MAY 4, 2013, 1:24 PM

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. Heres 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 Ive written before, Keyness point here is that economic models are incomplete, suspect, and not much use if they cant explain what happens year to year, but can only tell you where things will supposedly end up after a lot of time has passed. Its 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 theres 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 dont 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 isnt 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 theyre 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 doesnt 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.

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May 5, 2013, 8:31 am208 Comments Naive Fiscal Cynicism Expansionary austerity has been refuted and even the IMF sayis that short-run multipliers are big. The 90 percent red line on debt was an artifact of fuzzy math. The bond vigilantes remain invisible, and the confidence fairy refuses to make an appearance. Clearly, austerian economics has imploded (and some prominent austerians seem to be personally imploding too). Yet there remains immense reluctance to draw the obvious policy conclusion, which is not simply that we have too much austerity, but that right now we shouldnt be having austerity at all. As Simon Wren-Lewis says, If you are walking along a path, and there is a snake blocking your way, you dont react by walking towards it more slowly! Yet the orthodox response to the austerian response seems to be at most that we should slow the pace of fiscal consolidation. Why this refusal to follow through? One answer is sheer human unwillingness to admit gross error; we may have been a bit overenthusiastic is an easier thing to say than whoops we did exactly the wrong thing, and killed the economy. But my read of the discussion is that theres also something else going on an attitude that passes for realism, but is in fact sheer fantasy. The line, which you see in discussion all the time, goes something like this: OK, I see that in principle you might want to stimulate now, and pay for it later. But we all know that stimulus programs, once introduced on an alleged temporary basis, never actually go away; and the reality is that governments never pay down debt in good times. I see the appeal of this line; it sounds like knowing, worldly-wide cynicism. But if you look even briefly at the actual history, it turns out to bear no resemblance to reality. Start with stimulus programs. As it turns out, there have only been two significant spending stimulus programs in US history by which I mean programs deliberately introduced to fight an economic downturn. One was FDRs program, the WPA/CCC and all that; the other was the spending part of the Obama ARRA. So what happened to each of these programs? Why, not only did both go away; both went away too soon, with premature austerity hitting in 1937 and again in 2010. So much for stimulus that never ends. OK, someone will reply, but what about aid programs like unemployment benefits and food stamps? Dont they just ratchet up after each slump? Um, no. Unemployment benefits as a percentage of GDP:

Unemployment benefits as % of GDP By the way, look how low those benefits are already. SNAP (food stamps) as a percentage of GDP:

SNAP (food stamps) as percent of GDP Again, we see a pattern of rising during slumps, falling thereafter, and no hint of a ratchet effect. So this whole stimulus never goes away claim is a figment of right-wing imagination. What about the supposed inability of governments to pay down debt in good times? Well, heres the ratio of gross debt (including the Social Security trust fund) to GDP:

Hmm. Between World War II and 1980, every US president left the debt ratio lower when he left office than when he entered. Reagan/Bush I broke that pattern; Clinton brought it back; then came Bush II. And yes, debt is up under Obama, but a depressed economy in a liquidity trap is precisely when youre supposed to do that. So the story isnt irresponsible politicians will always squander the good years; it is conservative Republican politicians run up debt even in good years, because they want to force cuts in social programs. Kind of a different story, isnt it? The point, then, is that the seemingly worldly-wide cynicism that seems to be the last defense against the economically obvious is in fact based on an imaginary history that looks nothing like what actually happened.