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(email exchange)

Good stuff, thanks!

(Of course, I prefer to say ‘removal of fiscal drag’ rather than ‘fiscal stimulus!’ )

>   On Tue, Dec 30, 2008 at 3:17 PM, Scott wrote:
>   FYI . . . looking at the data on the sector financial balances for
>   Q1, Q2, and Q3 of 2008. All data are in $billions and are in
>   annualized nominal terms:
>    Sector: Q1 Q2 Q3
>    Household -195 110 24
>    Total Prvt -135 176 106
>    Fed Govt -346 -666 -544
>    Total Public -558 -899 -815
>   Note that in Q2, the -300 change in the fed govt balance is
>   almost exactly equal to the +300 change in HH sector
>   balance. Biz sector in Q2 actually reduced net saving a bit,
>   which is what it normally does when sales/profits improve
>   (expand capacity, etc.). Note also that Q2 was when real
>   GDP was over 2%, up from 0% previously. So . . . clearly the
>   stimulus “worked” in that it improved HH balance sheets
>   while raising real GDP growth. Only problem was that the
>   stimulus wasn’t large enough and didn’t last long enough,
>   Note that smaller Fed govt deficit in Q3 corresponds to
>   smaller HH balance and slower real GDP growth in that
>   quarter.
>   HH sector had been retrenching since 2006:3, when balance
>   peaked at -478B. Fed govt high was -176B in 2006:4, and
>   had been going into further deficit thereafter, so this is “the
>   hard way” you talk about in which automatic stabilizers offset
>   the slowdown, albeit not nearly enough as real GDP growth
>   deteriorated. The Q2 stimulus package was a clear “jolt” that
>   corresponds to “the easy way” of stabilization via direct fiscal
>   intervention and greater real GDP growth than otherwise,
>   albeit not nearly enough, again.
>   Anyone thinking that fiscal policy doesn’t “work” needs to
>   explain this data combined with quarterly real GDP growth.
>   Scott


7 Responses

  1. I’m new to this 3-balance approach to macro economic analysis, but I’m detecting some differences in emphasis between your version and the guys at the Levy Institute, such as Wynne Godley. Namely, how each of you deals with the export sector.

    You seem more inclined to let fiscal stimulus increase overall consumption, whether on domestic goods or imports, even if net exports detract from GDP; “exports are a cost, imports are a benefit”. And you seem to focus more on the terms of trade benefits from a stable or strong dollar.

    The Levy guys, on the other hand, seem more eager to use net exports and dollar depreciation as an adjustment tool along with fiscal policy. They seem almost mercantilist in their desire for net exports.

    Of course, their concern over imports may just be an indirect concern over personal sector debt, but, as you say, the fiscal stimulus (lack of drag) itself should help improve the credit structure.

    As I see it, the advantage of your approach is that it’s less antagonistic towards Euroland and Japan. Dollar depreciation can only fuel the ‘race to the bottom’ mentality and risk a smoot-hawley-like tariff war, especially given the political and cultural constraints on fiscal policy faced by Europe and Japan, respectively, as we head into the new year.

  2. I think you’re pretty much right. I haven’t asked them yet about this, but it seems there’s a bit of a difference on the current account balance. They’ve also noted in earlier publications, though, that fiscal stimulus (or at least less constraint on consumption) in the rest of the world would be a good way to change the balance of trade, which is more along the lines of my thinking, anyway (at least preferable to depreciating the $ to stimulate exports . . . but regardless exports are still a cost/imports a benefit, and there’s always the constraints on capacity at some point).

    They also seem to think that a doubling of the government debt/gdp ratio would be problematic for some reason. Don’t know where that came from.

  3. Agreed, they can’t get it through their heads that exports are costs and and imports benefits.

    When pressed, they agree that a trade deficit is beneficial for our standard of living, but then say it’s unsustainable and the day of reckoning will come when we can’t run a trade deficit any more.

    I say why hasten that day, why not instead work to optimize our real terms of trade.

    To me their position is something like ‘you have to die sometime so you might as well do it now and get it over with.’

    And feel free to tell them i said so. might help to hear it from someone else.

  4. The interesting thing to me is that Wynne and Marc published a paper last year in the JPKE arguing that current account deficits could be sustainable indefinitely (I think it’s a Levy wp, too). I’m not quite sure how they put all these different pieces together, or if they do at all.

    The angle I would take on the original point raised by Knapp regarding Godley, et al, is that US fiscal policy alone won’t be enough to bring the world economy out of the current situation, which I could agree with, but that then suggests more “removal of fiscal drag” is appropriate in those countries, rather than a depreciation of the $.

  5. I guess the only reason to force the adjustment sooner would be if the pain would be greater later than today – but I really don’t see any evidence for that. If the rest of the world wises up and starts consuming more of their own production, our terms of trade would weaken and our standard of living would decrease – but there aren’t really any mechanisms for the ROW to make us “pay them back”. I think the Levy boys are still stuck (temperamentally at least) a little too much in the gold standard paradigm.

    I also detect a bit of the “prophet of doom” tendency over there (except for Randy Wray) – that strange human inclination that desires to be a voice crying in the wilderness, warning the multitudes about the reckoning due for their sins. Warren, on the other hand, has always seemed to me to be a happy-go-lucky sort, who says, “We have problems, but they’re mostly of our own making. All we have to do is free ourselves from our bad ideas, and then go drive fast cars.”

    Maybe it has something to do with living in upstate NY vs. living on a tropical island…

  6. Warren,

    Although you don’t promote a weaker dollar, won’t a huge fiscal stimulus relative to ROW cause the dollar to fall?

    I was just re-reading your “General Framework..of Currrencies” and it got me thinking about the vertical component. If the desire by the foreign sector to net saving in US$ doesn’t change, doesn’t this reserve addition resolve itself thru a weaker currency?

    Or will the favorable relative growth story in the US courtesy of the stimulus provide the offset( by increasing demand to net save $(?))?

  7. scott, US fiscal policy could be enough, if it’s large enough, and if ‘they’ remain ‘export driven’

    But yes, doubtful if all that will come together as it did a few years back, particularly with our former leaders also trying to be export driven, and our current leaders saying same. but one never knows…

    jim, yes, apart from energy, it’s just a spread sheet problem, that can be fixed with the right entries in about 20 minutes

    Knapp, yes, the dollar might weaken or strengthen for the reasons you suggest. But if left to their own devices the export driven countries tend to support the dollar by buying it to support their export industries. and couldn’t be happier to accommodate us!

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