This is not a blog about economics or economic theory, though from time to time, I do comment on economic policy issues. I do so as a dilettante, with just enough training in the field to know my limitations. When I have commented, my focus has been on austerity policy. And the reason has less to do with theory than politics. Perhaps I should explain.
Going back to 2008, there has been an ongoing debate about how to cope with the financial crash. Even though the crash presented a new and urgent situation, the debate about what to do by and large, continued the thread of a political debate about the size of government and its spending. Fortunately, the Bush Administration held its nose and did the right thing, saving the US banking system and preventing an all out meltdown, They deserve credit for that.
But even then, some argued that government action distorted markets and made the problem worse. I thought then and think now that this is beyond the pale - a chance to score political points rather than enhance the nation’s welfare. My comments have followed Paul Krugman, who argues that if anything, the US government policy response was too small. Unemployment rather than deficits should have been the main focus.
Well, one need not be a genius or even a PhD in economics to understand that attempting to balance budgets during a recession is a fool’s errand. There are no good examples of this working and there are good examples of austerity not working. But that is exactly the policy mix that austerians have pushed and pushed and pushed - despite the growing and growing evidence that austerity brought no economic benefits and turned massive unemployment into massive long term unemployment. Never mind! One must balance the budget!
More recently, there has been a bit of a wake up call when it turned out that data relied on by austerians to prove that we must cap the debt was the product of a coding error. Oh dear! So, is it yet time for a reckoning?
If you don’t think so, consider the recent behavior of prominent austerian Niall Ferguson. In response to a question at an investment conference, Prof. Ferguson blurted out that John Maynard Keynes (who first theorized about the liquidity trap) didn’t care about the future. And he had no such care because he was gay and childless. Outrageous! Ferguson’s gay baiting is offensive enough. But suggesting that Keynes didn’t care about the future is the economic policy equivalent of saying that the Pope is Muslim.
Austerians like Ferguson have argued for years that our responsibility to the future requires an “either, or” approach to spending. Either we spend now and pile up debt that our children must pay or we are responsible to our children and pay down debt, supposedly freeing them from the burden. Keynes and others pointed out that this is a false choice. During a liquidity trap — as we have now — austerity does not lead to prosperity in the future. It is the irresponsible choice, not the responsible one. In this weird policy context, the government is the only actor on the stage that can keep people employed until markets wake up again. And government can borrow very cheaply, paying back the debt when society can better afford to do so.
Perhaps there is a silver lining to this rather sordid event. To his credit, the good professor apologized for his comment. But we might consider as well that this incident shows that he has no better arguments to offer.
In other words, this “emperor” undressed himself in public.