In “Heritage, Chicago, and the Fiscal Cliff” Krugman writes:
Menzie Chinn has some fun pointing out that if the doctrine Heritage was pushing to oppose fiscal stimulus were true — namely, that government borrowing always crowds out an equal amount of private spending — then the fiscal cliff could not be a problem. Hey, the government is going to borrow less, which will automatically and necessarily lead to an equal rise in private borrowing, so total demand can’t be affected, right?
It is, of course, an absurd proposition; when Heritage propounded this doctrine, it was also retrogressing intellectually by at least 80 years.
So if you think the fiscal cliff matters, you also, whether you know it or not, believe that a whole school of macroeconomics responded to the greatest economic crisis since the Great Depression with ludicrous conceptual errors, of a kind nobody has had a right to make since 1936 at the latest.
Maybe, the “ludicrous conceptual errors” were:
- To let nominal spending tank – a monetary policy error not seen since 1937 (not 1936) and one which the present day Fed has only halfheartedly tried to redress, with little success;
- To think that fiscal stimulus could solve, or even help solve, the problem
To those claims, there´s no better visual evidence than the one below!
See also: The numbers that defy Keynesian logic