Delong vs Krugman on fiscal stimulus: updated

Update on Dec. 25

Having actually taken the effort roughly to score the macro effects of what might be the Trump budget, Krugman says it is unlikely to introduce any net “stimulus.”  It raises the deficit, but the multipliers on the upper end tax cuts are so much lower than those on the lower-end income support cuts that it ends up being “contractionary.”

(The Krugman piece was from a week ago, but the Beinn Bhiorach supercomputer was blocked, so I can just now see it.)

I see a minor inconsistency there, although I don’t think it is worth pounding the table over. Given that Krugman seems to have the same take as I do on the inappropriateness of fiscal stimulus at this point in the cycle, the fact that the Trump budget might not be “stimulative” is not itself a weakness.

The issue is much more the redistributive effects, which are not to my taste on normative grounds. But that weakness goes to fairness, not primarily to macro, I think.  The macro issue here, if there is one, is just that a higher deficit might encourage poorly timed austerity later on, come the next recession.


Original post

I’m with Krugman on this.   The link is to Delong, who links to Krugman.

Krugman says that the economy is probably at roughly full employment, that the Fed should support above-trend growth anyway to test the situation, and that fiscal stimulus per se is pointless because it will be systematically offset by the Fed. I don’t think the Fed should be aiming for much-above-trend growth, but it is not worth quibbling over that here.  On the bigger points, I agree, having made the same ones in this post.


It is not so much that we are necessarily at full employment, as that we are close enough to it for the Fed now to have a ceiling as well as floor on tolerable demand growth. And it does not matter WHAT it is.

Delong leaves an impression of not knowing what the question is.  He argues that the case for being at full employment is “very weak”, seemingly because he excludes all non-cyclical / non-demographic influences on the participation rate.

Ok, we don’t really know why the participation rate made such a dive after the crisis, but the evidence suggests that the most likely case is other than what Delong blithely assumes. It seems it is largely structural.

More to the point, that whole discussion is irrelevant to the question actually at hand.  If the Fed is off the zero bound and has ANY — regardless of what it is — objective for the unemployment rate, then it will systematically offset any fiscal “stimulus” in the coming quarters.

Let me repeat that for emphasis.  It does not matter what the Fed’s preference for growth and thus employment and unemployment might be.  If it has one, regardless of WHAT it is, and if policy is no longer constrained by the zero bound, then it will systematically offset fiscal “stimulus.” And you can tell the the Fed is away from the zero bound, at least for now, because it is raising interest rates.

This could change at some point in the medium term. I expect it to do so, although not with high confidence. Were that to happen,  were we to return to the zero bound, we would  not want also be confronted with a hangover from an earlier ill-timed fiscal expansion. We would want more, not less, fiscal capacity, in both a technical and political sense.  *

Separately, I loved this juxtaposition on Delong’s website:


* I think of the political aspect of fiscal capacity as being an ability to avoid stupidly-timed austerity.  If poorly-timed fiscal stimulus were to be followed by Fed tightening, a steepening of the debt trajectory, eventual recession, and then an even further steepening of the debt trajectory, then you could bet your bottom dollar that the hypocritical hair shirts would be back in control in DC.

Update on Dec. 19

Did Brian Romanchuk just call me a Democrat economist?

If so, thanks, Bri.

Sadly, he may just mean Krugman and Delong, in which case I did not really make the cut.   Here he is at Seeking Alpha discussing, among other things, my words above.

My old boss, Gerard MacDonell, discusses how fiscal policy is interacting with monetary policy in “DeLong vs Krugman on fiscal stimulus.” For those of us who are detached from American politics, there is considerable entertainment value in watching Democrat economists views on fiscal policy morph in response to a Republican taking the presidency (although there are reasonable concerns about the fiscal policy tools being employed).

As I mentioned in my original piece on this issue, the interaction between fiscal and monetary policy switches, like a lot of things, once the economy comes off the zero bound. A weird coincidence here is that the zero bound came with Obama and seems roughly to have left with Trump.

I am not implying causation. But it is an important issue and taking it on board need not be just politics. As I read it, Krugman takes it on board and Delong does not.  Perhaps they are all just Democrats to Brian. If so, it is impressive how Brian rises above politics.  Very balanced, one of my favorite features.

Brian raises a more serious point about how to think about the natural rate of unemployment.  That term is freighted with model dependency, as he points out. I don’t have a dog in that fight, beyond admiring Brian’s desire to avoid getting bogged down in discussions of things that might not have an agreed meaning — or even exist.  (See the bottom of this note, for example.) Maybe I should relabel my chart “natural” rate of unemployment, out of respect for Brian’s point.

I drop back and take a pragmatic approach to this, as I often do.  The Fed is going to act like it does not want the unemployment rate to go a lot lower. So if there were to be fiscal stimulus, I would expect the Fed to offset it. FWIW, I would not likely criticize them much were they to do that.

But I will leave to my betters the fight over which words they might use to rationalize that approach. I agree with Brian that something merely not existing will not necessarily prevent the Fed from referring to it. Or me neither, I guess as it turn out in this case. Fair point.

Related, I had meant to comment on this very pleasing post at Enlightened Economics, which urges a lot of humility when thinking about things that may or may not exist, like — for example — the natural rate of unemployment.  But Brian’s prod beat me to it, and my main takeaway from the EE post is that I ought not argue with Brian over stuff like this.

Attack Krugman

I think it is fun how Krugman is being attacked from the left again. It has been about two decades, by my reckoning.

As I see it, the thing about Krugman is that he is not one of those fake centrists, who peddles middle of the road pabulum in an effort to seem to “rise above” and thus to win applause from the deeply uninformed.

As I see it, he has a view of the world and follows it where it leads him. He certainly has a political perspective, but he knows how to keep the issues separate, which is why he is now being attacked by political allies on the left.

That is my taken anyway. Huge fan. And fwiw, I believe Krugman when he says that his politics arose out of his analysis, not vice versa. You don’t have to. I already know many don’t. The right can’t stand this guy.

In this piece, Tim Duy goes after Krugman for implying, among other things, that China was not the cause of coal mining job losses in Appalachia. For some reason, this irritates Tim Duy who leaves all the problems of neoliberalism at Krugman’s door, simply because Krugman has a slightly different take on a technical issue than Tim Duy does.

I find that very weird.  Krugman’s insistence on clear thinking and evidence would seem to be a stronger antidote to Trumpian fascism than an equally post-truth reaction from the left. China has not caused job losses in Appalachia, as a matter of fact. It is not a sign of being a good liberal to imply otherwise.

 I have no chance here

Simon Wren-Lewis of Mainly Macro takes a shot at identifying what populist policies are here.  They are not just policies favored by populist politicians.  Rather, one way to think about them is to invoke notions from welfare economics, like pareto optimality. I do not know enough to participate in that debate. But there is a broader and maybe simpler issue here that I would like to comment on.

There exists an adjective “populist” that has occasionally been applied to various policies over the years; and recently use of the adjective has become more prominent.  However, it does not follow from this that populist is, dare I say, an essential aspect of any particular policy or set of policies.  Policies can be assessed in terms of what they do or who likes them or whatever. The adjective we apply to them is mostly incidental.  But people will have none of this.

I have trotted out this pragmatic take on things on previous occasions, never to any effect. My favorite application is to discourage people from worrying about what is “natural” or “artificial” in monetary policy.  No interesting question is resolved by an answer to that “debate.”  It was, however, very effective at getting people to be wrong about the Fed in one direction for five years in a row.

But many people assume that to engage in semantics debates is a sign of sophistication, of stepping back to see the big picture.  To reveal ignorance of even rudimentary philosophical comments is taken as philosophical.

And so much ink will be spilled trying to figure out what the words populist and populism refer to.  The words exist, so they must refer to something! What could that thing be? That puts the cart before the horse, but I got no shot at correcting that habit.