Jonathan Portes on fiscal and monetary stimulus

Britmouse directed me to a recent post by Jonathan Portes:

There is at least some economic theory behind the first prescription; indeed, I used to believe it myself, as I set out here.  But this is a purist approach, which simply hasn’t survived contact with reality, as Chris’ own articles show. If monetary policy alone was indeed enough in practice, we wouldn’t be where we are now, with unemployment in the UK a million higher than the official estimate of the natural rate, and no prospect of it coming down in the immediate future. Any demand management policy that delivers that outcome is not one that policymakers should regard as remotely adequate.

I’ll bet most people read this and nod their heads in approval.  But suppose you replaced the phrase “if monetary policy was indeed enough in practice” with “if fiscal policy was indeed enough in practice.”  Would that not be equally true?  I’d say so.  On the other hand I’m pretty sure Portes would disagree.  But why?  Here’s where I’ll try a bit of mind-reading.  I’ll bet Portes would say; “we (in Britain) have tried monetary stimulus, but not fiscal stimulus.  Hence the demand shortfall is best explained by a lack of fiscal stimulus.”  Even if I’ve misread his mind, I don’t doubt that plenty of Keynesians think that way.  But as we’ll see, there’s really no reason for doing so.  First let’s consider what we mean by monetary and fiscal stimulus:

Naive, man-on-the-street view:

Monetary stimulus is low interest rates and/or a rapid increase in the money supply.  Fiscal stimulus is huge budget deficits.

By that definition Britain’s had plenty of monetary and fiscal stimulus; its interest rates are very low and its budget deficits over the past few years have been among the world’s largest.

Now let’s consider the more sophisticated view:

Bernanke says you can’t judge the stance of monetary policy by looking at interest rates or the money supply, only indicators of nominal demand growth are reliable.  Paul Krugman says you can’t judge fiscal stimulus by the budget deficit, you need to look at the full employment deficit, at the tax/expenditure mix, at the change in the deficit.

Money obviously hasn’t been expansionary by the more sophisticated perspective, and Keynesians claim fiscal policy hasn’t been expansionary (I have my doubts, but I’ll take their word for it here.)

[Update 5/26/12: I’ve corresponded with Portes by email, and he emphasized that he was thinking in terms of the effects of the fiscal tightening of the new government, which took office in mid-2010.  It’s probably better to view this post as a critique of broad trends in Keynesian ideas, rather that Portes’ specific views.]

No one can claim that Britain has done easy money and tight fiscal policy, regardless of whether they use the naive or the sophisticated policy definition.  Indeed you’d have to use the naive view of monetary policy and combine it with the sophisticated view of fiscal stimulus, to be able to claim Britain has done easy money and tight fiscal policy.

The bottom line is that either fiscal policy has been tried and failed (my view),  or neither fiscal nor monetary stimulus has been tried (the sophisticated Keynesian view.)  Let’s say I’m wrong and the sophisticated Keynesians are right.  Then what?

Then Cameron should choose the optimal policy.  He could either:

1.  Call on the BOE to hit a higher NGDP target.


2.  Do a big fiscal stimulus, and continue to insist that the BOE adhere to a 2% inflation target, which forces the BOE to cut back on unconventional monetary stimulus every time the fiscal stimulus boosts NGDP and inflation.  That’s obviously nuts.  The Japanese have gone down that road for 20 years and have a countryside paved over with bridges to nowhere, and zero NGDP growth since 1993.

The current British policy is not working—I agree with Portes on that point.  The question is where do we go from here?  I see lots of good arguments for setting a higher NGDP target.  I see no good arguments for relying of fiscal stimulus.

But suppose I’m wrong.  Suppose it’s politically impossible for Cameron to tell the BOE to switch away from a 2% inflation target.  What then?  Well then you’d instruct the fiscal authorities to target inflation at a higher level, and fight it out with the BOE.  Just imagine Cameron announced:  “The BOE is instructed to keep shooting for 2% inflation, but we fiscal authorities will set a 4% inflation target because that’s what it will take in an economy that had its a supply-side weakened by Gordon Brown’s big government policies.  Thus we plan to fight it out with the BOE, and see who is stronger.”

Cameron would instantly be the laughing stock of the global economy.  But that’s essentially what Keynesians are asking him to do; they simply want him to be quiet about it.  They know that the idea of the fiscal authority targeting a higher rate of inflation is absurd, indeed laughable.  And why is it crazy?  Because it would require the fiscal authorities to be able to control aggregate demand, i.e. total nominal expenditure.  Oh wait . . . Keynesians do believe that.

PS.  Last Friday Karl Smith came up with the phrase “the Sumner Critique.”  Within three days the phrase had spread to Matt Yglesias at Slate, Ryan Avent at The Economist, Josh Hendrickson, and across the ocean to Britmouse.  Someone better find a antidote quickly, before the virus spreads even further.

PPS.  Speaking of Karl Smith, at his new Forbes home he has a wonderful graph showing data relevant to the “re-calculation argument.”  It seems that the share of our economy devoted to information technology is plunging, whereas the share devoted to primary metals production is soaring.  In 2000 IT was 2 1/2 times larger than primary metals.  Now primary metals is far bigger.  We desperately need to retrain Silicon Valley engineers on how to dig up copper in the Arizona desert; otherwise Silicon Valley will soon look like Detroit.



37 Responses to “Jonathan Portes on fiscal and monetary stimulus”

  1. Gravatar of Tom Tom
    25. May 2012 at 16:13

    Let’s remember there are 2 main fiscal stimuli (lusses?): more gov’t spending OR …
    lower taxes.

    What few examples we have in history do show that a lower tax fiscal stimulus is more stimulating than a (bloated, wasted, goes to cronies) higher spending stimulus.

    Even the Bush Tax Cuts stimulus worked far better than the Obama mega spend.

    The real problem with K and NKers, is their dishonesty. They pay lip service to “reducing the deficit in good times”, but I don’t think Krugman, from 2001 thru 2006, ever called for any major gov’t spending reduction (except military).

  2. Gravatar of Jon Jon
    25. May 2012 at 17:26

    In 2000 IT was 2 1/2 times larger than primary metals.  Now primary metals is far bigger.  We desperately need to retrain Silicon Valley engineers on how to dig up copper in the Arizona desert; otherwise Silicon Valley will soon look like Detroit.

    Karl led with: we’re told tech is replacing the old economy.. Then he plots IT as if that was the tech sector. Then you bring up silicon valley…

    Ventured funding is blooming in areas like energy, nanoscale devices, DNA sequencing… All not covered in the it sector as defined by the m3 report.

  3. Gravatar of kebko kebko
    25. May 2012 at 17:31

    Tom: I think he called for tax increases.
    Scott: does the Karl Smith graph support the notion that the fed has tried to goose the money supply, but poor federal govt policies are keeping it out of productivity investments?

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. May 2012 at 17:38

    The general consensus on spending versus tax cuts as a fiscal multiplier is quite different than what you claim. Here’s the IMF’s latest Fiscal Monitor and its summary of the research (Pages 35-36):

    “In line with the bulk of the previous literature
    (including the survey by Spilimbergo, Symansky, and
    Schindler, 2009), short-term spending multipliers
    are found to be significantly higher than revenue
    multipliers. This can be explained with basic
    Keynesian theory, which argues that tax cuts are less
    potent than spending increases in stimulating the
    economy, since households may save a significant
    portion of the additional after-tax income.
    However, a number of earlier studies have shown
    that expenditure-based fiscal consolidations have a
    more favorable effect on output than revenue-based
    consolidations, in spite of the standard multiplier
    analysis (see, for example, Alesina and Ardagna,
    2010). Chapter 3 of the October 2010 World
    Economic Outlook reaches the same conclusion (IMF,
    2010b) and notes that this result is partly because,
    on average, central banks lower interest rates more
    in the case of expenditure-based consolidations (perhaps because they regard them as more longlasting).
    22 However, when interest rates are already
    low, the interest rate response becomes less relevant,
    which may imply that, in the current environment,
    the standard fiscal multiplier prediction prevails.
    Results from short-term multipliers should in any
    case not be used to conclude whether revenue- or
    expenditure-based consolidations are preferable, since
    the size of the short-run multiplier is not the only
    thing that matters in designing a fiscal adjustment
    package. Long-term effects on potential output are
    also important, and the already-high tax pressure in
    some countries (particularly in Europe) implies that
    the bulk of the fiscal adjustment should be on the
    expenditure side (although revenue increases may be
    inevitable when the targeted adjustment is large).”

    The IMF’s Fiscal Monitor goes on to show that the US specific tax cut multiplier is not statistically significantly different from zero. More importantly it states on page 39:

    “There are several important caveats regarding
    the analysis. First, the model looks at only three
    variables and does not take into account possible
    interactions with monetary policy and public debt….”

    Which implies from a Market Monetarist perspective, when one takes into account monetary policy, the fiscal multiplier, regardless of whether it is expenditure or revenue based, is precisely zero.

    Now, there may be long run growth benefits to structuring fiscal policy differently. But that is not especially relevant to this particular blog post.

    In defense of Krugman, it’s worth pointing out he was highly critical of Bush’s fiscal policy starting with a book called Fuzzy Math in 2001 and running through dozens and dozens of columns for which he was labeled a hypocrite by Larry Elder in 2010, among many others, since he was supportive of deficits under Obama (becuase of his belief in the “liquidity trap”).

    Most of this criticism it is true was directed at the Bush tax cuts and defense spending. But it’s not hard to find him criticizing Bush on non-defense spending from 2001-2006 if one takes a few seconds to google. For example here’s something he wrote about Medicare Advantage in 2006:

    Health Policy Malpractice
    Published: September 4, 2006

    “In 2003, however, the Bush administration pushed through the Medicare Advantage program, which offers heavy subsidies to H.M.O.’s. According to the independent Medicare Payment Advisory Commission, Medicare Advantage plans cost the government 11 percent more per person than traditional Medicare. Oh, and mortality rates in these plans are 40 percent higher than those of elderly veterans covered by the V.A. But thanks to the subsidy, membership in Medicare Advantage plans is surging.

    On one side, then, the administration and its allies in Congress oppose expanding the best health care system in America, even though that expansion would save taxpayer dollars, because they’re afraid that allowing a successful government program to expand would undermine their antigovernment crusade and displease powerful business lobbies.

    On the other side, ideology and fealty to interest groups make them willing to waste billions subsidizing private H.M.O.’s.

    Remember that contrast the next time you hear some conservative going on about excessive spending on entitlements, and declaring that we need to cut back on Medicare and Medicaid benefits.”

    I don’t mind people criticizing fiscal stimulus or Krugman. I do both myself frequently. What I do mind is people getting their facts all wrong.

  5. Gravatar of Morgan Warstler Morgan Warstler
    25. May 2012 at 17:54

    Economics is in the end… Micro. And Micro is undergoing sea change.

    In the new micro:

    1. Digital has no scarcity. So much so, that you can’t truly “own” the digital, the way we conceive of ownership. Property rights are out the window.

    2. Only the atomic is scarce.

    3. Every year, the digital makes up more of human quality of life, satisfies more of their wants.


    There are three causes for Karl’s graph:

    1. Digital replaces Atomic

    2. Money printing drives up cost of commodities, but does nothing to ding digital abundance.

    3. Digital abundance raises up the third world to want commodities too.

  6. Gravatar of Peter N Peter N
    25. May 2012 at 20:43

    Japan has suffered enormous asset price deflation, but negligible consumer price deflation. This type of problem can be tricky to fix. Asset and goods prices are decorrellated.

    From a BOJ reprentative:

    “”There is much confusion in popular discussion of Japan’s deflation and associated economic problems. This confusion tends to arise from a failure to distinguish between three related, but different phenomena: the stagnation of the real side of the economy, the deflation of general prices, and the deflation of asset prices. The deflation of general prices has certainly persisted since the mid- or late 1990s, depending on the price index one looks at. However, the extent of the price decline has been mild. The cumulative decline in the consumer price index (CPI) since its peak in 1998 has been no more than about 3%.”

    “Declines in asset prices since the 1990s in Japan have been as large as they were during the Great Depression.”

    Now if the current low asset prices are the natural prices, you don’t really want to inflate them.

  7. Gravatar of Don Geddis Don Geddis
    25. May 2012 at 21:06

    Peter N: “if the current low asset prices [in Japan] are the natural prices, you don’t really want to inflate them.”

    There is no such thing as a “natural” price level. No particular nominal values are any more natural than any other. All that matters is how the current nominal values compare to recent ones, and how they relate to the prices of other things (wages, debt) in the economy.

    Only relative prices matter. Not absolute ones.

  8. Gravatar of Saturos Saturos
    25. May 2012 at 22:20

    Is there any way to email this post to David Cameron?

  9. Gravatar of J.V. Dubois J.V. Dubois
    26. May 2012 at 02:44

    Tom: Mark is right. This is all Market Monetarist talk about: fiscal policy works (to stimulate aggregate demand) only if monetary policy does not do its job. So if someone observes that tax cuts work better then government spending, this is just testimony of CB being driven by political goal. That it literally generates recessions to beat government into different sort of fiscal policy.

    The same is valid for famous fiscal austerity expansions: if there is an historical evidence that fiscal austerity boosts demand (as Alesina and Ardagna claim it does) again it just reveals that Central Banks are dabbling in politics by letting their personal judgments overshadow the task they were given by the public: to watch over aggregate demand.

    This is why Scoot sometimes sees Cenral Bankers behaviour bordering on criminal. It is as if doctors would refuse to offer a treatment to the patient because they think that they deserve the pain. It is as if firefighters would refuse to put down the fire because they thing the people owning the house deserve to be punished for some other sins.

    Central Bankers have immense authority given to them by public. And not only refuse to do what is essentially the reason why these institutions were established, but they arrogantly refuse to give any (fact-based) explanation whatsoever why they do or don’t do something. They offer excuses based on some internal rules of operations (“our goal is to guard price stability (as defined by ourselves)” and they see anybody disrupting this gridlock as an enemy.

    It is time for somebody to step up. To start asking central bankers hard questions and make them accountable for the answers they give. And if they refuse to answer them to journalists, let parliamentary commission to ask them. And if they will still keep refusing to answer those question and to take responsibility for what they do (or don’t do), maybe it would be time to move the whole matter to the court.

    And these are not unreasonable questions. They are easy ones: do you think that an economy has sufficient demand? If yes, on what grounds? If you decided “not to do anything” what were the alternative policy proposals you were discussing internally? Why did you decide on this policy path and not on a different policy path? These and similar questions (and honest answers for them) are important for well being of hundreds of millions of people. It is astonishing that they were not asked to the persons most responsible several years into the worst recession we experienced in decades.

  10. Gravatar of Bill Woolsey Bill Woolsey
    26. May 2012 at 03:51

    Monetary policy (2012 conventional wisdom) — modest periodic adjustments in a short and safe interest rate based upon observations of inflation and the output gap close the output gaps while reversing any deviations of inflation from target.

    This is what failed.

    Monetary policy (Traditional Monetarist) changes in the growth rate of the monetary base lead to changes in the growth rate of some broader measure of the quantity of money, which leads to changes in the growth rate of nominal income. This impacts real output growth and employment in the short run, but in the long run only impacts inflation.

    Hyperinflation is coming, with a long and variable lag.

    Monetary policy (Market monetarist) Market perceptions of the nominal goal of the monetary regime determines expected future nominal income, which largely determines current spending on output. How this divides up between real output and prices is based on supply side factors only loosely related to monetary policy. In the end, it is changes in the future quantity of base money that determines future nominal income, but the details of central banks operating procedure are less important than market perceptions of the future nominal income that will be generated.

    Is that right?

  11. Gravatar of Mike Sax Mike Sax
    26. May 2012 at 06:47

    “Monetary stimulus is low interest rates and/or a rapid increase in the money supply. Fiscal stimulus is huge budget deficits.”

    While you may think me part of the “naive man in the street view” I don’t think fiscal stimulus is huge budget deficits necessarily. A revenue shortfall also gives us huge deficits. Or war spending…

    For me you have to show me what financed the budget deficit before I’m convinced there’s been fiscal stimulus which is why I and others can claim there has been austerity in Britian regardless of its current deficit-austerity is self-sustaining.

  12. Gravatar of Mike Sax Mike Sax
    26. May 2012 at 06:52

    I’ll admit it though I wrote that comment before reading where you acknowledge the “sophisticated fiscal view” which was actually the very next paragraph

    To me the sophisticated fiscal view holds in Britain. I think that under Cameron and Osbourne at least the intention is to combine fiscal austerity and monetary stimulus though I will take your word up to a point that monetayr stimulus has not been as stimuluative as it should be though I think they’ve tried harder than in the US

  13. Gravatar of David Pearson David Pearson
    26. May 2012 at 07:07

    It is widely recognized that the BOE de facto raised its inflation target to (at least) 3%.

    The Sumnerian view is that the implied higher NGDP target should have resulted, all else equal, in improved real output due to the positively-sloped SRAS curve.

    The opposite occurred.

    The response seems to be, “well, Britain has (unique?) structural problems.”

  14. Gravatar of dwb dwb
    26. May 2012 at 08:14

    if PK would just say expectations for nominal income and not inflation…

    So what, I wonder, would he do if he were put in charge? He says he would add maybe another $2tn to the Fed’s balance sheet, by purchasing a wider range of assets, including more private sector liabilities. “But mostly”, he continues, “you work on the expectations side. I think mostly what you really need to do is to signal that you’re going to keep your foot on the gas pedal.”

    It does not even matter, he believes, if people are not sure the Fed will carry through. They just have to believe it might happen. “So if Ben Bernanke made a statement, or the board made a statement, saying that we are reconsidering our views about the inflation target, even if we don’t have a credible commitment that they’re going to deliver 3.7 per cent annual inflation over five years, that’s still a help.”

  15. Gravatar of UnlearningEcon UnlearningEcon
    26. May 2012 at 08:31


    Surely you have realised by now that budget deficits alone are not a reliable indicator of the scale of stimulus? They do not take into account cyclical components; they do not tell us about changes.

    In my eyes you have a double standard. You apply the logic of only looking at NGDP as an indicator of monetary stimulus, but not for fiscal stimulus, instead holding onto the crude measures that you decry others for using in a monetary context. What’s wrong with using NGDP as an indicator for fiscal stimulus, too?

  16. Gravatar of W. Peden W. Peden
    26. May 2012 at 09:18

    David Pearson,

    Raising an inflation target with an index like the CPI does not imply a higher NGDP target-

    A higher GDP deflator target (or a GDP deflator level target) WOULD have implied a higher NGDP target. However, that never happened.

    That’s not to say that there are no structural issues in the UK.

  17. Gravatar of Major_Freedom Major_Freedom
    26. May 2012 at 12:25


    Monetary stimulus is low interest rates and/or a rapid increase in the money supply.

    I know you’re attacking the view that low interest rates somehow mean monetary stimulus, but you are seemingly taking for granted the concept of “low” interest rates. Relative to what though? Relative to the recent past, relative to some historical average, or relative to some other standard?

    PS The Fed lowers the fed funds rate from what it otherwise would have been without the Fed’s actions, by the Fed purchasing t-bills, i.e. by monetary stimulus, i.e. by increasing bank reserves, i.e. by inflation of the money supply. The way the Fed keeps interest rates lower than they otherwise would have been in the presence of an increasing NGDP, which would have otherwise put upward pressure on interest rates, is by the Fed ACCELERATING the increase in bank reserves. Usually however, the Fed decelerates at some point, to avoid runaway consumer price inflation, which is why the fed funds rate then rises.

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. May 2012 at 12:37

    Scott may have another famous economist being more than just on board;

    Click on the Watch This Program button at the right. At about 30 minutes Robert Shiller talks briefly about developing ‘Trills’ (short for trillion). Sounds like NGDP futures to me.

    And, he’s actually doing it now.

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. May 2012 at 12:47

    More, from 2009;

    ‘The market price of trills would fluctuate, reflecting the changing prospects for future G.D.P. growth, just as the market price of stocks reflects the changing prospects for future earnings growth. There is no complexity here. It is all plain-vanilla financing, though unconventional by today’s standards.

    ‘There are indications that officials in China are starting to worry about threats to their huge investment in United States debt from a possible outbreak of high inflation. The trills, tied to nominal G.D.P., would protect them. Right now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields, which may have to be raised to attract more investment. Trills, even at an ultralow dividend yield, would seem more exciting as an inflation-protected prospect, because they represent a share in future economic growth.’

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. May 2012 at 13:19

    From the scholarly version,

    The Treasury Inflation Protected Securities (TIPS) already issued by the U.S. government have a number of features that are attractive to investors. There is virtually no default risk with TIPS (likely no more than a Trill would pose), there is little or no inflation risk (which is similar to the inflation protection afforded by the Trill) and, unlike the coupon from a Trill, the TIPS income is fixed in real terms. In good times and bad, an
    investor will get a known, risk-free real coupon.

    The coupon from the Trill, on the other hand, will vary with the GDP of the economy. This is good for the issuer, the U.S. government, because when the economy is expanding rapidly and the Trill pays more to the investor, the government has better tax
    revenues and hence better ability to pay. When times are bad, the Trill pays (relatively) less, which is also good for the government because this is exactly when tax revenues fall.

    For some investors, in good times there is less need for a big coupon from the Trill – all of a domestic investor’s income sources are likely paying off in good times. In bad times for the U.S., when the domestic investor may really need the money, the Trill is paying less. In the language of financial economists, the Trill exposes domestic investors to systematic risk and insures the government against it. If the Trills are held only by
    domestic investors, these investors will need to be compensated for bearing this risk. To the extent that the Trills become held by foreign investors, whose GDPs are not highly correlated with U.S. GDP, the compensation will likely be lower. For still other investors, including pension funds, this disadvantage comes with an important offsetting advantage: that Trills will provide higher incomes when their wage-indexed liabilities are growing
    more quickly in booms, and when Trills pay lower incomes, in slumps, pension fund wage indexed liabilities are also growing more slowly.

  21. Gravatar of dwb dwb
    26. May 2012 at 13:24

    how have i never heard of trills (from Schiller). Get ‘er done!

  22. Gravatar of ssumner ssumner
    26. May 2012 at 14:03

    Tom, I agree about taxes. But let’s face it, the GOP also pays lip service to reducing the deficit (Clinton was the last to eliminate it.)

    Jon, I thought it was amusing, but yes, “IT” is misleading.

    Kebko, No, because if we’d goosed the economy we’d have robust NGDP growth.

    Mark, But didn’t a study by the Romers find tax cuts are more stimulative (presumably due to supply-side effects?)

    Morgan, Good observation.

    Peter N. I agree that you don’t want to inflate asset prices. But Japan’s had falling NGDP for 18 years, I’ll do a post later this weekend.

    Saturos, I think he knows this–I think the politics of walking away from an inflation target is tricky. I’m trying to make his job easier by changing pundit opinion, changing the conventional wisdom.

    Bill, Well said.

    Mike Sax, I’d never call you naive.

    David Pearson. NGDP actually fell in the recent quarter. NGDP growth is plunging. I pay no attention to inflation. Britain has both AD problems (low NGDP) and supply-side problems, due to a government that’s gone from 37% to 49% of GDP.

    more to come . . .

  23. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. May 2012 at 14:13

    As I expected, Shiller gets to the meat of it later in the ‘Cowles’ paper;

    There is a possibility that trills could be privately issued. Index-linked bonds, called MacroShares, have been issued under the auspices of the US company MacroMarkets LLC that could be a model for the private issuance of GDP-linked securities. The securities, whose structure is patented in the United States, are issued by a special entity whose charter dictates that it does nothing else, and invests their underlying assets according to
    specific rules. The rules state that shares are automatically issued and redeemed upon public demand in creation units only in pairs, one long the index, the other short the index, and the assets underlying the shares are invested in U.S. Treasury bills, so that the issuer cannot fail to index effectively.

    The long and short securities, when issued, trade separately on a stock exchange. MacroShares indexed to the S&P/Case-Shiller 10-City Home Price Index, with the ticker symbols UMM and DMM, are now traded on the New York Stock Exchange Arca. Such a structure could be applied to the issuance of trills in the United
    States, by substituting U.S. GDP for real estate price in the structure. These could even be perpetual trills, since the structure is not dependent on the activities and survival of any
    financial entity that does other business. The structure creates a market for both long and short interests in GDP, and the hope in establishing such a private market for GDP in the U.S. would be that a sufficient number of investors would want to take a short position in U.S. GDP. Such investors might include state governments of the U.S, who could use them to hedge their own tax and expenditure risks, or corporations whose revenues rise and fall with GDP.

    It also is a way to solve the Social Security unfunded liability problem (as Milton Friedman suggested).

  24. Gravatar of Britmouse Britmouse
    26. May 2012 at 16:09

    dwb, fantastic quote from Krugman!

    “Fiscal policy might be great. But if you’re not getting it you should be doing something on the Fed side and I think that logic becomes stronger and stronger as the years go by”

    Will he say that about UK fiscal policy too – it “might” be nicer to have bigger deficits, but if not, blame the BOE?

    Nice post Scott. Market Monetarism is a plague, it is unstoppable. By the way, there are several posts on the BoE monetary policy committee up for grabs next year, including Governor. You did say it would be good to trial NGDP targeting somewhere other than the US… just send your resume to Osborne and tell him you have a Foolproof Plan. The weather’s nice (this week anyway).

  25. Gravatar of Britmouse Britmouse
    26. May 2012 at 16:10

    I missed the punchline… a Foolproof Plan to get Osborne re-elected.

  26. Gravatar of dwb dwb
    26. May 2012 at 17:31

    Will he say that about UK fiscal policy too – it “might” be nicer to have bigger deficits, but if not, blame the BOE?
    He’s been pretty silent on the BoE. Its all anti-Cameron, all the time.

    One must interpret Krugman carefully. He is not dumb and he sees himself as the liberal economist mouthpiece going into the Nov election. Even if he agreed that the BoE should work harder, I doubt you’d hear him say so because it would detract from the message. In the US its a little different – there is no chance of getting spending out of Congress, so he is freer to air his views.

  27. Gravatar of Major_Freedom Major_Freedom
    26. May 2012 at 18:34


    Tom, I agree about taxes. But let’s face it, the GOP also pays lip service to reducing the deficit (Clinton was the last to eliminate it.)

    That is a commonly believed myth. The deficit was not actually eliminated under Clinton. The way the government accounts for intra-governmental debt transfers only made it appear that the deficit was eliminated.

    Just check out the total government debt incurred each year in this chart. In every single year throughout the 1990s, the debt outstanding increased. The last time there was a surplus was during the 1950s.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. May 2012 at 18:38

    You wrote:
    “Mark, But didn’t a study by the Romers find tax cuts are more stimulative (presumably due to supply-side effects?)”

    No, of course not. The Romers study you are refering to didn’t examine the supply side effects of tax changes at all, only the demand side effect (otherwise it would be part of my dissertation’s literature review). Moreover the paper didn’t compare tax changes to sending changes. It only focused on the effects of tax changes.

    What the Romers’ paper (and their earlier work on monetary policy) showed is that that failing to consider the reasons for policy changes leads to underestimates of the effects of aggregate demand stimulus.

    The paper did this by classifying tax changes according to their intended purpose. A tax change was classified as “endogenous” if it spending driven (done to accomodate a change in spending) or countercyclical (designed to be stimulative in a downturn, and so a tax cut). All other tax changes were classified as “exogenous.” The result most commonly cited is the one concerning this latter category. A passage of the paper that helps to drive the correct meaning of the paper home is the following:

    “Following a spending-driven tax increase, real GDP on average rises moderately, reaching a maximum of 0.7 percent after two quarters (t = 1.5). Thereafter the effect fluctuates irregularly around zero and is always far from significant. Thus looking at how the economy behaves after tax changes driven by spending changes yields estimates of the effects of tax changes that are starkly different from those based on exogenous tax changes.”

    In short tax increases coupled with spending increases yielded no statistically significant effect on the economy, and in fact, in direct contradiction to a simplistic supply side interpretation, on average, at least temporarily, they increased GDP.

    The paper found that the only tax change that had a statistically significant positive effect on GDP were noncountercyclical tax changes that reduced the federal budget balance. (And in fact, in most cases, this increased an existing budget deficit.)

    More importantly, the Romers themselves have made it quite clear that they do not believe the paper has any supply side implications, which makes it kind of silly for people to keep insisting on drawing supply side implications from it.

    There actually is a small body literature (approximately 21 papers) on tax structure and growth that is relevant to the supply side effect of tax changes and which shows that the only kind of taxes that are conducive to long run growth are consumption taxes. I wish people interested in the supply side effects of taxes would start refering to these papers which truly are relevant.

  29. Gravatar of Morgan Warstler Morgan Warstler
    26. May 2012 at 19:19

    On DeKrugman, the logical question becomes this:

    Since you admit you aren’t going to “get fiscal”and “monetary makes more sense”

    WHY NOT cut the shit out of fiscal to force Monetary?

    WE KNOW for a 100% FACT. A GOD DAMN 100% FACT… that when inflation runs down under 2%, you get monetary.

    So WHY NOT respond to the Fed bait???

    If there anything we could do to get deflationary forces????

    Why not advocate hard core govt reform, really cut those public employee salaries???

    It is FREE! It is $100 bills laying on the ground.

    You slash and gut public employees, inflation drops (demand drops), and you lure/force/sex up the Fed to print money under their 2% rule.


    Logic is easy.

    The point is there the logical things DeKrugman is opening himself up to…

    And WE are not being truthful enough to SAY IT.

    Because then he’ll clam up and retract his admittance.

    Won’t he?

  30. Gravatar of ssumner ssumner
    26. May 2012 at 19:33

    dwb, Yes, I plan to comment on that interview.

    Unlearningecon, Did you actually read my post? I discussed two ways of thinking about fiscal stimulus, the naive and the sophisticated.

    Thanks Patrick, Shiller has actually favored trills for quite some time.

  31. Gravatar of ssumner ssumner
    26. May 2012 at 19:41

    Britmouse, I’m ready—I lived in London in the 1980s (for just 4 months) and would love to go back!

    Mark, Thanks, but I’m still not sure I understand the bottom line of their paper. I suppose I should read it myself.

  32. Gravatar of Greg Ransom Greg Ransom
    26. May 2012 at 19:43

    The graph shows _classic_ Hayekian characteristics.

    Have you read any Hayek?

    “Speaking of Karl Smith, at his new Forbes home he has a wonderful graph showing data relevant to the “re-calculation argument.”

  33. Gravatar of UnlearningEcon UnlearningEcon
    27. May 2012 at 02:38


    You teetered around a more sophisticated definition but continually expressed doubts and didn’t apply NGDP. As fiscal stimulus is functionally similar, it seems you should regard NGDP as an indicator for it, too.

    (Personally I’m not sure about it as an indicator in either case but that’s not the point).

  34. Gravatar of cthorm cthorm
    27. May 2012 at 03:18


    Is there any better case than for the Paul Budget? Slam a trillion dollar spending cut immediately, pull that AS slope up and don’t forget to say cheese as the Fed moves to hit that daunting 2% target.

  35. Gravatar of Morgan Warstler Morgan Warstler
    27. May 2012 at 18:38

    “Is there any better case than for the Paul Budget? Slam a trillion dollar spending cut immediately, pull that AS slope up and don’t forget to say cheese as the Fed moves to hit that daunting 2% target.”

    Ha! “Cheese!”

    Now why can’t we get Scott to talk about how EASY it is going to be for Romney to pull a Reagan Recovery.

    It’s essentially Volker in reverse.

  36. Gravatar of ssumner ssumner
    28. May 2012 at 12:13

    Unlearning econ, Fiscal policy obviously isn’t powerful enough to target NGDP growth, or inflation. That’s why even Keynesians now talk about using monetary policy to target inflation, not fiscal policy.

  37. Gravatar of should public schools bet so heavily on ‘technology’? « Irvington Parents Forum should public schools bet so heavily on ‘technology’? « Irvington Parents Forum
    19. June 2012 at 09:39

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