## Council on Foreign Relations Wingnut Watch: Benn Steil

Benn Steil resents being called a wingnut. But what choice do I have? He is a wingnut: he continues to assert something that nobody--save Jacques Rueff--ever believed since the days of R.G. Hawtrey and the original "Treasury View": that the fiscal multiplier is zero because the interest elasticity of money demand is zero:

Benn Steil: Krugman’s claim [that money demand is interest elastic] is manifestly false. Institutions are not hoarding dollar bills, awaiting the issuance of stimulus bonds. Any funds they choose to make available to the government, beyond their current holdings of Treasurys, will have to be withdrawn from the banking system or the market for corporate securities.... [I]f Krugman had actually been using the word “idle” to mean circulating at low velocity, he would then have been assuming the very thing he needs to establish - that by outbidding the banks and corporate securities markets for funds, and then spending such funds, the government necessarily increases velocity...

I asked him for other, alternative adjectives, but he has not responded.

Milton Friedman is thought to have known something about money demand. Milton Friedman went to great pains to assure everyone that he was not so silly as to think that the interest elasticity of money demand is zero:

[Tobin claims that] characteristic monetarist propositions require the LM curve to be vertical.... I thought that I had disproved this contention in detail.... In... 1966, I concluded, "In my opinion, no 'fundamental issues'... hinge on whether the estimated elasticity [of demand for money with respect to the interest rate] can... be approximated by zero or is better approximated by -.1 or -.5 of -2.0, provided it is seldom capable of being approximated by -∞..." http://www.jstor.org/stable/pdfplus/1830418.pdf

And Benn Steil tries to muster support from Robert Barro:

Benn Steil: Harvard’s Robert Barro, writing in the Wall Street Journal on January 22, provides logic and offers evidence supporting the case that it is not true...

where "it" is presumably Krugman's belief that (a) money demand is elastic and (b) the fiscal multiplier is greater than zero.

What evidence does Robert Barro bring to the table? This:

Robert J. Barro: Government Spending Is No Free Lunch: I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by$430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540).

No help for Steil there.

What logic does Robert Barro bring to the table? This:

Robert J. Barro: Government Spending Is No Free Lunch: The theory... [is] that the government is better than the private market at marshaling idle resources.... Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy.... So, something deeper must be involved.... A much more plausible starting point is a multiplier of zero...

I confess that Barro's logic eludes me. The disease for which fiscal stimulus is the remedy can indeed be helped by expansionary monetary policy, and indeed expansionary monetary policy is almost always a superior medicine. People who believe that fiscal policy can help do not believe that monetary policy cannot. It is not clear to me what the logical point is.