Wolfers on the fiscal consensus
Justin Wolfers points to a survey showing overwhelming support for the notion of a positive fiscal multiplier in early 2009:
The Initiative on Global Markets at the University of Chicago — hardly a hotbed of liberal or Keynesian thought — regularly surveys a number of the leading American economists about a variety of policy issues. The economists surveyed constitute a good sample of the leading economists in the nation, and the panel was chosen to be geographically diverse, to include older and younger economists, and importantly, to include Democrats, Republicans and independents. The most important qualification is that these are top-notch economists: senior faculty at the leading economics departments in the United States who are also vitally interested in public policy.
Here was the question:
Question: Because of the American Recovery and Reinvestment Act of 2009, the United States unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.
The results showed 37 agreed, one disagreed, and zero said uncertain (the answer I would have given.)
Was this survey as representative as Wolfers claims? Obviously not. There are lots of Chicago School/new classical/RBC/monetarist/Austrian people who would have said “disagree” or “uncertain.” The fact that the survey was sponsored by the University of Chicago tells us nothing about whether it was biased to the left (contrary to the implication of Wolfers.) But this is nitpicking, as Wolfers is right about one thing; any fair survey would have shown overwhelming support for the claim (I’d guess 80% or more, at a minimum.)
Given that all of these economists are much more distinguished than I am, should I change my views on fiscal stimulus? Maybe, but here’s why I’m skeptical:
1. Although they are more distinguished, most don’t specialize in fiscal stimulus.
2. When I talk to other economists, I am constantly surprised by several things. First, I’m shocked at how few know that monetary offset was deeply embedded in mainstream New Keynesian economics by 2007. Many have never heard of monetary offset. They think that the standard argument against fiscal stimulus is “crowding out,” which makes them decades out of date. Second, I’m shocked at how few know that in 2007 the number one monetary policy textbook taught our students that monetary policy remains “highly effective” at the zero bound. I’m surprised by how few understood that Ben Bernanke agreed with that assessment. Perhaps all these people were aware of those facts, all I can do is describe my own experiences.
3. I have never once met an economist who had ever heard of the specific argument I made about the 2009 stimulus. Not one. Until they’ve heard the argument and rejected it, it’s hard for me to give up on my views.
4. The consensus has been wrong before. The overwhelming consensus of economists did not believe money was too tight in late 2008. Now I think almost everyone recognizes the market monetarists were correct, it was way too tight. The Fed should have cut rates after Lehman failed. The vast majority of economists thought the Fed was out of ammo by December 2008. Now they’ve seen the BOJ succeed in boosting AD and depreciating the yen at the zero bound with a higher inflation target. They know there are lots of unconventional things central banks can do. They know that the US did better than the eurozone because of a less contractionary monetary policy. They’ve seen monetary stimulus adopted in late 2012 prevent the fiscal austerity of 2013 from slowing the economy (as most Keynesians wrongly expected.) Given they were wrong and market monetarists were right on these other issues, is it that much of a stretch that the same might be true of a closely related issue?
Briefly, here’s the argument I find most economists are unfamiliar with, for those new to my blogging:
1. Bernanke overestimated the efficacy of QE and underestimated the efficacy of forward guidance. Even Paul Krugman would probably agree with that statement.
2. Bernanke’s research was the Great Depression and the Japanese deflation. He had a passionately strong belief that the central banks could have and should have done much more in both cases. He felt that BOJ had it in their power to prevent the deflation. A person with that research record had no intention of presiding over another Great Depression as head of the Fed. If fiscal policy had not stepped forward, he would have moved far more aggressively, especially in the forward guidance area. Unlike QE, which did less than Bernanke expected and hoped for, more aggressive forward guidance would have done more than Bernanke expected and hoped for. We simply cannot know the monetary policy counterfactual to no fiscal stimulus, which is why the correct answer is “uncertain”.
Can anyone tell me with a straight face that the argument I just outlined was considered and rejected by the panel of 50? I only recall one person even mentioning “monetary offset” in their answer. And it wasn’t the specific scenario outline here.
I’ll let you decide. Am I hopelessly behind the Ivy League elites on monetary offset and fiscal stimulus? Maybe. But is it also possible that they haven’t fully considered the market monetarist argument? Who knows more about the other side’s argument? (Hint: if you don’t know the answer, ask yourself this: Do Americans know more about Canada or do Canadians know more about America?)
HT: Ramesh Ponnuru