Brad Delong tries to detangle Niall Ferguson’s most recent blatherings. I’m in sleepy Rochester, Minnesota (under less than desirable circumstances, but celebratory nonetheless) and, like always, Ferguson gives me the chance to write something fun. On the bright side, Ferguson’s article is a rare example of pundits updating their priors. Only, in this case, it’s within the same piece of writing.
To understand the contradictions within this article, one must first understand Ferguson’s pathological relationship with free markets, his intellectual heroes, and aggregate demand. We begin:
What’s so seductive about the efficient markets hypothesis is that it applies nine years out of ten. A lot of the time it works. But when it stops working, you blow up. Much of the time it looks like you’re in the Bell Curve, and then something happens that your model tells you will happen only once in a million years, but which history tells you happens about once every 50 years.
Key to Ferguson’s intellectual framework are mathematically efficient markets, or at least the program prescribed thereof. His hagiographic pieces on Reagan, Thatcher and supply-side reform in general derive from work by the likes of Robert Barro in the context of Ricardian Equivalence or crowding out. Niall Ferguson is a free marketer, but also a Jeffersonian in the image of producerist currents. That is, the bankers, lawyers, and special interests within the government manipulate power against the common man.
But the ultimate implication of efficient markets is embodied in its eponymous hypothesis: the price is always right. Ferguson can live with this “nine times out of ten”. More accurately, this hypothesis (arguably) vindicates Ferguson’s world view nine times out of ten.
But today, the markets are not telling us the United States of America will default on its debt. Not now, nor ever in the future. Today the markets are not telling us that Washington “is playing Russian Roulette with our creditworthiness”. And suddenly, markets are wrong. Suddenly, Sir Niall Ferguson the first is better than the market at evaluating its own signals. This flies in the face of his own ideology.
Capitalizing on his Jeffersonian credo, he tries to blame the Fed on manipulating the market:
So long as the Federal Reserve continues with the policies of near-zero interest rates and quantitative easing, the gun will likely continue to fire blanks. After all, Fed purchases of Treasurys, if continued at their current level until the end of the year, will account for three quarters of new government borrowing.
But in the world of efficient markets – the world in which Ricardian Equivalence, crowding out, and real business cycles too reside – the Federal Reserve cannot trick investors. Indeed, if the market believed we were spending recklessly – sustained only by a massive balance sheet expansion on part of the central bank – eventually inflationary expectations would become unanchored precipitating a rapid rise – not fall – in Treasury yields.
Here emerges the next in Niall Ferguson’s theory. On the one hand, he heaps praise on Milton Friedman and his “skepticism towards government and faith in individual rationality”. And yet, he disregards a key implication of this theory:
Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
But this would fly in the face of Ferguson’s position on monetary policy.
Niall Ferguson could rightly – or at least arguably – take the position that government spending is less efficient than the private sector and hence we should avoid expectations of a future increase in tax rates. Niall Ferguson could express disdain at the ideology of a large government, quite independent from its economic effect, in libertarian spirit. But instead he insists that fiscal crisis is nigh. But this contradicts Ferguson’s every belief in the efficient market.
Niall Ferguson’s two contradictions fold into an ultimate third: a contradiction between aggregate demand and aggregate supply. On the one hand, Ferguson is a fervent supply-sider with a saintly view of the Thatcher and Reagan reforms. On the other, he believes supply matters not at all:
Only a fantasist can seriously believe “this is not a crisis.” […] Net interest payments on the federal debt are around 8% of revenues. But under the CBO’s extended baseline scenario, that share could rise to 20% by 2026, 30% by 2049, and 40% by 2072. By 2088, the last date for which the CBO now offers projections, interest payments would—absent any changes in current policy—absorb just under half of all tax revenues. That is another way of saying that policy is unsustainable.
Someone who believes in the importance of aggregate supply cannot reasonably speak of predictions into the year two thousand and eighty eight ( = 2088). Someone who believes in the importance of aggregate supply (or, indeed, the efficient market hypothesis) cannot possibly imagine the growth of gross domestic product can be predicted in any sensible fashion by the Congressional Budget Office.
But perhaps Ferguson’s 2010 column – “Today’s Keynesians Have Learned Nothing” – explains everything:
When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) 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.
You see, high deficits are okay in times of war, but not of peace. Markets are efficient nine times out of ten, but not when millions are out job in which case bond yields are too low, because… well… because. Aggregate supply is important when it’s used to justify tax cuts and low public spending, but not when we can predict the infinite future like certain Scottish Sages.
As I have documented in detail before, Niall Ferguson’s grand theory is devoted to a time of big government, but of a different kind. He yearns for the day when big governments taxed the poor to finance colonial adventures and fought with each other for glory and nothing else. Indeed, as he’s written before, he yearns for the day when “Britannia bestrode the globe”.
We today owe our intellectual and humanitarian heritage to Franklin Roosevelt. Not because he vindicated principles of easy money or public finance. Not because he vindicated principles of modern liberalism. But – for the first time in the history of our nation and all nations – he demonstrated that government can exist for the great benefit of the many at the minor cost of the few. For almost a century both political parties have lived by this end, if disagreeing on the means.
There is an ideology that accommodates the worst of efficient markets, supply side economics, and neoliberal economists like Milton Friedman. It is called right wing hackery, with Niall Ferguson as its high priest.