Tag: Fiscal Policy

Must-Read: Simon Wren-Lewis: Helicopter Money and Fiscal Policy

Posted on by Brad DeLong

Must-Read: What I often hear: “Expansionary fiscal policy increases the burden of the national debt. That’s the reason expansionary fiscal policy is too risky. Helicopter money–social credit–is expansionary fiscal policy. But expansionary fiscal policy is too risky. Hence helicopter money is too risky.”

Stupid or evil? Simon Wren-Lewis does some intellectual garbage collection:

Simon Wren-Lewis: Helicopter Money and Fiscal Policy: “John Kay and Joerg Bibow think additional government spending on public investment is a good idea…

…We can have endless debates about whether HM is more monetary or fiscal. While attempts to distinguish… can sometime clarify… ultimately… HM is what it is. Arguments that… use definitions to… conclude that central banks should not do HM because it’s fiscal are equally pointless. Any HM distribution mechanism needs to be set up in agreement with governments, and existing monetary policy has fiscal consequences which governments have no control over…..

At this moment in time… public investment should increase in the US, UK and Eurozone. There is absolutely no reason why that cannot be financed by issuing government debt…. HM does not stop the government doing what it wants with fiscal policy. Monetary policy adapts to whatever fiscal policy plans the government has, and it can do this because it can move faster than governments…. Kay… also suggests that HM is somehow a way of getting politicians to do fiscal stimulus by calling it something else. This seems to ignore why fiscal stimulus ended. In 2010 both Osborne and Merkel argued we had to reduce government borrowing immediately because the markets demanded it. HM… avoids the constraint that Osborne and Merkel said prevented further fiscal stimulus…. Many argue that these concerns about debt are manufactured… deficit deceit. HM, particularly in its democratic form, calls their bluff….

There is a related point in favour of HM that both Kay and Bibow miss. Independent central banks are a means of delegating macroeconomic stabilisation. Yet that delegation is crucially incomplete, because of the lower bound for nominal interest rates. While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task. HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do?

Must-Read: Simon Wren-Lewis: A General Theory of Austerity

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: A General Theory of Austerity: “I start by making a distinction… between fiscal consolidation, which is a policy decision, and austerity, which is an outcome where that fiscal consolidation leads to an increase in aggregate unemployment…

…Monetary policy can normally stop fiscal consolidation leading to austerity, but cannot when interest rates are stuck near zero…. I say that austerity is nearly always unnecessary… has nothing to do with markets: the Eurozone crisis from 2010 to 2012 was a result of mistakes by the ECB. If a union member’s government debt is not sustainable, there needs to be some form of default (Greece). If it is sustainable, then the central bank should back that government, as the ECB ended up doing with OMT in 2012…. None of this theory is at all new….

That makes the question of why policy makers made the mistake all the more pertinent. One set of arguments point to… austerity as an accident… Greece happened at a time when German orthodoxy was dominant…. [But this] does not explain what happened in the US and UK…. The set of arguments that I think have more force… reflect political opportunism on the political right which is dominated by a ‘small state’ ideology…. [But] how was the economics known since Keynes lost to simplistic household analogies[?]…. [And why] in this recession, but not in earlier economic downturns?… It does not have to be this way…. We cannot be complacent that when the next liquidity trap recession hits the austerity mistake will not be made again…

Questions for the medium run…

Posted on by Brad DeLong

Take the mechanics of demand stabilization and management off the table. Move, in our imagination at least, into a world in which short-term safe nominal interest rates rarely if ever hit the zero nominal bound. In that world, as a result, the full employment and price stability stabilization-policy mission could be left to central banks and monetary policy. Furthermore, confine our thinking to the North Atlantic, possibly plus Japan.

It seems to me then that there are four big remaining questions:

  1. Can, in a political-economy sense, central banks be trusted with this mission? Are they not captured, to too great an extent, by the commercial-banking sector that, myopically, favors higher nominal interest rates to directly improve bank cash flows and indirectly dampen inflation and so redistribute wealth to nominal creditors–like banks?

  2. What is the proper size of the twenty-first century public sector?

  3. What is the proper size of the public debt for (a) countries that do possess exorbitant privilege because they do issue reserve currencies, and (b) countries that do not?

  4. What are the real risks associated with the public debt in the context of historically-low present and anticipated future interest rates?

I gave my preliminary answers to (2), (3), and (4) here. But what about (1)? And what about others’ takes on my answers to (2), (3), and (4)?

I think that these are among the most important questions for macroeconomists to be grappling with right now, and yet I am disappointed to see relatively little serious work on them. Am I missing active literatures because I am not looking in the right places?

Does anyone have any bright ideas here?

On the definition of a “liquidity trap”

Posted on by Brad DeLong

I am going to split hairs with Robert Waldmann here…

Robert writes:

Robert Waldmann: The USA is not in a liquidity trap any more: “The output gap can be [estimated] by attempting to measure slack directly…

…The ratio of employment to prime age (25-54) population… is very low…. The ratio of vacant jobs to employment is very high, the quit rate is normal and real wages have begun to grow. The pattern is very confusing… it is possible for the same person to reach very different conclusions on different days….

[But] we [do not] need to estimate the output gap to predict the Fed’s response to fiscal stimulus…. The Fed Open Market Committee (FOMC) has… made it very clear that they are considering further rate increases. It could not be more clear that markedly reduced unemployment will convince them to raise interest rates. The US economy is not at the zero lower bound anymore. This just means that the FOMC no longer wishes it could achieve a negative federal funds rate…. This is a statement about what the FOMC will do not what it should do…

Let me disagree with Robert.

Whether or not the short-term safe nominal interest rate that the central bank controls is zero or not, an economy is in a liquidity trap when:

  • even a zero interest rate is not sufficient to raise planned expenditure to the level of full-employment output.

The central bank could be pegging the Fed Funds rate at 5%, and the economy would still be in a liquidity trap if even a 0% rate was insufficient to restore full employment.

Now there is disagreement about whether the U.S. economy is in a liquidity trap right now. The Federal Reserve doesn’t think so: the Federal Reserve thinks the current short-term safe nominal Wicksellian neutral interest rate is 0.25%. But I think that the Federal Reserve is wrong. And if the Federal Reserve is wrong–if the short-term safe nominal Wicksellian neutral interest rate is still less than zero–the economy is still in a liquidity trap, even though the Federal Reserve does not think that it is.

This bears on the question of whether expansionary fiscal policy is a good thing or not. If indeed the economy still is in a liquidity trap, the Federal Reserve will learn–in which case expansionary fiscal policy now will be beneficial, as it will save them from the consequences of their current mistakes as they learn and adjust. If the economy is not in a liquidity trap, expansionary fiscal policy will still raise the neutral interest rate–and so provide the Federal Reserve with more sea-room and a much better chance of avoiding another zero lower-bound catastrophe when the next adverse macroeconomic shock hits.

To say: “Because the Fed has raised the Fed Funds rate above zero, we are no longer in a liquidity trap, and expansionary fiscal policy no longer has a point” is, I think, to fundamentally mis-analyze the situation…

Must-Read: Larry Summers: Four Common-Sense Ideas for Economic Growth

Posted on by Brad DeLong

Must-Read: Larry Summers: Four Common-Sense Ideas for Economic Growth: “Since the summer of 2009, the US economy has grown at about 2 percent…

…The 10-year interest rate at the end of trading today [February 18, 2016] was just a bit below 1.8 percent…. We are having trouble achieving… a 2 percent inflation…. This is the judgment of a market that thinks that the Fed is not going to do anything like what it says it’s going to do…. The real interest rate is at least a kind of measure of the certainty equivalent of the productivity of capital. If the market is saying that’s below 1 percent, that has to be of concern as well. [And] the Fed has been substantially too optimistic in its one-year-ahead forecast every year for the last six….

What should be done?… First, there is an overwhelming case in the United States for expanded public infrastructure investment…. Yt the rate of infrastructure investment is lower now than it’s been anytime since 1947. If you take depreciation out, federal infrastructure investment is negative…. Second, we should increase support for private investment in infrastructure…. With respect to private investment, tax reform is critical…. Third, we should grow our effective labor force…. What we do to educate our workforce matters. What we do to incentivize our workforce—through the design of our social safety net, and through disability insurance—matters. What we do to change our immigration policies—particularly our immigration policies on highly skilled workers—matters….

Fourth, our financial system requires continuing attention… the 1987 crash, the 1990 real-estate bubble, the S&L crash, the Mexican financial crisis, the Asian financial crisis, the internet bubble, Enron, and then the Great Recession of 2008. On average, a crisis every three years for the last 30 years. That surely has taken a toll on growth. At the same time, because pendulums swing, at a time of substantial unemployment, a large number of middle-class Americans are not able to get mortgages today with reasonable down payments. It appears, though the matter is in some dispute, that there are significant impediments in the flow of capital to small businesses as well. Financial reform, labor-force support, stimulus to private investment, increases in public investment—this stuff is not rocket science. Most of it operates on both the demand side and the supply side….

If all you care about is that we’ve got an excessive federal debt, the most important determinant of the debt-to-GDP ratio in 2030 is how rapidly the economy grows between now and then. If what you care about is American national security, the most important determinant of how much we are respected and how much influence we have in the world is how well our economy performs. If what you care about is inequality and poverty, the most important determinant of the employment prospects of the poor is how rapidly the economy is growing…

Must-read: Narayana Kocherlakota: “The World Needs More U.S. Government Debt”

Posted on by Brad DeLong

Must-Read: Narayana Kocherlakota: The World Needs More U.S. Government Debt: “Are government-imposed restrictions holding back the U.S. economy?…

…In a way, yes: The federal government is causing great harm by failing to issue enough debt.

The U.S. generates more income than any other country, and will keep doing so for many years to come. The federal government can generate a lot of revenue by taxing this income — a power that puts it in a unique position to issue the kind of extremely safe bonds that are in great demand among the world’s investors. How is the U.S. government wielding its power? Not well. The yield on a 20-year inflation-protected Treasury bond, at just over 0.5 percent, is nearly two full percentage points lower than it was 10 years ago. This means that the price is near record highs, suggesting that the U.S. government’s supply of such safe investments is falling far short of demand. In other words, we’re starving the world of desperately needed financial safety. To some, the idea that the U.S. government isn’t issuing enough debt may seem counterintuitive — after all, federal debt outstanding has more than doubled over the past 10 years. But scarcity is not about supply alone. In the wake of the financial crisis, households and businesses are demanding more safe assets to protect themselves against sudden downturns. Similarly, regulators are requiring banks to hold more safe assets. Market prices tell us that the government needs to produce more safety in order to meet this increased demand. The scarcity of safety creates hardships for people and businesses…

Must-read: Ben Spielberg: “How to Prepare for the Next Recession”

Posted on by Brad DeLong

Must-Read: Ben Spielberg: How to Prepare for the Next Recession: “Because interest rates are already so low…

…the Fed’s principal ammunition–the ability to further lower rates–is unlikely to have much traction when the next downturn rolls around. If we want to mitigate hardship and help the economy get back on its feet when that happens, the prudent move would be to strengthen the ‘automatic stabilizers’ in the federal budget–programs like unemployment insurance, the Supplemental Nutrition Assistance Program, or SNAP (food stamps) and Medicaid–that, without the need for congressional action, expand when the economy is weak and contract when the economy is on its way to recovery…. As they currently stand, these programs aren’t enough…. One of the biggest challenges during a recession is at the state level–many states have balanced-budget requirements, which mean that as tax revenues drop, spending has to as well, making the recession more painful…. Policy makers from both major political parties recognize the risks of inaction; Congress passed stimulus packages under the administrations of both George W. Bush and President Obama. In addition to increasing SNAP benefits, providing states with fiscal relief and enacting a Homelessness Prevention and Rapid Rehousing Program that served over one million people, the Obama stimulus funded about 260,000 subsidized jobs in 2009 and 2010. But it would be risky to depend on the same wisdom to come through in the next crisis…

Must-read: Jim Tankersley: “The world has too many workers. Here’s one way to fix it”

Posted on by Brad DeLong

Must-Read:I really do not like the “too many workers” framing: I vastly prefer either:

  • Too little public investment
  • Too little government purchases
  • Too little government debt
  • Too little risk-bearing capacity
  • Too little in the way of safe assets for savers to hold

But the argument seems 100% right to me:

Jim Tankersley: The world has too many workers. Here’s one way to fix it: “overcomplicating America’s economic challenges today…

…Maybe the problem is simple: too many workers. That is the argument made in a new paper released by the centrist Democratic think tank Third Way, which theorizes that the world economy is suffering from an oversupply of labor and too little demand for the goods and services those workers produce…. Daniel Alpert… [makes] Third Way’s latest effort to shape the liberal policy conversation in the 2016 presidential primaries. It does so in decidedly un-centrist fashion — by embracing a larger infrastructure spending program than Bernie Sanders does….

Alpert laments the ‘suddenness and extent of the integration of over 3 billion people into a global capitalist market, that really only hitherto consisted of about 800 million in the advanced economies.’ He argues that worker influx has triggered a wave of low-wage job creation in America. He notes that nearly half of the jobs created in the current recovery have come in traditionally low-wage sectors…. Intervening, he says, requires a ‘bold change in policy focus’ for the United States. Which is to say, a $1.2 trillion infrastructure spending program, at a time when Congress remains dead set against big new spending plans. Alpert estimates it would create 5.5 million jobs….

It might seem an unusual position for a centrist think-tank, outflanking the most liberal presidential candidate on the left. But Third Way officials argue it’s an economic imperative. ‘Whether it’s through some sort of spending deal, where you’re getting more money into infrastructure, or repatriation or some other means, you have to get this done’ in Congress, said Jim Kessler, the group’s senior vice president for policy. ‘That glut of worldwide labor is not going to go away, magically.’

Must-read: Paul Krugman: “In Hamilton’s Debt”

Posted on by Brad DeLong

Must-Read: Paul Krugman: In Hamilton’s Debt: “Hamilton’s pathbreaking economic policy manifestoes…

…his 1790 ‘First Report on the Public Credit’… remains amazingly relevant today…. Why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower… give wealthy, influential investors a stake in the new federal government…. Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because:

in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.

That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a ‘national blessing’…. This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global ‘safe asset shortage.’ The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question–and for a variety of reasons, there just aren’t enough such assets these days. As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. And it’s a very persuasive story to just about everyone who has looked hard at the evidence.

Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds…. Alexander Hamilton knew better. Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.

Must-read: Noah Smith: “America Isn’t Going Broke”

Posted on by Brad DeLong

Must-Read: Noah Smith: America Isn’t Going Broke: “The U.S. government isn’t insolvent…

…Insolvency… [is] when liabilities are greater than assets. That’s very basic accounting. One of the U.S. government’s assets is its ability to tax…. The national debt–which includes debt held by the public and money owed to other branches of the government–is only equal to about six years’ worth of tax revenue. If the U.S. devoted a fifth of tax revenue to paying down the entire national debt, it would take 30 years to do it. That’s not insolvency….

The federal debt held by the public is now growing at about a 3 percent rate, while the economy is growing at about a 3.4 percent rate (these are both in nominal terms)…. the U.S. deficit is now perfectly sustainable. This represents a remarkable–possibly even excessive–display of fiscal responsibility by the U.S. government…. So the U.S. debt isn’t frighteningly large, nor is it growing in relation to the economy. In the future, it might do so, if health care prices accelerate again, or if the population ages more. But the U.S. can take steps to address those contingencies when they happen. For now, the U.S. is living in the greatest period of fiscal responsibility since the second Clinton administration.

Resist the urge to engage in debt hysterics, please.