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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...