Guess HSBC and China Haven't Read Scott Sumner

        If they had they'd know that fiscal policy doesn't work. Because right now China is planning a stimulus, where fiscal is going to play the major part.

        "With inflation finally under control, Chinese policymakers will turn their focus to stimulating growth this year, using fiscal easing as their key ammunition, according to HSBC's Co-Head of Asian Economics Research Frederic Neumann."

          http://www.cnbc.com/id/45937446

         Fiscal easing as their main ammunition? Evidently Neumann didn't read Sumner when he claimed that the multiplier is "roughly zero."

        “We need a fiscal stimulus,” Neumann told CNBC on Tuesday. “The Chinese want to avoid at all cost another resurgent housing market, so they're not going to turn on the taps on monetary policy all too aggressively. But primarily use fiscal policy to cut taxes on consumers, on SMEs, start irrigation projects again, restarting the rail investment for example.”

        "While HSBC expects China to conduct "across-the-board" monetary easing in the form of up to 150 basis points cut in its banks' reserve requirement ratios in the first half of 2012, it believes Beijing's fiscal policy will be more important than its monetary policy."

         "HSBC expects to see tax cuts for small and medium-sized enterprises (SMEs) amounting to around one percent of GDP, more spending on public housing and infrastructure projects and more subsidies for rural households."

           Of course the reason Sumner claims the fiscal multiplier is zero seems to me to be always changing depending on the argument, but one reason he uses which is very common is that it is zero because of Fed policy. If the Fed targets 2 percent inflation then it will always undue any fiscal stimulus. Even if that is true though this clearly is not true in China where you wont see the monetary authorities deliberately trying to undo fiscal stimulus as Sumner claims the U.S. Fed does.

            Furthermore, if Sumner is right here, it wouldn't necessarily mean fiscal stimulus is wrong just that Fed policy is. And that is actually my view-the Taylor Rule and the vaunted Great Moderation of which their is much pride wrongly put too high a priority on low inflation at the expense of employment and growth.