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Get your Rogoff

July 21, 2010

So Paul Krugman – of whom I’m a big fan –  kind of annoyed me today.

At issue is this response he gave to the Kenneth Rogoff’s piece in the FT as part of its very interesting series this week on stimulus vs austerity.

What annoyed me is that Krugman basically focused on the weakest – but not necessarily the most relevant – part of Rogoff’s contribution to the debate. Here’s PK:

A completely baffling piece in the FT. Leave aside the fact that — in the only number presented in the whole piece — he cites his recent work with Reinhart on debt/growth, which is highly questionable. Where I really lost him was when he says,

The academic evidence on Keynesian growth effects of fiscal deficits is thoroughly inconclusive. Ironically, a lot of the newfound conviction comes from the casual empiricism on the growth effects of the Bush tax cuts …

What? Who’s citing the Bush tax cuts in this debate? Not me, surely; not Brad DeLong; not Christy Romer; not Barry Eichengreen; not Jamie Galbraith. I have no idea where Ken got that, although I suspect that he vaguely imagines that Mankiw citing Romer and Romer had something to do with it, which it didn’t.

Anyway, debate over the biggest policy issue facing the world today should not be based on what you think you heard someone say other people are saying.

While I agree that Rogoff’s article made for a weird and unconvincing argument, the key problem for me was not the Bush tax cuts claim. Rather, it’s the fact that he effectively says that millions of workers out of jobs, and a long sluggish recovery is not worth “panicking” about (read: worrying about). And why? Because it’s “par for the course” after a financial crisis. Well that’s OK then! As long as we’re not below par!

But that said, I do think PK’s post doesn’t respond to two relevant points he does make:

1. That there is academic uncertainty about the effectiveness of fiscal multipliers. Is that true? I don’t know, but PK should!

2. That it’s perhaps slightly disingenuous to talk about “confidence fairies” when his research suggests that confidence can evaporate suddenly and without notice. Sure, 2.97% still seems more than confortable from that perspective, but the question here is surely how far can you push the deficit until we’re no longer in comfort land? i.e. how much stimulus can you safely do and would it be sufficient?

And when PK’s done with that, maybe he can tell us what’s the meaning of life?


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