I missed this little contretemps between Nick Rowe and Paul Krugman. Actually this appears to be a fuss over nothing. The main point Paul was trying to make, it seemed to me, was about how far the Republican base were on monetary policy from anything reasonable, and so what he called the neomonetarist movement did not have much chance with this group. By implication, neomonetarism was something more reasonable, although he had well known problems with its ideas. So a sort of backhanded compliment, if anything.
Nick responded by pointing out that what he called neofiscalists (those, like me, who argue for fiscal stimulus at the Zero Lower Bound (ZLB)) hadn’t done too well at finding a political home recently either. Which, alas, is all too true, but I think we kind of knew that.
What interests me is how annoyed each side gets with each other. Following my earlier posts, I will use the label market monetarist (MM) rather than neomonetarist. It seems to me that I understand a little why those in the MM camp get so annoyed with those like me who go on about fiscal policy. Let me quote Nick:
“We don't like fiscal patches that cover up that underlying problem. Because fiscal policy has other objectives and you can't always kill two birds with the same fiscal stone. Because we can't always rely on fiscal policymakers being able and willing to do the right thing. And because if your car has alternator trouble you fix the alternator; you don't just keep on doing bodge-jobs like replacing the battery every 100kms.”
I’ll come back to the car analogy, but let me focus on the patches idea for now. In their view, the proper way to do stabilisation policy outside a fixed exchange rate regime is, without qualification, to use monetary policy. So the first best policy is to try every monetary means possible, which may in fact turn out to be quite easy if only policymakers adopt the right rule. Fiscal policy is a second best bodge. MM just hates bodgers.
As I explained in this post, the situation is not symmetric. I do not get annoyed with MM because I think monetary policy is a bodge. I have spent much time discussing what monetary policy can do at the ZLB, and I have written favourably about nominal GDP targets. But, speaking for just myself, I do get annoyed by at least some advocates of MM.
Before I say why, let me dismiss two possible reasons. First, some find MM difficult because there does not seem to be a clear theoretical model behind their advocacy (see this post from Tony Yates for example). I can live with that, because I suspect I can see the principles behind their reasoning, and principles can be more general than models (although they can also be wrong). Second, I personally would have every right to be annoyed with some MMs (but certainly not Nick) because of their debating style and lack of homework, but I see that as a symptom rather than fundamental.
To understand why I do get annoyed with MM, let me use another car analogy. We are going downhill, and the brakes do not seem to be working properly. I’m sitting in the backseat with a representative of MM. I suggest to the driver that they should keep trying the brake pedal, but they should also put the handbrake on. The person sitting next to me says “That is a terrible idea. The brake pedal should work. Maybe try pressing it in a different way. But do not put on the handbrake. The smell of burning rubber will be terrible. The brake pedal should work, that is what it is designed for, and to do anything else just lets the car manufacturer off the hook. Have you tried pressing on the accelerator after trying the brake?”
OK, that last one is unfair, but you get my point. When you have a macroeconomic disaster, with policymakers who are confused, conflicted and unreliable, you do not obsess over the optimal way of getting out of the disaster. There will be a time and place for that later. Instead you try and convince all the actors involved to do things that will avoid disaster. If both monetary and fiscal policymakers are doing the wrong thing given each other’s actions, and your influence on either will be minimal, you encourage both to change their ways.
MM agrees that fiscal stimulus will work unless it is actively counteracted by monetary policy. Nick says we can't always rely on fiscal policymakers being able and willing to do the right thing. But since at least 2011 we have not been able to rely on monetary policymakers in the Eurozone to do either the right thing, or consistently the wrong thing. So why is anyone with any sense saying that austerity is not a major factor behind the second Eurozone recession? That is just encouraging fiscal policymakers to carry on doing exactly the wrong thing, in the real world where monetary policy is set by the ECB rather than some MM devotee.