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Tag Archives: Fiscal Policy

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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Fiscal austerity in Japan

Because history is written by Keynesians, many people have a highly distorted view of fiscal policy.  They attribute the double dip Eurozone recession (2011-13) to fiscal austerity, whereas it was actually caused by an extremely tight money policy at the ECB.  Or they think the Great Inflation of 1966-61 was triggered by an expansionary fiscal policy, whereas budget deficits during the 1960s were actually quite small.  And few people know that Japan’s long deflation...

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How not to save for college

Twenty years ago, my wife and I faced the question of how to save for my daughter’s college education. (BTW, why did I have to pay for both my college education and my daughter’s?) Suppose I had suggested the following plan to my wife: We’ll invest $10,000/year in collectables. We can buy some Song dynasty porcelain, ancient Greek coins, 17th century French furniture and etchings by Durer, Goya and Rembrandt. Then we’ll sell them after 18 years to pay for her...

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Sebastian Edwards on MMT and Latin American populism

Sebastian Edwards is perhaps the world’s leading expert on populist policies in Latin America. He has an excellent new paper discussing the lessons of Latin American populism for the debate over MMT. Here’s the abstract: According to Modern Monetary Theory (MMT) it is possible to use expansive monetary policy – money creation by the central bank (i.e. the Federal Reserve) – to finance large fiscal deficits that will ensure full employment and good jobs for everyone,...

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Hummel on Modern Monetary Theory

If we focus solely on MMT’s [Modern Monetary Theory’s] essential claims about money, distinct from any associated policy proposals, it is neither new nor modern. It simply justifies funding government expenditures by issuing fiat money, which, of course, all economists have long been aware is possible. MMT then attempts to downplay the potential inflationary impact of such financing with manipulations of the government and central-bank balance sheets. But it merely...

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Spending must be paid for—but when?

There’s been a lot of recent discussion about the budget deficit, which is growing rapidly. Some argue that this is not a problem, while others see a crisis coming. I believe that both sides are wrong. I don’t believe the deficit will lead to high inflation, nor do I expect default. There may be some increase in interest rates, but probably not very large.  Nonetheless, it is a problem. All government spending must be paid for with taxes (if one treats inflation as a...

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