My critique of fiscal policy at The Economist

Here’s my latest.  [Update:  The first line of paragraph 3 should read  “A more sophisticated argument for fiscal stimulus . . .”

PS.  Jim Glass, (who sent me the household depression data) has his own blog.  This post has much more data, graphs, and is far superior to mine.

PPS.  When you wish Mankiw had a comment section.  (Read the final two paragraphs of the attached paper, the definitive refutation of the hypothesis that a large private sector promotes economic development.)



19 Responses to “My critique of fiscal policy at The Economist”

  1. Gravatar of StatsGuy StatsGuy
    19. July 2011 at 07:02

    Hey, it’s true for bats…

    FYI, while we’re on privates, the “private” ownership of Singapore’s public housing is in fact 99 year leases. You could say that sounds a lot like ownership – then again, it probably sounded a lot like ownership to Hong Kong in 1898.

  2. Gravatar of Contemplationist Contemplationist
    19. July 2011 at 07:44


    Did you mean fiscal as opposed to monetary here?

    “A more sophisticated argument for monetary stimulus runs as follows”

  3. Gravatar of Marcelo Marcelo
    19. July 2011 at 07:47

    What do you make of this quote from Ben Bernanke:
    “The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.”
    Source: (Linked on Matt Yglesias’ Blog)

    What do you think the risk of the inflation no longer being anchored is? How does one argue against this type of thinking?


  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. July 2011 at 08:49

    I suspect I know who put Mankiw up to posting a link to that paper. If so, there’s a connection between Scott and Mankiw’s posts.

  5. Gravatar of Benjamin Cole Benjamin Cole
    19. July 2011 at 09:05

    Excellent column in The Economist, and also the Jim Glass post is very good. But who is Jim Glass? His blog is nearly secretive.

  6. Gravatar of Charlie Charlie
    19. July 2011 at 09:33


    Does it follow your under inflation targeting argument that when inflation fell below 2% around Aug. 2009 and stayed there for at least a year, that fiscal stimulus would have been beneficial? [might have the exact numbers/dates wrong, which inflation rate are they targeting?]

    Second, since the Fed wasn’t willing to protect their inflation target at the low end, are we sure they are willing to protect it at the high end? After all the faded some price spikes at the beginning of 2011.

    Last, if we don’t think the Fed is willing to step in with aggressive moves at the low end, if we buy the argument they aren’t willing to do extremely unconventional monetary policy, is there a probabilistic argument for fiscal stimulus? That is the Fed lists an 11% probability from TIPS that the relevent CPI is lower on 2016 than in 2011. I’m not exactly sure what that means, but it seems pretty high. A stimulus in that case could be argued for now to prevent the type of nominal gdp fall that could occur over some bad futures where the fed is too meek.


  7. Gravatar of Scott Sumner Scott Sumner
    19. July 2011 at 09:42

    Statsguy, By that time they will make it totally private–I’ll bet the housing market there doesn’t even price in much 99 year risk.

    contemplationist; Ouch that’s an embarrassing error.

    Marcelo, Close to zero risk, unless the Fed keeps up it’s tight money policies, and discredits low inflation.

    Patrick, Maybe I’m dense, but that’s too cryptic for me. Do I know this person?

    Benjamin, He had recently taken a break from blogging. I read him in 2009.

    Charlie, Hard to say; growth might have been faster in 2009-10, but slower in 2010-11 (because of lack of QE2.) I really don’t know.

  8. Gravatar of Scott Sumner Scott Sumner
    19. July 2011 at 09:46

    Charlie, A stimulus now would simply lead the Fed to do less over time.

    I agree that there is some risk of inflation rising to 3% or slightly more, but I don’t care about inflation, I favor NGDP targeting.

  9. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2011 at 10:36

    “For obvious reasons the male organ narrative yields little in terms of feasible policy recommendations. Beyond mass [im]migration, not much can be done on the average size of male organ at the population level. Still, one practical
    and serious implication stands out. Namely, these ndings spell trouble for countries with large male organs since they evidence both low levels and growth rates of GDPs. In fact it would be interesting to analyze whether the patterns laid out here have any predictive power in the post-1985 era { did countries with little male organs continue their growth spur and vice versa? However, omitting further policy discussion at this point is sensible given that the results are evidently tentative.

    Even with the reservations outlined above the `male organ hypothesis’ is worth pursuing in future research. It clearly seems that the `private sector’ deserves more credit for economic development than is typically acknowledged.”

  10. Gravatar of Leon Roger Leon Roger
    19. July 2011 at 14:07

    “Because monetary policy drives long run nominal-GDP growth in a modern fiat-money economy, fiscal stabilisation policy will never play an important role in a country with a well-functionary monetary regime.”

    Please be so kind to explain the transmission mechanism of monetary policy that you believe brings growth? What must monetary policy do now to get us the growth we need?

    Thank you,
    Leon Roger

  11. Gravatar of Dilip Dilip
    19. July 2011 at 15:14

    You still didn’t correct that error in the article? (fiscal as opposed to monetary)

  12. Gravatar of Greg Ransom Greg Ransom
    19. July 2011 at 17:26

    A good deal of aggregated “economic data” is socially constructed.

    The “household formation” data has a particularly strong odor of invention, extrapolation and social construction.

    What does the term “household formation” really mean, and how solid is the data? Is it constructed from survey data, or is it an actual head count? And who decides what a “new household” is?

    Does anyone know?

    Or are we pretending we know?

  13. Gravatar of Scott Sumner Scott Sumner
    19. July 2011 at 18:19

    Morgan, I thought you’d enjoy that one.

    Leon, I have many posts on that, but the short answer is:

    1. Monetary policy drives NGDP growth.
    2. In the short run, nominal wages are sticky. As NGDP rises, the ratio of NGDP to hourly wages rises, which encourages more hiring.

    Dilip, I can’t, but I did put an update up top, warning people.

    Greg, I don’t know.

  14. Gravatar of onliberty onliberty
    19. July 2011 at 19:51

    “Conservative opponents of fiscal stimulus also seem to be focusing on the wrong issues. For instance, these critics are generally equally opposed to additional monetary stimulus…”

    I’ve been thinking this same thing for a long time. To paint with a broad brush, many of the people that are staunchly opposed to fiscal stimulus are the same people that advocate for abolishing the Fed and returning to a gold standard (an idea that makes no sense for other reason too, btw).

    Don’t they realize that if we abolish the Fed or tie its hands with a gold standard that we are left with nothing *but* fiscal policy for improving the economy?

    They would really rather have our politicians in charge of guiding our economy? I doubt it. I suspect they just haven’t thought critically about it.


  15. Gravatar of Scott Sumner Scott Sumner
    20. July 2011 at 08:00

    onliberty, Exactly.

  16. Gravatar of Charlie Charlie
    20. July 2011 at 09:04


    Maybe I can ask the question in a simpler way. How can you be so sure the Fed is inflation targeting, since they have done such a terrible job of it? All the different measures of inflation I’ve looked at have large swings, since 2007.

  17. Gravatar of Scott Sumner Scott Sumner
    21. July 2011 at 07:10

    Charlie, They are targeting core inflation.

  18. Gravatar of Charlie Charlie
    21. July 2011 at 11:56


    Am I doing this right? Take the seasonally adjusted CPI for all Urban Consumers: Less Food and Energy from the Fed site. Then I look at the percentage change compared to 12 months earlier. Starting with 2008 data, I’m getting a high of 2.53% in August 2008 and a low of .59% in October of 2010. June compared to last June was 1.64% higher.

    Is this the right data to look at?

    What is their target range going forward in your mind?

    I really am just trying to understand what you are saying as accurately possible. I personally am wondering if the Fed is really inflation targeting with the caveat that they’re really uncomfortable with unconventional monetary policy, and if that better explains what the Fed is doing.

  19. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 12:36

    Charlie, If they miss by 1.0% or 1.5%, they don’t seem to regard that as a big deal. But yes, you have the data right. Markets are currently showing that investors expect about 2% inflation going forward, maybe a bit less.

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