Let’s take a historical trip to see Very Serious People of the early 1930s explain the need to abandon expansionary plans and pivot to deficit reduction. Here’s a fun one. First there’s a 1932 letter published to the Times of London by MacGregor, Pigou, Keynes, Layton, Salter and Stamp (power team!) calling for expansionary fiscal stimulus:
…in present conditions, private economy does not transfer from consumption to investment part of an unchanged national real income. On the contrary, it cuts down the national income by nearly as much as it cuts down consumption. Instead of enabling labour-power, machine-power, and shipping-power to be turned to a different and more important use, it throws them into idleness.
Yup. Here’s the response, two days later (my bold):
The Times of London, Wednesday, October 19, 1932
TO THE EDITOR OF THE TIMES
[…]But it is perhaps on the third question—the question whether this is an appropriate time for State and municipal authorities to extend their expenditure—that our differences with the signatories of the letter is most acute. On this point we find ourselves in agreement with your leading article on Monday. We are of the opinion that many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities. We do not desire to see a renewal of such practices. At best they mortgage the Budgets of the future, and they tend to drive up the rate of interest—a process which is surely particularly undesirable at this juncture when the revival of the supply of capital to private industry is an admittedly urgent necessity. The depression has abundantly shown that the existence of public debt on a large scale imposes frictions and obstacles to readjustment very much greater than the frictions and obstacles imposed by the existence of private debt. Hence we cannot agree with the signatories of the letter that this is a time for new municipal swimming baths, &c., merely because people “feel they want” such amenities.
If the Government wish to help revival, the right way for them to proceed is, not expenditure, but to abolish those restrictions on trade and the free movement of capital (including restrictions on new issues) which are at present impeding even the beginning of recovery.
We are, Sir, your obedient servants,
T.E. GREGORY, Cassel Professor of Economics,
F. A. VON HAYEK, Tooke Professor of Economic Science and Statistics,
ARNOLD PLANT, Cassel Professor of Commerce,
LIONEL ROBBINS, Professor of Economics
It’s 1932 and Hayek thinks government deficits are causing the Great Depression. As this webpage that has these two letters and two contemporary letters notes, these battles have not evolved much in the past 80 years – even though the second view has been routed in Economics 101 classes.
Two bonus: First, that webpage has a British austerity VSP letter (“However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year”) from The Sunday Times in February 2010. It is signed by, among others, Ken Rogoff. Has Rogoff changed his mind on British austerity, or been asked about it by reporters? Perhaps that is more fuel for Joe Weisenthal’s argument that Rogoff is the most dangerous economist in the world.
Second, the following, from Keynes, is fantastic. From a 1933 radio debate Keynes did with Stamp (my bold, though I should bold all of it):
You will never balance the Budget through measures which reduce the national income. The Chancellor would simply be chasing his own tail – or cloven hoof! The only chance of balancing the Budget in the long run is to bring things back to normal, and so avoid the enormous Budget charges arising out of unemployment…Even if you take the Budget as your test, the criterion of whether the economy would be useful or not is the state of employment…I do not believe that measures which truly enrich the country will injure the public credit…It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.
Add health-care costs to that last line and it’s perfect.