What Would Keynes Do? A Forum, Part 2

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http://www.thenation.com/article/163835/what-would-keynes-do-forum-part-2

WWKD? Get the Dollar Down
Dean Baker

I am sympathetic to much of Tom Geoghegan’s piece. It is often said that there are two types of economists: those who believe in accounting identities and those who don’t; and unfortunately, those in policy positions fall primarily in the latter category.

Geoghegan is right to point out the inescapable logic of a large trade deficit. Either we must have a large budget deficit or we must have negative private savings, as we did when the stock bubble spurred a consumption boom in the late 1990s, or—worse—when the housing bubble drove an even bigger consumption boom in the last decade. Economists who are fine with large trade deficits want either large government deficits or negative private savings, or they don’t know what they are talking about.

I am also a big fan of a financial transactions tax to help rein in the bloat in the financial sector, as well as raise a ton of revenue for the government. And I would certainly not argue with Geoghegan about the merits of Medicare for all.

However, I would take issue with some other items in his analysis. First, there was absolutely zero surprise with the stimulus. The best analysis we have shows that it worked almost exactly as planned. Of course as planned, it was not nearly big enough. It was designed to create to 2-3 million jobs in a context where we needed 10-12 million jobs. There is no mystery that needs to be explained.