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2015-11-17 09:13:43
Nov 13th 2015, 14:57 by R.A. | LONDON
TYLER COWEN has set out his macroeconomic framework, circa 2015. I am surprised
at how much there is to his list that I disagree with. Rather than nitpick,
however, I'll give my own very general framework. There is a lot of nuance and
detail left out of the list below; it is more a set of rough principles.
1) Supply-side policy is hard. Why is America the richest large economy in the
world? Well, because output per person has grown at about 2% per year, on
average, for a very long time. How did it manage that? I have a long list of
policy choices and characteristics and historical accidents that I believe
contributed, but I would find it very difficult to say which of those factors
were most important. If someone gave me free rein over the German economy and
asked me to raise its output per person to American levels, I know the sorts of
things I would do, but I have a low level of confidence that I could succeed,
or even close much of the gap, within a generation.
2) That doesn't mean that supply-side policy should be ignored. Supply-side
reforms (of the sort this newspaper tends to favour) are politically difficult
to achieve, but many of them are probably at least somewhat useful and should
be undertaken whenever the political environment is amenable (though with very
modest expectations regarding detectable effects on growth).
3) With supply-side policy, the precision of a policy action is not the
problem; accuracy is. With demand-side policy, it is the opposite: it is pretty
easy to meet broad policy goals, so long as you're not too concerned about
hitting them square on the nose.
4) We know what an economy with way too much demand looks like. It has high and
accelerating inflation.
5) We know what an economy with way too little demand looks like. It has high
unemployment and deflation.
6) Within those two extremes, it can be tricky to identify exactly where an
economy stands: how close or far away from potential output it is.
7) Both too much and too little demand are economically costly, but history
suggests that too little demand is far more economically costly and politically
risky than too much demand. So policy should err on the side of too much demand
rather than too little.
8) The determined use of monetary policy is almost always going to be
sufficient to generate the right sort of "too much demand". But an independent
central bank might not always be able to muster the appropriate determination.
In some cases a central bank may flounder until a clear political consensus
emerges supporting the determined use of monetary policy.
9) It is generally unwise for countries to sacrifice monetary-policy autonomy,
either by adopting a constraining exchange-rate regime or by introducing an
excessive level of capital-account openness.
10) In countries with autonomous monetary policy, which are stuck at the zero
lower bound on interest rates, fiscal policy is almost by definition too tight,
and it is probably quite difficult to conduct fiscal stimulus in a way that
generates long-run economic costs. That is because the long-run supply-side and
fiscal benefits of getting off the ZLB are probably pretty large.
11) Fiscal policy is subject to political constraints, and it may be easier to
introduce a large stimulus in emergency situations if the pre-emergency
public-debt burden is low. That suggests that prudence in normal times is a
good idea (though do remember point number 10).
12) Don't subsidise debt.
13) The level of financial- and banking-sector liberalisation at which it can
be demonstrated persuasively that further liberalisation will generate net
benefits is probably not that high.
There you are, rough principles. Subject to change in light of new information,
as always...