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Debt and its consequences: Greeks queue for food after farmers went on strike in protest at bailout measures (Angelos Tzortzinis/AFP/Getty Images)

The monetarist Tim Congdon has attacked me and other Keynesians in two recent articles in this publication ("Don't let the Keynesians wreck the recovery", December 2014, and "Keynesians fear the US fiscal cliff. I don't", January/February 2013). These comments deserve a response.

In some circumstances, fiscal policy is indeed unusable. Greece was in this predicament in 2010. Is fiscal policy always unusable or even damaging? No. Mr Congdon is, in particular, wrong about the UK since 2010.

Mr Congdon makes a general point and a more particular one. The general point is that there is no connection between fiscal policy and economic activity or, maybe, fiscal tightening is even expansionary. He supports this broad proposition by noting the absence of a consistent relationship between changes in the cyclically adjusted fiscal balance and the "output gap"—a measure of economic slack—in the case of the US over the past three decades.

My response is: so what? How should one estimate the effect of a particular policy change when many other changes to policy and economic behaviour are occurring? The only sound approach is to estimate an econometric model in which account is taken of as many of the relevant factors as possible. When this is done, the evidence is clear: other things being equal, fiscal contraction is contractionary.

The only question is over the size of the multipliers—that is the relationship between changes in fiscal policy and in economic activity. Standard estimates suggest that they lie somewhere between a low of 0.5 and a high of 1.5 in recessions. The range is wide. But there is no doubt about the direction of the impact.

Why, then, is there no clear relationship between changes in fiscal policy and activity much of the time? The answer is that other things are often not equal. Monetary policy may be one important offsetting change. Sometimes, the indirect effects of fiscal tightening on confidence may offset the direct effects on demand, particularly if there are doubts about the sustainability of the public finances.

Whether or not fiscal expansion is expansionary depends on circumstances. My judgment about the role of fiscal policy after the Great Recession of 2007-08 was specific to that exceptional event.

So what justified my calls for exceptional fiscal support? The answers are straightforward: the recession had been huge; both nominal and real interest rates on government debt were exceptionally low; the financial system was in crisis; monetary growth had effectively halted, despite the efforts of the Bank of England; and the global economic environment was extremely poor, especially in the eurozone, the UK's biggest trading partner.

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