The debate over fiscal stimulus-whether it works or not has taken more and more strange turns. David Glasner who I even thought was right in his criticisms of his fellow market monetarist predictably concluded the interminable discussion-interminable thanks to Scott-by declaring,
"Note that I didn’t need to say anything about accounting identities to get to this result. (Gotta find that silver lining somewhere.) But Scott can still feel good about having convinced me that his basic intuition was right. The should teach us all to remember the old maxim, “Don’t Mess with Scott.”
Sumner was a good winner-he won as far as Glasner is won over and Noah Smith and effusively declared that,
"Noah Smith is of course the highly respected Keynesian blogger that Paul Krugman linked to as an expert on the issue of misinterpreting identities. Who says I always disagree with Paul Krugman."
I wouldnt' be too impressed by this praise, it's just a case of Sumner's considerable ability for concern trolling. After all it's easy to praise and flatter the "Keyneisan blogger" now that Smith declared that Scott was right or at least had made no error of accounting identity vs. behavioral phenomena and that Wren-Lewis did make some error.
Meanwhile after all this quibbling-the whole thing was about Sumner taking it personally that Simon Wren-Lewis allegedly treated Lucas and Cochrane so shabby, Cochrane came out with a post today that seems to be an admission that stimulus is needed-deficit spending-as long as we don't call it stimulus. If we do that will somehow have some ill effects.
We need something that we think of as stimulus but that Cochrane calls something else and as much as we need it and it will be bad if we don't have it worse still apparently is if we do have it but call it by an imprecise term.
This is what these debates amount to. So now Cochrane approves of stimulus as long as you don't call it stimulus. However he spends the second half of his post complaining about as Noah Smith puts it that Krugman and Delong are "big meanies." He provides example after example.
I put the words Sumner, awesome, obfuscation as that seems where this entire tremendous digression over Simon Wren-Lewis allegedly using a bad argument-consumption smoothing-to make an argument that Sumner says is reasonable.
So what does this all amount to? Not much. I maintain that to understand Sumner you have to recognize his capacity for concern trolling. That's how he's able to seduce some liberals. If he came out like Money Illusion's resident Right wing nut Morgan Warstler his readership would be a heck of a lot smaller. But Warstler has told me that he believes that he and Scott are of one accord in their aims and maybe Scott is simply much better in presentation.
If you want to get the endgame of this whole market monetarist phenomenon I say put down Scott Sumner and check out Lars Christensen. His post is called simply Market Monetarist, and indeed the very name of market monetarism is actually his coinage rather than Scott.
During the interminable tangent-a rather amusing three ring circus that Sumner led-Lars wrote a post called "There is no such thing as fiscal policy." This is a pretty radical attack on fiscal policy. From Cochrane claiming that fiscal policy can't work-till his bout face today-and Sumner saying it can never be as effective as monetary policy in reviving demand-we have Lars claiming it simply doesn't exist.
Whoa! I guess if it doesn't even exist we can't use it. Ever. It's another postmodernist mind fuck evidently. What are Cochrane and Christensen going to say to each other now? I will suggest that if you want to make any sense of market monetarism read Lars. You get it much more concisely and to the point if nothing else.
Now here is his point. In a barter economy, he tells us, there can be no fiscal stimulus. Why is this? Because, "As there is no money we can not talk about sticky prices and wages. In a barter economy you have to produce to consume. Hence, there is no such thing as recessions in a barter economy and hence no excess capacity and no unemployment. Therefore there is no need for Keynesian style fiscal policy to “boost” demand."
Fiscal policy can redistribute income but not effect demand.
"in a barter economy fiscal policy is a purely redistributional exercise, but it will have no impact on “aggregate demand"
Ok but maybe the title of this post is wrong. It shouldn't say there is no such thing as fiscal policy just fiscal stimulus.
The reason we believe that fiscal policy can impact demand is because of money illusion.
"for fiscal policy to influence aggregate demand we need to introduce money and sticky prices and wages in our model. This in my view demonstrates the first problem with the Keynesian thinking about fiscal policy. Keynesians do often not realise that money is completely key to how they make fiscal policy have an impact on aggregate demand."
What NGDP targeting is meant to do is to take away money illusion by taking away this misleading effect of the velocity of money.
"Under NGDP level targeting M*V will be fixed or grow at a fixed rate. That means that we is basically back in the Arrow-Debreu world and any increase in G must lead to a similar drop in D as M*V is fixed."
The goal of NGDP targeting therefore as Sumner, Lars, David Glasner, et al, conceive it is a return to in effect a barter economy. Money is therefore for them kind of like the root of all evil or at least original sin. Like for old fashioned philosophers appearance was the veil that led us to misapprehend true existence, so for the market monetarists, money is the veil that makes us misapprehend the truth of the economy.
Yet Lars does admit that fiscal stimulus can work or seem to work due the the Circe of money.
"lets say that the central bank is just an agent for the government and that any increase in G is fully funded by an increase in the money supply (M). Then an increase in G will lead to a similar increase in nominal income M*V. With this monetary policy reaction function “fiscal policy” is highly efficient. There is, however, just one problem. This is not really fiscal policy as the increase in nominal GDP is caused by the increase in M. The impact on nominal income would have been exactly the same if M had been increased and G had been kept constant – then the entire adjustment on the right hand side of (3) would then just have increased D."
Yeah let's say that. Actually I think this accurately describes the actual historical record of the Fed between the time of Marriner Eccles and the 1970 when Milton Friedman started whispering sweet nothings in Nixon's ear.
To be sure Christensen claims that this effect is still misleading as it's the printed money-monetary policy-that does the real heavy lifting. It would have been exactly the same had the supply of money been increased and government spending been kept constant.
In a way these claims by Lars actually straddles the line with MMTers who do actually argue that it makes no difference whether the Fed or Treasury prints the money but where they go from here is obviously more or less diametrically opposed to what the MMers do with it. The Market Monetarists vs. The Modern Monetary Theorists... Talk about a battle royale.
Again though Lars should call this "There is no such thing as fiscal stimulus." It seems to me though that even if you believe that fiscal stimulus is a fiction it may nevertheless have proved to be as the belief in God once was.
For what's curious is during the time we believed fiscal stimulus we had the Keynesian era. Since we gave it up we have had an anti-Keynesian era. During this anti-K ear we have seen the wages of median Americans stagnate. Is this all coincidence? What do you think?
In any case Sumner's oft repeated argument that the fiscal multiplier is roughly zero because any fiscal stimulus will be followed by monetary tightening according to Lards depends on the policy of the Fed. It wasn't true during the Keynesian ear. However in this anti inflation era, post Volcker and of the Taylor Rule-the much lauded Great Moderation-it is true of how the Fed has in fact acted. This doesn't prove that fiscal stimulus doesn't work but rather the Fed is off the rails and probably could use the kind of reforms Barney Frank wanted for it. Namely not ending the Fed as Ron Paul says but rather ending its "independence."