In my post about Marcus Nunes and Salim Furth I asked questions of both Marcus and Nick Rowe regarding fiscal policy. They both gave me comments. I appreciate that. I appreciate honestly having two such auspicious readers and whatever disagreements I may have with either of them I do admire their work.
It's possible to agree with someone very much on Issue A and disagree very sharply on Issue B as we can see with Reinhart-Rogoff. While they have given a lot of aid and comfort to the austerians and I think that's to their very considerable discredit, on the other hand they were as right as rain in their 2009 book It's Different Now. I often see that book misconstrued, incidentally. The point of the title is not to mock those who always think it's different now but rather that in 2009 it really was different. Financial crises are different and take longer to get over.
Actually I totally agree with Nick in the advice he gave as an economic expert in Canada in 2009:
"At the beginning of the recession the PM asked a couple dozen Canadian economists to speak for 5 minutes each and give their advice. I advised him not to cut spending or raise taxes or try to balance the budget during the recession. I said it was OK to run a temporary deficit. I stand by that advice. The Canadian government also temporarily increased (or maybe preponed) investment spending. I think that was the right decision too."
"But Canada is not the US. Canada entered the recession with a fiscal surplus, and I am reasonably confident our political system will eliminate the deficit (inflation-adjusted) as we exit the recession. You republicans have a different system of government, and you had a deficit even during the good times."
"And fiscal policy isn't just about macro and aggregate demand. Micro matters too. There's a good micro reason for increasing investment when real interest rates are temporarily very low."
http://diaryofarepublicanhater.blogspot.com/2013/06/marcus-nune-salim-furth-and-case-for.html
I couldn't agree more with all of that, except maybe that the U.S. was different in 2009 due to teh deficits. It seems to me that even with a deficit during a recession you still want a recovery which won't happen by trying to balance the budgets as tax revenues plunge.
Of course Keynesianism-perhaps what Lars Christensen-calls 'paleo Keynesianism- say during a bad recession we should deficit spend. Even NKers say we should spend during the recession. One difference may be that NKers might ask that it be paid for in the long run whereas 'Old Keynesians' prefer it not to be paid for but rather legitimate deficit spending.
Nick does make a great point about good reasons to increase investment being micro with such low interest rates. I mostly agree then. However, here is Marcus' latest post on the austerity debate. He argues that both the austerians and anti-austerians miss something esential. At this point it sounds very much like Scott.
"Krugman comments on a post by DeLong:
UPDATE: HT to Tom Brown who pointed out that Nick's comments on the use of the word 'austerity' has become a post. It's word for word what he wrote in the comments section. The question though is that even if we use 'fiscal tightening rather than 'austerity' does our terms of the debate or our understanding change? I'm not clear on that.
It's possible to agree with someone very much on Issue A and disagree very sharply on Issue B as we can see with Reinhart-Rogoff. While they have given a lot of aid and comfort to the austerians and I think that's to their very considerable discredit, on the other hand they were as right as rain in their 2009 book It's Different Now. I often see that book misconstrued, incidentally. The point of the title is not to mock those who always think it's different now but rather that in 2009 it really was different. Financial crises are different and take longer to get over.
Actually I totally agree with Nick in the advice he gave as an economic expert in Canada in 2009:
"At the beginning of the recession the PM asked a couple dozen Canadian economists to speak for 5 minutes each and give their advice. I advised him not to cut spending or raise taxes or try to balance the budget during the recession. I said it was OK to run a temporary deficit. I stand by that advice. The Canadian government also temporarily increased (or maybe preponed) investment spending. I think that was the right decision too."
"But Canada is not the US. Canada entered the recession with a fiscal surplus, and I am reasonably confident our political system will eliminate the deficit (inflation-adjusted) as we exit the recession. You republicans have a different system of government, and you had a deficit even during the good times."
"And fiscal policy isn't just about macro and aggregate demand. Micro matters too. There's a good micro reason for increasing investment when real interest rates are temporarily very low."
http://diaryofarepublicanhater.blogspot.com/2013/06/marcus-nune-salim-furth-and-case-for.html
I couldn't agree more with all of that, except maybe that the U.S. was different in 2009 due to teh deficits. It seems to me that even with a deficit during a recession you still want a recovery which won't happen by trying to balance the budgets as tax revenues plunge.
Of course Keynesianism-perhaps what Lars Christensen-calls 'paleo Keynesianism- say during a bad recession we should deficit spend. Even NKers say we should spend during the recession. One difference may be that NKers might ask that it be paid for in the long run whereas 'Old Keynesians' prefer it not to be paid for but rather legitimate deficit spending.
Nick does make a great point about good reasons to increase investment being micro with such low interest rates. I mostly agree then. However, here is Marcus' latest post on the austerity debate. He argues that both the austerians and anti-austerians miss something esential. At this point it sounds very much like Scott.
"Krugman comments on a post by DeLong:
He’s referring to calls for the Fed and other central banks to raise expectations of future inflation as a way to get some traction in a liquidity trap — which is certainly something I and others support. But there are two crucial differences between us and the expansionary austerity types.First, our expectations argument is a hope; theirs is a plan. I want the Fed, the Bank of Japan, etc. to target higher inflation, in the hope that it might help, but it’s a hope, and meanwhile we need to fight demands for fiscal austerity and even push for stimulus. The expansionary austerity types, on the other hand, are (or were) actually counting on the supposed rise in confidence to avoid what would otherwise be nasty recessions, which have in fact materialized.Which brings us to the second point: those of us hoping to summon the expectations imp want to do so with policies that are at worst harmless, such as expanding the monetary base under conditions where this has no direct inflationary impact. The austerians, on the other hand, have pushed directly destructive policies — fiscal contraction in depressed economies — in order to achieve their hoped-for shift in expectations.So this is the difference between “Let’s try this possibly ineffective remedy, it might work and in any case won’t do any harm” and “Let’s do the opposite of what standard analysis says we should be doing, just trust me”.
"So you see, Krugman barely pays lip service to monetary policy. It´s only a hope and likely ineffective, so why bother?"
So he's upset with Krugman for using the word hope? It's true enough that he doesn't have the level of confidence in unconventional monetary policy that Scott or Marcus have.
"Krugman bashes the austerians, and vice-versa, because their respective agendas are diametrically opposed. The market monetarist´s don´t have a political agenda behind their arguments, but if their proposals were tried and succeeded, they would prove Krugman wrong in saying that without fiscal stimulus (more government) the economy would remain subdued. In order to discourage something like NGDP level targeting to be even tried Krugman says it´s like ‘chasing rainbows’, or an ‘impossible dream’.
"I´ll try to show that it isn´t an ‘impossible dream’. In doing so, I´ll argue that neither ‘fiscal austerity’ implies at all times a drop in economic activity or that ‘fiscal stimulus’ implies a strengthening in the economy´s performance."
Notice though that while he seems to be saying the austerians and Krugman are both wrong-Krugman for opposing austerity they for advocating it that's not really what he is saying. He's saying that if monetary policy as effective as he believes it can be then we can do all the fiscal austerity-or as Nick prefers 'fiscal tigthening'--the Republicans want and Keynesains shouldn't raise a peep. If he's right then Krugman is wrong, but the austerians aren't wrong too-they're actually right as they can have all the austerity they want.
However, as Nick says, there can be 'micro'-does he mean supply side?-reasons for doing stimulus right now anyway.
At the end of the day, teh relationship of Scott and Krugman is not symetrical. Krugman says do both monetary and fiscal stimulus, Scott insists we should do only monetary. Now Marcus judges Krugman's support of monetary policy as wanting as it's not confident enough, but at least he supports it. Scott claims though that he's not as doctrinaire about this as it may sound just that he's got the long view in mind:
"As for whether my arguments are “callous” I think it depends whose making them. I happen to think that fiscal stimulus does a modest amount of harm, in a couple ways. It increases the level of future distortionary taxes, and it makes it less likely that effective monetary stimulus will occur, by muddying the waters. But I also recognize that lots of people who are smarter than me (Krugman, DeLong, Yglesias, Avent, etc) disagree."
"Here’s my bottom line. If I was someone like Abe, I’d look at the intellectual dispute and make the same pragmatic decision that FDR made; try a little of everything. So I agree with Garcia that it would be “callous” of policymakers to ignore any tool with widespread support among economists. That doesn’t mean they must do everything recommended by economists, but at least they should give the argument serious consideration, if widely held. (Even if I disagree.)"
"My role is different. I’m not a policymaker; I’m inside the academic debate. I see my role as telling the truth as I see it, and let the chips fall where they may. If my arguments convince other academics and pundits to come over to my side, that’s great. If not, then I’ll just be one small input into a vast policymaker apparatus, which is as it should be."
"I’m playing a longer game—hoping that if my view eventually prevails then in the future we will DEMAND that central banks stabilize the expected path of NGDP. My fear is that if we use fiscal policy today, we’ll have to use it in the future. But the best outcome is an expected NGDP growth path where fiscal policy isnever even called for. That’s my long term goal, and it’s why I maintain my “purist” stance. (Which given that I favor employer-side payroll tax cuts, is actually not all that pure.)"
Of course, it's more mud in the eye for Keynesians that his favored fiscal stimulus is regressive-a tax cut for wealthy employers. It's obvious that he wants to influence the debate for the long term. I too am very interested in this. I still at this point don't take his point. So I'll have to continue to raise questions.
He has two core beliefs it seems:
1). It's preferable that monetary policy handle 100% of demand management. To use fiscal policy in this way is to employ the wrong tool.
2). Monetary policy can in fact handle 100% of demand management.
At this point 2 is just a conjecture. We lack as usual in economics a natural experiment. These come but rarely. This is the beauty of all those GOP Governors and state legislatures rejecting Medicaid funds from the government and dragging their feet on implementation. We will get a real natural experiment between the states that do it properly and those that don't.
I must say though that Sumner has never provided what I find a persuasive case for 1 either. Why is fiscal policy the wrong tool? I don't buy that we'd rather avoid an increase in public debt for the reason Nick mentioned-we have record low interest rates right now.
We have the history of the huge public debt after WWII that we never consolidated fiscal spending to pay. Yet it didn't strangle us and we paid for it over a period of 25 years through higher GDP and revenue.
As to distortionary taxes, there are two ways of looking at it.
1). The New Keynesians argue that thanks to consumption smoothing any ill effects of future taxes to pay for the stimulus will be largely mitigated.
2). The 'Old Keynesians'-I'm more in this camp-don't think you want to 'pay for' stimulus anyway. The best benefit is from deficit spending rather than 'balanced budget' spending. Again, like after WWII we should see debt cone down as a percentage of GDP-remember as Krugman always says that in the debt to GDP ratio there's a denominator as well.
"The market monetarist´s don´t have a political agenda behind their arguments, "
ReplyDeleteOh really? I wonder what qualifies as a political agenda? I hear this all the time from conservatives...... that someone else is being political. As if their own positions have nothing to do with politics, they are just verifiable truths not opinions.
Just the times we live in I suppose.