Tuesday, January 7, 2014

A Reply to Simon Wren-Lewis

In a timeframe when economic arguments often get bogged down in particulars, I was somewhat relieved when Simon Wren-Lewis asked a rather basic question which boils down to this: what's the deal with the fight between monetary and fiscal advocates, anyway? Even though I have a limited understanding of macroeconomics beyond the level of a layperson, the fact that much of this discussion comes down to political differences is something I can engage in. That's not true because I think in normal political terms (as my readers are well aware) but because I prefer to weave my way around the minefields that both sides set up for one another. Why? Because I'm tired...and there are days when life feels too short for either "precise" logic or fallacy!

First, I need to stress that as a Market Monetarist, the basic issue for me is - yes - about a very specific parameter which I believe to be paramount for economic stability. (No, not that earlier IS-LM model that macroeconomists argued about) The parameter I'm concerned about, is a faithful following of the actual capacity which everyone has to spend - or consume - in any given timeframe. That is, money is made available to economic participants, based on recent commitments and contractual arrangements on everyone's part. The importance of providing adequate money for all the economic players (whoever they are) with a level target has been lost, in the competing arenas of finance demands and fought over government programs.

Even though following this parameter faithfully is not going to ease all unemployment, it can still clarify how to best focus on the remainder.  By focusing on the actual time value of economic participants, the missing (knowledge use) marketplace of the present can also be addressed. That means governments can move away from inefficient and partial reimbursement of limited services, to reimbursing all citizens at local levels in their efforts to coordinate activity and services. When knowledge use becomes actual wealth and desirable product in its own right, services are no longer just a means to an end. This would be a tremendous boost for governments which have spent decades preparing citizens for knowledge use, only to end up not having room for them in the marketplace, because of tight money and special interests in the wake of the Great Recession.

When I suggest that monetary measures are more effective than fiscal measures, my reasoning also includes a historical timing element, besides the nominal targeting context. Governments in developed nations don't have the room to maneuver that they once had. Plus, the idea of fiscal action occurs within a general monetary framework at all times. What's more, the role of finance is quite similar to fiscal support in that regard. Unfortunately, a lot of priors for these arguments not only get lost, but correlation and causation are getting confused as well.

Therefore the primary thing I need to emphasize is the former growth trend level, which dropped at the onset of the Great Recession and has not recovered. What's more, it's difficult to even visualize what was lost, if graphs are not illustrated in nominal spending terms. Granted, some Market Monetarists no longer expect that the previous trend line can be restored, but until recently, there was considerable hope that it could be. What's more, Market Monetarists such as myself will continue to push for the return of the growth trajectory which existed prior to the Great Recession.

Not only do many fiscal theorists downplay this concern on the part of Market Monetarists, but they also downplay MM concern regarding persistent long term unemployment. Very few macroeconomists have given enough thought to that still missing territory in recent debates, which has resulted in yet more misunderstandings. Throwing up one's hands and declaring that we are facing stagnation well into the future, is not addressing the issue.

Why is it so hard to explore what happened to the core idea of wealth, almost overnight? Yes, people bought increasingly larger homes as the 20th century progressed. But this was hardly the way that most people conceptualized or spoke of wealth. So why did a decline in housing destroy wealth building potential? This issue is barely being spoken of in the present, and that wealth needs to be recaptured both in knowledge use and services terms. No one can afford to exclude the concept of missing wealth indefinitely, from these most recent versions of monetary and fiscal debate.

Governments once made a tremendous difference in infrastructure because of their ability to affect economic conditions in general. Unfortunately, this flexibility has been lost. What's more, some of the reasoning for that loss goes beyond finger pointing, and governments can reach out to their own citizens to find greater flexibility in decision making. So when I suggest that fiscal outlays are not as effective as monetary outlays, much of this has to do with government's inability to coordinate societal goals on its own. A primary reason I advocate economic coordination through informal group settings across the U.S. (domestic summits for citizens), is the fact that governments and special interests have become too entrenched to be able to respond to the actual needs of present generations.

The space in which many governments could partake in infrastructural design, was quickly filled, defined and hardened by special interests in the 20th century. That's why fiscal action is not the guaranteed economic booster it once was, especially in developed nations. In the meantime, past infrastructure continues to decline, and future infrastructure cannot be agreed upon . But even these differences in focus are not always obvious, because younger generations will be living in ways quite different from the Baby Boomers and the generation just prior to them.

Focusing on technical differences in models between New Keynesians and Market Monetarists has not really borne fruit, which is why I suggest digging a bit deeper, now. Even exploring political differences is not enough, for polarization is far greater here, than in the economics profession itself. For this blogger, recognizing the importance of following a nominal level target is vital, because until all economic actors are taken into account, finance alongside other special interests are going to win the bigger part of these battles while the rest of us lose.

Any time people can agree on coordinated action for the economy, fiscal efforts can certainly play a vital role. It is when fiscal elements are used instead for special interests that no one gains. Instead, more people ultimately end up unemployed or driven out of business, and taxes are even harder to come by. What the nominal target insists upon in all this, is that we all are monetarily covered for what we are already obligated to in the present, no more and no less.

That is the best starting point we have. When everyone recognizes what it actually means, then government efforts can continue to play their part in economic activity, just as they always have. Unfortunately, government efforts have become too bogged down in past promises of late, to really assist in present needs. Which is also why a better understanding of the monetary role is needed now, so that nations might once again move forward.

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