Friday, July 23, 2010

Niall Ferguson, macroeconomist to the stars

Niall Ferguson has written an amazing piece contributing to the FT's austerity debate.

Not surprisingly, Ferguson doesn't buy the Keynesian line that deficits stimulate economic activity and help the recovery from the financial crisis. No shocks there. The shocking thing is what a pathetic argument he presents.

So for Ferguson, the deficit run by the US, whose output is a third of the world economy, looks like the policies followed by multiple defaulter Argentina. The Chinese who are bankrolling the US deficit could withdraw and leave the American government high and dry. Even though that would leave them with a pile of worthless paper and make their own products unsaleable in the process. Anyway, the obvious thing to do is abandon this reckless fiscal loosening and adopt balanced budget policies, like... yes, like Ronald Reagan in the 1980s (the 1980s don't count as history, presumably, so Ferguson has no idea what happened in that decade).

Ferguson is embarrassing. There is a coherent argument for fiscal tightening, and it is nicely expressed by Marty Feldstein, also in the FT. For Feldstein, a 'double dip is a price worth paying'. The ideal policy would be a gentle fiscal contraction gaining in intensity over time, but voters and markets will not believe that governments will stick it out, so the only credible policy is to tighten straight away. This will increase unemployment in the short run, but that's a price worth paying if we are to return to fiscal balance.

Now that is a coherent conservative position. Why can't Ferguson come out and say what he thinks: that the destruction of jobs is a price worth paying for a balanced budget, instead of pretending that government deficits crowd out private sector investment, investment which would produce goods that no-one will buy? That would make sense, even though it is a still a questionable argument - 'paradox of thrift' and all that.

Tragically, the Ferguson line is pretty much what the Con-Lib Dem coalition seems to be buying into. Public sector workers will be thrown out of work, and the government fondly imagines the private sector will hire them all with the funds no longer placed in government bonds. We'll see.