Archive for the ‘Fiscal Policy’ Category

“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…


The Crisis in Brazil and the “Narrow Path” for Economic Policy

Michael Stephens | April 22, 2016

The big political story in Brazil is the potential impeachment of President Dilma Rousseff (Brazil’s lower house of congress voted in favor of impeachment; the motion now moves to the senate for consideration). To get an idea of how messy this situation is, note that the man leading the impeachment attempt, Speaker of the House Eduardo Cunha, is facing 184 years in prison for his role in the Petrobras corruption scandal. (In the NYTimes‘ Room for Debate series, Laura Carvalho describes the impeachment process as a parliamentary coup. See also Felipe Rezende’s critical take on the charges for which Rousseff is ostensibly being impeached: violation of the Fiscal Responsibility Law.)

All of this is happening against the backdrop of a multi-faceted economic crisis. Here’s Fernando Cardim de Carvalho’s summary of the situation from his latest policy note:

Brazilian real GDP is estimated to have contracted 3.8 percent in 2015. Meanwhile, annual inflation reached 10.7 percent in 2015 … The overnight cost of bank reserves in the interbank market (SELIC) is currently 14.25 percent. The exchange rate to the US dollar is around R$4, a 50 percent increase over a year ago. Fiscal space for implementing recovery policies is practically nonexistent, with fiscal deficits reaching 10.3 percent of GDP … Unemployment has been growing rapidly and the outlook for 2016 is not promising, to say the least, with the International Monetary Fund (IMF 2016) projecting a further contraction in GDP of 3.5 percent. Concerns about the solvency of large firms that have sharply increased their foreign indebtedness in recent years intensified with the steep devaluation of the real in 2015.

Cardim de Carvalho recently presented his analysis of Brazil’s political and economic challenges at the 25th Minsky Conference. He observed that for once the balance of payments has not played a key role in this economic crisis; nor are there any easily identifiable “external villains” this time around: “this … is an entirely domestically generated crisis.” (Here are the slides from his presentation; video is embedded below the fold.)

As he points out in the policy note (pdf), even a fully functioning, stable government would have a hard time addressing this mix of economic problems, but as it stands, it isn’t even clear who will be running the country in the near future. Cardim de Carvalho pins Brazil’s hopes[1] partially on maintaining the devaluation of the Brazilian real and advocates a change up in fiscal policy. But even here, there’s not much room for policy maneuvering: “For all practical political purposes, Brazil is stuck with fiscal austerity,” he laments.

Under the circumstances, policymakers might be able to do less damage by turning to what Cardim de Carvalho calls “smarter austerity”:  “an increase in public investment paired with less damaging spending cuts and revenue increases, could limit the negative impact on aggregate demand.” The problem, as he explains, is that implementing this kind of budgetary shift would require managing some complicated political trade-offs. Reading the headlines this week, it’s hard to imagine the political system pulling this off, no matter who ends up running the country until the 2018 elections. He’s not optimistic:

Only skillful negotiation led by a trusted political leadership could obtain current sacrifices from participants with a view to achieving better results in the future. Unfortunately, there does not seem to be the slightest possibility that such a negotiation could happen in the near future. The government does not seem capable of doing it. All initiative was lost when avoiding or beating an impeachment process became its first and practically only priority. On the other hand, no legitimate organized opposition exists to present demands and lead a negotiation on behalf of the people. The country has no “elders” to appeal to, no statesmen of recognized stature who deserve the trust of the nation.

Under such circumstances, until Brazil gets closer to the presidential elections scheduled for 2018, there seems to be no plausible alternative to the continuation of the recession and political uncertainty.

You can read the policy note here. See also Cardim de Carvalho’s working paper for more detailed data on how the Brazilian economy got to this point.

[1] “Hope” being the operative word: “While the extent to which the recent devaluation will help to engineer a sustained recovery is unclear, there is little doubt that a return to the overvaluation characteristic of the post-1994 period would kill any such possibility.” He expresses concern that Brazil’s deindustrialization may limit any potential expansionary effect from devaluation.

continue reading…


Is There a Solution to Brazil’s Crises?

Michael Stephens | April 5, 2016

This is the first of a series of blog posts on the Brazilian crisis by Felipe Rezende.


There are two major crises Brazil’s President Dilma Rousseff is facing: one is a political crisis and the other is Brazil’s sharpest recession in 25 years.

Brazil’s Political Crisis

The political crisis has two main pillars: a) a vast corruption scandal (with evidence of a kickback scheme funneling billions of dollars from state-run firms and, more recently, in a massive data leak over possible tax evasion, Brazilian politicians linked to offshore companies in the Panama Papers); and b) impeachment proceedings to move forward against President Dilma Rousseff.

The Federal Court of Accounts (TCU) announced in 2015 that it had rejected the accounts of Rousseff’s administration for the year 2014. In a unanimous vote, the TCU ruled Dilma Rousseff’s government manipulated its accounts in 2014 to “disguise fiscal deficits” as she campaigned for re-election. The allegation is that Ms. Rousseff manipulated Brazil’s account books to hide a growing fiscal deficit.

The argument is that the federal government borrowed money from public banks (which is forbidden by the Fiscal Responsibility Law) to pay for social programs. So, they argued she allegedly committed an administrative crime.

Once we understand how the government spends and what bonds are for, then we can analyze TCU’s decision. The Treasury has an account—known as Treasury Single Account—with the central bank. When the Treasury spends, its account with the central bank is debited and the bank’s account with the central bank is credited. This is followed by a credit to the beneficiary’s bank account. That is, the public bank then makes payments to the social program beneficiary by issuing deposits (Case 1).

Case 1. The Treasury spends using its account with the central bank

Case 1_Rezende_Brazil

The issue at hand is that the federal government made payments for social programs using its public banks but it delayed payment to the same banks. That is, the federal government did not use its account at the central bank to credit the public banks’ account with the central bank while public banks made those social benefits payments. So, public banks made the payment (by creating demand deposits) and on the asset side there was an increase in credits (“loans”) to the Treasury (Case 2), which is forbidden by the fiscal responsibility law. In a “normal” transaction banks’ reserve balances (that is, government IOUs) with the central bank would go up, but because the Treasury delayed payments to banks there was in increase in balances owed by the Treasury to the public banks. This led the TCU to conclude that this was a “financing” operation. continue reading…