Anti-Keynesian Revisionism, by Paul Krugman, in NY Times: Hmm. A number of people who attacked Keynesian analysis vigorously seem to be in the process of backing off, which is good. But they also seem to be in the process of rewriting history, specifically the history of their own positions. So just a few notes about what actually happened.
Niall Ferguson now says,
I think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was. My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it’s no longer credible. But I didn’t think that point was going to be this year or next year.
What he said then:
After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them. It’s certainly not going to be the Chinese. That worked fine in the good times, but what I call “Chimerica,” the marriage between China and America, is coming to an end. Maybe it’s going to end in a messy divorce.
No, the problem is that only the Fed can buy these freshly minted treasuries, and there is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates, which will also have an effect on mortgage rates—the precise opposite of what Ben Bernanke is trying to achieve at the Fed.
Oh, and notice that his argument wasn’t about solvency at all.
John Cochrane now says,
This is all ridiculous, of course. No, I — and certainly Bob Lucas and Gene Fama — am not making the “Say’s law” fallacy. We all understand the difference between identities, budget constraints, and equilibrium conditions.
What he said then:
Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both1 . This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.
The big winners, apart from the American public?: real business cycle theory.
Oh well. I guess we’ve always been at war with Eastasia.