Matt Yglesias on monetary and fiscal stimulus
I recently was invited by Brink Lindsey to speak to a group of bloggers, reporters, academics, think tankers, and policymakers in Washington DC. I was surprised at how many well known people showed up to hear my views on monetary policy. Many of the faces (Bob Samuelson, Bruce Bartlett, Ezra Klein, etc) were instantly recognizable (even though I had never met them.) I met two of my favorite bloggers for the first time; Ryan Avent and Matt Yglesias. The next day I had lunch with a bunch of George Mason faculty/bloggers, including Tyler Cowen, Alex Tabarrok, Bryan Caplan, Garett Jones and Robin Hanson. I’m not used to feeling like the dumbest guy at the table.
[Note, I said “feeling like,” I didn’t say “not used to being the dumbest guy at the table.”]
Because I’ve been so busy I haven’t had much chance to respond to some of the comments on my National Review piece. I plan to return to the issues raised by Cowen and DeLong at a later date, but for now I’d like to respond to Yglesias, and then Kling.
Yglesias liked part of my article, but criticized my shameless attempt to cozy up to conservatives (first me, then Yglesias):
“This sort of policy regime addresses many of the liberal arguments for big government. Right now conservatives don’t have good counterarguments to Paul Krugman’s insistence that all the laws of economics go out the window when we are in a “depression.” Classical economics assumes full employment; how credible are classical arguments against federal job-creation schemes when unemployment is 9.8 percent? Yes, government intervention doesn’t even work very well when there is economic slack. But with NGDP futures targeting, there is no respectable argument for fiscal stimulus, as the money supply would already be set at the level expected to produce the desired level of future nominal spending.”
As a way of surveying the political scene, this seems very shortsighted to me. Yes, it happens to be the case that in January 2009 Barack Obama was President of the United States, Susan Collins was the pivotal member of the US Senate, Paul Krugman had a New York Times column, and David Obey was chair of the House Appropriations Committee. Consequently, we got a stimulus bill oriented around progressive objectives and a lot of Krugman columns about the virtues of stimulus. But if you think back to January 2001 when George W Bush was President, the GOP ran the House, and Dianne Feinstein was the pivotal Senator as I recall our response to the recession was a large debt-financed tax cut. A large debt-financed tax code sold, mind you, with Keynesian arguments about the need to fight the recession.
I’m not quite sure what Yglesias is trying to say here. If he’s arguing that the Republicans pushed the 2001 tax cut for anti-recession reasons, I don’t entirely agree. Bush ran on the idea in 2000, when the economy was still booming. He did take the opportunity to sell it in 2001 using Keynesian arguments, but that’s because Keynesianism is more intuitively appealing, especially to swing voters and Congressmen. Indeed I imagine even Bush himself finds demand-side arguments to be more plausible than supply-side arguments. But the motivation of the GOP was supposed to be starve the beast and lower MTRs.
Or perhaps Yglesias was suggesting that I was implying the Dems are the bad guys who favor fiscal stimulus and the Republicans are the good guys who oppose fiscal stimulus. If so, I guess he’s partly right. I did imply that, and he’s right I was incorrect in doing so. But I don’t see the two cases as being at all identical. My opposition to a massive spending stimulus was that it would require a sharp increase in future distortionary taxes. Bush’s tax cuts might also require future tax increases, but at the time it seemed (to me) like they would not. Indeed if spending under Bush had grown at the same rate as under Clinton then the budget deficit would not have been a significant problem, even with the Bush tax cuts. Naive me, I didn’t realize that when the GOP took all three branches of government (for the first time in my life), they’d increase both military and domestic spending at a rapid rate. In addition, even if future taxes must be raised, it is still better to have the benefits of lower distortionary taxes now, being offset by higher distortionary taxes in the future, as compared to a spending stimulus, which increases future distortionary taxes without any current reduction. BTW, some argue that Obama’s stimulus didn’t end up involving much spending. But any tax cuts that are not cuts in MTRs, are effectively spending increases in terms of their impact on current and future distortionary taxes.
Or perhaps Yglesias was suggesting that I am naive in thinking that politicians will refrain from fiscal stimulus, just because NGDP futures targeting makes it redundant. Perhaps, but the 2001 case certainly doesn’t show that, as we weren’t doing NGDP futures targeting in 2001.
On some other issues, Yglesias effectively critiques the so-called “Latvian success story.” (But they did build some pretty neat banks, for a country of only 2 million people.)
Yglesias also plumps for a “target the forecast” policy. (That’s the first time in my life I’ve written “plumps for.”)
Yglesias also takes on the tricky issue of “what is money.” I don’t have anything earth-shaking to add, as I am a pragmatist about language. It’s not a question of what does the term ‘money’ really mean, but rather what is a useful definition of money. Yglesias seems to take the same approach. I would add, however, that I find the concept of the ‘medium of account’ to be very useful. In monetary models the price level is the inverse of the value of money. To see why this matters, consider walking into a yacht dealer with $100,000 dollars and $100,000 worth of Microsoft stock. You see a $100,000 sticker price on a new yacht. Can you buy the yacht with either asset? Probably; the dealer might slightly prefer cash, but he’d also be willing to take the stock ,which he knows he can quickly sell for roughly $100,000. After all, there is probably some wiggle room in the listed price anyway. So I’m not denying that stock could serve as money in the sense of “medium of exchange.” But now consider the following two thought experiments:
1. The Fed doubles the (non-interest bearing) monetary base.
2. Microsoft doubles the amount of stock outstanding.
Both actions would probably reduce the value of each individual paper asset. (The dilution effect.) The difference is that if the value of Microsoft stock fell in half, its nominal price would probably fall in half. If the value of cash fell in half, its nominal price cannot change. Instead, the nominal price of all other goods must double. That’s why I find it convenient to define money in a way that focuses on its role as the medium of account.