It’s surprisingly easy to stymie fiscal stimulus

Brad DeLong has a thoughtful piece over at Project Syndicate, advocating fiscal stimulus:

The fiscal implications of this are striking. Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion. Suppose further that their central banks, while unwilling to extend themselves further in unconventional monetary policy, are also unwilling to stymie elected governments’ policies by offsetting their efforts to stimulate their economies. In that case, a simple constant-monetary-conditions multiplier indicates that we can expect roughly $150 billion of extra GDP. That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion.

I say “thoughtful” because he recognizes and addresses the problem of monetary policy offset, which many less knowledgeable Keynesian fail to do.  But I’m still not convinced.

It seems to me that Keynesians tend to underestimate how easy it is to stymie fiscal stimulus.  I imagine they think in terms of the Fed or ECB raising interest rates to offset the expansionary effect of more government spending.  That sort of sabotage is unlikely to occur in the near future (and least in the US; and in Europe unless in a fit of madness Trichet is put back in charge.)

Unfortunately, there are many other ways to offset fiscal stimulus.  In recent weeks Bernanke has seemed to waver on the question of whether addition unconventional stimulus is appropriate.  A reasonable way to interpret that indecision is that he’d first like to see whether the recent upswing in economic indicators is for real.  But he also might have been waiting to see if Congress would extend the payroll tax cut, and also the extended unemployment compensation.  I don’t think it’s a stretch to assume that QE3 would suddenly have become much more likely if the Congress had failed to act.

Admittedly there are all sorts of possible objections to my argument.  Some might question whether QE actually has all that much effect–a reasonable objection.  Or whether the Fed would actually be all that sensitive to fiscal stimulus.  But for every argument against my hypothesis, there is a counterargument.  The Fed doesn’t even have to directly react to fiscal actions to nullify them; it merely needs to use occasional unconventional policy initiatives to keep inflation near 2%.  And the Fed hasn’t just relied on QE; they’ve also used Operation Twist, and promises of extended low interest rates.  Indeed ever since late 2008 they’ve alternated back and forth between periods of action (mostly when the recovery looked weak) and periods of passivity (mostly when indicators seemed to be picking up.)  So it’s a mistake to think that monetary offset implies some sort of evil mastermind in the Fed, intentionally thwarting the progressive initiatives of our fiscal policymakers.  Let’s not forget that the fiscal multiplier is precisely zero if the Fed is “doing its job.”  Of course if they were really doing their job then there would be no need for fiscal stimulus.  That’s one area I do agree with the Keynesians–we do need some additional stimulus.

Just so I don’t come across as dogmatically opposed to fiscal stimulus, I can see two plausible arguments.  One is the “low real interest rates justify marginal projects” argument, which DeLong often cites.  The strongest argument would be for a fiscal move that raised SRAS, and hence would be unlikely to be offset.  An employer-side payroll tax cut is an example.  Or Russ Abbott’s plan for tax rebates.  If a computer science professor at Cal State LA can figure this out, why can’t our policymakers in Washington come up with a plan that won’t be neutralized if the Fed is “doing its job.”

HT:  123


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39 Responses to “It’s surprisingly easy to stymie fiscal stimulus”

  1. Gravatar of marcus nunes marcus nunes
    4. March 2012 at 06:47

    Scott

    ” The Fed doesn’t even have to directly react to fiscal actions to nullify them; it merely needs to use occasional unconventional policy initiatives to keep inflation near 2%”.

    Sounds pretty much like the description of a “cat and mouse” game. Wasn´t it for those kinds of reasons that Sargent and Lucas postulated the adption of “policy strategies” in lieu of “policy actions”?

  2. Gravatar of Morgan Warstler Morgan Warstler
    4. March 2012 at 07:13

    “So it’s a mistake to think that monetary offset implies some sort of evil mastermind in the Fed, intentionally thwarting the progressive initiatives of our fiscal policymakers.”

    This is true, but easier explained, and still better at poking Dekrugman with a stick (which is good) this way:

    Bankers > Republicans > Democrats

    Fed members live in support of free markets and have deep within them a respect for the men of action (businessmen) that move the world forward.

    They will automatically by their default mental position bring a set of personal assumptions to decision making that IF the banks are OK, the economy is better off without the government being a bigger part of it.

    This is why attitudes so quickly change when a Republican is president.

    It isn’t nefarious.

    The reality is that the very foundation of the Fed as “independent” just simply meant it was a trump card that the businessmen (and their bankers) would have to play IF they couldn’t first buy off the Democrat pols.

    It is part of the Fed very CREATION, and annoys DeKrugman as deeply as the very one-sides (states over the Federal govt)or guns for everybody! aspects of our countries founding.

    The RULES in the minds of liberals are not fair.

    The winning response no one likes is that THESE THINGS wouldn’t even be created unless the RULES were written unfair.

  3. Gravatar of dwb dwb
    4. March 2012 at 07:23

    conversely, Keysians also underestimate the power of printing money at the ZLB. But on this latter point I find a lot of Keynsian bloggers confoundingly inconsistent. If the govt were to print 2 Tn platimun coins and and pay off some debt that would stimulate the economy, but if the Fed prints money to buy bonds, it does not. I admit 2 years ago i was deeply skeptical QE would do anything but sit on banks balance sheets, that the transmission mechanism might be broken, but the jury is in and i think the empirical evidence is ovewhelming that QE is stimulative. I find it even more puzzling among economists who recognize the deflationary transmission mechanism with the Euro (ala the gold standard in the 30s) yet are unwilling to criticize the tight money ECB. the velocity of money did not drop to zero The QE debate is not about “whether” but “how much” and will the Fed be able to soak it up in time to prevent a burst of credibility-reducing inflation.

    Some days I think it will be revealed that Krugman is a closet monetarist (there are certain lucid moments when he qualifies “when not offset by monetary policy” and calls for Draghi to create some inflation) but is simply unwilling to critize a fellow Princeton colleague…

  4. Gravatar of Philo Philo
    4. March 2012 at 08:24

    Does DeLong have any clear conception of what ‘constant monetary policy’ is supposed to be? A constant discount rate? A constant money supply (base money, or some other M)? A constant growth rate of the money supply? A constant growth rate of expected (18-month forward) NGNP? An absence of headline-grabbing action by the Fed? I would add: A constant rate of inflation?, but DeLong does implicitly reject *this* conception–though not for any good reason (so far as I can see).

    I think the answer is that he lacks any such clear conception; that makes his piece insufficiently ‘thoughtful’.

  5. Gravatar of Steve Steve
    4. March 2012 at 09:26

    I get frustrated by the endless debates over fiscal policy. I believe that fiscal austerity has *REAL* downward effects on potential output, when it involves firing teachers and bridge builders, transferring them to unemployment, and eventually retraining them. I don’t think monetary policy can immediately offset these frictional losses. So in a sense I agree with Krugman and DeLong that budget austerity is harmful.

    HOWEVER, why do we have to have these debates when NGDP is so far below trend? We’ve spent five years guessing at the extent of structural imbalances because we haven’t had a monetary policy that would neutralize the cyclical distortions. My wish is that the MM and Keynes crowd could reach a middle ground (probably 3/4 MM) and acknowledge that the absence of fiscal austerity (but not necessarily stimulus) helps some but monetary policy is more potent and should be used as a first resort.

    Also, Krugman likes to point out that Greece and the other “GIPSIs” as evidence that fiscal austerity doesn’t help. While I’m partially with him, he hasn’t gotten a neutral monetary policy in those countries. I’ve heard people say that money supply in Greece is down 15-25% over the last few years as bank deposits flee the country. It’s hard to disentangle that from fiscal austerity.

  6. Gravatar of Mjaor_Freedom Mjaor_Freedom
    4. March 2012 at 09:28

    A reasonable way to interpret that indecision is that he’d first like to see whether the recent upswing in economic indicators is for real.

    Clearly it can’t be, considering how much money the Fed system has been creating, and how low the Fed has been keeping interest rates.

    Just so I don’t come across as dogmatically opposed to fiscal stimulus…

    Because it’s better to be dogmatically opposed to a free market gold standard.

  7. Gravatar of D R D R
    4. March 2012 at 10:12

    “An employer-side payroll tax cut is an example.”

    Why employer-side? Why not employee-side? Isn’t the incidence on either side the same?

    “The Fed doesn’t even have to directly react to fiscal actions to nullify them; it merely needs to use occasional unconventional policy initiatives to keep inflation near 2%”

    And if the Fed is trying to keep inflation at 2%, they would only offset fiscal stimulus to the extent that it is inflationary– not to the extent it would raise RGDP. Thus, even with the Fed taking fiscal policy into account, the real fiscal multiplier would be positive to the extent that the real fiscal multiplier… is positive.

    That is, if the real fiscal multiplier is positive, but the Fed understates the real multiplier, it will think the policy to increase inflation more than it does, and therefore overreact, resulting in inflation below target.

  8. Gravatar of Benjamin Cole Benjamin Cole
    4. March 2012 at 10:44

    Yes, we need QE and monetization of some national debt. Enough to crank the NGDP up towards 7 percent or so for several years.

    BTW, have any economists ever thought about monetizing the debt, and its effect on taxpayers, especially income-tax payers?

    Right now, we use income taxes to pay down the debt, largely levied on rich people. So, with QE we are reducing their future tax rates, (also through inflation-deleveraging).

    (Remember, the huge entitlement programs are financed with payroll taxes. Income taxes are used to finance agency spending, and borrowing).

    Removing this huge future debt-tax burden should make the wealthy more likely to invest and spend.

    I bring this up largely for political reasons. There seems to be a large portion of our political parties and punditry deeply concerned with our top income tax rates. The plight of America’s wealthiest brings forth a Niagara of tears in some quarters.

    By highlighting the benefits of QE and debt monetization for the wealthy, perhaps we build a bigger base for Market Monetarism.

  9. Gravatar of Max Max
    4. March 2012 at 11:54

    Ben, the Fed is targeting >4% short term rates (this may be delusional, but that’s what they say). The 10-year bond is at 2%. The time to monetize the debt was 1982…

  10. Gravatar of Alex Godofsky Alex Godofsky
    4. March 2012 at 12:03

    D R:

    “Why employer-side? Why not employee-side? Isn’t the incidence on either side the same?”

    The long-run incidence is the same but the short-run incidence is very different, especially given sticky downward nominal wages.

  11. Gravatar of Benjamin Cole Benjamin Cole
    4. March 2012 at 12:08

    Max-

    I don’t follow. We have about $10 trillion in debt outstanding ($5 trillion held by agencies).

    Why not monetize about 20 percent of it in next year?

    In 1982 we did not face such a weak economy. This today is called the Great Recession for a reason. It is really bad—we have about the same number of employees in the USA as in 2004.

    There’s a huge amount of reflation needed in real estate, and AD is shrimpy-wimp.

    Inflation is dead.

    Today USA strikes me as a textbook case of when aggressive full-throttled QE is needed.

    Just like Japan—and indeed, we found John Taylor, Ben Bernanke, Milton Friedman and Alan Meltzer calling for QE there.

    Friedman laughed at those who said it would not work. He said the Bank of Japan can never run out of ammo–just keep printing money until it gets results. Friedman did not have the “any and all inflation is evil at any time ever” sentiments that seems to infect the right-wing today.

    This is one of the strangest arguments in all history—the people who should be forthrightly calling for QE are silent, or worse, pompously pettifogging about the risks of inflation.

    And, rich people would benefit a lot by QE. If we can tell them that, maybe the GOP will come around.

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. March 2012 at 12:12

    Here’s an alternate link for Russ Abbot;

    https://sites.google.com/site/russabbott/home/regaining-the-great-moderation

    Reminds me of something Michele Boldrin once proposed in a debate with DeLong;

    ———–quote————
    Consider a national value-added (or sales) surcharge/rebate controlled by the Fed.

    ♦ When the economy slumps, as now, the Fed would establish or increase the rebate rate. By offering a rebate for every purchase the Fed would increase the money supply while in effect putting the economy on sale.

    ♦ When inflation threatens, the Fed would establish or increase the surcharge rate. This would both raise effective prices and extract money from the economy.

    ♦ When the economy is balanced, there would be neither a surcharge nor a rebate.

    Basic economics tells us that price levels effect demand””higher prices reduce demand, and lower prices increase demand. A surcharge/rebate would have exactly that effect. It would give the Fed the power to increase or decrease demand as needed. This strategy has a number of advantages.

    ♦ There would be no liquidity trap””the situation in which the Fed finds its options limited as interest rates approach zero. The Fed could always provide additional support by increasing the rebate rate.

    ♦ It should be more politically acceptable since the surcharge/rebate would be neither a tax nor a government expenditure. The money would go to and come from the Fed, not the Treasury.

    ♦ Since the surcharge/rebate would be spread over the entire economy it would be minimally distorting. Even interest rates would float freely. We would continue to rely on the market to do what it does best””allocate available resources.

    ♦ It’s direct and immediate. When the Fed changes the surcharge/rebate rate, money would flow immediately into or out of the economy, and prices would immediately rise or fall. The program would function like a controlled IV drip/drain.
    ———–endquote———–

  13. Gravatar of ssumner ssumner
    4. March 2012 at 12:33

    Marcus, Exactly.

    Morgan, So what was the Fed up to during the 1970s?

    dwb, Agreed, He has criticized Bernanke on occasion–but more along the lines of “let Bernanke be Bernanke.”

    Philo, We had a back and forth on that issue a few months back–so I think he knows my views.

    Steve, And I would add that Greece has no choice at this point, no one would lend them any money for stimulus right now, so they have no way of avoiding “austerity,” and no way to implement fiscal stimulus. Their only option is monetary stimulus (leaving the eurozone.)

    DR, You said;

    “Why employer-side? Why not employee-side? Isn’t the incidence on either side the same?”

    Not if wages are sticky.

    Fiscal stimulus doesn’t always create inflation, but it almost always does if it’s effective. So there’s little chance of an effective fiscal stimulus if the Fed is targeting inflation.

    Ben, Just raising the denominator of the Debt/GDP ratio would help a lot, even without any explicit monetization.

    Patrick, Thanks for that link–it’s a good idea.

  14. Gravatar of Max Max
    4. March 2012 at 12:42

    Ben, I don’t think printing money causes inflation (unless the Fed raises the inflation target – but that would work just as well without printing). But even if I’m wrong about that, it’s still not a great idea. Better to buy assets which benefit from economic recovery. Trying to stimulate the economy by buying assets which benefit from economic collapse sends a mixed message.

  15. Gravatar of D R D R
    4. March 2012 at 12:44

    “The long-run incidence is the same but the short-run incidence is very different, especially given sticky downward nominal wages.”

    Meaning: the difference is due to employees being unwilling to accept a lower nominal wage in exchange for a tax cut, even if their after-tax wage is higher? So again we wouldn’t need the tax cut of only the nominal wage wasn’t so high? Not that NGDP is too low? The nominal wage is too high?

    I’m doubting that Scott agrees.

  16. Gravatar of D R D R
    4. March 2012 at 12:46

    Heh.

    Shows what I know. Scott does seem to believe the wage is too damn high after all.

  17. Gravatar of D R D R
    4. March 2012 at 12:50

    “Fiscal stimulus doesn’t always create inflation, but it almost always does if it’s effective. So there’s little chance of an effective fiscal stimulus if the Fed is targeting inflation.”

    That’s exactly backwards. If fiscal stimulus is effective, it increases RGDP. That’s pretty much the definition of effective stimulus. Yes, an effective stimulus also may create inflation. If you want to say it almost always does, or even always does, then so what? Why would the Fed act to counter the real effect as well as the nominal?

  18. Gravatar of Benjamin Cole Benjamin Cole
    4. March 2012 at 13:24

    Max-

    Here is my idea: It is great to print more money–but who benefits from the fresh cash? If the fresh cash is used to buy existing public debt, then we all benefit. We are all deleveraged.

    If the fresh cash is used to buy private-sector bonds, then no one is deleveraged. The debtors still have to pay off the bonds.

    I suppose taxpayers gain, as now they have a stream of income into the Treasury that was bought by printing up money. They can look forward to lower tax payments in the future, I suppose.

    As a side note, buying up T-bills/bonds will leave cash there that has to be invested somewhere. As the option of doing the safe thing and buying US bonds disappears, more money should flow into private-sector investments.

    As an aside, I would encourage excellent counterfeiters to move to the USA, and start cranking up the presses too. True, this is wrong, but it would be beneficial.

    As would the globe’s drug lords bringing all the suitcases full of Ben Franklins back to the USA and going on a spend-a-thon—now, that is the kind of amnesty I would support!!!

  19. Gravatar of e e
    4. March 2012 at 13:27

    Scott,

    I am actually not as sure about delong’s low interest rate justification because I think the interest rate right now reflects expectations for economic growth, which should directly impact the future value of govt investment. For example lets assume a project during a normal interest rate period has future benefits exactly equal to current costs. If we then hit deflation and the rate falls, the future benefits are certain to fall. How much I don’t know, and it probably varies with the project, but my instincts are that you probably do better making investments in a high growth economy even though the interest rates are high than a depressed one even with cheap financing. Besides with optimal monetary policy rates would never be super low, so it still dominates fiscal stimulus.

    I do think the Keynesians have a point though that the current fed seems willing to have a higher interest rate target with conventional monetary policy than unconventional. So fiscal stimulus that bumped the fed all the way off the zero bound would probably improve monetary policy. That argument seems solid for me although I’m skeptical it ever gets tried in real life.

  20. Gravatar of Morgan Warstler Morgan Warstler
    4. March 2012 at 13:27

    Scott I understand those were your formative Fed watching years.

    But, what about this could you possibly argue about:

    “Federal Reserve Policy under Arthur Burns

    President Richard M. Nixon appointed Arthur Burns chairman of the Fed Board in 1970. Under Burns’s chairmanship, the Fed continued its policy of “stimulation-accommodation.” When a recession appeared, as occurred in 1969, the Fed increased its open-market buying activity to stimulate spending. Once recovery was in place, Fed policy accommodated revived business spending, again with open-market purchases. This combination caused higher inflation, which the Nixon administration, with Burns’s blessing, sought to restrain by statutory wage and price controls””the Economic Stabilization Act, which became law in August 1971. This program failed to tame inflation. Fed policy continued in the same pattern, however, through the 1970s, reaching its climax with the inflation spike of 1979-1981.

    Burns summed up the Fed’s problems in 1987, as they had appeared during his tenure. “Currents of thought and the political environment they have created,” he lamented, give rise to government spending programs and federal fiscal deficits. The Fed has “the power to abort the inflation” at any time, and “it has the power to end it today,” he admitted. However, Burns continued,

    it is illusory to expect central banks to put an end to an inflation . . . that is continually driven by political forces.. . . Persistent inflation . . . will not be vanquished . . . until new currents of thought create a political environment in which the difficult adjustments required to end inflation can be undertaken. (Arthur F. Burns, “The Anguish of Central Banking,” Federal Reserve Bulletin, September 1987, pp. 695-696)”

    http://www.econlib.org/library/Enc/FederalReserveSystem.html

    This is what Fisher @ Dallas sounds like he remembers vividly, no?

  21. Gravatar of marcus nunes marcus nunes
    4. March 2012 at 13:38

    Mark Thoma shows the need for a “Designer School of Economics”:
    http://thefaintofheart.wordpress.com/2012/03/04/good-designers-please-come-forward-the-policymakers-need-you/

  22. Gravatar of Ron Ronson Ron Ronson
    4. March 2012 at 16:54

    Some fiscal policies (such as a sales subsidy/tax that is used to keep NGDP on target – it would be a subsidy when NGDP is below target and a tax when NGDP is above target and neutral over the long term) seem to have a more direct transmission mechanism that some of the monetary policy proposals favored on this blog.

    What do Market Monetarists see as the advantages of the monetary approach over the fiscal approach if the fiscal policy has the same goal of stabilizing NGDP ?

  23. Gravatar of W. Peden W. Peden
    4. March 2012 at 17:02

    Ron Ronson,

    Briefly-

    (1) Flexibility: monetary policy can react quickly and more often than fiscal policy, at least within almost any real-world political regime.

    (2) Reversibility: the biggest single problem with “Why can’t we just send out $10,000 cheques in the mail?” reasoning is that it’s much easier to send them out than take them back once it’s time to tighten. In a situation like the current one, I’m not sure if it would be politically feasible to introduce a tax when NGDP gets back to target, since real output will still be below its pre-recession level and unemployment will still be high. Introducing taxes during supply-shock/demand surge combinations would also be extremely difficult.

    (3) Incentives: politicians have special incentives that encourage them to spend on politically convenient projects e.g. “cash for clunkers”. Automatic stabilisers don’t win votes.

  24. Gravatar of W. Peden W. Peden
    4. March 2012 at 17:03

    Also (4) fiscal policy has a lot of jobs to do without having to worry about demand management.

  25. Gravatar of Jim Glass Jim Glass
    4. March 2012 at 17:19

    DeLong is extraordinarily optimistic.

    Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion … a simple constant-monetary-conditions multiplier indicates that we can expect roughly $150 billion of extra GDP. That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion.

    Where does he get these numbers from?

    (1) The US govt collects about 20% of GDP in revenue, at best. Where does he get 33%?

    (2) Summers in his pre-stimulus memo to Obama (.pdf) said the govt had only $225 billion of “doable” targetable worthwhile fiscal stimulus, the rest would have to be low-return tax cuts, transfers, or low-quality spending. We went way, way, way past that $225b.

    (3) Ignore the analysis by Taylor et al arguing fiscal stimulus just doesn’t work. Let’s assume it does, with multipliers estimated by CBO (.pdf, table 1).

    Cumulative effect on GDP 2010-15
    Dollar per dollar of budgetary cost

    method: low – high estimate

    aid to unemployed: 0.7 – 1.9
    reducing employer payroll tax: 0.4 – 1.2
    reducing employee payroll tax: 0.3 – 0.9
    expensing of investment costs: 0.2 – 1.0
    investing in infrastructure: 0.5 – 1.2
    aid to states (non-infrastructure): 0.4 – 1.1
    refundable tax credit for lower-middle class: 0.3 – 0.9
    reducing income tax: 0.1 – 0.4

    Only one (1) single option has a multiplier as high as 1.5 as its high-side estimate. The highest low-side estimate is 0.7 How does DeLong assume 1.5 for all?

    CBO also says the “mere” addition to the national debt will permanently reduce long-term GDP growth.

    And this is giving fiscal stimulus the benefit of every doubt, on its own terms, *before* considering the monetary complication.

  26. Gravatar of Jim Glass Jim Glass
    4. March 2012 at 17:37

    What do Market Monetarists see as the advantages of the monetary approach over the fiscal approach if the fiscal policy has the same goal of stabilizing NGDP ?

    The reasons for using monetary stimulus over fiscal stimulus, as per the textbook I used in the 1980s that’s still on my shelf (with every other textbook I’ve seen since then also advising monetary over fiscal stimulus, even Krugman’s (!))

    1) Much much faster delivery of effect.
    2) Not distorted through the political system into political pork with little stimulus value.
    3) Doesn’t add to the national debt.
    4) Doesn’t create new politically driven spending programs that will live on forever once created, even though they are of such low quality they couldn’t be enacted in normal times absent the special rationale of being “stimulus”.

    That’s four advantages of monetary over fiscal stimulus to start with.

  27. Gravatar of Ron Ronson Ron Ronson
    4. March 2012 at 17:47

    Thanks for the reply W. Peden.

    I agree that many fiscal policies would have the disadvantages that you mention.

    To refine my question a bit: An NGDP futures market would keep NGDP on whatever target is set for it. How would a simple fiscal policy rule aimed at achieving the same target (such as a sales tax or a paxroll tax that could be allowed to go negative when NGDP is below target) compare with this policy in terms of 1) effectiveness , and 2) likelihood of having it accepted?

  28. Gravatar of W. Peden W. Peden
    4. March 2012 at 18:36

    Ron Ronson,

    (1) I don’t see any significant differences in effectiveness, unless there’s a big difference between controlling the price of assets and controlling the volume of assets that has escaped me.

    (2) I think this depends mainly on how its packaged and to whom. If such a fiscal regime is sold as a means to discipline governments to a non-interventionist government or as a means to prevent employment shocks to an interventionist government, then it has a shot. However, one has to question such a strategy’s durability under multiple regimes.

    That last point also applies to many monetary policy strategies, even where there is a strong tradition of central-bank independence. Yet, perhaps because an apolitical macroeconomic strategy has mutual benefits, central bank mandates seem to be pretty durable; there are also some clear transition costs of changing a central bank strategy that don’t apply to a government with a democratic mandate e.g if Obama tried to change the Fed’s mandate there would be a lot of rubbish about him seeking a way to “inflate his way to re-election like Mugabe” and so on.

    There’s still a good case for modest automatic stabilisers as a supplement to monetary policy. In a recession, though, the focus of fiscal policy should be (a) taking advantage of idle resources to get as much cheap capital expenditure done as possible, (b) recognising and try to fix any supply-side problems, and (c) maintaining support for vulnerable groups like the unemployed without excessive increases in government debt. That’s plenty of work to do and only fiscal policy can handle it, while monetary policy can handle (d) maintaining NGDP.

    Even if fiscal policy and monetary policy can do (d) equally well, only fiscal policy can do (a)-(c) and it makes sense therefore for fiscal policy to focus on (a)-(c) while monetary policy focuses on (d).

  29. Gravatar of Ron Ronson Ron Ronson
    4. March 2012 at 19:17

    W. Peden,

    I came to Market Monetarism via Austrian Economics. I was attracted by its free-market focus combined by a recognition that sticky-prices was not a problem that could just be wished away.

    My policy preferences would be

    1) Free banking
    2) NGDP futures market
    3) Whatever is the most politically viable way of stabilizing AD that would actually work in practice

    I see 1) and 2) as some ways away.

    So I am trying to understand the optimal 3). Given a wider acceptance that an NGDP target make sense then what is the optimal policy to push for ? Because of my Austrian heritage both are equally bad 🙂 and need to be judged from their ability to both achieve their goal and be accepted politically.

    So: If a simple sales subsidy/tax as proposed by Russ Abbott would work then why push for more complex monetary stimulus that would be a harder sell politically ?

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2012 at 22:10

    Scott wrotte:
    “Unfortunately, there are many other ways to offset fiscal stimulus. In recent weeks Bernanke has seemed to waver on the question of whether addition unconventional stimulus is appropriate. A reasonable way to interpret that indecision is that he’d first like to see whether the recent upswing in economic indicators is for real. But he also might have been waiting to see if Congress would extend the payroll tax cut, and also the extended unemployment compensation. I don’t think it’s a stretch to assume that QE3 would suddenly have become much more likely if the Congress had failed to act.”

    I feel like I’m in the minority in this debate. Obviously monetary stimulus hasn’t been tried. If it had we should be seeing inflation. Have we forgotten how to debase our currency?

    Give me the printing press. I’ll show you how it’s done.

  31. Gravatar of W. Peden W. Peden
    5. March 2012 at 04:14

    Ron Ronson,

    Those are also exactly my preferences (in that order) though I came to the Austrian School via monetarism!

    I think that monetary stimulus per se is a harder sell than fiscal stimulus. However, I think that a monetary regime that implied monetary stimulus under the right circumstances is a much easier sell than an equivalent fiscal policy regime (at the very least in that it’s a sale with less of a chance of a customer return).

    Nick Rowe did a good blog a while back about how we shouldn’t talk about the effects of particular policy actions in themselves, but rather about different policy regimes. So while unconventional monetary stimulus is fiendishly difficult to sell (it manages to tickle the right’s inflation-phobic trigger sensor AND the left’s anti-finance gut reaction) what we should be looking at is whether policy regimes that imply unconventional monetary stimulus.

    (I don’t accept the premise that a sales/subsidy approach would work as well as monetary stimulus, by the way, unless we’re going to have monthly budgets and somehow manage to have governance under such circumstances.)

  32. Gravatar of ssumner ssumner
    5. March 2012 at 06:14

    DR, I don’t think wages are too high in any absolute sense, but only relative to NGDP–which is the standard assumption of both Keynesian and monetarists models.

    You said;

    “That’s exactly backwards. If fiscal stimulus is effective, it increases RGDP. That’s pretty much the definition of effective stimulus.”

    It’s this sort of comment that drives me absolutely stark raving mad. Fiscal stimulus boosts AD. Period end of story. It has no influence over the P/Y split. If it’s effective it boosts NGDP. Whether Y rises depends on all sorts of factors like whether the economy is at full employment. It’s reasonable to assume that the SRAS is never completely flat (recall we had rapid inflation in 1933) so it’s reasonable to assume that any fiscal stimulus that succeeds in boosting AD will also raise inflation.

    Policymakers may hope the rise in NGDP is all RGDP and no inflation, but wishing for an impossible dream doesn’t make it happen.

    Monetary policy also boosts NGDP, and again has no influence on the P/Y split.

    You said;

    “Why would the Fed act to counter the real effect as well as the nominal?”

    Perhaps because that’s its mandate? It’s told to set policy to produce what it thinks is the desired combination of P and Y (i.e. employment). If the Fed is doing what Congress tells it to do, fiscal stimulus will have no effect on NGDP.

    e, Regarding your second point, I agree that the argument applied to late 2008 and early 2009. After that there was no real prospect of it working. And even back then the size of the stimulus would have had to be so large that there was zero chance Congress would approve.

    I’m not sure about your first point, I suppose it’s possible, it would depend on the specific project.

    Morgan, The Burns info supports my argument that the Fed doesn’t favor bankers.

    Marcus, Thanks for the link. So he’s suggesting Congress will get it right next time there’s a zero interest rate bound? I doubt it.

    Ron, Since you have to do SOME monetary policy anyway, why not do the optimal one? If monetary policy is always set in a position where expected future NGDP is right on target (as it should be) then the fiscal multiplier is zero,

    Jim Glass, Good points. Perhaps DeLong got the 33% by adding in S&L governments.

    Mark, My view exactly.

  33. Gravatar of Morgan Warstler Morgan Warstler
    5. March 2012 at 07:32

    Scott, the Burns info supports MY VIEW that you had your formative years RUINED by Burns.

    You need to figure out why you are so off the mark about your assumptions about what the Fed is and is not…. Burns looks like it.

    Burns was an aberration, the Fed is 100% determined to NOT let Burns happen again.

    Finally, you miss my argument about bankers > republicans.

    The Fed is Republican, they will have all the normal biases I mentioned above.

    It’s just that IF the banks are under threat, the current Fed will throw main street Republicans under the bus during the crisis.

    In order for:

    republicans > bankers – the Fed would have had to liquidate all the banks that got upside down.

  34. Gravatar of D R D R
    5. March 2012 at 08:03

    “DR, I don’t think wages are too high in any absolute sense, but only relative to NGDP-which is the standard assumption of both Keynesian and monetarists models.”

    Then what difference does it make if the tax cut is on the employer versus employee side?

    “It’s this sort of comment that drives me absolutely stark raving mad. Fiscal stimulus boosts AD. Period end of story. It has no influence over the P/Y split. If it’s effective it boosts NGDP.”

    Seriously. I really don’t know anyone else who would argue that if fiscal stimulus raised the price level more than it lowered real output would call that “effective.” You just have an odd concept of “effective” which seems to be at odds with the usual notion of expanding output.

    And I am not saying that policymakers have total control over the P-Y split, but rather that whatever happens, that an inflation-targeting Fed wouldn’t counter the real part.

  35. Gravatar of Cthorm Cthorm
    5. March 2012 at 08:26

    The strongest argument would be for a fiscal move that raised SRAS, and hence would be unlikely to be offset. An employer-side payroll tax cut is an example.

    Some more examples: a wage subsidy; a cut in unemployment benefits; a flat tax replacement of the federal income tax code; a VAT replacement of the federal income tax code; leasing Federal land under a charter system; suspending/ending Davis/Bacon; eliminating the corporate income tax; eliminating the NRC…

    But if you look at all of these policy possibilities for increasing the SRAS, how many of them has this administration tried to implement? How many policies has this administration tried to implement run counter to these SRAS-boosting policies? I’d say policies over the last several years have been 3:1 depressive of SRAS, or at the least neutral to SRAS and depressive to LRAS (e.g. stimulus going to state budgets).

  36. Gravatar of D R D R
    5. March 2012 at 09:03

    “`Why would the Fed act to counter the real effect as well as the nominal?

    “Perhaps because that’s its mandate? It’s told to set policy to produce what it thinks is the desired combination of P and Y (i.e. employment). If the Fed is doing what Congress tells it to do, fiscal stimulus will have no effect on NGDP.”

    Gee. Let me repeat my quote of you…

    “Fiscal stimulus doesn’t always create inflation, but it almost always does if it’s effective. So there’s little chance of an effective fiscal stimulus if the Fed is targeting inflation.”

    IF THE FED IS TARGETING INFLATION. Your words, not mine.

  37. Gravatar of Major_Freedom Major_Freedom
    5. March 2012 at 10:38

    Ron Ronson:

    I came to Market Monetarism via Austrian Economics. I was attracted by its free-market focus combined by a recognition that sticky-prices was not a problem that could just be wished away.

    Austrians don’t “wish away” price “stickiness.” They just emphasize that the state, VIA inflation and other policies, exacerbates price stickiness.

    In a world where the Fed promises to boost aggregate spending 5% a year and hence boost prices year after year where real productivity is below 5% (which is almost always), then is it really that surprising that laborers and other factor owners would become more and more resistant to wage decreases even though new economic conditions (preferences, technology, pricing, etc) warrant it?

    Prices will be maximally flexible in a free market gold standard, since it is most reflective of changes in individual preferences, but at the same time, one would almost certainly empirically observe the most stable prices over time, since inflation of the money supply is dramatically reduced, and deflation of the money supply is almost non-existent.

    Letting people the freedom to set their own prices and not be misled into setting too low a nominal price in the face of more nominal demand than they expected, is not how to improve the quality of entrepreneurs and laborers. It numbs and dumbs them down over time and makes them more and more dependent on the central bank to secretly bail out their bad decisions all the time. People learn the most when their actions create results that they experience.

    Would it be better for a laborer to choose working in the housing industry because the state is continually printing money and bailing out bad choices in the industry, or would it be better for that laborer to choose working in an industry that is more independent, self-reliant, and is a product of making good choices in the industry?

  38. Gravatar of ssumner ssumner
    5. March 2012 at 17:23

    DR, You said;

    “Then what difference does it make if the tax cut is on the employer versus employee side?”

    If wages are sticky, only an employer side cut will boost AS.

    I know that lots of people look at stimulus in terms of RGDP, but I can’t be held responsible if they don’t understand their own model. The basic Keynesian model says fiscal stimulus boosts AD. It does not say fiscal stimulus boosts RGDP. Indeed that only occurs if the economy is not at full employment. If you get higher prices and no increase in RGDP, then obviously the AS curve is vertical. But fiscal stimulus has nothing to do with the slope of the AS curve, that’s the supply side of the economy. Fiscal stimulus boost AD, end of story (unless you are making a supply-side argument, like employer side payroll tax cuts.)

    Cthorm, Yes, we really could have used some supply-side policies, and this administration is the most anti-supply-side since Nixon was president.

    DR, You said;

    “IF THE FED IS TARGETING INFLATION. Your words, not mine.”

    I don’t see any conflict with what I said before. It doesn’t matter whether the Fed targets inflation, or inflation and real output, the fiscal multiplier is zero. I thought everyone accepted that 20 years ago. Is it still being debated?

  39. Gravatar of Russ Abbott Russ Abbott
    14. April 2013 at 13:28

    Thanks for mentioning my FED plan in your post. Although “if a Computer Science professor at Cal State LA can figure this out” wasn’t quite how I fantasized being recognized, I guess getting my name in print is better than not.

    In any event, I’m still hoping that you will respond to my counter example to the claim that a payroll tax is equivalent to a consumption tax. See the final comments here: https://www.themoneyillusion.com/?p=20574.

    Thanks.

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