Today’s FT contains an article from Jeffrey Sachs in which he writes the following:
Fiscal stimulus, in short, has been tried, but did not succeed in spurring a robust recovery. Advocates of stimulus bemoan the idea of reversing the fiscal expansion now, in view of the weak economy, and argue that it be prolonged and expanded. The original idea of the stimulus, however, was as a temporary measure that would make a bridge to self-sustaining private-sector-led recovery.
The Keynesian interpretation in late 2008 and early 2009 was that the economic downturn was a cyclical matter. A housing boom had turned temporarily to bust. Consumer spending was temporarily down. Temporary tax cuts would boost consumer spending while a temporary boost in government spending would create temporary jobs in construction and preserve jobs in cash-strapped state and local governments. By 2010 or 2011, a natural recovery would replace the temporary fiscal boost, and allow it to be withdrawn.
That is probably some of the worst commentary I have read on the subject. Just a few interventions. First, I’d like to know the source of the Keynesian interpretation. Paul Krugman in December 2008 on his blog pointed out discussions arising from it. The name of the book was “Return of depression economics”, not “recession economics”. So, it was supposed to be a big problem, not a small one. Then, what is the difference between a recession and a depression? A depression is deeper and takes longer. That means that it is a cyclical downswing that is much worse than the average recession. Then, I am not aware of any serious economist from the Keynesian camp who said in 2008: with a little bit of stimulus the problem will go away for good. Every Keynesian and non-Keynesian economist should understand that Keynesian demand management has to be sustained as long as the economy slumps. That is what we learned in the Great Depression, and again in the Japanese depression. Krugman, in his book, discusses the Japanese example at length.
About that first paragraph I shake my head. There was so much discussion (like this issue), and Sachs just ignores all of it. Sachs ends his article with this:
To get there, we need to move beyond the stale US political debate pitting short-run Keynesian stimulus on one side versus trickle-down economics on the other.
This kind of behavior has been going on for much too long: here’s the bad Keynesians, there’s the bad Neo-classicals, let me present an apolilitical middle way: OK, I throw the scientific method overboard by misrepresenting at least one side, but, hey, who cares: I will look good!
One more thing: wouldn’t it be interesting to read what Jeffrey Sachs himself wrote in late 2008 on the crisis? Here he is in the Daily Times on November 29, 2012:
Obama will need to put forward a medium-term fiscal plan that restores government finances. This will include ending the war in Iraq, raising taxes on the rich, and also gradually phasing in new consumption taxes. The US currently collects the lowest ratio of taxes to national income among rich nations. This will have to change.
So, let me count that as against fiscal stimulus. The point is: there is something called business cycles and sometimes you have to fight short-run problems that have something to do with them. At other times, you can implement structural reforms in order to increase long-term growth. A good economist understands the difference and does not give long-run solutions to short-run problems or the reverse.