29
Apr
12

Links on fiscal policy

Gettin’ very blogospheric in here — I’m linking to bloggers writing about other bloggers.  Who’d have thought ten years ago that the term “blog” would become respectable in an academic sense?  Anyway.

Tyler Cowen writes about fiscal policy and multiple equlibria:

One of the equilibria is a slow, steady decline from the top of a boom to more “realistic” supply/demand levels:

In this model there is still a useful role for fiscal policy.  For one thing, fiscal policy can smooth that ride down the escalator, by spreading the losses out over time, at the cost of future debt of course.  This may be needed if only to make the political economy of decline less bitter; see Spain and Greece.   Nonetheless fiscal policy cannot make up for the output losses at will.  We are not standing in an IS-LM diagram where the difference between “what we have” and “what we could have” is thwarted only by some supposed Austerians who won’t shift the proper curve and yet somehow have taken over some of the biggest spending social democratic, insider-leaning governments in world history.  The IS-LM approach fits in nicely with the view that policy improvement is all about yakking about the obstructionists.  Instead, policy is also about rebuilding trust, not just maintaining NGDP on a decent keel.

(Aside: Nick Rowe on NGDP targeting.)

Another is a shift to a new boom steady state economy:

There is another possible role for fiscal policy, as there usually is in models of multiple equilibria.  If you ran some super-duper fiscal policy, and invented the flying car, a cure for cancer, and other marvels, the market might suddenly latch its expectations on to a much more positive scenario.  There could be a significant upward bounce to a much higher equilibrium of output and employment.  In any case, the quality of fiscal policy matters, and Keynesian ditch digging probably doesn’t do much for inferences about institutional quality and for the selection of multiple equilibria.  “Spend the money, anywhere” is in my view a deeply pernicious attitude, somewhat akin to thinking you can create a good NBA team, with a strong ethic for quality and work, by tanking for better draft picks at the end of every season.  But no, the internal ethic matters and cannot be first destroyed and then recreated at will.  Good teams don’t usually work that way, and neither do good fiscal policies.

(Emphasis added.)

I think most supporters of public spending tend to imagine this second equlibrium, justified by awesomesauce Cold War-era aerospace projects like the Avro Arrow and the Apollo programme.  Unfortunately, what we actually get tends to be Keynesian ditch-digging at best.

Speaking of which, here’s Arnold Kling replying to Garrett Jones:

He writes,

If you want a big Keynesian multiplier:1. Focus on projects that hire less-skilled workers (remembering that “skilled” includes pipefitters, electricians and other specialties that mercifully don’t yet require a college degree).
2. Focus on projects that use workers from sectors with temporarily high unemployment rates.
3. Make some kind of effort to target parts of the country with high unemployment rates

It should have read,

If you are an entrepreneur who wants to set up a manufacturing operation during a recession:

(Emphasis from Kling’s post.)

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4 Responses to “Links on fiscal policy”


  1. 1 Bobo
    April 29, 2012 at 18:55

    When people talk about fiscal policy, the always talk about special projects. That’s fine, but it’s also a political choice of how to achieve an extra deficit. What about doing something like cutting the payroll tax entirely on both sides? That achieves a similar deficit, but it puts the extra spending power into worker’s hands- that seems like a great way to pump extra aggregate demand into an economy with minimal distortions.

  2. 2 TMI
    April 30, 2012 at 10:48

    The whole Keynesian thing hinges on a theoretical underpinning that neglects the dynamics of our economy; that is, a reliance on static analysis. What happens when the value of endogenous variables shift? Aggregation of individual impulses to save or spend is how we come up with certain data, so how can you ignore shifts in those individual impulses?

    The reliance upon the marginal propensity to consume (MPC) is the cornerstone of Keynesian economic prescriptions; give people more money and they’ll spend more money. The more money you have, the greater is the likelyhood that you will spend more of you money. While this is obviously true for subsistence levels of income and below, I don’t think that relationship necessarily follows for upper-income groups. If you have descretionary income, what if you decide to save, rather than spend?

    Increasing liquidity and declining national income? What’s this called? (Liquidity trap?)

    So the next step? How about requiring spending? Or giving huge incentives to spend for things no rational person would choose to purchase without massive incentives? What happens, instead, if shifts in MPC occur, how can economic analysis capture this possible shift?

    You’re not going to catch it with static analysis. Which is why idiots like Pelosi can still believe that increased unemployment compensation (transfer payments) will increase GDP.
    .

    • April 30, 2012 at 10:58

      The whole Keynesian thing hinges on a theoretical underpinning that neglects the dynamics of our economy; that is, a reliance on static analysis.

      Bingo. (I’m not too sure that holds for the sort of New Keynesian stuff Nick Rowe and company do, but it surely holds for anything that bounces around a politician’s cranial cavity.)

      give people more money and they’ll spend more money. The more money you have, the greater is the likelyhood that you will spend more of you money. While this is obviously true for subsistence levels of income and below, I don’t think that relationship necessarily follows for upper-income groups. If you have descretionary income, what if you decide to save, rather than spend?

      It also depends what you count as “spending”. Is paying off personal debt considered “spending”? If you follow the money around the financial sector, maybe it ends up in a multiplier somewhere, but it’s not what most simple-Keynesians have in mind. We saw this with the ARRA — a bunch of state and local gov’t.s got federal money and used it to lower their debt burdens or prop up their pension funds rather than hire people to dig ditches resurface roads.

      • 4 Bobo
        April 30, 2012 at 22:19

        Nick Rowe and company are just as guilty of ignoring the dynamics of our economy. They just apply the confidence fairy explanation a little further upstream to expectations surrounding the interest rate- basically asserting that businessmen look to Bernanke to decide whether or not to invest, as opposed to looking at the potential demand for whatever they’re investing in. As another example Nick’s take on what he would do if he knew hyperinflation was coming- basically buy expensive stuff, take a vacation and buy commodities.

        Paying off personal debt is certainly saving. Banks create horizontal money by creating a loan- it’s held as an asset on their balance sheet and a liability on yours. At a system wide level, paying off debt removes both the asset and the liability which destroys money in the system.

        Monetary policy works primarily through the housing channel (what else do most people spend large enough amounts of money that they need a loan?)- lower rates make borrowing to buy a more expensive house more attractive. If, as we’re seeing now, debt and housing is already too high, making it more attractive to borrow isn’t appealing to very many people which is why monetary policy is so powerless right now.

        State and local governments are revenue constrained- they need to balance budgets so when revenue crashed during the financial crisis they slashed jobs and spending rapidly which pushed forward the negative cycle for aggregate demand. The Fed’s should have stepped in even more aggressively to prop them up in that cycle.


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