I got to the third sentence of Osborne’s speech

The second and third sentences of the Chancellor’s budget speech today were:

            “We set out our plan. And together with the British people, we held our nerve.”

In other words, it was Plan A all the way. None of the easing of austerity that fuddy-duddy old Keynesians were asking for.

Everyone knows this is true because the Chancellor keeps telling us it is, and is rarely challenged when he does so. The only problem is that the numbers tell a different story. The best simple way of seeing how fiscal policy actions might influence the economy is to look at the cyclically adjusted primary balance: that is, spending minus taxes adjusted for the state of the economic cycle, and excluding interest payments on government debt. The first column presents the OBR estimates and forecast of that series from today’s budget. We start with the peak deficit in 2009/10, when the last government was trying to minimise the impact of the recession. We then see substantial fiscal tightening until 2012/13. Fiscal tightening essentially stopped in 2012/3 and 2013/4. (The figures exclude Royal Mail and other distortions: the headline figures that include this effect are in brackets.) 

	2009-10	2010-11	2011-12	2012-13	2013-14	2014-15	2018-19
Cyclically adjusted primary balance	-6.8	-4.4	-2.9	-2.8 (-1.0)	-2.5	-1.9	3.2 (3.0)
Cyclically adjusted net borrowing	8.7	7.1	6.0	5.3 (3.1)	5.0 (4.3)	4.5 (3.8)	-0.3 (-0.1)
Above, March 2011 budget	8.9	7.4	5.3	3.7	2.0	1.0	n.a.

Source: OBR March 2014 Budget Tables 4.39 and 4.43, Feb 2014 Databank, and March 2011 Budget Table 4.1.

The second row shows the same figures for the balance including debt interest payments, and the pattern is much the same. The final row shows what was planned in the March 2011 budget. That shows continuing fiscal contraction in 2012/13 and 2013/4. That was Plan A, and the table shows clearly how Plan A was abandoned as the recovery failed to come.

So the government did not ‘hold its nerve’. Thankfully it realised its mistake, and put its policy of austerity on hold. But it wants to keep that quiet, and continues to pretend it never happened. Why? The reason is that these numbers clearly indicate the original policy was damaging. Frontloading austerity was not meant to help derail the recovery. It did, so after a couple of years fiscal tightening stopped. The economy recovered. If the initial austerity was supposed to have no impact, why was it stopped in 2012/3? The Chancellor keeps telling us there is much more to do. 

So we have a blatant misrepresentation by the third sentence of the budget speech. Is this a record? I may get beyond that in later posts, but as Tim Harford writes, it really is all politics and precious little economics.

Greece and denying responsibility

My earlier post making some parallels between attitudes to Greece and attitudes during the Irish potato famine of the 1840s was picked up by others in Ireland and Greece, and has drawn some interesting reactions. Thankfully most understood that, as I wrote: “Of course the Irish famine is different in degree and form to the difficulties being faced by many in some Eurozone economies.” So why did I still want to make the comparison? The trigger was the denial of responsibility highlighted by the Lancet study I referred to, and the common alternative view that all problems were down to a corrupt or inefficient Greek government and economy.

I wanted to make the parallel with the Irish famine for three reasons. First, there seemed to be the same type of deflection of blame going on today as at that time. Second, ideas about what could and couldn’t be done in terms of economic relationships were central. Third, the verdict of history is pretty clear with the Irish famine. The British government did provide some famine relief, but what history remembers is that it was not nearly enough. History remembers the action and inaction of the British government, and not the inefficiencies and inadequacies of Irish agriculture.

One response to my criticisms is that without Troika or IMF support, austerity would have been much more immediate and intense. This is of course true: unable to borrow at all, the Greek government’s primary deficit would have had to fall to zero even if all interest payments on debt had been halted. But as I noted above, the headline from history is not that the famine would have been worse still if the British government had not provided any relief, but rather that it did not provide enough.

Troika assistance to Greece made two major mistakes. First, wishful (at best) thinking about the amount of government debt Greece could support. Second, the Troika imposed a front loaded austerity programme that was far too severe. How much of the subsequent collapse of the economy was due to this is unclear, but few seriously doubt it played a major role. As I noted here, the estimates by the Troika of the impact of austerity that were made at the time ignored basic and widely accepted macroeconomic analysis.

Mistakes get made, particularly in a crisis. When these mistakes become evident, as they did pretty quickly in the case of Greece, there are two possible responses. The first is for those who made these mistakes to admit responsibility, and try and learn the lessons. I think the IMF has to some extent tried to do this, as I noted in this earlier post. The second possible reaction is denial, and to seek to blame others. It is this response that history does not look too kindly upon.

Denial takes many forms. There are many myths. One of the most invidious is that the failure of Greek debt to stabilise is because the Greek government failed to undertake the required austerity. This is simply not true, as this excellent study of all the assistance programmes to Eurozone countries by Pisani-Ferry, Sapir and Wolff documents. (See also the numbers I presented in this post.) The austerity programme was always far too severe, and became more so over time.

Another myth is that workers refused to cut wages, thus preventing the necessary adjustment in competitiveness. To quote the Pisani-Ferry et al study: “It is only for wage-based competitiveness indicators such as unit labour costs that the improvement is noticeable. Thanks mostly to downward wage adjustment, ULCs started to decline already in 2010 and the trend accelerated strongly in 2011-12.” So the image of the stubborn Greek worker refusing to face reality is incorrect.

There is also a denial of the extent to which the Troika promoted its self interest, rather than doing what was good for the Greek people. No doubt part of the failure to recognise the necessary debt write off was wishful thinking, but it is difficult to believe that it had nothing to do with who held that debt. As this Breugel study shows, the term ‘privatisation’ appears ten times more often in Commission programme documents than the word ‘poverty’. When it became possible that Greece might elect a government headed by Syriza, Greece was threatened with exit from the Eurozone not because the Troika believed this prospective government might do more harm to the Greek economy, but because they threatened to suspend interest payments.

A good example of this self interest is defense spending, and German built submarines in particular. Greek defense spending is well above the Eurozone average. An obvious initial austerity measure would have been a complete suspension of Greek spending on overseas produced military hardware. This is one example where austerity could actually be expansionary: Greece benefits from the reduced tax burden, but the demand impact is felt entirely overseas. Any fears about Turkey could have been covered by assurances from other governments. Indeed, given the alternatives, it seems criminal not to have made this a condition of Troika support. But of course this would be to ignore where this hardware was built - mainly in Germany and other Eurozone economies.  

As Merkel is reported as saying: “But we never asked you to spend so much of your GDP on defence”. Yet the Troika has not been afraid to ask for many things. One of the myths is that Troika loans have not involved much conditionality - as Pisani-Ferry et al note, “the Troika has immersed itself more and more in the sector-specific regulation of microeconomic behaviour.” The extent of corruption in the procurement of Greek military hardware is immense, but the bribes have been paid by companies in other Eurozone countries, particularly Germany.

It is clearly nonsense to argue that the damage done to the economy and health of the Greek people is all down to corruption and inefficiency within Greece and nothing to do with Troika actions. Denial of responsibility is particularly dangerous if it means not admitting your mistakes but instead repeating them. The tragedy of the Greek political class is not that they failed to enact Troika policies, but that acquiesced to them. The one ray of hope is that now the Greek government is no longer running a primary deficit, so it potentially has much stronger negotiating power. I only hope they use it. 

Earlier posts on Greece

17/03/14 The sharp but effectual remedy

13/06/13 How a Greek drama became a global tragedy

19/04/13 The stupid cruelty of the creditor

14/11/12 Greece: continuing the disastrous ‘squeeze and hope’ strategy

23/07/12 Playing with Fire in the Eurozone

23/05/12 Why I can still believe the Euro will survive, just

Inequality and the media

Kathleen Geier asks why there is not more outrage about growing inequality. Her starting point is an excellent piece by Justin Fox, in which he recounts the history of class warfare in the U.S. To quote:

“What’s been unique, or at least highly unusual, has been the environment in which entrepreneurs and business executives were able to operate from the late 1970s through the early 2000s. Taxes dropped, high-end incomes exploded, and hardly anybody complained at all. Far from complaining, in fact, the news media for the most part celebrated the recipients of those exploding incomes for their boldness, creativity, and economic importance.”

On this side of the pond there may be more awareness of past class conflict. Yet I suspect there is even less outrage in the UK than in the US, and there is just as much to be outraged about. Anyone who thinks what has happened over the last few decades to executive pay just represent increasing marginal products should read Will Hutton today on recent pay deals at the Co-op. As those in the UK will know, this company has not been doing too well of late, which means no performance related bonuses. So instead the Co-op’s executives are to receive ‘retention payments’ equal to their base salary. This ‘retention bonus’ is also being paid to a director who is leaving the company!

Remuneration committees, who fix these salaries, always say that they are just aligning pay ‘to the market’. But this is a market without supply and demand! What these committees invariably do is fix pay to somewhere in the upper half of ‘market rates’, because their particular company faces ‘unusually difficult challenges’ and wants to retain the ‘best talent’. It does not take an economist to see that this process will generate over time steady increases in executive pay relative to the pay of everyone else, which is of course exactly what we have seen. (For one possible story of why this process goes on at some times and countries but not others, see here.) Even David Cameron calls this market failure.

So why no outrage? Geier gives two explanations. The first is the welfare state, which reduces poverty and therefore takes the edge off outrage. I’m not sure I buy this. In the UK a third of a million people received a minimum of three days emergency food from Trussell Trust food banks in 2012-13, compared to 26,000 in 2008-09. Plenty of potential scope for outrage there. The second is the media, which I certainly do buy. But what I found interesting was how she ended her piece. She felt that the media could only “explain a part of the public’s eerie underreaction to the skyrocketing economic inequality we’ve seen over the past several decades. There’s got to be more to the voters’ lack of outrage.”

I’m sure there are other potential explanations, such as the decline of trade union influence. I know that Geier is not alone in feeling that any explanation that focuses on the role of the media is somehow inadequate. Yet why is this? We know that the public significantly underestimates the extent of inequality in both the US and UK. The image that most people have of the super rich is movie stars or the likes of Bill Gates, not common or garden executives doing managerial jobs. How can people be outraged, when they do not have the outrageous information? I think the decline of trade unionism in the US and UK is important partly because unions provided an alternative source of information from the mass media, and because they were a resource which - once upon a time - media that wanted to be unbiased felt they should draw upon.

So why are many on the left reluctant to put an analysis of the media at the centre of any discussion of political beliefs and attitudes? The mechanisms by which power of various kinds can influence the media are hardly mysterious. (Here is an example of how this can be modelled, and here is a case study.) Perhaps it is hard for those obsessed by politics and adept at obtaining information to imagine the position of the majority who have other priorities. Perhaps it is a reaction to how some abused Engels’ idea of false consciousness as a means of overriding democracy. Perhaps arguing that people’s attitudes depend on the information they receive can too easily be portrayed as paternalism. But when it comes to understanding the lack of outrage about inequality, I’m not sure there has got to be more than the media.

Two earlier but related posts:

Inequality and the Left

Is UKIP the UK's Tea Party?

 

The sharp but effectual remedy

This is about the Eurozone, and it needs to be rather long to be provocative. You do not need any prior knowledge to understand the message.

Mario Draghi, head of the ECB, declared the Eurozone as an “island of stability” yesterday as he announced no change in policy. He was referring to the impact of the Ukrainian crisis, but I think it serves for macroeconomic policy as a whole. Inflation is well below target, and there is a negative output gap of nearly 4% according to the OECD. Unemployment remains at 12%. There is a recovery from recession, but as Reza Moghadam from the IMF points out, it is weak and fragile.

So the Eurozone is stable, stuck in a bad place. As the IMF again warns, this place looks a lot like Japan in the 1990s. I have my misgivings (technical discussion here) about the ‘two equilibria’ idea that Gavin Davis among others have used, but where it might apply is when a central bank’s inflation target is either unclear or one-sided, and that is much more true for the ECB than for the Fed or the Bank of England. What is clear is that the ECB should not wait until there is deflation before doing more than sitting on its hands.

Yet complacency is not confined to the ECB. We had a second Eurozone recession because fiscal austerity has been acute in some member countries, and it has not been offset elsewhere. (For the numbers, see here.) If you think that is because the Eurozone is a monetary union and not a fiscal union, ask yourself this. If overall fiscal policy was being determined in Brussels rather than by individual national governments, would it be so very different today? I suspect we would be seeing similar overall austerity as the ‘Eurozone government’ obsessed with reducing debt. Given their relative competitive positions, that would mean ‘stability’ in parts of the Eurozone and severe recessions elsewhere, much as we have now.

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“drastic reductions to municipality budgets have led to a scaling back of several activities (eg, mosquito spraying programmes), which, in combination with other factors, has allowed the re-emergence of locally transmitted malaria for the first time in 40 years”

“a 21% rise in stillbirths between 2008 and 2011 …. attributed to reduced access to prenatal health services for pregnant women.”

These are statements not about some poor African nation, but about Greece, from a recent paper in the Lancet. (HT Francesco Saraceno. Quotes above and below exclude footnotes giving references.) The title of the paper is  ‘Greece's health crisis: from austerity to denialism’. By denialism they mean the following:

“Greek citizens ... are subject to one of the most radical programmes of welfare-state retrenchment in recent times, which in turn affects population health. Yet despite this clear evidence, there has been little agreement about the causal role of austerity. There is a

broad consensus that the social sector in Greece was in grave need of reform, with widespread corruption, misuse of patronage, and inefficiencies, and many commentators have noted that the crisis presented an opportunity to introduce long-overdue changes. Greek Government officials, and several sympathetic commentators, have argued that the introduction of the wide ranging changes and deep public-spending cuts have not damaged health and, indeed, might lead to long-term improvements. However, the scientific literature presents a different picture. In view of this detailed body of evidence for the harmful effects of austerity on health, the failure of public recognition of the issue by successive Greek Governments and international agencies is remarkable.”

This paper focuses on Greece, but here I talked more generally about the work of one of the co-authors, David Stuckler, who finds a general association between austerity and deteriorating public health.

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Between 1846 and 1851 about a million died of starvation and epidemic disease in the Irish potato famine. The general consensus today is that although this famine began as an extraordinary natural catastrophe, its impact was made much worse by the actions (or lack of action) of the British government, headed by the Whig Lord John Russell. As Jim Donnelly describes here, there seem to be three ideologies that held the “British political élite and the middle classes in their grip, and largely determined the decisions not to adopt the possible relief measures.” These were “the economic doctrines of laissez-faire, the Protestant evangelical belief in divine Providence, and the deep-dyed ethnic prejudice against the Catholic Irish.” The system of agriculture in Ireland was perceived in Britain to be riddled with inefficiency and abuse. The British civil servant Charles Trevelyan, chiefly responsible for administering Irish relief policy, wrote that the famine was “the sharp but effectual remedy by which the cure is likely to be effected.”

There is a debate about the humanity and personal responsibility of Charles Trevelyan. Yet his actions were hardly idiosyncratic. The Lord Lieutenant of Ireland, the Earl of Clarendon wrote a letter to Prime Minister Russell on April 26th, 1849, expressing his feelings about lack of aid from the British House of Commons: "I do not think there is another legislature in Europe that would disregard such suffering as now exists in the west of Ireland, or coldly persist in a policy of extermination." Henry Farrell notes that the Economist magazine strongly supported the laissez-faire line pursued by Trevelyan and Russell. Were the governing elite collectively evil, as they provided armed guards for the shipping of huge quantities of grain away from the same areas affected by the blight? We could just say people act in their own interests, but as Dani Rodrik argues, this underestimates the power of ideas and ideologies.

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Of course the Irish famine is different in degree and form to the difficulties being faced by many in some Eurozone economies. But the similarities should worry us. There is the widespread view that the inefficiencies and corruption that exist in these economies are a key factor in explaining the difficulties these countries are in. Worse still is the idea that severe austerity is necessary to ensure ‘structural reform’ takes place to reduce these inefficiencies. There is also a common belief today that various economic processes cannot be interfered with and contracts have to be upheld, which are not very different from beliefs held by the British government in the 1840s. When the ‘effectual remedy’ leads directly to suffering, the evidence that it does so is ignored, as the Lancet paper argues is happening in Greece today.

If you think that the problems in Greece and elsewhere are clearly self-inflicted, rather than the result of an act of God like potato blight, consider this. The Greek government borrowed way too much and concealed that fact, but this was hidden from the Greek people as much as anyone else. Just because politicians are elected, does that make the people as a whole responsible for everything they do? Are they more responsible than those who lent the government this money, or in the case of other Eurozone countries lent money to banks that were subsequently bailed out with no public discussion? 

In Victorian times there was a belief that the debtor must be made to repay their debts whatever the hardship that this entails, and with minimal cost to the creditor. We think we live in more enlightened times today, but at least the individuals in debtor prisons normally signed the contracts they were being held to. In the case of Greece and elsewhere their leaders signed on their population’s behalf.

If you say that the law must be followed, well the British government was also protecting the rule of law when it ensured that those shipments of grain left famine stricken Ireland. Are those shipments of grain so very different from the flows of money now leaving Greece and elsewhere to pay the interest on government debt? Our attitude to famines is a little more enlightened than it was in the 1840s, but perhaps some of that enlightenment is needed elsewhere.

Economics, Politics and Naivety

I’m no fan of UK Chancellor George Osborne’s economics, but he is a pretty good politician. He pulled out all the stops a few weeks ago when he ruled out a monetary union if Scotland became independent. (For the background, see here.) Not only did he get his Labour opposite number Ed Balls to agree, but he also had the Treasury’s Permanent Secretary take the highly unusual step of publishing personal advice that monetary union was unwise.

What has rather amused me since has been the reaction of some that this is only a bluff. Incredulous indignation brimmed over from Kevin McKenna in the Observer: “Is a UK chancellor of the exchequer seriously asking us to believe that he is contemplating damaging the entire UK economy following a yes vote?” The chair of the Scottish government's fiscal commission working group, Crawford Beveridge, whose other members are Professors Andrew Hughes Hallett, Sir Jim Mirrlees, Frances Ruane and Joseph Stiglitz, said that none of them believed "for a minute" that chancellor George Osborne was serious.

Why was I amused at the idea that George Osborne could not possibly plan to do something that would be damaging to the economic interests of the UK economy? Just yesterday in opposite pages of the FT were two news items that gave clear examples of where for the Conservatives politics trumps economics. First, the chief executive of the engineering company GKN warned that the possibility of Britain leaving the EU following the proposed referendum was harmful to UK companies and was already being used by competitors against them. The second was on a report that migrants to the UK set up one in seven new UK companies.

Now you could argue that planning a referendum on leaving the EU and curbs on immigration are not ‘true’ Conservative policies, but are being forced on the party by the rise of UKIP. I’m not sure about that, but it is not the point. Both policies are clearly harmful to the economy as a whole (don’t forget the damage that the current immigration policy is doing to one of our more successful export industries, higher education), yet are being adopted for political reasons. Politics is dominating economic interests.

And then there is the small matter of fiscal austerity, which the OBR estimates has reduced UK GDP by a total of over 5% of annual output up to last year. That is a large economic price for the political goal of a smaller state.

Perhaps the bluff idea comes from the perception that once the Scots have voted yes, the political incentive to say no to monetary union disappears. That seems naive. Losing Scotland will be deeply humiliating for this government, and unpopular among remaining UK voters. The political imperative after a Yes vote will be to make it appear as if the Scots have made a mistake. In that situation, are politicians likely to quickly turn around and say they have changed their minds on monetary union?

The incentives of the Scottish government after a Yes vote are more interesting. Without a monetary union, will they continue to use sterling or will they create their own currency? While keeping sterling will be the least disruptive option, in political terms it would vindicate Osborne’s strategy, because the remaining UK would get most of the benefits of monetary union without the costs. [1] A new currency would give Scotland more independence, which would seem to be where the Scottish National Party’s heart is, particularly if they could say that this is an option they had been forced to take by the ‘auld enemy’. So I think my money is still on a new currency if there is a Yes vote. 

[1] (Postscript) This option has clear economic costs for Scotland, as this post by Angus Armstrong makes clear. 

Forward Guidance is not Forward Commitment

Some recent discussions I have had with those who follow monetary policy in the UK and US, and indeed some who actually make that policy, suggest deep confusion between forward guidance and forward commitment. By forward commitment I mean a policy of committing to a future stimulus that would raise future output and inflation, in order to assist the current recovery. This is the policy that was first suggested by Paul Krugman for Japan and championed by Michael Woodford in particular. For more background, I discussed a recent paper exploring this policy here.

Why am I so confident that central banks are not undertaking this policy? First, because this policy only works through its influence on expectations. So those undertaking forward commitment have to be completely clear about what they are doing. The more opaque they are about the policy, the less effective it will be, particularly as the policy is time inconsistent. (The central bank has an incentive to change its mind once the recession is over)

Second, there is a defining characteristic of a forward commitment policy that no central bank has so far committed to, and that is to raise output above its natural rate (or equivalently to reduce unemployment below its natural rate) in the future. In short, to create a future boom. So, if that is a defining characteristic of the policy, yet no central bank has committed to do this, then as the policy has to be clear to be effective it must follow that central banks are not following the policy.

So why the confusion? First, I think there is a presumption that central bank communication will always be obscure, and that money can be made from trying to decipher their true intentions. Sometimes that may be true. In those circumstances, statements by certain policymakers that talked positively about a Woodford type policy might be relevant. However for this particular policy clarity is central. To pursue forward commitment yet to be mysterious about doing so is like announcing that you are targeting inflation but not announcing what your inflation target is.

The second source of confusion comes from focusing on inflation. A second feature of the forward commitment policy is that inflation will be above target during the boom (and perhaps before). So some have taken the part of forward guidance that says the central bank will be relaxed about inflation up to 2.5%, when their target is 2%, as indicating forward commitment. Yet that same forward guidance also features unemployment thresholds, which are above the estimated natural rate. [1] That would be a perverse thing to announce as part of forward commitment, because the whole idea is to get future unemployment below its natural rate.

A much more plausible explanation of forward guidance in the UK and US is that it is clarifying the short term trade-off the central bank will allow between inflation and unemployment. That could simply be informing the public about existing policy at a time when shocks might push inflation above target without also pushing output above the natural rate. Alternatively it could be indicating a change in that trade-off - a change in policy. In either case, the framework of that policy is entirely traditional. There is no commitment to engineer a future boom.

If I am right about this, it raises the interesting question of why no central banks during this recession have tried forward commitment. A closely related question is why no central banks have established price level or nominal GDP targets. In the case of the former this is the puzzle addressed in a recent paper by Steve Amber. To quote from the introduction: “Price-level targeting has convincing advantages, especially as a tool for avoiding the worst consequences of economic downturns. Then why haven’t central banks experimented with the regime?” He suggests that central banks are too fond of their current discretion to make this kind of commitment. If I have something interesting to say about this it will be for a future post.

[1] Here is the Fed's discussion of forward guidance. It suggests that it will be "appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent". But at no point does it say it intends to reduce unemployment below the natural rate (between 5% and 6%) in order to raise inflation above target in the future. 

Two Anti-Keynesian myths

This is mainly of interest to economists, but given the importance of these issues, I have tried to write it in an accessible manner.

Stephen Williamson, in commenting on this post, remarks acidly that

“Part of what defines a Keynesian (new or old), is that a Keynesian thinks that his or her views are "mainstream," and that the rest of macroeconomic thought is defined relative to what Keynesians think - Keynesians reside at the center of the universe, and everything else revolves around them.”

In that post I was careful to distinguish between academic research and policy. Of course macroeconomists research many things, and only a minority are using New Keynesian models, and probably even some of those do not really need the New Keynesian bit. That is the great thing about abstraction. Working with what can be called ‘flex price’ models does not imply that you think price rigidity is unimportant, but instead that it can often be ignored if you want to focus on other processes. So in terms of research I talked about the significant divide being between mainstream and heterodox. In terms of research, mainstream macroeconomists talk the same language.

I used the term anti-Keynesian in the context of macroeconomic policy, and in this context I was not talking about academics, but the set of economists involved with macro policy. They could be academics, but they could be working for central banks, a finance ministry, or an international organisation like the IMF or OECD. For this group, I think we have good reason to believe that the large majority are not anti-Keynesian.

Just look, for example, at any central bank publication discussing recent movements in output. This will typically focus on movements in components of aggregate demand: consumption, investment etc. The reason is a belief that output in the short run is demand determined. That, for me, is the defining feature of Keynesian analysis. If you look at the core models used in central banks (which, unlike models used by academics, need to be ‘horses for all courses’) the same will be true.

Now Nick Rowe and David Glasner suggest that this view is not uniquely Keynesian - I could equally call it monetarist, for example. But what then are the criteria you will use to restrict the Keynesian set today? Different views about unconventional monetary policy? Different views about the efficacy of fiscal policy at the zero lower bound? This seems way too narrow. People have views about the relative merits of fiscal policy for all kinds of reasons, which may be very context specific, so this does not look like a good method of defining a label for economists today.  

Yet not everyone is a Keynesian using my deliberately broad definition. The only logical way to make sense of statements like those discussed here, for example, is to imagine we are in a world where output is determined from the supply side, so if one particular component of demand, like government spending on goods and services, goes down its impact on output will be offset by some means. That is an anti-Keynesian view. My first anti-Keynesian myth is that among economists involved with policy this is not a minority view.

The second myth is that all you need to justify this anti-Keynesian view is to observe that wages and prices move in response to booms and recessions. For example Roger Farmer points to negative inflation following the Great Depression. Language can be confusing here. As an analogy, suppose someone has been ill, and you ask them whether they are now better. Do you mean better than they were (but still ill), or completely recovered? For us to take an anti-Keynesian view, we do not just require prices to move, we require them to move by just the amount needed so that we can ignore demand. So, for example, in an open economy under fixed exchange rates, for a devaluation to have no demand impact requires prices to immediately rise by the same amount. Prices will begin to rise for sure, but ‘flexible prices’ means more than that.

If we take a simple closed economy, then ‘flexible prices’ is short for the real interest rate (nominal rates less expected inflation) always being at its ‘natural level’, which is the level that ensures demand matches supply. This immediately tells you that we are not just talking about price flexibility, but also monetary policy. Imagine in this economy there is a negative demand shock, caused by a fall in government spending. In this economy, the immediate impact is that firms will reduce output as well as prices. To offset this, the natural interest rate will fall to increase private consumption. Will the actual real interest rate do the same? This could happen without prices changing if the central bank cut nominal rates by exactly the required amount. It could happen without the central bank doing anything to nominal rates if expected inflation rose by exactly the required amount. Or it could be some combination of the two.

One justification for assuming that the real interest rate is always at its natural level is that monetary policy is super efficient, moving nominal rates to always offset the impact of demand shocks. For some reason this is not an argument anti-Keynesians usually make. The alternative justification is that, conditional on whatever monetary policy does, prices move by just the amount required to give you the expected inflation rate necessary to generate the natural real interest rate, and therefore offset the demand shock.

This becomes clear when nominal interest rates are stuck at the zero lower bound. In that case, the natural real interest rate is large and negative, but monetary policy cannot get there because nominal interest rates cannot be negative. For flexible prices to get you to that real rate you would need expected inflation to be significantly positive. (We now believe there is no independent Pigou effect (or real balance effect) that will save the day.) As Roger shows, actual inflation from 1929 to 1933 was persistently negative. One must presume that inflation expectations were also negative. So clearly although prices were moving, they were not moving in the way required for the anti-Keynesian view to hold. Far from casting doubt on the Keynesian story, falling prices during the Great Depression show how unrealistic the anti-Keynesian view is.