(1) So-called "Treasury view" arguments by famous economists were seriously unconvincing and embarrassing to the profession (I didn't say that, but I think it was implied).
(2) There should be more debate about the merits of vigorous, unconventional monetary policy vis-a-vis fiscal stimulus.
(3) There should be more serious discussion about particular stimulus policies, not just tax-cuts vs. spending, but the particulars of how taxes would be cut and spending would be implemented.
(4) Bank bailouts could be a lot more effective and tax-payer friendly.
I am pleased to report (to myself and a handful of possible followers) that things seem to have improved a bit on points 1-3. Point 4 looks uglier every day, but others are writing about this a lot, so I'll focus on the positive:
Silly arguments along the lines of (1) seem to be dying (slowly).
With regard to (2): Here is Brad Delong, considering the options. While Delong's prolific and supremely intelligent blogging is routinely awe inspiring, somehow I find his argument against printing money a little thin and dismissive. Times are getting desperate. And the Fed can easily reverse its money-printing ways if things get out of hand. Here is Robert Lucas arguing for more vigorous monetary policy--now that's a more sensible position coming from the Chicago School! It's a heck of a lot better than silly perfect-markets story when the economy is losing 5-700,000 jobs a month. Here's Brad Delong responding to Lucas. I'd still like to see what Krugman has to say. He's made a couple oblique references, and he doesn't seem to dislike the idea of unconventional monetary policy. Mostly he seems to prefer not talking about it. Why is that? His recent emphasis on deflation, to me anyway, screams for the printing press.
With regard to (3) we're seeing more discussion of multipliers. Even the senators on the hill seem to be talking about it more seriously. Here is Menzie Chinn giving us the gory details beneath the various ways of estimating multipliers. But there remains a disappointing lack of discussion of finer design issues. My comment to Menzie Chinn was:
I think my gut instincts were right. Menzie replied:I'm not a macroeconomist but studied some of this stuff once upon a lifetime.
Can/do these models differentiate the way stimulus is implemented? Or is spending just spending and a tax cut just a tax cut?
I ask because I would think the details would matter a lot. Like a tax credit for new investment spending differs from a corporate tax rate cut which differs from an income tax break which differs from a payroll tax break. Or like government spending on infrastructure development differs from extending unemployment benefits which differs from subsidizing car purchases which differs from subsidizing the wages of all new hires by firms.
It does seem, to me anyway, that too much of the discussion is on tax cuts versus spending. It seems more relevant to talk about the details of how these things would be implemented.
Indeed, I can imaging tax-cut/spending alternatives that, in effect, would seem nearly identical.
Don't you think spending and/or tax cuts, if done creatively, might induce much larger multipliers that historical data/models would indicate? Sadly, developing evidence for such creative policies, no matter how conceptually compelling, would seem difficult, given paucity or nonexistent data and the large aggregates used in macro analysis. But please do educate me if I'm wrong and you are so compelled.
Very nice post, by the way.
Some models would make the distinctions you do highlight, but the more formal general equilibrium models would probably not be able to handle these fine distinctions.It's so cool that Jim Hamilton and Menzie Chinn actually reply to comments when their blog gets some 2600 visits per day. Here is Mark Thoma's link to Menzie plus his comments about why we know so little about multipliers.
Anyway, I don't think there is much historical precedent for the current situation, and thus limited evidence to work with. It's going to take some good common-sense thinking combined with historical evidence to achieve the best policy. And under the circumstances, some creative risk taking seems in order, too.
Here at NCSU, we've been told all our grad student funding will be cut off. This makes me sad as we have a remarkably good crop of 25 first-year PhDs and I'd hate to see any of them cut off. I guess that means I'll be writing more grant proposals...
If we're hurting, I hate to think how bad it is in the trenches outside academia. The charts at Calculated Risk sure are ugly.
But Mike, don't you understand that sending money down to the states isn't stimulus?
ReplyDeleteWhat a load of horse manure. I can't stand this lying and ignorance coming from the Republicans. It's become insufferable.
As a School Board member in New Hampshire, my district could put at least $5 million to work by next Monday, for heaven's sake.
I was a Republican for 33 years. But I became a Democrat two years ago because the Republican policies actually encourage greed, cruelty and ignorance.
Beezer: As far as government spending goes, sending money to the states makes a lot of sense to me. Huge state cut backs at a time like this is anti-stimulus at the worst possible time.
ReplyDeleteAnyhow, I don't have much to say about it that others haven't said. When blogging about macro (not my specialty) I'm trying to focus on issues about which I'm unsure.
(1)The prominence of the “Treasury View” in editorial pages assures its long and highly influential life, all trenchant blogosphere commentary to the contrary notwithstanding. (2)Much of the dollar value of the proposed stimulus package, as opposed to the media-highlighted programs, is in the nature of automatic stabilizers/transfer payments or the prevention of a recession-induced downward spiral in governmental spending.
ReplyDelete(3)If the Fed pays “cash for trash”, it cannot subsequently completely sterilize the monetary injections when the purchased assets are subsequently proved to be trash. Market inflation expectations reflect this— spreads on Treasuries over TIPS have started to widen.
(4)The Fed’s actions deliberately feed inflationary expectations and, hopefully, some actual moderate inflation, since a debt-deflation spiral is to be avoided at all costs. Not only will subsequent complete sterilization not be possible, it is not desirable. The impossibility strengthens Fed credibility in debt-deflation prevention.
(5)The current crisis is not a liquidity crisis; high-powered money growth and excess reserves (>$800bn) have been extremely high since August/September. The crisis is one of solvency, initially for financial institutions but now for the downturn-exacerbated real sector. Widely-heralded credit-spread tightening in LIBOR vs. T-bills, CP, etc., reflect special Fed/BofE/ECB programs to guarantee interbank and CP lending. Corporate bond spreads to Treasuries remain sky high.
(6)In a solvency crisis, the one remaining good credit is the government, whose debt-financed spending can lead the economy out of recession (although the current stimulus package will not do so, since it is so small), reducing depression fears and hence private credit spreads. IMHO, permanent income reductions from feared depression are much more of an immediate macro-economic concern than Ricardian Equivalence (RE).
(7) Proved absence of political resolve to increase taxes after recovery (think of the Bush years; tax cuts were permanent irrespective of the spending level) is a major issue for any stimulus efficacy, however, since that absence implies an ever-increasing external funding of the debt. Even a reserve currency country must eventually face increasing interest spreads and a reduced domestically-owned capital stock in such circumstances: incomes are reduced and by the PIH the current effects of a stimulus are partially vitiated by the political irresoluteness—think banana republic writ large. The reserve currency status in limiting the irresoluteness dampening effects is itself reduced by other reserve currency economies being better off (JPY but not GBP) and by continued increasing world-wide liquidity demand outstripping global stimulus needs-- itself not very likely in this global downturn.
(8)So we maximize fiscal/monetary efficacy by selling the Treasuries not abroad but to a domestic banking sector awash in excess reserves, by continuing accommodative Fed actions to facilitate same, by deliberately—and unexpectedly-- inflating post recovery to partially renege on the stimulus-induced debt to minimize RE effects after depression fears are gone, and by demonstrating the political will not seen in the last 8 years to address the budget long term. The post-recovery policy difficulty is the usual one on inflationary expectations management without gut-wrenching 80s-style cures.