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Don’t forget about private debt

June 19, 2012

Niall Ferguson is one of those celebrity historians loved by the BBC, a Man With Gravitas who teaches at a well-known university and looks good in chinos on telly. But when he tries to do economics, he’s rubbish.

In the first of his Reith lectures today about institutions and the debt crisis, the Glaswegian claims to have found the “heart of the matter… the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn.”

He reckons our kids are going to pay for the fast-living of the current generation. It’s an old argument aired by lots of people, like John Kay in the Financial Times a couple of months ago.

Anyone who claims to have identified a single explanation for our economic problems is like one of those bores you meet at the bar who claim that the immigrants are to blame (actually Ferguson comes close to arguing this in one of his books, but that’s another story). It’s all down to the banks/ the NHS/ aliens/ benefits claimants.

There is no heart of the matter. A host of explanations underlie the crisis: the spontaneous tendency of our economic system to build up bubbles; globalisation; the failure of the system of global economic regulation after the war; the unleashing of the financial sector in the 1980s; the abolition of laws designed to separate the investment and retail arms of banks; poor financial supervision; the Iraq war; Blair and Bush dipping into their pockets too much.

But no, Ferguson thinks it’s all about the kids. After arguing that we should probe deeper than just the debate over government debt, which he thinks has led to a pointless battle between austerity and stimulus, he focuses almost exclusively on government debt, completely overlooking the private sector as if only spending on education and health is responsible for the national overdraft.

All the evidence shows that in recent decades companies splurged more unsustainably than the government did, and that the private sector bears at least as much responsibility for the crisis. Private sector debt is now about 450 per cent of Gross  Domestic Product, four times public debt even on the most pessimistic measure.

Financial sector debt ballooned much faster than government, personal or non-financial debt, and is now higher than all three. By the time the crisis hit the UK financial system had become the most highly leveraged of any major economy, and it remains so.

Ferguson ignores the links between private and public debt. Much of that onslaught of financial-sector borrowing (the light green bar on the graph) was gambling on dodgy derivatives and dubious mergers. When the British government bailed out the banks it socialised the cock-ups made by Fred Goodwin et al. In other words, we all paid.

Public and private borrowing can’t be analysed entirely separately. It’s like pouring water into a glass already part-full: the new liquid is inseparable from the old. The state implicitly acts as a guarantor for companies deemed too big to fail. When public borrowing falls, companies tend to step up their investment, and vice versa. So when Goodwin homes in so unerringly on the government, he’s hit the wrong target. National debt has to be seen in aggregate.

In another outburst of unoriginality Ferguson claims to have identified a new fear for the world’s public finances in coming years: welfare payments and health spending! Wow, I’ve never heard that one before. In the UK, the bank bailout in one blow cost approximately eight years’ worth of NHS funding. A great way of ensuring a poor future for our kids would be to continue allowing free rein to the financial sector.

Even Ferguson’s statistics are selective. He quotes the International Monetary Fund, which of course estimates public borrowing to be in a worse state than Whitehall does, at 88 per cent of GDP. According to the UK government, net British debt excluding the temporary effects of the bank bailouts is 66 per cent of GDP. (Include the cash forked out to help our financial friends and the figure is 148 per cent of GDP, although the taxpayer will hopefully earn a lot of that money back when the banks are sold.)

In the end Ferguson plumps spectacularly for a particular side of the debate which he professes to have found so pointless. He thinks not only that we should cut welfare payments but that we should legally limit deficits, publish government liabilities versus assets, and prepare accounts showing what future generations will pay.

In other words, more austerity and more pressure on the poor, just at a time when the economic downturn is so severe that an absence of growth is hammering tax revenues and raising poverty. The following graph shows that government debt, although already rising, spiralled higher after the crisis in late 2007 as the economy slowed and tax revenues fell. The downturn in growth contributed to the debt  more than spending did. If we want to look after our kids’ futures, we should restore growth first in order to tackle the debt.

It’s not that public debt isn’t a problem or that we should foist unnecessary borrowings upon our children. It’s that Ferguson’s analysis is about as balanced as a North Korean political broadcast — a situation which is all the more sad given that the BBC endows him with authority.

Lord Reith thought that broadcasting should be a public service which enriches the intellectual and cultural life of the nation. The first Reith lecturer Bertrand Russell, and more recently philosopher Michael Sandel and Aung San Suu Kyi probably did “advance public understanding and debate about significant issues of contemporary interest”. So far, Ferguson hasn’t.



It’s not just me that thinks Ferguson is a rubbish economist. Jonathan Portes, Director of the National Institute of Economic and Social Research, tweeted “Ferguson not credible on economics. Analysis incoherent.” That follows his earlier link to an article by Ferguson published in the FT in 2009, which I remember, and in which he claims to have won a debate with Paul Krugman, arguing that “this is a big recession, comparable in scale with 1973-1975” rather than the 1930s. After three years of stagnation that view now looks silly, with most serious commentators accepting that a repeat of the great depression is worryingly possible. Britain’s economy basically hasn’t grown at all since that statement was made.

The chino-clad historian continues: “Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next.” Er, it didn’t. Inflation is falling.

“In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates.” Nope. Wrong there too. Interest rates remain at rock-bottom because of worries about the growth outlook.

His inaccuracy isn’t just a fluke. Krugman was right in almost everything he said, partly because, for all his faults, he at least has a reasonably coherent analytical framework. Ferguson is just a pop-dismalist seizing on current events to grab attention. We should ignore him.

4 Comments leave one →
  1. June 19, 2012 9:24 pm

    “But when he tries to do economics, he’s rubbish.”

    I know you know this, and partially alluded to it, but just to clear up any confusion: he’s terrible at history, too. This was demonstrated when he was corrected by Al Murray (a comedian) in an episode of The One Show.

    • June 20, 2012 8:44 am

      Thanks. Will have a look at that. You’re right. He’s not a great historian either. All that West versus East stuff is so unoriginal.

  2. June 27, 2012 11:52 pm

    This is a great essay, I too am frustrated by the near-senile bias shown by many of the darlings of the Right (along with Toby Young and others) in their economic analysis. Hopefully sane and sober analysis such as this will win out, my fear though is that there is something of a propagandist tide of Olympic and Jubilee hysteria that is pushing this type of debate further from the mainstream media than it should be allowed to get.


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