Why is So Little Known About Modern Fiscal Stimulus?
Thursday February 5, 2009
Justin Wolfers makes a terrific observation - that "fiscal policy has largely disappeared from the research program of modern macro". He compares the number of peer-reviewed journal articles since 1970 on monetary policy and on fiscal policy. The resulting graph is eye-opening. as Wolfers puts it: "[T]here are about three papers written on monetary policy for each paper mentioning fiscal policy. And there are only a few dozen papers written on the multiplier each year."
Wolfers gives three reasons why this might be the case, the first of which I see as being highly unlikely:
Thoma's second argument, however, is a home run:
Wolfers gives three reasons why this might be the case, the first of which I see as being highly unlikely:
- Pro-market ideology
- Monetary policy research leads to high-paying private sector consulting jobs
- "[T]here are 12 regional Federal Reserve banks subsidizing research on monetary policy, and almost no one provides similar subsidies for fiscal research."
Thoma's second argument, however, is a home run:
The second factor was the belief that if stabilization policy is needed, monetary policy was superior in every way to fiscal policy. Monetary policy could be implemented faster, with less distortions, it could be reversed quickly, it was in the hands of independent, public minded shepherds, there wasn't any dimension, or so it was thought, upon which fiscal policy would be better than monetary policy, and vast amounts of research were devoted to getting the monetary policy component of stabilization policy correct. In the process, fiscal policy was dismissed as irrelevant, at least as a stabilization tool, and largely ignored by researchers (fiscal policy was still used to try to promote growth - that's the whole supply-side argument about cutting taxes, but not as a stabilization tool). That's not to say government spending and taxes weren't included in models and analyzed theoretically, or even empirically, but to the extent that happened, the questions were not focused on how fiscal policy could be used as a stabilization tool -- the models were not constructed to answer this question.This makes far more sense. When you consider real-world complications, fiscal stimulus is irrelvant (or at least should be) - as I describe in What Are The Key Ingredients of Fiscal Stimulus and Fiscal Stimulus - Unlikely To Work in the Real World.
Comments
Lets see.
1. Fiscal stimulus was rejected as a policy by just about every living macroeconomist over the last 40 years.
2. Fiscal stimulus came to be rejected by even God himself .. sorry, make that the weird looking man named Keynes.
Yes, why deal with facts when we already have the true faith. They are either unnecessary or heretical. Suppress them before they can do any damage.
I think there is more truth to Wolfers’ number 1 reason than you think, when one asks “Why” has monetary policy been assumed to be more effective than fiscal policy. Obviously monetary policy was effective for a long time. But this crisis shows us that when the crux of the problem is monetary in nature, monetary policy is a complete failure.
Economics has been over-run by free market ideologues who have assumed incorrectly that such financial market failures were not an inherent part of our economy. Free marketers were fine with a little fine tuning via monetary policy but never wanted to talk fiscal policy since it is arguably even more interventionist – and given the assumption of adjusting markets and limited financial failure, monetary policy is all we need.
Had free marketers listened to the minority of economists over the last few decades who warned of just this problem, we might not be in this situation today.
Further, if proper fiscal policy was used decades ago to build the right kinds of public infrastructure etc. (and demand for it), we might not have grown to be so dependent on things like oil, service/finance sector, foreign entities with questionable motives.
As it is, many economists have often touted ideology under the false guise of science. I’m sure they don’t see it that way. Once you are brainwashed it’s easy to justify something under the right set of assumptions. Among the myriad assumptions necessary to make this ideology hold, they must assume all government expenditure is a consumption that is tossed down the drain, as opposed to a social and public investment in our future.
EDITORS CLASH OVER WORD CHOICE, REPETITION
New York – 2/6
A newsroom debate over semantics escalated to a tense stand-off yesterday, as copy editors walked out following the rejection of proposed revisions to an op-ed.
“Readers have no way of knowing what ‘the economy’ means at this point,” said long-time copy editor Claire Leinhard. “Given the inordinate repetition in this particular column, we felt that an alternate term, ‘resource-efficiency,’ helped clarify the argument.”
Editorial page editors declined comment. Talks will resume Monday morning.
The revised text is below. For the full published version, see Times Opinion, Feb. 5, 2009
A not-so-funny thing happened on the way to resource-efficiency. Over the last two weeks, what should have been a deadly serious debate about how to save our resource-efficiency in desperate straits turned, instead, into hackneyed political theater.
It’s as if the dismal resource-efficiency failure of the last eight years never happened. Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into a resource-efficiency abyss.
It’s hard to exaggerate how much resource-efficiency trouble we’re in. The crisis began with housing, but the implosion of the housing bubble has set resource-efficiency dominoes falling not just in the United States, but around the world.
Consumers have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to resource-efficiency right now. And exports, which were one of the U.S. resource-efficiency’s few areas of strength over the past couple of years, are now plunging.
Meanwhile, the Federal Reserve’s usual ability to support resource-efficiency by cutting interest rates — has already been overrun. The Fed has cut the rates it controls basically to zero, yet resource-efficiency is still in free fall. It’s no wonder, then, that most resource-efficiency forecasts warn that in the absence of government action we’re headed for a deep, prolonged slump.
Worst of all is the possibility that resource-efficiency will end up stuck in a prolonged deflationary trap. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if resource-efficiency continues to weaken.
As the great American resource-efficiency expert Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of depressed resource-efficiency, the burden of debt becomes harder to bear. These effects of deflation depress our resource-efficiency further, which leads to more deflation, and so on.
Would the Obama resource-efficiency plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of resource-efficiency experts, myself included, think the plan falls short and should be substantially bigger.
Those who stand in the way of his plan, in the name of a discredited resource-efficiency philosophy, are putting the nation’s future at risk. American resource-efficiency is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.
The only cost of printing money is inflation but we are experiencing deflation. It’s because the old people (Republicans) have all the money, but they are not spending it. The stock market took off and the people who had 1 million found themselves with 4 million when the market hit 13,800. The people who retired with 1 million don’t know how to live with 4 million.
The rich old people don’t spend their money, or give it to their children. They don’t talk about it. No one knows they have it. They can’t even convince themselves they have it.
The upwardly mobile 30 to 40 to 50-somethings have been building wealth, creating a large “starting in the low $200’s” housing market, luxury car market, and upscale malls.
The other half have no money. They couldn’t pay full price for cars, couldn’t afford houses, so we started having deflation in the regular car market, then we hit a mortgage crisis and stocks started crashing. It was easy to predict. I did predict it because of the car market. And I know poor people have no money.
Now I hear David Letterman, the local news anchor, and the blogger at Economics complaining bitterly about where all their money went.
We have been in stagnation for a long time, as prices haven’t risen in almost ten years. $11,000 cars are still $11,000. $70,000 condos are still $70,000. $42,000 cars are still $42,000; and $240,000 town houses are still $240,000; for almost ten years.
Now we are looking at deflation as the young wealthy are pulling back. $42,000 cars are now $37,500. Dinner is on special, entrees $20.00 for two. $10 off if you bring this coupon, to nice restaurants.
We have a genuine loss of money in the system. That means we can print money, give it to working people to repair roads and bridges and upgrade schools, and never pay the money back. We will have the roads and bridges, working people will have money to spend, and the stock market will stabilize.
So the economic stimulus plan is absolutely correct and it will cost nothing.
Why do we never have to pay the money back? Because we are in deflation and new money won’t cause inflation, so there is no cost in printing money. If we were to call it bonds, and then write promissory notes to rich old people or to the Chinese saying we owe them a trillion dollars, wouldn’t that be a form of insanity?
Re: John C
TINSTAAFL – Everything has a cost. Number 1 rules of econ. Printing money is going to cost us.