Posts tagged fiscal stimulus
Fiscal dominance is here, or is it?

One of the more useful AI tools that I have set up recently is a bi-weekly macro and demographics theme scout, which collects material on a given topic and runs through a number of recent and older sources, and synthesises this material into a brief essay, as well as a text to speech (TTS) document so that I listen back with the ElevenLabs text-to-speech app.

I thought it might be useful to recycle some of this material on the blog. One of the topics my AI scout landed on earlier this year was fiscal dominance, and whether developed markets are now slipping into this regime after a long period in which monetary dominance—activist monetary and passive fiscal policy—was the norm. I would frame the question like this. Has fiscal largesse during Covid, the subsequent fiscal support to protect against sequential global supply shocks in energy, and more generally deglobalisation and a focus the government balance sheet as a strategic lever for economic security pushed monetary policy into a Sargent and Wallace world of "unpleasant arithmetic”?

Here is the essay with some additions by me and more recent contributions.

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Economic Theory and Acadmics, Economics, Business, and Finance , Fiscal Policy, Monetary Policyclaus vistesenfiscal stimulus, monetary policy, central banks
The Real Macro Wars

I am still not entirely sure whether Noah Smith, a U.S. Economist and prolific blogger, is a converted MMTer or not. But I do know that he is doing a great job in describing the discourse around this newfound holy grail of macroeconomic policymaking. In my attempt to label MMT as “Woke Economics”, I leaned on some of Noah’s earlier pieces on this, and now he is back with his invocation of the new Macro Wars. The stage, according to Noah, is the recent fiscal relief bill in the US, prompting even otherwise pro-stimulus economists to push back. Oliver Blanchard and Lawrence Summers both suggest that $1.9T might be too much of a good thing, while Krugman is sticking to his Keynesian ethos, arguing that Biden’s bill really is ‘disaster relief’, a position that Noah seems to agree with. Replying specifically to Noah’s recent post, he argues that Keynesianism won the theoretical battle a decade ago, leaving only “cranks, charlatans and WSJ Op-ed writers” on the other side. Tyler Cowen chimes in, pointing out that Biden’s post-election fiscal stimulus push has as much to do with populism as it has to do with careful application of Keynesian macroeconomics. As it turns out, this is a position I have a lot of sympathy for.

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Economic Theory and Acadmics, Economics, Business, and Finance , US politics and society, US Economyclaus vistesenMMT, functional finance, Tyler Cowen, Paul Krugman, Noah Smith, larry summers, Oliver Blanchard, fiscal policy, fiscal stimulus, fiscal multiplier, monetary policy, modern monetary theory
Fiscal Policy

The idea of government intervention and demand-side fiscal stimulus was born by Keynes, eradicated by neoclassical economics, lazily reintroduced by the new Keynesians, and is now enjoying a renaissance. It’s fiendishly difficult to judge history in real time, but I would bet that the current shift has momentum, a position that has been strengthened by the response to the Covid-19 crisis. It is perhaps unfair to insist on a marriage between this story and MMT, but it serves as an introduction to the issues at hand. The idea that governments with sovereign Chartalist currencies can’t run out of money, and that this power should be used to achieve full employment, is enticing. It is also, however, naive. MMT easily dodges the main theoretical critique, at least in the current environment. The Phillips Curve probably still exists, but it has also flattened significantly, making it difficult to attack MMT armed with the traditional trade-off between unemployment and inflation. If MMT passes this first test, however, it fails the subsequent trials. The implementation of MMT in today’s economy requires significant shifts in the relationship between fiscal and monetary policymakers and an end to the free flow of capital. My sense is that about half the proponents of the theory don’t have a clue about any of this. The other half understands that MMT requires an end to central bank independence, and a significant reduction in capital mobility. The problem is that this latter group aren’t being honest, and for that reason, I am skeptical about their true motivation. If you want to dial back globalization, the least you can do is to be honest about what this means for households and firms. If you think that an independent central bank is a suboptimal institution, how will the alternative look, and how will it be held accountable?

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Economic Theory and Acadmics, Global Economy, Writingclaus vistesenfiscal policy, MMT, modern monetary theory, Keynes, John Maynard Keynes, fiscal stimulus, fiscal multiplier, capital flows, monetary policy, interest rates, politics, geopolitics