David Glasner: the Fiscal Multiplier Could be More Than Zero

     Wow. This is pretty earth shattering in the econ blogosphere. While Sumner always brushes off the questions of Keynesians like me, it will be interesting how he answers his fellow Market Monetarist, David Glasner.

     For the original Sumner piece see here

     http://diaryofarepublicanhater.blogspot.com/2013/05/sumner-again-throwing-stones-at.html

     Now and again Sumner's shrillness gets to Glasner clearly.

     "But now Scott seems to be turning the Lucas Critique on its head by saying that the expectations that result from a particular policy regime — a policy regime that has been subjected to withering criticism by none other than Scott himself – refutes a structural theory (that government spending can increase aggregate spending and income) of how the economy works. I don’t think so. The fact that the Fed has adopted and tenaciously sticks to a perverse reaction function cannot refute a theory in which the Fed’s reaction function is a matter of choice not necessity."

     "I agree with Scott that monetary policy is usually the best tool for macroeconomic stabilization. But that doesn’t mean that fiscal policy can never ever promote recovery. Even Ralph Hawtrey, originator of the “Treasury view”that fiscal policy is powerless to affect aggregate spending, acknowledged that, in a credit deadlock, when expectations are so pessimistic that the monetary authority is powerless to increase private spending, deficit spending by the government financed by money creation might be the only way to increase aggregate spending. That, to be sure, is a pathological situation. But, with at least some real interest rates, currently below zero, it is not impossible to suppose that we are, or have been, in something like a Hawtreyan credit deadlock. I don’t say that we are in one, just that it’s possible that we are close enough to being there that we can’t confidently exclude the possibility, if only the Fed would listen to Scott and stop targeting 2% inflation, of a positive fiscal multiplier."

     By saying monetary policy is usually the best tool-but that there may be times when fiscal policy would have a rule, Glasner is on the same page as Krugman. 

    http://uneasymoney.com/2013/05/21/scott-sumner-meet-robert-lucas/#comment-19001

    A Hawtreyan credit deadlock sounds kind of like a liquidity trap... 

    Glasner asks asks a question I often ask Sumner. We'll see if he gives him a better answer than he gives me-it couldn't be a worse one. 

     "With US NGDP not even increasing at a 4% annual rate, and the US economy far below its pre-2008 trendline of 5% annual NGDP growth, I don’t understand why one wouldn’t welcome the aid of fiscal policy in getting NDGP to increase at a faster rate than it has for the last 5 years. Sure the economy has been expanding despite a sharp turn toward contractionary fiscal policy two years ago. If fiscal stimulus had not been withdrawn so rapidly, can we be sure that the economy would not have grown faster? Under conditions such as these, as Hawtrey himself well understood, the prudent course of action is to err on the side of recklessness."

     I've never gotten Sumner's dogmatism on this point, assuming, the real point is that his agenda is to make sure there is never a fiscal intervention into the economy regardless of how bad the economy gets; ie, his dogmatism about the multiplier is ideological rather than scientific. 

     It will be interesting to see if he answers Glasner-it may be tough not to as they are friends and fellow MMers. 

     HT: Tom Brown