Ralph Musgrave alerts us to the Simon Wren-Lewis moving in the direction of agreeing with MMT on using fiscal policy to address economic contraction at the zero bound where monetary policy is unable to turn the economy around. While MMT disagrees about the relevance of fiscal versus monetary policy in general rather than only in special cases like the zero bound, the ball is moving down the field.
Be sure to read the comments, too. Good stuff there, too.
The basic principle is from Keynes, as MMT points out and Ralph reminds there: "Take care of unemployment and the budget will take care of itself."
Simon Wren-Lewis is a budget balancer over the cycle and believes that while fiscal policy should be used in troughs, the deficit be addressed later through appropriate policy to reduce it.
According to MMT, if fiscal policy is used in the first place, then the troughs are shallower and the subsequent recovery reduces the deficit automatically by increasing tax receipts and reducing the automatic stabilization that the previous contraction had engaged.
Mainly Macro
Austerity: Nick Rowe's not so silly question
Simon Wren-Lewis | Professor of Economics, Oxford University
Mainly Macro
Austerity: Nick Rowe's not so silly question
Simon Wren-Lewis | Professor of Economics, Oxford University
7 comments:
Ralph Musgrave alerts us to the Simon Wren-Lewis moving in the direction of agreeing with MMT on using fiscal policy to address economic contraction at the zero bound where monetary policy is unable to turn the economy around.
Huh? That's straight out of Krugman. It has nothing to do with MMT.
Big step for monetarists, which includes all neoclassically based ("natural rate") economists, regardless of whether they call themselves Keynesians.
The standard neoclassical line is that fiscal stimulus is at best a wash due to Ricardian equivalence, or else a drag due to crowding out investment.
The next step is taking away the zero bound qualifier and the need to balance the budget over the cycle.
But any progress away from monetarism in the direction of fiscalism is a victory for MMT.
The difference is actually one of timing.
The New Keynesians believe you have to address the issue *now* because it will get in the way of their famed 'natural' processes. In other words they are mind reading about the future. (Arguably it is a depressive pathology known as 'catastrophising').
MMT believes you deal with any issues as they arise in current time via functional finance because - uncertainty.
Nothing shows the lack of Keynes in New Keynesianism more than this belief that they can predict the future years hence.
Meteorologists are always at pains to say that they can't do that, and their chaotic system is *much* more predictable than something involving humans.
In systems we call this the YAGNI principle - You ain't gonna need it. Only do what you need to do when you need to do it, and nothing else.
It would be easier for them if there was no debt, just bank reserves. They can't let the monetarist paradigma go. If there were bank reserves ten times GDP and negative output gap 10%, he would not ask those silly questions.
They do struggle with the idea that interest payments are entirely voluntary government benefit payments - just like state pensions or unemployment benefit.
Here's Wren-Lewis in 2012. He's just returning to well-trodden ground:
http://mainlymacro.blogspot.com/2012/09/zero-lower-bound-denial.html
I'm in two minds about the role played by the more liberal members of New Keynesianism.
In terms of fiscal policy prescription in the here and now, they are, broadly speaking, in a fair bit of agreement with MMTers, even though they arrive at their position in what MMTers regard as a more circuitous way. And because they frame their argument in orthodox terms (imposing ad hoc assumptions to the standard model to get more sensible policy prescriptions), they can attain prominent positions in the public debate, especially during periods of economic crisis. If they didn't adopt this strategy, they would probably be reduced quick smart to the position of heterodox economists, on the fringes, shouting from the sidelines. I do think shouting from the sidelines is important and does seem to play some role in shifting the mainstream debate in times of crisis. It adds pressure for the mainstream to respond to a degree and perhaps creates a bigger space for the more liberal voices in the mainstream to rise to prominence.
But the longer term effect of this process is likely to be a preservation of the orthodox framework within academia, leaving the way open for temporarily disgraced Chicago types to re-emerge from their places of hiding and reassert their dominance in the public debate. When it is safe again for economists to snicker in the audience during (New) Keynesian presentations and more liberal New Keynesians find it necessary to go back to wrapping non-crazy assumptions inside crazy orthodox hypotheses, we will have come full circle.
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