There are two ways to think about why North Atlantic economies are depressed. The first is that would-be spenders (including people and businesses that buy durable capital goods) want to spend less than income earners would earn if there were full employment. The second is that would-be lenders want to lend more than would-be borrowers would want to borrow and than financial intermediaries would be willing to let them borrow if there were full employment. These two ways of thinking about it are, in the math, identical. But they highlight different aspects of the situation.



Ken Rogoff tends to naturally think in the debtors-creditors framework. I tend to think in the spending-income framework. Although the math of each is consistent with the math of the other--in fact, you can turn one into the other via algebra--this does, I think, drive a difference in our orientations.



From my perspective, if the German government spends on Germans, it produces a boom and inflation in Germany. If the boom continues long enough and is strong enough, German internal prices and costs rise--and southern Europe's and France's competitiveness problems melt away as the burden of the outstanding debt is reduced as well. Yes, it would be very nice if France and southern Europe as well were to undertake thorough-going pro-productivity pro-competitiveness social reforms, and Germany should demand them as the price of its raising its debt and borrowing to spend on Germans and so create a moderate-inflationary boom. But those reforms are not of the essence of the current short-term problem, which is too much debt in the periphery and too-high wage levels in the periphery and in France relative to Germany.



By contrast, if the German government borrows to spend making Spanish creditors of Spanish banks whole--well, that does not generate the inflation in Germany that is the easiest path to eliminate Europe's internal structural wage imbalances, and it does generate a massive defeat for the government that adopts it in the next elections in the Bundesrepublik.



As I see it, fiscal expansion in Germany is a stone that kills four birds: the boost-general-European-demand bird through directly boosting spending so that it matches full-employment incomes, the eliminate-structural-wage-level-imbalances bird through inflation, the through-inflation-impose-haircuts-on-creditors bird, and the make-the-German-electorate-happy bird. By contrast, as I see it at least, Ken's stone is a much more efficient stone, but it only hits two birds: the impose-haircuts-on-creditors bird, and the boost-general-European-demand bird as reductions in debt burdens diminish the desire of those on whom haircuts have been imposed to lend in the future and also increase the desire of those who were underwater to resume normal borrowing patterns. To hit four birds with one stone is, I think, better than to hit two.



But I may be wrong: Ken is one of those people whose judgment is significantly more likely than not to be better than my own.