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Paul Krugman: Conceding the Principle


Conceding the Principle (Wonkish): Dave Altig at the Atlanta Fed is a circumspect blogger — as he must be, given his position. He generally understates his points, and gives the benefit of the doubt to those who don’t deserve it; again, that’s the nature of his position, so it’s perfectly OK. But his latest post, about the very Keynesian models of some supposed anti-Keynesians, hits a little harder than most. And well it should. As Altig says, it’s really peculiar to have John Taylor, Robert Mundell, and Ken Rogoff portrayed as anti-Keynesians. Rogoff in particular is one of the founders of the “new open economy macroeconomics”, which is basically new Keynesian analysis applied to international macro. I knew immediately that some of the arguments being advanced about how government spending would lead to an equal fall in private spending were wrong precisely because I had read Obstfeld and Rogoff, and new that fiscal policy “works” even given very strong assumptions about rational, perfectly informed consumers....

What Altig soft-pedals here, understandably, is how inconsistent it is to accept the importance of aggregate demand, on one side, and reject any possible role for fiscal policy, on the other. If an increase in debt-financed business investment expands the economy; if an increase in debt-financed consumer spending expands the economy; then how can it be that an increase in debt-financed government spending doesn’t do the same thing? Faced with this question, as far as I can tell, the response of the Keynesian anti-Keynesians is, “Look! Regulation!” or maybe, “Anybody else have a question besides this guy?”

One thing I guarantee you: if John McCain were living in the White House, these same people would have lots of good things to say about the stimulative effects of deficits in a depressed economy.

I don't think Rogoff would. As somebody-or-other remarked at the recent Bretton Woods conference (Alan Taylor? Kevin O'Rourke?), for Reinhart and Rogoff it is always 1931 and we are always Austria--that fiscal policy is too dangerous to use for stabilization policy because government credibility is always shaky.