Cut it Out! With Marshallian Scissors, That Is

It's been a while since I've been this confused, regarding a recent dustup in the blogosphere. Maybe I shouldn't be swayed by anyone's rhetoric! But in this case, I was inspired by a post from John Cochrane ("Macro debates") because it seemed sincere. To be sure, some reacted to his arguments in the WSJ as mostly an attack on Keynesian thought. Time for another round of clashing egos, I suppose. (update: Cochrane's blog post on this subject has unfortunately been removed)

Silly me (perhaps?), I read the arguments in that now removed post as a newly concerned Cochrane, who appeared to be asking an important segment of the public to "wake up" - i.e. WSJ readers who might just as soon remain "asleep" and content with a stagnant economy. Growth, for the sake of those who are still excluded, please - even if it means "bashing" some theories to get there! What economist wouldn't find a more inclusive economy a worthy endeavor? Hmm, it depends...

Sometimes, macroeconomic thought from any angle deserves a bit of questioning, should it fall short of the societal purpose it is purported to serve. As one commenter at Cochrane's post noted, "With a passive fiscal authority, what path is the economy supposed to be following?" Of course as it turns out, there were several who thought Cochrane was just spoiling for a good fight.

While I wasn't surprised Noah Smith "piled on" (after all piling on can be fun) I was surprised that someone so balanced in outlook as David Glasner, would strongly react to Cochrane. Still, it was Noah Smith's post, where David Andolfatto took the balanced marshallian scissors approach in comments:

I think we have to be careful when we apply Marshall's partial equilibrium scissors to understand the macroeconomy. I have a hard time distinguishing between supply and demand in GE (everything is connected).

If only those connections could be more readily considered when the arguments start, perhaps solutions would be easier to come by. So long as everyone remains divided, a lack of coordination between supply and demand factors will mean insufficient growth. And while many are still looking away from the lost output of the Great Recession, that lost output tells an important story about an incomplete marketplace. An important story (let alone potential economic outcome) will be missed, if supply and demand are not approached through the common ground that opposing viewpoints actually hold.

Apologies to my readers for a complete lack of chronological order in today's post - here is some of today's response from Nick Rowe:

Increased political uncertainty would reduce aggregate demand. Plus, positive feedback processes could amplify that initial reduction in aggregate demand. Even those who were not directly affected by that increased political uncertainty would reduce their own willingness to hire lend or invest, because of that initial reduction in aggregate demand, plus their own uncertainty about aggregate demand. So the average person or firm might respond to a survey by saying that insufficient demand was the problem in their particular case, and not the political uncertainty which caused it.  

So it's not just an either/or thing. Nor is it even a bit-of-one-plus-bit-of-the-other thing. Increased political uncertainty can cause a recession via its effect on demand. Unless monetary policy responds appropriately.

That - of course - means targeting NGDP. Not to say that growth potential isn't affected by uncertainty in the short run, but that being faithful to a level target would prevent the massive level decrease such as occurred to set off the Great Recession.

As Nick Rowe said in his recent reply to a post from Krugman:

Neomonetarism is a radical position. We want to get to the root of the problem of insufficient aggregate demand. We can't always rely on fiscal policy makers being able and willing to do the right thing

To be sure, fiscal policy is sometimes capable of doing a lot, when it has the chance to do so. But fiscal policies can be the first casualty, when uncertainty is at stake. Therein lies the paradox, because appropriate monetary offset can also mean greater fiscal choices as a result. With a level nominal target, fiscal policies would have a better chance at success than they otherwise might, in a post recessionary environment.

Why wouldn't those who support fiscal policy want the overall growth stability, that a nominal target can represent? Why is it such a problem for anyone, that the opportunities of fiscal policy are nested in the potential of what could be meaningful monetary policy? Monetary policy is not morally "superior"...that's not the point! Done right, monetary policy is by far the best tool for the job, because of the complete representative potential it holds. Unlike the occasional steering that fiscal policy necessarily represents, monetary policy could always be at the wheel. That is, it would be capable of representing total spending capacity on the part of everyone - government, business and citizens alike - were it given the chance.

Mark Thoma has highlighted some of Nick Rowe's quotes in his response, and Thoma emphasizes the demand side of the equation. Again, monetary policy has the capacity to fully represent the demand side of the economy. Perhaps the main thing I need to stress is that whatever models and theories are used, they need to be applied so that the intersections of those concepts actually matter for potential solution sets, instead of being endlessly contrast time and again. Now, I need to get this post published before anyone else responds -"blow by blow" accounts are not really my forte, thus I need to do a better job of remembering that in the future.
Update: Cochrane's post is back up.