Joe Weisenthal Digs a Ditch

by Ramesh Ponnuru

Joe Weisenthal has produced a quick response to my article with David Beckworth on why we need to cut federal spending and adopt a new rule to stabilize monetary policy. I admire his speed and appreciate his attention, but I’m unconvinced by his critique.

He writes that “it seems ludicrous to think that the answer to the debt crisis is: cheaper loans! People don’t want (and can’t utilize) cheaper loans: What people need is more income to pay off this debt.” Who’s talking about cheaper loans? Not Beckworth or me, with or without exclamation marks. If nominal incomes rise, as we want, interest rates will go up. And so will the ability to pay off debts.

Against our claim that monetary policy nullifies the effect of fiscal policy, Weisenthal counters that Bernanke has called for fiscal activism. But there is no contradiction here. Of course Bernanke would prefer that Congress and the president do more and he do less—it’s much easier on him. There’s no need for him to overcome internal Fed disagreement or face external criticism for the Fed’s activism. That doesn’t mean elected officials will change the end result by following his preferences.

Weisenthal says that it’s “just plain weird” to suppose that fiscal stimulus merely shifts economic activity around rather than adds to it. “If the government hires someone to, say, dig a ditch . . . then that person is gaining income without any ‘subtraction’ from another part of the income.” That’s true under certain assumptions. It’s false under the assumption we believe is realistic: that the government’s spending of this money causes the Fed to run a tighter monetary policy than it would have done without the federal spending. That’s what causes the displacement.

Weisenthal concludes that it’s “just intuitive” that fiscal policy would be more effective than monetary policy. “If you take the average person, ask them what will cause them to spend more money: A policy announcement from Bernanke, or the promise of a well-paying job for years to come. The answer is obvious” (bolding in original). Yes: It is indeed possible to construct a stacked hypothetical question that yields the answer you’re looking for. One constructed to my liking would ask: Which would have more of a positive impact on you, the prospect of a permanently higher amount of money in your pocket, or more federal debt? The answer to that one is obvious too. It’s just intuitive! Neither mental exercise settles anything important.

Two minor points. Weisenthal describes nominal GDP targeting as “super-aggressive monetary policy.” This is an inapt description. Nominal GDP targeting would on average have been no more aggressive than actual Fed policy during 1982-2007; it would if anything have been tighter during the tail end of that period. The headline says that “The Smartest People in Washington are 100% Wrong About Stimulating the Economy.” I’ll take the compliment, such as it is. But Professor Beckworth works in Texas, and many of the other influential supporters of nominal GDP targeting (the ones who have influenced me include Scott Sumner, Joshua Hendrickson, and Nick Rowe) rarely set foot in the D.C. area.