I liked Scott Sumner’s National Review article about why conservatives should embrace level-targeting of nominal expenditure as monetary policy, but this paragraph left me sort of scratching my head:
This sort of policy regime addresses many of the liberal arguments for big government. Right now conservatives don’t have good counterarguments to Paul Krugman’s insistence that all the laws of economics go out the window when we are in a “depression.” Classical economics assumes full employment; how credible are classical arguments against federal job-creation schemes when unemployment is 9.8 percent? Yes, government intervention doesn’t even work very well when there is economic slack. But with NGDP futures targeting, there is no respectable argument for fiscal stimulus, as the money supply would already be set at the level expected to produce the desired level of future nominal spending.
As a way of surveying the political scene, this seems very shortsighted to me. Yes, it happens to be the case that in January 2009 Barack Obama was President of the United States, Susan Collins was the pivotal member of the US Senate, Paul Krugman had a New York Times column, and David Obey was chair of the House Appropriations Committee. Consequently, we got a stimulus bill oriented around progressive objectives and a lot of Krugman columns about the virtues of stimulus. But if you think back to January 2001 when George W Bush was President, the GOP ran the House, and Dianne Feinstein was the pivotal Senator as I recall our response to the recession was a large debt-financed tax cut. A large debt-financed tax code sold, mind you, with Keynesian arguments about the need to fight the recession.
And here, thanks to Google, is David Ignatius plumping for the Bush tax cuts:
Bush made his remarks at a motorcycle plant — hardly a Keynesian venue — but the British economics sage himself couldn’t have put the argument for fiscal stimulus any better. [...] That’s what Bush has been doing, with his tax cut and rebate and — perhaps by accident — it turns out to be precisely the right policy. Anyone who bleats about the effect of this fiscal stimulus on the future budget surplus or the Social Security trust fund is, in my view, missing the point. We have a spreading economic crisis, and right now “saving Social Security” is a secondary worry.
Whatever the merits of stimulus in general, or tax cuts versus spending, I think there’s no serious argument against the proposition that economic conditions in 2001 were much less dire than those of 2009. And yet there was huge embrace of Keynesian logic on the part of folks who liked the idea of cutting taxes.
That’s not to say Sumner is right or wrong about NGDP targeting, but I think he’d have a better understanding of some of the reasons why it’s hard to persuade people of his view if he had a more realistic look at the political landscape.