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| Niall Ferguson is Wrong |
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|
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| Written by Giles Wilkes |
| Wednesday, 03 June 2009 20:33 |
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I ought to get little credit for originality in using this as a title. People seem to be queuing up to point out the errors in Niall Ferguson's piece about the wrongness of Keynes and fiscal measures to combat recession. Matt Yglesias for one takes offence with the statement that "a deficit this size has not been seen in the US since the second world war”. Martin Wolf more comprehensively takes apart the melodramatic implication that a rise in US yields to 3.6% indicates a 'quailing' bond market. And at least three letters to the FT take issue with his position. What is his position? Well, it gets stuck into something I've touched on before: whether fiscal stimulus can work. Paul Krugman's provocative piece about the Dark Age for Macroeconomics found an opponent in Prof Ferguson - who now, quite amazingly, thinks his views are proven right by the rise in bond yields to 3.6%. Yup, long term borrowing at 3.6% proves that fiscal stimulus crowds out private investment so thoroughly that the stimulus is negated. It is probably this 'wonkish' piece by Paul K that really riled him. To concede some positions: it is true that hard-core Keynesians after the War mistakenly thought that macroeconomic management of demand through the government deficit could keep the economy at full employment forever. There was a trade-off between inflation and unemployment: if you wanted the latter lower, you squeezed out some of the former. For them, the 70s was a shock. With inflation raging, extra government demand did drive out private demand. Under Thatcher and Reagan, consolidating government budgets happened while the economy boomed - although important social goals were lost in the mix, and plenty of UK workers never worked again. But Professor F understands that this is not the 80s. And he surely knows unlike some that the S&P hint of a downgrade does not show that the UK is heading for banana-republic status. But he seems to think that just because we have not had Depression-style collapses, Keynes' insights about insufficient demand, too much saving, and consequent deflation dynamicsall fall down. This is very simple-minded. There was only one Great Depression. But it was not the only time that government demand could help out an economy. Depression economics is not just about scale. It is about how the economy is falling -whether through deflation, with interest-rates bound at zero, and growing economic capacity or not. Circumstances matter. Those circumstances threatened last autumn. Furthermore, like many others, Professor F ignores the counterfactual. What would the growth rate of the US - and the world - have been had Hank Paulson gone for a balanced budget last year? If such a thing had been possible, my guess is -10%. Plus a total collapse in everything else - house prices, banks, businesses. The fiscal deficit was necessary. (the CEPR is does a more analytical defence here) I don't claim that this debt will be easy to manage. The critical moment will be when the economy is recovering, investors have a better choice of instruments that yield more than 1% real terms, and the government has to raise taxes to capture some of this uplift and start repaying. Personally, I think the real plaudits should go to the world leaders who manage that one - splurging during the downturn is a relative no-brainer. But little noticed by the debt-doommongers is that the last UK long bond auction went extremely well. People still want these instruments. As Dillow points out, there is still a lot of saving out there. The UK needs just 2.5%. And one consequence of the private sector deleveraging is that they save more - or the banks who have the debts repaid have to put their money somewhere.
Now google "cost iraq war trillion" to check up on that hypothesis. I am amazed he can now lecture people on the lessons of history. UPDATE: Daniel Gross also thinks Ferguson is wrong: "this instance, the Fergusonians lack credibility. H.L. Mencken tagged the Puritans as people possessed of the "haunting fear that someone, somewhere, may be happy." Ferguson represents a strain of intellectual Toryism bedeviled by the haunting fear that someone, somewhere may be getting social insurance. ... Their solution to the problem of large deficits always seems to be to cut entitlements and never to raise taxes." |
| Last Updated ( Friday, 05 June 2009 06:45 ) |



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