The Power of Folk Macroeconomics
By Arnold Kling
In the past I’ve frequented discussed a strange sort of schizophrenia among macroeconomic commentators. They talk as if fiscal stimulus affects RGDP growth whereas monetary stimulus affects inflation. (Of course both affect NGDP directly, and the effect on each component depends on the slope of the SRAS.
In textbook macroeconomics, aggregate demand is aggregate demand. It does not matter whether nominal GDP goes up because of monetary expansion or fiscal expansion.
Sumner points out that in the UK they are experiencing inflation without real GDP growth. According to textbook macroeconomics, that means that there is a problem with aggregate supply, not with aggregate demand. Instead, commentators are willing to blame the inflation on loose money while blaming the low real GDP growth on fiscal austerity. My guess is that very few textbook authors will bother to correct the commentators, because the textbook authors are hostile to the conservative government in the UK. Two additional points.
1. If inflation is rising, you are not in a liquidity trap.
2. Tyler Cowen always says, “the monetary authority moves last.”
Anyway, that is all well and good from a textbook.
Folk macroeconomics consists of spending and an aggregate production function. When the government spends more, output goes up, and employment goes up. End of story. Money is just voodoo. Oh, the central bank can jigger interest rates, but that does not really do anything. (By the way, I am the really odd duck here. I think that money is just voodoo, but I do not believe in the aggregate production function, so government spending is pretty much voodoo, also.)
Anyway, I give Sumner credit for trying to stick up for textbook macro. But folk macro is easier for people to understand, so that is what you will continue to get from the media.