Time To Give Up On Good Macro Policy

A majority of the knuckleheads elected to run our country are opposed to the traditional use of macroeconomic policy to correct fluctuations of the economy. The size of the national debt seems to be the only measure simple enough for them to understand. Here’s a novel idea: Let’s sacrifice the economy at the altar of reducing the debt and hope that, when the smoke clears, economics is allowed to be the primary driver of economic policy again.

I had the privilege of attending the Rethinking Macroeconomic Policy conference at the International Monetary Fund in April. Terrific fun. But while I was only able to see this month’s Annual Research Conference panels online, I could still hear the despair in the voices of the last session’s guests all the way over here in Bangkok.

Why the long, bearded faces? As Adam Posen says, “You can’t defeat fiscal policy with monetary policy.” He’s explaining why Japanese monetary measures have been ineffective in the past two decades. Unfortunately, he happens to mention later in his comments that, with traditional fiscal policy off the table in the United States for political reasons, American monetary policy (which deals partly in expectations) is also hobbled by the public’s understanding of what is and isn’t on the table. “It may not be economically rationally justified to worry about the confidence fairies or about the austerity nutters, but they’re out there.” Posen’s eventual recommendation is basically to try to push unconventional monetary policy as far as it will go…because it probably doesn’t do much, anyway. Ouch.

Paul Krugman follows and echoes the idea that both fiscal and monetary measures face crippling political obstruction. “Fiscal policy is ruled out…the sad discovery is it turns out that adequate monetary policy also seems to be ruled out. And so what is the answer? I have no idea.” He’s almost crying.

These guys should stop beating their heads against the wall. Throw in the towel. Applying realpolitikal strategy to macroeconomic policy suggests that liberal (or Keynesian, or interventionist, or at this point any sort of traditional) macroeconomists should join the chorus of voices calling for a reduction in the national debt.


The economy is still too weak for deficit reduction to be safely made a priority, you say. True. Does the current size of the debt reflect a real danger to the solvency of the United States? The markets obviously don’t think so, as demonstrated by the perpetually low rates at which the government can borrow. Does the cost of servicing the debt necessarily inflict serious damage on the economy? On its own, for similar reasons, no; we pay lots of it to ourselves, and at current borrowing costs we can still afford the stimulus some think we need on top of it. As has been pretty well established by the mountain of evidence refuting the terminally flawed, somewhat hysterical post-crisis debt-threshold literature (Alesina et al, Rogoff et al), adding slightly to our manageable debt burden wouldn’t endanger the world’s most powerful economy. (Allowing it to collapse in on itself in a Japanese-style deflationary spiral would do so, of course, but since that’s what I seem to find myself arguing in favor of here, we’ll pass over that fact.)

So why should we try to reduce the debt now? Because a level of debt that looked less scary, or at least a balanced budget, would possibly provide the political space for real fiscal management, which currently doesn’t exist, of the economic cycle. Yes, sadly, “the debt number just sounds scary” is an important consideration today. Not because it should be, but because the politicians we actually have in real life “check their premises” against the fictional Francisco d’Anconia’s nonsensical ranting.

Fiscal numbers in the black would also take some pressure off the Federal Reserve. How? Not by making the ZLB any less binding, but by making even less defensible the assertion that the Fed is somehow “bailing out” fiscal policy.

And of course, if the debt could be eliminated immediately by magic, there’s no doubt that the money we currently spend servicing it would be put to better use servicing America’s – the following adjective is compulsory these days – crumbling infrastructure.

Perhaps it’s time to acknowledge what it means that our fiscal policy (and, increasingly, our monetary policy) is in the hands of economically ignorant hijackers. Perhaps it’s best to give in to their demands and hope they can crash-land the Plane of State without totally destroying it, putting wiser heads back in the cockpit for future flights. I know, I know: None of their demands make sense. I also know that, barring austerity measures deep enough to destroy the economy completely, we’re talking about many, many decades of hurt before we can eliminate the debt completely.


Maybe, though, a balanced budget alone would be enough to make a fiscal response to the next crisis possible. The timing is as right as it will be; if we’re not at full employment now, we’re close. Yes, balancing the budget in the next few years would guarantee the secular stagnation Larry Summers and others now fear, and would cause an enormous amount of pain for an enormous number of people, but we’re currently sitting ducks. With fiscal measures off the table and the Fed handcuffed, another crisis in the near future, whether it originated in emerging markets (Ragu Rajan’s “musical crises” theory suggests it won’t be long) or in the (still under-regulated) financial sector, would be met with essentially no response. That’s a recipe for Depression.

Okay, so why not keep fighting the good fight? Is it hopeless? The body language of those on the front lines doesn’t look good. Besides, with PK talking about political regime change and nobody talking credibly about investing more in education, it doesn’t look likely that the next generation of politicians (at least on one side of the aisle) will be any more reasonable than this one. Time for some tough choices.

*A is A: Please note that this post is full of bad advice. One of the most important lessons from the grand Greek experiment of the past few years is that not only is austerity (spoiler alert) contractionary, but it’s also likely, in certain situations, to permanently impair a country’s ability to pay down its debt by hamstringing its productive capacity. Not that we are Greece.

I guess my current receptiveness to schemes to destroy the global economic system for no good reason is, in fact, probably just a result of my having recently subjected myself to the exercise in gag reflex suppression that is reading Atlas Shrugged.