Brad DeLong hasn’t done his homework

Here’s Brad DeLong:

2.  Believers in market monetarism thought that fiscal policy was nearly irrelevant, and that the adoption of QE III would substantially affect long-term interest rates and substantially spur the recovery relative to baseline.

3. Believers in regime change thought that if markets were convinced that the Federal Reserve would pursue QE III until the output gap shrank and would not then reverse its asset purchases–that QE III was actually QE ∞–that expectations of the future price level would rise and those expectations would pull current nominal demand up, accelerating the recovery relative to baseline.

.  .  .

And believers in market monetarism? They appear to be declaring victory. And damned if I can see why.

Wow.  That isn’t even close to being correct.  I argued that growth in 2013 would be about the same as in 2012, because monetary stimulus would roughly offset fiscal austerity.  And that’s essentially what happened.  It was Paul Krugman who suggested that monetary offset would not occur.

And the third item on the list, that monetary stimulus is only effective when it is expected to be permanent, is something I’ve been arguing since 1993, and Krugman picked up on in 1998.  It’s a core component of market monetarism. Nick Rowe once said that policy is 99% expectations of the future path of policy and 1% the current stance.

DeLong doesn’t seem to realize that his description of the effects of QE3 actually supports our argument. This comment by DeLong is something that MMs have been emphasizing for years:

But believers in (1) were surprised by the fact that Ben Bernanke’s announcements that QE III was nearing its end provoked large and substantial shifts in asset prices. That should not have happened according to the only fiscal policy matters at the zero lower bound.

Yes, and the earlier QE programs also impacted asset prices.  The dollar fell 6 cents against the euro on the day QE1 was announced.

And I do not understand why Tabarrok and Sumner are declaring victory for point-of-view (2)–although reading phrases like “arch-Keynesian Paul Krugman now says we are approaching the long run!” and “none of this really matters, does it?  Paul Krugman was the one that said 2013 was a test of market monetarism. He’s the one who said it was a test…” makes me think that much of what is going on here is not marking-our-beliefs-to-market but rather the tragedy of Krugman derangement syndrome at work…

Krugman is caught in one of the most embarrassing flip flops that I have ever seen, and DeLong can’t see it.  Why am I not surprised?  In late April Krugman says 2013 will be a test of market monetarism. Last week he says no test actually occurred.  And of course he would have said no test occurred even if there had been a recession in 2013.  Is that your view Brad?

There is certainly plenty of “derangement” going around, but it’s not in the market monetarist community, which is the only group to have been right about 2013.

HT:  An igyt, 123.


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50 Responses to “Brad DeLong hasn’t done his homework”

  1. Gravatar of Nathan Nathan
    6. January 2014 at 07:35

    Lol. Those two deserve each other.

  2. Gravatar of Gregor Bush Gregor Bush
    6. January 2014 at 08:04

    “Believers in market monetarism thought that fiscal policy was nearly irrelevant, and that the adoption of QE III would substantially affect long-term interest rates.”

    Huh? Which MMs refer to long-term interest rates as the primary transmission mechanism of monetary stimulus? MMs (Sumner, Beckworth, Rowe) bend over backwards to describe the impact on long-term interest rates as ambiguous because liquidity and expectations effects work in opposite directions. It’s Keynesians who insist on always and everywhere seeing monetary policy through the lens of interest rates. To say that MMs are wrong about QE because monetary stimulus can only work with “regime change” (ie. changes in inflation/NGDP expectations) completely misses the core of the MM worldview: which is that changes in monetary policy ARE changes in NGDP expectations.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. January 2014 at 08:19

    Krugman makes a boneheaded error, people notice it and point out the obvious, Krugman obfuscates. Brad DeLong enables the obfuscation.

    Deja vu, all over again.

  4. Gravatar of dtoh dtoh
    6. January 2014 at 08:33

    DeLong says,

    “Believers that only fiscal policy matters at the zero lower bound …. [are] wrong in [their] belief that monetary policy is pushing on a string at the zero lower bound.”

    Seems to me that statement completely cuts PK off at the knees.

    It acknowledges both a) that fiscal policy is not necessary at the ZLB and b) that there is a monetary offset.

    Don’t think you could ask for much more.

  5. Gravatar of Kenneth Duda Kenneth Duda
    6. January 2014 at 08:41

    Scott, as much as I like DeLong and Krugman, I am fully supportive of your viewpoint here. I think you’re right and they’re wrong, FWIW.

    One thing that might have confused some people (including them) is when you talk about the fiscal multiplier being zero. At first blush, this sounds like the Ricardian equivalence nonsense, that every dollar of increased government spending is somehow immediately offset by a one-dollar reduction in private spending. It also confuses people into thinking that the MM’s believe that fiscal policy does not matter. Here is DeLong:

    > Believers in market monetarism thought that fiscal policy
    > was nearly irrelevant, and that the adoption of QE III would
    > substantially affect long-term interest rates and
    > substantially spur the recovery relative to baseline.

    My understanding of the MM view is that *if monetary policy were conducted correctly* (i.e., if the Fed targeted NGDP level) then the Fed could and would offset every dollar of fiscal contraction with monetary expansion, so that NGDP would in fact be unaffected by changing fiscal policy. But that’s a big “if”. MM’s do not believe that today’s Fed actually does this. If the Fed fails to target the NGDP level, but instead does something else (like targets interest rates until they reach zero, and then lurches from one position to another with lots of ambiguous language and internal dissent and premature talk of taper etc) then I believe MM’s would agree that fiscal policy can affect NGDP pretty dramatically. If monetary policy is sufficiently confused, then the fiscal multiplier can be at least 1 and maybe even more.

    So I guess my suggestion is that MM’s should be careful when discussing the impact of fiscal policy, to emphasize that only if the central bank is doing the right thing can MM disconnect fiscal policy from NGDP.

    By the way, I read your Mercatus Research paper (A Market-Driven Nominal GDP Targeting Regime) and it will take me a few more tries to internalize, but these ideas are so beautiful, I do not understand why more economists and central banks do not adopt them.

    Thank you,
    -Ken

    Kenneth Duda
    Menlo Park, CA
    kjd@duda.org

  6. Gravatar of SUMNER FTW SUMNER FTW
    6. January 2014 at 09:32

    I think many, like De Long and Krugman, are missing the more broad point here: the forgotten importance of monetary policy. Something Krugman had a large part in contributing to with all his liquidity trap talk and saying repeatedly that monetary policy was powerless and irrelevant at the ZLB. I wouldn’t necessarily say 2013 proved market monetarism right, but it did prove at the very least that monetary policy is still very relevant. Thank you Professor Sumner for revitalizing monetary debate in macro. Is it so hard to ask Krugman to say plainly: “okay fine, you were right I was wrong, monetary policy still is important.”

    of course that would compromise Krugman’s fiscal agenda, so I’m really not surprised he is in denial. Here is an ironic post from Krugman bashing the right wing for “climate change denial” and “inequality denial”:

    http://krugman.blogs.nytimes.com/2011/10/29/denial-in-depth/

    Denial in depth, huh? Well then let’s just call what Krugman is doing: “Monetary Denial”

  7. Gravatar of SG SG
    6. January 2014 at 10:48

    I think the fact that Delong thinks that “Market Monetarism” is different than “Regime Change” pretty much sums up his misunderstanding.

    Does he not realize that the preferred regime of MM is NGDPLT? Does he not think that NGDPLT would be regime change? The tribalism from team DeLong and Krugman is maddening.

  8. Gravatar of o. nate o. nate
    6. January 2014 at 11:12

    I think if you read closely, Krugman is admitting that he was wrong: he was wrong to think that 2013 would be a good test of market monetarism. Why? For one, the sequester had less of an impact than expected. Krugman is usually pretty good at pointing out that the Federal government is only part of the government, and not even the biggest part when you include state and local. What happened in 2013 is that state and local expenditure stopped shrinking as fast, and if you look at a trend line of total government expenditure, such as the BEA publishes, 2013 is basically a non-event. The trend continues unchanged from 2012.

  9. Gravatar of Ed Ed
    6. January 2014 at 11:37

    o. nate

    Fiscal austerity in the US for 2013 was quite significant http://2.bp.blogspot.com/-opH-QpBF0Hg/Uslq8-SgOmI/AAAAAAAAGrU/i5va8g7pTCo/s1600/fiscal+austeriy.png

  10. Gravatar of o. nate o. nate
    6. January 2014 at 11:43

    Ed- If I’m reading that graph correctly it shows the budget deficit (all levels) as a percentage of potential GDP. But I’m not sure why that’s the relevant measure. If I just look at total government expenditure (all levels), the trend line in 2013 roughly continues on at the same (low) rate of growth from 2012. I’m not an expert on Keynesian economics, but my understanding is that the fiscal multiplier applies to all government spending, regardless of how it’s funded.

    Ps- I was wrong on relative size of Federal vs. state and local govt in my prior post.

  11. Gravatar of Ed Ed
    6. January 2014 at 11:52

    o. nate,

    I am not an expert either, but I think “Keynsians” apply the fiscal multiplier to changes in the deficit not aggregate government expenditures.

  12. Gravatar of ssumner ssumner
    6. January 2014 at 14:19

    Ken, Thanks for the comments. You said;

    “If the Fed fails to target the NGDP level, but instead does something else (like targets interest rates until they reach zero, and then lurches from one position to another with lots of ambiguous language and internal dissent and premature talk of taper etc) then I believe MM’s would agree that fiscal policy can affect NGDP pretty dramatically.”

    I’ve always argued that zero is a sort of benchmark, a starting point in the analysis. If the fiscal stimulus is large enough to bankrupt a country, then for fiscal theory of the price level reasons I’d expect a positive multiplier. In not (i.e. in the US) I expect the multiplier is zero on average, but may be above or below zero for the reasons you indicate. What matters is the expected multiplier, not the actual multiplier, and I see no reason to expect a multiplier that is significantly different from zero. In 2013 we saw about what I expected.

    SumnerFTW, To say that Krugman has a double standard would be like saying it’s cold in Wisconsin right now. An understatement.

    o. nate. You said:

    “I think if you read closely,”

    Where does he say that he was wrong? All I see is him criticizing MMs, even though we passed his test with flying colors.

  13. Gravatar of Saturos Saturos
    6. January 2014 at 16:42

    And Yellen is now the most powerful woman in US history.

  14. Gravatar of Tom M. Tom M.
    6. January 2014 at 17:06

    Ummm….

    “To this list of reasons for the slow recovery–the effects of the financial crisis, problems in the housing and mortgage markets, weaker-than-expected productivity growth, and events in Europe and elsewhere–I would add one more significant factor–namely, fiscal policy. Federal fiscal policy was expansionary in 2009 and 2010. Since that time, however, federal fiscal policy has turned quite restrictive; according to the Congressional Budget Office, tax increases and spending cuts likely lowered output growth in 2013 by as much as 1-1/2 percentage points. In addition, throughout much of the recovery, state and local government budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues. To illustrate the extent of fiscal tightness, at the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment, in infrastructure for example, as well as increases in taxes and reductions in transfers.”

    That’s Ben Bernanke folks. You know the chairman of the FED! This economy blows and should be doing a helluva a lot better and would if Paul Krugman’s advice had been listened to.

    Read more: http://www.businessinsider.com/bernanke-on-fiscal-policy-2014-1#ixzz2pfc8NLB5

  15. Gravatar of benjamin cole benjamin cole
    6. January 2014 at 17:50

    Sad to see this dispute. I wish Krugman would say, “Fine, go aggressive growth on monetary policy, heavy QE. Let us hope it works.”
    Actually, since QE3—open-ended, results dependent QE—the economy and property/stock markets have done okay, in contrast to Europe.
    The MM argument should be that the Fed should have gone to sustained QE bigger and harder, earlier.
    Between Krugman and Cochrane you would think QE3 is killing us–but the economy is generating almost 200k jobs a month. Stocks and property well up. The should ramp up, not down.

  16. Gravatar of Mike Sax Mike Sax
    6. January 2014 at 20:49

    “Sad to see this dispute. I wish Krugman would say, “Fine, go aggressive growth on monetary policy, heavy QE. Let us hope it works.”

    How is Krugman stopoing heavy QE? Actually even the MMers seem to love the taper so why blame Krugman?

    It’s not Keynesians who have said don’t ever do monetary stimulus it’s MMers who insist that we must never do fiscal stimulus and that we shouldn’t even lighten up on austerity.

    Scott. part you didn’t quote Delong on is important-basicaly a ‘neutral’ year for policy-neither easier or tighter-should by definition make up 2/5 of any output gap. IN 2013 we didn’t see that. So it was less than an neutral year-which means that we did not have full monetary offset which means there’s no MM victory.

    You think that the fact that we grew by roughly the same amount in 2013 as 2012 is some great victory. It isn’t-as Delong shows, victory would have to at least be a ‘neutral’ year which would mean closing the output gap by about 2/5.

  17. Gravatar of Mike Sax Mike Sax
    6. January 2014 at 20:51

    ” I argued that growth in 2013 would be about the same as in 2012, because monetary stimulus would roughly offset fiscal austerity. And that’s essentially what happened.”

    Good for you but that’s not a victory. Maybe what Delong should have said was that a true MM victory would require a significant amount of the recovery-about 2/5-relative to baseline.

  18. Gravatar of Mike Sax Mike Sax
    6. January 2014 at 21:23

    Ok, now we’re talking

    http://diaryofarepublicanhater.blogspot.com/2014/01/now-were-talking-delong-takes-on-white.html

  19. Gravatar of Bob Murphy Bob Murphy
    6. January 2014 at 21:27

    This is truly astonishing. I can’t believe people are acting like Scott’s out of line here. Yes, the man thinks Bernanke was too tight (!) and yes, he thinks income is a meaningless concept (!!!) and yes, he says “never reason from a price change” even though he does it every Tuesday.

    But on this one, Sumner quite clearly wins the match against Krugman.

  20. Gravatar of Mike Sax Mike Sax
    6. January 2014 at 21:37

    Bob you’d take the Son of Sam’s side of an argument against Krugman

  21. Gravatar of dtoh dtoh
    6. January 2014 at 22:15

    Just one final point here. I think the main take away from this is that PK said monetary policy does not work at the ZLB. After 2013 and Abenomics, no on believes that anymore.

  22. Gravatar of W. Peden W. Peden
    6. January 2014 at 23:39

    Mike Sax,

    Setting out a “test” of a theory and moving the parameters AFTER the experiment is over looks very silly. It’s the kind of pseudo-empiricism that make people take Austrian praxeology seriously. Fortunately, we’re talking about Keynesian bloggers here, not professional Keynesian economists as such.

  23. Gravatar of Ralph Musgrave Ralph Musgrave
    7. January 2014 at 01:37

    Simon Wren-Lewis (economics prof. at Oxford) also responds to Brad’s post and says he can’t see why fiscal policy is no use at the zero bound. See:

    http://mainlymacro.blogspot.co.uk/2014/01/monetary-versus-fiscal-odd-debate.html

  24. Gravatar of Ralph Musgrave Ralph Musgrave
    7. January 2014 at 01:57

    Scott says “that monetary stimulus is only effective when it is expected to be permanent, is something I’ve been arguing since 1993, and Krugman picked up on in 1998. It’s a core component of market monetarism. Nick Rowe once said that policy is 99% expectations of the future path of policy and 1% the current stance.”

    Is there any empirical evidence to support that? All the evidence I’ve come across indicates that when people receive unexpected dollops of money (e.g. via tax cuts) they don’t bother about whether that increased income is permanent, or whether the dollop might be withdrawn via future tax increases. They spend a significant proportion of the money within about a year. See:

    http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.1984.tb00322.x/abstract
    http://www.nber.org/digest/mar09/w14753.html
    http://www.kellogg.northwestern.edu/faculty/parker/htm/research/johnsonparkersouleles2005.pdf
    http://finance.wharton.upenn.edu/~rlwctr/papers/0801.pdf
    http://www.eea-esem.com/files/papers/eea-esem/2012/1382/chz1a.pdf
    http://www.newyorkfed.org/research/current_issues/ci7-11/ci7-11.html

    The above studies do not SPECIFICALLY look at money received as a result of monetary stimulus, but they are indicative that people just don’t go in for a HUGE AMOUNT of Ricardian type thinking or forward planning.

  25. Gravatar of Daniel Daniel
    7. January 2014 at 02:42

    As usual, people are more interested in winning than in being right – nothing surprising.

    And the higher the public profile, the greater the stakes in “winning”.

    So don’t expect the likes of Krugman (and his sycophants) to admit anything.

  26. Gravatar of Mike Sax Mike Sax
    7. January 2014 at 03:34

    W. Peden I never set any test. It’s not moving the paramaeters, it’s simply the definition of neutral policy. Where did Krugman say we’re going into a recession? If you can quote that I’ll be impressed.

    But in any case it’s not about Krugman and what he said or didn’t say. The claim that’s Sumner and friends are making is that there was full monetary offset in 2013.

    Now the ‘test’ for that is simply recovering 2/5 of the output gap during the year-that’s what neutral policy would mean. This is not a ‘moved parameter’ it’s the definition of neutral policy and it will predates any ‘test.’

    I’d say what looks silly is how many ‘told you sos’ MMs are throwing around without any basis. I mean sure-Keynesian is now dead. It was around for 78 years but now it’s dead becasue growth in 2013 was roughly the same as 2012. Yean, nothing silly about that claim.

  27. Gravatar of Mike Sax Mike Sax
    7. January 2014 at 03:35

    Daniel you’re not interested in winning?

  28. Gravatar of W. Peden W. Peden
    7. January 2014 at 03:38

    Mike Sax,

    I don’t remember Krugman and co. stating it that way back in 2013. That’s what moving the parameters means.

    Most of your comment isn’t addressed to me, I think, or it’s just a strawman.

  29. Gravatar of Mike Sax Mike Sax
    7. January 2014 at 03:40

    I’d say the last 4 years have been a pretty good ‘test’ for MM and in that vein the results are not impressive. We still have a major output gap. With a 1 percent inflation rate there is still plenty of scope for fiscal stimulus now.

  30. Gravatar of Daniel Daniel
    7. January 2014 at 03:43

    Obviously, I am interested in winning.

    However, I’m not the one who made confident predictions – and when they turned out to be false, said “it doesn’t prove anything”.

  31. Gravatar of Mike Sax Mike Sax
    7. January 2014 at 03:44

    It seems you don’t know what strawman means any more than you know what neutral policy means.

    Krugman didn’t have to state it that way back in 2011 for it to be true. You don’t seem to get it-this is not about doing a Bob Murphy and just quoting Krugman feerishly in the hope of finding an inconsitentcy. This is simply the definition of netrual policy. IN this sense MM has failed any test that matters for the last 4 years of fiscal contraction.

    If you want to quote KRugman quote him promising a recession or for growth to collapse in 2013. You wont find it.

    Here he is in the past taking about what I’m talking about here regarding neutral policy.

    http://krugman.blogs.nytimes.com/2009/02/17/slumps-and-spontaneous-remission-wonkish/

  32. Gravatar of Daniel Daniel
    7. January 2014 at 03:46

    Mike Sax logic at its finest.

    Monetarist theory says that tight money will cause a drawn-out recovery.

    We’ve had tight money over the past 5 years – and the recovery has been slow,

    Therefore, monetarism has been falsified.

    Pretty much on the same intellectual level with Geoff.

  33. Gravatar of W. Peden W. Peden
    7. January 2014 at 04:01

    Mike Sax,

    How is it a test? Presumably not in the sense that the Fed is following a MM policy. Perhaps you mean a test of monetary policy offset? We hear a lot about how the fiscal stimulus was too small, and yet in the face of the biggest financial crisis in the US since the Great Depression, core CPI growth has been in or above the Fed’s usual desired range of 1.7-2%. Obviously, growth has been disappointing during that period, but that’s a deficiency of inflation targeting.

    As for a strawman: you’re attacking assertions I never made. For example, I never said that Krugman predicted a recession in 2013, so your requests for a quote didn’t initially even strike me as addressed to me. How is that any different from a strawman argument?

    Anyway, let’s look at some of the numerical parameters actually put forward in the early days of the experiment. Here’s Konzcal-

    “An increase in interest rates would signal inflation, higher expected growth and less demand for safe assets.”

    He continues-

    “Here, too, there was an initial boost after the December announcement, but as 2013 has continued, interest rates have dropped back down.”

    – and gives a graph to prove his point-

    http://research.stlouisfed.org/fredgraph.png?g=hPE

    Interesting. What has happened since April?

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=DGS10&scale=Left&range=Custom&cosd=2012-06-02&coed=2014-01-03&line_color=%230000ff&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&fq=Daily&fam=avg&fgst=lin&transformation=lin&vintage_date=2014-01-07&revision_date=2014-01-07

    Oh my. Looks like monetary policy offset to me.

    What about inflation expectations? Konzcal notes an initial boost in December 2012, but a slump “to an average rate lower than that of 2012” in the Cleveland Fed’s figures. What has happened since to those figures? They’ve gone from under 1.5% when Konzcal wrote that article to 1.75% on the latest figures.

    Now, you can dispute Konzcal’s (I think very admirable) ability to reconsider his views in response to evidence, or the parameters he sets. But, as a similar isolated question, there’s no dispute that the theory of monetary policy offset passed the tests he set in April.

    “Ah”, I hear you say, “but those are KONZCAL’S parameters, not Krugman’s. No doubt, he meant what I’m saying to you now.” Except, that’s not true. Let’s look back at what Krugman said in his April article-

    “But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.

    And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.”

    In other words, Krugman endorsed Konzcal’s parameters, viewed them as a test of market monetarism, and believed that they confirmed his viewpoint. So, if market monetarism now passed the test (over the overall period of “the experiment”) then Krugman should logically believe that they disconfirm his viewpoint.

    THAT’S the relevant Krugman quote, by the way…

  34. Gravatar of W. Peden W. Peden
    7. January 2014 at 04:14

    Note that there were some people who even regarded this as a crucial experiment re: market monetarism-

    https://twitter.com/Noahpinion/status/328202170367369217

    Wow.

  35. Gravatar of libertaer libertaer
    7. January 2014 at 06:10

    The beauty of Market Monetarism is that it cuts all connections between money and debt, be it state or bank debt. Neither fiscal policy nor credit money are needed to get us back to full employment.

    That’s why the statist left (needing Keynesianism as a legitimation for their policy) and private creditors (often on the right and often using Austrianism as their legitimation) both hate market monetarism. They try to subordinate monetary policy to their interests, be it fiscal policies for their constituency or bailouts for their shareholders.

    The inconvenient truth of Market Monetarism is that the state could go bankrupt and the whole banking sector could explode, it wouldn’t matter for AD. Lack of AD is a nominal problem and can be solved by monetary policy alone.

    That’s a frightening message for politicians, bankers, creditors and money hoarders. “We don’t need you! You don’t matter!”

  36. Gravatar of ssumner ssumner
    7. January 2014 at 06:21

    Tom, Bernanke denies that tight money caused the recession? That can’t be!!

    Mike, You said:

    “Scott. part you didn’t quote Delong on is important-basicaly a ‘neutral’ year for policy-neither easier or tighter-should by definition make up 2/5 of any output gap. IN 2013 we didn’t see that. So it was less than an neutral year-which means that we did not have full monetary offset which means there’s no MM victory.”

    Can you just once in your life stick to the topic being discussed and comment on the actual post? We aren’t discussing whether monetary offset occurred.

    Bob, You said:

    “This is truly astonishing. I can’t believe people are acting like Scott’s out of line here.”

    You are a sweet guy, but a bit naive. You simply don’t know how ideology distorts people’s brains. If Krugman said the sky is green Mike Sax would come over here and vigorously argue the sky is green.

    Ralph, Yes, I read that post. He’s obviously not familiar with the MM argument for monetary offset. And he also said monetarists like the IS-LM model. Really?

    Your second post confuses monetary and fiscal policy. As an example Krugman might agree with you on fiscal policy but would strongly disagree on monetary. They are very different issues. And yes, there are plenty of studies showing that people spend a smaller proportion of one-time windfalls.

  37. Gravatar of W. Peden W. Peden
    7. January 2014 at 06:32

    Libertaer,

    Well said. Also, one can eliminate a deficit within a year and there would be no AD problems with an NGDPLT central bank. The only reasons not to do so are practical (it takes a lot of time to work out what to cut/tax, by how much, and to change fiscal consolidation plans in response to unexpected problems and events in general) or due to concern about real effects of fiscal consolidation e.g. disruption.

    Fiscal policy matters, but not because of its potential significance to AD.

  38. Gravatar of TallDave TallDave
    7. January 2014 at 07:09

    Perhaps the most risible aspect of Brad’s argument is that anyone suggested deltas in fiscal spending would not affect NGDP. That’s little more than an accounting identity.

  39. Gravatar of J.V. Dubois J.V. Dubois
    7. January 2014 at 07:15

    I have to say that I am saddened by claims of Paul Krugman and Brad DeLong. In a way their latest posts were a different kind of test. To use Krugman’s words it was a test of two ideas he frequently mentions: “promising to be irresponsible” vs “fiscal stimulus”.

    If anything 2013 shows that Central Bank can be very powerful. Krugman should rejoice since he always hedged his claims. He could have said that he was mistaken in that he thought FED was not sufficiently credible to be irresponsible with QE3 policy.

    He could have praised Ben Bernanke and other members on FOMC for their bold moves so that when we have similar crisis in near future members of FOMC will feel the support of Nobel Price winner for their more aggressive approach. But Krugman didn’t do any of that. It was not aggressive monetary policy – that was fought even from the inside of FOMC on every turn – that saved the day. It was mystical “other stuff”. Maybe mysterious confidence fairy finally showed up after 5 year holidays to offset fiscal austerity?

    In the end I am very sad. This was test between Krugman’s pride and his character. And former won possible to the detriment of us all when next recession hits.

  40. Gravatar of Mike Sax Mike Sax
    7. January 2014 at 09:23

    That is the topic Scott. Maybe you just want to wallow over whether or not Krugman has been proved wrong or not. But that’s just small potatoes. Monetary offset is the whole point. The whole point of MM is that fiscal policy doesn’t matter. This is what the test of MM comes down to. Can it wholly offset fiscal policy or not?

    Judging by 2013-or 2010, 2011, or 2012-the answer is not even close-so the fiscal multiplier is not zero-again, not even close.

    Why don’t you try to do something for the first time in your life. Answer a direct question-did monetary policy wholly offset fiscal last year or did it not? Because that’s really the meat of the argument. You want to construe it as narrowly as possible-but at this level it’s just a pedantic game of ‘I told you so.’ My point is what have we really learned. What we’ve learned is there isn’t total monetary offset.

  41. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. January 2014 at 09:32

    ‘This was test between Krugman’s pride and his character. And former won ….’

    Which it always does with Krugman. We can just add this episode to the others; Thomas White engaged in stock market manipulation while he was at Enron…, Fannie and Freddie not only didn’t engage in subprime lending, they were prohibited by law from doing so…, George W. Bush got a sweetheart deal from his Texas Rangers partners…, The Economics of QWERTY….

  42. Gravatar of Ralph Musgrave Ralph Musgrave
    7. January 2014 at 09:59

    Kenneth Duda,

    You say that “MM’s should be careful when discussing the impact of fiscal policy..” because fiscal DOES WORK where monetary policy is inadequate. That’s exactly what I said in a post on my own blog before Christmas:

    http://ralphanomics.blogspot.co.uk/2013/12/scott-sumners-strange-claim-that-fiscal.html

    I.e. the statement that the fiscal multiplier is zero is a bit like saying “I’ve decided to dig a hole with a shovel rather than a spade, therefor spades are useless.” There is a choice as to whether to use monetary or fiscal measures (or some combination) just as there is a choice as to whether to use a spade or shovel.

  43. Gravatar of Don Geddis Don Geddis
    7. January 2014 at 21:14

    Mike Sax: If you want to make your comments more relevant, you need to show that you understand: (1) that the Fed has not been run according to MM principles, so you can’t look at past history as a guide to what is possible under MM; and (2) the test Krugman proposed in early 2013, was that the sequester was going to harm US growth, compared to previous years. But previous years didn’t have your 2/5 output gap growth, so that isn’t relevant to the comparison.

    Krugman railed on about the damage that austerity would cause to US growth, and claimed that monetary policy at the zero lower bound would be unable to offset it. He was wrong. The austerity happened, but no NGDP damage was seen. Instead, observed growth was the same as in the previous recession years, not worse, the way Krugman predicted.

  44. Gravatar of Erik Trygger Erik Trygger
    8. January 2014 at 02:13

    Scott, October 2013 Krugman has a post titled “What a drag”:

    “First, part of the fiscal cliff deal involved letting the Obama payroll tax cut “” a significant, useful form of economic stimulus “” expire. (Republicans only like tax cuts that go to people with high incomes.) This led to a surprisingly large tax hike in 2013, focused on workers:

    Second, GOP opposition to unemployment insurance has been the biggest factor in a very rapid decline in unemployment benefits despite continuing weak job markets:

    This hurts the unemployed a lot, but it also hurts the economy, because the unemployed are already living on the edge, and surely must have been forced into spending cuts as benefits expired.

    The combination of the payroll take hike and the benefit cuts amounts to about $200 billion of fiscal contraction at an annual rate, or 1.25 percent of GDP, probably with a significant multiplier effect. Add this to the effects of sharp cuts in discretionary spending and the effects of economic uncertainty, however measured, and I don’t think it’s unreasonable to suggest that extortion tactics may have shaved as much as 4 percent off GDP and added 2 points to the unemployment rate.”

    The post discusses more than 2013 so it is not totally clear that the 4% shaved from GDP is only for 2013. It seems quite clear though that Krugman argues that there were significant (and increased) austerity in 2013, and other negative effects as well. I am also wondering what happened to all the assumed negative effects of the budget problems and the government shotdown.. Offset by the Fed maybe?

    http://krugman.blogs.nytimes.com/2013/10/17/what-a-drag-2/

    And in this post from a few days earlier Krugman states that he believes the fiscal multiplier is 1.5.

    “Take these effects into account, and the multiplier effect of an initial decline in government spending should be around 2.5, not 1.5”

    http://krugman.blogs.nytimes.com/2013/10/10/automatic-destabilizers/

  45. Gravatar of ssumner ssumner
    8. January 2014 at 06:01

    Mike, You said;

    “What we’ve learned is there isn’t total monetary offset.”

    It doesn’t matter that there is no evidence to support this claim, you’re going to believe it away.

    Ralph, You said;

    “You say that “MM’s should be careful when discussing the impact of fiscal policy..” because fiscal DOES WORK where monetary policy is inadequate.”

    No, monetary policy in 2013 was inadequate and fiscal stimulus still didn’t work.

    Erik, Thanks, That’s pretty embarrassing.

  46. Gravatar of Ralph Musgrave Ralph Musgrave
    8. January 2014 at 09:31

    Scott,

    You said above that “that monetary stimulus is only effective when it is expected to be permanent, is something I’ve been arguing since 1993, and Krugman picked up on in 1998. It’s a core component of market monetarism.”

    In contrast, you said in a post that introduces MM (link below) that “Some of us are skeptical of fiscal stimulus, partly because we think monetary stimulus is more efficient for the usual deadweight cost of future taxes reasons, and partly because the central bank might offset the effect by targeting inflation or NGDP.”

    In short, you seem to be saying that for monetary policy to be effect, recipients of the relevant cash windfall must believe the windfall to be permanent, whereas fiscal policy is ineffective because recipients of the relevant cash windfalls think their windfalls will be confiscated via extra tax.

    That’s not what I call a fair comparison. I.e. for a fair comparison one should stipulate that in BOTH CASES windfalls will say in place, or in BOTH CASES, everyone expects them to be withdrawn / reversed.

    As to what happens in the real world, I suggest its some sort of messy compromise between those two extremes. I.e. windfall recipients will save some of their windfall and spend some (if the 6 links in the above comment of mine are any guide). Plus when the economy recovers from the relevant recession, government / central bank may need to withdraw some windfall, else demand will become excessive.

    Re your point about fiscal policy not working in 2013, I’ll run over the argument again. A criticism you make of fiscal policy (which actually appears in one of the quotes a few paragraphs above) is that fiscal policy is ineffective because the Fed will just negate it or offset it. My answer to that is that NOTHING WORKS if someone deliberately negates it. That doesn’t prove that fiscal policy is ineffective. Or as Kenneth Duda suggested, if monetary policy is inadequate and the Fed knows it’s inadequate, it won’t offset fiscal stimulus, ergo the latter should work.

    As to your suggestion that fiscal stimulus didn’t in fact work in 2013, I don’t accept that evidence from one year proves very much, but I do accept that fiscal policy on its own may be pretty ineffective because of crowding out: i.e. the possibility that the borrowing that it involves largely negates the additional spending. But that problem is easily solved by printing money rather than borrowing it. And that all amounts to the MMT solution for recessions: print money and spend it and/or cut taxes.

    To summarise, fiscal policy alone may be of little use because of crowding out, and monetary policy alone is distortionary. Ergo… combining the two is the ideal.

    (Link of yours that introduces MM:https://www.themoneyillusion.com/?p=13353)

  47. Gravatar of ssumner ssumner
    9. January 2014 at 06:11

    Ralph, You misunderstood that quotation. I was not referring to Ricardian equivalence, I was referring to the deadweight cost of taxes. Even the Keynesian model says that bigger deficits today imply higher future taxes.

    You said;

    “A criticism you make of fiscal policy (which actually appears in one of the quotes a few paragraphs above) is that fiscal policy is ineffective because the Fed will just negate it or offset it. My answer to that is that NOTHING WORKS if someone deliberately negates it.”

    By that logic if fiscal stimulus was 100% crowded out by a drop in private investment then it still would have “worked.”

    And please don’t mention MMT over here if you want to be taking seriously, it’s like mentioning witchcraft.

  48. Gravatar of Erik Trygger Erik Trygger
    11. January 2014 at 01:08

    The Economist estimates 2013 US austerity was 1.75% (and they seem to indicate that austerity was not abating in 2013):

    “Finally, the fiscal squeeze is abating. In 2013 the federal government took 1.75% of GDP out of the economy with tax rises and spending cuts. The recently agreed budget deal will help cut the fiscal squeeze to 0.5% of GDP this year.”

    http://www.economist.com/news/leaders/21592613-good-news-about-global-growth-risks-pushing-interest-rates-up-and-politicians-appetite-reform

  49. Gravatar of Sumner's Trouble is He Doesn't Know What Monetary Offset Is | Last Men and OverMen Sumner's Trouble is He Doesn't Know What Monetary Offset Is | Last Men and OverMen
    16. February 2017 at 20:26

    […]     https://www.themoneyillusion.com/?p=25779 […]

  50. Gravatar of Now We're Talking-Delong Takes on White Whale Sumner | Last Men and OverMen Now We're Talking-Delong Takes on White Whale Sumner | Last Men and OverMen
    14. April 2017 at 03:00

    […] was Paul Krugman who suggested that monetary offset would not occur.”      https://www.themoneyillusion.com/?p=25779#comment-310649      There he goes again. He’s making it sound as if Krugman claimed growth […]

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