Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 27 January 2015

Post Recession Lessons

If you are familiar with this blog, you will know that I regard 2010 as a fateful year for the advanced economies in their recovery from recession. That was the year that the US, UK and Eurozone switched from fiscal stimulus to fiscal contraction. Because we were at the Zero Lower Bound (ZLB), this policy switch is directly responsible for the weak recovery in all three countries/zones. A huge amount of resources have been needlessly wasted as a result, and much misery prolonged.

This post is not about justifying that statement, but taking at as given and asking what should we conclude as a result. [1] To answer that question, what happened in Greece (in 2010, not two days ago) may be critical. To see why, let me paint a relatively optimistic picture of the recent past. 

Greece had to default because previous governments had been profligate and had hidden that fact from everyone, including the Greek people. Recessions rather than booms tend to be when things like that get exposed. If Greece had been a country with its own exchange rate, then it would have been a footnote in global macroeconomic history: fiscal stimulus that had begun in all three countries/zones in 2009 would have continued (or at least not been reversed), and the recovery would have been robust.

Instead Greece was part of the Eurozone, a monetary union that had been implemented in such a way that it was particularly vulnerable to the threat of default by one of its members. Policy makers in other union countries prevaricated, partly to protect their own banks, partly because they worried about contagion. The ECB refused to act as a lender of last resort - we only got OMT in 2012. So the Greek crisis became a Eurozone periphery crisis. (For more detail, based on an IMF evaluation of their role in this affair, see this post.) This led to panic not just in the Eurozone but in all the advanced economies. Stimulus turned to austerity. By the time some in organisations like the IMF began to realise that this shift to austerity had been a mistake, it was too late. The recovery had been anemic.

Why is that an optimistic account? Because it is basically a story of bad luck, which we have no reason to believe will be repeated again. When the next crisis comes along, the Eurozone will have OMT in place, and hopefully there will be some rational system for deciding when a Eurozone country that gets into difficulties should get ECB help or should be allowed to default. If this was just bad luck, we do not need to rethink how macro policy is made.

Now for the pessimistic version. The political right in all three countries/zones was always set against fiscal stimulus. It is true that during 2009, when no one was sure how bad things might get, Germany enacted a modest (if fairly ineffective [2]) stimulus, but in the US and UK the political right opposed it. Without Greece, we still would have had a Conservative led government taking power in the UK in 2010, and we still would have had Republicans blocking stimulus moves and then forcing fiscal austerity. The right’s strength in the media, together with the ‘commonsense’ idea that governments like individuals need to tighten their belts in bad times, would mean that opposition to austerity within the political elite would be lukewarm, and so austerity was bound to prevail. While we might hope that this right wing opportunism does not happen again during a future crisis, there is no clear reason to believe it will not. Greece may have just voted against austerity, but there is every chance that in the UK the Conservatives will retain power this year on an austerity platform and the Republicans are just the presidency away from complete control in the US.

If the pessimistic account is right, then it has important implications for macroeconomics. Although it may be true that fiscal stimulus is capable of assisting monetary policy when interest rates are at the ZLB, the political economy of the situation will mean it may well not happen, and that instead we get the fiscal instrument moving in the wrong direction. That means that macroeconomists have to start thinking about how to fundamentally change the way policy is done at the ZLB.

When some economists over the last few years began to push the idea of helicopter money, I was initially rather sceptical. The scepticism could be summed up by saying that helicopter money when you have inflation targets is identical to tax cuts plus Quantitative Easing (QE), so why not just argue for an expansionary fiscal policy? (There was also the point that tax cuts might be a rather poor form of stimulus compared to, for example, bringing forward public investment.)

However, if the pessimistic account is correct, then arguing with politicians for better fiscal policy is quite likely to be a waste of time, a lost cause. A more robust response is to argue for institutional changes so that politicians find it much more difficult to embark on austerity at the ZLB, or to allow others to effectively offset this austerity if it happens. Central banks have QE, but helicopter money would be a much more effective instrument. To put it another way, central bank independence was all about taking macroeconomic stabilisation away from politicians, because politicians were not very good at it. The last five years have demonstrated how bad at it they can be. However that move to independence was always incomplete because of the ZLB problem. We now need to make it complete.

This of course raises all kinds of questions. Do we want to give additional powers to the central bank, or should another independent institution be involved? If we do give central banks more power, could this be limited to enforcing a dialogue between central banks and government (along the lines suggested here), or should we go for something like helicopter money? If the latter, what are the knock on consequences to ensure the central bank can always tighten policy as necessary? Going down that road must in my view include thinking about how to make central banks a lot more accountable, so that they do not behave like the ECB. Arguably macroeconomics has been naive in suggesting that the more independent a central bank is the better.

However, we only need to go there if the pessimistic interpretation of the last five years is correct. Should we put the last five years down to bad luck, or to political economy forces that will not go away. I currently think the pessimistic interpretation is more persuasive, but I will be very happy to change my mind.

[1] Many argue that the recovery was weak because the recession was caused by a financial crisis, and it was always going to take a long time before banks would start to want to lend again. Even if you put a lot of weight on this argument, it implies a multiplier of one, not zero. It does not justify reducing public spending and employment i.e. making people unemployed when there was little chance they would find work in the private sector.

[2] The stimulus focused on tax cuts, which are less effective than increased government spending because some of the tax cuts will be saved. See Carare, A, Mody, A and F Ohnsorge (2009) “The German fiscal stimulus package in perspective” VoxEU  23/01/09. 


51 comments:

  1. Democracy? We don't need no stinkin' democracy when the Best and the Good can lead.

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  2. If we assess the politics of the UK in 2010, would the Orange Book Liberals without Greece have joined with the Tories on expansionary austerity?

    Would then the BBC, in political and sociological sympathy with the Liberals because of their run-ins with the Tories and Labour, have followed a more sensible course of action?

    What has been clear is that the Liberals and the BBC are institutionally minded, and that altering institutions seems to be the only clear way of effecting a more predictable change.

    And that the electorate as a whole has not been able to find even a 35% grouping capable of the simple articulation of an anti-austerity platform has also been an unfortunate conclusion of the last five years.

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  3. Simon, In your 2nd last para you suggest different ways of apportioning responsibility for stimulus. I suggest the ideal answer to that question depends on answering a more fundamental question, namely: does it make sense to distinguish between monetary and fiscal policy? I.e. is there a case for a monetary authority (aka a central bank) which is separate from the fiscal authority (aka the treasury)?

    Implementing fiscal stimulus (i.e. having government borrow and spend) without accompanying monetary loosening strikes me as silly: reason is that borrowing is deflationary while spending is stimulatory. So that policy sort of contradicts itself.

    As to monetary policy (e.g. interst rate cuts) without fiscal stimulus, that is distortionary: it involves boosting the economy just via lending based types of activity, with no sort of boost for non-lending based activity. So I vote for combining monetary and fiscal.

    If I’m correct, that answers your question “Do we want to give additional powers to the central bank, or should another independent institution be involved?” The answer is that there is no point in having two authorities responsible for stimulus if monetary and fiscal are combined.

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  4. Good news about UK GDP growth for 2014. The best since 2005 and 20006, and they were only slightly better.
    http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-327798

    Best to look forward now, rather than back? What are your predictions for 2015?

    Market Monetarists worry about the still too low NGDP growth of around 4%, caused by QE trapped by a 2% IT world leading to still confused expecations about what exactly the BoE is trying to achieve. Same in Europe, despite the welcome SQE.

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    1. If you hold a man under water for long enough, when you do finally release him he's bound to come up faster and take the biggest breath of air he's had for some time. But until that time, there is a lot of unnecessary suffering, and he's not very productive either.

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  5. "...macroeconomists have to start thinking about how to fundamentally change the way policy is done at the ZLB."

    Does it not also make the case for doing more to avoid the ZLB: in particular, having a higher inflation target?

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    1. Of course. But it would be foolish to not also think about what happens if we do hit the ZLB.

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  6. If you give central banks or other independent organisations all these extra powers, aren't you basically removing economic policy from democratic oversight?

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    1. No, if you allow oversight over these institutions. I like the UK set-up in this respect.

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    2. We cannot have financial policy independent of the monetary policy. The UK for the last years has proved this big mistake where on one hand the government has decided to subsidise the BTL capital appreciation while at the same time the BoE has decided to lower their rates.

      The reality is that BoE is not independent and it is just another branch of the Treasury. As a result, they allow policies like HTB and are pressured to not do anything to stop the house price bubble.

      Lets instead get BoE back at the Treasury. At least this way, politicians cannot hide behind the back of the CB and pretend that this is independent.

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  7. Hi, can we have a post about why (if) Greek debt is unsustainable? Arithmetically, as long as GDP grows at a rate higher than the average interest rate paid on the debt, even with zero primary balance, the debt/GDP ratio goes down. Why is not the Japanese or italian debt sustainable? THANKS!!

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    1. Greek Debt to GDP in 2008 was 109%; in 2014 it was 160+%. In between austerity policies created a Primary Surplus of 3%, highest of the developed world, according to Newsnight. But debt payments move this into a large annual deficit. The austerity policies have cut Greek GDP by 25%. Unemployment averages 25%. Unemployment for the 24 and under age group is at 60%. That's unsustainable, and the Syriza victory proves that beyond a certain limit, people will just reject austerity by voting out whoever it is that is pushing it.

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    2. The debt to GDP ratio is not very informative unless the average debt maturity and the interest rate are taken into account..
      The debt of Greece has been pushed from 6yrs to 16-17yrs and the rate has been compressed.
      Perhaps the next step is to push it further and in the far future it should be absorved by EU.

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    3. Even so, I believe it is the cost of servicing the debt that is the issue, not how long they have to pay it for. It would however be nice to see a checklist of possible and actual restructuring programs the Greeks have done, if for nothing else than to shut the Germans up.

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  8. "not" in the last sentence above was typo

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  9. Writing this from Germany, I must say that you are going down a very dangerous road. The last thing I want is more power in the hands of the bundesbank.

    There is a very real question about democratic decision making and oversight to be answered.

    How do you prevent the central bank (or other regulators) from being captured?

    This arguably one of the biggest problems in the West right now, either regulators are captured due to ideology (bundesbank, European Commission) or due to Big Money (plenty US regulators, i.e. NY Fed, parts of the SEC, parts of the US treausury), see e.g. J. Connaughton's or N. Barofsky's books.

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    1. Which is why I said what I did about the ECB. However the Bank of England and Fed do seem to be able to avoid this capture to a considerable extent - I would argue having lots of academics involved (on a temporary basis) helps. Both are accountable, and in the UK there is a lot of political oversight of the MPC. And of course politicians can get captured too.

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    2. While I agree with your assessment of the BoE and I am more skeptical with regards to the FED. There are some really deep cultural problems at the NY FED including the presidency (but not at the BoG).

      Your idea of having lots of academics involved on a temporary basis seems to be a good idea. This could prevent the incestuous and isolated cultural atmosphere which has developed at the bundesbank (at least according to friends who work there).

      Politicians can get captured too and obviously are. (See your own chancellor or nearly every US treasury secretary of the last 30 years).

      While I agree (as a macroeconomist) that having the option of doing helicopter money would be a good idea, I am very skeptical if giving more power to experts is really a good political idea.
      In some sense it reduces the accountability of politicians because they can say "I am just doing what the experts" tell me and it some sense it has lead the old center-left parties in Europe to abandon the fight for economic improvements and focus on other social inequalities since "the experts" told them there is no alternative (as it was the case 20-30 years ago). Economic policy has become apolitical in this way, which it is clearly not.
      In Germany, the consequence is that most of the population and parties think that austerity is the standard economic response to the euroarea problems and that it is "alternativlos" (TINA).
      You can say that this is a problem of the German economic establishment, which I think it is, but it also illustrates that just handing over everything to experts does not have to lead to better policy.

      Maybe I am just too young to remember the days when politicians used to do monetary policy and fiscal policy, but currently it seems quite attractive to me since at least it would become clear for the general public who is to blame.

      But if we allow the central bank to do QE, I do not really see a big difference in allowing the CB to do helicopter money.

      In general, I think that this is one of the points at which the heterodox critics of economics are right. Economist underestimate power structures and tend to forget how they, themselves or parts of their profession, can be captured (either by ideology or by money) and how politicians misuse their ideas for their specific purposes.

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    3. I think it is naive to believe that most UK politicians are in any way accountable... the current lot have never admitted to any of their many mistakes, blaming problems first on the last lot, and secondly on Europe. Provided they represent a safe seat they are never going to be voted out either.

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    4. Blub,

      Re “it reduces the accountability of politicians”, that always happens when politicians delegate a decision to some committee. “Reduced accountability” is inherent to delegation, so that is not a good argument against delegation. But come election time, the buck stops at the top, so I don’t think that reduced accountability matters too much.

      Next, why does delegating decisions on one specific issue, i.e. stimulus, induce politicians to “abandon the fight for economic improvements” over a broad range of economic issues? That’s too sweeping. The fact that decisions on interest rate adjustment are done by a BoE committee doesn’t induce UK politicians to “abandon the fight” on a whole range of other economic issues, far as I know.

      Re “euroarea problems”, the biggest problem there is the fact that in a common currency area it is very hard to see any quick easy solution for uncompetitive countries other than internal devaluation brought about by years of deflation and pain. So Germans have good reason to think there is no alternative: they haven’t been induced to believe that because some economic decisions have been delegated to committees of experts.

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  10. If you can't get a (right-wing) government to follow reasonable fiscal policy grounded in macroeconomic analysis (assuming it's correct--which I'll go with for the time being), then how will you get the same (right-wing) governments to give up independence to a central bank? Paul Ryan et al would sooner get rid of the Fed than give it more control over the economy that they would not be able to reign in. Consider that the Republicans want to change how the CBO evaluates policies so that results are more pleasing to tax-cutting (Republican) ears. In other words, the same exogenous political economy that makes fiscal policy difficult is likely to make the institutional changes you want near impossible.

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    1. Perhaps what I am talking about are institutional changes to be made when those politicians are not in charge. Of course politicians can in the limit always resume control, but there are significant costs in doing so.

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    2. True. But I think you underestimate all of the political forces and inertia involved, although these a country-specific: a more insulated state could push through those kinds of reforms relatively more easily than a less insulated state (such as the USA). Party structures matter, too--something like this might be relatively easier in a parliamentary system.

      But linking this back to the OP: we are in a moment when the "political discourse" will make such policies and institutional changes that you want (and many of your readers, myself included, agree with) difficult. Neoliberalism has not been sufficiently bashed. It's not just macromedia--it's also that the state worked well enough in 2008. If things had been much worse, when no one could not see lines on the street for soup kitchens, then maybe enough voters would have been ready to stop voting for the nimrods who got us into this mess. In the USA & the UK, there are still too many people hurt by the Tories or Republicans who continue to vote for them because of identity politics (race, immigration, etc.). I hate to say it, but these people weren't hurt badly enough to realize that the Camerons and Romneys were duping them. (It might help if there was a real threat of fascism and communism as well to get enough of the political elite to realize that markets need moderated--which was part of what happened in the 1930s.) Long story short, there are all these forces that need to come together to get the status quo to shift. Until then, we fight the good fight and bide our time...and hope and/or pray.

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    3. I'm not really thinking about changes that would be implemented soon. I'm really looking to start a discussion, perhaps mainly among macroeconomists, of what changes might be desirable before the next crisis.

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    4. I'd talk to a lot of political scientists as well. With all due respect, as a group they have forgotten far more than (macro)economists know about how politics and institutions work.

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    5. As someone who has lived in NYC and DC just some years ago I can only second what Anon said.
      Meaningful change in a worthwhile direction is impossible in the US before a bigger crash happens (or we see an ideological change of 180 degree which I do not see how it can happen without a crash).
      If you see how it is impossible to get US approval for a change at the IMF or for international tax reforms or the ignorance with respect to the US security apparatus, one can only become deeply pessimistic about the US institutions.
      To get meaningful change, you would need 65 democratic senators to get a filibuster proof majority (under the assumption that only 5 are deeply bought by banks), a progressive president and a democratic majority in the House. It will not happen.
      As an outsider it is sometimes astonishing to see that the country is still functioning. There are some still working parts like the FED or the Department of State but others have really deep structural problems as the DoJ or the Treasury.

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    6. According to Krugman (1/28), the anti-Fed frenzy on the American Right is growing and getting crazier. This is what happens when dogma meets argument grounded in reality. Good luck getting any institutional reform with that kind of crowd around.

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  11. Simon -

    You wrote:

    "The political right in all three countries/zones was always set against fiscal stimulus." ... "in the US and UK the political right opposed it." ... "While we might hope that this right wing opportunism does not happen again during a future crisis, there is no clear reason to believe it will not."

    Has anyone studied the connections between the fiscal hawkishness of right-wing politicians and pundits (and many "fresh-water" economists in the US) and the financial interests of the extremely wealthy people who bankroll their careers? It seems clear to me that in the absence of sufficient demand for goods and services in the real economy, much of the liquidity made available through monetary stimulus has flowed into financial assets, thereby disproportionately enriching the wealthy people who hold most of those assets. If that monetary policy had been accompanied by sustained fiscal stimulus, more of the proceeds would have flowed to wage-earners, whose income is primarily earned producing non-financial goods and services.

    Your thoughts?

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    1. I wrote about this recently:

      http://mainlymacro.blogspot.co.uk/2015/01/when-central-bank-losses-matter.html

      But there is a simpler point. If austerity is just a way of getting a smaller state, then a smaller state needs less taxes.

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    2. Those types don't want a smaller state generally. They want a state that serves them. Corporate welfare generally doesn't require the same bureaucratic scope that a regulatory and welfare state requires. So except for a few libertarian types, the Right aren't arguing for a "small state" per se: they want a state that intrudes when it suits them: corporate welfare, fewer regulations, but defend property rights and bust unions; in the bedroom to defend right-wing social preferences e.g. no gay marriage or abortions); and spying on society to keep "bad types" under control (non-whites & immigrants). Can't have a small state with a big military and security apparatus. If the Right wanted a small state, they'd really be going after military budgets. But they are not. They just want to tame the state and make sure it cannot regulate the power of the elite and their right-wing followers.

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  12. "thinking about how to make central banks a lot more accountable, so that they do not behave like the ECB"

    Clearly you don't want them to be democratically accountable as the whole problem is being caused by those pesky democratically elected politicians doing things you don't like.

    So, accountable to whom?

    The question only needs to be asked for the answer to be obvious.

    I prefer democracy for all its flaws, thanks all the same.

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    1. But what kind of democracy? UK safe seat democracy where MPs get a job for life just like in China, or like Russia was under the Politburo, or Proportional Representation democracy with citizen votes on 18 laws per year as exists in Switzerland?

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  13. This is one problem with economists: their default isn't usually democracy, it is technocracy. There was a lot written about this in the 1980s, often in reference to Latin America, but the lessons are still relevant. I'm sympathetic to what Simon would like to see, in terms of policies. But what if you get Mankiw Mark II running an autonomous central bank? And who does the oversight anyway?

    Of course, for democracy to work well, you need an empowered and informed electorate, and that seems to be going the way of the dodo. Maybe technocracy is better than democracy? I don't know anymore.

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  14. Monetary policy is already away from democratic control and it works on well known rules. Since monetary policy is what has huge importance in non-ZLB times, it has more weight then fiscal policy. So isn't monetary policy more precious to be under democratic control then fiscal? Most of the time it is the monetary policy that controls the market then fiscal, then isn't it more important?
    And it has shown that FED was good on such responsibility, much better then rulers of fiscal policy.

    Monetary policy was great most of the time and they apear much, much more responsible then bosses of fiscal policy.
    Ading an aditional provision to FED's rules, which they realy followed, would also be followed as well.
    Let say;
    i) Central bank will finance automatic stabilizers when unemployment reaches, say over 4%, maybe 5% AND at ZLB by new money. This will hide increased deficits from automatic stabilizers.

    ii) Inflation target never to go bellow 3%. (interest rates bellow 2% do not budge, since banks do not follow it lower when offering loans)

    iii) If unemployment goes above 8%, FED could offer refinancing private corporate and personal housing loans to those with highest interest rates first at low rates, up to let say 5% of GDP. using new development banks like Fanie Mae and Fready Mac, and call it FED Mae.

    iv) as a permanent practice to fight inequality rise FED could took to issuing low rate loans to those with the worst credit score and low income. ( one of the practical reasons for increasing inequality is that credit score is the tool to increase more inequality besides low wage, those with problems are punished by credit score pushing them even more down. Low score does not mean bad creditworthiness, there is the different scale for that- 33% of income, it means that people got into problems because of the market failures.)

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  15. My comment is relevant for earlier posts by S-W-L on media-macro, rather than for the current post, but it's on something that only appeared today. Robert Peston in discussing the new report on the distributional effects of the government's austerity program made the throw-away remark: "The point, of course, is that hard decisions had to be taken to fix the public finances." (http://www.bbc.co.uk/news/business-31000413) Note the "of course". Almar

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    1. If you think Peston is bad (and he is) try Nick Robinson...!

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  16. "Policy makers in other union countries prevaricated, partly to protect their own banks, partly because they worried about contagion."

    Unless you are using the now very rare use of prevaricated as in "deviated from what is right", you probably mean procrastinated. Prevaricated means "to have deceived".

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  17. It means to disengenuously and actively avoid responding to a question. So Simon's use is correct. (He could have used "hemmed and hawed", which means much the same thing in this context, and probably more appropriate, since it doesn't connotate so much the idea of lying.)

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  18. Enjoyed the piece, but I would argue that it taints fiscal conservatism with an ideological brush. The assumption that fresh debt and low rates automatically creates "recovery" obscures the fact that ZIRP has consistently been a failure since it was (mis) conceived in the orient a score ago. The lower rates go, the lower the US employment ratio goes, and Japan is much the same story. Most painfully for the younger set which aspires to a middle class status, this weak job market also often comes with significant asset inflation, especially in desirable real estate markets. And, of course, in a world of weakening oil prices, these debts seem much more onerous.

    I think academics are pressured to obfuscate these things because the financialization of society is, of course, linked to the ZIRP agenda (and the tacit acceptance of central bank balance sheets in the trillions).

    Conflating this discussion with larger issues involving the pros and cons of euro and/or eurozone membership also isn't helpful.

    These are all just opinions, thank you for sharing your work, it is insightful.

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  19. So the problem is framed as either unwitting or deliberate political ineptitude and the solution is to reduce the powers of politicians over policy by beefing up the powers of "independent" institutions.

    1. Since so many eminent academics have themselves been successfully suborned into becoming cheerleaders for the austerity agenda (think "expansionary austerity" and treating 90% as the absolute limit for sovereign debt) I think you are overly optimistic about the ability of this small group to transcend real world political and economic pressures.

    2. You are applying a politically regressive institutional fix for a much simpler political problem. Academics should be asking themselves how it was that in textbook Keynesian crisis not merely the government but also the opposition completely rejected the Keynesian diagnosis and treatment.

    Here the labour party has never put forward a robust critique of Government policy based on Keynesian principles. In France a Socialist government has actually paid lip service to Says law! In Spain Socialists collaborated in making the entirely retrograde fiscal treaty into a Constitutional requirement! Ditto Italy.

    So now Syriza & Podemos have risen to remind us all of what progressive and constructive policy alternatives really sound like after years of deafening political silence. Political austerity prevailed because it wasn't politically challenged.

    For my part I don't think that a revival of Keynesian policy is going to flow from conferring greater authority on the quiet groves of academe. I think it is going to flow from being loudly proclaimed by passionate politicians in the public square.....

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  20. You may be right about the economics; but there is a problem. What you are proposing is fundamentally undemocratic. The policies under discussion go well beyond matters of technical expert opinion. It should be for elected representatives to decide where the balance of public interest lies. If you think that politicians are not competent to decide these matters, why do you think that they are better qualified to decide other big public policy questions?

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  21. We need NGDP level targeting done by helicopter drops and vacuum cleaner operations through VATs (which wouldn't be a real tax since central banks have to destroy any money they suck out of the market).

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  22. US engaged in some stimulus in 2009: "American Recovery and Reinvestment Act of 2009" (http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009).

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  23. What if attempting to influence fiscal policy through sound reasoning and evidence is fundamentally an exercise in futility? If we, as economists, that particular breed of social scientist, should perhaps step back and consider the bigger picture. Observed fiscal policy rarely makes sense in purely economic terms, so how do we, as economists, explain that fact? We might look at party interest (which, looking at the parties' respective sources of funding, starts to look like a straightforward projection of class interest), and viewed through that prism, policy begins to make a lot more sense.

    This may be a somewhat fatalistic view, but what if it's right? What if the best we can hope for is not to change society, but to merely understand it?

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  24. Helicopter money might be "more effective" than QE, but that misses the point. QE could have been effective if it were conducted on the understanding that it was in the service of a real world economic outcome: a price level trend target, an NGDP level target. But the same political forces that don't like "fiscal" stimulus don't like monetary stimulus either.

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  25. I think this is a great proposal but I'm very skeptical. I think the fundamental problem is human greed and stupidity. It isn't as if there wasn't plenty of economic theory and even previous examples to show that current macro policies are misguided. The problem is that the positions of power for the most part end up occupied by politicians whose goal's are to serve the interests of the wealthy. Even now is there anyone in Germany in a position of power who is willing to either admit to the past stupidity or to take action to enact rational macro policy?

    Again, I think the proposal of allowing helicopter money with temporary academics and other ideas at central banks is great but I think it misses the point. If we are wishing for long term solutions, how about something along the American Bill of Rights guaranteeing a minimum income or guaranteeing some kind of counter-cyclical fiscal policy?

    I think the primary problem is people in positions of power try to protect the wealthy. Why not address that directly with some kind of constitutional means instead of hoping that additional technocratic powers will somehow not be captured?

    -Enonymous

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  26. Asperine was developed in Europe, and it has had a great home-market. Confederal politics never looks elegant, but the Dutch Republic and CH had a confederacy with a common currency, so there is no excue in it; it can work with finncial stability and prosperity. There are good guys; they trade in goods. I shall not tell he whole truth.
    In the 1980s France opted for an early monetary integration with the idea that an emergency would enforce the required political integration; it would speed up the process. "Germans hate, hate, hate... " disorder. France "abused" German re-unification to get a euro without political integration. In 2010-2011 France insisted on a confederal bail-out of French finance; it combined a move towards political integration with a French interest. It met resistance. In nature (not in duration), it is similar to the US-federal shutdown in October 2013. When Trichet stepped down, and Draghi entered office there was a mood to do what had to be done. Such growing pains US and UK had long time ago. When the union in America was ¾ century old - founding fathers dead and history still young - it ran to civil war. "Digging holes in the ground" in Flanders fields will not be approved by Brussels, and the EU lacks the energy for it (I hope).
    Apart from that the EU also has left-right, up-down, financial-operational, etc.

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  27. "If you are familiar with this blog, you will know that I regard 2010 as a fateful year for the advanced economies in their recovery from recession. That was the year that the US, UK and Eurozone switched from fiscal stimulus to fiscal contraction. Because we were at the Zero Lower Bound (ZLB), this policy switch is directly responsible for the weak recovery in all three countries/zones. A huge amount of resources have been needlessly wasted as a result, and much misery prolonged."
    But you don´t need to appeal to "austerity". Bad monetary policy explains both the steep downturn and the lackluster recovery:
    https://thefaintofheart.wordpress.com/2012/12/01/market-monetarism-provides-a-unified-account-of-both-the-steep-fall-and-the-weak-recovery/

    ReplyDelete
  28. This comment has been removed by the author.

    ReplyDelete
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