Robot Fiscal Policy

A few days ago, I complained that Matt Yglesias seemed to be ripping off Monetary Realism posts, or at least riffing on them. selise pointed out perhaps “great minds think alike” and well, I guess it is in the air. I then said he would start writing about automating fiscal policy because we were writing about it.

I was totally wrong in asking if Matt Y would ever talk about automating fiscal policy, because it turns out he had just written an article on it. I had flagged this Matt Yglesias post for commenting a few weeks back, and somehow I forgot about it until now.

Still, MR has some of the few people out there talking about automating fiscal policy on a consistent basis. Both Carlos and I have suggested rules which would cause the government to give more money to people automatically if the economy is operating at less than full employment. Of course, I am really Peter Orszag who was also kinda talking about automating fiscal policy a few years back. Izabella Kiminska also has some ideas on automatic fiscal policy. Steve Waldman has a great post on automating fiscal policy, as you would expect.

I’ve proposed the strong economy rule – which gives a suggested deficit which should get us pretty close to full employment – and Carlos has proposed a full employment tax system which links the level of payroll taxes to the unemployment rate.

Matt Y. lays out a three pronged approach which is very, very close to my thinking on the economy.

“1. We should aim for a long-term inflation rate of four or even five percent so that the Federal Reserve is much less likely to hit the “zero bound” and lose confidence in its own ability to shape the economy-wide demand picture.

2. We should make specific statutory provision for Fed injection of “helicopter money” into the economy. The metaphysics of fiscal vs monetary policy are less important than the fact that the Fed has the right institutional setup to conduct a joint fiscal-monetary action when needed. A Fed that can order money-financed payroll tax cuts that have zero impact on the deficit is never going to “run out of ammunition” in the war on demand shortfalls.

3. We should beef up automatic stabilizers in the budget by creating some kind of national rainy day fund that automatically releases unrestricted funds to state governments in times of recession. Some elected officials will use the money to avoid pro-cyclical service cuts and furloughs, while others will use it to finance tax cuts and we’ll just live with disagreement about the best way to proceed.”

The first two proposals are essentially what I have been proposing since the very first post at MR.

The zero lower bound is a dangerous area, because it makes monetary policy less interest rate oriented and more asset price oriented. The fed right now is trying to kickstart the economy by buying real world assets. QE is perfectly understandable as a response to a stagnating economy at the ZLB, but it would be smarter to avoid the ZLB in the first place. QE and all monetary policy is hugely distortionary and doesn’t work great, and chooses winners and losers as directly as the most directed pork-barrel fiscal spending imaginable.

So how to avoid the zero bound? Keep inflation at 4-5% in normal times, so there is little chance that you’ll get anywhere close to the zero bound during bad times and need to resort to handing only rich people money. This is exactly what the Strong economy rule suggests, for exactly this reason.

Next, there needs to be some way to automate fiscal policy. Fiscal policy is far too important to leave to the political process on an ongoing basis. It’s simply too much to deal with over and over again. Then, we already automate fiscal policy with a combination of weak “automatic stabilizers” and the tax collection/pre-determined spending racket. It’s just our method of automating fiscal is almost completely arbitrary.

There needs to be some way to explicitly change fiscal policy as the economy changes. This is Matt Y’s point #2.  We need to know how much fiscal to use, and have a program already in place which can use that much fiscal policy.

So, apologies to Matt Y!  Also, Ramanan – can you give us some reasons this is a bad idea?

About

Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

View all posts by
Guest
wh10
3 years 11 months ago

“So how to avoid the zero bound? Keep inflation at 4-5% in normal times, so there is little chance that you’ll get anywhere close to the zero bound during bad times and need to resort to handing only rich people money. This is exactly what the Strong economy rule suggests, for exactly this reason.”

Sorry to be obtuse, but why does keeping inflation at 4-5% do this?

Guest
3 years 11 months ago

I’m very dubious about the merits of inflation. It seems to me to constantly erode wage contract values. It means that wages constantly need to be bickered over. Also the set up we have seems to give 3% wage inflation and 6% asset price inflation. That looks to me as a sustained rip off from wage earners to speculators/banks.

wpDiscuz