Krugman Clarifies the Difference Between Fiscal and Monetary Policy

      I got to say I was tickled yesterday at a comment of Cedric over at the Money Illusion. He told Morgan Warstler that he's the worst Right wing conspirator ever. I told Cedric he was right on the money with that one and he answered thus:

     "Don’t credit me. I stole the idea from some jerk with a blog."

     http://diaryofarepublicanhater.blogspot.com/2012/04/morgan-warstler-explains-market.html

      http://www.themoneyillusion.com/?p=14895

     I told him I consider jerk a high compliment and he said he keeps his enemies close! LOL He also said:

     "Morgan, I see a beautiful union of market monetarists, Keynesians, and conservatives joining hands and leading us out of the crisis via monetary stimulus. And then when he least expects it, we stab Mike Sax in the back and cut his Medicaid. It’s brilliant."

     Look I'm not the enemy of NGDP level targeting exactly. I'm something of a friendly skeptic. Remember Steve Waldman said that he thinks MM and MMT are really frenemies? Me, I'm not sure where I come down. I'm slow to be a joiner, that much is clear.

     You got to understand I'm probably a little more liberal than the median Money Illusion reader-not necessarily by much, a lot of readers are moderates and liberals as well-but for all that I like hanging out there actually more than most of the big liberal sites like Fireoglake, Daily KOS, or even Democratic Underground. Indeed I got banned from all three places.

    I don't  necessarily crave agreement. Don't get me wrong I couldn't last very long at Errick Erickson's RedStateAmerica either I don't bet .But in some ways I like talking economics more than politics in the blogs I visit-part of the trouble is that politics is all opinion but economics has some chance of being scientific.

      What's funny though is that at the really left wing blogs like Firedoglake-to say nothing of say Black Agenda Report(you got be real brave to comment on that last one if you aren't black and talk the lingo quiet honestly and I say this as a mulatto myself) Obama is pissed on just as much as at Erickson's.  This to me proves that the Far Right and Far Left have more in common with each other than the Center-their common foe. Obama is in reality a very moderate liberal.

     The firebaggers-what we call extreme libs or Lefties, extreme Righties are teabaggers, double meaning intended-never could get why I wasn't more critical of Obama do I think he's perfect? No. I defintely have some valid criticism of him, but the trouble is that there are so many invalid ones that little good comes out of joining in as it only gives aid and comfort to his Right wing enemies who are scum-much like Clintion in the 90s, the ugliness of his enemies is Obama's best asset.

      In any case, Cedric's comments are more proof that I get a lot of Money Illusion visitors, to all who come I salute you! Hey for whatever reason you are reading it you read it and I know at least some really like it. Marcus Nunes receives it in his email. Lars Christensen has been known to read it, Nick Rowe. I haven't heard from Nick lately, I hope he's not sore we had words about a month ago. Nick if you're out there drop me a line!

     As far as NGDPLT is concerned again, I'm more a friendly skeptic. I say try it-if you can win the Fed over. I don't know for sure it would work any more than Friemdan's money supply growth rule works-it didn't. I think the talk about models is that a good one could ferret out if it's at least technically feasible. After all, it's costly and not possible to test every idea on the trial and error of empirical failure. The Fed and BOE  did that with Friedman but it was costly.

     I do think through all the condescending snark, Stephen Williamson made a good point that we both don't know that MM will work-a model could help us with that-and we don't know why the optimum policy is for the Fed to pursue this. Why is nominal spending what really matters?

     Still, to Waldman's gloss that MM and MMT are frenemies, interesting that MMT actually sees stable nominal spending as key as well, but they get their not by having the Fed set a nominal target but from the wage that workers receive in their Job Guarantee (JG). The idea is to pay the JG workers about $8-as an aside not all JG workers are government workers. The government guarantees every one who wants a job, gets a job. However some of these jobs will be with nonprofit employers and some will indeed be with private employers.

      It's interesting to consider that Sumner often says that what could be even better than a NGDP target is a wage to productivity target. To even further butress the idea that MM and MMT may be frenemies, consider that Morgan Warstler himself is always telling anyone who'll listen that he has the answer to unemployment through his GI (Guaranteed Income). He wont listen when I point out that the GI sounds a lot like the JG but it's pretty obvious.

     The difference is that he wants the GI jobs to be all private sector that will be set up through an auction. And of course in exchange for this workers give up a minimum wage and unemployment benefits-MMT likely doesn't do that.

    Speaking of models, I was looking at Sumner's criticisms of IS-LM again. He linked to a few posts by Krugman. Krugman wrote some kind of longer piece called "There's Something About Macro."

    He argues that while lots of fancy models have come since Lucas at the expense of IS-LM, policy makers still prefer IS-LM in part because of why Lucas and company knock it-it's ad hoc and rough and ready for use.  One  line particularly caught my eye:

      "How can we distinguish between monetary and fiscal policy? Well, in a fiscal expansion the government sells bonds and buys goods - producing the same shifts in schedules shown in Figure 4. In a monetary expansion it buys bonds and "sells" newly printed money, shifting the bonds and money (but not goods) schedules "

       http://web.mit.edu/krugman/www/islm.html
  
       http://www.themoneyillusion.com/?p=11277
      This is rather eye popping for me as it seems like a big part of the monetary debates have centered around this question. Scott always says that the fiscal multiplier is roughly zero. Some of the MMTers like Dan Kerzig go almost 180 degrees in the opposite direction-that monetary policy is largely ineffective and we want fiscal policy.

       A lot of the argument centers around the zero bound question and interest rates. Scott makes the point again and again that interest rates are not a good guide to monetary policy and too much stress has been laid on them by IS-LM.

      Yet I thnk that the argument is as some have suggested political and definitional. What do you call "fiscal" policy, what do you call "monetary policy?" Scott implicitly suggests that they are the same thing with the only difference that fiscal policy raises the national debt and monetary policy doesn't, ergo fiscal policy is more costly and so redundant.

     Lars Christensen in a particularly radical post once claimed that "there is no such thing as fiscal policy."

    For the details check this out. Yes Lars favored me with a post-exciting stuff.

    http://marketmonetarist.com/2012/01/31/christensens-postmodernist-mind-fuck/

     Lars basically argues that talk about fiscal policy is basically an illusion-ergo I called his argument a "postmodernist mind fuck."

     As far as I been to gloss this so far fiscal and monetary policy are not the same as Scott and-Lars more radically-claim. The operations are different. I look at it this way-fiscal policy more directly impacts the real economy, monetary policy aims more directly at the financial economy. It's more indirect. In reality the choice depends on what your problem is and what you're trying to do to fix it.

    Dan Kervick thinks a major difference is that monetary policy is undemocratic-it's not really any different than fiscal policy but its run by unelected bureaucrats and on populist, democratic grounds, he prefers fiscal policy here as well.

   I'm not entirely sure I'm with him on this one. In theory of course the Fed is accountable to Congress and is appointed by the President. I'd like to see the Fed's "independence" pulled back a little for sure.

   I think my idea of monetary-financial economy, fiscal-real economy, is on the right track. But Krugman gives us actually a very straightforward and technical definition of the difference between the two. Fiscal policy is when the government buys goods and sells bonds and monetary policy is where the government buys bonds and "sells" money.