies in recession and ZLB conditions) is both inappropriate and weak (but, yes, plausible enough for certain other economies – Cyprus etc).

      3. Lastly, let’s just be honest about this and admit that you haven’t read DeLong & Summers’ paper on the multiplier. If you had, you would not have written this:

      “Long term unemployment (in France) this is NOT something Summers has factored into his calculations”

      Rather than making up claims and assuming he hasn’t considered the impact of prolonged recession on output and the unemployed, then relying on me (or anyone else) not having read the paper, why do you not read it yourself then make a proper, informed judgement of their work?
      Forming a large part of their study, “Hysterisis” is considered in great detail, and is accommodated for in their estimates of the multiplier. Likewise, the risk of default and thus capital flight is also considered in the paper.

      So, back to that multiplier value for countries such as the USA and UK (recession and at ZLB), but WITHOUT CAPITAL FLIGHT. DeLong & Summers, NIESR, IMF, IFS (Green Paper) and Oxford Economics to name but a few indicate a multiplier for such economies and circumstances of >1...
      Are they really ALL still exaggerating it?

      Go ahead and read it, do your homework, then if you still disagree (which is fine), put forward reasoning to explain why.
      At least then you’re engaging in rational, evidence based arguments and reasoning, whether it turns out to be correct or not in the end. As you say, we all will have to wait and see.

    10. Simon
      You're boring now. You do no work for yourself. Why do you think there is capital flight?
      Obviously it ALL has to be spealt out for you, I started reading and after your first point gave up.
      You are standing outside a house on fire but because there is no fire engine you don't believe there is a fire.
      Either read Kuhn's 'structure of scientific revolutons, OR go and read some maths on dynamical systems, or re-read your Keynes- preferably all 3

    11. Hi Robert
      Recommending Keynes is very wise:
      "When my information changes, I alter my conclusions. What do you do, sir?"

      But resorting to ad hominems, though completely inappropriate on an economics blog, is highly revealing:

      “When the debate is lost, slander becomes the tool of the loser.”

      Lets spend no more time on this one, and I wish you a good Easter weekend.

    12. A happy Easter week end to you Simon.

  5. By all means make it up as you go along. However, don't get all teary when people ask you to justify your assumptions etc. Glad that @jdportes, Danny Blanchflower and others are prepared to challenge.

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  7. This is the story of the current government in a microcosm.
    Don't let inconveniences like empirical evidence, data and reality get in the way of ideologically driven goals.
    Glyn Willmoth

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