Scott Sumner: “The 2009 stimulus was sabotaged.” By the Fed.

Not everyone (notably including me) has time to read everything Scott Sumner writes. But you really should — even if you don’t believe or agree with it all (like, his conventional notions about not taxing earnings and gains on financial assets).

This — on the interacting dynamics of fiscal and monetary policy — is a don’t-miss:

…if you look at how the Fed actually behaves, rather than what Bernanke says or “really” believes, then you are forced to conclude that the 2009 stimulus was sabotaged. That stimulus was not enough to create a robust recovery, even with unconventional Fed moves.  If they hadn’t done that stimulus, it looks like the Fed would have done a more aggressive stimulus, as they seem determined to keep core inflation in the 0.6% to 2.0% range.  And thus if we’d never done the 2009 fiscal stimulus, we’d probably be about where we are now–9.1% unemployment and 2% core inflation.  But with a much smaller national debt.

Not sure how much I’m adding to what is I think an important insight into stimulus dynamics, but it’s interesting to think about this MMT-style, with the Treasury and the Fed as a consolidated entity.

In the factual (with fiscal stimulus), Treasury issued more debt, and the Fed bought/retired (at least temporarily) less of it (than it would have otherwise).

In the counterfactual, Treasury would have issued less debt, and the Fed would have bought/retired more of it.

So in that consolidated view of things, fiscal stimulus also resulted in the Fed multiplying Treasury’s increased debt issuance.

Am I missing something here, probably having to do with reserves?






4 responses to “Scott Sumner: “The 2009 stimulus was sabotaged.” By the Fed.”

  1. jazzbumpa Avatar

    I stopped reading Sumner about a year ago, when I concluded he was insane.

    Paying interest on reserves has at least a little to do with all that new money sitting idle, doncha think?

    Why is anybody ever impressed with a counter-factual argument? All it offers is a speculative (and typically bis-colored) conclusion based on speculative guess based on what never happened. Seriously. What is the difference between a counter-factual and simple bull shit?


  2. Asymptosis Avatar

    Funny you mention that. He was talking about lower IOR as a stimulus measure, among several others, and I asked him what he thought would happen if the fed lowered them, tomorrow, to zero. He self-admittedly evaded the question “because I don’t think it would happen without other things.” So much for thought experiments.

    I’m too much of a sucker for what at least appears to be cogent argument. Can’t resist it. But I like to think I self-correct over time…

  3. Detroit Dan Avatar
    Detroit Dan

    Right — I reached a similar conclusion to jazzbumpa…

  4. […] words, the Fed — as the last player in every round of the game — would “sabotage” any growth that rapid (especially, I would add, if it saw any traces of that terrifying […]