Tuesday, 17 October 2017
More fiscal space nonsense.
Christina and David Romer have a new paper published by NBER – working paper 23931 – which claims, to judge by the abstract, that stimulus is more effective given fiscal space and monetary space (i.e. a low national debt to GDP ratio).
The actual reason for this would seem to be that the authorities implement more fiscal and monetary stimulus when there is “space”. As the second last sentence of the abstract puts it, “We find that monetary and fiscal policy are used more aggressively when policy space is ample.”
Quite. So “space” itself is irrelevant: what’s really important is economists’ BELIEF in the importance of space.
Likewise if I believe I get more benefit from jogging when there’s a full moon, then I’ll probably do more jogging when there’s a full moon. And lo and behold, as a result, I will actually derive more benefit from jogging when there’s a full moon. But of course that does not prove that a full Moon is the direct cause of jogging conferring extra benefit: the benefit is an INDIRECT one, which relies entirely on my beliefs!
Thus the Romer paper in no way tempts me to moderate my claim expressed in earlier articles on this blog that “fiscal space” is one huge nonsense: a sentiment shared by Bill Mitchell, unless I’ve got him wrong. (Title of Bill's article: "The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency.")
But never mind. “Fiscal space” keeps the numpties, charlatans and time wasters at the IMF employed, as Bill eloquently explains.