Nick Macpherson’s – Permanent Secretary to The Treasury – speech to the British Academy on the General Theory at 80: Keynes and Treasury policy-making today. 4 Feb 2016
the mythical “shovel ready” infrastructure project is precisely that: a myth. This is nothing new. The Treasury made the same point in the 1930s. But it is more of a problem today given the inexorable growth in planning law and wider regulation. Keynes’s suggestion in Chapter 10 of the General Theory that “the Treasury fill old bottles with bank-notes, bury them…in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise…to dig up” would be the victim of many a health and safety regulation and environmental impact assessment today. In short, the lead times for getting public investment up and running are long and variable….I’d like to think that Maynard Keynes – who understood markets as well as anybody – would have approved of what the Treasury has done since 2008.
Quite a shocking statement given the treasury has been directly responsible for that ‘inexorable growth in planning law’ all having the opposite effect of that intended slowing down plan making . As I have long said the Government seems to have given up using the ‘Build What You Like Where you Like’ as a hypothetical not to be used to get planning seeded up and is left with a ‘Build What You Like Where you Like’ reality. But even this extreme situation has only got us to half way to the houses we need and ministers are clear it has hot its maximum buffers, the problem is with the structure of the house building industry which IS something the Treasury can do something about with a tool within its arsenal it has forgotten how to use – tax.
Notwithstanding the planning issue in economics terms I took great delight, as someone whose weird hobby is the history of economic theory, in the speech, as almost every sentence contains a classic fallacy which Keynes spent 20 years (in the end successfully though temporarily) persuading the Treasury on. In the end having to write a whole rewriting the conventions of economic theory to overcome his most stubborn protagonists of the ‘Treasury View’ – the General Theory being a book effectively written as a long letter to the Treasury stating – look even if we accept what are saying is right fiscal policy will still work – because your underlying economic theory is wrong. Keynes succeeded – Hawtry, his great friend & who originated the Treasury View admitted in the 1950s hat Keynes was right on this point – Fiscal policy had and did work, Hansen – who read rival theories in original french and German that even Keynes had not seen and did not become standard till after his death, at first fascinatingly dismissive became his greatest propagandist, hey even Hayek admitted he was (partially) wrong.
I could go through the speech line by line but im sure as we speak Lord Skidelsky and Bill Keegan are writing book length rebuttals.
So ill pick on the shovel ready bit. The famous digging up milk bottles case was designed to meet the argument advance in the 30s and now called the ‘Shovel Ready’ (myth). Keynes didn’t believe it but was arguing that even if you we accept the premise that there are no shovel ready projects if you just give people shovels – zero capital/infrastructure growth – my theory still works. Incrementally the New Deal did just that effectively, with a successful programme of ‘Digging for Dollars’ an archaology programme, that Keynes must have had in mind. This also became the origin of the term ‘Shovel ready’ as within weeks shovels were at the ready. You can read about it in Shovel Ready: Archaeology and Roosevelt’s New Deal for America 2013 Bernard K. Means.
‘Favored were projects deemed as “shovel ready” because they could quickly provide jobs to laborers desperately seeking employment.’
The ‘there is no such thing as shovel ready’ mantra arises from a famous 57 page memo from Larry Summmers (in reality he commissioned his follow Keynsian Christina Roma to write much of it – and Obama clearly read every word. The Memo looked at four options 550-890 billion dollars, so you can understand why it was so carefully read.
Summers favoured 800 billion stimulus – towards the top end – of that estimates but about half of the level of additional spending he had calculated was needed to ensure recovery. So why this level?
Because $225 billion of “actual spending on priority investments” is all that the government could get out the door over a two year time span” (and so the rest had to be made up of tax cuts, aid to states, etc.). Seemingly overiding Christina Romer (Chair of the Council of Economic Advisors) – who fampously wrote a long article after she stood down saying how the higher figure could have staved off the Great Recession.
However as ever getting nearly a trillion of stimuls of of the door proved challenging
Obama’s Council on Jobs and Competitiveness met today in Durham (june 2011), NC at Cree Inc., a company that manufactures energy-efficient LED lighting. One of the Council’s recommendations to President Obama was to streamline the federal permit process for construction and infrastructure projects. It was explained to Obama that the permitting process can delay projects for “months to years … and in many cases even cause projects to be abandoned … I’m sure that when you implemented the Recovery Act your staff briefed you on many of these challenges.” At this point, Obama smiled and interjected, “Shovel-ready was not as … uh .. shovel-ready as we expected.“ The Council, led by GE’s Jeffrey Immelt, erupted in laughter.
Such subtleties of pragmatism have been lost in how the phrase has been pilloried as a talking point.
He was not saying abandon 800 billion as surplus, simply that they take time to get out pof the door.
As he said a year earlier to the NYT
He realized too late that “there’s no such thing as shovel-ready projects” when it comes to public works.
I.e. they take time. The Stimulus was successful, saving 2.5% of GDP compared to Gideon’s disastrous austerity in the UK, making everyone in the UK many thousands of pounds worse off compared to had a sensible spending policy been pursued.
So stimulus on infrastructure was balanced with quick win projects such as ‘cash for clunkers’ where the’no such thing as shovel ready charge is completely irrelevant. Equally you can cut taxes as stimulus not just raise spending. MacPheson had no argument for this, arther he was spouting the same kind of false history as talk radio bigots such as Rush Limbaugh, well below the standing of someone of his status.
The argument though is just bad economics and based on a fallacy. Its not that on any one day when you increase infrastructure spending the planning for all new projects commences. At any one time there is a stock and flow of projects at various stages of preparation. It is like a forest where in any one year you chop down the most mature trees. Any well managed agency will keep a schedule of projects including some which fall just below the benefit:cost ratio to be funded this year, but may be funded if new capital funding comes forward. Once enacted it will take a while for shovels to hit the ground, but this is no reason not to do it at all. Silly argument treasury, if we need to do it and at the ZLB shows a positive return to treasury standards we should fund them.
The problem is the UKs stodgynous in not keeping a schedule of major projects that are needed in the housing field. Nick’s argument is the treasury hasnt done its job in the past so is unable to do its job in the future. No wonder Keynes got so frustrated with its pathological stupidity and laziness.