Friday, March 23, 2012

Politics of PK

Business Insider believes that Goldman embraces PK in their analysis. I don't see it.
In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.
They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.
The DeLong and Summers paper, unsurprising for two Democrats, only talks about higher Government spending (G), not higher deficits (G-T).

The "higher G" argument to "prime the pump" is K, not PK.

It's also fun to see how careful the authors are to remain on the good side of Monetarists, who continue to set the orthodoxy for macro. Does any of this sound like PK to you?
In normal times the logic of Taylor (2000) that stabilization policy should be left to the monetary authority still holds.
The fear is that expansionary fiscal policy will lead to a collapse in confidence in the government, and a spiking of interest and inflation rates to previously-unseen values.
Sovereign debt crises can be triggered by rises in spending due to expansion
All basic gold-standard stuff.

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Blogger Ralph Musgrave said...

The popular idea (repeated by DeLong and Summers) that “monetary policy is constrained by the zero bound” is clap-trap.

It’s debatable as to exactly where the dividing line is between monetary and fiscal policy, but I assume that simply printing extra dollars and dishing them out to the population (i.e. a helicopter drop) is “monetary”. Now even if the central bank base rate is zero, it is complete nonsense to suggest that the average household if given $10,000 in cash is going to do nothing with that cash.

Of course if a government / central bank (GSB) wants to do a helicopter drop, it would take the form of something like cutting taxes, raising benefits, etc, but the effect is the same as handing out newly printed $100 bills.

As for the idea that a “temporary fiscal stimulus could be self-financing”, that’s just more clap-trap. It views the government / central bank as a microeconomic entity like a household or firm that “has to pay its way”. GSB does not need to pay its way: it can confiscate any amount of money anytime from the private sector via tax, or conversely, it can print money and dish it out to the private sector in limitless quantities.

Of course there may be institutional arrangements in particular countries that prevent the country applying the above MMT type logic. But in that case the “constraint” is the economically illiterate dick-heads running the country, not monetary policy or fiscal policy as such.

12:27 AM  
Blogger winterspeak said...

Ralph: If extra dollars are in the form of reserves and given to banks, it is monetary, as all that impacts is interest rates.

If extra dollars are in the form of NFA(e) and given to non-banks in the form of a transfer, it's fiscal.

There are grey areas, of course, too, especially in the realm of capital forebearance.

9:37 AM  
Blogger Ohm (Ώ) said...

Ralph, RE: "cutting taxes, raising benefits, etc (expanding Gov services like Infrastructure and Schools?), but the effect is the same as handing out newly printed $100 bills"

It might sound that the effect is the same but that would require human beings to be inanimate objects or particles that they are not. Money stays meaningful as long as it has to be earned, and the ones that are earning more appear, by and large, more deserving/delivering to those that earn less.

Helidrops or printing new money and just handing it out is a bad's not the same thing as sending it into the economy via the hands of people employed to add facilities that the populace by and large wants to have, and without significant portion of the money absorbed by middlemen.

10:32 AM  
Blogger Michael Sankowski said...

I think Jan Hatzius and many of the other analysts at Goldman entertain PK ideas and embrace PK when necessary. I've read some small but non-zero amount of goldies "private" analysis and have been shocked at some of the ideas presented.

7:40 PM  

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