The Austerity Files

You'll see so many blog posts and columns talking about the low interest rates and high unemployment of our times, thus arguing in favor of further fiscal stimulus.

So far, these are the least likely arguments you will hear addressed:

1. The monetary authority moves last anyway.

2. We don't need exotic "quantitative easing," we can simply print up more money and hand it out to consumers through a simple vouchers program, at basically zero budgetary cost.  If consumers save all that money, fiscal stimulus also won't have much of a kick.

3. The real fiscal problem is spending contraction at the state level (expanding and contracting spending are not symmetric in their effects; contracting spend hurts more than expanding spending helps).  The correct fiscal policy move would have been, and still is, to take Medicaid away from the states and make it fully federal.  This would give state budgets a huge break, and help employment, yet as a one-time change it reduces the moral hazard problems from ongoing outright grants.  Furthermore federalizing Medicaid is a good idea in its own right and it also could be a spur to make other improvements in the program.

4. Rather than just arguing about the most likely scenario, we should apply the same worst case scenario thinking that is recommended for climate change.

5. Macroeconomics really is just a theory.  Politicians are reluctant to spend more money, in tough times, on the basis of a mere theory.  Advocates of fiscal stimulus make it sound as simple as solving an undergraduate homework problem and I think they sometimes genuinely do not realize how much the rest of the world, including politicians, views them as simply being very convinced by their own theory.  There are plenty of historical examples with confounding factors and I've linked to some of them lately.  One default hypothesis is that the ranges of fiscal policy being discussed, whether looser or tighter, aren't going to matter much one way or the other.  

The next time you read a blog post or column on fiscal stimulus, and it isn't addressing those issues, the correct response is to think that a deeper analysis is needed.  Don't be swayed by the mere repetition of the usual arguments about interest rates, unemployment rates, and the like.


"The monetary authority moves last anyway." What a wonderfully ambiguous sentence. How long do they last for, these moves?

Eighth Army push bottles up Germans.

I wonder if the pundits are on board with the recent war on for-profit education.

I believe the problem is that the debate by policymakers remains at a level of analysis well below the arguments Krugman is making, so he's still elevating the discourse. I have little doubt that he's capable of deeper analysis.

Those are certainly some powerful arguments for antiausterity.

1. ??

2. stimulus would improve balance sheets. A very important thing.

3. agree

4. worst case scenario is Great Depression or Long Depression, i take it. Should i assume central bankers won't forget how to turn off the printing press? It seems they have forgotten how to turn it on...

5. Evolution! Just a theory!

I fear everyone is locked into conventional thinking, or perhaps we should say conventional responses since not much thinking goes on.

These are all very good points. One additional point is that I've also seen arguments for a one time payroll tax holiday in the US.

In the blog where the payroll tax holiday was suggested, some people argued against it on the grounds that it would undermine social security. However, you could grant the holiday for a portion of the income tax (say the first $50,000 annually) witheld from the paycheck and still collect the medicare and social security portions. The self employed and small businessmen would be out of luck, but combined with unemployment insurance extensions, this would get the most cash in the hands of the most people quickly.

It seems that all the stimulus measures so far, at least in the US, have been designed to do stimulus while keeping ordinary people from actually getting the stimulus money. The one exception has been the UI extension (though this is the one thing we got right that they didn't get in the 1930s, the British government's response to the Great Depression was to cut unemployment benefits!).

"I did not understand, 40 years ago when Medicaid was created, why it was a largely state-funded (but federally-mandated) program."

This is a side point, but an amazing amount of the inefficiencies of the U.S. government are linked to attempts to maintain the semi-fiction that it is a federal system and the federal government is just co-ordinating the activities of a bunch of sovereign states.

"The real fiscal problem is spending contraction at the state level"

So why do you spend most of your blog inches railing against fiscal stimulus instead of advocating federal filling of state budget gaps, Tyler. I think you're defining yourself in opposition to Krugman and Delong instead of trying to find common cause like you always claim people should.

And that's what I think of that. ;-)

Tyler, forget about nonsense macroeconomics. If you don't want to watch the Cup, you can play a "fill the blank" game. Today a WP editorial includes the following
"... it's clear that the confusion in U.S. policy is damaging the mission. Only one person can fix it -- and that is President Obama. It's time for him to make clear whether the United States is prepared to stay long enough to ensure [fill the blank]"
I'm sure your can provide a list of at least ten alternatives for your readers to fill the blank. Let us start the game.

Mostly on point question:

With interest rates so low, what is the downside to the government simply creating money for itself?

Given low enough interest rates, this becomes nearly indistinguishable from issuing new debt, and it allows the government to accrue the benefits of seigniorage directly. I believe Tyler touched on this in #2 (as distinct from quantitative easing, i.e. lowering interest rates further), but could someone provide me with a more complete explanation, please?

We will supply fewer bonds increasing the demand and lowering the interest rate we have to pay.


He may have been the first to suggest support for state budgets, but what has he done for them lately?

I'm sorry to sound peevish about this, but the vast majority of posts by Tyler have not been arguing for additional stimulus in the form of filling gaps in state budgets. The vast majority on this topic have been abstruse arguments about why the case for fiscal stimulus isn't as strong or as simple as others are pointing out. I can't evaluate whether he's right or wrong on those points, but I sure hope I hear more from Tyler trying to convince others on the economic right about why additional aid to states is a good idea and less about who moves before whom.

"The correct fiscal policy move would have been, and still is, to take Medicaid away from the states and make it fully federal."

Is this dumb or what? The finances of the Federal government are in considerably worse shape than the states. Massive austerity efforts (higher taxes, spending cuts) are inevitable at some point (see the UK, Germany, France, etc.). Tyler wants to make it worse? Wow.

However, the deeper problem is that Medicaid is grimly mismanaged. I quote from "The Medicaid Monster" (

"Since its inception over four decades ago, New York State’s Medicaid program has expanded inexorably. Today it is the nation’s most expensive by far, projected to spend a mind-boggling $49.2 billion in 2010—roughly 14 percent of the nation’s total Medicaid budget, though the state holds just 7 percent of the nation’s population."

See the graph showing vast differences in per enrollee spending between the states (Texas and California are notably frugal).

If the State of New York has failed to reform Medicaid in New York state, why would anyone think the Federal government would do any better? The State of New York has a more direct incentive than Washington ever will. Worse, once Washington is paying all the bills, the New York State Congressional delegation (Schumer, etc.) will use their considerable clout to stop any reform.

Right now, competition between the states provides some modest incentive for New York State to reform. Not enough obviously. With a Federal takeover, reform will go into overdrive, in reverse, as every state decides that the New York approach simply yields more $$$s from Washington.

The power of bad ideas is limitless...

Talk about contraction makes me wonder: Is it better for a government's economy to cut wages paid to government employees by 10% by laying people off, or to do so by lowering salaries to all employees?

Is it better to keep the same level of government employment while lowering the employees' disposable income, or to increase unemployment while keeping the disposable income of those employed high?

Quick follow up: one will point to fixed pensioners as a counterpoint to fairness. Of course there are losers in various degrees. But we must recognize that pensions and entitlements are leverage vehicles. Unfairly, federal pensions would not be relieved because they are indexed. There's a needed budget cut that no one has the guts to make.

What do you really mean by "The monetary authority moves last?" You've said it several times, but it seems either rather controversial or rather inane. For one thing, do not governments tend to take longer to act than central banks and so do so later?


Macroeconomic theories are MUCH harder to test experimentally than Microeconomic theories, lending significantly more credit to the latter.

Underlying this whole this discussion there is a very simple problem:

No one in the whole world has the slightest clue about how exactly an economic system (aka an economy) works. Period.

There is just no theory out there that will give a reasonably deterministic answer about what effect a given intervention will have under the current circumstances that is 'accepted' (in the sense of being {reasonably} falsifiable and not having been falsified while at the same time squaring up with at least the large majority of observable facts).

Tyler's points are all good.

Meanwhile, the recession is long over, and the still moderately sane US labor market will churn out the jobs in due course.

The case against those against fiscal austerity is here

"we should take away Medicaid and Medicare altogether."

Run for state office, DP Roberts, promising to prove that getting government out of health care would be better by terminating your State Medicaid program.

You can tell the over 65 crowd their Medicare will be strengthened because the Medicaid money can be used to pay for Medicare.

Since when is arresting movement towards an ever more imbalanced budget -- without even getting near balancing it -- fiscal austerity????

"Evolution! Just a theory!"

If anyone thinks that Keynesian theory is as strongly supported by the evidence as evolution is, then we are all truly f*cked.

In a fiat money economy, the existence of a government budget constraint is just a theory. Why should politicians give any more credence to this theory than to other macroeconomic theories?

Well good points carried out.Its really a frustrating task to read blogs about the low interest rates and high unemployment of the earlier times.Keep updating.

Don't forget the value of signaling. E.g., if the consumers use their vouchers to buy gold the signal is pretty much the end whistle.

tyler, you do realize that a majority of the people who respond to your posts on macro oppose your views, or at least think you're spewing nonsense. Do you ever read them and realize that you might be wrong? Or, that you are so biased against people like Krugman that it affects the thinking exhibited on your blog in a negative way?

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