Cardiff Garcia’s taxonomy of demand-siders

Cardiff Garcia has an excellent article discussing the differences between various types of demand-side economists.  (BTW, I’m both a supply-sider and a demand-sider; both sides matter.)

It’s very hard for reporters to get all the nuances right, but Garcia did an outstanding job here:

Scott Sumner is the Godfather of the modern NGDP level targeting movement and generally a monetary policy purist. By “purist” I mean simply that he believes monetary policy, applied correctly, is fully capable of hitting its targets without the aid of fiscal stimulus, and it can also safely ignore the banking and credit channels.

Still, he pragmatically writes that unless monetary policy is primed to offset it, fiscal policy can indeed raise NGDP. It’s just that fiscal policy can’t deliver the same “ooomph” (not a technical term, unfortunately) as monetary policy. He also thinks fiscal policy can help on the supply side and specifically cites payroll taxes.

When reading Sumner, the point gets across that he just doesn’t think counter-cyclical fiscal policy matters all that much “” or more to the point, would not matter if monetary policy were done right. More on this below.

And as far as I can tell he also did an excellent job with the others.  A brief comment on his conclusion:

So long as your side has a plausible case, and there is agreement that trying the other side’s ideas alongside your ideas would have no effect at worst, then it seems callous to argue against doing both.

If only your ideas are tried and it turns out that you were wrong, an awful lot of people will have suffered for that newfound knowledge about macroeconomics.

Better to try everything at once, and then worry later about deciphering the causal mechanisms, post hoc.

As for whether my arguments are “callous” I think it depends whose making them.  I happen to think that fiscal stimulus does a modest amount of harm, in a couple ways.  It increases the level of future distortionary taxes, and it makes it less likely that effective monetary stimulus will occur, by muddying the waters.  But I also recognize that lots of people who are smarter than me (Krugman, DeLong, Yglesias, Avent, etc) disagree.

Here’s my bottom line. If I was someone like Abe, I’d look at the intellectual dispute and make the same pragmatic decision that FDR made; try a little of everything.  So I agree with Garcia that it would be “callous” of policymakers to ignore any tool with widespread support among economists.  That doesn’t mean they must do everything recommended by economists, but at least they should give the argument serious consideration, if widely held.  (Even if I disagree.)

My role is different.  I’m not a policymaker; I’m inside the academic debate.  I see my role as telling the truth as I see it, and let the chips fall where they may.  If my arguments convince other academics and pundits to come over to my side, that’s great.  If not, then I’ll just be one small input into a vast policymaker apparatus, which is as it should be.

I’m playing a longer game—hoping that if my view eventually prevails then in the future we will DEMAND that central banks stabilize the expected path of NGDP.  My fear is that if we use fiscal policy today, we’ll have to use it in the future.  But the best outcome is an expected NGDP growth path where fiscal policy is never even called for.  That’s my long term goal, and it’s why I maintain my “purist” stance.  (Which given that I favor employer-side payroll tax cuts, is actually not all that pure.)

PS.  The Godfather?  Well every time I decide to stop talking about the need for monetary stimulus, the annoying central banks pull me back in.

PPS.  I wish an investment bank would make me an offer I can’t refuse.

HT:  Saturos


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23 Responses to “Cardiff Garcia’s taxonomy of demand-siders”

  1. Gravatar of Jon Jon
    13. June 2013 at 07:20

    Scott, regarding the irrelevance of the credit channel, there is an effect–not on whether the cb can achieve its nominal target but in the details of how expectations are set.

    For instance, in the world of ten years ago, announcing your goal of stable ngdp and announcing that you will exclusive use an overnight interest rate target to steer toward this goal would work.

    But today, the same position would not align expectations with your goal. Different kinds of problems may require the cb to announce different instruments. For instance if all of the primary dealers went bankrupt, the fed would need to change its methods because its usual tool to inject reserves and steer overnight rates involves not direct transactions in the fed funds market but buying and selling treasuries with the primary dealers. Failure to adapt your instruments leads to failure to align expectations to your goal due to lack of credibility.

  2. Gravatar of ssumner ssumner
    13. June 2013 at 07:41

    Jon, Yes, but I don’t regard interest rate changes and/or OMOs as being the “credit channel.” Elsewhere I’ve argued that “Cantillon effects” don’t matter very much.

  3. Gravatar of jknarr jknarr
    13. June 2013 at 07:50

    Well, if tight money/easy fiscal persists, the Committee of Public Safety may ultimately give you a call, but they don’t pay well. And if you take that IB job, I worry that you’ll find that Krugman was right all along and monetary policy cannot possibly be applied, and that the solution is more credit — underwritten by your employer, of course.

    The credit channel argument is an odd beast — in short, if they tighten base money, reduce NGDP, lower yields, then more credit is available, which they say is easy money. OK, that’s all cleared up, then (not).

    Sounds to me as if tight money – not loose – produces credit.

    But, happily, we can have both fiscal- and monetary- policy working simultaneously. We just need to cut debt out of the equation (if my postulate is correct, debt formation is a symptom of tight money).

    Fund fiscal expenditure to the public directly out of base money, and the world will see how powerful the combined approach can be. Japan should give it a whirl.

  4. Gravatar of J Mann J Mann
    13. June 2013 at 08:03

    I hadn’t read that “Ooomph” posting before, but now I’m glad I did – it’s one of the clearest macro pieces I’ve ever read.

  5. Gravatar of Philo Philo
    13. June 2013 at 08:08

    “My fear is that if we use fiscal policy today, we’ll have to use it in the future.” Yes, because we won’t have a clean demonstration of the effectiveness of monetary stimulus by itself: we will see that combined monetary-fiscal stimulus worked, so that’s what we’ll use again next time, and the time after, etc. Thus the harm that is done by fiscal stimulus *this time* will be repeated, over and over again. For the long run it will be better to have had a clean experiment with purely monetary stimulus.

  6. Gravatar of Doug M Doug M
    13. June 2013 at 08:23

    You can’t say “keep finance out of macro” and then expect Wall Street might make you an offer you can’t refuse. Wall Street has a vested interest in pushing forth the idea that they are “doing gods work.”

  7. Gravatar of John John
    13. June 2013 at 08:37

    A little of everything doesn’t seem to work very well. You might get a little of something that works mixed with a bunch of things that don’t work. If anything that discredits whatever actually works.

    As you point out, in the beginning of Roosevelt’s presidency you got “a little bit” of monetary policy mixed with “a little bit” of price and wage controls. Today we had a little of bit almost everything as well. A little bit of tax cuts, a little bit of spending (a lot in my opinion), a little bit of monetary policy, and a little bit of new regulation (Obamacare and Dodd-Frank). The shotgun approach seems like the wrong way to go if you care about results. It’s probably the right way to go if you care about politics and not pissing anyone off.

  8. Gravatar of Tom Brown Tom Brown
    13. June 2013 at 10:12

    Well I’m glad I predicted that you’d be OK with Cardiff’s blurb about you Scott. Mr. Roche was less pleased with his treatment, but he’s OK with it, and recommends the article as well:

    http://pragcap.com/the-taxonomy-of-nerds

  9. Gravatar of Bob Bob
    13. June 2013 at 11:03

    @Philo
    You wrote: “For the long run it will be better to have had a clean experiment with purely monetary stimulus.”
    That’s a troubling statement. There is real human suffering right now. Families are being torn apart. Long term unemployment can cause permanent harm. Young people who do everything right can’t find jobs. We’re not talking about lab rats. The subjects of this experiment are human beings. I’d like to win this argument too, but at what cost?

  10. Gravatar of ssumner ssumner
    13. June 2013 at 12:30

    jknarr, You said;

    “Fund fiscal expenditure to the public directly out of base money, and the world will see how powerful the combined approach can be. Japan should give it a whirl.”

    Thay’ve been doing that off and on for 20 years. Hasn’t worked.

    J Mann. Thanks.

    Philo, I agree, but it’s almost impossible to get clean experiments, especially given the role of expectations.

    Doug, Seriously, I don’t expect a call.

    John, I agree.

  11. Gravatar of jknarr jknarr
    13. June 2013 at 13:36

    Scott,
    The BoJ has been screwing around with JGBs and its current account balances in the base for 20 years, and unsurprisingly it has not worked — pathetic M1 growth. It’s similar to the US screwing around with reserves at the zero bound.

    Note that I said to cut debt out of the equation — what I’m suggesting is to send Kuroda down to the Tsukiji market to buy trout at Y100,000 a pop every day until M1 explodes higher — and then keep buying. Policy credibility — no unwind — and demand deposit formation, full stop, problem solved. (Weren’t you the one threatening to buy the entire world just a few posts ago?)

  12. Gravatar of kebko kebko
    13. June 2013 at 16:30

    “So long as your side has a plausible case, and there is agreement that trying the other side’s ideas alongside your ideas would have no effect at worst, then it seems callous to argue against doing both.”

    OK. So your side wants tight money and my side is proposing the NIRA. Let’s try both. What’s the worst that can happen?

    😎

  13. Gravatar of W. Peden W. Peden
    13. June 2013 at 16:41

    kebko,

    I laughed!

  14. Gravatar of John S John S
    13. June 2013 at 18:25

    Ok, I’ve been pestering you about helicopter drops for awhile. Now David Beckworth is endorsing:

    “a helicopter drop, a government program that gives money directly to households. The Fed would finance it and the Treasury Department would deliver it to each household. This idea is not new. It was originally suggested by Milton Friedman and recently discussed by the conservative AEI.”

    Do you have any thoughts or criticisms of Beckworth’s plan?
    http://macromarketmusings.blogspot.kr/2013/06/a-foolproof-approach-to-monetary-policy.html

  15. Gravatar of Benjamin Cole Benjamin Cole
    13. June 2013 at 20:15

    PPS. I wish an investment bank would make me an offer I can’t refuse.–Scott Sumner.

    Probably a trip to a headhunter, and a query at Morgan Stanley or Goldman Sachs would do the trick.

  16. Gravatar of dtoh dtoh
    13. June 2013 at 20:55

    A helicopter drop would work…..once. After that it would just push up inflation (and NGDP) with no impact on real growth.

  17. Gravatar of Tom Brown Tom Brown
    14. June 2013 at 00:10

    @dtoh,

    How about once… every fifty years or so (or only when absolutely needed… break glass in case of emergency and all that). I don’t think that Beckworth is proposing it become an everyday occurrence… in fact he’s hoping it would never have to be used.

  18. Gravatar of dtoh dtoh
    14. June 2013 at 04:15

    Tom Brown,

    No need. Traditional OMP (QE or whatever you want to call it) will work just fine.

  19. Gravatar of ssumner ssumner
    14. June 2013 at 08:32

    jknarr, I said buy the world if needed, but it would never been needed. Japan doesn’t need more money, they need more velocity.

    John S, I don’t like helicopter drops, I’ll do a post.

  20. Gravatar of jknarr jknarr
    14. June 2013 at 08:53

    Wow, I am the monetary purist! That’s saying something around
    here.

    Japan should do helicopter drops, not muck around with JGBs and BoJ deposits. They don’t do the drop, simply don’t want the results (higher growth/higher yields).

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