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Tag Archives: Fiscal Policy

Stress test the government?

During the 1920s, real interest rates were fairly high. Then during the period from 1933 to the 1950s, both nominal and real rates were fairly low. Then nominal rates rose in the 1960s, and somewhat later the real interest rate also increased. Since 2000, both nominal and real interest rates have fallen to very low levels. What lesson can we learn from this historical pattern of ups and downs? If you believe most of the pundits that I read, the proper lesson is...

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Pay attention to what people are not talking about

The Treasury Department just released the budget figures for fiscal 2019, and they are mind-boggling: Revenues increased by 4%, roughly in line with nominal GDP.  Spending soared by 8.25%, more than twice as fast as NGDP.  The budget deficit increased from $779 billion to $984 billion. Normally, spending grows faster than NGDP during recessions and slower than NGDP during booms.  Thus you’d expect federal spending to be growing at less than 4%/year.  It’s very...

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The China (manipulation) shock and the (mostly) Trump fiscal shock

During the 2000s, China was accused of currency manipulation. Many observers claimed that this policy hurt America’s tradable goods sector, boosting our current account deficit. Some argue that this led to a net loss of jobs, and/or de-industrialization. Here I’d like to point out that the same models that suggest China’s currency manipulation hurt our tradable goods sector also imply that America’s recent fiscal policy hurts this sector even more, indeed by much,...

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Do spending caps work?

The news media tends to focus on problems.  Thus it’s refreshing to see an article that examines places where things have gone right. Veronique de Rugy has a piece in Reason magazine that looks at a variety of countries that have done well, including Switzerland: After public referenda in 2001, the Swiss government in 2003 implemented a new constitutional requirement aimed at ensuring a balanced annual budget through a cyclically adjusted expenditure ceiling. The...

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Monetary offset is more mainstream than you think

I frequently argue that the fiscal multiplier is roughly zero in an economy where the central bank targets some variable linked to aggregate demand, such as inflation or NGDP. I don’t claim it is precisely zero, just that zero is a good baseline assumption to start the analysis. This claim is often viewed as being quite heterodox. In fact, at the upper levels of economics it is a quite mainstream view of how things work when the economy is not at the zero bound (like...

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Germany’s real business cycle

Germany’s large manufacturing sector has done poorly during 2019. As a result, many are calling for fiscal stimulus: Germany is the economic engine of Europe — and it’s running on fumes. After a decade of near-constant expansion, the economy is flirting with recession. Germany’s export-dependent companies are deeply exposed to fallout from rumbling trade disputes, and the critical auto industry is struggling with the shift to electric cars. That means pressure is...

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The Balance Sheet of Supply Side Economics

The major pluses of their [the supply-siders’] approach have been three. First, they came up with a way to dramatize the fact that an x percent increase in tax rates–even if it leads to higher tax revenues–will cause less than, and possibly much less than, an x percent increase in tax revenues. This was best illustrated by Arthur Laffer, with his Laffer Curve. Second, the supply-side economists’ focus on incentives made unprecedentedly prominent the harmful effects...

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The unsung success of Japan’s recent fiscal policy

The media tends to dwell on bad news. Even when something is a smashing success, say Germany’s 2004 labor market reforms, the reporting is relentlessly downbeat. The same is true of Japan’s recent fiscal policy, which has finally brought the national debt under control.  The debt to GDP ratio has leveled off at roughly 240% of GDP since the 2014 tax increase: Better yet, this fiscal austerity was associated with an extremely strong labor market, not at all the...

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Central banks should sell money, not give it away

The Financial Times has an article that discusses how central banks could give away money during a recession, in order to stimulate the economy: In the past, central banks set the price of money using interest rates. In the future, it seems, they will be giving it away. . . .  One problem with this common sense idea is its simplicity, which rarely appeals to economists charged with taking important decisions. I like uncomplicated ideas, but I don’t see how this idea...

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Advice to libertarians and progressives

In this post I’ll offer a couple of suggestions to two groups that seem to be hurting their own cause. Let’s start with the progressives. The mainstream parties in much of Europe have recently presided over some very ineffective economic policies. Perhaps as a result, some right-wing, nativist, authoritarian parties have risen in the polls. One of the most successful is Italy’s Northern League, which is now proposing a “fiscal shock” including a 15% flat rate income...

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