The Monefiscalist Synthesis

by: Cullen Roche

Cardiff Garcia’s post at the FT struck a good cord. He emphasized something that I think is really important – that fiscalists and monetarists can and should all get along. There’s an inherent battle that’s mainly drawn down political lines here and it’s enormously destructive. Monetarists seem to feel like they need to crush fiscalists and vice versa. Both groups seem to generally believe that their approach has more to offer than the other. But the truth probably lies somewhere in the middle. And that’s why it’s so important that we try to find areas of agreement as opposed to trying to perpetually prove the other side wrong. If we can find areas of overlap (which certainly exist) then we can essentially blend the best ideas of everyone involved (at least to some degree). Then we all win, right?

Anyhow, David Beckworth has a nice post detailing an approach that many of us should generally agree on. I think this is an important way of thinking that is necessary for policy improvement and progress. David is more concerned with solving a problem that we all recognize. And his idea is a nice blend of concepts:

Here is how I would operationalize this policy. First, the Fed adopts a NGDP level target. Doing so would better anchor nominal spending and income expectations and therefore minimize the chance of ever entering a liquidity-trap. In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits.

Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.

This two-tier approach to NGDP level targeting should create a foolproof way to avoid liquidity traps. It should also reduce asset boom-bust cycles since NGDP targets avoid destabilizing responses to supply shocks that often fuel swings in asset prices. This approach is consistent with Milton Friedman’s vision of monetary policy, would impose a monetary policy rule, and provide a solid long-run nominal anchor. Finally, per Cardiff Garcia’s request it would satisfy both fiscalists and monetarists. What is there not to like about it?

This is a great start. I am not sure how David’s helicopter drop would work exactly and I think there are potential complications in it, but it’s a good start. I’d counter with something he’d probably also agree with. Why not automate fiscal policy by turning the rate of taxes up and down like a thermostat? For instance, we could use the payroll tax rate to slide up and down with something like the rate of unemployment or the target level of NGDP? Mike Sankowski has touched on this several times in the past (see here).

I think we need more specifics on policy ideas here, but I 100% endorse David’s way of thinking about this. I hope more economists try to find overlap and build bridges where they can rather than constantly throwing grenades at each other. So let’s start the discussion. It’s too important not to.