Prebuttal: Fiscal Policy Can Be Effective — Menzie Chinn

Let’s hope we don’t go through the next recession debating in the same way whether fiscal policy can affect GDP, particularly during periods of economic slack and accommodative monetary policy (e.g., Fama, Mulligan, etc.).…

If we do, I foresee social unrest.

Menzie Chinn lays out an empirical case against neoclassical argument based on non-empirical assumptions like Ricardian equivalence, for example, that also turn out to be contradicted by data-based evidence.

Econbrowser
Prebuttal: Fiscal Policy Can Be Effective
Menzie Chinn | Professor of Public Affairs and Economics, Robert M. La Follette School of Public Affairs, University of Wisconsin–Madison, co-editor of the Journal of International Money and Finance, and a Research Associate of the National Bureau of Economic Research International Finance and Macroeconomics

Alan Longbon — Good News: U.S. Government Posts A $214 Billion Deficit For August 2018, The U.S. Private Sector Posts A $214 Billion Surplus

Summary

The US budget deficit is $214 billion in August 2018; this is a net add of income to the private sector and a bumper month.

• The good news is that dollars are being added to the economy by the Federal government, allowing the private sector to post a $214 billion surplus.

• Further, net inflows are expected for the rest of the year from the Federal government and private credit growth.

• Private credit growth is a big surprise, growing strongly despite Fed rate rises.

Seeking Alpha
Good News: U.S. Government Posts A $214 Billion Deficit For August 2018, The U.S. Private Sector Posts A $214 Billion Surplus
Alan Longbon

Prakash Loungani — Links

From a new paper by Antonio Fatas:

“This paper studies the negative loop created by the interaction between pessimistic estimates of potential output and the effects of fiscal policy during the 2008-2014 period in Europe. The crisis of 2008 created an overly pessimistic view on potential output among policy makers that led to a large adjustment in fiscal policy during the years that followed. Contractionary fiscal policy, via hysteresis effects, caused a reduction in potential output that not only validated the original pessimistic forecasts, but also led to a second round of fiscal consolidation. This succession of contractionary fiscal policies was likely self-defeating for many European countries. The negative effects on GDP caused more damage to the sustainability of debt than the benefits of the budgetary adjustments. The paper concludes by discussing alternative frameworks for fiscal policy that could potentially avoid this negative loop in future crises.”

The Unassuming Economist
Fiscal Policy and the Shifting Goalposts

Prakash Loungani | Advisor and Senior Personnel & Budget Manager in the IMF’s Independent Evaluation Office

See also

From a new IMF working paper:

“This paper contributes to the open economy local fiscal multiplier literature by estimating regional output and employment responses to federal expenditure shocks in the European Union. In particular, similarly to the literature on foreign aid and growth, I use shocks to the supply of federal transfers (European Commission commitments) of structural fund spending by subnational region as instruments for annual realized expenditure in a panel from 2000-2013. I find a large, contemporaneous multiplier of 1.7 which translates into a cumulative multiplier of 4 three years after the shock. Furthermore, using a novel dataset on bilateral trade between EU regions, I find evidence of demand-driven spillovers up to three years after a shock.”

Fiscal Stimulus in a Monetary Union: Evidence from Eurozone Regions

Also

From a new IMF policy paper:

“This paper reviews the experience with the fiscal space assessment framework that was piloted during 2017–18. In 2016, staff proposed an operational definition of fiscal space and a new four-stage framework for its assessment. These were discussed informally by the Board in June, and a Board paper “Assessing Fiscal Space: An Initial Consistent Set of Considerations”incorporating Directors’ views was published in December. Fiscal space was narrowly defined as the room for undertaking discretionary fiscal policy relative to existing plans without endangering market access and debt sustainability. The framework was developed in response to the need to provide a more systematic approach to assessing fiscal space in the Fund’s surveillance. It was designed as a tool to inform the availability of fiscal space over a 3 to 4 year horizon for discretionary action, as opposed to the optimality of its use. Indeed, it was stressed that the availability of space does not necessarily mean that it should be used or should not be further expanded. The framework was piloted in the Article IV consultations of 34 advanced economies and emerging markets, comprising almost 80 percent of global GDP in PPP terms.”

Assessing Fiscal Space: An Update and Stocktaking

Alan Auerbach and Yuriy Gorodnichenko — Fiscal stimulus in downturns is safe even when debt is high

Government spending in a recession can boost a country’s economy without permanently bloating its public debt, even if the debt is already quite large, researchers told an influential group of central bankers in Jackson, Wyoming, on Saturday.

“Expansionary fiscal policies adopted when the economy is weak may not only stimulate output but also reduce debt-to-GDP ratios,” University of California, Berkeley, professors Alan Auerbach and Yuriy Gorodnichenko said in a paper presented at the Kansas City Federal Reserve’s annual economic symposium….

The research presented Saturday offers new evidence that fiscal stimulus in a recession is not only safe but effective even in heavily indebted countries....

Reuters
Fiscal stimulus in downturns is safe even when debt is high: researchers

Reuters Staff

Bill Mitchell — Japan is different, right? Wrong! Fiscal policy works

Japan is different, right? Japan has a different culture, right? Japan has sustained low unemployment, low inflation, low interest rates, high public deficits and high gross public debt for 25 years, but that is cultural, right? Even the mainstream media is starting to see through the Japan is different narrative as we will see. Yesterday (August 14, 2017), the Cabinet Office in Japan published the preliminary – Quarterly Estimates of GDP – which showed that the Japanese economy is growing strongly and has just posted the 9th quarter of positive annual real GDP growth. Private consumption and investment is strong, the public sector continues to underpin growth with fiscal deficits and real wages are growing. The Eurozone should send a delegation to Tokyo but then all they would learn is that a currency-issuing government that doesn’t fall into the austerity obsession promoted by many economists (including those in the European Commission) can oversee strong growth and low unemployment. Simple really. The Japan experience is interesting because it demonstrates how the reversal in fiscal policy can have significant negative and positive effects in a fairly short time span, whereas monetary policy is much less effective in influencing expenditure....

Bill Mitchell – billy blog
Japan is different, right? Wrong! Fiscal policy works
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

Japanese sectoral balances.

Seeking Alpha (Aug. 8, 2017)
Good News: Japanese Current Account ¥935B Surplus In July 2017
Alan Longbon

Zero Hedge — Japan GDP Surges 4%, Most In Two Years, On Jump In Government Stimulus Spending

The unexpectedly strong GDP print was driven by a 9.9% jump in private non-residential investment as well as an striking 21.9% annualized surge in public investment as some of the public works spending included in last year’s economic stimulus package starting to emerge; meanwhile exports declined....

Zero Hedge
Japan GDP Surges 4%, Most In Two Years, On Jump In Government Stimulus Spending

Tyler Durden

FRB Cleveland Does Fiscal Stimulus Work?

Conclusion

Overall, our results suggest that fiscal stimulus is effective even during recessions induced by consumer-debt overhang. An increase in government spending is associated with a fiscal multiplier above one, and the multiplier is higher in consumer-debt-ridden geographical areas. The higher multiplier in those areas might be attributed to a direct increase in household consumption and local economic slack. Our results imply that the ills of private debt can be cured by government spending that is financed by public debt. At least in the short term (two years are considered in this study), public debt is effective in stimulating income and employment even in areas of high consumer indebtedness.

FRB Cleveland
Does Fiscal Stimulus Work?

Yulyia Demyanyk, Elena Loutskina, Daniel Murphy

ht Mark Thoma at Economist's View

Bill Mitchell — OECD joins the rush to fiscal expansion – for now at least

In the last month or so, we have seen the IMF publish material that is critical of what they call neo-liberalism. They now claim that the sort of policies that the IMF and the OECD have championed for several decades now are damaging to the well-being of people and societies. They now advocated policy positions that are diametrically opposite their past recommendations (for example, in relation to capital controls). In the most recent OECD Economic Outlook we now read that their is an “urgent need” for fiscal expansion – for large-scale expenditure on public infrastructure and education – despite this organisation advocating the opposite policies at the height of the crisis. It is too early to say whether these ‘swallows’ constitute a break-down of the neo-liberal Groupthink that has dominated these institutions over the last several decades. But for now, we should welcome the change of position, albeit from elements within these institutions. They are now advocating policies that Modern Monetary Theory (MMT) proponents have consistently proposed throughout the crisis. If only! The damage caused by the interventions of the IMF and the OECD in advancing austerity would have been avoided had these new positions been taken early on in the crisis. The other question is who within these organisations is going to pay for their previous incompetence?…

Maybe some light at the end of the tunnel?

Bill Mitchell – billy blog
OECD joins the rush to fiscal expansion – for now at least
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — US economy – slowing down – fiscal stimulus needed

Last week (March 25, 2016), the US Bureau of Economic Analysis released their ‘Third Estimate’ of – Gross Domestic Product, 4th quarter 2015 – which showed that the US economy slowed rather appreciably in the last three months of 2015. The BEA said that real GDP growth was “increased at an annual rate of 1.4 percent” after having increased by 2 per cent in the third-quarter of 2015. Two things stand out from the data: (a) Private consumption expenditure, while still relatively strong continues to slow. The main drivers of consumption expenditure are recreation and health care services and durable goods; (b) Capital formation (investment) declined for the second consecutive quarter, signalling a lack of confidence in the medium-term outlook by business firms. However, residential investment was relatively strong as was federal government spending. The BEA also reported that corporate “profits decreased by 7.8 per cent at a quarterly rate”. The data release provides no succour to those who think the Federal Reserve Bank should continue to hike interest rates. Inflation is still well below the implicit central bank target rate (2 per cent) and growth is faltering.…

Bill Mitchell – billy blog
US economy – slowing down – fiscal stimulus needed
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brad DeLong — Ordoliberalismus and Ordovolkismus

And rare these days is the competent economist Who has thought through the benefit-cost calculation and failed to conclude that the governments of the United States, Germany, and Britain have large enough multipliers, strong enough hysteresis coefficients for infrastructure investment programs, and sufficient fiscal space–favorable likely distributions of r-g–to make substantially more expansionary fiscal policies than they are currently following almost no-brainers. 

It is against the backdrop of this situation that we find aversion to fiscal expansion being driven not by pragmatic technocratic benefit-cost calculations but by raw ideology.…

Contrast this to China's, We will do what it takes to avoid missing our growth targets, increasing unemployment while rebalancing and maintain price and currency stability. This is why China is going to win the international economic competition, and kick Western butt. They get fiscal, and they know the between the currency issuer and currency users. They may not be in paradigm but at least they are in the right ball park.

The West? Hopeless with the current crop in charge.

"Liquidity trap" = "You are using the wrong tool."

WCEG — The Equitablog
Ordoliberalismus and Ordovolkismus
Brad DeLong

Economy Watch — IMF Warns of Possible Global Economic Derailment

The International Monetary Fund (IMF) has begun warning the largest economies in the world that a global economic catastrophe could occur if concerted action is not taken; however, many economists fear that the Group of 20 (G20) economies are unwilling or unable to do anything about the IMF’s dire predictions.…

The IMF began sounding the alarm late last month during a meeting with the G20 in Shanghai. At that time, it warned that it would likely be forced to downgrade its economic performance outlook for the global economy by April. At the same time, IMF Managing Director, Christine Lagarde, advised that a coordinated effort would be needed to avoid catastrophe, urging governments that had sufficient margins in their budgets to increase spending. She also suggested that every nation should accelerate their respective economic overhaul plans.…

For its part, Germany released a statement flatly denouncing the IMF’s position: “We are strictly against announcing publicly that the G20 is preparing a stimulus program.” …

Economy Watch

IMF Warns of Possible Global Economic Derailment

Bill Mitchell — Fiscal stimulus does not necessarily mean large governmen

There was an interesting if not ego-centric interchange last week involving the New Keynesian economist Paul Krugman and others about whether the sort of macroeconomic policy positions one takes is more motivated by ideological motives (about the desirable size of government) rather than being evidence-based. Apparently, if you support austerity it is because you really just want smaller government and vice versa. This is an oft-stated claim made by conservatives. That if you support fiscal stimulus and government regulation that you are automatically in favour of big (intrusive) government. The point is not valid. Whether one supports a larger proportional government or smaller is a separate matter to understanding how the monetary system functions and the capacities and options available to the government. Modern Monetary Theory (MMT) provides the basis for that understanding but not a prescription for a particular size of government.

Bill Mitchell – billy blog
Fiscal stimulus does not necessarily mean large government
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

William K. Black — EU Deflation Arrives and the Troika Continues to Fiddle While the EU Burns

Good post by Bill Black on EZ deflation in which is excoriates the usual. I would just add that price level is not an observable but rather an estimate, and estimating is a slippery affair. Central banks try to err on the high side rather than fall into the deflation trap. When a currency zone officially falls into deflation, the government has drastically missed the mark and failed to use its available tools properly. As Bill notes, deflation doesn't just happen. It happens over time through a period of disinflation. This has been obvious in the EZ, especially through its effects on the periphery. Moreover, sanctions on Russia have further reduced demand for European produced goods and services, which is a double whammy on top of ill-advsed austerity. This is dangerous not only socio-economically, but also politically. Instability is increasing.

New Economic Perspectives
EU Deflation Arrives and the Troika Continues to Fiddle While the EU Burns
William K. Black | Associate Professor of Economics and Law, UMKC

Mark Thoma — The Contribution of Fiscal Policy to Real GDP Growth

From the comments at Economists View:

Lafayette said...

{Between 2008 and 2011, fiscal impact was positive, indicating that government policy was stimulative; in recent years, it has been negative, indicating restraint.}

And, what happened in 2008 to boost the economy? Lead-head left office and handed Obama on a platter the worst recession since the 1930s.
What did a Dem Prez and a Dem Congress do? They passed the ARRA stimulus spending bill of $831B in 2009. 

Were Americans grateful for having spiked unemployment at 10%, when it could have gone to Great Depression levels of 20/25%?

Nope - they voted the Koch Bros' T-Party in control of the HofR in 2010. All Stimulus Spending stopped dead.

How dumb can voters get? Really effing dumb ...

Not only dumb. Misled by a massive propaganda effort to convince them to vote against their economic interests for ideological reasons. The result. A repeat of 1937.
 

Economist’s View
The Contribution of Fiscal Policy to Real GDP Growth
Mark Thoma | Professor of Economics, University of Oregon

Stephen Roach on China and the US

The Fed’s mistake was to extrapolate – that is, to believe that shock therapy could not only save the patient but also foster sustained recovery. Two further rounds of QE expanded the Fed’s balance sheet by another $2.1 trillion between late 2009 and today, but yielded little in terms of jump-starting the real economy.

This becomes clear when the Fed’s liquidity injections are compared with increases in nominal GDP. From late 2008 to May 2014, the Fed’s balance sheet increased by a total of $3.4 trillion, well in excess of the $2.6 trillion increase in nominal GDP over the same period. This is hardly “Mission accomplished,” as QE supporters claim. Every dollar of QE generated only 76 cents of nominal GDP.

Unlike the United States, which relied largely on its central bank’s efforts to cushion the crisis and foster recovery, China deployed a CN¥4 trillion fiscal stimulus (about 12% of its 2008 GDP) to jump-start its sagging economy in the depths of the crisis. Whereas the US fiscal stimulus of $787 billion (5.5% of its 2009 GDP) gained limited traction, at best, on the real economy, the Chinese effort produced an immediate and sharp increase in “shovel-ready” infrastructure projects that boosted the fixed-investment share of GDP from 44% in 2008 to 47% in 2009.

To be sure, China also eased monetary policy. But such efforts fell well short of those of the Fed, with no zero-interest-rate or quantitative-easing gambits – only standard reductions in policy rates (five cuts in late 2008) and reserve requirements (four adjustments).

The most important thing to note is that there was no extrapolation mania in Beijing. Chinese officials viewed their actions in 2008-2009 as one-off measures, and they have been much quicker than their US counterparts to face up to the perils of policies initiated in the depths of the crisis. In America, denial runs deep....

It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.

Jewish Business News
Former Chairman Of Morgan Stanley Asia Stephen Roach : China Sets America’s Mental Trap
Stephen S. Roach | senior fellow at Jackson Institute for Global Affairs and a senior lecturer at Yale School of Management, and former Chairman of Morgan Stanley Asia 

Lord Keynes — Murphy on Keynesianism and Great Recession

Lord Keynes calls in Rothbardian Huerto De Soto and Friedrich Hayek to refute Robert Murphy's "refutation" of Keynesianism.

Social Democracy for the 21st Century
Murphy on Keynesianism and Great Recession
Lord Keynes

Lord Keynes on how Japan avoided the Great Depression

In other words, Japan was using a policy we would now associate with Modern Monetary Theory (MMT). From November 1932, the government’s deficit was financed by issuing bonds directly to the Bank of Japan, and then later the Bank sold these bonds to private banks. Not only was there no hyperinflation, but no significant inflation.

Social Decmocracy for the 21st Century
Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s
Lord Keynes
(h/t Philip Pilkington on FB)

Japan got it right then, but now, not so much as they focus on monetary policy rather than fiscal.

Social Security benefits to go up by 1.7 percent

Mildly positive news out today on the fiscal front.  Story at Yahoo!.

Social Security payments for retired workers average $1,237 a month, or about $14,800 a year. A 1.7 percent increase will amount to about $21 a month, or $252 a year, on average. Social Security recipients received a 3.6 percent increase in benefits this year after getting none the previous two years. About 8 million people who receive Supplemental Security Income will also receive the cost-of-living adjustment, or COLA, meaning the announcement will affect about 1 in 5 U.S. residents.

I believe this flow adjustment will take place on January 1, 2013.  All of these balances WILL be spent in the economy.

Based on last FY's total Social Security withdrawals of $658B, this 1.7% increase will add just over $10B more in fiscal flows to the non-government sector next year.... like I said, mildly positive.  Perhaps the best we can expect from the morons who are unfortunately in policy making positions at this time.

Brad DeLong — When Conservative Republicans Loved Keynes And Expansionary Fiscal Policy

Surprise. Paul Ryan was for it (when the GOP was in power) before he was against it (when Democrats are in power). Partisan politics making policy?

Grasping Reality with Both Invisible Hands
When Conservative Republicans Loved Keynes And Expansionary Fiscal Policy
J. Bradford DeLong | Professor of Economics, UCAL Berkeley

Did the stimulus work? Here's unequivocal proof

I put together a chartbook with all the major metrics on the economy, such as GDP, employment, household wealth, personal income/savings, inflation, industrial production, capacity utilization, housing starts, etc, comparing the "pre-stimulus" period with the "post-stimulus" period. This should put to bed any questions about whether or not the stimulus worked. Feel free to use this as a resource when arguing with your friends, relatives and colleagues at work.

Here are two sample charts. Get the full chart book here: Mike Norman pre/post stimulus chartbook.