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GUY RAZ, host:

So, say, the White House went along with what some economists are urging and convinced Congress to pass a second stimulus package, say, another $500 billion or so, how much of an impact would that have? Here's what Harvard economic historian Niall Ferguson says.

Professor NIALL FERGUSON (Economic Historian, Harvard University): Not a huge amount, it seems to me. The idea that there would be a tremendous knock-on effect through the multiplier, a term made famous by John Maynard Keynes, I think is pretty far-fetched.

And there's a potential downside risk. The risk is that you finally stretch the credulity of financial markets to the breaking point, and investors, not only in the U.S. but abroad, say, you know what? U.S. fiscal policy really is out of control.

RAZ: Now over the past few weeks, we've had a lot of economists on this program talking about how to tackle high unemployment or economic problems. Many of them are Keynesian, and many of them support - most of them support additional stimulus spending, like Paul Krugman.

And they point back to, you know, when Franklin Roosevelt became president in 1933, and there's a narrative that there was this massive fiscal stimulus all throughout the '30s and then on the eve of World War II, and that really helped us get out of the Depression. Why wouldn't spending, you know, several billion more dollars now have the same effect as it did then?

Prof. FERGUSON: Well, number one, we're not in a depression. I mean, the comparison just suggests a complete historical ignorance on their part.

In the Depression, gross domestic product contracts by about a third from peak to trough. The stock market fell 85 percent. The unemployment rate was 25 percent.

Right now, the U.S. economy, its gross domestic product is about 2 percent below its pre-crisis peak. The unemployment rate is below 10 percent. The economy is growing.

And critically - and this is the really big difference that I'm afraid Paul Krugman doesn't seem to grasp - policies in the 1930s were essentially conducted in closed economies because globalization had collapsed by 1932, before Roosevelt even came into office.

So it was relatively easy to engage in fiscal or monetary stimulus because there was virtually no trade, and there was virtually no capital movement across borders.

Today, globalization is still operational. In fact, it didn't break down in the crisis, as many feared. And so a lot of what the United States does in terms of fiscal and monetary stimulus leaks abroad.

It is no coincidence that the United States has been engaging in massive deficit finance and massive quantitative easing, to use the technical term for printing money, and that simultaneously, there have been surges in commodity prices and in emerging markets.

RAZ: Right. I mean, gold is now at its all-time high.

Prof. FERGUSON: Right, this is not unrelated to U.S. policy because, after all, gold is priced in dollars. And if the Fed is making dollars available virtually for free to the financial system, don't be surprised if people take that money. And instead of investing in, oh, I don't know, a new car factory in Michigan, they go and try and invest it in a more profitable way, in Asia or Latin America or just in the commodity markets.

So the whole Keynesian model is, in fact, completely inapplicable, as Keynes himself would have acknowledged. The trouble is that economists who like to simplify the world basically don't know their Keynes.

RAZ: Hmm. So if fiscal stimulus would be the wrong policy solution now, what's the right one?

Prof. FERGUSON: Well, one thing that I would strongly recommend the Obama administration to consider is having a plan for medium-term fiscal stability, because right now, the fiscal plans for the United States, even if you project out 80 years, as the Congressional Budget Office does, is to run a deficit every year for the rest of time and a deficit of a really substantial size, ranging between five and 7 percent of gross domestic product.

Now, that's extremely dangerous in my view because at some point, you hit a ceiling. I mean, there's a certain point beyond which nobody can borrow, not even the United States, without paying a higher risk premium.

And I don't think the United States wants to find out what that ceiling is by bumping into it. So step number one, let's try and have a credible plan to get back to budget balance over a five to 10-year timeframe. I think that's an extremely important thing in order to try to restore business confidence, which is really lacking right now.

It's not that non-financial corporations are in deep financial trouble. They actually are awash with cash. But nobody really wants to invest in any significant way in new plant under conditions of uncertainty, and there's huge policy uncertainty.

Confidence is a huge part of what makes an economy grow. Keynes himself, everybody's favorite economist these days, used the term animal spirits to characterize the kind of mood that you need to have to engage in investment, and it's only investment, after all, that will ultimately create jobs.

The animal spirits out there on Main Street are distinctly depressed, and we need to address that.

RAZ: So despite this debate between and among economists, the choice is not between either stimulus or austerity?

Prof. FERGUSON: I think that's a really caricatured version of the debate. I mean, I've certainly never argued that we should be balancing the budget now. I, at no point, made that argument. On the contrary, it's clear that in a recession, there's going to be a deficit. That happens automatically because tax revenues fall and welfare spending rises.

The issue is whether you have a credible plan to get back into equilibrium as the economy recovers, and right now, we don't have that.

Another issue, which I think the mainstream economists just don't seem to grasp, is the extent to which if it's unemployment you're worried about, then it's small business and startups that you need to encourage. And it may, I think, illustrate a misunderstanding on the part of economists about the way the economy actually works.

Now, that might sound surprising to you because you would expect economists to know a lot about that. But I have news for you: Most of the academic economists know fantastically little about the way that the real world works, because they spend a lot of their time doing applied mathematics and devising fancy models that effectively simplify the way the world works, because that sounds really clever.

What this crisis has revealed is that that cleverness is of really very little value in the real world.

RAZ: That's Harvard historian Niall Ferguson. His latest book is called "High Financier: The Lives and Times of Siegmund Warburg."

Niall Ferguson, thank you so much.

Prof. FERGUSON: Thank you.

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