The next paragraph, after that opening:
Our contention has been that lower interest rates decrease the fiscal and the economic costs of public debt. In addition, lower interest rates and the effective lower bound on nominal interest rates limit policymakers’ ability to use monetary policy, requiring them to rely more on fiscal policy to sustain demand and activity. We have made a careful case for the use of primary deficits to sustain demand where needed, and for the use of these deficits to finance growth-friendly measures, such as the fight against global warming, or the financing of transition costs of reforms, or other types of public investment. We have argued that, by increasing investment, a well-designed fiscal policy can contribute to increased neutral rates, in turn making monetary policy more effective.So the main thrust of their argument is that low interest rates make public debt a good deal. A secondary issue, offered "in addition" to the main thrust, is that low rates make monetary policy ineffective. Third, they have made "a careful case" that deficit spending would be a great way to expand "the fight against global warming".
To pick up where I left off yesterday, it's all bullshit.
It's certainly not economics. Economics wouldn't focus on getting you a bargain price on the fight against global warming. I think Blanchard and Ubide only bring up global warming because it has a pre-existing fan base which they hope to use to expand their readership. What else could it be? That they don't know the difference between macro-economics and bargain-hunting? Give me a break.
Where is the part where Blanchard and Ubide ponder the need "to sustain demand" and how that need arose and whether their recommended solution even works?
And how the hell did the failure of monetary policy get to be just an afterthought? What's wrong with these people?
The one sentence that impresses me:
We have argued that, by increasing investment, a well-designed fiscal policy can contribute to increased neutral rates, in turn making monetary policy more effective.That's economics. That's where they should be all the time. But you can't just give it one sentence and think you're done. If you want to increase investment, you need to know why investment is insufficient and you might want to know the cause of the cause, and the cause of the cause of the cause.
If you work backwards like that, eventually you'll find that the ultimate cause of most any economic problem is policy. Policy that's just wrong, or policy that was right but then the economy changed. Add a little irony to that and make it that the economy changed because of policy (as it should), and you've got the Lucas critique.
Now that's funny.
2 comments:
I think they're saying that it's more effective to deficit-spend on some kind of investment that is likely to increase growth in the future, such as preventing global warming. Another example might be infrastructure: highways, power grid, water, etc.
e.g. It seems plausible that part of the reason for the good growth in the US in the 60s was deficit spending on infrastructure (highways, etc) in the 30s, 40s and 50s.
(I don't follow the "neutral rates" thing -- maybe that is a second unrelated effect of the spending. Or maybe it is an effect of the increased growth later on (an indirect effect of the spending/investment).)
Jerry
"more effective to deficit-spend" on investment when rates are low, because it pulls the neutral rate up and makes monetary policy more effective?
That's interesting. But it's like pulling teeth to get that from their paragraph.
Based on the one paragraph, for Blanchard and Ubide the most important detail seems to be the decreased cost of public debt due to low interest rates. (Who are they writing for, the Home Shopping Club?) And they do sense that the ineffectiveness of monetary policy is important, but not important enough to take priority over the bargains available to deficit-spending governments.
I am not objecting to deficit spending, or investment, or the fight against global warming. I am objecting to Blanchard and Ubide's apparent priorities, their sense of what's most important. Also, I apparently disagree with them on what is, and what is not, economics.
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