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Reply to an MMT critique of my column on pro-cyclical policy

Summary:
Aug. 30, 2018 — I received an invitation from Paul Fagan to respond to a critique by Bill Mitchell of my column at Project Syndicate and the Guardian, “US will lack fiscal space to respond when next recession comes”.   (My subsequent blogpost, “The next recession could be a bad one” is a slightly extended version.)  I am happy to respond to the critique. As my column made clear, I don’t know when the next recession will come or what will cause it. I take as given that someday there will be another recession.  Does anyone disagree with that?  I mentioned the high stock market among the possible triggers for a new downturn.  But it could be anything. Next, he asks “What is a pro-cyclical policy? Does counter-cyclical policy require  fiscal deficits/low interest rate in a downturn and

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Aug. 30, 2018 — I received an invitation from Paul Fagan to respond to a critique by Bill Mitchell of my column at Project Syndicate and the Guardian,US will lack fiscal space to respond when next recession comes”.   (My subsequent blogpost, “The next recession could be a bad one” is a slightly extended version.)  I am happy to respond to the critique.

  1. As my column made clear, I don’t know when the next recession will come or what will cause it. I take as given that someday there will be another recession.  Does anyone disagree with that?  I mentioned the high stock market among the possible triggers for a new downturn.  But it could be anything.
  2. Next, he asks “What is a pro-cyclical policy? Does counter-cyclical policy require  fiscal deficits/low interest rate in a downturn and fiscal surpluses/high interest rates in an upturn?”  The answer is, Yes, it does indeed call for smaller budget balances and easier monetary policy in a recession and stronger budget balances and tighter monetary policy in a boom.
  3. I may be a “mainstream economist” and former Clinton advisor; but No, as it happens, I don’t believe that the only time for fiscal stimulus is when monetary policy hits the zero lower bound or even that “at other times, [only] monetary policy should be firmly in charge of counter-stabilisation duties.” The ZLB after all was almost unheard of until the most recent decade; regardless of the ZLB, I believe in fiscal stimulus when the economy is in recession (except perhaps in countries where debt is already so high that sustainability is in doubt and creditors demand a steep default premium).  I have even said the reverse of the position attributed to me, that the effect of fiscal policy on the economy is generally more reliable (leaving aside politics) than the effect of monetary policy: “Monetary alchemy, fiscal science.”  I don’t know where Mr. Mitchell deduced something different from my views.
  4. Evidently Mr. Mitchell believes that there is literally no limit to the extent to which a country can incur and monetize vast levels of debt relative to GDP without adverse consequence such as rising inflation and interest rates. I am sure he is familiar with economic disasters from history, including extreme example such as the current hyperinflation in Venezuela and the preceding one in Zimbabwe.  Does MMT really hold that all advanced countries are somehow immune from consequences of debt, no matter how high?  Is it just the US?
Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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