There were three posts yesterday. The first was “The Gods Themselves Contend In Vain:”
The basic idea behind Keynesian support for stimulus/opposition to austerity under current conditions is that when private demand is weak and monetary policy is up against the zero lower bound, there is no offset to changes in government spending. This shouldn’t be a hard concept to grasp — in particular, you would think that anyone posing as an economist could grasp the conditional nature of the statement. But, well … some short takes just from the past few days:
Update: Credit where credit is due: Ferguson has made a full, unqualified apology.
The second post of the day was “Keynes, Keynesians, the Long Run, and Fiscal Policy:”
One dead giveaway that someone pretending to be an authority on economics is in fact faking it is misuse of the famous Keynes line about the long run. Here’s the actual quote:
But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
As I’ve written before, Keynes’s point here is that economic models are incomplete, suspect, and not much use if they can’t explain what happens year to year, but can only tell you where things will supposedly end up after a lot of time has passed. It’s an appeal for better analysis, not for ignoring the future; and anyone who tries to make it into some kind of moral indictment of Keynesian thought has forfeited any right to be taken seriously.
And there’s an important corollary: how you should go about getting to some desired long-run outcome may depend a lot on how you think the economy works in the short run.
I don’t like the framing of this Blanchard-Leigh piece , which simply takes it as a given that we should be engaged in fiscal consolidation even in the short run, and the only question is how much. The truth is that the economics suggests strongly that we should be engaged in fiscal expansion right now. Still, framing aside, Blanchard and Leigh do get at the right issue: because the short-run effects of fiscal policy may differ greatly depending on the state of the economy, appropriate policy depends hugely on where we are right now.
And look, this isn’t hard. The overwhelming fact about our current situation is that conventional monetary policy is played out, with short-run interest rates at zero. This means that there is no easy way to offset the contractionary effects of fiscal austerity (maybe there are exotic ways to do something, but they’re tricky and unproved). And this in turn means that austerity right now is a terrible idea: any fiscal savings come at the expense of reduced output and higher unemployment. Indeed, even the fiscal savings are likely to be small and maybe even nonexistent: lower output and employment reduces revenues, and may inflict long-run economic damage that actually worsens the long-run fiscal position.
The other things B-L mention,like credit constraints, just reinforce this basic point. (By the way: Gillian Tett notes today that consumer spending is now fluctuating dramatically with the timing of paychecks, suggesting a lot of people living hand to mouth. What she doesn’t point out is that this is a world in which Ricardian equivalence, in which expectations of future taxes drive current spending, is even wronger than usual — and fiscal multipliers will be large).
The point, then, is not to ignore the long run; it is to recognize that the boom, not the slump, is the time for austerity, and spending cuts right now are disastrous policy. In the long run we are all dead; the point is to avoid killing our economy before its time.
The last post of the day was “Indecisive Battles (Feeding My Civil War Obsession):”
I’ve been loving the Times’s Disunion blog, partly because it plays into my U.S. Grant obsession. And James Q. Whitman’s post about how battlefield victories didn’t seem to settle anything was definitely interesting.
But — you knew there was going to be a “but” — I’m not sure I go along with his conclusion.
He thinks that the reason Chancellorsville, or Gettysburg, or whatever never seemed to bring an end to the war lay in the moral depth of the conflict. Maybe. But my read of history is that there were many previous wars in which repeated seemingly decisive pitched battles proved anything but. Think of Marlborough versus Louis XIV: four huge battlefield victories, each of which ended up being fairly sterile in terms of the underlying struggle.
I’d also raise a (very) amateur historian’s point: one thing that does seem striking about Civil War battles is how few truly lopsided results there were in terms of casualties. There were plenty of defeats, but very few routs, and often the victors were nearly as devastated as the losers.
And here’s a guess: it was, at least partly, about the rifles.
In the days of muskets and bayonets, cavalry charges could rarely break an intact line of infantry. But once the line was broken, cavalry could and did overrun the retreating army, so that defeat turned into mass slaughter or surrender.
In the Civil War, however, rifles sharply restricted cavalry — yes, a few saber-to-saber confrontations, but mainly horses were just a way to deliver men to where they could shoot their carbines. And this meant that retreating armies generally made their getaway.
The main exceptions all involved Grant, who three times managed to surround an army and force its surrender. And right now (minus 150 years) Grant is beginning the inland march that will eventually pen a rebel army in Vicksburg.
OK, self-indulgence over.