A completely pointless amendment

There was a lot of indignation yesterday from committed Remainers about Corbyn sacking those who supported the Chuka Umunna amendment on the Single Market. I’m a committed Remainer, but I couldn’t see what the point of the amendment was. That is because we are almost certain to leave the EU still in the Single Market.

In March I wrote that the outline of the Brexit deal was fairly clear. Crucially, there would be a longish (many years) transitional arrangement to enable a bespoke trade deal to be negotiated. During this period we would preserve our position in the customs union and Single Market (and pay money to the EU to do so). The UK side may dress this up as something a little different, if they have the wit and energy to do so and if the EU lets them, but to all intents and purposes that means nothing changes on the trade side for some time. That conclusion didn’t require any great powers of foresight at the time, but simply followed from the length of time it takes to negotiate bespoke trade deals (see, for example, Alasdair Smith here).

My only uncertainty back in March was whether May would choose (or be forced to choose) No Deal. With the election giving more power to soft Brexit elements among the Conservatives (e.g. Hammond), I think No Deal is now very unlikely because parliament will vote it down. As a result, towards the end of 2018 we will know how much we have to pay in order to formally leave the EU, but things will otherwise stay pretty much as they are now.

What about a change in Prime Minister and an election? Unless something turns up (a big if), I suspect we will see neither before the end of 2018. The least important reason for this is May would rather be known as the PM who took us out of the EU than the PM who threw away certain victory in GE2017. One reason she is unlikely to be challenged over the next year and a half is that delaying the negotiations once again (this time for a leadership contest) just looks awful. Both ex Tory Remainers and Brexiteers are nervous of how a leadership election might evolve. If May is prepared to sacrifice her two lieutenants, she will also sacrifice the foolish red lines she created for the EU negotiations.

No Conservative contest of course means no election. Once again, unless something turns up, the Conservatives will want to leave an election for as long as possible in the hope that their popularity improves. Labour will be hoping that it wins that election, so it will be in charge of the trade negotiations designed to create a bespoke trade deal, but whoever is in charge it is difficult to see any enthusiasm for replacing the Single Market.

On the Conservative side the idea that we should leave the customs union because it will enable us to negotiate lots of trade deals of our own will be increasingly recognised as the nonsense that it is. It will also be obvious that any bespoke trade deal will require the same pooling of sovereignty as the Single Market. Brexiteers never had any real interest in ending freedom of movement: that was a ploy to get a Brexit vote. If Labour were in charge they would quickly find out that the Single Market did not prevent them doing most of what they want to do, and that there were easier ways of managing free movement. The priority would be repairing the public services, a task not helped by reducing immigration and weakening our trade position, so the bespoke trade deal will get kicked into the long grass.

Of course that means ending up with a situation where nothing has changed except that the UK will have paid the EU to no longer have any influence on the rules of the Single Market it is still part of. All that time and effort for a truly epic fail. The best hope for Remainers is that this realisation will dawn on enough Conservative MPs to embolden them to demand a second referendum. (This has always been the best strategy for Remainers: to work the Condorcet paradox that was at the heart of the referendum result.) In these circumstances it would be an extraordinary act of self harm if Labour did not join them in voting for a referendum. They would instantly be on the wrong side of the triangulation which served them so well in GE2017, which would put their popularity at serious risk.

Given all this, what was the point in the amendment to the Queen’s speech saying we should stay in the Single Market, given that the occasion meant that no Tory MPs could vote for it, and we will probably be staying in the Single Market anyway? (Jonn Elledge comes to similar conclusions by a different route.) When you are a leader of the opposition who has surprised himself by completely wrong footing the pundits through a combination of a manifesto that increases the size of the state and triangulation on Brexit, wouldn’t you be annoyed by such pointless and potentially harmful distractions? 

Economists and the Euro: for the record

Almost every time I write something about Brexit, I get at least one comment along the lines of ‘you economists got it wrong on the Euro, so why should we take any notice of you on Brexit’. This is beginning to annoy me, because in reality the opposite is true: it was because of economics and economists that we didn’t join the Euro in 2003. So the next time someone says the same to you, send them this blog post.

As far as I can see, the source of this ‘you got it wrong’ line is a poll that the Economist magazine did of academic economists on whether the UK should join the Euro in 1999. In that poll 65% said yes, and 35% said no. It was a good piece of journalism and a sensible survey, and it roughly corresponds with how I viewed academic opinions at the time. Claims by Andrea Leadsom that the Bank and IMF also recommended joining are simply wrong.

This poll has zero relevance to the Brexit issue for the following reasons:

1. Academic economists split 2 to 1 in favour of joining in 1999. In the case of Brexit, for every one economist that thought leaving was a good idea, there were 22 that said the opposite. So while a majority of economists favoured joining the Euro, the overwhelming consensus was that Brexit would involve economic costs.
   
   
2. Ask any academic about the Euro, and they will tell you that there are pros and cons, and it is largely a matter of judgement whether the pros or cons win. A key issue which I did some work on (with Rebecca Driver) was whether countercyclical fiscal policy could deal with asymmetric shocks. Our work suggested they could to a significant extent, but that made the proposed Stability and Growth Pact a concern. Others, looking at other types of risk, might come to a different conclusion.
   
   The contrast with Brexit is total. There are no major economic pros that need to be compared with the cons. Instead there are just economic costs, and the debate is about how large these will be.
   
   
3. Euro membership involved macroeconomics. Membership of the EU is mostly about trade. These are different branches of economics with little in common. Brexit involves the impact of geography on trade (gravity equations) and the impact of trade on productivity, while Euro membership involves the macroeconomic response to asymmetric shocks. It is a bit like refusing to have your hip replaced because your flu jab didn’t stop you getting flu.
   
   

The poll was in 1999. The UK did not decide to make a decision whether to join the Euro or not until 2003, and thankfully it did more than take a poll of economists on the issue. The Treasury was given plenty of time to analyse the pros and cons of entry, and it did so by undertaking a large number of studies. This is how policy advice should work in the absence of delegation: you do not ask the expert what the decision should be, but instead ask what the issues are and let the politician make the decision. I have discussed the so called 5 tests process, overseen by Dave Ramsden, in detail here. Most of the studies were done ‘in house’ by Treasury economists, but advice was sought from a large number of leading academics in the field. Peter Westaway was brought in from the Bank to write a couple, and I wrote a study on the optimal entry rate, extending and developing work I had begun back in the days before we entered the ERM.

The analysis was at the highest level, and I could detect no overt bias one way or the other. Some studies found significant benefits from joining, and others found significant costs or concerns. Although it is easy to be cynical, I have talked to some of the actors involved and it does seem as if the economics, encapsulated in these various studies, was critical in first convincing Gordon Brown and then Tony Blair that now was not the right time to join.

So the reality is that studies that summarised state of the art academic economic analysis stopped the UK joining the Euro. Without that, the decision on UK entry would have been down to politics, much like the formation of the Euro itself, and who knows how that would have gone. The economic analysis anticipated some of the problems behind the Euro crisis but not all. Economics is far from perfect, but that is no reason to ignore it when it says things you do not like to hear.

When capturing the middle ground works or fails

In 2015 Labour went for austerity-lite compared to Osborne’s full on austerity. It failed. Yet in 2017 Labour went for Brexit-lite, and it worked. Why does capturing the middle ground (often called triangulation) sometimes work and sometimes fail?

The theory behind why it should work is straightforward. Suppose you can grade an issue from 1 to 10, and we have a two party system: you can vote Labour or Conservative. In the case of Brexit, 1 would be staying in the EU and joining the Euro, and 10 would be No Deal. Now suppose voters are evenly distributed along this spectrum of possibilities: 10% want No Deal (10), 10% want a deal where we leave with minimal trade deals with the EU (9) and so on. An even distribution means 50% of the population want options between 1 and 5, and 50% want options between 6 and 10. Suppose the Conservatives go for option 8, which in this case is a fairly hard Brexit. Suppose Labour actually believe in option 3. What option should they campaign for in an election?

If all voters are well informed and are certain to vote, and there are no third parties, the answer is to go for the middle ground. If they campaigned for 3, they would capture only 50% of voters (those who prefer options 1 to 5), and the Conservatives would win those preferring 6 to 10. But if they campaigned for option 7, they would capture 70% of the vote. Indeed those voters who understood triangulation might have reasoned that although Labour were campaigning for 7, they were only doing that to appease some of their traditional core voters, and if elected they would actually go for a more EU friendly option.

You could read Labour’s position on Brexit in GE2017 as being very close to the Conservatives. But the language that stressed the importance of the economy allowed those who prefered options 1 to 7 to think Labour would be better than the Conservatives. Labour did indeed appear to go for something like option 7 in GE2017, and it seems to have worked: the swing to Labour was higher in areas that voted to Remain (their did not alienate voters who wanted options 2 or 3), but they captured some Leave voters as well. Whether that Labour positioning was based on triangulation or did actually reflect the leadership's true beliefs I honestly do not know.

Compare this to the 2015 election and austerity, where option 1 is wanting fiscal stimulus and more public investment because interest rates were stuck close to their lower bound, and 10 was an even sharper austerity than George Osborne was proposing. Instead he proposed option 8, and Labour went for something more moderate: on paper maybe 6, but they kept quiet about the difference so maybe in practice 7. Labour’s positioning is generally thought to have failed. Not only did they lose the election, but afterwards an ‘outsider’ became party leader on a platform that was clearly anti-austerity.

So why did triangulation work with Brexit in 2017 but fail with austerity in 2015? There are many ways of changing this very simple model to resolve this puzzle. My current favourite is as follows. What is missing from the linear scale of options outlined above is any account of the framework by which voters judge competence, and the option of not voting. In 2015 the dominant narrative was the one set out by the Conservatives: austerity was required because they were clearing up the mess left by Labour. By positioning themselves as austerity-lite Labour in effect did nothing to challenge that narrative. This had two consequences. First, those who took a strong anti-austerity line might have been tempted not to vote. Second, those in the middle did not go with Labour because Labour’s competence was questionable: they had caused the deficit problem in the first place.

So Labour’s positioning in 2015 to capture the middle ground failed. By not challenging the dominant narrative they appeared to accept their alleged past incompetence, and committed anti-austerity voters may have not turned up. In 2017 Labour openly challenged the austerity narrative. That meant they didn’t capture the middle ground, but they did not lose it either. (It should also be added that the middle ground on austerity has probably been shifting as the deficit itself falls.)

In 2017 with Brexit, there was no dominant narrative. As I have remarked before, the country is as divided as it was in the original vote. Labour had two options. It could oppose Brexit, and get the anti-Brexit vote. Or it could attempt to capture the middle ground by accepting Brexit but stressing that they would put the economy first. They, by preference or design, went with the second triangulation option and it seems to have worked.

Why were hard line Remainers not put off from voting Labour as anti-austerity voters may have been in 2015? In part I suspect because Brexit was not the only dominant issue. Labour campaigned on its anti-austerity manifesto, and for many Remain voters this was at least as important as Brexit. This meant that not voting was not an option. There may also have been the realisation that had Labour campaigned to Remain, this would have allowed the Conservatives to make the election a rerun of the Brexit vote, and the distribution of voters by constituency would mean the Conservatives would have won more seats even if the national vote had been evenly split. So in the case of Brexit, but not austerity, triangulation made sense.

Whether this is right or not I have no idea as I am very much an amateur on these issues. I only write about it here because I have not seen this comparison between the two elections made elsewhere. To the extent that Labour’s triangulation on Brexit was tactical, it means if (following May's failed election) the Conservatives move to a softer Brexit (from 8 to 7, say), it is important that Labour moves as well (from 7 to 6) to keep their Remain voters on side. 

Brexiteers versus Economists one year on

One year ago we found out that the British people had decided (narrowly) that they had had enough of experts, and one group of experts in particular: economists. Economists had warned that Brexit would harm the economy, and the Brexiteers laughed it off, claiming Brexit could give the UK lower immigration without any economic pain. Economists responded that reducing immigration would make access to public services worse not better, but everyone told us we were simply out of touch with the people.

When a few months after the referendum Brexiteers started claiming that the economists had been proved to be completely wrong, I decided to score this match between Brexiteers and Economists. Goals would come from actual events, not from unconditional forecasts. The first goal of this match had been scored by the Economists within seconds of the match starting: the collapse in sterling would make nearly all British citizens poorer. The second arrived shortly afterwards, as the Bank decided to cut rates and restart QE to offset the negative impact of Brexit.

The Brexiteer side later claimed that this second goal shouldn’t count, because the economy did not collapse in the second half of 2016. But the main reason that happened was because consumers dipped into their savings, something that was not sustainable. The Bank did not reverse its decision. Forecasts went up and down, but this match is based on events, not forecasts.

The next goal was the election of Donald Trump. At first Brexiteers claimed it was a goal for their side, as Trump had been in favour of Brexit. But the reality soon dawned that Trump, like Brexiteers, lied all the time: he had no intention of making any trade deals with the UK before doing one with the EU first (as Obama had said, we would be way down the list). In addition a trade deal with Trump began to look like something it might be better not to have. That blew apart Brexiteers claims that they could quickly get new trade deals outside the EU to make up for lost trade with the EU. They had scored a goal, but it was in their own net.

If at this point you are thinking the referee is biased, I should add that he subsequently ruled out two goals claimed by Economists. The first was invoking Article 50. Economists claimed that was a foolish thing to do because it would leave the UK fighting against the clock. The referee ruled it out because that was a forecast, and the Brexiteers were still claiming that No Deal was better than a bad deal for the UK. The second was the first quarter GDP figures, with no growth in GDP per head. The referee rightly said that this could just be erratic data and we would have to wait for another quarter at least.

But with the score at 3:0 to the Economists the chances of a Brexiteer win still seemed remote. We now entered the most exciting period of the game yet. The Brexiteer captain called a general election, which she foolishly said was to enable her to consolidate her Brexit position. The Brexiteers threw everything into attack, but this left them weak at the back and a swift counterattack led to the fourth goal in the Brexiteer net. A despondent team then conceded without any resistance a fifth goal, when they agreed to the structure of negotiations set out by the EU. It was now clear the Economists had been right, and starting the Article 50 process had been a huge mistake. Trying to use EU migrants as a bargaining chip became a cruel failure, a tactic apparently invented by the captain herself.

With the Brexiteers now 5:0 down, and with the only prospects being further successful strikes by the Economists (the divorce payment, an interim settlement that effectively keeps existing trade arrangements including free movement), it looks like certain defeat for the Brexiteers. If I had started this off as a boxing match rather than a football match, I could have had the referee calling an end to this fight. It now seems absolutely clear that the Economists have been proved right and the Brexiteers horribly wrong about the economics of Brexit. But Boris Johnson or David Davis are favourites to be the next Prime Minister, Gove is back in the Cabinet and someone is calling for an inquiry into economists because they are "dangerously irrelevant", so what do I know?

UK monetary policy: you cannot be serious?

Nothing shocks me in the area of fiscal policy anymore, but I do have some faith that monetary policy makers know what they are doing. While fiscal policy makers in the US, UK and the EZ did precisely the wrong thing consistently from 2010, monetary policy makers rightly pulled out all the stops, and my main quarrel was that in the UK and EZ they pretended QE was an instrument with the same order of reliability as interest rates. Instead they should have told fiscal policy makers that they could no longer do their jobs efficiently because interest rates had hit their lower bound.

However, there are occasional aberrations. EZ interest rates went up in 2011 rather than down and the MPC almost did the same. (Let’s not mention Sweden.) And then, last month, three members of the MPC voted to raise interest rates. After I had had my John McEnroe moment, I quickly realised that these three members were making exactly the same mistake as a different three made in 2011. Only this time they had less excuse.

Back in 2011, inflation was between 4% and 5% but the UK was still in deep recession. Inflation was high because of austerity (an increase in VAT), higher energy prices and maybe the lagged effects of an earlier depreciation. In 2017 inflation is high because of the Brexit depreciation, yet the real economy looks very weak as consumers start to pull back spending. In essence the situation is identical: inflation is high because of one-off factors, and because the real economy is weak inflation will come back down of its own accord. There is no point making the real economy even weaker by raising interest rates.

The only thing you might worry about in these circumstances is that inflation might be more persistent than you thought because nominal wages start to rise as workers try and avoid falls in real wages. That didn’t happen in 2011 even though inflation reached 5%, and inflation did come quickly back to near target within a year. An increase in interest rates would have achieved nothing except make the recession worse.

Exactly the same applies now, with the only difference being inflation is still less than 3%. We can be sure of this by looking at what is happening to nominal wages. UK nominal wages have increased in the four months of 2017 by less than 2% compared to a year earlier, which represents a distinctly lower rate of growth than in the second half of 2016. A relative price change, like a depreciation, can only shift inflation permanently higher if wage inflation starts rising. Right now it is falling.

When I recently wrote about increasing the inflation target, I knew I would get at least one comment saying wouldn’t this reduce real wages even further. As I always do, I explained that raising the inflation target should raise the rate of increase of all nominal quantities by the same amount, which is what economists mean by inflation. But it seems the same basic point has to be made to these three members of the MPC too: inflation is not just the rate of change of the consumer price index.

The weakness of real wages in the face of rising inflation (and remember this increase in inflation was predictable the moment Brexit happened) also tells us something important about the UK labour market. Here is the Resolution Foundation’s underemployment measure, based on work by Bell and Blanchflower. It shows the index still above its level in the first half of the 2000s. 

But perhaps more importantly, the weakness of nominal wages suggests that the NAIRU may have decreased since then. A good rule for monetary policymakers right now is to only think about raising interest rates when nominal wage inflation starts rising by more than 2% above underlying labour productivity growth. 

Postscript 22/6/17

The day this post was published a speech from MPC member Andy Haldane was also published. Haldane did not vote for higher interest rates in May. It is a speech of two halves. The first presents a detailed and analytical discussion of the changing nature of the UK labour market, and his conclusion is that the NAIRU may well have declined as a result. He therefore provides solid evidence for the conjecture in my last paragraph. 

However the second half of the speech is in complete contrast. It involves a kind of unstructured shopping list of pros and cons for raising rates, full of references to things like 'political uncertainty' and equity markets and 'inflation narratives'. As a result of that, he favours raising rates earlier than markets expect. Sterling rose on publication of the speech. (If nothing else, sterling's reaction to first Carney's speech and then this has been a nice vindication of uncovered interest parity (UIP) theory.)

I think there is another way of describing this speech of two halves. The first involves a careful analysis of a key driver of the inflationary process (and finds a strong explanation of why wage inflation is currently weak). The second is unstructured list making, with a decision based on some unexplained intuitive process. I may be a little harsh, but it looks to me like the best and worst of monetary policy making.       

Austerity will only end when our leaders start being honest

Austerity was the underlying motivation for starting this blog. Sometimes I think everything that I, Paul Krugman and many others have written over the last six or more years has fallen on deaf ears. Take two recent pieces of evidence: this FT article by Nicholas Macpherson, ex permanent secretary at the Treasury, and this interview of the Chancellor by Andrew Marr.

In talking about Osborne’s fiscal consolidation that began in 2010, Macpherson says: “With hindsight, there was a case for going further faster.” His rationale is that the public like a dose of austerity, but tire after a time. At no point does he mention the economy (a recovery that stalled from 2010 to 2013, and then only started growing at trend thereafter), or monetary policy (interest rates were stuck at their lower bound). His desire for a shorter, sharper fiscal shock would have almost certainly produced a second recession.

I calculated that the fiscal consolidation that did take place cost the average household at least £4,000 in lost resources. This is based on OBR numbers, and assumes (as the OBR does) that the economy recovers quickly from any fiscal consolidation. This latter assumption looks very shaky indeed. Once you stop making it, the costs of austerity become horribly large. Not a word about this from Macpherson, which allows him to make the ridiculous argument that we should have had a shorter sharper consolidation.

One of the other ridiculous things Macpherson says is that, from 2010 to 2016, the UK did not even experience austerity. He justifies this because the debt to GDP ratio over this period rose. I’ve heard similar things in comments on my blog, presumably because of what Conservative politicians or their apologists say in the press. The statement confuses levels with rates of change, whether you are talking about the impact on the economy or on individuals. This is first year undergraduate stuff.

Philip Hammond said in his interview that a deficit of 2.5% is not sustainable. The normal definition of sustainability is a deficit that keeps the debt to GDP ratio constant. The current debt to GDP ratio is 86.5%. To work out roughly what the sustainable deficit is, divide the debt level by 100 and multiply that by the expected growth rate of nominal GDP. That means that today a deficit of 2.5% of GDP would be sustainable as long as nominal GDP grew at about 3%. So his statement that a deficit of 2.5% is not sustainable simply looks wrong.

You could rationalise this by saying that he believes our current debt to GDP level is not sustainable, and that therefore he wants to reduce it, but if that is what he means he should say so. Instead it seems that he wants to pretend that the government is like a household, and so therefore there is some reason why a deficit of zero is desirable. Of course Hammond does not mention interest rates either. And he knows that, in an interview like this, he can get away with anything involving economics or numbers.

Austerity has been supposedly dying since after the Brexit vote, but that just reflects misleading or dishonest reporting. As Torsten Bell says, for most people austerity means cuts to public spending, and for public sector workers and those on low incomes there is more austerity to come. Hammond also said Labour’s proposed fiscal policy would be “catastrophic for the country”. I suspect this kind of nonsense hyperbole, frequently invoked by the right wing press, has now become counter-productive. In reality at the heart of Labour’s fiscal policy is a fiscal rule which takes the government’s role in the economy seriously, rather than reduce it to the budget of a Swabian housewife. I cannot wait for the day that becomes the UK government’s fiscal rule, and we can move discussion of UK fiscal policy away from numbers 'not adding up' and back into the 21st century.

Raising the inflation target

The argument for a higher inflation target is straightforward, once you understand two things. First the most effective and reliable monetary policy instrument is to influence the real interest rate in the economy, which is the nominal interest rate less expected inflation. Second nominal short term interest rates have a floor near zero (the Zero Lower Bound, or ZLB). Combine the two and you have a severe problem in a recession, because to combat the recession real interest rates need to move into negative territory, and how far they can go into that territory is limited by the ZLB. That means monetary policy alone may be unable to get us out of a recession.

Raising the inflation target reduces the likelihood that interest rates will hit the ZLB. To see why, note first that the long run (economists often say ‘equilibrium’ or ‘natural’) real interest rate is positive. Let’s say it is 2%. If the inflation target is 2%, and the ZLB is 0%, that would mean that in normal times the average nominal interest rate is 4% (2% inflation target + 2% to get to a 2% real interest rate). That means nominal interest rates can be cut by a maximum of 4% if the economy falters. That may be enough for a mild downturn, but as we saw in 2008 it is not enough for a major recession. However if the inflation target was 4%, nominal rates would now be able to fall by a maximum of 6%. That is probably enough to combat all but the worst kind of recession.

Why are many economists currently arguing that we should raise the inflation target from 2% to 4%? One of the reasons is that we now believe the long run real interest rate is currently lower than it was when the 2% target was first chosen. (This is sometimes referred to as secular stagnation.) If you go through the arithmetic above, you can see why a lower long run real interest rate will make the ZLB problem worse. The argument is that we now need to raise the inflation target to make sure we hit the ZLB less often in the future.

This issue moved from an academic discussion to a real possibility in the US a few days ago. When Fed Chair Janet Yellen had been asked about raising the inflation target in the past, she has tended to dismiss the idea. However she now says that it is something that the Fed will review in the future, and that it is one of the most important questions facing central bankers today.

This will undoubtedly give new impetus to the debate over whether the inflation target should be raised. We are in standard trade-off territory here. Economists generally agree a higher inflation target will in itself inflict greater costs on the economy, but they bring the benefit that the ZLB problem will occur less often. But there is an alternative, and clearly much better way out of this dilemma.

Governments have another instrument that has a reasonably predictable impact on aggregate demand, and which can be used to combat a recession: fiscal policy (changes to taxes and government spending). In the UK at the moment interest rates are at the ZLB in part because fiscal policy is contractionary (austerity). It would be far better to use this instrument to stimulate the economy in a recession than to raise the inflation target. Yet the institution of independent central banks have discouraged governments from using fiscal policy in this way.

It is no good central banks pretending that this is something which is up to governments, and that there is some unwritten law which means that central banks should keep quiet on such things. In reality, in both the UK and the Eurozone, the central bank actively encouraged governments to do the wrong thing with fiscal policy in the last recession. In other words, they encouraged austerity. If there is something inherent in the institution of a central bank that makes them give inappropriate advice in this way, then we should be asking how central banks can be changed as a matter of urgency.

What should happen in a recession, as soon as the central bank thinks that interest rates will hit the ZLB, is that central banks should say, out loud in public, that fiscal policy should become more expansionary. In addition central banks should say, out loud in public, that governments need not worry about rising debt and deficits due to the recession and any fiscal stimulus they undertake spooking markets because the central bank has that covered. Both statements have the merit of being true. 

Of course governments will need to restore debt to desired levels at some point, but that point should be well after interest rates have left the ZLB because then debt correction can be painless. The immediate aim of fiscal policy in a recession should be to allow interest rates to rise above the ZLB as soon as possible. That gives you the best macroeconomic outcome, and one that is far superior to raising the inflation target. The most important question facing central bankers today is why they failed to do that from 2009.

Now it is possible that, if democracy is in a bad shape (as it currently is in the US for example), the government may ignore the advice it receives from the central bank. In that case it is worth considering giving central banks some additional power to mimic a fiscal expansion, such as helicopter money for example. Or it may be worth considering institutional changes that allow nominal interest rates to go negative. Or raising the inflation target. But before doing any of those things we need to ensure that central banks give the right advice to governments when the next recession comes along.