Mark your calendars! February 28th 3:00 PM eastern the AEI's Michael Strain will host a zoom event on Fiscal Theory of the Price Level. Info and registration here.
This event will be particularly good because Michael convinced Robert Barro, Tom Sargent, and Eric Leeper to come and discuss. These are the giants on whose shoulders I meekly stand.
Robert Barro did the modern version of "Ricardian Equivalence." If people look at government debt and understand that there will be taxes to pay it off, they save and the deficit (with lump sum taxes) has no effect. He also did the modern version of tax smoothing. It is good government policy to borrow in bad times, and repay in good times, with steady low taxes, rather than raise distorting tax rates a lot in bad times. Both underlie fiscal theory,
Tom Sargent, with Neil Wallace wrote “Unpleasant Monetarist Arithmetic,” the cornerstone of the modern fiscal theory. They pointed out that if fiscal policy is stuck in deficits, monetary policy can only choose to inflate now or inflate later. Tom went on to write many fantastic papers on the theory of fiscal-monetary interactions, and on their place in economic history. His "ends of four big inflations" showed that the great post WWI hyperinflations ended when the fiscal problem was solved, involving no monetary stringency. A good lesson, now mostly forgotten in the widespread view that ending inflation must come with misery. His Nobel speech “United States Then, Europe Now” is a great example of historical work. In my view, the Nobel Committee should have given him a prize for monetary-fiscal interactions, which is even better than the econometric work they cited. Maybe he'll be the first economist to get two.
Eric Leeper is the original innovator of the modern fiscal theory in his paper "Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies. " Eric put fiscal theory in the context of interest rate targets, r rather than money supply, which is how all our central bankers operate, and includes nominal rather than real debt. Thus, he integrates fiscal theory with how our monetary policy actually works, creates the essential model of inflation under interest rate targets, and integrates fiscal theory with modern new-Keynesian or general equilibrium models that are 99% of all applied work.
I'm going to try to be as brief as possible so we can hear from these amazing economists, plus Michael, no slouch himself. This much talent can't possibly sit still and not say things that are a bit critical, and thought provoking.
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Vince Ginn of the "Let People Prosper" Podcast did a very nice interview on FTPL. Like many economists, Vince has a good monetarist heart, and explaining the difference between FTPL and monetarism was useful for me.
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As of January 17, The Fiscal Theory of the Price Level is formally released! Along with this good news, I have some bad news -- I have to take down the free version on my website. However, keep that in mind for the (sadly) evolving typo list, sample chapters, online appendix, follow on essays, and revisions as they come. I already have a revised Chapter 5 posted, which does a better job of introducing fiscal theory in standard new-Keynesian models.
Super fun! Already marked on my calendar.
ReplyDeleteToo bad you couldn't get Chris Sims too, though.
The AEI link is rubbish. "Checking to see if you're human."
ReplyDeleteI think I failed their test... Didn't get a confirmation email.
DeleteMy how times change! When I was taking a class with Fama, I wanted to develop models for price leves. He constantly remarked "nobody cares about levels. People care about returns."
ReplyDeleteI'm hoping you're book is just the start of economists studying levels as the drivers of change. With a clearer understanding, better policy can emerge.
Worked for me. For a confirmation e-mail, too. Some bits in between were opaque, though. Forgot which ones. Keep trying! Looks to be very worth it!
ReplyDeleteThe U.S. Treasury reports that personal net income tax receipts have increased by 50% since the end of 2019, on a 12-month box-car (rolling) average, to $2.63 trillion up from $1.75 trillion (give or take half a hundred billion dollars).
ReplyDeleteThe increase is above the trendline established in the decade leading up to the onset of the pandemic. If it holds, then this may go some distance to repay the funds borrowed during the pandemic. With a GOP-controlled House of Representatives, White House spend-thrifts face an impediment to further deficit spending in the coming two years. The fiscal side of the inflation equation is improving. Plug those into the FTPL models, turn the crank a couple of times, and see what falls out. Mathematics is fine, but it ain't the be all and end all by any stretch of the imagination.
“His "ends of four big inflations" showed that the great post WWI hyperinflations ended when the fiscal problem was solved, involving no monetary stringency. A good lesson, now mostly forgotten in the widespread view that ending inflation must come with misery.”
ReplyDeleteDoesn’t that view change somewhat now given the type of spending that makes up the federal budget? That is, even without severe monetary tightening the misery can come from cutting back the redistributive spending that people have come to rely on?
John, I'd be curious for your review of Olivier Blanchard's new book (including disagreements with your thesis wherever they may appear) whenever you have a chance to read it. Both yours and his are still on my to-read pile.
ReplyDeletehttps://mitpress.mit.edu/9780262544870/fiscal-policy-under-low-interest-rates/
Haven’t read it. R<g on my webpage is an extended response to earlier work. The idea that we just need more debt financed spending seems hard to take with visible supply constraints and inflation. Blanchard is as unlucky with timing as I am lucky, but that’s not proof.
DeleteHello. Since the AEI event already happened, have they made the video available somewhere? I couldn't find it (neither on their page, Twitter or YouTube). Wish I had seen it live.
ReplyDeleteThanks
Feb 28!
DeleteHey John,
ReplyDeleteYou are probably not aware but a fairly influential MMT defender in Brazil published a book last year in which he cites your paper “Michelson-Morley, Occam and Fisher: The Radical Implications of Stable Inflation at Near-Zero Interest Rates” to support the MMT agenda in a mis-interpretation of the neo-fisherian properties of the models you described in that paper. The guy is a strong candidate to become president of the brazilian central bank...
I found it really curious because anyone who actually read pretty much anything you've written would realize that it could not be further from what you think. Nevertheless, unsound economic reasoning along with lies is the norm in policy debates around here.
ps: the FTPL book is awesome and I will definitely watch the Barro/Cochrane/Leeper/Sargent/ discussion next week!