Scott Sumner  

Wolfers on the fiscal consensus

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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 They think that the standard argument against fiscal stimulus is "crowding out," which makes them decades out of date.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


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COMMENTS (16 to date)
David R. Henderson writes:

Good post, Scott. My take on the group, given that I’ve looked at these surveys a lot on a lot of policy issues, is that although they are “vitally interested in public policy,” on average they are not well-informed about public policy. The issue you post on is an instance.

BTW, I’m writing this on board a United flight to Chicago. I love this world we live in.

Scott Wentland writes:

I'm not sure where this survey of experts movement came from and why people put so much weight on it. Many of these surveys seem to be concerned with asking a relatively simple question with a few simple choices, ignoring that they are often asking a question that requires a more complex, nuanced response. Then the results trumpet a simple answer as gospel with "expert consensus."

Generally, I will take a well-reasoned argument and convincing data over a survey of experts any day. Scott, keep up the fight. It'll take a while, but reason will win these battle eventually.

Charlie writes:

You are making the argument that Bernanke/Fed did less monetary stimulus because there was fiscal stimulus. That implies Fed wanted a certain level of stimulus. Had there been less fiscal, Fed would have supplemented more monetary.

So the only way that more monetary stimulus would have been better is if Bernake/Fed misjudged the effects of its policy.

Assuming perfect knowledge/implementation, the correct answer to the question is disagree - it provided the exact same amount that the Fed wanted. Assuming imperfect knowledge/implementation, the correct answer is uncertain - it depends upon what the Fed would have done instead.

Could we assume the Fed did as much stimulus as possible given political constraints (various board members wanted different levels of stimulus, Fed didn't want to seem to unconventional/wacky - might risk image or independence)? Given that constraint, more fiscal stimulus increased total stimulus which helped the economy.

I am guessing that it is incorrect to take monetary policy as given and then set fiscal policy, but I don't understand why (or if) that is incorrect. I think you have discussed this, but I can't seem to find the post. Thanks.

Scott Sumner writes:

Thanks David and Scott.

Charlie, I don't believe you can take monetary policy as given. For instance, when the Fed moved aggressively in late 2012 they cited the approaching fiscal austerity as a reason. That's monetary offset.

Brian Donohue writes:

Perhaps most economists answered under 'ceterus paribus' conditions, while monetary offset argues that ceterus is never paribus.

RPLong writes:

Regarding your reasons for skepticism, #2 and #3 are probably not reliable reasons for skepticism. Who you've met and who is representative of a given population are often two very different things. It almost sounds as if you will not adjust your priors until you take a similar survey yourself.

However, I sympathize with your view that the consensus is often wrong. Particularly in matters of science (even social science), it is important to form beliefs based on empirical facts, rather than out-sourcing our beliefs to a panel of experts.

Jack PQ writes:

I think economists express more skepticism among colleagues than out in the open in public. Colleagues understand that "we can know something without knowing everything" (L.P. Hansen's wonderfully simple quote).

But to the public, for economists to admit the stimulus failed is to admit economics as a profession failed and is useless when it matters the most. So economists will pretend that all is how it should be.

charlie writes:

Is there a reason that "fiscal offset" is not an equally useful concept? I'm confused why only monetary policy is implemented strategically.

weareastrangemonkey writes:

"We simply cannot know the monetary policy counterfactual to no fiscal stimulus"

Is it really that unknowable?

Bernanke is not dead just not the head of the fed.

So someone can just ask him.

Scott Sumner writes:

RPLong, I don't follow your comment. My skepticism about the survey had nothing to do with points 2 and 3.

Charlie. Two reasons:

1. Fiscal policy is costly, monetary policy is not.

2. The Fed moves last.

wear, What makes you think Bernanke knows?

Anand writes:

(Based on Scott's paper on "monetary offset" here)

It seems to me that under one interpretation of the question (the more likely one to me, but what do I know), Scott could have answered "yes" instead of "uncertain".

Argument is simple. Fiscal stimulus increases AD by X. Monetary offset decreases AD by Y. Net increase is X - Y.

In 2009-10, with the depressed economy, it is hard to believe that Y would be large. It would be small, probably even negative (expansionary monetary policy). Thus X >> Y.

So X - Y > 0, and thus fiscal stimulus "helped". And a larger one would have helped even more.

Another counterfactual is that the Fed would be so scared by no fiscal stimulus that it would expand more than X - Y. In this case ARRA "didn't help". This, needless to say, is impossible to know, a point already made. And, as Scott says, since the Fed controls Y, it is more a matter of Fed competence than anything else.

But since you have other tools to control AD (fiscal stimulus or X), why not use it? Why not use both fiscal and monetary policy?

Scott says in the last sentence in his paper: "Attempts to jump-start the economy with demand-side fiscal stimulus merely cause the government to pile up more debt, with any growth effects being offset by the Fed".

This assumes that Y would be large in the depressed economy of 2009-10, an unrealistic assumption to me.

Mike Sax writes:

Well one person who can qualify for understanding and yet rejecting your argument is Bernanke himself who has numerous times asked for less contractionary fiscal policy as now has Janet Yellen

Scott Sumner writes:

Anand, I see no reason to assume Y is less than X. Nor does the data support that claim.

Mike, So Bernanke is qualified to evaluate the hypothesis that Bernanke overestimated the impact of QE and under-estimated the impact of forward guidance? That's a novel theory of self-awareness.

I'd add that his call for fiscal stimulus doesn't really prove he thinks it's effective, he might just prefer that the Fed balance sheet not get too large. If I ask my wife to take out the trash, does that prove I'm incapable of doing so? Does it prove I would not do so if she didn't?

Scott Sumner writes:

Anand, I see no reason to assume Y is less than X. Nor does the data support that claim.

Mike, So Bernanke is qualified to evaluate the hypothesis that Bernanke overestimated the impact of QE and under-estimated the impact of forward guidance? That's a novel theory of self-awareness.

I'd add that his call for fiscal stimulus doesn't really prove he thinks it's effective, he might just prefer that the Fed balance sheet not get too large. If I ask my wife to take out the trash, does that prove I'm incapable of doing so? Does it prove I would not do so if she didn't?

Anand writes:

I think I overstated my point. Let me come at it in another way. This does not depend on how large Y is.

The thing I find strange is the counterfactual which makes Scott's answer "uncertain" rather than "yes".

Perhaps using the other tool might have made Bernanke more complacent about using monetary policy. In other words, the counterfactual is Yprime much less than Y and Xprime = 0 (no fiscal stimulus). Then the AD boost is higher.

Should one reject a tool for increasing AD, in the hope that the really scary situation might have convinced Bernanke to take more drastic measures, so that he will expand monetary policy so much (reduce Y to Yprime) to compensate for the non-boost from fiscal stimulus (X to zero)?

pyroseed13 writes:

I thought Larry Samuleson's response was telling:

"I think the ARRA was a good idea, but this reflects faith rather than analysis."

I wonder for how many other economists on this panel this statement holds true?

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