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This Economic Analysis Requires A Little More Work

There really is such a thing as the business cycle. Even Keynes agreed there was and that the task of macroeconomics is to moderate it for it will – as with JC and the poor – always be with us. We have two sets of tools with which to do that moderating, fiscal and monetary policy. Thus this set of views needs, umm, moderation:

However, a “poisonous mix” of ­reduced fiscal stimulus, higher inflation, rising interest rates and protectionism could combine to slow the US economy in the coming years, Gregory Daco, US economist at Oxford Economics, argued. Economic “growth exhaustion could be the real Wile E Coyote moment in 2020”, he predicted.

It may well be that the US economy will Wile E Coyote off a cliff in 2020. You’d rather hope so if you’re a Democrat, certainly, given Trump’s re-election attempt in November of that year. But that’s not an excuse to permit this sort of economic nonsense.

So, Keynes. Or, actually, standard macroeconomics. We should use fiscal stimulus upon the economy when we’re in recession, when we’re not operating at full capacity. Or, equally, we should use monetary stimulus when we are. The first would mean expanding the budget deficit, increasing spending without increasing taxes, or decreasing taxes while leaving spending static. The second would mean lowering interest rates – let’s leave unconventional policy like QE out of this.

When we’re booming we should be doing the opposite. We’re trying to moderate the cycle, recall? We should be raising taxes, or reducing spending. Or, and, raising interest rates.

A very useful sign that we’re booming being the arrival of inflation. For that’s the signal that we’re not in recession, that we’ve not got any unused economic resources and that further stimulus is just pushing up prices.

The point being that we cannot have inflation and also be against reduced fiscal stimulus, inflation and also being against interest rate rises. Reducing stimulus, whether monetary or fiscal, is what we should be doing in the face of inflation.

Yes, of course, much macroeconomics is just mumbo jumbo but can we at least get those incantations right in themselves?

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5 years ago

Why should there be a business cycle? That is, why should activity attenuate across the economy, provided all wages and prices are free to adjust? They are not, of course, and you also have the central bank and ambitious legislators who value their political persona more than analysis of the effects of their actions. G.H.W. Bush caused a recession by signing a law to reform depreciation that made it much more costly to own stuff. Ronald Reagan caused a recession when Congress “phased in” his signature tax cuts, inducing businesses to defer investment. Donald Trump may have caused a recession… Read more »

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