progressive fiscal policy

Don’t Soak the Rich by Edoward D. Kleinbard

Our peer countries typically rely on large, regressive tax systems to mitigate income inequality far more than we do. For example, I compared Germany and the United States, using 2007 data (the last year unaffected by the Great Recession) collected by the Organization for Economic Cooperation and Development. The two countries had virtually equivalent levels of income inequality. Moreover, the American tax system as a whole was quite progressive, while Germany’s actually was regressive. 

Nonetheless, the American fiscal system as whole (including state and local government spending) reduced inequality in market income — that is, income before subtracting taxes and adding back government benefits — by only 22 percent, while Germany’s reduced it by 41 percent. The reason is that the German fiscal system was significantly larger in overall terms: Taxes accounted for about 36 percent of German gross domestic product, against 28 percent for the United States. It’s the spending side, not the taxes, that makes the difference.

Book Review: Edward Kleinbard’s “We Are Better Than This.” by Jared Bernstein

austerity, thanks Tea Party

Stanley Fischer:

The stance of U.S. fiscal policy in recent years constituted a significant drag on growth as the large budget deficit was reduced. Historically, fiscal policy has been a support during both recessions and recoveries. In part, this reflects the operation of automatic stabilizers, such as declines in tax revenues and increases in unemployment benefits, that tend to accompany a downturn in activity. In addition, discretionary fiscal policy actions typically boost growth in the years just after a recession. In the U.S., as well as in other countries--especially in Europe--fiscal policy was typically expansionary during the recent recession and early in the recovery, but discretionary fiscal policy shifted relatively fast from expansionary to contractionary as the recovery progressed. In the United States, at the federal level, the end of the payroll tax cut, the sequestration, the squeeze on discretionary spending from budget caps, and the declines in defense spending have all curtailed economic growth. Last year, for example, the Congressional Budget Office estimated that fiscal headwinds slowed the pace of real GDP growth in 2013 by about 1-1/2 percentage points relative to what it would have been otherwise. Moreover, state and local governments, facing balanced budget requirements, have responded to the large and sustained decline in their revenues owing to the deep recession and slow recovery by reducing their purchases of real goods and services. Job cuts at federal, state, and local governments have reduced payrolls by almost 3/4 of a million workers, resulting in a decline in total government civilian employment of 3-1/4 percent since its peak in early 2009. The fiscal adjustments of the last few years have reduced the federal government deficit to an expected level of 3 percent of GDP in 2014 and fiscal drag over the next few years is likely to be relatively low. 

Simon Wren-Lewis and Nick Rowe Annoy Each Other…: Friday Focus for August 1, 2014 by DeLong

...In the case of (2), the key shortage is not of the stock of the liquid medium exchange per se or an elevation of the entire risk spectrum of real interest rates above the Wicksellian natural rate because of the zero lower bound, but rather the inability of financial intermediaries to raise enough capital and trust to do the risk transformation. The consequence is safe interest rates at or below their first-best Wicksellian natural values and risky interest rates well above their first-best Wicksellian natural values. In this case a resort to monetary expansion–even if the economy is away from its zero interest-rate lower bound–provides incentives to invest too much of society’s wealth in long-duration assets, with the added complication that the financial sector has a difficult time distinguishing A valid long-duration asset from a Ponzi scheme because neither requires the investors be shown the money in any serious way.

Kalecki and fiscal policy

Why Not Fiscal Policy? by Chris Dillow

Simon Wren-Lewis suggests there might be “other motives at work“ than macroeconomic reasoning for the government’s refusal to consider using fiscal policy to combat rising unemployment. 

If he is anything like the Oxford macroeconomics lecturers of my day, he is hinting at Michal Kalecki’s 1943 paper, Political Aspects of Full Employment: 

Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence…This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness... The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence…. 

'Discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.

A lack of discipline in the factories and political instability should be valued more by the left than wage gains. That is, lasting full employment should be *the* priority.

The goal should be to allow "government to increase employment by its own purchases." The doctrine of "sound finance" should be fought root and branch.

fiscal stimulus

More Monetarism and the Great Depression.

The “spending hypothesis” attributes the Great Depression to a sudden collapse of spending which, in turn, is attributed to a collapse of consumer confidence resulting from the 1929 stock-market crash and a collapse of investment spending occasioned by a collapse of business confidence. The cause of the collapse in consumer and business confidence is not really specified, but somehow it has to do with the unstable economic and financial situation that characterized the developed world in the wake of World War I. In addition there was, at least according to some accounts, a perverse fiscal response, cuts in government spending and increases in taxes to keep the budget in balance. The latter notion that fiscal policy was contractionary evokes a contemptuous response from Scott, more or less justified, because nominal government spending actually rose in 1930 and 1931 and spending in real terms continued to rise in 1932. But the key point is that government spending in those days was too low to have made much difference; the spending hypothesis rises or falls on the notion that the trigger for the Great Depression was an autonomous collapse in private spending.

Obummer (thanks Obama!)

 Obama's greatest failure: The rapidly falling deficit by Ryan Cooper

Ever since 2009, when the recession and the stimulus package pushed the annual budget deficit to a peak of nearly $1.5 trillion, it has been falling steadily. Last year it came in at$680 billion; this year it is projected to total $492 billion. 

This is an absolute disaster. It is President Obama's single greatest failure, representing the fact that he, and the rest of the American government, did not adequately respond to the Great Recession. It means that millions of Americans were kept out of work, that trillions in potential output was flushed down the toilet, and that the American economy was very seriously damaged, probably permanently, for no reason at all. 

Simply keeping government employment on the Bush-era course would have directly created 1.5 million more jobs, and hundreds of thousands more through the multiplier effect, in which jobs beget jobs through increased consumer spending. Another stimulus would have had us at full employment years ago (and possibly would have even paid for itself in fiscal terms). 

Instead, we've slashed spending and fired hundreds of thousands of government workers.
Of course, the situation is not entirely Obama's fault, given the pressure he was under from all sides to lower the deficit. His major failing was threefold: underestimating how dangerous undershooting the stimulus would be (despite being warned at the time), banking on a Grand Bargain to shore up his bipartisan credentials in the run-up to the 2012 election, and failing to understand how irresistible austerity would be to Washington insiders. Think of austerity as a big shiny bag of crystal meth, and D.C. elites as a bunch of jittery speed freaks who haven't had a fix in weeks. 

As Mike Grunwald convincingly demonstrated in his book, it was "centrist" senators like Arlen Specter who negotiated the stimulus down to $800 billion for no reason. However, that Obama didn't even try to win a bigger stimulus through a much bigger ask, or implement other mechanisms like a trigger that would keep spending flowing so long as unemployment was high, demonstrates his commitment to fixing the economy was weak at best. 

Because after the stimulus was passed, Obama pivoted immediately to austerity, trying repeatedly to strike a Grand Bargain with Republicans. It was only total GOP intransigence that repeatedly saved our threadbare social insurance programs from being slashed.
For my money, the crazed bipartisan panic over the budget deficit that swept the political class in 2010 is the singlemost contemptible political event of the Obama era. 

But as the unemployment rate has inched down with agonizing slowness, Obama and the Democratic Party have continued to implicitly rate deficit reduction as more important than jobs. The White House always trumpets proudly the latest deficit figures. Their jobs proposals are always deficit neutral. And they regard insinuations that ObamaCare might increase the deficit as the gravest slander. 

Despite the absolute intellectual collapse of austerity as an economic program, it continues to hold cultural hegemony over most of the American elite. As with meth, the damage is immediate and staggering, but they just can't quit. It's well past time Democrats stopped enshrining deficit reduction as the most important policy goal.

less bad fiscal policy

Today in Fiscal Policy: Is There a Little Deal in the Offing? by Jared Bernstein

emphasis on balancing the budget from Clinton through Bush and Obama

How Did Fiscal Policy Get Turned Upside Down? by Jared Bernstein

baseline scenario

The Arithmetic of Fantasy Fiscal Policy by Krugman

Sometimes — usually, though not always, in a belligerent tone — people ask me, well, how big do you think the stimulus should have been? How much debt should we have run up? Regardless of the tone, that is actually a question worth answering. With the benefit of hindsight, we do know roughly how depressed the economy has been; we have reasonably good estimates of the effects of government spending; so we can put together an estimate of what would have happened if we had, in fact, pursued a policy of government spending sufficient to keep output at potential. 

Start with the CBO estimates of potential GDP, which can be subtracted from actual GDP to estimate the output gap. Start the clock at the beginning of 2009, and the output gap — measured quarterly, but at an annual rate — looks like this: 

 

The output gap. 

If you add it up, the cumulative output gap since start-2009 comes to $2.29 trillion — that is, $2.29 trillion worth of goods and services we could and should have produced, but didn’t. 

How much government spending would have been required to close that gap? The evidence is now overwhelming that when you’re at the zero lower bound the multiplier is greater than one; see,e.g., Blanchard and Leigh. Suppose we take a multiplier of 1.3, which is fairly conservative. Then it would have taken $1.76 trillion in spending over the past 4 1/2 years to close the output gap. Yes, I know, it would have been politically impossible — but we’re just doing the economics here. 

So is that an extra $1.76 trillion in debt? No — the economy would have been stronger, leading both to higher revenue and to lower spending on means-tested programs. A fairly conservative estimate is that each dollar of extra GDP would have saved 1/3 of a dollar in the form of higher revenue and lower spending, which means 2.29/3 = $0.76 trillion. 

So the net extra debt we would have run up with my fantasy stimulus turns out to be a round $1 trillion. OMG: ONE TRILLION DOLLARS! 

But how bad is that? It’s about 6 percent of GDP. And remember, also, that GDP would have been higher — it would have been at potential, not well below. So at this point, instead of where we are — with federal debt at 72 percent of GDP — we would have had federal debt at 76 percent of GDP. Does anyone seriously claim that this difference would have caused a fiscal crisis? 

And in return for those 4 points on the debt ratio, millions of American families would have been spared the hardship and humiliation of mass unemployment, lost houses and savings, and more. We can further argue that by avoiding the corrosive effects of long-term unemployment, we would surely have avoided substantial damage to America’s longer-run economic prospects, which in turn means that future revenue would be higher — and my fantasy fiscal program would probably have improved, not worsened, our fundamental fiscal position. 

Again, I understand that none of this was going to happen. But you should understand that this reflects bad judgment by bad politicians and bad economists, not the logic of the case.

Bernanke, less than year left in office

Federal fiscal policy, taking into account both discretionary actions and so-called automatic stabilizers, was, on net, quite expansionary during the recession and early in the recovery. However, a substantial part of this impetus was offset by spending cuts and tax increases by state and local governments, most of which are subject to balanced-budget requirements, and by subsequent fiscal tightening at the federal level. Notably, over the past four years, state and local governments have cut civilian government employment by roughly 700,000 jobs, and total government employment has fallen by more than 800,000 jobs over the same period. For comparison, over the four years following the trough of the 2001 recession, total government employment rose by more than 500,000 jobs.

Bernanke's statement The Economic Outlook given before the Joint Economic Committee

Can the Fed offset contractionary fiscal policy? by Ryan Avent

Monetarism Falls Short (Somewhat Wonkish) by Krugman

Washington Post Editorial Condemns Austerity in Europe! by Dean Baker

I double-checked to see that this is in fact April 28 and not April 1. This does seem to be real, a Washington Post lead editorial on Europe that calls for Germany to ease up on austerity and to allow the peripheral euro zone countries to grow again. 

I could nit-pick and point out that the editorial doesn't get everything right (nothing wrong with Germany running trade surpluses, if the surpluses were with fast-growing countries in the developing world), but we should just sit back and enjoy this one for a moment. Perhaps evidence and logic can actually have an impact on economic policy debates, even at the Washington Post.

The Unnatural Rate Hypothesis by Krugman

But what I found striking was Hiatt’s offhand explanation of why his never-changing, never-right prediction keeps not happening; it’s because

the Federal Reserve is gobbling up U.S. debt to keep interest rates low

Clearly, this has become part of the CW. And once again we see how a highly dubious economic idea can become part of what Everyone knows and Nobody disagrees with, even if in this case Nobody includes a fellow by the name of Ben Bernanke, who gave a speech on this very topic just a few weeks ago. 

In fact, the notion that rates are low just because the Fed is buying up debt is wrong on at least three levels. 

First, as Bernanke stressed, long-term interest rates have moved very similarly across a wide range of countries, including countries where the central bank is buying up lots of bonds and countries where it isn’t. Here, for example, is a comparison of the US and France:

Monetary Policy and the Global Economy by Ben Bernanke

The London Whale and the real link between the US economy and Cyprus by Dean Baker

LAWRENCE SUMMERS, AXEL WEBER, MERVYN KING, BEN BERNANKE, OLIVIER BLANCHARD AT THE LSE: "I DO NOT BELIEVE THE LONG RUN CAN BE CEDED TO THE AVATARS OF AUSTERITY" WEBLOGGING by DeLong

Imagine an alternate timeline where Clinton had a beard.

My comment at Economist's View.
Summary/Genealogy

December 22, 2012
Maya and the Vigilantes by Krugman

[O]ne way to tell what’s driving interest rates over any given period is to look at what was happening to other asset prices…. If rates have risen because investors fear default and fiscal chaos, stock prices should plunge. Did this happen during the supposed vigilante attack of the 1990s?

Well, no.

What really happened in 1994? The economy was starting to recover (it was actually adding 300,000 jobs a month for a while),and investors expected the Fed to tighten a lot. Clearly, they overreacted. But the events don’t bear the “signature” of an attack driven by debt fears.

BACK WHEN I FEARED THE BOND-MARKET VIGILANTES: MAUNDERING OLD-TIMER REMINISCENCE WEBLOGGING by DeLong

The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the [Alan Greenspan] that [he] need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 

That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking [Alan Greenspan] thought [he] was about to get a horizon-sighting of bond market vigilantes. 

I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any [Alan Greenspan] decision that i[he] needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right. [changed "Federal Reserve" to "Alan Greenspan"].

December 24, 2012
Bond Vigilantes and the Power of Three by Krugman

Matthew Yglesias picks up on a point I’ve tried to make at some length recently: the popular story about how an attack by bond vigilantes can cause an interest rate spike and turn America into Greece, Greece I tell you, is incoherent. (Here’s a 2010 example from Alan Greenspan — the piece in which he declares it “regrettable” that the vigilantes haven’t yet attacked, but grudgingly concedes that low rates might persist “well into next year”, that is, into 2011. So what has he learned from the failure of his prophecy? Nothing, of course).

February 15, 2013
The best reason to worry about the deficit by Ezra Klein

The theory was correct. By the end of Clinton’s term, the interest rate on 10-year Treasurys had fallen to 5.26 percent — lower than it had been in 30 years. And the economy was, indeed, booming. “The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further,” Treasury Secretary Robert Rubin said in 1998.

February 16, 2013
Can We Cut the Crap on Robert Rubin and Deficit Reduction by Dean Baker

So we are supposed to believe that the difference between the 2.5 percent real interest rate in the high deficit pre-Clinton years and the 2.2 percent real interest rate at the end of the Clinton years is the difference between the road to hell and the path to prosperity? This is the sort of nonsense that you tell to children. It might past muster with DC pundits, but serious people need not waste their time. 

The story of the boom of the Clinton years was an unsustainable stock bubble. This led to a surge in junk investment like Pets.com. It led to an even larger surge in consumption. People spent based on their stock wealth, pushing the saving rate to a then record low of 2.0 percent (compared to an average of 8.0 percent in the pre-bubble decades). 

Robert Rubin acolytes may not like it, but the deficit reduction was a minor actor in the growth of the 1990s. The bubble was the real story. That may not be a smart thing to say if you're looking for a job in the Obama administration, but it happens to be the truth. You have to really torture the data to get a different conclusion.

February 19, 2013
CROWDING-IN AND RAPID GROWTH IN THE 1990S: DEAN BAKER GETS ONE WRONG, I THINK by DeLong

The actual inflation rate in 1991 was 5%/year, but the expected inflation rate over the next decade was more like 3%/year. We are not talking about an 0.3 percentage-point decline in real interest rates, but rather about a 2.3 percentage-point decline in real interest rates. Moreover, back in 1992 when we unwound the yield curve and projected interest rates in the future we saw nominal interest rates has highly likely to rise unless the deficit was substantially reduced. The 2000 we were looking forward at had forecast nominal interest rates of not 7.86%/year but 10%/year or so--a real interest rate of 7%/year. 

The counterfactual for 2010 is thus different not by 0.3 percentage-points but by 4.8 percentage-points. That is a much bigger deal. 

How big a deal? Enough to boost the growth rate of potential output by between 0.5 and 1.0 percentage points per year, in my estimation…

 Andy Harless comments:

Empirically I have to call this for Dean. Take the real 10-year yield at the end of the last quarter before the election, using the Philadelphia Fed Survey of Professional Forecasters 10-year expected inflation rate. In 1992, the real yield was 2.6% (6.4-3.8). In 2000, it was 3.3% (5.8-2.5). Obviously, you could choose the dates differently and get a different answer, but it's hard to imagine that there's strong evidence of declining real yields when my first cut shows them increasing. And I don't think you can use projections if those projections are based on models in which crowding out has large effects on interest rates. 

However, (1) everyone should realize that interest rates are endogenous, and I'm not sure the long run elasticity of investment demand with respect to the interest rate is very large, (2) it's obvious if you remember the late 1990's that there is dynamic, multiple equilibrium kind of stuff going on here, and I think interest rate comparisons are missing the important part of the story.

February 21, 2013
DeLong responds:

(i) At least as we saw it, much of the effect of Clinton fiscal policy was baked into the interest-rate cake by the fall of 1992, (ii) we did have a large unexpected increase in desired high-tech investment spending in the 1990s, and (iii) we at least had no doubt that without deficit reduction on a large scale Greenspan was going to push interest rates up far and fast...

My posts:

First post

Second post

Third post

Fourth post

Fifth post

Sixth post

Seventh post

I have to call this for Krugman/Baker/Harless against DeLong/Klein. I guess the counterfactual would be that if Clinton hadn't done deficit reduction on a large scale, Greenspan would have pushed interst rates up far and fast. No doubt DeLong agrees with Krugman and views Greenspan's current views on bond vigilantes as wrong. So Greenspan would have been wrong to send the economy into recession in the 90s. What would have followed?

Janet Yellen Speaks, Makes Critical Points, and Presents a Graph I Shoulda Made by Jared Bernstein

JANET YELLEN POINTS OUT THAT THE FEDERAL RESERVE HAS HAD NO HELP IN STEMMING THE DEPRESSION by DeLong

opportunistic disinflation

There Is An Inflation Problem: It's Falling Below Target by Thoma

Our Incredible Shrinking Government by Krugman

Why Have Recoveries Been So Miserable the Past 20 Years? by Matt O'Brien

Are jobless recoveries the Fed's fault? by Noah Smith

Guest Contribution: "The Myth of 'Jobless Recoveries'" (a.k.a. Okun’s Law is Alive and Well, from Econobrowser)

Floor System Paradigm Shift Genealogy*

I have an updated list here.

Jan. 2

Debt in a Time of Zero by Krugman

Jan. 7

On The Folly of Inflation Targeting In A World Of Interest Bearing Money by Ashwin Parameswaran

The end of RoRo, or is it? by Izabella Kaminska

Jan. 8

The liquidity trap heralds fundamental change by Frances Coppola

Jan. 9

Platinomics by Greg Ip

Jan. 12

On The Disruptiveness of the Platinum Coin by Tim Duy

Jan. 13

There’s no such thing as base money anymore by Steve Randy Waldman

A Trap of My Own Making by Tim Duy

Jan. 14

All Our Base Are Belong To Us (Wonkish) by Krugman

Floor Systems by Stephen Williamson

Jan. 15

Do we ever rise from the floor? by Steve Randy Waldman

All Your Base Are Belong To Us, Continued (Still Wonkish) by Krugman

Yet more on the floor with Paul Krugman by Steve Randy Waldman

Money and Debt, Continued by Tim Duy

Do sofas refute monetarism? by Nick Rowe

Currency matters, even with IOR by Scott Sumner

The Waldman-Krugman-Sumner Debate: It's the IOER Path by David Beckworth

Base money basics by Merijn Knibbe

Unifying The Fiscal And Monetary Functions: A Policy Proposal by Ashwin Parameswaran

All Your Bases and Dead Presidents Are Belong to the Government? by Cullen Roche

More on Floor Systems by Stephen Williamson

Jan. 16

Once you turn base money into short-term debt, can you go back? by Izabella Kaminska

Understanding the Permanent Floor—An Important Inconsistency in Neoclassical Monetary Economics by Scott Fullwiler


Jan. 17

All Your Base Are Belong To Us: What Is the Question? by Krugman

All Your Dorks Are Belong to This by Cullen Roche

Krugman, Kaminska, and Waldman by Scott Sumner

Monetary Policy: From Managing the Monetary Base to Setting an Interest Rate Floor by Peter Dorman

Let’s Talk About Interest on Reserves by Josh Hendrickson

Jan. 18

A confederacy of dorks by Steve Randy Waldman

THE PERMANENT FLOOR 2004 by Scott Fullwiler

Two extreme fiscal/monetary worlds by Nick Rowe

AND NICK ROWE IS THE LATEST ECONOMIST TO JOIN THE INARTICULATE DORKS... by Brad DeLong

The Coin is Dead! Long Live the Coin! by Michael Sankowski

Furthering Understanding of the Permanent Floor by Joshua Wojnilower

Shinzo and the Helicopters (Somewhat Wonkish) by Krugman

Jan. 19

Waldman Thinks Bernanke Will Go for (Flawed) Exit #1 by Robert Murphy

Murphy of the bad inflation bet, I think.

Jan. 28

Safe Assets and Financial Crises by Carola Binder

19JAN

---------------------
*provisional. Times are not sorted.

ROUGH TRANSCRIPT: STIMULUS OR STYMIED?: THE MACROECONOMICS OF RECESSIONS

Panel Moderator: J. BRADFORD DELONG (University of California-Berkeley)

Panelists:
CARLO COTTARELLI (International Monetary Fund)
PAUL KRUGMAN (Princeton University)
VALERIE A. RAMEY (University of California-San Diego)
HARALD UHLIG (University of Chicago)

The Frustrating Fiscal Stimulus Debate by Yglesias

Is he right? Will rightwingers admit they don't care about the unemployed, inequality or the output gap? You would think that rightwingers would like to close the output gap and then funnel the gains to the 1 percent and/or cut taxes.

Final Thoughts on the Baker-Rowe-DeLong-Krugman Deficit Debate by Dean Baker

Fiscal Cliff May Be Felt Gradually, Analysts Say by Annie Lowrey

Ryan McCarthy:

Twitter / mccarthyryanj:

It just occurred to me that I've been reading/editing "Bernanke calls on Congress to spend" stories for more than 3 years…

(via DeLong)
 

Federal Reserve Confirmation by DeLong

To my knowledge:

• Two people whom Obama intended to nominate or nominated to the Federal Reserve have been refused confirmation: Peter Diamond and Rich Clarida in 2010-2011.
• Two people whom George W. Bush intended to nominate or nominated to the Federal Reserve have been refused confirmation: Larry Klane and Randy Kroszner in 2008.
• Two people whom Bill Clinton intended to nominate or nominated to the Federal Reserve have been refused confirmation: Alicia Munnell and Felix Rohatyn in 2005-6.
• Before then… to my knowledge, at least, you have to go back to 1914 and President Woodrow Wilson and the first batch of nominations to get any other examples: Thomas Jones, Richard Olney, and Harry Wheeler.