Amidst all this Reinhart and Rogoff mishegas, it’s worth saying that I recently read Brad DeLong’s slideshow about what we’ve learned about fiscal stimulus since the crisis began and even though he doesn’t read it this way I think it contains far and away the most persuasive argument that the “old” (1977-2007) consensus against discretionary fiscal stimulus is still roughly valid. It’s right there in his first slide “What We Thought About Fiscal Policy in 2007”, which I’ll retype:
— Near-consensus support of John Taylor’s (2000) argument that aggregate demand management was the near-exclusive province of central banks.
— Five reasons for near consensus:
1. The problem of legislative confusion.
2. The problem of legislative process
3. The problem of implementation.
4. The problem of rent-seeking.
5. The problem of superfluity.
— Monetary policy was strong enough to do the job. Fiscal policy was simply not necessary.
Now looking back on this the crisis has done a lot to imperil (5), the notion that fiscal stimulus is superfluous. But it’s reenforced 1-4. Even if you assume perfect good faith on the part of each and every member of congress (which seems like a stretch) there’s an inherent tension between the desire to do high-multiplier stimulus and the desire to do high social value expenditures. And not only is there empirical disagreement about multipliers, there’s complicated and multi-layered disagreement about the social value of different expenditures. And operating in an environment of uncertainty, in which members know that their colleagues are seeking to advance what they believe to be socially valuable expenditures members are rational to worry about ratchet effects. What you get is gridlock and confusion. The old thinking was that a “let’s do stimulus now” mentality would lead to overstimulus (and indeed multiple accounts have the Obama administration assuming congress would substantially exceed its ARRA requests) which is wrong, but the general concern about confusion/process/implementation/rents has been confused.
So we’re left with superfluity and the revelation that whether or not “monetary policy” is in some sense “strong enough” the actual practice of Western central banks is not strong enough.
But the solution to this problem can’t be to say “next time congress is going to be way better and less partisan and fiscal stimulus will work out great.” We need something else. A lot of things might fit the bill, from stepped-up automatic stabilizers to a higher long-term inflation target. But I’d say the best thing to do would be to change the practice of central banks. Give the Federal Reserve an explicit mandate to level-target aggregate economy-wide spending and authorize the Fed to issue helicopter money directly to citizens when necessary to hit the targets. Then there’s no “zero bound”, there’s no question of monetary impotence, and there’s no question of discretionary fiscal stabilization. Then members of congress can go back to the important work of arguing about which programs and valuable and which aren’t and how middling programs can be reformed to be more valuable and so forth. Creating a dedicated agency charged with macroeconomic stabilization was a good idea. If it’s failed, we need to fire its leaders and replace them with people who’ll succeed. If it legally lacks the necessary tools, give it the tools. Print money and give it to people.
