Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman and, until recently, President Obama’s economic guru Prof. Larry Summers weighed in with the fiscal factoid in separate articles which appeared in the 15 May 2011 issue of The New York Times Magazine. Prof. Krugman asserted that the U.S. “economic policy should be concerned with jobs, jobs and jobs.” And to generate more jobs, Prof. Krugman recommends — you guessed it — “continuing budget deficits.” Prof. Summers sings from the same song sheet. The lack of jobs keeps Prof. Summers “in cold sweats at night.” And when he was operating as the Director of President Obama’s National Economic Council, his advice was clear: “the president was told that there was no danger of doing too much fiscal stimulus, and that we should do as much as we could from an economic point of view.”
Some people — particularly some with a conservative turn of mind — pooh‐pooh Prof. Krugman’s and Prof. Summer’s musings. This attitude is worse than a crime, it is a blunder.
Statements made by the likes of Nobel laureates and former Presidents of Harvard University carry weight — even if those statements amount to nothing more than factoids. The famous “Dr. Fox Lecture,” which was presented at the University of Southern California’s Medical School, illustrates just how so‐called “experts” can effectively work and influence a crowd.
The lecture was presented by Dr. Myron Fox — an advertised heavyweight — to an academic audience. The response to Dr. Fox’s lecture was unanimously favorable. Little did the audience know that “Dr. Fox” was an actor who had been cloaked with an impressive fake curriculum vitae and trained to deliver a nonsensical lecture filled with contradictory statements, double‐talk and non sequiturs. When the big guns sound off, they are heard.
The cold, hard facts can silence the big guns, however. One of the most notable cases involves the fiscal factoid. Prime Minister Margaret Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy in 1981, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee‐jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.” Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures than the economy boomed. People had confidence in Britain again, and Mrs. Thatcher was able to introduce a long series of deep, freemarket reforms.
As for the 364 economists (who included seventy‐six present or past professors, a majority of the Chief Economic Advisors to the Government in the post‐WWII period, and the president, as well as nine present or past vice‐presidents, and the secretarygeneral of the Royal Economic Society) they were not only wrong, but came to look ridiculous. In the U.S., the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, Profs. Krugman and Summers can continue to peddle snake oil with reckless abandon and to influence policy in Washington, D.C. and elsewhere.
Let’s take a closer look at the fiscal facts and the effectiveness of the Keynesian fiscal elixir. Nobelist Milton Friedman addressed the issue in a 1999 Wall Street Journal column (8 January 1999). Prof. Friedman wrote: