Does the Fed favor fiscal stimulus or fiscal relief?

I favor fiscal relief for the unemployed and small businesses, but not fiscal stimulus. But what sort of fiscal policy do Fed officials favor? Most people assume that the Fed wants more fiscal stimulus, and perhaps that’s true. But I’m not so sure.

Tim Duy directed me to a curious statement by SF Fed President Mary Daly:

The U.S. economy is likely to slow and perhaps even stall in coming months amid the surge in coronavirus cases, San Francisco Federal Reserve Bank President Mary Daly said on Tuesday, but the central bank should not respond, as it typically does to slowdowns, by pulling out more stops.

“It is not the time to stimulate the economy aggressively and get people out in the economy because that would be unsafe,” Daly told reporters on a call after a talk at Arizona State University, held virtually. “I judge policy as in a good place.”

So an increase in aggregate demand would be unwise because it would be unsafe. And yet on October 15 Daly said this:

Monetary policy, including interest rates and the pace of asset purchases by the Federal Reserve are in a good place, but more fiscal stimulus may be needed to ensure that households and state and local governments are able to recover, San Francisco Fed President Mary Daly said Thursday.

And in a November 10 interview, Steve Liesman asked her, “If the fiscal side does less does that mean the Fed needs to do more?” As in almost every single case where Fed officials are asked this question, Daly didn’t directly answer the question. (BTW, it’s a worrisome sign when policymakers don’t answer questions.) Instead, Daly strongly emphasized that fiscal stimulus was needed to support unemployed workers and small businesses. I.e., fiscal relief was needed, not “stimulus”.

We don’t need to send $1200 checks to professionals making $100,000/year.

She also indicated that the Fed had the option of making policy either more expansionary or more contractionary. That’s also my view.

In a normal recession, Fed officials (or at the very least Fed doves) would favor more monetary stimulus. They are not doing so today because they believe the recession is mostly caused by Covid-19. The virus caused spending to suddenly shift from people-oriented services toward the purchase of goods, creating mass unemployment. Tim Duy points out that other doves such as Charles Evans are also opposed to additional monetary stimulus. Here’s Duy:

Ok, so maybe you don’t trust Daly’s signal. She’s newer. She’s on the west coast. I’m on the west coast too. What do we know about what’s going on? Let’s pull another dove then, this time Chicago Federal Reserve President interviewed after the labor report and via Nic Timiraos at the Wall Street JournalEvans very clearly says they don’t need to revisit the asset purchase program until 2021:

And then Duy quotes from the WSJ article:

“The risk characterization has improved,” Chicago Fed President Charles Evans said on Friday…

…“As we see progress each and every week and month, that really sets the pace for a better recovery in 2021,” said Mr. Evans. “We’re still looking to see how things are going to work themselves out” before making decisions about whether to provide additional stimulus, he said.

So Evans also sees no current need for additional stimulus. That doesn’t mean he is opposed to fiscal “stimulus” (as in relief), but I suspect his views are closer to Daly’s views than to those who want to goose the economy with a flood of free money.

This post is in response to all those people who tell me I don’t know what I’m talking about, and that all the cool people favor more stimulus. Well, I’d say Mary Daly is pretty cool.

Daly was born in Ballwin, Missouri. Her father was a postal worker and her mother was a homemaker. She said, “we were not poor, but we weren’t very wealthy, either. And at some point my family just, sort of, imploded. And my siblings went to live with my grandparents and I went to live with friends. And I dropped out of high school.” At the time, she was 15 years of age. By age 16, she was living on her own working at doughnut shops and retailer Target, struggling to scrape together a full-time salary.

Daly went on to earn a general educational development (GED) and eventually a bachelor’s degree in economics and philosophy from the University of Missouri-Kansas City in 1985. She later received a master’s degree from the University of Illinois Urbana-Champaign in 1987 and a Ph.D in economics from the Maxwell School at Syracuse University in 1994. She completed a post-doctoral fellowship at National Institute of Aging at Northwestern University in 1996.

PS. Patrick Sullivan directed me to a WSJ article that mentions a Mercatus paper I did back in 2013:

They don’t work. “Why the Fiscal Multiplier is Roughly Zero” is the title of a 2013 paper by Scott Sumner for George Mason University, summarizing the Obama stimulus. The key line is that “estimates of fiscal multipliers become little more than forecasts of central bank incompetence,” meaning the Federal Reserve’s job of maintaining stable monetary conditions should actually require it to fight against stimulus.



21 Responses to “Does the Fed favor fiscal stimulus or fiscal relief?”

  1. Gravatar of Luc Mennet Luc Mennet
    6. December 2020 at 21:56

    Am I wrong for thinking that this “we need to stimulate the economy, but we can’t do it right now” conundrum makes having the fed declare that they’re moving to level targeting seem pretty obviously appealing?

  2. Gravatar of Benjamin Cole Benjamin Cole
    6. December 2020 at 23:34

    “It is not the time to stimulate the economy aggressively and get people out in the economy because that would be unsafe,” Mary Daly (SF Fed President) told reporters on a call after a talk at Arizona State University, held virtually. “I judge policy as in a good place.”


    Egads. Our Fed officials, wearing oh-so-many-hats (social justice, climate change, bank lackies) have now added they are public-health officials too.

    Daly is worried the Fed will create more employment, which would mean more people out and about, and this represents a public health hazard!

    There can be no macroeconomic reason for holding back on stimulus at this juncture.

    Unit labor costs are rising at about 1% annually for the last 12 years. We have lots of unemployment and lots of slack.

    If inflation is your bug-a-boo, you need not worry.

    In good news, it appears that vaccines are on the the near horizon (could be here already, but the FDA…is ponderous).

    So..why not all-hands-on-deck, full steam ahead, and damn the torpedoes?

    Sumner recently linked to a good Selgin paper, for CATO. The Fed always finds a reason to act…well, like central bankers.

    If you do not believe fiscal stimulus will work, that is fine; the economics profession has never sorted out whether this is true or not.

    The vast majority of central bankers globally are screaming for more stimulus, including Chair Powell at Hill hearings last week.

    That Mary Daly has a nice little autobiography is fine and dandy. Maybe she would favor stimulus if it went to green industries (I happen to be a greenie-weenie, but climate policies should be beyond the province of the Fed…you know, like making public-health policy.)

  3. Gravatar of Postkey Postkey
    7. December 2020 at 01:40

    “If you do not believe fiscal stimulus will work, that is fine; the economics profession has never sorted out whether this is true or not.”

    This ‘destroyer of the planet’ has?

    ‘ . . . whereby the coefficient for ∆g is expected to be close to –1. In other words, given the amount of credit creation produced by the banking system and the central bank, an autonomous increase in government expenditure g must result in an equal reduction in private demand. If the government issues bonds to fund fiscal expenditure, private sector investors (such as life insurance companies) that purchase the bonds must withdraw purchasing power elsewhere from the economy. The same applies (more visibly) to tax-financed government spending. “With unchanged credit creation, every yen in additional government spending reduces private sector activity by one yen. “ ‘

  4. Gravatar of Benjamin Cole Benjamin Cole
    7. December 2020 at 02:18


    Yes, there are plenty of studies that support every last possible position in macroeconomics, and highly regarded intelligent and credentialed experts with viewpoints 180 degrees opposed to one another.

    Stanley Fischer, former vice chair of Fed, former governor of the Bank of Israel, professor of Ben Bernanke and Mario Dragi, supports the Fed having a “fiscal facility” to stimulate growth.

    Meanwhile, Paul Volcker and Martin Feldstein, also very smart guys and big names, spent decades and decades and more decades forewarning of a higher interest rates and inflation that never came.

    So, as I always say, the nice thing about macroeconomic debates is no one is ever wrong.

    And the world’s smartest man, Ray Lopez, argues compellingly that money is neutral. Japan sidestepped the Great Depression as it invaded Manchuria, not because it went to helicopter drops.

    From what I can tell, the macroeconomics profession has not even sorted out what is fiscal, and what is monetary policy, when there is QE and concurrent fiscal deficits.

  5. Gravatar of Thomas Hutcheson Thomas Hutcheson
    7. December 2020 at 05:04

    It seem pretty obvious that when average inflation (stating just about any when you want) and inflation expectations (although they have risen recently) are below target, that the Fed should be providing more stimulus. Fiscal policy should be doing what fiscal policy should always be doing spending on activities that have positive NPV’s. Allowing unemployed workers to maintain a level of consumption, pay their rent and mortgages and health insurance and States and Local governments to deal with the extra costs arising from the pandemic (making schools safer, screening testing) have very high NPV’s.

  6. Gravatar of bb bb
    7. December 2020 at 06:24

    I’ve felt that term “fiscal stimulus” has bee harmful for a number of years. Glad to see you adopt the term fiscal relief. Not sure if this is a new term for you?
    Anyways I think people like Krugman contort themselves into somewhat disingenuous places when justifying fiscal stimulus, because what they really want is fiscal relief. And they want long term structural changes too of course. I commend you on the use of that term.

  7. Gravatar of Market Fiscalist Market Fiscalist
    7. December 2020 at 06:31

    Given that NGDP is likely be lower in 2020 than in 2019 isn’t there a strong case for ‘stimulus’ (either fiscal or monetary) right now even if the fall in NGDP is due to supply-side factors and even if the ‘stimulus’ causes a spike in inflation ? Isn’t there a danger that otherwise the supply-side shock could turn into an unnecessary demand-side recession ?

  8. Gravatar of Carl Carl
    7. December 2020 at 07:19

    I’m struggling to figure out the distinction between fiscal relief and fiscal stimulus. Is it fiscal relief if we’re below the natural employment rate and fiscal stimulus if we’re above it? Or is it fiscal relief if we’re in a recession caused by a supply shock and fiscal stimulus if it’s due to a demand shock?

  9. Gravatar of Andrew Andrew
    7. December 2020 at 07:55

    I find President Daly’s comments refreshing. Many economic pundits seem overly focused on employment and growth statistics, and have ignored the fact that we are in the middle of a pandemic. It does not make sense to send people back to work in situations (bartenders for example) that will put more people at risk of contracting the virus when a vaccine is just around the corner.

    Dr. Sumner’s comment, “We don’t need to send $1200 checks to professionals making $100,000/year,” strikes me as mostly true. I’m doing fine, and don’t need a check. But – the negative effects of the pandemic are not evenly spread and I have little faith in the ability of the government to identify and help all of the people in need in a timely manner. It might be better to just send checks to everyone, and encourage those who don’t need the money to donate to those who do.

  10. Gravatar of Alan Goldhammer Alan Goldhammer
    7. December 2020 at 08:57

    Fiscal relief is what it should have been from the beginning. We are still facing a crisis in terms of many small business not being able to make it. If bars and restaurants need to be closed during the pandemic (and they should be), relief should be provided. It’s not rocket science.

  11. Gravatar of ssumner ssumner
    7. December 2020 at 10:25

    Luc, Interesting idea. I’ll have to give that more thought, but my initial impression is that you might be right.

    bb, Thanks. I started using the term a few months back–mostly at Econlog.

    Market, I think there is an argument for stimulus, but I don’t think we should have a policy that prevents any fall in NGDP this year, rather we should aim to get back on a 4% trend line by late 2021.

    Carl, Fiscal relief is aimed at helping people who are not able to work due to social distancing. Fiscal stimulus is aimed at getting people back to work.

  12. Gravatar of bob bob
    7. December 2020 at 13:26

    1. Mayors and governors by the stroke of their dictatorial pen are personally responsible for laying off hundreds of thousands of Americans. And the Fed wants me to pay for the mistakes of poor leadership? That is a form of taxation without representation.

    2. Much of the fiscal stimulus finds its way to the pockets of politicians and their political donors.

    Let those states fail. Stop bailing out corrupt mayors and governors.

    And tell those economic tyrants in D.C. to leave WE THE PEOPLE alone!

  13. Gravatar of xu xu
    7. December 2020 at 13:39

    “If bars and restaurants need to be closed during the pandemic (and they should be), relief should be provided.”

    — What makes you think that bars and restaurants should be closed? What gives you the right to shut down a persons business?

    For non business owners, which is the majority of you, let me tell you that starting a business requires a lot more than cash and a good idea. It requires you to take extraordinary risk, act on that idea, and then compete locally & globally against others.

    A successful business requires 24/7 work. Small Business owners spend years building their businesses – they pay taxes, rent, salaries, benefits – and that business is an extension of their labor, their risk, their time and you want to destroy that with a mandate? What gives you the right? How would you feel if we shutdown your income stream for one year?

    People in America have lost touch with what made them successful in the first place. It was the risk takers and entrepreneurs that made your economy what it is, and you want to destroy them all because you are afraid of a virus with a fatality rate less than 1%. Or worse, you want to close them down and then force them to pay more taxes in the future to cover your stimulus?

    You’ve lost your minds.

    But even if the virus had a fatality rate of 20% – you still don’t have right to force someone to close their business. It’s a theft of labor. It’s unconstitutional.

  14. Gravatar of Spencer B Hall Spencer B Hall
    7. December 2020 at 15:22

    re: “We don’t need to send $1200 checks to professionals making $100,000/year”

    What’s a better target? Most people don’t make $100,000/year. That stimulus had an immediate impact. And now we’re on the downside of the demand curve:

    To quote economist John Gurley, “Money is a veil, but when the veil flutters, real-output sputters.”

    With no stimulus:

    02/1/2020 ,,,,, 0.04
    03/1/2020 ,,,,, 0.17
    04/1/2020 ,,,,, 0.40
    05/1/2020 ,,,,, 0.47
    06/1/2020 ,,,,, 0.53
    07/1/2020 ,,,,, 0.55
    08/1/2020 ,,,,, 0.56
    09/1/2020 ,,,,, 0.52
    10/1/2020 ,,,,, 0.60
    11/1/2020 ,,,,, 0.80 top
    12/1/2020 ,,,,, 0.57
    01/1/2021 ,,,,, 0.31
    02/1/2021 ,,,,, 0.25
    03/1/2021 ,,,,, 0.19 bottom

  15. Gravatar of Spencer B Hall Spencer B Hall
    7. December 2020 at 15:31

    The world-wide problem is that economists don’t know a debit from a credit.

    In “The General Theory of Employment, Interest and Money”, pg. 81 (New York: Harcourt, Brace and Co.): John Maynard Keynes gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an:

    “optical illusion” to assume that “a depositor and his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

    In almost every instance in which Keynes wrote the term “bank” in his General Theory, it is necessary to substitute the term non-bank in order to make Keynes’ statement correct.

    This is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, the elimination of Reg Q ceilings, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, the Financial Services Regulatory Relief Act of 2006, the Emergency Economic Stabilization Act of 2008, sec. 128. “acceleration of the effective date for payment of interest on reserves”, etc.

    This is the source of Secular Stagnation, not robotics, not demographics, not globalization, not monopolization.

  16. Gravatar of Benjamin Cole Benjamin Cole
    7. December 2020 at 15:56

    File under, “Now that Biden is president.”

    China is spreading dis- and mis-information?

    Who knew? And who was taken in?

  17. Gravatar of Benjamin Cole Benjamin Cole
    7. December 2020 at 16:04

    “More and more evidence suggests that the frozen seafood or meat products probably spread the virus from countries with the epidemic into our country,” Wu Zunyou, the chief epidemiologist at the Chinese Center for Disease Control and Prevention, said in a recent interview posted on a government website.—NYT


    How will it be possible for China to do anything but become even more repressive? There are a lot of examples in history in which repression breeds more repression.

  18. Gravatar of foosion foosion
    7. December 2020 at 16:05

    Krugman has been using “disaster relief” since at least March: So have many others.

    Many people are being sloppy with language, using stimulus for both fiscal stimulus and disaster relief.

    BTW, I presume you noticed today’s story that Trump declined in the summer to buy more Pfizer vaccine

  19. Gravatar of Benjamin Cole Benjamin Cole
    8. December 2020 at 00:46

    Another perspective:

    The US has about 130 million households.

    The US spends about $1.3 trillion annually on global security (DoD, VA, black budget, DHS and prorated interest on national debt).

    So, the US taxes away about $10k per household for global security.

    In 2020, the US sent a check for $1,200 back to many (most) households (I guess there were varying levels).

    Yes, perhaps a targeted tax cut would be better. About one-third of households have incomes above $100k a year.

    On the other hand, the checks went rather quickly once approved. A simple program. Not so bad.

  20. Gravatar of Spencer B Hall Spencer B Hall
    8. December 2020 at 06:59

    It seems rather obvious, that the consumption component comprises 70 percent of R-gDp in 2019. Unlike taxes, its quickly disseminated as inferred by the declining ratio of non-M1 components to total checkable deposits.

  21. Gravatar of ssumner ssumner
    8. December 2020 at 09:31

    Ben, A $1,000,000 house actually costs $2 million. One million for the house and one million for the interest on the mortgage. 🙂

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