The Battle for History II: Coyne’s Crisis

The Maclean’s cavalry has ridden over the hill to help Bill Robson defend the conventional wisdom against Keynesian fiscal policy.

Here are four problems with Andrew Coyne’s “Special Report” (which I am having trouble finding online) in the latest edition of Maclean’s magazine:

1. Coyne presents as evidence of failed deficit spending a 1991 paper by Christina Romer, who is now Obama’s chief economic advisor: “Fiscal policy . . . contributed almost nothing to the recovery before 1942.” But Coyne should have kept reading. The paper explains:

The small estimated effect of fiscal policy [is] fundamentally due to the fact that the deviation of fiscal policy from normal was not large during the 1930s. This fact can be seen in Figure 4, which shows the change in the surplus to GNP ratio (lagged one year). The change in the federal surplus to GNP ratio in the mid-1930s was typically less than one percent, and was actually positive in some years.

In other words, deficit spending did not contribute to the American recovery because the American government was not running significant deficits. Here are the combined budget balances of federal, state and local governments ($ billions) during the years of recovery from the 1929-1933 crash:
































There were as many surpluses as deficits and the value of surpluses was three times the value of deficits. This period of US history cannot be categorized as an attempt at, let alone a failure of, fiscal stimulus.

2. Regarding the causes of the current economic crisis, Coyne writes, “any attempt to pin the blame on ‘the free market’ has to reckon with the state at every stage of the process.” His contention seems to be that, because the crisis occurred within a context of some regulation rather than in a Lockian state of nature, it must be the fault of “government” as an institution.

Coyne is undoubtedly correct that the crisis would not have played out as it did without central bank interest rates, some banking regulation and some history of financial bailouts. But the point seems moot. We would not have an advanced capitalist economy in the first place without central bank rates, some banking regulation and some previous financial bailouts. The fact that markets cannot function without states does not mean that the state is to blame for everything that goes wrong in the market.

3. One of Coyne’s examples of how “government” is at fault is that “From 2001 to 2006, the Fed kept interest rates significantly below the rate consistent with non-inflationary growth. . . . The result: rising inflation, and runaway housing prices.” While it is true that low interest rates facilitated the excessive run-up in housing prices, this bubble did not simply reflect general inflation or some alleged lack of vigilance about inflation. In fact, from 2001 through 2006, the US inflation rate skyrocketed from 2.8% all the way to 3.2%, which was still below the 3.4% inflation of 2000.

4. Another of Coyne’s arguments is that past financial bailouts created an expectation of future bailouts, which prompted financial institutions to take bigger risks than they would have without a safety net. There may be some truth in this point, but it is hard to see how pulling away the safety net constitutes any kind of practical response to the crisis.

The Bush administration shared Coyne’s instinct to just let failing banks “take their medicine.” Indeed, its ruinous decision to allow Lehman Brothers to go bust rather than providing some sort of bailout was an important trigger in sending the rest of the financial sector into a tailspin.

UPDATE (Jan. 19): Coyne’s article was posted on the Maclean’s website today.


  • I’m curious, one of the bits of collective wisdom I’ve often heard is that the massive government spending of WWII was largely responsible for pulling us out of the Great Depression. Is that no longer believed?

  • That is still believed, which is why Romer and Coyne focus on the period before 1942, the first year of war (and large deficits) for the US.

  • “The fact that markets cannot function without states does not mean that the state is to blame for everything that goes wrong in the market.”

    Markets can function without states: ask an anthropologist. Whether modern capitalist markets can exist without states is another question. And that gets to the nub of it.

    I do not think Coyne actually believes modern capitalist markets would flourish without a state. He would perhaps use the Lockian justification of the limited state: “the commonwealth” as it were. And as a refresher it goes something like this: Although humans are born into perfect liberty (property bearing individuals they nonetheless are compelled to alienate part of that liberty to the state for the mutual protection of their life, liberty and pursuit of Levis Jeans.

    Everthying the state does outside of enforcing contracts, securing personal safety, and maintaining territorial integrity is an infraction on the natural predisposition of individual’s innate desire to truck barter and trade. This quasi-liberal libertarian ontological position is unassailable on its own terms because it is just that: an ontological proposition.

    But it also unassailable on *empirical* terms. We will never have an example of a state which stays within its prescribed minimalist bailiwick and thus the state is always to be blamed when capitalism fails.

    Taking the two together. To say that capitalism fails (not the state) is to say that the natural predispositions of individuals to truck barter and trade, when aggregated up, has failed which is an ontological impossibility. By definition it is always the state.

    Coyne’s position is designed to be immune from all counter arguments (the ontological moment) and from all empirical evidence because no pure version of the minimalist state will ever exist.

    So even when you get one of what most political economists would regard as one of the most liberal capitalist economies such as the US failing on a spectacular scale it is not proof of the failure of capitalism but rather the failure of the US state.

    Coyne is ideological warrior. Fkem.

  • Yes, Travis, I did mean modern capitalist markets. I had also intended to make the point that Coyne’s position (item #2 above) is unfalsifiable.

  • Hey Erin,

    I was not suggesting that you did not see these angles but rather understood that you chose to concentrate on where Coyne actually presented some evidence and his erroneous interpretation of it. That is, I used your innocent omission of “capitalist” as an excuse to hammer on °2. I do however think that it is because of the ontological vision contained in 2 that Coyne will play fast and easy with facts. I see that Fama and Mankiw are caught in the same unedifying exercise: yet even more sneakily they tried to couch it in accepted theory.

    On the WWII,

    Coyne is no leader just a follower so all he can do is bastardize facts. He certainly is not going to point to WWII: the greatest episode in successful centralized planning and deficit financing in western history, in the service of a good cause. Nor can he point to Iraq or Afghanistan to make the point: all conducted during the boom.

  • CBC on friday evening ran a Review that featured, at length, a Fraser Institute mouthpiece anxiously trying to convince the Sasketchewan interviewer that generations to come would be enslaved to a federal deficit.

    Now, post WW2, wasn’t there also large infrastructure spending, using the Bank of Canada directly? I understand this was done without horrendous consequences for inflation or debt. Indeed, it wasn’t until interest rates went through the roof in the ’80’s, along with huge corporate tax cuts, that our debt really ballooned.

    how many more of these Roman Coyne type addresses are we going to be subject to before we get some sensible commentary on the air waves and in the print media?

    i am reminded of the saying attributed to Ghandi- ‘first the ignore you, then they laugh at you, then they fight you, then you win.’

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