I’m talking to a guy that makes the claim that econometric studies have implied that fiscal stimulus did boost the economy, but it was not sufficiently or consistently applied (since fiscal stimulus acts as centralization of a coordination failure stemming from uncertainty, there will be increasing returns to stimulus) - and fiscal policy has limited effectiveness in the presence of deflationary pressure and failed banking system.
Also, Japanese failure to recover from recession is relatively well understood, although there remain pockets of controversy. the key problem is that japan did not fix the financial system (due to a plethora of political issues), with the resultant loss of financial intermediation suppressing any potential recovery. Also, the central bank’s inability to commit to inflationary policy generated a deflationary environment.
Obviously as an advocate for Austrian economics, I disagree with his position and I was wondering how I’d be able to refute this claim.
Ask what he thinks about the Fed printing and giving everyone in the USA $100,000 to spend, thereby increasing spending, thereby increasing the GDP. See, if you have every man, woman, and child spend $100,000 (300,000,000 X $100,000) you the GDP will increase by $30 trillion. Nevermind the increase in prices.
He doesn’t think the calculation makes sense and adds “that the proposal amounts to a helicopter drop of cash. There will likely be stimulative effects of a moderate helicopter drop arising from an increase in liquidity and also an easing of consumer debt overhang. However, there is absolutely no rationale for estimating that the effect on real production equals (even approximately) the amount of money printed. Any attempt at estimation will require some sort of structural model which takes into account the effects I mentioned above, not an accounting identity.”
You refute the claim by noting that you can’t spend what you don’t have your way out of spending what you didn’t have in the first place. IOW: you can’t do more of the same and expect it to cure the problem.
His basic premises are all wrong. A helicopter drop of cash does stimulate certain economic activity, but the question is what KIND of activity is it stimulating? The answer is that it is stimulating activity that only makes sense under the low rate of interest induced by the helicopter drop. Once the helicopter stops dropping (or slows down dropping), the interest rate will go back up toward its natural level. Business activity that is optimal under interest rate A is not optimal under interest rate B. If interest rate A changes to interest rate B due to a helicopter drop, economic actors will change accordingly. If after the dropping stops B goes back to A, economic actors will change BACK accordingly. So all you’ve done by temporarily altering the interest rate with your helicopter is to temporarily induce economic actors into activities that don’t make long-term sense.
Of course, he will denounce such a simple, undeniable truth as an “untested, abstract economic principle.” He’s invested in denouncing it as such, because to accept it would be to accept his own redundancy as an econometrician.
He is a bit of a Keynesian intellecut. His response…
"Do you even know what I refer to when I say debt overhang?
If you wish to use the austrian maladjustment critique against a helicopter drop (as opposed to a central bank’s interest rate policies), you should adapt it so that it criticizes quantitative easing rather than interest rate policies, instead of lifting the original critique verbatim. I am doubtful, however, that you actually understand the contemporary austrian argument well enough to do so.
Even contemporary Austrians such as roger garrison acknowledge the value of monetary policy (another hint: a helicopter drop is, admittedly unorthodox, monetary policy) in dealing with the adverse effect of a slowdown in money velocity. In fact, even Hayek in his later years supported a role for intervention in monetary supply. Take up your beef with them."
Quantitative easing, the way the Fed would conduct it, IS interest rate policy. New and additional money in the banks mean new and additional credit. An increase in the supply of credit means a lowering of the rate of interest.
Yes quantitative easing would temporarily help debt overhang, precisely because it lowers the rate of interest. It would also promote activity that will result in further debt overhang once the interest rate returns to its natural level. If investment opportunities can’t be realized because of debt overhang, then they’re not really viable opportunities. Debt MEANS something; it’s not just some burdensome specter to be banished by central bankers.