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Ask Not What Your Government can do for You: Macro Policy in
the Current EnvironmentRik Hafer
Distinguished Research ProfessorSouthern Illinois University Edwardsville
February 3,2012
Prologue What are your objectives in
classroom?
What is the “take away”?
Plug-and-chug vs. Policy debate
February 3, 2012
A story about fiscal policy… How has the conventional wisdom of
fiscal policy changed?
Does reality match what we teach?
February 3, 2012
Conventional wisdom, pre-1970“But quibbles about exact timing aside, the potency of fiscal policy…has been demonstrated time and again in the past couple of decades.”
Walter Heller (1969) A caricature Fiscal policy as a stabilization tool
Change G, change T and change Y
February 3, 2012
The Monetary vs. fiscal policy debate
St. Louis position Fiscal policy affects economy
Transitory Monetary policy affects economy
Lasting effects on nominal GDP and inflation
Fiscal policy without monetary support?
February 3, 2012
Fiscal policy fails: New conventional wisdom
“Dubious Keynesian Proposition #4:Fiscal policy is a powerful tool for economic stabilization, and monetary policy is not very important.”
Mankiw (1992)Political barriers
Inability to deal with deficits Lack consensus on countercyclical policy
February 3, 2012
“New” role for fiscal policy?
February 3, 2012
Spending/tax programs affect current behavior Deficits signal higher future taxes Fiscal policy is complicated (Woodford,
2011) Tax structure, spending, debt within
dynamic time dimension
Set policy for medium and longer term
Success of new conventional wisdom?
Tax policy Predictable tax structure?
Federal income tax code: > 45,000 pages Mid-1980-2001: 7,000 federal tax code
changes Debate over marginal rates in election
February 3, 2012
Success of new conventional wisdom?
Spending policy Unpredictability of deficits
Politics? Economics? CBO January 2011 projections (billions)
2015 2020Low $429 $429High $969 $1,422
February 3, 2012
Back to old conventional wisdom (pre-GR)?
Is debt sustainable? Bullard’s (2012) two worlds
Increased deficits/debt signal expectation of stronger future growth Business react and growth occurs
Increased deficits/debt signal expectation of weaker future growth
Probably in world #2
February 3, 2012
Stories we tell students
Government spending multiplier Concept or algebraic exercise? Wide range of estimates
IMF (2009) review of studies One-year spending multiplier
Range: -0.1 to 1.4
February 3, 2012
Should we ignore deficits/debt? Deficit has not crowded out private investment
doesn’t meant it could not happen Bond downgrades?
Gov’s taxing and spending choices affect us personally
Size of government debate What is government’s role Economic freedom
February 3, 2012
Monetary policy at ZLB
Bullard (2012)“In reality, the Committee has been able to run an
effective countercyclical monetary policy during the last three years via “unconventional” policy. In the theory, this makes fiscal stabilization policy ineffective.”
QE policies Not limited to financial assets Section 13.3 of Federal Reserve Act
February 3, 2012