Zero fiscal multiplier watch, example #843

Here’s Ryan Avent:

Yet it increasingly seems as though the fundamentals are not so important as what level of employment growth the Fed is willing to tolerate. As my colleague also notes, the Federal Reserve’s projections are consistent with job growth of 150,000 to 200,000 a month; over the past year, payrolls have risen by an average of 169,000 a month. America is getting exactly the recovery the Fed wants.

Should underlying fundamentals drive job growth forward at a faster pace in the months to come, one would expect the Fed’s inflation concerns to grow. When employment growth was healthier, at the beginning of the year, fed fund futures hinted that rate cuts might come earlier than the language in the Fed’s statements suggested. Markets, in other words, were taking the Fed’s late-2014 language as more conditional statement than commitment. Observed job growth was presumed to push up the date of expected rate increases. The Fed’s failure to stick rate-cut expectations firmly at the late-2014 date allowed policy to tighten a bit in response to better economic conditions. That reads as though the Fed made a mistake; I don’t think they did.

.   .   .

And so Mr Obama will be left biting his nails, pitching his efforts to the American people, and trying to explain why recovery hasn’t been any faster. Mitt Romney will put the blame for that squarely on the president. And the press will debate over who has the better argument. But Mr Bernanke is the wizard behind the curtain. Had Mr Obama managed to pass legislation preventing quite so many government jobs from being lost, the economy would have run hotter and the Fed would have been correspondingly less aggressive””leading, most likely, to no meaningful difference in the pace of job recovery.   America is getting the job growth the Fed wants, plus or minus a random error reflecting the fact that Mr Bernanke is not quite God.

Exactly.

If there is any silver lining in the current policy morass, it’s that at least we have a sort of clarity.  Back in 2009 I had to battle with people who insisted the Fed was out of ammunition, but really, really wanted to do lots more.  That argument never made much sense to me, and Bernanke’s recent comments pretty much drove a stake through any hopes for a fiscal end run around the Fed.  Core inflation is close to 2% and the Fed damn well intends to keep it there.

Time for some supply-side reforms?

BTW, that final allusion to Paul Krugman’s famous quip was just perfect; it put a big smile on my face.

My dream is that in a few more years I’ll be able to do a post entitled “We’re all zero fiscal multiplier, market monetarist, progressive consumption tax, supply-sider, neoliberal Yglesians now” so that I can retire to some place warm and sunny.


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79 Responses to “Zero fiscal multiplier watch, example #843”

  1. Gravatar of Greg Ransom Greg Ransom
    4. May 2012 at 08:19

    Scott, if your going to say anything helpful about what is happening RIGHT NOW, the expiration date on your NGDP story has passed its “good till” date.

    The economy has been on a solid NGDP growth path for several years now.

    Time to take some courage pills and break out of your little comfort zone box.

    Why is the economy still sick? Your story doesn’t tell ut.

  2. Gravatar of Becky Hargrove Becky Hargrove
    4. May 2012 at 08:24

    Greg,
    Scott is probably glad he isn’t God because if he was, he wouldn’t get a chance to retire somewhere warm and sunny.

    Scott: “Time for some supply-side reforms?”
    Let the games begin!

  3. Gravatar of Morgan Warstler Morgan Warstler
    4. May 2012 at 08:31

    “Time for some supply-side reforms?”

    1. Obama loses.
    2. Scott dedicates his book to me & begins to sell his NGDPLT to the Tea Party with gusto.
    3. Matty goes full “neo-progressive,” wherein public employees are sacrificed en masse to support safety-net benefits for the poor.
    4. DeKrugman cries foul while we blame Keynesian econ for 2008-2012.
    5. My Guaranteed Income plan gives Romney 4 more years.

  4. Gravatar of ssumner ssumner
    4. May 2012 at 08:44

    Greg, I said if we had 4.5% NGDP growth we’d get a slow recovery, which is what we’ve had, with unemployment falling gradually from 10.1% to 8.1%. If we’d had even slower NGDP growth we would have had an even slower recovery. If we’d had faster NGDP growth we would have had a faster recovery. Since I’ve clearly been right, why would I want to abondon my NGDP model?

    Thanks Becky.

    Morgan, At least you aren’t one of those who make little plans.

  5. Gravatar of Morgan Warstler Morgan Warstler
    4. May 2012 at 08:46

    “with unemployment falling gradually from 10.1% to 8.1%.”

    stop saying this.

    500K just dropped out of workforce.

    Only a liar mentions unemployment #s any other way.

  6. Gravatar of Morgan Warstler Morgan Warstler
    4. May 2012 at 08:48

    Scott, it’s one of those if, then things…

    If 1, then 2. If 2, then 3. If 1-3, then 4.

    5 is unavoidable in human history, I’d just like it to happen to come after 1-4.

  7. Gravatar of Morgan Warstler Morgan Warstler
    4. May 2012 at 08:53

    Jack Welch says you are lying Scott:

    https://twitter.com/#!/jack_welch/status/198451004893708289

  8. Gravatar of cthorm cthorm
    4. May 2012 at 10:16

    Morgan – at least in my banana republic those dropping out of the workforce are retiring public employees. Normally I’d cheer, but they’re poking in their absurd gold plated pension/health benefits before the gravy train comes off the rails. If I wasn’t a fourth generation Californian I’d be moving to Austin or Galveston or Huntsville or Vegas. Here is to hoping that CA doesn’t lead the way this time.

  9. Gravatar of Bill Woolsey Bill Woolsey
    4. May 2012 at 11:34

    Greg:

    While the growth rate of spending has been fine, the growth path is too low.

    Market monetarists favor growth path targeting, not growth rate targeting.

    If the price level is 100 and the inflation rate is zero, then if everything goes perfectly, the price level stays 100 and the inflation rate stays zero.

    But if the price level falls to 70, inflation targeting proposes to leave it at 70. Price level targeting proposes a 40% inflation rate to get it back to 100.

    I think market monetarists would agree that after a century or so, going back to 100 would be a bad idea. What about after 3 1/2 years? Not so clear.

    Of course, we don’t favor price level targeting, but that is the idea.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. May 2012 at 11:37

    Recommended reading for anyone who has never had the responsibility of managing a business’s cash flow;

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1923829#184230

    ————–quote————-
    If firms perceive future cash flows as risky they will postpone investment and post-recession corporate investment will take longer to rebound. …cash flow uncertainty during the post-recession period 2008-2009 has declined very slowly, and consequently corporate investment including corporate employment increases very modestly.

    These findings have significant policy implications. To wit, if policy makers would like corporations to increase their investment activity, they should focus on policies that decrease corporate cash flow uncertainty. Specifically, to the extent corporations are uncertain about the implementation and the implementation-timeline of the health reform act, and the impact of this act on their costs of hiring and retaining employees – a clarification of the implementation and the implementation-timeline of the health reform act would encourage corporations to invest more and hire more employees. Similarly, to the extent corporations are uncertain about the implementation and the implementation-timeline of the environmental cap-and-trade reform and corporate tax reforms – a clarification of the implementation and the implementation-timeline of these environmental and tax reforms would encourage corporations to invest more and hire more employees.
    ————–endquote—————

  11. Gravatar of Tommy Dorsett Tommy Dorsett
    4. May 2012 at 12:08

    Scott – Do you consider Simpson-Bowles a ‘supply-side’ reform capable of shifting the LRAS curve to the right and nudging up the natural rate path?

  12. Gravatar of Becky Hargrove Becky Hargrove
    4. May 2012 at 12:25

    Point taken about cash flows – it’s a reminder that the conservative businessperson would move slow, but not as slow as the conservative in Washington. So some doors would remain tightly shut. Even so, something has to give. If more money cannot be printed, the very definition of supply side needs to be reconsidered. Government still helps business muck that up on a regular basis in part to keep out the ‘riff raff’, but then the businessperson is asked to give a job to the ‘riff raff’ with benefits for the higher bar that government/business set. In other words, some conservatives, especially in Washington, are bound to wish they had gone ahead and printed money until the cows came home. You say you want free markets…

  13. Gravatar of Morgan Warstler Morgan Warstler
    4. May 2012 at 13:10

    cthorm,

    Tell your boss you’re opening a satellite office. Austin, TX is simply perfect.

    Bill, this isn’t really the question:

    “I think market monetarists would agree that after a century or so, going back to 100 would be a bad idea. What about after 3 1/2 years? Not so clear.”

    The question is IF all you’ll get is NGDPLT starting now, will you organize politically behind it, just to get the switch?

    You shouldn’t be talking about what you want, or think is is optimal, it makes everyone sound not serious.

    Starting with a high unemployment and running level is ACCEPTABLE:

    1. In long run who cares? Not you. Not Scott. Not anyone in MM.

    2. It serves the interest of anti-government types, who want to use the private sector unemployment to force productivity gains in public sector.

    We can use the economic anger to squeeze $500B a year from public employees in cuts

    That $500B in savings puts lots of private sector workers to work immediately. See: MW’s Guarantee Income plan.

    ——

    The point here is that, somehow MM guys feel like they will go ahead and accept the past juiced performance as standard, and do some make up, just to show everyone how great MM is.

    We don’t need the honey to woo DeKrugman, they will NEVER support NGDPLT. They just want the inflation. In two years they will be arguing for a new target.

    MM will work just fine. Let it ride into town, use the last 3.5 years avg. as nice cap on growth, be conservative about it for another decade… and let the magic work.

    The MAGIC is what happens to America when we all watch the growth pie get divvied up every single month.

  14. Gravatar of Rajat Rajat
    4. May 2012 at 13:15

    Scott, you might get people to become market monetarists, but you won’t succeed in getting the zero fiscal multiplier part. If it hasn’t happened after 20 years of inflation targeting, why would it happen under NGDP targeting?

  15. Gravatar of Major_Freedom Major_Freedom
    4. May 2012 at 14:04

    ssumner:

    If we’d had even slower NGDP growth we would have had an even slower recovery. If we’d had faster NGDP growth we would have had a faster recovery. Since I’ve clearly been right, why would I want to abondon my NGDP model?

    If we’d had even slower NGDP growth we would have had a faster recovery. If we’d had faster NGDP growth we would have had an even slower recovery. Since I’ve clearly been right, why would I want to abandon my model?

    Lesson: Notice how both of our statements are completely consistent with past data, and yet they contradict each other?

    When you start to deal in counter-factuals, THEN you finally start to think like an economist, for it finally gets you out of the morasses of historicism and positivism, and into praxeological logic and its foundation of rationalism.

    You’re making a claim of what WOULD have otherwise been the case, had certain things been different. I’m making a (opposite) claim of what WOULD have otherwise been the case, had certain things been different in the same way.

    Since we can’t go by historical data to settle this discrepancy, since both of our theories are not falsified by the data, it means that we have to compare and contrast our theories to a THIRD foundational standard, third meaning not history, and not our say so’s.

    Here is where your theory is exposed as fallacious. Here is where your theory can be shown as not “clearly right”, but clearly wrong.

    But you refuse to use that third standard, because either you don’t understand it, or you do but you know you will lose. Since I don’t want to assume dishonesty, I will assume just plain ignorance.

  16. Gravatar of ssumner ssumner
    4. May 2012 at 14:29

    Morgan, You’ll have to tell me what he said, as I don’t subscribe to twitter.

    Patrick, Yes, it would help if we had a competent government.

    Tommy, Probably, but I haven’t studied it in detail.

    Rajat, Because NGDP IS AGGREGATE DEMAND, making it obvious than all other demand-side initiatives are superfluous.

  17. Gravatar of Full Employment Hawk Full Employment Hawk
    4. May 2012 at 15:33

    The question that needs to be asked is whether holding job growth to an average of about 175000 a month is due to a deliberate strategy on the part of Bernanke of doing as much as he can to help Romney win without causing people to suspect that this is what he is doing.

    It is clear that if Bernanke had complied with the Congressional mandate to achieve maximum employment the unemployment rate would be coming down rapidly enough that Obama had the reelection in the bag and the Republicans would suffer significant losses in the congressional campaigns.

    I cannot read Bernanke’s mind and realize that I may be completely wrong about this. But applying Friedman’s Methodology of Positive Economics to what Bernanke is doing, Bernanke is behaving AS IF this were his objective. In other words, the theory that this is what Bernanke is doing is a good theory because it predicts Bernake’s actions well.

    At the very least, it appears highly plusible that if McCain were running for reelection Bernanke would be setting a higher target for job growth. And it appears highly likely that if Romney wins the Fed’s policy will turn more expansionary.
    (But if Obama wins, the Fed’s policy may also turn more expansionary because Bernake’s reappointment will be coming up. If I were Obama I would take particular pleasure in getting even with Bernanke for almost sinking my reelection.)
    Looking at things with the benefit of hindsight, Obama’s reappointment of Bernanke may well be the fatal mistake that costs him the reelection. It is, however an understandable mistake since even Krugman supported it (as I did, my bad.)

    This raises the question of why the other 3 people Obama has appointed to the BOG are not pressuring Bernanke to do more. And why the Obama adminstration has not made an all out effort to fill the vacancies on the BOG, by recess appointments if needed.

  18. Gravatar of Greg Ransom Greg Ransom
    4. May 2012 at 16:19

    Construction employment remains 2.1 million below the peak of the boom.

    At this point in all other post-war recoveries, construction is powering the recovery.

    2.1 million construction hires and the unemployment rate would be well below 7%.

    Those are 2.1 millions longer term job losses, about half of the number of current long term unemployed.

  19. Gravatar of OhMy OhMy
    4. May 2012 at 17:31

    Zero multiplier? Seems like Sumner will never learn. How well did it work in Ireland and the UK?

  20. Gravatar of Full Employment Hawk Full Employment Hawk
    4. May 2012 at 19:26

    “Zero multiplier? Seems like Sumner will never learn. How well did it work in Ireland and the UK?”

    Two important realities about the multiplier.

    1. When an economy is depressed, the size of the fiscal multiplier depends crucially on what the objectives of the central bank are.

    2. The ficsal multiplier works differently in the downward than in the upward direction.

    A very strong case can be made that there is a zero fical multiplier UPWARDS for the United States, given Bernanke’s current monetary policy and that the FOMC is willing to go along with it.

    In Great Britain the Bank of England has tried, but failed, to offset the contractionary effects of the contractionary Cameron fiscal policy. There is a significantly positive fiscal multiplier in Britain at the present time. (i.e. fiscal policy gets more contractioary, the economy contracts.)

    In the Eurozone the contractionary fiscal policies of the member countries is reinforced by the contractionary monetary policy of the ECB. The decline in output in many Eurozone countries appears to be too large to be explained exclusively by the contractionary monetary policy, and the size of the decline appears to be correlated with the size of the fiscal austerity, so that there are currently significantly positive fiscal multipliers in those countries.

  21. Gravatar of Full Employment Hawk Full Employment Hawk
    4. May 2012 at 19:43

    Unless the FOMC ceases to support Bernanke’s policy, we can expect job growth to be at about 175,000 for the remainder of the months until the election. So the question that needs to be asked is will Obama be reelected with that rate of job growth? And the answer to that is far from clear.

    Under normal circumstances a candidate would not be reelected with an approximately 8% unemployment rate and that anemic a rate of job growth, but these are not ordinary circumstances. What Obama has going for himself is that the Republican party has shifted far from the mainstream of public opinion to the extreme right, especially on social issues, and Romney is widely perceived as a priviledged elitist out of touch with the needs of ordinary working people and that his programs are designed to make the rich richer at their expense. (I understand that the Libertarians on this site would not agree with those perceptions, but it is the perceptions of the voting public that count. )It should be interesting.

    If I HAD to make an even odds bet, I would put the money on Obama, but I would not voluntarily bet more than a few dollars on him.

  22. Gravatar of Benjamin Cole Benjamin Cole
    4. May 2012 at 19:57

    “My dream is that in a few more years I’ll be able to do a post entitled “We’re all zero fiscal multiplier, market monetarist, progressive consumption tax, supply-sider, neoliberal Yglesians now” so that I can retire to some place warm and sunny.”–Sumner.

    My sentiments exactly. Except that I already live somewhere warm and sunny (Los Angeles). And I moving to Thailand.

    Keep on bloggin’

  23. Gravatar of flow5 flow5
    4. May 2012 at 21:02

    Zero multiplier? Try less than zero. Unless our trillion dollar deficits are drastically reduced, any recovery in the economy will present a “catch 22″ situation. An upturn in the economy will add increased private demand for loan funds to the insatiable demands of the federal government. The consequent rise in interest rates will effectively abort any recover.

  24. Gravatar of flow5 flow5
    4. May 2012 at 21:47

    11-Aug ,,,,,,, 0.16
    11-Sep ,,,,,,, 0.24
    11-Oct ,,,,,,, 0.26
    11-Nov ,,,,,,, 0.24
    11-Dec ,,,,,,, 0.25
    12-Jan ,,,,,,, 0.25
    12-Feb ,,,,,,, 0.29
    12-Mar ,,,,,,, 0.26
    12-Apr ,,,,,,, 0.25
    12-May ,,,,,,, 0.28
    12-Jun ,,,,,,, 0.31

    The above figures don’t correspond to any specific rate of inflation, they just show the trend will be up.

    12-Jan ,,,,,,, 0.16
    12-Feb ,,,,,,, 0.15
    12-Mar ,,,,,,, 0.13
    12-Apr ,,,,,,, 0.15
    12-May ,,,,,,, 0.13
    12-Jun ,,,,,,, 0.07

    The above figures show the trend in the (rate-of-change), in real-output. Barring countervailing intervention, June still looks very weak.

    So if June is weak, then the FED will intervene — shoving inflation temporarily higher.

  25. Gravatar of flow5 flow5
    4. May 2012 at 21:59

    In Dec. 2004, M1 spiked @ $1401.2b. M1 didn’t return to that level until Apr. 2008 @ $1406b.

    M1 was falling at the same time the economy was booming. Let’s reverse engineer this. Nominal gDp stood @ $12,123.9 in the 4th qtr of 2004. It grew to $14,415.5 in the 2nd qtr of 2008 (its peak). I.e., nominal gDp expanded by 19 percent during the same period. How did nominal gDp grow this big when the primary money supply was falling?

    The decline in M1 was offset by an increase in the transactions velocity of money. Because of the widespread increase in the proliferation of new financial innovations, Vt climbed — offsetting the “shortfall” in M1. This is identical to the impact velocity had during the 79-82 recession.

    While Greenspan thought he began tightening monetary policy in Dec. 2004, money flows (MVt) were still increasing (albeit at a decreasing roc). The roc in (MVt) became negative (below zero) in March 2006 (@ the same time the Case-Shiller Home Price National Index peaked @189.93 in the 2nd qtr 2006). Money flows (MVt) peaked in FEB 2006 (not when M1 peaked @ $1401.2 billion in Dec. 2004). I.e., Greenspan never tightened monetary policy.

    Targeting the money stock gives “false signals”. Targeting nominal gDp avoids this type of error. Essentially targeting nominal gDp means targeting a specific rate-of-change from starting point a to ending point b (i.e., targeting MVt’s constant time lag). Maybe there’s not much downward price flexibility in our economy, but “transitory” price increases don’t have a lasting impact (but high rates of unemployment do).

  26. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. May 2012 at 02:56

    Major_Freedom: all you have managed to establish is you cannot read a graph. But we knew that.

  27. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 03:55

    So Bernanke is getting exactly the job growth he wants-he doesn’t want higher?

    A progressive consumption tax is a contradiction in terms.

    Is your future utopia any different than Paul Ryan’s

  28. Gravatar of W. Peden W. Peden
    5. May 2012 at 04:41

    Mike Sax,

    “So Bernanke is getting exactly the job growth he wants-he doesn’t want higher?”

    He is getting the job growth he wants GIVEN that he doesn’t want a fight on the Fed BoG. Whether it is exactly what he wants: who knows? We can only look at the revealed preferences of the Fed.

    “A progressive consumption tax is a contradiction in terms.”

    No it isn’t, anymore than ‘regressive income tax’ is a contradiction is terms.

  29. Gravatar of Jason Odegaard Jason Odegaard
    5. May 2012 at 05:13

    Major_Freedom,

    Do you believe that research can reveal and predict the likely economic action of humans? I do, through both economics and through behavioral studies (more psychology-based). But I have heard that Austrians reject that notion.

    That’s just a question I’ve been meaning to ask.

    Thanks,
    Jason

  30. Gravatar of Benny Lava Benny Lava
    5. May 2012 at 05:33

    Maybe this is off topic, but as I’ve been trying to understand this blog’s point of view I have one question: why is Germany doing so well? Much of the analysis on this blog comes to tight money by the central bank choking growth. I understand demand and supply of money, but I don’t understand how that applies to Europe and why Germany does so well and Spain so poorly. If this is too off topic I understand.

    A related question I have is regarding inflation. How do economists measure the sources of inflation? For example there is a massive drought in Texas which culled the longhorn herd to 1950s numbers. This is causing beef prices to rise, naturally. How much of beef price increases are caused by the money supply and how much by the natural demand and supply equilibrium? Or oil? Or durables? And how does one measure it? Again feel free to ignore this query but I suspect it might help you in your arguments with Internet Austrians, who typically blame the money supply and the Fed for all inflation.

  31. Gravatar of dwb dwb
    5. May 2012 at 05:35

    @Rajat:

    If it hasn’t happened after 20 years of inflation targeting, why would it happen under NGDP targeting?

    that the fiscal multiplier is zero at full employment is not really controversial: even DeKrugman say so.

    the only real controvery is whether its zero at the ZLB. Given the number of times you hear Fed officials declare we are close to full employment for structural reasons and need to raise rates soon, and that even Krugman has conceded that the barrier to more Fed stimulus is political, its hard to conclude more fiscal expansion would not not result in the Fed raising rates sooner than they planned.

    wheres the fiscal multiplier in this graph:

    http://research.stlouisfed.org/fred2/graph/?g=6ZZ

  32. Gravatar of Bogdan Bogdan
    5. May 2012 at 05:54

    Lately, Paul Krugman prefers Darwinian biology analogies, of the most extreme hypothesis regarding the process of gene mutation (a la Richard Dawkins), so I guess the “Bernanke is God” quip should now read “Bernanke is the most selfish blind gene”. 🙂 The NY Times best seller version would probably be something like “The Fed Delusion” or “The Monetarist Delusion” 🙂

    Well, worse things can happen when you mix some scientific hypotheses with ideology, popular culture and social science.

  33. Gravatar of flow5 flow5
    5. May 2012 at 06:32

    Deficits obviously generate a net increase in the demand for loan-funds; the larger the deficit, the greater the demand. That doesn’t necessarily mean interest rates will be higher. But if they are not higher, the only other conclusion is that the deficits are keeping interest rates higher than they would be in the absence of the deficit.

    While current deficits increase the demand for loan-funds, the expectation of higher rates of inflation, and larger deficits, decreases the present supply of loan-funds. Lenders, as a group, will not lend long-term except at rates that will compensate for the expected rates of inflation. The, deficit financing impacts on the supply side (as well as the demand side) are pushing interest rates up or retarding their fall.

    Those who are wont to minimize the ill effects of the deficit are prone to compare the size of the deficit with nominal GDP, as if the volume of nominal GDP were independent of the size of the deficit. Unprecedented large deficits “absorb” a disproportionately large share of nominal GDP. Present deficits are unprecedented no matter how measured, and the past gives us no reliable guide to the future effects of deficit financing, beneficial or otherwise.

    To appraise the effect of the federal budget deficit on interest rates, it is necessary to compare the deficit, not to the debt to GDP ratio (a contrived figure), but to the VOLUME OF CURRENT GROSS SAVINGS MADE AVAILABLE TO THE CREDIT MARKETS. The current deficit ($1.3T interest expense 2011) is absorbing about 46 percent of gross private savings ($2,8T).

  34. Gravatar of Morgan Warstler Morgan Warstler
    5. May 2012 at 06:35

    Benny,

    “Maybe this is off topic, but as I’ve been trying to understand this blog’s point of view I have one question: why is Germany doing so well? Much of the analysis on this blog comes to tight money by the central bank choking growth. I understand demand and supply of money, but I don’t understand how that applies to Europe and why Germany does so well and Spain so poorly. If this is too off topic I understand.”

    A couple years ago, Germany began a painful restructuring dialing back their public sector, reducing regulations, and generally becoming more like the US compared to say OTHER European countries.

    Also, they are German, and as a self-loathing German, I think that says quite a bit. They are a humorless driven competitive homogeneous (sharing) group with a strong sense of order, right and wrong, and dude, somebody HAS to outrun the bear.

    Being king of a dunghill doesn’t make everything they do best, If America was using the Euro as well, we’d be kicking the shit out them still. We’d be even BIGGER cowboys, America with a Balanced Budget Amendment.

    As Mundell rightly points out… once you have a Free Trade Agreement, you are morally agreeing to a peg currency – otherwise it isn’t really free trade.

  35. Gravatar of dwb dwb
    5. May 2012 at 07:39

    @Benny,

    “Maybe this is off topic, but as I’ve been trying to understand this blog’s point of view I have one question: why is Germany doing so well? Much of the analysis on this blog comes to tight money by the central bank choking growth. I understand demand and supply of money, but I don’t understand how that applies to Europe and why Germany does so well and Spain so poorly. If this is too off topic I understand.”

    its a mistake to think recessions hit everyone, equally.

    Even in the US, during the depth of the recession, Vermont, New Hampshire, North/South Dakota and quite a few states had unemployment at or below 7%. And now, many states are lower than the national average (I would not call NH, MD, MA etc bastions of supply side labor policies either). In many case its because the states are tied to industries like defense or oil/gas that held up well during the recession.

    http://www.calculatedriskblog.com/2012/04/state-unemployment-rates-decline-in-30.html

  36. Gravatar of anon anon
    5. May 2012 at 08:20

    dwb, I think Germany is comparatively benefiting from nominal imbalances within the Eurozone, which are ultimately caused by poor economic integration. Kantoos Economics now has some good posts on this issue. It seems that tailored fiscal policy (Germany running higher budget surpluses, for instance) would help there, but this is politically problematic.

  37. Gravatar of Evan Soltas Evan Soltas
    5. May 2012 at 08:27

    Scott,

    I’m sort of amazed by the idea there is controversy here. Maybe I am missing something. You are saying that the fiscal multiplier is zero when the central bank determines the level and rate of growth of nominal income. In such a scenario, fiscal policy is unable to change the level or growth of nominal income insofar as monetary policy has immediate effects and expectations are stable. Given that the Keynesian multiplier is calculated as dY/dG = K, if any dG is counteracted by monetary policy such that the total change in aggregate demand is zero, in which case dY = 0, and therefore K must = 0.

    Isn’t this an identity? Keynesians have defined all of the terms; when you insert the assumption that there is a central bank which sets the path of nominal income, then it must follow that the fiscal policy multiplier is zero. The key words here are “must” and “follow.” It is only when the central bank does not have sufficient control over expectations of nominal income such that it cannot stabilize aggregate demand that the Keynesian fiscal multiplier can be nonzero.

    (The only case I can see where this is not true is if fiscal policy has some change on the aggregate supply curve — say if the government spending went to infrastructural projects which increased productivity.)

  38. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 08:31

    W. Peden I say it is a contradicition in terms you say it isn’t. Have we actually solved anything this way? Can you give me an example of a progressive consumption tax?

    I say all consumption taxes are regressive because they bite the poor and middle class much harder than the rich as much greater proportion of their income goes to consumption. For the poor and lower middle class all of it goes to consumption.

  39. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 08:45

    Morgan as much as you like pain-as long as it’s the poor-right now Europe is clearly voting with its feel and teh verdict is austerity is a flop.

    You can see this by Hollande’s likely victory in France the failure of the austierty loving Center-Right party in Holland, election resutles also in Greece, and now even Britian just saw Labour come back strong.

    Then there is the new Growth Compact the EU is working on no doubt in large part to the response to the elections-also no doubt the fact that all teh austerity countries are in deep recession.

    The era where the bondholders get to decide the policies of governments may be coming to the end.

    Of course the old saying goes “No pain, no gain.” Maybe but sometimes it’s all pain and no gain. Certianly that’s true of austerity.

    http://diaryofarepublicanhater.blogspot.com/2012/05/krugman-cautiously-optimistic-about.html

    http://diaryofarepublicanhater.blogspot.com/2012/05/big-wins-for-labour-in-uk-elections.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

  40. Gravatar of dwb dwb
    5. May 2012 at 08:56

    @anon,
    my point was that you cannot judge tight money *merely* because one region is doing better than another. Even if money is tight (ala the US) some regions will still seem comparatively ok.

    Yes, i agree: labor immobility and other factors are exacerbating the differences rather than leading to convergence.

  41. Gravatar of flow5 flow5
    5. May 2012 at 09:02

    Estimates by the Department of Commerce put the net debt figure as of the end of 1939 at $183.2 billion compared with a figure of $190.9 billion as of the end of 1929. I.e., for the period encompassing the Great Depression there was no over all debt expansion.

    Relative to nominal GDP we had the highest deficits during WWII and interest rates approximating the lowest levels of the Great Depression. Interest rates on Treasury obligations ranged from less than on percent on TBs to 2 ½ percent on long term bonds. This was accomplished by the Fed pegging the rates on all governments through the unlimited use of their open market power. If the market pushed any rate above the predetermined “peg level” the Fed entered the market on the buying side, etc. This resulted in a vast increase in m1, bank credit and commercial and reserve bank holdings of governments.

    At the same time due to rationing and the absence of available goods transactions velocity of demand deposits fell from around 20 to 13. The production of houses and automobiles was virtually stopped and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort this plus controls on prices and wages kept the reported rate of inflation down.

    It was true, as the Keynesians insisted, that monetary policy didn’t matter; fiscal policy was everything. NO MORE. The future holds the prospect of sharply declining levels of consumption for the vast majority of the American people, who will be facing years of stagflation. It is probable that we will never be able to dig ourselves out of the present morass of debt and still operate the economy within the framework of a free capitalistic system.

    Total Net Debt,,, Private,,,, Public
    1916 ,,,,, 82.1 ,,,,, 76.5 ,,,,, 5.6
    1917 ,,,,, 94.4 ,,,,, 82.4 ,,,,, 12.0
    1918 ,,,,, 117.4 ,,,,, 91.5 ,,,,, 25.9
    1919 ,,,,, 128.0 ,,,,, 97.2 ,,,,, 30.8
    1920 ,,,,, 135.4 ,,,,, 105.8 ,,,,, 29.6
    1921 ,,,,, 135.8 ,,,,, 106.2 ,,,,, 29.6
    1922 ,,,,, 140.0 ,,,,, 109.5 ,,,,, 30.5
    1923 ,,,,, 146.3 ,,,,, 116.3 ,,,,, 30.0
    1924 ,,,,, 153.0 ,,,,, 123.0 ,,,,, 30.0
    1925 ,,,,, 162.6 ,,,,, 132.3 ,,,,, 30.3
    1926 ,,,,, 168.8 ,,,,, 138.9 ,,,,, 29.9
    1927 ,,,,, 177.3 ,,,,, 147.6 ,,,,, 29.7
    1928 ,,,,, 185.9 ,,,,, 156.1 ,,,,, 29.8
    1929 ,,,,, 190.9 ,,,,, 161.2 ,,,,, 29.7
    1930 ,,,,, 191.0 ,,,,, 160.4 ,,,,, 30.6
    1931 ,,,,, 181.9 ,,,,, 147.9 ,,,,, 34.0
    1932 ,,,,, 174.6 ,,,,, 136.7 ,,,,, 37.9
    1933 ,,,,, 168.5 ,,,,, 127.5 ,,,,, 41.0
    1934 ,,,,, 171.4 ,,,,, 125.1 ,,,,, 46.3
    1935 ,,,,, 174.7 ,,,,, 124.2 ,,,,, 50.5
    1936 ,,,,, 180.3 ,,,,, 126.4 ,,,,, 53.9
    1937 ,,,,, 182.0 ,,,,, 126.7 ,,,,, 55.3
    1938 ,,,,, 179.6 ,,,,, 123.1 ,,,,, 56.5
    1939 ,,,,, 183.2 ,,,,, 124.3 ,,,,, 58.9
    1940 ,,,,, 189.9 ,,,,, 128.6 ,,,,, 61.3
    1941 ,,,,, 211.6 ,,,,, 139.0 ,,,,, 72.6
    1942 ,,,,, 259.0 ,,,,, 141.5 ,,,,, 117.5
    1943 ,,,,, 313.6 ,,,,, 144.3 ,,,,, 169.3
    1944 ,,,,, 370.8 ,,,,, 144.8 ,,,,, 226.0
    1945 ,,,,, 406.4 ,,,,, 140.0 ,,,,, 266.4
    1946 ,,,,, 397.5 ,,,,, 154.2 ,,,,, 243.3
    1947 ,,,,, 418.0 ,,,,, 180.3 ,,,,, 237.7
    1948 ,,,,, 434.3 ,,,,, 201.6 ,,,,, 232.7
    1949 ,,,,, 447.9 ,,,,, 211.2 ,,,,, 236.7
    1950 ,,,,, 488.2 ,,,,, 248.8 ,,,,, 239.4
    1951 ,,,,, 521.2 ,,,,, 279.2 ,,,,, 242.0
    1952 ,,,,, 552.7 ,,,,, 302.7 ,,,,, 250.0
    1953 ,,,,, 584.7 ,,,,, 328.0 ,,,,, 256.7
    1954 ,,,,, 605.5 ,,,,, 341.9 ,,,,, 263.6

    Sources: Office of Business Economics, United States Department of Commerce, “Survey of Current Business,” Sept, 1953, p. 14; May, 1955, p. 9.

  42. Gravatar of Benny Lava Benny Lava
    5. May 2012 at 09:06

    @dwb,

    It is my understanding that most of the boom in places like the Dakotas came from resource extraction. Germany, in contrast, has very little resources to extract and is doing well in manufacturing (or such is my understanding, correct me if I’m wrong).

    Although the typical American narrative of Germany relies on some sort of frugal hardworking Deutsche myth, the Germans appeared to have done a typical Keynesian counter cyclical spending, cutting deficits in the boom and then dropping stimulus in the bust: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=an0ME5IcV5bY

    So how come German Keynesian economics worked so well and American not so much? Was it because America never did the whole close the deficits during the boom part? Was the stimulus poorly directed? What role did tight money play in all this, seeing as Germany was in an even tighter monetary spot?

  43. Gravatar of W. Peden W. Peden
    5. May 2012 at 09:12

    Mike Sax,

    “W. Peden I say it is a contradicition in terms you say it isn’t. Have we actually solved anything this way?”

    You’re the one who made the positive claim, apparentely without having actually read up on what a progressive consumption tax IS.

    “Can you give me an example of a progressive consumption tax?”

    I can give two: (1) an income tax with progressive rates set on the basis of each band’s marginal propensity to consume and with 100% deductions for all investment income. Rather tricky to pull off in practice.

    (2) A progressive payroll tax i.e. all tax incidence is on wage income rather than investment income.

    “I say all consumption taxes are regressive because they bite the poor and middle class much harder than the rich as much greater proportion of their income goes to consumption. For the poor and lower middle class all of it goes to consumption.”

    Are you assuming that a consumption tax has to be at a flat rate? Or on all consumption?

    If we define progressivity in terms of tax incidence, what matters is the construction of the rates in relation to the levels of the behaviour in question within different groups. Whether the object of taxation is income, property, consumption, investment income or wages makes no essential difference to progressivity*.

    Notice your claim implies that a payroll tax on the top 1% only or a tax on caviar or a tax on mansions (assuming we regard them as consumption goods) are all regressive.

    * You might say that a property tax is inevitably somewhat progressive, because the poor tend not to own land or housing. However, a progressive payroll tax doesn’t affect those who earn no wages; an income tax doesn’t affect those who earn no income (unless you tax benefits); a progressive consumption tax like (1) can have a threshhold that is well above the incomes of the poor etc.

  44. Gravatar of dwb dwb
    5. May 2012 at 09:37

    @Benny,

    You are asking three different questions:
    1.as I understood your point, first you were saying that money could not be tight in the EU because Germany was doing well. That is not true, you cannot judge tight money in aggregate *merely* because one region is doing better than another. Even if money is tight (ala the US) some regions will still seem comparatively ok.

    2. now what explains differential peformance: yes exports are doing well in Germany. Sure resource extraction is important in the Dakotas. How about MD, NH, etc? We actually export a lot of capital goods in the US and Caterpillar is doing well (based in Illinois). How about the converse, why has FL unemployment droped 2% while DC has not?

    There are many, many factors that go into regional over/underperformance so you cannot really simplify it into one overarching principle.

    Yes, labor market and supply side reforms are important but i am skeptical all of Europe can adopt the German export-driven model (hows that going to work?). fiscal unification and labor mobility is also a factor (why dont more unemployed Spaniards move to Germany or Sweden where unemployment is low?).

    3. fiscal stimulus: “appeared to have done a typical Keynesian counter cyclical spending, cutting deficits in the boom and then dropping stimulus”. Well that is only 1/2 an explanation. Fiscal stimulus is only effective when not offset by monetary policy (or as a brilliant economist once said, the fiscal multiplier is a measure of central bank incompetence). The ECB is more incompetent than most. Also, Spain has the same debt/gdp ratio as Germany right before the crisis.

  45. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 09:49

    W. Peden it seems to me that Scott made the positive claim-implicitly he was presuming that a consumption tax is a good thing and that there are progressive consumption taxes.

    I was pushing back against that. Now as to your first example of a progressive consumption tax:

    “(1) an income tax with progressive rates set on the basis of each band’s marginal propensity to consume and with 100% deductions for all investment income. Rather tricky to pull off in practice.”

    I’m certianly not too vain to admit I don’t know that I even entirely understand the policy you’re advocating. It’s a question of terminology. I am of course familiar with the phfrase “margianl propensity to consume” but more in the sense that Keynes spoke of it. I suspect you mean something different. Until I know exactly what you mean by it I can’t really be sure what your calling for. On the ohter hand I have no idea what a “band” is here. You say it’s tricky to pull off it’s tricky enough to know what the policy is. Some elaboration would be helpful.

    As to your second progressive consumtpion tax “A progressive payroll tax i.e. all tax incidence is on wage income rather than investment income”

    I certainly am not happy with the current payroll tax regime which is very regressive. most people get aboslutely bruised every week with the high payroll taxes which are much lower even in absolute terms for the rich-capping SS taxes is a big part of the problem.

    In theory then I would love to see it progressive but am not sure what you might have in mind. If you mean to amke these taxes finally progressive then I’m all for it.

    Even then though I’m skeptical. Would such a move be revenue neautral or not? If it isn’t then what it means is more deep spending cuts which will hit the poor hardest so for them it’s like a tax hike-they’ll be worse off in any case.

    “Are you assuming that a consumption tax has to be at a flat rate? Or on all consumption>.?”

    “If we define progressivity in terms of tax incidence, what matters is the construction of the rates in relation to the levels of the behaviour in question within different groups. Whether the object of taxation is income, property, consumption, investment income or wages makes no essential difference to progressivity*.

    “Notice your claim implies that a payroll tax on the top 1% only or a tax on caviar or a tax on mansions (assuming we regard them as consumption goods) are all regressive”

    I admit I was largely assuming that. Certianly Herman Cain’s tax plan would have done just that-greatly lowered income taxes and investment taxes but hit us with a flat 23% federal sales tax-which along with a typical state sales tax of 7% or more will take us over 30%.

    Then of course his plan left state income taxes in tact.

    Your idea for taxing certain luxury items I suppose could be argued to be progressive. Yet what I don’t get is why do you want to discourage consumption? Even for the rich? Why is investment income to be so privliged-no taxes-while consumption is to be discouraged I don’t get the preference. You say that,

    “If we define progressivity in terms of tax incidence, what matters is the construction of the rates in relation to the levels of the behaviour in question within different groups. Whether the object of taxation is income, property, consumption, investment income or wages makes no essential difference to progressivity*.

    If it makes no differnece the object why do you have this preference for taxing consumption and giving a total pass to investment?

    I have never seen tangible proof that investment activities are nearly as sensitive to taxes as this seems to presume. I mean I see a lot of models that simply assume investment is very tax-adverse, but I’ve seen no presuarive empirical proof of this.

    Then again looking at it from a socially optimum way-externlatiy benefits of investment-some investment might be seen as haveing high external benefits but some of it hardly seems to have any upside for society as a whole. Why not distinguish different types of investment-hossing, capital equpment, labor, stocks, bonds, commodities…

  46. Gravatar of Morgan Warstler Morgan Warstler
    5. May 2012 at 10:20

    Sax,

    for all those machinations… are you saying the Euro is going to end?

    is Greece gong to drop out?

    Ultimately, that is the bet. And there is much gnashing of teeth, but no one is saying next year Greece leaves, which suggests there is an underlying law somewhere in there…

    Oh yes, they can’t borrow money on their own either, so they have to live on tax receipts.

    That makes me SMILE, and I suspect deep down, you hate that.

    Hey! Maybe Greece can quit the Euro, and go full MMT!

  47. Gravatar of Morgan Warstler Morgan Warstler
    5. May 2012 at 10:32

    Sax a Progressive consumption tax, is much like my Guaranteed Income…

    We hand everyone say $5K at beginning of year, and then tax back as sales tax, so that those who pay no taxes now, pay approximately $5K in sales taxes.

    This puts even the poorest and weakest into a savings mindset.

    I’m sure you are afraid they’ll blow the $5K and be screwed by high sales taxes for the rest of the year, so maybe we’ll deposit it in their Paypal acct. every week

  48. Gravatar of Benny Lava Benny Lava
    5. May 2012 at 10:38

    dwb,

    Yes, I suppose my line of thinking is more than one question. I shall try to be purposeful in my response.

    1. Please allow me to clarify. I was not denying the tightness of money in Europe. Rather why is the effect of tight money not uniformly contractionary? This, I suppose moves to the next part.

    2. Ok so tight money is not uniformly contractionary, only in the aggregate. To me this only begs the question of why. In America some of it can be explained by the commodities boom and small sample size. After all the Dakotas represent less than 1% of the US population. To be fair I don’t know that much about NH or Maryland, but I know that Illinois, even with Caterpillar and a few other in demand manufacturing exports is not doing that well, certainly not as well as Germany.

    I hope we are not talking past each other at this point. Germany is the 4th largest economy in the world, the largest in Europe, and I think the biggest or second biggest population in the EU. So it isn’t a small sample. A large percent of the EU is doing well (Germany), a large percent not well but not terrible (France), and a large percent poorly (PIIGS).

    3. If fiscal stimulus is only effective when not offset by monetary policy, did the EU do well or poorly? I thought the EU had tighter money that the US. I’m not really sure if Keynesian counter cyclical spending works, but I’m trying to understand the argument about why America’s tight money is restricting growth. My biggest problem to accepting this point of view is that it didn’t seem to restrict growth in Germany. German stimulus worked in the face of tight money and American stimulus did not. I can find scant information on the Spanish stimulus: http://www.theaustralian.com.au/business/breaking-news/spain-unveils-21bn-stimulus-package/story-e6frg90f-1111118166193

    Was it smaller than the German one? Poorly directed? Constrained by tight money? Or was the problem due to other factors like the bank bust? But then why didn’t German banks, which invested heavily in Spain and other places, go bust? And then if it is all these other factors then does tight money really matter and if so by how much?

  49. Gravatar of Marcelo Marcelo
    5. May 2012 at 10:54

    In Which Paul Krugman calls Scott Sumner the heir to Milton Friedman (after I ask a question he semi-answers) at about the 1:05.20 mark.

    http://www.youtube.com/watch?feature=player_embedded&v=kGDvJy0NZLI

  50. Gravatar of W. Peden W. Peden
    5. May 2012 at 10:56

    Mike Sax,

    I think “savings rate” is what I mean rather than “marginal propensity to consume” as such.

    Band = tax band.

    Put roughly, it’s an income tax with all investment income deductible.

    A progressive payroll tax is just like an ordinary payroll tax, except with progressive rates. To make it revenue-neutral, you’d have to greatly raise the overall amount of tax from payrolls in order to accomodate the abolition of income tax and capital gains tax.

    I wonder if the confusion about the supposed inherent regressivity of consumption taxes comes from the fact that when people talk about consumption taxes, they usually mean a sales tax (and VAT in particular). A sales tax is almost always regressive.

    “Yet what I don’t get is why do you want to discourage consumption? Even for the rich?”

    Especially the rich. I’d say there are three main reasons-

    (1) Western economies have chronic imbalances in favour of consumption over investment*.

    (2) Consumption inequality is arguably the worst kind of inequality, especially because of its effects on consumer debt behaviour-

    http://www.economist.com/blogs/democracyinamerica/2010/11/inequality_and_executive_pay

    (3) At low levels of income (i.e. those who already aren’t paying any income tax) greater capital abundance would change the capital/labour compensation gap more in labour’s favour, which would deal with some of the problems of the secular pattern of much greater investment-income compensation in recent decades in the West.

    Investment is just about the most mobile kind of taxable activity possible. Compare the mobility of financial capital to labour, for instance.

    As for tax sensitivity: even if investment has a low responsiveness to small changes in capital gains tax and income tax on invesmtent, the entire shift to a progressive consumption tax would have an effect that would be a very large multiple of these smaller effects.

    Basically, unless there’s any evidence that capital is extremely insensitive to tax at the margin (and we can at least have a null hypothesis that it IS sensitive) then a shift to a progressive consumption tax will have, at a bare minimum, a considerable effect on investment rates.

    All the evidence I’ve seen is that there is a substantial effect of changes in investment taxation on investment rates and therefore a total shift to a progressive consumption tax would have a major effect on the level of investment.

    “Why not distinguish different types of investment-hossing, capital equpment, labor, stocks, bonds, commodities…”

    Too complex and tempting for mere mortal minds and hearts to consistently pull-off well. Just look at how capital and reserve requirements respond to political meddling in the banking sector. Unless you trust George W. Bush or Mitt Romney to decide the different rates at which these investments are taxed…

    * Note that a progressive consumption tax isn’t for everywhere. Some countries, particularly in Asia, could do with tax policies that encourage more consumption and less investment.

  51. Gravatar of Major_Freedom Major_Freedom
    5. May 2012 at 11:14

    Lorenzo from Oz:

    Major_Freedom: all you have managed to establish is you cannot read a graph. But we knew that.

    Once again all you have is mindless antagonism devoid of substance, and a penchant for trying to appear informed instead of showing it.

    The funniest thing about this latest post of yours is that I did not even make any statements regarding any graphs, which can only reinforce my conviction that you’re in la la land.

    Jason Odegaard:

    Do you believe that research can reveal and predict the likely economic action of humans? I do, through both economics and through behavioral studies (more psychology-based). But I have heard that Austrians reject that notion.

    This is perhaps the most important question to ask in the whole of economic science, because the answer to this question is so fundamental that it will determine even the required methodology going forward.

    To answer your question, no, I do not accept that observing past data can reveal or predict anything regarding the future outcome of human behavior, the way that chemists and physicists do so with physical matter and energy past data.

    Here’s why:

    The very process of learning of these alleged constancies, presupposes a changing subject matter. You are obligated to hold that research endeavors results in the researcher to be a changed person. After all, research itself is ostensibly a process whereby the researcher learns something that they did not know before. Moreover, and this is the key point, when people learn different things, new things, they act differently. Knowledge influences what the researcher, indeed what everyone, does.

    So it would be like studying a particular molecule whose chemical properties and reactive behaviors keep changing every time you study it, because the process of studying it changes the nature of the molecule itself. It would be wrong then to assume that the molecule’s properties and reactive behaviors that existed last year are the same this year.

    So humans are like molecules whose properties change in the very process of learning about the history of the molecule.

    Thus, there are no constancies in human action that can be inferred from past history. The past is 100% unique. Nothing that can be observed in the past can possibly elucidate any constant relationships in human action. Humans are entities that learn. We are not automaton chemicals and atoms and molecules. Chemicals and atoms do not ACT. They do not behave with a purpose. Humans do. This is why the methodology that the Fed economists use is completely antithetical to the nature of humanity, and why their equations that presuppose constancy, keep blowing up in their faces.

    Consider. During the housing boom, the thought was that there existed a constant volatility of housing prices. This was encapsulated in most derivative pricing models as the value “rho.” This constancy assumption of course blew up. At the Fed, there is an assumption of a constancy relation between interest rates or inflation rates and employment. The Fisher equation, the CAPM, the list goes on and on. They all assume constancy, which does not apply to human action.

    During the 1970s, there was a prevailing belief that there existed a constant positive relationship between inflation and employment. That constancy assumption blew up as there was high inflation and high unemployment.

    NGDP targeting is also based on a constancy assumption, which is why it too will blow up if it is ever tried.

    Most economists who utilize positivist methodology are misguided fools who treat the economy like a physicist treats uranium atoms in the lab. Bernanke is also using the economy like an experiment. How else can you explain him doing Operation Twist after he wrote a paper saying that it doesn’t even work? He’s out of his element. Sumner is out of element. Bernanke and Sumner are really economic historians, data collectors, bookkeepers. They are not economic scientists. Real economists at least understand the subject matter they are dealing with.

    I mean Sumner just recently showed he doesn’t even understand the law of supply and demand. Some of his yokels spoke up after I brought this up and they too don’t understand it either.

    I hope that answers your question.

  52. Gravatar of dwb dwb
    5. May 2012 at 11:37

    2 -well, i was only using those as examples. Illinois unemployment for example dropped 2% while NY dropped .5%.

    monetary policy *always* affects regions/sectors differentially, since some sectors are more cyclical than other. more charts: http://macroblog.typepad.com/macroblog/2012/03/why-we-debate.html

    Some places in CA are doing much better than the state overall too.

    I thought the EU had tighter money that the US. I’m not really sure if Keynesian counter cyclical spending works, but I’m trying to understand the argument about why America’s tight money is restricting growth. My biggest problem to accepting this point of view is that it didn’t seem to restrict growth in Germany. German stimulus worked in the face of tight money and American stimulus did not.

    hang on, again, you are asking two different questions. You cant compare German performance to the overall US. You need to either compare the EU to the US, or Germany to individual states.

    In the US, money is tight because nominal growth is well under what most people think is potential. In the US we’ve had a pretty severe contraction in the government sector *yet* growth has stayed positive (just not positive enough). There is no long term correlation between governement expenditures and gdp growth – we have a fiscal union and Fed that until recent did a decent job offsetting fiscal contraction, (in the 90s, govt was contracting while the private sector was booming as well).

    I have no idea what European potential output is, but overall unemployment has risen since the crisis, on average policy has been tight.

  53. Gravatar of ssumner ssumner
    5. May 2012 at 11:51

    FEH, My hunch is that Bernanke would like to do a bit more, but lacks the votes.

    Greg, How much of that is due to lack of AD?

    OhMy, What’s your counterfactual? Britain has one of the most expansionary fiscal policies in the world. In 2011 their deficit trailed only Greece and Egypt.

    Ireland is broke, of course they cut back.

    Ben, I envy you.

    flow5, Yes, less than zero in real terms.

    Mike Sax, You said;

    “A progressive consumption tax is a contradiction in terms.”

    That will come as a big surprise to all the experts in public finance who support progressive consumption taxes.

    Benny lava, It’s no surprise that Germany is doing well, many parts of the US are doing just as well (including my state–Massachusetts.) There are always regional variations.

    And relative price variations, as you point out.

    Bogdan, Good point.

    Evan, I’m amazed too. I get two types of push back;

    1. Some claim fiscal stimulus can boost growth without inflation. Yeah, right.
    2. Some claim the Fed is not targeting inflation or NGDP, but something like interest rates. That seems unlikely.

    Benny, You said;

    “So how come German Keynesian economics worked so well and American not so much?”

    That will certainly come as a shock to the Germans. They claim their success occurred because they’ve avoided the massive fiscal stimulus of places like Britain, which in 2011 trailed only Greece and Egypt in the size of its deficit. Are there people seriously claiming Germany’s success is due to Keynesian stimulus??!!

    And let’s not overstate Germany’s success. Hours worked hasn’t done all that well, nor has RGDP.

    Marcelo, Thanks, I’ll listen.

  54. Gravatar of marcus nunes marcus nunes
    5. May 2012 at 12:04

    Scott
    In addition to votes, Bernanke lacks leadership!
    http://thefaintofheart.wordpress.com/2012/05/05/missing-federal-reserve-board-members-hawks-and-weak-leadership/

  55. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 12:58

    Scott, your answer hardly satisfied me-I understand if you don’t have that much time for a fuller answer.

    Luckily you’re Market Monetarist buddy W. Peden gave me more to work with in terms of how a consumption tax could be porgressive. I’ll follow up the larger conversation with him.

    I’ll just follow up with you on this:

    “That will come as a big surprise to all the experts in public finance who support progressive consumption taxes”

    Name me one such expert and even one small sample of the kind of thing they support.

  56. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 13:13

    Morgan, I know countries have to borrow. Still it’s a new thing that this means the bondholders get to write legislative policy.

    The power of the bondholders is partly that everyone minds them. If tomorrow the EU itself-by relaxing deficit targets-begins to pay it less heed they still need to borrow. Governments have to borrow but bondholders have to lend.

    When I look back on the 70s while I understand the problems of the Great Inflation one of the real benefits was that the people who ent to school during the 70s came out of school debt free-the rate of inflation bailed them out.

    Now even if anyone leaves college actually able to quickly find a job their earning potential is all wasted on college debt fianncing.

    Point is that no one used to worry so much about bondholers had yet life went on. Yet there were no structural reforms. The threat has as much power as you give it.

    Anyway what’s the use of borrowing money if you’re not allowed to spend it? Maybe the time has come to offer the public an opportniuty to invest in their own country by buying bonds themselves. Maybe the Eurobond idea has something to it.

    As for MMT, let me ask you this as long as I got you here: how is your GI different from the MMT JG of say $8 an hour?

    I think assessing either is best done via contrast.

  57. Gravatar of Benny Lava Benny Lava
    5. May 2012 at 13:17

    Scott,

    It should certainly surprise Tom Friedman that Germany is doing well (haha a joke yes).

    I guess Germany looks pretty successful compared to the rest of the EU in terms of unemployment, which are pretty much the only economic terms that matter in the realm of politics. I mean other metrics matter as well, but unemployment is big politically, as you know.

    I know the narrative about Germany in America and probably in Germany as well has been about being frugal and whatnot but you can’t really deny that Germany had a large stimulus (1.5% of GDP in 2009) which concatenated the period of very small deficits. I thought that was Keynesian. Feel free to correct me if I’m wrong (maybe I spend too much time reading DeLong and have a skewed view of what Keynesian means).

    I also thought the view of Britain’s mess was that fiscal policy couldn’t overcome monetary policy, and that monetary policy was too tight, so their big deficits are a waste. Did I misread things?

  58. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 13:30

    W. Peden I’ll admit you’ve given me some food for thoguht. You are right that I mostly associate a consumption tax with a sales tax-which can’t really be progressive unless it only goes to luxury goods, etc.

    All I can say, that as long as what you have in mind is nothing like Herman Cain’s 9-9-9 plan we can talk…

    It’s not is it?

    Your reasons for favoring investment over consumption were interesting:

    (1) Western economies have chronic imbalances in favour of consumption over investment*.

    (2) Consumption inequality is arguably the worst kind of inequality, especially because of its effects on consumer debt behaviour-

    http://www.economist.com/blogs/democracyinamerica/2010/11/inequality_and_executive_pay

    (3) At low levels of income (i.e. those who already aren’t paying any income tax) greater capital abundance would change the capital/labour compensation gap more in labour’s favour, which would deal with some of the problems of the secular pattern of much greater investment-income compensation in recent decades in the West.

    On (1) how do you know this to be a fact? Not saying it isn’t-or is-just asking how do you arrive at this premise?

    On (3) I want to empasize that for those who aren’t paying any income tax are still of course paying lots of taxes. You might seem to acknowledge this by your call for a progressive payroll tax-an idea that in principle at least, I’d love.

    The reason I feel it’s necesary though to emphasize this is because I hear a lot of people every day make broad comments that make “45% of people don’t pay income tax” to “45% of people don’t pay any tax.” So that point must be clear. The working poor actually do pay consdierable taxes already both in payroll as well as state level taxes-income, consumption, various other fees, etc.

    (2) if you’re right is very interesting and of great consequence. I will read the link. I defintely agree that level of consumer indebtedness is a real problem both for the individuals but also as a negative drag and externality on the larger economy.

    Your point about investment mobility is that its very difficult to tax it properly?

    “a shift to a progressive consumption tax will have, at a bare minimum, a considerable effect on investment rates.”

    Again, though is the rate of investment really so low? I mena during the housing boom this certainly didn’t seem to be the case.

  59. Gravatar of Negation of Ideology Negation of Ideology
    5. May 2012 at 15:36

    I just watched the part of the clip where Krugman calls Smuner the heir to Milton Friedman. I agree, but the rest of his answer surprised me a little. He said that there had to be something to change expectations significantly, like exiting the gold standard. He said that was a radical move at the time, and there was nothing equivalent we could do now to change expectations.

    Wouldn’t publicly changing to NDGP level target be a move to change expectations, as radical as ending the gold standard?

  60. Gravatar of W. Peden W. Peden
    5. May 2012 at 18:00

    Mike Sax,

    There’s quite a bit of work on overconsumption out there, but here’s an article that relates it specifically to position concerns-

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1187572

    Note that secularly high consumer debt is a sign of over-consumption, since it means people are not only consuming all of their income but actually consuming more than their incomes, chronically. Strong private investment are correlated with strong economic growth, though of course it’s very hard to work out the causality i.e. private investment may be strong because the economy is strong.

    I agree on non-income-tax taxes, though in the EU those are generally either mandatory (VAT at 15% or more) or desirable (alcohol and tobacco taxes). Of course, even if those 45% weren’t paying any tax, my response would be Friedmanite: good! If only the highest-earning 65% of the population are paying tax, then that’s great! Sadly, as you say, it’s an illusion in the US.

    Equipment investment and economic growth are statistically related, with the causality apparently running from the former to the latter-

    http://www.sciencedirect.com/science/article/pii/S0165176501005493

    The point about investment mobility it’s very easy for investors to move to the most favourable tax regimes. This means that it’s harder to tax investment, but it’s also easier to attract it through favourable tax rates.

    “Again, though is the rate of investment really so low? I mena during the housing boom this certainly didn’t seem to be the case.”

    It depends how we define housing (is it investment or consumption) which is difficult because housing is primarily or entirely an investment for some people, and primarily consumption for others. If you’re buying a house purely to have somewhere to live, then housing is consumption. If you’re buying a house for purely speculative purposes, then housing is investment. For most people, housing is somewhere in between: it’s something consumed, but it also produces value over time during a housing boom.

    I’d say that the housing boom had all the characteristics of a consumer boom, including dubious loans being provided to low-income consumers.

    The US fixed investment rate (fixed investment as a % of GDP) is one of the lowest in the world-

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

    135 out of 143 i.e. slightly more than Burma but less than the UK or Zimbabwe.

    Since the 1980s, US consumption rates (private + public) have been at a historically terrific rate. It was not always this way.

  61. Gravatar of W. Peden W. Peden
    5. May 2012 at 18:04

    Another set of statistics, this time showing what US consumption figures look like historically if you add residential investment and government consumption i.e. the consumption of housing and consumption by the government-

    http://www.economicsjunkie.com/wp-content/uploads/2010/03/us-true-consumption-as-percentage-of-gdp-q4-2009.png

    Consumption became more stable in the Great Moderation, until about 2001 when it began a long rise outside of historically normal values that has not yet finished.

  62. Gravatar of W. Peden W. Peden
    5. May 2012 at 18:05

    Negation of Ideology,

    “Wouldn’t publicly changing to NDGP level target be a move to change expectations, as radical as ending the gold standard?”

    I don’t think so, but the US isn’t in the same sort of position it was in 1933. Cold medicine is insufficient for meningitis but it’s a very good start for recovering from a cold.

  63. Gravatar of Saturos Saturos
    5. May 2012 at 22:48

    Scott, don’t tell me you consider yourself an Yglesian! Surely you must have some points of disagreement.

  64. Gravatar of Full Employment Hawk Full Employment Hawk
    5. May 2012 at 22:53

    “but it’s a very good start for recovering from a cold”

    What we are currently in is not a cold but a milder form of meningitis. We are currently in a little depression.

  65. Gravatar of Mike Sax Mike Sax
    6. May 2012 at 01:33

    W. Peden you’ve again given me lots of food for thought-thank you!

    “I agree on non-income-tax taxes, though in the EU those are generally either mandatory (VAT at 15% or more) or desirable (alcohol and tobacco taxes). Of course, even if those 45% weren’t paying any tax, my response would be Friedmanite: good! If only the highest-earning 65% of the population are paying tax, then that’s great! Sadly, as you say, it’s an illusion in the US.”

    Will certainly drink to that with you and Milt. No matter what anyone may think of Friedman on other issues he certainly deserves some graititude from the poor for desinging the Earned Income Tax Credit (EIC).

    What you say about Europe os well taken-it’s not necessarily true that Europe is siperior to the US on tax progressivity. Actually as I understand it what Europe does at least in many countries is have high and fairly regressive taxation however with a much more generoous welfare state than in the US. So part of it is that the bargain is different.

    For me Friedman’s attitude on taxaation for those with little or modest income is the right one because in my view what the US represents at it’s best is not equlaity of outcome but of opportunity.

    At our best we don’t gurantee anyone great wealth but they at least have the realistic chance. Note the key is realistic.

    For this reason we want to make the tax burden very light-I’d be happy with none for mamy-so that “gravity is wekaer” and the chance of upward mobility is higher. I do feel we’ve gone away from it in recent years.

    An interesting point-again I appreciate your-and Friemdan’s-attitude on taxes and the poor, but many conservatives these days seem to feel that the poor are somehow getting a free ride and they falsley conflate income tax with taxes-as we voth agree is totally wrongheaded.

    Yet when the US income tax originally started it was only levied on the rich. It really wasn’t until 1942 when income taxes-and more fatefully payroll taxes-started being levied on everyone.

    So those who bemoan “45% pay no tax” actually miss the point. Historically the nonrich have seen their total tax bill go up year after year. Income and payroll taxes used to only be for the rich.

    Interesting point about whether to call housing an investment or consumption. No question there has been a real problem with people not only consuming their whole income but indeed more than their income. This can only make us poorer in the aggregate.

    You have given me a lot to chew on. It may become a post over at Diary of a Republican Hater at some point…

  66. Gravatar of Mike Sax Mike Sax
    6. May 2012 at 02:38

    W. Peden it has indeed become a post! Talking taxes with W. Peden http://diaryofarepublicanhater.blogspot.com/2012/05/talking-taxes-with-w-peden.html

  67. Gravatar of ssumner ssumner
    6. May 2012 at 06:37

    Marcus, Good post, all three are problems.

    Mike Sax, I don’t recall names (I studied public finance 35 years ago), but the progressive consumption tax is quite popular among public finance types. It’s also a popular idea in Europe, where taxes are more aimed at consumption than in the US.

    With all due respect, instead of asking me to name names don’t you think it might make more sense for you to actually study public finance before blogging about it? Or do you think that actual knowledge is not important, just free floating opinions.

    You might ask Matt Yglesias, who also supports progressive consumption taxes–he might be able to name names.

    Benny, You said;

    “I know the narrative about Germany in America and probably in Germany as well has been about being frugal and whatnot but you can’t really deny that Germany had a large stimulus (1.5% of GDP in 2009) which concatenated the period of very small deficits. I thought that was Keynesian. Feel free to correct me if I’m wrong”

    Yes, you are wrong, that’s not Keynesian. BTW, Germany ran deficits in 2005 when it had 10% unemployment and was called the sick man of Europe. So there’s nothing particularly successful about the German model, it goes in cycles.

    You are right about Britain.

    Negation of Ideology, Yes, NGDP targeting would shock the markets, if set at a high enough level.

    Saturos, Sure, we differ on many public policy issues. He’s way more progressive than me. But he’s also a sort of model intellectual, and hence likely to be right about lots of things. (NGDP targeting, progressive consumption taxes, deregulating land use and reducing employment licensing laws, etc.)

  68. Gravatar of Mike Sax Mike Sax
    6. May 2012 at 11:36

    “With all due respect, instead of asking me to name names don’t you think it might make more sense for you to actually study public finance before blogging about it? Or do you think that actual knowledge is not important, just free floating opinions.”

    Well Scott I think that’s a cheap shot and not legitimate. I don’t know why you would claim I’m ignorant about economic matters as it clearly isn’t true. I think many people like my blog and don’t agree with you. It’s not just a question of you naming names. You basically speak in favor of an idea and aren’t able to justify it. My point in naming names was just ‘give me an example of what you mean so I can judge it.’ You advocate a position “progressive consumption tax” and in my understanding it’s a contradiction in terms. I asked you and you said that lots of “public finance” guys are for it. What I wanted you to do was explain how a consumption tax could be progressive. Saying a bunch of people are for it is not justification. Actually W. Peden was able to answer my question quite well. Basically according to him there are other kinds of consumption taxes besides a sales tax which he admits is usually regressive.

    You too clearly are not an expert on everything. You admit that you have no special knowedlge on fiscal matters and it shows. I really wouldn’t throw stones. But because you don’t like what I say to try to attack me that way doesn’t ring true and doesn’t speak well of you either. I wold say overall there’s nothing that makes me more ignorant than you and that’s a rather sad crutch to try to hang your hat on. If you don’t like me coming on and disagreeing with you now and again clearly I overestimated you.

  69. Gravatar of Mike Sax Mike Sax
    6. May 2012 at 12:12

    And to think you complain about Krugman slightiing you back in 2009. Your attempt to slight me was much more deliberate

  70. Gravatar of ssumner ssumner
    7. May 2012 at 06:48

    Mike Sax, You said:

    “You advocate a position “progressive consumption tax” and in my understanding it’s a contradiction in terms. I asked you and you said that lots of “public finance” guys are for it. What I wanted you to do was explain how a consumption tax could be progressive.”

    A progressive consumption tax is where the more you consume the higher the percentage rate of tax on consumption. I did not take a cheap shot at your knowledge of public finance, you’ve admitted you know little about it. Nothing to be ashamed of, I know very little about opera, or particle physics. But I don’t blog on those subjects.

    As for my “complaint” about Krugman, I thought it was obvious I was joking–I guess not.

    I agree with you on one point. One can find lots of people on the internet who like your blog.

  71. Gravatar of calmrevolt calmrevolt
    7. May 2012 at 08:17

    ^After all, the internet is full of people who hate republicans willing to read an online diary documenting these insightful observations!

  72. Gravatar of Mike Sax Mike Sax
    7. May 2012 at 10:10

    “I agree with you on one point. One can find lots of people on the internet who like your blog”

    Ok Scott with that I’m ready to come off the ledge! LOL

    I’m not sure here what you mean by public finance in this context. I feel that I’m pretty knoweldgeable about economics for an admitted lay person who took no formal training beyond Macro and Micro economics Itoo in college.

    I for my part do like your blog. Believe it or not when I make comments like “from what I understand a comsumption tax is a contradiction in terms” I don’t mean that as an isult or to be rude.

    What I’m saying is basically that’s not how I understand it, but I’m willing to be persauded. If I find it perausive I’ll admit it as I did in disucssing things a little with W. Peden-and yes, God help me, Morgan Warstler!

    Overall knoweldge is highly valued by me and I’m always trying to expand my own kwowledge.

  73. Gravatar of Mike Sax Mike Sax
    7. May 2012 at 10:12

    One more point-while I’m a lay person I do read extensively-I’ve read Friedman. I do at some point in the near future plan to read his huge Monetary History of the United States.

    Like I said I’m always willing to be persauded by anyone who makes the persuasive point.

  74. Gravatar of ssumner ssumner
    8. May 2012 at 05:24

    calmrevolt, You got it.

    Mike, You said, “I’m not sure here what you mean by public finance in this context. I feel that I’m pretty knoweldgeable about economics for an admitted lay person who took no formal training beyond Macro and Micro economics Itoo in college.”

    If you aren’t sure what “public finance” is, how could you be offended when I claimed you didn’t understand it.

    I agree you know more econ than most EC101 students, but isn’t that a low bar? I took one course in physics, suppose I did a blog on string theory?

    It’s certainly good that you are open minded–that already puts you ahead of most bloggers.

  75. Gravatar of Mike Sax Mike Sax
    8. May 2012 at 06:11

    Well, Scott, when you say “public fiance” do you simply mean fiscal policy? Sometimes people use different names for disciplines is what I mean.

    For example the MMTers are always complaining that most mainstream economists-they bash Krugman a lot about this-don’t get finance. But what they mean by fiance is the banking sytsem and how it works. INdeed if memory serves you have said on occaison you don’t know that much about finance-the kind of stuff Alpha writes about.

    Most of my knowldege of Econ is not from the two classes I took 18 years ago-Marcro I and Micro I. I didn’t really think that deeply about it at the time-just wanted a good grade. I aced a few tests which pleased me.

    But this was before I really valued knowledge for it’s own sake rather than just what some teacher gave me for a grade. But now economics fascinates me as much as anything.

    What I know about econ I’ve learned from my own reading and exploration. The last year or so I’ve really gotten into the econ blogs.

    I will just again make my point that I really am all about “teachable moments” and a genuine meeting of the minds whether or not it seems that way to you-LOL.

  76. Gravatar of Mike Sax Mike Sax
    8. May 2012 at 06:21

    So what motivates me is to umderstand the world. I think that in terms of what you might call the scientific method what matters is less whether or not you agree with a partiuclar writer or method but whether they help you understand and think more scientifically.

    So while I would consider myself a Keynesian I certainly wouldn’t relegate myself to only reading those who agree with me. I’ll read Monetarists, Austrians, and yes Marxists as well as some of that new fangled stuff like “evolutionary economics” or whatever.

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