Where did Obama get the crazy idea that fiscal stimulus was the only option?

When she first met President Obama, Christina Romer was taken aback to discover that he thought the Fed was out of ammo, and fiscal stimulus was the only option.  (And I’d add that he didn’t seem too disappointed by that situation.)

And it’s not just Obama, Mike Konczal and Joe Gagnon imply that liberal politicians are not well informed:

MK: Is it a question of balance? I’ve noticed that there is little political pressure from liberals on the Fed for more expansionary policy. Is it a matter of there being little countervailing pressure?

JG: I think it would help if politicians on the left criticized the Fed more strongly for failing to achieve its employment mandate.

Matt Yglesias has made similar observations about the progressive movement.  And where did liberals get this silly idea that fiscal policy is the only option?  Perhaps from reading Paul Krugman in late 2008:

Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future. In normal times, that would be a reason to cut interest rates. But interest rates can’t be cut in any meaningful sense. Fiscal policy is the only game in town.

Or perhaps he read this article by Brad DeLong in February 2009:

Brad Delong explains that the Obama Administration is on the right track with the economy because it is on the only track.

(Sorry, the rest of the article is behind a paywall, but he says fiscal stimulus is the only option because with nominal rates at zero monetary policy can’t do much.)

Or perhaps reading DeLong co-author and former Obama economics czar Larry Summers’ recent piece on monetary policy, which is so disappointing I’ll have to do an entire post on it.

DeLong recently took issue with Johnleemk in the comment section of one of my old posts (a comment replayed by Tyler Cowen.)  Here’s Brad:

I must say that I don’t know whether you live in a totally different universe from the rest of us, or are simply insane. The center-left extends from people like Jan Hatzius who think that massive quantitative easing-taking the Federal Reserve balance sheet to $5 trillion, or higher if necessary-would almost surely work and we don’t need fiscal policy to people like Paul Krugman who think that massive quantitative easing is unlikely to work, but is nevertheless worth trying.

I know of nobody on the center-left who is opposed to it…

Brad is right that most left wing economists aren’t opposed to monetary stimulus, although some big names like Joe Stiglitz expressed opposition to QE2.  Most consider it worth a shot.  But it’s also true that in policy circles there is almost zero awareness among liberals that monetary policy can be highly effective at the zero bound.  That was Johnleemk’s point.  And I continue to insist that this is due to the extremely misleading advice provided by people like Krugman and DeLong.  Consider their recent suggestions that the Cameron government needs a more expansionary fiscal policy.  That recommendation makes no sense, because if Britain needs more AD then Cameron could simply tell the BOE to raise its inflation target.  So what aren’t people like Krugman focusing on the need for Cameron to raise the inflation target?  (Or better yet NGDPLT.)  If they do fiscal stimulus, and the BOE keeps the inflation target at 2%, then it might end up sabotaging the stimulus. With a higher inflation target they wouldn’t need fiscal stimulus.

It’s these very “mixed signals” they lead most people to believe that the left is fixated on fiscal stimulus and has all but given up on monetary stimulus.  That perception might be unfair, but if progressives want to change it they need to work much harder at communicating the importance of monetary stimulus.  Because policymakers aren’t hearing the message, indeed it’s not even part of the debate.  All we hear is austerity vs. fiscal stimulus; it’s as if there are no other choices.  Does President Obama know monetary policy might determine his fate?  Did he know that when he appointed 6 of the 7 current members of the Board of Governors?  I think we all know the answer.

Some commenters tell me to “be nicer to Krugman and DeLong, they’re on your side.”   I often say good things about their support for monetary stimulus.  I call them insanely talented bloggers.  But I also think fiscal stimulus is a dangerous distraction, so I’m going to monomaniacally push the need for monetary stimulus.  Nothing else will work.

PS.  Tyler Cowen did a post on Johnleemk’s comment.  Then in his very next post he quoted from a WaPo article that perfectly illustrates the problem.  The Pearlstein article had lots of thoughtful things to say, but because it ignored monetary policy it was essentially worthless.


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39 Responses to “Where did Obama get the crazy idea that fiscal stimulus was the only option?”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    5. June 2012 at 05:05

    “So what aren’t people like Krugman focusing on the need for Cameron to raise the inflation target?”

    I haven’t been following UK blogs closely of late, as we had this tiresome squabble about a referendum in Ireland; but my impression is that Simon Wren-Lewis and Jonathan Portes have been clamouring for more spending. Maybe Krugman thinks they have it about right?

  2. Gravatar of OGT OGT
    5. June 2012 at 05:20

    Any comments on the substance of Gagnon’s take on Fed policy. He appears to have a strong sense of what their actual thinking is. I was somewhat struck by his claim that Fed policymakers believe that policy is almost out of bullets due to legal restrictions on the assets they can buy, which seems to be leading them to be more cautious in order to conserve ‘bullets.’

  3. Gravatar of johnleemk johnleemk
    5. June 2012 at 05:21

    “But I also think fiscal stimulus is a dangerous distraction, so I’m going to monomaniacally push the need for monetary stimulus. Nothing else will work.”

    While I agree, I would rephrase. Fiscal stimulus needs monetary accommodation to work. This is the heart of the Sumner critique. Not just that, it’s far more politically easier to guarantee monetary accommodation than it is to guarantee fiscal stimulus. The left has nothing to lose from pushing monetary policy.

    What’s the worst case scenario if you monetise all of US debt? The US doesn’t owe any money anymore. That’s the worst case scenario. There’s absolutely no reason for the left to not be pushing monetary stimulus — yet the most powerful man in the world’s first pick for the Fed was a Nobelist who doesn’t even believe 4% inflation is attainable. It’s insane.

  4. Gravatar of marcus nunes marcus nunes
    5. June 2012 at 05:36

    It was interesting to read some comments after TC put up Johnleemk´s comment. They were mostly a defense of PK and argued that by “attacking” PK, MM´s wanted to place themselves as the underdog or some such silliness. But you don´t have to go back to 2008. Just the other day, PK wrote “1937” arguing that since growth in government expenditure is negative, we could be trying to relive that experience. He implies that FP was responsible for the second leg of the depression and never mentions higher RR´s or, more importantly, Gold sterilization.
    http://krugman.blogs.nytimes.com/2012/06/03/1937-2/

  5. Gravatar of Vivian Darkbloom Vivian Darkbloom
    5. June 2012 at 05:46

    I have a hard time understanding the simultaneous arguments that 1) monetary policy does not work at the lower zero bound; and 2) *because* long-term interest rates are so extraordinarily low, we would be foolish not to take advantage of that by providing more fiscal stimulus.

    The one hand does not seem to be giving the other hand any credit; however, that one hand seems very much willing to take advantage of what the other hand did not do.

  6. Gravatar of Cthorm Cthorm
    5. June 2012 at 06:00

    In other news…

    The RBA continues to set the standard for English-speaking countries on how to run a central bank

  7. Gravatar of Saturos Saturos
    5. June 2012 at 06:20

    Well, he is the world’s highest paid central banker…

    “What’s the worst case scenario if you monetise all of US debt?”

    Hyperinflation.

  8. Gravatar of Alex Godofsky Alex Godofsky
    5. June 2012 at 06:25

    Saturos: but the context here is people who think that monetary stimulus is ineffective because of the zero lower bound. You can’t believe that and believe that too much monetary stimulus will lead to hyperinflation. If you believe the latter then you should also believe that monetize some fraction <100% of the US debt, that should produce a recovery.

  9. Gravatar of Saturos Saturos
    5. June 2012 at 06:32

    Again, reading articles like the one Cthorm linked to annoys the hell out of me. The press is so Keynesian. They make it sound like Stevens’ task of stabilizing aggregate spending is somehow a “real” thing. BHP decides to invest less, so Stevens has to goose the economy to shore things up. No wonder the public doesn’t understand monetary policy – it’s fifty years of Keynesianism that did their brains in. And that’s what people like Krugman are now trying to resurrect…

    I’m not afraid of saying that I like the ISLM model, whilst also saying that Keynesian thinking (Krugman: “Greenspan has to set the interest rate to equate desired saving and investment”; i.e. the most confusing possible way of reading the ISLM model) is an utter mess.

    Just talking to my father the other day, I realized the biggest benefit of NGDP targeting. With aggregate demand permanently stabilized, we return to a classical world where “creating jobs” is an absurdity even for the public. There’s not enough work being done, no question of whether there are “enough jobs to go around”. Just think of the enlightening consequences for political economy in general. Yes, the Caplanian view of politics has taught me to be pessimistic, but as Milton Friedman showed, change can happen. People can be less economically stupid, given the right environment.

    Then again, it took 100 years for economists to figure out that all you had to do was get the monopoly issuer of money to ensure that there was always enough money around to keep total spending stable, and you could do away with “macro maladies”. Instead we got bogged down for decades with multipliers and cost push inflation and the paradox of thrift. Now tell me that technocracy is apolitical…

  10. Gravatar of Saturos Saturos
    5. June 2012 at 06:35

    Alex Godofsky, do you really think that we got to where we are today with zero cognitive dissonance amongst the public and policymakers?

    https://www.themoneyillusion.com/?p=69
    https://www.themoneyillusion.com/?p=188

    Aint nothing you can say that Scott hasn’t said already.

  11. Gravatar of Saturos Saturos
    5. June 2012 at 06:37

    PS it’s refreshing to revisit the old posts on this blog, back before there were zillions of comments beneath each one, back before Major Freedom.

  12. Gravatar of Morgan Warstler Morgan Warstler
    5. June 2012 at 06:37

    Scott, it is your fault too.

    1. You allow there to be confusion between Faisal Stimulus as Tax Cuts and Gvt. Spending.

    2. You dance around it, but don’t specifically ask and insist that DeKrugman wants Gvt. Spending REGARDLESS of the situation. Which BTW makes them non-Keynesian to boot.

    3. You don’t take the time to HIGHLIGHT the way 4.5% NGDPLT shrinks govt. even though you agree.

    And they GET IT. They get that Cameron = cut govt. and printing money to make sure the nominal growth keeps happening.

    They are AGAINST it.

    4. You don’t say OUT LOUD you’d take 4.5% NGDPLT with no make up starting today, even though YOU WILL.

    Even though you dont think it is optimal, and it gives DeKrugman no inflation today, it offers the promise of some next month – that won’t be good enough for them.

    Why?

    You can compliment them all you want, but the fact is they are IN THE WAY of your policy.

    And the more they understand it, the more they will get in the way.

    Imagine yourself like Obama, a man with an agenda – DeKrugman is the GOP.

    Stop being an idiot and fight.

  13. Gravatar of Alex Godofsky Alex Godofsky
    5. June 2012 at 06:56

    Saturos: sorry, it seems like we were on the same page all along.

  14. Gravatar of Alex Godofsky Alex Godofsky
    5. June 2012 at 06:57

    PS if something I say sounds like something Sumner already said that’s probably because I read the thing Sumner already said and was convinced by it.

  15. Gravatar of Morgan Warstler Morgan Warstler
    5. June 2012 at 07:00

    If you said the above, Kevin Drum would KNOW what the fight was about:

    http://www.motherjones.com/kevin-drum/2012/06/left-and-right-are-not-equally-crazy-part-794

  16. Gravatar of Scott N Scott N
    5. June 2012 at 07:36

    I think DeLong and Krugman push fiscal stimulus because it matches their left-wing political ideology. They recognize that monetary stimulus will work too, but it doesn’t offer the same social engineering benefits (i.e., redistribution, welfare state, etc.) of fiscal stimulus.

    I think another reason they are clinging so desperately to NK is that they have spend their lives pushing it. If they switch to MM, they have to acknowledge the flaws of NK. This kind of change is probably too radical for proud academics like DeLong and Krugman. What makes it worse is that MM is the intellectual godchild of Milton Friedman, who isn’t exactly revered by the left.

  17. Gravatar of Morgan Warstler Morgan Warstler
    5. June 2012 at 07:39

    Scott N

    Ding, Ding, Ding!

    And EVERYONE knows it.

    The question is, since Scott KNOWS it, why doesn’t he be clear about it?

  18. Gravatar of dwb dwb
    5. June 2012 at 07:42

    Politicians always want to hear “my department can fix this” never “those guys over there are responsible.” That’s the institutional bias, and i expect to hear the same from any administration or Congressman. The idea that Congress can keep their hands out of the bank account, as some people are suggesting, is completely naive (the House just voted 299-120 for a 642 Bn defense bill that adds missile defense to the East Coast – and a lot of other items that the military opposes , Tea party Republicans have taken more than $1 Bn in earmarks).

  19. Gravatar of dwb dwb
    5. June 2012 at 07:43

    oh, and Romney supports methanol subsidies…. just more of “my projects are ok, yours are not.”

  20. Gravatar of Jeff Jeff
    5. June 2012 at 08:01

    It sure looks to me like liberals prefer fiscal stimulus to expansionary monetary policy because they favor more and bigger government programs.

    However, there is another aspect to this. In the old “rules vs. discretion” monetary policy debates back in the 1960’s and 70’s, Friedman and the conservatives favored rules while liberals mostly favored discretion. It now seems pretty clear that to be effective, monetary policy has to influence people’s expectations, and that is most easily accomplished by being explicit about what you’re trying to do.

    In line with this, market monetarists favor targeting the path of expected nominal GDP, which is much more like a rule than discretion. And to the extent it works, it destroys the rationale for fiscal stimulus programs. It’s not hard to see why the liberals don’t like this.

    What’s more puzzling is how the conservatives have apparently forgotten all about the debates of thirty years ago. It seems that much of what is called conservatism these days is just partisan hackery. Republicans don’t want to highlight the idea that the Fed, not the President, is largely responsible for the current deficient aggregate demand. So they also ignore the market monetarists. Watch how fast they change their minds about this if Romney wins the election.

  21. Gravatar of GMC GMC
    5. June 2012 at 08:09

    ” I must say that I don’t know whether you live in a totally different universe from the rest of us, or are simply insane. The center-left extends from people like Jan Hatzius who think that massive quantitative easing-taking the Federal Reserve balance sheet to $5 trillion, or higher if necessary-would almost surely work and we don’t need fiscal policy to people like Paul Krugman who think that massive quantitative easing is unlikely to work, but is nevertheless worth trying.

    I know of nobody on the center-left who is opposed to it…”

    Brad, typically, misses the point while crafting his ad hominems. The point is that the people on the center left have used liquidity trap models as ideological cover for their goals of raising government spending. Paul Krugman’s brief and ill-starred conversion to liquidity trap believer, merely as a for-instance, was simply a ploy to cloak “stimulus” spending, extended unemployment benefits, and other rises in government expenditures in the jargon of economic academia. Brad, Paul, and other economists who more-than-dabble in political activism used the liquidity trap models specifically to blind politicians to the truth about monetary policy, in order to obtain more government spending.

    Now, I don’t know what Paul, merely as a for-instance, really believed in 2008. But what he said was “Monetary Policy is impotent.”, which conveniently served the case for higher spending.

    I don’t know what Brad really believes either. But he is also willing to trade good policy and good economics for political expedience.

    For instance, DeLong last summer: http://www.bloomberg.com/news/2011-07-05/the-sorrow-and-the-pity-of-another-liquidity-trap-brad-delong.html

    The liquidity trap is a convenient excuse for people who want to use fiscal policy to entrench additional government spending.

  22. Gravatar of GMC GMC
    5. June 2012 at 08:18

    Morgan criticized Scott as follows:

    “1. You allow there to be confusion between Faisal Stimulus as Tax Cuts and Gvt. Spending.

    2. You dance around it, but don’t specifically ask and insist that DeKrugman wants Gvt. Spending REGARDLESS of the situation. Which BTW makes them non-Keynesian to boot.

    3. You don’t take the time to HIGHLIGHT the way 4.5% NGDPLT shrinks govt. even though you agree.

    And they GET IT. They get that Cameron = cut govt. and printing money to make sure the nominal growth keeps happening.

    They are AGAINST it.

    4. You don’t say OUT LOUD you’d take 4.5% NGDPLT with no make up starting today, even though YOU WILL.

    Even though you dont think it is optimal, and it gives DeKrugman no inflation today, it offers the promise of some next month – that won’t be good enough for them.

    Why?”

    Let me respond, not that Scott can’t do so adequately.

    1. For AD purposes, the difference is a matter of degree, defined by the fiscal multiplier. Assuming the multiplier is somewhere in the vague region of 1 (probably reasonable assuming that additional borrowing does not significantly affect interest rates), Scott does not have to care. He may care! But it is not necessary to his argument, and would just confuse matters and encourage people to see NGDPLT as an ideological point, rather than a policy tool.

    2. Have you seen what Brad DeLong writes about people who directly criticize Krugman? I’ve known rappers who are less vicious and more thoughtful in their put downs.

    3. Cameron hasn’t printed money.

    4. Why argue for a bad policy that is merely better than current policy, and thereby abandon any pretense of theoretical consistency, when there is a consistent argument that leads to a better policy which is easier to defend? Rhetoric and logic need not be separated when – you know – you are actually right about something.

  23. Gravatar of GMC GMC
    5. June 2012 at 08:24

    At Saturos:

    “Well, he is the world’s highest paid central banker…

    “What’s the worst case scenario if you monetise all of US debt?”

    Hyperinflation.”

    MV=PY. The national debt being about equivalent to “PY” at present, unless you have a mechanism for creating a positive velocity shock endogenous to your monetary policy model, the result should not be hyperinflation in this case. It would be a rapid rise in prices, probably on the order of several to a dozen % per year, depending on the rapidity with which the debt was monetized. The end result would be the rough doubling of M and P relative to the background case.

  24. Gravatar of GMC GMC
    5. June 2012 at 08:26

    At Saturos, again:

    I’m not implying that there is NOT a means of incorporating a positive velocity shock in a theoretically consistent manner (expectations!). But it would need to be a doozy to get hyperinflation.

  25. Gravatar of johnleemk johnleemk
    5. June 2012 at 08:30

    Saturos, re hyperinflation…I’m talking to the camp of people who for whatever reason believe monetary policy is incapable of goosing AD. Not the camp of people who believe everything is now supply-side and any AD movements will not touch output because we are operating at the LRAS curve.

    The worst case scenario for the liquidity trap people calling for fiscal stimulus is the government has even more carte blanche to spend money. The deafening silence of the left’s policy establishment on monetary stimulus is inexplicable.

  26. Gravatar of Negation of Ideology Negation of Ideology
    5. June 2012 at 08:33

    I think the Larry Summers piece had some interesting points, but doesn’t address the most important issue, which is how to return NGDP to trend. His point about borrowing at low long term rates to buy properties instead of leasing them (and other similar ideas) as a cost saving measure is valid.

    But he’s still referring to monetary policy as a tool to drive down interest rates, rather than a way to match the supply of money to the demand for it. Once we have stabilized the nominal price of demand through NGDPLT, those other decisions will still need to be made on a case by case basis with a cost benefit analysis.

  27. Gravatar of ssumner ssumner
    5. June 2012 at 08:41

    Kevin, But they have it wrong. No Keynesian has told me why fiscal stimulus is better than monetary stimulus. Nobody.

    OGT, There are many types of bullets, he’s saying they are almost out of certain types of bullets. But even that’s not true, there’s vast quantities of T-debt out there.

    And why does he say they can only cut long rates to 1%? Buy all the 10 year bonds–then the yields falls to zero percent. What would that make mortgage rates?

    Bernanke knows what to do, it’s just too controversial for him. Read his stuff on Japan.

    He does have lots of intelligent things to say, however–it’s a very good interview.

    Johnleemk, Good point.

    Marcus, I agree.

    Vivian, Good point.

    Cthorm, Great, I’ll do a post.

    Saturos, You said;

    “Aint nothing you can say that Scott hasn’t said already.”

    I have a post coming up later today (time permitting) that proves that point.

    Morgan, You keep repeating yourself.

    dwb, Yup, lots of hypocrisy in DC.

    Scott N and Jeff, That may be part of it, but it could just be subconscious.

    GMC, I agree that DeLong missed the point of Johnleemk.

  28. Gravatar of ssumner ssumner
    5. June 2012 at 08:42

    Negation, I wrote a post on Summers, I’ll put it up by tomorrow.

  29. Gravatar of OGT OGT
    5. June 2012 at 09:14

    I think you’re probably right about the controversy, especially on either explicitly allowing temporarily higher inflation or buying foreign currency.

    But the other thing that struck me was that they are so cautious in using tools they haven’t ruled out, like treasuries or MBS rates. If they had been less cautious they would have had a better chance of reaching escape velocity where the ‘natural’ nominal rate goes above the ZLB, and perhaps, less of a possibility to resort to other steps.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. June 2012 at 09:19

    “Where did Obama get the crazy idea that fiscal stimulus was the only option?”

    One can turn that on its head and ask where did Franklin Delano Roosevelt get the crazy notion that monetary stimulus was an option? Certainly based on Krugman’s interest rate reasoning a much stronger case could have been made in 1933 that fiscal stimulus was the “only game in town.”

    Well, the short answer is that he got it from agricultural economist George Warren who sold Irving Fisher’s “compensated dollar plan” to FDR in early 1933. FDR was so taken with Warren’s ideas that he pursued his dollar devaluation plan over the strong opposition of many of those within his own administration, such as William Woodin, Dean Acheson (yes, that Dean Acheson), Oliver Sprague, James Warburg and Henry Morgenthau, all of whom, with the exception of Morgenthau resigned in protest.

    It’s hard for me to imagine Obama fighting for monetary stimulus in opposition to all those puffed up egos much less going to the trouble of seeking out and listening to the seemingly hairbrained schemes of of a lowly rumpled bespectacled agricultural economist.

    Ultimately, the buck stops with Obama.

  31. Gravatar of anon/portly anon/portly
    5. June 2012 at 09:34

    This is another amazingly insightful post, but I wonder if it doesn’t kind of underestimate the sociological dilemma of the smart Keynesians. Yes, it’s hard not to be suspicious that they like fiscal policy simply because of the win-win of stimulus and more G, but then think of all of the hand-wringing about not having foreseen the Great Recession. I mean all the “we didn’t see this coming/failure of Macro” stuff. It all focused on not having foreseen the financial crisis, not having read enough Kindleberger and Minsky.

    Then market monetarism comes along and it turns out they all missed not only the significance of the NGDP drop, but its plain fact. So now not only their analysis but their meta-analysis are in tatters.

    It’s not easy to have to admit something like that – if nothing else, what if not only your analysis and your meta-analyis but also your meta-meta-analysis turn out to be wrong? 3 strikes and you’re out?

    On top of that, there are still dissenters in their own camp:

    http://rjwaldmann.blogspot.com/2012/06/my-usual-monetary-rant.html

    Obviously they don’t take the dissenters seriously but still it has to be a little unnerving – maybe all you really need is a copy of GTEIM, after all.

    You can see why the saltwater vs. freshwater thing is so soothing. “Hey, these guys know less than we do!” Still, you’d think there would be a lot more thoughtful consideration of what the Fed can and should do than there is. As far as I can tell, there’s this idea that if the Fed really tries to inflate, it will be the genie let out of the bottle or the toothpaste out of the tube and we won’t be able to get it back in again. I get the feeling that there’s a little bit of risk aversity among Macroeconomists – they don’t want to commit themselves to a policy that might fail or have yet-unknown negative consequences.

    Instead as SS says we get the “`mixed signals` [that] lead most people to believe that the left is fixated on fiscal stimulus and has all but given up on monetary stimulus.”

    It seems to me those “mixed signals” extend to every nook and cranny of the debate. Not only mixed signals about whether we should use MP (“why not give it a try” seems to be the dominant paradigm) but mixed signals about whether FP needs monetary accommodation and mixed signals about the feasibility and negative consequences of MP.

    Maybe people should stop using “he made an Econ 1” mistake as an insult. Maybe, given the inherent difficulty of understanding it, there is really no such thing as an Econ 1 mistake. They talk about “the fog of war,” maybe it should be the fog of Macro.

  32. Gravatar of Morgan Warstler Morgan Warstler
    5. June 2012 at 09:40

    Jeff, that isn’t exactly right.

    I have NO PROBLEM selling conservatives on NGDPLT, but doing it takes a very specific set of arguments:

    1. Pick a year back before 2005, run 4.5% NGDPLT and you get a stronger dollar, less inflation then we have had since then.

    2. Capping RGDP at 4.5% means that sure we limit RGDP to 4.5%, but that’s historically acceptable if it buys us something – and this buys us a TON.

    3. Demand driven inflation now eats into our allotted 4.5% RGDP which gives us the strong upper hand on defeating the current EPA.

    Under NGDPLT, we’ll begin to do all EPA work with a clear INFLATION IMPACT STATEMENT from CBO.

    4. Whenever we are running at 4.5% NGDPLT new govt. spending expenditures will come with a clear INFLATION IMPACT STAEMENT.

    So under NGDPLT, we can immediately classify all new govt. spending and new regulations as INFLATION.

    Tax cuts are NEVER inflationary.

    5. And since we hate inflation, and there is NO DANGER of deflation, under NGDPLT we gain the upper hand in arguing for productivity gains in the public sector and deregulation.

    Now for the first time, when things are going REALLY WELL there is strong resistance to increasing public employee salaries (without productivity gains) or new regulations.

    Once conservatives UNDERSTAND these arguments they are 100% fine with the possible downside of some extra inflation above 2% if RGDP falls.

  33. Gravatar of Morgan Warstler Morgan Warstler
    5. June 2012 at 09:51

    GMC,

    Scott believes under NGDPLT the fiscal multiplier is zero, not one.

    The point is DeKrugman is NON-ENTITY, they can literally be FORGOTTEN.

    They carry no weight, nor water.

    MEANWHILE, if there is a seismic changing of the guard in 6 months, Scott should have the groundwork well laid for adoption of NGDPLT.

    It is PRECISELY because DeKrugman are first activists, that they will NEVER agree to NGDPLT.

    It literally = their demise.

    So again, there comes a time where politics matters, and if you love your baby, you of course will get bloody to get her delivered.

  34. Gravatar of StatsGuy StatsGuy
    5. June 2012 at 12:33

    Joe Gagnon is my (other) hero. (Other than you, of course.)

    “Did he [Obama] know that when he appointed 6 of the 7 current members of the Board of Governors?”

    As Gagnon notes, the club for growth certainly knew it when they stonewalled Peter Diamond.

    We will all know on June 20th… With headline inflation and core inflation expectations dropping, employment sinking, etc… We will know whether the Fed is willing to do the right thing, or delay given the prospect of the coming election.

  35. Gravatar of “Puffed up egos” | Historinhas “Puffed up egos” | Historinhas
    5. June 2012 at 12:50

    […] Anon/Portly writes in the comments of this Scott Sumner post: This is another amazingly insightful post, but I wonder if it doesn’t kind of underestimate […]

  36. Gravatar of GMC GMC
    5. June 2012 at 16:32

    “Scott believes under NGDPLT the fiscal multiplier is zero, not one.”

    We aren’t discussing a world where NGDPLT is accomplished, or even attempted. We are discussing a world where the Fed and its indirect political and banking masters either believe or profess to believe that they are out of ammunition and cannot affect policy.

    If monetary authorities react late, or not at all, to fiscal stimulus, the multiplier will be likely positive (though possibly <1).

  37. Gravatar of GMC GMC
    5. June 2012 at 21:06

    Marcus:

    Since his transformation from Economist to pundit, beginning when he started writing for the NYT and ending with the Nobel, Krugman is less interested in telling coherent stories than convincing stories.

    1937 was right about the time of the “Switch in Time”… Anyone? Bueller?

  38. Gravatar of ssumner ssumner
    6. June 2012 at 06:47

    OGT, Good point.

    Mark, I agree.

    anon/portly. Yes, and not only did they decide they prefered fiscal to monetary, but they decided they prefered more G to less T. Coincidence?

    Statsguy, Yes, although I doubt Diamond would have voted differently from his actual appointees.

    GMC, Yes, that’s when the “switch” occurred.

  39. Gravatar of Major_Freedom Major_Freedom
    7. June 2012 at 10:38

    If the way monetary policy ACTUALLY works today is that the Fed relies on the banks to expand credit, which then increases NGDP, then what if the banks refuse to lend?

    To whom should the Fed send its checks? How will they “release” that money into the spending stream, and won’t that mislead investors and consumers in their ability to economically calculate actual marginal utilities and time preferences that are not monetary in nature, but that need money calculation to coordinate?

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