I’m afraid I did not respond to requests to talk directly about the
debate
over Gerald Friedman’s numbers.
I think I can only cope with that kind of thing one country at a
time, and there were better people
on the case. But I suspect a key to seeing your way through the wider
debate is to know when to be optimistic about economic growth, and
when not to be.
Martin Sandbu, channeling Narayana Kocherlakota, is quite right that
we should
not discount the possibility that economic growth could be unusually
strong over the next decade or two. There is a significant chance
that some of the slowdown that has appeared to have occurred to trend
growth since the Great Recession might be reversible, partly because
many hysteresis effects are also reversible. Inflation may not
respond positively to strong growth as it has done in the past.
That possibility is high enough that it should have a big influence
on monetary policy, for reasons I and others have outlined
many times. The cost of needlessly throwing away potential resources
is much higher than the cost of small overshoots of an inflation
target. For that and other
reasons the Fed’s decision to raise rates - and the MPC's decision not to cut them - was a mistake, as is
continuing austerity.
Does that mean we should hard wire this optimistic view into budget
projections? Essentially no, because budget projections should be
based on your central guess of what is going to happen rather than
any best case scenario. Almost every politician thinks they have the
magic ingredient that will lead to strong growth. There is nothing
wrong in that, but they should hope for the best and plan for the
ordinary.
Doing this imposes a discipline on the electoral process that is
essential to stop some politicians pulling the wool over voters eyes.
If a politician or party wants to go with optimistic numbers, then
the debate should be about how reasonable those numbers are, so
voters can see what is going on. A world where these things are not
debated is a world where everyone promises the moon and no one is any
the wiser.
Where the discussion can get confused is if we put these two things
together, and note also that fiscal stimulus involving additional
investment would be good for the world right now. But that should and
is argued
for without pretending that it can all be paid for with the taxes
that will come rolling in as it happens. There is a rock solid case
for paying for extra investment - investment in its widest sense
including human capital - by borrowing, because future generations
benefit from that investment. When real interest rates are as low as
they currently are, you have to be ignorant, duplicitous or slightly
mad to say otherwise.
