We had a debate about whether governments should respond to recessions with deficit spending or austerity.
That was the debate we had. And what’s interesting about this particular moment is that while Mr Grabell is writing about what did and didn’t work in the stimulus, and Mr Obama is staying away from the topic for political reasons, out there on the barricades what’s happening is that the entire argument that governments should engage in austerity appears to be collapsing.
Item 1: Over the past month, Paul Krugman, Brad DeLong, and Simon Wren-Lewis engaged in an interminable duel with Tyler Cowen, Scott Sumner, sort-of Karl Smith (occupying as usual an esoteric position not easily placed on the ideological grid), and probably some other people I’m forgetting—over an old argument by John Cochrane claiming that the multiplier effect of government stimulus spending probably ought to be zero.
Where does one even begin? The writer (initials M.S.) clearly implies that I took John Cochrane’s side in a debate over the multiplier effect of government spending, and that I am some sort of proponent of “austerity.” That must seem comical to readers of this blog, as I have spent three years relentlessly advocating stimulus. If you actually read the article M.S. links to, you’ll see that I am quite critical of Cochrane’s argument. Indeed the entire post has nothing to do with the question of whether the multiplier is positive, rather I simply pointed out that both sides of the debate were using bad arguments.
But what most bothers me isn’t the inaccuracy, but rather the re-writing of history. The entire post seems devoted to the proposition that the Keynesians have been right and the anti-Keynesians have been wrong. And yet as far as I can tell us market monetarists have been right about everything the Keynesians were right about, and plenty they missed. Here are some examples:
1. We consistently argued that the US was unlikely to face significantly higher interest rates or inflation.
2. We consistently argued that the stimulus was inadequate.
In fairness, Keynesians like Paul Krugman were also completely right on these points, and many anti-Keynesians were wrong. But the anti-Keynesian universe is large. If I looked at the entire anti-monetarist universe I could also find plenty of ignorance.
I’d also argue that we were ahead of the curve on some very important points:
3. In late 2008 and early 2009 market monetarists were loudly calling for more monetary stimulus. Later others came around to that view.
4. In late 2008 and early 2009 we pointed out that interest on reserves was contractionary. Later others came around to that view.
5. In 2009 we complained that Obama was waiting too long to fill empty Fed seats. Later others came around to that view.
6. We argued that expansionary monetary policy initiatives would tend to boost asset prices. Others initially denied that, then later came around to that view.
7. We insisted that inflation was the wrong target and that NGDP, level targeting, was needed. Several prominent Keynesians later endorsed that policy.
Overall, we were right on the things the Keynesians were right about, and ahead of the curve on other points. And let’s not forget that President Obama staffed his administration with Keynesians, and told us that unemployment would rise to 9% if we didn’t pass his stimulus program. In fairness, smart Keynesians like Krugman knew their plan had flaws, but just imagine what Keynesians would say if we’d had a monetarist president for the last 3 years, and the same path of unemployment. Do you think they’d make nuanced arguments separating out “good monetarists” and “bad monetarists?”
Later the article quotes John Cochrane making some eminently sensible classical arguments for countercyclical deficits, such as tax and consumption smoothing, or investment projects being judged on their (cost-benefit) merits, and we’re told that he has somehow thrown in the towel, and accepted that fiscal stimulus is a good way to boost GDP. Sometimes I think Keynesians are so in love with fiscal stimulus that they assume any argument for a budget deficit is ipso facto an argument for fiscal stimulus.
The Economist article is also highly selective in its use of data:
Americans are starting to recognise that our recovery is further along than other advanced countries’ in part because the way we handled the financial crisis wasn’t really so awful. And that includes the stimulus.
I’m not quite sure what this means. We are certainly further along than the periphery of Europe, but I don’t see what that shows. We are less far along than northern European members of the eurozone like German, Austria and Netherlands. But the US has its own currency, so we really ought to be compared to other developed countries with their own currency. How about Japan, Australia, Canada, Britain, Sweden, Poland, etc? Japan’s a special case that looks really good with unemployment and really bad in terms of growth. We aren’t doing as well as Canada, Australia, Poland and Sweden. We are doing better than Britain, but then Britain is one of the few countries that actually did even more fiscal stimulus than the US. Indeed more than just about anyone. So I don’t see how Britain’s poor performance strengthens the Keynesian case.
I haven’t seen Keynesians write down any objective formula for measuring the degree of fiscal stimulus. Admittedly it’s not easy, as the deficit is distorted by the business cycle. But when I read the pro-Keynesian pundits I constantly come across arguments that are supposed to simply be accepted on faith. I’ve seen Keynesians argue that fiscal stimulus in Japan worked, and I’ve seen Keynesians argue that fiscal stimulus in Japan failed, and I’ve seen Keynesians argue that it only appears that fiscal stimulus failed in Japan, because they really didn’t do much stimulus. If even the Keynesians can’t seem to get their story straight on Japan; how am I supposed to judge how effective the policy has been? All I know is that their national debt as a percentage of GDP has soared much higher during recent decades, and all that stimulus produced precisely 0% nominal GDP growth in 19 years. And yet we’re being told that fiscal stimulus is “obviously” effective?
It’s really annoying when Keynesian writers keep implying that only fools think fiscal stimulus is a bad idea. The entire concept of fiscal stimulus fell out of favor in the best universities for several decades. The only argument I’ve ever seen for reviving it is that monetary stimulus is ineffective at the zero bound. But many of the most dogmatic proponents of Keynesian economics, the ones who in early 2009 were telling their readers that there was nothing the Fed could do at the zero bound, are now loudly and relentlessly bashing the Fed for not doing more. That’s right, there’s only one good argument for fiscal stimulus, and even the proponents of fiscal stimulus don’t seem to believe it.