Where Are the Goalposts, Anyway?: The Relative Efficacy of Fiscal and Monetary Policy at the Zero Lower Bound II

I gave my thoughts on what we learned about the structure of the modern macroeconomy here: Washington Center for Equitable Growth | The Relative Efficacy of Fiscal and Monetary Policy at the Zero Lower Bound: Where Are the Goalposts, Anyway?: The Honest Broker for the Week of January 5, 2014

Now Mike Konczal gives his thoughts:

Mike Konczal: In 2013, the Fed Showed Why Fiscal Policy is Still Important: “Recently, there’s been a wave of posts by Scott Sumner and David Beckworth… saying… [2013] was a victory for the market monetarists… monetary policy… offset austerity in 2013 and fiscal policy… [did] not matter…. I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure….

At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures” and that “the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip…. So how did this line in the sand turn out?… It was stable, until it wasn’t. You can see the year-over-year stable at 4-5 percent from 2011 through part of 2012, but when government spending starts to fall in late 2012 and through 2013, this falls as well. NGDP growth was lower in the first two quarters of 2013 than it was in 2012…. I’d note Beckworth didn’t mention this data or his old approach at all in his victory lap. Scott Sumner used this graph and data for his “Most Important Graphic of 2013,” but didn’t include any of the 2013 data….

[The] second test…. [Matthew] Yglesias… pointed to higher inflation projections in the short- and medium-term as of January as a [monetary policy] success story. But, as you can see above, we then went on to have inflation rates collapse, leading to some of the lowest inflation rates in decades. Regardless of what you think the Fed wanted in late 2012, they certainly weren’t trying to generate lower inflation. If the Fed truly is omnipotent, we shouldn’t see this. You can say that the bickering over the taper caused these problems, but this is precisely, as Michael Woodford has pointed out, one of advantages of fiscal stimulus in these situations (as I said in last year’s piece, “Using fiscal policy also avoids the expectations problems that plague monetary policy”).

To reiterate, I think the Federal Reserve should be doing more. I’d love to see Yellen enact a genuine regime change at the Fed. But we shouldn’t doubt that fiscal policy, at this moment, is making a difference in the giant slack that still smothers our economy and is collapsing our labor force.