Not Just a Confusion Over Monetary Policy, The Fiscal Policy Debate as Well is Confused
Steve Horwitz's previsou post addressed the monetary policy debate over QE, and I think Steve does an excellent job summarizing the respective positions and explaning his opposition to QE. While Steve has focused most of his commentary since 2008 on monetary policy, I have focused most of my commentary on fiscal policy (and the connection to monetary policy). In fact, I am at the moment finishing a new working paper on how government spending and the "economics of illusion" has killed free market capitalism over the last 6 decades. On a recent trip my main reading was Laurence Kotlikoff and Scott Burns, The Clash of Generations, which I highly recommend.
During a recent lecture where the topic of the current state of the economy and public policy was the topic, one of the participants challenged me with the claim that "savage austerity" was destroying Europe. And if you follow this debate, then you know that this is the line of argument being advanced by leading economic commentators such as Paul Krugman and Richard Layard. But similar to Horwitz's discussion of QE, I found this piece by Daniel Gros to be a measured and well-argued response.
A true 'manifesto for economic sense' would have to repeat not only Keynesianism 101, but consider the pre-Keynesian arguments about the economic distortions that result from the manipulation of money and credit, and government interventions that distort the price system, and the after-Keynesian arguments about rules versus discretion, crowding out effects, the costs of inflation, and the political economy of public debt. You cannot just read Malthus, Keynes, Hicks, Lerner, Samuelson, and Tobin, but need to study closely the arguments of Say, Wicksell, Mises, Hayek, Friedman, Buchanan, and Lucas. We have to consider not only short-run disturbances, but long-run consequences for economic growth. And, most importantly, economic sense requires that we continually remind ourselves that the fiscal mess that exists in the western democracies of the EZ and US are not a consequence of the last few years, nor the last decade, but due to a 6 decade experiment in a shift away from the "old time fiscal religion" of Adam Smith and the classical political economists.