Thread by @t0nyyates

I don't understand worries about the stimulus package causing overheating emanating from the apex of macro.

1. overheating, if it were to happen, is better than underheating in these circumstances.

2. we know what to do to stop overheating and we have the instruments.

Central banks can raise interest rates from their floors. They can sell securities that they bought recently, bloating their balance sheets. Automatic stabilizers will kick in [increased tax revenues; lower spending on benefits].

There are debates to be had about how to maximize the welfare from a given $. But I don't see a serious case for worrying about overheating. Not after 12 years trapped at the zero bound.

There's a long history of exchanges about the ability of poicymakers to identify the inefficient bit of business cycles, and the efficacy with which they can smooth them out.

Protagonists split along left right political divides. Sceptics view business cycles as mostly efficient, policymakers as inept. Enthusiasts the reverse. [Obvs there are opportunists like John Taylor who will say whatever to support the Republicans.]

This conversation is a replay of those old concerns. 'The covid shock is unusual and we can't be sure how much of it is a compression of potential output aswell as demand, and we might inadvertently overstimulate demand and create a surge in inflation.'

And obvs at the same time you have some opportunists [no need to repeat names] 'The Democrats are proposing a stimulus; whatever the Democrats do is bad; so the stimulus is bad.'

Well, we might generate a surge in inflation. But. 1. We measure it pretty well, so we can see it when it happens. 2. We have just spent a long time struggling to generate the inflation we promised [hence instruments pressed at maximum setting].

Hence: 3. There can't be any serious worry about people losing confidence in the regime's determination not to create too much inflation. 4. Given the amount of nominal debt taken on by govt and private sector, a bit of inflation while Fed tightening happens would not be so bad

Where I started, pointing out that the risks are not symmetric, that undercooking is worse than overheating, needs saying again: this is not any old recession at the zero bound.

Some of the elements of the program are about underpinning the public health strategy. Those, bringing forward the date at which the economy gets beyond covid, have very high social rates of return.

There's a more useful debate to be had about the risk of overdoing it in terms of failing to sail sufficiently far away from the fiscal limit, and inflation materializing that way, as an alternative to default. But Summers/Blanchard comments about 'overheating' isn't that.

Fiscal limit risks are symmetric. Take on too little debt and you kill people by starving them and failing to control the virus, which has the corollary of social distancing [and death of course] shrinking the tax base.

Take on too much, and you find yourself in a debt crisis, and unable, until you have re-established the monetary-fiscal order, to fight future business cycles, pandemics, or climate change risks.

Yields staying so resolutely low throughout all this convinces me which way I would steer through these two risks at the moment.