There have been economic spats before (Rogoff versus Stiglitz comes to mind), but a new one is definitely brewing in the shape of the tit-for-tat currently raging between Harvard’s Niall Ferguson and Princetonian Nobel Laureate Paul Krugman, over the issue of fiscal deficits and rising bond yields.
The central premise: are they deadly, tolerable, or even positive?
The FT’s Martin Wolf summed up the affair in his column on Tuesday as follows (our emphasis):
Last week, the Financial Times carried two columns arguing that the US fiscal path was unsustainable, one by Stanford University’s John Taylor and the other by the Harvard historian Niall Ferguson. The latter, in turn, was a comment on a debate with, among others, the New York Times columnist and Nobel laureate Paul Krugman at the end of April.So what is the disagreement? Prof Ferguson made three propositions: first, the recent rise in US government bond rates shows that the bond market is “quailing” before the government’s huge issuance; second, huge fiscal deficits are both unnecessary and counterproductive; and, finally, there is reason to fear an inflationary outcome. These are widely held views. Are they right?
Meanwhile, according to Krugman:
A deep recession proves there is a huge rise in excess desired savings at full employment, as Prof Krugman argues. At present, therefore, fiscal deficits are not crowding the private sector out. They are crowding it in, instead, by supporting demand, which sustains jobs and profits.
Wolf’s key observation being:
The argument advanced by opponents is either that fiscal policy is always unnecessary and ineffective or, as Prof Ferguson suggests, redundant, because this is not a “Great Depression”. Monetarists argue fiscal policy is always unnecessary, since monetary expansion does the trick.
You can follow the whole public blog/editiorial argument here, here, and here, while Daniel Gross over at Newsweek does a good job of binding it all together here .
Which brings us to today. Martin Wolf may have tried to come in as a moderator, but — having clearly sided with Krugman in the end — was only ever going to fuel the fire further.
On Friday the letters pages of the Financial Times accordingly present this response from one Prof. Niall Ferguson of Harvard. Ferguson’s main grievance with Wolf’s article: the suggestion that he views the current crisis as only being ‘mild’. The response goes:
Sir,
I am glad to have furnished grist to Martin Wolf’s mill (“Rising government bond rates prove policy is working”, June 3). But hyper-Keynesian fiscal policy on top of a large structural deficit is going to cause bigger problems in the future than he allows.Allow me to make four points in response.
First, I have never said this crisis was a “mild” recession. I called it a Great Repression — a depression repressed by the Federal Reserve’s timely and bold action. Now it is just a big recession.Nor have I ever argued for tax increases, which Mr Wolf implies. For years I have urged expenditure restraint on the US.
Third, the normally hard-headed Mr Wolf must be dreaming if he thinks fiscal (as opposed to monetary) policy is not going to be “persistently loose”.
Of course it is. Just look at the budget — not to mention the Congress. Fourth, Mr Wolf blithely writes: “Historically well-run economies are certainly able to support higher levels of public debt very comfortably.”
His favourite macroeconomics textbook may make this claim. But the annals of history provide very few cases of economies with public debts in excess of 100 per cent of gross domestic product that were either well-run or very comfortable.
To judge by Ben Bernanke’s warning this week about the need for “fiscal sustainability”, the Fed is less insouciant than your columnist.
But if that wasn’t enough, Ferguson also appears to have brought out some stalwart support with him on Friday. In the same page we also see a letter from Ros Altman, the widely-respected pensions expert. She writes:
Sir,
As always, Martin Wolf offers a comprehensive analysis of the stance of Anglo-Saxon fiscal and monetary policies (“Rising government bond rates prove policy works”, June 3).However, with great respect, I believe his conclusions are wrong. The rise in government bond yields does not prove policy is “working”. It proves that policy is overdone. The markets are waking up to the enormous size of the sums involved in recent panic policy easing and they don’t like what they see.
To be continued, we presume…
Related links:
Inflationistas, deflationistas and Goldilockeans - FT AlphavilleBig news: apparently deficits are now officially a problem – FT Alphaville
The new art of inflation mongering – FT Alphaville
Napier: Higher yields do not mean normalisation – FT Alphaville
Another Ferguson blows it - The Long Room
