DeLong, "This Is Getting Damned Annoying" (May 20, 2009) by James DeLong

This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition)

6/17/09 9:21 PM

Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

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This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition) There have been two annoying things about the past decade. The first is that I feel like I have been living in a Ken Macleod novel--and one of the more dystopic ones too, at least up until January 21, 2009 (I am glad he has stopped: Ken: please don't get cranky again). The second is that the best way to understand the world is through these two rules: 1. Paul Krugman's analysis is correct.

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This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition)

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2. If you think that Paul Krugman's analysis is incorrect, see rule number 1. Most recently, I thought that Paul Krugman must be being too harsh on Niall Ferguson. Ferguson could not really have forgotten so much economics as to believe that when interest rates are zero deficit spending is inherently contractionary, could he? But Paul said he did: Liquidity preference, loanable funds, and Niall Ferguson (wonkish) - Paul Krugman Blog - NYTimes.com: Joe Nocera... fails to mention... the most depressing aspect... further confirmation that we’re living in a Dark Age of macroeconomics, in which hard-won knowledge has simply been forgotten. What’s the evidence? Niall Ferguson “explaining” that fiscal expansion will actually be contractionary, because it will drive up interest rates. At least that’s what I think he said.... [I]t might be useful to re-explain why [in] our current predicament... fiscal deficits won’t drive up interest rates unless they also expand the economy.... I imagine Niall Ferguson was thinking... of... the “loanable funds” model.... Keynes pointed out was that this picture is incomplete if... the economy is not at full employment.... [S]upply and demand for [loanable] funds... tells you what the interest rate would be conditional on the level of GDP... defines a relationship between the interest rate and GDP.... So what determines the level of GDP, and hence also ties down the interest rate?... [A]dd “liquidity preference”, the supply and demand for money. In the modern world... the central bank adjusts the money supply so as to [try to] achieve a target interest rate.... [But r]ight now the interest rate that the Fed chooses is essentially zero [and cannot go any lower], but that’s not enough to achieve full employment... the interest rate the Fed would like to have is negative... the Fed’s own economists estimate the desired Fed funds rate at -5 percent.... So what does government borrowing do? It gives some of those excess savings a place to go — and in the process expands overall demand, and hence GDP. It does NOT crowd out private spending... until the excess supply of savings has been sopped up... [and the interest rate consistent with full employment rises above zero]. Now, there are real problems with large-scale government borrowing — mainly, the effect on the government debt burden. I don’t want to minimize those problems; some countries, such as Ireland, are being forced into fiscal contraction even in the face of severe recession. But the fact remains that our current problem is, in effect, a problem of excess worldwide savings, looking for someplace to go. And Krugman reiterated his judgment: China and the liquidity trap - Paul Krugman Blog - NYTimes.com: By the way, I’ve had a chance to see the transcript of the PEN/ NY Review event, and I don’t think I was misrepresenting Niall Ferguson’s position... Sure enough, now that I have taken a look at the transcript, I have to once again agree that Paul Krugman's analysis is correct. This is annoying. This is damned annoying. In fact, this is beyond annoying: Niall Ferguson: Now we are in the therapy phase, and what therapy ar we using? Well, it is very interesting because we are using two quite contradictory courses of therapy. One is the prescription of Dr. Friedman, Milton Friedman, that is, that is being administered by the Federal Reserve: massive injections of liquidity to avert the kind of banking crisis that caused the Great Depression of the 1930s. I am fine with that. That is the right thing to do. But thre is qnother course of therapy that is simultaneously being administered, which is the therapy prescribed by Dr. Keynes, John Maynard Keynes, and that therapy involves the running of massive fiscal deficits in excess of 12 percent of gross domestic product this year and the issuance therefore of vast quantities of freshly-minted bonds. There is a clear contradiction between these two policies, and we are trying to have it both ways. You cannot be a Keynesian and a monetarist simultaneously, at least I cannot see how you can, because if the aim of the monetarist policy is to keep interest rates down to keep liquidity high, the effect of the Keynesian policy must be to drive interest rates up.... [T]here is going to be... a very painful tug-of-war between our monetary policy and our fiscal policy...

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This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition)

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A real monetarist--like Milton Friedman's teacher Jacob Viner, say--would argue (in fact, did argue during the Great Depression) that when the interest rate is near zero monetary expansion and deficit spending do not offset but reinforce each other, for essentially the reasons set out by Krugman. As Paul said in rebuttal to Ferguson: "There is... no contradiction between the Federal Reserve's actions and... fiscal stimulus. It is very much necessary to do both..." Normally the banking system buys bonds from corporations which then spend the money investing in plant and equipment. Right now that process has broken down, and until the banking system gets fixed the second-best is to have the government step into the role. As Krugman writes: By buying a lot of private securities, the Federal Reserve is... playing the role the private banking system is no longer playing properly... debt-financed spending on infrastructure by the Obama administraiton is filling the hole left by the collapse in business investment.... Conclusion? Once again: There is not an excess demand for savings that is going to drive up interest rates... Niall Ferguson does indeed know a lot less than economists knew in the 1920s. Back then when R.G. Hawtrey was laying out the Treasury View he claimed that fiscal policy was ineffective--and was wrong. Niall Ferguson's belief that fiscal policy is destructive shows that he has not even got that far. UPDATE: As a "friend" points out, Ferguson spent considerable time trying to bait Krugman into losing his cool: As d2 points out, the references to "Dr. Keynes" appear for some reason to work like a red flag to a bull on statusconscious Englishmen--for Keynes never got a Ph.D.--but it doesn't work on Dr. Krugman. "I rather fear that, at the risk of provoking the man sitting on the other side of me, that it says 1936 on the bottle of Dr. Keynes’ medicine..." "[I]if you listened carefully to what Paul Krumgan said, he actually agreed with me [laughter]..." "So, I hate to teach arithmetic to a Nobel laureate, it doesn’t quite add up..." Madrick: "Let’s let Paul speak..." Krugman: "Oh, Dear..." Ferguson: "Oh Dear indeed..." Krugman: "Let’s talk national income accounting offstage..." * rated 4.69 by you and 48 others [? ] You loved this post (

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Republicans, the Stupid Party; it's Much Worse than I Thought (Niall Ferguson Edition) (@this site) I See No Green Shoots Here... (@this site) 2 more recommended posts » Brad DeLong on May 20, 2009 at 06:37 PM in Economics, Economics: Federal Reserve, Economics: Finance, Economics: Fiscal Policy, Economics: Macro | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340115709b2050970b Listed below are links to weblogs that reference This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition):

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This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition)

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"So what does government borrowing do? It gives some of those excess savings a place to go â&#x20AC;&#x201D; and in the process expands overall demand" How did he get this if interest rates are zero and the government simply deficit spends? If government is not increasing spending, just borrowing, then the effect is simply to make up for lowered tax receipts. Tax receipts are lower because business activity is lower and the need for government goods has dropped. More likely this policy only results in a glut of government goods and services, which sit in inventory, instead of delivery. Hence, the multiplier, relative to baseline, is going to be much less than one, since the final delivery of government goods is only going to happen when the recovery starts. When the recovery is starting, then and only then, will the glut of government goods be delivered. We have traded excess savings for excess glut of government goods. The only effect is that we keep some government employees employed while they fill inventory, laying them off at a later date. The inventory they had built up will be inventory of goods designed for the last equilibrium conditions, not for the new equilibrium. Posted by: Mattyoung | May 20, 2009 at 08:11 PM Brad, Google Jan Kregel's critique of Paul K's case for engineering inflation in Japan for some shortcomings in Paul K's theory of the interest rate. Best, Greg Posted by: Greg Hill | May 20, 2009 at 09:00 PM The PEN/NYRB symposium sounds like a great debate. Is the trasncript posted online? (I cannot find it on Google, or at the PEN or NYRB websites) Posted by: Fabius Maximus | May 20, 2009 at 09:52 PM you lost at least half a point siding with ferguson, even in frustration. Posted by: hapa | May 21, 2009 at 12:43 AM We can't be more than 50 years away from being able to copy our personalities into some sort of free floating ball of energy. Once we reach that moment, the Megamoot, game over. Policy this, policy that, smart communists-turned-cryptofascists -- all this junk, gone. One ball of energy wants to dominate others? Not a problem: create infinite other subordinate balls for it. And think of the time that economists will have to whack each other over the virtual head with Keynes and Minsky and friends. An eternity! Not just what seems like one. An actual eternity. Posted by: Uncle Billy Vs. Mont Pelerin | May 21, 2009 at 12:54 AM What irks me most is "Dr Keynes". Ferguson ought to know that it's "Lord Keynes" or "Professor Keynes", but JM Keynes did not ever take a doctorate (or indeed any other academic qualification other than a BA). He was later awarded numerous honorary doctorates, but he didn't call himself "Dr Keynes". It's particularly annoying because a) John Neville Keynes was generally referred to as "Dr Keynes" b) it is not exactly hard to remember because of the title of John Hicks' "Mr Keynes and the Classics" (which was correct at the time, he hadn't been ennobled then). I don't know why this irritates me so much but it does. Posted by: dsquared | May 21, 2009 at 03:12 AM You're making the mistake of treating Ferguson as if he's anything other than a massive IRL troll. For some reason he's been given a reputation to trade on, and I would like to know how and why, because as far as I can tell he's never contributed anything useful to anything ever. I genuinely, *genuinely*, have absolutely no idea why he is even taken seriously, let alone why he is a tenured prof at Harvard. Every time I've heard him speak or read anything he's written, he's made a completely preposterous mistake (confusing/conflating stocks and flows - whether it's disingenuous or not, I really don't know - seems to be a particular favourite. He does it in the intro to The Ascent of Money and he did it in an NPR radio interview I heard) like this. It's embarrassing. http://delong.typepad.com/sdj/2009/05/this-is-getting-damned-annoyiâ&#x20AC;Śsagree-with-paul-krugman-again-about-anything-niall-ferguson-e.html

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Posted by: ydue | May 21, 2009 at 03:35 AM Even without a liquidity trap, Ferguson is wrong. Expansionary monetary and fiscal policy have opposite effects on interest rates, but both expand output Posted by: kevin quinn | May 21, 2009 at 05:36 AM "debt-financed spending on infrastructure by the Obama administraiton is filling the hole left by the collapse in business investment." This is the 'gotcha" that Keynes and Krugman use. The economy must must know what the future infrastructure needs are, if this is a solution. The only was this can be true is if 'animal spirits' are deciphered the government sector, but not other sectors. Or the other alternative is that both government and the privates sector know that the government sector is the constricting bottleneck of the mini-depression. The later assumption is generally true in a mini depression. Stimulus works precisely because the monopoly doing the stimulus act is solving a bottleneck problem of its own doing. Posted by: Mattyoung | May 21, 2009 at 06:23 AM I think it is supposed to irritate--getting minor terminologocal things wrong is a way of saying: "This isn't worth knowing." Posted by: Brad DeLong | May 21, 2009 at 06:41 AM What does this say about Ferguson's books and TeeVee shows? Is his current confusion a product of association with Hoover Institute or Harvard Business Management? Note: Harvard produced the first MBA President and that guy was an economic idiot. Posted by: bakho | May 21, 2009 at 07:30 AM Okay, I need some guidance here: I'm NOT an economist, but am an MBA in financial services. Is Ferguson's book "Ascent of Money" worth reading, or is it riddled with errors the way his public comments are? Thanks Posted by: Louie's Mom | May 21, 2009 at 09:08 AM I do know that Ferguson's thesis in "The Good Empire" on how the developing world would benefit from recolonization by the U.S. was demolished by Vivek Chibber in the Boston Review as being not only preposterous but based on an incredibly myopic reading of the historical record on colonialism. Chibber also found it totally perplexing that Ferguson had been granted so much credibility by liberals as well as conservatives. Here is a link if you are interested: http://www.bostonreview.net/BR30.1/contents.html Posted by: Barbara | May 21, 2009 at 09:13 AM Niall Ferguson is primarily an historian. Krugman's the economist. It's unfair to nit pick Ferguson to the extent that it's not an apples-to-apples. It's just his opinion. Some of his analysis and insights have been excellent. But he's not in the same profession, really, as Krugman. I think we may be in a debt deflation, and in uncharted water, anyway. Best not to be too harsh on anyone. That said, some of Niall Ferguson's political views on their face do sound reactionary. Posted by: Gregman2 | May 21, 2009 at 08:52 PM But, Brad, Krugman favoured Clinton in the primaries. Was he right about that? Posted by: antrastan | May 22, 2009 at 12:40 AM Gregman2, you're being too kind. 1) If he's only a historian, why is he even bothering to debate about something clearly out of his domain? Very intellectually dishonest. 2) Nobody who considers himself any sort of intellectual should bring up such a terrible false dichotomy. Are these really the people who are getting Ph.D.s and going out in the media talking about what x or y will do to the economy? Shameful.

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Posted by: Daniel Reeves | May 22, 2009 at 11:56 PM re: Daniel Reeves #1, As I heard pointed out recently during a presentation on risk analysis, a danger of solicitation of expert opinion (which is what a panel like the PEN/NYrev one is) is that almost everyone deemed an expert is eager to offer an opinion on any issue, regardless of the area of expertise. And it's probably the case for someone like Ferguson that it's not simply a matter of opinion; he KNOWS. Posted by: bdbd | May 23, 2009 at 09:23 AM Niall Ferguson is an ignoramus who is out to sell books. He has demonstrated his incompetent understanding of modern economics. What's scary is that he perpetuates views that millions of idiots (including Republicans in Congress) agree with. It wouldn't be so bad if this were a debate on a 10 day mandatory waiting period before a 6 year old can buy a bazooka or maybe on how many angels you can fit on the head of a pin-- but this debate will actually determine whether we have a depression or simply a severe recession. Could the grown ups in the economic community please step up and stop trying to nurse 10 year old vendettas? Just recognize facts. We're in a zero-inflation, zero interest rate savings glut. The only way to get out is liquidity + fiscal stimulus. Posted by: Evileconboy | May 23, 2009 at 09:47 AM "on status-conscious Englishmen" However, Ferguson is not an Englishman Posted by: Chestnut | May 23, 2009 at 11:59 AM "Krugman favoured Clinton in the primaries. Was he right about that?" Of course he was right (smirk) -- when Obama fouls things up Krugman will be able to say Aha? told you so -- in fact, he has already started Posted by: Chestnut | May 23, 2009 at 12:44 PM Ferguson isn't even very well regarded in his own field of history. Posted by: A Giant Slor | May 23, 2009 at 01:52 PM Having read the full transcript of the relevant bits, I'm even more impressed with Krugman and even more disgusted at Ferguson. Appropriately enough, and with apologies to LBJ, it's one huge, extended piss down his own leg. I thought my opinion of him couldn't get any lower, but your "friend" is spot on: Ferguson spent a sizable part of his comments attempting to bait Krugman specifically. When that didn't work, he tried to bait Jeff Madrick. When that didn't work, and Madrick responded dismissively, even he must have realised he'd pissed himself. Coming out with "[w]hy did I accept this invitation?" after all that would be hilarious if it wasn't so pathetic. Posted by: ydue | May 23, 2009 at 02:55 PM Blogger dsquared an Mr. DeLong seem to be in agreement, that Dr. Keynes never got a Ph.D. That is wrong! Dr. Keynes actually was a Dr. but not a Dr. of Econmics but of Mathematics. His Thesis is calles "A Treatise on Probability", was supervised by Alfred North Whitehead and (a much revised and expanded version) can be bought at any onlineshop, and is absolutly standart. (As somebody who wrote a paper on it, let me recommend it warmly. You should read it. If you are interessted in logiacal foundations of the thery of probability) Posted by: Maximilian Oberbauer | May 23, 2009 at 03:06 PM The PEN debate is online at http://www.nybooks.com/articles/22756 In it Paul Krugman says: "The United States has gone from approximately a zero savings rate two years ago up to about 4 percent right now, which is still below historical norms; but suddenly saving is occurring. That saving ought to be translated into investment, but the investment demand is not there." ----------------------------------------------------------Americans saving? According to the businessdictionary.com, the personal savings rate Paul refers to, is defined as: http://delong.typepad.com/sdj/2009/05/this-is-getting-damned-annoyi…sagree-with-paul-krugman-again-about-anything-niall-ferguson-e.html

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Americans saving? According to the businessdictionary.com, the personal savings rate Paul refers to, is defined as: "Savings as a percentage of the population's average disposable income." and savings means: "Portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through purchase of securities." Savings in GDP are not only comprise savings in terms of putting money into your bank account, it includes also the items named above normally not understood as savings in everyday speech. It would appear then that the increase in savings is not going into people's bank accounts but is used for paying down personal debt. This is why, in my view, the demand for investments is not there. The savings aren't there either. A more detailed discussion can be found at: http://alexandrahamilton.wordpress.com/2009/05/16/paul-krugmans-liquidity-trap/ Posted by: Alexandra | May 24, 2009 at 07:26 AM As to Niall Ferguson's arguments in the debate, he is just airing the IMF view. Which is 'bail-out-the-banks-and-tighten-the-budget'. This is real crazy. The problem with this is that it leads to failing institutions being kept alive artificially enabling them to continue their bonus bonanza, while the rest of the population is left to drown. They are being told, sorry, we have to save, while the bankers get trillions. This policy then leads to the Union not supporting its citizens and member states, but a small class of bankers. That's an odd choice for a democratically elected government. From the IMF's history we couldn't expect anything else and apparently you'll always find at least one 'Dr.' who supports such idiocies. Posted by: Alexandra | May 24, 2009 at 07:34 AM to "Louie's Mom" I read "Assent of Money" and enjoyed it, but not for any economic insight. It was interesting because of the anecdotes on Renaissance finance and a thumbnail history of the rise of the Rothschild banking cartel. Glancing thru the book again, all my favorite parts are discussions about the world before WWI. He draws a complete picture which is surely a very high level outline, but he gathered the narrative into a single volume for me, so that I didn't have to piece it together from a small library by myself. I very much appreciate that he gave me what I wanted, a description of a monetary focused tech-tree (Hi to all you CIV players out there) without making me become a self taught economic historian. The books for which Prof Ferguson seems most renown for are "Empire" (Which I read and enjoyed) and the series focusing on the House of Rothschild (which I haven't read). I'm afraid that Prof Ferguson changed careers after the success of "Empire" and is spending his energy trying to get network facetime, which generates more speaking engagements which pay for the life style to which he would like to become accustomed. Certainly his behavior as documented in this forum is more in line with Fox TV "lets pick fights with each other" style discourse than the kind of serious discussion that I look for Krugman and Roubini to deliver. Before we smack him down too hard though, it's damn hard to make money writing books. There seem to be as few Stephen Kings in the world as their are Magic Johnsons, and work a day writers could hardly afford to buy houses even before the bubble. Posted by: jnutley | May 24, 2009 at 11:38 AM The gold standard and the rapid growth in real output of the 1920’s were bound to create deflationary forces and a need to devalue eventually. Certainly output and the money supply should remain roughly proportional for healthy economic expansion. The massive waves of bankruptcies in the early 1930’s also helped the US private sector shed some of its debt burden. Subsequent devaluation put additional downwards pressure on this private debt burden and may have also contributed to demand during the 1933-1937 period. But such an approach appears to devalue old debt burdens in real terms and replace them with new ones that take into account the higher rate of (wage) inflation. When levels of new debt pile up, will they be sustainable in real terms? http://delong.typepad.com/sdj/2009/05/this-is-getting-damned-annoyi…sagree-with-paul-krugman-again-about-anything-niall-ferguson-e.html

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What makes deficit spending sustainable is the ability to borrow at interest rates that are lower than the return on investment. As long as this can be done, the multiplier effects (and the additional economic activity structured on them) can be maintained and more severe contractions can be averted. The danger of prolonged Keynesian stimulus with a moderate inflation target is that it does seem to prop up inefficient structures and thereby impair incentives towards the “desirable longer term reforms” though (as you point out). It may even harm incentives towards restructuring and innovation in general. This could consequently lower real return on additional government expenditure and tip it further towards unsustainability. After many years of stagnation and hard work on building many things that nobody really needed, Japan, for example, may ultimately end up either debasing the yen or adopting modern Germanic fiscal austerity anyway. Why sweat in stagnation for that long only to postpone the inevitable? To its credit, Japan did mitigate some additional fiscal waste while maintaining relatively high employment via shortening the workweek. This latter policy, possibly in combination with increased spending on R&D, seems to be the most rational one for an economy waiting for a high return on investment opportunity upon which to deploy its human and financial capital and a political system attempting to mitigate “the pain of a depression.” No doubt hitting the unsustainability point would involve a greater reduction in consumption and bankruptcies. In addition to shedding some debt burden “by default,” such recessions tend to boost productivity with a lag, as Japan’s recessions in 1998 and 2001 have shown. Similarly, some argue that the 1930’s was a period of great restructuring and technological innovation in the US. Whether Germany shortens its own workweek further, Japan continues to run massive fiscal deficits, or the US decides to adopt a higher inflation target and meet it with Keynesian stimulus, none of these economies are likely to grow sustainably and robustly until either a new technology is developed and/or a substantive export market is developed. As Japan’s export led rebound in 2003-2007 and the US CAPEX (and export) led rebound in the 1950’s both suggest, it’s the growth of the real economy that matters over the long term. In conclusion, the US should maintain its stimulus as long as the economy is restructuring proactively and is getting a return on investment/ expenditure that is higher than its borrowing costs. When this approach reaches diminishing returns, either a Volcker or EU type austerity should be pursued. Which pathway is chosen seems to depend upon the desire for an export led recovery and aversion of a higher temporary spike in unemployment on the one hand or the desire to maintain a strong dollar and the buying power of savings gluts on the other (assuming that commodities don’t become the store of wealth for such gluts under the Volcker pathway…). In either case, unemployment can be mitigated via shortening the workweek, incentives will be created for greater restructuring and innovation, and the US current account should swing to surplus at some point. These are probably the least painful pathways to sustainable longer term growth. Posted by: Nathan Frazier | May 24, 2009 at 09:02 PM To jnutley: You write: "Before we smack him down too hard though, it's damn hard to make money writing books. There seem to be as few Stephen Kings in the world as their are Magic Johnsons, and work a day writers could hardly afford to buy houses even before the bubble." Excuse me, but Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University and the William Ziegler Professor of Business Administration at the Harvard Business School. He was previously the John Herzog Professor in Financial History at New York University's Stern School of Business, and before that, Professor of Political and Financial History at Oxford University. I'm not sure what you consider to be making money, but I can assure that every single one of these institutions, as well as the new university to which Ferguson is bouncing, the London School of Economics, where he will hold the Philippe Roman Chair in History and International Affairs, all pay very well. The man is not hurting for paltry wages. At the same time, it is particularly distressing, given his comments, that he holds chairs at these prestigious institutions in "financial history." God help his students. Posted by: jstheater | May 24, 2009 at 11:45 PM "Paul Krugman's analysis is correct. If you think that Paul Krugman's analysis is incorrect, see rule number 1." Most of Krugman's analysis is correct, but his assertion that the economy is in a liquidity trap is obviously wrong. The yield on 10 year U.S. government notes was close to 2% at the end of last year and has now gone over 3% and is increasing. This is obviouly inconsistent with a liquidity trap. http://delong.typepad.com/sdj/2009/05/this-is-getting-damned-annoyi…sagree-with-paul-krugman-again-about-anything-niall-ferguson-e.html

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inconsistent with a liquidity trap. In most expenditure decisions in which the interest rate plays a significant role, it is longer and long-term interest rates that count, not the federal funds rate or the yield on 3 month treasuries. Therefore the yield on 10 year notes is a much more relevant proxy for "the" interest rate, rather than those short-term yields. And it is rising. That does not change the fact that fiscal policy is expansionary in the short run if the economy is below potential output. The easist way to see this is to use Hick's famous IS-LM model, which shows that expansionary fiscal policy, if financed by borrowing, will increase both output and the interest rate. The crowding out resulting from higher interest rates is only partial, so that output expands. The model also shows that if the expansionary fiscal policy is fully financed by printing money instead of borrowing, the interst rate will not increase, so that the expansionary effect of fiscal policy will be stronger. Posted by: Roland Buck | May 25, 2009 at 02:40 AM @Roland. A liquidity trap is perfectly consistent with non-zero yields on long term bonds. The only thing the 10 year is telling you is that the world isn't going to be over in 10 years. If it were down in the zero range, I would be stocking up on antibiotics and ammunition. Posted by: Evileconboy | May 25, 2009 at 10:13 AM "Niall Ferguson does indeed know a lot less than economists knew in the 1920s." Easily explained by the fact he is from the Amity Shlaes school of economics. Posted by: Ed | May 26, 2009 at 07:11 AM "However, Ferguson is not an Englishman." Indeed so: he is a North Briton, albeit not of the calibre of his eighteenth-century compatriots. He does know how the wheels of a particular economic engine (i.e. his own) are greased, though. Posted by: luther blissett | May 26, 2009 at 03:43 PM Niall Ferguson got into a lot of trouble with Paul Krugman for his remarks. I believe a synthesis of their opposing views is possible if one realises that Krugman is talking about the short to medium term, and Ferguson, naturally for a historian, is talking about the long term. The criticism of Ferguson as a conservative ideologue is wrong-headed in my opinion, and his words deserve due weight and attention. Posted by: Chris | May 27, 2009 at 03:01 PM It is very clear in the context that the "Dr... this or that" were figurative medical doctors, with their prescriptions for the economy, and not a reference to Professor Friedman's or Professor Keynes's academic attainments. Thus the later reference (as 'baiting', according to the note above) to "Dr Keynes's medicine bottle" being dated 1936. Posted by: John G | May 30, 2009 at 03:14 PM Then why are interest rates going up? Posted by: Thomas | June 05, 2009 at 11:39 AM Because some believe there is significant risk that the US treasury will either default or inflate. Maybe this *is* an emerging economy credit crisis after all... Posted by: ex-democrat | June 10, 2009 at 07:02 PM

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This Is Getting Damned Annoying: Will I Ever Be Allowed to Disagree with Paul Krugman Again About Anything? (Niall Ferguson Edition)

6/17/09 9:21 PM

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Economists: Paul Krugman Mark Thoma Cowen and Tabarrok Chinn and Hamilton

Juicebox Mafia: Moral Ezra Klein Philosophers: Matthew Yglesias Hilzoy and Spencer Friends Ackerman Crooked Timber Dana Goldstein of Humanity Mark Kleiman and Friends Eric Rauchway and Friends

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