“the consequences of economic devastation are very real indeed (the Greek suicide rate, for example, just hit a 50-year high)”
Ryan Cooper of the Washington Monthly argues that the national debt of the US is benign, that monetary stimulus will not create inflation and that more fiscal stimulus is needed to prevent economic devastation such as that which is occurring in Greece. Cooper is unconvincing, as he fails to address points that have been made regularly by opponents of Keynesianism and Monetarism. As such, he is preaching to the converted.
Recent articles on similar topics have tried to assign suspect moral motives to opponents of stimulus. However there are many rational unanswered arguments against stimulus on the record. Keynesians who seek to besmirch opponents run the risk of seeming unable to back up their arguments with unemotional facts and logic. Cooper seeks to calm things down with this article, but if he wishes to go further and convince opponents of his views, he needs to address their genuine concerns rather than continuing an avoidance strategy.
Cooper’s main point here is that the national debt is not a problem because the cost of servicing that debt is low. This has an obvious problem – interest rates may spike without warning, and the cost of servicing would then become high. If the debt is allowed to grow merely on the basis that current servicing costs are low, it is possible that an increase in rates would pose a serious problem. Cooper and other advocates of Keynesianism rarely address this. Monetarists sometimes counter that the central bank has control of the interest rate. However, as we now see in Japan, this control has its limits.
As to how the national debt will be reduced, Cooper advocates that we wait until we get back to full employment. This has another obvious problem – what if we don’t? Where is it written that continual stimulus always returns an economy to full employment? There are numerous examples in history of economies which hit a currency crisis, debt default or hyperinflation without ever reaching “full employment”.
Here Cooper makes a good point – monetary stimulus has not, to date, generated inflation. So why should continued monetary stimulus worry us?
Cooper neglects two important factors that do create genuine worry and which have not been addressed by monetarists. The first of these is that the long term lasts a lot longer than the short term. Our foremost concern should be the long-term health of the economy. Low inflation now does not guarantee low inflation in the long term. The build-up of excess reserves in the banking system could generate very high inflation down the track, if the money multiplier increases from its very low level at present. Monetarists may counter that the Fed would act to keep this under control. However there are numerous cases throughout history of central banks that did not do this. We have to ask – why did they not, and could a similar set of incentives cause the Fed to act in the same way?
The second problem with Cooper’s argument is that he ignores the fact that since the financial crisis, monetary stimulus has been offsetting private credit contraction. In other words, a natural tendency to deflate has been offset by a roughly equivalent amount of artificial inflation. This masked inflation may very well have similar detrimental effects to “normal” inflation. There is certainly plenty of evidence to suggest that the created money benefits the wealthy first, and is creating a bigger divide between rich and poor, with all of the societal problems that this can bring.
Overall, Cooper’s article goes over points covered by many other Keynesian writers, without adding anything new to assuage the concerns of opponents. Insight into the current mindset of Keynesians can be gained by examining this introductory statement by Cooper: “the consequences of economic devastation are very real indeed (the Greek suicide rate, for example, just hit a 50-year high)”. Cooper is implying that cuts to government deficits cause suicides (and this in an article that claims to be “calm and reasonable”). But the flaw is plain to see: he concentrates on the proximate cause without examining the ultimate cause. Opponents argue that if the Greek government had not been profligate in their spending over previous years (i.e. had not conducted continual stimulus), the Greek economy would be healthier, there would be no need for sharp spending cuts, and hence no suicides. From this perspective, the stimulus was the ultimate cause of the devastation, and the US risks going down the same path.
This favoring of a proximate cause is a common cognitive bias known as the “Fallacy of the single cause“. As with many cognitive biases it requires objective and non-self-serving analysis to overcome – something that Keynesians and Monetarists are not known for.