Charles Wolf, Jr. Holds A Distinguished Chair in Economics and Apparently Knows Nothing About Contemporary Economics

How Can This Be?  - Oh, He’s a Conservative

Now that the austerians, those policy makers who think that economic expansion can be created by economic contraction have been thoroughly routed by the real world, they are  trying to find excuses for their failure and to say that the other side, the successful Keynesian side was not successful.  Charles Wolf Jr, writing in the Wall Street Journal based on his credentials as a Distinguished Professor in International Economics is one of these folks.

But at the beginning Mr. Wolf says this,

Why is it that in the United States the "stimulus" solution to the economy's ills has performed badly while in Europe the opposite approach, "austerity," has performed even worse?

The answer is that austerity (defined as substantial reductions in debt-financed government spending) or stimulus (defined as high-levels of debt-financed government spending) will promote growth only in some countries and in some circumstances.

Wow, in two short paragraphs we have three fallacies.

1. Austerity is defined as a reduction in government spending AND an increase in taxes.  Mr. Wolf doesn’t even know what he is talking about.

2. The Stimulus in the United States has performed well, just not great.  When it was implemented the economy grew rapidly, and when it stopped the growth slowed.  But the U. S. economy has had continual growth and the lack of a great results comes from the fact that the Stimulus was insufficient and ill designed.

3. Austerity will not promote growth in some countries, at least it has not to date.  In every country that it has been implemented it has resulted in a total lack of growth.  Really, Mr. Wolf, you can look it up.  In fact you can look it up in the Wall Street Journal! (the news section, not the editorial fiction section.)

And then look at this statement by Mr. Wolf explaining why austerity might not work

Austerity adherents claim that its dismal record simply reflects that it was too severe and imposed too quickly.

Really, what he is saying that austerity works, but not too much and not too soon.  So this means he thinks austerity should only be lightly applied and only after a stimulus program has restored economic growth.  In the real world this is known as Keynesian economics.

So what are his reasons for thinking a stimulus does not work.  Well there is this

One is what textbooks refer to as "Ricardian equivalence"—that debt-financed government spending in the present may require higher taxes in the future, thereby motivating companies and households to save rather than invest or spend.

Of course he provides no data or support of any kind that any business or individual has withheld spending for the reason that taxes might, just might go up in the future.  And of course this is because no one knows of such an instance.  Can one imagine a business leader saying “well we have a great investment opportunity here but you know, taxes might go up in five or ten years so let’s just hold our money in cash that earn .5%.”  Really, does anyone other than an ivory tower, out of touch academician think this way?  

And finally there is this explanation of why the Stimulus did not do great things.

Other indicators are increased household savings rates (by 3%-4% annually) since 2009, and decreased household debt (by 8%), thus further negating the increased aggregate demand sought by stimulus.

Yes, this is right, but it is exactly why government spending as stimulus had to take place and why it needed to be higher and better directed.  It had to replace lower private spending until that private spending was revived.  In other words, what Mr. Wolf is claiming as a problem with expansionary policy is exactly its rationale.

All of this leaves us with one unanswered question, which is how does someone this ignorant of basic economics get to be a Distinguished Professor?