Tuesday, January 7, 2014

Market monetarism contradicts itself.

In Scott Sumner’s introduction to MM, he says (Item No.10) that “Some of us are skeptical of fiscal stimulus, partly because we think monetary stimulus is more efficient for the usual deadweight cost of future taxes reasons, and partly because the central bank might offset the effect by targeting inflation or NGDP.”
As to the “deadweight cost of future tax” I assume he’s referring to the fact that if those in receipt of fiscal stimulus dollars/pounds think their windfall will be confiscated by future tax, that will substantially reduce their desire to spend the windfall. Fair point.
But at the same time, and in reference to monetary stimulus, Sumner says “…that monetary stimulus is only effective when it is expected to be permanent, is something I’ve been arguing since 1993, and Krugman picked up on in 1998.  It’s a core component of market monetarism. Nick Rowe once said that policy is 99% expectations of the future path of policy and 1% the current stance.”
In short Sumner is saying that fiscal policy is not too effective because windfall recipients think their windfall will be confiscated. But at the same time he admits that for monetary policy to work, the impression must be given that windfalls WON’T BE confiscated!!!  Hardly a fair way of comparing fiscal to monetary policy!!
Second, there is Sumner’s claim that fiscal policy may be ineffective because “the central bank might offset the effect by targeting inflation or NGDP.” I actually dealt with that point here,but to repeat and briefly, my answer to that point is as follows.
To criticise fiscal policy because the central bank might negate it is like saying that turning your central heating on is a waste of time because someone might turn it off again, i.e. “negate” the “turn on” policy. Alternatively it’s like saying “I’ve decided to dig a hole with a shovel rather than a spade, therefor spades are useless.” There is a choice as to whether to use monetary or fiscal measures (or some combination) just as there is a choice as to whether to use a spade or shovel.

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