In The Weekend Australian, Stephen Kirchner decries short-term macroeconomic management. He writes:
“When the government reduces national saving by running a budget deficit, the interest rate rises and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy’s growth rate,” So says Joshua Gans in his Principles of Macroeconomics text. Yet Gans was also one of the 21 economists who recently signed a letter defending the government’s deficit spending.
Shock horror. What does this mean?
Let’s start with the obvious: that on page 218 of my co-authored adaptation of Mankiw’s Principles of Macroeconomics, it says just that. It even has italics for emphasis of the middle bit. (Actually, it is repeated on page 220 — must have a word with the publisher about that!) The passage occurs in a Section looking at the ‘Real Economy in the Long Run’ and in a long-run model that says that we don’t want government deficits persisting in the long-run. By the way, the statement that I put my name to says just that: “Of course other things being equal it’s better for governments to be debt free.”
The debate is about whether we incur a short-run deficit and had Kirchner bothered to read the entire book rather than pick bits and pieces he might have happened upon the very last chapter of the book which lays out five debates in macroeconomic policy the fourth of which is regarding the desirability of government balancing its budget. There ensues a discussion about the term ‘fiscal conservative’ but even in the pro case, I guess we can’t help ourselves to point out:
… it is reasonable to allow a budget deficitduring a temporary downturn in economic activity. When the economy goes into a recession, tax revenue falls automatically, because the income tax and the payroll tax are levied on measures of income. If the government tried to balance its budget during a recession, it would have to raise taxes or cut spending at a time of high unemployment. Such a policy would tend to depress aggregate demand at precisely the time it needed to be stimulated and, therefore, would tend to increase the magnitude of economic fluctuations.
This is precisely what the statement is. The surprising thing is we only have 21 economists signing it. And that is before we get to the ‘con’ case which emphasises the Ricardian argument that it all doesn’t matter really.
The bottom line: beware ‘got ya’ selective extracting. They reveal a short attention span and unwillingness to deal with economic complexity.