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Fiscal and Monetary policy

Keynes himself recognized that MonPol as a stimulating tool was limited but his view that fiscal policy could work without productive work (digging holes) is wrong.

It would be easy to implement a rule based fiscal policy which was effective using the classic PID (Proportional Integral Derivative)  algorithm.  There are two clear channels for an algorithmic approach to fiscal policy, taxes and spending.  The former is easier to implement (far easier politically) and the latter more direct and thus requiring smaller constants in the PID formula.  Ideally the changes would be spread across both channels.   Taxes would be set as they currently are but with an added term from the PID output.    Spending would be the same.  Ideally we would change spending in productive channels, for instance an infrastructure program where spending would go up or down from the baseline depending on the output of the PID.

It could be implemented slowly by increasing the output parameter from zero at a low rate.   It doesn't take any new spending programs, just small adjustments to most/all spending channels.  Congress would still allocate funding, but it would include a small variable term set by the PID algorithm.

A scientist would never look at the economy and choose monetary policy as the stabilizing tool when fiscal policy is so much more direct.

Cullen - I assume John D's post is in response to your "Black Hole Monetary Economics" article - so I'm posting here rather than starting a Topic with that name.  In any event, please keep pounding home on the points you made in that article until the powers-that-be (& eventually the mass media) come to understand what you're saying!

Black Hole Monetary Economics is one of the best posts Cullen has ever written.I never fully understood Cullen's disagreement with Krugman on this, but this made it clear. It is surprising to see Summers and Krugman come around to Cullen's view on this.

It is interesting to note that Wicksell clearly supported the endogenous money creation view:

Wicksell wrote "no matter what amount of money may be demanded from the banks, that is the amount which they are in a position to lend... Banks have merely to enter a figure in the borrower's account to represent a credit granted or a deposit created"

But I think the key to Wicksell on the natural rate of interest is his description that it is equivalent  to the rate of interest in a world without money, where all transactions are in real capital.  In other words if I trade one bushel of wheat with you it is worth 1/4 bushel of apples today, but 1/3 bushel of apples in one year.   As I see it this Wicksellian view allows for negative interest rates (my one bushel of wheat is worth 1/4 bushel of apples today but 1/5 bushel in one year).

While I clearly think fiscal policy (rule based) is far superior to MonPol this is largely due to the asymmetric response to MonPol.  But mathematically MonPol certainly works if you allow enforceable nominal negative interest rates.

Amazing post Cullen.  Your suggestion on a variable tax to stabilize the economy would be WAY more effective than Mon Pol.

I am excited to watch stocks crash as we enter the depression we should have had 10.5 years ago.

The only problem is that this increases the chance of a liberal whack job President.

Ultimately, when you ruin/pervert Capitalism as Congress chose to in 2008 (thanks to the encouragement of Hank Paulson and Warren Buffett)....   You now have some moral obligation to take care of the majority of the population who you just screwed over.

So maybe these liberals aren’t so dumb after all.  The dumbass decision was to borrow $10 trillion to try and support demand in an Economy that was financially and socially unsustainable on its own.  One way or the other, we are all going to have to pay the price for these poor decisions.