Despite Keynesians’ Victory, Economic Policy Holds

A tale of major international consequence, petit academic rivalries, classic economic history, and, quite possibly, the fate of markets:

The confluence of events provided further evidence of Keynes’s central proposition: when consumers and businesses set out to reduce their debt burden, and private spending and investment stall, it is the government’s job to borrow, spend and pick up the slack.

The claim by Ms. Reinhart and Mr. Rogoff had provided an intellectual foundation to the demand by House Republicans, British Tories and Germans that indebted governments should move quickly to reduce their budget deficits and the burden of debt.

Its demise — at the hands of a graduate student from the University of Massachusetts, Amherst, who discovered flaws in the Harvard economists’ methods — left a more modest assertion in its wake: heavily indebted nations grow more slowly. Yet it is not even clear that debt necessarily depresses growth. The track record from Europe and elsewhere suggests that austerity programs that hold back growth often make the debt burden even worse.

via Despite Keynesians’ Victory, Economic Policy Holds –


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