Harvard Takes on Princeton

Niall Ferguson is a Harvard professor of economic and financial history who has a concurrent appointment to Harvard Business School. He’s engaged in an ongoing public debate with Paul Krugman, the Princeton Nobel Prize winner in economics, and America’s best-known advocate of spending our way to prosperity. Krugman’s views appear regularly in the New York Times. Here are Ferguson’s:

➢ the second world war. . . saw the US embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war. . .

➢ the differences are immense. First, the US financed its huge wartime deficits from domestic savings, via the sale of war bonds. Second, wartime economies were essentially closed, so there was no leakage of fiscal stimulus. Third, war economies worked at maximum capacity; all kinds of controls had to be imposed on the private sector to prevent inflation.

➢ Today’s war-like deficits are being run at a time when the US is heavily reliant on foreign lenders, not least its rising strategic rival China; at a time when economies are open, so American stimulus can end up benefiting Chinese exporters; and at a time when there is much under-utilised capacity, so that deflation is a bigger threat than inflation.

➢ Are there precedents for such a combination? Certainly. . .Argentina [and] Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. [But] either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation.

➢ [By 1981, Britain] had discovered the hard way that deficits could not save [it]. With double-digit inflation and rising unemployment, drastic remedies were called for. [It took] “regime-change” [to] bring stabilisation, because only that would suffice to alter inflationary expectations.

➢ People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll. . . 45% of Americans “think it likely that their government will be unable to meet its financial commitments within 10 years”.

➢ The remedy for such fears must be the kind of policy regime-change . . . Thatcher and Reagan . . . implemented. Then, as today, the choice [is] between policies that boost private-sector confidence and those that kill it.