Matt Yglesias on monetary and fiscal stimulus

I recently was invited by Brink Lindsey to speak to a group of bloggers, reporters, academics, think tankers, and policymakers in Washington DC.  I was surprised at how many well known people showed up to hear my views on monetary policy.  Many of the faces (Bob Samuelson, Bruce Bartlett, Ezra Klein, etc) were instantly recognizable (even though I had never met them.) I met two of my favorite bloggers for the first time; Ryan Avent and Matt Yglesias.  The next day I had lunch with a bunch of George Mason faculty/bloggers, including Tyler Cowen, Alex Tabarrok, Bryan Caplan, Garett Jones and Robin Hanson.  I’m not used to feeling like the dumbest guy at the table.

[Note, I said “feeling like,” I didn’t say “not used to being the dumbest guy at the table.”]

Because I’ve been so busy I haven’t had much chance to respond to some of the comments on my National Review piece.  I plan to return to the issues raised by Cowen and DeLong at a later date, but for now I’d like to respond to Yglesias, and then Kling.

Yglesias liked part of my article, but criticized my shameless attempt to cozy up to conservatives (first me, then Yglesias):

“This sort of policy regime addresses many of the liberal arguments for big government. Right now conservatives don’t have good counterarguments to Paul Krugman’s insistence that all the laws of economics go out the window when we are in a “depression.” Classical economics assumes full employment; how credible are classical arguments against federal job-creation schemes when unemployment is 9.8 percent? Yes, government intervention doesn’t even work very well when there is economic slack. But with NGDP futures targeting, there is no respectable argument for fiscal stimulus, as the money supply would already be set at the level expected to produce the desired level of future nominal spending.”

As a way of surveying the political scene, this seems very shortsighted to me. Yes, it happens to be the case that in January 2009 Barack Obama was President of the United States, Susan Collins was the pivotal member of the US Senate, Paul Krugman had a New York Times column, and David Obey was chair of the House Appropriations Committee. Consequently, we got a stimulus bill oriented around progressive objectives and a lot of Krugman columns about the virtues of stimulus. But if you think back to January 2001 when George W Bush was President, the GOP ran the House, and Dianne Feinstein was the pivotal Senator as I recall our response to the recession was a large debt-financed tax cut. A large debt-financed tax code sold, mind you, with Keynesian arguments about the need to fight the recession.

I’m not quite sure what Yglesias is trying to say here.  If he’s arguing that the Republicans pushed the 2001 tax cut for anti-recession reasons, I don’t entirely agree.  Bush ran on the idea in 2000, when the economy was still booming.  He did take the opportunity to sell it in 2001 using Keynesian arguments, but that’s because Keynesianism is more intuitively appealing, especially to swing voters and Congressmen.  Indeed I imagine even Bush himself finds demand-side arguments to be more plausible than supply-side arguments.  But the motivation of the GOP was supposed to be starve the beast and lower MTRs.

Or perhaps Yglesias was suggesting that I was implying the Dems are the bad guys who favor fiscal stimulus and the Republicans are the good guys who oppose fiscal stimulus.  If so, I guess he’s partly right.  I did imply that, and he’s right I was incorrect in doing so.  But I don’t see the two cases as being at all identical.  My opposition to a massive spending stimulus was that it would require a sharp increase in future distortionary taxes.  Bush’s tax cuts might also require future tax increases, but at the time it seemed (to me) like they would not.  Indeed if spending under Bush had grown at the same rate as under Clinton then the budget deficit would not have been a significant problem, even with the Bush tax cuts.  Naive me, I didn’t realize that when the GOP took all three branches of government (for the first time in my life), they’d increase both military and domestic spending at a rapid rate.  In addition, even if future taxes must be raised, it is still better to have the benefits of lower distortionary taxes now, being offset by higher distortionary taxes in the future, as compared to a spending stimulus, which increases future distortionary taxes without any current reduction.  BTW, some argue that Obama’s stimulus didn’t end up involving much spending.  But any tax cuts that are not cuts in MTRs, are effectively spending increases in terms of their impact on current and future distortionary taxes.

Or perhaps Yglesias was suggesting that I am naive in thinking that politicians will refrain from fiscal stimulus, just because NGDP futures targeting makes it redundant.  Perhaps, but the 2001 case certainly doesn’t show that, as we weren’t doing NGDP futures targeting in 2001.

On some other issues, Yglesias effectively critiques the so-called “Latvian success story.”  (But they did build some pretty neat banks, for a country of only 2 million people.)

Yglesias also plumps for a “target the forecast” policy.  (That’s the first time in my life I’ve written “plumps for.”)

Yglesias also takes on the tricky issue of “what is money.”  I don’t have anything earth-shaking to add, as I am a pragmatist about language.  It’s not a question of what does the term ‘money’ really mean, but rather what is a useful definition of money.  Yglesias seems to take the same approach.  I would add, however, that I find the concept of the ‘medium of account’ to be very useful.  In monetary models the price level is the inverse of the value of money.  To see why this matters, consider walking into a yacht dealer with $100,000 dollars and $100,000 worth of Microsoft stock.  You see a $100,000 sticker price on a new yacht.  Can you buy the yacht with either asset?  Probably; the dealer might slightly prefer cash, but he’d also be willing to take the stock ,which he knows he can quickly sell for roughly $100,000.  After all, there is probably some wiggle room in the listed price anyway.  So I’m not denying that stock could serve as money in the sense of “medium of exchange.”  But now consider the following two thought experiments:

1.  The Fed doubles the (non-interest bearing) monetary base.

2.  Microsoft doubles the amount of stock outstanding.

Both actions would probably reduce the value of each individual paper asset.  (The dilution effect.)  The difference is that if the value of Microsoft stock fell in half, its nominal price would probably fall in half.  If the value of cash fell in half, its nominal price cannot change.  Instead, the nominal price of all other goods must double.  That’s why I find it convenient to define money in a way that focuses on its role as the medium of account.



16 Responses to “Matt Yglesias on monetary and fiscal stimulus”

  1. Gravatar of Philo Philo
    18. December 2010 at 09:51

    For present purposes the most important version of the question “what is a useful definition of money” is: what (if anything) is a useful definition *for economic analysis*? ‘Money’ is a term of ordinary language, presumably standing for a concept that has practical utility for ordinary people. Probably there is a closely related concept that is valuable for economic theory, and economists should appropriate the term ‘money’ for that concept. In the unlikely event that there is no such concept, economists had best eschew the term altogether. (If there are, let us say, *two* such concepts, they might use the term only with a qualifier, speaking always of “money of account” or “transaction-money” or whatever, never of “money” *simpliciter*.)

  2. Gravatar of scott sumner scott sumner
    18. December 2010 at 10:54

    Philo, In everyday life people use ‘money’ in all sorts of ways. I hear people say “Bill Gates has a lot of money.” when they mean something closer to what economists call ‘wealth.’

    So I think it best if economists develop their own language, which one hopes will be more precise than ordinary language. Having said that, I agree that as much as possible we should try to follow generally accepted word usage.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2010 at 10:58

    I’m particularly delighted that Bruce Bartlett has become one of your fans. He’s my favorite Republican economic columnist, primarily because he doesn’t treat the truth as something to be run over by a steamroller. Like you he responds to comments, and I can honestly say I’ve learned a thing or two from him despite the fact he has no formal background in economics.

    Yglesias’ post on Latvis highlights comments made by Klaus Regling, chief executive of the European Financial
    (In)Stability Facility in a recent FT article. Here is an extended quote from that article:

    “In addition, taking Greece, Ireland, Portugal and Spain as examples, real devaluations are happening inside Emu – contrary to standard textbooks. All four countries have cut public-sector wages. With labour costs falling competitiveness is improving. Latvia which has a currency pegged to the euro, testifies to the success of this policy. Contrary to commentators who predicted disaster for Latvia early last year unless it gave up its hard peg – in line with advice from the commission – it did not devalue its exchange rate. A real effective devaluation was achieved through severe cuts in nominal income. Today its economy is growing again. Those outside “experts”, who always seem to know what is good for Europe, should take note.”

    When I first read this my jaw dropped squarely to floor. He has an enourmous capacity to trivialize the social costs of tight money, doesn’t he? Latvia has suffered a 25% reduction in RGDP and has 20% unemployment. The IMF is currently forecasting that even by 2015 RGDP in Latvia will still be less than in 2007. And Ireland? Spain? These are success stories?

    As he says “real devaluations are happening inside Emu – contrary to standard textbooks”. Yes, it’s true, you can force countries to have real devaluations. You can also force square pegs into round holes if you hammer them hard enough.

  4. Gravatar of ssumner ssumner
    18. December 2010 at 11:10

    Mark, Well put.

  5. Gravatar of Jon Jon
    18. December 2010 at 11:49

    I remember the idioms being:

    – unit of account
    – medium of exchange
    – store of value

    When did “medium of account” become a standard locution? Do you mean to capture a distinction by this choice of words?

    I’ve been wrongfooted by this with Andy Harless, and I concluded it to be one of his idiosyncracies until I now see you writing the same.

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. December 2010 at 14:01

    Jon: cannot answer your question about the history of the usage, but what is meant is nicely captured by Bill Woolsey’s response to my “what does it mean?” question here.

  7. Gravatar of Benjamin Cole Benjamin Cole
    18. December 2010 at 14:46

    “Plumps” is becoming the word de jour. I have never used the word either, although I have been trying to work “jejune” into my casual conversation.

    Keep up the good work Scott, you have the profession shifted into a new platform, in which your ideas are being discussed.

  8. Gravatar of Jeff Singer Jeff Singer
    18. December 2010 at 16:48

    Mark Sadowski,

    Bruce Bartlett is a charlatan and an intellectual “goofball” (that’s the technical term). For one of the best fiskings of someone’s bad writing I’ve ever read, you simply must check out this link:

    Now I suppose in your defense, you describe Bruce as a “Republican” — but after reading Tino’s smack-down, is there really anything Republican about his views? I’m also sure he’s a social liberal, and I know there are a few left in the Republican party (probably a few reading this blog!) but at the end of the day, you need to make peace with the fact that the Republican party is socially conservative and will be for the foreseeable future and if you want to hang out with a bunch of libertines, you need to pull the lever for the Dems.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2010 at 17:01

    Jeff Singer,
    The opening lead of your link tells me all I need to know:

    “Bruce Bartlett thinks the revenue maximizing tax rate may be 83%, higher than any of the leftist economists”

    Precisely, but not by much (most research shows that to be in the 65-80% range). Bruce Bartlett relies on empirical evidence for his opinions. For that reason he’s been exiled by his own party.

    He’s not advocating marginal tax rates in that range and nor am I (taxes are my specialty, be forewarned). He knows that there are important anti-growth effects as well.

    And all this negativity directed at him despite the fact (or maybe because of the fact) he is perhaps in many ways the author of the biggest Supply Side Tax cut in history: The Kemp-Roth Tax Act.

    You guys must really be threatened by the truth to call Bruce the “charlatan”.

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2010 at 20:02

    Jeff Singer,
    I should have been more careful when I used the term “you guys”.

    I’ve researched your background in a preliminary fashion. Your church is “fundamentally” stupid. Commenting on an economics site when you believe economics is total crap is to say the least desceptive.

    Furthermore I should let you know I find your insipid and totally individualistic interpretation of Christianity to be highly offensive.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2010 at 20:12

    And no, my friends, I haven’t lost my hinge. On the contrary, I think I finally found it.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2010 at 20:56

    And no I’m not pixilated. At least not more than usual.

  13. Gravatar of scott sumner scott sumner
    19. December 2010 at 11:34

    Jon, The unit of account must be embodied in some way, it cannot be entirely abstract or else the price level would not be pinned down. It can be gold, paper money, etc. The supply and demand for the medium of account determine the price level and NGDP.

    Benjamin, Yes, now that I have a new word, I’ll try to wear it out.

    Jeff and Mark, Bruce certainly seems relatively liberal to me. I guess he started out as a supply-sider and has moved to the left. I think he grossly under-estimates the Laffer curve problem. I don’t think the US is at the top of the Laffer curve, but were are pretty close (in revenue terms, not necessarily in tax rate terms.)

  14. Gravatar of Jon Jon
    19. December 2010 at 12:09

    So, again using the phrase medium of account (sic, not unit of account) rather medium of exchange means what exactly?

    I’m afraid I still don’t see what you’re getting at by use of this _NEW_ phrase.

  15. Gravatar of Morgan Warstler Morgan Warstler
    19. December 2010 at 22:36

    “When I first read this my jaw dropped squarely to floor. He has an enourmous capacity to trivialize the social costs of tight money, doesn’t he?”


    When public employees make less money for the work they do, the private sector WINS.

    If you look at difference between what they used to make relative to the private sector, you are looking at the total cause of the deficit.

    Looking at it another way… if you get rid of defined benefit pensions… make them pay out of their current salary into a 401K – there is NO deficit.

    Looking at it another way… if public employees made the productivity gains of the private sector since the mid-90’s – there is no deficit.

    Look boys, GIVE UP THE CAKE, and it won’t be taken from your greedy fingers.

    Scott, you either admit there is a difference between government spending and tax cuts – and use that to silence Matty, or you’ll never actually win over conservatives.

    “Money” for whatever its other definitions is actually a moral promise to the holders, that should, during some horrific crisis, the quantity be expanded pari passu amongst the holders – and the non holders should get nothing.

    Money for whatever it is… is NOT a promise or a tool for those who don’t have any. Money has shareholders… they hold money.

  16. Gravatar of scott sumner scott sumner
    20. December 2010 at 18:31

    Jon, An example of a unit of account would be “dollar” which is an abstraction, a accounting term. An example of a medium of account, would be 1/20.67 oz of gold, which was the US medium of account from 1879-1933. Or the dollar bill, which is currently the medium of account.

    Morgan, I much prefer tax cuts to spending increases, and always have.

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