Fiscalists vs market monetarists is a breakout skirmish between rivalrous, unnatural allies whose common antagonists are in retreat.
But on the post-crisis intellectual battlefield, they have mostly been on the same side — or at least stayed out of each other’s way.
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.)
Consider:
– Paul Krugman pioneered much of the academic work on liquidity traps. He argues for the primacy of expansionary fiscal policy in a crisis, and believes that the underlying economics of monetary policy at the zero lower bound is mainly about inflation expectations.
But he has nonetheless acknowledged the usefulness of NGDP targeting, if only as a selling point for a bigger Fed balance sheet. And he has criticised US monetary policy as much for its timidity as for its impotence, notably in his book. He just believes that unlike monetary policy, fiscal policy “has a direct, current effect on the economy.”
– Brad DeLong is also among the chief advocates for fiscal stabilisation policy when rates hit the ZLB: try DeLong & Summers or DeLong & Tyson. Yet he too has supported NGDP level targeting. (Though DeLong’s views on these matters are nuanced and he has a commendable habit of re-evaluating them periodically.)
– Mike Konczal questions whether the expectations channel of monetary policy really works, citing the recent disinflation. He is sceptical that monetary policy can fully offset the drag from fiscal policy.
But you won’t find Konczal on any lists of hard money types; quite the opposite.
– Cullen Roche bears the standard for the Monetary Realists, a splinter faction of the Modern Monetary Theorists. He doesn’t much like QE and is sceptical that monetary policy can hit its targets without help.
But he will tolerate NGDPLT so long as fiscal policy is leading the crisis-fighting charge and the two are working in concert. (MR/MMT is different from Keynesian in non-ZLB settings, but they’re basically the same at the zero lower bound — hence “fiscalists”.)
– David Beckworth is a market monetarist who nonetheless acknowledges the possible role played by governments in replenishing, through increased issuance, money-like safe assets.
Naturally he would much prefer that monetary policy replenish them through credible commitments to hitting nominal income targets, but in the immediate aftermath of a crisis he will also accept helicopter drops — deficit spending financed by the central bank, which obviously means the cooperation of fiscal policy.
– Josh Barro, conservative reformist though not actually a conservative (don’t worry about it), lauds market monetarism as “the shining success of the conservative reform movement”. He aligns himself with Scott Sumner’s interpretation of the recent data, which is that monetary policy has effectively offset the fiscal drag imposed by the government.
But he also writes that “both the fiscal and the monetary channels work to stimulate the economy, and because they are both subject to practical and political limits, we shouldn’t close either one off”. Check out his nine charts showing that the US doesn’t need fiscal austerity.
– Scott Sumner is the Godfather of the modern NGDP level targeting movement and generally a monetary policy purist. By “purist” I mean simply that he believes monetary policy, applied correctly, is fully capable of hitting its targets without the aid of fiscal stimulus, and it can also safely ignore the banking and credit channels.
Still, he pragmatically writes that unless monetary policy is primed to offset it, fiscal policy can indeed raise NGDP. It’s just that fiscal policy can’t deliver the same “ooomph” (not a technical term, unfortunately) as monetary policy. He also thinks fiscal policy can help on the supply side and specifically cites payroll taxes.
When reading Sumner, the point gets across that he just doesn’t think counter-cyclical fiscal policy matters all that much — or more to the point, would not matter if monetary policy were done right. More on this below.
It’s easy to see on which side the above bloggers reside.
These next few can’t be categorised as easily:
– Karl Smith was a fierce early champion of NGDP level targeting and remains one, but he also thinks fiscal policy has a role precisely because “really-freaking-huge is something that central governments are good at”.
In a depressed economy, precise targets matter less than the scale of the response. The reason is that where “idle resources are plentiful and real borrowing costs are zero or negative is exactly where you find almost no return to precision”.
– Ryan Avent and Matt Yglesias have little patience for Bernanke’s blaming fiscal drag for the continued sluggishness, and their views on fiscal policy generally have more to do with longer-term issues than with demand-side responses after a crisis. Both believe that the changes to monetary policy last year made it more robust to the unexpectedly big fiscal pullback, but both think it still isn’t enough.
But certainly neither denies the effects of fiscal policy or has pushed for accelerated budget reduction. And for instance Yglesias has written that a failure to invest in infrastructure when real rates are negative is a missed chance. (The same presumably goes for spending on education.)
– Steve Randy Waldman wrote “the moral case for NGDP targeting”, believing it to be an imperfect improvement on inflation targeting. But he has reservations and thinks the monetarists and fiscalists (MMTers specifically) should combine their insights.
– Here at FT Alphaville we have focussed on collateral scarcities, both in financial markets and for households. Both fiscal policy and monetary policy have a role in alleviating these scarcities. Call it Intro Bagehot applied to the modern financial landscape.
This is running long, so here is a spectrum-looking thing with fiscalism on one end, market monetarism on the other, and the synthesis bloggers bracketed in the middle (with apologies to the bloggers included for the terse treatment, meant to reduce the word count rather than minimise their contributions):
[F] Matt K — Carney — [Felix -- Weisenthal -- Matt O] — A Harless — N Rowe [MM]
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.
UPDATE: I clumsily left out Mark Thoma, who was earlier than his fellow fiscalists to be sceptical of monetary policy’s ability to stimulate the economy sufficiently in a severe downturn, and earlier in pushing for an aggressive fiscal response. I should also mention Tim Duy, who has consistently criticised Bernanke for lacking boldness, and who has suggested that helicopter dropping may one day be necessary.
——————————
I wrote at the start that, aside from the occasional intensification of their dispute, the fiscalists and market monetarists have either been on the same side or stayed out of each other’s way.
More precisely, the fiscalists have been on the side of the monetarists in combating the hard money and goldbug types; while the monetarists have mostly stayed out of the fiscalists’ way in combating the deficit-cutting or “austerian” types.
The fiscalist vs monetarist argument becomes heated not because each side doubts the other’s claim to being effective, but precisely because they are focussing on the more narrow issue of which policy approach is more effective.
When the market monetarists and fiscalists are targeting each other, you can probably take it as a sign that their bigger dragons are either slain (the inflationistas) or wounded (the austerity-pushers).
But so long as we are here, I would make three general points:
1) The dispute is largely about responsibilities and excuses.
Each side obviously believes it has the better tools for macroeconomic stabilisation in a depressed economy, and wants its representative policymakers responsible for it. Correspondingly, each side wants to prevent the other from providing these policymakers with an excuse to point a finger elsewhere.
– So for instance, the market monetarists don’t want the fiscalists to minimise the Fed’s responsibility.
By the monetarist logic, if it is well understood that fiscal policymakers are not responsible for counter-cyclical demand management, then Bernanke wouldn’t be able to blame fiscal drag for his failure to satisfy the Fed’s mandate.
Instead he would have to get on with doing his job. No matter how much fiscal policy would shift the aggregate demand curve down and to the left, Bernanke would have to promise to shift it back up and to the right. Then he would do whatever was needed to reinforce the promise.
– Going the other way, the fiscalists might conceivably worry about a couple issues:
A) An over-reliance on the Fed will lead Congress to pursue actively harmful policies like cutting the deficit against a recession-led revenue drop, or
B) Relatedly, Congress will squander an opportunity to invest in the country’s physical and human capital at a historically opportune time, when resources are idle and money is cheap to borrow. Because some of these investments will have to be made eventually anyways, there’s a case that failing to make them now will ultimately harm rather than help the country’s budget problems.
And there is likely some (warranted) suspicion that the monetarists, whose ranks are more likely to include conservatives and libertarians, wouldn’t much mind these outcomes.
2) Their actual policy recommendations aren’t incompatible.
Everything written here is quite obvious to the people involved, but an outsider glancing at one of the backs-and-forths between the bloggers might come away thinking the fractiousness runs deeper than it does.
The fiscalist position is fairly clear: By all means, monetary policy should do all it can — and we support the attempt. We just don’t think it will be enough.
There’s no real conflict here.
The argument for market monetarist acceptance of fiscal policy is more complicated.
But there is one sense in which even the monetarist position is amenable to fiscal stimulus, and it is this. A belief of the market monetarists is that if NGDP level targeting were properly embraced, then the awful outcomes characteristic of a Great Recession — a slowdown of NGDP growth, calamitous falls in asset prices, the disintegration of usable collateral — would be avoided in the first place.
Or if applied correctly now, the perceived inevitability of monetary policy hitting its expectations would lead economic agents and market players to behave in such a way as to hasten the outcome.
As such, the very impetus for using fiscal policy to stabilise the economy and accelerate the recovery would be unnecessary. Everyone could go back to arguing about fiscal policy for the normal pre-crisis reasons (government’s role in the economy, redistribution, etc).
The monetarists therefore wouldn’t be inconsistent if they were to say: Sure, keep fiscal stabilisation policy at the ready in case we fail. We just don’t think it will be necessary. If it does turn out to be necessary, well, go for it.
3) Nobody knows anything yet.
Sticking all these bloggers into camps is folly in a way. It was necessary for this discussion, but it’s unfair to all of them. The fiscalists have differing views among themselves, as do the monetarists.
That said, the same argument that fiscalists made in 2009 and 2010 — policy was directionally right but too small in scale — can now be made by the monetarists. And they’ve got a point.
But more fundamentally, it’s just fantastically early to be having this discussion.
Monetary policy is well known to function with a lag, and the Evans Rule was only adopted in December of last year. Policy had been shifting in its direction, but the progression was slow and halting.
Moreover, the Evans Rule is far from the ne plus ultra of what the monetarists would want, which is NGDPLT coinciding with the creation of an NGDP futures market.
Different kinds of fiscal policy have differing effects on the economy, as do the various components of looser monetary policy. And how can we untangle the influence of different policy strands from that of non-policy-led changes in the business cycle? We can’t.
We’re going to have to wait for either more data or better detail about the data we already have — and even then it might not be possible. Certainly the growth numbers aren’t saying much just yet.
I find an awful lot of wisdom in the platforms of both the monetarists and the fiscalists, just as I find the penultimate, pro-synthesis paragraph of Michael Woodford’s famous paper last year to be convincing:
The most obvious source of a boost to current aggregate demand that would not depend solely on expectational channels is fiscal stimulus — whether through an increase in government purchases, tax incentives for current expenditure such as an investment tax credit, or subsidies for lending like the [UK Funding for Lending Scheme]. At the same time, commitment to a nominal GDP target path by the central bank would increase the bang for the buck from fiscal stimulus, by assuring people that premature interest-rate increases in response to rising economic activity and prices would not crowd out other types of spending than those directly affected by fiscal policy. And the existence of the central bank’s declared nominal GDP target path should also limit the degree of alarm that might arise about risks of unbridled inflation when special fiscal stimulus measures are introduced.
But it will be some time before we know if this year has indeed been some kind of policy experiment. And I can’t help but think of something implicit in Karl’s point about scale mattering more than precision when resources are idle and unemployment is such a tremendous problem — which is that the experiment will have been an avoidable and unjustifiable error.
So long as your side has a plausible case, and there is agreement that trying the other side’s ideas alongside your ideas would have no effect at worst, then it seems callous to argue against doing both.
If only your ideas are tried and it turns out that you were wrong, an awful lot of people will have suffered for that newfound knowledge about macroeconomics.
Better to try everything at once, and then worry later about deciphering the causal mechanisms, post hoc.
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.