The debate over post-crisis monetary and fiscal policy has been heating up, on both sides of the Atlantic. The eurozone is committed to fiscal and monetary tightening. The US is shifting towards fiscal tightening, while future monetary policy is unclear. Meanwhile, the UK is committed to fiscal tightening, with the future of monetary policy also uncertain.
So who is right? It will come as no surprise that economists disagree deeply. Some of those disagreements were brought out in a letter to the FT of May 4 2011 from my friend, Tim Congdon, perhaps the UK’s most influential monetarist. That letter was in response to my column of April 28 2011, which began with a remark by Larry Summers, former adviser to Barack Obama, that “I find the idea of expansionary fiscal contraction in the context of the world in which we now live to be every bit as oxymoronic as it sounds”. To this comment Mr Congdon responded that “fiscalist Keynesianism, like history, is bunk”.
Mr Congdon appealed to history, both there and in the June issue of Standpoint magazine, to demonstrate the coincidence of fiscal contractions with economic expansions. Maybe, he meant that Keynesianism is bunk, unlike history. I would suggest that his use of history is bunk.