Reinhart and Rogoff Let Their Inner Inflationist Hang Out

Mon, May 6, 2013 - 8:43am

Carmen Reinhart and Kenneth Rogoff are apparently eager to repair their dented reputation with the economic mainstream. After having to endure and fend off an attack of Keynesian deficit spenders (see e.g. Henry Blodget crowing about how allegedly the 'economic argument is now over' and 'Krugman has won'), the pair is now trying to get back into the good graces of the ever ubiquitous supporters of statism by noting that there are many ways to skin the cat. The cat to be skinned, in case you were wondering, is you dear reader – this is to say, all of us.

In an editorial in the FT entitled “Austerity is not the only answer to a debt problem” (aha!), they inform us:

“To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched – if there remains a choice, that is. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives.

Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.

Ultra-Keynesians would go further and abandon any pretence of concern about longer-term debt reduction. This position has been in the rhetorical ascendancy in recent months, with new signs of weaker growth. It throws caution to the wind on debt and, to quote Star Trek, pushes governments to “go where no man has gone before”. The basic rationale is that low interest rates make borrowing a free lunch.

Unfortunately, ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why rates have fallen so far so fast, and therefore no one can be sure for how long their current low level will be sustained.”

(emphasis added)

In other words: we never said deficit spending should be reined in- just as long as it is used for Reinhart-Rogoff approved infra-structure projects! Nothing wrong with those 'Ultra-Keynesians' in principle either, they are merely underestimating interest rate risk. This means in translation: 'Don't worry, we're Keynesians too!'

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