Will Wilkinson reprints the response of John Cochrane to the Brad DeLong-Luigi Zingales debate at the Economist. [The whole debate is very much worth the read].
Cochrane begins:
Nobody is Keynesian now, really. Keynes distrusted investment and did not think about growth. Now, we all understand that growth, fueled by higher productivity, is the key to prosperity.
This may sound like a dumb question, but do we all understand (i.e. agree with) that growth, fueled by higher productivity is the key to prosperity? Say when the media income (adjusting for inflation) for the average full-time worker is now lower than it is was in 1973? Not to sound like a Marxist here, but isn’t Cochrane’s statement only correct depending on where one sits in the economic world? Growth fueled by higher productivity is the key to prosperity for certain players in the game no doubt, but not everybody. Whose the royal we here? If it counts me, I’d like to absent myself from affiliation with this consensus.
A counterexample where growth would not lead to prosperity—say the short/medium-term prosperity is causing serious devastation to the natural wealth of the earth on which we depend and without whom we would be pretty well sunk. In that scenario, more growth (as we currently practice/understand the term) leads to longer term loss of prosperity.
Some more Cochrane:
We all now understand the inescapable need for markets and price signals, and the sclerosis induced by high marginal tax rates, especially on investment. Keynes recommended that Britain pay for the second world war with taxes. We now understand that it is best to finance wars by borrowing, so as to spread the disincentive effects of taxes more broadly over time.
Again–do we all now understand that it’s best to finance wars by borrowing? Especially when the borrowing can reach beyond comprehensible levels allowing for continued long past their expiration date wars? [This seems a relevant question since today is the 6th Anniversary of Iraq War II].
All of which leads to this policy prescription/conclusion:
Neither fiscal stimulus nor conventional monetary policy (exchanging government debt for more cash) diagnoses or addresses the central problem: frozen credit markets. Policy needs first of all to focus on the credit crunch. Rebuilding credit markets does not lend itself to quick fixes that sound sexy in a short op-ed or a speech, but that is the problem, so that is what we should focus on fixing.
I’m basically with him on fiscal stimulus/conventional monetary policy but I don’t get the central problem is frozen credit markets. [Again unless the “we” here is the world of investors]. Credit is the core problem, I suppose, if you think this debt-burdened economy fueled by growth (aka wage stagnation/increasing debt for many) can just go on forever. And that said growth will bring prosperity down the line. I think the current economic events are in many ways a critique of that core assumption.
If you think the primary issue is the debt bubble bursting (what Soros calls the super bubble), deflation in the short term, and then frighteningly given the amount of funny money being created by the Fed, a potential pendulum swing reverse to hyperinflation on the far side of the deflationary spiral, then no I don’t think you would think the credit crunch is the central problem.
