The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates.
It really does seem that on the big macroeconomic questions, our side is winning.
Pointer from Tyler Cowen. He lists a number of propositions, which tend to favor macroeconomic policies that stimulate demand and restrict supply.
For example although he argues (correctly) that there is no bright line between being unemployed and being out of the labor force, he claims that
Work incentives don’t matter.
Suppose you have very high marginal tax rates on work. The “new” theory is that with enough aggregate demand, everyone will work, anyway. As Mason puts it,
Weak demand is an ongoing problem, not just a short-term one. The most serious criticism of the ARPA is, I think, that so many of its provisions are set to phase out at specific dates when they could be permanent (the child tax credit) or linked to economic conditions (the unemployment insurance provisions). This suggests an implicit view that the problems of weak demand and income insecurity are specific to the coronavirus, rather than acute forms of a chronic condition.
I think that if you subsidize demand and restrict supply, then the whole economy will look like education, health care, and real estate, where prices go up and resources are wasted.
John Cochrane has a more detailed critique of this “new” economic theory. One way in which it differs from the conventional wisdom of the 1960s: back then, economists were confident that if inflation broke out, the government could direct businesses to slow the rate at which they increased wages and prices. That theory has not made a comeback, at least so far.
John Cochrane’s take is pretty good but Mason is totally correct about:
It suggests a big move in the center of gravity of economic policy debates.
(R) Trump’s huge deficits and its great success at increasing US mfg jobs and wages for non-college educated workers has transformed the Republicans away from deficit hawks.
What neither of them discuss much, as macro economists most often fail to discuss, is that not all deficits are equal in their effects on the future:
1) tax cut deficits reward the workers & investors the most who have been creating wealth, so more wealth is most likely to be created
2) infrastructure deficits are to make more roads & “infrastructure” – but like the Alaska “Bridge to Nowhere”, or the failed Solyndra gov’t supported investment, a huge amount of such gov’t “investment” gives negative or very negative Rates of Return. They are essentially semi-corruption boondoggle wastes.
3) helicopter drops of cash to everybody increases current consumption and, as long as interest rates and inflation remain low, seem like a free lunch. It’s looking like “Free Cash”, very very very popular among rich and poor and very rich and extremely rich, will continue until some econ event creates a crisis to stop it. This is Mason’s side, and it’s winning the political debate.
Grey’s Law – no hyperinflation without food shortages.
Where does the printed money go? Mostly into low cost consumer goods, including guns, and getting invested by the rich into … rich assets like stocks and houses in nice areas.
Why can’t the market cap of Apple keep increasing? What is stopping the Price/Earnings ratio from continuing to increase?
What else will the super-rich invest in?
Bitcoin? Euros or Eurobonds (some with negative interest???)? Renminbi/Yuan?
Who is making a bet that there will be a US financial crises before election 2024? I would bet no crisis (P=80%).
1 and 2 aren’t mutually exclusive. A tax cut that isn’t ‘funded’ by a reduction in spending won’t lead to more wealth being created; it just means the things you mention in (2) are now funded by borrowing rather than taxes. If we assume Ricardian equivalence more or less holds in the long run, a deficit financed tax cut is no tax cut at all, it just shifts how/when the tax is paid. Spending cuts are what lead to more private wealth being created, regardless of whether they’re matched by tax cuts, because reducing the budget deficit is itself an indirect tax cut.