Historically rules/institutional frameworks for monetary and fiscal policy were motivated by the concern that politicians were BIASED towards too much deficit increase, inflation, living for the moment, etc.
Certainly some politicians are biased in the traditional manner but many have the opposite bias--they want excessive deficit reduction at the wrong times and oppose expansionary policies by the Central Bank too.
Instead we should motivate rules/institutional frameworks by the concern that politicians are INEFFICIENT in the statistical sense of sometimes delivering/wanting too much and other times too little often for random reasons like the timing of an election, the incumbent party, etc
Both the BIAS and INEFFICIENT perspectives get you roughly the same answer on central banks but for different reasons. From the INEFFICIENT perspective, central bank independence is also about, eg., protecting technocrats at the ECB from German politicians pushing contraction.
The two perspectives give you different answers on fiscal policy. If you are concerned about the inefficiency of the political system you can either try to get politicians to behave more like central banks (impossible) or have more automatic rules for fiscal policy (possible).
In the US the most important set of rules is to expand automatic stabilizers because they are relatively small in our economy as you can see. Make state aid, unemployment and more contingent on the unemployment rate as I advocate in today's @wsjopinion. wsj.com/amp/articles/b…
Europe has better automatic stabilizers but a bad habit of reversing them unnecessarily during downturns (fortunately not this time). So what it needs are fiscal rules that are more symmetric, not just tilting against excessive deficits but also against excessive deficit redn.

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More from @jasonfurman

27 Jan
Some confusion about the term "pent up demand".

Short version, should distinguish btwn:

"Excess savings" (which we know households, in aggregate, have)

"Pent up demand" (a hypothesis that people will buy more this year to make up for the stuff they didn't buy last year).
The "excess savings" (stock) is because saving (flow) was higher last year due to higher disposable personal income (due to transfers) and lower consumption. This was $1.6T for 2020 and it is more now with the latest checks.

Note, is an aggregate, many households worse off.
This "excess saving" *could* be used to satisfy "pent up demand" if everyone who skipped a travel vacation in 2020 took one that was twice as long in 2021 or ate out twice as much.

If this happened the saving rate would be lower-than-average in 2021 and could even be negative.
Read 7 tweets
27 Jan
GDP for Q4 is coming out tomorrow. It won't tell us much about how the economy is doing very recently but will be a great moment to look back at 2020 as a whole and will provide some glimpses of 2021. A preview thread.
We only get GDP numbers for quarters not for months. If we got them for months GDP would likely have fallen in November and December. But the way the quarterly arithmetic works, GDP will likely be up around 4% at an annual rate in Q4. Not a good measure of now.
GDP will be down about 3-1/2 percent for 2020 relative to 2019. This is the largest decline in GDP since the demobilization from World War II in 1946, worse even than the 2.5 percent decline in 2009.

This is because Q2 GDP was very low and then it only partly recovered in Q3&Q4. Image
Read 8 tweets
26 Jan
The argument for deficits & debt raising interest rates in the US is not increased credit risk, it is that interest rates are a function of economic fundamentals, flows & policy. Deficits/debt change those.

I can't tell if I'm agreeing or disagreeing with @jc_econ.
Increasing government spending or reducing taxes increases demand (or reduces saving). This raises the price of loanable funds or the interest rate.

In a dynamic context, more demand means a stronger economy, the central bank raises interest rates sooner, and long rates rise.
(As an aside, we are not close to the United States needing to worry about credit risk and the risks are more overstated than understated in most other advanced economies too. But credit risk is not always & everywhere irrelevant, just look at the UK in 1976 or Canada in 1994.)
Read 10 tweets
14 Jan
A few thoughts on the recovery plan that President-elect Biden is announcing tonight.

THREAD:
It is *very* large. Together with the December legislation it would be around $2.8T, which is about $300b per month for the nine months it is in effect.

For context in November GDP was about $80b below pre-crisis trend and compensation was about $20b below pre-crisis trend.
The motivation appears to be more "bottom up" (what the health situation, households, states, etc.) need than "top down" (how big is the output gap, what is the multiplier, what is needed to fill it).
Read 11 tweets
1 Dec 20
In our new paper @LHSummers and I argue that low interest rates present a challenge for monetary policy and financial stability but an opportunity for fiscal policy--if we choose to seize it. A thread summarizing the paper. piie.com/system/files/d…
We all know interest rates have fallen. Many theories for why, what matters is do they stay low. Market expectations going forward are stunning:

--72% FFR < 0.25 in 2025

--1.4% FFR expected in 2030

--2% ten-year Treasury rate in 2030
This raises 3 concerns:

1. Less scope for monetary policy in recessions

2. Increased financial stability risks (e.g., investors "reach for yield")

3. Maybe even demand shortfalls in normal times.
Read 12 tweets
29 Nov 20
President Biden will have an economic dream team. I am thrilled for him, for them, and most importantly, for the country. One tweet for each member, starting with the most important economic agency (that I ever ran):
Ceci Rouse: An outstanding economist & wonderful person, she brings deep knowledge & commitment to the most important issues the country faces including how to raise wages, reduce discrimination and improve education. She is also experienced with previous stints at NEC and CEA.
Jared Bernstein: A stalwart of economic policymaking. Jared is a keen analyst and passionate advocate for working people who is also trusted and respected across the political spectrum. He brings macro, trade, labor & more to the role.
Read 9 tweets

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