Martin Wolf Understands Economics...
...as John Cochrane does not.
John Cochrane complains about being accurately quoted by Paul Krugman:
John Cochrane of the University of Chicago, who wrote that Krugman was sliming a growing enemies list: "Don't argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let's just not pretend this has anything to do with economics..."
John Cochrane's problem is not one embarrassing quote. It is that he keeps saying, over and over again, things that are wrong on a basic level, that reduce the level of the debate, and spread ignorance.
For example, Mike Sandifer:
Speaking of ignorance, I saw John Cochrane on Bloomberg a couple of weeks ago... at the 3:23 mark, he said that fiscal stimulus was ineffective because a dollar of spending is a dollar that had to come from someone else. Correct me if I’m wrong, but isn’t this an obvious fallacy? The stimulus is being financed with deficit spending, with government debt being bought by at least some of that money that may otherwise be on the sidelines. The link to the video: http://www.youtube.com/watch?v=HO4E1bs4CbE
Now comes Martin Wolf to--patiently--argue with John Cochrane and his ilk:
We can only cut debt by borrowing: “You can’t cut debt by borrowing.” How often have you read or heard this comment from “austerians” (a nice variant on “Austrians”), who complain about the huge fiscal deficits that have followed the financial crisis?
The obvious response is: so what? Shifting debt from people who cannot support it to those who can - the population at large, both now and in future - seems to make a great deal of sense if the alternative is an economic collapse that leads to a loss of output and investment now and so of income in the long term. Indeed, under the latter alternative, even the fiscal deficits may end up little, if any, smaller if one tries to slash them, as the UK could be about to discover.
Before leaping to that conclusion, however, let us approach the issue of de-leveraging - or debt reduction - analytically....
Since the financial balances of the household, corporate, government and foreign sectors must sum to zero, a rise in the surplus of the household sector must be offset by an offsetting move in other sectors. During a post-crisis recession, the surplus of the corporate sector always rises... because managements slash investment.... [N]on-financial corporate sectors were running substantial financial surpluses in the high-income countries before the crisis and are running still bigger surpluses now.... [S]urplus countries do not want to make the adjustments needed to allow the US, UK and other former deficit countries run huge current account surpluses at full employment levels of income.... When one has eliminated everything else, it turns out that the only sector both able and likely to offset a large move of the household sector towards financial surplus in a post-crisis slump is the government. Indeed, that is exactly what has happened.
My conclusion, then, is... the only way that the private sector can de-leverage, when large economies are in a post-crisis recession, is for the government to leverage. The economy, as a whole, cannot de-leverage in any other way, other than via accelerated mass bankruptcy, which would certainly deepen the recession.... The recommended alternative of slashing the fiscal deficit while the private sector tries to slash its debt suffers from a fallacy of composition: it is impossible for all sectors of the economy to spend less than income at the same time...
