This is something of a personal indulgence, but my excuse is obvious given recent posts.
I always smile when certain people claim that Keynesians said there would be no recovery. There are two reasons. The first is personal. A well known UK economist (clue: someone who the economics editor at a well known newspaper finds it best to ignore!) reminded me of this post I wrote three years ago. Here is an excerpt:
“Good spin is simple, and plays off real events. So the line “we have to reduce debt quickly because otherwise we will be like Greece, or Spain” works, while the response “but the Eurozone is special because member countries do not have their own central bank” is too technical to be an effective counter. In contrast the argument that Wolf and Portes put forward above – why not invest when it’s so cheap to borrow – is effective, which is why it is dangerous. So of course is “austerity is stifling growth”, as long as growth is negative or negligible. However, come 2015, the spin “we have done the hard work and the strategy has worked” will accord with (relatively) strong growth, while talk of output gaps and lost capacity will have less resonance. True, unemployment will still be high, but not many of the unemployed are Conservative voters, and the immunising spin about lack of willingness to work can be quite effective.
Will the strategy, and the associated spin, work? The risk that growth will not be respectable in 2014 must be low: by then consumers and firms should have adjusted their borrowing and wealth sufficiently such that growth can resume. If there is a chance that it might not be, I expect to see some measures in next year’s budget that do not conflict with the overriding ideological objective, such as incentives for firms to bring forward investment.”
I got two things wrong here. First, I did not foresee the continuing stagnation in productivity, and therefore that unemployment would fall rapidly despite at best average output growth. (Perhaps another piece of Cameron ‘luck’?) Second, I got the example of a budget stimulus measure wrong (we in fact got Help to Buy), because I was thinking like an economist and not a certain politician. But one thing I did not get wrong is that there would be a recovery. Indeed I was if anything expecting a rather stronger recovery than actually took place.
The reason I got this right, and the second reason I smile, is that this has nothing to do with any personal insight on my part. As Paul Krugman explains, I was just using the standard Keynesian model. What amuses me is how some anti-Keynesians seem to think that Keynesian ideas are embodied in the words of certain well known Keynesians, rather than in the journals, textbooks and central bank models. As Paul has rightly said many times, the basic ideas of Keynesian economics have been pretty well vindicated by macroeconomic developments in recent years. This, you might argue, is why they are in the textbooks and central bank models in the first place.