Wise Words From An Eminent 81 Year Old Economist

I love finding succinct independent thinking about conflicting views on issues such as the future financial health of the world.

In July I read just such an article by The Melbourne Age’s national editor, Mark Davis. As this discussion is hitting the airwaves again – I dug it out.

Followers Of John Maynard Keynes And Milton Friedman Lock Horns Again

Is it right to go for Keynesian big spending to stimulate economies out of recession or will any short term benefits be outweighed by the costs of having to pay off the higher levels of government debt, as argued by the neoclassicists?

“The quarrel is alive and well in Australia. It is the most important difference between Labor and the Coalition over economic policy.” Mark Davis, National Editor, The Age.

Introducing 81 Year Old Emeritus Professor Max Corden

Max Cordern, one of Australia’s most eminent economists, is one of the few economists alive today with personal experience of the Great Depression. His family came to Australia as refugees from Germany in 1939.

He describes himself as

‘a short-term Keynesian and a medium term neoclassicist’.

He has released a paper on whether the fiscal stimulus policies will hurt the taxpayers of the future.

Cordern Works Through A Simple Model Of The Economy

• There is big spending on infrastructure and capital works to overcome a decline in economic activity
• The stimulus creates a budget deficit financed by selling government bonds to investors
• The government has to pay off these debts ‘tomorrow’
• The fiscal stimulus brings a net benefit by increasing consumption which flows through to higher production and incomes
• In the future taxpayer liabilities do increase

but

THERE ARE TWO OTHER DEVELOPMENTS OFTEN IGNORED

(i) Those whose incomes rise due to the stimulus will save some of the extra income.
(ii) If some of the spending on infrastructure is socially productive it will have benefits in the future as well as today’s short-term benefits.

This means there will be an overall gain to society, something NOT understood during the Depression. About economic management during the Depression Max Cordern says

“Budgets did at first go into deficit…but instead of financing the deficits, powerful efforts were made to reduce or eliminate the deficits which, of course, worsened the unemployment situation even though it may have brought back some confidence in the financial and foreign exchange markets.”

So

“It is necessary to educate politicians and the public that in boom times that there should be fiscal surpluses so that there can be deficits when recessions threaten…No virtue attaches to balanced budgets”.

Wise words not getting much airplay…