Why are market monetarists such extremists on fiscal policy?

Here’s Simon Wren-Lewis:

I’m interested in this asymmetry, and where it comes from. Why do MM hate fiscal expansion at the ZLB so much? It could be ideological (see Noah Smith here), but I suspect something else matters. I think it has something to do with monetarism, by which I mean a belief that money is at the heart of issues to do with stabilisation and inflation. MM is not about controlling the money supply as monetarism originally was, but I think many other aspects of monetarism survive. My own view is more Wicksellian (or perhaps Woodfordian), whence the failure to be able to lower interest rates below zero naturally appears central. To those not trained as macroeconomists (and perhaps some that are) these sentences will appear mysterious, so if this idea survives comments I may come back to it later.

A few quick reactions:

1.  I seem to recall that some market monetarists think fiscal stimulus is worth a shot.

2.  I’ve argued that some types of fiscal stimulus can survive monetary offset.  For instance, if the central bank is targeting inflation then an employer-side payroll tax cut can work, by boosting aggregate supply.  Christina Romer has made the same argument, although I’m not sure uses the aggregate supply shift framework.  A cut in VAT rates can also help, if the central bank is targeting prices inclusive of indirect taxes.

I don’t think my views on these issues can in any way be described as ideological.  I actually think VATs and payroll taxes are our most efficient taxes, and instead tend to oppose high personal income tax rates.  And recall that fiscal stimulus can involve either lower taxes or higher spending, so it doesn’t fit neatly into a left/right debate over the size of government.

I think Wren-Lewis has a better argument when he points to the fact that MMs often oppose fiscal stimulus at zero rates.  I could write a whole dissertation on this issue (and arguably have in this blog) but here are a few points that come to mind:

1.  Monetary offset is highly counterintuitive.  It’s like the face/vase picture, where something can be easily seen from one perspective, and yet look invisible from another.  Here are a few examples:

a.  In this post I discuss a few comments by Tim Duy, a respected centrist Keynesian, which perfectly describe monetary offset.  Yet I am almost certain that Tim Duy doesn’t agree with my views on monetary offset (i.e. I doubt he agrees that fiscal multipliers are still zero at the zero bound.)  He sees what I see, but (presumably) interprets what he sees very differently.

b.  Paul Krugman said 2013 was going to be a “test” of the MM claim of monetary offset.  When we passed that test with flying colors (as growth accelerated), he ridiculed the idea that there had ever been a test.  Perhaps that’s because he’s so sure the idea is wrong that he assumed any test that seemed to show otherwise must be wrong.  Indeed in the case of the UK he complained about austerity, and then when GDP started accelerating unexpectedly, said something to the effect that on second thought there hadn’t been much austerity in 2012.  Then why not tell us that in 2012?  And suppose MM had failed the 2013 Krugman test?  Does anyone think he would have said “in fairness to the MMs, it wasn’t a fair test, because other things might have changed?”

c.  Many Keynesians accept that monetary offset applies at positive interest rates, but insist it doesn’t apply at zero rates.  But these same Keynesians often insist that fiscal austerity in the eurozone caused the recession of 2011-13, even though their own model says that interpretation makes no sense when rates are not at zero, and rates were not at zero when the eurozone went into the double dip recession.  The only response I’ve ever heard is that the liquidity trap model also applies to very low but positive interest rates.  Even if that were true, it would not be relevant for a case where the monetary authority is actually “pulling on the string” by raising its target rates, as in 2011.  That showed clear intent to restrain AD growth.  And yet I’ve never once heard a Keynesian refute this point.  So how can we take seriously the austerity claims that were being made in 2011?  If there is a model where austerity reduces NGDP growth during a period where the central bank is raising rates to restrain inflation, I’d love to see the model.  But as far as I know no Keynesian has even produced a defense of this claim.  Just silence.

2.  I also have an ulterior motive.  I think stabilization policy would be much more effective if everyone agreed with Ben Bernanke that the Fed never runs out of ammunition, that they can always do “more.”  Obviously this perception was not widely held, and hence the public put very little pressure on the Fed to boost AD in 2008-09.  I would go even further, I believe Bernanke would have welcomed more pressure on the Fed to stimulate the economy in 2008-09.  Insiders insist that the Fed was frustrated because 90% of what they heard was criticism from “inflation nutters.”  Krugman defenders will (correctly) point to the fact that Krugman asked the Fed to do more.  But I’ve spoken with highly intelligent economists around 2008-09, who read Krugman’s column frequently and very much like Krugman, who were shocked when I told them Krugman thought the Fed could do more.  They said the impression they got was that Krugman thought we were in a liquidity trap, and could do no more. That we needed fiscal stimulus.  His actual (nuanced) message got lost. Maybe the “pro-stimulus” side of the inflation debate needed more single-minded fanatics like me that sent a clear message–the Fed and BoE are steering the nominal economy, and if you don’t think there is enough AD then blame them for not doing more.  Instead the central banks were mostly blamed for doing too much.

This anonymous comment at the end of the Wren-Lewis post is a perfect example of how many Keynesians fail to grasp the implication of the ECB’s 2011 policy.  He/she confuses a situation where rates are low and even lower rates wouldn’t help (a good argument), and the very different case where rates are actually being raised (a bad argument).  If they are being raised then there is a presumption of 100% monetary offset.  I’m not sure why this idea is so hard to grasp.

W. Peden and Nick Rowe have some good comments after the Wren-Lewis post.

Mark Sadowski also replies to Wren-Lewis.


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75 Responses to “Why are market monetarists such extremists on fiscal policy?”

  1. Gravatar of TallDave TallDave
    11. June 2014 at 09:34

    Today I’m wondering 1) how many economists we can elect to Congress and 2) whether you’ve explained market monetarism to David Brat.

    http://en.wikipedia.org/wiki/Dave_Brat

  2. Gravatar of Ralph Musgrave Ralph Musgrave
    11. June 2014 at 10:08

    Scott, Your above arguments rely heavily on monetary offset, which I regard as one of the most ridiculous arguments ever put by any economist.

    Unless I’ve got it wrong, the offset argument is that the central bank will nullify any fiscal stimulus it regards as excessive, ergo fiscal stimulus is a waste of time.

    Well the simple answer to that is that the central bank WILL NOT nullify fiscal stimulus which it DOES NOT regard as excessive (a point which proves exactly and precisely nothing, just as the monetary offset argument proves nothing).

    Moreover, the fact that one institution has the power to override the actions of another does not of itself prove that the judgement of the former is better than that of the latter, or that the actual mechanism used by the former to effect stimulus is better than the mechanism used by the latter.

  3. Gravatar of Michael Byrnes Michael Byrnes
    11. June 2014 at 10:24

    Ralph,

    Scott’s argument is:

    1. Fiscal stimulus will tend to raise inflation and real output.
    2. An inflation-targeting central bank will tend to pursue tighter policy as inflation rises and looser policy as it falls.
    3. Thus, after fiscal stimulus a central bank will likely pursue tighter policy than it otherwise would have done. And after fiscal contraction, a central bank will likely pursue looser policy than it otherwise would have done.

    In Scott’s view, the Fed’s opinion about the excessiveness (or appropriateness) of the fiscal stimulus is irrelevant. Maybe you are confusing him with Morgan Warstler.

    Another way to look at it: imagine that the GOP had enough Senators to filibuster ARRA in 2009. Knowing nothing else, would that have been good or bad for the economy at the time? Obviously bad. But given that “bad”, would the Fed have done exactly what it did do in 2009 (with ARRA)… or would it have done more?

  4. Gravatar of Brian Donohue Brian Donohue
    11. June 2014 at 10:24

    Reasons? I got $17.5 trillion of ’em.

    http://www.usdebtclock.org/

  5. Gravatar of benjamin cole benjamin cole
    11. June 2014 at 11:08

    Excellent blogging.
    I agree that MM’ers are usually non-ideological, or political. I like MM as it appears to explain the macroeconomy and seems to work (see Japan).

    This places MM’ers at odds with Krugman or Meltzer.

    Sadly, most macroeconomics today is just politics in drag. Including that practised at the Fed.

  6. Gravatar of Market Fiscalist Market Fiscalist
    11. June 2014 at 12:12

    (first attempt to post this seemed to get lost – apologies if it duplicates)

    “Many Keynesians accept that monetary offset applies at positive interest rates, but insist it doesn’t apply at zero rates. But these same Keynesians often insist that fiscal austerity in the eurozone caused the recession of 2011-13, even though their own model says that interpretation makes no sense when rates are not at zero,”

    Can you clarify this please?

    Why can’t fiscal austerity (reducing the size of the deficit) cause a recession when rates are above zero (if the CB fails to lower rates in response) ?

  7. Gravatar of Nick Nick
    11. June 2014 at 12:43

    I think the ‘asymmetry’ he perceives comes from an ingrained sense that the political process ought to be asked first to solve crises, even economic ones. Maybe it’s hard for him to imagine a ngdplt targeting central bank tolerating a prolonged period of ~4% inflation and very low real growth waiting for supply side reforms to pass congress … or maybe he thinks that such a situation would be unstable and lead to ‘runaway’ inflation.

  8. Gravatar of LK Beland LK Beland
    11. June 2014 at 13:10

    Why is employer-side payroll tax cuts better than employee-side? Doesn’t simple econ 101 imply that they are equivalent? What am I missing?

  9. Gravatar of TravisV TravisV
    11. June 2014 at 13:14

    Noah Smith:

    “Japan’s Abe Is the World’s Best Leader”

    http://www.bloombergview.com/articles/2014-06-11/japan-s-abe-is-the-world-s-best-leader

  10. Gravatar of TravisV TravisV
    11. June 2014 at 13:15

    “Goldman’s top economist, Jan Hatzius, just said the words we’ve been wanting to hear for five years.

    He believes the economy is now growing at an above-trend pace.

    Goldman’s own proprietary current activity indicator (CAI) is showing its fastest growth since the crisis, and though he acknowledges that some of the strong May activity is the result of a snapback from a tough winter, he says that even without that snapback we’re still growing at a strong rate.”

    http://www.businessinsider.com/hatzius-says-economy-is-growing-at-above-trend-rate-2014-6

  11. Gravatar of Doug M Doug M
    11. June 2014 at 13:22

    I have heard a lot of theories over the years as to why the fiscal multiplier is closer to zero rather than the Keynesian claim that it is greater than 1.

    Public spending crowds out private investment.
    Government borrowing today needs to be repaid tomorrow and that triggers lower consumption today.
    Rising deficits undermine confidence.
    Changes in government spending are offset by foreign flows.
    and now, the monetary offset.

    I am not sure I really care if any or all are correct. Empirically, it seems to be true. I will grant that the monetary offset is more elegant than some of the others, but I don’t really care if it is correct or not.

    Stimulus / Austerity seems to be BS. So, lets move on to other prescriptions.

  12. Gravatar of Morgan Warstler Morgan Warstler
    11. June 2014 at 13:39

    Travis I came to post same thing…

    Noah didn’t mention Abe’s fiscal. MP, women, Deregulation and Noah cheers. No obligatory DeKrugman stuff.

    Act now Scott, we might have defector. Offer him the NYT MM ambassadorship.

  13. Gravatar of Major-Freedom Major-Freedom
    11. June 2014 at 14:58

    “I don’t think my views on these issues can in any way be described as ideological.”

    I can’t stop laughing

  14. Gravatar of Major-Freedom Major-Freedom
    11. June 2014 at 15:24

    The bright side in all of this is that the deflation nutters were at least to some tiny degree frustrated, so that instead of a totally batsh%t insane Fed running wild according to the deflation hysterics’ ideal, we only had to withstand a crazy destructive Fed.

    When you are a deflation nutter, any pushback would feel like the while world is crushingly against you, where it appears as though the small opposition feels like an invading army. Sort of like the emotion driven response to terrorism, only it negatively affects far more people.

    MM ideologues hold that the market ought not control NGDP, nor money production for that matter. We are told that MMs know what NGDP ought to be, and to reject any and all market driven deflations (due to past Fed inflation which distorted the capital structure and thus caused the need for a market driven correction in all things including spending).

    The MM ideologues are so acutely ideological, that they can’t even recognize that their own devotion to their particular set of ideas makes them ideologues by definition.

    MM passed the test with flying colors? Ya, sure it did, and drunken binges pass the test of “having a good time”, if you limit your horizon to just before the chickens come home to roost.

    Not all growth is healthy growth.

    Not all employment is healthy employment.

    Most importantly, NGDP is path dependent, meaning if NGDP rises by non-market means, for example central banking system generated credit expansion, then the resulting NGDP is associated with distorted relative spending which only market determined spending can correct. Some vitally needed corrections were thankfully capable of taking place post 2008, however the deflation nutters as typical got their way, and so the result is an even worse capital structure than before, which has made the needed corrections now an even more painful proposition.

    Thank you MM for your destructive victim complex driven insanity in which economics escapes you to such a degree that you cannot even recognize the destructive consequences of your own ideology.

  15. Gravatar of ssumner ssumner
    11. June 2014 at 16:00

    TallDave, Have they checked his economist license? I read that he thinks immigrants cost us jobs.

    Ralph, You said:

    “Your above arguments rely heavily on monetary offset, which I regard as one of the most ridiculous arguments ever put by any economist.”

    Wow! You must think Paul Krugman is a real idiot.

    Market Fiscalist. If rates are above zero and rising then AD is where the central bank wants it to be (or too high). So if you have a recession while rates are rising it’s the central bank’s fault.

    Nick, I’m totally opposed to having the central bank solve crises–so I agree on that point. I simply ask the central bank not to create crises. Is that asking too much?

    LK, You asked:

    “What am I missing?”

    Sticky wages. In the long run they are the same, once wages have adjusted.

    Travis, Noah used to hate Abe. Interesting.

    And given that Hatzius is one of the best, that nowcast makes me a bit more optimistic.

    Morgan, As if I had the power.

  16. Gravatar of Matt McOsker Matt McOsker
    11. June 2014 at 16:04

    Government spending is part of the GDP formula. Cut it enough NGDP drops, increase it enough NGDP increases. Basic math. I believe in monetary offset, but feel people have it backwards. Interset income on the debt is a net add to the economy. Higher rates at the zero bound could be stimulate if accompanied by high deficits. If deficits triggered real inflation, which is non existent right now, then the fed can really jack up rates to offset. There is nothing to offset right now. Fed, state and local spending is declining as a % of GDP.

  17. Gravatar of TallDave TallDave
    11. June 2014 at 16:16

    I think stabilization policy would be much more effective if everyone agreed with Ben Bernanke that the Fed never runs out of ammunition, that they can always do “more.” Obviously this perception was not widely held, and hence the public put very little pressure on the Fed to boost AD in 2008-09.

    Actually I would argue the public is actively hostile to the idea, because they are still more afraid of inflation (which they understand) than they are lack of growth (which they don’t). Most of the public (esp Republicans) believe the Fed has already done too much. Even otherwise perspicacious people like Megan McArdle still refer to our “ultra-loose” monetary policy.

  18. Gravatar of TallDave TallDave
    11. June 2014 at 16:17

    Scott — he seems to be Austrian and libertarian. Maybe you can send him a letter.

  19. Gravatar of Major-Freedom Major-Freedom
    11. June 2014 at 16:21

    Sumner:

    “Nick, I’m totally opposed to having the central bank solve crises-so I agree on that point. I simply ask the central bank not to create crises. Is that asking too much?”

    The only way a central bank can avoid creating crises is to cease existing. The economy has been in a continuous crisis since the early 1970s. The Roman Empire collapsed over a period of more than a century.

    If the crisis does not happen sooner, then it will happen later.

    Fiat systems are cancerous. A person may be able to live for many years with it, but their bodies are breaking down and at some point either the cancer or the body will prevail.

    If central banking prevails, then economic socialism is an inevitability.

  20. Gravatar of Major-Freedom Major-Freedom
    11. June 2014 at 16:25

    Sumner:

    “I simply ask the central bank not to create crises.”

    Also, you have advocated for more than this. You have also written polemics AGAINST free markets in money, as well as gold standards.

  21. Gravatar of Jason Jason
    11. June 2014 at 17:44

    Scott,
    off topic
    I was trolling the left wing alternet online paper and I came across this
    http://www.alternet.org/economy/ultimate-guide-shutting-down-conservative-anti-piketty-hysteria?page=0%2C1&paging=off&current_page=1#bookmark
    I think you would find this interesting

    “Claim: Inequality isn’t a problem because look at consumption!
    There are lots of ways to look at inequality. You could look at income inequality by examining how much a person takes home every year from their labor, income from assets and transfers. You could also look at wealth inequality by figuring out how many assets they own, in the form of stocks, bonds, property, and subtract from it their debts. Or you could look at how much they are able to consume.

    Some conservative economists argue that an increase in income inequality has not been mirrored by an increase in consumption inequality because the wealthy save or invest their income. Kevin Hassett, a former Romney economic adviser, illustrates this point, arguing:

    From 2000 to 2010, consumption has climbed 14% for individuals in the bottom fifth of households, 6% for individuals in the middle fifth, and 14.3% for individuals in the top fifth when we account for changes in U.S. population and the size of households. This despite the dire economy at the end of the decade.

    Although he initially made this argument against Piketty in 2012, he has revived it recently in a lecture on the subject.

    How to respond:In large part, this is a common trope on the right “” the “but they have cellphones!” argument. The empirical literature on this subject is still very much in flux, and there is not a consensus. Some recent studies find that consumption inequality has increased with income inequality. But even if we except the consumption inequality argument, conservatives have some explaining to do. After all, if income inequality has been rising while consumption inequality has stayed the same, where is the spending coming from? Debt. Which means that wealth inequality is increasing, as the rich save more and the poor fall further into debt. Research released this week by Amy Traub of Demos finds that the recent increase in credit card debt hasn’t been driven by profligate spending, but unemployment, children, the declining value of homes and lack of health insurance. Recent research by Emmanuel Saez and Gabriel Zucman show how the bottom 90 percent simply haven’t been able to save their incomes and thereby build wealth. (See chart below.)”

  22. Gravatar of Jason Jason
    11. June 2014 at 17:46

    Seriously, how do you respond to the progressive response of “yeah that’s only because the poor and the middle classes are getting deeper and deeper into debt!”

  23. Gravatar of Major-Freedom Major-Freedom
    11. June 2014 at 17:54

    Jason:

    Anyone who claims that a group of people are “unable to save” must be making an assumption of a consumption floor. I haven’t read the paper you cited, but I am going to pencil in the assumption that the floor is higher than real world examples of those who have saved despite living frugally. I mean, the very first humans who started with nothing MUST have saved something, because the only way the human race can be where it is now, is if distant ancestors saved.

  24. Gravatar of TallDave TallDave
    11. June 2014 at 19:44

    This is a nice little essay on TGI and how we got here.

    http://www.federalreservehistory.org/Period/Essay/13

  25. Gravatar of TallDave TallDave
    11. June 2014 at 19:44

    Whip Inflation Now! Haha, I wonder how many people remember that one?

  26. Gravatar of Jim Glass Jim Glass
    11. June 2014 at 21:04

    After all, if income inequality has been rising while consumption inequality has stayed the same…

    For context, the Consumer Expenditure Survey puts top-quartile to bottom-quartile income ratio at 16 to 1 and the consumption ratio about 5 to 1.

    … where is the spending coming from? Debt.

    Yes, in part, but not the way you say, rather via the young with high-income futures (naif lawyers, doctors, CPAs, economist-bloggers, and those nearing that situation) now being much more able to borrow against their future earnings than they were in the past.

    Also from greater later-in-life consumption of savings and the value of appreciated assets, which in recent years have reached much higher totals than in prior generations.

    Plus of course Social Security and Medicare, which have a market value of about $500k for the typical married couple.

    Which means that wealth inequality is increasing, as the rich save more and the poor fall further into debt.

    Um, no. It means greater smoothing of lifetime income.

    Take snapshots of static, volatile single-point-in-time income distributions in a world where income correlates very highly with age while total income increases over time, and one will get a bias towards ever wider distributions as a statistical artifact, whatever is happening in reality.

    OTOH given the same facts and looking at cohort lifetime income it is a logical possibility that one might see no increase in inequality at all.

    Consumption reflects lifetime income much more than volatile income-of-the-moment, in which 12% of people will be in the top 1% at some point, 39% will be in the top 5%, etc.

    And that produces a smaller and more realistic measure of inequality. About this, e.g.:

    income volatility has been an important cause of the increase in income inequality, but at the same time has lead to an endogenous development of credit markets, allowing households to better smooth their consumption.

    … is pretty standard analysis. No “the poor falling further in debt” needed.

  27. Gravatar of Steve Waldman Steve Waldman
    11. June 2014 at 21:59

    Re Point 2c, I think the case would be that there is a lower bound to monetary offset at whatever point a central bank is unwilling or incapable of going lower, or where it perceives large costs to adjusting lower.

    If there were a central bank in a theocracy that revered the number 4, and refused to drop rates lower than 4%, then there would be a 4% lower bound problem. If there were a central bank which, for some reason, thought that interest rates below 1%-ish imposed mysterious voodoo mongo costs on the economy (or, given agency issues, on itself as an institution), full monetary offset would cease at the “1% lower bound”. The central bank would balance the cost of offsetting its laps in targeting with the perceived cost of adjusting lower, leading to only partial adjustment.

    So it’s perfectly coherent to believe, as I think many mainstream Keynesians (and monetarists) do believe, that 1) interest rates are the key lever by which a central bank meets its targets; 2) in ranges where a central bank can costlessly adjust interest rates it will reliably meet its targets, such that any fiscal action that would push off-target would be fully offset; but 3) in ranges where interest rate adjustment is perceived by central bankers to be costly or is impossible for institutional reasons (ZLB under costless cash arbitrage), monetary offset will be incomplete or absent, so that fiscal policy can be effective.

    (I’m not arguing for or against this position. But I think it’s perfectly coherent and consistent with the broad facts. The main uncertainty for me has to do with the effectiveness and costs of “unconventional”, non-interest rate policy. The MM position seems to me to depend upon both the existence and willingness to use very effective unconventional policy when interest rate adjustments are for some reason constrained. I’m not persuaded of either, but I’m not certain that such unconventional “ammunition” does not exist either. So I’ll remain agnostic.)

  28. Gravatar of Steve Waldman Steve Waldman
    11. June 2014 at 22:01

    (Umm… it looks like that was Point 1c, not 2c. Some day i’ll learn to read.)

  29. Gravatar of Ralph Musgrave Ralph Musgrave
    11. June 2014 at 23:54

    Michael Byrnes,

    Re your first point, why would fiscal stimulus (i.e. putting spending power into the hands of government departments and/or a cross section of households) have any more inflationary effect than putting spending power into the hands of the asset rich whose assets the Fed buys under market monetarism?

    Re your second point, obviously an inflation targeting central bank will tighten policy as inflation rises. But so too will competent administrators of fiscal policy.

    Of course in that the “administrators of fiscal policy” are currently a collection of economically illiterate idiots known as “politicians” the latter point of mine loses force. But in an ideal world, fiscal policy could target inflation just as monetary policy does.

    Re your third point, what you say is correct as far as it goes. But it doesn’t prove that monetary policy is INHERENTLY better than fiscal.

  30. Gravatar of libertaer libertaer
    11. June 2014 at 23:57

    People think that monetary policy is powerless or better should be powerless because for them zero or negative real rates and capitalism don’t go together.

    Think about it, why call the central bank “central bank”? Why call capitalism “capitalism”? The monetary authority has nothing to do with banking, it doesn’t need assets, there are no liabilities, money is no credit. So why call it a “central bank”? In a free market, factors of production get paid their marginal product. Capital is just one factor among others, why call a free market system “capitalism”? Why not “laborism”?

    When Draghi introduced negative IOR, almost everybody here in Germany, left to right, thought: this is the end of capitalism. Why?

    I think, most people think that Marx or Piketty have it right. Capitalism is a rigged game, where an iron law commands that there shall be a positive rate of return on safe investments forever. People don’t have a problem with inflation if the nominal interest rate is high enough to produce a nice positive interest rate on safe assets. But the moment the real interest rate goes against zero or worse, the economy stops. Marx’s crisis theory (in “Theories of surplus value”) states that because money under capitalism is produced by private banks, if there is no safe profit to make (because of the tendency of the profit rate to fall), credit creation stops, money won’t get issued and/or refluxes to the issuer. One point of the Communist Manifesto was the creation of a government bank, which could prevent output gaps.

    Now even if you have a central bank, if it behaves like on a gold standard, thinks money creation is just a means to influence interest rates and credit creation, sees itself as a bank, thinks it has liabilities, that there will be a zero bound. Then the relations of production will stiffle the forces of production, as a Marxist would say.

    For a market monetarist living in Milton Friedman’s ideal world it could be possible to have an economy where we all produce only software or teach us yoga and piano lessons, where no capital goods, only consumption goods and human capital gets produced. In Marx’s world this is not possible. Capitalism is all about capital. If no positive return, then no investments and no credit creation, ergo no money creation and therefore no full employment. The Austrians are the best expression of this thinking, they want recessions, depressions and unemployment to happen until by magic the interest rate turns positive again. Keynesians think the state can do it. But nobody seems to accept a system where the market decides how high or low the real interest rate is because that would be a free market without capitalism.

    I think I talked to a million people here in Germany, and it all comes down to this point: people feel entitled to a positve return on safe investments, no matter what. That’s what capitalism is all about.

  31. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. June 2014 at 00:10

    Scott (and Ralph),

    I thought you might be interested in scanning the following JCT macro economic analysis of the proposed “Tax Reform Act of 2014” and, in particular, the tables reflecting an “aggressive Fed” and a “neutral Fed” and the discussion on page 8. The differences are significant. Indeed, the idea of “monetary offset” seems not at all controversial among economists at the Joint Committee on Taxation. Their models seem to indicate a larger offset in the fiscal years 2019-2023 compared with 2014-2019. I wonder if this has something to do with the assumptions their models make regarding the scope for Federal Reserve maneuver?

    The bill, if it ever stood any chance, is obviously dead now that its author, Senator Camp, will no longer be with us.

    https://www.jct.gov/publications.html?func=startdown&id=4564

  32. Gravatar of Vivian Darkbloom Vivian Darkbloom
    12. June 2014 at 00:15

    Or, perhaps more likely, an assumption regarding the lag times of response and effect?

  33. Gravatar of Daniel Daniel
    12. June 2014 at 00:23

    Ralph,

    But in an ideal world, fiscal policy could target inflation just as monetary policy does.

    Only we don’t live in that world. We live in a world where the central bank has a nominal target.

    And when the central bank has a nominal target, the central bank will actively counteract any fiscal stimulus. Aka the fiscal multiplier is zero.

    The only inflation you’ll get is the inflation the central bank will allow. It’s called “monetary offset”.

    But so too will competent administrators of fiscal policy

    Except we don’t live in that world. In the world we live in, the one actually populated by humans, human nature is such that, in conditions of anonimity, which is what prevails in industrial societies, the sociopaths rise to the top.

    But it doesn’t prove that monetary policy is INHERENTLY better than fiscal.

    Fiscal stimulus adds to the national debt, monetary stimulus decreases it.

    Geez man, what planet do you live on ?

  34. Gravatar of Daniel Daniel
    12. June 2014 at 00:26

    libertaer

    The Austrians are the best expression of this thinking, they want recessions, depressions and unemployment to happen until by magic the interest rate turns positive again

    This is gold (metaphorical gold, as opposed to the one the austrians worship).

  35. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. June 2014 at 01:16

    libertaer: agree with Daniel. Also, another way in which Austrians and Marxists tend to be mirror images. One way in which they are similar, is that lesser scholars of both breeds don’t look for evidence, they look for footnotes (as a friend observed of Marxist scholars), evidence not being needed, merely support for predetermined conclusions.

    Marxist analysis tends to ignore risk–ask anyone actually in business (not some corporate bureaucrat) whether it is in the nature of employed labour to generate surpluses, and a hollow laugh will be the response. But to be outraged by risk is not a response that had occurred to me, but it makes sense.

  36. Gravatar of J.V. Dubois J.V. Dubois
    12. June 2014 at 02:49

    Scott: “But I’ve spoken with highly intelligent economists around 2008-09, who read Krugman’s column frequently and very much like Krugman, who were shocked when I told them Krugman thought the Fed could do more. They said the impression they got was that Krugman thought we were in a liquidity trap, and could do no more.”

    To be honest this view is still there. I actually opened and read the links that Simon provided in defense of ZLB. In the very first one titled “The two arguments why the Zero Lower Bound matters” from last July Simon writes this:

    “Seen from this perspective, it becomes almost undeniable that fiscal austerity at or near the ZLB is a dangerous policy. By making us more reliant on unconventional monetary policy it increases macroeconomic uncertainty. It makes it more likely that we will have to resort to the unreliable medicine. I think too much of the argument over whether monetary policy is all you need focuses on the first reason why the ZLB may be important, and ignores the second.”

    So there you have it. Even as we speak prominent Keynesians like Simon Wren-Lewis consider “unconventional” monetary policy as dangerous and unreliable. They prefer fiscal policy and consider austerity dangerous. There is no sugarcoating there.

  37. Gravatar of Daniel Daniel
    12. June 2014 at 03:01

    Well, at one point surgeons considered washing their hands and using anaesthetics as controversial.

    The emperor is in fact naked. Either the likes of Wren-Lewis have an alternate agenda which they hide behind ZLB pseudo-science, or they’re in fact not smart enough to ponder the full implications of their models.

  38. Gravatar of J.V. Dubois J.V. Dubois
    12. June 2014 at 03:05

    Scott: Just and addendum to my previous post which ties to what you say. Imagine that you are now an ECB central banker and you actually consider going with negative interest rates.

    Not only are you now exposed to be hammered by Austrians, goldbugs or some outright nuts for debasing money and all that. You may now become a target of past opinion pieces by like the one by Simon Wren-Lewis just for the fact that you dared to go into uncharted waters opting for using “new medicine”. And this happens at the same time where inflation is 0.6% and your colleagues that “did nothing” and may played large part in what the situation looks like right now are not facing any serious critique at all. All blame is on GIIPSies or UK Prime Minister or whatever. It must make you feel like shit not even talking about how harder it makes for you to actually go and do your job for a change.

  39. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 03:11

    Lorenzo:

    Austrian propositions are not “pre-determined”. They are deduced.

    The only valid evidence in economics is self-reflective logic.

    What you are promoting is history, not economics.

    And what’s more, even your positivist methodology is grounded on a priori non-empirical assumptions.

    And in addition, you look for footnotes and evidence consistent with your a priori beliefs of government and capitalism. You interpret the failures of government as failures of capitalism due to your a priori beliefs. At least Austrians are not hypocritical in your respect.

  40. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 03:17

    Lorenzo:

    The irony is that you are actually closer to Marxism than Austrians, for you and Marx share the same a priori anti-capitalist sentiment, and the same a priori beliefs that central “management” is an improvement, regardless of what the data says.

  41. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 03:20

    Daniel:

    Monetary inflation does not decrease debt. For bank credit expansion is how money is largely created, and bank credit is debt.

    What is more, but inflation allows and encourages more government borrowing. You cannot abstract money away from how it enters the economy.

  42. Gravatar of Daniel Daniel
    12. June 2014 at 03:58

    Some people were dropped on their heads. Major_Moron was thrown against a wall.

  43. Gravatar of Ben J Ben J
    12. June 2014 at 04:14

    Not much at stake if your deductions are unfalsifiable…

  44. Gravatar of TallDave TallDave
    12. June 2014 at 04:21

    Jim Glass 11. June 2014 at 21:04

    Great points Jim.

    Also, economic policy would be much better served by “Maslow-adjusted” measures of inequality that reflected the marginal utility of the dollars spent — a country where no one has a car but some people are fat while other are starving should not be considered to have “less inequality” than ones where even the poorest are well-fed, but some people drive Ferraris and others have no car.

  45. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 04:59

    Daniel:

    Your jokes are as old and worn out

    as your ideology.

  46. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 05:09

    Ben J:

    Not falsifiable by experience does not mean immune from refutation in principle with fingers in ears going la la la can’t hear you.

    Ecnomic propositions are akin to logic and mathematical statements. They are not falsifiable throgh experience, but that doesn’t mean you can claim anything you want as true.

    There are true non falsifiable statements and there are false non falsifiable statements. The way we can know which non falsifiable statements are true, is through self-reflective logical deduction.

    An economic statement claimed to be true and non falsifiable is still subject to deductive refutation or verification. It is not like there is no way to address its veracity.

    If you want to know more about this, you can start by realizing that the statement “All knowable true statements must be falsifiable through experience”, is itself a non falsifiable statement!

    We’re all a priorists now. The only thing that makes a difference is whether or not a person recognizes that is how their knowledge is ultimately grounded.

  47. Gravatar of Edward Edward
    12. June 2014 at 05:10

    I can’t say Dave Brat’s name without
    Cracking up. Kind of like Mike Crapo.

  48. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 05:12

    I should emphasize that when I say falsifiable and non falsifiable, without qualification, I mean through observational experience.

  49. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 05:17

    A good sound bite for the principle of a priorism is this: One must first understand that which is observing the inputs, before one can understand the outputs.

  50. Gravatar of ssumner ssumner
    12. June 2014 at 05:37

    Jason, You quoted someone:

    “After all, if income inequality has been rising while consumption inequality has stayed the same, where is the spending coming from? Debt.”

    Debt is not the only possible reason. There is also transfers, changes in relative prices, work in the underground economy, and many other possible factors.

    Steve, That may be the case (although I doubt it), but it has no bearing on my argument that the zero bound scenario doesn’t apply to 2011. The ECB raised rates from 1.0% to 1.25% to 1.5%. If they are raising rates they are not constrained by the zero bound. Recently they cut rates to negative 0.1%, so we know that even 1% was not their lower limit.

    Libertaer, You said:

    “People think that monetary policy is powerless or better should be powerless because for them zero or negative real rates and capitalism don’t go together.”

    Yes, that view is widespread. I’d like to see higher rates as well, so that’s not what the dispute is actually about. I don’t doubt that people are as confused as you think, but monetary policy is never powerless, even at the zero bound. There is no such thing as “not using monetary policy.” The only question is what sort of monetary policy you adopt.

    And the Germans don’t realize that the reason they have zero rates, and will have them long after the Fed has raised rates, is that the ECB has been doing what the Germans wanted for the past 6 years.

    Thanks Vivian.

    JV, Good point.

  51. Gravatar of dannyb2b dannyb2b
    12. June 2014 at 05:55

    SSumner

    Do you agree that there is a difference between the fed interacting with a bank/financial company or a person?

    In your hot potato article it seems you overlook the fact that a bank and a person use money differently. If a person receives base money from a transfer(assuming they can have fed accounts) that person will consume more than a company dedicated to investing/lending. At times of insufficient growth excess reserves in the hands of people would create higher consumption because people have a higher opportunity cost of holding money than banks when risk adjusted investment returns are too low. Foregone consumption represents a higher opportunity cost to a person than a bank.

  52. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 06:35

    Market driven deflation is not the same thing as tight monetary policy.

  53. Gravatar of Nick Nick
    12. June 2014 at 07:09

    JV
    Yeah the link is clear, he believes full monetary offset at the ZLB exists (although central bank error milage may vary) but it is ‘dangerous’ bc it forces is to use ‘unreliable’ medicine. He goes on to say one important reason why: we don’t know the dose sensitivity. And the implication of potential ‘side effects’ is clear in his metaphor.
    Of course we’ve yet to observe an ‘overdose’, and it’s a little strange that our extensive knowledge of the ways short term interest rate policy may harm the economy is being held up as a point in its favor.
    So what does it all boil down to?
    I still say its a gut belief that we can’t or shouldn’t ever see the central bank madly executing QE to hit a 4.5% ngdp target in a context of ~4% inflation. It would be ‘dangerous’. And since it would be such a catastrophe to see that state, we’ll never find out exactly how much QE gets you there, and the medicine’s properties will forever remain ‘unknown and unreliable’.

  54. Gravatar of SG SG
    12. June 2014 at 07:18

    Scott has made this point many times before, but it bears repeating:

    An a central bank that is using unconventional monetary policy to *target inflation* at the ZLB CAN and likely WILL offset the effect of fiscal stimulus.

    Krugman’s failure to understand this fact is what let him to dramatically overestimate the liklihood that the US would experience deflation.

    The fact that fiscalists fail to understand and address this point tells you everything you need to know.

  55. Gravatar of Edward Edward
    12. June 2014 at 08:56

    Scott,
    via Paul Krugman http://krugman.blogs.nytimes.com/2014/06/12/synthesis-lost-2/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body
    Brad Delong has a new post out http://equitablegrowth.org/2014/06/11/scattered-preliminary-notes-comparative-economic-theology-wednesday-focus-june-11-2014/
    Your thoughts?

  56. Gravatar of TallDave TallDave
    12. June 2014 at 09:04

    Did you see this? Pethokoukis on Greenspan on Sumner!

    http://www.aei-ideas.org/2013/10/greenspan-market-monetarism/

    I didn’t realize Pethokoukis was a fellow convert.

    4. And as Sumner has pointed out, the actual growth in NGDP between 1990 and 2008 was just over 5%, only slightly above the 4.5% figure. And NGDP never strayed very fall from that 5% trend line until 2008. An interesting coincidence.

    This is a really strong point that I don’t remember often enough.

  57. Gravatar of TallDave TallDave
    12. June 2014 at 09:07

    Sorry, I just noticed there two dates on the above article, it is not new. -2 to the web design team.

  58. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. June 2014 at 11:49

    Scott,
    Wren-Lewis’s latest:

    http://mainlymacro.blogspot.com/2014/06/good-and-bad-blog-debates.html

    And my response:

    http://thefaintofheart.wordpress.com/2014/06/12/is-fiscalist-policy-advice-consistent-with-their-research-and-just-how-interested-is-simon-wren-lewis-in-debt-stabilization/

  59. Gravatar of TallDave TallDave
    12. June 2014 at 11:58

    I was re-reading this today, are there still people who think OMO purchases can be deflationary? I mean, if you said “QE is deflationary if the markets look at QE and say ‘Uh oh the Fed is going to do QE instead of raising the inflation target’ that could certainly be true, but I thought everyone now accepted that building more houses doesn’t actually raise the price the houses.

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/12/does-house-building-cause-house-price-inflation-the-sokal-hoax.html

  60. Gravatar of Major-Freedom Major-Freedom
    12. June 2014 at 12:42

    Mark:

    I trust that this unbelievably banal thing to quibble over is going to have a useful point being made at some point.

  61. Gravatar of Mike Sax Mike Sax
    12. June 2014 at 16:27

    Michael Byrnes, I know your interpreting for Scott-a kind of Sumner Whisperer-but I don’t think you’r right about one point.

    I don’t think he agrees about ARRA, he seems think that the economy would have grown faster if only the GOP had been able to block it.

  62. Gravatar of ssumner ssumner
    12. June 2014 at 18:11

    Danny, If you have two lakes connected by an open channel of water, it makes no difference whether you put an extra bucket of water in one lake or the other. The water level rises in both. It makes no difference who the Fed buys the bond from. Thinking it does is an example of the fallacy of composition.

    Edward, Stiglitz thinks our banking/housing regime is a “free market.” How does one even respond to something like that? I mean, where do I start?

    Thanks for the links Talldave and Mark.

  63. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. June 2014 at 18:45

    Instead the central banks were mostly blamed for doing too much. In large part because conservatives obsess over money-as-asset and not money-as-facilitator-of-transactions (i.e. the operation of the entire monetary system).

    Too many conservatives therefore cannot tell the difference between hard money and sound money, which are very much not the same things. As Nick Rowe points out, being an asset is the least distinctive thing about money and the more policy focuses on money as asset the less well money performs its wider (and proper) functions, the less well it performs as money.

    I have done a post:
    http://lorenzo-thinkingoutaloud.blogspot.com.au/2014/06/hard-money-is-not-same-as-sound-money.html

  64. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. June 2014 at 18:46

    The “looking at the whole system, versus looking at bits” may also figure in debates Keynesian-ward, as intimated in this post by Giles Wilkes, referring to Wren-Lewis.
    http://freethinkecon.wordpress.com/2014/06/09/the-fiscalists-vs-the-monetarists-lacking-a-common-language/

    Where he, strangely enough, complains about a lack of a common analytical language. Sounds almost Economic Babel like …
    https://www.themoneyillusion.com/?p=188

    (Done as two comments to avoid spam blocker.)

  65. Gravatar of dannyb2b dannyb2b
    12. June 2014 at 20:42

    “Danny, If you have two lakes connected by an open channel of water, it makes no difference whether you put an extra bucket of water in one lake or the other. The water level rises in both. It makes no difference who the Fed buys the bond from. Thinking it does is an example of the fallacy of composition.”

    At the ZLB the new expansions of MB are non permanent when bank’s risk adjusted returns are too low. Therefore the new water doesn’t leave the bucket, the banks just sit on their excess reserves. The general public on the other hand will utilize new “reserves” (assuming they can hold and transact in them) for consumption at the zlb therefore expansions are permanent.

  66. Gravatar of Ben J Ben J
    13. June 2014 at 01:34

    Major,

    The point I was making is distinct from the idea of falsifiability with respect to observational evidence.

    You’ve said yourself that Human Action, which is the idea that Austrian economics rests on, “cannot be refuted”.

    In which case you’re telling us that Austrian economics (and your business cycle theory in particular) is unfalsifiable with respect to *both* observational evidence *and* any deduction, since you take the concept of human action itself to be unfalsifiable.

    So again… the stakes couldn’t be lower.

  67. Gravatar of Philippe Philippe
    13. June 2014 at 04:59

    “If you have two lakes connected by an open channel of water, it makes no difference whether you put an extra bucket of water in one lake or the other. The water level rises in both.”

    If you have two different people it can make a difference whether you give an extra bucket of water to one or the other. Thinking that different people are like an undifferentiated mass of water is the fallacy.

  68. Gravatar of ssumner ssumner
    13. June 2014 at 05:27

    Lorenzo, You have a good memory, that Babel post is 5 years old as I recall.

    Philippe. Yes, but the Fed doesn’t give money to anyone. It sells money to the highest bidder.

  69. Gravatar of Morgan Warstler Morgan Warstler
    15. June 2014 at 08:53

    “Eric Cantor’s single largest source of campaign contributions was Blackstone Group, the high-rolling financial titan in Midtown Manhattan.

    Dave Brat’s largest source of campaign cash was Baugh Auto Body on West Broad Street in Richmond.”

    http://washingtonexaminer.com/tim-carney-eric-cantor-loss-gives-gop-chance-to-become-peoples-party/article/2549710

    There is an EASY WAY for MM to become the Tea Party’s favorite monetary policy.

    It’ll win over Brat and Carney ad all of us…

    Scott should really noodle using NGDP futures market as the TRANSMISSION MECHANISM that first and foremost benefits Baugh Auto Body.

    http://www.morganwarstler.com/post/37140255525/who-gets-the-new-money

    We have to stop trying tot be “even handed,” and outright cheer policy that recognizes Big Business has a negative externality called big government.

    There are NO net market efficiencies found in Large Corporations unless they come into existence without growing the government. Since they don’t we are simply moving the cost “savings” back onto the taxpayer and small business owner.

    This doesn’t mean we can’t have large corporations, BUT IT DOES MEAN, the system must enforce primacy of little guys, such that they carry more combined influence in DC than the big players.

  70. Gravatar of Negation of Ideology Negation of Ideology
    15. June 2014 at 13:54

    Why are market monetarists such extremists on fiscal policy? Consider 3 examples.

    1. The Flynn effect. When IQ tests are revised, the average is set to 100. But when current test takers take the old tests, they score over 100. IQ, measured by a particular base year is constantly increasing. But average IQ will always stay at 100, unless those controlling the unit of IQ allow it to.

    2. A professor grading on a curve. The average grade in the class will stay the same no matter what the students do. The professor controls the unit of account.

    3. NGDP in a country where the central bank controls the unit of account.

    I contend all 3 cases are the same. I the government borrows money and starts a program to improve IQ, the grades in the professor’s class, or increase NGDP it will be ineffective unless the IQ test scorers, the professor, or the central bank re-norms the unit of account. They may be able to change the distribution. They may be able to affect (positively or negatively) real intelligence, real learning in the class, or real GDP. But they cannot change the average without changing the unit of account.

    So it follows that we shouldn’t try. If the nominal IQ, grade or GDP is wrong, then the entity that controls the unit of account has the necessary and sufficient tools to fix it. If there are real issues to be addressed, such as distribution or productivity, then we don’t need to borrow to address them. And we should address inequality and substandard productivity regardless of whether we have a shortfall of NGDP or not.

  71. Gravatar of ssumner ssumner
    16. June 2014 at 14:54

    Morgan, Perhaps there’s some truth to that, but monetary policy is not the answer. better tax policy might help. And less regulations, which are a bigger burden on small firms.

    negation, good analogy.

  72. Gravatar of Major-Freedom Major-Freedom
    16. June 2014 at 16:23

    Sumner:

    “Philippe. Yes, but the Fed doesn’t give money to anyone. It sells money to the highest bidder.”

    That is incorrect. The Fed only sells to the primary dealers (officially, and who knows who else unofficially).

    Selling only to the primary dealers is NOT selling to the highest bidder.

  73. Gravatar of Major-Freedom Major-Freedom
    16. June 2014 at 16:32

    Ben J:

    “The point I was making is distinct from the idea of falsifiability with respect to observational evidence.”

    How so?

    “You’ve said yourself that Human Action, which is the idea that Austrian economics rests on, “cannot be refuted”.”

    There is a huge difference between an argument that is claimed as irrefutable because it is absolutely true, and an argument that is claimed as irrefutable in that the claimant refuses to even think of ways it might be refuted, which is to say, they refuse counter-arguments on principle.

    “In which case you’re telling us that Austrian economics (and your business cycle theory in particular) is unfalsifiable with respect to *both* observational evidence *and* any deduction, since you take the concept of human action itself to be unfalsifiable.”

    If an argument is correctly deduced on an absolutely true foundation, then of course it is not refutable and of course it is unfalsifiable.

    What is the controversy? That someone is claiming actual knowledge of an example of this, which you believe is not allowable even in principle? If so, show me the irrefutable logical deduction, and then explain why THAT argument is not itself an example of what you are claiming to disprove.

    “So again… the stakes couldn’t be lower.”

    They couldn’t be any higher.

  74. Gravatar of Major-Freedom Major-Freedom
    16. June 2014 at 16:39

    Ben J:

    What I am arguing is irrefutably true actually requires, as part of the deduction, the counter-claim that it is false.

    In other words, for it to be continually known as true requires a permanent, ongoing consideration that it is false. Without it, the ground for knowing it is absolutely true falls away. The denial is actually a part of the deduction.

    Again, this is far different from an argument being claimed as irrefutable without even considering counter-claims.

  75. Gravatar of Morgan Warstler Morgan Warstler
    17. June 2014 at 15:00

    Scott, you can’t have Big Business and less regulation.

    You have to choose.

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