Ken Rogoff, the Harvard economist whose work with Carmen Reinhart has played a central role in the debate about austerity policies, recently wrote a syndicated column that is structured as an argument against Those Who: those who believe that Europe’s problems result solely from excessive austerity, and would all be solved with a bit of Keynesianism. It might help if he would name names, otherwise people might imagine that he’s talking about, say, the economist Martin Wolf or me. But he can’t be, can he? Because neither of us — nor, for that matter, anyone else I can think of — is making that argument.
Everyone with a bit of sense has argued all along that Europe has a big problem resulting from its single currency: Countries on the periphery of the euro zone experienced a sharp rise in relative costs and prices during the boom years, and the process of correcting that overvaluation through “internal devaluation” has been extremely difficult and painful.
The Keynesian argument explains that this inherently difficult situation is made worse by two aspects of fiscal policy. One is the extreme austerity being imposed in the peripheral countries; nobody is suggesting stimulus for, say, Portugal, but the question is whether a less extreme austerity regime might not do almost as well at limiting debt while internal devaluation takes place, and with the effect of hugely reducing the human cost.
The other is that on any kind of rational pan-European basis, austerity on the periphery of the euro zone should be at least partly offset by stimulus in the core.
What officials have implemented instead is substantial austerity in the core, too.
Surely the terrible adjustment problem facing the peripheral countries would be at least somewhat easier if the core weren’t doing this; looser fiscal policy in the core would directly help the peripheral countries’ exports, and it would also help promote, yes, somewhat higher German inflation, which would also help to achieve internal devaluation.
So what the heck is Mr. Rogoff talking about? He has invented a class of straw men who believe that fiscal expansion alone can solve all of Europe’s problems, then uses the assertion that this is untrue — an assertion nobody disputes — to claim, or maybe just to insinuate, that a reduction in austerity would achieve nothing at all.
This is not a helpful contribution.
The Macroeconomic Version of Hippie-Punching
In a recent post on his blog, the economist Brad DeLong interprets Ken Rogoff’s Keynes-bashing opening to that column as strategic “hippie-punching,” designed to soften up his readers for the easy-money, debt-forgiveness message that follows.
Maybe that’s it, or maybe it’s just personal ire at some of the hippies (and their concerns about the human costs of austerity). Either way, though, there is a question about whether it’s an effective strategy. I don’t think so.
In recent years, the usual form of macroeconomic hippie-punching has been the pro-stimulus or anti-austerity article that opens with several paragraphs about the dangers of long-term budget deficits and the importance of a medium-term debt strategy — often with a specific condemnation of Those Who deny the importance of such — followed by a discussion of the reasons why slashing spending right now is a very bad idea.
And I’ve watched the response: the centrists who are the presumed audience read the first three paragraphs, say “Yes, the hippies are all wrong!” and never get to the part saying that, well, actually, the hippies are right on the important stuff.
To some extent this is just about the fact that the hippies have indeed been right across the board on macroeconomics, the same way they were on the Iraq War. But it’s also about journalistic messaging: if you have a point you want to get across, you should always, always, put it right up at the front, and get to the qualifications later. The patient reader who will wade through your pre-emptive hippie-bashing to get to the good stuff is a myth — just as much a myth as the reasonable centrist who can be won over by hippie-bashing in the first place.