fiscal consolidation is not stimulus

Martin Wolf responds to monetarist criticism of his position that fiscal contraction is unlikely to be expansionary when the economy is in deep recession. Martin explains that he is a fiscal conservative. His disagreement with monetarists is on the timing of fiscal consolidation, not the necessity.

I supported the [UK] fiscal consolidation in the early 1980s and 1990s. In both cases, it seemed manageable and necessary. I also support fiscal consolidation now. The doubts are simply over timing, speed and flexibility, because today private indebtedness is high, banks fragile and interest rates as low as possible. ….

Yes, in the very long run, the combination of a large expansion of broad money with a fiscal contraction would probably return the economy to something close to full employment, but nobody can know over what time period or even at what price level. The celebrated remark of Keynes – “The long run is a misleading guide to current affairs. In the long run we are all dead” – is applicable.

Martin Wolf, “Arguing over the ABC and D of the crisis“, Financial Times, 3 June 2011.

Martin selected an appropriate quote from chapter 3 of Keynes’ A Tract on Monetary Reform (1923). I would add the sentence that follows: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”


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