Scott Sumner Asks the Right Question

     After all the fiscal wars we've seen over the last few days-and over the 4 years of his blog-for some background see these links-

     http://diaryofarepublicanhater.blogspot.com/2013/04/krugman-calls-out-sumner-hornets-nest.html

     http://diaryofarepublicanhater.blogspot.com/2013/04/sumner-and-david-henderson-speak-on-r.html

     http://diaryofarepublicanhater.blogspot.com/2013/05/james-hamilton-r-r-only-guilty-of.html

     --he asks a very good question:

      "Over the past year NGDP growth has been running around 3.5%; 2% real and 1.5% inflation.  Given the slack in the economy, if the Fed bumped that up to 5.5% NGDP growth for 2 years, we’d get around 2% inflation and 3.5% RGDP growth.  At worst it would be 2.5% inflation and 3% RGDP growth.  In either case the unemployment rate would quickly fall back to the natural rate (whatever it is.)

Unfortunately there is very little chance that the Fed will achieve 5.5% NGDP growth.  Some have argued that fiscal austerity is slowing the recovery.  Indeed the Fed has argued that fiscal austerity is slowing the recovery.  And that’s because fiscal austerity is slowing the recovery.  RGDP growth in Q2 will likely be lower than if the sequester had not taken effect.  So why do I keep prattling on about  ”zero fiscal multiplier?”

       http://www.themoneyillusion.com/?p=20971

      I don't know. That's something that I- and many others no doubt- have been trying to figure out for years. He gets credit for at least asking the question.Until now I was never sure if he understood that the sequester is s drag on the economy, So what does he come come up with? Would you believe the Lucas Critique? Lucas had argued that over time discretionary monetary policy can't work as it would have to consistently surprise the market, and that's not likely over the long time. 

      "This is a hard concept to explain, so let me use the analogy of Lucas’s critique of discretionary monetary stimulus.  Lucas argued that discretionary monetary policy was undesirable.  He argued that monetary stimulus was ineffective if anticipated, as it would already be factored into wages and prices.  Then people would ask Lucas why unanticipated stimulus would not work.  He replied that one had to think in terms of systematic policy rules that one could write down on a piece of paper, otherwise there was little hope of producing a welfare-enhancing monetary regime.  Suppose you wrote down “Every time unemployment rises above 7% we’ll do an unexpected monetary stimulus.”   Then it would no longer be unexpected!  In other words, the monetary authority could only surprise the public by doing “wild and crazy” things which people had no reason to expect.  How likely is that to work?"

       Sumner's gloss is that fiscal policy can't possibly provide optimal outcomes over time-even if it could in specific instances:

         "I think wages and prices are stickier than Lucas believes, so I think even systematic monetary policies will have some real effects.  But the logic of his argument applies pretty well to the monetary offset issue.  The claim today seems to be “fiscal stimulus can work if it catches the Fed off guard, as with the April 2013 sequester.” Yes, but now think about this game from a “timeless perspective,” (not a 2013:2 perspective) where you don’t know the starting point.  Over time, there will be equal number of cases where fiscal stimulus is greater than expected, and less than expected.  Thus on average fiscal stimulus will have no effect.  Since 2009 there have certainly been some quarters of greater than expected stimulus and some quarters where it was less than the Fed expected. But it’s absurd to think we can have long run success from fiscal stimulus via a policy of Congress continually fooling the Fed.  It’s hard to imagine a less nimble organization than Congress."

           I'm not necessarily sure why  fiscal policy has to "surprise" the Fed; I mean that's the LC but one can question that too. However, why does fiscal stimulus need to show it will always be successful rather than not just that it's needed now? We're not going for a historical record. In any case, we're not discussing fiscal stimulus here but fiscal contraction. At this point fiscal stimulus isn't even on the table; could we just take deep fiscal contraction off the table.  

           So Scott's newest gloss is that cumulatively over time if you add up the different fiscal policies you will get zero. Not sure-even if this is true-why it matters. While his argument is against stimulus he also wants to criticize those who criticize austerity. 

       If he acknowledges that the sequester is slowing growth why is he so critical of those who criticize the sequester?