one of the major benefits that were expected from the introduction of inflation-indexed bonds (Treasury Inflation-Protected Securities, generally called TIPS), namely that they would provide a quick and reliable measure of inflation expectations, has not been borne out, and that we still have to struggle to get reasonable estimates of expected inflation.
He cites a paper by D’Amico, Kim, and Wei arguing that a large liquidity premium can suddenly appear in the TIPS market.
Pointer from Mark Thoma.
There is much of interest in Fischer’s speech, but I was particularly struck by the remark on TIPS.
One more excerpt:
it remains a pity that the fiscal lever seems to have been disabled.
I have some objections to that statement.
1. The “automatic stabilizer” components of fiscal policy are significant and certainly have not been disabled.
2. The stimulus package enacted in 2009 was quite large.
3. To the extent that the fiscal lever has been used less than some Keynesians might want, this could perhaps be blamed on the high levels of debt that governments accumulated, even when times were good. If anything has been disabled, it has been the “off switch” for fiscal stimulus. When you run deficits at full employment, this is going to limit your flexibility to increase deficits during a recession.
Yet there are those who do wish to disable them, the public debt level was fairly low preceding it, and fiscal stimulus fell quickly and has been mostly flat since 2011. Fiscal stimulus is not debt but debt/gdp.
What constitutes “low”? In any case, the ratio is over 1 today from 0.6 in 2008, and that is with the baby boom retirement still only in their initial climb. The next recession is likely to push it well over 2 in short order.
We will have just as much debt as the Fed wants us to have, and they prefer more to less.
Publicly held Federal debt, was 35% before and about 74% now, quite modest. A boom should be used to reduce this but contractionary policy, attempting to reduce it, in absence of one is more likely to increase than decrease this.
You don’t get to count federal debt held by the government itself as an asset.
A good example of some prudent use of the “good times off switch” comes from Canada which had a long period, starting about 20 years ago, of slow-but-steady net-debt draw down from 100% to 60% of GDP.
Partially in response to the collapse in oil prices, Trudeau Jr. has announced a few years of large projected deficits. That decision, however, is made more feasible and less dangerous by the two prior decades of fiscal prudence. One doesn’t want to be in the position of having Greek levels of debt when needing to pay for counter-cyclical stabilizers.
Yes, you are absolutely right.
But remember it was deliberate republican policy to starve the beast.
If you look at the deficit as a share of GDP since WW II every republican administration left office with a larger deficit than they inherited and every democratic administration reduced the deficit — one even created a surplus.
A meaningless distinction, mostly due to endpoint cherry picking (or coincidence to be charitable). For example Bush2 had deficits between 2 and 4 % of gdp for 7 years, and 1 year with a huge deficit to end his time in office. Obama then ran multiple years that were 2x-3x Bush’s average deficit, and will leave office with his 8 years contributing far more to the total debt than Bush’s 8 years, but you can make it sound the reverse by only looking at 1 year of Bush and 2 years of Obama.
I doubt many Republicans actually know what “starve the beast” refers to.
Even if that is true, if the liberal half doesn’t get their wish list, the point is? Of course they are are always going to say stimulus isn’t big enough. I propose they print it on stone tablets.
“When you run deficits at full employment” << not just deficits, but for most elected politicians the maximum they can get.
This is partly the fault of the voters, wanting the "free" benefits now (taxpayers later pay), but it's also a real issue of economics — it's almost always possible to increase the deficit, and total debt, in the short term without suffering bad economic results.
It's also a problem of media presentation & culture — even at full employment, there will be people with problems whose immediate discomfort could be hugely reduced by more gov't cash. Nice folk don't want others to suffer, even when they've made bad decisions to cause the suffering themselves. Until economists can teach folk the value of less gov't spending today, or even just smaller increases in gov't spending than in total GDP, many and often most voters will vote for free benefits.