Wer'e familiar with the famous Sumner Critique where provided the Fed is on the job there's no place for fiscal policy in terms of demand stabilization. Again and again Sumner argues "The fiscal multiplier is roughly zero."
Who can forget the time when Lars Christensen went one better and argued that fiscal policy doesn't even exist? That was fun as it lead to me writing a post about it which lead to him writing a post about my post all of which I explained here.
After all he had called his post about my post
Nevertheless his original argument is worth looking at again as it's one for the books in the fiscal-monetary divide-sort of reminds me of the divide in philosophy, which is the Analytic-Continental divide the former is Anglo philosphy the latter being of course the European contitnent. Anyway here is Lars from "There is no such thing as fiscal policy'
"In an earlier post – “How I would like to teach Econ 101” – I have explained that there seems to be a disconnect between how economists think about microeconomics and macroeconomics. I think this disconnect basically also creates the misunderstanding among Keynesians about what fiscal policy is and what it can do."
"The way we normally think of microeconomics is an Arrow-Debreu world with no money. Hence, we have a barter economy. 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. Furthermore, it is not possible, as public expenditures in barter economy basically have to be funded by “forced labour”. “Taxes” will be goods that somebody is asked to “pay” to government and government “spend” these “revenues” by giving away these goods to other people. Hence, in a barter economy fiscal policy is a purely redistributional exercise, but it will have no impact on “aggregate demand”."
"Therefore 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."
This is why I referred to it as a "postmodernist mind fuck"-in other words a variation of "there is no Truth." Lars said that's a unkind cut on my part as he has no use for postmodernism. Sumner on the other hand is a self described Richard Rorty man so maybe he would take it differently?
While Lars may not like postmodernism, isn't this what Monetarism always does in a way? There are no real problems all troubles are nominal. I guess what they really mean is that all real problems are problems of supply but demand side problems are always nominal. In this sense it's a variation of what Phil Gramm said back in 2008 that this is only a "mental recession."
Of course he said that before Obama was President. So that might be the real Monetarist gambit-that all real problems are supply side, demand side problems are by definition nominal-"mental" all in our heads. That is only further buttressed by the fact that Market Monetarists put so much store by simple market expectations-Nick Rowe's famous Chuck Norris Effect.
"One can of course play around with these things as much as one wants, but to me the key lesson is that fiscal policy only have an impact on aggregate demand if the central bank plays along. Hence, fiscal policy does not really exist in the sense Keynesians (normally tend to) claim. “Fiscal policy” needs to be monetary policy to be able to impact aggregate demand."
"That said, fiscal policy of course can have an impact of the supply side of the economy and that is ultimately much more important – especially as the ill (lack of aggregate demand) the Keynesians would like to cure cease to exist if the central bank targets the NGDP level."
Let's compare this with what Scott Fullwiler says about fiscal vs. monetary policy. Whereas for Lars fiscal policy really doesn't exist-it's little more than an inefficient brand of monetary policy, Fullwiler's view is 180 degrees away from this. He argues that the proverbial "Hellicopter Drops" of Ben Bernanke are actually fiscal operations:
"UNLIKE EVERY OTHER monetary policy operation, BUT LIKE EVERY OTHER fiscal policy operation (with or without bond sales), helicopter drops of "money" as shown in Figures 1 and 2 raise the net worth of the non-government sector. My colleagues and I therefore argue that it is more appropriate to label helicopter drops as FISCAL operations, NOT monetary operations."
Obviously you can't see the figures here. For them see below
This is a clear definition of fiscal operations-they raise the net worth of the non-government sector. Note too his proviso about "with or without bonds." This also differentiates him and the MMTers from Hickseans like Krugman. For Krugman fiscal policy is where the Treasury buys goods and sells bonds and monetary policy is where it buys bonds and "sells" money.
The difference is that MMT doesn't think there is any need for the government to sell bonds before buying goods.
In any case following Fullwiler here we get a working distinction between fiscal and monetary policy that's easy to follow. Fiscal increases the net worth of the non-government sector monetary policy increases liquidty through asset swaps. In the liquidity trap this breaks down as you have perfect substitutes being swapped-money and bonds.