I ask this because I don't know. However, Nick Rowe argues that it does matter. I still find his post something of a breakthrough for my understanding at least as to why the Monetarist preference for monetary over fiscal stimulus.
The reason for this preference at least for Nick is that he cares about the size of government. This is an argument less for a small government than a government of relatively constant size.
"Suppose I were totally indifferent about the size of government. Because I thought that the government was always equally good (or equally bad) at spending money as private households and firms. And not just at the margin, but everywhere. Never better, never worse, but always exactly the same. Whether G is 1% of GDP, or 99% of GDP, I don't care. The marginal benefits to government spending (adjusting for thee marginal deadweight cost of taxes, and relative to the marginal benefits of private spending) did not diminish."
The reason for this preference at least for Nick is that he cares about the size of government. This is an argument less for a small government than a government of relatively constant size.
"Suppose I were totally indifferent about the size of government. Because I thought that the government was always equally good (or equally bad) at spending money as private households and firms. And not just at the margin, but everywhere. Never better, never worse, but always exactly the same. Whether G is 1% of GDP, or 99% of GDP, I don't care. The marginal benefits to government spending (adjusting for thee marginal deadweight cost of taxes, and relative to the marginal benefits of private spending) did not diminish."
"Then I would find it hard to argue that fiscal policy was worse than monetary policy. You fiscalists want big government spending sometimes, and small government spending at other times? Whatever. We could use monetary policy instead, but who cares?"
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/fiscal-policy-and-indifference-about-the-size-of-government.html#more
See that's more or less my view. What is the big argument? Nick says it's that the size does matter:
"But if I really cared about the size of government, because I thought there were some things the government really should be buying, and other things the government really shouldn't be buying (initially high, but strongly diminishing marginal benefits of government spending at the optimal point) then I would strongly object to the use of fiscal policy instead of monetary policy to stabilize aggregate demand."
"For example, if I thought that government should do all the spending on education, and nothing else, and if I thought there was an exactly right amount to spend on education, and that spending either too little or too much would be very wasteful, then I would strongly object to macroeconomists telling me to increase or decrease government spending to control aggregate demand. I would want a very strong covariance between government spending and the number of kids needing schools and teachers, and no covariance between government spending and the number of workers needing jobs. Monetary policy should handle that."
"My beliefs about the optimal size of government don't matter for my beliefs about fiscal policy. My belief that the size of government matters and that there is an (interior*) optimum does matter for my beliefs about fiscal policy. It's why I'm against it."
"I accuse fiscalists of (implicitly) not caring about the size of government. You bad people you! You should care! Government spending is important, and its size is important too! (Sorry, I couldn't resist.)"
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/fiscal-policy-and-indifference-about-the-size-of-government.html#more
Ok, I understand the argument. That's how those who oppose fiscal stimulus feel. Now why they feel that way-this I don't know. I can't see why you would rigidly insist that education expenditures are exactly X and any variance at all will be a problem.
To me why would I before the fact unilaterally declare there will be X spent on education, Y spent on healthcare, Z spent on infrastructure come hell or high water?
How do we know that things on the ground could change requiring us to spend more or less than our original target? If we have to spend more on healthcare because of say an Ebola breakout why does this mean we have to subtract this increase with a decrease in education and/or infrastructure?
The irony is that Nick's post is inspried by Sumner''s previous post whose title announced that 'fiscal policy is not about big government.'
http://www.themoneyillusion.com/?p=29763
I asked Nick about that and here is his response:
"Mike: put G/Y on the horizontal axis. (That's a measure of the size of government, as a fraction of GDP.) Draw a downward-sloping Marginal Benefit curve, and an upward-sloping Marginal Cost curve. Where (you think) those two curves cross determines (what you think is) the optimal size of government."
"Scott is quite correct in saying that your beliefs about where the curves cross should have no effect on whether you agree or disagree with the use of fiscal policy."
"I am saying that (your beliefs about) the slope of the two curves where they cross should affect how much you dislike fiscal policy. If (you think) both curves are steep, you will strongly dislike fiscal policy. If (you think) both curves are fairly flat, you won't mind fiscal policy much."
"It's not the size, it's the variance around that size."
"Why am I using a visual explanation for an artsie?"
Good question-a visual explanation for me of all people! I'm not a big one for drawings. So it''s all about the slope of the cost vs. benefit curve...
Ironically I found Sumner's post-for once-kind of clarifying. I mean when you think about it, we always say conservatives desire small government and liberals big government.
But that depends. For the most part conservatives like smaller government on domestic policy matters but actually prefer big government for foreign policy matters. Republicans are down to cut every department's budget except the defense budget.
There are a few exceptions. The GOP was always happy to pay for the House of Un-American Activities, and they've been happy to spend money on endless Benghazi investigations that prove nothing but waste taxpayer time and money.
The premise behind the MMT Job Guarantee is that the government guarantees every American who wants a job a job. But these jobs aren't necessarily government jobs-they can also be non-profit or private sector jobs.
It's based on the premise that the size of government shouldn't be increased too much.
So that's sort of like Nick-of course the JG is as far from what Nick would support as you can get.
I still remain an agnostic. I don't see why I have to make a fetish out of a particular size of the government. Rather it should be an inductive rather than deductive process-we shouldn't declare what level each department will have to work with but rather access the needs of each department and only then come up with a number-whatever percentage of government spending this is, so be it.
Suppose there's an Ebola outbreak. And at the same time aggregate demand is getting too strong, and you want to reduce total (government + private) spending. Fiscal policy says you should reduce G to reduce total spending. I say you should increase G to cope with the Ebola outbreak, and use monetary policy to reduce total spending.
ReplyDeleteNow put it into reverse. There's a baby bust, so you don't need the government to build as many schools. But at the same time there's a recession, so you want to increase total spending. Fiscal policy says you should increase G to increase total spending. I say you should reduce G, and use monetary policy to increase total spending.
Interesting. I tend to think that these kinds of rules are just about making sure the govt doesn't get too bug but in your Ebola example we don't reduce govt spending.
ReplyDeleteSo monetary policy can also be used to avoid cutting govt spending as well. Which is not the way I usually conceive it.
Of course you're baby bust example can also be applied to justify the rush to cut spending to bring down the deficit in 2010 which just doesn't seem wise.
So do you believe the fiscal authorities should aim for a zero deficit all the time then rather than cyclically?
If anything from what I've seen I liked Canada's fiscal policy during the recession a lot better than the US in any case.
Mike: "So monetary policy can also be used to avoid cutting govt spending as well. Which is not the way I usually conceive it."
DeleteThat is the grain of truth in the "people who want bigger government want to use fiscal policy" position. They only think that because they never think about the cases where using fiscal policy would require you to cut government spending. Using fiscal policy, and not using monetary policy, means that half the time government would be bigger than you want it, and half the time it would be smaller than you want it. If you throw away the monetary policy lever, you have to use the fiscal policy lever to do two things that would only exactly coincide by sheer fluke. The chances of getting an Ebola outbreak of exactly the right size in a recession, and a baby bust of exactly the right size in a boom, are extremely small.
The fiscal policy should not aim for a balanced budget. It should aim to run a small deficit on average (to prevent the debt/GDP ratio either rising or falling forever), and run bigger deficits or surpluses depending on whether there's an Ebola outbreak of baby bust (or things like that).
Yes, Canadian fiscal policy has been (roughly) good in the recession. Other countries should envy it. (They made one mistake before the recession, by cutting GST (VAT).) Ironically, the government's critics say it is an extreme conservative government. Possible reasons:
1. The PM has an MA in economics. It's like talking economics to a bright grad student (but one who has a much better grasp of economic policy both in Canada and internationally than any grad student).
2. Canada went into the recession running a large surplus and with a low debt/GDP ratio. Loads of room to manouver.
3. People trusted that when the Bank of Canada lifted off the ZLB, and the economy recovered, they would bring down the deficit again (whether it were done by the Conservatives or the opposition). Which is what has been happening.
4. The extra spending was not on bread and circuses, but on very long-term investments, which made sense on purely micro grounds, given the very low real interest rates. My university got 2 new buildings, which is like long term investment (buildings) in long term investment (education). And it felt like they repaired or replaced every damn bridge on the Trans Canada (I exaggerate). The sort of stuff that fiscal conservatives like me are quite happy to borrow to finance. Doing it then saved us money in the long run.
But you can only safely spend big bucks like that if you have long run fiscal discipline and can stop spending when the time comes, which is what I don't see in the US.
Or maybe we just got lucky. I'm not sure what they would have done if the recession had been deeper and lasted longer.
I sort of like the JG theoretically. It has some really nice automatic stabiliser properties, if you set it up properly. It's like a world where gold is used as money, and gold mining increasing automatically whenever unemployment rises and nominal wages fall (you can get a better job panning for gold, which increases the money supply and brings the economy back to equilibrium automatically).
DeleteBut in practice it would be a godawful mess, because labour and jobs are not homogenous.
TK Nick, you've given me a lot to unpack. I'll be trying to game out the implications for the whole weekend and well beyond.
ReplyDelete'Here you are basically preaching to the choir:
"The fiscal policy should not aim for a balanced budget. It should aim to run a small deficit on average (to prevent the debt/GDP ratio either rising or falling forever), and run bigger deficits or surpluses depending on whether there's an Ebola outbreak of baby bust (or things like that)."
Ironically, this is what we had in the US until Reagan. He ran on balancing the budget then quite ironically gave us a huge deficit-TK to his huge tax cut and military spending.
The Republican Presidencies of both Bushes got us the same thing-record deficits.
So I see the alleged fiscal conservatives in our country rather ironically. That's what makes me so cynical. I've seen how they've urged one thing and given us the reverse time and again.
Meanwhile, until 1980 we had the small deficits that you rightly prefer.