There has been much discussion of the op-ed by Jean Claude Trichet, the French governor of the European Central Bank, in today’s Financial Times. The Tories will be pleased to see Trichet wholeheartedly and passionately backing the draconian “austerity” measures adopted by European governments in recent weeks, writing:
With hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: “stimulate”, “activate”, “spend”! . . . there is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now
Trichet’s comments cannot be ignored and will, as I said, bolster the deficit hawks on the right. But, for me, the more significant and fascinating contribution to this debate has been from Ben Bernanke, governor of the US Federal Reserve. Speaking yesterday in front of the House financial services committee on Capitol Hill, Bernanke spurned the UK and the eurozone’s approach to the deficit, rejecting immediate cuts and instead urging legislators to maintain support for fiscal stimulus.
From the Guardian:
In a second day of testimony to Congress, Bernanke said the Obama administration should delay measures to reduce Washington’s record budget deficits by cutting spending or increasing taxes.
“I believe we should maintain our stimulus in the short term,” Bernanke said, as the latest batch of economic data from the world’s biggest economy showed an increase in weekly unemployment claims, a drop in home sales and the second easing of activity in three months.
Bernanke’s opposition to fiscal retrenchment until economic recovery has been assured is in contrast to the approach favoured by Britain and the eurozone countries, where governments believe action to reduce budget deficits cannot be delayed.
Bernanke is not your run-of-the-mill central banker, and his views on “depression economics” carry special weight in a way in which Trichet’s do not. He spent much of his pre-Fed, academic career immersed in studying the causes and consequences of the Great Depression in the 1930s, publishing essays and books on the subject.
As Dennis Cauchon wrote in USA Today, “Bernanke, a former Princeton University economist, is considered the pre-eminent living scholar of the Great Depression. He is practising today what he preached in his book: Flood the system with money to avoid a depression.”
So who are you going to trust on avoiding a rerun of the 1930s? The American central banker or the European central banker? I know who my money’s on.
Meanwhile, if you want to read a rebuttal to Trichet’s piece, check out this op-ed from the US economist Brad DeLong, also writing in the Financial Times. DeLong writes:
History teaches us that when none of the three clear and present dangers that justify retrenchment and austerity — interest-rate crowding-out, rising inflationary pressures on consumer prices, national overleverage via borrowing in foreign currencies — are present, you should not retrench and austerity: don’t call the fire truck when there is no smoke. And history teaches us that when economies suffer from high unemployment, enormous excess capacity, incipient deflation, businesses terrified of a lack of customers, and an enormous excess demand for high quality assets, then is the time for expansion and stimulus: when the deck is awash, start bailing.
Yet Jean-Claude Trichet rejects these counsels of history. He seems to me to place himself in the position of, as British interwar bureaucrat R.G. Hawtrey described his precedessors at the start of the Great Depression, somebody: “crying ‘Fire! Fire!’ in Noah’s flood.”