Sumner, at least two steps ahead of me

He gives a reason why planned stimulus can affect outcomes now (hint: expectations), thus giving an economic argument for Brad Delong’s seemingly puzzling call for more extremely laggy fiscal policy. He then proceeds to give a reason why, given Fed behavior, said fiscal policy is contractionary(!).

A must read.

1 thought on “Sumner, at least two steps ahead of me”

  1. Well, he may actually be correct that the reason the recession has been so deep, and that the unemployment rate has climbed so high is that the Fed, and particularly Bernanke, are simply stupid people who’ve spent their careers “doing algebra”… Proof Bernanke has never been the sharpest tool in the shed can be seen from his title and paper “is growth endogenous?” — and I’m not making this up! OF COURSE growth is endogenous!

    So, two things — for fiscal stimulus to have been worthless, then you must believe that the entire downturn should have been 100% avoidable, had the Fed started QE policies last fall rather than this spring (which i don’t believe, but i don’t actually know the record on QE — I suspect they started late and haven’t carried the policy as far as I would have), and second, you must believe that raising taxes and cutting inner city education spending are good to do in a recession, and that the road from San Fran to Tahoe doesn’t need to be repaved.

    On the 2nd point, I’m hardly a dispassionate observer — I got a flat on that road which sucks shit (representative of California’s infrastructure and shitty schools), and I’m equally certain that cutting school funding for inner city schools is a f*cking terrible way to balance a budget. New York city increased Met fares for disabled people, and florida increased taxes on retirement homes. South Carolina cut food stamps. Sumner’s argument that a little extra QE would cancel out all these cuts sounds like utter nonsense to my ears.

    And the thing to realize about the first point is that there are two ways to fight a recession. One is fiscal policy, one is monetary policy. One way to fight it would be to use only monetary policy. Another would be to use only fiscal policy and hold monetary policy constant. With 9.5% unemployment and rising, with GDP dipping at a 6% annual rate in Q1 (and contracting at 10%+ in many other countries), with a recession which has lasted 18 months and counting, the argument that “Ha! Fiscal policy was not necessary b/c Monetary policy alone would have prevented the recession!” is a bit strange… And there are costs associated with both.

    In conclusion, just b/c the Fed is staffed w/ psuedoscientists rather than rocket scientists doesn’t mean fiscal policy is worthless…

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