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Krugman may be wrong, but the argument should be understood. First, that's a misleading chart, since it doesn't measure deficit spending at all, it measures purchase of output, which is very different, and completely ignores taxation. So you want to look at government deficits/GDP and total government deficits, since shifting burdens to/from provinces doesn't do anything for Keynesian stimulus.

Next about this "liftoff" in which The Bank of Canada kind-of-sort-a managed to stay above zero (what are they -- 0.75% or 0.5%) at the risk of below target inflation. It doesn't seem like much of a liftoff, it seems like stagnation while at the same time the government has been tightening.

So Krugman has some valid points -- he may be wrong, but there's a case to be made here that you shouldn't be reducing deficits to less than 2% of GDP even as you have to cut rates from 0.75% to 0.5% in order to try to keep inflation above 1%.

rsj: your first graph makes the Conservative government look even more fiscalist: "look how much they switched from surplus to deficit!" (But if I had put that graph up, people would object that I was failing to distinguish between actual surplus/deficit and cyclically adjusted surplus/deficit.)

Yes, you can make a case for deficit-financed government investment (especially if you have some good investment projects in mind). But it's not a very Keynesian case.

And the idea that Canada just discovered Keynes, this week, is just silly.

Nick, I don't understand. The graph presumably shows all levels of government combined, as it says "canadian" not "federal". Most federal government spending consists of cheques - transfers to persons and transfers to other levels of government. Yes, it may be a good idea to pre-pone investment and that's what Canada as a whole may have done - but that graph doesn't show that the federal government was doing the pre-poning. You'd have to dig up the numbers and break it down into federal, provincial and municipal spending. Perhaps in fact the credit should go to good Keynesian provincial Liberal governments?

Yes, I'm saying that my graph accurately reflects the "Keynesianness" of policy, not that it proves Canada just discovered Keynes.

I think the pro-Keynes side is saying that Canada should not have been tightening fiscal policy from 2010 until something like a real take off -- e.g. interest rates of 3% or 4% could be sustainably achieved by the BoC. It's a debate about 2% versus 4%, not Hayek vs. Keynes.

Sure Krugman is exaggerating the differences. Not being a Canadian, it doesn't really bother me. Perhaps Krugman is more influenced by the political rhetoric, but here I don't know the rhetoric of your election. The only thing I know of Harper is that he fired all the statisticians, closed all the libraries, and that Canada is no longer even conducting a census. Also, he wants the power to remove citizenship from women who wear headscarves.

You can obtain revenge against Krugman by sending a platoon of polar bears to cover his car in Maple Syrup.

Hmmm, imagine the Fed had raised US overnight rates up to 0.75% a month ago, how do you think Krugman would have responded to that?

I think he would have said something along the lines of, "Doesn't seem like much of a liftoff," or words to that effect.

Frances: fair enough. But IIRC a large part of the federal policy was to give various subsidies to investment to lower levels of government. So God only knows how that gets broken out in the accounts. (And Carleton's two new buildings (River and Canal) for example, that came from that Federal initiative, where would they get counted?) The combined figure seems about the best way to capture that, I think, but the initiative and extra money came from the feds.

I thought the last Canadian province that attempted an explicitly demand-side fiscal policy on its own was Bob Rae's Ontario government, in the 1980's, which ended in tears, and discouraged any province from attempting anything similar.

Tel: Yep. Though, with the benefit of hindsight (though I *think* I was saying this at the time, and CD Howe has the records of what I was saying) the Bank of Canada did raise a little bit too much too soon. Interest rates would be higher now if it had raised them more gradually.


I think Krugman would be against the U.S. raising rates even to 0.75% right now. But if we did raised them 5 yrs ago to 0.75% and then someone had argued with him that "we achieved liftoff" a long time ago, then he would say "no, that's not much of a liftoff" -- as would anyone else.

Interestingly, central banks all over the world have been trying to raise rates only to reverse themselves. Even crazy Australia, which historically has very high rates (5-6%) in comparison to other developed economies has had to reverse itself and cut rates (now at 2%), while it's sister thumb, New Zealand, also had to cut rates to 2.75%. During the crisis in 2009, RBA only cut rates to 3% and now it's at 2%. Norway cut in Sept to 0.75%. China cut rates to 4.75% (an all time low). Japan is still at 0. ECB is at 0 (negative for deposits). UK is at 0.5%. Sweden is negative. Denmark is negative.

So while not every industrialized nation is at exactly zero, all of them are being forced, over time, to lower rates or to reverse previous increases and reach new lows.

There was a study of global interest rates: https://www.imf.org/external/pubs/ft/weo/2014/01/pdf/c3.pdf

Ten year real global rates are now at 0, with 3 month real rates at -2%.

We are really a long way off from any kind of "normalization", "liftoff", etc.

rsj: Well, while China has a one-child policy (or the legacy thereof) and bad local savings options (creating low, even negative, time preferences), global savings are going to continue to "push downward" on global investment, pushing down interest rates, particularly long term interest rates. Add to that Japan and Germany having downward demographics with a similar (if not as intense) effect, and low interest rates are surely likely to continue.

Unless, of course, central banks manage to get higher rates of NGDP growth (which Australia has had, so it can manage somewhat higher interest rates), which would allow higher nominal rates: possibly even higher real rates if global investment picks up.

This post on the Macroeconomics of Chinese Kleptocracy is a bit of an eye-opener:

I thought Krugman's point was that the liberal party campaigned on a Keynesian policy of increasing deficit spending to improve the economy and won against the conservative party which opposed this. If so, it would support the headline "Keynes comes to Canada".

I agree with the post (although the current Liberal deficit strategy seems unusually proactive).

Krugman's title more accurately should have been "Summers comes to Canada".

This fits a pattern: Krugman does not really care about national contexts (for instance see this re: his views on Estonia: https://www.washingtonpost.com/blogs/reliable-source/post/estonian-president-hammers-paul-krugman-on-twitter/2012/06/07/gJQApU0zLV_blog.html). Developments in other countries are routinely re-interpreted to fit his views on domestic policy. So, Greece shows "austerity" is bad, therefore anything that can be interpreted as austerian in US must also be bad, etc.

JKH: "Krugman's title more accurately should have been "Summers comes to Canada"."


foosion. "Keynesian policy" does not mean "run deficits". It's about the when and why of running deficits and surpluses. JKH nails it.

Lorenzo: Yep it's hard to know how much of low global interest rates is due to secular stagnation and how much is due to tight global monetary policy (low expected NGDP growth). And how long those will last.

Alex: " Developments in other countries are routinely re-interpreted to fit his views on domestic policy."

I think that's spot on. It's as though the rest of the world is just a stage, whose only purpose is to illustrate what's good or bad about the US politics he likes and dislikes. The Canadian Conservative party is NOT the US Republican party wearing a maple leaf.

Funny thing is, he could have written a better post saying "Look how well fiscal policy worked in Canada, and the US Republicans should learn from the Canadian Conservatives! Because 9.5 years in power is not bad when the Liberals are the Natural Party of Government, and the election wasn't won or lost on fiscal policy." If Harper had said, 6 months ago, "We have decided to do a bit more deficit-financed infrastructure investment, because we think we didn't do enough in 2010." I don't think it would have helped him much, and might have hurt.

Klein's graph appears to me to show Keynes left in 2011 - consistent with Krugman's narrative that refers to temporary stimulus.

Perhaps, your argument would be more persuasive if you actually addressed Krugman's points.

Brad: "Klein's graph appears to me to show Keynes left in 2011"

Nope. Keynes did NOT say "Let's *always* run deficits!". He said we should run deficits in a liquidity trap (= ZLB), when monetary policy doesn't work (or in emergencies like WW2). (Keynes was a lot more sensible than some "keynesians" seem to think.)

My own Krugman filter goes like this: I pay close attention to anything he says about economics (particularly international macro), and find him to be much more right than average on these topics; and I mostly ignore anything else he says, especially about politics.

Not that he's a terrible political commentator (once you correct for partisan bias); I just don't think he has any particular insight.

It's also worth pointing out that (as I understand it) columnists do not pick their own headlines. The word "Keynes" never appears in the body of the op-ed, and the word "Keynesian" only appears here:

"The Liberals ran on a frankly, openly Keynesian vision, and won big."

Reading the piece, he seems to be talking about secular stagnation, and taking advantage of low rates for needed public investment (what Werning calls the "opportunistic" rather than "stimulus" motive). So for Krugman to be "right", you just need low rates, and a need for public investment. Both seem to apply.

jonathan: that's usually my filter too. But this one was too close to home and too clued out. Love or hate Harper, you recognise he got fiscal policy roughly right (except for the first GST/VAT cut), and don't put out a meme that messes up history.

jonathan @10.29 Hmmm. As JKH says, "Summers comes to Canada" would be a better title.

Would Keynes have voted Liberal or Conservative? Krugman writes "Which brings us to the issue of deficits and public investment. Here’s what the Liberal Party of Canada platform had to say on the subject: “Interest rates are at historic lows, our current infrastructure is aging rapidly, and our economy is stuck in neutral. Now is the time to invest.”"

Is the economy stuck in neutral? Is their a boom with too much inflation? If not I'd think Keynes would vote Liberal. Did Harper win elections by promising fiscal stimulus as countercyclical policy? Krugman is talking about politics and pro-austerity message of Western politicians.

Say Canada hits the next recession with interest rates still low. Is that a desirable outcome?

Would Keynes have approved of the level of Harper's stimulus? Interest rates are still near zero. Doesn't seem like they did enough.

Keynes said to reduce the deficit and pay down the debt during the boom. Doesn't seem like Canada is booming to me. Harper's campaign platform doesn't reflect Keynesianism.

Peter K: We have a 2% inflation target, agreed on by the government (both past and new) and the Bank of Canada. If the Bank of Canada thought that inflation were more likely to fall below target than rise above target (18 months from now) it would have cut the overnight rate. Now I don't agree with that 2% inflation target. But given that target, the Bank of Canada judges the economy is not stuck in "neutral". The Bank of Canada could be wrong, of course. But even if it were wrong, it would simply raise the overnight rate to offset any effects of looser fiscal policy.

The Bank of Canada's mistake (with hindsight) was that it raised the overnight rate too much in late 2010. It should have waited a bit longer before going to 1%. That was the mistake, rather than tightening fiscal policy too soon.

We try to avoid "booms". We hope there isn't a boom. We can't rely on there being a boom. A sensible keynesian policy is to slowly reduce the debt/GDP ratio, now we are off the ZLB, to where it was before the recession, so we have plenty of "fiscal space" to raise it again if there's another crisis (and that crisis might be some other sort of emergency). Think of it as good insurance.

"He said we should run deficits in a liquidity trap (= ZLB),"

I hate to potentially drag things off topic, but I recall Keynes's definition of a liquidity trap being distinct from "the ZLB". Something like "When an increase in the supply of (broad) money does not reduce the long-term rate of interest".

W. Peden: I think you are right. Though not 100% sure about the "long-term" bit, or the "broad" bit. But Keynes was thinking in terms of MB being the CB's instrument. So I think we could translate that into "when the CB is unable to push down interest rates any further". Which is close enough to "effective zero lower bound".

(Now, with "forward guidance", we might say the BoC never really was in a liquidity trap.)

Nick Rowe,

Keynes definitely thought that it was the long-term rate of interest that mattered, so I have some confidence that he didn't meant short-term rates. I could easily be wrong, however.

That he meant broad money is based on secondary literature, so I'm not sure on that one.

I think the essence of "Keynesian" fiscal policy is to say, "Do not use the deficit as an input into deciding whether to invest or not, use a positive NPV criterion," understanding that when borrowing rates are low and unemployed resources make the opportunity costs of many inputs into investment less than their market prices, this will lead to larger deficits. If Canadian Liberals argued for larger investments on these grounds, (the fall in oil prices having led to some increase in unemployed resources) I'd say they are "Keynesians."

There is a separate argument that if a central bank is constrained to use only short term interest rates as an instrument and it is constrained not to push that rate below zero, it might need the government to supply additional short term paper for it to buy in order to get NGDP back on target. This is sometimes mistakenly referred to as "impotence" of monetary policy, but so long as central banks can buy long-term government assets or non-government assets, or foreign exchange the policy is not impotent just not being used.

W Peden: IIRC he saw investment as depending on the "long" rate, and consumption not being much sensitive to interest rates at all. But whether that's an implicit *definition* of the *long* rate, or an empirical assertion, I'm not sure. How long is "long"?

I see, I see. So the conservative government is what should get the credit for the very automatic stabilizers which they so wish to dismantle.

I swear, every time I come here you've gotten more and more obvious.

Nick: You're right - Keynes, to my knowledge, is associated with counter cyclical spending. By your argument, an increase in interest rates in 2010 was a signal to scale back fiscal policy as it was supposedly no longer necessary. The rate increase was a call made by the Bank of Canada. That doesn't make it the right call and, I think, your argument depends on it being the right call.

ZLB effects, if any, don't simply disappear if you raise interest rates. That's the fallacy in your argument.

Fred: Nope. Those changes in investment spending were certainly not *automatic* stabilisers.

Brad: I agree with you up to this point: "......and, I think, your argument depends on it being the right call."

With hindsight, it was (slightly) the wrong call. But let us suppose I had a magic crystal ball, and knew at the time it was the wrong call. And I were PM, and decided to keep government spending high for a bit longer. The BoC would just have raised even more, to offset my action. Unless I could convince them my crystal ball worked, in which case they wouldn't have raised interest rates as much.

Krugman almost made a reference to your blog in his post. Nice choice of title for the blog!

I've encountered several people adamantly insisting that "liquidity trap" means something other than "ZLB", but I've never quite understood what they mean.

I think it has something to do with the yield curve, and the fact that when short rates approach zero, they can only go up in the future. Thus as the short rate approaches zero, you get diminishing effects on the long rate, because the yield curve becomes steeper. But like I said, I've never quite understood their argument, so maybe that's not it.

But if that is what they mean, I don't think it is qualitatively different from the ZLB. The point is that there's a limit to how low the CB can push interest rates. Emphasizing the diminished effect on long rates as short rates approach zero seems just a crude way of capturing the role of expectations of future rates and commitment issues. But these issues are explicitly modelled in the modern liquidity trap literature, and recognized as quite important.

Nick: If it helps, in the Theory of Unemployment (1933), Pigou discussed the ZLB and argued for increased public works spending under those circumstances.

Nick, you appear to believe that a sub-1% prime rate is desireable, rather than a sign that the economy is underperforming. When it has been at that level for years, it seems to me that the signal it sends is more in the nature of sirens and flashing red lights. The equanimity with which you view that fact is troubling. Beyond that, as one commenter noted, a sub-1% prime rate leaves the Bank of Canada with diminished capacity to respond to the next recession. Among the things that Mr. Harper can be rightly criticized for is requiring the Bank of Canada to shoulder most of the burden of assisting the economy recover from the 2008 crisis. Its low interest rate policy - it has no other weapon, after all - has fueled a housing bubble that can only end in tragedy.

"Now I don't agree with that 2% inflation target. But given that target, the Bank of Canada judges the economy is not stuck in "neutral"."

Well maybe Trudeau should change it and meddle with Central Bank "independence?" Now I'm addressing the BoC not you. If Canada is not stuck in neutral, is labor sharing in productivity gains? Are labor markets tight enough where workers have bargaining power?

I don't see the point of paying down the debt and lowering the debt/GDP ratio as insurance if workers' wages are stagnating. You're just increasing inequality which is a threat to democracy.

BTW here is Ian Bremmer in America's Time magazine newsweekly: (I don't know how popular it is anymore given that fewer people read print journalism.)

"Though just 43 years old and relatively untested, Trudeau conducted an effective campaign, arguing that a slowing Canadian economy needed stimulus, not more of the Conservatives' austerity."

Did Harper campaign on more government or on austerity? The BoC doesn't believe the economy is slowing? Maybe Trudeau wouldn't have a problem with the BoC raising rates to compensate for more stimulus via public investment in infrastructure.

If I were Trudeau I would do "Silly QE." Lower your debt-to-GDP ratio and upgrade Canada's infrastructure (i.e. bridges and roads, schools, education, health care, high-speed Internet, clean energy, etc.)

The only danger is too much inflation, but that can fought with higher rates.

Brad: that was Stephen Gordon's choice! (He started the blog, and I joined later.) I like it too.

jonathan: I tend to agree with you.

BSF: I didn't know that. (Did Keynes get the liquidity trap idea as a variation on Pigou??)

VJB: You *can* make a case for deficit spending simply to raise the natural rate of interest to reduce the risk of hitting the ZLB in future (or just because you think there are good government investment opportunities at low real interest rates). I would prefer an NGDPLP target instead, or a raised inflation target, but it's not an unreasonable argument. But it's not "Canadians have discovered Keynes".

Peter: you make a few mistakes there, but it would take me too long to go through them. Sorry.

I'm always amazed at the level of hate Nick and others have for Krugman.

Deficits which are smaller than GDP growth are hardly very Keynesian, in my opinion.

What makes it Keynesian is that he assumes that government spending on AD will raise GDP growth prospects without a relevant level of crowding out.

Also, don't forget that whatever parts about fiscal policy that Harper got "right" were forced on him by the NDP-Liberals. He was adamently against any sort of intervention, leading NDP and Liberals to band up together to turf him (late 2008), leading to the immediate prorouging of parliament. It was only after three months of anti-coalition ads to paint the NDP and Liberals are traitors that he came back and accepted their demands for fiscal stimulus (early 2009), arguably by then too late to be effective at staving off the worse of the recession.

Totally agree with the crystal ball analogy. In 2010, people were not expecting the following years to have such low growth across the West.

RN: don't be silly. PK is a very good economist. But sometimes (like all of us) he gets stuff wrong. This time it pissed me off a bit, because he was messing with Canadian economic history to tell a political story for his US readers.

Nathan: a Keynesian needs to keep the debt/GDP ratio constant *on average*, increase the debt/GDP ratio when in a "liquidity trap" (ZLB), which means reduce the debt/GDP ratio again when the ZLB is past. (And if you read my linked post on the "preponed" government expenditure multiplier being 2, you can actually see a very strong New Keynesian case for cutting G immediately after the ZLB is past. It makes the multiplier bigger (2 instead of 1, in my very simple model).

It should be pointed out that

* Headlines are generally not chosen by the op-ed writer -- try reading the article without the headline

* There was a political debate, also in Canada, of which I'm not that aware (did you guys have an election?) in which conventional wisdom argues that deficits are bad. That may not be the CW among all economists, but this essay was in the NYTimes, and seemed to be addressing the ability of Canadians to eschew conventional wisdom and follow Keynesian policies.


rsj: Canada *was* following keynesian policies. "Keynesian policies" does not mean "Hey! Let's run a deficit!"

Nick, I was talking about the rhetoric, not the policies. But again, I'm not too familiar with the rhetoric.

Further to Frances Woolley's comment, how does this analysis fit with our view of appropriate levels of deficits?


Henry: interesting find, but from skimming the executive summary it seems to be calling for some long run structural change to fiscal federalism. It's micro public finance (Frances stuff), not macro stabilisation (Nick stuff).

"Keynesian policies" does not mean "Hey! Let's run a deficit!"

I've oft heard that said, so I know you aren't just making it up. However, can you provide names and dates for any self avowed Keynesian who made a policy of running a surplus?

I can think perhaps of Robert Rubin, but it's difficult to make the case he was Keynesian, and modern Democrats have largely disowned him, even blame him for the present day problems. They wring hands and cry, "If only we had just stuck to running big deficits like Reagan showed us!" Well, maybe they don't put it exactly like that, but pretty darn close.

Tel: good question. The "self-avowed" bit makes it trickier. Unfortunately it's not a question my brain is good at answering. I think others could answer it better than me. My guess is they can come up with *some* good examples. Maybe Brad DeLong could answer it?

Simon Wren-Lewis chimes in:

Link here NR

[For some reason your comments are being caught in the spam filter. Sorry. NR]

Nick: You're right that the policy doesn't have to be right. Policy is made on belief. There are no crystal balls. The PM would only need to believe the BoC policy was right. Then, cutting spending would be consistent with Keynesian policy.

If the PM disagreed with the BoC, it would be valid Keynesian policy to continue spending until you thought it was no longer necessary. Monetary-fiscal offset doesn't change that. Fiscal policy still mitigates destructive monetary policy.

I still think Harper left the "foxhole" in 2011.

Brad: "If the PM disagreed with the BoC, it would be valid Keynesian policy to continue spending until you thought it was no longer necessary. Monetary-fiscal offset doesn't change that. Fiscal policy still mitigates destructive monetary policy."

I disagree. As Scott Sumner puts it, "The Fed moves last". If the PM loosens, he knows the BoC will simply tighten in response. That is how the game is played in Canada. You are implicitly assuming the PM moves last.

One old post on game between monetary and fiscal

An earlier simpler post

But the BoC hasn't moved "last" very much for years. Since 2011-12, here are the fiscal imbalances added by the provinces and by the federal government:
Provincial: $61.3 billion
Federal: $48.5 billion
These amounts are roughly half of all the stimulus spending since the recession, but the bank rate hardly moved for most of the period:
BoC 2011-2014: 1.25%, 2015: 1%, .75%

Clearly the way the game is played in Canada is heavily divided between the levels of government. And some have argued that it's silly for the federal government to cut expenses while benefiting from provincial stimulus spending which serves to improve federal revenues.

Since 2006-07, of the net $200 billion in additional deficits, fully 40% was incurred by the provinces. To speak of a single Conservative government running "optimal" fiscal policy seems to me to miss a good deal of the story.

Nick: As far as I know, there's no special flavor of Keynesian economics that applies only to Canada. I'm trying to examine your case based on a general view of Keynesian economics. My simplistic view of Keynesian economics includes counter cyclical spending and the use of monetary policy before fiscal policy. I also think that the Great Recession was a special case.

In your graph, it appears the last move was a tightening of fiscal policy (spending) in 2011 that followed a tightening of monetary policy in 2010. That is definitely not offset. It isn't at play. Keynesians tighten fiscal policy (spending) when they think the economy is doing well. Non-Keynesians, it appears to me, do not typically advocate fiscal policy and are fine with tightening spending at any time.

Your case depends on why spending was tightened. I don't think you've made it well enough.

I also don't think Krugman was right to say Keynes was returning to Canada. As you've said, Keynes was not spend, spend, spend.

Brad: We can't tell whether or not there was offset just by looking at the Bank of Canada's overnight rate, because we don't know what the Bank of Canada would have done otherwise. We don't observe the counterfactual conditional, of what the BoC would have done if fiscal policy had remained loose. (Plus, the exchange rate matters as much, if not a lot more than interest rates, in a small open economy like Canada with very open capital markets.)

But when the BoC says that it looks at everything, and adjusts the overnight rate to keep its forecast of future inflation at the 2% target, I am taking the BoC at its word. (Though in the past I have also tested that commitment empirically, and seen others test it, and it's not easy to find evidence against it.)

" Keynesians tighten fiscal policy (spending) when they think the economy is doing well."

That would be correct for Old Keynesian thought. It is not correct for New Keynesian thought. (Or rather, they have a very different definition of "doing well", that is more like "the economy is above the ZLB so the BoC is back in charge of keeping inflation at the 2% target, and doesn't need our help any more".)

I should probably write a post on this.

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