I Finally Get a Market Monetarist to Admit He's For Austerity

     I can't resist this-I have to go this way. I see that Cullen has a new piece that looks at the correlation of QE and low barely more than zero level inflation. It's true that the markets like QE and that tapering talk isn't good for the market. However, this doesn't by itself in any way show that expanding the MB is the key. However I see that the MM commentator Suvy-a Sumner regular-just declared that we can't 'kick the can down the road.', we need austerity and we need it now.

    UPDATE: The piece is actually not written by Cullen Roche but Marc Chandler. 

    "Right, we have a debt problem. How do you fix a debt problem? Austerity, inflation, and debt restructuring. You don’t do what Japan did and just kick the can down the road with no growth for 25 years. We can’t do that."

    Read more at http://pragcap.com/chart-of-the-day-no-inflation-in-the-developed-world-despite-qe#mw2tJMpvrPuHYPHm.99

    Technically, Japan has not had zero growth for 25 years though, admittedly, their growth has been low, certainly sub-optimum. Through it all by the way they have had unemployment that's stayed under 5%-so it hasn't been all bad. However, this is where we get into counterfactuals again-a major bane of economics. In my last post, we saw how Mark Sadowski claims that low almost zero inflation isn't embarrassing to the Market Monetarist model as he believes that without the huge expansion of the monetary base we would have had prolonged deflation rather than just very low inflation. 

   However, why do we have to accept his belief? This is the trouble with counterfactuals: which ones are we constrained to accept of at least give credibility to? What model actually shows that high government debt in any meaningful way causes low growth. When in the past I've accused Sumner and other MM of supporting austerity they claimed I was unhinged, lying, and engaging in character assassination. 

   http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-and-my-apparent-war-with.html

   http://diaryofarepublicanhater.blogspot.com/2013/11/id-like-to-welcome-mark-sadowski-to.html

   Now Suvy is cheefully calling for it. So he is in Alesina's camp-he thinks that austerity is expansionary. 

   http://krugman.blogs.nytimes.com/2013/03/13/night-of-the-living-alesina/?_r=0

   How else could imposing it increase growth? The more conventional model that Austerians argued that a high public debt level like Japan has is terrible because it will fire up the bond vigilantes. This clearly hasn't happend and is major egg on the Austerians' faces. 

   P.S. I have to say that Sumner and Alesina agree on an awful lot considering that Sumner is not supposed to believe in fiscal austerity. You could almost say that their fiscal views are separated at birth. Indeed, Alesina is basically a supply sider to boot, arguing that austerity works as long as most of it is spending cuts rather than revenue increases. Here he was recently on fiscal austerity.

   "So the ECB made a big mistake in 2011 by not offsetting fiscal austerity.  Krugman and I agree on that point.  The eurozone was not at the zero bound, so austerity should not have reduced demand, even using Krugman’s model.  One irony here is that Krugman may be partly right about the fiscal multiplier, but for essentially supply-side reasons.  One problem in 2011 was that inflation was running above target.  And that was partly due to various tax and fee increases designed to close the large budget deficits.  The ECB reacted to these tax increases by raising rates several times in 2011.  In an AS/AD model the tax increases shifted AS to the left, raising inflation and reducing output, and the ECB reacted by shifting the AD curve to the left.  So fiscal austerity was a mistake."

   "Or perhaps the real problem was the specific type of fiscal austerity.  My analysis, combined with the ECB’s insane preference for inflation targeting, suggests that demand-side fiscal austerity would have been desirable. Raise the employee-side payroll tax by 4 percentage points and lower the employer-side payroll tax by 2 percentage points.  That sort of fiscal reform would have lowered inflation and thus caused the ECB to cut rates in 2011, instead of raising rates."

     http://diaryofarepublicanhater.blogspot.com/2013/11/for-sumner-theres-good-fiscal-austerity.html

     You have to love supply side logic-the answer to a recession in the fiscal side is to raise tax rates on workers while lowering them for their employers. That's the supply side argument in a nutshell-regressive taxation is the key to long term growth.