Home > EMU Crisis, Fiscal Policy, Global Imbalances, Growth > Living in Terror of Dead Economists

Living in Terror of Dead Economists

Kenneth Rogoff has a piece on the Project Syndicate that is revealing of today’s intellectual climate. What does he say?

  1. The eurozone problems are structural, and stem from a monetary and economic integration that was not followed (I’d say accompanied) by fiscal integration (a federal budget to be clear). Hard to disagree on that
  2. Without massive debt write-downs, no reasonable solution to the current mess seems feasible. Hard to disagree on that as well
  3. Some more inflation would be desirable, to bring down the value of debt. Hard to disagree on that as well.

In a sentence, intra eurozone imbalances are the source of the current crisis. Could not agree more…

Unfortunately, Rogoff does not stop here, but feels the irrepressible urge to add that

Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems […] To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion. This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.

The question then arises. Who ever thought that a more expansionary stance in the eurozone would solve the French structural problems? And at the opposite, why would recognizing that France has structural problems make it less urgent to reverse the pro-cyclical fiscal stance of an eurozone that is desperately lacking domestic demand? Let me try to sort out things here. This is the way I see it:

  1. European woes have deep sources. Institutional developments have led to a suboptimal currency area that endogenously created imbalances; as of today only extreme solutions seem to offer a durable solution: Either we cross the ford towards a fully fledged federal entity, with a federal budget (the United States of Europe, just to be adamant); or we go back where we were a few years ago: a common market, in which each country retains its own monetary and fiscal sovereignty (we could call it the British View).
  2. The eurozone structural problems made it fragile, and the crisis exposed them.
  3. Disastrous management, and widespread adherence to the Berlin View have imposed harsh austerity to the periphery and to the core alike, worsening the textbook Keynesian demand slump.
  4. There is little hope that the aggregate fiscal stance in the eurozone turn positive (thus fighting the recession), if  core countries do not make a u-turn in their fiscal policies

From his Project Syndicate piece I infer that Rogoff would broadly agree with me on items 1-2. But I do not see why this would lead to deem appropriate the fiscal stance Europe is following today. Claiming that we need to sustain aggregate demand, here and now, in no way impacts on the diagnosis of the structural problems of the EU (even if I suspect that I would not have the same solutions as Rogoff for these problems). If anything, given that the fiscal expansion would mostly happen in the core, it would help, not hamper the necessary rebalancing between core and periphery.

The question remains of why we keep observing eminent economists that bash Keynesian policies even when this is inconsistent with (or irrelevant to) their general argument . Barring bad faith, I can’t find any other explanation than an ancestral aversion to Keynes and to its policy prescriptions (a couple of years ago Paul Krugman coined the term of Keynesophobia): whatever argument you are making , just find a way to slip into it a couple of paragraphs claiming that Keynesian policies would not work. This will keep you safe from hell. Could this also explain why a few excel cells were forgotten in a formula?

If that is the case, discussing it is not a job for me…


  1. Mark A. Sadowski
    May 25, 2013 at 10:12 pm

    Eurozone real GDP (RGDP) is down by 3.1% from 2008Q1 to 2012Q4 despite real government spending being up by 3.8%. U.S. RGDP is up by 3.0% despite real government spending being up by only 0.9%.

    The eurozone as a whole has been in recession for a year and a half now, longer than the 2008-2009 recession. The gap between the eurozone unemployment rate (12.1%) and the US unemployment rate (7.5%) is now the highest it has been since 2000.

    Individually every single country in the eurozone, with the exception of Estonia, Germany and the Slovak Republic, has had a second or third recession since 2008.

    The difference is clearly monetary policy, as the Fed has increased its monetary base by 245% since August 2008 and the ECB has increased its monetary base by only 48%. (The ECB has never done QE.)

    This is even more apparent when you look at the breakdown of eurozone government spending changes by country. Here is the change in real general government final consumption spending from 2008Q1 to 2012Q4:

    1.Luxembourg 17.5%
    2.Cyprus 15.3%
    3.Germany 9.1%
    4.France 7.5%
    5.Netherlands 6.8%
    6.Estonia 5.4%
    7.Belgium 5.3%
    8.Slovak Republic 4.0%

    eurozone (EA17) 3.8%

    9.Austria 3.3%
    10.Slovenia 3.0%
    11.Finland 2.0%
    12.Spain 1.7%

    US 0.9%

    13.Italy (-3.4%)
    14.Portugal (-5.2%)
    15.Ireland (-16.5%)


    Figures for Greece and Malta are not available but Greece is probably down by about 20%, and Malta is probably up a few percent.

    The point is, it is silly to think that the problem is a lack of core eurozone government spending. The problem is a lack of ECB monetary stimulus, which given the relative tightness of German labor markets, would almost certainly lead to a rebalancing through higher German wages.

    This is also something that Paul Krugman has written about:


  2. May 25, 2013 at 10:37 pm

    “Some more inflation would be desirable, to bring down the value of debt. Hard to disagree on that as well.” Hard for you and hard for me, but the idea that higher inflation can ever be better is anathema to most. It is radical enough that some irrelevant Keynes bashing might be resquired to keep VSP status.

    Keynes or Krugman ? For years Krugman listed Rogoff as first on his list of Reasonable an reasonably honest Republicans (he didn’t mention any others — I suspect that Rogoff was the whole list). After R&R responded to Herndon et al, Krugman denounced them. I think Rogoff might be so angry about this that he just needed to bash a straw man whom some might imagine stands for Krugman.

    Keynesophobia is an important public mental health problem, but Krugman derangement syndrome is almost equally prevalent.

    More generally, debating with straw men is not automatically followed by widespread mockery. I think it should be. Thanks for doing your part.

  3. Ben Johannson
    May 26, 2013 at 1:06 am

    Rogoff made one long argument attacking a position that, to my knowledge, no one is holding. Simply because someone believes austerity is counter-productive does not mean they believe “Keynesianism” (or Rogoff’s particular interpretation of it) will fix all the eurozone’s ills. What anti-austerians have been arguing is that stimulus and allowing automatic stabilizers to work will quickly return these countries to growth.

    There are many on the expansionary policy side who were warning about serious structural problems in the monetary union long before Rogoff and Reinhart demonstrated any awareness of it.

    But as you say Keynes is now a shibboleth to many who oppose counter-cyclical policies.

  4. May 26, 2013 at 5:34 am

    “…whatever argument you are making , just find a way to slip into it a couple of paragraphs claiming that Keynesian policies would not work. This will keep you safe from hell. Could this also explain why a few excel cells were forgotten in a formula?”

    Is this a suggestion that the omission was deliberate instead of inadvertent? If so, we’re talking academic fraud here. Harvard should empanel a review board or go through whatever procedure is necessary to determine whether Rogoff should continue at Harvard.

    If one is unwilling to go to the logical conclusion, one should not insert such an insinuation in the first place.

  1. May 25, 2013 at 6:19 pm
  2. May 31, 2013 at 5:07 pm

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