Ken Rogoff writes:
I am puzzled that so many economic pundits seem to think that the solution is
for all governments, rich and poor, to pass out even more cheques and subsidies
so as to keep the boom going. Keynesian stimulus policies might help ease the
pain a bit for individual countries acting in isolation. But if every country
tries to stimulate consumption at the same time, it won’t work. A general rise
in global demand will simply spill over into higher commodity prices, with
little helpful effect on consumption. Isn’t this obvious? Yes, there is still a
financial crisis in the US, but stoking inflation is an incredibly unfair and
inefficient way to deal with it.
In other words, if the initial shocks are real, boosting aggregate demand won’t have much of a positive effect plus it will worsen inflation. Maybe it’s a good thing the stimulus package is too small to be very "effective." Mark Thoma adds comment. I am, however, puzzled by Rogoff’s distinction between a single-country stimulus package and the global combination of such packages. If nominal stickiness is a binding problem in enough sectors, a large enough stimulus can work no matter how many countries do it. If nominal stickiness is not a major binding problem (and I suspect this is the relevant case), then even a single-country stimulus plan will be ineffective.
His reasoning seems to be that an individual country can consume more without having a large effect on commodity prices, but if all countries spend more together, commodity prices will rise to choke off the attempted increase in demand. Its a strange argument. I’ve never heard an economist make the argument that commodity prices are an important macroeconomic stabilizer. Typically, you think of interest rates as playing that role. Since the debates over the Pigou effect, the consensus has been that goods prices really don’t matter much as stabilizers. I’m not sure why commodity prices would be any different.
BTW, Tyler, I think you’re wrong about nominal stickiness being an important consideration here. Prices can be flexible and rise and the economy will remain above potential as long as the poicy interest rate is too low. Remember, if the problem is too much demand overall, then all prices should rise together, more or less proportionally, and there should be very little real effect on demand.
If nominal stickiness is a binding problem in enough sectors, a large enough stimulus can work no matter how many countries do it. If nominal stickiness is not a major binding problem (and I suspect this is the relevant case), then even a single-country stimulus plan will be ineffective.
Erm… No. Oil is a tradable, so a single country stimulus plan would be effective (at least partially). Even if the economy is large, like the US is, its demand is still just part of worldwide demand for oil. However, as Rogoff points out, if all countries attempt to stimulate demand then the spill into commodity prices would be larger, especially considering the relative low elasticity of oil demand.
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