ABSTRACT
One often attributes to Marx the apocryphal opinion according to which “history does not repeat itself, it stutters”. The recent (un-)expected resurrection of a policy debate around the old Treasury View is a splendid demonstration that economic theory – and/or might it be economists themselves – do more than stammering: they seem in fact to suffer from a serious speech impediment. Once again, and nearly 80 years after the 1929 great recession, the unex-
pected character and brutality of the 2008-2009 crisis have put in great difficulties the economic profession and the credibility of their models. The return of old theoretical arguments most thought forgotten, but also the way discussions between some economists rapidly took place in 2009 in the press are strangely reminiscent of the early 1930s. Pigou and Hawtrey are no longer politely but firmly arguing with Keynes, but Cochrane and Fama angrily inveigh Krugman; the debate is no longer taking place in the Times of London but in the New York Times (or, even better, in the more sophisticated New York Review of Books; Soros et al. 2009); the Treasury View is replaced by the crowding out effect; and, even if the pseudo classical model attributed by Keynes to Pigou has been replaced by a dynamic stochastic general
equilibrium model (DSGE) of the nth generation, one cannot be but flabbergasted by the economists’ inability to organise and carry out a reasonable debate on such fundamental questions of economic theory and policy. Before turning to the core of this debate, two obvious but important
issues must be dealt with first: on the one hand, the very different nature of the economic policy decisions taken by policy makers during the 1930s compared with those taken between 2009 and 2012. On the other, the crucial question of the exact measure of the multiplier effects of budget deficits during these two episodes. In June 1933, most industrial countries (including the Soviet Union
and China) gathered in London to examine various possible ways out of the crisis already in its fifth year. Perfectly analysed by Kindleberger (1986), the central difficulties was to avoid a vicious spiralling recession initiated by uncoordinated deflationary economic policies reinforced by beggar-thy-neighbour policies based on competitive devaluations and creeping protectionism. Characterised by the gold-exchange standard (the anchor par excellence of price stability) and the balanced budget canon (the Treasury View), this theoretical framework would by definition hinder any systematic countercyclical economic policy. In particular, the crowding out effect makes sure that consumption (via price rises and substitution effects) and private investment (via rises in interest rates) would be altered by an amount equivalent to any increase in public spending. Behind this twin argument, Say’s law is obviously looming large (in fact a primitive version of a Walrasian general equilibrium then surprisingly fallen into oblivion). Even if the United Kingdom (during the Summer of 1931) and the
United States (in June 1933) eventually gave up the gold-exchange standard, the Hoover administration kept alive the Treasury View until 1931 (the Federal budget for 1931 even registered a surplus). The same argument reigned supreme for HM Treasury against which Keynes battled ferociously. To make a complicated argument temporarily simple, and to paraphrase Jean-Claude Trichet (who, in. . . 2010, like in Moliere was speaking Treasury View, and did not even know it!), during a recession, a balanced budget is supposed to ease the recovery by freeing resources for private investments strengthening thus the private sector’s confidence. Conversely, 75 years later, in November 2008, The Washington G-20
summit worried that “1929 could happen again” asserted with great clarity to have understood how not to commit twice the same mistakes: a hyper-expansionist monetary policy coupled with substantial budget deficits were the order of the day. As a 2008 IMF Staff Position Note judiciously explained: “the optimal fiscal package should be timely, large, lasting, diversified, contingent, collective and sustainable” (Spilimbergo et al. 2008, p. 2). Less than two years later, most European countries
adopted some version of the Treasury View in an attempt to solve the euro crisis. The heated discussion between US economists to be examined later
took precisely place during this two-year interval. And, of course, to try to understand the part, if any, played by the economic profession in the (un-) expected resurrection of the Treasury View. Second qualification to the present discussion: the question of the mea-
sure of the multiplier effects of budget deficits. In the same 2008 Staff Note, the IMF economists asserted that multiplier effects is much weaker than postulated by Keynesian economists, and that “existing studies provide a range of fiscal multipliers from less than zero to larger than four” (p. 17). Five years later, and still within a deep recession, Blanchard as the IMF chief economist has produced several papers arguing unexpectedly that the fiscal multipliers have been considerably stronger, at the zero lower bound, than previously thought (see e.g. Blanchard and Leigh 2013).2 In what follows, nothing is said about this crucial issue. At that stage of the discussion, even if most economists would readily admit the weakness of the multiplier effect, most of them would also admit that, during a recession, deficit reduction (or even engineering a surplus) is not the best solution to support a potential recovery. On the other hand, a majority of economists is well aware today that,
unlike during the late 1920s when most countries had a recent record of balanced budgets, during the first decade of the twenty-first century, most countries have a long, sometimes very long, history of systematic and recurrent structural budget deficits reaching – some of them being saddled with hard-to sustain debt levels. Hence, the underlying argument recently has been much more on the unsustainable development of the stock of debt, i.e. a potential exponential increase in the debt/GDP ratio. This contribution is organised in three parts. With the help of the so-
called Chicago Cannon-Cochrane-Fama (CCF) model, part one is an attempt at a critical inventory of the resurrection process of a simplified version of the Treasury View during this 2008-2009 debate. Part two investigates some of the parallels between pre-Keynesian modelling and the logic of modern dynamic stochastic general equilibrium models (DSGE); it discusses the possible part played in that debate by the history of recent economic thought. A discussion of the nature and genealogy of the models used is also put forward. Part three suggests more briefly some parallels between Keynes’s suggestions in the General Theory and modern models on the level of public debt, the distribution of this debt between agents, the
risk transfer from private agents to the government and the opportunity to stimulate an economy in recession by . . . increasing the level of the public debt. Some conclusive remarks round up the contribution. A last warning is plainly not out of place here: in terms of economic the-
ory, the level of sophistication of this contribution is extremely modest. As a matter of fact, it does not report on careful discussions in top-tier journals but on the rhetoric used by some economists to sell their favourite theoretical conclusions to a large public. Hence, this paper is neither a scholarly history of the interwar Treasury View nor a sophisticated (or polemical) critique of current economic policy. By examining the rhetorical use of an old piece of economic theory by some modern economists, it simply intends to report on “how today’s economists conduct a public debate”. For once, the interest of the discussion does not lie in its level of sophistication but in the way it is conducted.
