Is the unusually hot summer that we are sweltering through causing a sudden outbreak of nonsense to be written by moderately illustrious economists this week? It all seems to have started with Allan Meltzer, coming from the hard right in Tuesday’s Wall Street Journal, whose outburst provoked this response from me. Then, hard on Meltzer’s heels, there was Martin Feldstein, coming from the moderate right, with this bit of ill-informed pomposity. Marcus Nunes provided a brief, but well-targeted, response to Feldstein’s pontification.
Now, today, we have Jeffrey Sachs, coming from the center-left, in the Financial Times, posing as the voice of reason, rising above the obsolete debates between the irrelevant ideologies inherited from the 1920s and 1930s.
The two sides of the debate live in timeless and increasingly irrelevant ideologies. The prescriptions of free market economics peddled by the Republicans – slash taxes and spending, end financial and environmental regulations – are throwbacks to the 1920s. Today’s free market ideologues are uninfluenced by the lessons of recent history, such as the financial crisis of 2008 or the devastating climate shocks hitting the world with ever-greater frequency and threatening far more than the economy. Their single impulse is the libertarianism of the rich: the liberty to enjoy one’s wealth no matter what the consequences for the economy or society.
The other side is also wide of the mark. In Paul Krugman’s telling, we are in the 1930s. We are in a depression, even though the collapse of output and rise of unemployment in the Great Depression was incomparably larger and different in character from today’s economic stagnation.
In Krugman’s simplified Keynesian worldview, there are no structural challenges, only shortfalls in aggregate demand. There is no public debt problem. There is no global competitiveness challenge, since “competitiveness” is a myth when applied to national economies. Fiscal multipliers are predictable, timeless, persistent, and large. All growth reversals can be solved through larger deficits. Politicians can be trusted to design short-term stimulus spending programmes of hundreds of billions of dollars. Tax cuts are about as good as increases in government spending, and short-term boosts in spending are about as good as long-term public investments. Not one of these conclusions stands scrutiny.
Both Krugman and Brad Delong, not surprisingly, are miffed by Sachs’s attack on the Keynesian model as irrelevant to today’s problems. Krugman defends the IS-LM model as a good way of identifying the chief problems preventing the economy from recovering the ground lost since the 2008 downturn. Krugman believes that the key contribution of the IS-LM framework is to focus attention on the zero-lower bound problem. I agree that that is an important problem, and IS-LM identifies it, but I am not so sure that IS-LM is the best way to think about it. In my paper “The Fisher Effect under Deflationary Expectations,” I think that I showed that the simple Fisher equation may provide at least as much insight into the zero lower bound problem as the IS-LM model. And I have also complained, as Sachs does, that our thinking about what to do about our current difficulties should not be restricted to the Keynes-Hayek stereotypes in which economic debates are now so often framed.
But my point in this post is not to argue with Krugman, it is rather to agree with him that Sachs is way, way off base in his argument in today’s Financial Times. Does Sachs really think that a 4% annual rate of growth in nominal GDP since the end of the 2008 downturn is sufficient to support a recovery? Has there been any recovery since the Great Depression that has been associated with a rate of growth in nominal GDP of 4%? I don’t think so. If Sachs thinks that 4% nominal GDP growth is adequate, is he prepared to argue that macroeconomic policy should not aim at a faster rate of growth in nominal GDP? Actually I would be shocked if Sachs does think that 4% growth is adequate, but If he does, then he needs to explain why, rather than engage in the pretense of rising above an irrelevant debate between those who are in favor of policies skewed to favor the wealthy and those who simply want to increase the size of the federal deficit and don’t care about the size of the debt burden. And if he doesn’t think that 4% nominal GDP growth is adequate, then he needs to support policies that would raise nominal GDP growth. Those policies need not be Keynesian policies, but he can’t just ignore the question as he does in today’s very unhelpful contribution to the discussion of economic policy.