Noted for May 4, 2013
Demography: Twentieth Century Economic History Weblogging

Matthew Yglesias vs. Alex Tabarrok

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Hey! Clive Crook! Here is one more reason why Paul Krugman is tired of trying to reason with you people

Matthew Yglesias:

Keynesianism today: Start by stating the argument correctly: This Alex Tabarrok post on growth in the face of fiscal austerity annoyed me as did his co-blogger Tyler Cowen chiming in to say Tabarrok had "nailed it"... the line "In the 1990s growth was strong even while 'austerity' was increasing."

That kind of thing is a dead giveaway that the author isn't even stating the argument for expansionary fiscal policy correctly.

What's the argument? Here it goes: Sometimes an economy falls into a demand shortfall. In those times, unemployment can be reduced and real growth increased through expansionary policy. The agreed-upon, uncontroversial, tractable way of doing this is for the Federal Reserve to reduce interest rates. But when interest rates hit zero, as they have today, things become less clear. The Keynesian view—including the view of the FOMC—is that in such times expansionary fiscal policy can play a useful role in stimulating aggregate demand. But the view does not say that stimulative fiscal policy is useful at all times. In fact it says that during a period of non-zero interest rates deficit reduction will "crowd-in" private investment and deficit increases will crowd it out....

The fact that Paul Krugman is a fierce advocate for expansionary fiscal policy and also a fierce advocate for progressive political causes in general often seems to me to create a distraction for small government types. I think the general shape of the debate would be improved if opponents of stimulus theories would use Ben Bernanke as their bearded-Jewish-Princeton-economist-foil... [for he too says] fiscal expansion would be helpful.