Is this really all they expected?

I was puzzled by a recent Paul Krugman post that argued the current recovery is about all we should have expected from the puny $800 billion stimulus package.  I found this confusing, as during the first 4 quarters of recovery growth has averaged 3%, which is less than what I would have expected with no stimulus at all.  (Note, essentially the entire world has been recovering over the last year, regardless of fiscal policies.)

Krugman shows a bar graph depicting rising and then declining expenditures on stimulus over the past 18 months, and then compares it to a fairly similar looking bar graph showing rising and then falling RGDP growth rates.

[BTW, I would argue that he should be showing NGDP, not RGDP growth, as stimulus is supposed to directly boost AD (NGDP), and the effect on RGDP depends on both the size of the AD increase, and also any concurrent supply-side factors.  But he’d get a similar correlation.]

As I read his post, he seems to be implying that we shouldn’t be surprised that the economy seems to be grinding to a halt, as the stimulus is now ending.  But I thought the proponents of stimulus had some sort of natural rate model in mind, where RGDP tends to grow 3% per year long term regardless of what is done, and that fiscal stimulus is a way of returning to trend more quickly by stimulating private spending.  The idea was to give the economy a shot in the arm, and once the effects wore off we’d get the normal 3% growth.  Indeed perhaps a bit more that 3% if we were still below trend, as long run wage and price flexibility give the economy a sort of self-correcting mechanism.

But instead we have only grown at trend during the recovery, and we now seem to be slowing even further.  Yes, the stimulus was smaller than Krugman wanted, but this is roughly the sort of pattern I would have expected:

1.  Krugman’s $1.3 trillion stimulus:  7% RGDP growth during brisk recovery, 3% thereafter.

2.  Actual $800 billion stimulus:  5% RGDP growth during a slower and longer recovery, 3% thereafter.

Isn’t that the basic idea?  Remember that RGDP grew 7.7% in the first 6 quarters of the 1983-84 recovery, with deficits of only 6% of GDP, not the 12% we have now.   Now you could argue that this cycle is different.  Maybe banking problems give the economy extra headwind.  Fair enough.  But I still don’t see how that supports Krugman’s point.  He’s seems to be saying this is exactly what Keynesian demand-side theory would suggest.  But it isn’t, as growth should be much faster.

I’m not ruling out that stimulus may have helped on a ceteris paribus basis.  And I suppose Krugman would argue that the correlation he finds supports that notion.  But I must admit that I don’t have much sympathy for any Keynesians reading Krugman and assuming that this shows fiscal stimulus “works.”  Those banking headwinds were well understood when the predictions were made in early 2009.  Indeed the subsequent banking crisis has turned out to be far milder than the IMF forecast at that time (which is why banks are able to repay almost all their TARP loans, something that wasn’t initially expected.)  So if Keynesians are claiming it worked, are we to believe that in early 2009 they were promising us no recovery at all for the expenditure of $800 billion?  I say “no recovery” because we are not recovering if we are merely growing at trend.  We are treading water.

To be fair, Krugman is not one of those Keynesians claiming success, he thinks the stimulus was way too small.  Thus my post is actually directed more at the administration than Krugman.   But he does seem to be claiming that we got about what you’d expect from an $800 billion stimulus.  And thus the question in title of this post.

PS.  In my last foray into multiplier economics I misinterpreted the long run multiplier, so it is possible I have missed something simple here.  What do you think?


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25 Responses to “Is this really all they expected?”

  1. Gravatar of RD RD
    28. August 2010 at 07:33

    I wonder how Krugman would respond to Germany’s recovery from the recession.
    When is The Midas Curse coming out?

  2. Gravatar of Andy Harless Andy Harless
    28. August 2010 at 07:41

    I would paraphrase Krugman’s implict argument thus:

    There is a low frequency factor, representing underlying conditions, and a high frequency factor, representing the impact of the stimulus. The former could not be predicted in advance, but the latter could. The high frequency movement, which is visible in the shape of the chart, is consistent with what was predicted.

    I should note that both the theoretical and empirical sides of this argument are subject to challenge. On the empirical side, although the shapes look the same, the time pattern is different (shifted by one quarter). Personally, I agree with Krugman’s vague point that the general pattern of the stimulus impact is more predictable than the timing, but it does seem pretty weak as a defense. I’m not sure the argument would be convincing to anyone who doesn’t already agree with the conclusion.

    On the theoretical side, he needs to explain why the low frequency factor would be unpredictable when the high frequency factor is predictable. He doesn’t begin to make the case, but I can imagine what his argument would be: it was very hard to estimate how big the impact of the financial crisis would be, but we know (from Reinhart-Rogoff and other research) that the recovery would be slow; so there is a factor that is low-frequency but unpredictable in size.

    To your point:

    I thought the proponents of stimulus had some sort of natural rate model in mind, where RGDP tends to grow 3% per year long term regardless of what is done, and that fiscal stimulus is a way of returning to trend more quickly by stimulating private spending.

    This is perhaps conventional contemporary Keynesiansm, but I don’t think it’s what Krugman’s “depression economics” would imply. My impression is that Krugman, looking at Japan as an example, thinks that the tendency to revert to the natural rate is very weak and normally requires support from macro policy. (Normally this support comes from monetary policy, but it didn’t this time because of the zero constraint. Now we could get into the whole controversy you have with Krugman — or that Krugman has with himself — about whether that constraint really matters, but his discussion of fiscal policy has always been based on the premise that it does.)

    To give my own perspective, I’ll quote something I wrote in January:

    …there are those who believe that the stimulus package has been, and will continue to be, entirely ineffective. For the sake of 2011, we had better hope that they are right.

    From my point of view, what is happening now seems like exactly what I was worried about — i.e. that the skeptics were wrong, and the growth in Q4 and Q1 were the result of a multiplier effect. I was essentially arguing that the stimulus theory made a testable prediction, namely that the economy would slow as the stimulus started to wind down. So I view today’s experience as a confirmation of the theory.

    Of course, if your stimulus hypothesis is based on a “pump-priming” model, then today’s experience would tend to lead one to reject it. But I don’t see how you get pump-priming out of a standard Keynesian multiplier model. My view has been that wages and prices are now far above the market-clearing level, and that it would take a very long time for them to adjust. Fiscal stimulus doesn’t speed up the adjustment process; it just ameliorates the resulting depression.

    Of course, that theory, as I’ve stated it, has trouble explaining why the Depression didn’t come back after WWII, but this comment is already too long to get into that.

  3. Gravatar of Leigh Caldwell Leigh Caldwell
    28. August 2010 at 08:08

    I think Andy’s interpretation of Krugman is correct, and it’s a defensible model for Krugman to believe in.

    One minor disagreement:

    “Fiscal stimulus doesn’t speed up the adjustment process; it just ameliorates the resulting depression.”

    Fiscal stimulus, by boosting or sustaining inflation and demand, can help to make the adjustment process faster. In this sense it’s a second-best substitute for monetary ease.

    Against that, one could argue that some of the adjustments are in the wrong direction – because many of the relative prices that rise are of goods disproportionately purchased by fiscal stimulus packages. Then again, good liberals like Krugman (and me) do usually have at the back of their minds this secondary motivation: fiscal stimulus not only boosts the economy, but it’s a good opportunity to buy public goods that might not get bought in the normal political environment.

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. August 2010 at 09:07

    Scott,
    You wrote:
    “As I read his post, he seems to be implying that we shouldn’t be surprised that the economy seems to be grinding to a halt, as the stimulus is now ending. But I thought the proponents of stimulus had some sort of natural rate model in mind, where RGDP tends to grow 3% per year long term regardless of what is done, and that fiscal stimulus is a way of returning to trend more quickly by stimulating private spending.”

    The key to understanding this is realizing that most of the proponents of fiscal stimulus are really Taylor Rule monetarists in disguise. In their world view most of the return to trend in “normal” times is really accomplished via monetary stimulus, not wage and price adjustments. But if the Taylor Rule dictates a negative interest rate then the return to trend will be slower than “normal” (if at all).

    Assuming the monetary authorities stand pat (because for some reason they refuse to adopt sufficient unconventional stimulus even if they know better) then a fiscal stimulus serves to speed up the return to trend only during the time that spending is constant and the multiplier is reaching its full effect (most econometric models show this occuring within about 6 quarters). However when fiscal stimulus spending is reduced (as it will starting the third quarter of 2010) then the return to trend will be slower (albeit from a higher GDP level).

    Note Mark Zandi’s graph of the effect of stimulus on GDP growth (not GDP levels) in Krugman’s blog entry. He shows it having a negative effect on GDP growth rates as it is withdrawn. You will see the same thing if you look at similar models of the effect of the stimulus (IHS/Global Insight, J.P. Morgan Stanley, Goldman Sachs etc.) Since all of these models took into account the Federal Reserve’s reaction function (which is essentially a constant and less than “normal” stimulus according to a Taylor Rule), all were forecasting a big slowdown in GDP growth as the stimulus was withdrawn in the later half of this year.

    Thus none of this is coming as a surprise to Krugman or the major forecasting firms like Moody’s economy.com. In their view the slowdown was baked in the cake a year and a half ago.

    Now, was this what the Obama administration expected? Obviously not. Look at their passiveness in filling FOMC chairs. As Krugman expresses it, evidently they were hoping for the “invisible cavalry” to show up about now.

  5. Gravatar of Ted Ted
    28. August 2010 at 09:52

    I’m kind of agnostic about fiscal stimulus myself. Trying to disentangle the effects of fiscal stimulus using structural VARS is already incredibly difficult and our experience when the zero lower bound becomes binding is pretty small and I think it’s pretty well accepted that fiscal stimulus has never really been tried on the scale that would be necessary to actually tests its validity. The only really sizable fiscal stimulus when interest rates were near / at zero was during WWII and that sample is horribly muddled by war-time rationing, the draft and patriotism interfering with the labor market, and savings being artificially high due to the ‘war bonds’ propaganda campaign. Not only was $500 billion pretty small stimulus (because the rest was more or less tax cuts), but a lot of that was counteracted by state and local fiscal contractions that nullified a lot of it.

    From a governance perspective, I wouldn’t want any fiscal stimulus since I think whatever fiscal stimulus can do, monetary stimulus can do much, much better. But, on an intellectual level, I would have actually loved to see a huge full blown $2-$3 trillion stimulus just to see if it would work.

    As a side note, I don’t understand this discussion about the delayed impact of stimulus. Shouldn’t we have seen the response to fiscal stimulus immediately when the bill was drafted or passed? If stimulus was going to work, inflation / growth expectations should have been lifted around the time it was passed – and so shouldn’t we have seen inflation expectations jump, stocks and commodities skyrocket, and the exchange rate depreciate substantially? I don’t remember seeing any of that. Or do I misunderstand how the market should have responded?

    Another side note, the only major policy action that seem to have any much impact was the quantitative easing done in March. The Cleveland Fed reports one-year inflation expectations were slightly negative (-0.504%) at the beginning of March and by the first of April they jumped backed up to 1.23%. The only major policy action in March I could think of is the fairly sizable quantitative easing.

  6. Gravatar of Kevin Donoghue Kevin Donoghue
    28. August 2010 at 09:57

    Scott,

    I think you may be overlooking the fact that multiplier arithmetic works in terms of GDP levels, not growth rates. So in a $100 economy with zero growth, a $10 stimulus lasting one year with a multiplier of 1.5 gives us $15 of extra output in one year only. The growth rate goes: 0%, 15%, -13%. It’s a simple point, but easily forgotten which Krugman discussed here. As for the NAIRU, if I understand Krugman’s thinking, the economy has only a weak tendency to get back there from a slump when the Fed is unwilling or unable to do its job. Krugman doesn’t have much faith in Pigou effects and suchlike.

  7. Gravatar of Matt Flipago Matt Flipago
    28. August 2010 at 11:45

    Correct me if I am wrong, but if Keynesian Stimulus packages rely on targeting unused resources, which becomes increasingly less easy to target as you get close to normal aggregate demand. So how is it a stimulus with 60% of what they wanted can seem to be so shitty. The multipliers of that 60% should be much higher than the next 40%.

  8. Gravatar of Morgan Warstler Morgan Warstler
    28. August 2010 at 11:50

    It’s like listening to a Christian demean a Muslim’s god.

    There is no god. You cannot print money or continuously deficit spend to form capital, the corresponding negative reaction (diluting discouraging savings, crowding out private profits, etc) kills any gains.

    Meanwhile, we have before us any number of levers that would EASILY UNSTICK prices, but none of you have meaningful conversations about those.

    It’s kind of odd really, everyone acting like prices are so very sticky, when mark-to-market would accomplish it overnight.

    And mark-to-market would put the assets immediately into the hands of the people who deserve to have them – the ones with dry capital.

    With mark-to-market we could IMMEDIATELY raise interest rates.

    And with prices largely unstuck – it’s really ONLY RENTS that are deflating right now – the only thing left we’d have to deal with would be public employees.

  9. Gravatar of scott sumner scott sumner
    28. August 2010 at 12:01

    Andy, Those are all reasonable points, and I certainly agree with the implication that “depression economics” explains the slow recovery. Of course I interpret that differently from Krugman, and I draw the implication that the multplier was near zero, because I am pretty sure that Bernanke would not have allowed any more disinflation that we actually got, in the absence of fiscal stimulus. In other words, with or without fiscal stimulus we’d be sitting here today at 1% inflation, in my view.

    Now obviously you and Krugman think I am wrong, and that we’d have 1/2% or 0% inflation without the fiscal stimulus, and that is certainly very possible.

    I suppose people will read the post as a criticism of Krugman, but I actually agree with Krugman that the fiscal stimulus was not likely to be successful, and was not very successful. We are still in a mess. (the only place we disagree is regarding the likely monetary policy counterfactual.) Where I really disagree is with Keynesians of the Obama adminstration who think the stimulus did work. We aren’t having any recovery. Suppose they told the public in 2009 that we’d spend $800 billion and have no recovery? It would just prevent something worse. Do you think people would have gone for it? Or might people have started asking questions about how much more the Fed could do, if it tried. But those questions weren’t asked.

    BTW, Isn’t fiscal stimulus supposed to affect final sales to domestic purchasers, and real GDP indirectly? While final sales have been totally uncorrelated with fiscal stimulus, so I’m not all that impressed with his graph.

    Leigh, I can see I need a follow up post, to clarify my argument. In my view when the government has to spend a lot of money really fast, there is enormous waste. Although I’ll concede there were some useful projects built.

    Mark, All good points, and I’ll do a follow up post.

    Ted, all very good points. The Woodford model says the impact should occur as soon as the policy is announced.

    Kevin. I think I have the multiplier right, but I was assuming no drop-off after the stimulus ended, because we’d still be below trend. In your example you drop off 13%5 at the end because you’d overshoot full employment. At least think so, multiplier analysis isn’t my forte.

    I agree with your interpretation of Krugman

    People, Hold off a bit on more comments until I get another post up

  10. Gravatar of q q
    28. August 2010 at 12:31

    i don’t see how the $800B number is valid. about $70B if i remember was the AMT extension, which would have happened anyway, out of a $780B package. so $700B is closer. i bet other people can find other things like that.

  11. Gravatar of Morgan Warstler Morgan Warstler
    28. August 2010 at 12:42

    A nice bit on how the public views QE and why…

    http://alephblog.com/2010/08/28/queasing-over-quantitative-easing-part-iii/

  12. Gravatar of Benjamin Cole Benjamin Cole
    28. August 2010 at 12:57

    A good post again by Sumner.
    Krugman doesn’t seem to think a lot about monetary policy. I contend it is his weakness.

    The more I think about monetary policy, the more I think it offers a way to stimulate without deficit spending. And we have gone down the deficit spending road about as far as we dare (thanks in part to Reagan, Bush, Bush).

    We also have to tie down and tickle to near-death anyone who talks about the value of the dollar, gold, the Austrian school (where I imagine stern men in mustaches talk about Nietzsche and have dueling scars on their faces).

    Can we just pump this economy up, and get the party going?

  13. Gravatar of scott sumner scott sumner
    28. August 2010 at 13:02

    Matt, That’s right. Another good point. I suppose they’d say we’re far from full employment either way. But you are correct that we should have gotten at least 60% of the goal, and it sure doesn’t seem that way.

    Morgan, There may be no god, but there are sticky wages and prices.

    People, I suggest putting new comments on the next post. It clarifies my thinking (I hope.)

  14. Gravatar of Morgan Warstler Morgan Warstler
    28. August 2010 at 13:32

    Scott, explain to me sticky prices vs. mark-to-market. I think without M2M, you’d have nothing to point to…

    1. energy – no
    2. food – no
    3. entertainment – no
    4. heavy equipment – no
    5. technology – no

    Without rents, WHAT EXACTLY do you think has sticky prices?

    College text books?
    Used Volvo 240s?

    Please be specific.

  15. Gravatar of scott sumner scott sumner
    28. August 2010 at 15:41

    RD, Haven’t heard back on the Midas Curse. I guess the book is cursed.

    Krugman seems to go back and forth on Germany. At times saying they are doing too little (because of the big trade surplus) but then pointing out how much they’ve done (when they grow fast.) I don’t know enough to comment.

    q, You may be right, it’s not an issue I follow closely.

    Morgan, he’s wrong.

    Benjamin, You said;

    “We also have to tie down and tickle to near-death anyone who talks about the value of the dollar, gold, the Austrian school (where I imagine stern men in mustaches talk about Nietzsche and have dueling scars on their faces). ”

    Yes, let’s you and me do that.

    Morgan, Ever heard of price catalogs? But I emphasize wages more than prices.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. August 2010 at 16:08

    Scott wrote,
    “Krugman seems to go back and forth on Germany. At times saying they are doing too little (because of the big trade surplus) but then pointing out how much they’ve done (when they grow fast.) I don’t know enough to comment.”

    Well I’ll comment because I’ve never been known to try to pretend I know enough to comment. In my opinion Germany has done well in terms of work sharing and consequently low unemployment rates. Where I think Germany is deficient is in terms of nominal or real GDP growth.

    Get it?

  17. Gravatar of Greg Ransom Greg Ransom
    28. August 2010 at 21:42

    Scott — so what is your explanation for what is happening with the German economy?

  18. Gravatar of MikeDC MikeDC
    28. August 2010 at 23:08

    Question: Has the NAIRU increased, decreased, or not changed since the stimulus began?

  19. Gravatar of Mr. E Mr. E
    29. August 2010 at 05:59

    He’s written many columns about the “50 little hoovers”. He correctly notes that much of the stimulus was countered by decreases in state spending.

    As for Germany, he also notes in a recent post that they outspent us by about 3% in stimulus. What he doesn’t note is that they are freeloading off Spain, Italy, Greece and Ireland by taking advantage of an undervalued Euro. A huge portion of German growth was due to increased exports.

    Don’t you guys read what he writes before launching attacks?

  20. Gravatar of scott sumner scott sumner
    29. August 2010 at 07:47

    Mark, Interestingly, I wrote exactly the same thing in an essay for The Economist (coming out tomorrow.)

    Greg, I have an essay coming out tomorrow in the Economist. The quick answer is a weaker euro helped them.

    MikeDC, It’s probably up by at least a point. But more monetary stimulus would reduce it. (By causing Congress to reduce the UI extension.)

    Mr E. You said;

    “Don’t you guys read what he writes before launching attacks?”

    First, I never attacked Krugman’s argument that stimulus was too weak. I acknowledged clearly in both posts that Krugman thought it was too weak.

    Regarding Germany, was I supposed to read the post where he said German stimulus was very large, or the one where he said we need to pressure Germany hard because they weren’t doing enough stimulus? Which one? Should I have read the essay where he said Japanese fiscal stimulus in the late 1990s was ineffective, or the blog post where he said Japanese stimulus in the late 1990s was effective?

    I just wrote an essay attributing German growth to the weak euro, so I won’t argue with you there. Indeed as far back at May I was pointing out that the Greek crisis was helping Germany and hurting the US in some ways. I think I was one of the first bloggers to point that out.

  21. Gravatar of Morgan Warstler Morgan Warstler
    29. August 2010 at 08:16

    Price Catalogs huh? Ok, a buddy of mine spent last couple years improving time-to-truck rates for McMaster-Carr (the largest industrial supply shop – they exclusively service mission critical production lines) – he took them from over 24 minutes to under 18 minutes, imagine the nation-wide productivity gains, where millions of line break-downs are solved 6 minutes earlier.

    They run the catalog BIBLE, prices on everything under the sun – regional warehouses each with almost 500K products. I’m assuming you have not heard of them, they do virtually no conventional marketing.

    Anyway, you think they aren’t adopting online real-time-pricing? You think they aren’t headed towards handing out tablet computers instead paper catalogs? Its even crazier than that… as a customer service they are keeping track of inventories of other supplies, Granger and the like – so when the customer can find the widget right around the corner and save a few bucks, THEY TELL THEM where to go get it.

    So that’s price catalogs. On any other consumer or small business facing business the answer is COUPONS.

    What percentage of Staples customers are getting $25 off $75, who and how many are getting $25 off $100?

    Forget that even, whats percentage retail now happens Black Friday to X-mas under sales?

    Groceries are a no brainer, they change weekly.

    Look, let’s just stipulate that there really aren’t sticky prices. It’ll be progress if you scuttle that CMPLETELY focus exclusively on Sticky Wages.

    Because then I can head in on convincing you that with turn-over, changes in health-care plans, commission based work, consultants…

    The only Sticky prices we face are PUBLIC EMPLOYEES.

    What’s it going to take for you to believe that one Scott?

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. August 2010 at 10:11

    MikeDC,
    You wrote:
    “Question: Has the NAIRU increased, decreased, or not changed since the stimulus began?”

    I don’t disagree with Scott’s assessment as estimates by Valletta & Kuang, and Aaronson, Mazumder, and Schechter have placed the increase in unemployment due to UI at 0.4%-1.7% this recession. But allow me to throw in some additional information.

    William T. Dickens has done some work on downward nominal rigidity that suggests that outward shifts in the Beveridge Curve, the relationship between job vacancies and the unemployment rate, has in the past been a sign of a worsening in the NAIRU. As many of those advocating a structural hypothesis have pointed out (such as Kocherlakota), the Beveridge Curve has in fact shifted out this recession.

    However, if one looks at data going back to WW II, the Beveridge Curve nearly *always* shifts out in a recession. Thus NAIRU probably has increased but it will probably also fall as the unemployment rate approaches it in a recovery.

    On the other hand, research by Ricardo Llaudes suggests that the long-term unemployed put less downward pressure on inflation than the recently unemployed. If that is the case, it is possible that the longer that unemployment stays high the more NAIRU will rise.

    One more reason that we need adequate monetary stimulus now.

  23. Gravatar of Mr. E Mr. E
    29. August 2010 at 10:17

    Hi Scott,

    Thanks for clarifying. I should have been more clear about to who I was directing my comments. I’ve seen that you’ve been mostly fair handed with your intrepretations of Krugman, but I will say, this post is a bit over the top for the very reason that he addressed this.

    But I’ll take this head on: Is this all they expected? By they, I’ll take it you mean specifically Krugman. The answer to this is almost a certain “Yes”.

    I wont go through the math in detail, but just take his famous “Okun’s Law” post as to the kind of growth that might be expected given the stimulus actually delivered. Not to toot my own horn – but I beat him to his original Okuns law post by several weeks – look up mickslam on Daily kos for proof.

    Just plug in some simple numbers as to the size of the stimulus delivered (of course taking individual U.S. state cutbacks into accounts) , natural rate of unemployment, and a reasonable okuns law multiplier, and you’ll get output in GDP terms that looks very much like the current trajectory of GDP growth.

    Here is a link to my article: http://www.dailykos.com/storyonly/2008/12/19/113044/52/802/670412

    Then about his seemingly bewlidering claims about Japan – come on, you know that in each of these cases, he was making statements that came with pretty clear and obvious to understand caveats about the behavior of the BoJ with these. Did the late Japan late 90s stimulus work? Yes, and no – and any real nuanced reading of the situation tells you the same.

    Note that one of your primary ideas that runs thorugh this blog is that monetary policy trumps fiscal policy. The only reason this is the case is that fiscal policy is largely dictated by politics while monetary policy is the result of a dictatorship of a few people with enormous power. Fiscal policy could swamp monetary policy at any time as has been demonstrated by the numerous occasions of hyperinflation that nearly always come from fiscal actors paying for goods and services with money they can create at any time that can swamp any monetary policy at all.

    It is a political constraint, not an accounting constraint, that makes monetary policy much more effective in major economies.

    RE: Euro and Germany

    I read those posts you’ve written on the Euro too – nice work.

    But you must know that doing more stimulus than the U.S. and not doing enough stimulus on an absolute level are not mutually exclusive. If you eat 500 calories a day, you’re eating more than a person that isn’t eating anything, but still not enough to survive.

    I’ve written about 10K words for my newsletter saying that much of the Euro sovereign crisis is being manufactured by Germany and France so they can export their way out of the slump. German growth last quarter is a demonstration of the power of adjusting your exchange rate. Manufacturing a crisis is an unconventional way of fostering a competitive devaluation, but apparently it has been effective. Germany is booming.

  24. Gravatar of Jim Glass Jim Glass
    29. August 2010 at 21:57

    Fiscal policy could swamp monetary policy at any time as has been demonstrated by the numerous occasions of hyperinflation that nearly always come from fiscal actors paying for goods and services with money they can create at any time that can swamp any monetary policy at all.

    Maybe it’s just me, but I’d consider overheating the printing presses printing money to be a monetary policy — even when using the money to pay the govt’s bills.

    When Friedman said “Inflation is always and everywhere a monetary phenomenon” he didn’t exclude Weimar.

    one of your primary ideas that runs thorugh this blog is that monetary policy trumps fiscal policy. The only reason this is the case is that fiscal policy is largely dictated by politics while monetary policy is the result of a dictatorship of a few people with enormous power…

    It is a political constraint, not an accounting constraint, that makes monetary policy much more effective…

    Well, yeah, at least partly so. Ever since I did my econ classes in the 1980s the textbooks have all said fiscal stimulus is inferior because, having to be delivered by politics, it always arises late, distorted, and twisted to serve interest group politics. Even Krugman’s textbook has a statement to that effect. I haven’t seen anything in the last couple years to refute those textbooks.

    If you want to describe that as “only because”, OK. Political constraints count.

    Although monetary stimulus, in addition to being capable of being delivered promptly and in a targeted manner, with much less political distortion, also doesn’t add huge amounts to the national debt that has to be serviced forever — and which may do its part to acclerate the looming debt crisis circa 2030.

    That counts too.

  25. Gravatar of ssumner ssumner
    30. August 2010 at 07:47

    Morgan, It will take a lot to convince me that there are no sticky wages. I am more open on prices.

    Mr E. You said;

    “But I’ll take this head on: Is this all they expected? By they, I’ll take it you mean specifically Krugman. The answer to this is almost a certain “Yes”.”

    No I meant the economists and politicians who supported this policy, who were mostly Keynesians. I meant “Is 1.6% growth the expected outcome of $787 billion in fiscal stimulus, according to the Keynesian model? We average 3.0% real growth.”

    BTW, your article is flat out wrong in the second sentence. Lot’s of people like me favor more monetary stimulus (which Hoover opposed) and yet are opposed to fiscal stimulus.

    You said;

    “Then about his seemingly bewlidering claims about Japan – come on, you know that in each of these cases, he was making statements that came with pretty clear and obvious to understand caveats about the behavior of the BoJ with these. Did the late Japan late 90s stimulus work? Yes, and no – and any real nuanced reading of the situation tells you the same.”

    Sorry, I’ve read his work as closely as anyone, and he has definitely changed his views on Japan. He once argued they did a lot of fiscal stimulus, and it didn’t work. Later he argued they did very little fiscal stimulus. Read his liquidity trap papers from 1998-99.

    You said;

    “Note that one of your primary ideas that runs through this blog is that monetary policy trumps fiscal policy. The only reason this is the case is that fiscal policy is largely dictated by politics while monetary policy is the result of a dictatorship of a few people with enormous power.”

    Krugman believes the exact same thing as me, at any time nominal interest rates are not zero.

    I don’t believe Germany is manufacturing the crisis—it has badly hurt the position of Merkel’s government; why would she want that? That’s too conspiratorial. No one forced Greece to cook the books.

    Jim Glass, Those are very good points.

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