1. You're half right about inflation being a monetary phenomenon à la Friedman. The Fed can counter fiscal deficits with tight monetary policy, as it did in the early 1980s. However, the stimulus still fueled a significant portion of the demand-driven inflation. This New York Fed paper estimates that at least half of the post-pandemic demand-side inflation can be attributed to fiscal stimulus: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1050.pdf
2. Here's how I would approach countercyclical policy. On the monetary side, implement an NGDP target or Taylor Rule. On the fiscal side, implement a Swiss debt rule, which means that Congress can run deficits during recessions but must run surpluses and reduce debt over the entire business cycle.
3. What are your thoughts on static vs. dynamic scoring? Republicans argue the CBO should account for the pro-growth effects of tax cuts. Democrats respond that the CBO should also include the growth impacts of things like infrastructure spending. Both sides have a point. But in my view, dynamic scoring is difficult to do with precision, and we should be very wary of budget gimmicks. However, the dynamic impact of tax cuts or spending hikes that increase the deficit seems relevant to your NPV fiscal rule.
I’d love for CBP to include the growth diminishing effects of deficits. Yes there is some growth enhancement from, say reducing business taxes.
But “Dynamic Scoring,” as understand it, is to request counting the effects of a supposed (Keynesian) “stimulus” resulting from the tax cut-deficit, whihc is just wrong. Fiscal policy neither “stimulates” nor causes “inflation” Both of those are results of monetary policy.
Funny that the Republican strategy of cutting taxes without cutting spending comes from Keynesian economics and JFK's 1964 tax cuts. If top marginal rates are 70-90 percent, that strategy might be the best of all worlds: more revenue and more growth. But after a certain point, the piñata runs out of candy, and you need to be serious about tradeoffs.
I’d say that reducing marginal rates without reducing revenue would have been better in 1964.
I’m a “neo Classical Keynesian:” recession or boom make deficits = activities with NPV>0. The difference is that if the Fed is fighting a recession with low interest rates and lots of resources are unemployed, lots of things will have NPV > 0. If we are art full employment and the Fed is “fighting inflation” many fewer things will have NPV >0. The result looks like ”vulgar Keynesian” countercyclical fiscal policy.
I think the problem with vulgar Keynesianism is that, in practice, politicians run deficits during periods of growth as well as recessions. So I think that to implement countercyclical fiscal policies effectively, you need a rule.
I also think that outside of the zero lower bound, monetary policy is a better way to moderate the boom-bust cycle than Keynesian-style demand management.
I think countercyclical fiscal policy has its place, but it should be used much more sparingly.
To (partially) defend the Gipper, part of the reason he ran deficits was to build up the military to outspend the Soviets, and that arguably accelerated the collapse of the USSR. Then Clinton was able to enjoy the peace dividend and eventually achieve a surplus. But yes, Reagan couldn't keep his promises to cut taxes, increase defense spending, not touch entitlements, and balance the budget. In my opinion, Reagan should have allowed Social Security to go insolvent and introduced spending growth caps for Medicare and Medicaid.
I think FAIT is the right monetary regime. _Flexible NGDPLT is the equivalent of FAIT, but since the main thing that changes is the price component of FNGDP, it makes more sense to be to call it FAIT. “NGDP” (not “flexible”) as I understand, it would never move the trajectory to a higher level and I think that is sometimes necessary to allow relative prices to adjust enough to avoid unemployment of resources.
Thomas, my understanding is that the ‘level’ of spending is important, but so is WHAT it’s spent on. Government spending that increases supply (improved ports, roads, loans for capital assets…) should not cause long term inflation. Can you comment?
Yes. Sometimes I’m cryptic and sometimes maybe just careless.
My deficit “rule” is deficit </= to productive public investment (NPV>0), the supply improving things you cite. I’d include science and technology investments and (if it was a good idea otherwise) subsidies for R&D. Of course that does not answer the question, is X a productive public investment.
1. You're half right about inflation being a monetary phenomenon à la Friedman. The Fed can counter fiscal deficits with tight monetary policy, as it did in the early 1980s. However, the stimulus still fueled a significant portion of the demand-driven inflation. This New York Fed paper estimates that at least half of the post-pandemic demand-side inflation can be attributed to fiscal stimulus: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1050.pdf
2. Here's how I would approach countercyclical policy. On the monetary side, implement an NGDP target or Taylor Rule. On the fiscal side, implement a Swiss debt rule, which means that Congress can run deficits during recessions but must run surpluses and reduce debt over the entire business cycle.
3. What are your thoughts on static vs. dynamic scoring? Republicans argue the CBO should account for the pro-growth effects of tax cuts. Democrats respond that the CBO should also include the growth impacts of things like infrastructure spending. Both sides have a point. But in my view, dynamic scoring is difficult to do with precision, and we should be very wary of budget gimmicks. However, the dynamic impact of tax cuts or spending hikes that increase the deficit seems relevant to your NPV fiscal rule.
I’d love for CBP to include the growth diminishing effects of deficits. Yes there is some growth enhancement from, say reducing business taxes.
But “Dynamic Scoring,” as understand it, is to request counting the effects of a supposed (Keynesian) “stimulus” resulting from the tax cut-deficit, whihc is just wrong. Fiscal policy neither “stimulates” nor causes “inflation” Both of those are results of monetary policy.
Funny that the Republican strategy of cutting taxes without cutting spending comes from Keynesian economics and JFK's 1964 tax cuts. If top marginal rates are 70-90 percent, that strategy might be the best of all worlds: more revenue and more growth. But after a certain point, the piñata runs out of candy, and you need to be serious about tradeoffs.
I’d say that reducing marginal rates without reducing revenue would have been better in 1964.
I’m a “neo Classical Keynesian:” recession or boom make deficits = activities with NPV>0. The difference is that if the Fed is fighting a recession with low interest rates and lots of resources are unemployed, lots of things will have NPV > 0. If we are art full employment and the Fed is “fighting inflation” many fewer things will have NPV >0. The result looks like ”vulgar Keynesian” countercyclical fiscal policy.
I think the problem with vulgar Keynesianism is that, in practice, politicians run deficits during periods of growth as well as recessions. So I think that to implement countercyclical fiscal policies effectively, you need a rule.
I also think that outside of the zero lower bound, monetary policy is a better way to moderate the boom-bust cycle than Keynesian-style demand management.
I think countercyclical fiscal policy has its place, but it should be used much more sparingly.
“Countercyclical fiscal policy” would be the result of following the Deficit = Σ(expenditures with NPV>0)
“politicians run deficits during periods of growth as well as recessions”
Especially Republicans since Reagan. :)
To (partially) defend the Gipper, part of the reason he ran deficits was to build up the military to outspend the Soviets, and that arguably accelerated the collapse of the USSR. Then Clinton was able to enjoy the peace dividend and eventually achieve a surplus. But yes, Reagan couldn't keep his promises to cut taxes, increase defense spending, not touch entitlements, and balance the budget. In my opinion, Reagan should have allowed Social Security to go insolvent and introduced spending growth caps for Medicare and Medicaid.
I do not believe there is a ZLB that effectively prevents a central bank from inflating enough in a FAIT regime.
You're even more of a monetarist than I am! What about 2008? Did the Fed still have more bullets in its chamber?
I gave you a rule. :)
Rules rule :)
I think FAIT is the right monetary regime. _Flexible NGDPLT is the equivalent of FAIT, but since the main thing that changes is the price component of FNGDP, it makes more sense to be to call it FAIT. “NGDP” (not “flexible”) as I understand, it would never move the trajectory to a higher level and I think that is sometimes necessary to allow relative prices to adjust enough to avoid unemployment of resources.
I’ll only be repeating myself, but the way I look at it, zero % of inflation is anything but Fed policy.
Thomas, my understanding is that the ‘level’ of spending is important, but so is WHAT it’s spent on. Government spending that increases supply (improved ports, roads, loans for capital assets…) should not cause long term inflation. Can you comment?
Yes. Sometimes I’m cryptic and sometimes maybe just careless.
My deficit “rule” is deficit </= to productive public investment (NPV>0), the supply improving things you cite. I’d include science and technology investments and (if it was a good idea otherwise) subsidies for R&D. Of course that does not answer the question, is X a productive public investment.