Stephen Williamson Says Fiscal not Monetary Policy at Zero Bound

       I've portrayed him as being basically an insular defender of the institutional status quo lately with his carping against Krugman and now his knocking of NGDP targeting-my problem is not so much criticizing NGDPT but think his reasons are mostly just about defending the status quo.

      I think there's some justification for this view, as he himself as said he values loyalty to one's institution-Krugman's sin is to openly bash the institution of Macro in front of the Great Unwashed public.

       Nevertheless I came across some things he wrote that gave me some pause suggesting that he's a hard guy to pin down. His own ideas are often quite interesting and idiosyncratic. I was all set to knock him again regarding inflation fighting, my premise being is that inflation hawks are a big part of the trouble and have been for a long time.

       As Bill Mitchel at Bill Blog in his piece about the Great Moderation has suggested,, the GM was a deliberate time of disinflation begun under Volcker that made the choice to sacrifice employment and output in exchange for the virtue of low inflation. Williamson made some comments that suggested this is his mindset:

       "The "inflation hawks" are NOT a powerful force on the FOMC. The Committee just voted, with one dissenting vote, to keep the target for the fed funds rate in the range 0-0.25% until the end of 2014. That's hardly a hawkish policy, and the Fed has already engaged in some massive and unprecedented quantitative easing, that is far from hawkish and conservative. Indeed, it is quite risky, and favored by the majority of FOMC members, who are basically old and new Keynesians, if they know any economics at all. Actually, the moniker I would prefer to apply to the "inflation hawks" is "serious economists" (for the most part - Fisher is not an economist)."

       http://newmonetarism.blogspot.com/2012/01/optimal-inflation.html

       This certainly makes him sound like an inflation hawk and as someone who things that "serious economists" should be concerned with inflation fighting first and foremost, the unemployed be damned. This underscores it further:

       "This presumes that the long-run costs of inflation are negligible, but to me this looks like an argument for wearing a sweater in July. You can always take it off if you want to cool down. I have written more on the costs of inflation here. Potentially the long-run costs of inflation are much larger than conventionally measured. Anyone who lived through the 1970s or, even better, comes from a country with a serious inflationary history, understands that inflation is bad."

         Well I do remember the 70s,, and while we did have gas lines and less stable prizes at least we didn't have the level of both unemployment and underemployment that have now become normal. The real important thing to remember about unemployment today and why nominal numbers aside it is much worse than anything we saw in the 70s is underemployment, a very toxic phenomenon that became a permanent feature of our economy with the recession of 2001.

         So, I was all set to write another anti SW piece when I noticed down the page this interesting quote:

        "If the key macroeconomic inefficiencies we are faced with are the relative price distortions coming from sticky prices, those inefficiencies might more appropriately be corrected with fiscal policy than monetary policy. Krugman seems to be thinking that the zero lower bound is a big problem, but the zero lower bound need not bind."

         This paragraph really jolted me, as it really challenged to sacredly held tenets one of Sumner and one of Krugman. It is a blasphemy for Sumner who doesn't believe that fiscal policy is more appropriate than monetary policy for anything, save Lucas' supply side reforms. Certainly not on the questions of price and demand stability.  And of course it also contradicts Krugman's belief-not only his to be sure-that the zero bound is paralyzing for policy.

         So, I checked out SW's above link on why the zero bound need not bind.

         "Given that the IROR cannot be negative, does this mean we are stuck with the zero lower bound, and the relative price distortions that are the concern of New Keynesians? Well, no. As discussed in this speech by Narayana Kocherlakota and in this paper and this one, fiscal policy gives us a lot of flexibility. Basically, in New Keynesian models, the problems created by sticky prices are relative price distortions which lead to a misallocation of resources. What could be more natural than correcting such distortions with fiscal policy, given a sufficiently rich array of taxes? The papers I link to above show that efficiency can be achieved in sticky price environments solely with appropriate taxation. Further, there are inventive ways to manipulate tax rates so that the zero lower bound no longer matters. Unless we think that fiscal policy is somehow constrained (e.g. the legislative process is too awkward) relative to monetary policy, this casts some doubt on the New Keynesian approach to monetary policy, as set out in Woodford's "Interest and Prices." The sticky price problem, if it exists, appears to be a problem more appropriately addressed with fiscal policy instruments than monetary policy instruments. Further,the solution is not an Old Keynesian program of expansion in government purchases of goods and services, but could be a revenue-neutral change in taxes."

      I checked out those papers and am reading them with interest. This is an unusual idea for sure, that fiscal policy via taxes is what we need now. It almost sounds like an MMT idea-if there anything SW isn't it's MMT

     This idea of fiscal policy to stabilize prices is very MMT-the Job Guarantee (JG). Woj has recently written on a fiscal policy that stabilizes prices as well-from what he tells me he's not rigidly MMT.

    http://bubblesandbusts.blogspot.com/2012/06/targeting-inflation-with-fiscal-policy.html

     I wonder what Woj would make os SW.