Monetarism vs. Fiscalism

    This debate which is always out there has smoldered more to the surface lately with the Market Monetarists' visceral reaction to Stiglitz's Vanity Fair piece. It seems that there are three basic positions: you can say that fiscal policy is irrelevant and using it to fight a recession only distorts things as it is usurping the job of monetary policy.

   The opposite extreme "fiscalist" view that monetary policy has little relevancy in fighting a recession-this is what many of the MM school thought Stiglitz said anyway. Then there is the view that neither are irrelevant and that both have some level of impact. This view can be seen in people like Krugman and Eggertsson.

    It might seem that the "intermediate" school would have something to say to the monetarist school, but the monetarists see it as a kind of "crowding out"; if you try to fight a recession by both a fiscal stimulus and effective monetary policy the one cancels out the other.

    Lars Christensen over at the Market Monetarist gave the monetarist view of fiscal stimulus-for Lars it's essentially illusionary. Lars gives this view in an allegory of an economics professor who teaches that macroeconomics is the same thing as microeconomics but with NGDP added to it:

    "The professor has now introduced the AD-AS model (and the dynamic AD-AS model). Since AD is just (1)’ the professor has not started to talk about fiscal policy (what multiplier??). In his head the AD curve can be shifted by shocks to M or V, but that has nothing to do with fiscal policy. In “his” AD-AS model fiscal policy does really not exist, as it is basically a micro phenomenon – fiscal policy might have an impact on relative prices, but it has no impact on the PY aggregate and fiscal policy might impact the supply side of the economy, but not the AD-curve? No, of course not."

    What's interesting is this seemed to me to be saying that monetary policy can fix all problems. Yet underneath this post he had written another one entitled, "No, Monetary Policy Can't Fix All Problems."

     Well I'm relieved to hear him say that. At least there are limits on dissonance. Though beneath this post he has another entitled "Scott is right: Recessions are always and everywhere a monetary phenomenon – just look at QRPI."

    If recessions are always and everywhere a monetary phenomenon that would seem to suggest that monetary policy can fix all problems.

    If Lars doesn't believe it can, I'm not sure Sumner would agree with that-any limit placed on monetary policy's abilities he doesn't take kindly too. Let's just be clear-it certainly can't. If a meteor hit the earth tomorrow and wiped out Europe and Asia-leaving the U.S. with both continents of the Americas, Africa, etc. in tact, we would have some economic problems-and others-that no manner of effective monetary policy-or even anything conventionally known as fiscal policy could fix. Actually the concern there would be that human civilization as we know it would be over and that we would soon all be back in the Iron Age.

   My point is that at some point the real economy has to make its appearance. It would be nice if everything could be solved by adjusting NGDP to the right level-but life is not that simple. This is not to say that monetary policy is powerless, but that like anything else human it is far from all-powerful. If monetary policy could fix all problems at least on the economic level it would be at least economically speaking, immortality.