TL;DR at bottom

Figured I'd make one final post--more of a compendium, really--on the issue of monetary policy, and fiscal stimulus vs. austerity. The poll is just to see where most people on the forum lie (note: if you choose the last one, you're bad and you should feel bad).

Full disclosure: I don't really "identify" with any school of thought to a substantial degree. I'm part New Keynesian, part monetarist, part neoclassical.

Deficit Spending and Keynesianism:

It's important to note that I'm talking specifically when we're going through the pains of the business cycle, and in a recession. It isn't good policy to run a deficit during times of prosperity; a 2004 study by Orszag and Gale found that a deficit of 3.5pc leads to rising interest rates and a shrinkage in the economy by 1 or 2pc. The reason for this is that it crowds out private investment by competing in the pool of available savings (speaking strictly domestically) and driving up interest rates.

An earlier study in 1999 by Blanchard and Perotti supports this; they demonstrate a very small long-run multiplier for increased government expenditure, as well as a similar crowding out effect. It's important to note that, at least in terms of the business cycle, Keynesian economics has been thoroughly discredited. Keynes was simply mostly wrong; investment isn't driven by animal spirits, and a combination of fiscal policy + regulation probably isn't the best way to deal with the business cycle (there are other errors, but they're somewhat more technical and not really worth mentioning, although I will elaborate if anybody wishes).

In fairness to Keynes, however, he got one very important thing absolutely correct. Parts of the business cycle are not optimal, and there is space for the government to act in its mitigation. This cannot be understated as a massive improvement upon the neoclassical economics which dominated at the time.

Fiscal Stimulus:

It's important to note that the existence of automatic stabilisers--which are essentially automatic deficits as tax receipts fall and social welfare spending rises during a bust--are useful for at least the partial mitigation of the business cycle. It's for this reason that I feel the Conservatives' pursuance of austerity in the midst of the Recession was probably sub-optimal (shocker), although the existence of a prior structural deficit muddies the issue.

However, where the issue get's really interesting is when short-term interest rates hit zero. The current view of monetary policy--not unjustifiably--is Wicksellian, in that it views monetary policy through a lens of manipulating interest rates. This is essentially why everybody freaked out when central banks started pursuing quantitative easing. Monetary policy works through open market operations, wherein the central bank buys or sells assets (usually short-term treasury bills in the US) in order to influence the supply of money and push the short-term interest rate under their influence up or down.

The conventional, New Keynesian perspective is that we enter a liquidity trap when those short-term interest rates hit zero. And thus monetary policy can't do any more. Thus, we must resort to the oh-so controversial fiscal stimulus to get the economy moving again. Make no mistake, fiscal stimulus works, it's just a question of whether it works better than monetary policy in a liquidity trap. During a liquidity trap, a 2011 paper by Christiano, Eichenbaum and Rebelo found a fiscal multiplier of 1.5 (meaning that fiscal stimulus is essentially worthwhile, under such circumstances).

Fiscal Austerity:

On the flip-side, we have fiscal austerity. There's no doubt that austerity is good form during a growing economy, but evidence suggests that in a liquidity trap the multiplier works in reverse, making austerity painful as the central bank cannot offset it. For some countries, like Greece, they don't really have a choice in austerity; they don't have the historical grounding as a reliable country for debt repayments, and they don't have the freedom that comes with having debt denominated in its own currency like the US. In an incredibly messy financial system, creditors may worry that larger deficits mean increased likelihood of default and so they raise interest rates; but the fact of the matter is that the UK simply wasn't in that position and probably never will be. The claims of the Conservatives on the need to avoid a Greek-like debt crisis were, essentially, false.

Monetary Policy in a liquidity trap:

Now, this is where I become more monetarist than the mainstream. I don't think the New Keynesian argument that liquidity traps kills off the central bank's effectiveness are all that good, and I think there is superior evidence that monetary policy can be effective during a liquidity trap. Just to take Paul Krugman during the 1990s, he argued vehemently (along with Ben Bernanke (the real one)) for more aggressive monetary stimulus in Japan even though they were in a liquidity trap.

It seems that most of the problems associated with monetary policy in liquidity traps are conceptual issues. Like I said, people freak out when the Fed/BoE performs quantitative easing. . . Despite the fact there is no real distinction between short-term treasury bills and long-term treasury bills, or indeed any other kind of asset. The only real liquidity trap would be one in which the central bank has driven the interest rates of every single asset on the planet down to zero (but more on this shortly).

To back this up with some empirical evidence: Lars Svensson (2003) argues for a mixture of clear communication and forward guidance, sticking to the monetary guns and a clear exit strategy (the latter being a significant failing of the Fed's rounds of QE). Eggertson and Woodford (2003) note that liquidity traps can indeed happen, but note alongside Svensson that forward guidance can help to mitigate this. It's also important to note that the degree of leverage (debt) held in an economy can have significant influence on whether or not short-term rates do hit zero.

My recommendations for policy:

I think one of the most important things is to sort out financial regulation. Nobody really knows just how much financial crises affect the business cycle, and I personally don't believe it's very much besides a depression of real GDP growth which can be offset. But, all the same, the uncertainty makes it not worth the risk. We should cut back on excessive, intricate regulation and follow Canada's example: institute broad capital and liquidity requirements to make sure banks can weather crises, and maybe also help counter-party surveillance by mandating public plans of "winding down" should a bank become insolvent (which will also help to combat too-big-to-fail).

In terms of monetary policy, I think the ideal is a nGDP level target wherein the central bank essentially commits to stabilise aggregate demand instead of inflation. However, I'm sceptical of whether or not this is reasonably possible (although evidence does suggest that Alan Greenspan successfully pulled it off from 1992 onwards). If an nGDP level target isn't possible, then maybe Paul Krugman's proposal of a 4pc rate of inflation is worth looking at. Make no mistake, the goal is to make fiscal stimulus unneeded.

If, however, we still hit a liquidity trap then I don't think monetary policy can hold out forever. I mentioned earlier that a "true" liquidity trap would require the central bank to push the interest rates of every single asset on the planet down to zero. While this is true, pursuing such a policy would result in significant capital risk that I'm not sure I can abide. I'm optimistic about the potential of monetary policy to manage the business cycle, but if we have a situation where it begins to fall down I don't think it should be pursued forever. And so we end up with the Larry Summers solution; the central bank pursues quantitative easing to a certain limit of GDP and then automatic fiscal stimulus takes over, mainly through tax cuts. I'm not having none of this politicised fiscal stimulus though.

In terms of austerity: I don't believe austerity should be pursued in times of recession. Automatic stabilisers should remain in place to make sure the contraction isn't excessive, and austerity should be pursued in times of recovery. With a pre-existing deficit, however, it's a lot harder to tell.

TL;DR for the lazy:
- Deficit spending crowds out private investment and hurts growth over the long-term.
- Keynes was wrong about the business cycle.
- Keynes was right that the government has a role.
- Automatic deficits occur when an economy goes into recession, and these are useful.
- Tories kind of fucked up by pursuing austerity when they did, although Labour's over-spending complicates it.
- When short-term interest rates reach zero, conventional wisdom says monetary policy can't do much more.
- Fiscal stimulus works, the question is whether it works better than monetary stimulus.
- Austerity may be necessary to avoid a credit crisis, although the UK wasn't in this position.
- I personally think monetary policy is effective even when rates approach zero.
- We need to make fiscal stimulus unnecessary.
- Monetary policy can probably control the business cycle (it definitely does if we never hit zero rates), but if it can't then some kind of fiscal stimulus could be warranted.

Ultimately, off the poll choices, I'm closest to "monetary stimulus, with delayed austerity".

A fiat fundie pro-Pigou-tax nazi eCONomist and Hitler named Paul Krugman was teaching a class on statism and Keynesianism (whoops, tautology!). "Before the class begins, you must get on your knees and accept that Fed Reserve notes are the One True Currency."

At this moment, a praxeologist, libertarian, math-rejecting Austrian who had written over 420 books in plain english and understood that inflation is an increase in the money supply and fully supported the legalization of anarcho-capitalism stood up and held up a gold bar.

"This is inherently valuable.”

The arrogant eCONometrickster smirked quite facistly and smugly replied "Specifically, in EconomicsTM , nothing is inherently valuable you stupid idiot.”

"Wrong. Value is entirely subjective, and humans will always love shiny things like gold because they are horses."

Krugthing was visibly shaken, and dropped his chalk and copy of Mein General Theory. He stormed out of the room crying those nazi Keynesian crocodile tears.

The students applauded and watched YouTube videos about how inflation is theft that day and accepted Bitcoin and Gold as the one true currency. A praxbro named Hans Hoppe flew into the room and perched atop a copy of Human Action and shed a tear on a copy of the U.S. Constitution when he learned gay people could now marry. The Fundamental Axiom was praxxed out several times, and Murray Rothbard himself showed up and abolished all government and central banks across the universe.

Krugthing lost all his tenure and was never stimulated again. He died from cutting himself on his edge while breaking windows and became a professor at CUNY.

That praxeologist's name? Ludwig von Mises.

Fucking hell.

Greece's leaked counter-proposal to creditors includes terms about re-imposing large-scale corporation tax and pension contributions. Obviously, the creditors aren't happy because of the chance this could plunge Greece even deeper into its depression and demanded that such terms be removed. Greece has rejected the offer, despite the pleading of Angela Merkel, which would've repurposed funds from bank recapitalisation to general government expenses.

Unless Greece and the creditors can come to an arrangement, Greece will likely suffer a run on the banks followed by capital controls and then default. Meanwhile, Eurozone officials have been drawing up contingency plans to ringfence Greece and protect the rest of the EZ should an arrangement not be made.

The Greek government is showing no signs of letting up on its corporation tax/pension contributions plans. Economic breakdown and social unrest are expected.

1pm Eastern Time. And questions about Monsanto's business practices are allowed.

Well it's been a while, and I'm bored, so I figured I'd make one of these. Questions primarily about schools of thought/the business cycle/policy are welcome, but I'll try and answer what I can.

Socialist countries make up 13 out of the top 15 countries in the world when measured with the Human Development Index.

This is just categorically false; not a single country in the top fifteen of the HDI are socialist. All of them are pretty strongly capitalist nations. . . So I have no idea what you're talking about it.

the fact it accounts for social justice means it is morally superior to capitalism.

This is a similarly ridiculous claim; not only is social justice so vague a concept as to be essentially inapplicable in any practical sense, but the intention behind whatever system we're talking about (presuming "it" is socialism) is largely irrelevant. Woodrow Wilson segregated the government because he thought it would be ultimately better for blacks, but this is obviously consequentially inferior to not segregating the government; ergo caring about blacks and not conducting segregation is morally superior.

And I hope you recognise that capitalists care about human well-being just as much as socialists do. . .

To adhere to the capitalist system would violate the ethical responsibility of each individual.

Umm, how?

Socialism is nothing but the next evolution in the way humanity conducts politics.

So are you just hoping to get away with the flagrant conflation of economic and political systems, here?

The whole system instead relies on the scientific approach to identify a problem, analyze an issue, and hypothesize a solution.

And it has been demonstrated time and time again that trying to engineer the economy in such a technocratic way simply doesn't work. If you want to assume a sort of scientific centrally planned economy (I don't know if you do, because I'm still confused about the "I like the free market, but I'm also a socialist") then it'd be pretty easy for me to demonstrate why a benevolent social planner would still opt for a capitalist market.

A terrible version of social darwinism run amuck

Haha, no. What a ridiculous caricature. Capitalism doesn't preclude the existence of either charity or a social safety net.

It is rather better for society to achieve greater prosperity and equality through application of a systematic, empirical, and objective governmental infrastructure instead of the anarchic chaos of capitalism.

Oh so you do want a planned economy?

Yeah, they don't work.

It has the ability to create a system of social justice that has yet to be implemented in human history. Capitalism itself was an evolution from the disorganized systems of government present throughout much of human history. It was the evolution of political economy and a new concept of the economic system formed.

Again, massive conflation of political and economic structures here. And, I don't know about you, but capitalism's accomplishment of providing 99pc of all the wealth in history to 1pc of human population in history is a pretty big victory for "social justice", whatever you actually mean by the phrase.

Socialism is not the attempt to replace capitalism. Rather it’s the attempt to combine the economic knowledge that capitalism brought the world with utilitarian philosophy.

I guess that's why utilitarians like J.S. Mill were classical liberals. . . Although you've so far utterly failed to define social justice, what sort of socialism you think you're propagating or why capitalism is incompatible with utilitarianism.

Social justice is justice in the distribution of wealth, opportunity, and societal privilege.

Well thank God we finally have a definition.

Far from the Robin Hood approach, it simply is the involvement of human social constructions to ensure that every member in a society fulfills their responsibilities and also receives their dues.

And how are you calculating/defining these variables?

Wealth disparity in the world expounds how capitalism has created a glaring issue in need of address. As of 2014 those who made more than $1 million a year compiled only .7% of the world’s total population yet had 44% of the world’s total wealth. Those who made between $100 thousand and $1 million were 7.9% of the world’s population and owned 41.3% of the world’s wealth. Together, this means that 85.3% of the world’s wealth resides in the hands of only 8.6% of its population. Or to show the more important side, over 90% of the world’s total population has only 14.7% of the total wealth.

So? You're yet to demonstrate why this is a bad thing, you're yet to provide any sources and you're yet to account for the fact that most countries don't actually apply capitalism as most economists would want them to.

France is ranked as the best country in the world for healthcare

France isn't socialist, and the healthcare system in France is far from socialised. France utilises (like Singapore, the other best country in the world depending on how you measure their respective systems) quite a marketised system; like most other good healthcare systems (Germany, the Netherlands, et cetera).

And all of this is without mentioning the current economic woes in France due to a number of policies surrounding monetary economics and taxation.

followed by Italy and a slew of countries with universal healthcare.

Italy isn't socialist, nor is universal healthcare a socialist concept.

Whereas the US appears only at 37 on the list. Why?

Because the US has a ridiculous healthcare system.

that means they spend less per person each year and still have a dramatically better system.

I'm not surprised.

The success of the French in healthcare is simply the result of a socialized system.

That's just not true.

Everyone is covered under the health care program. Funds are financed 60% by payroll taxes and 40% by a proportional income tax. Although patients do have a co-pay, however these have been reduced and people in many cases have been exempted from it. To combat this co-pay, over 90% of the population has a secondary, voluntary, health care insurance. This means that out-of-pocket payments don’t exceed 9% of health expenditures. Premiums for these voluntary services are not based on medical history either, but on income.

What does any of this have to do with socialised healthcare? Especially when you consider that most French physicians are private practitioners.

The objection of government involvement usually lacks any sort of objective and systematically formulated argument. They lobby for the deregulation of different industries with a blind faith comparable only to that of religion.

The amount of ignorance in these two sentences alone is staggering; you show an incredibly shocking lack of awareness about economics and the evidence for/against certain propositions.

Problem is that humans have proven over the millennia that we as a species are about as rational as our distant cousins.

Great, you also don't understand what economists mean when they say rational. When economists say "rational", they mean utility-maximising. And of course you have the entire discipline of behavioural economics, which tries to account for cognitive biases which could affect how humans reason in their approach to utility-maximisation.

Neither the government or the businessman are more responsible, moral, or logical than the other.

And yet you think it's possible to have a scientific, objective government.

the faster the decrease in mortality occurs.

Jesus.

Any evidence, or logic behind that position? Or are you merely defining morality in a useless way as to beg the conclusion?

The government is separate from this. There is hope to trust the government.

You just said that neither is better than the other.

If one can successfully separate greed and the search for profit, government corruption and irresponsibility will decrease.

It's kind of funny, then, how the most developed capitalist economies are usually the ones with the least political corruption.

Socialism only fails when politics and greed combine to produce corruption in the system.

You're still yet to define socialism, but if we're sticking with some scientifically planned economy then no it doesn't work because it's wildly inefficient.

The improvement comes in the attempt to introduce utility as a means of measuring both wealth, possession, but importantly emotional happiness and satisfaction.

Except no capitalist/economist has ever seriously denounced the importance of emotional well-being. Hell, the definition of "rationality" in economics is built so as to allow for such considerations.

Is it not intriguing that depression plagues the wealthy and satisfaction plagues the poor? This is why socialism is a higher moral system.

So it's morally justified if everybody is so stupid as a result of their shit standard of living that they don't know any better, and are therefore satisfied with said shit standard of living?

And that's ignoring the point that you've again failed to provide any evidence, nor seem to have an understanding of depression or where it comes from. Concentrated depression is at least partially the result of civil society itself; human beings were not designed to be civilised.

Many may argue that morality is controversial to use in measuring the utility offered by a governmental system.

Well it patently is; you use utility to measure morality, not morality to measure utility. . .

Things that can be determinably moral through objective observation based on maximizing the enrichment of life.

This is like the single true proposition you've made in the entire Wall of China that I've read so far.

as it imposes an arbitrary will upon another being to detract from his enjoyment.

I find it amusing you use this reasoning to argue that murder is immoral, but you're completely fine with the government imposing its will on the people just because you (in all your probable economic ignorance) think it's the best way of doing something.

This appeal of course is greed.

And freedom, prosperity, logic, empirical evidence. . . Et cetera.

Economically, centralized wealth slows an economy and the opportunity to maximize a states development falters.

Okay, but you're yet to demonstrate how this is explicitly a capitalist phenomena. Rising income inequality is pretty-well accounted for, being the result of rising rent, strict IP laws, the breakdown of the familial structure, harsh government sentences for minor crimes and a whole host of other complex factors.

It is an economic fact that the fluidity of money is necessary to growth.

What are you talking about here? The velocity of money? If so, the concentration of wealth/income isn't that big an issue besides the negative impact it has on investment in human capital at the lower-end of the socio-economic spectrum. What exactly do you think rich people do with their money? Stash it under a mattress?

The millennial generation is pumping needed resources into the struggling economy through their consumer spending.

Just, what? "Resources" don't remain stagnant if they aren't being spent on something.

Action must be taken to reduce income disparity through social goals and programs; whether it is the raising of a minimum wage, universal health care, or universal higher education.

Or, instead, abolishing the minimum wage and expanding wage subsidies, deregulating zoning requirements and planning laws, liberalising the IP system and fixing the broken primary-secondary school system. You've given no evidence that your proposals are the right ones, and they most probably are not.

If a proletariat were to complain about the terrible service of his ISP (Internet Service Provider), he would be lucky to receive a letter in the mail or an email.

Not really. . . There are numerous options available to people who actually know what the hell they're doing.

When in line at an airport security stop, why does a VIP or priority line exist?

Probably because they have a first-class ticket and want to get to the plane sooner? Splitting the load is just efficient, stop shoehorning your sociological biases in.

Examples like this

Holy shit, you aren't seriously trying to demonstrate the "immorality" of capitalism by comparing first- to economy-class on airlines are you?

It places arbitrary value on the consumption of goods and creates a type of crass demand for the consumption of products.

Not really; it places value on economic growth. Seriously, just go and talk to an economist. Quite often you'll hear things about how individuals should be saving more; how the US tax system disincentivises savings, et cetera et cetera.

The more elite one becomes, the less work he has to engage in.

I love how you're trying to measure "work" by the physical demands of certain kinds of work.

I look forward to your response.












From Youthdebates. Quoted bits are him, otherwise me.


I just, I can't even.

Absolutely Haram.

Probably Dark Souls for me.

Although I did really enjoy Oblivion, too.

The term "neoclassical" is heavily politicised and usually thrown around synonymously with neoliberal, but this really does a disservice to the school. Neoclassical micro served as the underpinning of Keynesian macro, but what I'm interested in today in neoclassical macro. It's something of a specific interest of mine, and I consider my view of the economy to be (very) broadly neoclassical.

Now, neoclassical usually refers to a "school" of thought in microeconomics; when it comes to macro people tend to use the phrase New Classical, which tried to depose the neoclassical-Keynesian synthesis as the dominant macro position. However, I'm going to be using neoclassical to discuss the "non-Keynesian" macro school in general, since it'll be easier for my to differentiate the various strands.

New Classical macro made a lot of assumptions for its models. It assumed that money was super-neutral, and thus could have no effect on the business cycle and not cause recessions; it made a number of other assumptions like homo economicus, the profit-maximising firm, rational expectations and incomplete information. However, it turned out that models based on such assumptions had very low explanatory power.

The New Classical school was originally rather novel, as it provided some of the best empirical analysis and combined a model of market-clearing equilibrium with rational expectations. However, the New Keynesians rolled up, using microfoundations to demonstrate that the market doesn't clear as the New Classicals suggested, and incorporated rational expectations into their models.

Neoclassical macro then developed Real Business Cycle Theory, which like New Classical macro claims that recessions are actually efficient market responses given the structure of the market. This essentially means that things like taxation and regulation are the drivers of the business cycle, which monetary policy having little-to-no effect. The real innovation that RBCT made over NCM was to change certain the assumption of incomplete information to full information, and add a function for productivity shocks.

Now, of course, the idea that monetary policy is neutral always and everywhere is a bit of a non-starter. If you ask what would happen if the money supply suddenly dropped by 90pc tomorrow, I don't think even the most ardent RBC theorist would claim that the market could clear in such a situation, simply because the physical denominations of money would make the payment of debt/wages impossible.

Which is where we reach the most important part. The New Neoclassical Synthesis. Now, to me, this offers the greatest explanation of the economy we see today. The evidence would suggest that RBCT can account for fluctuations in myriad economic variables over the medium-run, but it falls down during the short-run. It is fairly clear that nominal wage and price stickiness (where each have trouble falling in nominal value, thus leading to unemployment and other issues) is an issue, and dominates the business cycle in the short-run.

So, essentially, we have a model which states that in the short-run the business cycle is dominating by monetarist/New Keynesian claims of aggregate demand deficits due to monetary disequilibria (or some other hypothesis, although I find the monetary explanations the most satisfying) whereas the medium run is dominated by a Real Business Cycle (which sometimes has influence over the short-run, but not to the same extent as monetarist/NK explanations).

And essentially what this illuminates is that the job of the central bank is to make sure neoclassical macro is true, since it becomes true once complete nominal stability is obtained.

It means I can watch it with my kids.

I have over 300 published papers in the Quarterly Journal of Austrian Economics. I am trained in economic calculation and I’m the top Austrian price theorist in the entire Mises Institute. Your arguments present nothing to me other than the usual New Keynesian claims regarding idle resources and the profit-and-loss mechanism. I will refute your assertions with precision the likes of which academia has never been seen before on this Earth, mark my words. You think you can get away with arguing in a peer-reviewed journal that Say's Law is invalid and the "accelerator" and "multiplier" of the consumption function determine levels of employment? On the contrary, my friend, you are committing a very deep economic fallacy. As we speak I am contacting Peter Klein, Mario Rizzo, and Robert Murphy and your citation is being copied into my abstract, so you would do well to prepare for a comment. The comment that wipes out most of the claims asserted in your paper as though they are a priori principles, despite your other statements to the effect that they must be confirmed inductively somehow. You are going to be hard-pressed to respond in the next volume. I can publish in any journal, in any volume, and I can respond via a great variety of methodological approaches, and that's just with my own arguments. Not only am I extensively trained in the deconstruction of fallacious arguments, but I have access to the entire set of academic databases with economic sciences included as subjects and I will use them to their full extents to respond to your unfounded presuppositions. If only you could have known what response your otherwise non-controversial paper was about to bring down upon you, perhaps you would have reconsidered publishing it. But you couldn’t, you didn’t, and now you are facing the consequences of intellectual laziness. I will bombard you with corrections and expositions, and you will be overwhelmed by them. You may have to reconsider the theoretical underpinnings of your methodology, professor.

Because I pulled a sicky half-way through a shift a couple of weeks ago because I had two exams the day after. So they're fucking me for the absence.

Worth it.

blatantly a tranny

He needs our help.