Photo: Jeff Jarvis
Even economists and policymakers who agree that insufficient demand is what’s plaguing the economy right now do not really agree on what to do about it.In fact, they can be sorted into two different camps, and they have absolutely nothing in common. The question here is not about the current reality, but about whether you think there is any hope for growth in the short term.
That was evident after Monday’s Munk Debate on whether America is entering a Japanese-style Lost Decade. Paul Krugman and Larry Summers both agreed that insufficient demand is impinging upon the success of the recovery, the U.S. needs to do something to address this deficiency, but that something can indeed be done.
Meanwhile, David Rosenberg argued that the U.S. must face the consequences of years of debt-driven growth, and that there’s really know way out of this except default or printing a lot of money. This opinion is quite similar to that endorsed by PIMCO’s Bill Gross in an FT editorial today, where he asserted that the entire world is facing the consequences of years of debt-driven growth. Both maintain defeatist, even sado-monetarist, views of the economy; there is nothing you can do to fix the economy, you can only speed along a market correction.
After the debate, however, Krugman argued that he, Summers, and Rosenberg were all pretty much on the same page:
Larry Summers and me [were] basically doing liquidity-trap macro, David Rosenberg not too different in analysis of the problem but expressing deep pessimism about the prospects for policy even given the political will.
While the problem at the heart of this may be the same—that demand is ineffective to prop up growth right now—these viewpoints have nearly opposite policy implications and are the products of two different schools of macroeconomic thought.
For example, Krugman has endorsed policies directly in contrast with those Rosenberg suggests need to take place. In a 2008 NYT editorial [“Macro policy in a liquidity trap (wonkish)”] Krugman touts as typical of his economic ideas:
What’s the answer? Huge fiscal stimulus, to fill the hole. More aggressive GSE lending. Maybe a “pre-commitment” by the Fed to keep rates low for an extended period — that’s a more genteel version of my “credibly promise to be irresponsible.” And maybe large-scale purchases of risky assets.
This directly contrasts Rosenberg’s policy prescription. In an investor note earlier this year, he wrote:
Canada’s fiscal progress didn’t happen because of the economy—that much is certain. It took years of painful retrenchment and tax increases, and it took public acquiescence to make it stick. For America, it will end up playing out much the same way. And the process will be contractionary, deflationary, and very bullish for the bond market as supply recedes, and ultimately pave the way for more sustainable economic growth, including the return of capitalism.
Clearly, spending cuts and interest rate hikes are not the way to promote growth in the short term, regardless of whether this is the right choice in the long term. Gross and Rosenberg make clear that the U.S.—like the rest of the world—will have to face difficult times if the government takes that route.
So while economists and strategists may agree on the fact that demand is insufficient, this agreement is trivial in comparison to the way they are actually coming at the problem. Krugman believes that the U.S. is in trouble because of cyclical and structural problems the government has not taken initiative to fix. Rosenberg believes that we are in a global deleveraging cycle that will be long and hard and change the way in which governments everywhere look at spending.
They clearly demonstrate the question here is not about the current reality, but about whether you think there’s any hope for growth in the short term. If you do, then stimulus measures combining massive government spending and more accommodative policy from the Fed are the clear way forward for the U.S. If you believe that the U.S. economy, and perhaps the global economy, too, are structurally flawed, then the best you can do is speed along the process.
This actually mirrors the argument between Keynesians and neoclassical economists about whether spending would cure the Great Depression. Keynesian Krugman, Summers, and various other economists clearly think spending and fiscal stimulus is the way to restore growth (whether they think it will happen or not), whereas neoclassical-leaning Rosenberg and Gross think policymakers should speed up a natural market correction through deflation and austerity.