Why I'm a supply and demand-sider
By Scott Sumner
I first got into blogging in 2009 out of frustration over Fed policy. The US obviously had a huge demand shortfall, and the Fed wasn’t doing enough to address the problem. Indeed I believe the Fed caused the huge demand shortfall.
So most people think I’m a demand-side economist. (Some even equate “demand-side” with “Keynesian,” which would make Milton Friedman roll over in his grave.) But like Friedman, I’m also a supply-side economist. Indeed perhaps even more so than Friedman. Much of my academic work focused on the Great Depression, and I ended up convinced that both supply and demand shocks played a big role. The negative supply shocks were caused by counterproductive policies under Hoover and FDR, notably the NIRA.
Now I find people criticizing me for not advocating that Greece leave the euro to solve its unemployment problem. In one sense that’s a fair criticism, as it seems to go against my earlier views on the Great Depression, where I praised FDR for leaving the gold standard. Perhaps Greece should leave the euro. But first a few words of caution:
1. I hear people say that 25% unemployment is a disaster, which was caused by the euro. That’s partly true. But back in 1994, Spain had 24% unemployment and was not using the euro. Indeed unemployment in Spain exceeded 20% for about 5 years during the 1990s. Evidently not being on the euro is not a cure-all.
2. Proponents of devaluation like Paul Krugman often cite Argentina, where devaluation led to rapid recovery after a year of turmoil. I also cite Argentina, but only half agree with Krugman. I cite it as a cautionary case, where well-meaning but foolish neoliberal reformers adopted a fixed exchange rate, and the resulting deflation (and falling NGDP) ended up discrediting capitalism in Argentina. So yes, they got a fast recovery, but also an anti-capitalist government. Just a few years ago Krugman was still defending this government. I haven’t seen him do any recent posts on Argentina, for obvious reasons. And as far as I can tell, the Syriza government has policy views that are similar to those of Latin American leftists. The head of the party even named his son after Che Guevara. So let’s just say they are pretty unsavory characters to be in charge of a democratic European country.
If Sunday’s referendum had provided three options:
1. Continued rule by Syriza.
2. A new government, and German monetary policy.
3. A neoliberal government and leaving the euro.
Then my choice would be easy—option three. But that option is not on the table. As it is I lean toward option two, because I’m very afraid of Greece being ruled by a party that despises capitalism. In the short run, demand shocks are the most important, but in the long run it is supply-side factors that matter most. Ten years from now, Greece’s economic performance will depend on how many neoliberal reforms have been enacted, not on what they did with their exchange rate back in 2015.
Despite all that, I can see why people might disagree with me. The option of leaving the euro certainly seems tempting. But when you are both a supply and demand-sider, the choices don’t look quite as easy. Obviously the Spanish government didn’t believe that devaluation would solve all their problems in the 1990s, even though they could have easily done so, as they still had the peseta.
Update: Commenter dlr pointed out that Spain did devalue on several occasions during the early 1990s, and by a total of over 30%. That of course strengthens my point.
PS. I like this comment by Alberto Mingardi:
Tsipras has attempted to blackmail the creditors, by agitating the spectre of a Greek default as the Lehman Brothers of the European crisis. The European authorities have acted so far seconding their instincts: that is, muddling through. But when push came to shove, they couldn’t just accept the Greek terms, because of their most likely political effects: that is, suggesting to the Portuguese and Spanish that a deal on any terms could be ultimately made, and thus voters could heedlessly vote for anti-austerity parties.
If the EC gives in to Syriza, and gives them far better terms then they were willing to offer mainstream parties, then why wouldn’t voters in other European countries also elect radical leftist parties?