Nick Rowe gets a bit too much attention for his poor economics blog. Mostly it is full of arguments too clever by half and remonstrances that math is too hard for him AND unnecessary.
His latest references a takedown of a new Krugman article. Now the first thing to note is that this graph of Canadian spending under the Harper government is, at best, only tangentially related to Krugman’s column. Krugman was pointing out that recently Keynesian rhetoric proved, if not popular, at least politically tenable in both the UK and Canada. The Conservative rhetoric was far more in austerity territory. Rowe claims Krugman got it wrong on what actually happened regarding Keynesian policy in Canada, but Krugman was only writing about rhetorical stances.
But let us pursue Rowe’s point that, in the depths of the recession, Canada did engage in fiscal stimulus. However, he shows spending at all levels of government, when Conservatives only controlled the federal government and parties are much different at the province level in Canada. But let’s credit the Conservatives anyway. As the adage goes, in a crisis, everyone is a Keynesian. Even the far more extreme Republicans in the U.S.A. signed on to some fiscal stimulus.
The other part of Rowe’s piece is that many economists, including Keynes, thought you should only engage in fiscal stimulus at the Zero Lower Bound of interest rates. Canada raised their interest rates above the ZLB and soon after Canadian government investment declined. Rowe argues that the Conservatives were then exactly following Keynesian prescriptions.
However, if this recession has shown us anything, it is that central banks are not infallible. Yes the Bank of Canada raised rates a little, but recently they have lowered them again. Furthermore, inflation in Canada was persistently low after Canada raised its rates. This suggests that the Canadian economy was not ready for hiked rates and it took a few years before the BoC figured out they were wrong. More concretely, Canadian GDP was actually shrinking at the beginning of this year with a discount rate of 0.5% (0.25% is the official ZLB in Canada), which suggests that Canada could use some fiscal stimulus RIGHT NOW. Yet, I don’t hear anything of the sort from Harper; instead I keep hearing about his austerity policy.
So another Nick Rowe fail. Talking right past Krugman’s article AND getting his own argument wrong.