Ben Bernanke has a longish post about fiscal policy in the
Caligula Trump era. It’s not the most entertaining read; perhaps because of the political fraughtness of the moment, Bernanke has reverted a bit to Fedspeak. But there’s some solid insight, a lot of it pretty much in line with what I have been saying.
Notably, Bernanke, like yours truly, argues that the fiscal-stimulus case for deficit spending has gotten much weaker, but there’s still a case for borrowing to build infrastructure:
When I was Fed chair, I argued on a number of occasions against fiscal austerity (tax increases, spending cuts). The economy at the time was suffering from high unemployment, and with monetary policy operating close to its limits, I pushed (unsuccessfully) for fiscal policies to increase aggregate demand and job creation. Today, with the economy approaching full employment, the need for demand-side stimulus, while perhaps not entirely gone, is surely much less than it was three or four years ago. There is still a case for fiscal policy action today, but to increase output without unduly increasing inflation the focus should be on improving productivity and aggregate supply—for example, through improved public infrastructure that makes our economy more efficient or tax reforms that promote private capital investment.
But he gently expresses doubt that this kind of thing is actually going to happen:
In particular, will Republicans be willing to support big increases in spending, including infrastructure spending? Alternatively, if Congress opts to reduce the deficit impact of an infrastructure program by financing it through tax credits and public-private partnerships, as candidate Trump proposed, the program might turn out to be relatively small.
Let me be less gentle: there will be no significant public investment program, for two reasons.
First, Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top; they aren’t even talking about public investment, and would probably drag their feet even if Trump came forward with a detailed plan and made it a priority.
But this then raises the obvious question: who really believes that this crew is going to come up with a serious plan? Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program.
So investors betting on a big infrastructure push are almost surely deluding themselves. We may see some conspicuous privatizations, especially if they come with naming opportunities: maybe putting in new light fixtures will let him rename Hoover Dam as Trump Dam? But little or no real investment is coming.
You may be surprised at the evident panic now seizing Republicans, who finally — thanks to James Comey and Vladimir Putin — are in a position to do what they always wanted, and kill Obamacare. How can it be that they’re not ready with a replacement plan?
That is, you may be surprised if you spent the entire Obama era paying no attention to the substantive policy issues — which is a pretty good description of the Republicans, now that you think about it.
From the beginning, those of us who did think it through realized that anything like universal coverage could only be achieved in one of two ways: single payer, which was not going to be politically possible, or a three-legged stool of regulation, mandates, and subsidies. Here’s how I put it exactly 7 years ago:
Start with the proposition that we don’t want our fellow citizens denied coverage because of preexisting conditions — which is a very popular position, so much so that even conservatives generally share it, or at least pretend to.
So why not just impose community rating — no discrimination based on medical history?
Well, the answer, backed up by lots of real-world experience, is that this leads to an adverse-selection death spiral: healthy people choose to go uninsured until they get sick, leading to a poor risk pool, leading to high premiums, leading even more healthy people dropping out.
So you have to back community rating up with an individual mandate: people must be required to purchase insurance even if they don’t currently think they need it.
But what if they can’t afford insurance? Well, you have to have subsidies that cover part of premiums for lower-income Americans.
In short, you end up with the health care bill that’s about to get enacted. There’s hardly anything arbitrary about the structure: once the decision was made to rely on private insurers rather than a single-payer system — and look, single-payer wasn’t going to happen — it had to be more or less what we’re getting. It wasn’t about ideology, or greediness, it was about making the thing work.
It’s actually amazing how thoroughly the right turned a blind eye to this logic, and some — maybe even a majority — are still in denial. But this is as ironclad a policy argument as I’ve ever seen; and it means that you can’t tamper with the basic structure without throwing tens of millions of people out of coverage. You can’t even scale back the spending very much — Obamacare is somewhat underfunded as is.
Will they decide to go ahead anyway, and risk opening the eyes of working-class voters to the way they’ve been scammed? I have no idea. But if Republicans do end up paying a big political price for their willful policy ignorance, it couldn’t happen to more deserving people.
Some further thoughts on the macro situation: some of us spent years trying to convince others that the post-crisis environment changed the rules, especially for fiscal policy. Now we have a new problem: how to explain that the rules have (somewhat) changed back without leading to a lot of stupid gotchas, “You said that and now you say this”
The thing is, people like me or Simon Wren-Lewis have been consistent all along; and saying that the rules have changed back is just an application of the same basic framework that worked so well after 2008 — basically an updated version of IS-LM.
Again, think of aggregate demand as reflecting the interest rate, other things equal, while monetary policy normally leans against changes in GDP, so that there’s an upward-sloping LM curve — but because it’s really hard to cut rates below zero, that curve is flat at low levels of output. Short-run equilibrium of output and interest rates is where the IS and LM curves cross:
Now, suppose you’re considering the effects of policies that will, other things equal, raise or lower aggregate demand — that is, shift the IS curve. In normal circumstances, where the IS curve intersects an upward-sloping LM, such shifts have limited effects on output and employment, because they’re offset by changes in interest rates: fiscal expansion leads to crowding out, austerity to crowding in, and multipliers are low.
In the aftermath of the financial crisis, however, we spent an extended period at the ZLB, as shown by the “2010” IS curve. In those conditions, shifts in the IS curve don’t move interest rates, there is no crowding out (actually crowding in because increased sales lead to higher investment), and multipliers are large.
In that kind of world, prudence is folly and virtue is vice. Almost anything that leads to higher spending is a good thing; we were in coalmines and aliens territory.
Even at the time, however, I tried to explain that this wouldn’t always be the case. From the linked post:
Oh, and let’s always remember that Keynesians like me don’t believe that thing like the paradox of thrift and the paradox of flexibility are the way the economy normally works. They’re very much exceptional, applying only when interest rates are up against the zero lower bound. Unfortunately, that happens to be the world we’re currently living in.
So are we still there? No. Wages are finally rising, quit rates are back to pre-crisis levels, so we seem to be fairly close to full employment, and the Fed is raising rates. So it now looks like the “2017” IS curve in the figure. We’re just barely over the border into normality, which is why I think the Fed should hold and we could still use some fiscal stimulus for insurance, and very low rates still make the case for lots of infrastructure spending. But it’s not the same as it was.
Paul Waldman has a righteous rant on Congressional Republicans, who posed as the hawkiest of deficit hawks as long as a Democrat was in the White House, but are now fine with huge debt increases under Trump. But really, is anyone except the fiscal scolds surprised? The fraudulence and flim-flam of GOP deficit poseurs was obvious all along.
What is true is that the GOP flip-flop – flim-flam-flop? – is especially noteworthy because of the macroeconomic timing. Deficits were the ultimate evil when the economy was depressed, monetary policy was stymied by the zero lower bound, and we really needed fiscal expansion. Now deficits are fine at precisely the moment when the economy seems to be fairly close to full employment, the Fed is starting to hike rates, and the case for fiscal expansion, while not completely absent, is fairly subtle, resting mainly on the precautionary motive.
But will Republicans pay a price for their hypocrisy? Probably not: my guess is that professional centrists will move the center, as they always do, to declare both parties equally at fault, while the news media will continue to canonize Paul Ryan, who looks Very Serious as he instantly abandons all his supposed principles.
And meanwhile I and other Keynesians are getting mail accusing us of being the hypocrites: “You were for deficits when Obama was in, now they’re bad!”
But as I just said, the situation has changed.
Nobody knows precisely how close we are to full employment; we have very little reason to trust estimates of the NAIRU, if such a thing even exists at low inflation rates. However, some unambiguous indicators of labor market tightness clearly show an economy looking much more like its pre-crisis self than it did a few years ago. As the figure shows, wages are finally rising at a reasonable clip, and quit rates are more or less normal, suggesting that jobs are relatively easy to find.
I’d be a lot more comfortable about the state of affairs if we had more-or-less full employment along with an interest rate well clear of the ZLB, so that the Fed had evident room to cut in the next recession; the fact that we don’t is why I still think modest fiscal stimulus is appropriate, and so is monetary forbearance until inflation is higher. But it’s nothing like the situation in 2010.
When the macroeconomic situation changes, I change my policy recommendations. What do you do?