Thread by @IrvingSwisher

Posting some slides from a presentation I did last week on how we ought to think about fiscal policy and deficits in the next recession...

As a starting point, its worth pointing out how impotent the Fed is likely to be. Short-term interest rates are not far from zero and b/c long-term interest rates are actually lower now than they were in 2009, QE & forward guidance will have even less scope to move the needle

And while some see historically low long-term interest rates as an unpredictable exogenous force, the hard data suggests that they've largely followed declining income growth.
As long income growth remains constrained, "r" cannot drift too far above "g".

As for what causes recessions, it helps to get back to the core of Keynes: as the private sector's propensity to save sharply rises, so too does the risk of recession.
The Great Moderation playbook was to rely on the Fed to slow any aggregate pvt sector deleveraging process.

And while there are plenty of cheerleaders who thought the Great Moderation was a success, a closer look at the labor market paints a much gloomier picture. The last three "expansions" have included multi-year jobless recoveries.

The NBER recession definition is too kind.

The better answer was to use fiscal policy to actively expand government deficits through spending increases and tax cuts when the private sector was trying to save more.

Instead, macro policymakers seem to have taken a bunch of misguided lessons from Japan's experience

The first lesson we should be taking from Japan is that the level of fiscal deficits is very deceptive. Japan has run substantial fiscal deficits for multiple decades while simultaneously running persistent current account surpluses. The Japanese private sector likes to save!

I see a lot of people who think that Japan's high deficits have resulted in stagnation, esp in the private sector. This too is wrong.
While Japan did have a lost decade, per capita outcomes in the 2010s have been stellar.
Japan's labor market is streets ahead of the US!

Japan is such an informative experience to look at and yet orthodox macro modeling still folds in the loanable funds framework for understanding interest rates.
Japan has consistently had a much higher debt stock vs the US and yet consistently lower interest rates.

Crowding out is not an exogenous phenomenon. It is endogenous to the central bank's reaction function.

As long as the central bank is willing to be buyer of last resort, crowding out is not a thing.

If you actually look at what the Japanese government is able to deliver for their people in terms of quality healthcare, housing, and transportation, their low levels of inflation are a real human achievement!
Some in macro are too inclined to castigate what Japan has pulled off

Japan is not a flawless country and its low levels of inflation that it still can use fiscal policy to boost macroeconomic performance. Still...some perspective is needed among those who have continuously criticized its fiscal and monetary policies.

Getting back to the US...
We're going to need fiscal policy to step up in a big way if the private sector takes a more risk-averse posture.
The Fed is more than capable of slowing down a hot economy. But it is virtually toothless if fiscal stimulus underwhelms as it did in 2009

Instead of calibrating stimulus to the unemployment rate, it was calibrated to GDP. But only later revisions to GDP revealed the full loss of output! The unemployment rate, on the other hand, isn't really revised
Focus on the labor market tragedy, not the macro accounting tragedy

President Obama and the Democratic Senate were also too worried about the wrong problem (public debt sustainability). Thus, they were all happy with the level of stimulus that they managed to bargain for and didn't realize the fragility of the political window for stimulus.

We need a serious rethink of our approach to fiscal policy in recessions.

If the private sector gets defensive, there will be an even larger door that fiscal policymakers can walk through.

But still have to walk through it! And they tend to get gunshy at all the wrong times.

The most obvious place to start is to ramp up automatic stabilizer programs. @hamiltonproj has already put together a number of great ideas in this regard that also do a good job of addressing the human cost of recessions. But some impt things to note...

equitablegrowth.org/recession-read…

@hamiltonproj 1.) The real value of automatic stabilizers is to cut through the political problem of getting gunshy with fiscal stimulus at a time when government deficits rising because of a weak economy.
The 2009 ARRA was under-cooked because of deficit-sensitive elected officials

@hamiltonproj 1.) (continued) Auto stabilizers ensure that recession politics become less of a political football. By the time Dems realized a second stimulus was necessary, the window for stimulus closed and Tea Party austerity mania was in full gear. 2011-2014 was a fiscal policy disaster

@hamiltonproj 2) There is also a major political negotiation and implementation advantage to having these programs settled beforehand. February 2009 marked the passage of ARRA...5 months after Lehman collapsed. Still more time was needed for dollars to get out of the door...(cont.)

@hamiltonproj 2) (cont.) I don't believe in bypassing democratic institutions but these types of programs should be negotiated and agreed upon by the legislative and executive branches well ahead of time. Time to start thinking about recession insurance as part of the social safety net.

@hamiltonproj 3) Current government borrowing costs should force us to stop thinking in terms of deficit/GDP. We do not need to preemptively save to make enhanced automatic stabilizer programs a reality. Financial capacity exists now. Such fiscal tightening may actually do more harm than good

@hamiltonproj 4)The Sahm Rule (@Claudia_Sahm) is awesome b/c it allows us to calibrate such programs to when NBER recessions are already in motion.
But these programs often need to last much longer than the NBER's arbitrary definitions (as the Sahm Rule rightly does)...(cont)

@hamiltonproj @Claudia_Sahm 4) (cont) Lost in the NBER's recession definitions is just how bad the labor market can be both before it begins and well after it ends (just look at employment rates before and after the last three recessions...(cont.)

@hamiltonproj @Claudia_Sahm 4) We should care about recessions b/c of the damage done to people's source of income and livelihood, not to the synthetic macro aggregates that the NBER may fixate upon. The Sahm Rule shows how we can get that calibration right without trying to engage in excess prophecy.

@hamiltonproj @Claudia_Sahm 5) As a final point, recession mitigation is still going to require a do-no-harm Fed. Contrary to popular belief, I don't think the Fed was that cooperative w/ fiscal policy in the Great Recession. They were eager to exit stimulus and tolerated higher long-term rates...(cont.)

@hamiltonproj @Claudia_Sahm 5) Even when their own models showed that they should not be hiking for a very long time, they allowed the mkt perception to build.
The recent TCJA experience is also instructive. The Fed got trigger-happy about deficit expansion, even tho the cuts were largely just saved

@hamiltonproj @Claudia_Sahm 5) The evidence to me suggests that TCJA did little for growth or inflation but that still doesn't excuse the Fed from being so eager to tighten policy.

In the next recession, the Fed really has no margin for error. Stabilizers will expand the deficit; the Fed shouldn't blink

@hamiltonproj @Claudia_Sahm All of this is to say that there's plenty of room to use deficit expansion productively...even right now if we want to.

While markets don't have perfect information, there is no price signal worth ignoring. (end)