Talking past each other?
2009-02-11 · Original WordPress address
This post referencing an article by Prof. Delong makes me think people are talking past each other.
Delong and compatriots say that monetary policy has failed and so fiscal policy is necessary. They then mention things about how people are suffering and how we need to alleviate that suffering. They don't go this far, but at least rhetorically they connect fiscal policy with reducing that suffering, as if its the only way to do so.
Barro et al say monetary policy hasn't run out of steam and traditional fiscal policy is ineffective. The later point is irrelevant to the economic debate, but key to the policy debate. There are some "untraditional" fiscal policies that would act to improve expectations of inflation. Also rhetorically, at least, these folks are concerned about smoothing out the business cycle.
The thing is smoothing the business cycle and alleviating suffering are the same thing. We all share the same goal! The weird thing is, if you sat everyone around the table, they'd all agree the best way to smooth the business cycle (and alleviate suffering) is to have a constant level of inflation and the best way to do that is to have constant expectations of inflation.
The honest to god dispute is which policies will bring about constant expectations of inflation. Right now traditional monetary policy isn't workable. The options are non-traditional fiscal stimulus (e.g. "helicopter drops"), quantitative/qualitative easing or both. The policy we're seeing is traditional fiscal stimulus and tons of qualitative easing.
My take on the stimulus package is that it won't be very helicopter drop-ish ((and I suspect this fiscal policy may actually slow down recovery by slowing down sectoral shifts, but that's pure speculation)). Our real hope for recovery is in the untraditional monetary policy being pursued by the Fed. So far, contra-Delong, I think its working given indicators of inflation expectations, though, I'll admit these measures of expectations are very noisy.