Saturday, June 15, 2013

Why I am a fiscalist

The FT's Cardiff Garcia has a great rundown of the two factions within the pro-stimulus camp in the macro policy debate:
Fiscalists vs market monetarists is a breakout skirmish between rivalrous, unnatural allies whose common antagonists are in retreat...To recap, this debate is about the best way to accelerate the recovery and return to pre-crisis trend growth while interest rates are at the zero lower bound. (When rates are above the ZLB, many fiscalists — in particular the neo-Keynesians — are monetarists again.)
He mentions me:
I wanted to include Tyler Cowen somewhere, but his views are complicated and would require a longer discussion. Same with Noah Smith, who I think is a fiscalist but, given his broad scepticism, I wasn’t sure.
I am broadly skeptical, especially of macroeconomic theories. However, despite that skepticism, or maybe even because of it, I am a fiscalist. Let me explain why.

Here are three propositions about the macroeconomy:

1. The Monetary Stimulus Proposition: Monetary easing will raise real output and employment in a significantly depressed economy (and doing this is now worth the costs).

2. The Fiscal Stimulus Proposition: Government spending of any type will raise real output and employment in a significantly depressed economy (and that doing this is now worth the costs).

3. The Public Capital Proposition: The U.S. is currently below the optimum level of government provision of public capital (infrastructure, etc.).

I am skeptical about all three of these propositions, and I think you should be too. Macro data is not very informative, so while empirics can  be suggestive, it won't be decisive. And for that same reason, the relevant theories have not been reliably confirmed by real-world observation. We live in a world of extreme "model uncertainty". There is evidence for and against all 3 of these propositions.

But here's the thing. If either the Fiscal Stimulus Proposition or the Public Capital Proposition is true, we need to boost government spending. In fact, even someone who is not a supporter of any kind of stimulus might support fiscalist policy recommendations. For example, John Cochrane, who in early 2012 wrote:
Let's be clear what the "fiscal stimulus" argument is and is not about.  
It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget.  
Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course... 
So while I am not as convinced of pro-fiscal-stimulus theories as people like Paul Krugman, the fiscalist-vs.-monetarist argument is about policy. And the fiscalist policy prescription seems much more robust to model uncertainty, because of the multiple reasons to want government spending.

Let's put some numbers on this. Suppose, after looking at the data, you think it's 40% likely that pure fiscal stimulus will be cost-effective. And suppose you think it's 30% likely that the U.S. needs to spend more on infrastructure. (And suppose you think these propositions are independent). Then you think there's a 58% chance that more government spending on infrastructure would be a good thing, for one or another or both of those reasons. So while if you had only considered one of the reasons for spending, you would recommend against it, but with the combination of two reasons, you would recommend it. See how that works?

In fact, what data we have seems to suggest that the public capital impact of government spending adds to the pure stimulus effect. Alan Auerbach and Yuriy Gorodnichenko find that the fiscal multiplier for government spending on investment is much higher than the multiplier for spending on consumption.

Monetarists who argue strenuously against any fiscal stimulus are therefore forced to assert that the Public Capital Proposition is false. For example, here is David Beckworth:
Okay, but not all fiscal policy is equal. Fiscal policy geared toward large government spending programs is likely to be rife with corruption, inefficient government planning, future distortionary taxes, and a ratcheting up of government intervention in the economy. So I will pass on this type of fiscal policy.
This kind of hand-waving dismissal of the need for public capital probably carries a lot of weight in certain intellectual circles, but to those who do not share Beckworth's strong priors, the argument is unconvincing in the extreme. (I must say that I have noticed what seems to be a greater reliance on theory and assumptions among monetarists than fiscalists, but I could be wrong about that.)

So count me among the fiscalists. But like most of the other fiscalists, I am definitely in favor of doing monetary stimulus at the same time. I'm just less certain that it will work.


  1. I am a using-up-lax-resources-ist.

    Ideally, I'd like the private sector to use up the lax resources thus lowering unemployment, raising rates.

    If that's not possible — and I'd tend to look at an extended ZLB event as making that true by definition — then the government should step in and do it.

    The fact that infrastructure spending is so desirable right now — as I discussed here — is kind of a two birds with one stone thing.

    1. Anonymous9:37 PM

      "I am a using-up-lax-resources-ist."

      How well did ZIRP I (2002-2005) work out?

      Those "slack" resources were put to "work" building 2 million plus pointless McMansions - which it has taken 5 years (and counting) to work off - and taken the world economy off a cliff.

      All to allegedly "return to trend growth" in 2002-2005.

      In retrospect, ye olde "slack" looks a helluva lot smarter than the stimulus it inspired.

      In the real world, digging holes in the ground or McMansions in the sky isn't productive activity - ZIRP inspired capital mis-allocations have caused much more harm than they have avoided.

      How monstrous the legacy of ZIRP II (2008 to infinity and beyond)?

      "Ideally, I'd like the private sector to use up the lax resources"

      How about definitively answering *why* the private sector isn't doing so *before* ginning up ye olde government stimulus/patronage/vote buying machine?

      For example, the Obama stimulus didn't primarily go to renovating our shared went to purchasing a two or three year exemption from economic reality for millions of teachers and other government workers - core political allies all.

      That is "socialized" macroeconomics in *practice* - Tammany Hall writ large.

  2. Anonymous6:32 PM

    You left out the part about where government spending is not and will never be a source of sustainable economic growth. So whatever you are (which the non-virgin world couldn't care less), the one thing for sure is that you are wrong.

    1. Nate O10:16 AM

      We don't need sustainable growth from the government, we need the gov't to jump-start the economy, to fix the collapsing infrastructure, or both.

      I have to dock you a few points for your poor reading comprehension, but you get bonus points for the belligerent tone.

    2. "where government spending is not and will never be a source of sustainable economic growth"

      But government spending on science, education and infrastructure has been a source of sustainable growth. I would include in Noah's infrastructure spending seriously increased spending on science. Maybe we could re-purpose those NSA server farms to scientific research.

    3. government spending is not and will never be a source of sustainable economic growth.

      Not that I'm a militarist by any means, but do you have any idea how much government money is spent every year (let's begin our thought experiment with the end of WWII) on military and intelligence contractors, and how many people work in that sector and feed directly off Uncle Sugar's tit? And let's not leave out the military and intelligence branches of gov't either.

      Is 70-odd years 'sustainable' enough for you?

    4. Anonymous10:15 AM

      Why is "sustainable" good? At what point did we all decide that the most important aspect of growth is its "sustainability"?

      Obviously, given a long enough term, nothing is "sustainable." The sun will eventually burn out.

      I like things that are unsustainable. When I have a few beers and get that buzz of euphoria, I know that buzz is unsustainable. I still go back and do it again, though.

      What is interesting is that my objection to your preference about “sustainability” is not even in the top three stupid things in your 2 (!) sentence comment, which would be:

      1. Certainty ("for sure") in the face of a skeptic (you really don't have any idea how mockable your certainty is, do you?)
      2. You state your "never" assertion in the first sentence with absolutely no proof (or as noted above, without any idea that the definition of “sustainable” is likely to be different for different people).
      3. How do you know what the non-virgin world would or would not care about?

      I'm not even mad. The brevity with which you are able to establish so many mistakes is impressive.

    5. Why is "sustainable" good?

      Are you questioning the value of sustainability? I thought you were instructing us on government's impotence at producing that sort of growth? I don't think the combination of arrogance and vapidity is any coincidence, fwiw.

    6. mattski,

      can't you, by now, recognize a troll when you see one? :)

  3. Anonymous6:46 PM

    The other part is the downsides to adopting policies, which I think strongly favors the skeptic fiscalist position.

    1. Note that Propositon 3 is inherently net of costs. The "optimum level" of public capital provision is determined relative to the costs.

    2. Anonymous7:41 PM

      Point taken. But overshooting and undershooting an optimum level can have different downsides, right?

      From a monetarist position, what is the downside to increasing spending on infrastructure projects right now?

    3. But overshooting and undershooting an optimum level can have different downsides, right?

      Probably, but I'm not sure which is worse. Looking at Japan I suspect underprovision is a little worse than overprovision.

      From a monetarist position, what is the downside to increasing spending on infrastructure projects right now?

      From a pure monetarist perspective? None. But I think many "market monetarists" tack on anti-infrastructure derp to their belief system (see Beckworth above), for reasons that are not entirely clear to me...

    4. Anonymous8:04 PM

      Derp's razor: If opposing arguments are equally compelling, but one tacks on extra derp, chose the non-derpy.

  4. Phil Koop8:10 PM

    Completely off-topic: I have only now taken note of your subtitle. It seems completely inapposite. Surely you are entirely human and not at all a troll (well, except for the comments, where you do occasionally give our noses a well-deserved tweak. But that is not econo-trolling.)

    Now that I think about it, what about "Noahpinion"? Why do you think this is a "clever pun", as you once described it? If parsed as "Noah's opinion", it is exactly wrong, in a crude Monty-Python-mocking-Oscar-Wilde sort of way; amusing, perhaps, but not so clever. You say it should be "Noah's Opinion"? Not at all: that would be "Noah's Pinion", meaning either Noah's primary wingfeathers (???) or else the binding of Noah (I don't think so.)

    Still, as John Barth put it, one would rather have a book better than its title than a title better than its book ("Steal this Book" was his example of the latter.) At least you have a great blog.

    1. Anonymous4:49 PM

      With a great friggin' title.

  5. Phil Koop8:12 PM

    Oops. That should have been '... if parsed as "No Opinion" ...'. I've had a couple beers. Does it show?

    1. I've had a couple beers. Does it show?

      Nope! Not at all. Never woulda guessed... ;-)

  6. You should probably put the word "permanently" in your stimulus propositions, since *opponents* of stimulus mostly think they will raise output and employment (even if the economy is not depressed), just not sustainably.

  7. How do you get 54%? My calculations yield 58%.

  8. Not to say that there are not meaningful differences bewteen the two camps but does the evidence really support one position to the exclusion of the other? Both clearly result in economic stimulus, and both clearly have their limits. All targets of government spending is likely to have an equivalent effect on the economy even in the short run and I am certain that this is true in the longer run.

    Also, arguing about mulltipliers always seems counterproductive to me. The world is just not that linear. This fact is particularly important when deciding how to determine the appropriate size of an effort. Even if monetary easing is a good idea, there does come a point of diminishing returns.

    It seems when faced with problems whne theory is so inadequate that our only recourse is empiricism constrained by common sense. In other words, we are doomed.

    1. Not to say that there are not meaningful differences bewteen the two camps but does the evidence really support one position to the exclusion of the other?

      Interesting always seems to me that the fiscalists also embrace monetary stimulus, but not vice versa...

    2. That would be because of the overall philosophical attitudes of many Market Monetarists as separate from their economic 'beliefs'.

      i.e. MMers tend to dislike gvt, gvt spending, taxes etc. I think that they'd like the gvt to be as small as reasonably possible within a modern world and let the economy to the direction of the CB, which cannot fail if it targets NGDP.

      The whole universe is solved without having to do something as messy as raising taxes/emitting a bond to build a highway.

  9. Anonymous1:23 AM

    For those, like me, who have to dig into long underused parts of their brain to retrieve basic probability... P(A or B) = P(A) + P(B) - P(A and B), and if A and B are independent then P(A and B) = P(A) * P(B). So we get .3 + .4 - (.3*.4) = .58. I think.

    1. simpler to multiply the probabilities of failure and subtract from 1:

      probability fiscal stimulus will fail: .7
      probability infrastructure spending will fail: .6
      probability both will fail .6 * .7 = .42
      therefor, probability one or both will succeed = 1 - 0.42 = 0.58

  10. Anonymous5:00 AM

    Have you read . The bottom line of that one is there is a demand problem not a supply problem. The private sector has stopped spending. The government sector is not spending enough to hold the fort till the private deleveraging eases off. Government spending should not do anything the private sector is already doing itself. Temporary sales tax cuts work well, as long as everyone knows they are temporary. Signalling that "inflation will increase soon"; go get that 60 inch Plasma now while prices last.

    Try the bank of Mum and Dad game with the kids. Dad is the Treasury, Mum the FED. Dad spends some DadDollars that mum designed with photoshop and printed off in her locked dressing room (a family sovereign fiat currency is created). Dad buys services from the kids like washing the car etc., in exchange for DadDollars. The kids say these are just bits of paper they are no good to us. Dad says, if you want to keep living in this house it is going to cost you ten DadDollars a week. Welcome to tax driven money. Notice that Dad spends before he ever gets close to getting his DadDollars back from taxing the kids. When he does, Mum will tear them up and print nice new ones when Dad needs them. Mind you, printing to many and spending them on more services than the kids are prepared to give time to, will force up the price of kids and inflation gets invented in the family economy. (Hat Tip: L Randall Wray and The MMT Heterodox.

  11. Anonymous5:12 AM

    Fallacy of composition: both propositions imply that government spending should go up, but not all kinds of government spending should go up. Public capital is underprovided, but bridges to nowhere are overprovided.

    The political reality is that the fiscal stimulus argument gives cover to vanity projects that take away funding for better causes. That fiscal stimulus proposals are by circumstance cobbled together hastily should also make us more sceptical of whether these projects (and the plans to implement them) are truly the low-hanging fruit of public capital spending.

    So no, I don't think you're getting Beckworth's position on the Public Capital proposition; he would probably agree with Cochrane that "If the project is valuable, do it."

  12. I've grown fond of Krugman's coingage: "The Stimulati."

    Sounds like something you'd order at Starbucks.

    I'm an All-Of-The-Above-ist. Do it all like Abe and Yoda Kuroda, skepticism be damned. Review the historical case studies. Roosevelt. Chamberlain. Japan in the 30s, etc.

    As often is the case with economics, the problems are political.

    With fiscal policy, you need to run the Congressional gauntlet. With monetary policy the FOMC simply needs to decide to ignore the inflationistas/bubblistas and move forward. Fiscal policy gets more bang for the buck. Monetary policy has issues with fairness and inequality. I think the monetarists like Beckworth are needlessly worried that the government will get an inch/take a mile and encroach on the private sector. That's not the history, it's propaganda a la Hayek. Let's hope that the government does encroach on the health care sector and domesticate the financial sector.

    What about currency/trade policy? I would add Dean Baker to the taxonomy as one who focuses on trade and exchange rates. This time the politics are international.

  13. Only 2 implies an increase in government spending given the current level. 3 can imply an increase or more likely re-shuffling of funds.

    Since you mentioned Cochrane, you may want to look at:

    Most likely the marginal tax dollar is spent on getting a retired baby-boomer viagra, as opposed to funding the next green technology.

    So, you are missing an additional probability: Probability that the money for 'public capital' can be found from current funds without an increase government spending.

    1. I agree that the question should be where the marginal dollar will go, not where the average dollar goes, but that is a question Cochrane does not ask. And it's a tricky question, because the growth of entitlements has been primarily a natural result of leaving the main entitlement programs as they are while the number of seniors and the cost of health care grows, not as a result of congress constantly deciding to create new entitlement programs or expand their scope. I think you are entirely backwards as to where the marginal dollars come from/go.

      One way to ask the question is, if congress decided to spend an additional $x00 billion in addition to what they're currently planning to spend, what will it go to? If you look at the stimulus spending, the ratio of public investment (infrastructure, education, research) to entitlement spending is quite high, much higher than in the budget as a whole. Another question is, if congress decides it must cut $x00 billion it was planning to spend, where will it come from? And here the history is quite clear: 1. public investment 2. anything but entitlements. So if we starve the beast, or hold the size of government constant while the number of retirees continues to grow, if the past is any guide at all to the future, we can expect public investment of every sort to be decimated in order to preserve entitlement spending.

      Decide for yourself whether its worth destroying infrastructure investment and research completely so that after that the government will finally be forced to do the economically vital work of pushing seniors out on ice floes. I mean, cutting entitlement spending.

  14. Anonymous5:38 PM

    Which one is deadly wasteful: having millions of individuals unemployed for years or putting these idle resources back to work and "waste" some money in the process? The right-wing economists have this simplistic and dishonest measure of efficiency always and everywhere in terms of profits!! Class interests buried under truckloads of greed and offered to us as freedom, free market, free men, and all that senseless free brouhaha!!

    1. Anonymous9:54 PM

      "Class interests buried under truckloads of greed"

      You mean like purchasing teachers and other political class workers a two or three year exemption from economic reality at the cost of eliminating the earning power of *anybody* (millionaire or humble retiree) prudent/responsible enough to have saved/invested rather than recklessly borrowed or sold their vote to the State?

      Stimulus *in practice* is 80% vote-buying, with all the long-term distributional corruptions that entails.

      And ZIRP is the necessary tool for such stimulus - how else to finance 80%+ Debt-to-GDP ratios without soaring interest costs or political blowback?

  15. Anonymous8:06 AM

    Quotes like Beckworth's make me scratch by head. On views such as his, it is a kind of miracle that any government anywhere has ever successfully managed to provide for the national defense in a dangerous world, educate large numbers of its people, care for the health of those people, organize the retirement support for its seniors, and build networks of roads, bridges and tunnels linking up the various parts of their countries.

  16. Noah,

    Would you view the theory of monetary offset as separate from proposition one, or a logical implication of proposition one?

    That is to say, can you be skeptical that monetary stimulus will *boost* unemployment and simultaneously believe that a central bank that engineers low inflation can impede fiscal stimulus from being effective?

    Another way of asking my question is, do you believe that fiscal stimulus can boost output and employment without increasing inflation?

    1. Sure. Though you have to believe in some pretty severe nonlinearities, AND that we're now at the Goldilocks point.

    2. you could just believe that the central bank won't inflate on its own but will tolerate inflation from expansionary fiscal policy.. that's basically the evans rule – tightening conditioned on a good economy rather than loosening conditioned on a bad economy. That's why it's a crappy rule (and why fiscalism will work).

      Or you could believe that AS is flat with excess capacity.

  17. If you believe proposition 3 and not proposition 2, then you could plausibly argue for increasing spending on infrastructure while cutting other areas of government spending. (Like you, I think the empirics and the models too doubtful to have any defendable opinions on in the short-term).

  18. "because of the multiple reasons to want government spending"...all of which are completely destroyed by the preference revelation problem.

  19. Anonymous11:03 AM

    Where is Fiscal Stimulus ... thru Tax Cuts???

    The Bush Tax Cuts did, in fact, help reduce the bubble pop recession.

    Prop 2b: The US is overtaxed, so we need to increase the spending and saving and rewards for successfully working and creating wealth. Tax cuts for taxpayers do this best.

    2b.2 Growth after tax cuts is more sustainable than growth from gov't spending.

    Many conservatives against "fiscal policy" are especially against more gov't spending. That's not the only kind there is -- but statists seldom include tax cuts as an effective fiscal option.

  20. Isn't the key question what is the balance between monetary and fiscal stimulus? Forgive me for being cynical but doesn't monetary stimulus directly benefit the finance world and indirectly the rest of us whilst fiscal stimulus stands a better chance of reaching the real economy.

  21. My latest blog post: "The Employment To Population Ratio (EMRATIO) is NOT a good indicator"

  22. I admire your good manners, which i can't emulate. I will carefully avoid citing the non-fiscalists you quoted by name. I assert that their main method of argument is setting up straw men. They wish to debate with the fiscalist who seriously proposed putting money in bottles in coal mines to stimulate the mining industry. The debate in which they participate has nothing to do with the actual current policy debate.

    The uestion isn't whether the down turn justifies a huge increase in public sector investment. The question is whether public sector investment should be cut a lot (that is the fiscalist pole) or more sharply than it has been cut since the post Vietnam demobilization.

    The position you agree is not fiscalist is well to the left of the position advocated by Obama since January 2010 an so far to the left of the current policy debate that it might as well be Bolshevik or Bourbonist. The vast majority of policy makers and of ordinary citizens consider deficits to be bad bad bad and believe that cutting the deficit (also during a recession with zero safe nominal interest rates) is good for the economy.

    The idea that a less countercyclical fiscal policy would require financing projects which were considered dubious in 2006 is based on a complete refusal to look at the data. It is possible for someone who thinks that government investment was much too high in 2006 to argue that it isn't too low now. But the argument against fiscalists is based on refusal to note the basic facts about current policy.

    See what has happened to total gross governmentr investment since Lehman collapsed (hint not quite as dramatic as what happened to Lehman)

    I ask two questions. Does someone who ignores this data have anything useful to contribute to the discussion ? Does any anti fiscalist do anything with this data but ignore it ?