For the most part, I try not to blog too much about the divide between Keynesians and market monetarists, which often appears wider than it actually is. Still, it's fair to assign partial blame on this divide, for the remaining output gap. Why have Keynesians used so much energy to deride what could have been effective monetary policy to prevent the worst of the great Great Recession? And why should it be so controversial for market monetarists to suggest that further studies of fiscal austerity could be helpful? Regular readers know how I feel about the fact that vital fiscal activities need not be lost. Some of the growth which fiscal policy initiated, needs to be transformed into more direct, viable and understandable settings.
Until fiscal and monetary issues are better resolved, long term growth potential remains in the lurch. We're "all in this together", right? Hmm. Last week, I looked at the bright side and was glad for the support that Simon Wren Lewis appeared to offer to market monetarists in an earlier post. However, in "Faith based macroeconomics" he made me quite angry, so I said:
It is wrong to deride the fact that people need faith to move an economy forward, because government also relies on faith that the money will be in its coffers to do the job it wants to do. Also, when you use the word faith as a slap at anyone, you may as well accept the fact that you have already moved beyond simple statistics and numbers.Fiscal programs are important. But to defend them so indiscriminately that one is willing to derail the monetary base they rely on, makes little sense at all. When does fiscal policy accomplish needed ends, and when does it mostly line the pockets of special interests? At the onset of the Great Recession, a tremendous amount of fiscal stimulus was unleashed to assist the banks, but no further monetary support for spending on the part of the public was ever provided. Two suggestions for Keynesians: look closer to determine whether fiscal policy is fully capable of supporting the monetary framework at stake in an economy. If not, allow monetary policy to take care of and represent a public's needs, once governments and special interests take care of their own desires.
Some who never had their jobs dislodged by the Great Recession, don't really know what a foxhole feels like - let alone the faith one needs to overcome the dangers involved. The prosperity of any nation relies on the countless risks individuals have to take for their own survival - risks which do not always pay off. And once anyone has experienced a recessionary foxhole firsthand, the "dirt" never really goes away completely. The "dirt" stays with a person and affects - to some degree - the decisions he or she makes from that day forward.
No one can afford to forget that governments also rely on the faith which generates prosperity for their citizens. Faith is what those confidence surveys are all about, for instance. If only fiscal activity were in the starter or alpha position, and monetary activity in a beta position, these struggles would be quite unnecessary. But consider what has happened to U.S. government spending in recent years. Keynesians need to take a closer look at the behemoth they support and consider what might be done. What has been lost? Some of those losses need to be recreated on terms that are within reach of the average citizen, instead of the special interests whose default positions have eaten away at earlier fiscal gains.
Everyone's jobs would be easier if fiscal concerns were capable of trumping monetary concerns. But it doesn't work this way, which is why some of the most important aspects of fiscal activity in the present need to be preserved and redefined on monetary terms. Growth potential needs to be placed squarely into the public's hands, particularly if they are expected to have anything left over for government in the years ahead. Some services involve costs which eviscerate low income potential, hence need to take place on new terms. So do concepts of housing and infrastructure.
Perhaps I could say that by treating fiscal roles as one indecipherable entity, Keynesians are "flying blind". But why belabor the point? If they too occasionally need to rely on faith, fine. Confidence is good. But stop to consider...how far have the riptides already carried this fragile vessel out to sea? Sometimes, everyone needs to row hard for the shore - once again - when it becomes necessary to do so.