Saturday, June 02, 2012
Debt absolutists and simplistic Keynesians
Posted by David Smith at 04:30 PM
Category: Thoughts and responses

This is an excellent piece by Kenneth Rogoff, which is in the same territory as my piece for The Sunday Times tomorrow. Rogoff has no time for the debt-ceiling absolutists, who argue for an immediate block on all additional government debt. As he says, it can't be done. But, by the same token:

"If the debt-ceiling absolutists are naïve, so, too, are simplistic Keynesians. They see lingering post-financial-crisis unemployment as a compelling justification for much more aggressive fiscal expansion, even in countries already running massive deficits, such as the US and the United Kingdom. People who disagree with them are said to favor “austerity” at a time when hyper-low interest rates mean that governments can borrow for almost nothing.

"But who is being naïve? It is quite right to argue that governments should aim only to balance their budgets over the business cycle, running surpluses during booms and deficits when economic activity is weak. But it is wrong to think that massive accumulation of debt is a free lunch."