Thursday, December 13, 2012

Latest Article in the Atlantic

Ramesh Ponnuru and I have a new article in the Atlantic where we argue concerns about the fiscal cliff are exaggerated if the Fed continues to stabilize nominal spending.  We note two experiences that support this notion:
The Bank of England vividly demonstrated the power of central banks to offset fiscal policy at the dawn of the Thatcher era. In 1981 her government introduced a budget that would sharply reduce the deficit in the midst of a recession. Most economists opposed it on Keynesian grounds, with 364 of them signing a now-famous letter arguing there was "no basis in economic theory or supporting evidence" for it. Yet the Thatcher government implemented its plan and by late 1981 the economy was recovering. The Bank of England at the same time had begun a cycle of monetary policy easing, and the economists had underestimated its effects.
Something similar happened in Canada in the mid-1990s. After running several decades of budget deficits that had led to a debt-to-GDP ratio of 70 percent in 1995, then-Finance Minister Paul Martin introduced a budget plan that began a half decade of reducing the federal budget, largely through cuts in spending. This fiscal tightening led to budget surpluses by the early 2000s. As in the British case, the Bank of Canada eased monetary policy over the same time, offsetting any fiscal drag. The economy performed nicely.
The same outcome is possible for the U.S. fiscal cliff, but would require the Fed to adopt a NGDP level target.  Reihan Salam provides a smart follow-up discussion here.

P.S. This 2010 IMF article lends further support to our claim.  It shows that countries undertaking fiscal consolidation do much better when monetary policy accommodates it.


  1. Kudos Beckworth, on the articles and this blog.

    My only complaint is that the MM community is not pressing for even larger QE, and more forceful pursuit of economic growth by the Fed.

    But kudos all around MM-land!

  2. You are a bigger idiot than Ben Bernanke. Probably voted for Obama and don't have the first clue what will happen when the dollar crashes by 2014.

  3. I assume that the use of the word "idiot" means I am the target of the sobriquet, and not Beckworth.

    In fact, In fact I have only the usual clues as to what will happen if the dollar should decline in value in 2014. I assume exports will surge, and tourism to the USA will jump. And there will less Americans traveling overseas on vacation.

    Have you a better explanation the perils of a decline in the dollar? You seem to be suggesting a catastrophe. Let's hear it.

  4. The problem that can't be solved by monetary policy is "too much gov't spending".

    Which is the current US problem, and most Euro country problems. One fear that MM folk should have is that NGDP targeting is followed by CBs, but because of excess gov't waste, economies continue to have problems -- thus indicating NGDP isn't good enough.

    Because no money policy works with excessive fiscal waste. The two UK and Canada examples should be used by small gov't (Reps?) folk to argue for spending cuts, without fear of further econ reductions by expecting better Fed policy.