Friday, June 26, 2015

Are Keynesians and non-Keynesians moving toward a consensus on deficit reduction?

From Scott Sumner.
"Recently I see some positive signs of consensus.  Back in 2012 there seemed to be a huge split between the “deficit scolds” who insisted that we shrink the budget deficit, and Keynesians who suggested that it was a nutty idea.  At the time, I was under the misapprehension that many Keynesians thought a massive and sudden reduction in the federal budget deficit would constitute “austerity” and hence would slow growth.  Now that the dust has settled, we can calmly look at the data:

Calendar 2012:  Budget deficit = $1061 billion
Calendar 2013:  Budget deficit = $561 billion

A reduction of $500 billion in one year.  I used to be under the impression that Keynesians thought this would be a disastrous policy that sharply slowed growth. I’m now happy to report that I was wrong. (Who says I never admit I was wrong?) The new, new, new Keynesian consensus seems to be that the deficit reduction shown above does not constitute the sort of austerity that would be expected to slow growth.

I was under the impression that massive tax increases and cuts in transfer spending were contractionary.  Now I’m happy to report than only cuts in government consumption seem to count.  (Has Christina Romer been informed yet?)

So we have a new consensus, which spans the ideological spectrum.  Yes, Federal government officials, go ahead and slash the budget deficit by $500 billion in a single year by raising taxes and cutting spending.  Just don’t touch government consumption.  It’s OK, it won’t slow growth.  Who says economists can never agree on anything?

PS.  This post could be interpreted straightforwardly or sarcastically.  You might be surprised to know that even though I wrote the post, I don’t know which interpretation is correct.  Really.  I honestly don’t know what Keynesians think of the $500 billion in deficit reduction, mostly accomplished through taxes and transfers.  I welcome Keynesian commenters who will educate me on this point.  (I.e., if they really don’t think 2013 was austerity that would slow growth, then we really are achieving a consensus, no sarcasm intended.  It makes deficit reduction much easier.)"

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