Tyler Cowen nods approvingly to a comment by my erstwhile colleague at Dean’s World, “Tall Dave”, to the effect that consumption is constrained by production:
One way to justify this model is in terms of multiple equilibria, and that we have been walking (bouncing our heads?) back down the escalator. Arguably for the United States this downward bouncing is over. Along the way we are sending signals about the quality of our institutions and thus shaping the course of the future.
In this model there is still a useful role for fiscal policy. For one thing, fiscal policy can smooth that ride down the escalator, by spreading the losses out over time, at the cost of future debt of course. This may be needed if only to make the political economy of decline less bitter; see Spain and Greece. Nonetheless fiscal policy cannot make up for the output losses at will. We are not standing in an IS-LM diagram where the difference between “what we have†and “what we could have†is thwarted only by some supposed Austerians who won’t shift the proper curve and yet somehow have taken over some of the biggest spending social democratic, insider-leaning governments in world history. The IS-LM approach fits in nicely with the view that policy improvement is all about yakking about the obstructionists. Instead, policy is also about rebuilding trust, not just maintaining ngdp on a decent keel.
This is very much the point that I’ve been making here for some time. I might add that it is also perfectly consistent with Keynesianism however much it might make today’s folk Keynesians turn purple and spit fire.
Cowen is a moron. He’s obsessed with the structural unemployment paradigm (for which he provides no evidence) is enamored of monetary policies which don’t work, and ignores the mountain of evidence showing that fiscal policy is effective.
From the BEA National Accounts data:
The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed
investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a
subtraction in the calculation of GDP, increased.
So we have a decline in government spending plus an increase in the trade deficit (which almost no one seems to give a damn about) sapping energy out of the previous quarter’s relatively good performance. Cowen thinks fiddling with interest rates and shouting “lalalalalala” is the best response to this.
“…perfectly consistent with Keynesianism however much it might make today’s folk Keynesians turn purple and spit fire.”
Watching Paul Krugman turn purple does have a certain daydreamish but devilish satisfaction to it. Or perhps self immolation.
But seriously, no matter what you think of fiscal policy, the left’s full throttle, constant foot on the gas peddle approach leaves no room for recuperation in the good times to facilitate use of the tool, whatever its efficacy, in the bad times.
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