Robert Skidelsky says deficit hawks are "scraping the bottom of the intellectual barrel":
Fixing the Right Hole, by Robert Skidelsky, Commentary, Project Syndicate: ...When John Maynard Keynes talked of persistent under-employment, he did not mean that, following a big shock, economies stay frozen at one unchanging level of depressed activity. But he did think that, without external stimulus, recovery from the lowest point would be slow, uncertain, weak, and liable to relapse. His “under-employment equilibrium” is a form of gravitational pull rather than a fixed condition. ...
Contrary to Keynes, orthodox economists believe that, after a big shock, economies will “naturally” return to their previous rate of growth, provided that governments balance their budgets and stop stealing resources from the private sector. The theory underlying this way of thinking was set out in the July Bulletin of the European Central Bank.
Debt-financed public spending, the ECB argued, will “crowd out” private spending..., a fiscal stimulus will not only have no effect; the economy will be worse off, because public spending is inherently less efficient than private spending. ... The problem with fiscal stimulus, they say, is that it destroys confidence in government finances, thereby impeding recovery. So a credible deficit-reduction program is needed now to “consolidate recovery.” ...
The ECB’s arguments look to me like scraping the bottom of the intellectual barrel. The truth is that it is not fear of government bankruptcy, but governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders. The problem is not the hole in the budget; it is the hole in the economy.
Let us assume, though, that the ECB is right and that fears of “unsound finance” are holding back economic recovery. The question still needs to be asked: are such fears rational? Are they not exaggerated in today’s circumstances (except, possibly, in countries like Greece)? If so, is it not the duty of official bodies like the ECB to challenge irrational beliefs about the economy, rather than pander to them?
The trouble is that the current crisis finds governments intellectually disabled, because their theory of the economy is a mess. Events and common sense drove them to deficit finance in 2009-2010, but they have not abandoned the theory that depressions cannot happen, and that deficits are therefore always harmful (except in war!). So now they vie with each other in their haste to cut off the lifeline that they themselves extended.
Policymakers need to re-learn their Keynes, explain him clearly, and apply his lessons, not invent pseudo-rational arguments for prolonging the recession.