Fiscal rules: politics and economics

Jonathan Portes and I have an article in Prospect, which is a short summary of our discussion paper on fiscal rules (see here or here). In this post I want to use that paper to make two observations on the interaction of politics and economics.

Jonathan and I are frequently accused of being against fiscal austerity for political or quasi-political reasons: either we dislike governments that impose austerity, or we want to increase public spending and think that by advocating temporary increases in government investment at the zero lower bound we can achieve this goal. In which case we would obviously reject any fiscal rule formulated by this government, and more generally we would be against any kind of discipline on public debt or deficits.

If that is what you think, the Prospect article or the discussion paper will have you scratching your head. After a thorough analysis of the principles behind fiscal rules (on which more below), we conclude that the form of the coalitions current fiscal mandate is about right. It makes sense to have an operational target for the deficit rather than debt, and it makes sense to target that deficit always looking five years ahead.

There is one huge caveat, which is that this form of rule is appropriate as long as interest rates are not at, or expected to be at, their zero lower bound. In this recent post I outline what we recommend in our paper should happen in those circumstances, and of course current governments have (since 2010) failed to follow this advice. So our endorsement of the form of the current fiscal mandate only applies to when monetary policy can operate in a normal fashion.

Our paper also endorses another innovation of the current UK government: the formation of the OBR. In fact we suggest that it should have additional duties. So these two structural changes brought in by the coalition, the fiscal mandate and the OBR, were positive innovations. The tragedy is that the former was applied in the one circumstance in which it should have been (temporarily) abandoned.

Of course the form of the fiscal mandate is different from the actual numbers targeted for the deficit in five years time, and I will talk about those in a subsequent post. We also have some minor suggestions to improve the rule: for example if you are targeting a deficit in five years time when monetary policy is working normally, the target does not need to be cyclically adjusted, and we would target the deficit (actual or primary) rather than the current balance, and have a separate target for the share of public investment in GDP.

There is a second sense in which our paper directly addresses the interaction between economics and politics. The way I began thinking about fiscal rules was a standard way macroeconomists think about rules: how close are they to the optimal policy that would be chosen by a benevolent policy maker? This is a perfectly sensible question to ask, but for fiscal policy it is on its own hopelessly incomplete, because we also know that politicians are often not benevolent, in the sense that they act in their own interests rather than in the interests of society as a whole. As a result, we get deficit bias, although this bias may occur for other reasons. The role of fiscal rules is to a large extent to discourage this non-benevolent behaviour.

Take the current UK fiscal mandate, for example. An obvious criticism is that, by always targeting the deficit five years ahead, it allows a government to keep putting off making the adjustments required to achieve the target. Don’t worry that the deficit is above target, a government might say, in five years time it will be on target. And it could carry on saying that year after year. In the paper we say that this rule lacks an ‘implementation incentive’.

So why not make the target for some fixed date in the future, so adjustments cannot be continually delayed. The problem with a rule of that kind is that it can produce very sub-optimal behaviour as we approach the fixed date. Our macroeconomic theory says that the deficit should be a shock absorber, so having to achieve a target at a fixed date whatever shocks hit the economy could be harmful when unexpected shocks occur near that date. Imagine how much worse austerity would have been if the government had tried to achieve current balance by 2015.

Fiscal rules therefore involve a trade-off between optimality and effectiveness in preventing non-benevolent behaviour and deficit bias. The latter depends on a political judgement about policymakers. For the UK, both past evidence and current behaviour suggests that deficit bias is not a huge problem, which is why the rolling five year deficit target can work, but in other countries it might not. This is where a fiscal council like an enhanced OBR can be very useful.

Even the more responsible governments are tempted by devices that allow spending today but which shifts costs into the future (PFI in the UK for example). It is very difficult to devise fiscal rules that involve ‘operational targets’ (i.e. targets that a government can try to meet during its term of office) but also prevent such tricks. This is an important reason to do long term fiscal forecasts, undertaken or assessed by independent institutions, which is where the costs of such schemes become evident. However that alone is not enough. A fiscal council like the OBR should also have a duty to clearly alert the public when such tricks are being played. In addition, when targets are flexible so that the implementation incentive is weak (as in the case of a rolling five year target like the UK fiscal mandate), fiscal councils should also judge on behalf of the public whether meeting the target is being delayed for justifiable reasons or not.

So the choice of a fiscal rule and the mandate of a fiscal council inevitably involve political as well economic issues. However the politics is more about the transparency and accountability of government, rather than left versus right and associated ideologies.

    

The IMF apology nonsense: how to maintain a lie

When the current government took over in 2010, the UK economy had begun to recover from the Great Recession. In 2010 Q2, real GDP was about 2% higher than a year earlier. The new government embarked on a programme of enhanced fiscal consolidation (austerity). Growth over the next two years was less than 0.4% at an annual rate. The imminent debt crisis that was supposed to justify austerity never materialised - interest rates on government debt fell significantly.

On the face of it, this looks rather bad for the government. So it has been really important for its spin masters to manufacture a consensus that there was no serious alternative to this policy. This has involved three strands. First, that the recession was somehow the result of the previous government’s fiscal profligacy. Second, following on from this, that the government therefore had to ‘clean up the mess’ - austerity was inevitable. Third, that the economic recovery, when it came, was the reward for austerity.

The first strand is untenable. Yes, fiscal policy might have been tighter after 2000, particularly if we had known what we know now. But it played no part in causing the Great Recession. The second strand therefore does not follow. Among informed commentators on the UK economy, there is certainly no consensus that austerity was necessary. The third strand is complete and utter nonsense. To suggest that this story is self evident is a lie. So how did the government manage to convince almost everyone to accept the story as true?

First, it was vital that other governments were telling similar stories, and that real debt crises were happening not too far way. The idea that the Eurozone crisis is all about fiscal profligacy is equally untrue, but Greece provided the cover. Second, economists in the City tended to go along with the story, in part because it was in the interests of finance to do so. Third, most journalists and newspapers were happy to toe the party line. The occasional eminent journalist or academic would complain, and the Prime Minister revealingly described them as ‘dangerous voices’, but in truth they would only become dangerous if the political class took them seriously. They did not, as we shall see. The ultimate success of the lie was that political opposition to austerity died away.

There was just a little tidying up to do for the spin masters. The IMF had originally supported the 2010 austerity programme, but soon began to have doubts. As the economy continued to stagnate, those doubts grew more vocal. The IMF has an authority which really was dangerous. So when everyone, including the IMF, failed to forecast the strength of the 2013 recovery, the spin masters saw their opportunity. Before the 2014 Article IV assessment, they put out the line that the IMF really should apologise to the government for getting its forecast so wrong, and for daring to criticise the need for austerity.

Ashoka Mody systematically takes apart the idea that the IMF should apologise. But what was interesting for me was the idea that they should apologise ever got traction in the media. Please correct me if I’m wrong, but I do not remember a BBC interviewer ever asking the Managing Director of the IMF, or anyone else from the IMF for that matter, to apologise to the government before. It was so obviously an idea put out by the government in an attempt to stifle future criticism by the IMF, about policies like Help to Buy for example. The fact that newspapers and then a seasoned political interviewer on the BBC faithfully repeated it shows how dominant the austerity lie has become.

The race to raise interest rates

If you do not like the sporting metaphors in the post below, you can blame new MPC member Andy Haldane whose speech I have just read. Or maybe the World Cup.

When it comes to monetary policy, in recent years the UK has consistently followed the US. The US Fed started reducing interest rates in September 2007, and hit the Zero Lower Bound (ZLB) at the end of 2008. The UK’s MPC started reducing interest rates in October 2008, and hit the ZLB in March 2009. The lag between the two shortened considerably with Quantitative Easing, which the UK started just two months after the US. The MPC also followed the Fed with forward guidance, using a very similar formula.

The big question today for monetary policy in both the US and UK is when interest rates will start to increase. Until very recently this looked like a race that neither central bank was keen to enter, at least for a while. But that all changed last week following a speech by UK Governor Mark Carney. That led Gavyn Davies to ask what implications UK hawkishness might have on the US. It is very easy with such things to get lost in the immediacy of each new data release. In this post I’ll try and focus on the fundamentals.

Both central banks prioritise price inflation. UK inflation remains comfortably below target at 1.5%. US inflation had been in similar territory. The CPI rose by slightly more than 2% in May, but that is more volatile than the measure the Fed targets, so it is too soon to know whether this represents the beginning of a return of inflation to target. The FOMC committee’s latest forecasts indicate that inflation will remain below target for some time.

If the May CPI figure in the US turns out to be a blip, then there appears to be no immediate pressure to raise rates. However interest rate changes take time to feed through to inflation. As a result both central banks would like to start raising rates before rather than after the underlying level of inflation starts to exceed its target. Whether this is a sensible strategy I will discuss later, but it means the focus in both countries is on what determines future price inflation.

Here the UK seems to be in the lead, with stronger GDP growth than in the US. However economies often grow very rapidly when emerging from a deep recession. US growth was strong in 2010, but the Fed did not start raising rates then. The US has been growing at a moderate pace ever since, while the UK economy stagnated in 2011 and 2012. With this perspective, the US has not raised rates even after 5 years of recovery, so it seems odd that the UK should raise rates after just two years.

Economists would normally say that the more relevant measure for inflation is the output gap: an estimate of how much actual GDP is below the level at which inflation would be stable. Here most estimates suggest the UK is ‘winning’: the latest OECD Economic Outlook estimates for 2014 are UK -1% and US -3.1%. Now output gap estimates should normally be taken with a pinch of salt, but for the UK in recent years this pinch has become a spoonful. Most UK estimates assume that the marked decline in UK productivity growth since the recession (the UK ‘productivity puzzle’) is largely permanent. But as no one has any idea about why this decline has happened (hence puzzle), there is no compelling reason to assume it is permanent rather than reversible.

We can make the same point in a very simple way. UK output is currently around the same level as it was in January 2008, while US output is over 6% above its pre-recession peak. This would normally imply that the UK should be following well behind the US in raising rates.

      

What about the labour market? Here is a chart comparing unemployment in both countries.

I have taken the OECD’s latest Economic Outlook forecast for the US, but I have used much more optimistic numbers for the UK: 6.4% for 2014, and 5.7% for 2015. (Unemployment in May was 6.6%.) It is true that for unemployment, the lag between the UK recovery and the US recovery is shorter than for GDP growth. However they seem to be in similar territory at the moment, with unemployment unlikely to return to 2000-2007 numbers by 2015. In addition, there may be more labour market slack than is implied by these numbers, although for different reasons in each country. One final point worth noting is that, with free movement of labour within the EU, any labour market pressure in the UK can be offset by inward migration as long as Eurozone unemployment remains high.

There is no indication of any tightening in the labour market in either economy from data on wages. In the US real wages are stagnant, and wage growth in the UK continues to be below price inflation. In the UK, there is even some doubt whether rising real wages would put that much upward pressure on price inflation. Some part of the UK productivity puzzle must be the result of factor substitution: using labour rather than machines because real wages are low relative to the cost of capital. If that is the case, there is scope to reverse this if real wages start to rise, meaning that wage increases are not fully passed on into prices.   

One area which is often talked about where the UK is well ahead is the housing market, with UK prices rising rapidly. House prices are not part of the consumer prices index, but some argue that they should be. This is problematic conceptually - rents are the price of housing services, and house prices are the price of an asset. As I pointed out here, what we have in the UK at the moment is a rise in house prices relative to rents, which may in turn reflect the combination of falling interest rates and static supply, plus perhaps a bit of froth on top. According to the ONS data, rents have not been rising rapidly since the recession.

As John Williams among many others have emphasised, using interest rates to calm the housing market when inflation is below target has proved disastrous for Sweden and Norway. A housing boom is not a reliable indicator of incipient inflation. The UK should certainly not follow the Scandinavian example in this particular respect. 

Taking all this together, who will be the first to raise rates? My feeling is that US monetary policy makers are on reasonably solid ground, and are not even in their starting blocks. The output gap in the US is sufficiently large that there is little need to start raising rates now. UK monetary policy makers are in a much more difficult place, because of the UK productivity puzzle. The Carney speech has in effect tightened monetary policy by appreciating the exchange rate, as he must have known it would. Before this I had hoped that they would at least wait until real wages started rising significantly, but now I’m less sure. I fear after the Carney speech that they have entered the starting blocks, and any noise might trigger a false start.

The problem for the UK is that the strategy of wanting to start raising rates before inflation exceeds the target is inappropriate given the extreme uncertainties implied by the productivity puzzle. As Mark Thoma explains, and I have argued before, the risks are not symmetric. It would be unfortunate if inflation started rising before interest rates started increasing, but the costs of a few years of excess inflation would not be that great. The MPC has after all been there recently, and the world did not come to an end. The costs of prematurely choking off a recovery are much greater when recent productivity and output losses might be recoverable (as they were in the early 1980s and 1990s). These are very strong grounds for the Bank of England to continue to follow the US Fed, and not jump the gun.  

Postscript: Tony Yates elaborates on this last point, and also has more on the Haldane speech.

Does politics dominate economics in Eurozone crisis management?

Athanasios Orphanides, leading academic macroeconomist and from 2007-12 Governor of the Central Bank of Cyprus, does not hold back in a recent paper. Here is just one quote: 

“During the crisis, key decision makers exhibited neither political leadership nor political courage. Rather than work towards containing total losses, politics led governments to focus on shifting losses to others. The result was massive destruction in some member states and a considerably higher total cost for Europe as a whole. European institutions could have been the last line of defense against this destructive dynamic but instead served to facilitate and enable the destruction.”

His complaint will resonate with many from the smaller Eurozone economies. The text of the paper suggests that the way decisions are made in the Eurozone allows large countries to screw smaller countries, for short term economic gain, even if this damages the Eurozone as a whole.

He focuses on two ‘blunders’. The first was the meeting between French President Sarkozy and German Chancellor Merkel in Deauville in 2010, where these leaders suggested that a haircut should be imposed on private sector lenders to solvent governments that got in to funding difficulties. Ireland lost market access for its debt within weeks. However Orphanides notes that German debt became less costly as a result.

The second was in 2013, when the Eurogroup decided to impose a haircut on deposits of Cypriot banks, insured and uninsured. Although the decision was almost immediately recognised as a blunder, Orphanides justifiably asks how such a blunder could have been made. He suggests that it can be explained by the forthcoming German elections, and a need for the government to appear tough. The result was the destruction of Cypriot banks, which in turn gave Germany leverage to end the low Cypriot corporate tax rate.

It has not escaped at least one reader of this paper that such decisions invariably favour Germany. This is not the message Orphanides highlights. The abstract says that the paper is about how politics has dominated economics in crisis management. But what exactly does that mean? And is it really the case that economics is blameless here?

Take the Deauville decision. It is true that this hardly helped calm market nerves at the time, although Ashoka Mody argues that its impact on spreads was not that great. However it does seem to stretch credibility that this was a deliberate ploy by Germany to reduce its own borrowing costs. If it was, did Sarkozy also think it would reduce interest rates on French debt? A much more plausible explanation for this blunder is that Germany wanted to reintroduce some form of no bailout regime into the Eurozone. This may indeed have been a clumsy attempt to do so, but the real culprit was the absence of any clear economic mechanism that would allow the Eurozone to distinguish between sovereign debt crises where default was unavoidable, and sovereign debt crises which represented a self-fulfilling market panic, where the government’s fiscal position was in fact sustainable if support from other governments or institutions was forthcoming.

This problem had not been addressed in the design of the Eurozone, under the pretence that the Stability and Growth Pact would mean that such issues would never arise. It has still not been addressed today: the problem has simply been shifted on to the shoulders of the ECB in consultation with governments, who have to jointly decide whether OMT will be invoked, and under what conditions. It remains unclear under what circumstances, if any, a Eurozone government will be left to default.

It seems quite reasonable to argue in this case that politicians are left floundering, and make the occasional blunder, because the economics of the problem have not been thought through. Orphanides argues that “the domination of politics over economics has led to crisis mismanagement.” I suspect this is a little unfair on politics, and far too forgiving on economics.  

John Williams on bubbles and monetary policy

I have always found what John Williams writes interesting, from long before he became president of the Federal Reserve Bank of San Francisco. So this post just reviews a speech he recently gave at the Bundesbank’s delightful conference centre on the banks of the Rhine. For me he said three interesting things.

1) He first emphasised the dangers of deviating from monetary policy’s primary goals because of a concern about financial stability. What was interesting for me is that he did this by example, looking at what had happened in Sweden and in Norway. Now my impression is that central bankers do not make a habit of publicly criticising their colleagues in other countries, but Williams’ verdict is hardly nuanced. He is particularly concerned that inflation expectations in those countries have fallen sharply away from the target. (I discussed the dangers that could arise from this here.) He concludes “If the anchor were to slip, it would wreak lasting damage to a central bank’s control over both inflation and economic activity, at considerable cost to the economy.” We are used to hearing this about positive deviations of inflation from target, so it’s nice to hear it applied equally to negative deviations (ECB please note).

2) He then talked about asset market bubbles. What he had to say was not too controversial, but it is of immediate relevance to the UK. After looking at some persuasive empirical evidence, he said:

“Low interest rates boost fundamental valuation of assets. In a world of rational expectations, asset prices adjust and that’s it. But, if one allows for limited information, the resulting bull market may cause investors to get “carried away” over time and confuse what is a one-time, perhaps transitory, shift in fundamentals for a new paradigm of rising asset prices.”

Recently I talked about how expectations of a prolonged period of low real interest rates could lead to sharp increases in house prices, as we have recently observed in the UK and elsewhere. What Williams is suggesting is that this process can lead to overshooting, as the market gets carried away.

3) All this seems to be leading to the inevitable discussion of macroprudential controls rather than interest rates to deal with overshooting of this kind. He says “monetary policy actions should only be a last resort.” But then his discussion took an unexpected turn, for me at least.

“One of monetary policy’s most important lessons—borne out in both theory and practice—is that the framework for policy is more important than the details of the execution. In terms of price and economic stability, anchoring inflation expectations and responding in a systematic way to economic developments are by far the most important elements of good monetary policy.

 Instead of thinking about how monetary policy should respond to risks to financial stability, we should focus on studying ways to design policy frameworks that support financial stability with only a modest cost to macroeconomic goals and anchoring inflation expectations.”

What does this mean? He is careful to say “I am not personally advocating either of these proposals, but I do view them as creative ways to think of how to bend the curve in terms of macroeconomic and financial stability tradeoffs.” Well one of the two ideas he notes is that monetary policy should target nominal income rather than inflation. “The idea that nominal income targeting could be supportive of financial stability is relatively straightforward (Koenig 2013, Sheedy 2014).” The paper by Koenig [1] I did not know, but the paper by Kevin Sheedy [2] I discussed over a year ago in this post. You read it here first!

[1] Koenig, Evan F. 2013. “Like a Good Neighbor: Monetary Policy, Financial Stability, and the Distribution of Risk.” International Journal of Central Banking 9(2, June), pp. 57–82.

[2] Sheedy, Kevin D. 2014. “Debt and Incomplete Financial Markets: A Case for Nominal GDP Targeting.” Presented at Brookings Panel on Economic Activity, March 20–21.

Good and Bad Blog Debates

One of the things I really like about blogs is that they can generate considered and informed debates about ideas. But not all blog debates are like that. Debates can get too personal - they begin to become about the people involved in the debate, rather than the ideas. They become a debating contest. Sometimes this can be a contest between two people, or it can be a contest between two groups. This may be a fun sport for those committed fans of either side, but I do not think it is a very good means of informing those who are not committed but who want to know more about the issues involved.

Take the debate involving Mark Sadowski (MS) that started with this post. MS disagreed with a number of things I said, and we had a short back and forth in the comment thread to that post. MS also combined his points as a separate post. All well and good. This debate led me to write two subsequent posts. One was about how the US recovery had continued despite fiscal contraction. The other, actually written following a subsequent post by Giles Wilkes, was an attempt to try and explain in very general terms where the two sides agreed and disagreed on fiscal policy. I wrote neither as sequels in a debate between MS and myself, because they were not intended to be that. I wanted to talk about facts in the first case and ideas in the second, rather than have a debating contest.

I think MS saw it differently. Here he responds to my post on the US recovery, imagining it to be a ‘response’ to his earlier post. Here he responds to my second post. Both are written in a quite personal style, as the titles suggest. Not a style I like, but so what?

Well, if you are going to do this kind of thing, you need to be especially careful that you get your facts right, because it has become personal. In the second half of the second post, he writes:

“At what point will fiscalists stop wringing their hands over the “liquidity trap” and start to worry about what is the consensus assignment of fiscal policy, which is debt stabilization? What I sense is they aren’t really interested in the consensus assignment of fiscal policy.

 And who can blame them? Debt stabilization is dull. It is *really* dull. Why worry about something so dull when you can worry about something which is so much more exciting, which is obviously aggregate demand stabilization.

 And this I think is the crux of the real asymmetry. Monetarists are genuinely interested in the consensus assignment of monetary policy, which is aggregate demand stabilization. Fiscalists show no interest at all in the consensus assignment of fiscal policy, which is debt stabilization.”

Now here he talks about ‘fiscalists’ rather than mentioning me by name, but anyone reading this post would assume that I was among the people he is talking about. Another fiscalist named in this debate is Jonathan Portes. Now it just so happens that Jonathan and I have just written a substantial paper, which is all about debt stabilisation! Whoops.

An unlucky error? No, it’s much worse. A quick look on my homepage will show you that much of my academic research since 2000 has been about debt stabilisation. Unlike MS, I do not think the subject is really dull. Issues like what the long run target for debt should be, how quickly we should get there, what happens to monetary policy when debt is not controlled by the fiscal authority, seem to me rather interesting.

Hopefully that corrects the impression created that these particular 'fiscalists' are not interested in debt stabilisation. But has this post been very informative for someone interested in the issues, rather than the personalities? I learnt very soon after I started this blog, thanks to another market monetarist, that it is generally better to focus on the ideas rather than the individuals putting these ideas forward. This can be difficult, and I do not always get it right, but that at least was what I was trying to do in my last post.

Monetarist vs Fiscalist

Giles Wilkes (ex special advisor to Vince Cable, Business Secretary in the current UK government and LibDem) has a post that compares those he calls ‘fiscalists’ like myself and Jonathan Portes to market monetarists (MM). His post follows some comments and a post by Mark Sadowski responding to an earlier post of mine where Mark took exception to my saying “the major factor behind the second Eurozone recession is not [controversial] : contractionary fiscal policy”. You find much the same debate in this post by Scott Sumner, attacking (mainly) Paul Krugman.

I think Giles Wilkes gets a lot of things right, but I thought it might be useful to set out as clearly as I can how I see the nature of the disagreement. The first, and probably the most important, thing to say is that the disagreement is not about whether fiscal contraction is contractionary, if the monetary authority does nothing. (See, for example, Lars Christensen here.)That is actually what I meant with my statement about the Eurozone recession, which linked to a study that calculated the impact of austerity holding monetary policy ‘constant’. This is so important because, in their enthusiasm to denounce countercyclical fiscal policy, MM often give the impression of thinking otherwise.

The disagreement is over what monetary policy is capable of doing. The second thing to say is that this is all about the particular circumstances of the Zero Lower Bound (ZLB). I do not like the label fiscalist for this reason - it implies a belief that fiscal policy is always better than monetary policy as a means of stabilising the economy. (Giles Wilkes is not the first to use this term - see for example Cardiff Garcia, who includes more protagonists.) Now there may be some economists who think this, but I certainly do not, and nor I believe does Paul Krugman or Jonathan Portes. I described in this article what I called the consensus assignment: that monetary policy should look after stabilising aggregate demand and fiscal policy should be all about debt stabilisation, and there I described recent research (e.g.) which I think strongly supports this assignment. However there has always been a key caveat to that assignment - it does not apply at the ZLB.

Before talking about that, let me illustrate why language can confuse matters. Suppose we had fiscal austerity well away from the ZLB. Suppose further that for some reason the monetary authority did not take measures to offset the impact this had on aggregate demand, and there was a recession as a result. I suspect a MM would tend to say that this recession was caused by monetary policy, even though monetary policy had not ‘done anything’. (In this they follow in the tradition of that great monetarist, Milton Friedman, who liked to say that monetary policy caused the Great Depression.) The reason they would say that is not because fiscal policy has no effect, but because it is the duty of monetary policy to offset shocks like fiscal austerity. That is why fiscal policy multipliers should always be zero, because monetary policy should make them so. So Mark Sadowski got upset with my statement because in his view ECB policy failed to counteract the impact of Eurozone austerity, and could have done so, which meant the  recession in 2012/3 was down to monetary policy, not fiscal policy.

So we come to the heart of the disagreement - the ability of monetary policy to offset fiscal actions at the ZLB. This is all about the effectiveness of unconventional monetary policy (UMP), which is both Quantitative Easing and what I call forward commitment (promising positive output gaps in the future: see David Beckworth here). I do not want to go over these arguments again, partly because I have already written about them elsewhere (e.g. here, here and here). Instead I just want to make an observation about asymmetry.

Economists like Paul Krugman, Jonathan Portes and myself (and there are many others) do not argue against using UMP. Indeed PK pioneered the idea of forward commitment for Japan, and I have been as critical as anyone about ECB policy. We do not argue that fiscal policy will be so effective as to make unconventional monetary policy unnecessary, and so write countless posts criticising those promoting UCM. To take a specific example, I happen to think that the recent ECB moves will have less impact on the Eurozone than continuing fiscal austerity, but I do not say the ECB is wasting its time as a result. They should do more.   

I’m interested in this asymmetry, and where it comes from. Why do MM hate fiscal expansion at the ZLB so much? It could be ideological (see Noah Smith here), but I suspect something else matters. I think it has something to do with monetarism, by which I mean a belief that money is at the heart of issues to do with stabilisation and inflation. MM is not about controlling the money supply as monetarism originally was, but I think many other aspects of monetarism survive. My own view is more Wicksellian (or perhaps Woodfordian), whence the failure to be able to lower interest rates below zero naturally appears central. To those not trained as macroeconomists (and perhaps some that are) these sentences will appear mysterious, so if this idea survives comments I may come back to it later.