VSP Historical Trip; also Keynes: “Look after the unemployment, and the Budget will look after itself.”

Let’s take a historical trip to see Very Serious People of the early 1930s explain the need to abandon expansionary plans and pivot to deficit reduction.  Here’s a fun one.  First there’s a 1932 letter published to the Times of London by MacGregor, Pigou, Keynes, Layton, Salter and Stamp (power team!) calling for expansionary fiscal stimulus:

…in present conditions, private economy does not transfer from consumption to investment part of an unchanged national real income. On the contrary, it cuts down the national income by nearly as much as it cuts down consumption. Instead of enabling labour-power, machine-power, and shipping-power to be turned to a different and more important use, it throws them into idleness.

Yup.  Here’s the response, two days later (my bold):

The Times of London, Wednesday, October 19, 1932


[…]But it is perhaps on the third question—the question whether this is an appropriate time for State and municipal authorities to extend their expenditure—that our differences with the signatories of the letter is most acute. On this point we find ourselves in agreement with your leading article on Monday. We are of the opinion that many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities. We do not desire to see a renewal of such practices. At best they mortgage the Budgets of the future, and they tend to drive up the rate of interest—a process which is surely particularly undesirable at this juncture when the revival of the supply of capital to private industry is an admittedly urgent necessity. The depression has abundantly shown that the existence of public debt on a large scale imposes frictions and obstacles to readjustment very much greater than the frictions and obstacles imposed by the existence of private debt. Hence we cannot agree with the signatories of the letter that this is a time for new municipal swimming baths, &c., merely because people “feel they want” such amenities.

If the Government wish to help revival, the right way for them to proceed is, not expenditure, but to abolish those restrictions on trade and the free movement of capital (including restrictions on new issues) which are at present impeding even the beginning of recovery.

We are, Sir, your obedient servants,

T.E. GREGORY, Cassel Professor of Economics,
F. A. VON HAYEK, Tooke Professor of Economic Science and Statistics,
ARNOLD PLANT, Cassel Professor of Commerce,
LIONEL ROBBINS, Professor of Economics

It’s 1932 and Hayek thinks government deficits are causing the Great Depression.  As this webpage that has these two letters and two contemporary letters notes, these battles have not evolved much in the past 80 years – even though the second view has been routed in Economics 101 classes.

Two bonus:  First, that webpage has a British austerity VSP letter (“However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year”) from The Sunday Times in February 2010.  It is signed by, among others, Ken Rogoff.  Has Rogoff changed his mind on British austerity, or been asked about it by reporters?  Perhaps that is more fuel for Joe Weisenthal’s argument that Rogoff is the most dangerous economist in the world.

Second, the following, from Keynes, is fantastic.  From a 1933 radio debate Keynes did with Stamp (my bold, though I should bold all of it):

You will never balance the Budget through measures which reduce the national income.  The Chancellor would simply be chasing his own tail – or cloven hoof!  The only chance of balancing the Budget in the long run is to bring things back to normal, and so avoid the enormous Budget charges arising out of unemployment…Even if you take the Budget as your test, the criterion of whether the economy would be useful or not is the state of employment…I do not believe that measures which truly enrich the country will injure the public credit…It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.

Add health-care costs to that last line and it’s perfect.

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5 Responses to VSP Historical Trip; also Keynes: “Look after the unemployment, and the Budget will look after itself.”

  1. Barry Thompson says:

    Love this post. Well done.

  2. Worth mentioning that Lionel Robbins later called his support for austerity during the depression the biggest mistake he ever made.

  3. Fake Herzog says:

    ” even though the second view has been routed in Economics 101 classes.”

    I’m confused — I’ve taken Econ 101 and I never learned this Keysenian ‘wisdom’. I thought everyone has read their Friedman/Schwartz and knows that the Great Depression was a monetary problem? I guess you never got the memo. I suggest you start reading Scott Sumner’s blog here:


    and here:


    and here from a Sumner disciple:


    Also — what British austerity? Their government spending is just as big and bloated as ever…

    • reason says:

      Yeah, but unfortunately, as we are now finding, the monetary channel doesn’t always work well. Notice your own headline “nominal-spending-determines-outcomes….” – notice the “SPENDING” bit. It’s not quite the same as MONEY. Velocity is not a constant. This doesn’t mean that Scott Sumner is not correct that it might make sense to target nomical GDP rather than inflation. And Schwartz/Friedman doesn’t really have much credibility – it turns out it IS rather hard to control the money supply (money supply is endogenous) – that is why central banks everywhere have gone away from it.

  4. Tom says:

    To Fake Herzog:

    This is kind of the point. Britain’s austerity is reducing spending between 20-25% on everything except the NHS (which is being subject to partial privatization), and yet the government’s deficit remains, tragically, unchanged. You can’t cut your way to a balanced budget. Government spending has a fiscal multiplier effect. For every dollar spent, it can equal up to six dollars in additional economic output. By reducing spending in a weak economy, you also reduce economic output, which in turn reduces tax revenues from lost business and income taxes, which in turn increases your deficit.

    Britain’s finances do require reform, but the time to spend is now and the time to cut is later, when the economy is strong enough to shoulder the burden. Until unemployment drops, the economy remains weak. Because of high unemployment, consumers are afraid of what may happen to their own jobs and are simply not spending their money, choosing instead to save or pay down their debts: http://www.oregonlive.com/finance/index.ssf/2011/09/how_do_you_pay_off_many_debts.html

    For economies such as the US and the UK, this only exacerbates things, since we are consumer-drive economies. Until consumers start spending, businesses won’t hire, since demand (not political pronouncements, tax credits, or deficit hawkery) ultimately determines their staffing decisions. If we can get consumers to spend, then the economy can take off again and governments can ease off on the money supply and implement long-term fiscal reforms. But, right now we need direct tax credits to workers (especially the poor and middle class, who spend much of their paychecks) and government programs to increase employment and spending, especially in construction which was so hard-hit by the Great Recession. It worked in the 1930s and 1940s, why won’t it work now?

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