Friday, December 2, 2011

There is something to this point by Mankiw

He praises a European deal which he characterizes as fiscal hawkishness and monetary dovishness. I'm much more of a deficit hawk than I think a lot of people realize - it's simply that the full extent of my blogging career has occurred during a terrible depression where hawkishness is unnecessary at best and untenable at worst.

But there is one part of Mankiw's logic that I really don't like. He writes: "My more liberal friends argue, based on Keynesian principles, that we need dovish fiscal policy as well. They sometimes argue for short-run fiscal expansion coupled with long-run fiscal contraction. The problem is that fiscal policymakers cannot bind their future selves. It is hard to make commitments to future fiscal contraction credible, especially as short-run actions expand the budget deficit."

This is true, but any short-run fiscal expansion is not what's going to threaten the long-run situation. If we learned ANYTHING from early 2009 it's that fiscal stimulus is not something that Congress gets addicted to. What Congress gets addicted to is long-term, creeping imbalances. That's the hard thing to ween Congress off of, not big $750 billion packages. The $750 billion packages are easily lambasted on the campaign trail, so politicians don't like them. The subtle imbalances that grow debt over long periods of time do not raise as many hackles on the campaign trail (and the blame for these imbalances can be pawned off on someone else).

Mankiw is too skiddish about short-run stimulus. We should be pushing Congress as hard as we possibly can to do this because if we succeed it's not like they're going to get an appetite for it again. Three years after the $750 billion stimulus it's like pulling teeth to get them to pass a $450 billion jobs bill, half of which is composed of stuff that was already planned! They are not going to get addicted to these short-run packages, so the risks to our fiscal position are minor.

What you need is to give politicians cover on the campaign trail, which is why the sensible thing for Obama to have done over the summer is precisely what Christina Romer suggested he do: propose entitlement reform that addresses the long-term budget problem along with more short-term fiscal stimulus. I'm no politician - I don't know how this would work out exactly. One would hope entitlement reform would give conservatives cover on the stimulus and fiscal stimulus would give liberals cover on Medicare and Social Security. Maybe it sours the pot for both of them and nobody will bite. What I do know is that it's at least worth trying. It's far better than what we're doing now - nothing on the short-term fiscal stimulus front and nothing on the long-term debt problem.


  1. The central bank should look at long term interest rates, have them come down, and do everything it can to raise expectations. But I do agree that the stimulus should have been done much bigger, and a long time ago. China and Australia can be cited as good cases where stimulus worked.

    As for the United States, I agree, the current account deficit does need to be addressed. Ever read Irving Fisher's "Booms and Depressions" by any chance, Daniel Kuehn?

  2. Mankiw says, if I understand it correctly, that we should not conduct fiscal expansion in the short run because we cannot bind ourselves in the long run. That's no argument at all. Even fiscal austerity in the short run does not change the problem that we cannot commit to deficit reduction in the long run. So maybe Mankiw has some signalling game in mind, but then he should say that and model it.

  3. Entitlement reform will never happen, and will eventually be our demise. Which entitlement? Handouts to individuals? Handouts to corn farmers? The entitlements piece of it alone sours the pot for both -R and -D. I joke that I will vote for the politician whose platform is "Life is really hard work, and you will never get what you don't earn. You won't even get all of what you do earn." That politician will never get elected, and entitlements will endure until we are bankrupt, have a revolution, or WWIII.

  4. This was a reactionary move by central banks to news of a major bank in France on the verge of failing. Nothing to see here folks. Yields on government bonds will continue to climb to Euro highs, CDS spread will widen, the ECB will continue monetizing, and the EFSF will forever remind us that the politicians in Europe are desperate clowns..


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