Financial Times
May 7, 2012
French and Greek voters have rejected Europe’s current macroeconomic framework. The headlines cry that voters demand growth rather than austerity. Yet growth is not a policy but an outcome. A vote rejecting the incumbents does not define the policy alternatives.
There are four main schools of macroeconomic thought. Keynesians focus on boosting aggregate demand through temporary budget deficits followed by a gradual return to budget balance as the economy returns to full employment. Free-marketers (confusingly called “liberals” in Europe and “conservatives” in the US) advocate business deregulation plus cuts in government spending and taxes to spur private sector hiring and investment. Deficit hawks emphasise budget cuts to eliminate the deficit and restore the government’s creditworthiness. Structuralists call for increased public spending paid for with tax increases rather than deficits, to increase the role of government in education, jobs and banking recapitalisation.
To put some names to these categories, Paul Krugman and Ed Miliband are Keynesians. Martin Feldstein and Mitt Romney are US free-marketers, joined by various Thatcherites and Hayekians on the continent. Deficit hawks include George Osborne, Angela Merkel, and Mario Draghi. I count myself among the structuralists and perhaps Francois Hollande will turn out to be as well. President Barack Obama has dallied with three of the four schools, all but the free-marketers, at different times calling for budget stimulus, deficit cutting and public investments.
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