… the way that the discussion is conducted it seems like there is only a Keynesian option and the alternative is just sort of passively waiting for disaster. I think there is a better strategy that we could adopt. Imagine radical fiscal reform that attacked not only the entitlements problem — that fundamental problem of Medicare and Social Security that is going to bankrupt the country if something isn’t done — and rationalised the tax code: simplified income tax, maybe even created just a simple flat tax rate; simplified, and indeed reduced corporate tax; created a federal sales tax. There is a way of creating a confidence-boosting fiscal reform … I’m depressed at how few people in Washington are prepared to talk about this option.
And later on:
one reason I’m sceptical of [Krugman's proposed] response is that we used to do this. It’s not like we haven’t tried Keynesianism in the past. Indeed it was orthodoxy for most of the 60s and 70s that what you did in the face of unemployment was that you ran deficits and printed money. And guess what we ended up with? The 1970s — stagflation: double digit inflation and low growth. I don’t quite understand why Keynes is suddenly so fashionable … we need to look at some radical alternatives.
In his Ascent of Money, Ferguson takes a view of economic history that many Cobden Centre readers would question. Even after the financial crisis, he wrote,
The historical reality, as should by now be clear, is that states and financial markets have always existed in a symbiotic relationship. Indeed, without the exigencies of public finance, much of the financial innovation that produced central banks, the bond market and the stock market would never have occurred.
Read into that what you will. Personally, I suspect that two parasites can coexist symbiotically on a shared host. More encouraging was Ferguson’s December 2009 endorsement of Laurence Kotlikoff’s Limited Purpose Banking proposals.
Mutual funds are, effectively, small banks, with a 100 per cent capital requirement under all circumstances. Thus, LPB delivers what many advocate – small banks with more capital. Will this work? It has. Unlike so much of the financial system, the mutual fund industry came through this crisis unscathed. True, the Primary Reserve Fund broke the buck by investing in Lehman and had to be bailed out. But under LPB only cash mutual funds (invested solely in cash) would never lose investors’ principal. The first line of all other funds’ prospectuses would state: “This fund is risky and can break the buck.”
In any case, this interview is worth watching. High profile questioning of Keynesianism is always welcome.
There’s a follow-up article on Ferguson’s website: