The Global Economy in Turbulent Times

CHAPTER 77 This Obsession with Debt¹

At Harvard, I really enjoyed graduate macroeconomics taught by Nobel Laureate Professor Wassily Leontief and Professor Martin Feldstein—in particular, the philosophies underlying different policy approaches by John Maynard Keynes, Friedrich Hayek, and Milton Friedman. Simply put, Hayek (the Austrian school ascendant in the nineteenth and early twentieth centuries) promoted the idea that the private sector should be left free to find its own balance in a downturn. The markets’ resulting purging power served the United States well in the nineteenth century, when the economy emerged stronger after each recession. But, it was later taken too far in the mix of tight money and high taxes that led finally in the Great Depression. That’s when the Keynesian idea of fiscal stimulus took root. In October 1932, Keynes made the case that depressions are caused by a spending deficit, which can only be made up by government spending. Because of “a lack of confidence,” there is no assurance that excess funds will find its way into investment in new capital construction by public or private concerns. With global recession, the consensus made us all Keynesians—resorting to heavy government spending to resuscitate the economy was the answer to severe downturns. First cracks appeared with the outbreak of the fiscal crisis in Greece early in 2010. Critics argued government spending brought in diminishing returns, producing an anemic (jobless) recovery that benefited ...