On Monday John Taylor wrote: "Bob Hall argued that fiscal policy was not working". On Wednesday John Taylor wrote:
As part of his presentation, Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.”
The claim that expansionary fiscal policy is not being and will not be tried strikes me as very different from the claim that fiscal policy is not working. And the claim that these two claims are the same strikes me as simply not credible.
John Taylor: Monday, December 5:
Economics One: Restoring Robust Growth in America: "Restoring Robust Growth in America Why has the recovery been so slow? What can we do about it? Alan Greenspan, George Shultz, Ed Prescott, Steve Davis, Nick Bloom, John Cochrane, Bob Hall, Lee Ohanian, John Cogan and I recently met at the Hoover Institution at Stanford to present papers and discuss the issue with other economists and policy makers including Myron Scholes, Michael Boskin, Ron McKinnon and many others. Here is the agenda.
We plan to publish a book on the conclusions, but here is a very brief summary of the presentations. George Shultz led off by arguing that diagnosing the problem and thus finding a solution was extraordinarily important now, not only for the future of the United States but also for its leadership around world. Tax reform, entitlement reform, monetary reform, and K-12 education reform were at the top of his pro-growth policy list. Alan Greenspan presented empirical evidence that policy uncertainty caused by government activism was a major problem holding back growth, and that the first priority should be to start reducing the deficit immediately; investment is being crowded out now. He also recommended starting financial reform all over again because of the near impossibility of implementing Dodd Frank. Nick Bloom, Steve Davis and Scott Baker then presented their empirical measures of policy uncertainty and showed that they were negatively correlated with economic growth.
Ed Prescott had the most dramatic policy proposal which he argued would cause a major boom and restore strong growth. He would simultaneously reform the tax code and entitlement programs by slashing marginal tax rates which would increase employment and productivity. John Cochrane focused on the bailout problems in the European and American financial sectors, arguing that they would continue to be a drag on growth until policy makers stopped kicking the can down the road.
Bob Hall argued that fiscal policy was not working, and focused on alleviating the zero lower bound constraint on monetary policy. One of his proposals was a gradual phase-in of a tax reform in the form of a consumption tax, which would make consumption today relatively cheap and thereby increase aggregate demand. I presented research with John Cogan on fiscal policy showing that it had not been successful in raising government purchases and was ineffective regardless of the size of the multiplier. Finally Lee Ohanian showed that unemployment remained high in part because of restrictions on foreclosure proceedings which increased search unemployment by allowing people to stay in their homes for longer periods of time.
In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward, and (3) policy reforms that would normally be considered helpful in the long run would actually be very helpful right now in the short run.
Paul Krugman, December 7:
Taylor Rules: [W]hat’s really remarkable, and what I find a bit shocking even after all we’ve been through, is the way John Taylor misrepresents other peoples’ work. Reading Taylor’s summary, you’d think that Bloom, Baker and Davis had showed that fear of Obama was holding the economy down; if you actually read their paper, while they do conclude that “uncertainty” is an important factor, the biggest sources of uncertainty are Republican brinksmanship over the budget, the situation in Europe, and the legal challenges to health care reform. Not exactly what the GOP ordered.
Worse yet, Taylor makes it seem as if Bob Hall showed that fiscal expansion is ineffective. Yet if you have actually been following Hall — which I have, carefully — you’d know that he has been producing extensive evidence that fiscal expansion does, indeed, work; he argues (pdf) that the Obama stimulus made the slump considerably less severe. His complaint is that the stimulus wasn’t big enough — which is the same argument I made from the beginning.
You have to wonder why Taylor thinks he can get away with this. Does he think that other economists can’t actually read research papers, and catch the misrepresentation? Or does he think of himself as writing solely for people so politicized that they don’t care if he gets it wrong?
John Taylor, December 7:
Economics One: Krugman is Wrong: Krugman incorrectly claims that I mischaracterized the research of my Stanford colleague Nick Bloom and his coauthors Scott Baker and Steve Davis presented at the conference. Krugman says my conference summary suggested that “Bloom, Baker and Davis had showed that fear of Obama was holding the economy down.” No, my summary said or implied no such thing; there is no mention of Obama, Bush, or any politician in my summary. It simply says that these authors “presented their empirical measures of policy uncertainty and showed that they were negatively correlated with economic growth.” And that is what they did….
Krugman claims that my summary mischaracterized the presentation of my Stanford colleague Bob Hall, making it look like something it wasn't. My summary referred to Bob’s interesting presentation at the conference. As part of his presentation Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.” That is why Bob focused his paper at the conference on monetary policy and the problem of the zero lower bound….
I stand by my brief summary of the conference as a being accurate…