In his big book, Rational Expectations I think that Sargent here describes what Sumner is doing as well as it can be.
"My colleague Neil Wallace has described the scheme for coordinating monetary and fiscal policies that was being utilized at the inception of the Reagan administration as coordination via resort to a "game of chicken." The monetary authority had promised to stick to a tight-money policy of M(t)-M(t-1)=0 for all future t's, come hell or high water, but meanwhile the fiscal authority had set tax and expenditure plans G(t) -T(t) an indefinite future."
"On the one hand, if the monetary authority could successfully stick to its guns and forever refuse to monetize any government debt; then eventually the arithmetic of the government budget constraint would compel the fiscal authority to back down and to swing its budget into balance on the other hand, if the fiscal authority were to stick to its guns and simply refuse to reduce the stream of G(t)-T(t). then eventually the arithmetic of the government budget constraint would compel the monetary authority to monetize large parts of the deficit. All that is clear is that in this situation, one of the two parties to the conflict eventually has to give in (the party to capitulate is called a "chicken."
"This situation can be likened to one in which the quarterback on a football team (the fiscal authority) announces that he is going to run the ball and wants the tight end to block, while simultaneously the tight end (the monetary authority) announces he wants to catch a pass and will run a pass route on the next play. The quarterback and the tight end point out to one another that the other had better capitulate or else the next play will go badly. About the only thing that is certain about this situation is that it can not long endure.
http://www.amazon.com/Rational-Expectations-Inflation-Thomas-Sargent/dp/0691158703/ref=sr_1_1?s=books&ie=UTF8&qid=1392422048&sr=1-1&keywords=thomas+j+sargent+rational+expectations+and+inflation
Pgs. 34-35.
Sargent wrote this about the Reagan administration 28 years ago but I think what he says here basically sums up Sumner's strategy with monetary offset. He basically keeps warning the fiscal authority if it doesn't capitulate it's going to end badly. He insists that monetary policy is the QB and fiscal policy can only submit and react. Sargent didn't see things this way. There's no reason why the fiscal authorities can't insist that they're the QB.
Sumner loves to say that only an incompetent CB won't offset fiscal stimulus-presumably full offset. He goes so far as to say that there 'might have been' a negative multiplier. Later he drops the might have been. However, this claim of incompetence only holds good under certain assumptions. We have to assume an inflation targeting Taylor Rule kind of Fed in the post Volcker era that has a great deal of 'independence.'
Yet I think this shows that not only could we have a different political regime-as we had pre-Volcker, indeed we've had a number of different ones since 1914; the Mariner Eccles Fed couldn't have been more 180 degrees different-but in truth the fiscal authorities not the monetary is the QB.
The CB only exists and functions at the pleasure of the fiscal authority. It was created thanks to an act of Congress and it's Chairman and other high ranking officials are appointed by the President and confirmed by the Congress. Congress could change its mandate tomorrow to anything it wanted and Sumner's theory would be over.
Yes Sargent is one of the founding leading New Classicals but this is no argument against him-in fact Sumner was taught by the leading founding father himself, Bob Lucas.
"My colleague Neil Wallace has described the scheme for coordinating monetary and fiscal policies that was being utilized at the inception of the Reagan administration as coordination via resort to a "game of chicken." The monetary authority had promised to stick to a tight-money policy of M(t)-M(t-1)=0 for all future t's, come hell or high water, but meanwhile the fiscal authority had set tax and expenditure plans G(t) -T(t) an indefinite future."
"On the one hand, if the monetary authority could successfully stick to its guns and forever refuse to monetize any government debt; then eventually the arithmetic of the government budget constraint would compel the fiscal authority to back down and to swing its budget into balance on the other hand, if the fiscal authority were to stick to its guns and simply refuse to reduce the stream of G(t)-T(t). then eventually the arithmetic of the government budget constraint would compel the monetary authority to monetize large parts of the deficit. All that is clear is that in this situation, one of the two parties to the conflict eventually has to give in (the party to capitulate is called a "chicken."
"This situation can be likened to one in which the quarterback on a football team (the fiscal authority) announces that he is going to run the ball and wants the tight end to block, while simultaneously the tight end (the monetary authority) announces he wants to catch a pass and will run a pass route on the next play. The quarterback and the tight end point out to one another that the other had better capitulate or else the next play will go badly. About the only thing that is certain about this situation is that it can not long endure.
http://www.amazon.com/Rational-Expectations-Inflation-Thomas-Sargent/dp/0691158703/ref=sr_1_1?s=books&ie=UTF8&qid=1392422048&sr=1-1&keywords=thomas+j+sargent+rational+expectations+and+inflation
Pgs. 34-35.
Sargent wrote this about the Reagan administration 28 years ago but I think what he says here basically sums up Sumner's strategy with monetary offset. He basically keeps warning the fiscal authority if it doesn't capitulate it's going to end badly. He insists that monetary policy is the QB and fiscal policy can only submit and react. Sargent didn't see things this way. There's no reason why the fiscal authorities can't insist that they're the QB.
Sumner loves to say that only an incompetent CB won't offset fiscal stimulus-presumably full offset. He goes so far as to say that there 'might have been' a negative multiplier. Later he drops the might have been. However, this claim of incompetence only holds good under certain assumptions. We have to assume an inflation targeting Taylor Rule kind of Fed in the post Volcker era that has a great deal of 'independence.'
Yet I think this shows that not only could we have a different political regime-as we had pre-Volcker, indeed we've had a number of different ones since 1914; the Mariner Eccles Fed couldn't have been more 180 degrees different-but in truth the fiscal authorities not the monetary is the QB.
The CB only exists and functions at the pleasure of the fiscal authority. It was created thanks to an act of Congress and it's Chairman and other high ranking officials are appointed by the President and confirmed by the Congress. Congress could change its mandate tomorrow to anything it wanted and Sumner's theory would be over.
Yes Sargent is one of the founding leading New Classicals but this is no argument against him-in fact Sumner was taught by the leading founding father himself, Bob Lucas.
Sadowski pointed this one out today:
ReplyDeletehttp://moneymarketsandmisperceptions.blogspot.com/2014/02/were-all-mostly-monetarists-now-not-new.html
http://www.themoneyillusion.com/?p=26140#comment-318638
So what do you think? Is Caton right? Only monetarists and anti-monetarists now? New Classical would be in the latter, correct?
You should see Morgan's interchange with Glasner today:
ReplyDelete"I can hear you very well; you don’t have to shout at me." Lol
Ben Bernanke to the Joint Economic Committee on May 22, 2113: "...we are the agent, of course, of the Treasury and it's our job to do whatever they tell us to do."
ReplyDeletehttp://www.3spoken.co.uk/2013/06/bernanke-we-are-agent-of-treasury.html
This was written around the time that Thomas Sargent was still pushing the fiscal theory of the price level.
ReplyDeleteThe cyclically adjusted budget balance had remained in the relatively narrow range of (-2.7%) to (-1.3%) from fiscal year 1971 through 1982. In fact despite the image of a deficit prone decade the 1970s were one of the most fiscally responsible decades on record with gross Federal debt setting a post WW II record low of 32.5% of GDP in fiscal year 1981 (President Carter’s last budget).
:But NGDP growth was double digit every year from 1976 through 1979, peaking at 13.0% in 1978, and core inflation accelerated to 9.2% by 1980.
Under Reagan, cyclically adjusted Federal budget balance was reduced from (-1.5%) in fiscal year 1981 to (-4.6%) in fiscal year 1986 (the largest cyclically adjusted budget deficit since 1960 prior to the Great Recession). And yet from 1981 to 1986 NGDP growth averaged 7.4% and core PCEPI fell to 3.4% by 1986.
Sargent's book was published just as his fiscal theories seemed to have been soundly disproven.
Fiscal policy reminds of one of those 1960s vintage Deluxe Reading Playmobile toy dashboards:
http://www.thestrong.org/online-collections/images/Z000/Z00036/Z0003678.jpg
It's battery powered with working windshield wipers, turn signals, horn, etc. and even has a key for "starting it up". With its buttons, levers, steering wheel etc. it gives a fiscal policymaker the illusion that what he's doing really matters, but when push comes to shove the dashboard isn't even hooked up to anything.
I love it when you find a photo or a clip to to illustrate your point.
DeleteMark what does the time it was written matter. I mean in the history of ideas there are books written 200 years ago that are still read. You don't think Sumner was influence by him? again at the University of Chicago he was taught by Lucas.
DeleteIt may have been written in 1986-oh my God, so long ago!-but it accurately describes what sumner is trying to do now. To say that fiscal polcy sn't hip anymore is pretty shallow even for a Sumnerian like yourself. If you look at the actual quote-another words respond to what is said ratehr than who said it or what year he wrote it in-what did he say that was false?
I don't know why you love that one Tom as it didn't illustrate any point other than Mark doesn't have any answer for this. If you look at the substance of it,Sargent got you. Sumner is playing a game of chicken where he just keeps declaring monetary policy is the QB but this only works if fiscal policy capitulates. If it didn't this wouldn't work.
As for saying FP isn't cool anyomre. it is again after 2008 as desperate as Sumner is to the Pandora Box sealed.
Mark if you want to go beyond saying FP isn't cool, what you can't do is deny my point that FP could simply end 'Fed Independence' tomorrow-as Barney Frank has proposed as Henry Gonzalez did many times and Sumner's full monetary offset goes bust.
I agree that the deficit wasn't big-until Reagan and those who saw huge deficits thanks to his huge deficits were wrong. However, that wasn't the point in the quote. The point is that sumner plays this 'I'm the QB' game but there's nor reason we have to bow to him.
As Tom HIckey says the CB existst and functions only at the direction of Congress. Sumner always talks about how monetary offset only works with a incompetent CB but in truth it's opposite. The CB gets to be Sumnerian and say 'I'm the QB' only where we have an incompetent, dyfunctional Congress-sound familiar-that is derelict in its duty to provide oversight and supervision over the monetary authoritry.
Some say we should do away with the CB. I Just say do away with CB independence. Then there's no monetary offset. The CB will due what Congress tels it to do. If it says don't offset fiscal stimulus. It won't do that. Problem solved.
While you're playing the 'fiscal policy just aint cool no more' game Mark, I can't help but notice that we had a much better economy and standard of living in the 60s than we have with the allegedly Sumnerian CB-and Congress-of today.
Even the 70s with double digit inflation was much better than the last 6 years-in some ways it was much better than the 2001 to 2007 years as well.
"those who saw huge deficits thanks to his huge deficits were wrong."
ReplyDeleteI mean those who saw soaring inflation thanks to his huge deficits
You know Sargent really approved of Reagan's policy, he was just giving himself a little distance for PR reasons here. However, the point of this post is not to debate the Reagan Administration-as much as I hated that-but Sargent's QB analysis. He's dead right that Sumner's game is a game of chicken between the monetary and fiscal authorities.
Bottom line Beranke's own admission disproves monetary offset. They are the agent of Congress. Ie, not the QB.
ReplyDelete12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
DeleteNothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
http://monetaryrealism.com/did-the-fed-have-a-legal-basis-for-rejecting-the-coin/
Thank you Tom. Mark this is more incontrovertible evidence that yes the Fed is the agent of the Treasury and not the other way around. In Sargent's terms, the Treasury is the QB
Delete