What's new in blog-otopia

James Hamilton asks whether there's any statistical evidence that a global savings glut is the cause of U.S. current account deficits. He says not so much; the U.S. budget deficit is the main culprit. The Angry Bear takes on the Republicans' efforts to cut spending in order to reduce the budget deficit. Mark Thoma calls for a return to fiscal sanity. And off the subject of economics, Daily Kos offers a nice interpretation of Harry Reid's forcing the Senate to move to closed session yesterday: "Perhaps most importantly, it fires a huge warning shot into the Republican efforts to break Senate rules to disallow filibusters. Remember, Reid did similar parliamentary moves during the last discussion of Senate-busting "nuclear" rule changes by Republicans. So this is just a little punch to say "You want to mess with the rules? We can make your legislative lives into an unworkable living hell, if you're not willing to play by the rules. Think about whether you want to fire those shots.""



Monetary economists say that monetary policy works best when it is based on a "nominal anchor": a commitment, ideally an explicit one, by the central bank that monetary policy will in the long run be geared toward maintaining the value of some nominal quantity. For example, the central bank can guarantee that gold shall sell at $42/ounce; the dollar will be worth 130 yen; the inflation rate will be 2 percent per year; the money supply will grow at 4 percent per year. A nominal anchor fixes the public's expectations about the value of the dollar in the long run, adding to the stability of the economy.



Can the same be said about fiscal policy? There ought to be some rule underlying our approach to budget deficits. Before Keynes, that rule was that each and every year, there would be an attempt to balance the budget. In the 1960s, Keynesians adopted the rule that the budget deficit would be whatever was required to keep output at the full employment level. At times, an alternative rule was offered: the structural (full employment) budget deficit should be balanced, but if there was a deficit because the economy was in recession that was o.k. Most economists, I think, would support a rule that ensured a balanced budget over the long run; that is, over any long period (10 years? 20?) annual budget deficits should be offset by surpluses. Bill Clinton's argument that budget surpluses should be maintained in the late 1990s in anticipation of the government's running big budget deficits when the baby boomers retire was (probably unbeknownst to him) consistent with this logic. What is our overarching fiscal policy rule today? The best I can figure, it's this: whatever the level of taxes is this year, next year it should be smaller. This is not a sensible fiscal policy objective. We currently have no anchor for our fiscal policy. Fiscal policy has become unhinged. I would like to see some research done drawing out the implications of the unhinging of fiscal policy for economic stability. Heck, maybe I'll do that research myself.