As Adam Smith said, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public….”.
So when two Harvard economists are made to look silly (Rogoff and Reinhart), another Harvard economist, Laurence Summers, comes to their rescue in the Financial Times. The FT article is reproduced nearly word for word at Huffington.
And one of Summers’s arguments in defence of R&R is the straw man argument that we cannot let debts “accumulate with abandon”.
Well – doh – no one ever said they SHOULD accumulate “with abandon”.
Certainly one group that advocates a more relaxed attitude to deficits and debts (advocates of Modern Mondetary Theory, like me) do not advocate “abandon”. We have VERY SPECIFIC ideas as to EXACTLY how big deficits and debts should be.
And those ideas are little different to Keynes’s dictum: “Look after unemployment and the budget will look after itself”.
In other words if the amount of deficit required to maximise employment as far as that is consistent with keeping inflation under control is much bigger than any previous deficit, then so be it. Conversely, if a SURPLUS of record proportions is needed to achieve the above “unemployment / inflation” objective, then again, so be it.
To judge by his last paragraph, Summers doesn’t get the latter point. He says, “This is not the time for austerity, but we forget at our peril that debt financed spending is not an alternative to cutting other spending or raising taxes. It is only a way of deferring those painful acts.”
Those two last words “painful acts” indicate that Summers is not too clued up here, and for the following reason.
A painful act is an act that makes you worse off. In contrast, and in line with Keynes’s above dictum, if taxes are only raised when such taxes are required to damp down demand and inflation, then no “pain” is involved!!! That is, such taxes simply remove money from the private sector which, were it to be spent, would stoke inflation, and make us WORSE OFF.
And doing something that prevents you becoming worse off is not “painful”: taking an asprin to cure a head ache is not “painful”.
Now are you puzzled by the idea that raising taxes can make you better off or stop you becoming worse off? Then go back to square one above and read the above paragraphs again.
The only sense in which Summers can be said to be right in referring to “painful acts” is that such “acts” could be POLITICALLY difficult. But he doesn’t say anything to the latter effect, so I assume he isn’t referring to that specifically political point.