In the Long Run, Niall Ferguson, Keynes Was Right

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange.
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It's intellectually immature to critique an idea by going after the person who came up with it, rather than the logic of the idea itself. That didn't stop Niall Ferguson, a distinguished Harvard historian, from implying that Keynesian economics could be explained by Keynes's homosexuality and lack of children. (Ferguson has since apologized "deeply and unreservedly" for comments "that were as stupid as they were insensitive.")

Regrettably, Ferguson isn't the only person to suggest that Keynes's analysis should be discounted because of his personal qualities. In 2008, N. Gregory Mankiw, the chairman of the Harvard economics department (and a senior adviser to President George W. Bush and Mitt Romney), wrote that "passing a larger national debt to the next generation may look attractive to those without children" before going on to note that "Keynes himself was childless."

First off, it's important to note that both Mankiw and Ferguson misrepresent what Keynes actually meant when he said that "in the long run we are all dead." Here is a longer version of the quote, from chapter 3 of Keynes's 1923 pamphlet, "A Tract on Monetary Reform":

This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Keynes was saying that macroeconomic models that can't explain the ups and downs of real life are worthless. This critique of macroeconomics is about as cutting today as it was 90 years ago. Keynes's supposed obsession with the short-term at the expense of the long-term simply isn't in the text.

Keynes's personal life, while rightfully interesting to biographers and historians, shouldn't affect our understanding of how the economy works. This logic doesn't exclusively apply to Keynes. For a much more extreme example, consider Irving Fisher, who was once one of America's leading advocates of eugenics. Fisher was also a great economist whose insights into the consequences of excessive private borrowing are very useful for understanding recent history. It's anti-intellectual to presume that Fisher's reprehensible views on race somehow invalidate his other contributions. Those ideas, like all ideas, should be evaluated on their merits.

Finally, it's both insulting and wrong, as Ferguson rightly noted in his apology, for Mankiw to suggest that people without children would find it "attractive" to dump a huge burden on future generations for the sake of fun times today. At this point, someone who thinks he's clever might interject that Paul Krugman, the bête noir of government debt alarmists, is also childless. That of course tells us nothing. Plenty of people with an eye on the future -- including young people like me and older people with children and grandchildren -- think that government budget deficits are tolerable when the economy is weak.

Tellingly, Mankiw never bothered to explain why budget deficits are undesirable during downturns in his 2008 column. Mankiw also declined to explain how the quantity of government debt affects a country's standard of living. This preference for insinuation over reasoned argument suggests that he may not have been able to answer those questions. Given Mankiw's stature within the economics profession and the fact that he still believes that government borrowing is inherently dangerous, it's worth examing his ideas more closely.

Sovereign debt isn't just a liability for taxpayers, it's also an asset to anyone who owns government bonds. Interest payments are simply transfers from taxpayers to lenders. In many cases, these are the same people, so it's not clear why these transfers should affect the level of output one way or another. Foreigners who own U.S. Treasury bonds have to spend their dollar-denominated coupons on goods, services or assets that are denominated in dollars. The interest paid by taxpayers always comes back as income, one way or another.

Moreover, government bonds have several unique and desirable properties. There isn't much reason to think that their issuance "burdens" future generations. Inflation is the only meaningful constraint -- and the markets are telling us that it's not much of a danger right now. Gary Gorton and Guillermo Ordonez have even argued that "government bonds are net wealth" because they can always be used as collateral. Meanwhile, Arvind Krishnamurthy and Annette Vissing-Jorgensen have found that short-term government debt can help "crowd out" the supply of short-term debt issued by financial firms, thereby making the economy less vulnerable to crises.

Even if you ignore all of the evidence that government debt can be beneficial for its own reasons, Mankiw and his ilk are wrong to focus exclusively on the "costs" of government borrowing while ignoring the potential benefits. The economy's persistent weakness has created an underclass of millions of people who want to work full time but can't get full-time jobs. From now until they die, these people are likely to be less productive -- and earn less -- than they otherwise would have. They also tend to be unhappier.

The human misery and economic waste that this causes are substantial costs. Curiously, people like Mankiw don't seem to give much weight to these costs, despite their frequent reminders about the alleged costs of government debt. Biographers and historians might want to look into that.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.