Why Do We Talk About “Helicopter Money”?

Why do we talk about “helicopter money”? We talk about helicopter money because we seek a tool for managing aggregate demand–for nudging the level of spending in an economy up to but not above the economy’s current sustainable productive potential–that is all of:

  1. Effective and successful–even in the very low interest rate world we appear to be in.
  2. Does not excite fears of an outsized central bank balance sheet–with its vague but truly-feared risks.
  3. Does not excite fears of an outsized government interest-bearing debt–with its very real and costly amortization burdens should interest rates rise.
  4. Keeps what ought to be a technocratic problem of public administration out of the mishegas that is modern partisan politics.

Right now the modal projection by participants in the Federal Reserve’s Open Market Committee meetings is that the U.S. Treasury Bill rate will top out at 3% this business cycle. It would be a brave meeting participant who would be confident that we would get there–if we would get there–with high probability before 2020. That does not provide enough room for the Federal Reserve to loosen policy by even the average amount of loosening seen in post-World War II recessions. Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy.

The last decade has taught us that quantitative easing on a scale large enough to rapidly return economies to full employment is one bridge if not more too far for central banks as they are currently constituted–if, that is, it is possible at all. The last decade has taught us that bond-funded expansionary fiscal policy on a scale large enough to rapidly return economies to full employment is at least several bridges too far for our political systems, at least as they are currently constituted.

If we do not now start planning for how to implement helicopter money when the next adverse shock comes, what will our plan be? As a candidate for a tool capable of doing all four of these things, helicopter money–giving the central bank the additional policy tool of printing up extra money and either mailing it out to households as checks or getting it into the hands of the public by buying extra useful stuff–is our last hope, and, if it is not our best hope, then I do not know what our best hope might be.


I Do Not Understand the View from the Financial Markets…

I want to say that people like Global Head of Credit Products Strategy at Citigroup Matt King are simply not thinking clearly. The macroeconomic regularities that seem obvious to me simply are not there to him. What he ought to be saying is:

  1. Mammoth safe asset shortage–in large part because since 2007 nobody trusts any of his peers’ issuing departments to create a AAA asset.
  2. Hence destructively low yields.
  3. Hence those that can need to bend every policy nerve toward creating large amounts of safe assets–which means borrow-and-spend on the part of governments: expansionary fiscal policy.

But that is rarely what he or his peers are saying. Thus I hesitate. Could they possibly be misreading the situation in such an obvious way? What are they seeing and thinking about that I am missing?

Thus I never know what to do with pieces like this:

Alexandra Scaggs: There’s No Yield, and Citi Isn’t Going to Take It Anymore:

Citi’s Matt King has some harsh words for central bankers… echoes a group of fund managers who say central banks’ stimulus efforts are distorting the way global markets function…. With negative yields on $13 trillion of safe assets, investment managers are crowding into the shrinking group of investments with yield–or into securities they may be able to sell to central banks. This has been frustrating for those fund managers, to say the least…. Here are some of the reasons he thinks markets are broken:

(1) A greater share of global equity-market variance is explained by macro factors…. (2) Credit spreads aren’t responding to climbing leverage and defaults…. (3) Normal market relationships are breaking down…. (4) Cross-asset correlations are high, even though volatility is low….

It’s clear that global central banks have had a big effect on markets. A bigger challenge is answering the following question: so what? Lower borrowing costs should be a benefit of central bank stimulus, you’d think. But King says corporate borrowing isn’t helping the economy as much as policy makers would like, and raises the risk that the leverage will make any economic downturn worse. He continues:

Most doctors–and even patients–know that when a course of drugs seems not to be working, you don’t simply keep on doubling the dosage. This applies particularly when the patient, if no longer as sprightly as they used to be, is nevertheless doing more or less fine. The side effects of such a course are more likely to kill than to cure. Yet this is what central banks now seem intent on doing. They have too much invested in their models to consider changing them in our view…

I look at graphs like this:

FRED Graph FRED St Louis Fed

And I think:

  • If the Fed had followed policies to put short-term safe nominal interest rates at 3%/year right now, then you add on the impact of that on inflation–pushing inflation down from just below 2%/year to just negative–and you have a real value of the dollar in all likelihood 30% more than it is today. Would exports be as high in such a world?

  • If the Fed had followed policies to put short-term safe nominal interest rates at 3%/year right now, then you add on the impact of that on inflation–pushing inflation down from just below 2%/year to just negative–and you have real hurdle rates on business investment on the order of 5%-points/year higher than they are now. Would business investment–which is, in spite of the weak overall economy and sluggish growth, normal– be as high in such a world?

  • If the Fed had followed policies to put short-term safe nominal interest rates at 3%/year right now, then you add on the impact of that on inflation–pushing inflation down from just below 2%/year to just negative–and you have potential homebuyers facing greatly accelerated amortization burdens. Would residential investment–pathetic as it is–be as high in such a world?

If King has a magic wand that can boost government purchases massively, then yes–higher interest rates might well be appropriate. But he doesn’t. So what is the magic wand that would boost what component of spending to offset downward pressure on exports, business investment, residential investment, and consumer durables spending that would come from higher interest rates and lower inflation right now? Or what is the magic wand that would make buyers of exports, planners of business investment, and buyers of new houses from reacting to the signals prices are sending them?

I just do not get it. King seems to envision a world in which interest rates are higher and he is happier because he can clip coupons on his portfolio, and all without anybody changing any of their spending decisions. I do not see how that world can possibly be.

Indeed, I don’t think even King would like the world he says he wants to see: business corporation and real estate equity cushions are ample on average, but in the anti-Panglossian world of bond finance that your counterparties have ample equity cushions on average isn’t worth very much in terms of guaranteeing the quality of the assets you are long, is it?

Macroeconomic Policy Reform: A Tentative Agenda

It was 24 years ago this week that Larry Summers and I warned that if we were to push the target inflation rate much below roughly 5%/year, then, in the immortal words of Dr Suess’s the Fish in the Pot:

“Do I like this? Oh, no, I do not. This is not a good game”, said our fish as he lit. “No, I do not like it, not one little bit!”

As I see it, if we want good macroeconomic business-cycle stabilization policy over the next generation, we need to do one or more of four things. I think the more of them we do, the better. And I want Summers and Bernanke to chair a commission this fall and winter to establish the order in which we should attempt to do these four things, and to start building the political and technocratic coalition to get them accomplished:

  1. Raise the inflation target when the economy has any chance of hitting the zero lower bound on short-term safe nominal interest rates–either by nominal GDP or price-level catchup targeting, or by raising the inflation target to 4%/year or so. The way to sell this is to say that the Fed has a dual mandate, that dual mandate requires tradeoffs, and that those tradeoffs are best accomplished via targeting recovery too and growth along a 6%/year nominal GDP growth path.

  2. Give the Federal Reserve the tools that it needs in order to properly manage aggregate demand. That means such things as:

    • Deciding by itself how it is going to use its seigniorage revenue, rather than returning its profits to the Treasury as a matter of course. (Yes, this is helicopter money.)
    • Funding mechanisms to support what ought to be state-level automatic stabilizers in a downturn–states should not be cutting construction and education and public safety spending when the economy as a whole is in recession, and thus when there is plenty of slack in the labor market.
    • More aggressive use of regulatory asset-quality and reserve-requirement tools as countercyclical policy instruments.
  3. Act to substantially reduce the risk premium on safe highly-collateralizable assets, both to repair a significant microeconomic financial market failure and to raise the medium-run equilibrium short-term safe real interest rate–the r*–in order to provide the central bank with more sea room on the lee shore it finds itself on. This requires operating both on the side of boosting market risk tolerance and expanding the supply of safe assets. This means moving beyond “government debt and deficits are always bad!” to “under certain conditions, the national debt of those sovereigns with exorbitant privilege that create safe assets when they issue debt can be a global blessing.”

  4. Reintegrate macroeconomic policy. Return forecasting from three separate exercises–the White House’s Troika (CEA-Treasury-OMB), Congress’s OMB, and the Federal Reserve–back to the Quadriad (Federal Reserve-CEA-Treasury-OMB) or on to a Pentiad (Federal Reserve-CEA-Treasury-OMB-CBO), with the principals to whom it reports being not just the President and the FOMC, but also the Majority and Minority Leaders of the Senate and the Speaker and Minority Leader of the House.

The argument against (4) is, of course, that the Fed needs to be insulated from the broader policy-political world because (a) the Fed can do the job by itself, and (b) having its elbow joggled by the policy-political world would only bolix things up. Well, the past decade has proven to us that (a) the Fed cannot do the job by itself, and (b) Fed “independence” does not keep the policy-political world from bolixing things up. The moment the Republican Party decided in January 2009 to go all-in in root-and-branch opposition to Obama, it necessarily also decided to go all-in in root-and-branch to policies pursued by Obama–which meant root-and-branch opposition to the Federal Reserve as well.

And certainly if we are not going to do (2), we definitely need to do (4).


Some very recent background reading:

Larry Summers: A Thought Provoking Essay from Fed President Williams:

John Williams has written the most thoughtful piece on monetary policy that has come out of the Fed in a long time…. He stresses the desirability of raising r* by pursuing structural policies to raise growth and affirms the importance of fiscal policy. I yield to no one in my enthusiasm for improved education and educational opportunity, but I do not think it is plausible that it will change the neutral rate appreciably in the next decade given that the vast majority of the 2030 labor force will be unaffected.

If Williams is overenthusiastic on education, he is under enthusiastic on fiscal stimulus.  He fails to emphasize the supply side benefits of infrastructure investment that likely enable debt financed infrastructure investments to pay for themselves as suggested by DeLong and Summers and the IMF.  Nor does he note at current interest rates an increase in pay as you go social security could provide households with higher safe returns than private investments…. Nor does Williams address the possibility of tax measures such as incremental investment credits or expansions in the EITC financed by tax increases on those with a high propensity to save.  The case for fiscal policy changes in the current low r* environment seems to me overwhelming….

Williams’s comments on monetary policy have generated more interest…. If the Fed believed that a 2 percent inflation target was appropriate at the beginning of 2012 when it believed the neutral real rate was above 2 percent, I cannot see any argument for not adjusting the target or altering the framework when the neutral real rate is very plausibly close to zero.  The benefits of a higher target have increased and so far as I can see nothing has happened to change the cost of a higher target. I am disappointed therefore that Williams is so tentative in his recommendations on monetary policy…. Moreover even accepting the current framework, I find the current policy framework hard to comprehend.  If as it asserts, the Fed is serious about the 2 percent inflation target being symmetric there is an anomaly in its forecasts….

Finally there is this:  Everything we know about business cycle history suggests an overwhelming likelihood that there will be downturns in the industrial world sometime in the next several years. Nowhere is there room to cut rates by anything like the normal 400 basis points in response to potential recession.  This is the primary monetary and indeed macroeconomic policy challenge of our generation. I hope it will be very much in focus at Jackson Hole.


Greg Ip: The Case for Raising the Fed’s Inflation Target:

Six years ago, Olivier Blanchard, then chief economist at theInternational Monetary Fund, floated the idea that central banks should target 4% inflation instead of 2%. I remember giving a colleague countless reasons why he was wrong. It was I who was wrong….

Last week John Williams, president of the Federal Reserve Bank of San Francisco, made the case for a higher inflation target in a bank newsletter. The subject will almost certainly be in the air when Fed officials and their foreign counterparts meet next week at the annual Jackson Hole symposium…. The historical case for low inflation rested on the assumption that high inflation created damaging distortions and more frequent recessions. Low inflation or deflation was a trivial risk because central banks could easily drive inflation higher by promising to print more money. But in 2008, central banks around the world cut interest rates to nearly zero and printed copious amounts of money, and only lackluster growth followed….

Here are my original objections and how they have changed.

  1. Central banks have invested their credibility in a 2% target. If they raise it, the public will assume they’ll raise it again, and expectations will rapidly become unanchored…. If anything, central banks are too credible: Investors seem to believe 2% is a ceiling, not a midpoint.

  2. As inflation rises, individual prices become more volatile, which makes the economy less efficient and more prone to booms and busts. This is still true, but against that we can see the harm from not being able to lower real (inflation-adjusted) rates further is much larger than anticipated. Meanwhile, the microeconomic harm of higher inflation is elusive….

  3. Since inflation is below 2% now and there are no new tools to get it higher, it will undermine central banks’ credibility to raise the target. Japan’s success in getting inflation back above zero, albeit not to 2%, suggests adopting a higher inflation target can bring a shift in expectations, and actions, that help make it happen.

  4. A higher inflation target makes real interest rates more negative, which would spur reach-for-yield and other speculative excesses. This is true but the alternative may be worse….

  5. What happened in 2008 was unique. Why change the target for something that happens maybe twice per century? Interest rates have been near zero now for more than seven years, and there is every reason to think similar episodes are going to happen again…. Williams sees ample evidence that deep-seated structural forces have dragged down the real natural interest rate—which keeps the economy at full employment without stoking inflation—from around 2.5% before the recession to 1% now. It may be lower….


John Williams: Monetary Policy in a Low R-Star World:

The inflation wars of the 1970s and 1980s led to a broad consensus on two fronts among academics and policymakers….

[Larry Summers and I warned]:

First, central banks are responsible and accountable for price stability… often acknowledged through… formal adoption of… inflation targeting…. Second, monetary policy should play the lead role in stabilizing inflation and employment, while fiscal policy plays a supporting role through… automatic stabilizers…. Fiscal policy should focus primarily on longer-run goals such as economic efficiency and equity….

In the post-financial crisis world, however, new realities pose significant challenges…. A variety of economic factors have pushed natural interest rates very low and they appear poised to stay that way…. Interest rates are going to stay lower than we’ve come to expect in the past…. Juxtaposed with pre-recession normal short-term interest rates of, say, 4 to 4½%, it may be jarring to see the underlying r-star guiding us towards a new normal of 3 to 3½%—or even lower…. Conventional monetary policy has less room to stimulate the economy during an economic downturn, owing to a lower bound on how low interest rates can go…. In this new normal, recessions will tend to be longer and deeper, recoveries slower, and the risks of unacceptably low inflation and the ultimate loss of the nominal anchor will be higher…. If the status quo endures, the future is likely to hold more of the same—with the possibility of even more severe challenges to maintaining price and economic stability.

To avoid this fate, central banks and governments should critically reassess the efficacy of their current approaches and carefully consider redesigning economic policy strategies to better cope with a low r-star environment…. Greater long-term investments in education, public and private capital, and research and development…. Countercyclical fiscal policy should be our equivalent of a first responder to recessions, working hand-in-hand with monetary policy…. Stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries…. Monetary policy frameworks should be critically reevaluated to identify potential improvements in the context of a low r-star…. A low inflation rate… is not as well-suited for a low r-star era…. The most direct attack on low r-star would be for central banks to pursue a somewhat higher inflation target…. Second, inflation targeting could be replaced by a flexible price-level or nominal GDP targeting framework….

We’ve come to the point on the path where central banks must share responsibilities. There are limits to what monetary policy can and, indeed, should do. The burden must also fall on fiscal and other policies to do their part to help create conditions conducive to economic stability…


Simon Wren-Lewis: Helicopter Money: Missing the Point:

I am tired of reading discussions of helicopter money (HM) that have the following structure:

  1. HM is like a money financed fiscal stimulus
  2. HM would threaten central bank independence
  3. So HM is a bad idea….

These discussions never seem to ask… why we have independent central banks (ICB) in the first place. And what they never seem to note, even in establishing (1), is that ICBs deny the possibility of a money financed fiscal stimulus (MFFS)…. Creating an ICB means that a MFFS is no longer possible… [because] it could only happen through ICB/government cooperation, which would negate independence…. Proponents of ICBs say… macro stabilisation can be done entirely by using changes in interest rates, so a MFFS is never going to be needed. Then we hit the Zero Lower Bound….

To then say no problem, governments can do a bond financed fiscal expansion is to completely forget why ICBs were favoured in the first place. Politicians are not good at macroeconomic stabilisation…. Demonstrating (1) does not, I repeat not, imply that ICBs do not need to do HM. Implying that it does is a bit like saying governments could set interest rates, so why do we need ICBs. Most macroeconomists would never dream of doing that, so why are they happy to use this argument with HM?

Which brings us to (2)… never… examined with the same rigour as (1)… just mentioning ‘fiscal dominance’ is enough to frighten the horses…. Imagine the set of all governments that would refuse a request from an ICB for recapitalisation during a boom when inflation was rising–governments of central bank nightmares. Now imagine the set of all governments that, in a boom with inflation rising, would happily take away the independence of the central bank to prevent it raising rates. I would suggest the two sets are identical…. HM does not seem to compromise independence at all. So please, no more elaborate demonstrations that HM is equivalent to a MFFS, as if that is an argument against HM…


Paul Krugman: Slow Learners:

Larry Summers has a very nice essay that takes off from a new paper by John Williams at the San Francisco Fed…. Williams is the highest-placed Fed official yet to suggest that maybe the inflation target should be higher. It’s not a new argument… but seeing it come from a senior official is news. Yet as Larry says, the paper is still weak and tentative even on monetary policy, to an extent that’s hard to understand…. Furthermore, there’s basically no break with orthodoxy on fiscal policy, despite the evident importance of the liquidity trap, evidence that multipliers are fairly large, and basically zero real borrowing costs. Yet Williams is at the cutting edge of policy rethinking at the Fed…. Mainstream thinking about macroeconomic policy has changed remarkably little, remarkably slowly.

You might say that it is always thus. But, you know, it isn’t…. Stagflation emerged as an issue in 1974, after the first oil shock, and pretty much ended with the Volcker double-dip recession of 1979-82–a recession whose end implication was that monetary policy continued to work in a fairly Keynesian way. So it was well under a decade of experience; yet it utterly transformed how everyone talked about macroeconomics.

Then came the 2008 crisis…. The sheer persistence both of depressed economies and of low inflation/interest rates should by now have led to a big rethinking. Depression economics redux has now gone on as long as stagflation did. Yet rethinking has been glacial at best. People who warned about the coming inflation in 2009 are warning about the coming inflation in 2016. Orthodox fears of budget deficits still dominate a lot of discourse. And the Fed still clings to an inflation target originally devised in the belief that the kind of thing that has happened to our economy would never happen.

I’m not entirely sure why learning has been so slow this time. Part of it, I suspect, is that the anti-Keynesian backlash of the 1970s had a lot of political power, and behind the scenes a lot of money, behind it–which influenced even academics, whether they realized it or not. And these days that same power and money is deployed against any rethinking. Whatever the explanation, however, it’s taking a painfully long time for serious policy discussion to arrive at a point that should have been obvious years ago.

Hoisted from the Archives from Fall 2011: Barclays Debate with Robert Barro, Moderated by David Wessel

2011-09-24: DRAFT OPENING: Barclays Debate with Robert Barro, Moderated by David Wessel:

Question: If President Obama invited you into the Oval Office, told you that he recognized that the economic policies he has pursued to date haven’t had the desired outcome, and gave you five minutes to tell him what in your opinion he should do now (setting aside whether Congress would go along)?

DELONG: I would say: Mr. President: When you took office, you quickly became convinced for some reason that we were going to see a rapid, “V”-shaped recovery. Hence you took your task to be (a) stopping the panic, (b) recapitalizing the banking system, and (c) filling in a good chunk of the demand gap with the Recovery Act. Then, you thought, the task of macroeconomic stabilization would be finished. And so you turned your attention to (i) health care reform, (ii) financial regulation, (iii) long-run budget balance, and other issues.

This was wrong. We do not have a “V” but rather an “L”. Our expectations that the market was strong enough to return the economy to its long-run full-employment configuration within a couple of years–perhaps with assistance from the Federal Reserve–was wrong. The short run of slack aggregate demand, high unemployment, and low capacity utilization looks as though it will last not two to three years after the downturn begin but five to ten years–or more.

What to do? If Milton Friedman were here to advise you, he would give the same advice he gave Japan in the 1990s: Have the Federal Reserve buy bonds for cash. Have it keep buying bonds for cash until total nominal spending in the economy is on a satisfactory trajectory. Announce that it is going to keep buying bonds for cash until total nominal spending is on a satisfactory trajectory.

Milton Friedman’s teacher, the ur-monetarist Jacob Viner, had a somewhat different take. Viner worried that when–as now–interest rates are very low, people have no incentive to spend their cash. And when you take bonds out of circulation you reduce the supply and further lower interest rates further. Viner sought a way to boost the money stock without pushing interest rates down further. He recommended coordinated monetary and fiscal expansion: the Federal Reserve buys bonds for cash, and the Treasury than issues bonds and spends, in order to (a) expond the money supply, (b) directly put people to work and © keep falling interest rates from further depressing monetary velocity and so crowding out the beneficial effects of monetary expansion.

Both Friedman and Viner would, right now, say that the problem is that their policy recommendations have not been tried on a large enough scale commensurate with the seriousness of the problem.

I concur.

And when will it be time to think about long-term budget balance? As I believe my colleague Christina Romer used to tell you every single week: the bond market and the inflation rate will tell you when it is time to turn to dealing with long-term budget balance. They are certainly not telling you to do so now.


Materials:


And from the Notes of the Debate: A Cleaned-Up Version of What I Said:

Brad DeLong: If we are talking long-run, I would say that there is considerable agreement about what the long-run configuration of government policy should be. Cutting back on the tax-free status of fringe benefits–that is definitely there in what Obama has done with the tax on high-cost “Cadillac” health plan in the Affordable Care Act. People who keep their ear to the ground hear a lot of people in and out of the administration liking the Bowles-Simpson commission’s recommendations, and hear a lot of people liking the idea of a progressive consumption tax as a way to balance revenues an the long-run funding costs of social insurance.

But if I were to talk to Obama, I would say: “Mr. President, now is not the time to focus on the long-run here. There is an important short-run long-run distinction, and the short-run problems are the urgent ones.

“When you took office, you were convinced that there was going to be a rapid V-shaped recovery. Hence you took your tasks to be (i) the recapitalization of the banking system, (ii) filling a good chunk of the demand gap with the Recovery Act, and then (iii) your attention to Robert Barro issues–healthcare reform, long run budget balance, financial regulation, et cetera. In retrospect this was wrong. We don’t have a V. We have an L. The expectation that the market was strong enough to return the economy to more or less full employment within a couple of years was wrong.

The short run, during which the economy is depressed and unemployment is high now looks to be not two or three years but rather five to ten years, and we hope it isn’t longer. What you should do about this long-lasting short-run business-cycle problem? If Milton Friedman were here, he would give the same advice to the U.S. today that he gave to Japan in the 1990s: Have the Federal Reserve buy bonds for cash. Have the Federal Reserve keep buying bonds for cash until total nominal spending in the economy is on a satisfactory trajectory. And tell everybody that the Federal Reserve will keep buying bonds for cash until total nominal spending is where it wants it to be in order to get everyone involved in stabilizing speculation betting that the Fed will carry out this policy.

Now that is just one recommendation. Back during the Great Depression Milton Friedman’s teacher Jacob Viner worried that when interest rates are very very low people have little incentive to spend their cash. When the Federal Reerve buys bonds for cash, it increases the supply of cash but it takes bonds out of circulation. This reduction in the supply of bonds further lowers interest rates–and further depresses the incentive to spend cash. Thus normal expansionary monetary policy may fail. Viner worried that falling interest rates would crowd out the usual effects of monetary expansion.

Viner thus recommended both expansionary monetary policy and expansionary fiscal policy. The Federal Reserve buys bonds for cash. The Treasury then issues bonds and spends the money hiring people to work on government projects. Since the supply of bonds does not fall, interest rates do not fall. So monetary expansion would have its normal expansionary effects.

The right answer to the question–monetary or fiscal stimulus?–is: both.

Then Obama would ask me: “When will it be the time to worry about long -un budget deficits and all of Robert Barro’s other issues, like the financing of the social insurance state and marginal taxes and so forth?” I would give the answer that I think Christie Romer gave Obama very single week of the first year and a half of his administration: “The bond market and the inflation rate will tell you when it is time to deal with long-run issues. And they are certainly not telling you to deal with them now.”…

Brad: I have a slide that I want to put up now. It explains, I think, why Robert Barro is living in a much happier world than I am.

Robert Barro thinks that there is great uncertainty about the government budget and about government regulatory policy. And he believes that is the reason that the economy is still depressed. But if uncertainty about the government budget were the cause of our current depression, it would have started back in 2003.

In the early 1990s, the Clinton administration dealt with the Reagan deficits–over the unanimous objections of every single Republican member of congress. By the end of the 1990s the Clinton administration had balanced the budget. But by 2003 it became very clear that the Bush administration was intent on undoing as much as it could of the work of the Clinton administration. It became clear that Bush had no plans at all for cutting back federal spending to finance his tax cuts. It became clear that Bush had no plans at all to find any resources to pay for his expansion of Medicare, Medicare Part D.

Thus in 2003 we went from a world in which the long-run federal budget was on a sustainable track–a world that those of us who worked in the Clinton administration had sweated blood to create–to our current world, in which the U.S. debt to GDP ratio is on an explosive long-run trajectory and in which everything about the long-run federal budget is up for grabs. Right now we do not know whether in 25 years federal spending is going to be 20 or 30% GDP, we do not know what taxes are going to be levied to pay for that spending, and we do not even know whether we might default on the debt or inflate it away in a generation.

We have enormous long-run budgetary uncertainty.

This long-run budgetary uncertainty was created suddenly and discontinuously in 2003.

But our current deep economic downturn did not start in 2003, 2004, 2005, 2006, or 2007.

Our current deep economic downturn started with the collapse of housing followed by the Wall Street financial crisis of 2008. And our current deep recession does not continue because businesses are terrified of the future and so have cut back massively on equipment investment spending. Businesses are being reasonably aggressive at investing for the future. What is way down at the bottom is investment in residential construction. That is not a pattern that you would see if the big increase in budgetary uncertainty were the thing that drove the economy down and is keeping it down.

Now don’t get me wrong: If I had been running the Obama administration, I would on January 21, 2009 have promised to veto every bill that did not reduce the projected national debt in 2020. I would have required that every single initiative must be fully paid for within ten years in order for the administration to even consider it. I would have made it a governing principle that the Obama administration was not interested in increasing the long-run budgetary uncertainty created by George W Bush and his tame and craven supporters.

And I would have announced that as soon as the short-term crisis of our current Lesser Depression was over–as soon as the unemployment rate was back down to 6%–as soon as housing was back to normal and people had stopped doubling-up and living in their sisters’ basements because they were scared they could not get or would lose their jobs–we would turn to balancing long-run spending and taxes.

But dealing with long-run budget uncertainty that is not the cause of our current Lesser Depression will not cure it….

Brad: I did not say that uncertainty in general rose to its current level in 2003. I said uncertainty about the long-run government budget took a big upward jump in 2003.

Late 2009 sees an enormous increase in regulatory uncertainty as the Republican Party goes into opposition and declares that the healthcare reform ideas created by the Heritage Foundation and underlying RomneyCare are, in fact, Kenyan and socialistic and have to be opposed root-and-branch. That was an enormous increase in regulatory uncertainty. That came in late 2009. That was not the cause of our current Lesser Depression.

The uncertainty that is a major contributing cause to our current Lesser Depression came in 2008. One piece of it is uncertainty about whether the major money center bank you loaned your money to tonight will fail–that they will not open tomorrow. Another piece of it is uncertainty about what the level of aggregate demand is likely to be one, two, three years down the road. A third is uncertainty about whether the German government will bail out the government of Greece and the banks of Spain so they can pay back the banks of Germany so they can pay back their German depositors–or whether the German government will short-circuit the process and simply bail out the banks of Germany so they can pay back their depositors, leaving southern Europe to twist slowly in the wind.

These are the important kinds of uncertainty that are helping to cause our current Lesser Depression.

These are not kinds of uncertainty that are diminished by enacting Robert Barro’s progressive consumption tax, or by further reforming the U.S. healthcare financing system.

When I said that Barro was more optimistic than me, it was because I hear him saying that if only we could get back to the world of 2000–with projected spending levels and tax rates that Bill Clinton left us with, in which the long-run financial future of the U.S. government was secure and we had not made big Medicare Part D promises we have no idea how to fulfill–then the current Lesser Depression would rapidly end.

I would love to see us return to late Clinton policies. I do not believe that if we did so tomorrow it would rapidly cure our current depression. And I hear Robert Barro saying that it would….

Brad DeLong: Let me say that right now we have now have a rare point of agreement between Robert Barro and Paul Krugman. Paul is also highly highly skeptical of quantitative easing. Paul also fears that is is simply swapping one zero-yield government asset for another. Paul also cannot see why this should make a difference. After all, at the margin all you are doing is taking a very small amount of the risk out there onto the government’s balance sheet. It is hard to argue that that would have major effects….

Brad DeLong: Right now there is tremendous demand for long-term nominal U.S. government Treasury bonds, even though there is enormous uncertainty over how the government is going to tax in order to finance the social insurance state. Yet everyone is confident that in the long run the government is going to tax to pay its bills, and that inflation is going to remain low. Maybe the United States is the world’s tallest midget. But it’s a damn tall midget….

Brad DeLong: We really do not know what the effects of quantitative easing and other non-standard monetary policies will be. We haven’t been here before–except in the 1930s and in Japan in the 1990s. All we know is that whatever policies were tried back in the 1930s and in Japan in the 1990s did not work very well. We do not know if alternate policies will.

I think that the right way I think about it is maybe to go all the way back to the cutting edge of the maroeconomics of 1829. Start with John Stuart Mill, the very first economist to say: “Whenever we see high unemployment, it is not the case that we are producing too much. The problem is we don’t have enough financial assets for people to hold to make them happy with their portfolios. Thus everyone is cutting back on spending to try to build up their financial asset balances. And once they have done so they will once again start spending an amount equal to their incomes, and then by the circular flow principle we will quickly get back to full employment.”

It has turned out that there are three ways in which people, historically, have been unhappy with their portfolios:

  1. The standard monetarist problem we saw in 1982 was a liquidity squeeze that left everyone desperate for cash. That produced very high nominal interest rates all along the duration and risk yield curve as everyone short of cash dumped their other financial assets as well as spent less than they were earning to try to build up their cash balances.

  2. The standard Keynesian problem we saw in 2001 was that $4 trillion of dot-com wealth had vanished so everybody wanted to hold more saving vehicles–and so people started using the money they ordinarily use for transactions as a savings vehicle instead. That produced very low nominal interest rates all along the duration and risk yield curve.

  3. Today we see that the prices of all risky assets are very low–especially the bonds of the Greek government. But safe assets are, as Robert says, selling at extremely high prices. Households and businesses are cutting back their spending because they don’t think they have enough safe assets in their portfolios.

When you have a depression because the market is short of safe assets, the natural thing to do to cure it is to create the safe assets the market wants to hold. Who can do that? That the public certainly doesn’t trust banks like Barclays to create safe assets right now. The investment banks tried that with mortgage-backed securities. That did not turn out so well….

Brad DeLong: The fear is that if we raise the inflation target from one percent to four percent right now, then the next administration will probably raise it from four to seven, and then from seven to ten, and then 1979 is back again….

Brad DeLong: This crisis had its origins in late 2007, when it became clear that U..S had built two million extra houses, largely in the desert between Los Angeles and Albuquerque. It became clear that there was $500 billion of mortgage debt that was not going to be repaid. And that shouldn’t have been a problem: in a world economy of $80 trillion dollars of GDP each year, in a world where that 500 billion of tax or mortgage debt have been explicitly financed by originate-and-distribute securitization to chop up and lay off this risk to the global investor community rather than keep it in money-center banks, the 500 billion shouldn’t cause day problems.

But then we learn than an awful lot of Ireland and Irish and money center banks were still holding on to a huge amount of risk. And we learn that the capital of nearly every single major financial institution was significantly impaired if not totally gone. And then it went from there to Bear Sterns, in which the Federal Reserve wipes out the equity and option holders of the bank and subsidizes Jamie Dimon and JP Morgan to the tune of up to $30 billion to bail themselves in. After which there is then five months of beating up on Henry Paulson and Ben Bernanke for enabling more risk–for rescuing things that shouldn’t have been rescued, for creating a “we bet, and if we win we win, and if we lose we lose the government pays” state of mind. And Paulson and Bernanke respond to this six months of verbal abuse in the fall of 2008 by saying: “Okay. Well, now, as Lehman Brothers hits the wall we are going to let it default–we are not going to guarantee the creditors of Lehman brothers. See how much you like the market reaction too that!” And then–they thought–their critics would be chastened, and they would regain their freedom of maneuver to conduct proper lender-of-last-resort policy. The problem was that they misjudged how bad the market reaction would be. That decision to let Lehman fails was a complete and total disaster.

We should learn from that.

We should learn that, as Charlie Kindleberger said: In order to have a well-functioning system, everybody must always doubt that the lender of last resort exists before the financial crisis, but everybody must always be extremely confident that the lender of last resort is there in the financial crisis. This is a very neat trick to pull off–very hard to do. But the Federal Reserve via Bear Stearns and Lehman Brothers came close to pulling off the opposite.

There are always need to be people like Robert Barro saying: the right strategy is to let Greece default, and Spain, Portugal, Ireland–and maybe Italy too. Let the consequences of bad actions and overleverage rest upon the bad actors, lest you encourage more overleverage and more moral hazard in the future. But, as Charlie said and as I think Lehman Brothers strongly reinforces this lesson, when the financial crisis does come, if it’s bad and systemic enough, the lender of last resort has to show up. If you ask Charlie how you can reconcile these two he would shrug his shoulders….

Brad DeLong: What should the Europeans do tomorrow? Inflate. Move their long run price level target for the Eurozone as a whole up from its current zero to 1% up to say three to four percent. Explicitly say that we have a continent in which different regions are at very different levels of economic development, and that as a result we aren’t going to be able to maintain anything like Eurozone-wide price stability, and that we are going to aim for a long run inflation rate of 2% in the north west European core, which means 4% in the Eurozone as a whole and up to 6% in the periphery which ought to be undergoing a real appreciation over the long run as it develops.

Do that, and hope that Robert is wrong when Robert says that this will permanently de-anchor inflation expectations, and that you won’t then be able to hold the line at two percent inflation in the Northwest European industrialized core. The purpose of that is to get a slow real partial default so that the bankers don’t have to recognize it on their accounting immediately and can pretend that it isn’t happen until it is. This is how Carmen Reinhart says we solved the end of WWII debt-overhang problem, and Carmen Reinhardt is smart

Brad DeLong: Is the UK on a good governance or bad governance trajectory? Well, will they let the pound go down? Fiscal austerity in response to a recession and to great uncertainty about the long run financing of a government can be an appropriate policy response, but if and only if you are willing to let the value of your currency go where it needs to go so that you can shift activities out of government and into exports and so stay relatively close to full employment–and that means let the value of the currency go way down.

Usually you only want to do this when the bond market is telling you that it is really worried about the long run solvency of the government–when raising today’s government spending raises long-term interest rates by so much that you have massive crowding out and fiscal expansion has no traction. Then the depreciation-and-exports channel is the only way to try to stabilize aggregate demand near full employment.

The bond market hasn’t been telling us in the case of Britain.

But if Cameron really wants too, even though the bond market isn’t telling him he must do so, well he won the election–or, rather, Nick Clegg and the Liberal Democrats hate Labour more than they hate him, and so have sent him to the Queen to kiss hands. In this case, however, Cameron very much needs to have the appropriate monetary and exchange rate policies: a weak pound, a very weak pound–that is what is in Britain’s interest, if the entire policy configuration is to make any kind of sense….

Brad DeLong: The first part of your question concerns Robert Barro’s point–what Paul Krugman has been saying for 15 years–that when nominal interest rates hit zero conventional monetary policy is simply swapping one zero yield short term government asset for another and you wouldn’t expect anything from it. You should, rather, expect changes in the velocity of money to offset changes in the money supply more or less one for one. Here I would indeed go back to John Hicks and Jacob Viner: For monetary policy to have traction, you have to stuff people’s portfolios with enough bonds so that even when you expand the money supply short term nominal interest stay well above zero so people then have an incentive to spend their cash. That is why Jacob Viner back in 1993 ws asking not for monetary policy but for fiscal policy as well. You expand money supply, but also you expand the amount of bonds that the government can issue that people had to hold on their portfolios….

What Was Herbert Hoover’s Fiscal Policy?: Hoisted from Five Years Ago

Herbert hoover as president Google Search

What Was Herbert Hoover’s Fiscal Policy?: In his Budget Message setting out his plans for taxes and spending for fiscal year 1932, Herbert Hoover begged Congress not to embark on any ‘new or large ventures of government’. He admonished congress that even though ‘the plea of unemployment will be advanced as reasons for many new ventures… no reasonable view of the outlook warrants such pleas’. And he boasted that he was proposing a balanced budget–even though revenues were mightily depressed by the Great Depression:

This is not a time when we can afford to embark upon any new or enlarged ventures of Government. It will tax our every resource to expand in directions providing employment during the next few months upon already authorized projects. I realize that, naturally, there will be before the Congress this session many legislative matters involving additions to our estimated expenditures for 1932, and the plea of unemployment will be advanced as reasons for many new ventures, but no reasonable view of the outlook warrants such pleas as apply to expenditures in the 1932 Budget.

I have full faith that in acting upon these matters the Congress will give due consideration to our financial outlook. I am satisfied that in the absence of further legislation imposing any considerable burden upon our 1932 finances we can close that year with a balanced Budget. When we stop to consider that we are progressively amortizing our public debt, and that a balanced Budget is being presented for 1932, even after drastic writing down of expected revenue, I believe it will be agreed that our Government finances are in a sound condition…

Over at the Atlantic Monthly, Megan McArcle claimed that ‘Hoover was no budget-cutter’:

Hoover Was No Budget-Cutter: Hoover did not tighten up on spending.  According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before. In 1930 it was $3.3 billion. In 1931, Hoover raised spending to $3.6 billion.  And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget)…

In his Budget Message for fiscal year 1933, Hoover wrote:

In framing this Budget, I have proceeded on the basis that the estimates for 1933 should ask for only the minimum amounts which are absolutely essential for the operation of the Government under existing law, after making due allowance for continuing appropriations. The appropriation estimates for 1933 reflect a drastic curtailment of the expenses of Federal activities in all directions where a consideration of the public welfare would permit it….

The welfare of the country demands that the financial integrity of the Federal Government be maintained…. [W]e are now in a period where Federal finances will not permit of the assumption of any obligations which will enlarge the expenditures to be met from the ordinary receipts of the Government….

To those individuals or groups who normally would importune the Congress to enact measures in which they are interested, I wish to say that the most patriotic duty which they can perform at this time is to themselves refrain and to discourage others from seeking any increase in the drain upon public finances…

That is not a man who wants to open up the taps. That is not a man who thinks that he is opening up the taps.

So what is going on here?

I think that Megan McArdle’s major problem is that she is looking at one table–Table 1.1 in OMB’s Historical Tables. She is not reading Hoover’s Budget Messages or any other documents from the Hoover administration, not reading histories of the Hoover administration, not identifying how what congress finally enacted and what Hoover signed differed from what Hoover had originally proposed–or indeed, at how as the Great Depression deepened Hoover decided at the very start of calendar year 1932–halfway through fiscal year 1932–to push for measures (Reconstruction Finance Corporation, Home Loan Bank, direct loans to fund state Depression relief programs) that increased spending–but did so alongside the Revenue Act of 1932 that increased taxes.

After he decided that he was President and that the Treasury Secretary Andrew Mellon whom he had inherited from Coolidge worked for him and that Mellon should go off to be Ambassador to the Court of St. James, Hoover did decide to do something to fight the Great Depression. Tax increases to try to balance the budget in order to call down the confidence fairy made up the biggest part of his plan. But Hoover also sought to fund state relief. And he sought to set up GSE’s (RTC, HLB) to restart broken capital markets.

But to say that ‘Hoover was no budget-cutter’ misses most of the story. Hoover would have been a budget-cutter in normal times. Hoover was a budget-balancer. Hoover held the line against powerful political forces that sought to increase government spending in the Great Depression for fully 2 1/2 years before endorsing what seem to us to be half-measures.

The Need for Expansionary Fiscal Policy

Sisyphus Greek mythology Britannica com

I understand that we are Sisyphus here. And I accept that:

Je laisse Sisyphe au bas de la montagne! On retrouve toujours son fardeau. Mais Sisyphe enseigne la fidélité supérieure qui nie les dieux et soulève les rochers. Lui aussi juge que tout est bien. Cet univers désormais sans maître ne lui paraît ni stérile ni futile. Chacun des grains de cette pierre, chaque éclat minéral de cette montagne pleine de nuit, à lui seul, forme un monde. La lutte elle-même vers les sommets suffit à remplir un coeur d’homme. Il faut imaginer Sisyphe heureux.

But would people who ought to know better please stop adding weights to the stone that we are trying to roll uphill?

Thus I find myself quite annoyed by the sharp and usually-reliable Greg Ip this morning…

Let me back up: Here’s the story so far:

(1) They say that North Atlantic governments cannot afford to spend more to boost their economies via expansionary fiscal policy right now. We point out that current interest rates on Treasury debt are so low low private company would pass up the ability to borrow to stimulate and invest.

(2) They then say that maybe interest-rate will jump up a lot, soon, and thus make borrow to spend to stimulate and invest a bad deal. We point out that financial markets certainly do not expect any such thing. And we points out that, if you are truly worried about longer-run debt sustainability, the standard calculations tell us that debt- and amortization-to-GDP ratios will be lower with aggressive borrow and spend to stimulate and invest policies then with austerity.

(3) They then say that financial markets are irrational and wrong–it interest-rate will go up, will go up soon, and will go up far. We point out that fearful financial markets have been better forecasters then their hopes of imminent normalization every year for the past decade.

(4) They then say: let’s ignore those interest rates and pretend they are not telling us anything about the benefits and costs right now of fiscal expansion. We reply: you are economists–economists are supposed to take prices seriously, not throw the information in them away.

(5) They then say: nevertheless, running up the nominal debt through expansionary fiscal policy is somehow risky. We say: do helicopter money, which does not run up the debt.

(6) They then say: but even a half booming economy will take the pressure off of governments and bureaucrats to undertake urgent and important structural reforms. We ask: what evidence can you point to to support any claim that useful structural reform is easier and I low-pressure that in a high-pressure economy?

And we are met with silence.

And then they go back to parroting their talking point (1) again.

Greg Ip: Needed: A Contingency Plan for Secular Stagnation: “What if Larry Summers is right…

…[and there is] a chronic deficiency of investment relative to savings that has trapped the world in a state of low economic growth largely resistant to monetary policy[?] Events… have strengthened Mr. Summers’s case…. Formerly skeptical economists are less so: Both the International Monetary Fund and the Federal Reserve have implicitly warmed to Mr. Summers’s thesis. With yields taking another leg down after Britain’s vote to leave the European Union, the evidence of secular stagnation, Mr. Summers says, is stronger than ever. If he’s right, the world needs a contingency plan. The most direct response is more expansionary fiscal policy (i.e. lower taxes or higher spending), which would bolster demand and push interest rates up.

But policy makers are rightfully wary about acting in the face of so many contradictory signals. In the U.S., unemployment is moving lower and stocks are hitting new highs. Bonds could be pricing in secular stagnation, or merely a greater bias toward hyper-stimulative monetary policy by central banks…

Why are policy makers rightfully wary? All Ip says is:

Paolo Mauro of the Peterson Institute for International Economics notes that countries have often overestimated their long-term potential growth, resulting in too-high deficits and debts…

Um. No. The arithmetic tells us that at current interest rates fiscal expansion right now will not raise but lower the debt- and amortization-to-GDP ratios. Unless Mauro wants to take that on–which he does not–his piece is irrelevant for that reason alone. Moreover, Mauro seems to think that we have been overestimating long-term potential growth and correcting estimating long-term interest rates. That is wrong. We have been overestimating both long-term interest rates and long-term potential growth. If you overestimate both by the same amount, the biases induced in your estimates of the right current debt-to-GDP ratio are offsetting. The right level of the debt-to-GDP ratio is primarily a function of r-(n+g), the difference between the real interest rate r on Treasury debt and the real growth rate g of productivity plus the real growth rate n of the labor force. A reduction in r accompanied by an equal or smaller reduction in (n+g) is not a first-order reason to reduce government spending or the deficit right now. And that is what we have.

Here Larry Summers is right. Greg Ip is wrong. Larry has by now written a huge amount about his. Yet Ip counterposes his body of work to one working paper by Paulo Mauro that is, as best as I can see, irrelevant to secular stagnation arguments and concerns.

Why is it irrelevant? Mauro does correctly point out that lower future growth is a reason to slow the future growth of real government spending. But what Mauro does not point out is that such a fall in projected future growth is a reason to cut the level of spending now–or to avoid increases in the level of spending that would otherwise be good policy now–only if the slower expected growth is unaccompanied by an equal reduction in Treasury interest rates. Our reduction in expected future economic growth appears to have accompanied by a larger reduction in Treasury interest rates.

This opinions-of-shape-of-earth-differ-both-sides-have-a-point framing is… beneath what Greg ought to be writing. If he thinks Larry is wrong–or even that the anti-Larry case is arguable–he needs to find and quote real arguments that have real relevance here, and more than one of them, not a single piece from the Peterson Institute that is off-point.

Must-Read: Greg Ip: Needed: A Contingency Plan for Secular Stagnation

Must-Read: Um. No. Larry Summers is right. The sharp and usually-reliable Greg Ip is wrong. This opinions-of-shape-of-earth-differ-both-sides-have-a-point framing is simply wrong.

The right level of the debt-to-GDP ratio is primarily a function of r-(n+g), the difference between the real interest rate r on Treasury debt and the real growth rate g of productivity plus the real growth rate n of the labor force. A reduction in r accompanied by an equal or smaller reduction in (n+g) is not a first-order reason to reduce government spending or the deficit now–or to postpone or cancel plans to increase the deficit right now that would otherwise be good policy

Greg Ip: Needed: A Contingency Plan for Secular Stagnation: “If Larry Summers is right…

…the most direct response is more expansionary fiscal policy…. But policy makers are rightfully wary about acting in the face of so many contradictory signals. In the U.S., unemployment is moving lower and stocks are hitting new highs. Bonds could be pricing in secular stagnation, or merely a greater bias toward hyper-stimulative monetary policy by central banks…

Why are policy makers rightfully wary? All Ip says is:

Paolo Mauro of the Peterson Institute for International Economics notes that countries have often overestimated their long-term potential growth, resulting in too-high deficits and debts…

And chasing the link:

Paulo Mauro: Fiscal Policy in the Era of Stagnation: “Policymakers often mistake a long-lasting growth slowdown for a temporary slowdown…

…and systematically fail to increase the primary fiscal surplus sufficiently when the long-run economic growth rate declines. Economic history provides several examples of debt crises or near-crises caused by unexpected, long-lasting slowdowns in economic growth that were not recognized in time…. Ignoring a permanent slowdown in the rate of economic growth can lead to policy mistakes. For example, a country projecting a stable government debt ratio of 100 percent of GDP over the next decade or two would experience an increase in that ratio to 140 percent in 10 years if growth turns out to be 1 percentage point lower than assumed. As deficits rise, the ratio would balloon to more than 200 percent after 20 years…

Source: P. Mauro, R. Romeu, A. Binder, and A. Zaman, 2013, A Modern History of Fiscal Prudence and Profligacy (link is external), IMF Working Paper 13/5, Washington: International Monetary Fund.

The implication Ip takes from this is simply wrong. Slower future growth is a reason to slow the future growth of real government spending. It is a reason to cut the level of spending now–or to avoid increases in the level of spending that would otherwise be good policy–only if the slower expected growth is unaccompanied by an equal reduction in Treasury interest rates. But that is not the case: our reduction in expected future economic growth is accompanied by a larger reduction in Treasury interest rates.

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: “The global financial crisis has permanently lowered the path of GDP in all advanced economies…

..At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

Must-Read: Larry Summers: When the best umps blow a call

Must-Read: I think Larry Summers gets this wrong. Under Rivlin, Reischauer, Orszag, and Elmendorf the CBO was a national treasure. Otherwise… Not so much. Hit and miss.

Remember June O’Neill talking about how many people would lose their jobs from health care reform, and never once telling the reporters she briefed that in her models people hadn’t “lost” their jobs, they quit jobs they did not want to have and were made happier thereby?

And now we have an assumed-but-hidden 2%/year real rate of return on government infrastructure investment driving an analysis:

Larry Summers: When the best umps blow a call: “The Congressional Budget Office is an American national treasure…

…Without the impartial objectivity it brings to the budget process, our country would make much worse policy. Baseball without an umpire would be a very different game, and similarly the making of budget policy without CBO would be a very different and inferior activity. However, even the best umps occasionally blow a call, and I am afraid that is what CBO has done in its recent infrastructure report…

Must-Read: Paul Krugman: Cheap Money Talks

Must-Read: Paul Krugman: Cheap Money Talks: “Late last year the yield on 10-year U.S. government bonds was around 2.3 percent, already historically low…

…on Friday it was just 1.36 percent…. Some… blame the Federal Reserve and the European Central Bank, accusing them of engineering ‘artificially low’ interest rates that encourage speculation and distort the economy… largely the same people who used to predict that budget deficits would cause interest rates to soar…. They’re not making sense….‘Artificially low’ mean[s]… excessively easy money… [what generates] out-of-control inflation. That’s not happening…. If anything, developments in the real economies of the advanced world are telling us that interest rates aren’t low enough….

But why? In some past episodes… the story has been one of a flight to safety…. But there’s little sign of such a fear-driven process now…. Most famously Larry Summers, but also yours truly and others… [say] weak demand and a bias toward deflation are enduring problems… [no] return to what we used to consider normal…. Low short-term interest rates for a very long time, and [so] low long-term rates right away….

Raising rates in the face of weak economies would be an act of folly…. What policy makers should be doing, instead, is accepting the markets’ offer of incredibly cheap financing…. There are huge unmet demands for public investment on both sides of the Atlantic…. This would be eminently worth doing even if it wouldn’t also create jobs, but it would do that too…. Deficit scolds would issue dire warnings…. But they have been wrong about everything for at least the past eight years, and it’s time to stop taking them seriously. They say that money talks; well, cheap money is speaking very clearly right now, and it’s telling us to invest in our future.