Zero fiscal multiplier: Example # 213

From today’s news:

The marked improvement in the labor market since the U.S. central bank began its third round of quantitative easing, or QE3, has added an edge to calls by some policy hawks to dial down the stimulus. The roughly 50 percent jump in monthly job creation since the program began has even won renewed support from centrists, raising at least some chance the Fed could ratchet back its buying as early as next month.

I hope I don’t have to do any more of these.  The fiscal multiplier theory is as dead as John Cleese’s parrot.  The growth in jobs didn’t slow with fiscal austerity, it sped up!  And the Fed is saying that any job improvement due to fiscal stimulus will be offset with tighter money.  They talk like the multiplier is zero, and their actions produce a zero multiplier.  Has there ever been a more decisive refutation of a major economic theory?

Yes there has; the conservative view that QE and big deficits would lead to higher inflation and higher interest rates.

PS.  Saturos  asked me about this exchange on twitter.  The expected fiscal multiplier is roughly zero.  And for policy purposes it is the expected fiscal multiplier that matters, not the actual ex post multiplier (which is impossible to calculate in any case.)


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69 Responses to “Zero fiscal multiplier: Example # 213”

  1. Gravatar of Mike Sax Mike Sax
    20. May 2013 at 10:07

    “I hope I don’t have to do any more of these. The fiscal multiplier theory is as dead as John Cleese’s parrot. The growth in jobs didn’t slow with fiscal austerity, it sped up! And the Fed is saying that any job improvement due to fiscal stimulus will be offset with tighter money. They talk like the multiplier is zero, and their actions produce a zero multiplier. Has there ever been a more decisive refutation of a major economic theory?”

    I guess Boston Fed Chief Eric Rosengren didn’t get the memo as he talks like it’s still alive:

    “This morning, Eric Rosengren, chief executive of the Boston Federal Reserve, cautioned lawmakers against further fiscal retrenchment, lest they slow the recovery. As he said at the Global Interdependence Center’s Central Banking Conference in Italy: “Given the economic realities I would urge policymakers to consider scenarios where some elements of fiscal rebalancing take effect only after the economy has more fully improved.”

    http://diaryofarepublicanhater.blogspot.com/2013/05/post-scandal-gop-seems-less-interested.html

    http://www.washingtonpost.com/blogs/plum-line/wp/2013/05/16/congress-has-tackled-the-deficit-at-the-cost-of-the-economy/

    Now the claim is that fiscal austerity increases growth?

  2. Gravatar of Mike Sax Mike Sax
    20. May 2013 at 10:10

    In any case, even if we bought that QE3 has fully offset austerity-and no one agrees that it has, certainly not from the statements the Fed has made-why would it make sense to cutback on QE3 now with the sequester still with us?

  3. Gravatar of Mike Sax Mike Sax
    20. May 2013 at 10:12

    With a 1% inflation rate it would be a strange move anyway to tighten now with or without fiscal stimulus

  4. Gravatar of Morgan Warstler Morgan Warstler
    20. May 2013 at 10:27

    Nice dodge Scott, we both know your twitter alter ego is ECONHULK.

  5. Gravatar of CA CA
    20. May 2013 at 10:34

    Ha! Wouldn’t that be awesome if Scott really was Economist Hulk.

  6. Gravatar of Ashok Rao Ashok Rao
    20. May 2013 at 11:07

    I really appreciate some of your defenses of a zero fiscal multiplier but it really seems intellectual unfair to keep claiming something to the effect of “we had the sequester and then employment increased therefore monetary offset = no fiscal multiplier”.

    As we move deeper into recovery it goes without saying that reemployment will happen, as businesses and consumers gain confidence. The strongest evidence in favor of monetary policy is US vs. EU NGDP, but I don’t think any Keynesians have denied that.

  7. Gravatar of Bob Murphy Bob Murphy
    20. May 2013 at 11:18

    I loved the post up until this part:

    Has there ever been a more decisive refutation of a major economic theory?

    Yes there has; the conservative view that QE and big deficits would lead to higher inflation and higher interest rates.

    Scott, couldn’t we have just shared our special moment? But no, you have to go and hog the spotlight.

  8. Gravatar of Matt R Matt R
    20. May 2013 at 11:46

    I think the evidence is pointing to a zero fiscal multiplier, but I am subject to confirmation bias on that one. I think we need to consider two things:

    1. The end of the tax cuts were probably expected. At least they were announced as temporary tax cuts when originally planned and when extended. Since they were temporary they might not have added much to GDP and employment when in effect, so their expiration might not have had much of an effect either.

    2. There are lags even with fiscal policy. We generally think of the outside lags as short, but it is possible that we are wrong and the negative effect from the sequester and maybe even the tax cuts will show up over the next six months.

    I think the experience with the sequester and tax increases will ultimately point to zero fiscal multipliers, but I don’t think we can reach that conclusion just yet.

  9. Gravatar of Steve Steve
    20. May 2013 at 12:20

    Man, I was hoping to be the first intelligent reply in eight responses. But the only intelligent response is “Yup!”

  10. Gravatar of Mike Sax Mike Sax
    20. May 2013 at 12:27

    Yes, when you’re preaching only to the choir I guess “yup” is the only thing that sounds intelligent.

  11. Gravatar of marcus nunes marcus nunes
    20. May 2013 at 13:28

    These guys were the “Krugman” of their epoch, But managed to screw up MP so much, exactly at the moment G was falling after the 1936 Veteran Bonus payment ended:
    http://thefaintofheart.wordpress.com/2013/05/20/the-eccles-morgenthau-recession-wish/

  12. Gravatar of Bill Ellis Bill Ellis
    20. May 2013 at 16:37

    Are the effects instant ? Or is there Momentum?

    The Thing is, the economy is pretty much where Krugman and the Keynesians thought it would be about this time. QE or not. In fact it is about where everyone thought it would be if we had done nothing at all .

    Things wear out.

  13. Gravatar of Edward Edward
    20. May 2013 at 17:20

    “Now the claim is that fiscal austerity increases growth?”

    Hell no, Mike Sax. Scott isn’t a sado-austerian crazy person, like Jean Claude Trichet, Ollie Rehn, or Michael Kinsley, its just that monetary policy can negate the effects of bad fiscal policy.

    Scott would say all a central bank has to do is to announce a change in regime targets and expectations would take care of the rest. (RIght, Scott?) And there’s where I respectfully disagree. I think words are meaningless without demonstration of concrete action. To completely overwhelm bad fiscal policy, and not merely to offset it, QE would have to be done in the tens of trillions, , and the increase in the monetary base would be permanent.

  14. Gravatar of jurisdebtor jurisdebtor
    20. May 2013 at 17:35

    We haven’t had the full force of the sequester yet.

    http://www.govexec.com/management/2013/05/furlough-watch-potential-agency-agency-impacts-sequestration/61535/

    Agriculture Department: The department will not need to furlough food safety inspectors, due to the continuing resolution bill signed March 26. An email sent by a senior official on April 24 to employees at the Farm Service Agency said that the stop-gap funding bill passed by Congress would prevent furloughs at the agency. And the Rural Development division might escape furloughs too, meaning the whole department could be in the clear.

    Air Force: The Washington Post reported that employees in combat zones, non-appropriated funds employees, and foreign nationals would be excepted from furloughs. The Post also said that further exceptions would be allowed for “safety of life or property.” An Air Force spokeswoman told Government Executive that all Air Force civilian police, security guards and firefighters would be subject to furlough “except at installations where the manning level is under 25 percent.”

    Army: The Army formally clarified its furlough plans in a memo published March 20. Officials wrote that the Office of the Secretary of Defense had excepted employees deployed in a combat zone, non-appropriated fund employees, foreign national employees, political appointees, civilians funded through the National Intelligence Program and Foreign Military Sales workers. The memo also included overtime exceptions for workers ensuring “health, safety, and security of personnel or property.”

    Broadcasting Board of Governors: The agency does not anticipate needing to furlough employees this year, according to a memo obtaind by Government Executive. BBG is required to reduce spending by approximately 5 percent, or $37.6 million, by September 30, the memo said. It will do so by freezing hiring, eliminating bonuses, postponing technical upgrades and reducing broadcasts

    Commerce Department: As of May 9, no employees had been furloughed, according to a spokeswoman. She said plans were still in progress at component agencies, and details “are still forthcoming.”

    Customs and Border Protection: Started sending furlough notices to all 60,000 of its employees on March 7, but as of April 1, the furloughs were postponed. The agency submitted a plan to Congress in May that would eliminate the need for furloughs.

    Defense Department: Defense Secretary Chuck Hagel on May 14 reduced the number of his department’s civilian furlough days from 14 to 11. He also announced more furlough exemptions, including Navy shipyard workers. Secretary Leon Panetta had on Feb. 20 informed lawmakers that sequestration would force the Pentagon to put the “vast majority” of its 800,000 civilian workers on administrative furlough. The furloughs were set to occur one day a week for up to 22 discontinuous work days, but in late March Defense officials announced they would reduce them to 14 days. (See separate Air Force and Army entries.)

    Education Department: No fiscal 2013 furloughs at Education, according to a May 10 memo sent to employees and obtained by Education Week. Secretary Arne Duncan had testified Feb. 14 before the Senate Appropriations Committee that he expected furloughs. “The sequester would … likely require the department to furlough many of its own employees for multiple days,” he wrote in a Feb. 1 letter to the committee.”

    Environmental Protection Agency: Employees can expect 10 unpaid furlough days through the end of the fiscal year on September 30, according to The Washington Post. Officials had expected 13 furlough days, but acting Administrator Bob Perciasepe noted that the agency’s careful money management had allowed the the number to be reduced.

    Federal Aviation Administration: After nearly a week of flight delays nationwide, Congress on April 26 agreed to end FAA furloughs.

    Federal courts: 20,000 employees could be furloughed for 16 days.

    Government Accountability Office: Plans to avoid furloughs, according to The Washington Post. But, the sequester would affect hiring, employee benefits and travel and contract spending, according to Feb. 26 testimony from Comptroller General Gene Dodaro.

    Government Printing Office: Will save money by scaling back technology and other investments, but “if necessary, a furlough of GPO’s workforce may also be implemented,” acting Public Printer Davita Vance-Cook testified before a House subcommittee on Feb. 26.

    Homeland Security Department: Law enforcement personnel would face furloughs of up to 14 days, DHS Secretary Janet Napolitano said in a Feb. 13 letter to House lawmakers. She did not provide a specific number of employees affected but said it would be a “significant portion” of the department’s front-line law enforcement staff (see Customs and Border Protection and Transportation Security Adminsitration entries).

    Housing and Urban Development: A memorandum of understanding signed by agency executives and union officials says seven unpaid furlough days for employees won’t happen until May 24. A union representative told Government Executive that the department would shut down on furlough days, except for the Government National Mortgage Association and the inspector general’s office, neither of which are paid from the HUD salaries and expenses account.

    Interior Department: Secretary Ken Salazar has warned about furloughs of thousands of employees. The National Parks Service plans to furlough permanent staff if other cost-savings measures fail.

    Internal Revenue Service: The agency announced five specific dates its offices will be closed and employees furloughed, beginning on May 24. IRS said it may add another one or two furlouth days in 2013. Employees will have no more than one furlough day per pay period.

    Justice Department: Attorney General Eric Holder said the department would not have to implement sequestration furloughs in fiscal 2013. He said Justice was able to avoid mandatory unpaid leave by taking extraordinary actions that will not be available next year if lawmakers fail to agree on a plan to replace sequestration.

    Labor Department: Sent 4,700 employees furlough notices on March 5. A document posted on the department’s website said furloughs would begin on April 15, and continue through Sept. 21. All furlough scheduling would begin on March 29, and half of the furlough hours must be taken by July 13.

    Merit Systems Protection Board: MSPB does not anticipate needing to furlough its employees this year, according to Executive Director Jim Eisenmann. However, as Government Executive reported in February, the board is preparing for the possibility of processing and adjudicating appeals of furloughs by federal employees.

    NASA: 20,500 contractors could lose their jobs. The agency has not notified federal employees of any furlough possibility, but a spokesman told Government Executive on Feb. 25 that “all possible effects” of sequestration are “still being assessed.” In a series of memos posted by website SpaceRef on March 22, and confirmed by a NASA spokeswoman on Monday, David S. Weaver, the agency’s associate administrator for communications, told employees that sequestration would force immediate cuts to “all education and public outreach activities.” This includes many educational workshops, videos, and “any other activity whose goal is to reach out to external and internal stakeholders and the public concerning NASA.” In a later memo, he exempted breaking news updates, mission announcements and responses to media inquiries from the suspension.

    National Institutes of Health: Director Francis Collins said during a Feb. 25 conference call with reporters that the agency would “do everything we can to avoid furloughs.” He said that furloughs would barely help the agency manage a 5 percent cut since a bulk of the budget was spent on grants and funding for research. Areas that could face the axe include travel and conference spending, Collins said.

    National Labor Relations Board: Has issued formal furlough notices, according to OMB.

    National Oceanic and Atmospheric Administration: Employees can expect up to four furlough days through September, acting NOAA administrator Kathy Sullivan said on April 15. “Our current proposal includes plans to close a majority of our offices entirely on four specific days,” she said. “The proposal is intended to extend federal holiday weekends, when possible, which provides additional utilities and other facility cost savings.“ She said the four days being proposed were July 5, July 19, Aug. 5 and Aug. 30.

    National Park Service: In a March 20 statement, NPS said that sequestration-related budget cuts would force reduced visitor hours at several major attractions including Independence Hall and the Liberty Bell, the Thaddeus Kosciuszko National Memorial, and the Edgar Allan Poe National Historic Site. The agency noted that the budget cutbacks did not necessitate furloughs of current staff.

    National Nuclear Security Administration: Acting chief Neile Miller said it might not become clear until a month into sequestration whether the agency’s employees will have to be furloughed as a result of the across-the-board federal budget cuts.

    Nuclear Regulatory Commission: Has ruled out furloughs or salary cuts.

    Office of Management and Budget: An OMB spokesman told Government Executive that 480 employees subject to administrative furloughs were issued notices on March 7. Employees will be required to take 10 unpaid furlough days for the pay periods between April 21 and Sept. 7.

    Office of Personnel Management: Plans to find the required savings through a hiring freeze and administrative cuts, rather than furloughs.

    Small Business Administration: The Small Business Administration will rely on staff cuts made through early retirements in 2012 to avoid furloughs, according to an Associated Press report.

    Smithsonian: Does not anticipate furloughs.

    Social Security Administration: Remains “uncertain” about reducing its employees’ hours, which would save about $25 million per furlough day, according to a Feb. 1 letter to Congress. It will instead try to reach the reduced budget level through attrition.

    State Department: Won’t need furloughs in 2013.

    Transportation Security Administration: Isn’t planning any furloughs; will rely on a hiring freeze and reductions in overtime, according to a union official.

    Treasury Department: Acting Treasury Secretary Neal Wolin told the Senate Appropriations Committee earlier in February that the department would try to avoid furloughs by instituting hiring freezes, and reducing spending on support, travel, training and supplies, but noted that if the sequester takes effect, “most Treasury employees would face furloughs, which would have a cascading effect on employees’ families as well as on the economy at large.” The Internal Revenue Service would be particularly hard hit, he said (see separate IRS entry).

    Veterans Affairs Department: Mostly exempt from sequestration.

    White House: Assistant chef Sam Kass on April 9 told reporters he would be furloughed, but the White House did not offer further details, according to Reuters.

  15. Gravatar of Doug M Doug M
    20. May 2013 at 18:09

    Professor,

    The question that is burning in my mind…

    When you teach your intro to macro course, what do you say about the ficsal multiplier?

    Do you derive it in Keynesinan form, and then try to explain it away, or do you just skip right over it?

  16. Gravatar of Edward Lambert Edward Lambert
    20. May 2013 at 19:55

    The income surge from December 2012 is fading out and sequestration which started on March 1st is kicking in.

    What happened to capacity utilization and industrial output? They dropped in April.
    And what happened to lumber prices? They have fallen back down too. Face it, there was an income surge during the 1st quarter from people taking income to avoid 2013 taxes. To give credit to QE is not dishonest, but just unaware of the little details.

  17. Gravatar of Mike Sax Mike Sax
    20. May 2013 at 20:03

    Edward you said:

    ” I think words are meaningless without demonstration of concrete action. To completely overwhelm bad fiscal policy, and not merely to offset it, QE would have to be done in the tens of trillions, , and the increase in the monetary base would be permanent.”

    That’s Krugman’s position and mine as well. I don’t necessarily think Scott is a “crazy” person but I do wonder why it’s so important for him to convince the world the fiscal multiplier is zero. I mean why be so dogmatic about it.

    I’ve tried asking but he never shows any interest in telling me.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. May 2013 at 20:04

    jurisdebter,
    In February the CBO estimated the “equivalent” of about 750,000 fewer full-time jobs would exist by the fourth quarter due to the sequester. The CBO’s estimates did not include a breakdown into federal versus non-federal jobs but I think it’s fairly obvious that the CBO did not believe a large proportion of the jobs lost would be in the federal government. Rather, they would be due to the indirect effect of the decline in federal government outlays.

    According to the CBO’s “Budget and Economic Outlook: Fiscal years 2013 to 2023″, Table 1-2, the Defense Department, nondefense discretionary and Medicare will be cut by 7.9%, 5.8%, and 2.0% respectively. The Defense Department employed about 770,000 civilians in FY2010, the Department of Health and Human Services employed about 70,000, and all other departments, except the Social Security Administration (which is completely exempt), employed about 2 million people. Even assuming the federal jobs lost is proportional to the size of the spending cuts in a given department, that yields about 61,000 civilian Defense Department jobs, about 1,400 Health and Human Services jobs lost, and about 116,000 other federal jobs lost, or the equivalent of about 178,000 federal government jobs lost.

    Thus, assuming this estimate is correct, no more than a quarter of the estimated “equivalent” jobs lost will be in the federal government. Furthermore, federal agencies will probably avoid furloughs longer than 22 days because they fall under “reductions in force” rules. Without extended furloughs or layoffs, few federal government jobs will actually be lost.

  19. Gravatar of Integral Integral
    20. May 2013 at 21:07

    Doug M:

    Not Scott, but here’s how I do it.

    Macro 101: Draw AS. Draw AD. Draw vertical LRAS. Show “fiscal stimulus” as an increase in the AD schedule; the monetary response (given that the monetary authority wants to keep Y=LRAS) is to shift AD back to its initial position.

    Macro 201: Draw IS-LM-AD-AS-LRAS. Fiscal stimulus pushes the IS schedule out. Monetary response is to tighten, pulling the LM schedule in. No net change in AD, so no net effect of fiscal stimulus, after you take into account the monetary response.

    Advanced macro: Draw New Keynesian IS, New Keynesian Phillips Curve, and Taylor Rule. Fiscal stimulus pushes up both output and inflation; the monetary response is to contract until those pressures are alleviated.

    Of course all three work in reverse as well, austerity leads the central bank to ease policy.

    Slightly trickier at the zero bound, but still manageable.

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. May 2013 at 22:49

    Mike Sax: but I do wonder why it’s so important for him to convince the world the fiscal multiplier is zero. I mean why be so dogmatic about it. Because then the focus is on monetary policy and holding central bankers accountable for what they do.

    And we stop loading up unnecessary debt.

  21. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. May 2013 at 00:50

    “Face it, there was an income surge during the 1st quarter from people taking income to avoid 2013 taxes. To give credit to QE is not dishonest, but just unaware of the little details.”

    I just read a Bernanke speech from 2010 in which he outlines his ideas on the “portfolio-balance channel” through which he thought QE would have its effect.

    http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm

    I was driven there as a result of this recent column in the WSJ by Feldstein wherein he denies that QE has driven the rise in stock prices:

    http://online.wsj.com/article/SB10001424127887324326504578467592090881604.html?KEYWORDS=feldstein

    It is likely true that many taxpayers realized gains in late 2012 to run ahead of the capital gains tax increases (companies also upped dividends). This likely explains the increase in tax revenues do to advance running. But, these tax revenues are not essentially the result of increased taxes—they are the result of an increase in asset prices.

    If an increase in stock (and other asset) prices did not occur, there would certainly be far fewer gains to realize, tax increase or not. I’m a bit puzzled by Feldstein’s argument because he would, I’m sure, also argue that it certainly was not fiscal stimulus that caused the run-up in stock (or increase in housing) prices. Stock prices are generally forward-looking, so if fiscal stimulus has been eliminated or we are now suffering from retrenchment (aka “austerity”) I doubt that would explain it.

    That would lead me to believe that this channel is working, as Bernanke suggested it would. The positive effects of QE (at least in the short-term) are not seen only in the unemployment rate.

  22. Gravatar of Benjamin Cole Benjamin Cole
    21. May 2013 at 00:55

    Seems like the debate is being won…in the blogospeher.

    Is the fed willing to commit to long-term QE? Japan (BoJ) stuck with QE for four straight years, 2001-5. Already, we have the weakling Fed candy-assing FOMC’ers prancing around about big bad inflation, and maybe they have to stop QE.

    I jave yet to hear a fed official say (as they should), “We are going to bear down hard and with resolve, and even harder, in our QE program, and we will take some heat on inflation to get to robust GDP grpwth and full employment.”

    Instead, it is sniveling about inflation, and maybe we have done enough, and whimpering about inflation. Now at 1 percent, btw.

  23. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. May 2013 at 00:55

    Let me state this differently:

    I find it fascinating here how a *combination* of fiscal austerity and monetary policy can result in such a sudden increase in tax revenues (and a decrease, albeit not yet adequate) in budget deficits.

  24. Gravatar of Mike Sax Mike Sax
    21. May 2013 at 02:28

    Lorenzo do you believe that the debt level goes down relative to GDP if the economy improves? If so why worry about the debt level during a recession? After WWII we had a huge debt and we didn’t do anything to pay it back. Yet within 20 years it was gone.

    What’s important about the debt level is it’s relative value to GDP. If GDP gets higher it’s of less importance.

  25. Gravatar of SG SG
    21. May 2013 at 02:47

    @Mike Sax

    In response to your questions about why Scott hates the fiscal multiplier, i’d just echo Lorenzo’s point about central bank accountability.

    Christy Romer has a forthcoming paper about why central bank impotence is the “most dangerous idea in the history of the Federal Reserve.” You can see historically what happens when central bankers have a scapegoat: disaster. The Great Depression was a disaster, when you had the Fed saying they had cut rates to zero; the Great Inflation was a disaster, when you had the Fed blaming inflation on labor unions. Competent central banking means having the Fed OWN the health of the economy (price stability plus unemployment). That’s what Volker did, that’s what Greenspan did.

    And that’s kinda-sorta what Bernanke has done. But what has driven Scott nuts is that Bernanke is a walking contradiction: he’s never out of ammo, but he pushes for fiscal stimulus. Huh?

    Once we kill the relevance of fiscal stimulus, the Fed has no where else to cast blame. That’s when we start to get solutions.

  26. Gravatar of marcus nunes marcus nunes
    21. May 2013 at 04:51

    ‘Austerity’ in the US has been greater than in the UK, nevertheless…
    http://thefaintofheart.wordpress.com/2013/05/21/monetary-policy-trumps-fiscal-policy-uk-vs-us/

  27. Gravatar of marcus nunes marcus nunes
    21. May 2013 at 04:53

    @SG
    Christy´s paper is available:
    http://elsa.berkeley.edu/~cromer/Romer_and_Romer%20Fed_Anniversary_Session%20Manuscript.pdf

  28. Gravatar of jursidebtor jursidebtor
    21. May 2013 at 05:25

    “The CBO’s estimates did not include a breakdown into federal versus non-federal jobs but I think it’s fairly obvious that the CBO did not believe a large proportion of the jobs lost would be in the federal government. Rather, they would be due to the indirect effect of the decline in federal government outlays.”

    I know, the link I cite to is more of a convenient piece of evidence to link to. I am still not ready to pronounce the fiscal multiplier dead, though you, Sumner, and Nunes all make compelling/convincing arguments that the liquidity trap is fictitious.

  29. Gravatar of W. Peden W. Peden
    21. May 2013 at 05:56

    Marcus Nunes,

    Those are some very informative charts on UK vs US austerity.

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. May 2013 at 06:42

    ‘After WWII we had a huge debt and we didn’t do anything to pay it back.’

    Other than drastically cut back on govt. spending, you mean?

  31. Gravatar of Scott Sumner Scott Sumner
    21. May 2013 at 07:13

    Doug, I don’t do the Keynesian cross, I teach the intuition behind the multiplier.

  32. Gravatar of Scott Sumner Scott Sumner
    21. May 2013 at 07:15

    I see Keynesians saying that 2.5% RGDP growth was what they expected the austerity to produce. Would they have admitted defeat if growth had been 0.5%? Would they have said “Our model was wrong, we predicted 2.5% RGDP growth, and we got 0.5%?”

    I doubt it.

  33. Gravatar of Adam Adam
    21. May 2013 at 07:17

    The expected fiscal multiplier is roughly zero if and only if the fed wants it to be, no?

    I get how the Fed can offset fiscal stimulus if it so chooses, and I get how a strict inflation targeting rule (or for that matter an NDGP targeting rule) would imply that it will chose to do so.

    But we don’t really have such a rule, do we?

  34. Gravatar of Mike Sax Mike Sax
    21. May 2013 at 07:27

    SG you understand that Romer pushed for a bigger stimulus than the final ARRA right?

  35. Gravatar of Mike Sax Mike Sax
    21. May 2013 at 07:28

    If I understand your argument though you’re saying the Fed is simply all-powerful and must not claim to be otherwise?

  36. Gravatar of o. nate o. nate
    21. May 2013 at 07:46

    If the question is “Fiscal policy or monetary policy, which to use at the ZLB?” is it possible the best answer is “Yes”? Isn’t that what Japan is doing? We can all agree that the fiscal multiplier is zero in normal times, but at the ZLB, when bold action is needed to change expectations, doesn’t combining fiscal and monetary policy send a bolder message than either by itself? I think there is enough fear of government using monetary policy to inflate away its debts that the combination of the two retains a potent psychological effect. I don’t think we should turn up our noses at the strongest medicine available for reasons of ideological purism.

  37. Gravatar of Mike Sax Mike Sax
    21. May 2013 at 09:14

    Here’s a mainstream economist who says that without the sequester we’d see 4% GDP. There are no economists I’m aware of who predicted .5% or anything like it.

    “Whatever the data ultimately show for April, economists like Diane Swonk, chief economist for Mesirow Financial in Chicago, say the economy would be showing much more momentum if it were not for the combination of higher payroll taxes that went into effect in January, as well as the process of automatic spending cuts known as sequestration that began to bite last month.”

    “What’s the biggest drag on the economy? The government,” Ms. Swonk said. “If the government simply did no harm, we could be at escape velocity.”

    “Without the impact of federal cuts and higher taxes, Ms. Swonk estimates, annual economic growth would be close to 4 percent, above the 2.5 percent pace she is expecting in 2013.”
    http://diaryofarepublicanhater.blogspot.com/2013/05/sumners-continues-to-spike-ball-on.html

  38. Gravatar of Daniel Daniel
    21. May 2013 at 09:15

    The comments in this thread are logic-defying.

    We have an entity (the Fed) which owns the printing-presses – and therefore can always inflate – and yet, we shouldn’t disregard the power of fiscal stimulus because … well, just because.

    Monetary stimulus which costs nothing – vs expensive fiscal stimulus which will be neutralized by an inflation-targeting central bank.

    What are you people smoking ? (not that there’s anything wrong with that)

  39. Gravatar of o. nate o. nate
    21. May 2013 at 10:04

    We have an entity (the Fed) which owns the printing-presses and therefore can always inflate

    This may seem self-evident, but a graph of the monetary base vs. inflation over the fast 5 years might introduce a hint of doubt. Perhaps the Fed wanted inflation to stay low, but then why did they print all that money? More sophisticated advocates realize that the Fed’s strongest weapon is not the printing press but the press release – ie., if they can move expectations they don’t need to print money.

    Monetary stimulus which costs nothing vs expensive fiscal stimulus which will be neutralized by an inflation-targeting central bank.

    From a government balance sheet perspective, monetary stimulus doesn’t cost nothing, it actually has a negative cost – ie., it generates profit for the government (income on Fed assets being gifted to the Treasury). Fiscal policy could be combined with monetary stimulus in such a way as to have a net zero cost. But should our primary concern at this juncture be improving government finances or actually ending the crisis? Worrying about which one is more expensive seems to be a case of “penny-wise, pound-foolish”. Btw, I’m not advocating fiscal policy by itself, but coordinated fiscal and monetary policy. I realize that within the current legal framework this is taboo, but what better way to get people’s attention than by breaking a taboo?

  40. Gravatar of Adam Adam
    21. May 2013 at 10:47

    Daniel – Because the Fed is not entirely unrestrained in its money printing, as evidenced by its very real failure to adequately stimulate the economy in 2008.

    We may be slowly getting to a world in which the Fed is free (and feels free) to respond as strongly as needed, regardless of howling from gold bugs and hard-dollar conservative members of congress, but we are not there yet.

    Until we are, I don’t see why monetary and fiscal stimulus are not best used together, as both are constrained by political realities. Which seems to be what those inside the fed are telling us.

  41. Gravatar of Morgan Warstler Morgan Warstler
    21. May 2013 at 11:05

    jursidebtor / Sadowski,

    Econ guys shouldn’t be allowed to accept govt discussions of furloughs as par for course.

    It is SUB PAR.

    par is, these departments will make 3-5% YOY productivity gains, for management’s being fired.

    Meaning WHO CARES if they are furloughed.

    What matters is do the direct deposits get made? IF SO… (drum roll)…

    THAT IS GROWTH!

    Econs cannot forget rule #1, ALL growth is good.

    It can NEVER be bad.

    So before there can be any analysis of Sequester, the question is what is the output per dollar cost?

    If we are spending less and getting less, thats FINE, if we are net getting more per dollar.

    —–

    Here’s a real example. Mar 1, 2013, Treasury finally stopped sending out entitlement checks.

    Until 2011, SSA had between 20-25K employees working in telecenters answering about 60M calls a year.

    This runs about $3B.

    Callesr are three types: where’s my check? I’m 65, send me checks, my husband just died

    Funny thing, more than halfthe calls came from the remaining 15% who still got checks, asking “where’s my check”

    Guess what?

    Big old call volume drop.

    Now find out how many of those SSA G-6s got fired.

    Meanwhile liveopsdotcom will handle thos remaining 30M calls for $4 a piece 24/7. No coffee breaks, no pensions.

    30M * $4 = Econs better step up and start screaming about productivity gains, OR NOBODY SHOULD LISTEN when you try to play all macro.

    I will say it again:

    Arguing macro REQUIRES continuous moral proof that you are not violating basic rules of micro:

    1. More for less is growth

    2. policy changes that end sticky wages are GOOD

    As long as you keep bookending your macro with these prime directive micro points everyone should listen to the macro.

    but macro that obfuscates the prime directives, is just a liberal shell game.

  42. Gravatar of Negation of Ideology Negation of Ideology
    21. May 2013 at 11:58

    Edward -

    “To completely overwhelm bad fiscal policy, and not merely to offset it, QE would have to be done in the tens of trillions, , and the increase in the monetary base would be permanent.”

    o. nate -

    “From a government balance sheet perspective, monetary stimulus doesn’t cost nothing, it actually has a negative cost – ie., it generates profit for the government (income on Fed assets being gifted to the Treasury). Fiscal policy could be combined with monetary stimulus in such a way as to have a net zero cost. ”

    I’m astounded by this. People are arguing that saving the government money is a bad thing? Oh no, the government might have to buy back the entire national debt at negative cost and still not hit the NGDP target! The horror!

    It seems we have identified 3 basic choices:

    1. Hit the NGDP target with monetary policy. (negative cost)
    2. Hit the NGDP target with fiscal policy. (positive cost)
    3. Hit the NGDP target with a combination. (somewhere in the middle, possibly zero cost)

    It’s simple – we should hit our AD target in the most cost effective manner possible. That is obviously option 1. Why is this at all controversial?

  43. Gravatar of Michael Michael
    21. May 2013 at 12:20

    Does monetary offset require a level targeting central bank?

  44. Gravatar of o. nate o. nate
    21. May 2013 at 12:41

    Here’s a nice discussion of coordinated fiscal and monetary policy, aka “helicopter money”, with Michael Woodford and Adair Turner:

    http://www.voxeu.org/article/helicopter-money-policy-option

  45. Gravatar of Max Max
    21. May 2013 at 15:01

    nate, “Perhaps the Fed wanted inflation to stay low, but then why did they print all that money?”

    To appease monetarists?

    “From a government balance sheet perspective, monetary stimulus doesn’t cost nothing, it actually has a negative cost – ie., it generates profit for the government (income on Fed assets being gifted to the Treasury).”

    The income from t-bills is lower than what the Fed pays on reserves.

    The loss from monetization is around $4 billion/year.

  46. Gravatar of Scott Sumner, Meet Robert Lucas | Uneasy Money Scott Sumner, Meet Robert Lucas | Uneasy Money
    21. May 2013 at 19:47

    [...] just saw Scott Sumner’s latest post. It’s about the zero fiscal multiplier. Scott makes a good and important point, which is [...]

  47. Gravatar of J J
    22. May 2013 at 05:11

    o. nate,

    As Sumner has previously discussed, calling helicopter drops ‘coordinated fiscal and monetary policy’ is sort of misleading. Generally, people think of fiscal policy as boosting output through a multiplier, i.e. output goes up by more than G. On the other hand, monetary policy boosts output through the real interest rate. The effect of printing a bunch of money and dropping it from a helicopter on output through interest rates is several orders of magnitude larger than the effect on output through a government spending multiplier. In other words, the effect is a combination of the government spending and borrowing, and the Fed printing money to buy the new debt. The Fed part is much more effective for a given amount of spending.

  48. Gravatar of o. nate o. nate
    22. May 2013 at 05:40

    Max- Your statement that the Fed is losing money on monetization is incorrect. See this press release for instance:

    http://www.federalreserve.gov/newsevents/press/other/20130110a.htm

    In 2012, the Fed had a net profit of $91 billion, some $80 billion of which was interest income on its holdings, even after accounting for the $4 billion it paid in interest on reserves.

    J- Arguing about whether the fiscal or monetary component of a helicopter drop is more significant is, I think, of secondary importance. The main point is that combining the two is more effective than either in isolation. Part of the effect is psychological, so it’s difficult to disentangle the effects.

  49. Gravatar of J J
    22. May 2013 at 08:12

    o. nate,

    But wouldn’t it be better just to go all monetary stimulus and do as much as necessary? Fiscal interference creates more distortions and makes the stimulus more complicated. If there were some limit on how much money the Fed is allowed to print, then I would agree that combining it with fiscal stimulus would be optimal. But that’s just not the case. I appreciate that the Fed is in fact NOT doing all that it should (you suggested that money printing is not enough, but define a lot of money printing. QE has had an effect, and more QE would have more of an effect), but adding fiscal stimulus will not help. As Sumner has pointed out, it seems like we are in an ex-ante zero fiscal multiplier situation because the Fed is basing its actions on fiscal policy and expected growth/inflation.

  50. Gravatar of J J
    22. May 2013 at 08:14

    o. nate,

    Ultimately, I agree with your point that it’s silly to argue against fiscal policy combined with monetary policy. Now is not a time to be concerned about deficits. But, it becomes necessary to argue for monetary policy over fiscal policy when fiscal policy advocates are claiming that monetary policy is ineffective. The idea that the Fed has run out of ammo is untrue and dangerous.

  51. Gravatar of W. Peden W. Peden
    22. May 2013 at 08:16

    Mike Sax,

    And how many people predicted 4% growth before it became apparent that the sequester would occur?

  52. Gravatar of Max Max
    22. May 2013 at 09:15

    nate, the Fed is holding securities other than t-bills, so you can’t determine whether monetization is profitable by looking at the net profit. For example, if the Fed is holding a 10-year bond, the profit depends unpredictably on the path of interest rates…the Fed is speculating on low rates, and “winning” so far (it hasn’t been such a win for the economy!)

  53. Gravatar of o. nate o. nate
    22. May 2013 at 10:17

    Max- That is only true if the Fed can be forced to sell at a loss. If they hold to maturity, there is no way they can lose money. Now whether or not they might be forced to sell at a loss is a more complicated question depending on what they feel is necessary to do in the future, but it seems unlikely.

  54. Gravatar of marcus nunes marcus nunes
    22. May 2013 at 10:38

    Maybe because his Permanent Income Theory negated the idea of a multiplier from fiscal stimulus, some think the world is better without Milton Friedmans:
    http://thefaintofheart.wordpress.com/2013/05/22/milton-friedmans-are-bad-for-the-economy-and-for-society/

  55. Gravatar of mpowell mpowell
    22. May 2013 at 13:30

    Along with Mike Sax, I don’t fully understand why Scott Sumner takes the approach that he does. When you argue that the fiscal multiplier is zero but when pushed further you actually mean that in a world with an aggressive central bank capable of perfectly setting and hitting expectations, then the fiscal multiplier is zero you should recognize that you are using the phrase differently than other people. Sumner’s real beef (I think) is that monetary policy by itself works better than people acknowledge and can get the job done all on its own.

    A good reason for Sumner to post the way he does is because of what Lorenzo from Oz highlights. Don’t let the central bank dodge responsibility. A not so good reason might be that Paul Krugman is, as Scott has alluded I believe, his white whale. It seems to me damage being done by misguided austerity these days as opposed to fiscal stimulus in place of monetary policy. Japan until recently looked like perhaps the main exception.

  56. Gravatar of Max Max
    22. May 2013 at 14:25

    nate, “If they hold to maturity, there is no way they can lose money.”

    They can lose money very easily, if the average Fed Funds rate exceeds the bond yield.

  57. Gravatar of ssumner ssumner
    22. May 2013 at 18:18

    Mike Sax, You said;

    “why would it make sense to cutback on QE3 now with the sequester still with us?”

    Good question.

    I don’t know where you got the 4% growth number, only a fool would have predicted that sort of growth w/o monetary stimulus. Which part of the (developed) world is growing at 4%? Perhaps if we had the monetary stimulus w/o fiscal austerity, but if there had been no fiscal austerity then the Fed would have done much less stimulus.

    Ashok, The Keynesians predicted a sharp slowdown—if it had occurred they’d say it proved their theory correct. But it didn’t.

    Edward, Why would people take income in 2013 to avoid 2013 taxes?

    Mike, You said;

    “I’ve tried asking but he never shows any interest in telling me.”

    I keep telling you but you keep failing to understand. I’ve never been dogmatic about a zero multiplier.

    Adam, A competent central bank would want the fiscal multiplier to be zero.

    Mike, You said;

    “Without the impact of federal cuts and higher taxes, Ms. Swonk estimates, annual economic growth would be close to 4 percent,”

    That probably assumes monetary stimulus would have occurred even without fiscal austerity. In that case I agree.

    But that’s a meaningless counterfactual.

  58. Gravatar of Bill Ellis Bill Ellis
    22. May 2013 at 19:31

    Scotts says… “The Keynesians predicted a sharp slowdown—”

    I don’t recall this prediction. One could infer it…I suppose. Got a link to something specific ?

    My impression is that things are about where Krugman the Keynesians and just about everyone else predicted they would be about now. Fully cognizant of the austerity.
    It is one thing to say something will keep us mired for longer, another to predict “a sharp down turn”.

    Too bad the Market Monetarist refused to make anything like a specific prediction of what would happen after QE∞ was in place. (Even though they celebrated it ) All we got was an almost mystcal… “The effects were instant, The markets have already responded! …

    “BUT now…even though things are pretty much where everyone thought they would be… They take full credit for all that is going right in the economy.

  59. Gravatar of Benjamin Cole Benjamin Cole
    22. May 2013 at 21:23

    Here is Bernanke speaking in 2003. In Japan (This is amazing btw):

    My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt–so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent. …

    Isn’t it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio. The BOJ’s purchases would leave the nominal quantity of debt in the hands of the public unchanged, while nominal GDP would rise owing to increased nominal spending. Indeed, nothing would help reduce Japan’s fiscal woes more than healthy growth in nominal GDP and hence in tax revenues.–Bernanke, Japan, 2003.

    Who has captured Bernanke, and stolen his body in the years hence?

    BTW, the above quote is from the latest column by James Pethokoukis, who is now a Market Monetarist! At AEI!

  60. Gravatar of Daniel J Daniel J
    22. May 2013 at 23:19

    I was thinking about what would happen if the US retires the debt. I read a few articles talking about how it would harm the financial system as it would lead to absafe asset shortage. This got me thinking of Bernanke’s “Savings glut”. Right now the safe asset is treasury, whose supply is linked to the implicit fiscal safety net. Why not turn this on it’s head. Say the debt is retired and NGDP contracts are used, both wild and speculative assumptions I know. Since these contracts must tend in the to a fixed target, why wouldn’t they potentially become the next best safe asset after treasuries? Think about it, when the economy falters, suddenly supply of treasuries increases AS DOES demand since doubt is placed in private safe assets. Well this supply is way too subject to fiscal restraint, yet NGDP contracts are self correcting, they get bought up right as a recession hits with all private parties KNOWING the fed will act when thresholds are met. Does this not solve the NGDP and safe asset problem in one swoop?

  61. Gravatar of J J
    23. May 2013 at 02:40

    Bill Ellis,

    On a related note, should the validity of theories be based on the predictions of those who advocate them? If Krugman (and other Keynesians) sort of implicitly acknowledge that the Fed will do monetary offset, but don’t explicitly say it, then their predictions will take that into account. Or maybe their predictions before austerity plus QE were overly optimistic, so they predicted a downturn but were exactly right only because previous predictions were too optimistic.

    If we are going to play this prediction game, then Keynesians and Market Monetarists alike should have to justify the predictions pretty thoroughly and very consistently. Otherwise there is too much room to fudge future predictions if an economist is nervous that his/her theory might be proved wrong.

  62. Gravatar of Mike Sax Mike Sax
    23. May 2013 at 04:05

    “I don’t know where you got the 4% growth number, only a fool would have predicted that sort of growth w/o monetary stimulus. Which part of the (developed) world is growing at 4%? Perhaps if we had the monetary stimulus w/o fiscal austerity, but if there had been no fiscal austerity then the Fed would have done much less stimulus.”

    Diane Swork among others projected that-yes, without austerity but with monetary easing.

    It seems that the market was less impressed hearing about the Fed hawks than you were in this piece as it sold on these minutes.

    Maybe I’m confused about your position on the fiscal multiplier but your friend David Glasner doesn’t seem to get it either.

    http://uneasymoney.com/2013/05/21/scott-sumner-meet-robert-lucas/

  63. Gravatar of Saturos Saturos
    23. May 2013 at 05:27

    Bullard calls on ECB to do QE, advises against NIOR: http://www.nytimes.com/2013/05/22/business/global/in-europe-a-fed-president-urges-quantitative-easing.html?ref=economy&_r=0

  64. Gravatar of ssumner ssumner
    23. May 2013 at 06:00

    Mike Sax, You said;

    “Diane Swork among others projected that-yes, without austerity but with monetary easing.”

    I’m fine with that.

    You said;

    “It seems that the market was less impressed hearing about the Fed hawks than you were in this piece as it sold on these minutes.”

    I’ve never been “impressed” with Fed hawks. It seems to me you really don’t understand my argument.

  65. Gravatar of ssumner ssumner
    23. May 2013 at 06:02

    Bill, I could cite dozens of articles telling us that fiscal austerity would take 1.5% off RGDP growth this year. I’ve linked to some in previous posts.

  66. Gravatar of J J
    23. May 2013 at 07:59

    Professor Sumner,

    It seems like some (including Mike Sax) misinterpreted your post as supporting the calls to ‘dial down the stimulus.’ Correct me if I’m wrong, but I believe your point was simply that

    1) Monetary stimulus is boosting the economy in the face of austerity

    and 2) As the economy shows any sign of improvement, people (including Fed insiders) call for the Fed to cut back on monetary stimulus. Ergo, if fiscal policy joined in to boost the economy, that would only lead to the Fed cutting back on monetary stimulus sooner and so make the fiscal multiplier zero.

    It seems pretty clear from the linked article that the economy is not limited by the effectiveness of the tools of the Fed, but by the desire of central bankers to keep economic growth and inflation low.

    The only criticism I have is that you should have explicitly included the quote from one of the Fed bank presidents saying that QE might slow down soon. When I read your quote, it was unclear if it was Fed insiders or just politicians suggesting a dialing back of the monetary stimulus.

  67. Gravatar of Bill Ellis Bill Ellis
    23. May 2013 at 09:17

    Scott says …
    ” I could cite dozens of articles telling us that fiscal austerity would take 1.5% off RGDP growth this year.”

    Right…and they would still say that is what happened. That the growth should have been higher.

    Like I said….It is one thing to say something will keep us mired for longer, another to predict “a sharp down turn”.

  68. Gravatar of J Mann J Mann
    23. May 2013 at 09:56

    Bill, doesn’t that mean that the (possibly hypothetical Keynsians) now believe that but for austerity, we would now be in an explosive boom?

  69. Gravatar of ssumner ssumner
    23. May 2013 at 17:24

    J, Mike Sax always misinterprets my posts.

    Bill. So if growth had been 0.5%, would the Keynesians have admitted they were wrong? I doubt it. I have no idea why anyone expected growth to pick up sharply if there had been no austerity in 2013. It seems like a weak excuse to me. I notice that even the progressives over at ThinkProgress don’t buy that line.

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