The Fiscal Multiplier: Sumner vs. Bernanke

    About that Sumner victory lap.

    http://diaryofarepublicanhater.blogspot.com/2013/05/sumners-nuanced-support-of-austerity.html

    http://diaryofarepublicanhater.blogspot.com/2013/05/sumners-continues-to-spike-ball-on.html

    One thing he likes to say a lot is that belief in fiscal stimulus is an article of faith, ie, it cannot be proved to work. Yet Krugman made an interesting point yesterday. The history of fiscal stimulus, in this country least, is pretty small.

    The other day, Sumner complained of people who say he's 'pro-austerity.' Ok, I'm blushing, as I'm clearly one of those people he has in mind in the comments section.

    "There are some people claiming that I am “pro-austerity.”  That’s a bit misleading as my position has always been more nuanced:

1.  I favor monetary stimulus combined with fiscal austerity.

2.  If the central bank continues to stubbornly target inflation, I’ve advocated cuts in employer-side payroll taxes and/or the VAT as a way of reducing inflation, and encouraging more monetary stimulus.  So if monetary policy refuses to play ball I’ve advocated effective forms of fiscal stimulus.  I don’t favor ineffectivestimulus, such as bloated military spending merely to give us more “empty GDP calories.”

     http://www.themoneyillusion.com/?p=21045

     He gets contemptuous of 'mindnumbingly stupid' Keynesian complaints that are supposedly uninformed like how I can't help but notice that those fiscal actions he thinks could work are regressive rather than progressive measures-they go to people who tend to be richer; or to capital rather than labor, etc. 

     Still I can't help but notice that's the case.

     As for his knocking "empty GDP calories", he gives an example of ineffective stimulus in 'bloated military spending.' In a way that's smart on his part as most progressives when they think of fiscal stimulus certainly don't mean more military spending; Reagan was a military Keynesian. 

   For the record though, the huge mobilization of WWII was hardly ineffective. Of course, the massive mobilization was not done for it's fiscal impact chiefly but to save the world from Hitler. When discussing the history of fiscal stimulus measures, successful or unsuccessful, it's rather shocking how few such measures there have been the U.S. 

    Krugman was dealing with the myth that once you put in place fiscal stimulus measures they never end.

    "As it turns out, there have only been two significant spending stimulus programs in US history — by which I mean programs deliberately introduced to fight an economic downturn. One was FDR’s program, the WPA/CCC and all that; the other was the spending part of the Obama ARRA. So what happened to each of these programs? Why, not only did both go away; both went away too soon, with premature austerity hitting in 1937 and again in 2010. So much for stimulus that never ends."

     http://krugman.blogs.nytimes.com/2013/05/05/naive-fiscal-cynicism/

    Certainly a great point. This is why while Sumner likes to claim that belief in fiscal stimulus is an article of faith that can neither be proven nor disproven, Krugman makes the crucial point that it's tough to say Keynesianism has been defeated as it's scarcely been tried. 

   Due to his own Holy War against fiscal stimulus. Sumner is constantly arguing counterfactuals of what would have happened if fiscal policy weren't used. 

   "In a recent comment section, Statsguy asked if I thought the Fed would have offset a lack of fiscal stimulus in 2009.  I do think so, indeed I believe that the current unemployment rate would probably be lower than 7.7% if there had been no fiscal stimulus in 2009."

    http://www.themoneyillusion.com/?p=20017

    He provides a rather detailed argument with 11 assumptions-feel free to check it out- but what it comes down to is that if Congress had failed to pass the ARRA Stimulus in 2009 the Fed would have been forced to do a lot more. Sumner claims that the Fed can always offset any fiscal tightening and that the Fed can do it all. Interestingly, the Fed doesn't agree with this. I just finished Ben Bernanke's The Federal Reserve and the Financial Crisis, a collection of 4 lectures he have in 2012, and it's clear that he-unlike Sumner and his Market Monetarists-doesn't believe that monetary policy is all-powerful and can solve all problems. 

   While Sumner was spiking the ball on the "embarrassed Keynesians" and the "failed Keynesian multiplier" this is what Berannke's Federal Open Market Committee (FOMC) was saying:

    "Things are so grim that the Federal Reserve's policy-setting Open Market Committee, nobody's idea of a left-wing shop, felt the need to put out a statement Friday after the jobs numbers came out warning bluntly that "fiscal policy is restraining economic growth" and suggesting that inflation, if anything, is too low. The Fed vowed to keep interest rates extremely low, and suggested that the executive and legislative branches should take their feet off the brake. It's quite a situation when the Federal Reserve is the most fiscally left-wing outfit in town."

     http://www.huffingtonpost.com/robert-kuttner/april-jobs-report_b_3220657.html