More on fiscal stimulus
I got some really astute comments on the last post, and wanted to do a follow-up. Some commenters wanted to defend Krugman, which isn’t really necessary, as my criticism was more directed at the Obama administration. I regret not making that clearer. I actually differ with Krugman on only one small point regarding fiscal stimulus; the likely monetary policy counter-factual:
1. Krugman holds monetary policy constant in his analysis, and estimates fiscal multipliers on that basis.
2. I assume the Fed has an approximate inflation target (or range), and may offset the impact of fiscal stimulus with more or less unconventional QE.
I’m certainly not claiming I am 100% right, just suggesting there may be more ambiguity to multipliers that people assume. For instance, in the Jackson Hole speech Bernanke got pretty impassioned (for him) at one point. He suggested that inflation was a bit lower than the Fed’s target, and that any further disinflation would be very unwelcome. He also suggested that were this to occur, more monetary stimulus would definitely be called for on both inflation and growth grounds. There were some comments pretty clearly directed at the hawks. To me, it looked like Bernanke was drawing a line in the sand; this much disinflation but no more. We are at 1% on the core rate, and I think anything lower will lead to another March 2009-style QE. Recall that at that time forecasts were really bleak, and the Fed did act fairly aggressively (albeit not as much as I would have liked.) I think there is a sort of “Bernanke put” at 1% core inflation. He’s more conservative than he used to be, but he’s not as conservative as the hawks. In my view we’d have 1% core inflation today if there’d been zero fiscal stimulus. That implies an effective multiplier of zero, even if the theoretically true multiplier is 1.6.
Both Krugman and I were pessimistic about fiscal stimulus, and we both think it has failed to do what was needed. The only difference is that he argues that the $800 billion that was done did have a clear effect. After I wrote the post I noticed another possible flaw in his argument, although I will leave it up to my Keynesian readers to tell me whether I am right or wrong. I had thought the Keynesian model predicted that the direct effect of demand stimulus measures was on nominal final sales, and that the effect on RGDP was more indirect (depending on the SRAS curve, trade balance swings, and inventory adjustments.) I looked at the BEA data and found that (unlike real GDP) the final sales growth rates look pretty flat over the last 4 quarters, both real or nominal:
| 2009 III |
2009 IV |
2010 I |
2010 II |
||||
| 1 | Gross domestic product | 1.6 | 5.0 | 3.7 | 1.6 | ||
| 2 | Less: Exports of goods and services | 12.2 | 24.4 | 11.4 | 9.1 | ||
| 3 | Plus: Imports of goods and services | 21.9 | 4.9 | 11.2 | 32.4 | ||
| 4 | Equals: Gross domestic purchases | 3.0 | 3.0 | 3.9 | 4.9 | ||
| 5 | Less: Change in private inventories | — | — | — | — | ||
| 6 | Equals: Final sales to domestic purchasers |
1.8 | 0.2 | 1.3 | 4.3 | ||
| Addenda: | |||||||
| 7 | Final sales of domestic product | 0.4 | 2.1 | 1.1 | 1.0 | ||
| 8 | Gross domestic purchases, current dollars |
4.3 | 5.1 | 6.2 | 5.0 | ||
| 9 | Final sales to domestic purchasers, current dollars |
3.3 | 2.2 | 3.5 | 4.4 |
Which is the correct line to look at from a Keynesian perspective?
A commenter named Ted pointed out another problem. Newer Keynesian models such as Woodford and Eggertsson predict stimulus will start working when it is announced, not when the money is actually spent. I don’t know if the estimates Krugman cites took that into account. Perhaps someone else knows.
So if Krugman wasn’t my real target, who was? It was those who advocated fiscal stimulus and ignored monetary stimulus. You can’t have it both ways. The economy is in a mess. We aren’t recovering after having run up extra deficits of $800 billion. One can’t point to 3% growth and say; “See, the policy worked.” If we had known this was going to happen, then I would have had much more success making my argument for monetary stimulus 20 months ago. Think about it. Almost everyone on the left is now pushing for more monetary stimulus. The reason is obvious–we’re floundering. Whether Krugman predicted that or not isn’t the issue, the issue is that if the policy elite in this country had had a crystal ball in early 2009, and saw this coming, the debate would have been far different. For one thing, the Obama administration would not have let 3 Fed seats lie empty for 20 months. (Something I warned them about.)
Several commenters pointed out that you’d expect a slow recovery in a liquidity trap. Precisely; which is why we need the Fed to use the 4 remaining policy options Bernanke assures us they have. The grand fiscal adventure was merely a long and fruitless diversion, and 20 months later we have arrived back where in my view we’ve been all along–waiting for monetary policy to get NGDP growing at an adequate rate.
Time to start moving . . . except that now we have to wait until November when Bernanke gets reinforcements.
Tags:
28. August 2010 at 13:20
Bravo! Succinct and crystal clear. From my point of view this is one of your best posts ever.
Time to start moving again.
28. August 2010 at 13:46
Kurgman said, “Why did the peak impact of growth come in 2009, even though only part of the money had been spent? I explained all that a while back.”
In that link, he says, “Now think about three questions you might ask. The first is, how much higher is GDP this quarter than it would be without the stimulus? This should depend on “Rate” “” on the quantity of goods and services the government is buying right now.
The second question is, how much faster is GDP growth this quarter than it would be without the stimulus? This should depend on “Change” “” on the extent to which the government is buying more stuff than it did last quarter.”
Krugman’s explanation, since it seems to be dependent only on real-time government spending (vs. expected improvement in overall economic performance), then, doesn’t seem to jive with your summary of Ted’s comment: “Newer Keynesian models such as Woodford and Eggertsson predict stimulus will start working when it is announced, not when the money is actually spent.”
28. August 2010 at 13:52
Technically your analysis is perfectly consistent with Keynesian models. If the public believes the monetary authority has revised their desired target downward, then fiscal stimulus won’t work. My guess is that this isn’t really what happened though. I can’t imagine that the public would really believe the monetary authority would trample the impact of fiscal stimulus. My guess why it didn’t work is either the New Keynesian model is just wrong or the stimulus package was so small (again, especially with state and local fiscal contractions counteracting it) relative to the economy that it’s basically impossible to see whether it had an impact of not.
Like I said, the test for stimulus should be how the market reacted to it immediately – as the New Keynesian model says that market should react to it since it works by manipulating inflation expectations – just like monetary policy. The correct line, then, I think for a New Keynesian stimulus test is to, like I said before, look at the market response. Not look at those numbers since the counterfactual game is more or less impossible (and structural VARS can only do so much). The market response clearly demonstrated it would fail (or at least the impact would be minimal). There wasn’t a significant move in inflation expectations, stock and commodities didn’t rise substantially, and the exchange rate didn’t move a whole lot. So, in the NK model, that information informs us that stimulus would fail in that model. Maybe the NK model is wrong and this doesn’t inform us of the effects of stimulus. But if you are going to use the NK model to argue in favor of stimulus, you can’t ignore the other pieces that come along with it (like market responses to the stimulus).
What I find amazing though is that even ignoring any empirical evidence at all, as a pure theoretical proposition fiscal stimulus is only suppose to work if monetary policy fails. Go read those fiscal stimulus papers by Eggertsson, Christiano et al, and Woodford. They all immediately rule out (either implicitly or explicitly) the ability of the monetary authority to commit to future policy. I don’t buy that assumption, so I’m left to the conclusion that fiscal stimulus is only worth it if the central bank doesn’t do their job. How could proponents of stimulus not realize this? And why would they want to offer them cover for their own failure? Why not just instead push the Fed to do their job? If the monetary policy really did become powerless at the zero lower bound, I’d be all for trying large fiscal stimulus – but it’s not.
Also, a side note, do we even know the theoretical fiscal multiplier? Estimates are all over the map depending on how you parametrize it. Eggertsson probably does the most reasonable estimates since he benchmarks the simulation around a Great Depression-type drop, but Christiano et al get ridiculously high multiplier (I think higher than 5 if I remember correctly) by assuming unbounded output loss and deflation. So, what exactly would be the fiscal multiplier in our scenario seems difficult to get at. Nobody knows what our output drop would have really been without all the government actions. My guess is then that the fiscal multiplier is probably somewhat lower than Eggertsson’s benchmark since I don’t think we would have had a Great Depression-level crisis.
28. August 2010 at 13:55
“I assume the Fed has an approximate inflation target (or range), and may offset the impact of fiscal stimulus with more or less unconventional QE.”
This is true, the Fed absolutely takes into account whether there has been stimulus. Now that you have admitting it, there’ no turning back…
They will also take into account whether:
1. Congress is run by Democrats – uh oh.
2. A giant healthcare boondoggle has been foisted on businesses – uh oh #2.
3. Businesses worth the risk are clamoring for more credit – nope
In each or any of these situations, The Fed is not rationally going to do anything to diminish savings of the good people who have savings, unless… the banks are hurting.
Your only real lever is “banks are hurting,” and you refuse to see the logic of cheering for mark-to-market or liquidation of any kind.
So, if Krugman and you REALLY wanted more QE way back when you would have been specific and started screaming that insolvent banks needed to be liquidated.
You’d realize that if politically we started setting fire to the banks, thats the best shot you’d have the Fed would have come through with piles of cash… the more the banks are being busted up politically, the more the Fed will act.
I’m still not sure the public will stand for it, but you’d at least have the interests of the Fed aligned with yours.
28. August 2010 at 14:04
I just thought of another outlandish way stimulus could have “failed” that’s analogous to the time inconsistency problem in monetary policy. Supposedly time inconsistency tells us that if the Fed promises to do “x” in the future, the public may not believe them since the Fed may renege once of the economy starts to recover and so their policy won’t work. I don’t buy that model really, but that’s what it says. We can make another analogy to fiscal stimulus:
The stimulus costs a lot of money. We already have a big deficit. Is it entirely implausible to believe that the public would internalize this and then believe that right when the economy would begin to recover that the Congress would recoup the remaining funding? In the New Keynesian model, wouldn’t this effect be absolutely analogous to the time inconsistency problem of monetary policy. Thus, inflation / growth expectations wouldn’t actually move and so we wouldn’t recover from it?
I don’t think that’s what happening, but it adds another layer to the “did fiscal stimulus work?” discussion.
28. August 2010 at 14:25
Why would the economy slow down now?
Most of the reports I’ve seen show that a substantial portion of the stimulus, ~half, is still in the pipeline. Indeed, this was known at the time the stimulus was pass–contrary to the rhetoric favoring its enactment, most of the funds would come latter.
Krugman seems way off to see a correlation between the slow-down today and the stimulus spending today. The facts of his story just don’t line up.
What we’re seeing is a possible point in favor of expectations. Whether you believe more stimulus is necessary or you don’t believe the stimulus worked, everyone now believes the current stimulus plan is not a solution.
Expectations are over-powering the still heady stimulus in the pipeline. As we have as much stimulus coming as we had before, yet things now seem worse than they were before, it seems more than plausible that expectations are dominating.
28. August 2010 at 14:38
Scott,
I’m increaasingly inclined to open my course at Rowan University on monetary policy with “The Wizard of Oz”.
On the next to last page of the book Baum has Glinda, Witch of the South, tell Dorothy, “Your Silver Shoes will carry you over the desert…..If you had known their power you could have gone back to your Aunt Em the very first day you came to this country.”. Glinda explains, “All you have to do is knock the heels together three times and command the shoes to carry you wherever you wish to go.” (p.257).
If there is a more powerful parable of the importance of monetary policy then I am surely not aware of it.
All we have to do is knock our “heels together three times and”…
28. August 2010 at 15:44
I have a lot of contact with small business guys. Those who have borrowed using SBA did so due to collateral–property, small factories.
This makes me think we have to reflate property quickly, and shoot for even higher inflation rates than I see bruited about here.
I think 4-5 percent inflation for several years would be fine. It would also help deleverage the country and everyone in it.
Sheesh, are we really so afraid of minor inflation that we agree to endure a bruising and very long recession? And has the Fed decided that 1 percent inflation is the line in the sand–not two or four percent, as might be a useful line at the bottom of a recession?
28. August 2010 at 16:32
Hey, scott. I was wondering if you could explain the shape of the federal reserve’s liabilities affects monetary policy. It seems to me that if the fed was serious about monetary policy they would be buying t bills (or my preferred option forex futures)in exchange for high powered money rather than mbs’ for bank reserves. you check out the neat charts at:
http://ftalphaville.ft.com/blog/2010/08/27/328866/the-feds-balance-sheet-and-an-abs-update/
28. August 2010 at 16:33
Thanks Mark.
Thanks Indy, That sounds kind of simplistic. But in fairness to Krugman when you boil things down to a blog post certain subtleties can get lost. So I’ll reserve judgment.
Ted, You said;
“Technically your analysis is perfectly consistent with Keynesian models. If the public believes the monetary authority has revised their desired target downward, then fiscal stimulus won’t work. My guess is that this isn’t really what happened though.”
I’m pretty sure you misunderstood my point, because it is not at all far-fetched. I’m not saying they are shooting for 1% inflation, I am saying they don’t want inflation to fall below 1%, that there is some sort of target band. This may allow fiscal stimulus to have some effect, but less than if monetary policy were completely passive.
Also recall that even Krugman now says the Fed is sabotaging fiscal stimulus. Not in those words, but he says statements by the Fed hawks appear to already have harmed the economy. And that amounts to sabotage of fiscal stimulus. So if a big fan of fiscal stimulus thinks that, I don’t see it as being too far fetched.
I agree that fiscal stimulus failed, and it was obviously going to fail from the beginning. But I do recall at least one positive market response to a fiscal stimulus announcement, so the fact that it failed to achieve its goals doesn’t mean it had no effect. Krugman MIGHT be right about its marginal effect. I’m skeptical, but not willing to rule it out.
There is no such thing as “the multiplier” because there is no such thing as a “ceteris paribus” monetary policy. Economists do not agree what it means to hold monetary policy constant. I define monetary policy as expected NGDP growth; by that definition the fiscal multiplier is tautologically equal to zero.
Morgan, I agree the Fed worries too much about banks, and too little about the economy.
Ted, That is possible, and it is an example of time inconsistency. But I’m not sure it is a practical problem–Congress loves to spend money.
Jon, Yes, my instinct tells me that if Congress is still spending stimulus money, we should be growing more than 1.6%. Again, I think the problem is and has always been monetary policy.
Mark, Have you taught before? It can be a shock to go from grad school to teaching undergrads. The really interesting stuff may go over their heads at first, unless you have laid the groundwork.
Benjamin. The good news is that the SRAS is fairly flat, meaning inflation won’t rise much even with faster growth. That’s why I am so confident that the inflation worriers will be wrong. Even 3% inflation would be associated with very fast RGDP growth.
Everyone, No comment on my question about which aggregate in the BEA table is the right one?
28. August 2010 at 16:41
“Mark, Have you taught before? It can be a shock to go from grad school to teaching undergrads. The really interesting stuff may go over their heads at first, unless you have laid the groundwork.”
Not to depricate your comment but actually I’ve taught 7th grade math before. You raise a really good question. Thanks for raising the issue.
28. August 2010 at 16:43
Honeyoak, Yes, I’d like to see them buy more T-bills. Buy them all–why not?
28. August 2010 at 17:44
ssumner
“2. I assume the Fed has an approximate inflation target (or range), and may offset the impact of fiscal stimulus with more or less unconventional QE.”
I’m not defending Krugman, but I will anticipate his response – He would argue that in a zero bound condition, the Fed would target a taylor rate, but the taylor rate is -6% or whatever, and the Fed can’t do that without using unconventional tools that it hates using. Thus, under a zero bound condition, the Fed will _not_ offset fiscal stimulus with monetary contraction unless the taylor rate starts moving way up.
28. August 2010 at 18:04
If I’m not mistaken, Woodford interprets “holding monetary policy constant” as “maintaining a constant path for real interest rates.” The idea, I think, is that if the central bank does not raise real rates (or commits to not raising real rates) in response, then higher inflation expectations due to the increase in government purchases cause real rates to fall lower than where they would be if nominal rates are driven to the zero lower bound.
The interesting thing about understanding fiscal stimulus in this way is that it makes it look not that fiscal. By that, I mean that the stimulus basically works if the monetary authority wants it to work, and it only works to the extent that the monetary authority wants it to work. Consequently, the upshot of Woodford’s analysis seems to be that fiscal stimulus is just another one of those wacky tools the central bank can resort to once it hits the zero lower bound.
This is consistent with opposing fiscal stimulus at the zero lower bound, because Woodford for one thinks there are other things you can do at the zero lower bound (e.g., target a path for the price level). Moreover, Woodford notes that fiscal stimulus is a delicate instrument. Making it work requires careful expectations management, which the Fed is more capable of than the Congress or the Administration. Also, unlike QE or a price-level target, it creates debt which creates uncertainty about future taxes, etc. So Woodford seems to be saying fiscal stimulus is a tool that can supplement open market operations once you’ve hit the zero lower bound, but so are all these other tools and fiscal stimulus doesn’t look that good in comparison to these others.
28. August 2010 at 19:28
The Obama team insists on Fiscal Stimulus:
http://www.nytimes.com/2010/08/29/opinion/29tyson.html?_r=1
28. August 2010 at 19:39
A “nihilistic” sentiment prevails:
http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html
28. August 2010 at 20:00
From a Keynesian perspective: line 7
28. August 2010 at 20:06
‘I’m increaasingly inclined to open my course at Rowan University on monetary policy with “The Wizard of Oz”.’
Please tell me you’re kidding. I know the fable got into the pages of the JPE, but really, it’s been debunked. The man who originated the idea even admitted he made it up.
28. August 2010 at 20:06
i have a proposition, if you were to write a paper entitled “industrial policy 101, why it doesnt work”, why not simply replace the words “industrial policy” with “fiscal stimulus”‘ the argument works for me. except in the short run its even more powerful because because theres less time to make the right decisions.
whenever economists debate industrial policy it always involves cross country empirical comparisons and intuitive logical reasoning about how economies work. but for some reason when it comes down to short time fiscal stimulus economists get into complex macroeconomic debates.
the argument against fiscal stimulus to me is as simple as what arnold kling argues when he says “sustainable patterns of specialization and trade”
take for example if the government gave GM $20 billion and they subsequently invested it, according it to macroeconomic it would have a certain fiscal multiplier according and “poof!” you get stimulus. but what if later it turns out they made a huge mistake in analyzing the market, their investments fail, and they have to fire everyone, shut down the factories and end it all. but then what was stimulated at all?
if you multiply that by an infinity due to the sheer complexities of 300 million people then there is simply no way fiscal stimulus can actually do anything. thats why payroll and corporate tax cuts, unemployment insurance, are the best stimulus. thats why propping up local budgets is better than new additional spending in the short run.
to say that since consumption and investment fall, government needs to prop up gdp makesz no sense, since it assumes government is in someway of equal value and efficiency when it comes to the irreducible complexities of the “sustainable patterns of specialization and trade” of the interactions of 300 million people. arnold kling and david henderson had two posts on prcisely this point a few days ago.
best,
joe
28. August 2010 at 21:52
Any comment on Sweden’s interest rate hike or the possible role of Sweden’s banking disclosure reforms in it’s performance over the last few years?
http://blogs.wsj.com/economics/2010/08/28/swedens-ingves-economy-in-good-shape/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Feconomics%2Ffeed+%28WSJ.com%3A+Real+Time+Economics+Blog%29
29. August 2010 at 06:46
Someone above mentioned that a lot of the spending is still in the pipeline. Well, that was one of the arguments against fiscal stimulus; it takes too long. I’d say so:
BILOXI, Miss. “” More than a quarter of the $20 billion in Housing and Urban Development relief funds that were earmarked for Gulf Coast states after Hurricane Katrina remains unspent five years after the storm, a fact noticed by at least one congressional leader who’s eager to spend it elsewhere.
Read more: http://www.mcclatchydc.com/2010/08/27/99669/a-quarter-of-katrina-aid-money.html#ixzz0y0S3Ef3u
If we have to depend on the efficiency of government spending we will be waiting a long time for recovery.
29. August 2010 at 07:26
Patrick R. Sullivan,
You wrote:
“Please tell me you’re kidding. I know the fable got into the pages of the JPE, but really, it’s been debunked. The man who originated the idea even admitted he made it up.”
Actually, I’m not. It’s a great device to teach the complexities of late nineteenth century economic history. In any case, how does one debunk an allegorical interpretation of a fairy tale? Of course he made it up.
29. August 2010 at 07:33
Statsguy, The negative 6% from the Taylor Rule is a phony number, as it conflicts with the fact that the SRAS curve is fairly flat in a deep recession (according to the very same Keynesians who like the Taylor Rule.) So you can’t possibly need negative 6% real rates to get a robust recovery.
The Fed certainly will use unconventional policy to sabotage fiscal stimulus, Krugman basically said as much a few weeks ago when he accused the hawks of making statements that were already slowing the economy. Krugman can’t have it both ways.
And there are other unconventional tools. W/O any stimulus, the March 2009 QE would have been much bigger. With a 1.3 trillion stimulus package, there would have been no March 2009 QE. Anyway you cut it, we end up in the same place today, with 1% core inflation. That’s where the Bernanke put seems to be.
Ram, You said;
“The interesting thing about understanding fiscal stimulus in this way is that it makes it look not that fiscal. By that, I mean that the stimulus basically works if the monetary authority wants it to work, and it only works to the extent that the monetary authority wants it to work. Consequently, the upshot of Woodford’s analysis seems to be that fiscal stimulus is just another one of those wacky tools the central bank can resort to once it hits the zero lower bound.
This is consistent with opposing fiscal stimulus at the zero lower bound, because Woodford for one thinks there are other things you can do at the zero lower bound (e.g., target a path for the price level). Moreover, Woodford notes that fiscal stimulus is a delicate instrument. Making it work requires careful expectations management, which the Fed is more capable of than the Congress or the Administration. Also, unlike QE or a price-level target, it creates debt which creates uncertainty about future taxes, etc. So Woodford seems to be saying fiscal stimulus is a tool that can supplement open market operations once you’ve hit the zero lower bound, but so are all these other tools and fiscal stimulus doesn’t look that good in comparison to these others.”
BINGO! I couldn’t have said it better myself.
Marcus, Tyson, thinks there’s lots more job-creating stimulus to come. She hasn’t read Krugman.
Patrick, I know it’s been debunked, and I don’t teach it. But I don’t see how you can ever debunk something like that:
1. From a post-modern perspective, what matters is what the readers sees in a work.
2. Baum was interested in the silver cause. How could one ever prove that those symbols didn’t subconsciously work their way into his narrative?
Joe, Good points.
Greg, My impression is that the countries that are now hiking rates (Sweden, Canada, Australia, etc) are the one’s with the best macro policies during the crisis. That made their recessions less severe, and allowed them to hike rates today. In the long run you can’t have a healthy economy with near-zero rates.
Sweden was smart to use unconventional stimulus (currency devaluation) to make their recession less severe. I don’t know enough about Sweden to know whether the interest rate hike was premature.
Joe Calhoun, Yes, fiscal stimulus is an incredibly clumsy instrument.
29. August 2010 at 07:44
Scott, so really you’re not really full throated, you’ll say, “yep, the lever the Fed cares about is the banks.”
But you’re not going to take up the most politically doable policy (the one the Tea Party will support), force the insolvent banks to go belly up and sell off their assets for pennies to the guys with cash.
I’m telling you, what everyone needs to hear is stories of bankers being unemployed, and monied investors buying millions of homes cheap.
When people hear and believe that homes are FINALLY being sold at below market rates – growth will happen.
29. August 2010 at 07:55
Thanks, Prof. Sumner.
I should have also mentioned that these observations are consistent with supporting fiscal stimulus, but only for political reasons. The basic problem you’ve raised again and again is that the only way fiscal stimulus improves things relative to monetary-only stimulus is if the central bank is either unable or unwilling to pursue more expansion, but oddly is also willing to facilitate further fiscal expansion. You believe, I think correctly, not only that the central bank is able to do more, but also that if it were unwilling to do more it would be just as unwilling to facilitate further fiscal expansion.
Consider, however, a certain kind of political environment. Suppose that the central bank’s philosopher-kings have split into two camps: the hawks and the doves. The doves favor more monetary expansion, but cannot get the hawks to agree to it. The hawks favor monetary contraction, but cannot get the doves to agree to it. The central bank is in a state of gridlock–it cannot move in one direction or the other. What the doves can manage, however, is to prevent the hawks from undoing the effects of fiscal stimulus, which the Treasury is free to pursue if it so chooses. If this was the case, you would expect to see the chairman testifying before Congress, saying: “I support fiscal expansion at this time…I believe the central bank can do more…we do not plan to do more unless circumstances deteriorate further.”
Sounds incoherent, but it makes sense if he’s unable to win over the hawks but is just barely able to stop them from counteracting fiscal policy. I don’t know whether this is what really is happening, but if it were it would lend support to fiscal expansion, if only as a third-best option. Note, however, that fiscal policy proponents a la Krugman have not been making this precise argument until fairly recently, so this does not give cover to their earlier arguments.
29. August 2010 at 08:29
It is certainly time to fill those emply seats and also, to see if monetary polity will in fact work, for there are too many questions back and forth while potential solutions continue to slip away. As long as the Fed is slow to act, the accusations will only get more disorienting for everyone involved.
29. August 2010 at 09:05
Prof Sumner,
This paper asserts that the ARRA was basically completely offset by declining fiscal expenditure at the state level – in other words the multiplier appears to be zero because net stimulus was equal to zero. Would that be as valid an explanation for the empirical observations of declining nGDP growth?
I do remember at the time that there was some noise in the blogosphere about the federal stimulus not giving enough help to state budgets.
29. August 2010 at 14:51
‘ Baum was interested in the silver cause. How could one ever prove that those symbols didn’t subconsciously work their way into his narrative?’
Baum’s only interest in ‘the silver cause’ was to ridicule it (in a pro-‘sound money’ McKinley poem in his Aberdeen newspaper). Which is the opposite of what Littlefield claimed in his 65 years after the fact paper. That was the first time anyone ever claimed Baum’s story was a political parable.
It seems ridiculous for Littlefield to admit he’d invented something that was the opposite of the historical record, but say, ‘I like it anyway.’ I mean, leave poor Baum to rest in peace, and dream up your own allegory.
29. August 2010 at 18:14
The piece is a bit “all over the place” but Scott is “highlighted” and quoted:
http://www.ft.com/cms/s/0/f04d8600-b397-11df-81aa-00144feabdc0.html
29. August 2010 at 21:59
Far enough.
From what I’ve read, I also like Sweden’s financial disclosure laws. Transparency matters.
Scott wrote,
“Greg, My impression is that the countries that are now hiking rates (Sweden, Canada, Australia, etc) are the one’s with the best macro policies during the crisis. That made their recessions less severe, and allowed them to hike rates today. In the long run you can’t have a healthy economy with near-zero rates.”
30. August 2010 at 07:30
Morgan, Growth didn’t “happen” in 1929-31, and the government wasn’t propping up houses or banks.
Ram, Again, good post. You said;
“Note, however, that fiscal policy proponents a la Krugman have not been making this precise argument until fairly recently, so this does not give cover to their earlier arguments.”
I’d be shocked if that was the argument they are making now. It’s a very convoluted argument, although quite possibly true. Of course there are many other plausible scenarios, some of which imply a negative multplier. For instance, suppose unconventional monetary stimulus is much more powerful that most people believe (as I claim) and also assume they would have done unconventional monetary stimulus if there had been no fiscal stimulus.
BTW, the Fed’s QE of March 2009 suggests that they are not in gridlock, they do react to the economy. The BOJ reacted just last night.
Rebecca, I agree.
hishamh, If Krugman starts making that argument, I’ll take it seriously. It’s hard to believe state and local budgets fell by over $700 billion. They only spend about $1.5 trillion a year.
Patrick, That’s something I never knew. If true (and I have no reason to doubt you) it would suggest that the author of the JPE article should issue a retraction.
Thanks Marcus.
Greg, I like the Nordic countries’ transparency, and general honesty in governance. I just wish they had lower taxes.
30. August 2010 at 11:44
Is that a sufficient answer? Here’s a few things that DID happen between 1929-1931:
Hoover high-wage doctrine (see Lowell Gallaway)
Smoot-Hawley – June, 1930
Correlation problems abound. It seems like there could have been some real knowledge/experience problems with the Fed relative to the clearing houses it replaced as far as being able to discern between illiquid and insolvent banks too, right?
Anyway, one event/data point as falsification alone doesn’t seem like very good science.
1. September 2010 at 10:54
John, Neither of those can explain the sharp fall in NGDP. And we know from 1921 that falling NGDP causes steep falls in output, even if wages are flexible.
There are dozens of other recessions that would falsify Morgan’s model. This is one of the few recessions where housing played a big role. Morgan keeps focusing on housing, even though there is no evidence it played an important role in this recession. Most of the output drop occurred elsewhere.
1. September 2010 at 10:56
John, BTW, Morgan posts about 10 comments a day. I don’t have time to wrote a dissertation in response to each one. Most are nearly identical.