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?
- 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
- Without massive debt write-downs, no reasonable solution to the current mess seems feasible. Hard to disagree on that as well
- 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:
- 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).
- The eurozone structural problems made it fragile, and the crisis exposed them.
- 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.
- 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…