Francis Bator, who taught me economics in graduate school and was warning about the insanity of rational-expectations macro long before the current crash, had a short letter-to-the-editor in the Financial Times, which he has revised and extended for publication here.
Martin Wolfâ€™s characteristically insightful and important column of October 13 attributes to IMFâ€™s Olivier Blanchard an uncharacteristically partial (in both senses) prescription for the â€œinternalâ€ rebalancing needed in the advanced countries for a strong, sustainable world recovery: “a return to reliance on private demand in advanced countries and retrenchment of the fiscal deficits that opened in the crisis.”
For the U.S., that prescription ignores a hugely damaging multi-year demand-shortfall caused output and employment gap that cries out for extra fiscal stimulus to complement uncertainly potent Federal Reserve quantitative easing. Fiscal stimulus that would perforce make the already huge federal budget deficit temporarily still larger. In the longer term, the prescription would rule out an alternative deficit-shrinking fiscal strategy arguably more appropriate for an enormously rich country – a depressed GDP of $142,000 per notional three-person family – whose resource-starved public infrastructure and many resource starved public services are a scandal. Specifically, it would rule out shrinking the fiscal deficit mainly by increasing taxes on, and cutting transfer-payments to, the well-to-do as needed to reduce the relative share in GDP of the personal consumption of the non-poor, so as to make room not just for extra private business investment and net exports but also for public investment, hard and soft, and even some extra public consumption.
It’s no real suprise that the unwashed Teabaggers still believe in fixing economic downturns by cutting public spending: they have a demonstrated capacity for believing six impossible things before breakfast. But it’s pretty shocking that anyone who pretends to be a grown-up – let alone an economist – still believes in Hooverism.