Ideology and Macroeconomics, by Arnold Kling: Scott Sumner writes,
I am amazed by how many proponents of fiscal policy don’t understand that
it’s symmetrical. Fiscal policy doesn’t mean more government; it means more
government during recessions and less government during booms, with no
overall change in the average level of government. Anyone who doesn’t even
get to that level of understanding, who doesn’t think in terms of policy
regimes, is simply not part of the serious conversation.
I agree with the first two sentences, but not with the last.
Yes, in theory, there should be economists who, as they argued for more
stimulus in 2009, should at the same time have been arguing for entitlement
reform or other reductions in future spending. Other things equal, the bigger
debt that we have accumulated over the past five years would make a
non-ideological macroeconomist want to propose tighter fiscal policy somewhere
down the road.
But “nonideological” and macroeconomics are nearly oxymorons. ...
(from 2005, before the recession had even started):
... To use fiscal policy to stabilize the economy however, you have to spend
more or tax less in the bad times (increase the deficit) and then do the hard
thing which is to raise taxes or cut spending in the good times (decrease the
deficit). To keep the budget in balance the good has to be matched
somewhere by the bad. If you cut taxes for this disaster, or this
recession, or this war, and don’t raise them later, what do you do next time?
Cut again? Okay, what about the time after that? It won’t work
forever. The priming of the economy during the bad times must be matched
by a slowdown during the good. Borrow when income is low, pay it back when
income is high.
Furthermore, in stabilization policy, it’s also not possible in the long-run
to use both government spending and taxation at opposite points in the business
cycle. That is, suppose you cut taxes during the bad times, then cut
spending during the good times to pay it back. That will work for a
recession or two, a hurricane or two, but it won’t work forever because
eventually there will be nothing left to cut out of government. The
opposite will not work forever either. If you increase spending during the
bad times then increase taxes during the good, the size of government will grow
indefinitely over the long-run. In more graphic form:
G↑ (rec) → T↑ (boom) → G↑ (rec)→ T↑ (boom) → G↑ (rec)
→ T↑ (boom) → bloated government
T↓ (rec) → G↓ (boom) → T↓ (rec)→ G↓ (boom) → T↓ (rec) →
G↓ (boom) → no government
These two policies, or some combination of them (increase G and cut T in
recessions, do the opposite in booms) are sustainable:
G↑ (rec) → G↓ (boom) → G↑ (rec) → G↓ (boom) → G↑ (rec)
→ G↓ (boom) → sustainable size of government
T↓ (rec) → T↑ (boom) → T↓ (rec) → T↑ (boom) → T↓ (rec)
→ T↑ (boom) → sustainable size of government
The Democrats are accused of adopting the first strategy and bloating the
government. The Republicans claim to adopt the second strategy to shrink
government, but they’ve bloated government themselves (take the second line and
change it to T↓ (rec) → G↑ (boom) → etc., a clearly unsustainable path).
Neither party seems willing or able to use either the third and/or the fourth
lines as a means of stabilizing the economy. We are seeing that now, and
maybe even less stable budgetary variations. The WSJ and other
members of the GOP seems to advocate T↓ (rec)→ T↓ (boom) → etc. which, without
cuts in G, cause deficits rise no matter how much they claim otherwise.
There are, of course, lots and lots of variations on these basic chains of
events, e.g. to adjust the size of government the first or second strategies can
be adopted temporarily, and you hope lawmakers would put all their cards on the
table as they do so whichever direction government size is to be adjusted.
But fiscal policy that is sustainable in the long-run, through recession after
recession, natural disaster after natural disaster, war after war, has to adopt
some combination of the third and fourth lines. ...
(from 2008, a bit afer the recession started):
Short-run stabilization policy for the economy during a downturn involves
either cutting taxes to stimulate consumption and investment (and sometimes
net exports), or increasing government spending. Which of these is used and
the specific policy adopted has important implications for the effectiveness
of policy, but no matter how it is done it will raise the deficit, and the
increase in the deficit is often used to oppose the policy.
Theoretically, however, there is no reason at all why short-run
stabilization policy ought to impact the long-run budget picture. Ideally,
the deficits that accumulate during bad times are paid for by raising taxes
or cutting spending during the good times so that there is no net change in
the budget in the long-run.
Historically, we have been pretty good at spending money in bad times, but
not so good at paying for the spending when times are better. But if we are
serious about stabilization, that's what we need to do. When output is below
the long-run sustainable rate we increase economic activity by deficit
spending, and when output exceeds the long-run sustainable rate, we decrease
activity by running a surplus. Doing this fills the troughs with the shaved
peaks from the booms and keeps the economy closer to the long-run trend
I've been wondering if the current crisis will change our attitude about
paying for stabilization policy, i.e. if it will make us more willing to
raise taxes and cut spending when times are good. One of the problems with
the last two boom-bust cycles was unchecked exuberance. Any calls to raise
taxes or interest rates were met with howls about how it would cut off the
boom, and who would want to do that? But tempering the boom might have
helped to reduce the size of the meltdown we are experiencing now and left
us much better off.
When the next boom develops, will we be more willing to raise taxes, cut
spending, and tighten Fed policy? Will we remember what happened when the
previous two booms ended and be more willing to step in and slow down the
booming economy, will we be less susceptible to the argument that doing so
will eliminate creative and productive innovation (as opposed to
misdirecting resources during the mania phase)? This doesn't mean creating a
recession or slamming on the brakes so hard we hit our heads, it doesn't
mean ending innovative activity, it simply means what it says, bringing the
growth rate down to its sustainable rate, and attenuating the exuberance
that leads to housing and dot.com bubbles. Will we be more willing to take
the necessary steps the next time the economy begins to boom?
I doubt it.
And the problem is that if we aren't willing to pay our bills during the
good times, then it will be much harder to spend the money we need to spend
when times are bad -- our hands will be tied when it comes to stabilization
I could go on, but I'll just simply note that Krugman has been arguing (more than once) that
there is little evidence that expansionary fiscal policy in recessions is
Oh, and since we are talking about unwillingness to reverse policy for
ideological reasons, are conservatives arguing that the tax cuts they call for
in recessions ought to be reversed when the economy improves? Why aren't those
who are so worried about reversing policy in good times only talking about the
spending side of the equation? Could it be -- gasp -- that their ideology, there
belief that government is too big, is the reason?