Archive for the ‘Fiscal Policy’ Category

On the Concert of Interests and Unlearning the Lessons of the 1930s

Michael Stephens | April 20, 2017

Jan Kregel opened this year’s Minsky Conference (which just wrapped up yesterday) with a reminder that the broader public challenges we face today are still in many ways an echo of those that faced the nation in 1930s. What follows is an abridged version of those remarks:

This year’s conference takes place in an increasingly charged and divisive economic and political atmosphere. Sharp differences in approach are present within the new administration, within the majority party, and even within the opposition. It is a rather different environment than the one envisaged when planning for the Conference started last September. I had originally proposed as a title “The New Administration meets the New Normal: Economic Policy for Secular Stagnation.” It was an obvious attempt to hedge our bets on the outcome of the election. After the election the first adjustment to the title was “Can the New Mercantilism Displace the New Normal: Economic Policy under the New Administration.” As you can see the final title eventually adopted the elocution proposed at the presidential Inauguration.

My intention was not to elicit recollection of the “America First” committee’s support of isolation from the emerging European conflict in the 1930s. It was rather to recall that the phrase was first used, to my knowledge, by Franklin Roosevelt during his first election campaign.

Herbert Hoover had resolutely refrained from direct government support for the growing masses of the unemployed (although support was more than most give him credit for) for fear of interfering with the operation of the market mechanism in producing recovery from what was presumed to be a temporary cyclical downturn: “Recovery was just around the corner.” When this did not occur as expected the blame was laid on foreign financial and political events eroding confidence.

For Roosevelt, Hoover’s policy implied that “farmers and workers must wait for general recovery until some miracle occurs by which the factory wheels revolve again” but “No one knows the formula for this miracle.” Instead he argued in favor of direct measures to “restore prosperity here in this country by re-establishing the purchasing power of half the people of the country … In this respect, I am for America first.”

Instead of the miracle of a spontaneous market recovery, Roosevelt promised to take action to defend the condition of the “forgotten man” by offering him a “new deal” to protect from the ravages of bankers and industrialists. The simple substitution of “America Great” for “new deal” suggests an important similarity between the rhetoric and the target audience of the two campaigns.

It is instructive that in both cases the election was won with promises, creating a belief that appropriate actions would be forthcoming. We know from history how Roosevelt proceeded by experimentation, by trial and error, of what at the time were considered audacious, radical policies.

The question before us today is how the experimentation of the new administration may be directed to fulfill campaign promises. continue reading…


India’s Unexplored “Bill of Rights”: A Tool for Gender-Sensitive Public Policy

Lekha Chakraborty | March 3, 2017

The Justice Verma Committee submitted its report on January 23, 2013. In addition to recommendations for reforming laws related to sexual violence, harassment, and trafficking, it provided a comprehensive framework for gender justice through a proposed “Bill of Rights.” The Verma Committee’s recommendations are still waiting to be transformed into public policy.

We must not forget that this document represents an intense 30 days of work in response to a brutal gang rape of a young student in the heart of the nation’s capital in a public transport vehicle in the late evening of December 16, 2012. She was returning home with her friend after watching “Life of Pi.”

The power of this report is the acknowledgment (in the very first line of the report) that this brutal event represents a “failure of governance to provide a safe and dignified environment for the women of India, who are constantly exposed to sexual violence.” The acknowledgement is a clarion call for government policies to ensure dignity, safe mobility, and security for women.

“Bill of Rights”

The Bill of Rights is a proposed charter that would set out the rights guaranteed to women under the Constitution of India, against the backdrop of India’s commitment to international conventions. These rights are articulated as the right to life, security, and bodily integrity; democratic and civil rights; the right to equality and non-discrimination; the right to secured spaces; the right to special protections (for the elderly and disabled); and the right to special protection for women in distress.

The beauty of this Bill of Rights is that, unlike public policy approaches in which women facing differing challenges and circumstances are all treated the same, a careful analysis of heterogeneity is captured in these five dimensions (in this context, it is noteworthy that the Committee’s work is informed by Amartya Sen’s “capabilities approach”). Conceptually, the Bill of Rights lays out an analytical framework for gender budgeting to be conducted in the realm of “internal security.” When translating the Bill of Rights into policy, we need to examine existing budgets through a “gender lens” and rectify the deprivations thereby revealed.

Gender Issues in Public Policy

After every Union Budget, questions arise as to “what’s in it for women?”, but these debates have been largely been confined to just the rise and fall in allocations. The “rule of law” is a public good. The purpose of this post is to highlight this significant policy document—lying largely unexplored and with its recommendations mostly untouched—on women’s rights in India. Though the Verma Committee report was constituted to recommend “amendments to the Criminal Law so as to provide for quicker trial and enhanced punishment for criminals accused of committing sexual assault against women,” it is written in a broader context than just analyzing the legal codes.

The mere existence of the best-designed democratic institutions does not guarantee success: as noted by the Verma Committee report, even perfect laws would remain ineffective without the “individual virtuosity” of the human agency necessary for implementing the laws. Similarly, although gender budgeting—a silent revolution that integrates gender consciousness into fiscal policy frameworks—has been applied in the case of a few public expenditure budgets, it has remained sporadic and ineffective, in part due to insufficient capacity-building among the bureaucracy and a lack of accountability mechanisms.

Will the Fifteenth Finance Commission Integrate Gender?

In a co-operative federalism, it is high time that the Finance Commission “own” and integrate the gender concerns articulated in the Verma Committee’s proposed “Bill of Rights”—either in formula-based unconditional grants with a gender indicator/index as one of the criteria (just as a “climate change” variable appeared in the formula of the Fourteenth Finance Commission in sharing the divisible tax pool with the States), or as specific-purpose grants to the States to engage in meaningful gender-budgeting fiscal policy practices at the subnational level. This idea has been analyzed in my papers published by the IMF (2016) and the Levy Economics Institute (2016; 2014; 2010).

The Bill of Rights framed in the Justice Verma Committee Report can form the foundation for gender budgeting in a “law and order” context. Gender budgeting in criminal justice is a public good and needs effective planning and financing strategies, but it has so far been limited to the creation of the “Nirbhaya Fund” (designed to fund new schemes for the safety and security for women, with an initial allocation of Rs. 1,000 crores), which has been unused since 2013.


“Stimulus” Isn’t the Best Reason to Support (or Oppose) Infrastructure Spending

Michael Stephens | December 15, 2016

A little while back, Pavlina Tcherneva appeared with Bloomberg’s Joe Weisenthal to talk about the potential infrastructure policy of president-elect Donald Trump. She noted that, contrary to initial assumptions, the upcoming administration may not end up pushing public-debt-financed infrastructure spending, and that if the program simply amounts to tax incentives and public-private partnerships, it won’t be nearly as effective. But Tcherneva added another important dimension to this debate. (You can watch the interview here):

Tcherneva’s point is that infrastructure investment should be determined primarily by the state of dilapidation or obsolescence of our roads, bridges, etc., and not so much by the moment we occupy in the business cycle.

There are some who would argue that the time for a large fiscal stimulus has passed, with unemployment at 4.6 percent and growth continuing apace. There’s a good argument to be made that we’re not at “full employment” even at this moment, and that there’s no need to back off on stimulus (though there’s still the question as to whether the Federal Reserve would attempt to depress economic activity by raising interest rates in response to any substantial fiscal expansion — and, additionally, whether the Fed would succeed in those circumstances). But the point is, where you stand on this debate regarding the business cycle and the meaning of full employment shouldn’t be the driving factor behind infrastructure policy — we shouldn’t necessarily pursue or avoid infrastructure repairs and improvements for those reasons.

Moreover, if you’re looking for a job creation program, which Tcherneva would argue ought to be the point of “stimulus,” there are more effective options. In particular, she advocates a job guarantee that would provide paid employment at a minimally decent wage to all who are willing and able to work. Among other reasons, Tcherneva notes that such a program, which automatically expands during economic downturns and contracts in better times, is more effective as a countercyclical stabilizer, as compared to spending on infrastructure projects (read the tweet-storm version of the argument here).

And given that infrastructure seems to have become the go-to spending-side stimulus policy, we might also want to think about the distributive implications. continue reading…


New Book on Fiscal Policy and Macro in India

Michael Stephens | October 24, 2016

Fiscal Consolidation, Budget Deficits and the Macro Economy, by Research Associate Lekha Chakraborty, deals with debates about the macroeconomic effects of budget deficits in the context of examining fiscal policy in India over the period 1980/81–2012/13.

From the Introduction:

In India, efforts were … made to contain the fiscal deficit by both the central and state governments. The Fiscal Responsibility and Budget Management (FRBM) Act was enacted by the Government of India in 2000 with the aim to … reduce the fiscal deficit to three per cent of GDP by 2008-09. All the states in India also have introduced FRBM legislation. The rationale behind the reduction in fiscal deficits emanated from the theoretical paradigms of macroeconomics which argued that excessive fiscal deficits often trigger inflationary pressures in the economy, increase the rate of interest and crowd out private capital formation, create balance of payments crises and in turn debt spiraling. However, considerable ambiguity exists about the link between fiscal deficit and macroeconomic activity.

For more, visit Sage:



The Problem with “Gender-Blind” Economics

Michael Stephens | October 7, 2016

Pavlina Tcherneva joins Laura Flanders to discuss the need for a more gender-aware economics:


Paul McCulley Has Had It with Orthodox Macroeconomists

Michael Stephens | June 13, 2016

Writing in The Hill, Paul McCulley argues that his profession’s fussy obsession with the Fed’s zero-point-whatever monetary policy is leading us into a dead end: “after a financial crisis, itself spawned by bursting of a bubble in private-sector debt creation, the power of monetary policy to generate robust aggregate spending growth is severely truncated.”

The policy problem we need desperately to solve — whose solution is key to a robust recovery, McCulley argues — is fiscal: “fiscal deficits need to be dramatically bigger.” To that end, he adds, it’s time to place the concept of “central bank independence” in its proper context:

Central bank independence has its time and place. But when economic growth is milquetoast and the reality is that inflation is too low, not too high (with the risk of outright deflation in the event of a recessionary shock), there is no reason whatsoever for the monetary and fiscal authorities to act independently — as if they were oil and water — in pursuit of the common public good.

Right now, what the country needs is for the fiscal authority to exercise its latitude to purposely ramp up its spending more than its taxing, and for the monetary authority to print however much money is necessary to keep interest rates low, unless and until inflation smacks the economy in the face. And the fiscal and monetary authorities need to openly declare that these actions are a political joint venture.

Yes, my profession needs to remember that macroeconomics, as a discipline, is about solving collective action problems. The solutions are often politically messy, offending the sensibilities of the moneyed class. Such is the nature of effective democracy: Messiness that delivers for all.

Read it all here.

Related: “Central Bank Independence: Myth and Misunderstanding


Of Voices in the Air and Never-Ending Dreams of Helicopter Drops

Jörg Bibow | May 31, 2016

Confusions about so-called helicopter money (HM) continue unabated. My recent letter to the editor of The Financial Times, titled “’Helicopter money’ is a muddled fiscal policy by another name,” has not met with universal approval. In fact, it seems to have ruffled some feathers and caused some annoyance.

Simon Wren-Lewis is a case in point. In a response to my letter (and a piece in the FT by John Kay) published on the Mainly Macro blog, Wren-Lewis reiterates his concerns that trying to distinguish fiscal from monetary policies is ultimately pointless and that central banks need to have HM in their armory since otherwise delegating stabilization would be dangerously incomplete. Mr. Wren-Lewis is perhaps best known for his selfless efforts at trying to wring any sense out of mainstream macroeconomics – an endeavor that takes a lot of wringing indeed. Another case in point is fellow helicopter warrior J. Bradford DeLong, who re-published Wren-Lewis’s HM elaborations on his own blog with the remark “intellectual garbage collection.” The wisdom of HM is just too obvious to be challenged, it seems.

But first recall here that Bradford DeLong is the supposedly “New Keynesian” macroeconomist who a few years back published a piece titled “The Triumph of Monetarism?” in the Journal of Economic Perspectives, arguing – quite correctly actually! – that New Keynesianism was really muddled New Monetarism by another name. It is also the same new monetarist economist who not so long ago published a piece together with Larry Summers titled “Fiscal Policy in a Depressed Economy,” in which the two argued that the time was right for governments to ramp up their investment spending and not worry about debt. That argument made quite a bit of sense to me at the time – and it still does today, as I suggested in my FT letter.

In any case, I was quite amused when at an event at the Brookings Institution on May 23 Larry Summers proclaimed that: “Helicopter money, hear me, helicopter money is fiscal policy. There is no such thing as helicopter money that isn’t fiscal policy.” That may well be just yet another useless point to make of course. But I will leave it to Messrs. Wren-Lewis and DeLong to do the intellectual garbage sorting of Mr. Summers’ remark.

Moving on, a rather interesting piece was published on VoxEU by Claudio Borio (together with Piti Disyatat and Anna Zabei). Borio’s earlier research at the BIS focused on central banks’ operating procedures. He isn’t someone who can be easily fooled about what central banks are doing or not doing. Furthermore, and this may not be a coincidence, he is also one of those rare cases among monetary economists who clearly identified what I long ago dubbed the “loanable funds fallacy” in Ben Bernanke’s “saving glut hypothesis” (see here). continue reading…


Bibow on Helicopter Money in the FT

Michael Stephens | May 19, 2016

In the Financial Times, Jörg Bibow writes in reaction to an article by Stephanie Flanders on “helicopter money” — the idea of having the central bank directly credit citizens’ bank accounts (or, in the thought experiment, to print bank notes and drop them from helicopters) with the aim of generating increases in consumer spending.

Bibow observes that helicopter money is really just fiscal policy, properly understood, and adds that it is preferable that elected fiscal authorities actually do their job — increase spending — during a period of inadequate demand; perhaps by investing in the “energy infrastructure,” as Bibow suggests.

Read the letter here.


Donald Trump’s Printing Press Sends the Media to the Fainting Couch

Michael Stephens | May 18, 2016

Donald Trump generated some breathless commentary last week (perhaps, for once, unjustified) for suggesting, in response in part to those who have pointed out that some of the policies he has pseudo-proposed would enlarge the deficit, that the US government can always pay its bills: “This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK?” (He had also suggested that the government might buy back government debt at a discount if interest rates rise. Dean Baker argues this would be pointless, not disastrous.) Among the responses to these comments were claims that this “money printing” business would, ipso facto, be (hyper)inflationary.

L. Randall Wray spoke to Bloomberg’s Joe Weisenthal about the issue. Wray emphasized that the government always spends by “printing money,” or more accurately, by crediting bank accounts through computer keystrokes. With respect to whether Trump’s purported policies would or would not be inflationary then, the central question for Wray is not whether Trump would or would not have the government “printing money,” but whether the economy would be at full employment. At that point, a government deficit of sufficient size could be inflationary (in other words: “So, yes, deficits do matter, but not for solvency“).

Watch the interview here at Bloomberg:

Weisenthal Wray Interview


Dear Time Magazine Readers, the United States Is Not Insolvent

Michael Stephens | April 25, 2016

This is apparently the latest cover of Time magazine:

Zombie Time Magazine Cover

The idea that the US government or the nation as a whole is “insolvent” has an undying appeal. The fear of (or yearning for) some manner of budget crisis has waned somewhat over the last couple of years (one hopes this is due to the fact that most people alive today have never lived through a period in which the deficit has shrunk so rapidly), but stories like this will never go away.

The 25th Minsky conference wrapped up recently (video of all the speakers is posted here), and in one of the sessions Stephanie Kelton delivered a presentation in which she argued that, in contrast to almost any other area of policy, there is one issue on which Democrats and Republicans agree: a public debt crisis is looming. In addition to some disagreement over when the crisis will strike (hawks: yesterday; doves: in a decade or so), they differ merely on the question of how to solve this perceived problem: by cutting spending or raising revenue. This broader moment of bipartisan consensus, Kelton argued, is tarnished only by being wrong.

Among her efforts to dispel the appeal of the debt crisis narrative, Kelton pointed out that US government deficits are the mirror image of non-government surpluses (domestic private sector surpluses plus current account deficits), with a nod to what Goldman Sachs’ Jan Hatzius once described as “the world’s most important chart.” The upshot, she argued, is that calling for a reduction of public sector deficits in the presence of persistent current account deficits should be understood as calling for a reduction of the private sector’s surpluses. Kelton put together the following chart, which flips the script on the Simpson-Bowles-era discussions of how rapidly we should bring down the budget deficit:

Kelton_Flip the Script_Minsky Conference

“Ask the same question now. Now the graph doesn’t show the path of projected government deficits, but instead the path of projected non-government surpluses. So the question becomes how rapidly would you like to reduce the non-government surplus? You want to do it really quickly, follow the blue line; just bring surpluses down very sharply. Would you like to reduce the surpluses in the non-government sector more slowly, a more gradual approach. Or would you like to rethink this exercise all together because you think it’s madness that a policy objective is to reduce non-government surpluses? […]

In other words, their red ink is our black ink. And setting out to reduce budget deficits by $4.1 trillion over the next ten years is the same as saying my goal is to reduce the non-government surplus by 4.1 trillion over the next ten years. One might sound reasonable and the other sounds like madness, but it’s the same thing said two different ways.”

Watch her presentation (slides here):

Two other speakers at the conference mentioned a different, perfectly orthodox reason to stop worrying about a US public debt crisis. Even if you’re convinced that a debt ratio of the size predicted by the Congressional Budget Office’s long-run budget forecast represents a threat, there are reasons to doubt that we’re destined to reach that level. continue reading…