My Mercatus paper on monetary offset

Here is an excerpt from my latest paper for the Mercatus Center.

What role does this leave for fiscal policy? What would an effective fiscal stimulus look like? It turns out that fiscal policy could play a role, but only through supply-side channels. Return to the AS/AD diagram discussed above. If policymakers were able to increase aggregate supply, then the Fed would be under no pressure to offset the effects with tighter monetary policy. That’s because supply-side tax cuts actually tend to lower the inflation rates and raise growth. A good example is a cut in the employer-side of the payroll tax, which would encourage hiring but would not boost wages or prices. Indeed, the cost of labor from the firm’s perspective would decline, whereas workers would see no change in take-home pay. Some economists believe that cuts in taxes on investment income might also boost aggregate supply.

Policy is most effective if each part of the government focuses on what it does best. That means the Fed should focus on stable monetary conditions. Elsewhere I’ve argued that this can best be achieved by targeting a stable growth path for nominal GDP.14 By committing to a policy of stable spending growth, the Fed can shape market expectations in a way that would lessen the volatility created by its current policies. This would result in less aggressive policies from the Fed in the long run. Meanwhile, the fiscal authorities should focus on the supply side of the economy, creating an environment where the private sector can flourish. Attempts to jumpstart the economy with demand-side fiscal stimulus merely cause the government to pile up more debt, with any growth effects being offset by the Fed.


Tags:

 
 
 

45 Responses to “My Mercatus paper on monetary offset”

  1. Gravatar of ThomasH ThomasH
    12. September 2013 at 11:33

    A proper fiscal stimulus would consist of expenditures and tax reductions whose cost benefit analyses rise when there there are generalized underemployment of resources. For example, during recessions private construction normally decreases; this reduces the opportunity cost of government infrastructure projects. This works for tax cuts, too, given optimal Fed policy.

  2. Gravatar of Benoit Essiambre Benoit Essiambre
    12. September 2013 at 12:06

    You know what, I usually stand on the left side of the political spectrum, but I agree with this. When we are in conditions of economic crisis, unemployment and liquidity traps, it is not the right time to try to increase the weight of the government.

    I’m convinced that once the economy gets going, the left will be in a much better position to fight for things we want, there being more real wealth out there to fund them.

    In the short term, governments need to help restore a high enough amount of investment in private infrastructure. They need to encourage the construction of factories and offices, the purchase of tools and machinery, of things that are going to require people to operate and thus things which inevitably lead to long lasting jobs.

  3. Gravatar of Ralph Musgrave Ralph Musgrave
    12. September 2013 at 12:08

    “Attempts to jumpstart the economy with demand-side fiscal stimulus merely cause the government to pile up more debt, with any growth effects being offset by the Fed.”

    That would be true of the Fed thought unemployment was at NAIRU. But if the Fed thought unemployment was above NAIRU, it would not “offset”, so fiscal stimulus would be beneficial.

    Moreover, monetary stimulus is a complete farce and for numerous reasons which I set out here:

    http://www.positivemoney.org/2013/09/monetary-policy-is-nonsense/

  4. Gravatar of jknarr jknarr
    12. September 2013 at 13:10

    NGDPLT creeping into bank research:
    http://www.zerohedge.com/news/2013-09-12/war-now-inevitable

    “There has been some debate about possibly targeting the level of NGDP and perhaps such a policy should get more airtime. Such a policy was first mooted in the late 1970s and by the late 1980s was offered as a possible successor to the money targeting of that decade. A NGDPT would embody two major changes from current policy. First the central bank would act to stabilise nominal GDP, rather than inflation, at some constantly increasing level. Second it would target the level of nominal GDP rather than its rate of change.

    The special feature of NGDPT is this second distinction. Currently if a central bank aiming to hit a 2% annual inflation target were to undershoot and achieve only a 1% rate then when the next year came around, the central bank would have to enact monetary policy still with the aim of hitting a 2% inflation rate. It’s 1% miss the previous year is forgotten. With a level target if the central bank’s objective is to hit a level of NGDP 2% higher at the end of the year then at the start, and it achieved only a 1% increase, then in the next year it has to make up for lost ground and put in place expansionary policies to grow the nominal economy by an extra 1% on top of the +2% it would have been expected to hit anyway.

    This demand to correct for past mistakes can have big implications down the road. Let’s continue with the above example of the central bank who undershoots by 1%. After 5 years (see Figure 90) the central bank would have to try to generate 7% nominal growth in the next year. After 10 years it would need 13% nominal growth. After 100 years the hapless undershooter would need to almost treble (x2.7 or +170%) the size of the nominal economy.

    This last and rather extreme figure isn’t far away from where a nominal GDP targeting Fed would have found itself in 1933 (see Figure 91, LHS). If the Fed had been told to achieve a level of nominal GDP consistent with a 5%-a-year growth rate (the 1790-1929 average) after 1929 then by 1933, after 3 years of Depression, the Fed would have had to have generated 135% growth in 1934 to get back on “target”. As it turned out, the US economy managed to grow at an average of 13.5% a year over the next 10 years and was back on ‘target’ by 1944.”

  5. Gravatar of Justin Irving Justin Irving
    12. September 2013 at 13:14

    I dig it. I like to think of supplyside tax cuts as potentially moving a country from ‘Sweden’ to ‘Switzerland’. The politically viable cuts won’t lead to earth shattering changes, but most people will end up a bit richer.

  6. Gravatar of Morgan Warstler Morgan Warstler
    12. September 2013 at 13:25

    Yah, I suspect this one might finally do it.

    Lefty ideologues might just finally figure out, Scott just said the Fed’s JOB is to make sure that shrinking government, by cutting government spending on the demand side, will not slow down the economy.

    BUT shrinking government on the supply side by cutting taxes on the capital class, can still grow the economy today.

    Cut Spending.
    Cut Taxes.

    I think after 5+ years, it might finally be clear how dangerous to big government Mr Sumner is…

  7. Gravatar of TESC TESC
    12. September 2013 at 14:09

    @ Morgan,

    Let’s say he is giving solutions to problems the left is concern. The word “dangerous” hurts communication, because it is in no way the purpose of MM. MM now is solving problems that the Left and Right are concern, employment and gov micro-management. MM is above politics; the proper place for economics.

    MM: “Bringing the world together through the power of ideas.”

  8. Gravatar of Morgan Warstler Morgan Warstler
    12. September 2013 at 14:58

    TESC,

    rofl

  9. Gravatar of Tom Brown Tom Brown
    12. September 2013 at 15:35

    O/T: New film about the Fed:

    http://www.businessinsider.com/money-for-nothing-film-2013-9

  10. Gravatar of Bill Ellis Bill Ellis
    12. September 2013 at 15:41

    Morgan… Just think if you did convince liberals that Scott is dangerous to them. Is that what you want ? A bunch of people opposing NGDPT for ideological reasons.

  11. Gravatar of jknarr jknarr
    12. September 2013 at 16:12

    Bill Ellis — big government aficionados have already figured it out, and most certainly oppose Scott on ideological grounds. What else explains Krugman’s ignorance and animus? MM most certainly offends his conscience of a liberal, so he mostly ignores its critiques.

    MM will win on policy merits, not the ignorance of its opponents. The biggest merit of NGDPLT? Nobody likes a small cabal operating in secrecy, backed by force and coercion, making decisions that effect everybody.

    Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity.

  12. Gravatar of ssumner ssumner
    12. September 2013 at 16:44

    Thomas, Even better would be optimal monetary policy.

    Ralph, How’d those “multiplier” theories work out in 2013?

    And if the Fed thought unemployment was too high, why are they going to taper? And why did they do QE3, if not to offset fiscal austerity?

    Justin, That’s exactly how I see it too.

    Morgan, Glad to hear I finally got it right.

    Tom, Yes, I have a link for that film in an earlier post–or at least the trailer.

  13. Gravatar of TESC TESC
    12. September 2013 at 17:21

    @jknarr

    “MM will win on policy merits, not the ignorance of its opponents.”

    Social reality is more complex than that. I wish you were right. However, economists first have to SHOW that we care about people’s welfare, not just about how efficient a policy is. Even though I think it is a fact that MM was born out of concern for the world’s welfare, econ talk does not sound like that to the lay audience/voters.

    The general public will support what they FEEL is better, not what IS better. So policy makers need to know that the general public supports MM policies even in a distant limited way.

    Silly policies tend to win because they FEEL or SOUND better, not because they ARE better. People need to KNOW and FEEL how important their welfare is for MM. A MM needs to always SOUND sophisticated and conciliatory, and then no-one will stop MM.

    By the way, great job Dr. Sumner, you have been greatly conciliatory and sophisticated.

  14. Gravatar of Geoff Geoff
    12. September 2013 at 17:22

    Monetary “stability” is unhealthy when economic conditions require “unstable” money in order to rectify.

  15. Gravatar of Philippe Philippe
    12. September 2013 at 18:41

    Scott,

    Sorry to ask a question you’ve probably been asked many times.

    Do you think the Fed was wrong to cut the fed funds rate so much after 2001?

    Do you think they were wrong to raise the rate so high between 2005-07?

    What do you think of the austrian argument that the crisis was basically caused by the Fed’s low interest rate policy following 2001?

    Thanks

  16. Gravatar of Morgan Warstler Morgan Warstler
    12. September 2013 at 19:24

    Scott, it surely feels like new battle lines are finally being drawn, doesn’t it?

    Maybe it’s Summers?

    Maybe it’s the taper and sequester?

    But it feels like the DeLong Moar Govt. Fiscal crowd are starting to lash out like trapped animals. Also, I truly think DeLong expects Summers to go sit in front of Congress and tell them MP is out of ammo and they HAVE to give more money on the poor who will spend it right away.

  17. Gravatar of jknarr jknarr
    12. September 2013 at 20:11

    Anybody know precisely why Woodford is now more concerned with the availability of Treasurys on the secondary than the central bank doing its job?

    http://www.bloomberg.com/news/2013-09-12/why-michael-woodford-thinks-the-fed-should-taper.html

    “For Woodford, the most important point is that the Fed’s balance sheet cannot keep growing without imposing costs on the financial system and broader economy — even when inflation is low and unemployment is high. While Woodford didn’t explicitly tell me what those costs were, a possible explanation can be found in this brief passage from the paper he presented at last year’s Jackson Hole Economic Symposium:

    An increase in the safety premium obtained by making “safe assets” (in the relevant sense) more scarce would in itself be welfare-reducing. If Treasuries provide a convenience yield not available from other assets (including bank reserves), then reducing the quantity of Treasuries in the hands of the public reduces the benefits obtained from this service flow.”

    They put something in the water at Jackson Hole, clearly.

  18. Gravatar of Ralph Musgrave Ralph Musgrave
    12. September 2013 at 22:35

    Scott,

    The multiplier is one huge irrelevance. It’s generally held to be around 1 as I understand it, but if it were 0.5, who cares? That would just mean that if government wanted an increase in demand of $Xbn, it would have to borrow and spend $2Xbn. But that would increase what MMTers call “private sector net financial assets”, i.e. the deficit accumulates as extra debt or extra monetary base. And the larger the latter gets, the bigger the hot potato effect. At some point, the potato effect gets sufficiently large that no more deficit is needed.

    Next, you ask “And if the Fed thought unemployment was too high, why are they going to taper?” The difference between us there is, I think, that I’m talking about central banks IN GENERAL, whereas you are referring specifically to the US central bank, the Fed, in 2013. My point was that a central bank won’t “offset” fiscal stimulus if it thinks inflation poses a negligible threat.

    In contrast, if a central bank thinks irrational exuberance is appearing, it will mop up liquidity by tapering or raising interest rates, and the Fed may well do that in the next two years or so.

    As to why the Fed did QE3, I agree that was to offset fiscal austerity. No difference between us there, far as I can see.

  19. Gravatar of Saturos Saturos
    12. September 2013 at 23:14

    Ryan Avent on the meaning of inflation: http://www.economist.com/blogs/freeexchange/2013/09/generations?fsrc=scn/fb/wl/bl/meaningofinflation

  20. Gravatar of Saturos Saturos
    12. September 2013 at 23:15

    Shouldn’t you have titled it, “Why the (expected) fiscal multiplier is roughly zero”?

  21. Gravatar of Prakash Prakash
    13. September 2013 at 01:16

    @jknarr

    “MM will win on policy merits, not the ignorance of its opponents.”

    Sorry, jknarr. That need not happen. Land Value Taxation was proposed by the physiocrats in the mid 18th century. It has solid economic and ethical reasons behind it. It is nowhere near the fraction of the taxation portfolio of any major sovereign as pure merit indicates it should have been.

  22. Gravatar of Morgan Warstler Morgan Warstler
    13. September 2013 at 03:30

    Prakash, you just don’t have a long enough time frame.

  23. Gravatar of Brian Donohue Brian Donohue
    13. September 2013 at 04:02

    Morgan,

    If you’re interested in battle lines, the recently-surfacing issue of “Who benefits from QE?” seems like a current hot spot. Sadowski had some good numbers here countering an emerging narrative on this front. I’m not 100% sure what I think- as a bottom-rung member of what you call the ‘capital class’, I can say I’ve done quite well the past five years.

    Ultimately, though, I think Dems take this half a loaf, however the argument comes out. What is the future of ‘fiscal stimuls’? The worst recession of my lifetime produced something of a damp squib.

    With $17 trillion in debt and Boomers skipping out over the past few and upcoming several years, I would be surprised to see another ‘fiscal stimulus’ bill passed into law in my lifetime.

  24. Gravatar of dtoh dtoh
    13. September 2013 at 04:12

    If you’re into insane arguments about fiscal policy, check out the latest Japan pronouncements about the consumption tax increase.

    They need the tax to reduce the fiscal deficit.

    Because the tax will hurt the economy, they’ve decided to use the revenue from the tax to increase spending on new useless infrastructure projects.

  25. Gravatar of ssumner ssumner
    13. September 2013 at 04:40

    Philippe, No it wasn’t a mistake, if they had not done so we could well have had another Great Depression after the tech bubble burst.

    jknarr, I don’t know.

    Ralph, I’m claiming the multiplier is zero.

    Saturos, When you write articles for others you don’t always get to choose the title.

    dtoh, Yes, I saw that story—it really is insane.

  26. Gravatar of ssumner ssumner
    13. September 2013 at 04:51

    Saturos, I’m afraid that Avent post is not one of his best. He got the Balassa Samuelson effect wrong, it implies rising real exchange rates, not higher inflation in fast growing economies.

    And it’s hard to tell if he’s thinking high inflation is associated with fast growth or slow growth.

  27. Gravatar of Morgan Warstler Morgan Warstler
    13. September 2013 at 04:59

    Brian Donohue,

    I don’t think what freaks out the Fiscal Stimulus guys is not getting FS.

    I think what freaks them out is:

    Cut Spending – the government gets more productive, shrinks labor force (unions eat it) and not only is that Real growth, but cries that it hurts the economy are silenced by Scott saying “no the Fed will support it with MP, so no worries”

    Cut Taxes on employer side and capital class – and the Fed will not tighten MP.

    That’s why I like Farmer’s argument about Keynes so much, just when Scott’s bashing the left on the head with MM, in comes Farmer from the rear preaching the fed shouldn’t even conduct MP buying and selling T-Bills.

  28. Gravatar of Morgan Warstler Morgan Warstler
    13. September 2013 at 05:02

    That’s why i keep trying to get a discussion between Scott and Farmer, bc if they agree 80% on “what should we do now” – as a tag team they are a force multiplier.

  29. Gravatar of Ralph Musgrave Ralph Musgrave
    13. September 2013 at 09:05

    Scott,

    I find the idea that the multiplier is zero completely bizarre. But I’m always interested in novel ideas.

    Where are your basic theoretical reasons for thinking the multiplier is zero? I’ve done some relevant Googling, but can’t find anything.

    Thanks.

  30. Gravatar of Don Geddis Don Geddis
    13. September 2013 at 12:53

    Ralph Musgrave: the “fiscal multiplier is zero” argument goes like this: The Fed is in absolute control of nominal aggregates. By altering its actions, it can cause NGDP to come out to any number that it wants. The concept of a fiscal “multiplier” says that, if the government spends $X more (funded via increased deficits), that the economy (= NGDP) will grow by $X times the multiplier. But: whatever choice the fiscal side of the government does (spend more, spend less), the central bank retains the power to make NGDP whatever number it wants. (Simply by doing more or less money supply growth, to offset whatever fiscal changes happen.)

    One minor correction: Sumner generally says not that the fiscal multiplier is strictly zero, but instead that the fiscal multiplier is an estimate of central bank incompetence. Central banks have the power to absolutely control NGDP; but an incompetent central bank may choose not to use that power, and in that case fiscal budget changes may indeed affect the economy. But a competent central bank would cause the multiplier to be zero.

  31. Gravatar of Ralph Musgrave Ralph Musgrave
    14. September 2013 at 00:42

    Don,

    Thanks for your answer.

    Re your first paragraph, I’m not sure about your argument that the fact that entity X has the power to negate the actions of entity Y proves that the actions of entity Y have no effect or are useless. For example I have the power to stop the local fire brigade dealing with a house fire: I can get out my gun and shoot any firefighters who turn up to deal with the fire. But I wouldn’t argue that fire brigades are therefore useless.

    In your second paragraph you assume that central banks have the “power to absolutely control NGDP”. Given the feeble effects of QE, I doubt it. But there isn’t space to argue that point in a comment after a blog pose. So let’s assume that CBs have complete control of NGDP.

    First, that control comes about in a very bizarre way: it involves (in the case of QE) stuffing cash into the pockets of asset owners – the rich. If that’s your idea of social justice, it’s not mine.

    Second, both interest rate cuts and QE are distortionary: they channel stimulus into the economy initially just via extra investment. That makes as much sense as channelling stimulus into the economy just via massage parlours and car production and then waiting for the trickle down effect.

    Third, there are whole string of other defects in monetary policy which I set out here:

    http://www.positivemoney.org/2013/09/monetary-policy-is-nonsense/

    In short I don’t agree with the claim by you and Scott that effecting stimulus via monetary policy is “competence”. I think it amounts to incompetence.

  32. Gravatar of Joe Eagar Joe Eagar
    14. September 2013 at 06:01

    ThomasH, I’ve been thinking this too. We need a countercyclical infrastructure investment policy: approve projects in expansions, and built them in downturns. But so far, Congress hasn’t been willing to give up it’s control over the infrastructure process (Democrats talked a lot about a “infrastructure bank” when they controlled the House, but ultimately chose not to create one; and unfortunately, Republicans haven’t been any more eager to enact infrastructure reforms themselves).

  33. Gravatar of ssumner ssumner
    14. September 2013 at 06:09

    Ralph, That surprises me because a zero multiplier was standard new Keynesian economics circa 2007. It was what we were teaching our grad students at elite universities. It’s not some whacky idea I thought up.

    Joe, Good idea, but in America infrastructure simply takes far too long. The sort of big projects that would make a difference must go through endless planning. Look at California high speed rail. They can fill potholes, but that won’t make much difference.

    It does work in China though.

  34. Gravatar of Don Geddis Don Geddis
    14. September 2013 at 08:35

    Ralph Musgrave: your model of macro has almost no overlap with the understanding on this blog. There obviously isn’t space in a comment here to convince you of anything, but perhaps I’ll just highlight your assertions that Market Monetarists don’t agree with.

    [“absolutely control NGDP”]. Given the feeble effects of QE” The US Fed has never attempted to explicitly target NGDP, so past QE performance is not meaningful.

    stuffing cash into the pockets of asset owners” Fed purchases function through the Hot Potato Effect, not through Cantillon effects.

    social justice” The greatest injustice to average people, has been the 8-10% unemployment for 5 years, instead of 5-6%. People couldn’t get jobs. And the cause was Fed mismanagement of NGDP.

    interest rate cuts and QE are distortionary: they channel stimulus into the economy initially just via extra investment” No, it’s the HPE (and future expectations), not Cantillon.

  35. Gravatar of Don Geddis Don Geddis
    14. September 2013 at 08:47

    Ralph Musgrave: Now, on to the fun of your blog post!

    1. Lags” No, monetary policy works instantly, mostly via expectations. You seem to be one of the people of the concrete steppes. You don’t show any understanding of Chuck Norris at the party.

    2. Distortionary” No, the transmission mechanism is HPE and expectations, not investment and trickle-down.

    3. QE … rich” False.

    4. Credit crunch … unemployment” The initial spark was the subprime housing market, but the recession was caused by the fall in NGDP. The “excessive and irresponsible lending” did not require the subsequent unemployment. Also, you focus again on “reduced interest rates so as to encourage more lending”, but that is not the suggested cure. (A rise in NGDP expectations is likely to lead to higher interest rates, not lower rates!)

    5. interest rates should be left to find their own level.” Strangely, MMs probably agree! Manage the money supply, and NGDP, and let rates settle where ever they may.

    6. interest rates … credit cards … 8. interest rates … credit … 9. interest rates … investment” No, that is not how monetary policy is expected to work. You’re very confused about the transmission mechanism, so naturally all the evidence you seek doesn’t apply.

    Meanwhile, you don’t seem to mention all the negative consequences of fiscal policy (growing debt, crowding out, government chooses the winners, regulatory capture, no shovel-ready projects, cost/benefit analysis, etc.).

    Oh, and not to mention: whatever the fiscal government tries to do, the monetary authority gets to “move last”, and has the power to undo any of it.

  36. Gravatar of Joe Eagar Joe Eagar
    14. September 2013 at 15:02

    Scott, the idea is that the planning happens during expansions, before recessions. It’s a nice idea, though I suspect it’s politically impossible.

  37. Gravatar of Ralph Musgrave Ralph Musgrave
    15. September 2013 at 04:12

    Scott,

    I still want to know where your definitive explanation is as to what’s wrong with fiscal policy and why monetary policy is so much better.

    If you can point me to that, then thanks.

  38. Gravatar of Ralph Musgrave Ralph Musgrave
    15. September 2013 at 05:40

    Don,

    Taking your numbered points in turn.

    Para starting [“absolutely control NGDP”]. If QE doesn’t have much effect, that rather blows a hole in the idea that NGDP targeting via QE (or other asset purchases) will work. After all, NGDP targeting only works if the Fed’s threat to increase GDP is credible.

    Both the Fed and the Bank of England recently said they’d keep interest rates low for a couple more years or so. I don’t believe them. Do you? If irrational exuberance takes hold, they’ll raise rates immediately, I’d guess.

    Para starting “stuffing cash into the pockets of asset owners”. Re the hot potato effect, I appreciate that effect works, but I don’t like having it work just via the rich. Why not channel money into the pockets of the less well off as well? That’s what fiscal policy does.

    Moreover, fiscal policy, as MMTers keep pointing out, increases “private sector net financial assets”. Asset purchase don’t. Ergo the hot potato effect is bigger per dollar under fiscal than under monetary policy.

    Re your next comment and your numbered points…

    1. I’m well acquainted with Nick Rowe’s ideas on Chuck Norris. I think Nick’s idea that the Fed ought to keep printing billions – buying up the entire stock exchange if necessary – is ridiculous. It is ridiculously distortionary. Feeding cash into the pockets of those likely to spend it (i.e. the less well off) makes far more sense.

    Re your points 2 and 3, my answer is much as in 1 above.

    4, 6, 8, & 9. You are basically making the point that market monetarists, Chuck Norris fans, etc see monetary policy working in a very different way to that proposed by more traditional advocates of monetary policy. True. In the Positive Money article I was just concentrating on the “traditional”. Perhaps I’ll do an article in the near future on Chuck Norris.

    Re your claim that “growing debt” is a problematic effect of fiscal policy, I suggest that national debts are a complete and total non-problem. Reasons are here:

    http://ralphanomics.blogspot.co.uk/2013/03/the-national-debt-and-deficit-are-total.html

    Moreover, it’s odd for someone who advocates massive amounts of money printing by Fed with a view to purchasing assets to then claim that debt is a problem: reason is that there isn’t much difference between national debt and monetary base. As to short term debt, there’s almost no difference. $X in my bank account is near identical to me having a bit of paper saying the Fed will pay me $X in two weeks time.

    Re “government chooses the winners, regulatory capture” those are inherent problems to ALL GOVERNMENT SPENDING. That’s not an argument against relatively small adjustments to government spending.

    Re “no shovel-ready projects”. Agreed. I actually regard infrastructure projects as a cure for recessions as ridiculous, amongst other reasons for the “no shovel-ready” reason. But that doesn’t preclude other fiscal measures. E.g. the UK adjusted its sales tax, VAT, a couple of times since the crisis. The US adjusted its payroll tax, I think.

    Also I’m pretty sure that one or more of the larger economies (UK, US, Germany etc) actually REDUCED public sector investment during the last five years. That’s ridiculous: at the very least they could have held that investment constant.

    And finally, as you rightly say, this whole business is too complicated to sort out in comments after a blog post. That’s why I want to get hold of Scott’s definitive explanation as to why he thinks fiscal policy is no good, and respond to it – employing 5,000 words if need be.

  39. Gravatar of ssumner ssumner
    15. September 2013 at 07:32

    Ralph, QE is highly effective when combined with NGDPLT. Indeed all you need to do is peg the price of a NGDP futures contract. No fiat money central ever tried to inflate and failed, so we shouldn’t even be talking about liquidity traps, it’s a complete non-issue. I mean the Japanese just devalued the yen by 20%, what more evidence do people need?

    You said;

    “Asset purchase don’t. Ergo the hot potato effect is bigger per dollar under fiscal than under monetary policy.”

    This doesn’t follow at all. Cash is much more of a hot potato than bonds.

    You said;

    “I’m well acquainted with Nick Rowe’s ideas on Chuck Norris. I think Nick’s idea that the Fed ought to keep printing billions – buying up the entire stock exchange if necessary – is ridiculous. It is ridiculously distortionary.”

    You missed the whole point of the exercise, obviously it would not be necessary. If it was, it would be wonderful for the US. We could buy up all the assets of foreign countries. We’d be king of the world!!! Don’t think other countries would give us all their real assets for pieces of paper? Neither do I.

    But if they would . . . great!

    You said:

    “reason is that there isn’t much difference between national debt and monetary base.”

    There’s a huge difference. You have to pay interest on debt. Even today, with low rates, the government pays 3.8% interest on 30 year bonds. MMs favor zero interest reserves, much cheaper.

    We agree on one thing, a employer-side payroll tax cut is a good tool during recessions if the Fed is not doing its job.

  40. Gravatar of Ralph Musgrave Ralph Musgrave
    17. September 2013 at 08:56

    Scott,

    You say “QE is highly effective when combined with NGDPLT.” I have doubts about the word “highly”.

    I.e. that COMBINATION certainly has SOME EFFECT, but it could easily be a less than dramatic. To illustrate… if the Fed announces “we’re going to employ QE to get us out of the recession” but DOESN’T mention NGDPLT, that announcement will nevertheless have some sort of expectation effect.

    Conversely, if the Fed says “we’re combining QE and NGDPLT” but a significant proportion of the private sector thinks QE just doesn’t work, then that proportion will just laugh at the Fed, and to that extent here’ll be no expectation effect. So the COMBINATION is possibly not all that important.

    In short, its best go for whatever policy (fiscal, monetary or a combination of the two) really involves the best transmission mechanism. And if the Fed and/or government combines that with NGDPLT, I have no objections.

    Re your point that “No fiat money central ever tried to inflate and failed..” I don’t think the theory supports that, nor the evidence.

    As to the theory, a central bank cannot increase what MMTers call “private sector net financial assets”: it can only swap monetary base for government debt. Now if part of my pension pot that consists of $X of debt is replaced with cash, I’m not going to go on a spending spree.

    On the other hand if government borrows and the central bank then buys the relevant bonds, then PSNFA rises. Taking me and my pension pot again, if I get $X of cash out of the blue and all my other assets remain constant, I’m much more likely to go on a spree.

    In contrast to the theory, there’s the evidence. I think Japan ten or fifteen years ago tried QE on a big scale and it had little effect, but I’m not 100% sure about that. In contrast, Abenomics includes a fiscal element, which means Japanese PSNFA will have been increased, hence the devaluation of the Yen to which you refer.

    Next there’s your point about hot potatoes. I agree that cash is more of a hot potato than bonds, but in the above passage of mine to which you referred, I wasn’t referring to the difference between cash and bonds. I was referring to the difference between increasing PSNFA and not increasing it.

    As to the difference between cash and bonds, there is a big difference where the interest on bonds is significant and/or the bonds are long term. In contrast, a bond near maturity paying a miserable rate of interest is very near cash.

    Milton Friedman and Warren Mosler have both argued against governments issuing any liability apart from cash. I agree with them. I.e., if we have bonds at all, I think they should be “Japanese style”. That is, they should pay a miserable rate of interest, in which case they are very near the same as cash.

  41. Gravatar of Krugman Unwittingly Confirms Scott Sumner’s Whole Point Krugman Unwittingly Confirms Scott Sumner’s Whole Point
    4. January 2014 at 08:54

    […] multiplier is basically zero, assuming that the Fed is doing its job. That’s because of monetary offset. Let’s say we have a demand shortfall, leading to unemployment above the natural rate. That […]

  42. Gravatar of Monetary offset: the matrix | Historinhas Monetary offset: the matrix | Historinhas
    17. September 2015 at 11:23

    […] A common criticism comes from Keynesians who suggest darkly that Market Monetarists actually don’t approve of fiscal easing at all. But that is a separate question where there is a range of views. Scott Sumner has made it clear that he thinks fiscal easing via tax cuts, particularly employer payroll taxes, is preferable to additional spending. Some Keynesians agree with this too (eg Ralph Musgrave here).  […]

  43. Gravatar of Offset here, offset there, offset everywhere | Historinhas Offset here, offset there, offset everywhere | Historinhas
    18. October 2015 at 18:00

    […] Scott Sumner has been dogged in drawing attention to the fact of “monetary offset”, whereby the tool of expansionary fiscal policy is offset if the overarching policy tool is inflation targeting. Monetary policy will stay tight if the market believes the central bank thinks their inflation target is at risk under the expansionary fiscal policy. The riskiness of an expansionary fiscal policy is moot, but if the market believes the central bank is concerned then the policy will be offset. […]

  44. Gravatar of Offset here, offset there, offset everywhere | The Corner Offset here, offset there, offset everywhere | The Corner
    20. October 2015 at 22:01

    […] Scott Sumner has been dogged in drawing attention to the fact of “monetary offset”, whereby the tool of expansionary fiscal policy is offset if the overarching policy tool is inflation targeting. Monetary policy will stay tight if the market believes the central bank thinks their inflation target is at risk under the expansionary fiscal policy. The riskiness of an expansionary fiscal policy is moot, but if the market believes the central bank is concerned then the policy will be offset. […]

  45. Gravatar of David Glasner vs. Scott Sumner on QE, Monetary Offset | Last Men and OverMen David Glasner vs. Scott Sumner on QE, Monetary Offset | Last Men and OverMen
    17. February 2017 at 09:10

    […] if it were inclined to, is effectively powerless to challenge.”      “Scott Sumner calls this monetary offset. I don’t think that we disagree much on the economic analysis, but it seems to me that he […]

Leave a Reply