Paul Krugman is
dismayed by something Christopher Sims said a Jackson Hole
Sims said
Fiscal expansion can replace ineffective monetary policy at the zero lower bound, but fiscal expansion is not the same thing as deficit finance. It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as fi- nanced by future inflation, not future taxes or spending cuts.
I promise that my immediate thought when I read the Sims quote somewhere else yesterday is that another effective fiscal stimulus would be increased government consumption whether financed by future spending cuts, future taxes or even current taxes with no increase in the deficit ever.
I sense the long term damage done by Milton Friedman's rhetorical brilliance. Friedman somehow managed to redefine Keynesian stimulus as temporary tax cuts and not as temporary deficit financed spending increases (which is you know (at least I hope you know) the policy that Keynes actually advocated).
Sims makes it fairly clear that he is not considering spending increases. I don't know why. The statement "fiscal expansion ... requires deficits" is false for all existing macroeconomic models and makes no sense *unless* fiscal is interpreted to mean "based on taxes alone for given government spending".
DeLong is in the title for two reasons. First he remarked somewhere on the amazing success of Friedman's rhetorical trick (one among his many completely brilliant, unscrupulous and successful triks: others are saying that keeping the growth of the money supply constant via constant monetoriing and intervention is laissez faire, saying the Fed caused the great depression because he thinks the Fed could have countered the private sector crisis (as it tried to do in 2008 so the current evidence is that the Fed could have made the great depression a great recession), and pretending that prominent Keynesians claimed that the expectations unaugmented Phillips curve was stable). Second, he regularly has the effect on me that Sims had on Krugman when he writes things to the effect that *THE* solution to inadequate aggregate demand in a liquidity trap is to increase the supply of safe assets. I try to always comment that balanced budget fiscal expansion would also work without any increase in the supply of any assets. He always agrees until the next time he writes that.
There is something strange going on there in Berkeley & Jackson Hole . I am at least as confused as Paul Krugman (as is usual).
update: There is a third reason to put Brad in the title. He wrote this post before I did, then added an interesting post with a model and all that. He usefully adds that Sims might also have considered a model in which there is government spending but GDP is defined as GDP-G, that is there is no fiscal stimulus do to increased spending if the multiplier is 1. It is indeed true that a lot of Ricardianoid arguments are based on the equation 1=0 in which "multiplier effects" mean a multiplier greater than 0 if one is discussing optimal policy and a multiplier greater than one if one is discussing the evidence. I hit post and *then* surfed over to Brad's blog (usually a mistake).
